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 and Part II, Item 1A of this Form 10-Q, in each case 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. During the third quarter of 2024, the Company announced the following product and operating system updates: • iPad Air ® ; • iPad Pro ® ; • iOS 18, macOS ® Sequoia, iPadOS ® 18, watchOS ® 11, visionOS™ 2 and tvOS ® 18. The Company also announced Apple Intelligence™, a personal intelligence system that uses generative models, which will be available on certain iPhone, Mac and iPad devices. Apple Intelligence is deeply integrated into iOS 18, macOS Sequoia and iPadOS 18. 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. Macroeconomic Conditions Macroeconomic conditions, including inflation, 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. | Q3 2024 Form 10-Q | 13 Segment Operating Performance The following table shows net sales by reportable segment for the three- and nine-month periods ended June 29, 2024 and July 1, 2023 (dollars in millions): Three Months Ended Nine Months Ended June 29, 2024 July 1, 2023 Change June 29, 2024 July 1, 2023 Change Net sales by reportable segment: Americas $ 37,678 $ 35,383 6 % $ 125,381 $ 122,445 2 % Europe 21,884 20,205 8 % 76,404 71,831 6 % Greater China 14,728 15,758 (7) % 51,919 57,475 (10) % Japan 5,097 4,821 6 % 19,126 18,752 2 % Rest of Asia Pacific 6,390 5,630 13 % 23,275 23,284 — % Total net sales $ 85,777 $ 81,797 5 % $ 296,105 $ 293,787 1 % Americas Americas net sales increased during the third quarter of 2024 compared to the third quarter of 2023 due primarily to higher net sales of Services and iPad. Year-over-year Americas net sales increased during the first nine months of 2024 due primarily to higher net sales of Services, partially offset by lower net sales of iPhone and Wearables, Home and Accessories. 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 nine months of 2024. Europe Europe net sales increased during the third quarter of 2024 compared to the third quarter of 2023 due primarily to higher net sales of Services and iPad. 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 of 2024. Year-over-year Europe net sales increased during the first nine months of 2024 due primarily to higher net sales of Services and iPhone, partially offset by lower net sales of Wearables, Home and Accessories. Greater China Greater China net sales decreased during the third quarter of 2024 compared to the third quarter of 2023 due primarily to lower net sales of iPhone. Year-over-year Greater China net sales decreased during the first nine months of 2024 due primarily to lower net sales of iPhone and iPad. 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 2024. Japan Japan net sales increased during the third quarter of 2024 compared to the third quarter of 2023 due primarily to higher net sales of iPhone and iPad. Year-over-year Japan net sales increased during the first nine months of 2024 due primarily to higher net sales of iPhone, partially offset by lower net sales of Wearables, Home and Accessories. 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 2024. Rest of Asia Pacific Rest of Asia Pacific net sales increased during the third quarter of 2024 compared to the third quarter of 2023 due primarily to higher net sales of Services, iPhone and iPad. Year-over-year Rest of Asia Pacific net sales were relatively flat during the first nine months of 2024. 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 2024. Apple Inc. | Q3 2024 Form 10-Q | 14 Products and Services Performance The following table shows net sales by category for the three- and nine-month periods ended June 29, 2024 and July 1, 2023 (dollars in millions): Three Months Ended Nine Months Ended June 29, 2024 July 1, 2023 Change June 29, 2024 July 1, 2023 Change Net sales by category: iPhone $ 39,296 $ 39,669 (1) % $ 154,961 $ 156,778 (1) % Mac 7,009 6,840 2 % 22,240 21,743 2 % iPad 7,162 5,791 24 % 19,744 21,857 (10) % Wearables, Home and Accessories 8,097 8,284 (2) % 27,963 30,523 (8) % Services 24,213 21,213 14 % 71,197 62,886 13 % Total net sales $ 85,777 $ 81,797 5 % $ 296,105 $ 293,787 1 % iPhone iPhone net sales were relatively flat during the third quarter and first nine months of 2024 compared to the same periods in 2023. Mac Mac net sales increased during the third quarter and first nine months of 2024 compared to the same periods in 2023 due to higher net sales of laptops. iPad iPad net sales increased during the third quarter of 2024 compared to the third quarter of 2023 due primarily to higher net sales of iPad Pro and iPad Air. Year-over-year iPad net sales decreased during the first nine months of 2024 due primarily to lower net sales of iPad 9th generation and iPad Pro, partially offset by higher net sales of iPad 10th generation. Wearables, Home and Accessories Wearables, Home and Accessories net sales decreased during the third quarter of 2024 compared to the third quarter of 2023 due primarily to lower net sales of Wearables. Year-over-year Wearables, Home and Accessories net sales decreased during the first nine months of 2024 due primarily to lower net sales of Wearables and Accessories. Services Services net sales increased during the third quarter and first nine months of 2024 compared to the same periods in 2023 due primarily to higher net sales from advertising, the App Store ® and cloud services. Apple Inc. | Q3 2024 Form 10-Q | 15 Gross Margin Products and Services gross margin and gross margin percentage for the three- and nine-month periods ended June 29, 2024 and July 1, 2023 were as follows (dollars in millions): Three Months Ended Nine Months Ended June 29, 2024 July 1, 2023 June 29, 2024 July 1, 2023 Gross margin: Products $ 21,761 $ 21,448 $ 84,241 $ 84,205 Services 17,917 14,965 52,563 44,516 Total gross margin $ 39,678 $ 36,413 $ 136,804 $ 128,721 Gross margin percentage: Products 35.3 % 35.4 % 37.5 % 36.5 % Services 74.0 % 70.5 % 73.8 % 70.8 % Total gross margin percentage 46.3 % 44.5 % 46.2 % 43.8 % Products Gross Margin Products gross margin was relatively flat during the third quarter and first nine months of 2024 compared to the same periods in 2023. Products gross margin percentage was relatively flat during the third quarter of 2024 compared to the third quarter of 2023. Year-over-year Products gross margin percentage increased during the first nine months of 2024 due primarily to cost savings, partially offset by a different Products mix and the weakness in foreign currencies relative to the U.S. dollar. Services Gross Margin Services gross margin increased during the third quarter and first nine months of 2024 compared to the same periods in 2023 due primarily to higher Services net sales. Services gross margin percentage increased during the third quarter and first nine months of 2024 compared to the same periods 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 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 downward pressure. Operating Expenses Operating expenses for the three- and nine-month periods ended June 29, 2024 and July 1, 2023 were as follows (dollars in millions): Three Months Ended Nine Months Ended June 29, 2024 July 1, 2023 June 29, 2024 July 1, 2023 Research and development $ 8,006 $ 7,442 $ 23,605 $ 22,608 Percentage of total net sales 9 % 9 % 8 % 8 % Selling, general and administrative $ 6,320 $ 5,973 $ 19,574 $ 18,781 Percentage of total net sales 7 % 7 % 7 % 6 % Total operating expenses $ 14,326 $ 13,415 $ 43,179 $ 41,389 Percentage of total net sales 17 % 16 % 15 % 14 % Research and Development The growth in research and development (“R&D”) expense during the third quarter and first nine months of 2024 compared to the same periods in 2023 was driven primarily by increases in headcount-related expenses. Apple Inc. | Q3 2024 Form 10-Q | 16 Selling, General and Administrative Selling, general and administrative expense increased $347 million during the third quarter of 2024 and $793 million during the first nine months of 2024 compared to the same periods in 2023. 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 29, 2024 and July 1, 2023 were as follows (dollars in millions): Three Months Ended Nine Months Ended June 29, 2024 July 1, 2023 June 29, 2024 July 1, 2023 Provision for income taxes $ 4,046 $ 2,852 $ 14,875 $ 12,699 Effective tax rate 15.9 % 12.5 % 15.8 % 14.6 % Statutory federal income tax rate 21 % 21 % 21 % 21 % The Company’s effective tax rate for the third quarter and first nine months of 2024 was lower than the statutory federal income tax rate due primarily to a lower effective tax rate on foreign earnings, the impact of 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 third quarter and first nine months of 2024 was higher compared to the same periods in 2023 due primarily to a higher effective tax rate on foreign earnings and lower tax benefits from share-based compensation, partially offset by lower state income taxes. 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 June 29, 2024, the Company had manufacturing purchase obligations of $38.4 billion, with $38.3 billion payable within 12 months. Capital Return Program In addition to its contractual cash requirements, the Company has authorized share repurchase programs. The programs do not obligate the Company to acquire a minimum amount of shares. As of June 29, 2024, the Company’s quarterly cash dividend was $0.25 per share. The Company intends to increase its dividend on an annual basis, subject to declaration by the Board of Directors. During the third quarter of 2024, the Company repurchased $26.0 billion of its common stock and paid dividends and dividend equivalents of $3.9 billion. 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 using a prospective transition method. Apple Inc. | Q3 2024 Form 10-Q | 17 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 nine 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.