Back in the late '90s, when Apple (NASDAQ:AAPL) was flirting with bankruptcy, the Mac maker had accumulated a considerable debt load as part of its efforts to stay afloat. Things had gotten so dire that credit rating agencies had downgraded Apple's paper to junk status, and outstanding debt reached $954 million in fiscal 1998. Near the end of that fiscal year, Apple would release the first iMac, marking the beginning of its turnaround.
By the end of fiscal 1999, Apple had just $300 million of debt left -- unsecured notes initially issued in 1994 with a 6.5% coupon -- that was set to mature in February 2004. Over the next five years, Apple's turnaround gained momentum as the company proceeded to release the revolutionary iPod in 2001.
By the time those notes were coming due, Apple had nearly $4.8 billion in cash on the balance sheet and could easily afford to pay what it owed. "The Company currently anticipates utilizing its existing cash balances to settle these notes when due," Apple wrote in its fiscal 2003 annual report. "Today is a historic day of sorts for our company," Steve Jobs wrote in an internal memo to employees once the debt was extinguished.
Back to the future
Fast-forward 16 years, and Apple now has over $103 billion in term debt. Add in commercial paper and total debt climbs to $108 billion. Of course, a lot has changed over those years: Apple released the iPhone and iPad; Jobs succumbed to pancreatic cancer and Tim Cook succeeded him as CEO; and the Cupertino tech juggernaut became the first trillion-dollar U.S. company.
As revenue grew exponentially and Apple began diverting money to foreign subsidiaries as part of its tax-minimization strategies, so did the company's overall cash hoard. But that money was effectively locked up, as companies were only able to keep cash outside the U.S. if the earnings were designated as "indefinitely reinvested" abroad, allowing multinational corporations to defer paying taxes on those profits.
Somewhat ironically, the year that Apple became debt-free (2004) was the same year that Congress approved the first repatriation tax holiday, which allowed companies to bring cash home at a reduced tax rate of 5.25%. That created an inadvertent precedent, incentivizing companies to wait around for the next tax holiday, and collective international cash holdings continued to climb for another 13 years.
Why Apple has so much debt
Apple initiated its current capital return program, which consists of dividend and share repurchases, in 2012. By then, total cash had grown to nearly $140 billion and Apple had more money than it knew what to do with, so it wanted to give some of that cash back to shareholders.
Instead of repatriating cash at the then-statutory rate of 35% to return to investors, it began issuing debt as an alternative way to bolster its domestic cash position without touching international reserves. Operating cash flow was more than sufficient to service that debt, and the debt strategy helped the company reduce its weighted average cost of capital (WACC), thanks in part to the associated tax shield.
Between the beginning of 2013 and the end of 2017, Apple proceeded to accumulate $110 billion worth of debt as it utilized this strategy. Everything changed when tax reform was passed in December 2017, which included deemed repatriation that effectively unlocked foreign cash reserves. Since then, Apple has mostly been letting its debt mature. The company did issue bonds in September, its first debt offering since tax reform, but outstanding debt continues to trend lower overall.
Over the course of two decades, Apple went from relying on debt for survival to voluntarily issuing copious amounts of paper just because it could.