"NXP's liquidity position, which already was affected by first-half 2008 cash operating losses, has tightened further as a result of the restructuring announcement," Cochelin said in a report.
Although the company faces numerous problems, the major constraint on NXP's management continues to be its cash-flow situation. Operating costs remain dangerously high despite efforts by the company to reduce expenses. Meanwhile, its R&D budget exceeds the industry average by several percentage points.
In the second quarter, for instance, NXP's R&D expense totalled $345 million, representing 23 percent of sales, compared with 20 percent for fellow European semiconductor vendor STMicroelectronics N.V., and 16 percent for market leader Intel Corp. during the same three-month period.
As a percentage of sales, NXP's general and administrative expenses are also significantly higher than those of STMicroelectronics and Intel. In the second quarter, NXP reported SG&A expenses of $327 million, or 22 percent of the quarterly sales. Meanwhile, Intel and ST had SG&A expenses respectively of 15 percent and 11 percent.
NXP should have started out with a lower debt burden, but now that the company is stuck with billions in long-term financial obligations and a huge annual payment in service fees, management needs to concentrate on paying down the obligations.
In order to do this, NXP may have to sell off some additional business units, an option the management has apparently considered based on recent developments.
Months earlier it looked like NXP was about to put some of the financial pressures behind it when it agreed to the sale of its wireless IC unit to ST. The approximately $1.6 billion it expected from the transaction was to be used to pay down debts and strengthen the company's deteriorating cash position.
With cash flow from operations turning negative, the company desperately needed the additional cash injection.
Management also was looking to shore up the company's shaky finances with additional payments from ST, which had exercised its option to purchase NXP's remaining 20 percent stake in ST-NXP Wireless.
That money should still come in handy and should help offset the $800 million estimated cash payout NXP expects to disburse as a result of the planned reorganization, said Cochelin.
"In the very near term, [NXP's] liquidity is supported by the $1.55 billion of gross proceeds from the disposal of its wireless chip business," Cochelin added. "We expect liquidity to be further supported by the sale of NXP's remaining 20 percent stake in the wireless joint venture."
This slightly positive development did not prevent the lowering of NXP's long-term corporate credit rating, however. S&P also put the company on its negative credit watch citing its $6.7 billion long-term debt and the "very weak profits and cash flow generation."
NXP hopes to address the cash flow and profitability problems with this admittedly comprehensive reorganization plan. The company wants to lower payroll by 4,500, sell or shutter several manufacturing facilities and reduce R&D expenses to about 16 to 17 percent of annual sales.
By closing or selling manufacturing plants, NXP expects to reduce operating costs by $300 million and lower R&D costs $250 million for a combined annual cost reduction of $550 million.
This may not suffice, however. To erase the memory of circumstances surrounding its birth, NXP eventually may be forced to sell business units and concentrate on a few operational divisions. Failing this, it can always opt for a merger with ST or Infineon, taking a cue from the financial market where ailing companies are agreeing to be bought by stronger rivals.