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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 28, 2019
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             .
Commission File Number: 001-36743
 
g66145g66i41.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)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, $0.00001 par value per share
AAPL
The Nasdaq Stock Market LLC
1.000% Notes due 2022
—
The Nasdaq Stock Market LLC
1.375% Notes due 2024
—
The Nasdaq Stock Market LLC
0.000% Notes due 2025
—
The Nasdaq Stock Market LLC
0.875% Notes due 2025
—
The Nasdaq Stock Market LLC
1.625% Notes due 2026
—
The Nasdaq Stock Market LLC
2.000% Notes due 2027
—
The Nasdaq Stock Market LLC
1.375% Notes due 2029
—
The Nasdaq Stock Market LLC
3.050% Notes due 2029
—
The Nasdaq Stock Market LLC
0.500% Notes due 2031
—
The Nasdaq Stock Market LLC
3.600% Notes due 2042
—
The Nasdaq Stock Market LLC
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  ☒    No  ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
Yes  ☒    No  ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
☒
 
Accelerated filer
 
☐
Non-accelerated filer
 
☐
 
Smaller reporting company
 
☐
 
 
 
 
Emerging growth company
 
☐
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

4,375,480,000 shares of common stock were issued and outstanding as of January 17, 2020.
 


Apple Inc.

Form 10-Q
For the Fiscal Quarter Ended December 28, 2019
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 28,
2019
 
December 29,
2018
Net sales:
 
 
 
   Products
$
79,104

 
$
73,435

   Services
12,715

 
10,875

Total net sales
91,819

 
84,310

 
 
 
 
Cost of sales:
 
 
 
   Products
52,075

 
48,238

   Services
4,527

 
4,041

Total cost of sales
56,602

 
52,279

Gross margin
35,217

 
32,031

 
 
 
 
Operating expenses:
 
 
 
Research and development
4,451

 
3,902

Selling, general and administrative
5,197

 
4,783

Total operating expenses
9,648

 
8,685

 
 
 
 
Operating income
25,569

 
23,346

Other income/(expense), net
349

 
560

Income before provision for income taxes
25,918

 
23,906

Provision for income taxes
3,682

 
3,941

Net income
$
22,236

 
$
19,965

 
 
 
 
Earnings per share:
 
 
 
Basic
$
5.04

 
$
4.22

Diluted
$
4.99

 
$
4.18

 
 
 
 
Shares used in computing earnings per share:
 
 
 
Basic
4,415,040

 
4,735,820

Diluted
4,454,604

 
4,773,252

See accompanying Notes to Condensed Consolidated Financial Statements.

Apple Inc. | Q1 2020 Form 10-Q | 1

Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In millions)

 
Three Months Ended
 
December 28,
2019
 
December 29,
2018
Net income
$
22,236

 
$
19,965

Other comprehensive income/(loss):
 
 
 
Change in foreign currency translation, net of tax
202

 
(78
)
 
 
 
 
Change in unrealized gains/losses on derivative instruments, net of tax:
 
 
 
Change in fair value of derivatives
111

 
(334
)
Adjustment for net (gains)/losses realized and included in net income
(398
)
 
42

Total change in unrealized gains/losses on derivative instruments
(287
)
 
(292
)
 
 
 
 
Change in unrealized gains/losses on marketable securities, net of tax:
 
 
 
Change in fair value of marketable securities
125

 
110

Adjustment for net (gains)/losses realized and included in net income
(10
)
 
37

Total change in unrealized gains/losses on marketable securities
115

 
147

 
 
 
 
Total other comprehensive income/(loss)
30

 
(223
)
Total comprehensive income
$
22,266

 
$
19,742

See accompanying Notes to Condensed Consolidated Financial Statements.

Apple Inc. | Q1 2020 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 28,
2019
 
September 28,
2019
ASSETS:
Current assets:
 
 
 
Cash and cash equivalents
$
39,771

 
$
48,844

Marketable securities
67,391

 
51,713

Accounts receivable, net
20,970

 
22,926

Inventories
4,097

 
4,106

Vendor non-trade receivables
18,976

 
22,878

Other current assets
12,026

 
12,352

Total current assets
163,231

 
162,819

 
 
 
 
Non-current assets:
 
 
 
Marketable securities
99,899

 
105,341

Property, plant and equipment, net
37,031

 
37,378

Other non-current assets
40,457

 
32,978

Total non-current assets
177,387

 
175,697

Total assets
$
340,618

 
$
338,516

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
 
 
 
Accounts payable
$
45,111

 
$
46,236

Other current liabilities
36,263

 
37,720

Deferred revenue
5,573

 
5,522

Commercial paper
4,990

 
5,980

Term debt
10,224

 
10,260

Total current liabilities
102,161

 
105,718

 
 
 
 
Non-current liabilities:
 
 
 
Term debt
93,078

 
91,807

Other non-current liabilities
55,848

 
50,503

Total non-current liabilities
148,926

 
142,310

Total liabilities
251,087

 
248,028

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Shareholders’ equity:
 
 
 
Common stock and additional paid-in capital, $0.00001 par value: 12,600,000 shares authorized; 4,384,959 and 4,443,236 shares issued and outstanding, respectively
45,972

 
45,174

Retained earnings
43,977

 
45,898

Accumulated other comprehensive income/(loss)
(418
)
 
(584
)
Total shareholders’ equity
89,531

 
90,488

Total liabilities and shareholders’ equity
$
340,618

 
$
338,516

See accompanying Notes to Condensed Consolidated Financial Statements.

Apple Inc. | Q1 2020 Form 10-Q | 3

Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
(In millions, except per share amounts)

 
Three Months Ended
 
December 28,
2019
 
December 29,
2018
Total shareholders’ equity, beginning balances
$
90,488

 
$
107,147

 
 
 
 
Common stock and additional paid-in capital:
 
 
 
Beginning balances
45,174

 
40,201

Common stock issued
2

 
—

Common stock withheld related to net share settlement of equity awards
(951
)
 
(822
)
Share-based compensation
1,747

 
1,591

Ending balances
45,972

 
40,970

 
 
 
 
Retained earnings:
 
 
 
Beginning balances
45,898

 
70,400

Net income
22,236

 
19,965

Dividends and dividend equivalents declared
(3,485
)
 
(3,526
)
Common stock withheld related to net share settlement of equity awards
(536
)
 
(594
)
Common stock repurchased
(20,000
)
 
(8,236
)
Cumulative effects of changes in accounting principles
(136
)
 
2,501

Ending balances
43,977

 
80,510

 
 
 
 
Accumulated other comprehensive income/(loss):
 
 
 
Beginning balances
(584
)
 
(3,454
)
Other comprehensive income/(loss)
30

 
(223
)
Cumulative effects of changes in accounting principles
136

 
89

Ending balances
(418
)
 
(3,588
)
 
 
 
 
Total shareholders’ equity, ending balances
$
89,531

 
$
117,892

 
 
 
 
Dividends and dividend equivalents declared per share or RSU
$
0.77

 
$
0.73

See accompanying Notes to Condensed Consolidated Financial Statements.

Apple Inc. | Q1 2020 Form 10-Q | 4

Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions)
 
Three Months Ended
 
December 28,
2019
 
December 29,
2018
Cash, cash equivalents and restricted cash, beginning balances
$
50,224

 
$
25,913

Operating activities:
 
 
 
Net income
22,236

 
19,965

Adjustments to reconcile net income to cash generated by operating activities:
 
 
 
Depreciation and amortization
2,816

 
3,395

Share-based compensation expense
1,710

 
1,559

Deferred income tax expense/(benefit)
(349
)
 
53

Other
(142
)
 
(54
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
2,015

 
5,130

Inventories
(28
)
 
(1,076
)
Vendor non-trade receivables
3,902

 
6,905

Other current and non-current assets
(7,054
)
 
(886
)
Accounts payable
(1,089
)
 
(8,501
)
Deferred revenue
985

 
(370
)
Other current and non-current liabilities
5,514

 
570

Cash generated by operating activities
30,516

 
26,690

Investing activities:
 
 
 
Purchases of marketable securities
(37,416
)
 
(7,077
)
Proceeds from maturities of marketable securities
19,740

 
7,203

Proceeds from sales of marketable securities
7,280

 
9,723

Payments for acquisition of property, plant and equipment
(2,107
)
 
(3,355
)
Payments made in connection with business acquisitions, net
(958
)
 
(167
)
Purchases of non-marketable securities
(77
)
 
(427
)
Other
(130
)
 
(56
)
Cash generated by/(used in) investing activities
(13,668
)
 
5,844

Financing activities:
 
 
 
Proceeds from issuance of common stock
2

 
—

Payments for taxes related to net share settlement of equity awards
(1,379
)
 
(1,318
)
Payments for dividends and dividend equivalents
(3,539
)
 
(3,568
)
Repurchases of common stock
(20,706
)
 
(8,796
)
Proceeds from issuance of term debt, net
2,210

 
—

Repayments of term debt
(1,000
)
 
—

Proceeds from/(Repayments of) commercial paper, net
(979
)
 
6

Other
(16
)
 
—

Cash used in financing activities
(25,407
)
 
(13,676
)
Increase/(Decrease) in cash, cash equivalents and restricted cash
(8,559
)
 
18,858

Cash, cash equivalents and restricted cash, ending balances
$
41,665

 
$
44,771

Supplemental cash flow disclosure:
 
 
 
Cash paid for income taxes, net
$
4,393

 
$
4,916

Cash paid for interest
$
771

 
$
836

See accompanying Notes to Condensed Consolidated Financial Statements.

Apple Inc. | Q1 2020 Form 10-Q | 5

Apple Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 – Summary of Significant Accounting Policies
Basis of Presentation and Preparation
The condensed consolidated financial statements include the accounts of Apple Inc. and its wholly owned subsidiaries (collectively “Apple” or the “Company”). Intercompany accounts and transactions have been eliminated. In the opinion of the Company’s management, the condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The preparation of these condensed consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ materially from those estimates. These condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s annual consolidated financial statements and accompanying notes included in its Annual Report on Form 10-K for the fiscal year ended September 28, 2019 (the “2019 Form 10-K”).
The Company’s fiscal year is the 52- or 53-week period that ends on the last Saturday of September. A 14th week is included in the first fiscal quarter every five or six years to realign the Company’s fiscal quarters with calendar quarters. The Company’s fiscal years 2020 and 2019 span 52 weeks each. Unless otherwise stated, references to particular years, quarters, months and periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years.
Recently Adopted Accounting Pronouncements
Leases
At the beginning of the first quarter of 2020, the Company adopted the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), and additional ASUs issued to clarify and update the guidance in ASU 2016-02 (collectively, the “new leases standard”), which modifies lease accounting for lessees to increase transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements. The Company adopted the new leases standard utilizing the modified retrospective transition method, under which amounts in prior periods presented were not restated. For contracts existing at the time of adoption, the Company elected to not reassess (i) whether any are or contain leases, (ii) lease classification, and (iii) initial direct costs. Upon adoption, the Company recorded $7.5 billion of right-of-use (“ROU”) assets and $8.1 billion of lease liabilities on its Condensed Consolidated Balance Sheet.
Hedging
At the beginning of the first quarter of 2020, the Company adopted FASB ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 expands component and fair value hedging, specifies the presentation of the effects of hedging instruments, eliminates the separate measurement and presentation of hedge ineffectiveness, and updates disclosure requirements related to hedging. The Company adopted ASU 2017-12 utilizing the modified retrospective transition method. Upon adoption, the Company recorded a $136 million increase in accumulated other comprehensive income/(loss) (“AOCI”) and a corresponding decrease in retained earnings in the Condensed Consolidated Statement of Shareholders’ Equity.

Apple Inc. | Q1 2020 Form 10-Q | 6

Earnings Per Share
The following table shows the computation of basic and diluted earnings per share for the three months ended December 28, 2019 and December 29, 2018 (net income in millions and shares in thousands):
 
Three Months Ended
 
December 28,
2019
 
December 29,
2018
Numerator:
 
 
 
Net income
$
22,236

 
$
19,965

 
 
 
 
Denominator:
 
 
 
Weighted-average basic shares outstanding
4,415,040

 
4,735,820

Effect of dilutive securities
39,564

 
37,432

Weighted-average diluted shares
4,454,604

 
4,773,252

 
 
 
 
Basic earnings per share
$
5.04

 
$
4.22

Diluted earnings per share
$
4.99

 
$
4.18


Potentially dilutive securities representing 28.8 million shares of common stock were excluded from the computation of diluted earnings per share for the three months ended December 29, 2018, because their effect would have been antidilutive.
Note 2 – Revenue Recognition
Net sales consist of revenue from the sale of iPhone®, Mac®, iPad®, Services and other products. The Company recognizes revenue at the amount to which it expects to be entitled when control of the products or services is transferred to its customers. Control is generally transferred when the Company has a present right to payment and title and the significant risks and rewards of ownership of products or services are transferred to its customers. For most of the Company’s Products net sales, control transfers when products are shipped. For the Company’s Services net sales, control transfers over time as services are delivered. Payment for Products and Services net sales is collected within a short period following transfer of control or commencement of delivery of services, as applicable.
The Company records reductions to Products net sales related to future product returns, price protection and other customer incentive programs based on the Company’s expectations and historical experience.
For arrangements with multiple performance obligations, which represent promises within an arrangement that are capable of being distinct, the Company allocates revenue to all distinct performance obligations based on their relative stand-alone selling prices (“SSPs”). When available, the Company uses observable prices to determine SSPs. When observable prices are not available, SSPs are established that reflect the Company’s best estimates of what the selling prices of the performance obligations would be if they were sold regularly on a stand-alone basis. The Company’s process for estimating SSPs without observable prices considers multiple factors that may vary depending upon the unique facts and circumstances related to each performance obligation including, where applicable, prices charged by the Company for similar offerings, market trends in the pricing for similar offerings, product-specific business objectives and the estimated cost to provide the performance obligation.
The Company has identified up to three performance obligations regularly included in arrangements involving the sale of iPhone, Mac, iPad and certain other products. The first performance obligation, which represents the substantial portion of the allocated sales price, is the hardware and bundled software delivered at the time of sale. The second performance obligation is the right to receive certain product-related bundled services, which include iCloud®, Siri® and Maps. The third performance obligation is the right to receive, on a when-and-if-available basis, future unspecified software upgrades relating to the software bundled with each device. The Company allocates revenue and any related discounts to these performance obligations based on their relative SSPs. Because the Company lacks observable prices for the undelivered performance obligations, the allocation of revenue is based on the Company’s estimated SSPs. Revenue allocated to the delivered hardware and bundled software is recognized when control has transferred to the customer, which generally occurs when the product is shipped. Revenue allocated to the product-related bundled services and unspecified software upgrade rights is deferred and recognized on a straight-line basis over the estimated period they are expected to be provided. Cost of sales related to delivered hardware and bundled software, including estimated warranty costs, are recognized at the time of sale. Costs incurred to provide product-related bundled services and unspecified software upgrade rights are recognized as cost of sales as incurred.

Apple Inc. | Q1 2020 Form 10-Q | 7

For certain long-term service arrangements, the Company has performance obligations for services it has not yet delivered. For these arrangements, the Company does not have a right to bill for the undelivered services. The Company has determined that any unbilled consideration relates entirely to the value of the undelivered services. Accordingly, the Company has not recognized revenue, and has elected not to disclose amounts, related to these undelivered services.
For the sale of third-party products where the Company obtains control of the product before transferring it to the customer, the Company recognizes revenue based on the gross amount billed to customers. The Company considers multiple factors when determining whether it obtains control of third-party products including, but not limited to, evaluating if it can establish the price of the product, retains inventory risk for tangible products or has the responsibility for ensuring acceptability of the product. For third-party applications sold through the App Store®, Mac App Store, TV App Store and Watch App Store and certain digital content sold through the Company’s other digital content stores, the Company does not obtain control of the product before transferring it to the customer. Therefore, the Company accounts for such sales on a net basis by recognizing in Services net sales only the commission it retains.
The Company has elected to record revenue net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded within other current liabilities until remitted to the relevant government authority.
Deferred Revenue
As of December 28, 2019 and September 28, 2019, the Company had total deferred revenue of $9.1 billion and $8.1 billion, respectively. As of December 28, 2019, the Company expects 61% of total deferred revenue to be realized in less than a year, 29% within one-to-two years, 8% within two-to-three years and 2% in greater than three years.
Disaggregated Revenue
Net sales disaggregated by significant products and services for the three months ended December 28, 2019 and December 29, 2018 were as follows (in millions):
 
Three Months Ended
 
December 28,
2019
 
December 29,
2018
iPhone (1)
$
55,957

 
$
51,982

Mac (1)
7,160

 
7,416

iPad (1)
5,977

 
6,729

Wearables, Home and Accessories (1)(2)
10,010

 
7,308

Services (3)
12,715

 
10,875

Total net sales (4)
$
91,819

 
$
84,310

(1)
Products net sales include amortization of the deferred value of unspecified software upgrade rights, which are bundled in the sales price of the respective product.
(2)
Wearables, Home and Accessories net sales include sales of AirPods®, Apple TV®, Apple Watch®, Beats® products, HomePod™, iPod touch® and Apple-branded and third-party accessories.
(3)
Services net sales include sales from the Company’s digital content stores and streaming services, AppleCare®, licensing and other services. Services net sales also include amortization of the deferred value of Maps, Siri, and free iCloud and Apple TV + services, which are bundled in the sales price of certain products.
(4)
Includes $1.9 billion of revenue recognized in the three months ended December 28, 2019 that was included in deferred revenue as of September 28, 2019 and $2.4 billion of revenue recognized in the three months ended December 29, 2018 that was included in deferred revenue as of September 29, 2018.
The Company’s proportion of net sales by disaggregated revenue source was generally consistent for each reportable segment in Note 11, “Segment Information and Geographic Data” for the three months ended December 28, 2019 and December 29, 2018.

Apple Inc. | Q1 2020 Form 10-Q | 8

Note 3 – Financial Instruments
Cash, Cash Equivalents and Marketable Securities
The following tables show the Company’s cash and marketable securities by significant investment category as of December 28, 2019 and September 28, 2019 (in millions):
 
December 28, 2019
 
Adjusted
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Current
Marketable
Securities
 
Non-Current
Marketable
Securities
Cash
$
11,383

 
$
—

 
$
—

 
$
11,383

 
$
11,383

 
$
—

 
$
—

Level 1 (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
11,535

 
—

 
—

 
11,535

 
11,535

 
—

 
—

Subtotal
11,535

 
—

 
—

 
11,535

 
11,535

 
—

 
—

Level 2 (2):
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
28,600

 
29

 
(40
)
 
28,589

 
3,950

 
11,069

 
13,570

U.S. agency securities
8,302

 
2

 
(1
)
 
8,303

 
3,703

 
4,095

 
505

Non-U.S. government securities
18,978

 
324

 
(92
)
 
19,210

 
289

 
2,637

 
16,284

Certificates of deposit and time deposits
12,916

 
—

 
—

 
12,916

 
4,595

 
6,777

 
1,544

Commercial paper
17,823

 
—

 
—

 
17,823

 
4,254

 
13,569

 
—

Corporate debt securities
82,007

 
876

 
(37
)
 
82,846

 
62

 
27,894

 
54,890

Municipal securities
971

 
11

 
—

 
982

 
—

 
35

 
947

Mortgage- and asset-backed securities
13,475

 
68

 
(69
)
 
13,474

 
—

 
1,315

 
12,159

Subtotal
183,072

 
1,310

 
(239
)
 
184,143

 
16,853

 
67,391

 
99,899

Total (3)
$
205,990

 
$
1,310

 
$
(239
)
 
$
207,061

 
$
39,771

 
$
67,391

 
$
99,899

 
September 28, 2019
 
Adjusted
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Current
Marketable
Securities
 
Non-Current
Marketable
Securities
Cash
$
12,204

 
$
—

 
$
—

 
$
12,204

 
$
12,204

 
$
—

 
$
—

Level 1 (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
15,897

 
—

 
—

 
15,897

 
15,897

 
—

 
—

Subtotal
15,897

 
—

 
—

 
15,897

 
15,897

 
—

 
—

Level 2 (2):
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
30,293

 
33

 
(62
)
 
30,264

 
6,165

 
9,817

 
14,282

U.S. agency securities
9,767

 
1

 
(3
)
 
9,765

 
6,489

 
2,249

 
1,027

Non-U.S. government securities
19,821

 
337

 
(50
)
 
20,108

 
749

 
3,168

 
16,191

Certificates of deposit and time deposits
4,041

 
—

 
—

 
4,041

 
2,024

 
1,922

 
95

Commercial paper
12,433

 
—

 
—

 
12,433

 
5,193

 
7,240

 
—

Corporate debt securities
85,383

 
756

 
(92
)
 
86,047

 
123

 
26,127

 
59,797

Municipal securities
958

 
8

 
(1
)
 
965

 
—

 
68

 
897

Mortgage- and asset-backed securities
14,180

 
67

 
(73
)
 
14,174

 
—

 
1,122

 
13,052

Subtotal
176,876

 
1,202

 
(281
)
 
177,797

 
20,743

 
51,713

 
105,341

Total (3)
$
204,977

 
$
1,202

 
$
(281
)
 
$
205,898

 
$
48,844

 
$
51,713

 
$
105,341

(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 December 28, 2019 and September 28, 2019, total marketable securities included $19.1 billion and $18.9 billion, respectively, that was restricted from general use, related to the State Aid Decision (refer to Note 5, “Income Taxes”) and other agreements.

Apple Inc. | Q1 2020 Form 10-Q | 9

The Company may sell certain of its marketable debt securities prior to their stated maturities for reasons including, but not limited to, managing liquidity, credit risk, duration and asset allocation. The maturities of the Company’s non-current marketable debt securities generally range from one to five years.
The Company typically invests in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer. Fair values were determined for each individual security in the investment portfolio. When evaluating a marketable debt security for other-than-temporary impairment, the Company reviews factors such as the duration and extent to which the fair value of the security is less than its cost, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it will more likely than not be required to sell the security before recovery of its amortized cost basis. As of December 28, 2019, the Company does not consider any of its marketable debt securities to be other-than-temporarily impaired.
Non-Marketable Securities
The Company holds non-marketable equity securities of certain privately held companies without readily determinable fair values. As of both December 28, 2019 and September 28, 2019, the Company’s non-marketable equity securities had a carrying value of $2.9 billion.
Restricted Cash
A reconciliation of the Company’s cash and cash equivalents in the Condensed Consolidated Balance Sheets to cash, cash equivalents and restricted cash in the Condensed Consolidated Statements of Cash Flows as of December 28, 2019 and September 28, 2019 is as follows (in millions):
 
December 28,
2019
 
September 28,
2019
Cash and cash equivalents
$
39,771

 
$
48,844

Restricted cash included in other current assets
68

 
23

Restricted cash included in other non-current assets
1,826

 
1,357

Cash, cash equivalents and restricted cash
$
41,665

 
$
50,224


The Company’s restricted cash primarily consisted of cash required to be on deposit under a contractual agreement with a bank to support the Company’s iPhone Upgrade Program.
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, net investments in certain foreign subsidiaries, and 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 or 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 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 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 protect the net investment in a foreign operation from fluctuations in foreign currency exchange rates, the Company may enter into foreign currency forward and option contracts to offset a portion of 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 hedges of its net investments in certain foreign subsidiaries. In both of these cases, the Company designates these instruments as net investment hedges.

Apple Inc. | Q1 2020 Form 10-Q | 10

To 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 December 28, 2019, the Company’s hedged term debt– and marketable securities–related foreign currency transactions are expected to be recognized within 23 years.
The Company may also enter into non-designated foreign currency contracts to offset a portion of the foreign currency exchange gains and losses generated by the remeasurement of certain assets and liabilities denominated in non-functional currencies.
To 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 December 28, 2019, the Company’s hedged interest rate transactions are expected to be recognized within 8 years.
Cash Flow Hedges
Cash flow hedge amounts that are included in the assessment of hedge effectiveness are deferred in 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 (“OI&E”) in the same period as the related income or expense is recognized. For options designated as cash flow hedges, the time value is excluded from the assessment of hedge effectiveness and recognized in the financial statement line item to which the hedge relates on a straight-line basis over the life of the hedge. Changes in the fair value of amounts excluded from the assessment of hedge effectiveness are recognized in other comprehensive income/(loss) (“OCI”).
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 OI&E in the period of de-designation. Any subsequent changes in fair value of such derivative instruments are reflected in OI&E unless they are re-designated as hedges of other transactions.
Net Investment Hedges
Net investment hedge amounts that are included in the assessment of hedge effectiveness are recorded in OCI as a part of the cumulative translation adjustment. For foreign exchange forward contracts designated as net investment hedges, the forward carry component is excluded from the assessment of hedge effectiveness and recognized in OCI on a straight-line basis over the life of the hedge. Changes in the fair value of amounts excluded from the assessment of hedge effectiveness are recognized in OCI.
Fair Value Hedges
Fair value hedge gains and losses related to amounts that are included in the assessment of hedge effectiveness are recognized in earnings along with a corresponding loss or gain related to the change in value of the hedged item in the same line in the Condensed Consolidated Statements of Operations. For foreign exchange forward contracts designated as fair value hedges, the forward carry component is excluded from the assessment of hedge effectiveness and recognized in OI&E on a straight-line basis over the life of the hedge. Changes in the fair value of amounts excluded from the assessment of hedge effectiveness are recognized in OCI. The amount excluded from the effectiveness assessment of fair value hedges and recognized in OI&E was a gain of $128 million for the three months ended December 28, 2019.
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.

Apple Inc. | Q1 2020 Form 10-Q | 11

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 28, 2019 and September 28, 2019 (in millions):
 
December 28, 2019
 
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
$
1,625

 
$
327

 
$
1,952

Interest rate contracts
$
475

 
$
—

 
$
475

 
 
 
 
 
 
Derivative liabilities (2):
 
 
 
 
 
Foreign exchange contracts
$
964

 
$
494

 
$
1,458

Interest rate contracts
$
57

 
$
—

 
$
57

 
September 28, 2019
 
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
$
1,798

 
$
323

 
$
2,121

Interest rate contracts
$
685

 
$
—

 
$
685

 
 
 
 
 
 
Derivative liabilities (2):
 
 
 
 
 
Foreign exchange contracts
$
1,341

 
$
160

 
$
1,501

Interest rate contracts
$
105

 
$
—

 
$
105

(1)
The fair value of derivative assets is measured using Level 2 fair value inputs and is included in 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 included in other current liabilities and other non-current liabilities in the Condensed Consolidated Balance Sheets.
The Company classifies cash flows related to derivative financial instruments as operating activities in its Condensed Consolidated Statements of Cash Flows.
The following table shows the pre-tax gains and losses of the Company’s derivative and non-derivative instruments designated as cash flow and net investment hedges in OCI and the Condensed Consolidated Statements of Operations for the three months ended December 28, 2019 and December 29, 2018 (in millions):
 
Three Months Ended
 
December 28,
2019
 
December 29,
2018
Gains/(Losses) recognized in OCI – included in effectiveness assessment:
 
 
 
Cash flow hedges:
 
 
 
Foreign exchange contracts
$
271

 
$
(478
)
 
 
 
 
Net investment hedges:
 
 
 
Foreign currency debt
$
24

 
$
(16
)
 
 
 
 
Gains/(Losses) reclassified from AOCI into net income – included in effectiveness assessment:
 
 
 
Cash flow hedges:
 
 
 
Foreign exchange contracts
$
491

 
$
(118
)
Interest rate contracts
(2
)
 
(1
)
Total
$
489

 
$
(119
)


Apple Inc. | Q1 2020 Form 10-Q | 12

The amount excluded from the effectiveness assessment of the Company’s hedges and recognized in OCI was a loss of $89 million for the three months ended December 28, 2019.
The following tables show information about the Company’s derivative instruments designated as fair value hedges and the related hedged items for the three months ended December 28, 2019 and December 29, 2018 and as of December 28, 2019 (in millions):
 
Three Months Ended
 
December 28,
2019
 
December 29,
2018
Gains/(Losses) on derivative instruments (1):
 
 
 
Foreign exchange contracts
$
(183
)
 
$
402

Interest rate contracts
(162
)
 
657

Total
$
(345
)
 
$
1,059

 
 
 
 
Gains/(Losses) related to hedged items (1):
 
 
 
Marketable securities
$
183

 
$
(402
)
Fixed-rate debt
162

 
(657
)
Total
$
345

 
$
(1,059
)
 
December 28,
2019
Carrying amounts of hedged assets/(liabilities):
 
Marketable securities (2)
$
15,544

Fixed-rate debt (3)
$
(28,631
)
 
 
Cumulative hedging adjustments included in the carrying amounts of hedged items:
 
Marketable securities carrying amount increases/(decreases)
$
(594
)
Fixed-rate debt carrying amount (increases)/decreases
$
(418
)
(1)
Gains and losses related to fair value hedges are included in OI&E in the Condensed Consolidated Statements of Operations.
(2)
The carrying amounts of marketable securities that are designated as hedged items in fair value hedges are included in current marketable securities and non-current marketable securities in the Condensed Consolidated Balance Sheet.
(3)
The carrying amounts of fixed-rate debt instruments that are designated as hedged items in fair value hedges are included in current term debt and non-current term debt in the Condensed Consolidated Balance Sheet.
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 28, 2019 and September 28, 2019 (in millions):
 
December 28, 2019
 
September 28, 2019
 
Notional
Amount
 
Credit Risk
Amount
 
Notional
Amount
 
Credit Risk
Amount
Instruments designated as accounting hedges:
 
 
 
 
 
 
 
Foreign exchange contracts
$
54,215

 
$
1,625

 
$
61,795

 
$
1,798

Interest rate contracts
$
28,250

 
$
475

 
$
31,250

 
$
685

 
 
 
 
 
 
 
 
Instruments not designated as accounting hedges:
 
 
 
 
 
 
 
Foreign exchange contracts
$
96,470

 
$
327

 
$
76,868

 
$
323



Apple Inc. | Q1 2020 Form 10-Q | 13

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 December 28, 2019 and September 28, 2019, the net cash collateral received by the Company related to derivative instruments under its collateral security arrangements was $1.0 billion and $1.6 billion, respectively, which were included in other current liabilities 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 28, 2019 and September 28, 2019, 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 $2.4 billion and $2.7 billion, respectively, resulting in net derivative liabilities of $128 million and $407 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.
As of both December 28, 2019 and September 28, 2019, the Company had no customers that individually represented 10% or more of total trade receivables. The Company’s cellular network carriers accounted for 43% and 51% of total trade receivables as of December 28, 2019 and September 28, 2019, 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 28, 2019, the Company had two vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 56% and 17%. As of September 28, 2019, the Company had two vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 59% and 14%.

Apple Inc. | Q1 2020 Form 10-Q | 14

Note 4 – Condensed Consolidated Financial Statement Details
The following tables show the Company’s condensed consolidated financial statement details as of December 28, 2019 and September 28, 2019 (in millions):
Property, Plant and Equipment, Net
 
December 28,
2019
 
September 28,
2019
Land and buildings
$
17,754

 
$
17,085

Machinery, equipment and internal-use software
70,841

 
69,797

Leasehold improvements
9,395

 
9,075

Gross property, plant and equipment
97,990

 
95,957

Accumulated depreciation and amortization
(60,959
)
 
(58,579
)
Total property, plant and equipment, net
$
37,031

 
$
37,378


Other Non-Current Liabilities
 
December 28,
2019
 
September 28,
2019
Long-term taxes payable
$
28,198

 
$
29,545

Other non-current liabilities
27,650

 
20,958

Total other non-current liabilities
$
55,848

 
$
50,503


Other Income/(Expense), Net
The following table shows the detail of OI&E for the three months ended December 28, 2019 and December 29, 2018 (in millions):
 
Three Months Ended
 
December 28,
2019
 
December 29,
2018
Interest and dividend income
$
1,045

 
$
1,307

Interest expense
(785
)
 
(890
)
Other income, net
89

 
143

Total other income/(expense), net
$
349

 
$
560


Note 5 – Income Taxes
Uncertain Tax Positions
As of December 28, 2019, the total amount of gross unrecognized tax benefits was $16.4 billion, of which $8.9 billion, if recognized, would impact the Company’s effective tax rate. The Company had accrued $1.5 billion of gross interest and penalties related to income tax matters as of December 28, 2019.
The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and many state and foreign jurisdictions. The U.S. Internal Revenue Service concluded its review of the years 2013 through 2015 in 2018, and all years before 2016 are closed. Tax years after 2014 remain open in certain major foreign jurisdictions and are 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 the 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 in the next 12 months by as much as $2.3 billion.

Apple Inc. | Q1 2020 Form 10-Q | 15

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 €13.1 billion, plus interest of €1.2 billion. On an annual basis, the Company may request approval from the Irish Minister for Finance to reduce the recovery amount for certain taxes paid to other countries. As of December 28, 2019, the adjusted recovery amount was €12.9 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 U.S. Tax Cuts and Jobs Act. The adjusted recovery amount plus interest is funded into escrow, where it will remain restricted from general use pending the conclusion of all appeals. Refer to the Cash, Cash Equivalents and Marketable Securities section of Note 3, “Financial Instruments” for more information.
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 December 28, 2019 and September 28, 2019, the Company had $5.0 billion and $6.0 billion of Commercial Paper outstanding, respectively, with maturities generally less than nine months. The weighted-average interest rate of the Company’s Commercial Paper was 1.88% and 2.24% as of December 28, 2019 and September 28, 2019, respectively. The following table provides a summary of cash flows associated with the issuance and maturities of Commercial Paper for the three months ended