Apple Inc. (AAPL): The Debt Bombshell You Probably Missed

Inc. (NASDAQ:AAPL) , the Cupertino, California-based tech giant, is sitting on a pile of cash. As a matter of fact, there is no company in the world that is sitting on more cash than Apple Inc. (NASDAQ:AAPL). To be precise, the company possesses close to $145 billion in cash. Theoretically, Apple can purchase Amazon.com, Inc. (NASDAQ:AMZN) for $113 billion in cash and still keep a nice chunk of change.

The question most ordinary investors ask is: why in the world does a company this size need to raise money at this magnitude, while having so much cash in the bank?

Tax issues

A significant part of Apple Inc. (NASDAQ:AAPL)’s cash and cash equivalent is trapped outside the U.S. – the recent numbers are: $102 billion out of $145 billion is held overseas. A 35% income tax is certainly an issue for Apple, or anybody in his right mind. If Apple were to repatriate its foreign-held cash, it would be subject to U.S. corporate income taxes. In other words, Apple would have to cut a $14 billion check to the IRS.

The U.S. marginal income tax rates are among the highest in the developed world. The problem lies in the fact that corporate income taxes aren’t uniform. Corporate America “formula” for U.S. tax duty is very simple – take deductions on foreign income taxes paid, but stay away from foreign profits that are subject to higher U.S. tax rates. The average “Joe” would probably do the same if he had the legal opportunity.

Return money to frustrated investors

Apple Inc. (NASDAQ:AAPL) shares have dropped over 40% year-to-date, and the slide in stock price led to pressure from frustrated investors. As a result, Tim Cook and the company realized Apple needs to return money to investors, and, basically, let the financial juggling begin.

The first move was the board’s announcement of the company’s intention to increase its share repurchase program from $10 to $60 billion – the largest share buyback authorization of a public company in history. The stock repurchase program came shortly after the stock traded near its 52-week lows.

To put current cash holdings into perspective, Microsoft Corporation (NASDAQ:MSFT) and Google Inc (NASDAQ:GOOG) hold $85 and $50 billion in cash, respectively. Microsoft Corporation (NASDAQ:MSFT)’s repurchase program started in 2004 and already reached the imaginary $101 billion. Furthermore, according to Bloomberg, Google Inc (NASDAQ:GOOG) shareholders are urging the web search giant to follow Apple Inc. (NASDAQ:AAPL) and return part of its $44 billion in cash to investors. One should note, however, that repurchases don’t always pay off for investors. In any case, following the stock repurchase, Apple raised its quarterly dividend by 15% to $3.05 per share.

The second move was issuing the largest bond offering in the world outside the financial sector. Apple Inc. (NASDAQ:AAPL) issued six bond trenches totaling $17 billion. The offering includes three and five-year variable rate bonds, as well as three, five, ten and 30-year fixed rate bonds. The three-year fixed interest bonds will be 0.45%, only slightly higher than three-year U.S. government bonds, which is now about 0.3%. The bonds are expected to channel more investment in Apple, and will be considered a relatively safe investment.