Apple Inc. 10-Q Summary: Quarter Ended March 27, 2004
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Apple Computer, Inc. (now Apple Inc.) for the three and six months ended March 27, 2004. The company designs, manufactures, and markets personal computers (Macintosh), the iPod digital music player, software, and peripherals. The reporting period covers the second quarter of fiscal year 2004.
Key Financial Metrics
| Metric (in millions) | 3 Months Ended 3/27/04 | 3 Months Ended 3/29/03 | 6 Months Ended 3/27/04 | 6 Months Ended 3/29/03 |
|---|---|---|---|---|
| Net Sales | $1,909 | $1,475 | $3,915 | $2,947 |
| Gross Margin | $530 (27.8%) | $418 (28.3%) | $1,066 (27.2%) | $824 (28.0%) |
| Operating Income | $52 | $(4) | $126 | $(41) |
| Net Income | $46 | $14 | $109 | $6 |
| Diluted EPS | $0.12 | $0.04 | $0.29 | $0.02 |
| Cash & Equivalents | $3,158 | $3,396 (Sep 27, 2003) | Total Cash, Equivalents & Short-Term Investments: $4,594 | |
| Working Capital | $3,804 | $3,530 (Sep 27, 2003) | N/A | |
| Debt | $0 | $304 (Current) | $300M notes repaid in Feb 2004 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 29% year-over-year (YoY) for the quarter and 33% for the six-month period. This was driven primarily by a 752% increase in iPod sales and a 97% increase in Retail segment sales.
- Profitability: The company returned to profitability, reporting $52 million in operating income compared to a $4 million loss in the prior year quarter. Net income tripled to $46 million.
- Product Mix: While total Macintosh unit sales grew 5%, sales of iMac systems declined 17% due to consumer preference shifts toward portables and price competition. Conversely, iBook and PowerBook sales increased significantly.
- Margin Compression: Gross margin percentage declined slightly (27.8% vs. 28.3% YoY) due to a higher mix of lower-margin iPod sales, pricing actions on Power Mac G5, and higher freight/duty costs.
- Debt Repayment: The company repaid $300 million in unsecured notes upon maturity in February 2004, resulting in zero current debt.
Guidance, Outlook, and Risks
- Restructuring: The company incurred $10 million in restructuring costs for the quarter, related to closing the Sacramento manufacturing facility and headcount reductions in sales/marketing. An additional $10 million in charges is expected in the third quarter.
- Retail Expansion: The Retail segment opened 25 new stores in the last year, reaching 78 stores total. While profitable for the quarter ($5M operating income), the segment requires significant capital investment and carries fixed cost risks.
- Japan Segment Weakness: Sales in Japan declined 21% YoY due to weak consumer PC demand and delays in Mac OS X native application releases.
- Accounting Changes: The company is monitoring a proposed FASB statement on share-based payment which could require expensing stock options, potentially materially impacting future earnings.
- Legal Proceedings: The company faces various litigation, including shareholder class actions (dismissed but appealed), patent infringement claims (e.g., Antor Media, Compression Labs), and consumer class actions regarding iPod battery life and iBook logic boards.
Investor Verification Checklist
- iPod Sustainability: Verify if the 909% YoY unit growth in iPod sales is sustainable or a one-time surge driven by the new iPod mini launch.
- Retail Economics: Assess the long-term profitability of the Retail segment given the high fixed costs of leases and the $376 million in outstanding retail lease commitments.
- Japan Recovery: Monitor the Japan segment for signs of recovery pending the release of key Mac OS X applications (e.g., Quark XPress 6).
- Stock Compensation Impact: Review the potential financial impact of the proposed FASB rule change requiring the expensing of stock options, which could significantly reduce reported net income.
- Component Supply: Confirm the stability of the supply chain for PowerPC microprocessors (supplied by IBM/Motorola) given the company's reliance on single-source suppliers for key components.