Cash and debt position
Cypress Semiconductor (CY) is looking to increase its cash flow and use the excess cash to repay its debt. At the end of fiscal 2016, its cash reserves were $121.1 million compared to its long-term debt of $1.2 billion. Its debt increased as it funded the all-cash deal of $550.0 million to acquire Broadcom’s (AVGO) wireless IoT (Internet of Things) business.
Cypress’s debt repayment strategy
Cypress’s leverage ratio is 3.5x. It aims to reduce that ratio to less than 3.0x by the end of fiscal 2017. It plans to do that by using its FCF (free cash flow) for debt repayment. It expects its FCF to grow three times faster than its revenue. If revenue is expected to rise 7.0%–9.0% annually over the next five years, FCF is expected to rise 21.0%–27.0%.
It has stalled its share buyback program until it reduces its leverage ratio below 3.0x. However, it will continue to pay dividends.
Why Cypress is looking to reduce its debt
High debt levels have reduced Cypress’s flexibility to invest in future growth opportunities or buy back shares when the stock is low.
At the Morgan Stanley Technology, Media & Telecom Conference on February 28, 2017, Cypress’s chief financial officer Thad Trent said the company wants to reduce its leverage to get some flexibility in order to make large investments such as M&A (mergers and acquisitions). He said the company is interested in acquiring businesses that would complement its automotive and industrial portfolios or expand its distribution channels.
At the company’s 2017 analyst day, Cypress’s chief executive officer Hassane El-Khoury, in response to an analyst’s question, said that sensor is the next technology the company is eyeing but didn’t say if sensor would be its next M&A target.
Trent said the company won’t make any aggressive investments such as M&A when its debt levels are high. A similar statement was made by Broadcom’s chief executive officer after the Broadcom-Avago merger. But the company announced the acquisition of Brocade Communications Systems (BRCD) for a cash consideration of $5.5 billion in 2016.
Amid all the restructuring, there were some management conflicts that encouraged Cypress founder T.J. Rodgers to encourage a change in board members. We’ll take a closer look at that in the next part.