When Apple reported its June quarter results it crossed over $200 billion in cash and investments on its balance sheet ($202.8 billion to be exact), which became touted by the press such as CNBC, CNN Money and Bloomberg. While CNN Money and Bloomberg mentioned that the company had about $50 billion in debt it was more of a passing remark than understanding its implication. (Note that I own Apple shares).
It’s net cash that an investor needs to consider
Apple still has a huge amount of net cash of $150.9 billion (subtract $54.4 billion of total debt from the $202.8 billion and ignore the rounding of $0.1 billion) so I’m not trying to degrade what it has but it needs to be kept in context. Think of the extreme example where Apple had borrowed $200 billion to fund dividends and buybacks (we’ll ignore the rating agencies and other reasons this almost assuredly wouldn’t happen). It would then only have $2.8 billion in net cash, which would be a paltry amount. That is one reason investors look at Enterprise Value for a company which is its market cap minus cash and investments plus debt as the true “value” of a company.
Apple has a negative $32.7 billion net US cash
Over the past two years Apple has taken on $54.4 billion in debt, which I’ll assume has been used to pay dividends and help fund the stock buyback program. Only US cash in the long-run can be used for these purposes. At some point in time the debt will have to be paid back in US generated cash (assuming no tax holiday) or pay additional taxes on the internationally generated profits. Since the company has about $21.7 billion in US cash as of June it has a negative US cash position of about $32.7 billion.
Apple’s incremental tax rate on international profits is 17%
I’ve gone through the past three years of Apple’s 10-K filings and determined that the incremental tax rate on the company’s overseas profits is 17%. This rate has ranged from 16.5% to 17.0% over the three years.
If you were assume that Apple needed about $20 billion in US cash to run the company and have a war chest to do a large acquisition this would mean it would have to use almost all international cash to pay off all the debt since Apple has about $21.7 billion in US cash. To pay off the $54.4 billion Apple would have to bring back $63.4 billion, which means it would pay $9 billion in additional taxes.
One other item to keep in mind is that any internationally raised debt that is used to pay dividends or buyback stock has to have its interest payments made using US cash.
Cash to run the company and additional taxes cuts Apple’s “net cash” by $9
When you assume $20 billion is needed to run the company and about $30 billion is the amount of additional taxes due as of June 2015 this decrease Apple’s net cash after debt from $26 per share to about $17. While this isn’t a huge haircut it seems both bearish and bullish sell-side analysts use the $26 per share when they compute their price targets when they use cash as part of the equation. This puts the company’s “available” cash at just under $100 billion or about 14% of its market cap.
