The
following description of risk factors includes any material changes to, and supersedes the description of, risk factors associated with the Companys business previously disclosed in Part I, Item 1A of the Companys 2013 Form 10-K and
in Part II, Item 1A of the Form 10-Q for the quarter ended December 28, 2013, in each case under the heading Risk Factors. The business, financial condition and operating results of the Company can be affected by a number of
factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause the Companys actual results of operations and financial condition to vary materially
from past, or from anticipated future, results of operations and financial condition. Any of these factors, in whole or in part, could materially and adversely affect the Companys business, financial condition, results of operations and common
stock price.
The following discussion of risk factors contains forward-looking statements. These risk factors may be
important to understanding any statement in this Form 10-Q or elsewhere. The following information should be read in conjunction with the condensed consolidated financial statements and related notes in Part I, Item 1, Financial
Statements and Part I, Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-Q.
Because of the following factors, as well as other factors affecting the Companys financial condition and operating results, past financial performance should not be considered to be a reliable
indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
Global
and regional economic conditions could materially adversely affect the Company.
The Companys operations and
performance depend significantly on global and regional economic conditions. Uncertainty about global and regional economic conditions poses a risk as consumers and businesses postpone spending in response to tighter credit, higher
unemployment, financial market volatility, government austerity programs, negative financial news, declines in income or asset values and/or other factors. These worldwide and regional economic conditions could have a material adverse effect on
demand for the Companys products and services. Demand also could differ materially from the Companys expectations as a result of currency fluctuations because the Company generally raises prices on goods and services sold outside the
U.S. to correspond with the effect of a strengthening of the U.S. dollar. Other factors that could influence worldwide or regional demand include increases in fuel and other energy costs, conditions in the real estate and mortgage markets,
unemployment, labor and healthcare costs, access to credit, consumer confidence, and other macroeconomic factors affecting consumer spending behavior. These and other economic factors could materially adversely affect demand for the Companys
products and services.
In the event of further financial turmoil affecting the banking system and financial markets,
additional consolidation of the financial services industry, or significant financial service institution failures, there could be a new or incremental tightening in the credit markets, low liquidity, and extreme volatility in fixed
income, credit, currency, and equity markets. This could have a number of effects on the Companys business, including the insolvency or financial instability of outsourcing partners or suppliers or their inability to obtain credit to
finance development and/or manufacture products resulting in product delays; inability of customers, including channel partners, to obtain credit to finance purchases of the Companys products; failure of derivative counterparties and
other financial institutions; and restricting the Companys ability to issue new debt. Other income and expense also could vary materially from expectations depending on gains or losses realized on the sale or exchange of financial
instruments; impairment charges resulting from revaluations of debt and equity securities and other investments; interest rates; cash balances; volatility in foreign exchange rates; and changes in fair value of derivative
instruments. Increased volatility in the financial markets and overall economic uncertainty would increase the risk of the actual amounts realized in the future on the Companys financial instruments differing
significantly from the fair values currently assigned to them.
39
Global markets for the Companys products and services are highly competitive and subject to rapid
technological change, and the Company may be unable to compete effectively in these markets.
The Companys products
and services compete in highly competitive global markets characterized by aggressive price cutting and resulting downward pressure on gross margins, frequent introduction of new products, short product life cycles, evolving industry standards,
continual improvement in product price/performance characteristics, rapid adoption of technological and product advancements by competitors, and price sensitivity on the part of consumers.
The Companys ability to compete successfully depends heavily on its ability to ensure a continuing and timely introduction of
innovative new products and technologies to the marketplace. The Company believes it is unique in that it designs and develops nearly the entire solution for its products, including the hardware, operating system, numerous software applications, and
related services. As a result, the Company must make significant investments in research and development. The Company currently holds a significant number of patents and copyrights and has registered and/or has applied to register numerous patents,
trademarks and service marks. In contrast, many of the Companys competitors seek to compete primarily through aggressive pricing and very low cost structures, and emulating the Companys products and infringing
on its intellectual property. If the Company is unable to continue to develop and sell innovative new products with attractive margins or if competitors infringe on the Companys intellectual property, the Companys ability to
maintain a competitive advantage could be adversely affected.
The Company markets certain mobile communication and media
devices based on the iOS mobile operating system and also markets related third-party digital content and applications. The Company faces substantial competition in these markets from companies that have significant technical, marketing,
distribution and other resources, as well as established hardware, software and digital content supplier relationships; and the Company has a minority market share in the smartphone market. Additionally, the Company faces significant price
competition as competitors reduce their selling prices and attempt to imitate the Companys product features and applications within their own products or, alternatively, collaborate with each other to offer solutions that are more competitive
than those they currently offer. The Company also competes with illegitimate ways to obtain third-party digital content and applications. Some of the Companys competitors have greater experience, product breadth and distribution channels than
the Company. Because some current and potential competitors have substantial resources and/or experience and a lower cost structure, they may be able to provide products and services at little or no profit or even at a loss. The Company also expects
competition to intensify as competitors attempt to imitate the Companys approach to providing components seamlessly within their individual offerings or work collaboratively to offer integrated solutions. The Companys financial condition
and operating results depend substantially on the Companys ability to continually improve iOS and iOS devices in order to maintain their functional and design advantages.
The Company is the only authorized maker of hardware using OS X, which has a minority market share in the personal computer market. This
market is dominated by computer makers using competing operating systems, most notably Windows. In the market for personal computers and peripherals, the Company faces a significant number of competitors, many of which have broader product lines,
lower priced products, and a larger installed customer base. Historically, consolidation in this market has resulted in larger competitors. Price competition has been particularly intense as competitors selling Windows-based personal computers have
aggressively cut prices and lowered product margins. An increasing number of Internet-enabled devices that include software applications and are smaller and simpler than traditional personal computers compete for market share with the Companys
existing products. The Companys financial condition and operating results also depend on its ability to continually improve the Mac platform to maintain its functional and design advantages.
There can be no assurance the Company will be able to continue to provide products and services that compete effectively.
To remain competitive and stimulate customer demand, the Company must successfully manage frequent product introductions and transitions.
Due to the highly volatile and competitive nature of the industries in which the Company competes, the Company must
continually introduce new products, services and technologies, enhance existing products and services, and effectively stimulate customer demand for new and upgraded products. The success of new product introductions depends on a number of factors
including, but not limited to, timely and successful product development, market acceptance, the Companys ability to manage the risks associated with new product production ramp-up issues, the availability of application software for new
products, the effective management of purchase commitments and inventory levels in line with anticipated product demand, the availability of products in appropriate quantities and costs to meet anticipated demand, and the risk that new products may
have quality or other defects or deficiencies in the early stages of introduction. Accordingly, the Company cannot determine in advance the ultimate effect of new product introductions and transitions.
40
The Company depends on the performance of distributors, carriers and other resellers.
The Company distributes its products through cellular network carriers, wholesalers, national and regional retailers, and value-added
resellers, many of whom distribute products from competing manufacturers. The Company also sells its products and third-party products in most of its major markets directly to education, enterprise and government customers, and consumers and small
and mid-sized businesses through its online and retail stores.
Carriers providing cellular network service for iPhone
typically subsidize users purchases of the device. There is no assurance that such subsidies will be continued at all or in the same amounts upon renewal of the Companys agreements with these carriers or in agreements the Company enters
into with new carriers.
Many resellers have narrow operating margins and have been adversely affected in the past by weak
economic conditions. Some resellers have perceived the expansion of the Companys direct sales as conflicting with their business interests as distributors and resellers of the Companys products. Such a perception could discourage
resellers from investing resources in the distribution and sale of the Companys products or lead them to limit or cease distribution of those products. The Company has invested and will continue to invest in programs to enhance reseller sales,
including staffing selected resellers stores with Company employees and contractors, and improving product placement displays. These programs could require a substantial investment while providing no assurance of return or incremental revenue.
The financial condition of these resellers could weaken, these resellers could stop distributing the Companys products, or uncertainty regarding demand for the Companys products could cause resellers to reduce their ordering and
marketing of the Companys products.
The Company faces substantial inventory and other asset risk in addition to purchase commitment
cancellation risk.
The Company records a write-down for product and component inventories that have become obsolete or
exceed anticipated demand or net realizable value and accrues necessary cancellation fee reserves for orders of excess products and components. The Company also reviews its long-lived assets, including capital assets held at its suppliers
facilities and inventory prepayments, for impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable. If the Company determines that impairment has occurred, it records a write-down equal to the
amount by which the carrying value of the assets exceeds its fair value. Although the Company believes its provisions related to inventory, capital assets, inventory prepayments and other assets and purchase commitments are currently adequate, no
assurance can be given that the Company will not incur additional related charges given the rapid and unpredictable pace of product obsolescence in the industries in which the Company competes.
The Company must order components for its products and build inventory in advance of product announcements and shipments. Consistent with
industry practice, components are normally acquired through a combination of purchase orders, supplier contracts, and open orders, in each case based on projected demand. Where appropriate, the purchases are applied to inventory
component prepayments that are outstanding with the respective supplier. Purchase commitments typically cover forecasted component and manufacturing requirements for periods up to 150 days. Because the Companys markets are
volatile, competitive and subject to rapid technology and price changes, there is a risk the Company will forecast incorrectly and order or produce excess or insufficient amounts of components or products, or not fully utilize firm purchase
commitments.
Future operating results depend upon the Companys ability to obtain components in sufficient quantities.
Because the Company currently obtains components from single or limited sources, the Company is subject to significant
supply and pricing risks. Many components, including those that are available from multiple sources, are at times subject to industry-wide shortages and significant commodity pricing fluctuations. While the Company has entered into various
agreements for the supply of components, there can be no assurance that the Company will be able to extend or renew these agreements on similar terms, or at all. The follow-on effects from global economic conditions on the Companys
suppliers, described in
Global and regional economic conditions could materially adversely affect the Company
above, also could affect the Companys ability to obtain components
.
Therefore, the Company remains subject
to significant risks of supply shortages and price increases.
The Company and other participants in the markets for mobile
communication and media devices and personal computers also compete for various components with other industries that have experienced increased demand for their products. The Company uses some custom components that are not common to the rest of
these industries. The Companys new products often utilize custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers yields have matured
or manufacturing capacity has increased. Continued availability of these components at acceptable prices, or at all, may be affected if those suppliers decided to concentrate on the production of common components instead of components customized to
meet the Companys requirements. The supply of components for a new or existing product could be delayed or constrained, or a key manufacturing vendor could delay shipments of completed products to the Company.
41
The Company depends on component and product manufacturing and logistical services provided by
outsourcing partners, many of whom are located outside of the U.S.
Substantially all of the Companys manufacturing
is performed in whole or in part by a few outsourcing partners located primarily in Asia. The Company has also outsourced much of its transportation and logistics management. While these arrangements may lower operating costs, they also reduce the
Companys direct control over production and distribution. It is uncertain what effect such diminished control will have on the quality or quantity of products or services, or the Companys flexibility to respond to changing conditions.
Although arrangements with these partners may contain provisions for warranty expense reimbursement, the Company may remain responsible to the consumer for warranty service in the event of product defects and could experience an unanticipated
product defect or warranty liability. While the Company relies on its partners to adhere to its supplier code of conduct, material violations of the supplier code of conduct could occur.
The Company relies on sole-sourced outsourcing partners in the U.S., Asia and Europe to supply and manufacture many critical components,
and on outsourcing partners in Asia, and to a much lesser extent the United States, for final assembly of substantially all of the Companys hardware products. Any failure of these partners to perform may have a negative impact on the
Companys cost or supply of components or finished goods. In addition, manufacturing or logistics in these locations or transit to final destinations may be disrupted for a variety of reasons including, but not limited to, natural and man-made
disasters, information technology system failures, commercial disputes, military actions or economic, business, labor, environmental, public health, or political issues.
The Company has invested in manufacturing process equipment, much of which is held at certain of its outsourcing partners, and has made prepayments to certain of its suppliers associated with long-term
supply agreements. While these arrangements help ensure the supply of components and finished goods, if these outsourcing partners or suppliers experience severe financial problems or other disruptions in their business, the net realizable value of
these assets could be negatively impacted.
The Companys products and services may experience quality problems from time to time that
can result in decreased sales and operating margin and harm to the Companys reputation.
The Company sells complex
hardware and software products and services that can contain design and manufacturing defects. Sophisticated operating system software and applications, such as those sold by the Company, often contain bugs that can unexpectedly
interfere with the softwares intended operation. The Companys online services may from time to time experience outages, service slowdowns, or errors. Defects may also occur in components and products the Company purchases from third
parties. There can be no assurance the Company will be able to detect and fix all defects in the hardware, software and services it sells. Failure to do so could result in lost revenue, significant warranty and other expenses, and harm to the
Companys reputation.
The Company relies on access to third-party digital content, which may not be available to the Company on
commercially reasonable terms or at all.
The Company contracts with numerous third parties to offer their digital content
through the iTunes Store. This includes the right to make available music, movies, TV shows and books currently available through the iTunes Store. The licensing or other distribution arrangements with these third parties are short-term and do not
guarantee the continuation or renewal of these arrangements on reasonable terms, if at all. Some third-party content providers and distributors currently or in the future may offer competing products and services, and could take action to make it
more difficult or impossible for the Company to license or otherwise distribute their content in the future. Other content owners, providers or distributors may seek to limit the Companys access to, or increase the cost of, such content. The
Company may be unable to continue to offer a wide variety of content at reasonable prices with acceptable usage rules, or continue to expand its geographic reach. Failure to obtain the right to make available third-party digital content, or to make
available such content on commercially reasonable terms, could have a material adverse impact on the Companys financial condition and operating results.
Some third-party digital content providers require the Company to provide digital rights management and other security solutions. If requirements change, the Company may have to develop or license new
technology to provide these solutions. There is no assurance the Company will be able to develop or license such solutions at a reasonable cost and in a timely manner. In addition, certain countries have passed or may propose and adopt legislation
that would force the Company to license its digital rights management, which could lessen the protection of content and subject it to piracy and also could negatively affect arrangements with the Companys content providers.
42
The Companys future performance depends in part on support from
third-party
software developers.
The Company believes decisions by customers to
purchase its hardware products depend in part on the availability of
third-party
software applications and services. There is no assurance that third-party developers will continue to develop and maintain
software applications and services for the Companys products. If third-party software applications and services cease to be developed and maintained for the Companys products, customers may choose not to buy the Companys products.
With respect to its Mac products, the Company believes the availability of
third-party
software applications and services depends in part on the developers perception and analysis of the relative benefits of developing, maintaining, and upgrading such software for the
Companys products compared to Windows-based products. This analysis may be based on factors such as the market position of the Company and its products, the anticipated revenue that may be generated, expected future growth of Mac sales, and
the costs of developing such applications and services. If the Companys minority share of the global personal computer market causes developers to question the Companys prospects, developers could be less inclined to develop or upgrade
software for the Companys products and more inclined to devote their resources to developing and upgrading software for the larger Windows market.
With respect to iOS devices, the Company relies on the continued availability and development of compelling and innovative software applications, which are distributed through a single distribution
channel, the App Store. iOS devices are subject to rapid technological change, and, if third-party developers are unable to or choose not to keep up with this pace of change, third-party applications might not successfully operate and may result in
dissatisfied customers. As with applications for the Companys Mac products, the availability and development of these applications also depend on developers perceptions and analysis of the relative benefits of developing software for the
Companys products rather than its competitors platforms, such as Android. If developers focus their efforts on these competing platforms, the availability and quality of applications for the Companys iOS devices may suffer.
The Company relies on access to third-party intellectual property, which may not be available to the Company on commercially reasonable
terms or at all.
Many of the Companys products include third-party intellectual property, which requires licenses
from those third parties. Based on past experience and industry practice, the Company believes such licenses generally can be obtained on reasonable terms. There is, however, no assurance that the necessary licenses can be obtained on acceptable
terms or at all. Failure to obtain the right to use third-party intellectual property, or to use such intellectual property on commercially reasonable terms, could preclude the Company from selling certain products or otherwise have a material
adverse impact on the Companys financial condition and operating results.
The Company could be impacted by unfavorable results of
legal proceedings, such as being found to have infringed on intellectual property rights.
The Company is subject to
various legal proceedings and claims that have not yet been fully resolved and that have arisen in the ordinary course of business, and additional claims may arise in the future.
For example, technology companies, including many of the Companys competitors, frequently enter into litigation based on
allegations of patent infringement or other violations of intellectual property rights. In addition, patent holding companies seek to monetize patents they have purchased or otherwise obtained. As the Company has grown, the intellectual property
rights claims against it have increased and may continue to increase. In particular, the Companys cellular enabled products compete with mobile communication and media device companies that hold significant patent portfolios, and the number of
patent claims against the Company has significantly increased. The Company is vigorously defending infringement actions in courts in a number of U.S. jurisdictions and before the U.S. International Trade Commission, as well as internationally
in various countries. The plaintiffs in these actions frequently seek injunctions and substantial damages.
Regardless of the
scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential or actual litigants, the Company may have to engage in protracted litigation. If the Company is found to infringe one or more
patents or other intellectual property rights, regardless of whether it can develop non-infringing technology, it may be required to pay substantial damages or royalties to a third-party, or it may be subject to a temporary or permanent injunction
prohibiting the Company from marketing or selling certain products.
In certain cases, the Company may consider the
desirability of entering into licensing agreements, although no assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur. These licenses may also significantly increase the Companys
operating expenses.
43
Regardless of the merit of particular claims, litigation may be expensive, time-consuming,
disruptive to the Companys operations, and distracting to management. In recognition of these considerations, the Company may enter into arrangements to settle litigation.
In managements opinion, there is not at least a reasonable possibility the Company may have incurred a material loss, or a material
loss in excess of a recorded accrual, with respect to loss contingencies, including matters related to infringement of intellectual property rights. However, the outcome of litigation is inherently uncertain.
Although management considers the likelihood of such an outcome to be remote, if one or more legal matters were resolved against the
Company in a reporting period for amounts in excess of managements expectations, the Companys consolidated financial statements for that reporting period could be materially adversely affected. Further, such an outcome could result in
significant compensatory, punitive or trebled monetary damages, disgorgement of revenue or profits, remedial corporate measures or injunctive relief against the Company that could materially adversely affect its financial condition and operating
results.
The Company is subject to laws and regulations worldwide, changes to which could increase the Companys costs and
individually or in the aggregate adversely affect the Companys business.
The Company is subject to laws and
regulations affecting its domestic and international operations in a number of areas. These U.S. and foreign laws and regulations affect the Companys activities including, but not limited to, in areas of labor, advertising, digital
content, consumer protection, real estate, billing, e-commerce, promotions, quality of services, telecommunications, mobile communications and media, television, intellectual property ownership and infringement, tax, import and export requirements,
anti-corruption, foreign exchange controls and cash repatriation restrictions, data privacy requirements, anti-competition, environmental, health, and safety.
By way of example, laws and regulations related to mobile communications and media devices in the many jurisdictions in which the Company operates are extensive and subject to change. Such changes could
include, among others, restrictions on the production, manufacture, distribution, and use of devices, locking devices to a carriers network, or mandating the use of devices on more than one carriers network. These devices are also
subject to certification and regulation by governmental and standardization bodies, as well as by cellular network carriers for use on their networks. These certification processes are extensive and time consuming, and could result in
additional testing requirements, product modifications, or delays in product shipment dates, or could preclude the Company from selling certain products.
Compliance with these laws, regulations and similar requirements may be onerous and expensive, and they may be inconsistent from jurisdiction to jurisdiction, further increasing the cost of compliance and
doing business. Any such costs, which may rise in the future as a result of changes in these laws and regulations or in their interpretation, could individually or in the aggregate make the Companys products and services less attractive to the
Companys customers, delay the introduction of new products in one or more regions, or cause the Company to change or limit its business practices. The Company has implemented policies and procedures designed to ensure compliance with
applicable laws and regulations, but there can be no assurance that the Companys employees, contractors, or agents will not violate such laws and regulations or the Companys policies and procedures.
The Companys business is subject to the risks of international operations.
The Company derives a significant portion of its revenue and earnings from its international operations. Compliance with applicable U.S.
and foreign laws and regulations, such as import and export requirements, anti-corruption laws, tax laws, foreign exchange controls and cash repatriation restrictions, data privacy requirements, environmental laws, labor laws, and anti-competition
regulations, increases the costs of doing business in foreign jurisdictions. Although the Company has implemented policies and procedures to comply with these laws and regulations, a violation by the Companys employees, contractors, or agents
could nevertheless occur.
The Company also could be significantly affected by other risks associated with international
activities including, but not limited to, economic and labor conditions, increased duties, taxes and other costs, and political instability. Margins on sales of the Companys products in foreign countries, and on sales of products that include
components obtained from foreign suppliers, could be materially adversely affected by international trade regulations, including duties, tariffs and antidumping penalties. The Company is also exposed to credit and collectability risk on its trade
receivables with customers in certain international markets. There can be no assurance the Company can effectively limit its credit risk and avoid losses.
44
The Companys Retail segment has required and will continue to require a substantial investment and
commitment of resources and is subject to numerous risks and uncertainties.
The Companys retail stores have required
substantial investment in equipment and leasehold improvements, information systems, inventory and personnel. The Company also has entered into substantial operating lease commitments for retail space. Certain stores have been designed and built to
serve as high-profile venues to promote brand awareness and serve as vehicles for corporate sales and marketing activities. Because of their unique design elements, locations and size, these stores require substantially more investment than the
Companys more typical retail stores. Due to the high cost structure associated with the Retail segment, a decline in sales or the closure or poor performance of individual or multiple stores could result in significant lease termination costs,
write-offs of equipment and leasehold improvements, and severance costs.
Many factors unique to retail operations, some of
which are beyond the Companys control, pose risks and uncertainties. These risks and uncertainties include, but are not limited to, macro-economic factors that could have an adverse effect on general retail activity, as well as the
Companys inability to manage costs associated with store construction and operation, the Companys failure to manage relationships with its existing retail channel partners, more challenging environments in managing retail operations
outside the U.S., costs associated with unanticipated fluctuations in the value of retail inventory, and the Companys inability to obtain and renew leases in quality retail locations at a reasonable cost.
Investment in new business strategies and acquisitions could disrupt the Companys ongoing business and present risks not originally
contemplated.
The Company has invested, and in the future may invest, in new business strategies or acquisitions. Such
endeavors may involve significant risks and uncertainties, including distraction of management from current operations, greater than expected liabilities and expenses, inadequate return of capital, and unidentified issues not discovered in the
Companys due diligence. These new ventures are inherently risky and may not be successful.
The Companys business and
reputation may be impacted by information technology system failures or network disruptions.
The Company may be subject to
information technology system failures and network disruptions. These may be caused by natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins, or
other events or disruptions. System redundancy may be ineffective or inadequate, and the Companys disaster recovery planning may not be sufficient for all eventualities. Such failures or disruptions could prevent access to the Companys
online stores and services, preclude retail store transactions, compromise Company or customer data, and result in delayed or cancelled orders. System failures and disruptions could also impede the manufacturing and shipping of products, delivery of
online services, transactions processing and financial reporting.
There may be breaches of the Companys information technology
systems that materially damage business partner and customer relationships, curtail or otherwise adversely impact access to online stores and services, or subject the Company to significant reputational, financial, legal, and operational
consequences.
The Companys business requires it to use and store customer, employee, and business partner personally
identifiable information (PII). This may include, among other information, names, addresses, phone numbers, email addresses, contact preferences, tax identification numbers, and payment account information. Although malicious attacks to
gain access to PII affect many companies across various industries, the Company is at a relatively greater risk of being targeted because of its high profile and the amount of PII it manages.
The Company requires user names and passwords in order to access its information technology systems. The Company also uses encryption and
authentication technologies to secure the transmission and storage of data and prevent access to Company data or accounts. As with all companies, these security measures are subject to third-party security breaches, employee error, malfeasance,
faulty password management, or other irregularities. For example, third parties may attempt to fraudulently induce employees or customers into disclosing user names, passwords or other sensitive information, which may in turn be used to access the
Companys information technology systems. To help protect customers and the Company, the Company monitors accounts and systems for unusual activity and may freeze accounts under suspicious circumstances, which may result in the delay or loss of
customer orders.
45
The Company devotes significant resources to network security, data encryption, and other
security measures to protect its systems and data, but these security measures cannot provide absolute security. To the extent the Company was to experience a breach of its systems and was unable to protect sensitive data, such a breach could
materially damage business partner and customer relationships, and curtail or otherwise adversely impact access to online stores and services. Moreover, if a computer security breach affects the Companys systems or results in the unauthorized
release of PII, the Companys reputation and brand could be materially damaged, use of the Companys products and services could decrease, and the Company could be exposed to a risk of loss or litigation and possible liability.
The Companys business is subject to a variety of U.S. and international laws, rules, policies and other obligations regarding data protection.
The Company is subject to federal, state and international laws relating to the collection, use, retention, security and
transfer of PII. In many cases, these laws apply not only to third-party transactions, but also to transfers of information between the Company and its subsidiaries, and among the Company, its subsidiaries and other parties with which the Company
has commercial relations. Several jurisdictions have passed laws in this area, and other jurisdictions are considering imposing additional restrictions. These laws continue to develop and may be inconsistent from jurisdiction to jurisdiction.
Complying with emerging and changing international requirements may cause the Company to incur substantial costs or require the Company to change its business practices. Noncompliance could result in penalties or significant legal liability.
The Companys privacy policy, which includes related practices concerning the use and disclosure of data, is posted on
its website. Any failure by the Company, its suppliers or other parties with whom the Company does business to comply with its posted privacy policy or with other federal, state or international privacy-related or data protection laws and
regulations could result in proceedings against the Company by governmental entities or others.
The Company is also subject
to payment card association rules and obligations under its contracts with payment card processors. Under these rules and obligations, if information is compromised, the Company could be liable to payment card issuers for associated expenses and
penalties. In addition, if the Company fails to follow payment card industry security standards, even if no customer information is compromised, the Company could incur significant fines or experience a significant increase in payment card
transaction costs.
The Companys success depends largely on the continued service and availability of key personnel.
Much of the Companys future success depends on the continued availability and service of key personnel, including its Chief
Executive Officer, executive team and other highly skilled employees. Experienced personnel in the technology industry are in high demand and competition for their talents is intense, especially in Silicon Valley, where most of the Companys
key personnel are located.
The Companys business may be impacted by political events, war, terrorism, public health issues, natural
disasters and other business interruptions.
War, terrorism, geopolitical uncertainties, public health issues, and other
business interruptions have caused and could cause damage or disruption to international commerce and the global economy, and thus could have a material adverse effect on the Company, its suppliers, logistics providers, manufacturing vendors and
customers, including channel partners. The Companys business operations are subject to interruption by, among others, natural disasters, fire, power shortages, nuclear power plant accidents, terrorist attacks and other hostile acts, labor
disputes, public health issues, and other events beyond its control. Such events could decrease demand for the Companys products, make it difficult or impossible for the Company to make and deliver products to its customers, including channel
partners, or to receive components from its suppliers, and create delays and inefficiencies in the Companys supply chain. Should major public health issues, including pandemics, arise, the Company could be adversely affected by more stringent
employee travel restrictions, additional limitations in freight services, governmental actions limiting the movement of products between regions, delays in production ramps of new products, and disruptions in the operations of the Companys
manufacturing vendors and component suppliers. The majority of the Companys research and development activities, its corporate headquarters, information technology systems, and other critical business operations, including certain component
suppliers and manufacturing vendors, are in locations that could be affected by natural disasters. In the event of a natural disaster, the Company could incur significant losses, require substantial recovery time and experience significant
expenditures in order to resume operations.
46
The Company expects its quarterly revenue and operating results to fluctuate.
The Companys profit margins vary across its products and distribution channels. The Companys software, accessories, and
service and support contracts generally have higher gross margins than certain of the Companys other products. Gross margins on the Companys hardware products vary across product lines and can change over time as a result of product
transitions, pricing and configuration changes, and component, warranty, and other cost fluctuations. The Companys direct sales generally have higher associated gross margins than its indirect sales through its channel partners. In addition,
the Companys gross margin and operating margin percentages, as well as overall profitability, may be materially adversely impacted as a result of a shift in product, geographic or channel mix, component cost increases, the strengthening U.S.
dollar, price competition, or the introduction of new products, including those that have higher cost structures with flat or reduced pricing.
The Company has typically experienced higher net sales in its first quarter compared to other quarters due in part to seasonal holiday demand. Additionally, new product introductions can significantly
impact net sales, product costs and operating expenses. The Company could be subject to unexpected developments late in a quarter, such as lower-than-anticipated demand for the Companys products, issues with new product introductions, an
internal systems failure, or failure of one of the Companys logistics, components supply, or manufacturing partners.
The
Companys stock price is subject to volatility.
The Companys stock continues to experience substantial price
volatility. Additionally, the Company, the technology industry, and the stock market as a whole have experienced extreme stock price and volume fluctuations that have affected stock prices in ways that may have been unrelated to these
companies operating performance. Price volatility over a given period may cause the average price at which the Company repurchases its own stock to exceed the stocks price at a given point in time. The Company believes its stock price
reflects expectations of future growth and profitability. The Company also believes its stock price reflects expectations that its cash dividend will continue at current levels or grow and that its current share repurchase program will be fully
consummated. Future dividends are subject to declaration by the Companys Board of Directors, and the Companys share repurchase program does not obligate it to acquire any specific number of shares. If the Company fails to meet any of
these expectations related to future growth, profitability, dividends, share repurchases or other market expectations its stock price may decline significantly, which could have a material adverse impact on investor confidence and employee
retention.
The Companys financial performance is subject to risks associated with changes in the value of the U.S. dollar versus
local currencies.
The Companys primary exposure to movements in foreign currency exchange rates relates to non-U.S.
dollar denominated sales and operating expenses worldwide. Weakening of foreign currencies relative to the U.S. dollar adversely affects the U.S. dollar value of the Companys foreign currency-denominated sales and earnings, and generally leads
the Company to raise international pricing, potentially reducing demand for the Companys products. Margins on sales of the Companys products in foreign countries, and on sales of products that include components obtained from foreign
suppliers, could be materially adversely affected by foreign currency exchange rate fluctuations. In some circumstances, for competitive or other reasons, the Company may decide not to raise local prices to fully offset the dollars
strengthening, or at all, which would adversely affect the U.S. dollar value of the Companys foreign currency denominated sales and earnings. Conversely, a strengthening of foreign currencies relative to the U.S. dollar, while generally
beneficial to the Companys foreign currency-denominated sales and earnings, could cause the Company to reduce international pricing and incur losses on its foreign currency derivative instruments, thereby limiting the benefit. Additionally,
strengthening of foreign currencies may also increase the Companys cost of product components denominated in those currencies, thus adversely affecting gross margins.
The Company uses derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging
activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place.
The Company is exposed to credit risk and fluctuations in the market values of its investment portfolio.
Given the global nature of its business, the Company has both domestic and international investments. Credit ratings and pricing of the Companys investments can be negatively affected by liquidity,
credit deterioration, financial results, economic risk, political risk, sovereign risk or other factors. As a result, the value and liquidity of the Companys cash, cash equivalents and marketable securities may fluctuate substantially.
Therefore, although the Company has not realized any significant losses on its cash, cash equivalents and marketable securities, future fluctuations in their value could result in a significant realized loss.
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The Company is exposed to credit risk on its trade accounts receivable, vendor non-trade receivables and
prepayments related to long-term supply agreements, and this risk is heightened during periods when economic conditions worsen.
The Company distributes its products through third-party cellular network carriers, wholesalers, retailers and value-added resellers. A substantial majority of the Companys outstanding trade
receivables are not covered by collateral or credit insurance. The Companys exposure to credit and collectability risk on its trade receivables is higher in certain international markets and its ability to mitigate such risks may be limited.
The Company also has unsecured vendor non-trade receivables resulting from purchases of components by outsourcing partners and other vendors that manufacture sub-assemblies or assemble final products for the Company. In addition, the Company has
made prepayments associated with long-term supply agreements to secure supply of inventory components. As of March 29, 2014, a significant portion of the Companys trade receivables was concentrated within cellular network carriers, and
its non-trade receivables and prepayments related to long-term supply agreements were concentrated among a few individual vendors located primarily in Asia. While the Company has procedures to monitor and limit exposure to credit risk on its trade
and vendor non-trade receivables as well as long-term prepayments, there can be no assurance such procedures will effectively limit its credit risk and avoid losses.
The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities.
The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Companys
subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Companys future effective tax rates could be affected by changes in the mix of earnings in
countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland. The Company is also subject to the examination of its
tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of
its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Companys effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Companys taxes
owed is for an amount in excess of amounts previously accrued, the Companys operating results, cash flows, and financial condition could be adversely affected.
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