UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ending March 28,June 27, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to _________
Commission file number: 1-7221
MOTOROLA, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-1115800
(State of Incorporation) (I.R.S. Employer Identification No.)
1303 E. Algonquin Road, Schaumburg, Illinois 60196
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 576-5000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of each of the issuer's classes of
common stock as of the close of business on March 28,June 27, 1998:
Class Number of Shares
Common Stock; $3 Par Value 597,676,024598,117,115
Motorola, Inc. and Subsidiaries
Index
Part I
Financial Information Page
Item 1 Financial Statements
Condensed Consolidated Statements of EarningsOperations for the
Three-Month and Six-Month Periods Ended
March 28,June 27, 1998 and March 29,June 28, 1997 3
Condensed Consolidated Balance Sheets at
March 28,June 27, 1998 and December 31, 1997 4
Condensed Consolidated Statement of Stockholders'
Equity for the Three-MonthSix-Month Period Ended March 28,June 27, 1998 5
Condensed Consolidated Statements of Cash Flows for the
Three-MonthSix-Month Periods Ended March 28,ended June 27, 1998 and
March 29,June 28, 1997 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II
Other Information
Item 1 Legal Proceedings 18
Item 2 Changes in Securities 18
Item 3 Defaults Upon Senior Securities 18
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 5 Other Information 18
Item 6 Exhibits and Reports on Form 8-K 19
Part I - Financial Information
Motorola, Inc. and Subsidiaries
Condensed Consolidated Statements of EarningsOperations
(Unaudited)
(In millions, except per share amounts)
Three Months Ended MarchSix Months Ended
June 27, June 28, March 29,June 27, June 28,
1998 1997 1998 1997
Net sales $ 6,8867,023 $ 6,6427,521 $13,909 $14,163
Costs and expenses
Manufacturing and other
costs of sales 4,814 4,3845,018 5,019 9,832 9,403
Selling, general and
administrative expenses 1,237 1,1621,351 1,311 2,588 2,473
Restructuring charges 1,980 170 1,980 170
Depreciation expense 540 565518 572 1,058 1,137
Interest expense, net 38 3253 36 91 68
Total costs and expenses 6,629 6,143
Earnings8,920 7,108 15,549 13,251
Earnings(loss) before income taxes 257 499(1,897) 413 (1,640) 912
Income taxes 77 174tax provision(benefit) (569) 145 (492) 319
Net earningsearnings(loss) $(1,328) $ 180268 $(1,148) $ 325593
Net earningsearnings(loss) per common share
Basic $ .30(2.22) $ .55.45 $ (1.92) $ 1.00
Diluted $ .30(2.22) $ .53.44 $ (1.92) $ .97
Weighted average common shares
outstanding
Basic 597.4 593.9597.9 594.7 597.6 594.3
Diluted 611.3 610.8597.9 610.2 597.6 611.4
Dividends paid per share $ .12 $ .12 $ .24 $ .24
See accompanying notes to condensed consolidated financial statements.
Motorola, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in millions)
(Unaudited)
March 28,June 27, December 31,
1998 1997
Assets
Current
Assets
Cash and cash equivalents $ 1,5091,177 $ 1,445
Short-term investments 289268 335
Accounts receivable, net 4,9064,904 4,847
Inventories 4,4084,383 4,096
Deferred income taxes 1,7482,204 1,726
Other current assets 764816 787
Total current assets 13,62413,752 13,236
Property, plant and equipment, net 9,9279,990 9,856
Other assets 4,5164,930 4,186
Total Assets $28,067$28,672 $27,278
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable and current portion of
long-term debt $ 1,9942,973 $ 1,282
Accounts payable 2,0981,972 2,297
Accrued liabilities 5,3866,584 5,476
Total current liabilities 9,47811,529 9,055
Long-term debt 2,1272,129 2,144
Deferred income taxes 1,6181,642 1,522
Other liabilities 1,3171,300 1,285
Stockholders' Equity
Common stock,Stock, $3 par value 1,7941,795 1,793
Preferred stock, $100 par value issuable
in series --- ---
Additional paid-in capital 1,7251,737 1,720
Retained earnings 9,6128,212 9,504
Non-owner changes to equity 396328 255
Total stockholders' equity 13,52712,072 13,272
Total liabilities and stockholders' equity $28,067$28,672 $27,278
See accompanying notes to condensed consolidated financial statements.
Motorola, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
(Dollars in millions)
Non-Owner Changes To Equity
Common
Stock Fair Value
and Adjustment Foreign Minimum
Additional to Certain Currency Pension
Paid-In Cost-Based Translation Liability Retained
Capital Investments Adjustments Adjustment Earnings
------- ----------- ----------- ---------- --------
BALANCES AT
12/31/97 $3,513 $533 ($240) ($38) $9,504
12/31/97
Net earnings
180loss (1,148)
Conversion of
zero coupon
notes 1
Fair value
adjustmentAdjustment
to certain
cost-based
investments:
Reversal of
prior
period
adjustment (533)
Recognition
of current
period
unrecognized
gain 699642
Change in foreign
currencyCurrency
translation
adjustments (25)(36)
Stock options
exercised and
other 618
Dividends declared (72)(144)
BALANCES AT
3/28/6/27/98 $3,519 $699$3,532 $642 ($265)276) ($38) $9,612$8,212
See accompanying notes to condensed consolidated financial statements.
Motorola, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in millions)
ThreeSix Months Ended
MarchJune 27, June 28, March 29,
1998 1997
Operating
Net earningsearnings(loss) $(1,148) $ 180 $ 325593
Add(deduct) non-cash items
Restructuring charges 1,980 170
Depreciation 540 5651,058 1,137
Deferred income taxes (35) 40(430) 98
Amortization of debt discount and issue costs 2 25 5
Gain on disposition of investments in
affiliated companies (90) (17)(168) (47)
Change in assets and liabilities, net of
effects of acquisitions and dispositions
Accounts receivable, net (58) (259)(64) (624)
Inventories (312) (252)(314) (443)
Other current assets 21 11(40) (66)
Accounts payable and accrued liabilities (290) (29)(848) 245
Other assets and liabilities 85 49(298) 17
Net cash (used for)provided by operating activities $ 43 $ 435(267) $1,085
Investing
Acquisitions and advances to affiliated
companies $ (111)(320) $ (32)(80)
Proceeds from the dispositions of investments
in affiliated companies 111 22184 81
Capital expenditures (684) (521)
Other changes to(1,688) (1,052)
Proceeds from dispositions of property, plant and
equipment net 57 197
Salesand other changes 246 127
(Purchases)sales of short-term investments 46 3167 (20)
Net cash used for investing activities $(1,511) $ (581) $ (303)(944)
Financing
Proceeds from(repayment of)from commercial paper and short-term
borrowings $1,691 $ 712 $ 1403
Proceeds from issuance of debt 58 1
Repayment of debt (24) (68)(27) (52)
Issuance of common stock 6 1218 52
Payment of dividends (72) (71)(144) (143)
Net cash provided byby(used for) financing activities $1,546 $ 627 $ 14(139)
Effect of exchange rate changes on cash and
cash equivalents (25) (79)(36) (62)
Net increasedecrease in cash and cash equivalents $ 64(268) $ 67(60)
Cash and cash equivalents, beginning of period $1,445 $1,513
Cash and cash equivalents, end of period $1,509 $1,580$1,177 $1,453
See accompanying notes to condensed consolidated financial statements.
Motorola, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The condensed consolidated financial statements as of March 28,June 27, 1998 and for
the three-month and six-month periods ended March 28,June 27, 1998 and March 29,June 28,
1997, include, in the opinion of management, all adjustments (consisting solely
of
normal recurring adjustments, reclassifications, and reclassifications)restructuring charges)
necessary to present fairly the financial position, results of operations
and cash flows at March 28,June 27, 1998 and for all periods presented.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
these condensed consolidated financial statements be read in conjunction
with the consolidated financial statements and notes thereto incorporated
by reference in the Company's Form 10-K for the year ending December 31,
1997. The results of operations for the three-month periodand six-month periods
ended March 28,June 27, 1998 are not necessarily indicative of the operating results
to be expected for the full year. Certain amounts have been reclassified
in the 1997 financial statements to conform to the 1998 presentation.
2. Supplemental Balance Sheet Information
Inventories consist of the following (in millions):
March 28,June 27, Dec. 31,
1998 1997
Finished goods $1,182 $1,078$ 1,227 $ 1,078
Work in process and production materials 3,2263,156 3,018
Inventories $4,408 $4,096$ 4,383 $ 4,096
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", requires the carrying
value of certain investments to be adjusted to fair value. The Company
recorded an increase to stockholders' equity, other assets and deferred
income taxes of $699$642 million, $1,157$1,062 million and $458$420 million as of March
28,June
27, 1998; compared to an increase of $533 million, $881 million and $348
million as of December 31, 1997.
3. Supplemental Cash Flows Information
Cash paid for interest during the first quarterssix months of 1998 and 1997 was
$60$146 million and $59$95 million, respectively. Cash paid for income taxes
during the first quarterssix months of 1998 and 1997 was $158$307 million and $195$318
million, respectively.
4. EarningsEarnings(Loss) Per Share
The following table presentstables present a reconciliation of the numerators and
denominators of basic and diluted earningsearnings(loss) per common share for the periods
specified:
Three Months Ended
MarchJune 27, June 28,
March 29,
(Dollars in(In millions, except per share amounts) 1998 1997
Basic earningsearnings(loss) per common share:
Net earningsearnings(loss) $ 180(1,328) $ 325268
Weighted average common shares
Outstanding 597.4 593.9outstanding 597.9 594.7
Per share amount $ .30(2.22) $ .55.45
Diluted earningsearnings(loss) per common share:
Net earningsearnings(loss) $ 180(1,328) $ 325268
Add: Interest on zero coupon
notes, net of taxes, and
effect of executive
incentive and employee
profit sharing plans 1 1--- 2
Net earnings,earnings(loss), as adjusted $ 181(1,328) $ 326270
Weighted average common shares
outstanding 597.4 593.9597.9 594.7
Add: Effect of dilutive securities
Stock options 7.7 10.5--- 9.0
Zero coupon notes 6.2 6.4--- 6.5
Diluted weighted average common
shares outstanding 611.3 610.8597.9 610.2
Per share amount $ .30(2.22) $ .53.44
4. Earnings(Loss) Per Share-cont'd
Six Months Ended
June 27, June 28,
(In millions, except per share amounts) 1998 1997
Basic earnings(loss) per share:
Net earnings(loss) $ (1,148) $ 593
Weighted average common shares
outstanding 597.6 594.3
Per share amount $ (1.92) $ 1.00
Diluted earnings(loss) per share:
Net earnings(loss) $ (1,148) $ 593
Add: Interest on zero coupon
notes, net of taxes, and
effect of executive
incentive and employee
profit sharing plans --- 3
Net earnings(loss), as adjusted $ (1,148) $ 596
Weighted average common shares
outstanding 597.6 594.3
Add: Effect of dilutive securities
Stock options --- 10.8
Zero coupon notes --- 6.3
Diluted weighted average common
shares outstanding 597.6 611.4
Per share amount $ (1.92) $ .97
5. Recent Accounting Pronouncements
AsReorganization of January 1,Businesses
In the second quarter of 1998, the Company implementedrecorded a pre-tax restructuring
charge of $1.98 billion to cover: a reduction in employment by
approximately 15,000 over the next 12 months from the approximate 150,000
employees worldwide; the consolidation of manufacturing operations
throughout the Company with emphasis on the Semiconductor Products and
Messaging, Information and Media segments; the exit of additional non-
strategic, poorly performing businesses; and the writedown of assets which
have become impaired either as a result of current business conditions or
business portfolio decisions.
Throughout 1997, the Company established restructuring accruals totalling
$327 million to exit its modem business in Huntsville, AL, to exit the
MacOSr-compatible computer systems business, and to phase out participation
in the dynamic random access memory (DRAM) market. At June 27, 1998, $256
million of the accruals had been utilized with the remainder expected to be
used by the end of 1998.
6. Comprehensive Earnings(Loss)
SFAS No. 130 "Reporting Comprehensive Income". This pronouncement,, which is solely a financial
statement presentation standard, requires the Company to disclose non-owner
changes included in equity but not included in net earnings.earnings(loss). These
changes include the fair value adjustment to certain cost-based
investments, the
foreign currency translation adjustments, and the minimum pension
liability adjustment. Comprehensive earningsearnings(loss) for the three-month
periods ended March
28,June 27, 1998, and March 29,June 28, 1997, were $321 million$(1.4) billion and
$265$567 million, respectively. Comprehensive earnings(loss) for the six-month
periods ended June 27, 1998, and June 28, 1997, were $(1.1) billion and
$832 million, respectively.
7. Recent Accounting Pronouncement
During the firstsecond quarter, the Financial Accounting Standards Board issued
SFAS 133 "Accounting for Derivative Instruments and Hedging Activities",
which will be effective for the Company's fiscal year 2000. This statement
establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments imbedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that
changes in the derivative's fair value be recognized in earnings unless
specific hedge accounting criteria are met. The Company adopted SFAS No. 132 "Employers'
Disclosures about Pensionsis currently
assessing the impact of this new statement on its consolidated financial
position, liquidity, and Other Postretirement Benefits". This new
accounting standard also only affects financial statement presentation and
disclosure.results of operations.
Motorola, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
This commentary should be read in conjunction with the Company's
consolidated financial statements and related notes thereto and
management's discussion and analysis of financial condition and
results of operations incorporated by reference in the Company's Form
10-K for the year ended December 31, 1997.
Results of Operations:
Sales increased 4In the second quarter of 1998, sales decreased 7 percent to $6.9$7.0
billion from $6.6$7.5 billion a year earlier. In the first half of 1998,
sales declined 2 percent to $13.9 billion from $14.2 billion in the
first quarterhalf of 1997. Earnings were $180 million, compared with $325 million a
year earlier. Earnings per share (diluted) were 30 cents, compared with 53
cents a year ago. Earnings in both periods were positively affected by the
sale of assets and favorable settlements of patent claims.
Special items increased income by $54 million before taxes in 1998,
equivalent to 7 cents per share after taxes. In the first quarter of 1997,
the special items increased income by $59 million before taxes, equivalent
to 6 cents per share after taxes.
Excluding special items, from both
periods,second-quarter earnings would have been $142were $6 million, or
23 cents1 cent per share in 1998, and $286compared with $392 million, or 4764 cents per
share in the year-earlier quarter.
Net margin on sales was 2.6 percent in 1998, compared with 4.9 percent insecond quarter of 1997. Excluding special items,
these margins would have been 2.1 percentearnings for the six months were $147 million, or 25 cents per share,
compared with $678 million, or $1.11 per share a year earlier.
The Company recorded special items of $1.91 billion pre-tax, or $2.23
per share after-tax, in the firstsecond quarter of 1998. These items
include $1.98 billion of charges associated with a comprehensive
series of manufacturing consolidations, cost reductions and
4.3 percentrestructuring steps intended to improve financial performance, as
announced June 4, partially offset by gains on the sale of assets.
As a result, the second-quarter loss, including the special items,
was $1.3 billion, or $2.22 per share, compared with earnings of $268
million, or 44 cents per share, in the second quarter a year ago.
The year-earlier quarter includes special charges against pre-tax
earnings of $190 million, or 20 cents per share after-tax, largely
from the phase-out of the dynamic random access memory (DRAM)
business.
In the first six months of 1998, the loss, including special items
was $1.15 billion, or $1.92 per share, compared with earnings of $593
million, or 97 cents per share, in last year's first half.
Cellular Products Segment sales increased 3declined 1 percent to $2.81$2.78 billion
orders were flat and segment operating profits were lower. The segment
includes results of the Cellular Subscriber Sector (CSS), the Cellular
Infrastructure Group (CIG) and the Network Management Group.
CSS sales and orders declined. Sales
and orders were higher in Europe
but lower indown 11 percent. Excluding special items referred to
earlier, the Americas and Asia. Digital product sales, which
accounted for approximately 65 percent of sales, increased
significantly versussegment had a smaller operating profit than a year ago.
This increase was largely offset by a
decline in analog product sales, primarily caused by an accelerating
trend of demand shift to digital products. CSS began shipments of CDMA
(Code Division Multiple Access) phones using Motorola's CDMA chipset
and offering advanced digital features. The phones are for use in the
U.S., Hong Kong and South Korea. CSS also expanded its product line of
TDMA (Time Division Multiple Access) cellular telephones.
CIG sales and orders were higher. Sales increased significantly in
both the Americas and Japan while they declined in Europe and China,
and declined very significantly in other Asian markets. Orders were up
significantly in the Americas, higher in Japan but lower in Europe and
China, and declined very significantly in other Asian markets. Digital
product sales, which accounted for approximately 80 percent of sales,
increased significantly while analog product sales declined. CIG
announced four contracts totaling more than $150 million to deploy
commercial CDMA digital cellular systems in North Carolina, South
Carolina, South Dakota, and five other U.S. markets, as well as in
Mexico. In addition, CIG won contracts totaling more than $150 million
to expand GSM networks in China, Kuwait and Portugal.
Semiconductor Products Segment sales increased 1 percent to $1.83
billion, orders were 4 percent lower and the segment had an operating
loss, compared with a profit a year ago. The loss is attributable to
various restructuring charges, without which the segment would have
reported a slight profit. The segment also was affected by weak demand
in Asia and increased pricing pressure worldwide. On a regional basis,
orders were higher in Europe and lower in Japan, the Asia-Pacific
region and the Americas. By business, orders improved significantly
for the Networking and Computing Systems Group, were higher for the
Transportation Systems Group and the Wireless Subscriber Systems Group
but declined for the Consumer Systems Group and the Semiconductor
Components Group.
Land Mobile Products Segment sales climbed 27 percent to $1.24 billion,
orders rose 2 percent, and operating profits were higher. Profits include
a gain on the sale of a one-third interest in the shared network operation
of Motorola Communications Israel, Ltd. to Ampal (Israel) Ltd. Orders in
the iDEN(Registered Trademark) business were lower compared with the
significant demand experienced in the same period last year. The iDEN
business includes large infrastructure orders, which increase the potential
for volatility in the timing of order recognition during any particular
period. Contracts with a combined value of approximately $40 million were
received for new iDEN systems in Peru and in Singapore.
Messaging, Information and Media Segment sales declined 25 percent to
$693 million, orders were 21 percent lower andIncluding special items, the segment had an operating loss versus a
profit a year ago.
These results are largely
attributableCellular Subscriber Sector (CSS) sales and orders declined. Sales
and orders were higher in Europe, lower in Pan America and
significantly lower in Asia. Sales of digital products continued to
increase versus last year. This increase was entirely offset by a
decline in sales of analog products, caused by a continuing trend of
demand shift to digital products.
Cellular Infrastructure Group (CIG) sales increased while orders were
significantly lower. Sales were up significantly in Japan and Pan
America, lower in Europe and significantly lower in Asia. Orders
were higher in Europe, lower in Asia and Pan America, and
significantly lower in Japan than a year ago when an unusually high
level of orders was recorded on a contract to build a nationwide Code
Division Multiple Access (CDMA) system. The cellular infrastructure
business has been historically characterized by large orders and
irregular purchasing patterns, which can cause volatility in
quarterly growth rates.
Semiconductor Products Segment sales decreased 11 percent to $1.81
billion and orders were down 25 percent. Excluding special items
referred to earlier, the segment had an operating loss versus a
profit a year ago. Including special items, the segment had a larger
operating loss than a year ago. Orders were higher in the
Transportation Systems Group, lower in the Consumer Systems and
Networking and Computing Systems Groups, and significantly lower in
the Wireless Subscriber Systems Group and Semiconductor Components
Group. All major regions posted lower orders with orders in Japan
and Asia down significantly. The semiconductor market continued weak pagingto
be adversely affected by economic difficulties in Asia, contributing
to general market weakness and severe pricing pressures in many
product lines.
Land Mobile Products Segment sales increased 18 percent to operators$1.37
billion, orders rose 12 percent and operating profits increased.
Orders for iDEN (Registered) equipment for integrated digital
enhanced networks were up significantly, led by orders for
infrastructure equipment in North America, Brazil, Colombia and
Japan. A new system in Sao Paulo, Brazil, and a second system in
Buenos Aires, Argentina, began operations during the quarter. A 900
MHz dispatch-only system based on iDEN technology was announced and
the first trial system was launched in Las Vegas, Nev. The segment
also won several contracts for TETRA (Terrestrial Trunked Radio)
equipment. TETRA is the only European-approved standard for digital
trunked radio communications. A contract in excess of $60 million
was received from Dolphin Telecommunications for 150,000 radio
handsets for use on its national network in the U.K.
Messaging, Information and Media Segment sales declined 32 percent to
$771 million and orders were down 35 percent. Excluding special
items referred to earlier, the segment had a smaller operating profit
than a year ago. Including special items, the segment had an
operating loss versus a profit a year ago. Orders in the Paging
Group were down significantly. Sales and orders were lower in North
America and China as well as tosignificantly lower in China. The Company announced the
weak Asian economy. Management
believesfirst commercial launch of the FLEX (Trademark) high speed, multi-
frequency roaming paging operators continue to manage inventory levels very
closely to improve their financial positionnetwork in the Guangxi Zhuang Autonomous
Region of China's nationwide paging network. Orders and cash flow. Management
also believes that sales
by operators to consumersincreased significantly in North America and
China continue to grow.the emerging cable modem business.
Automotive, Component, Computer and Energy Sector sales rose 3 percent,
orders increaseddeclined 9
percent and operating profitsorders were higher. Two of
its businesses, the Component Products Group and Energy Systems Group,
were negatively affected by weakened Asian currencies which reduced
salesdown 15 percent. Excluding special items
referred to their original-equipment manufacturing customers in the
region. The sector formed a new business, Telematics Information
Systems, to leverage technologies related to the emerging telematics
industry. Motorola Computer Group became part ofearlier, the sector in
January.had a smaller operating profit than a
year ago. Including special items, the sector had an operating loss
versus a profit a year ago. The sector's results are reported as
part of the "Other Products" segment.
Space and Systems Technology Group sales increased 41Sales declined 36 percent, orders
were 3230 percent lower, and the group had an operating loss versus a
profit a year ago. The changes in sales, orders and operating
profits are all largely attributable to the lower dollar value than a
year ago andof contractual milestones on the segment had an operating
profit compared with a loss a year ago, as anticipated due largely to
planned activity in the IRIDIUM(Registered Trademark)IRIDIUM (Registered)
program. Results are reported as part of the "Other Products"
segment.
SinceInitial deployment of the beginning of 1998, the group has successfully launched 21
IRIDIUM global personal communications
system satellites into low-earth orbit, bringing thewas completed. The total number of operational, on-orbit
satellites to 62. The system's voice
links, paging signals, satellite crosslinks and satellite hand-offs
have been successfully tested. Testingis currently 65. Motorola is planning 2 additional
launches of the satellite system will
continue until the startIridium satellites, carrying a total of commercial service, expected at7 additional
satellites, by the end of September this year.August. Operational and voice quality
testing of the system continued to be demonstrated successfully, and
nine Iridium gateways achieved pre-commercial acceptance by gateway
owners. As previously reported, Iridium LLC may require additional
financing, possibly during the second half of 1998, to continue to
make contractual payments to the Company.
Manufacturing and other costs of sales were 7071 percent of sales,
compared with 6667 percent in the firstsecond quarter of 1997. Increased
pricing pressures were experienced in several business segments and
were due to a variety of factors including weakened Asian currencies
and reduced demand for pagers and analog cellular telephones.demand.
Selling, general and administrative expenses were 1819 percent of sales
versuscompared with 17 percent in the year-earlier period. Excluding the losses
recognized on the Company's investments in Iridium LLC and the White
Oak semiconductor joint venture, selling, general and administrative
expenses would have declinedperiod, largely as a
percentageresult of lower sales.
Depreciation expense decreased slightly as a percent of sales.
Interest expense increased slightly.slightly as a percent of sales. The tax
rate for the firstsecond quarter was 30 percent compared withversus a 35 percent in the prior year.tax
rate a year ago.
Liquidity and Capital Resources:
NetOperating activities used $267 million in cash provided by operations decreased to $43 million for the three-monthsix-month
period ended March 28,June 27, 1998, as compared to $435 millionproviding $1.1 billion in
cash for the three-monthsix-month period ended March 29,June 28, 1997. The decreaseuse of cash
was due primarily to lower earnings, increases in inventory and decreases in
accounts payable and accrued liabilities for the
first half of 1998, and recognition of the restructuring charge in
the second quarter of 1998.
Inventories at March 28,June 27, 1998 increased by 87 percent or $312$287 million,
compared withto inventories at December 31, 1997. Property, plant and
equipment, less accumulated depreciation, increased $70$134 million
since December 31, 1997.
The Company's notes payable and current portion of its long-term debt
increased to $2.0$3.0 billion at March 28,June 27, 1998, from $1.3 billion at
December 31, 1997. Net debt (notes payable and current portion of
long-term debt plus long-term debt less short-term investments and
cash equivalents) to net debt plus equity increased to 16.324.5 percent
at March 28,June 27, 1998 from 12.4 percent at December 31, 1997. The
Company's total domestic and non-U.S.foreign credit facilities aggregated
$3.7$4.0 billion at March 28,June 27, 1998, of which $274$297 million were used and
the remaining $3.4$3.7 billion were available to back up outstanding
commercial paper which totaled $1.7$2.6 billion.
At March 31,June 27, 1998, the off-balance sheet commitment to Nextel
Communications, Inc. for equipment financing aggregatedremained at $485
million. This amount represents the maximum available commitment and
may not be completely utilized.used.
As a multinational company, the Company's transactions are
denominated in a variety of currencies. The Company uses financial
instruments to hedge, and therefore attempts to reduce, its overall
exposure to the effects of currency fluctuations on cash flows. The
Company's policy is to not speculate in financial instruments for
profit on the exchange rate price fluctuation, trade in currencies
for which there are no underlying exposures, or enter into trades for
any currency to intentionally increase the underlying exposure.
Instruments used as hedges must be effective at reducing the risk
associated with the exposure being hedged and must be designated as a
hedge at the inception of the contract. Accordingly, changes in
market values of hedge instruments must be highly correlated with
changes in market values of underlying hedged items both at inception
of the hedge and over the life of the hedge contract.
The Company's strategy in foreign exchange exposure issues is to
offset the gains or losses of the financial instruments against
losses or gains on the underlying operational cash flows or
investments based on the operating business units' assessment of
risk. Currently, the Company primarily hedges firm commitments,
including assets and liabilities currently on the balance sheet. The
Company expects that it may hedge anticipated transactions,
forecasted transactions or investments in foreign subsidiaries in the
future.
Almost all of the Company's non-functional currency receivables and
payables which are denominated in major currencies that can be traded
on open markets are hedged. The Company uses forward contracts and
options to hedge these currency exposures. A portion of the
Company's exposure is to currencies which are not traded on open
markets, such as those in Latin America and China, and these are
addressed, to the extent reasonably possible, through managing net
asset positions, product pricing, and other means, such as component
sourcing.
At March 28,June 27, 1998 and March 29,June 28, 1997, the Company had net outstanding
foreign exchange contracts totaling $2.3$2.0 billion and $1.5$1.6 billion,
respectively. The following schedule shows the five largest foreign
exchange hedge positions as of March 28,June 27, 1998 and the corresponding
positions at March 29,June 28, 1997:
Dollars in millions
Buy (Sell) MarchJune 27, June 28, March 29,
1998 1997
Japanese Yen (831) (375)(569) (427)
British Pound Sterling (535) (529)(405) (356)
German Mark (352) (149)
Italian Lira (178) (94)
Taiwan Dollar (170) (44)
German Mark (121) (48)(177) (129)
Malaysian Ringgit 69 4
At March 28,June 27, 1998 and March 29,June 28, 1997, outstanding foreign exchange
contracts primarily consisted of short-term forward contracts. Net
deferred gains at March 28,June 27, 1998, and net deferred losses at March 29,June 28,
1997, on these forward contracts which hedge designated firm
commitments were immaterial.
As of the end of the reporting period, the Company had no outstanding
interest rate swaps, commodity derivatives, currency swaps or options
relating to either its debt instruments or investments. The Company
does not have any derivatives to hedge the value of its equity
investments in affiliated companies.
The Company's research and development expenditures were $703$722 million
in the firstsecond quarter of 1998, compared with $614$678 million in the
firstsecond quarter of 1997. Research and development expenditures for
the year ended December 31, 1997 were $2.7 billion. The Company
continues to believe that a strong commitment to research and
development drives long-term growth. The Company's capital
expenditures for the firstsecond quarter of 1998 totaled $684
million,$1.0 billion,
compared with $521$611 million in the firstsecond quarter of 1997. The
Company is currently anticipating that capitalfixed asset expenditures for
1998 will increase to $4.0be $3.5 billion.
Return on average invested capital (net earnings divided by the sum
of stockholders' equity, long-term debt, notes payable and net debt)the
current portion of long-term debt, less short-term investments and
cash equivalents) was 7.2(3.8%) percent based on the performance of the
four preceding fiscal quarters ending March 28,June 27, 1998, compared with
8.07.4 percent based on the performance of the four preceding fiscal
quarters ending March 29,June 28, 1997. Motorola'sThe Company's current ratio (the
ratio of current assets to current liabilities) was 1.441.19 at March 28,June 27,
1998, compared to 1.46 at December 31, 1997.
Outlook:Year 2000:
The first-quarter results were greatly affectedCompany has been aggressively addressing "Year 2000" issues relating to
the processing of date data at the turn of the century. A company-wide
task force has been formed, milestones have been established, and detailed
plans are actively being implemented so that Motorola research programs,
products and internal computer, financial, manufacturing and other
infrastructure systems are reviewed and the necessary changes are
addressed.
Additionally, Motorola customer and supplier relationships are being
reviewed to assess and address Year 2000 issues. The Company has undertaken
internal reviews and has contacted certain of its customers to assess, to
the extent possible, Year 2000 issues related to Motorola products. While
the Company is taking all reasonable efforts to make information on the
Year 2000 readiness of Motorola products available to its customers, this
information may not reach all customers, particularly indirect purchasers.
Although the Company believes that it can address Year 2000 readiness
issues related to its products, there still may be disruptions and/or
product failures that are unforeseen, particularly with respect to its
infrastructure equipment.
Motorola is requesting assurances from its major suppliers that they are
addressing this issue and that products procured by Motorola will function
properly in the worldwide impactYear 2000. Certain critical suppliers, such as energy
providers, have been unwilling to provide such assurances and do not expect
to provide such assurances prior to the Year 2000. Other critical
suppliers do not expect to be able to provide such assurances until 1999.
In both instances, this is particularly the case outside of Asian deflationary currency-influenced price competition, lower
Asian consumer confidence than a year ago and unfavorable shifts in
product mix. These conditions may continue for several more quarters.
Second-quarter salesthe United
States where the Company has significant operations. In addition, many
governmental agencies are not expected to be below thoseYear 2000 compliant. As a
result, it is difficult for the Company to assess the likelihood, or the
impact on its business, of such entities' failure to be Year 2000
compliant.
While Motorola's efforts to address Year 2000 issues will involve
additional costs and the time and effort of a year ago.
Second-quarter earnings could be equal to or less than 1998
first-quarter earnings, excluding special items.
However,number of Motorola employees,
the Company remains fully committedbelieves, based on currently available information, that it
will be able to long-term growth
prospectsmanage its total Year 2000 transition without any material
adverse effect on the Company's future consolidated results of operations,
liquidity and capital resources.
Euro Conversion:
On January 1, 1999, eleven of the fifteen member countries of the European
Union are scheduled to establish fixed conversion rates between their
existing sovereign currencies and the euro. The participating countries
have agreed to adopt the euro as their common legal currency on that date.
The Company has formed a task force and has begun to assess the potential
impact to the Company that may result from the euro conversion. In
addition to tax and accounting considerations, the Company is assessing the
potential impact from the euro conversion in a number of areas, including
the following: (1) the technical challenges to adapt information
technology and other systems to accommodate euro-denominated transactions;
(2) the competitive impact of cross-border price transparency, which may
make it more difficult for businesses to charge different prices for the
same products on a country-by-country basis; (3) the impact on currency
exchange costs and currency exchange rate risk; and (4) the impact on
existing contracts.
At this early stage of its assessment, the Company can not yet predict the
anticipated impact of the euro conversion on the Company.
Outlook:
Conditions in the whole semiconductor industry worldwide and general
business conditions in Asia weakened further in the second quarter.
The currency-related impact on pricing and consumer confidence
continues to affect the Asian region and the Company. Significant
efforts to stabilize the region by the International Monetary Fund
and various governments have not yet proven successful. The negative
impact on the Company's business is likely to continue for at least
the remainder of the year.
To respond to the severity of these business conditions, the Company
is resizing itself through aggressive restructuring steps announced
last month. These actions are intended to improve the Company's
long-term profitability and efficiency.
The Company announced a more collaborative and market-focused
Communications Enterprise that links together all of Motorola's
communications businesses so they can easily share resources and
cooperate on key business and technology issues. At the same time,
it will realign individual businesses so they can quickly and more
efficiently direct the Company's diverse core competencies toward
winning solutions, as the convergence of wireless technologies
continues. In the longer term, the Company expects to see the
benefits of alliances and joint development projects in technologies
ranging from digital signal processors to Internet Protocol
telephony. The Company has announced, and is pursuing additional,
cooperative efforts to enable it to build on its software strengths
and technology portfolio and to bring profitable new products to the
marketplace ahead of the competition. The Company believes these
efforts, coupled with its strong position in emerging markets
throughout the world, while taking appropriate
capital spending and cost control measures to match capacity with
demand. Such ongoing actions include consolidating manufacturing
operations and reduced staffing or shortened work weeks in several
businesses.
Despiteset the weakness in Asia, the Company is benefiting from strongstage for a renewal of growth in Latin Americasales
and continued expansion in the U.S.earnings.
Business Risks:
Statements that are not historical facts are forward-looking and involve
risks and uncertainties. These include the statements in "Outlook" and
statements about the launch of commercial service by Iridium LLC, Iridium LLC's financing needs, and the Company's 1998 capital expenditures.fixed
asset expenditures and the impact of Year 2000 issues. 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 includeinclude: (i) the ability of
Motorola to implement manufacturing consolidations, cost reductions and
restructuring actions in a timely manner and the success of those efforts;
(ii) the ability of the Company to integrate its businesses to reduce costs
and increase efficiencies; (iii) unanticipated impact of the renewal plan
on productivity and the ability of the company to retain, and where
necessary recruit, employees; (iv) the success of efforts to stabilize
economic conditions in Asia; (ii)(v) pricing pressures and demand for product,the
company's products, particularly semiconductor and messaging products,
especially in light of the current economic conditions in Asia; (iii)(vi) 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; (iv)(vii) the potential that deteriorating economic
conditions in Japan could continue or worsen; (viii) the ability of
Motorola's cellular businesses to continue to transition to digital
products and gain market share; (v)(ix) product and technology development and
commercialization risks, including for newer digital products, Iridiumr
satellite deployment and Iridium(Registered Trademark)software development and Iridium products; (vi) the success of
strategic decisions to improve performance; (vii)(x)
steady growth in emerging markets; (viii)(xi) unanticipated changes in demand for
products; and (ix)(xii) continued weak demand for paging products in North America
and China.
IRIDIUM(Registered Trademark)China; and (xiii) unanticipated impact of Year 2000 issues,
particularly the failure of products of major suppliers to function
properly in the Year 2000.
IRIDIUM (Registered) is a registered trademark and service mark of
Iridium LLC.
MacOS (Registered) is a registered trademark of Apple Computer, Inc.
All other brand names mentioned are registered trademarks of their
respective holders and are herein acknowledged.
Motorola, Inc. and Subsidiaries
Information by Industry Segment
(Unaudited)
(Dollars In millions)
Summarized below are the Company's segment sales as defined by industry
segment for the three-month and six-month periods ended June 27, 1998 and
June 28, 1997:
Segment Sales
for the three months ended
MarchJune 27, June 28, 1998 and March 29, 1997:
(Dollars in millions)
Three months ended
March 28, March 29,
1998 1997 % Change
Cellular Products $2,808 $2,713 3$2,785 $2,824 (1)
Semiconductor Products 1,833 1,808 12,032 (11)
Land Mobile Products 1,243 977 271,370 1,160 18
Messaging, Information and
Media Products 693 924 (25)771 1,135 (32)
Other Products 1,018 876 16959 1,166 (18)
Adjustments &and eliminations (709) (656) 8(670) (796) (16)
Industry segment totals $6,886 $6,642 4$7,023 $7,521 (7)
Six months ended
June 27, June 28,
1998 1997 % Change
Cellular Products $5,592 $5,537 1
Semiconductor Products 3,641 3,840 (5)
Land Mobile Products 2,613 2,137 22
Messaging, Information and
Media Products 1,463 2,059 (29)
Other Products 1,977 2,042 (3)
Adjustments and eliminations (1,377) (1,452) (5)
Industry segment totals $13,909 $14,163 (2)
Part II _- Other Information
Item 1 _- Legal Proceedings.
Motorola is a named defendant in seven cases arising out of alleged
groundwater, soil and air pollution in Phoenix and Scottsdale, Arizona. On
June 1, 1998, acting with respect to that portion of the consolidated
Lofgren personal injury cases that had been set for a June trial, and
following extensive evidentiary hearings held in April and May, the Lofgren
court ruled inadmissible proffered testimony from each of the plaintiffs'
medical causation experts and granted summary judgment on those personal
injury claims in favor of Motorola and the other remaining defendants.
Motorola has been a defendant in several cases arising out of its
manufacture and sale of portable cellular telephones. On June 30, 1998,
the Illinois Appellate Court affirmed the Circuit Court's earlier dismissal
of Schiffner v. Motorola, a purported class action by purchasers of
portable cellular phones alleging economic losses.
See Item 3 of the Company's Form 10-K for the fiscal year ended December
31, 1997 and Item 1 of Part II of the Company's Form 10-Q for the period
ended March 28, 1998 for additional disclosures regarding pending matters.
In the opinion of management, the ultimate disposition of these matters
will not have a material adverse effect on the consolidated financial
position, liquidity or results of operations of Motorola.
Item 2 _- Changes in Securities.
Not applicable.
Item 3 _- Defaults Upon Senior Securities.
Not applicable.
Item 4 _- Submission of Matters to a Vote of Security Holders.
(a)Not applicable.
Item 5 - Other Information.
Stockholder Proposals
Proposals of stockholders intended to be presented at the Company's 1999
annual meeting of stockholders must be received at the Company's principal
executive offices not later than November 23, 1998 in order to be included
in the Company's proxy statement and (c)form of proxy relating to the 1999
annual meeting.
Pursuant to new amendments to Rule 14a-4(c) of the Securities Exchange Act
of 1934, as amended, if a stockholder who intends to present a proposal at
the 1999 annual meeting of stockholders does not notify the Company of such
proposal on or prior to February 6, 1999, then management proxies would be
allowed to use their discretionary voting authority to vote on the proposal
when the proposal is raised at the annual meeting, even though there is no
discussion of the proposal in the 1999 proxy statement.
Pursuant to the Company's Bylaws, proposals of stockholders intended to be
presented at the Company's 1999 annual meeting of stockholders must be
received by the Secretary of the Company at the Company's principal
executive offices not earlier than the 90th day prior to the date of the
annual meeting nor later than the 60th day prior to the date of the annual
meeting in order to be brought before the meeting. (Although, as stated
above, the proposal must be received no later than November 23, 1998 in
order to be included in the proxy statement relating to the 1999 annual
meeting). The Company held itscurrently believes that the 1999 annual meeting of
stockholders will be held during the stockholders onfirst week of May 4,
1998, and the following matters were voted on at that meeting:
1. The election of the following directors, who will serve until their
successors are elected and qualified, or their earlier death or resignation:
BROKER
DIRECTOR FOR WITHHELD NON-VOTES
Ronnie C. Chan 513,386,757 8,683,888 0
H. Lawrence Fuller 515,812,691 6,257,954 0
Christopher B. Galvin 515,636,868 6,433,777 0
Robert W. Galvin 515,536,527 6,534,118 0
Robert L. Growney 515,777,042 6,293,603 0
Anne P. Jones 515,705,814 6,364,831 0
Donald R. Jones 515,705,440 6,365,205 0
Judy C. Lewent 515,788,666 6,281,979 0
Walter E. Massey 515,789,029 6,281,616 0
Thomas J. Murrin 515,712,626 6,358,019 0
Nicholas Negreponte 515,704,034 6,366,611 0
John E. Pepper, Jr. 515,901,300 6,169,345 0
Samuel C. Scott III 515,860,819 6,209,826 0
Gary L. Tooker 515,845,383 6,225,262 0
B. Kenneth West 515,763,794 6,306,851 0
John A. White 515,785,110 6,285,535 0
2. The adoption of the Motorola Incentive Plan of 1998 was approved by the
following vote: For, 362,067,901; Against, 25,886,659; Abstain, 3,877,919; and
Broker Non-Votes, 130,238,166.
Item 5 _ Other Information.
Not applicable.1999.
Item 6 _- Exhibits and Reports on Form 8-K.
(a) Exhibits
103(ii) By-Laws of Motorola, Inc., as amended through July 16, 1997.
10.1 Motorola Executive Incentive Plan, as amended through February
4, 1998.
10.2 Motorola Long Range Incentive Plan of 19981994, as amended through
February 4, 1998.
10.12 Motorola Non-Employee Directors Stock Plan, as amended and
restated on February 4, 1998.
27 Financial Data Schedule (filed only electronically with the
SEC).
(b) Reports on Form 8-K
No reportsThe Company filed a Current Report on formForm 8-K were filed during the first quarter
of 1998dated
June 5, 1998.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOTOROLA, INC.
(Registrant)
Date: May 8,July 31, 1998 By: /s/ Kenneth J. Johnson
Kenneth J. Johnson
Senior Vice President and Controller
(Chief Accounting Officer and Duly
Authorized Officer of the Registrant)
EXHIBIT INDEX
Number Description of Exhibits
103(ii) By-Laws of Motorola, Inc., as amended through July 16, 1997.
10.1 Motorola Executive Incentive Plan, as amended through
February 4, 1998.
10.2 Motorola Long Range Incentive Plan of 19981994, as amended
through February 4, 1998.
10.12 Motorola Non-Employee Directors Stock Plan, as amended and
restated on February 4, 1998.
27 Financial Data Schedule (filed only electronically with the
SEC).