Apple's Most Overlooked Weapon? Its Balance Sheet.

Apple (Nasdaq: AAPL  ) reported its fiscal third-quarter earnings last week. This we know. Digging through the company's 10-Q that was filed shortly thereafter, investors can glean even more information on the inner workings of the largest tech company in the world.

I'm looking at the balance sheet today.

The money mountain
We already knew that Apple was up to $117.2 billion in total cash, but Apple waits until the 10-Q to disclose exactly how much of that sits abroad and how much rests stateside. On the conference call, CFO Peter Oppenheimer gave an approximation but now we have a more precise figure as to how much cash is being held by foreign subsidiaries: $81.4 billion.

Source: SEC filings.

Source: SEC filings.

That leaves just $35.8 billion held domestically. Apple continues to stockpile its international war chest.

This next chart shows the sequential changes in Apple's cash balance, and you can see a clear trend of increasingly bolstering its international coffers while its domestic figure even decreased slightly last quarter.

Source: SEC filings.

Source: SEC filings.

Over the past four quarters, foreign cash has increased by a total of $33.8 billion, domestic just $7.3 billion.

A few months back, The New York Times ran a piece on how much of this composition is a result of elaborate strategies that Apple uses to keep down its tax bill, which isn't unique to Apple in any way, but merely the latest in the publication's string of hit pieces against the company. Fellow tech giants like Google (Nasdaq: GOOG  ) and Microsoft (Nasdaq: MSFT  ) use similar strategies.

Bloomberg ran a report a few years ago on how Google uses similar tactics to lighten its tax load and even said Facebook (Nasdaq: FB  ) , which has since gone public, was preparing to set up a similar legal maze of subsidiaries at the time. Microsoft has $54 billion stashed overseas, an even larger proportion of its total $63 billion in cash and equivalents than Apple keeps internationally. Microsoft keeps 86% of its money in foreign subsidiaries, higher than Apple's 69%. Repatriation taxes keep Mr. Softy's dollars from coming home, just like Apple's.

As far as what Apple puts all those dollars in, it continues to invest primarily in corporate securities and U.S. Treasuries and U.S. agency securities. The company dabbles a little bit in mortgage- and asset-backed securities as well as non-U.S. government securities.

Source: SEC filings. As of June 30, 2012.

Source: SEC filings. As of June 30, 2012.

Fortunately, I don't think Apple's at risk of having any checks bounce anytime soon, which would simply wreak havoc on the iCredit score it's worked so hard to obtain.

All those dollars ensures that Apple has plenty of ammo for ...

"Apple bought them all"
While Apple famously has no official long-term debt, the company still effectively has some through the use of off-balance sheet arrangements and contractual obligations, some of which extend through 2022. The Mac maker is also known for locking down supply of critical components, leaving rivals scrambling to find the ingredients that they need for their competing devices.

When including the commitments it has with third-party manufacturers that assemble its products as well as component purchases, Apple's on the hook for $13.6 billion. That's in addition to the $4.4 billion in component prepayments it's already made that is classified as an asset on the balance sheet.

The amount of purchase commitments that Apple has agreed to has steadily risen over the years as demand for its iDevices soars.

Source: SEC filings.

Source: SEC filings.

The current figure is up from just $3.5 billion three years ago and illustrates how Apple is able to lock down what it needs in advance with its weight and deep pockets.

The Verge recently profiled the demise of Palm, including when Hewlett-Packard (NYSE: HPQ  ) acquired the company for $1.2 billion in 2010. At the time, HP's new subsidiary needed some financial backing from its new parent to get components to compete meaningfully, except here's how one anonymous former Palm exec recalled it:

We told HP we needed better displays [for the Pre 3]. They'd come back and say, Apple bought them all. Our suppliers tell us we need to build them a factory if we want the displays and they weren't willing to put the billion dollars upfront to do that. The same thing happened with cameras. We'd pick a part; turns out Apple picked the same part.

Source: The Verge. Emphasis added.

Obviously, Apple has no problem putting down billions upfront to get what it needs, and its rivals are the ones that suffer for it.

Weapon of mass destruction
One downside is that all that cash artificially deflates some of Apple's efficiency metrics, such as return on assets or return on equity, among others, so the Mac maker is actually even more efficient than you think. Still, Apple has done something remarkable: It has weaponized its balance sheet.

Apple's ability to lock down the broader supply chain and cripple rivals is one reason it shows no signs of slowing down in the long term. Sign up for this brand-new premium research service that's all Apple, all the time to read more.

Fool contributor Evan Niu owns shares of Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Facebook, Google, Microsoft, and Apple. Motley Fool newsletter services have recommended buying shares of Microsoft, Google, Apple, and Facebook and creating bull call spread positions in Microsoft and Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (18) | Recommend This Article (66)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 31, 2012, at 10:05 PM, techy46 wrote:

    No kidding they could actually pay Americans to make their crappy products.

  • Report this Comment On July 31, 2012, at 10:13 PM, EquityBull wrote:

    If our politicians had a grade school IQ they could see how cutting the repatriation tax to 5% or killing it altogether would bring over a trillion back to the USA without costing tax payers a dime.

    No matter what that money would trickle out and be spent (good for economy) and taxed. Taxes such as sales tax, use tax, dividend tax, new jobs, payroll taxes and all the other taxes our government finds a way to grab.

    If the companies brought the money home and left it in the bank that would be about the only way it would not find its way into the IRS coffers. But hey...that would be exactly equivalent to what it is right NOW.

    Will our do nothing politicians ever make this happen? Certainly not this year. You would need a grade school IQ to see how easy this one is....

  • Report this Comment On July 31, 2012, at 10:47 PM, 1984macman wrote:

    All that cash is nothing more than a waste product of the Apple innovation machine. Apple is literally sh*tting gold....

  • Report this Comment On August 02, 2012, at 6:23 PM, ershler wrote:

    I agree with EquityBull about getting rid of the repatriation tax, corporations don't have enough reasons to outsource or setup elaborate tax dodges as it is.

  • Report this Comment On August 02, 2012, at 6:33 PM, dennyinusa wrote:

    ershler

    Agree with you 100%.

  • Report this Comment On August 03, 2012, at 8:31 AM, The1MAGE wrote:

    Even Apple is a drop in the bucket to the amounts of cash that people want to bring to America, but won't because of the tax. A reduction would result in tons of cash entering the treasury, and an instant and giant boost to our economy that the "stimulus" couldn't do.

  • Report this Comment On August 10, 2012, at 11:33 AM, KirkHartley wrote:

    Equity Bull and others argue for a tax holiday but ignore the historic facts. The last overseas cash holiday failed to produce returns and instead was paid out as dividends virtually dollar for dollar. The definitive study is at the link below; the abstract for the paper is pasted further below. It is time to put in place a tax on excess offshore cash, and to end the carried interest tax dodge for hedge funders.

    http://www.nber.org/papers/w15023.pdf

    This paper analyzes the impact on firm behavior of the Homeland Investment Act of 2004, which provided

    a one-time tax holiday for the repatriation of foreign earnings by U.S. multinationals. The analysis

    controls for endogeneity and omitted variable bias by using instruments that identify the firms likely

    to receive the largest tax benefits from the holiday. Repatriations did not lead to an increase in domestic

    investment, employment or R&D—even for the firms that lobbied for the tax holiday stating these

    intentions and for firms that appeared to be financially constrained. Instead, a $1 increase in repatriations

    was associated with an increase of almost $1 in payouts to shareholders. These results suggest that

    the domestic operations of U.S. multinationals were not financially constrained and that these firms

    were reasonably well-governed. The results have important implications for understanding the impact

    of U.S. corporate tax policy on multinational firms.

    Dhammika Dharmapala

    University of Illinois College of Law

    504 E. Pennsylvania Avenue

    Champaign, IL 61820

    dharmap@illinois.edu

    C. Fritz Foley

    Harvard Business School

    Soldiers Field

    Boston, MA 02163

    and NBER

    ffoley@hbs.edu

    Kristin J. Forbes

    MIT Sloan School Room E52-455

    50 Memorial Drive

    Cambridge, MA 02142

    and NBER

    kjforbes@mit.edu

  • Report this Comment On August 10, 2012, at 12:11 PM, SteinwayB731 wrote:

    It's real simple. If you think Apple makes crappy products, don't buy them. I'm sure they'll find a way to make up the lost earnings.

  • Report this Comment On August 10, 2012, at 12:31 PM, Longhorns01 wrote:

    If it ends up as a dividend to shareholders, then each shareholder will pay taxes on the income and the government gets their money...So, we don't need more taxes.

    Oh, sorry, you need a grade school IQ to figure this out..

  • Report this Comment On August 10, 2012, at 12:37 PM, gslusher wrote:

    One thing that should be noted is that Apple sets aside a portion of their cash for potential tax payments. As I recall, they use a higher rate for this than, say, Microsoft does. Look for "deferred tax liabilities" or something like that.

    Also, contracts like the author mentioned are NOT "debts." When that money is paid out, it will be counted as cost of goods sold. Prepayments are different, of course. As I understand it, those cannot be expensed until the goods are actually delivered, just as the supplier can't recognize the prepayment as revenue until they ship the goods.

  • Report this Comment On August 10, 2012, at 1:25 PM, bretco wrote:

    I believe Longhorns01's comments are on point

    much to the counterpoint of Dhammika-Fritzy-Kristin's ascertion that ignores the basic "trickle-down" benefit of dividends paid to the commonfolk.

    Thank goodness for that grade school I.Q.

  • Report this Comment On August 10, 2012, at 2:26 PM, JRomeKEG wrote:

    I'm tending to agree withbretco, gslusher and Equity Bull in that bringing the dollars back to the US is good even if they run straight to the shareholders, dollar for dollar, because that's more dollars in circulation and more business and more tax revenue for Uncle Sam! I'm also very appreciative of that grade school education and my IQ is above my age!

  • Report this Comment On August 11, 2012, at 10:06 AM, cgreen23 wrote:

    Equity Bull, JromeKEG, Bretco, Longhorns01:

    Before so cavalierly suggesting the thoughtful piece posted by Kirk Hartly referencing the NBER study, you might want to study up on your tax law:

    "Federal tax rates on dividend income were temporarily reduced in 2003, when Congress passed the Jobs and Growth Tax Reconciliation Act. The 2003 law capped the tax rates on dividend income at 15%. Taxpayers in the 10% and 15% tax brackets had their tax rate on dividend income lowered to zero. The 2003 move also cut the maximum tax rate on long-term capital gains from 20% to 15%. These tax rates on dividend income and long-term capital gains were temporarily extended in 2006 and again in 2010."

    Source: http://www.investorplace.com/investorpolitics/threat-of-high...

    In other words: if your proposal to cut rates were enacted and all the money went to dividends, contrary to what you might like to think, it would not 'trickle down' in the same way as other kinds of stimulus. It would accrue disproportionately to the shareholder class of folks, many of whom would pay Bush-era super-low tax rates on that income.

    Once again, the mindless chant of 'trickle-down' needs some examination. Thanks to Hartly for trying to inject some information into the conversation, but apparently it requires constant vigilance against the knee-jerk crowd.

  • Report this Comment On August 11, 2012, at 5:16 PM, jhoyt1313 wrote:

    cggreen assumes that equity bull and others don't understand the current tax law. I summarize his point to be that even though billions of dollars would come back to the U.S. not enough would go to the government, and more importantly the rich would not be punished enough.

    I don't care if none of the money goes to the government. Put all of those dollars in the hands of the "shareholder class" and what would they do? Oh yeah, invest it. No chance of that helping the economy!

    You call them mindless? Really?

  • Report this Comment On August 12, 2012, at 5:25 PM, blpc wrote:

    There IS a high percentage of the population that is cgreen23's "investor class. Anyone with a pension, a 401(k) account, and an IRA are investors. So, if you work for a governmental entity, you are investor class. If you are a union member, you are investor class. It amazes me that so many don't understand this concept. Also, many people that are not now in the invertor class, will be at sometime in their lives. Like college students. Also, how does taking money from the investor class in the form of taxes help the folks that are not investors. Answer: It doesn't.

  • Report this Comment On August 14, 2012, at 1:31 PM, PoorerThanU wrote:

    Glad to see so many common sense points and responses to cgreen23 and KirkHartley. Tax it 0; what does it matter? If the company's are free to utilize it any way the see fit, shareholders will demand a return (either through additional investments or dividends).

    And, btw, do you think Calpers owns any Apple stock? Do you think the New York Firefighters pension fund owns any Apple? Texas Teachers Retirement? YES, THEY ALL DO. I'm glad green and Hartley have fallen for the class warfare rhetoric of the BHO administration. The rest of us understand economics and capital creation. All of that cash is not working very hard right now to avoid taxes. Reduce (or eliminate) the tax and watch that cash work, baby!

    Although I don't think this is grade school stuff, it is only introductory college material. ;)

  • Report this Comment On August 14, 2012, at 1:33 PM, PoorerThanU wrote:

    Maybe all the politicians only took law, poli-sci, and history classes in college. Therefore, the introductory economic concepts escape their comprehension....

  • Report this Comment On September 01, 2012, at 4:32 AM, bordereiver wrote:

    There are other reasons to leave cash in a foreign subsidiary. For example, a company has operations in China. It is not easy to get cash out of China at times without cost, and if there is another affiliate in China that needs cash, the subsidiary with the cash can loan it to the affiliate that needs funds. So some may well be tax planning in terms of when it goes back to the US, but there are other reasons for using it outside US as well, especially for a company that has presence in many countries.

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