Apple 2011 Annual Report Download - page 14

Download and view the complete annual report

Please find page 14 of the 2011 Apple annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 107

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107

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 2011, largely due to a higher mix of new and innovative products with flat or reduced pricing that have
higher cost structures and deliver greater value to customers, and potential future component cost and other cost increases.
The Company and other participants in the mobile communication and media device, and personal computer 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 components for a new or existing product were delayed or constrained, 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 outsourcing partners, many of whom are
located outside of the U.S.
Substantially all of the Company’
s manufacturing is performed in whole or in part by a few outsourcing partners primarily located in Asia. 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. Although arrangements with these
partners may contain provisions for warranty expense reimbursement, the Company may remain responsible to the consumer for warranty
service in the event of product defects. The Company also relies on its partners to adhere to the Company’
s supplier code of conduct. Any
unanticipated product defect or warranty liability, whether pursuant to arrangements with outsourcing partners or otherwise, or material
violations of the supplier code of conduct, could materially adversely affect the Company’s reputation, financial condition and operating results.
The supply and manufacture of many critical components is performed by sole-
sourced outsourcing partners in the U.S., Asia and Europe.
Single-sourced outsourcing partners in Asia perform final assembly of substantially all of the Company’
s hardware products. If manufacturing or
logistics in these locations is disrupted for any reason including, but not limited to, natural and man-
made disasters, information technology
system failures, military actions or economic, business, labor, environmental, public health, or political issues, the Company’
s financial
condition and operating results could be materially adversely affected.
The Company relies on third-
party intellectual property and digital content, which may not be available to the Company on commercially
reasonable terms or at all.
Many of the Company’s products include third-
party intellectual property, which requires licenses from those third parties. Based on past
experience and industry practice, the Company believes such licenses generally could be obtained on reasonable terms. There is however no
assurance that the necessary licenses could be obtained on acceptable terms or at all. If the Company is unable to obtain or renew critical licenses
on reasonable terms, its financial condition and operating results may be materially adversely affected.
The Company also contracts with third parties to offer their digital content through the iTunes Store. The licensing arrangements with these third
parties are short-term and do not guarantee the continuation or renewal of these arrangements on reasonable terms, if at all. Some third-
party
content providers currently or in the future may offer competing products and services, and could take action to make it more difficult or
impossible for the
12