Apple 2009 Annual Report Download - page 19

Table of Contents
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. The follow-
on effects from the credit crisis on the Company’s key suppliers, referred to in “
Economic conditions could materially adversely affect the
Company” above, which is incorporated herein by reference, also could affect the Company’
s ability to obtain key components. Therefore, the
Company remains subject to significant risks of supply shortages and/or price increases that could materially adversely affect the Company’
s
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 2009 and 2008, 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, a stronger U.S.
dollar 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, mobile communication and consumer electronics 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, mobile communication and consumer electronics 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 or manufacturing capacity has increased. 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 concentrated in several general locations. The Company has also outsourced much of its
transportation and logistics management. While these arrangements may lower operating costs, 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 products or services,
or the Company’s flexibility to respond to changing conditions. In addition, the Company relies on third-
party manufacturers to adhere to the
Company’
s supplier code of conduct. Although arrangements with such manufacturers may contain provisions for warranty expense
reimbursement, the Company may remain 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 materially adversely
affect the Company’s reputation, financial condition and operating results.
Final assembly of the Company’s products is currently performed in the Company’
s manufacturing facility in Ireland, and by external vendors in
California, Texas, China, the Czech Republic and Korea. Currently, the supply and manufacture of many critical components is performed by
sole-sourced third-
party vendors in the U.S., China, Germany, Ireland, Israel Japan, Korea, Malaysia, the Netherlands, the Philippines, Taiwan,
Thailand and Singapore. Sole-sourced third-party vendors in China perform final assembly of substantially all of the
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