Corporate Bankruptcy
Semiconductor Memory Chip Maker Yields to Bankruptcy
June 11, 2009
Photo courtesy of webshots.com
The Spansion, Inc. corporate office
in Sunnyvale, California.
Spansion Inc. bankruptcy illustrates the risk posed by companies dependent on high market caps in boom times for survival. The company was below the industry averages on all five CSI benchmarks. CSI score: 3.10.
On March 1, 2009, Spansion, Inc., a $2.3 billion flash memory chip manufacturer based in Sunnyvale, California, and four of its affiliates filed a voluntary petition for chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Delaware only three years after going public on the NASDAQ.
In its 2008 annual filing, Spansion reported total assets of $1.78 billion compared to total liabilities of $2.32 billion for a debts-to-assets ratio of 1.31 to 1. Debts-to-assets is a critical credit-analysis tool used in determining the solvency of a company.
Spansion's debt was approximately $1.44 billion with roughly $1.23 billion of it coming due within one year thus bringing the company's current ratio to a dismal .38 to 1, according to the company's 2008 annual report. By 2008, the company's debt had risen to 63% of total revenue.
To make matters worse, amidst a downturn in the stock market investors were fleeing the company's stock in droves as Spansion's market cap plummeted from $1.14 billion as of June 30, 2007 to $309 million at the same time in 2008, a 73% drop in one year.
And finally, operating cash, the most critical source of funding for all companies, dropped from 17.2% of revenue in 2006 to 8.7% of revenue in 2007 before increasing slightly to 11.5% in 2008.
In its bankruptcy filing, the company blamed an oversupply of flash memory products, the global economic recession, which it said reduced the demand for its products, and the "inability to obtain the additional external financing necessary to meet capital expenditure needs and operational costs," according to the filing.
Spansion, Inc., which had 9,300 employees in 2007, was formed in 2003 as the result of a joint flash memory manufacturing venture between Advanced Micro Devices, Inc. (AMD), a $6 billion chip maker based in California, and Fujitsu Limited, a $52 billion technology products and services conglomerate based in Japan. After originally manufacturing memory chips primarily for distribution through AMD and Fujitsu, the company went public in December 2005 and in 2006 began selling products to a variety of customers, according to SEC filings. In 2007, some 88% of the company's flash memory devices were sold outside of North America, mainly in China, Europe and Korea. 35% of the company's sales were to Fujitsu with none to AMD.
In the 2007 Credit Standards Index (CSI), Spansion was ranked in the lower 15% of the 95 companies listed in the semiconductor industry grouping with a CSI score of 3.10 on a scale of 1 to 5 with 1.00 being the best and 5.00 the worst. Although a 3.10 score is not in the danger zone per se, the company was well below its industry peers in two important categories - current ratio (liquidity) and debts-to-assets (solvency).
Spansion's debts-to-assets ratio in 2007, as reported in the 2008 CSI, was .57:1 well above the industry average of .32:1. But the real warning sign was current ratio, which for Spansion was at 1.69 in an industry with historically high current ratios for its healthiest companies due in part to an abundance of cash from investor capital. The average current ratio for the semiconductor industry in 2007 was 4.19:1. Spansion's was an enormous 2.50 below the industry average.
With revenue, operating cash and market capitalization diminishing, the company was becoming dependent on a variety of lending facilities from a variety of sources to stay afloat. Not surprisingly, in an era of seemingly endless credit and unlimited risk, several financial firms decided to put their money where customers and investors would not.
By 2008, the company had approximately $1.8 billion in loan obligations, operating leases and unconditional purchase commitments. The majority, $625 million, was in the form of senior secured floating rate notes, according to SEC filings. The largest of these was a $550 million floating rate loan issued on May 18, 2007 by Wells Fargo Bank. GE Capital and Bank of America are two more institutions with a history of lending to Spansion.
The last pre-bankruptcy petition loan appears to be an $11.7 revolving credit facility issued to Spansion China on June 27, 2008 by a Chinese financial institution. The details of this loan agreement, and the name of the lender, could not be found in any SEC filings by CreditPulse.
Just before the bankruptcy, Spansion laid off approximately 3,000 employees, or 35% of its workforce, according to a press release issued by the company on February 23rd. Previously, the company had announced that its executives would take a 10% pay cut but reinstated the executive pay cut a week before the company filed bankruptcy.
"Our reduction in force was a regrettable, but an unavoidable decision that affected all levels of the company, including our executive management team," said Holly L. Burkhart, Director of Public Relations, in a press release dated February 24th. "The remaining members of Spansion's management team are more critical than ever to leading the company through a difficult period so that we can preserve the value of the enterprise and create new jobs in the future. As a result, the Board of Directors made a strategic decision to restore the full salaries of our key executives to ensure their continued commitment to the company's future," the press release stated.
