Apple Inc. closed the June quarter with approximately $202.8 billion in cash, short-term and long-term investments, up more than $9 billion from the preceding three-month period, as the world’s biggest consumer electronics company by market value continued to spew cash like a geyser. But where is this hoard of cash and what is the company doing with the money?
Almost 90 percent of Apple's $200 billion in cash is packed outside the United States and this isn’t about to change anytime soon because the company is taking advantage of current laws to avoid paying what executives say would be hefty taxes on the money. Instead, Apple is keeping the money outside the reach of Uncle Sam until it can legally return it to shareholders at a fraction of current taxation rates.
“We ended the quarter with $202.8 billion in cash plus marketable securities, a sequential increase of $9.3 billion,” said Luca Maestri, CFO at Apple, during a conference call with analysts earlier this month. “$181 billion of this cash, or 89 percent of the total, was offshore.”
Apple is not alone. Many other U.S. technology companies with extensive international operations are keeping capital generated outside their home base in offshore accounts. The funds may not be yielding high interest rates in the overseas accounts but shifting it back home right now is even less attractive for these companies.
I reviewed the balance sheet of 10 of the top 10 U.S. technology companies and estimate between them they have more than $600 billion in cash, short-term, long-term and other long-term liquid investments. The companies include Apple, the richest by far with more than $202 billion followed by Microsoft ($111.5 billion), Google ($74.2 billion), Cisco ($57.5 billion), Oracle ($54.4 billion), Yahoo ($41.4 billion) and Intel ($22.8 billion). The other companies in my Top 10 cash-rich U.S. technology companies are Hewlett-Packard ($14.8 billion), IBM ($14.1 billion), Facebook ($12.4 billion) and Micron ($9.7 billion). I did not strip out these companies’ long-term debts in my calculation but even with the debts included, the group is sitting on more money than many mid-size economy countries could dream of.
Aside from having more cash than capital projects to spend the funds on, these companies also share another problem. They operate internationally, which means they generate a boatload of cash each quarter from foreign operations but can’t immediately repatriate the funds without incurring what they would consider hefty tax burdens. In response, a large percentage of the funds remains in overseas account while the companies put pressure on the U.S. Congress for favorable legislation that would allow them repatriate the money at a lower cost to shareholders.
It’s likely Congress will eventually agree to these companies’ request. Until it does, though, Apple and its technology peers have become creative in their financing and are using every tools accountants can dream up to return the funds to shareholders at a fraction of potential costs. Apple, for instance, is involved in a heavy stock buyback and capital returns program that is expected to result in the transfer of more than $200 billion in cash to shareholders within a few years.
The company in April approved a “capital return” program totaling $200 billion by March 2017. The capital return program includes the repurchase of about $140 billion of Apple stock, it said in a press release. CFO Maestri said during the latest conference call that the company in the June quarter conducted shares repurchase of approximately $4.1 billion or 31.2 million shares. The company has also jacked up its dividends payment, increasing this 11 percent for payments to shareholders of record in May. Between August 2012 and March 2015, Apple returned “$112 billion to shareholders, including $80 billion in share repurchases,” it said in a statement.
So how is Apple financing the shares repurchase and dividends payment if almost 90 percent of its cash remains overseas and outside of U.S. regulatory control? The company has taken advantage of favorably low interest rates to borrow heavily from the equity market. A mere three years ago, Apple closed its fiscal year ended Sept. 29, 2013 with zero in notes payable/short-term debt and long-term debt. It has since been active in the investment market and has issued billions of dollars in corporate bonds to finance its shares repurchase and dividends payment programs.
The company, for example, closed fiscal 2014 with approximately $29 billion in long-term debt, up from $17 billion in the prior fiscal year, and $6.3 billion in notes payable/short-term debt versus zero such obligations in the preceding year.
By the end of the latest quarter, Apple’s long-term debts had ballooned to approximately $47.4 billion while notes payable/short-term debt stood at $7 billion. During the June quarter alone, the company “issued a total of $10 billion of term debt, consisting of $8 billion US dollar denominated notes and ¥250 billion denominated notes,” according to Maestri.
“During the quarter, we turned over $13 billion to our investors,” Maestri said. “We paid $3.1 billion in dividends and equivalents and we spent $4 billion to repurchase 31.2 million Apple shares through open market transactions. We also launched a $6 billion accelerated share repurchase program in May and received an initial delivery of 38.3 million shares. The purchase period for the new ASR [approved shares repurchase] will end in or before November of 2015.”
U.S. tax authorities are unlikely to get their hands on Apple’s money unless they changed the laws in the company’s favor. But if they do this only as a one-time program so companies like Apple can repatriate money currently kept overseas, it won’t be long before U.S. tech companies find themselves back in the same conundrum.
Bolaji Ojo is editor-in-chief and publisher of Electronics Purchasing Strategies. The views expressed in this blog are those of the author alone who promises to base his sometimes biased, possibly ignorant, occasionally irrelevant but absolutely stimulating thoughts on the subjective interpretation of verifiable facts alone. Any comments should be sent to the author at firstname.lastname@example.org.