MSI 06-29-13-Q2-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________
Form 10-Q
____________________________________________
(Mark One)
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| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the period ended June 29, 2013
or
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 1-7221
____________________________________________
MOTOROLA SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
____________________________________________
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DELAWARE (State of Incorporation) | | 36-1115800 (I.R.S. Employer Identification No.) |
1303 E. Algonquin Road, Schaumburg, Illinois (Address of principal executive offices) | | 60196 (Zip Code) |
Registrant’s telephone number, including area code:
(847) 576-5000
____________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer x | | Accelerated filer ¨ | | Non-accelerated filer | | Smaller reporting company ¨ |
| | (Do not check if a smaller reporting company) | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of each of the issuer’s classes of common stock as of the close of business on June 29, 2013:
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Class | | Number of Shares |
Common Stock; $.01 Par Value | | 265,854,476 |
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Item 1 Financial Statements | |
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Item 4 Mine Safety Disclosures | |
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Part I—Financial Information
Motorola Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(In millions, except per share amounts) | June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 |
Net sales from products | $ | 1,479 |
| | $ | 1,563 |
| | $ | 2,860 |
| | $ | 3,007 |
|
Net sales from services | 628 |
| | 585 |
| | 1,220 |
| | 1,097 |
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Net sales | 2,107 |
| | 2,148 |
| | 4,080 |
| | 4,104 |
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Costs of product sales | 695 |
| | 712 |
| | 1,346 |
| | 1,370 |
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Costs of service sales | 383 |
| | 376 |
| | 750 |
| | 701 |
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Costs of sales | 1,078 |
| | 1,088 |
| | 2,096 |
| | 2,071 |
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Gross margin | 1,029 |
| | 1,060 |
| | 1,984 |
| | 2,033 |
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Selling, general and administrative expenses | 470 |
| | 496 |
| | 930 |
| | 968 |
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Research and development expenditures | 268 |
| | 269 |
| | 530 |
| | 523 |
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Other charges | 25 |
| | 17 |
| | 42 |
| | 32 |
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Operating earnings | 266 |
| | 278 |
| | 482 |
| | 510 |
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Other income (expense): | | | | |
| |
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Interest expense, net | (32 | ) | | (16 | ) | | (57 | ) | | (30 | ) |
Gains on sales of investments and businesses, net | — |
| | 3 |
| | 7 |
| | 20 |
|
Other | (10 | ) | | (25 | ) | | (3 | ) | | (16 | ) |
Total other expense | (42 | ) | | (38 | ) | | (53 | ) | | (26 | ) |
Earnings from continuing operations before income taxes | 224 |
| | 240 |
| | 429 |
| | 484 |
|
Income tax expense (benefit) | (38 | ) | | 63 |
| | (25 | ) | | 148 |
|
Earnings from continuing operations | 262 |
| | 177 |
| | 454 |
| | 336 |
|
Earnings from discontinued operations, net of tax | — |
| | 5 |
| | — |
| | 3 |
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Net earnings | 262 |
| | 182 |
| | 454 |
| | 339 |
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Less: Earnings attributable to noncontrolling interests | 4 |
| | — |
| | 4 |
| | — |
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Net earnings attributable to Motorola Solutions, Inc. | 258 |
| | 182 |
| | $ | 450 |
| | $ | 339 |
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Amounts attributable to Motorola Solutions, Inc. common stockholders: | | | | | | | |
Earnings from continuing operations, net of tax | $ | 258 |
| | $ | 177 |
| | $ | 450 |
| | $ | 336 |
|
Earnings from discontinued operations, net of tax | — |
| | 5 |
| | — |
| | 3 |
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Net earnings | $ | 258 |
| | $ | 182 |
| | $ | 450 |
| | $ | 339 |
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Earnings per common share: | | | | | | | |
Basic: | | | | | | | |
Continuing operations | $ | 0.96 |
| | $ | 0.61 |
| | $ | 1.66 |
| | $ | 1.11 |
|
Discontinued operations | — |
| | 0.02 |
| | — |
| | 0.01 |
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| $ | 0.96 |
| | $ | 0.63 |
| | $ | 1.66 |
| | $ | 1.12 |
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Diluted: | | | | | | | |
Continuing operations | $ | 0.94 |
| | $ | 0.60 |
| | $ | 1.62 |
| | $ | 1.09 |
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Discontinued operations | — |
| | 0.01 |
| | — |
| | 0.01 |
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| $ | 0.94 |
| | $ | 0.61 |
| | $ | 1.62 |
| | $ | 1.10 |
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Weighted average common shares outstanding: | | | | | | | |
Basic | 269.5 |
| | 290.6 |
| | 271.9 |
| | 302.1 |
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Diluted | 274.7 |
| | 296.1 |
| | 277.7 |
| | 308.1 |
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Dividends declared per share | $ | 0.26 |
| | 0.22 |
| | $ | 0.52 |
| | 0.44 |
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See accompanying notes to condensed consolidated financial statements (unaudited).
Motorola Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
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| Three Months ended |
(In millions) | June 29, 2013 | | June 30, 2012 |
Net earnings | $ | 262 |
| | $ | 182 |
|
Other comprehensive income (loss): | | | |
Amortization of retirement benefit adjustments, net of tax of $10 and $25 | 16 |
| | 46 |
|
Foreign currency translation adjustment, net of tax of $(5) and $(6) | (5 | ) | | (18 | ) |
Net loss on derivative hedging instruments, net of tax of $0 and $0 | — |
| | (2 | ) |
Net unrealized gain (loss) on securities, net of tax of $0 and $6 | (1 | ) | | 8 |
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Total other comprehensive income | 10 |
| | 34 |
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Comprehensive income | 272 |
| | 216 |
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Less: Earnings attributable to noncontrolling interest | 4 |
| | — |
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Comprehensive income attributable to Motorola Solutions, Inc. common shareholders | $ | 268 |
| | $ | 216 |
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| Six Months Ended |
(In millions) | June 29, 2013 | | June 30, 2012 |
Net earnings | $ | 454 |
| | $ | 339 |
|
Other comprehensive income (loss): | | | |
Amortization of retirement benefit adjustments, net of tax of $19 and $51 | 35 |
| | 95 |
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Foreign currency translation adjustment, net of tax of $(6) and $(10) | (42 | ) | | (22 | ) |
Net gain (loss) on derivative hedging instruments, net of tax of $0 and $0 | (1 | ) | | 2 |
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Net unrealized gain (loss) on securities, net of tax of $0 and $6 | (1 | ) | | 8 |
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Total other comprehensive income (loss) | (9 | ) | | 83 |
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Comprehensive income | 445 |
| | 422 |
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Less: Earnings attributable to noncontrolling interest | 4 |
| | — |
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Comprehensive income attributable to Motorola Solutions, Inc. common shareholders | $ | 441 |
| | $ | 422 |
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See accompanying notes to condensed consolidated financial statements (unaudited).
Motorola Solutions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
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(In millions, except par value amounts) | June 29, 2013 | | December 31, 2012 |
ASSETS |
Cash and cash equivalents | $ | 1,457 |
| | $ | 1,468 |
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Sigma Fund and short-term investments | 1,759 |
| | 2,135 |
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Accounts receivable, net | 1,707 |
| | 1,881 |
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Inventories, net | 498 |
| | 513 |
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Deferred income taxes | 641 |
| | 604 |
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Other current assets | 779 |
| | 800 |
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Total current assets | 6,841 |
| | 7,401 |
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Property, plant and equipment, net | 830 |
| | 839 |
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Investments | 142 |
| | 144 |
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Deferred income taxes | 2,530 |
| | 2,416 |
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Goodwill | 1,502 |
| | 1,510 |
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Other assets | 315 |
| | 369 |
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Total assets | $ | 12,160 |
| | $ | 12,679 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current portion of long-term debt | $ | 4 |
| | $ | 4 |
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Accounts payable | 597 |
| | 705 |
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Accrued liabilities | 2,193 |
| | 2,626 |
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Total current liabilities | 2,794 |
| | 3,335 |
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Long-term debt | 2,452 |
| | 1,859 |
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Other liabilities | 4,095 |
| | 4,195 |
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Stockholders’ Equity | | | |
Preferred stock, $100 par value | — |
| | — |
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Common stock, $.01 par value: | 3 |
| | 3 |
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Authorized shares: 600.0 | | | |
Issued shares: 6/29/13—267.4; 12/31/12—277.3 | | | |
Outstanding shares: 6/29/13—265.9; 12/31/12—276.1 | | | |
Additional paid-in capital | 4,162 |
| | 4,937 |
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Retained earnings | 1,935 |
| | 1,625 |
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Accumulated other comprehensive loss | (3,309 | ) | | (3,300 | ) |
Total Motorola Solutions, Inc. stockholders’ equity | 2,791 |
| | 3,265 |
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Noncontrolling interests | 28 |
| | 25 |
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Total stockholders’ equity | 2,819 |
| | 3,290 |
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Total liabilities and stockholders’ equity | $ | 12,160 |
| | $ | 12,679 |
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See accompanying notes to condensed consolidated financial statements (unaudited).
Motorola Solutions, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
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(In millions) | Shares | | Common Stock and Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss), Net of Tax | | Retained Earnings | | Noncontrolling Interests |
Balance at December 31, 2012 | 277.3 |
| | $ | 4,940 |
| | $ | (3,300 | ) | | $ | 1,625 |
| | $ | 25 |
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Net earnings |
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| | 450 |
| | 4 |
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Net unrealized loss on securities, net of tax of $0 |
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| | (1 | ) | |
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Foreign currency translation adjustments, net of tax of $(6) |
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| | (42 | ) | |
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Amortization of retirement benefit adjustments, net of tax of $19 |
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| | 35 |
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Issuance of common stock and stock options exercised | 5.5 |
| | 38 |
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Share repurchase program | (15.4 | ) | | (907 | ) | |
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Excess tax benefit from share-based compensation |
| | 18 |
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Share-based compensation expense |
| | 79 |
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Net loss on derivative hedging instruments, net of tax of $0 |
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| | (1 | ) | |
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Acquisition of noncontrolling interest |
| | (3 | ) | |
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|
| | (1 | ) |
Dividends declared | | | | |
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| | (140 | ) | | |
Balance at June 29, 2013 | 267.4 |
| | $ | 4,165 |
| | $ | (3,309 | ) | | $ | 1,935 |
| | $ | 28 |
|
See accompanying notes to condensed consolidated financial statements (unaudited).
Motorola Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited) |
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| Six Months Ended |
(In millions) | June 29, 2013 | | June 30, 2012 |
Operating | | | |
Net earnings attributable to Motorola Solutions, Inc. | $ | 450 |
| | $ | 339 |
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Earnings attributable to noncontrolling interests | 4 |
| | — |
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Net earnings | 454 |
| | 339 |
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Earnings from discontinued operations, net of tax | — |
| | 3 |
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Earnings from continuing operations | 454 |
| | 336 |
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Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities: | | | |
Depreciation and amortization | 109 |
| | 106 |
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Non-cash other income | (5 | ) | | (1 | ) |
Share-based compensation expense | 79 |
| | 95 |
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Gains on sales of investments and businesses, net | (7 | ) | | (20 | ) |
Loss from the extinguishment of long-term debt | — |
| | 6 |
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Deferred income taxes | (154 | ) | | 93 |
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Changes in assets and liabilities, net of effects of acquisitions and dispositions: | | | |
Accounts receivable | 132 |
| | 262 |
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Inventories | 11 |
| | (8 | ) |
Other current assets | — |
| | (77 | ) |
Accounts payable and accrued liabilities | (575 | ) | | (383 | ) |
Other assets and liabilities | 7 |
| | (87 | ) |
Net cash provided by operating activities from continuing operations | 51 |
| | 322 |
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Investing | | | |
Acquisitions and investments, net | (15 | ) | | 68 |
|
Proceeds from (used for) sales of investments and businesses, net | 21 |
| | (67 | ) |
Capital expenditures | (89 | ) | | (101 | ) |
Proceeds from sales of property, plant and equipment | 15 |
| | 9 |
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Proceeds from sales of Sigma Fund and short term investments, net | 376 |
| | 1,277 |
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Net cash provided by investing activities from continuing operations | 308 |
| | 1,186 |
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Financing | | | |
Repayment of debt | (2 | ) | | (411 | ) |
Net proceeds from issuance of debt | 593 |
| | 747 |
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Contribution to Motorola Mobility | — |
| | (73 | ) |
Issuance of common stock | 100 |
| | 63 |
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Purchase of common stock | (907 | ) | | (1,804 | ) |
Excess tax benefits from share-based compensation | 18 |
| | 17 |
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Payments of dividends | (143 | ) | | (134 | ) |
Distribution to discontinued operations | — |
| | (11 | ) |
Net cash used for financing activities from continuing operations | (341 | ) | | (1,606 | ) |
Discontinued Operations | | | |
Net cash provided by operating activities from discontinued operations | — |
| | 2 |
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Net cash provided by financing activities from discontinued operations | — |
| | 11 |
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Effect of exchange rate changes on cash and cash equivalents from discontinued operations | — |
| | (13 | ) |
Net cash provided by (used for) discontinued operations | — |
| | — |
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Effect of exchange rate changes on cash and cash equivalents from continuing operations | (29 | ) | | (11 | ) |
Net decrease in cash and cash equivalents | (11 | ) | | (109 | ) |
Cash and cash equivalents, beginning of period | 1,468 |
| | 1,881 |
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Cash and cash equivalents, end of period | $ | 1,457 |
| | $ | 1,772 |
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Supplemental Cash Flow Information | | | |
Cash paid during the period for: | | | |
Interest, net | $ | 58 |
| | $ | 54 |
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Income and withholding taxes, net of refunds
| 68 |
| | 91 |
|
See accompanying notes to condensed consolidated financial statements (unaudited).
Motorola Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Dollars in millions, except as noted)
(Unaudited)
The condensed consolidated financial statements as of June 29, 2013 and for the three and six months ended June 29, 2013 and June 30, 2012, 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, 2012. The results of operations for the three and six months ended June 29, 2013 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 February 2013, the Financing Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for which the Total Amount of the Obligation Is Fixed at the Reporting Date.” The standard addresses the recognition, measurement, and disclosure of certain obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, including debt arrangements, other contractual obligations, and settled litigation and judicial rulings. U.S. GAAP does not currently include specific guidance on accounting for such obligations with joint and several liability which has resulted in diversity in practice. The ASU requires an entity to measure these obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The ASU also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The ASU is to be applied retrospectively to all prior periods presented for those obligations resulting from joint and several liability arrangements within the updates scope that exist within the Company's statement of financial position at the beginning of the year of adoption. This guidance will be effective for the Company beginning January 1, 2014. The Company anticipates that the adoption of this standard will not have a material impact on its consolidated financial statements or footnote disclosures.
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2. | Discontinued Operations |
On January 1, 2012, the Company completed a series of transactions which resulted in exiting the amateur, marine and airband radio businesses. The operating results of the amateur, marine and airband radio businesses, formerly included as part of the Government segment, are reported as discontinued operations in the condensed consolidated statements of operations for all periods presented. The results of certain purchase price adjustments for previous divestitures that were recorded during the periods presented have also been reported as discontinued operations.
During the three and six months ended June 29, 2013 the Company had no activity in the condensed consolidated statements of operations for discontinued operations. The following table displays summarized activity in the Company's condensed consolidated statements of operations for discontinued operations during the three and six months ended June 30, 2012.
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| Three Months Ended | | Six Months Ended |
| June 30, 2012 | | June 30, 2012 |
Net sales | $ | — |
| | $ | — |
|
Operating earnings | 10 |
| | 11 |
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Loss on sales of investments and businesses, net | — |
| | (7 | ) |
Earnings before income taxes | 10 |
| | 8 |
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Income tax expense | 5 |
| | 5 |
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Earnings from discontinued operations, net of tax | 5 |
| | 3 |
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Statement of Operations Information
Other Charges
Other charges included in Operating earnings consist of the following:
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 |
Other charges: | | | | | | | |
Amortization of intangible assets | $ | 6 |
| | $ | 6 |
| | $ | 12 |
| | $ | 12 |
|
Reorganization of business charges | 19 |
| | 11 |
| | 30 |
| | 20 |
|
| $ | 25 |
| | $ | 17 |
| | $ | 42 |
| | $ | 32 |
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Other Income (Expense)
Interest expense, net, and Other, both included in Other income (expense), consist of the following:
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 |
Interest income (expense), net: | | | | | | | |
Interest expense | $ | (38 | ) | | $ | (25 | ) | | $ | (68 | ) | | $ | (50 | ) |
Interest income | 6 |
| | 9 |
| | 11 |
| | 20 |
|
| $ | (32 | ) | | $ | (16 | ) | | $ | (57 | ) | | $ | (30 | ) |
Other: | | | | | | | |
Loss from the extinguishment of long-term debt | $ | — |
| | $ | (6 | ) | | $ | — |
| | $ | (6 | ) |
Investment impairments | (4 | ) | | — |
| | (4 | ) | | (2 | ) |
Foreign currency loss | (8 | ) | | (21 | ) | | (4 | ) | | (11 | ) |
Other | 2 |
| | 2 |
| | 5 |
| | 3 |
|
| $ | (10 | ) | | $ | (25 | ) | | $ | (3 | ) | | $ | (16 | ) |
Earnings Per Common Share
The computation of basic and diluted earnings per common share attributable to Motorola Solutions, Inc. common stockholders is as follows:
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| | | | | | | | | | | | | | | |
| Amounts attributable to Motorola Solutions, Inc. common stockholders |
| Earnings from Continuing Operations | | Net Earnings |
Three Months Ended | June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 |
Basic earnings per common share: | | | | | | | |
Earnings | $ | 258 |
| | $ | 177 |
| | $ | 258 |
| | $ | 182 |
|
Weighted average common shares outstanding | 269.5 |
| | 290.6 |
| | 269.5 |
| | 290.6 |
|
Per share amount | $ | 0.96 |
| | $ | 0.61 |
| | $ | 0.96 |
| | $ | 0.63 |
|
Diluted earnings per common share: | | | | | | | |
Earnings | $ | 258 |
| | $ | 177 |
| | $ | 258 |
| | $ | 182 |
|
Weighted average common shares outstanding | 269.5 |
| | 290.6 |
| | 269.5 |
| | 290.6 |
|
Add effect of dilutive securities: | | | | | | | |
Share-based awards | 5.2 |
| | 5.5 |
| | 5.2 |
| | 5.5 |
|
Diluted weighted average common shares outstanding | 274.7 |
| | 296.1 |
| | 274.7 |
| | 296.1 |
|
Per share amount | $ | 0.94 |
| | $ | 0.60 |
| | $ | 0.94 |
| | $ | 0.61 |
|
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| | | | | | | | | | | | | | | |
| Amounts attributable to Motorola Solutions, Inc. common stockholders |
| Earnings from Continuing Operations | | Net Earnings |
Six Months Ended | June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 |
Basic earnings per common share: | | | | | | | |
Earnings | $ | 450 |
| | $ | 336 |
| | $ | 450 |
| | $ | 339 |
|
Weighted average common shares outstanding | 271.9 |
| | 302.1 |
| | 271.9 |
| | 302.1 |
|
Per share amount | $ | 1.66 |
| | $ | 1.11 |
| | $ | 1.66 |
| | $ | 1.12 |
|
Diluted earnings per common share: | | | | | | | |
Earnings | $ | 450 |
| | $ | 336 |
| | $ | 450 |
| | $ | 339 |
|
Weighted average common shares outstanding | 271.9 |
| | 302.1 |
| | 271.9 |
| | 302.1 |
|
Add effect of dilutive securities: | | | | | | | |
Share-based awards | 5.8 |
| | 6.0 |
| | 5.8 |
| | 6.0 |
|
Diluted weighted average common shares outstanding | 277.7 |
| | 308.1 |
| | 277.7 |
| | 308.1 |
|
Per share amount | $ | 1.62 |
| | $ | 1.09 |
| | $ | 1.62 |
| | $ | 1.10 |
|
In the computation of diluted earnings per common share from both continuing operations and on a net earnings basis for the three and six months ended June 29, 2013, the assumed exercise of 4.3 million and 4.4 million stock options, respectively, were excluded because their inclusion would have been antidilutive. In the computation of diluted earnings per common share from both continuing operations and on a net earnings basis for the three and six months ended June 30, 2012, the assumed exercise of 6.2 million and 6.0 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 $1.5 billion at both June 29, 2013 and December 31, 2012. Of these amounts, $63 million at both June 29, 2013 and December 31, 2012 was restricted.
Sigma Fund
The Sigma Fund consists of the following:
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| | | | | | | |
| June 29, 2013 | | December 31, 2012 |
Cash | $ | 46 |
| | $ | 149 |
|
Securities: | | | |
U.S. government, agency, and government-sponsored enterprise obligations | 1,710 |
| | 1,984 |
|
| $ | 1,756 |
| | $ | 2,133 |
|
Investments
Investments consist of the following: |
| | | | | | | | | | | | | | | | | | | |
| Recorded Value | | Less | | |
June 29, 2013 | Short-term Investments | | Investments | | Unrealized Gains | | Unrealized Loss | | Cost Basis |
Available-for-sale securities: | | | | | | | | | |
U.S. government, agency and government-sponsored enterprise obligations | $ | — |
| | $ | 18 |
| | $ | — |
| | $ | (1 | ) | | $ | 19 |
|
Corporate bonds | 3 |
| | 6 |
| | — |
| | — |
| | 9 |
|
Mortgage-backed securities | — |
| | 2 |
| | — |
| | — |
| | 2 |
|
Common stock and equivalents | — |
| | 9 |
| | 3 |
| | — |
| | 6 |
|
| 3 |
| | 35 |
| | 3 |
| | (1 | ) | | 36 |
|
Other securities, at cost | — |
| | 96 |
| | — |
| | — |
| | 96 |
|
Equity method investments | — |
| | 11 |
| | — |
| | — |
| | 11 |
|
| $ | 3 |
| | $ | 142 |
| | $ | 3 |
| | $ | (1 | ) | | $ | 143 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Recorded Value | | Less | | |
December 31, 2012 | Short-term Investments | | Investments | | Unrealized Gains | | Unrealized Loss | | Cost Basis |
Available-for-sale securities: | | | | | | | | | |
U.S. government, agency and government-sponsored enterprise obligations | $ | — |
| | $ | 15 |
| | $ | — |
| | $ | — |
| | $ | 15 |
|
Corporate bonds | 2 |
| | 11 |
| | — |
| | — |
| | 13 |
|
Mortgage-backed securities | — |
| | 2 |
| | — |
| | — |
| | 2 |
|
Common stock and equivalents | — |
| | 10 |
| | 3 |
| | — |
| | 7 |
|
| 2 |
| | 38 |
| | 3 |
| | — |
| | 37 |
|
Other securities, at cost | — |
| | 93 |
| | — |
| | — |
| | 93 |
|
Equity method investments | — |
| | 13 |
| | — |
| | — |
| | 13 |
|
| $ | 2 |
| | $ | 144 |
| | $ | 3 |
| | $ | — |
| | $ | 143 |
|
Accounts Receivable, Net
Accounts receivable, net, consists of the following:
|
| | | | | | | |
| June 29, 2013 | | December 31, 2012 |
Accounts receivable | $ | 1,762 |
| | $ | 1,932 |
|
Less allowance for doubtful accounts | (55 | ) | | (51 | ) |
| $ | 1,707 |
| | $ | 1,881 |
|
Inventories, Net
Inventories, net, consist of the following:
|
| | | | | | | |
| June 29, 2013 | | December 31, 2012 |
Finished goods | $ | 231 |
| | $ | 244 |
|
Work-in-process and production materials | 436 |
| | 432 |
|
| 667 |
| | 676 |
|
Less inventory reserves | (169 | ) | | (163 | ) |
| $ | 498 |
| | $ | 513 |
|
Other Current Assets
Other current assets consist of the following:
|
| | | | | | | |
| June 29, 2013 | | December 31, 2012 |
Costs and earnings in excess of billings | $ | 424 |
| | $ | 416 |
|
Contract-related deferred costs | 115 |
| | 141 |
|
Tax-related deposits and refunds receivable | 103 |
| | 95 |
|
Other | 137 |
| | 148 |
|
| $ | 779 |
| | $ | 800 |
|
Property, Plant and Equipment, Net
Property, plant and equipment, net, consists of the following:
|
| | | | | | | |
| June 29, 2013 | | December 31, 2012 |
Land | $ | 36 |
| | $ | 38 |
|
Building | 736 |
| | 739 |
|
Machinery and equipment | 1,894 |
| | 1,932 |
|
| 2,666 |
| | 2,709 |
|
Less accumulated depreciation | (1,836 | ) | | (1,870 | ) |
| $ | 830 |
| | $ | 839 |
|
Depreciation expense for the three months ended June 29, 2013 and June 30, 2012 was $51 million and $48 million, respectively. Depreciation expense for the six months ended June 29, 2013 and June 30, 2012 was $96 million and $94 million, respectively.
Other Assets
Other assets consist of the following:
|
| | | | | | | |
| June 29, 2013 | | December 31, 2012 |
Intangible assets | $ | 96 |
| | $ | 109 |
|
Long-term receivables | 22 |
| | 60 |
|
Other | 197 |
| | 200 |
|
| $ | 315 |
| | $ | 369 |
|
Accrued Liabilities
Accrued liabilities consist of the following:
|
| | | | | | | |
| June 29, 2013 | | December 31, 2012 |
Deferred revenue | $ | 766 |
| | $ | 820 |
|
Billings in excess of costs and earnings | 242 |
| | 387 |
|
Compensation | 296 |
| | 424 |
|
Tax liabilities | 123 |
| | 95 |
|
Customer reserves | 120 |
| | 144 |
|
Dividend payable | 71 |
| | 72 |
|
Other | 575 |
| | 684 |
|
| $ | 2,193 |
| | $ | 2,626 |
|
Other Liabilities
Other liabilities consist of the following:
|
| | | | | | | |
| June 29, 2013 | | December 31, 2012 |
Defined benefit plans, including split dollar life insurance policies | $ | 3,334 |
| | $ | 3,389 |
|
Postretirement health care benefit plan | 167 |
| | 167 |
|
Deferred revenue | 296 |
| | 304 |
|
Unrecognized tax benefits | 95 |
| | 98 |
|
Other | 203 |
| | 237 |
|
| $ | 4,095 |
| | $ | 4,195 |
|
Stockholders’ Equity
Share Repurchase Program: The Company paid an aggregate of $550 million during the second quarter of 2013, including transactions costs, to repurchase 9.5 million shares at an average price of $57.80 per share. The Company paid an aggregate of $907 million during the first half of 2013, including transactions costs, to repurchase 15.4 million shares at an average price of $58.75 per share. During the first half of 2012, the Company paid an aggregate of $1.8 billion, including transaction costs, to repurchase 37.1 million shares at an average price of $48.69 per share. All repurchased shares have been retired.
As of June 29, 2013, the Company had used approximately $4.5 billion of the share repurchase authority, including transaction costs, to repurchase shares, leaving $545 million of authority available for future repurchases. On July 24, 2013, the Company announced that its Board of Directors authorized up to $2.0 billion in additional funds for share repurchase, bringing the aggregate amount of the share repurchase program to $7.0 billion.
Payment of Dividends: During the three months ended June 29, 2013 and June 30, 2012, the Company paid $71 million and $64 million, respectively, in cash dividends to holders of its common stock. During the six months ended June 29, 2013 and June 30, 2012, the Company paid $143 million and $134 million, respectively, in cash dividends to holders of its common stock. On July 24, 2013, the Company announced that its Board of Directors approved an increase in the quarterly cash dividend from $0.26 per share to $0.31 per share of 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, 2013 to June 29, 2013:
|
| | | | | | | | | | | | | | | | | | | |
| 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 at December 31, 2012: | $ | 1 |
| | $ | 2 |
| | $ | (3,211 | ) | | $ | (92 | ) | | $ | (3,300 | ) |
Other comprehensive loss before reclassifications | — |
| | — |
| | — |
| | (37 | ) | | (37 | ) |
Amounts reclassified from accumulated other comprehensive loss | $ | (1 | ) | | $ | — |
| | $ | 19 |
| | $ | — |
| | $ | 18 |
|
Net current-period other comprehensive income (loss) | (1 | ) | | — |
| | 19 |
| | (37 | ) | | (19 | ) |
Balance at March 30, 2013 | $ | — |
| | $ | 2 |
| | $ | (3,192 | ) | | $ | (129 | ) | | $ | (3,319 | ) |
Other comprehensive losses before reclassifications | — |
| | (1 | ) | | — |
| | (5 | ) | | (6 | ) |
Amounts reclassified from accumulated other comprehensive loss | $ | — |
| | $ | — |
| | $ | 16 |
| | $ | — |
| | $ | 16 |
|
Net current-period other comprehensive income (loss) | — |
| | (1 | ) | | 16 |
| | (5 | ) | | 10 |
|
Balance at June 29, 2013 | $ | — |
| | $ | 1 |
| | $ | (3,176 | ) | | $ | (134 | ) | | $ | (3,309 | ) |
Amounts reclassified from Accumulated other comprehensive loss during the three months ended June 29, 2013:
|
| | | | |
Three months ended June 29, 2013 | Amount Reclassified from Accumulated Other Comprehensive Loss | Affected Line Item in the Condensed Consolidated Statement of Operations |
Amortization of retirement benefit items: | | |
Prior service costs | $ | (14 | ) | Selling, general, and administrative expenses |
Unrecognized net losses | 40 |
| Selling, general, and administrative expenses |
| 26 |
| Total before tax |
| (10 | ) | Tax benefit |
Total reclassifications for the period, net of tax | $ | 16 |
| |
Amounts reclassified from Accumulated other comprehensive loss during the six months ended June 29, 2013:
|
| | | | |
Six months ended June 29, 2013 | Amount Reclassified from Accumulated Other Comprehensive Loss | Affected Line Item in the Condensed Consolidated Statement of Operations |
Gain on cash flow hedges: | | |
Foreign exchange contracts | $ | (1 | ) | Cost of sales |
| (1 | ) | Total before tax |
| — |
| Tax expense |
| $ | (1 | ) | Net of tax |
Amortization of retirement benefit items: | | |
Prior service costs | $ | (25 | ) | Selling, general, and administrative expenses |
Unrecognized net losses | 79 |
| Selling, general, and administrative expenses |
| 54 |
| Total before tax |
| (19 | ) | Tax benefit |
| 35 |
| Net of tax |
Total reclassifications for the period, net of tax | $ | 34 |
| |
| |
4. | 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.
In May 2012 , the Company issued an aggregate face principle amount of $750 million of 3.750% Senior Notes due May 15, 2022 (the “2022 Senior Notes”), which after debt issuance and debt discounts, the Company recognized net proceeds of $740 million from the issuance of this debt. Also in May 2012, the Company called for the redemption of the $400 million aggregate principle amount outstanding of its 5.375% Senior Notes due November 2012 (the “2012 Senior Notes”). All of the 2012 Senior Notes were redeemed in June 2012 for an aggregate purchase price of approximately $408 million. After accelerating the amortization of debt issuance costs and debt discounts, the Company recognized a loss of approximately $6 million related to this redemption within Other income (expense) in the condensed consolidated statements of operations. This debt was repurchased with a portion of the proceeds from the issuance of the 2022 Senior Notes.
As of June 29, 2013, 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 June 29, 2013. The Company did not borrow under the 2011 Motorola Solutions Credit Agreement during the three and six months ended June 29, 2013.
Foreign Currency Risk
At June 29, 2013, the Company had outstanding foreign exchange contracts with notional amounts totaling $667 million, compared to $523 million outstanding at December 31, 2012. Management believes that these financial instruments should not subject the Company 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 June 29, 2013, and the corresponding positions as of December 31, 2012:
|
| | | | | | | |
| Notional Amount |
Net Buy (Sell) by Currency | June 29, 2013 | | December 31, 2012 |
British Pound | $ | 231 |
| | $ | 225 |
|
Chinese Renminbi | (141 | ) | | (99 | ) |
Norwegian Krone
| (75 | ) | | (48 | ) |
Brazilian Real | (75 | ) | | 3 |
|
Israeli Shekel | (43 | ) | | (35 | ) |
Interest Rate Risk
At June 29, 2013, the Company had $2.5 billion of long-term debt, including the current portion 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 and $4 million, at June 29, 2013 and December 31, 2012, respectively.
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 June 29, 2013, 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 June 29, 2013, the Company was exposed to an aggregate net credit risk of approximately $2 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 June 29, 2013 and December 31, 2012:
|
| | | | | | | | | | | |
| Fair Values of Derivative Instruments |
| Assets | | Liabilities |
June 29, 2013 | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location |
Derivatives not designated as hedging instruments: | | | | | | | |
Foreign exchange contracts | $ | 4 |
| | Other assets | | $ | 5 |
| | Other liabilities |
Interest agreements | — |
| | Other assets | | 3 |
| | Other liabilities |
Total derivatives not designated as hedging instruments | $ | 4 |
| | | | $ | 8 |
| | |
|
| | | | | | | | | | | |
| Fair Values of Derivative Instruments |
| Assets | | Liabilities |
December 31, 2012 | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location |
Derivatives designated as hedging instruments: | | | | | | | |
Foreign exchange contracts | $ | 1 |
| | Other assets | | $ | — |
| | Other liabilities |
Derivatives not designated as hedging instruments: | | | | | | | |
Foreign exchange contracts | 2 |
| | Other assets | | 3 |
| | Other liabilities |
Interest agreements | — |
| | Other assets | | 4 |
| | Other liabilities |
Total derivatives not designated as hedging instruments | 2 |
| | | | 7 |
| | |
Total derivatives | $ | 3 |
| | | | $ | 7 |
| | |
The following tables summarize the effect of derivative instruments in the Company's condensed consolidated statements of operations for the three and six months ended June 29, 2013 and June 30, 2012:
|
| | | | | | | | | |
| Three Months Ended | | Statement of Operations Location |
Gain on Derivative Instruments | June 29, 2013 | | June 30, 2012 | |
Derivatives not designated as hedging instruments: | | | | | |
Interest rate contracts | $ | 1 |
| | $ | — |
| | Other income (expense) |
Foreign exchange contracts | 8 |
| | 1 |
| | Other income (expense) |
Total derivatives not designated as hedging instruments | $ | 9 |
| | $ | 1 |
| | |
|
| | | | | | | | | |
| Six Months Ended | | Statement of Operations Location |
Gain (loss) on Derivative Instruments | June 29, 2013 | | June 30, 2012 | |
Derivatives not designated as hedging instruments: | | | | | |
Interest rate contracts | $ | 1 |
| | $ | — |
| | Other income (expense) |
Foreign exchange contracts | (9 | ) | | (3 | ) | | Other income (expense) |
Total derivatives not designated as hedging instruments | $ | (8 | ) | | $ | (3 | ) | | |
The following tables summarize the gains and losses recognized in the condensed consolidated financial statements for the three and six months ended June 29, 2013 and June 30, 2012:
|
| | | | | | | | | |
| Three Months Ended | | Financial Statement Location |
Foreign Exchange Contracts | June 29, 2013 | | June 30, 2012 | |
Derivatives in cash flow hedging relationships: | | | | | |
Loss recognized in Accumulated other comprehensive loss | $ | — |
| | $ | (2 | ) | | Accumulated other comprehensive loss |
|
| | | | | | | | | |
| Six Months Ended | | Financial Statement Location |
Foreign Exchange Contracts | June 29, 2013 | | June 30, 2012 | |
Derivatives in cash flow hedging relationships: | | | | | |
Gain recognized in Accumulated other comprehensive loss | $ | — |
| | $ | 1 |
| | Accumulated other comprehensive loss |
Gain (loss) reclassified from Accumulated other comprehensive loss into Net earnings | 1 |
| | (1 | ) | | Costs of sales |
At June 29, 2013 and December 31, 2012, the Company had valuation allowances of $293 million and $308 million, respectively, including $266 million and $272 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.
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, accrues for the U.S. federal and foreign income 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 are permanently invested overseas. The Company intends to utilize the offshore earnings to fund foreign investments, such as potential acquisitions and capital expenditures. During 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. Undistributed earnings that the Company intends to reinvest indefinitely, and for which no income taxes have been accrued, aggregate to $1.3 billion and $1.0 billion at June 29, 2013 and December 31, 2012, respectively.
During 2012, the Company began to reorganize certain of its non-U.S. subsidiaries under a holding company structure in order to facilitate the efficient movement of non-U.S. cash and provide a platform to fund foreign investments, such as potential acquisitions and capital expenditures. In the second quarter of 2013, the recently implemented foreign holding company structure provided the ability to realize excess foreign tax credits associated with undistributed foreign earnings, which favorably impacted the effective tax rate in the second quarter of 2013 by $128 million of tax benefit and will continue to favorably impact the annual effective tax rate for the remainder of 2013.
The Company had unrecognized tax benefits of $147 million and $161 million at June 29, 2013 and December 31, 2012, respectively, of which $123 million and $138 million, respectively, if recognized, would affect the effective tax rate, net of resulting changes to valuation allowances. During the six months ended June 29, 2013, the Company reduced its unrecognized tax benefits for settlements with tax authorities in the amount of $17 million, all of which resulted in a reduction to tax carryforwards and prepaid tax assets.
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 12 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 $75 million tax benefit, with cash payments in the range of $0 to $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.
| |
7. | Retirement and Other Employee Benefits |
Pension Benefit Plans
The net periodic pension costs for the U.S. and Non-U.S. plans were as follows:
|
| | | | | | | | | | | | | | | |
| June 29, 2013 | | June 30, 2012 |
Three Months Ended | U.S. | | Non U.S. | | U.S. | | Non U.S. |
Service cost | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | 3 |
|
Interest cost | 88 |
| | 16 |
| | 87 |
| | 18 |
|
Expected return on plan assets | (90 | ) | | (18 | ) | | (105 | ) | | (19 | ) |
Amortization of: | | | | | | | |
Unrecognized net loss | 33 |
| | 3 |
| | 62 |
| | 6 |
|
Unrecognized prior service cost | — |
| | (2 | ) | | — |
| | (1 | ) |
Net periodic pension costs | $ | 31 |
| | $ | 2 |
| | $ | 44 |
| | $ | 7 |
|
|
| | | | | | | | | | | | | | | |
| June 29, 2013 | | June 30, 2012 |
Six Months Ended | U.S. | | Non U.S. | | U.S. | | Non U.S. |
Service cost | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | 6 |
|
Interest cost | 176 |
| | 33 |
| | 175 |
| | 36 |
|
Expected return on plan assets | (182 | ) | | (37 | ) | | (211 | ) | | (38 | ) |
Amortization of: | | | | | | | |
Unrecognized net loss | 66 |
| | 6 |
| | 130 |
| | 11 |
|
Unrecognized prior service cost | — |
| | (4 | ) | | — |
| | (2 | ) |
Net periodic pension costs | $ | 60 |
| | $ | 4 |
| | $ | 94 |
| | $ | 13 |
|
During the six months ended June 29, 2013, contributions of $50 million were made to the Company’s U.S. plans, and $17 million to the Company’s Non-U.S. plans.
Postretirement Health Care Benefits Plan
Net postretirement health care expenses (benefits) consist of the following:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 |
Service cost | $ | — |
| | $ | 1 |
| | $ | 1 |
| | $ | 2 |
|
Interest cost | 3 |
| | 5 |
| | 6 |
| | 10 |
|
Expected return on plan assets | (3 | ) | | (3 | ) | | (5 | ) | | (6 | ) |
Amortization of: | | | | | | | |
Unrecognized net loss | 3 |
| | 3 |
| | 7 |
| | 6 |
|
Unrecognized prior service cost | (11 | ) | | — |
| | (22 | ) | | — |
|
Net postretirement health care expense (benefits) | $ | (8 | ) | | $ | 6 |
| | $ | (13 | ) | | $ | 12 |
|
During the year ended December 31, 2012, the Company announced an amendment to the Postretirement Health Care Benefits Plan. Starting January 1, 2013, benefits under the plan to participants over age 65 are paid to a retiree health reimbursement account instead of directly providing health insurance coverage to the participants. Covered retirees will be able to use the annual subsidy they receive through this account toward the purchase of their own health care coverage from private insurance companies and for reimbursement of eligible health care expenses. This change resulted in a remeasurement of the plan during 2012 which reduced the liability through an increase in deferred prior service cost. The majority of the deferred prior service cost will be recognized over approximately three years, which is the period in which the remaining employees eligible for the plan will qualify for benefits under the plan.
The Company made no contributions to its postretirement health care fund during the six months ended June 29, 2013.
Defined Contribution Plans
The Company and certain subsidiaries have various defined contribution plans, in which all eligible employees participate. In the U.S., the 401(k) plan is a contributory plan. Matching contributions are based upon the amount of the employees' contributions. For the three and six months ended June 29, 2013 and the June 30, 2012, the Company did not make any discretionary matching contributions.
Deferred Compensation Plan
On June 5, 2013, the Company reinstated a deferred compensation plan (“the Plan”) effective June 1, 2013. Under the Plan, participating executives may elect to defer base salary and cash incentive compensation in excess of 401(k) plan limitations. Participants under the Plan may choose to invest their deferred amounts in the same investment alternatives available under the Company's 401(k) plan, other than the Company stock fund. The Plan also allows for Company matching contributions (i) with respect to the first 4% of compensation deferred under the Plan, subject to a maximum of $50,000 for board officers, (ii) to restore lost matching amounts that would have been made under the 401(k) plan if participants had not participated in the Plan, and (iii) in such discretionary amounts, as approved by the Compensation Committee of the Board of Directors.
| |
8. | 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 | | Six Months Ended |
| June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 |
Share-based compensation expense included in: | | | | | | | |
Costs of sales | $ | 4 |
| | $ | 7 |
| | $ | 10 |
| | $ | 13 |
|
Selling, general and administrative expenses | 21 |
| | 31 |
| | 49 |
| | 57 |
|
Research and development expenditures | 9 |
| | 14 |
| | 20 |
| | 25 |
|
Share-based compensation expense included in Operating earnings | 34 |
| | 52 |
| | 79 |
| | 95 |
|
Tax benefit | 10 |
| | 21 |
| | 24 |
| | 34 |
|
Share-based compensation expense, net of tax | $ | 24 |
| | $ | 31 |
| | $ | 55 |
| | $ | 61 |
|
Decrease in basic earnings per share | $ | (0.09 | ) | | $ | (0.11 | ) | | $ | (0.20 | ) | | $ | (0.20 | ) |
Decrease in diluted earnings per share | $ | (0.09 | ) | | $ | (0.10 | ) | | $ | (0.20 | ) | | $ | (0.20 | ) |
For the three months ended June 29, 2013, the Company granted 1.3 million and 1.4 million RSUs and stock options, respectively. The total aggregate compensation expense, net of estimated forfeitures, for these RSUs and stock options was $63 million and $13 million, respectively, which will be recognized over a weighted average vesting period of three years. For the six months ended June 29, 2013, the Company granted 1.4 million RSUs and 1.5 million stock options. The total aggregate compensation expense, net of estimated forfeitures, for these RSUs and stock options was $68 million and $14 million, respectively, which will be recognized over a weighted average vesting period of three years.
Employee Stock Purchase Plan
The employee stock purchase plan allows eligible participants to purchase shares of the Company's common stock through payroll deductions of eligible compensation on an after-tax basis. Effective April 1, 2012, the Company increased the maximum purchase from 10% to 20% of eligible compensation. Plan participants cannot purchase more than $25,000 of stock in any calendar year.
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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 June 29, 2013 and December 31, 2012 were as follows:
|
| | | | | | | | | | | |
June 29, 2013 | Level 1 | | Level 2 | | Total |
Assets: | | | | | |
Sigma Fund securities: | | | | | |
U.S. government, agency and government-sponsored enterprise obligations | $ | — |
| | $ | 1,710 |
| | $ | 1,710 |
|
Foreign exchange derivative contracts | — |
| | 4 |
| | 4 |
|
Available-for-sale securities: | | | | | |
U.S. government, agency and government-sponsored enterprise obligations | — |
| | 18 |
| | 18 |
|
Corporate bonds | — |
| | 6 |
| | 6 |
|
Mortgage-backed securities | — |
| | 2 |
| | 2 |
|
Common stock and equivalents | 2 |
| | 7 |
| | 9 |
|
Liabilities: | | | | | |
Foreign exchange derivative contracts | $ | — |
| | $ | 5 |
| | $ | 5 |
|
Interest agreement derivative contracts | — |
| | 3 |
| | 3 |
|
|
| | | | | | | | | | | |
December 31, 2012 | Level 1 | | Level 2 | | Total |
Assets: | | | | | |
Sigma Fund securities: | | | | | |
U.S. government, agency and government-sponsored enterprise obligations | $ | — |
| | $ | 1,984 |
| | $ | 1,984 |
|
Foreign exchange derivative contracts | — |
| | 3 |
| | 3 |
|
Available-for-sale securities: | | | | | |
U.S. government, agency and government-sponsored enterprise obligations | — |
| | 15 |
| | 15 |
|
Corporate bonds | — |
| | 11 |
| | 11 |
|
Mortgage-backed securities | — |
| | 2 |
| | 2 |
|
Common stock and equivalents | 3 |
| | 7 |
| | 10 |
|
Liabilities: | | | | | |
Foreign exchange derivative contracts | $ | — |
| | $ | 3 |
| | $ | 3 |
|
Interest agreement derivative contracts | — |
| | 4 |
| | 4 |
|
The Company had no Level 3 holdings as of June 29, 2013 or December 31, 2012.
At June 29, 2013, the Company had $379 million of investments in money market mutual funds classified as Cash and cash equivalents in its condensed consolidated balance sheet, compared to $422 million at December 31, 2012. 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 June 29, 2013 was $2.5 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.
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10. | 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:
|
| | | | | | | |
| June 29, 2013 | | December 31, 2012 |
Long-term customer financing receivables | $ | 63 |
| | $ | 101 |
|
Less current portion | (41 | ) | | (41 | ) |
Non-current long-term receivables, net | $ | 22 |
| | $ | 60 |
|
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 $91 million at June 29, 2013, compared to $84 million at December 31, 2012.
Sales of Receivables
The following table summarizes the proceeds received from sales of accounts receivable and long-term receivables for the three and six months ended June 29, 2013 and June 30, 2012:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 |
Cumulative quarterly proceeds received from sales: | | | | | | | |
Accounts receivable sales proceeds | $ | 2 |
| | $ | 2 | |