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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 March 28, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 001-36743
Apple Inc.
(Exact name of Registrant as specified in its charter)
|
| | | | |
California | | 94-2404110 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | |
One Apple Park Way | |
|
Cupertino | | California | | 95014 |
(Address of principal executive offices) | | (Zip Code) |
(408) 996-1010
(Registrant’s telephone number, including area code)
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 ☒
4,334,335,000 shares of common stock were issued and outstanding as of April 17, 2020.
Apple Inc.
Form 10-Q
For the Fiscal Quarter Ended March 28, 2020
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In millions, except number of shares which are reflected in thousands and per share amounts)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| March 28, 2020 | | March 30, 2019 | | March 28, 2020 | | March 30, 2019 |
Net sales: | | | | | | | |
Products | $ | 44,965 |
| | $ | 46,565 |
| | $ | 124,069 |
| | $ | 120,000 |
|
Services | 13,348 |
| | 11,450 |
| | 26,063 |
| | 22,325 |
|
Total net sales | 58,313 |
| | 58,015 |
| | 150,132 |
| | 142,325 |
|
| | | | | | | |
Cost of sales: | | | | | | | |
Products | 31,321 |
| | 32,047 |
| | 83,396 |
| | 80,285 |
|
Services | 4,622 |
| | 4,147 |
| | 9,149 |
| | 8,188 |
|
Total cost of sales | 35,943 |
| | 36,194 |
| | 92,545 |
| | 88,473 |
|
Gross margin | 22,370 |
| | 21,821 |
| | 57,587 |
| | 53,852 |
|
| | | | | | | |
Operating expenses: | | | | | | | |
Research and development | 4,565 |
| | 3,948 |
| | 9,016 |
| | 7,850 |
|
Selling, general and administrative | 4,952 |
| | 4,458 |
| | 10,149 |
| | 9,241 |
|
Total operating expenses | 9,517 |
| | 8,406 |
| | 19,165 |
| | 17,091 |
|
| | | | | | | |
Operating income | 12,853 |
| | 13,415 |
| | 38,422 |
| | 36,761 |
|
Other income/(expense), net | 282 |
| | 378 |
| | 631 |
| | 938 |
|
Income before provision for income taxes | 13,135 |
| | 13,793 |
| | 39,053 |
| | 37,699 |
|
Provision for income taxes | 1,886 |
| | 2,232 |
| | 5,568 |
| | 6,173 |
|
Net income | $ | 11,249 |
| | $ | 11,561 |
| | $ | 33,485 |
| | $ | 31,526 |
|
| | | | | | | |
Earnings per share: | | | | | | | |
Basic | $ | 2.58 |
| | $ | 2.47 |
| | $ | 7.63 |
| | $ | 6.70 |
|
Diluted | $ | 2.55 |
| | $ | 2.46 |
| | $ | 7.56 |
| | $ | 6.66 |
|
| | | | | | | |
Shares used in computing earnings per share: | | | | | | | |
Basic | 4,360,101 |
| | 4,674,071 |
| | 4,387,570 |
| | 4,704,945 |
|
Diluted | 4,404,691 |
| | 4,700,646 |
| | 4,429,648 |
| | 4,736,949 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
Apple Inc. | Q2 2020 Form 10-Q | 1
Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In millions)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| March 28, 2020 | | March 30, 2019 | | March 28, 2020 | | March 30, 2019 |
Net income | $ | 11,249 |
| | $ | 11,561 |
| | $ | 33,485 |
| | $ | 31,526 |
|
Other comprehensive income/(loss): | | | | | | | |
Change in foreign currency translation, net of tax | (566 | ) | | 174 |
| | (364 | ) | | 96 |
|
| | | | | | | |
Change in unrealized gains/losses on derivative instruments, net of tax: | | | | | | | |
Change in fair value of derivatives | (143 | ) | | (50 | ) | | (32 | ) | | (384 | ) |
Adjustment for net (gains)/losses realized and included in net income | 634 |
| | (105 | ) | | 236 |
| | (63 | ) |
Total change in unrealized gains/losses on derivative instruments | 491 |
| | (155 | ) | | 204 |
| | (447 | ) |
| | | | | | | |
Change in unrealized gains/losses on marketable debt securities, net of tax: | | | | | | | |
Change in fair value of marketable debt securities | (2,325 | ) | | 2,042 |
| | (2,200 | ) | | 2,152 |
|
Adjustment for net (gains)/losses realized and included in net income | 29 |
| | 28 |
| | 19 |
| | 65 |
|
Total change in unrealized gains/losses on marketable debt securities | (2,296 | ) | | 2,070 |
| | (2,181 | ) | | 2,217 |
|
| | | | | | | |
Total other comprehensive income/(loss) | (2,371 | ) | | 2,089 |
| | (2,341 | ) | | 1,866 |
|
Total comprehensive income | $ | 8,878 |
| | $ | 13,650 |
| | $ | 31,144 |
| | $ | 33,392 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
Apple Inc. | Q2 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)
|
| | | | | | | |
| March 28, 2020 | | September 28, 2019 |
ASSETS: |
Current assets: | | | |
Cash and cash equivalents | $ | 40,174 |
| | $ | 48,844 |
|
Marketable securities | 53,877 |
| | 51,713 |
|
Accounts receivable, net | 15,722 |
| | 22,926 |
|
Inventories | 3,334 |
| | 4,106 |
|
Vendor non-trade receivables | 14,955 |
| | 22,878 |
|
Other current assets | 15,691 |
| | 12,352 |
|
Total current assets | 143,753 |
| | 162,819 |
|
| | | |
Non-current assets: | | | |
Marketable securities | 98,793 |
| | 105,341 |
|
Property, plant and equipment, net | 35,889 |
| | 37,378 |
|
Other non-current assets | 41,965 |
| | 32,978 |
|
Total non-current assets | 176,647 |
| | 175,697 |
|
Total assets | $ | 320,400 |
| | $ | 338,516 |
|
| | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY: |
Current liabilities: | | | |
Accounts payable | $ | 32,421 |
| | $ | 46,236 |
|
Other current liabilities | 37,324 |
| | 37,720 |
|
Deferred revenue | 5,928 |
| | 5,522 |
|
Commercial paper and repurchase agreement | 10,029 |
| | 5,980 |
|
Term debt | 10,392 |
| | 10,260 |
|
Total current liabilities | 96,094 |
| | 105,718 |
|
| | | |
Non-current liabilities: | | | |
Term debt | 89,086 |
| | 91,807 |
|
Other non-current liabilities | 56,795 |
| | 50,503 |
|
Total non-current liabilities | 145,881 |
| | 142,310 |
|
Total liabilities | 241,975 |
| | 248,028 |
|
| | | |
Commitments and contingencies |
| |
|
| | | |
Shareholders’ equity: | | | |
Common stock and additional paid-in capital, $0.00001 par value: 12,600,000 shares authorized; 4,323,987 and 4,443,236 shares issued and outstanding, respectively | 48,032 |
| | 45,174 |
|
Retained earnings | 33,182 |
| | 45,898 |
|
Accumulated other comprehensive income/(loss) | (2,789 | ) | | (584 | ) |
Total shareholders’ equity | 78,425 |
| | 90,488 |
|
Total liabilities and shareholders’ equity | $ | 320,400 |
| | $ | 338,516 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
Apple Inc. | Q2 2020 Form 10-Q | 3
Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
(In millions, except per share amounts)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| March 28, 2020 | | March 30, 2019 | | March 28, 2020 | | March 30, 2019 |
Total shareholders’ equity, beginning balances | $ | 89,531 |
| | $ | 117,892 |
| | $ | 90,488 |
| | $ | 107,147 |
|
| | | | | | | |
Common stock and additional paid-in capital: | | | | | | | |
Beginning balances | 45,972 |
| | 40,970 |
| | 45,174 |
| | 40,201 |
|
Common stock issued | 428 |
| | 390 |
| | 430 |
| | 390 |
|
Common stock withheld related to net share settlement of equity awards | (101 | ) | | (105 | ) | | (1,052 | ) | | (927 | ) |
Share-based compensation | 1,733 |
| | 1,546 |
| | 3,480 |
| | 3,137 |
|
Ending balances | 48,032 |
| | 42,801 |
| | 48,032 |
| | 42,801 |
|
| | | | | | | |
Retained earnings: | | | | | | | |
Beginning balances | 43,977 |
| | 80,510 |
| | 45,898 |
| | 70,400 |
|
Net income | 11,249 |
| | 11,561 |
| | 33,485 |
| | 31,526 |
|
Dividends and dividend equivalents declared | (3,432 | ) | | (3,499 | ) | | (6,917 | ) | | (7,025 | ) |
Common stock withheld related to net share settlement of equity awards | (96 | ) | | (14 | ) | | (632 | ) | | (608 | ) |
Common stock repurchased | (18,516 | ) | | (24,000 | ) | | (38,516 | ) | | (32,236 | ) |
Cumulative effects of changes in accounting principles | — |
| | — |
| | (136 | ) | | 2,501 |
|
Ending balances | 33,182 |
| | 64,558 |
| | 33,182 |
| | 64,558 |
|
| | | | | | | |
Accumulated other comprehensive income/(loss): | | | | | | | |
Beginning balances | (418 | ) | | (3,588 | ) | | (584 | ) | | (3,454 | ) |
Other comprehensive income/(loss) | (2,371 | ) | | 2,089 |
| | (2,341 | ) | | 1,866 |
|
Cumulative effects of changes in accounting principles | — |
| | — |
| | 136 |
| | 89 |
|
Ending balances | (2,789 | ) | | (1,499 | ) | | (2,789 | ) | | (1,499 | ) |
| | | | | | | |
Total shareholders’ equity, ending balances | $ | 78,425 |
| | $ | 105,860 |
| | $ | 78,425 |
| | $ | 105,860 |
|
| | | | | | | |
Dividends and dividend equivalents declared per share or RSU | $ | 0.77 |
| | $ | 0.73 |
| | $ | 1.54 |
| | $ | 1.46 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
Apple Inc. | Q2 2020 Form 10-Q | 4
Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions)
|
| | | | | | | |
| Six Months Ended |
| March 28, 2020 | | March 30, 2019 |
Cash, cash equivalents and restricted cash, beginning balances | $ | 50,224 |
| | $ | 25,913 |
|
Operating activities: | | | |
Net income | 33,485 |
| | 31,526 |
|
Adjustments to reconcile net income to cash generated by operating activities: | | | |
Depreciation and amortization | 5,602 |
| | 6,435 |
|
Share-based compensation expense | 3,407 |
| | 3,073 |
|
Deferred income tax benefit | (651 | ) | | (124 | ) |
Other | (259 | ) | | (215 | ) |
Changes in operating assets and liabilities: | | | |
Accounts receivable, net | 7,284 |
| | 8,094 |
|
Inventories | 699 |
| | (1,006 | ) |
Vendor non-trade receivables | 7,923 |
| | 14,616 |
|
Other current and non-current assets | (8,866 | ) | | (717 | ) |
Accounts payable | (13,520 | ) | | (20,024 | ) |
Deferred revenue | 1,223 |
| | (540 | ) |
Other current and non-current liabilities | 7,500 |
| | (3,273 | ) |
Cash generated by operating activities | 43,827 |
| | 37,845 |
|
Investing activities: | | | |
Purchases of marketable securities | (66,489 | ) | | (13,854 | ) |
Proceeds from maturities of marketable securities | 39,738 |
| | 16,880 |
|
Proceeds from sales of marketable securities | 27,762 |
| | 22,635 |
|
Payments for acquisition of property, plant and equipment | (3,960 | ) | | (5,718 | ) |
Payments made in connection with business acquisitions, net | (1,134 | ) | | (291 | ) |
Purchases of non-marketable securities | (146 | ) | | (490 | ) |
Other | (426 | ) | | 30 |
|
Cash generated by/(used in) investing activities | (4,655 | ) | | 19,192 |
|
Financing activities: | | | |
Proceeds from issuance of common stock | 430 |
| | 390 |
|
Payments for taxes related to net share settlement of equity awards | (1,566 | ) | | (1,427 | ) |
Payments for dividends and dividend equivalents | (6,914 | ) | | (7,011 | ) |
Repurchases of common stock | (39,280 | ) | | (32,498 | ) |
Proceeds from issuance of term debt, net | 2,210 |
| | — |
|
Repayments of term debt | (5,250 | ) | | (2,500 | ) |
Proceeds from/(Repayments of) commercial paper, net | 1,518 |
| | (36 | ) |
Proceeds from repurchase agreement | 2,556 |
| | — |
|
Other | (51 | ) | | (51 | ) |
Cash used in financing activities | (46,347 | ) | | (43,133 | ) |
Increase/(Decrease) in cash, cash equivalents and restricted cash | (7,175 | ) | | 13,904 |
|
Cash, cash equivalents and restricted cash, ending balances | $ | 43,049 |
| | $ | 39,817 |
|
Supplemental cash flow disclosure: | | | |
Cash paid for income taxes, net | $ | 7,505 |
| | $ | 9,497 |
|
Cash paid for interest | $ | 1,689 |
| | $ | 1,762 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
Apple Inc. | Q2 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. 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 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. | Q2 2020 Form 10-Q | 6
Earnings Per Share
The following table shows the computation of basic and diluted earnings per share for the three- and six-month periods ended March 28, 2020 and March 30, 2019 (net income in millions and shares in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| March 28, 2020 | | March 30, 2019 | | March 28, 2020 | | March 30, 2019 |
Numerator: | | | | | | | |
Net income | $ | 11,249 |
| | $ | 11,561 |
| | $ | 33,485 |
| | $ | 31,526 |
|
| | | | | | | |
Denominator: | | | | | | | |
Weighted-average basic shares outstanding | 4,360,101 |
| | 4,674,071 |
| | 4,387,570 |
| | 4,704,945 |
|
Effect of dilutive securities | 44,590 |
| | 26,575 |
| | 42,078 |
| | 32,004 |
|
Weighted-average diluted shares | 4,404,691 |
| | 4,700,646 |
| | 4,429,648 |
| | 4,736,949 |
|
| | | | | | | |
Basic earnings per share | $ | 2.58 |
| | $ | 2.47 |
| | $ | 7.63 |
| | $ | 6.70 |
|
Diluted earnings per share | $ | 2.55 |
| | $ | 2.46 |
| | $ | 7.56 |
| | $ | 6.66 |
|
Potentially dilutive securities representing 31.1 million and 30.0 million shares of common stock were excluded from the computation of diluted earnings per share for the three- and six-month periods ended March 30, 2019, respectively, because their effect would have been antidilutive.
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. | Q2 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 March 28, 2020 and September 28, 2019, the Company had total deferred revenue of $9.4 billion and $8.1 billion, respectively. As of March 28, 2020, the Company expects 63% of total deferred revenue to be realized in less than a year, 28% within one-to-two years, 7% 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- and six-month periods ended March 28, 2020 and March 30, 2019 were as follows (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| March 28, 2020 | | March 30, 2019 | | March 28, 2020 | | March 30, 2019 |
iPhone (1) | $ | 28,962 |
| | $ | 31,051 |
| | $ | 84,919 |
| | $ | 83,033 |
|
Mac (1) | 5,351 |
| | 5,513 |
| | 12,511 |
| | 12,929 |
|
iPad (1) | 4,368 |
| | 4,872 |
| | 10,345 |
| | 11,601 |
|
Wearables, Home and Accessories (1)(2) | 6,284 |
| | 5,129 |
| | 16,294 |
| | 12,437 |
|
Services (3) | 13,348 |
| | 11,450 |
| | 26,063 |
| | 22,325 |
|
Total net sales (4) | $ | 58,313 |
| | $ | 58,015 |
| | $ | 150,132 |
| | $ | 142,325 |
|
| |
(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 storage 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 March 28, 2020 that was included in deferred revenue as of December 28, 2019, $1.9 billion of revenue recognized in the three months ended March 30, 2019 that was included in deferred revenue as of December 29, 2018, $3.0 billion of revenue recognized in the six months ended March 28, 2020 that was included in deferred revenue as of September 28, 2019, and $3.8 billion of revenue recognized in the six months ended March 30, 2019 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- and six-month periods ended March 28, 2020 and March 30, 2019.
Apple Inc. | Q2 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 March 28, 2020 and September 28, 2019 (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 28, 2020 |
| Adjusted Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Current Marketable Securities | | Non-Current Marketable Securities |
Cash | $ | 24,405 |
| | $ | — |
| | $ | — |
| | $ | 24,405 |
| | $ | 24,405 |
| | $ | — |
| | $ | — |
|
Level 1 (1): | | | | | | | | | | | | | |
Money market funds | 4,473 |
| | — |
| | — |
| | 4,473 |
| | 4,473 |
| | — |
| | — |
|
Subtotal | 4,473 |
| | — |
| | — |
| | 4,473 |
| | 4,473 |
| | — |
| | — |
|
Level 2 (2): | | | | | | | | | | | | | |
U.S. Treasury securities | 18,755 |
| | 405 |
| | — |
| | 19,160 |
| | 1,042 |
| | 6,736 |
| | 11,382 |
|
U.S. agency securities | 6,079 |
| | 12 |
| | (9 | ) | | 6,082 |
| | 129 |
| | 1,478 |
| | 4,475 |
|
Non-U.S. government securities | 18,548 |
| | 97 |
| | (693 | ) | | 17,952 |
| | 652 |
| | 2,348 |
| | 14,952 |
|
Certificates of deposit and time deposits | 10,616 |
| | — |
| | — |
| | 10,616 |
| | 3,661 |
| | 6,319 |
| | 636 |
|
Commercial paper | 15,690 |
| | — |
| | — |
| | 15,690 |
| | 5,653 |
| | 10,037 |
| | — |
|
Corporate debt securities | 82,153 |
| | 207 |
| | (2,177 | ) | | 80,183 |
| | 159 |
| | 25,708 |
| | 54,316 |
|
Municipal securities | 974 |
| | 9 |
| | (1 | ) | | 982 |
| | — |
| | 53 |
| | 929 |
|
Mortgage- and asset-backed securities | 13,066 |
| | 278 |
| | (43 | ) | | 13,301 |
| | — |
| | 1,198 |
| | 12,103 |
|
Subtotal | 165,881 |
| | 1,008 |
| | (2,923 | ) | | 163,966 |
| | 11,296 |
| | 53,877 |
| | 98,793 |
|
Total (3) | $ | 194,759 |
| | $ | 1,008 |
| | $ | (2,923 | ) | | $ | 192,844 |
| | $ | 40,174 |
| | $ | 53,877 |
| | $ | 98,793 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 March 28, 2020 and September 28, 2019, total marketable securities included $17.6 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. Additionally, as of March 28, 2020, $2.6 billion of marketable securities were pledged as collateral under a repurchase agreement (refer to Note 6, “Debt”). |
Apple Inc. | Q2 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 March 28, 2020, 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 March 28, 2020 and September 28, 2019, the Company’s non-marketable equity securities had a carrying value of $2.8 billion and $2.9 billion, respectively.
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 March 28, 2020 and September 28, 2019 is as follows (in millions):
|
| | | | | | | |
| March 28, 2020 | | September 28, 2019 |
Cash and cash equivalents | $ | 40,174 |
| | $ | 48,844 |
|
Restricted cash included in other current assets | 1,077 |
| | 23 |
|
Restricted cash included in other non-current assets | 1,798 |
| | 1,357 |
|
Cash, cash equivalents and restricted cash | $ | 43,049 |
| | $ | 50,224 |
|
The Company’s restricted cash primarily consisted of cash to support the Company’s iPhone Upgrade Program and certain partner agreements.
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. | Q2 2020 Form 10-Q | 10