10-Q
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 October 3, 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)
____________________________________________
|
| | |
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 October 3, 2015:
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| | |
Class | | Number of Shares |
Common Stock; $.01 Par Value | | 176,561,670 |
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| Page |
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Item 1 Financial Statements | |
Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended October 3, 2015 and September 27, 2014 | |
Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended October 3, 2015 and September 27, 2014 | |
Condensed Consolidated Balance Sheets as of October 3, 2015 (Unaudited) and December 31, 2014 | |
Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) for the Nine Months Ended October 3, 2015 | |
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended October 3, 2015 and September 27, 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 | | Nine Months Ended |
(In millions, except per share amounts) | October 3, 2015 | | September 27, 2014 | | October 3, 2015 | | September 27, 2014 |
Net sales from products | $ | 925 |
| | $ | 921 |
| | $ | 2,550 |
| | $ | 2,561 |
|
Net sales from services | 497 |
| | 515 |
| | 1,463 |
| | 1,497 |
|
Net sales | 1,422 |
| | 1,436 |
| | 4,013 |
| | 4,058 |
|
Costs of product sales | 395 |
| | 414 |
| | 1,139 |
| | 1,165 |
|
Costs of services sales | 342 |
| | 337 |
| | 993 |
| | 974 |
|
Costs of sales | 737 |
| | 751 |
| | 2,132 |
| | 2,139 |
|
Gross margin | 685 |
| | 685 |
| | 1,881 |
| | 1,919 |
|
Selling, general and administrative expenses | 259 |
| | 287 |
| | 769 |
| | 902 |
|
Research and development expenditures | 153 |
| | 166 |
| | 468 |
| | 516 |
|
Other charges | 42 |
| | 25 |
| | 39 |
| | 49 |
|
Operating earnings | 231 |
| | 207 |
| | 605 |
| | 452 |
|
Other income (expense): | | | | | | | |
Interest expense, net | (43 | ) | | (31 | ) | | (122 | ) | | (85 | ) |
Gains on sales of investments, net | 10 |
| | 1 |
| | 60 |
| | 4 |
|
Other | (1 | ) | | (26 | ) | | (3 | ) | | (34 | ) |
Total other expense | (34 | ) | | (56 | ) | | (65 | ) | | (115 | ) |
Earnings from continuing operations before income taxes | 197 |
| | 151 |
| | 540 |
| | 337 |
|
Income tax expense | 71 |
| | 84 |
| | 175 |
| | 107 |
|
Earnings from continuing operations | 126 |
| | 67 |
| | 365 |
| | 230 |
|
Earnings (loss) from discontinued operations, net of tax | (11 | ) | | 81 |
| | (32 | ) | | 869 |
|
Net earnings | 115 |
| | 148 |
| | 333 |
| | 1,099 |
|
Less: Earnings attributable to noncontrolling interests | — |
| | 1 |
| | 2 |
| | 1 |
|
Net earnings attributable to Motorola Solutions, Inc. | $ | 115 |
| | $ | 147 |
| | $ | 331 |
| | $ | 1,098 |
|
Amounts attributable to Motorola Solutions, Inc. common stockholders: | | | | | | | |
Earnings from continuing operations, net of tax | $ | 126 |
| | $ | 66 |
| | $ | 363 |
| | $ | 229 |
|
Earnings (loss) from discontinued operations, net of tax | (11 | ) | | 81 |
| | (32 | ) | | 869 |
|
Net earnings attributable to Motorola Solutions, Inc. | $ | 115 |
| | $ | 147 |
| | $ | 331 |
| | $ | 1,098 |
|
Earnings (loss) per common share: | | | | | | | |
Basic: | | | | | | | |
Continuing operations | $ | 0.63 |
| | $ | 0.27 |
| | $ | 1.75 |
| | $ | 0.91 |
|
Discontinued operations | (0.05 | ) | | 0.33 |
| | (0.15 | ) | | 3.46 |
|
| $ | 0.58 |
| | $ | 0.60 |
| | $ | 1.60 |
| | $ | 4.37 |
|
Diluted: | | | | | | | |
Continuing operations | $ | 0.63 |
| | $ | 0.27 |
| | $ | 1.74 |
| | $ | 0.90 |
|
Discontinued operations | (0.06 | ) | | 0.32 |
| | (0.16 | ) | | 3.42 |
|
| $ | 0.57 |
| | $ | 0.59 |
| | $ | 1.58 |
| | $ | 4.32 |
|
Weighted average common shares outstanding: | | | | | | | |
Basic | 199.2 |
| | 246.3 |
| | 207.2 |
| | 251.1 |
|
Diluted | 201.3 |
| | 248.2 |
| | 209.2 |
| | 254.0 |
|
Dividends declared per share | $ | 0.34 |
| | 0.34 |
| | $ | 1.02 |
| | 0.96 |
|
See accompanying notes to condensed consolidated financial statements (unaudited).
Condensed Consolidated Statements of Comprehensive Income
(Unaudited) |
| | | | | | | |
| Three Months Ended |
(In millions) | October 3, 2015 | | September 27, 2014 |
Net earnings | $ | 115 |
| | $ | 148 |
|
Other comprehensive loss, net of tax (Note 3): | | | |
Foreign currency translation adjustments | (16 | ) | | (34 | ) |
Marketable securities | (5 | ) | | — |
|
Defined benefit plans | — |
| | (345 | ) |
Total other comprehensive loss, net of tax | (21 | ) | | (379 | ) |
Comprehensive income (loss) | 94 |
| | (231 | ) |
Less: Earnings attributable to noncontrolling interest | — |
| | 1 |
|
Comprehensive income (loss) attributable to Motorola Solutions, Inc. common shareholders | $ | 94 |
| | $ | (232 | ) |
|
| | | | | | | |
| Nine Months Ended |
(In millions) | October 3, 2015 | | September 27, 2014 |
Net earnings | $ | 333 |
| | $ | 1,099 |
|
Other comprehensive income (loss), net of tax (Note 3): | | | |
Foreign currency translation adjustments | (35 | ) | | (19 | ) |
Derivative instruments
| — |
| | 1 |
|
Marketable securities | (34 | ) | | 2 |
|
Defined benefit plans | (82 | ) | | (322 | ) |
Total other comprehensive loss, net of tax | (151 | ) | | (338 | ) |
Comprehensive income | 182 |
| | 761 |
|
Less: Earnings attributable to noncontrolling interest | 2 |
| | 1 |
|
Comprehensive income attributable to Motorola Solutions, Inc. common shareholders | $ | 180 |
| | $ | 760 |
|
See accompanying notes to condensed consolidated financial statements (unaudited).
Condensed Consolidated Balance Sheets
|
| | | | | | | |
(In millions, except par value) | October 3, 2015 | | December 31, 2014 |
| (Unaudited) | | |
ASSETS |
Cash and cash equivalents | $ | 2,200 |
| | $ | 3,954 |
|
Accounts receivable, net | 1,222 |
| | 1,409 |
|
Inventories, net | 334 |
| | 345 |
|
Deferred income taxes | 430 |
| | 431 |
|
Other current assets | 574 |
| | 740 |
|
Current assets held for disposition | 27 |
| | — |
|
Total current assets | 4,787 |
| | 6,879 |
|
Property, plant and equipment, net | 467 |
| | 549 |
|
Investments | 292 |
| | 316 |
|
Deferred income taxes | 1,889 |
| | 2,151 |
|
Goodwill | 423 |
| | 383 |
|
Other assets | 183 |
| | 145 |
|
Non-current assets held for disposition | 45 |
| | — |
|
Total assets | $ | 8,086 |
| | $ | 10,423 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current portion of long-term debt | $ | 4 |
| | $ | 4 |
|
Accounts payable | 443 |
| | 540 |
|
Accrued liabilities | 1,582 |
| | 1,706 |
|
Total current liabilities | 2,029 |
| | 2,250 |
|
Long-term debt | 4,386 |
| | 3,396 |
|
Other liabilities | 1,969 |
| | 2,011 |
|
Stockholders’ Equity | | | |
Preferred stock, $100 par value | — |
| | — |
|
Common stock, $.01 par value: | 2 |
| | 2 |
|
Authorized shares: 600.0 | | | |
Issued shares: 10/3/15—176.7; 12/31/14—220.5 | | | |
Outstanding shares: 10/3/15—176.6; 12/31/14—219.8 | | | |
Additional paid-in capital | 8 |
| | 1,178 |
|
Retained earnings | 1,689 |
| | 3,410 |
|
Accumulated other comprehensive loss | (2,006 | ) | | (1,855 | ) |
Total Motorola Solutions, Inc. stockholders’ equity (deficit) | (307 | ) | | 2,735 |
|
Noncontrolling interests | 9 |
| | 31 |
|
Total stockholders’ equity (deficit) | (298 | ) | | 2,766 |
|
Total liabilities and stockholders’ equity | $ | 8,086 |
| | $ | 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 |
|
| |
|
| |
|
| | 331 |
| | 2 |
|
Other comprehensive loss |
|
| |
|
| | (151 | ) | |
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Issuance of common stock and stock options exercised | 1.6 |
| | 71 |
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Share repurchase program | (45.4 | ) | | (1,147 | ) | |
|
| | (1,849 | ) | |
|
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Tax shortfalls from share-based compensation |
|
| | (160 | ) | |
|
| |
|
| |
|
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Share-based compensation expense |
|
| | 58 |
| |
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| |
|
| |
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Sale of controlling interest in subsidiary common stock |
|
| |
|
| |
|
| |
|
| | (24 | ) |
Dividends declared |
|
| |
|
| |
|
| | (203 | ) | |
|
|
Equity component of Senior Convertible Notes |
|
| | 8 |
| |
|
| |
|
| |
|
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Balance as of October 3, 2015 | 176.7 |
| | $ | 10 |
| | $ | (2,006 | ) | | $ | 1,689 |
| | $ | 9 |
|
See accompanying notes to condensed consolidated financial statements (unaudited).
Condensed Consolidated Statements of Cash Flows
(Unaudited) |
| | | | | | | |
| Nine Months Ended |
(In millions) | October 3, 2015 | | September 27, 2014 |
Operating | | | |
Net earnings attributable to Motorola Solutions, Inc. | $ | 331 |
| | $ | 1,098 |
|
Earnings attributable to noncontrolling interests | 2 |
| | 1 |
|
Net earnings | 333 |
| | 1,099 |
|
Earnings (loss) from discontinued operations, net of tax | (32 | ) | | 869 |
|
Earnings from continuing operations, net of tax | 365 |
| | 230 |
|
Adjustments to reconcile Earnings from continuing operations to Net cash provided by operating activities from continuing operations: | | | |
Depreciation and amortization | 113 |
| | 131 |
|
Gain on sale of building and land | — |
| | (21 | ) |
Non-cash other charges (income) | 43 |
| | (2 | ) |
Non-U.S. pension curtailment gain | (32 | ) |
| — |
|
Share-based compensation expense | 58 |
| | 74 |
|
Gains on sales of investments and businesses, net | (60 | ) | | (4 | ) |
Loss from the extinguishment of long term debt | — |
| | 37 |
|
Deferred income taxes | 127 |
| | 69 |
|
Changes in assets and liabilities, net of effects of acquisitions, dispositions, and foreign currency translation adjustments: | | | |
Accounts receivable | 167 |
| | 202 |
|
Inventories | (21 | ) | | 12 |
|
Other current assets | 38 |
| | (9 | ) |
Accounts payable and accrued liabilities | (168 | ) | | (170 | ) |
Other assets and liabilities | (39 | ) | | (534 | ) |
Net cash provided by operating activities from continuing operations | 591 |
| | 15 |
|
Investing | | | |
Acquisitions and investments, net | (150 | ) | | (21 | ) |
Proceeds from sales of investments and businesses, net | 150 |
| | 23 |
|
Capital expenditures | (131 | ) | | (130 | ) |
Proceeds from sales of property, plant and equipment | 2 |
| | 30 |
|
Net cash used for investing activities from continuing operations | (129 | ) | | (98 | ) |
Financing | | | |
Repayment of debt | (3 | ) | | (461 | ) |
Net proceeds from issuance of debt | 976 |
| | 1,375 |
|
Issuance of common stock | 85 |
| | 94 |
|
Purchase of common stock | (2,996 | ) | | (1,123 | ) |
Excess tax benefit from share-based compensation | 1 |
| | 11 |
|
Payment of dividends | (218 | ) | | (236 | ) |
Distributions from discontinued operations | — |
| | 66 |
|
Net cash used for financing activities from continuing operations | (2,155 | ) | | (274 | ) |
Discontinued Operations | | | |
Net cash provided by operating activities from discontinued operations | — |
| | 63 |
|
Net cash provided by investing activities from discontinued operations | — |
| | 5 |
|
Net cash used for financing activities from discontinued operations | — |
| | (66 | ) |
Effect of exchange rate changes on cash and cash equivalents from discontinued operations | — |
| | (2 | ) |
Net cash provided by discontinued operations | — |
| | — |
|
Effect of exchange rate changes on cash and cash equivalents from continuing operations | (61 | ) | | (23 | ) |
Net decrease in cash and cash equivalents | (1,754 | ) | | (380 | ) |
Cash and cash equivalents, beginning of period | 3,954 |
| | 3,225 |
|
Cash and cash equivalents, end of period | $ | 2,200 |
| | $ | 2,845 |
|
Supplemental Cash Flow Information | | | |
Cash paid during the period for: | | | |
Interest, net | $ | 130 |
| | $ | 92 |
|
Income and withholding taxes, net of refunds | 86 |
| | 36 |
|
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 October 3, 2015 and for the three and nine months ended October 3, 2015 and September 27, 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 nine months ended October 3, 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 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. ASU 2014-09 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 October 3, 2015, debt issuance costs, net of accumulated amortization, recognized in the condensed consolidated balance sheet were $44 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, where 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 does not expect this ASU will have a material impact on its consolidated financial statements.
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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 nine months ended October 3, 2015 and September 27, 2014:
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 3, 2015 | | September 27, 2014 | | October 3, 2015 | | September 27, 2014 |
Net sales | $ | — |
| | $ | 605 |
| | $ | — |
| | $ | 1,737 |
|
Operating earnings | — |
| | 78 |
| | — |
| | 195 |
|
Losses on sales of investments and businesses, net | — |
| | — |
| | (28 | ) | | — |
|
Earnings (loss) before income taxes | — |
| | 68 |
| | (28 | ) | | 181 |
|
Income tax expense (benefit) | 11 |
| | (13 | ) | | 4 |
| | (688 | ) |
Earnings (loss) from discontinued operations, net of tax | $ | (11 | ) | | $ | 81 |
| | $ | (32 | ) | | $ | 869 |
|
During the three months ended October 3, 2015, the Company recorded $11 million of tax expense on the gain on the sale of the Enterprise business to reflect actual amounts filed in the income tax return.
Statements of Operations Information
Other Charges (Income)
Other charges (income) included in Operating earnings consist of the following:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 3, 2015 | | September 27, 2014 | | October 3, 2015 | | September 27, 2014 |
Other charges (income): | | | | | | | |
Intangibles amortization | $ | 2 |
| | $ | 1 |
| | $ | 6 |
| | $ | 3 |
|
Reorganization of business | 14 |
| | 13 |
| | 39 |
| | 48 |
|
Legal settlement | — |
| | — |
| | — |
| | 8 |
|
Non-U.S. pension curtailment gain | — |
| | — |
| | (32 | ) | | — |
|
Pension-related transaction fees | — |
|
| 11 |
|
| — |
|
| 11 |
|
Impairment of corporate aircraft | 26 |
|
| — |
|
| 26 |
|
| — |
|
Gain on sale of building and land | — |
| | — |
| | — |
| | (21 | ) |
| $ | 42 |
| | $ | 25 |
| | $ | 39 |
| | $ | 49 |
|
Other Income (Expense)
Interest expense, net, and Other, both included in Other income (expense), consist of the following:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 3, 2015 | | September 27, 2014 | | October 3, 2015 | | September 27, 2014 |
Interest income (expense), net: | | | | | | | |
Interest expense | $ | (47 | ) | | $ | (38 | ) | | $ | (132 | ) | | $ | (102 | ) |
Interest income | 4 |
| | 7 |
| | 10 |
| | 17 |
|
| $ | (43 | ) | | $ | (31 | ) | | $ | (122 | ) | | $ | (85 | ) |
Other: | | | | | | | |
Loss from the extinguishment of long-term debt | $ | — |
| | $ | (37 | ) | | $ | — |
| | $ | (37 | ) |
Investment impairments | — |
| | — |
| | (3 | ) | | — |
|
Foreign currency gain (loss) | (29 | ) | | 10 |
| | $ | (23 | ) | | $ | 2 |
|
Gain (loss) on derivative instruments | 25 |
| | (6 | ) | | 13 |
| | (8 | ) |
Gains on equity method investments | 2 |
| | 11 |
| | 6 |
| | 13 |
|
Other | 1 |
| | (4 | ) | | 4 |
| | (4 | ) |
| $ | (1 | ) | | $ | (26 | ) | | $ | (3 | ) | | $ | (34 | ) |
Earnings Per Common Share
The computation of basic and diluted earnings per common share is as follows: |
| | | | | | | | | | | | | | | |
| Amounts attributable to Motorola Solutions, Inc. common stockholders |
| Earnings from Continuing Operations, net of tax | | Net Earnings |
Three Months Ended | October 3, 2015 | | September 27, 2014 | | October 3, 2015 | | September 27, 2014 |
Basic earnings per common share: | | | | | | | |
Earnings | $ | 126 |
| | $ | 66 |
| | $ | 115 |
| | $ | 147 |
|
Weighted average common shares outstanding | 199.2 |
| | 246.3 |
| | 199.2 |
| | 246.3 |
|
Per share amount | $ | 0.63 |
| | $ | 0.27 |
| | $ | 0.58 |
| | $ | 0.60 |
|
Diluted earnings per common share: | | | | | | | |
Earnings | $ | 126 |
| | $ | 66 |
| | $ | 115 |
| | $ | 147 |
|
Weighted average common shares outstanding | 199.2 |
| | 246.3 |
| | 199.2 |
| | 246.3 |
|
Add effect of dilutive securities: | | | | | | | |
Share-based awards | 2.1 |
| | 1.9 |
| | 2.1 |
| | 1.9 |
|
Diluted weighted average common shares outstanding | 201.3 |
| | 248.2 |
| | 201.3 |
| | 248.2 |
|
Per share amount | $ | 0.63 |
| | $ | 0.27 |
| | $ | 0.57 |
| | $ | 0.59 |
|
|
| | | | | | | | | | | | | | | |
| Amounts attributable to Motorola Solutions, Inc. common stockholders |
| Earnings from Continuing Operations, net of tax | | Net Earnings |
Nine Months Ended | October 3, 2015 | | September 27, 2014 | | October 3, 2015 | | September 27, 2014 |
Basic earnings per common share: | | | | | | | |
Earnings | $ | 363 |
| | $ | 229 |
| | $ | 331 |
| | $ | 1,098 |
|
Weighted average common shares outstanding | 207.2 |
| | 251.1 |
| | 207.2 |
| | 251.1 |
|
Per share amount | $ | 1.75 |
| | $ | 0.91 |
| | $ | 1.60 |
| | $ | 4.37 |
|
Diluted earnings per common share: | | | | | | | |
Earnings | $ | 363 |
| | $ | 229 |
| | $ | 331 |
| | $ | 1,098 |
|
Weighted average common shares outstanding | 207.2 |
| | 251.1 |
| | 207.2 |
| | 251.1 |
|
Add effect of dilutive securities: | | | | | | | |
Share-based awards | 2.0 |
| | 2.9 |
| | 2.0 |
| | 2.9 |
|
Diluted weighted average common shares outstanding | 209.2 |
| | 254.0 |
| | 209.2 |
| | 254.0 |
|
Per share amount | $ | 1.74 |
| | $ | 0.90 |
| | $ | 1.58 |
| | $ | 4.32 |
|
In the computation of diluted earnings per common share from both continuing operations and on a net earnings basis for the three months ended October 3, 2015, the assumed exercise of 3.9 million options were excluded because their inclusion would have been antidilutive. For the nine months ended October 3, 2015, the assumed exercise of 2.6 million options were excluded because their inclusion would have been antidilutive.
For the three and nine months ended September 27, 2014, the assumed exercise of 4.9 million and 4.8 million stock options, respectively, were excluded because their inclusion would have been antidilutive.
On August 25, 2015, the Company issued $1 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). See discussion in Note 4. 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, Motorola Solutions does not reflect any shares underlying the Senior Convertible Notes in its diluted weighted average shares outstanding until the average stock price per share for the period exceeds the conversion price. 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 period ended October 3, 2015, there was no dilutive effect of the Senior Convertible Notes on diluted earnings per share attributable to Motorola Solutions, Inc. as the average stock price for the period outstanding was below the conversion price.
Balance Sheet Information
Cash and Cash Equivalents
The Company’s cash and cash equivalents were $2.2 billion at October 3, 2015 and $4.0 billion at December 31, 2014. Of these amounts, $63 million was restricted at both October 3, 2015 and December 31, 2014.
Investments
Investments consist of the following: |
| | | | | | | | | | | |
October 3, 2015 | Cost Basis | | Unrealized Gains | | Investments |
Available-for-sale securities: | | | | | |
Government, agency, and government-sponsored enterprise obligations | $ | 58 |
| | $ | 1 |
| | $ | 59 |
|
Corporate bonds | 9 |
| | — |
| | 9 |
|
Common stock | — |
| | 15 |
| | 15 |
|
| 67 |
| | 16 |
| | 83 |
|
Other investments, at cost | 201 |
| | — |
| | 201 |
|
Equity method investments | 8 |
| | — |
| | 8 |
|
| $ | 276 |
| | $ | 16 |
| | $ | 292 |
|
|
| | | | | | | | | | | |
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 October 3, 2015, the Company sold various cost method investments recognizing a gain of $10 million. During the nine months ended October 3, 2015, the Company recorded Gains on sales of investments, net of $60 million, primarily related to the sale of one individual investment which represented $54 million of the total gain.
Accounts Receivable, Net
Accounts receivable, net, consists of the following:
|
| | | | | | | |
| October 3, 2015 | | December 31, 2014 |
Accounts receivable | $ | 1,247 |
| | $ | 1,444 |
|
Less allowance for doubtful accounts | (25 | ) | | (35 | ) |
| $ | 1,222 |
| | $ | 1,409 |
|
Inventories, Net
Inventories, net, consist of the following:
|
| | | | | | | |
| October 3, 2015 | | December 31, 2014 |
Finished goods | $ | 153 |
| | $ | 163 |
|
Work-in-process and production materials | 323 |
| | 313 |
|
| 476 |
| | 476 |
|
Less inventory reserves | (142 | ) | | (131 | ) |
| $ | 334 |
| | $ | 345 |
|
Other Current Assets
Other current assets consist of the following:
|
| | | | | | | |
| October 3, 2015 | | December 31, 2014 |
Costs and earnings in excess of billings | $ | 397 |
| | $ | 417 |
|
Tax-related refunds receivable | 77 |
| | 103 |
|
Zebra receivable for cash transferred | — |
| | 49 |
|
Other | 100 |
| | 171 |
|
| $ | 574 |
| | $ | 740 |
|
In conjunction with the sale of the Enterprise business to Zebra Technologies, the Company transferred legal entities which maintained cash balances. During the nine months ended October 3, 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:
|
| | | | | | | |
| October 3, 2015 | | December 31, 2014 |
Land | $ | 18 |
| | $ | 18 |
|
Building | 528 |
| | 559 |
|
Machinery and equipment | 1,536 |
| | 1,672 |
|
| 2,082 |
| | 2,249 |
|
Less accumulated depreciation | (1,615 | ) | | (1,700 | ) |
| $ | 467 |
| | $ | 549 |
|
Depreciation expense for the three months ended October 3, 2015 and September 27, 2014 was $30 million and $44 million, respectively. Depreciation expense for the nine months ended October 3, 2015 and September 27, 2014 was $107 million and $128 million, respectively.
Subsequent to the three months ended October 3, 2015, the Company entered into an arrangement to transfer its Penang, Malaysia manufacturing operations, including the land, building, equipment, inventory, and employees to a contract manufacturer. In the three months ended October 3, 2015, the Company recognized an impairment loss of $6 million on the building that is held for sale within Other charges, in its condensed consolidated statements of operations, and presented the assets as held for sale in its condensed consolidated balance sheets.
During the three months ended October 3, 2015, the Company entered into an agreement to broker the sale of its corporate aircraft. In the three months ended October 3, 2015, the Company recognized an impairment loss of $26 million within Other charges based on the indicated market value of the aircraft held for sale and has presented the aircraft as assets held for sale in its condensed consolidated balance sheets.
Other Assets
Other assets consist of the following:
|
| | | | | | | |
| October 3, 2015 | | December 31, 2014 |
Intangible assets, net | $ | 50 |
| | $ | 23 |
|
Long-term receivables | 16 |
| | 31 |
|
Other | 117 |
| | 91 |
|
| $ | 183 |
| | $ | 145 |
|
Accrued Liabilities
Accrued liabilities consist of the following:
|
| | | | | | | |
| October 3, 2015 | | December 31, 2014 |
Deferred revenue | $ | 363 |
| | $ | 355 |
|
Compensation | 216 |
| | 190 |
|
Billings in excess of costs and earnings | 357 |
| | 358 |
|
Tax liabilities | 59 |
| | 91 |
|
Dividend payable | 60 |
| | 75 |
|
Other | 527 |
| | 637 |
|
| $ | 1,582 |
| | $ | 1,706 |
|
Other Liabilities
Other liabilities consist of the following:
|
| | | | | | | |
| October 3, 2015 | | December 31, 2014 |
Defined benefit plans | $ | 1,590 |
| | $ | 1,611 |
|
Postretirement Health Care Benefit Plan | 47 |
| | 49 |
|
Deferred revenue | 116 |
| | 139 |
|
Unrecognized tax benefits | 50 |
| | 54 |
|
Other | 166 |
| | 158 |
|
| $ | 1,969 |
| | $ | 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 in the aggregate 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.
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 was authorized under the existing share repurchase authority, as outlined above. The tender offer commenced on August 7, 2015 and expired on September 3, 2015. The Company paid $2 billion, including transaction costs, to repurchase approximately 30.1 million shares at a tender price of $66.50 per share.
In addition, excluding shares repurchased under the tender offer mentioned above, the Company paid an aggregate of $55 million during the three months ended October 3, 2015, including transaction costs, to repurchase approximately 0.8 million shares at an average price of $67.62 per share.
During the nine months ended October 3, 2015, the Company paid an aggregate of $3.0 billion, including transaction costs, to repurchase approximately 45.4 million shares at an average price of $66.04 per share. As of October 3, 2015, the Company had used approximately $10.8 billion of the share repurchase authority, including transaction costs, to repurchase shares, leaving $1.2 billion of authority available for future repurchases.
Payment of Dividends: During the three months ended October 3, 2015 and September 27, 2014, the Company paid $70 million and $78 million, respectively, in cash dividends to holders of its common stock. During the nine months ended October 3, 2015 and September 27, 2014, the Company paid $218 million and $236 million, respectively, in cash dividends to holders of its common stock.
Accumulated Other Comprehensive Loss
The following table displays the changes in Accumulated other comprehensive loss, including amounts reclassified into income, and the affected line items in the condensed consolidated statements of operations during the three and nine months ended October 3, 2015 and September 27, 2014: |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 3, 2015 | | September 27, 2014 | | October 3, 2015 | | September 27, 2014 |
Foreign Currency Translation Adjustments: | | | | | | | |
Balance at beginning of period | $ | (223 | ) | | $ | (81 | ) | | $ | (204 | ) | | $ | (96 | ) |
Other comprehensive loss before reclassification adjustment | (17 | ) | | (35 | ) | | (35 | ) | | (24 | ) |
Tax benefit | 1 |
| | 1 |
| | — |
| | 5 |
|
Other comprehensive loss, net of tax | (16 | ) | | (34 | ) | | (35 | ) | | (19 | ) |
Balance at end of period | $ | (239 | ) | | $ | (115 | ) | | $ | (239 | ) | | $ | (115 | ) |
Derivative instruments: | | | | | | | |
Balance at beginning of period | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1 | ) |
Reclassification adjustment into Cost of sales | — |
| | — |
| | — |
| | 1 |
|
Tax expense | — |
| | — |
| | — |
| | — |
|
Reclassification adjustment into Cost of sales, net of tax | — |
| | — |
| | — |
| | 1 |
|
Other comprehensive income, net of tax | — |
| | — |
| | — |
| | 1 |
|
Balance at end of period | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Unrealized Gains and Losses on Available-for-Sale Securities: | | | | | | | |
Balance at beginning of period | $ | 15 |
| | $ | — |
| | $ | 44 |
| | $ | (2 | ) |
Other comprehensive loss before reclassification adjustment | — |
| | — |
| | (2 | ) | | — |
|
Tax benefit | — |
| | — |
| | 1 |
| | 2 |
|
Other comprehensive income (loss) before reclassification adjustment, net of tax | — |
| | — |
| | (1 | ) | | 2 |
|
Reclassification adjustment into Gains on sales of investments and businesses, net | (8 | ) | | — |
| | (54 | ) | | — |
|
Tax expense | 3 |
| | — |
| | 21 |
| | — |
|
Reclassification adjustment into Gains on sales of investments and businesses, net of tax | (5 | ) | | — |
| | (33 | ) | | — |
|
Other comprehensive income (loss), net of tax | (5 | ) | | — |
| | (34 | ) | | 2 |
|
Balance at end of period | $ | 10 |
| | $ | — |
| | $ | 10 |
| | $ | — |
|
Defined Benefit Plans: | | | | | | | |
Balance at beginning of period | (1,777 | ) | | (2,164 | ) | | (1,695 | ) | | (2,188 | ) |
Other comprehensive loss before reclassification adjustment | — |
| | (647 | ) | | (53 | ) | | (647 | ) |
Tax benefit | — |
| | 294 |
| | — |
| | 294 |
|
Other comprehensive loss before reclassification adjustment, net of tax | — |
| | (353 | ) | | (53 | ) | | (353 | ) |
Reclassification adjustment - Actuarial net losses into Selling, general, and administrative expenses | 20 |
| | 27 |
| | 56 |
| | 84 |
|
Reclassification adjustment - Prior service benefits into Selling, general, and administrative expenses | (20 | ) | | (16 | ) | | (52 | ) | | (39 | ) |
Reclassification adjustment - Non-U.S. pension curtailment gain into Selling, general, and administrative expenses | — |
| | — |
| | (32 | ) | | — |
|
Tax benefit | — |
| | (4 | ) | | (1 | ) | | (14 | ) |
Reclassification adjustment into Selling, general, and administrative expenses, net of tax | — |
| | 7 |
| | (29 | ) | | 31 |
|
Other comprehensive loss, net of tax | — |
| | (346 | ) | | (82 | ) | | (322 | ) |
Balance at end of period | $ | (1,777 | ) | | $ | (2,510 | ) | | $ | (1,777 | ) | | $ | (2,510 | ) |
| | | | | | | |
Total Accumulated other comprehensive loss | $ | (2,006 | ) | | $ | (2,625 | ) | | $ | (2,006 | ) | | $ | (2,625 | ) |
| |
4. | Debt and Credit Facilities |
As of October 3, 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 October 3, 2015. The Company did not borrow or issue any letters of credit under the 2014 Motorola Solutions Credit Agreement during the nine months ended October 3, 2015.
On August 25, 2015, the Company entered into an agreement with Silver Lake Partners to issue $1 billion of 2% Senior Convertible Notes which mature in September 2020 (the "Senior Convertible Notes"). Interest on these notes is 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 14.5985 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.
The Company has recorded a debt liability associated with the Senior Convertible Notes by determining the fair value of an equivalent debt instrument without a conversion option. Using a discount rate of 2.4%, which was determined based on a review of relevant market data, the Company has calculated the debt liability to be $992 million, indicating an $8 million discount to be amortized over the expected life of the debt instrument. The total of proceeds received in excess of the fair value of the debt liability of $8 million has been recorded within Additional paid-in capital.
Foreign Currency Risk
As of October 3, 2015, the Company had outstanding foreign exchange contracts with notional amounts totaling $521 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 October 3, 2015, and the corresponding positions as of December 31, 2014:
|
| | | | | | | |
| Notional Amount |
Net Buy (Sell) by Currency | October 3, 2015 | | December 31, 2014 |
Euro | $ | 142 |
| | $ | 214 |
|
Chinese Renminbi | (131 | ) | | (161 | ) |
Australian Dollar | (44 | ) | | (42 | ) |
Brazilian Real | (39 | ) | | (28 | ) |
Norwegian Krone | (38 | ) | | (90 | ) |
Interest Rate Risk
As of October 3, 2015, the Company had $4.4 billion of long-term debt, including the current portion, which is priced at 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 $1 million at October 3, 2015 and a liability position of $2 million 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 October 3, 2015, all of the counterparties have investment grade credit ratings. As of October 3, 2015, the Company had de minimis 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 October 3, 2015 and December 31, 2014:
|
| | | | | | | | | | | |
| Fair Values of Derivative Instruments |
| Assets | | Liabilities |
October 3, 2015 | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location |
Derivatives not designated as hedging instruments: | | | | | | | |
Foreign exchange contracts | $ | — |
| | Other current assets | | $ | 2 |
| | Accrued liabilities |
Interest rate swap | — |
| | Other current assets | | 1 |
| | Accrued liabilities |
Total derivatives | $ | — |
| | | | $ | 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 nine months ended October 3, 2015 and September 27, 2014:
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | | Statements of Operations Location |
Gain (loss) on Derivative Instruments | October 3, 2015 | | September 27, 2014 | | October 3, 2015 | | September 27, 2014 | |
Interest rate swap | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | Other income (expense) |
Foreign exchange contracts | 25 |
| | (6 | ) | | 12 |
| | (8 | ) | | Other income (expense) |
Total derivatives | $ | 25 |
| | $ | (6 | ) | | $ | 13 |
| | $ | (8 | ) | | |
The following table summarizes the gains and losses reclassified from Accumulated other comprehensive loss into Net earnings during the three and nine months ended October 3, 2015 and September 27, 2014:
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | | Financial Statement Location |
Foreign Exchange Contracts | October 3, 2015 | | September 27, 2014 | | October 3, 2015 | | September 27, 2014 | |
Derivatives in cash flow hedging relationships: | | | | | | | | | |
Losses reclassified from Accumulated other comprehensive loss into Net earnings | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1 | ) | | Cost of sales |
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 | | Nine Months Ended |
| October 3, 2015 | | September 27, 2014 | | October 3, 2015 | | September 27, 2014 |
Earnings from continuing operations before income taxes | $ | 197 |
| | $ | 151 |
| | $ | 540 |
| | $ | 337 |
|
Income tax expense | 71 |
| | 84 |
| | 175 |
| | 107 |
|
Effective tax rate | 36 | % | | 56 | % | | 32 | % | | 32 | % |
The Company recorded $71 million of net tax expense in the third quarter of 2015 resulting in an effective tax rate of 36%, compared to $84 million of net tax expense in the third quarter of 2014 resulting in an effective tax rate of 56%. The effective tax rate in the third quarter of 2015 was higher than the U.S. statutory tax rate of 35% primarily due to higher income in the U.S. relative to foreign operations. The effective tax rate in the third quarter of 2014 was unfavorably impacted by $55 million of tax expense related to the recording of a valuation allowance on certain foreign deferred tax assets.
The Company recorded $175 million of net tax expense in the first nine months of 2015 resulting in an effective tax rate of 32%, compared to $107 million of net tax expense resulting in an effective tax rate of 32% in the first nine months of 2014. The effective tax rate for the first nine months of 2015 was lower than the U.S. statutory tax rate of 35% primarily due to the rate differential for foreign affiliates and the U.S domestic production tax deduction. The effective tax rate in the first nine months of 2014 was lower than the U.S. statutory tax rate of 35% due to tax benefits associated with the net reduction in unrecognized tax benefits and revaluing of deferred tax assets for state effective rates.
| |
7. | Retirement and Other Employee Benefits |
Pension and Postretirement Health Care Benefits Plans
The net periodic costs (benefits) for Pension and Postretirement Health Care Benefits Plans were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Pension Benefit Plans | | Non U.S. Pension Benefit Plans | | Postretirement Health Care Benefits Plan |
Three Months Ended | October 3, 2015 | | September 27, 2014 | | October 3, 2015 | | September 27, 2014 | | October 3, 2015 | | September 27, 2014 |
Service cost | $ | — |
| | $ | — |
| | $ | 3 |
| | $ | 4 |
| | $ | — |
| | $ | — |
|
Interest cost | 48 |
| | 93 |
| | 14 |
| | 20 |
| | 2 |
| | 2 |
|
Expected return on plan assets | (53 | ) | | (97 | ) | | (23 | ) | | (23 | ) | | (2 | ) | | (3 | ) |
Amortization of: | | | | | | | | | | | |
Unrecognized net loss | 12 |
| | 23 |
| | 5 |
| | 3 |
| | 3 |
| | 1 |
|
Unrecognized prior service benefit | — |
| | — |
| | (1 | ) | | (2 | ) | | (15 | ) | | (13 | ) |
Net periodic pension cost (benefit) | $ | 7 |
| | $ | 19 |
| | $ | (2 | ) | | $ | 2 |
| | $ | (12 | ) | | $ | (13 | ) |
The Company made no contributions to its U.S. Pension Benefit Plans during the three months ended October 3, 2015 and $397 million of contributions to its U.S. Pension Benefit plans for the three months ended September 27, 2014. During the three months ended October 3, 2015 and September 27, 2014, contributions of $2 million and $7 million were made to the Company’s Non U.S. Pension Benefit Plans, respectively.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Pension Benefit Plans | | Non U.S. Pension Benefit Plans | | Postretirement Health Care Benefits Plan |
Nine Months Ended | October 3, 2015 | | September 27, 2014 | | October 3, 2015 | | September 27, 2014 | | October 3, 2015 | | September 27, 2014 |
Service cost | $ | — |
| | $ | — |
| | $ | 10 |
| | $ | 11 |
| | $ | 1 |
| | $ | 1 |
|
Interest cost | 144 |
| | 278 |
| | 49 |
| | 61 |
| | 6 |
| | 8 |
|
Expected return on plan assets | (159 | ) | | (294 | ) | | (79 | ) | | (69 | ) | | (7 | ) | | (7 | ) |
Amortization of: | | | | | | | | | | | |
Unrecognized net loss | 35 |
| | 68 |
| | 13 |
| | 9 |
| | 8 |
| | 7 |
|
Unrecognized prior service benefit | — |
| | — |
| | (3 | ) | | (5 | ) | | (45 | ) | | (35 | ) |
Curtailment gain | — |
| | — |
| | (32 | ) | | — |
| | — |
| | — |
|
Net periodic pension cost (benefit) | $ | 20 |
| | $ | 52 |
| | $ | (42 | ) | | $ | 7 |
| | $ | (37 | ) | | $ | (26 | ) |
During the nine months ended October 3, 2015, the Company amended its Non U.S. defined benefit plan within the United Kingdom by closing future benefit accruals to all participants effective December 31, 2015. As a result, the Company recorded a curtailment gain of $32 million to Other charges in the Company’s condensed consolidated statements of operations.
The Company made no contributions to its U.S. Pension Benefit Plans during the nine months ended October 3, 2015 and $463 million of contributions to its U.S. Pension Benefit Plans for the nine months ended September 27, 2014. During the nine months ended October 3, 2015 and September 27, 2014, contributions of $8 million and $27 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 | | Nine Months Ended |
| October 3, 2015 | | September 27, 2014 | | October 3, 2015 | | September 27, 2014 |
Share-based compensation expense included in: | | | | | | | |
Costs of sales | $ | 2 |
| | $ | 2 |
| | $ | 7 |
| | $ | 9 |
|
Selling, general and administrative expenses | 13 |
| | 14 |
| | 38 |
| | 47 |
|
Research and development expenditures | 3 |
| | 4 |
| | 13 |
| | 18 |
|
Share-based compensation expense included in Operating earnings | 18 |
| | 20 |
| | 58 |
| | 74 |
|
Tax benefit | 6 |
| | 6 |
| | 19 |
| | 23 |
|
Share-based compensation expense, net of tax | $ | 12 |
| | $ | 14 |
| | $ | 39 |
| | $ | 51 |
|
Decrease in basic earnings per share | $ | (0.06 | ) | | $ | (0.06 | ) | | $ | (0.19 | ) | | $ | (0.20 | ) |
Decrease in diluted earnings per share | $ | (0.06 | ) | | $ | (0.06 | ) | | $ | (0.19 | ) | | $ | (0.20 | ) |
Share-based compensation expense in discontinued operations | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | 18 |
|
During the nine months ended October 3, 2015, the Company granted 0.8 million RSUs and 2.6 million stock options. The total aggregate compensation expense, net of estimated forfeitures, for these RSUs and stock options was $44 million and $17 million, respectively, which will generally be recognized over the vesting period of three years.
During the third quarter of 2015, the Company approved a one-time grant of performance-contingent stock options (the “PCSOs”) to certain officers under the Motorola Solutions Omnibus Incentive Plan of 2015 (the “Omnibus Plan”). The PCSOs have a seven-year term and a per share exercise price of $68.50. The PCSOs would vest upon satisfaction of the following Company stock price hurdles which must be maintained for 10-consecutive trading days during the three-year period following the grant date: 20% of the total award would vest at an $85 stock price; an additional 30% of the total award would vest at a $102.50 stock price; and the final 50% of the total award would vest at a $120 stock price. If any stock price hurdles are not met during the three-year period, the corresponding portion of the PCSOs would not vest and would be forfeited. PCSOs are generally not exercisable prior to the end of the three-year performance period.
| |
9. | Fair Value Measurements |
The Company holds certain fixed income securities, equity securities and derivatives, which are recognized and disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Fair value is measured using the fair value hierarchy and related valuation methodologies as defined in the authoritative literature. This guidance specifies a hierarchy of valuation techniques based on whether the inputs to each measurement are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's assumptions about current market conditions.
The fair value hierarchy and related valuation methodologies are as follows:
Level 1—Quoted prices for identical instruments in active markets.
Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.
Level 3—Valuations derived from valuation techniques, in which one or more significant inputs are unobservable.
The fair values of the Company’s financial assets and liabilities by level in the fair value hierarchy as of October 3, 2015 and December 31, 2014 were as follows:
|
| | | | | | | | | | | |
October 3, 2015 | Level 1 | | Level 2 | | Total |
Assets: | | | | | |
Available-for-sale securities: | | | | | |
Government, agency, and government-sponsored enterprise obligations | $ | — |
| | $ | 59 |
| | $ | 59 |
|
Corporate bonds | — |
| | 9 |
| | 9 |
|
Common stock | 15 |
| | — |
| | 15 |
|
Liabilities: | | | | | |
Foreign exchange derivative contracts | $ | — |
| | $ | 2 |
| | $ | 2 |
|
Interest rate swap | — |
| | 1 |
| | 1 |
|
|
| | | | | | | | | | | |
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 October 3, 2015 or December 31, 2014.
At October 3, 2015 and December 31, 2014, the Company had $1.5 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 October 3, 2015 and December 31, 2014 was $4.2 billion and $3.6 billion (Level 2), respectively.
All other financial instruments are carried at cost, which is not materially different from the instruments’ fair values.
| |
10. | Long-term 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: