PHILADELPHIA NXP Semiconductor didn't need enemies, competitors or bad financial advisers -- not with parents like the ones the Dutch IC vendor had at its birth in late 2006.
One parent, Royal Philips Electronics N.V., wanted to get out fast from the capital-intensive semiconductor market. The second parent, a group of investors led by Kohlberg Kravis Roberts & Co. (KKR), saw huge dollar signs in a sector it barely understood.
The combination has been a fiasco for NXP, the IC company that emerged when Philips sold 80 percent of its semiconductor business to the investors, keeping 20 percent for what the management assumed would be a huge future payout from an initial public offering.
The circumstances surrounding NXP's birth and Philips' decision to sell a major chunk of the company to investors rather than spin out the entire business to shareholders incapacitated the company and made it extremely difficult for the company to compete against rivals with better cash liquidity and even lower debt leverage.
To finance the purchase, the KKR group borrowed heavily and tacked on the loans on to NXP's balance sheet, leaving the company with a huge debt burden when the transaction closed. NXP's long-term debt was as high as $6.7 billion at the end of the second quarter, according to Standard & Poor's, which calculates the company is spending approximately $485 million annually servicing the debt.
Additionally, the company's high operating costs have hurt margins and squeezed cash flow even as inventories increased, resulting in a net loss of $330 million in the June quarter compared with a net loss of $359 million in the year-ago quarter.
To shore up its weak cash position, NXP during the quarter borrowed $450 million from its revolving credit line to boost quarter-ending cash balance to $660 million from $519 million at the end of the preceding quarter.
With $6 billion in annual sales and a leading position in several major IC markets, including consumer electronics, automotive, identification and multimarket applications, NXP Semiconductor should have emerged as a leading force in the high-tech sector.
That's not the case.
On Friday (Sept. 12), the Eindhoven, Netherlands,-based company announced the latest reorganization program in its two-year history as it struggles with losses, negative cash flow, mounting manufacturing and R&D costs, a weakening U.S. dollar and pressures from problems in the global economy.
This set of problems would have been extremely difficult for any company, but at NXP the situation is compounded by the $6.7 billion debt millstone conveniently hung on its neck by parents Philips and the KKR-led investors.
Reorganization: A temporary solution
Cost-cutting will help relieve the financial pressures facing the company but what ails the IC vendor won't be cured by job cuts or another round of operational restructuring.
Don't be fooled, either, by the numbers tossed out by NXP's management. The $550 million in annual savings the company expects from the latest action sounds substantial, but will the goal be achieved in the midst of growing global economic problems, a fluctuating U.S. dollar and a comprehensive reorganization program that is likely to sap employee morale and detract management from its core goals?
While NXP management tried to portray the reorganization as the panacea for the company's problems, analysts contend it will at least initially add to NXP's woes. In fact, the multifaceted restructuring plan, which will affect the manufacturing and R&D operations, further complicates management's task of restoring the company to profitability and will erode its cash position significantly in the first year, according to industry analyst Patrice Cochelin, based in Standard & Poor's Paris office.