Apple Inc.

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Financial Analysis of Apple, Inc.

Jonathan Richey Craig Maddron, Ph.D. Managerial Accounting ATSU-SHM

13 February 2008

Apple Inc. FINANCIAL ANALYSIS OF APPLE, INC.

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BACKGROUND.3 BUSINESS STRATEGY....3 MARKETS AND DISTRIBUTION..4 COMPETITION.....4 FINANCIAL ANALYSIS...5 2007 VS 2006...5 2006 VS 2005...5 Unique accounting practices..6 COMPANY GROSS MARGIN.6 RATIO ANALYSIS.6 Current Ratio....6 Quick Ratio7 Accounts Receivable Turnover.7 Dividend Payout....7 Return on Equity/Return on Assets.7 Debt/Equity Ratio.7 CASH FLOWS8 RECOMMENDATIONS8 REFERENCES...9 APPENDIX.10 Income Statement..10 Balance Sheet.11 Accounting Ratios..12 Cash Flow...14 Industry Comparisons..15

Apple Inc. FINANCIAL ANALYSIS OF APPLE, INC.

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Background. Apple Inc. designs, manufactures, and markets personal computers, portable digital music players, and mobile communication devices. It sells a variety of related software, services, peripherals, and networking solutions. The Company sells its products worldwide through its online stores, retail stores, direct sales force, and third-party wholesalers, and resellers. In addition, the Company sells a variety of third-party Macintosh ("Mac"), iPod and iPhone compatible products, including application software, printers, storage devices, speakers, headphones, and various other accessories and peripherals through its online and retail stores. The Company sells to education, consumer, creative professional, business, and government customers. The Company's fiscal year is the 52 or 53-week period that ends on the last Saturday of September. The Cupertino, California based company's U.S. Mac shipments grew 37.2 percent year-over-year more than twice as fast as any other manufacturer ranked in Gartner's top 5 PC vendors for the three-month period ending September 2007 - helping it snag a spot as the No. 3 U.S. PC vendor overall (Gartner, 2007). Apple's US-based Mac shipments during the quarter totaled 1,338,000, compared just 975,000 during the same time last year. Hewlett-Packard and Toshiba also posted somewhat healthy growth during the quarter of 16.5 percent and 16.3 percent to garner a 25.7 percent and 5.7 percent share of the U.S. market, respectively.

Business Strategy. The Company brings some of the best personal computing, portable digital music and mobile communication experience to students, educators, creative professionals, businesses, government agencies, and consumers 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 system, hardware, application software, and services to provide its customers new products and solutions with superior ease-of-use, seamless integration, and innovative industrial design. The Company believes continual investment in research and development is critical to the development and enhancement of innovative products and technologies. In addition to evolving its personal computers and related solutions, the Company continues to capitalize on the convergence of the personal computer, digital consumer electronics and mobile communications by creating and refining innovations, such as the iPod, iPhone, iTunes Store, and Apple TV. The Company's strategy also includes expanding its distribution network to effectively reach more of its targeted customers and provide them with a high-quality sales and post-sales support experience.

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Markets and Distribution. Apples customers are primarily in the education, creative professional, consumer, and business markets. The Company distributes its products through wholesalers, resellers, national and regional retailers and cataloguers. No individual customer accounted for more than 10% of net sales in 2007, 2006, or 2005. The Company also sells many of its products and resells certain third-party products in most of its major markets directly to consumers, education customers, and businesses through its own sales force and retail and online stores.

Competition. The Company is confronted by aggressive competition in all areas of its business. The markets for consumer electronics, personal computers, related software and peripheral products, digital music devices and related services, and mobile communication devices are highly competitive. These markets are characterized by rapid technological advances in both hardware and software that have substantially increased the capabilities and use of personal computers, other digital electronic devices, and mobile communication devices that have resulted in the frequent introduction of new products with competitive price, feature, and performance characteristics. Over the past several years, price competition in these markets has been particularly intense. The Company's competitors who sell personal computers based on other operating systems have aggressively cut prices and lowered their product margins to gain or maintain market share. The Company's financial condition and operating results can be adversely affected by these and other industry-wide downward pressures on gross margins. The principal competitive factors include price, product features, relative price/performance, product quality and reliability, design innovation, availability of software and peripherals, marketing and distribution capability, service and support, and corporate reputation. Further, as the personal computer industry and its customers place more reliance on the Internet, an increasing number of Internet devices that are smaller, simpler, and less expensive than traditional personal computers may compete for market share with the Company's products. Apples music products and services have faced significant competition from other companies promoting their own digital music and content products and services, including those offering free peer-to-peer music and video services. The Company believes it currently retains a competitive advantage by offering superior innovation and integration of the entire solution including the hardware (personal computer and iPod), software (iTunes), and distribution of content (iTunes Store and iTunes Wi-Fi Music Store). Some of these current and potential competitors have substantial resources and may be able to provide such products and services at little or no profit or even at a loss to compete with the Company's offerings.

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The Company is currently focused on market opportunities related to mobile communication devices including the iPhone. The mobile communications industry is highly competitive with several large, wellfunded, and experienced competitors. The Company faces competition from mobile communication device companies that may attempt to imitate some of the iPhone's functions and applications within their own smart phones. This industry is characterized by aggressive pricing practices, frequent product introductions, evolving design approaches and technologies, rapid adoption of technological and product advancements by competitors, and price sensitivity on the part of consumers. The Company's future financial condition and operating results are substantially dependent on the Company's ability to continue to develop improvements to the Mac platform and to the Company's hardware, software and services related to consumer electronic devices, including iPods, and mobile communication devices, including iPhone.

Financial Analysis. Vertical financial statements help us evaluate trends for the company (Appendix). This information provides immense detail in the financial status of Apple, Inc. over time. Combined with data regarding product sales, much can be derived to analyze Apples strength. 2007 vs 2006. Net sales during 2007 increased 24% or $4.7 billion from 2006. Several factors contributed to these increases including the following: Mac net sales increased $3 billion or 40% during 2007 compared to 2006, while Mac unit sales increased by 1.75 million units or 33%. The 33% Mac unit sales growth rate is significantly greater than the estimated growth rate of the overall personal computer industry during that timeframe. 2006 vs 2005. Net sales during 2006 increased 39% or $5.4 billion from 2005. This increase was due in part to the fact that 2006 spanned 53 weeks while 2005 spanned 52 weeks. Several other factors contributed to these increases including the following: Net sales of iPods increased $3.1 billion or 69% during 2006 compared to 2005. Unit sales of iPods totaled 39.4 million in 2006, which represents an increase of 75% from the 22.5 million iPod units sold in 2005. Strong iPod sales during 2006 reflected significant sales of both the hard-drive based iPod that supports video, first introduced in October of 2005 and the iPod nano, introduced in September 2005, as well as continued expansion of iPod distribution points (see apple 10-k in references). During 2006, the net sales per iPod unit sold decreased by 3% compared to 2005 primarily due to an overall decrease in average selling prices for all iPods as well as a shift in product mix to the iPod nano.

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Unique accounting practices. Early in 2007, Apple adopted a subscription accounting model for the iPhone. Sales will be amortized over a 24-month period. Instead of recording iPhone sales against earnings every quarter, sales will show up as monthly revenue. This is unusual, and Apple hasn't said why, but observers believe it's because new features will be added to the iPhone in coming months. Because of general accounting practices, Apple can't add significant new features unless it charges for them (Kahney, 2007). Apple accounts for their Apple TV in the same way. Whatever the reason, sales of more than 2 million iPhones this quarter won't all be put on the books this year -- the cash will be spread out over the next two years.

Company Gross Margin. Apples strength can be gross margin percentage of 34.0% in 2007 increased significantly from 29.0% in 2006 (Appendix). The primary drivers of this increase were more favorable costs on certain commodity components, including NAND flash memory and DRAM memory, higher overall revenue that provided for more leverage on fixed production costs and a higher percentage of revenue from the Company's direct sales channels. It is anticipated that Apples gross margin and the gross margins of the personal computer, consumer electronics, and mobile communication industries will be subject to pressure due to price competition. The Companys gross margin percentage will probably decline sequentially in the first quarter of 2008 primarily as a result of the full-quarter impact of product transitions and reduced pricing that were effected in the fourth quarter of 2007, lower sales of iLife and iWork in their second quarter of availability, and seasonally higher component costs. These factors are expected to be partially offset by higher sales of the Company's Mac OS X operating system due to the introduction of Mac OS X Version 10.5 Leopard ("Mac OS X Leopard") that became available in October 2007. Gross margins could also be affected by the Company's ability to effectively manage product quality and warranty costs and to stimulate demand for certain of its products.

Ratio Analysis. Financial statements are historical documents. They tell us what has happened during a particular period. It is essential to try and predict what will happen in the future. Financial ratios help assess the financial health and future prospects of a company (Appendix). Current ratio. This measures the short term debt paying ability of Apple, inc. At 2.7, this is lower than the personal computing industry average. This has been relatively stable which is a good sign. A declining ratio could be a sign of deteriorating financial condition. On the other hand it might be the result of eliminating

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obsolete inventories or other stagnant current assets. An improving ratio might be the result of stockpiling inventory or it might indicate an improving financial situation. Quick Ratio. This helps determine how well a company can meet its obligations without having to liquidate or depend too heavily on its inventory. Apples quick ratio is 2.2. Again this is lower than the industry standard but having $2.2 to back every $1 of liabilities is still strong. Accounts receivable turnover. This indicates how quickly credit sales are converted into cash. Apples average is 19 days. Values less than a month are positive. Collection periods ranging from 10 to 180 days are common depending upon the industry. Dividend payout. Apple used to pay dividends to the owners of its stock but it discontinued that policy in December 1995. Since, Apple is a fast growing company and the industry it competes in requires constant innovation and rolling out of new products, Iphone for example, if Apple started paying its shareholders dividends there would be a lot less money to research and develop new products which in turn would harm the company's future prospects. Apple can use that dividend money rather to invest in new products which in turn (hopefully) become a success like Ipod and raise Apple stocks to new heights which would in turn help investors. Return on equity/Return on assets. These values help an investor measure how well assets have been employed by management (Garrison, 2006). When compared to the return on total assets, return on equity measures the extent to which financial leverage is working for or against common stockholders. Apples ROE and ROA are both similar to the industry standard. Debt to equity ratio. This measures the among of assets being provided by creditors for each dollar of assets being provided by the stockholders. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. The cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing. The debt/equity ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5. Apples debt/equity ratio average over 5 years is 0.01.

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Cash Flows. In 2007, Apple Inc. increased its cash reserves by 46.31%, or $3.0B. As a percent of revenues, this was among the biggest increases by any company in the Computers and Peripherals industry. By looking at the Cash Flow Statement (Appendix), analysts can easily see the sources and use of cash generated throughout the year. In 2007, management spent only 0.03% of its revenues in attempting to spur growth in its operating business lines. That was among the lowest in the industry and indicates that Apple either does not feel it is necessary to or is unable to invest as much as others in the group.

Recommendations. Apples stock has more than doubled in price in 2007. Great products, great management, and great financial performance, lend to good stock outcomes. Apple has beaten analyst estimates for 19 straight quarters so even with it priced at 30 to 40 times next years earnings, who's to say what those earnings will end up being? Success of the iPhone, iPod, and Mac don't appear to be slowing and should continue into 2008. As long as Apple keeps beating estimates and continuing to put money into research and development, they should continue to do well. As competition rises, Apple will have to be careful to maintain their pace of growth and pace of market share. Without a hiccup, this company will continue to move forward as an innovative, and strong company to invest in.

Apple Inc. REFERENCES

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Apple 10-k. Retrieved February, 10, 2008 from http://phx.corporate-ir.net/phoenix.zhtml?c=107357&p=IROL-secToc&TOC=aHR0cDovL2NjYm4uMT Brd2l6YXJkLmNvbS94bWwvY29udGVudHMueG1sP2lwYWdlPTUyODYwMzUmcmVwbz10ZW5r Garrison, R.H., Noreen, E.W., Brewer, P.C. (2006). Managerial Accounting, 11 Ed. McGraw-Hill: Boston, p. 802 Gartner (2007). Retrieved February 12, 2008 from http://www.gartner.com/it/products/research/ asset_129157_2395.jsp. Kahney, L. (11/13/07) Apple Stock Crash Means It's Time to Go Long on AAPL. Retrieved February 13, 2008 from http://www.wired.com/gadgets/mac/commentary/cultofmac/2007/11/cultofmac_1114.

Apple Inc. APPENDIX

INCOME STATEMENT for Apple, Inc. Operating Revenue (Revenue/Sales) Total Revenues Cost of Sales Cost of Sales with Depreciation Gross Margin Gross Operating Prot Research & Development Expense Selling, Gen. & Administrative Expense Operating Income Operating Income b/f Depreciation (EBITDA) Depreciation Operating Income After Depreciation Interest Income Other Income, Net Income, Restructuring and M&A Special Income/Charges 2007 24,006,000 24,006,000 15,852,000 15,852,000 8,154,000 8,154,000 782,000 2,963,000 4,409,000 4,409,000 * 4,409,000 * 599,000 * * 2006 19,315,000 19,315,000 13,492,000 13,717,000 5,598,000 5,823,000 712,000 2,433,000 2,453,000 2,678,000 225,000 2,453,000 394,000 -29,000 * *

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2005 13,931,000 13,931,000 9,709,000 9,888,000 4,043,000 4,222,000 534,000 1,859,000 1,650,000 1,829,000 179,000 1,650,000 183,000 -18,000 * *

2004 8,279,000 8,279,000 5,870,000 6,020,000 2,259,000 2,409,000 489,000 1,421,000 326,000 499,000 150,000 349,000 53,000 4,000 -23,000 -23,000

Total Income Avail for Interest Expense (EBIT) Pre-tax Income (EBT) Income Taxes Income before Income Taxes Net Income from Continuing Operations Net Income from Total Operations Total Net Income Normalized Income Net Income Available for Common Income Statement - Year-to-Date Revenues Year-to-Date Income Year-to-Date fr. Total Ops. * = Data not available

5,008,000 5,008,000 1,512,000 5,008,000 3,496,000 3,496,000 3,496,000 * 3,496,000

2,818,000 2,818,000 829,000 2,818,000 1,989,000 1,989,000 1,989,000 1,989,000 1,989,000

1,815,000 1,815,000 480,000 1,815,000 1,335,000 1,335,000 1,335,000 1,335,000 1,335,000

383,000 383,000 107,000 383,000 276,000 276,000 276,000 299,000 276,000

24,006,000 3,496,000

19,315,000 1,989,000

13,931,000 1,335,000

8,279,000 276,000

Apple Inc.
BALANCE SHEET for Apple Inc. ASSETS Cash and Equivalents Marketable Securities Accounts Receivable Receivables Purchased Components Finished Goods Other Inventories Inventories Current Deferred Income Taxes Other Current Assets Total Current Assets Land & Improvements Building & Improvements Machinery, Furniture & Equipment Total Fixed Assets Gross Fixed Assets (Plant, Prop. & Equip.) Accumulated Depreciation & Depletion Net Fixed Assets (Net PP&E) Intangibles Cost in Excess Non-Current Deferred Income Taxes Other Non-Current Assets Total Non-Current Assets Total Assets LIABILITIES/STOCKHOLDER EQUITY Accounts Payable Accrued Expenses Accrued Liabilities Deferred Revenues Other Current Liabilities Total Current Liabilities Deferred Income Taxes Other Non-Current Liabilities Total Non-Current Liabilities Total Liabilities Common Stock Equity Common Par Retained Earnings Other Equity Adjustments Total Capitalization Total Equity Total Liabilities & Stock Equity Cash Flow Working Capital Free Cash Flow Invested Capital Sep 1, 2007 9,352,000 6,034,000 1,637,000 1,637,000 * * * 346,000 782,000 3,805,000 21,956,000 * * * * 1,832,000 * 1,832,000 299,000 38,000 * 1,222,000 3,391,000 25,347,000 Sep 1, 2006 6,392,000 3,718,000 1,252,000 1,252,000 * * 270,000 270,000 607,000 2,270,000 14,509,000 626,000 760,000 689,000 2,075,000 2,075,000 794,000 1,281,000 160,000 38,000 * 1,217,000 2,696,000 17,205,000

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Sep 1, 2005 3,491,000 4,770,000 895,000 895,000 * * 165,000 165,000 331,000 648,000 10,300,000 361,000 545,000 575,000 1,481,000 1,481,000 664,000 817,000 96,000 * 183,000 155,000 1,251,000 11,551,000 Sep 1, 2004 2,969,000 2,495,000 774,000 774,000 1,000 100,000 * 101,000 231,000 485,000 7,055,000 351,000 446,000 501,000 1,298,000 1,298,000 591,000 707,000 97,000 * * 191,000 995,000 8,050,000

4,970,000 4,329,000 * * * 9,299,000 * 1,516,000 1,516,000 10,815,000 14,532,000 5,368,000 9,101,000 63,000 14,532,000 14,532,000 25,347,000 * 12,657,000 * 14,532,000

3,390,000 1,191,000 * 746,000 1,144,000 6,471,000 381,000 369,000 750,000 7,221,000 9,984,000 4,355,000 5,607,000 22,000 9,984,000 9,984,000 17,205,000 2,214,000 8,038,000 1,563,000 9,984,000

1,779,000 * 576,000 501,000 628,000 3,484,000 601,000 * 601,000 4,085,000 7,466,000 3,521,000 4,005,000 -60,000 7,466,000 7,466,000 11,551,000 1,514,000 6,816,000 2,275,000 7,466,000

1,451,000 1,229,000 * * * 2,680,000 294,000 * 294,000 2,974,000 5,076,000 2,514,000 2,670,000 -108,000 5,076,000 5,076,000 8,050,000 426,000 4,375,000 758,000 5,076,000

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ACCOUNTING RATIOS for Apple, Inc Gross Prot Margin EBIT Margin EBITDA Margin Pre-Tax Prot Margin Current Ratio Quick Ratio Leverage Ratio Receivables Turnover Inventory Turnover Asset Turnover Revenue to Assets ROE from Total Operations Return on Invested Capital Return on Assets Debt/Common Equity Ratio Price/Book Ratio (Price/Equity) Book Value per Share Total Debt/ Equity Long-Term Debt to Total Capital SG&A as % of Revenue R&D as % of Revenue Receivables per Day Sales Days CGS in Inventory Working Capital per Share Cash per Share Cash Flow per Share Free Cash Flow per Share Tangible Book Value per Share Price/Cash Flow Ratio Price/Free Cash Flow Ratio Price/Tangible Book Ratio Most recent data 5-YEAR AVERAGES Return on Equity Return on Assets Return on Invested Capital Gross Prot Margin Pre-Tax Prot Margin Post-Tax Prot Margin Net Prot Margin (Total Operations) R&D as a % of Sales SG&A as a % of Sales

38.10% 18.70% 17.70% 18.70% 2.7 2.2 1.6 19.2 64.1 1.3 1.1 26.10% 26.10% 16.20% 0 12.45 $15.41 0 0 11.50% 3.10% $21.14 6 $13.51 $8.18 $3.94 $4.52 $15.02 48.7 42.4 12.77

12.10% 7.50% 12% 29.90% 9.70% 10% 10% 5% 15%

Apple Inc.
ACCOUNTING RATIOS for Apple, Inc Debt/Equity Ratio Total Debt/Equity Ratio PRICE EARNING RATIOS Current P/E Ratio P/E Ratio 1 Month Ago P/E Ratio 26 Weeks Ago P/E Ratio 52 Weeks Ago 5-Year High P/E Ratio 5-Year Avg. High P/E Ratio 5-Year Low P/E Ratio 5-Year Avg. Low P/E Ratio 5-Year Avg. P/E Ratio Current P/E as % of 5-Year Avg. P/E P/E as % of 2 Digit MG Group P/E P/E as % of 3 Digit MG Group P/E 12 Month Normalized P/E Ratio 48.8 41.1 34.3 36.6 122.7 58.1 12.1 29.1 53 92% 174% 128% 48.8

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0.01 0.02

Apple Inc.
CASH FLOW for Apple Inc. Net Income (Loss) Depreciation Deferred Income Taxes Operating (Gains) Losses (Increase) Decrease in Receivables (Increase) Decrease in Inventories (Increase) Decrease in Other Current Assets (Increase) Decrease in Payables (Increase) Decrease in Other Curr Liabs. (Increase) Decrease in Other Working Capital Other Non-Cash Items Net Cash from Continuing Operations Net Cash from Operating Activities Sale of Long Term Investments Sale of Short Term Investments Purchase of Property, Plant, Equipment Purchase of Long Term Investments Purchase of Short Term Investments Other Investing Changes Net Net Cash from Investing Activities Issuance of Capital Stock Repayment of Debt Repurchase of Capital Stock Other Financing Charges, Net Net Cash from Financing Activities Net Change in Cash & Cash Equivalents Cash at Beginning of Period Cash at End of Period Foreign Sales Domestic Sales Auditor's Report (Aud. Name & Aud. Op.) * = Data not available Sep 1, 2007 3,496,000 269,000 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Sep 1, 2006 1,989,000 225,000 53,000 11,000 -357,000 -105,000 -1,626,000 1,611,000 * 256,000 163,000 2,220,000 2,220,000 * 8,312,000 -657,000 -25,000 -7,255,000 -18,000 357,000 318,000 * -355,000 361,000 324,000 2,901,000 3,491,000 6,392,000 7,829,000 11,486,000 UQ

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Sep 1, 2005 1,335,000 179,000 52,000 504,000 -121,000 -64,000 -211,000 328,000 533,000 * * 2,535,000 2,535,000 * 9,195,000 -260,000 * -11,470,000 -21,000 -2,556,000 543,000 * * * 543,000 522,000 2,969,000 3,491,000 5,737,000 8,194,000 UQ Sep 1, 2004 276,000 150,000 20,000 40,000 -8,000 -45,000 -215,000 297,000 419,000 * * 934,000 934,000 5,000 1,942,000 -176,000 * -3,270,000 11,000 -1,488,000 427,000 -300,000 * * 127,000 -427,000 3,396,000 2,969,000 4,260,000 4,019,000 UQ

Apple Inc.
INDUSTRY COMPARISON SHEET Sales: Market Cap: Company $24,006.0 Mil $112,173.7 Mil

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Industry $38,641.6 Mil $157,393.1 Mil

Averages Growth Historic Revenue: Estimated Revenue: Historic Earnings: Estimated Earnings: Stock Price (1 Year): Cash per Share: Dividend: Price Trailing PE: Forward PE: Price-to-Sales: Price-to-Book: Dividend Yield: Market Cap: Operations Net Margin: Gross Margin: Return on Equity: Return on Assets: Balance Sheet Current Ratio: Quick Ratio: Cash Ratio: Debt-to-Equity: Interest Coverage: Technicals Relative-Strength Index: Other companies in Personal Computers Dell Inc. (DELL) Lenovo Group Ltd Sponsored ADR (LNVGY) SourceForge Inc. (LNUX)

Company 24.30% 32.30% 73.10% 31.30% 46.30% 43.50% N/A 27.3 19.5 4.2 7.5 N/A $112,173.7 Mil 15.40% 34% 0.2 0.1 2.4 2.3 1.7 0.7 N/A N/A Price $19.57 $13.95 $1.78

Industry 14.40% 28.40% 211.60% 3.50% (12.6%) (1.8%) N/A 19 16.2 N/A 4.7 N/A $39,348.3 Mil 11.90% 38.50% 0.2 0.1 4.6 4.4 3.6 0.5 N/A N/A Market Cap $43,856.2 Mil $1,243.2 Mil $120.0 M

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