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TMCNet:  MOTOROLA SOLUTIONS, INC. - 10-K - : Management's Discussion and Analysis of Financial Condition and Results of Operations

[February 12, 2013]

MOTOROLA SOLUTIONS, INC. - 10-K - : Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) The following is a discussion and analysis of our financial position and results of operations for each of the three years in the period ended December 31, 2012.

This commentary should be read in conjunction with our consolidated financial statements and the notes thereto appearing under "Item 8: Financial Statements and Supplementary Data." Executive Overview What businesses are we in We report financial results for two segments: Government: Our Government segment includes sales of public safety communications systems, commercial two-way radio systems, devices, and software.



Service revenues included in the Government segment are primarily those associated with the design, installation, maintenance and optimization of equipment for public safety networks.

Enterprise: Our Enterprise segment includes sales of rugged and enterprise-grade mobile computers and tablets, laser/imaging/RFID based data capture products, WLAN and iDEN infrastructure and software. Service revenues included in the Enterprise segment are primarily maintenance contracts associated with the above products.

What were our 2012 financial results • We increased net sales by 6% to $8.7 billion in 2012, compared to net sales of $8.2 billion in 2011.

• We generated operating earnings of $1.3 billion in 2012, compared to $858 million in 2011. Operating margin was 14.4% of net sales in 2012, compared to 10.5% of net sales in 2011.

• We had earnings from continuing operations of $878 million, or $2.95 per diluted common share, in 2012, compared to earnings from continuing operations of $747 million, or $2.20 per diluted common share, in 2011.

• We generated cash from operating activities of $1.1 billion in 2012, compared to $848 million of cash from operating activities in 2011.

• We returned $2.4 billion in cash to shareholders through share repurchases and $270 million in cash dividends during 2012.

• We issued $750 million of 3.750% senior notes due 2022 and redeemed $400 million of 5.375% senior notes due in November 2012.

What were the financial results for our two operating segments in 2012 • In the Government segment: Net sales were $6.0 billion in 2012, an increase of 12% compared to net sales of $5.4 billion in 2011. On a geographic basis, net sales increased in all regions. Operating margin improved in 2012 to 16.1% from 11.5% in 2011, primarily due to the 12% increase in net sales and increased leverage in operating expenses.

Operating earnings were $965 million in 2012, compared to operating earnings of $616 million in 2011.

• In the Enterprise segment: Net sales were $2.7 billion in 2012, a decrease of 5% compared to net sales of $2.8 billion in 2011. On a geographic basis, net sales increased in Asia and decreased in North America, Latin America and Europe, Middle East, and Africa ("EMEA"). Operating earnings were $291 million in 2012, compared to operating earnings of $242 million in 2011. Operating margin increased in 2012 compared to 2011, due to a decrease in Other charges driven by lower intangible amortization, partially offset by decreased gross margins due to lower sales levels.

What were our major accomplishments in 2012 • In the Government segment: In 2012, sales, operating earnings, and operating leverage increased compared to 2011. We saw strong growth across all of our major product lines, including systems infrastructure and subscribers. The 12% increase in net sales was primarily driven by the continued transition from analog to digital, the replacement of aged public safety infrastructure, and the tiered expansion of our product portfolio. Additionally, in North America we benefited from U.S.

narrowbanding, as many existing public safety, professional and commercial analog systems were replaced with next generation digital systems, with enhanced features and a more efficient use of spectrum, providing additional channels and enabling new users to be added.

During 2012, our APCO P-25 based Astro technology continued to extend beyond North America, as we now have deployments in over 60 countries. Additionally, we shipped our two millionth TETRA terminal, and continued to expand our digital professional and commercial radio solution MOTOTRBO. Additionally, our services portfolio saw significant growth with the completion of the agreement with NSN to take over responsibility to implement and manage Norway´s TETRA public safety network.

24-------------------------------------------------------------------------------- • In the Enterprise segment: Our sales decline in 2012 was driven by a challenging macro environment as many large customers continued to postpone deployments in the face of soft economic conditions. Despite challenges in the macro environment, our engagement with customers who continue to invest in our mobile technologies, remains strong.

Our R&D and capital investments resulted in many new enhancements to our product portfolio, including the acquisition of Psion plc ("Psion"), a U.K. based leader in mobile computing solutions. We extended retail thought leadership with innovative new products like the SB1, MC40 and ET1 tablet that help provide customer support while delivering significant operational efficiencies. Within the data capture solutions product group we continued to strengthen our product portfolio by executing on the laser to imager transition, including the recent announcement of the MP6000 multi-plane imager based scanner, which sits inside the check-out counters used by retailers.

Looking Forward In 2012, we achieved a number of key accomplishments, including solid sales growth, operating earnings expansion and earnings per share growth, generating strong operating cash flow and significant capital returns to our shareholders, which positions us well as we begin 2013. The demand drivers for our business remain solid and we remain focused on improving operating leverage through targeted investments and disciplined cost management.

In the Government segment, our focused R&D investments have led to the introduction of over 100 new products across both our subscriber and infrastructure portfolios since 2009, giving us the broadest portfolio in the industry. We believe that while regulatory mandates to improve spectrum efficiency have encouraged some of our U.S. customers to upgrade, our new product introductions and expanded portfolio will continue to be a driver for growth across our U.S. and international markets, as customers will continue to invest in our next-generation systems with the assurance that new radios with enhanced features remain interoperable and backward-compatible.

In addition to our investment in our radio communication systems, we have been investing in R&D for next generation public safety. Private public safety broadband networks based on the LTE standard are an important next generation tool for our first-responder customers, and we believe our expertise in both public and private networks makes us uniquely qualified to provide LTE solutions. The development of this market is an important part of our overall global growth strategy for the Government segment.

Our government customer base is composed of thousands of customers, predominantly at the U.S. state and local level with various funding sources. In addition, these customers are at different stages of network evolution and aging in a long cycle business. We believe the fundamentals for our business and customer base provide a significant degree of resiliency for this segment even if sequestration cuts were to occur.

In the Enterprise segment, sales declined in 2012 due to a challenging macro environment, unfavorable foreign currency fluctuations and uncertainty around operating system roadmaps. These factors led to suppressed information technology ("IT") spend and fewer large deals as compared to 2011 in the key verticals we serve, including retail and transportation and logistics. Although our 2012 results were impacted by these factors, we believe customers will continue to invest in our mobile computing, data capture, and WLAN technologies, which yield high return on investment and enable real-time information to their workforce. In addition, we believe information technology ("IT") and IT hardware spend will increase during 2013.

We feel well equipped to address the uncertainty around operating system roadmaps with our R&D investment in mobile computing technologies, which enables us to accommodate applications through a variety of different enterprise environments, including devices on Microsoft with Windows Embedded 8, Android, and at the web-browser level, HTML5. Outside of our investment in mobile computing, we continue to invest in new products across the Enterprise portfolio that serve many existing customers, but address market opportunities that are new to us.

Beyond investment in R&D, in 2012, we made acquisitions that are complimentary to our existing portfolio, including Psion. We expect that the financial results of Psion, which we report in the Enterprise segment, will be accretive to earnings by 2014, as we integrate their technology into our current Enterprise product and services offering.

For the iDEN infrastructure portfolio, which we report in the Enterprise segment, we expect to see a continued decline in iDEN infrastructure and related services.

We continue to expand our current services offerings, as both our government and enterprise customers are looking for end-to-end solutions that combine managed services and comprehensive device and network management with our existing portfolio. We believe we are uniquely positioned to provide our customers products and services that meet mobile workforce needs, as well as build successful long term relationships.

We are committed to employing disciplined financial policies, achieving our financial plan, and optimizing our capital structure. In 2013, we intend to continue the quarterly dividends that were initiated in 2011 and intend to continue to invest 25 -------------------------------------------------------------------------------- organically in capital expenditures. We will also evaluate our acquisition opportunities along with the opportunities to return capital to shareholders via share repurchases. As of December, 31, 2012 we had approximately $1.5 billion of authority available for repurchases.

We conduct our business in competitive markets, facing both new and established competitors. The markets for many of our products are characterized by rapidly changing technologies and evolving industry standards. Market disruptions caused by new technologies, the entry of new competitors, consolidations among our customers and competitors, and changes in regulatory requirements, among other matters, can introduce volatility into our businesses. Meeting all of these challenges requires consistent operational planning and execution and investment in technology, resulting in innovative solutions that meet the needs of our customers globally. As we execute on meeting these objectives, we remain focused on taking the necessary action to design and deliver differentiated and innovative products and services that serve the needs of our government and enterprise customers.

26-------------------------------------------------------------------------------- Results of Operations Years Ended December 31 (Dollars in millions, % of % of % ofexcept per share amounts) 2012 sales** 2011 sales 2010 sales** Net sales from products $ 6,363 $ 6,068 $ 5,616 Net sales from services 2,335 2,135 2,001 Net sales 8,698 8,203 7,617 Cost of product sales 2,844 44.7 % 2,723 44.9 % 2,523 44.9 % Cost of service sales 1,506 64.5 % 1,334 62.5 % 1,282 64.1 % Costs of sales 4,350 50.0 % 4,057 49.5 % 3,805 50.0 % Gross margin 4,348 50.0 % 4,146 50.5 % 3,812 50.0 % Selling, general and administrative expenses 1,963 22.6 % 1,912 23.2 % 1,874 24.5 % Research and development expenditures 1,075 12.4 % 1,035 12.6 % 1,037 13.6 % Other charges 54 0.6 % 341 4.2 % 150 2.0 % Operating earnings 1,256 14.4 % 858 10.5 % 751 9.9 % Other income (expense): Interest expense, net (66 ) (0.8 )% (74 ) (0.9 )% (129 ) (1.7 )% Gains on sales of investments and businesses, net 39 0.4 % 23 0.3 % 49 0.6 % Other (14 ) (0.2 )% (69 ) (0.8 )% (7 ) (0.1 )% Total other income (expense) (41 ) (0.5 )% (120 ) (1.5 )% (87 ) (1.2 )% Earnings from continuing operations before income taxes 1,215 14.0 % 738 9.0 % 664 8.7 % Income tax expense (benefit) 337 3.9 % (3 ) - % 403 5.3 % Earnings from continuing operations 878 10.1 % 741 9.0 % 261 3.4 % Less: Earnings (loss) attributable to noncontrolling interests - - % (6 ) (0.1 )% 17 0.2 % Earnings from continuing operations* 878 10.1 % 747 9.1 % 244 3.2 % Earnings from discontinued operations, net of tax 3 - % 411 5.0 % 389 5.1 % Net earnings* $ 881 10.1 % $ 1,158 14.1 % $ 633 8.3 % Earnings per diluted common share: Continuing operations $ 2.95 $ 2.20 $ 0.72 Discontinued operations 0.01 1.21 1.15 $ 2.96 $ 3.41 $ 1.87 * Amounts attributable to Motorola Solutions, Inc. common shareholders.

** Percentages may not add due to rounding.

27 -------------------------------------------------------------------------------- Geographic market sales measured by the locale of the end customer as a percent of total net sales for 2012, 2011 and 2010 are as follows: Geographic Market Sales by Locale of End Customer 2012 2011 2010 North America 58 % 57 % 58 % Latin America 8 % 9 % 9 % EMEA 21 % 21 % 21 % Asia 13 % 13 % 12 % 100 % 100 % 100 % Results of Operations-2012 Compared to 2011 Net Sales Net sales were $8.7 billion in 2012, a 6% increase compared to net sales of $8.2 billion in 2011. The increase in net sales reflects: (i) a $631 million, or 12% increase in net sales in the Government segment driven by broad based growth across the product portfolio, and (ii) a $136 million, or 5% decrease in net sales in the Enterprise segment driven by the anticipated decline in iDEN infrastructure sales, reduced information technology spending driven by macroeconomic uncertainty, and unfavorable foreign currency fluctuations.

Gross Margin Gross margin was $4.3 billion, or 50.0% of net sales in 2012, compared to $4.1 billion, or 50.5% of net sales, in 2011. The gross margin increase was driven by the 12% increase in net sales in our Government segment, offset by lower gross margin in our Enterprise segment, primarily related to a decline in volume, including the decline in iDEN infrastructure sales, and unfavorable foreign currency fluctuations. The decrease in gross margin as a percent of sales reflects higher gross margin percent from product sales and lower gross margin percent from service sales. The decline in gross margin percentage from service sales primarily relates to: (i) the expansion of managed services, which generally have lower gross margin than our traditional service contracts, and (ii) unfavorable foreign currency fluctuations.

Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses increased 3% to $2.0 billion, or 22.6% of net sales in 2012, compared to $1.9 billion, or 23.2% of net sales in 2011. The increase in SG&A expenses is driven by an increase in pension and employee benefit-related expenses, as well as the Psion acquisition that closed in the fourth quarter of 2012.

Research and Development Expenditures Research and development ("R&D") expenditures increased 4% to $1.1 billion, or 12.4% of net sales in 2012, compared to $1.0 billion, or 12.6% of net sales, in 2011. The increase in R&D expenditures reflects higher R&D expenditures in both segments, primarily due to: (i) an increase in employee benefit-related expenses, and (ii) increased investment in next-generation technology, including strategic acquisitions.

Other Charges We recorded net charges of $54 million in Other charges in 2012, compared to net charges of $341 million in 2011. The charges in 2012 included: (i) $41 million of charges relating to the reorganization of business charges, and (ii) $29 million of charges relating to amortization of intangibles, partially offset by $16 million of income related to a legal matter. The charges in 2011 included: (i) $200 million of charges relating to the amortization of intangibles, (ii) $88 million of net charges relating to legal matters, (iii) $52 million of net reorganization of business charges, and (iv) $10 million related to a long term financing receivable reserve, partially offset by $9 million in gains related to pension plan adjustments. The net reorganization of business charges are discussed in further detail in the "Reorganization of Businesses" section.

Net Interest Expense Net interest expense was $66 million in 2012, compared to net interest expense of $74 million in 2011. Net interest expense in 2012 included interest expense of $108 million, partially offset by interest income of $42 million. Net interest expense in 2011 includes interest expense of $132 million, partially offset by interest income of $58 million. The decrease in net interest expense in 2012 compared to 2011 is primarily attributable to lower interest expense driven by lower average debt outstanding, partially offset by a decrease in interest income due to lower average cash and cash equivalents during 2012 compared to 2011.

28 -------------------------------------------------------------------------------- Gains on Sales of Investments and Businesses Gains on sales of investments and businesses were $39 million in 2012, compared to $23 million in 2011. In 2012 and 2011, the net gains were primarily comprised of gains related to sales of certain of our equity investments.

Other Net Other expense was $14 million in 2012, compared to net Other expense of $69 million in 2011. The net Other expense in 2012 was primarily comprised of: (i) $13 million foreign currency expense, (ii) $6 million loss from the extinguishment of debt, and (iii) a $8 million investment write down expense, partially offset by $13 million of other net investment earnings. The net Other expense in 2011 was primarily comprised of an $81 million loss from the extinguishment of a portion of our outstanding long-term debt, partially offset by an $8 million foreign currency gain.

Effective Tax Rate We recorded $337 million of net tax expense in 2012, resulting in an effective tax rate of 28%, compared to a $3 million net tax benefit in 2011, resulting in a negative effective tax rate. Our effective tax rate in 2012 is lower than the U.S. statutory tax rate of 35% primarily due to: (i) a $60 million tax benefit related to the reversal of a significant portion of the valuation allowance established on certain foreign deferred tax assets, and (ii) a $13 million reduction in unrecognized tax benefits for facts that now indicate the extent to which certain tax positions are more-likely-than-not of being sustained. Our negative effective tax rate in 2011 was primarily due to: (i) a $274 million tax benefit related to the reversal of a significant portion of the valuation allowance established on the U.S. deferred tax assets, and (ii) reductions in unrecognized tax benefits for facts that now indicate the extent to which certain tax positions are more-likely-than-not of being sustained, partially offset by an increase in the U.S. federal income tax accrual for repatriation of undistributed foreign earnings.

While our effective tax rate may change from period to period due to non-recurring events, such as settlements of income tax audits and changes in valuation allowances, we generally expect our effective tax rate to be close to the U.S. statutory tax rate primarily due to our current repatriation strategy and the U.S. federal income tax accrual on undistributed foreign earnings.

During 2012, the Company began to reorganize certain of its non-U.S.

subsidiaries under a holding company structure in order to facilitate the efficient movement of non-U.S. cash and provide a platform to fund foreign investments, such as potential acquisitions and capital expenditures. When the reorganization is complete, the tax impact of future cash repatriations from these subsidiaries may be more favorable than under the existing structure.

The valuation allowances on our deferred tax assets are discussed further in Note 6, "Income Taxes," of our consolidated financial statements. Our effective tax rate will change from period to period based on non-recurring events, such as the settlement of income tax audits, changes in valuation allowances and the tax impact of significant unusual or extraordinary items, as well as recurring factors including changes in the geographic mix of income and effects of various global income tax strategies.

Earnings from Continuing Operations After taxes, and excluding earnings attributable to noncontrolling interests, we had net earnings from continuing operations of $878 million, or $2.95 per diluted share, in 2012, compared to $747 million, or $2.20 per diluted share, in 2011. The increase in earnings from continuing operations in 2012 compared to 2011 was primarily attributable to: (i) $287 million decrease in other charges related to lower intangible asset amortization and net legal and related insurance matters, and (ii) $202 million increase in gross margin, partially offset by the $274 million benefit for the valuation allowance reversal recorded during 2011. The increase in earnings per diluted share was primarily due to the increase in earnings from continuing operations and the reduction in shares outstanding as a result of our share repurchase program.

Earnings from Discontinued Operations After taxes, we had earnings from discontinued operations of $3 million, or $0.01 per diluted share, in 2012, compared to earnings from discontinued operations of $411 million, or $1.21 per diluted share, in 2011. The earnings from discontinued operations in 2011 were primarily from the operations of and the gain on the sale of the Networks business.

Results of Operations-2011 Compared to 2010 Net Sales Net sales were $8.2 billion in 2011, an 8% increase compared to net sales of $7.6 billion in 2010. The increase in net sales reflects: (i) a $309 million, or 6% increase in net sales in the Government segment and (ii) a $277 million, or 11% increase in net sales in the Enterprise segment.

Gross Margin Gross margin was $4.1 billion, or 50.5% of net sales in 2011, compared to $3.8 billion, or 50.0% of net sales, in 2010. Gross margin dollars increased in both segments. The increase in gross margin as a percent of sales reflects higher gross margin in the Government segment, driven by the increase in sales and favorable product mix, with margins remaining flat in the 29 -------------------------------------------------------------------------------- Enterprise segment driven by margin gains in certain product lines offset by the anticipated decline in iDEN, which has historically yielded strong margins.

Selling, General and Administrative Expenses SG&A expenses increased 2% to $1.9 billion, or 23.2% of net sales, in 2011, compared to $1.9 billion, or 24.5% of net sales, in 2010. The increase in SG&A expenses reflects higher SG&A expenses in both segments, primarily due to (i) increased sales incentives related to the increase in net sales and (ii) increased employee benefit-related expenses. The increases in employee benefit-related expenses are primarily due to an increase in pension-related expenses and the reinstatement of our 401(k) matching contributions.

Research and Development Expenditures R&D expenditures of $1.0 billion, or 12.6% of net sales were relatively flat in 2011, compared to $1.0 billion, or 13.6% of net sales in 2010. R&D expenditures were flat in 2011 compared to 2010, which reflects higher R&D expenditures in the Enterprise segment and lower R&D expenditures in the Government segment. The slight increase in the Enterprise segment was primarily due to investment in next-generation technologies and increased employee benefit-related expenses.

The decrease in R&D expenditures in the Government segment was primarily due to savings from cost reduction initiatives related to non employee expenses, partially offset by increased employee benefit expenses.

Other Charges We recorded net charges of $341 million in Other charges in 2011, compared to net charges of $150 million in 2010. The charges in 2011 included: (i) $200 million of charges relating to the amortization of intangibles, (ii) $88 million of net charges relating to legal matters, (iii) $52 million of net reorganization of business charges included in Other charges, and (iv) $10 million related to a long term financing receivable reserve, partially offset by $9 million of gains related to pension plan adjustments. The charges in 2010 included: (i) $203 million of charges relating to the amortization of intangibles, and (ii) $54 million of net reorganization of business charges included in Other charges, partially offset by: (i) $78 million of gains related to intellectual property settlements and reserve adjustments, and (ii) $29 million of income related to a legal settlement. The net reorganization of business charges are discussed in further detail in the "Reorganization of Businesses" section.

Net Interest Expense Net interest expense was $74 million in 2011, compared to net interest expense of $129 million in 2010. Net interest expense in 2011 included interest expense of $132 million, partially offset by interest income of $58 million. Net interest expense in 2010 includes interest expense of $217 million, partially offset by interest income of $88 million. The decrease in net interest expense in 2011 compared to 2010 is primarily attributable to lower interest expense driven by lower average debt outstanding partially offset by a decrease in lower interest income driven by lower average cash and cash equivalents and lower yields during 2011 compared to 2010.

Gains on Sales of Investments and Businesses Gains on sales of investments and businesses were $23 million in 2011, compared to a gain of $49 million in 2010. In 2011, the net gain was primarily comprised of gains related to sales of certain of our equity investments. In 2010, the net gain was primarily comprised of a gain on the sale of a single investment.

Other Net Other expense was $69 million in 2011, compared to net Other expense of $7 million in 2010. The net Other expense in 2011 was primarily comprised of an $81 million loss from the extinguishment of a portion of our outstanding long-term debt, partially offset by an $8 million foreign currency gain. The net expense in 2010 was primarily comprised of: (i) $21 million of investment impairments, and (ii) a $12 million loss from the extinguishment of a portion of our outstanding long-term debt, partially offset by: (i) a $12 million foreign currency gain, and (ii) an $11 million gain from Sigma Fund investments.

Effective Tax Rate We recorded $3 million of net tax benefit in 2011, resulting in a negative effective tax rate on continuing operations compared to $403 million of net tax expense in 2010, resulting in an effective tax rate of 61%. Our negative effective tax rate in 2011 was primarily due to: (i) a $274 million tax benefit related to the reversal of a significant portion of the valuation allowance established on the U.S. deferred tax assets, and (ii) reductions in unrecognized tax benefits for facts that now indicate the extent to which certain tax positions are more-likely-than-not of being sustained, partially offset by an increase in the U.S. federal income tax accrual for repatriation of undistributed foreign earnings.

Our effective tax rate for 2010 was higher than the U.S. statutory tax rate of 35% primarily due to (i) an increase in the U.S. federal income tax accrual for repatriation of undistributed foreign earnings related to the realignment of our investment structure in preparation of the distribution of Motorola Mobility, and (ii) a non-cash tax charge related to the Medicare Part D 30 -------------------------------------------------------------------------------- subsidy tax law change, partially offset by reductions in unrecognized tax benefits for facts that now indicate the extent to which certain tax positions are more-likely-than-not of being sustained.

Earnings from Continuing Operations After taxes, and excluding earnings attributable to noncontrolling interests, we had net earnings from continuing operations of $747 million, or $2.20 per diluted share, in 2011, compared to $244 million, or $0.72 per diluted share, in 2010. The improvement in the earnings from continuing operations in 2011 compared to 2010 was primarily attributable to a $334 million increase in gross margin and a $406 million decrease in tax expense. These improvements were partially offset by a $191 million increase in other charges, and a $38 million increase in SG&A expenses.

Earnings from Discontinued Operations After taxes, we had earnings from discontinued operations of $411 million, or $1.21 per diluted share, in 2011, compared to earnings from discontinued operations of $389 million, or $1.15 per diluted share, in 2010. The earnings from discontinued operations in 2011 was primarily from the operations and gain from the sale of the Networks business. The earnings from discontinued operations in 2010 were primarily from the Networks business, partially offset by losses from Motorola Mobility.

Segment Information The following commentary should be read in conjunction with the financial results of each operating business segment as detailed in Note 12, "Information by Segment and Geographic Region," to our consolidated financial statements. Net sales and operating results for our two reporting segments for 2012, 2011, and 2010 are presented below.

Government Segment In 2012, the Government segment's net sales represented 69% of our consolidated net sales, compared to 65% in 2011, and 66% in 2010.

Years Ended December 31 Percent Change (Dollars in millions) 2012 2011 2010 2012-2011 2011-2010 Segment net sales $ 5,989 $ 5,358 $ 5,049 12 % 6 % Operating earnings 965 616 534 57 % 15 % Segment Results-2012 Compared to 2011 In 2012, the segment's net sales were $6.0 billion, a 12% increase compared to net sales of $5.4 billion in 2011. The 12% increase in net sales in the Government segment reflects broad based growth across the portfolio and in all regions. Net sales in North America continued to comprise a significant portion of the segment's business, accounting for approximately 63% of the segment's net sales in both 2012 and 2011. The segment's backlog was $4.9 billion at December 31, 2012 and $4.4 billion at December 31, 2011.

The segment had operating earnings of $965 million in 2012, compared to operating earnings of $616 million in 2011. The increase in operating earnings was primarily due to: (i) an increase in gross margin, driven by the 12% increase in net sales, and (ii) a decline in Other charges, driven by net legal matters that occurred in 2011, partially offset by an increase in SG&A expenses and R&D expenditures. The increase in SG&A expenses was due to increases in pension and employee benefit related expenses, and the increase in R&D expenditures was driven by higher employee benefit related expenses and increased investment in next-generation technologies. As a percentage of net sales in 2012 as compared to 2011, gross margin increased slightly due to favorable mix, and operating leverage increased primarily due to the 12% increase in net sales while improving the segment's fixed cost structure.

Segment Results-2011 Compared to 2010 In 2011, the segment's net sales were $5.4 billion, a 6% increase compared to net sales of $5.0 billion in 2010. The 6% increase in net sales in the Government segment reflects an increase in sales of mission critical and professional commercial radio products and services. The increase in net sales for the segment reflects higher net sales in North America, Latin America, and Asia, while EMEA was down slightly due to continued macro-economic challenges in Western Europe. Net sales in North America continued to comprise a significant portion of the segment's business, accounting for approximately 63% of the segment's net sales in both 2011 and 2010. The segment's backlog was $4.4 billion at December 31, 2011 and $3.9 billion at December 31, 2010.

The segment had operating earnings of $616 million in 2011, compared to operating earnings of $534 million in 2010. As a percentage of net sales in 2011 as compared to 2010, gross margin increased, and SG&A expenses and R&D expenditures decreased. The increase in operating earnings was primarily due to an increase in gross margin, driven by the 6% increase in net sales and a favorable product mix, partially offset by: (i) increased SG&A expenses primarily due to an increase in sales incentives related to the increase in net sales and increased employee benefit-related expenses, and (ii) an increase in Other 31-------------------------------------------------------------------------------- charges primarily from net charges related to legal matters. The decrease in R&D expenditures was primarily due to savings from cost reduction initiatives related to non employee expenses partially offset by an increase in investment in next-generation technologies and increased employee benefit-related expenses.

Enterprise Segment In 2012, the Enterprise segment's net sales represented 31% of our consolidated net sales, compared to 35% in 2011, and 34% in 2010.

Years Ended December 31 Percent Change (Dollars in millions) 2012 2011 2010 2012-2011 2011-2010 Segment net sales $ 2,709 $ 2,845 $ 2,568 (5 )% 11 % Operating earnings 291 242 217 20 % 12 % Segment Results-2012 Compared to 2011 In 2012, the segment's net sales were $2.7 billion, a 5% decrease compared to net sales of $2.8 billion in 2011. The 5% decrease in net sales in the Enterprise segment reflects a decrease in sales of: (i) iDEN infrastructure, (ii) mobile computing, and (iii)WLAN, partially offset by an increase in data capture equipment sales. The decrease in net sales for the segment reflects a decline in North America, Latin America, and EMEA, and an increase in Asia. Net sales in North America continued to comprise a significant portion of the segment's business, accounting for approximately 47% of the segment's net sales in 2012, and approximately 46% in 2011. The segment's backlog was $782 million at December 31, 2012, compared to $875 million at December 31, 2011. The decline in backlog is primarily related to the anticipated decline in iDEN infrastructure and reduced information technology spending driven by macroeconomic uncertainty.

The segment had operating earnings of $291 million in 2012, compared to operating earnings of $242 million in 2011. The increase in operating earnings was primarily due to a decrease in Other charges as a result of a reduction in intangibles amortization as certain intangible assets are fully amortized, as well as a decline from net legal matters that occurred in 2011. The decrease in Other charges was partially offset by: (i) a decrease in gross margin, primarily attributable to a decline in volume, and unfavorable foreign currency fluctuations, (ii) increased SG&A expenses due to increases in pension and employee benefit related expenses and the acquisition of Psion, and (iii) an increase in R&D expenditures, driven by higher employee benefit expenses and increased investment in next-generation technologies, including the acquisition of Psion. As a percentage of net sales in 2012 as compared to 2011, gross margin decreased primarily related to unfavorable foreign currency fluctuations and product mix, and operating leverage decreased due to the 5% decline in net sales.

Segment Results-2011 Compared to 2010 In 2011, the segment's net sales were $2.8 billion, an 11% increase compared to net sales of $2.6 billion in 2010. The 11% increase in net sales in the Enterprise segment reflects an increase in mobile computing, WLAN and data capture equipment sales, partially offset by a decline in iDEN. The increase in net sales for the segment reflects higher net sales in all regions. Net sales in North America continued to comprise a significant portion of the segment's business, accounting for approximately 46% of the segment's net sales in 2011, and approximately 48% in 2010. The segment's backlog was $875 million at December 31, 2012, compared to $881 million at December 31, 2011.

The segment had operating earnings of $242 million in 2011, compared to operating earnings of $217 million in 2010. As a percentage of net sales in 2011 as compared to 2010, gross margin was relatively flat and SG&A expenses and R&D expenditures decreased. The increase in operating earnings was primarily due to an increase in gross margin, driven by the 11% increase in net sales, partially offset by: (i) increased SG&A expenses primarily due to an increase in sales incentives related to the increase in net sales and increased employee benefit-related expenses, (ii) an increase in Other charges primarily from net charges related to legal matters, and (iii) an increase in R&D expenditures primarily due to an increased investment in next-generation technologies and increased employee benefit-related expenses.

Reorganization of Businesses During 2012 we implemented various productivity improvement plans aimed at achieving long term, sustainable profitability by driving efficiencies and reducing operating costs. In 2012, we recorded net reorganization of business charges of $50 million relating to the separation of 1,000 employees, of which 700 were indirect employees and 300 were direct employees. These charges included $9 million recorded to Costs of sales and $41 million of charges within Other charges in our consolidated statements of operations. Included in the aggregate $50 million are charges of: (i) $54 million for employee separation costs, and (ii) building impairment charges of $7 million, partially offset by $11 million of reversals for accruals no longer needed.

We realized cost-saving benefits of approximately $17 million in 2012 from the plans that were initiated during 2012, primarily in operating expenses. Beyond 2012, we expect the reorganization plans initiated during 2012 to provide annualized 32 -------------------------------------------------------------------------------- cost savings of approximately $70 million, consisting of $15 million of savings in Cost of sales, and $55 million of savings in operating expenses.

During 2011, we recorded net reorganization of business charges of $58 million, including $41 million for employee separation costs and $19 million for exit costs, partially offset by $2 million for reversals of accruals no longer needed. During 2010 we recorded net reorganization of business charges of $73 million, including $73 million for employee separation costs and $16 million for exit costs, partially offset by $16 million of reversals of accruals no longer needed.

The following table displays the net charges incurred by business segment: Year Ended December 31, 2012 2011 2010 Government $ 33 $ 40 $ 57 Enterprise 17 18 16 $ 50 $ 58 $ 73 Cash payments for exit costs and employee separations in connection with these reorganization plans were $55 million in 2012, as compared to $81 million in 2011, and $53 million in 2010. The $35 million reorganization of businesses accrual at December 31, 2012, includes: (i) $31 million relating to employee separation costs that are expected to be paid in 2013, and (ii) $4 million relating to lease termination obligations that are expected to be paid over a number of years.

Liquidity and Capital Resources We decreased the aggregate of our (i) cash and cash equivalent balances, and (ii) Sigma Fund and short-term investments by $1.5 billion from $5.1 billion as of December 31, 2011 to $3.6 billion as of December 31, 2012. This decrease was primarily due to: (i) the return of $2.7 billion of capital to shareholders through share repurchases and dividends paid during 2012, and (ii) the $413 million used for the retirement of debt, partially offset by: (i) $747 million of net proceeds from the issuance of debt, and (ii) $1.1 billion of operating cash flow.

Cash and Cash Equivalents At December 31, 2012, our cash and cash equivalents (which are highly-liquid investments with an original maturity of three months or less) were $1.5 billion, a decrease of $413 million compared to $1.9 billion at December 31, 2011. At December 31, 2012, approximately $400 million of this amount was held in the U.S. and $1.1 billion was held in other countries (including $322 million in China). At both December 31, 2012 and December 31, 2011, restricted cash was $63 million (including $3 million held outside the U.S.).

We continue to analyze and review various repatriation strategies to continue to efficiently repatriate cash. In 2012, we repatriated approximately $1.0 billion in cash to the U.S. from international jurisdictions. We have approximately $1.3 billion of earnings in foreign subsidiaries that are not permanently reinvested and may be repatriated without an additional income tax charge to our consolidated statements of operations, given the U.S. federal and foreign income tax provisions accrued on undistributed earnings and the utilization of available foreign tax credits. On a cash basis, certain of these repatriations from our non-U.S. subsidiaries will require the payment of additional taxes. Repatriation of some of these funds could be subject to delay for local country approvals and could have potential adverse tax consequences.

On January 4, 2011, the distribution of Motorola Mobility from Motorola Solutions was completed. As part of the distribution, we contributed $3.2 billion of cash and cash equivalents to Motorola Mobility. We had an obligation to fund an additional $300 million, upon receipt of cash distributions as a result of future capital reductions of an overseas subsidiary, of which $225 million was paid during 2011 and $73 million was paid during 2012. These contributions are reflected as financing activities in our consolidated statements of cash flows for the years ended, December 31, 2012 and 2011.

Operating Activities Cash provided by operating activities from continuing operations in 2012 was $1.1 billion, compared to $848 million in 2011 and $803 million in 2010.

Operating cash flows in 2012, as compared to 2011, were positively impacted by: (i) our increased sales and the expansion of our operating margins, (ii) a $156 million decrease in contributions to our pension plans, and (iii) improvements in our working capital management, including approximately $100 million of sold or collected long-term receivables related to the Networks divestiture that were retained after the sale. Operating cash flows in 2011, as compared to 2010, were negatively impacted by timing differences within our working capital accounts, as well as an increase of $329 million in contributions to our pension plans, partially offset by $150 million of sold or collected long-term receivables related to the Networks divestiture that were retained after the sale.

We contributed $340 million to our U.S. pension plans during 2012 compared to $489 million in 2011. We contributed $31 million to our non-U.S. pension plans during 2012 compared to $38 million contributed in 2011. In January 2011, the Pension Benefit Guaranty Corporation ("PBGC") announced an agreement with Motorola Solutions under which we would 33 -------------------------------------------------------------------------------- contribute $100 million above and beyond our legal requirement to our U.S.

pension plans over the next five years. We and the PBGC entered into this agreement as we were in the process of separating Motorola Mobility and pursuing the sale of certain assets of the Networks business. We made $250 million of pension contributions to our U.S. pension plans over the amounts required in 2011, of which $100 million fulfilled the PBGC financial obligation. As a result, we have no further financial obligations under this agreement with the PBGC. During 2013, we expect to make cash contributions of approximately $300 million to our U.S. pension plans and approximately $30 million to our non-U.S.

pension plans.

Our pension deficit is impacted by the volatility of corporate bond rates which are used to determine the plan discount rate as well as returns on the pension plan asset portfolio. The discount rate used to measure the U.S. liability at the end of 2012 was 4.35%, compared to 5.1% in the prior year. As a result of the decrease in the discount rate, net of contributions and other factors, our total underfunded U.S. pension at year end increased to approximately $2.9 billion. As of December 31, 2012, changing the U.S. pension plans discount rate by one percentage point would change the U.S. pension plans net period expense by: 1% Point 1% Point Increase Decrease Increase (decrease) in: U.S. pension plans net periodic pension expense $ (12 ) $ 8 Based on the December 31, 2012 valuation of the U.S. pension plans, we expect a decrease in net periodic pension costs in 2013 as compared to 2012. The decrease is primarily due to changes in our loss amortization period, which was increased from nine years, the previous estimated remaining service period, to 28 years, the average remaining participant lifetime. The increase in amortization period reflects the change in mix of active and non-active employees remaining in the plan, as almost all of our plan participants are no longer actively employed by the Company due to significant employee exits as a result of our recent divestitures, including the distribution of Motorola Mobility and the sale of certain assets and liabilities of the Networks business.

We maintained all of the U.S. pension liabilities and the majority of the non-U.S. pension liabilities following the distribution of Motorola Mobility on January 4, 2011, and following the sale of certain assets and liabilities of the Networks business to NSN on April 29, 2011. Retirement benefits are further discussed in the "Accounting Policies - Retirement Benefits" section.

Investing Activities Net cash provided by investing activities was $797 million in 2012, compared to $2.4 billion in 2011 and net cash provided for investing activities of $523 million in 2010. The $1.6 billion decrease in net cash provided by investing activities from 2011 to 2012 was primarily due to: (i) a $1.2 billion decrease in cash received from sales of investments and businesses relating to the sale of certain assets and liabilities of the Networks business, and (ii) $433 million decrease in cash received from net sales of Sigma Fund investments. The $1.9 billion increase in net cash provided by investing activities in 2011 from 2010 was primarily due to: (i) $1.1 billion increase in cash received from net sales of Sigma Fund investments, and (ii) $860 million increase in cash received from sales of investments and businesses relating to the sale of certain assets and liabilities of the Networks business.

Sigma Fund: We and our wholly-owned subsidiaries invest most of our U.S.

dollar-denominated cash in a fund (the "Sigma Fund") that allows us to efficiently invest our cash around the world. We had net proceeds of $1.1 billion from sales of Sigma Fund investments in 2012, compared to $1.5 billion in net proceeds from sales of Sigma Fund investments in 2011 and $453 million from sales of Sigma Fund investments in 2010. The aggregate fair value of Sigma Fund investments was $2.1 billion at December 31, 2012 (including $969 million held outside the U.S.), compared to $3.2 billion at December 31, 2011 (including $1.3 billion held outside the U.S.).

The Sigma Fund portfolio is managed by four independent investment management firms. The investment guidelines of the Sigma Fund require that purchased investments must be in high-quality, investment grade (rated at least A/A-1 by Standard & Poor's or A2/P-1 by Moody's Investors Service), U.S.

dollar-denominated fixed income obligations, including certificates of deposit, commercial paper, government bonds, corporate bonds and asset- and mortgage-backed securities. Under the Sigma Fund's investment policies, except for obligations of the U.S. government, agencies and government-sponsored enterprises, no more than 5% of the Sigma Fund portfolio is to consist of securities of any one issuer. The Sigma Fund's investment policies further require that floating rate investments must have a maturity at purchase date that does not exceed thirty-six months with an interest rate that is reset at least annually. The average interest rate reset of the investments held by the funds must be 120 days or less. The actual average maturity of the portfolio (excluding cash) was less than one month at both December 31, 2012, and December 31, 2011.

34 -------------------------------------------------------------------------------- At December 31, 2012, 100% of the Sigma Fund investments were invested in cash and U.S. government, agency and government-sponsored enterprise obligations.

This reflects a strategic decision to prioritize capital preservation rather than investment income.

We continuously assess our cash needs and continue to believe that the balance of cash and cash equivalents, short-term investments and investments in the Sigma Fund are more than adequate to meet our operating requirements over the next twelve months.

Acquisitions and Investments: We used $109 million cash for acquisitions and new investment activities in 2012, compared to $32 million in 2011 and $23 million in 2010. The cash used in 2012 was primarily for the acquisition of Psion plc, a U.K. based leader in mobile computing solutions, for approximately $200 million, primarily utilizing foreign cash, partially offset by net proceeds received related to the agreement with NSN to take over responsibility to implement Norway´s TETRA public safety network. The cash used in 2011 and 2010 was for small strategic investments.

Capital Expenditures: Capital expenditures were $187 million in 2012, compared to $186 million in 2011 and $192 million in 2010. Capital spending in 2012 was primarily focused on updating our information technology infrastructure, managed services opportunities, and engineering projects. Capital spending in 2011 as compared to 2010 was generally flat across all functions except for a slight decrease in our services function, offset by higher information technology capital spend.

Sales of Investments and Businesses: We made $38 million of disbursements related to a divested business and sales of investments in 2012, compared to proceeds received of $1.1 billion in 2011 and proceeds received of $264 million in 2010. The $38 million of disbursements in 2012 were primarily comprised of payments to NSN related to the purchase price adjustment from the sale of the Networks business, partially offset by proceeds from sales of certain of our equity investments. The $1.1 billion in proceeds in 2011 were primarily comprised of net proceeds received in connection with sales of: (i) certain assets of the Networks business, (ii) the Wireless Broadband businesses, (iii) certain of our equity investments, and (iv) the Israel-based module business.

The $264 million in proceeds in 2010 were related to the sale of our Israel-based wireless network operator business.

Financing Activities Net cash used for financing activities was $2.3 billion in 2012, compared to $5.5 billion in 2011 and $40 million in 2010. Cash used for financing activities in 2012 was primarily comprised of: (i) $2.4 billion used for purchases of our common stock under our share repurchase program, (ii) $413 million of cash used for the repayment of debt, and (iii) $270 million of cash used for the payment of dividends, partially offset by: (i) $747 million of net proceeds from the issuance of debt, and (ii) $133 million of net cash received from the issuance of common stock in connection with our employee stock option plans and employee stock purchase plan.

Cash used for financing activities in 2011 was primarily comprised of: (i) $3.4 billion of contributions to Motorola Mobility, (ii) $1.2 billion used for repayment of long-term debt, (iii) $1.1 billion of cash used for repurchases of shares, and (iv) $72 million of cash used for payment of dividends, partially offset by $192 million of net cash received from the issuance of common stock in connection with our employee stock option plans and employee stock purchase plan.

Cash used for financing activities in 2010 was primarily $1.0 billion of cash used for the repayment of long-term debt, partially offset by: (i) $797 million of cash provided by distributions from discontinued operations, and (ii) $179 million of cash received from the issuance of common stock in connection with our employee stock option plans and employee stock purchase plan.

Current portion of Long-Term Debt: At December 31, 2012, our current portion of long-term debt was $4 million, compared to $405 million at December 31, 2011. In May 2012, we retired early the $400 million aggregate principal outstanding of our 5.375% Senior Notes due November 2012. In November 2011, we repaid, at maturity, the entire $600 million aggregate principal amount outstanding of our 8.0% Notes.

Long-term portion of Long-Term Debt: At December 31, 2012, we had outstanding long-term debt of $1.9 billion, compared to $1.1 billion at December 31, 2011.

During the year ended 2012, we issued an aggregate face principal amount of $750 million of 3.750% Senior Notes due May 15, 2022 (the "2022 Senior Notes"). We also called for the redemption of the $400 million aggregate principal amount outstanding of our 5.375% Senior Notes due November 2012 (the "2012 Senior Notes"). All of the 2012 Senior Notes were redeemed for an aggregate purchase price of approximately $408 million. This debt was repurchased with a portion of the proceeds from the issuance of the 2022 Senior Notes.

During the year ended 2011, we repurchased $540 million of our outstanding long-term debt for a purchase price of $615 million, excluding approximately $6 million of accrued interest, all of which occurred during the three months ended July 2, 2011. The $540 million of long-term debt repurchased included principal amounts of: (i) $196 million of the $314 million then outstanding of the 6.50% Debentures due 2025, (ii) $174 million of the $210 million then outstanding of the 6.50% Debentures due 2028, and (iii) $170 million of the $225 million then outstanding of the 6.625% Senior Notes due 2037.

35 -------------------------------------------------------------------------------- After accelerating the amortization of debt issuance costs and debt discounts, we recognized a loss of approximately $81 million related to this debt tender in Other within Other income (expense) in the consolidated statements of operations.

The three largest U.S. national ratings agencies rate our senior unsecured long-term debt investment grade. We believe that we will be able to maintain sufficient access to the capital markets at our current ratings. Any future disruptions, uncertainty or volatility in the capital markets may result in higher funding costs for us and adversely affect our ability to access funds.

We may, from time to time, seek to retire certain of our outstanding debt through open market cash purchases, privately-negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

Share Repurchase Program: Through actions taken in July 2011 and January 2012, the Board of Directors authorized us to repurchase an aggregate amount of up to $3.0 billion of our outstanding common stock through December 31, 2012. On February 26, 2012, we entered into a stock purchase agreement with Carl C. Icahn and certain of his affiliates to purchase 23,739,362 shares of our common stock for approximately $1.2 billion. On July 25, 2012, the Board of Directors authorized up to $2.0 billion in additional funds for share repurchase, bringing the aggregate amount of the share repurchase program to $5.0 billion, and extended the entire share repurchase program indefinitely with no expiration date. During 2012, we paid an aggregate of $2.4 billion, including transaction costs, to repurchase 49.6 million shares at an average price of $49.14 per share. As of December 31, 2012, we had used approximately $3.5 billion of the share repurchase authority, including transaction costs, to repurchase shares, leaving approximately $1.5 billion available for future repurchases. All repurchased shares have been retired.

Payment of Dividends: We paid $270 million and $72 million in cash dividends to holders of our common stock during the years ended December 31, 2012 and December 31, 2011, respectively. During the year ended December 31, 2010, we did not pay cash dividends to holders of our common stock. Subsequent to December 31, 2012, we paid $72 million in cash dividends to holders of our common stock.

During the years ended December 31, 2011, and 2010, we paid $8 million and $23 million, respectively, of dividends to minority shareholders in connection with subsidiary common stock.

Credit Facilities As of December 31, 2012, we had a $1.5 billion unsecured syndicated revolving credit facility (the "2011 Motorola Solutions Credit Agreement") that is scheduled to expire on June 30, 2014. The 2011 Motorola Solutions Credit Agreement includes a provision for which we can increase the aggregate credit facility size up to a maximum of $2.0 billion by adding lenders or having existing lenders increase their commitments. We must comply with certain customary covenants, including maintaining maximum leverage and minimum interest coverage ratios as defined in the 2011 Motorola Solutions Credit Agreement. We were in compliance with our financial covenants as of December 31, 2012. As of and during the year ended December 31, 2012, there were no outstanding borrowings under the 2011 Motorola Solutions Credit Agreement.

Contractual Obligations and Other Purchase Commitments Summarized in the table below are our obligations and commitments to make future payments under long-term debt obligations (assuming earliest possible exercise of put rights by holders), lease obligations, purchase obligations, tax obligations and other obligations as of December 31, 2012.

Payments Due by Period Uncertain (in millions) Total 2013 2014 2015 2016 2017 Timeframe Thereafter Long-Term Debt Obligations $ 1,864 $ 4 $ 4 $ 4 $ 5 $ 405 $ - $ 1,442 Lease Obligations 356 69 54 36 28 20 - 149 Purchase Obligations 50 22 19 9 - - - - Tax Obligations 161 25 - - - - 136 - Total Contractual Obligations $ 2,431 $ 120 $ 77 $ 49 $ 33 $ 425 $ 136 $ 1,591 Amounts included represent firm, non-cancelable commitments.

Long-Term Debt Obligations: Our long-term debt obligations, including the current portion of long-term debt, totaled $1.9 billion at December 31, 2012, compared to $1.5 billion at December 31, 2011.

Lease Obligations: We lease certain office, factory and warehouse space, land, information technology and other equipment, principally under non-cancelable operating leases. Our future minimum lease obligations, net of minimum sublease rentals, totaled $356 million. Rental expense, net of sublease income, was $65 million in 2012, $92 million in 2011, and $123 million in 2010.

36 -------------------------------------------------------------------------------- Tax Obligations: We have approximately $161 million of unrecognized income tax benefits relating to multiple tax jurisdictions and tax years. Based on the potential outcome of our global tax examinations, or the expiration of the statute of limitations for specific jurisdictions, it is reasonably possible that the unrecognized tax benefits will change within the next twelve months.

The associated net tax impact on the effective tax rate, exclusive of valuation allowance changes, is estimated to be in the range of a $50 million tax charge to a $50 million tax benefit, with cash payments not expected to exceed $25 million.

Purchase Obligations: We have entered into agreements for the purchase of inventory, license of software, promotional activities and research and development, which are firm commitments and are not cancelable. As of December 31, 2012 our obligations in connection with these agreements run through 2015, and the total payments expected to be made by us under these agreements totaled $50 million, of which $32 million relate to take or pay obligations from arrangements with suppliers for the sourcing of inventory supplies and materials. We do not anticipate the cancellation of any of our take or pay agreements in the future and estimate that purchases from these suppliers will exceed the minimum obligations during the agreement periods.

Commitments Under Other Long-Term Agreements: We have entered into certain long-term agreements to purchase software, components, supplies and materials from suppliers which are not "take or pay" in nature. Most of the agreements extend for periods of one to three years (three to five years for software).

Generally, these agreements do not obligate us to make any purchases, and many permit us to terminate the agreement with advance notice (usually ranging from 60 to 180 days). If we were to terminate these agreements, we generally would be liable for certain termination charges, typically based on work performed and supplier on-hand inventory and raw materials attributable to canceled orders.

Our liability would only arise in the event we terminate the agreements for reasons other than "cause." We outsource certain corporate functions, such as benefit administration and information technology-related services. These contracts are expected to expire in 2017. Our remaining payments under these contracts are approximately $603 million over the remaining life of the contracts; however, these contracts can be terminated. Termination would result in a penalty substantially less than the remaining annual contract payments. We would also be required to find another source for these services, including the possibility of performing them in-house.

As is customary in bidding for and completing certain projects and pursuant to a practice we have followed for many years, we have a number of performance/bid bonds, standby letters of credit and surety bonds outstanding (collectively, referred to as "Performance Bonds"), primarily relating to projects of the Government segment. These Performance Bonds normally have maturities of multiple years and are standard in the industry as a way to give customers a convenient mechanism to seek resolution if a contractor does not satisfy certain requirements under a contract. Typically, a customer can draw on the Performance Bond only if we do not fulfill all terms of a project contract. If such an occasion occurred, we would be obligated to reimburse the institution that issued the Performance Bond for the amounts paid. In our long history, it has been rare for us to have a Performance Bond drawn upon. At December 31, 2012, outstanding Performance Bonds totaled approximately $891 million, compared to $1.1 billion at December 31, 2011. Any future disruptions, uncertainty, or volatility in bank, insurance or capital markets, or a change in our credit ratings could adversely affect our ability to obtain Performance Bonds and may result in higher funding costs.

Off-Balance Sheet Arrangements: Under the definition contained in Item 303(a)(4)(ii) of Regulation S-K, we do not have any off-balance sheet arrangements.

Long-term Customer Financing Commitments Outstanding Commitments: Certain purchasers of our infrastructure equipment may request that we provide long-term financing (defined as financing with a term of greater than one year) in connection with the sale of equipment. These requests may include all or a portion of the purchase price of the equipment. Our obligation to provide long-term financing may be conditioned on the issuance of a letter of credit in favor of us by a reputable bank to support the purchaser's credit or a pre-existing commitment from a reputable bank to purchase the long-term receivables from us. We had outstanding commitments to provide long-term financing to third-parties totaling $84 million at December 31, 2012, compared to $138 million at December 31, 2011.

Outstanding Long-Term Receivables: We had net non-current long-term receivables of $60 million at December 31, 2012, compared to net non-current long-term receivables of $37 million (net of allowances for losses of $10 million) at December 31, 2011. These long-term receivables are generally interest bearing, with interest rates ranging from 1% to 13%.

Sales of Receivables From time to time, we sell accounts receivable and long-term receivables on a non-recourse basis to third parties under one-time arrangements while others have been sold to third-parties under committed facilities that involve contractual commitments. We may or may not retain the obligation to service the sold accounts receivable and long-term receivables. We had no significant committed facilities for the sale of long-term receivables at December 31, 2012 or at December 31, 2011.

37-------------------------------------------------------------------------------- The following table summarizes the proceeds received from non-recourse sales of accounts receivable and long-term receivables for the years ended December 31, 2012, 2011, and 2010: Years Ended December 31 2012 2011 2010 Cumulative annual proceeds received from one-time sales: Accounts receivable sales proceeds $ 12 $ 8 $ 30 Long-term receivables sales proceeds 178 224 67 Total proceeds from one-time sales 190 232 97 Cumulative annual proceeds received from sales under committed facilities - - 70 Total proceeds from receivables sales $ 190 $ 232 $ 167 At December 31, 2012, the Company had retained servicing obligations for $375 million of long-term receivables, compared to $263 million of long-term receivables at December 31, 2011. Servicing obligations are limited to collection activities of the non-recourse sales of accounts receivables and long-term receivables.

Adequate Internal Funding Resources We believe that we have adequate internal resources available to fund expected working capital and capital expenditure requirements for the next twelve months as supported by the level of cash, cash equivalents, short-term investments and Sigma Fund balances in the U.S. and the ability to repatriate funds from foreign jurisdictions.

Other Contingencies Potential Contractual Damage Claims in Excess of Underlying Contract Value: In certain circumstances, our businesses may enter into contracts with customers pursuant to which the damages that could be claimed by the other party for failed performance might exceed the revenue we receive from the contract.

Contracts with these types of uncapped damage provisions are fairly rare, but individual contracts could still represent meaningful risk. There is a possibility that a damage claim by a counterparty to one of these contracts could result in expenses to us that are far in excess of the revenue received from the counterparty in connection with the contract.

Indemnification Provisions: In addition, we may provide indemnifications for losses that result from the breach of general warranties contained in certain commercial, intellectual property and divestiture agreements. Historically, we have not made significant payments under these agreements, nor have there been significant claims asserted against us. However, there is an increasing risk in relation to intellectual property indemnities given the current legal climate.

In indemnification cases, payment by us is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow us to challenge the other party's claims. In some instances we may have recourse against third-parties for certain payments made by us. Further, our obligations under divestiture agreements for indemnification based on breach of representations and warranties are generally limited in terms of duration, typically not more than 24 months, and for amounts not in excess of a percentage of the contract value.

Intellectual Property Matters: During 2010, we entered into a settlement agreement with another company to resolve certain intellectual property disputes between the two companies. As a result of the settlement agreement, we received $65 million in cash and were assigned certain patent properties. As a result of this agreement, we recorded a pre-tax gain of $39 million (and $55 million was allocated to discontinued operations) during the year ended December 31, 2010, related to the settlement of the outstanding litigation between the parties.

Legal Matters: We are a defendant in various lawsuits, claims and actions, which arise in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, liquidity or results of operations.

However, an unfavorable resolution could have a material adverse effect on our consolidated financial position, liquidity or results of operations in the periods in which the matters are ultimately resolved.

Significant Accounting Policies Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period.

Management bases its estimates and judgments on historical experience, current economic and industry conditions and on various other factors that are believed to be reasonable under the circumstances. This forms the basis for making judgments 38 -------------------------------------------------------------------------------- about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following significant accounting policies require significant judgment and estimates: -Revenue recognition -Inventory valuation -Income taxes -Valuation of Sigma Fund and investment portfolios -Restructuring activities -Retirement-related benefits -Valuation and recoverability of goodwill Revenue Recognition Net sales consist of a wide range of activities including the delivery of stand-alone equipment or services, custom design and installation over a period of time, and bundled sales of equipment, software and services. We enter into revenue arrangements that may consist of multiple deliverables of our product and service offerings due to the needs of our customers. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability of the sales price is reasonably assured. We recognize revenue from the sale of equipment, software bundled with equipment that is essential to the functionality of the equipment, and most services in accordance with general revenue recognition accounting principles. We recognize revenue in accordance with software accounting guidance for the following types of sales transactions: (i) standalone sales of software products or software upgrades, (ii) standalone sales of software maintenance agreements and (iii) sales of software bundled with hardware not essential to the functionality of that hardware.

Products -For product sales, revenue recognition occurs when products have been shipped, risk of loss has transferred to the customer, objective evidence exists that customer acceptance provisions have been met, no significant obligations remain and allowances for discounts, price protection, returns and customer incentives can be reliably estimated. Recorded revenues are reduced by these allowances. We base our estimates of these allowances on historical experience taking into consideration the type of products sold, the type of customer, and the specific type of transaction in each arrangement. Where customer incentives cannot be reliably estimated, we defer revenue until the incentive has been finalized with the customer.

We sell software and equipment obtained from other companies. We establish our own pricing and retain related inventory risk, are the primary obligor in sales transactions with customers, and assume the credit risk for amounts billed to customers. Accordingly, we generally recognize revenue for the sale of products obtained from other companies based on the gross amount billed.

Within our Enterprise segment, products are primarily sold through distributors and value-added resellers (collectively "channel partners"). Channel partners may provide a service or add componentry in order to resell our products to end customers. For sales to channel partners where we cannot reliably estimate the final sales price or when a channel partner is unable to pay for our products without reselling them to their customers, revenue is not recognized until the products are resold by the channel partner to the end customer.

Long-Term Contracts-For long-term contracts that involve customization of equipment and/or software, we generally recognize revenue using the percentage of completion method based on the percentage of costs incurred to date compared to the total estimated costs to complete the contract. In certain instances, when revenues or costs associated with long-term contracts cannot be reliably estimated or the contract contains other inherent uncertainties, revenues and costs are deferred until the project is complete and customer acceptance is obtained. When current estimates of total contract revenue and contract costs indicate a contract loss, the loss is recognized in the period it becomes evident.

Services-Revenue for services is generally recognized ratably over the contract term as services are performed.

Software and Licenses-Revenue from pre-paid perpetual licenses is recognized at the inception of the arrangement, presuming all other relevant revenue recognition criteria are met. Revenue from non-perpetual licenses or term licenses is recognized ratably over the period that the licensee uses the license. Revenues from software maintenance, technical support and unspecified upgrades are recognized over the period that these services are delivered.

Multiple-Element Arrangements-Arrangements with customers may include multiple deliverables, including any combination of products, services and software.

These multiple element arrangements could also include an element accounted for as a long-term contract coupled with other products, services and software. For multiple-element arrangements that include products containing software essential to the equipment's functionality, undelivered software elements that relate to the product's essential software, and undelivered non-software services, deliverables are separated into more than one unit of 39 -------------------------------------------------------------------------------- accounting when (i) the delivered element(s) have value to the customer on a stand-alone basis, and (ii) delivery of the undelivered element(s) is probable and substantially in our control. In these arrangements, we allocate revenue to all deliverables based on their relative selling prices. We use the following hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value ("VSOE"), (ii) third-party evidence of selling price ("TPE") and (iii) best estimate of selling price ("ESP").

• VSOE-In many instances, products are sold separately in stand-alone arrangements as customers may support the products themselves or purchase support on a time and materials basis. Additionally, advanced services such as general consulting, network management or advisory projects are often sold in stand-alone engagements. Technical support services are also often sold separately through renewals of annual contracts. We determine VSOE based on our normal pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, we require that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range, generally evidenced by the pricing rates of approximately 80% of such historical stand-alone transactions falling within plus or minus 15% of the median rate. In addition, we consider the geographies in which the products or services are sold, major product and service groups, customer classification, and other environmental or marketing variables in determining VSOE.

• TPE-VSOE exists only when we sell the deliverable separately. When VSOE does not exist, we attempt to determine TPE based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy for many of our products differs from that of our peers and our offerings contain a significant level of customization and differentiation such that the comparable pricing of products with similar functionality sold by other companies cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor products' selling prices are on a stand-alone basis. Therefore, we are typically not able to determine TPE.

• ESP-The objective of ESP is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. When both VSOE and TPE do not exist, we determine ESP by first collecting all reasonably available data points including sales, cost and margin analysis of the product, and other inputs based on our normal pricing practices. Second, we make any reasonably required adjustments to the data based on market and Company-specific factors. Third, we stratify the data points, when appropriate, based on customer, magnitude of the transaction and sales volume.

Once elements of an arrangement are separated into more than one unit of accounting, revenue is recognized for each separate unit of accounting based on the nature of the revenue as described above.

Our arrangements with multiple deliverables may also contain a stand-alone software deliverable that is subject to software revenue recognition guidance.

The revenue for these multiple-element arrangements is allocated to the software deliverable and the non-software deliverable(s) based on the relative selling prices of all of the deliverables in the arrangement using the fair value hierarchy outlined above. In circumstances where we cannot determine VSOE or TPE of the selling price for any of the deliverables in the arrangement, ESP is used for the purpose of allocating the arrangement consideration.

We account for multiple element arrangements that consist entirely of software or software-related products, including the sale of software upgrades or software support agreements to previously sold software, in accordance with software accounting guidance. For such arrangements, revenue is allocated to the deliverables based on the relative fair value of each element, and fair value is determined using VSOE. Where VSOE does not exist for the undelivered software element, revenue is deferred until either the undelivered element is delivered or VSOE is established, whichever occurs first. When VSOE of a delivered element has not been established, but VSOE exists for the undelivered elements, we use the residual method to recognize revenue when the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement consideration is allocated to the delivered elements and is recognized as revenue.

Changes in cost estimates and the fair values of certain deliverables could negatively impact our operating results. In addition, unforeseen conditions could arise over the contract term that may have a significant impact on operating results.

Inventory Valuation We record valuation reserves on our inventory for estimated excess or obsolescence. The amount of the reserve is equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. On a quarterly basis, management performs an analysis of the underlying inventory to identify reserves needed for excess and obsolescence. We use our best judgment to estimate appropriate reserves based on this analysis. In addition, we adjust the carrying value of inventory if the current market value of that inventory is below our cost.

40 -------------------------------------------------------------------------------- At December 31, 2012 and 2011, Inventories consisted of the following: December 31 2012 2011 Finished goods $ 244 $ 319 Work-in-process and production materials 432 363 676 682 Less inventory reserves (163 ) (170 ) $ 513 $ 512 We balance the need to maintain strategic inventory levels to ensure competitive delivery performance to our customers against the risk of inventory obsolescence due to rapidly changing technology and customer requirements. As reflected above, our inventory reserves represented 24% of the gross inventory balance at December 31, 2012, compared to 25% of the gross inventory balance at December 31, 2011. We have inventory reserves for excess inventory, pending cancellations of product lines due to technology changes, long-life cycle products, lifetime buys at the end of supplier production runs, business exits, and a shift of production to outsourced manufacturing.

If future demand or market conditions are less favorable than those projected by management, additional inventory writedowns may be required.

Income Taxes Our effective tax rate is based on pre-tax income and the tax rates applicable to that income in the various jurisdictions in which we operate. An estimated effective tax rate for a year is applied to our quarterly operating results. In the event that there is a significant unusual or discrete item recognized, or expected to be recognized, in our quarterly operating results, the tax attributable to that item would be separately calculated and recorded at the same time as the unusual or discrete item. We consider the resolution of prior-year tax matters to be such items. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions. We establish reserves when it is not more-likely-than-not that we will realize the full tax benefit of the position. We adjust these reserves in light of changing facts and circumstances.

Tax regulations may require items of income and expense to be included in a tax return in different periods than the items are reflected in the consolidated financial statements. As a result, the effective tax rate reflected in the consolidated financial statements may be different than the tax rate reported in the income tax return. Some of these differences are permanent, such as expenses that are not deductible on the tax return, and some are temporary differences, such as depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the tax return in future years for which we have already recorded the tax benefit in the consolidated financial statements.

Deferred tax liabilities generally represent tax expense recognized in the consolidated financial statements for which the tax payment has been deferred or expense for which we have already taken a deduction on an income tax return, but has not yet been recognized in the consolidated financial statements.

We account for income taxes by recognizing deferred tax assets and liabilities using enacted tax rates for the effect of the temporary differences between the book and tax basis of recorded assets and liabilities. We make estimates and judgments with regard to the calculation of certain income tax assets and liabilities. Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more-likely-than-not that some portion of the deferred tax asset will not be realized. Significant weight is given to evidence that can be objectively verified.

We evaluate deferred income taxes on a quarterly basis to determine if valuation allowances are required by considering available evidence, including historical and projected taxable income and tax planning strategies that are both prudent and feasible. During 2012, we recorded $60 million of tax benefits related to the reversal of a significant portion of the valuation allowance established on certain foreign deferred tax assets.

During 2011, we reassessed our valuation allowance requirements taking into consideration the distribution of Motorola Mobility. We evaluated all available evidence in our analysis, including the historical and projected pre-tax profits generated by our U.S. operations. We also considered tax planning strategies that are prudent and can be reasonably implemented. Based on our assessment, we recorded $274 million of tax benefits related to the reversal of a valuation allowance established on U.S. deferred tax assets. During 2010, the U.S.

valuation allowance was reduced by $39 million, primarily for certain of our state tax carryforwards that we expect to utilize. The U.S. valuation allowance as of December 31, 2012 relates to state tax carryforwards and deferred tax assets of a U.S. subsidiary that we expect to expire unutilized.

We have a total deferred tax asset valuation allowance of approximately $308 million against gross deferred tax assets of approximately $4.7 billion as of December 31, 2012, compared to total deferred tax asset valuation allowance of approximately $366 million against net deferred tax assets of approximately $5.1 billion as of December 31, 2011.

41 -------------------------------------------------------------------------------- Valuation of Sigma Fund and Investment Portfolios Investments in Sigma Fund primarily consist of fixed income securities with an average maturity of less than one month at both December 31, 2012 and 2011.

These securities are carried at fair value. Investments not held in Sigma Fund generally consist of equity and fixed income securities, which are classified as available-for-sale and are carried at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date.

Fair value is determined in accordance with the authoritative guidance for fair value measurements and disclosures using the prescribed fair value hierarchy.

Publicly traded common stock and equivalents within our investment portfolios where quoted market prices in active markets are available are classified as Level 1 fair value measurements within the prescribed fair value hierarchy.

The securities classified as Level 2 are primarily those that are professionally managed within the Sigma Fund. Level 2 securities are priced using pricing services, bid/offer, and last trade. Prices may also be obtained from brokers, counterparties, fund administrators, online securities data services, or investment managers. Fixed income securities, including short-term instruments, may be priced using pricing models comprised of observable inputs which include, but are not limited to, market quotations, yields, maturities, call features, and the security's terms and conditions. We review these prices and pricing procedures as well as amounts realized as a basis for validating our fair value price estimates.

As of December 31, 2012 and December 31, 2011, there are no Level 3 securities within the Sigma Fund or our investment portfolio.

We cannot predict the occurrence of future events that might have an impact on the fair values of our investments in Sigma Fund or other investments carried at fair value.

Restructuring Activities We maintain a formal Involuntary Severance Plan (the "Severance Plan"), which permits us to offer eligible employees severance benefits based on years of service and employment grade level in the event that employment is involuntarily terminated as a result of a reduction-in-force or restructuring. We recognize termination benefits based on formulas per the Severance Plan at the point in time that future settlement is probable and can be reasonably estimated based on estimates prepared at the time a restructuring plan is approved by management.

Exit costs consist of future minimum lease payments on vacated facilities and other contractual terminations. At each reporting date, we evaluate our accruals for employee separation and exit costs to ensure the accruals are still appropriate. In certain circumstances, accruals are no longer needed because of efficiencies in carrying out the plans or because employees previously identified for separation resigned from the Company and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were approved. In these cases, we reverse accruals through the consolidated statements of operations where the original charges were recorded when it is determined they are no longer needed.

Retirement Benefits Our noncontributory pension plan (the "Regular Pension Plan") covers U.S.

employees who became eligible after one year of service. The benefit formula is dependent upon employee earnings and years of service. Effective January 1, 2005, newly-hired employees are not eligible to participate in the Regular Pension Plan. We also provide defined benefit plans which cover non-U.S.

employees in certain jurisdictions, principally the United Kingdom, Germany and Japan (the "Non-U.S. Plans"). Other pension plans are not material to us either individually or in the aggregate.

We also have a noncontributory supplemental retirement benefit plan (the "Officers' Plan") for our elected officers. The Officers' Plan contains provisions for vesting and funding the participants' expected retirement benefits when the participants meet the minimum age and years of service requirements. Elected officers who were not yet vested in the Officers' Plan as of December 31, 1999 had the option to remain in the Officers' Plan or elect to have their benefit bought out in restricted stock units. Effective December 31, 1999, newly elected officers are not eligible to participate in the Officers' Plan. Effective June 30, 2005, salaries were frozen for this plan.

We have an additional noncontributory supplemental retirement benefit plan, the Motorola Supplemental Pension Plan ("MSPP"), which provides supplemental benefits to individuals by replacing the Regular Pension Plan benefits that are lost by such individuals under the retirement formula due to application of the limitations imposed by the Internal Revenue Code. However, elected officers who are covered under the Officers' Plan or who participated in the restricted stock buy-out are not eligible to participate in the MSPP. Effective January 1, 2007, eligible compensation was capped at the IRS limit plus $175,000 (the "Cap") or, for those already in excess of the Cap as of January 1, 2007, the eligible compensation used to compute such employee's MSPP benefit for all future years will be the greater of: (i) such employee's eligible compensation as of January 1, 2007 (frozen at that amount), or (ii) the relevant Cap for the given year. Additionally, effective January 1, 2009, the MSPP was frozen to new participants unless such participation was due to a prior contractual entitlement.

42 -------------------------------------------------------------------------------- In February 2007, we amended the Regular Pension Plan and the MSPP, modifying the definition of average earnings. For years ended prior to December 31, 2007, benefits were calculated using the rolling average of the highest annual earnings in any five years within the previous ten calendar year period.

Beginning in January 2008, the benefit calculation was based on the set of the five highest years of earnings within the ten calendar years prior to December 31, 2007, averaged with earnings from each year after 2007. Also effective January 2008, we amended the Regular Pension Plan, modifying the vesting period from five years to three years.

In December 2008, we amended the Regular Pension Plan, the Officers' Plan and the MSPP (collectively, the "2008 Amended Pension Plans") such that, effective March 1, 2009: (i) no participant shall accrue any benefit or additional benefit on or after March 1, 2009, and (ii) no compensation increases earned by a participant on or after March 1, 2009 shall be used to compute any accrued benefit.

Certain healthcare benefits are available to eligible domestic employees meeting certain age and service requirements upon termination of employment (the "Postretirement Health Care Benefits Plan"). For eligible employees hired prior to January 1, 2002, we offset a portion of the postretirement medical costs to the retired participant. As of January 1, 2005, the Postretirement Health Care Benefits Plan has been closed to new participants.

During the year ended December 31, 2012, the Company announced an amendment to the Postretirement Health Care Benefits Plan. Starting January 1, 2013, benefits under the plan to participants over age 65 will be paid to a retiree health reimbursement account instead of directly providing health insurance coverage to the participants. Covered retirees will be able to use the annual subsidy they receive through this account toward the purchase of their own health care coverage from private insurance companies and for reimbursement of eligible health care expenses. This change has resulted in a remeasurement of the plan where $139 million of the net liability was reduced through a decrease in accumulated other comprehensive loss of $87 million, net of taxes. The majority of the reduced liability will be recognized over approximately three years, which is the period in which the remaining employees eligible for the plan will qualify for benefits under the plan.

Accounting methodologies use an attribution approach that generally spreads the effects of individual events over the service lives of the participants in the plan, or estimated average lifetime when almost all of the plan participants are considered "inactive." Examples of "events" are plan amendments and changes in actuarial assumptions such as discount rate, expected long-term rate of return on plan assets, and rate of compensation increases.

There are various assumptions used in calculating the net periodic benefit expense and related benefit obligations. One of these assumptions is the expected long-term rate of return on plan assets. The required use of the expected long-term rate of return on plan assets may result in recognized pension income that is greater or less than the actual returns of those plan assets in any given year. Over time, however, the expected long-term returns are designed to approximate the actual long-term returns and therefore result in a pattern of income and expense recognition that more closely matches the pattern either of the service life or average lifetime of the employees. Differences between actual and expected returns are recognized in the net periodic pension calculation over five years.

We use long-term historical actual return experience with consideration of the expected investment mix of the plans' assets, as well as future estimates of long-term investment returns, to develop our expected rate of return assumption used in calculating the net periodic pension cost and the net retirement healthcare expense. Our investment return assumption for the Regular Pension Plan and Postretirement Healthcare Benefits Plan was 8.25% in both 2012 and 2011. At December 31, 2012, the Regular Pension Plan and the Postretirement Health Care Benefits Plan investment portfolios were predominantly equity investments and the Officers' Plan investment portfolio was predominantly fixed-income securities.

A second key assumption is the discount rate. The discount rate assumptions used for pension benefits and postretirement health care benefits reflect, at December 31 of each year, the prevailing market rates for high-quality, fixed-income debt instruments that, if the obligation was settled at the measurement date, would provide the necessary future cash flows to pay the benefit obligation when due. Our discount rates for measuring our U.S. pension obligations were 4.35% and 5.10% at December 2012 and 2011, respectively. Our discount rates for measuring the Postretirement Health Care Benefits Plan obligation were 3.80% and 4.75% at December 31, 2012 and 2011, respectively.

A final set of assumptions involves the cost drivers of the underlying benefits.

The rate of compensation increase is a key assumption used in the actuarial model for pension accounting and is determined by us based upon our long-term plans for such increases. Our 2012 and 2011 rate for future compensation increase for the Regular Pension Plan and Officers' Plan was 0%, as the salaries to be utilized for calculation of benefits under these plans have been frozen.

For the Postretirement Health Care Benefits Plan, we review external data and our own historical trends for health care costs to determine the health care cost trend rates. The health care cost trend rate used to determine the December 31, 2012, accumulated postretirement benefit obligation is 8.50% for 2013, then grading down to a rate of 5% in 2020. The health care cost trend rate used to determine the December 31, 2011 accumulated postretirement benefit obligation was 7.25% for 2012, remaining flat at 7.25% through 2015, then grading down to a rate of 5% in 2019.

43 -------------------------------------------------------------------------------- For the year ended December 31, 2012, we recognized net periodic pension expense of $188 million related to our U.S. pension plans, compared to $151 million for the year ended December 31, 2011. Cash contributions of $340 million were made to the U.S. pension plans during 2012 as compared to $489 million in 2011. In January 2011, the Pension Benefit Guaranty Corporation ("PBGC") announced an agreement with Motorola Solutions under which we would contribute $100 million above and beyond our legal requirement to our U.S. pension plans over the next five years. The Company and the PBGC entered into the agreement as the Company was in the process of separating Motorola Mobility and pursuing the sale of certain assets of the Networks business. The Company made $250 million of pension contributions to our U.S. pension plans over the amounts required in the fourth quarter 2011, of which $100 million fulfilled the PBGC financial obligation. As a result, the Company has no further financial obligations under this agreement with the PBGC. We maintained all of the U.S. pension liabilities and the majority of the non-U.S. pension liabilities following the distribution of Motorola Mobility on January 4, 2011, and following the sale of certain assets and liabilities of the Networks business to NSN on April 29, 2011.

We recognized net postretirement health care expense of $3 million and $20 million for the years ended December 31, 2012 and 2011, respectively. No cash contributions were made to this plan in 2012. We expect to make no cash contributions to the Postretirement Health Care Benefits Plan in 2013.

The measurement date of all of our retirement plans assets and obligations is December 31.

Valuation and Recoverability of Goodwill We assess the recorded amount of goodwill for recovery on an annual basis in the fourth quarter of each fiscal year. Goodwill is assessed more frequently if an event occurs or circumstances change that would indicate it is more-likely-than-not that the fair value of a reporting unit is below its carrying amount. We continually assess whether any such events and circumstances have occurred, which requires a significant amount of judgment. Such events and circumstances may include: adverse changes in macroeconomic conditions, adverse changes in the entity's industry or market, changes in cost factors negatively impacting earnings and cash flows, negative or declining overall financial performance, events affecting the carrying value or composition of a reporting unit, or a sustained decrease in share price, among others. Any such adverse event or change in circumstances could have a significant impact on the recoverability of goodwill and could have a material impact on our combined financial statements.

The goodwill impairment assessment is performed at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a "component"). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. When two or more components of an operating segment have similar economic characteristics, the components are aggregated and deemed a single reporting unit. An operating segment is deemed to be a reporting unit if all of its components are similar, if none of its components is a reporting unit, or if the segment comprises only a single component. Based on this guidance, we have determined that our Government and Enterprise segments each meet the definition of a reporting unit.

In September 2011, the Financial Accounting Standards Board (the "FASB") issued guidance which provides an entity with the option to first perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If an entity determines this is the case, it is required to perform the two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized. If an entity determines that it is more-likely-than-not that the fair value of a reporting is greater than its carrying amount, the two-step goodwill impairment test is not required. We adopted this guidance as of the fourth quarter of 2011.

2012 &2011 We performed a qualitative assessment to determine whether it was more-likely-than-not that the fair value of each reporting unit was less than its carrying amount for fiscal year 2012 and fiscal year 2011. In performing this qualitative assessment, we assessed relevant events and circumstances including macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, changes in share price, and entity-specific events. In addition, we considered the fair value derived for each reporting unit in conjunction with the 2010 goodwill impairment test. We compared this prior fair value against the current carrying value of each reporting unit noting fair value significantly exceeded carrying value for both reporting units. We performed a sensitivity analysis on the fair value determined for each reporting unit in conjunction with the 2010 goodwill impairment test for changes in significant assumptions including the weighted average cost of capital used in the income approach and changes in expected cash flows. For fiscal year 2012, these changes in assumptions and estimated cash flows resulted in an increase in fair value for the Government reporting unit and a slight decrease in fair value for the Enterprise reporting unit. In spite of this small decrease in estimated fair value of the Enterprise reporting unit, the reporting unit's fair value significantly exceeds its carrying value. For fiscal year 2011, these changes in assumptions and estimated cash flows resulted in an increase in fair value for each reporting unit from the 2010 fair values.

As such, for fiscal years 2012 and 2011, we concluded it is more-likely-than-not that the fair value of each reporting unit exceeds its carrying value.

Therefore, the two-step goodwill impairment test was not required for fiscal year 2012 or fiscal year 2011.

44 -------------------------------------------------------------------------------- 2010 The goodwill impairment test for fiscal 2010 was performed using the two step goodwill impairment analysis. In step one, the fair value of each reporting unit was compared to its book value. Fair value was determined using a combination of present value techniques and quoted market prices of comparable businesses. If the fair value of the reporting unit exceeds its book value, goodwill is not deemed to be impaired for that reporting unit, and no further testing would be necessary. If the fair value of the reporting unit is less than its book value, we perform step two. Step two uses the calculated fair value of the reporting unit to perform a hypothetical purchase price allocation to the fair value of the assets and liabilities of the reporting unit. The difference between the fair value of the reporting unit calculated in step one and the fair value of the underlying assets and liabilities of the reporting unit was the implied fair value of the reporting unit's goodwill. A charge is recorded in the financial statements if the carrying value of the reporting unit's goodwill is greater than its implied fair value.

The following describes the valuation methodologies used to derive the fair value of the reporting units: • Income Approach: To determine fair value, we discounted the expected future cash flows of the reporting units. The discount rate used represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in our operations and the rate of return a market participant would expect to earn. To estimate cash flows beyond the final year of our model, we used a terminal value approach. Under this approach, we used estimated operating income before interest, taxes, depreciation and amortization in the final year of the model, adjusted it to estimate a normalized cash flow, applied a perpetuity growth assumption and discounted it by a perpetuity discount factor to determine the terminal value. We incorporated the present value of the resulting terminal value into the estimate of fair value.

• Market-Based Approach: To corroborate the results of the income approach described above, we estimated the fair value of our reporting units using several market-based approaches, including the value that is derived based on Motorola Solutions' consolidated stock price as described above. We also used the guideline company method, which focuses on comparing our risk profile and growth prospects to select reasonably similar/guideline publicly traded companies.

The determination of fair value of the reporting units and assets and liabilities within the reporting units requires us to make significant estimates and assumptions. These estimates and assumptions primarily included, the discount rate, terminal growth rates, earnings before depreciation and amortization, and capital expenditures forecasts.

We evaluated the merits of each significant assumption, both individually and in the aggregate, used to determine the fair value of each reporting unit, as well as the fair values of the corresponding assets and liabilities within the reporting unit, and concluded they are reasonable. We weighted the valuation of our reporting units at 75% based on the income approach and 25% based on the market-based approach, consistent with prior periods.

The accounting principles regarding goodwill acknowledge that the observed market prices of individual trades of a company's stock (and thus its computed market capitalization) may not be representative of the fair value of the company as a whole. Additional value may arise from the ability to take advantage of synergies and other benefits that flow from control over another entity. Consequently, measuring the fair value of a collection of assets and liabilities that operate together in a controlled entity is different from measuring the fair value of that entity's individual common stock. In most industries, including ours, an acquiring entity typically is willing to pay more for equity securities that give it a controlling interest than an investor would pay for a number of equity securities representing less than a controlling interest.

For the purpose of determining the implied control premium calculation in the overall goodwill analysis, we applied assumptions for determining the fair value of corporate assets. Corporate assets primarily consisted of cash and cash equivalents, Sigma Fund balances, short-term investments, investments, deferred tax assets and corporate facilities. Judgments about the fair value of corporate assets include, among others, an assumption that deferred tax assets should be discounted to reflect their economic lives, that a significant portion of the corporate assets are required to pay off debt, fund our retirement obligations, and market participants' perceptions of the likely restructuring costs, including severance and exit costs, that might be incurred if our strategy is not successful. The results of our impairment analysis resulted in an implied control premium commensurate with historical transactions observed in our industry.

Based on the results of our 2012, 2011, and 2010 annual assessments of the recoverability of goodwill, there were no goodwill impairments.

Differences in our actual future cash flows, operating results, growth rates, capital expenditures, cost of capital and discount rates as compared to the estimates utilized for the purpose of calculating the fair value of each reporting unit, as well as a decline in macroeconomic conditions, the industry, the market, overall financial performance or our stock price and related market capitalization, could affect the results of our annual goodwill assessment and, accordingly, potentially lead to future goodwill impairment charges.

45 -------------------------------------------------------------------------------- Recent Accounting Pronouncements In December 2011, the FASB issued Accounting Standards Update ("ASU") No.

2011-11 "Disclosures about Offsetting Assets and Liabilities." The standard requires additional disclosure to enhance the comparability of U.S. GAAP and International Financial Reporting Standards financial statements. In January 2013, the FASB issued Accounting Standards Update 2013-01 "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities." This standard provided additional guidance on the scope of ASU 2011-11. The new standards are effective for annual and interim periods beginning January 1, 2013. Retrospective application is required. The guidance concerns disclosure only and will not have an impact on our consolidated financial position or results of operations.

In February 2013, the FASB issued ASU No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." Under ASU 2013-02, an entity is required to provide information about the amounts reclassified out of Accumulated Other Comprehensive Income ("AOCI") by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements.

ASU 2013-02 is effective for us on January 1, 2013.

Forward-Looking Statements Except for historical matters, the matters discussed in this Form 10-K are forward-looking statements that involve risks and uncertainties. Forward-looking statements include, but are not limited to, statements under the following headings: (1) "Business," about: (a) industry growth and demand, including opportunities resulting from such growth, (b) customer spending, (c) the impact of each segment's strategy, (d) the impact from the loss of key customers, (e) competitive position, (f) increased competition, (g) the impact of regulatory matters, (h) the impact from the allocation and regulation of spectrum, (i) the availability of materials and components, energy supplies and labor, (j) the seasonality of the business, (k) the firmness of each segment's backlog, (l) the competitiveness of the patent portfolio, and (m) the impact of research and development; (2) "Properties," about the consequences of a disruption in manufacturing; (3) "Legal Proceedings," about the ultimate disposition of pending legal matters and timing; (4) "Management's Discussion and Analysis," about: (a) market growth/contraction, demand, spending and resulting opportunities, (b) the financial results of Psion and the impact to earnings in 2014, (c) the decline in the iDEN infrastructure portfolio, (d) the return of capital to shareholders through dividends and/or repurchasing shares, (e) the success of our business strategy and portfolio, (f) future payments, charges, use of accruals and expected cost-saving and profitability benefits associated with our reorganization of business programs and employee separation costs, (g) our ability and cost to repatriate funds, (h) the impact of the timing and level of sales and the geographic location of such sales, (i) the impact of maintaining inventory, (j) future cash contributions to pension plans or retiree health benefit plans, (k) our ability to collect on our Sigma Fund and other investments, (l) our ability and cost to access the capital markets, (m) our ability to borrow and the amount available under our credit facilities, (n) our ability to retire outstanding debt, (o) our ability and cost to obtain performance related bonds, (p) adequacy of resources to fund expected working capital and capital expenditure measurements, (q) expected payments pursuant to commitments under long-term agreements, (r) the ability to meet minimum purchase obligations, (s) our ability to sell accounts receivable and the terms and amounts of such sales, (t) the outcome and effect of ongoing and future legal proceedings, (u) the impact of recent accounting pronouncements on our financial statements, (v) the impact of the loss of key customers, and (w) the expected effective tax rate and deductibility of certain items; and (5) "Quantitative and Qualitative Disclosures about Market Risk," about: (a) the impact of foreign currency exchange risks, (b) future hedging activity and expectations of the Company, and (c) the ability of counterparties to financial instruments to perform their obligations.

Some of the risk factors that affect the Company's business and financial results are discussed in "Item 1A: Risk Factors." We wish to caution the reader that the risk factors discussed in "Item 1A: Risk Factors," and those described elsewhere in this report or in our other Securities and Exchange Commission filings, could cause our actual results to differ materially from those stated in the forward-looking statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk As of December 31, 2012, we have $1.9 billion of long-term debt, including the current portion of long-term debt, which is primarily priced at long-term, fixed interest rates. Of this total long-term debt amount, a $36 million Euro-denominated variable interest loan has a hedge that changes the interest rate characteristics from variable to fixed-rate. A hypothetical unfavorable movement of 10% in the interest rates would have an immaterial impact on the hedge's fair value.

46-------------------------------------------------------------------------------- Foreign Currency Risk We use financial instruments to reduce our overall exposure to the effects of currency fluctuations on cash flows. Our policy prohibits speculation in financial instruments for profit on exchange rate price fluctuations, trading in currencies for which there are no underlying exposures, or entering into transactions for any currency to intentionally increase the underlying exposure.

Instruments that are designated as part of a hedging relationship must be effective at reducing the risk associated with the exposure being hedged and are designated as part of a hedging relationship at the inception of the contract.

Accordingly, changes in the market values of hedge instruments must be highly correlated with changes in market values of the underlying hedged items both at the inception of the hedge and over the life of the hedge contract.

Our strategy related to foreign exchange exposure management is to offset the gains or losses on the financial instruments against losses or gains on the underlying operational cash flows or investments based on our operating assessment of risk. We enter into derivative contracts for some of our non-functional currency cash, receivables, and payables, which are primarily denominated in major currencies that can be traded on open markets. We typically use forward contracts and options to hedge these currency exposures. In addition, we enter into derivative contracts for some forecasted transactions, which are designated as part of a hedging relationship if it is determined that the transaction qualifies for hedge accounting under the provisions of the authoritative accounting guidance for derivative instruments and hedging activities. A portion of our exposure is from currencies that are not traded in liquid markets and these are addressed, to the extent reasonably possible, by managing net asset positions, product pricing and component sourcing.

At December 31, 2012, we had outstanding foreign exchange contracts totaling $523 million, compared to $524 million outstanding at December 31, 2011.

Management believes that these financial instruments should not subject us to undue risk due to foreign exchange movements because gains and losses on these contracts should generally offset losses and gains on the underlying assets, liabilities and transactions, except for the ineffective portion of the instruments, which are charged to Other within Other income (expense) in our consolidated statements of operations.

The following table shows the five largest net notional amounts of the positions to buy or sell foreign currency as of December 31, 2012 and the corresponding positions as of December 31, 2011: Notional Amount Net Buy (Sell) by Currency December 31, 2012 December 31, 2011 British Pound $ 225 $ 55 Chinese Renminbi (99 ) (283 ) Norwegian Krone (48 ) - Israeli Shekel (35 ) 8 Japanese Yen 32 46 Foreign exchange financial instruments that are subject to the effects of currency fluctuations, which may affect reported earnings, include derivative financial instruments and other monetary assets and liabilities denominated in a currency other than the functional currency of the legal entity holding the instrument. Derivative financial instruments consist primarily of currency forward contracts and options. Other monetary assets and liabilities denominated in a currency other than the functional currency of the legal entity consist primarily of cash, cash equivalents, Sigma Fund investments and short-term investments, as well as accounts payable and receivable. Accounts payable and receivable are reflected at fair value in the financial statements. Assuming the amounts of the outstanding foreign exchange contracts represent our underlying foreign exchange risk related to monetary assets and liabilities, a hypothetical unfavorable 10% movement in the foreign exchange rates, from current levels, would reduce the value of those monetary assets and liabilities by approximately $54 million. Our market risk calculation represents an estimate of reasonably possible net losses that would be recognized assuming hypothetical 10% movements in future currency market pricing and is not necessarily indicative of actual results, which may or may not occur. It does not represent the maximum possible loss or any expected loss that may occur, since actual future gains and losses will differ from those estimated, based upon, among other things, actual fluctuation in market rates, operating exposures, and the timing thereof. We believe, however, that any such loss incurred would be offset by the effects of market rate movements on the respective underlying derivative financial instruments transactions. The foreign exchange financial instruments are held for purposes other than trading.

At December 31, 2012, the maximum term of derivative instruments that hedge forecasted transactions was seven months. The weighted average duration of our derivative instruments that hedge forecasted transactions was three months.

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