updated 12:55 am EST, Fri December 20, 2002
Apple today filed its , which includes a section on critical accounting policies (revenue recognition, allowances for doubtful accounts, inventory valuation, purchase commitments, valuation of long-lived assets, and valuation of non-Current debt and equity investments and other sales and operational details. We have some annotated highlights from the report...[details added]
- Workforce Reduction: Six million of Apple's $30M restructuring charge was incurred in the fourth quarter of 2002 related workforce reduction and adjustment of its PowerSchool product strategy. Headcount actions, primarily in Corporate operations, sales, and PowerSchool related R&D, resulted in the elimination ofapproximately 180 positions worldwide at a cost of $1.8 million. The shift in product strategy at PowerSchool included discontinuing development and marketing of a PowerSchool product (impairment of $4.5M in capitalized development costs associated with the product). The remaining charge in 2002 of $24 million was incurred in the first quarter of 2002 and will ultimately result in the elimination of approximately 425 positions worldwide--415 of which were eliminated by September 28, 2002, at a cost of $8M.
- Debt and Equity Securities: As of September 28, 2002, the Company held investments in certain debt and equity securities with a combined carrying value of $39M. These investments, which are reflected in the consolidated balance sheets as non-current debt and equity investments, have been categorized as available-for-sale requiring that they be carried at fair value with unrealized gains and losses, net of taxes, reported in equity as a component of accumulated other comprehensive income.
- Education Sales Declining: Net sales to the US education market fell to 21% of the Company's total net sales in 2002 from 26% in 2001. This drop reflects declines in both net sales and Macintosh unit sales in these markets of about 15% in fiscal 2002 compared to 2001. These developments are consistent with industry data showing the Company losing market share in the U.S. education market in each of the last two fiscal years.
- Power Mac sales fall significantly: Unit sales of Power Macs fell 18% during 2002 as compared to 2001 and fell 35% in 2001 from 2000. Power Macintosh unit sales have fallen as a percentage of total unit sales from 38% in 1999 to 25% in 2002. Declining sales of Power Macs also have a negative effect on its overall gross margin. If future sales of Power Macs fail to partially or fully recover, it will be difficult for the Company to improve its overall profitability.
- Processor Development Issues: Despite Apple's efforts to educate the marketplace, it believes that many of its current and potential customers believe that the relatively slower MHz rating or clock speed of the microprocessors it utilizes in its Macs compares unfavorably to those utilized by Windows-based systems and translates to slower overall system performance. There have been instances in recent years where the inability of Apple's suppliers [IBM and Motorola] to provide advanced G4 and G3 microprocessors with higher clock speeds in sufficient quantity has had significant adverse effects on Apple's sales.
- "Flagship" Store Liability: Some of Apple's retail stores have been intentionally designed and built to serve as high profile venues that function as vehicles for general corporate marketing, corporate events, and brand awareness. Because of their unique design elements, locations and size, these "flagship" stores require substantially more investment in equipment and leasehold improvements than the Company's typical retail stores. The Company has opened two such stores and has several others under development.
- R&D Expenses Up: R&D expense increased 4% or $16M to $446M in 2002 as compared to 2001. This followed a $50M or 13% increase in 2001 as compared to 2000. The increase relates primarily to increased R&D headcount and support for new product development activities. R&D spending in 2002 also included capitalized software development costs of approximately $13.3M associated with the development of Mac OS X Jaguar and approximately $6M associated with PowerSchool. R&D spending in 2001 also included capitalized software development costs of approximately $5.4 million associated with the development of the original version of Mac OS X.
- Retail Segment Grows: By the end of September 2002, Apple had 40 retail stores in the US, 32 of which were opened during fiscal 2002 and has opened 11 additional stores during the first fiscal quarter of 2003. During 2002, approximately 39% of the Retail segment's net sales came from the sale of Apple-branded and third-party peripherals and software. This compares to 21% for the Company as a whole. The Retail segment achieved average annualized revenue per store during the fourth quarter of approximately $12 million (and had approximately 2.25 million visitors), but reported a loss for all of 2002 of $22 million, and a loss for the fourth quarter of 2002 of $3 million.
- Stock repurchase plan: During the fourth quarter of 2001, Apple entered into a forward purchase agreement to acquire 1.5 million shares for a total cost of $25.5M. Since inception of the $500M stock repurchase plan, Apple has repurchased or committed to repurchase a total of 6.55M shares of its common stock at a cost of $217M.
- Capital Expenditures: Of total capital expenditures in 2002 of $174M, $106M was for expenses related to the Retail segment and $68M was for corporate infrastructure including IT enhancements and operating facilities enhancements and expansions. Apple currently anticipates it will utilize approximately $160M for capital expenditures during 2003, approximately $77M of which is expected to be utilized for expanding the Retail segment.
- PowerSchool Purchase: Of total PowerSchool purchase consideration (May 2001) of $66.1M, $10.8M was allocated to IPR&D. At the date of the acquisition, the PowerSchool product under development was approximately 50% complete, and it was expected that the remaining 50% would be completed during the Company's fiscal 2002 at a cost of approximately $9.25M. The remaining efforts, which were completed during 2002, included completion of coding, finalizing user interface design and development, and testing.
- Emagic Purchase: During the fourth quarter of 2002, Apple acquired Emagic, a provider of professional software solutions for computer based music production, for approximately $30M in cash; $551,000 of which was allocated to IPR&D. At the date of the acquisition, the products under development were between 43%-83% complete, and it was expected that the remaining work would be completed during the fiscal 2003 at a cost of approximately $415,000.
- Restructuring Charges: During fiscal 2002, Apple recorded total restructuring charges of $30M, part of which was to offset the cost of continuing investments in new product development and investments in the Retail operating segment. Once fully implemented, the Company estimates these restructuring actions will result in reduced quarterly operating expenses of approximately $10M.
- Gross Margin Increased: Gross margin increased to 28% of net sales in 2002 from 23% in 2001. Gross margin in 2001 was unusually low resulting from negative gross margin of 2% experienced in the first quarter of 2001. As a percentage of net sales, quarterly gross margins declined during fiscal 2002 from 31% in the first quarter down to 26% in the fourth quarter. This decline resulted from several factors including a rise in component costs and aggressive pricing due to continued pricing pressures in the PC industry. Apple anticipates that its gross margin (and that of the overall PC industry) will remain under pressure throughout fiscal 2003 in light of weak economic conditions, flat demand for personal computers in general, and the resulting pressure on prices.