Apple Inc. Annual Report 2010

Think ahead.

Apple Inc. Annual Report 2010

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Menu.

Letter

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A Greener Apple

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Business Strategy

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Statements

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Business Conduct

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The Future

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Knowledge is power.

Letter.

Today is the first time we have openly discussed our plans to become a greener Apple. It will not be the last. We will provide updates of our efforts and accomplishments at least annually, most likely around this time of the year. And we plan to bring other environmental issues to the table as well, such as the energy efficiency of the products in our industry. We are also beginning to explore the overall carbon “footprint� of our products, and have some interesting data and issues to share later this year.

I hope you are as delighted as I was when I first learned how far along Apple actually is in removing toxic chemicals from its products and recycling its older products. We apologize for leaving you in the dark for this long. Apple is already a leader in innovation and engineering, and we are applying these same talents to become an environmental leader. Based on all our tangible actions and results over time, hopefully our customers, employees, shareholders and professional colleagues will all feel proud of our ongoing efforts to become a greener Apple.

Steve Jobs

CEO & Co-Founder, Apple Inc.

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“....you cannot connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will all somehow connect in your future. You have to trust in something -your gut, destiny, life, karma, whatever. This approach has never let me down in the least, and has made all the difference in my life...�

Steve Jobs

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A Greener Apple.

The story behind Apple’s environmental footprint Apple reports environmental impact comprehensively. We do this by focusing on our products: what happens when we design them, what happens when we make them, and what happens when you take them home and use them.

A history of progress.

For more than 20 years, Apple has been working on ways to minimize the impact our company and our products have on the environment. We developed and formulated our first environmental policy in 1990, and every year since then, we’ve continued to make our products more energy efficient, eliminated many toxic substances, and embraced renewable energy in our facilities. In 2009, we became the first company in our industry to report comprehensive calculations of our total carbon footprint — including environmental reports for every product — giving the public an opportunity to judge our efforts and track our progress in detail.

Our environmental focus.

We know that the most important thing we can do to reduce our impact on the environment is to improve our products. That’s why we design them to use less material, ship with smaller packaging, be free of many toxic substances, and be as energy efficient and recyclable as possible. With every new product, we continue our progress toward minimizing our environmental impact.

About 97 percent of Apple’s carbon footprint is directly related to our products — from manufacturing to customer use to recycling. The remaining 3 percent is related to our facilities.

So while other companies talk about making their offices more energy efficient, Apple is focused on reducing the impact our products have on the environment.

Total Carbon Footprint The vast majority of our own carbon emissions comes from the manufacturing, transportation, use, and recycling of our products. The rest — 3 percent — comes from our facilities.

3% Facilities

How we calculate our carbon footprint.

To accurately measure a company’s environmental footprint, it’s important to look at the impact that company’s products have on the planet. For the past two years, Apple has used a comprehensive life cycle analysis to determine where our greenhouse gas emissions come from.

97% Product Life Cycle

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CO2 Emissions Savings

Commute Program Total

The use of our products generates 46 percent of Apple’s complete total of greenhouse gas emissions.

Energy Efficiency.

The majority of the greenhouse gas emissions (this of course does not include our gassy disposition about being hip Mac users versus the square headed PCers), Apple accounts for are a result of when our users plug in our products and start using them. That’s why we design all our products to be as energy efficient as possible.

Because we design both the hardware and the operating system, we’re able to make sure they work together to conserve power.

Energy use.

Apple reduces energy use in our facilities in a number of ways. Currently, our full facilities in Austin, Texas, Sacramento, California, and Cork, Ireland, are 100 percent powered by renewable energy — eliminating 19,200 metric tons of CO2e emissions.

In addition, Apple has now been installing state-of-the-art digital controls, highefficiency mechanical equipment, as well as monitoring technology for years, and we continue to investigate even better ways to run our facilities more efficiently.

Of course, we use energy-efficient Apple computers in all our facilities.

10,292,000 10,292,000 kilograms kilograms

Renewable Energy

19,200,000

19,200, 000 kilograms kilograms

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Recycling One percent of Apple’s total greenhouse gas emissions are related to recycling.

Product recyclability.

Apple’s approach to recycling begins in the design stage, when we create compact, efficient products that require less material to produce. The materials we do use (including arsenic-free glass, high-grade aluminum, and strong polycarbonate) are highly valuable to recyclers, who can reclaim them for use in new products.

Longer-lasting products.

Apple designs products that last. The built-in battery in our MacBook lineup is a perfect example. Other notebook batteries can be charged only 200 to 300 times.

The MacBook Pro battery can be charged up to 1000 times.6 And because this battery lasts up to five years, MacBook Pro uses just one battery in about the same time a typical notebook uses three. That saves you money, produces less waste, and increases the lifespan of your MacBook Pro. Apple recycling programs.

Once an Apple product reaches the end of its useful life, we will help you recycle it responsibly. Apple has instituted recycling programs in cities and college campuses in 95 percent of the countries where our products are sold, diverting more than 130.2 million pounds of equipment from landfills since 1994. Our original goal for 2010 was to achieve a worldwide recycling rate of 50 percent. (To calculate this rate, we use a measurement proposed by Dell that assumes a seven-year product lifetime.

The weight of the materials we recycle each year is compared to the total weight of the products Apple sold seven years earlier.) We exceeded that goal in 2009, one year earlier than projected, when we achieved a rate of 66.4 percent. This far surpasses the last reported numbers from Dell and HP, which were each lower than 20 percent.

In 2010, we expect to reach 70 percent, and we will strive to meet or exceed 70 percent in years to come.

Weight Recycled per Year

2006

9.5%

2007

2008

2009

2010-2020

18.4% 41.9% 66.4% 100% (GOAL)

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Business Strategy.

Bringing the best user experience to our customers.

The Company is committed to bringing the best user experience to its customers through its innovative hardware, software, peripherals, services, and Internet offerings.

The Company’s business strategy leverages its unique ability to design and develop its own operating systems, hardware, application software, and services to provide its customers new products and with superior ease-of-use, seamless integration, and innovative industrial design.

Apple believes continual investment in research and development is critical to the development and enhancement of innovative products and technologies. In conjunction with its strategy, the Company continues to build and host a robust platform for the discovery and delivery of third-party digital content and applications through the iTunes Store. The iTunes Store includes the App Store and iBookstore, which allow customers to discover and download third-party applications and books through either a Mac or Windows-based computer or wirelessly through an iPhone, iPad or iPod touch. The Company also works to support a community for the development of third-party software and hardware products and digital content.

Additionally, the Company’s strategy includes expanding its distribution to effectively reach more customers and provide them with a high-quality sales and postsales support experience. The Company is therefore uniquely positioned to offer superior and well-integrated digital lifestyle and productivity solutions.

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Statements.

Notes on Selected Financial Data

Selected Financial Data

Fiscal Year 2010 versus 2009

The information set forth below for the five years ended September 25, 2010, is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7-B, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included in Item 8 of this Form 10-K to fully understand factors that may affect the comparability of the information presented below (in millions, except share amounts which appear in thousands and per share amounts.)

Net sales during 2010 increased $22.3 billion or 52% compared to 2009. Several factors contributed positively to these increases, including the following: Net sales of iPhone and related products and services were $25.2 billion in 2010 representing an increase of $12.1 billion or 93% compared to 2009. iPhone unit sales totaled 40 million in 2010, which represents an increase of 19.3 million or 93% compared to 2009. iPhone year-overyear growth was attributable primarily to continued growth from existing carriers, expanded distribution with new international carriers and resellers, and strong demand for the iPhone 4, which was released in the U.S. in June 2010.

Net sales of iPad and related products and services were $5 billion and unit sales of iPad were 7.5 million during 2010. iPad was released in the U.S. in April 2010 and in other countries over the remainder of 2010. As of September 25, 2010, the Company distributed iPad in 26 countries.

Net sales of iPad and related products and services accounted for 8% of the Company’s total net sales for 2010, reflecting the strong demand for iPad during the five months following release.

Mac net sales increased by $3.6 billion or 26% in 2010 compared to 2009, and Mac unit sales increased by 3.3 million or 31% in 2010 compared to 2009. Net sales of the Company’s Macs accounted for 27% of the Company’s total net sales in 2010 compared to 32% in 2009. During 2010, net sales and unit sales of the Company’s Mac portable systems increased by 18% and 25%, respectively, primarily attributable to strong demand for MacBook Pro, updated in April 2010. Net sales and unit sales of the Company’s Mac desktop systems increased by 43% and 45%, respectively, as a result of higher sales of iMac, which was updated in July 2010.

Net sales $ 65,225 $ 42,905 $ 37,491 $ 24,578 $ 19,315 Net income $ 14,013 $ 8,235 $ 6,119 $ 3,495 $ 1,989 Earnings per common share: Basic $ 15.41 $ 9.22 $ 6.94 $ 4.04 $ 2.36 Diluted $ 15.15 $ 9.08 $ 6.78 $ 3.93 $ 2.27 Cash dividends per common share $0 $0 $0 $0 $0 Shares used in earnings per share: Basic 909,461 893,016 881,592 864,595 44,058 Diluted 924,712 907,005 902,139 889,292 77,526 Total cash, cash equivalents & securities Total assets Total long-term obligations (a) Total liabilities Total shareholders’ equity ____________ (a) The Concurrent deferred revenue.

$ 51,011 $ 75,183 $ 5,531 $ 27,392 $ 47,791

$ 33,992 $ 47,501 $ 3,502 $ 15,861 $ 31,640

$ 24,490 $ 36,171 $ 1,745 $ 13,874 $ 22,297

$ 15,386 $ 24,878 $ 687 $ 10,347 $ 14,531

$ 10,110 $ 17,205 $ 395 $ 7,221 $ 9,984

Net sales of other music related products and services increased $912 million or 23% during 2010 compared to 2009. This increase was due primarily to growth of the iTunes Store which generated total net sales of $4.1 billion for 2010. The results of the iTunes Store reflect growth of iTunes App Store, continued growth in the installed base of iPhone, iPad, and iPod customers, and the expansion of third-party audio and video content available for sale via the iTunes Store.

Net sales of other music related products and services accounted for 8% of the Company’s total net sales for 2010.

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Company Stock Performance

Market for Registrant’s Common Equity

The following graph shows a five-year comparison of cumulative total shareholder return, calculated on a dividend reinvested basis, for the Company, the S&P 500 Composite Duo Index, the S&P Computer Hardware Index, and the Dow Jones U.S. Technology Index. The Company has added the Dow Jones U.S. Technology Index to the graph to capture the stock performance of companies whose products and services more closely relate to those of the Company. The Dow Jones U.S. Technology Index incorporates software and computer services companies, as well as technology hardware and equipment companies. The graph assumes $100 was invested in each of the Company’s common stock, the S&P 500 Composite Index, the S&P Computer Hardware Index, and the Dow Jones U.S. Technology Index on September 30, 2005. Data points onthe graph are annual. Note that historic stock price performance is not necessarily indicative of future stock price performance.

The Company’s common stock is traded on the over-the-counter market and is quoted on the NASDAQ Global Select Market under the symbol AAPL.

Sept. 30,

Sept. 30,

Sept. 30,

Sept. 30,

Sept. 30,

Sept. 30,

2005

2006

2007

2008

2009

2010

Apple Inc.

$ 100

$ 144

$ 286

$ 212

$ 346

$ 529

S&P 500

$ 100

$ 111

$ 129

$ 101

$ 94

$ 103

S&P Comp Hardware

$ 100

$ 107

$ 158

$ 132

$ 157

$ 186

Dow Jones US Technology

$ 100

$ 106

$ 131

$ 100

$ 111

$ 124

Price Range of Common Stock The price range per share of common stock presented below represents the highest and lowest sales prices for the Company’s common stock on the NASDAQ Global Select Market during each quarter of the two most recent years.

4th Quarter

Fiscal 2010 price range per common share

Fiscal 2009 price range per common share

$ 293 - $ 235

$ 188 - $ 134

3rd Quarter $ 279 - $ 199

$ 146 - $ 102

2nd Quarter

1st Quarter

$ 231 - $ 190

$ 209 - $ 180

$ 109 - $ 78

$ 119 - $ 79

Holders As of October 15, 2010, there were 29,405 shareholders of record.

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Consolidated Statements of Income

Net Sales

Gross margin for the 3 years ended Sept 25, 2010 (in millions, except gross margin percentages.)

Fiscal years 2010, 2009 and 2008 each spanned 52 weeks. An additional week is included in the first fiscal quarter approximately every six years to realign fiscal quarters with calendar quarters. The following table summarizes net sales and Mac unit sales by operating segment and net sales and unit sales by product during the three years ended September 25, 2010 (in millions, except sales in thousands per unit amounts.)

2010 2009 2008 Net sales $ 65,225 $ 42,905 $ 37,491 Cost of sales 39,541 25,683 24,294 Gross margin $ 25,684 $ 17,222 $ 13,197 Gross margin percentage 39.4% 40.1% 35.2%

Operating Expenses Operating expenses for the 3 years ended Sept 25, 2010 (in millions, except for percentages): Research and development $ 1,782 $ 1,333 $ 1,109 Percentage of net sales 2.7% 3.1% 3.0% Selling, general and administrative $ 5,517 $ 4,149 $ 3,761 Percentage of net sales 8.5% 9.7% 10.0%

2010 Change 2009 Change 2008 Mac Unit Sales by Operating Segment: Retail Mac unit sales 2,846 35% 2,115 4% 2,034

Total Mac unit sales 13,662 31% 10,396 7% 9,715 Net Sales by Product: Desktops (a) $ 6,201 Portables (b) 11,278

Total Mac net sales 17,479 iPod 8,274 Other music products and services (c) 4,948 iPhone and products and services (d) 25,179 iPad and related products and services (e) 4,958 Software, service and other sales (g) 2,573

Total net sales $ 65,225 Unit Sales by Product: Desktops (a) 4,627 Portables (b) 9,035

Total Mac unit sales 13,662 Net sales per Mac unit sold (h) $ 1,279 iPod unit sales 50,312 Net sales per iPod unit sold (h) $ 164 iPhone units sold 39,989 iPad units sold 7,458

43% $ 4,324 18% 9,535 26% 13,859 2% 8,091 23% 4,036 93% 13,033 NM 0 7% 2,411 52% $ 42,905

(23)% $ 5,622 9% 8,732 (3)% 14,354 (12)% 9,153 21% 3,340 93% 6,742 NM 0 9% 2,208 14% $ 37,491

45% 3,182 (14)% 3,712 25% 7,214 20% 6,003 31% 10,396 7% 9,715 (4)% $ 1,333 (7)% 54,132 10% $ 149 93% 20,731 NM 0

(10)% $ 1,478 (1)% 54,828 (11)% $ 167 78% 11,627 NM 0

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Business Conduct.

The way we do business worldwide Apple conducts business ethically, honestly, and in full compliance with all laws and regulations. This applies to every business decision in every area of the company worldwide.

July 2010 Apple’s Principles of Business Conduct

Apple’s success is based on creating innovative, high-quality products and services and on demonstrating integrity in every business interaction. Apple’s principles of business conduct define the way we do business worldwide. These principles are: • Honesty. Demonstrate honesty and high ethical standards in all business dealings.

• Respect. Treat customers, suppliers, employees, and others with respect and courtesy.

• Confidentiality. Protect the confidentiality of Apple’s information and the information of our customers, suppliers, and employees.

• Compliance. Ensure business decisions comply with applicable laws and regulations.

Your Responsibilities

Apple’s Business Conduct Policy and principles apply to employees, independent contractors, consultants, and others who do business with Apple. All such individuals are expected to comply with Apple’s Business Conduct Policy and principles and with all applicable legal requirements.

Apple retains the right to discipline (up to and including termination of employment) or end working relationships with those who do not comply. If you have knowledge of a possible violation of Apple’s Business Conduct Policy or principles, other Apple policies, or legal or regulatory requirements, you are required to notify either your manager.

When facing a tough decision: • Use good judgment. Apply Apple’s principles of business conduct, review our policies, review legal requirements, and then decide what to do.

• Need some help? When in doubt about how to proceed, discuss pending decisions with your manager, your Human Resources representative, or the Legal Department. If you need more support, contact the Business Conduct Helpline.

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The Future.

Here’s what you’ll see in 2011...

Another stream of product updates. And actually, what will likely be a much stronger stream than in 2009. We already know about the Verizon iPhone (which Apple COO Tim Cook was on hand to unveil —which will launch mid-year. But we’re very likely to see the iPad 3 in the coming months as well. The iPad 1 was a blockbuster product for the company. If anything, Apple is known for relatively weak initial product offerings, followed by much stronger secondary iterations.

So what happens when they start so strong with a first crack?

We’re about to find out.

Likewise, the iPhone 5 would seem to be a lock for the June timeframe because, well, that’s what happens every year. The early rumors of a dualcore processor and new design sound promising.

The same is undoubtedly true for Mac desktop and notebook updates. While perhaps not as revolutionary as the aforementioned products, you know they’re coming and will help Apple’s bottom line in a major way. Same with the iPod later in the year as well

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The Board.

Board of Directors Steve Jobs Chairman of the Board Apple Bill Campbell Chairman and former CEO Intuit Corp.

Tim Cook CEO Apple Millard Drexler Chairman and CEO J. Crew Albert Gore Jr. Former Vice President of the United States Andrea Jung Chairman and CEO Avon Products Arthur D. Levinson Chairman Genentech Ronald D. Sugar, Ph. D. Former Chairman and CEO Northrop Grumman

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Work, play, home...for generations to come.

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iReport 13MB Apple 1 Infinite Loop Cupertino, CA 95014 408.996.1010