Fitch Affirms Motorola's IDR at 'BBB-/F3'; Rating Outlook Revised to Stable

CHICAGO--(BUSINESS WIRE)--Fitch Ratings affirms the following ratings on Motorola Inc. (Motorola; NYSE: MOT) and revises the Rating Outlook to Stable from Negative:

--Issuer Default Rating (IDR) at 'BBB-';

--Senior secured revolving credit facility at 'BBB';

--Senior unsecured notes at 'BBB-';

--Short-term IDR and commercial paper program at 'F3'.

The rating actions affect approximately $4.9 billion of total debt, including the company's undrawn $1.5 billion revolving credit facility.

The Stable Outlook reflects Fitch's increasing confidence that Motorola's operating performance will exceed Fitch's original expectations for 2010, driven by:

--Fitch's belief that Mobile Devices' (MDB) current momentum should continue in the second half of 2010. Motorola's operating momentum should be driven by robust smartphone unit growth and increased penetration of smartphones (versus feature phones), broad adoption of the Android-based operating system, and solid commercial acceptance of Motorola's Droid smartphone model. The mid-July release of Droid X, the company's next generation product, should also support Motorola's operating momentum through the second half of 2010. The resultant richer sales mix and benefits from significant cost cuts over the last few years could enable MDB to achieve its target of breakeven profitability by the fourth quarter of 2010.

--Enterprise Mobility Solutions' (EMS) steady operating performance due to gradually recovering enterprise and public safety markets.

--Meaningful debt reduction, following the company's successful tender for approximately $500 million of senior unsecured notes in the second quarter of 2010.

Fitch's believes Motorola's consolidated free cash flow could exceed $500 million in 2010 after cash restructuring and pension contributions compared with prior expectations for modestly positive free cash flow. Motorola generated $250 million of free cash flow in 2009 and used $715 million in 2008.

Fitch believes the probability of Motorola postponing the separation of MDB and Home from EMS and the remaining Networks assets ('Motorola Solutions') in the first quarter of 2011 continues to decline with each quarter. Upon separation, Fitch believes that the IDR for Motorola Solutions will be at least 'BBB-'.

Prior to the anticipated separation, positive rating actions could occur if:

--Motorola provides clarity on anticipated cash levels for Motorola Solutions at separation;

--Motorola experiences meaningfully better than expected revenue growth and profitability expansion in Motorola Solutions.

Negative rating actions could result if the company:

--Postpones the separation of the MDB and Home businesses, which Fitch believes would be most likely due to the reversal of MDB's positive operating momentum and weak market acceptance of new product launches;

--Uses free cash flow before special cash outlays in 2010, likely due to a stalled recovery in enterprise markets or more significant than anticipated municipal and state budget cuts.

From demand and revenue growth perspectives, Fitch has increased confidence Motorola will exceed Fitch's full year expectations within MDB and meet Fitch's expectations for Home, EMS, and Networks. While Fitch remains skeptical of handset-makers' longer-term ability to meaningfully differentiate Android-based products, given the anticipated crowding of this space, the market's initial acceptance of Motorola's version of the Droid and its interface and applications configuration has enabled the company to meaningfully increase the average selling price (ASP) of its handsets. Furthermore, the company remains committed to meeting its targets of 20 discrete smartphone product launches and 12 million to 14 million smartphone unit shipments in 2010.

Within Home, Fitch expects the segment's slightly richer sales mix will be offset by weak housing starts and cautious consumer spending in the U.S., resulting in mid- to high-single-digit revenue declines for the full year. For Networks, CDMA sales are expected to taper off over the course of the second half of 2010, resulting in full year sales declining by 10%. EMS revenues for 2010 are expected to grow in the mid-single-digit range, driven by gradual recoveries in enterprise and public safety spending.

Despite Fitch's expectations that consolidated sales will be down slightly in 2010, Fitch believes operating income will increase to the high single digits in 2010 from 6% in 2009, driven by a richer sales mix and lower cost structure. In conjunction with recent debt reduction, Fitch believes credit protection measures will strengthen meaningfully throughout 2010 with total leverage (total debt-to-operating EBITDA) declining a full turn to approximately 2 times (x) in 2010 from approximately 3x in both 2009 and 2008. This does not consider additional debt reduction or the approximately $1.2 billion of cash proceeds from the sale of the majority of the Networks assets to Nokia-Siemens, which is expected to close by the end of 2010. Fitch estimates interest coverage (operating EBITDA-to-interest expense) will approach 10x in 2010 from approximately 6x in 2009 and 2008.

Fitch believes Motorola's liquidity was solid as of June 30, 2010 and supported by:

--Approximately $2.9 billion of cash and cash equivalents, more than 80% of which Fitch estimates is located outside the U.S. Nonetheless, Motorola continues to review various repatriation strategies to return offshore cash to the U.S. with minimal adverse tax consequences. Of the cash and cash equivalents amount, $216 million was restricted cash;

--Approximately $5.3 billion of Sigma Funds balances and short-term investments, approximately 39% of which was held outside the U.S. and the majority of which was invested in highly liquid securities; and

--An undrawn $1.5 billion revolving credit facility expiring Dec. 14, 2011. The size of the facility is limited to an amount determined based on eligible domestic accounts receivable and inventory.

Fitch's expectations for positive free cash flow also support liquidity. Beyond 2010, free cash flow could be pressured by potential increases in mandatory cash contributions attributable to the company's underfunded pension in 2011. The aforementioned sale of the majority of the Networks assets for $1.2 billion of cash, along with approximately $150 million of retained accounts receivables, should provide additional sources of liquidity.

Total debt as of June 30, 2010 was approximately $3.4 billion, consisting of various tranches of senior unsecured notes and debentures. Motorola's nearest maturity is $527 million of 7.625% senior unsecured debentures due on Nov. 15, 2010, which Fitch believes the company could repay with available cash.

Applicable criteria are available at 'www.fitchratings.com' and specifically include the following reports:

--'Corporate Rating Methodology', dated Nov. 24, 2009;

--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers', dated Nov. 24, 2009;

--'Liquidity Considerations for Corporate Issuers', dated June 12, 2007.

Additional information is available at 'www.fitchratings.com'.

Related Research:

Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489006

Liquidity Considerations for Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666

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