10-Q 1 a10-qq220183312018.

htm 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 001-36743

Apple Inc.
(Exact name of Registrant as specified in its charter)

California 94-2404110
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)

One Apple Park Way

Cupertino, California 95014
(Address of principal executive offices) (Zip Code)

(408) 996-1010
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the Registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ☐

Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒

4,915,138,000 shares of common stock, par value $0.00001 per share, issued and outstanding as of April 20, 2018
 Apple Inc.

Form 10-Q
For the Fiscal Quarter Ended March 31, 2018
TABLE OF CONTENTS

Page
Part I
Item 1. Financial Statements 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
Item 4. Controls and Procedures 34
Part II
Item 1. Legal Proceedings 35
Item 1A. Risk Factors 35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 45
Item 3. Defaults Upon Senior Securities 45
Item 4. Mine Safety Disclosures 45
Item 5. Other Information 45
Item 6. Exhibits 46
PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Apple Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In millions, except number of shares which are reflected in thousands and per share amounts)

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
2018 2017 2018 2017
Net sales $ 61,137 $ 52,896 $ 149,430 $ 131,247
Cost of sales 37,715 32,305 92,096 80,480
Gross margin 23,422 20,591 57,334 50,767

Operating expenses:
Research and development 3,378 2,776 6,785 5,647
Selling, general and administrative 4,150 3,718 8,381 7,664
Total operating expenses 7,528 6,494 15,166 13,311

Operating income 15,894 14,097 42,168 37,456

Other income/(expense), net 274 587 1,030 1,408
Income before provision for income taxes 16,168 14,684 43,198 38,864
Provision for income taxes 2,346 3,655 9,311 9,944
Net income $ 13,822 $ 11,029 $ 33,887 $ 28,920

Earnings per share:

Basic $ 2.75 $ 2.11 $ 6.69 $ 5.50
Diluted $ 2.73 $ 2.10 $ 6.63 $ 5.46

Shares used in computing earnings per share:

Basic 5,024,877 5,225,791 5,068,877 5,262,226
Diluted 5,068,493 5,261,688 5,113,140 5,294,841

Cash dividends declared per share $ 0.63 $ 0.57 $ 1.26 $ 1.14

See accompanying Notes to Condensed Consolidated Financial Statements.

Apple Inc. | Q2 2018 Form 10-Q | 1

 Apple Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In millions)

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
2018 2017 2018 2017
Net income $ 13,822 $ 11,029 $ 33,887 $ 28,920
Other comprehensive income/(loss):
Change in foreign currency translation, net of tax effects
of $8, $(44), $7 and $32, respectively 263 214 303 (161)

Change in unrealized gains/losses on derivative

instruments:
Change in fair value of derivatives, net of tax
benefit/(expense) of $(64), $(25), $(130) and
$(253), respectively (27) (300) 61 1,168
Adjustment for net (gains)/losses realized and
included in net income, net of tax expense/(benefit)
of $77, $311, $56 and $100, respectively (207) (1,032) (105) (726)
Total change in unrealized gains/losses on
derivative instruments, net of tax (234) (1,332) (44) 442

Change in unrealized gains/losses on marketable

securities:
Change in fair value of marketable securities, net of
tax benefit/(expense) of $541, $(256), $1,005 and
$733, respectively (2,003) 464 (2,849) (1,344)
Adjustment for net (gains)/losses realized and
included in net income, net of tax expense/(benefit)
of $(7), $7, $34 and $(4), respectively 29 (13) (46) 7
Total change in unrealized gains/losses on
marketable securities, net of tax (1,974) 451 (2,895) (1,337)

Total other comprehensive income/(loss) (1,945) (667) (2,636) (1,056)

Total comprehensive income $ 11,877 $ 10,362 $ 31,251 $ 27,864

See accompanying Notes to Condensed Consolidated Financial Statements.

Apple Inc. | Q2 2018 Form 10-Q | 2

 Apple Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In millions, except number of shares which are reflected in thousands and par value)

March 31, September 30,

2018 2017
ASSETS:
Current assets:
Cash and cash equivalents $ 45,059 $ 20,289
Short-term marketable securities 42,881 53,892
Accounts receivable, less allowances of $60 and $58, respectively 14,324 17,874
Inventories 7,662 4,855
Vendor non-trade receivables 8,084 17,799
Other current assets 12,043 13,936
Total current assets 130,053 128,645

Long-term marketable securities 179,286 194,714

Property, plant and equipment, net 35,077 33,783
Other non-current assets 23,086 18,177
Total assets $ 367,502 $ 375,319

LIABILITIES AND SHAREHOLDERS’ EQUITY:

Current liabilities:
Accounts payable $ 34,311 $ 49,049
Accrued expenses 26,756 25,744
Deferred revenue 7,775 7,548
Commercial paper 11,980 11,977
Current portion of long-term debt 8,498 6,496
Total current liabilities 89,320 100,814

Deferred revenue, non-current 3,087 2,836

Long-term debt 101,362 97,207
Other non-current liabilities 46,855 40,415
Total liabilities 240,624 241,272

Commitments and contingencies

Shareholders’ equity:
Common stock and additional paid-in capital, $0.00001 par value: 12,600,000 shares
authorized; 4,943,282 and 5,126,201 shares issued and outstanding, respectively 38,044 35,867
Retained earnings 91,898 98,330
Accumulated other comprehensive income/(loss) (3,064) (150)
Total shareholders’ equity 126,878 134,047
Total liabilities and shareholders’ equity $ 367,502 $ 375,319

See accompanying Notes to Condensed Consolidated Financial Statements.

Apple Inc. | Q2 2018 Form 10-Q | 3

 Apple Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In millions)

Six Months Ended

March 31, April 1,
2018 2017
Cash and cash equivalents, beginning of the period $ 20,289 $ 20,484
Operating activities:
Net income 33,887 28,920
Adjustments to reconcile net income to cash generated by operating activities:
Depreciation and amortization 5,484 5,319
Share-based compensation expense 2,644 2,473
Deferred income tax expense/(benefit) (34,235) 2,822
Other (151) (209)
Changes in operating assets and liabilities:
Accounts receivable, net 3,523 4,183
Inventories (2,807) (778)
Vendor non-trade receivables 9,715 4,512
Other current and non-current assets (1,053) (896)
Accounts payable (13,220) (6,862)
Deferred revenue 478 (221)
Other current and non-current liabilities 39,158 541
Cash generated by operating activities 43,423 39,804
Investing activities:
Purchases of marketable securities (48,449) (99,821)
Proceeds from maturities of marketable securities 31,884 12,429
Proceeds from sales of marketable securities 38,942 60,454
Payments for acquisition of property, plant and equipment (7,005) (6,309)
Payments made in connection with business acquisitions, net (305) (67)
Other 53 (10)
Cash generated by/(used in) investing activities 15,120 (33,324)
Financing activities:
Proceeds from issuance of common stock 327 273
Payments for taxes related to net share settlement of equity awards (1,190) (788)
Payments for dividends and dividend equivalents (6,529) (6,134)
Repurchases of common stock (32,851) (18,012)
Proceeds from issuance of term debt, net 6,969 10,975
Repayments of term debt (500) —
Change in commercial paper, net 1 1,879
Cash used in financing activities (33,773) (11,807)
Increase/(Decrease) in cash and cash equivalents 24,770 (5,327)
Cash and cash equivalents, end of the period $ 45,059 $ 15,157
Supplemental cash flow disclosure:
Cash paid for income taxes, net $ 6,340 $ 6,878
Cash paid for interest $ 1,356 $ 1,007

See accompanying Notes to Condensed Consolidated Financial Statements.

Apple Inc. | Q2 2018 Form 10-Q | 4

 Apple Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1 – Summary of Significant Accounting Policies

Apple Inc. and its wholly-owned subsidiaries (collectively “Apple” or the “Company”) designs, manufactures and markets mobile
communication and media devices and personal computers, and sells a variety of related software, services, accessories,
networking solutions and third-party digital content and applications. The Company’s products and services include iPhone®, iPad®,
Mac®, Apple Watch®, AirPods®, Apple TV®, HomePod™, a portfolio of consumer and professional software applications, iOS,
macOS®, watchOS® and tvOS™ operating systems, iCloud®, Apple Pay® and a variety of other accessory, service and support
offerings. The Company sells and delivers digital content and applications through the iTunes Store®, App Store®, Mac App Store,
TV App Store, iBooks Store® and Apple Music® (collectively “Digital Content and Services”). The Company sells its products
worldwide through its retail stores, online stores and direct sales force, as well as through third-party cellular network carriers,
wholesalers, retailers and resellers. In addition, the Company sells a variety of third-party Apple-compatible products, including
application software and various accessories through its retail and online stores. The Company sells to consumers, small and mid-
sized businesses and education, enterprise and government customers.

Basis of Presentation and Preparation

The accompanying condensed consolidated financial statements include the accounts of the Company. Intercompany accounts and
transactions have been eliminated. In the opinion of the Company’s management, the condensed consolidated financial statements
reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The preparation
of these condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”)
requires management to make estimates and assumptions that affect the amounts reported in these condensed consolidated
financial statements and accompanying notes. Actual results could differ materially from those estimates. Certain prior period
amounts in the condensed consolidated financial statements and accompanying notes have been reclassified to conform to the
current period’s presentation. These condensed consolidated financial statements and accompanying notes should be read in
conjunction with the Company’s annual consolidated financial statements and the notes thereto included in its Annual Report on
Form 10-K for the fiscal year ended September 30, 2017 (the “2017 Form 10-K”).

The Company’s fiscal year is the 52- or 53-week period that ends on the last Saturday of September. The first quarter of 2018
spanned 13 weeks, whereas a 14th week was added to the first fiscal quarter of 2017, as is done every five or six years, to realign
the Company’s fiscal quarters with calendar quarters. Unless otherwise stated, references to particular years, quarters, months and
periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal
years.

Share-Based Compensation
During the first quarter of 2018, the Company adopted the Financial Accounting Standards Board’s (the “FASB”) Accounting
Standards Update (“ASU”) No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-
Based Payment Accounting (“ASU 2016-09”), which modified certain aspects of the accounting for share-based payment
transactions, including income taxes, classification of awards and classification in the statement of cash flows. Historically, excess
tax benefits or deficiencies from the Company’s equity awards were recorded as additional paid-in capital in its Condensed
Consolidated Balance Sheets and were classified as a financing activity in its Condensed Consolidated Statements of Cash Flows.
Beginning in 2018, the Company records any excess tax benefits or deficiencies from its equity awards as part of the provision for
income taxes in its Condensed Consolidated Statements of Operations in the reporting periods in which equity vesting occurs. The
Company elected to apply the cash flow classification requirements related to excess tax benefits retrospectively to all periods
presented, which resulted in an increase to cash generated by operating activities in the Condensed Consolidated Statements of
Cash Flows of $225 million for the six months ended April 1, 2017.

Apple Inc. | Q2 2018 Form 10-Q | 5

Earnings Per Share
The following table shows the computation of basic and diluted earnings per share for the three- and six-month periods ended March
31, 2018 and April 1, 2017 (net income in millions and shares in thousands):

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
2018 2017 2018 2017
Numerator:
Net income $ 13,822 $ 11,029 $ 33,887 $ 28,920

Denominator:
Weighted-average basic shares outstanding 5,024,877 5,225,791 5,068,877 5,262,226
Effect of dilutive securities 43,616 35,897 44,263 32,615
Weighted-average diluted shares 5,068,493 5,261,688 5,113,140 5,294,841

Basic earnings per share $ 2.75 $ 2.11 $ 6.69 $ 5.50

Diluted earnings per share $ 2.73 $ 2.10 $ 6.63 $ 5.46

Note 2 – Financial Instruments

Cash, Cash Equivalents and Marketable Securities

The following tables show the Company’s cash and available-for-sale securities by significant investment category as of March 31,
2018 and September 30, 2017 (in millions):

March 31, 2018

Cash and Short-Term Long-Term
Adjusted Unrealized Unrealized Fair Cash Marketable Marketable
Cost Gains Losses Value Equivalents Securities Securities
Cash $ 9,934 $ — $ — $ 9,934 $ 9,934 $ — $ —

Level 1 (1):
Money market funds 5,742 — — 5,742 5,742 — —
Mutual funds 800 — (105) 695 — 695 —
Subtotal 6,542 — (105) 6,437 5,742 695 —

Level 2 (2):
U.S. Treasury securities 56,737 1 (932) 55,806 6,379 9,106 40,321
U.S. agency securities 5,539 — (39) 5,500 2,837 588 2,075
Non-U.S. government securities 8,247 88 (137) 8,198 — 477 7,721
Certificates of deposit and time
deposits 7,266 — — 7,266 4,611 2,021 634
Commercial paper 17,417 — — 17,417 15,455 1,962 —
Corporate securities 138,036 176 (1,975) 136,237 101 27,431 108,705
Municipal securities 973 — (11) 962 — 166 796
Mortgage- and asset-backed
securities 19,966 9 (506) 19,469 — 435 19,034
Subtotal 254,181 274 (3,600) 250,855 29,383 42,186 179,286

Total $ 270,657 $ 274 $ (3,705) $ 267,226 $ 45,059 $ 42,881 $ 179,286

Apple Inc. | Q2 2018 Form 10-Q | 6

 September 30, 2017
Cash and Short-Term Long-Term
Adjusted Unrealized Unrealized Fair Cash Marketable Marketable
Cost Gains Losses Value Equivalents Securities Securities
Cash $ 7,982 $ — $ — $ 7,982 $ 7,982 $ — $ —

Level 1 (1):
Money market funds 6,534 — — 6,534 6,534 — —
Mutual funds 799 — (88) 711 — 711 —
Subtotal 7,333 — (88) 7,245 6,534 711 —

Level 2 (2):
U.S. Treasury securities 55,254 58 (230) 55,082 865 17,228 36,989
U.S. agency securities 5,162 2 (9) 5,155 1,439 2,057 1,659
Non-U.S. government securities 7,827 210 (37) 8,000 9 123 7,868
Certificates of deposit and time
deposits 5,832 — — 5,832 1,142 3,918 772
Commercial paper 3,640 — — 3,640 2,146 1,494 —
Corporate securities 152,724 969 (242) 153,451 172 27,591 125,688
Municipal securities 961 4 (1) 964 — 114 850
Mortgage- and asset-backed
securities 21,684 35 (175) 21,544 — 656 20,888
Subtotal 253,084 1,278 (694) 253,668 5,773 53,181 194,714

Total $ 268,399 $ 1,278 $ (782) $ 268,895 $ 20,289 $ 53,892 $ 194,714

(1) Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities.
(2) Level 2 fair value estimates are based on observable inputs other than quoted prices in active markets for identical assets and liabilities,
quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or liabilities.

The Company may sell certain of its marketable securities prior to their stated maturities for strategic reasons including, but not
limited to, anticipation of credit deterioration and duration management. The maturities of the Company’s long-term marketable
securities generally range from one to five years.

The following tables show information about the Company’s marketable securities that had been in a continuous unrealized loss
position for less than 12 months and for 12 months or greater as of March 31, 2018 and September 30, 2017 (in millions):

March 31, 2018

Continuous Unrealized Losses
Less than 12 Months 12 Months or Greater Total
Fair value of marketable securities $ 159,198 $ 37,266 $ 196,464
Unrealized losses $ (2,633) $ (1,072) $ (3,705)

September 30, 2017

Continuous Unrealized Losses
Less than 12 Months 12 Months or Greater Total
Fair value of marketable securities $ 101,986 $ 8,290 $ 110,276
Unrealized losses $ (596) $ (186) $ (782)

The Company typically invests in highly rated securities, and its investment policy generally limits the amount of credit exposure to
any one issuer. The policy generally requires investments to be investment grade, with the primary objective of minimizing the
potential risk of principal loss. Fair values were determined for each individual security in the investment portfolio. When evaluating
an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair
value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates
and the Company’s intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of the
investment’s cost basis. As of March 31, 2018, the Company does not consider any of its investments to be other-than-temporarily
impaired.

Apple Inc. | Q2 2018 Form 10-Q | 7

Derivative Financial Instruments
The Company may use derivatives to partially offset its business exposure to foreign currency and interest rate risk on expected
future cash flows, on net investments in certain foreign subsidiaries and on certain existing assets and liabilities. However, the
Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations
and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a
portion of the financial impact resulting from movements in foreign currency exchange or interest rates.

To help protect gross margins from fluctuations in foreign currency exchange rates, certain of the Company’s subsidiaries whose
functional currency is the U.S. dollar may hedge a portion of forecasted foreign currency revenue, and subsidiaries whose functional
currency is not the U.S. dollar and who sell in local currencies may hedge a portion of forecasted inventory purchases not
denominated in the subsidiaries’ functional currencies. The Company may enter into forward contracts, option contracts or other
instruments to manage this risk and may designate these instruments as cash flow hedges. The Company typically hedges portions
of its forecasted foreign currency exposure associated with revenue and inventory purchases, typically for up to 12 months.

To help protect the net investment in a foreign operation from adverse changes in foreign currency exchange rates, the Company
may enter into foreign currency forward and option contracts to offset the changes in the carrying amounts of these investments due
to fluctuations in foreign currency exchange rates. In addition, the Company may use non-derivative financial instruments, such as
its foreign currency–denominated debt, as economic hedges of its net investments in certain foreign subsidiaries. In both of these
cases, the Company designates these instruments as net investment hedges.

The Company may also enter into non-designated foreign currency contracts to partially offset the foreign currency exchange gains
and losses generated by the remeasurement of certain assets and liabilities denominated in non-functional currencies.

The Company may enter into interest rate swaps, options or other instruments to manage interest rate risk. These instruments may
offset a portion of changes in income or expense, or changes in fair value of the Company’s term debt or investments. The Company
designates these instruments as either cash flow or fair value hedges. The Company’s hedged interest rate transactions as of
March 31, 2018 are expected to be recognized within 10 years.

The Company may enter into foreign currency swaps to manage currency risk on its foreign currency–denominated term debt.
These instruments may offset a portion of the foreign currency remeasurement gains or losses on the Company’s term debt and
related interest payments. The Company designates these instruments as cash flow hedges. The Company’s hedged term debt–
related foreign currency transactions as of March 31, 2018 are expected to be recognized within 24 years.

Cash Flow Hedges

The effective portions of cash flow hedges are recorded in accumulated other comprehensive income/(loss) (“AOCI”) until the
hedged item is recognized in earnings. Deferred gains and losses associated with cash flow hedges of foreign currency revenue are
recognized as a component of net sales in the same period as the related revenue is recognized, and deferred gains and losses
related to cash flow hedges of inventory purchases are recognized as a component of cost of sales in the same period as the related
costs are recognized. Deferred gains and losses associated with cash flow hedges of interest income or expense are recognized in
other income/(expense), net in the same period as the related income or expense is recognized. The ineffective portions and
amounts excluded from the effectiveness testing of cash flow hedges are recognized in other income/(expense), net.

Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged
transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and
losses in AOCI associated with such derivative instruments are reclassified into other income/(expense), net in the period of de-
designation. Any subsequent changes in fair value of such derivative instruments are reflected in other income/(expense), net unless
they are re-designated as hedges of other transactions.

Net Investment Hedges

The effective portions of net investment hedges are recorded in other comprehensive income/(loss) (“OCI”) as a part of the
cumulative translation adjustment. The ineffective portions and amounts excluded from the effectiveness testing of net investment
hedges are recognized in other income/(expense), net.

Fair Value Hedges

Gains and losses related to changes in fair value hedges are recognized in earnings along with a corresponding loss or gain related
to the change in value of the underlying hedged item.

Apple Inc. | Q2 2018 Form 10-Q | 8

Non-Designated Derivatives
Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line
item to which the derivative relates. As a result, during the three- and six-month periods ended March 31, 2018, respectively, the
Company recognized losses of $203 million and $142 million in net sales, losses of $247 million and $212 million in cost of sales
and losses of $331 million and $373 million in other income/(expense), net. During the three- and six-month periods ended April 1,
2017, respectively, the Company recognized a loss of $67 million and a gain of $206 million in net sales, a loss of $253 million and a
gain of $79 million in cost of sales and a loss of $76 million and a gain of $432 million in other income/(expense), net.

The Company records all derivatives in the Condensed Consolidated Balance Sheets at fair value. The Company’s accounting
treatment for these derivative instruments is based on its hedge designation. The following tables show the Company’s derivative
instruments at gross fair value as of March 31, 2018 and September 30, 2017 (in millions):

March 31, 2018

Fair Value of Fair Value of
Derivatives Designated Derivatives Not Designated Total
as Hedge Instruments as Hedge Instruments Fair Value
Derivative assets (1):
Foreign exchange contracts $ 1,361 $ 290 $ 1,651
Interest rate contracts $ 12 $ — $ 12

Derivative liabilities (2):

Foreign exchange contracts $ 651 $ 514 $ 1,165
Interest rate contracts $ 1,052 $ — $ 1,052

September 30, 2017

Fair Value of Fair Value of
Derivatives Designated Derivatives Not Designated Total
as Hedge Instruments as Hedge Instruments Fair Value
Derivative assets (1):
Foreign exchange contracts $ 1,049 $ 363 $ 1,412
Interest rate contracts $ 218 $ — $ 218

Derivative liabilities (2):

Foreign exchange contracts $ 759 $ 501 $ 1,260
Interest rate contracts $ 303 $ — $ 303

(1) The fair value of derivative assets is measured using Level 2 fair value inputs and is recorded as other current assets and other non-
current assets in the Condensed Consolidated Balance Sheets.
(2) The fair value of derivative liabilities is measured using Level 2 fair value inputs and is recorded as accrued expenses and other non-
current liabilities in the Condensed Consolidated Balance Sheets.

Apple Inc. | Q2 2018 Form 10-Q | 9

The following table shows the pre-tax gains and losses of the Company’s derivative and non-derivative instruments designated as
cash flow, net investment and fair value hedges in OCI and the Condensed Consolidated Statements of Operations for the three-
and six-month periods ended March 31, 2018 and April 1, 2017 (in millions):

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
2018 2017 2018 2017
Gains/(Losses) recognized in OCI – effective portion:
Cash flow hedges:
Foreign exchange contracts $ 37 $ (317) $ 190 $ 1,410
Interest rate contracts — 2 1 9
Total $ 37 $ (315) $ 191 $ 1,419

Net investment hedges:

Foreign currency debt $ (33) $ (85) $ (31) $ 37

Gains/(Losses) reclassified from AOCI into net income –

effective portion:
Cash flow hedges:
Foreign exchange contracts $ 287 $ 1,344 $ 163 $ 833
Interest rate contracts 2 (2) 3 (3)
Total $ 289 $ 1,342 $ 166 $ 830

Gains/(Losses) on derivative instruments:

Fair value hedges:
Interest rate contracts $ (674) $ (50) $ (948) $ (922)

Gains/(Losses) related to hedged items:

Fair value hedges:
Fixed-rate debt $ 674 $ 50 $ 948 $ 922

The following table shows the notional amounts of the Company’s outstanding derivative instruments and credit risk amounts
associated with outstanding or unsettled derivative instruments as of March 31, 2018 and September 30, 2017 (in millions):

March 31, 2018 September 30, 2017

Notional Credit Risk Notional Credit Risk
Amount Amount Amount Amount
Instruments designated as accounting hedges:
Foreign exchange contracts $ 48,122 $ 1,361 $ 56,156 $ 1,049
Interest rate contracts $ 35,250 $ 12 $ 33,000 $ 218

Instruments not designated as accounting hedges:

Foreign exchange contracts $ 61,179 $ 290 $ 69,774 $ 363

The notional amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not
represent the amount of the Company’s exposure to credit or market loss. The credit risk amounts represent the Company’s gross
exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform
according to the terms of the contract, based on then-current currency or interest rates at each respective date. The Company’s
exposure to credit loss and market risk will vary over time as currency and interest rates change. Although the table above reflects
the notional and credit risk amounts of the Company’s derivative instruments, it does not reflect the gains or losses associated with
the exposures and transactions that the instruments are intended to hedge. The amounts ultimately realized upon settlement of
these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions
during the remaining life of the instruments.

Apple Inc. | Q2 2018 Form 10-Q | 10

The Company generally enters into master netting arrangements, which are designed to reduce credit risk by permitting net
settlement of transactions with the same counterparty. To further limit credit risk, the Company generally enters into collateral
security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments
fluctuates from contractually established thresholds. The Company presents its derivative assets and derivative liabilities at their
gross fair values in its Condensed Consolidated Balance Sheets. As of March 31, 2018, the net cash collateral posted by the
Company related to derivative instruments under its collateral security arrangements was $241 million, which was recorded as other
current assets in the Condensed Consolidated Balance Sheet. As of September 30, 2017, the net cash collateral received by the
Company related to derivative instruments under its collateral security arrangements was $35 million, which was recorded as
accrued expenses in the Condensed Consolidated Balance Sheet.

Under master netting arrangements with the respective counterparties to the Company’s derivative contracts, the Company is
allowed to net settle transactions with a single net amount payable by one party to the other. As of March 31, 2018 and
September 30, 2017, the potential effects of these rights of set-off associated with the Company’s derivative contracts, including the
effects of collateral, would be a reduction to both derivative assets and derivative liabilities of $2.1 billion and $1.4 billion,
respectively, resulting in a net derivative liability of $313 million and a net derivative asset of $32 million, respectively.

Accounts Receivable
Trade Receivables
The Company has considerable trade receivables outstanding with its third-party cellular network carriers, wholesalers, retailers,
resellers, small and mid-sized businesses and education, enterprise and government customers. The Company generally does not
require collateral from its customers; however, the Company will require collateral or third-party credit support in certain instances to
limit credit risk. In addition, when possible, the Company attempts to limit credit risk on trade receivables with credit insurance for
certain customers or by requiring third-party financing, loans or leases to support credit exposure. These credit-financing
arrangements are directly between the third-party financing company and the end customer. As such, the Company generally does
not assume any recourse or credit risk sharing related to any of these arrangements.

The Company had no customers that individually represented 10% or more of total trade receivables as of March 31, 2018. As of
September 30, 2017, the Company had two customers that individually represented 10% or more of total trade receivables, each of
which accounted for 10%. The Company’s cellular network carriers accounted for 48% and 59% of total trade receivables as of
March 31, 2018 and September 30, 2017, respectively.

Vendor Non-Trade Receivables

The Company has non-trade receivables from certain of its manufacturing vendors resulting from the sale of components to these
vendors who manufacture sub-assemblies or assemble final products for the Company. The Company purchases these components
directly from suppliers. As of March 31, 2018, the Company had three vendors that individually represented 10% or more of total
vendor non-trade receivables, which accounted for 44%, 20% and 11%. As of September 30, 2017, the Company had three vendors
that individually represented 10% or more of total vendor non-trade receivables, which accounted for 42%, 19% and 10%.

Note 3 – Condensed Consolidated Financial Statement Details

The following tables show the Company’s condensed consolidated financial statement details as of March 31, 2018 and
September 30, 2017 (in millions):

Inventories

March 31, September 30,

2018 2017
Components $ 5,186 $ 3,025
Finished goods 2,476 1,830
Total inventories $ 7,662 $ 4,855

Apple Inc. | Q2 2018 Form 10-Q | 11

Property, Plant and Equipment, Net

March 31, September 30,

2018 2017
Land and buildings $ 14,931 $ 13,587
Machinery, equipment and internal-use software 57,784 54,210
Leasehold improvements 7,787 7,279
Gross property, plant and equipment 80,502 75,076
Accumulated depreciation and amortization (45,425) (41,293)
Total property, plant and equipment, net $ 35,077 $ 33,783

Other Non-Current Liabilities

March 31, September 30,

2018 2017
Long-term taxes payable $ 34,913 $ 257
Deferred tax liabilities 548 31,504
Other non-current liabilities 11,394 8,654
Total other non-current liabilities $ 46,855 $ 40,415

Other Income/(Expense), Net

The following table shows the detail of other income/(expense), net for the three- and six-month periods ended March 31, 2018 and
April 1, 2017 (in millions):

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
2018 2017 2018 2017
Interest and dividend income $ 1,505 $ 1,282 $ 2,957 $ 2,506
Interest expense (792) (530) (1,526) (1,055)
Other expense, net (439) (165) (401) (43)
Total other income/(expense), net $ 274 $ 587 $ 1,030 $ 1,408

Note 4 – Income Taxes

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act
lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a
deemed repatriation tax on previously deferred foreign income. The Act also created a new minimum tax on certain future foreign
earnings. During the first six months of fiscal 2018, the Company recognized income tax expense of $9.3 billion, of which $2.6 billion
was a provisional estimate in accordance with the U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118 and
was recognized during the first quarter of 2018. This $2.6 billion provisional estimate included $1.8 billion related to the impact of
remeasuring to reduce the Company’s deferred tax balances to reflect the new tax rate, and approximately $800 million associated
with the net impact of the deemed repatriation tax.

Deferred Tax Balances

As a result of the Act, the Company remeasured certain deferred tax assets and liabilities based on the revised rates at which they
are expected to reverse, including items for which the related income tax effects were originally recognized in OCI. In addition, the
Company elected to record certain deferred tax assets and liabilities related to the new minimum tax on certain future foreign
earnings. The provisional estimate of $1.8 billion noted above incorporates assumptions based upon the best available interpretation
of the Act and may change as the Company receives additional clarification and implementation guidance.

During the second quarter of 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income
(Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). ASU 2018-02
allows an entity to elect to reclassify the income tax effects of the Act on items within AOCI to retained earnings. The Company
elected to apply the provision of ASU 2018-02 at the beginning of the second quarter of 2018 with a reclassification of net tax
benefits related to cumulative foreign currency translation and unrealized gains/losses on derivative instruments and marketable
securities, resulting in a $278 million decrease in AOCI and a corresponding increase in retained earnings in the Condensed
Consolidated Balance Sheet.

Apple Inc. | Q2 2018 Form 10-Q | 12

Deemed Repatriation Tax
As of September 30, 2017, the Company had a U.S. deferred tax liability of $36.4 billion for deferred foreign income. As a result of
the deemed repatriation tax, which is based on the Company’s cumulative post-1986 deferred foreign income, the Company
replaced $36.1 billion of its U.S. deferred tax liability with a provisional tax payable of $38.0 billion. This estimate of the deemed
repatriation tax is based, in part, on the amount of cash and other specified assets anticipated to be held by the Company’s foreign
subsidiaries as of September 29, 2018. Therefore, the tax payable may change as the asset amounts are finalized. The Company
plans to pay the tax in installments in accordance with the Act.

Unrecognized Tax Benefits

As of March 31, 2018, the Company had gross unrecognized tax benefits of $9.5 billion. These gross unrecognized tax benefits
have been offset by certain tax deposits and a $1.1 billion reduction for the estimated impact of the deemed repatriation tax, with the
net unrecognized tax benefits classified as other non-current liabilities in the Condensed Consolidated Balance Sheet. Upon
recognition, $8.2 billion of the unrecognized tax benefits would impact the Company’s effective tax rate. The Company had accrued
$1.5 billion of gross interest and penalties as of March 31, 2018, which are also classified as other non-current liabilities in the
Condensed Consolidated Balance Sheet.

The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations.
However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are
resolved in a manner inconsistent with its expectations, the Company could be required to adjust its provision for income taxes in the
period such resolution occurs. Although timing of resolution and/or closure of audits is not certain, the Company believes it is
reasonably possible that its gross unrecognized tax benefits could decrease (either by payment, release or a combination of both) in
the next 12 months by as much as $3.4 billion.

European Commission State Aid Decision

On August 30, 2016, the European Commission announced its decision that Ireland granted state aid to the Company by providing
tax opinions in 1991 and 2007 concerning the tax allocation of profits of the Irish branches of two subsidiaries of the Company (the
“State Aid Decision”). The State Aid Decision orders Ireland to calculate and recover additional taxes from the Company for the
period June 2003 through December 2014. Irish legislative changes, effective as of January 2015, eliminated the application of the
tax opinions from that date forward. The Company believes the State Aid Decision to be without merit and appealed to the General
Court of the Court of Justice of the European Union. Ireland has also appealed the State Aid Decision. Although Ireland is still
computing the recovery amount, the Company expects the amount to be in line with the European Commission’s announced
recovery amount of €13 billion, plus interest of €1 billion. During the third quarter of 2018, the Company expects to begin funding
amounts into escrow, where they will remain pending conclusion of all appeals. The Company believes that any incremental Irish
corporate income taxes potentially due related to the State Aid Decision would be creditable against U.S. taxes.

Note 5 – Debt

Commercial Paper
The Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. The
Company uses net proceeds from the commercial paper program for general corporate purposes, including dividends and share
repurchases. As of both March 31, 2018 and September 30, 2017, the Company had $12.0 billion of Commercial Paper outstanding
with maturities generally less than nine months. The weighted-average interest rate of the Company’s Commercial Paper was 1.68%
as of March 31, 2018 and 1.20% as of September 30, 2017. The following table provides a summary of cash flows associated with
the issuance and maturities of Commercial Paper for the six months ended March 31, 2018 and April 1, 2017 (in millions):

Six Months Ended

March 31, April 1,
2018 2017
Maturities 90 days or less:
Proceeds from/(Repayments of) commercial paper, net $ 4,070 $ (1,318)

Maturities greater than 90 days:

Proceeds from commercial paper 5,550 7,057
Repayments of commercial paper (9,619) (3,860)
Proceeds from/(Repayments of) commercial paper, net (4,069) 3,197

Total change in commercial paper, net $ 1 $ 1,879

Apple Inc. | Q2 2018 Form 10-Q | 13

Term Debt
As of March 31, 2018, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal
amount of $111.1 billion (collectively the “Notes”). The Notes are senior unsecured obligations, and interest is payable in arrears,
quarterly for the U.S. dollar–denominated and Australian dollar–denominated floating-rate notes, semi-annually for the U.S. dollar–
denominated, Australian dollar–denominated, British pound–denominated, Japanese yen–denominated and Canadian dollar–
denominated fixed-rate notes and annually for the euro-denominated and Swiss franc–denominated fixed-rate notes. The following
table provides a summary of the Company’s term debt as of March 31, 2018 and September 30, 2017:

March 31, 2018 September 30, 2017

Amount Effective Amount Effective
Maturities (in millions) Interest Rate (in millions) Interest Rate

2013 debt issuance of $17.0 billion:

Floating-rate notes 2018 2018 $ 2,000 1.10% 1.10% $ 2,000 1.10% 1.10%

Fixed-rate 1.000% – 3.850% notes 2018 – 2043 12,500 1.08% – 3.91% 12,500 1.08% – 3.91%

2014 debt issuance of $12.0 billion:

Floating-rate notes 2019 2019 1,000 2.09% 2.09% 1,000 1.61% 1.61%

Fixed-rate 2.100% – 4.450% notes 2019 – 2044 8,500 2.09% – 4.48% 8,500 1.61% – 4.48%

2015 debt issuances of $27.3 billion:

Floating-rate notes 2019 – 2020 1,537 1.87% – 2.12% 1,549 1.56% – 1.87%

Fixed-rate 0.350% – 4.375% notes 2019 – 2045 25,094 0.28% – 4.51% 24,522 0.28% – 4.51%

2016 debt issuances of $24.9 billion:

Floating-rate notes 2019 – 2021 1,350 1.93% – 3.05% 1,350 1.45% – 2.44%

Fixed-rate 1.100% – 4.650% notes 2019 – 2046 23,120 1.13% – 4.78% 23,645 1.13% – 4.78%

2017 debt issuances of $28.7 billion:

Floating-rate notes 2019 – 2022 3,250 1.88% – 2.30% 3,250 1.38% – 1.81%

Fixed-rate 0.875% – 4.300% notes 2019 – 2047 25,786 1.54% – 4.30% 25,705 1.51% – 4.30%

First quarter 2018 debt issuance of $7.0 billion:

Fixed-rate 1.800% notes 2019 1,000 1.83% — —%

Fixed-rate 2.000% notes 2020 1,000 2.03% — —%

Fixed-rate 2.400% notes 2023 750 2.14% — —%

Fixed-rate 2.750% notes 2025 1,500 2.77% — —%

Fixed-rate 3.000% notes 2027 1,500 2.54% — —%

Fixed-rate 3.750% notes 2047 1,250 3.80% — —%

Total term debt 111,137 104,021

Unamortized premium/(discount) and issuance costs,

net (236) (225)

Hedge accounting fair value adjustments (1,041) (93)

Less: Current portion of long-term debt (8,498) (6,496)

Total long-term debt $ 101,362 $ 97,207

To manage interest rate risk on certain of its U.S. dollar–denominated fixed- or floating-rate notes, the Company has entered into
interest rate swaps to effectively convert the fixed interest rates to floating interest rates or the floating interest rates to fixed interest
rates on a portion of these notes. Additionally, to manage foreign currency risk on certain of its foreign currency–denominated notes,
the Company has entered into foreign currency swaps to effectively convert these notes to U.S. dollar–denominated notes.

A portion of the Company’s Japanese yen–denominated notes is designated as a hedge of the foreign currency exposure of the
Company’s net investment in a foreign operation. As of March 31, 2018 and September 30, 2017, the carrying value of the debt
designated as a net investment hedge was $518 million and $1.6 billion, respectively. For further discussion regarding the
Company’s use of derivative instruments see the Derivative Financial Instruments section of Note 2, “Financial Instruments.”

The effective interest rates for the Notes include the interest on the Notes, amortization of the discount or premium and, if applicable,
adjustments related to hedging. The Company recognized $742 million and $1.4 billion of interest expense on its term debt for the
three- and six-month periods ended March 31, 2018, respectively. The Company recognized $507 million and $1.0 billion of interest
expense on its term debt for the three- and six-month periods ended April 1, 2017, respectively.

Apple Inc. | Q2 2018 Form 10-Q | 14

As of March 31, 2018 and September 30, 2017, the fair value of the Company’s Notes, based on Level 2 inputs, was $111.1 billion
and $106.1 billion, respectively.

Note 6 – Shareholders’ Equity

Share Repurchase Program

As of March 31, 2018, the Company had an authorized share repurchase program of up to $210 billion of the Company’s common
stock, of which $199.6 billion had been utilized.

The Company has entered, and in the future may enter, into accelerated share repurchase arrangements (“ASRs”) with financial
institutions. In exchange for up-front payments, the financial institutions deliver shares of the Company’s common stock during the
purchase periods of each ASR. The total number of shares ultimately delivered, and therefore the average repurchase price paid per
share, is determined at the end of the applicable purchase period of each ASR based on the volume-weighted average price of the
Company’s common stock during that period. The shares received are retired in the periods they are delivered, and the up-front
payments are accounted for as a reduction to shareholders’ equity in the Company’s Condensed Consolidated Balance Sheets in
the periods the payments are made. The Company reflects the ASRs as a repurchase of common stock in the period delivered for
purposes of calculating earnings per share and as forward contracts indexed to its own common stock. The ASRs met all of the
applicable criteria for equity classification, and therefore were not accounted for as derivative instruments.

The following table shows the Company’s ASR activity and related information during the six months ended March 31, 2018 and the
year ended September 30, 2017:

Average
Purchase Period Number of Shares Repurchase ASR Amount
End Date (in thousands) Price Per Share (in millions)
November 2017 ASR February 2018 29,269 (1) $ 170.84 $ 5,000
August 2017 ASR November 2017 18,887 $ 158.84 $ 3,000
May 2017 ASR August 2017 20,108 $ 149.20 $ 3,000
February 2017 ASR May 2017 20,949 $ 143.20 $ 3,000
November 2016 ASR February 2017 51,157 $ 117.29 $ 6,000
August 2016 ASR November 2016 26,850 $ 111.73 $ 3,000

(1) Includes 23.6 million shares delivered and retired at the beginning of the purchase period, which began in the first quarter of 2018, and 5.7
million shares delivered and retired at the end of the purchase period, which concluded in the second quarter of 2018.

Additionally, the Company repurchased shares of its common stock in the open market, which were retired upon repurchase, during
the periods presented as follows:

Average
Number of Shares Repurchase Amount
(in thousands) Price Per Share (in millions)
2018:
Second quarter 137,040 $ 171.48 $ 23,500
First quarter 30,181 $ 169.26 5,109
Total open market common stock repurchases 167,221 $ 28,609

2017:
Fourth quarter 29,073 $ 154.78 $ 4,500
Third quarter 30,356 $ 148.24 4,500
Second quarter 31,070 $ 128.74 4,001
First quarter 44,333 $ 112.78 5,000
Total open market common stock repurchases 134,832 $ 18,001

On May 1, 2018, the Company announced that the Board of Directors had authorized a new program to repurchase up to $100
billion of the Company’s common stock. The Company’s share repurchase program does not obligate it to acquire any specific
number of shares. Under the program, shares may be repurchased in privately negotiated and/or open market transactions,
including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Apple Inc. | Q2 2018 Form 10-Q | 15

Note 7 – Comprehensive Income
Comprehensive income consists of two components, net income and OCI. OCI refers to revenue, expenses, and gains and losses
that under GAAP are recorded as an element of shareholders’ equity but are excluded from net income. The Company’s OCI
consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, net
deferred gains and losses on certain derivative instruments accounted for as cash flow hedges and unrealized gains and losses on
marketable securities classified as available-for-sale.

The following table shows the pre-tax amounts reclassified from AOCI into the Condensed Consolidated Statements of Operations,
and the associated financial statement line item, for the three- and six-month periods ended March 31, 2018 and April 1, 2017 (in
millions):

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
Comprehensive Income Components Financial Statement Line Item 2018 2017 2018 2017
Unrealized (gains)/losses on derivative
instruments:
Foreign exchange contracts Net sales $ 87 $ (408) $ 271 $ (509)
Cost of sales 21 (570) (6) (557)
Other income/(expense), net (390) (367) (423) 237
Interest rate contracts Other income/(expense), net (2) 2 (3) 3
(284) (1,343) (161) (826)
Unrealized (gains)/losses on
marketable securities Other income/(expense), net 36 (20) (80) 11
Total amounts reclassified from AOCI $ (248) $ (1,363) $ (241) $ (815)

The following table shows the changes in AOCI by component for the six months ended March 31, 2018 (in millions):

Cumulative Unrealized Unrealized

Foreign Gains/Losses Gains/Losses
Currency on Derivative on Marketable
Translation Instruments Securities Total
Balances as of September 30, 2017 $ (354) $ (124) $ 328 $ (150)
Other comprehensive income/(loss) before
reclassifications 296 191 (3,854) (3,367)
Amounts reclassified from AOCI — (161) (80) (241)
Tax effect 7 (74) 1,039 972
Other comprehensive income/(loss) 303 (44) (2,895) (2,636)
Cumulative effect of change in accounting principle
(1) (176) 29 (131) (278)
Balances as of March 31, 2018 $ (227) $ (139) $ (2,698) $ (3,064)

(1) Refer to Note 4, “Income Taxes” for more information on the Company’s adoption of ASU 2018-02 at the beginning of the second quarter of
2018.

Note 8 – Benefit Plans

Stock Plans
The Company had 270.0 million shares reserved for future issuance under its stock plans as of March 31, 2018. Restricted stock
units (“RSUs”) granted generally vest over four years, based on continued employment, and are settled upon vesting in shares of the
Company’s common stock on a one-for-one basis. Each share issued with respect to RSUs granted under the Company’s stock
plans reduces the number of shares available for grant under the plans by two shares. RSUs canceled and shares withheld to satisfy
tax withholding obligations increase the number of shares available for grant under the plans utilizing a factor of two times the
number of RSUs canceled or shares withheld.

Apple Inc. | Q2 2018 Form 10-Q | 16

Rule 10b5-1 Trading Plans
During the three months ended March 31, 2018, Section 16 officers Angela Ahrendts, Timothy D. Cook, Luca Maestri, Daniel Riccio,
Philip Schiller and Jeffrey Williams had equity trading plans in place in accordance with Rule 10b5-1(c)(1) under the Exchange Act.
An equity trading plan is a written document that pre-establishes the amounts, prices and dates (or formula for determining the
amounts, prices and dates) of future purchases or sales of the Company’s stock, including shares acquired pursuant to the
Company’s employee and director equity plans.

Restricted Stock Units

A summary of the Company’s RSU activity and related information for the six months ended March 31, 2018 is as follows:

Number of Weighted-Average Aggregate

RSUs Grant Date Fair Fair Value
(in thousands) Value Per RSU (in millions)
Balance as of September 30, 2017 97,571 $ 110.33
RSUs granted 40,184 $ 159.25
RSUs vested (22,348) $ 103.66
RSUs canceled (3,023) $ 123.28
Balance as of March 31, 2018 112,384 $ 128.80 $ 18,856

The fair value as of the respective vesting dates of RSUs was $457 million and $3.6 billion for the three- and six-month periods
ended March 31, 2018, respectively, and was $460 million and $2.6 billion for the three- and six-month periods ended April 1, 2017,
respectively.

Share-Based Compensation
The following table shows a summary of the share-based compensation expense included in the Condensed Consolidated
Statements of Operations for the three- and six-month periods ended March 31, 2018 and April 1, 2017 (in millions):

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
2018 2017 2018 2017
Cost of sales $ 257 $ 217 $ 509 $ 446
Research and development 666 575 1,312 1,164
Selling, general and administrative 425 425 823 863
Total share-based compensation expense $ 1,348 $ 1,217 $ 2,644 $ 2,473

The income tax benefit related to share-based compensation expense was $347 million and $1.0 billion for the three- and six-month
periods ended March 31, 2018, respectively, and was $424 million and $889 million for the three- and six-month periods ended April
1, 2017, respectively. As of March 31, 2018, the total unrecognized compensation cost related to outstanding RSUs and stock
options was $11.4 billion, which the Company expects to recognize over a weighted-average period of 2.8 years.

Note 9 – Commitments and Contingencies

Accrued Warranty and Indemnification

The following table shows changes in the Company’s accrued warranties and related costs for the three- and six-month periods
ended March 31, 2018 and April 1, 2017 (in millions):

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
2018 2017 2018 2017
Beginning accrued warranty and related costs $ 4,323 $ 4,698 $ 3,834 $ 3,702
Cost of warranty claims (933) (1,031) (1,915) (2,368)
Accruals for product warranty 640 1,068 2,111 3,401
Ending accrued warranty and related costs $ 4,030 $ 4,735 $ 4,030 $ 4,735

Apple Inc. | Q2 2018 Form 10-Q | 17

Agreements entered into by the Company sometimes include indemnification provisions which may subject the Company to costs
and damages in the event of a claim against 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, or a material loss in excess of a recorded accrual, with
respect to indemnification of third parties.

The Company offers an iPhone Upgrade Program, which is available to customers who purchase a qualifying iPhone in the U.S., the
U.K. and mainland China. The iPhone Upgrade Program provides customers the right to trade in that iPhone for a specified amount
when purchasing a new iPhone, provided certain conditions are met. The Company accounts for the trade-in right as a guarantee
liability and recognizes arrangement revenue net of the fair value of such right, with subsequent changes to the guarantee liability
recognized within revenue.

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 of the Company 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. While the Company maintains directors and officers liability insurance coverage, such insurance coverage
may be insufficient to cover all losses or all types of claims that may arise.

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, a few components
are currently obtained from single or limited sources. In addition, the Company competes for various components with other
participants in the markets for mobile communication and media devices and personal computers. Therefore, many components
used by the Company, including those that are available from multiple sources, are at times subject to industry-wide shortage and
significant pricing fluctuations that could materially adversely affect the Company’s financial condition and operating results.

The Company uses some custom components that are not commonly used by its competitors, 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 components for a new or existing product were delayed or constrained, or if an 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 materially 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
decide to concentrate on the production of common components instead of components customized to meet the Company’s
requirements.

The Company has entered into agreements for the supply of many components; however, there can be no guarantee that the
Company will be able to extend or renew these agreements on similar terms, or at all. Therefore, the Company remains subject to
significant risks of supply shortages and price increases that could materially adversely affect its financial condition and operating
results.

Substantially all of the Company’s hardware products are manufactured by outsourcing partners that are located primarily in Asia,
with some Mac computers manufactured in the U.S. and Ireland. A significant concentration of this manufacturing is currently
performed by a small number of outsourcing partners, often in single locations. Certain of these outsourcing partners are the sole-
sourced suppliers of components and manufacturers for many of the Company’s 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 manufacturing purchase obligations typically cover its
requirements for periods up to 150 days.

Other Off–Balance Sheet Commitments

Operating Leases
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. As of March 31, 2018, the Company’s
total future minimum lease payments under noncancelable operating leases were $9.8 billion. The Company’s retail store and other
facility leases typically have original terms not exceeding 10 years and generally contain multi-year renewal options.

Apple Inc. | Q2 2018 Form 10-Q | 18

Unconditional Purchase Obligations
The Company has entered into certain off–balance sheet arrangements which require the future purchase of goods or services
(“unconditional purchase obligations”). The Company’s unconditional purchase obligations primarily consist of payments for supplier
arrangements, internet and telecommunication services and intellectual property licenses. As of March 31, 2018, the Company’s
total future payments under noncancelable unconditional purchase obligations having a remaining term in excess of one year were
$8.3 billion.

Contingencies
The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have
not been fully adjudicated, as further discussed in Part II, Item 1 of this Form 10-Q under the heading “Legal Proceedings” and in
Part II, Item 1A of this Form 10-Q 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 for asserted legal and other claims, except for the following matter:

VirnetX
VirnetX, Inc. filed two lawsuits in the U.S. District Court for the Eastern District of Texas (the “Eastern Texas District Court”) against
the Company alleging that certain Company products infringe four patents (the “VirnetX Patents”) relating to network
communications technology (“VirnetX I” and “VirnetX II”). On September 30, 2016, a jury returned a verdict in VirnetX I against the
Company and awarded damages of $302 million, which later increased to $440 million in post-trial proceedings. VirnetX I is currently
on appeal at the U.S. Court of Appeals for the Federal Circuit (the “Federal Circuit”). On April 11, 2018, a jury returned a verdict in
VirnetX II against the Company and awarded damages of $503 million. VirnetX II is currently in post-trial proceedings and is
expected to proceed to appeal thereafter. The Company has challenged the validity of the VirnetX Patents at the U.S. Patent and
Trademark Office (the “PTO”). In response, the PTO has declared the VirnetX Patents invalid. VirnetX has appealed, and those
appeals are currently pending at the Federal Circuit. The Federal Circuit has consolidated the Company’s appeal of the Eastern
Texas District Court VirnetX I verdict and VirnetX’s appeals from the PTO invalidity proceedings. The Company believes it will prevail
on the merits.

The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting
period for amounts in excess of management’s expectations, the Company’s consolidated financial statements for that reporting
period could be materially adversely affected.

Note 10 – Segment Information and Geographic Data

The Company reports segment information based on the “management” approach. The management approach designates the
internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable
segments.

The Company manages its business primarily on a geographic basis. The Company’s reportable segments consist of the Americas,
Europe, Greater China, Japan and Rest of Asia Pacific. Americas includes both North and South America. Europe includes
European countries, as well as India, the Middle East and Africa. Greater China includes China, Hong Kong and Taiwan. Rest of
Asia Pacific includes Australia and those Asian countries not included in the Company’s other reportable segments. Although the
reportable segments provide similar hardware and software products and similar services, each one is managed separately to better
align with the location of the Company’s customers and distribution partners and the unique market dynamics of each geographic
region. The accounting policies of the various segments are the same as those described in Note 1, “Summary of Significant
Accounting Policies” of the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2017 Form 10-K.

The Company evaluates the performance of its reportable segments based on net sales and operating income. Net sales for
geographic segments are generally based on the location of customers and sales through the Company’s retail stores located in
those geographic locations. Operating income for each segment includes net sales to third parties, related cost of sales and
operating expenses directly attributable to the segment. Advertising expenses are generally included in the geographic segment in
which the expenditures are incurred. Operating income for each segment excludes other income and expense and certain expenses
managed outside the reportable segments. Costs excluded from segment operating income include various corporate expenses
such as research and development, corporate marketing expenses, certain share-based compensation expenses, income taxes,
various nonrecurring charges and other separately managed general and administrative costs. The Company does not include
intercompany transfers between segments for management reporting purposes.

Apple Inc. | Q2 2018 Form 10-Q | 19

The following table shows information by reportable segment for the three- and six-month periods ended March 31, 2018 and April 1,
2017 (in millions):

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
2018 2017 2018 2017
Americas:
Net sales $ 24,841 $ 21,157 $ 60,034 $ 53,125
Operating income $ 7,768 $ 6,668 $ 19,084 $ 17,162

Europe:
Net sales $ 13,846 $ 12,733 $ 34,900 $ 31,254
Operating income $ 4,259 $ 3,851 $ 11,152 $ 9,587

Greater China:
Net sales $ 13,024 $ 10,726 $ 30,980 $ 26,959
Operating income $ 4,963 $ 4,224 $ 11,871 $ 10,400

Japan:
Net sales $ 5,468 $ 4,485 $ 12,705 $ 10,251
Operating income $ 2,346 $ 2,037 $ 5,428 $ 4,710

Rest of Asia Pacific:

Net sales $ 3,958 $ 3,795 $ 10,811 $ 9,658
Operating income $ 1,278 $ 1,309 $ 3,853 $ 3,538

A reconciliation of the Company’s segment operating income to the Condensed Consolidated Statements of Operations for the
three- and six-month periods ended March 31, 2018 and April 1, 2017 is as follows (in millions):

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
2018 2017 2018 2017
Segment operating income $ 20,614 $ 18,089 $ 51,388 $ 45,397
Research and development expense (3,378) (2,776) (6,785) (5,647)
Other corporate expenses, net (1,342) (1,216) (2,435) (2,294)
Total operating income $ 15,894 $ 14,097 $ 42,168 $ 37,456

Apple Inc. | Q2 2018 Form 10-Q | 20

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section and other parts of this Quarterly Report on Form 10-Q (“Form 10-Q”) contain forward-looking statements, within the
meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements
provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to
any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,”
“estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking
statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results
discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those
discussed in Part II, Item 1A of this Form 10-Q under the heading “Risk Factors,” which are incorporated herein by reference. The
following discussion should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended
September 30, 2017 (the “2017 Form 10-K”) filed with the U.S. Securities and Exchange Commission (the “SEC”) and the
condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Form 10-Q. All information presented
herein is based on the Company’s fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or
periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal
years. Each of the terms the “Company” and “Apple” as used herein refers collectively to Apple Inc. and its wholly-owned
subsidiaries, unless otherwise stated. The Company assumes no obligation to revise or update any forward-looking statements for
any reason, except as required by law.

Available Information
The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to
reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are
filed with the SEC. The Company is subject to the informational requirements of the Exchange Act and files or furnishes reports,
proxy statements, and other information with the SEC. Such reports and other information filed by the Company with the SEC are
available free of charge on the Company’s website at investor.apple.com/sec.cfm when such reports are available on the SEC’s
website. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at
100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The information contained
on the websites referenced in this Form 10-Q is not incorporated by reference into this filing. Further, the Company’s references to
website URLs are intended to be inactive textual references only.

Overview and Highlights

The Company designs, manufactures and markets mobile communication and media devices and personal computers, and sells a
variety of related software, services, accessories, networking solutions and third-party digital content and applications. The
Company’s products and services include iPhone, iPad, Mac, Apple Watch, AirPods, Apple TV, HomePod, a portfolio of consumer
and professional software applications, iOS, macOS, watchOS and tvOS operating systems, iCloud, Apple Pay and a variety of other
accessory, service and support offerings. The Company sells and delivers digital content and applications through the iTunes Store,
App Store, Mac App Store, TV App Store, iBooks Store and Apple Music (collectively “Digital Content and Services”). The Company
sells its products worldwide through its retail stores, online stores and direct sales force, as well as through third-party cellular
network carriers, wholesalers, retailers and resellers. In addition, the Company sells a variety of third-party Apple-compatible
products, including application software and various accessories through its retail and online stores. The Company sells to
consumers, small and mid-sized businesses and education, enterprise and government customers.

Business Strategy
The Company is committed to bringing the best user experience to its customers through its innovative hardware, software and
services. The Company’s business strategy leverages its unique ability to design and develop its own operating systems, hardware,
application software and services to provide its customers products and solutions with innovative design, superior ease-of-use and
seamless integration. As part of its strategy, the Company continues to expand its platform for the discovery and delivery of digital
content and applications through its Digital Content and Services, which allows customers to discover and download digital content,
iOS, Mac, Apple Watch and Apple TV applications, and books through either a Mac or Windows personal computer or through
iPhone, iPad and iPod touch® devices (“iOS devices”), Apple TV and Apple Watch. The Company also supports a community for the
development of third-party software and hardware products and digital content that complement the Company’s offerings. The
Company believes a high-quality buying experience with knowledgeable salespersons who can convey the value of the Company’s
products and services greatly enhances its ability to attract and retain customers. Therefore, the Company’s strategy also includes
building and expanding its own retail and online stores and its third-party distribution network to effectively reach more customers
and provide them with a high-quality sales and post-sales support experience. The Company believes ongoing investment in
research and development (“R&D”), marketing and advertising is critical to the development and sale of innovative products,
services and technologies.

Apple Inc. | Q2 2018 Form 10-Q | 21

Business Seasonality and Product Introductions
The Company has historically experienced higher net sales in its first quarter compared to other quarters in its fiscal year due in part
to seasonal holiday demand. Additionally, new product introductions can significantly impact net sales, product costs and operating
expenses. Product introductions can also impact the Company’s net sales to its indirect distribution channels as these channels are
filled with new product inventory following a product introduction, and channel inventory of a particular product often declines as the
next related major product launch approaches. Net sales can also be affected when consumers and distributors anticipate a product
introduction. However, neither historical seasonal patterns nor historical patterns of product introductions should be considered
reliable indicators of the Company’s future pattern of product introductions, future net sales or financial performance.

Fiscal Period
The Company’s fiscal year is the 52- or 53-week period that ends on the last Saturday of September. The first quarter of 2018
spanned 13 weeks, whereas a 14th week was added to the first quarter of 2017, as is done every five or six years, to realign fiscal
quarters with calendar quarters.

Second Quarter Fiscal 2018 Highlights

Net sales increased 16% or $8.2 billion during the second quarter of 2018 compared to the same quarter in 2017, primarily driven by
higher net sales of iPhone, Services and Other Products. Year-over-year net sales increased in each of the geographic reportable
segments. Additionally, the strength in foreign currencies relative to the U.S. dollar had a favorable impact on net sales during the
second quarter of 2018 compared to the same quarter in 2017.

The Company began shipping HomePod in February 2018. In March 2018, the Company introduced a new 9.7-inch iPad with Apple
Pencil® compatibility, which began shipping at the end of the second quarter of 2018.

The Company spent $23.5 billion to repurchase shares of its common stock and paid dividends and dividend equivalents of $3.2
billion during the second quarter of 2018.

Apple Inc. | Q2 2018 Form 10-Q | 22

Sales Data
The following table shows net sales by reportable segment and net sales and unit sales by product for the three- and six-month
periods ended March 31, 2018 and April 1, 2017 (dollars in millions and units in thousands):

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
2018 2017 Change 2018 2017 Change
Net Sales by Reportable Segment:
Americas $ 24,841 $ 21,157 17 % $ 60,034 $ 53,125 13 %
Europe 13,846 12,733 9% 34,900 31,254 12 %
Greater China 13,024 10,726 21 % 30,980 26,959 15 %
Japan 5,468 4,485 22 % 12,705 10,251 24 %
Rest of Asia Pacific 3,958 3,795 4% 10,811 9,658 12 %
Total net sales $ 61,137 $ 52,896 16 % $ 149,430 $ 131,247 14 %

Net Sales by Product:

iPhone (1) $ 38,032 $ 33,249 14 % $ 99,608 $ 87,627 14 %
iPad (1) 4,113 3,889 6% 9,975 9,422 6%
Mac (1) 5,848 5,844 —% 12,743 13,088 (3)%
Services (2) 9,190 7,041 31 % 17,661 14,213 24 %
Other Products (1)(3) 3,954 2,873 38 % 9,443 6,897 37 %
Total net sales $ 61,137 $ 52,896 16 % $ 149,430 $ 131,247 14 %

Unit Sales by Product:

iPhone 52,217 50,763 3% 129,533 129,053 —%
iPad 9,113 8,922 2% 22,283 22,003 1%
Mac 4,078 4,199 (3)% 9,190 9,573 (4)%

(1) Includes deferrals and amortization of related software upgrade rights and non-software services.
(2) Includes revenue from Digital Content and Services, AppleCare®, Apple Pay, licensing and other services.
(3) Includes sales of AirPods, Apple TV, Apple Watch, Beats® products, HomePod, iPod touch and other Apple-branded and third-party
accessories.

Apple Inc. | Q2 2018 Form 10-Q | 23

Product Performance

iPhone
The following table presents iPhone net sales and unit sales information for the three- and six-month periods ended March 31, 2018
and April 1, 2017 (dollars in millions and units in thousands):

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
2018 2017 Change 2018 2017 Change
Net sales $ 38,032 $ 33,249 14% $ 99,608 $ 87,627 14%
Percentage of total net sales 62% 63% 67% 67%
Unit sales 52,217 50,763 3% 129,533 129,053 —%

iPhone net sales increased during the second quarter and first six months of 2018 compared to the same periods in 2017 due
primarily to a different mix of iPhones with higher average selling prices.

iPad
The following table presents iPad net sales and unit sales information for the three- and six-month periods ended March 31, 2018
and April 1, 2017 (dollars in millions and units in thousands):

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
2018 2017 Change 2018 2017 Change
Net sales $ 4,113 $ 3,889 6% $ 9,975 $ 9,422 6%
Percentage of total net sales 7% 7% 7% 7%
Unit sales 9,113 8,922 2% 22,283 22,003 1%

iPad net sales increased during the second quarter and first six months of 2018 compared to the same periods in 2017 due primarily
to a different mix of iPads with higher average selling prices.

Mac
The following table presents Mac net sales and unit sales information for the three- and six-month periods ended March 31, 2018
and April 1, 2017 (dollars in millions and units in thousands):

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
2018 2017 Change 2018 2017 Change
Net sales $ 5,848 $ 5,844 —% $ 12,743 $ 13,088 (3)%
Percentage of total net sales 10% 11% 9% 10%
Unit sales 4,078 4,199 (3)% 9,190 9,573 (4)%

Mac net sales were flat during the second quarter of 2018 and declined during the first six months of 2018 compared to the same
periods in 2017 due primarily to lower Mac unit sales. The MacBook Pro® launch during the first quarter of 2017 had a positive
impact on the results during the first six months of 2017. The strength in foreign currencies relative to the U.S. dollar had a favorable
impact on Mac net sales during the second quarter and first six months of 2018.

Apple Inc. | Q2 2018 Form 10-Q | 24

Services
The following table presents Services net sales information for the three- and six-month periods ended March 31, 2018 and April 1,
2017 (dollars in millions):

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
2018 2017 Change 2018 2017 Change
Net sales $ 9,190 $ 7,041 31% $ 17,661 $ 14,213 24%
Percentage of total net sales 15% 13% 12% 11%

Services net sales increased during the second quarter of 2018 compared to the same period in 2017 due primarily to licensing, App
Store and AppleCare. Year-over-year growth in Services net sales during the first six months of 2018 was due primarily to licensing,
App Store and iCloud.

Segment Operating Performance

The Company manages its business primarily on a geographic basis. The Company’s reportable segments consist of the Americas,
Europe, Greater China, Japan and Rest of Asia Pacific. Americas includes both North and South America. Europe includes
European countries, as well as India, the Middle East and Africa. Greater China includes China, Hong Kong and Taiwan. Rest of
Asia Pacific includes Australia and those Asian countries not included in the Company’s other reportable segments. Although the
reportable segments provide similar hardware and software products and similar services, each one is managed separately to better
align with the location of the Company’s customers and distribution partners and the unique market dynamics of each geographic
region. Further information regarding the Company’s reportable segments can be found in Part I, Item 1 of this Form 10-Q in the
Notes to Condensed Consolidated Financial Statements in Note 10, “Segment Information and Geographic Data.”

Americas
The following table presents Americas net sales information for the three- and six-month periods ended March 31, 2018 and April 1,
2017 (dollars in millions):

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
2018 2017 Change 2018 2017 Change
Net sales $ 24,841 $ 21,157 17% $ 60,034 $ 53,125 13%
Percentage of total net sales 41% 40% 40% 40%

Americas net sales increased during the second quarter and first six months of 2018 compared to the same periods in 2017 due
primarily to higher net sales of iPhone, Services and Other Products.

Europe
The following table presents Europe net sales information for the three- and six-month periods ended March 31, 2018 and April 1,
2017 (dollars in millions):

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
2018 2017 Change 2018 2017 Change
Net sales $ 13,846 $ 12,733 9% $ 34,900 $ 31,254 12%
Percentage of total net sales 23% 24% 23% 24%

The strength in foreign currencies relative to the U.S. dollar had a favorable impact on Europe net sales during the second quarter
and first six months of 2018 compared to the same periods in 2017. Additionally, year-over-year Europe net sales increased during
the first six months of 2018 due primarily to higher net sales of iPhone and Services.

Apple Inc. | Q2 2018 Form 10-Q | 25

Greater China
The following table presents Greater China net sales information for the three- and six-month periods ended March 31, 2018 and
April 1, 2017 (dollars in millions):

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
2018 2017 Change 2018 2017 Change
Net sales $ 13,024 $ 10,726 21% $ 30,980 $ 26,959 15%
Percentage of total net sales 21% 20% 21% 21%

Greater China net sales increased during the second quarter and first six months of 2018 compared to the same periods in 2017 due
primarily to higher net sales of iPhone and the strength in foreign currencies relative to the U.S. dollar.

Japan
The following table presents Japan net sales information for the three- and six-month periods ended March 31, 2018 and April 1,
2017 (dollars in millions):

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
2018 2017 Change 2018 2017 Change
Net sales $ 5,468 $ 4,485 22% $ 12,705 $ 10,251 24%
Percentage of total net sales 9% 8% 9% 8%

Japan net sales increased during the second quarter and first six months of 2018 compared to the same periods in 2017 due
primarily to higher net sales of iPhone and Services. Additionally, the value of the Japanese Yen relative to the U.S. dollar had a
favorable impact on Japan net sales during the second quarter of 2018 and an unfavorable impact during the first six months of
2018.

Rest of Asia Pacific

The following table presents Rest of Asia Pacific net sales information for the three- and six-month periods ended March 31, 2018
and April 1, 2017 (dollars in millions):

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
2018 2017 Change 2018 2017 Change
Net sales $ 3,958 $ 3,795 4% $ 10,811 $ 9,658 12%
Percentage of total net sales 6% 7% 7% 7%

The strength in foreign currencies relative to the U.S. dollar had a favorable impact on Rest of Asia Pacific net sales during the
second quarter and first six months of 2018 compared to the same periods in 2017. Additionally, year-over-year Rest of Asia Pacific
net sales increased during the first six months of 2018 due primarily to higher net sales of iPhone and Services.

Apple Inc. | Q2 2018 Form 10-Q | 26

Gross Margin
Gross margin for the three- and six-month periods ended March 31, 2018 and April 1, 2017 was as follows (dollars in millions):

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
2018 2017 2018 2017
Net sales $ 61,137 $ 52,896 $ 149,430 $ 131,247
Cost of sales 37,715 32,305 92,096 80,480
Gross margin $ 23,422 $ 20,591 $ 57,334 $ 50,767
Gross margin percentage 38.3% 38.9% 38.4% 38.7%

Gross margin increased during the second quarter and first six months of 2018 compared to the same periods in 2017 due primarily
to a favorable shift in mix of products and Services, partially offset by higher product cost structures. Additionally, to a lesser extent
the strength in foreign currencies relative to the U.S. dollar had a favorable impact on gross margin.

Gross margin percentage decreased during the second quarter and first six months of 2018 compared to the same periods in 2017
due primarily to higher product cost structures, partially offset by a favorable shift in mix of products and Services. Additionally, to a
lesser extent the strength in foreign currencies relative to the U.S. dollar had a favorable impact on gross margin percentage.

The Company anticipates gross margin percentage during the third quarter of 2018 to be between 38.0% and 38.5%. The foregoing
statement regarding the Company’s expected gross margin percentage in the third quarter of 2018 is forward-looking and could
differ from actual results. The Company’s future gross margins can be impacted by multiple factors including, but not limited to, those
set forth in Part II, Item 1A of this Form 10-Q under the heading “Risk Factors” and those described in this paragraph. In general, the
Company believes gross margins will remain under downward pressure due to a variety of factors, including: continued industry-
wide global product pricing pressures; increased competition; the Company’s ability to effectively stimulate demand for certain of its
products; compressed product life cycles; product transitions; potential increases in the cost of components and outside
manufacturing services; the Company’s ability to manage product quality and warranty costs effectively; and a potential shift in the
Company’s sales mix towards products with lower gross margins. In response to competitive pressures, the Company expects it will
continue to take product pricing actions, which would adversely affect gross margins. Due to the Company’s significant international
operations, its financial condition and operating results, including gross margins, could be significantly affected by fluctuations in
exchange rates.

Operating Expenses
Operating expenses for the three- and six-month periods ended March 31, 2018 and April 1, 2017 were as follows (dollars in
millions):

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
2018 2017 2018 2017
Research and development $ 3,378 $ 2,776 $ 6,785 $ 5,647
Percentage of total net sales 6% 5% 5% 4%
Selling, general and administrative $ 4,150 $ 3,718 $ 8,381 $ 7,664
Percentage of total net sales 7% 7% 6% 6%
Total operating expenses $ 7,528 $ 6,494 $ 15,166 $ 13,311
Percentage of total net sales 12% 12% 10% 10%

Research and Development

The growth in R&D expense during the second quarter and first six months of 2018 compared to the same periods in 2017 was
driven primarily by increases in headcount-related expenses and material costs to support expanded R&D activities. The Company
continues to believe that focused investments in R&D are critical to its future growth and competitive position in the marketplace, and
to the development of new and updated products and services that are central to the Company’s core business strategy.

Selling, General and Administrative

The growth in selling, general and administrative expense during the second quarter and first six months of 2018 compared to the
same periods in 2017 was driven primarily by increases in headcount-related expenses and infrastructure-related costs.

Apple Inc. | Q2 2018 Form 10-Q | 27

Other Income/(Expense), Net
Other income/(expense), net for the three- and six-month periods ended March 31, 2018 and April 1, 2017 was as follows (dollars in
millions):

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
2018 2017 Change 2018 2017 Change
Interest and dividend income $ 1,505 $ 1,282 $ 2,957 $ 2,506
Interest expense (792) (530) (1,526) (1,055)
Other expense, net (439) (165) (401) (43)
Total other income/(expense), net $ 274 $ 587 (53)% $ 1,030 $ 1,408 (27)%

The decrease in other income/(expense), net during the second quarter and first six months of 2018 compared to the same periods
in 2017 was due primarily to the impact of foreign exchange–related items and higher interest expense on debt, partially offset by
higher interest income. Additionally, the decrease in other income/(expense), net during the first six months of 2018 was partially
offset by realized gains on sales of marketable securities. The weighted-average interest rate earned by the Company on its cash,
cash equivalents and marketable securities was 2.14% and 1.99% in the second quarter of 2018 and 2017, respectively, and 2.12%
and 1.93% in the first six months of 2018 and 2017, respectively.

Provision for Income Taxes

Provision for income taxes and effective tax rates for the three- and six-month periods ended March 31, 2018 and April 1, 2017 were
as follows (dollars in millions):

Three Months Ended Six Months Ended

March 31, April 1, March 31, April 1,
2018 2017 2018 2017
Provision for income taxes $ 2,346 $ 3,655 $ 9,311 $ 9,944
Effective tax rate 14.5% 24.9% 21.6% 25.6%

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act
lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a
deemed repatriation tax on previously deferred foreign income. By operation of law, the Company will apply a blended U.S. statutory
federal income tax rate of 24.5% for 2018 (the “2018 blended U.S. tax rate”). The Act also created a new minimum tax on certain
future foreign earnings.

The Company’s effective tax rate of 14.5% for the second quarter of 2018 was lower than the 2018 blended U.S. tax rate due
primarily to the lower tax rate on foreign earnings. The Company’s effective tax rate of 21.6% for the first six months of 2018 was
lower than the 2018 blended U.S. tax rate due primarily to the lower tax rate on foreign earnings, partially offset by the
remeasurement of deferred tax assets and liabilities as a result of the Act.

The Company’s effective tax rate of 14.5% for the second quarter of 2018 was lower than the same period in 2017 due to the lower
2018 blended U.S. tax rate as a result of the Act. The Company’s effective tax rate of 21.6% for the first six months of 2018 was
lower than the same period in 2017 due to the lower 2018 blended U.S. tax rate, partially offset by the remeasurement of deferred
tax assets and liabilities as a result of the Act.

As a result of adopting Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting, in 2018, the Company records any excess tax benefits or
deficiencies from its equity awards as part of the provision for income taxes. The Company anticipates that these excess tax benefits
or deficiencies will have the greatest impact on its effective tax rates in the first and third quarters, as the majority of the Company’s
equity awards vest in those quarters.

The Company is subject to audits by federal, state, local and foreign tax authorities. Management believes that adequate provisions
have been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted
with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner inconsistent with management’s
expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.

Apple Inc. | Q2 2018 Form 10-Q | 28

On August 30, 2016, the European Commission announced its decision that Ireland granted state aid to the Company by providing
tax opinions in 1991 and 2007 concerning the tax allocation of profits of the Irish branches of two subsidiaries of the Company (the
“State Aid Decision”). The State Aid Decision orders Ireland to calculate and recover additional taxes from the Company for the
period June 2003 through December 2014. Irish legislative changes, effective as of January 2015, eliminated the application of the
tax opinions from that date forward. The Company believes the State Aid Decision to be without merit and appealed to the General
Court of the Court of Justice of the European Union. Ireland has also appealed the State Aid Decision. Although Ireland is still
computing the recovery amount, the Company expects the amount to be in line with the European Commission’s announced
recovery amount of €13 billion, plus interest of €1 billion. During the third quarter of 2018, the Company expects to begin funding
amounts into escrow, where they will remain pending conclusion of all appeals. The Company believes that any incremental Irish
corporate income taxes potentially due related to the State Aid Decision would be creditable against U.S. taxes.

Recent Accounting Pronouncements

Hedging
In August 2017, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2017-12, Derivatives and Hedging (Topic
815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 expands component and fair
value hedging, specifies the presentation of the effects of hedging instruments, and eliminates the separate measurement and
presentation of hedge ineffectiveness. The Company will adopt ASU 2017-12 in its first quarter of 2020 utilizing the modified
retrospective transition method and is currently evaluating the impact of adoption on its consolidated financial statements.

Restricted Cash
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”),
which enhances and clarifies the guidance on the classification and presentation of restricted cash in the statement of cash flows.
The Company will adopt ASU 2016-18 in its first quarter of 2019 utilizing the retrospective transition method. Currently, the
Company’s restricted cash balance is not significant.

Income Taxes
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than
Inventory (“ASU 2016-16”), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset,
other than inventory, when the transfer occurs. The Company will adopt ASU 2016-16 in its first quarter of 2019 utilizing the modified
retrospective transition method. Currently, the Company estimates recording up to $4 billion of net deferred tax assets on its
Condensed Consolidated Balance Sheets upon adoption. However, the ultimate impact of adopting ASU 2016-16 will depend on the
balance of intellectual property transferred between its subsidiaries as of the adoption date, as well as the deferred tax impact of the
new minimum tax on certain future foreign earnings. The Company will recognize incremental deferred income tax expense
thereafter as these net deferred tax assets are utilized.

Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modifies lease accounting for
lessees to increase transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key
information about leasing arrangements. The Company will adopt ASU 2016-02 in its first quarter of 2020 utilizing the modified
retrospective transition method. While the Company is currently evaluating the impact of adopting ASU 2016-02, based on the lease
portfolio as of March 31, 2018, the Company anticipates recording lease assets and liabilities of approximately $9.0 billion on its
Condensed Consolidated Balance Sheets, with no material impact to its Condensed Consolidated Statements of Operations.
However, the ultimate impact of adopting ASU 2016-02 will depend on the Company’s lease portfolio as of the adoption date.

Financial Instruments
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which updates certain aspects of recognition,
measurement, presentation and disclosure of financial instruments. The Company will adopt ASU 2016-01 in its first quarter of 2019
utilizing the modified retrospective transition method. Based on the composition of the Company’s investment portfolio, the adoption
of ASU 2016-01 is not expected to have a material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments (“ASU 2016-13”), which modifies the measurement of expected credit losses of certain financial
instruments. The Company will adopt ASU 2016-13 in its first quarter of 2021 utilizing the modified retrospective transition method.
Based on the composition of the Company’s investment portfolio, current market conditions, and historical credit loss activity, the
adoption of ASU 2016-13 is not expected to have a material impact on its consolidated financial statements.

Apple Inc. | Q2 2018 Form 10-Q | 29

Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which
amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition
of revenue at an amount an entity expects to be entitled when products are transferred to customers.

Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08, Revenue from Contracts
with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”); ASU No. 2016-10, Revenue from Contracts
with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”); ASU No. 2016-12, Revenue from
Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”); and ASU No. 2016-
20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20”). The Company
must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 with ASU 2014-09 (collectively, the “new revenue
standards”).

The new revenue standards may be applied retrospectively to each prior period presented or retrospectively with the cumulative
effect recognized as of the date of adoption. The Company will adopt the new revenue standards in its first quarter of 2019 utilizing
the full retrospective transition method. The new revenue standards are not expected to have a material impact on the amount and
timing of revenue recognized in the Company’s consolidated financial statements.

Liquidity and Capital Resources

The following tables present selected financial information and statistics as of March 31, 2018 and September 30, 2017 and for the
first six months of 2018 and 2017 (in millions):

March 31, September 30,

2018 2017
Cash, cash equivalents and marketable securities $ 267,226 $ 268,895
Property, plant and equipment, net $ 35,077 $ 33,783
Commercial paper $ 11,980 $ 11,977
Total term debt $ 109,860 $ 103,703
Working capital $ 40,733 $ 27,831

Six Months Ended

March 31, April 1,
2018 2017
Cash generated by operating activities (1) $ 43,423 $ 39,804
Cash generated by/(used in) investing activities $ 15,120 $ (33,324)
Cash used in financing activities (1) $ (33,773) $ (11,807)

(1) Refer to Note 1, “Summary of Significant Accounting Polices” in the Notes to Condensed Consolidated Financial Statements in Part I, Item
1 of this Form 10-Q for more information on the prior period reclassification related to the Company’s adoption of ASU 2016-09.

The Company believes its existing balances of cash, cash equivalents and marketable securities will be sufficient to satisfy its
working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with its
existing operations over the next 12 months. The Company currently anticipates the cash used for future dividends, the share
repurchase program and debt repayments will come from its current cash and cash generated from ongoing operating activities.

In connection with the State Aid Decision, although Ireland is still computing the recovery amount, the Company expects the amount
to be in line with the European Commission’s announced recovery amount of €13 billion, plus interest of €1 billion. During the third
quarter of 2018, the Company expects to begin funding amounts into escrow, where they will remain pending conclusion of all
appeals.

The Company’s marketable securities investment portfolio is primarily invested in highly rated securities, and its investment policy
generally limits the amount of credit exposure to any one issuer. The policy generally requires investments to be investment grade,
with the primary objective of minimizing the potential risk of principal loss.

Apple Inc. | Q2 2018 Form 10-Q | 30

During the six months ended March 31, 2018, cash generated by operating activities of $43.4 billion was a result of $33.9 billion of
net income and an increase in the net change in operating assets and liabilities of $35.8 billion, partially offset by non-cash
adjustments to net income of $26.3 billion. Cash generated by investing activities of $15.1 billion during the six months ended
March 31, 2018 consisted primarily of proceeds from sales or maturities of marketable securities, net of purchases, of $22.4 billion,
partially offset by cash used to acquire property, plant and equipment of $7.0 billion. Cash used in financing activities of $33.8 billion
during the six months ended March 31, 2018 consisted primarily of cash used to repurchase common stock of $32.9 billion and cash
used to pay dividends and dividend equivalents of $6.5 billion, partially offset by proceeds from the issuance of term debt, net of $7.0
billion.

During the six months ended April 1, 2017, cash generated by operating activities of $39.8 billion was a result of $28.9 billion of net
income, non-cash adjustments to net income of $10.4 billion and an increase in the net change in operating assets and liabilities of
$479 million. Cash used in investing activities of $33.3 billion during the six months ended April 1, 2017 consisted primarily of cash
used for purchases of marketable securities, net of sales and maturities, of $26.9 billion and cash used to acquire property, plant and
equipment of $6.3 billion. Cash used in financing activities of $11.8 billion during the six months ended April 1, 2017 consisted
primarily of cash used to repurchase common stock of $18.0 billion and cash used to pay dividends and dividend equivalents of $6.1
billion, partially offset by proceeds from the issuance of term debt, net of $11.0 billion and proceeds from commercial paper, net of
$1.9 billion.

Capital Assets
The Company’s capital expenditures were $5.8 billion during the first six months of 2018. The Company anticipates utilizing
approximately $16.0 billion for capital expenditures during 2018, which includes product tooling and manufacturing process
equipment; data centers; corporate facilities and infrastructure, including information systems hardware, software and
enhancements; and retail store facilities.

Debt
The Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. The
Company uses the net proceeds from the commercial paper program for general corporate purposes, including dividends and share
repurchases. As of March 31, 2018, the Company had $12.0 billion of Commercial Paper outstanding, with a weighted-average
interest rate of 1.68% and maturities generally less than nine months.

As of March 31, 2018, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal
amount of $111.1 billion (collectively the “Notes”). During the second quarter of 2018, the Company repaid $500 million of its Notes.
The Company has entered, and in the future may enter, into interest rate swaps to manage interest rate risk on the Notes. In
addition, the Company has entered, and in the future may enter, into foreign currency swaps to manage foreign currency risk on the
Notes.

Further information regarding the Company’s debt issuances and related hedging activity can be found in Part I, Item 1 of this Form
10-Q in the Notes to Condensed Consolidated Financial Statements in Note 2, “Financial Instruments” and Note 5, “Debt.”

Capital Return Program

As of March 31, 2018, the Company had an authorized capital return program of $300 billion, which included a share repurchase
program of up to $210 billion of the Company’s common stock. As of March 31, 2018, $199.6 billion of the share repurchase
program had been utilized.

The following table presents the Company’s dividends, dividend equivalents, share repurchases and net share settlement activity
from the start of the capital return program in August 2012 through March 31, 2018 (in millions):

Dividends and Taxes Related to

Dividend Accelerated Share Open Market Settlement
Equivalents Paid Repurchases Share Repurchases of Equity Awards Total
Q2 2018 $ 3,190 $ — $ 23,500 $ 152 $ 26,842
Q1 2018 3,339 5,000 5,109 1,038 14,486
2017 12,769 15,000 18,001 1,874 47,644
2016 12,150 12,000 17,000 1,570 42,720
2015 11,561 6,000 30,026 1,499 49,086
2014 11,126 21,000 24,000 1,158 57,284
2013 10,564 13,950 9,000 1,082 34,596
2012 2,488 — — 56 2,544
Total $ 67,187 $ 72,950 $ 126,636 $ 8,429 $ 275,202

Apple Inc. | Q2 2018 Form 10-Q | 31

On May 1, 2018, the Company announced that the Board of Directors had authorized a new program to repurchase up to $100
billion of the Company’s common stock. The Company’s share repurchase program does not obligate it to acquire any specific
number of shares. Under the program, shares may be repurchased in privately negotiated and/or open market transactions,
including under plans complying with Rule 10b5-1 under the Exchange Act. Additionally, the Company announced that the Board of
Directors raised the Company’s quarterly cash dividend by 16% from $0.63 to $0.73 per share, beginning with the dividend to be
paid during the third quarter of 2018. The Company intends to increase its dividend on an annual basis, subject to declaration by the
Board of Directors. The Company plans to use current cash and cash generated from ongoing operating activities to fund its share
repurchase program and quarterly cash dividend.

Off–Balance Sheet Arrangements and Contractual Obligations

The Company has not entered into any transactions with unconsolidated entities whereby the Company has financial guarantees,
subordinated retained interests, derivative instruments, or other contingent arrangements that expose the Company to material
continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides
financing, liquidity, market risk, or credit risk support to the Company, or engages in leasing, hedging, or R&D services with the
Company.

Operating Leases
As of March 31, 2018, the Company’s total future minimum lease payments under noncancelable operating leases were $9.8 billion.
The Company’s retail store and other facility leases typically have original terms not exceeding 10 years and generally contain multi-
year renewal options.

Manufacturing Purchase Obligations

The Company utilizes several outsourcing partners to manufacture sub-assemblies for the Company’s products and to perform final
assembly and testing of finished products. These outsourcing partners acquire components and build product based on demand
information supplied by the Company, which typically covers periods up to 150 days. The Company also obtains individual
components for its products from a wide variety of individual suppliers. As of March 31, 2018, the Company expects to pay $27.1
billion under manufacturing-related supplier arrangements, substantially all of which is noncancelable.

Other Purchase Obligations

The Company’s other purchase obligations consist of noncancelable obligations to acquire capital assets, including product tooling
and manufacturing process equipment, and noncancelable obligations related to advertising, licensing, R&D, internet and
telecommunications services and other obligations. As of March 31, 2018, the Company had other purchase obligations of $8.6
billion.

Other Non-Current Liabilities

The Company’s other non-current liabilities in the Condensed Consolidated Balance Sheets consist primarily of long-term taxes
payable of $34.9 billion, and net unrecognized tax benefits and related interest and penalties of $7.5 billion. The Company plans to
pay the tax payable in installments in accordance with the Act. The Company is unable to make a reasonably reliable estimate of the
timing of payments related to unrecognized tax benefits due to uncertainties in the timing of tax audit outcomes.

Indemnification
Agreements entered into by the Company sometimes include indemnification provisions which may subject the Company to costs
and damages in the event of a claim against 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, or a material loss in excess of a recorded accrual, with
respect to indemnification of third parties.

The Company offers an iPhone Upgrade Program, which is available to customers who purchase a qualifying iPhone in the U.S., the
U.K. and mainland China. The iPhone Upgrade Program provides customers the right to trade in that iPhone for a specified amount
when purchasing a new iPhone, provided certain conditions are met. The Company accounts for the trade-in right as a guarantee
liability and recognizes arrangement revenue net of the fair value of such right, with subsequent changes to the guarantee liability
recognized within revenue.

Apple Inc. | Q2 2018 Form 10-Q | 32

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 of the Company 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. While the Company maintains directors and officers liability insurance coverage, such insurance coverage
may be insufficient to cover all losses or all types of claims that may arise.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and
the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make
judgments, assumptions and estimates that affect the amounts reported in its condensed consolidated financial statements and
accompanying notes. Management bases its estimates on historical experience and on various other assumptions it believes to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities. Actual results may differ from these estimates, and such differences may be material.

Note 1, “Summary of Significant Accounting Policies” in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial
Statements in Part II, Item 8 of the 2017 Form 10-K, and “Critical Accounting Policies and Estimates” in Part II, Item 7 of the 2017
Form 10-K describe the significant accounting policies and methods used in the preparation of the Company’s condensed
consolidated financial statements. With the exception of Income Taxes, there have been no material changes to the Company’s
critical accounting policies and estimates since the 2017 Form 10-K.

Income Taxes
The Company records a tax provision for the anticipated tax consequences of its reported operating results. The provision for
income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities,
and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted
tax rates that will be in effect for the years in which those tax assets and liabilities are expected to be realized or settled. The
Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be
realized.

The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the
financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement.

Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain
tax planning strategies, together with future reversals of existing taxable temporary differences, will be sufficient to fully recover the
Company’s deferred tax assets. In the event that the Company determines all or part of its net deferred tax assets are not realizable
in the future, the Company will record an adjustment to the valuation allowance that would be charged to earnings in the period such
determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of
uncertainties in the application of GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with
management’s expectations could have a material impact on the Company’s financial condition and operating results.

On December 22, 2017, the U.S. enacted the Act, which significantly changed U.S. tax law. The Act lowered the Company’s U.S.
statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on
previously deferred foreign income. The Act also created a new minimum tax on certain future foreign earnings. During the first six
months of fiscal 2018, the Company recognized income tax expense of $9.3 billion, of which $2.6 billion was a provisional estimate
in accordance with the SEC Staff Accounting Bulletin No. 118 and was recognized during the first quarter of 2018. This $2.6 billion
provisional estimate included $1.8 billion related to the impact of remeasuring to reduce the Company’s deferred tax balances to
reflect the new tax rate, and approximately $800 million associated with the net impact of the deemed repatriation tax. Resolution of
the provisional estimates of the Act’s effects different from the assumptions made by the Company could have a material impact on
the Company’s financial condition and operating results.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to the Company’s market risk during the first six months of 2018. For a discussion of the
Company’s exposure to market risk, refer to the Company’s market risk disclosures set forth in Part II, Item 7A, “Quantitative and
Qualitative Disclosures About Market Risk” of the 2017 Form 10-K.

Apple Inc. | Q2 2018 Form 10-Q | 33

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal
executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act were effective as of March 31, 2018 to ensure that information required to
be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and
reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s
management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding
required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the second quarter of 2018, which were
identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange
Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Apple Inc. | Q2 2018 Form 10-Q | 34

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The Company is subject to legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary
course of business. Except as described in Part I, Item 1 of this Form 10-Q in the Notes to Condensed Consolidated Financial
Statements in Note 9, “Commitments and Contingencies” under the heading “Contingencies,” 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 for asserted legal and other claims.

The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting
period for amounts in excess of management’s expectations, the Company’s consolidated financial statements for that reporting
period could be materially adversely affected. See the risk factor “The Company could be impacted by unfavorable results of legal
proceedings, such as being found to have infringed on intellectual property rights” in Part II, Item 1A of this Form 10-Q under the
heading “Risk Factors.” The Company settled certain matters during the second quarter of 2018 that did not individually or in the
aggregate have a material impact on the Company’s financial condition or operating results.

Item 1A. Risk Factors

The following description of risk factors includes any material changes to, and supersedes the description of, risk factors associated
with the Company’s business previously disclosed in Part I, Item 1A of the 2017 Form 10-K and in Part II, Item 1A of the Form 10-Q
for the quarter ended December 30, 2017, in each case under the heading “Risk Factors.” The business, financial condition and
operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not
limited to those described below, any one or more of which could, directly or indirectly, cause the Company’s actual financial
condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any
of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating
results and stock price.

The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding
other statements in this Form 10-Q. The following information should be read in conjunction with the condensed consolidated
financial statements and related notes in Part I, Item 1, “Financial Statements” and Part I, Item 2, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” of this Form 10-Q.

Because of the following factors, as well as other factors affecting the Company’s financial condition and operating results, past
financial performance should not be considered to be a reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods.

Global and regional economic conditions could materially adversely affect the Company.
The Company’s operations and performance depend significantly on global and regional economic conditions. Uncertainty about
global and regional economic conditions poses a risk as consumers and businesses may postpone spending in response to tighter
credit, higher unemployment, financial market volatility, government austerity programs, negative financial news, declines in income
or asset values and/or other factors. These worldwide and regional economic conditions could have a material adverse effect on
demand for the Company’s products and services. Demand also could differ materially from the Company’s expectations as a result
of currency fluctuations because the Company generally raises prices on goods and services sold outside the U.S. to correspond
with the effect of a strengthening of the U.S. dollar. Other factors that could influence worldwide or regional demand include changes
in fuel and other energy costs, conditions in the real estate and mortgage markets, unemployment, labor and healthcare costs,
access to credit, consumer confidence and other macroeconomic factors affecting consumer spending behavior. These and other
economic factors could materially adversely affect demand for the Company’s products and services.

In the event of financial turmoil affecting the banking system and financial markets, additional consolidation of the financial services
industry, or significant financial service institution failures, there could be tightening in the credit markets, low liquidity and extreme
volatility in fixed income, credit, currency and equity markets. This could have a number of effects on the Company’s business,
including the insolvency or financial instability of outsourcing partners or suppliers or their inability to obtain credit to finance
development and/or manufacture products, resulting in product delays; inability of customers, including channel partners, to obtain
credit to finance purchases of the Company’s products; failure of derivative counterparties and other financial institutions; and
restrictions on the Company’s ability to issue new debt. Other income and expense also could vary materially from expectations
depending on gains or losses realized on the sale or exchange of financial instruments; impairment charges resulting from
revaluations of debt and equity securities and other investments; changes in interest rates; increases or decreases in cash balances;
volatility in foreign exchange rates; and changes in fair value of derivative instruments. Increased volatility in the financial markets
and overall economic uncertainty would increase the risk of the actual amounts realized in the future on the Company’s financial
instruments differing significantly from the fair values currently assigned to them.

Apple Inc. | Q2 2018 Form 10-Q | 35

Global markets for the Company’s products and services are highly competitive and subject to rapid technological change,
and the Company may be unable to compete effectively in these markets.
The Company’s products and services compete in highly competitive global markets characterized by aggressive price competition
and resulting downward pressure on gross margins, frequent introduction of new products, short product life cycles, evolving
industry standards, continual improvement in product price/performance characteristics, rapid adoption of technological and product
advancements by competitors and price sensitivity on the part of consumers.

The Company’s ability to compete successfully depends heavily on its ability to ensure a continuing and timely introduction of
innovative new products, services and technologies to the marketplace. The Company believes it is unique in that it designs and
develops nearly the entire solution for its products, including the hardware, operating system, numerous software applications and
related services. As a result, the Company must make significant investments in R&D. The Company currently holds a significant
number of patents and copyrights and has registered and/or has applied to register numerous patents, trademarks and service
marks. In contrast, many of the Company’s competitors seek to compete primarily through aggressive pricing and very low cost
structures, and emulating the Company’s products and infringing on its intellectual property. If the Company is unable to continue to
develop and sell innovative new products with attractive margins or if competitors infringe on the Company’s intellectual property, the
Company’s ability to maintain a competitive advantage could be adversely affected.

The Company markets certain mobile communication and media devices based on the iOS mobile operating system and also
markets related services, including third-party digital content and applications. The Company faces substantial competition in these
markets from companies that have significant technical, marketing, distribution and other resources, as well as established
hardware, software and digital content supplier relationships; and the Company has a minority market share in the global
smartphone market. Additionally, the Company faces significant competition as competitors reduce their selling prices and attempt to
imitate the Company’s product features and applications within their own products or, alternatively, collaborate with each other to
offer solutions that are more competitive than those they currently offer. The Company competes with business models that provide
content to users for free. The Company also competes with illegitimate means to obtain third-party digital content and applications.
Some of the Company’s competitors have greater experience, product breadth and distribution channels than the Company.
Because some current and potential competitors have substantial resources and/or experience and a lower cost structure, they may
be able to provide products and services at little or no profit or even at a loss. The Company also expects competition to intensify as
competitors attempt to imitate the Company’s approach to providing components seamlessly within their individual offerings or work
collaboratively to offer integrated solutions. The Company’s financial condition and operating results depend substantially on the
Company’s ability to continually improve iOS and iOS devices in order to maintain their functional and design advantages.

The Company is the only authorized maker of hardware using macOS, which has a minority market share in the personal computer
market. This market has been contracting and is dominated by computer makers using competing operating systems, most notably
Windows. In the market for personal computers and accessories, the Company faces a significant number of competitors, many of
which have broader product lines, lower-priced products and a larger installed customer base. Historically, consolidation in this
market has resulted in larger competitors. Competition has been particularly intense as competitors have aggressively cut prices and
lowered product margins. An increasing number of internet-enabled devices that include software applications and are smaller and
simpler than traditional personal computers compete for market share with the Company’s existing products. The Company’s
financial condition and operating results also depend on its ability to continually improve the Mac platform to maintain its functional
and design advantages.

There can be no assurance the Company will be able to continue to provide products and services that compete effectively.

To remain competitive and stimulate customer demand, the Company must successfully manage frequent product
introductions and transitions.
Due to the highly volatile and competitive nature of the industries in which the Company competes, the Company must continually
introduce new products, services and technologies, enhance existing products and services, effectively stimulate customer demand
for new and upgraded products and successfully manage the transition to these new and upgraded products. The success of new
product introductions depends on a number of factors including, but not limited to, timely and successful product development,
market acceptance, the Company’s ability to manage the risks associated with new product production ramp-up issues, the
availability of application software for new products, the effective management of purchase commitments and inventory levels in line
with anticipated product demand, the availability of products in appropriate quantities and at expected costs to meet anticipated
demand and the risk that new products may have quality or other defects or deficiencies in the early stages of introduction.
Accordingly, the Company cannot determine in advance the ultimate effect of new product introductions and transitions.

Apple Inc. | Q2 2018 Form 10-Q | 36

The Company depends on the performance of distributors, carriers and other resellers.
The Company distributes its products through cellular network carriers, wholesalers, national and regional retailers and resellers,
many of whom distribute products from competing manufacturers. The Company also sells its products and third-party products in
most of its major markets directly to education, enterprise and government customers and consumers and small and mid-sized
businesses through its retail and online stores.

Some carriers providing cellular network service for iPhone subsidize users’ purchases of the device. There is no assurance that
such subsidies will be continued at all or in the same amounts upon renewal of the Company’s agreements with these carriers or in
agreements the Company enters into with new carriers.

The Company has invested and will continue to invest in programs to enhance reseller sales, including staffing selected resellers’
stores with Company employees and contractors, and improving product placement displays. These programs could require a
substantial investment while providing no assurance of return or incremental revenue. The financial condition of these resellers could
weaken, these resellers could stop distributing the Company’s products, or uncertainty regarding demand for some or all of the
Company’s products could cause resellers to reduce their ordering and marketing of the Company’s products.

The Company faces substantial inventory and other asset risk in addition to purchase commitment cancellation risk.
The Company records a write-down for product and component inventories that have become obsolete or exceed anticipated
demand or net realizable value and accrues necessary cancellation fee reserves for orders of excess products and components.
The Company also reviews its long-lived assets, including capital assets held at its suppliers’ facilities and inventory prepayments,
for impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable. If the Company
determines that impairment has occurred, it records a write-down equal to the amount by which the carrying value of the asset
exceeds its fair value. Although the Company believes its provisions related to inventory, capital assets, inventory prepayments and
other assets and purchase commitments are currently adequate, no assurance can be given that the Company will not incur
additional related charges given the rapid and unpredictable pace of product obsolescence in the industries in which the Company
competes.

The Company must order components for its products and build inventory in advance of product announcements and shipments.
Manufacturing purchase obligations typically cover forecasted component and manufacturing requirements for periods up to 150
days. Because the Company’s markets are volatile, competitive and subject to rapid technology and price changes, there is a risk
the Company will forecast incorrectly and order or produce excess or insufficient amounts of components or products, or not fully
utilize firm purchase commitments.

Future operating results depend upon the Company’s ability to obtain components in sufficient quantities on commercially
reasonable terms.
Because the Company currently obtains components from single or limited sources, the Company is subject to significant supply and
pricing risks. Many components, including those that are available from multiple sources, are at times subject to industry-wide
shortages and significant commodity pricing fluctuations. While the Company has entered into agreements for the supply of many
components, there can be no assurance that the Company will be able to extend or renew these agreements on similar terms, or at
all. A number of suppliers of components may suffer from poor financial conditions, which can lead to business failure for the supplier
or consolidation within a particular industry, further limiting the Company’s ability to obtain sufficient quantities of components on
commercially reasonable terms. The effects of global or regional economic conditions on the Company’s suppliers, described in
“Global and regional economic conditions could materially adversely affect the Company” above, also could affect the Company’s
ability to obtain components. Therefore, the Company remains subject to significant risks of supply shortages and price increases.

The Company’s new products 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. Continued availability of these components at acceptable prices, or at all, may be affected for any number of reasons,
including if those suppliers decide to concentrate on the production of common components instead of components customized to
meet the Company’s requirements. The supply of components for a new or existing product could be delayed or constrained, or a
key manufacturing vendor could delay shipments of completed products to the Company.

Apple Inc. | Q2 2018 Form 10-Q | 37

The Company depends on component and product manufacturing and logistical services provided by outsourcing
partners, many of which are located outside of the U.S.
Substantially all of the Company’s manufacturing is performed in whole or in part by a few outsourcing partners located primarily in
Asia. The Company has also outsourced much of its transportation and logistics management. While these arrangements may lower
operating costs, they also reduce the Company’s direct control over production and distribution. It is uncertain what effect such
diminished control will have on the quality or quantity of products or services, or the Company’s flexibility to respond to changing
conditions. Although arrangements with these partners may contain provisions for warranty expense reimbursement, the Company
may remain responsible to the consumer for warranty service in the event of product defects and could experience an unanticipated
product defect or warranty liability. While the Company relies on its partners to adhere to its supplier code of conduct, material
violations of the supplier code of conduct could occur.

The Company relies on sole-sourced outsourcing partners in the U.S., Asia and Europe to supply and manufacture many critical
components, and on outsourcing partners primarily located in Asia, for final assembly of substantially all of the Company’s hardware
products. Any failure of these partners to perform may have a negative impact on the Company’s cost or supply of components or
finished goods. In addition, manufacturing or logistics in these locations or transit to final destinations may be disrupted for a variety
of reasons including, but not limited to, natural and man-made disasters, information technology system failures, commercial
disputes, military actions or economic, business, labor, environmental, public health, or political issues.

The Company has invested in manufacturing process equipment, much of which is held at certain of its outsourcing partners, and
has made prepayments to certain of its suppliers associated with long-term supply agreements. While these arrangements help
ensure the supply of components and finished goods, if these outsourcing partners or suppliers experience severe financial
problems or other disruptions in their business, such continued supply could be reduced or terminated and the net realizable value of
these assets could be negatively impacted.

The Company’s products and services may experience quality problems from time to time that can result in decreased
sales and operating margin and harm to the Company’s reputation.
The Company sells complex hardware and software products and services that can contain design and manufacturing defects.
Sophisticated operating system software and applications, such as those sold by the Company, often contain “bugs” that can
unexpectedly interfere with the software’s intended operation. The Company’s online services may from time to time experience
outages, service slowdowns or errors. Defects may also occur in components and products the Company purchases from third
parties. There can be no assurance the Company will be able to detect and fix all defects in the hardware, software and services it
sells. Failure to do so could result in lost revenue, significant warranty and other expenses and harm to the Company’s reputation.

The Company relies on access to third-party digital content, which may not be available to the Company on commercially
reasonable terms or at all.
The Company contracts with numerous third parties to offer their digital content to customers. This includes the right to sell currently
available music, movies, TV shows and books. The licensing or other distribution arrangements with these third parties are for
relatively short terms and do not guarantee the continuation or renewal of these arrangements on reasonable terms, if at all. Some
third-party content providers and distributors currently or in the future may offer competing products and services, and could take
action to make it more difficult or impossible for the Company to license or otherwise distribute their content in the future. Other
content owners, providers or distributors may seek to limit the Company’s access to, or increase the cost of, such content. The
Company may be unable to continue to offer a wide variety of content at reasonable prices with acceptable usage rules, or continue
to expand its geographic reach. Failure to obtain the right to make third-party digital content available, or to make such content
available on commercially reasonable terms, could have a material adverse impact on the Company’s financial condition and
operating results.

Some third-party digital content providers require the Company to provide digital rights management and other security solutions. If
requirements change, the Company may have to develop or license new technology to provide these solutions. There is no
assurance the Company will be able to develop or license such solutions at a reasonable cost and in a timely manner. In addition,
certain countries have passed or may propose and adopt legislation that would force the Company to license its digital rights
management, which could lessen the protection of content and subject it to piracy and also could negatively affect arrangements
with the Company’s content providers.

Apple Inc. | Q2 2018 Form 10-Q | 38

The Company’s future performance depends in part on support from third-party software developers.
The Company believes decisions by customers to purchase its hardware products depend in part on the availability of third-party
software applications and services. There is no assurance that third-party developers will continue to develop and maintain software
applications and services for the Company’s products. If third-party software applications and services cease to be developed and
maintained for the Company’s products, customers may choose not to buy the Company’s products.

With respect to its Mac products, the Company believes the availability of third-party software applications and services depends in
part on the developers’ perception and analysis of the relative benefits of developing, maintaining and upgrading such software for
the Company’s products compared to Windows-based products. This analysis may be based on factors such as the market position
of the Company and its products, the anticipated revenue that may be generated, expected future growth of Mac sales and the costs
of developing such applications and services. If the Company’s minority share of the global personal computer market causes
developers to question the Mac’s prospects, developers could be less inclined to develop or upgrade software for the Company’s
Mac products and more inclined to devote their resources to developing and upgrading software for the larger Windows market.

With respect to iOS devices, the Company relies on the continued availability and development of compelling and innovative
software applications, including applications distributed through the App Store. iOS devices are subject to rapid technological
change, and, if third-party developers are unable to or choose not to keep up with this pace of change, third-party applications might
not successfully operate and may result in dissatisfied customers. As with applications for the Company’s Mac products, the
availability and development of these applications also depend on developers’ perceptions and analysis of the relative benefits of
developing, maintaining or upgrading software for the Company’s iOS devices rather than its competitors’ platforms, such as
Android. If developers focus their efforts on these competing platforms, the availability and quality of applications for the Company’s
iOS devices may suffer.

The Company relies on access to third-party intellectual property, which may not be available to the Company on
commercially reasonable terms or at all.
Many of the Company’s products include third-party intellectual property, which requires licenses from those third parties. Based on
past experience and industry practice, the Company believes such licenses generally can be obtained on reasonable terms. There
is, however, no assurance that the necessary licenses can be obtained on acceptable terms or at all. Failure to obtain the right to
use third-party intellectual property, or to use such intellectual property on commercially reasonable terms, could preclude the
Company from selling certain products or otherwise have a material adverse impact on the Company’s financial condition and
operating results.

The Company could be impacted by unfavorable results of legal proceedings, such as being found to have infringed on
intellectual property rights.
The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and have not
yet been fully resolved, and new claims may arise in the future. In addition, agreements entered into by the Company sometimes
include indemnification provisions which may subject the Company to costs and damages in the event of a claim against an
indemnified third party.

Claims against the Company based on allegations of patent infringement or other violations of intellectual property rights have
generally increased over time and may continue to increase. In particular, the Company has historically faced a significant number of
patent claims relating to its cellular-enabled products, and new claims may arise in the future. For example, technology and other
patent-holding companies frequently assert their patents and seek royalties and often enter into litigation based on allegations of
patent infringement or other violations of intellectual property rights. The Company is vigorously defending infringement actions in
courts in a number of U.S. jurisdictions and before the U.S. International Trade Commission, as well as internationally in various
countries. The plaintiffs in these actions frequently seek injunctions and substantial damages.

Regardless of the merit of particular claims, litigation may be expensive, time-consuming, disruptive to the Company’s operations
and distracting to management. In recognition of these considerations, the Company may enter into licensing agreements or other
arrangements to settle litigation and resolve such disputes. No assurance can be given that such agreements can be obtained on
acceptable terms or that litigation will not occur. These agreements may also significantly increase the Company’s operating
expenses.

Except as described in Part I, Item 1 of this Form 10-Q in the Notes to Condensed Consolidated Financial Statements in Note 9,
“Commitments and Contingencies” under the heading “Contingencies,” 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 for asserted legal and other claims, including matters related to infringement of intellectual property
rights.

Apple Inc. | Q2 2018 Form 10-Q | 39

The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company or an indemnified
third party in a reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial
statements for that reporting period could be materially adversely affected. Further, such an outcome could result in significant
compensatory, punitive or trebled monetary damages, disgorgement of revenue or profits, remedial corporate measures or injunctive
relief against the Company that could materially adversely affect its financial condition and operating results.

While the Company maintains insurance coverage for certain types of claims, such insurance coverage may be insufficient to cover
all losses or all types of claims that may arise.

The Company is subject to laws and regulations worldwide, changes to which could increase the Company’s costs and
individually or in the aggregate adversely affect the Company’s business.
The Company is subject to laws and regulations affecting its domestic and international operations in a number of areas. These U.S.
and foreign laws and regulations affect the Company’s activities including, but not limited to, in areas of labor, advertising, digital
content, consumer protection, real estate, billing, e-commerce, promotions, quality of services, telecommunications, mobile
communications and media, television, intellectual property ownership and infringement, tax, import and export requirements, anti-
corruption, foreign exchange controls and cash repatriation restrictions, data privacy requirements, anti-competition, environmental,
health and safety.

By way of example, laws and regulations related to mobile communications and media devices in the many jurisdictions in which the
Company operates are extensive and subject to change. Such changes could include, among others, restrictions on the production,
manufacture, distribution and use of devices, locking devices to a carrier’s network, or mandating the use of devices on more than
one carrier’s network. These devices are also subject to certification and regulation by governmental and standardization bodies, as
well as by cellular network carriers for use on their networks. These certification processes are extensive and time consuming, and
could result in additional testing requirements, product modifications, or delays in product shipment dates, or could preclude the
Company from selling certain products.

Compliance with these laws, regulations and similar requirements may be onerous and expensive, and they may be inconsistent
from jurisdiction to jurisdiction, further increasing the cost of compliance and doing business. Any such costs, which may rise in the
future as a result of changes in these laws and regulations or in their interpretation, could individually or in the aggregate make the
Company’s products and services less attractive to the Company’s customers, delay the introduction of new products in one or more
regions, or cause the Company to change or limit its business practices. The Company has implemented policies and procedures
designed to ensure compliance with applicable laws and regulations, but there can be no assurance that the Company’s employees,
contractors, or agents will not violate such laws and regulations or the Company’s policies and procedures.

The Company’s business is subject to the risks of international operations.

The Company derives a significant portion of its revenue and earnings from its international operations. Compliance with applicable
U.S. and foreign laws and regulations, such as import and export requirements, anti-corruption laws, tax laws, foreign exchange
controls and cash repatriation restrictions, data privacy requirements, environmental laws, labor laws and anti-competition
regulations, increases the costs of doing business in foreign jurisdictions. Although the Company has implemented policies and
procedures to comply with these laws and regulations, a violation by the Company’s employees, contractors or agents could
nevertheless occur. In some cases, compliance with the laws and regulations of one country could violate the laws and regulations
of another country. Violations of these laws and regulations could materially adversely affect the Company’s brand, international
growth efforts and business.

The Company also could be significantly affected by other risks associated with international activities including, but not limited to,
economic and labor conditions, increased duties, taxes and other costs and political instability. Margins on sales of the Company’s
products in foreign countries, and on sales of products that include components obtained from foreign suppliers, could be materially
adversely affected by international trade regulations, including duties, tariffs and antidumping penalties. The Company is also
exposed to credit and collectibility risk on its trade receivables with customers in certain international markets. There can be no
assurance the Company can effectively limit its credit risk and avoid losses.

Apple Inc. | Q2 2018 Form 10-Q | 40

The Company’s retail stores have required and will continue to require a substantial investment and commitment of
resources and are subject to numerous risks and uncertainties.
The Company’s retail stores have required substantial investment in equipment and leasehold improvements, information systems,
inventory and personnel. The Company also has entered into substantial operating lease commitments for retail space. Certain
stores have been designed and built to serve as high-profile venues to promote brand awareness and serve as vehicles for
corporate sales and marketing activities. Because of their unique design elements, locations and size, these stores require
substantially more investment than the Company’s more typical retail stores. Due to the high cost structure associated with the
Company’s retail stores, a decline in sales or the closure or poor performance of individual or multiple stores could result in
significant lease termination costs, write-offs of equipment and leasehold improvements and severance costs.

Many factors unique to retail operations, some of which are beyond the Company’s control, pose risks and uncertainties. These risks
and uncertainties include, but are not limited to, macro-economic factors that could have an adverse effect on general retail activity,
as well as the Company’s inability to manage costs associated with store construction and operation, the Company’s failure to
manage relationships with its existing retail partners, more challenging environments in managing retail operations outside the U.S.,
costs associated with unanticipated fluctuations in the value of retail inventory, and the Company’s inability to obtain and renew
leases in quality retail locations at a reasonable cost.

Investment in new business strategies and acquisitions could disrupt the Company’s ongoing business and present risks
not originally contemplated.
The Company has invested, and in the future may invest, in new business strategies or acquisitions. Such endeavors may involve
significant risks and uncertainties, including distraction of management from current operations, greater than expected liabilities and
expenses, inadequate return of capital and unidentified issues not discovered in the Company’s due diligence. These new ventures
are inherently risky and may not be successful.

The Company’s business and reputation may be impacted by information technology system failures or network
disruptions.
The Company may be subject to information technology system failures or network disruptions caused by natural disasters,
accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-
ins, or other events or disruptions. System redundancy and other continuity measures may be ineffective or inadequate, and the
Company’s business continuity and disaster recovery planning may not be sufficient for all eventualities. Such failures or disruptions
could adversely impact the Company’s business by, among other things, preventing access to the Company’s online services,
interfering with customer transactions or impeding the manufacturing and shipping of the Company’s products. These events could
materially adversely affect the Company’s reputation, financial condition and operating results.

There may be losses or unauthorized access to or releases of confidential information, including personally identifiable
information, that could subject the Company to significant reputational, financial, legal and operational consequences.
The Company’s business requires it to use and store confidential information, including, among other things, personally identifiable
information (“PII”) with respect to the Company’s customers and employees. The Company devotes significant resources to network
and data security, including through the use of encryption and other security measures intended to protect its systems and data. But
these measures cannot provide absolute security, and losses or unauthorized access to or releases of confidential information may
still occur, which could materially adversely affect the Company’s reputation, financial condition and operating results.

The Company’s business also requires it to share confidential information with suppliers and other third parties. Although the
Company takes steps to secure confidential information that is provided to third parties, such measures may not be effective and
losses or unauthorized access to or releases of confidential information may still occur, which could materially adversely affect the
Company’s reputation, financial condition and operating results.

For example, the Company may experience a security breach impacting the Company’s information technology systems that
compromises the confidentiality, integrity or availability of confidential information. Such an incident could, among other things,
impair the Company’s ability to attract and retain customers for its products and services, impact the Company’s stock price,
materially damage supplier relationships, and expose the Company to litigation or government investigations, which could result in
penalties, fines or judgments against the Company.

Although malicious attacks perpetrated to gain access to confidential information, including PII, affect many companies across
various industries, the Company is at a relatively greater risk of being targeted because of its high profile and the value of the
confidential information it creates, owns, manages, stores and processes.

Apple Inc. | Q2 2018 Form 10-Q | 41

The Company has implemented systems and processes intended to secure its information technology systems and prevent
unauthorized access to or loss of sensitive data, including through the use of encryption and authentication technologies. As with all
companies, these security measures may not be sufficient for all eventualities and may be vulnerable to hacking, employee error,
malfeasance, system error, faulty password management or other irregularities. For example, third parties may attempt to
fraudulently induce employees or customers into disclosing user names, passwords or other sensitive information, which may in turn
be used to access the Company’s information technology systems. To help protect customers and the Company, the Company
monitors its services and systems for unusual activity and may freeze accounts under suspicious circumstances, which, among
other things, may result in the delay or loss of customer orders or impede customer access to the Company’s products and services.

In addition to the risks relating to general confidential information described above, the Company may also be subject to specific
obligations relating to health data and payment card data. Health data may be subject to additional privacy, security and breach
notification requirements, and the Company may be subject to audit by governmental authorities regarding the Company’s
compliance with these obligations. If the Company fails to adequately comply with these rules and requirements, or if health data is
handled in a manner not permitted by law or under the Company’s agreements with healthcare institutions, the Company could be
subject to litigation or government investigations, may be liable for associated investigatory expenses, and could also incur
significant fees or fines.

Under payment card rules and obligations, if cardholder information is potentially compromised, the Company could be liable for
associated investigatory expenses and could also incur significant fees or fines if the Company fails to follow payment card industry
data security standards. The Company could also experience a significant increase in payment card transaction costs or lose the
ability to process payment cards if it fails to follow payment card industry data security standards, which would materially adversely
affect the Company’s reputation, financial condition and operating results.

While the Company maintains insurance coverage that is intended to address certain aspects of data security risks, such insurance
coverage may be insufficient to cover all losses or all types of claims that may arise.

The Company’s business is subject to a variety of U.S. and international laws, rules, policies and other obligations
regarding data protection.
The Company is subject to federal, state and international laws relating to the collection, use, retention, security and transfer of PII.
In many cases, these laws apply not only to third-party transactions, but also may restrict transfers of PII among the Company and
its international subsidiaries. Several jurisdictions have passed laws in this area, and other jurisdictions are considering imposing
additional restrictions. These laws continue to develop and may be inconsistent from jurisdiction to jurisdiction. Complying with
emerging and changing international requirements may cause the Company to incur substantial costs or require the Company to
change its business practices. Noncompliance could result in significant penalties or legal liability.

The Company makes statements about its use and disclosure of PII through its privacy policy, information provided on its website
and press statements. Any failure by the Company to comply with these public statements or with other federal, state or international
privacy-related or data protection laws and regulations could result in proceedings against the Company by governmental entities or
others. In addition to reputational impacts, penalties could include ongoing audit requirements and significant legal liability.

The Company’s success depends largely on the continued service and availability of key personnel.
Much of the Company’s future success depends on the continued availability and service of key personnel, including its Chief
Executive Officer, executive team and other highly skilled employees. Experienced personnel in the technology industry are in high
demand and competition for their talents is intense, especially in Silicon Valley, where most of the Company’s key personnel are
located.

Apple Inc. | Q2 2018 Form 10-Q | 42

The Company’s business may be impacted by political events, war, terrorism, public health issues, natural disasters and
other business interruptions.
War, terrorism, geopolitical uncertainties, public health issues and other business interruptions have caused and could cause
damage or disruption to international commerce and the global economy, and thus could have a material adverse effect on the
Company, its suppliers, logistics providers, manufacturing vendors and customers, including channel partners. The Company’s
business operations are subject to interruption by, among others, natural disasters, whether as a result of climate change or
otherwise, fire, power shortages, nuclear power plant accidents and other industrial accidents, terrorist attacks and other hostile
acts, labor disputes, public health issues and other events beyond its control. Such events could decrease demand for the
Company’s products, make it difficult or impossible for the Company to make and deliver products to its customers, including
channel partners, or to receive components from its suppliers, and create delays and inefficiencies in the Company’s supply chain.
While the Company’s suppliers are required to maintain safe working environments and operations, an industrial accident could
occur and could result in disruption to the Company’s business and harm to the Company’s reputation. Should major public health
issues, including pandemics, arise, the Company could be adversely affected by more stringent employee travel restrictions,
additional limitations in freight services, governmental actions limiting the movement of products between regions, delays in
production ramps of new products and disruptions in the operations of the Company’s manufacturing vendors and component
suppliers. The majority of the Company’s R&D activities, its corporate headquarters, information technology systems and other
critical business operations, including certain component suppliers and manufacturing vendors, are in locations that could be
affected by natural disasters. In the event of a natural disaster, the Company could incur significant losses, require substantial
recovery time and experience significant expenditures in order to resume operations.

The Company expects its quarterly revenue and operating results to fluctuate.
The Company’s profit margins vary across its products and distribution channels. The Company’s software, accessories, and service
and support contracts generally have higher gross margins than certain of the Company’s other products. Gross margins on the
Company’s hardware products vary across product lines and can change over time as a result of product transitions, pricing and
configuration changes, and component, warranty, and other cost fluctuations. The Company’s direct sales generally have higher
associated gross margins than its indirect sales through its channel partners. In addition, the Company’s gross margin and operating
margin percentages, as well as overall profitability, may be materially adversely impacted as a result of a shift in product, geographic
or channel mix, component cost increases, the strengthening U.S. dollar, price competition, or the introduction of new products,
including those that have higher cost structures with flat or reduced pricing.

The Company has typically experienced higher net sales in its first quarter compared to other quarters due in part to seasonal
holiday demand. Additionally, new product introductions can significantly impact net sales, product costs and operating expenses.
Further, the Company generates a majority of its net sales from a single product and a decline in demand for that product could
significantly impact quarterly net sales. The Company could also be subject to unexpected developments late in a quarter, such as
lower-than-anticipated demand for the Company’s products, issues with new product introductions, an internal systems failure, or
failure of one of the Company’s logistics, components supply, or manufacturing partners.

The Company’s stock price is subject to volatility.

The Company’s stock price has experienced substantial price volatility in the past and may continue to do so in the future.
Additionally, the Company, the technology industry and the stock market as a whole have experienced extreme stock price and
volume fluctuations that have affected stock prices in ways that may have been unrelated to these companies’ operating
performance. Price volatility over a given period may cause the average price at which the Company repurchases its own stock to
exceed the stock’s price at a given point in time. The Company believes its stock price should reflect expectations of future growth
and profitability. The Company also believes its stock price should reflect expectations that its cash dividend will continue at current
levels or grow and that its current share repurchase program will be fully consummated. Future dividends are subject to declaration
by the Company’s Board of Directors, and the Company’s share repurchase program does not obligate it to acquire any specific
number of shares. If the Company fails to meet expectations related to future growth, profitability, dividends, share repurchases or
other market expectations, its stock price may decline significantly, which could have a material adverse impact on investor
confidence and employee retention.

Apple Inc. | Q2 2018 Form 10-Q | 43

The Company’s financial performance is subject to risks associated with changes in the value of the U.S. dollar versus
local currencies.
The Company’s primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar–denominated sales
and operating expenses worldwide. Weakening of foreign currencies relative to the U.S. dollar adversely affects the U.S. dollar value
of the Company’s foreign currency–denominated sales and earnings, and generally leads the Company to raise international pricing,
potentially reducing demand for the Company’s products. Margins on sales of the Company’s products in foreign countries and on
sales of products that include components obtained from foreign suppliers, could be materially adversely affected by foreign
currency exchange rate fluctuations. In some circumstances, for competitive or other reasons, the Company may decide not to raise
local prices to fully offset the dollar’s strengthening, or at all, which would adversely affect the U.S. dollar value of the Company’s
foreign currency–denominated sales and earnings. Conversely, a strengthening of foreign currencies relative to the U.S. dollar, while
generally beneficial to the Company’s foreign currency–denominated sales and earnings, could cause the Company to reduce
international pricing and incur losses on its foreign currency derivative instruments, thereby limiting the benefit. Additionally,
strengthening of foreign currencies may increase the Company’s cost of product components denominated in those currencies, thus
adversely affecting gross margins.

The Company uses derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to
fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any, or more than a portion, of the
adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place.

The Company is exposed to credit risk and fluctuations in the market values of its investment portfolio.
Given the global nature of its business, the Company has both domestic and international investments. Credit ratings and pricing of
the Company’s investments can be negatively affected by liquidity, credit deterioration, financial results, economic risk, political risk,
sovereign risk or other factors. As a result, the value and liquidity of the Company’s cash, cash equivalents and marketable
securities may fluctuate substantially. Therefore, although the Company has not realized any significant losses on its cash, cash
equivalents and marketable securities, future fluctuations in their value could result in significant realized losses.

The Company is exposed to credit risk on its trade accounts receivable, vendor non-trade receivables and prepayments
related to long-term supply agreements, and this risk is heightened during periods when economic conditions worsen.
The Company distributes its products through third-party cellular network carriers, wholesalers, retailers and resellers. The Company
also sells its products directly to small and mid-sized businesses and education, enterprise and government customers. A substantial
majority of the Company’s outstanding trade receivables are not covered by collateral, third-party bank support or financing
arrangements, or credit insurance. The Company’s exposure to credit and collectibility risk on its trade receivables is higher in
certain international markets and its ability to mitigate such risks may be limited. The Company also has unsecured vendor non-trade
receivables resulting from purchases of components by outsourcing partners and other vendors that manufacture sub-assemblies or
assemble final products for the Company. In addition, the Company has made prepayments associated with long-term supply
agreements to secure supply of inventory components. As of March 31, 2018, a significant portion of the Company’s trade
receivables was concentrated within cellular network carriers, and its vendor non-trade receivables and prepayments related to long-
term supply agreements were concentrated among a few individual vendors located primarily in Asia. While the Company has
procedures to monitor and limit exposure to credit risk on its trade and vendor non-trade receivables, as well as long-term
prepayments, there can be no assurance such procedures will effectively limit its credit risk and avoid losses.

The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or
exposure to additional tax liabilities.
The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company’s
subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant
change. The Company’s effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory
tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the
U.S. and Ireland.

The Company is also subject to the examination of its tax returns and other tax matters by the U.S. Internal Revenue Service and
other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from
these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these
examinations. If the Company’s effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination
of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s financial condition,
operating results and cash flows could be adversely affected.

Apple Inc. | Q2 2018 Form 10-Q | 44

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Share repurchase activity during the three months ended March 31, 2018 was as follows (in millions, except number of shares,
which are reflected in thousands, and per share amounts):

Total Number of
Shares Approximate Dollar
Purchased as Value of
Average Part of Publicly Shares That May Yet
Total Number Price Announced Be Purchased
of Shares Paid Per Plans or Under the Plans or
Periods Purchased Share Programs Programs (1)
December 31, 2017 to February 3, 2018:
Open market and privately negotiated purchases 20,323 $ 172.22 20,323

February 4, 2018 to March 3, 2018:

November 2017 ASR 5,667 (2) 5,667
Open market and privately negotiated purchases 62,421 $ 168.21 62,421

March 4, 2018 to March 31, 2018:

Open market and privately negotiated purchases 54,296 $ 174.97 54,296
Total 142,707 $ 10,414

(1) As of March 31, 2018, the Company had an authorized share repurchase program of up to $210 billion of the Company’s common stock, of
which $199.6 billion had been utilized. The remaining $10.4 billion in the table represents the amount available to repurchase shares under
the authorized repurchase program as of March 31, 2018. On May 1, 2018, the Company announced that the Board of Directors had
authorized a new program to repurchase up to $100 billion of the Company’s common stock. The Company’s share repurchase program
does not obligate it to acquire any specific number of shares. Under the program, shares may be repurchased in privately negotiated
and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.
(2) In November 2017, the Company entered into an accelerated share repurchase arrangement (“ASR”) to purchase up to $5.0 billion of the
Company’s common stock. In February 2018, the purchase period for this ASR ended and an additional 5.7 million shares were delivered
and retired. In total, 29.3 million shares were delivered under this ASR at an average repurchase price of $170.84.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Apple Inc. | Q2 2018 Form 10-Q | 45

Item 6. Exhibits

Incorporated by Reference
Filing Date/
Exhibit Period End
Number Exhibit Description Form Exhibit Date
10.1* Non-Employee Director Stock Plan, as amended and restated as of February 13, 8-K 10.1 2/14/18
2018.
10.2*, ** Form of Restricted Stock Unit Award Agreement under Non-Employee Director Stock
Plan effective as of February 13, 2018.
31.1** Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer.
31.2** Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer.
32.1*** Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.
101.INS** XBRL Instance Document.
101.SCH** XBRL Taxonomy Extension Schema Document.
101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF** XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB** XBRL Taxonomy Extension Label Linkbase Document.
101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document.

* Indicates management contract or compensatory plan or arrangement.

** Filed herewith.
*** Furnished herewith.

Apple Inc. | Q2 2018 Form 10-Q | 46

 SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

May 2, 2018 Apple Inc.

By: /s/ Luca Maestri

Luca Maestri
Senior Vice President,
Chief Financial Officer

Apple Inc. | Q2 2018 Form 10-Q | 47