Even after Freescale Semiconductor Inc. posted a sharp decline in first quarter sales and wider sequential operating loss, 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 analog, automotive, networking and multimarket 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, chairman and CEO of the company.
"The reorganization 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 the first quarter had $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 stabilizing 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 the first quarter shaved a substantial amount off Freescale's long-term debt, bringing it down to $7.5 billion as at the end of the first quarter from $9.6 billion at the end of 2008. As a result, interest expense will go down by up to $140 million per annum with the effects kicking in during the second quarter, according to Beyer.
The company's cash and short-term securities also grew slightly in the first quarter to $1.42 billion from $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."
It would seem the odds might still be against Freescale. Sales tumbled in the first quarter more than 40 percent from the year-ago quarter and dropped 11 percent from the immediately preceding quarter. The forecast for the second quarter is for sales to be flat sequentially with strong growth unlikely until at least the third quarter.
Also, while long-term debts have fallen from almost $10 billion, the cost of servicing $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 skeptics wrong, though, pointing this time to signs of sales stabilization as his primary evidence and the improvement in the company's fiscal status.
Freescale did beat its own internal sales forecasts slightly in the first quarter, 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 stabilizing. We don't have indications things are improving greatly but stabilization is good," Beyer said.