Notes to
Condensed
Consolidated Financial Statements
(Dollars in millions, except as noted)
(Unaudited)
The condensed consolidated financial statements as of
October 1, 2016
and for the
three and nine months ended
October 1, 2016
and
October 3, 2015
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, 2015
. The results of operations for the
three and nine months ended
October 1, 2016
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 Developments
On February 19, 2016, the Company completed the acquisition of Guardian Digital Communications Limited ("GDCL"), a holding company of Airwave Solutions Limited ("Airwave"), the largest private operator of a public safety network in the world. All of the outstanding equity of GDCL was acquired for the sum of
£1
, after which the Company invested into GDCL
£698 million
, net of cash acquired, or approximately
$1.0 billion
, to settle all third party debt. The Company will make a deferred cash payment of
£64 million
on November 15, 2018. The Company funded the investment with a
$675 million
term loan (the “Term Loan”) and approximately
$400 million
of international cash on hand. The acquisition has been reported within our Services segment, enabling the Company to geographically diversify its global Managed & Support services offerings, while offering a proven service delivery platform to build on for providing innovative, leading, mission-critical communications solutions and services to customers. See discussion in Note 14.
During the
three months ended
October 1, 2016
, Motorola Solutions relocated its global headquarters from Schaumburg, IL to Chicago, IL. The move provides the Company with access to key talent and allows the Company to optimize the Schaumburg campus for current space requirements.
On September 23, 2016, the Company entered into a stock purchase agreement with Spillman Technologies, a provider of comprehensive law enforcement and public safety software solutions. The acquisition, which is expected to close in the fourth quarter of 2016, will expand the Company's smart public safety portfolio and will enable the Company to offer a full suite of command center solutions to a broader customer base.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers." This new standard will replace most existing revenue recognition guidance in U.S. GAAP. The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount it expects to receive for those goods and services. This ASU requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and estimates and changes in those estimates. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers: Deferral of the Effective Date" that delayed the effective date of ASU 2014-09 by one year to January 1, 2018, as the Company’s annual reporting period begins after December 15, 2017. In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" which clarifies the implementation guidance on principal versus agent considerations and includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. In April of 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing,” which reduces the complexity when applying the guidance for identifying performance obligations and improves the operability and understandability of the license implementation guidance. In May 2016, the FASB issued ASU 2016-12 “Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients,” which amends the guidance on transition, collectability, non-cash consideration, and the presentation of sales and other similar taxes. ASU 2016-12 clarifies that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria. The standard allows for both retrospective and modified retrospective methods of adoption. The Company is in the process of determining the method of adoption it will elect and is currently assessing the impact of this ASU on its consolidated financial statements and footnote disclosures.
In February 2016, the FASB issued ASU No. 2016-02, "Leases," which amends existing guidance to require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. The ASU is effective for the Company January 1, 2019 and interim periods within that reporting period. The ASU requires a modified retrospective method upon adoption. The Company is in the process of assessing the impact of this ASU on its consolidated financial statements and footnote disclosures.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments,” which clarifies eight specific cash flow issues in an effort to reduce diversity in practice in how certain transactions are classified within the statement of cash flows. This ASU is effective for the Company January 1, 2018 with early adoption permitted. Upon adoption, the ASU requires a retrospective application unless it is determined that it is impractical to do so for which it must be retrospectively applied at the earliest date practical. Upon adoption, the Company does not anticipate significant changes to the Company's existing accounting policies or presentation of the Statement of Cash Flows.
In October 2016, the FASB issued ASU 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory,” as part of the Board’s simplification initiative aimed at reducing complexity in accounting standards. This ASU eliminates the current application of deferring the income tax effect of intra-entity asset transfers, other than inventory, until the transferred asset is sold to a third party or otherwise recovered through use and will require entities to recognize tax expense when the transfer occurs. The guidance will be effective for the Company on January 1, 2018 and interim periods within that reporting period; early adoption permitted. The ASU requires a modified retrospective application with a cumulative-effect adjustment recorded in retained earnings as of the beginning of the period of adoption. The Company is currently assessing the impact of this ASU on its consolidated financial statements and footnote disclosures.
The Company elected to adopt ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” as of January 1, 2016. ASU 2016-09, which was issued by the FASB in March 2016, simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The impact of the prospective adoption of the provisions related to the recognition of excess tax benefits in income tax expense was a
$5 million
income tax benefit during the
nine months ended
October 1, 2016
. Additionally, as a result of the adoption of this accounting standard, excess tax benefits on share-based compensation have been reported as a component of operating cash rather than within financing cash flows as previously presented, while the payment of withholding taxes on the settlement of share-based awards has been reported as a component of financing cash flows rather than within operating cash flows as previously presented. The change in presentation of withholding taxes within the condensed consolidated statements of cash flows has been adopted retrospectively, thereby increasing operating cash flows and reducing financing cash flows by
$16 million
for both the
nine months ended
October 1, 2016
and
October 3, 2015
. The presentation of excess tax benefits on share-based compensation has been adjusted prospectively within the condensed consolidated statement of cash flows, increasing operating cash flow and decreasing financing cash flow by
$5 million
for the
nine months ended
October 1, 2016
.
The Company adopted ASU No. 2015-03, "Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs," effective January 1, 2016. Under this guidance, debt issuance costs related to a recognized debt liability are required to be presented in the balance sheet as a direct reduction from the carrying amount of such debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this guidance. We have retrospectively adopted ASU 2015-03 effective January 1, 2016. As a result, debt issuance costs which were previously capitalized in other assets in the condensed consolidated balance sheet have been presented as a reduction to long-term debt. As of
October 1, 2016
and
December 31, 2015
,
$31 million
and
$41 million
, respectively, have been presented as a component of long-term debt.
|
|
2.
|
Discontinued Operations
|
On October 27, 2014, the Company completed the sale of its Enterprise business to Zebra Technologies Corporation for
$3.45 billion
in cash. Certain assets of the Enterprise business were excluded from the transaction and retained by the Company, including the Company’s iDEN business. The historical financial results of the Enterprise business, excluding those assets and liabilities retained in the transaction, are reflected in the Company's condensed consolidated financial statements and footnotes as discontinued operations for all periods presented.
During the
three and nine months ended
October 1, 2016
, the Company had
no
earnings from discontinued operations in the condensed consolidated statements of operations. During the
three and nine months ended
October 3, 2015
, the Company recorded losses from discontinued operations of
$11 million
and
$32 million
, respectively.
Statements of Operations Information
Other Charges (Income)
Other charges (income) included in Operating earnings consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1,
2016
|
|
October 3,
2015
|
|
October 1,
2016
|
|
October 3,
2015
|
Other charges:
|
|
|
|
|
|
|
|
Intangibles amortization
|
$
|
31
|
|
|
$
|
2
|
|
|
$
|
83
|
|
|
$
|
6
|
|
Reorganization of business
|
6
|
|
|
8
|
|
|
28
|
|
|
33
|
|
Building impairment
|
—
|
|
|
6
|
|
|
17
|
|
|
6
|
|
Non-U.S. pension curtailment gain
|
—
|
|
|
—
|
|
|
—
|
|
|
(32
|
)
|
Impairment of corporate aircraft
|
—
|
|
|
26
|
|
|
3
|
|
|
26
|
|
Acquisition-related transaction fees
|
—
|
|
|
—
|
|
|
13
|
|
|
—
|
|
|
$
|
37
|
|
|
$
|
42
|
|
|
$
|
144
|
|
|
$
|
39
|
|
Other Income (Expense)
Interest expense, net, and Other, both included in Other income (expense), consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1,
2016
|
|
October 3,
2015
|
|
October 1,
2016
|
|
October 3,
2015
|
Interest income (expense), net:
|
|
|
|
|
|
|
|
Interest expense
|
$
|
(58
|
)
|
|
$
|
(47
|
)
|
|
$
|
(169
|
)
|
|
$
|
(132
|
)
|
Interest income
|
4
|
|
|
4
|
|
|
12
|
|
|
10
|
|
|
$
|
(54
|
)
|
|
$
|
(43
|
)
|
|
$
|
(157
|
)
|
|
$
|
(122
|
)
|
Other:
|
|
|
|
|
|
|
|
Investment impairments
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
|
(3
|
)
|
Foreign currency gain (loss)
|
7
|
|
|
(29
|
)
|
|
$
|
34
|
|
|
$
|
(23
|
)
|
Gain (loss) on derivative instruments
|
(11
|
)
|
|
25
|
|
|
(41
|
)
|
|
13
|
|
Gains on equity method investments
|
—
|
|
|
2
|
|
|
2
|
|
|
6
|
|
Realized foreign currency loss on acquisition
|
—
|
|
|
—
|
|
|
(10
|
)
|
|
—
|
|
Other
|
5
|
|
|
1
|
|
|
5
|
|
|
4
|
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
|
$
|
(12
|
)
|
|
$
|
(3
|
)
|
Earnings Per Common Share
The computation of basic and diluted earnings per common share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to Motorola Solutions, Inc. common stockholders
|
|
Earnings from Continuing Operations, net of tax
|
|
Net Earnings
|
Three Months Ended
|
October 1,
2016
|
|
October 3,
2015
|
|
October 1,
2016
|
|
October 3,
2015
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
Earnings
|
$
|
192
|
|
|
$
|
126
|
|
|
$
|
192
|
|
|
$
|
115
|
|
Weighted average common shares outstanding
|
166.3
|
|
|
199.2
|
|
|
166.3
|
|
|
199.2
|
|
Per share amount
|
$
|
1.15
|
|
|
$
|
0.63
|
|
|
$
|
1.15
|
|
|
$
|
0.58
|
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
Earnings
|
$
|
192
|
|
|
$
|
126
|
|
|
$
|
192
|
|
|
$
|
115
|
|
Weighted average common shares outstanding
|
166.3
|
|
|
199.2
|
|
|
166.3
|
|
|
199.2
|
|
Add effect of dilutive securities:
|
|
|
|
|
|
|
|
Share-based awards
|
2.4
|
|
|
2.1
|
|
|
2.4
|
|
|
2.1
|
|
Senior Convertible Notes
|
0.9
|
|
|
—
|
|
|
0.9
|
|
|
—
|
|
Diluted weighted average common shares outstanding
|
169.6
|
|
|
201.3
|
|
|
169.6
|
|
|
201.3
|
|
Per share amount
|
$
|
1.13
|
|
|
$
|
0.63
|
|
|
$
|
1.13
|
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to Motorola Solutions, Inc. common stockholders
|
|
Earnings from Continuing Operations, net of tax
|
|
Net Earnings
|
Nine Months Ended
|
October 1,
2016
|
|
October 3,
2015
|
|
October 1,
2016
|
|
October 3,
2015
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
Earnings
|
$
|
317
|
|
|
$
|
363
|
|
|
$
|
317
|
|
|
$
|
331
|
|
Weighted average common shares outstanding
|
171.0
|
|
|
207.2
|
|
|
171.0
|
|
|
207.2
|
|
Per share amount
|
$
|
1.85
|
|
|
$
|
1.75
|
|
|
$
|
1.85
|
|
|
$
|
1.60
|
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
Earnings
|
$
|
317
|
|
|
$
|
363
|
|
|
$
|
317
|
|
|
$
|
331
|
|
Weighted average common shares outstanding
|
171.0
|
|
|
207.2
|
|
|
171.0
|
|
|
207.2
|
|
Add effect of dilutive securities:
|
|
|
|
|
|
|
|
Share-based awards
|
2.5
|
|
|
2.0
|
|
|
2.5
|
|
|
2.0
|
|
Senior Convertible Notes
|
0.5
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
Diluted weighted average common shares outstanding
|
174.0
|
|
|
209.2
|
|
|
174.0
|
|
|
209.2
|
|
Per share amount
|
$
|
1.82
|
|
|
$
|
1.74
|
|
|
$
|
1.82
|
|
|
$
|
1.58
|
|
In the computation of diluted earnings per common share from both continuing operations and on a net earnings basis for the
three months ended
October 1, 2016
, the assumed exercise of
2.5 million
options were excluded because their inclusion would have been antidilutive. For the
nine months ended
October 1, 2016
, the assumed exercise of
2.9 million
options and the assumed vesting of
0.4 million
restricted stock units ("RSUs") were excluded because their inclusion would have been antidilutive.
For the
three months ended
October 3, 2015
, the assumed exercise of
3.9 million
stock options were excluded because their inclusion would have been antidilutive. For the
nine months ended
October 3, 2015
, the assumed exercise of
2.6 million
options and the assumed vesting of
0.4 million
RSUs were excluded because their inclusion would have been antidilutive.
On August 25, 2015, the Company issued
$1.0 billion
of
2%
Senior Convertible Notes which mature in September 2020 (the "Senior Convertible Notes"). The notes are convertible based on a conversion rate of
14.5985
per
$1,000
principal amount (which is equal to an initial conversion price of
$68.50
per share). In the event of conversion, the Company intends to settle the principal amount of the Senior Convertible Notes in cash.
Because of the Company’s intention to settle the par value of the Senior Convertible Notes in cash upon conversion, Motorola Solutions does not reflect any shares underlying the Senior Convertible Notes in its diluted weighted average shares outstanding until the average stock price per share for the period exceeds the conversion price. In this case, only the number of shares that would be issuable (under the treasury stock method of accounting for share dilution) will be included, which is based upon the amount by which the average stock price exceeds the conversion price of
$68.50
. For the
three and nine months ended
October 1, 2016
, the dilutive impact of the Senior Convertible Notes was
0.9 million
shares and
0.5 million
shares, respectively.
Balance Sheet Information
Cash and Cash Equivalents
The Company’s cash and cash equivalents were
$1.7 billion
at
October 1, 2016
and
$2.0 billion
at
December 31, 2015
. Of these amounts,
$63 million
was restricted at both
October 1, 2016
and
December 31, 2015
.
Accounts Receivable, Net
Accounts receivable, net, consists of the following:
|
|
|
|
|
|
|
|
|
|
October 1,
2016
|
|
December 31,
2015
|
Accounts receivable
|
$
|
1,207
|
|
|
$
|
1,390
|
|
Less allowance for doubtful accounts
|
(43
|
)
|
|
(28
|
)
|
|
$
|
1,164
|
|
|
$
|
1,362
|
|
Inventories, Net
Inventories, net, consist of the following:
|
|
|
|
|
|
|
|
|
|
October 1,
2016
|
|
December 31,
2015
|
Finished goods
|
$
|
154
|
|
|
$
|
151
|
|
Work-in-process and production materials
|
265
|
|
|
287
|
|
|
419
|
|
|
438
|
|
Less inventory reserves
|
(136
|
)
|
|
(142
|
)
|
|
$
|
283
|
|
|
$
|
296
|
|
Other Current Assets
Other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
October 1,
2016
|
|
December 31,
2015
|
Available-for-sale securities
|
$
|
45
|
|
|
$
|
438
|
|
Costs and earnings in excess of billings
|
413
|
|
|
374
|
|
Tax-related refunds receivable
|
100
|
|
|
44
|
|
Other
|
112
|
|
|
98
|
|
|
$
|
670
|
|
|
$
|
954
|
|
Property, Plant and Equipment, Net
Property, plant and equipment, net, consists of the following:
|
|
|
|
|
|
|
|
|
|
October 1,
2016
|
|
December 31,
2015
|
Land
|
$
|
14
|
|
|
$
|
17
|
|
Building
|
293
|
|
|
523
|
|
Machinery and equipment
|
1,920
|
|
|
1,585
|
|
|
2,227
|
|
|
2,125
|
|
Less accumulated depreciation
|
(1,447
|
)
|
|
(1,638
|
)
|
|
$
|
780
|
|
|
$
|
487
|
|
Depreciation expense for the
three months ended
October 1, 2016
and
October 3, 2015
was
$45 million
and
$30 million
, respectively. Depreciation expense for the
nine months ended
October 1, 2016
and
October 3, 2015
was
$137 million
and
$107 million
, respectively.
On February 1, 2016, the Company completed the sale of its Penang, Malaysia manufacturing operations, including the land, building, equipment, and inventory, as well as the transfer of employees to a contract manufacturer. During the
nine months ended
October 1, 2016
, the Company incurred a loss of
$7 million
on the sale of its Penang, Malaysia facility and manufacturing operations, which is included within Gains (losses) on sales of investments and businesses, net.
The Company acquired property, plant and equipment, including network-related assets, with a fair value of
$245 million
in the acquisition of GDCL on February 19, 2016. See discussion in Note 14.
During the
nine months ended
October 1, 2016
, the Company sold all remaining parcels of its Schaumburg, IL headquarters campus. A building impairment loss of
$17 million
has been recognized in Other charges during the
nine months ended
October 1, 2016
related to the excess carrying value of the long-lived assets in relation to the selling price.
During the
three months ended
October 1, 2016
, Motorola Solutions relocated its global headquarters from Schaumburg, IL to Chicago, IL. The move provides the Company with access to key talent and allows the Company to optimize the Schaumburg campus for current space requirements.
Investments
Investments consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
Cost
Basis
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Investments
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
Government, agency, and government-sponsored enterprise obligations
|
$
|
50
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
50
|
|
Corporate bonds
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
Common stock
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
55
|
|
|
1
|
|
|
—
|
|
|
56
|
|
Other investments, at cost
|
217
|
|
|
—
|
|
|
—
|
|
|
217
|
|
Equity method investments
|
10
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
$
|
282
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
283
|
|
Less: current portion of available-for-sale securities
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
$
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
Cost
Basis
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Investments
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
Government, agency, and government-sponsored enterprise obligations
|
$
|
455
|
|
|
$
|
—
|
|
|
$
|
(11
|
)
|
|
$
|
444
|
|
Corporate bonds
|
7
|
|
|
—
|
|
|
—
|
|
|
7
|
|
Common stock
|
—
|
|
|
6
|
|
|
—
|
|
|
6
|
|
|
462
|
|
|
6
|
|
|
(11
|
)
|
|
457
|
|
Other investments, at cost
|
203
|
|
|
—
|
|
|
—
|
|
|
203
|
|
Equity method investments
|
9
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
$
|
674
|
|
|
$
|
6
|
|
|
$
|
(11
|
)
|
|
$
|
669
|
|
Less: current portion of available-for-sale securities
|
|
|
|
|
|
|
438
|
|
|
|
|
|
|
|
|
$
|
231
|
|
In December 2015, the Company invested
$401 million
in United Kingdom treasury securities in order to partially offset the risk associated with fluctuations in the British Pound Sterling in the period before the closing of the purchase of GDCL. The investments were recorded within Other current assets in the Company's consolidated balance sheets. The Company liquidated these investments in February 2016 to partially fund the acquisition of GDCL. During the
nine months ended
October 1, 2016
, the Company realized a loss of
$19 million
associated with the sale of the treasury securities, of which,
$11 million
was unrealized as of December 31, 2015.
Other Assets
Other assets consist of the following:
|
|
|
|
|
|
|
|
|
|
October 1,
2016
|
|
December 31,
2015
|
Intangible assets, net (Note 14)
|
$
|
769
|
|
|
$
|
49
|
|
Non-current long-term receivables, net
|
43
|
|
|
47
|
|
Defined benefit plan assets
|
163
|
|
|
128
|
|
Other
|
38
|
|
|
47
|
|
|
$
|
1,013
|
|
|
$
|
271
|
|
Accrued Liabilities
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
October 1,
2016
|
|
December 31,
2015
|
Deferred revenue
|
$
|
404
|
|
|
$
|
390
|
|
Compensation
|
196
|
|
|
241
|
|
Billings in excess of costs and earnings
|
329
|
|
|
337
|
|
Tax liabilities
|
72
|
|
|
48
|
|
Dividend payable
|
68
|
|
|
71
|
|
Trade liabilities
|
159
|
|
|
135
|
|
Other
|
522
|
|
|
449
|
|
|
$
|
1,750
|
|
|
$
|
1,671
|
|
Other Liabilities
Other liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
October 1,
2016
|
|
December 31,
2015
|
Defined benefit plans
|
$
|
1,486
|
|
|
$
|
1,512
|
|
Postretirement Health Care Benefit Plan
|
—
|
|
|
49
|
|
Deferred revenue
|
126
|
|
|
113
|
|
Unrecognized tax benefits
|
42
|
|
|
50
|
|
Deferred income taxes
|
119
|
|
|
—
|
|
Deferred consideration (Note 14)
|
76
|
|
|
—
|
|
Other
|
213
|
|
|
180
|
|
|
$
|
2,062
|
|
|
$
|
1,904
|
|
Stockholders’ Equity
Share Repurchase Program:
Through actions taken on July 28, 2011, January 30, 2012, July 25, 2012, July 22, 2013, November 3, 2014, and August 3, 2016, the Board of Directors has authorized the Company to repurchase in the aggregate up to
$14.0 billion
of its outstanding shares of common stock (the “share repurchase program”). The share repurchase program does not have an expiration date.
During the
nine months ended
October 1, 2016
, the Company paid an aggregate of
$728 million
, including transaction costs, to repurchase approximately
10.5 million
shares at an average price of
$69.31
per share. As of
October 1, 2016
, the
Company had used approximately
$11.7 billion
of the share repurchase authority, including transaction costs, to repurchase shares, leaving
$2.3 billion
of authority available for future repurchases.
Payment of Dividends:
On November 3, 2016, the Company announced that its Board of Directors approved an increase in the quarterly cash dividend from
$0.41
per share to
$0.47
per share of common stock. During both the
three months ended
October 1, 2016
and
October 3, 2015
, the Company paid
$70 million
in cash dividends to holders of its common stock. During the
nine months ended
October 1, 2016
and
October 3, 2015
, the Company paid
$213 million
and
$218 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, including amounts reclassified into income, and the affected line items in the condensed consolidated statements of operations during the
three and nine months ended
October 1, 2016
and
October 3, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1,
2016
|
|
October 3,
2015
|
|
October 1,
2016
|
|
October 3,
2015
|
Foreign Currency Translation Adjustments:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
(351
|
)
|
|
$
|
(223
|
)
|
|
$
|
(266
|
)
|
|
$
|
(204
|
)
|
Other comprehensive loss before reclassification adjustment
|
(47
|
)
|
|
(17
|
)
|
|
(131
|
)
|
|
(35
|
)
|
Tax (expense) benefit
|
(2
|
)
|
|
1
|
|
|
(3
|
)
|
|
—
|
|
Other comprehensive loss, net of tax
|
(49
|
)
|
|
(16
|
)
|
|
(134
|
)
|
|
(35
|
)
|
Balance at end of period
|
$
|
(400
|
)
|
|
$
|
(239
|
)
|
|
$
|
(400
|
)
|
|
$
|
(239
|
)
|
Available-for-Sale Securities:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
—
|
|
|
$
|
15
|
|
|
$
|
(3
|
)
|
|
$
|
44
|
|
Other comprehensive income (loss) before reclassification adjustment
|
1
|
|
|
—
|
|
|
(1
|
)
|
|
(2
|
)
|
Tax benefit
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Other comprehensive income (loss) before reclassification adjustment, net of tax
|
1
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Reclassification adjustment into Gains (losses) on sales of investments and businesses, net
|
—
|
|
|
(8
|
)
|
|
6
|
|
|
(54
|
)
|
Tax expense (benefit)
|
—
|
|
|
3
|
|
|
(2
|
)
|
|
21
|
|
Reclassification adjustment into Gains (losses) on sales of investments and businesses, net of tax
|
—
|
|
|
(5
|
)
|
|
4
|
|
|
(33
|
)
|
Other comprehensive income (loss), net of tax
|
1
|
|
|
(5
|
)
|
|
4
|
|
|
(34
|
)
|
Balance at end of period
|
$
|
1
|
|
|
$
|
10
|
|
|
$
|
1
|
|
|
$
|
10
|
|
Defined Benefit Plans:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
(1,537
|
)
|
|
(1,777
|
)
|
|
$
|
(1,597
|
)
|
|
$
|
(1,695
|
)
|
Other comprehensive income (loss) before reclassification adjustment
|
—
|
|
|
—
|
|
|
53
|
|
|
(53
|
)
|
Tax expense
|
—
|
|
|
—
|
|
|
(16
|
)
|
|
—
|
|
Other comprehensive income (loss) before reclassification adjustment, net of tax
|
—
|
|
|
—
|
|
|
37
|
|
|
(53
|
)
|
Reclassification adjustment - Actuarial net losses into Selling, general, and administrative expenses
|
13
|
|
|
20
|
|
|
40
|
|
|
56
|
|
Reclassification adjustment - Prior service benefits into Selling, general, and administrative expenses
|
(7
|
)
|
|
(20
|
)
|
|
(20
|
)
|
|
(52
|
)
|
Reclassification adjustment - Non-U.S. pension curtailment gain into Other charges
|
—
|
|
|
—
|
|
|
—
|
|
|
(32
|
)
|
Tax expense (benefit)
|
(1
|
)
|
|
—
|
|
|
8
|
|
|
(1
|
)
|
Reclassification adjustment into Selling, general, and administrative expenses, net of tax
|
5
|
|
|
—
|
|
|
28
|
|
|
(29
|
)
|
Other comprehensive income (loss), net of tax
|
5
|
|
|
—
|
|
|
65
|
|
|
(82
|
)
|
Balance at end of period
|
$
|
(1,532
|
)
|
|
$
|
(1,777
|
)
|
|
$
|
(1,532
|
)
|
|
$
|
(1,777
|
)
|
|
|
|
|
|
|
|
|
Total Accumulated other comprehensive loss
|
$
|
(1,931
|
)
|
|
$
|
(2,006
|
)
|
|
$
|
(1,931
|
)
|
|
$
|
(2,006
|
)
|
|
|
4.
|
Debt and Credit Facilities
|
As of
October 1, 2016
, the Company had a
$2.1 billion
unsecured syndicated revolving credit facility, which includes a
$450 million
letter of credit sub-limit, (the “2014 Motorola Solutions Credit Agreement”) scheduled to mature on May 29, 2019. The Company must comply with certain customary covenants, including a maximum leverage ratio as defined in the 2014 Motorola Solutions Credit Agreement. The Company was in compliance with its financial covenants as of
October 1, 2016
. The Company did not borrow or issue any letters of credit under the 2014 Motorola Solutions Credit Agreement during the
nine
months ended
October 1, 2016
.
In connection with the completion of the acquisition of GDCL, the Company entered into a new term loan credit agreement (the “Term Loan Agreement”), under which the Company borrowed a term loan with an initial principal amount of
$675 million
and a maturity date of February 18, 2019 (the "Term Loan"). Interest on the Term Loan is variable and indexed to LIBOR. Interest expense on the Term Loan is payable quarterly in February, May, August, and November. No additional borrowings are permitted under the Term Loan Agreement and amounts borrowed and repaid or prepaid may not be re-borrowed.
Effective January 1, 2016, the Company retrospectively adopted ASU No. 2015-03, "Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs." Under this guidance, the Company has revised the presentation of debt issuance costs which were previously capitalized in other assets in the consolidated balance sheet to be presented as a reduction to long-term debt. As of
October 1, 2016
and
December 31, 2015
,
$31 million
and
$41 million
, respectively, have been reclassified to be presented as a component of long-term debt.
Foreign Currency Risk
As of
October 1, 2016
, the Company had outstanding foreign exchange contracts with notional amounts totaling
$744 million
, compared to
$494 million
outstanding at
December 31, 2015
. 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.
The following table shows the five largest net notional amounts of the positions to buy or sell foreign currency as of
October 1, 2016
, and the corresponding positions as of
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
Net Buy (Sell) by Currency
|
October 1,
2016
|
|
December 31,
2015
|
Euro
|
$
|
211
|
|
|
$
|
99
|
|
British Pound
|
192
|
|
|
62
|
|
Chinese Renminbi
|
(98
|
)
|
|
(114
|
)
|
Australian Dollar
|
(61
|
)
|
|
(60
|
)
|
Brazilian Real
|
(59
|
)
|
|
(44
|
)
|
Interest Rate Risk
One of the Company’s European subsidiaries has Euro-denominated loans. The interest on the Euro-denominated loans is variable. The Company has interest rate swap agreements in place which change the characteristics of interest rate payments from variable to maximum fixed-rate payments. The interest rate swaps are not designated as a hedge. As such, changes in the fair value of the interest rate swaps are included in Other income (expense) in the Company’s condensed consolidated statements of operations. The fair value of the interest rate swap was in a liability position of
$1 million
at both
October 1, 2016
and
December 31, 2015
.
The Company is exposed to interest rate risk on its Term Loan which has a variable interest rate that is indexed to LIBOR.
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
October 1, 2016
, all of the counterparties have investment grade credit ratings. As of
October 1, 2016
, the aggregate net credit risk with all counterparties was
de minimus
.
The following tables summarize the fair values and locations in the condensed consolidated balance sheets of all derivative financial instruments held by the Company as of
October 1, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Derivative Instruments
|
|
Assets
|
|
Liabilities
|
October 1, 2016
|
Fair
Value
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
Balance
Sheet
Location
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
—
|
|
|
Other current assets
|
|
$
|
18
|
|
|
Accrued liabilities
|
Interest rate swap
|
—
|
|
|
Other current assets
|
|
1
|
|
|
Accrued liabilities
|
Total derivatives
|
$
|
—
|
|
|
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Derivative Instruments
|
|
Assets
|
|
Liabilities
|
December 31, 2015
|
Fair
Value
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
Balance
Sheet
Location
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
6
|
|
|
Other current assets
|
|
$
|
2
|
|
|
Accrued liabilities
|
Interest rate swap
|
—
|
|
|
Other current assets
|
|
1
|
|
|
Accrued liabilities
|
Total derivatives
|
$
|
6
|
|
|
|
|
$
|
3
|
|
|
|
The following table summarizes the effect of derivatives not designated as hedging instruments on the Company's condensed consolidated statements of operations for the
three and nine months ended
October 1, 2016
and
October 3, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
Statements of
Operations Location
|
Gain (loss) on Derivative Instruments
|
October 1,
2016
|
|
October 3,
2015
|
|
October 1,
2016
|
|
October 3,
2015
|
|
Interest rate swap
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
Other income (expense)
|
Foreign exchange contracts
|
(11
|
)
|
|
25
|
|
|
(41
|
)
|
|
12
|
|
|
Other income (expense)
|
Total derivatives
|
$
|
(11
|
)
|
|
$
|
25
|
|
|
$
|
(41
|
)
|
|
$
|
13
|
|
|
|
The Company had no instruments designated as hedging instruments for the
three and nine months ended
October 1, 2016
and
October 3, 2015
.
At the end of each interim reporting period, the Company makes an estimate of its annual effective income tax rate. Tax expense in interim periods is calculated at the estimated annual effective tax rate plus or minus the tax effects of items of income and expense that are discrete to the period. The estimate used in providing for income taxes on a year-to-date basis may change in subsequent interim periods.
The following table provides details of income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1,
2016
|
|
October 3,
2015
|
|
October 1,
2016
|
|
October 3,
2015
|
Earnings from continuing operations before income taxes
|
$
|
293
|
|
|
$
|
197
|
|
|
$
|
482
|
|
|
$
|
540
|
|
Income tax expense
|
100
|
|
|
71
|
|
|
164
|
|
|
175
|
|
Effective tax rate
|
34
|
%
|
|
36
|
%
|
|
34
|
%
|
|
32
|
%
|
The Company recorded
$100 million
of net tax expense in the
third
quarter of
2016
resulting in an effective tax rate of
34%
, compared to
$71 million
of net tax expense in the
third
quarter of
2015
resulting in an effective tax rate of
36%
. The effective tax rate in the
third
quarter of
2016
was lower than the U.S. statutory tax rate of
35%
partly due to favorable discrete adjustments to deferred tax assets of foreign subsidiaries. The effective tax rate in the
third
quarter of
2015
was higher than the U.S. statutory tax rate of
35%
primarily due to higher income in the U.S. relative to foreign operations.
The Company recorded
$164 million
of net tax expense in the
first nine months
of
2016
resulting in an effective tax rate of
34%
, compared to
$175 million
of net tax expense resulting in an effective tax rate of
32%
in the
first nine months
of
2015
. The effective tax rate for the
first nine months
of
2016
was lower than the U.S. statutory tax rate of
35%
partly due to the recognition of excess tax benefits on share-based compensation. The effective tax rate in the
first nine months
of
2015
was lower than the U.S. statutory tax rate of
35%
primarily due to the rate differential for foreign affiliates and the U.S. domestic production tax deduction.
|
|
7.
|
Retirement and Other Employee Benefits
|
Pension and Postretirement Health Care Benefits Plans
The net periodic costs (benefits) 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
|
October 1, 2016
|
|
October 3, 2015
|
|
October 1, 2016
|
|
October 3, 2015
|
|
October 1, 2016
|
|
October 3, 2015
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
46
|
|
|
48
|
|
|
13
|
|
|
14
|
|
|
1
|
|
|
2
|
|
Expected return on plan assets
|
(55
|
)
|
|
(53
|
)
|
|
(23
|
)
|
|
(23
|
)
|
|
(2
|
)
|
|
(2
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net loss
|
9
|
|
|
12
|
|
|
3
|
|
|
5
|
|
|
1
|
|
|
3
|
|
Unrecognized prior service benefit
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(7
|
)
|
|
(15
|
)
|
Net periodic pension cost (benefit)
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
(5
|
)
|
|
$
|
(2
|
)
|
|
$
|
(7
|
)
|
|
$
|
(12
|
)
|
The Company made
no
contributions to its U.S. Pension Benefit Plans during both the
three months ended
October 1, 2016
and
October 3, 2015
. The Company made
$2 million
of contributions to its Non U.S. Pension Benefit Plans during both the
three months ended
October 1, 2016
and
October 3, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefit Plans
|
|
Non U.S. Pension Benefit Plans
|
|
Postretirement Health Care Benefits Plan
|
Nine Months Ended
|
October 1, 2016
|
|
October 3, 2015
|
|
October 1, 2016
|
|
October 3, 2015
|
|
October 1, 2016
|
|
October 3, 2015
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Interest cost
|
138
|
|
|
144
|
|
|
41
|
|
|
49
|
|
|
3
|
|
|
6
|
|
Expected return on plan assets
|
(165
|
)
|
|
(159
|
)
|
|
(71
|
)
|
|
(79
|
)
|
|
(7
|
)
|
|
(7
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net loss
|
27
|
|
|
35
|
|
|
9
|
|
|
13
|
|
|
4
|
|
|
8
|
|
Unrecognized prior service benefit
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(20
|
)
|
|
(45
|
)
|
Curtailment gain
|
—
|
|
|
—
|
|
|
—
|
|
|
(32
|
)
|
|
—
|
|
|
—
|
|
Net periodic cost (benefit)
|
$
|
—
|
|
|
$
|
20
|
|
|
$
|
(15
|
)
|
|
$
|
(42
|
)
|
|
$
|
(20
|
)
|
|
$
|
(37
|
)
|
The Company made
$2 million
of contributions to its U.S. Pension Benefit Plans during the
nine months ended
October 1, 2016
and
no
contributions to its U.S. Pension Benefit Plans during the
nine months ended
October 3, 2015
. During the
nine months ended
October 1, 2016
and
October 3, 2015
, the Company made
$7 million
and
$8 million
of contributions to its Non U.S. Pension Benefit Plans, respectively.
During the
nine months ended
October 1, 2016
, the Company made an amendment to the Postretirement Health Care Benefits Plan (the “Amendment”). As a result of the Amendment, all eligible retirees under the age of
65
will be provided an annual subsidy per household, versus per individual, toward the purchase of their own health care coverage from private insurance companies and for the reimbursement of eligible health care expenses.
The Amendment to the Postretirement Health Care Benefits Plan required a remeasurement of the plan, resulting in a
$53 million
reduction in the accumulated Postretirement Benefit Obligation. A substantial portion of the decrease is related to a prior service credit and will be recognized as a credit to the condensed consolidated statements of operations over approximately
five
years, or the period in which the remaining employees eligible for the plan will qualify for benefits under the plan.
During the
nine months ended
October 3, 2015
, the Company amended its Non U.S. defined benefit plan within the United Kingdom by closing future benefit accruals to all participants effective December 31, 2015. As a result, the Company recorded a curtailment gain of
$32 million
to Other charges in the Company’s condensed consolidated statements of operations.
Effective January 1, 2016, the Company changed the method used to estimate the interest and service cost components of net periodic cost for defined benefit pension and other post-retirement benefit plans. Historically, the interest and service cost components were estimated using a single weighted-average discount rate derived from the yield curve used to measure the projected benefit obligation at the beginning of the period. The Company has elected to use a full yield curve approach in the estimation of these components of net periodic cost by applying the specific spot rates along the yield curve used in the determination of the projected benefit obligation to the relevant projected cash flows. The Company made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of interest and service costs. This change does not affect the measurement of total benefit obligations as the change in interest and service cost is completely offset in the actuarial loss reported in the period. The Company has concluded that this change is a change in estimate and, therefore, has accounted for it prospectively beginning January 1, 2016. Based on the change in estimate, the Company experienced
no
reduction in service costs and a
$21 million
reduction in interest costs for the
nine months ended
October 1, 2016
compared to the prior approach. The overall reduction in the interest cost for the
nine months ended
October 1, 2016
is comprised of
$14 million
related to the U.S. Pension Benefit Plans,
$3 million
related to the Postretirement Health Care Benefit Plans, and
$4 million
related to the Non U.S. Pension Benefits Plan.
|
|
8.
|
Share-Based Compensation Plans
|
Compensation expense for the Company’s share-based compensation plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1,
2016
|
|
October 3,
2015
|
|
October 1,
2016
|
|
October 3,
2015
|
Share-based compensation expense included in:
|
|
|
|
|
|
|
|
Costs of sales
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
7
|
|
|
$
|
7
|
|
Selling, general and administrative expenses
|
12
|
|
|
13
|
|
|
35
|
|
|
38
|
|
Research and development expenditures
|
3
|
|
|
3
|
|
|
10
|
|
|
13
|
|
Share-based compensation expense included in Operating earnings
|
17
|
|
|
18
|
|
|
52
|
|
|
58
|
|
Tax benefit
|
5
|
|
|
6
|
|
|
16
|
|
|
19
|
|
Share-based compensation expense, net of tax
|
$
|
12
|
|
|
$
|
12
|
|
|
$
|
36
|
|
|
$
|
39
|
|
Decrease in basic earnings per share
|
$
|
(0.07
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.19
|
)
|
Decrease in diluted earnings per share
|
$
|
(0.07
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.19
|
)
|
During the
nine months ended
October 1, 2016
, the Company granted
0.7 million
RSUs and market stock units ("MSUs") and
0.7 million
stock options and performance options ("POs"). The total aggregate compensation expense, net of estimated forfeitures, for these RSUs and MSUs was
$42 million
and stock options and POs was
$10 million
, respectively, which will generally be recognized over the vesting period of three years.
|
|
9.
|
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
October 1, 2016
and
December 31, 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
Level 1
|
|
Level 2
|
|
Total
|
Assets:
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
Government, agency, and government-sponsored enterprise obligations
|
$
|
—
|
|
|
$
|
50
|
|
|
$
|
50
|
|
Corporate bonds
|
—
|
|
|
5
|
|
|
5
|
|
Common stock
|
1
|
|
|
—
|
|
|
1
|
|
Liabilities:
|
|
|
|
|
|
Foreign exchange derivative contracts
|
$
|
—
|
|
|
$
|
18
|
|
|
$
|
18
|
|
Interest rate swap
|
—
|
|
|
1
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
Level 1
|
|
Level 2
|
|
Total
|
Assets:
|
|
|
|
|
|
Foreign exchange derivative contracts
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
6
|
|
Available-for-sale securities:
|
|
|
|
|
|
Government, agency, and government-sponsored enterprise obligations
|
—
|
|
|
444
|
|
|
444
|
|
Corporate bonds
|
—
|
|
|
7
|
|
|
7
|
|
Common stock
|
6
|
|
|
—
|
|
|
6
|
|
Liabilities:
|
|
|
|
|
|
Foreign exchange derivative contracts
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Interest rate swap
|
—
|
|
|
1
|
|
|
1
|
|
The Company had
no
Level 3 holdings as of
October 1, 2016
or
December 31, 2015
.
At
October 1, 2016
and
December 31, 2015
, the Company had
$1.1 billion
and
$1.3 billion
, respectively, of investments in money market mutual funds (Level 2) classified as Cash and cash equivalents in its condensed consolidated balance sheets. 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
October 1, 2016
and
December 31, 2015
was
$5.2 billion
and
$4.1 billion
(Level 2), respectively.
All other financial instruments are carried at cost, which is not materially different from the instruments’ fair values.
|
|
10.
|
Long-term Financing and Sales of Receivables
|
Long-term Financing
Long-term receivables consist of receivables with payment terms greater than twelve months, long-term loans and lease receivables under sales-type leases. Long-term receivables consist of the following:
|
|
|
|
|
|
|
|
|
|
October 1,
2016
|
|
December 31,
2015
|
Long-term receivables, net
|
54
|
|
|
60
|
|
Less current portion
|
(11
|
)
|
|
(13
|
)
|
Non-current long-term receivables, net
|
$
|
43
|
|
|
$
|
47
|
|
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. The Company had outstanding commitments to provide long-term financing to third parties totaling
$214 million
at
October 1, 2016
, compared to
$112 million
at
December 31, 2015
.
Sales of Receivables
The following table summarizes the proceeds received from sales of accounts receivable and long-term receivables for the
three and nine months ended
October 1, 2016
and
October 3, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1,
2016
|
|
October 3,
2015
|
|
October 1,
2016
|
|
October 3,
2015
|
Accounts receivable sales proceeds
|
$
|
8
|
|
|
$
|
5
|
|
|
$
|
15
|
|
|
$
|
16
|
|
Long-term receivables sales proceeds
|
39
|
|
|
24
|
|
|
173
|
|
|
132
|
|
Total proceeds from receivable sales
|
$
|
47
|
|
|
$
|
29
|
|
|
$
|
188
|
|
|
$
|
148
|
|
At
October 1, 2016
, the Company had retained servicing obligations for
$685 million
of long-term receivables, compared to
$668 million
of long-term receivables at
December 31, 2015
. Servicing obligations are limited to collection activities related to the sales of accounts receivables and long-term receivables.
Credit Quality of Financing Receivables and Allowance for Credit Losses
An aging analysis of financing receivables at
October 1, 2016
and
December 31, 2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
Total
Long-term
Receivable
|
|
Current Billed
Due
|
|
Past Due Under 90 Days
|
|
Past Due Over 90 Days
|
Municipal leases secured tax exempt
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial loans and leases secured
|
42
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Total gross long-term receivables, including current portion
|
$
|
54
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
Total
Long-term
Receivable
|
|
Current Billed
Due
|
|
Past Due Under 90 Days
|
|
Past Due Over 90 Days
|
Municipal leases secured tax exempt
|
$
|
35
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial loans and leases secured
|
25
|
|
|
1
|
|
|
1
|
|
|
1
|
|
Total gross long-term receivables, including current portion
|
$
|
60
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
|
11.
|
Commitments and Contingencies
|
Legal Matters
The Company is 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 the Company's condensed consolidated financial position, liquidity, or results of operations. However, an unfavorable resolution 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, or in the periods in which more information is obtained that changes management's opinion of the ultimate disposition.
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.
Some of these obligations arise as a result of divestitures of the Company's assets or businesses and require the Company to indemnify the other party against losses arising from breaches of representations and warranties and covenants and, in some cases, the settlement of pending obligations. The Company's obligations under divestiture agreements for indemnification based on breaches of representations and warranties are generally limited in terms of duration and to amounts not in excess of a percentage of the contract value. The Company had
no
accruals for any such obligations at
October 1, 2016
.
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.
The Company conducts its business globally and manages it through the following
two
segments:
Products:
The Products segment is comprised of Devices and Systems. Devices includes two-way portable and vehicle-mounted radios, accessories, software features, and upgrades. Systems includes the radio network core and central processing software, base stations, consoles, repeaters, and software applications and features. The primary customers of the Products segment are government, public safety and first-responder agencies, municipalities, and commercial and industrial customers who operate private communications networks and manage a mobile workforce.
Services:
The Services segment provides a full set of offerings for government, public safety and commercial communication networks including: (i) Integration services, (ii) Managed & Support services, and (iii) iDEN services. Integration services includes implementation, optimization, and integration of networks, devices, software, and applications. Managed & Support services includes a continuum of service offerings beginning with repair, technical support and hardware maintenance. More advanced offerings include network monitoring, software maintenance and cyber security services. Managed service offerings range from partial or full operation of customer owned networks to operation of Motorola Solutions owned networks. Services are provided across all radio network technologies, Command Center Consoles and Smart Public Safety Solutions. iDEN services consists primarily of hardware and software maintenance services for our legacy iDEN customers.
The following table summarizes Net sales by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1,
2016
|
|
October 3,
2015
|
|
October 1,
2016
|
|
October 3,
2015
|
Products
|
$
|
920
|
|
|
$
|
925
|
|
|
$
|
2,423
|
|
|
$
|
2,550
|
|
Services
|
612
|
|
|
497
|
|
|
1,732
|
|
|
1,463
|
|
|
$
|
1,532
|
|
|
$
|
1,422
|
|
|
$
|
4,155
|
|
|
$
|
4,013
|
|
The following table summarizes the Operating earnings by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1,
2016
|
|
October 3,
2015
|
|
October 1,
2016
|
|
October 3,
2015
|
Products
|
$
|
225
|
|
|
$
|
178
|
|
|
$
|
404
|
|
|
$
|
413
|
|
Services
|
116
|
|
|
53
|
|
|
260
|
|
|
192
|
|
Operating earnings
|
341
|
|
|
231
|
|
|
664
|
|
|
605
|
|
Total other expense
|
(48
|
)
|
|
(34
|
)
|
|
(182
|
)
|
|
(65
|
)
|
Earnings from continuing operations before income taxes
|
$
|
293
|
|
|
$
|
197
|
|
|
$
|
482
|
|
|
$
|
540
|
|
|
|
13.
|
Reorganization of Business
|
2016
Charges
During the
three months ended
October 1, 2016
, the Company recorded net reorganization of business charges of
$7 million
including
$6 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
$7 million
were charges of
$8 million
related to employee separation costs, partially offset by
$1 million
of reversals for accruals no longer needed.
During the
nine months ended
October 1, 2016
, the Company recorded net reorganization of business charges of
$74 million
including
$48 million
of charges in Other charges and
$26 million
of charges in Cost of sales in the Company's condensed consolidated statements of operations. Included in the
$74 million
were charges of: (i)
$54 million
for employee separation costs, (ii)
$20 million
for impairments, including
$17 million
for a building impairment and
$3 million
for the impairment of the corporate aircraft, and (iii)
$5 million
for exit costs, partially offset by
$5 million
of reversals for accruals no longer needed.
The following table displays the net charges incurred by segment:
|
|
|
|
|
|
|
|
|
October 1, 2016
|
Three Months Ended
|
|
Nine Months Ended
|
Products
|
$
|
5
|
|
|
$
|
59
|
|
Services
|
2
|
|
|
15
|
|
|
$
|
7
|
|
|
$
|
74
|
|
The following table displays a rollforward of the reorganization of business accruals established for lease exit costs and employee separation costs from
January 1, 2016
to
October 1, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2016
|
|
Additional
Charges
|
|
Adjustments
|
|
Amount
Used
|
|
October 1, 2016
|
Exit costs
|
$
|
9
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
(5
|
)
|
|
$
|
9
|
|
Employee separation costs
|
51
|
|
|
54
|
|
|
(5
|
)
|
|
(54
|
)
|
|
46
|
|
|
$
|
60
|
|
|
$
|
59
|
|
|
$
|
(5
|
)
|
|
$
|
(59
|
)
|
|
$
|
55
|
|
Exit Costs
At
January 1, 2016
, the Company had
$9 million
of accruals for exit costs. During the
nine months ended
October 1, 2016
, there were
$5 million
of additional charges and
$5 million
of cash payments related to the exit of leased facilities. The remaining accrual of
$9 million
, which is included in Accrued liabilities in the Company’s condensed consolidated balance sheets at
October 1, 2016
, primarily represents future cash payments for lease obligations that are expected to be paid over a number of years.
Employee Separation Costs
At
January 1, 2016
, the Company had an accrual of
$51 million
for employee separation costs. The
2016
additional charges of
$54 million
represent severance costs for approximately
600
employees. The adjustment of
$5 million
reflects reversals for accruals no longer needed. The
$54 million
used reflects cash payments to severed employees. The remaining accrual of
$46 million
, which is included in Accrued liabilities in the Company’s condensed consolidated balance sheets at
October 1, 2016
, is expected to be paid, primarily within one year, to approximately
500
employees, who have either been severed or have been notified of their severance and have begun or will begin receiving payments.
2015
Charges
During the
three months ended
October 3, 2015
, the Company recorded net reorganization of business charges of
$41 million
including
$40 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
$41 million
were charges of: (i)
$26 million
for the impairment of corporate aircraft, (ii)
$11 million
of charges related to employee separation costs, and (iii) a
$6 million
building impairment charge, partially offset by
$2 million
of reversals for accruals no longer needed.
During the
nine months ended
October 3, 2015
, the Company recorded net reorganization of business charges of
$70 million
including
$65 million
of charges in Other charges and
$5 million
of charges in Cost of sales in the Company's condensed consolidated statements of operations. Included in the
$70 million
were charges of: (i)
$36 million
related to employee separation costs, (ii)
$26 million
for the impairment of the corporate aircraft, (iii) a
$6 million
building impairment charge, and (iv)
$4 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:
|
|
|
|
|
|
|
|
|
October 3, 2015
|
Three Months Ended
|
|
Nine Months Ended
|
Products
|
$
|
29
|
|
|
$
|
51
|
|
Services
|
12
|
|
|
19
|
|
|
$
|
41
|
|
|
$
|
70
|
|
|
|
14.
|
Intangible Assets and Goodwill
|
Acquisitions
During the year ended December 31, 2015 the Company completed the acquisitions of
two
providers of public safety software-based solutions for an aggregate purchase price of
$50 million
, recognizing an additional
$31 million
of goodwill,
$22 million
of identifiable intangible assets, and
$3 million
of acquired liabilities related to these acquisitions. The
$22 million
of
identifiable intangible assets were classified as: (i)
$11 million
of completed technology, (ii)
$8 million
of customer-related, and (iii)
$3 million
of other intangibles. These intangible assets will be amortized over periods ranging from
five
to
ten
years. The results of operations for these acquisitions have been included in the Company’s condensed consolidated statements of operations subsequent to the acquisition date. The pro forma effects of these acquisitions are not significant individually or in the aggregate.
On February 19, 2016, the Company completed the acquisition of GDCL, a holding company of Airwave, the largest private operator of a public safety network in the world. All of the outstanding equity of GDCL was acquired for the sum of
£1
, after which the Company invested into GDCL
£698 million
, net of cash acquired, or approximately
$1.0 billion
, to settle all third party debt. The Company will make a deferred cash payment of
£64 million
on November 15, 2018.
The acquisition of GDCL enables the Company to geographically diversify its global Managed & Support services offerings, while offering a proven service delivery platform to build on for providing innovative, leading, mission-critical communications solutions and services to customers. During the
nine months ended
October 1, 2016
, the Company recorded
$338 million
within Net sales and
$71 million
within Net earnings from the operations of Airwave.
The acquisition of GDCL has been accounted for at fair value as of the acquisition date, based on the fair value of the total consideration transferred which has been attributed to all identifiable assets acquired and liabilities assumed and measured at fair value.
The total consideration for the acquisition of GDCL was approximately
$1.1 billion
, consisting of cash payments of
$1.0 billion
, net of cash acquired, and deferred consideration valued at fair value on the date of the acquisition of
$82 million
. The fair value of deferred consideration has been determined based on its net present value, calculated using a discount rate of
4.2%
, which is reflective of the credit standing of the combined entity. The following table summarizes fair values of assets acquired and liabilities assumed as of the February 19, 2016 acquisition date:
|
|
|
|
|
|
Cash
|
|
$
|
86
|
|
Accounts receivable, net
|
|
55
|
|
Other current assets
|
|
36
|
|
Property, plant and equipment, net
|
|
245
|
|
Deferred income taxes
|
|
78
|
|
Accounts payable
|
|
(18
|
)
|
Accrued liabilities
|
|
(181
|
)
|
Other liabilities
|
|
(289
|
)
|
Goodwill
|
|
195
|
|
Intangible assets
|
|
875
|
|
Total consideration
|
|
$
|
1,082
|
|
Net present value of deferred consideration payment to former owners
|
|
(82
|
)
|
Net cash consideration at purchase
|
|
$
|
1,000
|
|
Acquired intangible assets consist of
$846 million
of customer relationships and
$29 million
of trade names. All intangibles have a useful life of
seven
years, over which amortization expense will be recognized on a straight line basis.
The fair values of trade names and customer relationships were estimated using the income approach. Customer relationships were valued under the excess earnings method which assumes that the value of an intangible asset is equal to the present value of the incremental after-tax cash flows attributable specifically to the intangible asset. Trade names were valued under the relief from royalty method, which assumes value to the extent that the acquired company is relieved of the obligation to pay royalties for the benefits received from them.
The fair value of acquired Property, plant and equipment, primarily network-related assets, was valued under the replacement cost method, which determines fair value based on the replacement cost of new property with similar capacity, adjusted for physical deterioration over the remaining useful life.
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from the other assets acquired that could not be individually identified and separately recognized. Goodwill is not deductible for tax purposes.
On August 9, 2016, the Company completed the acquisition of a provider of communications systems support and two-way radios, for a gross purchase price of
$6 million
, recognizing
$5 million
of identifiable intangible assets, which will be amortized over a period of
five
years. The results of operations for these acquisitions have been included in the Company’s condensed consolidated statements of operations subsequent to the acquisition date.
On September 23, 2016, the Company entered into a stock purchase agreement with Spillman Technologies, a provider of comprehensive law enforcement and public safety software solutions. The acquisition, which is expected to close in the fourth
quarter of 2016, will expand the Company's smart public safety portfolio and will enable the Company to offer a full suite of command center solutions to a broader customer base.
Pro Forma Financial Information
The following table presents the unaudited pro forma combined results of operations of the Company and GDCL for the
three and nine months ended
October 1, 2016
and
October 3, 2015
as if the acquisition of GDCL had occurred on January 1, 2016 and January 1, 2015, respectively, (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1, 2016
|
|
October 3, 2015
|
|
October 1, 2016
|
|
October 3, 2015
|
Revenues
|
$
|
1,532
|
|
|
$
|
1,570
|
|
|
$
|
4,226
|
|
|
$
|
4,450
|
|
Earnings from continuing operations
|
192
|
|
|
152
|
|
|
340
|
|
|
(464
|
)
|
Basic earnings per share from continuing operations
|
1.15
|
|
|
0.76
|
|
|
1.99
|
|
|
(2.24
|
)
|
Diluted earnings per share from continuing operations
|
1.13
|
|
|
0.76
|
|
|
1.95
|
|
|
(2.22
|
)
|
The Company did not adjust the effects of an
$884 million
goodwill impairment charge reported in the historic results of GDCL for the
nine months ended
October 3, 2015
on the basis that the goodwill impairment charge was not directly attributable to the acquisition of GDCL by the Company. However, this goodwill impairment charge should be highlighted as unusual and non-recurring.
The pro forma results are based on estimates and assumptions, which the Company believes are reasonable. They are not necessarily indicative of its consolidated results of operations in future periods or the results that actually would have been realized had we been a combined company during the periods presented. The pro forma results include adjustments primarily related to amortization of acquired intangible assets, depreciation, interest expense, and transaction costs expensed during the period.
Intangible Assets
Amortized intangible assets were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
December 31, 2015
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Completed technology
|
$
|
60
|
|
|
$
|
36
|
|
|
$
|
60
|
|
|
$
|
32
|
|
Patents
|
8
|
|
|
6
|
|
|
8
|
|
|
5
|
|
Customer-related
|
795
|
|
|
79
|
|
|
23
|
|
|
10
|
|
Other intangibles
|
43
|
|
|
16
|
|
|
20
|
|
|
15
|
|
|
$
|
906
|
|
|
$
|
137
|
|
|
$
|
111
|
|
|
$
|
62
|
|
Amortization expense on intangible assets was
$31 million
for the
three months ended
October 1, 2016
and
$83 million
for the
nine months ended
October 1, 2016
. Amortization expense on intangible assets was
$2 million
for the
three months ended
October 3, 2015
and
$6 million
for the
nine months ended
October 3, 2015
. The increase in amortization expense is due to the acquisition of GDCL. As of
October 1, 2016
, annual amortization expense is estimated to be
$114 million
in
2016
,
$123 million
in
2017
,
$122 million
in
2018
and
2019
,
$119 million
in
2020
, and
$118 million
in
2021
.
Amortized intangible assets, excluding goodwill, were comprised of the following by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
December 31, 2015
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Products
|
$
|
86
|
|
|
$
|
61
|
|
|
$
|
89
|
|
|
$
|
60
|
|
Services
|
820
|
|
|
76
|
|
|
22
|
|
|
2
|
|
|
$
|
906
|
|
|
$
|
137
|
|
|
$
|
111
|
|
|
$
|
62
|
|
Goodwill
The following table displays a rollforward of the carrying amount of goodwill by segment from
January 1, 2016
to
October 1, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
Services
|
|
Total
|
Balance as of January 1, 2016
|
|
|
|
|
|
Aggregate goodwill
|
$
|
270
|
|
|
$
|
150
|
|
|
$
|
420
|
|
Accumulated impairment losses
|
—
|
|
|
—
|
|
|
—
|
|
Goodwill, net of impairment losses
|
$
|
270
|
|
|
$
|
150
|
|
|
$
|
420
|
|
Goodwill acquired
|
—
|
|
|
170
|
|
|
170
|
|
Purchase accounting adjustments
|
—
|
|
|
25
|
|
|
25
|
|
Foreign currency
|
—
|
|
|
(18
|
)
|
|
(18
|
)
|
Balance as of October 1, 2016
|
|
|
|
|
|
Aggregate goodwill
|
$
|
270
|
|
|
$
|
327
|
|
|
$
|
597
|
|
Accumulated impairment losses
|
—
|
|
|
—
|
|
|
—
|
|
Goodwill, net of impairment losses
|
$
|
270
|
|
|
$
|
327
|
|
|
$
|
597
|
|