Posted by: Olga Kharif on December 5, 2008
Just when many investors thought that situation at Motorola couldn’t get any worse, it has: On Dec. 5, Standard & Poor’s (which is, just like BusinessWeek.com, a division of McGraw-Hill Cos.) cut the handset and infrastructure maker’s rating to junk. Earlier this week, rating agency Moody’s warned it may cut Motorola’s rating as well.
Basic reasons behind the downgrade are nothing new: Motorola’s device division continues to face operational challenges that could become more pronounced as the industry battles the current economic downturn. Analysts at researcher Strategy Analytics forecast global cell-phone unit sales to drop 1% to 5% next year. The world’s largest cell-phone maker, Nokia, has already revised its forward guidance twice. And that’s Nokia, which has just released several cool products. Motorola, which may not have any truly revolutionary new products out until the second half of 2009, could be even more vulnerable in this difficult market environment.
On top of that, Motorola is in the midst of yet another major restructuring, which could be taking away from its operational focus. In October, Motorola’s new CEO, Sanjay Jha, said the company will effectively look to exit a number of global markets. It’s also tweaked its mobile software strategy, and its new software initiatives will require further investments next year.
All that is happening against the backdrop of tight credit markets. Motorola had nearly $3 billion in cash and equivalents at the end of September; still, it has burned through $210 million to $440 million per quarter in the last couple of quarters. (The company has had positive operating cash flows.) And now that S&P has cut the rating, the company’s borrowing costs will likely rise. According to Motorola’s last annual report, “If [rating changes] were to occur, the terms on which the Company could borrow money would become more onerous. The Company would also have to pay higher fees related to its domestic revolving credit facility.” According to the same report, Motorola’s long-term debt repayments next year will be relatively light, but they will ramp up starting in 2010.
A lot of people in the industry are counting on Jha, known as a stellar executive, to turn the company around no matter what. But a credit rating cut won’t make his already tough job any easier.
Here's Motorola's comment, issued to BusinessWeek.com today, that addresses the credit rating cut: "We believe this ratings action undervalues the strength of the Company's balance sheet and the substantial efforts underway to improve the Company's profitability. Motorola remains committed to maintaining tight controls on costs, improving operating cash flow across the Company and concentrating on maintaining our long-standing relationships with all of our customers."
Motorola adds: "Our plans to rebuild and reposition the Mobile Devices business remain a top priority. We have announced significant actions to accelerate the consolidation of our product platforms and refocus our investment and market priorities. We are confident that as we execute on our plan and consistently bring to market more differentiated, cost-effective devices, we will deliver sustained financial improvement."