Apple Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This section and other parts of this Quarterly Report on Form 10-Q (“Form 10-Q”) 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. For example, statements in this Form 10-Q regarding the potential future impact of macroeconomic conditions on the Company’s business and results of operations are forward-looking statements . 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 the Company’s Annual Report on Form 10-K for the fiscal year ended September 24, 2022 (the “2022 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 following discussion should be read in conjunction with the 2022 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 The Company periodically provides certain information for investors on its corporate website, www.apple.com, and its investor relations website, investor.apple.com. This includes press releases and other information about financial performance, information on environmental, social and governance matters, and details related to the Company’s annual meeting of shareholders. The information contained on the websites referenced in this Form 10-Q is not incorporated by reference into this filing. Further, the Company’s references to website URLs are intended to be inactive textual references only. Business Seasonality and Product Introductions The Company has historically experienced higher net sales in its first quarter compared to other quarters in its fiscal year due in part to seasonal holiday demand. Additionally, new product and service introductions can significantly impact net sales, cost of sales and operating expenses. The timing of product introductions can also impact the Company’s net sales to its indirect distribution channels as these channels are filled with new inventory following a product launch, and channel inventory of an older product often declines as the launch of a newer product approaches. Net sales can also be affected when consumers and distributors anticipate a product introduction. Fiscal Period The Company’s fiscal year is the 52- or 53-week period that ends on the last Saturday of September. An additional week is included in the first fiscal quarter every five or six years to realign the Company’s fiscal quarters with calendar quarters, which occurred in the first quarter of 2023. The Company’s fiscal years 2023 and 2022 span 53 and 52 weeks, respectively. Quarterly Highlights Weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on the Company’s total net sales, which decreased 3% or $2.4 billion during the second quarter of 2023 compared to the same quarter in 2022. The year-over-year net sales decrease consisted primarily of lower net sales of Mac, partially offset by higher net sales of Services. During the second quarter of 2023, the Company announced the following new products: • MacBook Pro ® 14” and MacBook Pro 16”, powered by the Apple M2 Pro and M2 Max chip; • Mac mini ® , powered by the Apple M2 and M2 Pro chip; and • Second-generation HomePod ® . The Company repurchased $19.1 billion of its common stock and paid dividends and dividend equivalents of $3.7 billion during the second quarter of 2023. Apple Inc. | Q2 2023 Form 10-Q | 14 Macroeconomic Conditions Macroeconomic conditions, including inflation, changes in interest rates, and currency fluctuations, have directly and indirectly impacted, and could in the future materially impact, the Company’s results of operations and financial condition. Segment Operating Performance The following table shows net sales by reportable segment for the three- and six-month periods ended April 1, 2023 and March 26, 2022 (dollars in millions): Three Months Ended Six Months Ended April 1, 2023 March 26, 2022 Change April 1, 2023 March 26, 2022 Change Net sales by reportable segment: Americas $ 37,784 $ 40,882 (8) % $ 87,062 $ 92,378 (6) % Europe 23,945 23,287 3 % 51,626 53,036 (3) % Greater China 17,812 18,343 (3) % 41,717 44,126 (5) % Japan 7,176 7,724 (7) % 13,931 14,831 (6) % Rest of Asia Pacific 8,119 7,042 15 % 17,654 16,852 5 % Total net sales $ 94,836 $ 97,278 (3) % $ 211,990 $ 221,223 (4) % Americas Americas net sales decreased during the second quarter and first six months of 2023 compared to the same periods in 2022 due primarily to lower net sales of iPhone and Mac, partially offset by higher net sales of Services. Europe The weakness in foreign currencies relative to the U.S. dollar had a net unfavorable year-over-year impact on Europe net sales during the second quarter and first six months of 2023. During the second quarter of 2023, the Europe net sales increase consisted primarily of higher net sales of iPhone, partially offset by lower net sales of Mac. During the first six months of 2023, the Europe net sales decrease consisted primarily of lower net sales of Mac, partially offset by higher net sales of iPhone. Greater China The weakness in the renminbi relative to the U.S. dollar had an unfavorable year-over-year impact on Greater China net sales during the second quarter and first six months of 2023. During the second quarter and first six months of 2023, the Greater China net sales decrease consisted primarily of lower net sales of iPhone and Mac. Japan The weakness in the yen relative to the U.S. dollar had an unfavorable year-over-year impact on Japan net sales during the second quarter and first six months of 2023. During the second quarter of 2023, the Japan net sales decrease consisted primarily of lower net sales of iPad, Services and iPhone. During the first six months of 2023, the Japan net sales decrease consisted primarily of lower net sales of Services, Wearables, Home and Accessories and Mac. Rest of Asia Pacific The weakness in foreign currencies relative to the U.S. dollar had an unfavorable year-over-year impact on Rest of Asia Pacific net sales during the second quarter and first six months of 2023. During the second quarter and first six months of 2023, the Rest of Asia Pacific net sales increase consisted primarily of higher net sales of iPhone, partially offset by lower net sales of Mac. Apple Inc. | Q2 2023 Form 10-Q | 15 Products and Services Performance The following table shows net sales by category for the three- and six-month periods ended April 1, 2023 and March 26, 2022 (dollars in millions): Three Months Ended Six Months Ended April 1, 2023 March 26, 2022 Change April 1, 2023 March 26, 2022 Change Net sales by category: iPhone $ 51,334 $ 50,570 2 % $ 117,109 $ 122,198 (4) % Mac 7,168 10,435 (31) % 14,903 21,287 (30) % iPad 6,670 7,646 (13) % 16,066 14,894 8 % Wearables, Home and Accessories 8,757 8,806 (1) % 22,239 23,507 (5) % Services 20,907 19,821 5 % 41,673 39,337 6 % Total net sales $ 94,836 $ 97,278 (3) % $ 211,990 $ 221,223 (4) % iPhone iPhone net sales were relatively flat during the second quarter of 2023 compared to the second quarter of 2022. Year-over-year iPhone net sales decreased during the first six months of 2023 due primarily to lower net sales from the Company’s new iPhone models launched in the fourth quarter of 2022. Mac Mac net sales decreased during the second quarter and first six months of 2023 compared to the same periods in 2022 due primarily to lower net sales of MacBook Pro. iPad iPad net sales decreased during the second quarter of 2023 compared to the second quarter of 2022 due primarily to lower net sales of iPad Pro ® and iPad Air ® . Year-over-year iPad net sales increased during the first six months of 2023 due primarily to higher net sales of iPad, partially offset by lower net sales of iPad mini ® . Wearables, Home and Accessories Wearables, Home and Accessories net sales were relatively flat during the second quarter of 2023 compared to the second quarter of 2022. Year-over-year Wearables, Home and Accessories net sales decreased during the first six months of 2023 due primarily to lower net sales of AirPods ® . Services Services net sales increased during the second quarter and first six months of 2023 compared to the same periods in 2022 due primarily to higher net sales from cloud services, music and advertising. Apple Inc. | Q2 2023 Form 10-Q | 16 Gross Margin Products and Services gross margin and gross margin percentage for the three- and six-month periods ended April 1, 2023 and March 26, 2022 were as follows (dollars in millions): Three Months Ended Six Months Ended April 1, 2023 March 26, 2022 April 1, 2023 March 26, 2022 Gross margin: Products $ 27,134 $ 28,167 $ 62,757 $ 68,287 Services 14,842 14,392 29,551 28,515 Total gross margin $ 41,976 $ 42,559 $ 92,308 $ 96,802 Gross margin percentage: Products 36.7 % 36.4 % 36.8 % 37.5 % Services 71.0 % 72.6 % 70.9 % 72.5 % Total gross margin percentage 44.3 % 43.7 % 43.5 % 43.8 % Products Gross Margin Products gross margin decreased during the second quarter and first six months of 2023 compared to the same periods in 2022 due primarily to lower Products volume and the weakness in foreign currencies relative to the U.S. dollar, partially offset by a different Products mix. Products gross margin percentage increased during the second quarter of 2023 compared to the second quarter of 2022 due primarily to a different Products mix, partially offset by the weakness in foreign currencies relative to the U.S. dollar. Year-over-year Products gross margin percentage decreased during the first six months of 2023 due primarily to the weakness in foreign currencies relative to the U.S. dollar, partially offset by a different Products mix. Services Gross Margin Services gross margin increased during the second quarter and first six months of 2023 compared to the same periods in 2022 due primarily to higher Services net sales, partially offset by the weakness in foreign currencies relative to the U.S. dollar and higher Services costs. Services gross margin percentage decreased during the second quarter and first six months of 2023 compared to the same periods 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. Apple Inc. | Q2 2023 Form 10-Q | 17 Operating Expenses Operating expenses for the three- and six-month periods ended April 1, 2023 and March 26, 2022 were as follows (dollars in millions): Three Months Ended Six Months Ended April 1, 2023 March 26, 2022 April 1, 2023 March 26, 2022 Research and development $ 7,457 $ 6,387 $ 15,166 $ 12,693 Percentage of total net sales 8 % 7 % 7 % 6 % Selling, general and administrative $ 6,201 $ 6,193 $ 12,808 $ 12,642 Percentage of total net sales 7 % 6 % 6 % 6 % Total operating expenses $ 13,658 $ 12,580 $ 27,974 $ 25,335 Percentage of total net sales 14 % 13 % 13 % 11 % Research and Development The growth in research and development (“R&D”) expense during the second quarter and first six months of 2023 compared to the same periods in 2022 was driven primarily by increases in headcount-related expenses. Selling, General and Administrative Selling, general and administrative expense was relatively flat during the second quarter and first six months of 2023 compared to the same periods in 2022. Provision for Income Taxes Provision for income taxes, effective tax rate and statutory federal income tax rate for the three- and six-month periods ended April 1, 2023 and March 26, 2022 were as follows (dollars in millions): Three Months Ended Six Months Ended April 1, 2023 March 26, 2022 April 1, 2023 March 26, 2022 Provision for income taxes $ 4,222 $ 5,129 $ 9,847 $ 11,740 Effective tax rate 14.9 % 17.0 % 15.4 % 16.4 % Statutory federal income tax rate 21 % 21 % 21 % 21 % The Company’s effective tax rate for the second quarter of 2023 was lower than the statutory federal income tax rate due primarily to a lower effective tax rate on foreign earnings and the U.S. federal R&D credit, partially offset by state income taxes. The Company’s effective tax rate for the first six months of 2023 was lower than the statutory federal income tax rate due primarily to a lower effective tax rate on foreign earnings, the U.S. federal R&D credit and tax benefits from share-based compensation, partially offset by state income taxes. The Company’s effective tax rate for the second quarter of 2023 was lower compared to the second quarter of 2022 due primarily to the impact of U.S. foreign tax credit regulations issued by the U.S. Department of the Treasury in 2022 and a higher U.S. federal R&D credit. The Company’s effective tax rate for the first six months of 2023 was lower compared to the same period in 2022 due primarily to the impact of U.S. foreign tax credit regulations issued by the U.S. Department of the Treasury in 2022 and a higher U.S. federal R&D credit, partially 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 2022 Form 10-K, except for commercial paper and manufacturing purchase obligations. Apple Inc. | Q2 2023 Form 10-Q | 18 Commercial Paper The Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. As of April 1, 2023, the Company had $2.0 billion of Commercial Paper outstanding, all of which was payable within 12 months. Manufacturing Purchase Obligations The Company utilizes several outsourcing partners to manufacture subassemblies for the Company’s products and to perform final assembly and testing of finished products. The Company also obtains individual components for its products from a wide variety of individual suppliers. Outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically covers periods up to 150 days. As of April 1, 2023, the Company had manufacturing purchase obligations of $40.5 billion, with $40.1 billion payable within 12 months. The Company’s manufacturing purchase obligations are primarily noncancelable. Capital Return Program In addition to its contractual cash requirements, the Company has an authorized share repurchase program, under which the remaining availability was $22.6 billion as of April 1, 2023. On May 4, 2023, the Company announced the Board of Directors had authorized an additional program to repurchase up to $90 billion of the Company’s common stock. The programs do not obligate the Company to acquire a minimum amount of shares. On May 4, 2023, the Company also announced the Board of Directors raised the Company’s quarterly cash dividend from $0.23 to $0.24 per share, beginning with the dividend to be paid during the third quarter of 2023. The Company intends to increase its dividend on an annual basis, subject to declaration by the Board of Directors. Critical Accounting Estimates The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported. Note 1, “Summary of Significant Accounting Policies” of the Notes to condensed consolidated Financial Statements in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2022 Form 10-K describe the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements. There have been no material changes to the Company’s critical accounting estimates since the 2022 Form 10-K. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes to the Company’s market risk during the first six 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.