A mixed bag from Motorola

Last week, Motorola closed the book on its worst quarter in years, reporting earnings below its already lowered expectations and predicting an even greater loss next quarter.

The announcement signals the end of a quarter that saw the company give a February warning that it would not make earnings estimates of 12¢ per share. The current economic downturn, referred to by Motorola Chairman and CEO Christopher Galvin as a “recession,” has also led the company to announce 26,000 layoffs — 4000 of which are unannounced.

For the period ending March 31, Motorola reported sales of $7.8 billion, down from $8.8 billion from the same quarter last year. Pro forma operating loss was $206 million, or 9¢ per share — 2¢ lower than consensus analyst estimates from First Call/Thompson Financial and much less than the pro forma earnings of 21¢ year over year.

Sales were down across many key sectors, notably in the personal communications segment, including handset production. Sales for the unit were 29% less than last year, and the $402 million operating loss was a stark contrast to the $53 million profit the previous year. The company said that it would ship between 425 million and 475 million handsets this year, now a respectable number but lower than what would have been expected during boom times.

Inside Motorola's balance sheet

Some of Motorola's assets and liabilities, in millions

	March 31, 2001	Dec. 31, 2000
Cash and cash equivalents	$4047	$3301
Accounts receivable, net	5644	7092
Inventories, net	4533	5242
Notes payable and current portion of long-term debt	4937	6391
Accounts payable	2966	3492
Accrued liabilities	5719	6374
Long-term debt	6673	4293
Source: Motorola

“The issue for Motorola is cost control and, obviously, getting product cycles improved,” said Brian Modoff, senior wireless technology analyst with Deutsche Banc Alex Brown.

The end of the quarter does not mark the end of difficult times for Motorola. The company lowered the bar on earnings for its current quarter, estimating that earnings will drop a few cents from the first quarter's 9¢ loss.

The news wasn't all bad, though. Despite the lowered guidance quarter, the company predicts sales will increase during the second half of the year.

Motorola expects to turn a profit in the second half of the year, leading to sales slightly lower than last year and a “modest but positive annual earnings per share,” said Motorola President and Chief Operating Officer Robert Growney.

Responding to speculation that Motorola's credit would be downgraded, company executives went to great lengths to show the strength of its balance sheet during the quarterly conference call.

“Our entire management team has been, is now and will be intensely focused on maintaining a strong balance sheet and improving operating cash flow. Cash flow from businesses, including net proceeds from investments, was positive for the first quarter and we anticipate it will be positive for the year,” Growney said.

As proof, Growney noted that Motorola significantly lowered net inventories and net accounts receivable, which are down by a combined total of more than $2 billion compared with the previous quarter (see table). The company also increased its cash and cash equivalents during the quarter from about $3.3 billion to slightly less than $4.05 billion.

In an effort to further improve its capital standing, Growney said the firm will consider selling non-strategic assets.

But relying on revenues from these sales may be risky, said a research note from Tim Luke, senior vice president of wireless and Internet infrastructure for Lehman Bros.

“We continue to highlight the importance for Motorola in focusing on improving its working capital management, as the value of the investment in tech companies may be limited [Motorola's investment portfolio includes a significant investment in tech companies], and asset sales could prove challenging near-term.”