Freescale dragged to loss; will lay off 10%

SAN FRANCISO—Freescale Semiconductor said it would trim about 10 percent of its workforce after charges dragged the company to a $3.37 billion loss in the third quarter. Hurt by non-cash charges associated with the company's decision to divest its cellular products business and weakening market conditions, Freescale reported the loss on net sales of $1.41 billion for the third quarter. Freescale (Austin, Texas) also said it would reduce its global workforce by about 2,400 jobs as part of a restructuring program that the company expects will save more than $400 million per year. Freescale recorded non-cash intangible assets and goodwill charges totaling $3.37 billion in the third quarter, an estimate which the company expects plans to finalize in the fourth quarter. The $3.37 billion write off is "a recognition that the value of our company, much like the value of other companies, has come down," particularly in light of plummeting market valuations of peer companies, said Rich Beyer, Freescale chairman and CEO. Beyer emphasized that the charge was a non-cash charge and said Freescale's third quarter "was a thoroughly decent quarter given the incredible macroeconomic environment." Freescale reported third quarter net sales of $1.41 billion, down 4 percent sequentially from $1.47 billion in the second quarter and down 3 percent year-to-year from $1.45 billion in the third quarter of 2007. Freescale recorded earnings before interest, tax, depreciation and amortization (EBITDA) of $387 million in the third quarter. Beyer expressed concern about the macroeconomic environment, suggesting the current chip industry downturn could be worse than those in recent memory. While all downturns share certain characteristics, Beyer said, the current downturn is different from the tech sector implosion of 2000. As a more broad-based economic problem, this downturn could potentially be worse, he added. "I believe that the potential exists for it to be a deeper drop in revenues or a longer period in which the revenues stay down—or, God forbid, both," Beyer said. Freescale said it has initiated a series of restructuring actions which will reduce headcount in its supply chain, technology, marketing and general administrative functions. The company said it expects to incur about $175 million in restructuring charges. The moves, which include modest layoffs initiated in the third quarter, are expected to save the company more than $400 million per year. Freescale announced Oct. 2 that it would exit the wireless handset chip set business to focus on other core products. Beyer said the company is involved in negotiations with interested parties over the unit and that the company continues to expect to reach a decision within the next 60 to 90 days. Beyer acknowledged that Freescale may be unable to strike a deal with a buyer, but characterized that possibility as unlikely "We are both hopeful and confident that we will sell the business or a major part of the business," he said. Beyer politely declined to identify possible buyers or characterize the types of companies Freescale is negotiating with. Executives said Freescale must resize its cost structure given that it plans to divest about 20 percent of its revenue with the cellular business sale. In addition to layoffs, the company will undertake cost-cutting moves like the closure of its 6-inch fab in East Kilbride, Scotland. Freescale has said semiconductor manufacturing there will cease by the middle of next year. But Beyer said Freescale is "not just hunkering down and reducing its cost structure." In addition to making cuts, Freescale is putting more investment in areas that will drive growth, he said, like creating more sales and field applications roles. The company is also investing more in some areas of product development, he said, like multicore platforms, media applications processors and some of the company's products for the automotive market. During the third quarter, Freescale said it recorded reorganization costs which resulted in a net benefit of $139 million. This included a $296 million benefit from a third quarter settlement with Motorola, which was partially offset by $156 million in charges, including impairment of R&D assets, about $38 million for contract termination fees associated with the cancelling of the supply agreement for the company's wireless business, and about $57 million in employee severance costs associated with the closure of the East Kilbride facility, Freescale said. Freescale said net sales from its microcontroller product segment in the third quarter decreased to $408 million, down from $460 million in the second quarter and down from $465 million in the third quarter of 2007. RF, analog and sensor net sales were $261 million in the third quarter, down from $280 million in the second quarter but up from $256 million in the third quarter of 2007, Freescale said. Networking and multimedia products net sales were $307 million in the third quarter, down from $312 million in the second quarter but up from $281 million in the third quarter of 2007. Cellular net sales were $344 million in the third quarter, up from $337 million in the second quarter and down from $349 million in the third quarter of 2007, Freescale said. Freescale's third quarter loss was more than 16 times the $202 million the company lost in the same period of 2007.