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Apple Now Debt Free, Says Internal Memo
An anonymous reader writes "99mac.se publishes an internal memo from Steve Jobs to Apple employees today.
According to the Memo, Jobs states that "Today is a historic day of sorts for our company." Apple used $300 million in cash to pay off the rest of their debt, and is now a debt-free company. A big turnaround from over $1 billion in debt in mid-1997.
Also noted in the memo is that Apple has $4.8 billion in the bank at this time." (Since this is not coming straight from Apple, confirmation -- or debunking -- would be helpful.)
Is that cash reserves or for daily operation? Huge difference.
I don't understand why a company with $4.8 billion (or $5.1 billion pre-$300mill hit) would wait this long to pay off the $300 million owed.
When they say $4.8 billion in the bank, they don't mean $4.8 billion sitting there doing nothing. They mean $4.8 billion, part of which is earmarked for salaries in the next quarter, part of which is for office space, maintainance, etc, part of which is for production of new units, part of which is for research and development, and maybe a very tiny bit that's actually not earmarked for anything. And it's that tiny bit not earmarked for anything that they can use to pay off the debts. Remember: $4.8 billion is a lot of cash, but Apple is a huge company these days, and it takes a lot of cash to keep that going.
You've obviously never heard of Pippin.
Yes they did. It was called the Pippin and was relased by Bandai. It did very bad in the US and Japanese markets. It booted MacOS 7 off of a CD (no internal storage) so, while it could run any Macintosh game, the game had to be built with an OS image on the CD.
"Have you ever thought about just turning off the TV, sitting down with your kids, and hitting them?"
according to their last sec filing, they had 300 million in debt and about 5 billion cash.
see this for details.
"If you think you have things under control, you're not going fast enough." --Mario Andretti
Umm... Debt != Insolvent. Apple has always been solvent.
Solvency is the ability to cover current debts (loans due in less than 1 year) with current assets (cash, inventory, short-term paper etc...). As others have pointed out, carrying debt can have a number of advantages, including tax treatments, treasury management, leverage etc...
For example, loans increase the usable cash for a company, which allow you to make more money than you could with just equity. And, since someone else has loaned you the money your return on equity (ROE) is higher. Since high ROE is a good thing, debt is an important part of the equation.
When you have nothing left to burn you must set yourself on fire
According to recent financial statements they did have about $302M in debt, and they had plenty ($3B) of "Cash" (or equivalents, which presumedly includes very liquid financial assets), so it seems reasonable that they would have paid it off. To be absolutely sure, I feel that we'd need to wait for the next batch of statements (March).
... well, whatever Apple does.
What they don't mention is that (of course) they have plenty of accounts payable. Not explicitly debt, they are still liabilities that are owed. No big deal, though, every company's got that.
I don't understand, though, why they're so eager to get rid of their debt. $300M isn't that much money (when they've got $3B cash, i.e.) and there's nothing wrong with a moderately leveraged firm (debt is of course usable capital, and they've effectively just lost $300M of "project money"), and I don't think that Apple was at any risk of defaulting.
If this debt was raised long ago (when rates were high), then I figure it's reasonable, but if this debt is recent, then it doesn't explicitly make sense to me (IANACFO), because that's cheap money for
To me, this seems to be an indication that Apple's going to be a bit more conservative and slow down new projects and products and such. When a company pays off debt, this must mean that interest rates cost more than the returns of the projects this money could finance.
This ranks Apple right up with Microsoft (since Microsoft started dividends a while back) as cash cow companies. I would be careful about buying.
Just my thoughts.br.
The Wall Street Journal (right arm & shirt off back required) reported last month that Apple were planning to pay off the rest of their debt when it was due on Feb 16. So I'd be surprised if it wasn't true. MacMinute have a summary.
Also, debt reduces the cost of capital for a company (i.e. the return expected on money used).
If I were to invest $10 in a new research effort, if it were "borrowed" money the cost of capital would be only the interest on that $10 until I expected the research to pay back $10.
However, if that $10 came from my debt-free bank account, my shareholders would expect a certain rate of return on that investment which is typically much higher than interest rates are right now (which is why people invest in stocks in the first place, they're higher risk, but they expect higher returns).
Typically, cost of capital can be 15%, 20%, or more depending on the industry and stock performance. Borrowed money is cheap.
MadCow.
I used to have a sig, but I set it free and it never came back.
Since they've got way more than $300 million in the bank, they would be able to cover these notes in cash, which is apparently what they did.
...phil
"For a list of the ways which technology has failed to improve our quality of life, press 3."
They developed a game console that didn't make money, but they weren't stupid enough to make it.
I don't understand why a company with $4.8 billion (or $5.1 billion pre-$300mill hit) would wait this long to pay off the $300 million owed.
If the $300M was comprised of corporate bonds, (and the phrase 'which we decided to hold to maturity' indicates that it was) then paying them off earlier would have meant giving the bond holders back their capital. Since those bond holders would have had to reinvest at last year's lower interest rates, Apple would have been doing them a dis-service. By holding them to maturity they make those bond holders more likely to purchase Apple corporate debt in the future, which could lower their total borrowing costs down the line
Don Negro
Perl 6 will give you the big knob. -- Larry Wall
That's a half-truth. Long term debt (loans, bonds, preferred shares) bares a fixed cost every year, where common shares do not. There are many ratios that attempt to describe the mix of debt and equity, as well as their fit of the mix to the company.
For example, with more debt you incur more yearly interest and your times interest earned ratio (net profits / interest costs) decreases, which can bring about questions of solvency.
Tech companies especially need to have very conservative ratios to show their financial viability. A lot of cash and not a lot of debt seems to be the rule of thumb when you look at the NASDAQ.
If in fact it is the real memo, InternalMemos.com (from the same people who brought you FuckedCompany) has it. It just looks kind of suspicious because of how short it is, but that very well may be it.
blog & fiction: jd87
Lets assume I want to buy Apple - all of it
First I buy all of the shares
Now I get access to their bank account - if the company has net debt (see Disney) I have to pay that off (either through loan payments, or through other means)
If the company has net cash (see Microsoft) I can take that money and do whatever I want with it
So Enterprise value of a company is
The cost of all of the shares of stock
Plus the debt of the company
Minus the cash/etc. of the company
End result is paying debt off from cash is a net wash on enterprise value because the cash is smaller, but the debt is as well.
End result is I prefer companies with smaller debt loads - it is easier to predict their earnings (every penny they make goes to profit, not debt service) however companies with large debt loads can have huge swings in earnings because the first 10 bucks they make go to debt service, and every penny beyond that goes to profit - so a small change in profits look a lot bigger (compare 10.02 to 10.01 dollars vs. 0.02 vs 0.01 as a percentage)
I have mod points and I am not afraid to use them
I just bought five albums on iTunes. Not one of them was on an RIAA label. One of the labels I bought from is owned by the artist himself (Pete Namlook's FAX label). The others were similar independent labels (Ninja Tune and Tresor). There is non-RIAA music on iTunes in spades, and I will continue to buy from them.
Most technology firms are not in debt, or carry a token amount. There are three major reasons for this. First, successful technology firms generally mint money. Dell, Intel, MS, Oracle, and a whole host of others generated well over 1 billion in cash last year (and the year before, and before, etc), so they can fund expansion projects with retained cash. Second equity buyers have been happy to give them money with no expectation for a dividend for an increasingly small part of the company. Effectivly share increases mean that investors are willing to accept a smaller part of the company for the same amount of money. Finally, the rating agencies (the companies that issue opinions about how risky debt is, which are used by lenders to establish the rate at which they will loan money for) treat technology firms like late paying poor people. My personal rule of thumb is that technology firms will have a rating at least 3 notches or one full grade below a company with the same credit statistics in any other industry. Credit agencies look at a host of ratios for the basis of a rating. Two examples are Apple and Oracle both have well more than 10 times more cash than debt, and both have a long history of generating relativly stable operating cash, (more important to lenders than profits). If they operated in any other industry they would be at least AA (credit ratings go down from AAA, AA, A, BBB, BB, B, CCC, CC, C with + and - modifers on each rating, and D is a special rating for in default, ie not paying even the interest on the debt and no modifers). BB is the beginning of junk bonds. Apple's credit rating was BB and Oracle's was A-, to give you an some comparisons Qwest is B (they were touch and go on bankruptcy for the better part of 2002 and 2003). MS would likely not get a AAA rating with almost 60 billion in cash, and a two decade history of positive cash flows. Generally the rating agencies perceive a ton of operational risk in all firms that are involved in technology.
Degaussing scares the bad magnetism out of the monitor and fills it with good karma.
Did anyone else notice that one of the posts said their debt was DUE in February 2004. They didn't just go and pay off a loan. They met their contractual obligations to repay debt.
It's up to the finance guys to say, "Hey, we can borrow another $300 mill for 5% while we're making 6% on our investments." If they can't say that, then they won't borrow more money unless they need it.
Actually the filings are quarterly and Apple has scheduled their next filing for April 14. However, that is for SEC 10-Q statements. Major debt stucture changes could warrant a non-scheduled 8-K filing.
Maybe you remember the MacExpo keynote from 1997, where Steve Jobs announced that a) Microsoft had aquired shares of Apple worth $US 150 million and b) guaranteed that they would continue to offer MS Office for MacOS for at least another five years. Today this is still recalled by a lot of PC fans as the day Microsoft saved Apple by buying stock. But what most people did not see was that at that time Apple already had several billions in reserve (I think it were four) and the stock Microsoft bought was basically symbolic, the major news was the Office deal. (http://antibogon.org/Stepwise/TheHolyGrail.html mentiones that Apple was worth $US 7 billion at that time.)
So if Apple now claims to be debt free this does not mean at all that they finally earned enought to pay back their debt. They could have done that years ago. It just means that they decided (for some strange fiscal reasons) to pay back everything in 2004 (remember, debt is positive from a tax point of view) and that, as usual, Steve Jobs takes this non-news and transforms it into holy water for the mac users.
Posted from my blessed iBook
memomo: free web based language trainer DE-EN-ES-FR-IT
I am a believer of momentum and curves.
Apple sold debt in 1994 that was due in February 2004 (10 year debt). For examples sake (and easy math), Apple said to bond holders: "Loan me $100,000 and I'll pay you 6.5% interest. On February 2004, I'll pay you back $100,000. However, instead of giving me $100,000, I'll let you give me $99,925 today (99.925% of par), but still give you back $100,000 in February 2004." The bond holder make the 6.5% interest and an extra $75. The "effective yield" is that 6.5% plus the $75.
The interest rate swaps are a little harder to explain. Essentially, Apple is covering themselves in case of large interest rate swings.
If you would like to read up on bond things, you might want to look at the Bond Market Association Publication list. Click the PDF links. The prices listed are for if you want a hard copy.
Sure.
A very common way of borrowing money in the corporate setting is by selling promissory notes ("notes"), or loan contracts. Like private loans, every note has associated with it a principle amount (how much was borrowed), an interest rate (how much extra the lender gets per annum for lending the money), and sometimes a security (what the lender gets if the borrower fails to live up to the terms of the notes).
Most notes are standardized in their particulars: The principle is usually $1000, the payment plan is usually interest payed quarterly or semiannually and the principle payed off in full at the end of a pre-defined period. The only variables of import are the length of the loan and the interest rate.
In this case, the notes in question have a lifetime of 10 years, and pay 6.50% interest semiannually. If you owned one of these notes you would get two checks a year of $32.50 each until now, when you would get a check for $1000. If you had bought it when originally sold by Apple, you would have paid $999.25 for it instead of $1000.
So what Apple is saying is that there were $300Mil of these notes (or 300,000 of them) still outstanding in February, and they planned to pay them off with cash on hand.
Someone with a bent for Truth. Thank you.
And I'd like to add that Apple Engineering enhances or completely refactors bits and pieces of the NetBSD, OpenBSD, FreeBSD code, and give back accordingly per any licensing agreements.
This reminds me of when people give Adobe the credits to developing Display Postcript and NeXT just licensed it. DUH! Without NeXT it wouldn't have come about, let alone Display PDF, etc. Let's give credit for ideas and code where they are due.
The RIAA cannot get money from an artist or company that is not member. The RIAA is NOT a record company but a trade group whose main goal is to represent the U.S. recording industry (the record companies, artists, distributors, etc.). Its mission is to protect the right of artists, etc.
I believe membership fees for the RIAA are based on gross revenues... ahh this outlines it.
In some ways the RIAA is like the ACLU, almost everyone hates it at some point until it is defending a constitutional right that they care about.
-Shawn
Then you should credit Sun. Their NeWS client-server windowing system (which began development in 1985) used PostScript to describe objects on the screen, but predated NeXT and Adobe's Display PostScript. See http://www.postscript.org/FAQs/language/node73.htm l
and http://en.wikipedia.org/wiki/NeWS for corroboration.
NeWS eventually was absorbed into Sun's OpenLook environment. To this day, Sun's X server supports Display PostScript, as anyone who uses a Sun workstation knows. (A logo to this effect is displayed when the X server starts.)
I don't mean to belittle NeXT here - I've been a NeXT user for a decade and still have a working NeXTStation TurboColor and NeXTLaser Printer. Display PostScript wasn't really a NeXT innovation, however. (Objective-C on the other hand, was all NeXT)
-Isaac
I am not a lawyer, and this is not legal advice. For Entertainment Purposes Only.
Since this is not coming straight from Apple, confirmation -- or debunking -- would be helpful.
Well, given that at the announcement of their last quarterly results they stated that they would likely pay off their debt this quarter, it seems likely that this is true.