The most interesting part of Apple’s earnings report wasn’t its $43.6 billion in revenue or $9.5 billion in net profit. Nor was it the 37.4 million iPhones and 19.5 million iPads sold over the last three months. It was the fact that, despite having just under $145 billion in cash and short-term marketable securities on its balance sheet, the company plans to borrow money by issuing debt for the first time in its history.
Apple did not specify how much it planned to borrow, saying only that it “expects to announce more details about this in the near future.” Sure, the company needs to find money to fund the extra $50 billion it plans to spend on share buybacks by 2015, which at a total of $60 billion makes it the largest single share repurchase program in corporate history. It also needs more money for its 15% dividend increase to $3.05 per share.
But taken together those moves only amount to $100 billion in extra cash between now and 2015, which Apple can easily fund from its normal business operations — cash flow from operations for the second quarter alone totaled $12.5 billion.
The real reason Apple is borrowing money is because more than two-thirds of its $145 billion cash pile resides overseas, and bringing it back to the U.S., known as “repatriating,” would subject the company to a huge tax hit. According to U.S. tax law, the income companies earn from operations overseas aren’t subject to taxes provided they remain overseas.
“Seventy percent of Apple’s cash is overseas and would be taxed if they brought it home to buyback stock,” said BTIG analyst Walter Piecyk.
Apple isn’t alone in wanting to keep its cash overseas to avoid taxes. A study of 60 U.S. companies by the Wall Street Journal in March found that together they kept a total of $166 billion offshore last year, or more than 40% of their annual profits. The situation is currently a hot topic of debate in economic and fiscal policy circles, with some arguing the tax code punishes companies for doing well and others saying corporations are using sophisticated financial maneuvering to avoid fulfilling their tax liability.
“There’s probably some truth to the suggestion they’ve made that they want to borrow cheap money and adjust their capital structure,” said Rob Wilson, founder and president of Tiburon Research Group in San Francisco. “But I suspect that a major reason they’re borrowing is the fact that a large portion of their cash is parked overseas.”
In September, Apple had only $40.4 billion in cash overseas, which it estimated at the time would result in a tax hit of $13.8 billion at a roughly 35% tax rate if brought back to the U.S. It now has $102 billion in cash overseas, which would equate to just over $35 billion in taxes at the same implied tax rate.
Small wonder, then, that Apple told analysts that going forward it expects its “foreign cash and domestic borrowing to grow.”