Motorola facing a cash crunch

Motorola's latest stumble puts the spotlight on its cash supply.

First, a few highlights from the company's quarterly financial report. The adjusted loss was a nickel a share and the guidance for the second quarter was a repeat of the first-quarter losses, or about a nickel per share. That's not exactly an improvement to the penny-per-share loss analysts had expected. And directionally, flat is not up from here.

The big drag on Motorola' (MOT, Fortune 500)s performance was -- no surprise -- its mobile phone business, where only 27.4 million phones were sold. That's 40% below the 45.4 million sold a year ago and well below the 31 million analysts' consensus estimate. This dramatic decrease in phone shipments is an alarming sign that the company has seen an even sharper drop in its share of the phone market.

Motorola's mobile phone division -- which is scheduled to be spun off some time next year thanks to the urgings of big investor Carl Icahn -- lost $418 million last quarter, 80% more than the year-ago period. And maybe a better representation of where this trend is going: Operating cash flow, the money generated from the business, fell 78% to $785 million last year.

While Motorola has targeted the elimination of 10,000 jobs, the cost cutting effort hasn't kept up with falling sales and mounting losses.

As some analysts have pointed out, Motorola's manufacturing and distribution operations are still set up to handle a much higher volume of phones than the company actually produces.

Facing a cash crunch. With the oversized expenses and undersized sales, analysts' thoughts have turned to the company's use of cash. On Thursday's conference call with analysts, Motorola executives said the cash available to the company will likely be "comparable to 2007."

Motorola had $2.8 billion in cash at the end of last year, unchanged from the 2006 level. While that sounds like a decent cushion, it's not quite as handy as it would appear. About $2.5 billion of Motorola's cash is held overseas, according to federal filings. If say, the company suddenly needed to dip into its savings, the repatriation process would be slow and the tax bill steep.

An even bigger expense looming in Motorola future is the cost of separating the handset business from the rest of the company. In addition to the charges related to the spinoff, Motorola will likely have to find financing to keep the money losing venture afloat, say analysts.

On the conference call Thursday, Motorola was asked if it was prudent to continue the share buybacks and dividend payments. The company currently has $3.6 billion budgeted for buybacks and pays about $450 million a year in dividends.

As for the stock repurchases, executives said there were "looking to optimize our capital structure." Translation: That's a no-brainer. On the dividend front, the company was a little more elusive, issuing a "no comment" statement.

"The share buyback is definitely doomed," says one money manager who has no Motorola position. "You don't buy back shares when you have a big separation expense and when you have an operating loss with no end in sight."

Lack of buyers. Motorola's troubles, including the lack of interested parties who'd consider buying the phone business, have some disturbing parallels in other segments of tech as some observers point out.

When Dell (DELL, Fortune 500)'s low cost PC manufacturing and sales model swept through the computer market, rivals had two choices: Sell or merge. Hewlett-Packard (HPQ, Fortune 500) joined forces with rival Compaq. Gateway, on the other hand, eventually went away. Last year, Acer acquired the remaining portions of Gateway for $710 million.

There was one shred of good news from Motorola however. The company expects to have a new compelling lineup of phones with faster 3G capabilities, email and messaging functions and at long last, touch screens.

But here's the kicker. These new phones won't be available until sometime next year.