Notes to Condensed Consolidated Financial Statements
(Dollars in millions, except as noted)
(Unaudited)
The condensed consolidated financial statements as of
March 29, 2014
and for the
three months ended
March 29, 2014
and
March 30, 2013
, include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to present fairly the condensed consolidated balance sheets, statements of operations, statements of comprehensive income, statement of stockholders' equity, and statements of cash flows of Motorola Solutions, Inc. (“Motorola Solutions” or the “Company”) for all periods presented.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended
December 31, 2013
. The results of operations for the
three months ended
March 29, 2014
are not necessarily indicative of the operating results to be expected for the full year.
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In January 2014, the FASB issued ASU No. 2014-05, “
Service Concession Arrangements.
” The ASU clarifies that an operating entity should not account for a services concession arrangement with a public-sector grantor as a lease if: (i) the grantor controls or has the ability to modify or approve the services the operating entity must provide, to whom it must provide them, and at what price and (ii) the grantor controls any residual interest in the infrastructure at the end of the arrangement. In addition, the infrastructure used in a service concession arrangement would not be recognized as property, plant and equipment of the operating entity. The ASU is to be applied on a modified retrospective basis to service concession arrangements outstanding upon adoption and will be effective for the Company beginning January 1, 2015. The Company is currently assessing the impact of this standard on its consolidated financial statements and footnote disclosures.
Statement of Operations Information
Other Charges
Other charges included in Operating earnings consist of the following:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 29,
2014
|
|
March 30,
2013
|
Other charges (income):
|
|
|
|
Intangibles amortization
|
$
|
5
|
|
|
$
|
6
|
|
Reorganization of businesses
|
21
|
|
|
11
|
|
Gain on sale of building and land
|
(21
|
)
|
|
—
|
|
|
$
|
5
|
|
|
$
|
17
|
|
During the
three months ended
March 29, 2014
, the Company completed the sale of a building and parcel of land with a net book value of
$3 million
for net cash proceeds of
$24 million
resulting in a gain on sale of
$21 million
.
Other Income (Expense)
Interest expense, net, and Other, both included in Other income (expense), consist of the following:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 29,
2014
|
|
March 30,
2013
|
Interest income (expense), net:
|
|
|
|
Interest expense
|
$
|
(30
|
)
|
|
$
|
(30
|
)
|
Interest income
|
5
|
|
|
5
|
|
|
$
|
(25
|
)
|
|
$
|
(25
|
)
|
Other:
|
|
|
|
Foreign currency gain (loss)
|
$
|
(2
|
)
|
|
$
|
4
|
|
Other
|
1
|
|
|
3
|
|
|
$
|
(1
|
)
|
|
$
|
7
|
|
Earnings Per Common Share
The computation of basic and diluted earnings per common share is as follows:
|
|
|
|
|
|
|
|
|
|
Net Earnings
|
Three Months Ended
|
March 29,
2014
|
|
March 30,
2013
|
Basic earnings per common share:
|
|
|
|
Earnings
|
$
|
127
|
|
|
$
|
192
|
|
Weighted average common shares outstanding
|
254.1
|
|
|
274.5
|
|
Per share amount
|
$
|
0.50
|
|
|
$
|
0.70
|
|
Diluted earnings per common share:
|
|
|
|
Earnings
|
$
|
127
|
|
|
$
|
192
|
|
Weighted average common shares outstanding
|
254.1
|
|
|
274.5
|
|
Add effect of dilutive securities:
|
|
|
|
Share-based awards
|
4.2
|
|
|
6.2
|
|
Diluted weighted average common shares outstanding
|
258.3
|
|
|
280.7
|
|
Per share amount
|
$
|
0.49
|
|
|
$
|
0.68
|
|
In the computation of diluted earnings per common share for the
three months ended
March 29, 2014
and
March 30, 2013
, the assumed exercise of
5.0 million
and
4.5 million
stock options, respectively, were excluded because their inclusion would have been antidilutive.
Balance Sheet Information
Cash and Cash Equivalents
The Company’s cash and cash equivalents (which are highly-liquid investments with an original maturity of three months or less) were
$3.1 billion
at
March 29, 2014
and
$3.2 billion
at
December 31, 2013
. Of these amounts,
$64 million
at
March 29, 2014
and
$63 million
at
December 31, 2013
were restricted.
Investments
Investments consist of the following:
|
|
|
|
|
|
|
|
|
March 29, 2014
|
March 29, 2014
|
|
December 31, 2013
|
Available-for-sale securities:
|
|
|
|
Government, agency, and government-sponsored enterprise obligations
|
$
|
15
|
|
|
$
|
15
|
|
Corporate bonds
|
8
|
|
|
7
|
|
Mutual funds
|
11
|
|
|
11
|
|
Common stock and equivalents
|
—
|
|
|
2
|
|
|
34
|
|
|
35
|
|
Other investments, at cost
|
211
|
|
|
201
|
|
Equity method investments
|
15
|
|
|
15
|
|
|
$
|
260
|
|
|
$
|
251
|
|
The Company had no unrealized gains or losses on its investments as of both
March 29, 2014
and
December 31, 2013
.
Accounts Receivable, Net
Accounts receivable, net, consists of the following:
|
|
|
|
|
|
|
|
|
|
March 29,
2014
|
|
December 31,
2013
|
Accounts receivable
|
$
|
1,788
|
|
|
$
|
1,976
|
|
Less allowance for doubtful accounts
|
(61
|
)
|
|
(56
|
)
|
|
$
|
1,727
|
|
|
$
|
1,920
|
|
Inventories, Net
Inventories, net, consist of the following:
|
|
|
|
|
|
|
|
|
|
March 29,
2014
|
|
December 31,
2013
|
Finished goods
|
$
|
257
|
|
|
$
|
232
|
|
Work-in-process and production materials
|
508
|
|
|
468
|
|
|
765
|
|
|
700
|
|
Less inventory reserves
|
(189
|
)
|
|
(178
|
)
|
|
$
|
576
|
|
|
$
|
522
|
|
Other Current Assets
Other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
March 29,
2014
|
|
December 31,
2013
|
Costs and earnings in excess of billings
|
$
|
392
|
|
|
$
|
390
|
|
Contract-related deferred costs
|
114
|
|
|
105
|
|
Tax-related deposits and refunds receivable
|
71
|
|
|
113
|
|
Other
|
136
|
|
|
161
|
|
|
$
|
713
|
|
|
$
|
769
|
|
Property, Plant and Equipment, Net
Property, plant and equipment, net, consists of the following:
|
|
|
|
|
|
|
|
|
|
March 29,
2014
|
|
December 31,
2013
|
Land
|
$
|
36
|
|
|
$
|
36
|
|
Building
|
651
|
|
|
649
|
|
Machinery and equipment
|
1,979
|
|
|
1,938
|
|
|
2,666
|
|
|
2,623
|
|
Less accumulated depreciation
|
(1,871
|
)
|
|
(1,813
|
)
|
|
$
|
795
|
|
|
$
|
810
|
|
During the first quarter of 2014, the Company entered into an arrangement to transfer its Reynosa, Mexico manufacturing operation including the land, building, equipment, inventory, and employees to a contract manufacturer. The transaction closed subsequent to the quarter ended March 29, 2014. As a result of the expected sales proceeds, the Company recognized an impairment loss of
$6 million
during the quarter ended March 29, 2014, within Other charges in its condensed consolidated statements of operations.
Depreciation expense for the
three months ended
March 29, 2014
and
March 30, 2013
was
$50 million
and
$45 million
, respectively.
Other Assets
Other assets consist of the following:
|
|
|
|
|
|
|
|
|
|
March 29,
2014
|
|
December 31,
2013
|
Intangible assets, net
|
$
|
103
|
|
|
$
|
87
|
|
Long-term receivables
|
47
|
|
|
6
|
|
Other
|
94
|
|
|
92
|
|
|
$
|
244
|
|
|
$
|
185
|
|
Accrued Liabilities
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
March 29,
2014
|
|
December 31,
2013
|
Deferred revenue
|
$
|
810
|
|
|
$
|
778
|
|
Compensation
|
276
|
|
|
334
|
|
Billings in excess of costs and earnings
|
354
|
|
|
295
|
|
Tax liabilities
|
92
|
|
|
95
|
|
Customer reserves
|
107
|
|
|
146
|
|
Dividend payable
|
79
|
|
|
79
|
|
Other
|
649
|
|
|
675
|
|
|
$
|
2,367
|
|
|
$
|
2,402
|
|
Other Liabilities
Other liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
March 29,
2014
|
|
December 31,
2013
|
Defined benefit plans, including split dollar life insurance arrangements
|
$
|
1,714
|
|
|
$
|
1,759
|
|
Postretirement health care benefit plan
|
118
|
|
|
117
|
|
Deferred revenue
|
293
|
|
|
302
|
|
Unrecognized tax benefits
|
61
|
|
|
102
|
|
Other
|
194
|
|
|
205
|
|
|
$
|
2,380
|
|
|
$
|
2,485
|
|
Stockholders’ Equity
Share Repurchase Program:
The Company paid an aggregate of
$57 million
during the
first quarter
of
2014
, including transaction costs, to repurchase approximately
one million
shares at an average price of
$66.32
per share. As of
March 29, 2014
, the Company had used approximately
$5.3 billion
of the share repurchase authority, including transaction costs, to repurchase shares, leaving
$1.7 billion
of authority available for future repurchases.
Payment of Dividends:
During the
three months ended
March 29, 2014
and
March 30, 2013
, the Company paid
$79 million
and
$72 million
, respectively, in cash dividends to holders of its common stock.
Accumulated Other Comprehensive Loss
The following table displays the changes in Accumulated other comprehensive loss, net of tax, by component from
January 1, 2014
to
March 29, 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains and Losses on Cash Flow Hedges
|
|
Unrealized Gains and Losses on Available-for-Sale Securities
|
|
Retirement Benefit Items
|
|
Foreign Currency Translation Adjustments
|
|
Total
|
Balance as of January 1, 2014
|
$
|
(1
|
)
|
|
$
|
(2
|
)
|
|
$
|
(2,188
|
)
|
|
$
|
(96
|
)
|
|
$
|
(2,287
|
)
|
Other comprehensive income before reclassifications
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
4
|
|
Amounts reclassified from accumulated other comprehensive loss
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
13
|
|
Current period change in Other comprehensive income (loss)
|
—
|
|
|
2
|
|
|
13
|
|
|
2
|
|
|
17
|
|
Balance as of March 29, 2014
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
(2,175
|
)
|
|
$
|
(94
|
)
|
|
$
|
(2,270
|
)
|
The following table displays the amounts reclassified from Accumulated other comprehensive loss and the affected line item in the condensed consolidated statement of operations during the
three months ended
March 29, 2014
and
March 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 29,
2014
|
|
March 30,
2013
|
|
|
Gains on cash flow hedges:
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
|
|
|
$
|
(1
|
)
|
|
Cost of sales
|
|
—
|
|
|
(1
|
)
|
|
Total before tax
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Tax (expense) or benefit
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
Net of tax
|
Amortization of Retirement Benefit Items:
|
|
|
|
|
|
Prior-service costs
|
$
|
(10
|
)
|
|
$
|
(11
|
)
|
|
Selling, general, and administrative expenses
|
Actuarial net losses
|
29
|
|
|
39
|
|
|
Selling, general, and administrative expenses
|
|
19
|
|
|
28
|
|
|
Total before tax
|
|
(6
|
)
|
|
(9
|
)
|
|
Tax benefit
|
|
$
|
13
|
|
|
$
|
19
|
|
|
Net of tax
|
|
|
|
|
|
|
Total reclassifications for the period, net of tax
|
$
|
13
|
|
|
$
|
18
|
|
|
|
|
|
3.
|
Debt and Credit Facilities
|
During the first quarter of 2013, the Company issued an aggregate face principal amount of
$600 million
of
3.500%
Senior Notes due
2023
, of which, after debt issuance costs and debt discounts, the Company recognized net proceeds from issuance of this debt of
$588 million
.
As of
March 29, 2014
, the Company had a
$1.5 billion
unsecured syndicated revolving credit facility (the “2011 Motorola Solutions Credit Agreement”) scheduled to mature on June 30, 2014. The Company must comply with certain customary covenants, including maximum leverage and minimum interest coverage ratios as defined in the 2011 Motorola Solutions Credit Agreement. The Company was in compliance with its financial covenants as of
March 29, 2014
. The Company did not borrow under the 2011 Motorola Solutions Credit Agreement during the
three months ended
March 29, 2014
.
Foreign Currency Risk
At
March 29, 2014
, the Company had outstanding foreign exchange contracts with notional amounts totaling
$703 million
, compared to
$837 million
outstanding at
December 31, 2013
. The Company does not believe these financial instruments should subject it to undue risk due to foreign exchange movements because gains and losses on these contracts should generally offset gains and losses 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 the Company’s condensed 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
March 29, 2014
, and the corresponding positions as of
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
Net Buy (Sell) by Currency
|
March 29,
2014
|
|
December 31,
2013
|
British Pound
|
$
|
262
|
|
|
$
|
257
|
|
Chinese Renminbi
|
(179
|
)
|
|
(181
|
)
|
Norwegian Krone
|
(105
|
)
|
|
(95
|
)
|
Brazilian Real
|
(49
|
)
|
|
(44
|
)
|
Israeli Shekel
|
(38
|
)
|
|
(40
|
)
|
Interest Rate Risk
At
March 29, 2014
, including the current portion, the Company had
$2.5 billion
of long-term debt, which is primarily priced at long-term, fixed interest rates.
As part of its liability management program, one of the Company’s European subsidiaries has outstanding interest rate agreements (“Interest Agreements”) relating to Euro-denominated loans. The interest on the Euro-denominated loans is variable. The Interest Agreements change the characteristics of interest payments from variable to maximum fixed-rate payments. The Interest Agreements are not accounted for as a part of a hedging relationship and, accordingly, the changes in the fair value of the Interest Agreements are included in Other income (expense) in the Company’s condensed consolidated statements of operations. The fair value of the Interest Agreements was in a liability position of
$3 million
at
March 29, 2014
and
$3 million
at
December 31, 2013
.
Counterparty Risk
The use of derivative financial instruments exposes the Company to counterparty credit risk in the event of non-performance by counterparties. However, the Company’s risk is limited to the fair value of the instruments when the derivative is in an asset position. The Company actively monitors its exposure to credit risk. As of
March 29, 2014
, all of the counterparties have investment grade credit ratings. The Company is not exposed to material net credit risk with any single counterparty. As of
March 29, 2014
, the Company was exposed to an aggregate net credit risk of approximately
$1 million
with all counterparties.
The following tables summarize the fair values and location in the condensed consolidated balance sheets of all derivative financial instruments held by the Company at
March 29, 2014
and
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Derivative Instruments
|
|
Assets
|
|
Liabilities
|
March 29, 2014
|
Fair
Value
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
Balance
Sheet
Location
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
2
|
|
|
Other assets
|
|
$
|
2
|
|
|
Other liabilities
|
Interest agreements
|
—
|
|
|
Other assets
|
|
3
|
|
|
Other liabilities
|
Total derivatives
|
$
|
2
|
|
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Derivative Instruments
|
|
Assets
|
|
Liabilities
|
December 31, 2013
|
Fair
Value
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
Balance
Sheet
Location
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
—
|
|
|
Other assets
|
|
$
|
1
|
|
|
Other liabilities
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
4
|
|
|
Other assets
|
|
1
|
|
|
Other liabilities
|
Interest agreements
|
—
|
|
|
Other assets
|
|
3
|
|
|
Other liabilities
|
Total derivatives not designated as hedging instruments
|
4
|
|
|
|
|
4
|
|
|
|
Total derivatives
|
$
|
4
|
|
|
|
|
$
|
5
|
|
|
|
The following table summarizes the effect of derivative instruments in the Company's condensed consolidated statements of operations for the
three months ended
March 29, 2014
and
March 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Statements of
Operations Location
|
Loss on Derivative Instruments
|
March 29,
2014
|
|
March 30,
2013
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
(1
|
)
|
|
$
|
(17
|
)
|
|
Other income (expense)
|
Total derivatives not designated as hedging instruments
|
$
|
(1
|
)
|
|
$
|
(17
|
)
|
|
|
The following table summarizes the gains recognized in the condensed consolidated financial statements for the
three months ended
March 29, 2014
and
March 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Financial Statement
Location
|
Foreign Exchange Contracts
|
March 29, 2014
|
|
March 30, 2013
|
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
Gains reclassified from Accumulated other comprehensive loss into Net earnings
|
$
|
—
|
|
|
$
|
1
|
|
|
Costs of sales
|
At
March 29, 2014
and
December 31, 2013
, the Company had valuation allowances of
$263 million
and
$256 million
, respectively, including
$230 million
and
$233 million
, respectively, relating to deferred tax assets for non-U.S. subsidiaries. The Company believes the remaining deferred tax assets are more-likely-than-not to be realizable based on estimates of future taxable income and the implementation of tax planning strategies.
Undistributed earnings the Company intends to reinvest indefinitely, and for which no income taxes have been provided, aggregate to
$1.4 billion
at March 29, 2014 and December 31, 2013. The Company currently has no plans to repatriate the foreign earnings permanently reinvested and therefore, the time and manner of repatriation is uncertain. If circumstances change and it becomes apparent that some or all of the permanently reinvested earnings will be remitted to the U.S. in the foreseeable future, an additional income tax charge may be necessary.
The Company evaluates its permanent reinvestment assertions with respect to foreign earnings at each reporting period and, except for certain earnings the Company intends to reinvest indefinitely due to the capital requirements of the foreign subsidiaries or due to local country restrictions, accrues for the U.S. federal and foreign tax applicable to the earnings. During the first quarter of 2013, the Company reassessed its unremitted earnings position and concluded that certain of its non-U.S. subsidiaries' earnings were permanently invested overseas. The Company intends to utilize the offshore earnings to fund foreign investments, such as potential acquisitions and capital expenditures. In the first quarter of 2013, the Company recorded a net tax benefit of
$25 million
related to reversals of deferred tax liabilities for undistributed foreign earnings, primarily due to the change in permanent reinvestment assertion.
As of
March 29, 2014
, the Company has approximately
$600 million
of foreign earnings not considered permanently reinvested and which may be repatriated without an additional tax charge, given the U.S. federal and foreign tax accrued on undistributed earnings and the utilization of available foreign tax credits.
The Company had unrecognized tax benefits of
$128 million
and
$156 million
at
March 29, 2014
and
December 31, 2013
, respectively, of which
$105 million
and
$131 million
, respectively, if recognized, would affect the effective tax rate, net of resulting changes to valuation allowances. The Company's liability for unrecognized tax benefits is classified within its condensed consolidated balance sheets within Accrued liabilities, Other liabilities, and Deferred income taxes, to the extent settlement will reduce deferred tax assets. During the three months ended
March 29, 2014
, the Company adjusted its unrecognized tax benefits for prior year tax positions for facts that now indicate the extent to which certain tax positions are more-likely-than-not of being sustained. The Company recorded a gross increase of
$19 million
and a gross decrease of
$49 million
to unrecognized tax benefits for prior year tax positions resulting in a net tax benefit of
$30 million
.
Based on the potential outcome of the Company’s 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 to exceed
$25 million
.
The Company has audits pending in several tax jurisdictions. Although the final resolution of the Company's global tax disputes is uncertain, based on current information, in the opinion of the Company's management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company's consolidated financial position, liquidity or results of operations. However, an unfavorable resolution of the Company's global tax disputes could have a material adverse effect on the Company's consolidated financial position, liquidity or results of operations in the periods in which the matters are ultimately resolved.
|
|
6.
|
Retirement and Other Employee Benefits
|
Pension and Postretirement Health Care Benefits Plans
The net periodic costs (benefit) for Pension and Postretirement Health Care Benefits plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefit Plans
|
|
Non U.S. Pension Benefit Plans
|
|
Postretirement Health Care Benefits Plan
|
Three Months Ended
|
March 29, 2014
|
|
March 30, 2013
|
|
March 29, 2014
|
|
March 30, 2013
|
|
March 29, 2014
|
|
March 30, 2013
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost
|
93
|
|
|
88
|
|
|
20
|
|
|
17
|
|
|
3
|
|
|
3
|
|
Expected return on plan assets
|
(98
|
)
|
|
(92
|
)
|
|
(23
|
)
|
|
(19
|
)
|
|
(2
|
)
|
|
(2
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net loss
|
22
|
|
|
33
|
|
|
3
|
|
|
3
|
|
|
3
|
|
|
4
|
|
Unrecognized prior service benefit
|
—
|
|
|
—
|
|
|
2
|
|
|
(2
|
)
|
|
(12
|
)
|
|
(11
|
)
|
Net periodic pension cost (benefit)
|
$
|
17
|
|
|
$
|
29
|
|
|
$
|
6
|
|
|
$
|
2
|
|
|
$
|
(7
|
)
|
|
$
|
(5
|
)
|
During the
three months ended
March 29, 2014
and
March 30, 2013
, contributions of
$26 million
and
$24 million
were made to the Company’s U.S. Pension Benefit Plans, respectively. During the
three months ended
March 29, 2014
and
March 30, 2013
, contributions of
$17 million
and
$13 million
were made to the Company’s Non U.S. Pension Benefit Plans, respectively.
The Company made no contributions to its Postretirement Health Care Benefits Plan during the
three months ended
March 29, 2014
and
March 30, 2013
.
|
|
7.
|
Share-Based Compensation Plans
|
Compensation expense for the Company’s employee stock options, stock appreciation rights, employee stock purchase plan, restricted stock and restricted stock units (“RSUs”) was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 29,
2014
|
|
March 30,
2013
|
Share-based compensation expense included in:
|
|
|
|
Costs of sales
|
$
|
4
|
|
|
$
|
6
|
|
Selling, general and administrative expenses
|
22
|
|
|
28
|
|
Research and development expenditures
|
10
|
|
|
11
|
|
Share-based compensation expense included in Operating earnings
|
36
|
|
|
45
|
|
Tax benefit
|
11
|
|
|
14
|
|
Share-based compensation expense, net of tax
|
$
|
25
|
|
|
$
|
31
|
|
Decrease in basic earnings per share
|
$
|
(0.10
|
)
|
|
$
|
(0.11
|
)
|
Decrease in diluted earnings per share
|
$
|
(0.10
|
)
|
|
$
|
(0.11
|
)
|
For the
three months ended
March 29, 2014
, the Company granted
1.1 million
RSUs and
1.2 million
stock options. The total aggregate compensation expense, net of estimated forfeitures, for these RSUs and stock options was
$60 million
and
$13 million
, respectively, which will be recognized over a weighted average vesting period of three years.
|
|
8.
|
Fair Value Measurements
|
The Company holds certain fixed income securities, equity securities and derivatives, which are recognized and disclosed at fair value in the financial statements on a recurring basis. 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 measured using the fair value hierarchy and related valuation methodologies as defined in the authoritative literature. This guidance specifies a hierarchy of valuation techniques based on whether the inputs to each measurement are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's assumptions about current market conditions.
The fair value hierarchy and related valuation methodologies are as follows:
Level 1
—Quoted prices for identical instruments in active markets.
Level 2
—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.
Level 3
—Valuations derived from valuation techniques, in which one or more significant inputs are unobservable.
The fair values of the Company’s financial assets and liabilities by level in the fair value hierarchy as of
March 29, 2014
and
December 31, 2013
were as follows:
|
|
|
|
|
March 29, 2014
|
Level 2
|
Assets:
|
|
Foreign exchange derivative contracts
|
$
|
2
|
|
Available-for-sale securities:
|
|
Government, agency, and government-sponsored enterprise obligations
|
15
|
|
Corporate bonds
|
8
|
|
Mutual funds
|
11
|
|
Liabilities:
|
|
Foreign exchange derivative contracts
|
$
|
2
|
|
Interest agreement derivative contracts
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
Level 1
|
|
Level 2
|
|
Total
|
Assets:
|
|
|
|
|
|
Foreign exchange derivative contracts
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
4
|
|
Available-for-sale securities:
|
|
|
|
|
|
Government, agency, and government-sponsored enterprise obligations
|
—
|
|
|
15
|
|
|
15
|
|
Corporate bonds
|
—
|
|
|
7
|
|
|
7
|
|
Mutual funds
|
—
|
|
|
11
|
|
|
11
|
|
Common stock and equivalents
|
2
|
|
|
—
|
|
|
2
|
|
Liabilities:
|
|
|
|
|
|
Foreign exchange derivative contracts
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Interest agreement derivative contracts
|
—
|
|
|
3
|
|
|
3
|
|
The Company had no Level 3 holdings as of
March 29, 2014
or
December 31, 2013
.
At
March 29, 2014
and
December 31, 2013
, the Company had
$2.1 billion
of investments in money market mutual funds (Level 2) classified as Cash and cash equivalents in its condensed consolidated balance sheet. The money market funds had quoted market prices that are equivalent to par.
Using quoted market prices and market interest rates, the Company determined that the fair value of long-term debt at
March 29, 2014
was
$2.6 billion
(Level 2), consistent with the instruments' face value of
$2.5 billion
. Since considerable judgment is required in interpreting market information, the fair value of the long-term debt is not necessarily indicative of the amount which could be realized in a current market exchange.
All other financial instruments are carried at cost, which is not materially different from the instruments’ fair values.
|
|
9.
|
Long-term Customer Financing and Sales of Receivables
|
Long-term Customer Financing
Long-term customer financing receivables consist of trade receivables with payment terms greater than twelve months, long-term loans and lease receivables under sales-type leases. Long-term customer financing receivables consist of the following:
|
|
|
|
|
|
|
|
|
|
March 29,
2014
|
|
December 31,
2013
|
Long-term receivables
|
$
|
72
|
|
|
$
|
36
|
|
Less current portion
|
(25
|
)
|
|
(30
|
)
|
Non-current long-term receivables, net
|
$
|
47
|
|
|
$
|
6
|
|
The current portion of long-term receivables is included in Accounts receivable, net and the non-current portion of long-term receivables is included in Other assets in the Company’s condensed consolidated balance sheets.
Certain purchasers of the Company’s products and services may request that the Company 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. The Company’s obligation to provide long-term financing may be conditioned on the issuance of a letter of credit in favor of the Company 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 the Company. The Company had outstanding commitments to provide long-term financing to third parties totaling
$223 million
at
March 29, 2014
, compared to
$120 million
at
December 31, 2013
.
Sales of Receivables
The following table summarizes the proceeds received from sales of accounts receivable and long-term receivables for the
three months ended
March 29, 2014
and
March 30, 2013
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 29,
2014
|
|
March 30,
2013
|
Cumulative annual proceeds received from sales:
|
|
|
|
Accounts receivable sales proceeds
|
$
|
7
|
|
|
$
|
1
|
|
Long-term receivables sales proceeds
|
2
|
|
|
28
|
|
Total proceeds from receivable sales
|
$
|
9
|
|
|
$
|
29
|
|
At
March 29, 2014
, the Company had retained servicing obligations for
$418 million
of long-term receivables, compared to
$434 million
of long-term receivables at
December 31, 2013
. Servicing obligations are limited to collection activities related to the sales of accounts receivables and long-term receivables.
Credit Quality of Customer Financing Receivables and Allowance for Credit Losses
An aging analysis of financing receivables at
March 29, 2014
and
December 31, 2013
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2014
|
Total
Long-term
Receivable
|
|
Current Billed
Due
|
|
Past Due Under 90 Days
|
|
Past Due Over 90 Days
|
Municipal leases secured tax exempt
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial loans and leases secured
|
63
|
|
|
1
|
|
|
—
|
|
|
12
|
|
Total gross long-term receivables, including current portion
|
$
|
72
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
Total
Long-term
Receivable
|
|
Current Billed
Due
|
|
Past Due Under 90 Days
|
|
Past Due Over 90 Days
|
Municipal leases secured tax exempt
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial loans and leases secured
|
35
|
|
|
13
|
|
|
2
|
|
|
10
|
|
Total gross long-term receivables, including current portion
|
$
|
36
|
|
|
$
|
13
|
|
|
$
|
2
|
|
|
$
|
10
|
|
The Company had a total of
$12 million
of financing receivables past due over
90
days as of
March 29, 2014
in relation to two loans. The Company has not accrued interest on these loans, which are adequately reserved, during the
three months ended
March 29, 2014
.
|
|
10.
|
Commitments and Contingencies
|
Legal Matters
The Company is a defendant in various suits, claims and investigations that 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 the Company’s consolidated financial position, liquidity or results of operations. However, an unfavorable resolution could have a material adverse effect on the Company’s results of operations in the periods in which the matters are ultimately resolved.
Other Indemnifications
The Company is a party to a variety of agreements pursuant to which it is obligated to indemnify the other party with respect to certain matters. In indemnification cases, payment by the Company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party's claims. In some instances, the Company may have recourse against third parties for certain payments made by the Company.
In addition, the Company may provide indemnifications for losses that result from the breach of general warranties contained in certain commercial and intellectual property agreements. Historically, the Company has not made significant payments under these agreements.
Also, pursuant to the Master Separation and Distribution Agreement and certain other agreements entered into in connection with the separating of Motorola Mobility Holdings, Inc. ("Motorola Mobility"), Motorola Mobility agreed to indemnify the Company for certain liabilities, and the Company agreed to indemnify Motorola Mobility for certain liabilities, in each case for uncapped amounts.
The following table summarizes the Net sales by segment:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 29,
2014
|
|
March 30,
2013
|
Government
|
$
|
1,201
|
|
|
$
|
1,346
|
|
Enterprise
|
600
|
|
|
627
|
|
|
$
|
1,801
|
|
|
$
|
1,973
|
|
The following table summarizes the Operating earnings by segment:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 29,
2014
|
|
March 30,
2013
|
Government
|
$
|
113
|
|
|
$
|
180
|
|
Enterprise
|
57
|
|
|
36
|
|
Operating earnings
|
170
|
|
|
216
|
|
Total other expense
|
(19
|
)
|
|
(11
|
)
|
Earnings before income taxes
|
$
|
151
|
|
|
$
|
205
|
|
|
|
12.
|
Reorganization of Businesses
|
2014
Charges
During the
three months ended
March 29, 2014
, the Company recorded net reorganization of business charges of
$22 million
including
$21 million
of charges in Other charges, and
$1 million
of charges in Cost of sales in the Company's condensed consolidated statements of operations. Included in the
$22 million
were charges of
$12 million
for employee separation costs, a
$6 million
impairment charge, and
$6 million
for exit costs, partially offset by
$2 million
of reversals for accruals no longer needed.
The following table displays the net charges incurred by segment:
|
|
|
|
|
March 29, 2014
|
Three Months Ended
|
Government
|
$
|
15
|
|
Enterprise
|
7
|
|
|
$
|
22
|
|
The following table displays a rollforward of the reorganization of businesses accruals established for lease exit costs and employee separation costs from
January 1, 2014
to
March 29, 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2014
|
|
Additional
Charges
|
|
Adjustments
|
|
Amount
Used
|
|
March 29, 2014
|
Exit costs
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
11
|
|
Employee separation costs
|
103
|
|
|
12
|
|
|
(2
|
)
|
|
(39
|
)
|
|
74
|
|
|
$
|
109
|
|
|
$
|
18
|
|
|
$
|
(2
|
)
|
|
$
|
(40
|
)
|
|
$
|
85
|
|
Exit Costs
At
January 1, 2014
, the Company had an accrual of
$6 million
for exit costs attributable to lease terminations. During the
three months ended
March 29, 2014
, there were
$6 million
of additional charges and
$1 million
of cash payments related to the exit of leased facilities. The remaining accrual of
$11 million
, which is included in Accrued liabilities in the Company’s condensed consolidated balance sheets at
March 29, 2014
, primarily represents future cash payments for lease termination obligations that are expected to be paid over a number of years.
Employee Separation Costs
At
January 1, 2014
, the Company had an accrual of
$103 million
for employee separation costs. The
2014
additional charges of
$12 million
represent severance costs for approximately
200
employees, all of which were indirect employees. The adjustment of
$2 million
reflects reversals of accruals no longer needed. The
$39 million
used reflects cash payments. The remaining accrual of
$74 million
, which is included in Accrued liabilities in the Company’s condensed consolidated balance sheets at
March 29, 2014
, is expected to be paid, primarily within one year, to approximately
600
employees, who have either been severed or have been notified of their severance and have begun or will begin receiving payments.
2013
Charges
During the
three months ended
March 30, 2013
, the Company recorded net reorganization of business charges of
$11 million
, all of which was included in Other charges in the Company's condensed consolidated statements of operations. Included in the aggregate
$11 million
were charges of
$16 million
related to employee separation costs, partially offset by
$5 million
of reversals for accruals no longer needed.
The following table displays the net charges incurred by segment:
|
|
|
|
|
March 30, 2013
|
Three Months Ended
|
Government
|
$
|
7
|
|
Enterprise
|
4
|
|
|
$
|
11
|
|
|
|
13.
|
Intangible Assets and Goodwill
|
Intangible Assets
Amortized intangible assets were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2014
|
|
December 31, 2013
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Completed technology
|
$
|
674
|
|
|
$
|
641
|
|
|
$
|
662
|
|
|
$
|
639
|
|
Patents
|
276
|
|
|
276
|
|
|
276
|
|
|
276
|
|
Customer-related
|
210
|
|
|
147
|
|
|
203
|
|
|
144
|
|
Licensed technology
|
17
|
|
|
16
|
|
|
17
|
|
|
16
|
|
Other intangibles
|
98
|
|
|
92
|
|
|
96
|
|
|
92
|
|
|
$
|
1,275
|
|
|
$
|
1,172
|
|
|
$
|
1,254
|
|
|
$
|
1,167
|
|
Amortization expense on intangible assets was
$5 million
for the
three months ended
March 29, 2014
and
$6 million
for the
three months ended
March 30, 2013
. As of
March 29, 2014
, annual amortization expense is estimated to be
$24 million
in
2014
,
$21 million
in
2015
,
$19 million
in
2016
,
$15 million
in
2017
and
$8 million
in
2018
.
Amortized intangible assets, excluding goodwill, were comprised of the following by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2014
|
|
December 31, 2013
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Government
|
$
|
73
|
|
|
$
|
48
|
|
|
$
|
55
|
|
|
$
|
48
|
|
Enterprise
|
1,202
|
|
|
1,124
|
|
|
1,199
|
|
|
1,119
|
|
|
$
|
1,275
|
|
|
$
|
1,172
|
|
|
$
|
1,254
|
|
|
$
|
1,167
|
|
Goodwill
The following table displays a rollforward of the carrying amount of goodwill by segment from
January 1, 2014
to
March 29, 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
|
|
Enterprise
|
|
Total
|
Balance as of January 1, 2014
|
|
|
|
|
|
Aggregate goodwill
|
$
|
349
|
|
|
$
|
2,724
|
|
|
$
|
3,073
|
|
Accumulated impairment losses
|
—
|
|
|
(1,564
|
)
|
|
(1,564
|
)
|
Goodwill, net of impairment losses
|
$
|
349
|
|
|
$
|
1,160
|
|
|
$
|
1,509
|
|
Goodwill acquired
|
22
|
|
|
—
|
|
|
22
|
|
Balance as of March 29, 2014
|
|
|
|
|
|
Aggregate goodwill
|
$
|
371
|
|
|
$
|
2,724
|
|
|
$
|
3,095
|
|
Accumulated impairment losses
|
—
|
|
|
(1,564
|
)
|
|
(1,564
|
)
|
Goodwill, net of impairment losses
|
$
|
371
|
|
|
$
|
1,160
|
|
|
$
|
1,531
|
|
On December 31, 2013, the Company completed the acquisition of a communications software provider in push-to-talk-over-broadband applications for a gross purchase price of
$48 million
. During the quarter ended March 29, 2014, the Company completed the purchase accounting for this acquisition recognizing
$22 million
of goodwill and
$20 million
of identifiable intangible assets. The results of operations for this acquisition have been included in the Company’s statement of operations subsequent to the acquisition date. The pro forma effects of this acquisition were not significant.
On April 14, 2014, the Company entered into a Master Acquisition Agreement (the “Acquisition Agreement”) with Zebra Technologies Corporation to sell the Company’s Enterprise business for
$3.45 billion
in cash. Certain assets of the Enterprise business will be excluded from the transaction and retained by the Company, including the Company’s iDEN infrastructure business, and other assets and certain liabilities as specified in the Acquisition Agreement. The transaction is expected to close by the end of 2014.