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.)

Comments

How does this compare with other companies?

[Raleel]

Particularly other hardware and software firms?

Re:How does this compare with other companies?

[justanyone]

So, it seems Apple, like White Castle, among other companies, is debt free.

However, being debt free is not necessarily a good thing. I was informed by an accounting / MBA friend that having corporate debt can be a very, very good thing when it comes to tax time. Apparently, it's useful to mortgage certain properties (including real estate, physical plant, etc.). This lets you write down things or depreciate them differently I think.

I'm sure there's accountants out there (though how many of them read Slashdot is an open question). Can anyone explain this? Or Refute it?

-- Kevin J. Rice, programmer (not accountant!), Chicago area.

Re:How does this compare with other companies?

[Dukael_Mikakis]

Yes, debt does reduce the cost of capital because every $1 of new equity will cost you an expected value of $1 (if it were higher, people would bid up the stock price; if it were lower, nobody would buy the stock). Every $1 of debt will cost you interest (typically less than 100%, so maybe $0.05). The reason why people ever issue equity over debt is that you can typically raise much more money more more easily in the stock market than at a bank. Put yourself on the market and millions of people might contribute equity, looking to get some of the profits, and they'll do it (essentially) no questions asked, as long as you pad their wallets. If you get some debt, you'll have to deal with restrictions, you'll have to keep some amount of cash in the bank, the bank could liquidate your assets and shut you down .... In short, with equity, if you screw up (within the law) nothing bad will happen to you beyond that -- shareholders lose money, sell their stock, oh well. With debt, if you screw up it's a big hassle, banks can sell your stuff, assume management, etc. Risk of bankruptcy is the only reason why equity is ever issued.

So if Apple's not at risk of bankruptcy (they're not), they should have no problem finding cheap debt to invest. In this case, I think it's foolish for Apple to pay it's debt off.

Plus, the interest you pay on debt is tax deductible itself (as an expense) and that's just an extra bonus to load up on debt (assuming you can afford it, and aren't at risk of failing).

Re:How does this compare with other companies?

[nelsonal]

Debt is leverage, it amplifies your returns to owners. This is great if you do well, but it is bad if you do poorly. Most people experience this when with mortgages (because of a ton of very favorable laws and a reasonably good housing market since wwII lenders will give an amazing amount of leverage on a house). Which is why they thing real estate is such a good investment, houses have actually been out performed by most other asset classes, but nothing else allows the same measure of leverage.
For a simple example lets look at buying stock on margin. Take Microsoft, let's say Bill and Steve each have $1000 to invest in MS and the current share price is $25. Bill chooses to buy 40 shares for $1000 (ignoring commissions), while steve listened to his MBA friend and bought 80 shares, taking a loan for $1000 and puting up his own $1000. The next day MS comes out better than expected earnings and the price pops to $30 per share. Both sell their stock. Bill gets $1200 (40x$30) while Steve gets $1400 (80x30-1000) I'm rounding off the $0.11 in interest expenses.
Now if the news had been bad, and the stock fell to $20, the opposite would have happened, Bill would have $800 (40x$20), while Steve would have $600 (80x$20-1000), again ignoring the $0.11 in daily interest.
With debt financing you multiply the regular returns by the inverse of the percentage you put up. (If you put up one fifth of the intial capital you will recieve five times the return on the asset (before interest expenses), if it returns 10% annually the owner will get more like 50% annually, if it returns -5% annually, the owner will get -25% annually (again before interest expenses). In our examples above the asset returned 20% but due to the differences in financing the investors got very different returns.
Armed with this knowledge the optimal situation would be nearly no owner investment and almost all debt financing, assuming an investment is likely to produce returns. However, lenders will require a higher interest rate to projects that have less owner investment decreasing the returns (the asset must return more than the interst rate for this to work, it becomes increasingly difficult to find investments that will do this. In the stock market there are regulations limiting you to debt equal to your starting capital, and if you start to loose money the broker will issue a call requireing either additonal investments or he will sell your asset to bring it back in line with the rules. With a big successful company lenders stop at about 3/4 of total investment (3:1 leverage). Houses allow a ton of leverage (the old rules were for 20% (5:1 leverage) down but I know of people who put less than 10% down (10:1 leverage). Feel free to ask any further questions, this format is not ideal for math topics

is that a good thing?

[Nathan Brazil]

With interest rates as low as they are right now, shouldn't they be borrowing and investing more in the future, or some such economic technobabble like that? Cash in the bank can't be giving them as much growth as investment would...

Though cash in the bank is very safe, at least.

Re:is that a good thing?

[Ranger96]

Even more to the point, if the interest Apple was paying on the debt was lower than the return they could make investing the $300M, then (everything else being equal), this wasn't the best use of their cash.

However, there are too many variables for a non-insider to really know. Most companies have finance people who are at least competent enough to make these kinds of decisions. This is Finance 101 stuff.

Chris

Where did the money come from

[SuDZ]

Now that they are out of debt I wonder what the percentages of the income were. For example was the new OS's able to give 20% of that, the iPod good for 40% etc. What about iTunes? I know I just picked those %'s out of the air and have no way of guessing what they might be but what do you guys think helped them get into the clear?

SuDZ

Re:First to say - Well Done

[be-fan]

Debt isn't an inherently bad thing. Without maintaining some debt, its hard to become economically successful. One of the key reasons why Britain is so rich, for example, is because it was willing to carry a debt in the process of expanding, while other countries were not.

They key is to manage the debt carefully, and make sure that the interest payments do not get so large that they start eating away at your profits.

Interesting for a public company

[oliverk]

Debt is very good for public companies (in fact it raises the valuation, mainly because of the tax ramifications on debt versus equity issuance). [note: I'm a first year MBA at Georgia Tech...so I'm speaking strictly academically].

It makes me wonder about Jobs' (or the CFO's) motivations. Strictly speaking, this would be the smartest move if Apple were to pursue a Leverage BuyOut (LBO), which is basically a reverse IPO. I can't see them doing this, but would give them a chance to radically reposition the company without requiring stockholder approval.

Just thinking out loud...

.

Addicted to OS X

[MarkWatson]

Since I am basically addicted to OS X, this is good news :-)

Apple has always had pricey, but cool stuff. I paid a premium for my Apple II (serial number 79 !! - I used it to write the free Chess program that was on the demo cassette for the Apple II).

I paid a premium for my first Mac in 1984.

Sometimes, more expensive products are just worth it.

-Mark

According to their last 10-Q

[timbob_com]

Here is their last 10-Q they had a total of $2.6 Billion listed as liabilities and about $7 Billion in Assets (with almost $4.8 B being cash or short term investments) So this is definately possible.

I remember back to something Steve Jobs said back in 97 or 98 when asked how he was going to grow desktop market share. His response was something along the lines of 'We have 6% of the desktop market, Mercedes has 6% of the automobile market. Why aren't you predicting the end of Mercedes?'

iMac, iPod and iTunes really helped them accumulate some iCash.

Re:Buy SCO?

[EricWright]

No. No. A thousand times no. Buying out SCO would just put more money into Darl's hands and the hands of his cronies. Is that what you really want? Personally, I want to see Darl McBride broke, homeless, and begging on the streets.

good insights from Feb 3 article

[octalgirl]

The article

"Let's do the math: According to its latest earnings report, Apple averaged $349 in revenue per iPod sold. If prices remain stable, 3 million iPods would generate more than $1 billion in revenue. Four million units could produce $1.4 billion in sales. Apple sold $345 million in iPods during fiscal 2003.

Turning the dial to iTunes, Apple says that more than 30 million songs have been sold to date, with 17 million of those coming during the Christmas quarter. The Pepsi promotion should dramatically increase iTunes traffic. Add in the help from HP and paid downloads could pass 100 million during 2004. At that level, Apple should make a few pennies per song, up from zero now."

Re:Because..

[Wyatt Earp]

"The game had to be built with an OS image on the CD."

That would be easy, I used to have a 7.5.5 boot CD and if I remember right, that stripped down System Folder took up all of about 30 MB with full network functionality.

Once we made a System 7.1 boot floppy with Appletalk and I don't remember what else so that we could dasiy-chain Performa 5xx series machines with the old LocalTalk boxes and phone cords and reformated 14 of them at a time from my G3 AIO.

I

Re:why wait so long?

[Dukael_Mikakis]

Pleasing investors has nothing to do with being debt-free. If you have a friend that will loan you money at 1% interest, and you can turn and loan that money to somebody else at 2% interest, you'd want as much debt as possible, and your investors (in this case, you) would be thrilled that you have so much debt.

In fact, in successful companies, investors might actually prefer debt. If you and a friend have a project that will cost $1200 but will net you $1800 in a year, you each stand to gain $900 minus your investment. But you only have $800 total. If you get another friend in on it, all three of you will only net $200 apiece ($600 - $400). If you get $400 debt at 5%, then the two of you will make $1800 - $420 (debt + interest) = $1380 / 2 = $690 - $400 = $290.

So the current investors end up making more by taking debt. Of course new investors would love an opportunity at profiting from this project, but companies tend to look out for current shareholders more than anything else.

CFO Fred Anderson is Retiring in June

[good soldier svejk]

I guess Fred feels his work is done now, because he is calling it quits on June 1. Anderson has been instrumental in solving Apple's financial problems from the day Gil Amelio hired him in 1996. He created the company's large cash reserves by liquidating unnecessary capital investments (plant), issuing a convertible debenture and selling some of their valuable ARM holdings. Then he managed the investment of those funds astutely enough to make the conversion of those outstanding notes to common stock a huge win for both the company and creditors. That 1999 conversion alone eliminated about two thirds of Apple's long term debt (conversely that means the issue had assumed most of Apple's debt). Really, this guy has done an outstanding job. You can thank him for their sound financials.

ok, so...

[pb]

Apple's got like $5 billion in cash lying around, Microsoft has $50 billion or so last I heard... Just to put this into perspective, $50 billion dollars is about $166.67 from every man, woman, and child in the US, or about enough for them each to buy a copy of Windows retail (or almost two upgrade editions or full OEM editions). It's almost equal to the GDP of Iraq in 2002. You could hire a million people full-time with that money and pay them $25/hr for a year. It's a lot of money.

The profit margin on software is about as high as a profit margin can be, and even when you consider that they spend money on R&D, salaries, advertising, buildings, manufacturing, computers, etc., etc. -- that's still an enormous mark-up from the market value of their products. (They both sell hardware too, and in Apple's case, there's a hefty mark-up on that as well, especially RAM--but not nearly as much as there is on software.)

So it'll be interesting to see what happens, as Microsoft slashes prices on core offerings to compete with Linux, and newer desktop environments and toolkits are developed across the board to compete with Apple. Still--I don't know about TCO, but there should be no doubt in your mind that these companies are overcharging. :)

Re:First to say - Well Done

[Shisha]

Of course, it doesn't hurt to colonize numerous less powerfull nations, systematically remove all profit and natural resources, then "benevolently" grant said colonies their independence when everything of value is gone and they're no longer profitable to the empire. Just ask the Indians and north Africans . . .

This still compares favourably with countries like France and Spain that did the same thing and didn't become sucessful :-) Not to mention the Germans who didn't even manage to colonise anyone at the time.

Re:want confirmation?

[sam1am]

And just in time for Fred Anderson's Retirement from the position of Apple's CFO on June 1.

HUMANS do it better

Re:As opposed to Red Ink Republicans?

[be-fan]

Numbers:

US Budget Summary since 1789
Inflation calculator.

Okay, the largest budget deficit of the 1930's (Great Depression, New Deal) was about $3bn in 1939. That's about $31bn in 2002 dollars.

The largest budget deficit of the 1940's (WWII) was $55bn in 1943. That's about $585bn in 2002 dollars.

The largest deficit of the 1960's (Soviet Union, Space Race) was $25bn in 1968. That's $130bn in 2002 dollars.

The largest deficit in the 1980's (Soviet Union) was $221bn in 1986. That's $354bn in 2002 dollars.

The largest deficit of the 1990's (Iraq war?) was $290bn in 1992, which is $370bn in 2002 dollars.

The 2004 budget deficit is officially $521bn. However, that does not count the costs of war, which are $84bn in Iraq alone. All told, the current deficit is well over $600bn. Depending on the cost model, that equates to about $580bn 2002 dollars.

So in any case, the current US budget deficit is not larger than at least the one FDR carried, but its skirting damn close.