Apple 2012 Annual Report Download - page 70

individuals in connection with related legal proceedings. It is not possible to determine the maximum potential
amount of payments the Company could be required to make under these agreements due to the limited history of
prior indemnification claims and the unique facts and circumstances involved in each claim. However, the
Company maintains directors and officers liability insurance coverage to reduce its exposure to such obligations,
and payments made under these agreements historically have not been material.
Concentrations in the Available Sources of Supply of Materials and Product
Although most components essential to the Company’s business are generally available from multiple sources, a
number of components are currently obtained from single or limited sources, which subjects the Company to
significant supply and pricing risks. Many components, including those that are available from multiple sources,
are at times subject to industry-wide shortages and significant commodity pricing fluctuations. In addition, the
Company has entered into various agreements for the supply of components; however there can be no guarantee
that the Company will be able to extend or renew these agreements on similar terms, or at all. Therefore, the
Company remains subject to significant risks of supply shortages and price increases that can materially
adversely affect its financial condition and operating results.
The Company and other participants in the markets for mobile communication and media devices and personal
computers also compete for various components with other industries that have experienced increased demand
for their products. The Company also uses some custom components that are not common to the rest of these
industries, and new products introduced by the Company 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. If the Company’s supply of components
for a new or existing product were delayed or constrained, or if an outsourcing partner delayed shipments of
completed products to the Company, the Company’s financial condition and operating results could be materially
adversely affected. The Company’s business and financial performance could also be materially adversely
affected depending on the time required to obtain sufficient quantities from the original source, or to identify and
obtain sufficient quantities from an alternative source. Continued availability of these components at acceptable
prices, or at all, may be affected if those suppliers concentrated on the production of common components
instead of components customized to meet the Company’s requirements.
Substantially all of the Company’s hardware products are manufactured by outsourcing partners that are located
primarily in Asia. A significant concentration of this manufacturing is currently performed by a small number of
outsourcing partners, often in single locations. Certain of these outsourcing partners are the sole-sourced
suppliers of components and manufacturers for many of the Company’s products. Although the Company works
closely with its outsourcing partners on manufacturing schedules, the Company’s operating results could be
adversely affected if its outsourcing partners were unable to meet their production commitments. The Company’s
purchase commitments typically cover its requirements for periods up to 150 days.
Long-Term Supply Agreements
The Company has entered into long-term agreements to secure the supply of certain inventory components.
Under certain of these agreements, which expire between 2012 and 2022, the Company has made prepayments
for the future purchase of inventory components and has acquired capital equipment to use in the manufacturing
of such components.
As of September 29, 2012, the Company had a total of $4.2 billion of inventory component prepayments
outstanding, of which $1.2 billion are classified as other current assets and $3.0 billion are classified as other
assets in the Consolidated Balance Sheets. The Company had a total of $2.3 billion of inventory component
prepayments outstanding as of September 24, 2011. The Company’s outstanding prepayments will be applied to
certain inventory component purchases made during the term of each respective agreement. The Company
utilized $943 million and $173 million of inventory component prepayments during 2012 and 2011, respectively.
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