Apple Inc. (Apple Computer, Inc.) 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Apple Computer, Inc. for the quarterly period ended March 30, 2002. The company designs, manufactures, and markets personal computers and related solutions for education, creative, consumer, and business customers. The report covers the second quarter of fiscal year 2002 and the first six months of the fiscal year.
Key Financial Metrics
| Metric | Three Months Ended Mar 30, 2002 |
Six Months Ended Mar 30, 2002 |
|---|---|---|
| Net Sales | $1,495 million | $2,870 million |
| Gross Margin | $409 million (27.4%) | $831 million (29.0%) |
| Operating Income | $28 million | $24 million |
| Net Income | $40 million | $78 million |
| Diluted EPS | $0.11 | $0.22 |
| Cash & Equivalents | $1,159 million | $1,159 million (Ending Balance) |
| Short-term Investments | $3,150 million | $3,150 million (Ending Balance) |
| Long-term Debt | $311 million | $311 million |
| Working Capital | $3,705 million | $3,705 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 4% year-over-year (YoY) for the quarter and 18% for the six-month period. This growth occurred despite a seasonal decline typically seen in the PC industry during the first calendar quarter.
- Profitability Turnaround: The company returned to profitability, reporting $28 million in operating income for the quarter compared to an $8 million loss in the same period in 2001. Net income for the six months ended March 30, 2002, was $78 million, a significant improvement from a $152 million loss in the prior year period.
- Gross Margin Expansion: Gross margin percentage improved to 27.4% from 26.9% YoY, driven by lower component costs (memory and flat panels) and the favorable margin impact of the Retail segment. The six-month margin of 29.0% was heavily influenced by a negative 2.1% margin in Q1 2001 due to price cuts and inventory charges.
- Product Mix Shift: iMac unit sales rose 24% and iBook unit sales surged 156% YoY, offsetting declines in Power Mac (down 19%) and PowerBook (down 34%) sales.
- Restructuring: A $24 million restructuring charge was recognized in Q1 2002 to eliminate approximately 425 positions and align expenses with economic conditions. No restructuring costs were recorded in Q2 2002.
Guidance, Outlook, and Risks
- Q3 2002 Outlook: Management expects net sales to rise sequentially to approximately $1.6 billion. Earnings are expected to be relatively flat or increase slightly compared to Q2. Operating expenses and other income/expense are expected to remain sequentially flat.
- Gross Margin Warning: Management anticipates a sequential decline in gross margin for Q3 2002 due to higher component costs and a product mix shift toward lower-margin education-oriented units during the back-to-school season.
- Key Risks:
- Economic Conditions: Continued uncertainty regarding the global economy and the impact of the September 11, 2001, terrorist attacks on demand.
- Education Channel: Weakness in the U.S. education channel, with sales down 18% YoY for the first six months, attributed to funding concerns at educational institutions.
- Inventory Risk: The need to order components in advance creates risk of obsolescence or excess inventory if demand forecasts are inaccurate.
- Investment Volatility: Significant fluctuations in the fair value of non-current investments (e.g., EarthLink, ARM Holdings) could impact earnings if declines are deemed other-than-temporary.
- Subsequent Event: In April 2002, the company made a $100 million unsecured prepayment to an Asian supplier for future components, exposing the deposit to potential risk if the supplier fails to perform.
Investor Verification Checklist
- Education Channel Recovery: Verify if the 18% decline in U.S. education sales stabilizes in the upcoming quarters, as this segment is critical for volume.
- Retail Segment Economics: Monitor the Retail segment's path to profitability; it currently operates at a loss ($4 million in Q2) despite $70 million in sales.
- Component Cost Trends: Confirm if the anticipated rise in component costs for Q3 materializes, which could pressure the gross margin below the 27.4% level achieved in Q2.
- Investment Valuation: Review the fair value of the EarthLink investment (basis $79M vs. fair value $66M) to assess the risk of a future impairment charge.
- Supplier Concentration: Assess the risk associated with the $100 million unsecured deposit made to an Asian supplier in April 2002.