In the previous part of the series, we learned that NXP Semiconductors (NXPI) is divesting its low-margin Standard Products division to improve its margins. An improvement in the company’s margins could also improve its cash flows, strengthening its short-term financial position.
NXP completed the integration of Freescale in 4Q15, which saw its FCF (free cash flow) rise 77% sequentially to $308 million in 1Q16. Initially, growth was slow as the company incurred integration costs. However, it started to realize merger synergies that almost doubled its FCF from $356 million in 2Q16 to $610 million in 3Q16.
The company expects its operating margin to improve slightly in 4Q16 while its revenue remains flat. This could result in FCF of over $610 million in 4Q16, bringing the company’s 2016 FCF to $1.8 billion, a rise of 84% year-over-year.
NXP’s inventory rose 150% to $1.9 billion in 4Q15 after Freescale’s inventory was added. Over the past three quarters, NXP managed to reduce its inventory by $738 million to $1.1 billion in 3Q16, which equated to 101 DIO (days of inventory outstanding). The company plans to reduce its inventory further, bringing it down to its pre-acquisition level of 95 DIO, over the next few quarters.
Freescale not only increased NXP’s cash flows and inventory but also doubled its long-term debt from $10 billion in 3Q15 to $21 billion in 4Q15. This increased the combined company’s leverage from 1.7x in 2014 to 3.9x in 2015. The company managed to reduce its debt to $8.7 billion by the end of 3Q16.
Next, we’ll look at the company’s debt repayment strategy.