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| Billions and billions in cash, still |
Shareholder activists clamored for cash pay-outs and even devised ingenious financial maneuverings and new equity instruments to get to it. The current generation of Apple managers, with Tim Cook at the helm as CEO, grew up with Steve Jobs' abhorrence of debt markets and his clinging to a security blanket of hoarded cash if only to endure tough times.
Apple has often countered--in carefully worded ways--that much of the cash it maintains appears in foreign subsidiaries, cash that couldn't be efficiently repatriated back to the U.S. into the hands of shareholders without the company paying onerous taxes on it. This argument may make sense to corporate-finance managers, but wouldn't sit well in the public media.
After shareholders fussed enough in the past year, Apple decided to tap debt markets and borrowed $17 billion to use some funds to give shareholders a gift (via dividends and share repurchases). Apple wasn't desperate for new funding, but appeased shareholders while taking advantage of low rates in the marketplace.
Often at established companies, new-debt funding is channeled into new investments, new acquisitions, or aggressive expansion or into replacing old, more expensive debt. Apple's borrowing helped quiet teeming shareholders and proved to capital markets it could get comfortable with the process of taking on new loans and issuing corporate bonds, if it ever needed to.
With the debt now in place, what is the flavor and look of Apple's balance sheet today?
1. Cash reserves. Funds from the new borrowings might have been a gift to shareholders, but Apple continues to be a formidable cash-generating machine in its global operations. By late summer, Apple's cash accounts (including some liquid short-term investments and excluding much of what's held abroad) had almost doubled over the past year to amounts above $42 billion.
With debt proceeds, it provided gifts to shareholders, but cash will continue to climb as the company continues to be profitable. The company is operating at a pace of generating about $7 billion in new cash every quarter.
2. Debt on the balance sheet. For once, there is long-term debt on its balance sheet, $17 billion. But it's still insignificant. The closely watched debt-to-equity ratio is still so low (0.13) that it would hardly cause a blip on the analytical screens of ratings agencies and investors. Every bit of that debt could be paid down within days with cash on hand, if it chose to do so. No need to wait for cash generated from operations.
3. Debt capacity. Is there any room for more debt (to help increase ROE, if not fund new projects), now that it has gotten a first bite of it? With cash flow of that magnitude, the company has lots of room to borrow more if it needed to or wanted to. Interest expense on the new debt each quarter will total less than $200 million--having no burden on a company generating $6-7 billion in new cash quarter after quarter and already with over $40 billion more sitting aside with little agenda.
The company could arguably borrow another $50 billion before investors and ratings agencies might start fidgeting. This assumes Apple will continue at a modest growth pace and the whole globe is at least somewhat infatuated with its product offerings.
These transactions in 2013 were all about tests and gifts for Apple--a test to see if it can become accustomed to debt markets and a gift to get shareholders off its backs. It passed the debt test. Shareholders, however, will become spoiled and will continue to look for more dividends and repurchases, as Apple piles on $5 billion or more of new cash quarter after quarter.
Tracy Williams
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