AAPL

Apple Inc. 10-Q Summary: Quarter Ended June 26, 1998

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for Apple Computer, Inc. covering the three and nine months ended June 26, 1998. The company is in a turnaround phase following significant restructuring efforts initiated in 1996 and 1997. The reporting period marks the third quarter of fiscal year 1998, during which the company returned to profitability after reporting losses in the prior year.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Turnaround: The company reported a net income of $101 million for the quarter, a stark contrast to the $56 million net loss in the same period of 1997. For the nine-month period, the company posted a $203 million profit compared to an $884 million loss in 1997.
• Revenue Decline: Net sales decreased 19% year-over-year for the quarter and 20% for the nine-month period. This decline was driven by the discontinuation of peripheral products (imaging and display), a 37% drop in Asian sales due to regional economic issues, and lower average revenue per Macintosh system.
• Expense Reduction: Selling, general, and administrative (SG&A) expenses dropped 30% year-over-year, and R&D expenses fell 25%, largely due to restructuring actions including headcount reductions and facility closures.
• One-Time Gains: Interest and other income increased significantly (1,100% for the quarter) due to a $24 million gain from the sale of ARM Holdings shares and a $16 million adjustment related to the ARM IPO.

Guidance, Outlook, and Risks

• Revenue Outlook: Management anticipates modest sequential revenue growth for the fourth quarter of fiscal 1998. Year-over-year revenue growth is not expected until the first quarter of fiscal 1999.
• Margin Pressure: While gross margins improved to 26% due to a shift toward higher-margin Power Macintosh G3 systems, management expects margins to trend down gradually as lower-margin consumer products comprise a larger share of sales.
• Liquidity and Debt: The company holds $1,993 million in cash and short-term investments, deemed sufficient for the next 12 months. However, debt ratings remain non-investment grade (B- by S&P, B2 by Moody's), though outlooks were revised to "positive" in June 1998.
• Restructuring: Approximately $77 million in restructuring costs remain accrued, with expected cash expenditures of $35 million in the next three months.
• Risks: Key risks include continued competitive pricing pressures, dependence on third-party suppliers for components (specifically PowerPC microprocessors), the success of the Year 2000 compliance program, and the realization of deferred tax assets dependent on future taxable income.

Investor Verification Checklist

• ARM Investment Valuation: Verify the carrying value ($21 million) versus fair market value ($219 million) of the ARM Holdings investment and the impact of the "lock-up" agreement expiring in October 1998.
• Deferred Tax Assets: Confirm the realizability of the $658 million deferred tax asset, noting the $173 million valuation allowance and the requirement to generate $245 million in future U.S. taxable income.
• Product Mix Shift: Monitor the transition to Power Macintosh G3 systems (84% of shipments in Q3) and the potential margin compression as consumer products increase in volume.
• Restructuring Completion: Track the execution of the remaining $77 million in restructuring costs and the associated cash outflows.
• Debt Covenants: Review the implications of non-investment grade debt ratings on future borrowing costs and potential collateral requirements.