Apple Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Item and other sections 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 2023 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. The following discussion should be read in conjunction with the 2023 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 2024 and 2023 span 52 and 53 weeks, respectively. Quarterly Highlights The Company’s first quarter of 2024 included 13 weeks, compared to 14 weeks during the first quarter of 2023. The Company’s total net sales increased 2% or $2.4 billion during the first quarter of 2024 compared to the same quarter in 2023, driven primarily by higher net sales of iPhone and Services, partially offset by lower net sales of iPad and Wearables, Home and Accessories. During the first quarter of 2024, the Company announced an updated MacBook Pro ® 14-in., MacBook Pro 16-in. and iMac ® . The Company repurchased $20.5 billion of its common stock and paid dividends and dividend equivalents of $3.8 billion during the first quarter of 2024. 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. Apple Inc. | Q1 2024 Form 10-Q | 13 Segment Operating Performance The following table shows net sales by reportable segment for the three months ended December 30, 2023 and December 31, 2022 (dollars in millions): Three Months Ended December 30, 2023 December 31, 2022 Change Net sales by reportable segment: Americas $ 50,430 $ 49,278 2 % Europe 30,397 27,681 10 % Greater China 20,819 23,905 (13) % Japan 7,767 6,755 15 % Rest of Asia Pacific 10,162 9,535 7 % Total net sales $ 119,575 $ 117,154 2 % Americas Americas net sales increased 2% or $1.2 billion during the first quarter of 2024 compared to the same quarter in 2023 due primarily to higher net sales of Services and iPhone, partially offset by lower net sales of iPad. The strength in foreign currencies relative to the U.S. dollar had a net favorable year-over-year impact on Americas net sales during the first quarter of 2024. Europe Europe net sales increased 10% or $2.7 billion during the first quarter of 2024 compared to the same quarter in 2023 due primarily to higher net sales of iPhone. The strength in foreign currencies relative to the U.S. dollar had a net favorable year-over-year impact on Europe net sales during the first quarter of 2024. Greater China Greater China net sales decreased 13% or $3.1 billion during the first quarter of 2024 compared to the same quarter in 2023 due primarily to lower net sales of iPhone, iPad and Wearables, Home and Accessories. 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 first quarter of 2024. Japan Japan net sales increased 15% or $1.0 billion during the first quarter of 2024 compared to the same quarter in 2023 due primarily to higher net sales of iPhone. The weakness in the yen relative to the U.S. dollar had an unfavorable year-over-year impact on Japan net sales during the first quarter of 2024. Rest of Asia Pacific Rest of Asia Pacific net sales increased 7% or $627 million during the first quarter of 2024 compared to the same quarter in 2023 due primarily to higher net sales of iPhone, partially offset by lower net sales of Wearables, Home and Accessories. Apple Inc. | Q1 2024 Form 10-Q | 14 Products and Services Performance The following table shows net sales by category for the three months ended December 30, 2023 and December 31, 2022 (dollars in millions): Three Months Ended December 30, 2023 December 31, 2022 Change Net sales by category: iPhone $ 69,702 $ 65,775 6 % Mac 7,780 7,735 1 % iPad 7,023 9,396 (25) % Wearables, Home and Accessories 11,953 13,482 (11) % Services 23,117 20,766 11 % Total net sales $ 119,575 $ 117,154 2 % iPhone iPhone net sales increased 6% or $3.9 billion during the first quarter of 2024 compared to the same quarter in 2023 due primarily to higher net sales of Pro models, partially offset by lower net sales of other models. Mac Mac net sales were relatively flat during the first quarter of 2024 compared to the same quarter in 2023. iPad iPad net sales decreased 25% or $2.4 billion during the first quarter of 2024 compared to the same quarter in 2023 due primarily to lower net sales of iPad Pro, iPad 9th generation and iPad Air. Wearables, Home and Accessories Wearables, Home and Accessories net sales decreased 11% or $1.5 billion during the first quarter of 2024 compared to the same quarter in 2023 due primarily to lower net sales of Wearables and Accessories. Services Services net sales increased 11% or $2.4 billion during the first quarter of 2024 compared to the same quarter in 2023 due primarily to higher net sales from advertising, video and cloud services. Apple Inc. | Q1 2024 Form 10-Q | 15 Gross Margin Products and Services gross margin and gross margin percentage for the three months ended December 30, 2023 and December 31, 2022 were as follows (dollars in millions): Three Months Ended December 30, 2023 December 31, 2022 Gross margin: Products $ 38,018 $ 35,623 Services 16,837 14,709 Total gross margin $ 54,855 $ 50,332 Gross margin percentage: Products 39.4 % 37.0 % Services 72.8 % 70.8 % Total gross margin percentage 45.9 % 43.0 % Products Gross Margin Products gross margin increased during the first quarter of 2024 compared to the same quarter in 2023 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 lower Products volume. Products gross margin percentage increased during the first quarter of 2024 compared to the same quarter in 2023 due primarily to cost savings and a different Products mix, partially offset by the weakness in foreign currencies relative to the U.S. dollar. Services Gross Margin Services gross margin increased during the first quarter of 2024 compared to the same quarter in 2023 due primarily to higher Services net sales and a different Services mix. Services gross margin percentage increased during the first quarter of 2024 compared to the same quarter in 2023 due primarily to a different Services mix. The Company’s future gross margins can be impacted by a variety of factors, as discussed in Part I, Item 1A of the 2023 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. | Q1 2024 Form 10-Q | 16 Operating Expenses Operating expenses for the three months ended December 30, 2023 and December 31, 2022 were as follows (dollars in millions): Three Months Ended December 30, 2023 December 31, 2022 Research and development $ 7,696 $ 7,709 Percentage of total net sales 6 % 7 % Selling, general and administrative $ 6,786 $ 6,607 Percentage of total net sales 6 % 6 % Total operating expenses $ 14,482 $ 14,316 Percentage of total net sales 12 % 12 % Research and Development Research and development (“R&D”) expense was relatively flat during the first quarter of 2024 compared to the same quarter in 2023. Selling, General and Administrative Selling, general and administrative expense increased 3% or $179 million during the first quarter of 2024 compared to the same quarter in 2023. Provision for Income Taxes Provision for income taxes, effective tax rate and statutory federal income tax rate for the three months ended December 30, 2023 and December 31, 2022 were as follows (dollars in millions): Three Months Ended December 30, 2023 December 31, 2022 Provision for income taxes $ 6,407 $ 5,625 Effective tax rate 15.9 % 15.8 % Statutory federal income tax rate 21 % 21 % The Company’s effective tax rate for the first quarter of 2024 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 credit, partially offset by state income taxes. The Company’s effective tax rate for the first quarter of 2024 was relatively flat compared to the same quarter in 2023. 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 2023 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. As of December 30, 2023, the Company had manufacturing purchase obligations of $38.0 billion, with $37.9 billion payable within 12 months. Apple Inc. | Q1 2024 Form 10-Q | 17 Capital Return Program In addition to its contractual cash requirements, the Company has an authorized share repurchase program. The program does not obligate the Company to acquire a minimum amount of shares. As of December 30, 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. Recent Accounting Pronouncements Income Taxes In December 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), which will require the Company to disclose specified additional information in its income tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. ASU 2023-09 will also require the Company to disaggregate its income taxes paid disclosure by federal, state and foreign taxes, with further disaggregation required for significant individual jurisdictions. The Company will adopt ASU 2023-09 in its fourth quarter of 2026. ASU 2023-09 allows for adoption using either a prospective or retrospective transition method. Segment Reporting In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which will require the Company to disclose segment expenses that are significant and regularly provided to the Company’s chief operating decision maker (“CODM”). In addition, ASU 2023-07 will require the Company to disclose the title and position of its CODM and how the CODM uses segment profit or loss information in assessing segment performance and deciding how to allocate resources. The Company will adopt ASU 2023-07 in its fourth quarter of 2025 using a retrospective transition method. Critical Accounting Estimates The preparation of financial statements and related disclosures in conformity with GAAP 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 2023 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 2023 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 three months of 2024. 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 2023 Form 10-K.