Motorola reports second quarter, first half results

SCHAUMBURG, Ill. -- Motorola, Inc. today reported sales of $7.0 billion in the second quarter of 1998, down 7 percent from $7.5 billion a year earlier. In the first half, sales declined 2 percent to $13.9 billion from $14.2 billion in the first half of 1997. Excluding special items, second-quarter earnings were $6 million, or 1 cent per share in 1998, compared with $392 million, or 64 cents per share in the second quarter of 1997. Excluding special items, earnings for the six months were $147 million, or 25 cents per share, compared with $678 million, or $1.11 per share a year earlier. The company recorded special items of $1.91 billion pre-tax, or $2.23 per share after-tax, in the second quarter of 1998. These items include $1.98 billion of charges associated with a comprehensive series of manufacturing consolidations, cost reductions and restructuring steps intended to improve financial performance, as announced June 4, partially offset by gains on the sale of assets. As a result, the second-quarter loss, including the special items, was $1.3 billion, or $2.22 per share, compared with earnings of $268 million, or 44 cents per share, in the second quarter a year ago. The year- earlier quarter includes special charges against pre-tax earnings of $190 million, or 20 cents per share after-tax, largely from the phase-out of the dynamic random access memory (DRAM) business. In the first six months of 1998, the loss, including special items was $1.15 billion, or $1.92 per share, compared with earnings of $593 million, or 97 cents per share, in last year's first half. Robert L. Growney, president and chief operating officer, said, "As we indicated last month, the second-quarter results reflect further slowing of demand and continuing global pricing pressure, principally in the Semiconductor Products and Messaging, Information and Media segments and driven primarily by economic conditions in Asia," he said. "The goal of our renewal plan," Growney continued, "is to generate annualized savings, once all actions have been implemented over the next 12 months, of more than $750 million. We expect to see the positive impact of these savings to steadily increase over the next several quarters." Growney reviewed the following results of Motorola's major operations for the second quarter, compared with the second quarter of 1997: Cellular Products Segment Segment sales declined 1 percent to $2.78 billion and orders were down 11 percent. Excluding special items referred to earlier, the segment had a smaller operating profit than a year ago. Including special items, the segment had an operating loss versus a profit a year ago. Cellular Subscriber Sector (CSS) sales and orders declined. Sales and orders were higher in Europe, lower in Pan America and significantly lower in Asia. Sales of digital products continued to increase versus last year. This increase was entirely offset by a decline in sales of analog products, caused by a continuing trend of demand shift to digital products. CSS announced an integrated smart card GSM (Global System for Mobile Communications) digital cellular phone that uses two smart cards. This new category of cellular telephones is expected to pave the way for an impressive new range of consumer services, including mobile automated teller machine, remote ticketing, pay-as-you-use telephony and flexible, secure on-line payment mechanisms using smart cards. Cellular Infrastructure Group (CIG) sales increased while orders were significantly lower. Sales were up significantly in Japan and Pan America, lower in Europe and significantly lower in Asia. Orders were higher in Europe, lower in Asia and Pan America, and significantly lower in Japan than a year ago when an unusually high level of orders was recorded on a contract to build a nationwide Code Division Multiple Access (CDMA) system. The cellular infrastructure business has been historically characterized by large orders and irregular purchasing patterns, which can cause volatility in quarterly growth rates. CIG was awarded GSM infrastructure contracts valued at more than $750 million, including the world's single largest GSM contract to date with network operator Telsim in Turkey and multiple contracts in China. These contracts were only partially reflected in the orders reported during the quarter. CIG announced that it has been selected by two of Japan's leading cellular service providers, DDI and IDO, to deploy a trial version of third- generation (3G) cdma2000, also known as Wideband cdmaOne , wireless systems. CIG announced it is establishing a research and development complex in Tokyo to advance its strong position in 3G experimental and commercial wireless systems. CIG announced the development and successful trials of a new software feature called Extended Range Cell that enables GSM operators to achieve three times the coverage from their networks with no additional infrastructure equipment. In addition, CIG announced it was the first in the U.S. to install circuit-switched data and fax services for CDMA digital wireless networks. Semiconductor Products Segment Segment sales decreased 11 percent to $1.81 billion and orders were down 25 percent. Excluding special items referred to earlier, the segment had an operating loss versus a profit a year ago. Including special items, the segment had a larger operating loss than a year ago. Orders were higher in the Transportation Systems Group, lower in the Consumer Systems and Networking and Computing Systems Groups, and significantly lower in the Wireless Subscriber Systems Group and Semiconductor Components Group. All major regions posted lower orders with orders in Japan and Asia down significantly. The semiconductor market continued to be adversely affected by economic difficulties in Asia, contributing to general market weakness and severe pricing pressures in many product lines. Motorola and Lucent Technologies announced a strategic alliance to develop next-generation digital signal processor (DSP) technology, and to cross-license existing DSP architectures. As part of the alliance, Lucent and Motorola will create a joint design center, named Star*Core, in the Atlanta area. Lucent also became the first company to license Motorola's M.CORE microRISC architecture. To serve the consumer and small-office markets, the Semiconductor Products Sector (SPS) announced a new family of imaging products, including the world's first tri-linear complementary metal-oxide semiconductor (CMOS) image sensor with an on-chip digital signal processing engine. Kodak selected a member of Motorola's PowerPC microprocessor family for its new low-cost Mega-Pixel cameras. SPS announced high-speed CMOS static random access memory (SRAM) technology using copper interconnect, which dramatically improves circuit speed, reliability and manufacturing costs. Land Mobile Products Segment Segment sales increased 18 percent to $1.37 billion, orders rose 12 percent and operating profits increased. Orders for iDEN® equipment for integrated digital enhanced networks were up significantly, led by orders for infrastructure equipment in North America, Brazil, Colombia and Japan. A new system in Sao Paulo, Brazil, and a second system in Buenos Aires, Argentina, began operations during the quarter. A 900 MHz dispatch-only system based on iDEN technology was announced and the first trial system was launched in Las Vegas, Nev. The Land Mobile Products Sector won several contracts for TETRA (Terrestrial Trunked Radio) equipment. TETRA is the only European-approved standard for digital trunked radio communications. A contract in excess of $60 million was received from Dolphin Telecommunications for 150,000 radio handsets for use on its national network in the U.K. Contracts for other systems were received from Bucks County, Pa., United Parcel Service, the Vietnam Ministry of Interior, the Royal Malaysian Police, a public safety customer in Brazil and Mexico's railroad, Ferrocarriles de Mexico. Motorola is providing radio products for the 16th Commonwealth Games to be held in Malaysia in September. Messaging, Information and Media Segment Segment sales declined 32 percent to $771 million and orders were down 35 percent. Excluding special items referred to earlier, the segment had a smaller operating profit than a year ago. Including special items, the segment had an operating loss versus a profit a year ago. Orders in the Paging Group were down significantly. Sales and orders were lower in North America and significantly lower in China. Motorola announced the first commercial launch of the FLEX high speed, multi-frequency roaming paging network in the Guangxi Zhuang Autonomous Region of China's nationwide paging network. Motorola announced the Email VClient application allowing Lotus Notes® Mail users to receive and manage electronic mail on a Motorola PageWriter 2000 pocket message center. The PageWriter 2000 design team won this year's Mobile Innovation Award for Communications Design. The Information Systems Group announced a V.90 version of its software modem product. Orders and sales increased significantly in the emerging cable modem business. Automotive, Component, Computer and Energy Sector Sales declined 9 percent and orders were down 15 percent. Excluding special items referred to earlier, the sector had a smaller operating profit than a year ago. Including special items, the sector had an operating loss versus a profit a year ago. The sector's results are reported as part of the "Other Products" segment. In its automotive business, the sector was awarded additional telematics business by a major U.S. automotive manufacturer. Telematics is designed to provide security, information, convenience and entertainment from a central service center to drivers and their passengers. Motorola's Telematics Information Systems business announced contracts from Renault and Visteon Automotive Systems. The Renault telematics system will be offered as an option on all new Renault vehicles in France, beginning in the fall of 1998, and will gradually be extended throughout Europe. Motorola and Visteon announced a new vehicle emergency messaging system that will be available for Ford-authorized aftermarket installation on select new vehicles in North America. Motorola Computer Group announced the first CompactPCI® Single Board Computer utilizing Intel Corporation's recently announced Pentium® II processor mobile module. Space and Systems Technology Group Sales declined 36 percent, orders were 30 percent lower, and the group had an operating loss versus a profit a year ago. The changes in sales, orders and operating profits are all largely attributable to the lower dollar value than a year ago of contractual milestones on the IRIDIUM® program. Results are reported as part of the "Other Products" segment. Initial deployment of the IRIDIUM global personal communications system was completed, bringing the total of operational, on-orbit satellites to 67. Operational and voice quality testing of the system continued to be demonstrated successfully, and nine Iridium gateways achieved pre-commercial acceptance by gateway owners. As previously reported, Iridium LLC may require additional financing, possibly during the second half of 1998, to continue to make contractual payments to Motorola. Motorola and Teledesic LLC announced that they intend to become partners in the further development of the broadband Internet-in-the-Sky satellite communications system. Motorola would be the prime contractor for construction of the network, designed to provide high-speed data connections to businesses and individuals everywhere on Earth. Other industrial partners include Boeing Co. and Matra Marconi Space. General Corporate Manufacturing and other costs of sales were 71 percent of sales, compared with 67 percent in the second quarter of 1997. Increased pricing pressures were experienced in several business segments and were due to a variety of factors including weakened Asian currencies and reduced demand. Selling, general and administrative expenses were 19 percent of sales compared with 17 percent in the year-earlier period, largely as a result of lower sales. Depreciation expense decreased slightly as a percent of sales. Interest expense increased slightly as a percent of sales. The tax rate for the second quarter was 30 percent versus a 35 percent tax rate a year ago. Review and Outlook Christopher B. Galvin, chief executive officer, said conditions in the whole semiconductor industry worldwide and general business conditions in Asia weakened further in the second quarter. "The currency-related impact on pricing and consumer confidence continues to affect the Asian region and Motorola. Significant efforts to stabilize the region by the International Monetary Fund and various governments have not yet proven successful. The negative impact on our business is likely to continue for at least the remainder of the year," he said. "To respond to the severity of these business conditions, we are resizing the company through aggressive restructuring steps announced last month. These actions are intended to improve our long-term profitability and efficiency. "In the next few days we will announce a more collaborative and market- focused Communications Enterprise that links together all of Motorola's communications businesses so they can easily share resources and cooperate on key business and technology issues. At the same time, it will realign individual businesses so they can quickly and more efficiently direct Motorola's diverse core competencies toward winning solutions, as the convergence of wireless technologies continues," Galvin said. "In the longer term," Galvin said, "we expect to see the benefits of alliances and joint development projects in technologies ranging from digital signal processors to Internet Protocol telephony. We are pursuing a number of cooperative efforts to enable us to build on our software strengths and technology portfolio and to bring profitable new products to the marketplace ahead of the competition. We believe these efforts, coupled with our strong position in emerging markets throughout the world, set the stage for a renewal of growth in sales and earnings." Business Risks Statements about Motorola's renewal plan and the impact of such plan, the impact of new products, the planned Star*Core design center, the Teledesic LLC investment, and the statements in "Review and Outlook" are forward-looking and involve risks and uncertainties. Motorola wishes to caution the reader that the factors below and those in Motorola's 1998 Proxy Statement on pages F-8 and F-9 and in its other SEC filings could cause Motorola's results to differ materially from those stated in the forward-looking statements. These factors include: (i) the ability of Motorola to implement the manufacturing consolidations, cost reductions and restructuring actions in a timely manner and the success of those efforts; (ii) the ability of the Company to integrate its businesses to reduce costs and increase efficiencies; (iii) unanticipated impact of the renewal plan on productivity and the ability of the company to retain and where necessary recruit employees; (iv) the success of efforts to stabilize economic conditions in Asia; (v) pricing pressures and demand for the company's products, particularly semiconductor and messaging products, especially in light of the current economic conditions in Asia; (vi) the potential that the impact of weakened currencies in Southeast Asia could spread to countries where Motorola does a sizable amount of business, including China and Japan; (vii) the ability of Motorola's cellular businesses to continue to transition to digital products and gain market share; (viii) the risk that Motorola will not be able to finalize the terms of its partnership with Teledesic LLC; (ix) product and technology development and commercialization risks, including for newer digital products and IRIDIUM® products; (x) steady growth in emerging markets; (xi) unanticipated changes in demand for products; and (xii) continued weak demand for paging products in North America and China. IRIDIUM® is a registered trademark and service mark of Iridium LLC. LotusNotes® is a registered trademark of Lotus Development Corp. CompactPCI® is a registered trademark of PCI Industrial Computers and Manufacturers Group. PowerPC is a trademark of IBM Corporation. Pentium® is a trademark of Intel Corporation. Motorola, Inc. and Subsidiaries Consolidated Statements of Operations (In millions, except per share amounts) Three Months Ended Six Months Ended June 27, June 28, June 27, June 28, 1998 1997 1998 1997 Net sales $7,023 $7,521 $13,909 $14,163 Manufacturing and other costs of sales 5,018 5,019 9,832 9,403 Selling, general and admin. expenses 1,351 1,311 2,588 2,473 Restructuring charges 1,980 170 1,980 170 Depreciation expense 518 572 1,058 1,137 Interest expense, net 53 36 91 68 Total costs and expenses 8,920 7,108 15,549 13,251 Earnings(loss)before income taxes (1,897) 413 (1,640) 912 Income tax(benefit) provision (569) 145 (492) 319 Net earnings(loss) $(1,328) $ 268 $(1,148) $ 593 Net earnings(loss) per share Basic $ (2.22) $ .45 $ (1.92) $ 1.00 Diluted $ (2.22) $ .44 $ (1.92) $ .97 Avg. common shares outstanding Basic 597.9 594.7 597.6 594.3 Diluted 597.9 610.2 597.6 611.4 Dividends paid per share $ .12 $ .12 $ .24 $ .24 Net margin on sales (18.9%) 3.6% (8.3%) 4.2% Return on average invested capital (3.8%) 7.4% R&D expenditures $ 722 $ 678 $1,425 $1,292 Motorola, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Dollars in millions) ASSETS June 27, Dec. 31, 1998 1997 Cash and cash equivalents $ 1,177 $ 1,445 Short-term investments 268 335 Accounts receivable, net 4,904 4,847 Inventories 4,383 4,096 Other current assets 2,576 2,513 Total current assets 13,308 13,236 Property, plant and equipment, net 9,990 9,856 Other assets 4,930 4,186 Total assets $28,228 $27,278 LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable and current portion of long-term debt $ 2,973 $ 1,282 Accounts payable 1,972 2,297 Accrued liabilities 6,140 5,476 Total current liabilities 11,085 9,055 Long-term debt 2,129 2,144 Other liabilities 2,942 2,807 Stockholders' equity 12,072 13,272 Total liabilities, stockholders' equity $28,228 $27,278 Motorola, Inc. and Subsidiaries Information by Industry Segment (Dollars in millions) Summarized below are the Company's segment sales as defined by industry segment for the three and six months ended June 27, 1998 and June 28, 1997: Three months ended June 27, June 28, 1998 1997 % Change Cellular Products $2,785 $2,824 (1) Semiconductor Products 1,808 2,032 (11) Land Mobile Products 1,370 1,160 18 Messaging, Information and Media Products 771 1,135 (32) Other Products 959 1,166 (18) Adjustments & eliminations (670) (796) (16) Industry segment totals $7,023 $7,521 (7) Six months ended June 27, June 28, 1998 1997 % Change Cellular Products $5,592 $5,537 1 Semiconductor Products 3,641 3,840 (5) Land Mobile Products 2,613 2,137 22 Messaging, Information and Media Products 1,463 2,059 (29) Other Products 1,977 2,042 (3) Adjustments & eliminations (1,377) (1,452) (5) Industry segment totals $13,909 $14,163 (2)

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