Apple Inc. 10-Q Summary: Quarter Ended June 26, 1999
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Apple Computer, Inc. for the three and nine months ended June 26, 1999. The company designs and manufactures personal computers, peripherals, and software. During this period, Apple continued its strategic shift toward consumer and education markets, highlighted by the strong performance of the iMac product line. The company also amended its fiscal calendar to end quarters on Saturdays rather than Fridays, adding one day to the first quarter of fiscal 1999.
Key Financial Metrics
| Metric | 3 Months Ended 6/26/99 | 9 Months Ended 6/26/99 | 3 Months Ended 6/26/98 | 9 Months Ended 6/26/98 |
|---|---|---|---|---|
| Net Sales | $1,558 million | $4,798 million | $1,402 million | $4,385 million |
| Gross Margin | $427 million (27.4%) | $1,312 million (27.3%) | $360 million (25.7%) | $1,062 million (24.2%) |
| Operating Income | $104 million | $310 million | $61 million | $152 million |
| Net Income | $203 million | $490 million | $101 million | $203 million |
| Diluted EPS | $1.20 | $2.99 | $0.65 | $1.40 |
| Cash & Equivalents | $1,773 million | $1,773 million | $1,481 million | $1,230 million |
| Short-term Investments | $1,333 million | $1,333 million | $819 million | $1,230 million |
| Long-term Debt | $300 million | $300 million | $954 million | $953 million |
| Working Capital | $2,759 million | $2,759 million | $2,178 million | $1,986 million |
Liquidity: Total cash, cash equivalents, and short-term investments stood at $3.1 billion as of June 26, 1999. Operating cash flow for the nine-month period was $580 million.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 11% year-over-year for the quarter and 9% for the nine-month period. This was driven by a 41% increase in Macintosh CPU unit sales (905,000 units vs. 644,000), largely due to the iMac, which accounted for 54% of unit sales.
- Profitability Surge: Net income doubled year-over-year for the quarter (101% increase) and more than doubled for the nine-month period (141% increase). This was significantly aided by a $101 million gain from the sale of ARM Holdings stock in the quarter and $188 million for the nine months.
- Margin Expansion: Gross margin percentage improved to 27.4% from 25.7% year-over-year, attributed to operational efficiencies, lower component costs (DRAM, microprocessors), and product line simplification.
- Debt Reduction: Long-term debt decreased from $954 million to $300 million. The company called for redemption of its $661 million convertible debentures, which were virtually entirely converted into approximately 22.6 million shares of common stock.
- Inventory Management: Inventory levels dropped dramatically from $78 million to $7 million, reducing days of supply from 6 to 1 day.
Guidance, Outlook, and Risks
- Stock Repurchase: On July 14, 1999, the board authorized a plan to repurchase up to $500 million of common stock.
- Strategic Investment: On July 28, 1999, Apple announced a $100 million investment in Samsung Electronics in the form of convertible bonds to expand TFT-LCD display capacity.
- Tax Outlook: The effective tax rate was 11% for the period, lower than the statutory rate due to valuation allowance reversals. Management anticipates the tax rate will increase significantly in fiscal 2000.
- Year 2000 (Y2K) Compliance: The company is in the remediation and testing phases of its Y2K plan. While internal systems are largely compliant, risks remain regarding third-party vendors and potential global infrastructure failures (shipping, power, telecommunications) that could disrupt operations.
- Market Risks: The company faces downward pressure on gross margins due to industry pricing trends and competition. It is also exposed to foreign currency fluctuations, though it hedges a majority of material exposures.
Key Facts for Investor Verification
- ARM Investment Gains: Verify the sustainability of earnings without the $188 million non-recurring gain from ARM stock sales included in the nine-month net income.
- Debt Conversion: Confirm the impact of the $661 million debt conversion on future interest expense savings (approx. $11 million quarterly) and share dilution (22.6 million new shares).
- Product Mix Shift: Assess the long-term margin impact of the shift toward lower-priced iMac systems, which drove volume but reduced average revenue per unit by 21% year-over-year.
- Y2K Contingency: Review the status of third-party vendor compliance, as Apple's operations are heavily dependent on external suppliers whose Y2K readiness is not fully guaranteed.
- Stock Buyback Execution: Monitor the execution of the newly authorized $500 million stock repurchase plan and its effect on share count and liquidity.