Fitch Upgrades Motorola Inc. to 'BBB+'; Outlook Positive

NEW YORK--Jan. 20, 2005--Fitch Ratings has upgraded Motorola Inc.'s senior unsecured debt to 'BBB+' from 'BBB' and affirmed the 'F2' commercial paper (CP) program. The Rating Outlook remains Positive. Approximately $5.2 billion of public debt securities are affected by Fitch's action.

The rating upgrade and Positive Outlook reflects Motorola's improving credit protection measures and strengthened balance sheet and liquidity from on-going debt reduction efforts and strong free cash flow. The company's diversified product portfolio has achieved better-than-expected operating performance from solid revenue growth and various cost restructuring programs. Fitch anticipates tepid revenue growth in 2005 with continued operating risk associated with the company's various end markets, particularly in wireless handsets. However, Fitch expects Motorola will continue to emphasize debt reduction in 2005 and free cash flow should remain solid at approximately $2 billion annually. Consistent operating performance and confirmation of the company's capital structure plans including a disciplined approach to stock repurchases could result in further positive rating actions.

Further, Fitch believes the company's successful spin-off of its former semiconductor business, Freescale Semiconductor, Inc. ('BB+'/Stable Outlook), strengthens Motorola's long-term credit quality by lowering capital spending and research and development commitments, and decreasing earnings volatility by reducing exposure to the more volatile and cyclical semiconductor industry.

Credit concerns continue to center on the competitive mobile handset industry, which experiences quarterly market share fluctuations, constant pricing pressures, and the necessity for continual product introductions. Positively, Motorola's market share improved in the fourth quarter to more than 16% due to better operational execution and market acceptance of its new products. Additionally, Fitch believes there could be a potential negative impact on Motorola as a result of the Sprint/Nextel merger over the long term given that Nextel is currently a greater than 10% customer for Motorola's handset and telecommunications infrastructure businesses. Nonetheless, Motorola recently signed a three-year contract extension with Nextel to supply wireless handsets and telecommunication equipment, and Fitch does not anticipate any significant near-term impact from this proposed merger. Motorola also maintains an equity investment of more than $2 billion in Nextel. To a lesser extent, litigation risk continues to remain a concern, but Fitch believes that the company has sufficient liquidity and financial flexibility to absorb any likely adverse monetary outcome.

Motorola's credit metrics have improved as leverage, measured by total debt/EBITDA, was 1.1 times(x) as of Dec. 31, 2004, versus nearly 3.0x at year-end 2003, while interest coverage increased to approximately 12.0x for 2004 compared to nearly 7.0x for 2003. Additionally, total-debt-to-cash flow from operations was less than 1.4x compared to approximately 3.0x at the end of 2003, mostly as a result of greater profitability and better working capital management. Fitch anticipates that credit metrics will continue to trend positively from further debt reduction in 2005.

Total debt as of Dec. 31, 2004, was $5.3 billion, down from $8.1 billion in 2003 and $9.3 billion in 2002. At the end of the fourth quarter, debt consisted primarily of $4.6 billion of long-term debt and $700 million of short-term debt, including approximately $300 million of CP borrowings. Motorola utilized more than $1 billion in cash proceeds from the Freescale IPO along with existing cash to reduce debt throughout 2004. Fitch believes debt reduction beyond current maturities will continue in 2005 as the company targets reducing debt-to-capitalization to 15%-20% from 28% at year-end 2004. Near term maturities are manageable with a potential $400 million put in 2005, $1.3 billion due in 2007, and $525 million due in 2008.

Motorola's liquidity is solid with approximately $10.6 billion in cash and cash equivalents, of which more than half is located outside of the United States. The company could repatriate the overseas cash under the American Jobs Creation Act of 2004, which reduces the tax for one year on earnings repatriated from abroad to approximately 5.25% from 35%. Free cash flow is strong and has been trending positively: $3 billion for 2004, $2.1 billion for fiscal 2003, and $730 million in fiscal 2002. The improvement in free cash flow is due to higher profitability, lower cash restructuring charges, and better working capital efficiency, especially inventory turns. Fitch estimates Motorola's cash conversion cycle was approximately 43 days at year-end 2004, an improvement from 48 days in the fourth quarter of 2003, and much lower than the 70 day average the company achieved in the 2001-2003 period. Completing the spin-off of Freescale significantly reduces Motorola's future capital spending requirements, and Fitch would anticipate annual free cash flow will be approximately $2 billion. Cash flow figures in 2004 include a voluntary cash contribution of more than $400 million to the company's various pension plans, which Fitch expects will continue in 2005 but to a lower degree. Motorola's liquidity is also enhanced by an undrawn $1 billion three-year U.S. revolving credit facility expiring in May 20, 200507, which has no credit ratings triggers.