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 2024 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 2024 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 first quarter of 2025, the Company announced the following product updates: • MacBook Pro ® • Mac mini ® • iMac ® • iPad mini ® 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. | Q1 2025 Form 10-Q | 12 Segment Operating Performance The following table shows net sales by reportable segment for the three months ended December 28, 2024 and December 30, 2023 (dollars in millions): Three Months Ended December 28, 2024 December 30, 2023 Change Americas $ 52,648 $ 50,430 4 % Europe 33,861 30,397 11 % Greater China 18,513 20,819 (11) % Japan 8,987 7,767 16 % Rest of Asia Pacific 10,291 10,162 1 % Total net sales $ 124,300 $ 119,575 4 % Americas Americas net sales increased during the first quarter of 2025 compared to the same quarter in 2024 due primarily to higher net sales of Services and iPhone. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable year-over-year impact on Americas net sales during the first quarter of 2025. Europe Europe net sales increased during the first quarter of 2025 compared to the same quarter in 2024 due primarily to higher net sales of Services and 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 2025. Greater China Greater China net sales decreased during the first quarter of 2025 compared to the same quarter in 2024 due to lower net sales of iPhone. The strength in the renminbi relative to the U.S. dollar had a favorable year-over-year impact on Greater China net sales during the first quarter of 2025. Japan Japan net sales increased during the first quarter of 2025 compared to the same quarter in 2024 due primarily to higher net sales of iPhone and Services. Rest of Asia Pacific Rest of Asia Pacific net sales were relatively flat during the first quarter of 2025 compared to the same quarter in 2024. Apple Inc. | Q1 2025 Form 10-Q | 13 Products and Services Performance The following table shows net sales by category for the three months ended December 28, 2024 and December 30, 2023 (dollars in millions): Three Months Ended December 28, 2024 December 30, 2023 Change iPhone $ 69,138 $ 69,702 (1) % Mac 8,987 7,780 16 % iPad 8,088 7,023 15 % Wearables, Home and Accessories 11,747 11,953 (2) % Services 26,340 23,117 14 % Total net sales $ 124,300 $ 119,575 4 % iPhone iPhone net sales were relatively flat during the first quarter of 2025 compared to the same quarter in 2024. Mac Mac net sales increased during the first quarter of 2025 compared to the same quarter in 2024 due primarily to higher net sales of laptops. iPad iPad net sales increased during the first quarter of 2025 compared to the same quarter in 2024 due primarily to higher net sales of iPad Air ® . Wearables, Home and Accessories Wearables, Home and Accessories net sales decreased during the first quarter of 2025 compared to the same quarter in 2024 due primarily to lower net sales of Wearables. Services Services net sales increased during the first quarter of 2025 compared to the same quarter in 2024 due primarily to higher net sales from advertising, the App Store ® and cloud services. Apple Inc. | Q1 2025 Form 10-Q | 14 Gross Margin Products and Services gross margin and gross margin percentage for the three months ended December 28, 2024 and December 30, 2023 were as follows (dollars in millions): Three Months Ended December 28, 2024 December 30, 2023 Gross margin: Products $ 38,513 $ 38,018 Services 19,762 16,837 Total gross margin $ 58,275 $ 54,855 Gross margin percentage: Products 39.3 % 39.4 % Services 75.0 % 72.8 % Total gross margin percentage 46.9 % 45.9 % Products Gross Margin Products gross margin and Products gross margin percentage were relatively flat during the first quarter of 2025 compared to the same quarter in 2024. Services Gross Margin Services gross margin increased during the first quarter of 2025 compared to the same quarter in 2024 due primarily to higher Services net sales and a different Services mix. Services gross margin percentage increased during the first quarter of 2025 compared to the same quarter in 2024 due primarily to a different Services mix, partially offset by higher Services costs. The Company’s future gross margins can be impacted by a variety of factors, as discussed in Part I, Item 1A of the 2024 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 months ended December 28, 2024 and December 30, 2023 were as follows (dollars in millions): Three Months Ended December 28, 2024 December 30, 2023 Research and development $ 8,268 $ 7,696 Percentage of total net sales 7 % 6 % Selling, general and administrative $ 7,175 $ 6,786 Percentage of total net sales 6 % 6 % Total operating expenses $ 15,443 $ 14,482 Percentage of total net sales 12 % 12 % Research and Development The growth in research and development expense during the first quarter of 2025 compared to the same quarter in 2024 was driven primarily by increases in headcount-related expenses and infrastructure-related costs. Selling, General and Administrative The growth in selling, general and administrative expense during the first quarter of 2025 compared to the same quarter in 2024 was driven primarily by higher variable selling expenses and increases in headcount-related expenses. Apple Inc. | Q1 2025 Form 10-Q | 15 Provision for Income Taxes Provision for income taxes, effective tax rate and statutory federal income tax rate for the three months ended December 28, 2024 and December 30, 2023 were as follows (dollars in millions): Three Months Ended December 28, 2024 December 30, 2023 Provision for income taxes $ 6,254 $ 6,407 Effective tax rate 14.7 % 15.9 % Statutory federal income tax rate 21 % 21 % The Company’s effective tax rate for the first quarter of 2025 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, the impact of foreign currency loss regulations issued by the U.S. Department of the Treasury in December 2024, and the tax impact from foreign currency revaluations related to the State Aid Decision. The Company’s effective tax rate for the first quarter of 2025 was lower compared to the same quarter in 2024 due primarily to the impact of foreign currency loss regulations issued by the U.S. Department of the Treasury in December 2024 and the tax impact from foreign currency revaluations related to the State Aid Decision, partially offset by a higher effective tax rate on foreign earnings. Liquidity and Capital Resources The Company believes its balances of unrestricted cash, cash equivalents and 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 2024 Form 10-K, except for commercial paper, manufacturing purchase obligations and the State Aid Decision tax payable. Commercial Paper The Company issues unsecured short-term promissory notes pursuant to a commercial paper program. As of December 28, 2024, the Company had $2.0 billion of commercial paper outstanding, 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. As of December 28, 2024, the Company had manufacturing purchase obligations of $39.8 billion, which were payable within 12 months. State Aid Decision Tax Payable During the first quarter of 2025, the Company paid €11.0 billion or $11.9 billion to Ireland in connection with the State Aid Decision. As of December 28, 2024, the Company had a remaining obligation to pay €3.3 billion or $3.4 billion, which was expected to be paid within 12 months. The funds necessary to settle the remaining obligation were held in escrow as of December 28, 2024, and restricted from general use. 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 28, 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 first quarter of 2025, the Company repurchased $23.3 billion of its common stock and paid dividends and dividend equivalents of $3.9 billion. Apple Inc. | Q1 2025 Form 10-Q | 16 Recent Accounting Pronouncements Disaggregation of Income Statement Expenses In November 2024, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses (“ASU 2024-03”) and in January 2025, the FASB issued ASU No. 2025-01, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Clarifying the Effective Date , which clarified the effective date of ASU 2024-03. ASU 2024-03 will require the Company to disclose the amounts of purchases of inventory, employee compensation, depreciation and intangible asset amortization, as applicable, included in certain expense captions in the Consolidated Statements of Operations, as well as qualitatively describe remaining amounts included in those captions. ASU 2024-03 will also require the Company to disclose both the amount and the Company’s definition of selling expenses. The Company will adopt ASU 2024-03 in its fourth quarter of 2028 using a prospective transition method. Income Taxes In December 2023, the FASB issued 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. 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 2024 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 2024 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 2025. 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 2024 Form 10-K.