Apple Inc. 10-Q Summary: Quarter Ended March 27, 1999
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Apple Computer, Inc. for the three and six months ended March 27, 1999. The company reported a strategic shift in fiscal quarter end dates to Saturdays, adding one day to the first quarter of fiscal 1999. The period covers the second quarter of fiscal 1999, characterized by strong unit volume growth driven by the iMac and Power Macintosh G3 lines, offset by declining average selling prices.
Key Financial Metrics
| Metric | 3 Months Ended 3/27/99 | 6 Months Ended 3/27/99 | 3 Months Ended 3/27/98 | 6 Months Ended 3/27/98 |
|---|---|---|---|---|
| Net Sales | $1,530 million | $3,240 million | $1,405 million | $2,983 million |
| Gross Margin | $403 million (26.3%) | $885 million (27.3%) | $349 million (24.8%) | $702 million (23.5%) |
| Operating Income | $79 million | $206 million | $51 million | $91 million |
| Net Income | $135 million | $287 million | $55 million | $102 million |
| Diluted EPS | $0.84 | $1.79 | $0.38 | $0.71 |
| Cash & Equivalents | $1,358 million | (Balance Sheet Item) | ||
| Short-term Investments | $1,564 million | (Balance Sheet Item) | ||
| Long-term Debt | $955 million | (Balance Sheet Item) |
Liquidity: Total cash, cash equivalents, and short-term investments stood at $2.922 billion as of March 27, 1999. Working capital was $2.548 billion.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 9% year-over-year (YoY) for the quarter and 9% for the six-month period. This was driven by a 27% increase in Macintosh CPU unit sales (827,000 units vs. 650,000 units YoY), largely due to the iMac (42% of unit sales).
- Profitability Surge: Net income increased 145% YoY for the quarter and 181% for the six-month period. This significant jump was primarily fueled by non-operating gains from the sale of ARM Holdings stock ($55 million gain in Q2, $32 million in Q1).
- Margin Expansion: Gross margin percentage improved to 26.3% from 24.8% YoY, attributed to operational efficiencies, product line simplification, and lower component costs. However, margins declined sequentially from Q1 due to aggressive pricing on Power Macintosh G3 and iMac systems.
- Restructuring: The company incurred $9 million in restructuring costs in Q2 related to moving final assembly to third-party manufacturers, including severance and asset write-downs.
Guidance, Outlook, and Risks
- Debt Redemption: On April 14, 1999, Apple announced the call for redemption of all $661 million of its 6% convertible subordinated debentures on June 1, 1999. Holders may convert to stock or receive principal plus a 2.4% premium.
- Tax Outlook: The effective tax rate for the six months ended March 27, 1999, was 11%. Management anticipates the rate for the remainder of fiscal 1999 to be between 11% and 15%, but expects a significant increase in fiscal 2000 as valuation allowances for tax loss carryforwards are reversed.
- Year 2000 (Y2K) Compliance: The company is on schedule to complete remediation of IT systems in Q3 and testing in Q4. Estimated incremental external spending for Y2K is $13.2 million. Risks include potential disruptions from third-party vendors and airfreight services.
- Market Risks: The company faces pressure from global pricing trends, competition, and foreign currency fluctuations. A strengthening U.S. dollar could negatively impact sales and margins. Debt ratings remain non-investment grade (B+ by S&P, B2 by Moody's), which may affect borrowing costs.
Investor Verification Checklist
- ARM Investment Gains: Verify the sustainability of earnings given that a significant portion of Q2 net income ($55 million) and Q1 net income ($32 million) resulted from one-time gains on the sale of ARM Holdings stock.
- Debt Redemption Impact: Confirm the cash outflow required for the June 1, 1999, redemption of $661 million in debentures and the potential dilution if holders choose to convert to common stock.
- Y2K Contingency: Assess the adequacy of contingency plans for third-party vendor failures and potential airfreight disruptions in early 2000.
- Sequential Revenue Decline: Note the 11% sequential decline in net sales from Q1 to Q2, driven by seasonal factors and the phase-out of high-margin MacOS 8.5 upgrade sales.
- Future Tax Rates: Monitor the reversal of tax valuation allowances in fiscal 2000, which is expected to significantly increase the effective tax rate.