Apple 2010 Annual Report Download - page 16

Table of Contents
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, open orders and, where
appropriate, prepayments, in each case 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. 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 2010, largely due to a higher mix of new and
innovative products that have higher cost structures and deliver greater value to customers, and expected and potential future component cost and
other cost increases. 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, and mobile communication and media device 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 these industries. The Company’
s new products often utilize custom components available from only one source.
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.
Substantially all 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
13