Apple 2004 Annual Report Download - page 39

global pricing pressures, increased competition, compressed product life cycles, potential increases in the cost and availability of raw material
and outside manufacturing services, and potential changes to the Company's product mix, including higher unit sales of consumer products with
lower average selling prices and lower gross margins. In response to these downward pressures, the Company expects it will continue to take
pricing actions with respect to its products. Gross margins could also be affected by the Company's ability to effectively manage product quality
and warranty costs and to stimulate demand for certain of its products. The Company's operating strategy and pricing take into account
anticipated changes in foreign currency exchange rates over time; however, the Company's results of operations can be significantly affected in
the short-term by fluctuations in exchange rates.
The Company orders components for its products and builds 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 or components. The Company's operating results and financial condition in the
past have been and may in the future be materially adversely affected by the Company's ability to manage its inventory levels and outstanding
purchase commitments and to respond to short-term shifts in customer demand patterns.
Gross margin decreased to 27.5% of net sales in 2003 from 27.9% of net sales in 2002. This decline in gross margin reflects relatively aggressive
pricing actions on several Macintosh models instituted by the Company beginning in late fiscal 2002 as a result of continued pricing pressure
throughout the personal computer industry, lower sales of relatively higher margin Power Macintosh systems during the first three fiscal quarters
of 2003, and increased air freight and manufacturing costs associated with the production ramp-up of the new Power Mac G5 and 15-inch
PowerBook, both of which began shipping in volume during September 2003. This decline is also attributable to a rise in certain component
costs as the year progressed. The aforementioned negative factors affecting gross margins during 2003 were partially offset by the increase in
higher margin software and direct sales.
Operating Expenses
Operating expenses for the three fiscal years ended September 25, 2004 are as follows (in millions, except for percentages):
Research and Development (R&D)
The Company recognizes that focused investments in R&D are critical to its future growth and competitive position in the marketplace and are
directly related to timely development of new and enhanced products that are central to the Company's core business strategy. The Company has
historically relied upon innovation to remain competitive. R&D expense amounted to approximately 6% of total net sales during fiscal 2004
down from 8% of total net sales in both 2003 and 2002. This decrease is due to the significant increase of 33% in total net sales of the Company
for fiscal 2004. Although R&D expense decreased as a percentage of total net sales in fiscal 2004, actual expenditures for R&D in fiscal 2004
increased $18 million or 4% from fiscal 2003, which follows a 6% or $25 million increase in 2003 compared to 2002. The overall increase in
R&D expense relates primarily to increased headcount and support for new product development activities and the impact of employee salary
merit increases in 2004. R&D spending also included capitalized software development costs of approximately $4.5 million related to the
36
2004 2003 2002
Research and development
$
489
$
471
$
446
Percentage of net sales
6
%
8
%
8
%
Selling, general, and administrative expenses
$
1,421
$
1,212
$
1,109
Percentage of net sales
17
%
20
%
19
%
Restructuring costs
$
23
$
26
$
30
Purchased in
-
process research and development
—
—
$
1