Analysts last week hoped Motorola Inc. would shed some light in its earnings conference call on whether it will need to raise more money or take additional charges to cover its Iridium L.L.C. debt exposure, but the company avoided any specific questions on the matter.
“Our comments are limited because Iridium is public,” said Robert Growney, president and chief operating officer of Motorola. “We are monitoring the situation very closely and will be evaluating Iridium’s new business plan as it evolves. Whether we give any additional financial support will depend on the content of the revised business plan, negotiations with their banks and approval from our board of directors.”
Motorola owns about 18 percent of Iridium, which built and launched the world’s first low-earth-orbit satellite network for global voice communications. The satellite company’s struggles are well known. After revealing it would fall short of revenue and subscriber targets stipulated in its bank loan agreements, Iridium revised its business plan. The company’s banks have given the company a two-month waiver on these loan requirements, after which it will begin renegotiating with them.
Once seen as Motorola’s potential money-maker when the vendor was struggling with worldwide economic conditions and lack of demand for analog handsets, Iridium now may turn out to be a thorn in Motorola’s side as the company financially recovers.
Motorola said it recorded an additional financing reserve related to its support of Iridium, and indicated it may be required to give Iridium more money if the satellite company doesn’t meet its loan agreements. Motorola would not disclose how large of an impact this reserve had on first-quarter profits, only saying it recorded a $91 million loss in its “other products” business segment.
Standard & Poor’s credit rating agency placed its ratings of Motorola Inc. and Motorola Credit Corp. on CreditWatch with negative implications following the company’s earnings announcement. The agency cited economic conditions, increased costs and the possibility that Motorola would have to provide additional financial support to Iridium later this year.
Motorola beat analysts’ expectations for the first quarter, earning $171 million, or 28 cents per share, on sales of $7.2 billion. President and Chief Operating Officer Robert Growney said it will exceed Wall Street’s expectations in the second quarter as well, possibly reaching $7.6 billion in sales with earnings of 37 cents to 42 cents per share.
“Operating results reflect increasing market share in digital wireless telephones, stemming from the success of new products and continuing improvements in the semiconductor business, which returned to profitability,” said Growney.
Motorola said it continued to see increased benefits from its restructuring plan, which is expected to improve its operating profitability by at least $750 million per year following a $2 billion restructuring charge in the second quarter 1998.
The end of the first quarter saw a reduction of 24,000 employees since mid-1998, said Growney.
“That number is now near the maximum of what we expect,” said Growney. “We intend to add to our engineering, marketing and customer response organizations. This will offset any remaining reductions set to occur … During the first quarter, these programs reached a profitable improvement of $250 million, almost reaching our goal of $1 billion by the middle of 1999.”
