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AAPL > SEC Filings for AAPL > Form 10-K on 30-Oct-2013All Recent SEC Filings

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Form 10-K for APPLE INC


30-Oct-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and other parts of this Form 10-K 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. 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 this Form 10-K under the heading "Risk Factors," which are incorporated herein by reference. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Part II, Item 8 of this Form 10-K. All information presented herein is based on the Company's fiscal calendar. Unless otherwise stated, 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.

Overview and Highlights

The Company designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players, and sells a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications. The Company sells its products worldwide through its retail stores, online stores, and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers, and value-added resellers. In addition, the Company sells a variety of third-party iPhone, iPad, Mac and iPod compatible products, including application software, and various accessories through its online and retail stores. The Company sells to consumers; small and mid-sized businesses; and education, enterprise and government customers.

Fiscal 2013 Highlights

Net sales rose 9% or $14.4 billion during 2013 compared to 2012. This resulted from growth in net sales of iPhone; iTunes, software, and services; and iPad. Growth in 2013 reflects strong sales of iPhone 5, strong continuing sales of iPhone 4 and 4s, the introduction of iPhone 5c and 5s, strong performance of the iPad Mini and fourth generation iPad, and continued growth in the Company's online sales of apps, digital content, and services. Growth in these areas was partially offset by declines in net sales of Mac and iPod. All of the Company's operating segments experienced increased net sales in 2013, with net sales growth being particularly strong in the Americas, Greater China and Japan operating segments. Similar to 2012, growth in total net sales was higher during the first half of 2013, rising $12.6 billion or 14.7% over the same period in 2012. First half growth in 2013 was driven by iPhone and iPad introductions at or near the beginning of 2013.

During the first quarter of 2013, the Company introduced the fourth generation iPad and iPad Mini, a new MacBook Pro with Retina display, a new iPod touch, a new iMac, and expanded the rollout of iPhone 5 which began in September 2012. In June 2013 at its Worldwide Developer Conference, the Company announced iOS 7 and OS X Mavericks, announced iTunes Radio, introduced a significant upgrade to MacBook Air, and provided a preview of all new Mac Pro desktops expected to be introduced during 2014. In September 2013, the Company introduced iPhone 5s and iPhone 5c, released iOS 7, launched iTunes Radio, and announced that beginning in September 2013 iPhoto, iMovie and iWork apps for iOS would be available as free downloads with all new "iOS devices," namely iPhone, iPad and iPod touch. In October 2013, the Company announced iPad Airô, its fifth generation iPad, and iPad mini with Retina display.


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In April 2013 the Company announced a significant increase to its program to return capital to shareholders by raising the total amount it expected to utilize for the program through December 2015 to $100 billion. This included increasing its share repurchase authorization to $60 billion and raising its quarterly dividend to $3.05 per common share beginning in May 2013. During 2013, the Company utilized $23.0 billion to repurchase common shares and paid dividends of $10.5 billion or $11.40 per common share. In conjunction with its capital return program, in May 2013 the Company issued $17.0 billion of notes with varying maturities through 2043.

Fiscal 2012 Highlights

Overall net sales during 2012 increased $48.3 billion or 45% compared to 2011. All of the Company's operating segments experienced increased net sales during 2012, primarily a result of strong demand for iPhone and iPad. Growth in total net sales was particularly strong during the first six months of 2012, rising $34.1 billion or 66% compared to the same period in 2011. The net sales growth during the first six months of 2012 reflected the launch of iPhone 4s in the first quarter of 2012 and the Company's ability to meet demand more quickly for iPhone 4s when compared to the iPhone 4 launch. Growth during the first half of 2012 was also favorably impacted by strong unit sales of iPad during the holiday season, resulting in a 111% increase in iPad unit sales during the first quarter of 2012 compared to the same quarter in 2011. Partially offsetting these positive factors was a decrease in iPod net sales experienced across all operating segments.

In October 2011, the Company introduced iPhone 4s and launched iCloud, the Company's cloud service that stores user data and keeps it up to date and available on multiple iOS devices and Mac and Windows personal computers. The Company introduced the third generation iPad with Retina display in March 2012 and in June 2012 introduced the MacBook Pro with Retina display and an updated MacBook Air During the fourth quarter of 2012, OS X Mountain Lion was released and iPhone 5 was introduced.

In March 2012, the Company announced a $10 billion share repurchase program that would be executed over three years and announced plans to initiate a quarterly dividend commencing in the fourth quarter of 2012. During the fourth quarter, the Company paid dividends of $2.5 billion or $2.65 per common share.


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Sales Data

The following table shows net sales by operating segment and net sales and unit
sales by product during 2013, 2012 and 2011 (dollars in millions and units in
thousands):



                                      2013        Change        2012        Change        2011
Net Sales by Operating Segment:
Americas                            $  62,739          9%     $  57,512         50%     $  38,315
Europe                                 37,883          4%        36,323         31%        27,778
Greater China (a)                      25,417         13%        22,533         78%        12,690
Japan                                  13,462         27%        10,571         94%         5,437
Rest of Asia Pacific                   11,181          4%        10,741          8%         9,902
Retail                                 20,228          7%        18,828         33%        14,127

Total net sales                     $ 170,910          9%     $ 156,508         45%     $ 108,249

Net Sales by Product:
iPhone (b)                          $  91,279         16%     $  78,692         71%     $  45,998
iPad (b)                               31,980          3%        30,945         61%        19,168
Mac (b)                                21,483        (7)%        23,221          7%        21,783
iPod (b)                                4,411       (21)%         5,615       (25)%         7,453
iTunes, software and services (c)      16,051         25%        12,890         38%         9,373
Accessories (d)                         5,706         11%         5,145         15%         4,474

Total net sales                     $ 170,910          9%     $ 156,508         45%     $ 108,249

Unit Sales by Product:
iPhone                                150,257         20%       125,046         73%        72,293
iPad                                   71,033         22%        58,310         80%        32,394
Mac                                    16,341       (10)%        18,158          9%        16,735
iPod                                   26,379       (25)%        35,165       (17)%        42,620

(a) Greater China includes China, Hong Kong and Taiwan.

(b) Includes deferrals and amortization of related non-software services and software upgrade rights.

(c) Includes revenue from sales on the iTunes Store, the App Store, the Mac App Store, and the iBooks Store, and revenue from sales of AppleCare, licensing and other services.

(d) Includes sales of hardware peripherals and Apple-branded and third-party accessories for iPhone, iPad, Mac and iPod.

The Company's fiscal year is the 52 or 53-week period that ends on the last Saturday of September. The Company's fiscal years 2013, 2012 and 2011 ended on September 28, 2013, September 29, 2012 and September 24, 2011, respectively. Both fiscal years 2013 and 2011 spanned 52 weeks. Fiscal year 2012 spanned 53 weeks, with a 14th week added to the first quarter of 2012, as is done approximately every six years to realign the Company's fiscal quarters more closely to calendar quarters. Inclusion of the additional week in 2012 increased the Company's overall net sales and operating expenses for the year.


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Product Performance

iPhone

The following table presents iPhone net sales and unit sales information for
2013, 2012 and 2011 (net sales in millions and units in thousands):



                                   2013         Change        2012         Change        2011
 Net sales                       $  91,279          16%     $  78,692          71%     $  45,998
 Percentage of total net sales         53%                        50%                        42%
 Unit sales                        150,257          20%       125,046          73%        72,293

The growth in iPhone net sales and unit sales during 2013 resulted from increased demand for iPhone in all of the Company's operating segments primarily due to the launch of iPhone 5 beginning in September 2012 and strong ongoing demand for iPhone 4 and 4s. All of the Company's operating segments experienced increases in net sales and unit sales of iPhone during 2013 compared to 2012. The year-over-year impact of higher iPhone unit sales in 2013 was partially offset by a 3% decline in iPhone average selling prices ("ASPs") in 2013 compared to 2012 primarily as a result of a shift in product mix towards lower-priced iPhone models, particularly iPhone 4. All of the Company's geographic operating segments experienced a decline in iPhone ASPs during 2013.

The year-over-year growth in iPhone net sales and unit sales during 2012 reflects strong demand for iPhone in all of the Company's operating segments, except for the Rest of Asia Pacific segment. Growth in iPhone sales during 2012 is primarily a result of the launches of iPhone 4s in the first quarter of 2012 and iPhone 5 in the fourth quarter of 2012, ongoing demand during 2012 for iPhone 4 and iPhone 3GS, and expanded distribution with new carriers and resellers.

iPad

The following table presents iPad net sales and unit sales information for 2013, 2012 and 2011 (net sales in millions and units in thousands):

                                   2013         Change        2012         Change        2011
 Net sales                       $  31,980           3%     $  30,945          61%     $  19,168
 Percentage of total net sales         19%                        20%                        18%
 Unit sales                         71,033          22%        58,310          80%        32,394

The growth in net sales and unit sales of iPad during 2013 resulted from growth in iPad unit sales in all of the Company's operating segments. This growth was driven by the launch of iPad mini and the fourth generation iPad beginning in the first quarter of 2013. The year-over-year growth rate of total iPad unit sales was significantly higher than the growth rate of total iPad net sales for 2013 due to a reduction in iPad ASPs of 15% in 2013 compared to 2012. This decline resulted primarily from introduction of the lower priced iPad mini and the full year impact of the price reduction on iPad 2 made in 2012. The decline in iPad ASPs was experienced to various degrees by all of the Company's operating segments.

The year-over-year increase in iPad net sales and unit sales during 2012 was driven by strong demand for iPad in all of the Company's operating segments as a result of the launch of the third generation iPad in March 2012, continued demand for iPad 2, and expanded distribution with new resellers. The year-over-year growth rate of iPad unit sales was higher than the growth rate of iPad net sales during 2012 due to a 10% reduction in ASPs as a result of a shift in product mix toward lower-priced iPad models, a price reduction on iPad 2 and an increase in indirect sales due to expanded distribution through third-party resellers.


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Mac

The following table presents Mac net sales and unit sales information for 2013, 2012 and 2011 (net sales in millions and units in thousands):

                                      2013       Change        2012       Change        2011
    Net sales                       $ 21,483        (7)%     $ 23,221          7%     $ 21,783
    Percentage of total net sales        13%                      15%                      20%
    Unit sales                        16,341       (10)%       18,158          9%       16,735

Mac net sales and unit sales for 2013 were down or relatively flat in all of the Company's operating segments. Mac ASPs increased slightly partially offsetting the impact of lower unit sales on net sales. The decline in Mac unit sales and net sales reflects the overall weakness in the market for personal computers.

The year-over-year growth in Mac net sales and unit sales during 2012 reflects increased demand for Mac portables in all of the Company's operating segments driven by 2012 releases of updated models of MacBook Air and MacBook Pro, including MacBook Pro with Retina display in June 2012. Partially offsetting the increase in net sales of Mac portables was a decline in net sales of Mac desktops that reflected the overall decline in the market for desktop personal computers during 2012. Additionally, the Company did not introduce updated versions of its Mac desktop products in 2012.

iTunes, Software and Services

The following table presents net sales information of iTunes, software and services for 2013, 2012 and 2011 (in millions):

                                     2013        Change        2012        Change        2011
   iTunes, software and services   $ 16,051          25%     $ 12,890          38%     $  9,373
   Percentage of total net sales         9%                        8%                        9%

The increase in net sales of iTunes, software and services in 2013 compared to 2012 was primarily due to growth in net sales from the iTunes Store, AppleCare and licensing. The iTunes Store generated a total of $9.3 billion in net sales during 2013, a 24% increase from 2012. Growth in the iTunes Store, which includes the App Store, the Mac App Store and the iBooks Store, reflects continued growth in the installed base of iOS devices, expanded offerings of iOS apps and related in-App purchases, and expanded offerings of iTunes digital content.

The increase in net sales of iTunes, software and services in 2012 compared to 2011 was due primarily to growth of the iTunes Store, which generated total net sales of $7.5 billion for 2012 compared to net sales of $5.4 billion during 2011. The strong results of the iTunes Store in 2012 reflect growth of the App Store; growth of the Company's customer base; and the continued expansion of third-party audio, video and book content available for sale or rent via the iTunes Store.


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Segment Operating Performance

The Company manages its business primarily on a geographic basis. Accordingly, the Company determined its reportable operating segments, which are generally based on the nature and location of its customers, to be the Americas, Europe, Greater China, Japan, Rest of Asia Pacific and Retail. The Americas segment includes both North and South America. The Europe segment includes European countries, as well as India, the Middle East and Africa. The Greater China segment includes China, Hong Kong and Taiwan. The Rest of Asia Pacific segment includes Australia and Asian countries, other than those countries included in the Company's other operating segments. The Retail segment operates Apple retail stores in 13 countries, including the U.S. The results of the Company's geographic segments do not include results of the Retail segment. Each operating segment provides similar hardware and software products and similar services. Further information regarding the Company's operating segments may be found in Note 11, "Segment Information and Geographic Data."

Americas

The following table presents Americas net sales information for 2013, 2012 and
2011 (in millions):



                                     2013       Change        2012        Change        2011
   Net sales                       $ 62,739          9%     $ 57,512          50%     $ 38,315
   Percentage of total net sales        37%                      37%                       35%

The growth in the Americas segment net sales during 2013 was driven by increased sales of iPhone following the introduction of iPhone 5 in September 2012 and iPhone 5s and 5c in September 2013, increased sales from the iTunes Store, and increased sales of iPad, particularly iPad mini. These increases were partially offset by a decrease in net sales of iPod and Mac and a decline in iPad ASPs.

The growth in net sales during 2012 was primarily driven by increased demand for iPhone following the launches of iPhone 4s and iPhone 5, strong demand for the third generation iPad and iPad 2, and higher sales from the iTunes Store.

Europe

The following table presents Europe net sales information for 2013, 2012 and
2011 (in millions):



                                     2013       Change        2012        Change        2011
   Net sales                       $ 37,883          4%     $ 36,323          31%     $ 27,778
   Percentage of total net sales        22%                      23%                       26%

Similar to the Americas segment, growth in net sales in the Europe segment during 2013 was primarily driven by increased sales of iPhone, iPad and higher net sales from iTunes. These increases were partially offset by decreases in net sales of Mac and iPod and a decline in iPad ASPs. Net sales in the Europe segment continue to be negatively impacted by unfavorable economic conditions in parts of the region reflected by second half 2013 net sales falling 4% compared to the second half of 2012, which followed an 11% increase in net sales during the first half of 2013.

The growth in net sales during 2012 was primarily driven by strong demand for the third generation iPad and iPad 2, higher sales from the iTunes Store and increased demand for iPhone from the launch of iPhone 4s. iPhone 5 was launched in a limited number of countries in the Europe segment at the end of the fourth quarter of 2012 and did not contribute to the growth in net sales in the Europe segment to the extent it did in other segments. Lower year-over-year growth in net sales in the Europe segment during 2012 compared to the Company's other geographic segments reflects growth in iPhone unit sales that was well below the growth rates experienced by the Company's other operating segments, partially offset by strong growth in iPad unit sales. Net sales in the Europe


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segment were also negatively impacted by the region's uncertain economic conditions and the strength in the U.S. dollar relative to several European currencies, including the euro.

Greater China

The following table presents Greater China net sales information for 2013, 2012
and 2011 (in millions):



                                     2013        Change        2012        Change        2011
   Net sales                       $ 25,417          13%     $ 22,533          78%     $ 12,690
   Percentage of total net sales        15%                       14%                       12%

The growth in net sales in the Greater China segment during 2013 resulted from two major iPhone introductions during the year, iPhone 5 in December 2012 and iPhone 5c and iPhone 5s in September 2013. Further contributing to the growth in 2013 was the introduction of the fourth generation iPad and iPad mini during the second quarter of 2013 and an increase in iPhone channel inventory as of the end of 2013 compared to the end of 2012. While net sales in the China segment were up 13% for all of 2013, net sales for the second half of 2013 declined 4% compared to the second half of 2012.

The growth in net sales during 2012 was mainly due to increased demand for iPhone following the launch of iPhone 4s and strong demand for the third generation iPad and iPad 2. Growth in the Greater China segment was affected by the timing of iPhone and iPad product launches. iPhone 5 was not launched in China during 2012, and the third generation iPad that was introduced by the Company in March 2012 was not launched in China until the fourth quarter of 2012.

Japan

The following table presents Japan net sales information for 2013, 2012 and 2011
(in millions):



                                     2013        Change        2012        Change        2011
   Net sales                       $ 13,462          27%     $ 10,571          94%     $  5,437
   Percentage of total net sales         8%                        7%                        5%

The increase in net sales in the Japan segment during 2013 reflects significant increases in unit volumes of iPhone and iPad, strong growth of iTunes Store net sales and an increase in iPhone channel inventory as of the end of 2013 compared to the end of 2012. These positive factors were partially offset by declines in ASPs for iPhone and iPad and by weakness in the Japanese Yen relative to the U.S. dollar.

The growth in net sales during 2012 was primarily driven by increased demand for iPhone following the launches of iPhone 4s and iPhone 5, expanded distribution with a new iPhone carrier, strong demand for the third generation iPad and iPad 2, higher sales from the iTunes Store, and strength in the Japanese Yen relative to the U.S. dollar.

Rest of Asia Pacific

The following table presents Rest of Asia Pacific net sales information for
2013, 2012 and 2011 (in millions):



                                      2013       Change        2012       Change        2011
    Net sales                       $ 11,181          4%     $ 10,741          8%     $  9,902
    Percentage of total net sales         7%                       7%                       9%

The growth in net sales during 2013 was primarily driven by the launch of iPhone 5 and higher sales from iTunes, partially offset by a decrease in net sales of iPad and Mac.


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The growth in net sales during 2012 was mainly due to strong demand for the third generation iPad. The Rest of Asia Pacific segment experienced significantly lower year-over-year growth in net sales compared to all of the Company's other operating segments due primarily to a decrease in iPhone sales. This decrease reflects the timing of iPhone 5 launches in the Rest of Asia Pacific segment, which only occurred in a limited number of countries during the fourth quarter of 2012.

Retail

The following table presents Retail net sales information for 2013, 2012 and
2011 (in millions, except for store counts):



                                     2013       Change        2012        Change        2011
   Net sales                       $ 20,228          7%     $ 18,828          33%     $ 14,127
   Percentage of total net sales        12%                      12%                       13%

   U.S. stores                          254                      250                       245
   International stores                 162                      140                       112

   Total store count                    416                      390                       357

The growth in net sales during 2013 was primarily driven by increased unit sales of iPhone and iPad following the new product introductions in the first half of 2013 and increased sales of services. With an average of 403 and 365 open stores during 2013 and 2012, respectively, average revenue per store decreased to $50.2 million in 2013, compared to $51.5 million in 2012.

The growth in net sales during 2012 was driven primarily by increased demand for iPhone following the launches of iPhone 4s and iPhone 5, strong demand for the third generation iPad and iPad 2, and higher Mac net sales. Lower year-over-year growth in net sales in the Retail segment during 2012 compared to the Company's other segments reflects the significant growth in iPad indirect distribution channel expansion. With an average of 365 stores and 326 stores during 2012 and 2011, respectively, average revenue per store increased 19% to $51.5 million in 2012 compared to $43.3 million in 2011.

The Retail segment's operating income was $4.0 billion, $4.6 billion and $3.1 billion during 2013, 2012, and 2011, respectively. The year-over-year decrease in Retail operating income in 2013 is primarily attributable to lower gross . . .

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