Apple 2006 Annual Report Download - page 26

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historical gross margin percentages on its products, including Intel-based Macintosh computers, which may adversely impact the Company’s
results of operations.
The Company’s products from time to time experience quality problems that can result in decreased net sales and operating profits.
The Company sells highly complex hardware and software products that can contain defects in design and manufacture. Sophisticated
operating system software and applications, such as those sold by the Company, often contain “bugs” that can unexpectedly interfere with the
operation of the software. Defects may also occur in components and products the Company purchases from third-parties. There can be no
assurance that the Company will be able to detect and fix all defects in the hardware and software it sells. Failure to do so could result in lost
revenue, loss of reputation, and significant warranty and other expense to remedy.
Because orders for components, and in some cases commitments to purchase components, must be placed in advance of customer orders, the
Company faces substantial inventory risk.
The Company records a write-down for inventories of components and products that have become obsolete or are in excess of anticipated
demand or net realizable value and accrues necessary reserves for cancellation fees for orders of products and components that have been
cancelled. Although the Company believes its inventory and related provisions are currently adequate, given the rapid and unpredictable pace
of product obsolescence in the computer and consumer electronics industries and the transition to Intel-based Macintosh computers, no
assurance can be given that the Company will not incur additional inventory and related charges. In addition, such charges have had, and may
have, a material effect on the Company’s financial position and results of operations.
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, and because of the transition to Intel-based Macintosh computers, 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 purchase orders, supplier contracts, and open
orders based on projected demand information. Such purchase commitments typically cover the Company’s forecasted component and
manufacturing requirements for periods ranging from 30 to 150 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.
The Company is dependent on manufacturing and logistics services provided by third parties, many of whom are located outside of the U.S.
Most 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 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 services rendered, or the flexibility of the Company to respond to changing market conditions. In
addition, the Company is reliant on third-party manufacturers to adhere to the Company’s supplier code of conduct. Moreover, although
arrangements with such manufacturers may contain provisions for warranty expense reimbursement, the Company may remain at least initially
responsible to the consumer for warranty service 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.
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