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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.)
when's their next SEC filing deadline?
They didn't make a game console that doesn't make money.
You're nothing; like me.
Is that cash reserves or for daily operation? Huge difference.
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.
echo Prpv a\'rfg cnf har cvcr | tr Pacfghnrvp Cnpstuaeic
I can debunk it right now - Steve Jobs owes me thousands of dollars for the mental anguish I've experienced when trying to use the imac's original "hockey puck" mouse.
The anti-salmon
Sometimes overcharging does pay off...
Choice is good - including platform choice.
Who needs the market share when you've got a cool 4 billion bucks in the bank, and the mind share - apple equals style and coolness, like it or not.
Now back to my beige box... :(
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.
A deep unwavering belief is a sure sign you're missing something...
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...
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---- Please be nice in case my Slashdot karma ~= my real life karma.
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
This isn't being in the black. Being in the back means being profitable and they've been profitable long before now. This isn't a sign of business strength either, since many companies keep some debt around just so they have some flexibility when it comes to reporting their financials.
This is more of a business decision to run a debt-free company. With 4.8 billion cash on hand they could have been debt free before now.
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.
Unitarian Church: Freethinkers Congregate!
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.
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.
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.
;-)
Would you like to run for Congress?
--You will rephrase your request for me to go to hell. Goto statements are not acceptable programming constructs
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.
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
But you go right ahead and keep the faith. Obviously reality isn't bothering you enough to change your thinking.
Debunking the "59 Deceits"
Regardless of your choice of architecture or OS, this news is great for consumers and technology users. I may not use a Mac, but as long as Apple is out there, out of debt, and profitable I don't have to worry about Microsoft having free reign over the direction of the computer industry. XP Pro works fine for me right now when I need to get real work done (sidenote: please, Linux, work completely on laptops soon!), but if Gates & Co. decide to slide farther down some restrictive draconian path of DRM I know that I can switch in a heartbeat.
We all saw what happened when AMD became a viable competitor for Intel, processor speeds dramatically increased and prices dropped.
Without Apple continuing to innovate and capture user mindshare we'd all probably be stuck using something along the lines of Windows ME.
ce n'est pas un Sig.
Steve Jobs must have replied to one of those anonymous e-mails titled "GET OUT OF DEBT NOW".
Ergonomica Auctorita Illico!
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 filing is quarterly not trimesterly. Their second quarter reports have historically been published in the middle of April.
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.
It is cowardly, and a betrayal of whatever it means to be a Jew, to act as a white man
-James Baldwin
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.
pb Reply or e-mail; don't vaguely moderate.
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.
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).
Just a quick correction (not a Troll... I'm glad they're doing well)...
Also noted in the memo is that Apple has $4.8 billion in the bank at this time.
and
Apple has $4.8 billion in total assets
Are not synonymous. Assets include buildings, machinery, office equipment, which I'm sure Apple has laying around somewhere...
Saying Android is a family of phones is akin to saying Linux is a family of PCs.
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.
I bought an iBook on Friday for around $1300 without tax. That must have been the sale that pushed them over the edge.
Mac OS X for x86 would suck. Unless they put a lot of money into driver support or emulation of Win32 drivers, which is risky and inelegant.
The reason why OSX "just works" on Apple computers is because Apple has complete control over the hardware.
The x86 world is so heterogeneous that if an OSX for x86 was released, it would have so many compatibility problems that Windows XP would look elegant by comparison.
And before you say "If Linux can run well on the desktop OSX should be able to as well", the answer is NO, Linux does not work well as a desktop platform yet precisely because of all the unsupported hardware and software.
And before you say "OSX has a fairly large number of commercial software availeable that could give it an edge over Linux as an alternative x86 desktop", the answer is NO, all that software would have to be redesigned, recompiled and retested for x86 which would take a very LONG time.
You OSX-for-x86 folks are so naive, it ceased to be funny a long time ago.
Apple's current business model of making their own hardware _AND_ software is working very well. It is the only way they can stay alive in a Redmond dominated world, and still compete with free (libre) alternatives like Linux.
The unofficial
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
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
Degaussing scares the bad magnetism out of the monitor and fills it with good karma.
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