Edgar Filing: Motorola Solutions, Inc.

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________

Form 10-Q

____________________________________________

(Mark One)



	x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the period ended July 1, 2017



	¨	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)

____________________________________________



DELAWARE (State of Incorporation)		36-1115800 (I.R.S. Employer Identification No.)
500 W. Monroe Street, Chicago, Illinois (Address of principal executive offices)		60661 (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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer” “accelerated filer” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer x	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨	Emerging growth company ¨
	(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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 1, 2017:



Class		Number of Shares
Common Stock; $.01 Par Value		162,653,552



	Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements	1
Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended July 1, 2017 and July 2, 2016	1
Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended July 1, 2017 and July 2, 2016	2
Condensed Consolidated Balance Sheets as of July 1, 2017 (Unaudited) and December 31, 2016	3
Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) for the Six Months Ended July 1, 2017	4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended July 1, 2017 and July 2, 2016	5
Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3 Quantitative and Qualitative Disclosures About Market Risk	35
Item 4 Controls and Procedures	36
PART II OTHER INFORMATION
Item 1 Legal Proceedings	37
Item 1A Risk Factors	37
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3 Defaults Upon Senior Securities	38
Item 4 Mine Safety Disclosures	38
Item 5 Other Information	38
Item 6 Exhibits	39

Part I—Financial Information

Condensed Consolidated Statements of Operations

(Unaudited)



	Three Months Ended						Six Months Ended
(In millions, except per share amounts)	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
Net sales from products	$	848		$	801		$	1,551		$	1,503
Net sales from services	649			629			1,226			1,120
Net sales	1,497			1,430			2,777			2,623
Costs of products sales	392			361			739			726
Costs of services sales	415			393			778			718
Costs of sales	807			754			1,517			1,444
Gross margin	690			676			1,260			1,179
Selling, general and administrative expenses	242			240			475			475
Research and development expenditures	138			138			273			274
Other charges	53			74			79			107
Operating earnings	257			224			433			323
Other income (expense):
Interest expense, net	(51		)	(54		)	(102		)	(103		)
Gains (losses) on sales of investments and businesses, net	(1		)	1			2			(20		)
Other	—			(4		)	(9		)	(11		)
Total other expense	(52		)	(57		)	(109		)	(134		)
Net earnings before income taxes	205			167			324			189
Income tax expense	73			59			114			64
Net earnings	132			108			210			125
Less: Earnings attributable to noncontrolling interests	1			1			2			1
Net earnings attributable to Motorola Solutions, Inc.	$	131		$	107		$	208		$	124
Earnings per common share:
Basic	$	0.80		$	0.62		$	1.27		$	0.72
Diluted	$	0.78		$	0.61		$	1.23		$	0.71

Weighted average common shares outstanding:
Basic	163.1			171.9			163.7			173.0
Diluted	169.0			174.8			169.5			175.7
Dividends declared per share	$	0.47		$	0.41		$	0.94		$	0.82

See accompanying notes to condensed consolidated financial statements (unaudited).

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)



	Three Months Ended
(In millions)	July 1, 2017		July 2, 2016
Net earnings	$	132	$	108
Other comprehensive income (loss), net of tax (Note 2):
Foreign currency translation adjustments	47		(98		)
Marketable securities	4		(1		)
Defined benefit plans	14		56
Total other comprehensive income (loss), net of tax	65		(43		)
Comprehensive income	197		65
Less: Earnings attributable to noncontrolling interest	1		1
Comprehensive income attributable to Motorola Solutions, Inc. common shareholders	$	196	$	64



	Six Months Ended
(In millions)	July 1, 2017		July 2, 2016
Net earnings	$	210	$	125
Other comprehensive income (loss), net of tax (Note 2):
Foreign currency translation adjustments	81		(85		)
Marketable securities	4		3
Defined benefit plans	33		60
Total other comprehensive income (loss), net of tax	118		(22		)
Comprehensive income	328		103
Less: Earnings attributable to noncontrolling interest	2		1
Comprehensive income attributable to Motorola Solutions, Inc. common shareholders	$	326	$	102

See accompanying notes to condensed consolidated financial statements (unaudited).

Condensed Consolidated Balance Sheets



(In millions, except par value)	July 1, 2017			December 31, 2016
	(Unaudited)
ASSETS
Cash and cash equivalents	$	742		$	967
Restricted cash	63			63
Total cash and cash equivalents	805			1,030
Accounts receivable, net	1,211			1,410
Inventories, net	391			273
Other current assets	804			755
Total current assets	3,211			3,468
Property, plant and equipment, net	859			789
Investments	248			238
Deferred income taxes	2,160			2,219
Goodwill	749			728
Intangible assets	868			821
Other assets	200			200
Total assets	$	8,295		$	8,463
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current portion of long-term debt	$	46		$	4
Accounts payable	440			553
Accrued liabilities	1,924			2,111
Total current liabilities	2,410			2,668
Long-term debt	4,421			4,392
Other liabilities	2,440			2,355
Stockholders’ Equity
Preferred stock, $100 par value	—			—
Common stock, $.01 par value:	2			2
Authorized shares: 600.0
Issued shares: 7/1/17—163.1; 12/31/16—165.5
Outstanding shares: 7/1/17—162.7; 12/31/16—164.7
Additional paid-in capital	264			203
Retained earnings	945			1,148
Accumulated other comprehensive loss	(2,199		)	(2,317		)
Total Motorola Solutions, Inc. stockholders’ equity (deficit)	(988		)	(964		)
Noncontrolling interests	12			12
Total stockholders’ equity (deficit)	(976		)	(952		)
Total liabilities and stockholders’ equity	$	8,295		$	8,463

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, 2016	165.5		$	205	$	(2,317	)	$	1,148		$	12
Net earnings								208			2
Other comprehensive income					118
Issuance of common stock and stock options exercised	0.8		28
Share repurchase program	(3.2	)						(258		)
Share-based compensation expense			33
Dividends declared								(153		)	(2		)
Balance as of July 1, 2017	163.1		$	266	$	(2,199	)	$	945		$	12

See accompanying notes to condensed consolidated financial statements (unaudited).

Condensed Consolidated Statements of Cash Flows

(Unaudited)



	Six Months Ended
(In millions)	July 1, 2017			July 2, 2016
Operating
Net earnings attributable to Motorola Solutions, Inc.	$	208		$	124
Earnings attributable to noncontrolling interests	2			1
Net earnings	210			125
Adjustments to reconcile Net earnings to Net cash provided by operating activities:
Depreciation and amortization	166			144
Non-cash other charges	21			35
Non-U.S. pension settlement loss	25			—
Share-based compensation expense	33			35
Losses (gains) on sales of investments and businesses, net	(2		)	20
Deferred income taxes	63			71
Changes in assets and liabilities, net of effects of acquisitions, dispositions, and foreign currency translation adjustments:
Accounts receivable	251			327
Inventories	(112		)	(2		)
Other current assets	(21		)	(65		)
Accounts payable and accrued liabilities	(340		)	(362		)
Other assets and liabilities	21			(24		)
Net cash provided by operating activities	315			304
Investing
Acquisitions and investments, net	(140		)	(1,120		)
Proceeds from sales of investments and businesses, net	72			553
Capital expenditures	(121		)	(143		)
Proceeds from sales of property, plant and equipment	—			46
Net cash used for investing activities	(189		)	(664		)
Financing
Repayment of debt	(6		)	(2		)
Net proceeds from issuance of debt	—			673
Proceeds from financing through capital leases	7			—
Issuance of common stock	28			40
Purchase of common stock	(258		)	(619		)
Payment of dividends	(154		)	(143		)
Payment of dividend to non-controlling interest	(2		)	—
Net cash used for financing activities	(385		)	(51		)
Effect of exchange rate changes on cash and cash equivalents	34			(24		)
Net decrease in cash and cash equivalents	(225		)	(435		)
Cash and cash equivalents, beginning of period	1,030			1,980
Cash and cash equivalents, end of period	$	805		$	1,545
Supplemental Cash Flow Information
Cash paid during the period for:
Interest, net	$	88		$	94
Income and withholding taxes, net of refunds	47			54

See accompanying notes to condensed consolidated financial statements (unaudited).

Notes to Condensed Consolidated Financial Statements

(Dollars in millions, except as noted)

(Unaudited)


1.	Basis of Presentation

The condensed consolidated financial statements as of July 1, 2017 and for the three and six months ended July 1, 2017 and July 2, 2016 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, 2016. The results of operations for the three and six months ended July 1, 2017 are not necessarily indicative of the operating results to be expected for the full year.

The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Recent Developments

On July 28, 2017, the Company announced its intention to purchase Plant Holdings, Inc., which owns the Airbus DS Communications business. This acquisition will expand the Company's software portfolio in the Command Center with additional solutions for Next Gen 9-1-1.

On May 1, 2017, the Company announced its intention to purchase Kodiak Networks, a provider of broadband push-to-talk (PTT) for commercial customers. The acquisition of Kodiak Networks reflects Motorola Solutions' strategy to build its communications and collaboration software portfolio. The acquisition is expected to be completed later this year.

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 the existing revenue recognition guidance in U.S. GAAP. The core principle of the ASU is the recognition of revenue for the transfer of goods and services equal to the amount an entity expects to receive for those goods and services. This ASU requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and estimates and changes in those estimates. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers: Deferral of the Effective Date" that delayed the effective date of ASU 2014-09 by one year to January 1, 2018, as the Company’s annual reporting period begins after December 15, 2017.

The Company has continued to analyze the impact of the new standard on its financial results based on an inventory of the Company's current contracts with customers. The Company has obtained an understanding of the new standard and currently believes that it will retain much of the same accounting treatment used to recognize revenue under current standards. Revenue on a significant portion of its contracts is currently recognized under percentage of completion accounting, applying a cost-to-cost method.

Under the new standard, the Company must identify the distinct promises to transfer goods and/or services within its contracts using certain factors. For contracts that are currently recognized under percentage of completion accounting, the Company has considered the factors used to determine whether promises made in the contract are distinct and determined that devices represent distinct goods. Accordingly, adoption of the new standard will impact the Company's percentage of completion contracts that include devices, with the resulting impact being revenue recognized earlier as control of the devices transfers to the customer at a point in time rather than over time. For the remaining promised goods and services within the Company's percentage of completion contracts, it will continue to recognize revenue on these contracts using a cost-to-cost method based on the continuous transfer of control to the customer over time. Transfer of control in the Company's contracts is demonstrated by creating a customized asset for customers, in conjunction with contract terms which provide the right to receive payment for goods and services.

In addition, the standard may generally cause issuers to accelerate revenue recognition in contracts which were previously limited by software revenue recognition rules. While the Company may have contracts which fall under these rules in the current standard, it has not historically deferred significant amounts of revenue under these rules as many arrangements are single-element software arrangements or sales of software with a tangible product which falls out of the scope of the current software rules. Based on the contracts currently in place, the Company does not anticipate a significant acceleration of revenue upon applying the new standard to its current contracts under these fact patterns.

The Company continues to evaluate the impact of ASU No. 2014-09 on its financial results and prepare for the adoption of the standard on January 1, 2018, including readying its internal processes and control environment for new requirements,

particularly around enhanced disclosures, under the new standard. The standard allows for both retrospective and modified retrospective methods of adoption. The Company expects to adopt this standard under the modified retrospective method of adoption, which recognizes the cumulative effect of transition as an adjustment to retained earnings for contracts that are not completed as of the adoption date, without restating prior period financial statements.

In February 2016, the FASB issued ASU No. 2016-02, "Leases," which amends existing guidance to require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. The ASU is effective for the Company January 1, 2019 and interim periods within that reporting period. The ASU prescribes the use of a modified retrospective method upon adoption, which requires all prior periods presented in the financial statements to be restated, with a cumulative adjustment to retained earnings as of the beginning of the earliest period presented. The Company is in the process of assessing the impact of this ASU on its consolidated financial statements and footnote disclosures.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments,” which clarifies eight specific cash flow issues in an effort to reduce diversity in practice in how certain transactions are classified within the statement of cash flows. This ASU is effective for the Company January 1, 2018 with early adoption permitted. The Company intends to adopt this ASU January 1, 2018. Upon adoption, the ASU requires a retrospective application unless it is determined that it is impractical to do so, in which case it must be retrospectively applied at the earliest date practical. Upon adoption, the Company does not anticipate significant changes to the Company's existing accounting policies or presentation of the Statement of Cash Flows.

In October 2016, the FASB issued ASU 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory,” as part of the Board’s simplification initiative aimed at reducing complexity in accounting standards. This ASU eliminates the current application of deferring the income tax effect of intra-entity asset transfers, other than inventory, until the transferred asset is sold to a third party or otherwise recovered through use and will require entities to recognize tax expense when the transfer occurs. The guidance will be effective for the Company on January 1, 2018 and interim periods within that reporting period; early adoption permitted. The Company intends to adopt the ASU January 1, 2018. The ASU requires a modified retrospective application with a cumulative-effect adjustment recorded in retained earnings as of the beginning of the period of adoption. The Company is currently assessing the impact of this ASU on its consolidated financial statements and footnote disclosures.

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash," which requires that the statement of cash flows explain the change during the period in the total cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning of period and end of period balances on the statement of cash flows upon adoption of this standard. The ASU is effective for the Company January 1, 2018 with early adoption permitted. Upon adoption, the ASU requires the retrospective application. The Company does not anticipate significant changes to the Company's financial statements and related disclosures from adoption of the ASU.

In March 2017, the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715) - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The amendments in this update require that an employer disaggregate the service cost component from the other components of net periodic cost (benefit) and report that component in the same line item as other compensation costs arising from services rendered by employees during the period. The other components of net periodic cost (benefit) are required to be presented in the statement of operations separately from the service cost component and outside of operating earnings. The amendment also allows for the service cost component of net periodic cost (benefit) to be eligible for capitalization when applicable. The guidance will be effective for the Company on January 1, 2018 and interim periods within that reporting period; early adoption permitted. The guidance on the income statement presentation of the components of net periodic cost (benefit) must be applied retrospectively, while the guidance limiting the capitalization of net periodic cost (benefit) in assets to the service cost component must be applied prospectively. The Company intends to adopt this ASU on January 1, 2018. Upon adoption, the Company plans to update the presentation of net periodic cost (benefit) accordingly, noting all components of the Company's net periodic cost (benefit), with the exception of the service cost component, will be presented outside of operating earnings. The estimated impact of adoption of the ASU will be a reclassification of certain components of net periodic benefit from operating earnings to other income (expense) in the amount of $37 million and $29 million for the years ended December 31, 2017 and December 31, 2016, respectively.

2. Other Financial Data

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 1, 2017			July 2, 2016		July 1, 2017			July 2, 2016
Other charges:
Intangibles amortization	$	37		$	38	$	73		$	52
Reorganization of business	1			19		16			25
Building impairment	—			17		8			17
Non-U.S. pension settlement loss	16			—		25			—
Legal settlements	(1		)	—		(44		)	—
Acquisition-related transaction fees	—			—		1			13
	$	53		$	74	$	79		$	107

During the six months ended July 1, 2017, the Company recognized a net gain of $44 million related to legal settlements. Of this amount, $42 million relates to the recovery, through legal procedures to seize and liquidate assets, of financial receivables owed to the Company by a former customer of its legacy Networks business. The net gain of $42 million was based on $52 million of proceeds received, net $10 million of fees owed to third parties for their involvement in the recovery.

Other Income (Expense)

Interest expense, net, and Other, both included in Other income (expense), consist of the following:



	Three Months Ended						Six Months Ended
	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
Interest income (expense), net:
Interest expense	$	(55	)	$	(59	)	$	(109	)	$	(111	)
Interest income	4			5			7			8
	$	(51	)	$	(54	)	$	(102	)	$	(103	)
Other:
Foreign currency gain (loss)	$	(20	)	$	14		$	(22	)	$	27
Gain (loss) on derivative instruments	18			(18		)	11			(30		)
Gains on equity method investments	1			—			—			2
Realized foreign currency loss on acquisition	—			—			—			(10		)
Other	1			—			2			—
	$	—		$	(4	)	$	(9	)	$	(11	)

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
	Three Months Ended				Six Months Ended
	July 1, 2017		July 2, 2016		July 1, 2017		July 2, 2016
Basic earnings per common share:
Earnings	$	131	$	107	$	208	$	124
Weighted average common shares outstanding	163.1		171.9		163.7		173.0
Per share amount	$	0.80	$	0.62	$	1.27	$	0.72
Diluted earnings per common share:
Earnings	$	131	$	107	$	208	$	124
Weighted average common shares outstanding	163.1		171.9		163.7		173.0
Add effect of dilutive securities:
Share-based awards	3.1		2.4		3.2		2.4
Senior Convertible Notes	2.8		0.5		2.6		0.3
Diluted weighted average common shares outstanding	169.0		174.8		169.5		175.7
Per share amount	$	0.78	$	0.61	$	1.23	$	0.71

In the computation of diluted earnings per common share for the three months ended July 1, 2017, the assumed exercise of 2.1 million options, including 1.8 million subject to market-based contingent stock agreements, were excluded because their inclusion would have been antidilutive. For the six months ended July 1, 2017, the assumed exercise of 2.4 million options, including 2.0 million subject to market-based contingent stock agreements, were excluded because their inclusion would have been antidilutive.

For the three months ended July 2, 2016, the assumed exercise of 2.3 million options, including 2.1 million subject to market-based contingent stock agreements, and the assumed vesting of 0.6 million restricted stock units ("RSUs") were excluded because their inclusion would have been antidilutive. For the six months ended July 2, 2016, the assumed exercise of 3.2 million options, including 2.1 million subject to market-based contingent stock agreements, and the assumed vesting of 0.6 million RSUs were excluded because their inclusion would have been antidilutive.

On August 25, 2015, the Company issued $1.0 billion of 2% Senior Convertible Notes which mature in September 2020 (the "Senior Convertible Notes"). The notes are convertible based on a conversion rate of 14.5985 per $1,000 principal amount (which is equal to an initial conversion price of $68.50 per share). In the event of conversion, the Company intends to settle the principal amount of the Senior Convertible Notes in cash.

Because of the Company’s intention to settle the par value of the Senior Convertible Notes in cash upon conversion, the Company does not reflect any shares underlying the Senior Convertible Notes in its diluted weighted average shares outstanding until the average stock price per share for the period exceeds the conversion price. In this case, only the number of shares that would be issuable (under the treasury stock method of accounting for share dilution) will be included, which is based upon the amount by which the average stock price exceeds the conversion price of $68.50. For the three and six months ended July 1, 2017, the dilutive impact of the Senior Convertible Notes was 2.8 million shares and 2.6 million shares, respectively.

Balance Sheet Information

Accounts Receivable, Net

Accounts receivable, net, consists of the following:



	July 1, 2017			December 31, 2016
Accounts receivable	$	1,250		$	1,454
Less allowance for doubtful accounts	(39		)	(44		)
	$	1,211		$	1,410

Inventories, Net

Inventories, net, consist of the following:



	July 1, 2017			December 31, 2016
Finished goods	$	197		$	151
Work-in-process and production materials	321			253
	518			404
Less inventory reserves	(127		)	(131		)
	$	391		$	273

Other Current Assets

Other current assets consist of the following:



	July 1, 2017		December 31, 2016
Available-for-sale securities	$	50	$	46
Costs and earnings in excess of billings	529		495
Tax-related refunds receivable	110		90
Other	115		124
	$	804	$	755

Property, Plant and Equipment, Net

Property, plant and equipment, net, consists of the following:



	July 1, 2017			December 31, 2016
Land	$	10		$	12
Building	267			306
Machinery and equipment	2,078			1,921
	2,355			2,239
Less accumulated depreciation	(1,496		)	(1,450		)
	$	859		$	789

Depreciation expense for the three months ended July 1, 2017 and July 2, 2016 was $49 million and $44 million, respectively. Depreciation expense for the six months ended July 1, 2017 and July 2, 2016 was $93 million and $92 million, respectively.

Investments

Investments consist of the following:



July 1, 2017	Cost Basis		Unrealized Gains		Investments
Available-for-sale securities:
Government, agency, and government-sponsored enterprise obligations	$	56	$	—	$	56
Corporate bonds	5		—		5
Common stock	5		7		12
	66		7		73
Other investments	210		—		210
Equity method investments	15		—		15
	$	291	$	7	$	298
Less: current portion of available-for-sale securities					50
					$	248



December 31, 2016	Cost Basis		Unrealized Gains		Investments
Available-for-sale securities:
Government, agency, and government-sponsored enterprise obligations	$	51	$	—	$	51
Corporate bonds	5		—		5
	56		—		56
Other investments	211		—		211
Equity method investments	17		—		17
	$	284	$	—	$	284
Less: current portion of available-for-sale securities					46
					$	238

Other investments include strategic investments in non-public technology-driven startup companies recorded at cost of $74 million and $76 million, and insurance policies recorded at their cash surrender value of $136 million and $135 million, at July 1, 2017 and December 31, 2016.

During the three months ended July 1, 2017, the Company recognized a loss on the sale of investments and businesses of $1 million, compared to a gain of $1 million during the three months ended July 2, 2016. During the six months ended July 1, 2017, the Company recognized a gain on the sale of investments and businesses of $2 million, compared to a loss of $20 million during the six months ended July 2, 2016, of which, $19 million was associated with the sale of United Kingdom treasury securities.

Other Assets

Other assets consist of the following:



	July 1, 2017		December 31, 2016
Long-term receivables	35		49
Defined benefit plan assets	125		102
Other	40		49
	$	200	200

Accrued Liabilities

Accrued liabilities consist of the following:



	July 1, 2017		December 31, 2016
Deferred revenue	$	427	$	439
Compensation	171		250
Billings in excess of costs and earnings	387		434
Tax liabilities	134		111
Dividend payable	76		77
Trade liabilities	174		180
Other	555		620
	$	1,924	$	2,111

Other Liabilities

Other liabilities consist of the following:



	July 1, 2017		December 31, 2016
Defined benefit plans	$	1,800	$	1,799
Deferred revenue	164		115
Unrecognized tax benefits	39		39
Deferred income taxes	139		121
Deferred consideration (Note 13)	78		72
Other	220		209
	$	2,440	$	2,355

Stockholders’ Equity

Share Repurchase Program: Through actions taken on July 28, 2011, January 30, 2012, July 25, 2012, July 22, 2013, November 3, 2014, and August 3, 2016, the Board of Directors has authorized the Company to repurchase in the aggregate up to $14.0 billion of its outstanding shares of common stock (the “share repurchase program”). The share repurchase program does not have an expiration date.

During the six months ended July 1, 2017, the Company paid an aggregate of $258 million, including transaction costs, to repurchase approximately 3.2 million shares at an average price of $81.66 per share. As of July 1, 2017, the Company had used approximately $12.1 billion of the share repurchase authority, including transaction costs, to repurchase shares, leaving $1.9 billion of authority available for future repurchases.

Payment of Dividends: During the three months ended July 1, 2017 and July 2, 2016, the Company paid $77 million and $72 million, respectively, in cash dividends to holders of its common stock. During the six months ended July 1, 2017 and July 2, 2016, the Company paid $154 million and $143 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 1, 2017 and July 2, 2016:



	Three Months Ended						Six Months Ended
	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
Foreign Currency Translation Adjustments:
Balance at beginning of period	$	(460	)	$	(253	)	$	(494	)	$	(266	)
Other comprehensive income (loss) before reclassification adjustment	47			(98		)	84			(84		)
Tax expense	—			—			(3		)	(1		)
Other comprehensive income (loss), net of tax	47			(98		)	81			(85		)
Balance at end of period	$	(413	)	$	(351	)	$	(413	)	$	(351	)
Available-for-Sale Securities:
Balance at beginning of period	$	—		$	1		$	—		$	(3	)
Other comprehensive income (loss) before reclassification adjustment	7			(2		)	7			(2		)
Tax (expense) benefit	(3		)	1			(3		)	1
Other comprehensive income (loss) before reclassification adjustment, net of tax	4			(1		)	4			(1		)
Reclassification adjustment into Gains (losses) on sales of investments and businesses, net	—			—			—			6
Tax benefit	—			—			—			(2		)
Reclassification adjustment into Gains (losses) on sales of investments and businesses, net of tax	—			—			—			4
Other comprehensive income (loss), net of tax	4			(1		)	4			3
Balance at end of period	$	4		$	—		$	4		$	—
Defined Benefit Plans:
Balance at beginning of period	(1,804		)	(1,593		)	$	(1,823	)	$	(1,597	)
Other comprehensive income (loss) before reclassification adjustment	(11		)	53			(11		)	53
Tax expense	—			(16		)	—			(16		)
Other comprehensive income (loss) before reclassification adjustment, net of tax	(11		)	37			(11		)	37
Reclassification adjustment - Actuarial net losses into Selling, general, and administrative expenses	16			18			32			28
Reclassification adjustment - Prior service benefits into Selling, general, and administrative expenses	(4		)	(7		)	(8		)	(13		)
Reclassification adjustment - Non-U.S. pension settlement loss into Other charges	16			—			25			—
Tax expense (benefit)	(3		)	8			(5		)	8
Reclassification adjustment into Operating earnings, net of tax	25			19			44			23
Other comprehensive income, net of tax	14			56			33			60
Balance at end of period	$	(1,790	)	$	(1,537	)	$	(1,790	)	$	(1,537	)

Total Accumulated other comprehensive loss	$	(2,199	)	$	(1,888	)	$	(2,199	)	$	(1,888	)

3. Debt and Credit Facilities

On April 25, 2017, the Company entered into a $2.2 billion syndicated, unsecured revolving credit facility expiring April 2022, which can be used for borrowing and letters of credit (the "2017 Motorola Solutions Credit Agreement"). The 2017 Motorola Solutions Credit Agreement replaces the 2014 Motorola Solutions Credit Agreement.

The 2017 Motorola Solutions Credit Agreement has a $500 million letter of credit sub-limit with $450 million of fronting commitments. Borrowings under the facility bear interest at the prime rate plus the applicable margin, or at a spread above the London Interbank Offered Rate, at the Company's option. An annual facility fee is payable on the undrawn amount of the credit line. The interest rate and facility fee are subject to adjustment if the Company's credit rating changes.

Under the 2017 Motorola Solutions Credit Agreement, the Company must comply with certain customary covenants including a maximum leverage ratio, as defined in the 2017 Motorola Solutions Credit Agreement. The Company was in compliance with it financial covenants as of July 1, 2017. The Company did not borrow or issue any letters of credit under the 2017 Motorola Solutions Credit Agreement during the three months ended July 1, 2017.

On August 25, 2015, the Company entered into an agreement with Silver Lake Partners to issue $1.0 billion of 2% Senior Convertible Notes which mature in September 2020. The notes are convertible anytime on or after two years from their issuance date, except in certain limited circumstances including, for example, if the volume weighted average price of the Company's stock exceeds $85 for ten consecutive trading days, then up to 20% of the notes may be transferred, and then subsequently converted to shares of Company stock by such transferee. The notes are convertible based on a conversion rate of 14.5985 per $1,000 principal amount (which is equal to an initial conversion price of $68.50 per share). During the three months ended July 1, 2017, the volume weighted average price of the Company's stock exceeded $85 for ten consecutive trading days, making 20% of Senior Convertible Notes convertible. In the event of conversion, the notes may be settled in either cash or stock, at the Company's discretion. The Company intends to settle the principal amount of the Senior Convertible Notes in cash.

4. Risk Management

Foreign Currency Risk

As of July 1, 2017, the Company had outstanding foreign exchange contracts with notional amounts totaling $590 million, compared to $717 million outstanding at December 31, 2016. 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 1, 2017, and the corresponding positions as of December 31, 2016:



	Notional Amount
Net Buy (Sell) by Currency	July 1, 2017			December 31, 2016
Euro	$	161		$	122
British Pound	149			246
Chinese Renminbi	(81		)	(108		)
Australian Dollar	(50		)	(51		)
Brazilian Real	(45		)	(56		)

During the six months ended July 1, 2017, the Company entered into forward contracts to sell £50 million, expiring in December 2017. The forward contracts have been designated as a net investment hedge which is in place to partially hedge the Company's British Pound foreign currency exposure on its net investment in Airwave Solutions Limited. The gains and losses on the Company's net investment in pound-denominated foreign operations, driven by changes in foreign exchange rates, are economically offset by movements in the fair values of the forward contracts designated as net investment hedges. Any changes in fair value of the net investment hedges are reflected as a component of Accumulated other comprehensive loss. As of July 1, 2017, the fair value of the derivative contract was $2 million.

Interest Rate Risk

One of the Company’s European subsidiaries has Euro-denominated loans. The interest on the Euro-denominated loans is variable. The Company has interest rate swap agreements in place which change the characteristics of interest rate payments from variable to maximum fixed-rate payments. The interest rate swaps are not designated as a hedge. As such, changes in the fair value of the interest rate swaps are included in Other income (expense) in the Company’s condensed consolidated statements of operations. The fair value of the interest rate swaps liability was de minimus at both July 1, 2017 and December 31, 2016.

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 1, 2017, all of the counterparties have investment grade credit ratings. As of July 1, 2017, the Company had $6 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 1, 2017 and December 31, 2016:



	Fair Values of Derivative Instruments
	Assets			Liabilities
July 1, 2017	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location
Derivatives designated as hedging instruments:
Foreign exchange contracts	$	—	Other assets	$	2	Other liabilities
Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	6	Other current assets	$	4	Accrued liabilities
Total derivatives	$	6		$	6



	Fair Values of Derivative Instruments
	Assets			Liabilities
December 31, 2016	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location
Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	9	Other current assets	$	32	Accrued liabilities

The following table summarizes the effect of derivatives designated as hedging instruments on the Company's condensed consolidated financial statements for the three and six months ended July 1, 2017 and July 2, 2016:



	Three Months Ended					Six Months Ended					Balance Sheet Location
Derivatives Designated as Hedging Instruments	July 1, 2017			July 2, 2016		July 1, 2017			July 2, 2016		Balance Sheet Location
Foreign exchange contracts	$	(2	)	$	—	$	(2	)	$	—	Other comprehensive income (loss)

The following table summarizes the effect of derivatives not designated as hedging instruments on the Company's condensed consolidated financial statements for the three and six months ended July 1, 2017 and July 2, 2016:

Three Months Ended

Six Months Ended

Statements of

Operations Location

Gain (loss) on Derivative Instruments

July 1,
2017

July 2,
2016

July 1,
2017

July 2,
2016

Foreign exchange contracts

(18

)

(30

)

Other income (expense)

5. Income Taxes

At the end of each interim reporting period, the Company makes an estimate of its annual effective income tax rate. Tax expense in interim periods is calculated at the estimated annual effective tax rate plus or minus the tax effects of items of income and expense that are discrete to the period. The estimate used in providing for income taxes on a year-to-date basis may change in subsequent interim periods.

The following table provides details of income taxes:



	Three Months Ended						Six Months Ended
	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
Net earnings before income taxes	$	205		$	167		$	324		$	189
Income tax expense	73			59			114			64
Effective tax rate	36		%	35		%	35		%	34		%

The Company recorded $73 million of net tax expense during the three months ended July 1, 2017, resulting in an effective tax rate of 36%, compared to $59 million of net tax expense during the three months ended July 2, 2016, resulting in an effective tax rate of 35%. The effective tax rate in the second quarter of 2017 was greater than the U.S. statutory tax rate of 35% partly due to change of estimates between provision and the filing of tax returns in foreign jurisdictions. The effective tax rate in the second quarter of 2016 was equal to the U.S. statutory tax rate of 35%.

The Company recorded $114 million of net tax expense during the six months ended July 1, 2017, resulting in an effective tax rate of 35%, compared to $64 million of net tax expense during the six months ended July 2, 2016, resulting in an effective tax rate of 34%. The effective tax rate in the first half of 2017 was equal to the U.S. statutory tax rate of 35%. The effective tax rate in the first half of 2016 was lower than the U.S. statutory tax rate of 35% partly due to the recognition of excess tax benefits on share-based compensation.

6. 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 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
Service cost	$	—		$	—		$	1		$	2		$	—		$	—
Interest cost	46			46			10			14			1			1
Expected return on plan assets	(57		)	(55		)	(24		)	(24		)	(3		)	(3		)
Amortization of:
Unrecognized net loss	11			9			4			3			1			2
Unrecognized prior service benefit	—			—			—			—			(4		)	(7		)
Settlement loss	—			—			16			—			—			—
Net periodic pension cost (benefit)	$	—		$	—		$	7		$	(5	)	$	(5	)	$	(7	)



	U.S. Pension Benefit Plans						Non U.S. Pension Benefit Plans						Postretirement Health Care Benefits Plan
Six Months Ended	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
Service cost	$	—		$	—		$	2		$	4		$	—		$	—
Interest cost	92			91			20			28			2			2
Expected return on plan assets	(115		)	(110		)	(47		)	(48		)	(6		)	(5		)
Amortization of:
Unrecognized net loss	22			19			8			6			2			3
Unrecognized prior service benefit	—			—			—			—			(8		)	(13		)
Settlement loss	—			—			25			—			—			—
Net periodic cost (benefit)	$	(1	)	$	—		$	8		$	(10	)	$	(10	)	$	(13	)

During the six months ended July 1, 2017, the Company offered lump-sum settlements to certain participants in the Non-US defined benefit plan within the United Kingdom. The lump-sum settlements were targeted to certain participants who had accrued a pension benefit, but had not yet started receiving pension benefit payments. As of June 30, 2017, the window for the participant registration in the program has closed. However, the Company expects to account for continuing settlements through the third quarter of 2017, as remaining lump-sum settlements are paid to participants. As a result of the actions taken through the first half of 2017, the Company recorded a settlement loss of $16 million and $25 million during the three and six months ended July 1, 2017, which is recorded within Other Charges within the condensed consolidated statement of operations.

During the six months ended July 2, 2016, the Company made an amendment to the Postretirement Health Care Benefits Plan (the “Amendment”). As a result of the Amendment, all eligible retirees under the age of 65 will be provided an annual subsidy per household, versus per individual, toward the purchase of their own health care coverage from private insurance companies and for the reimbursement of eligible health care expenses. The Amendment to the Postretirement Health Care Benefits Plan required a remeasurement of the plan, resulting in a $53 million reduction in the Accumulated Postretirement Benefit Obligation. A substantial portion of the decrease is related to a prior service credit and will be recognized as a credit to the condensed consolidated statements of operations over approximately five years, or the period in which the remaining employees eligible for the plan will qualify for benefits under the plan.

7. Share-Based Compensation Plans

Compensation expense for the Company’s share-based compensation plans was as follows:



	Three Months Ended						Six Months Ended
	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
Share-based compensation expense included in:
Costs of sales	$	2		$	2		$	4		$	4
Selling, general and administrative expenses	11			12			22			24
Research and development expenditures	3			4			7			7
Share-based compensation expense included in Operating earnings	16			18			33			35
Tax benefit	5			6			11			11
Share-based compensation expense, net of tax	$	11		$	12		$	22		$	24
Decrease in basic earnings per share	$	(0.07	)	$	(0.07	)	$	(0.13	)	$	(0.14	)
Decrease in diluted earnings per share	$	(0.07	)	$	(0.07	)	$	(0.13	)	$	(0.14	)

During the six months ended July 1, 2017, the Company granted 0.5 million RSUs and 0.1 million market stock units ("MSUs") with an aggregate grant-date fair value of $39 million and $6 million, respectively, and 0.3 million stock options and 0.6 million performance options ("POs") with an aggregate grant-date fair value of $5 million and $9 million, respectively. Share-based compensation expense will generally be recognized over the vesting period of three years.

8. Fair Value Measurements

The Company holds certain fixed income securities, equity securities and derivatives, which are recognized and disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Fair value is measured using the fair value hierarchy and related valuation methodologies as defined in the authoritative literature. This guidance specifies a hierarchy of valuation techniques based on whether the inputs to each measurement are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's assumptions about current market conditions.

The fair value hierarchy and related valuation methodologies are as follows:

Level 1—Quoted prices for identical instruments in active markets.

Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.

Level 3—Valuations derived from valuation techniques, in which one or more significant inputs are unobservable.

The fair values of the Company’s financial assets and liabilities by level in the fair value hierarchy as of July 1, 2017 and December 31, 2016 were as follows:



July 1, 2017	Level 1		Level 2		Total
Assets:
Foreign exchange derivative contracts	$	—	$	6	$	6
Available-for-sale securities:
Government, agency, and government-sponsored enterprise obligations	$	—	$	56	$	56
Corporate bonds	—		5		5
Common stock	12		—		12
Liabilities:
Foreign exchange derivative contracts	$	—	$	6	$	6



December 31, 2016	Level 2		Total
Assets:
Foreign exchange derivative contracts	$	9	$	9
Available-for-sale securities:
Government, agency, and government-sponsored enterprise obligations	51		51
Corporate bonds	5		5
Liabilities:
Foreign exchange derivative contracts	$	32	$	32

The Company had no Level 3 holdings as of July 1, 2017 or December 31, 2016.

At July 1, 2017 and December 31, 2016, the Company had $298 million and $309 million, respectively, of investments in money market prime and government funds (Level 1) 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 1, 2017 and December 31, 2016 was $4.6 billion and $4.5 billion (Level 2), respectively.

All other financial instruments are carried at cost, which is not materially different from the instruments’ fair values.

9. Long-term Financing and Sales of Receivables

Long-term Financing

Long-term receivables consist of receivables with payment terms greater than twelve months, long-term loans and lease receivables under sales-type leases. Long-term receivables consist of the following:



	July 1, 2017			December 31, 2016
Long-term receivables	$	48		$	63
Less current portion	(13		)	(14		)
Non-current long-term receivables	$	35		$	49

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 $209 million at July 1, 2017, compared to $125 million at December 31, 2016. During the six months ended July 1, 2017, the Company agreed to provide long-term financing to one customer in the amount of $75 million.

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 1, 2017 and July 2, 2016:



	Three Months Ended				Six Months Ended
	July 1, 2017		July 2, 2016		July 1, 2017		July 2, 2016
Accounts receivable sales proceeds	$	61	$	5	$	80	$	7
Long-term receivables sales proceeds	22		70		68		134
Total proceeds from receivable sales	$	83	$	75	$	148	$	141

At July 1, 2017, the Company had retained servicing obligations for $775 million of long-term receivables, compared to $774 million at December 31, 2016. Servicing obligations are limited to collection activities related to the sales of accounts receivables and long-term receivables.

Credit Quality of Financing Receivables and Allowance for Credit Losses

An aging analysis of financing receivables at July 1, 2017 and December 31, 2016 is as follows:



July 1, 2017	Total Long-term Receivable		Current Billed Due		Past Due Over 90 Days
Municipal leases secured tax exempt	$	21	$	1	$	2
Commercial loans and leases secured	27		—		—
Long-term receivables, including current portion	$	48	$	1	$	2



December 31, 2016	Total Long-term Receivable		Current Billed Due		Past Due Over 90 Days
Municipal leases secured tax exempt	$	20	$	—	$	—
Commercial loans and leases secured	43		—		2
Long-term receivables, including current portion	$	63	$	—	$	2

10. Commitments and Contingencies

Legal Matters

The Company is a defendant in various lawsuits, claims, and actions, which arise in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's condensed consolidated financial position, liquidity, or results of operations. However, an unfavorable resolution could have a material adverse effect on the Company's consolidated financial position, liquidity, or results of operations in the periods in which the matters are ultimately resolved, or in the periods in which more information is obtained that changes management's opinion of the ultimate disposition.

Other Indemnifications

The Company is a party to a variety of agreements pursuant to which it is obligated to indemnify the other party with respect to certain matters. In indemnification cases, payment by the Company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party's claims. In some instances, the Company may have recourse against third parties for certain payments made by the Company.

Some of these obligations arise as a result of divestitures of the Company's assets or businesses and require the Company to indemnify the other party against losses arising from breaches of representations and warranties and covenants and, in some cases, the settlement of pending obligations. The Company's obligations under divestiture agreements for indemnification based on breaches of representations and warranties are generally limited in terms of duration and to amounts not in excess of a percentage of the contract value. The Company had no accruals for any such obligations at July 1, 2017.

In addition, the Company may provide indemnifications for losses that result from the breach of general warranties contained in certain commercial and intellectual property agreements. Historically, the Company has not made significant payments under these agreements.

11. Segment Information

The Company conducts its business globally and manages it through the following two segments:

Products: The Products segment is comprised of Devices and Systems. Devices includes two-way portable and vehicle-mounted radios, accessories, software features, and upgrades. Systems includes the radio network core and central processing software, base stations, consoles, repeaters, and software applications and features. The primary customers of the Products segment are government, public safety and first-responder agencies, municipalities, and commercial and industrial customers who operate private communications networks and manage a mobile workforce.

Services: The Services segment provides a full set of offerings for government, public safety and commercial communication networks including: (i) Integration services, (ii) Managed & Support services, and (iii) iDEN services. Integration services includes implementation, optimization, and integration of networks, devices, software, and applications. Managed & Support services includes a continuum of service offerings beginning with repair, technical support and hardware maintenance. More advanced offerings include network monitoring, software maintenance and cyber security services. Managed services offerings range from partial or full operation of customer owned networks to operation of Motorola Solutions owned networks. Services are provided across all radio network technologies, Command Center Consoles and Smart Public Safety Solutions. iDEN services consists primarily of hardware and software maintenance services for our legacy iDEN customers.

The following table summarizes Net sales by segment:



	Three Months Ended				Six Months Ended
	July 1, 2017		July 2, 2016		July 1, 2017		July 2, 2016
Products	$	848	$	801	$	1,551	$	1,503
Services	649		629		1,226		1,120
	$	1,497	$	1,430	$	2,777	$	2,623

The following table summarizes the Operating earnings by segment:



	Three Months Ended						Six Months Ended
	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
Products	$	168		$	129		$	257		$	179
Services	89			95			176			144
Operating earnings	257			224			433			323
Total other expense	(52		)	(57		)	(109		)	(134		)
Earnings before income taxes	$	205		$	167		$	324		$	189

12. Reorganization of Business

2017 Charges

During the three months ended July 1, 2017, the Company recorded net reorganization of business charges of $3 million including $1 million of charges in Other charges and $2 million of charges in Cost of sales in the Company's condensed consolidated statements of operations. Included in the $3 million were charges of $8 million related to employee separation costs, partially offset by $5 million of reversals for accruals no longer needed.

During the six months ended July 1, 2017, the Company recorded net reorganization of business charges of $22 million including $16 million of charges in Other charges and $6 million of charges in Cost of sales in the Company's condensed consolidated statements of operations. Included in the $22 million were charges of $23 million for employee separation costs and $4 million for exit costs, partially offset by $5 million of reversals for accruals no longer needed.

The following table displays the net charges incurred by segment:



July 1, 2017	Three Months Ended		Six Months Ended
Products	$	3	$	16
Services	—		6
	$	3	$	22

The following table displays a rollforward of the reorganization of business accruals established for lease exit costs and employee separation costs from January 1, 2017 to July 1, 2017:



	January 1, 2017		Additional Charges		Adjustments			Amount Used			July 1, 2017
Exit costs	$	7	$	4	$	—		$	(1	)	$	10
Employee separation costs	95		23		(5		)	(55		)	58
	$	102	$	27	$	(5	)	$	(56	)	$	68

Exit Costs

At January 1, 2017, the Company had $7 million of accruals for exit costs. During the six months ended July 1, 2017, there were $4 million of additional charges and $1 million of cash payments related to the exit of leased facilities. The remaining accrual of $10 million, which is included in Accrued liabilities in the Company’s condensed consolidated balance sheets at July 1, 2017, primarily represents future cash payments for lease obligations that are expected to be paid over a number of years.

Employee Separation Costs

At January 1, 2017, the Company had an accrual of $95 million for employee separation costs. The 2017 additional charges of $23 million represent severance costs for approximately 300 employees. The adjustment of $5 million reflects reversals for accruals no longer needed. The $55 million used reflects cash payments to severed employees. The remaining accrual of $58 million, which is included in Accrued liabilities in the Company’s condensed consolidated balance sheets at July 1, 2017, is expected to be paid, primarily within one year, to approximately 500 employees, who have either been severed or have been notified of their severance and have begun or will begin receiving payments.

2016 Charges

During the three months ended July 2, 2016, the Company recorded net reorganization of business charges of $44 million including $36 million of charges in Other charges and $8 million of charges in Cost of sales in the Company's condensed consolidated statements of operations. Included in the $44 million were charges of: (i) $22 million of charges related to employee separation costs, (ii) $17 million for a building impairment, and (iii) $5 million for exit costs.

During the six months ended July 2, 2016, the Company recorded net reorganization of business charges of $67 million including $42 million of charges in Other charges and $25 million of charges in Cost of sales in the Company's condensed consolidated statements of operations. Included in the $67 million were charges of: (i) $46 million related to employee separation costs, (ii) $20 million for impairments, including $17 million for a building impairment and $3 million for the impairment of the corporate aircraft, and (iii) $5 million for exit costs, partially offset by $4 million of reversals for accruals no longer needed.

The following table displays the net charges incurred by segment:



July 2, 2016	Three Months Ended		Six Months Ended
Products	$	33	$	54
Services	11		13
	$	44	$	67

13. Intangible Assets and Goodwill

The Company accounts for acquisitions using purchase accounting with the results of operations for each acquiree included in the Company's condensed consolidated financial statements for the period subsequent to the date of acquisition.

Guardian Digital Communications Limited

On February 19, 2016, the Company completed the acquisition of Guardian Digital Communications Limited ("GDCL"), a holding company of Airwave Solutions Limited (collectively referred to as "Airwave"), the largest private operator of a public safety network in the world. All of the outstanding equity of Airwave was acquired for the sum of £1, after which the Company

invested into Airwave £698 million, net of cash acquired, or approximately $1.0 billion, to settle all third party debt. The Company will make a deferred cash payment of £64 million on November 15, 2018.

The acquisition of Airwave enables the Company to geographically diversify its global Managed & Support services offerings, while offering a proven service delivery platform to build on for providing innovative, leading, mission-critical communications solutions and services to customers.

The acquisition of Airwave has been accounted for at fair value as of the acquisition date, based on the fair value of the total consideration transferred which has been attributed to all identifiable assets acquired and liabilities assumed and measured at fair value.

The total consideration for the acquisition of Airwave was approximately $1.1 billion, consisting of cash payments of $1.0 billion, net of cash acquired, and deferred consideration valued at fair value on the date of the acquisition of $82 million. The fair value of deferred consideration has been determined based on its net present value, calculated using a discount rate of 4.2%, which is reflective of the credit standing of the combined entity. The following table summarizes fair values of assets acquired and liabilities assumed as of the February 19, 2016 acquisition date:



Cash	$	86
Accounts receivable, net	55
Other current assets	36
Property, plant and equipment, net	245
Deferred income taxes	82
Accounts payable	(18		)
Accrued liabilities	(181		)
Other liabilities	(289		)
Goodwill	191
Intangible assets	875
Total consideration	$	1,082
Net present value of deferred consideration payment to former owners	(82		)
Net cash consideration at purchase	$	1,000

Acquired intangible assets consist of $846 million of customer relationships and $29 million of trade names. All intangibles have a useful life of seven years, over which amortization expense will be recognized on a straight line basis. Acquired goodwill of $191 million is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from the other assets acquired that could not be individually identified and separately recognized. Goodwill is not deductible for tax purposes.

Other Acquisitions

On March 13, 2017, the Company completed the acquisition of Interexport, a company that provides Managed & Support services for communications systems to public safety and commercial customers in Chile, for a gross purchase price of $98 billion Chilean Pesos, or approximately $147 million U.S. Dollars based on cash proceeds of $55 million, net of cash acquired, and assumed liabilities of $92 million, primarily related to capital leases. As a result of the acquisition, the Company recognized $7 million of goodwill, $61 million of identifiable intangible assets, $70 million of acquired property, plant and equipment and $9 million of net other tangible assets. The estimated identifiable intangible assets were classified as $56 million of customer-related intangibles and $5 million of other intangibles and will be amortized over a period of seven years.

On November 10, 2016, the Company completed the acquisition of Spillman Technologies, Inc., a provider of comprehensive law enforcement and public safety software solutions, for a gross purchase price of $221 million. As a result of the acquisition, the Company recognized $144 million of goodwill, $115 million of identifiable intangible assets, and $38 million of acquired liabilities. The identifiable intangible assets were classified as $49 million of completed technology, $59 million of customer-related intangibles, and $7 million of other intangibles and will be amortized over a period of seven to ten years.

During the year ended December 31, 2016, the Company completed the acquisition of several software and service-based providers for a total of $30 million, recognizing $6 million of goodwill, $15 million of intangible assets, and $9 million of tangible net assets related to these acquisitions. Under the preliminary purchase accounting, the $15 million of identifiable intangible assets were classified as: (i) $7 million of completed technology and (ii) $8 million of customer-related intangibles and will be