Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This commentary should be read in conjunction with the condensed consolidated financial statements and related notes thereto of Motorola Solutions, Inc. (“Motorola Solutions” or the “Company,” “we,” “our,” or “us”) for the three and
six
months ended
June 29, 2013
and
June 30, 2012
, as well as our consolidated financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations in our Annual Report on Form 10-K for the year ended
December 31, 2012
.
Executive Overview
We are a leading provider of mission-critical communication infrastructure, devices, software and services. Our communications-focused products and services help government and enterprise customers improve their operations through increased effectiveness and efficiency of their mobile workforces. Our customers benefit from our global footprint and thought leadership, with sales in more than 100 countries, 22,000 employees worldwide, an industry leadership position, an unmatched portfolio of products and services and a strong patent portfolio.
We report financial results for two segments:
Government:
Our Government segment includes sales of public safety mission-critical communications systems, commercial two-way radio systems and devices, software and services. In the
second
quarter of
2013
, the segment’s net sales were
$1.5 billion
, representing
69%
of our consolidated net sales.
Enterprise:
Our Enterprise segment includes sales of rugged and enterprise-grade mobile computers and tablets, laser/imaging/RFID-based data capture products, wireless local area network (“WLAN”) and integrated digital enhanced network (“iDEN”) infrastructure, software and services. In the
second
quarter of
2013
, the segment’s net sales were
$656 million
, representing
31%
of our consolidated net sales.
Change in Presentation
As of January 1, 2013, we restructured our regions operationally to improve our delivery of products and services, by aligning the Middle East go-to-market team with Asia Pacific. Accordingly, we now report net sales for the following four geographic regions: North America; Latin America; Europe and Africa ("EA"); and Asia Pacific and Middle East ("APME"). We have updated all periods presented to reflect this change in presentation.
Second Quarter Summary
|
|
•
|
Net sales
decreased
by
$41 million
, or
2%
, to
$2.1 billion
in the
second
quarter of
2013
, compared to net sales of
$2.1 billion
in the
second
quarter of
2012
.
|
|
|
•
|
We generated operating earnings of
$266 million
, or
12.6%
of net sales, in the
second
quarter of
2013
, compared to
$278 million
, or
12.9%
of net sales, in the
second
quarter of
2012
.
|
|
|
•
|
We had earnings from continuing operations, net of tax, of
$258 million
, or
$0.94
per diluted common share, in the
second
quarter of
2013
, compared to earnings from continuing operations, net of tax, of
$177 million
, or
$0.60
per diluted common share, in the
second
quarter of
2012
.
|
|
|
•
|
We generated net cash from operating activities of
$51 million
during the
first half
of
2013
, compared to
$322 million
in the
first half
of
2012
.
|
|
|
•
|
We returned
$1.1 billion
in capital to shareholders through share repurchases and dividends during the
first half
of
2013
.
|
Highlights for each of our segments are as follows:
|
|
•
|
Government:
Net sales were
$1.5 billion
in the
second
quarter of
2013
,
a decrease
of
$8 million
, or
1%
, compared to net sales of
$1.5 billion
during the
second
quarter of
2012
. On a geographic basis, net sales decreased in Latin America and APME, and increased in North America and EA compared to the year-ago quarter.
|
|
|
•
|
Enterprise:
Net sales were
$656 million
in the
second
quarter of
2013
,
a decrease
of
$33 million
, or
5%
, compared to net sales of
$689 million
in the
second
quarter of
2012
. On a geographic basis, net sales declined in North America and Latin America, and increased in EA and APME compared to the year-ago quarter.
|
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(Dollars in millions, except per
share amounts)
|
June 29, 2013
|
|
% of
Sales**
|
|
June 30, 2012
|
|
% of
Sales**
|
|
June 29, 2013
|
|
% of
Sales**
|
|
June 30, 2012
|
|
% of
Sales**
|
Net sales from products
|
$
|
1,479
|
|
|
|
|
$
|
1,563
|
|
|
|
|
$
|
2,860
|
|
|
|
|
$
|
3,007
|
|
|
|
Net sales from services
|
628
|
|
|
|
|
585
|
|
|
|
|
1,220
|
|
|
|
|
1,097
|
|
|
|
Net sales
|
2,107
|
|
|
|
|
2,148
|
|
|
|
|
4,080
|
|
|
|
|
4,104
|
|
|
|
Costs of product sales
|
695
|
|
|
47.0
|
%
|
|
712
|
|
|
45.6
|
%
|
|
1,346
|
|
|
47.1
|
%
|
|
1,370
|
|
|
45.6
|
%
|
Costs of service sales
|
383
|
|
|
61.0
|
%
|
|
376
|
|
|
64.3
|
%
|
|
750
|
|
|
61.5
|
%
|
|
701
|
|
|
63.9
|
%
|
Costs of sales
|
1,078
|
|
|
|
|
1,088
|
|
|
|
|
2,096
|
|
|
|
|
2,071
|
|
|
|
Gross margin
|
1,029
|
|
|
48.8
|
%
|
|
1,060
|
|
|
49.3
|
%
|
|
1,984
|
|
|
48.6
|
%
|
|
2,033
|
|
|
49.5
|
%
|
Selling, general and administrative expenses
|
470
|
|
|
22.3
|
%
|
|
496
|
|
|
23.1
|
%
|
|
930
|
|
|
22.8
|
%
|
|
968
|
|
|
23.6
|
%
|
Research and development expenditures
|
268
|
|
|
12.7
|
%
|
|
269
|
|
|
12.5
|
%
|
|
530
|
|
|
13.0
|
%
|
|
523
|
|
|
12.7
|
%
|
Other charges
|
25
|
|
|
1.2
|
%
|
|
17
|
|
|
0.8
|
%
|
|
42
|
|
|
1.0
|
%
|
|
32
|
|
|
0.8
|
%
|
Operating earnings
|
266
|
|
|
12.6
|
%
|
|
278
|
|
|
12.9
|
%
|
|
482
|
|
|
11.8
|
%
|
|
510
|
|
|
12.4
|
%
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
(32
|
)
|
|
(1.5
|
)%
|
|
(16
|
)
|
|
(0.7
|
)%
|
|
(57
|
)
|
|
(1.4
|
)%
|
|
(30
|
)
|
|
(0.7
|
)%
|
0 on sales of investments and businesses, net
|
—
|
|
|
—
|
%
|
|
3
|
|
|
0.1
|
%
|
|
7
|
|
|
0.2
|
%
|
|
20
|
|
|
0.5
|
%
|
Other
|
(10
|
)
|
|
(0.5
|
)%
|
|
(25
|
)
|
|
(1.2
|
)%
|
|
(3
|
)
|
|
(0.1
|
)%
|
|
(16
|
)
|
|
(0.4
|
)%
|
Total other income (expense)
|
(42
|
)
|
|
(2.0
|
)%
|
|
(38
|
)
|
|
(1.8
|
)%
|
|
(53
|
)
|
|
(1.3
|
)%
|
|
(26
|
)
|
|
(0.6
|
)%
|
Earnings from continuing operations before income taxes
|
224
|
|
|
10.6
|
%
|
|
240
|
|
|
11.2
|
%
|
|
429
|
|
|
10.5
|
%
|
|
484
|
|
|
11.8
|
%
|
Income tax expense (benefit)
|
(38
|
)
|
|
(1.8
|
)%
|
|
63
|
|
|
2.9
|
%
|
|
(25
|
)
|
|
(0.6
|
)%
|
|
148
|
|
|
3.6
|
%
|
Net Earnings
|
262
|
|
|
12.4
|
%
|
|
177
|
|
|
8.2
|
%
|
|
454
|
|
|
11.1
|
%
|
|
336
|
|
|
8.2
|
%
|
Less: Earnings attributable to noncontrolling interests
|
4
|
|
|
0.2
|
%
|
|
—
|
|
|
—
|
%
|
|
4
|
|
|
0.1
|
%
|
|
—
|
|
|
—
|
%
|
Earnings from continuing operations*
|
258
|
|
|
12.2
|
%
|
|
177
|
|
|
8.2
|
%
|
|
450
|
|
|
11.0
|
%
|
|
336
|
|
|
8.2
|
%
|
Earnings from discontinued operations, net of tax
|
—
|
|
|
—
|
%
|
|
5
|
|
|
0.2
|
%
|
|
—
|
|
|
—
|
%
|
|
3
|
|
|
0.1
|
%
|
Net earnings*
|
$
|
258
|
|
|
12.2
|
%
|
|
$
|
182
|
|
|
8.5
|
%
|
|
$
|
450
|
|
|
11.0
|
%
|
|
$
|
339
|
|
|
8.3
|
%
|
Earnings per diluted common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.94
|
|
|
|
|
$
|
0.60
|
|
|
|
|
$
|
1.62
|
|
|
|
|
$
|
1.09
|
|
|
|
Discontinued operations
|
—
|
|
|
|
|
0.01
|
|
|
|
|
—
|
|
|
|
|
0.01
|
|
|
|
|
$
|
0.94
|
|
|
|
|
|
$
|
0.61
|
|
|
|
|
|
$
|
1.62
|
|
|
|
|
$
|
1.10
|
|
|
|
* Amounts attributable to Motorola Solutions, Inc. common stockholders.
** Percentages may not add due to rounding
Results of Operations—
Three months ended
June 29, 2013
compared to
three months ended
June 30, 2012
Net Sales
Net sales were
$2.1 billion
in the
second
quarter of
2013
,
down
$41 million
, or
2%
, compared to net sales of
$2.1 billion
in the
second
quarter of
2012
. The
decrease
in net sales reflects a
$33 million
, or
5%
,
decrease
in net sales in the Enterprise segment driven by declines in North America and Latin America, and an
$8 million
, or
1%
,
decrease
in net sales in the Government segment driven by declines in Latin America and APME.
Gross Margin
Gross margin was
$1.0 billion
, or
48.8%
of net sales, in the
second
quarter of
2013
, compared to
$1.1 billion
, or
49.3%
of net sales, in the
second
quarter of
2012
. The
decrease
in gross margin percentage is driven primarily from the Enterprise segment related to: (i) lower sales in the iDEN product group, which typically has higher margins, (ii) lower gross margin percentages in our mobile computing product group, driven by the acquisition of Psion, which has a slightly lower margin profile, and (iii) an unfavorable product and service mix. Gross margin percentage in the Government segment was slightly higher in the
second
quarter of
2013
, as compared to the
second
quarter of
2012
, driven by a favorable product mix.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses
decreased
5%
to
$470 million
, or
22.3%
of net sales, in the
second
quarter of
2013
, compared to
$496 million
, or
23.1%
of net sales, in the
second
quarter of
2012
. The decrease is primarily driven by a decrease in pension expense, partially offset by SG&A expenses relating to the Psion acquisition that closed in the fourth quarter of 2012.
Research and Development Expenditures
Research and development (“R&D”) expenditures
decreased
slightly to
$268 million
, or
12.7%
of net sales, in the
second
quarter of
2013
, from
$269 million
, or
12.5%
of net sales, in the
second
quarter of
2012
. The slight
decrease
in R&D expenditures is primarily due to reduced iDEN expenses within the Enterprise segment, partially offset by increased R&D related to the Psion acquisition.
Other Charges
We recorded net charges of
$25 million
in Other charges in the
second
quarter of
2013
, compared to net charges of
$17 million
in the
second
quarter of
2012
. The net charges in the
second
quarter of
2013
included: (i)
$19 million
of net reorganization of business charges and (ii)
$6 million
of charges relating to the amortization of intangibles. The net charges in the
second
quarter of
2012
included: (i)
$11 million
of net reorganization of business charges and (ii)
$6 million
of charges relating to the amortization of intangibles. The net reorganization of business charges are discussed in further detail in the “Reorganization of Businesses” section.
Net Interest Expense
Net interest expense was
$32 million
in the
second
quarter of
2013
, compared to net interest expense of
$16 million
in the
second
quarter of
2012
. Net interest expense in the
second
quarter of
2013
included interest expense of
$38 million
, partially offset by interest income of
$6 million
. Net interest expense in the
second
quarter of
2012
included interest expense of
$25 million
, partially offset by interest income of
$9 million
. The increase in net interest expense in the
second
quarter of
2013
is primarily attributable to: (i) higher interest expense driven by an increase of average debt outstanding and (ii) a decrease in interest income due to lower average cash and cash equivalents during the
second
quarter of
2013
compared to the
second
quarter of
2012
.
Net Gains on Sales of Investments and Businesses
We had no sales of investments and businesses in the
second
quarter of
2013
, as compared to
$3 million
in the
second
quarter of
2012
. In the
second
quarter of
2012
, the net gains were primarily related to sales of certain equity investments.
Other
Net Other expense was
$10 million
in the
second
quarter of
2013
, compared to net Other expense of
$25 million
in the
second
quarter of
2012
. The net Other expense in the
second
quarter of
2013
was primarily comprised of: (i) an
$8 million
loss on foreign currency and (ii) an investment impairment of
$4 million
. The net Other expense in the
second
quarter of
2012
was primarily comprised of: (i) a
$21 million
loss on foreign currency and (ii) a
$6 million
loss from the extinguishment of debt.
Effective Tax Rate
We recorded
$38 million
of net tax benefits in the
second
quarter of
2013
, resulting in a negative effective tax rate, compared to
$63 million
of net tax expense in the
second
quarter of
2012
, resulting in an effective tax rate of
26%
. Our effective tax rate in the
second
quarter of
2013
was favorably impacted by $118 million of net tax benefits largely associated with excess foreign tax credits on undistributed foreign earnings.
The tax benefit for excess foreign tax credits relates to undistributed foreign earnings of certain non-U.S. subsidiaries reorganized under our recently implemented holding company structure, which allowed these tax credits to be realized, and represents the year-to-date amount of the full year tax benefit. The tax benefit related to the excess foreign tax credits is recognized in our annual effective tax rate and will favorably impact our effective tax rate for the remainder of 2013.
Our effective tax rate in the second quarter of 2012 was lower than the U.S. statutory tax rate of 35% primarily due to a reduction in unrecognized tax benefits for facts that then indicated the extent to which certain tax positions were more-likely-than-not of being sustained.
Earnings from Continuing Operations
After taxes, we had net earnings from continuing operations of
$258 million
, or
$0.94
per diluted share, in the
second
quarter of
2013
, compared to net earnings from continuing operations of
$177 million
, or
$0.60
per diluted share, in the
second
quarter of
2012
.
The increase in net earnings from continuing operations in the
second
quarter of
2013
, as compared to the
second
quarter of
2012
, was primarily driven by: (i) a lower effective tax rate and (ii) decreased pension expense, partially offset by: (i) a $31 million decrease in gross margin primarily due to sales declines, (ii) an unfavorable product and service mix in our Enterprise segment, and (iii) a $16 million increase in net interest expense. The increase in earnings per diluted share was driven by higher net earnings and the reduction in shares outstanding as a result of our share repurchase program.
Earnings from Discontinued Operations
In the
second
quarter of
2013
, we had no after-tax earnings from discontinued operations, compared to
$5 million
earnings from discontinued operations, or
$0.01
per diluted share, in the
second
quarter of
2012
. The earnings from discontinued operations in the
second
quarter of
2012
were primarily driven by a purchase price adjustment of a previously disposed business.
Results of Operations—
Six months ended
June 29, 2013
compared to
six months ended
June 30, 2012
Net Sales
Net sales were
$4.1 billion
in the
first half
of
2013
, down $
24 million
, or
1%
, compared to net sales of
$4.1 billion
in the
first half
of
2012
. The
decrease
in net sales reflects a
$61 million
, or
5%
,
decrease
in net sales in the Enterprise segment driven by declines in North America and Latin America, partially offset by a
$37 million
, or
1%
,
increase
in net sales in the Government segment driven by growth in all regions with the exception of APME.
Gross Margin
Gross margin was
$2.0 billion
, or
48.6%
of net sales, in the
first half
of
2013
, compared to
$2.0 billion
, or
49.5%
of net sales, in the
first half
of
2012
. The
decrease
in gross margin percentage is driven primarily from the Enterprise segment related to: (i) lower sales in the iDEN product group, which typically have higher margins, (ii) lower gross margin percentages in our mobile computing product group, driven by the acquisition of Psion, which has a slightly lower margin profile, and (iii) an unfavorable product and service mix. Gross margin percentage in the Government segment was higher in the
first half
of
2013
, as compared to the
first half
of
2012
, driven by a favorable product mix.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses
decreased
4%
to
$930 million
, or
22.8%
of net sales, in the
first half
of
2013
, compared to
$968 million
, or
23.6%
of net sales, in the
first half
of
2012
. The decrease was primarily driven by a decrease in pension expense, partially offset by SG&A expenses relating to the Psion acquisition.
Research and Development Expenditures
Research and development (“R&D”) expenditures
increased
1%
to
$530 million
, or
13.0%
of net sales, in the
first half
of
2013
, compared to
$523 million
, or
12.7%
of net sales, in the
first half
of
2012
. The increase in R&D expenditures is primarily due to the Psion acquisition.
Other Charges
We recorded net charges of
$42 million
in Other charges in the
first half
of
2013
, compared to net charges of
$32 million
in the
first half
of
2012
. The net charges in the
first half
of
2013
included: (i)
$30 million
of net reorganization of business charges and (ii)
$12 million
of charges relating to the amortization of intangibles. The net charges in the
first half
of
2012
included: (i)
$20 million
of net reorganization of business charges and (ii)
$12 million
of charges relating to the amortization of intangibles. The net reorganization of business charges are discussed in further detail in the “Reorganization of Businesses” section.
Net Interest Expense
Net interest expense was
$57 million
in the
first half
of
2013
, compared to net interest expense of
$30 million
in the
first half
of
2012
. Net interest expense in the
first half
of
2013
included interest expense of
$68 million
, partially offset by interest
income of
$11 million
. Net interest expense in the
first half
of
2012
included interest expense of
$50 million
, partially offset by interest income of
$20 million
. The increase in net interest expense in the
first half
of
2013
is primarily attributable to: (i) higher interest expense driven by an increase of average debt outstanding and (ii) a decrease in interest income due to lower average cash and cash equivalents during the
first half
of
2013
compared to the
first half
of
2012
.
Net Gains on Sales of Investments and Businesses
Net gains on sales of investments and businesses were
$7 million
in the
first half
of
2013
, compared to
$20 million
in the
first half
of
2012
. In both the first halves of
2013
and
2012
, the net gains were primarily related to sales of our equity investments.
Other
Net Other expense was
$3 million
in the
first half
of
2013
, compared to net Other expense of
$16 million
in the
first half
of
2012
. The net Other expense in the
first half
of
2013
was primarily comprised of: (i) a
$4 million
loss on foreign currency and (ii) an investment impairment of
$4 million
, offset by
$5 million
of equity method investment earnings. The net Other expense in the
first half
of
2012
was primarily comprised of an
$11 million
loss on foreign currency and a
$6 million
loss from the extinguishment of debt.
Effective Tax Rate
We recorded
$25 million
of net tax benefits in the
first half
of
2013
, resulting in a negative effective tax rate, compared to
$148 million
of net tax expense in the
first half
of
2012
, resulting in an effective tax rate of 31%. Our effective tax rate in the first half of 2013 was impacted by: (i) $118 million of net tax benefits largely associated with excess foreign tax credits on undistributed foreign earnings, (ii) a $25 million reduction in our deferred tax liability for undistributed foreign earnings primarily due to our assertion that certain earnings are now permanently reinvested, and (iii) a $12 million tax benefit for R&D tax credits.
The tax benefit for excess foreign tax credits relates to undistributed foreign earnings of certain non-U.S. subsidiaries reorganized under our recently implemented holding company structure, which allowed these tax credits to be realized, and represents the year-to-date amount of the full year tax benefit. The tax benefit related to the excess foreign tax credits is recognized in our annual effective tax rate and will favorably impact our effective tax rate for the remainder of 2013.
Our effective tax rate in the first half of 2012 was lower than the U.S. statutory tax rate of 35% primarily due to a reduction in unrecognized tax benefits for facts that then indicated the extent to which certain tax positions were more-likely-than-not of being sustained.
Earnings from Continuing Operations
After taxes, we had net earnings from continuing operations of
$450 million
, or
$1.62
per diluted share, in the
first half
of
2013
, compared to net earnings from continuing operations of
$336 million
, or
$1.09
per diluted share, in the
first half
of
2012
.
The increase in net earnings from continuing operations in the
first half
of
2013
, as compared to the
first half
of
2012
, was primarily driven by: (i) a lower effective tax rate and (ii) decreased pension expense, partially offset by: (i) a $49 million decrease in gross margin primarily due to sales declines and an unfavorable product and service mix in our Enterprise segment and (ii) a $27 million increase in net interest expense. The increase in earnings per diluted share was driven by higher net earnings and the reduction in shares outstanding as a result of our share repurchase program.
Earnings from Discontinued Operations
In the
first half
of
2013
, we had no after-tax earnings from discontinued operations, compared to
$3 million
of earnings from discontinued operations, or
$0.01
per diluted share, in the
first half
of
2012
. The earnings from discontinued operations in the
first half
of
2012
were primarily driven by a purchase price adjustment of a previously disposed business, offset by a loss related to the exit of the amateur, marine and airband business.
Segment Information
The following commentary should be read in conjunction with the financial results of each reporting segment for the
three and six months ended
June 29, 2013
and
June 30, 2012
as detailed in Note 12, “Segment Information,” of our condensed consolidated financial statements.
Government Segment
For the
second
quarter of
2013
, the segment’s net sales represented
69%
of our consolidated net sales, compared to
68%
of our consolidated net sales for the
second
quarter of
2012
. For the
first half
of
2013
, the segment’s net sales represented
69%
of our consolidated net sales, compared to
67%
of our consolidated net sales for the
first half
of
2012
.
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
June 29,
2013
|
|
June 30,
2012
|
|
% Change
|
|
June 29,
2013
|
|
June 30,
2012
|
|
% Change
|
Segment net sales
|
$
|
1,451
|
|
|
$
|
1,459
|
|
|
(1
|
)%
|
|
$
|
2,797
|
|
|
$
|
2,760
|
|
|
1
|
%
|
Operating earnings
|
215
|
|
|
197
|
|
|
9
|
%
|
|
395
|
|
|
347
|
|
|
14
|
%
|
Three months ended
June 29, 2013
compared to
three months ended
June 30, 2012
The segment’s net sales
decreased
$8 million
, or
1%
, to
$1.5 billion
in the
second
quarter of
2013
, as compared to
$1.5 billion
during the
second
quarter of
2012
. The
decrease
in net sales in the Government segment reflects a decrease in data products, partially offset by an increase in sales of: (i) mission-critical radio products and (ii) integration services. On a geographic basis, net sales increased in North America and EA, and declined in Latin America and APME, compared to the year-ago quarter. Net sales in North America continued to comprise a significant portion of the segment’s business, accounting for approximately 66% of the segment’s sales in the
second
quarter of
2013
and 64% of the segment’s net sales in the
second
quarter of
2012
.
The segment had operating earnings of
$215 million
in the
second
quarter of
2013
, compared to
$197 million
in the
second
quarter of
2012
. As a percentage of net sales in the
second
quarter of
2013
as compared to the
second
quarter of
2012
, gross margin was 1% higher, SG&A expenditures decreased, and R&D expenditures were flat. The increase in operating earnings was primarily due to: (i) an increase in gross margin and (ii) a decrease in SG&A expenses, driven by a decrease in pension expense.
Six months ended
June 29, 2013
compared to
six months ended
June 30, 2012
The segment’s net sales
increased
$37 million
, or
1%
, to
$2.8 billion
in the
first half
of
2013
, as compared to
$2.8 billion
in the
first half
of
2012
. The
increase
in net sales in the Government segment reflects an increase in sales of: (i) mission-critical radio products and (ii) integration services, partially offset by a decrease in: (i) professional and commercial radio and (ii) data products. On a geographic basis, net sales increased in North America, Latin America and EA, and declined in APME, compared to the
first half
of
2012
. Net sales in North America continued to comprise a significant portion of the segment’s business, accounting for approximately 65% of the segment’s net sales in the
first half
of
2013
and 63% of the segment’s net sales in the
first half
of
2012
.
The segment had operating earnings of
$395 million
in the
first half
of
2013
, compared to
$347 million
in the
first half
of
2012
. As a percentage of net sales in the
first half
of
2013
as compared to the
first half
of
2012
, gross margin was 2% higher, SG&A expenditures decreased, and R&D expenditures increased. The increase in operating earnings was primarily due to: (i) an increase in gross margin and (ii) a decrease in SG&A expenses, driven by a decrease in pension expense.
Enterprise Segment
For the
second
quarter of
2013
, the segment’s net sales represented
31%
of our consolidated net sales, compared to
32%
of our consolidated net sales for the
second
quarter of
2012
. For the
first half
of
2013
, the segment’s net sales represented
31%
of our consolidated net sales, compared to
33%
of our consolidated net sales for the
first half
of
2012
.
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|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
June 29,
2013
|
|
June 30,
2012
|
|
% Change
|
|
June 29,
2013
|
|
June 30,
2012
|
|
% Change
|
Segment net sales
|
$
|
656
|
|
|
$
|
689
|
|
|
(5
|
)%
|
|
$
|
1,283
|
|
|
$
|
1,344
|
|
|
(5
|
)%
|
Operating earnings
|
51
|
|
|
81
|
|
|
(37
|
)%
|
|
87
|
|
|
163
|
|
|
(47
|
)%
|
Three months ended
June 29, 2013
compared to
three months ended
June 30, 2012
The segment’s net sales
decreased
$33 million
, or
5%
, to
$656 million
in the
second
quarter of
2013
, as compared to
$689 million
in the
second
quarter of
2012
. The
5%
decrease
in net sales in the Enterprise segment reflects a decrease in: (i) iDEN and (ii) data capture equipment sales. The decrease in net sales for the segment reflects a decline in North America and Latin America, offset by an increase in EA and APME, compared to the year-ago quarter. The decline in North America was driven by lower sales in the data capture and mobile computing product groups as a result of fewer large deals as customers have reduced information technology hardware spend, while the decline in Latin America was driven by a decline in iDEN. The
increases in EA and APME were primarily driven by mobile computing sales, with EA net sales increasing due to the Psion acquisition. Net sales in North America continued to comprise a significant portion of the segment’s business, accounting for approximately 45% of the segment’s net sales in the
second
quarter of
2013
and 46% of the segment’s net sales in the
second
quarter of
2012
.
The segment had operating earnings of
$51 million
in the
second
quarter of
2013
, compared to
$81 million
in the
second
quarter of
2012
. As a percentage of net sales in the
second
quarter of
2013
as compared to the
second
quarter of
2012
, gross margin was 3% lower, SG&A expenditures decreased, and R&D expenditures were flat. The decrease in operating earnings was due to a decline in gross margin primarily attributable to the decline in iDEN sales, which typically have higher margins, and an unfavorable product and service mix. The decrease in SG&A expenses was driven by a decrease in pension expense.
Six months ended
June 29, 2013
compared to
six months ended
June 30, 2012
The segment’s net sales
decreased
$61 million
, or
5%
, to
$1.3 billion
in the
first half
of
2013
, as compared to net sales of
$1.3 billion
in the
first half
of
2012
. The
5%
decrease
in net sales in the Enterprise segment reflects a decrease in sales of: (i) iDEN, (ii) data capture, and (iii) WLAN equipment as a result of fewer large deals as customers have reduced information technology hardware spend, partially offset by an increase in mobile computing sales due to the Psion acquisition. The decrease in net sales for the segment reflects a decline in North America and Latin America, offset by an increase in EA and APME, compared to the
first half
of
2012
. The decline in North America was driven by lower sales in the data capture, mobile computing, and WLAN product groups, while the decline in Latin America was driven by a decline in iDEN. The increases in EA and APME were primarily driven by mobile computing sales, with EA net sales increasing due to the Psion acquisition. Net sales in North America continued to comprise a significant portion of the segment’s business, accounting for approximately 45% of the segment’s net sales in the
first half
of
2013
and 48% of the segment’s net sales in the
first half
of
2012
.
The segment had operating earnings of
$87 million
in the
first half
of
2013
, compared to operating earnings of
$163 million
in the
first half
of
2012
. As a percentage of net sales in the
first half
of
2013
as compared to the
first half
of
2012
, gross margin was 4% lower, SG&A expenditures decreased, and R&D expenditures increased slightly. The decrease in operating earnings was due to: (i) a decline in gross margin primarily attributable to the decline in iDEN sales, which typically have higher margins and (ii) an unfavorable product and service mix. The decrease in SG&A expenses was driven by a decrease in pension expense, and the increase in R&D expenditures was primarily due to the Psion acquisition.
Reorganization of Businesses
During the
first half
of
2013
, we implemented various productivity improvement plans aimed at achieving long term, sustainable profitability by driving efficiencies and reducing operating costs. During the
second
quarter of
2013
, we recorded net reorganization of business charges of
$28 million
related to the separation of approximately
500
employees, of which
200
were indirect employees and
300
were direct employees. Of the
$28 million
,
$19 million
of charges were recorded within Other charges and
$9 million
of charges in Cost of sales in our condensed consolidated statements of operations. The
$28 million
of charges are made up of
$30 million
for employee separation costs, offset by
$2 million
of reversals for accruals no longer needed.
During the
six months ended
June 29, 2013
, we recorded net reorganization of business charges of
$39 million
related to the separation of approximately
700
employees, of which
300
were indirect employees and
400
were direct employees. The
$39 million
recorded for net reorganization of business charges included
$30 million
of charges in Other charges and
$9 million
of charges in Cost of sales in the Company's condensed consolidated statements of operations. Included in the aggregate
$39 million
are charges of
$46 million
for employee separation costs, offset by
$7 million
of reversals for accruals no longer needed.
During the
three months ended
June 30, 2012
, we recorded net reorganization of business charges of
$14 million
related to the separation of approximately 200 primarily indirect employees. Included in the aggregate $14 million of charges were $11 million of charges in Other charges and $3 million of charges in Costs of sales in our condensed consolidated statements of operations.
During the
six months ended
June 30, 2012
, we recorded net reorganization of business charges of
$23 million
, including $20 million of charges in Other charges and $3 million of charges in Costs of sales in our condensed consolidated statements of operations. Included in the aggregate $23 million are charges of $26 million for employee separation costs and $1 million for building impairment charges, offset by $4 million of reversals for accruals no longer needed.
We expect to realize cost-saving benefits of approximately $20 million during the remaining
six
months of
2013
from the plans that were initiated during the first
six
months of
2013
. Beyond
2013
, we expect the reorganization plans initiated during the first
six
months of
2013
to provide annualized cost savings of approximately $44 million, consisting of: (i) $29 million of savings in SG&A expenses, (ii) $10 million of savings in Cost of sales, and (iii) $5 million of savings in R&D expenditures.
The following table displays the net charges incurred by business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 29, 2013
|
|
June 30, 2012
|
|
June 29, 2013
|
|
June 30, 2012
|
Government
|
$
|
18
|
|
|
$
|
9
|
|
|
$
|
25
|
|
|
$
|
16
|
|
Enterprise
|
10
|
|
|
5
|
|
|
14
|
|
|
7
|
|
|
$
|
28
|
|
|
$
|
14
|
|
|
$
|
39
|
|
|
$
|
23
|
|
Cash payments for employee severance and exit costs in connection with the reorganization of business plans were
$32 million
in the first
six
months of
2013
, and $30 million in the first
six
months of
2012
. Of the
$42 million
of reorganization of businesses accruals at
June 29, 2013
,
$39 million
relate to employee separation costs and are expected to be paid in
2013
and
2014
. The remaining
$3 million
in accruals relate 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
$387 million
from
$3.6 billion
as of
December 31, 2012
to
$3.2 billion
as of
June 29, 2013
. The change in the balances is primarily due to
$1.1 billion
of capital returned to shareholders through share repurchases and dividends paid during the
first half
of
2013
, partially offset by: (i)
$593 million
of net proceeds from the issuance of debt, and (ii)
$51 million
generated by operating activities.
As highlighted in the condensed consolidated statements of cash flows, our liquidity and available capital resources are impacted by four key components: (i) cash and cash equivalents, (ii) operating activities, (iii) investing activities, and (iv) financing activities.
Cash and Cash Equivalents
Our cash and cash equivalents (which are highly-liquid investments with an original maturity of three months or less) were
$1.5 billion
at
June 29, 2013
and
December 31, 2012
. At
June 29, 2013
, approximately
$409 million
of this amount was held in the U.S. and approximately
$1.1 billion
was held by the Company or its subsidiaries in other countries (including $271 million in China and $226 million in Germany). At both
June 29, 2013
and
December 31, 2012
, restricted cash was
$63 million
(including
$3 million
held outside the U.S.).
Repatriation of foreign funds continues to be important given our domestic cash needs. We continuously analyze and review various repatriation strategies to efficiently repatriate funds in the context of meeting our business needs in a tax efficient manner. During the first
six
months of 2013, we repatriated $101 million in funds to the U.S. from international jurisdictions. We have approximately
$1.0 billion
of earnings in foreign subsidiaries that are not permanently reinvested and may be repatriated without an additional income tax charge, given the U.S. federal and foreign income tax accrued on undistributed earnings and the utilization of available foreign tax credits. Subsequent to quarter end, we made a $150 million cash payment for previously accrued non-U.S. income and withholding taxes associated with an intercompany foreign dividend.
Where appropriate, we may also pursue capital reduction activities; however, such activities can be more involved and lengthy. While we regularly repatriate funds, and a portion of offshore funds can be repatriated with minimal adverse financial impact, repatriation of some of these funds may be subject to delay for local country approvals and could have potential adverse cash tax consequences.
Operating Activities
Net cash provided by operating activities from continuing operations in the
first half
of
2013
was
$51 million
, as compared to
$322 million
in the
first half
of
2012
. Operating cash flows in the
first half
of 2013, as compared to the
first half
of
2012
, were negatively impacted by: (i) the timing of our long term contract milestone billings, (ii) increased volume of sales towards the end of the second quarter of 2013 which unfavorably affected receivable collections, (iii) timing of accounts payable, (iv) lower operating earnings, and (v) Indian tax deposits of $43 million.
In the first quarter of 2013, $43 million was seized by the Indian tax authorities from our Indian subsidiary related to Indian income tax and interest assessments currently under review by the Indian and U.S. Competent Authorities. We continue to appeal the Indian tax authorities' seizure of the funds and believe that we will ultimately prevail on this matter and that the related tax and interest reserves are appropriately stated.
We contributed
$50 million
to our U.S. pension plans during the
first half
of
2013
, compared to
$132 million
contributed in the
first half
of
2012
. Subsequent to quarter end, we contributed an additional $26 million to our U.S. pension plans. We expect to make cash contributions of approximately $225 million to our U.S. pension plans in 2013. We contributed
$17 million
to our non-U.S. pension plans during the
first half
of
2013
, compared to
$18 million
contributed in the
first half
of
2012
.
Investing Activities
Net cash provided by investing activities was
$308 million
in the
first half
of
2013
, compared to
$1.2 billion
in the
first half
of
2012
. This
$878 million
decrease
was primarily due to the $1.2 billion of proceeds from sales of Sigma Fund investments in the
first half
of 2012, as compared to
$376 million
of proceeds from Sigma Fund investments in the
first half
of
2013
.
Sigma Fund:
We and our wholly-owned subsidiaries invest most of our U.S. dollar-denominated cash in a fund, which we refer to as the Sigma Fund, that allows us to efficiently manage our cash around the world. The aggregate fair value of Sigma Fund investments was
$1.8 billion
at
June 29, 2013
(including
$1.0 billion
held outside the U.S.), compared to
$2.1 billion
at
December 31, 2012
(including
$1.0 billion
held outside the U.S.).
At
June 29, 2013
and
December 31, 2012
, the Sigma Fund was invested in cash and U.S. government, agency and government-sponsored enterprise obligations. The investments had a weighted average maturity of less than 30 days. This reflects a strategic decision to prioritize liquidity and capital preservation.
We continually 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 current operating requirements over the next twelve months. During those twelve months, we plan to use cash in excess of what is required to run the business for dividends, capital expenditures, and a combination of share repurchases and acquisitions.
Acquisition and Investments
: The Company used net cash for acquisitions and new investment activities of $15 million during the first half of 2013 compared to net cash proceeds of $68 million in the first half of 2012. The $15 million used for new investments and businesses in the first six months of 2013 relates to a number of small investments. The net cash proceeds of $68 million in the first six months of 2012 primarily relates to an agreement reached with Nokia Siemens Networks B.V. during the period to assume the Norwegian Terrestrial Trunked Radio (“TETRA”) public safety network. Under this arrangement we broadened our scope from being a sub-supplier of the technology for the core TETRA digital radio communications infrastructure to become the prime contractor, including all managed services for the rollout, implementation, and operation of the system.
Capital Expenditures:
Capital expenditures slightly
decreased
in the first
six
months of
2013
to
$89 million
, compared to
$101 million
in the first
six
months of
2012
, primarily driven by a $13 million decrease in opportunity-based expenditures related to our services group.
Sales of Investments and Businesses
: We had
$21 million
of proceeds related to the sales of investments and businesses in the first
six
months of
2013
, compared to
$67 million
used for investments and businesses in the first
six
months of
2012
. The
$67 million
used for investments and businesses in the first
six
months of 2012 primarily relates to payments to NSN related to the purchase price adjustment from the sale of the Networks business, partially offset by proceeds from sales of certain equity investments. The proceeds in the first
six
months of 2013 were primarily comprised of proceeds from sales of certain equity investments.
Financing Activities
Net cash used for financing activities was
$341 million
in the first
six
months of
2013
, compared to
$1.6 billion
in the first
six
months of
2012
. Cash used for financing activities in the first
six
months of
2013
was primarily comprised of: (i)
$907 million
used for purchases of our common stock under our share repurchase program and (ii)
$143 million
of cash used for the payment of dividends, partially offset by: (i)
$593 million
of net proceeds from the issuance of debt and (ii)
$100 million
of net proceeds from the issuance of common stock in connection with our employee stock option plans and employee stock purchase plan. Net cash used for financing activities in the first
six
months of
2012
was primarily comprised of: (i)
$1.8 billion
used for purchases of our common stock under our share repurchase program, (ii)
$411 million
of cash used for the repayment of debt, and (iii)
$134 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)
$63 million
of net cash received from the issuance of common stock in connection with our employee stock option plans and employee stock purchase plans.
Long-Term Debt:
We had outstanding long-term debt of
$2.5 billion
at
June 29, 2013
, and
$1.9 billion
at
December 31, 2012
, net of current portions of
$4 million
at both
June 29, 2013
and
December 31, 2012
. In the first quarter of 2013, we issued an aggregate face principal amount of $600 million of 3.500% Senior Notes due March 1, 2023, recognizing net proceeds of $588 million, after debt discount and issuance costs.
We have investment grade ratings on our senior unsecured long-term debt from the three largest U.S. national rating agencies. 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.
We continue to assess our capital structure and address opportunities to return capital to shareholders. Depending on prevailing market conditions, we expect our capital structure to be in a “net debt” (cash and cash equivalents plus Sigma Fund and short term investments less long-term debt) position by sometime in 2014.
Share Repurchase Program:
We paid an aggregate of $550 million during the
second
quarter of
2013
, including transaction costs, to repurchase
9.5 million
shares at an average price of
$57.80
per share. We paid an aggregate of
$907 million
during the
first half
of
2013
, including transaction costs, to repurchase
15.4 million
shares at an average price of
$58.75
per share. All repurchased shares have been retired.
As of June 29, 2013, we have used approximately $4.5 billion of the share repurchase authority, including transaction costs, to repurchase shares, leaving approximately
$545 million
of authority available for future repurchases. On July 24, 2013, we announced that our 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 $7.0 billion.
Payment of Dividends:
During the
six months ended
June 29, 2013
, we paid
$143 million
in cash dividends to holders of our common stock. Subsequent to
June 29, 2013
, we paid $69 million in cash dividends to holders of our common stock. On July 24, 2013, we announced that our Board of Directors approved an increase in the quarterly cash dividend from $0.26 per share to $0.31 per share of common stock.
Credit Facilities
As of
June 29, 2013
, we had a
$1.5 billion
unsecured syndicated revolving credit facility (the “2011 Motorola Solutions Credit Agreement”) scheduled to mature on June 30, 2014. We must comply with certain customary covenants, including 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
June 29, 2013
. We did not borrow under the 2011 Motorola Solutions Credit Agreement during the
six months ended
June 29, 2013
.
Long-Term Customer Financing Commitments
Outstanding Commitments:
Certain purchasers of our products and services 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 products and services. These requests may include all or a portion of the purchase price of the products and services. 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
$91 million
at
June 29, 2013
, compared to
$84 million
at
December 31, 2012
.
Outstanding Long-Term Receivables:
We had net non-current long-term receivables of
$22 million
at
June 29, 2013
, compared to
$60 million
at
December 31, 2012
. These long-term receivables are generally interest bearing, with interest rates generally ranging from 2% to 13%.
Sales of Receivables
The following table summarizes the proceeds received from sales of accounts receivable and long-term customer financing receivables for the
three and six months ended
June 29, 2013
and
June 30, 2012
:
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|
|
|
|
|
|
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Three Months Ended
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|
Six Months Ended
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|
June 29, 2013
|
|
June 30, 2012
|
|
June 29, 2013
|
|
June 30, 2012
|
Cumulative quarterly proceeds received from one-time sales:
|
|
|
|
|
|
|
|
Accounts receivable sales proceeds
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
7
|
|
Long-term receivables sales proceeds
|
24
|
|
|
62
|
|
|
52
|
|
|
129
|
|
Total proceeds from sales of accounts receivable
|
$
|
26
|
|
|
$
|
64
|
|
|
$
|
55
|
|
|
$
|
136
|
|
At
June 29, 2013
, we had retained servicing obligations for
$390 million
of sold long-term receivables, compared to
$375 million
of sold long-term receivables at
December 31, 2012
. Servicing obligations are limited to collection activities related to the sales of accounts receivables and long-term receivables.
Other Contingencies
Potential Contractual Damage Claims in Excess of Underlying Contract Value:
In certain circumstances, we 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, our payment is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, for which procedures typically allow us to challenge the other party’s claims. 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 the contract value.
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.
In addition, pursuant to the Master Separation and Distribution Agreement and certain other agreements with Motorola Mobility, Motorola Mobility agreed to indemnify us for certain liabilities, and we agreed to indemnify Motorola Mobility for certain liabilities, in each case for uncapped amounts.
Recent Accounting Pronouncements
In February 2013, the Financing Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-04, “
Obligations Resulting from Joint and Several Liability Arrangements for which the Total Amount of the Obligation Is Fixed at the Reporting Date.”
The standard addresses the recognition, measurement, and disclosure of certain obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, including debt arrangements, other contractual obligations, and settled litigation and judicial rulings. U.S. GAAP does not currently include specific guidance on accounting for such obligations with joint and several liability which has resulted in diversity in practice. The ASU requires an entity to measure these obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The ASU also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The ASU is to be applied retrospectively to all prior periods presented for those obligations resulting from joint and several liability arrangements within the updates scope that exist within our statement of financial position at the beginning of the year of adoption. This guidance will be effective for us beginning January 1, 2014. We anticipate that the adoption of this standard will not have a material impact on our consolidated financial statements and footnote disclosures.
In June 2013, the FASB issued ASU No. 2013-08, “
Financial Services -
Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements.”
This ASU amends the criteria that define an investment company, clarifies the measurement guidance that applies to investment companies, and requires new disclosures. This guidance will be effective beginning January 1, 2014. We are currently assessing the impact of this standard on our consolidated financial statements and footnote disclosures.