Apple 2002 Annual Report Download - page 31

The Company must order components for its products and build inventory in advance of product shipments. Because the Company's markets
are volatile and subject to rapid technology and price changes, there is a risk the Company will forecast incorrectly and produce or order from
third parties excess or insufficient inventories of particular products. Consistent with industry practice, components are normally acquired
through a combination of formal purchase orders, supplier contracts, and open orders based on projected demand information. Such formal and
informal purchase commitments typically cover the Company's forecasted component and manufacturing requirements for periods ranging
from 30 to 130 days. The Company's operating results and financial condition have been in the past and may in the future be materially
adversely affected by the Company's ability to manage its inventory levels and respond to short-term shifts in customer demand patterns.
Future operating results are dependent upon the Company's ability to obtain a sufficient supply of components, some of which are in short
supply or available only from limited sources.
Although most components essential to the Company's business are generally available from multiple sources, certain key components
including microprocessors and application specific integrated circuits ("ASICs") are currently obtained by the Company from single or limited
sources. Some key components (including without limitation DRAM, TFT-LCD flat-panel displays, and optical and magnetic disk drives),
while currently available to the Company from multiple sources, are at times subject to industry-wide availability and pricing pressures. In
addition, new products introduced by the Company often initially utilize custom components obtained from only one source until the Company
has evaluated whether there is a need for, and subsequently qualifies, additional suppliers. In situations where a component or product utilizes
new technologies, initial capacity constraints may exist until such time as the suppliers' yields have
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matured. The Company and other producers in the personal computer industry also compete for various components with other industries that
have experienced increased demand for their products. The Company uses some components that are not common to the rest of the personal
computer industry including certain microprocessors and ASICs. Continued availability of these components may be affected if producers were
to decide to concentrate on the production of components other than those customized to meet the Company's requirements. If the supply of a
key component were to be delayed or constrained on a new or existing product, the Company's results of operations and financial condition
could be adversely affected.
The Company's ability to produce and market competitive products is also dependent on the ability and desire of IBM and Motorola, the sole
suppliers of the PowerPC RISC-based microprocessor for the Company's Macintosh computers, to provide the Company with a sufficient
supply of microprocessors with price/performance features that compare favorably to those supplied to the Company's competitors by Intel
Corporation and other developers and producers of microprocessors used by personal computers using the Windows operating systems.
Further, despite its efforts to educate the marketplace to the contrary, the Company believes that many of its current and potential customers
believe that the relatively slower MHz rating or clock speed of the microprocessors it utilizes in its Macintosh systems compares unfavorably to
those utilized by Windows-
based systems and translates to slower overall system performance. There have been instances in recent years where
the inability of the Company's suppliers to provide advanced G4 and G3 microprocessors with higher clock speeds in sufficient quantity has
had significant adverse effects on the Company's results of operations. The inability in the future of the Company to obtain microprocessors in
sufficient quantities with competitive price/performance features could have an adverse impact on the Company's results of operations and
financial condition.
The Company is dependent on manufacturing and logistics services provided by third parties, many of whom are located outside of the United
States.
Many of the Company's products are manufactured in whole or in part by third-party manufacturers. In addition, the Company has outsourced
much of its transportation and logistics management. While outsourcing arrangements may lower the fixed cost of operations, 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 the products manufactured, or the flexibility of the Company to respond to changing market conditions. Moreover, although
arrangements with such manufacturers may contain provisions for warranty expense reimbursement, the Company may remain at least initially
responsible to the ultimate consumer for warranty service or in the event of product defects. Any unanticipated product defect or warranty
liability, whether pursuant to arrangements with contract manufacturers or otherwise, could adversely affect the Company's future operating
results and financial condition.
Final assembly of products sold by the Company is conducted in the Company's manufacturing facilities in Sacramento, California, and Cork,
Ireland, and by external vendors in Fullerton, California, Taiwan, Korea, the People's Republic of China, and the Czech Republic. Currently,
manufacture of many of the components used in the Company's products and final assembly of all of the Company's portable products
including PowerBooks, iBooks, and the iPod is performed by third-
party vendors in Taiwan. If for any reason manufacturing or logistics in any
of these locations is disrupted by regional economic, business, environmental, political, or military conditions or events, the Company's results
of operations and financial condition could be adversely affected.
The Company's products could experience quality problems that result in decreased net sales and operating profits.
The Company sells highly complex hardware and software products that may contain defects in design and manufacture. Sophisticated
operating system software and applications such as the Company sells often contains "bugs" that can unexpectedly interfere with the operation