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Can Freescale survive?

Posted: 27 Apr 2009     Print Version  Bookmark and Share

Keywords:IC vendor  restructuring  debt swap 

Despite posting sharp decline in Q1 sales and wider sequential operating loss, Freescale Semiconductor Inc. chairman and CEO Rich Beyer insists the IC vendor is actually in better than expected shape and will not succumb to pressures from crushing debt servicing costs and the weak global economy.

The analogue, automotive, networking and multi-market IC vendor, which spun off from Motorola Inc. and was taken private by a group of equity investors, will emerge eventually a stronger player in the electronics industry once the effects of cost-cutting actions taken over the last year begin to kick in, according to Beyer.

"The reorganisation actions we are taking are ahead of schedule and we are very confident we are not only going to survive but that we are going to do better than many of the companies we compete against," Beyer said in an interview.

Beyer does have concerns about the company that keep him awake at night. He is worried about the dampening effects of the global economic downturn on sales across the electronics industry and is similarly concerned about financial liquidity at Freescale, which at the end of Q1 had Rs.37,289.39 crore ($7.5 billion) in long-term debts.

"It is difficult predicting the bottom of the economic recession and I am of course concerned about liquidity," Beyer said. "However, we believe Freescale's revenue is stabilising and we are confident we'll see improvements soon."

Time will eventually confirm whether or not Beyer's confidence in Freescale was misplaced but for now, he remains certain the chipmaker is taking the necessary steps to counter the impact of the negative economy on its operations.

The latest actions include plans to shutter a manufacturing facility in Japan and close another one in France. While the restructuring will initially involve higher cash expenses related to severance and other plant closing costs, the company believes its overall operating costs will go down as a result.

On the positive side, the latest debt swap arranged by the company in Q1 shaved a substantial amount off Freescale's long-term debt, bringing it down to Rs.37,289.39 crore ($7.5 billion) as at the end of Q1 from Rs.47,730.42 crore ($9.6 billion) at the end of 2008. As a result, interest expense will go down by up to Rs.696.07 crore ($140 million) per annum with the effects kicking in during Q2, according to Beyer.

The company's cash and short-term securities also grew slightly in Q1 to Rs.7,060.12 crore ($1.42 billion) from Rs.6,910.97 crore ($1.39 billion) in the December 2008 quarter. While the liquidity improvement may seem negligible, merely managing to stop bleeding cash is already a major achievement for the company especially during a period of negative sales growth.

"We are doing well against the background of a tough economic environment," Beyer said. "I believe we have a solid foundation we are building on and the company's leading market position in several product areas excites me."

Beating the odds
It would seem the odds might still be against Freescale. Sales tumbled in Q1 more than 40 per cent from the year-ago quarter and dropped 11 per cent from the immediately preceding quarter. The forecast for Q2 is for sales to be flat sequentially with strong growth unlikely until at least Q3.

Also, while long-term debts have fallen from almost Rs.49,719.19 crore ($10 billion), the cost of servicing Rs.37,289.39 crore ($7.5 billion) in debts is still huge, amounting to several hundred millions per year, funds the company can use for critical marketing as well as other research and development functions. Furthermore, with the equity markets still in turmoil, Freescale may not be able in the near future to whittle down its debts by selling shares to the public.

Beyer still believes the company stands a good chance of proving sceptics wrong, though, pointing this time to signs of sales stabilisation as his primary evidence and the improvement in the company's fiscal status.

Freescale did beat its own internal sales forecasts slightly in Q1, marking the early signs of improvements in the company's performance, according to Beyer.

"Our revenue dropped less than we expected in the first quarter and orders appeared to be stabilising. We don't have indications things are improving greatly but stabilisation is good," Beyer said.

- Bolaji Ojo
EE Times

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