When a high-tech business like Tektronix
Tektronix builds electronic testing and monitoring equipment, the stuff that helps companies like Motorola
The steps Tektronix has taken over the past quarter to upgrade its capital structure include taking on $345 million in new debt and buying back $164 million worth of company stock. Wait a minute -- isn't that particular one-two punch exactly what IBM
Before taking on the new debt, Tektronix had a squeaky-clean balance sheet, with nary a borrowed penny. Even now, it hardly faces a crushing debt load -- interest payments for the quarter totaled only $1.4 million, which makes for an EBIT-to-interest ratio of about 20.
That's comparable to the interest service ratios at IBM (where EBIT is 40 times interest), Cisco Systems
Yes, but why bother?
The new capital structure has reached a degree of leverage comparable to some respectable, mature tech companies. Sometimes, a certain degree of debt can benefit a company by lowering its weighted average cost of capital, thanks to tax advantages associated with the deductibility of interest payments.
The board just upped its authorized share repurchase limits by another $350 million, and management expects to spend something like $140 million of that by the end of the fiscal year. That's three more quarters from now, and I wouldn't be surprised to see that estimate raised before all is said and done. After all, the company bought back roughly 7% of its outstanding shares in just one quarter, and that was at a significantly fatter price tag per share than what we're looking at today. If Tektronix believes the company is undervalued, it makes sense for management to maintain an active repurchase program like IBM and HP.
I hope that makes sense to my fellow gearheads. It never hurts to understand financial theories a bit better, even if all you ever invest in are high-flying high-tech operations. Taking on debt just to buy back stock may look like fiscal insanity, but there are time-honored reasons for this practice. Tektronix is simply acting like a grown-up business and emulating some excellent role models.
Further financial Foolishness: