Apple (AAPL) 10-Q2024 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:

PART I — FINANCIAL INFORMATION

Item 1.    Financial Statements

See accompanying Notes to Condensed Consolidated Financial Statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

Note 1 – Summary of Significant Accounting Policies

The condensed consolidated financial statements include the accounts of Apple Inc. and its wholly owned subsidiaries (collectively “Apple” or the “Company”). 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 (“GAAP”) requires the use of management 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 30, 2023 (the “2023 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, which occurred in the first fiscal quarter of 2023. The Company’s fiscal years 2024 and 2023 span 52 and 53 weeks, respectively. 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.

Note 2 – Revenue

Net sales disaggregated by significant products and services for the three months ended December 30, 2023 and December 31, 2022 were as follows (in millions):

Total net sales include $3.5 billion of revenue recognized in the three months ended December 30, 2023 that was included in deferred revenue as of September 30, 2023 and $3.4 billion of revenue recognized in the three months ended December 31, 2022 that was included in deferred revenue as of September 24, 2022.

The Company’s proportion of net sales by disaggregated revenue source was generally consistent for each reportable segment in Note 10, “Segment Information and Geographic Data” for the three months ended December 30, 2023 and December 31, 2022, except in Greater China, where iPhone revenue represented a moderately higher proportion of net sales.

As of December 30, 2023 and September 30, 2023, the Company had total deferred revenue of $12.5 billion and $12.1 billion, respectively. As of December 30, 2023, the Company expects 66% 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 1% in greater than three years.

Note 3 – Earnings Per Share

The following table shows the computation of basic and diluted earnings per share for the three months ended December 30, 2023 and December 31, 2022 (net income in millions and shares in thousands):

Approximately 89 million restricted stock units (“RSUs”) were excluded from the computation of diluted earnings per share for the three months ended December 31, 2022 because their effect would have been antidilutive.

Note 4 – Financial Instruments

The following tables show the Company’s cash, cash equivalents and marketable securities by significant investment category as of December 30, 2023 and September 30, 2023 (in millions):

Derivative Instruments and Hedging

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.

To protect gross margins from fluctuations in foreign exchange rates, the Company may use forwards, options 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 exchange rates, the Company may use forwards, cross-currency swaps or other instruments. The Company designates these instruments as either cash flow or fair value hedges. As of December 30, 2023, the maximum length of time over which the Company is hedging its exposure to the variability in future cash flows for term debt–related foreign currency transactions is 19 years.

The Company may also use derivative instruments that are not designated as accounting hedges to protect gross margins from certain fluctuations in foreign exchange rates, as well as to offset a portion of the foreign currency gains and losses generated by the remeasurement of certain assets and liabilities denominated in non-functional currencies.

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

The notional amounts of the Company’s outstanding derivative instruments as of December 30, 2023 and September 30, 2023 were as follows (in millions):

The carrying amounts of the Company’s hedged items in fair value hedges as of December 30, 2023 and September 30, 2023 were as follows (in millions):

Accounts Receivable

Trade Receivables

The Company’s third-party cellular network carriers accounted for 34% and 41% of total trade receivables as of December 30, 2023 and September 30, 2023, respectively. The Company requires third-party credit support or collateral from certain customers to limit credit risk.

Note 5 – Condensed Consolidated Financial Statement Details

The following table shows the Company’s condensed consolidated financial statement details as of December 30, 2023 and September 30, 2023 (in millions):

Property, Plant and Equipment, Net

Note 6 – Debt

The Company issues unsecured short-term promissory notes 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 30, 2023 and September 30, 2023, the Company had $2.0 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 30, 2023 and December 31, 2022 (in millions):

Term Debt

Note 7 – Shareholders’ Equity

During the three months ended December 30, 2023, the Company repurchased 118 million shares of its common stock for $20.5 billion. The Company’s share repurchase program does not obligate the Company to acquire a minimum amount of shares. Under the program, shares may be repurchased in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Note 8 – Share-Based Compensation

A summary of the Company’s RSU activity and related information for the three months ended December 30, 2023 is as follows:

The fair value as of the respective vesting dates of RSUs was $7.7 billion and $6.8 billion for the three months ended December 30, 2023 and December 31, 2022, 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 months ended December 30, 2023 and December 31, 2022 (in millions):

As of December 30, 2023, the total unrecognized compensation cost related to outstanding RSUs was $27.4 billion, which the Company expects to recognize over a weighted-average period of 2.9 years.

Note 9 – 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. 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.

Note 10 – Segment Information and Geographic Data

The following table shows information by reportable segment for the three months ended December 30, 2023 and December 31, 2022 (in millions):

A reconciliation of the Company’s segment operating income to the Condensed Consolidated Statements of Operations for the three months ended December 30, 2023 and December 31, 2022 is as follows (in millions):

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 environmental, social and 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.

Fiscal Period

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, which occurred in the first quarter of 2023. The Company’s fiscal years 2024 and 2023 span 52 and 53 weeks, respectively.

Quarterly Highlights

The Company’s first quarter of 2024 included 13 weeks, compared to 14 weeks during the first quarter of 2023.

The Company’s total net sales increased 2% or $2.4 billion during the first quarter of 2024 compared to the same quarter in 2023, driven primarily by higher net sales of iPhone and Services, partially offset by lower net sales of iPad and Wearables, Home and Accessories.

The Company repurchased $20.5 billion of its common stock and paid dividends and dividend equivalents of $3.8 billion during the first quarter of 2024.

Macroeconomic conditions, including inflation, changes in interest rates, and currency fluctuations, have directly and indirectly impacted, and could in the future materially impact, the Company’s results of operations and financial condition.

The following table shows net sales by reportable segment for the three months ended December 30, 2023 and December 31, 2022 (dollars in millions):

Americas net sales increased 2% or $1.2 billion during the first quarter of 2024 compared to the same quarter in 2023 due primarily to higher net sales of Services and iPhone, partially offset by lower net sales of iPad. The strength in foreign currencies relative to the U.S. dollar had a net favorable year-over-year impact on Americas net sales during the first quarter of 2024.

Europe

Europe net sales increased 10% or $2.7 billion during the first quarter of 2024 compared to the same quarter in 2023 due primarily to higher net sales of iPhone. The strength in foreign currencies relative to the U.S. dollar had a net favorable year-over-year impact on Europe net sales during the first quarter of 2024.

Greater China net sales decreased 13% or $3.1 billion during the first quarter of 2024 compared to the same quarter in 2023 due primarily to lower net sales of iPhone, iPad and Wearables, Home and Accessories. The weakness in the renminbi relative to the U.S. dollar had an unfavorable year-over-year impact on Greater China net sales during the first quarter of 2024.

Japan net sales increased 15% or $1.0 billion during the first quarter of 2024 compared to the same quarter in 2023 due primarily to higher net sales of iPhone. The weakness in the yen relative to the U.S. dollar had an unfavorable year-over-year impact on Japan net sales during the first quarter of 2024.

Rest of Asia Pacific net sales increased 7% or $627 million during the first quarter of 2024 compared to the same quarter in 2023 due primarily to higher net sales of iPhone, partially offset by lower net sales of Wearables, Home and Accessories.

Products and Services Performance

The following table shows net sales by category for the three months ended December 30, 2023 and December 31, 2022 (dollars in millions):

iPhone net sales increased 6% or $3.9 billion during the first quarter of 2024 compared to the same quarter in 2023 due primarily to higher net sales of Pro models, partially offset by lower net sales of other models.

iPad net sales decreased 25% or $2.4 billion during the first quarter of 2024 compared to the same quarter in 2023 due primarily to lower net sales of iPad Pro, iPad 9th generation and iPad Air.

Wearables, Home and Accessories net sales decreased 11% or $1.5 billion during the first quarter of 2024 compared to the same quarter in 2023 due primarily to lower net sales of Wearables and Accessories.

Services net sales increased 11% or $2.4 billion during the first quarter of 2024 compared to the same quarter in 2023 due primarily to higher net sales from advertising, video and cloud services.

Gross Margin

Products and Services gross margin and gross margin percentage for the three months ended December 30, 2023 and December 31, 2022 were as follows (dollars in millions):

Products gross margin increased during the first quarter of 2024 compared to the same quarter in 2023 due primarily to cost savings and a different Products mix, partially offset by the weakness in foreign currencies relative to the U.S. dollar and lower Products volume.

Products gross margin percentage increased during the first quarter of 2024 compared to the same quarter in 2023 due primarily to cost savings and a different Products mix, partially offset by the weakness in foreign currencies relative to the U.S. dollar.

Services gross margin increased during the first quarter of 2024 compared to the same quarter in 2023 due primarily to higher Services net sales and a different Services mix.

Services gross margin percentage increased during the first quarter of 2024 compared to the same quarter in 2023 due primarily to a different Services mix.

The Company’s future gross margins can be impacted by a variety of factors, as discussed in Part I, Item 1A of the 2023 Form 10-K under the heading “Risk Factors.” As a result, the Company believes, in general, gross margins will be subject to volatility and downward pressure.

Operating Expenses

Operating expenses for the three months ended December 30, 2023 and December 31, 2022 were as follows (dollars in millions):

Research and development (“R&D”) expense was relatively flat during the first quarter of 2024 compared to the same quarter in 2023.

Selling, general and administrative expense increased 3% or $179 million during the first quarter of 2024 compared to the same quarter in 2023.

Provision for Income Taxes

Provision for income taxes, effective tax rate and statutory federal income tax rate for the three months ended December 30, 2023 and December 31, 2022 were as follows (dollars in millions):

The Company’s effective tax rate for the first quarter of 2024 was lower than the statutory federal income tax rate due primarily to a lower effective tax rate on foreign earnings, tax benefits from share-based compensation, and the impact of the U.S. federal R&D credit, partially offset by state income taxes.

The Company’s effective tax rate for the first quarter of 2024 was relatively flat compared to the same quarter in 2023.

Liquidity and Capital Resources

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 contractual cash requirements have not changed materially since the 2023 Form 10-K, except for 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. As of December 30, 2023, the Company had manufacturing purchase obligations of $38.0 billion, with $37.9 billion payable within 12 months.

In addition to its contractual cash requirements, the Company has an authorized share repurchase program. The program does not obligate the Company to acquire a minimum amount of shares. As of December 30, 2023, the Company’s quarterly cash dividend was $0.24 per share. The Company intends to increase its dividend on an annual basis, subject to declaration by the Board of Directors.

Recent Accounting Pronouncements

Income Taxes

Critical Accounting Estimates

The preparation of financial statements and related disclosures in conformity with GAAP 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 2023 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 2023 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 2024. 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 2023 Form 10-K.

Item 4.    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 December 30, 2023 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 first quarter of 2024, 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

Epic Games

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 2024 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, financial condition and stock price can be affected by a number of factors, whether currently known or unknown, including those described in Part I, Item 1A of the 2023 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, financial condition and stock price can be materially and adversely affected. Except as set forth below, there have been no material changes to the Company’s risk factors since the 2023 Form 10-K.

The technology industry, including, in some instances, the Company, is subject to intense media, political and regulatory scrutiny, which exposes the Company to increasing regulation, government investigations, legal actions and penalties.

From time to time, the Company has made changes to its App Store, including actions taken in response to litigation, competition, market conditions and legal and regulatory requirements. The Company expects to make further business changes in the future. For example, in the U.S. the Company has implemented changes to how developers communicate with consumers within apps on the U.S. storefront of the iOS and iPadOS App Store regarding alternative purchasing mechanisms.

The Company is also currently subject to antitrust investigations in various jurisdictions around the world, which can result in legal proceedings and claims against the Company that could, individually or in the aggregate, have a materially adverse impact on the Company’s business, results of operations and financial condition. For example, the Company is the subject of investigations in Europe and other jurisdictions relating to App Store terms and conditions. If such investigations result in adverse findings against the Company, the Company could be exposed to significant fines and may be required to make further changes to its App Store business, all of which could materially adversely affect the Company’s business, results of operations and financial condition.

Further, the Company has commercial relationships with other companies in the technology industry that are or may become subject to investigations and litigation that, if resolved against those other companies, could materially adversely affect the Company’s commercial relationships with those business partners and materially adversely affect the Company’s business, results of operations and financial condition. For example, the Company earns revenue from licensing arrangements with other companies to offer their search services on the Company’s platforms and applications, and certain of these arrangements are currently subject to government investigations and legal proceedings.

There can be no assurance the Company’s business will not be materially adversely affected, individually or in the aggregate, by the outcomes of such investigations, litigation or changes to laws and regulations in the future. Changes to the Company’s business practices to comply with new laws and regulations or in connection with other legal proceedings can negatively impact the reputation of the Company’s products for privacy and security and otherwise adversely affect the experience for users of the Company’s products and services, and result in harm to the Company’s reputation, loss of competitive advantage, poor market acceptance, reduced demand for products and services, and lost sales.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

Share repurchase activity during the three months ended December 30, 2023 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

On November 11, 2023 and November 27, 2023, respectively, Luca Maestri, the Company’s Senior Vice President and Chief Financial Officer, and Katherine L. Adams, the Company’s Senior Vice President and General Counsel, each entered into a trading plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act. The plans provide for the sale of all shares vested during the duration of the plans pursuant to certain equity awards granted to Mr. Maestri and Ms. Adams, respectively, excluding any shares withheld by the Company to satisfy income tax withholding and remittance obligations. Mr. Maestri’s plan will expire on December 31, 2024, and Ms. Adams’s plan will expire on November 1, 2024, subject to early termination for certain specified events set forth in the plans.

*    Filed herewith.

**    Furnished herewith.

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.