Apple
APPLE INC (Form: 10-Q, Received: 08/01/2018 16:36:12)
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to              .
Commission File Number: 001-36743
 
G66145G66I19.JPG
Apple Inc.
(Exact name of Registrant as specified in its charter)
 
California
 
94-2404110
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
One Apple Park Way
Cupertino, California
 
95014
(Address of principal executive offices)
 
(Zip Code)
(408) 996-1010
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes       No  
Indicate by check mark whether the Registrant has submitted electronically 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       No  
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
 
Accelerated filer
 
Non-accelerated filer
 
(Do not check if a smaller reporting company)
 
Smaller reporting company
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes       No  

4,829,926,000 shares of common stock, par value $0.00001 per share, issued and outstanding as of July 20, 2018
 



Apple Inc.

Form 10-Q
For the Fiscal Quarter Ended June 30, 2018
TABLE OF CONTENTS

 
Page



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 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Net sales
$
53,265

 
$
45,408

 
$
202,695

 
$
176,655

Cost of sales
32,844

 
27,920

 
124,940

 
108,400

Gross margin
20,421

 
17,488

 
77,755

 
68,255

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Research and development
3,701

 
2,937

 
10,486

 
8,584

Selling, general and administrative
4,108

 
3,783

 
12,489

 
11,447

Total operating expenses
7,809

 
6,720

 
22,975

 
20,031

 
 
 
 
 
 
 
 
Operating income
12,612

 
10,768

 
54,780

 
48,224

Other income/(expense), net
672


540


1,702


1,948

Income before provision for income taxes
13,284

 
11,308

 
56,482

 
50,172

Provision for income taxes
1,765

 
2,591

 
11,076

 
12,535

Net income
$
11,519

 
$
8,717

 
$
45,406

 
$
37,637

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
2.36

 
$
1.68

 
$
9.07

 
$
7.18

Diluted
$
2.34

 
$
1.67

 
$
8.99

 
$
7.14

 
 
 
 
 
 
 
 
Shares used in computing earnings per share:
 
 
 
 
 
 
 
Basic
4,882,167

 
5,195,088

 
5,006,640

 
5,239,847

Diluted
4,926,609

 
5,233,499

 
5,050,963

 
5,274,394

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.73

 
$
0.63

 
$
1.99

 
$
1.77

See accompanying Notes to Condensed Consolidated Financial Statements.

Apple Inc. | Q3 2018 Form 10-Q | 1


Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In millions)
 
 
Three Months Ended
 
Nine Months Ended
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Net income
$
11,519

 
$
8,717

 
$
45,406

 
$
37,637

Other comprehensive income/(loss):
 
 
 
 
 
 
 
Change in foreign currency translation, net of tax effects of $(3), $(35), $4 and $(3), respectively
(590
)
 
120

 
(287
)
 
(41
)
 
 
 
 
 
 
 
 
Change in unrealized gains/losses on derivative instruments:
 
 
 
 
 
 
 
Change in fair value of derivatives, net of tax benefit/(expense) of $70, $(16), $(60) and $(269), respectively
109

 
(166
)
 
170

 
1,002

Adjustment for net (gains)/losses realized and included in net income, net of tax expense/(benefit) of $(254), $176, $(198) and $276, respectively
978

 
(409
)
 
873

 
(1,135
)
Total change in unrealized gains/losses on derivative instruments, net of tax
1,087

 
(575
)
 
1,043

 
(133
)
 
 
 
 
 
 
 
 
Change in unrealized gains/losses on marketable securities:
 
 
 
 
 
 
 
Change in fair value of marketable securities, net of tax benefit/(expense) of $154, $(197), $1,159 and $536, respectively
(568
)
 
364

 
(3,417
)
 
(980
)
Adjustment for net (gains)/losses realized and included in net income, net of tax expense/(benefit) of $(7), $16, $27 and $12, respectively
24

 
(32
)
 
(22
)
 
(25
)
Total change in unrealized gains/losses on marketable securities, net of tax
(544
)
 
332

 
(3,439
)
 
(1,005
)
 
 
 
 
 
 
 
 
Total other comprehensive income/(loss)
(47
)
 
(123
)
 
(2,683
)
 
(1,179
)
Total comprehensive income
$
11,472

 
$
8,594

 
$
42,723

 
$
36,458

See accompanying Notes to Condensed Consolidated Financial Statements.

Apple Inc. | Q3 2018 Form 10-Q | 2


Apple Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In millions, except number of shares which are reflected in thousands and par value)
 
 
June 30,
2018
 
September 30,
2017
ASSETS:
Current assets:
 
 
 
Cash and cash equivalents
$
31,971

 
$
20,289

Short-term marketable securities
38,999

 
53,892

Accounts receivable, net
14,104

 
17,874

Inventories
5,936

 
4,855

Vendor non-trade receivables
12,263

 
17,799

Other current assets
12,488

 
13,936

Total current assets
115,761

 
128,645

 
 
 
 
Long-term marketable securities
172,773

 
194,714

Property, plant and equipment, net
38,117

 
33,783

Other non-current assets
22,546

 
18,177

Total assets
$
349,197

 
$
375,319

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
 
 
 
Accounts payable
$
38,489

 
$
49,049

Accrued expenses
25,184

 
25,744

Deferred revenue
7,403

 
7,548

Commercial paper
11,974

 
11,977

Current portion of long-term debt
5,498

 
6,496

Total current liabilities
88,548

 
100,814

 
 
 
 
Deferred revenue, non-current
2,878

 
2,836

Long-term debt
97,128

 
97,207

Other non-current liabilities
45,694

 
40,415

Total liabilities
234,248

 
241,272

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Shareholders’ equity:
 
 
 
Common stock and additional paid-in capital, $0.00001 par value: 12,600,000 shares authorized; 4,842,917 and 5,126,201 shares issued and outstanding, respectively
38,624

 
35,867

Retained earnings
79,436

 
98,330

Accumulated other comprehensive income/(loss)
(3,111
)
 
(150
)
Total shareholders’ equity
114,949

 
134,047

Total liabilities and shareholders’ equity
$
349,197

 
$
375,319

See accompanying Notes to Condensed Consolidated Financial Statements.

Apple Inc. | Q3 2018 Form 10-Q | 3


Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions)
 
Nine Months Ended
 
June 30,
2018
 
July 1,
2017
Cash and cash equivalents, beginning of the period
$
20,289

 
$
20,484

Operating activities:
 
 
 
Net income
45,406

 
37,637

Adjustments to reconcile net income to cash generated by operating activities:
 
 
 
Depreciation and amortization
8,149

 
7,673

Share-based compensation expense
3,995

 
3,666

Deferred income tax expense/(benefit)
(33,109
)
 
4,764

Other
(410
)
 
(142
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
3,756

 
3,381

Inventories
(1,114
)
 
(1,014
)
Vendor non-trade receivables
5,536

 
3,312

Other current and non-current assets
(65
)
 
(3,229
)
Accounts payable
(11,139
)
 
(5,212
)
Deferred revenue
(103
)
 
(418
)
Other current and non-current liabilities
37,009

 
(1,942
)
Cash generated by operating activities
57,911

 
48,476

Investing activities:
 
 
 
Purchases of marketable securities
(56,133
)
 
(123,781
)
Proceeds from maturities of marketable securities
46,290

 
19,347

Proceeds from sales of marketable securities
41,614

 
76,747

Payments for acquisition of property, plant and equipment
(10,272
)
 
(8,586
)
Payments made in connection with business acquisitions, net
(431
)
 
(248
)
Purchases of non-marketable securities
(1,788
)
 
(213
)
Proceeds from non-marketable securities
310

 
126

Other
(523
)
 
104

Cash generated by/(used in) investing activities
19,067

 
(36,504
)
Financing activities:
 
 
 
Proceeds from issuance of common stock
328

 
274

Payments for taxes related to net share settlement of equity awards
(2,267
)
 
(1,646
)
Payments for dividends and dividend equivalents
(10,182
)
 
(9,499
)
Repurchases of common stock
(53,634
)
 
(25,105
)
Proceeds from issuance of term debt, net
6,969

 
21,725

Repayments of term debt
(6,500
)
 
(3,500
)
Change in commercial paper, net
(10
)
 
3,866

Cash used in financing activities
(65,296
)
 
(13,885
)
Increase/(Decrease) in cash and cash equivalents
11,682

 
(1,913
)
Cash and cash equivalents, end of the period
$
31,971

 
$
18,571

Supplemental cash flow disclosure:
 
 
 
Cash paid for income taxes, net
$
8,819

 
$
9,752

Cash paid for interest
$
2,120

 
$
1,456

See accompanying Notes to Condensed Consolidated Financial Statements.

Apple Inc. | Q3 2018 Form 10-Q | 4


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 and personal computers, and sells a variety of related software, services, accessories and third-party digital content and applications. The Company’s products and services include iPhone ® , iPad ® , Mac ® , Apple Watch ® , AirPods ® , Apple TV ® , HomePod™, a portfolio of consumer and professional software applications, iOS, macOS ® , watchOS ® and tvOS™ operating systems, iCloud ® , Apple Pay ® and a variety of other accessory, service and support offerings. The Company sells and delivers digital content and applications through the iTunes Store ® , App Store ® , Mac App Store, TV App Store, iBooks Store ® and Apple Music ® (collectively “Digital Content and Services”). 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 resellers. In addition, the Company sells a variety of third-party Apple-compatible products, including application software and various accessories through its retail and online 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. In the opinion of the Company’s management, the condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The preparation of these condensed consolidated financial statements 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. Certain prior period amounts in the condensed consolidated financial statements and accompanying notes have been reclassified to conform to the current period’s presentation. These condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s annual consolidated financial statements and the notes thereto included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2017 (the “ 2017 Form 10-K”).
The Company’s fiscal year is the 52- or 53-week period that ends on the last Saturday of September. The first quarter of 2018 spanned 13 weeks, whereas a 14th week was added to the first fiscal quarter of 2017, as is done every five or six years, to realign the Company’s fiscal quarters with calendar quarters. Unless otherwise stated, references to particular years, quarters, months and periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years.
Share-Based Compensation
During the first quarter of 2018, the Company adopted the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which modified certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards and classification in the statement of cash flows. Historically, excess tax benefits or deficiencies from the Company’s equity awards were recorded as additional paid-in capital in its Condensed Consolidated Balance Sheets and were classified as a financing activity in its Condensed Consolidated Statements of Cash Flows. Beginning in 2018, the Company records any excess tax benefits or deficiencies from its equity awards as part of the provision for income taxes in its Condensed Consolidated Statements of Operations in the reporting periods in which equity vesting occurs. The Company elected to apply the cash flow classification requirements related to excess tax benefits retrospectively to all periods presented, which resulted in an increase to cash generated by operating activities in the Condensed Consolidated Statements of Cash Flows of $534 million for the nine months ended July 1, 2017 .

Apple Inc. | Q3 2018 Form 10-Q | 5


Earnings Per Share
The following table shows the computation of basic and diluted earnings per share for the three- and nine-month periods ended June 30, 2018 and July 1, 2017 (net income in millions and shares in thousands):
 
Three Months Ended
 
Nine Months Ended
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Numerator:
 
 
 
 
 
 
 
Net income
$
11,519

 
$
8,717

 
$
45,406

 
$
37,637

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted-average basic shares outstanding
4,882,167

 
5,195,088

 
5,006,640

 
5,239,847

Effect of dilutive securities
44,442

 
38,411

 
44,323

 
34,547

Weighted-average diluted shares
4,926,609

 
5,233,499

 
5,050,963

 
5,274,394

 
 
 
 
 
 
 
 
Basic earnings per share
$
2.36

 
$
1.68

 
$
9.07

 
$
7.18

Diluted earnings per share
$
2.34

 
$
1.67

 
$
8.99

 
$
7.14

Note 2 – Financial Instruments
Cash, Cash Equivalents and Marketable Securities
The following tables show the Company’s cash and available-for-sale securities by significant investment category as of June 30, 2018 and September 30, 2017 (in millions):
 
June 30, 2018
 
Adjusted
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Short-Term
Marketable
Securities
 
Long-Term
Marketable
Securities
Cash
$
9,973

 
$

 
$

 
$
9,973

 
$
9,973

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1 (1) :
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
7,722

 

 

 
7,722

 
7,722

 

 

Mutual funds
799

 

 
(112
)
 
687

 

 
687

 

Subtotal
8,521

 

 
(112
)
 
8,409

 
7,722

 
687

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2 (2) :
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
47,056

 
1

 
(1,055
)
 
46,002

 
350

 
7,262

 
38,390

U.S. agency securities
6,994

 

 
(44
)
 
6,950

 
4,477

 
483

 
1,990

Non-U.S. government securities
11,774

 
40

 
(282
)
 
11,532

 

 
1,124

 
10,408

Certificates of deposit and time deposits
5,662

 

 

 
5,662

 
3,649

 
1,412

 
601

Commercial paper
7,064

 

 

 
7,064

 
5,653

 
1,411

 

Corporate securities
130,945

 
129

 
(2,246
)
 
128,828

 
147

 
25,874

 
102,807

Municipal securities
956

 

 
(8
)
 
948

 

 
172

 
776

Mortgage- and asset-backed securities
18,919

 
9

 
(553
)
 
18,375

 

 
574

 
17,801

Subtotal
229,370

 
179

 
(4,188
)
 
225,361

 
14,276

 
38,312

 
172,773

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total (3)
$
247,864

 
$
179

 
$
(4,300
)
 
$
243,743

 
$
31,971

 
$
38,999

 
$
172,773


Apple Inc. | Q3 2018 Form 10-Q | 6


 
September 30, 2017
 
Adjusted
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Short-Term
Marketable
Securities
 
Long-Term
Marketable
Securities
Cash
$
7,982

 
$

 
$

 
$
7,982

 
$
7,982

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1 (1) :
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
6,534

 

 

 
6,534

 
6,534

 

 

Mutual funds
799

 

 
(88
)
 
711

 

 
711

 

Subtotal
7,333

 

 
(88
)
 
7,245

 
6,534

 
711

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2 (2) :
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
55,254

 
58

 
(230
)
 
55,082

 
865

 
17,228

 
36,989

U.S. agency securities
5,162

 
2

 
(9
)
 
5,155

 
1,439

 
2,057

 
1,659

Non-U.S. government securities
7,827

 
210

 
(37
)
 
8,000

 
9

 
123

 
7,868

Certificates of deposit and time deposits
5,832

 

 

 
5,832

 
1,142

 
3,918

 
772

Commercial paper
3,640

 

 

 
3,640

 
2,146

 
1,494

 

Corporate securities
152,724

 
969

 
(242
)
 
153,451

 
172

 
27,591

 
125,688

Municipal securities
961

 
4

 
(1
)
 
964

 

 
114

 
850

Mortgage- and asset-backed securities
21,684

 
35

 
(175
)
 
21,544

 

 
656

 
20,888

Subtotal
253,084

 
1,278

 
(694
)
 
253,668

 
5,773

 
53,181

 
194,714

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
268,399

 
$
1,278

 
$
(782
)
 
$
268,895

 
$
20,289

 
$
53,892

 
$
194,714

(1)
Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities.
(2)
Level 2 fair value estimates are 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.
(3)
As of June 30, 2018 , total cash, cash equivalents and marketable securities included $8.8 billion , related to the State Aid Decision (see Note 4, “Income Taxes”) and other agreements, which was restricted from general use.
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 maturities of the Company’s long-term marketable securities generally range from one to five years .
The following tables show information about the Company’s marketable securities that had been in a continuous unrealized loss position for less than 12 months and for 12 months or greater as of June 30, 2018 and September 30, 2017 (in millions):
 
June 30, 2018
 
Continuous Unrealized Losses
 
Less than 12 Months
 
12 Months or Greater
 
Total
Fair value of marketable securities
$
150,468

 
$
36,960

 
$
187,428

Unrealized losses
$
(3,134
)
 
$
(1,166
)
 
$
(4,300
)
 
September 30, 2017
 
Continuous Unrealized Losses
 
Less than 12 Months
 
12 Months or Greater
 
Total
Fair value of marketable securities
$
101,986

 
$
8,290

 
$
110,276

Unrealized losses
$
(596
)
 
$
(186
)
 
$
(782
)

Apple Inc. | Q3 2018 Form 10-Q | 7


The Company typically invests in highly rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The policy generally requires securities 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. As of June 30, 2018 , the Company does not consider any of its investments to be other-than-temporarily impaired.
Derivative Financial Instruments
The Company may use derivatives to partially offset its business exposure to foreign currency and interest rate 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 may hedge a portion of forecasted foreign currency revenue, and 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 may enter into forward contracts, option contracts or other instruments to manage this risk and may designate these instruments as cash flow hedges. The Company generally 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. In addition, the Company may use non-derivative financial instruments, such as its foreign currency–denominated debt, as economic hedges of its net investments in certain foreign subsidiaries. In both of these cases, the Company designates these instruments as net investment hedges.
To help protect the Company’s foreign currency–denominated term debt or marketable securities from fluctuations in foreign currency exchange rates, the Company may enter into forward contracts, cross-currency swaps or other instruments. These instruments may offset a portion of the foreign currency remeasurement gains or losses, or changes in fair value. The Company may designate these instruments as either cash flow or fair value hedges. As of June 30, 2018 , the Company’s hedged term debt– and marketable securities–related foreign currency transactions are expected to be recognized within 24 years .
The Company may also enter into non-designated foreign currency contracts to partially offset the foreign currency exchange gains and losses generated by the remeasurement of certain assets and liabilities denominated in non-functional currencies.
To help protect the Company’s foreign currency–denominated term debt or marketable securities from fluctuations in interest rates, the Company may enter into interest rate swaps, options or other instruments. These instruments may offset a portion of the changes in interest income or expense, or changes in fair value. The Company designates these instruments as either cash flow or fair value hedges. As of June 30, 2018 , the Company’s hedged interest rate transactions are expected to be recognized within 9 years .
Cash Flow Hedges
The effective portions of cash flow hedges are recorded in accumulated other comprehensive income/(loss) (“AOCI”) until the hedged item is recognized in earnings. 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 in other income/(expense), net in the same period as the related income or expense is recognized. The ineffective portions and amounts excluded from the effectiveness testing of cash flow hedges are recognized in other income/(expense), net.
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 into other income/(expense), net in the period of de-designation. Any subsequent changes in fair value of such derivative instruments are reflected in other income/(expense), net unless they are re-designated as hedges of other transactions.

Apple Inc. | Q3 2018 Form 10-Q | 8


Net Investment Hedges
The effective portions of net investment hedges are recorded in other comprehensive income/(loss) (“OCI”) as a part of the cumulative translation adjustment. The ineffective portions and amounts excluded from the effectiveness testing of net investment hedges are recognized in other income/(expense), net.
Fair Value Hedges
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.
Non-Designated Derivatives
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. As a result, during the three- and nine-month periods ended June 30, 2018 , respectively, the Company recognized a gain of $135 million and a loss of $7 million in net sales, a gain of $151 million and a loss of $61 million in cost of sales and a gain of $254 million and a loss of $119 million in other income/(expense), net. During the three- and nine-month periods ended July 1, 2017 , respectively, the Company recognized a loss of $77 million and a gain of $129 million in net sales, gains of $12 million and $91 million in cost of sales and gains of $49 million and $481 million in other income/(expense), net.
The Company records all derivatives in the Condensed Consolidated Balance Sheets at fair value. The Company’s accounting treatment for these derivative instruments is based on its hedge designation. The following tables show the Company’s derivative instruments at gross fair value as of June 30, 2018 and September 30, 2017 (in millions):
 
June 30, 2018
 
Fair Value of
Derivatives Designated
as Hedge Instruments
 
Fair Value of
Derivatives Not Designated
as Hedge Instruments
 
Total
Fair Value
Derivative assets (1) :
 
 
 
 
 
Foreign exchange contracts
$
850

 
$
385

 
$
1,235

Interest rate contracts
$

 
$

 
$

 
 
 
 
 
 
Derivative liabilities (2) :
 
 
 
 
 
Foreign exchange contracts
$
357

 
$
221

 
$
578

Interest rate contracts
$
1,271

 
$

 
$
1,271

 
September 30, 2017
 
Fair Value of
Derivatives Designated
as Hedge Instruments
 
Fair Value of
Derivatives Not Designated
as Hedge Instruments
 
Total
Fair Value
Derivative assets  (1) :
 
 
 
 
 
Foreign exchange contracts
$
1,049

 
$
363

 
$
1,412

Interest rate contracts
$
218

 
$

 
$
218

 
 
 
 
 
 
Derivative liabilities (2) :
 
 
 
 
 
Foreign exchange contracts
$
759

 
$
501

 
$
1,260

Interest rate contracts
$
303

 
$

 
$
303

(1)
The fair value of derivative assets is measured using Level 2 fair value inputs and is recorded as other current assets and other non-current assets in the Condensed Consolidated Balance Sheets.
(2)
The fair value of derivative liabilities is measured using Level 2 fair value inputs and is recorded as accrued expenses and other non-current liabilities in the Condensed Consolidated Balance Sheets.

Apple Inc. | Q3 2018 Form 10-Q | 9


The following table shows the pre-tax gains and losses of the Company’s derivative and non-derivative instruments designated as cash flow, net investment and fair value hedges in OCI and the Condensed Consolidated Statements of Operations for the three- and nine-month periods ended June 30, 2018 and July 1, 2017 (in millions):
 
Three Months Ended
 
Nine Months Ended
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Gains/(Losses) recognized in OCI – effective portion:
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
Foreign exchange contracts
$
40

 
$
(143
)
 
$
230

 
$
1,267

Interest rate contracts

 
(2
)
 
1

 
7

Total
$
40

 
$
(145
)
 
$
231

 
$
1,274

 
 
 
 
 
 
 
 
Net investment hedges:
 
 
 
 
 
 
 
Foreign currency debt
$
13

 
$
16

 
$
(18
)
 
$
53

 
 
 
 
 
 
 
 
Gains/(Losses) reclassified from AOCI into net income – effective portion:
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
Foreign exchange contracts
$
(1,231
)
 
$
585

 
$
(1,068
)
 
$
1,418

Interest rate contracts

 

 
3

 
(3
)
Total
$
(1,231
)
 
$
585

 
$
(1,065
)
 
$
1,415

 
 
 
 
 
 
 
 
Gains/(Losses) on derivative instruments:
 
 
 
 
 
 
 
Fair value hedges:
 
 
 
 
 
 
 
Foreign exchange contracts
$
31

 
$

 
$
31

 
$

Interest rate contracts
(230
)
 
185

 
(1,178
)
 
(737
)
Total
$
(199
)
 
$
185

 
$
(1,147
)
 
$
(737
)
 
 
 
 
 
 
 
 
Gains/(Losses) related to hedged items:
 
 
 
 
 
 
 
Fair value hedges:
 
 
 
 
 
 
 
Marketable securities
$
(31
)
 
$

 
$
(31
)
 
$

Fixed-rate debt
230

 
(185
)
 
1,178

 
737

Total
$
199

 
$
(185
)
 
$
1,147

 
$
737

The following table shows the notional amounts of the Company’s outstanding derivative instruments and credit risk amounts associated with outstanding or unsettled derivative instruments as of June 30, 2018 and September 30, 2017 (in millions):
 
June 30, 2018
 
September 30, 2017
 
Notional
Amount
 
Credit Risk
Amount
 
Notional
Amount
 
Credit Risk
Amount
Instruments designated as accounting hedges:
 
 
 
 
 
 
 
Foreign exchange contracts
$
36,807

 
$
850

 
$
56,156

 
$
1,049

Interest rate contracts
$
33,250

 
$

 
$
33,000

 
$
218

 
 
 
 
 
 
 
 
Instruments not designated as accounting hedges:
 
 
 
 
 
 
 
Foreign exchange contracts
$
50,936

 
$
385

 
$
69,774

 
$
363


Apple Inc. | Q3 2018 Form 10-Q | 10


The notional 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 exposure to credit loss and market risk will vary over time as currency and interest rates change. Although the table above reflects the notional 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.
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 in its Condensed Consolidated Balance Sheets. As of June 30, 2018 , the net cash collateral posted by the Company related to derivative instruments under its collateral security arrangements was $211 million , which was recorded as other current assets in the Condensed Consolidated Balance Sheet. As of September 30, 2017 , the net cash collateral received by the Company related to derivative instruments under its collateral security arrangements was $35 million , which was recorded as accrued expenses in the Condensed Consolidated Balance Sheet.
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. As of June 30, 2018 and September 30, 2017 , 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 $1.5 billion and $1.4 billion , respectively, resulting in a net derivative liability of $403 million and a net derivative asset of $32 million , respectively.
Accounts Receivable
Trade Receivables
The Company has considerable trade receivables outstanding with its third-party cellular network carriers, wholesalers, retailers, resellers, small and mid-sized businesses and education, enterprise and government customers. The Company generally does not require collateral from its customers; however, the Company will require collateral or third-party credit support in certain instances to limit credit risk. In addition, when possible, the Company attempts to limit credit risk on trade receivables with credit insurance for certain customers or by requiring third-party financing, loans or leases to support credit exposure. These credit-financing arrangements are directly between the third-party financing company and the end customer. As such, the Company generally does not assume any recourse or credit risk sharing related to any of these arrangements.
The Company had no customers that individually represented 10% or more of total trade receivables as of June 30, 2018 . As of September 30, 2017 , the Company had two customers that individually represented 10% or more of total trade receivables, each of which accounted for 10% . The Company’s cellular network carriers accounted for 45% and 59% of total trade receivables as of June 30, 2018 and September 30, 2017 , respectively.
Vendor Non-Trade Receivables
The Company has non-trade receivables from certain of its manufacturing vendors resulting from the sale of components to these vendors who manufacture sub-assemblies or assemble final products for the Company. The Company purchases these components directly from suppliers. As of June 30, 2018 , the Company had three vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 54% , 12% and 11% . As of September 30, 2017 , the Company had three vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 42% , 19% and 10% .

Apple Inc. | Q3 2018 Form 10-Q | 11


Note 3 – Condensed Consolidated Financial Statement Details
The following tables show the Company’s condensed consolidated financial statement details as of June 30, 2018 and September 30, 2017 (in millions):
Inventories
 
June 30,
2018
 
September 30,
2017
Components
$
4,287

 
$
3,025

Finished goods
1,649

 
1,830

Total inventories
$
5,936

 
$
4,855

Property, Plant and Equipment, Net
 
June 30,
2018
 
September 30,
2017
Land and buildings
$
15,409

 
$
13,587

Machinery, equipment and internal-use software
62,060

 
54,210

Leasehold improvements
7,899

 
7,279

Gross property, plant and equipment
85,368

 
75,076

Accumulated depreciation and amortization
(47,251
)
 
(41,293
)
Total property, plant and equipment, net
$
38,117

 
$
33,783

Other Non-Current Liabilities
 
June 30,
2018
 
September 30,
2017
Long-term taxes payable
$
34,029

 
$
257

Deferred tax liabilities
398

 
31,504

Other non-current liabilities
11,267

 
8,654

Total other non-current liabilities
$
45,694

 
$
40,415

Other Income/(Expense), Net
The following table shows the detail of other income/(expense), net for the three- and nine-month periods ended June 30, 2018 and July 1, 2017 (in millions):
 
Three Months Ended
 
Nine Months Ended
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Interest and dividend income
$
1,418

 
$
1,327

 
$
4,375

 
$
3,833

Interest expense
(846
)
 
(602
)
 
(2,372
)
 
(1,657
)
Other income/(expense), net
100

 
(185
)
 
(301
)
 
(228
)
Total other income/(expense), net
$
672

 
$
540

 
$
1,702

 
$
1,948


Apple Inc. | Q3 2018 Form 10-Q | 12


Note 4 – Income Taxes
U.S. Tax Cuts and Jobs Act and Provisional Estimates
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on previously deferred foreign income. The Act also created a new minimum tax on certain future foreign earnings. During the first quarter of 2018, the Company’s income tax expense included a provisional estimate of $2.6 billion in accordance with the U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118. This $2.6 billion provisional estimate included $1.8 billion related to the impact of remeasuring the Company’s deferred tax balances to reflect the new lower tax rate, and approximately $800 million associated with the net impact of the deemed repatriation tax. During the third quarter of 2018, the Company reduced its estimate of the deemed repatriation tax by $1.0 billion and adjusted the estimated impact of the deemed repatriation tax on unrecognized tax benefits by $700 million , resulting in the reduction of the Company’s provisional estimate from $2.6 billion to $900 million . The adjustments to the provisional estimate for the deemed repatriation tax and unrecognized tax benefits are discussed below and their impact was included in the Company’s income tax expense during the third quarter of 2018.
Deferred Tax Balances
As a result of the Act, the Company remeasured certain deferred tax assets and liabilities based on the revised rates at which they are expected to reverse, including items for which the related income tax effects were originally recognized in OCI. In addition, the Company elected to record certain deferred tax assets and liabilities related to the new minimum tax on certain future foreign earnings. The provisional estimate of $1.8 billion noted above incorporates assumptions based upon the best available interpretation of the Act and may change as the Company receives additional clarification and implementation guidance.
During the second quarter of 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). ASU 2018-02 allows an entity to elect to reclassify the income tax effects of the Act on items within AOCI to retained earnings. The Company elected to apply the provision of ASU 2018-02 at the beginning of the second quarter of 2018 with a reclassification of net tax benefits related to cumulative foreign currency translation and unrealized gains/losses on derivative instruments and marketable securities, resulting in a $278 million decrease in AOCI and a corresponding increase in retained earnings in the Condensed Consolidated Balance Sheet.
Deemed Repatriation Tax
As of September 30, 2017, the Company had a U.S. deferred tax liability of $36.4 billion for deferred foreign income. During the first quarter of 2018 the Company replaced $36.1 billion of its U.S. deferred tax liability with a provisional deemed repatriation tax payable of $38.0 billion , which was based on the Company’s cumulative post-1986 deferred foreign income. The Company’s estimate of the deemed repatriation tax is based, in part, on the amount of cash and other specified assets anticipated to be held by the Company’s foreign subsidiaries as of September 29, 2018. Therefore, the provisional tax payable is subject to change as the asset amounts are finalized. During the third quarter of 2018, the Company reduced its provisional tax payable by $1.0 billion to $37.0 billion due, in part, to revised estimates of the amount of cash and other specified assets anticipated to be held by the Company’s foreign subsidiaries as of September 29, 2018. The Company plans to pay the tax in installments in accordance with the Act.
Unrecognized Tax Benefits
As of June 30, 2018 , the Company had gross unrecognized tax benefits of $9.4 billion . These gross unrecognized tax benefits have been offset by certain tax deposits and reduced by the estimated impact of the deemed repatriation tax. As of December 30, 2017, the estimated impact of the deemed repatriation tax on unrecognized tax benefits was $1.1 billion . During the third quarter of 2018, the Company increased the estimated impact of the deemed repatriation tax on unrecognized tax benefits by $700 million , resulting in a revised total estimated impact of $1.8 billion . Upon recognition, $7.3 billion of the unrecognized tax benefits would impact the Company’s effective tax rate. The Company had accrued $1.3 billion of gross interest and penalties as of June 30, 2018 . Both the net unrecognized tax benefits and the interest and penalties are classified as other non-current liabilities in the Condensed Consolidated Balance Sheet.

Apple Inc. | Q3 2018 Form 10-Q | 13


The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. The U.S. Internal Revenue Service concluded its review of the years 2013 through 2015 during the third quarter of 2018. All years prior to 2016 are now closed. The Company is also subject to audits by state, local and foreign tax authorities. In major states and major foreign jurisdictions, the years subsequent to 2003 generally remain open and could be subject to examination by the taxing authorities. The Company 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 inconsistent with its expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although timing of resolution and/or closure of audits is not certain, the Company believes it is reasonably possible that its gross unrecognized tax benefits could decrease (either by payment, release or a combination of both) in the next 12 months by as much as $500 million .
European Commission State Aid Decision
On August 30, 2016, the European Commission announced its decision that Ireland granted state aid to the Company by providing tax opinions in 1991 and 2007 concerning the tax allocation of profits of the Irish branches of two subsidiaries of the Company (the “State Aid Decision”). The State Aid Decision ordered Ireland to calculate and recover additional taxes from the Company for the period June 2003 through December 2014. The recovery amount was calculated to be €13 billion , plus interest of €1 billion . Irish legislative changes, effective as of January 2015, eliminated the application of the tax opinions from that date forward. The Company believes the State Aid Decision to be without merit and appealed to the General Court of the Court of Justice of the European Union. Ireland has also appealed the State Aid Decision. The Company believes that any incremental Irish corporate income taxes potentially due related to the State Aid Decision would be creditable against U.S. taxes, subject to any foreign tax credit limitations in the Act. During the third quarter of 2018, the Company began funding amounts into escrow, where they will remain pending conclusion of all appeals. As of June 30, 2018 , €4.5 billion of the recovery amount was funded into escrow and was restricted from general use. Refer to Note 2, “Financial Instruments” for more information. Subsequent to June 30, 2018, the Company has funded an additional €4.5 billion of the recovery amount into escrow.
Note 5 – Debt
Commercial Paper
The Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. The Company uses net proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases. As of both June 30, 2018 and September 30, 2017 , the Company had $12.0 billion of Commercial Paper outstanding with maturities generally less than nine months . The weighted-average interest rate of the Company’s Commercial Paper was 2.03% as of June 30, 2018 and 1.20% as of September 30, 2017 . The following table provides a summary of cash flows associated with the issuance and maturities of Commercial Paper for the nine months ended June 30, 2018 and July 1, 2017 (in millions):
 
Nine Months Ended
 
June 30,
2018
 
July 1,
2017
Maturities 90 days or less:
 
 
 
Proceeds from/(Repayments of) commercial paper, net
$
2,619

 
$
(143
)
 
 
 
 
Maturities greater than 90 days:
 
 
 
Proceeds from commercial paper
9,782

 
12,633

Repayments of commercial paper
(12,411
)
 
(8,624
)
Proceeds from/(Repayments of) commercial paper, net
(2,629
)
 
4,009

 
 
 
 
Total change in commercial paper, net
$
(10
)
 
$
3,866

Term Debt
As of June 30, 2018 , the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $104.1 billion (collectively the “Notes”). The Notes are senior unsecured obligations, and interest is payable in arrears, quarterly for the U.S. dollar–denominated and Australian dollar–denominated floating-rate notes, semi-annually for the U.S. dollar–denominated, Australian dollar–denominated, British pound–denominated, Japanese yen–denominated and Canadian dollar–denominated fixed-rate notes and annually for the euro-denominated and Swiss franc–denominated fixed-rate notes.

Apple Inc. | Q3 2018 Form 10-Q | 14


The following table provides a summary of the Company’s term debt as of June 30, 2018 and September 30, 2017 :
 
Maturities
 
June 30, 2018
 
September 30, 2017
 
Amount
(in millions)
 
Effective
Interest Rate
 
Amount
(in millions)
 
Effective
Interest Rate
2013 debt issuance of $17.0 billion:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating-rate notes
 
 
 
$

 
 
 
 
%
 
$
2,000

 
 
1.10%
 
1.10
%
Fixed-rate 2.400% – 3.850% notes
2023
2043
 
8,500

 
 
2.44%
3.91
%
 
12,500

 
 
1.08%
3.91
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014 debt issuance of $12.0 billion:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating-rate notes
2019
 
2019
 
1,000

 
 
2.66%
 
2.66
%
 
1,000

 
 
1.61%
 
1.61
%
Fixed-rate 2.100% – 4.450% notes
2019
2044
 
8,500

 
 
2.66%
4.48
%
 
8,500

 
 
1.61%
4.48
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2015 debt issuances of $27.3 billion:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating-rate notes
2019
2020
 
1,517

 
 
1.87%
2.66
%
 
1,549

 
 
1.56%
1.87
%
Fixed-rate 0.350% – 4.375% notes
2019
2045
 
24,395

 
 
0.28%
4.51
%
 
24,522

 
 
0.28%
4.51
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016 debt issuances of $24.9 billion:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating-rate notes
2019
2021
 
1,350

 
 
2.50%
3.46
%
 
1,350

 
 
1.45%
2.44
%
Fixed-rate 1.100% – 4.650% notes
2019
2046
 
23,079

 
 
1.13%
4.78
%
 
23,645

 
 
1.13%
4.78
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2017 debt issuances of $28.7 billion:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating-rate notes
2019
2022
 
3,250

 
 
2.43%
2.87
%
 
3,250

 
 
1.38%
1.81
%
Fixed-rate 0.875% – 4.300% notes
2019
2047
 
25,533

 
 
1.54%
4.30
%
 
25,705

 
 
1.51%
4.30
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First quarter 2018 debt issuance of $7.0 billion:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate 1.800% notes
 
 
2019
 
1,000

 
 
 
 
1.83
%
 

 
 
 
 
%
Fixed-rate 2.000% notes
 
 
2020
 
1,000

 
 
 
 
2.03
%
 

 
 
 
 
%
Fixed-rate 2.400% notes
 
 
2023
 
750

 
 
 
 
2.66
%
 

 
 
 
 
%
Fixed-rate 2.750% notes
 
 
2025
 
1,500

 
 
 
 
2.77
%
 

 
 
 
 
%
Fixed-rate 3.000% notes
 
 
2027
 
1,500

 
 
 
 
3.07
%
 

 
 
 
 
%
Fixed-rate 3.750% notes
 
 
2047
 
1,250

 
 
 
 
3.80
%
 

 
 
 
 
%
Total term debt
 
 
 
 
104,124

 
 
 
 
 
 
104,021

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unamortized premium/(discount) and issuance costs, net
 
 
 
 
(227
)
 
 
 
 
 
 
(225
)
 
 
 
 
 
Hedge accounting fair value adjustments
 
 
 
 
(1,271
)
 
 
 
 
 
 
(93
)
 
 
 
 
 
Less: Current portion of long-term debt
 
 
 
 
(5,498
)
 
 
 
 
 
 
(6,496
)
 
 
 
 
 
Total long-term debt
 
 
 
 
$
97,128

 
 
 
 
 
 
$
97,207

 
 
 
 
 
To manage interest rate risk on certain of its U.S. dollar–denominated fixed- or floating-rate notes, the Company has entered into interest rate swaps to effectively convert the fixed interest rates to floating interest rates or the floating interest rates to fixed interest rates on a portion of these notes. Additionally, to manage foreign currency risk on certain of its foreign currency–denominated notes, the Company has entered into foreign currency swaps to effectively convert these notes to U.S. dollar–denominated notes.
A portion of the Company’s Japanese yen–denominated notes is designated as a hedge of the foreign currency exposure of the Company’s net investment in a foreign operation. As of June 30, 2018 and September 30, 2017 , the carrying value of the debt designated as a net investment hedge was $349 million and $1.6 billion , respectively. For further discussion regarding the Company’s use of derivative instruments, see the Derivative Financial Instruments section of Note 2, “Financial Instruments.”
The effective interest rates for the Notes include the interest on the Notes, amortization of the discount or premium and, if applicable, adjustments related to hedging. The Company recognized $780 million and $2.2 billion of interest expense on its term debt for the three- and nine-month periods ended June 30, 2018 , respectively. The Company recognized $574 million and $1.6 billion of interest expense on its term debt for the three- and nine-month periods ended July 1, 2017 , respectively.
As of June 30, 2018 and September 30, 2017 , the fair value of the Company’s Notes, based on Level 2 inputs, was $103.1 billion and $106.1 billion , respectively.

Apple Inc. | Q3 2018 Form 10-Q | 15


Note 6 – Shareholders’ Equity
Share Repurchase Program
During the third quarter of 2018, the Company repurchased 112.8 million shares of its common stock for $20.0 billion in connection with two separate share repurchase programs. Of the $20.0 billion , $10.4 billion was repurchased under the Company’s previous share repurchase program of up to $210 billion , thereby completing that program. On May 1, 2018, the Company announced the Board of Directors had authorized a new program to repurchase up to $100 billion of the Company’s common stock. The remaining $9.6 billion repurchased during the third quarter of 2018 was in connection with the new share repurchase program. The Company’s new share repurchase program does not obligate it to acquire any specific number of shares. Under this 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”).
Note 7 – 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.
The following table shows the pre-tax 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 30, 2018 and July 1, 2017 (in millions):
 
 
 
 
Three Months Ended
 
Nine Months Ended
Comprehensive Income Components
 
Financial Statement Line Item
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Unrealized (gains)/losses on derivative instruments:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Net sales
 
$
162

 
$
(148
)
 
$
433

 
$
(657
)
 
 
Cost of sales
 
206

 
(73
)
 
200

 
(630
)
 
 
Other income/(expense), net
 
864

 
(364
)
 
441

 
(127
)
Interest rate contracts
 
Other income/(expense), net
 

 

 
(3
)
 
3

 
 
 
 
1,232

 
(585
)
 
1,071

 
(1,411
)
Unrealized (gains)/losses on marketable securities
 
Other income/(expense), net
 
31

 
(48
)
 
(49
)
 
(37
)
Total amounts reclassified from AOCI
 
$
1,263

 
$
(633
)
 
$
1,022

 
$
(1,448
)
The following table shows the changes in AOCI by component for the nine months ended June 30, 2018 (in millions):