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Impact of CA Technologies Acquisition on Broadcom’s Balance Sheet

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Broadcom’s cash flows

Broadcom’s (AVGO) strategy of acquiring companies that generate high cash flows was evident in its CA Technologies acquisition. Broadcom’s fiscal 2019 first-quarter FCF (free cash flow) rose 39% YoY (year-over-year) to $2.03 billion, or 35% of its revenue. The first quarter of the fiscal year is sequentially weak for Broadcom’s cash flows, as it includes APBs (annual performance bonus). Broadcom’s FCF rose 39% YoY after deducting $530 million in APB cash bonuses and $363 million in cash payments related to restructuring.

Broadcom gave a conservative FCF guidance of $10 billion for fiscal 2019, up 21.3% YoY. It plans to use its fiscal 2018 FCF to provide returns to shareholders.

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Shareholder returns

In the first quarter of fiscal 2019, Broadcom returned $4.6 billion to its shareholders: $1.1 billion in the form of dividend payments and $3.5 billion in the form of stock buybacks. Its management stated that it was committed to buying back $8 million worth of stocks and spending $4 billion on dividend payments in fiscal 2019, resulting in total returns of $12 billion.

On Broadcom’s recent earnings call, its management stated that it didn’t plan to repay its debt this year, which could be a cause for concern for investors in the event the economy falls into a recession.

Broadcom’s leverage

At the end of the first quarter of fiscal 2019, the company’s debt stood at $37.6 billion, and its cash stood at $5.1 billion. Its debt more than doubled from $17.5 billion in the last quarter, as it included the debt it undertook to fund its $18.9 billion CA Technologies acquisition. Broadcom expects its increased debt to foot its net interest and other expenses of ~$1.25 billion in fiscal 2019.

Moody’s has downgraded Broadcom, as it expects the CA Technologies acquisition to increase its total debt-to-EBITDA ratio from 2.0x to 3.7x. Broadcom’s leverage ratio will be higher than Qualcomm’s (QCOM) and Intel’s (INTC) leverage ratios of 2.63x and 0.83x, respectively.

While Broadcom’s balance sheet leverage is one of its major shortcomings, its biggest strength is its profits. Next, we’ll look at Broadcom’s profitability.

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