Motorola Reports Third-quarter, Nine-month Results

MOTOROLA REPORTS THIRD-QUARTER, NINE-MONTH RESULTS SCHAUMBURG, Ill. -Motorola, Inc. today reported sales of $7.2 billion in the third quarter of 1998, down 3 percent from $7.4 billion a year earlier. In the first nine months, sales decreased 2 percent to $21.1 billion from $21.5 billion in the first nine months of 1997. Excluding special charges, third-quarter earnings were $40 million, or 7 cents per share after-tax in 1998, compared with $308 million, or 51 cents per share after-tax in the third quarter of 1997. Excluding special charges, earnings for the nine months were $188 million, or 31 cents per share after-tax, compared with $986 million, or $1.62 per share after-tax a year earlier. The third-quarter results reflect the continuing impact of adverse business conditions in Asia and weakness in semiconductors and paging products on a worldwide basis. These negative factors were partially offset by some early benefits from Motorola's manufacturing consolidation, cost reduction and restructuring programs. The company recorded special charges of $117 million pre-tax, or 14 cents per share after-tax, in the third quarter of 1998. These charges include a write-off in connection with the acquisition of Starfish Software, Inc., partially offset by gains on business and asset sales. Including the special charges, third-quarter results were a loss of $42 million, or 7 cents per share after-tax, compared with earnings of $266 million, or 44 cents per share after-tax, in the third quarter a year ago. The year-earlier quarter included special charges against pre-tax earnings of $65 million, or 7 cents per share after- tax, largely from the decision to exit the MacOS?-compatible computer systems business. In the first nine months of 1998, the loss, including special charges, was $1.2 billion, or $1.99 per share after-tax, compared with earnings of $859 million, or $1.41 per share after-tax, in last year's first nine months. This year's loss includes special charges of $2.0 billion pre-tax, or $2.30 per share after-tax, largely as a result of charges associated with a comprehensive series of manufacturing consolidations, cost reductions and restructuring steps intended to improve financial performance. The year-earlier period also includes special charges against pre-tax earnings of $196 million, or 21 cents per share after-tax, largely from the phase-out of the dynamic random access memory (DRAM) business. Robert L. Growney, president and chief operating officer, said the manufacturing consolidation, cost reduction and restructuring programs generated an estimated $140 million in savings during the third quarter. "The program is on track to achieve its goal of an annualized savings rate of at least $750 million by mid-1999," he said. In July, Motorola's communications-related businesses were realigned into the Communications Enterprise, a structure intended to enable integrated solutions and improved responsiveness to the needs of distinct customer segments, including consumers, telecommunications network operators, and commercial, government and industrial users of telecommunications equipment. For this quarter's financial reporting purposes, the company continues to use the previous segments, pending a restatement at a later date. The following are results of major operations for the third quarter, compared with the third quarter of 1997: Cellular Products Segment Segment sales increased 9 percent to $3 billion and orders were down 2 percent. Operating profits were higher due to gains on business and asset sales. Excluding those gains, operating profits would have declined, largely due to increased research and development investment in digital cellular technologies. Cellular Subscriber Sector (CSS) sales and orders declined. However, sales and orders of digital products increased significantly versus last year. This was offset by a very significant decline in sales of analog products, caused by a continuing trend of demand shift to digital products. In Asia, sales and orders were significantly higher, while they were significantly lower in Pan America and slightly lower in Europe. GSM phone sales showed a strong sequential increase due to rapid acceptance of new products announced earlier in 1998, including the cd900 series phones. Motorola announced a broad array of new wireless phones. Shipments of new digital StarTAC® phones for CDMA (Code Division Multiple Access) began in early October and StarTAC phones for TDMA (Time Division Multiple Access)are scheduled to begin shipping later in October. The new V-Series phones, weighing 2.7 ounces, include an analog version scheduled to ship in October, and digital GSM (Global System for Mobile Communications) versions scheduled to ship in December. The Satellite Series 9500 portable phone began initial shipment in September. It is designed for use on the Iridium? global personal communications system. Motorola signed a $100 million agreement with Bell Atlantic Mobile for CDMA digital phones for its new service program. Cellular Infrastructure Group (CIG) sales increased significantly and orders were higher. In Japan and Europe both sales and orders were significantly higher, while they were lower in Pan America and significantly lower in Asia. The cellular infrastructure business has been historically characterized by large orders and irregular purchasing patterns which can cause volatility in quarterly growth rates. Contracts for GSM systems included expansion of a GSM900 network and installation of a commercial GSM1800 dual band network in Beijing, China. The group also received contracts to enhance GSM systems in Germany and Egypt. New CDMA contracts included a $220 million contract for a dual- mode CDMA and analog system in Brazil; a CDMA cellular system in the Democratic Republic of Congo, and a CDMA wireless local loop system in the Dominican Republic. Motorola and three of DDI's service providers announced that commercial service on Japan's first CDMA network was introduced in 177 cities and 440 towns and villages. Further deployment of the nationwide system for DDI and IDO continued on schedule. Land Mobile Products Segment Segment sales increased 3 percent to $1.3 billion, orders increased 20 percent and operating profits were higher. Orders for iDEN? equipment for integrated digital enhanced networks were significantly higher. New iDEN systems began operations in the greater Tokyo area, Rio de Janeiro, Manila and Singapore. Motorola began shipping the i1000 digital handset for business professionals. The palm-sized device offers cellular phone (including speaker phone operation), two-way radio and paging capabilities. The sector was awarded a contract for a TETRA (TErrestrial Trunked RAdio) system for the Basque region of Spain. In the UK, Motorola was selected as the preferred supplier to replace and manage radio services for the London underground railway network as part of the Citylink Consortium. Motorola also will provide voice and data infrastructure equipment as well as mobile and portable products to TRW, Inc., the system integrator for Ohio's statewide radio communications system. Other major system awards were received in Brazil, Colombia, Bermuda, the Azores, Australia and Hong Kong. Both Target and Best Buy announced plans to carry Motorola's TalkAbout consumer radios in their stores. Two smaller and lighter additions to the TalkAbout radio line were announced. Motorola announced its first industry-standard, Internet Protocol (IP)-based wireless data solution for its Private DataTAC network. Messaging, Information and Media Segment Segment sales decreased 38 percent to $552 million and orders were 10 percent lower. The segment had an operating loss versus a profit a year ago, due to the decline in sales and the write-off related to the acquisition of Starfish Software, Inc., a supplier of synchronization technology for wireless and wireline connected information devices. Paging Group orders were lower than a year ago due to a significant decline in Asia, only partly offset by higher orders in Pan America. Paging Group sales were significantly lower than a year ago in all regions. The new Satellite Series 9501 pager was announced and is expected to be available in the fourth quarter. Designed for use on the Iridium® system, it will enable users to receive messages throughout the world. Space and Systems Technology Group Sales increased 12 percent, orders were down 87 percent, and operating profits increased. The decline in orders is related to the timing of contractual milestones on the Iridium® program. The results are reported as part of the "Other Products" segment. Operational and voice quality testing of the Iridium system continued during the quarter. Commercial service, including paging, is scheduled to begin Nov. 1. Gateway operators have accepted 11 of 12 Iridium gateways around the world. The last gateway of the initial deployment, in China, is expected to be ready prior to commercial service. As previously reported, Iridium LLC may require additional financing, possibly before the end of 1998, to continue to make contractual payments to Motorola. Motorola received a five-year contract from the U.S. Navy for a new digital software-programmable radio. If the Navy exercises all options, the contract could exceed $337 million. Semiconductor Products Segment Segment sales decreased 14 percent to $1.8 billion and orders were 10 percent lower. The sector had an operating loss versus a profit a year ago, due to the decline in sales and lower average selling prices resulting from a worldwide industry recession. Orders were higher in the Networking & Computing and Transportation Systems groups, down slightly in Wireless Subscriber Systems and down significantly in the Consumer Systems and Semiconductor Components groups. By region, orders grew slightly in Europe and Asia-Pacific, were down in the Americas, and were down significantly in Japan. Motorola introduced an open, extensible multimedia architecture, code-named "Blackbird," aimed at dramatically improving video entertainment and video communications. Offering an unprecedented integration of communications and interactive entertainment, the system architecture aims to revolutionize multimedia in the home. Advanced Micro Devices Inc. and Motorola announced plans to cross- license patents, and to jointly develop common process technology platforms for microprocessors and embedded flash memory featuring copper interconnects. New products based on the PowerPC architecture included 366, 333 and 300 megahertz PowerPC 750 microprocessors operating at 1.9 volts for embedded, mobile and desktop applications. The new PowerQUICC II communications microprocessor is designed for equipment such as remote access concentrators, regional office routers, cellular base stations and telecom switching equipment. Automotive, Component, Computer and Energy Sector Sales declined 12 percent and orders were down 10 percent. The sector had an operating profit versus a loss a year ago, when a charge was taken to exit the MacOS®-compatible computer systems business. Excluding that charge, operating profits would have been lower than a year ago, largely due to the decline in sales. The sector's results are reported as part of the "Other Products" segment. Motorola sold its printed circuit board business, which included two manufacturing operations in Singapore. Motorola also signed a memorandum of understanding to sell its component products division to CTS Corp. The businesses in the division include ceramics, quartz oscillator, piezoelectric technology and surface acoustic wave operations. The Automotive and Industrial Electronics Group introduced a fully integrated radio frequency module designed for a wide range of applications including telematics. Motorola Computer Group introduced a series of CompactPCI® systems to serve as platforms for use in WindowsNT?-based and real-time industrial automation and telecom environments. Review and Outlook Christopher B. Galvin, chief executive officer, said, "Although we are far from satisfied with our current financial performance and have more to accomplish, we are beginning to see some early signs of progress. Positive developments include the benefits of our manufacturing consolidation, cost reduction and restructuring programs, our broadened portfolio of digital cellular telephones, the efficiencies being achieved by our new Communications Enterprise, as it focuses on integrated customer solutions, and the potential benefits of the refocusing of our semiconductor business." Galvin added, "Regrettably, the Asian economy and slowing of global economic growth have impacted Motorola since earlier this year, just as those factors are now readily apparent and affecting many other global corporations." "Our everyday focus is to fix or optimize every product, network or cost issue that is within our control. We intend to serve our customers and consumers as rapidly as possible and better than any of our competitors. This has not yet been accomplished in every instance, but it will be during this renewal process," Galvin said. "On issues beyond our control, such as world economic, global liquidity and currency issues, we will join with our global business peers and governments to encourage the adoption of policies and actions to help return the world's markets to robust economic growth," he said. Business Risks Statements about Motorola's manufacturing consolidation, cost reduction and restructuring programs and the impact of such programs, the availability and impact of new products, 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 consolidation, cost reduction and restructuring programs in a timely manner and the success of those efforts; (ii) the ability of Motorola to integrate its businesses to reduce costs and increase efficiencies; (iii) unanticipated impact of the manufacturing consolidation, cost reduction and restructuring programs on productivity and the ability of Motorola to retain and where necessary recruit employees; (iv) the timing of the end of the worldwide semiconductor industry recession; (v) the success of efforts to stabilize economic conditions in Asia and other emerging markets; (vi) pricing pressures and demand for Motorola's products, particularly semiconductor and messaging products, especially in light of the current economic conditions in Asia and other emerging markets; (vii) 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; (viii) the potential that deteriorating economic conditions in Japan could continue or worsen; (ix) the ability of Motorola's cellular businesses to continue to transition to digital products and gain market share; (x) product and technology development and commercialization risks, including for newer digital products and Iridium® products and services; (xi) the uncertainty of steady growth in emerging markets; (xii) the success of the Iridium project and the impact on Motorola's financial performance; (xiii) continued weak demand for paging products in North America and China; and (xiv) unanticipated impact of Year 2000 issues, particularly the failure of products of major suppliers to function properly in the Year 2000. CompactPCI® is a registered trademark of PCI Industrial Computers and Manufacturers Group. Iridium® is a registered trademark and service mark of Iridium LLC. MacOS? is a registered trademark of Apple Computer, Inc. PowerPC? is a trademark of IBM Corp. WindowsNT? is a registered trademark of Microsoft Corp. Motorola, Inc. and Subsidiaries Consolidated Statements of Operations (In millions, except per share amounts) Three Months Ended Nine Months Ended Sept. 26, Sept. 27, Sept. 26, Sept. 27, 1998 1997 1998 1997 Net sales $7,152 $7,353 $21,061 $21,516 Manufacturing and other costs of sales 5,155 4,986 14,987 14,389 Selling, general and admin. expenses 1,458 1,237 4,046 3,710 Restructuring charges --- 95 1,980 265 Depreciation expense 537 595 1,595 1,732 Interest expense, net 62 30 153 98 Total costs and expenses 7,212 6,943 22,761 20,194 Earnings(loss)before income taxes (60) 410 (1,700) 1,322 Income tax(benefit) provision (18) 144 (510) 463 Net earnings(loss) $ (42) $ 266 $ (1,190) $ 859 Net earnings(loss) per share Basic $ (.07) $ .44 $(1.99) $ 1.44 Diluted $ (.07) $ .44 $(1.99) $ 1.41 Avg. common shares outstanding Basic 598.7 596.4 598.0 595.0 Diluted 598.7 612.3 598.0 613.3 Dividends paid per share $ .12 $ .12 $ .36 $ .36 Net margin on sales (.6%) 3.6% (5.7%) 4.0% Return on average invested capital (5.8%) 7.8% --- --- R&D expenditures $ 732 $ 695 $2,157 $1,987 Motorola, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Dollars in millions) ASSETS Sept. 26, Dec. 31, 1998 1997 Cash and cash equivalents $ 1,257 $ 1,445 Short-term investments 250 335 Accounts receivable, net 5,023 4,847 Inventories 4,290 4,096 Other current assets 2,885 2,513 Total current assets 13,705 13,236 Property, plant and equipment, net 9,957 9,856 Other assets 4,654 4,186 Total assets $28,316 $27,278 LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable and current portion of long-term debt $ 3,598 $ 1,282 Accounts payable 2,056 2,297 Accrued liabilities 6,086 5,476 Total current liabilities 11,740 9,055 Long-term debt 2,133 2,144 Other liabilities 2,622 2,807 Stockholders' equity 11,821 13,272 Total liabilities, stockholders' equity $28,316 $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 nine months ended September 26, 1998 and September 27, 1997: Three months ended Sept. 26, Sept. 27, 1998 1997 % Change Cellular Products $3,027 $2,778 9 Semiconductor Products 1,773 2,074 (14) Land Mobile Products 1,323 1,280 3 Messaging, Information and Media Products 552 885 (38) Other Products 1,118 1,120 --- Adjustments & eliminations (641) (784) (18) Industry segment totals $7,152 $7,353 (3) Nine months ended Sept. 26, Sept. 27, 1998 1997 % Change Cellular Products $8,619 $8,315 4 Semiconductor Products 5,414 5,914 (8) Land Mobile Products 3,936 3,417 15 Messaging, Information and Media Products 2,015 2,944 (32) Other Products 3,095 3,162 (2) Adjustments & eliminations (2,018) (2,236) (10) Industry segment totals $21,061 $21,516 (2)