Apple 2015 Annual Report Download - page 30

Gross Margin
Gross margin for 2015, 2014 and 2013 is as follows (dollars in millions):
2015 2014 2013
Net sales $ 233,715 $ 182,795 $ 170,910
Cost of sales 140,089 112,258 106,606
Gross margin $ 93,626 $ 70,537 $ 64,304
Gross margin percentage 40.1% 38.6% 37.6%
The year-over-year increase in the gross margin percentage in 2015 was driven primarily by a favorable shift in mix to products with higher
margins and, to a lesser extent, by improved leverage on fixed costs from higher net sales. These positive factors were partially offset
primarily by higher product cost structures and, to a lesser extent, by the effect of weakness in most foreign currencies relative to the U.S.
dollar.
The year-over-year increase in the gross margin percentage in 2014 was driven by multiple factors including lower commodity costs, a
favorable shift in mix to products with higher margins and improved leverage on fixed costs from higher net sales, which was partially
offset by the weakness in several foreign currencies relative to the U.S. dollar, price reductions on select products and higher cost
structures on certain new products.
The Company anticipates gross margin during the first quarter of 2016 to be between 39% and 40%. The foregoing statement regarding
the Company’s expected gross margin percentage in the first quarter of 2016 is forward-looking and could differ from actual results. The
Company’s future gross margins can be impacted by multiple factors including, but not limited to, those set forth in Part I, Item 1A of this
Form 10-K under the heading “Risk Factors” and those described in this paragraph. In general, the Company believes gross margins will
remain under downward pressure due to a variety of factors, including continued industry wide global product pricing pressures,
increased competition, compressed product life cycles, product transitions, potential increases in the cost of components, and potential
strengthening of the U.S. dollar, as well as potential increases in the costs of outside manufacturing services and a potential shift in the
Company’s sales mix towards products with lower gross margins. In response to competitive pressures, the Company expects it will
continue to take product pricing actions, which would adversely affect gross margins. Gross margins could also be affected by the
Company’s ability to manage product quality and warranty costs effectively and to stimulate demand for certain of its products. Due to the
Company’s significant international operations, its financial condition and operating results, including gross margins, could be significantly
affected by fluctuations in exchange rates.
Operating Expenses
Operating expenses for 2015, 2014 and 2013 are as follows (dollars in millions):
2015 Change 2014 Change 2013
Research and development $ 8,067 34% $ 6,041 35% $ 4,475
Percentage of total net sales 3% 3% 3%
Selling, general and administrative $ 14,329 19% $ 11,993 11% $ 10,830
Percentage of total net sales 6% 7% 6%
Total operating expenses $ 22,396 24% $ 18,034 18% $ 15,305
Percentage of total net sales 10% 10% 9%
Research and Development
The year-over-year growth in R&D expense in 2015 and 2014 was driven primarily by an increase in headcount and related expenses,
including share-based compensation costs, and material costs to support expanded R&D activities. The Company continues to believe
that focused investments in R&D are critical to its future growth and competitive position in the marketplace and are directly related to
timely development of new and updated products that are central to the Company’s core business strategy.
Selling, General and Administrative
The year-over-year growth in selling, general and administrative expense in 2015 and 2014 was primarily due to increased headcount and
related expenses, including share-based compensation costs, and higher spending on marketing and advertising.
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