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Motorola takes $2B charge
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June 4, 1998: 8:35 p.m. ET
Company to cut 15,000 jobs, citing slower sales, weakness in Asia
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NEW YORK (CNNfn) - Motorola Inc., citing deteriorating demand for its semiconductors, Thursday said it plans to slash 15,000 jobs and take a nearly $2 billion restructuring charge in the second quarter.
In a statement issued after the close of trading, Motorola said its second-quarter results will be substantially below analysts' estimates and could even translate into an operating loss. According to First Call, analysts had expected the company to earn 20 cents a share in the second quarter, down from 44 cents a share a year ago.
The move, the second time the Schaumberg, Ill.-based company has warned of weaker results in the last two months, reflects ongoing pressures in the technology sector as chip makers struggle with a growing supply glut.
"In the fourth quarter of last year our forecast for 1998 called for higher sales growth and improved profitability, but that has not materialized," Robert Growney, president and chief operating officer said in a statement.
"It is clearly time to accelerate the implementation of our renewal plan. We are determined to return our financial results to an acceptable level as soon as possible," he said.
Wall Street reacted negatively to the news, sending Motorola (MOT) shares down 2-1/2 in after-hours trading from its New York close of 51-1/2.
Industry analysts said Motorola's warning about pricing pressures could short-circuit technology stocks on Friday, particularly in light of investor concerns about chip giant Intel Corp. (INTC).
On Wednesday, Hambrecht & Quist cut its second quarter earnings estimates for Intel, citing weaker demand in Europe and slow PC sales in the United States. The cut sent Intel shares reeling but they recovered Thursday after the company said it had no plans to issue a revised outlook for the quarter.
Cuts blamed on price pressures, Asia
Motorola, which makes semiconductors, cell phones, pagers and a variety of communications products, attributed the moves to pricing pressures and weakness in Asian markets.
"While we very much regret the impact this will have on certain employees, we must adjust our production capacity to the reality of current business conditions and reduce costs to improve overall financial performance," Christopher Galvin, Motorola's chief executive officer, said.
Growney said the company hopes the initiatives will lead to annual savings of more than $750 million.
Specifically, Motorola said it would:
- Cut about 10 percent of its worldwide work force over the next 12 months.
- Consolidate manufacturing operations company-wide. The company said plants that make semiconductors and message products would be hardest hit.
- Exit other non-strategic, poorly performing businesses.
- Write down the value of assets which have declined due to current business conditions or shifts in strategy.
- Take a $1.95 billion pre-tax charge in the second quarter to pay for the moves.
Analysts said the news wasn't entirely surprising since Motorola relies so heavily on Asia.
"Most of their peers have maybe 20 percent or less of their earnings coming from Asia, whereas Motorola generates 30 percent of its revenue from Asia. Asia is certainly a major factor," said Alex Cena, telecommunications equipment analyst at Bear Stearns & Co.
David Powers, technology analyst at Edward D. Jones & Co. said the cuts, while painful now, will help Motorola in the long-term. (147K WAV) or (147K AIFF)
Motorola trails rivals in digital phones
Motorola is the world's largest maker of cellular phones, but it currently trails Nokia and Ericsson in digital phone sales. Over the last few years the company's profits have been hurt by the switch from analog to digital phones and the severe price pressures in its other core business -- semiconductors.
(Click here to see a chart of Motorola's stock over the last three years.)
Galvin said the company will focus on its new light-weight line of cellular phones, pagers and two-way radios marketed under the Wings brand.
"Through these propositions, we intend to gain market share in key businesses, such as digital cellular telephones, where significant new products are planned for introduction before the end of the third quarter, and embedded semiconductors," Galvin said.
Embedded semiconductors are chips Motorola makes to go into consumer devices made by a variety of companies.
Galvin said these initiatives should put Motorola on the road to financial recovery in the second half of the year if economic conditions in Asia improve.
-- by staff writer Cyrus Afzali
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