Freescale Still Firing People; High Inventory; Low Utilisation.
Over six years after being taken over by a private equity company, Freescale is still firing people. Freescale intends to take $100 million worth of charges for sacking people in the course of this year. For Q4 it took a $40 million charge for severance payments.
Freescale was bought by New York private equity company Blackstone in 2006 at a valuation of $17.6 billion and Blackstone loaded up Freescale with $10 billion of debt which was put on Freescale’s balance sheet.
Since then Freescale management has laboured heroically to reduce the debt to $6.6 billion but the interest payments and capital repayments are a huge burden on a company with annual revenues of $4 billion – restricting its ability to invest in new product programmes which restricts its ability to grow.
Freescale CEO Gregg Lowe, says: “The company has lost share overall for the last several years.” It has also been chronically loss-making.
Freescale is currently caught between the rock of 71% fab utilisation and the hard place of 122 days of inventory. A year or so ago, Freescale ran at 80-90 days of inventory. Freescale’s problem is getting the fab cranked up to operate cost-efficiently without increasing the inventory.
A couple of weeks ago Freescale notified customers and distributors it would be shipping product up to five years old instead of its previous policy of shipping only two year-old product. Although Freescale denies this action was taken specifically to reduce inventory, it is generally assumed in the industry that this is the underlying motivation for the decision to change to shipping five year-old product.
Freescale has a powerful motivation for reducing inventory. If it can reduce its inventory levels significantly, it can increase fab utilisation and that will have a big effect on Freescale’s profitability.
As Freescale CFO Alan Campbell points out: “For every one-point increase in utilization, 30% of that would come through in gross margin. So if utilizations improve from 71% in today to 80%, that’s 900 basis points which would create 300 basis points of gross margin.”