Apple Inc.
APPLE INC (Form: 10-Q, Received: 07/23/2014 16:33:27)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 28, 2014

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: 000-10030

 

 

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.)

1 Infinite Loop

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   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

Non-accelerated filer

 

¨   (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   ¨     No   x

5,987,867,000 shares of common stock, par value $0.00001, issued and outstanding as of July 11, 2014

 

 

 


Table of Contents

Apple Inc.

Form 10-Q

For the Fiscal Quarter Ended June 28, 2014

TABLE OF CONTENTS

 

         Page  
Part I   

Item 1.    

 

Financial Statements

     3   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     25   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     41   

Item 4.

 

Controls and Procedures

     41   
Part II   

Item 1.

 

Legal Proceedings

     42   

Item 1A.

 

Risk Factors

     43   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     54   

Item 6.

 

Exhibits

     55   

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

APPLE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In millions, except number of shares which are reflected in thousands and per share amounts)

 

                                                                                                   
     Three Months Ended      Nine Months Ended  
     June 28,
2014
     June 29,
2013
     June 28,
2014
     June 29,
2013
 

Net sales

   $ 37,432       $ 35,323       $ 140,672       $ 133,438   

Cost of sales

     22,697         22,299         86,144         83,005   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

     14,735         13,024         54,528         50,433   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses:

           

Research and development

     1,603         1,178         4,355         3,307   

Selling, general and administrative

     2,850         2,645         8,835         8,157   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     4,453         3,823         13,190         11,464   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     10,282         9,201         41,338         38,969   

Other income/(expense), net

     202         234         673         1,043   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before provision for income taxes

     10,484         9,435         42,011         40,012   

Provision for income taxes

     2,736         2,535         10,968         10,487   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 7,748       $ 6,900       $ 31,043       $ 29,525   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ 1.29       $ 1.07       $ 5.06       $ 4.52   

Diluted

   $ 1.28       $ 1.07       $ 5.03       $ 4.49   

Shares used in computing earnings per share:

           

Basic

     6,012,635         6,430,323         6,136,147         6,526,714   

Diluted

     6,051,711         6,469,854         6,172,857         6,574,205   

Cash dividends declared per common share

   $ 0.47       $ 0.44       $ 1.35       $ 1.20   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3


Table of Contents

APPLE INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In millions)

 

                                                                                                   
     Three Months Ended     Nine Months Ended  
     June 28,
2014
    June 29,
2013
    June 28,
2014
    June 29,
2013
 

Net income

   $ 7,748      $ 6,900      $ 31,043      $ 29,525   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income/(loss):

        

Change in foreign currency translation, net of tax

     51        (100     (35     (177

Change in unrecognized gains/losses on derivative instruments:

        

Change in fair value of derivatives, net of tax

     (65     188        39        791   

Adjustment for net (gains)/losses realized and included in net income, net of tax

     26        (357     85        (203
  

 

 

   

 

 

   

 

 

   

 

 

 

Total change in unrecognized gains/losses on derivative instruments, net of tax

     (39     (169     124        588   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in unrealized gains/losses on marketable securities:

        

Change in fair value of marketable securities, net of tax

     357        (883     550        (1,001

Adjustment for net (gains)/losses realized and included in net income, net of tax

     (32     (46     (82     (143
  

 

 

   

 

 

   

 

 

   

 

 

 

Total change in unrealized gains/losses on marketable securities, net of tax

     325        (929     468        (1,144
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income/(loss)

     337        (1,198     557        (733
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 8,085      $ 5,702      $ 31,600      $ 28,792   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4


Table of Contents

APPLE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In millions, except number of shares which are reflected in thousands and par value)

 

                                                 
     June 28,
2014
     September 28,
2013
 
ASSETS:   

Current assets:

     

Cash and cash equivalents

   $ 12,977       $ 14,259   

Short-term marketable securities

     24,828         26,287   

Accounts receivable, less allowances of $86 and $99, respectively

     10,788         13,102   

Inventories

     1,594         1,764   

Deferred tax assets

     3,884         3,453   

Vendor non-trade receivables

     6,053         7,539   

Other current assets

     7,825         6,882   
  

 

 

    

 

 

 

Total current assets

     67,949         73,286   

Long-term marketable securities

     126,685         106,215   

Property, plant and equipment, net

     17,585         16,597   

Goodwill

     2,374         1,577   

Acquired intangible assets, net

     3,767         4,179   

Other assets

     4,160         5,146   
  

 

 

    

 

 

 

Total assets

   $ 222,520       $ 207,000   
  

 

 

    

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY:      

Current liabilities:

     

Accounts payable

   $ 20,535       $ 22,367   

Accrued expenses

     15,264         13,856   

Deferred revenue

     8,396         7,435   

Commercial paper

     2,010         0   
  

 

 

    

 

 

 

Total current liabilities

     46,205         43,658   

Deferred revenue – non-current

     3,058         2,625   

Long-term debt

     29,030         16,960   

Other non-current liabilities

     23,287         20,208   
  

 

 

    

 

 

 

Total liabilities

     101,580         83,451   
  

 

 

    

 

 

 

Commitments and contingencies

     

Shareholders’ equity:

     

Common stock and additional paid-in capital, $0.00001 par value: 12,600,000 shares authorized; 5,989,171 and 6,294,494 shares issued and outstanding, respectively

     22,139         19,764   

Retained earnings

     98,715         104,256   

Accumulated other comprehensive income/(loss)

     86         (471
  

 

 

    

 

 

 

Total shareholders’ equity

     120,940         123,549   
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 222,520       $ 207,000   
  

 

 

    

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

APPLE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In millions)

 

                                                 
     Nine Months Ended  
     June 28,
2014
    June 29,
2013
 

Cash and cash equivalents, beginning of the period

   $ 14,259      $ 10,746   
  

 

 

   

 

 

 

Operating activities:

    

Net income

     31,043        29,525   

Adjustments to reconcile net income to cash generated by operating activities:

    

Depreciation and amortization

     5,977        4,974   

Share-based compensation expense

     2,101        1,698   

Deferred income tax expense

     3,154        2,524   

Changes in operating assets and liabilities:

    

Accounts receivable, net

     2,314        2,091   

Inventories

     170        (906

Vendor non-trade receivables

     1,486        3,148   

Other current and non-current assets

     931        484   

Accounts payable

     (2,531     (4,740

Deferred revenue

     1,394        1,404   

Other current and non-current liabilities

     424        3,556   
  

 

 

   

 

 

 

Cash generated by operating activities

     46,463        43,758   
  

 

 

   

 

 

 

Investing activities:

    

Purchases of marketable securities

     (160,662     (122,681

Proceeds from maturities of marketable securities

     15,111        13,963   

Proceeds from sales of marketable securities

     126,827        81,734   

Payments made in connection with business acquisitions, net

     (898     (443

Payments for acquisition of property, plant and equipment

     (5,745     (6,210

Payments for acquisition of intangible assets

     (216     (560

Other

     7        (188
  

 

 

   

 

 

 

Cash used in investing activities

     (25,576     (34,385
  

 

 

   

 

 

 

Financing activities:

    

Proceeds from issuance of common stock

     435        335   

Excess tax benefits from equity awards

     562        644   

Taxes paid related to net share settlement of equity awards

     (839     (1,001

Dividends and dividend equivalents paid

     (8,297     (7,795

Repurchase of common stock

     (28,000     (17,950

Proceeds from issuance of long-term debt

     11,960        16,896   

Proceeds from issuance of commercial paper, net

     2,010        0   
  

 

 

   

 

 

 

Cash used in financing activities

     (22,169     (8,871
  

 

 

   

 

 

 

Increase/(decrease) in cash and cash equivalents

     (1,282     502   
  

 

 

   

 

 

 

Cash and cash equivalents, end of the period

   $ 12,977      $ 11,248   
  

 

 

   

 

 

 

Supplemental cash flow disclosure:

    

Cash paid for income taxes, net

   $ 8,013      $ 7,188   

Cash paid for interest

   $ 322      $ 0   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

6


Table of Contents

Apple Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1 – Summary of Significant Accounting Policies

Apple Inc. and its wholly-owned subsidiaries (collectively “Apple” or the “Company”) designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players, and sells a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications. The Company sells its products worldwide through its retail stores, online stores, and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers and value-added resellers. In addition, the Company sells a variety of third-party iPhone, iPad, Mac, and iPod compatible products, including application software, and various accessories through its online and retail stores. The Company sells to consumers; small and mid-sized businesses; and education, enterprise and government customers.

Basis of Presentation and Preparation

The accompanying condensed consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated. The preparation of these condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in these condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

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 for the fiscal year ended September 28, 2013, included in its Annual Report on Form 10-K (the “2013 Form 10-K”). 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 approximately every six years to realign fiscal quarters with calendar quarters. The Company’s fiscal years 2014 and 2013 include 52 weeks each. Unless otherwise stated, references to particular years, quarters or months refer to the Company’s fiscal years ended in September and the associated quarters or months of those fiscal years.

During the first quarter of 2014, the Company adopted updated accounting standards that (i) required disclosure of additional information about the amounts reclassified out of Accumulated Other Comprehensive Income (“AOCI”) by component and (ii) required gross and net disclosures about offsetting assets and liabilities. The adoption of these updated standards only impacted the disclosures in the Notes to the Condensed Consolidated Financial Statements; accordingly, the adoption had no impact on the Company’s financial position or results of operations. The Company has provided these additional disclosures in this Form 10-Q in Note 8, “Comprehensive Income” and Note 2, “Financial Instruments,” respectively.

Common Stock Split

On June 6, 2014, the Company effected a seven-for-one stock split to shareholders of record as of June 2, 2014. All share and per share information has been retroactively adjusted to reflect the stock split.

Revenue Recognition

In 2013, the Company’s combined best estimates of selling price (“ESPs”) for the unspecified software upgrade rights and the rights to receive the non-software services included with its qualifying hardware devices ranged from $5 to $25. Beginning in the first quarter of 2014, the Company adjusted the combined ESPs for Mac from $20 to $40 to reflect additions to unspecified software upgrade rights related to expansion of bundled essential software.

 

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Table of Contents

Earnings Per Share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, shares to be purchased under the Company’s employee stock purchase plan and unvested restricted stock units (“RSUs”). The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities.

The following table shows the computation of basic and diluted earnings per share for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 (in thousands, except net income in millions and per share amounts):

 

                                                                                                   
     Three Months Ended      Nine Months Ended  
     June 28,
2014
     June 29,
2013
     June 28,
2014
     June 29,
2013
 

Numerator:

           

Net income

   $ 7,748       $ 6,900       $ 31,043       $ 29,525   

Denominator:

           

Weighted-average shares outstanding

     6,012,635         6,430,323         6,136,147         6,526,714   

Effect of dilutive securities

     39,076         39,531         36,710         47,491   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average diluted shares

     6,051,711         6,469,854         6,172,857         6,574,205   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 1.29       $ 1.07       $ 5.06       $ 4.52   

Diluted earnings per share

   $ 1.28       $ 1.07       $ 5.03       $ 4.49   

Potentially dilutive securities, the effect of which would have been antidilutive, were not significant for the three- and nine-month periods ended June 28, 2014 and the three- and nine-month periods ended June 29, 2013. The Company excluded these securities from the computation of diluted earnings per share.

 

8


Table of Contents

Note 2 – Financial Instruments

Cash, Cash Equivalents and Marketable Securities

The following tables show the Company’s cash and available-for-sale securities’ adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash and cash equivalents or short- or long-term marketable securities as of June 28, 2014 and September 28, 2013 (in millions):

 

                                                                                                                                                         
     June 28, 2014  
     Adjusted
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair
Value
     Cash and
Cash
Equivalents
     Short-Term
Marketable
Securities
     Long-Term
Marketable
Securities
 

Cash

   $ 8,317       $ 0       $ 0       $ 8,317       $ 8,317       $ 0       $ 0   

Level 1 (a):

                    

Money market funds

     1,257         0         0         1,257         1,257         0         0   

Mutual funds

     2,673         2         (132      2,543         0         2,543         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     3,930         2         (132      3,800         1,257         2,543         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Level 2 (b):

                    

U.S. Treasury securities

     35,320         26         (4      35,342         73         7,280         27,989   

U.S. agency securities

     7,804         6         (7      7,803         342         632         6,829   

Non-U.S. government securities

     6,292         78         (51      6,319         0         580         5,739   

Certificates of deposit and time deposits

     4,509         0         0         4,509         1,650         1,778         1,081   

Commercial paper

     5,144         0         0         5,144         1,338         3,806         0   

Corporate securities

     72,659         477         (60      73,076         0         7,718         65,358   

Municipal securities

     2,807         27         (1      2,833         0         430         2,403   

Mortgage- and asset-backed securities

     17,334         45         (32      17,347         0         61         17,286   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     151,869         659         (155      152,373         3,403         22,285         126,685   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 164,116       $ 661       $ (287    $ 164,490       $ 12,977       $ 24,828       $ 126,685   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     September 28, 2013  
     Adjusted
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair
Value
     Cash and
Cash
Equivalents
     Short-Term
Marketable
Securities
     Long-Term
Marketable
Securities
 

Cash

   $ 8,705       $ 0       $ 0       $ 8,705       $ 8,705       $ 0       $ 0   

Level 1 (a):

                    

Money market funds

     1,793         0         0         1,793         1,793         0         0   

Mutual funds

     3,999         0         (197      3,802         0         3,802         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     5,792         0         (197      5,595         1,793         3,802         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Level 2 (b):

                    

U.S. Treasury securities

     27,642         24         (47      27,619         431         7,554         19,634   

U.S. agency securities

     16,878         12         (52      16,838         177         3,412         13,249   

Non-U.S. government securities

     5,545         35         (137      5,443         50         313         5,080   

Certificates of deposit and time deposits

     2,344         0         0         2,344         1,264         844         236   

Commercial paper

     2,998         0         0         2,998         1,835         1,163         0   

Corporate securities

     54,586         275         (252      54,609         0         8,077         46,532   

Municipal securities

     6,257         45         (22      6,280         4         1,114         5,162   

Mortgage- and asset-backed securities

     16,396         23         (89      16,330         0         8         16,322   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     132,646         414         (599      132,461         3,761         22,485         106,215   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 147,143       $ 414       $ (796    $ 146,761       $ 14,259       $ 26,287       $ 106,215   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(a)

The fair value of Level 1 securities is estimated based on quoted prices in active markets for identical assets or liabilities.

 

(b)

The fair value of Level 2 securities is estimated based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

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Table of Contents

The Company may sell certain of its marketable securities prior to their stated maturities for strategic reasons including, but not limited to, anticipation of credit deterioration and duration management. The net realized gains or losses recognized by the Company related to such sales were not significant during the three- and nine-month periods ended June 28, 2014 and June 29, 2013. The maturities of the Company’s long-term marketable securities generally range from one to five years.

As of June 28, 2014 and September 28, 2013, gross unrealized losses related to individual securities that had been in a continuous loss position for 12 months or longer were not significant.

As of June 28, 2014, the Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature and does not consider any of its investments other-than-temporarily impaired. The Company typically invests in highly-rated securities, and its investment policy limits the amount of credit exposure to any one issuer. The policy generally requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss. Fair values were determined for each individual security in the investment portfolio. When evaluating an investment for other-than-temporary impairment the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of the investment’s cost basis. During the three- and nine-month periods ended June 28, 2014 and June 29, 2013, the Company did not recognize any significant impairment charges.

Derivative Financial Instruments

The Company uses derivatives to partially offset its business exposure to foreign currency and interest rate risk. The Company may enter into forward contracts, option contracts, swaps, or other derivative instruments to offset some of the risk on expected future cash flows, on net investments in certain foreign subsidiaries, and on certain existing assets and liabilities. However, the Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange or interest rates.

To help protect gross margins from fluctuations in foreign currency exchange rates, certain of the Company’s subsidiaries whose functional currency is the U.S. dollar hedge a portion of forecasted foreign currency revenue. The Company’s subsidiaries whose functional currency is not the U.S. dollar and who sell in local currencies may hedge a portion of forecasted inventory purchases not denominated in the subsidiaries’ functional currencies. The Company typically hedges portions of its forecasted foreign currency exposure associated with revenue and inventory purchases, typically for up to 12 months.

To help protect the net investment in a foreign operation from adverse changes in foreign currency exchange rates, the Company may enter into foreign currency forward and option contracts to offset the changes in the carrying amounts of these investments due to fluctuations in foreign currency exchange rates.

The Company may also enter into foreign currency forward contracts and option contracts to partially offset the foreign currency exchange gains and losses generated by the re-measurement of certain assets and liabilities denominated in non-functional currencies.

The Company may enter into interest rate swaps, options, or other instruments to manage interest rate risk. These instruments may offset a portion of changes in income or expense, or changes in fair value of the Company’s long-term debt or investments.

The Company records all derivatives in the Condensed Consolidated Balance Sheets at fair value. The Company’s accounting treatment for these instruments is based on the hedge designation. The effective portions of cash flow hedges are recorded in AOCI until the hedged item is recognized in earnings. Gains and losses related to changes in fair value hedges are recognized in earnings along with a corresponding loss or gain related to the change in value of the underlying hedged item. The effective portions of net investment hedges are recorded in other comprehensive income (“OCI”) as a part of the cumulative translation adjustment. The ineffective portions of cash flow hedges and net investment hedges are recorded in other income and expense. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates.

 

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Deferred gains and losses associated with cash flow hedges of foreign currency revenue are recognized as a component of net sales in the same period as the related revenue is recognized, and deferred gains and losses related to cash flow hedges of inventory purchases are recognized as a component of cost of sales in the same period as the related costs are recognized. Deferred gains and losses associated with cash flow hedges of interest income or expense are recognized as a component of other income/(expense), net in the same period as the related income or expense is recognized. The Company’s foreign currency and interest rate transactions hedged with cash flow hedges as of June 28, 2014 are expected to occur within 12 months and four years, respectively.

Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in AOCI associated with such derivative instruments are reclassified immediately into other income and expense. Any subsequent changes in fair value of such derivative instruments are reflected in other income and expense unless they are re-designated as hedges of other transactions. The Company did not recognize any significant net gains or losses related to the loss of hedge designation on discontinued cash flow hedges during the three- and nine-month periods ended June 28, 2014 and June 29, 2013.

The Company’s unrealized net gains and losses on net investment hedges, included in the cumulative translation adjustment account of AOCI, were not significant as of June 28, 2014 and September 28, 2013. The ineffective portions and amounts excluded from the effectiveness test of net investment hedges are recorded in other income and expense.

The gain/loss recognized in other income and expense for foreign currency forward and option contracts not designated as hedging instruments was not significant during the three- and nine-month periods ended June 28, 2014 and June 29, 2013.

The following table shows the notional principal amounts of the Company’s outstanding derivative instruments and credit risk amounts associated with outstanding or unsettled derivative instruments as of June 28, 2014 and September 28, 2013 (in millions):

 

                                                                                                   
     June 28, 2014      September 28, 2013  
     Notional
Principal
     Credit
Risk
     Notional
Principal
     Credit
Risk
 

Instruments designated as accounting hedges:

           

Foreign exchange contracts

   $ 22,996       $ 132       $ 35,013       $ 159   

Interest rate contracts

   $ 12,000       $ 121       $ 3,000       $ 44   

Instruments not designated as accounting hedges:

           

Foreign exchange contracts

   $ 21,559       $ 22       $ 16,131       $ 25   

The notional principal amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of the Company’s exposure to credit or market loss. The credit risk amounts represent the Company’s gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current currency or interest rates at each respective date. The Company’s gross exposure on these transactions may be further mitigated by collateral received from certain counterparties. The Company’s exposure to credit loss and market risk will vary over time as currency and interest rates change. Although the table above reflects the notional principal and credit risk amounts of the Company’s derivative instruments, it does not reflect the gains or losses associated with the exposures and transactions that the instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.

 

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The Company generally enters into master netting arrangements, which are designed to reduce credit risk by permitting net settlement of transactions with the same counterparty. To further limit credit risk, the Company generally enters into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. The Company presents its derivative assets and derivative liabilities at their gross fair values. As of June 28, 2014, the Company received $27 million of net cash collateral related to the derivative instruments under its collateral security arrangements, which were recorded as accrued expenses in the Condensed Consolidated Balance Sheet. As of September 28, 2013, the Company posted cash collateral related to the derivative instruments under its collateral security arrangements of $164 million, which it recorded as other current assets in the Condensed Consolidated Balance Sheet. The Company did not have any derivative instruments with credit-risk related contingent features that would require it to post additional collateral as of June 28, 2014 or September 28, 2013.

Under master netting arrangements with the respective counterparties to the Company’s derivative contracts, the Company is allowed to net settle transactions with a single net amount payable by one party to the other. However, the Company has elected to present the derivative assets and derivative liabilities on a gross basis in its Condensed Consolidated Balance Sheets. As of June 28, 2014 and September 28, 2013, the potential effects of these rights of set-off associated with the Company’s derivative contracts, including the effects of collateral, would be a reduction to both derivative assets and derivative liabilities of $140 million and $333 million, respectively, resulting in net derivative assets of $128 million and net derivative liabilities of $57 million, respectively.

The following tables show the Company’s derivative instruments at gross fair value as reflected in the Condensed Consolidated Balance Sheets as of June 28, 2014 and September 28, 2013 (in millions):

 

                                                                                      
     June 28, 2014  
     Fair Value of
Derivatives
Designated as Hedge
Instruments
     Fair Value of
Derivatives Not
Designated as
Hedge Instruments
     Total
Fair Value
 

Derivative assets (a):

  

Foreign exchange contracts

   $ 132       $ 22       $ 154   

Interest rate contracts

   $ 121       $ 0       $ 121   

Derivative liabilities (b):

        

Foreign exchange contracts

   $ 69       $ 51       $ 120   
     September 28, 2013  
     Fair Value of
Derivatives
Designated as Hedge
Instruments
     Fair Value of
Derivatives Not
Designated as
Hedge Instruments
     Total
Fair Value
 

Derivative assets (a):

  

Foreign exchange contracts

   $ 145       $ 25       $ 170   

Interest rate contracts

   $ 44       $ 0       $ 44   

Derivative liabilities (b):

        

Foreign exchange contracts

   $ 389       $ 46       $ 435   

 

 

(a)

The fair value of derivative assets is measured using Level 2 fair value inputs and is recorded as other current assets in the Condensed Consolidated Balance Sheets.

 

(b)

The fair value of derivative liabilities is measured using Level 2 fair value inputs and is recorded as accrued expenses in the Condensed Consolidated Balance Sheets.

 

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The following tables show the pre-tax effect of the Company’s derivative instruments designated as cash flow, net investment and fair value hedges in the Condensed Consolidated Statements of Operations for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 (in millions):

 

    Three Months Ended  
    June 28,
2014
    June 29,
2013
    June 28,
2014
    June 29,
2013
        June 28, 2014     June 29, 2013  
    Gains/(Losses)
Recognized in  OCI -
Effective Portion
    Gains/(Losses)
Reclassified  from AOCI
into Net Income -
Effective Portion
   

Financial

Statement Line

Item

  Gains/(Losses) Recognized –
Ineffective Portion and
Amount Excluded from
Effectiveness Testing
 

Cash flow hedges:                  

             

Foreign exchange contracts

  $ (73   $ 272      $ (29   $ 492      Other income/(expense), net   $ (52   $ (63

Interest rate contracts

    (10     33        (4     (2   Other income/(expense), net     0        0   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Total

  $ (83   $ 305      $ (33   $ 490        $ (52   $ (63
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Net investment hedges:

             

Foreign exchange contracts

  $ (5   $ 26      $ 0      $ 0      Other income/(expense), net   $ 0      $ 0   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 
    Gains/(Losses) On
Derivative Instruments
    Gains/(Losses) Related  to
Hedged Items
                 

Fair value hedges:

             

Interest rate contracts

  $ 83      $ 0      $ (83   $ 0      Other income/(expense), net   $ 0      $ 0   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 
    Nine Months Ended  
    June 28,
2014
    June 29,
2013
    June 28,
2014
    June 29,
2013
        June 28, 2014     June 29, 2013  
    Gains/(Losses)
Recognized in OCI -
Effective Portion
    Gains/(Losses)
Reclassified  from AOCI
into Net Income -
Effective Portion
   

Financial

Statement Line

Item

  Gains/(Losses) Recognized –
Ineffective Portion and
Amount Excluded from
Effectiveness Testing
 

Cash flow hedges:

             

Foreign exchange contracts

  $ 70      $ 1,218      $ (81   $ 304      Other income/(expense), net   $ (63   $ (115

Interest rate contracts

    (16     33        (12     (2   Other income/(expense), net     0        0   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Total

  $ 54      $ 1,251      $ (93   $ 302        $ (63   $ (115
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Net investment hedges:

             

Foreign exchange contracts

  $ 0      $ 132      $ 0      $ 0      Other income/(expense), net   $ 1      $ 1   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 
    Gains/(Losses) On
Derivative
Instruments
    Gains/(Losses)
Related to

Hedged Items
                 

Fair value hedges:

             

Interest rate contracts

  $ 83      $ 0      $ (83   $ 0      Other income/(expense), net   $ 0      $ 0   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

 

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Accounts Receivable

The Company has considerable trade receivables outstanding with its third-party cellular network carriers, wholesalers, retailers, value-added resellers, small and mid-sized businesses, and education, enterprise and government customers that are not covered by collateral, third-party financing arrangements or credit insurance. As of June 28, 2014, the Company had two customers that represented 10% or more of total trade receivables, one of which accounted for 12% and the other 11%. As of September 28, 2013, the Company had two customers that represented 10% or more of total trade receivables, one of which accounted for 13% and the other 10%. The Company’s cellular network carriers accounted for 55% and 68% of trade receivables as of June 28, 2014 and September 28, 2013, respectively.

Additionally, the Company has non-trade receivables from certain of its manufacturing vendors resulting from the sale of components to these manufacturing vendors who manufacture sub-assemblies or assemble final products for the Company. Three of the Company’s vendors accounted for 50%, 19% and 13% of total vendor non-trade receivables as of June 28, 2014 and three of the Company’s vendors accounted for 47%, 21% and 15% of total vendor non-trade receivables as of September 28, 2013.

Note 3 – Condensed Consolidated Financial Statement Details

The following tables show the Company’s condensed consolidated financial statement details as of June 28, 2014 and September 28, 2013 (in millions):

Inventories

 

                                                                 
     June 28, 2014      September 28, 2013  

Components

   $ 315       $ 683   

Finished goods

     1,279         1,081   
  

 

 

    

 

 

 

Total inventories

   $ 1,594       $ 1,764   
  

 

 

    

 

 

 

Property, Plant and Equipment

 

                                                                 
     June 28, 2014     September 28, 2013  

Land and buildings

   $ 4,448      $ 3,309   

Machinery, equipment and internal-use software

     25,595        21,242   

Leasehold improvements

     4,410        3,968   
  

 

 

   

 

 

 

Gross property, plant and equipment

     34,453        28,519   

Accumulated depreciation and amortization

     (16,868     (11,922
  

 

 

   

 

 

 

Net property, plant and equipment

   $ 17,585      $ 16,597   
  

 

 

   

 

 

 

Accrued Expenses

 

                                                                 
     June 28, 2014      September 28, 2013  

Accrued warranty and related costs

   $ 4,242       $ 2,967   

Accrued marketing and selling expenses

     1,686         1,291   

Accrued taxes

     1,437         1,200   

Accrued compensation and employee benefits

     1,234         959   

Deferred margin on component sales

     890         1,262   

Other current liabilities

     5,775         6,177   
  

 

 

    

 

 

 

Total accrued expenses

   $ 15,264       $ 13,856   
  

 

 

    

 

 

 

Non-Current Liabilities

 

                                                                 
     June 28, 2014      September 28, 2013  

Deferred tax liabilities

   $ 20,159       $ 16,489   

Other non-current liabilities

     3,128         3,719   
  

 

 

    

 

 

 

Total other non-current liabilities

   $ 23,287       $ 20,208   
  

 

 

    

 

 

 

 

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Table of Contents

Other Income and Expense

The following table shows the detail of other income and expense for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 (in millions):

 

                                                                                                   
     Three Months Ended     Nine Months Ended  
     June 28,
2014
    June 29,
2013
    June 28,
2014
    June 29,
2013
 

Interest and dividend income

   $ 439      $ 385      $ 1,276      $ 1,226   

Interest expense

     (100     (53     (269     (53

Other expense, net

     (137     (98     (334     (130
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income/(expense), net

   $ 202      $ 234      $ 673      $ 1,043   
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 4 – Goodwill and Other Intangible Assets

The Company’s acquired intangible assets with definite useful lives primarily consist of patents and licenses and are amortized over periods typically from three to seven years. The following table summarizes the components of gross and net intangible asset balances as of June 28, 2014 and September 28, 2013 (in millions):

 

                                                                                                                                                     
     June 28, 2014      September 28, 2013  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
 

Definite-lived and amortizable acquired intangible assets

   $ 6,472       $ (2,805   $ 3,667       $ 6,081       $ (2,002   $ 4,079   

Indefinite-lived and non-amortizable acquired intangible assets

     100         0        100         100         0        100   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total acquired intangible assets

   $ 6,572       $ (2,805   $ 3,767       $ 6,181       $ (2,002   $ 4,179   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

During the nine months ended June 28, 2014, the Company completed various business acquisitions. The aggregate cash consideration paid, net of cash acquired, was $898 million, of which $789 million was allocated to goodwill, $247 million to acquired intangible assets and $138 million to net liabilities assumed. During the nine months ended June 29, 2013, the aggregate cash consideration paid, net of cash acquired, was $443 million, of which $369 million was allocated to goodwill, $167 million to acquired intangible assets and $93 million to net liabilities assumed.

Note 5 – Income Taxes

As of June 28, 2014, the Company recorded gross unrecognized tax benefits of $3.1 billion, of which $1.6 billion, if recognized, would affect the Company’s effective tax rate. As of September 28, 2013, the total amount of gross unrecognized tax benefits was $2.7 billion, of which $1.4 billion, if recognized, would affect the Company’s effective tax rate. Additionally, the Company had $606 million and $590 million of gross interest and penalties accrued as of June 28, 2014 and September 28, 2013, respectively. The Company’s unrecognized tax benefits, interest and penalties are presented net of related tax deposits and are classified as other non-current liabilities in the Condensed Consolidated Balance Sheets.

During the second quarter of 2014, the U.S. Internal Revenue Service Appeals Office concluded its review of the years 2004 through 2006, which resulted in the Company reducing its gross unrecognized tax benefits by $95 million and recognizing a tax benefit of $68 million.

Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs. Although timing of the resolution and/or closure of audits is not certain, the Company believes it is reasonably possible that tax audit resolutions could reduce its unrecognized tax benefits by between $400 million and $550 million in the next 12 months.

 

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Table of Contents

Note 6 – Debt

Commercial Paper

In April 2014, the Board of Directors authorized the Company to issue unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. The Company intends to use net proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases. As of June 28, 2014, the Company had $2.0 billion of Commercial Paper outstanding, with a weighted average interest rate of 0.09% and maturities generally less than nine months.

Long-Term Debt

In the third quarter of 2014 and 2013, the Company issued $12.0 billion and $17.0 billion of long-term debt, respectively. The debt issuances included floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $29.0 billion (collectively the “Notes”). The Notes are senior unsecured obligations, and interest is payable in arrears, quarterly for the floating-rate notes and semi-annually for the fixed-rate notes.

The following table provides a summary of the Company’s long-term debt as of June 28, 2014 and September 28, 2013:

 

                                                                                                   
     As of June 28, 2014      As of September 28, 2013  
     Amount
(in  millions)
    Effective
Interest  Rate
     Amount
(in  millions)
    Effective
Interest  Rate
 

Floating-rate notes due 2016

   $ 1,000        0.51%       $ 1,000        0.51%   

Floating-rate notes due 2017

     1,000        0.29%         0        0   

Floating-rate notes due 2018

     2,000        1.10%         2,000        1.10%   

Floating-rate notes due 2019

     1,000        0.52%         0        0   

Fixed-rate 0.45% notes due 2016

     1,500        0.51%         1,500        0.51%   

Fixed-rate 1.05% notes due 2017

     1,500        0.29%         0        0   

Fixed-rate 1.00% notes due 2018

     4,000        1.08%         4,000        1.08%   

Fixed-rate 2.10% notes due 2019

     2,000        0.52%         0        0   

Fixed-rate 2.85% notes due 2021

     3,000        0.77%         0        0   

Fixed-rate 2.40% notes due 2023

     5,500        2.44%         5,500        2.44%   

Fixed-rate 3.45% notes due 2024

     2,500        0.88%         0        0   

Fixed-rate 3.85% notes due 2043

     3,000        3.91%         3,000        3.91%   

Fixed-rate 4.45% notes due 2044

     1,000        4.48%         0        0   
  

 

 

      

 

 

   

Total

     29,000           17,000     
  

 

 

      

 

 

   

Unamortized discount

     (53        (40  

Hedge accounting fair value adjustments

     83           0     
  

 

 

      

 

 

   

Total

   $ 29,030         $ 16,960     
  

 

 

      

 

 

   

The Company has entered, and may enter in the future, into interest rate swaps to manage interest rate risk on the Notes. Such swaps allow the Company to effectively convert fixed-rate payments to floating-rate or floating-rate payments into fixed-rate payments. In the third quarter of 2013, the Company entered into interest rate swaps with an aggregate $3.0 billion notional, which effectively converted the floating-rate notes due 2016 and 2018 to a fixed interest rate. In the third quarter of 2014, the Company entered into interest rate swaps with an aggregate $9.0 billion notional, which effectively converted the fixed-rate notes due 2017, 2019, 2021 and 2024 to a floating interest rate.

The effective rates for the Notes include the interest on the Notes, amortization of the discount and, if applicable, adjustments related to hedging. The Company recognized $100 million and $268 million of interest expense on its long-term debt for the three- and nine-month periods ended June 28, 2014, respectively.

 

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Table of Contents

Future principal payments for the Company’s Notes as of June 28, 2014, are as follows (in millions):

 

                        

2014

   $ 0   

2015

     0   

2016

     2,500   

2017

     2,500   

2018

     6,000   

Thereafter

     18,000   
  

 

 

 

Total

   $ 29,000   
  

 

 

 

As of June 28, 2014 and September 28, 2013, the fair value of the Company’s Notes, based on Level 2 inputs, was $28.5 billion and $15.9 billion, respectively.

Note 7 – Shareholders’ Equity

Preferred and Common Stock

During the second quarter of 2014, the Company’s shareholders approved amendments (the “Amendments”) to the Company’s Restated Articles of Incorporation. The Amendments included the elimination of the Board of Directors’ authority to issue preferred stock and established a par value for the Company’s common stock of $0.00001 per share.

Dividends

The Company declared and paid cash dividends per common share during the periods presented as follows:

 

                                                 
     Dividends
Per Share
     Amount
(in  millions)
 

2014:

     

Third quarter

   $ 0.47       $ 2,830   

Second quarter

     0.44         2,655   

First quarter

     0.44         2,739   
  

 

 

    

 

 

 

Total

   $ 1.35       $ 8,224   
  

 

 

    

 

 

 

2013:

     
     

Fourth quarter

   $ 0.44       $ 2,763   

Third quarter

     0.44         2,789   

Second quarter

     0.38         2,490   

First quarter

     0.38         2,486   
  

 

 

    

 

 

 

Total

   $ 1.64       $ 10,528   
  

 

 

    

 

 

 

Future dividends are subject to declaration by the Board of Directors.

Share Repurchase Program

In 2012, the Company’s Board of Directors authorized a program to repurchase up to $10 billion of the Company’s common stock beginning in 2013. In April 2013, the Company’s Board of Directors increased the share repurchase authorization from $10 billion to $60 billion. In April 2014, the Company’s Board of Directors increased the share repurchase authorization from $60 billion to $90 billion, of which $50.9 billion had been utilized as of June 28, 2014. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. Under the program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

The Company has entered into three accelerated share repurchase arrangements (“ASRs”) with financial institutions beginning in August 2012. In exchange for up-front payments, the financial institutions deliver shares of the Company’s common stock during the purchase periods of each ASR. The total number of shares ultimately delivered, and therefore the average repurchase price paid per share, will be determined at the end of the applicable purchase period of each ASR based on the volume weighted-average price of the Company’s common stock during that period. The shares received are retired in the periods they are delivered, and the up-front payments are accounted for as a reduction to shareholders’ equity in the Company’s Condensed Consolidated Balance Sheet in the periods the payments are made. The Company reflects the ASRs as a repurchase of common stock in the period delivered for purposes of calculating earnings per share and as forward contracts indexed to its own common stock. The ASRs met all of the applicable criteria for equity classification, and, therefore, were not accounted for as derivative instruments.

 

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The following table presents the Company’s ASRs:

 

                                                                                                                   
     Purchase
Period End
Date
    Number of
Shares

(in thousands)
     Average
Repurchase
Price Per

Share
    ASR
Amount

(in  millions)
 

January 2014 ASR

     (a     134,247(a)         (a   $ 12,000   

April 2013 ASR

     March 2014        172,548(b)       $ 69.55      $ 12,000   

August 2012 ASR

     April 2013        28,544            $ 68.31      $ 1,950   

 

 

(a)

The number of shares represents shares delivered in the second quarter of 2014 and does not represent the final number of shares to be delivered under the January 2014 ASR. The total number of shares ultimately delivered under the January 2014 ASR, and therefore the average repurchase price paid per share, will be determined at the end of the applicable purchase period based on the volume weighted-average price of the Company’s common stock during that period. The January 2014 ASR purchase period will end in or before December 2014.

 

(b)

Includes 8.0 million shares that were delivered and retired at the end of the purchase period, which concluded in the second quarter of 2014.

The Company repurchased shares of its common stock in the open market, which were retired upon repurchase, during the periods presented as follows:

 

                                                                                      
     Number of
Shares

(in thousands)
     Average
Repurchase Price
Per Share
     Amount
(in  millions)
 

2014:

        

Third quarter

     58,661       $ 85.23       $ 5,000   

Second quarter

     79,749       $ 75.24         6,000   

First quarter

     66,847       $ 74.79         5,000   
  

 

 

       

 

 

 

Total

     205,257          $ 16,000   
  

 

 

       

 

 

 

2013:

        

Fourth quarter

     73,064       $ 68.43       $ 5,000   

Third quarter

     62,676       $ 63.82         4,000   

Second quarter

     0       $ 0         0   

First quarter

     0       $ 0         0   
  

 

 

       

 

 

 

Total

     135,740          $ 9,000   
  

 

 

       

 

 

 

Note 8 – Comprehensive Income

Comprehensive income consists of two components, net income and OCI. OCI refers to revenue, expenses, and gains and losses that under GAAP are recorded as an element of shareholders’ equity but are excluded from net income. The Company’s OCI consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, net deferred gains and losses on certain derivative instruments accounted for as cash flow hedges, and unrealized gains and losses on marketable securities classified as available-for-sale.

 

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The following table shows the gross amounts reclassified from AOCI into the Condensed Consolidated Statements of Operations and the associated financial statement line item, for the three- and nine-month periods ended June 28, 2014 (in millions):

 

                                                                          
     Three Months
Ended
    Nine Months
Ended
 

Comprehensive Income Components

  

Financial Statement Line Item

   June 28, 2014  

Unrecognized gains/losses on derivative instruments:

       

Foreign exchange contracts

   Revenue    $ 86      $ 389   
  

Cost of sales

     (57     (308
  

Other income/expense, net

     0        14   

Interest rate contracts

   Other income/expense, net      4        12   
     

 

 

   

 

 

 
        33        107   

Unrealized gains/losses on marketable securities

   Other income/expense, net      (50     (127
     

 

 

   

 

 

 

Total amounts reclassified from AOCI

      $ (17   $ (20
     

 

 

   

 

 

 

The following table shows the changes in AOCI by component for the nine months ended June 28, 2014 (in millions):

 

                                                                                                   
     Cumulative
Foreign
Currency
Translation
    Unrecognized
Gains/Losses
on Derivative
Instruments
    Unrealized
Gains/Losses
on Marketable
Securities
    Total  

September 28, 2013

   $ (105   $ (175   $ (191   $ (471
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income/(loss) before reclassifications

     (38     43        838        843   

Amounts reclassified from AOCI

     0        107        (127     (20

Tax effect

     3        (26     (243     (266
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income/(loss)

     (35     124        468        557   
  

 

 

   

 

 

   

 

 

   

 

 

 

June 28, 2014

   $ (140   $ (51   $ 277      $ 86   
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 9 – Benefit Plans

Stock Plans

The Company had 495.7 million shares reserved for future issuance under its stock plans as of June 28, 2014. RSUs granted reduce the number of shares available for grant under the Company’s stock plans utilizing a factor of two times the number of RSUs granted. Similarly, RSUs cancelled and shares withheld to satisfy tax withholding obligations increase the number of shares available for grant under the Company’s stock plans utilizing a factor of two times the number of RSUs cancelled or shares withheld. Stock options count against the number of shares available for grant on a one-for-one basis.

2014 Employee Stock Plan

In the second quarter of 2014, shareholders approved the 2014 Employee Stock Plan (the “2014 Plan”) and terminated the Company’s authority to grant new awards under the 2003 Employee Stock Plan (the “2003 Plan”). The 2014 Plan provides for broad-based equity grants to employees, including executive officers, and permits the granting of stock options, stock appreciation rights, stock grants and RSUs, as well as cash bonus awards. RSUs granted under the 2014 Plan are settled upon vesting in shares of the Company’s common stock on a one-for-one basis. Currently, all RSUs granted under the 2014 Plan have dividend equivalent rights (“DERs”), which entitle holders of RSUs to the same dividend value per share as holders of common stock. DERs are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated and paid when the underlying shares vest. Upon approval of the 2014 Plan, the Company reserved 385 million shares plus any shares that were reserved but not issued under the 2003 Plan for future issuance.

 

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Rule 10b5-1 Trading Plans

During the three months ended June 28, 2014, Section 16 officers Timothy D. Cook, Luca Maestri, Peter Oppenheimer, Daniel Riccio, Philip W. Schiller, D. Bruce Sewell and Jeffrey E. Williams and director William V. Campbell had equity trading plans in place in accordance with Rule 10b5-1(c)(1) under the Exchange Act. An equity trading plan is a written document that pre-establishes the amounts, prices and dates (or formula for determining the amounts, prices and dates) of future purchases or sales of the Company’s stock, including shares acquired pursuant to the Company’s employee and director equity plans.

Restricted Stock Units

A summary of the Company’s RSU activity and related information for the nine months ended June 28, 2014, is as follows:

 

                                                                          
     Number of
RSUs
(in thousands)
    Weighted-Average
Grant Date Fair
Value
     Aggregate
Intrinsic  Value
(in millions)
 

Balance at September 28, 2013

     93,284      $ 62.24      

RSUs granted

     53,730      $ 72.18      

RSUs vested

     (35,529   $ 58.87      

RSUs cancelled

     (4,401   $ 67.64      
  

 

 

      

Balance at June 28, 2014

     107,084      $ 68.12       $ 9,850   
  

 

 

      

RSUs that vested during the three- and nine-month periods ended June 28, 2014 had fair values of $1.3 billion and $2.6 billion, respectively, as of the vesting date. RSUs that vested during the three- and nine-month periods ended June 29, 2013 had fair values of $1.2 billion and $2.9 billion, respectively, as of the vesting date.

Stock Options

The Company had 13.1 million stock options outstanding as of June 28, 2014, with a weighted average exercise price per share of $22.39 and weighted average remaining contractual term of 1.1 years, substantially all of which are exercisable. The aggregate intrinsic value of the stock options outstanding as of June 28, 2014 was $908 million, which represents the value of the Company’s closing stock price on the last trading day of the period in excess of the weighted-average exercise price multiplied by the number of options outstanding.

The total intrinsic value of options at the time of exercise was $271 million and $978 million for the three- and nine-month periods ended June 28, 2014, respectively, and $180 million and $738 million for the three- and nine-month periods ended June 29, 2013, respectively.

Share-Based Compensation

Share-based compensation cost for RSUs is measured based on the closing fair market value of the Company’s common stock on the date of grant. Share-based compensation cost for stock options and employee stock purchase plan rights (“stock purchase rights”) is measured at the grant date and offering date, respectively, based on the fair value as calculated by the Black-Scholes-Merton (“BSM”) option-pricing model. The BSM option-pricing model incorporates various assumptions including expected volatility, estimated expected life and interest rates. The Company recognizes share-based compensation cost over the award’s requisite service period on a straight-line basis for time-based RSUs and on a graded basis for RSUs that are contingent on the achievement of performance metrics.

 

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The following table shows a summary of the share-based compensation expense included in the Condensed Consolidated Statements of Operations for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 (in millions):

 

                                                                                                   
     Three Months Ended      Nine Months Ended  
     June 28,
2014
     June 29,
2013
     June 28,
2014
     June 29,
2013
 

Cost of sales

   $ 115       $ 90       $ 334       $ 262   

Research and development

     313         245         902         708   

Selling, general and administrative

     296         243         865         728   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

   $ 724       $ 578       $ 2,101       $ 1,698   
  

 

 

    

 

 

    

 

 

    

 

 

 

The income tax benefit related to share-based compensation expense was $260 million and $755 million for the three- and nine-month periods ended June 28, 2014, respectively, and was $197 million and $606 million for the three- and nine-month periods ended June 29, 2013, respectively. As of June 28, 2014, the total unrecognized compensation cost related to outstanding stock options and RSUs expected to vest was $6.1 billion, which the Company expects to recognize over a weighted-average period of 2.9 years.

Note 10 – Commitments and Contingencies

Accrued Warranty and Indemnification

The following table shows changes in the Company’s accrued warranties and related costs for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 (in millions):

 

                                                                                                   
     Three Months Ended     Nine Months Ended  
     June 28,
2014
    June 29,
2013
    June 28,
2014
    June 29,
2013
 

Beginning accrued warranty and related costs

   $ 4,368      $ 3,014      $ 2,967      $ 1,638   

Cost of warranty claims

     (882     (1,033     (2,811     (2,566

Accruals for product warranty

     756        736        4,086        3,645   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending accrued warranty and related costs

   $ 4,242      $ 2,717      $ 4,242      $ 2,717   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company generally does not indemnify end-users of its operating system and application software against legal claims that the software infringes third-party intellectual property rights. Other agreements entered into by the Company sometimes include indemnification provisions under which the Company could be subject to costs and/or damages in the event of an infringement claim against the Company or an indemnified third-party. However, the Company has not been required to make any significant payments resulting from such an infringement claim asserted against it or an indemnified third-party. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss with respect to indemnification of end-users of its operating system or application software for infringement of third-party intellectual property rights. The Company did not record a liability for infringement costs related to indemnification as of June 28, 2014 or September 28, 2013.

The Company has entered into indemnification agreements with its directors and executive officers. Under these agreements, the Company has agreed to indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their status as directors or officers and to advance expenses incurred by such individuals in connection with related legal proceedings. It is not possible to determine the maximum potential amount of payments the Company could be required to make under these agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each claim. However, the Company maintains directors and officers liability insurance coverage to reduce its exposure to such obligations, and payments made under these agreements historically have not been material.

 

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Table of Contents

Concentrations in the Available Sources of Supply of Materials and Product

Although most components essential to the Company’s business are generally available from multiple sources, a number of components are currently obtained from single or limited sources. In addition, the Company competes for various components with other participants in the markets for mobile communication and media devices and personal computers. Therefore, many components used by the Company, including those that are available from multiple sources, are at times subject to industry-wide shortage and significant pricing fluctuations that could materially adversely affect the Company’s financial condition and operating results.

The Company uses some custom components that are not commonly used by its competitors, and new products introduced by the Company often utilize custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or manufacturing capacity has increased. If the Company’s supply of components for a new or existing product were delayed or constrained, or if an outsourcing partner delayed shipments of completed products to the Company, the Company’s financial condition and operating results could be materially adversely affected. The Company’s business and financial performance could also be materially adversely affected depending on the time required to obtain sufficient quantities from the original source, or to identify and obtain sufficient quantities from an alternative source. Continued availability of these components at acceptable prices, or at all, may be affected if those suppliers concentrated on the production of common components instead of components customized to meet the Company’s requirements.

The Company has entered into agreements for the supply of many components; however, there can be no guarantee that the Company will be able to extend or renew these agreements on similar terms, or at all. Therefore, the Company remains subject to significant risks of supply shortages and price increases that could materially adversely affect its financial condition and operating results.

Substantially all of the Company’s hardware products are manufactured by outsourcing partners that are located primarily in Asia. A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in single locations. Certain of these outsourcing partners are the sole-sourced suppliers of components and manufacturers for many of the Company’s products. Although the Company works closely with its outsourcing partners on manufacturing schedules, the Company’s operating results could be adversely affected if its outsourcing partners were unable to meet their production commitments. The Company’s purchase commitments typically cover its requirements for periods up to 150 days.

Other Off-Balance Sheet Commitments

The Company leases various equipment and facilities, including retail space, under noncancelable operating lease arrangements. The Company does not currently utilize any other off-balance sheet financing arrangements. The major facility leases are typically for terms not exceeding 10 years and generally provide renewal options for terms not exceeding five additional years. Leases for retail space are for terms ranging from five to 20 years, the majority of which are for 10 years, and often contain multi-year renewal options. As of June 28, 2014, the Company’s total future minimum lease payments under noncancelable operating leases were $5.0 billion, of which $3.8 billion related to leases for retail space.

The Company utilizes several outsourcing partners to manufacture sub-assemblies for the Company’s products and to perform final assembly and testing of finished products. These outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically covers periods up to 150 days. The Company also obtains individual components for its products from a wide variety of individual suppliers. Consistent with industry practice, the Company acquires components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. Where appropriate, the purchases are applied to inventory component prepayments that are outstanding with the respective supplier. As of June 28, 2014, the Company had outstanding off-balance sheet third-party manufacturing commitments and component purchase commitments of $15.4 billion.

In addition to the commitments mentioned above, the Company had additional off-balance sheet obligations of $5.6 billion as of June 28, 2014, which were comprised mainly of commitments to acquire capital assets, including product tooling and manufacturing process equipment, and commitments related to advertising, research and development, Internet and telecommunications services and other obligations.

 

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Contingencies

The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully adjudicated, certain of which are discussed in Part II, Item 1 of this Form 10-Q under the heading “Legal Proceedings” and in Part II, Item 1A of this Form 10-Q under the heading “Risk Factors.” In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies. However, the outcome of litigation is inherently uncertain. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial statements for that reporting period could be materially adversely affected.

Apple Inc. v. Samsung Electronics Co., Ltd, et al.

On August 24, 2012, a jury returned a verdict awarding the Company $1.05 billion in its lawsuit against Samsung Electronics Co., Ltd and affiliated parties in the United States District Court, Northern District of California, San Jose Division. On March 6, 2014, the Court entered final judgment in favor of the Company in the amount of approximately $930 million. Because the award is now subject to appeal, the Company has not recognized the award in its results of operations.

VirnetX, Inc. v. Apple Inc. et al.

On August 11, 2010, VirnetX, Inc. filed an action against the Company alleging that certain of its products infringed on four patents relating to network communications technology. On November 6, 2012, a jury returned a verdict against the Company, and awarded damages of $368 million. On March 3, 2014, the Court entered a ruling awarding a royalty of 0.98% against adjudicated products and products not colorably different than those adjudicated at trial. The Company has appealed the verdict, believes it has valid defenses and has not recorded a loss accrual at this time.

Note 11 – Segment Information and Geographic Data

The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments.

The Company manages its business primarily on a geographic basis. The Company’s reportable operating segments consist of the Americas, Europe, Greater China, Japan, Rest of Asia Pacific and Retail operations. The Americas segment includes both North and South America. The Europe segment includes European countries, as well as India, the Middle East and Africa. The Greater China segment includes China, Hong Kong and Taiwan. The Rest of Asia Pacific segment includes Australia and Asian countries, other than those countries included in the Company’s other operating segments. The results of the Company’s geographic segments do not include results of the Retail segment. Each operating segment provides similar hardware and software products and similar services. The accounting policies of the various segments are the same as those described in Note 1, “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company’s 2013 Form 10-K.

The Company evaluates the performance of its operating segments based on net sales and operating income. Net sales for geographic segments are generally based on the location of customers, while Retail segment net sales are based on sales through the Company’s retail stores. Operating income for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. Advertising expenses are generally included in the geographic segment in which the expenditures are incurred. Operating income for each segment excludes other income and expense and certain expenses managed outside the operating segments. Costs excluded from segment operating income include various corporate expenses such as research and development, corporate marketing expenses, share-based compensation expense, income taxes, various nonrecurring charges, and other separately managed general and administrative costs and certain manufacturing period expenses. The Company does not include intercompany transfers between segments for management reporting purposes.

 

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The following table shows information by operating segment for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 (in millions):

 

                                                                                                   
     Three Months Ended      Nine Months Ended  
     June 28,
2014
     June 29,
2013
     June 28,
2014
     June 29,
2013
 

Americas:

           

Net sales

   $ 14,577       $ 14,405       $ 48,985       $ 48,798   

Operating income

   $ 5,717       $ 5,140       $ 18,416       $ 17,637   

Europe:

           

Net sales

   $ 8,091       $ 7,614       $ 31,394       $ 29,878   

Operating income

   $ 3,016       $ 2,450       $ 11,345       $ 10,308   

Greater China:

           

Net sales

   $ 5,935       $ 4,641       $ 24,068       $ 19,684   

Operating income

   $ 2,173       $ 1,440       $ 8,837       $ 6,771   

Japan:

           

Net sales

   $ 2,564       $ 2,543       $ 11,475       $ 10,121   

Operating income

   $ 1,289       $ 1,343       $ 5,560       $ 5,158   

Rest of Asia Pacific:

           

Net sales

   $ 2,161       $ 2,046       $ 8,421       $ 9,201   

Operating income

   $ 721       $ 729       $ 2,948       $ 3,098   

Retail:

           

Net sales

   $ 4,104       $ 4,074       $ 16,329       $ 15,756   

Operating income

   $ 711       $ 667       $ 3,606       $ 3,316   

A reconciliation of the Company’s segment operating income to the condensed consolidated financial statements for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 is as follows (in millions):

 

                                                                                                   
     Three Months Ended     Nine Months Ended  
     June 28,
2014
    June 29,
2013
    June 28,
2014
    June 29,
2013
 

Segment operating income

   $ 13,627      $ 11,769      $ 50,712      $ 46,288   

Research and development expense (a)

     (1,290     (933     (3,453     (2,599

Share-based compensation expense

     (724     (578     (2,101     (1,698

Other corporate expenses, net

     (1,331     (1,057     (3,820     (3,022
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income

   $ 10,282      $ 9,201      $ 41,338      $ 38,969   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

(a)

Amount excludes research and development share-based compensation expense.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This section and other parts of this 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. Forward-looking statements also can be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “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 II, Item 1A of this Form 10-Q under the heading “Risk Factors,” which are incorporated herein by reference. The following discussion should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended September 28, 2013 (the “2013 Form 10-K”) filed with the U.S. Securities and Exchange Commission (the “SEC”) and the condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. All information presented herein is based on the Company’s fiscal calendar. Unless otherwise stated, references in this report to particular years, quarters, months or periods refer to the Company’s fiscal years ended in September and the associated quarters, months, or 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 Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Available Information

The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the SEC. The Company is subject to the informational requirements of the Exchange Act and files or furnishes reports, proxy statements, and other information with the SEC. Such reports and other information filed by the Company with the SEC are available free of charge on the Company’s website at investor.apple.com/sec.cfm when such reports are available on the SEC’s website. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov . The contents of these websites are not incorporated into this filing. Further, the Company’s references to the URLs for these websites are intended to be inactive textual references only.

Overview and Highlights

Company Background

The Company designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players, and sells a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications. The Company’s products and services include iPhone ® , iPad ® , Mac ® , iPod ® , Apple TV ® , a portfolio of consumer and professional software applications, the iOS and OS X ® operating systems, iCloud ® , and a variety of accessory, service and support offerings. The Company also sells and delivers digital content and applications through the iTunes Store ® , App Store™, iBooks Store™, and Mac App Store. The Company sells its products worldwide through its retail stores, online stores, and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers, and value-added resellers. In addition, the Company sells a variety of third-party iPhone, iPad, Mac and iPod compatible products, including application software, and various accessories, through its online and retail stores. The Company sells to consumers; small and mid-sized businesses; and education, enterprise and government customers.

Business Strategy

The Company is committed to bringing the best user experience to its customers through its innovative hardware, software and services. The Company’s business strategy leverages its unique ability to design and develop its own operating systems, hardware, application software, and services to provide its customers new products and solutions with superior ease-of-use, seamless integration, and innovative design. The Company believes continual investment in research and development, marketing and advertising is critical to the development and sale of innovative products and technologies. As part of its strategy, the Company continues to expand its platform for the discovery and delivery of third-party digital content and applications through the iTunes Store. As part of the iTunes Store, the Company’s App Store and iBooks Store allow customers to discover and download applications and books through either a Mac or Windows-based computer or through “iOS devices,” namely iPhone, iPad and iPod touch ® . The Company’s Mac App Store allows customers to easily discover, download and install Mac applications. The Company also supports a community for the development of third-party software and hardware products and digital content that complement the Company’s offerings. The Company believes a high-quality buying experience with knowledgeable salespersons who can convey the value of the Company’s products and services greatly enhances its ability to attract and retain customers. Therefore, the Company’s strategy also includes enhancing and expanding its own retail and online stores and its third-party distribution network to effectively reach more customers and provide them with a high-quality sales and post-sales support experience.

 

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Table of Contents

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 introductions can significantly impact net sales, product costs and operating expenses. Product introductions can also impact the Company’s net sales to its indirect distribution channels as these channels are filled with new product inventory following a product introduction, and often, channel inventory of a particular product declines as the next related major product launch approaches. Net sales can also be affected when consumers and distributors anticipate a product introduction. However, neither historical seasonal patterns nor historical patterns of product introductions should be considered reliable indicators of the Company’s future pattern of product introductions, future net sales or financial performance.

Third Quarter Fiscal 2014 Highlights

Net sales rose $2.1 billion in the third quarter of 2014 compared to the same period in 2013, representing growth of 6%. Net sales and unit sales increased for iPhone resulting primarily from the successful introduction of new iPhones in the latter half of calendar year 2013 and expanded distribution. Net sales and unit sales increased for Mac due to strong demand for MacBook Air ® which was updated with faster processors and lower prices in April 2014 and due to sales of the new Mac Pro ® which became available in December 2013. Net sales of iTunes ® , Software and Services grew primarily due to increased revenue from sales of iOS Apps, AppleCare ® and licensing. Net sales and unit sales for iPad declined in the third quarter of 2014 compared to the same period in 2013 due to lower unit sales in many markets. Growth in total net sales during the third quarter of 2014 was also negatively impacted by the continuing decline of iPod sales. Growth in net sales was particularly strong in Greater China where revenue grew 28% in the third quarter of 2014 compared to the same period in 2013.

At its Worldwide Developers Conference in June 2014, the Company announced new versions of its operating systems, iOS 8 and OS X Yosemite, both of which are expected to be available in the fall of 2014.

During the third quarter of 2014, the Company utilized $5 billion to repurchase its common stock and paid dividends and dividend equivalents of $2.9 billion. Additionally, the Company issued $12.0 billion of long-term debt and $2.0 billion of commercial paper during the third quarter of 2014.

 

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Sales Data

The following table shows net sales by operating segment and net sales and unit sales by product during the three- and nine-month periods ended June 28, 2014 and June 29, 2013 (dollars in millions and units in thousands):

 

                                                                                                                                                     
     Three Months Ended      Nine Months Ended  
     June 28,
2014
     June 29,
2013
     Change      June 28,
2014
     June 29,
2013
     Change  

Net Sales by Operating Segment :

                 

Americas

   $ 14,577       $ 14,405         1%       $ 48,985       $ 48,798         0%   

Europe

     8,091         7,614         6%         31,394         29,878         5%   

Greater China (a)

     5,935         4,641         28%         24,068         19,684         22%   

Japan

     2,564         2,543         1%         11,475         10,121         13%   

Rest of Asia Pacific

     2,161         2,046         6%         8,421         9,201         (8)%   

Retail

     4,104         4,074         1%         16,329         15,756         4%   
  

 

 

    

 

 

       

 

 

    

 

 

    

Total net sales

   $ 37,432       $ 35,323         6%       $ 140,672       $ 133,438         5%   
  

 

 

    

 

 

       

 

 

    

 

 

    

Net Sales by Product :

                 

iPhone (b)

   $ 19,751       $ 18,154         9%       $ 78,313       $ 71,769         9%   

iPad (b)

     5,889         6,374         (8)%         24,967         25,794         (3)%   

Mac (b)

     5,540         4,893         13%         17,454         15,859         10%   

iPod (b)

     442         733         (40)%         1,876         3,838         (51)%   

iTunes, Software and Services (c)

     4,485         3,990         12%         13,455         11,791         14%   

Accessories (d)

     1,325         1,179         12%         4,607         4,387         5%   
  

 

 

    

 

 

       

 

 

    

 

 

    

Total net sales

   $ 37,432       $ 35,323         6%       $ 140,672       $ 133,438         5%   
  

 

 

    

 

 

       

 

 

    

 

 

    

Unit Sales by Product :

                 

iPhone

     35,203         31,241         13%         129,947         116,460         12%   

iPad

     13,276         14,617         (9)%         55,661         56,954         (2)%   

Mac

     4,413         3,754         18%         13,386         11,767         14%   

iPod

     2,926         4,569         (36)%         11,736         22,881         (49)%   

 

 

(a)

Greater China includes China, Hong Kong and Taiwan.

 

(b)

Includes deferrals and amortization of related non-software services and software upgrade rights.

 

(c)

Includes revenue from sales on the iTunes Store, the App Store, the Mac App Store, and the iBooks Store, and revenue from sales of AppleCare, licensing and other services.

 

(d)

Includes sales of hardware peripherals and Apple-branded and third-party accessories for iPhone, iPad, Mac and iPod.

 

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Product Performance

iPhone

The following table presents iPhone net sales and unit sales information for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 (dollars in millions and units in thousands):

 

                                                                                                                                                     
     Three Months Ended      Nine Months Ended  
     June 28,
2014
     June 29,
2013
     Change      June 28,
2014
     June 29,
2013
     Change  

Net sales

   $ 19,751       $ 18,154         9%       $ 78,313       $ 71,769         9%   

Percentage of total net sales

     53%         51%            56%         54%      

Unit sales

     35,203         31,241         13%         129,947         116,460         12%   
                 

The year-over-year growth in iPhone net sales and unit sales in the third quarter and first nine months of 2014 resulted primarily from the successful introduction of new iPhones in the latter half of calendar year 2013 and expanded distribution. Compared to the same periods in 2013, iPhone net sales and unit sales growth were particularly strong in the Greater China and Rest of Asia Pacific segments in the third quarter of 2014, and in the Greater China and Japan segments in the first nine months of 2014. Overall average selling prices (“ASPs”) for iPhone were down during the third quarter and first nine months of 2014 compared to the same periods in 2013, primarily due to a shift in product mix and to weakening of foreign currencies relative to the U.S. dollar.

iPad

The following table presents iPad net sales and unit sales information for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 (dollars in millions and units in thousands):

 

                                                                                                                                                     
     Three Months Ended      Nine Months Ended  
     June 28,
2014
     June 29,
2013
     Change      June 28,
2014
     June 29,
2013
     Change  

Net sales

   $ 5,889       $ 6,374         (8)%       $ 24,967       $ 25,794         (3)%   

Percentage of total net sales

     16%         18%            18%         19%      

Unit sales

     13,276         14,617         (9)%         55,661         56,954         (2)%   
                 

Net sales and unit sales for iPad declined in the third quarter and first nine months of 2014 compared to the same periods in 2013. iPad net sales and unit sales grew overall in developing markets in the third quarter and first nine months of 2014, but this growth was more than offset by a decline in overall iPad net sales and unit sales in mature markets. iPad ASPs increased in the third quarter of 2014 compared to the same period in 2013 primarily as a result of a shift in mix toward higher priced iPads, while iPad ASPs declined in the first nine months of 2014 compared to the first nine months of 2013 with a shift in iPad product mix being more than offset by the October 2013 price reduction of iPad mini.

 

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Mac

The following table presents Mac net sales and unit sales information for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 (dollars in millions and units in thousands):

 

                                                                                                                                                     
     Three Months Ended      Nine Months Ended  
     June 28,
2014
     June 29,
2013
     Change      June 28,
2014
     June 29,
2013
     Change  

Net sales

   $ 5,540       $ 4,893         13%       $ 17,454       $ 15,859         10%   

Percentage of total net sales

     15%         14%            12%         12%      

Unit sales

     4,413         3,754         18%         13,386         11,767         14%   
                 

The year-over-year growth in Mac net sales and unit sales for the third quarter and first nine months of 2014 was primarily driven by increased sales of MacBook Air and Mac Pro. Mac ASPs decreased during the third quarter and first nine months of 2014 compared to the same periods in 2013 primarily due to price reductions on certain Mac models and a shift in mix towards Mac portable systems.

iTunes, Software and Services

The following table presents net sales information of iTunes, Software and Services for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 (dollars in millions):

 

                                                                                                                                                     
     Three Months Ended      Nine Months Ended  
     June 28,
2014
     June 29,
2013
     Change      June 28,
2014
     June 29,
2013
     Change  

Net sales

   $ 4,485       $ 3,990         12%       $ 13,455       $ 11,791         14%   

Percentage of total net sales

     12%         11%            10%         9%      

The increase in net sales of iTunes, Software and Services in the third quarter and first nine months of 2014 compared to the same periods in 2013 was primarily due to growth in net sales from the iTunes Store, AppleCare and licensing. The iTunes Store generated a total of $2.6 billion and $7.6 billion in net sales during the third quarter and first nine months of 2014, respectively, compared to $2.4 billion and $6.9 billion during the third quarter and first nine months of 2013, respectively. Growth in net sales from the iTunes Store was driven by increases in revenue from App sales reflecting continued growth in the installed base of iOS devices and the expansion in the number of third-party iOS Apps available. This was partially offset by a decline in sales of digital music.

Segment Operating Performance

The Company manages its business primarily on a geographic basis. Accordingly, the Company determined its reportable operating segments, which are generally based on the nature and location of its customers, to be the Americas, Europe, Greater China, Japan, Rest of Asia Pacific and Retail. The Americas segment includes both North and South America. The Europe segment includes European countries, as well as India, the Middle East and Africa. The Greater China segment includes China, Hong Kong and Taiwan. The Rest of Asia Pacific segment includes Australia and Asian countries, other than those countries included in the Company’s other operating segments. The results of the Company’s geographic segments do not include results of the Retail segment. Each operating segment provides similar hardware and software products and similar services. Further information regarding the Company’s operating segments may be found in Note 11, “Segment Information and Geographic Data” in Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

 

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Americas

The following table presents Americas net sales information for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 (dollars in millions):

 

                                                                                                                                                     
     Three Months Ended      Nine Months Ended  
     June 28,
2014
     June 29,
2013
     Change      June 28,
2014
     June 29,
2013
     Change  

Net sales

   $ 14,577       $ 14,405         1%       $ 48,985       $ 48,798         0%   

Percentage of total net sales

     39%         41%            35%         36%      

Americas experienced increases in net sales of Mac and iTunes, Software and Services that were largely offset by a decline in net sales of both iPod and iPad and weakness in foreign currencies relative to the U.S. dollar in the third quarter and first nine months of 2014 compared to the same periods in 2013. Mac growth was driven by increased net sales and unit sales of MacBook Air and Mac Pro. Net sales of iPhone were relatively flat in the third quarter of 2014 and were up only slightly in the first nine months of 2014 compared to the same periods in 2013.

Europe

The following table presents Europe net sales information for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 (dollars in millions):

 

                                                                                                                                                     
     Three Months Ended      Nine Months Ended  
     June 28,
2014
     June 29,
2013
     Change      June 28,
2014
     June 29,
2013
     Change  

Net sales

   $ 8,091       $ 7,614         6%       $ 31,394       $ 29,878         5%   

Percentage of total net sales

     22%         21%            22%         22%      

The increase in Europe net sales during the third quarter and first nine months of 2014 compared to the same periods in 2013 reflects increases in net sales of iPhone, Mac and iTunes, Software and Services, partially offset by a decline in net sales of iPod and iPad. Net sales growth in the third quarter and first nine months of 2014 was most pronounced in developing markets within Europe. Strength of foreign currencies relative to the U.S. dollar also contributed to net sales growth in the third quarter and first nine months of 2014.

Greater China

The following table presents Greater China net sales information for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 (dollars in millions):

 

                                                                                                                                                     
     Three Months Ended      Nine Months Ended  
     June 28,
2014
     June 29,
2013
     Change      June 28,
2014
     June 29,
2013
     Change  

Net sales

   $ 5,935       $ 4,641         28%       $ 24,068       $ 19,684         22%   

Percentage of total net sales

     16%         13%            17%         15%      

During the third quarter and first nine months of 2014, Greater China experienced year-over-year increases in net sales that were significantly higher than those experienced by the Company overall. The growth in 2014 compared to 2013 was driven by higher unit sales and net sales of all major product categories, except iPod, in addition to higher net sales of iTunes, Software and Services. Growth in net sales and unit sales of iPhone was especially strong, driven by the successful launch of new iPhones in Greater China at the end of 2013, increased demand for the Company’s entry-priced iPhones and the addition of a significant new carrier in the second quarter of 2014.

 

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Japan

The following table presents Japan net sales information for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 (dollars in millions):

 

                                                                                                                                                     
     Three Months Ended      Nine Months Ended  
     June 28,
2014
     June 29,
2013
     Change      June 28,
2014
     June 29,
2013
     Change  

Net sales

   $ 2,564       $ 2,543         1%       $ 11,475       $ 10,121         13%   

Percentage of total net sales

     7%         7%            8%         8%      

In the third quarter of 2014, Japan generated increases in net sales of iPad, Mac, and iTunes, Software and Services that were largely offset by a decline in net sales of iPhone and iPod in addition to the weakening of the Japanese Yen relative to the U.S. dollar. iPhone net sales and unit sales declined in the third quarter of 2014 compared to the same period in 2013 as changes in the regulatory environment negatively impacted growth of the Japan smartphone market. iPad unit sales were down during the third quarter of 2014 compared to the same period in 2013, but the decline was more than offset by higher ASPs that drove higher net sales of iPad year-over-year. In the first nine months of 2014, Japan generated year-over-year increases in net sales of every major product category except iPod and generated growth in net sales of iTunes, Software and Service, partially offset by weakness in the Japanese Yen relative to the U.S. dollar. While net sales of iPad increased during the first nine months of 2014 compared to the same period in 2013, iPad unit sales declined over the same period.

Rest of Asia Pacific

The following table presents Rest of Asia Pacific net sales information for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 (dollars in millions):

 

                                                                                                                                                     
     Three Months Ended      Nine Months Ended  
     June 28,
2014
     June 29,
2013
     Change      June 28,
2014
     June 29,
2013
     Change  

Net sales

   $ 2,161       $ 2,046         6%       $ 8,421       $ 9,201         (8)%   

Percentage of total net sales

     6%         6%            6%         7%      

Net sales in Rest of Asia Pacific increased during the third quarter of 2014 compared to the same period in 2013 due to strong growth in net sales and unit sales of iPhone and Mac. The growth of iPhone was driven by higher sales of entry-priced iPhones, while the growth of Mac was driven by higher sales of MacBook Air. Net sales declined in the first nine months of 2014 compared to the same period in 2013 due to year-over-year reductions in net sales in all major product categories except Mac in most countries in Rest of Asia Pacific. Net sales in both the third quarter and first nine months of 2014 were negatively affected by the weakness in several currencies relative to the U.S. dollar, including the Australian dollar.

 

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Retail

The following tables present Retail net sales information for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 and Retail store and headcount information as of June 28, 2014 and June 29, 2013 (dollars in millions):

 

                                                                                                                                                     
     Three Months Ended      Nine Months Ended  
     June 28,
2014
     June 29,
2013
     Change      June 28,
2014
     June 29,
2013
     Change  

Net sales

   $ 4,104       $ 4,074         1%       $ 16,329       $ 15,756         4%   

Percentage of total net sales

     11%         12%            12%         12%      

 

                                                 
     June 28, 2014      June 29, 2013  

U.S. stores

     254         252   

International stores

     173         156   
  

 

 

    

 

 

 

Total store count

     427         408   
  

 

 

    

 

 

 

Headcount

     41,300         41,700   

Growth in Retail net sales in the third quarter and first nine months of 2014 was driven by increases in net sales and unit sales of iPhone and Mac, partially offset by declines in net sales and unit sales of iPad and iPod. With an average of 424 and 405 stores open during the third quarters of 2014 and 2013, respectively, average revenue per store declined to $9.7 million in the third quarter of 2014 from $10.1 million in the third quarter of 2013. Average revenue per store declined to $38.8 million in the first nine months of 2014 from $39.3 million in the first nine months of 2013.

Retail generated operating income of $711 million during the third quarter of 2014 compared to $667 million in the third quarter of 2013, and generated operating income of $3.6 billion during the first nine months of 2014 compared to $3.3 billion in the first nine months of 2013. The year-over-year increase in Retail operating income during the third quarter and first nine months of 2014 was primarily attributable to a higher gross margin percentage.

Gross Margin

Gross margin for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 was as follows (dollars in millions):

 

                                                                                                   
     Three Months Ended      Nine Months Ended  
     June 28,
2014
     June 29,
2013
     June 28,
2014
     June 29,
2013
 

Net sales

   $ 37,432       $ 35,323       $ 140,672       $ 133,438   

Cost of sales

     22,697         22,299         86,144         83,005   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

   $ 14,735       $ 13,024       $ 54,528       $ 50,433   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin percentage

     39.4%         36.9%         38.8%         37.8%   

The increase in the gross margin percentage during the third quarter and first nine months of 2014 compared to the same periods in 2013 was driven by multiple factors including a favorable shift in mix to products with higher margins, lower commodity costs, and improved leverage on fixed costs from higher net sales. The impact of these factors was partially offset by higher cost structures on certain new products and by changes in some foreign currency exchange rates.

The Company anticipates gross margin during the fourth quarter of 2014 to be between 37% and 38%. The foregoing statement regarding the Company’s expected gross margin percentage in the fourth quarter of 2014 is forward-looking and could differ from actual results. The Company’s future gross margins can be impacted by multiple factors including, but not limited to, those set forth in Part II, Item 1A of this Form 10-Q under the heading “Risk Factors” and those described in this paragraph. In general, the Company believes gross margins will remain under downward pressure due to a variety of factors, including continued industry wide global product pricing pressures, increased competition, compressed product life cycles, product transitions, potential increases in the cost of components, and potential strengthening of the U.S. dollar, as well as potential increases in the costs of outside manufacturing services and a potential shift in the Company’s sales mix towards products with lower gross margins. In response to competitive pressures, the Company expects it will continue to take product pricing actions, which would adversely affect gross margins. Gross margins could also be affected by the Company’s ability to manage product quality and warranty costs effectively and to stimulate demand for certain of its products. Due to the Company’s significant international operations, financial results can be significantly affected by fluctuations in exchange rates.

 

 

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Operating Expenses

Operating expenses for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 were as follows (dollars in millions):

 

                                                                                                   
     Three Months Ended      Nine Months Ended  
     June 28,
2014
     June 29,
2013
     June 28,
2014
     June 29,
2013
 

Research and development expense

   $ 1,603       $ 1,178       $ 4,355       $ 3,307   

Percentage of net sales

     4.3%         3.3%         3.1%         2.5%   

Selling, general and administrative expense

   $ 2,850       $ 2,645       $ 8,835       $ 8,157   

Percentage of net sales

     7.6%         7.5%         6.3%         6.1%   

Total operating expenses

   $ 4,453       $ 3,823       $ 13,190       $ 11,464   

Percentage of net sales

     11.9%         10.8%         9.4%         8.6%   

Research and Development (“R&D”) Expense

The growth in R&D expense during the third quarter and the first nine months of 2014 compared to the same periods in 2013 was driven primarily by an increase in headcount and related expenses to support expanded R&D activities. The Company continues to believe that focused investments in R&D are critical to its future growth and competitive position in the marketplace and are directly related to timely development of new and enhanced products that are central to the Company’s core business strategy. As such, the Company expects to make further investments in R&D to remain competitive.

Selling, General and Administrative (“SG&A”) Expense

The growth in SG&A expense during the third quarter and the first nine months of 2014 compared to the same periods in 2013 was primarily due to increased headcount and related expenses, and higher spending on marketing and professional services.

Other Income and Expense

Other income and expense for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 was as follows (dollars in millions):

 

                                                                                                                                                     
     Three Months Ended      Nine Months Ended  
     June 28,
2014
     June 29,
2013
     Change      June 28,
2014
     June 29,
2013
     Change  

Interest and dividend income

   $ 439       $ 385          $ 1,276       $ 1,226      

Interest expense

     (100)         (53)            (269)         (53)      

Other expense, net

     (137)         (98)            (334)         (130)      
  

 

 

    

 

 

       

 

 

    

 

 

    

Total other income/(expense), net

   $ 202       $ 234         (14)%       $ 673       $ 1,043         (35)%   
  

 

 

    

 

 

       

 

 

    

 

 

    

The decrease in other income and expense during the third quarter of 2014 compared to the same period in 2013 was due primarily to higher interest expense on debt and lower realized gains on marketable securities, partially offset by higher interest income. The decrease in other income and expense during the first nine months of 2014 compared to the same period in 2013 was due primarily to higher interest expense on debt, higher expenses associated with foreign exchange rate movements and lower realized gains from investment sales, partially offset by lower premium expenses on foreign exchange contracts. The weighted-average interest rate earned by the Company on its cash, cash equivalents and marketable securities was 1.09% and 1.00% in the third quarter of 2014 and 2013, respectively, and 1.05% and 1.04% in the first nine months of 2014 and 2013, respectively.

 

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Provision for Income Taxes

Provision for income taxes and effective tax rates for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 was as follows (dollars in millions):

 

                                                                                                   
     Three Months Ended      Nine Months Ended  
     June 28,
2014
     June 29,
2013
     June 28,
2014
     June 29,
2013
 

Provision for income taxes

   $ 2,736       $ 2,535       $ 10,968       $ 10,487   

Effective tax rate

     26.1%         26.9%         26.1%         26.2%   

The Company’s effective tax rates for both periods differ from the statutory federal income tax rate of 35% due primarily to certain undistributed foreign earnings, a substantial portion of which was generated by subsidiaries organized in Ireland, for which no U.S. taxes are provided because such earnings are intended to be indefinitely reinvested outside the U.S.

The Internal Revenue Service (the “IRS”) is currently examining the years 2007 through 2012. All IRS audit issues for years prior to 2007 have been resolved. In addition, the Company is subject to audits by state, local, and foreign tax authorities. Management believes that adequate provisions have been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU 2014-09 will be effective for the Company beginning in its first quarter of 2018. Early adoption is not permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the impact of adopting the new revenue standard on its consolidated financial statements.

Liquidity and Capital Resources

The following tables present selected financial information and statistics as of June 28, 2014 and September 28, 2013 and during the first nine months of 2014 and 2013 (in millions):

 

                                                                 
     June 28, 2014     September 28, 2013  

Cash, cash equivalents and marketable securities

   $ 164,490      $ 146,761   

Property, plant and equipment, net

   $ 17,585      $ 16,597   

Long-term debt

   $ 29,030      $ 16,960   

Working capital

   $ 21,744      $ 29,628   
     Nine Months Ended  
     June 28, 2014     June 29, 2013  

Cash generated by operating activities

   $ 46,463      $ 43,758   

Cash used in investing activities

   $ (25,576   $ (34,385

Cash used in financing activities

   $ (22,169   $ (8,871

The Company believes its existing balances of cash, cash equivalents and marketable securities will be sufficient to satisfy its working capital needs, capital asset purchases, outstanding commitments, and other liquidity requirements associated with its existing operations over the next 12 months. To provide additional flexibility in managing liquidity, the Company began accessing the commercial paper markets in the third quarter of 2014. The Company currently anticipates the cash used for future dividends and the share repurchase program will come from its current domestic cash, cash generated from on-going U.S. operating activities and from borrowings.

 

 

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As of June 28, 2014 and September 28, 2013, $137.7 billion and $111.3 billion, respectively, of the Company’s cash, cash equivalents and marketable securities were held by foreign subsidiaries and generally based in U.S. dollar-denominated holdings. Amounts held by foreign subsidiaries are typically subject to U.S. income taxation on repatriation to the U.S. The Company’s marketable securities investment portfolio is invested primarily in highly-rated securities and its investment policy limits the amount of credit exposure to any one issuer. The policy generally requires investments to be investment grade with the objective of minimizing the potential risk of principal loss.

During the nine months ended June 28, 2014, cash generated from operating activities of $46.5 billion was a result of $31.0 billion of net income, non-cash adjustments to net income of $11.2 billion and an increase in net change in operating assets and liabilities of $4.2 billion. Cash used in investing activities of $25.6 billion during the nine months ended June 28, 2014 consisted primarily of cash used for purchases of marketable securities, net of sales and maturities, of $18.7 billion and cash used to acquire property, plant and equipment of $5.7 billion. Cash used in financing activities of $22.2 billion during the nine months ended June 28, 2014 consisted primarily of cash used to repurchase common stock of $28.0 billion and cash used to pay dividends and dividend equivalents of $8.3 billion, partially offset by proceeds from the issuance of long-term debt and commercial paper of $12.0 billion and $2.0 billion, respectively.

During the nine months ended June 29, 2013, cash generated from operating activities of $43.8 billion was a result of $29.5 billion of net income, non-cash adjustments to net income of $9.2 billion and an increase in net change in operating assets and liabilities of $5.0 billion. Cash used in investing activities of $34.4 billion during the nine months ended June 29, 2013 consisted primarily of cash used for purchases of marketable securities, net of sales and maturities, of $27.0 billion and cash used to acquire property, plant and equipment of $6.2 billion. Cash used in financing activities of $8.9 billion during the nine months ended June 29, 2013 consisted primarily of cash used to repurchase common stock of $18.0 billion and cash used to pay dividends and dividend equivalents of $7.8 billion, partially offset by net proceeds from the issuance of long-term debt of $16.9 billion.

Capital Assets

The Company’s capital expenditures were $6.2 billion during the first nine months of 2014 consisting of $341 million for retail store facilities and $5.9 billion for other capital expenditures, including product tooling and manufacturing process equipment, and other corporate facilities and infrastructure. The Company’s actual cash payments for capital expenditures during the first nine months of 2014 were $5.7 billion.

The Company anticipates utilizing approximately $11.0 billion for capital expenditures during 2014, including approximately $500 million for retail store facilities and approximately $10.5 billion for other capital expenditures, including product tooling and manufacturing process equipment, and corporate facilities and infrastructure, including information systems hardware, software and enhancements.

During 2014, the Company expects to open about 20 new retail stores, with approximately two-thirds located outside of the U.S. During 2014, the Company also expects to remodel approximately 15 of its existing stores.

Debt

In April 2014, the Board of Directors authorized the Company to issue unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. The Company intends to use net proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases. As of June 28, 2014, the Company had $2.0 billion of Commercial Paper outstanding, with a weighted average interest rate of 0.09% and maturities generally less than nine months.

In the third quarter of 2014 and 2013, the Company issued $12.0 billion and $17.0 billion of long-term debt, respectively. The debt issuances included floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $29.0 billion (collectively the “Notes”). The Company has entered, and may enter in the future, into interest rate swaps to manage interest rate risk on the Notes. Interest rate swaps allow the Company to effectively convert fixed-rate payments to floating-rate payments or floating-rate payments into fixed-rate payments. In the third quarter of 2014, the Company entered into interest rate swaps with an aggregate $9.0 billion notional, which effectively converted primarily all of the fixed-rate notes to a floating interest rate, and in the third quarter of 2013, the Company entered into interest rate swaps with an aggregate $3.0 billion notional, which effectively converted the floating-rate notes to a fixed interest rate.

 

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Capital Return Program

In April 2014, the Company’s Board of Directors increased the share repurchase program authorization from $60 billion to $90 billion of the Company’s common stock, of which $50.9 billion had been utilized as of June 28, 2014. The share repurchase program is expected to be completed by the end of December 2015. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. Under the program, shares may be repurchased in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.

The increase to the Company’s share repurchase program authorization resulted in a total capital return program of over $130 billion. The Company expects to complete the capital return program by the end of December 2015 by paying dividends and dividend equivalents, repurchasing shares, and remitting withheld taxes related to net share settlement of restricted stock units. To assist in funding its capital return program, the Company expects to access the public debt markets, both domestically and internationally.

The following table presents the Company’s dividends, dividend equivalents, share repurchases and net share settlement activity from the start of the capital return program in August 2012 through the third quarter of 2014 (in millions):

 

                                                                                                                                                
     Dividends  and
Dividend
Equivalents
Paid
     Accelerated
Share
Repurchases
     Open Market
Share
Repurchases
     Taxes Related to
Settlement of
Equity Awards
     Total  

2012

   $ 2,488       $ 0       $ 0       $ 56       $ 2,544   

2013

     10,564         13,950         9,000         1,082         34,596   

Q1 2014

     2,769         0         5,000         365         8,134   

Q2 2014

     2,661         12,000         6,000         65         20,726   

Q3 2014

     2,867         0         5,000         409         8,276   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 21,349       $