10-QPeriod: Q3 FY2013

Apple Inc. Quarterly Report for Q3 Ended Jun 29, 2013

Filed July 24, 2013For Securities:AAPL

Summary

Apple Inc.'s (AAPL) Form 10-Q for the quarter ending June 29, 2013, reveals a period of mixed performance, with overall net sales showing slight growth year-over-year, but with a noticeable decline in gross margin percentage. While revenue increased to $35.3 billion, up 1% from $35.0 billion in the prior year's comparable quarter, the gross margin contracted significantly to 36.9% from 42.8%. This compression in profitability appears to be driven by several factors, including the introduction of new products with higher cost structures, a greater mix of lower-margin products like the iPad mini, and price reductions on older models such as the iPad 2 and iPhone 4. The company also saw a substantial increase in Research and Development expenses, reflecting continued investment in innovation. Despite margin pressures, Apple continues to generate strong cash flows from operations, allowing for significant investments in capital expenditures and robust shareholder return programs. The company raised $17 billion in long-term debt and significantly expanded its share repurchase program to $60 billion, demonstrating a commitment to returning capital to shareholders. The balance sheet remains strong, with substantial cash and marketable securities. Investors should monitor the company's ability to manage its cost of goods sold, the success of upcoming product launches, and the impact of competitive pressures on future pricing and margins.

Financial Highlights

53 data points
Beta

Revenue

$35.32B

36.9% Gross Margin

Net Income

$6.90B

19.5% Net Margin

EPS (Diluted)

$0.27

Total Assets

$199.86B

Cash & Equivalents

$11.25B

Free Cash Flow

$7.83B

Financial Statements
Beta
Revenue$35.32B
Cost of Revenue$22.30B
Gross Profit$13.02B
R&D Expenses$1.18B
SG&A Expenses$2.65B
Operating Expenses$3.82B
Operating Income$9.20B
Interest Expense$53.00M
Net Income$6.90B
EPS (Basic)$0.27
EPS (Diluted)$0.27
Shares Outstanding (Basic)25.72B
Shares Outstanding (Diluted)25.88B

Key Highlights

  • 1Net sales for the third quarter of fiscal year 2013 were $35.323 billion, a 1% increase compared to $35.023 billion in the third quarter of fiscal year 2012.
  • 2Gross margin percentage decreased to 36.9% from 42.8% in the prior year's quarter, indicating pressure on profitability, attributed to new product costs, lower-margin product mix, and price reductions.
  • 3Research and Development expenses increased by 34% to $1.178 billion, reflecting continued investment in innovation.
  • 4Diluted earnings per share were $7.47, down from $9.32 in the prior year's quarter.
  • 5The company issued $17 billion in long-term debt in May 2013.
  • 6Apple announced an increase in its share repurchase program authorization to $60 billion, with $18 billion utilized as of June 29, 2013.
  • 7Cash and cash equivalents, along with marketable securities, totaled $146.6 billion as of June 29, 2013, showing a significant increase from the previous fiscal year-end.

Frequently Asked Questions

The decline in gross margin percentage was primarily driven by the introduction of new product versions with higher cost structures and flat or reduced pricing, the launch of lower-margin products like the iPad mini, increased warranty costs, and price reductions on older models such as the iPad 2 and iPhone 4. The company also anticipated continued gross margin pressure due to component cost increases and potential strengthening of the U.S. dollar.

Apple continues to generate substantial cash flow from operations, leading to a robust cash and marketable securities balance of $146.6 billion. The company is actively returning capital to shareholders through a significantly expanded share repurchase program (authorized at $60 billion) and increased quarterly cash dividends. Additionally, Apple is investing heavily in capital expenditures, particularly for product tooling and manufacturing equipment, and R&D.

iPhone sales showed strong growth, with net sales up 15% and unit sales up 20%, driven by the iPhone 5 and continued demand for older models. However, iPad sales experienced a significant decline of 27% in net sales and 14% in unit sales for the quarter, largely due to the previous year's strong launch of the third-generation iPad and the introduction of the lower-priced iPad mini affecting average selling prices. Mac sales were relatively flat, while iTunes, Software, and Services continued to show strong growth (25%).

Key risks include intense competition and rapid technological change in the industry, which puts pressure on pricing and margins. The company also faces risks related to managing frequent product introductions and transitions, potential inventory obsolescence, supply chain disruptions from reliance on a few outsourcing partners, and legal proceedings, including ongoing intellectual property litigation. The overall global economic conditions and currency fluctuations also pose significant challenges.