Markets & Finance

S&P Cuts Motorola Debt Rating


On June 14, 2002, Standard & Poor's lowered its corporate credit rating on Motorola Inc. to 'BBB' and revised its outlook to stable. The action reflected Standard & Poor's belief that weak market conditions could challenge the company's ability to increase its profitability to appropriate levels for the prior rating, despite progress to date.

Ratings continue to reflect the Schaumburg, Ill.-based company's good position in the cellular handset, semiconductor, two-way radio, broadband and wireless infrastructure industries, as well as its strong balance sheet.

Motorola's March 2002 quarterly revenues were $6 billion, down 20% year-on-year. Still, Motorola expects June quarter sales to increase by at least 7%-8% sequentially and that revenues for all of 2002 will be about $27 billion-$28.5 billion, or 10% below the 2001 level.

Substantial cost-reduction programs have helped to support overall profitability, as EBITDA for the March 2002 quarter was $479 million, down from $556 million for the March 2001 quarter despite the revenue decline. The company's net loss for the March 2002 quarter was $174 million, adjusted for special items. Excluding these charges, Motorola expects to return to net profitability in the second half and to be profitable for the full year as economic conditions improve and already-announced cost reduction actions continue, offsetting first half losses.

Motorola's wireless infrastructure business is experiencing very depressed revenue levels as telecom network operators defer all but the most essential expenditures.

The handset unit's operating profitability, excluding special items, was $108 million in the March quarter, compared to a $382 million loss a year earlier. Improvements are attributable to substantial staff cuts and major product cost-reduction programs, as sales of $2.3 billion were unchanged from year earlier. Still, industry growth has stalled, although Motorola has gained share to 17%. Long-term performance will depend on competitive actions and uncertain consumer choices.

The semiconductor unit's revenues have remained near $1.1 billion for the past three quarters. Losses have been trimmed, while the industry is slowly recovering. Motorola expects to be profitable in the fourth quarter of this year at a $4.9 billion annualized run rate. Still, the business is very capital-intensive.

The cable TV/broadband unit also faces depressed revenues, although it has remained profitable, as were other operations, including private radio systems and automotive electronics.

Restructuring actions totaling $6.4 billion pretax in 2001 were targeted to reduce the company's breakeven sales level 25%. Cumulative headcount reductions by the end of 2002 will total 50,000 positions, from Motorola's 150,000-peak census in mid-2000.

Excluding one-time items, the company expects its net loss to be below $88 million in the June quarter, that it will return to profitability in the September quarter, and that it will generate at least $88 million net income for the full year. Motorola's return on capital has averaged 6% for the past three years, well below average for the rating category, and is likely to remain so over the intermediate period.

Motorola had cut its capital expenditures to $1.3 billion in 2001, from $4 billion in 2000. Ongoing plans to outsource a significant portion of semiconductor production should help curtail future fixed-asset expenditures. The company generated free cash flows of $1.2 billion over the 12 months ended March 31, 2002, and sold numerous holdings in 2001 to bolster liquidity. Net debt was reduced to $4 billion at March 31, 2002, from $8.1 billion one year earlier. Motorola retains ample financial flexibility, with cash balances of $6 billion at that date, in addition to full availability under its recently renegotiated $1.8 billion revolving credit agreement.

Total debt was about $10 billion on March 31, 2002 including capitalized leases. Debt to EBITDA was 4.4x for the 12 months ended March 31, although improvements are expected as profitability recovers this year.

Motorola's business profile and liquidity are expected to support the rating over the intermediate term as profitability measures are strengthened. From Standard & Poor's CreditWire


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