Understanding the Apple Balance Sheet

An article by New York Institute of Finance instructor Tracy Williams.

For the past year or two, Apple, Inc. has had a delightful dilemma. What should it do with its billions of cash, sitting on the balance sheet, earning paltry returns in safe markets, causing restlessness among shareholders who feel entitled to special dividends to get access to it? Should it use cash to repurchase some stock, a few shareholders pressed?

Shareholder activists have 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 Jobs’ 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, in 2013 Apple decided to tap debt markets. It 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 this year helped quiet teeming shareholders and proved to capital markets it could get comfortable with the mechanics 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?

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 (cash that it can touch and feel in one grasp, 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 accounts 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.

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 from cash on hand, if it chose to do so. No need to wait for cash generated from operations.

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--no burden on a company generating $6-7 billion in new cash each quarter and already sheltering $40 billion-plus more, sitting aside with little agenda.

The company could arguably borrow another $50 billion before investors and ratings agencies might start fidgeting. This presumes Apple will continue at a modest growth pace and the whole globe remains 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.

But take note. Shareholders will become spoiled and have ongoing expectations. Corporate-finance gurus often say the issue of paying dividends is that investors come to like dividends, will be attracted to the stock partly for that reason, and will expect cash pay-outs every quarter—no matter the business environment, internal growth expectations or internal investment requirements.

Apple shareholders, thus, will look for more dividends and repurchases. Apple managers must manage new expectations. Fortunately for now, Apple will continue to amass at least $5 billion in cash quarter after quarter--sufficient amounts to appease more than a few.

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