Apple (AAPL) 10-Q2022 Q1 Quarterly report

UNITED STATES

(408) 996-1010

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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. Certain prior period amounts in the condensed consolidated financial statements and accompanying notes have been reclassified to conform to the current period’s presentation. 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 25, 2021 (the “2021 Form 10-K”).

The Company’s fiscal year is the 52- or 53-week period that ends on the last Saturday of September. An additional week is included in the first fiscal quarter every five or six years to realign the Company’s fiscal quarters with calendar quarters. The Company’s fiscal years 2022 and 2021 span 52 weeks each. Unless otherwise stated, references to particular years, quarters, months and periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years.

The following table shows the computation of basic and diluted earnings per share for the three months ended December 25, 2021 and December 26, 2020 (net income in millions and shares in thousands):

Net sales disaggregated by significant products and services for the three months ended December 25, 2021 and December 26, 2020 were as follows (in millions):

The Company’s proportion of net sales by disaggregated revenue source was generally consistent for each reportable segment in Note 9, “Segment Information and Geographic Data” for the three months ended December 25, 2021 and December 26, 2020, except in Greater China, where iPhone revenue represented a moderately higher proportion of net sales.

Cash, Cash Equivalents and Marketable Securities

The following tables show the Company’s cash, cash equivalents and marketable securities by significant investment category as of December 25, 2021 and September 25, 2021 (in millions):

The following table shows the fair value of the Company’s non-current marketable debt securities, by contractual maturity, as of December 25, 2021 (in millions):

The Company may use derivative instruments to partially offset its business exposure to foreign exchange and interest rate risk. However, the Company may choose not to hedge certain exposures for a variety of reasons, including 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 exchange or interest rates.

Foreign Exchange Risk

To protect gross margins from fluctuations in foreign currency exchange rates, the Company may enter into forward contracts, option contracts or other instruments, 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 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. The Company designates these instruments as either cash flow or fair value hedges. As of December 25, 2021, the Company’s hedged term debt– and marketable securities–related foreign currency transactions are expected to be recognized within 21 years.

The Company may also enter into derivative instruments that are not designated as accounting hedges to protect gross margins from certain fluctuations in foreign currency exchange rates, as well as 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.

0Interest Rate Risk

To protect the Company’s term debt or marketable securities from fluctuations in interest rates, the Company may enter into interest rate swaps, options or other instruments. The Company designates these instruments as either cash flow or fair value hedges.

The gross fair values of the Company’s derivative assets and liabilities were not material as of December 25, 2021 and September 25, 2021.

The gains and losses recognized in other comprehensive income and amounts reclassified from accumulated other comprehensive income to net income for the Company’s derivative instruments designated as cash flow hedges were not material in the three months ended December 25, 2021 and December 26, 2020.

The gains and losses on the Company’s derivative instruments designated as fair value hedges and the related hedged item adjustments were not material in the three months ended December 25, 2021 and December 26, 2020.

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.

The Company’s cellular network carriers accounted for 45% and 42% of total trade receivables as of December 25, 2021 and September 25, 2021, 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 subassemblies or assemble final products for the Company. The Company purchases these components directly from suppliers. As of December 25, 2021, the Company had 3 vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 54%, 13% and 12%. As of September 25, 2021, the Company had 3 vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 52%, 11% and 11%.

The following tables show the Company’s condensed consolidated financial statement details as of December 25, 2021 and September 25, 2021 (in millions):

The following table shows the detail of other income/(expense), net for the three months ended December 25, 2021 and December 26, 2020 (in millions):

Commercial Paper

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 December 25, 2021 and September 25, 2021, the Company had $5.0 billion and $6.0 billion of Commercial Paper outstanding, respectively. The following table provides a summary of cash flows associated with the issuance and maturities of Commercial Paper for the three months ended December 25, 2021 and December 26, 2020 (in millions):

As of December 25, 2021 and September 25, 2021, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate carrying amount of $117.8 billion and $118.7 billion, respectively (collectively the “Notes”). As of December 25, 2021 and September 25, 2021, the fair value of the Company’s Notes, based on Level 2 inputs, was $123.5 billion and $125.3 billion, respectively.

Share Repurchase Program

As of December 25, 2021, the Company was authorized to purchase up to $315 billion of the Company’s common stock under a share repurchase program (the “Program”). During the three months ended December 25, 2021, the Company repurchased 124 million shares of its common stock for $20.4 billion, including 30 million shares initially delivered under accelerated share repurchase agreements (“ASRs”) entered into in November 2021, bringing the total utilization under the Program to $274.5 billion as of December 25, 2021. The Program does not obligate the Company to acquire any specific number of shares. Under the 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.

Under the terms of the Company’s ASRs, two financial institutions committed to deliver shares of the Company’s common stock during the purchase periods in exchange for up-front payments totaling $6.0 billion. The total number of shares ultimately delivered under the ASRs, 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 ASRs’ purchase periods, which end in the second quarter of 2022. The shares received are retired in the periods they are delivered, and the up-front payments are accounted for as a reduction to retained earnings in the Company’s Condensed Consolidated Statement of Shareholders’ Equity in the period the payments are made.

Restricted Stock Units

A summary of the Company’s restricted stock unit (“RSU”) activity and related information for the three months ended December 25, 2021 is as follows:

The fair value as of the respective vesting dates of RSUs was $8.5 billion for the three months ended both December 25, 2021 and December 26, 2020.

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 months ended December 25, 2021 and December 26, 2020 (in millions):

As of December 25, 2021, the total unrecognized compensation cost related to outstanding RSUs and stock options was $20.6 billion, which the Company expects to recognize over a weighted-average period of 3.0 years.

Accrued Warranty

The following table shows changes in the Company’s accrued warranties and related costs for the three months ended December 25, 2021 and December 26, 2020 (in millions):

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. 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.

The following table shows information by reportable segment for the three months ended December 25, 2021 and December 26, 2020 (in millions):

A reconciliation of the Company’s segment operating income to the Condensed Consolidated Statements of Operations for the three months ended December 25, 2021 and December 26, 2020 is as follows (in millions):

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 environmental, social and corporate governance matters, 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.

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

The COVID-19 pandemic has had, and continues to have, a significant impact around the world, prompting governments and businesses to take unprecedented measures, such as restrictions on travel and business operations, temporary closures of businesses, and quarantine and shelter-in-place orders. The COVID-19 pandemic has at times 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 affected and could in the future materially impact the Company’s business, results of operations and financial condition, as well as the price of the Company’s stock.

During the first quarter of 2022, aspects of the Company’s business continued to be affected by the COVID-19 pandemic, with a significant number of the Company’s employees working remotely and certain of the Company’s retail stores operating at limited capacity or temporarily closing at various times. The Company has reopened substantially all of its other facilities, subject to operating restrictions to protect public health and the health and safety of employees, and it continues to work on safely reopening the remainder of its facilities, subject to local rules and regulations. At times, certain of the Company’s component suppliers and logistical service providers have experienced disruptions, resulting in supply shortages that affected sales worldwide. Similar impacts or other disruptions could occur in the future.

The extent of the continuing impact of the COVID-19 pandemic on the Company’s operational and financial performance is uncertain and will depend on many factors outside the Company’s control, including the timing, extent, trajectory and duration of the pandemic, the emergence of new variants, the development, availability, distribution and effectiveness of vaccines and treatments, 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 2021 Form 10-K under the heading “Risk Factors” for more information.

First Quarter Fiscal 2022 Highlights

Total net sales increased 11% or $12.5 billion during the first quarter of 2022 compared to the same quarter in 2021, driven primarily by growth in iPhone, Services and Mac.

During the first quarter of 2022, the Company released the following new products:

The Company repurchased $20.4 billion of its common stock and paid dividends and dividend equivalents of $3.7 billion during the first quarter of 2022.

The following table shows net sales by category for the three months ended December 25, 2021 and December 26, 2020 (dollars in millions):

iPhone

iPhone net sales increased during the first quarter of 2022 compared to the same quarter in 2021 due primarily to higher net sales from the Company’s new iPhone models launched in the fourth quarter of 2021 and a different mix of iPhone sales.

Mac

iPad

iPad net sales decreased during the first quarter of 2022 compared to the same quarter in 2021 due primarily to lower net sales of the 10-inch version of iPad.

Wearables, Home and Accessories

Wearables, Home and Accessories net sales increased during the first quarter of 2022 compared to the same quarter in 2021 due primarily to higher net sales of AirPods, Apple Watch and accessories.

Services

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 mainland, 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 9, “Segment Information and Geographic Data.”

The following table shows net sales by reportable segment for the three months ended December 25, 2021 and December 26, 2020 (dollars in millions):

Americas

Americas net sales increased during the first quarter of 2022 compared to the same quarter in 2021 due primarily to higher net sales of Services, iPhone, and Wearables, Home and Accessories.

Europe

Europe net sales increased during the first quarter of 2022 compared to the same quarter in 2021 due primarily to higher net sales of Services, Mac and iPhone. The movement of foreign currencies in Europe relative to the U.S. dollar had a net favorable impact on Europe net sales during the first quarter of 2022.

Greater China

Greater China net sales increased during the first quarter of 2022 compared to the same quarter in 2021 due primarily to higher net sales of iPhone and Services. The strength of the Chinese renminbi relative to the U.S. dollar had a favorable impact on Greater China net sales during the first quarter of 2022.

Japan

Japan net sales decreased during the first quarter of 2022 compared to the same quarter in 2021 due primarily to lower net sales of iPhone and iPad, partially offset by higher net sales of Services. The weakness of the Japanese yen relative to the U.S. dollar had an unfavorable impact on Japan net sales during the first quarter of 2022.

Rest of Asia Pacific

Rest of Asia Pacific net sales increased during the first quarter of 2022 compared to the same quarter in 2021 due primarily to higher net sales of iPhone, Wearables, Home and Accessories and Mac.

Products and Services gross margin and gross margin percentage for the three months ended December 25, 2021 and December 26, 2020 were as follows (dollars in millions):

Products Gross Margin

Products gross margin and Products gross margin percentage increased during the first quarter of 2022 compared to the same quarter in 2021 due primarily to a different Products mix and the strength in foreign currencies relative to the U.S. dollar.

Services Gross Margin

Services gross margin increased during the first quarter of 2022 compared to the same quarter in 2021 due primarily to higher Services net sales and a different Services mix. Services gross margin percentage increased during the first quarter of 2022 compared to the same quarter in 2021 due primarily to a different Services mix and leverage, partially offset by higher Services costs.

Operating expenses for the three months ended December 25, 2021 and December 26, 2020 were as follows (dollars in millions):

Research and Development

The growth in research and development (“R&D”) expense during the first quarter of 2022 compared to the same quarter in 2021 was driven primarily by increases in headcount-related expenses, engineering program costs and infrastructure-related costs. 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 first quarter of 2022 compared to the same quarter in 2021 was driven primarily by increases in headcount-related expenses, variable selling expenses and professional services.

Other income/(expense), net (“OI&E”) for the three months ended December 25, 2021 and December 26, 2020 was as follows (dollars in millions):

OI&E decreased during the first quarter of 2022 compared to the same quarter in 2021 due primarily to higher net losses on marketable and non-marketable securities and lower interest income.

Provision for income taxes, effective tax rate and statutory federal income tax rate for the three months ended December 25, 2021 and December 26, 2020 were as follows (dollars in millions):

The Company’s effective tax rate for the first quarter of 2022 was lower than the statutory federal income tax rate due primarily to a lower effective tax rate on foreign earnings and tax benefits from share-based compensation.

The Company’s effective tax rate for the first quarter of 2022 was higher compared to the same quarter in 2021 due primarily to lower tax benefits from share-based compensation and a change in geographic mix of earnings.

The Company believes its balances of cash, cash equivalents and unrestricted marketable securities, along with cash generated by ongoing operations and continued access to debt markets, will be sufficient to satisfy its cash requirements and capital return program over the next 12 months and beyond.

The Company’s cash requirements have not changed materially since the 2021 Form 10-K, except for manufacturing purchase obligations.

Manufacturing Purchase Obligations

The Company utilizes several outsourcing partners to manufacture subassemblies for the Company’s products and to perform final assembly and testing of finished products. The Company also obtains individual components for its products from a wide variety of individual suppliers. Outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically covers periods up to 150 days. As of December 25, 2021, the Company had manufacturing purchase obligations of $47.6 billion, with $47.5 billion payable within 12 months. The Company’s manufacturing purchase obligations are primarily noncancelable.

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. Note 1, “Summary of Significant Accounting Policies” of the Notes to condensed consolidated Financial Statements 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 2021 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 estimates since the 2021 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 three months of 2022. 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 2021 Form 10-K.

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 Securities Exchange Act of 1934, as amended (the “Exchange Act”) were effective as of December 25, 2021 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.

There were no changes in the Company’s internal control over financial reporting during the first quarter of 2022, 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.

Item 1.    Legal Proceedings

Epic Games

Epic Games, Inc. (“Epic”) filed a lawsuit in the U.S. District Court for the Northern District of California (the “Northern California District Court”) against the Company alleging violations of federal and state antitrust laws and California’s unfair competition law based upon the Company’s operation of its App Store. The Company filed a counterclaim for breach of contract. On September 10, 2021, the Northern California District Court ruled in favor of the Company with respect to nine out of the ten counts included in Epic’s claim, and in favor of the Company with respect to the Company’s claims for breach of contract. The Northern California District Court found that certain provisions of the Company’s App Store Review Guidelines violate California’s unfair competition law and issued an injunction. Epic appealed the decision. The Company filed a cross-appeal and has been granted a stay pending the appeal.

Other Legal Proceedings

The Company is subject to other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. The Company settled certain matters during the first quarter of 2022 that did not individually or in the aggregate have a material impact on the Company’s financial condition or operating results. 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.

Item 1A.    Risk Factors

The Company’s business, reputation, results of operations and financial condition, as well as the price of the Company’s stock, can be affected by a number of factors, whether currently known or unknown, including those described in Part I, Item 1A of the 2021 Form 10-K under the heading “Risk Factors.” When any one or more of these risks materialize from time to time, the Company’s business, reputation, results of operations and financial condition, as well as the price of the Company’s stock, can be materially and adversely affected. There have been no material changes to the Company’s risk factors since the 2021 Form 10-K.

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 December 25, 2021 was as follows (in millions, except number of shares, which are reflected in thousands, and per share amounts):

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    Mine Safety Disclosures

Not applicable.

Item 5.    Other Information

Rule 10b5-1 Trading Plans

During the three months ended December 25, 2021, Katherine L. Adams, Timothy D. Cook, Luca Maestri, Deirdre O’Brien and Jeffrey Williams, each an officer for purposes of Section 16 of the Exchange Act, 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 preestablishes 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 sales of shares acquired under the Company’s employee and director equity plans.

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.