Apple 2008 Annual Report Download - page 20

Table of Contents
value of the assets exceeds its fair market value. Although the Company believes its inventory, asset, and related provisions are currently
adequate, no assurance can be given that, given the rapid and unpredictable pace of product obsolescence in the global personal computer,
consumer electronics, and mobile communication industries, the Company will not incur additional inventory or asset related charges. Such
charges have had, and could have, a material adverse effect on the Company’s financial condition and operating results.
The Company must order components for its products and build inventory in advance of product announcements and shipments. Consistent with
industry practice, components are normally acquired through a combination of purchase orders, supplier contracts, and open orders based on
projected demand. Such purchase commitments typically cover forecasted component and manufacturing requirements for 30 to 150 days.
Because the Company’s markets are volatile, competitive and subject to rapid technology and price changes, there is a risk the Company will
forecast incorrectly and order or produce excess or insufficient inventories of components or products. The Company’s financial condition and
operating results have been in the past and could be in the future 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 depend upon the Company
’s ability to obtain key components including, but not limited to microprocessors, NAND
flash memory, DRAM and LCDs at favorable prices and in sufficient quantities.
Because the Company currently obtains certain key components including, but not limited to microprocessors, enclosures, certain LCDs, certain
optical drives, and ASICs, from single or limited sources, the Company is subject to significant supply and pricing risks. Many of these and other
key components that are available from multiple sources including, but not limited to NAND flash memory, DRAM and certain LCDs, are
subject at times to industry-
wide shortages and significant commodity pricing fluctuations. The Company has entered into certain agreements for
the supply of key components including, but not limited to microprocessors, NAND flash memory, DRAM and LCDs at favorable pricing, but
there is no guarantee that the Company will be able to extend or renew these agreements on similar favorable terms, or at all, upon expiration or
otherwise obtain favorable pricing in the future. Therefore, the Company remains subject to significant risks of supply shortages and/or price
increases that can have a material adverse effect on its financial condition and operating results. The Company expects to experience decreases
in its gross margin percentage in future periods, as compared to levels achieved during 2008 and 2007, due largely to the anticipated impact of
product transitions, flat or reduced pricing on new and innovative products that have higher cost structures, both expected and potential future
cost increases for key components, and higher logistical costs. For additional information refer to Part II, Item 7, “Management’
s Discussion and
Analysis of Financial Condition and Results of Operations,” under the subheading “Gross Margin,” which is incorporated herein by reference.
The Company and other participants in the personal computer, consumer electronics and mobile communication industries compete for various
components with other industries that have experienced increased demand for their products. The Company uses some custom components that
are not common to the rest of the personal computer, consumer electronics or mobile communication industries. The Company’s new products
often utilize custom components available from only one source until the Company has evaluated whether there is a need for, and subsequently
qualifies, additional suppliers. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’
yields have matured. Continued availability of these components at acceptable prices, or at all, may be affected if those suppliers decided to
concentrate on the production of common components instead of components customized to meet the Company’s requirements. If the supply of
a key single-sourced component for a new or existing product were delayed or constrained, if such components were available only at
significantly higher prices, or if a key manufacturing vendor delayed shipments of completed products to the Company, the Company’
s financial
condition and operating results could be materially adversely affected.
The Company depends on component and product manufacturing and logistical services provided by third parties, many of whom are located
outside of the U.S.
Most of the Company’s components and products are manufactured in whole or in part by a few third-party manufacturers. Many of these
manufacturers are located outside of the U.S., and are geographically concentrated
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