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Item 2. Management’s Discussion and Analysis

2021-01-28 compared with 2020-07-31 · 106 added, 146 removed, 121 unchanged (68% of the section changed)

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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.

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 26, 2020 (the “2020 Form 10-K”) under the heading “Risk Factors.” The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Unless otherwise stated, 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.

The following discussion should be read in conjunction with the 2020 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.

Available Information

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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 prompted governments and businesses to take unprecedented measures, such as 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.

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, financial condition and stock price.

During the first quarter of 2021, aspects of the Company’s business continued to be affected by the COVID-19 pandemic, with many of the Company’s retail stores, as well as channel partner points of sale, temporarily closed at various times, and the vast majority of the Company’s employees working remotely.

The Company has reopened some of its offices and retail stores, subject to operating restrictions to protect public health and the health and safety of employees and customers, and it continues to work on safely reopening the remainder of its offices and retail stores, subject to local rules and regulations.

the availability, distribution and effectiveness of 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 2020 Form 10-K under the heading “Risk Factors,” for more information.

| Q1 2021 Form 10-Q | 22

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.

First Quarter Fiscal 2021 Highlights

Total net sales increased 21% or $19.6 billion during the first quarter of 2021 compared to the same quarter in 2020, driven by higher net sales in all Products and Services categories.

Additionally, net sales in all of the Company’s geographic reportable segments grew during the first quarter of 2021.

During the first quarter of 2021, the Company released the following products and services:

• iPhone 12, iPhone 12 mini, iPhone 12 Pro and iPhone 12 Pro Max, all with 5G technology;

• MacBook Air ® , 13-inch MacBook Pro ® and Mac mini ® , all powered by M1, the Company’s first chip designed specifically for the Mac;

• An all-new iPad Air ® ;

• AirPods Max™, new over-ear wireless headphones, and HomePod mini™;

• Apple Fitness+ SM , a fitness subscription service.

The Company repurchased $24.0 billion of its common stock and paid dividends and dividend equivalents of $3.6 billion during the first quarter of 2021.

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

2020 June 29,

2019 Change June 27,

2020 June 29,

The following table shows net sales by category for the three months ended December 26, 2020 and December 28, 2019 (dollars in millions):

Three Months Ended

2020 December 28,

Net sales by category:

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(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.

(3) Services net sales include sales from the Company’s advertising, AppleCare, digital content 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 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 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 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 ® .

iPhone net sales increased during the first quarter of 2021 compared to the same quarter in 2020 due primarily to higher net sales from the successful launch of the Company’s four new iPhone models and a favorable mix of iPhone sales.

Mac net sales increased during the first quarter of 2021 compared to the same quarter in 2020 due primarily to higher net sales of MacBook Air and MacBook Pro.

iPad net sales increased during the first quarter of 2021 compared to the same quarter in 2020 due primarily to higher net sales of iPad Air and iPad Pro ® .

| Q1 2021 Form 10-Q | 23

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 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.

Wearables, Home and Accessories net sales increased during the first quarter of 2021 compared to the same quarter in 2020 due primarily to higher net sales of Apple Watch, accessories and AirPods.

Services net sales increased during the first quarter of 2021 compared to the same quarter in 2020 due primarily to higher net sales from the App Store, advertising and cloud services.

Segment Operating Performance

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Europe includes European countries, as well as India, the Middle East and Africa.

Greater China includes China, Hong Kong and Taiwan.

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.

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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

2020 June 29,

2019 Change June 27,

2020 June 29,

The following table shows net sales by reportable segment for the three months ended December 26, 2020 and December 28, 2019 (dollars in millions):

Three Months Ended

2020 December 28,

Net sales by reportable segment:

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Total net sales $ 111,439 $ 91,819 21 %

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 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.

Americas net sales increased during the first quarter of 2021 compared to the same quarter in 2020 due primarily to higher net sales of Services, iPhone and Wearables, Home and Accessories.

Europe net sales increased during the first quarter of 2021 compared to the same quarter in 2020 due primarily to higher net sales of Wearables, Home and Accessories, iPhone and iPad.

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.

| Q3 2020 Form 10-Q | 27

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.

Greater China net sales increased during the first quarter of 2021 compared to the same quarter in 2020 due primarily to higher net sales of iPhone, iPad and Wearables, Home and Accessories.

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 2021.

Japan net sales increased during the first quarter of 2021 compared to the same quarter in 2020 due primarily to higher net sales of iPhone, Services and iPad.

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.

dollar had a favorable impact on Japan net sales during the first quarter of 2021.

| Q1 2021 Form 10-Q | 24

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.

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

2020 June 29,

2019 June 27,

2020 June 29,

Rest of Asia Pacific net sales increased during the first quarter of 2021 compared to the same quarter in 2020 due primarily to higher net sales of Services, iPad and Wearables, Home and Accessories.

The movement of foreign currencies in the Rest of Asia Pacific relative to the U.S.

dollar had a net favorable impact on net sales during the first quarter of 2021.

Products and Services gross margin and gross margin percentage for the three months ended December 26, 2020 and December 28, 2019 were as follows (dollars in millions):

Three Months Ended

2020 December 28,

Gross margin:

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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.

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.

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.

Products gross margin increased during the first quarter of 2021 compared to the same quarter in 2020 due primarily to higher Products volume and a different Products mix.

Products gross margin percentage increased during the first quarter of 2021 compared to the same quarter in 2020 due primarily to 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.

| Q3 2020 Form 10-Q | 28

Services gross margin increased during the first quarter of 2021 compared to the same quarter in 2020 due primarily to higher Services net sales and a different Services mix.

Services gross margin percentage increased during the first quarter of 2021 compared to the same quarter in 2020 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 2020 Form 10-K 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.

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

2020 June 29,

2019 June 27,

2020 June 29,

Operating expenses for the three months ended December 26, 2020 and December 28, 2019 were as follows (dollars in millions):

Three Months Ended

2020 December 28,

Research and development $ 5,163 $ 4,451

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Percentage of total net sales 10 % 11 %

| Q1 2021 Form 10-Q | 25

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 growth in research and development (“R&D”) expense during the first quarter of 2021 compared to the same quarter in 2020 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.

The growth in selling, general and administrative expense during the first quarter of 2021 compared to the same quarter in 2020 was driven primarily by increases in headcount-related expenses 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

2020 June 29,

2019 Change June 27,

2020 June 29,

Other income/(expense), net (“OI&E”) for the three months ended December 26, 2020 and December 28, 2019 was as follows (dollars in millions):

Three Months Ended

2020 December 28,

Interest and dividend income $ 747 $ 1,045

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Total other income/(expense), net $ 45 $ 349 (87) %

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.

| Q3 2020 Form 10-Q | 29

OI&E decreased during the first quarter of 2021 compared to the same quarter in 2020 due primarily to lower interest income and an adjustment to the carrying value of a non-marketable security, partially offset by lower interest expense.

The weighted-average interest rate earned by the Company on its cash, cash equivalents and marketable securities was 1.49% and 2.08% in the first quarter of 2021 and 2020, respectively.

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

2020 June 29,

2019 June 27,

2020 June 29,

Provision for income taxes, effective tax rate and statutory federal income tax rate for the three months ended December 26, 2020 and December 28, 2019 were as follows (dollars in millions):

Three Months Ended

2020 December 28,

Provision for income taxes $ 4,824 $ 3,682

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Statutory federal income tax rate 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.

The Company’s effective tax rate for the first quarter of 2021 was lower than the statutory federal income tax rate due primarily to lower tax rates on foreign earnings and tax benefits from share-based compensation.

The Company’s effective tax rate for the first quarter of 2021 was relatively flat compared to the same quarter in 2020.

| Q1 2021 Form 10-Q | 26

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):

The following tables present selected financial information and statistics as of December 26, 2020 and September 26, 2020 and for the first three months of 2021 and 2020 (in millions):

2020 September 26,

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Property, plant and equipment, net $ 37,933 $ 36,766

Commercial paper and repurchase agreements $ 11,166 $ 5,980

Commercial paper $ 5,000 $ 4,996

Total term debt $ 107,043 $ 107,440

Working capital $ 21,599 $ 38,321

Nine Months Ended

2020 June 29,

Three Months Ended

2020 December 28,

Cash generated by operating activities $ 38,763 $ 30,516

Cash generated by/(used in) investing activities $ (9,820) $ 46,694

Cash used in investing activities $ (8,584) $ (13,668)

Cash used in financing activities $ (32,249) $ (25,407)

(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).

| Q3 2020 Form 10-Q | 30

(1) As of December 26, 2020 and September 26, 2020, total marketable securities included $19.5 billion and $18.6 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.

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.

In connection with the State Aid Decision, as of December 26, 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.

Further information regarding the State Aid Decision can be found in Part I, Item 1 of this Form 10-Q in the Notes to Condensed Consolidated Financial Statements in Note 5, “Income Taxes.”

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.

During the three months ended December 26, 2020, cash generated by operating activities of $38.8 billion was a result of $28.8 billion of net income, non-cash adjustments to net income of $4.7 billion and an increase in the net change in operating assets and liabilities of $5.4 billion.

Cash used in investing activities of $8.6 billion during the three months ended December 26, 2020 consisted primarily of cash used for purchases of marketable securities, net of maturities and sales, of $5.3 billion and cash used to acquire property, plant and equipment of $3.5 billion.

Cash used in financing activities of $32.2 billion during the three months ended December 26, 2020 consisted primarily of cash used to repurchase common stock of $24.8 billion, cash used to pay dividends and dividend equivalents of $3.6 billion, cash used for taxes related to net share settlement of equity awards of $2.9 billion, and cash used to repay term debt of $1.0 billion.

During the three months ended December 28, 2019, cash generated by operating activities of $30.5 billion was a result of $22.2 billion of net income, non-cash adjustments to net income of $4.0 billion and an increase in the net change in operating assets and liabilities of $4.2 billion.

Cash used in investing activities of $13.7 billion during the three months ended December 28, 2019 consisted primarily of cash used for purchases of marketable securities, net of sales and maturities, of $10.4 billion and cash used to acquire property, plant and equipment of $2.1 billion.

Cash used in financing activities of $25.4 billion during the three months ended December 28, 2019 consisted primarily of cash used to repurchase common stock of $20.7 billion, cash used to pay dividends and dividend equivalents of $3.5 billion and cash used to repay term debt of $1.0 billion, partially offset by net proceeds from the issuance of term debt of $2.2 billion.

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.

As of December 26, 2020, the Company had $5.0 billion of Commercial Paper outstanding, with a weighted-average interest rate of 0.10% and maturities generally less than nine months.

| Q1 2021 Form 10-Q | 27

As of December 26, 2020, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $105.9 billion (collectively the “Notes”).

During the first three months of 2021, the Company repaid $1.0 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.

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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.

As of December 26, 2020, the Company was authorized to purchase up to $225 billion of the Company’s common stock under a share repurchase program, of which $192.6 billion had been utilized.

During the three months ended December 26, 2020, the Company repurchased 200 million shares of its common stock for $24.0 billion.

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.

As of December 26, 2020, the Company’s quarterly cash dividend was $0.205 per share.

The Company intends to increase its dividend on an annual basis, subject to declaration by the Board of Directors.

| 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

As of June 27, 2020, the Company’s total fixed lease payment obligations wer e $12.8 billion, of which $8.1 billion w as included in other non-current liabilities in the Company’s Condensed Consolidated Balance Sheet.

Th e Company’s leases typically have original terms not exceeding 10 years and generally contain multi-year renewal options.

The Company has lease arrangements for certain equipment and facilities, including retail, corporate, manufacturing and data center space.

The Company’s retail store and other facility leases typically have original terms not exceeding 10 years and generally contain multi-year renewal options.

The Company’s total fixed lease payment obligation of $13.0 billion as of December 26, 2020 included future payments under leases that had commenced as of December 26, 2020, and were therefore recorded on the Company’s Condensed Consolidated Balance Sheet, as well as leases that had been signed but not yet commenced as of December 26, 2020.

Manufacturing Purchase Obligations

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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.

As of December 26, 2020, the Company expects to pay $45.8 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.

The Company’s other purchase obligations primarily consist of noncancelable obligations to acquire capital assets, including product tooling and manufacturing process equipment, and noncancelable obligations related to advertising, content creation and Internet and telecommunications services.

As of December 26, 2020, the Company had other purchase obligations of $7.8 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.

As of December 26, 2020, the balance of the deemed repatriation tax payable imposed by the U.S.

Tax Cuts and Jobs Act (the “Act”) was $29.9 billion, of which $28.1 billion was included in other non-current liabilities in the Company’s Condensed Consolidated Balance Sheet.

The Company pays 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.

| Q1 2021 Form 10-Q | 28

Critical Accounting Policies and Estimates

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There have been no material changes to the Company’s critical accounting policies and estimates since the 2020 Form 10-K.

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 2021.

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 2020 Form 10-K.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis