|
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.
47
--------------------------------------------------------------------------------
® Reg. U.S. Patent & Trademark Office.
MOTOROLA MOTO, MOTOROLA SOLUTIONS and the Stylized M Logo, as well as iDEN are
trademarks or registered trademarks of Motorola Trademark Holdings, LLC and are
used under license. All other products or service names are the property of
their respective owners.
48--------------------------------------------------------------------------------
[ Back To LatinAmerica.tmcnet.com's Homepage 's Homepage ]
|
Internet Telephony Magazine
Click here to read latest issue
CUSTOMER 
Cloud Computing Magazine
Click here to read latest issue
M2M Evolution Magazine
Call Center/CRM
Info Tech 
IP Communications 
Mobile 
Green 
Satellite 
Robotics 
