Over the past five years, Dell Technologies Inc. has shed billions of dollars in debt by growing its business and selling assets, such as the recent spin-off from its stake in cloud software company VMware. Inc.
The Round Rock, Texas-based personal computer maker’s $67 billion merger in 2016 with EMC Corp. burdened him with a substantial debt. As of Jan. 28, Dell had net debt of $17.48 billion, down 51.5% from a year earlier, according to data provider S&P Global Market Intelligence. The company said $3 billion in debt unrelated to its financial services arm is due over the next four years.
Chief Financial Officer Tom Sweet explained how Dell reduced its debt, allowing it to focus more on investments and stock buybacks.
This is the first part of a new series that focuses on how CFOs and other executives reduce debt and other costs. Edited excerpts follow.
Tom Sweet, CFO of Dell Technologies.
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Dell Technologies Inc.
WSJ: What were the main steps you took to get the debt to where it is now?
Mr Sweet: We brought $46 billion of debt to the balance sheet as part of the EMC transaction. It boils down to two or three key areas. One of them is clearly the fact that the company generated significant free cash flow, which helped to pay off debt. Our capital allocation framework was such that approximately 90% of free cash flow was dedicated to debt repayment.
Add to that some of the divestiture deals we’ve done over the years. And then the last pivot around that was the VMware spin transaction.
You put it all together and you reduced your debt balance from about $57 billion to about $27 billion.
WSJ: What are your next steps?
Mr Sweet: We are considering how we deploy capital to invest in the business, deliver shareholder returns and continue to make progress on some of our leverage targets. We are currently top quality with all three rating agencies. We will continue our deleveraging. But in general, a lot of the heavy lifting is done.
WSJ: Do you have a debt objective in mind?
Mr Sweet: Our objective is to achieve an Ebitda leverage ratio of 1.5 times over the next few years. That means you need to pay off around $2 billion to $3 billion in additional debt to hit that range. That’s probably a healthy debt ratio for a company our size. This would be funded primarily through balance sheet cash or operating cash flow.
WSJ: Will the interest rate hikes planned by the Federal Reserve have an impact on your leverage?
Mr Sweet: I do not believe. Currently, our debt is primarily fixed rate, given the low rate environment we have found ourselves in over the past few years. Ultimately, over time, you want a bit of a mix of floating and fixed. But right now, we’re mostly set.
WSJ: What does the Investment Grade rating allow you to do?
Mr Sweet: Broaden our capital allocation framework. We rolled out a revised capital allocation framework in September. We talked about the fact that, given our progress on debt and the quality of the balance sheet, we were pivoting our capital allocation framework to be more balanced, where around 40% to 60% of our flow Free cash would be spent on some type of shareholder return of capital program, be it dividends or buybacks.
The remaining part would focus on deleveraging as well as investing in the business. [Editor’s note: In September, Dell said its board approved a $5 billion stock buyback program.]
WSJ: What advice do you have for other CFOs trying to deleverage their businesses?
Mr Sweet: You must define a plan and continue to execute the plan. You need to make sure that the organization and your management understand how you think about allocating capital, balancing debt repayment needs against investments in the business, recognizing that you need to have some flexibility in this regard depending on the circumstances. A lot of it is about being consistent in your objective and in your message to the investment community and outside analysts about your intention regarding the use of capital.
WSJ: What went wrong?
Mr Sweet: Some things that I thought were going to turn out one way clearly turned out a different way. The example I’m thinking of is part of the swap transaction we did in 2019 that ultimately made us public with class C common stock. We ended up listing about $5 billion in debt on the balance sheet as part of this transaction.
I hadn’t really considered this when we started our debt progression, but it was clearly a business need and what we felt was appropriate from a corporate structure perspective to achieve this exchange transaction.
It would be an example of something that we really hadn’t planned on doing, but it was the appropriate thing to do at the time.
Write to Mark Maurer at [email protected]
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