Apple
APPLE INC (Form: 10-Q, Received: 02/02/2018 09:07:16)
 
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 December 30, 2017
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
 
G66145G66I10.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.)
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       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  

5,074,013,000 shares of common stock, par value $0.00001 per share, issued and outstanding as of January 19, 2018
 



Apple Inc.

Form 10-Q
For the Fiscal Quarter Ended December 30, 2017
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
 
December 30,
2017
 
December 31,
2016
Net sales
$
88,293

 
$
78,351

Cost of sales
54,381

 
48,175

Gross margin
33,912

 
30,176

 
 
 
 
Operating expenses:
 
 
 
Research and development
3,407

 
2,871

Selling, general and administrative
4,231

 
3,946

Total operating expenses
7,638

 
6,817

 
 
 
 
Operating income
26,274

 
23,359

Other income/(expense), net
756


821

Income before provision for income taxes
27,030

 
24,180

Provision for income taxes
6,965

 
6,289

Net income
$
20,065

 
$
17,891

 
 
 
 
Earnings per share:
 
 
 
Basic
$
3.92

 
$
3.38

Diluted
$
3.89

 
$
3.36

 
 
 
 
Shares used in computing earnings per share:
 
 
 
Basic
5,112,877

 
5,298,661

Diluted
5,157,787

 
5,327,995

 
 
 
 
Cash dividends declared per share
$
0.63

 
$
0.57

See accompanying Notes to Condensed Consolidated Financial Statements.

Apple Inc. | Q1 2018 Form 10-Q | 1


Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In millions)
 
 
Three Months Ended
 
December 30,
2017
 
December 31,
2016
Net income
$
20,065

 
$
17,891

Other comprehensive income/(loss):
 
 
 
Change in foreign currency translation, net of tax effects of $(1) and $76, respectively
40

 
(375
)
 
 
 
 
Change in unrealized gains/losses on derivative instruments:
 
 
 
Change in fair value of derivatives, net of tax benefit/(expense) of $(66) and $(228), respectively
88

 
1,468

Adjustment for net (gains)/losses realized and included in net income, net of tax expense/(benefit) of $(21) and $(211), respectively
102

 
306

Total change in unrealized gains/losses on derivative instruments, net of tax
190

 
1,774

 
 
 
 
Change in unrealized gains/losses on marketable securities:
 
 
 
Change in fair value of marketable securities, net of tax benefit/(expense) of $464 and $989, respectively
(846
)
 
(1,808
)
Adjustment for net (gains)/losses realized and included in net income, net of tax expense/(benefit) of $41 and $(11), respectively
(75
)
 
20

Total change in unrealized gains/losses on marketable securities, net of tax
(921
)
 
(1,788
)
 
 
 
 
Total other comprehensive income/(loss)
(691
)
 
(389
)
Total comprehensive income
$
19,374

 
$
17,502

See accompanying Notes to Condensed Consolidated Financial Statements.

Apple Inc. | Q1 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)
 
 
December 30,
2017
 
September 30,
2017
ASSETS:
Current assets:
 
 
 
Cash and cash equivalents
$
27,491

 
$
20,289

Short-term marketable securities
49,662

 
53,892

Accounts receivable, less allowances of $59 and $58, respectively
23,440

 
17,874

Inventories
4,421

 
4,855

Vendor non-trade receivables
27,459

 
17,799

Other current assets
11,337

 
13,936

Total current assets
143,810

 
128,645

 
 
 
 
Long-term marketable securities
207,944

 
194,714

Property, plant and equipment, net
33,679

 
33,783

Goodwill
5,889

 
5,717

Acquired intangible assets, net
2,149

 
2,298

Other non-current assets
13,323

 
10,162

Total assets
$
406,794

 
$
375,319

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
 
 
 
Accounts payable
$
62,985

 
$
49,049

Accrued expenses
26,281

 
25,744

Deferred revenue
8,044

 
7,548

Commercial paper
11,980

 
11,977

Current portion of long-term debt
6,498

 
6,496

Total current liabilities
115,788

 
100,814

 
 
 
 
Deferred revenue, non-current
3,131

 
2,836

Long-term debt
103,922

 
97,207

Other non-current liabilities
43,754

 
40,415

Total liabilities
266,595

 
241,272

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Shareholders’ equity:
 
 
 
Common stock and additional paid-in capital, $0.00001 par value: 12,600,000 shares authorized; 5,081,651 and 5,126,201 shares issued and outstanding, respectively
36,447

 
35,867

Retained earnings
104,593

 
98,330

Accumulated other comprehensive income/(loss)
(841
)
 
(150
)
Total shareholders’ equity
140,199

 
134,047

Total liabilities and shareholders’ equity
$
406,794

 
$
375,319

See accompanying Notes to Condensed Consolidated Financial Statements.

Apple Inc. | Q1 2018 Form 10-Q | 3


Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions)
 
Three Months Ended
 
December 30,
2017
 
December 31,
2016
Cash and cash equivalents, beginning of the period
$
20,289

 
$
20,484

Operating activities:
 
 
 
Net income
20,065

 
17,891

Adjustments to reconcile net income to cash generated by operating activities:
 
 
 
Depreciation and amortization
2,745

 
2,987

Share-based compensation expense
1,296

 
1,256

Deferred income tax expense/(benefit)
(33,737
)
 
1,452

Other
(11
)
 
(274
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(5,570
)
 
1,697

Inventories
434

 
(580
)
Vendor non-trade receivables
(9,660
)
 
(375
)
Other current and non-current assets
(197
)
 
(1,446
)
Accounts payable
14,588

 
2,460

Deferred revenue
791

 
42

Other current and non-current liabilities
37,549

 
2,124

Cash generated by operating activities
28,293

 
27,234

Investing activities:
 
 
 
Purchases of marketable securities
(41,272
)
 
(54,272
)
Proceeds from maturities of marketable securities
14,048

 
6,525

Proceeds from sales of marketable securities
16,801

 
32,166

Payments made in connection with business acquisitions, net
(173
)
 
(17
)
Payments for acquisition of property, plant and equipment
(2,810
)
 
(3,334
)
Payments for acquisition of intangible assets
(154
)
 
(86
)
Payments for strategic investments, net
(94
)
 

Other
64

 
(104
)
Cash used in investing activities
(13,590
)
 
(19,122
)
Financing activities:
 
 
 
Payments for taxes related to net share settlement of equity awards
(1,038
)
 
(629
)
Payments for dividends and dividend equivalents
(3,339
)
 
(3,130
)
Repurchases of common stock
(10,095
)
 
(10,851
)
Proceeds from issuance of term debt, net
6,969

 

Change in commercial paper, net
2

 
2,385

Cash used in financing activities
(7,501
)
 
(12,225
)
Increase/(Decrease) in cash and cash equivalents
7,202

 
(4,113
)
Cash and cash equivalents, end of the period
$
27,491

 
$
16,371

Supplemental cash flow disclosure:
 
 
 
Cash paid for income taxes, net
$
3,551

 
$
3,510

Cash paid for interest
$
623

 
$
497

See accompanying Notes to Condensed Consolidated Financial Statements.

Apple Inc. | Q1 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, networking solutions and third-party digital content and applications. The Company’s products and services include iPhone ® , iPad ® , Mac ® , Apple Watch ® , Apple TV ® , a portfolio of consumer and professional software applications, iOS, macOS ® , watchOS ® and tvOS™ operating systems, iCloud ® , Apple Pay ® and a variety of 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 (“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. As a result of adoption, the Company will prospectively record any excess tax benefits or deficiencies from its equity awards as part of its 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 $178 million for the three months ended December 31, 2016.
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 unvested restricted stock units (“RSUs”), unvested restricted stock, outstanding stock options and shares to be purchased by employees under the Company’s employee stock purchase plan. 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.

Apple Inc. | Q1 2018 Form 10-Q | 5


The following table shows the computation of basic and diluted earnings per share for the three months ended December 30, 2017 and December 31, 2016 (net income in millions and shares in thousands):
 
Three Months Ended
 
December 30,
2017
 
December 31,
2016
Numerator:
 
 
 
Net income
$
20,065

 
$
17,891

 
 
 
 
Denominator:
 
 
 
Weighted-average shares outstanding
5,112,877

 
5,298,661

Effect of dilutive securities
44,910

 
29,334

Weighted-average diluted shares
5,157,787

 
5,327,995

 
 
 
 
Basic earnings per share
$
3.92

 
$
3.38

Diluted earnings per share
$
3.89

 
$
3.36

Potentially dilutive securities whose effect would have been antidilutive are excluded from the computation of diluted earnings per share.
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 December 30, 2017 and September 30, 2017 (in millions):
 
December 30, 2017
 
Adjusted
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Short-Term
Marketable
Securities
 
Long-Term
Marketable
Securities
Cash
$
9,529

 
$

 
$

 
$
9,529

 
$
9,529

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1 (1) :
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
8,570

 

 

 
8,570

 
8,570

 

 

Mutual funds
800

 

 
(92
)
 
708

 

 
708

 

Subtotal
9,370

 

 
(92
)
 
9,278

 
8,570

 
708

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2 (2) :
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
60,329

 
4

 
(502
)
 
59,831

 
2,268

 
13,661

 
43,902

U.S. agency securities
5,384

 

 
(22
)
 
5,362

 
1,376

 
1,980

 
2,006

Non-U.S. government securities
8,651

 
206

 
(60
)
 
8,797

 

 
223

 
8,574

Certificates of deposit and time deposits
6,307

 

 

 
6,307

 
2,237

 
3,064

 
1,006

Commercial paper
5,384

 

 

 
5,384

 
3,186

 
2,198

 

Corporate securities
157,043

 
506

 
(681
)
 
156,868

 
325

 
27,252

 
129,291

Municipal securities
971

 

 
(8
)
 
963

 

 
110

 
853

Mortgage- and asset-backed securities
23,052

 
17

 
(291
)
 
22,778

 

 
466

 
22,312

Subtotal
267,121

 
733

 
(1,564
)
 
266,290

 
9,392

 
48,954

 
207,944

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
286,020

 
$
733

 
$
(1,656
)
 
$
285,097

 
$
27,491

 
$
49,662

 
$
207,944



Apple Inc. | Q1 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.
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 Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature. 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 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. As of December 30, 2017 , 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 typically hedges portions of its forecasted foreign currency exposure associated with revenue and inventory purchases, typically for up to 12 months .

Apple Inc. | Q1 2018 Form 10-Q | 7


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.
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.
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 term debt or investments. The Company designates these instruments as either cash flow or fair value hedges. The Company’s hedged interest rate transactions as of December 30, 2017 are expected to be recognized within 10 years .
The Company may enter into foreign currency swaps to manage currency risk on its foreign currency-denominated term debt. These instruments may offset a portion of the foreign currency remeasurement gains or losses on the Company’s term debt and related interest payments. The Company designates these instruments as cash flow hedges. The Company’s hedged term debt-related foreign currency transactions as of December 30, 2017 are expected to be recognized within 25 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.
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. Amounts recognized in earnings related to non-designated derivatives were not significant for the three -month period ended December 30, 2017 . During the three -month period ended December 31, 2016 , the Company recognized gains of $273 million , $332 million and $508 million in net sales, cost of sales and other income/(expense), net, respectively.

Apple Inc. | Q1 2018 Form 10-Q | 8


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 December 30, 2017 and September 30, 2017 (in millions):
 
December 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
$
985

 
$
284

 
$
1,269

Interest rate contracts
$
100

 
$

 
$
100

 
 
 
 
 
 
Derivative liabilities (2) :
 
 
 
 
 
Foreign exchange contracts
$
460

 
$
283

 
$
743

Interest rate contracts
$
462

 
$

 
$
462

 
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. | Q1 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 months ended December 30, 2017 and December 31, 2016 (in millions):
 
Three Months Ended
 
December 30,
2017
 
December 31,
2016
Gains/(Losses) recognized in OCI – effective portion:
 
 
 
Cash flow hedges:
 
 
 
Foreign exchange contracts
$
153

 
$
1,727

Interest rate contracts
1

 
7

Total
$
154

 
$
1,734

 
 
 
 
Net investment hedges:
 
 
 
Foreign currency debt
$
2

 
$
122

 
 
 
 
Gains/(Losses) reclassified from AOCI into net income – effective portion:
 
 
 
Cash flow hedges:
 
 
 
Foreign exchange contracts
$
(124
)
 
$
(511
)
Interest rate contracts
1

 
(1
)
Total
$
(123
)
 
$
(512
)
 
 
 
 
Gains/(Losses) on derivative instruments:
 
 
 
Fair value hedges:
 
 
 
Interest rate contracts
$
(274
)
 
$
(872
)
 
 
 
 
Gains/(Losses) related to hedged items:
 
 
 
Fair value hedges:
 
 
 
Fixed-rate debt
$
274

 
$
872

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 December 30, 2017 and September 30, 2017 (in millions):
 
December 30, 2017
 
September 30, 2017
 
Notional
Amount
 
Credit Risk
Amount
 
Notional
Amount
 
Credit Risk
Amount
Instruments designated as accounting hedges:
 
 
 
 
 
 
 
Foreign exchange contracts
$
48,337

 
$
985

 
$
56,156

 
$
1,049

Interest rate contracts
$
35,250

 
$
100

 
$
33,000

 
$
218

 
 
 
 
 
 
 
 
Instruments not designated as accounting hedges:
 
 
 
 
 
 
 
Foreign exchange contracts
$
77,059

 
$
284

 
$
69,774

 
$
363

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.

Apple Inc. | Q1 2018 Form 10-Q | 10


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. The net cash collateral received by the Company related to derivative instruments under its collateral security arrangements was $230 million and $35 million as of December 30, 2017 and September 30, 2017 , respectively, which were recorded as accrued expenses in the Condensed Consolidated Balance Sheets.
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 December 30, 2017 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 $1.3 billion and $1.4 billion , respectively, resulting in a net derivative liability of $66 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 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.
As of December 30, 2017 , the Company had one customer that represented 10% or more of total trade receivables, which accounted for 11% . 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 57% and 59% of total trade receivables as of December 30, 2017 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 December 30, 2017 , the Company had one vendor that represented 10% or more of total vendor non-trade receivables, which accounted for 66% . 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% .
Note 3 – Condensed Consolidated Financial Statement Details
The following tables show the Company’s condensed consolidated financial statement details as of December 30, 2017 and September 30, 2017 (in millions):
Property, Plant and Equipment, Net
 
December 30,
2017
 
September 30,
2017
Land and buildings
$
14,189

 
$
13,587

Machinery, equipment and internal-use software
55,479

 
54,210

Leasehold improvements
7,442

 
7,279

Gross property, plant and equipment
77,110

 
75,076

Accumulated depreciation and amortization
(43,431
)
 
(41,293
)
Total property, plant and equipment, net
$
33,679

 
$
33,783


Apple Inc. | Q1 2018 Form 10-Q | 11


Other Non-Current Liabilities
 
December 30,
2017
 
September 30,
2017
Long-term taxes payable
$
34,913

 
$
257

Deferred tax liabilities
548

 
31,504

Other non-current liabilities
8,293

 
8,654

Total other non-current liabilities
$
43,754

 
$
40,415

Other Income/(Expense), Net
The following table shows the detail of other income/(expense), net for the three months ended December 30, 2017 and December 31, 2016 (in millions):
 
Three Months Ended
 
December 30,
2017
 
December 31,
2016
Interest and dividend income
$
1,452

 
$
1,224

Interest expense
(734
)
 
(525
)
Other income, net
38

 
122

Total other income/(expense), net
$
756

 
$
821

Note 4 – Acquired Intangible Assets
The Company’s acquired intangible assets with definite useful lives primarily consist of patents and licenses. The following table summarizes the components of acquired intangible asset balances as of December 30, 2017 and September 30, 2017 (in millions):
 
December 30, 2017
 
September 30, 2017
 
Gross
Carrying Amount
 
Accumulated
Amortization
 
Net
Carrying Amount
 
Gross
Carrying Amount
 
Accumulated
Amortization
 
Net
Carrying Amount
Definite-lived and amortizable acquired intangible assets
$
7,540

 
$
(5,491
)
 
$
2,049

 
$
7,507

 
$
(5,309
)
 
$
2,198

Indefinite-lived and non-amortizable acquired intangible assets
100

 

 
100

 
100

 

 
100

Total acquired intangible assets
$
7,640

 
$
(5,491
)
 
$
2,149

 
$
7,607

 
$
(5,309
)
 
$
2,298

Note 5 – Income Taxes
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 deferred foreign income. The Act also created a new minimum tax on certain future foreign earnings. During the first quarter of 2018, the Company recognized a provision for income taxes of $7.0 billion , of which $2.6 billion was considered a provisional estimate under the U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118. The Company’s provisional estimate of $2.6 billion included $1.8 billion related to the impact of remeasuring the Company’s deferred tax balances to reflect the new tax rate and approximately $800 million , net, associated with the deemed repatriation tax.
Deferred Tax Balances
The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse. In addition, the Company elected to record certain deferred tax assets and liabilities related to the minimum tax on certain future foreign earnings. The provisional estimate of $1.8 billion incorporates assumptions made based upon the best available interpretation of the Act and may change as the Company receives additional clarification and implementation guidance.

Apple Inc. | Q1 2018 Form 10-Q | 12


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. As a result of the deemed repatriation tax, which is based on the Company’s total post-1986 deferred foreign income, the Company replaced $36.1 billion of its U.S. deferred tax liability with a provisional tax payable of $38.0 billion . The 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. As a result, the final amount may change as the amounts are finalized. The Company plans to pay the tax payable in installments in accordance with the Act.
Unrecognized Tax Benefits
As of December 30, 2017 , the Company recorded gross unrecognized tax benefits of $9.0 billion . These gross unrecognized tax benefits have been offset by certain tax deposits and a $1.1 billion reduction for the estimated impact of the deemed repatriation tax, with the net unrecognized tax benefits classified as other non-current liabilities in the Condensed Consolidated Balance Sheets. Upon recognition, $7.7 billion of the unrecognized tax benefits would affect the Company’s effective tax rate. The Company had $1.4 billion of gross interest and penalties accrued as of December 30, 2017 , which is also classified as other non-current liabilities in the Condensed Consolidated Balance Sheets.
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 the resolution and/or closure of audits is not certain, the Company believes it is reasonably possible that its gross unrecognized tax benefits could decrease (whether by payment, release or a combination of both) in the next 12 months by as much as $2.9 billion .
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 orders Ireland to calculate and recover additional taxes from the Company for the period June 2003 through December 2014. 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. Although Ireland is still computing the recovery amount, the Company expects the amount to be in line with the European Commission’s announced recovery amount of €13 billion , plus interest of €1 billion . Once the recovery amount is finalized by Ireland, the Company anticipates funding it by placing amounts into escrow in 2018, pending conclusion of all appeals. 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.
Note 6 – 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 December 30, 2017 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 1.33% as of December 30, 2017 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 three months ended December 30, 2017 and December 31, 2016 (in millions):
 
Three Months Ended
 
December 30,
2017
 
December 31,
2016
Maturities less than 90 days:
 
 
 
Proceeds from/(Repayments of) commercial paper, net
$
1,621

 
$
1,550

 
 
 
 
Maturities greater than 90 days:
 
 
 
Proceeds from commercial paper
3,441

 
2,544

Repayments of commercial paper
(5,060
)
 
(1,709
)
Proceeds from/(Repayments of) commercial paper, net
(1,619
)
 
835

 
 
 
 
Total change in commercial paper, net
$
2

 
$
2,385


Apple Inc. | Q1 2018 Form 10-Q | 13


Term Debt
As of December 30, 2017 , the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $111.0 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. The following table provides a summary of the Company’s term debt as of December 30, 2017 and September 30, 2017 :
 
Maturities
 
December 30, 2017
 
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
2018
 
2018
 
$
2,000

 
 
1.10%
 
1.10
%
 
$
2,000

 
 
1.10%
 
1.10
%
Fixed-rate 1.000% – 3.850% notes
2018
2043
 
12,500

 
 
1.08%
3.91
%
 
12,500

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

 
 
1.69%
 
1.69
%
 
1,000

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

 
 
1.69%
4.48
%
 
8,500

 
 
1.61%
4.48
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2015 debt issuances of $27.3 billion:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating-rate notes
2019
2020
 
1,544

 
 
1.65%
1.87
%
 
1,549

 
 
1.56%
1.87
%
Fixed-rate 0.350% – 4.375% notes
2019
2045
 
24,555

 
 
0.28%
4.51
%
 
24,522

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

 
 
1.53%
2.59
%
 
1,350

 
 
1.45%
2.44
%
Fixed-rate 1.100% – 4.650% notes
2018
2046
 
23,635

 
 
1.13%
4.78
%
 
23,645

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

 
 
1.48%
1.90
%
 
3,250

 
 
1.38%
1.81
%
Fixed-rate 0.875% – 4.300% notes
2019
2047
 
25,699

 
 
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

 
 
 
 
1.93
%
 

 
 
 
 
%
Fixed-rate 2.750% notes
 
 
2025
 
1,500

 
 
 
 
2.77
%
 

 
 
 
 
%
Fixed-rate 3.000% notes
 
 
2027
 
1,500

 
 
 
 
2.13
%
 

 
 
 
 
%
Fixed-rate 3.750% notes
 
 
2047
 
1,250

 
 
 
 
3.80
%
 

 
 
 
 
%
Total term debt
 
 
 
 
111,033

 
 
 
 
 
 
104,021

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unamortized premium/(discount) and issuance costs, net
 
 
 
 
(246
)
 
 
 
 
 
 
(225
)
 
 
 
 
 
Hedge accounting fair value adjustments
 
 
 
 
(367
)
 
 
 
 
 
 
(93
)
 
 
 
 
 
Less: Current portion of long-term debt
 
 
 
 
(6,498
)
 
 
 
 
 
 
(6,496
)
 
 
 
 
 
Total long-term debt
 
 
 
 
$
103,922

 
 
 
 
 
 
$
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 December 30, 2017 and September 30, 2017 , the carrying value of the debt designated as a net investment hedge was $1.4 billion 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 $695 million and $509 million of interest expense on its term debt for the three months ended December 30, 2017 and December 31, 2016 , respectively.
As of December 30, 2017 and September 30, 2017 , the fair value of the Company’s Notes, based on Level 2 inputs, was $113.5 billion and $106.1 billion , respectively.

Apple Inc. | Q1 2018 Form 10-Q | 14


Note 7 – Shareholders’ Equity
Dividends
The Company declared and paid cash dividends per share during the periods presented as follows:
 
Dividends
Per Share
 
Amount
(in millions)
2018:
 
 
 
First quarter
$
0.63

 
$
3,232

 
 
 
 
2017:
 
 
 
Fourth quarter
$
0.63

 
$
3,252

Third quarter
0.63

 
3,281

Second quarter
0.57

 
2,988

First quarter
0.57

 
3,042

Total cash dividends declared and paid
$
2.40

 
$
12,563

Future dividends are subject to declaration by the Board of Directors.
Share Repurchase Program
In May 2017 , the Company’s Board of Directors increased the share repurchase authorization from $175 billion to $210 billion of the Company’s common stock, of which $176 billion had been utilized as of December 30, 2017 . 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, and in the future may enter, into accelerated share repurchase arrangements (“ASRs”) with financial institutions. 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, is 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 Sheets 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.
The following table shows the Company’s ASR activity and related information during the three months ended December 30, 2017 and the year ended September 30, 2017 :
 
Purchase Period
End Date
 
Number of Shares
(in thousands)
 
Average Repurchase
Price Per Share
 
ASR Amount
(in millions)
November 2017 ASR
February 2018
 
23,602

(1)  
(1)  

 
$
5,000

August 2017 ASR
November 2017
 
18,887

(2)  
$
158.84

 
$
3,000

May 2017 ASR
August 2017
 
20,108

 
$
149.20

 
$
3,000

February 2017 ASR
May 2017
 
20,949

 
$
143.20

 
$
3,000

November 2016 ASR
February 2017
 
51,157

 
$
117.29

 
$
6,000

August 2016 ASR
November 2016
 
26,850

 
$
111.73

 
$
3,000

(1)
“Number of Shares” represents those shares delivered at the beginning of the purchase period and does not represent the final number of shares to be delivered under the 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 purchase period based on the volume-weighted average price of the Company’s common stock during that period. The November 2017 ASR purchase period will end in February 2018.
(2)
Includes 15.1 million shares delivered and retired at the beginning of the purchase period, which began in the fourth quarter of 2017, and 3.8 million shares delivered and retired at the end of the purchase period, which concluded in the first quarter of 2018.

Apple Inc. | Q1 2018 Form 10-Q | 15


Additionally, 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)
2018:
 
 
 
 
 
First quarter
30,181

 
$
169.26

 
$
5,109

 
 
 
 
 
 
2017:
 
 
 
 
 
Fourth quarter
29,073

 
$
154.78

 
$
4,500

Third quarter
30,356

 
$
148.24

 
4,500

Second quarter
31,070

 
$
128.74

 
4,001

First quarter
44,333

 
$
112.78

 
5,000

Total open market common stock repurchases
134,832

 
 
 
$
18,001

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.
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 months ended December 30, 2017 and December 31, 2016 (in millions):
 
 
 
 
Three Months Ended
Comprehensive Income Components
 
Financial Statement Line Item
 
December 30,
2017
 
December 31,
2016
Unrealized (gains)/losses on derivative instruments:
 
 
 
 
 
 
Foreign exchange contracts
 
Net sales
 
$
184

 
$
(101
)
 
 
Cost of sales
 
(27
)
 
13

 
 
Other income/(expense), net
 
(33
)
 
604

Interest rate contracts
 
Other income/(expense), net
 
(1
)
 
1

 
 
 
 
123

 
517

Unrealized (gains)/losses on marketable securities
 
Other income/(expense), net
 
(116
)
 
31

Total amounts reclassified from AOCI
 
$
7

 
$
548

The following table shows the changes in AOCI by component for the three months ended December 30, 2017 (in millions):
 
Cumulative Foreign
Currency Translation
 
Unrealized Gains/Losses
on Derivative Instruments
 
Unrealized Gains/Losses
on Marketable Securities
 
Total
Balances as of September 30, 2017
$
(354
)
 
$
(124
)
 
$
328

 
$
(150
)
Other comprehensive income/(loss) before reclassifications
41

 
154

 
(1,310
)
 
(1,115
)
Amounts reclassified from AOCI

 
123

 
(116
)
 
7

Tax effect
(1
)
 
(87
)
 
505

 
417

Other comprehensive income/(loss)
40

 
190

 
(921
)
 
(691
)
Balances as of December 30, 2017
$
(314
)
 
$
66

 
$
(593
)
 
$
(841
)

Apple Inc. | Q1 2018 Form 10-Q | 16


Note 9 – Benefit Plans
Stock Plans
The Company had 273.4 million shares reserved for future issuance under its stock plans as of December 30, 2017 . RSUs granted generally vest over four years , based on continued employment, and are settled upon vesting in shares of the Company’s common stock on a one -for-one basis. Each share issued with respect to RSUs granted under the Company’s stock plans reduces the number of shares available for grant under the plan by two shares. RSUs canceled and shares withheld to satisfy tax withholding obligations increase the number of shares available for grant under the plans utilizing a factor of two times the number of RSUs canceled or shares withheld.
Rule 10b5-1 Trading Plans
During the three months ended December 30, 2017 , Section 16 officers Angela Ahrendts, Timothy D. Cook, Luca Maestri, Daniel Riccio and Philip Schiller 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 three months ended December 30, 2017 is as follows:
 
Number of
RSUs
(in thousands)
 
Weighted-Average
Grant Date Fair
Value Per Share
 
Aggregate
Fair Value
(in millions)
Balance as of September 30, 2017
97,571

 
$
110.33

 
 
RSUs granted
35,853

 
$
157.49

 
 
RSUs vested
(19,741
)
 
$
102.40

 
 
RSUs canceled
(1,316
)
 
$
121.76

 
 
Balance as of December 30, 2017
112,367

 
$
126.64

 
$
19,016

The fair value as of the respective vesting dates of RSUs was $3.1 billion and $2.2 billion for the three months ended December 30, 2017 and December 31, 2016 , respectively.
Share-Based Compensation
The following table shows a summary of the share-based compensation expense included in the Condensed Consolidated Statements of Operations for the three months ended December 30, 2017 and December 31, 2016 (in millions): 
 
Three Months Ended
 
December 30,
2017
 
December 31,
2016
Cost of sales
$
252

 
$
229

Research and development
646

 
589

Selling, general and administrative
398

 
438

Total share-based compensation expense
$
1,296

 
$
1,256

The income tax benefit related to share-based compensation expense was $631 million and $465 million for the three months ended December 30, 2017 and December 31, 2016 , respectively. As of December 30, 2017 , the total unrecognized compensation cost related to outstanding RSUs, restricted stock and stock options was $12.1 billion , which the Company expects to recognize over a weighted-average period of 2.9 years .

Apple Inc. | Q1 2018 Form 10-Q | 17


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 months ended December 30, 2017 and December 31, 2016 (in millions):
 
Three Months Ended
 
December 30,
2017
 
December 31,
2016
Beginning accrued warranty and related costs
$
3,834

 
$
3,702

Cost of warranty claims
(982
)
 
(1,337
)
Accruals for product warranty
1,471

 
2,333

Ending accrued warranty and related costs
$
4,323

 
$
4,698

Agreements entered into by the Company sometimes include indemnification provisions which may subject the Company to costs and damages in the event of a claim against 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, or a material loss in excess of a recorded accrual, with respect to indemnification of third parties.
The Company offers an iPhone Upgrade Program, which is available to customers who purchase a qualifying iPhone in the U.S., the U.K. and mainland China. The iPhone Upgrade Program provides customers the right to trade in that iPhone for a specified amount when purchasing a new iPhone, provided certain conditions are met. The Company accounts for the trade-in right as a guarantee liability and recognizes arrangement revenue net of the fair value of such right, with subsequent changes to the guarantee liability recognized within revenue.
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 of the Company 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. While the Company maintains directors and officers liability insurance coverage, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise.
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 few 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 decide to concentrate 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.

Apple Inc. | Q1 2018 Form 10-Q | 18


Substantially all of the Company’s hardware products are manufactured by outsourcing partners that are located primarily in Asia, with some Mac computers manufactured in the U.S. and Ireland. 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 manufacturing purchase obligations typically cover its requirements for periods up to 150 days .
Other Off-Balance Sheet Commitments
Operating Leases
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. As of December 30, 2017 , the Company’s total future minimum lease payments under noncancelable operating leases were $9.6 billion . The Company’s retail store and other facility leases typically have original terms not exceeding 10 years and generally contain multi-year renewal options.
Unconditional Purchase Obligations
The Company has entered into certain off-balance sheet arrangements which require the future purchase of goods or services (“Unconditional Purchase Obligations”). The Company’s Unconditional Purchase Obligations primarily consist of payments for supplier arrangements, internet and telecommunication services and intellectual property licenses. As of December 30, 2017 , the Company’s total future payments under noncancelable Unconditional Purchase Obligations having a remaining term in excess of one year were $8.7 billion .
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, as further 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 for asserted legal and other claims. 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 District Court entered final judgment in favor of the Company in the amount of approximately $930 million . On May 18, 2015, the U.S. Court of Appeals for the Federal Circuit affirmed in part, and reversed in part, the decision of the District Court. As a result, the Court of Appeals ordered entry of final judgment on damages in the amount of approximately $548 million , with the District Court to determine supplemental damages and interest, as well as damages owed for products subject to the reversal in part. Samsung paid $548 million to the Company in December 2015, which was included in net sales in the Condensed Consolidated Statement of Operations. On December 6, 2016, the U.S. Supreme Court remanded the case to the U.S. Court of Appeals for the Federal Circuit for further proceedings related to the $548 million in damages. On February 7, 2017, the U.S. Court of Appeals for the Federal Circuit remanded the case to the District Court to determine what additional proceedings, if any, are needed. On October 22, 2017, on remand from the U.S. Supreme Court, the District Court ordered a new trial on damages.
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 segments consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. Americas includes both North and South America. Europe includes European countries, as well as India, the Middle East and Africa. Greater China includes China, Hong Kong and Taiwan. Rest of Asia Pacific includes Australia and those Asian countries not included in the Company’s other reportable segments. Although the reportable segments provide similar hardware and software products and similar services, each one is managed separately to better align with the location of the Company’s customers and distribution partners and the unique market dynamics of each geographic region. 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 2017 Form 10-K.

Apple Inc. | Q1 2018 Form 10-Q | 19


The Company evaluates the performance of its reportable segments based on net sales and operating income. Net sales for geographic segments are generally based on the location of customers and sales through the Company’s retail stores located in those geographic locations. 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 reportable segments. Costs excluded from segment operating income include various corporate expenses such as research and development, corporate marketing expenses, certain share-based compensation expenses, income taxes, various nonrecurring charges and other separately managed general and administrative costs. The Company does not include intercompany transfers between segments for management reporting purposes.
The following table shows information by reportable segment for the three months ended December 30, 2017 and December 31, 2016 (in millions):
 
Three Months Ended
 
December 30,
2017
 
December 31,
2016
Americas:
 
 
 
Net sales
$
35,193

 
$
31,968

Operating income
$
11,316

 
$
10,494

 
 
 
 
Europe:
 
 
 
Net sales
$ </