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 ending April 1, 2000
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, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-1115800
(State of Incorporation) (I.R.S. Employer Identification No.)
1303 E. Algonquin Road, Schaumburg, Illinois 60196
(Address of principal executive offices) (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 [ ]
The number of shares outstanding of each of the issuer's classes of
common stock as of the close of business on April 1, 2000:
Class Number of Shares
Common Stock; $3 Par Value 717,414,007
Motorola, Inc. and Subsidiaries
Index
Part I
Financial Information Page
Item 1 Financial Statements
Condensed Consolidated Statements of Earnings for the
Three-Month Periods Ended April 1, 2000 and April 3, 1999 3
Condensed Consolidated Balance Sheets as of
April 1, 2000 and December 31, 1999 4
Condensed Consolidated Statement of Stockholders'
Equity for the Three-Month Period Ended April 1, 2000 5
Condensed Consolidated Statements of Cash Flows for
the Three-Month Periods Ended April 1, 2000 and
April 3, 1999 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Part II
Other Information
Item 1 Legal Proceedings 32
Item 2 Changes in Securities 32
Item 3 Defaults Upon Senior Securities 32
Item 4 Submission of Matters to a Vote of Security Holders 32
Item 5 Other Information 33
Item 6 Exhibits and Reports on Form 8-K 33
Part I - Financial Information
Motorola, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(Unaudited)
(In millions, except per share amounts)
Three Months Ended
Apr. 1, Apr. 3,
2000 1999
Net sales $ 8,768 $ 7,736
Costs and expenses
Manufacturing and other
costs of sales 5,200 4,601
Selling, general and
administrative expenses 1,308 1,471
Research & development
expenditures 1,015 773
Depreciation expense 558 564
Interest expense, net 47 38
Total costs and expenses 8,128 7,447
Earnings before income taxes 640 289
Income tax provision 192 90
Net earnings $ 448 $ 199
Net earnings per common share
Basic $ .63 $ .28
Diluted $ .59 $ .28
Weighted average common shares
outstanding
Basic 715.4 702.8
Diluted 755.9 724.6
Dividends paid per share $ .12 $ .12
See accompanying notes to condensed consolidated financial statements.
Motorola, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In millions)
(Unaudited)
Apr. 1, Dec. 31,
2000 1999
Assets
Cash and cash equivalents $ 3,275 $ 3,537
Short-term investments 587 699
Accounts receivable, net 5,993 5,627
Inventories 4,688 3,707
Deferred income taxes 2,588 3,247
Other current assets 1,528 768
Total current assets 18,659 17,585
Property, plant and equipment, net 9,763 9,591
Investments 11,113 9,039
Other assets 3,624 4,274
Total assets $43,159 $40,489
Liabilities and Stockholders' Equity
Notes payable and current portion of
long-term debt $ 3,703 $ 2,504
Accounts payable 3,558 3,285
Accrued liabilities 6,129 7,117
Total current liabilities 13,390 12,906
Long-term debt 3,086 3,089
Deferred income taxes 4,328 3,719
Other liabilities 1,301 1,598
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely company-guaranteed debentures 484 484
Stockholders' Equity
Preferred stock, $100 par value issuable
in series ----- -----
Common stock, $3 par value 2,152 2,140
Additional paid-in capital 4,391 4,145
Retained earnings 9,252 8,890
Non-owner changes to equity 4,775 3,518
Total stockholders' equity 20,570 18,693
Total liabilities and stockholders' equity $43,159 $40,489
See accompanying notes to condensed consolidated financial statements.
Motorola, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
(In millions)
Non-Owner Changes To Equity
Common
Stock Fair Value
and Adjustment Foreign Minimum
Additional to Certain Currency Pension
Paid-In Cost-Based Translation Liability Retained
Capital Investments Adjustments Adjustment Earnings
BALANCES AT
12/31/99 $6,285 $3,830 ($239) ($73) $8,890
Net earnings 448
Conversion of zero
coupon notes 4
Fair value
adjustment to
certain cost-
based investments 1,320
Change in foreign
Currency
Translation
adjustments (63)
Stock options
exercised and
other 254
Dividends declared (86)
BALANCES AT 4/1/00 $6,543 $5,150 ($302) ($73) $9,252
See accompanying notes to condensed consolidated financial statements.
Motorola, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In millions)
Three Months Ended
Apr. 1, Apr. 3,
2000 1999
Operating
Net earnings $ 448 $ 199
Adjustments to reconcile net earnings to net
cash (used for) provided by operating activities:
Depreciation 558 564
Deferred income taxes 520 197
Amortization of debt discount and issue costs 5 9
Warrant costs related to customer purchases 12 8
Gain on disposition of investments and
businesses, net of acquisition charges (92) (42)
Change in assets and liabilities, net of
effects of acquisitions and dispositions:
Accounts receivable (389) 221
Inventories (1,014) 100
Other current assets (776) 28
Accounts payable and accrued liabilities (735) (490)
Other assets and liabilities 568 (7)
Net cash (used for) provided by operating activities $ (895) $ 787
Investing
Acquisitions and advances to affiliates $ (232) $ (76)
Proceeds from dispositions of investments
and businesses 234 213
Capital expenditures (688) (399)
Proceeds from dispositions of property, plant and
equipment --- 148
Sales (purchases) of short-term investments 112 (64)
Net cash used for investing activities $ (574) $ (178)
Financing
Proceeds from (repayment of) commercial paper and
short-term borrowings $1,199 $ (654)
Proceeds from issuance of debt --- 10
Repayment of debt (4) (16)
Issuance of common stock 161 249
Issuance of preferred securities of subsidiary
trust --- 484
Payment of dividends (86) (72)
Net cash provided by financing activities $1,270 $ 1
Effect of exchange rate changes on cash and
cash equivalents $ (63) $ (73)
Net (decrease)increase in cash and cash equivalents $ (262) $ 537
Cash and cash equivalents, beginning of period $3,537 $1,602
Cash and cash equivalents, end of period $3,275 $2,139
See accompanying notes to condensed consolidated financial statements.
Motorola, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
On January 5, 2000, Motorola, Inc. ("Motorola") completed its previously
announced merger with General Instrument Corporation ("General Instrument")
by exchanging 100.6 million shares of its common stock for all of the
common stock of General Instrument. Each share of General Instrument was
exchanged for 0.575 shares of Motorola's common stock. Motorola has
accounted for the merger as a pooling-of-interests and accordingly, all
prior period consolidated financial statements of Motorola have been
restated to include the results of operations, financial position and cash
flows of General Instrument. The effects of conforming General
Instrument's accounting policies to those of Motorola were not material.
For the quarter ended April 3, 1999, net sales for Motorola and General
Instrument were $7.2 billion and $519 million, respectively. Net earnings
for Motorola and General Instrument were $171 million and $28 million,
respectively. Results of operations for the quarter ended April 1, 2000,
already reflect the pooling of interests. From this point onward, all
references to Motorola, Inc. or the Company reflect the pooling of
interests.
The condensed consolidated financial statements as of April 1, 2000 and for
the three-month periods ended April 1, 2000 and April 3, 1999, include, in
the opinion of management, all adjustments (consisting of normal recurring
adjustments and reclassifications) necessary to present fairly the
financial position, results of operations and cash flows at April 1, 2000
and for all periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto incorporated by
reference in the Company's Form 10-K for the year ended December 31, 1999,
as supplemented by Form 8-K/A which was filed on March 24, 2000. The
results of operations for the three-month period ended April 1, 2000 are
not necessarily indicative of the operating results to be expected for the
full year. Certain amounts in prior years' financial statements and
related notes have been reclassified to conform to the 2000 presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles 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 financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2. Other Financial Data
Statement of Earnings Information
The following table presents a reconciliation of the numerators and
denominators of basic and diluted earnings per common share:
Three Months Ended
Apr. 1, Apr. 3,
(In millions, except per share amounts) 2000 1999
Basic earnings per common share:
Net earnings $ 448 $ 199
Weighted average common shares
outstanding 715.4 702.8
Per share amount $ .63 $ .28
Diluted earnings per common share:
Net earnings $ 448 $ 199
Add: Interest on zero coupon
notes, net 1 ---
Net earnings as adjusted $ 449 $ 199
Weighted average common shares
outstanding 715.4 702.8
Add: Effect of dilutive securities
Stock options 25.5 14.7
Warrants 13.3 5.8
Zero coupon notes 1.7 1.3
Diluted weighted average common
shares outstanding 755.9 724.6
Per share amount $ .59 $ .28
Balance Sheet Information
Inventories consist of the following (in millions):
Apr. 3, Dec. 31,
2000 1999
Finished goods $ 1,395 $ 1,199
Work-in-process and production materials 3,293 2,508
$ 4,688 $ 3,707
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", requires the carrying
value of available for sale securities to be adjusted to fair value. The
Company classifies certain cost-based investments as available for sale
securities. As such, the Company recorded an increase to investments,
deferred income taxes and stockholders' equity of $2.0 billion, $708
million and $1.3 billion, respectively, as of April 1, 2000; and an
increase to investments, deferred income taxes and stockholders' equity of
$5.5 billion, $2.2 billion and $3.3 billion, respectively, as of December
31, 1999.
Investments include available for sale securities, the related fair value
adjustment for such securities and investments under the cost and equity
methods of accounting.
Stockholders' Equity Information
Comprehensive Earnings
Comprehensive earnings for the three-month periods ended April 1, 2000 and
April 3, 1999 were $1.7 billion and $718 million, respectively, and exclude
reclassification adjustments, net of tax, of $28 million and $45 million,
respectively, related to the sale of securities.
Warrants Issued in Conjunction with Selling Products
In December 1997, the Company entered into agreements to supply an
aggregate of 15 million of its two-way, interactive digital cable terminals
to nine of the leading North American cable television multiple system
operators ("MSOs") over a three to five year period, beginning in 1998. In
connection with these legally binding supply agreements, the Company issued
warrants to the MSOs to purchase approximately 16.5 million shares of the
Company's common stock.
For the three-month periods ended April 1, 2000 and April 3, 1999, the
Company recorded $12 million and $8 million, respectively, to manufacturing
and other costs of sales in the condensed consolidated statements of
earnings related to these warrants. On a quarterly basis, management
assesses the Company's ability to deliver the threshold number of units and
the impact it may have on the number and fair value of warrants issued.
Motorola Employee Stock Purchase Plan of 1999 (MOTshare)
MOTshare allows eligible participants to purchase shares of the Company's
common stock through payroll deductions of up to 10 percent of compensation
on an after-tax basis. The price an employee pays per share is 85 percent
of the lower of the fair market value of the Company's stock on the close
of the first trading day or last trading day of the purchase period. The
plan has two purchase periods, the first one from October 1 through March
31 and the second one from April 1 to September 30. At the close of the
first purchase period and subsequent to the end of the first quarter of
2000, employees purchased approximately 1.1 million shares of the Company's
common stock at a per share price of $75.70.
Stock Split
On February 29, 2000, the Company's Board of Directors declared a 3-for-1
common stock split in the form of a 200 percent stock dividend, contingent
upon stockholder approval of an increase in the authorized shares of the
Company's common stock from 1.4 billion to 4.2 billion. At their Annual
Meeting on May 1, 2000, the Company's stockholders approved this increase
in authorized shares of common stock. Accordingly, the stock dividend will
be distributed on June 1, 2000, to common stockholders of record on May 15,
2000.
Cash Flow Information
Cash paid for interest during the first three months of 2000 and 1999 was
$95 million and $71 million, respectively. Cash paid for income taxes
during the first three months of 2000 and 1999 was $46 million and $57
million, respectively.
3. Reorganization of Businesses
In the second quarter of 1998, the Company recorded a pre-tax charge of
$1.98 billion to cover restructuring costs of $1.275 billion and asset
impairments and other charges of $705 million ("1998 Program"). The 1998
Program reached its planned completion at December 31, 1999. At that time,
the Company reversed into income $226 million for accruals no longer
required. The remaining $27 million in accruals as of December 31, 1999,
represented cash payments to be made during the first quarter of 2000. As
of April 1, 2000, all cash payments have been made. The following table
displays a rollforward by category from December 31, 1999, to April 1,
2000, of the remaining accrual balances as of December 31, 1999:
1998 Program
Accruals Accruals
At Q1 2000 At
Dec. 31, Amounts Apr. 1,
1999 Used 2000
Consolidation of manufacturing
operations $ 12 $ (12) $ --
Business exits 4 ( 4) --
Employee separations 11 (11) --
Totals $ 27 $ (27) $ --
The $12 million utilization for consolidation of manufacturing operations
related to the finalization of plant closings in the Semiconductor Products
and Personal Communications segments. The $4 million utilization for
business exits related to the payment of final shut down costs in the
Semiconductor Products and Integrated Electronic Systems segments. The $11
million utilization for employee separations was for severance and other
employee-related payments made in the Semiconductor Products Segment,
Integrated Electronic Systems Segment and the Internet and Networking
Group.
1997 Programs
During 1997, the Company recorded restructuring charges of $327 million
resulting from decisions to exit three unprofitable businesses that no
longer had long-term strategic value to the Company. As of December 31,
1999, the business exits from the dynamic random access memory market and
from the retail analog modem business had been completed. For the exit
from the MacOS ("Registered")-compatible computer systems business, $1
million was utilized during the first quarter of 2000 for contractual and
warranty payments. The remaining $12 million accrual as of April 1, 2000,
relates to contractual commitments and warranty liability and may extend
past the 2000 year end.
4. Segment Information
Beginning with the first quarter of 2000, the Company added two operating
segments for financial reporting purposes. The Broadband Communications
Segment combines the operations of General Instrument Corporation with the
existing cable modem and telephony business of the Company's Internet and
Networking Group, which is part of the Other Products Segment. The
Integrated Electronic Systems Sector, which has been included in the Other
Products Segment, is now reported as a separate segment. Historical
segment data has been restated to reflect these changes.
Summarized below are the Company's segment sales and operating profit
(loss) before taxes by new reportable segment for the three months ended
April 1, 2000, and April 3, 1999.
Three Months Ended
Apr. 1, Apr. 3, Percent
2000 1999 Change
Segment Sales:
Personal Communications Segment $3,236 $2,602 24
Network Systems Segment 1,809 1,623 11
Commercial, Govt. and Industrial
Systems Segment 998 885 13
Broadband Communications Segment 678 590 15
Semiconductor Products Segment 1,900 1,907 --
Integrated Electronic Systems Segment 690 591 17
Other Products Segment 259 211 23
Adjustments & Eliminations (802) (673) (19)
Segment Totals $8,768 $7,736 13
Percent Of Percent Of
Sales Sales
Segment Operating Profit
(Loss) Before Taxes:
Personal Communications Segment $ 112 3 $ 83 3
Network Systems Segment 280 15 193 12
Commercial, Govt. and Industrial
Systems Segment 90 9 52 6
Broadband Communications Segment 91 13 51 9
Semiconductor Products Segment 123 6 47 2
Integrated Electronic Systems Segment 79 11 35 6
Other Products Segment (38) (15) (161) (76)
Adjustments & Eliminations (2) -- (8) 1
Segment Totals 735 8 292 4
General Corporate (95) (3)
Earnings Before Income Taxes $ 640 7 $ 289 4
5. Commitments and Contingencies
Iridium Program
At April 1, 2000, the Company owned, directly and indirectly, approximately
18 percent of the equity interests in Iridium LLC and its operating
subsidiaries (Iridium LLC and its operating subsidiaries are collectively
referred to as "Iridium") and a significant portion of a series of Iridium
bonds. Since August 1999, Iridium has operated as debtors-in-possession
under Chapter 11 of the U.S. Federal Bankruptcy Code. On March 17, 2000,
Iridium began the process of winding down and liquidating its operations
because no qualified bid to purchase the Iridium satellites was timely
received. At the same time, the Company began the process of finalizing a
plan for the decommissioning of the Iridium constellation and continued
with the process of shutting down its Iridium-related operations. As part
of the liquidation process, Iridium is continuing with a process to
solicit, and evaluate, bids for its assets and to prepare a liquidating
plan of reorganization.
At December 31, 1999 the Company had $1.8 billion of reserves related to
the Iridium program. There were no charges recorded in the first quarter
of 2000 related to the Iridium program. During the first quarter of 1999,
the Company recorded $206 million of charges related to the Iridium
program. Included in this charge was a $122 million special charge to
increase its reserve related to its financial exposure to the Iridium
project, $34 million of other charges to reserve for assets at risk and
other potential contractual obligations and a $50 million charge for its
share of Iridium net losses.
The following table displays a rollforward by category from December 31,
1999 to April 1, 2000, of the remaining accrual balances as of December 31,
1999:
Accruals at Amounts Accruals at
Dec. 31, 1999 Used Apr. 1, 2000
Accounts Receivable $ 661 $ (661) $ -
Bank Guarantees and
Other Financial
Commitments $ 50 $ - $ 50
Investments, Contractual
Commitments and Other
Obligations $ 1,087 $ (623) $ 464
Totals $ 1,798 $ (1,284) $ 514
In the first quarter of 2000 the Company utilized $1.3 billion of reserves
including $661 million for accounts receivable write-offs and $623 million
for inventory and other asset write-offs. Of the $1.3 billion used in the
first quarter of 2000, approximately $56 million was for cash payments that
were primarily for operating costs associated with the wind-down of Iridium
operations and Iridium gateway debt guarantees. The remaining $1.2 billion
used in the first quarter reflect asset write-offs. There were no reserves
used in the first quarter 1999.
The development and commercialization reserve as of April 1, 2000 was $514
million, of which $381 million was included in accrued liabilities, $56
million was included as a contra asset, in inventories, $53 million was
included as a contra asset, in property, plant and equipment, and $24
million was included as a contra asset, in other assets. The remaining
$514 million of accruals at April 1, 2000 represent approximately $374
million for cash payments and $140 million for asset write-downs. The
development and commercialization reserve as of December 31, 1999 was $1.8
billion, of which $869 million was included in accrued liabilities, $734
million was included as a contra asset, in inventories, $79 million was
included as a contra asset, in property, plant and equipment, $72 million
was included as a contra asset, in other assets, $39 million was included
in other liabilities, $4 million was included in accounts payable, and $1
million was included as a contra asset, in accounts receivable, in the
condensed consolidated balance sheets. These reserves are believed by
management to be sufficient to cover the Company's Iridium exposures.
These reserves do not include additional special charges that may arise as
a result of litigation related to the Iridium project.
The Company had several contracts with Iridium, primarily for the operation
and maintenance of the global personal communications system. The Company
stopped recognizing revenue on the operations and maintenance contract with
Iridium after the second quarter of 1999, and continued to perform its
services under that contract throughout 1999 without being paid currently,
although the Company has not waived its right to receive payment. Although
not contractually required to do so, the Company is continuing to operate
the Iridium system without compensation while a plan to decommission the
Iridium constellation is finalized. The Company currently expects to
continue to perform some services without compensation during the
decommissioning, although it has not waived its right to seek compensation.
The Company had agreed under a Memorandum of Understanding to provide a
guarantee of up to an additional $350 million of Iridium debt for Iridium's
use, subject to certain conditions. Iridium requested Motorola to provide
this guarantee during the third quarter of 1999, however, Motorola believes
it was not obligated to do so. In certain circumstances and subject to
certain conditions, $300 million of such guarantee could have been required
to be used to guarantee amounts borrowed under the Secured Credit
Agreement. The lenders under the Secured Credit Agreement asserted that
Iridium failed to have the Company provide such guarantee as required, and
that the Company was obligated to provide them with this $300 million
guarantee. The Company believes that it was not obligated to do so.
Iridium has also stated that it believed it was not obligated to have the
Company provide this $300 million guarantee to these lenders. The lenders
under the Secured Credit Agreement have also demanded that the investors in
Iridium comply with their capital call requirements. In the Company's
case, this could require an additional equity investment of $50 million.
Creditors and other stakeholders in Iridium may seek to bring various
claims against the Company, with respect to payments previously made by
Iridium to the Company, and otherwise. As described in "Legal
Proceedings," a number of purported class action lawsuits alleging
securities law violations have been filed naming Iridium, certain current
and former officers of Iridium, other entities and the Company as
defendants.
Other
At April 1, 2000, the Company's off-balance sheet commitment to Nextel
Communications, Inc. ("Nextel") for equipment financing aggregated $457
million, of which $320 million was outstanding. The Company's other off-
balance sheet third party financial guarantees aggregated $753 million, of
which $614 million was outstanding. The aggregate off-balance sheet
amounts represent the maximum available and may not be completely utilized.
6. Acquisition and Disposition of Businesses
The following table summarizes the major intellectual property acquisition,
involving an acquired in-process research and development charge, and
business disposition that the Company made during the first quarter of
2000:
In-Process
Research and
Form of Development
(in millions) Consideration Consideration Charge
Acquisition:
Intec, Ltd. $ 31 Cash $9
Disposition:
Motorola Lighting, Inc. $110 Cash Not Applicable
Intec, Ltd. - Intellectual Property Acquisition
In January, 2000, the Company purchased the assets and the intellectual
property rights of Intec, Ltd. (Intec), a Korean-based smartcard system
provider, for approximately $31 million in cash. In connection with this
transaction, the Company recorded an acquired in-process research and
development charge of approximately $9 million, which was included in
selling, general and administrative expenses in the condensed consolidated
statements of earnings, and goodwill and other intangibles of approximately
$20 million, which was recorded in other assets in the condensed
consolidated balance sheets. The goodwill and other intangibles are to be
amortized over a period of five years.
At the acquisition date, a total of 6 projects were in process and were
approximately 75 percent complete. These projects were related to the
development of multi-application smartcard software and hardware. This in-
process research will have no alternative future uses if the products are
not feasible. Revenues from in-process products are estimated primarily
beginning in the first quarter of 2001, with projected research and
development costs-to-complete of approximately $2 million.
Historical pricing, margins, and expense levels were used in the valuation
of the in-process products. The allocation of value to in-process research
and development was determined using expected future cash flows discounted
at an average risk adjusted rate of 22 percent. This rate reflects both
technological and market risk as well as the time value of money.
Motorola Lighting, Inc.
In March, 2000, the Company completed the sale of Motorola Lighting, Inc.
(MLI) to Osram Sylvania, the North American operation of Osram GmbH of
Germany, for approximately $110 million in cash. The sale resulted in a
$33 million gain included in selling, general and administrative expenses
in the condensed consolidated statements of earnings. Through the date of
disposition, MLI's first quarter 2000 results of operations were not
significant.
Motorola, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
On January 5, 2000, Motorola, Inc. ("Motorola") completed its previously
announced merger with General Instrument Corporation ("General Instrument")
by exchanging 100.6 million shares of its common stock for all of the
common stock of General Instrument. Each share of General Instrument was
exchanged for 0.575 shares of Motorola's common stock. Motorola has
accounted for the merger as a pooling-of-interests and accordingly, all
prior period consolidated financial statements of Motorola have been
restated to include the results of operations, financial position and cash
flows of General Instrument. From this point onward, all references to
Motorola, Inc. or the Company reflect the pooling of interests.
This commentary should be read in conjunction with the Company's
consolidated financial statements and related notes thereto and
management's discussion and analysis of financial condition and results of
operations incorporated by reference in the Company's Form 10-K for the
year ended December 31, 1999, as supplemented by Form 8-K/A which was filed
on March 24, 2000.
The order information as of any particular date may not be an accurate
indicator of future results as orders are subject to revision or
cancellation to reflect changes in customer needs.
Results of Operations:
Motorola, Inc.
Three-Months Ended April 1, Percent of April 3, Percent of
(in millions except per 2000 Sales 1999 Sales
share amounts)
Net sales $ 8,768 $ 7,736
Percent change from
prior year 13 percent
Cost and expenses
Manufacturing and other
costs of sales 5,200 59 percent 4,601 59 percent
Selling, general and
administrative expenses 1,308 15 percent 1,471 19 percent
Research and development
expenditures 1,015 12 percent 773 10 percent
Depreciation expense 558 6 percent 564 7 percent
Interest expense, net 47 1 percent 38 0 percent
Total costs and expenses 8,128 7,447
Earnings before income taxes 640 7 percent 289 4 percent
Income tax provision 192 90
Net earnings $ 448 5 percent $ 199 3 percent
Diluted earning per common
share $ 0.59 $ 0.28
Sales were $8.8 billion in the first quarter of 2000, up 13 percent from
$7.7 billion a year earlier. Sales growth was attributed primarily to an
increase in sales from the digital wireless phone business resulting from
strong market acceptance and demand for the Company's new digital products.
First-quarter 2000 earnings were $448 million, or 59 cents per share,
compared with first-quarter 1999 earnings of $199 million, or 28 cents per
share. Net margin on sales was 5 percent in the first quarter of 2000
compared with 3 percent a year earlier. The increase in earnings for the
first quarter of 2000 compared to the first quarter of 1999 was attributed
to: (i) increased sales, (ii) higher margins in the semiconductor
business, (iii) lower selling, general and administrative expenses, and
(iv) lower net special items. These improvements were partially offset by
an increase in research and development expenditures. The main businesses
contributing to this improvement in earnings were semiconductor and
broadband communications.
Manufacturing margin in the first quarter of 2000 remained constant at 41
percent.
Selling, general and administrative expenses decreased to 15 percent of
sales compared to 19 percent a year earlier. This decline was primarily
attributable to the continued benefits from the Company's prior
manufacturing consolidation, cost reduction and restructuring programs.
Research and development expenditures increased 31 percent to $1.0 billion,
or 12 percent of sales, in the first quarter of 2000 compared to $773
million, or 10 percent of sales, a year earlier. Over the past three
years, the Company has been increasing the percentage of its sales that is
spent on research and development. The Company continues to believe that a
strong commitment to research and development is required to drive long-
term growth. Research and development spending in 2000 is expected to
continue to increase at a rate higher than the rate of sales growth.
Depreciation expense in the first quarter of 2000 as a percentage of sales
decreased to 6 percent from 7 percent a year earlier. This decline was
attributable to the increase in sales, while depreciation expense remained
fairly constant. Depreciation expense for 2000 is expected to increase,
but at a rate below the expected rate of sales growth.
Interest expense increased versus a year ago to $47 million from $38
million due to increased commercial paper and short-term borrowings.
Interest expense in 2000 is expected to increase, but at a rate below the
expected rate of sales growth.
The tax rate for the first quarter was 30 percent. The Company currently
expects the tax rate to be 30 percent for 2000.
Results of Operations Excluding Net Special Items
Motorola, Inc.
Three-Months Ended April 1, Percent of April 3, Percent of
(in millions except per 2000 Sales 1999 Sales
share amounts)
Net sales $ 8,768 $ 7,736
Percent change from
prior year 13 percent
Cost and expenses
Manufacturing and other
costs of sales 5,200 59 percent 4,593 59 percent
Selling, general and
administrative expenses 1,306 15 percent 1,459 19 percent
Research and development
expenditures 1,015 12 percent 773 10 percent
Depreciation expense 558 6 percent 564 7 percent
Interest expense, net 47 1 percent 38 0 percent
Total costs and expenses 8,126 7,427
Earnings before income taxes 642 7 percent 309 4 percent
Income tax provision 193 96
Net earnings $ 449 5 percent $ 213 3 percent
Diluted earning per common
share $ 0.59 $ 0.30
Excluding net special items, first-quarter 2000 earnings were $449 million,
or 59 cents per share, compared with first-quarter 1999 earnings of $213
million, or 30 cents per share.
Excluding net special items, net margin on sales would have been 5 percent
for the first quarter of 2000 compared with 3 percent for the first quarter
of 1999.
In the first quarter of 2000, the Company recorded in selling, general and
administrative expenses in the condensed consolidated statements of
earnings a net special charge of $2 million pre-tax. Included in this net
special charge were the following items (in millions):
Merger and integration costs related
to the General Instrument merger $ 100
In-process research and development
write-off 9
Other gains ( 6)
Gains from the sale of investments
and a business (101)
Net special charge $ 2
In the first quarter of 1999, the Company recorded a net special charge of
$20 million pre-tax, or 2 cents per share after-tax. Included in this net
special charge were the following items (in millions):
Iridium related charge $ 122
Other charges 15
Gains from the sale of investments
and businesses (117)
Net special charge $ 20
Of the $20 million net special charge, $12 million was included in selling,
general and administrative expenses, and $8 million was included in
manufacturing and other costs of sales in the condensed consolidated
statements of earnings.
Results of Operations for Ongoing Businesses Excluding Net Special Items
Motorola, Inc.
Three-Months Ended April 1, Percent of April 3, Percent of
(in millions except per 2000 Sales 1999 Sales
share amounts)
Net sales $ 8,768 $ 7,340
Percent change from
prior year 19 percent
Cost and expenses
Manufacturing and other
costs of sales 5,200 59 percent 4,314 59 percent
Selling, general and
administrative expenses 1,306 15 percent 1,397 19 percent
Research and development
expenditures 1,015 12 percent 764 10 percent
Depreciation expense 558 6 percent 561 8 percent
Interest expense, net 47 1 percent 36 0 percent
Total costs and expenses 8,126 7,072
Earnings before income taxes 642 7 percent 268 4 percent
Income tax provision 193 84
Net earnings $ 449 5 percent $ 184 3 percent
Diluted earning per common
share $ 0.59 $ 0.26
The Company sold several businesses in 1999, of which the sale of the
Semiconductor Components Group was the largest transaction. Excluding the
results of these businesses and net special items, sales were $8.8 billion
in the first quarter of 2000, up 19 percent from $7.3 billion a year
earlier. First-quarter 2000 earnings were $449 million, or 59 cents per
share, compared with first-quarter 1999 earnings of $184 million, or 26
cents per share.
Excluding the results of these businesses and net special items, net margin
on sales was 5 percent in the first quarter of 2000 compared with 3 percent
a year earlier.
1998 Restructuring Program
In the second quarter of 1998, the Company recorded a pre-tax charge of
$1.98 billion to cover restructuring costs of $1.275 billion and asset
impairments and other charges of $705 million ("1998 Program"). The 1998
Program reached its planned completion at December 31, 1999. At that time,
the Company reversed into income $226 million for accruals no longer
required. The remaining $27 million in accruals as of December 31, 1999,
represented cash payments to be made during the first quarter of 2000. As
of April 1, 2000, all cash payments have been made. The following table
displays a rollforward by category from December 31, 1999, to April 1,
2000, of the remaining accrual balances as of December 31, 1999:
Accruals Accruals
At Q1 2000 At
Dec. 31, Amounts Apr. 1,
1999 Used 2000
Consolidation of manufacturing
operations $ 12 $ (12) $ --
Business exits 4 ( 4) --
Employee separations 11 (11) --
Totals $ 27 $ (27) $ --
The $12 million utilization for consolidation of manufacturing operations
related to the finalization of plant closings in the Semiconductor Products
and Personal Communications segments. The $4 million utilization for
business exits related to the payment of final shut down costs in the
Semiconductor Products and Integrated Electronic Systems segments. The $11
million utilization for employee separations were for severance and other
employee-related payments made in the Semiconductor Products Segment,
Integrated Electronic Systems Segment and the Internet and Networking
Group.
1997 Restructuring Programs
During 1997, the Company recorded restructuring charges of $327 million
resulting from decisions to exit three unprofitable businesses that no
longer had long-term strategic value to the Company. As of December 31,
1999, the business exits from the dynamic random access memory market and
from the retail analog modem business had been completed. For the exit
from the MacOS ("Registered")-compatible computer systems business, $1
million was utilized during the first quarter of 2000 for contractual and
warranty payments. The remaining $12 million accrual as of April 1, 2000,
relates to contractual commitments and warranty liability and may extend
past the 2000 year end.
Segment Information
Results of the Company's major operations, which include the effect of the
sales of various businesses and net special items, for the first quarter of
2000 compared with the first quarter of 1999 are as follows:
Personal Communications Segment
Three Months Ended
April 1, April, 3, Percent
(in millions) 2000 1999 Change
Orders $3,169 $2,651 20 percent
Segment sales $3,236 $2,602 24 percent
Operating profit before tax $112 $ 83 35 percent
Net special items:
income(expense) $ 63 $ --
Operating profit excluding
net special items $ 49 $ 83 (41) percent
Segment sales rose 24 percent to $3.2 billion, and orders increased 20
percent to $3.2 billion. Operating profits increased to $112 million from
$83 million in the year earlier quarter. The increase in operating profit
was entirely due to a net gain of $63 million from the sale of an
investment. This special item is reflected in selling, general and
administrative expenses in the condensed consolidated statements of
earnings.
Excluding net special items, operating profits decreased to $49 million,
compared to $83 million a year ago. The decrease resulted from a
combination of factors. First, there was a shift in the wireless phone
product mix toward low-tier products with smaller profit margins. This
shift was driven by an increase in the number of prepaid programs, which
feature low-tier products, offered by wireless service providers,
especially in Europe. Second, certain components are in short supply,
which caused an increase in the cost of acquiring these components. Third,
the segment made significantly higher investments in engineering and
advertising.
For ongoing businesses, sales and orders were unchanged from the data shown
in the table above. Operating profits for ongoing businesses excluding net
special items were also unchanged from the data shown in the table above.
In the wireless phone business, which includes iDEN ("Registered") phones,
versus the year ago quarter, (i) orders increased 30 percent; (ii) sales
increased 37 percent; and (iii) operating profits were down very
significantly for the reasons discussed above. Sales increased
significantly in all regions. Orders increased significantly in the
Americas and Asia but were lower in Europe. Digital wireless phone sales
represented 92 percent of all wireless phone sales dollars in the quarter.
Analog wireless phone sales were significantly lower.
Digital wireless phone unit sales increased approximately 95 percent in the
first quarter versus a year ago. Versus the year ago quarter, unit sales
for (i) Global System for Mobile (GSM) products increased by almost 100
percent; (ii) Code Division Multiple Access (CDMA) products increased
approximately 80 percent; (iii) Time Division Multiple Access (TDMA)
products increased by over 100 percent; and (iv) iDEN ("Registered") phones
were almost twice the levels of a year ago.
The overall selling price for digital wireless phones declined by
approximately 20 percent versus a year ago, and the overall selling price
for analog wireless phones declined in the 15-20 percent range in the first
quarter versus a year ago. Average selling prices can be subject to
changes in product mix and regional mix.
For paging products, orders and sales were significantly lower than a year
ago. This decrease in sales and orders resulted from fewer unit sales, as
average selling prices stabilized, and occurred in all regions.
Network Systems Segment
Three Months Ended
April 1, April, 3, Percent
(in millions) 2000 1999 Change
Orders $1,795 $1,726 4 percent
Segment sales $1,809 $1,623 11 percent
Operating profit before tax $280 $193 45 percent
Net special items:
income(expense) $ -- $ --
Operating profit excluding
net special items $280 $193 45 percent
Segment sales rose 11 percent to $1.8 billion, and orders increased 4
percent to $1.8 billion. Operating profits increased to $280 million from
$193 million in the year earlier quarter due to an increase in sales of
terrestrial infrastructure equipment that more than offset a very
significant decline in sales of satellite communications equipment.
Excluding net special items, operating profits were unchanged from the data
shown in the table above.
For ongoing businesses, sales and orders were unchanged from the data shown
in the table above. Operating profits for ongoing businesses excluding net
special items were also unchanged from the data shown in the table above.
Excluding the very significant declines in the sales and orders of
satellite communications equipment, segment sales would have increased 25
percent and orders would have increased 8 percent. Sales and orders were
significantly higher in the Americas and higher in Europe. Sales increased
significantly, but orders were lower in Asia. Sales of iDEN ("Registered")
and GSM infrastructure equipment were up significantly versus a year ago.
Sales of CDMA infrastructure equipment increased. PDC sales in Japan were
lower. Analog sales were almost zero.
The Company signed an agreement with Telsim, which is estimated to have a
sales potential of at least $1.5 billion over three years. Under this
agreement, the Company expects to provide infrastructure equipment,
wireless phones and associated services to expand the countrywide GSM
network in Turkey.
The Company's contract with Teledesic LLC for design and construction of a
satellite communications network continues to be contingent upon
Teledesic's approval following a technical review period. This technical
review period was originally scheduled to end on September 11, 1999, but
Teledesic has extended the period several times. Since approval of the
contract is in the sole discretion of Teledesic, there can be no assurances
that Teledesic will provide this approval.
Commercial, Government and Industrial Systems Segment
Three Months Ended
April 1, April, 3, Percent
(in millions) 2000 1999 Change
Orders $1,094 $1,223 (11) percent
Segment sales $ 998 $ 885 13 percent
Operating profit before tax $ 90 $ 52 73 percent
Net special items:
income(expense) $( 3) $ --
Operating profit excluding
net special items $ 93 $ 52 79 percent
Segment sales rose 13 percent to $998 million, and orders declined 11
percent to $1.1 billion. The decline in orders is attributable to very
strong orders in the first quarter of 1999. Operating profits increased to
$90 million from $52 million in the year earlier quarter primarily due to
higher two-way radio equipment sales in all geographic regions and improved
operating margins on these sales. Included in operating profits for the
three months ended April 1, 2000 are net special items of $3 million. This
net charge is comprised of a $6 million gain from the sale of an investment
and a $9 million in-process research and development charge related to the
acquisition of Intec, Ltd.'s intellectual property. The net special items
are included in selling, general and administrative expenses in the
condensed consolidated statements of earnings.
Excluding net special items, operating profits rose to $93 million,
compared to $52 million a year ago primarily due to the increase in sales
and improved operating margins.
For ongoing businesses, sales rose 16 percent to $998 million from $864
million, and orders declined 9 percent. Operating profits for ongoing
businesses excluding net special items rose to $93 million compared to $48
million a year ago.
Two-way radio equipment sales were higher in the Americas and Europe, and
significantly higher in Asia. Orders were lower in the Americas and Asia
but higher in Europe.
Broadband Communications Segment
Three Months Ended
April 1, April, 3, Percent
(in millions) 2000 1999 Change
Orders $ 880 $ 604 46 percent
Segment sales $ 678 $ 590 15 percent
Operating profit before tax $ 91 $ 51 78 percent
Net special items:
income(expense) $ -- $(10)
Operating profit excluding
net special items $ 91 $ 61 49 percent
Segment sales rose 15 percent to $678 million, and orders increased 46
percent to $880 million. Operating profits increased to $91 million from
$51 million in the year earlier quarter due to increases in sales in the IP
(Internet Protocol) Network Systems, Transmission Network Systems, and
Digital Network Systems businesses. Included in operating profits for the
three months ended April 3, 1999 are net special items of $10 million.
This net charge is comprised of a $5 million gain from the sale of an
investment and a $15 million charge related to the write down of inventory
and other charges from the loss of a significant customer in the satellite
business. In the condensed consolidated statements of earnings, the $5
million gain and $7 million of the $15 million charge are included in
selling, general and administrative expenses, and the remaining $8 million
of the $15 million charge is included in manufacturing and other costs of
sales.
Excluding net special items, operating profits rose to $91 million,
compared to $61 million a year ago primarily due to the increase in sales.
For ongoing businesses, sales and orders were unchanged from the data shown
in the table above. Operating profits for ongoing businesses excluding net
special items were also unchanged from the data shown in the table above.
Sales were up very significantly in the IP Network Systems and Transmission
Network Systems businesses. They were significantly higher in the Digital
Network Systems business, significantly lower in the Satellite and
Broadcast Network Systems business and very significantly lower in the
Analog Network Systems business.
Orders were up very significantly in the IP Network Systems and Digital
Network Systems businesses. They were significantly higher in the
Transmission Network Systems business, higher in the Satellite and
Broadcast Network Systems business and significantly lower in the Analog
Network Systems business.
By region, the Americas continued to account for approximately 90 percent
of the segment's total sales and orders. A slight shift towards Latin
America and Asia occurred during the quarter.
Semiconductor Products Segment
Three Months Ended
April 1, April, 3, Percent
(in millions) 2000 1999 Change
Orders $2,040 $2,084 ( 2) percent
Segment sales $1,900 $1,907 --
Operating profit before tax $123 $ 47 162 percent
Net special items:
income(expense) $ -- $ --
Operating profit excluding
net special items $123 $ 47 162 percent
Segment sales remained flat at $1.9 billion, and orders declined 2 percent
to $2.0 billion. Operating profits increased to $123 million from $47
million in the year earlier quarter. The profit improvement is the result
of the impact of restructuring programs undertaken over the past few years,
including the exit of low-growth or unprofitable businesses, the
consolidation of manufacturing facilities and the reduction of employees.
These restructuring programs included the strategic decision to focus the
business on high-growth end markets and to emphasize systems-on-chip
solutions, providing opportunities to reap the benefits of higher gross
margins from value-added hardware, software and services.
Excluding net special items, operating profits were unchanged from the data
shown in the table above.
For ongoing businesses, sales rose 24 percent to $1.9 billion from $1.5
billion, and orders increased 21 percent to $2.0 billion from $1.7 billion
in the year earlier quarter. Operating profits for ongoing businesses
excluding net special items increased to $123 million from $10 million in
the year earlier quarter. The increase in profits for ongoing businesses
excluding net special items is primarily the result of the factors
discussed above and an increase in sales driven by the recovery of the
semiconductor industry from its recessionary period.
By region, orders were up significantly in Europe and the Americas and were
higher in Japan and Asia Pacific. By end market, orders were up
significantly in networking and computing and wireless, and were higher in
imaging and entertainment and transportation.
During the quarter, the Company entered into an agreement to acquire C-Port
Corporation, a developer of programmable microprocessors used in optical
networks and high-speed Internet switching and routing, for approximately
2.9 million shares of its common stock. This acquisition will allow the
Company to deliver a complete communications platform including host,
integrated communications and network processors, digital signal
processors, development environments and application software. The
transaction was completed on May 9, 2000.
In addition, the Company announced the acquisition of a major semiconductor
manufacturing facility in Scotland formerly owned by Hyundai.
Integrated Electronic Systems Segment
Three Months Ended
April 1, April, 3, Percent
(in millions) 2000 1999 Change
Orders $ 728 $ 594 23 percent
Segment sales $ 690 $ 591 17 percent
Operating profit before tax $ 79 $ 35 126 percent
Net special items:
income(expense) $ 33 $ 6
Operating profit excluding
net special items $ 46 $ 29 59 percent
Segment sales rose 17 percent to $690 million, and orders increased 23
percent to $728 million. Operating profits increased to $79 million from
$35 million in the year earlier quarter primarily due to a $33 million gain
from the sale of Motorola Lighting, Inc. Included in operating profits for
the three-month period ended April 3, 1999, is a $6 million gain from the
sale of an investment. These special items are reflected in selling,
general and administrative expenses in the condensed consolidated
statements of earnings.
Excluding net special items, operating profits rose to $46 million,
compared to $29 million a year ago due to significantly higher operating
profits in the automotive and industrial electronics, computer and energy
systems businesses offset by a larger operating loss in the telematics
communications business.
For ongoing businesses, sales and orders were unchanged from the data shown
in the table above. Operating profits for ongoing businesses excluding net
special items were also unchanged from the data shown in the table above.
The Integrated Electronic Systems Sector is being reported as an operating
segment for the first time. Results were previously reported as part of
the "Other Products" segment.
General Corporate
In the first quarter of 2000, the Company incurred acquisition and
integration costs of approximately $100 million in connection with the
merger with General Instrument Corporation. These costs consisted
primarily of fees for investment bankers, attorneys, accountants and
financial printing. This special charge is included in selling, general
and administrative expenses in the condensed consolidated statements of
earnings.
Liquidity and Capital Resources:
Cash and cash equivalents aggregated $3.3 billion as of April 1, 2000,
compared to $2.1 billion as of April 3, 1999.
Net cash used by operations was $895 million for the three-month period
ended April 1, 2000, as compared to $787 million in cash provided by
operations for the three-month period ended April 3, 1999. The net cash
used by operations of $895 million was primarily due to an increase in
accounts receivable and inventory in the Personal Communications and
Network Systems segments.
Net cash used by investing activities was $574 million for the three-month
period ended April 1, 2000, as compared to $178 million for the three-month
period ended April 3, 1999. The increase in cash used by investing
activities for the first quarter of 2000 compared to the first quarter of
1999 was primarily due to increased capital expenditures. Capital
expenditures for the first quarter of 2000 aggregated $688 million, as
compared to $399 million for the first quarter of 1999. Of these
expenditures, approximately $356 million and $148 million, respectively,
were spent in the Semiconductor Products Segment. For 2000, total capital
expenditures are expected to be $4.9 billion, of which $2.6 billion is
expected to be spent in the Semiconductor Products Segment, compared to
$2.9 billion in 1999.
Net cash provided by financing activities was $1.3 billion for the three-
month period ended April 1, 2000, as compared to $1 million for the three-
month period ended April 3, 1999. The increase in cash from financing
activities for the first quarter of 2000 compared to the first quarter of
1999 was primarily due to $1.2 billion in proceeds from commercial paper
and short-term borrowings to meet the increase in cash needs from
operations primarily related to inventory. The Company's ratio of net debt
to net debt plus equity was 14.6 percent at April 1, 2000 compared to 8.2
percent at December 31, 1999.
The Company's total domestic and non-U.S. credit facilities aggregated $6.3
billion at April 1, 2000, of which $275 million was used and the remaining
$6.1 billion was available to back up outstanding commercial paper which
totaled $3.6 billion.
Purchasers of the Company's infrastructure equipment continue to require
suppliers to provide long-term financing in connection with equipment
purchases. Financing may include all or a portion of the purchase price
and working capital. The Company may also assist customers in obtaining
financing from banks and other sources.
At April 1, 2000, the Company's off-balance sheet commitment to Nextel
Communications, Inc. ("Nextel") for equipment financing aggregated $457
million, of which $320 million was outstanding. The Company's other off-
balance sheet third party financial guarantees aggregated $753 million, of
which $614 million was outstanding. The aggregate off-balance sheet
amounts represent the maximum available and may not be completely utilized.
The Company expects that the need to provide equipment financing or to
arrange financing for its customers will continue and may increase in the
future.
The Company believes that it can continue to access the capital markets in
2000, if necessary, on acceptable terms and conditions. However, factors
outside of the Company's control, such as the liquidity of the capital
markets, may affect the Company's ability to access the capital markets on
favorable terms.
Return on average invested capital, based on the performance of the four
preceding quarters ending with April 1, 2000, was 6.6 percent, compared
with (4.8) percent based on the performance of the four preceding quarters
ending April 3, 1999. The Company's current ratio, weeks receivable, and
inventory turns (using the cost-of-sales calculation method) were 1.39,
8.4, and 5.2, respectively, at April 1, 2000, compared to 1.36, 7.7, and
5.9, respectively, at December 31, 1999.
Iridium Program
At April 1, 2000, the Company owned, directly and indirectly, approximately
18 percent of the equity interests in Iridium LLC and its operating
subsidiaries (Iridium LLC and its operating subsidiaries are collectively
referred to as "Iridium") and a significant portion of a series of Iridium
bonds. Since August 1999, Iridium has operated as debtors-in-possession
under Chapter 11 of the U.S. Federal Bankruptcy Code. On March 17, 2000,
Iridium began the process of winding down and liquidating its operations
because no qualified bid to purchase the Iridium satellites was timely
received. At the same time, the Company began the process of finalizing a
plan for the decommissioning of the Iridium constellation and continued
with the process of shutting down its Iridium-related operations. As part
of the liquidation process, Iridium is continuing with a process to
solicit, and evaluate, bids for its assets and to prepare a liquidating
plan of reorganization.
At December 31, 1999 the Company had $1.8 billion of reserves related to
the Iridium program. There were no charges recorded in the first quarter
of 2000 related to the Iridium program. During the first quarter of 1999,
the Company recorded $206 million of charges related to the Iridium
program. Included in this charge was a $122 million special charge to
increase its reserve related to its financial exposure to the Iridium
project, $34 million of other charges to reserve for assets at risk and
other potential contractual obligations and a $50 million charge for its
share of Iridium net losses.
The following table displays a rollforward by category from December 31,
1999 to April 1, 2000, of the remaining accrual balances as of December 31,
1999:
Accruals at Amounts Accruals at
Dec. 31, 1999 Used Apr. 1, 2000
Accounts Receivable $ 661 $ (661) $ -
Bank Guarantees and Other
Financial Commitments $ 50 $ - $ 50
Investments, Contractual
Commitments and Other
Obligations $ 1,087 $ (623) $ 464
Totals $ 1,798 $ (1,284) $ 514
In the first quarter of 2000 the Company utilized $1.3 billion of reserves
including $661 million for accounts receivable write-offs and $623 million
for inventory and other asset write-offs. Of the $1.3 billion used in the
first quarter of 2000, approximately $56 million was for cash payments that
were primarily for operating costs associated with the wind-down of Iridium
operations and Iridium gateway debt guarantees. The remaining $1.2 billion
used in the first quarter reflect asset write-offs. There were no reserves
used in the first quarter 1999.
The development and commercialization reserve as of April 1, 2000 was $514
million, of which $381 million was included in accrued liabilities, $56
million was included as a contra asset, in inventories, $53 million was
included as a contra asset, in property, plant and equipment, and $24
million was included as a contra asset, in other assets. The remaining
$514 million of accruals at April 1, 2000 represent approximately $374
million for cash payments and $140 million for asset write-downs. The
development and commercialization reserve as of December 31, 1999 was $1.8
billion, of which $869 million was included in accrued liabilities, $734
million was included as a contra asset, in inventories, $79 million was
included as a contra asset, in property, plant and equipment, $72 million
was included as a contra asset, in other assets, $39 million was included
in other liabilities, $4 million was included in accounts payable, and $1
million was included as a contra asset, in accounts receivable, in the
condensed consolidated balance sheets. These reserves are believed by
management to be sufficient to cover the Company's Iridium exposures.
These reserves do not include additional special charges that may arise as
a result of litigation related to the Iridium project.
The Company had several contracts with Iridium, primarily for the operation
and maintenance of the global personal communications system. The Company
stopped recognizing revenue on the operations and maintenance contract with
Iridium after the second quarter of 1999, and continued to perform its
services under that contract throughout 1999 without being paid currently,
although the Company has not waived its right to receive payment. Although
not contractually required to do so, the Company is continuing to operate
the Iridium system without compensation while a plan to decommission the
Iridium constellation is finalized. The Company currently expects to
continue to perform some services without compensation during the
decommissioning, although it has not waived its right to seek compensation.
The Company had agreed under a Memorandum of Understanding to provide a
guarantee of up to an additional $350 million of Iridium debt for Iridium's
use, subject to certain conditions. Iridium requested Motorola to provide
this guarantee during the third quarter of 1999, however, Motorola believes
it was not obligated to do so. In certain circumstances and subject to
certain conditions, $300 million of such guarantee could have been required
to be used to guarantee amounts borrowed under the Secured Credit
Agreement. The lenders under the Secured Credit Agreement asserted that
Iridium failed to have the Company provide such guarantee as required, and
that the Company was obligated to provide them with this $300 million
guarantee. The Company believes that it was not obligated to do so.
Iridium has also stated that it believed it was not obligated to have the
Company provide this $300 million guarantee to these lenders. The lenders
under the Secured Credit Agreement have also demanded that the investors in
Iridium comply with their capital call requirements. In the Company's
case, this could require an additional equity investment of $50 million.
Creditors and other stakeholders in Iridium may seek to bring various
claims against the Company, with respect to payments previously made by
Iridium to the Company, and otherwise. As described in "Legal
Proceedings," a number of purported class action lawsuits alleging
securities law violations have been filed naming Iridium, certain current
and former officers of Iridium, other entities and the Company as
defendants.
A discussion of the Company's commitments and contingencies are detailed in
Note 5 to the condensed consolidated financial statements.
Risk Management
As a multinational company, the Company's transactions are denominated in a
variety of currencies. The Company uses financial instruments to hedge,
and therefore attempts to reduce its overall exposure to the effects of
currency fluctuations on cash flows. The Company's policy is not to
speculate in financial instruments for profit on the exchange rate price
fluctuation, trade in currencies for which there are no underlying
exposures, or enter into trades for any currency to intentionally increase
the underlying exposure. Instruments used as hedges must be effective at
reducing the risk associated with the exposure being hedged and must be
designated as a hedge at the inception of the contract. Accordingly,
changes in market values of hedge instruments must be highly correlated
with changes in market values of underlying hedged items both at inception
of the hedge and over the life of the hedge contract.
The Company's strategy in foreign exchange exposure issues is to offset the
gains or losses of the financial instruments against losses or gains on the
underlying operational cash flows or investments based on the operating
business units' assessment of risk. Currently, the Company primarily
hedges firm commitments, including assets and liabilities currently on the
balance sheet. The Company expects that it may hedge anticipated
transactions, forecasted transactions or investments in foreign
subsidiaries in the future.
Almost all of the Company's non-functional currency receivables and
payables which are denominated in major currencies that can be traded on
open markets are hedged. The Company uses forward contracts and options to
hedge these currency exposures. A portion of the Company's exposure is to
currencies which are not traded on open markets, such as those in Latin
America, and these are addressed, to the extent reasonably possible,
through managing net asset positions, product pricing, and other means,
such as component sourcing.
At April 1, 2000 and April 3, 1999, the Company had net outstanding foreign
exchange contracts totaling $3.6 billion and $2.1 billion, respectively.
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 offset losses and gains on the assets,
liabilities, and transactions being hedged. At April 1, 2000, deferred
gains totaled $41 million, and deferred losses totaled $1 million. At
April 3, 1999, deferred gains totaled $3 million, and deferred losses
totaled $3 million. The following table shows, in millions, the five
largest net foreign exchange hedge positions as of April 1, 2000 and April
3, 1999:
April 1, April 3,
Buy (Sell) 2000 1999
Japanese Yen (1,588) (798)
Euro (727) (447)
Chinese Renminbi (560) (110)
Taiwan Dollar 167 (102)
Malaysia Ringgit 148 ---
The Company is exposed to credit-related losses if counterparties to
financial instruments fail to perform their obligations. However, it does
not expect any counterparties, which presently have high credit ratings, to
fail to meet their obligations.
In June 1999, the Company's finance subsidiary entered into interest rate
swaps to change the characteristics of the interest rate payments on its
$500 million 6.75 percent Guaranteed Bonds due 2004 from fixed-rate
payments to short-term LIBOR based variable rate payments in order to match
the funding with its underlying assets. Except for these interest rate
swaps, as of the end of the reporting period, the Company had no
outstanding commodity derivatives, currency swaps or options relating to
either its debt instruments or investments. The Company does not have any
derivatives to hedge the value of its equity investments in affiliated
companies.
Year 2000:
The Company has not experienced any significant Year 2000 related issues.
Such issues should they arise will be handled in the normal course of the
Company's commercial operations. Date-related issues involving the
products, services or operations of customers, suppliers or other third
parties could arise in the future and could adversely affect the Company.
Euro Conversion:
For disclosure regarding the impact to the Company from the introduction of
the euro, see the information contained under the caption "Euro Conversion"
on page F-23 of the appendix to the Company's Proxy Statement for its 2000
annual meeting of stockholders.
Business Risks:
Statements that are not historical facts are forward-looking statements
based on current expectations that involve risks and uncertainties.
Forward-looking statements include, but are not limited to, statements
about research and development expenditures, depreciation expense, interest
expense, tax rate, the sales potential of the contract with Telsim, the
Company's relationship with Teledesic LLC, capital expenditures, the need
to provide or arrange financing for customers, the Company's ability to
access the capital markets on acceptable terms and conditions, future
actions relating to the Iridium project, and the ability of counterparties
to financial instruments to perform their obligations. The Company wishes
to caution the reader that the factors below and those on pages F-25
through F-28 of the appendix to Company's Proxy Statement for its 2000
annual meeting of stockholders and in its other SEC filings could cause the
Company's results to differ materially from those stated in the forward-
looking statements. These factors include: (i) difficulties in integrating
the operations of newly-acquired businesses and achieving strategic
objectives, cost savings and other benefits; (ii) demand for products,
including those to be purchased under the Telsim contract; (iii) continued
improvement in the semiconductor industry and the Company's participation
in that improvement; (iv) continued gains in the digital wireless telephone
market and market acceptance of new products; (v) difficulties, delays or
unexpected liabilities or expenses encountered in connection with the
implementation of Iridium's liquidation proceedings, including those
encountered in finalizing and implementing the process for decommissioning
the Iridium constellation; (vi) unfavorable outcomes to any pending or
future litigation involving the Iridium project; (vii) pricing pressures
and demand for the Company's products, especially in light of the current
economic conditions in parts of Asia, Latin America and other emerging
markets; (viii) the success of alliances and agreements with other
companies to develop new products and services; (ix) unexpected changes in
the requirements for manufacturing capacity, which may necessitate
different levels of capital expenditures; (x) increasing demand for
customer financing of equipment sales, particularly infrastructure
equipment; (xi) the success of the Company's efforts to secure sufficient
components for its products, including wireless phones; and (xii) product
and technology development and commercialization risks, including for newer
digital products.
Iridium ("Registered") is a registered trademark and service mark of
Iridium LLC.
Part II - Other Information
Item 1 - Legal Proceedings.
Motorola has been a defendant in several cases arising out of its
manufacture and sale of portable cellular telephones. Kane, et al., v.
Motorola, Inc., et al., filed on December 13, 1993 in the Circuit Court of
Cook County, Illinois, alleged that plaintiffs' brain cancer was caused by
or aggravated by a prototype communication device. On May 11, 2000, the
Court entered summary judgment in Motorola's favor holding that there was
no evidence to support plaintiffs' theory of causation.
See Item 3 of the Company's Form 10-K for the fiscal year ended December
31, 1999 for additional disclosures regarding pending matters.
In the opinion of management, the ultimate disposition of these matters
will not have a material adverse effect on the consolidated financial
position, liquidity or results of operations of Motorola.
Item 2 - Changes in Securities and Use of Proceeds.
Not applicable.
Item 3 - Defaults Upon Senior Securities.
Not applicable.
Item 4 - Submission of Matters to Vote of Security Holders.
The Company held its annual meeting of stockholders on May 1, 2000, and the
following matters were voted on at that meeting:
1. The election of the following directors, who will serve until their
respective successors are elected and qualified or until their earlier
death or resignation:
BROKER
DIRECTOR FOR WITHHELD NON-VOTES
Ronnie C. Chan 509,355,753 117,758,845 0
H. Laurance Fuller 622,852,295 4,262,303 0
Christopher B. Galvin 622,711,472 4,403,126 0
Robert W. Galvin 622,661,770 4,452,828 0
Robert L. Growney 622,891,037 4,223,561 0
Anne P. Jones 622,799,776 4,314,822 0
Judy C. Lewent 622,851,980 4,262,618 0
Walter E. Massey 622,733,279 4,381,319 0
Nicholas Negroponte 622,944,660 4,169,938 0
John E. Pepper, Jr. 622,894,246 4,220,352 0
Samuel C. Scott III 622,850,966 4,263,632 0
Gary L. Tooker 622,750,811 4,363,787 0
B. Kenneth West 622,693,943 4,420,655 0
John A. White 622,847,616 4,266,982 0
2. A proposed amendment to the Company's Restated Certificate of
Incorporation, as amended, to increase the number of shares of
authorized common stock of the Company to 4.2 billion shares was
approved by the following vote: For, 592,355,247; Against, 32,786,088;
Abstain, 1,973,263; and Broker Non-Votes, 0.
3. The adoption of the Motorola, Inc. Omnibus Incentive Plan of 2000 was
approved by the following vote: For, 530,407,584; Against, 93,257,270;
Abstain, 3,442,631; and Broker Non-Votes, 7,133.
Item 5 - Other Information.
On February 29, 2000, the Company's Board of Directors declared a 3-for-1
common stock split in the form of a 200% stock dividend, contingent upon
stockholder approval of an increase in the authorized shares of the
Company's common stock from 1.4 billion to 4.2 billion. At their Annual
Meeting on May 1, 2000, the Company's stockholders approved this increase
in the authorized shares of common stock. Accordingly, the stock dividend
will be distributed on June 1, 2000, to stockholders of record on May 15,
2000.
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits
3(i)(a) Certificate of Amendment of Restated Certificate of
Incorporation of Motorola, Inc., filed May 3, 2000.
3(i)(b) Restated Certificate of Incorporation of Motorola, Inc.,
as amended through May 3, 2000.
27 Financial Data Schedule (filed only electronically with the
SEC).
(b) Reports on Form 8-K
The Company filed Current Reports on Form 8-K dated January 5,
2000 (as amended by Amendment No. 1 thereto filed on Form 8-
K/A on March 17, 2000) and March 23, 2000(as amended by
Amendment No. 1 thereto filed on Form 8-K/A on March 24,
2000).
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOTOROLA, INC.
(Registrant)
Date: May 15, 2000 By: /s/Anthony Knapp
Anthony Knapp
Senior Vice President and Controller
(Chief Accounting Officer and Duly
Authorized Officer of the Registrant)
EXHIBIT INDEX
Number Description of Exhibits
3(i)(a) Certificate of Amendment of Restated Certificate of
Incorporation of Motorola, Inc., filed May 3, 2000.
3(i)(b) Restated Certificate of Incorporation of Motorola, Inc.,
as amended through May 3, 2000.
27 Financial Data Schedule (filed only electronically with the SEC)