Fitch Removes Motorola From Rating Watch Negative; Affirms 'BBB' IDR; Outlook Negative

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has removed Motorola Inc.'s (Motorola; NYSE:MOT) ratings from Rating Watch Negative and affirmed the following ratings for the company:

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

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

--Senior unsecured notes at 'BBB';

--Commercial paper program rating at 'F2'.

The Rating Outlook is Negative. Approximately $6.2 billion of total debt, including the company's revolving credit facility, is affected by Fitch's actions.

The removal of the ratings from Rating Watch Negative (where they were placed on Feb. 1, 2008) follows Motorola's indefinite postponement of the separation of its Mobile Devices division to beyond 2009 from the previously expected third quarter of 2009 due to macroeconomic weakness and slowing global handset demand. In addition, Mobile Devices recently has undertaken certain strategic initiatives, including further headcount reductions and the consolidation of software and silicon platforms, which will require additional time to better position the unit for separation. Given the uncertainty related to timing of the planned separation, Fitch will continue evaluating Motorola as a consolidated entity.

The ratings and Negative Outlook reflect:

--Fitch's expectation for challenging consumer and enterprise markets throughout 2009, negatively affecting Motorola's revenue and potentially resulting in operating losses and negative free cash flow for fiscal year 2009, despite further aggressive restructuring steps planned for 2009. The company's solid liquidity, underpinned by a net cash position, and Fitch's expectations that share repurchase and acquisition activity will be minimal over the foreseeable future, should absorb Fitch's expectations for modestly negative free cash flow from operating losses at mobile devices along with cash restructuring charges over the intermediate-term. In addition, Fitch believes the company's financial flexibility could be enhanced by reducing capital spending or the dividend. The company's cash balance and financial flexibility remain important considerations for Motorola's ratings.

--Expectations for further weakening of the company's competitive position within mobile devices, which could be exacerbated by a reduced number of new product introductions in the first half of 2009 and the de-emphasis of the European region. Given the company's reduced scale, Fitch believes the mobile devices unit will be challenged to return to profitability and free cash flow over the near term, particularly given the decline of consumer spending and comparatively mature North American wireless subscriber market - Motorola's largest market. Fitch believes the strategy at mobile devices of focusing on a limited number of operating systems (Android, Windows Mobile, and its own proprietary solution) will positively result in significant cost reductions but also may constrain the company's opportunities for differentiation as a number of key competitors utilize similar platforms while also focusing on using proprietary software. With decreasing scale and delayed product introductions, Motorola's competitive advantage remains uncertain.

While Motorola's consolidation of silicon and software platforms will result in delayed new product offering for early 2009 and is likely to result in additional market share losses (currently at approximately 8.4%), Fitch notes that Motorola plans to reduce costs by $600 million in the mobile devices business, which is in addition to the $1 billion in expense reduction in 2008.

--The company's pressured credit protection measures: Fitch estimates leverage (total debt/operating EBITDA) will exceed 3.0 times (x), while interest coverage (operating EBITDA/gross interest expense) will be less than 5x over the intermediate term, in the absence of a successful restructuring and modest improvement in mobile devices and stable operating performance for broadband mobility solutions in 2009.

Further negative rating actions could result from:

--The continuation of negative trends in the company's mobile devices business resulting in continued operating losses and increasingly negative free cash flow;

--Meaningful degradation in the operating performance of the company's remaining businesses in the current challenging economic environment, indicating a less resilient business model relative to Fitch's expectations. Fitch believes the continued stability and free cash flow generation within these businesses are key to minimizing consolidated cash usage.

The ratings could be stabilized by:

--Meaningfully improved operating performance in mobile devices, driven by a combination of successfully achieving cost savings targets of $600 million and some success in new product introductions in the second half of 2009, likely resulting in break-even profitability and positive free cash flow;

--Stronger than anticipated operating performance by the Home and Mobility Networks and Enterprise Mobility Solutions divisions, although Fitch believes this is unlikely given expectations for a less favorable consumer and enterprise spending environment.

The ratings are supported by:

--Motorola's solid financial flexibility and liquidity position;

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

--The strength of its Broadband Mobility Solutions (non-mobile devices) business, which generates relatively solid and consistent profitability and free cash flow. Due to an expected decline in mobile devices revenue in 2009, Fitch believes the Home & Networks Mobility and Enterprise Mobility Solutions segments will represent more than 60% of consolidated sales in 2009 versus 56% for the latest 12 months ended Sept. 27, 2008. Fitch believes anticipated cost reductions for both of these businesses in 2009 will enable them to maintain relatively stable operating margins despite expectations for a more challenging overall demand environment.

Fitch believes Motorola's liquidity as of Sept. 27, 2008 was solid and supported by:

--Approximately $7.1 billion of cash and cash equivalents (excluding long-term Sigma Fund balances), the majority of which is located outside the U.S.;

--An undrawn $2 billion senior unsecured revolving credit facility expiring 2011.

Total debt as of Sept. 27, 2008 was approximately $4.1 billion, consisting of various tranches of senior unsecured notes and debentures. The company's nearest maturity is $527 million of 7.625% senior unsecured debentures due Nov. 15, 2010. The company is on track to make approximately $300 million of cash contributions to its U.S. and non-U.S. pension and post-retirement healthcare plans in 2008.

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.