APPLE INC PROJECT

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1 Apple Inc. Financial Overview Your Name Saint Mary's University of Minnesota Number and Name of Course Instructor's Name Date of Submission (e.g., October 12, 2020)

2 Apple Financial Overview Project Brief Background Information Apple Inc. represents an American corporation that was founded in 1977 and specializes in developing and software, smartphones, computer electronics, and other portable devices globally (Schwab, 2021). The company also provides other technology-related services. Apple Inc. was founded by Steve Jobs, Ronald Wayne, and Steve Wozniak in 1976 but was later incorporated in 1977. The company has a history of over 44 years. During this time the company has grown as well as faced challenges in financial performance and other crucial areas. Apple’s widespread success has been attributed to the company’s ability to continually innovate while at the same time coming up with products and services that focus on solving modern-day consumer needs. For instance, the company started experiencing widespread success in 2007 after it had launched the iPhone, iPad, and the iPod touch. The company’s ability to continually innovate has led to its recognition as the symbol of innovation and elegance in terms of the designs of its products. Apple has traded on the NASDAQ under the ticker AAPL. Furthermore, Apple has been part of the NASDAQ-100 as well as the S&P 500. Apple Inc. Mission and Vision Statement Mission Statement “To bring the best personal computing products and support to students, designers, educators, engineers, businesspersons, and consumers in over 140 countries around the world.” Vision Statement “To make the best products on earth, and to leave the world better than we found it” Apple’s Inc Top Management Team Tim Cook (Chief Executive Officer)

3 Tim Cook became the CEO in August 2011 and also services on the company’s board of directors. Before becoming the CEO, Tim Cook was Apple’s Chief Operating Officer and was in charge of all the global sales as well as operations (Apple, 2020). He also facilitated end-to-end management of the company’s supply chain, service, support, and sales activities in different markets globally. Before joining the company, Tim Cook was the vice president of Corporate Materials for Compaq. In this position, he was responsible for managing as well as procuring Compaq’s product inventory. Tim was also the chief operating officer in charge of the Reseller Division at Intelligent Electronics. He had occupied this role before joining Compaq (Apple, 2020). Tim Cook also worked for IBM for close to 12 years as the director of North American Fulfillment. Academically, Tim Crook has an MBA from Duke University and a Bachelor of Science degree in Industrial Engineering from Auburn University (Apple, 2020). Katherine Adams (Senior Vice President and General Counsel) Katherine Adams is the company’s senior vice president of Legal and Global Security (Apple Inc., 2020). She serves on Apple’s executive team and oversees all legal issues including securities and litigation compliance, privacy, security, intellectual property, and corporate governance. Katherine worked in Honeywell for 14 years before joining Apple. At Honeywell, she was in charge of the company’s global legal strategy in at least 100 countries. She was also a partner at Sidney Austin LLP in New York as well as a law clerk for Sandra Day O’Connor (Supreme Court Justice). Katherine has a bachelor’s degree in Comparative Literature from Brown University as well as a law degree from the University of Chicago Law School (Apple Inc., 2020). Eddy Cue (Senior Vice President Internet, Software, and Services)

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4 Eddy reports to Tim Crook (CEO). He oversees the company’s industry-leading content stores that consist of the iTunes Store and Apple Music, Maps, Apple Pay, Search Ads, Apple’s creativity and productivity apps, and the innovative iCloud services (Apple, 2020). Eddy Cue also leads the newly developed group that is responsible for developing different aspects of the company’s global video programming. Eddy has an excellent team the builds and strengthens online services to meet and even exceed customers' expectations. Eddy joined Apple in 1989 and was instrumental in developing the company’s online store, the iTunes store, and the App Store (Apple, 2020). He has also been a key player in the development of Apple’s award-winning iLife collection of applications. Eddy Cue has a bachelor’s degree in Computer Science and Economics from Duke University. Craig Federighi (Senior Vice President, Software Engineering) Craig Federighi reports to Tim Crook (CEO) and he oversees the development of macOS as well as iOS (Apple, 2020). He leads a team that is in charge of delivering software for Apple’s innovative products including assorted applications, user interfaces, and frameworks. Craig returned to Apple in 2009 after working at NeXT (Apple, 2020). He also worked at Ariba (an internet e-commerce pioneer). Federighi holds a Master of Science degree in computer science as well as a Bachelor of Science in Electrical Engineering and Computer Science from the University of California, Berkeley. Apple’s Environment Environment, Social and Governance (ESG) Risk Ratings Apple believes that any business can and should represent a force for good. In this regard, the company uses innovation, focus, and hard work and the primary tools for serving others. The

5 company leads with its values in technology to create powerful tools while at the same time empower others. Some of the company’s values consist of; Accessibility: the company focuses on building devices and services that come with features that solve customer needs while at the same time improve their experiences. Education: the company aims at giving products, support, an opportunity to different schools that are in need. Environment: Apple designs most of its innovative products from recycled materials and aims at fully embracing clean energy with no carbon footprint. Inclusion and Diversity: Apple upholds diversity as a major strength and uses inclusion as a strategy for creating products that serve everyone. Privacy: Apple upholds privacy and regard’s it as a fundamental human right. The company designs products that are meant to protect user privacy as well as give them control over their information. Supplier Responsibility: Apple considers not only consumers of its products and services but also those who help to build them. In this regard, suppliers are held to the highest standards to protect the company’s supply chain. Apple’s adherence to the highlighted values translates to its commitment to advancing projects across Environment, Social, and Governance (ESG). Apple has a total ESG Risk Score of 16. The company’s environment risk score is 0.1, the social risk score is 7.6, and the governance risk score is 8.8. Furthermore, Apple’s controversy level is 3. The highlighted ESG Risk score depicts Apple as a company that leads in its industry in terms of managing the environment, social and governance risks, and related opportunities. Notably, the highlighted ESG risk score has been mapped across metrics outlined in Sustainable Accounting Standards

6 Board (SASB), the Global Reporting Initiative (GRI), and the Task Force on Climate-Related Financial Disclosures (TCFD). Apple’s Competitive Position Apple Inc.’s competitive advantage is derived from the company’s ability to package hardware, services, software, and third-party applications into intuitive, sleek, and appealing devices. This expertise creates the opportunity for capturing premium on Apple’s hardware, unlike most of its peers. However, the admirable reputation, loyal customer base, and the ability to come up with unique products do not exempt Apple Inc. from stiff competition. As such, Apple Inc. is not able to consistently satiate customer’s appetite for additional features. With the short product cycles of AAPL’s products as well as the presence of other well-established firms that target the company’s dominance, Apple is placed in a position that is characterized by a moderate economic moat. Switching costs, as well as intangible assets, tend to support the company’s narrow moat. Apple enjoys stellar returns on its devices through offering an exceptional user experience with the iOS ecosystem. Contrary to the company’s competitors who rely on open- source operating systems such as Android, Apple a popular and premium operating system (iOS). The iPhone remains to be a revolutionary product that developed the smartphone ecosystem while at the same time transitioned computing activities away from the PC. The robust app store supported iPhone’s adoption as well as its growing user base. Regardless of the increasing competition especially when it comes to the greater smartphone penetration in the emerging global markets as well as the repeat sales to current customers, Apple has the opportunity of reaping rewards from the iPhone business. Apple is still innovating most of its products with the introduction of other streams of revenue such as Apple Watch, Apple TV, Apple Pay, and Air

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7 Pods. Each of these products and services has the potential of driving incremental revenue while at the same time help in retaining iPhone users. The decision of the company to adopt and maintain a premium pricing strategy may help in fending off gross margin compression. However, this strategy could also limit unit sales growth since most of the company’s devices may be unaffordable to most of the customers. Apple has a narrow economic moat rating that stems from the combination of intangible assets as well as switching costs. The primary moat source is customer switching costs as the company bolsters users with a cohort of auxiliary products such as the Apple Watch, AirPods, Apple TV, and iPad. Furthermore, Schwab (2021) equity ratings report, Apple Inc. is planning on increasing smartphone production by almost 30%. This move will help increase revenue from the same of the highlighted product. Analysis of Key Financial Metrics and Measures Income Statement

8 Figure 1: Apple Inc. income statement (Yahoo Finance, 2020). Total Revenue: for the past three years, the total revenue of Apple Inc. has experienced steady growth. Ideally, the company’s total annual revenue has quadrupled over the last ten years. This growth shows a positive trend based on the fact that the company is continually improving and coming up with newer products and services. An increase in total revenue translates to an increase in gross profit and thus increased cost per share. Operating Income: Apple’s operating income increased slightly from 2018 to 2020. Gross Profit: the increase in total revenue translated to an increase in the company’s gross profit. This acts as a positive trend in terms of the future profitability of the company and

9 related investments. Furthermore, the yet to launched iPhone 12 presents a new stream of revenue which will lead to additional revenue and increased gross profit. EBITDA: The Earnings Before Interest, Taxes, Depreciation, and Amortization increased tremendously during the last two years. This growth supports the company’s prosperity through the years. Income Taxes: Apple’s income tax decreased in 2019 but later increased in 2020. Balance Sheet Figure 2: Apple Inc. balance sheet (Yahoo Finance, 2020). Total Assets: Apple’s total assets have been decreasing from 2018 to 2019 and slightly from 2019 to 2020. Invested Capital: the amount of invested capital has been decreasing since 2018 with 2020 recoding the lowest amount in the past three years. Total Debt: Apple’s total debt has decreased in 2018 and 2019. However, it later increased in 2020.

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10 Total Capitalization: the company’s total capitalization also decreased from 2018 with 2020 having the lowest amount when compared to the past two years. Shareholder’s equity: a decrease in the highlighted factors led to a decrease in Apple Inc’s shareholder’s equity from 2018 to 2019 and from 2019 to 2020. Cash Flow Figure 3: Apple Inc. cash flow (Yahoo Finance, 2020). Operating Cash Flow: Apple’s operating cash flow decreased from 2018 to 2019 but later increased from 2019 to 2020. Investing Cash Flow: Apple’s investing cash flow increased from 2018 to 2019 but decreased significantly from 2019 to the year 2020. Financing Cash Flow: the financing cash flow decreased from 2018 to 2019 but later increased from 2019 to 2020 in such a way that it exceeded the 2018 level. Apples Financial Strength and Dividend

11 Apple's rating when it comes to financial strength is high. In the recent cut in the corporate tax rate as well as the relaxed restrictions on repatriating cut overseas cash, the company managed to improve its stakeholder return program with significant buybacks. At the end of 1Q21, the company’s cash was $195.6 billion. This represents a rise from what was reported in the previous financial years. For instance, Apple’s cash at the end of FY20 was 191.8 billion. On the other hand, the company’s debt at the end of 1Q21 was $112.0 billion and $112.4 billion at the end of FY20. It is important that in the past years, the company has levered up in anticipation of a more aggressive capital allocation. Apple’s cash flow from operations was $80.7 billion in FY20. This amount represented an increase when compared to the previous year. As such, the previous year’s cash flow was $69.4. Apple added $50 billion to the existing buyback authorization with $40 billion remaining. Comparison of Apple’s Financial Metrics with Three Peers/ Competitors Figure 4: Table showing Peer and Industry Analysis of AAPL (Kelleher, 2021, p.3). Apple’s innovation outlook appears to be taking a downward trend based on the fact that the company’s current score is 92 out of 99 thus outperforming the sector average. AAPL’s jobs growth over the year 2020 has increased whereas insider’s sentiment is negative. Apple Inc. is on low in terms of sustainability. From the table above, the company is leading in terms of the market cap. Furthermore, Apple Inc. stacks up when compared to its peers on two main features.

12 These features comprise long-term growth and value. AAPL’s competitors such as IBM, HPQ, and HPE are more value-oriented and less growth-oriented when compared to AAPL. The table above illustrates AAPL’s broadens the highlighted comparison while at the same time explains how Apple Inc. might modify or fit a diversified portfolio (Kelleher, 2021, p.3). For a long time, AAPL has embraced innovation and used it to improve its products and services. This approach has not only inspired continuous growth but also made the company profitable. Increasing profits have translated to increased improved valuation as well as the cost per share. Despite the competition as well as increasing company debt, Apple Inc is an attractive investment for stakeholders.

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13 References Apple Inc. (2020). Katherine Adams . Apple. https://www.apple.com/leadership/katherine-adams/ Apple. (2020). Craig Federighi . https://www.apple.com/leadership/craig-federighi/ Apple. (2020). Eddy cue . https://www.apple.com/leadership/eddy-cue/ Apple. (2020). Tim Cook . https://www.apple.com/leadership/tim-cook/ Kelleher, J. (2021). Analyst Notes . Argus Research Company. Schwab, C. (2021). Apple Inc . Schwab Equity Ratings Report. Yahoo Finance. (2020). Apple Inc. (AAPL) . Yahoo Finance - Stock Market Live, Quotes, Business & Finance News. https://finance.yahoo.com/quote/AAPL/cash-flow?p=AAPL Yahoo Finance. (2020). Apple Inc. (AAPL) . Yahoo Finance - Stock Market Live, Quotes, Business & Finance News. https://finance.yahoo.com/quote/AAPL/balance-sheet? p=AAPL Yahoo Finance. (2020). Apple Inc. (AAPL) . Yahoo Finance - Stock Market Live, Quotes, Business & Finance News. https://finance.yahoo.com/quote/AAPL/financials?p=AAPL

APPLE INC PROJECT

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