Apple 2007 Annual Report Download - page 52

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demand for certain of its products. Due to the Company's significant international operations, financial results 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 financial condition and operating results 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 percentage of 29.0% in 2006 remained flat compared to 2005. The Company experienced more favorable pricing on certain
commodity components including LCD flat-panel displays and DRAM memory and higher overall revenue that provided for more leverage on
fixed production costs, offset by an increase in lower margin iPod sales and other music-related services.
Operating Expenses
Operating expenses for each of the last three fiscal years are as follows (in millions, except for percentages):
Research and Development ("R&D")
Expenditures for R&D increased 10% or $70 million to $782 million in 2007 compared to 2006. R&D expense does not include capitalized
software development costs of $75 million related to the development of Mac OS X Leopard and iPhone. The increases in R&D expense were
primarily due to an increase in R&D headcount in the current year to support expanded R&D activities, partially offset by one less week of
expenses in the first quarter of 2007 and the capitalized software development costs mentioned above. The Company continues to believe 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. As such, the Company expects to increase
spending in R&D to remain competitive.
Selling, General, and Administrative Expense ("SG&A")
Expenditures for SG&A increased $530 million or 22% during 2007 compared to 2006. The increase was primarily due to higher direct and
indirect channel variable selling expenses resulting from the significant year-over-year increase in total net sales in 2007, the Company's
continued expansion of its Retail segment in both domestic and international markets, and a current year increase in spending on marketing and
advertising, partially offset by one less week of expenses in the first quarter of 2007.
48
September 29,
2007
September 30,
2006
September 24,
2005
Research and development
$
782
$
712
$
535
Percentage of net sales
3
%
4
%
4
%
Selling, general, and administrative expenses
$
2,963
$
2,433
$
1,864
Percentage of net sales
12
%
13
%
13
%