Led by president and CEO Frans van Houten, the Eindhoven, Netherlands-based company has, in less than a year and a half, instituted a major reorganization plan—dubbed Business Renewal Strategy—that is fast reshaping NXP into the antithesis of the company established 50-plus years ago by Koninklijke Philips Electronics NV. Perhaps realizing that remaining competitive means operating less cautiously than it did as a part of Philips, the company is pushing on one hand for lower costs through manufacturing rationalization and, on the other, for faster growth through acquisitions.

The restructuring process is likely to accelerate this year, if NXP's recent moves are any indication. They include the unexpected transaction earlier this month to merge the company's wireless-IC business with that of rival STMicroelectronics NV into a separate, joint venture, along with a February deal with Thomson to create a standalone can-tuner modules company.

Aside from a product-offering reorganization that observers believe will see NXP exit sectors where it doesn't hold commanding positions, the company's most drastic action—and the one that may help most in deflecting criticisms of its highly leveraged debt position—is likely to occur in manufacturing, where NXP is vigorously pursuing what executives describe as an "asset lite" production system. Here, NXP is sharply scaling back its involvement in semiconductor manufacturing, assembly and test in favor of outsourced production to wafer foundries and other partners.

The goal? "Our continued asset-lite strategy for manufacturing through partnerships not only reduces capital expenditure, but also enhances flexibility and time-to-market," the company states in a regulatory filing. "It enables us to maintain more optimized loading in the fabs in spite of cyclical demands."

Pressure is rising across the semiconductor industry for companies to slash operating costs and divert more resources into R&D, sales and marketing, and programs to facilitate the design of their components into OEM products. NXP, especially, is feeling the heat, thanks to its November 2006 exit from Philips. While that transaction is generally considered a positive, credit-rating agencies were dismayed by the debt load the company took on during the separation.

NXP emerged from Philips with billions in long-term debt. It closed its balance sheet in 2007 with debt totaling approximately $6.53 billion (about 4.1 billion euros), down slightly from $4.5 billion at the end of 2006. The company had 706 million euros in cash and cash equivalents at the end of 2007—enough to fund operations, acknowledged Patrice Cochelin, a Standard & Poor's analyst. Nonetheless, Cochelin worries the company is in a precarious financial position and has it on a B-plus negative credit rating.

"The ratings on NXP are constrained by the company's highly leveraged capital structure—which restricts free cash flow generation, leaving reduced headroom for industry cyclicality or unprofitable investments—and by the group's recently weak operating performance," Cochelin said.

NXP executives agree the company should improve its capital structure, but they are less focused on paying down debt than on improving competitive position in key market segments. Managers are implementing a double-pronged strategy focused on acquisitions where necessary and divestiture when appropriate.

By: DocMemory
Copyright © 2023 CST, Inc. All Rights Reserved