What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-03 compared with 2022-07-29 · 84 added, 113 removed, 84 unchanged (70% of the section changed)

13 unchanged sentences

The Company periodically provides certain information for investors on its corporate website, www.apple.com, and its investor relations website, investor.apple.com.

This includes press releases and other information about financial performance, information on environmental, social and corporate governance matters, and details related to the Company’s annual meeting of shareholders.

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.

5 unchanged sentences

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 2023 and 2022 span 53 and 52 weeks, respectively.

Quarterly Highlights

Total net sales increased 2% or $1.5 billion during the third quarter of 2022 compared to the same quarter in 2021, driven primarily by higher net sales of Services and iPhone, partially offset by lower net sales of Mac and Wearables, Home and Accessories.

The weakness in foreign currencies relative to the U.S.

dollar had an unfavorable impact on all Products and Services net sales during the third quarter of 2022.

At the end of the third quarter of 2022, the Company introduced an all-new MacBook Air ® and an updated 13-inch MacBook Pro ® , both powered by the new Apple M2 chip.

The Company also announced iOS 16, macOS ® Ventura, iPadOS ® 16 and watchOS ® 9, updates to its operating systems that are expected to be available in the fall of 2022.

The Company repurchased $21.7 billion of its common stock and paid dividends and dividend equivalents of $3.8 billion during the third quarter of 2022.

Total net sales decreased 5% or $6.8 billion during the first quarter of 2023 compared to the same quarter in 2022 due to the weakness in foreign currencies relative to the U.S.

The weakness in foreign currencies contributed to lower net sales of iPhone and Mac, which was partially offset by higher net sales of iPad.

During the first quarter of 2023, the Company announced a new iPad, a new iPad Pro ® powered by the Apple M2 chip, and a new Apple TV 4K.

The Company repurchased $19.0 billion of its common stock and paid dividends and dividend equivalents of $3.8 billion during the first quarter of 2023.

| Q1 2023 Form 10-Q | 15

2 unchanged sentences

The COVID-19 pandemic and the measures taken by many countries in response have affected and could in the future materially impact the Company’s business, results of operations and financial condition.

Certain of the Company’s outsourcing partners, component suppliers and logistical service providers have experienced disruptions during the COVID-19 pandemic, resulting in supply shortages.

Similar disruptions could occur in the future.

Products and Services Performance

The following table shows net sales by category for the three- and nine-month periods ended June 25, 2022 and June 26, 2021 (dollars in millions):

Three Months Ended Nine Months Ended

2022 June 26,

2021 Change June 25,

2022 June 26,

Net sales by category:

$ 40,665 $ 39,570 3 % $ 162,863 $ 153,105 6 %

7,382 8,235 (10) % 28,669 26,012 10 %

7,224 7,368 (2) % 22,118 23,610 (6) %

Wearables, Home and Accessories (1)(2)

8,084 8,775 (8) % 31,591 29,582 7 %

19,604 17,486 12 % 58,941 50,148 18 %

Total net sales $ 82,959 $ 81,434 2 % $ 304,182 $ 282,457 8 %

(1) Products net sales include amortization of the deferred value of unspecified software upgrade rights, which are bundled in the sales price of the respective product.

(2) Wearables, Home and Accessories net sales include sales of AirPods, Apple TV, Apple Watch, Beats products, HomePod mini and accessories.

(3) Services net sales include sales from the Company’s advertising, AppleCare, cloud, digital content, payment and other services.

Services net sales also include amortization of the deferred value of services bundled in the sales price of certain products.

iPhone net sales increased during the third quarter and first nine months of 2022 compared to the same periods in 2021 due primarily to higher net sales from the Company’s new iPhone models.

Mac net sales decreased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to lower net sales of MacBook Air and iMac ® , partially offset by higher net sales of MacBook Pro.

Year-over-year Mac net sales increased during the first nine months of 2022 due primarily to higher net sales of MacBook Pro, partially offset by lower net sales of MacBook Air.

iPad net sales decreased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to lower net sales of iPad Pro ® , partially offset by higher net sales of all other iPad models.

Year-over-year iPad net sales decreased during the first nine months of 2022 due primarily to lower net sales of the 10-inch version of iPad and iPad Air ® , partially offset by higher net sales of iPad mini ® .

Wearables, Home and Accessories

Wearables, Home and Accessories net sales decreased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to lower net sales of AirPods and Apple Watch.

Year-over-year Wearables, Home and Accessories net sales increased during the first nine months of 2022 due primarily to higher net sales of Apple Watch and AirPods.

| Q3 2022 Form 10-Q | 15

Services net sales increased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to higher net sales from advertising, cloud services and AppleCare.

Year-over-year Services net sales increased during the first nine months of 2022 due primarily to higher net sales from advertising, the App Store ® and cloud services.

Certain of the Company’s outsourcing partners, component suppliers and logistical service providers have experienced, and could in the future experience, disruptions related to the COVID-19 pandemic, resulting in supply shortages.

During the first quarter of 2023, COVID-related impacts temporarily affected the Company’s primary iPhone 14 Pro and iPhone 14 Pro Max assembly facility located in Zhengzhou, China.

The facility operated at significantly reduced capacity, impacting iPhone 14 Pro and iPhone Pro Max shipments.

Macroeconomic Conditions

Macroeconomic conditions, including inflation, rising interest rates and currency fluctuations, have direct and indirect impacts on the Company’s business.

The Company believes these factors have impacted, and could in the future materially impact, the Company’s results of operations and financial condition.

Segment Operating Performance

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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 9, “Segment Information and Geographic Data.”

The following table shows net sales by reportable segment for the three- and nine-month periods ended June 25, 2022 and June 26, 2021 (dollars in millions):

Three Months Ended Nine Months Ended

2022 June 26,

2021 Change June 25,

2022 June 26,

The following table shows net sales by reportable segment for the three months ended December 31, 2022 and December 25, 2021 (dollars in millions):

Three Months Ended

2022 December 25,

Net sales by reportable segment:

5 unchanged sentences

Total net sales $ 117,154 $ 123,945 (5) %

Americas net sales increased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to higher net sales of Services and iPhone, partially offset by lower net sales of Mac and Wearables, Home and Accessories.

Year-over-year Americas net sales increased during the first nine months of 2022 due primarily to higher net sales of iPhone, Services and Wearables, Home and Accessories.

Europe net sales increased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to higher net sales of iPhone, partially offset by lower net sales of Mac.

Year-over-year Europe net sales increased during the first nine months of 2022 due primarily to higher net sales of Services and iPhone.

The weakness in foreign currencies relative to the U.S.

dollar had a net unfavorable impact on Europe net sales during the third quarter and first nine months of 2022.

Greater China

Greater China net sales decreased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to lower net sales of iPhone, partially offset by higher net sales of Services.

Year-over-year Greater China net sales increased during the first nine months of 2022 due primarily to higher net sales of iPhone and Services.

The weakness in foreign currencies relative to the U.S.

dollar had an unfavorable impact on Greater China net sales during the third quarter of 2022.

The strength of the renminbi relative to the U.S.

dollar had a favorable impact on Greater China net sales during the first nine months of 2022.

Japan net sales decreased during the third quarter and first nine months of 2022 compared to the same periods in 2021 due primarily to lower net sales of iPhone and iPad.

The weakness of the yen relative to the U.S.

dollar had an unfavorable impact on Japan net sales during the third quarter and first nine months of 2022.

Americas net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to lower net sales of iPhone and Mac, partially offset by higher net sales of Services and iPad.

The weakness of the Canadian dollar relative to the U.S.

dollar had an unfavorable year-over-year impact on Americas net sales during the first quarter of 2023.

Europe net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due to the weakness in foreign currencies relative to the U.S.

dollar, which contributed to lower net sales of iPhone and Mac.

| Q1 2023 Form 10-Q | 16

Greater China

Greater China net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due to the weakness of the renminbi relative to the U.S.

The weakness of the renminbi contributed to lower net sales of iPhone, which was partially offset by higher net sales of iPad.

Japan net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due to the weakness of the yen relative to the U.S.

dollar, which contributed to lower net sales of Services and Mac.

Rest of Asia Pacific

Rest of Asia Pacific net sales increased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to higher net sales of iPhone and Services.

Year-over-year Rest of Asia Pacific net sales increased during the first nine months of 2022 due primarily to higher net sales of Services, iPhone and Mac.

The weakness in foreign currencies relative to the U.S.

dollar had a net unfavorable impact on Rest of Asia Pacific net sales during the third quarter and first nine months of 2022.

Products and Services gross margin and gross margin percentage for the three- and nine-month periods ended June 25, 2022 and June 26, 2021 were as follows (dollars in millions):

Three Months Ended Nine Months Ended

2022 June 26,

2021 June 25,

2022 June 26,

Rest of Asia Pacific net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due to the weakness in foreign currencies relative to the U.S.

The weakness in foreign currencies contributed to lower net sales of iPhone and Mac, which was partially offset by higher net sales of Services and iPad.

Products and Services Performance

The following table shows net sales by category for the three months ended December 31, 2022 and December 25, 2021 (dollars in millions):

Three Months Ended

2022 December 25,

Net sales by category:

$ 65,775 $ 71,628 (8) %

7,735 10,852 (29) %

9,396 7,248 30 %

Wearables, Home and Accessories (1)(2)

13,482 14,701 (8) %

20,766 19,516 6 %

Total net sales $ 117,154 $ 123,945 (5) %

(1) Products net sales include amortization of the deferred value of unspecified software upgrade rights, which are bundled in the sales price of the respective product.

(2) Wearables, Home and Accessories net sales include sales of AirPods, Apple TV, Apple Watch, Beats products, HomePod mini and accessories.

(3) Services net sales include sales from the Company’s advertising, AppleCare, cloud, digital content, payment and other services.

Services net sales also include amortization of the deferred value of services bundled in the sales price of certain products.

iPhone net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to lower net sales from the Company’s new iPhone models launched in the fourth quarter of 2022.

Mac net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to lower net sales of MacBook Pro ® .

iPad net sales increased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to higher net sales of iPad and iPad Air ® .

| Q1 2023 Form 10-Q | 17

Wearables, Home and Accessories

Wearables, Home and Accessories net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to lower net sales of AirPods, partially offset by higher net sales of Watch.

Services net sales increased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to higher net sales from cloud services, the App Store ® and music.

Products and Services gross margin and gross margin percentage for the three months ended December 31, 2022 and December 25, 2021 were as follows (dollars in millions):

Three Months Ended

2022 December 25,

Gross margin:

7 unchanged sentences

Products Gross Margin

Products gross margin decreased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to the weakness in foreign currencies relative to the U.S.

Year-over-year Products gross margin increased during the first nine months of 2022 due primarily to a different Products mix and higher Products volume, partially offset by the weakness in foreign currencies relative to the U.S.

Products gross margin percentage decreased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to the weakness in foreign currencies relative to the U.S.

dollar and a different Products mix.

Year-over-year Products gross margin percentage increased during the first nine months of 2022 due primarily to a different Products mix.

Products gross margin decreased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to the weakness in foreign currencies relative to the U.S.

dollar and lower Products volume.

Products gross margin percentage decreased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to the weakness in foreign currencies relative to the U.S.

Services Gross Margin

Services gross margin increased during the third quarter and first nine months of 2022 compared to the same periods in 2021 due primarily to higher Services net sales, partially offset by the weakness in foreign currencies relative to the U.S.

Services gross margin percentage increased during the third quarter and first nine months of 2022 compared to the same periods in 2021 due primarily to improved leverage and a different Services mix, partially offset by the weakness in foreign currencies relative to the U.S.

dollar and higher Services costs.

Services gross margin increased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to higher Services net sales, partially offset by the weakness in foreign currencies relative to the U.S.

Services gross margin percentage decreased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to the weakness in foreign currencies relative to the U.S.

dollar and higher Services costs, partially offset by improved leverage.

The Company’s future gross margins can be impacted by a variety of factors, as discussed in Part I, Item 1A of the 2022 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.

1 unchanged sentence

Operating Expenses

Operating expenses for the three- and nine-month periods ended June 25, 2022 and June 26, 2021 were as follows (dollars in millions):

Three Months Ended Nine Months Ended

2022 June 26,

2021 June 25,

2022 June 26,

Operating expenses for the three months ended December 31, 2022 and December 25, 2021 were as follows (dollars in millions):

Three Months Ended

2022 December 25,

Research and development $ 7,709 $ 6,306

5 unchanged sentences

Research and Development

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

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.

The growth in research and development (“R&D”) expense during the first quarter of 2023 compared to the same quarter in 2022 was driven primarily by increases in headcount-related expenses.

Selling, General and Administrative

The growth in selling, general and administrative expense during the third quarter and first nine months of 2022 compared to the same periods in 2021 was driven primarily by increases in headcount-related expenses, advertising and professional services.

Other Income/(Expense), Net

Other income/(expense), net (“OI&E”) for the three- and nine-month periods ended June 25, 2022 and June 26, 2021 was as follows (dollars in millions):

Three Months Ended Nine Months Ended

2022 June 26,

2021 Change June 25,

2022 June 26,

Interest and dividend income $ 722 $ 719 $ 2,072 $ 2,184

Interest expense (719) (665) (2,104) (1,973)

Other income/(expense), net (13) 189 (65) 585

Total other income/(expense), net $ (10) $ 243 (104) % $ (97) $ 796 (112) %

OI&E decreased during the third quarter and first nine months of 2022 compared to the same periods in 2021 due primarily to fair value adjustments and realized losses on marketable securities and higher interest expense, partially offset by foreign exchange gains.

The growth in selling, general and administrative expense during the first quarter of 2023 compared to the same quarter in 2022 was driven primarily by increases in headcount-related expenses.

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 25, 2022 and June 26, 2021 were as follows (dollars in millions):

Three Months Ended Nine Months Ended

2022 June 26,

2021 June 25,

2022 June 26,

Provision for income taxes, effective tax rate and statutory federal income tax rate for the three months ended December 31, 2022 and December 25, 2021 were as follows (dollars in millions):

Three Months Ended

2022 December 25,

Provision for income taxes $ 5,625 $ 6,611

1 unchanged sentence

Statutory federal income tax rate 21 % 21 %

The Company’s effective tax rate for the third quarter and first nine months of 2022 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 tax credit, partially offset by state income taxes.

| Q3 2022 Form 10-Q | 18

The Company’s effective tax rate for the third quarter of 2022 was higher compared to the third quarter of 2021 due primarily to a higher effective tax rate on foreign earnings and an adjustment to prior years’ foreign-derived intangible income deductions.

The Company’s effective tax rate for the first nine months of 2022 was higher compared to the same period in 2021 due primarily to a higher effective tax rate on foreign earnings, lower tax benefits from share-based compensation, and the impact to U.S.

foreign tax credits as a result of regulations issued by the U.S.

Department of the Treasury in January 2022.

The Company’s effective tax rate for the first quarter of 2023 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 U.S.

federal R&D credit, partially offset by state income taxes.

The Company’s effective tax rate for the first quarter of 2023 was lower compared to the same quarter in 2022 due primarily to a higher U.S.

federal R&D credit, lower state income taxes and a lower effective tax rate on foreign earnings, largely offset by lower tax benefits from share-based compensation.

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 2021 Form 10-K, except for manufacturing purchase obligations.

The Company’s contractual cash requirements have not changed materially since the 2022 Form 10-K, except for commercial paper and manufacturing purchase obligations.

Commercial Paper

The Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program.

As of December 31, 2022, the Company had $1.7 billion of Commercial Paper outstanding, all of which was payable within 12 months.

| Q1 2023 Form 10-Q | 19

Manufacturing Purchase Obligations

2 unchanged sentences

Outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically covers periods up to 150 days.

As of June 25, 2022, the Company had manufacturing purchase obligations of $43.1 billion, with $43.0 billion payable within 12 months.

As of December 31, 2022, the Company had manufacturing purchase obligations of $55.1 billion, with $54.8 billion payable within 12 months.

The Company’s manufacturing purchase obligations are primarily noncancelable.

In addition to its contractual cash requirements, the Company has a share repurchase program authorized by the Board of Directors (the “Program”).

The Program does not obligate the Company to acquire a minimum amount of shares.

As of June 25, 2022, the Company’s quarterly cash dividend was $0.23 per share.

In addition to its contractual cash requirements, the Company has a capital return program authorized by the Board of Directors.

The share repurchase program (the “Program”) does not obligate the Company to acquire a minimum amount of shares.

As of December 31, 2022, the Company’s quarterly cash dividend was $0.23 per share.

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

5 unchanged sentences

Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to the Company’s market risk during the first nine months of 2022.

There have been no material changes to the Company’s market risk during the first three months of 2023.

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 2022 Form 10-K.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis