Apple Inc 10-Q for FY2020 Q3
Apple Inc. (AAPL)
10-Q
2020-07-31
For: 2020-06-27
View Original
Added on
April 01, 2026
About this 10-Q
Apple Inc filed this 10-Q on July 31, 2020, covering the quarter ended June 27, 2020 (FY2020 Q3).
Headline figures
Quarter ended June 27, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $59.69B
- up 10.9% from $53.81B a year earlier
- Net income
- $11.25B
- up 12.0% from net income of $10.04B a year earlier
- Diluted EPS
- $2.58
- up 18.3% from $2.18 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended June 27, 2020
or
For the transition period from to .
Commission File Number: 001-36743
(Exact name of Registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(408 ) 996-1010
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | ||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Apple Inc.
Form 10-Q
For the Fiscal Quarter Ended June 27, 2020
TABLE OF CONTENTS
| Page | ||||||||||||||
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In millions, except number of shares which are reflected in thousands and per share amounts)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||||||||||||||
| Products | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Services | |||||||||||||||||||||||||||||||||||
| Total net sales | |||||||||||||||||||||||||||||||||||
| Cost of sales: | |||||||||||||||||||||||||||||||||||
| Products | |||||||||||||||||||||||||||||||||||
| Services | |||||||||||||||||||||||||||||||||||
| Total cost of sales | |||||||||||||||||||||||||||||||||||
| Gross margin | |||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||||||||||||||
| Other income/(expense), net | |||||||||||||||||||||||||||||||||||
| Income before provision for income taxes | |||||||||||||||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Earnings per share: | |||||||||||||||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Shares used in computing earnings per share: | |||||||||||||||||||||||||||||||||||
| Basic | |||||||||||||||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
Apple Inc. | Q3 2020 Form 10-Q | 1
Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In millions)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||
Net income | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Other comprehensive income/(loss): | |||||||||||||||||||||||||||||||||||
Change in foreign currency translation, net of tax | ( | ( | ( | ||||||||||||||||||||||||||||||||
Change in unrealized gains/losses on derivative instruments, net of tax: | |||||||||||||||||||||||||||||||||||
Change in fair value of derivatives | ( | ( | |||||||||||||||||||||||||||||||||
Adjustment for net (gains)/losses realized and included in net income | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
Total change in unrealized gains/losses on derivative instruments | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
Change in unrealized gains/losses on marketable debt securities, net of tax: | |||||||||||||||||||||||||||||||||||
Change in fair value of marketable debt securities | |||||||||||||||||||||||||||||||||||
Adjustment for net (gains)/losses realized and included in net income | ( | ( | |||||||||||||||||||||||||||||||||
Total change in unrealized gains/losses on marketable debt securities | |||||||||||||||||||||||||||||||||||
| Total other comprehensive income/(loss) | ( | ||||||||||||||||||||||||||||||||||
| Total comprehensive income | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
Apple Inc. | Q3 2020 Form 10-Q | 2
Apple Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In millions, except number of shares which are reflected in thousands and par value)
| June 27, 2020 | September 28, 2019 | |||||||||||||||||||
| ASSETS: | ||||||||||||||||||||
| Current assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||||||||
| Marketable securities | ||||||||||||||||||||
| Accounts receivable, net | ||||||||||||||||||||
| Inventories | ||||||||||||||||||||
| Vendor non-trade receivables | ||||||||||||||||||||
| Other current assets | ||||||||||||||||||||
| Total current assets | ||||||||||||||||||||
| Non-current assets: | ||||||||||||||||||||
| Marketable securities | ||||||||||||||||||||
| Property, plant and equipment, net | ||||||||||||||||||||
| Other non-current assets | ||||||||||||||||||||
Total non-current assets | ||||||||||||||||||||
Total assets | $ | $ | ||||||||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY: | ||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||
| Accounts payable | $ | $ | ||||||||||||||||||
| Other current liabilities | ||||||||||||||||||||
| Deferred revenue | ||||||||||||||||||||
| Commercial paper and repurchase agreements | ||||||||||||||||||||
| Term debt | ||||||||||||||||||||
| Total current liabilities | ||||||||||||||||||||
Non-current liabilities: | ||||||||||||||||||||
Term debt | ||||||||||||||||||||
Other non-current liabilities | ||||||||||||||||||||
Total non-current liabilities | ||||||||||||||||||||
Total liabilities | ||||||||||||||||||||
| Commitments and contingencies | ||||||||||||||||||||
| Shareholders’ equity: | ||||||||||||||||||||
Common stock and additional paid-in capital, $ | ||||||||||||||||||||
| Retained earnings | ||||||||||||||||||||
| Accumulated other comprehensive income/(loss) | ( | ( | ||||||||||||||||||
| Total shareholders’ equity | ||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
Apple Inc. | Q3 2020 Form 10-Q | 3
Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
(In millions, except per share amounts)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||
| Total shareholders’ equity, beginning balances | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Common stock and additional paid-in capital: | |||||||||||||||||||||||||||||||||||
| Beginning balances | |||||||||||||||||||||||||||||||||||
Common stock issued | |||||||||||||||||||||||||||||||||||
Common stock withheld related to net share settlement of equity awards | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Share-based compensation | |||||||||||||||||||||||||||||||||||
| Ending balances | |||||||||||||||||||||||||||||||||||
| Retained earnings: | |||||||||||||||||||||||||||||||||||
| Beginning balances | |||||||||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||
| Dividends and dividend equivalents declared | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
Common stock withheld related to net share settlement of equity awards | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Common stock repurchased | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Cumulative effects of changes in accounting principles | ( | ||||||||||||||||||||||||||||||||||
| Ending balances | |||||||||||||||||||||||||||||||||||
| Accumulated other comprehensive income/(loss): | |||||||||||||||||||||||||||||||||||
| Beginning balances | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Other comprehensive income/(loss) | ( | ||||||||||||||||||||||||||||||||||
| Cumulative effects of changes in accounting principles | |||||||||||||||||||||||||||||||||||
| Ending balances | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Total shareholders’ equity, ending balances | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Dividends and dividend equivalents declared per share or RSU | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
Apple Inc. | Q3 2020 Form 10-Q | 4
Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions)
| Nine Months Ended | |||||||||||||||||
| June 27, 2020 | June 29, 2019 | ||||||||||||||||
| Cash, cash equivalents and restricted cash, beginning balances | $ | $ | |||||||||||||||
| Operating activities: | |||||||||||||||||
| Net income | |||||||||||||||||
| Adjustments to reconcile net income to cash generated by operating activities: | |||||||||||||||||
| Depreciation and amortization | |||||||||||||||||
| Share-based compensation expense | |||||||||||||||||
| Deferred income tax expense/(benefit) | ( | ||||||||||||||||
| Other | ( | ( | |||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Accounts receivable, net | |||||||||||||||||
| Inventories | |||||||||||||||||
| Vendor non-trade receivables | |||||||||||||||||
| Other current and non-current assets | ( | ||||||||||||||||
| Accounts payable | ( | ( | |||||||||||||||
| Deferred revenue | ( | ||||||||||||||||
| Other current and non-current liabilities | ( | ||||||||||||||||
| Cash generated by operating activities | |||||||||||||||||
| Investing activities: | |||||||||||||||||
| Purchases of marketable securities | ( | ( | |||||||||||||||
| Proceeds from maturities of marketable securities | |||||||||||||||||
| Proceeds from sales of marketable securities | |||||||||||||||||
| Payments for acquisition of property, plant and equipment | ( | ( | |||||||||||||||
| Payments made in connection with business acquisitions, net | ( | ( | |||||||||||||||
Purchases of non-marketable securities | ( | ( | |||||||||||||||
| Proceeds from non-marketable securities | |||||||||||||||||
| Other | ( | ( | |||||||||||||||
| Cash generated by/(used in) investing activities | ( | ||||||||||||||||
| Financing activities: | |||||||||||||||||
| Proceeds from issuance of common stock | |||||||||||||||||
| Payments for taxes related to net share settlement of equity awards | ( | ( | |||||||||||||||
| Payments for dividends and dividend equivalents | ( | ( | |||||||||||||||
| Repurchases of common stock | ( | ( | |||||||||||||||
| Proceeds from issuance of term debt, net | |||||||||||||||||
| Repayments of term debt | ( | ( | |||||||||||||||
| Proceeds from/(Repayments of) commercial paper, net | ( | ||||||||||||||||
| Proceeds from repurchase agreements | |||||||||||||||||
| Other | ( | ( | |||||||||||||||
| Cash used in financing activities | ( | ( | |||||||||||||||
| Increase/(Decrease) in cash, cash equivalents and restricted cash | ( | ||||||||||||||||
| Cash, cash equivalents and restricted cash, ending balances | $ | $ | |||||||||||||||
| Supplemental cash flow disclosure: | |||||||||||||||||
| Cash paid for income taxes, net | $ | $ | |||||||||||||||
| Cash paid for interest | $ | $ | |||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
Apple Inc. | Q3 2020 Form 10-Q | 5
Apple Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 – Summary of Significant Accounting Policies
Basis of Presentation and Preparation
The condensed consolidated financial statements include the accounts of Apple Inc. and its wholly owned subsidiaries (collectively “Apple” or the “Company”). Intercompany accounts and transactions have been eliminated. In the opinion of the Company’s management, the condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The preparation of these condensed consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ materially from those estimates. These condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s annual consolidated financial statements and accompanying notes included in its Annual Report on Form 10-K for the fiscal year ended September 28, 2019 (the “2019 Form 10-K”).
Recently Adopted Accounting Pronouncements
Leases
At the beginning of the first quarter of 2020, the Company adopted the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), and additional ASUs issued to clarify and update the guidance in ASU 2016-02 (collectively, the “new leases standard”), which modifies lease accounting for lessees to increase transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements. The Company adopted the new leases standard utilizing the modified retrospective transition method, under which amounts in prior periods presented were not restated. For contracts existing at the time of adoption, the Company elected to not reassess (i) whether any are or contain leases, (ii) lease classification, and (iii) initial direct costs. Upon adoption, the Company recorded $7.5 billion of right-of-use (“ROU”) assets and $8.1 billion of lease liabilities on its Condensed Consolidated Balance Sheet.
Hedging
At the beginning of the first quarter of 2020, the Company adopted FASB ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 expands component and fair value hedging, specifies the presentation of the effects of hedging instruments, eliminates the separate measurement and presentation of hedge ineffectiveness, and updates disclosure requirements related to hedging. The Company adopted ASU 2017-12 utilizing the modified retrospective transition method. Upon adoption, the Company recorded a $136
Apple Inc. | Q3 2020 Form 10-Q | 6
Earnings Per Share
The following table shows the computation of basic and diluted earnings per share for the three- and nine-month periods ended June 27, 2020 and June 29, 2019 (net income in millions and shares in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Denominator: | |||||||||||||||||||||||||||||||||||
| Weighted-average basic shares outstanding | |||||||||||||||||||||||||||||||||||
| Effect of dilutive securities | |||||||||||||||||||||||||||||||||||
| Weighted-average diluted shares | |||||||||||||||||||||||||||||||||||
| Basic earnings per share | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Potentially dilutive securities representing 1.5 million and 20.5 million shares of common stock were excluded from the computation of diluted earnings per share for the three- and nine-month periods ended June 29, 2019, respectively, because their effect would have been antidilutive.
Note 2 – Revenue Recognition
Net sales consist of revenue from the sale of iPhone®, Mac®, iPad®, Services and other products. The Company recognizes revenue at the amount to which it expects to be entitled when control of the products or services is transferred to its customers. Control is generally transferred when the Company has a present right to payment and title and the significant risks and rewards of ownership of products or services are transferred to its customers. For most of the Company’s Products net sales, control transfers when products are shipped. For the Company’s Services net sales, control transfers over time as services are delivered. Payment for Products and Services net sales is collected within a short period following transfer of control or commencement of delivery of services, as applicable.
The Company records reductions to Products net sales related to future product returns, price protection and other customer incentive programs based on the Company’s expectations and historical experience.
For arrangements with multiple performance obligations, which represent promises within an arrangement that are capable of being distinct, the Company allocates revenue to all distinct performance obligations based on their relative stand-alone selling prices (“SSPs”). When available, the Company uses observable prices to determine SSPs. When observable prices are not available, SSPs are established that reflect the Company’s best estimates of what the selling prices of the performance obligations would be if they were sold regularly on a stand-alone basis. The Company’s process for estimating SSPs without observable prices considers multiple factors that may vary depending upon the unique facts and circumstances related to each performance obligation including, where applicable, prices charged by the Company for similar offerings, market trends in the pricing for similar offerings, product-specific business objectives and the estimated cost to provide the performance obligation.
The Company has identified up to three performance obligations regularly included in arrangements involving the sale of iPhone, Mac, iPad and certain other products. The first performance obligation, which represents the substantial portion of the allocated sales price, is the hardware and bundled software delivered at the time of sale. The second performance obligation is the right to receive certain product-related bundled services, which include iCloud®, Siri® and Maps. The third performance obligation is the right to receive, on a when-and-if-available basis, future unspecified software upgrades relating to the software bundled with each device. The Company allocates revenue and any related discounts to these performance obligations based on their relative SSPs. Because the Company lacks observable prices for the undelivered performance obligations, the allocation of revenue is based on the Company’s estimated SSPs. Revenue allocated to the delivered hardware and bundled software is recognized when control has transferred to the customer, which generally occurs when the product is shipped. Revenue allocated to the product-related bundled services and unspecified software upgrade rights is deferred and recognized on a straight-line basis over the estimated period they are expected to be provided. Cost of sales related to delivered hardware and bundled software, including estimated warranty costs, are recognized at the time of sale. Costs incurred to provide product-related bundled services and unspecified software upgrade rights are recognized as cost of sales as incurred.
Apple Inc. | Q3 2020 Form 10-Q | 7
For certain long-term service arrangements, the Company has performance obligations for services it has not yet delivered. For these arrangements, the Company does not have a right to bill for the undelivered services. The Company has determined that any unbilled consideration relates entirely to the value of the undelivered services. Accordingly, the Company has not recognized revenue, and has elected not to disclose amounts, related to these undelivered services.
For the sale of third-party products where the Company obtains control of the product before transferring it to the customer, the Company recognizes revenue based on the gross amount billed to customers. The Company considers multiple factors when determining whether it obtains control of third-party products including, but not limited to, evaluating if it can establish the price of the product, retains inventory risk for tangible products or has the responsibility for ensuring acceptability of the product. For third-party applications sold through the App Store®, Mac App Store, TV App Store and Watch App Store and certain digital content sold through the Company’s other digital content stores, the Company does not obtain control of the product before transferring it to the customer. Therefore, the Company accounts for such sales on a net basis by recognizing in Services net sales only the commission it retains.
The Company has elected to record revenue net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded within other current liabilities until remitted to the relevant government authority.
Deferred Revenue
As of June 27, 2020 and September 28, 2019, the Company had total deferred revenue of $9.8 billion and $8.1 billion, respectively. As of June 27, 2020, the Company expects 65 % of total deferred revenue to be realized in less than a year, 26 % within one-to-two years, 7 % within two-to-three years and 2 % in greater than three years.
Disaggregated Revenue
Net sales disaggregated by significant products and services for the three- and nine-month periods ended June 27, 2020 and June 29, 2019 were as follows (in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||
iPhone (1) | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Mac (1) | |||||||||||||||||||||||||||||||||||
iPad (1) | |||||||||||||||||||||||||||||||||||
Wearables, Home and Accessories (1)(2) | |||||||||||||||||||||||||||||||||||
Services (3) | |||||||||||||||||||||||||||||||||||
Total net sales (4) | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
(1)Products net sales include amortization of the deferred value of unspecified software upgrade rights, which are bundled in the sales price of the respective product.
(2)Wearables, Home and Accessories net sales include sales of AirPods®, Apple TV®, Apple Watch®, Beats® products, HomePod®, iPod touch® and Apple-branded and third-party accessories.
(3)Services net sales include sales from the Company’s digital content stores and streaming services, AppleCare®, Advertising and other services. Services net sales also include amortization of the deferred value of Maps, Siri, and free iCloud storage and Apple TV + services, which are bundled in the sales price of certain products.
(4)Includes $2.1 billion of revenue recognized in the three months ended June 27, 2020 that was included in deferred revenue as of March 28, 2020, $2.0 billion of revenue recognized in the three months ended June 29, 2019 that was included in deferred revenue as of March 30, 2019, $4.0 billion of revenue recognized in the nine months ended June 27, 2020 that was included in deferred revenue as of September 28, 2019, and $4.9 billion of revenue recognized in the nine months ended June 29, 2019 that was included in deferred revenue as of September 29, 2018.
The Company’s proportion of net sales by disaggregated revenue source was generally consistent for each reportable segment in Note 11, “Segment Information and Geographic Data” for the three- and nine-month periods ended June 27, 2020 and June 29, 2019.
Apple Inc. | Q3 2020 Form 10-Q | 8
Note 3 – Financial Instruments
Cash, Cash Equivalents and Marketable Securities
The following tables show the Company’s cash and marketable securities by significant investment category as of June 27, 2020 and September 28, 2019 (in millions):
| June 27, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Current Marketable Securities | Non-Current
Marketable
Securities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Level 1 (1): | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Money market funds | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Subtotal | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Level 2 (2): | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. agency securities | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-U.S. government securities | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Certificates of deposit and time deposits | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate debt securities | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Municipal securities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage- and asset-backed securities | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Subtotal | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total (3) | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| September 28, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Current Marketable Securities | Non-Current Marketable Securities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Level 1 (1): | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Money market funds | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Subtotal | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Level 2 (2): | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. agency securities | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-U.S. government securities | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Certificates of deposit and time deposits | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate debt securities | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Municipal securities | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage- and asset-backed securities | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Subtotal | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total (3) | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1)Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities.
(2)Level 2 fair value estimates are based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
(3)As of June 27, 2020 and September 28, 2019, total marketable securities included $18.3 billion and $18.9 billion, respectively, that was restricted from general use, related to the State Aid Decision (refer to Note 5, “Income Taxes”) and other agreements. Additionally, as of June 27, 2020, $5.3 billion of marketable securities were pledged as collateral under repurchase agreements (refer to Note 6, “Debt”).
Apple Inc. | Q3 2020 Form 10-Q | 9
The Company may sell certain of its marketable debt securities prior to their stated maturities for reasons including, but not limited to, managing liquidity, credit risk, duration and asset allocation. The maturities of the Company’s non-current marketable debt securities generally range from to five years .
The Company typically invests in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer. Fair values were determined for each individual security in the investment portfolio. When evaluating a marketable debt security for other-than-temporary impairment, the Company reviews factors such as the duration and extent to which the fair value of the security is less than its cost, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it will more likely than not be required to sell the security before recovery of its amortized cost basis. As of June 27, 2020, the Company does not consider any of its marketable debt securities to be other-than-temporarily impaired.
Non-Marketable Securities
The Company holds non-marketable equity securities of certain privately held companies without readily determinable fair values. As of June 27, 2020 and September 28, 2019, the Company’s non-marketable equity securities had a carrying value of $2.8 billion and $2.9 billion, respectively.
Restricted Cash
A reconciliation of the Company’s cash and cash equivalents in the Condensed Consolidated Balance Sheets to cash, cash equivalents and restricted cash in the Condensed Consolidated Statements of Cash Flows as of June 27, 2020 and September 28, 2019 is as follows (in millions):
| June 27, 2020 | September 28, 2019 | ||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash included in other current assets | |||||||||||
| Restricted cash included in other non-current assets | |||||||||||
| Cash, cash equivalents and restricted cash | $ | $ | |||||||||
The Company’s restricted cash primarily consisted of cash to support the Company’s iPhone Upgrade Program.
Derivative Financial Instruments
The Company may use derivatives to partially offset its business exposure to foreign currency and interest rate risk on expected future cash flows, net investments in certain foreign subsidiaries, and certain existing assets and liabilities. However, the Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations or the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange or interest rates.
To protect gross margins from fluctuations in foreign currency exchange rates, certain of the Company’s subsidiaries whose functional currency is the U.S. dollar may hedge a portion of forecasted foreign currency revenue, and subsidiaries whose functional currency is not the U.S. dollar may hedge a portion of forecasted inventory purchases not denominated in the subsidiaries’ functional currencies. The Company may enter into forward contracts, option contracts or other instruments to manage this risk and may designate these instruments as cash flow hedges. The Company generally hedges portions of its forecasted foreign currency exposure associated with revenue and inventory purchases, typically for up to 12 months.
To protect the net investment in a foreign operation from fluctuations in foreign currency exchange rates, the Company may enter into foreign currency forward and option contracts to offset a portion of the changes in the carrying amounts of these investments due to fluctuations in foreign currency exchange rates. In addition, the Company may use non-derivative financial instruments, such as its foreign currency–denominated debt, as hedges of its net investments in certain foreign subsidiaries. In both of these cases, the Company designates these instruments as net investment hedges.
To protect the Company’s foreign currency–denominated term debt or marketable securities from fluctuations in foreign currency exchange rates, the Company may enter into forward contracts, cross-currency swaps or other instruments. These instruments may offset a portion of the foreign currency remeasurement gains or losses, or changes in fair value. The Company may designate these instruments as either cash flow or fair value hedges. As of June 27, 2020, the Company’s hedged term debt– and marketable securities–related foreign currency transactions are expected to be recognized within 22 years.
Apple Inc. | Q3 2020 Form 10-Q | 10
The Company may also enter into non-designated foreign currency contracts to offset a portion of the foreign currency exchange gains and losses generated by the remeasurement of certain assets and liabilities denominated in non-functional currencies.
To protect the Company’s foreign currency–denominated term debt or marketable securities from fluctuations in interest rates, the Company may enter into interest rate swaps, options or other instruments. These instruments may offset a portion of the changes in interest income or expense, or changes in fair value. The Company designates these instruments as either cash flow or fair value hedges. As of June 27, 2020, the Company’s hedged interest rate transactions are expected to be recognized within seven years .
Cash Flow Hedges
Cash flow hedge amounts that are included in the assessment of hedge effectiveness are deferred in AOCI until the hedged item is recognized in earnings. Deferred gains and losses associated with cash flow hedges of foreign currency revenue are recognized as a component of net sales in the same period as the related revenue is recognized, and deferred gains and losses related to cash flow hedges of inventory purchases are recognized as a component of cost of sales in the same period as the related costs are recognized. Deferred gains and losses associated with cash flow hedges of interest income or expense are recognized in other income/(expense), net (“OI&E”) in the same period as the related income or expense is recognized. Generally, for options designated as cash flow hedges, the time value is excluded from the assessment of hedge effectiveness and recognized in the financial statement line item to which the hedge relates on a straight-line basis over the life of the hedge. Changes in the fair value of amounts excluded from the assessment of hedge effectiveness are recognized in other comprehensive income/(loss) (“OCI”).
Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in AOCI associated with such derivative instruments are reclassified into OI&E in the period of de-designation. Any subsequent changes in fair value of such derivative instruments are reflected in OI&E unless they are re-designated as hedges of other transactions.
Net Investment Hedges
Net investment hedge amounts that are included in the assessment of hedge effectiveness are recorded in OCI as a part of the cumulative translation adjustment. For foreign exchange forward contracts designated as net investment hedges, the forward carry component is excluded from the assessment of hedge effectiveness and recognized in OCI on a straight-line basis over the life of the hedge. Changes in the fair value of amounts excluded from the assessment of hedge effectiveness are recognized in OCI.
Fair Value Hedges
Fair value hedge gains and losses related to amounts that are included in the assessment of hedge effectiveness are recognized in earnings along with a corresponding loss or gain related to the change in value of the hedged item in the same line in the Condensed Consolidated Statements of Operations. For foreign exchange forward contracts designated as fair value hedges, the forward carry component is excluded from the assessment of hedge effectiveness and recognized in OI&E on a straight-line basis over the life of the hedge. Changes in the fair value of amounts excluded from the assessment of hedge effectiveness are recognized in OCI. Amounts excluded from the effectiveness assessment of fair value hedges and recognized in OI&E were gains of $119 million and $373 million for the three- and nine-month periods ended June 27, 2020, respectively.
Non-Designated Derivatives
Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates.
Apple Inc. | Q3 2020 Form 10-Q | 11
| June 27, 2020 | |||||||||||||||||||||||||||||
| Fair Value of Derivatives Designated as Hedge Instruments | Fair Value of Derivatives Not Designated as Hedge Instruments | Total Fair Value | |||||||||||||||||||||||||||
Derivative assets (1): | |||||||||||||||||||||||||||||
| Foreign exchange contracts | $ | $ | $ | ||||||||||||||||||||||||||
| Interest rate contracts | $ | $ | $ | ||||||||||||||||||||||||||
Derivative liabilities (2): | |||||||||||||||||||||||||||||
| Foreign exchange contracts | $ | $ | $ | ||||||||||||||||||||||||||
| September 28, 2019 | |||||||||||||||||||||||||||||
| Fair Value of Derivatives Designated as Hedge Instruments | Fair Value of Derivatives Not Designated as Hedge Instruments | Total Fair Value | |||||||||||||||||||||||||||
Derivative assets (1): | |||||||||||||||||||||||||||||
| Foreign exchange contracts | $ | $ | $ | ||||||||||||||||||||||||||
| Interest rate contracts | $ | $ | $ | ||||||||||||||||||||||||||
Derivative liabilities (2): | |||||||||||||||||||||||||||||
| Foreign exchange contracts | $ | $ | $ | ||||||||||||||||||||||||||
| Interest rate contracts | $ | $ | $ | ||||||||||||||||||||||||||
(1)The fair value of derivative assets is measured using Level 2 fair value inputs and is included in other current assets and other non-current assets in the Condensed Consolidated Balance Sheets.
(2)The fair value of derivative liabilities is measured using Level 2 fair value inputs and is included in other current liabilities and other non-current liabilities in the Condensed Consolidated Balance Sheets.
Apple Inc. | Q3 2020 Form 10-Q | 12
The following table shows the pre-tax gains and losses of the Company’s derivative and non-derivative instruments designated as cash flow and net investment hedges in OCI and the Condensed Consolidated Statements of Operations for the three- and nine-month periods ended June 27, 2020 and June 29, 2019 (in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||
Gains/(Losses) recognized in OCI – included in effectiveness assessment: | |||||||||||||||||||||||||||||||||||
| Cash flow hedges: | |||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||
| Interest rate contracts | ( | ( | |||||||||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||
| Net investment hedges: | |||||||||||||||||||||||||||||||||||
| Foreign currency debt | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||||
Gains/(Losses) reclassified from AOCI into net income – included in effectiveness assessment: | |||||||||||||||||||||||||||||||||||
| Cash flow hedges: | |||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Interest rate contracts | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Amounts excluded from the effectiveness assessment of the Company’s hedges and recognized in OCI were losses of $220 million and $51 million for the three- and nine-month periods ended June 27, 2020, respectively.
The following tables show information about the Company’s derivative instruments designated as fair value hedges and the related hedged items for the three- and nine-month periods ended June 27, 2020 and June 29, 2019 and as of June 27, 2020 (in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||
Gains/(Losses) on derivative instruments (1): | |||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Interest rate contracts | |||||||||||||||||||||||||||||||||||
| Total | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||
Gains/(Losses) related to hedged items (1): | |||||||||||||||||||||||||||||||||||
| Marketable securities | $ | $ | $ | $ | ( | ||||||||||||||||||||||||||||||
| Fixed-rate debt | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||
Apple Inc. | Q3 2020 Form 10-Q | 13
| June 27, 2020 | |||||||||||
| Carrying amounts of hedged assets/(liabilities): | |||||||||||
Marketable securities (2) | $ | ||||||||||
Fixed-rate debt (3) | $ | ( | |||||||||
| Cumulative hedging adjustments included in the carrying amounts of hedged items: | |||||||||||
| Marketable securities carrying amount increases/(decreases) | $ | ( | |||||||||
| Fixed-rate debt carrying amount (increases)/decreases | $ | ( | |||||||||
(1)Gains and losses related to fair value hedges are included in OI&E in the Condensed Consolidated Statements of Operations.
(2)The carrying amounts of marketable securities that are designated as hedged items in fair value hedges are included in current marketable securities and non-current marketable securities in the Condensed Consolidated Balance Sheet.
(3)The carrying amounts of fixed-rate debt instruments that are designated as hedged items in fair value hedges are included in current term debt and non-current term debt in the Condensed Consolidated Balance Sheet.
The following table shows the notional amounts of the Company’s outstanding derivative instruments and credit risk amounts associated with outstanding or unsettled derivative instruments as of June 27, 2020 and September 28, 2019 (in millions):
| June 27, 2020 | September 28, 2019 | ||||||||||||||||||||||||||||||||||
| Notional Amount | Credit Risk Amount | Notional Amount | Credit Risk Amount | ||||||||||||||||||||||||||||||||
| Instruments designated as accounting hedges: | |||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Interest rate contracts | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Instruments not designated as accounting hedges: | |||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
The notional amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of the Company’s exposure to credit or market loss. The credit risk amounts represent the Company’s gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current currency or interest rates at each respective date. The Company’s exposure to credit loss and market risk will vary over time as currency and interest rates change. Although the table above reflects the notional and credit risk amounts of the Company’s derivative instruments, it does not reflect the gains or losses associated with the exposures and transactions that the instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.
The Company generally enters into master netting arrangements, which are designed to reduce credit risk by permitting net settlement of transactions with the same counterparty. To further limit credit risk, the Company generally enters into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. The Company presents its derivative assets and derivative liabilities at their gross fair values in its Condensed Consolidated Balance Sheets. As of June 27, 2020 and September 28, 2019, the net cash collateral received by the Company related to derivative instruments under its collateral security arrangements was $1.2 billion and $1.6 billion, respectively, which were included in other current liabilities in the Condensed Consolidated Balance Sheets.
Under master netting arrangements with the respective counterparties to the Company’s derivative contracts, the Company is allowed to net settle transactions with a single net amount payable by one party to the other. As of June 27, 2020 and September 28, 2019, the potential effects of these rights of set-off associated with the Company’s derivative contracts, including the effects of collateral, would be a reduction to both derivative assets and derivative liabilities of $3.3 2.7 197 million and $407 million, respectively.
Apple Inc. | Q3 2020 Form 10-Q | 14
Accounts Receivable
Trade Receivables
The Company has considerable trade receivables outstanding with its third-party cellular network carriers, wholesalers, retailers, resellers, small and mid-sized businesses and education, enterprise and government customers. The Company generally does not require collateral from its customers; however, the Company will require collateral or third-party credit support in certain instances to limit credit risk. In addition, when possible, the Company attempts to limit credit risk on trade receivables with credit insurance for certain customers or by requiring third-party financing, loans or leases to support credit exposure. These credit-financing arrangements are directly between the third-party financing company and the end customer. As such, the Company generally does not assume any recourse or credit risk sharing related to any of these arrangements.
As of both June 27, 2020 and September 28, 2019, the Company had no 32 % and 51 % of total trade receivables as of June 27, 2020 and September 28, 2019, respectively.
Vendor Non-Trade Receivables
The Company has non-trade receivables from certain of its manufacturing vendors resulting from the sale of components to these vendors who manufacture sub-assemblies or assemble final products for the Company. The Company purchases these components directly from suppliers. As of June 27, 2020, the Company had three vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 49 %, 18 % and 11 %. As of September 28, 2019, the Company had two vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 59 % and 14 %.
Note 4 – Condensed Consolidated Financial Statement Details
The following tables show the Company’s condensed consolidated financial statement details as of June 27, 2020 and September 28, 2019 (in millions):
Property, Plant and Equipment, Net
| June 27, 2020 | September 28, 2019 | ||||||||||
| Land and buildings | $ | $ | |||||||||
| Machinery, equipment and internal-use software | |||||||||||
| Leasehold improvements | |||||||||||
| Gross property, plant and equipment | |||||||||||
| Accumulated depreciation and amortization | ( | ( | |||||||||
| Total property, plant and equipment, net | $ | $ | |||||||||
Other Non-Current Liabilities
| June 27, 2020 | September 28, 2019 | ||||||||||
| Long-term taxes payable | $ | $ | |||||||||
| Other non-current liabilities | |||||||||||
| Total other non-current liabilities | $ | $ | |||||||||
Apple Inc. | Q3 2020 Form 10-Q | 15
Other Income/(Expense), Net
The following table shows the detail of OI&E for the three- and nine-month periods ended June 27, 2020 and June 29, 2019 (in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||
| Interest and dividend income | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Other income/(expense), net | ( | ( | |||||||||||||||||||||||||||||||||
| Total other income/(expense), net | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Note 5 – Income Taxes
Uncertain Tax Positions
As of June 27, 2020, the total amount of gross unrecognized tax benefits was $16.2 billion, of which $8.6 billion, if recognized, would impact the Company’s effective tax rate. The Company had accrued $1.3 billion of gross interest and penalties related to income tax matters as of June 27, 2020.
The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and many state and foreign jurisdictions. The U.S. Internal Revenue Service concluded its review of the years 2013 through 2015 in 2018, and all years before 2016 are closed. Tax years after 2014 remain open in certain major foreign jurisdictions and are subject to examination by the taxing authorities. The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner inconsistent with its expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although the timing of resolution and/or closure of audits is not certain, the Company believes it is reasonably possible that its gross unrecognized tax benefits could decrease in the next 12 months by as much as $4.8 billion.
European Commission State Aid Decision
On August 30, 2016, the European Commission announced its decision that Ireland granted state aid to the Company by providing tax opinions in 1991 and 2007 concerning the tax allocation of profits of the Irish branches of two subsidiaries of the Company (the “State Aid Decision”). The State Aid Decision ordered Ireland to calculate and recover additional taxes from the Company for the period June 2003 through December 2014. Irish legislative changes, effective as of January 2015, eliminated the application of the tax opinions from that date forward. The recovery amount was calculated to be €13.1 billion, plus interest of €1.2 billion. The Company and Ireland appealed the State Aid Decision to the General Court of the Court of Justice of the European Union (the “General Court”). On July 15, 2020, the General Court annulled the State Aid Decision. The General Court’s judgment is subject to appeal by the European Commission.
On an annual basis, the Company may request approval from the Irish Minister for Finance to reduce the recovery amount for certain taxes paid to other countries. As of June 27, 2020, the adjusted recovery amount was €12.9 billion, excluding interest. The adjusted recovery amount plus interest is funded into escrow, where it will remain restricted from general use pending the conclusion of all legal proceedings. Refer to the Cash, Cash Equivalents and Marketable Securities section of Note 3, “Financial Instruments” for more information.
Apple Inc. | Q3 2020 Form 10-Q | 16
Note 6 – Debt
Commercial Paper and Repurchase Agreements
The Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. The Company uses net proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases. As of both June 27, 2020 and September 28, 2019, the Company had $6.0 nine months . The weighted-average interest rate of the Company’s Commercial Paper was 0.77 % and 2.24 % as of June 27, 2020 and September 28, 2019, respectively. The following table provides a summary of cash flows associated with the issuance and maturities of Commercial Paper for the nine months ended June 27, 2020 and June 29, 2019 (in millions):
| Nine Months Ended | |||||||||||||||||
| June 27, 2020 | June 29, 2019 | ||||||||||||||||
| Maturities 90 days or less: | |||||||||||||||||
| Proceeds from/(Repayments of) commercial paper, net | $ | $ | ( | ||||||||||||||
| Maturities greater than 90 days: | |||||||||||||||||
| Proceeds from commercial paper | |||||||||||||||||
| Repayments of commercial paper | ( | ( | |||||||||||||||
| Proceeds from/(Repayments of) commercial paper, net | ( | ||||||||||||||||
| Total proceeds from/(repayments of) commercial paper, net | $ | $ | ( | ||||||||||||||
In 2020, the Company entered into agreements to sell certain of its marketable securities with a promise to repurchase the securities at a specified time and amount (“Repos”). Due to the Company’s continuing involvement with the marketable securities, the Company accounts for its Repos as collateralized borrowings. As of June 27, 2020, the Company had $5.2 billion of Repo liabilities outstanding with maturities of less than three months , and had pledged $5.3 billion of marketable securities as collateral.
Term Debt
As of June 27, 2020, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $100.1 billion (collectively the “Notes”). The Notes are senior unsecured obligations and interest is payable in arrears. The following table provides a summary of the Company’s term debt as of June 27, 2020 and September 28, 2019:
| Maturities (calendar year) | June 27, 2020 | September 28, 2019 | |||||||||||||||||||||||||||||||||||||||
| Amount (in millions) | Effective Interest Rate | Amount (in millions) | Effective Interest Rate | ||||||||||||||||||||||||||||||||||||||
| 2013 – 2019 debt issuances: | |||||||||||||||||||||||||||||||||||||||||
Floating-rate notes | $ | $ | |||||||||||||||||||||||||||||||||||||||
Fixed-rate | |||||||||||||||||||||||||||||||||||||||||
First quarter 2020 debt issuance of € | |||||||||||||||||||||||||||||||||||||||||
Fixed-rate | % | ||||||||||||||||||||||||||||||||||||||||
Third quarter 2020 debt issuance of $ | |||||||||||||||||||||||||||||||||||||||||
Fixed-rate | % | ||||||||||||||||||||||||||||||||||||||||
| Total term debt | |||||||||||||||||||||||||||||||||||||||||
Unamortized premium/(discount) and issuance costs, net | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Hedge accounting fair value adjustments | |||||||||||||||||||||||||||||||||||||||||
| Less: Current portion of term debt | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Total non-current portion of term debt | $ | $ | |||||||||||||||||||||||||||||||||||||||
Apple Inc. | Q3 2020 Form 10-Q | 17
To manage interest rate risk on certain of its U.S. dollar–denominated fixed- or floating-rate notes, the Company has entered into interest rate swaps to effectively convert the fixed interest rates to floating interest rates or the floating interest rates to fixed interest rates on a portion of these notes. Additionally, to manage foreign currency risk on certain of its foreign currency–denominated notes, the Company has entered into foreign currency swaps to effectively convert these notes to U.S. dollar–denominated notes.
As of September 28, 2019, a portion of the Company’s Japanese yen–denominated notes with a carrying value of $1.0 billion was designated as a hedge of the foreign currency exposure of the Company’s net investment in a foreign operation. The Company’s Japanese yen–denominated notes matured during the third quarter of 2020 and the associated net investment hedges were terminated. For further discussion regarding the Company’s use of derivative instruments, refer to the Derivative Financial Instruments section of Note 3, “Financial Instruments.”
The effective interest rates for the Notes include the interest on the Notes, amortization of the discount or premium and, if applicable, adjustments related to hedging. The Company recognized $664 million and $2.1 billion of interest cost on its term debt for the three- and nine-month periods ended June 27, 2020, respectively. The Company recognized $790 million and $2.4 billion of interest cost on its term debt for the three- and nine-month periods ended June 29, 2019, respectively.
As of June 27, 2020 and September 28, 2019, the fair value of the Company’s Notes, based on Level 2 inputs, was $110.8 billion and $107.5 billion, respectively.
Note 7 – Shareholders’ Equity
Share Repurchase Program
As of June 27, 2020, the Company was authorized to purchase up to $225 billion of the Company’s common stock under a share repurchase program, of which $150.6 billion had been utilized. During the nine months ended June 27, 2020, the Company repurchased 186.4 million shares of its common stock for $54.5 billion, including 35.2 million shares delivered under a $10.0 billion November 2019 accelerated share repurchase arrangement (“ASR”) and 15.2 million shares initially delivered under a $6.0 billion May 2020 ASR. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Under the Company’s ASRs, financial institutions deliver shares of the Company’s common stock during the purchase period of each ASR in exchange for an up-front payment. The total number of shares ultimately delivered under the May 2020 ASR, and therefore the average repurchase price paid per share, is determined based on the volume-weighted average price of the Company’s common stock during the purchase period, which will end in or before August 2020. The shares received are retired in the periods they are delivered, and the up-front payment is accounted for as a reduction to retained earnings in the Company’s Condensed Consolidated Statement of Shareholders’ Equity in the period the payment is made.
Common Stock Split
On July 30, 2020, the Company announced a four -for-one split of its common stock to shareholders of record as of the close of business on August 24, 2020. Trading of the Company’s common stock will begin on a split-adjusted basis on August 31, 2020.
Note 8 – Comprehensive Income
Apple Inc. | Q3 2020 Form 10-Q | 18
The following table shows the pre-tax amounts reclassified from AOCI into the Condensed Consolidated Statements of Operations, and the associated financial statement line items, for the three- and nine-month periods ended June 27, 2020 and June 29, 2019 (in millions):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||
| Comprehensive Income Components | Financial Statement Line Items | June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | |||||||||||||||||||||||||||||||||||||||
Unrealized (gains)/losses on derivative instruments: | ||||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | Total net sales | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||
| Total cost of sales | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||
| Other income/(expense), net | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Interest rate contracts | Other income/(expense), net | |||||||||||||||||||||||||||||||||||||||||||
| ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||
Unrealized (gains)/losses on marketable debt securities | Other income/(expense), net | ( | ( | |||||||||||||||||||||||||||||||||||||||||
| Total amounts reclassified from AOCI | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||
The following table shows the changes in AOCI by component for the nine months ended June 27, 2020 (in millions):
| Cumulative Foreign Currency Translation | Unrealized Gains/Losses on Derivative Instruments | Unrealized Gains/Losses on Marketable Debt Securities | Total | ||||||||||||||||||||
| Balances as of September 28, 2019 | $ | ( | $ | $ | $ | ( | |||||||||||||||||
Other comprehensive income/(loss) before reclassifications | ( | ||||||||||||||||||||||
| Amounts reclassified from AOCI | ( | ( | |||||||||||||||||||||
| Tax effect | ( | ( | ( | ||||||||||||||||||||
| Other comprehensive income/(loss) | ( | ( | ( | ||||||||||||||||||||
Cumulative effect of change in accounting principle (1) | |||||||||||||||||||||||
| Balances as of June 27, 2020 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
(1)Refer to Note 1, “Summary of Significant Accounting Policies” for more information on the Company’s adoption of ASU 2017-12 at the beginning of the first quarter of 2020.
Note 9 – Benefit Plans
Stock Plans
The Company had 203.3 million shares reserved for future issuance under its stock plans as of June 27, 2020. Restricted stock units (“RSUs”) granted under the Company’s stock plans generally vest over four years , based on continued employment, and are settled upon vesting in shares of the Company’s common stock on a one -for-one basis. RSUs granted under the Company’s stock plans reduce the number of shares available for grant under the plans by a factor of two times the number of RSUs granted. RSUs canceled and shares withheld to satisfy tax withholding obligations increase the number of shares available for grant under the plans utilizing a factor of two times the number of RSUs canceled or shares withheld.
Rule 10b5-1 Trading Plans
During the three months ended June 27, 2020, Section 16 officers Katherine L. Adams, Timothy D. Cook, Chris Kondo, Luca Maestri, Deirdre O’Brien and Jeffrey Williams had equity trading plans in place in accordance with Rule 10b5-1(c)(1) under the Exchange Act. An equity trading plan is a written document that pre-establishes the amounts, prices and dates (or formula for determining the amounts, prices and dates) of future purchases or sales of the Company’s stock, including shares acquired under the Company’s employee and director equity plans.
Apple Inc. | Q3 2020 Form 10-Q | 19
Restricted Stock Units
A summary of the Company’s RSU activity and related information for the nine months ended June 27, 2020 is as follows:
Number of RSUs (in thousands) | Weighted-Average Grant Date Fair Value Per RSU | Aggregate Fair Value (in millions) | |||||||||||||||
| Balance as of September 28, 2019 | $ | ||||||||||||||||
| RSUs granted | $ | ||||||||||||||||
| RSUs vested | ( | $ | |||||||||||||||
| RSUs canceled | ( | $ | |||||||||||||||
| Balance as of June 27, 2020 | $ | $ | |||||||||||||||
The fair value as of the respective vesting dates of RSUs was $5.0 billion and $9.8 billion for the three- and nine-month periods ended June 27, 2020, respectively, and was $3.7 billion and $8.1 billion for the three- and nine-month periods ended June 29, 2019, respectively.
Share-Based Compensation
The following table shows share-based compensation expense and the related income tax benefit included in the Condensed Consolidated Statements of Operations for the three- and nine-month periods ended June 27, 2020 and June 29, 2019 (in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||
| Share-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Income tax benefit related to share-based compensation expense | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||
As of June 27, 2020, the total unrecognized compensation cost related to outstanding RSUs and stock options was $13.4 billion, which the Company expects to recognize over a weighted-average period of 2.7 years.
Note 10 – Commitments and Contingencies
Accrued Warranty and Guarantees
The following table shows changes in the Company’s accrued warranties and related costs for the three- and nine-month periods ended June 27, 2020 and June 29, 2019 (in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||
| Beginning accrued warranty and related costs | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Cost of warranty claims | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Accruals for product warranty | |||||||||||||||||||||||||||||||||||
| Ending accrued warranty and related costs | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
The Company offers an iPhone Upgrade Program, which is available to customers who purchase a qualifying iPhone in the U.S., the U.K. and mainland China. The iPhone Upgrade Program provides customers the right to trade in that iPhone for a specified amount when purchasing a new iPhone, provided certain conditions are met. The Company accounts for the trade-in right as a guarantee liability and recognizes arrangement revenue net of the fair value of such right, with subsequent changes to the guarantee liability recognized within net sales.
Concentrations in the Available Sources of Supply of Materials and Product
Although most components essential to the Company’s business are generally available from multiple sources, certain components are currently obtained from single or limited sources. The Company also competes for various components with other participants in the markets for smartphones, personal computers, tablets and other electronic devices. Therefore, many components used by the Company, including those that are available from multiple sources, are at times subject to industry-wide shortage and significant commodity pricing fluctuations.
Apple Inc. | Q3 2020 Form 10-Q | 20
The Company uses some custom components that are not commonly used by its competitors, and new products introduced by the Company often utilize custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or their manufacturing capacities have increased. The continued availability of these components at acceptable prices, or at all, may be affected if suppliers decide to concentrate on the production of common components instead of components customized to meet the Company’s requirements.
The Company has entered into agreements for the supply of many components; however, there can be no guarantee that the Company will be able to extend or renew these agreements on similar terms, or at all.
Substantially all of the Company’s hardware products are manufactured by outsourcing partners that are located primarily in Asia, with some Mac computers manufactured in the U.S. and Ireland.
Unconditional Purchase Obligations
The Company has entered into certain off–balance sheet commitments that require the future purchase of goods or services (“unconditional purchase obligations”). The Company’s unconditional purchase obligations primarily consist of payments for supplier arrangements, Internet and telecommunication services, intellectual property licenses and content creation. As of June 27, 2020, the Company’s total future payments under noncancelable unconditional purchase obligations having a remaining term in excess of one year were $9.2 billion.
Contingencies
The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully resolved. The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting period for amounts above management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss greater than a recorded accrual, concerning loss contingencies for asserted legal and other claims, except for the following matters:
VirnetX
VirnetX, Inc. (“VirnetX”) filed a lawsuit against the Company alleging that certain of the Company’s products infringe on patents owned by VirnetX. On April 11, 2018, a jury returned a verdict against the Company and awarded damages of $503 million. The Company appealed the verdict to the U.S. Court of Appeals for the Federal Circuit, which remanded the case back to the U.S. District Court for the Eastern District of Texas, where it is scheduled for a re-trial in August 2020. The Company has challenged the validity of the patents at issue in the re-trial at the U.S. Patent and Trademark Office (the “PTO”), and the PTO has declared the patents invalid, subject to further appeal by VirnetX.
iOS Performance Management Cases
Various civil litigation matters have been filed in state and federal courts in the U.S. and in various international jurisdictions alleging violation of consumer protection laws, fraud, computer intrusion and other causes of action related to the Company’s performance management feature used in its iPhone operating systems, introduced to certain iPhones in iOS updates 10.2.1 and 11.2. The claims seek monetary damages and other non-monetary relief. On April 5, 2018, several U.S. federal actions were consolidated through a Multidistrict Litigation process into a single action in the U.S. District Court for the Northern District of California (the “Northern California District Court”). On February 28, 2020, the parties in the Multidistrict Litigation reached a settlement to resolve the U.S. federal and California state class actions. Under the terms of the settlement, which the Northern California District Court preliminarily approved in May 2020, the Company has agreed to pay up to $500 million in the aggregate to certain U.S. owners of iPhones if certain conditions are met. The final amount of the settlement will be determined based on the number of consumers who file valid claims and the attorneys’ fee award. However, the Company has agreed to pay at least $310 million to settle the claims. In addition to civil litigation, the Company is also responding to governmental investigations and requests for information relating to the performance management feature. The Company continues to believe that its iPhones were not defective, that the performance management feature introduced with iOS updates 10.2.1 and 11.2 was intended to, and did, improve customers’ user experience, and that the Company did not make any misleading statements or fail to disclose any material information. The Company has accrued its best estimate for the ultimate resolution of these matters.
French Competition Authority
On March 16, 2020, the French Competition Authority (“FCA”) announced its decision that aspects of the Company’s sales and distribution practices in France violate French competition law, and issued a fine of €1.1 billion. The Company strongly disagrees with the FCA’s decision, and has appealed.
Apple Inc. | Q3 2020 Form 10-Q | 21
Note 11 – Segment Information and Geographic Data
The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments.
The Company manages its business primarily on a geographic basis. The Company’s reportable segments consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. Americas includes both North and South America. Europe includes European countries, as well as India, the Middle East and Africa. Greater China includes China, Hong Kong and Taiwan. Rest of Asia Pacific includes Australia and those Asian countries not included in the Company’s other reportable segments. Although the reportable segments provide similar hardware and software products and similar services, each one is managed separately to better align with the location of the Company’s customers and distribution partners and the unique market dynamics of each geographic region. The accounting policies of the various segments are the same as those described in Note 1, “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2019 Form 10-K.
The Company evaluates the performance of its reportable segments based on net sales and operating income. Net sales for geographic segments are generally based on the location of customers and sales through the Company’s retail stores located in those geographic locations. Operating income for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. Advertising expenses are generally included in the geographic segment in which the expenditures are incurred. Operating income for each segment excludes other income and expense and certain expenses managed outside the reportable segments. Costs excluded from segment operating income include various corporate expenses such as research and development, corporate marketing expenses, certain share-based compensation expenses, income taxes, various nonrecurring charges and other separately managed general and administrative costs. The Company does not include intercompany transfers between segments for management reporting purposes.
The following table shows information by reportable segment for the three- and nine-month periods ended June 27, 2020 and June 29, 2019 (in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||
| Americas: | |||||||||||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Operating income | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Europe: | |||||||||||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Operating income | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Greater China: | |||||||||||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Operating income | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Japan: | |||||||||||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Operating income | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Rest of Asia Pacific: | |||||||||||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Operating income | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Apple Inc. | Q3 2020 Form 10-Q | 22
A reconciliation of the Company’s segment operating income to the Condensed Consolidated Statements of Operations for the three- and nine-month periods ended June 27, 2020 and June 29, 2019 is as follows (in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||
| Segment operating income | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Research and development expense | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Other corporate expenses, net | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Total operating income | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Note 12 – Leases
The Company has lease arrangements for certain equipment and facilities, including retail, corporate, manufacturing and data center space. These leases typically have original terms not exceeding 10 years and generally contain multi-year renewal options, some of which are reasonably certain of exercise. The Company’s lease arrangements may contain both lease and non-lease components. The Company has elected to combine and account for lease and non-lease components as a single lease component for leases of retail, corporate, and data center facilities.
Payments under the Company’s lease arrangements may be fixed or variable, and variable lease payments are primarily based on purchases of output of the underlying leased assets. Lease costs associated with fixed payments on the Company’s operating leases were $381 million and $1.1 billion for the three- and nine-month periods ended June 27, 2020, respectively. Lease costs associated with variable payments on the Company’s leases were $1.8 billion and $6.6 billion for the three- and nine-month periods ended June 27, 2020, respectively.
For the three- and nine-month periods ended June 27, 2020, the Company made $388 million and $1.1 billion of fixed cash payments related to operating leases, respectively. Non-cash activities involving ROU assets obtained in exchange for lease liabilities were $403 million and $9.7 billion for the three- and nine-month periods ended June 27, 2020, respectively, including the impact of adopting the new leases standard in the first quarter of 2020.
The following table shows ROU assets and lease liabilities, and the associated financial statement line items, as of June 27, 2020 (in millions):
| Lease-Related Assets and Liabilities | Financial Statement Line Items | June 27, 2020 | ||||||||||||||||||
Right-of-use assets: | ||||||||||||||||||||
| Operating leases | Other non-current assets | $ | ||||||||||||||||||
| Finance leases | Property, plant and equipment, net | |||||||||||||||||||
| Total right-of-use assets | $ | |||||||||||||||||||
Lease liabilities: | ||||||||||||||||||||
| Operating leases | Other current liabilities | $ | ||||||||||||||||||
| Other non-current liabilities | ||||||||||||||||||||
| Finance leases | Other current liabilities | |||||||||||||||||||
| Other non-current liabilities | ||||||||||||||||||||
| Total lease liabilities | $ | |||||||||||||||||||
Apple Inc. | Q3 2020 Form 10-Q | 23
Lease liability maturities as of June 27, 2020, are as follows (in millions):
| Operating Leases | Finance Leases | Total | |||||||||||||||
| 2020 (remaining three months) | $ | $ | $ | ||||||||||||||
| 2021 | |||||||||||||||||
| 2022 | |||||||||||||||||
| 2023 | |||||||||||||||||
| 2024 | |||||||||||||||||
| Thereafter | |||||||||||||||||
| Total undiscounted liabilities | |||||||||||||||||
| Less: Imputed interest | ( | ( | ( | ||||||||||||||
| Total lease liabilities | $ | $ | $ | ||||||||||||||
The weighted-average remaining lease term and discount rate related to the Company’s lease liabilities as of June 27, 2020 were 10.5 years and 2.2 %, respectively. The Company’s lease discount rates are generally based on estimates of its incremental borrowing rate, as the discount rates implicit in the Company’s leases cannot be readily determined.
As of June 27, 2020, the Company had $1.8 billion of future payments under additional leases, primarily for corporate facilities and retail space, that had not yet commenced. These leases will commence between 2020 and 2022, with lease terms ranging from less than 1 year to 20 years.
Apple Inc. | Q3 2020 Form 10-Q | 24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section and other parts of this Quarterly Report on Form 10-Q (“Form 10-Q”) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. For example, statements in this Form 10-Q regarding the potential future impact of the COVID-19 pandemic on the Company’s business and results of operations are forward-looking statements. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended September 28, 2019 (the “2019 Form 10-K”) and Part II, Item 1A of this Form 10-Q, in each case under the heading “Risk Factors.” The following discussion should be read in conjunction with the 2019 Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) and the condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q. All information presented herein is based on the Company’s fiscal calendar, and references to particular years, quarters, months or periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years. Each of the terms the “Company” and “Apple” as used herein refers collectively to Apple Inc. and its wholly owned subsidiaries, unless otherwise stated. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Available Information
The Company periodically provides certain information for investors on its corporate website, www.apple.com, and its investor relations website, investor.apple.com. This includes press releases and other information about financial performance, information on corporate governance and details related to the Company’s annual meeting of shareholders. The information contained on the websites referenced in this Form 10-Q is not incorporated by reference into this filing. Further, the Company’s references to website URLs are intended to be inactive textual references only.
Quarterly Highlights
Business Seasonality and Product Introductions
The Company has historically experienced higher net sales in its first quarter compared to other quarters in its fiscal year due in part to seasonal holiday demand. Additionally, new product and service introductions can significantly impact net sales, cost of sales and operating expenses. The timing of product introductions can also impact the Company’s net sales to its indirect distribution channels as these channels are filled with new inventory following a product launch, and channel inventory of an older product often declines as the launch of a newer product approaches. Net sales can also be affected when consumers and distributors anticipate a product introduction.
COVID-19 Update
During the second quarter of 2020, a novel strain of coronavirus (“COVID-19”) began spreading rapidly throughout the world, prompting governments and businesses to take unprecedented measures in response. Such measures included restrictions on travel and business operations, temporary closures of businesses, and quarantines and shelter-in-place orders. The COVID-19 pandemic has significantly curtailed global economic activity and caused significant volatility and disruption in global financial markets. The COVID-19 pandemic and the measures taken by many countries in response have adversely affected and could in the future materially adversely impact the Company’s business, results of operations, financial condition and stock price.
During the third quarter of 2020, aspects of the Company’s business continued to be adversely affected by the COVID-19 pandemic, with many of the Company’s retail stores temporarily closed and the vast majority of the Company’s employees working remotely. The Company is working on safely re-opening its offices and retail stores, subject to local rules and regulations.
Demand for certain of the Company’s products and services was impacted throughout the third quarter of 2020. The most pronounced impact occurred in April 2020, with demand improving in May and June 2020 across all product categories and Services.
The full extent of the future impact of the COVID-19 pandemic on the Company’s operational and financial performance is currently uncertain and will depend on many factors outside the Company’s control, including, without limitation, the timing, extent, trajectory and duration of the pandemic, the development and availability of effective treatments and vaccines, the imposition of protective public safety measures, and the impact of the pandemic on the global economy and demand for consumer products. Refer to Part I, Item 1A of the 2019 Form 10-K and Part II, Item 1A of this Form 10-Q, in each case under the heading “Risk Factors,” for more information.
Apple Inc. | Q3 2020 Form 10-Q | 25
The Company believes its existing balances of cash, cash equivalents and marketable securities, along with commercial paper and other short-term liquidity arrangements, will be sufficient to satisfy its working capital needs, capital asset purchases, dividends, share repurchases, debt repayments and other liquidity requirements associated with its existing operations.
Third Quarter Fiscal 2020 Highlights
Total net sales increased 11% or $5.9 billion during the third quarter of 2020 compared to the same quarter in 2019, primarily driven by higher net sales of Services, iPad and Mac. The year-over-year increase in net sales during the third quarter of 2020 reflected growth in all of the Company’s geographic reportable segments and product categories. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on net sales during the third quarter of 2020.
During the third quarter of 2020, the Company released a new iPhone SE and an updated 13-inch MacBook Pro®. The Company also announced iOS 14, iPadOS® 14, macOS® Big Sur, watchOS® 7 and tvOS® 14, updates to its operating systems that are expected to be available in the fall of 2020.
The Company repurchased $16.0 billion of its common stock and paid dividends and dividend equivalents of $3.7 billion during the third quarter of 2020.
Products and Services Performance
The following table shows net sales by category for the three- and nine-month periods ended June 27, 2020 and June 29, 2019 (dollars in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | Change | June 27, 2020 | June 29, 2019 | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales by category: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
iPhone (1) | $ | 26,418 | $ | 25,986 | 2 | % | $ | 111,337 | $ | 109,019 | 2 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Mac (1) | 7,079 | 5,820 | 22 | % | 19,590 | 18,749 | 4 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
iPad (1) | 6,582 | 5,023 | 31 | % | 16,927 | 16,624 | 2 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
Wearables, Home and Accessories (1)(2) | 6,450 | 5,525 | 17 | % | 22,744 | 17,962 | 27 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
Services (3) | 13,156 | 11,455 | 15 | % | 39,219 | 33,780 | 16 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Total net sales | $ | 59,685 | $ | 53,809 | 11 | % | $ | 209,817 | $ | 196,134 | 7 | % | |||||||||||||||||||||||||||||||||||||||||||||||
(1)Products net sales include amortization of the deferred value of unspecified software upgrade rights, which are bundled in the sales price of the respective product.
(2)Wearables, Home and Accessories net sales include sales of AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch and Apple-branded and third-party accessories.
(3)Services net sales include sales from the Company’s digital content stores and streaming services, AppleCare, Advertising and other services. Services net sales also include amortization of the deferred value of Maps, Siri, and free iCloud storage and Apple TV + services, which are bundled in the sales price of certain products.
iPhone
iPhone net sales increased during the third quarter of 2020 compared to the third quarter of 2019 due primarily to net sales of the new iPhone SE released during the third quarter of 2020. Year-over-year iPhone net sales increased during the first nine months of 2020 due primarily to higher net sales of iPhone 11, 11 Pro and 11 Pro Max.
Mac
Mac net sales increased during the third quarter of 2020 compared to the third quarter of 2019 due to higher net sales of MacBook Pro and MacBook Air®. Year-over-year Mac net sales increased during the first nine months of 2020 due to higher net sales of MacBook Pro.
iPad
iPad net sales increased during the third quarter of 2020 compared to the third quarter of 2019 due primarily to higher net sales of iPad Pro®. Year-over-year iPad net sales increased during the first nine months of 2020 due primarily to higher net sales of iPad Air®.
Apple Inc. | Q3 2020 Form 10-Q | 26
Wearables, Home and Accessories
Wearables, Home and Accessories net sales increased during the third quarter and first nine months of 2020 compared to the same periods in 2019 due primarily to higher net sales of AirPods.
Services
Services net sales increased during the third quarter of 2020 compared to the third quarter of 2019 due primarily to higher net sales from the App Store, Video and Cloud Services. Year-over-year Services net sales increased during the first nine months of 2020 due primarily to higher net sales from the App Store, Advertising and AppleCare. Advertising net sales includes net sales from licensing arrangements and the Company’s advertising platforms.
Segment Operating Performance
The Company manages its business primarily on a geographic basis. The Company’s reportable segments consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. Americas includes both North and South America. Europe includes European countries, as well as India, the Middle East and Africa. Greater China includes China, Hong Kong and Taiwan. Rest of Asia Pacific includes Australia and those Asian countries not included in the Company’s other reportable segments. Although the reportable segments provide similar hardware and software products and similar services, each one is managed separately to better align with the location of the Company’s customers and distribution partners and the unique market dynamics of each geographic region. Further information regarding the Company’s reportable segments can be found in Part I, Item 1 of this Form 10-Q in the Notes to Condensed Consolidated Financial Statements in Note 11, “Segment Information and Geographic Data.”
The following table shows net sales by reportable segment for the three- and nine-month periods ended June 27, 2020 and June 29, 2019 (dollars in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | Change | June 27, 2020 | June 29, 2019 | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales by reportable segment: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Americas | $ | 27,018 | $ | 25,056 | 8 | % | $ | 93,858 | $ | 87,592 | 7 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Europe | 14,173 | 11,925 | 19 | % | 51,740 | 45,342 | 14 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Greater China | 9,329 | 9,157 | 2 | % | 32,362 | 32,544 | (1) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Japan | 4,966 | 4,082 | 22 | % | 16,395 | 16,524 | (1) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Rest of Asia Pacific | 4,199 | 3,589 | 17 | % | 15,462 | 14,132 | 9 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Total net sales | $ | 59,685 | $ | 53,809 | 11 | % | $ | 209,817 | $ | 196,134 | 7 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Americas
Americas net sales increased during the third quarter of 2020 compared to the third quarter of 2019 due primarily to higher net sales of Services and iPad. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on Americas net sales during the third quarter of 2020. Year-over-year Americas net sales increased during the first nine months of 2020 due primarily to higher net sales of Services and Wearables, Home and Accessories.
Europe
Europe net sales increased during the third quarter of 2020 compared to the third quarter of 2019 due primarily to higher net sales of iPhone, iPad and Wearables, Home and Accessories. Year-over-year Europe net sales increased during the first nine months of 2020 due primarily to higher net sales of iPhone and Wearables, Home and Accessories. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on Europe net sales during the third quarter and first nine months of 2020.
Greater China
Greater China net sales increased during the third quarter of 2020 compared to the third quarter of 2019 due primarily to higher net sales of iPad and Services, partially offset by lower net sales of iPhone. Year-over-year Greater China net sales decreased during the first nine months of 2020 due primarily to lower net sales of iPhone, partially offset by higher net sales of Services and Wearables, Home and Accessories. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on Greater China net sales during the third quarter and first nine months of 2020.
Apple Inc. | Q3 2020 Form 10-Q | 27
Japan
Japan net sales increased during the third quarter of 2020 compared to the third quarter of 2019 due primarily to higher net sales of Services, iPad and Mac. Year-over-year Japan net sales decreased during the first nine months of 2020 due primarily to lower net sales of iPhone, partially offset by higher net sales of Services and Wearables, Home and Accessories. The strength of the Japanese Yen relative to the U.S. dollar had a favorable impact on Japan net sales during the first nine months of 2020.
Rest of Asia Pacific
Rest of Asia Pacific net sales increased during the third quarter of 2020 compared to the third quarter of 2019 due primarily to higher net sales of iPhone, iPad and Mac. Year-over-year Rest of Asia Pacific net sales increased during the first nine months of 2020 due primarily to higher net sales of Wearables, Home and Accessories, iPhone and Services. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on Rest of Asia Pacific net sales during the third quarter and first nine months of 2020.
Gross Margin
Products and Services gross margin and gross margin percentage for the three- and nine-month periods ended June 27, 2020 and June 29, 2019 were as follows (dollars in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||
| Gross margin: | |||||||||||||||||||||||||||||||||||
| Products | $ | 13,836 | $ | 12,881 | $ | 54,509 | $ | 52,596 | |||||||||||||||||||||||||||
| Services | 8,844 | 7,346 | 25,758 | 21,483 | |||||||||||||||||||||||||||||||
| Total gross margin | $ | 22,680 | $ | 20,227 | $ | 80,267 | $ | 74,079 | |||||||||||||||||||||||||||
| Gross margin percentage: | |||||||||||||||||||||||
| Products | 29.7 | % | 30.4 | % | 32.0 | % | 32.4 | % | |||||||||||||||
| Services | 67.2 | % | 64.1 | % | 65.7 | % | 63.6 | % | |||||||||||||||
| Total gross margin percentage | 38.0 | % | 37.6 | % | 38.3 | % | 37.8 | % | |||||||||||||||
Products Gross Margin
Products gross margin increased during the third quarter of 2020 compared to the third quarter of 2019 due primarily to higher Products volume and material cost savings, partially offset by a different Products mix and the weakness in foreign currencies relative to the U.S. dollar. Year-over-year Products gross margin percentage decreased during the third quarter of 2020 due primarily to a different Products mix and the weakness in foreign currencies relative to the U.S. dollar, partially offset by material cost savings and higher leverage.
Products gross margin increased during the first nine months of 2020 compared to the same period in 2019 due primarily to higher Products volume, partially offset by the weakness in foreign currencies relative to the U.S. dollar. Year-over-year Products gross margin percentage decreased during the first nine months of 2020 due primarily to the weakness in foreign currencies relative to the U.S. dollar and a different Products mix, partially offset by higher leverage.
Services Gross Margin
Services gross margin increased during the third quarter and first nine months of 2020 compared to the same periods in 2019 due primarily to higher Services net sales. Services gross margin percentage increased during the third quarter and first nine months of 2020 compared to the same periods in 2019 due primarily to a different Services mix and higher leverage, partially offset by higher Services costs.
The Company’s future gross margins can be impacted by a variety of factors, as discussed in Part I, Item 1A of the 2019 Form 10-K and Part II, Item 1A of this Form 10-Q, in each case under the heading “Risk Factors.” As a result, the Company believes, in general, gross margins will be subject to volatility and remain under downward pressure.
Apple Inc. | Q3 2020 Form 10-Q | 28
Operating Expenses
Operating expenses for the three- and nine-month periods ended June 27, 2020 and June 29, 2019 were as follows (dollars in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||
| Research and development | $ | 4,758 | $ | 4,257 | $ | 13,774 | $ | 12,107 | |||||||||||||||||||||||||||
| Percentage of total net sales | 8 | % | 8 | % | 7 | % | 6 | % | |||||||||||||||||||||||||||
| Selling, general and administrative | $ | 4,831 | $ | 4,426 | $ | 14,980 | $ | 13,667 | |||||||||||||||||||||||||||
| Percentage of total net sales | 8 | % | 8 | % | 7 | % | 7 | % | |||||||||||||||||||||||||||
| Total operating expenses | $ | 9,589 | $ | 8,683 | $ | 28,754 | $ | 25,774 | |||||||||||||||||||||||||||
| Percentage of total net sales | 16 | % | 16 | % | 14 | % | 13 | % | |||||||||||||||||||||||||||
Research and Development
The growth in research and development (“R&D”) expense during the third quarter and first nine months of 2020 compared to the same periods in 2019 was driven primarily by increases in headcount-related expenses. The Company continues to believe that focused investments in R&D are critical to its future growth and competitive position in the marketplace, and to the development of new and updated products and services that are central to the Company’s core business strategy.
Selling, General and Administrative
The growth in selling, general and administrative expense during the third quarter and first nine months of 2020 compared to the same periods in 2019 was driven primarily by increases in headcount-related expenses, higher spending on marketing and advertising and higher variable selling expenses.
Other Income/(Expense), Net
Other income/(expense), net (“OI&E”) for the three- and nine-month periods ended June 27, 2020 and June 29, 2019 was as follows (dollars in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | Change | June 27, 2020 | June 29, 2019 | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest and dividend income | $ | 901 | $ | 1,190 | $ | 2,995 | $ | 3,855 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | (697) | (866) | (2,239) | (2,766) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other income/(expense), net | (158) | 43 | (79) | 216 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total other income/(expense), net | $ | 46 | $ | 367 | (87) | % | $ | 677 | $ | 1,305 | (48) | % | |||||||||||||||||||||||||||||||||||||||||||||||
OI&E decreased during the third quarter and first nine months of 2020 compared to the same periods in 2019 due primarily to lower interest income and impairments on non-marketable securities, partially offset by lower interest expense. The weighted-average interest rate earned by the Company on its cash, cash equivalents and marketable securities was 1.74% and 2.17% in the third quarter of 2020 and 2019, respectively, and 1.95% and 2.21% in the first nine months of 2020 and 2019, respectively.
Apple Inc. | Q3 2020 Form 10-Q | 29
Provision for Income Taxes
Provision for income taxes, effective tax rate and statutory federal income tax rate for the three- and nine-month periods ended June 27, 2020 and June 29, 2019 were as follows (dollars in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||
| Provision for income taxes | $ | 1,884 | $ | 1,867 | $ | 7,452 | $ | 8,040 | |||||||||||||||||||||||||||
| Effective tax rate | 14.3 | % | 15.7 | % | 14.3 | % | 16.2 | % | |||||||||||||||||||||||||||
| Statutory federal income tax rate | 21 | % | 21 | % | 21 | % | 21 | % | |||||||||||||||||||||||||||
The Company’s effective tax rate for the third quarter and first nine months of 2020 was lower than the statutory federal income tax rate due primarily to lower taxes on foreign earnings, including the impact of tax settlements, and tax benefits from share-based compensation.
The Company’s effective tax rate for the third quarter of 2020 was lower compared to the third quarter of 2019 due primarily to higher tax benefits from share-based compensation. The Company’s effective tax rate for the first nine months of 2020 was lower compared to the same period in 2019 due primarily to the one-time adjustment of U.S. foreign tax credits in response to regulations issued by the U.S. Department of the Treasury in December 2019 and lower taxes on foreign earnings, including the impact of tax settlements.
Recent Accounting Pronouncements
Financial Instruments
In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which modifies the measurement of expected credit losses on certain financial instruments. The Company will adopt ASU 2016-13 in its first quarter of 2021 utilizing the modified retrospective transition method. Based on the composition of the Company’s investment portfolio, current market conditions, and historical credit loss activity, the adoption of ASU 2016-13 is not expected to have a material impact on its consolidated financial statements.
Liquidity and Capital Resources
The following tables present selected financial information and statistics as of June 27, 2020 and September 28, 2019 and for the first nine months of 2020 and 2019 (in millions):
| June 27, 2020 | September 28, 2019 | ||||||||||
Cash, cash equivalents and marketable securities (1) | $ | 193,617 | $ | 205,898 | |||||||
| Property, plant and equipment, net | $ | 35,687 | $ | 37,378 | |||||||
| Commercial paper and repurchase agreements | $ | 11,166 | $ | 5,980 | |||||||
| Total term debt | $ | 101,557 | $ | 102,067 | |||||||
| Working capital | $ | 44,747 | $ | 57,101 | |||||||
| Nine Months Ended | |||||||||||||||||
| June 27, 2020 | June 29, 2019 | ||||||||||||||||
| Cash generated by operating activities | $ | 60,098 | $ | 49,481 | |||||||||||||
| Cash generated by/(used in) investing activities | $ | (9,820) | $ | 46,694 | |||||||||||||
| Cash used in financing activities | $ | (65,463) | $ | (69,937) | |||||||||||||
(1)As of June 27, 2020 and September 28, 2019, total marketable securities included $18.3 billion and $18.9 billion, respectively, that was restricted from general use, related to the State Aid Decision (refer to Note 5, “Income Taxes” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q) and other agreements. Additionally, as of June 27, 2020, $5.3 billion of marketable securities were pledged as collateral under repurchase agreements (refer to Note 6, “Debt” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q).
Apple Inc. | Q3 2020 Form 10-Q | 30
The Company believes its existing balances of cash, cash equivalents and marketable securities, along with commercial paper and other short-term liquidity arrangements, will be sufficient to satisfy its working capital needs, capital asset purchases, dividends, share repurchases, debt repayments and other liquidity requirements associated with its existing operations over the next 12 months.
In connection with the State Aid Decision, as of June 27, 2020, the adjusted recovery amount of €12.9 billion plus interest of €1.2 billion was funded into escrow, where it will remain restricted from general use pending the conclusion of all legal proceedings.
The Company’s marketable securities investment portfolio is primarily invested in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer.
During the nine months ended June 27, 2020, cash generated by operating activities of $60.1 billion was a result of $44.7 billion of net income, non-cash adjustments to net income of $13.5 billion and an increase in the net change in operating assets and liabilities of $1.8 billion. Cash used in investing activities of $9.8 billion during the nine months ended June 27, 2020 consisted primarily of cash used for purchases of marketable securities, net of maturities and sales, of $2.0 billion and cash used to acquire property, plant and equipment of $5.5 billion. Cash used in financing activities of $65.5 billion during the nine months ended June 27, 2020 consisted primarily of cash used to repurchase common stock of $55.2 billion, cash used to pay dividends and dividend equivalents of $10.6 billion and cash used to repay or redeem term debt of $12.6 billion, partially offset by net proceeds from the issuance of term debt of $10.6 billion and proceeds from repurchase agreements of $5.2 billion.
During the nine months ended June 29, 2019, cash generated by operating activities of $49.5 billion was a result of $41.6 billion of net income and non-cash adjustments to net income of $13.6 billion, partially offset by a decrease in the net change in operating assets and liabilities of $5.6 billion. Cash generated by investing activities of $46.7 billion during the nine months ended June 29, 2019 consisted primarily of proceeds from sales and maturities of marketable securities, net of purchases, of $54.4 billion, partially offset by cash used to acquire property, plant and equipment of $7.7 billion. Cash used in financing activities of $69.9 billion during the nine months ended June 29, 2019 consisted primarily of cash used to repurchase common stock of $49.5 billion, cash used to pay dividends and dividend equivalents of $10.6 billion and cash used to repay term debt of $5.5 billion.
Debt
The Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. The Company uses the net proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases. As of June 27, 2020, the Company had $6.0 billion of Commercial Paper outstanding, with a weighted-average interest rate of 0.77% and maturities generally less than nine months.
In 2020, the Company entered into agreements to sell certain of its marketable securities with a promise to repurchase the securities at a specified time and amount (“Repos”). Due to the Company’s continuing involvement with the marketable securities, the Company accounts for its Repos as collateralized borrowings. As of June 27, 2020, the Company had $5.2 billion of Repo liabilities outstanding with maturities of less than three months, and had pledged $5.3 billion of marketable securities as collateral.
As of June 27, 2020, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $100.1 billion (collectively the “Notes”). During the first nine months of 2020, the Company issued $10.6 billion and repaid or redeemed $12.6 billion of Notes. The Company has entered, and in the future may enter, into interest rate swaps to manage interest rate risk on the Notes. In addition, the Company has entered, and in the future may enter, into foreign currency swaps to manage foreign currency risk on the Notes.
Further information regarding the Company’s debt issuances and related hedging activity can be found in Part I, Item 1 of this Form 10-Q in the Notes to Condensed Consolidated Financial Statements in Note 3, “Financial Instruments” and Note 6, “Debt.”
Capital Return Program
As of June 27, 2020, the Company was authorized to purchase up to $225 billion of the Company’s common stock under a share repurchase program, of which $150.6 billion had been utilized. During the nine months ended June 27, 2020, the Company repurchased 186.4 million shares of its common stock for $54.5 billion, including 35.2 million shares delivered under a $10.0 billion November 2019 accelerated share repurchase arrangement (“ASR”) and 15.2 million shares initially delivered under a $6.0 billion May 2020 ASR. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
As of June 27, 2020, the Company’s quarterly cash dividend was $0.82 per share. The Company intends to increase its dividend on an annual basis, subject to declaration by the Board of Directors.
Apple Inc. | Q3 2020 Form 10-Q | 31
Common Stock Split
On July 30, 2020, the Company announced a four-for-one split of its common stock to shareholders of record as of the close of business on August 24, 2020. Trading of the Company’s common stock will begin on a split-adjusted basis on August 31, 2020.
Contractual Obligations
Leases
As of June 27, 2020, the Company’s total fixed lease payment obligations were $12.8 billion, of which $8.1 billion was included in other non-current liabilities in the Company’s Condensed Consolidated Balance Sheet. The Company’s leases typically have original terms not exceeding 10 years and generally contain multi-year renewal options.
Manufacturing Purchase Obligations
The Company utilizes several outsourcing partners to manufacture sub-assemblies for the Company’s products and to perform final assembly and testing of finished products. These outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically covers periods up to 150 days. The Company also obtains individual components for its products from a wide variety of individual suppliers. As of June 27, 2020, the Company expects to pay $30.3 billion under manufacturing-related supplier arrangements, which are primarily noncancelable.
Other Purchase Obligations
The Company’s other purchase obligations consist of noncancelable obligations to acquire capital assets, including product tooling and manufacturing process equipment, and noncancelable obligations related to advertising, licensing, R&D, Internet and telecommunications services, content creation and other activities. As of June 27, 2020, the Company had other purchase obligations of $10.0 billion.
Deemed Repatriation Tax Payable
As of June 27, 2020, the balance of the deemed repatriation tax payable imposed by the U.S. Tax Cuts and Jobs Act (the “Act”) was $28.1 billion, and was included in other non-current liabilities in the Company’s Condensed Consolidated Balance Sheet. The Company plans to pay the deemed repatriation tax payable in installments in accordance with the Act.
Other Non-Current Liabilities
The Company’s remaining other non-current liabilities primarily consist of items for which the Company is unable to make a reasonably reliable estimate of the timing or amount of payments.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material.
Note 1, “Summary of Significant Accounting Policies” in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2019 Form 10-K, and “Critical Accounting Policies and Estimates” in Part II, Item 7 of the 2019 Form 10-K describe the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements. There have been no material changes to the Company’s critical accounting policies and estimates since the 2019 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the Company’s market risk during the first nine months of 2020. For a discussion of the Company’s exposure to market risk, refer to the Company’s market risk disclosures set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of the 2019 Form 10-K.
Apple Inc. | Q3 2020 Form 10-Q | 32
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were effective as of June 27, 2020 to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the third quarter of 2020, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. The Company’s material legal proceedings are described in Part I, Item 1 of this Form 10-Q in the Notes to Condensed Consolidated Financial Statements in Note 10, “Commitments and Contingencies” under the heading “Contingencies.”
The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting period for amounts above management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected. The Company settled certain matters during the third quarter of 2020 that did not individually or in the aggregate have a material impact on the Company’s financial condition or operating results.
Item 1A. Risk Factors
The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in Part I, Item 1A of the 2019 Form 10-K and Part II, Item 1A of the Form 10-Q for the quarter ended March 28, 2020 (the “second quarter 2020 Form 10-Q”), in each case under the heading “Risk Factors,” any one or more of which could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price. Except for the risk factor disclosed in Part II, Item 1A of the second quarter 2020 Form 10-Q, which is hereby incorporated by reference into this Part II, Item 1A of this Form 10-Q, there have been no material changes to the Company’s risk factors since the 2019 Form 10-K.
Apple Inc. | Q3 2020 Form 10-Q | 33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Share repurchase activity during the three months ended June 27, 2020 was as follows (in millions, except number of shares, which are reflected in thousands, and per share amounts):
| Periods | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (1) | ||||||||||||||||||||||
| March 29, 2020 to May 2, 2020: | ||||||||||||||||||||||||||
Open market and privately negotiated purchases | — | $ | — | — | ||||||||||||||||||||||
| May 3, 2020 to May 30, 2020: | ||||||||||||||||||||||||||
| November 2019 ASR | 4,828 | (2) | 4,828 | |||||||||||||||||||||||
| May 2020 ASR | 15,155 | (3) | (3) | 15,155 | (3) | |||||||||||||||||||||
Open market and privately negotiated purchases | 20,953 | $ | 310.22 | 20,953 | ||||||||||||||||||||||
| May 31, 2020 to June 27, 2020: | ||||||||||||||||||||||||||
Open market and privately negotiated purchases | 10,380 | $ | 337.20 | 10,380 | ||||||||||||||||||||||
| Total | 51,316 | $ | 74,353 | |||||||||||||||||||||||
(1)As of June 27, 2020, the Company was authorized to purchase up to $225 billion of the Company’s common stock under a share repurchase program announced on April 30, 2020, of which $150.6 billion had been utilized. The remaining $74.4 billion in the table represents the amount available to repurchase shares under the authorized repurchase program as of June 27, 2020. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.
(2)In November 2019, the Company entered into an ASR to purchase up to $10.0 billion of the Company’s common stock. In May 2020, the purchase period for this ASR ended and an additional 4.8 million shares were delivered and retired. In total, 35.2 million shares were delivered under this ASR at an average repurchase price of $283.89.
(3)In May 2020, the Company entered into a new ASR to purchase up to $6.0 billion of the Company’s common stock. In exchange for up-front payments totaling $6.0 billion, the financial institutions that are party to the arrangement committed to deliver shares to the Company during the ASR’s purchase period, which will end in or before August 2020. The total number of shares ultimately delivered, and therefore the average price paid per share, will be determined at the end of the applicable purchase period based on the volume-weighted average price of the Company’s common stock during that period.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Apple Inc. | Q3 2020 Form 10-Q | 34
Item 6. Exhibits
| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
Exhibit Number | Exhibit Description | Form | Exhibit | Filing Date/ Period End Date | ||||||||||||||||||||||||||||||||||
| 4.1 | 8-K | 4.1 | 5/11/20 | |||||||||||||||||||||||||||||||||||
| 31.1* | ||||||||||||||||||||||||||||||||||||||
| 31.2* | ||||||||||||||||||||||||||||||||||||||
| 32.1** | ||||||||||||||||||||||||||||||||||||||
| 101* | Inline XBRL Document Set for the condensed consolidated financial statements and accompanying notes in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q. | |||||||||||||||||||||||||||||||||||||
| 104* | Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set. | |||||||||||||||||||||||||||||||||||||
* Filed herewith.
** Furnished herewith.
Apple Inc. | Q3 2020 Form 10-Q | 35
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| July 30, 2020 | Apple Inc. | ||||||||||||||||
| By: | /s/ Luca Maestri | ||||||||||||||||
| Luca Maestri | |||||||||||||||||
| Senior Vice President, Chief Financial Officer | |||||||||||||||||
Apple Inc. | Q3 2020 Form 10-Q | 36