Running Head: APPLE INC. SEC 10-K ANALYSIS
Apple Incorporated SEC 10-K Analysis
Apple Incorporated SEC 10-K Analysis
This project will cover my financial analysis of Apple Corporation after review and presentation of the firm’s financial documents and records. I will present factual information to the reader and also my analysis and interpretation of the data for use by managers and investors in making more informed decisions about Apple. I chose Apple because they have several marketable products right now to include the iPod and the iPhone. It seems they are constantly moving in the right direction financially and technically and also remain ahead of their competitors in the marketplace.
Who is Apple? (MD&A Review)
Apple designs, manufactures and markets personal computing devices such as laptops and personal computers, digital music players to include digital content and cellular telephones. The company also sells its own line of software and peripherals as well as the Apple operating system. Apple is focused on providing its customers with “enhanced digital lifestyles (Security and Exchange Commission [SEC] 10-K, 2008)” and their consumer base ranges from individual consumers, small businesses, and enterprises to educational and governmental agencies. Apple’s product distribution channels are both direct through its own Apple Stores and web-based stores and indirect through major retailers such as Wal-mart and Best Buy, cellular service carriers, private membership warehouses, and online retailers. The main focus on selling the company’s products is put into its sales force. Apple invests heavily in the training and careful placement of its sales force in all direct and indirect sales locations so that consumers can be educated on the benefits that only Apple products can offer over its competitors being sold at the same location. The company believes that the more consumers are educated about the benefits of their product, the more they will remain ahead of the competition (SEC 10-K, 2008).
Products & Inventory records
Apple Inc. sells a wide variety of technological products to include its line of Mac desktop computers such as the Mac Pro for business professionals, the Mac for the home user, and the Mac Mini to appeal to the consumer wanting the latest technology in a small package. The company also sells a similar line of laptop computers such as the MacBook Pro for advanced users, the MacBook for everyday users, and MacBook Air – the patented ultra slim, ultra light laptop. Accompanying the desktop and laptop computers is the Mac OS X Operating System, a wide variety of proprietary software and also the Xserve, a server equipped with all of the latest capabilities and materials to appeal to large and small business. The popular iPod portable digital music players come in a variety of shapes, sizes and colors also to appeal to every consumer. Along with the iPod is the iTunes online digital music store where consumers can purchase digital music, games, movies, television shows and other content for use with the iPod. The company also recently launched the popular iPhone, a hand held device capable of providing iPod music and applications, internet and e-mail access as well as mobile phone capabilities (SEC 10-K, 2008).
Apple makes inventory purchase decisions through demand forecasts, product lifecycle status, product development plans, current sales levels and component cost trends. The company keeps enough inventory on hand to cover shipments and orders based on these forecasts. These inventory purchases are recorded on the income statement as part of the cost of sales and this cost is recognized in the quarter in which other costs of sales are recorded. Apple’s net income is reduced by write-downs on products in inventory that have become obsolete or in reduced demand. Although the forecast of product sales in the future is favorable, additional write-downs could negatively impact Apple’s income if inventory continues to be recorded in this way and sales do not go as planned (SEC 10-K, 2008).
According to the annual report, Apple faces fierce competition in the computer, digital music and overall technology market because of competitors’ abilities to offer very low prices and their own versions of software, hardware and digital music content that may be less proprietary than Apple’s products. Companies similar to Apple who also sell computer products based on their operating systems have significantly cut prices and lowered their product margins to gain a greater market share. Similarly, the consumer market is changing its focus from software capabilities more to internet access capabilities. For Apple to stay ahead of this market, it must offer low cost alternatives to the small, inexpensive internet access devices being introduced to the market (SEC 10-K, 2008). Yahoo! Finance offers a competitors feature that charts a company’s biggest competitors and their market shares. Apple’s direct competitor comparison according to Yahoo! Finance is below:
As you can see, the company’s direct competitors are mainly sellers of personal computers although Apple also competes in other markets such as digital music and cellular telephone manufacturer markets. According to the above comparison, Apple does not make as much revenue or income as other direct competitors but their higher gross margin says they will have more money left over to spend on marketing, operations and research and development to keep them afloat among tough competition. Their quarterly revenue growth is also the highest, and Price to Earnings Growth (PEG) is very promising over that of competitors. Based off of these numbers, I would say Apple has a better handle on future sales and revenue then that of its competitors.
Popular Media Views and Reports
Recently in the news, Apple reports that it is dealing with direct competitors by significantly cutting prices on their MacBook laptops in reaction to the growing popularity of netbooks – compact notebook computers that mainly offer internet access for a fraction of the cost of today’s computing notebooks with all of the additional software and hardware offered. Although, netbooks were once thought by industry research professionals to fail in sales, these little machines have been best sellers this year. Rumors are circulating in the media that Apple may cut MacBook sales up to $150.00 per unit to counter falling sales last quarter and with such a promising gross margin, the company can definitely afford to take a step in that direction (Elmer-Dewitt, 2009).
In other news from Forbes.com, Apple is reportedly expanding its market in the gaming industry – the last area of the technology market left for Apple to conquer. The company has hired industry professional leaders such as Richard Teversham from Microsoft’s XBOX team and Bob Drevin, the creator of the Nintendo Game cube’s processor chip. Plans appear to be in the works to corner the handheld gaming market for Apple’s new generation of iPods and iPhones. There was also a large amount of money invested in semi-conductor technology through acquirement of Imaginations Power VR graphics technology and purchase of a processor designer called PA Semi. This new technology is reportedly being used to improve the iPods and iPhones with newly produced silicon as well as faster processors and better cameras and technology (Caulfield, B. 2009). So far, the future is looking bright!
Like most other companies, Apple uses accrual accounting for revenue recognition in accordance with the American Institute of Certified Public Accountants. For this purpose, revenue is recorded when the product is in the buyers possession after shipment has occurred, if shipment requires the company to be liable for the product until it is delivered, or it is recognized when it is purchased online (such as software purchases) or by the retailer. According to the SEC 10-K, revenue is recognized when an arrangement exists, the product is delivered, the sales price is determined and payment is probable. This is where many financial analysts draw the line between cash flows and accrual accounting. Because payment is only probable and has not yet been received, sometimes it is more useful to use the operating cash flow amounts in conjunction with the net income amounts reported in financial documents when determining if investments in a company are sound decisions (Marshall, McManus, & Viele, 2008).
Ratio relationship and analysis of:
- Income Statement (SEC 10-K, 2008)
Income Statement Analysis
Apple uses a multiple-step formatted income statement which shows gross profit as well as operating income. Net income has increased significantly due to market expansion of the iPod and iPhone and increased brand recognition over the past few years. The company has a very efficient gross profit margin in 2008 of 34.3 percent ($11,145,000 Gross Profit / $32,479,000 Total Revenue) and 34 percent in 2007. Investors use this percentage to determine the amount of money a company has left over after subtracting the cost of goods sold. At a steady gross profit margin of 34 percent, investors can be sure that Apple has plenty of money left for profitability as long as overhead costs remain low. Another positive sign is that the gross profit margin is not fluctuating by a large amount over time, which can be a sign of fraud or accounting irregularities (Kennon, 2001).
Another consideration of the income statement is the Cost of Good Sold (COGS) or Cost of revenue percentage. In 2008, Apple’s COGS percentage was 66 percent, relatively high compared to major competitor Microsoft’s COGS percentage of only 19 percent for the same year. It is clear that the cost of Apple’s inventory is high and this could be an area where costs could be cut to increase profitability.
Overall, I would say the income statement for the company shows promise for the future. Overall income has increased over time; gross profit margin has also remained consistent and shows profitability. I do not consider the COGS percentage to be negative as the company prides itself on its higher priced goods and all other percentages prove strong sales volume.
Balance Sheet Analysis
Below is the Balance Sheet captured from the SEC 10-K. The balance sheet shows the liquidity of Apple and the ability of the company to pay debt in the short term or the current ratio. In 2008, Apple’s current ratio was (2.46:1). Another words, for every $1.00 of current liability due in the next year, the company has $2.46 in current assets that will convert to cash during the year to pay the debts. A current ratio of 2.0 or higher is considered healthy for a business.
Another consideration from the balance sheet and income statement is the Return on Assets (ROA) ratio, or the company’s ability to generate profit. In 2008, Apple’s ROA ratio was 12.22 percent ($4,834,000 net income / $39,572,000 total assets). For every $1.00 of assets Apple has, a profit of $.12215 is returned. This is the equivalent of a 12 percent return on investment and is very favorable from an investors or managers perspective (Marshall, McManus, & Viele, 2008).
- Balance Sheet and Stockholders Equity (SEC 10-K, 2008)
Lastly, we can look at how much Apple Inc. invested in the company. Apple has no long term investments which is favorable as they are not paying accrued interest on these investments and $12,615,000 in short term investments. Another favorable ratio is the Return on Equity (ROE), which reveals how much profit a company has generated from the money shareholders have invested (Investopedia, 2009). In 2008, Apple had a ROE ratio of 23 percent ($4,834,000 net income / $21,030,000 shareholder’s equity). This is a very favorable profit returned on monies invested by stockholders. In comparison that same year, competitor Microsoft had a ROE of 49 percent ($17,681,000 net income / 36,286,000 shareholder equity). Again, although Microsoft has a higher ROE, Apple remains a sound investment decision based on other factors in competitor data such as market share and gross margin. It is however important for investors and management to compare the profitability of a company of interest to other companies in the same industry for sound decision making purposes (Investopedia, 2009).
- Cash flows (SEC 10-K, 2008).
The cash flow statement shows how much actual cash a company has generated, whereas the income statement shows accrual accounting of revenues and expenses. It is important for investors and managers to pay attention to the cash flow statement because it shows the ability of a company to actually pay for its operations and growth. The ability to produce cash shows how well a company will fare if the business gets into financial trouble (McClure, 2009). Cash flows from financing activities have significantly increased over the past few years while overall change in cash and cash equivalents decreased by $437,000 in 2008. The balance of the two numbers shows that although the change in cash flow has decreased, the company has increased its financing activities and is improving revenue from that aspect. As an investor, this would be promising and should not cause alarm because of other totals on the cash flow statement such as the cash flow from operating activities increasing significantly over the past few years. The cash flow statement proves that Apple Inc. is more than capable of paying down debt should the future present challenges. The statement also shows that Apple is moving its cash flow from operating activities to investment activities for further cash flow in the future.
Based on the analysis of Apple Inc.’s financial statements, and SEC 10-K I would say that the company has a firm handle on the market and is ahead of its competitors in forward thinking about future operations and investments. The financial analysis shows a strong financial standing as well as a definite ability to handle adverse financial situations should they occur. Management would be smart in looking to Apple to stay ahead of competition in the technological market as well as to offer Apple’s products and sales force in their retail facilities. Investors can be fairly certain that Apple is a sound investment option as a company with a plan for maintaining its stronghold in the current market as well as in possible future markets. Apple is expanding its operations and product line at a safe rate while also anticipating changes for current products as they become obsolete or do not meet today’s consumer requirements in technology. Finally, from an accounting perspective, the numbers on the financial statements show sound accounting practices over time and the statements and company objectives on the SEC form 10-K seem to line up with the company’s overall financial reporting.
Caulfield, B. (2009). Apple’s Interest in Gaming isn’t Casual. Forbes.com. Retrieved April 20, 2009 from http://www.forbes.com/2009/05/01/apple-gaming-iphone-technology-enteprise-tech-apple.html?partner=yahootix
Direct Competitors Comparison. (2009). Direct Competitors data from Hoovers Inc. Retrieved from http://finance.yahoo.com/q/co?s=AAPL
Elmer-Dewitt, P. (2009). Would you pay $849 for a new MacBook? Fortune. Retrieved April 20, 2009, from http://apple20.blogs.fortune.cnn.com/2009/05/03/would-you-pay-849-for-a-new-macbook/?source=yahoo_quote
Investopedia. (2009). Return on Equity. Forbes Digital. Retrieved April 24, 2009 from http://www.investopedia.com/terms/r/returnonequity.asp
Kennon, J. (2001). Calculating Gross Profit Margin. About.com. Retrieved April 28, 2009 from http://beginnersinvest.about.com/cs/investinglessons/l/blgrossmargin.htm
Marshall, D. H., McManus, W. W., & Viele D. F. (2008). Accounting: What the Numbers Mean, 8e. New York: McGraw-Hill/Irwin.
McClure, B. (2009). Fundamental Analysis: The Cash Flows Statement. Investopedia. Retrieved April 24, 2009 from http://www.investopedia.com/university/fundamentalanalysis/fundanalysis8.asp
Security and Exchange Commission. (2008). Annual Report for Apple Inc (SEC Form 10-K). Washington, DC. Retrieved April 24, 2009 from http://yahoo.brand.edgar-online.com/DisplayFiling.aspx?dcn=0001193125-08-224958