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Q3 2001 Conference Call Opening Comments

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Q3 2001 Conference Call Opening Comments

  1. 1. 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. Good morning, 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 time today. 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
  2. 2. 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 ago. - 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 sales. - 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 year.
  3. 3. - 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 Communications Sector. 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:
  4. 4. • 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.
  5. 5. • 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 $1.2B. • 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 future. 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- million-unit range. 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…
  6. 6. 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 U.S. 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 operator ARPU. 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
  7. 7. 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 conditions. 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.
  8. 8. 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 demand. 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 were affected. 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 products. 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.
  9. 9. 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 upturn. 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 merchant market. 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 to market. 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 cost. 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
  10. 10. 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 expect. Thank 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 transition. 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.
  11. 11. 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 Year. 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 2002. 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.
  12. 12. 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 integrated solutions. 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
  13. 13. 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 of 2002. 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 performance. Thank you. And now I’ll turn it over to Bob Growney. BOB GROWNEY’S REMARKS Good Morning, I’d like to begin my remarks with a detailed update on the very important subject of our balance sheet. 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.
  14. 14. 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 attrition. 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.
  15. 15. 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 50%. 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 Significantly Semiconductor Down Loss in Q4, 2001 Flat Slightly Significantly Profit in Q4, 2000 Smaller Loss and lower negative operating margin Integrated Electronics Down Loss in Q4, 2001 Flat Flat Significantly Profit in Q4, 2000 Other Products Down Smaller Loss Flat Smaller Loss Significantly 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.
  16. 16. 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.

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