MOTOROLA CONFERENCE CALL OPENING COMMENTS
THIRD QUARTER 2001 EARNINGS RELEASE
The following text represents opening remarks made by: Ed Gams, Senior Vice
President and Director of Investor Relations; Fred Shlapak, President of the
Semiconductor Products Sector; Mike Zafirovski, President of the Personal
Communications Sector; Ed Breen, President of the Networks Sector and President
and Chief Operating Officer-Elect; Bob Growney, President and Chief Operating
Officer; and Chris Galvin, Chairman and Chief Executive Officer of Motorola, Inc.
during Motorola’s third quarter 2001 earnings conference call held on Wednesday,
October 10th, 2001. These opening remarks should be read in conjunction with
Motorola's October 9th, 2001 earnings press release and Motorola SEC filings.
I am being joined this morning by Fred Shlapak, President of the Semiconductor
Products Sector, Mike Zafirovski, President of the Personal Communications
Sector, Ed Breen, President of the Networks Sector and President and Chief
Operating Officer-Elect, Bob Growney, President and Chief Operating Officer and
Chris Galvin, Chairman and Chief Executive Officer of Motorola Inc.
An Internet slide presentation is accompanying this conference call. The
presentation can be viewed by visiting www.motorola.com/investor. This entire
commentary will be available on the First Call Network and on our website later this
morning, approximately ninety minutes after the conclusion of this conference call.
The taped call will also be available on our website at approximately noon, central
This conference call is occurring on the morning of October 10, 2001. The content
of this conference call contains time-sensitive information that is accurate only as of
the time of this live broadcast. If any portion of this conference call is retransmitted
at a later date, Motorola will not be reviewing or updating the material that is
contained herein. This conference call is the exclusive property of Motorola, Inc.
Any redistribution, retransmission or rebroadcast of this call in any form without the
express written consent of Motorola, Inc. is strictly prohibited.
We will be making forward-looking comments regarding the following:
fixed asset spending; the timing and sales impact of new products; the impact of cost
reduction actions; wireless handset inventories; worldwide industry shipments of wireless
handsets in 2001and 2002; sales and profitability of the Personal Communications
segment in the fourth quarter; worldwide semiconductor industry growth in 2001 and
2002; semiconductor inventories; contracts for new semiconductor technology; the
timing of the semiconductor industry recovery; cable equipment industry growth in 2002;
two-way radio equipment industry growth in 2002; the closing of pending transactions;
3G wireless infrastructure contracts; wireless infrastructure equipment industry growth in
2002; new iDEN technology availability; the recoverability of amounts due under our
loan to Telsim; potential joint ventures and other transactions; and expected Motorola
sales and earnings per share for the fourth quarter of 2001. Actual results could differ
materially from these comments. Information about the factors that could cause such
differences can be found in yesterday's earnings release and on pages F-29 through F-33
of Motorola's 2001 proxy statement for its 2001 annual meeting, and in other SEC filings.
CHRIS GALVIN’S REMARKS
Mr. Galvin’s comments were a summary of his comments in the Review and
Outlook section of the earnings release and will be available later.
ED GAMS' REMARKS
I'll begin my comments with a review of our overall corporate results for the third
quarter of 2001, reported on a pro forma basis.
- Third quarter sales decreased 22% versus a year ago. A net loss was incurred
of $153 million compared with earnings of $643 million last year. This was a
loss of 7 cents per share, compared with earnings per share of 28 cents last
year. Net margin on sales was negative 2.1% versus a positive 6.8% a year
- Manufacturing margin for the third quarter declined to 30.4% of sales from
40.7% a year ago. The greatest declines occurred in the Semiconductor and
Global Telecom Solutions segments. Manufacturing margin improved versus
a year ago in the Personal Communications and Broadband Communications
segments. Manufacturing margin declined by 1.4% sequentially from the
second quarter, due to the mix of sales between segments. Manufacturing
margin improved sequentially in all segments except the Integrated
Electronics Systems Segment.
- SG&A expenses in the third quarter were 10.7% of sales versus 11.8% of
sales a year ago and 12.9% in the second quarter.
- R&D expenses were 14.0% of sales in the third quarter versus 12.3% a year
ago. The increase in percent of sales is due to the decline in sales, as R&D
expenses were $134 million lower than a year ago. Sequentially versus the
second quarter, R&D expenses declined both in dollars and as a percent of
- Depreciation expense was 7.2% of sales versus 6.2% a year ago and 7.8% in
the second quarter. Depreciation expense continued to decline sequentially as
a result of a very significant decline in fixed asset expenditures versus last
- Fixed asset expenditures in the third quarter were $253 million versus $1.08
billion a year ago. Of this quarter’s total, $104 million was spent in the
semiconductor business versus $649 million a year ago. Versus the second
quarter fixed asset expenditures decreased by $63 million. The company now
expects that fixed asset expenditures for the full year will be approximately
$1.6 billion, versus $4.1 billion last year.
- Interest expense was 1.5% of sales versus 0.8% a year ago and 1.4% in the
second quarter. Bob Growney will be providing more information on
Motorola’s balance sheet performance in a few minutes.
- From a total corporate perspective orders in the quarter were 22% lower than
last year. Sequentially versus the second quarter orders decreased
approximately $600 million, or 7%.
- The total corporate backlog position is down 10% versus a year ago. By
segment, backlog is up in the Personal Communications and Commercial,
Government & Industrial Systems segments, down in the Broadband
Communications and Global Telecom Solutions segments, and down
significantly in the Integrated Electronic Systems and Semiconductor
segments. Sequentially versus the second quarter total backlog increased
approximately $100 million, or 1%, with only the Integrated Electronic
Systems, Personal Communications and Semiconductor segments having a
sequential backlog increase.
- The market value of Motorola’s portfolio of publicly traded securities was
valued at approximately $2.0 billion as of September 28, 2001.The largest of
these investments are: in Nextel, with a market value of $935 million,
Callahan, with a market value of $367 million and in Next Level
Communications, with a market value of $196 million. No other individual
investment represented more than 10% of the total market value. The liquidity
and realizable values of these securities are subject to market and other
conditions. Since the majority of these securities represent investments in
technology companies, the fair market values of these securities are subject to
substantial price volatility.
Now I would like to introduce Mike Zafirovski, President of the Personal
MIKE ZAFIROVSKI’S REMARKS
Good morning. I’m pleased to report that the Personal Communications Sector continued
to make good progress this quarter – despite challenging market conditions.
As compared to the strong Q3 of last year, it’s a tough year-to-year comparison:
• Orders were down 12%; unit shipments were flat; sales were down 16%; and
profitability was down 92%. Regarding unit shipments by technology, CDMA
shipments were up 33% versus last year and iDEN shipments were up 12%, but
GSM shipments were down 9%, and TDMA shipments were down 18%.
However, we’re very pleased with the sequential improvements in our business for the
second quarter in a row. Here are some highlights:
• Sales for the quarter were $2.7B, up 8% sequentially from the second quarter of
2001 and 18% from Q1.
• Orders for the quarter were $3B, up 3% from the strong Q2. Orders were higher
than sales for the third quarter in a row, resulting in a favorable book-to-bill ratio
this quarter of 1.10.
• Backlog at the end of Q3 was $3.3B, up 9% from last quarter and the highest in
our sector’s history, and up 22% from Q3 2000.
• Unit shipments for the quarter were 15.8M, resulting in an estimated ship-in
market share in the 17 to 18% range, a slight increase compared to the first
quarter. Unit shipments were down 5% from Q2. And, our strongest regional
performance was in the Americas.
• GSM unit sales were down 13% sequentially versus the second quarter, which we
can attribute to end-of-life inventory clearance efforts during Q2, and iDEN unit
sales were down 13%. TDMA unit sales were up 18% sequentially versus Q2,
and CDMA unit sales increased 15%. And, for GPRS, we are the industry leader.
GPRS unit sales soared from 84,000 in Q2 to 1.5M in Q3, representing more than
9% of all PCS unit sales for the third quarter.
• In the last call, I said that our average selling prices were expected to increase in
Q3. They did . . . by 14% compared Q2. The upward trend reflects increased
shipments of new products and significantly fewer sales of end-of-life products.
• PBT for the quarter was a positive $19M, a $256M improvement from Q2 and
$421M from Q1. This progress was driven by an improving product mix and the
impact of previously announced cost-reduction efforts. On an annualized basis –
from Q4 2000 through Q4 2001 – our costs are on pace to be down by more than
• PCS also generated positive cash flow for the third quarter in a row, bringing
year-to-date positive cash flow to more than $700M. This is a significant
improvement over the negative cash flow last year.
• The cash flow results continue to be driven by dramatic improvements in our
working capital performance. For example, inventories have been reduced from
$2.4B at year-end 2000 to $1.1B on September 30th. The resultant inventory turns
have more than doubled. In addition, our capital expenditures are down by 77%
versus last year.
• Employment levels on September 30th were approximately 20,200, down from
33,000 a year ago. We have achieved our commitment of taking employment
below 21,000 by the end of Q3. As I have said repeatedly, as the leader of an
organization, the most difficult thing you can do is to let people go. Yet, through
it all, our employees have retained a sense of confidence and optimism about the
Before discussing our new products and the outlook for the fourth quarter, let me make
several comments on the overall market and industry inventory levels:
We now expect industry-wide handset shipments to be between 380 and 400 million units
in 2001, down 5 to 10% from 2000. Around the world, the industry’s channel inventory
levels have normalized. We estimate that current channel inventories are about 5 to 7
weeks in all regions. And, for 2002, we expect the market to be in the 420- to 460-
Operator and consumer response to our new portfolio has been very positive. In fact,
many of you who are listening participated in our mid-year test-drive of several new
products. Your feedback has been invaluable. Here’s a sampling of what you and the
media have said about our new products . . .
- “Great interface!”
- “Look is great, feel is great, even the weight is nice.”
Of course, some people also told us how they would improve products and the overall
Motorola experience. We’re listening and taking action.
A few product highlights include…
In CDMA, we are shipping and continue to win more customer approvals for our V. 120
and 60 and for the Timeport 270. These products, which feature our new, simple to
navigate, next-generation user interface, are fashionable, functional and affordable. We
also announced additional 1X CDMA phones in Korea, and received acceptance for our
entry-level Talkabout 182 from several operators in Latin America.
In TDMA, we won numerous customer approvals for the V.60t in Mexico, Brazil and
In GSM, we have our iconic blends of style and technology – the Motorola V. 100, 66
and 60. Public response to the V.66 has been very positive. For example, in the UK, the
cover of What MOBILE magazine proclaims, “Good call, Motorola!” Germany’s
Connect magazine says . . . and this is a direct quote: “The V.60 shines not only in terms
of its visual appeal but in its acoustic extravagance. Yes, it’s worth it.”
But, we’re not just about fashion . . . business consumers are demanding more, so we are
delivering products like the Timeport 280, which enhances productivity and increases
For iDEN, we’re delivering solutions for harsh environments. Our i55sr is the first
rugged wireless phone in North America with Java technology. The i55sr is the third
handset from Motorola with J2ME technology, which allows users to customize the
phone with software applications to fit their unique needs.
Now, let’s take a look at GPRS, an enabling technology that will build ARPU for
operators and fuel future growth and profits for PCS. . . .
• At the close of Q3, we had more than 2.4M GPRS units on order from more than
20 operators. Those units are expected ship in Q4, and we continue to believe
that we will ship at least five million GPRS units through the end of 2001.
• Industry experts continue to report that only Motorola has a complete portfolio of
commercially available GPRS solutions.
• GPRS is an exciting opportunity for our industry, and Motorola enabling
technologies are leading the way to increased levels of applications in the
messaging, information, entertainment, location and commerce arenas.
Let me also remind you that our GPRS handsets are … for starters … great GSM phones.
As such, they are also very attractive to operators that might not be ready with their
GPRS infrastructure. The operators get great phones that are also technology proofed
today for planned GPRS upgrades tomorrow.
Let me make a few comments on processes that we will be implementing to accelerate
our progress. Six Sigma and M-Gates are two critical processes invented at Motorola but
that we at PCS need to be re-emphasizing with a renewed vigor. We’re ready to drive
both into every part of our business. Six Sigma will help us measure and drive customer
satisfaction, growth, and cost reductions. M-Gates is a program management process that
will help us synchronize our New Product Introduction process – from the initial design
to the product introduction and eventual end-of-life activities.
As for the remainder of 2001, we expect a sequential increase in sales and continued,
significant increases in our overall profitability – based on current trends and market
Let me wrap up by repeating our commitment. Regardless of economic outlook or
trends, you can expect three things from Motorola PCS:
1. Relentless pursuit of cost leadership,
2. Close working relationships with operators that ensure effective
commercialization of Motorola technologies and applications for the benefit of
our customers and consumers; and
3. And, an unyielding commitment to innovation.
We are confident that our long heritage of innovation coupled with unyielding emphasis
on customers and applications, and a passion for execution and cost leadership, will
deliver the value that investors expect and demand. Thank you for listening.
FRED SHLAPAK’S REMARKS
Thank you Mike, and good morning, everyone.
I will provide you an update on the semiconductor industry, on Motorola’s
semiconductor business, and on our continuing actions to manage through the deepest
industry decline in history.
The global semiconductor market continued to decline in the third quarter for the fifth
consecutive quarter. We now are projecting industry sales will decline 25 to 30% for the
full year compared with the 15 to 20% decline we predicted at the end of last quarter.
These revised numbers are in line with recent projections by numerous industry research
firms. By comparison the deepest, previous industry decline was 17% in 1985.
Prior to the attacks on September 11th we believed the semiconductor industry would
begin to recover this year. However, we now believe that the economic uncertainty
resulting from those attacks will delay the recovery until the first half of 2002.
Therefore, we have reduced our semiconductor market growth projection for next year
from the 15 to 20% range we shared with you last quarter to a range of 5 to 10%. This
revised estimate also is in line with recent projections by numerous industry forecasters.
We continue to believe that the semiconductor market cycle dynamics discussed with you
over the past several quarters are still intact. They have just been postponed by one or
two quarters. Evidence shows that customers are working off unwanted inventory and
adjusting inventory levels to align with more realistic expectations of end-market product
Broad macroeconomic support for the semiconductor industry recovery continues to be
put in place, including the 400 basis point reduction in short-term U.S. interest rates and
the recent tax cuts. We also believe the industry should benefit from an expected
increase in economic activity associated with higher levels of spending for defense and
public safety, communications, and infrastructure security all requiring significant
electronics and semiconductor content.
As you saw in the company’s announced results continuing weak demand during the
quarter negatively impacted our semiconductor business. Orders decreased 49% and
sales were 48% below the year-ago level. All of our business units, regions and markets
Sales were down very significantly in Americas and were down significantly in Europe,
Asia/Pacific and Japan. Sales among major markets were down very significantly in
networking/computing and wireless/broadband and declined in transportation/standard
Orders were down very significantly in the Americas and Europe and declined
significantly in Japan and Asia/Pacific. Among major markets, orders were down very
significantly in networking/computing and declined significantly in wireless/broadband
and transportation/standard products.
But the news is somewhat better on a sequential basis. Our orders were higher than the
previous quarter’s and they exceeded sales during the quarter, for the first time in a year.
This means our book-to-bill ratio was slightly above 1 for the quarter. Our backlog grew
slightly. This was driven by a substantial increase in orders for our Wireless and
Broadband business. If this trend continues then we should be able to confirm that the
industry downturn may have bottomed out.
Despite this glimmer of hope we continued to reduce costs aggressively. We cut
expenses during the quarter by another $166 million, took out further SG&A costs and
achieved our goal of 4,000 job reductions. As a result our operating losses remained flat
compared to the previous quarter, even though sales were $170 million lower.
We are on track to spend approximately $700 million in capital this year the amount we
announced previously. While we haven’t finalized our capital spending plans for next
year it will be focused only on the most mission-critical items.
These cost-reduction actions and reduced business levels have resulted in significantly
more than $1 billion in cost reductions on an annual run-rate basis. We have kept a
strong hand on the balance sheet with receivables in good shape and inventory balances
getting better. Our cash flow was positive during the quarter and, by enough to bring us
to positive year-to-date.
We also are continuing our intense focus on asset management through factory
consolidations and closures. During the past four years we have reduced our number of
wafer fabs by fifty percent, from 29 in 1997 to 14 by the end of this year. And, in August
we announced the phase-out of two more chip production lines in Arizona over the next
18 to 30 months.
Looking forward, in light of reduced expectations for industry growth next year we will
continue to adjust our cost structure and lower our break-even point as necessary. Our
goal is to return to profitability as rapidly as possible and to participate fully and
aggressively as the industry recovers.
As I noted at Motorola’s annual Financial Analysts’ Meeting on July 31st we have a true
sense of urgency about improving our performance. We are not waiting for the industry
We are continuing to work very hard to develop a business model that fundamentally
changes how we fund and run the Semiconductor Products Sector. We are assessing a
variety of options and talking to potential partners. I can’t discuss a timetable or any
specifics right now but I can assure you that we are committed to a successful outcome.
In the interest of brevity I won’t provide an update on our target markets and our many
platform and product initiatives. But I do want to give you a quick update on one of our
most important strategies to offer complete, embedded 2.5 and 3G solutions to the
This is a bold move for Motorola to take advanced wireless intellectual property from
across the company and aim it straight at what Gartner Dataquest says will be a $35
billion market by 2004. We think only Motorola can provide this unique value
proposition, which essentially removes the technological barriers to entry and speeds time
We announced this strategy in late July and in mid-September we unveiled our 2.5G
Innovative Convergence platform, or i.250, for the GSM/GPRS market. It combines an
advanced chipset with an industry-leading development environment field-proven GPRS
protocol software type certification support and lowest part count, best-in-class system
Just the chipset itself is an amazing achievement. It includes a dual-core base-band
processor with a digital signal processor and ARM microprocessor fabricated in our 0.13-
micron copper-based technology. The front-end IC uses our Silicon Germanium Carbon
process for superior high-frequency performance. The power management and audio
circuit is based upon our SMARTMOS 5 process. And the power amplifier module uses
our Indium Gallium Phosphide technology.
Industry consultant Andrew Seybold says of this platform “In the next three to four years,
companies like Motorola that get out in front like you are doing with this announcement
will be the ones that last in the marketplace, the ones that will win.” We agree. And we
expect to announce two customer wins by year-end.
The i.250 platform is just one of the bold initiatives we are pursuing to leverage our
strengths in embedded processing and connectivity. We believe that we are well
positioned for when the recovery begins and able to deliver the profitable growth you
And now I’m pleased to introduce Ed Breen.
ED BREEN’S REMARKS
Thank you and good morning everyone.
Before I discuss the third quarter performance of the Networks Sector, I would like to
thank Chris, Bob and the Board for giving me the opportunity to become President and
Chief Operating Officer of Motorola beginning in 2002. I appreciate their confidence in
me and I am looking forward to working closely with Chris and Bob during this
The Networks Sector is comprised of the Broadband Communications Segment,
Commercial, Government and Industrial Systems Segment and Global Telecom Solutions
Segment. On a sequential basis; sales were flat and orders were down; profit margins
declined slightly from 7.3% to 7.0%; and the Sector generated profits of $239 million.
Despite the current challenging economic climate, the Sector remains committed to
improving its financial performance. We did generate positive operating cash flow
during the quarter and more than $1.2 billion year-to-date. We are also on target to
reduce our capital spending by 50% over the prior year.
During the quarter, we successfully completed the sale of our defense and government
electronics business for $825 million in cash. We also completed the sale of our
Multiservice Networks Division.
Let me give you an overview of our three Networks Sector businesses in more detail.
The Broadband Communications Segment reported orders of $647 million and sales of
$637 million during the quarter. This compares to orders of $941 million and sales of
$917 million in the third quarter of last year. Despite the reduction in revenues,
profitability during the quarter remained strong. Operating profits as a percentage of
sales increased to 18.8% from 17.4% in the prior year -- a result of continued product
cost reductions, favorable product mix and overhead cost controls.
Although our customers have reduced capital expenditures, we continue to be the leading
global provider of digital set-top and headend solutions as well as high-speed cable
modems. And, we are clearly focused on increasing our global leadership position into
2002 and beyond.
During the quarter, we shipped approximately 1.5 million interactive digital cable set-top
terminals; total shipments now exceed 18 million. We also shipped more than 800,000
modems during the quarter, bringing the total number shipped to more than 6.4 million.
In recognition of our commitment to serving small to mid-size cable operators, Motorola
was selected by the National Cable Television Cooperative as its 2001 Vendor of the
We also are very pleased with the success of our IP telephony trials and are now
beginning to see a gradual transition of several system trials into commercial
deployments, especially in Europe. Most recently, Callahan Associates awarded
Motorola a second network upgrade in Germany to supply network infrastructure
electronics, Voice over IP consumer premise equipment and cable modem termination
system technology. With the addition of this second system, Callahan is positioned to
offer advanced interactive broadband video, voice and data services to more than 7.4
million homes in Germany.
In France, Motorola successfully deployed a Voice over IP system trial with Noos, a
subsidiary of Lyonaise Communications. We anticipate commercial launch in early
As I indicated earlier, cable modem shipments remained strong. In addition to our
traditional sales channel to cable operators, SURFboard cable modems are now available
in over 2,000 retail stores throughout the United States.
During the third quarter, Motorola announced a definitive agreement to acquire
RiverDelta Networks for stock. River Delta is a leading provider of carrier-class,
broadband routing, switching and cable modem termination systems and solutions,
through a stock transfer.
Upon closing the acquisition, which we anticipate to occur this month, Motorola will
offer a complete suite of IP infrastructure products that will enable operators to capitalize
on the new revenue generating opportunities arising from the delivery of enhanced IP
services to their subscribers.
We expect cable operator capital spending to remain flat over the next few quarters and
increase in the second half of 2002 as international operators expand their system
upgrades and rollouts.
In our Commercial, Government and Industrial Systems Segment, on a sequential basis,
sales were flat and profits improved due to our cost containment measures.
In North America, we successfully conducted a trial in Pinellas County, Florida of our
next-generation wideband data capability. This new technology is many times faster than
the current U.S. public safety standard and enables simultaneous live wireless mobile
video, voice and high-speed Intranet/Internet data transmission on one system.
In Europe, we announced a new TETRA-compliant offering, which offers improved
geographic coverage and connectivity to existing IT infrastructures.
In the area of Integrated Solutions, we introduced a new service to municipalities to
support their Customer Service Request (CSR) or 3-1-1 systems. For a monthly fee,
Motorola will implement, host, manage and maintain a customer’s CSR System from our
state-of-the-art network operations and data center. The City of Baltimore, Maryland, is
the first customer for this new service.
In Managed Services, we announced a multi-million dollar agreement to provide The
Dow Chemical Company with portable radio communications management at five
facilities in Canada, the United States and Europe.
Looking ahead, the worldwide two-way radio market is expected to experience modest
growth in 2002. We will continue our focus on growing market share and improving
profitably, while positioning this business for success in the emerging market for
In the Global Telecom Solutions Segment, sales and orders were down from last year, but
sales were up slightly on a sequential basis.
The Asia-Pacific region continues to be positive for the Segment, securing more than
$1.3 billion in contracts this year in China alone. We have shipped the initial CDMA
systems for installation in China Unicom’s new nationwide network, which it plans to
commercially launch in Q4. We have expanded the GSM infrastructure networks for
both China Mobile and China Unicom, and recently announced upgrades of China
Mobile’s GSM systems to GPRS high-speed packet data services.
We also received a $145 million contract for a CDMA2000 1X system from Telekom
Malaysia, and recently announced nearly $300 million in contracts for GSM and GPRS
systems in India and Malaysia.
In the Americas, Motorola recently won a $30 million 1X contract from Horizon PCS to
expand and upgrade its CDMA network to 3G capability. We continued to provide 1X
software and hardware upgrades to Verizon Wireless, Sprint PCS and ALLTEL networks
and others. Our CDMA base stations and centralized base station controllers have been
shipped to Global Telecom and TeleSP Celular in Brazil. And, last week Motorola and
Nextel announced new enhancements to double voice capacity with the iDEN wireless
network technology. These enhancements are expected to become available in 2003.
In Europe, Motorola received a contract for the first CDMA 1X system in the Ukraine
from CST Invest Limited. Commercial service is expected to launch in the first quarter
We see reduced capital spending in the wireless infrastructure market continuing into
2002. Industry analysts estimate that the global wireless infrastructure market could
remain flat or decline as much as 10% in 2002.
In closing, the Networks Sector remains firmly committed to making investments in
future growth areas; continuing to right size our cost structure; generating strong
operating cash flow; and aggressively pursuing actions to improve our financial
Thank you. And now I’ll turn it over to Bob Growney.
BOB GROWNEY’S REMARKS
I’d like to begin my remarks with a detailed update on the very important subject of our
As we discussed last quarter, the management team continues to be intensely focused on
maintaining a strong balance sheet and improving operating cash flow. Cash flow from
operations was again positive, at approximately $200 million in the third quarter and due
largely to a reduction in net inventories. Operating cash flow year-to-date is a positive
$1.2 billion. Total debt net of cash, cash equivalents, and marketable securities decreased
to $3.7 billion from $6.0 billion at the end of the second quarter.
During the third quarter, our total short-term debt decreased by $1.3 billion to $2.7 billion
compared to $4.0 billion at the end of the second quarter and $6.4 billion at the end of
last year. The $2 billion term loan facility was reduced to $720 million, with the
proceeds of the sale of all of the Telefonica stock Motorola held. Since the end of the
quarter the entire remainder of this term loan facility has been paid using the proceeds of
the sale of a business to General Dynamics. Excluding the since repaid $720 million
under the term loan facility, Motorola had total domestic and non-domestic revolving
credit facilities of $4.9 billion, of which $660 million was considered utilized. Our
commercial paper borrowings were $1.6 billion as of September 28th and we continued to
access the commercial paper market throughout September.
As reported in our press release, we have increased the reserve by $1.3 billion for the Telsim
loan. This is the largest single part of our special charges this quarter. Thus far, Telsim has been
largely uncooperative in restructuring the loan or entering into a transaction with third-party
investors to either sell, or bring new equity into, the company. With this additional reserve, the
net amount of the receivable from Telsim on Motorola's books is now $530 million. Regardless
of the reserves already taken, Motorola intends to continue to pursue a collaborative solution
with Telsim or, if need be, pursue all remedies to address Telsim's breach of contract and collect
the $2 billion Telsim owes to Motorola.
Now I’d like to give you an update on the steps we have been taking to reduce costs. As
of the end of the third quarter our employee population has been reduced by
approximately 31,000. The total population reduction we now expect to achieve by the
end of this year is approximately 39,000. This total is expected to be made up of 32,000
of announced major population reduction actions; 4,000 positions associated with
businesses sold; and 3,000 positions eliminated through smaller reduction actions and
At Motorola’s annual analyst meeting on July 31st, we announced that we were hard at
work on developing a new business model for our semiconductor business. At that same
meeting we also stated that we expected that there would be ongoing industry
collaborations, alliances and/or consolidations among wireless equipment manufacturers
of handsets and infrastructure. We acknowledged that discussion activity was high among
participants in both the semiconductor and wireless equipment industries and that we
were a party to many of these discussions. While this environment continues, we will not
comment on any of the recent rumors regarding Motorola and various potential mergers,
business sales, spin-offs or alliances. We will only state that we continue to search for
new business models that can build on Motorola’s strengths and enable the company to
build value more competitively and consistently in the future than in the recent past.
As we enter the fourth quarter visibility of customer demand remains low. Additionally,
uncertainties have been introduced into the world’s economic outlook, as a result of both
the terrorist attacks of September 11th and the resulting retaliation by the U.S. and its
many allies in the war against terrorism. Depending on business conditions Motorola will
continue to take appropriate cost reduction actions.
As a result our guidance for the fourth quarter has become more conservative, although
we continue to believe that we can achieve sequential improvements in our financial
results versus the third quarter. We expect sales from ongoing operations to be flat to 3%
higher in the fourth quarter than in the third quarter and we now expect to incur a loss, on
a pro-forma basis, of 4 to 5 cents per share in the fourth quarter. This improvement versus
our third quarter loss is expected to come largely from further savings from cost
reduction actions. This guidance assumes no further deterioration in global political or
economic conditions. We will not be providing guidance for 2002 at this time.
I’ll conclude by saying that this management team remains intensely focused on
protecting the strength of the company’s balance sheet and returning to credible
profitability as quickly as market conditions allow. Now here is Ed Gams.
ED GAMS’ REMARKS
Thank you, Bob. Now I'd like to review our segment guidance. The use of the
word “significantly” in this guidance section indicates a change of greater than
25%. The use of the words ”very significantly” indicates a change of greater than
VERSUS 4th QTR. 2000 VERSUS 3rd QTR. 2001
SALES OPR. MARGIN SALES OPR. MARGIN
Personal Communications Down Up Up Up
Global Telecom Solutions Down Loss in Q4, 2001 Down Loss in Q4
Significantly Profit in Q4, 2000 Profit in Q3
Comm., Gov’t. &Industrial Down Down Up Up
Broadband Communications Down Down Flat Down
Semiconductor Down Loss in Q4, 2001 Flat Slightly
Significantly Profit in Q4, 2000 Smaller Loss
and lower negative
Integrated Electronics Down Loss in Q4, 2001 Flat Flat
Significantly Profit in Q4, 2000
Other Products Down Smaller Loss Flat Smaller Loss
Participating in our question and answer session along with our previous speakers will be
Garth Milne, Senior Vice President and Treasurer. Now before we take your questions,
we would like to ask that each of you please limit yourself to one question and avoid
multiple part questions. We only do this to help ensure that, in the limited time available,
as many of you as possible will have an opportunity to ask your questions. Your
cooperation is appreciated.
Our answers relating to expected performance by our various businesses; expected
handset shipments in 2001; future SG&A and R&D expenses; backlog expectations;
orders for products; expectations for the replacement market; average selling prices
trends; employee headcounts; technology trends; outcome of the Telsim loan; plans for
vendor financing; trends in the infrastructure market; improvement in operating cash
flow; expectations for the broadband communications segment and its industry; and cost
structure at the semiconductor segment and profitability; are forward looking and involve
risks and uncertainties. Motorola’s actual results could differ materially from those
stated in the forward looking statements and information about factors that could cause
such differences can be found in yesterday’s earnings press release, on pages F-29
through F-33 of Motorola’s Proxy Statement for the 2001 annual meeting of stockholders
and in Motorola’s other SEC filings.