Fitch Lowers Motorola's IDR to 'BBB'; Outlook Remains Negative

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded the following ratings for Motorola Inc. (Motorola) (NYSE: MOT):

-- Issuer Default Rating (IDR) to 'BBB' from 'BBB+';

-- Senior unsecured revolving credit facility to 'BBB' from 'BBB+';

-- Senior unsecured notes to 'BBB' from 'BBB+'.

In addition, the short-term IDR and Commercial Paper program ratings are affirmed at 'F2'. Approximately $4.3 billion of total debt is affected by Fitch's action. The Rating Outlook remains Negative.

The rating action and Outlook reflect:

-- Limited visibility and expected further delays in returning the mobile devices business to consistent profitability and stable market share. The company's slower than anticipated progress in turning around the mobile devices business, which will require additional restructuring in addition to bringing to market a steady stream of new products;

-- Expectations that credit protection measures will remain pressured for the rating, as Fitch estimates leverage (Total Debt/Operating EBITDA) as of Dec. 31, 2007, was more than 3 times (x), meaningfully above historical levels, with interest coverage at approximately 4x;

-- The potential for more aggressive share repurchase activity following the significant decline in the company's stock price; Motorola had approximately $3.8 billion outstanding under its stock buyback authorization as of Dec. 31, 2007;

-- Fitch's reduced confidence that Motorola will return annual free cash flow to historical levels in excess of $1 billion annually over the intermediate term, as free cash flow was negative for 2007.

Fitch believes consistently improving operating performance throughout 2008 for the mobile devices segment and a disciplined approach to share repurchases could stabilize the ratings. Failure to slow mobile handset market share declines from a lack of market acceptance of new products and/or a more aggressive approach to shareholder-friendly actions could result in negative rating actions.

The ratings are supported by Motorola's:

-- Solid financial flexibility and liquidity position, given the company's $8.6 billion cash position (although Fitch believes approximately 25% of its cash and cash equivalents are located outside the U.S.) along with an undrawn $2 billion senior credit facility expiring December 2011. Near-term maturities are very manageable and include approximately $114 million 6.5% senior notes due March 1, 2008 and $84 million of 5.8% senior debentures due Oct. 15, 2008.

-- Relatively diversified product portfolio, at the company's two other segments, Home & Networks Mobility and Enterprise Mobility Solutions, which accounted for nearly 50% of company-wide sales in the fourth quarter of 2007 (4Q'07) versus only 34% in the prior year quarter and have maintained comparatively consisting financial and operating profiles;

-- Solid intellectual property (IP) portfolio and brand name, supported by the company's significant scale.

Fitch estimates operating income margin for the Mobile Devices business in the seasonally stronger 4Q'07 increased only modestly to -1.7% from -3.1% in the third quarter despite an approximately 7% increase in sales, reflecting a lower sales mix and suggesting the company's restructuring efforts in 2007 were not sufficiently aggressive. In addition, the company recently introduced nine new cellphone models that, if successful, are not expected to meaningfully affect operating results until the end of 1Q'08. However, the company's restructuring initiatives contributed to a 10-day sequential improvement in the company's cash conversion cycle (CCC) to a Fitch-estimated 36 days for the fourth quarter from 46 days in the third quarter, although this was essentially flat from the fourth quarter of 2006. Nonetheless, given the need for further restructuring and that the majority of handset unit growth will be driven by low-cost models for emerging markets, Fitch remains skeptical of the company's ability to return operating income margin to double digits over the longer term.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.