If a corporation has a lot of cash, one would think it doesn't need to take on the added costs (through interest payments) associated with debt. But it appears things in practice are a little different from what they are in theory; a simple screen on robotdough.com demonstrates that there are some 1200 public companies in the US in net cash positions that still feel the need to carry debt, paying interest charges that would otherwise be part of shareholder earnings. There can be many legitimate reasons for doing this, but some reasons are more legit than others! C-com (CMI) is actually making currency speculations with its debt!
A logical reason a company may have debt even though it has even more cash has to do with its debt repayment schedule. If debt is due relatively soon, it's only prudent that the company have the cash on hand to pay it off. But this group represents a relatively small subset of the companies who carry debt despite large cash balances.
A major reason many international companies are in this high-cash-some-debt boat has to do with tax laws. For American companies in particular, tax charges for bringing home money that was earned abroad are rather punitive. As such, these companies often borrow at home to fund what they'd rather be doing (e.g. paying out shareholders and/or hiring employees) with cash that is stuck abroad. Cisco (CSCO) and Microsoft (MSFT) are among the companies in this boat.
Another reason a company may have tons of cash and still carry debt may have to do with its being a Chinese RTO. Just because the bank says the cash balance is $100 million (or $200 million, because if you're going to lie, you might as well make it worth your while) doesn't mean you can spend it on salaries. Management of such companies would need debt to grow the operations of the company (however highly exaggerated they may be), despite "cash balances" well in excess of these amounts.
But C-Com doesn't really fit any of the above categories. Though it is an international company, Canadian tax rates and laws are such that repatriation is not such a big deal. And yet despite a cash balance of just under $10 million, management saw fit to take out a $2.8 million loan, bringing the cash balance up to $12.5 million. Here's why:
"Management decided to increase its cash secured line of credit...to meet its Canadian dollar obligations rather than convert its United States dollars into Canadian dollars at unfavourable exchange rate."
In other words, the company is starting to speculate on currency! As the Canadian dollar has strengthened recently against the greenback, the company is betting the opposite will happen. While I may agree with their thinking, I am by no means sure about it, and I don't see how they can be either. Currency markets can stay out of whack for many years at a time, and so this decision increases this company's risk: the company has effectively increased the currency mismatch between its costs and its revenues by increasing its Canadian dollar costs, which have to be paid down with US dollars at some point.
Rather than taking additional currency risks, C-Com would probably have been better served had it hedged its currency mismatch by purchasing forward currency contracts. Since it did not do that ("The Company typically does not enter into foreign currency hedges"), it seems to be trying to recoup currency losses by speculating that currency movements will reverse themselves. The company has enough business risks...why add to the list?
Disclosure: No position