Rich Beyer, chairman and CEO at Freescale Semiconductor Inc. would not put a timeline on the company's plans for an initial public offering but, clearly, the automotive and networking IC vendor is several steps closer to returning to the equity market as a publicly traded company.
In fact, I won't be surprised if the Austin, Texas-based company sometime later this year or latest by early 2011 announce its much speculated IPO, a move that would mark the completion or near-completion of several years of reorganization and restructuring that started with the company being taken private in a leveraged buyout in 2006.
"Freescale has come out of the recession in a very healthy state. The debt and capital structure is also healthy. The shipment that we are making are being received for production by customers and not merely going into inventory restocking, we have good visibility for the next three months and slightly beyond and we are on track with the revenue growth we have achieved," said Rich Beyer, chairman and CEO of the company in an interview. "An IPO is the most likely next scenario for Freescale."
Many of Freescale's current bondholders would welcome an IPO. It's already obvious bondholders are happy to roll over the company's debts rather than press for immediate repayment. Not only has Freescale's sales and operating positions improved but the company is also benefitting from a resurgent U.S. and global economy, rising demand for semiconductor products and improving overall sentiments for its key automotive and networking markets.
Here are 5 reasons Freescale will return to the equity market within the next year:
1. Healthy sales growth: Freescale's quarterly revenue rose above $1 billion in the March ended quarter, putting the company on track to exceed $4 billion in annual revenue with the additional possibility of declaring net profit on a GAAP basis.
While annual sales would still be substantially below the $6.4 billion the company posted in 2006, operating metrics have also significantly improved and the completion of its multi-year reorganization have refocused Freescale on higher-margin IC products, giving it a much leaner but healthier look.
2. Higher design wins: Freescale is obviously on a roll as far as customers are concerned. The company continues to rack up design wins in key microcontroller, RF, analog and sensor and networking and multimedia markets and indications are that this will continue through the current quarter and perhaps well into the third quarter, according to Beyer.
"Design wins continue very strongly. We are confident the second quarter is going to be a growth quarter and the third quarter would also be good," Beyer said.
3. Improved financial position: In the first quarter, Freescale posted a smaller operating loss on a GAAP basis and adjusted earnings before interest taxes and depreciation and amortization of $194 million versus adjusted EBITDA loss of $21 million in the year-ago quarter. This is a huge achievement for the company because it shows the fundamentals of its operations, which exclude non-cash charges, have significantly improved.
Even on a GAAP basis, Freescale is likely to post operating profit in the second or third quarter as sales continue to grow. Furthermore, gross profit margin in the first quarter strengthened sequentially to 36.2 percent from 32.5 percent in the 2009 fourth quarter and up sharply from 21 percent in the first quarter of 2009.
As sales continue to rise, Freescale's operating metrics will also strengthen, pushing the company towards profitability and improving its profile with current and potential investors.
4. Better debt profile: Freescale's enormous long-term debts have hung on the company like a millstone since it was taken private but steps taken over the last one year have significantly changed perception amongst investors of its ability to continue—in industry parlance—as a going concern.
True, long-term debt at $7.4 billion as at the end of the first quarter remains stubbornly high—versus $7.5 billion in the 2009 first quarter—but behind the scene Freescale has been successful in implementing steps to push out the maturity of a huge chunk of those obligations. In the just ended quarter, for instance, the company sold $2.1 billion of debt and used the proceeds to "extend over $4.4 billion of near term maturities out to 2016 and 2018."
In other words, Freescale only has to service these debts for another five to eight years before worrying about repaying them. It is expected that a successful IPO would give it the chance to repurchase the debts or convert some of the obligations to shares, thereby reducing interest expenses.
5. A vibrant equity market: This is one of the strongest factors supporting a likely return of Freescale to the equity market soon. Globally, investment markets have improved strongly since the middle of 2009 and investors are showing greater appetite for new offerings. In fact, several semiconductor and electronic-related IPOs have been launched in recent months, including a filing by NXP Semiconductor, the Eindhoven, the Netherlands, chip vendor that was similarly taken private by equity investors.
The Dow Jones Industrial Average, for instance, has risen almost 45 percent in the last year while the Philadelphia Semiconductor Index has jumped 70 percent with the leading chip vendors seeing their valuations rocket skyward.
Executives at Freescale and other private semiconductor companies like NXP know they cannot afford to wait too long when the market is on a positive swing especially because the traditionally cyclical sector could take another dive within the next year or so. The stars appear perfectly aligned right now if Freescale wants to sell shares as the management has indicated.
What could hurt the company's move to an IPO? A dramatic deterioration in equity and semiconductor market conditions, worsening sales at the company, weak product portfolio, poor execution of turnaround strategy, including a return to higher operating costs, and management turnover are all possible events that could set the company back and make its offering less attractive to investors.
Having come this far, however, it is unlikely Freescale's executive management and the board of directors would let things get out of hand again. As Beyer has repeatedly said, the company would continue to stay on top of the things it can control, which means the march towards the IPO would continue. Any other events and developments beyond the company's control would not even qualify for boardroom discussion.