MSI 07-04-15 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 July 4, 2015
or |
| | |
| ¨ | 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 July 4, 2015:
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| | |
Class | | Number of Shares |
Common Stock; $.01 Par Value | | 206,777,008 |
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| Page |
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Item 1 Financial Statements | |
Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended July 4, 2015 and June 28, 2014 | |
Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended July 4, 2015 and June 28, 2014 | |
Condensed Consolidated Balance Sheets as of July 4, 2015 (Unaudited) and December 31, 2014 | |
Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) for the Six Months Ended July 4, 2015 | |
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended July 4, 2015 and June 28, 2014 | |
Notes to Condensed Consolidated Financial Statements (Unaudited) | |
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Item 4 Mine Safety Disclosures | |
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Part I—Financial Information
Condensed Consolidated Statements of Operations
(Unaudited) |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(In millions, except per share amounts) | July 4,
2015 | | June 28,
2014 | | July 4,
2015 | | June 28,
2014 |
Net sales from products | $ | 867 |
| | $ | 887 |
| | $ | 1,626 |
| | $ | 1,640 |
|
Net sales from services | 501 |
| | 506 |
| | 965 |
| | 982 |
|
Net sales | 1,368 |
| | 1,393 |
| | 2,591 |
| | 2,622 |
|
Costs of product sales | 385 |
| | 400 |
| | 745 |
| | 751 |
|
Costs of services sales | 335 |
| | 337 |
| | 650 |
| | 638 |
|
Costs of sales | 720 |
| | 737 |
| | 1,395 |
| | 1,389 |
|
Gross margin | 648 |
| | 656 |
| | 1,196 |
| | 1,233 |
|
Selling, general and administrative expenses | 254 |
| | 308 |
| | 510 |
| | 615 |
|
Research and development expenditures | 156 |
| | 176 |
| | 315 |
| | 350 |
|
Other charges (income) | (16 | ) | | 34 |
| | (2 | ) | | 23 |
|
Operating earnings | 254 |
| | 138 |
| | 373 |
| | 245 |
|
Other income (expense): | | | | | | | |
Interest expense, net | (39 | ) | | (29 | ) | | (79 | ) | | (54 | ) |
Gains (losses) on sales of investments, net | 4 |
| | (4 | ) | | 50 |
| | 4 |
|
Other | (4 | ) | | (7 | ) | | (1 | ) | | (9 | ) |
Total other expense | (39 | ) | | (40 | ) | | (30 | ) | | (59 | ) |
Earnings from continuing operations before income taxes | 215 |
| | 98 |
| | 343 |
| | 186 |
|
Income tax expense | 64 |
| | 20 |
| | 104 |
| | 23 |
|
Earnings from continuing operations | 151 |
| | 78 |
| | 239 |
| | 163 |
|
Earnings (loss) from discontinued operations, net of tax | (8 | ) | | 746 |
| | (21 | ) | | 788 |
|
Net earnings | 143 |
| | 824 |
| | 218 |
| | 951 |
|
Less: Earnings attributable to noncontrolling interests | 1 |
| | — |
| | 1 |
| | — |
|
Net earnings attributable to Motorola Solutions, Inc. | $ | 142 |
| | $ | 824 |
| | $ | 217 |
| | $ | 951 |
|
Amounts attributable to Motorola Solutions, Inc. common stockholders: | | | | | | | |
Earnings from continuing operations, net of tax | $ | 150 |
| | $ | 78 |
| | $ | 238 |
| | $ | 163 |
|
Earnings (loss) from discontinued operations, net of tax | (8 | ) | | 746 |
| | (21 | ) | | 788 |
|
Net earnings attributable to Motorola Solutions, Inc. | $ | 142 |
| | $ | 824 |
| | $ | 217 |
| | $ | 951 |
|
Earnings (loss) per common share: | | | | | | | |
Basic: | | | | | | | |
Continuing operations | $ | 0.72 |
| | $ | 0.31 |
| | $ | 1.12 |
| | $ | 0.64 |
|
Discontinued operations | (0.04 | ) | | 2.94 |
| | (0.09 | ) | | 3.11 |
|
| $ | 0.68 |
| | $ | 3.25 |
| | $ | 1.03 |
| | $ | 3.75 |
|
Diluted: | | | | | | | |
Continuing operations | $ | 0.72 |
| | $ | 0.30 |
| | $ | 1.11 |
| | $ | 0.63 |
|
Discontinued operations | (0.04 | ) | | 2.92 |
| | (0.10 | ) | | 3.07 |
|
| $ | 0.68 |
| | $ | 3.22 |
| | $ | 1.01 |
| | $ | 3.70 |
|
Weighted average common shares outstanding: | | | | | | | |
Basic | 208.0 |
| | 253.7 |
| | 211.7 |
| | 253.8 |
|
Diluted | 209.5 |
| | 256.2 |
| | 213.8 |
| | 257.2 |
|
Dividends declared per share | $ | 0.34 |
| | 0.31 |
| | $ | 0.68 |
| | 0.62 |
|
See accompanying notes to condensed consolidated financial statements (unaudited).
Condensed Consolidated Statements of Comprehensive Income
(Unaudited) |
| | | | | | | |
| Three Months Ended |
(In millions) | July 4,
2015 | | June 28,
2014 |
Net earnings | $ | 143 |
| | $ | 824 |
|
Other comprehensive income (loss), net of tax (Note 3): | | | |
Foreign currency translation adjustments | 7 |
| | 13 |
|
Net loss on derivative instruments | — |
| | 1 |
|
Marketable securities | 4 |
| | — |
|
Defined benefit plans | (83 | ) | | 11 |
|
Total other comprehensive income (loss), net of tax | (72 | ) | | 25 |
|
Comprehensive income | 71 |
| | 849 |
|
Less: Earnings attributable to noncontrolling interest | 1 |
| | — |
|
Comprehensive income attributable to Motorola Solutions, Inc. common shareholders | $ | 70 |
| | $ | 849 |
|
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| | | | | | | |
| Six Months Ended |
(In millions) | July 4,
2015 | | June 28,
2014 |
Net earnings | $ | 218 |
| | $ | 951 |
|
Other comprehensive income (loss), net of tax (Note 3): | | | |
Foreign currency translation adjustments | (19 | ) | | 15 |
|
Net loss on derivative instruments | — |
| | 1 |
|
Marketable securities | (29 | ) | | 2 |
|
Defined benefit plans | (82 | ) | | 24 |
|
Total other comprehensive income (loss), net of tax | (130 | ) | | 42 |
|
Comprehensive income | 88 |
| | 993 |
|
Less: Earnings attributable to noncontrolling interest | 1 |
| | — |
|
Comprehensive income attributable to Motorola Solutions, Inc. common shareholders | $ | 87 |
| | $ | 993 |
|
See accompanying notes to condensed consolidated financial statements (unaudited).
Condensed Consolidated Balance Sheets
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| | | | | | | |
(In millions, except par value) | July 4,
2015 | | December 31,
2014 |
| (Unaudited) | | |
ASSETS |
Cash and cash equivalents | $ | 3,112 |
| | $ | 3,954 |
|
Accounts receivable, net | 1,141 |
| | 1,409 |
|
Inventories, net | 364 |
| | 345 |
|
Deferred income taxes | 422 |
| | 431 |
|
Other current assets | 593 |
| | 740 |
|
Total current assets | 5,632 |
| | 6,879 |
|
Property, plant and equipment, net | 542 |
| | 549 |
|
Investments | 285 |
| | 316 |
|
Deferred income taxes | 2,118 |
| | 2,151 |
|
Goodwill | 423 |
| | 383 |
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Other assets | 160 |
| | 145 |
|
Total assets | $ | 9,160 |
| | $ | 10,423 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current portion of long-term debt | $ | 4 |
| | $ | 4 |
|
Accounts payable | 417 |
| | 540 |
|
Accrued liabilities | 1,550 |
| | 1,706 |
|
Total current liabilities | 1,971 |
| | 2,250 |
|
Long-term debt | 3,393 |
| | 3,396 |
|
Other liabilities | 1,973 |
| | 2,011 |
|
Stockholders’ Equity | | | |
Preferred stock, $100 par value | — |
| | — |
|
Common stock, $.01 par value: | 2 |
| | 2 |
|
Authorized shares: 600.0 | | | |
Issued shares: 7/4/15—207.3; 12/31/14—220.5 | | | |
Outstanding shares: 7/4/15—206.8; 12/31/14—219.8 | | | |
Additional paid-in capital | 313 |
| | 1,178 |
|
Retained earnings | 3,485 |
| | 3,410 |
|
Accumulated other comprehensive loss | (1,985 | ) | | (1,855 | ) |
Total Motorola Solutions, Inc. stockholders’ equity | 1,815 |
| | 2,735 |
|
Noncontrolling interests | 8 |
| | 31 |
|
Total stockholders’ equity | 1,823 |
| | 2,766 |
|
Total liabilities and stockholders’ equity | $ | 9,160 |
| | $ | 10,423 |
|
See accompanying notes to condensed consolidated financial statements (unaudited).
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited) |
| | | | | | | | | | | | | | | | | | |
(In millions) | Shares | | Common Stock and Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained
Earnings | | Noncontrolling
Interests |
Balance as of December 31, 2014 | 220.5 |
| | $ | 1,180 |
| | $ | (1,855 | ) | | $ | 3,410 |
| | $ | 31 |
|
Net earnings |
| |
| |
|
| | 217 |
| | 1 |
|
Other comprehensive loss |
| |
| | (130 | ) | |
| |
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Issuance of common stock and stock options exercised | 1.3 |
| | 37 |
| |
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| |
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Share repurchase program | (14.5 | ) | | (938 | ) | |
| |
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Tax shortfalls from share-based compensation |
| | (4 | ) | |
| |
| |
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Share-based compensation expense |
| | 40 |
| |
| |
| |
|
Sale of controlling interest in subsidiary common stock |
| |
| |
| |
| | (24 | ) |
Dividends declared |
| |
| |
|
| | (142 | ) | |
|
Balance as of July 4, 2015 | 207.3 |
| | $ | 315 |
| | $ | (1,985 | ) | | $ | 3,485 |
| | $ | 8 |
|
See accompanying notes to condensed consolidated financial statements (unaudited).
Condensed Consolidated Statements of Cash Flows
(Unaudited) |
| | | | | | | |
| Six Months Ended |
(In millions) | July 4,
2015 | | June 28,
2014 |
Operating | | | |
Net earnings attributable to Motorola Solutions, Inc. | $ | 217 |
| | $ | 951 |
|
Earnings attributable to noncontrolling interests | 1 |
| | — |
|
Net earnings | 218 |
| | 951 |
|
Earnings (loss) from discontinued operations, net of tax | (21 | ) | | 788 |
|
Earnings from continuing operations, net of tax | 239 |
| | 163 |
|
Adjustments to reconcile Earnings from continuing operations to Net cash provided by operating activities from continuing operations: | | | |
Depreciation and amortization | 81 |
| | 86 |
|
Gain on sale of building and land | — |
| | (21 | ) |
Non-cash other charges (income) | 5 |
| | (5 | ) |
Non-U.S. pension curtailment gain | (32 | ) |
| — |
|
Share-based compensation expense | 40 |
| | 54 |
|
Gains on sales of investments and businesses, net | (50 | ) | | (4 | ) |
Deferred income taxes | 55 |
| | 6 |
|
Changes in assets and liabilities, net of effects of acquisitions, dispositions, and foreign currency translation adjustments: | | | |
Accounts receivable | 255 |
| | 190 |
|
Inventories | (25 | ) | | 17 |
|
Other current assets | 28 |
| | 76 |
|
Accounts payable and accrued liabilities | (263 | ) | | (299 | ) |
Other assets and liabilities | (42 | ) | | (133 | ) |
Net cash provided by operating activities from continuing operations | 291 |
| | 130 |
|
Investing | | | |
Acquisitions and investments, net | (93 | ) | | (11 | ) |
Proceeds from sales of investments and businesses, net | 111 |
| | 21 |
|
Capital expenditures | (81 | ) | | (82 | ) |
Proceeds from sales of property, plant and equipment | 1 |
| | 24 |
|
Net cash used for investing activities from continuing operations | (62 | ) | | (48 | ) |
Financing | | | |
Repayment of debt | (2 | ) | | (2 | ) |
Net proceeds from issuance of debt | — |
| | 4 |
|
Issuance of common stock | 51 |
| | 85 |
|
Purchase of common stock | (938 | ) | | (473 | ) |
Excess tax benefit from share-based compensation | 1 |
| | 6 |
|
Payment of dividends | (148 | ) | | (158 | ) |
Distributions from discontinued operations | — |
| | 100 |
|
Net cash used for financing activities from continuing operations | (1,036 | ) | | (438 | ) |
Discontinued Operations | | | |
Net cash provided by operating activities from discontinued operations | — |
| | 89 |
|
Net cash provided by investing activities from discontinued operations | — |
| | 11 |
|
Net cash used for financing activities from discontinued operations | — |
| | (100 | ) |
Net cash provided by discontinued operations | — |
| | — |
|
Effect of exchange rate changes on cash and cash equivalents from continuing operations | (35 | ) | | 7 |
|
Net decrease in cash and cash equivalents | (842 | ) | | (349 | ) |
Cash and cash equivalents, beginning of period | 3,954 |
| | 3,225 |
|
Cash and cash equivalents, end of period | $ | 3,112 |
| | $ | 2,876 |
|
Supplemental Cash Flow Information | | | |
Cash paid during the period for: | | | |
Interest, net | $ | 81 |
| | $ | 67 |
|
Income and withholding taxes, net of refunds | 71 |
| | 31 |
|
See accompanying notes to condensed consolidated financial statements (unaudited).
Notes to Condensed Consolidated Financial Statements
(Dollars in millions, except as noted)
(Unaudited)
The condensed consolidated financial statements as of July 4, 2015 and for the three and six months ended July 4, 2015 and June 28, 2014, 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, 2014. The results of operations for the three and six months ended July 4, 2015 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 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 disclosure 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. This ASU will be effective for the Company beginning January 1, 2018. This ASU 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 April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. 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. In adopting the ASU, the Company will be required to apply a full retrospective approach to all periods presented. This guidance will be effective January 1, 2016 and, upon adoption, debt issuance costs capitalized in other assets in the consolidated balance sheet will be reclassified and presented as a reduction to long-term debt. As of July 4, 2015, debt issuance costs, net of accumulated amortization, recognized in the condensed consolidated balance sheet were $18 million.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 340): Simplifying the Measurement of Inventory. Under this guidance, entities utilizing the FIFO or average cost method should measure inventory at the lower of cost or net realizable value, whereas net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU should be applied prospectively and will be effective for the Company beginning January 1, 2017 with early adoption permitted. The Company is in the process of assessing the impact of this ASU on its consolidated financial statements and footnote disclosures.
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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.
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 July 4, 2015 and June 28, 2014:
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| Three Months Ended | | Six Months Ended |
| July 4,
2015 | | June 28,
2014 | | July 4,
2015 | | June 28,
2014 |
Net sales | $ | — |
| | $ | 560 |
| | $ | — |
| | $ | 1,133 |
|
Operating earnings | — |
| | 55 |
| | — |
| | 118 |
|
Losses on sales of investments and businesses, net | — |
| | (1 | ) | | — |
| | (1 | ) |
Investment impairments | — |
| | (3 | ) | | — |
| | (3 | ) |
Earnings (loss) before income taxes | (8 | ) | | 50 |
| | (28 | ) | | 112 |
|
Income tax benefit | — |
| | (696 | ) | | (7 | ) | | (676 | ) |
Earnings (loss) from discontinued operations, net of tax | $ | (8 | ) | | $ | 746 |
| | $ | (21 | ) | | $ | 788 |
|
Statements of Operations Information
Other Charges (Income)
Other charges (income) included in Operating earnings consist of the following:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 4,
2015 | | June 28,
2014 | | July 4,
2015 | | June 28,
2014 |
Other charges (income): | | | | | | | |
Intangibles amortization | $ | 3 |
| | $ | 1 |
| | $ | 4 |
| | $ | 2 |
|
Reorganization of business | 13 |
| | 25 |
| | 26 |
| | 34 |
|
Legal settlement | — |
| | 8 |
| | — |
| | 8 |
|
Non-U.S. pension curtailment gain | (32 | ) | | — |
| | (32 | ) | | — |
|
Gain on sale of building and land | — |
| | — |
| | — |
| | (21 | ) |
| $ | (16 | ) | | $ | 34 |
| | $ | (2 | ) | | $ | 23 |
|
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 |
| July 4,
2015 | | June 28,
2014 | | July 4,
2015 | | June 28,
2014 |
Interest income (expense), net: | | | | | | | |
Interest expense | $ | (42 | ) | | $ | (34 | ) | | $ | (86 | ) | | $ | (64 | ) |
Interest income | 3 |
| | 5 |
| | 7 |
| | 10 |
|
| $ | (39 | ) | | $ | (29 | ) | | $ | (79 | ) | | $ | (54 | ) |
Other: | | | | | | | |
Investment impairments | (3 | ) | | — |
| | (3 | ) | | — |
|
Foreign currency gain (loss) | (11 | ) | | (7 | ) | | $ | 7 |
| | $ | (8 | ) |
Gain (loss) on derivative instruments | 4 |
| | (1 | ) | | (12 | ) | | (2 | ) |
Gains on equity method investments | 4 |
| | 2 |
| | 4 |
| | 2 |
|
Other | 2 |
| | (1 | ) | | 3 |
| | (1 | ) |
| $ | (4 | ) | | $ | (7 | ) | | $ | (1 | ) | | $ | (9 | ) |
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 | July 4,
2015 | | June 28,
2014 | | July 4,
2015 | | June 28,
2014 |
Basic earnings per common share: | | | | | | | |
Earnings | $ | 150 |
| | $ | 78 |
| | $ | 142 |
| | $ | 824 |
|
Weighted average common shares outstanding | 208.0 |
| | 253.7 |
| | 208.0 |
| | 253.7 |
|
Per share amount | $ | 0.72 |
| | $ | 0.31 |
| | $ | 0.68 |
| | $ | 3.25 |
|
Diluted earnings per common share: | | | | | | | |
Earnings | $ | 150 |
| | $ | 78 |
| | $ | 142 |
| | $ | 824 |
|
Weighted average common shares outstanding | 208.0 |
| | 253.7 |
| | 208.0 |
| | 253.7 |
|
Add effect of dilutive securities: | | | | | | | |
Share-based awards | 1.5 |
| | 2.5 |
| | 1.5 |
| | 2.5 |
|
Diluted weighted average common shares outstanding | 209.5 |
| | 256.2 |
| | 209.5 |
| | 256.2 |
|
Per share amount | $ | 0.72 |
| | $ | 0.30 |
| | $ | 0.68 |
| | $ | 3.22 |
|
|
| | | | | | | | | | | | | | | |
| Amounts attributable to Motorola Solutions, Inc. common stockholders |
| Earnings from Continuing Operations, net of tax | | Net Earnings |
Six Months Ended | July 4,
2015 | | June 28,
2014 | | July 4,
2015 | | June 28,
2014 |
Basic earnings per common share: | | | | | | | |
Earnings | $ | 238 |
| | $ | 163 |
| | $ | 217 |
| | $ | 951 |
|
Weighted average common shares outstanding | 211.7 |
| | 253.8 |
| | 211.7 |
| | 253.8 |
|
Per share amount | $ | 1.12 |
| | $ | 0.64 |
| | $ | 1.03 |
| | $ | 3.75 |
|
Diluted earnings per common share: | | | | | | | |
Earnings | $ | 238 |
| | $ | 163 |
| | $ | 217 |
| | $ | 951 |
|
Weighted average common shares outstanding | 211.7 |
| | 253.8 |
| | 211.7 |
| | 253.8 |
|
Add effect of dilutive securities: | | | | | | | |
Share-based awards | 2.1 |
| | 3.4 |
| | 2.1 |
| | 3.4 |
|
Diluted weighted average common shares outstanding | 213.8 |
| | 257.2 |
| | 213.8 |
| | 257.2 |
|
Per share amount | $ | 1.11 |
| | $ | 0.63 |
| | $ | 1.01 |
| | $ | 3.70 |
|
In the computation of diluted earnings per common share from both continuing operations and on a net earnings basis for the three months ended July 4, 2015, the assumed exercise of 1.7 million options and the assumed vesting of 0.7 million RSUs were excluded because their inclusion would have been antidilutive. For the six months ended July 4, 2015, the assumed exercise of 3.9 million options and the assumed vesting of 1.2 million RSUs were excluded because their inclusion would have been antidilutive.
For the three and six months ended June 28, 2014, the assumed exercise of 4.6 million and 4.8 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 were $3.1 billion at July 4, 2015 and $4.0 billion at December 31, 2014. Of these amounts, $63 million was restricted at both July 4, 2015 and December 31, 2014.
Investments
Investments consist of the following: |
| | | | | | | | | | | |
July 4, 2015 | Cost
Basis | | Unrealized
Gains | | Investments |
Available-for-sale securities: | | | | | |
Government, agency, and government-sponsored enterprise obligations | $ | 31 |
| | $ | — |
| | $ | 31 |
|
Corporate bonds | 9 |
| | — |
| | 9 |
|
Common stock | — |
| | 23 |
| | 23 |
|
| 40 |
| | 23 |
| | 63 |
|
Other investments, at cost | 208 |
| | — |
| | 208 |
|
Equity method investments | 14 |
| | — |
| | 14 |
|
| $ | 262 |
| | $ | 23 |
| | $ | 285 |
|
|
| | | | | | | | | | | |
December 31, 2014 | Cost
Basis | | Unrealized
Gains | | Investments |
Available-for-sale securities: | | | | | |
Government, agency, and government-sponsored enterprise obligations | $ | 14 |
| | $ | — |
| | $ | 14 |
|
Corporate bonds | 16 |
| | — |
| | 16 |
|
Mutual funds | 2 |
| | — |
| | 2 |
|
Common stock | 1 |
| | 70 |
| | 71 |
|
| 33 |
| | 70 |
| | 103 |
|
Other investments, at cost | 191 |
| | — |
| | 191 |
|
Equity method investments | 22 |
| | — |
| | 22 |
|
| $ | 246 |
| | $ | 70 |
| | $ | 316 |
|
During the three months ended July 4, 2015, the Company recorded investment impairment charges of $3 million related to cost method investments and sold a cost method investment recognizing a gain on sale of $4 million. During the six months ended July 4, 2015, the Company sold shares of an equity investment realizing cash proceeds of $47 million and a previously unrecognized gain of $46 million.
Accounts Receivable, Net
Accounts receivable, net, consists of the following:
|
| | | | | | | |
| July 4,
2015 | | December 31,
2014 |
Accounts receivable | $ | 1,168 |
| | $ | 1,444 |
|
Less allowance for doubtful accounts | (27 | ) | | (35 | ) |
| $ | 1,141 |
| | $ | 1,409 |
|
Inventories, Net
Inventories, net, consist of the following:
|
| | | | | | | |
| July 4,
2015 | | December 31,
2014 |
Finished goods | $ | 165 |
| | $ | 163 |
|
Work-in-process and production materials | 337 |
| | 313 |
|
| 502 |
| | 476 |
|
Less inventory reserves | (138 | ) | | (131 | ) |
| $ | 364 |
| | $ | 345 |
|
Other Current Assets
Other current assets consist of the following:
|
| | | | | | | |
| July 4,
2015 | | December 31,
2014 |
Costs and earnings in excess of billings | $ | 385 |
| | $ | 417 |
|
Tax-related refunds receivable | 90 |
| | 103 |
|
Zebra receivable for cash transferred | — |
| | 49 |
|
Other | 118 |
| | 171 |
|
| $ | 593 |
| | $ | 740 |
|
In conjunction with the sale of the Enterprise business to Zebra Technologies, the Company transferred legal entities which maintained cash balances. During the six months ended July 4, 2015, approximately $49 million of transferred cash balances were reimbursed by Zebra in accordance with the sales agreement.
Property, Plant and Equipment, Net
Property, plant and equipment, net, consists of the following:
|
| | | | | | | |
| July 4,
2015 | | December 31,
2014 |
Land | $ | 18 |
| | $ | 18 |
|
Building | 555 |
| | 559 |
|
Machinery and equipment | 1,695 |
| | 1,672 |
|
| 2,268 |
| | 2,249 |
|
Less accumulated depreciation | (1,726 | ) | | (1,700 | ) |
| $ | 542 |
| | $ | 549 |
|
Depreciation expense for the three months ended July 4, 2015 and June 28, 2014 was $38 million and $45 million, respectively. Depreciation expense for the six months ended July 4, 2015 and June 28, 2014 was $77 million and $84 million, respectively.
Other Assets
Other assets consist of the following:
|
| | | | | | | |
| July 4,
2015 | | December 31,
2014 |
Intangible assets, net | $ | 52 |
| | $ | 23 |
|
Long-term receivables | 18 |
| | 31 |
|
Other | 90 |
| | 91 |
|
| $ | 160 |
| | $ | 145 |
|
Accrued Liabilities
Accrued liabilities consist of the following:
|
| | | | | | | |
| July 4,
2015 | | December 31,
2014 |
Deferred revenue | $ | 335 |
| | $ | 355 |
|
Compensation | 180 |
| | 190 |
|
Billings in excess of costs and earnings | 346 |
| | 358 |
|
Tax liabilities | 68 |
| | 91 |
|
Dividend payable | 70 |
| | 75 |
|
Other | 551 |
| | 637 |
|
| $ | 1,550 |
| | $ | 1,706 |
|
Other Liabilities
Other liabilities consist of the following:
|
| | | | | | | |
| July 4,
2015 | | December 31,
2014 |
Defined benefit plans | $ | 1,600 |
| | $ | 1,611 |
|
Postretirement Health Care Benefit Plan | 39 |
| | 49 |
|
Deferred revenue | 121 |
| | 139 |
|
Unrecognized tax benefits | 51 |
| | 54 |
|
Other | 162 |
| | 158 |
|
| $ | 1,973 |
| | $ | 2,011 |
|
Stockholders’ Equity
Share Repurchase Program: Through actions taken on July 28, 2011, January 30, 2012, July 25, 2012, July 22, 2013, and November 3, 2014, the Board of Directors has authorized the Company to repurchase an aggregate amount of up to $12.0 billion of its outstanding shares of common stock (the “share repurchase program”). The share repurchase program does not have an expiration date.
The Company paid an aggregate of $285 million during the three months ended July 4, 2015, including transaction costs, to repurchase approximately 4.6 million shares at an average price of $61.63 per share. The Company paid an aggregate of $938 million during the six months ended July 4, 2015, including transaction costs, to repurchase approximately 14.5 million shares at an average price of $64.69 per share. As of July 4, 2015, the Company had used approximately $8.7 billion of the share repurchase authority, including transaction costs, to repurchase shares leaving $3.3 billion of authority available for future repurchases.
On August 4, 2015, the Board of Directors authorized the Company to commence a modified "Dutch auction" tender offer to repurchase up to $2 billion of its outstanding shares of common stock. The repurchase of these shares is authorized under the existing share repurchase authority as outlined above and the purchase will be funded with a combination of cash on hand and a portion of the proceeds raised through the issuance of new convertible notes (see Note 4). The Company anticipates commencing the tender offer on or about August 7, 2015. The tender offer is expected to close on or about September 4, 2015.
Payment of Dividends: During the three months ended July 4, 2015 and June 28, 2014, the Company paid $72 million and $79 million, respectively, in cash dividends to holders of its common stock. During the six months ended July 4, 2015 and June 28, 2014, the Company paid $148 million and $158 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 six months ended July 4, 2015 and June 28, 2014:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 4,
2015 | | June 28,
2014 | | July 4,
2015 | | June 28,
2014 |
Foreign Currency Translation Adjustments: | | | | | | | |
Balance at beginning of period | $ | (230 | ) | | $ | (94 | ) | | $ | (204 | ) | | $ | (96 | ) |
Other comprehensive income (loss) before reclassification adjustment | 7 |
| | 8 |
| | (18 | ) | | 11 |
|
Tax (expense) benefit | — |
| | 5 |
| | (1 | ) | | 4 |
|
Other comprehensive income (loss), net of tax | 7 |
| | 13 |
| | (19 | ) | | 15 |
|
Balance at end of period | $ | (223 | ) | | $ | (81 | ) | | $ | (223 | ) | | $ | (81 | ) |
Net loss on derivative instruments: | | | | | | | |
Balance at beginning of period | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | (1 | ) |
Reclassification adjustment into Cost of Sales | — |
| | 1 |
| | — |
| | 1 |
|
Tax expense | — |
| | — |
| | — |
| | — |
|
Reclassification adjustment into Cost of Sales, net of tax | — |
| | 1 |
| | — |
| | 1 |
|
Other comprehensive income, net of tax | — |
| | 1 |
| | — |
| | 1 |
|
Balance at end of period | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Unrealized Gains and Losses on Available-for-Sale Securities: | | | | | | | |
Balance at beginning of period | $ | 11 |
| | $ | — |
| | $ | 44 |
| | $ | (2 | ) |
Other comprehensive income (loss) before reclassification adjustment | 6 |
| | — |
| | (1 | ) | | 2 |
|
Tax (expense) benefit | (2 | ) | | — |
| | 1 |
| | — |
|
Other comprehensive income before reclassification adjustment, net of tax | 4 |
| | — |
| | — |
| | 2 |
|
Reclassification adjustment into Gains on Sales of investments and businesses, net | — |
| | — |
| | (46 | ) | | — |
|
Tax expense | — |
| | — |
| | 17 |
| | — |
|
Reclassification adjustment into Gains on sales of investments and businesses, net of tax | — |
| | — |
| | (29 | ) | | — |
|
Other comprehensive income (loss), net of tax | 4 |
| | — |
| | (29 | ) | | 2 |
|
Balance at end of period | $ | 15 |
| | $ | — |
| | $ | 15 |
| | $ | — |
|
Defined Benefit Plans: | | | | | | | |
Balance at beginning of period | (1,694 | ) | | (2,175 | ) | | (1,695 | ) | | (2,188 | ) |
Other comprehensive loss before reclassification adjustment | (53 | ) | | — |
| | (53 | ) | | — |
|
Tax expense | — |
| | — |
| | — |
| | — |
|
Other comprehensive loss before reclassification adjustment, net of tax | (53 | ) | | — |
| | (53 | ) | | — |
|
Reclassification adjustment - Actuarial net losses into Selling, general, and administrative expenses | 18 |
| | 25 |
| | 36 |
| | 53 |
|
Reclassification adjustment - Prior service benefits into Selling, general, and administrative expenses | (16 | ) | | (9 | ) | | (32 | ) | | (18 | ) |
Reclassification adjustment - Non-U.S. pension curtailment gain into Selling, general, and administrative expenses | (32 | ) | | — |
| | (32 | ) | | — |
|
Tax benefit | — |
| | (5 | ) | | (1 | ) | | (11 | ) |
Reclassification adjustment into Selling, general, and administrative expenses, net of tax | (30 | ) | | 11 |
| | (29 | ) | | 24 |
|
Other comprehensive income (loss), net of tax | (83 | ) | | 11 |
| | (82 | ) | | 24 |
|
Balance at end of period | $ | (1,777 | ) | | $ | (2,164 | ) | | $ | (1,777 | ) | | $ | (2,164 | ) |
|
|
| |
|
| | | | |
Total Accumulated other comprehensive loss | $ | (1,985 | ) | | $ | (2,245 | ) | | $ | (1,985 | ) | | $ | (2,245 | ) |
| |
4. | Debt and Credit Facilities |
As of July 4, 2015, 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 maximum leverage ratio as defined in the 2014 Motorola Solutions Credit Agreement. The Company was in compliance with its financial covenants as of July 4, 2015. The Company did not borrow or issue any letters of credit under the 2014 Motorola Solutions Credit Agreement during the six months ended July 4, 2015.
On August 4, 2015, the Company entered into an agreement with Silver Lake Partners to issue $1 billion of 2% convertible notes which mature in September 2020. Interest on the notes will be payable semiannually. The notes are convertible anytime on or after two years from their issuance date, except in certain limited circumstances. The notes are convertible based on a conversion rate of 14.59854 per $1,000 principal amount (which is equal to an initial conversion price of $68.50 per share). The Company may, at its option, elect to settle the amount due upon conversion in cash, common stock, or a combination of cash and common stock. The Company expects to close this transaction on August 25, 2015.
Foreign Currency Risk
As of July 4, 2015, the Company had outstanding foreign exchange contracts with notional amounts totaling $609 million, compared to $628 million outstanding at December 31, 2014. 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 July 4, 2015, and the corresponding positions as of December 31, 2014:
|
| | | | | | | |
| Notional Amount |
Net Buy (Sell) by Currency | July 4,
2015 | | December 31,
2014 |
Euro | $ | 158 |
| | $ | 214 |
|
Chinese Renminbi | (148 | ) | | (161 | ) |
Norwegian Krone | (91 | ) | | (90 | ) |
Australian Dollar | (60 | ) | | (42 | ) |
Brazilian Real | (46 | ) | | (28 | ) |
Interest Rate Risk
As of July 4, 2015, the Company had $3.4 billion of long-term debt, including the current portion, which is primarily priced at long-term, fixed interest rates.
One of the Company’s European subsidiaries has Euro-denominated loans. The interest on the Euro-denominated loans is variable and the Company has an interest rate swap in place which is not designated as a hedge. As such, the changes in the fair value of the interest rate swap 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 $2 million at July 4, 2015 and December 31, 2014.
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 July 4, 2015, all of the counterparties have investment grade credit ratings. As of July 4, 2015, the Company had $3 million of exposure to aggregate net credit risk with all counterparties.
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 July 4, 2015 and December 31, 2014:
|
| | | | | | | | | | | |
| Fair Values of Derivative Instruments |
| Assets | | Liabilities |
July 4, 2015 | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location |
Derivatives not designated as hedging instruments: | | | | | | | |
Foreign exchange contracts | $ | 3 |
| | Other current assets | | $ | 1 |
| | Accrued liabilities |
Interest rate swap | — |
| | Other current assets | | 2 |
| | Accrued liabilities |
Total derivatives | $ | 3 |
| | | | $ | 3 |
| | |
|
| | | | | | | | | |
| Fair Values of Derivative Instruments |
| Assets | | Liabilities |
December 31, 2014 | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location |
Derivatives not designated as hedging instruments: | | | | | | | |
Foreign exchange contracts | 1 |
| | Other current assets | | 5 |
| | Accrued liabilities |
Interest rate swap | — |
| | Other current assets | | 2 |
| | Accrued liabilities |
Total derivatives | 1 |
| | | | 7 |
| | |
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 six months ended July 4, 2015 and June 28, 2014:
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended | | Statements of Operations Location |
Gain (loss) on Derivative Instruments | July 4,
2015 | | June 28,
2014 | | July 4,
2015 | | June 28,
2014 | |
Interest rate swap | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | Other income (expense) |
Foreign exchange contracts | 4 |
| | (1 | ) | | (13 | ) | | (2 | ) | | Other income (expense) |
Total derivatives | $ | 4 |
| | $ | (1 | ) | | $ | (12 | ) | | $ | (2 | ) | | |
At the end of each interim reporting period, the Company makes an estimate of its annual effective income tax rate. Tax items included in the annual effective income tax rate are pro-rated for the full year and tax items discrete to a specific quarter are included in the effective income tax rate for that quarter. 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 | | Six Months Ended |
| July 4, 2015 | | June 28, 2014 | | July 4, 2015 | | June 28, 2014 |
Earnings from continuing operations before income taxes | $ | 215 |
| | $ | 98 |
| | $ | 343 |
| | $ | 186 |
|
Income tax expense | 64 |
| | 20 |
| | 104 |
| | 23 |
|
Effective tax rate | 30 | % | | 20 | % | | 30 | % | | 12 | % |
The Company recorded $64 million of net tax expense in the second quarter of 2015 resulting in an effective tax rate of 30%, compared to $20 million of net tax expense in the second quarter of 2014 resulting in an effective tax rate of 20%. The effective tax rate in the second quarter 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.
The effective tax rate in the second quarter of 2014 was lower than the U.S. statutory tax rate of 35% due to discrete tax benefits, primarily related to return-to-provision adjustments associated with our deferred tax liability for undistributed foreign earnings, the rate differential for foreign affiliates, and the U.S domestic production tax deduction.
The Company recorded $104 million of net income tax expense in the first half of 2015 resulting in an effective tax rate of 30%, compared to $23 million of net tax expense resulting in an effective tax rate of 12% in the first half of 2014. The effective tax rate for the first half 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.
The effective tax rate in the first half of 2014 was lower than the U.S. statutory tax rate of 35% due to a tax benefit associated with the net reduction in unrecognized tax benefits for facts that indicated the extent to which certain tax positions were more-likely-than-not of being sustained, discrete tax benefits primarily related to return-to-provision adjustments associated with our deferred tax liability for undistributed foreign earnings, 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 | July 4, 2015 | | June 28, 2014 | | July 4, 2015 | | June 28, 2014 | | July 4, 2015 | | June 28, 2014 |
Service cost | $ | — |
| | $ | — |
| | $ | 4 |
| | $ | 4 |
| | $ | 1 |
| | $ | 1 |
|
Interest cost | 47 |
| | 93 |
| | 19 |
| | 20 |
| | 2 |
| | 3 |
|
Expected return on plan assets | (52 | ) | | (98 | ) | | (31 | ) | | (23 | ) | | (3 | ) | | (2 | ) |
Amortization of: | | | | | | | | | | | |
Unrecognized net loss | 11 |
| | 21 |
| | 5 |
| | 3 |
| | 2 |
| | 3 |
|
Unrecognized prior service cost (benefit) | — |
| | — |
| | (1 | ) | | 2 |
| | (15 | ) | | (11 | ) |
Curtailment gain | — |
| | — |
| | (32 | ) | | — |
| | — |
| | — |
|
Net periodic pension cost (benefit) | $ | 6 |
| | $ | 16 |
| | $ | (36 | ) | | $ | 6 |
| | $ | (13 | ) | | $ | (6 | ) |
During the three months ended July 4, 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.
The Company made no contributions to its U.S. Pension Benefit Plans during the three months ended July 4, 2015 and $40 million of contributions to its U.S. Pension Benefit plans for the three months ended June 28, 2014. During both the three months ended July 4, 2015 and June 28, 2014, contributions of $3 million were made to the Company’s Non U.S. Pension Benefit Plans.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Pension Benefit Plans | | Non U.S. Pension Benefit Plans | | Postretirement Health Care Benefits Plan |
Six Months Ended | July 4, 2015 | | June 28, 2014 | | July 4, 2015 | | June 28, 2014 | | July 4, 2015 | | June 28, 2014 |
Service cost | $ | — |
| | $ | — |
| | $ | 7 |
| | $ | 7 |
| | $ | 1 |
| | $ | 1 |
|
Interest cost | 96 |
| | 185 |
| | 35 |
| | 40 |
| | 4 |
| | 6 |
|
Expected return on plan assets | (106 | ) | | (196 | ) | | (57 | ) | | (45 | ) | | (5 | ) | | (5 | ) |
Amortization of: | | | | | | | | | | | |
Unrecognized net loss | 23 |
| | 44 |
| | 9 |
| | 6 |
| | 5 |
| | 6 |
|
Unrecognized prior service cost (benefit) | — |
| | — |
| | (2 | ) | | 3 |
| | (30 | ) | | (21 | ) |
Curtailment gain | — |
| | — |
| | (32 | ) | | — |
| | — |
| | — |
|
Net periodic pension cost (benefit) | $ | 13 |
| | $ | 33 |
| | $ | (40 | ) | | $ | 11 |
| | $ | (25 | ) | | $ | (13 | ) |
The Company made no contributions to its U.S. Pension Benefit Plans during the six months ended July 4, 2015 and $66 million of contributions to its U.S. Pension Benefit Plans for the six months ended June 28, 2014. During the six months ended July 4, 2015 and June 28, 2014, contributions of $6 million and $20 million were made to the Company’s Non U.S. Pension Benefit Plans, respectively.
| |
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 |
| July 4,
2015 | | June 28,
2014 | | July 4,
2015 | | June 28,
2014 |
Share-based compensation expense included in: | | | | | | | |
Costs of sales | $ | 2 |
| | $ | 3 |
| | $ | 5 |
| | $ | 7 |
|
Selling, general and administrative expenses | 12 |
| | 16 |
| | 25 |
| | 33 |
|
Research and development expenditures | 5 |
| | 7 |
| | 10 |
| | 14 |
|
Share-based compensation expense included in Operating earnings | 19 |
| | 26 |
| | 40 |
| | 54 |
|
Tax benefit | 6 |
| | 8 |
| | 13 |
| | 17 |
|
Share-based compensation expense, net of tax | $ | 13 |
| | $ | 18 |
| | $ | 27 |
| | $ | 37 |
|
Decrease in basic earnings per share | $ | (0.06 | ) | | $ | (0.07 | ) | | $ | (0.13 | ) | | $ | (0.15 | ) |
Decrease in diluted earnings per share | $ | (0.06 | ) | | $ | (0.07 | ) | | $ | (0.13 | ) | | $ | (0.14 | ) |
Share-based compensation expense in discontinued operations | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | 13 |
|
During the six months ended July 4, 2015, the Company granted 0.8 million RSUs and 0.8 million stock options. The total aggregate compensation expense, net of estimated forfeitures, for these RSUs and stock options was $39 million and $9 million, respectively, which will 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 July 4, 2015 and December 31, 2014 were as follows:
|
| | | | | | | | | | | |
July 4, 2015 | Level 1 | | Level 2 | | Total |
Assets: | | | | | |
Foreign exchange derivative contracts | $ | — |
| | $ | 3 |
| | $ | 3 |
|
Available-for-sale securities: | | | | | |
Government, agency, and government-sponsored enterprise obligations | — |
| | 31 |
| | 31 |
|
Corporate bonds | — |
| | 9 |
| | 9 |
|
Common stock | 23 |
| | — |
| | 23 |
|
Liabilities: | | | | | |
Foreign exchange derivative contracts | $ | — |
| | $ | 1 |
| | $ | 1 |
|
Interest rate swap | — |
| | 2 |
| | 2 |
|
|
| | | | | | | | | | | |
December 31, 2014 | Level 1 | | Level 2 | | Total |
Assets: | | | | | |
Foreign exchange derivative contracts | $ | — |
| | $ | 1 |
| | $ | 1 |
|
Available-for-sale securities: | | | | | |
Government, agency, and government-sponsored enterprise obligations | — |
| | 14 |
| | 14 |
|
Corporate bonds | — |
| | 16 |
| | 16 |
|
Mutual funds | — |
| | 2 |
| | 2 |
|
Common stock | 71 |
| | — |
| | 71 |
|
Liabilities: | | | | | |
Foreign exchange derivative contracts | $ | — |
| | $ | 5 |
| | $ | 5 |
|
Interest rate swap | — |
| | 2 |
| | 2 |
|
The Company had no Level 3 holdings as of July 4, 2015 or December 31, 2014.
At July 4, 2015 and December 31, 2014, the Company had $2.2 billion and $3.3 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 July 4, 2015 was $3.4 billion (Level 2).
All other financial instruments are carried at cost, which is not materially different from the instruments’ fair values.
| |
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:
|
| | | | | | | |
| July 4,
2015 | | December 31,
2014 |
Long-term receivables | $ | 29 |
| | $ | 49 |
|
Less current portion | (11 | ) | | (18 | ) |
Non-current long-term receivables, net | $ | 18 |
| | $ | 31 |
|
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 $107 million at July 4, 2015, compared to $293 million at December 31, 2014. Outstanding commitments decreased during the six months ended July 4, 2015 primarily as a result of two large customer contracts, one of which was converted to an order without long-term financing and the other where the financing commitment was funded and sold.
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 July 4, 2015 and June 28, 2014:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 4,
2015 | | June 28,
2014 | | July 4,
2015 | | June 28,
2014 |
Accounts receivable sales proceeds | $ | 5 |
| | $ | 26 |
| | $ | 11 |
| | $ | 33 |
|
Long-term receivables sales proceeds | 43 |
| | 52 |
| | 108 |
| | 52 |
|
Total proceeds from receivable sales | $ | 48 |
| | $ | 78 |
| | $ | 119 |
| | $ | 85 |
|
At July 4, 2015, the Company had retained servicing obligations for $627 million of long-term receivables, compared to $496 million of long-term receivables at December 31, 2014. Servicing obligations are limited to collection activities related to the sales of accounts receivables and long-term receivables.
Credit Quality of Customer Financing Receivables and Allowance for Credit Losses
An aging analysis of financing receivables at July 4, 2015 and December 31, 2014 is as follows:
|
| | | | | | | | | | | | | | | |
July 4, 2015 | Total Long-term Receivable | | Current Billed Due | | Past Due Under 90 Days | | Past Due Over 90 Days |
Municipal leases secured tax exempt | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | — | |