Apple 2003 Annual Report Download - page 75

Asia-Pacific, which includes Australia and Asia except for Japan, and the Company's subsidiary, Filemaker, Inc. Each reportable operating
segment provides similar hardware and software products and similar services, and the accounting policies of the various segments are the
same as those described in the Summary of Significant Accounting Policies in Note 1, except as described below for the Retail segment.
The Company evaluates the performance of its operating segments based on net sales. The Retail segment's performance is also evaluated
based on operating income. Net sales for geographic segments are based on the location of the customers. Operating income for each segment
includes net sales to third parties, related cost of sales, and operating expenses directly attributable to the segment. Operating income for each
segment excludes other income and expense and certain expenses that are managed outside the operating segments. Costs excluded from
segment operating income include various corporate expenses, manufacturing costs not included in standard costs, income taxes, and various
nonrecurring charges. Corporate expenses include research and development, corporate marketing expenses, and other separately managed
general and administrative expenses including certain corporate expenses associated with support of the Retail segment. The Company does not
include intercompany transfers between segments for management reporting purposes. Segment assets exclude corporate assets. Corporate
assets include cash, short-term and long-term investments, manufacturing facilities, miscellaneous corporate infrastructure, goodwill and other
acquired intangible assets, and retail store construction-in-progress that is not subject to depreciation. Except for the Retail segment, capital
expenditures for long-lived assets are not reported to management by segment. Capital expenditures by the Retail segment were $92 million,
$106 million, and $92 million in 2003, 2002, and 2001, respectively.
Operating income for all segments except Retail includes cost of sales at standard cost. Certain manufacturing expenses and related adjustments
not included in segment cost of sales, including variances between standard and actual manufacturing costs and the mark-up above standard
cost for product supplied to the Retail segment, are included in corporate expenses.
To assess the operating performance of the Retail segment several significant items are included in its results for internal management reporting
that are not included in results of the Company's other segments. First, cost of sales for the Retail segment includes a mark-up above the
Company's standard cost to approximate the price normally charged to the Company's major channel partners in the United States. For the
years ended September 27, 2003, September 28, 2002, and September 29, 2001 this resulted in the
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recognition of additional cost of sales above standard cost by the Retail segment and an offsetting benefit to corporate expenses of
approximately $106 million, $52 million, and $4 million, respectively.
Second, the Retail segment includes in its net sales proceeds from sales of the Company's extended warranty and support contracts and also
recognizes related cost of sales based on the amount at which such contracts are normally sold to the Company's resellers operating retail stores
in the United States. This treatment is consistent with how the Company's major resellers account for the sales and cost of the Company's
extended warranty and support contracts. Because the Company has not yet earned the revenue or incurred the costs associated with the sale of
these contracts, an offset to these amounts is recognized in the Americas segment's net sales and cost of sales. For the year ended
September 27, 2003, this resulted in the recognition of net sales and cost of sales by the Retail segment, with corresponding offsets in the
Americas segment, of $30 million and $20 million, respectively. For the year ended September 28, 2002, this resulted in the recognition of net
sales and cost of sales by the Retail segment, with corresponding offsets in the Americas segment, of $8 million and $6 million, respectively.
These amounts were insignificant in fiscal 2001.
Third, a portion of the operating expenses associated with certain high profile retail stores are allocated from the Retail segment to corporate
marketing expense. Allocation of these expenses reflects the unique nature of these stores which, given their larger size and extraordinary
design elements, function as vehicles for general corporate marketing, corporate sales and marketing events, and brand awareness. Allocated
operating costs are those in excess of operating costs incurred by one of the Company's more typical retail locations. Stores were open in three
such high profile locations in New York, Los Angeles, and Chicago as of September 27, 2003. Expenses allocated to corporate marketing
resulting from the operations of these three stores were $6 million and $1 million in fiscal 2003 and 2002, respectively.
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Summary information by operating segment follows (in millions):
2003 2002 2001
Americas:
Net sales
$
3,181
$
3,131
$
3,037
Operating income $
323
$
278
$
128
Depreciation, amortization and accretion $
5
$
4
$
4
Segment assets(a) $
494
$
395
$
334