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 25, 2021 (the “2021 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 2021 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 corporate 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.
Quarterly Highlights
Total net sales increased 2% or $1.5 billion during the third quarter of 2022 compared to the same quarter in 2021, driven primarily by higher net sales of Services and iPhone, partially offset by lower net sales of Mac and Wearables, Home and Accessories. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on all Products and Services net sales during the third quarter of 2022.
At the end of the third quarter of 2022, the Company introduced an all-new MacBook Air® and an updated 13-inch MacBook Pro®, both powered by the new Apple M2 chip. The Company also announced iOS 16, macOS® Ventura, iPadOS® 16 and watchOS® 9, updates to its operating systems that are expected to be available in the fall of 2022.
The Company repurchased $21.7 billion of its common stock and paid dividends and dividend equivalents of $3.8 billion during the third quarter of 2022.
Apple Inc. | Q3 2022 Form 10-Q | 14
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 disruptions during the COVID-19 pandemic, resulting in supply shortages. Similar disruptions could occur in the future.
Products and Services Performance
The following table shows net sales by category for the three- and nine-month periods ended June 25, 2022 and June 26, 2021 (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| June 25, 2022 | | June 26, 2021 | | Change | | June 25, 2022 | | June 26, 2021 | | Change |
Net sales by category: | | | | | | | | | | | |
iPhone (1) | $ | 40,665 | | | $ | 39,570 | | | 3 | % | | $ | 162,863 | | | $ | 153,105 | | | 6 | % |
Mac (1) | 7,382 | | | 8,235 | | | (10) | % | | 28,669 | | | 26,012 | | | 10 | % |
iPad (1) | 7,224 | | | 7,368 | | | (2) | % | | 22,118 | | | 23,610 | | | (6) | % |
Wearables, Home and Accessories (1)(2) | 8,084 | | | 8,775 | | | (8) | % | | 31,591 | | | 29,582 | | | 7 | % |
Services (3) | 19,604 | | | 17,486 | | | 12 | % | | 58,941 | | | 50,148 | | | 18 | % |
Total net sales | $ | 82,959 | | | $ | 81,434 | | | 2 | % | | $ | 304,182 | | | $ | 282,457 | | | 8 | % |
(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 increased during the third quarter and first nine months of 2022 compared to the same periods in 2021 due primarily to higher net sales from the Company’s new iPhone models.
Mac
Mac net sales decreased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to lower net sales of MacBook Air and iMac®, partially offset by higher net sales of MacBook Pro. Year-over-year Mac net sales increased during the first nine months of 2022 due primarily to higher net sales of MacBook Pro, partially offset by lower net sales of MacBook Air.
iPad
iPad net sales decreased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to lower net sales of iPad Pro®, partially offset by higher net sales of all other iPad models. Year-over-year iPad net sales decreased during the first nine months of 2022 due primarily to lower net sales of the 10-inch version of iPad and iPad Air®, partially offset by higher net sales of iPad mini®.
Wearables, Home and Accessories
Wearables, Home and Accessories net sales decreased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to lower net sales of AirPods and Apple Watch. Year-over-year Wearables, Home and Accessories net sales increased during the first nine months of 2022 due primarily to higher net sales of Apple Watch and AirPods.
Apple Inc. | Q3 2022 Form 10-Q | 15
Services
Services net sales increased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to higher net sales from advertising, cloud services and AppleCare. Year-over-year Services net sales increased during the first nine months of 2022 due primarily to higher net sales from advertising, the App Store® and cloud services.
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- and nine-month periods ended June 25, 2022 and June 26, 2021 (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| June 25, 2022 | | June 26, 2021 | | Change | | June 25, 2022 | | June 26, 2021 | | Change |
Net sales by reportable segment: | | | | | | | | | | | |
Americas | $ | 37,472 | | | $ | 35,870 | | | 4 | % | | $ | 129,850 | | | $ | 116,486 | | | 11 | % |
Europe | 19,287 | | | 18,943 | | | 2 | % | | 72,323 | | | 68,513 | | | 6 | % |
Greater China | 14,604 | | | 14,762 | | | (1) | % | | 58,730 | | | 53,803 | | | 9 | % |
Japan | 5,446 | | | 6,464 | | | (16) | % | | 20,277 | | | 22,491 | | | (10) | % |
Rest of Asia Pacific | 6,150 | | | 5,395 | | | 14 | % | | 23,002 | | | 21,164 | | | 9 | % |
Total net sales | $ | 82,959 | | | $ | 81,434 | | | 2 | % | | $ | 304,182 | | | $ | 282,457 | | | 8 | % |
Americas
Americas net sales increased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to higher net sales of Services and iPhone, partially offset by lower net sales of Mac and Wearables, Home and Accessories. Year-over-year Americas net sales increased during the first nine months of 2022 due primarily to higher net sales of iPhone, Services and Wearables, Home and Accessories.
Europe
Europe net sales increased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to higher net sales of iPhone, partially offset by lower net sales of Mac. Year-over-year Europe net sales increased during the first nine months of 2022 due primarily to higher net sales of Services and iPhone. The weakness in foreign currencies relative to the U.S. dollar had a net unfavorable impact on Europe net sales during the third quarter and first nine months of 2022.
Greater China
Greater China net sales decreased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to lower net sales of iPhone, partially offset by higher net sales of Services. Year-over-year Greater China net sales increased during the first nine months of 2022 due primarily to higher net sales of iPhone and Services. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on Greater China net sales during the third quarter of 2022. The strength of the renminbi relative to the U.S. dollar had a favorable impact on Greater China net sales during the first nine months of 2022.
Japan
Japan net sales decreased during the third quarter and first nine months of 2022 compared to the same periods in 2021 due primarily to lower net sales of iPhone and iPad. The weakness of the yen relative to the U.S. dollar had an unfavorable impact on Japan net sales during the third quarter and first nine months of 2022.
Apple Inc. | Q3 2022 Form 10-Q | 16
Rest of Asia Pacific
Rest of Asia Pacific net sales increased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to higher net sales of iPhone and Services. Year-over-year Rest of Asia Pacific net sales increased during the first nine months of 2022 due primarily to higher net sales of Services, iPhone and Mac. The weakness in foreign currencies relative to the U.S. dollar had a net unfavorable impact on Rest of Asia Pacific net sales during the third quarter and first nine months of 2022.
Gross Margin
Products and Services gross margin and gross margin percentage for the three- and nine-month periods ended June 25, 2022 and June 26, 2021 were as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| June 25, 2022 | | June 26, 2021 | | June 25, 2022 | | June 26, 2021 |
Gross margin: | | | | | | | |
Products | $ | 21,870 | | | $ | 23,049 | | | $ | 90,157 | | | $ | 82,833 | |
Services | 14,015 | | | 12,206 | | | 42,530 | | | 34,829 | |
Total gross margin | $ | 35,885 | | | $ | 35,255 | | | $ | 132,687 | | | $ | 117,662 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Gross margin percentage: | | | | | | | |
Products | 34.5 | % | | 36.0 | % | | 36.8 | % | | 35.7 | % |
Services | 71.5 | % | | 69.8 | % | | 72.2 | % | | 69.5 | % |
Total gross margin percentage | 43.3 | % | | 43.3 | % | | 43.6 | % | | 41.7 | % |
Products Gross Margin
Products gross margin decreased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to the weakness in foreign currencies relative to the U.S. dollar. Year-over-year Products gross margin increased during the first nine months of 2022 due primarily to a different Products mix and higher Products volume, partially offset by the weakness in foreign currencies relative to the U.S. dollar.
Products gross margin percentage decreased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to the weakness in foreign currencies relative to the U.S. dollar and a different Products mix. Year-over-year Products gross margin percentage increased during the first nine months of 2022 due primarily to a different Products mix.
Services Gross Margin
Services gross margin increased during the third quarter and first nine months of 2022 compared to the same periods in 2021 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 increased during the third quarter and first nine months of 2022 compared to the same periods in 2021 due primarily to improved leverage and a different Services mix, partially offset by the weakness in foreign currencies relative to the U.S. dollar and higher Services costs.
The Company’s future gross margins can be impacted by a variety of factors, as discussed in Part I, Item 1A of the 2021 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. | Q3 2022 Form 10-Q | 17
Operating Expenses
Operating expenses for the three- and nine-month periods ended June 25, 2022 and June 26, 2021 were as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| June 25, 2022 | | June 26, 2021 | | June 25, 2022 | | June 26, 2021 |
Research and development | $ | 6,797 | | | $ | 5,717 | | | $ | 19,490 | | | $ | 16,142 | |
Percentage of total net sales | 8 | % | | 7 | % | | 6 | % | | 6 | % |
Selling, general and administrative | $ | 6,012 | | | $ | 5,412 | | | $ | 18,654 | | | $ | 16,357 | |
Percentage of total net sales | 7 | % | | 7 | % | | 6 | % | | 6 | % |
Total operating expenses | $ | 12,809 | | | $ | 11,129 | | | $ | 38,144 | | | $ | 32,499 | |
Percentage of total net sales | 15 | % | | 14 | % | | 13 | % | | 12 | % |
Research and Development
The growth in research and development (“R&D”) expense during the third quarter and first nine months of 2022 compared to the same periods in 2021 was driven primarily by increases in headcount-related expenses, engineering program costs and professional services. The Company continues to believe that focused investments in R&D are critical to its future growth and competitive position in the marketplace, and to the development of new and updated products and services that are central to the Company’s core business strategy.
Selling, General and Administrative
The growth in selling, general and administrative expense during the third quarter and first nine months of 2022 compared to the same periods in 2021 was driven primarily by increases in headcount-related expenses, advertising and professional services.
Other Income/(Expense), Net
Other income/(expense), net (“OI&E”) for the three- and nine-month periods ended June 25, 2022 and June 26, 2021 was as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| June 25, 2022 | | June 26, 2021 | | Change | | June 25, 2022 | | June 26, 2021 | | Change |
Interest and dividend income | $ | 722 | | | $ | 719 | | | | | $ | 2,072 | | | $ | 2,184 | | | |
Interest expense | (719) | | | (665) | | | | | (2,104) | | | (1,973) | | | |
Other income/(expense), net | (13) | | | 189 | | | | | (65) | | | 585 | | | |
Total other income/(expense), net | $ | (10) | | | $ | 243 | | | (104) | % | | $ | (97) | | | $ | 796 | | | (112) | % |
OI&E decreased during the third quarter and first nine months of 2022 compared to the same periods in 2021 due primarily to fair value adjustments and realized losses on marketable securities and higher interest expense, partially offset by foreign exchange gains.
Provision for Income Taxes
Provision for income taxes, effective tax rate and statutory federal income tax rate for the three- and nine-month periods ended June 25, 2022 and June 26, 2021 were as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| June 25, 2022 | | June 26, 2021 | | June 25, 2022 | | June 26, 2021 |
Provision for income taxes | $ | 3,624 | | | $ | 2,625 | | | $ | 15,364 | | | $ | 11,830 | |
Effective tax rate | 15.7 | % | | 10.8 | % | | 16.3 | % | | 13.8 | % |
Statutory federal income tax rate | 21 | % | | 21 | % | | 21 | % | | 21 | % |
The Company’s effective tax rate for the third quarter and first nine months of 2022 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 impact of the U.S. federal R&D tax credit, partially offset by state income taxes.
Apple Inc. | Q3 2022 Form 10-Q | 18
The Company’s effective tax rate for the third quarter of 2022 was higher compared to the third quarter of 2021 due primarily to a higher effective tax rate on foreign earnings and an adjustment to prior years’ foreign-derived intangible income deductions. The Company’s effective tax rate for the first nine months of 2022 was higher compared to the same period in 2021 due primarily to a higher effective tax rate on foreign earnings, lower tax benefits from share-based compensation, and the impact to U.S. foreign tax credits as a result of regulations issued by the U.S. Department of the Treasury in January 2022.
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 2021 Form 10-K, except for manufacturing purchase obligations.
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 June 25, 2022, the Company had manufacturing purchase obligations of $43.1 billion, with $43.0 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 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. As of June 25, 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 2021 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 2021 Form 10-K.