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 1% or $1.2 billion during the third quarter of 2023 compared to the same quarter in 2022. The year-over-year net sales decrease consisted primarily of lower net sales of iPad and iPhone, partially offset by higher net sales of Services. During the third quarter of 2023, the Company announced the following new products: • 15-inch MacBook Air ® , powered by the M2 chip; • Mac Studio™, powered by the M2 Max chip and the new M2 Ultra chip; • Mac Pro ® , powered by the new M2 Ultra chip; and • Apple Vision Pro™, the Company’s first spatial computer featuring its new visionOS™, expected to be available in early calendar year 2024. The Company also announced iOS 17, macOS ® Sonoma, iPadOS ® 17, tvOS ® 17 and watchOS ® 10, updates to its operating systems that are expected to be available in the fall of 2023. Apple Inc. | Q3 2023 Form 10-Q | 14 The Company repurchased $18.0 billion of its common stock and paid dividends and dividend equivalents of $3.8 billion during the third quarter of 2023. 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 nine-month periods ended July 1, 2023 and June 25, 2022 (dollars in millions): Three Months Ended Nine Months Ended July 1, 2023 June 25, 2022 Change July 1, 2023 June 25, 2022 Change Net sales by reportable segment: Americas $ 35,383 $ 37,472 (6) % $ 122,445 $ 129,850 (6) % Europe 20,205 19,287 5 % 71,831 72,323 (1) % Greater China 15,758 14,604 8 % 57,475 58,730 (2) % Japan 4,821 5,446 (11) % 18,752 20,277 (8) % Rest of Asia Pacific 5,630 6,150 (8) % 23,284 23,002 1 % Total net sales $ 81,797 $ 82,959 (1) % $ 293,787 $ 304,182 (3) % Americas Americas net sales decreased during the third quarter and first nine 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 third quarter and first nine months of 2023. During the third quarter of 2023, the Europe net sales increase consisted primarily of higher net sales of iPhone. During the first nine 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 third quarter and first nine months of 2023. During the third quarter of 2023, the Greater China net sales increase consisted primarily of higher net sales of iPhone. During the first nine months of 2023, the Greater China net sales decrease consisted primarily of lower net sales of iPhone. 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 third quarter and first nine months of 2023. During the third quarter of 2023, the Japan net sales decrease consisted primarily of lower net sales of iPhone. During the first nine months of 2023, the Japan net sales decrease consisted primarily of lower net sales of iPhone, Services and Wearables, Home and Accessories. Rest of Asia Pacific The weakness in foreign currencies relative to the U.S. dollar had a net unfavorable year-over-year impact on Rest of Asia Pacific net sales during the third quarter and first nine months of 2023. During the third quarter of 2023, the Rest of Asia Pacific net sales decrease consisted primarily of lower net sales of iPhone and iPad. During the first nine 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. | Q3 2023 Form 10-Q | 15 Products and Services Performance The following table shows net sales by category for the three- and nine-month periods ended July 1, 2023 and June 25, 2022 (dollars in millions): Three Months Ended Nine Months Ended July 1, 2023 June 25, 2022 Change July 1, 2023 June 25, 2022 Change Net sales by category: iPhone $ 39,669 $ 40,665 (2) % $ 156,778 $ 162,863 (4) % Mac 6,840 7,382 (7) % 21,743 28,669 (24) % iPad 5,791 7,224 (20) % 21,857 22,118 (1) % Wearables, Home and Accessories 8,284 8,084 2 % 30,523 31,591 (3) % Services 21,213 19,604 8 % 62,886 58,941 7 % Total net sales $ 81,797 $ 82,959 (1) % $ 293,787 $ 304,182 (3) % iPhone iPhone net sales decreased during the third quarter and first nine months of 2023 compared to the same periods in 2022 due primarily to lower net sales from certain iPhone models, partially offset by higher net sales of iPhone 14 Pro models. Mac Mac net sales decreased during the third quarter and first nine months of 2023 compared to the same periods in 2022 due primarily to lower net sales of laptops. iPad iPad net sales decreased during the third quarter of 2023 compared to the third quarter of 2022 due primarily to lower net sales across most iPad models. Year-over-year iPad net sales were relatively flat during the first nine months of 2023. Wearables, Home and Accessories Wearables, Home and Accessories net sales increased during the third quarter of 2023 compared to the third quarter of 2022 due primarily to higher net sales of Wearables, which includes AirPods ® , Apple Watch ® and Beats ® products, partially offset by lower net sales of accessories. Year-over-year Wearables, Home and Accessories net sales decreased during the first nine months of 2023 due primarily to lower net sales of Wearables and accessories. Services Services net sales increased during the third quarter of 2023 compared to the third quarter of 2022 due primarily to higher net sales from advertising, cloud services and the App Store ® . Year-over-year Services net sales increased during the first nine months of 2023 due primarily to higher net sales from cloud services, advertising and music. Apple Inc. | Q3 2023 Form 10-Q | 16 Gross Margin Products and Services gross margin and gross margin percentage for the three- and nine-month periods ended July 1, 2023 and June 25, 2022 were as follows (dollars in millions): Three Months Ended Nine Months Ended July 1, 2023 June 25, 2022 July 1, 2023 June 25, 2022 Gross margin: Products $ 21,448 $ 21,870 $ 84,205 $ 90,157 Services 14,965 14,015 44,516 42,530 Total gross margin $ 36,413 $ 35,885 $ 128,721 $ 132,687 Gross margin percentage: Products 35.4 % 34.5 % 36.5 % 36.8 % Services 70.5 % 71.5 % 70.8 % 72.2 % Total gross margin percentage 44.5 % 43.3 % 43.8 % 43.6 % Products Gross Margin Products gross margin decreased during the third quarter and first nine 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 lower Products volume, partially offset by cost savings and a different Products mix. Products gross margin percentage increased during the third quarter of 2023 compared to the third quarter of 2022 due primarily to cost savings and a different Products mix, partially offset by the weakness in foreign currencies relative to the U.S. dollar and decreased leverage. Year-over-year Products gross margin percentage decreased during the first nine months of 2023 due primarily to the weakness in foreign currencies relative to the U.S. dollar and decreased leverage, partially offset by cost savings and a different Products mix. Services Gross Margin Services gross margin increased during the third quarter and first nine 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 third quarter of 2023 compared to the third quarter of 2022 due primarily to higher Services costs, partially offset by improved leverage. Year-over-year Services gross margin percentage decreased during the first nine months of 2023 due primarily to higher Services costs and the weakness in foreign currencies relative to the U.S. dollar, 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. | Q3 2023 Form 10-Q | 17 Operating Expenses Operating expenses for the three- and nine-month periods ended July 1, 2023 and June 25, 2022 were as follows (dollars in millions): Three Months Ended Nine Months Ended July 1, 2023 June 25, 2022 July 1, 2023 June 25, 2022 Research and development $ 7,442 $ 6,797 $ 22,608 $ 19,490 Percentage of total net sales 9 % 8 % 8 % 6 % Selling, general and administrative $ 5,973 $ 6,012 $ 18,781 $ 18,654 Percentage of total net sales 7 % 7 % 6 % 6 % Total operating expenses $ 13,415 $ 12,809 $ 41,389 $ 38,144 Percentage of total net sales 16 % 15 % 14 % 13 % Research and Development The growth in research and development (“R&D”) expense during the third quarter and first nine 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 third quarter and first nine 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 nine-month periods ended July 1, 2023 and June 25, 2022 were as follows (dollars in millions): Three Months Ended Nine Months Ended July 1, 2023 June 25, 2022 July 1, 2023 June 25, 2022 Provision for income taxes $ 2,852 $ 3,624 $ 12,699 $ 15,364 Effective tax rate 12.5 % 15.7 % 14.6 % 16.3 % Statutory federal income tax rate 21 % 21 % 21 % 21 % The Company’s effective tax rate for the third quarter and first nine months of 2023 was lower than the statutory federal income tax rate due primarily to a lower effective tax rate on foreign earnings, including the favorable impact of changes in unrecognized tax benefits, 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 third quarter of 2023 was lower compared to the third quarter of 2022 due primarily to a lower effective tax rate on foreign earnings, including the favorable impact of changes in unrecognized tax benefits, partially offset by lower tax benefits from share-based compensation. The Company’s effective tax rate for the first nine months of 2023 was lower compared to the same period in 2022 due primarily to a lower effective tax rate on foreign earnings and the impact of U.S. foreign tax credit regulations issued by the U.S. Department of the Treasury in 2022, partially offset by lower tax benefits from share-based compensation. Apple Inc. | Q3 2023 Form 10-Q | 18 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 manufacturing purchase obligations. 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 July 1, 2023, the Company had manufacturing purchase obligations of $38.4 billion, with $38.1 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 had authorized share repurchase programs as of July 1, 2023. The programs do not obligate the Company to acquire a minimum amount of shares. As of July 1, 2023, the Company’s quarterly cash dividend was $0.24 per share. The Company intends to increase its dividend on an annual basis, subject to declaration by the Board of Directors. 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 nine 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.