PHILADELPHIA NXP B.V.'s management should begin seriously considering filing for Chapter 11 bankruptcy reorganization in order to improve its chances for surviving and emerging stronger from a rapidly deteriorating semiconductor market. Such a move would lessen the huge debt burden loaded on the chip maker by former parents Philips Electronics and its private equity partners.
To be sure, a bankruptcy filing wouldn't be welcomed by Philips or the Kohlberg Kravis & Roberts-led group of equity investors that took the company private in a leveraged buyout deal in 2006. But recent events point to more difficulties ahead for NXP unless it is able to shed more than $6 billion in debts and the huge interest expense it must pay annually to service those notes.
The company's latest offer to swap portions of its existing debts for new secured notes represent only a Band-Aid that will only provide temporary relief, not the total cure NXP urgently requires. The bond exchange represents only about 25 percent of NXP's outstanding debt, Standard & Poor's analyst Patrice Cochelin said in a report, leaving the company with almost $5 billion in long-term debt.
The huge debt, combined with falling sales as demand for chips weakens and negative cash flow from operations, could doom NXP. Fourth quarter 2008 sales, for example, tumbled 39 percent, to $1 billion from $1.7 billion in the comparable 2007 quarter, driving its gross profit margin down to 18 percent from 38 percent. The net loss for the quarter was $645 million versus net income of $69 million in the fourth quarter of 2007.
Furthermore, NXP is looking at a hefty double-digit sales decline for the current quarter. Company executives admitted that "visibility of sales for the full year ahead is even more limited," adding that revenue in the first quarter could drop by as much as 40 percent from the December quarter.
"Our ability to give guidance on our expected first quarter revenues is limited, due to the unusual conditions prevailing in the semiconductor industry," the company said in a filing with the U.S. Securities & Exchange Commission. "However, our current expectation is that our 2009 revenues will be lower than our 2008 revenues, and the size of this decline could be significant. A decline, combined with the large cash cost of our redesign program, our interest expense and our capital expenditures would lead to reduced liquidity at the end of 2009."
On Tuesday, (March 4) ratings agency Standard & Poor's cut its corporate rating for NXP to "CC" from "CCC," and put the company on a "credit watch with negative implications" following the company's offer to exchange portions of its unsecured debts for new secured euro- and dollar-denominated notes.
The exchange offer was meant to help NXP reduce interest expense payments at a time of reduced cash flow from operations tied to the downturn in the global economy and sliding demand for semiconductor products.
While the move should help take some pressure off the Dutch company, it is unlikely to pull it out of its current financial doldrums, S&P's analysts noted, pointing out that even a successful completion of the bond-exchange program would still leave NXP with high debts and interest expense obligations.
Combined with the ongoing market downturn and other strategic operational moves being taken by the company to lower costs, this could result in high cash utilization in 2009, further jeopardizing NXP's ability to pull quickly out of the financial mess that followed its spin off from Philips.