Motorola, Inc. Form 10-Q Summary
Business context and reporting period. This filing is for the quarter ended October 3, 2009, with comparisons to the quarter ended September 27, 2008; nine-month results compare the same periods. The registrant is identified in the filing as Motorola, Inc. Its businesses are Mobile Devices, Home and Networks Mobility, and Enterprise Mobility Solutions. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Net sales | $5,453 | $7,480 | $16,321 | $23,010 |
| Gross margin | $1,808; 33.2% | $1,803; 24.1% | $5,014; 30.7% | $6,273; 27.3% |
| Operating earnings (loss) | $128; 2.3% | $(452); (6.0)% | $(311); (1.9)% | $(716); (3.1)% |
| Continuing-operations earnings (loss) attributable to common shareholders | $12; $0.01 per diluted share | $(397); $(0.18) per diluted share | $(253); $(0.11) per diluted share | $(587); $(0.26) per diluted share |
| Net earnings (loss) attributable to Motorola | $12 | $(397) | $(193) | $(587) |
Q3 2009 net interest expense was $49, versus net interest income of $18 a year earlier. Nine-month net interest expense was $114, versus net interest income of $6. The nine-month 2009 net loss includes $60 of after-tax earnings from discontinued operations.
- Cash flow: Operating cash flow was $616 in Q3 2009, compared with $180 in Q3 2008. For the first nine months, operating activities used $248, versus $41 provided in 2008. Nine-month investing activities provided $395 and financing activities used $198.
- Balance sheet and liquidity: At October 3, 2009, cash and cash equivalents were $3,050, Sigma Fund investments were $4,125 (current and non-current), and short-term investments were $15. Current assets were $15,325 and current liabilities $7,600. Cash included $391 of restricted cash; $2.6 billion of cash was held outside the U.S.
- Debt: Notes payable and current debt were $24; long-term debt was $3,901. The company repurchased $199 of debt principal for $133, including accrued interest, recognizing a $67 gain. The amended revolving credit facility, due December 2011, was unused and sized at up to $1.5 billion, subject to eligible receivables and inventory.
- Capital returns: The company paid $114 of dividends in the first nine months, all in Q1; quarterly common dividends were suspended in February. No shares were repurchased in 2009, and the repurchase authorization expired in June.
Material changes versus the prior comparable periods
- Q3 revenue fell 27%; revenue declined in all three segments, led by Mobile Devices, down 46%. Nine-month revenue fell 29%.
- Despite lower sales, Q3 gross margin percentage rose to 33.2% from 24.1%, and operating results improved from a $452 loss to $128 of earnings. Management attributed much of the improvement to lower excess-inventory and related charges compared with 2008, as well as cost reductions.
- Nine-month operating loss narrowed to $311 from $716, but the company remained loss-making. Mobile Devices reported a Q3 operating loss of $183 and a nine-month loss of $945.
- Q3 handset shipments were 13.6 million, down 46% year over year; estimated global handset market share was 4.7%, down about four percentage points. Digital entertainment device shipments were 3.3 million, down 20%.
- Net inventory declined to $1,523 from $2,659 at year-end 2008; accounts payable fell to $2,212 from $3,188. Management cited lower inventory and other current assets as cash-flow offsets to a $2.8 billion decrease in accounts payable and accrued liabilities.
Outlook, management commentary, and risks
- Management said global economic conditions showed some stabilization, but demand remained weak and visibility limited. It expected many served markets to have little or no growth, or contract, for full-year 2009.
- For Mobile Devices, management expected intense competition and lower 2009 handset demand than in 2008. It planned two Android/MOTOBLUR smartphones for Q4 2009 and a broader smartphone rollout in 2010.
- Home and Networks Mobility expected 2009 declines in the overall 2G/3G infrastructure market and cited slower home-business demand. It projected approximately $600 million of WiMAX product sales in 2009.
- Enterprise Mobility Solutions reported stable current demand in government and public safety, but warned that customer budget constraints could reduce or delay full-year purchases. Commercial customers continued to face challenging, though stabilizing, conditions.
- Cost-reduction plans generated $266 of net reorganization charges in the first nine months, including severance and exit costs. Management expected approximately $104 of savings in the remainder of 2009 and annualized savings of approximately $429 thereafter. About 7,600 employees had been separated during the nine-month period.
- The company continued to pursue separation into two independent public companies. Management emphasized cash preservation, working-capital management, and operating cash-flow improvement, and stated it believed liquidity was sufficient.
- Key risks include prolonged weak demand, handset competition and product execution, potential customer financing needs, restricted or costly capital-market access, foreign-exchange exposure, investment valuation, and possible goodwill impairment if forecasts deteriorate. Motorola had split credit ratings: Fitch BBB- and Moody’s Baa3, both with negative outlooks, and S&P BB+.
- Tax audits and unrecognized tax benefits remain uncertain; management said an unfavorable resolution could materially affect results or liquidity, although it did not expect a material adverse effect based on information then available. The company disclosed various lawsuits and indemnities; management did not expect pending matters to have a material adverse effect. A $24 environmental reserve charge was recorded in Q3, and total indemnification obligations were $156, with $55 accrued.
- After quarter-end, the company disclosed a $45 CIT note in the Sigma Fund carried at $31; following CIT’s Chapter 11 filing, the maximum remaining potential loss was $31. The filing also notes that chief financial officer and principal accounting officer roles changed after quarter-end.
Important facts for investors to verify
- Whether the handset product transition, including Android launches, improves shipment trends, market share, and Mobile Devices profitability.
- Whether projected cost savings are achieved and how much additional restructuring cash cost or severance remains.
- Whether operating cash flow turns positive, given the nine-month cash use and substantial working-capital movements.
- The liquidity and accessibility of foreign-held cash and Sigma Fund assets, including the CIT note exposure and any repatriation constraints or taxes.
- Progress, timing, and expected costs or benefits of the proposed separation into two public companies.
- Developments in tax audits, litigation, customer financing commitments, and credit ratings or facility availability.