Apple Inc. - Quarter Report: 2022 December (Form 10-Q)
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 31, 2022
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 | ||||||
| 1.375% 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 ☒
15,821,946,000 shares of common stock were issued and outstanding as of January 20, 2023.
Apple Inc.
Form 10-Q
For the Fiscal Quarter Ended December 31, 2022
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 31, 2022 | December 25, 2021 | ||||||||||
| Net sales: | |||||||||||
| Products | $ | 96,388 | $ | 104,429 | |||||||
| Services | 20,766 | 19,516 | |||||||||
| Total net sales | 117,154 | 123,945 | |||||||||
| Cost of sales: | |||||||||||
| Products | 60,765 | 64,309 | |||||||||
| Services | 6,057 | 5,393 | |||||||||
| Total cost of sales | 66,822 | 69,702 | |||||||||
| Gross margin | 50,332 | 54,243 | |||||||||
| Operating expenses: | |||||||||||
| Research and development | 7,709 | 6,306 | |||||||||
| Selling, general and administrative | 6,607 | 6,449 | |||||||||
| Total operating expenses | 14,316 | 12,755 | |||||||||
| Operating income | 36,016 | 41,488 | |||||||||
| Other income/(expense), net | (393) | (247) | |||||||||
| Income before provision for income taxes | 35,623 | 41,241 | |||||||||
| Provision for income taxes | 5,625 | 6,611 | |||||||||
| Net income | $ | 29,998 | $ | 34,630 | |||||||
| Earnings per share: | |||||||||||
| Basic | $ | 1.89 | $ | 2.11 | |||||||
| Diluted | $ | 1.88 | $ | 2.10 | |||||||
| Shares used in computing earnings per share: | |||||||||||
| Basic | 15,892,723 | 16,391,724 | |||||||||
| Diluted | 15,955,718 | 16,519,291 | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
Apple Inc. | Q1 2023 Form 10-Q | 1
Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In millions)
| Three Months Ended | |||||||||||
| December 31, 2022 | December 25, 2021 | ||||||||||
Net income | $ | 29,998 | $ | 34,630 | |||||||
| Other comprehensive income/(loss): | |||||||||||
Change in foreign currency translation, net of tax | (14) | (360) | |||||||||
Change in unrealized gains/losses on derivative instruments, net of tax: | |||||||||||
| Change in fair value of derivative instruments | (988) | 362 | |||||||||
Adjustment for net (gains)/losses realized and included in net income | (1,766) | 93 | |||||||||
Total change in unrealized gains/losses on derivative instruments | (2,754) | 455 | |||||||||
Change in unrealized gains/losses on marketable debt securities, net of tax: | |||||||||||
Change in fair value of marketable debt securities | 900 | (1,176) | |||||||||
Adjustment for net (gains)/losses realized and included in net income | 65 | (9) | |||||||||
Total change in unrealized gains/losses on marketable debt securities | 965 | (1,185) | |||||||||
| Total other comprehensive income/(loss) | (1,803) | (1,090) | |||||||||
| Total comprehensive income | $ | 28,195 | $ | 33,540 | |||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
Apple Inc. | Q1 2023 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 31, 2022 | September 24, 2022 | ||||||||||
| ASSETS: | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 20,535 | $ | 23,646 | |||||||
| Marketable securities | 30,820 | 24,658 | |||||||||
| Accounts receivable, net | 23,752 | 28,184 | |||||||||
| Inventories | 6,820 | 4,946 | |||||||||
| Vendor non-trade receivables | 30,428 | 32,748 | |||||||||
| Other current assets | 16,422 | 21,223 | |||||||||
| Total current assets | 128,777 | 135,405 | |||||||||
| Non-current assets: | |||||||||||
| Marketable securities | 114,095 | 120,805 | |||||||||
| Property, plant and equipment, net | 42,951 | 42,117 | |||||||||
| Other non-current assets | 60,924 | 54,428 | |||||||||
Total non-current assets | 217,970 | 217,350 | |||||||||
Total assets | $ | 346,747 | $ | 352,755 | |||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY: | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 57,918 | $ | 64,115 | |||||||
| Other current liabilities | 59,893 | 60,845 | |||||||||
| Deferred revenue | 7,992 | 7,912 | |||||||||
| Commercial paper | 1,743 | 9,982 | |||||||||
| Term debt | 9,740 | 11,128 | |||||||||
| Total current liabilities | 137,286 | 153,982 | |||||||||
Non-current liabilities: | |||||||||||
Term debt | 99,627 | 98,959 | |||||||||
Other non-current liabilities | 53,107 | 49,142 | |||||||||
Total non-current liabilities | 152,734 | 148,101 | |||||||||
Total liabilities | 290,020 | 302,083 | |||||||||
| Commitments and contingencies | |||||||||||
| Shareholders’ equity: | |||||||||||
Common stock and additional paid-in capital, $0.00001 par value: 50,400,000 shares authorized; 15,842,407 and 15,943,425 shares issued and outstanding, respectively | 66,399 | 64,849 | |||||||||
| Retained earnings/(Accumulated deficit) | 3,240 | (3,068) | |||||||||
| Accumulated other comprehensive income/(loss) | (12,912) | (11,109) | |||||||||
| Total shareholders’ equity | 56,727 | 50,672 | |||||||||
| Total liabilities and shareholders’ equity | $ | 346,747 | $ | 352,755 | |||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
Apple Inc. | Q1 2023 Form 10-Q | 3
Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
(In millions, except per share amounts)
| Three Months Ended | |||||||||||
| December 31, 2022 | December 25, 2021 | ||||||||||
| Total shareholders’ equity, beginning balances | $ | 50,672 | $ | 63,090 | |||||||
| Common stock and additional paid-in capital: | |||||||||||
| Beginning balances | 64,849 | 57,365 | |||||||||
Common stock withheld related to net share settlement of equity awards | (1,434) | (1,263) | |||||||||
| Share-based compensation | 2,984 | 2,322 | |||||||||
| Ending balances | 66,399 | 58,424 | |||||||||
| Retained earnings/(Accumulated deficit): | |||||||||||
| Beginning balances | (3,068) | 5,562 | |||||||||
| Net income | 29,998 | 34,630 | |||||||||
| Dividends and dividend equivalents declared | (3,712) | (3,665) | |||||||||
Common stock withheld related to net share settlement of equity awards | (978) | (1,730) | |||||||||
| Common stock repurchased | (19,000) | (20,362) | |||||||||
| Ending balances | 3,240 | 14,435 | |||||||||
| Accumulated other comprehensive income/(loss): | |||||||||||
| Beginning balances | (11,109) | 163 | |||||||||
| Other comprehensive income/(loss) | (1,803) | (1,090) | |||||||||
| Ending balances | (12,912) | (927) | |||||||||
| Total shareholders’ equity, ending balances | $ | 56,727 | $ | 71,932 | |||||||
| Dividends and dividend equivalents declared per share or RSU | $ | 0.23 | $ | 0.22 | |||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
Apple Inc. | Q1 2023 Form 10-Q | 4
Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions)
| Three Months Ended | |||||||||||
| December 31, 2022 | December 25, 2021 | ||||||||||
| Cash, cash equivalents and restricted cash, beginning balances | $ | 24,977 | $ | 35,929 | |||||||
| Operating activities: | |||||||||||
| Net income | 29,998 | 34,630 | |||||||||
| Adjustments to reconcile net income to cash generated by operating activities: | |||||||||||
| Depreciation and amortization | 2,916 | 2,697 | |||||||||
| Share-based compensation expense | 2,905 | 2,265 | |||||||||
| Other | (317) | 849 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable, net | 4,275 | (3,934) | |||||||||
| Inventories | (1,807) | 681 | |||||||||
| Vendor non-trade receivables | 2,320 | (9,812) | |||||||||
| Other current and non-current assets | (4,099) | (4,921) | |||||||||
| Accounts payable | (6,075) | 19,813 | |||||||||
| Deferred revenue | 131 | 462 | |||||||||
| Other current and non-current liabilities | 3,758 | 4,236 | |||||||||
| Cash generated by operating activities | 34,005 | 46,966 | |||||||||
| Investing activities: | |||||||||||
| Purchases of marketable securities | (5,153) | (34,913) | |||||||||
| Proceeds from maturities of marketable securities | 7,127 | 11,309 | |||||||||
| Proceeds from sales of marketable securities | 509 | 10,675 | |||||||||
| Payments for acquisition of property, plant and equipment | (3,787) | (2,803) | |||||||||
| Other | (141) | (374) | |||||||||
| Cash used in investing activities | (1,445) | (16,106) | |||||||||
| Financing activities: | |||||||||||
| Payments for taxes related to net share settlement of equity awards | (2,316) | (2,888) | |||||||||
| Payments for dividends and dividend equivalents | (3,768) | (3,732) | |||||||||
| Repurchases of common stock | (19,475) | (20,478) | |||||||||
| Repayments of term debt | (1,401) | — | |||||||||
| Repayments of commercial paper, net | (8,214) | (1,000) | |||||||||
| Other | (389) | (61) | |||||||||
| Cash used in financing activities | (35,563) | (28,159) | |||||||||
| Increase/(Decrease) in cash, cash equivalents and restricted cash | (3,003) | 2,701 | |||||||||
| Cash, cash equivalents and restricted cash, ending balances | $ | 21,974 | $ | 38,630 | |||||||
| Supplemental cash flow disclosure: | |||||||||||
| Cash paid for income taxes, net | $ | 828 | $ | 5,235 | |||||||
| Cash paid for interest | $ | 703 | $ | 531 | |||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
Apple Inc. | Q1 2023 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 24, 2022.
The Company’s fiscal year is the 52- or 53-week period that ends on the last Saturday of September. An additional week is included in the first fiscal quarter every five or six years to realign the Company’s fiscal quarters with calendar quarters, which occurred in the first fiscal quarter of 2023. The Company’s fiscal years 2023 and 2022 span 53 and 52 weeks, respectively. 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.
Earnings Per Share
The following table shows the computation of basic and diluted earnings per share for the three months ended December 31, 2022 and December 25, 2021 (net income in millions and shares in thousands):
| Three Months Ended | |||||||||||
| December 31, 2022 | December 25, 2021 | ||||||||||
| Numerator: | |||||||||||
| Net income | $ | 29,998 | $ | 34,630 | |||||||
| Denominator: | |||||||||||
| Weighted-average basic shares outstanding | 15,892,723 | 16,391,724 | |||||||||
| Effect of dilutive securities | 62,995 | 127,567 | |||||||||
| Weighted-average diluted shares | 15,955,718 | 16,519,291 | |||||||||
| Basic earnings per share | $ | 1.89 | $ | 2.11 | |||||||
| Diluted earnings per share | $ | 1.88 | $ | 2.10 | |||||||
Approximately 89 million restricted stock units (“RSUs”) were excluded from the computation of diluted earnings per share for the three months ended December 31, 2022 because their effect would have been antidilutive.
Apple Inc. | Q1 2023 Form 10-Q | 6
Note 2 – Revenue
Net sales disaggregated by significant products and services for the three months ended December 31, 2022 and December 25, 2021 were as follows (in millions):
| Three Months Ended | |||||||||||
| December 31, 2022 | December 25, 2021 | ||||||||||
iPhone® (1) | $ | 65,775 | $ | 71,628 | |||||||
Mac® (1) | 7,735 | 10,852 | |||||||||
iPad® (1) | 9,396 | 7,248 | |||||||||
Wearables, Home and Accessories (1)(2) | 13,482 | 14,701 | |||||||||
Services (3) | 20,766 | 19,516 | |||||||||
Total net sales (4) | $ | 117,154 | $ | 123,945 | |||||||
(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 mini® and accessories.
(3)Services net sales include sales from the Company’s advertising, AppleCare®, cloud, digital content, payment and other services. Services net sales also include amortization of the deferred value of services bundled in the sales price of certain products.
(4)Includes $3.4 billion of revenue recognized in the three months ended December 31, 2022 that was included in deferred revenue as of September 24, 2022 and $3.0 billion of revenue recognized in the three months ended December 25, 2021 that was included in deferred revenue as of September 25, 2021.
The Company’s proportion of net sales by disaggregated revenue source was generally consistent for each reportable segment in Note 9, “Segment Information and Geographic Data” for the three months ended December 31, 2022 and December 25, 2021, except in Greater China, where iPhone revenue represented a moderately higher proportion of net sales.
As of December 31, 2022 and September 24, 2022, the Company had total deferred revenue of $12.6 billion and $12.4 billion, respectively. As of December 31, 2022, the Company expects 63% of total deferred revenue to be realized in less than a year, 27% within one-to-two years, 8% within two-to-three years and 2% in greater than three years.
Apple Inc. | Q1 2023 Form 10-Q | 7
Note 3 – Financial Instruments
Cash, Cash Equivalents and Marketable Securities
The following tables show the Company’s cash, cash equivalents and marketable securities by significant investment category as of December 31, 2022 and September 24, 2022 (in millions):
| December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Current Marketable Securities | Non-Current Marketable Securities | |||||||||||||||||||||||||||||||||||
| Cash | $ | 17,908 | $ | — | $ | — | $ | 17,908 | $ | 17,908 | $ | — | $ | — | |||||||||||||||||||||||||||
Level 1 (1): | |||||||||||||||||||||||||||||||||||||||||
| Money market funds | 818 | — | — | 818 | 818 | — | — | ||||||||||||||||||||||||||||||||||
| Mutual funds | 330 | 2 | (40) | 292 | — | 292 | — | ||||||||||||||||||||||||||||||||||
| Subtotal | 1,148 | 2 | (40) | 1,110 | 818 | 292 | — | ||||||||||||||||||||||||||||||||||
Level 2 (2): | |||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | 24,128 | 1 | (1,576) | 22,553 | 13 | 9,105 | 13,435 | ||||||||||||||||||||||||||||||||||
| U.S. agency securities | 5,743 | — | (643) | 5,100 | — | 310 | 4,790 | ||||||||||||||||||||||||||||||||||
| Non-U.S. government securities | 17,778 | 14 | (1,029) | 16,763 | — | 9,907 | 6,856 | ||||||||||||||||||||||||||||||||||
Certificates of deposit and time deposits | 2,025 | — | — | 2,025 | 1,795 | 230 | — | ||||||||||||||||||||||||||||||||||
| Commercial paper | 237 | — | — | 237 | — | 237 | — | ||||||||||||||||||||||||||||||||||
| Corporate debt securities | 85,895 | 14 | (7,039) | 78,870 | 1 | 10,377 | 68,492 | ||||||||||||||||||||||||||||||||||
| Municipal securities | 864 | — | (26) | 838 | — | 278 | 560 | ||||||||||||||||||||||||||||||||||
Mortgage- and asset-backed securities | 22,448 | 3 | (2,405) | 20,046 | — | 84 | 19,962 | ||||||||||||||||||||||||||||||||||
| Subtotal | 159,118 | 32 | (12,718) | 146,432 | 1,809 | 30,528 | 114,095 | ||||||||||||||||||||||||||||||||||
Total (3) | $ | 178,174 | $ | 34 | $ | (12,758) | $ | 165,450 | $ | 20,535 | $ | 30,820 | $ | 114,095 | |||||||||||||||||||||||||||
| September 24, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Current Marketable Securities | Non-Current Marketable Securities | |||||||||||||||||||||||||||||||||||
| Cash | $ | 18,546 | $ | — | $ | — | $ | 18,546 | $ | 18,546 | $ | — | $ | — | |||||||||||||||||||||||||||
Level 1 (1): | |||||||||||||||||||||||||||||||||||||||||
| Money market funds | 2,929 | — | — | 2,929 | 2,929 | — | — | ||||||||||||||||||||||||||||||||||
| Mutual funds | 274 | — | (47) | 227 | — | 227 | — | ||||||||||||||||||||||||||||||||||
| Subtotal | 3,203 | — | (47) | 3,156 | 2,929 | 227 | — | ||||||||||||||||||||||||||||||||||
Level 2 (2): | |||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | 25,134 | — | (1,725) | 23,409 | 338 | 5,091 | 17,980 | ||||||||||||||||||||||||||||||||||
| U.S. agency securities | 5,823 | — | (655) | 5,168 | — | 240 | 4,928 | ||||||||||||||||||||||||||||||||||
| Non-U.S. government securities | 16,948 | 2 | (1,201) | 15,749 | — | 8,806 | 6,943 | ||||||||||||||||||||||||||||||||||
Certificates of deposit and time deposits | 2,067 | — | — | 2,067 | 1,805 | 262 | — | ||||||||||||||||||||||||||||||||||
| Commercial paper | 718 | — | — | 718 | 28 | 690 | — | ||||||||||||||||||||||||||||||||||
| Corporate debt securities | 87,148 | 9 | (7,707) | 79,450 | — | 9,023 | 70,427 | ||||||||||||||||||||||||||||||||||
| Municipal securities | 921 | — | (35) | 886 | — | 266 | 620 | ||||||||||||||||||||||||||||||||||
Mortgage- and asset-backed securities | 22,553 | — | (2,593) | 19,960 | — | 53 | 19,907 | ||||||||||||||||||||||||||||||||||
| Subtotal | 161,312 | 11 | (13,916) | 147,407 | 2,171 | 24,431 | 120,805 | ||||||||||||||||||||||||||||||||||
Total (3) | $ | 183,061 | $ | 11 | $ | (13,963) | $ | 169,109 | $ | 23,646 | $ | 24,658 | $ | 120,805 | |||||||||||||||||||||||||||
(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 31, 2022 and September 24, 2022, total marketable securities included $13.6 billion and $12.7 billion, respectively, that were restricted from general use, related to the European Commission decision finding that Ireland granted state aid to the Company, and other agreements.
Apple Inc. | Q1 2023 Form 10-Q | 8
The following table shows the fair value of the Company’s non-current marketable debt securities, by contractual maturity, as of December 31, 2022 (in millions):
| Due after 1 year through 5 years | $ | 82,497 | |||
| Due after 5 years through 10 years | 14,243 | ||||
| Due after 10 years | 17,355 | ||||
| Total fair value | $ | 114,095 | |||
Derivative Instruments and Hedging
The Company may use derivative instruments to partially offset its business exposure to foreign exchange and interest rate risk. However, the Company may choose not to hedge certain exposures for a variety of reasons, including 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 exchange or interest rates.
Foreign Exchange Risk
To protect gross margins from fluctuations in foreign currency exchange rates, the Company may enter into forward contracts, option contracts or other instruments, 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 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. The Company designates these instruments as either cash flow or fair value hedges. As of December 31, 2022, the maximum length of time over which the Company is hedging its exposure to the variability in future cash flows for term debt–related foreign currency transactions is 20 years.
The Company may also enter into derivative instruments that are not designated as accounting hedges to protect gross margins from certain fluctuations in foreign currency exchange rates, as well as 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.
Interest Rate Risk
To protect the Company’s term debt or marketable securities from fluctuations in interest rates, the Company may enter into interest rate swaps, options or other instruments. The Company designates these instruments as either cash flow or fair value hedges.
The notional amounts of the Company’s outstanding derivative instruments as of December 31, 2022 and September 24, 2022 were as follows (in millions):
| December 31, 2022 | September 24, 2022 | ||||||||||
| Derivative instruments designated as accounting hedges: | |||||||||||
| Foreign exchange contracts | $ | 66,054 | $ | 102,670 | |||||||
| Interest rate contracts | $ | 20,125 | $ | 20,125 | |||||||
| Derivative instruments not designated as accounting hedges: | |||||||||||
| Foreign exchange contracts | $ | 134,971 | $ | 185,381 | |||||||
Apple Inc. | Q1 2023 Form 10-Q | 9
The gross fair values of the Company’s derivative assets and liabilities as of September 24, 2022 were as follows (in millions):
| September 24, 2022 | |||||||||||||||||
| Fair Value of Derivatives Designated as Accounting Hedges | Fair Value of Derivatives Not Designated as Accounting Hedges | Total Fair Value | |||||||||||||||
Derivative assets (1): | |||||||||||||||||
| Foreign exchange contracts | $ | 4,317 | $ | 2,819 | $ | 7,136 | |||||||||||
Derivative liabilities (2): | |||||||||||||||||
| Foreign exchange contracts | $ | 2,205 | $ | 2,547 | $ | 4,752 | |||||||||||
| Interest rate contracts | $ | 1,367 | $ | — | $ | 1,367 | |||||||||||
(1)Derivative assets are measured using Level 2 fair value inputs and are included in other current assets and other non-current assets in the Condensed Consolidated Balance Sheet.
(2)Derivative liabilities are measured using Level 2 fair value inputs and are included in other current liabilities and other non-current liabilities in the Condensed Consolidated Balance Sheet.
The derivative assets above represent the Company’s gross credit exposure if all counterparties failed to perform. To mitigate credit risk, the Company generally enters into collateral security arrangements that provide for collateral to be received or posted when the net fair values of certain derivatives fluctuate from contractually established thresholds. To further limit credit risk, the Company generally enters into master netting arrangements with the respective counterparties to the Company’s derivative contracts, under which the Company is allowed to settle transactions with a single net amount payable by one party to the other. As of September 24, 2022, 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 $7.8 billion, resulting in a net derivative asset of $412 million.
The carrying amounts of the Company’s hedged items in fair value hedges as of December 31, 2022 and September 24, 2022 were as follows (in millions):
| December 31, 2022 | September 24, 2022 | ||||||||||
| Hedged assets/(liabilities): | |||||||||||
| Current and non-current marketable securities | $ | 14,311 | $ | 13,378 | |||||||
| Current and non-current term debt | $ | (18,731) | $ | (18,739) | |||||||
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 31, 2022 and September 24, 2022, the Company had one customer that represented 10% or more of total trade receivables, which accounted for 11% and 10%, respectively. The Company’s cellular network carriers accounted for 43% and 44% of total trade receivables as of December 31, 2022 and September 24, 2022, 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 subassemblies or assemble final products for the Company. The Company purchases these components directly from suppliers. As of December 31, 2022, the Company had two vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 54% and 16%. As of September 24, 2022, the Company had two vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 54% and 13%.
Apple Inc. | Q1 2023 Form 10-Q | 10
Note 4 – Condensed Consolidated Financial Statement Details
The following tables show the Company’s condensed consolidated financial statement details as of December 31, 2022 and September 24, 2022 (in millions):
Inventories
| December 31, 2022 | September 24, 2022 | ||||||||||
| Components | $ | 2,513 | $ | 1,637 | |||||||
| Finished goods | 4,307 | 3,309 | |||||||||
| Total inventories | $ | 6,820 | $ | 4,946 | |||||||
Property, Plant and Equipment, Net
| December 31, 2022 | September 24, 2022 | ||||||||||
| Gross property, plant and equipment | $ | 110,995 | $ | 114,457 | |||||||
| Accumulated depreciation and amortization | (68,044) | (72,340) | |||||||||
| Total property, plant and equipment, net | $ | 42,951 | $ | 42,117 | |||||||
Other Income/(Expense), Net
The following table shows the detail of other income/(expense), net for the three months ended December 31, 2022 and December 25, 2021 (in millions):
| Three Months Ended | |||||||||||
| December 31, 2022 | December 25, 2021 | ||||||||||
| Interest and dividend income | $ | 868 | $ | 650 | |||||||
| Interest expense | (1,003) | (694) | |||||||||
| Other expense, net | (258) | (203) | |||||||||
| Total other income/(expense), net | $ | (393) | $ | (247) | |||||||
Note 5 – Debt
Commercial Paper
The Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. The Company uses net proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases. As of December 31, 2022 and September 24, 2022, the Company had $1.7 billion and $10.0 billion of Commercial Paper outstanding, respectively. The following table provides a summary of cash flows associated with the issuance and maturities of Commercial Paper for the three months ended December 31, 2022 and December 25, 2021 (in millions):
| Three Months Ended | |||||||||||
| December 31, 2022 | December 25, 2021 | ||||||||||
| Maturities 90 days or less: | |||||||||||
| Proceeds from/(Repayments of) commercial paper, net | $ | (5,569) | $ | 1,339 | |||||||
| Maturities greater than 90 days: | |||||||||||
| Proceeds from commercial paper | — | 1,191 | |||||||||
| Repayments of commercial paper | (2,645) | (3,530) | |||||||||
| Repayments of commercial paper, net | (2,645) | (2,339) | |||||||||
| Total repayments of commercial paper, net | $ | (8,214) | $ | (1,000) | |||||||
Apple Inc. | Q1 2023 Form 10-Q | 11
Term Debt
As of December 31, 2022 and September 24, 2022, the Company had outstanding fixed-rate notes with varying maturities for an aggregate carrying amount of $109.4 billion and $110.1 billion, respectively (collectively the “Notes”). As of December 31, 2022 and September 24, 2022, the fair value of the Company’s Notes, based on Level 2 inputs, was $98.0 billion and $98.8 billion, respectively.
Note 6 – Shareholders’ Equity
Share Repurchase Program
During the three months ended December 31, 2022, the Company repurchased 133 million shares of its common stock for $19.0 billion under a share repurchase program authorized by the Board of Directors (the “Program”). The Program does not obligate the Company to acquire a minimum amount 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.
Note 7 – Benefit Plans
Restricted Stock Units
A summary of the Company’s RSU activity and related information for the three months ended December 31, 2022 is as follows:
Number of RSUs (in thousands) | Weighted-Average Grant Date Fair Value Per RSU | Aggregate Fair Value (in millions) | |||||||||||||||
| Balance as of September 24, 2022 | 201,501 | $ | 109.48 | ||||||||||||||
| RSUs granted | 82,123 | $ | 149.85 | ||||||||||||||
| RSUs vested | (47,298) | $ | 84.46 | ||||||||||||||
| RSUs canceled | (2,958) | $ | 120.26 | ||||||||||||||
| Balance as of December 31, 2022 | 233,368 | $ | 128.62 | $ | 30,322 | ||||||||||||
The fair value as of the respective vesting dates of RSUs was $6.8 billion and $8.5 billion for the three months ended December 31, 2022 and December 25, 2021, respectively.
Share-Based Compensation
The following table shows share-based compensation expense and the related income tax benefit included in the Condensed Consolidated Statements of Operations for the three months ended December 31, 2022 and December 25, 2021 (in millions):
| Three Months Ended | |||||||||||
| December 31, 2022 | December 25, 2021 | ||||||||||
| Share-based compensation expense | $ | 2,905 | $ | 2,265 | |||||||
| Income tax benefit related to share-based compensation expense | $ | (1,178) | $ | (1,536) | |||||||
As of December 31, 2022, the total unrecognized compensation cost related to outstanding RSUs and stock options was $25.5 billion, which the Company expects to recognize over a weighted-average period of 3.0 years.
Apple Inc. | Q1 2023 Form 10-Q | 12
Note 8 – Commitments and Contingencies
Unconditional Purchase Obligations
The Company has entered into certain off–balance sheet commitments that require the future purchase of goods or services (“unconditional purchase obligations”). The Company’s unconditional purchase obligations primarily consist of supplier arrangements, licensed content and distribution rights. Future payments under noncancelable unconditional purchase obligations with a remaining term in excess of one year as of December 31, 2022, are as follows (in millions):
| 2023 (remaining nine months) | $ | 2,899 | |||
| 2024 | 2,897 | ||||
| 2025 | 1,584 | ||||
| 2026 | 6,554 | ||||
| 2027 | 348 | ||||
| Thereafter | 444 | ||||
| Total | $ | 14,726 | |||
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 resolved. The outcome of litigation is inherently uncertain. 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 greater than a recorded accrual, concerning loss contingencies for asserted legal and other claims.
Note 9 – Segment Information and Geographic Data
The following table shows information by reportable segment for the three months ended December 31, 2022 and December 25, 2021 (in millions):
| Three Months Ended | |||||||||||
| December 31, 2022 | December 25, 2021 | ||||||||||
| Americas: | |||||||||||
| Net sales | $ | 49,278 | $ | 51,496 | |||||||
| Operating income | $ | 17,864 | $ | 19,585 | |||||||
| Europe: | |||||||||||
| Net sales | $ | 27,681 | $ | 29,749 | |||||||
| Operating income | $ | 10,017 | $ | 11,545 | |||||||
| Greater China: | |||||||||||
| Net sales | $ | 23,905 | $ | 25,783 | |||||||
| Operating income | $ | 10,437 | $ | 11,183 | |||||||
| Japan: | |||||||||||
| Net sales | $ | 6,755 | $ | 7,107 | |||||||
| Operating income | $ | 3,236 | $ | 3,349 | |||||||
| Rest of Asia Pacific: | |||||||||||
| Net sales | $ | 9,535 | $ | 9,810 | |||||||
| Operating income | $ | 3,851 | $ | 3,995 | |||||||
Apple Inc. | Q1 2023 Form 10-Q | 13
A reconciliation of the Company’s segment operating income to the Condensed Consolidated Statements of Operations for the three months ended December 31, 2022 and December 25, 2021 is as follows (in millions):
| Three Months Ended | |||||||||||
| December 31, 2022 | December 25, 2021 | ||||||||||
| Segment operating income | $ | 45,405 | $ | 49,657 | |||||||
| Research and development expense | (7,709) | (6,306) | |||||||||
| Other corporate expenses, net | (1,680) | (1,863) | |||||||||
| Total operating income | $ | 36,016 | $ | 41,488 | |||||||
Apple Inc. | Q1 2023 Form 10-Q | 14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section and other parts of this Quarterly Report on Form 10-Q (“Form 10-Q”) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. For example, statements in this Form 10-Q regarding the potential future impact of the COVID-19 pandemic on the Company’s business and results of operations are forward-looking statements. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended September 24, 2022 (the “2022 Form 10-K”) under the heading “Risk Factors.” The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Unless otherwise stated, all information presented herein is based on the Company’s fiscal calendar, and references to particular years, quarters, months or periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years. Each of the terms the “Company” and “Apple” as used herein refers collectively to Apple Inc. and its wholly owned subsidiaries, unless otherwise stated.
The following discussion should be read in conjunction with the 2022 Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) and the condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q.
Available Information
The Company periodically provides certain information for investors on its corporate website, www.apple.com, and its investor relations website, investor.apple.com. This includes press releases and other information about financial performance, information on environmental, social and governance matters, and details related to the Company’s annual meeting of shareholders. The information contained on the websites referenced in this Form 10-Q is not incorporated by reference into this filing. Further, the Company’s references to website URLs are intended to be inactive textual references only.
Business Seasonality and Product Introductions
The Company has historically experienced higher net sales in its first quarter compared to other quarters in its fiscal year due in part to seasonal holiday demand. Additionally, new product and service introductions can significantly impact net sales, cost of sales and operating expenses. The timing of product introductions can also impact the Company’s net sales to its indirect distribution channels as these channels are filled with new inventory following a product launch, and channel inventory of an older product often declines as the launch of a newer product approaches. Net sales can also be affected when consumers and distributors anticipate a product introduction.
Fiscal Period
The Company’s fiscal year is the 52- or 53-week period that ends on the last Saturday of September. An additional week is included in the first fiscal quarter every five or six years to realign the Company’s fiscal quarters with calendar quarters, which occurred in the first quarter of 2023. The Company’s fiscal years 2023 and 2022 span 53 and 52 weeks, respectively.
Quarterly Highlights
Total net sales decreased 5% or $6.8 billion during the first quarter of 2023 compared to the same quarter in 2022 due to the weakness in foreign currencies relative to the U.S. dollar. The weakness in foreign currencies contributed to lower net sales of iPhone and Mac, which was partially offset by higher net sales of iPad.
During the first quarter of 2023, the Company announced a new iPad, a new iPad Pro® powered by the Apple M2 chip, and a new Apple TV 4K.
The Company repurchased $19.0 billion of its common stock and paid dividends and dividend equivalents of $3.8 billion during the first quarter of 2023.
Apple Inc. | Q1 2023 Form 10-Q | 15
COVID-19
The COVID-19 pandemic has had, and continues to have, a significant impact around the world, prompting governments and businesses to take unprecedented measures, such as restrictions on travel and business operations, temporary closures of businesses, and quarantine and shelter-in-place orders. The COVID-19 pandemic has at times significantly curtailed global economic activity and caused significant volatility and disruption in global financial markets. The COVID-19 pandemic and the measures taken by many countries in response have affected and could in the future materially impact the Company’s business, results of operations and financial condition.
Certain of the Company’s outsourcing partners, component suppliers and logistical service providers have experienced, and could in the future experience, disruptions related to the COVID-19 pandemic, resulting in supply shortages. During the first quarter of 2023, COVID-related impacts temporarily affected the Company’s primary iPhone 14 Pro and iPhone 14 Pro Max assembly facility located in Zhengzhou, China. The facility operated at significantly reduced capacity, impacting iPhone 14 Pro and iPhone Pro Max shipments.
Macroeconomic Conditions
Macroeconomic conditions, including inflation, rising interest rates and currency fluctuations, have direct and indirect impacts on the Company’s business. The Company believes these factors have impacted, and could in the future materially impact, the Company’s results of operations and financial condition.
Segment Operating Performance
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 mainland, 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. Further information regarding the Company’s reportable segments can be found in Part I, Item 1 of this Form 10-Q in the Notes to Condensed Consolidated Financial Statements in Note 9, “Segment Information and Geographic Data.”
The following table shows net sales by reportable segment for the three months ended December 31, 2022 and December 25, 2021 (dollars in millions):
| Three Months Ended | |||||||||||||||||
| December 31, 2022 | December 25, 2021 | Change | |||||||||||||||
| Net sales by reportable segment: | |||||||||||||||||
| Americas | $ | 49,278 | $ | 51,496 | (4) | % | |||||||||||
| Europe | 27,681 | 29,749 | (7) | % | |||||||||||||
| Greater China | 23,905 | 25,783 | (7) | % | |||||||||||||
| Japan | 6,755 | 7,107 | (5) | % | |||||||||||||
| Rest of Asia Pacific | 9,535 | 9,810 | (3) | % | |||||||||||||
| Total net sales | $ | 117,154 | $ | 123,945 | (5) | % | |||||||||||
Americas
Americas net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to lower net sales of iPhone and Mac, partially offset by higher net sales of Services and iPad. The weakness of the Canadian dollar relative to the U.S. dollar had an unfavorable year-over-year impact on Americas net sales during the first quarter of 2023.
Europe
Europe net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due to the weakness in foreign currencies relative to the U.S. dollar, which contributed to lower net sales of iPhone and Mac.
Apple Inc. | Q1 2023 Form 10-Q | 16
Greater China
Greater China net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due to the weakness of the renminbi relative to the U.S. dollar. The weakness of the renminbi contributed to lower net sales of iPhone, which was partially offset by higher net sales of iPad.
Japan
Japan net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due to the weakness of the yen relative to the U.S. dollar, which contributed to lower net sales of Services and Mac.
Rest of Asia Pacific
Rest of Asia Pacific net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due to the weakness in foreign currencies relative to the U.S. dollar. The weakness in foreign currencies contributed to lower net sales of iPhone and Mac, which was partially offset by higher net sales of Services and iPad.
Products and Services Performance
The following table shows net sales by category for the three months ended December 31, 2022 and December 25, 2021 (dollars in millions):
| Three Months Ended | |||||||||||||||||
| December 31, 2022 | December 25, 2021 | Change | |||||||||||||||
| Net sales by category: | |||||||||||||||||
iPhone (1) | $ | 65,775 | $ | 71,628 | (8) | % | |||||||||||
Mac (1) | 7,735 | 10,852 | (29) | % | |||||||||||||
iPad (1) | 9,396 | 7,248 | 30 | % | |||||||||||||
Wearables, Home and Accessories (1)(2) | 13,482 | 14,701 | (8) | % | |||||||||||||
Services (3) | 20,766 | 19,516 | 6 | % | |||||||||||||
| Total net sales | $ | 117,154 | $ | 123,945 | (5) | % | |||||||||||
(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 mini and accessories.
(3)Services net sales include sales from the Company’s advertising, AppleCare, cloud, digital content, payment and other services. Services net sales also include amortization of the deferred value of services bundled in the sales price of certain products.
iPhone
iPhone net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to lower net sales from the Company’s new iPhone models launched in the fourth quarter of 2022.
Mac
Mac net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to lower net sales of MacBook Pro®.
iPad
iPad net sales increased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to higher net sales of iPad and iPad Air®.
Apple Inc. | Q1 2023 Form 10-Q | 17
Wearables, Home and Accessories
Wearables, Home and Accessories net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to lower net sales of AirPods, partially offset by higher net sales of Watch.
Services
Services net sales increased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to higher net sales from cloud services, the App Store® and music.
Gross Margin
Products and Services gross margin and gross margin percentage for the three months ended December 31, 2022 and December 25, 2021 were as follows (dollars in millions):
| Three Months Ended | |||||||||||
| December 31, 2022 | December 25, 2021 | ||||||||||
| Gross margin: | |||||||||||
| Products | $ | 35,623 | $ | 40,120 | |||||||
| Services | 14,709 | 14,123 | |||||||||
| Total gross margin | $ | 50,332 | $ | 54,243 | |||||||
| Gross margin percentage: | |||||||||||
| Products | 37.0 | % | 38.4 | % | |||||||
| Services | 70.8 | % | 72.4 | % | |||||||
| Total gross margin percentage | 43.0 | % | 43.8 | % | |||||||
Products Gross Margin
Products gross margin decreased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to the weakness in foreign currencies relative to the U.S. dollar and lower Products volume.
Products gross margin percentage decreased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to the weakness in foreign currencies relative to the U.S. dollar.
Services Gross Margin
Services gross margin increased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to higher Services net sales, partially offset by the weakness in foreign currencies relative to the U.S. dollar.
Services gross margin percentage decreased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to the weakness in foreign currencies relative to the U.S. dollar and higher Services costs, partially offset by improved leverage.
The Company’s future gross margins can be impacted by a variety of factors, as discussed in Part I, Item 1A of the 2022 Form 10-K under the heading “Risk Factors.” As a result, the Company believes, in general, gross margins will be subject to volatility and downward pressure.
Apple Inc. | Q1 2023 Form 10-Q | 18
Operating Expenses
Operating expenses for the three months ended December 31, 2022 and December 25, 2021 were as follows (dollars in millions):
| Three Months Ended | |||||||||||
| December 31, 2022 | December 25, 2021 | ||||||||||
| Research and development | $ | 7,709 | $ | 6,306 | |||||||
| Percentage of total net sales | 7 | % | 5 | % | |||||||
| Selling, general and administrative | $ | 6,607 | $ | 6,449 | |||||||
| Percentage of total net sales | 6 | % | 5 | % | |||||||
| Total operating expenses | $ | 14,316 | $ | 12,755 | |||||||
| Percentage of total net sales | 12 | % | 10 | % | |||||||
Research and Development
The growth in research and development (“R&D”) expense during the first quarter of 2023 compared to the same quarter in 2022 was driven primarily by increases in headcount-related expenses.
Selling, General and Administrative
The growth in selling, general and administrative expense during the first quarter of 2023 compared to the same quarter in 2022 was driven primarily by increases in headcount-related expenses.
Provision for Income Taxes
Provision for income taxes, effective tax rate and statutory federal income tax rate for the three months ended December 31, 2022 and December 25, 2021 were as follows (dollars in millions):
| Three Months Ended | |||||||||||
| December 31, 2022 | December 25, 2021 | ||||||||||
| Provision for income taxes | $ | 5,625 | $ | 6,611 | |||||||
| Effective tax rate | 15.8 | % | 16.0 | % | |||||||
| Statutory federal income tax rate | 21 | % | 21 | % | |||||||
The Company’s effective tax rate for the first quarter of 2023 was lower than the statutory federal income tax rate due primarily to a lower effective tax rate on foreign earnings, tax benefits from share-based compensation, and the U.S. federal R&D credit, partially offset by state income taxes.
The Company’s effective tax rate for the first quarter of 2023 was lower compared to the same quarter in 2022 due primarily to a higher U.S. federal R&D credit, lower state income taxes and a lower effective tax rate on foreign earnings, largely offset by lower tax benefits from share-based compensation.
Liquidity and Capital Resources
The Company believes its balances of cash, cash equivalents and unrestricted marketable securities, along with cash generated by ongoing operations and continued access to debt markets, will be sufficient to satisfy its cash requirements and capital return program over the next 12 months and beyond.
The Company’s contractual cash requirements have not changed materially since the 2022 Form 10-K, except for commercial paper and manufacturing purchase obligations.
Commercial Paper
The Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. As of December 31, 2022, the Company had $1.7 billion of Commercial Paper outstanding, all of which was payable within 12 months.
Apple Inc. | Q1 2023 Form 10-Q | 19
Manufacturing Purchase Obligations
The Company utilizes several outsourcing partners to manufacture subassemblies for the Company’s products and to perform final assembly and testing of finished products. The Company also obtains individual components for its products from a wide variety of individual suppliers. Outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically covers periods up to 150 days. As of December 31, 2022, the Company had manufacturing purchase obligations of $55.1 billion, with $54.8 billion payable within 12 months. The Company’s manufacturing purchase obligations are primarily noncancelable.
In addition to its contractual cash requirements, the Company has a capital return program authorized by the Board of Directors. The share repurchase program (the “Program”) does not obligate the Company to acquire a minimum amount of shares. As of December 31, 2022, the Company’s quarterly cash dividend was $0.23 per share. The Company intends to increase its dividend on an annual basis, subject to declaration by the Board of Directors.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported. Note 1, “Summary of Significant Accounting Policies” of the Notes to condensed consolidated Financial Statements in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2022 Form 10-K describe the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements. There have been no material changes to the Company’s critical accounting estimates since the 2022 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the Company’s market risk during the first three months of 2023. For a discussion of the Company’s exposure to market risk, refer to the Company’s market risk disclosures set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of the 2022 Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) were effective as of December 31, 2022 to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the first quarter of 2023, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Apple Inc. | Q1 2023 Form 10-Q | 20
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Epic Games
Epic Games, Inc. (“Epic”) filed a lawsuit in the U.S. District Court for the Northern District of California (the “Northern California District Court”) against the Company alleging violations of federal and state antitrust laws and California’s unfair competition law based upon the Company’s operation of its App Store. The Company filed a counterclaim for breach of contract. On September 10, 2021, the Northern California District Court ruled in favor of the Company with respect to nine out of the ten counts included in Epic’s claim, and in favor of the Company with respect to the Company’s claims for breach of contract. The Northern California District Court found that certain provisions of the Company’s App Store Review Guidelines violate California’s unfair competition law and issued an injunction. Epic appealed the decision. The Company filed a cross-appeal and has been granted a stay pending the appeal.
Other Legal Proceedings
The Company is subject to other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. The Company settled certain matters during the first quarter of 2023 that did not individually or in the aggregate have a material impact on the Company’s financial condition or operating results. The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting period for amounts above management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected.
Item 1A. Risk Factors
The Company’s business, reputation, results of operations, financial condition and stock price can be affected by a number of factors, whether currently known or unknown, including those described in Part I, Item 1A of the 2022 Form 10-K under the heading “Risk Factors.” When any one or more of these risks materialize from time to time, the Company’s business, reputation, results of operations, financial condition and stock price can be materially and adversely affected. There have been no material changes to the Company’s risk factors since the 2022 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Share repurchase activity during the three months ended December 31, 2022 was as follows (in millions, except number of shares, which are reflected in thousands, and per share amounts):
| Periods | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (1) | ||||||||||||||||||||||
| September 25, 2022 to October 29, 2022: | ||||||||||||||||||||||||||
Open market and privately negotiated purchases | 69,169 | $ | 144.57 | 69,169 | ||||||||||||||||||||||
| October 30, 2022 to November 26, 2022: | ||||||||||||||||||||||||||
Open market and privately negotiated purchases | 23,113 | $ | 149.26 | 23,113 | ||||||||||||||||||||||
| November 27, 2022 to December 31, 2022: | ||||||||||||||||||||||||||
Open market and privately negotiated purchases | 40,557 | $ | 136.85 | 40,557 | ||||||||||||||||||||||
| Total | 132,839 | $ | 41,665 | |||||||||||||||||||||||
(1)On April 28, 2022, the Board of Directors authorized the purchase of an additional $90 billion of the Company’s common stock under the Program. As of December 31, 2022, total utilization under the April 2022 authorization was $48.3 billion. The Program does not obligate the Company to acquire a minimum amount 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 Exchange Act.
Item 3. Defaults Upon Senior Securities
None.
Apple Inc. | Q1 2023 Form 10-Q | 21
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Rule 10b5-1 Trading Plans
During the three months ended December 31, 2022, Katherine L. Adams, Timothy D. Cook, Luca Maestri, Deirdre O’Brien and Jeffrey Williams, each an officer for purposes of Section 16 of the Exchange Act, 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 preestablishes 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 sales of shares acquired under the Company’s employee and director equity plans.
Item 6. Exhibits
| Incorporated by Reference | ||||||||||||||||||||||||||
Exhibit Number | Exhibit Description | Form | Exhibit | Filing Date/ Period End Date | ||||||||||||||||||||||
| 10.1* | ||||||||||||||||||||||||||
| 10.2* | ||||||||||||||||||||||||||
| 31.1* | ||||||||||||||||||||||||||
| 31.2* | ||||||||||||||||||||||||||
| 32.1** | ||||||||||||||||||||||||||
| 101* | Inline XBRL Document Set for the condensed consolidated financial statements and accompanying notes in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q. | |||||||||||||||||||||||||
| 104* | Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set. | |||||||||||||||||||||||||
* Filed herewith.
** Furnished herewith.
Apple Inc. | Q1 2023 Form 10-Q | 22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: February 2, 2023 | Apple Inc. | ||||||||||
| By: | /s/ Luca Maestri | ||||||||||
| Luca Maestri | |||||||||||
| Senior Vice President, Chief Financial Officer | |||||||||||
Apple Inc. | Q1 2023 Form 10-Q | 23