☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2019
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 001-36743
Apple Inc.
(Exact name of Registrant as specified in its charter)
California
94-2404110
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer Identification No.)
One Apple Park Way
Cupertino, California
95014
(Address of principal executive offices)
(Zip Code)
(408) 996-1010
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
4,601,075,000 shares of common stock, par value $0.00001 per share, issued and outstanding as of April 22, 2019
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In millions, except number of shares which are reflected in thousands and per share amounts)
Three Months Ended
Six Months Ended
March 30, 2019
March 31, 2018
March 30, 2019
March 31, 2018
Net sales:
Products
$
46,565
$
51,287
$
120,000
$
130,451
Services
11,450
9,850
22,325
18,979
Total net sales
58,015
61,137
142,325
149,430
Cost of sales:
Products
32,047
33,936
80,285
84,511
Services
4,147
3,779
8,188
7,585
Total cost of sales
36,194
37,715
88,473
92,096
Gross margin
21,821
23,422
53,852
57,334
Operating expenses:
Research and development
3,948
3,378
7,850
6,785
Selling, general and administrative
4,458
4,150
9,241
8,381
Total operating expenses
8,406
7,528
17,091
15,166
Operating income
13,415
15,894
36,761
42,168
Other income/(expense), net
378
274
938
1,030
Income before provision for income taxes
13,793
16,168
37,699
43,198
Provision for income taxes
2,232
2,346
6,173
9,311
Net income
$
11,561
$
13,822
$
31,526
$
33,887
Earnings per share:
Basic
$
2.47
$
2.75
$
6.70
$
6.69
Diluted
$
2.46
$
2.73
$
6.66
$
6.63
Shares used in computing earnings per share:
Basic
4,674,071
5,024,877
4,704,945
5,068,877
Diluted
4,700,646
5,068,493
4,736,949
5,113,140
See accompanying Notes to Condensed Consolidated Financial Statements.
Apple Inc. | Q2 2019 Form 10-Q | 1
Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In millions)
Three Months Ended
Six Months Ended
March 30, 2019
March 31, 2018
March 30, 2019
March 31, 2018
Net income
$
11,561
$
13,822
$
31,526
$
33,887
Other comprehensive income/(loss):
Change in foreign currency translation, net of tax
174
263
96
303
Change in unrealized gains/losses on derivative instruments, net of tax:
Change in fair value of derivatives
(50
)
(27
)
(384
)
61
Adjustment for net (gains)/losses realized and included in net income
(105
)
(207
)
(63
)
(105
)
Total change in unrealized gains/losses on derivative instruments
(155
)
(234
)
(447
)
(44
)
Change in unrealized gains/losses on marketable securities, net of tax:
Change in fair value of marketable securities
2,042
(2,003
)
2,152
(2,849
)
Adjustment for net (gains)/losses realized and included in net income
28
29
65
(46
)
Total change in unrealized gains/losses on marketable securities
2,070
(1,974
)
2,217
(2,895
)
Total other comprehensive income/(loss)
2,089
(1,945
)
1,866
(2,636
)
Total comprehensive income
$
13,650
$
11,877
$
33,392
$
31,251
See accompanying Notes to Condensed Consolidated Financial Statements.
Apple Inc. | Q2 2019 Form 10-Q | 2
Apple Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In millions, except number of shares which are reflected in thousands and par value)
March 30, 2019
September 29, 2018
ASSETS:
Current assets:
Cash and cash equivalents
$
37,988
$
25,913
Marketable securities
42,104
40,388
Accounts receivable, net
15,085
23,186
Inventories
4,884
3,956
Vendor non-trade receivables
11,193
25,809
Other current assets
12,092
12,087
Total current assets
123,346
131,339
Non-current assets:
Marketable securities
145,319
170,799
Property, plant and equipment, net
38,746
41,304
Other non-current assets
34,587
22,283
Total non-current assets
218,652
234,386
Total assets
$
341,998
$
365,725
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Accounts payable
$
30,443
$
55,888
Other current liabilities
35,368
33,327
Deferred revenue
5,532
5,966
Commercial paper
11,924
11,964
Term debt
10,505
8,784
Total current liabilities
93,772
115,929
Non-current liabilities:
Term debt
90,201
93,735
Other non-current liabilities
52,165
48,914
Total non-current liabilities
142,366
142,649
Total liabilities
236,138
258,578
Commitments and contingencies
Shareholders’ equity:
Common stock and additional paid-in capital, $0.00001 par value: 12,600,000 shares authorized; 4,607,284 and 4,754,986 shares issued and outstanding, respectively
42,801
40,201
Retained earnings
64,558
70,400
Accumulated other comprehensive income/(loss)
(1,499
)
(3,454
)
Total shareholders’ equity
105,860
107,147
Total liabilities and shareholders’ equity
$
341,998
$
365,725
See accompanying Notes to Condensed Consolidated Financial Statements.
Apple Inc. | Q2 2019 Form 10-Q | 3
Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
(In millions, except number of shares which are reflected in thousands and per share amounts)
Three Months Ended
Six Months Ended
March 30, 2019
March 31, 2018
March 30, 2019
March 31, 2018
Total shareholders’ equity, beginning balances
$
117,892
$
140,199
$
107,147
$
134,047
Common stock and additional paid-in capital:
Beginning balances
40,970
36,447
40,201
35,867
Common stock issued
390
327
390
327
Common stock withheld related to net share settlement of equity awards
(105
)
(107
)
(927
)
(845
)
Share-based compensation
1,546
1,377
3,137
2,695
Ending balances
42,801
38,044
42,801
38,044
Retained earnings:
Beginning balances
80,510
104,593
70,400
98,330
Net income
11,561
13,822
31,526
33,887
Dividends and dividend equivalents declared
(3,499
)
(3,239
)
(7,025
)
(6,539
)
Common stock withheld related to net share settlement of equity awards
(14
)
(56
)
(608
)
(449
)
Common stock repurchased
(24,000
)
(23,500
)
(32,236
)
(33,609
)
Cumulative effects of changes in accounting principles
—
278
2,501
278
Ending balances
64,558
91,898
64,558
91,898
Accumulated other comprehensive income/(loss):
Beginning balances
(3,588
)
(841
)
(3,454
)
(150
)
Other comprehensive income/(loss)
2,089
(1,945
)
1,866
(2,636
)
Cumulative effects of changes in accounting principles
—
(278
)
89
(278
)
Ending balances
(1,499
)
(3,064
)
(1,499
)
(3,064
)
Total shareholders’ equity, ending balances
$
105,860
$
126,878
$
105,860
$
126,878
Dividends and dividend equivalents declared per share or RSU
$
0.73
$
0.63
$
1.46
$
1.26
See accompanying Notes to Condensed Consolidated Financial Statements.
Apple Inc. | Q2 2019 Form 10-Q | 4
Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions)
Six Months Ended
March 30, 2019
March 31, 2018
Cash, cash equivalents and restricted cash, beginning balances
$
25,913
$
20,289
Operating activities:
Net income
31,526
33,887
Adjustments to reconcile net income to cash generated by operating activities:
Depreciation and amortization
6,435
5,484
Share-based compensation expense
3,073
2,644
Deferred income tax benefit
(124
)
(34,235
)
Other
(215
)
(151
)
Changes in operating assets and liabilities:
Accounts receivable, net
8,094
3,523
Inventories
(1,006
)
(2,807
)
Vendor non-trade receivables
14,616
9,715
Other current and non-current assets
(717
)
(1,053
)
Accounts payable
(20,024
)
(12,004
)
Deferred revenue
(540
)
394
Other current and non-current liabilities
(3,273
)
38,026
Cash generated by operating activities
37,845
43,423
Investing activities:
Purchases of marketable securities
(13,854
)
(48,449
)
Proceeds from maturities of marketable securities
16,880
31,884
Proceeds from sales of marketable securities
22,635
38,942
Payments for acquisition of property, plant and equipment
(5,718
)
(7,005
)
Payments made in connection with business acquisitions, net
(291
)
(305
)
Purchases of non-marketable securities
(490
)
(163
)
Other
30
216
Cash generated by investing activities
19,192
15,120
Financing activities:
Proceeds from issuance of common stock
390
327
Payments for taxes related to net share settlement of equity awards
(1,427
)
(1,190
)
Payments for dividends and dividend equivalents
(7,011
)
(6,529
)
Repurchases of common stock
(32,498
)
(32,851
)
Proceeds from issuance of term debt, net
—
6,969
Repayments of term debt
(2,500
)
(500
)
Other
(87
)
1
Cash used in financing activities
(43,133
)
(33,773
)
Increase in cash, cash equivalents and restricted cash
13,904
24,770
Cash, cash equivalents and restricted cash, ending balances
$
39,817
$
45,059
Supplemental cash flow disclosure:
Cash paid for income taxes, net
$
9,497
$
6,340
Cash paid for interest
$
1,762
$
1,356
See accompanying Notes to Condensed Consolidated Financial Statements.
Apple Inc. | Q2 2019 Form 10-Q | 5
Apple Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 – Summary of Significant Accounting Policies
Basis of Presentation and Preparation
The accompanying condensed consolidated financial statements include the accounts of Apple Inc. and its wholly owned subsidiaries (collectively “Apple” or the “Company”). Intercompany accounts and transactions have been eliminated. In the opinion of the Company’s management, the condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The preparation of these condensed consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ materially from those estimates. Certain prior period amounts in the condensed consolidated financial statements and accompanying notes have been reclassified to conform to the current period’s presentation. These condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s annual consolidated financial statements and the notes thereto included in its Annual Report on Form 10-K for the fiscal year ended September 29, 2018 (the “2018 Form 10-K”).
The Company’s fiscal year is the 52- or 53-week period that ends on the last Saturday of September. A 14th week is included in the first fiscal quarter every five or six years to realign the Company’s fiscal quarters with calendar quarters. The Company’s fiscal years 2019 and 2018 span 52 weeks each. Unless otherwise stated, references to particular years, quarters, months and periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years.
Recently Adopted Accounting Pronouncements
Revenue Recognition
In the first quarter of 2019, the Company adopted the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), and additional ASUs issued to clarify the guidance in ASU 2014-09 (collectively the “new revenue standard”), which amends the existing accounting standards for revenue recognition. The Company adopted the new revenue standard utilizing the full retrospective transition method. The Company did not restate total net sales in the prior periods presented, as adoption of the new revenue standard did not have a material impact on previously reported amounts.
Additionally, beginning in the first quarter of 2019, the Company classified the amortization of the deferred value of Maps, Siri® and free iCloud® services, which are bundled in the sales price of iPhone®, Mac®, iPad® and certain other products, in services net sales. Historically, the Company classified the amortization of these amounts in products net sales consistent with its management reporting framework. As a result, products and services net sales information for the second quarter and first six months of 2018 was reclassified to conform to the 2019 presentation.
Financial Instruments
In the first quarter of 2019, the Company adopted FASB ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which updates certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. The adoption of ASU 2016-01 did not have a material impact on the Company’s condensed consolidated financial statements.
Income Taxes
In the first quarter of 2019, the Company adopted FASB ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The Company adopted ASU 2016-16 utilizing the modified retrospective transition method. Upon adoption, the Company recorded $2.7 billion of net deferred tax assets, reduced other non-current assets by $128 million, and increased retained earnings by $2.6 billion on its Condensed Consolidated Balance Sheet. The Company will recognize incremental deferred income tax expense as these net deferred tax assets are utilized.
Restricted Cash
In the first quarter of 2019, the Company adopted FASB ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which enhances and clarifies the guidance on the classification and presentation of restricted cash in the statement of cash flows and requires additional disclosures about restricted cash balances.
Apple Inc. | Q2 2019 Form 10-Q | 6
Earnings Per Share
The following table shows the computation of basic and diluted earnings per share for the three- and six-month periods ended March 30, 2019 and March 31, 2018 (net income in millions and shares in thousands):
Three Months Ended
Six Months Ended
March 30, 2019
March 31, 2018
March 30, 2019
March 31, 2018
Numerator:
Net income
$
11,561
$
13,822
$
31,526
$
33,887
Denominator:
Weighted-average basic shares outstanding
4,674,071
5,024,877
4,704,945
5,068,877
Effect of dilutive securities
26,575
43,616
32,004
44,263
Weighted-average diluted shares
4,700,646
5,068,493
4,736,949
5,113,140
Basic earnings per share
$
2.47
$
2.75
$
6.70
$
6.69
Diluted earnings per share
$
2.46
$
2.73
$
6.66
$
6.63
Potentially dilutive securities representing 31.1 million and 30.0 million shares of common stock were excluded from the computation of diluted earnings per share for the three- and six-month periods ended March 30, 2019, respectively, because their effect would have been antidilutive.
Restricted Cash and Restricted Marketable Securities
The Company considers cash and marketable securities to be restricted when withdrawal or general use is legally restricted. The Company records restricted cash as other assets in the Condensed Consolidated Balance Sheets, and determines current or non-current classification based on the expected duration of the restriction. The Company records restricted marketable securities as current or non-current marketable securities in the Condensed Consolidated Balance Sheets based on the classification of the underlying securities.
Note 2 – Revenue Recognition
Net sales consist of revenue from the sale of iPhone, Mac, iPad, services and other products. The Company recognizes revenue at the amount to which it expects to be entitled when control of the products or services is transferred to its customers. Control is generally transferred when the Company has a present right to payment and title and the significant risks and rewards of ownership of products or services are transferred to its customers. For most of the Company’s products net sales, control transfers when products are shipped. For the Company’s services net sales, control transfers over time as services are delivered. Payment for products and services net sales is collected within a short period of time following transfer of control or commencement of delivery of services, as applicable.
The Company records reductions to products net sales related to future product returns, price protection and other customer incentive programs based on the Company’s expectations and historical experience.
For arrangements with multiple performance obligations, which represent promises within an arrangement that are capable of being distinct, the Company allocates revenue to all distinct performance obligations based on their relative stand-alone selling prices (“SSP”). When available, the Company uses observable prices to determine the SSP. When observable prices are not available, SSPs are established that reflect the Company’s best estimates of what the selling prices of the performance obligations would be if they were sold regularly on a stand-alone basis. The Company’s process for estimating SSPs without observable prices considers multiple factors that may vary depending upon the unique facts and circumstances related to each performance obligation including, where applicable, prices charged by the Company for similar offerings, market trends in the pricing for similar offerings, product-specific business objectives and the estimated cost to provide the performance obligation.
Apple Inc. | Q2 2019 Form 10-Q | 7
The Company has identified up to three performance obligations regularly included in arrangements involving the sale of iPhone, Mac, iPad and certain other products. The first performance obligation, which represents the substantial portion of the allocated sales price, is the hardware and bundled software delivered at the time of sale. The second performance obligation is the right to receive certain product-related bundled services, which include iCloud, Siri and Maps. The third performance obligation is the right to receive, on a when-and-if-available basis, future unspecified software upgrades relating to the software bundled with each device. The Company allocates revenue and any related discounts to these performance obligations based on their relative SSPs. Because the Company lacks observable prices for the undelivered performance obligations, the allocation of revenue is based on the Company’s estimated SSPs. Revenue allocated to the delivered hardware and bundled software is recognized when control has transferred to the customer, which generally occurs when the product is shipped. Revenue allocated to the product-related bundled services and unspecified software upgrade rights is deferred and recognized on a straight-line basis over the estimated period they are expected to be provided. Cost of sales related to delivered hardware and bundled software, including estimated warranty costs, are recognized at the time of sale. Costs incurred to provide product-related bundled services and unspecified software upgrade rights are recognized as cost of sales as incurred.
For certain long-term service arrangements, the Company has performance obligations for services it has not yet delivered. For these arrangements, the Company does not have a right to bill for the undelivered services. The Company has determined that any unbilled consideration relates entirely to the value of the undelivered services. Accordingly, the Company has not recognized revenue, and has elected not to disclose amounts, related to these undelivered services.
For the sale of third-party products where the Company obtains control of the product before transferring it to the customer, the Company recognizes revenue based on the gross amount billed to customers. The Company considers multiple factors when determining whether it obtains control of third-party products including, but not limited to, evaluating if it has the ability to establish the price of the product, retains inventory risk for tangible products or has the responsibility for ensuring acceptability of the product. For third-party applications sold through the App Store®, Mac App Store and TV App Store and certain digital content sold through the iTunes Store®, the Company does not obtain control of the product before transferring it to the customer. Therefore, the Company accounts for such sales on a net basis by recognizing in services net sales only the commission it retains.
The Company has elected to record revenue net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded within other current liabilities until remitted to the relevant government authority.
Deferred Revenue
As of March 30, 2019 and September 29, 2018, the Company had total deferred revenue of $8.2 billion and $8.8 billion, respectively. As of March 30, 2019, the Company expects 67% of total deferred revenue to be realized in less than a year, 26% within one-to-two years, 6% within two-to-three years and 1% in greater than three years.
Disaggregated Revenue
Net sales disaggregated by significant products and services for the three- and six-month periods ended March 30, 2019 and March 31, 2018 were as follows (in millions):
Three Months Ended
Six Months Ended
March 30, 2019
March 31, 2018
March 30, 2019
March 31, 2018
iPhone (1)
$
31,051
$
37,559
$
83,033
$
98,663
Mac (1)
5,513
5,776
12,929
12,600
iPad (1)
4,872
4,008
11,601
9,763
Wearables, Home and Accessories (1)(2)
5,129
3,944
12,437
9,425
Services (3)
11,450
9,850
22,325
18,979
Total net sales (4)
$
58,015
$
61,137
$
142,325
$
149,430
(1)
Products net sales include amortization of the deferred value of unspecified software upgrade rights, which are bundled in the sales price of the respective product.
(2)
Wearables, Home and Accessories net sales include sales of AirPods®, Apple TV®, Apple Watch®, Beats® products, HomePod™, iPod touch® and Apple-branded and third-party accessories.
(3)
Services net sales include sales from the Company’s digital content stores and streaming services, AppleCare®, Apple Pay®, licensing and other services. Services net sales also include amortization of the deferred value of Maps, Siri and free iCloud services, which are bundled in the sales price of certain products.
(4)
Includes $1.9 billion and $2.2 billion of revenue recognized in the three months ended March 30, 2019and March 31, 2018, respectively, and $3.8 billion and $3.5 billion of revenue recognized in the six months ended March 30, 2019 and March 31, 2018, respectively, that was included in deferred revenue at the beginning of each respective period.
Apple Inc. | Q2 2019 Form 10-Q | 8
The Company’s proportion of net sales by disaggregated revenue source was generally consistent for each reportable segment in Note 11, “Segment Information and Geographic Data” for the three- and six-month periods ended March 30, 2019 and March 31, 2018.
Note 3 – Financial Instruments
Cash, Cash Equivalents and Marketable Securities
The Company’s investments in marketable debt securities have been classified and accounted for as available-for-sale. The Company classifies its marketable debt securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Unrealized gains and losses on marketable debt securities classified as available-for-sale are recognized in other comprehensive income/(loss) (“OCI”).
The Company’s investments in marketable equity securities are classified based on the nature of the securities and their availability for use in current operations. The Company’s marketable equity securities are measured at fair value with gains and losses recognized in other income/(expense), net.
The following tables show the Company’s cash and marketable securities by significant investment category as of March 30, 2019 and September 29, 2018 (in millions):
