Note 6 –
Commitments and Contingencies
Accrued Warranty and
Indemnifications
The following
table summarizes changes in the Company’s accrued warranties
and related costs for the three- and nine-month periods ended
June 25, 2011 and June 26, 2010 (in millions):
C:
|
|
|
September 30, |
|
|
|
September 30, |
|
|
|
September 30, |
|
|
|
September 30, |
|
|
|
Three Months Ended |
|
|
Nine Months
Ended |
|
|
|
June 25,
2011 |
|
|
June 26,
2010 |
|
|
June 25,
2011 |
|
|
June 26,
2010 |
|
C:
C:
Beginning accrued warranty
and related costs
|
|
$ |
1,103 |
|
|
$ |
588 |
|
|
$ |
761 |
|
|
$ |
577 |
|
Cost of warranty
claims
|
|
|
(288 |
) |
|
|
(155 |
) |
|
|
(790 |
) |
|
|
(427 |
) |
Accruals for product
warranty
|
|
|
375 |
|
|
|
157 |
|
|
|
1,219 |
|
|
|
440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending accrued warranty and
related costs
|
|
$ |
1,190 |
|
|
$ |
590 |
|
|
$ |
1,190 |
|
|
$ |
590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C:
The Company
generally does not indemnify end-users of its operating system and
application software against legal claims that the software
infringes third-party intellectual property rights. Other
agreements entered into by the Company sometimes include
indemnification provisions under which the Company could be subject
to costs and/or damages in the event of an infringement claim
against the Company or an indemnified third-party. However, the
Company has not been required to make any significant payments
resulting from such an infringement claim asserted against it or an
indemnified third-party. In the opinion of management, there was
not at least a reasonable possibility the Company may have incurred
a material loss with respect to indemnification of end-users of its
operating system or application software for infringement of
third-party intellectual property rights. The Company did not
record a liability for infringement costs related to
indemnification as of either June 25, 2011 or
September 25, 2010.
The Company has
entered into indemnification agreements with its directors and
executive officers. Under these agreements, the Company has agreed
to indemnify such individuals to the fullest extent permitted by
law against liabilities that arise by reason of their status as
directors or officers and to advance expenses incurred by such
individuals in connection with related legal proceedings. It is not
possible to determine the maximum potential amount of payments the
Company could be required to make under these agreements due to the
limited history of prior indemnification claims and the unique
facts and circumstances involved in each claim. However, the
Company maintains directors and officers liability insurance
coverage to reduce its exposure to such obligations, and payments
made under these agreements historically have not been
material.
Concentrations in the
Available Sources of Supply of Materials and Product
Although most
components essential to the Company’s business are generally
available from multiple sources, certain key components including
but not limited to microprocessors, enclosures, certain liquid
crystal displays (“LCDs”), certain optical drives and
application-specific integrated circuits (“ASICs”) are
currently obtained by the Company from single or limited sources,
which subjects the Company to significant supply and pricing risks.
Many of these and other key components that are available from
multiple sources including but not limited to NAND flash memory,
dynamic random access memory (“DRAM”) and certain LCDs,
are subject at times to industry-wide shortages and significant
commodity pricing fluctuations. In addition, the Company has
entered into certain agreements for the supply of key components
including, but not limited to, microprocessors, NAND flash memory,
DRAM and LCDs with favorable pricing, but there can be no guarantee
that the Company will be able to extend or renew these agreements
on similar favorable terms, or at all, upon expiration or otherwise
obtain favorable pricing in the future. Therefore, the Company
remains subject to significant risks of supply shortages and/or
price increases that can materially adversely affect its financial
condition and operating results.
The Company and
other participants in the mobile communication and media device,
and personal computer industries also compete for various
components with other industries that have experienced increased
demand for their products. In addition, the Company uses some
custom components that are not common to the rest of these
industries, and new products introduced by the Company often
utilize custom components available from only one source. When a
component or product uses new technologies, initial capacity
constraints may exist until the suppliers’ yields have
matured or manufacturing capacity has increased. If the
Company’s supply of a key single-sourced component for a new
or existing product were delayed or constrained, if such components
were available only at significantly higher prices, or if a key
outsourcing partner delayed shipments of completed products to the
Company, the Company’s financial condition and operating
results could be materially adversely affected. The Company’s
business and financial performance could also be adversely affected
depending on the time required to obtain sufficient quantities from
the original source, or to identify and obtain sufficient
quantities from an alternative source. Continued availability of
these components at acceptable prices, or at all, may be affected
if those suppliers decided to concentrate on the production of
common components instead of components customized to meet the
Company’s requirements.
Substantially
all of the Company’s iPhones, iPads, Macs, iPods, logic
boards and other assembled products are manufactured by outsourcing
partners, primarily in various parts of Asia. A significant
concentration of this outsourced manufacturing is currently
performed by only a few outsourcing partners of the Company, often
in single locations. Certain of these outsourcing partners are the
sole-sourced supplier of components and manufacturing outsourcing
for many of the Company’s key products including but not
limited to final assembly of substantially all of the
Company’s hardware products. Although the Company works
closely with its outsourcing partners on manufacturing schedules,
the Company’s operating results could be adversely affected
if its outsourcing partners were unable to meet their production
commitments. The Company’s purchase commitments typically
cover its requirements for periods ranging from 30 to 150
days.
Long-Term Supply
Agreements
The Company has
entered into long-term agreements to secure the supply of certain
inventory components. These agreements generally expire between
2011 and 2022. As of June 25, 2011, the Company had a total of
$2.4 billion of inventory component prepayments outstanding, of
which $701 million are classified as other current assets and $1.7
billion are classified as other assets in the Condensed
Consolidated Balance Sheets. The Company had a total of $956
million of inventory component prepayments outstanding as of
September 25, 2010. The Company’s outstanding
prepayments will be applied to certain inventory component
purchases made during the term of each respective agreement. As of
June 25, 2011, the Company had off-balance sheet commitments
under long-term supply agreements totaling approximately $1.7
billion to make additional inventory component prepayments and to
acquire capital equipment in 2011 and beyond.
Other Off-Balance Sheet
Commitments
The Company
leases various equipment and facilities, including retail space,
under noncancelable operating lease arrangements. The Company does
not currently utilize any other off-balance sheet financing
arrangements. The major facility leases are typically for terms not
exceeding 10 years and generally provide renewal options for terms
not exceeding five additional years. Leases for retail space are
for terms ranging from five to 20 years, the majority of which are
for 10 years, and often contain multi-year renewal options. As of
June 25, 2011, the Company’s total future minimum lease
payments under noncancelable operating leases were $2.7 billion, of
which $2.2 billion related to leases for retail space.
Additionally, as
of June 25, 2011, the Company had outstanding off-balance
sheet commitments for outsourced manufacturing and component
purchases of $11.0 billion. Other outstanding obligations were $1.6
billion as of June 25, 2011, and were comprised mainly of
commitments to acquire product tooling and manufacturing process
equipment and commitments related to advertising, research and
development, Internet and telecommunications services and other
obligations. These commitments exclude the off-balance sheet
commitments under the long-term supply agreements described
above.
Contingencies
The Company is
subject to various legal proceedings and claims that have arisen in
the ordinary course of business and have not been fully
adjudicated, which are discussed in Part II, Item 1 of this
Form 10-Q under the heading “Legal Proceedings” and in
Part II Item 1A under the heading “Risk Factors.”
In the opinion of management, there was not at least a reasonable
possibility the Company may have incurred a material loss, or a
material loss in excess of a recorded accrual, with respect to loss
contingencies. However, the outcome of litigation is inherently
uncertain. Therefore, although management considers the likelihood
of such an outcome to be remote, if one or more of these legal
matters were resolved against the Company in the same reporting
period for amounts in excess of management’s expectations,
the Company’s condensed consolidated financial statements of
a particular reporting period could be materially adversely
affected.
On
March 14, 2008, Mirror Worlds, LLC filed an action against the
Company alleging that certain of its products infringed on three
patents covering technology used to display files. On
October 1, 2010, a jury returned a verdict against the
Company, and awarded damages of $208 million per patent for each of
the three patents asserted. On April 4, 2011, the Judge
overturned the verdict in the Company’s favor. Mirror Worlds
has appealed the ruling. The Company had not recorded a loss
contingency for this action.
Production and
marketing of products in certain states and countries may subject
the Company to environmental, product safety and other regulations
including, in some instances, the requirement to provide customers
the ability to return product at the end of its useful life, and
place responsibility for environmentally safe disposal or recycling
with the Company. Such laws and regulations have been passed in
several jurisdictions in which the Company operates, including
various countries within Europe and Asia and certain states and
provinces within North America. Although the Company does not
anticipate any material adverse effects in the future based on the
nature of its operations and the thrust of such laws, there can be
no assurance that such existing laws or future laws will not
materially adversely affect the Company’s financial condition
or operating results.