Form 10-Q
Table of Contents

 

 

 

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 2, 2011

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):

 

Large accelerated filer x

   Accelerated filer ¨   

Non-accelerated filer ¨

(Do not check if a smaller reporting company)

  Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨  No x

The number of shares outstanding of each of the issuer’s classes of common stock as of the close of business on July 2, 2011:

 

Class

 

Number of Shares

Common Stock; $.01 Par Value

  343,136,511

 

 

 

 


Table of Contents
    Page      

PART I FINANCIAL INFORMATION

    1   

Item 1 Financial Statements

 

Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended July  2, 2011 and July 3, 2010

    1   

Condensed Consolidated Balance Sheets (Unaudited) as of July 2, 2011 and December 31, 2010

    2   

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) for the Six Months Ended July 2, 2011

    3   

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended July  2, 2011 and July 3, 2010

    4   

Notes to Condensed Consolidated Financial Statements (Unaudited)

    5   

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

    28   

Item 3 Quantitative and Qualitative Disclosures About Market Risk

    45   

Item 4 Controls and Procedures

    47   

PART II OTHER INFORMATION

    48   

Item 1 Legal Proceedings

    48   

Item 1A Risk Factors

    50   

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

    50   

Item 3 Defaults Upon Senior Securities

    50   

Item 4 (Removed and Reserved)

    50   

Item 5 Other Information

    50   

Item 6 Exhibits

    51   


Table of Contents

Part I—Financial Information

Motorola Solutions, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

 

       Three Months Ended            Six Months Ended    
(In millions, except per share amounts)    July 2,
2011
     July 3,
2010
     July 2,
2011
     July 3,
2010
 

Net sales from products

     $1,524         $1,438         $2,948         $2,729   

Net sales from services

     531         498         991         947   

Net sales

     2,055         1,936         3,939         3,676   

Costs of product sales

     685         656         1,341         1,250   

Costs of services sales

     331         315         617         608   

Costs of sales

     1,016         971         1,958         1,858   

Gross margin

     1,039         965         1,981         1,818   

Selling, general and administrative expenses

     492         471         960         925   

Research and development expenditures

     271         269         520         527   

Other charges

     106         64         161         85   

Operating earnings

     170         161         340         281   

Other income (expense):

           

Interest expense, net

     (21)         (35)         (41)         (68)   

Gain on sales of investments and businesses, net

     1         33         19         40   

Other

     (77)         (30)         (72)         (15)   

Total other income (expense)

     (97)         (32)         (94)         (43)   

Earnings from continuing operations before income taxes

     73         129         246         238   

Income tax expense (benefit)

     17         122         (169)         135   

Earnings from continuing operations

     56         7         415         103   

Earnings from discontinued operations, net of tax

     291         159         423         131   

Net earnings

     347         166         838         234   

Less: Earnings (loss) attributable to noncontrolling interests

     (2)         4         (8)         3   

Net earnings attributable to Motorola Solutions, Inc.

     $349         $162         $846         $231   

Amounts attributable to Motorola Solutions, Inc. common stockholders:

           

Earnings from continuing operations, net of tax

     $58         $3         $423         $100   

Earnings from discontinued operations, net of tax

     291         159         423         131   

Net earnings

     $349         $162         $846         $231   

Earnings per common share:

           

Basic:

           

Continuing operations

     $0.17         $0.01         $1.24         $0.30   

Discontinued operations

     0.85         0.48         1.25         0.40   
                                   
     $1.02         $0.49         $2.49         $0.70   
                                   

Diluted:

           

Continuing operations

     $0.17         $0.01         $1.22         $0.30   

Discontinued operations

     0.83         0.47         1.22         0.39   
                                   
     $1.00         $0.48         $2.44         $0.69   
                                   

Weighted average common shares outstanding:

           

Basic

     341.2         332.7         339.3         331.7   

Diluted

     348.5         337.9         346.3         336.1   

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

 

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Table of Contents

Motorola Solutions, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

(In millions, except par value amounts)   

July 2,

2011

     December 31,
2010
 
ASSETS   

Cash and cash equivalents

     $2,203         $4,208   

Sigma Fund and short-term investments

     4,424         4,655   

Accounts receivable, net

     1,546         1,547   

Inventories, net

     522         521   

Deferred income taxes

     729         871   

Other current assets

     729         748   

Current assets held for disposition

     116         4,604   
  

 

 

 

Total current assets

     10,269         17,154   
  

 

 

 

Property, plant and equipment, net

     899         922   

Sigma Fund

     28         70   

Investments

     175         172   

Deferred income taxes

     2,063         1,920   

Goodwill

     1,429         1,429   

Other assets

     641         734   

Non-current assets held for disposition

     93         3,176   
  

 

 

 

Total assets

     $15,597         $25,577   
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Notes payable and current portion of long-term debt

     $606         $605   

Accounts payable

     625         731   

Accrued liabilities

     2,790         2,574   

Current liabilities held for disposition

     110         4,800   
  

 

 

 

Total current liabilities

     4,131         8,710   
  

 

 

 

Long-term debt

     1,548         2,098   

Other liabilities

     3,015         3,045   

Non-current liabilities held for disposition

     79         737   

Stockholders’ Equity

     

Preferred stock, $100 par value

               

Common stock, $.01 par value:

     3         3   

Authorized shares: 600.0

     

Issued shares: 7/02/11—344.9; 12/31/10—337.2

     

Outstanding shares: 7/02/11—343.1; 12/31/10—336.3

     

Additional paid-in capital

     8,030         8,644   

Retained earnings

     846         4,460   

Accumulated other comprehensive loss

     (2,140)         (2,222)   
  

 

 

 

Total Motorola Solutions, Inc. stockholders’ equity

     6,739         10,885   

Noncontrolling interests

     85         102   
  

 

 

 

Total stockholders’ equity

     6,824         10,987   
  

 

 

 

Total liabilities and stockholders’ equity

     $15,597         $25,577   

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

 

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Table of Contents

Motorola Solutions, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

 

                Motorola Solutions, Inc. Stockholders
Accumulated Other Comprehensive Income (Loss)
                   
(In millions)   Shares     Common
Stock and
Additional
Paid-in
Capital
    Fair Value
Adjustment
to
Available
for Sale
Securities,
Net of  Tax
    Foreign
Currency
Translation
Adjustments,
Net of Tax
    Retirement
Benefits
Adjustments,
Net of Tax
    Other
Items,
Net of Tax
    Retained
Earnings
    Noncontrolling
Interests
    Comprehensive
Earnings
 

Balances at December 31, 2010

    337.2        $8,647        $12        $(126)        $(2,108)        $—        $4,460        $102     

Net earnings (loss)

                846        (8)        $838   

Net unrealized gain on securities, net of tax of $6

        9                  9   

Foreign currency translation adjustments, net of tax of $(5)

          83                83   

Amortization of retirement benefit adjustments, net of tax of $36

            65              65   

Remeasurement of retirement benefits, net of tax of $9

            (77)              (77)   

Issuance of common stock and stock options exercised

    7.7        92                 

Excess tax benefit from stock-based compensation

      36                 

Share-based compensation expense

      91                 

Net gain on derivative instruments, net of tax of $0

              2            2   

Distribution of Motorola Mobility

      (831)        (9)        1        8          (4,460)       

Dividends paid to noncontrolling interest on subsidiary common stock

                  (8)     

Purchase of noncontrolling interest in subsidiary

                  (1)     

Reclassification of share-based awards from equity to liability

            (2)                                                           

Balances at July 2, 2011

    344.9        $8,033        $12        $(42)        $(2,112)        $2        $846        $85        $920   

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

 

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Motorola Solutions, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Six Months Ended  
(In millions)            July 2,         
2011
             July 3,        
2010
 

Operating

     

Net earnings attributable to Motorola Solutions, Inc.

     $846         $231   

Earnings (loss) attributable to noncontrolling interests

     (8)         3   
        

Net earnings

     838         234   

Earnings from discontinued operations, net of tax

     423         131   
        

Earnings from continuing operations

     415         103   

Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities:

     

Depreciation and amortization

     181         172   

Non-cash other charges (income)

     45         (37)   

Share-based compensation expense

     78         69   

Gain on sales of investments and businesses, net

     (19)         (40)   

Loss from the extinguishment of long-term debt

     81         12   

Deferred income taxes

     (10)         255   

Changes in assets and liabilities, net of effects of acquisitions and dispositions:

     

Accounts receivable

     88         (32)   

Inventories

     (12)         (36)   

Other current assets

     9         10   

Accounts payable and accrued liabilities

     (338)         (144)   

Other assets and liabilities

     (185)         (170)   
        

Net cash provided by operating activities from continuing operations

     333         162   

Investing

     

Acquisitions and investments, net

     (2)         (6)   

Proceeds from sales of investments and businesses, net

     1,078         239   

Capital expenditures

     (60)         (74)   

Proceeds from sales of property, plant and equipment

     4         27   

Proceeds from sales (purchases) of Sigma Fund investments, net

     266         (248)   

Proceeds from sales (purchases) of short-term investments, net

     6         (23)   
        

Net cash provided by (used for) investing activities from continuing operations

     1,292         (85)   

Financing

     

Repayment of short-term borrowings, net

             (5)   

Repayment of debt

     (616)         (481)   

Contribution to Motorola Mobility

     (3,200)           

Issuance of common stock

     128         68   

Distribution from discontinued operations

     75         531   
        

Net cash provided by (used for) financing activities from continuing operations

     (3,613)         113   

Discontinued Operations

     

Net cash provided by operating activities from discontinued operations

     38         567   

Net cash used for investing activities from discontinued operations

     (8)         (88)   

Net cash used for financing activities from discontinued operations

     (75)         (531)   

Effect of exchange rate changes on cash and cash equivalents from discontinued operations

     45         52   
        

Net cash provided by (used for) discontinued operations

               

Effect of exchange rate changes on cash and cash equivalents from continuing operations

     (17)         (166)   

Net increase (decrease) in cash and cash equivalents

     (2,005)         24   

Cash and cash equivalents, beginning of period

     4,208         2,869   

Cash and cash equivalents, end of period

     $2,203         $2,893   

Cash Flow Information

                 

Cash paid during the period for:

     

Interest, net

     $105         $130   

Income taxes, net of refunds

     39         34   

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

 

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Motorola Solutions, Inc. and Subsidiaries

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 2, 2011 and for the three and six months ended July 2, 2011 and July 3, 2010, include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to present fairly the consolidated financial position, results of operations and 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, 2010, as well as the Company’s Form 8-K filed on May 12, 2011 to reflect: (i) the revised presentation of the Company’s segments as a result of the realignment of its operations into two segments: Government and Enterprise, and (ii) the reclassification of the historical financial results of Motorola Mobility Holdings, Inc. (“Motorola Mobility”) as discontinued operations. The results of operations for the three and six months ended July 2, 2011 are not necessarily indicative of the operating results to be expected for the full year. Certain amounts in prior period financial statements and related notes have been reclassified to conform to the 2011 presentation.

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.

Changes in Presentation

Networks Transaction

On July 19, 2010, the Company announced an agreement to sell certain assets and liabilities of its Networks business to Nokia Siemens Networks B.V. (“NSN”) (the “Transaction”). On April 12, 2011, the Company announced certain amendments to the Transaction. On April 29, 2011, the Company completed the Transaction, as amended. Based on the terms and conditions of the amended sale agreement, certain assets including $150 million of accounts receivable and the Company’s iDEN infrastructure business were excluded from the Transaction. During the three months ended July 2, 2011, the Company recorded a pre-tax gain related to the completion of the Transaction of $488 million, net of closing costs and an expected purchase price adjustment, to Gains on sales of investments and business, net, within the discontinued operations in the Company’s condensed consolidated statements of operations. As of July 2, 2011, regulatory approvals required to complete the Transaction in certain countries are still in-process and are expected to be completed in the second half of 2011. Until these approvals are received, the Company will maintain the assets and liabilities associated with these countries in assets and liabilities held for disposition in the Company’s condensed consolidated balance sheets.

The results of operations of the portions of the Networks business included in the Transaction are reported as discontinued operations for all periods presented. Certain Corporate and general costs which have historically been allocated to the Networks business remain with the Company after the sale of the Networks business.

 

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Table of Contents

Motorola Mobility Distribution

On January 4, 2011, the distribution by the Company of all the common stock of Motorola Mobility was completed (the “Distribution”). The stockholders of record as of the close of business on December 21, 2010 received one (1) share of Motorola Mobility common stock for each eight (8) shares of the Company’s common stock held as of the record date. The Distribution was structured to be tax-free to Motorola Solutions and its stockholders for U.S. tax purposes (other than with respect to any cash received in lieu of fractional shares). The historical financial results of Motorola Mobility are reflected in the Company’s condensed consolidated financial statements as discontinued operations for all periods presented.

Reverse Stock Split and Name Change

On January 4, 2011, immediately following the Distribution, the Company completed a 1-for-7 reverse stock split (“the Reverse Stock Split”) and changed its name to Motorola Solutions, Inc. All consolidated per share information presented gives effect to the Reverse Stock Split.

Change in Segmentation

Following the Distribution, the Company reports financial results for the following two segments:

 

   

Government: Our Government segment includes sales of two-way radios and public safety systems. Service revenues included in the Government segment are primarily those associated with the design, installation, maintenance and optimization of equipment for public safety networks.

 

   

Enterprise: Our Enterprise segment includes sales of enterprise mobile computing devices, scanning devices, wireless broadband systems, RFID data capture solutions and iDEN infrastructure. Service revenues included in the Enterprise segment are primarily maintenance contracts associated with the above products.

Recent Accounting Pronouncements

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” (“ASU 2011-04”). ASU 2011-04 expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively. This guidance will be effective for the Company beginning January 1, 2012. The Company anticipates that the adoption of this standard will not materially affect its financial statements.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” (“ASU 2011-05”). ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is to be applied retrospectively. This guidance will be effective for the Company beginning January 1, 2012. The Company anticipates that the adoption of this standard will change the presentation of its consolidated financial statements.

 

2. Discontinued Operations

During the three and six months ended July 2, 2011, the activity from discontinued operations substantially relates to the operations of the Networks business. During the three and six months ended July 3, 2010, the activity from discontinued operations substantially relates to the operations of Motorola Mobility and

 

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the Networks business. The following table displays summarized activity in the Company’s condensed consolidated statements of operations for discontinued operations during the three and six months ended July 2, 2011 and July 3, 2010.

 

    Three Months Ended     Six Months Ended  
    

    July 2,    

2011

   

    July 3,    

2010

   

    July 2,    

2011

   

    July 3,    

2010

 

Net sales

    $260        $3,491        $1,108        $6,821   

Operating earnings (loss)

    (14)        202        190        158   

Gains on sales of investments and businesses, net

    488        20        488        21   

Earnings before income taxes

    467        217        666        171   

Income tax expense

    176        58        243        40   

Earnings from discontinued operations, net of tax

    291        159        423        131   

At July 2, 2011, the assets and liabilities held for disposition relate to the assets and liabilities of the Networks business in the certain countries that are yet to receive regulatory approvals. At December 31, 2010, the assets and liabilities held for disposition relate to the assets and liabilities of Motorola Mobility and the Networks business. The following table displays a summary of the assets and liabilities held for disposition as of July 2, 2011 and December 31, 2010.

 

      July 2,
2011
     December 31,
2010
 

Assets

     

Accounts receivable, net

     $60         $2,072   

Inventories, net

     24         1,040   

Other current assets

     32         1,492   

Property, plant and equipment, net

     10         1,013   

Investments

             145   

Goodwill

             1,504   

Other assets

     83         514   
                 
     $209         $7,780   
                 

Liabilities

     

Accounts payable

     $27         $2,060   

Accrued liabilities

     83         2,740   

Other liabilities

     79         737   
                 
       $189         $5,537   

 

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3. Other Financial Data

Statement of Operations Information

Other Charges

Other charges included in Operating earnings consist of the following:

 

     Three Month Ended      Six Months Ended  
          July 2,    
2011
         July 3,    
2010
         July 2,    
2011
         July 3,    
2010
 

Other charges:

           

Amortization of intangible assets

     $50         $50         $100         $101   

Legal matters and settlements, net

     48                 48         (29)   

Reorganization of business charges

     17         14         22         13   

Pension plan adjustments, net

     (9)                 (9)           
                                   
       $106         $64         $161         $85   

Other Income (Expense)

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

 

     Three Month Ended      Six Months Ended  
          July 2,    
2011
         July 3,    
2010
         July 2,    
2011
         July 3,    
2010
 

Interest income (expense), net:

           

Interest expense

     $(40)         $(56)         $(74)         $(116)   

Interest income

     19         21         33         48   
                                   
     $(21)         $(35)         $(41)         $(68)   
                                   

Other:

           

Loss from the extinguishment of the Company’s outstanding long-term debt

     $(81)         $(12)         $(81)         $(12)   

Investment impairments

             (9)         (3)         (18)   

Foreign currency gain (loss)

     6         (4)         11         3   

Gain (loss) on Sigma Fund investments

             (4)                 12   

Other

     (2)         (1)         1           
                                   
       $(77)         $(30)         $(72)         $(15)   

 

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Earnings Per Common Share

The computation of basic and diluted earnings per common share attributable to Motorola Solutions, Inc. common stockholders is as follows:

 

    Amounts attributable to Motorola Solutions, Inc.
common stockholders
 
    Earnings from
Continuing Operations
    Net Earnings  
Three Months Ended   July 2,
2011
    July 3,
2010
    July 2,
2011
    July 3,
2010
 

Basic earnings per common share:

       

Earnings

    $58        $3        $349        $162   

Weighted average common shares outstanding

    341.2        332.7        341.2        332.7   
                               

Per share amount

    $0.17        $0.01        $1.02        $0.49   
                               

Diluted earnings per common share:

       

Earnings

    $58        $3        $349        $162   
                               

Weighted average common shares outstanding

    341.2        332.7        341.2        332.7   

Add effect of dilutive securities:

       

Share-based awards and other

    7.3        5.2        7.3        5.2   
                               

Diluted weighted average common shares outstanding

    348.5        337.9        348.5        337.9   
                               

Per share amount

    $0.17        $0.01        $1.00        $0.48   

 

    Amounts attributable to Motorola Solutions, Inc.
common stockholders
 
    Earnings from
Continuing Operations
    Net Earnings  
Six Months Ended   July 2,
2011
    July 3,
2010
    July 2,
2011
    July 3,
2010
 

Basic earnings per common share:

       

Earnings

    $423        $100        $846        $231   

Weighted average common shares outstanding

    339.3        331.7        339.3        331.7   
                               

Per share amount

    $1.24        $0.30        $2.49        $0.70   
                               

Diluted earnings per common share:

       

Earnings

    $423        $100        $846        $231   
                               

Weighted average common shares outstanding

    339.3        331.7        339.3        331.7   

Add effect of dilutive securities:

       

Share-based awards and other

    7.0        4.4        7.0        4.4   
                               

Diluted weighted average common shares outstanding

    346.3        336.1        346.3        336.1   
                               

Per share amount

    $1.22        $0.30        $2.44        $0.69   

In the computation of diluted earnings per common share from both continuing operations and on a net earnings basis for the three and six months ended July 2, 2011, the assumed exercise of 8.0 million and 8.8 million stock options, respectively, and the assumed vesting of 0.3 million and 0.2 million restricted stock units, respectively, were excluded because their inclusion would have been antidilutive. In the computation of diluted earnings per common share from both continuing operations and on a net earnings basis for the three and six months ended July 3, 2010, the assumed exercise of 19.1 million and 18.9 million stock options, respectively, and the assumed vesting of 1.2 million and 0.7 million restricted stock units, respectively, were excluded because their inclusion would have been antidilutive.

 

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Balance Sheet Information

Cash and Cash Equivalents

The Company’s cash and cash equivalents (which are highly-liquid investments with an original maturity of three months or less) were $2.2 billion and $4.2 billion at July 2, 2011 and December 31, 2010, respectively. Of these amounts, $63 million and $226 million, respectively, were restricted. The decrease in the Company’s cash and cash equivalents from December 31, 2010 to July 2, 2011 is reflective of the Company’s contribution of $3.2 billion of cash and cash equivalents to Motorola Mobility, which included $160 million of restricted cash.

Sigma Fund

The Sigma Fund consists of the following:

 

     July 2, 2011      December 31, 2010  
Fair Value    Current      Non-current      Current      Non-Current  

Cash

     $1,988         $—         $2,355         $—   

Securities:

           

U.S. government and agency obligations

     2,434                 2,291           

Corporate bonds

             21                 58   

Asset-backed securities

                             1   

Mortgage-backed securities

             7                 11   
                                   
           $4,422         $28             $4,646         $70   

During the three months ended July 2, 2011, the Company recorded de minimus gains on Sigma Fund investments, compared to a net loss of $4 million during the three months ended July 3, 2010, in Other income (expense) in the condensed consolidated statement of operations. During the six months ended July 2, 2011, the Company recorded de minimus losses on Sigma Fund investments, compared to gains of $12 million during the six months ended July 3, 2010, in Other income (expense) in the condensed consolidated statement of operations.

Investments

Investments consist of the following:

 

     Recorded Value      Less         
July 2, 2011      Short-term  
Investments
       Investments          Unrealized  
Gains
       Cost  
Basis
 

Available-for-sale securities:

           

U.S. government, agency and government-sponsored enterprise obligations

             17                 17   

Corporate bonds

     2         11                 13   

Mortgage-backed securities

             3                 3   

Common stock and equivalents

             30         19         11   
                                   
     2         61         19         44   

Other securities, at cost

             104                 104   

Equity method investments

             10                 10   
                                   
       $2         $175         $19         $158   

 

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Table of Contents
     Recorded Value      Less         
December 31, 2010      Short-term  
Investments
       Investments          Unrealized  
Gains
       Cost  
Basis
 

Certificates of deposit

     $7         $—         $—         $7   

Available-for-sale securities:

           

U.S. government, agency and government-sponsored enterprise obligations

             17                 17   

Corporate bonds

     2         11                 13   

Mortgage-backed securities

             3                 3   

Common stock and equivalents

             12         4         8   
  

 

 

    

 

 

    

 

 

    

 

 

 
     9         43         4         48   

Other securities, at cost

             113                 113   

Equity method investments

             16                 16   
  

 

 

    

 

 

    

 

 

    

 

 

 
       $9         $172         $4         $177   

During the three months ended July 2, 2011, the Company recorded no investment impairment charges. During the three months ended July 3, 2010, the Company recorded investment impairment charges of $9 million, representing other-than-temporary declines in the value of the Company’s investment portfolio, primarily related to common stock and equivalents and other securities recorded at cost. During the six months ended July 2, 2011 and July 3, 2010, the Company recorded investment impairment charges of $3 million and $18 million, respectively, representing other-than-temporary declines in the value of the Company’s investment portfolio, primarily related to common stock and equivalents and other securities recorded at cost. Investment impairment charges are included in Other within Other income (expense) in the Company’s condensed consolidated statements of operations.

Accounts Receivable, Net

Accounts receivable, net, consists of the following:

 

      July 2,
2011
    December 31,
2010
 

Accounts receivable

             $1,596                $1,596   

Less allowance for doubtful accounts

     (50)        (49)   
  

 

 

   

 

 

 
       $1,546        $1,547   

Inventories, Net

Inventories, net, consist of the following:

 

      July 2,
2011
    December 31,
2010
 

Finished goods

             $398                $386   

Work-in-process and production materials

     284        292   
  

 

 

   

 

 

 
     682        678   

Less inventory reserves

     (160)        (157)   
  

 

 

   

 

 

 
       $522        $521   

 

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Table of Contents

Other Current Assets

Other current assets consist of the following:

 

      July 2,
2011
    December 31,
2010
 

Costs and earnings in excess of billings

             $314                $291   

Contract-related deferred costs

     163        160   

Tax-related refunds receivable

     105        116   

Other

     147        181   
                
       $729        $748   

Property, Plant and Equipment, Net

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

 

      July 2,
2011
    December 31,
2010
 

Land

             $70                $71   

Building

     769        804   

Machinery and equipment

     2,115        2,094   
                
     2,954        2,969   

Less accumulated depreciation

     (2,055)        (2,047)   
                
       $899        $922   

Depreciation expense for the three months ended July 2, 2011 and July 3, 2010 was $40 million and $35 million, respectively. Depreciation expense for the six months ended July 2, 2011 and July 3, 2010 was $81 million and $71 million, respectively.

Other Assets

Other assets consist of the following:

 

      July 2,
2011
    December 31,
2010
 

Long-term receivables, net of allowances of $6 and $1

             $272                $251   

Intangible assets, net of accumulated amortization of $1,047 and $947

     146        246   

Other

     223        237   
                
       $641        $734   

 

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Table of Contents

Accrued Liabilities

Accrued liabilities consist of the following:

 

      July 2,
2011
    December 31,
2010
 

Deferred revenue

             $760                $746   

Compensation

     336        558   

Distribution-related obligation

     300          

Billings in excess of costs and earnings

     251        226   

Tax liabilities

     146        179   

Customer reserves

     112        117   

Other

     885        748   
                
       $2,790        $2,574   

As part of the Distribution of Motorola Mobility, the Company has an obligation to fund an additional $300 million, upon receipt of cash distributions as a result of future capital reductions of an overseas subsidiary, of which $75 million was paid to Motorola Mobility on July 22, 2011.

Other Liabilities

Other liabilities consist of the following:

 

      July 2,
2011
    December 31,
2010
 

Defined benefit plans, including split dollar life insurance policies

     $2,025        $2,113   

Deferred revenue

     293        274   

Postretirement health care benefit plan

     286        277   

Unrecognized tax benefits

     102        70   

Other

     309        311   
                
       $3,015        $3,045   

Stockholders’ Equity

Separation of Motorola Mobility: As a result of the Distribution on January 4, 2011, certain equity balances were transferred by the Company to Motorola Mobility including: (i) $1 million in Foreign currency translation adjustments, net of tax of a de minimus amount, (ii) $9 million in Fair value adjustments to available for sale securities, net of tax of $5 million, and (iii) $8 million in Retirement benefit adjustments, net of tax of $4 million. The distribution of net assets and these equity balances were effected by way of a pro rata dividend to Motorola Solutions stockholders, which reduced retained earnings and additional paid in capital by $5.3 billion.

Share Repurchase Program: On July 28, 2011, the Company announced that its Board of Directors approved a share repurchase program that allows the Company to purchase up to $2.0 billion of its outstanding common stock through December 31, 2012, subject to market conditions. All repurchased shares are expected to be retired.

Payment of Dividends: Also on July 28, 2011, the Company announced that its Board of Directors approved the initiation of a regular quarterly cash dividend on the Company’s outstanding common stock. The Board of Directors approved a cash dividend of $0.22 per share of common stock payable on October 14, 2011 to shareholders of record as of the close of business on September 15, 2011.

 

4. Debt and Credit Facilities

During the six months ended July 2, 2011, the Company repurchased $540 million of its outstanding long-term debt for a purchase price of $615 million, excluding approximately $6 million of accrued interest, all

 

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of which occurred during the three months ended July 2, 2011. The $540 million of long-term debt repurchased included principal amounts of: (i) $196 million of the $314 million then outstanding of the 6.50% Debentures due 2025, (ii) $174 million of the $210 million then outstanding of the 6.50% Debentures due 2028, and (iii) $170 million of the $225 million then outstanding of the 6.625% Senior Notes due 2037. After accelerating the amortization of debt issuance costs and debt discounts, the Company recognized a loss of approximately $81 million related to this debt tender in Other within Other income (expense) in the condensed consolidated statements of operations.

During the six months ended July 3, 2010, the Company repurchased $500 million of its outstanding long-term debt for a purchase price of $477 million, excluding approximately $5 million of accrued interest, all of which occurred during the three months ended July 3, 2010. The $500 million of long-term debt repurchased included principal amounts of: (i) $65 million of the $379 million then outstanding of the 6.50% Debentures due 2025, (ii) $75 million of the $286 million then outstanding of the 6.50% Debentures due 2028, (iii) $222 million of the $446 million then outstanding of the 6.625% Senior Notes due 2037, and (iv) $138 million of the $252 million then outstanding of the 5.22% Debentures due 2097. After accelerating the amortization of debt issuance costs and debt discounts, the Company recognized a loss of approximately $12 million related to this debt tender in Other within Other income (expense) in the condensed consolidated statements of operations.

During the first quarter of 2011, the Company terminated its $1.5 billion domestic syndicated revolving credit facility scheduled to mature December 2011 and entered into a new $1.5 billion unsecured syndicated revolving credit facility (the “2011 Motorola Solutions Credit Agreement”) scheduled to mature on June 30, 2014. The 2011 Motorola Solutions Credit Agreement includes a provision pursuant to which the Company can increase the aggregate credit facility size up to a maximum of $2.0 billion by adding lenders or having existing lenders increase their commitments. The Company must comply with certain customary covenants, including maximum leverage and minimum interest coverage ratios as defined in the 2011 Motorola Solutions Credit Agreement. The Company was in compliance with its financial covenants as of July 2, 2011. The Company has no outstanding borrowings under the 2011 Motorola Solutions Credit Agreement.

 

5. Risk Management

Derivative Financial Instruments

Foreign Currency Risk

At July 2, 2011, the Company had outstanding foreign exchange contracts with notional amounts totaling $665 million, compared to $1.5 billion outstanding at December 31, 2010. The decrease in outstanding contracts is primarily related to the Distribution of Motorola Mobility. Management believes that these financial instruments should not subject the Company to undue risk due to foreign exchange movements because gains and losses on these contracts should generally offset losses and gains on the underlying assets, liabilities and transactions, except for the ineffective portion of the instruments, which are charged to Other within Other income (expense) in the Company’s condensed consolidated statements of operations.

The following table shows the five largest net notional amounts of the positions to buy or sell foreign currency as of July 2, 2011 and the corresponding positions as of December 31, 2010:

 

     Notional Amount  
Net Buy (Sell) by Currency    July 2,
2011
    December 31,
2010
 

Chinese Renminbi

     $(424)        $(423)   

Malaysian Ringgit

     45        64   

Euro

     42        (195)   

British Pound

     24        187   

Israeli Shekel

     24        (5)   

 

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Table of Contents

Interest Rate Risk

At July 2, 2011, the Company had $2.2 billion of long-term debt, including the current portion of long-term debt, which is primarily priced at long-term, fixed interest rates.

As part of its liability management program, one of the Company’s European subsidiaries has an outstanding interest rate agreement (“Interest Agreement”) relating to a Euro-denominated loan. The interest on the Euro-denominated loan is variable. The Interest Agreement changes the characteristics of interest payments from variable to fixed-rate payments. The Interest Agreement is not accounted for as a part of a hedging relationship and, accordingly, the changes in the fair value of the Interest Agreement are included in Other income (expense) in the Company’s condensed consolidated statements of operations. The fair value of the Interest Agreement was in a liability position of $3 million at both July 2, 2011 and December 31, 2010.

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 2, 2011, all of the counterparties have investment grade credit ratings. The Company is not exposed to material credit risk with any single counterparty. As of July 2, 2011, the Company was exposed to an aggregate credit risk of approximately $3 million with all counterparties.

The following tables summarize the fair values and location in the condensed consolidated balance sheets of all derivative financial instruments held by the Company, including amounts held for disposition, at July 2, 2011 and December 31, 2010:

 

     Fair Values of Derivative Instruments  
     Assets      Liabilities  
July 2, 2011   

Fair

Value

    

Balance

Sheet

Location

    

Fair

Value

    

Balance

Sheet

Location

 

Derivatives designated as hedging instruments:

           

Foreign exchange contracts

     $2         Other assets         $—         Other liabilities   

Derivatives not designated as hedging instruments:

           

Foreign exchange contracts

     1         Other assets         1         Other liabilities   

Interest agreement contracts

             Other assets         3         Other liabilities   
                       

Total derivatives not designated as hedging instruments

     1            4      
                       

Total derivatives

     $3                  $4            

 

     Fair Values of Derivative Instruments  
     Assets      Liabilities  
December 31, 2010   

Fair

Value

    

Balance

Sheet

Location

    

Fair

Value

    

Balance

Sheet

Location

 

Derivatives designated as hedging instruments:

           

Foreign exchange contracts

     $1         Other assets         $—         Other liabilities   

Derivatives not designated as hedging instruments:

           

Foreign exchange contracts

     4         Other assets         15         Other liabilities   

Interest agreement contracts

             Other assets         3         Other liabilities   
                       

Total derivatives not designated as hedging instruments

     4            18      
                       

Total derivatives

     $5                  $18            

 

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Table of Contents

The following table summarizes the effect of derivative instruments in our condensed consolidated statements of operations, including amounts related to discontinued operations, for the three and six months ended July 2, 2011 and July 3, 2010:

 

     Three Months Ended      Statement of
Operations Location
 
Gain (Loss) on Derivative Instruments    July 2, 2011      July 3, 2010     

Derivatives not designated as hedging instruments:

        

Interest rate contracts

     $(3)         $(4)         Other income (expense)   

Foreign exchange contracts

     (8)         22         Other income (expense)   
                    

Total derivatives not designated as hedging instruments

     $(11)         $18            

 

     Six Months Ended      Statement of
Operations Location
 
Gain (Loss) on Derivative Instruments    July 2, 2011     July 3, 2010     

Derivatives not designated as hedging instruments:

       

Interest rate contracts

     $(5     $(8)         Other income (expense)   

Foreign exchange contracts

     (15     31         Other income (expense)   
                   

Total derivatives not designated as hedging instruments

     $(20     $23            

The following table summarizes the gains and losses recognized in the condensed consolidated financial statements, including amounts related to discontinued operations, for the three and six months ended July 2, 2011 and July 3, 2010:

 

     Three Months Ended      Financial Statement
Location
 
Foreign Exchange Contracts    July 2, 2011      July 3, 2010     

Derivatives in cash flow hedging relationships:

        

Loss recognized in Accumulated other comprehensive loss (effective portion)

     $—         $(6)        

 

Accumulated other

comprehensive loss

  

  

Gain reclassified from Accumulated other comprehensive loss into Net earnings (effective portion)

     2         3         Cost of sales/Sales   

 

     Six Months Ended      Financial Statement
Location
 
Foreign Exchange Contracts    July 2, 2011      July 3, 2010     

Derivatives in cash flow hedging relationships:

        

Gain (loss) recognized in Accumulated other comprehensive loss (effective portion)

     $3         $(3)        

 

Accumulated other

comprehensive loss

  

  

Gain reclassified from Accumulated other comprehensive loss into Net earnings (effective portion)

     2         3         Cost of sales/Sales   

Fair Value of Financial Instruments

The Company’s financial instruments include cash equivalents, Sigma Fund investments, short-term investments, accounts receivable, long-term receivables, accounts payable, accrued liabilities, derivative financial instruments and other financing commitments. The Company’s Sigma Fund, available-for-sale investment portfolios and derivative financial instruments are recorded in the Company’s condensed consolidated balance sheets at fair value. All other financial instruments, with the exception of long-term debt, are carried at cost, which is not materially different than the instruments’ fair values.

Using quoted market prices and market interest rates, the Company determined that the fair value of long-term debt at July 2, 2011 was $2.3 billion, compared to a face value of $2.2 billion. Since considerable judgment is required in interpreting market information, the fair value of the long-term debt is not necessarily indicative of the amount which could be realized in a current market exchange.

 

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Table of Contents
6. Income Taxes

At July 2, 2011 and December 31, 2010, the Company had valuation allowances of $283 million and $502 million, respectively, including $258 million and $187 million, respectively, relating to deferred tax assets for non-U.S. subsidiaries. During the three months ended April 2, 2011, the Company reassessed its valuation allowance requirements taking into consideration the Distribution of Motorola Mobility. The Company evaluated all available evidence in its analysis, including the historical and projected pre-tax profits generated by the Motorola Solutions U.S. operations. The Company also considered tax planning strategies that are prudent and can be reasonably implemented. As a result, the Company recorded a $244 million tax benefit related to the reversal of a significant portion of the valuation allowance established on U.S. deferred tax assets. During the three months ended July 2, 2011, the U.S. valuation allowance was reduced by $34 million for deferred tax assets related to future capital losses that the Company expects to utilize due to the capital gain realized on the disposition of the Networks business. The U.S. valuation allowance as of July 2, 2011 relates primarily to state tax carryforwards. The valuation allowance relating to deferred tax assets of non-U.S. subsidiaries was adjusted for current year activity, exchange rate variances and a $34 million increase for loss carryforwards the Company expects to expire unutilized. The Company believes the remaining deferred tax assets are more-likely-than-not to be realized based on estimates of future taxable income and the implementation of tax planning strategies.

The Company had unrecognized tax benefits of $233 million and $198 million, at July 2, 2011 and December 31, 2010, respectively, of which approximately $175 million and $20 million, respectively, if recognized, would affect the effective tax rate, net of resulting changes to valuation allowances.

Based on the potential outcome of the Company’s global tax examinations or the expiration of the statute of limitations for specific jurisdictions, it is reasonably possible that the unrecognized tax benefits will change within the next 12 months. The associated net tax impact on the effective tax rate, exclusive of valuation allowance changes, is estimated to be in the range of a $50 million tax charge to a $125 million tax benefit, with cash payments in the range of $0 to $100 million.

The Company has audits pending in several tax jurisdictions. Although the final resolution of the Company’s global tax disputes is uncertain, based on current information, in the opinion of the Company’s management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations. However, an unfavorable resolution of the Company’s global tax disputes could have a material adverse effect on the Company’s results of operations in the periods in which the matters are ultimately resolved.

 

7. Retirement Benefits

Pension Benefit Plans

The net periodic pension costs for the U.S. Regular Pension Plan, Officers’ Plan, the Motorola Supplemental Pension Plan (“MSPP”) and Non-U.S. plans were as follows:

 

     July 2, 2011      July 3, 2010  
Three Months Ended   

U.S.

Regular

Pension

    

Officers’

and

MSPP

    

Non

U.S.

    

U.S.
Regular

Pension

    

Officers’

and

MSPP

    

Non

U.S.

 

Service cost

     $—         $—         $8         $—         $—         $6   

Interest cost

     83                 31         85         1         21   

Expected return on plan assets

     (96)                 (35)         (94)                 (20)   

Amortization of:

                 

Unrecognized net loss

     46         1         5         36                 4   

Unrecognized prior service cost

                     (5)                         (1)   

Settlement/curtailment loss

             3         (9)                 1           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension cost

     $33         $4         $(5)         $27         $2         $10   

 

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Table of Contents
     July 2, 2011      July 3, 2010  
Six Months Ended   

U.S.

Regular

Pension

    

Officers’

and

MSPP

    

Non

U.S.

    

U.S.
Regular

Pension

    

Officers’

and

MSPP

    

Non

U.S.

 

Service cost

     $—         $—         $14         $—         $—         $13   

Interest cost

     170         1         49         171         1         49   

Expected return on plan assets

     (194)                 (55)         (189)                 (48)   

Amortization of:

                 

Unrecognized net loss

     93         2         8         74         1         10   

Unrecognized prior service cost

                     (7)                         (2)   

Settlement/curtailment loss

             4         (9)                 2           
                                                     

Net periodic pension cost

     $69         $7         $—         $56         $4         $22   

During the six months ended July 2, 2011, contributions of $23 million were made to the Company’s Non-U.S. plans, $6 million to its Officers’ plan and $110 million to the Company’s Regular Pension Plan.

During the three months ended July 2, 2011, the Company recognized a curtailment gain in its United Kingdom defined benefit plan, offset by a settlement loss in its Japan defined benefit plan, due to the Networks Transaction. As a result, the Company recorded a net gain of $9 million to Other charges in the Company’s condensed consolidated statements of operations.

Postretirement Health Care Benefit Plans

Net postretirement health care expenses consist of the following:

 

     Three Months Ended      Six Months Ended  
      July 2,
2011
     July 3,
2010
     July 3,
2010
     July 3,
2010
 

Service cost

     $1         $2         $2         $3   

Interest cost

     6         6         12         13   

Expected return on plan assets

     (4)         (4)         (8)         (8)   

Amortization of:

           

Unrecognized net loss

     3         3         6         5   

Unrecognized prior service cost

             (1)                 (1)   
                                   

Net postretirement health care expense

     $6         $6         $12         $12   

The Company made no contributions to its postretirement healthcare fund during the three and six months ended July 2, 2011.

 

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8. Share-Based Compensation Plans

Compensation expense for the Company’s employee stock options, stock appreciation rights, employee stock purchase plans, restricted stock and restricted stock units (“RSUs”) was as follows:

 

     Three Months Ended      Six Months Ended  
        July 2,  
2011
       July 3,  
2010
       July 2,  
2011
       July 3,  
2010
 

Share-based compensation expense included in:

           

Costs of sales

     $5         $5         $8         $9   

Selling, general and administrative expenses

     25         20         54         40   

Research and development expenditures

     9         11         16         20   
  

 

 

    

 

 

    

 

 

    

 

 

 

Share-based compensation expense included in Operating earnings

     39         36         78         69   

Tax benefit

     13         11         25         21   
  

 

 

    

 

 

    

 

 

    

 

 

 

Share-based compensation expense, net of tax

     $26         $25         $53         $48   

Decrease in basic earnings per share

     $(0.08)         $(0.08)         $(0.16)         $(0.15)   

Decrease in diluted earning per share

     $(0.08)         $(0.08)         $(0.15)         $(0.14)   

Share-based compensation expense in discontinued operations

     $5         $40         $13         $79   

For the three months ended July 2, 2011, the Company granted 4.4 million and 0.5 million RSUs and stock options, respectively. The total compensation expense, net of estimated forfeitures, for these RSUs and stock options was $161 million and $6 million, respectively. For the six months ended July 2, 2011, the Company granted 4.9 million, 3.1 million, and 0.1 million RSUs, stock options and shares of restricted stock, respectively. The total compensation expense, net of estimated forfeitures, for these RSUs, stock options and shares of restricted stock was $180 million, $35 million and $4 million, respectively. The expense will be recognized over a weighted average vesting period of 3 years.

Following the completion of the Distribution on January 4, 2011, 3.8 million unvested RSUs and 8.0 million stock options held by the employees of Motorola Mobility were cancelled.

All RSUs and stock options remaining with Motorola Solutions after the Distribution were adjusted to reflect the Distribution and the Reverse Stock Split. The number of shares covered by, and the exercise price of, all vested and unvested stock options was adjusted to reflect the change in the Company’s stock price immediately following the Distribution and Reverse Stock Split by:

 

   

Multiplying the number of shares subject to each stock option grant by .238089 (“the Motorola Adjustment Factor”) and rounding down to the next whole share; and

 

   

Dividing the exercise price per share for each such stock option grant by the Motorola Adjustment Factor and rounding up to the penny.

The number of RSUs immediately following the Distribution and Reverse Stock Split was calculated by multiplying the number of shares subject to each such grant by the Motorola Adjustment Factor and rounding down to the next whole share.

In April 2011, the vesting terms of certain awards, granted to Networks employees, were modified to allow for pro rata vesting. These awards were within a few days of vesting at the time of the closing of the sale. This modification resulted in the vesting of 0.3 million RSUs and a de minimus amount of options which would not have otherwise vested, resulting in an additional compensation expense of $5.0 million for the three and six months ended July 2, 2011. Upon the completion of the Networks Transaction on April 29, 2011, approximately 1.3 million unvested RSUs and 0.2 million unvested stock options were cancelled.

 

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9. Fair Value Measurements

The Company holds certain fixed income securities, equity securities and derivatives, which must be measured using the fair value hierarchy and related valuation methodologies. The 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 prescribed 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 2, 2011 and December 31, 2010 were as follows:

 

July 2, 2011    Level 1      Level 2      Level 3      Total  

Assets:

           

Sigma Fund securities:

           

U.S. government, agency and government-sponsored enterprise obligations

     $—         $2,434         $—         $2,434   

Corporate bonds

                     21         21   

Asset-backed securities

             0                 0   

Mortgage-backed securities

             7                 7   

Available-for-sale securities:

           

U.S. government, agency and government-sponsored enterprise obligations

             17                 17   

Corporate bonds

             11                 11   

Mortgage-backed securities

             3                 3   

Common stock and equivalents

     21         9                 30   

Foreign exchange derivative contracts*

             3                 3   

Liabilities:

           

Foreign exchange derivative contracts*

             1                 1   

Interest agreement derivative contracts

             3                 3   
* Includes amounts included in held for disposition.

 

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December 31, 2010    Level 1      Level 2      Level 3      Total  

Assets:

           

Sigma Fund securities:

           

U.S. government, agency and government-sponsored enterprise obligations

     $—         $2,291         $—         $2,291   

Corporate bonds

             43         15         58   

Asset-backed securities

             1                 1   

Mortgage-backed securities

             11                 11   

Available-for-sale securities:

           

U.S. government, agency and government-sponsored enterprise obligations

             17                 17   

Corporate bonds

             11                 11   

Mortgage-backed securities

             3                 3   

Common stock and equivalents

     2         10                 12   

Foreign exchange derivative contracts*

             5                 5   

Liabilities:

           

Foreign exchange derivative contracts*

             15                 15   

Interest agreement derivative contracts

             3                 3   
* Includes amounts included in held for disposition.

The following table summarizes the changes in fair value of our Level 3 assets:

 

     Three Months Ended      Six Months Ended  
      July 2,
2011
     July 3,
2010
     July 2,
2011
     July 3,
2010
 

Beginning balance

     $21         $22         $15         $19   

Transfers to Level 3

             3         21         3   

Payments received and securities sold

             (4)         (18)         (5)   

Mark-to-market on Sigma Fund investments included in Other income (expense)

             1         3         5   
                                   

Ending balance

     $21         $22         $21         $22   

At July 2, 2011, the Company had $388 million of investments in money market mutual funds classified as Cash and cash equivalents in its condensed consolidated balance sheet, compared to $1.0 billion at December 31, 2010. The money market funds have quoted market prices that are equivalent to par.

 

10. Long-term Customer Financing and Sales of Receivables

Long-term Customer Financing

Long-term receivables consist of trade 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 2,

2011

    

December 31,

2010

 

Long-term receivables

         $307         $265   

Less allowance for losses

     (6)         (1)   
                 
     301         264   

Less current portion

     (29)         (13)   
                 

Non-current long-term receivables, net

     $272         $251   

 

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The current portion of long-term receivables is included in Accounts receivable 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 $135 million at July 2, 2011, compared to $333 million at December 31, 2010 (including $168 million at December 31, 2010 relating to the Networks business). Of these amounts, $1 million was supported by letters of credit or by bank commitments to purchase long-term receivables at July 2, 2011, compared to $27 million at December 31, 2010. The Company retained the funded portion of the financing arrangements related to the Networks business following the sale to NSN, which totaled approximately $286 million at July 2, 2011 and is included in Long-term receivables reported in the table above.

The Company had committed to provide financial guarantees relating to customer financing facilities totaling $1 million at July 2, 2011, compared to $10 million at December 31, 2010 (including $6 million at December 31, 2010 relating to the sale of short-term receivables). Customer financing guarantees outstanding were $1 million at both July 2, 2011 and December 31, 2010 (all relating to the sale of long-term receivables).

Sales of Receivables

As of July 2, 2011 and December 31, 2010, the Company had a $200 million committed revolving receivable sales facility, maturing December 2011, for the sale of accounts receivable, which was fully available at both periods. The initial cash proceeds received by the Company for the sale of these receivables is capped at the lower of $200 million or eligible receivables less reserves. The Company had no significant committed facilities for the sale of long-term receivables at July 2, 2011 or at December 31, 2010.

The following table summarizes the proceeds received from non-recourse sales of accounts receivable and long-term receivables for the three and six months ended July 2, 2011 and July 3, 2010:

 

     Three Months Ended      Six Months Ended  
      July 2,
2011
     July 3,
2010
     July 2,
2011
     July 3,
2010
 

Cumulative quarterly proceeds received from one-time sales:

           

Accounts receivable sales proceeds

     $—         $5         $1         $28   

Long-term receivables sales proceeds

     17         6         23         9   
                                   

Total proceeds from one-time sales

     17         11         24         37   

Cumulative quarterly proceeds received from sales under committed facilities

             16                 70   
                                   

Total proceeds from receivables sales

     $17         $27         $24         $107   

At July 2, 2011, the Company retained no servicing obligations for sold accounts receivable and $266 million of long-term receivables, compared to $329 million of sold accounts receivable and $277 million of long-term receivables at December 31, 2010.

 

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Credit Quality of Customer Financing Receivables and Allowance for Credit Losses

An aging analysis of financing receivables at July 2, 2011 and December 31, 2010 is as follows:

 

July 2, 2011   

Total

Long-term

Receivable

    

Current Billed

Due

  

Past Due

Under 90 Days

Municipal leases secured tax exempt

     $11       $—    $—

Commercial loans and leases secured

     80          6

Commercial loans unsecured

     216         
                  

Total long-term receivables

     $307       $—    $6

 

December 31, 2010   

Total

Long-term

Receivable

    

Current Billed

Due

  

Past Due

Under 90 Days

Municipal leases secured tax exempt

     $16       $—    $—

Commercial loans and leases secured

     67       1   

Commercial loans unsecured

     182         
                  

Total long-term receivables

     $265       $1    $—

The Company uses an internally developed credit risk rating system for establishing customer credit limits. This system is aligned with and comparable to the rating systems utilized by independent rating agencies.

The Company policy for valuing the allowance for credit losses is on an individual review basis. All customer financing receivables with past due balances greater than 90 days are reviewed for collectability. The value of impairment is calculated based on the net present value of anticipated future cash streams from the customer. The Company did not have any financing receivables past due over 90 days as of July 2, 2011 or December 31, 2010.

At July 2, 2011, long-term receivables included an impaired loan of $49 million with a related reserve for credit losses of $5 million. The Company recognizes interest income on impaired loans on a cash basis with cash receipts recorded as interest income when received. The average recorded investment in this impaired loan during both the three and six months ended July 2, 2011 was $48 million. Interest income recognized during the period the loan was impaired was de minimus.

 

11. Commitments and Contingencies

Legal

The Company is a defendant in various suits, claims and investigations that 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 consolidated financial position, liquidity or results of operations. However, an unfavorable resolution could have a material adverse effect on the Company’s results of operations in the periods in which the matters are ultimately resolved.

Other

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. Some of these obligations arise as a result of divestitures of the Company’s assets or businesses and require the Company to hold the other party harmless against losses arising from the settlement of these pending obligations. The total amount of indemnification under these types of provisions is $251 million, of which the Company accrued $8 million at July 2, 2011 for potential claims under these provisions.

 

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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. However, there is an increasing risk in relation to patent indemnities given the current legal climate.

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. Further, the Company’s obligations under these agreements for indemnification based on breach of representations and warranties are generally limited in terms of duration, and for amounts not in excess of the contract value, and, in some instances, the Company may have recourse against second parties for certain payments made by the Company.

In addition, pursuant to the Master Separation and Distribution Agreement and certain other agreements with Motorola Mobility, Motorola Mobility agreed to indemnify the Company for certain liabilities, and the Company agreed to indemnify Motorola Mobility for certain liabilities, in each case for uncapped amounts.

During the three months ended July 2, 2011, the Company recorded $48 million of net charges related to legal matters to Other charges in the Company’s condensed consolidated statements of operations. The net charges primarily related to a contingent reserve for a suit in which the Company has assessed the likelihood of having to pay as probable.

 

12. Segment Information

The following table summarizes the Net sales by segment:

 

     Three Months Ended      Six Months Ended  
          July 2,    
2011
         July 3,    
2010
         July 2,    
2011
         July 3,    
2010
 

Government

             $1,308                 $1,262         $2,497         $2,394   

Enterprise

     747         674         1,442         1,282   
                                   
       $2,055         $1,936         $3,939         $3,676   

The following table summarizes the Operating earnings by segment:

 

    Three Months Ended     Six Months Ended  
         July 2,  
2011
        July 3,    
2010
        July 2,    
2011
        July 3,    
2010
 

Government

            $111                $117        $215        $209   

Enterprise

    59        44        125        72   
                               

Operating earnings

    170        161        340        281   

Total other income (expense)

    (97)        (32)        (94)        (43)   
                               

Earnings from continuing operations before income taxes

    $73        $129        $246        $238   

 

13. Reorganization of Businesses

The Company maintains a formal Involuntary Severance Plan (the “Severance Plan”), which permits the Company to offer eligible employees severance benefits based on years of service and employment grade level in the event that employment is involuntarily terminated as a result of a reduction-in-force or restructuring. The Company recognizes termination benefits based on formulas per the Severance Plan at the point in time that future settlement is probable and can be reasonably estimated based on estimates prepared at the time a

 

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restructuring plan is approved by management. Exit costs consist of future minimum lease payments on vacated facilities and other contractual terminations. At each reporting date, the Company evaluates its accruals for employee separation and exit costs to ensure the accruals are still appropriate. In certain circumstances, accruals are no longer needed because of efficiencies in carrying out the plans or because employees previously identified for separation resigned from the Company and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were initiated. In these cases, the Company reverses accruals through the condensed consolidated statements of operations where the original charges were recorded when it is determined they are no longer needed.

2011 Charges

During the three months ended July 2, 2011, the Company recorded net reorganization of business charges of $17 million, primarily under Other charges in the Company’s condensed consolidated statements of operations. Included in the aggregate $17 million are charges of $13 million for exit costs and $5 million for employee separation costs, partially offset by $1 million of reversals for accruals no longer needed.

During the six months ended July 2, 2011, the Company recorded net reorganization of business charges of $25 million, including $3 million of charges in Costs of sales and $22 million of charges under Other charges in the Company’s condensed consolidated statements of operations. Included in the aggregate $25 million are charges of $14 million for employee separation costs and $13 million for exit costs, partially offset by $2 million of reversals for accruals no longer needed.

The following table displays the net charges incurred by segment:

 

July 2, 2011    Three Months Ended      Six Months Ended  

Government

     $10         $18   

Enterprise

     7         7   
                 
       $17         $25   

The following table displays a rollforward of the reorganization of businesses accruals established for exit costs and employee separation costs from January 1, 2011 to July 2, 2011:

 

     

Accruals at

January 1,

2011

    

Additional

Charges

     Adjustments      Amount
Used
    

Accruals at

July 2,

2011

 

Exit costs

     $17         $13         $—         $(16)         $14   

Employee separation costs

     50         14         (2)         (36)         26   
                                            
       $67         $27         $(2)         $(52)         $40   

Exit Costs

At January 1, 2011, the Company had an accrual of $17 million for exit costs attributable to lease terminations. During the first half of 2011, the additional 2011 charges were $13 million primarily related to the exit of leased facilities. The $16 million used reflects cash payments. The remaining accrual of $14 million, which is included in Accrued liabilities in the Company’s condensed consolidated balance sheets at July 2, 2011, primarily represents future cash payments for lease termination obligations that are expected to be paid over a number of years.

Employee Separation Costs

At January 1, 2011, the Company had an accrual of $50 million for employee separation costs, representing the severance costs for: (i) severed employees who began receiving payments in 2010, and (ii) approximately 1,000 employees who began receiving payments in 2011. The 2011 additional charges of

 

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Table of Contents

$14 million represent severance costs for approximately an additional 200 employees, of whom substantially all were indirect employees. The adjustment of $2 million reflects reversals of accruals no longer needed. The $36 million used reflects cash payments. The remaining accrual of $26 million, which is included in Accrued liabilities in the Company’s condensed consolidated balance sheets at July 2, 2011, is expected to be paid, generally, within one year to approximately 1,000 employees, who have either been severed or notified to be severed and have begun or will begin receiving payments.

2010 Charges

During the three months ended July 3, 2010, the Company recorded net reorganization of business charges of $20 million, including $6 million of charges in Costs of sales and $14 million of charges under Other charges in the Company’s condensed consolidated statements of operations. Included in the aggregate $20 million are charges of $21 million for employee separation costs, partially offset by $1 million of reversals for accruals no longer needed.

During the six months ended July 3, 2010, the Company recorded net reorganization of business charges of $20 million, including $7 million of charges in Costs of sales and $13 million of charges under Other charges in the Company’s condensed consolidated statements of operations. Included in the aggregate $20 million are charges of $27 million for employee separation costs, partially offset by $7 million of reversals for accruals no longer needed.

The following table displays the net charges incurred by segment:

 

July 3, 2010    Three Months Ended      Six Months Ended  

Government

     $15         $15   

Enterprise

     5         5   
                 
       $20         $20   

The following table displays a rollforward of the reorganization of businesses accruals established for exit costs and employee separation costs from January 1, 2010 to July 3, 2010:

 

     

Accruals at

January 1,

2010

    

Additional

Charges

     Adjustments      Amount
Used
    

Accruals at

July 3,

2010

 

Exit costs

     $16         $—         $(2)         $(7)         $7   

Employee separation costs

     31         27         (5)         (27)         26   
                                            
       $47         $27         $(7)         $(34)         $33   

During the first half of 2010, approximately 500 employees, of whom substantially all were indirect employees, were separated from the Company, resulting in charges of $27 million. These charges were offset by adjustments of $5 million, reflecting reversals of accruals no longer needed, and $27 million used for cash payments. At July 3, 2010, the Company had accruals of $7 million and $26 million, for exit costs attributable to lease terminations and employee separation costs, respectively.

 

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14. Intangible Assets and Goodwill

Intangible Assets

Amortized intangible assets were comprised of the following:

 

     July 2, 2011      December 31, 2010  
      Gross
Carrying
Amount
     Accumulated
Amortization
     Gross
Carrying
Amount
     Accumulated
Amortization
 

Completed technology

     $642         $596         $642         $532   

Patents

     277         237         277         211   

Customer-related

     148         100         148         90   

Licensed technology

     25         18         25         18   

Other intangibles

     101         96         101         96   
                                   
       $1,193         $1,047         $1,193         $947   

Amortization expense on intangible assets was $50 million for both the three months ended July 2, 2011 and July 3, 2010. Amortization expense on intangible assets was $100 million and $101 million for the six months ended July 2, 2011 and July 3, 2010, respectively. As of July 2, 2011, annual amortization expense is estimated to be $200 million in 2011, $25 million in 2012, $9 million in 2013, $7 million in 2014 and $2 million in 2015.

Amortized intangible assets, excluding goodwill, by segment:

 

     July 2, 2011      December 31, 2010  
      Gross
Carrying
Amount
     Accumulated
Amortization
     Gross
Carrying
Amount
     Accumulated
Amortization
 

Government

     $   140         $   133         $   140         $130   

Enterprise

     1,053         914         1,053         817   
                                   
       $1,193         $1,047         $1,193         $947   

Goodwill

The following table displays a rollforward of the carrying amount of goodwill by segment from January 1, 2011 to July 2, 2011:

 

      Government      Enterprise      Total  

Balances as of January 1, 2011:

        

Aggregate goodwill acquired

     $350         $2,643         $2,993   

Accumulated impairment losses

             (1,564)         (1,564)   

Goodwill, net of impairment losses

     $350         $1,079         $1,429   

Goodwill acquired

                       

Balances as of July 2, 2011:

        

Aggregate goodwill acquired

     $350         $2,643         $2,993   

Accumulated impairment losses

             (1,564)         (1,564)   

Goodwill, net of impairment losses

     $350         $1,079         $1,429   

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This commentary should be read in conjunction with the condensed consolidated financial statements of Motorola Solutions, Inc. (“Motorola Solutions” or the “Company”) for the three and six months ended July 2, 2011 and July 3, 2010, as well as the Company’s consolidated financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, as well as the Company’s Form 8-K filed on May 12, 2011 to reflect: (i) the revised presentation of the Company’s segments as a result of the realignment of its operations into two segments: Government and Enterprise, and (ii) the reclassification of the historical financial results of Motorola Mobility Holdings, Inc. (“Motorola Mobility”) as discontinued operations.

Executive Overview

Recent Developments

On July 19, 2010, the Company announced an agreement to sell certain assets and liabilities of its Networks business to Nokia Siemens Networks B.V. (“NSN”) (the “Transaction”). On April 12, 2011, the Company announced certain amendments to the Transaction. On April 29, 2011, the Company completed the Transaction, as amended. Based on the terms and conditions of the amended sale agreement, certain assets including $150 million of accounts receivable and the Company’s iDEN infrastructure business were excluded from the Transaction. Based on the terms and conditions of the Transaction, the sale is subject to a purchase price adjustment that is contingent upon the review of final assets and liabilities transferred to NSN and is based on the change in net assets from the original agreed upon sale date. The Company expects to settle the purchase price adjustment with NSN in the second half of 2011.

During the three months ended July 2, 2011, the Company recorded a pre-tax gain related to the completion of the Transaction of $488 million, net of closing costs and the expected purchase price adjustment, to Gains on sales of investments and business, net, within the discontinued operations in the Company’s condensed consolidated statements of operations. The cash proceeds, including the $150 million of accounts receivable collected after the Transaction closed, were $1.0 billion, net of taxes, assignment fees, the expected purchase price adjustment and other transaction-related fees and expenses. A significant amount of the cash proceeds were received in the U.S. As of July 2, 2011, regulatory approvals required to complete the Transaction in certain countries are still in-process and are expected to be completed in the second half of 2011. Until these approvals are received, the Company will maintain the assets and liabilities associated with these countries in assets and liabilities held for sale in the Company’s condensed consolidated balance sheets. The results of operations of the portions of the Networks business included in the Transaction are reported as discontinued operations for all periods presented.

On January 4, 2011, the distribution by the Company of all the common stock of Motorola Mobility was completed (the “Distribution”). Immediately following the Distribution, the Company changed its name from Motorola, Inc. to Motorola Solutions, Inc. The Distribution was structured to be tax-free to Motorola Solutions and its stockholders for U.S. tax purposes (other than with respect to any cash received in lieu of fractional shares). The historical financial results of Motorola Mobility are reflected in the Company’s condensed consolidated financial statements as discontinued operations for all periods presented.

Reporting Segments

As of the first quarter of 2011, the Company reports financial results for the following two segments:

 

   

Government: Our Government segment includes sales of two-way radios and public safety systems. Service revenues included in the Government segment are primarily those associated with the design, installation, maintenance and optimization of equipment for public safety networks. In the second quarter of 2011, the segment’s net sales were $1.3 billion, representing 64% of the Company’s consolidated net sales.

 

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Enterprise: Our Enterprise segment includes sales of enterprise mobile computing devices, scanning devices, wireless broadband systems, RFID data capture solutions and iDEN infrastructure. Service revenues included in the Enterprise segment are primarily maintenance contracts associated with the above products. In the second quarter of 2011, the segment’s net sales were $747 million, representing 36% of the Company’s consolidated net sales.

Second Quarter Summary

 

 

Our net sales were $2.1 billion in the second quarter of 2011, up 6% compared to net sales of $1.9 billion in the second quarter of 2010.

 

 

We had operating earnings of $170 million in the second quarter of 2011, compared to operating earnings of $161 million in the second quarter of 2010. Operating margin was 8.3% of net sales in both the second quarter of 2011 and the second quarter of 2010.

 

 

We had earnings from continuing operations, net of tax, of $58 million, or $0.17 per diluted common share, in the second quarter of 2011, compared to earnings from continuing operations, net of tax, of $3 million, or $0.01 per diluted common share, in the second quarter of 2010. The increase in earnings from continuing operations, net of tax, was primarily driven by lower income taxes.

 

 

We generated cash from operating activities of $333 million in the first half of 2011, compared to $162 million in the first half of 2010.

Highlights for each of our segments are as follows:

 

 

Government: Net sales were $1.3 billion during both the second quarter of 2011 and 2010. On a geographic basis, net sales increased in North America, Latin America and Asia and decreased in the Europe, Middle East and Africa region (“EMEA”) compared to the year-ago quarter.

 

 

Enterprise: Net sales were $747 million in the second quarter of 2011, an increase of 11% compared to net sales of $674 million in the second quarter of 2010. On a geographic basis, net sales increased in North America, EMEA, and Asia and decreased in Latin America compared to the year-ago quarter.

Looking Forward

Our Government segment showed continued growth in the second quarter. Although the government budget environment remains challenging in the U.S. and in parts of Western Europe in particular, there are signs of improvement as tax receipts continue to increase and approach 2008 levels. Our customers continue to prioritize funding of their public safety communication needs, and we remain focused on helping them find ways to fund system upgrades, improve interoperability and meet spectrum narrow-banding requirements. In addition, governments are increasingly examining their operations for the productivity and efficiency improvements that our solutions enable.

Our Enterprise segment demonstrated sustained momentum in the second quarter driven by retailers that continue to invest in technology to drive sales growth. Our solutions have a high return on investment, and with increasing demands for real-time information and rapid increases in knowledge workers, we expect continued sales growth.

Private public safety broadband networks based on the long-term evolution (“LTE”) standard are an important next generation tool for our first-responder customers. There is increasing support from our U.S. first-responder customers’ position to dedicate the 700Mhz D-Block to public safety, which would efficiently

 

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and effectively double the spectrum available for public safety grade broadband data networks. We have been investing in research and development for next generation public safety, and our expertise in both public and private networks makes us uniquely qualified to provide LTE solutions. The development of this market is an important part of our overall growth strategy for government and public safety.

 

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Results of Operations

 

     Three Months Ended     Six Months Ended  
(Dollars in millions, except per share
amounts)
   July 2,
2011
     % of
Sales
    July 3,
2010
     % of
Sales
    July 2,
2011
     % of
Sales
    July 3,
2010
     % of
Sales
 

Net sales from products

     $1,524           $1,438           $2,948           $2,729      

Net sales from services

     531           498           991           947      
  

 

 

      

 

 

      

 

 

      

 

 

    

Net sales

     2,055           1,936           3,939           3,676      

Costs of products sales

     685         44.9     656         45.6     1,341         45.5     1,250         45.8

Costs of services sales

     331         62.3     315         63.3     617         62.3     608         64.2
  

 

 

      

 

 

      

 

 

      

 

 

    

Costs of sales

     1,016           971         50.2     1,958           1,858         50.5

Gross margin

     1,039         50.6     965         49.8     1,981         50.3     1,818         49.5
  

 

 

      

 

 

      

 

 

      

 

 

    

Selling, general and administrative expenses

     492         23.9     471         24.3     960         24.4     925         25.2

Research and development expenditures

     271         13.2     269         13.9     520         13.2     527         14.3

Other charges

     106         5.2     64         3.3     161         4.1     85         2.4
  

 

 

      

 

 

      

 

 

      

 

 

    

Operating earnings

     170         8.3     161         8.3     340         8.6     281         7.6
  

 

 

      

 

 

      

 

 

      

 

 

    

Other income (expense):

                    

Interest expense, net

     (21)         (1.0 )%      (35)         (1.8 )%      (41)         (1.0 )%      (68)         (1.8 )% 

Gains on sales of investments and businesses, net

     1         0.0     33         1.7     19         0.5     40         1.1

Other expense

     (77)         (3.7 )%      (30)         (1.6 )%      (72)         (1.9 )%      (15)         (0.4 )% 
  

 

 

      

 

 

      

 

 

      

 

 

    

Total other income (expense)

     (97)         (4.7 )%      (32)         (1.7 )%      (94)         (2.4 )%      (43)         (1.1 )% 
  

 

 

      

 

 

      

 

 

      

 

 

    

Earnings from continuing operations before income taxes

     73         3.6     129         6.6     246         6.2     238         6.5

Income tax expense (benefit)

     17         0.9     122         6.2     (169)         (4.3 )%      135         3.7
  

 

 

      

 

 

      

 

 

      

 

 

    
     56         2.7     7         0.4     415         10.5     103         2.8

Less: Earnings (loss) attributable to noncontrolling interests

     (2)         (0.1 )%      4         0.2     (8)         (0.2 )%      3         0.1
  

 

 

      

 

 

      

 

 

      

 

 

    

Earnings from continuing operations*

     58         2.8     3         0.2     423         10.7     100         2.7

Earnings from discontinued operations, net of tax

     291         14.2     159         8.2     423         10.8     131         3.6
  

 

 

      

 

 

      

 

 

      

 

 

    

Net earnings

     $349         17.0     $162         8.4     $846         21.5     $231         6.3
  

 

 

      

 

 

      

 

 

      

 

 

    

Earnings per diluted common share:

                    

Continuing operations

     $0.17           $0.01           $1.22           $0.30      

Discontinued operations

     0.83           0.47           1.22           0.39      
  

 

 

      

 

 

      

 

 

      

 

 

    
       $1.00                 $0.48                 $2.44                 $0.69            

* Amounts attributable to Motorola Solutions, Inc. common stockholders.

Results of Operations—Three months ended July 2, 2011 compared to three months ended July 3, 2010

Net Sales

Net sales were $2.1 billion in the second quarter of 2011, up 6% compared to net sales of $1.9 billion in the second quarter of 2010. The increase in net sales reflects: (i) a $73 million, or 11%, increase in net sales in the Enterprise segment, and (ii) a $46 million, or 4%, increase in net sales in the Government segment.

 

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Gross Margin

Gross margin was $1.0 billion, or 50.6% of net sales, in the second quarter of 2011, compared to $965 million, or 49.8% of net sales, in the second quarter of 2010. The increase in gross margin reflects higher gross margins in both segments, primarily driven by the increase in net sales and product mix. The increase in gross margin as a percentage of net sales in the second quarter of 2011 compared to the second quarter of 2010 reflects an increase in gross margin percentage in both segments. The Company’s overall gross margin as a percentage of net sales is impacted by the proportion of overall net sales generated by its businesses.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses increased 4% to $492 million, or 23.9% of net sales, in the second quarter of 2011, compared to $471 million, or 24.3% of net sales, in the second quarter of 2010. The increase in SG&A expenses reflects higher SG&A expenses in both segments. The increase in both segments was primarily due to (i) an increase in selling and marketing expenses related to the increase in net sales, and (ii) increased employee benefit-related expenses, partially offset by savings from cost-reduction initiatives. The increases in employee benefit-related expenses are primarily due to an increase in pension-related expenses and the reinstatement of the Company’s 401(k) matching contributions. SG&A expenses as a percentage of net sales decreased in the Enterprise segment and slightly increased in the Government segment.

Research and Development Expenditures

Research and development (“R&D”) expenditures increased 1% to $271 million, or 13.2% of net sales, in the second quarter of 2011, compared to $269 million, or 13.9% of net sales, in the second quarter of 2010. The increase in R&D expenditures reflects higher R&D expenditures in the Enterprise segment and relatively flat R&D expenditures in the Government segment. The increase in the Enterprise segment was primarily due to higher developmental engineering expenditures for new product development, investment in next-generation technologies and increased employee benefit-related expenses. R&D expenditures as a percentage of net sales decreased in both segments. The Company participates in competitive industries with constant changes in technology and, accordingly, the Company continues to believe that a strong commitment to R&D is required to drive long-term growth.

Other Charges

The Company recorded net charges of $106 million in Other charges in the second quarter of 2011, compared to net charges of $64 million in the second quarter of 2010. The net charges in the second quarter of 2011 included: (i) $50 million of charges relating to the amortization of intangibles, (ii) $48 million of charges for legal matters, net, (iii) $17 million of net reorganization of business charges, partially offset by a $9 million pension plan adjustments, net, related to the Networks Transaction. The charges in the second quarter of 2010 included: (i) $50 million of charges relating to the amortization of intangibles, and (ii) $14 million of net reorganization of business charges included in Other charges. The net reorganization of business charges are discussed in further detail in the “Reorganization of Businesses” section.

Net Interest Expense

Net interest expense was $21 million in the second quarter of 2011, compared to net interest expense of $35 million in the second quarter of 2010. Net interest expense in the second quarter of 2011 included interest expense of $40 million, partially offset by interest income of $19 million. Net interest expense in the second quarter of 2010 includes interest expense of $56 million, partially offset by interest income of $21 million. The decrease in net interest expense in the second quarter of 2011 is primarily attributable to a decline in interest expense due to lower average debt outstanding during the second quarter of 2011 compared to the second quarter of 2010. Additionally, interest income decreased due to lower average cash and cash equivalents during the second quarter of 2011 compared to the second quarter of 2010.

 

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Gains on Sales of Investments and Businesses

Gains on sales of investments and businesses were $1 million in the second quarter of 2011, compared to $33 million in the second quarter of 2010. In the second quarter of 2011, the net gains were primarily comprised of gains related to sales of certain of the Company’s equity investments. In the second quarter of 2010, the net gains were primarily comprised of a $31 million gain on a sale of a single investment.

Other

Net Other expense was $77 million in the second quarter of 2011, compared to net Other expense of $30 million in the second quarter of 2010. The net Other expense in the second quarter of 2011 was primarily comprised of an $81 million loss from the extinguishment of debt, partially offset by $6 million of foreign currency gains. The net Other expense in the second quarter of 2010 was primarily comprised of: (i) a $12 million loss from the extinguishment of debt, (ii) $9 million of investment impairments, (iii) $4 million of foreign currency losses, and (iv) $4 million of net losses from Sigma Fund investments.

Effective Tax Rate

The Company recorded $17 million of net tax expense in the second quarter of 2011, resulting in an effective tax rate of 23%, compared to $122 million of net tax expense in the second quarter of 2010, resulting in an effective tax rate of 95%. The Company’s effective tax rate in the second quarter of 2011 was lower than the U.S. statutory tax rate of 35% primarily due to a pension curtailment gain for which no tax expense was recorded.

The Company’s effective tax rate in the second quarter of 2010 was higher than the U.S. statutory tax rate of 35% primarily due to an increase in the U.S. federal income tax accrual for repatriation of undistributed foreign earnings, offset by a reduction in unrecognized tax benefits for facts that now indicate the extent to which certain tax positions are more-likely-than-not of being sustained.

The Company’s effective tax rate will change from period to period based on non-recurring events, such as the settlement of income tax audits, changes in valuation allowances and the tax impact of significant unusual or extraordinary items, as well as recurring factors including changes in the geographic mix of income before taxes and effects of various global income tax strategies

Earnings from Continuing Operations

The Company had net earnings from continuing operations before income taxes of $73 million in the second quarter of 2011, compared with net earnings from continuing operations before income taxes of $129 million in the second quarter of 2010. After taxes, and excluding Loss attributable to noncontrolling interests, the Company had net earnings from continuing operations of $58 million, or $0.17 per diluted share, in the second quarter of 2011, compared to a net earnings from continuing operations of $3 million, or $0.01 per diluted share, in the second quarter of 2010.

The decrease in net earnings from continuing operations was primarily driven by: (i) a $74 million increase in gross margin, and (ii) a $105 million decrease in income tax expense, offset by: (i) a $65 million increase in Other income (expense), (ii) a $42 million increase in Other charges, and (iii) a $21 million increase in SG&A.

Earnings from Discontinued Operations

In the second quarter of 2011, the Company had after-tax earnings from discontinued operations of $291 million, or $0.83 per diluted share, primarily from the $488 million pre-tax gain on the sale of the Networks

 

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business. In the second quarter of 2010, the Company had after-tax earnings from discontinued operations of $159 million, or $0.47 per diluted share, from Motorola Mobility and the Networks business.

Results of Operations—Six months ended July 2, 2011 compared to six months ended July 3, 2010

Net Sales

Net sales were $3.9 billion in the first half of 2011, up 7% compared to net sales of $3.7 billion in the first half of 2010. The increase in net sales reflects: (i) a $160 million, or 12%, increase in net sales in the Enterprise segment, and (ii) a $103 million, or 4%, increase in net sales in the Government segment.

Gross Margin

Gross margin was $2.0 billion, or 50.3% of net sales, in the first half of 2011, compared to $1.8 billion, or 49.5% of net sales, in the first half of 2010. The increase in gross margin reflects higher gross margins in both segments, primarily driven by the increase in net sales and product mix. The increase in gross margin as a percentage of net sales in the first half of 2011 compared to the first half of 2010 reflects an increase in gross margin percentage in both segments. The Company’s overall gross margin as a percentage of net sales is impacted by the proportion of overall net sales generated by its businesses.

Selling, General and Administrative Expenses

SG&A expenses increased 4% to $960 million, or 24.4% of net sales, in the first half of 2011, compared to $925 million, or 25.2% of net sales, in the first half of 2010. The increase in SG&A expenses reflects higher SG&A expenses in both segments. The increase in both segments was primarily due to (i) an increase in selling and marketing expenses related to the increase in net sales, and (ii) increased employee benefit-related expenses, partially offset by savings from cost-reduction initiatives. The increases in employee benefit-related expenses are primarily due to an increase in pension-related expenses and the reinstatement of the Company’s 401(k) matching contributions. SG&A expenses as a percentage of net sales decreased in the Enterprise segment and slightly increased in the Government segment.

Research and Development Expenditures

R&D expenditures decreased 1% to $520 million, or 13.2% of net sales, in the first half of 2011, compared to $527 million, or 14.3% of net sales, in the first half of 2010. The decrease in R&D expenditures reflects lower R&D expenditures in the Government segment and slightly higher R&D expenditures in the Enterprise segment. The decrease in R&D expenditures in the Government segment was primarily due to savings from cost-reduction initiatives, partially offset by higher developmental engineering expenditures for new product development, investment in next-generation technologies and increased employee benefit-related expenses. The slight increase in R&D expenditures in the Enterprise segment was primarily due to investment in next-generation technologies and increased employee benefit-related expenses. R&D expenditures as a percentage of net sales decreased in both segments. The Company participates in competitive industries with constant changes in technology and, accordingly, the Company continues to believe that a strong commitment to R&D is required to drive long-term growth.

Other Charges

The Company recorded net charges of $161 million in Other charges in the first half of 2011, compared to net charges of $85 million in the first half of 2010. The net charges in the first half of 2011 included: (i) $100 million of charges relating to the amortization of intangibles, (ii) $48 million of charges for legal matters, net, and (iii) $22 million of net reorganization of business charge, partially offset by a $9 million pension plan adjustments, net, related to the Networks Transaction. The charges in the first half of 2010 included:

 

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(i) $101 million of charges relating to the amortization of intangibles, and (ii) $13 million of net reorganization of business charges included in Other charges, partially offset by a $29 million gain related to a legal settlement. The net reorganization of business charges are discussed in further detail in the “Reorganization of Businesses” section.

Net Interest Expense

Net interest expense was $41 million in the first half of 2011, compared to net interest expense of $68 million in the first half of 2010. Net interest expense in the first half of 2011 included interest expense of $74 million, partially offset by interest income of $33 million. Net interest expense in the first half of 2010 includes interest expense of $116 million, partially offset by interest income of $48 million. The decrease in net interest expense in the first half of 2011 is primarily attributable to a decline in interest expense due to lower average debt outstanding during the first half of 2011 compared to the first half of 2010 and the reversal of an interest accrual that was no longer needed. Additionally, interest income decreased due to lower average cash and cash equivalents during the first half of 2011 compared to the first half of 2010.

Gains on Sales of Investments and Businesses

Gains on sales of investments and businesses were $19 million in the first half of 2011, compared to gains on sales of investments and businesses of $40 million in the first half of 2010. In the first half of 2011, the net gains were primarily comprised of gains related to sales of certain of the Company’s equity investments. In the first half of 2010, the net gains were primarily comprised of a $31 million gain on a sale of a single investment.

Other

Net Other expense was $72 million in the first half of 2011, compared to net Other expense of $15 million in the first half of 2010. The net Other expense in the first half of 2011 was primarily comprised of (i) $81 million loss from the extinguishment of debt, and (ii) $3 million of investment impairments, partially offset by $11 million of foreign currency gain. The net Other expense in the first half of 2010 was primarily comprised of: (i) $18 million of investment impairments, and (ii) a $12 million loss from the extinguishment of debt, partially offset by: (i) $12 million of net gains from Sigma Fund investments, and (ii) $7 million of foreign currency gains.

Effective Tax Rate

The Company recorded $169 million of net tax benefits in the first half of 2011, resulting in a negative effective tax rate on continuing operations, compared to $135 million of net tax expense in the first half of 2010, resulting in an effective tax rate of 57%. The Company’s negative effective tax rate in the first half of 2011 was primarily related to the recording of a $244 million tax benefit for the reversal of a significant portion of the valuation allowance established on the U.S. deferred tax assets. The valuation allowances on the Company’s deferred tax assets are discussed further in Note 6, “Income Taxes,” of the Company’s condensed consolidated financial statements.

The Company’s effective tax rate in the first half of 2010 was higher than the U.S. statutory tax rate of 35% primarily due to an increase in the U.S. federal income tax accrual for repatriation of undistributed foreign earnings and a non-cash tax charge related to the Medicare Part D subsidy tax law change, partially offset by reductions in unrecognized tax benefits for facts that now indicate the extent to which certain tax positions are more-likely-than-not of being sustained.

The Company’s effective tax rate will change from period to period based on non-recurring events, such as the settlement of income tax audits, changes in valuation allowances and the tax impact of significant unusual or extraordinary items, as well as recurring factors including changes in the geographic mix of income before taxes and effects of various global income tax strategies.

 

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Earnings from Continuing Operations

The Company had net earnings from continuing operations before income taxes of $246 million in the first half of 2011, compared with net earnings from continuing operations before income taxes of $238 million in the first half of 2010. After taxes, and excluding Earnings attributable to noncontrolling interests, the Company had net earnings from continuing operations of $423 million, or $1.22 per diluted share, in the first half of 2011, compared to a net earnings from continuing operations of $100 million, or $0.30 per diluted share, in the first half of 2010.

The increase in net earnings from continuing operations was primarily driven by a $244 million tax benefit for the reversal of a significant portion of the valuation allowance established on the U.S. deferred tax assets recorded during the first quarter of 2011 and an $163 million increase in gross margin, partially offset by a $76 million increase in Other charges.

Earnings from Discontinued Operations

In the first half of 2011, the Company had after-tax earnings from discontinued operations of $423 million, or $1.22 per diluted share, substantially from the operations and gain from the sale of the Networks business. In the first half of 2010, the Company had an after-tax earnings from discontinued operations of $131 million, or $0.39 per diluted share, from Motorola Mobility and the Networks business.

Segment Information

The following commentary should be read in conjunction with the financial results of each reporting segment for the three and six months ended July 2, 2011 and July 3, 2010 as detailed in Note 12, “Segment Information,” of the Company’s condensed consolidated financial statements.

Government Segment

For the second quarter of 2011, the segment’s net sales represented 64% of the Company’s consolidated net sales, compared to 65% in the second quarter of 2010. For the first half of 2011, the segment’s net sales represented 63% of the Company’s consolidated net sales, compared to 65% in the first half of 2010.

 

     Three Months Ended            Six Months Ended         
      July 2, 2011      July 3, 2010      % Change     July 2, 2011      July 3, 2010      % Change  

Segment net sales

     $1,308         $1,262         4     $2,497         $2,394         4

Operating earnings

     111         117         (5 )%      215         209         3

Three months ended July 2, 2011 compared to three months ended July 3, 2010

The segment’s net sales were $1.3 billion during both the second quarter of 2011 and 2010. The increase in net sales in the Government segment reflects an increase in radio sales and service revenues. On a geographic basis, net sales increased in North America, Latin America and Asia and decreased in the Europe, Middle East and Africa (“EMEA”) region compared to the year-ago quarter. Net sales in North America continued to comprise a significant portion of the segment’s business, accounting for approximately 64% of the segment’s net sales in both the second quarter of 2011 and the second quarter of 2010.

The segment had operating earnings of $111 million in the second quarter of 2011, compared to operating earnings of $117 million in the second quarter of 2010. The decrease in operating earnings was primarily due to an increase in Other charges and SG&A expenses, partially offset by an increase in gross

 

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margin, driven by the 4% increase in net sales. The increase in Other charges was primarily due to charges from legal matters, net. The increase in SG&A expenses was primarily due to an increase in selling and marketing expenses related to the increase in net sales, and increased employee benefit-related expenses, partially offset by savings from cost-reduction initiatives. As a percentage of net sales in the second quarter of 2011 as compared to the second quarter of 2010, gross margin increased, SG&A expenses slightly increased, and R&D expenditures decreased.

Six months ended July 2, 2011 compared to six months ended July 3, 2010

In the first half of 2011, the segment’s net sales were $2.5 billion, a 4% increase compared to net sales of $2.4 billion in the first half of 2010. The increase in net sales in the Government segment reflects an increase in radio sales and service revenues. On a geographic basis, net sales increased in North America, Latin America and Asia and decreased in the EMEA region compared to the first half of 2010. Net sales in North America continued to comprise a significant portion of the segment’s business, accounting for approximately 63% of the segment’s net sales in both the first half of 2011 and the first half of 2010.

The segment had operating earnings of $215 million in the first half of 2011, compared to operating earnings of $209 million in the first half of 2010. The increase in operating earnings was primarily due to: (i) an increase in gross margin, driven by the 4% increase in net sales, and (ii) a decrease in R&D expenditures, partially offset by increases in Other charges and SG&A expenses. The decrease in R&D expenditures was primarily due to savings from cost-reduction initiatives, partially offset by higher developmental engineering expenditures for new product development and investment in next-generation technologies. The increase in Other charges was primarily due to charges from legal matters, net. The increase in SG&A expenses was primarily due to an increase in selling and marketing expenses related to the increase in net sales and increased employee benefit-related expenses, partially offset by savings from cost-reduction initiatives. As a percentage of net sales in the first half of 2011 as compared to the first half of 2010, gross margin increased, SG&A expenses increased, and R&D expenditures decreased.

Enterprise Segment

For the second quarter of 2011, the segment’s net sales represented 36% of the Company’s consolidated net sales, compared to 35% in the second quarter of 2010. For the first half of 2011, the segment’s net sales represented 37% of the Company’s consolidated net sales, compared to 35% in the first half of 2010.

 

     Three Months Ended            Six Months Ended         
      July 2, 2011      July 3, 2010      % Change     July 2, 2011      July 3, 2010      % Change  

Segment net sales

     $747         $674         11     $1,442         $1,282         12

Operating earnings (loss)

     59         44         34     125         72         74

Three months ended July 2, 2011 compared to three months ended July 3, 2010

In the second quarter of 2011, the segment’s net sales were $747 million, an 11% increase compared to net sales of $674 million in the second quarter of 2010. The 11% increase in net sales in the Enterprise segment reflects an increase in mobile computing, wireless network solutions and advanced data capture, partially offset by a decrease in the iDEN infrastructure business. On a geographic basis, net sales increased in North America, EMEA region and Asia and decreased in Latin America compared to the year-ago quarter. Net sales in North America continued to comprise a significant portion of the segment’s business, accounting for approximately 46% and 49% of the segment’s net sales in the second quarter of 2011 and the second quarter of 2010, respectively. The decrease in the percentage of net sales in the North America regions reflects an increase in net sales in the EMEA and Asia regions.

 

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The segment had operating earnings of $59 million in the second quarter of 2011, compared to operating earnings of $44 million in the second quarter of 2010. The increase in operating earnings was primarily due to an increase in gross margin, driven by the 11% increase in net sales, partially offset by increases in Other charges and SG&A expenses. The increase in Other charges was primarily due to charges from legal matters, net. The increase in SG&A expenses was primarily due to an increase in selling and marketing expenses related to the increase in net sales and increased employee benefit-related expenses, partially offset by savings from cost-reduction initiatives. As a percentage of net sales in the second quarter of 2011 as compared to the second quarter of 2010, gross margin increased, SG&A expenses decreased, and R&D expenditures decreased.

Six months ended July 2, 2011 compared to six months ended July 3, 2010

In the first half of 2011, the segment’s net sales were $1.4 billion, a 12% increase compared to net sales of $1.3 billion in the first half of 2010. The 12% increase in net sales in the Enterprise segment reflects an increase in mobile computing and wireless network solutions, partially offset by a decrease in the iDEN infrastructure business. On a geographic basis, net sales increased in all regions compared to the first half of 2010. Net sales in North America continued to comprise a significant portion of the segment’s business, accounting for approximately 45% and 50% of the segment’s net sales in the first half of 2011 and the first half of 2010, respectively. The decrease in the percentage of net sales in the North America regions reflects an increase in net sales in the EMEA region.

The segment had operating earnings of $125 million in the first half of 2011, compared to operating earnings of $72 million in the first half of 2010. The increase in operating earnings was primarily due to an increase in gross margin, driven by the 12% increase in net sales, partially offset by increases in Other charges and SG&A expenses. The increase in Other charges was primarily due to charges from legal matters, net. The increase in SG&A expenses was primarily due to an increase in selling and marketing expenses related to the increase in net sales, and increased employee benefit-related expenses, partially offset by savings from cost-reduction initiatives. As a percentage of net sales in the first half of 2011 as compared to the first half of 2010, gross margin increased, SG&A expenses decreased, and R&D expenditures decreased.

Reorganization of Businesses

During 2011, the Company implemented various productivity improvement plans aimed at achieving long term, sustainable profitability by driving efficiencies and reducing operating costs. During the second quarter of 2011, the Company recorded net reorganization of business charges of $17 million, including: (i) $13 million for exit costs relating to the exit of leased facilities, and (ii) $5 million relating to the separation of 100 employees, of whom substantially all were indirect employees, partially offset by $1 million of reversals for accruals no longer needed. These charges were substantially all classified as Other charges in the Company’s condensed consolidated statements of operations.

During the second quarter of 2010, the Company’s net reorganization of business charges were $20 million, including $6 million of charges in Costs of sales and $14 million of charges under Other charges in the Company’s condensed consolidated statements of operations. Included in the aggregate $20 million are charges of $21 million for employee separation costs, partially offset by $1 million of reversals for accruals no longer needed.

The Company expects to realize cost-saving benefits of approximately $3 million during the remaining six months of 2011 from the plans that were initiated during the first half of 2011, primarily in SG&A expenses. Beyond 2011, the Company expects the reorganization plans initiated during the first half of 2011 to provide annualized cost savings of approximately $6 million, primarily in SG&A expenses.

 

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The following table displays the net charges incurred by business segment:

 

     Three Months Ended      Six Months Ended  
      July 2, 2011      July 3, 2010      July 2, 2011      July 3, 2010  

Government

     $10         $15         $18         $15   

Enterprise

     7         5         7         5   
                                   
       $17         $20         $25         $20   

Cash payments for employee severance and exit costs in connection with the reorganization of business plans were $52 million in the first half of 2011, as compared to $34 million in the first half of 2010. Of the $40 million of reorganization of businesses accruals at July 2, 2011, $26 million relate to employee separation costs and are expected to be paid in 2011. The remaining $14 million in accruals relate to lease termination obligations that are expected to be paid over a number of years.

Liquidity and Capital Resources

As highlighted in the condensed consolidated statements of cash flows, the Company’s liquidity and available capital resources are impacted by four key components: (i) cash and cash equivalents, (ii) operating activities, (iii) investing activities, and (iv) financing activities.

Cash and Cash Equivalents

The Company’s cash and cash equivalents (which are highly-liquid investments with an original maturity of three months or less) were $2.2 billion at July 2, 2011, compared to $4.2 billion at December 31, 2010. At July 2, 2011, $206 million of this amount was held in the U.S. and $1.9 billion was held by the Company or its subsidiaries in other countries. At July 2, 2011, restricted cash was $63 million (including $60 million held in the U.S.), compared to $226 million (including $60 million held in the U.S.) at December 31, 2010. The decrease in the Company’s cash and cash equivalents from December 31, 2010 to July 2, 2011 is reflective of the Company’s contribution of $3.2 billion of cash and cash equivalents to Motorola Mobility, which included $160 million of restricted cash, partially offset by $1.0 billion of net cash received from the sale of the Networks business.

The Company continues to analyze and review various repatriation strategies to continue to efficiently repatriate funds. During the first half of 2011, the Company repatriated $1.0 billion in funds to the U.S. from international jurisdictions with minimal cash tax cost. The Company has approximately $2.4 billion of earnings in foreign subsidiaries that are not permanently reinvested and may be repatriated without additional U.S. federal income tax charges to the Company’s condensed consolidated statements of operations, given the U.S. Federal tax provisions previously accrued on undistributed earnings and the utilization of available foreign tax credits. On a cash basis, these repatriations from the Company’s non-U.S. subsidiaries could require the payment of additional foreign taxes. While the Company regularly repatriates funds and a portion of offshore funds can be repatriated with minimal adverse financial impact, repatriation of some of these funds could be subject to delay for local country approvals and could have potential adverse cash tax consequences.

On January 4, 2011, the Distribution of Motorola Mobility from Motorola Solutions was completed. Immediately prior to the Distribution, the Company contributed $3.2 billion of cash and cash equivalents to Motorola Mobility. The contribution is reflected in the Company’s condensed consolidated statements of cash flow in the first half of 2011. The Company has an obligation to fund an additional $300 million, upon receipt of cash distributions as a result of future capital reductions of an overseas subsidiary, of which $75 million was paid to Motorola Mobility on July 22, 2011.

During the six months ended July 2, 2011, the Company received cash proceeds from the sale of the Networks business of $1.0 billion, net of taxes, assignment fees, an expected purchase price adjustment and other transaction-related fees and expenses. Included in the cash proceeds were the $150 million of accounts receivable

 

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collected after the Transaction closed. A significant amount of the cash proceeds was received in the U.S. Based on the terms and conditions of the Transaction, the sale is subject to a purchase price adjustment that is contingent upon the review of final assets and liabilities transferred to NSN and is based on the change in net assets from the original agreed upon sale date. The Company expects to settle the purchase price adjustment with NSN in the second half of 2011.

Operating Activities

In the first half of 2011, the cash provided by operating activities was $333 million, compared to $162 million of cash provided by operating activities in the first half of 2010. The primary contributors to the cash provided in the first half of 2011 were: (i) income from continuing operations (adjusted for net non-cash charges) of $771 million, (ii) a $338 million decrease in accounts payable and accrued liabilities, and (iii) a $185 million net decrease in other assets and liabilities.

Accounts Receivable: The Company’s net accounts receivable were $1.5 billion at both July 2, 2011 and December 31, 2010. The Company’s businesses sell their products in a variety of markets throughout the world and payment terms can vary by market type and geographic location. Accordingly, the Company’s levels of net accounts receivable can be impacted by the timing and level of sales that are made by its various businesses and by the geographic locations in which those sales are made. See related discussion below under “Sales of Receivables.”

Inventory: The Company’s net inventory was $522 million at July 2, 2011, compared to $521 million at December 31, 2010. Inventory management continues to be an area of focus as the Company balances the need to maintain strategic inventory levels to ensure competitive delivery performance to its customers against the risk of inventory excess and obsolescence due to rapidly changing technology and customer spending requirements.

Accounts Payable: The Company’s accounts payable were $625 million at July 2, 2011, compared to $731 million at December 31, 2010. The Company buys products in a variety of markets throughout the world and payment terms can vary by market type and geographic location. Accordingly, the Company’s levels of acco