Apple Inc. (AAPL): A Look At Warranty Accruals And CapEx

Apple Inc. (AAPL): A Look At Warranty Accruals And CapEx
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Apple Inc. (NASDAQ:AAPL) recorded especially high warranty accruals in the June quarter, mostly because of problems in China. However, the company’s 10-K filing indicates that accruals are heading back to a more normalized level. Stifel analyst Aaron C. Rakers and his team examined the filing and provide the most important highlights from it.

Apple Inc. (AAPL): A Look At Warranty Accruals And CapEx

Apple reports decline in warranty accruals

According to the 10-K, Apple Inc. (NASDAQ:AAPL) had $1.387 billion in warranty accruals during the September quarter. That’s a significant increase from $736 million during the same quarter last year, but Stifel analysts note that Apple is starting to recover from the problems it saw in China during the June quarter. However, the early part of the quarter may still have been affected by the increased accruals.

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According to their model, the amount was a negative 174 basis point sequential impact to Apple’s gross margin percent during the September quarter. They note that warranty plus depreciation and amortization expenses are now up to 8.5% of revenue, an increase from 4.3% in the same quarter a year ago.

Breaking down Apple’s spending

In property, plant and equipment, Apple Inc. (NASDAQ:AAPL) reported $21.242 billion in machinery, equipment and internal use software, which is a significant increase from $20.02 billion at the end of the June quarter. Spending in Apple’s supply chain amounts to more than 75% of its total ex-retail capital expenditures, and Stifel analysts believe this is an important part of Apple’s report.

The company guided for $11 billion in capital expenditures for the 2014 fiscal year, compared to $7 billion for the 2013 fiscal year. In 2012, however, capital expenditures were $10.3 billion. Included in the $11 billion for 2014 is about $550 million in retail-related capital expenditures. There were no comments included about spending on Apple Inc. (NASDAQ:AAPL)’s new spaceship headquarters in Cupertino, Calif. Stifel analysts are especially interested in the company’s spending in machinery, equipment and internal use software because of the three to five year straight line depreciation cycle and its impact on gross margin percentage.

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