Despite the fact that Apple beat on both the top and bottom line on Monday on the back of better-than-expected iPhone sales (thank you China), and despite a near $20 billion increase in the company's massive cash pile which now stands at around $193 billion, shares have languised this week, falling around 5% post-earnings.
Now, we have a possible explanation for the weakness. As FT reports, the company's 10Q contains a warning that Apple could face "material" financial damage in the event the European Commission forces Ireland to reclaim a decade's worth of tax advantages that have accrued to the company under a tax deal that may have accorded it a "selective" advantage. Here's more:
Apple has warned investors that it could face “material” financial penalties from the European Commission’s investigation into its tax deals with Ireland — the first time it has disclosed the potential consequences of the probe.
Under US securities rules, a material event is usually defined as 5 per cent of a company’s average pre-tax earnings for the past three years. For Apple, which reported the highest quarterly profit ever for a US company in January, that could exceed $2.5bn, according to FT calculations.
The warning came in Apple’s regular 10-Q filing to the Securities and Exchange Commission on Tuesday, a day after it reported first-quarter revenues of $58bn and net income of $13.6bn.
Brussels has the power to order Dublin to reclaim 10 years of tax advantages granted to Apple if it finds that deals struck in 1991 and 2007 were unlawful.
Both the Irish government and Apple have consistently denied any wrongdoing and declined to comment on the size of any fine. However, some Brussels officials suggest any ruling could set a new record for a state-aid investigation penalty by comfortably topping €1bn.
Apple said in the filing: “If the European Commission were to conclude against Ireland, it could require Ireland to recover from the company past taxes covering a period of up to 10 years reflective of the disallowed state aid, and such amount could be material.”
Just how "material" is this "material" event for the maker of the newest, easily breakable wearable that's guaranteed to get you ridiculed by colleagues? Have a look at the following chart which shows onshore versus offshore cash and decide for yourself…