Here’s How Dell Pared Its Debt

Chief Financial Officer Tom Sweet explained how Dell worked down its debt, which has allowed it to focus more on investments and share buybacks.

This is the first part in a new series that focuses on how CFOs and other executives reduce debt and other costs. Edited excerpts follow.

WSJ: What were the primary actions you’ve taken to get debt to where it is now?

Mr. Sweet: We put $46 billion of debt on the balance sheet as part of the EMC transaction. It comes down to two or three key areas. One has clearly been the fact that the business has thrown off strong free cash flow, which has allowed for debt pay down. Our capital allocation framework was such that about 90% of free cash flow was going to debt paydown.

You couple that with some of the divestiture transactions we’ve done over the years. And then the final linchpin around that was the VMware spin transaction.

You put all of those together and you took your debt balance from somewhere around $57 billion total debt down to roughly about $27 billion.

WSJ: What are your next steps?

Mr. Sweet: We’re thinking our way through how we deploy capital to invest in the business, provide shareholder returns as well as continue to move forward on some of our debt leverage goals. We’re investment-grade with all three rating agencies at this point. We will continue deleveraging. But in general, a lot of the heavy lifting is done.

WSJ: Do you have a debt target in mind?

Mr. Sweet: Our goal is to get to a 1.5 times Ebitda leverage ratio over the next few years. That says you’ve got to pay down roughly $2 billion to $3 billion worth of incremental debt to get to that range. That’s probably a healthy leverage ratio for a company of our size. That would be funded principally through balance sheet cash or cash flow from operations.

WSJ: Will the Federal Reserve’s planned interest rate increases have an impact on your leverage?

Mr. Sweet: I don’t believe so. Our debt right now is principally fixed-rate debt, given the low rate environment we’ve been in over the last few years. Ultimately over time, you do want a bit of a blend of both floating and fixed. But right now we’re principally fixed.

WSJ: What does having investment-grade ratings enable you to do?

Mr. Sweet: Expand 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 roughly 40% to 60% of our free cash flow would be devoted to some type of shareholder capital return program, either dividends or buybacks.

The remaining portion would be focused on deleveraging as well as investment in the business. [Editor’s note: In September, Dell said its board approved a $5 billion stock buyback program.]

WSJ: What tips do you have for other CFOs who are working to deleverage their business?

Mr. Sweet: You’ve got to set a plan and continue to execute the plan. You’ve got to ensure that the organization and your leadership understand how you’re thinking about capital allocation, balancing the needs of debt repayment versus investments in the business—recognizing that you have to have some flexibility in that as circumstances arise. Much of it is just being consistent in your focus and in your messaging to the external investor and analyst community about what your intention is around use of capital.

WSJ: What didn’t work?

Mr. Sweet: Certain things that I thought were going to play out one way clearly played out a different way. The example I think of is part of the exchange transaction we did in 2019, which ultimately resulted in us being a public company with Class C common stock. We ended up putting roughly $5 billion in debt on the balance sheet as part of that transaction.

I hadn’t really contemplated that when we started our debt progression, but that was clearly a need of the business and what we thought was appropriate from a corporate structure perspective to get that exchange transaction done.

That’d be an example of something that really we hadn’t planned to do, but it was the appropriate thing to do at that time.

Write to Mark Maurer at [email protected]