16 Years After Getting Off Debt, Apple Now Owes Over $ 100 Billion
In the late 90s, when Apple (NASDAQ: AAPL) Flirting with bankruptcy, the Mac maker had racked up considerable debt as part of its effort to stay afloat. Things had gotten so dire that rating agencies downgraded Apple’s paper to junk status, and outstanding debt reached $ 954 million in fiscal 1998. By the end of that year fiscal year, Apple would release the first iMac, marking the start of its turnaround.
At the end of fiscal 1999, Apple had only $ 300 million in debt – unsecured notes originally issued in 1994 with a 6.5% coupon – which were due to mature in February 2004. Over Apple’s recovery accelerated over the next five years as the company released the revolutionary iPod in 2001.
By the time those notes came due, Apple had nearly $ 4.8 billion in cash on the balance sheet and could easily afford to pay what it owed. “The company is currently planning to use its existing cash balances to settle these notes as they fall due,” Apple wrote in its annual report for fiscal 2003. “Today is sort of a historic day for our company.” Steve Jobs wrote in an internal memo to employees after the debt was extinguished.
Back to the future
Fast forward 16 years, and Apple now has over $ 103 billion in term debt. Add the commercial paper and the total debt climbs to $ 108 billion. Of course, a parcel has changed over the years: Apple released the iPhone and the iPad; Jobs succumbed to pancreatic cancer and Tim Cook succeeded him as CEO; and Cupertino technology juggernaut Became the first US trillion dollar company.
As revenues grew exponentially and Apple began to divert money to foreign affiliates as part of its tax reduction strategies, the company’s overall cash flow also increased. But that money was effectively locked in, because companies could only keep money outside the United States if the profits were designated as “indefinitely reinvested” abroad, allowing multinational corporations to defer the payment of income taxes. these benefits.
Ironically enough, the year Apple deleveraged (2004) was the same year Congress approved the first repatriation tax holiday, which allowed businesses to bring money home at a rate of tax reduced by 5.25%. This inadvertently set a precedent, causing companies to wait for the next tax holiday, and collective international cash holdings continued to rise for another 13 years.
Why Apple has so much debt
Apple launched its current capital return program, which consists of dividend and stock buybacks, in 2012. By that time, total cash had reached nearly $ 140 billion and Apple had over money that he did not know what to do with it. only money to shareholders.
Instead of repatriating liquidity at the legal rate of 35% at the time to return it to investors, it started issuing debt as an alternative means of strengthening its domestic cash position without touching international reserves. Cash flow from operations was more than sufficient to service this debt, and the debt consolidation strategy helped the company reduce its weighted average cost of capital (WACC), thanks in part to the associated tax shield.
Between early 2013 and late 2017, Apple accumulated $ 110 billion in debt using this strategy. Everything changed when the tax reform was passed in December 2017, which included presumed repatriation which has effectively released foreign liquidity reserves. Since then, Apple has mainly let its debt fall due. The company made issue bonds in september, its first debt offering since tax reform, but the outstanding debt continues to decline overall.
Over the course of two decades, Apple went from debt to survive to voluntarily issuing large amounts of paper just because it could.
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