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 October 2, 1999
---------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number: 1-7221
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MOTOROLA, INC.
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 576-5000
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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 October 2, 1999:
Class Number of Shares
----- ----------------
Common Stock; $3 Par Value 609,093,685
Motorola, Inc. and Subsidiaries
Index
Part I
Financial Information Page
Item 1 Financial Statements
Condensed Consolidated Statements of Operations for the
Three-Month and Nine-Month Periods Ended
October 2, 1999 and September 26, 1998 3
Condensed Consolidated Balance Sheets as of
October 2, 1999 and December 31, 1998 4
Condensed Consolidated Statement of Stockholders'
Equity for the Nine-Month Period Ended October 2, 1999 5
Condensed Consolidated Statements of Cash Flows for the
Nine-Month Periods Ended October 2, 1999 and
September 26, 1998 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 23
Part II
Other Information
Item 1 Legal Proceedings 51
Item 2 Changes in Securities 52
Item 3 Defaults Upon Senior Securities 52
Item 4 Submission of Matters to a Vote of Security Holders 52
Item 5 Other Information 52
Item 6 Exhibits and Reports on Form 8-K 52
Part I - Financial Information
Motorola, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(In millions, except per share amounts)
Three Months Ended Nine Months Ended
------------------------------------
Oct. 2, Sept. 26, Oct. 2, Sept. 27,
1999 1998 1999 1998
------- ------- ------- ------
Net sales $ 7,688 $ 7,152 $22,433 $21,061
------- ------- ------- -------
Costs and expenses
Manufacturing and other
costs of sales 4,922 4,431 13,563 12,876
Selling, general and
administrative expenses 1,196 1,351 3,999 3,901
Restructuring and other charges --- --- --- 1,980
Research & development
expenditures 882 732 2,437 2,157
Depreciation expense 521 537 1,635 1,595
Interest expense, net 37 62 130 153
------ ------ ------ ------
Total costs and expenses 7,558 7,113 21,764 22,662
------ ------ ------ ------
Earnings (loss) before income taxes 130 39 669 (1,601)
Income tax provision (benefit) 39 12 201 (480)
------ ------ ------ -------
Net earnings (loss) $ 91 $ 27 $ 468 $(1,121)
====== ====== ====== =======
Net earnings (loss) per common share
Basic $ .14 $ .05 $ .77 $( 1.87)
====== ====== ====== =======
Diluted $ .14 $ .04 $ .75 $( 1.87)
====== ====== ====== =======
Weighted average common shares
outstanding
Basic 608.2 598.7 604.9 598.0
====== ====== ====== ======
Diluted 624.4 604.5 621.4 598.0
====== ====== ====== ======
Dividends paid per share $ .12 $ .12 $ .36 $ .36
====== ====== ====== ======
See accompanying notes to condensed consolidated financial statements.
Motorola, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In millions)
(Unaudited)
Oct. 2, December 31,
1999 1998
------ ------
Assets
Cash and cash equivalents $ 3,092 $ 1,453
Short-term investments 435 171
Accounts receivable, net 5,195 5,057
Inventories 3,730 3,745
Deferred income taxes 2,809 2,362
Other current assets 754 743
------- -------
Total current assets 16,015 13,531
------- -------
Property, plant and equipment, net 8,843 10,049
Other assets 9,414 5,148
------- -------
Total assets $34,272 $28,728
======= =======
Liabilities and Stockholders' Equity
Notes payable and current portion of
long-term debt $ 1,495 $ 2,909
Accounts payable 2,512 2,305
Accrued liabilities 7,891 6,226
------- -------
Total current liabilities 11,898 11,440
------- -------
Long-term debt 3,114 2,633
Deferred income taxes 2,435 1,188
Other liabilities 1,905 1,245
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely company-guaranteed debentures 484 -----
Stockholders' Equity
Preferred stock, $100 par value issuable
in series ----- -----
Common Stock, $3 par value 1,827 1,804
Additional paid-in capital 2,188 1,894
Retained earnings 8,505 8,254
Non-owner changes to equity 1,916 270
------- -------
Total stockholders' equity 14,436 12,222
------- -------
Total liabilities and stockholders' equity $34,272 $28,728
======= =======
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
Additional to Certain Currency
Paid-In Cost-Based Translation Retained
Capital Investments Adjustments Earnings
- ---------------------------------------------------------------------------
BALANCES AT 12/31/98 $3,698 $ 476 ($206) $8,254
- ---------------------------------------------------------------------------
Net earnings 468
Conversion of zero coupon notes 5
Fair value adjustment to
certain cost-based investments:
Reversal of prior period
adjustment (476)
Recognition of current period
unrecognized gain 2,139
Change in foreign currency
translation adjustments (17)
Stock options exercised
and other 312
Dividends declared
(217)
- ---------------------------------------------------------------------------
BALANCES AT 10/2/99 $4,015 $2,139 ($223) $8,505
- ---------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
Motorola, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In millions)
Nine Months Ended
---------------------
Oct. 2, Sept. 26,
1999 1998
------ ------
Operating
Net earnings (loss) $ 468 $(1,121)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used for) operating activities:
Restructuring and other charges --- 1,980
Depreciation 1,635 1,595
Deferred income taxes (906) (814)
Amortization of debt discount and issue costs 8 7
Gain on disposition of investments and
businesses net of acquisition charges (716) (160)
Change in assets and liabilities, net of
effects of acquisitions and dispositions:
Accounts receivable (59) (203)
Inventories (217) (290)
Other current assets (38) (77)
Accounts payable and accrued liabilities 1,447 (545)
Other assets and liabilities 56 (509)
------ -------
Net cash provided by (used for) operating activities $1,678 $ (137)
Investing
Acquisitions and advances to affiliates $ (389) $ (562)
Proceeds from dispositions of investments
and businesses 2,132 339
Capital expenditures (1,570) (2,395)
Proceeds from dispositions of property, plant and
equipment 383 376
(Purchases) sales of short-term investments (226) 85
------ ------
Net cash provided by (used for) investing activities $ 330 $(2,157)
Financing
(Repayment of) proceeds from commercial paper and
short-term borrowings $(1,412) $ 2,316
Proceeds from issuance of debt 497 12
Repayment of debt (23) (28)
Issuance of common stock 319 21
Issuance of preferred securities of subsidiary
trust 484 ---
Payment of dividends (217) (216)
----- -------
Net cash (used for) provided by financing activities $ (352) $ 2,105
Effect of exchange rate changes on cash and
cash equivalents $ (17) $ 1
------ -------
Net increase(decrease) in cash and cash equivalents $1,639 $ (188)
Cash and cash equivalents, beginning of period $1,453 $ 1,445
Cash and cash equivalents, end of period $3,092 $ 1,257
====== =======
See accompanying notes to condensed consolidated financial statements.
Motorola, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
- -------------------------
The condensed consolidated financial statements as of October 2, 1999 and
for the three-month and nine-month periods ended October 2, 1999 and
September 26, 1998, 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 October 2, 1999 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/A for the year ended December 31,
1998. The results of operations for the three-month and nine-month periods
ended October 2, 1999 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 1999 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. Supplemental Balance Sheet Information
- ------------------------------------------
Inventories consist of the following (in millions):
Oct. 2, Dec. 31,
1999 1998
------- -------
Finished goods $ 1,012 $ 1,033
Work-in-process and production materials 2,718 2,712
------- -------
$ 3,730 $ 3,745
======= =======
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", requires the carrying
value of certain investments to be adjusted to fair value. The Company
recorded an increase to stockholders' equity, other assets and deferred
income taxes of $2.1 billion, $3.5 billion and $1.4 billion as of October
2, 1999; compared to an increase of $476 million, $787 million and $311
million as of December 31, 1998.
3. Supplemental Cash Flow Information
- --------------------------------------
Cash paid for interest during the first nine months of 1999 and 1998 was
$134 million and $203 million, respectively. Cash paid for income taxes
during the first nine months of 1999 and 1998 was $99 million and $315
million, respectively.
4. Earnings (Loss) Per Common Share
- ------------------------------------
The following table presents a reconciliation of the numerators and
denominators of basic and diluted earnings (loss) per common share:
Three Months Ended
------------------
Oct. 2, Sept. 26,
(In millions, except per share amounts) 1999 1998
------ ------
Basic earnings per common share:
Net earnings $ 91 $ 27
Weighted average common shares
outstanding 608.2 598.7
------ -------
Per share amount $ .14 $ .05
====== =======
Diluted earnings per common share:
Net earnings $ 91 $ 27
Add: Interest on zero coupon
notes, net --- ---
------ -------
Net earnings as adjusted $ 91 $ 27
------ -------
Weighted average common shares
outstanding 608.2 598.7
Add: Effect of dilutive securities
Stock options 16.2 5.8
Zero coupon notes --- ---
------ -------
Diluted weighted average common
shares outstanding 624.4 604.5
------ -------
Per share amount $ .14 $ .04
====== =======
In the computation of diluted earnings per common share for the three
months ended October 2, 1999, the assumed conversions of the zero coupon
notes due 2009 and 2013 were excluded because their inclusion would have
been antidilutive.
Nine Months Ended
------------------
Oct. 2, Sept. 26,
(In millions, except per share amounts) 1999 1998
------ ------
Basic earnings (loss) per common share:
Net earnings (loss) $ 468 $(1,121)
Weighted average common shares
outstanding 604.9 598.0
------ =======
Per share amount $ .77 $ (1.87)
====== =======
Diluted earnings (loss) per common share:
Net earnings (loss) $ 468 $(1,121)
Add: Interest on zero coupon
notes, net 1 ---
------ -------
Net earnings (loss) as adjusted $ 469 $(1,121)
------ -------
Weighted average common shares
outstanding 604.9 598.0
Add: Effect of dilutive securities
Stock options 15.3 ---
Zero coupon notes 1.2 ---
------ -------
Diluted weighted average common
shares outstanding 621.4 598.0
------ -------
Per share amount $ .75 $ (1.87)
====== =======
In the computation of diluted earnings per common share for the nine months
ended October 2, 1999, the assumed conversion of the zero coupon notes due
2009 was excluded because their inclusion would have been antidilutive.
5. Reorganization of Businesses
- --------------------------------
In the second quarter of 1998, the Company recorded, as a separate line in
the consolidated statements of operations, 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. Restructuring costs include
costs to consolidate manufacturing operations throughout the Company; to
exit non-strategic, poorly-performing businesses; and to reduce worldwide
employment by 20,000 employees. The following tables display rollforwards
from December 31, 1998, to October 2, 1999, and from June 27, 1998, to
December 31, 1998, of the accruals established during the second quarter of
1998:
1998 Program
- ------------
Accruals Q1 and Q2 Q3 Accruals
At 1999 1999 At
Dec. 31, Amounts Amounts Oct. 2,
1998 Used Used 1999
- ----------------------------------------------------------------
Consolidation of
manufacturing
operations $ 155 $ (81) $ (42) $ 32
Business exits 137 46 (43) 140
Employee separations 187 (76) (20) 91
----- ----- ----- -----
Total restructuring $ 479 $ (111) $ (105) $ 263
- --------------------------------------------------------------
Asset impairments and
other charges 161 (12) (15) 134
- --------------------------------------------------------------
Totals $ 640 $ (123) $ (120) $ 397
- --------------------------------------------------------------
Second
Quarter Accruals
1998 1998 Initial 1998 At
Initial Reclassifi- Charges Amounts Dec. 31,
Charges cations As Adjusted Used 1998
- ---------------------------------------------------------------------------
Consolidation of
manufacturing
operations $ 361 $ (35) $ 326 $ (171) $ 155
Business exits 453 (162) 291 (154) 137
Employee separations 461 197 658 (471) 187
----- ------ ----- ------ -----
Total restructuring $1,275 $ --- $1,275 $ (796) 479
- -------------------------------------------------------------------------
Asset impairments and
other charges 705 --- 705 (544) 161
- -------------------------------------------------------------------------
Totals $1,980 $ --- $1,980 $(1,340) $ 640
- -------------------------------------------------------------------------
Amounts in the 1998 Reclassifications column represent the reallocation of
accruals in 1998 between restructuring categories and not increases in the
initial charges. These reallocations were due to the sale of, rather than
the planned closure of, two of the Company's businesses and the
reclassification of employee severance costs originally accrued for in the
consolidation of manufacturing operations and business exits. These
reallocations were also offset by higher than anticipated severance costs
from special voluntary termination benefits.
The total 1999 amount used of $243 million through October 2, 1999,
reflects approximately $161 million in cash payments and $82 million in
write-offs. The total 1998 amount used of $1.34 billion through December
31, 1998, reflects approximately $600 million in cash payments and $740
million in write-offs. Of the remaining $397 million accrual balance as of
October 2, 1999, the Company expects to make approximately $132 million in
cash payments and $265 million in write-offs.
In July 1998, the Company's communications-related businesses began
realigning into the Communications Enterprise, a structure intended to
enable integrated solutions and improved responsiveness to customers'
needs. This realignment resulted in the formation of new reportable
segments. The following table displays by category the restructuring and
other charges, as adjusted, recorded by each new reportable segment and
included in the segment's restated operating profit (loss) before tax for
the three-month period ended June 27, 1998. The segment amounts also
include the allocation of $55 million in restructuring and other charges
recorded at the corporate level.
Restructuring Charges Other Charges
Asset.
Consol of Business Employee Impair Other
mfg. ops. exits separations -menst Charges Total
- ---------------------------------------------------------------------------
Personal Communications $113 $ 38 $149 $175 $122 $ 597
Network Systems 11 --- 44 --- 104 159
Commercial, Government
and Industrial Systems 18 --- 104 5 --- 127
Semiconductor Products 163 101 282 159 26 731
Other Products 21 152 79 41 73 366
- ---------------------------------------------------------------------------
Total $326 $291 $658 $380 $325 $1,980
Consolidation of manufacturing operations relates to the closing of
production and distribution facilities, selling or disposing of the
machinery and equipment that was no longer needed and, in some cases,
scrapping excess assets that had no realizable value. The remaining $32
million accrual, included in accrued liabilities in the consolidated
balance sheets, as of October 2, 1999, for this restructuring category
primarily relates to the finalization of plant closings in the
Semiconductor Products and Personal Communications segments.
Business exit costs include costs associated with shutting down businesses
that did not fit with the Company's new strategy. In many cases, these
businesses used older technologies that produced non-strategic products.
Year-to-date utilization was $68 million, offset by $71 million of
favorable adjustments related to a Semiconductor Products segment
technology agreement and the sale of the Integrated Electronic Systems
Sector's non-silicon component manufacturing business to CTS Corp. The
remaining $140 million accrual, included in accrued liabilities in the
consolidated balance sheets, as of October 2, 1999, for this restructuring
category primarily relates to contract requirements and contingencies as
part of the sales of the Company's printed circuit board business in the
third quarter of 1998 and non-silicon component manufacturing business in
the first quarter of 1999 and the finalization of remaining activities in
the Semiconductor Products segment.
Employee separation costs represent the accrual of severance based upon the
headcount reductions for the involuntary severance package the Company
offered as part of its restructuring plan. As of October 2, 1999,
approximately 18,900 employees have separated from the Company through a
combination of voluntary and involuntary severance programs. Of these
18,900 separated employees, approximately 12,000 were direct employees, and
6,900 were indirect employees. Direct employees are primarily non-
supervisory production employees, and indirect employees are primarily non-
production employees and production managers. In addition, 4,200 employees
separated from the Company with the sale of the non-silicon component
manufacturing business. These 4,200 people were not paid any severance
because the business was sold to another corporation. The remaining $91
million accrual, included in accrued liabilities in the consolidated
balance sheets, as of October 2, 1999, to cover 1,100 positions for the
employee separations restructuring category relates to severance payments
still to be completed in the cellular and paging businesses in Illinois,
Florida and Texas and in the semiconductor products business in Japan, the
U.K. and Arizona.
The asset impairment costs related to reductions in the carrying values of
assets for businesses that the Company was going to continue to operate
but, in doing an impairment analysis, the carrying values of these assets
were not recoverable from the future cash flows of the businesses. The
Company reduced the carrying values of the related asset balances by
approximately $380 million.
The other charges are not restructuring charges, but rather are other costs
primarily comprised of contract termination costs related to agreements
that were associated with businesses that the Company was no longer making
investments in, losses recorded on cellular infrastructure contracts, and
an in-process research and development write-off of $42 million related to
a transaction from the second quarter of 1998. The remaining $134 million
accrual as of October 2, 1999, relates entirely to these other charges.
As the Company's 1998 comprehensive manufacturing consolidation, cost
reduction and restructuring programs reach their planned completion,
management continues to assess the estimated costs to complete these
programs. Management anticipates completing these programs by December 31,
1999, and believes the remaining accruals are adequate to cover these
costs.
1997 Programs
- -------------
During 1997, the Company established various restructuring accruals for the
purpose of redirecting resources from businesses which have not met
profitability objectives. The related charges totaled $327 million. The
following tables display rollforwards of the accruals established by
business exit for December 31, 1998, to October 2, 1999, and for the years
ended December 31, 1998, and 1997:
Accruals Accruals
At 1999 At
Dec. 31, Amounts Oct. 2,
1998 Adjustments Used 1999
- ---------------------------------------------------------------------------
Q2 1997: Semiconductor Products
Segment
Exit from DRAM market $ 8 $ (3) $ (5) $ ---
- ---------------------------------------------------------------------------
Q3 1997: Other Products Segment
Exit from MacOS-compatible
computer systems business $ 15 $ --- $ (2) $ 13
- ---------------------------------------------------------------------------
Q4 1997: Messaging, Information and
Media Segment
Exit from retail analog
modem business $ 3 $ (3) $ --- $ ---
- ---------------------------------------------------------------------------
Grand total $ 26 $ (6) $ (7) $ 13
- ---------------------------------------------------------------------------
Accruals Accruals
At 1998 At
Dec. 31, Amounts Dec. 31,
1997 Adjustments Used 1998
- ---------------------------------------------------------------------------
Q2 1997: Semiconductor Products
Segment
Exit from DRAM market $ 30 $ (12) $ (10) $ 8
- ---------------------------------------------------------------------------
Q3 1997: Other Products Segment
Exit from MacOS-compatible
computer systems business $ 67 $ (10) $ (42) $ 15
- ---------------------------------------------------------------------------
Q4 1997: Messaging, Information and
Media Segment
Exit from retail analog
modem business $ 62 $ --- $ (59) $ 3
- ---------------------------------------------------------------------------
Grand total $159 $ (22) $(111) $ 26
- ---------------------------------------------------------------------------
Accruals
1997 1997 At
Initial Amounts Dec. 31,
Charges Adjustments Used 1997
- ---------------------------------------------------------------------------
Q2 1997: Semiconductor Products
Segment
Exit from DRAM market $170 $ (9) $(131) $ 30
- ---------------------------------------------------------------------------
Q3 1997: Other Products Segment
Exit from MacOS-compatible
computer systems business $ 95 $ --- $ (28) $ 67
- ---------------------------------------------------------------------------
Q4 1997: Messaging, Information and
Media Segment
Exit from retail analog
modem business $ 62 $ --- $ --- $ 62
- --------------------------------------------------------------------------
Grand total $327 $ (9) $(159) $ 159
- --------------------------------------------------------------------------
In the second quarter of 1997, the Company's Semiconductor Products Segment
announced its decision to phase out its participation in the dynamic random
access memory (DRAM) market. The decision to exit this business was made
primarily because the business did not meet strategic and profitability
objectives, rather than to generate significant future cost savings. As a
result of this decision, the segment incurred a $170 million charge to
write off technology development costs and to provide for the write-down of
manufacturing equipment which could not be retrofitted for other
production. In the fourth quarter of 1997 and in the first quarter of
1998, the segment sold some of this manufacturing equipment to its joint
venture partner and thus reversed into income $9 million and $12 million,
respectively, of accruals no longer needed. The amounts used in 1997
reflect write-offs. The amounts used in 1998 reflect $3 million in cash
payments for exit fees and $7 million in write-offs. The amounts used in
1999 reflect $4 million in cash payments for exit fees and $1 million in
write-offs. The remaining $3 million was reversed into income in the third
quarter of 1999.
In the third quarter of 1997, the Company announced its decision to exit
the MacOS(R)-compatible computer systems business, a business included in
the Other Products Segment. The decision was made in response to a
decision by Apple Computer to limit the introduction of its new technology
and phase out future licenses, rather than to generate significant future
cost savings. As a result of this decision, the Company incurred a $95
million charge primarily for the write-down of inventory and the cost of
terminating contractual commitments. In the second quarter of 1998, the
exposures on these contractual commitments were less than anticipated, thus
resulting in the reversal into income of $10 million. The amounts used in
1997 reflect $3 million in employee severance payments and $25 million in
write-offs. The amounts used in 1998 reflect $3 million in employee
severance payments and $39 million in write-offs. The amounts used in 1999
reflect $2 million in write-offs. The remaining $13 million accrual as of
October 2, 1999, relates to contractual commitments and warranty liability
and may extend past the 1999 year end.
In the fourth quarter of 1997, the Company announced its decision to exit
the retail analog modem business based in Huntsville, AL, and formerly part
of the Messaging, Information and Media segment. The decision was made
primarily because the business was not meeting the Company's strategic and
profitability objectives, rather than to generate significant future cost
savings. As a result of this decision, the segment incurred a $62 million
charge for the write-down of inventory and fixed assets, severance costs
and certain other costs relating to the realignment process. The amounts
used in 1998 reflect $37 million in employee severance payments and $22
million in write-offs. The remaining $3 million accrual as of December 31,
1998, was reversed into income in the first quarter of 1999.
The results of operations of each of these exited businesses were not
material to the Company's consolidated financial statements.
6. Comprehensive Earnings (Loss)
- ---------------------------------
Comprehensive earnings (loss) for the three-month periods ended October 2,
1999 and September 26, 1998 were $745 million and $(234) million,
respectively. Comprehensive earnings (loss) for the nine-month periods
ended October 2, 1999, and September 26, 1998, were $2.1 billion and $(1.3)
billion, respectively. The unrecognized gain on cost-based investments of
$2.1 billion properly excludes a reclassification adjustment of $51.7
million, net of tax, related to the sale of securities.
7. Finance Subsidiary Debt and Trust Originated Preferred Securities(SM)
- -------------------------------------------------------------------------
On June 21, 1999, the Company's finance subsidiary sold an aggregate face
principal amount at maturity of $500 million of 6.75% Guaranteed Bonds due
June 21, 2004, to non-U.S. persons. The Bonds were sold outside of the
United States in reliance on Regulation S under the Securities Act of 1933,
as amended. The net proceeds to the finance subsidiary from the issuance
and sale of the bonds were $497 million and were used to reduce its short-
term indebtedness. Shortly after the sale, the finance subsidiary entered
into interest rate swaps to change the characteristics of the interest rate
payments on the bonds from fixed-rate payments to short-term LIBOR based
variable rate payments in order to match the funding of its underlying
assets.
In February 1999, Motorola Capital Trust I, a Delaware statutory business
trust and wholly-owned subsidiary of the Company (the "Trust"), sold Trust
Originated Preferred Securities(SM) ("TOPrS") to the public at an aggregate
offering price of $500 million. The Trust used the proceeds from this
sale, together with the proceeds from its sale of common stock to the
Company, to buy a series of 6.68% Deferrable Interest Junior Subordinated
Debentures due March 31, 2039 ("Subordinated Debentures") from the Company
with the same payment terms as the TOPrS. The sole asset of the Trust is
the Subordinated Debentures. The TOPrS are shown as "Company-obligated
mandatorily redeemable preferred securities of subsidiary trust holding
solely company-guaranteed debentures" in the Company's consolidated
financial statements.
(SM) "Trust Originated Preferred Securities" and "TOPrS" are service marks
of Merrill Lynch & Co., Inc.
8. Segment Information
- -----------------------
Beginning in the first quarter of 1999, the Company changed the operating
segments it uses for financial reporting purposes as a result of
organizational changes implemented in its communications businesses.
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
October 2, 1999 and September 26, 1998.
Three Months Ended
Oct. 2, Sept. 26, %
1999 1998 Change
------ ------ ------
Segment Sales:
- -------------
Personal Communications Segment $3,084 $2,285 35
Network Systems Segment 1,594 1,917 (17)
Commercial, Govt. and Industrial
Systems Segment 1,020 981 4
Semiconductor Products Segment 1,708 1,773 (4)
Other Products Segment 918 840 9
Adjustments & Eliminations (636) (644) (1)
------ ------
Segment Totals $7,688 $7,152 7
====== ======
% Of % Of
Sales Sales
----- -----
Segment Operating Profit
(Loss) Before Taxes:
- -------------------
Personal Communications Segment $ 133 4 $ 9 ---
Network Systems Segment (639) (40) 337 18
Commercial, Govt. and Industrial
Systems Segment 293 29 91 9
Semiconductor Products Segment 406 24 (188) (11)
Other Products Segment (142) (15) (182) (22)
Adjustments & Eliminations 1 -- (10) 2
------ -------
Segment Totals 52 1 57 1
General Corporate 78 (18)
------ ------
Earnings (Loss) Before Income Taxes $ 130 2 $ 39 1
====== =======
Summarized below are the Company's segment sales and operating profit
(loss) before taxes by new reportable segment for the nine months ended
October 2, 1999 and September 26, 1998.
Nine Months Ended
Oct. 2, Sept. 26, %
1999 1998 Change
------ ------ ------
Segment Sales:
- -------------
Personal Communications Segment $8,474 $7,083 20
Network Systems Segment 4,804 5,050 (5)
Commercial, Govt. and Industrial
Systems Segment 2,860 2,931 (2)
Semiconductor Products Segment 5,594 5,414 3
Other Products Segment 2,675 2,607 3
Adjustments & Eliminations (1,974) (2,024) (3)
------- -------
Segment Totals $22,433 $21,061 7
======= =======
% Of % Of
Sales Sales
----- -----
Segment Operating Profit
(Loss) Before Taxes:
- -------------------
Personal Communications Segment $ 341 4 $ (425) (6)
Network Systems Segment (277) (6) 543 11
Commercial, Govt. and Industrial
Systems Segment 439 15 222 8
Semiconductor Products Segment 533 10 (1,145) (21)
Other Products Segment (433) (16) (707) (27)
Adjustments & Eliminations (6) -- (17) 1
------ ------
Segment Totals 597 3 (1,529) (7)
General Corporate 72 (72)
------ -------
Earnings (Loss) Before Income Taxes $ 669 3 $(1,601) (8)
====== =======
9. Commitments and Contingencies
- ---------------------------------
Iridium
- -------
During the third quarter of 1999, Iridium LLC and its operating subsidiary,
Iridium Operating LLC (collectively referred to as Iridium), went into a
reorganization proceeding under Chapter 11 of the U.S. Federal Bankruptcy
Code and are currently operating as debtors-in-possession under that
Chapter.
At October 2, 1999, the Company owned, directly and indirectly,
approximately 18% of the equity interests in Iridium and a significant
portion of a series of Iridium bonds. The Company also holds equity
investments and notes receivable, in several Iridium gateway companies in
the amount of $47 million. The Company also holds accounts receivable from
Iridium in the amount of $661 million.
The Company recorded a special charge in the third quarter of 1999 of $994
million (i) to increase its reserve related to its financial exposure to
the Iridium project to a level consistent with its expectation of a Chapter
11 financial restructuring of Iridium and (ii) to write down the remaining
value of the Iridium bonds it holds. This increase in the reserve
primarily relates to accounts receivable and inventory associated with the
Iridium project.
The book value of the Company's equity investments in several Iridium
gateway companies is included in Other Assets in the condensed consolidated
balance sheets. The Company accounts for its investment in Iridium under
the equity method of accounting due to its financial influence on Iridium
in the form of guarantees of Iridium's indebtedness, its contract with
Iridium for the operation and maintenance of the global communications
system and the other financial commitments more fully discussed below.
The following table summarizes the Company's equity and bond investments in
Iridium and investments in the Iridium gateway companies as of October 2,
1999, and the amounts owed to the Company by Iridium under several
contracts as of October 2, 1999, excluding reserves:
Investments:
Equity investment in Iridium $ ---
Bond investment in Iridium ---
Investments in and notes receivables
from Iridium gateway companies 47
---
Total $ 47
=====
Accounts Receivable:
Operations & Maintenance contract
Deferred amount due to Company $ 400
Other amounts due to Company 130
-----
$ 530
Other contracts 131
-----
Total $ 661
=====
The following table summarizes, as of October 2, 1999, (i) the Company's
bank guarantees and other financial commitments and (ii) the contractual
commitments to Iridium and other obligations, excluding reserves:
Bank Guarantees and Other Financial Commitments:
Senior Secured Credit Agreement capital call $ 50
Senior Guaranteed Credit Agreement $ 750
Conditional Commitment to Provide Guarantee See Below
Contractual Commitments and Other Obligations:
Obligations to subcontractors $ 80
Assets at risk and other estimated potential
contractual obligations $ 722
Iridium's bank facilities are an $800 million Senior Secured Credit
Agreement (the "Secured Credit Agreement") and a $750 million Senior
Guaranteed Credit Agreement (the "Guaranteed Credit Agreement"). The
Guaranteed Credit Agreement is guaranteed by the Company. As of October 2,
1999, Iridium had borrowed all of the funds available under the Guaranteed
Credit Agreement.
Iridium is in default under the Guaranteed Credit Agreement and the Secured
Credit Agreement. Iridium is also in default on approximately $1.4 billion
of public debt.
Under a waiver to the Guaranteed Credit Agreement, the banks providing
loans under that Agreement agreed to waive certain events of default so
long as the Company paid the interest on those loans and monthly fees.
Although the waiver could have stayed in effect through December 15, 1999,
on November 15, 1999, the Company paid the banks approximately $743
million. With this payment, the Company believes it has satisfied all of
its guarantee obligations under this Agreement. By satisfying its
guarantee obligations, the Company avoided paying interest and substantial
monthly fees to the banks.
Subject to the automatic stay provisions of Chapter 11, the lenders under
the Secured Credit Agreement could accelerate Iridium's obligations under
the Secured Credit Agreement and seek to foreclose on their security
interests in substantially all of Iridium's assets. Iridium is subject to
an order which permits it to make only a limited use of some of the assets
subject to these security interests. The order generally permits Iridium,
during the term of the order, to pay only specified budgeted amounts and
prohibits Iridium from making any payments to Motorola. The order is to
remain effective through December 15, 1999. However, Iridium's ability to
make use of these assets automatically terminates earlier if specified
events occur, such as Motorola's failure to provide material services under
the operations and maintenance contract.
The lenders under the Secured Credit Agreement have 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.
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 is 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 is obligated to provide them with this $300 million
guarantee. The Company believes that it is not obligated to do so.
Iridium has also stated that it believes it was not obligated to have the
Company provide this $300 million guarantee to these lenders.
The Company has several contracts with Iridium, primarily for the operation
and maintenance of the global personal communications system. The Company
has stopped recognizing revenue on the operations and maintenance contract
with Iridium at this time. The Company agreed to permit Iridium to defer
up to $400 million of amounts owed under its operations and maintenance
contract with the Company. The Company is currently performing under its
operations and maintenance contract with Iridium without being paid
concurrently, even though the Company has not agreed to waive its right to
receive payment. As of October 2, 1999, the Company had accounts
receivable from Iridium relating to the operations and maintenance contract
of $530 million.
The Company has subcontracts for portions of the system, for which it
generally remains obligated in the amount of $80 million as of October 2,
1999. In addition, the Company has investments in assets related to these
contracts which are at risk, such as inventory, manufacturing equipment and
buildings, as well as other potential obligations in connection with these
contracts, the value of which the Company estimates to be approximately
$722 million as of October 2, 1999. While the Company expects to be able
to use a portion of these assets in connection with other programs, the
Company would still incur substantial costs in winding down operations
related to the Iridium program.
The repayment by Iridium of the contractually deferred amounts owed under
the operations and maintenance contract with the Company is subordinated to
repayment of Iridium's Secured Credit Agreement, as is the repayment to the
Company by Iridium of any amounts the Company may pay to the lenders under
its guarantees and certain other obligations owed to the Company. As a
result of the Chapter 11 filing, Iridium is unlikely to be able to repay in
full the Company amounts previously deferred under its various contracts
with the Company and is unlikely to be able to pay amounts which have since
accrued and not been paid or which may become due under such contracts in
the future. The Company's third-quarter reserve, in part, provided for the
uncollectibility of these accounts receivable from Iridium.
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.
The following table presents the Company's equity losses and development
and commercialization provisions related to Iridium for the three months
ended October 2, 1999; July 3, 1999; and April 3, 1999; and for the twelve
months ended December 31, 1998 and the ending balances for the development
and commercialization reserves as of October 2, 1999; July 3, 1999; April
3, 1999; and December 31, 1998:
Oct. 2, Jul. 3, Apr. 3, Dec. 31,
Period Ended 1999 1999 1999 1998
Company's share of Iridium's net
loss applicable to Class 1
interests $ --- $ --- $ 50 $ 265
Bond investment write-down $ 31 $ 126 $ --- $ ---
- ---------------------------------------------------------------------------
Development and Commercialization
provisions:
Special charges $ 963 $ --- $ 122 $ ---
Other charges $ 14 36 37 95
------ ----- ------ -----
Total provisions $ 977 $ 36 $ 159 $ 95
Development and Commercialization
reserves $1,821 $ 844 $ 808 $ 649
The Company's share of Iridium's net loss was included in selling, general
and administrative expenses in the condensed consolidated statements of
operations.
The development and commercialization provisions for the three months ended
October 2, 1999, July 3, 1999 and April 3, 1999, and for the twelve months
ended December 31, 1998 are shown in the above table. All such amounts
were included in selling, general and administrative expenses, except that
$321 million, relating to inventory write-downs, was included in
manufacturing and other costs of sales in the condensed consolidated
statements of operations for the three months ended October 2, 1999, $31
million relating to operations and maintenance contract reserves was
included in manufacturing and other costs of sales in the consolidated
statements of operations for the three months ended July 3, 1999 and $81
million of margin reserves relating to product feasibility was included in
manufacturing and other costs of sales in the condensed consolidated
statements of operations for the twelve months ended December 31, 1998.
The development and commercialization reserve as of October 2, 1999 was
$1.8 billion of which $1.4 billion was included in accrued liabilities and
$422 million was included in other liabilities in the condensed
consolidated balance sheets. The reserve as of July 3, 1999, was $844
million, of which $482 million was included in accrued liabilities and $362
million was included in other liabilities in the condensed consolidated
balance sheets. The reserve as of April 3, 1999 was $808 million of which
$506 million was included in accrued liabilities and $302 million was
included in other liabilities on the condensed consolidated balance sheets.
The reserve as of December 31, 1998 was $649 million of which $529 million
was included in accrued liabilities and $120 million was included in other
liabilities in the condensed consolidated balance sheets.
Additionally in the third quarter of 1999, the Company wrote down its
remaining investment in Iridium bonds. The bond write-down of $31 million
is reflected in selling, general and administrative expenses in the
condensed consolidated statements of operations. The bond write-down of
$157 million is reflected as a contra-asset, in other assets, in the
condensed consolidated balance sheets as of October 2, 1999.
The loss of the value of its investment in Iridium gateway companies, the
Company having to perform under its Iridium guarantee obligations, other
costs or liabilities related to the Company's relationship with Iridium,
and the winding down of operations related to the Iridium program,
collectively, could have a material negative impact on the Company's
consolidated financial position and results of operations.
Nextel
At October 2, 1999, the Company's off-balance sheet commitment to Nextel
Communications, Inc. ("Nextel") for equipment financing aggregated $542
million, of which $259 million was outstanding. The Company's other off-
balance sheet third party financial guarantees, excluding the Iridium LLC
guarantee which is separately discussed above, aggregated $433 million, of
which $393 million was outstanding. The aggregate off-balance sheet
amounts represent the maximum available and may not be completely utilized.
10. Acquisitions and Dispositions of Businesses
- ------------------------------------------------
The following table summarizes the major business dispositions and
acquisitions involving acquired in-process research and development write-
offs that the Company made during the third quarter of 1999:
In-Process
Research and
Form of Development
(in millions) Consideration Consideration Charge
- --------------------------------------------------------------------------
Dispositions:
Semiconductor Components
Group $1,600 Cash Not Applicable
Notes
Common Stock
North American Antenna
Sites $ 255 Cash Not Applicable
Common Stock
Acquisitions:
Metrowerks $ 98 Cash $35
Bosch Telecom, Inc./
Spectrapoint $ 45 Cash $14
- ---------------------------------------------------------------------------
Semiconductor Components Group
- ------------------------------
In August, 1999, the Company completed the sale of the Semiconductor
Components Group (SCG). The Company received approximately $1.6 billion in
cash, notes and approximately 9 percent of the stock of the new company.
The sale resulted in a $362 million gain included in selling, general and
administrative expenses in the condensed consolidated statements of
operations. Through the date of disposition, SCG had 1999 net sales and
operating profits of approximately $894 million and $113 million,
respectively.
North American Antenna Sites
- ----------------------------
In August, 1999, the Company completed the sale of its North American
antenna site business to Pinnacle Towers for $245 million in cash and $10
million in common stock of Pinnacle Holdings. The sale resulted in a $198
million gain included in selling, general and administrative expenses in
the condensed consolidated statements of operations. The transaction
involved all the assets and operations of the business, which included a
portfolio of approximately 1,850 wireless communications facilities located
throughout the U.S. and Canada that were owned, managed or leased by the
Company. Through the date of disposition, this business had 1999 net sales
and operating profits of approximately $56 million and $8 million,
respectively.
Metrowerks
- ----------
In September and October of 1999, the Company purchased all of the
outstanding common shares of Metrowerks Inc. for approximately $98 million.
In connection with this transaction, the Company recorded an acquired in
process research and development charge of approximately $35 million which
was included in selling, general and administrative expenses in the
condensed consolidated statements of operations. The acquisition was
accounted for under the purchase method and accordingly, the results of
operations for Metrowerks have been included in the Company's consolidated
financial statements since the date of acquisition. The pro forma effects
of this acquisition on the Company's financial statements were not
material.
Metrowerks designs, develops, markets, and supports professional software
development tools used by programmers to create software applications. Its
flagship product line is called CodeWarrior(R). A total of 32 projects
were in process at the acquisition date. These projects were related to
the development of software development tools for the desktop and embedded
markets. 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 2000, with projected
research and development costs-to-complete of approximately $12 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%. This rate reflects both
technological and market risk as well as the time value of money.
Bosch Telecom, Inc./Spectrapoint
In July, 1999, the Company and Cisco Systems, Inc. purchased the fixed
wireless assets of Bosch Telecom, Inc. and created a new, jointly owned
company called SpectraPoint Wireless. The Company paid approximately $45
million in cash for its 81% ownership and recorded an acquired in-process
research and development charge of $14 million, which was included in
selling, general and administrative expenses in the condensed consolidated
statements of operations. The Company has included the results of
operations of SpectraPoint Wireless in its consolidated financial
statements since the date of formation. The pro forma effects of this
acquisition on the Company's financial statements were not material.
Spectrapoint Wireless is in the process of developing a point-to-multipoint
(PMP) broadband wireless access system using 28 GHz radio frequency (RF)
equipment. Combining RF equipment with advanced ATM processing and modem
technology yields a flexible system that delivers network services to LMDS
customers. The system couples a shared broadband downstream carrier with
dedicated Frequency Division Multiple Access (FDMA) carriers operating in
the range of 2-10 Mbps upstream. The system development is approximately
70% complete. The 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 second quarter of 2000, with projected
research and development costs-to-complete of approximately $14 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 20%. This rate reflects both
technological and market risk as well as the time value of money and is
higher than the market-derived rate for similar companies.
11. Proposed Merger of General Instrument Corporation with Motorola, Inc.
- -------------------------------------------------------------------------
On September 14, 1999, the Company entered into a definitive agreement for
the merger of General Instrument Corporation with and into the Company.
The merger agreement, which is subject to customary regulatory and
shareholder approvals, provides that each share of General Instrument would
be exchanged for 0.575 shares of the Company's common stock. The Company
expects to account for the merger under the pooling-of-interests method and
expects to complete the transaction in the first quarter of 2000.
Motorola, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
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/A for the
year ended December 31, 1998. 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:
- ---------------------
Sales were $7.7 billion in the third quarter of 1999, up 7 percent from
$7.2 billion a year earlier. Sales were $22.4 billion in the first nine
months of 1999, up 7 percent from $21.1 billion a year earlier. Third-
quarter 1999 earnings were $91 million, or 14 cents per share, compared
with third-quarter 1998 earnings of $27 million, or 4 cents per share.
Nine-month 1999 earnings were $468 million, or 75 cents per share, compared
with a loss of $1.1 billion, or $1.87 per share, in the first nine months
of 1998.
Net margin on sales was 1.2 percent in the third quarter of 1999 compared
with 0.4 percent a year earlier. Net margin on sales for the first nine
months of 1999 was 2.1 percent compared with a negative 5.3 percent in the
first nine months of 1998.
Results of Operations excluding special items
- ---------------------------------------------
Excluding special items, third-quarter 1999 earnings were $332 million, or
53 cents per share, compared with third-quarter 1998 earnings of $40
million, or 7 cents per share. Nine-month 1999 earnings were $782 million,
or $1.26 per share, compared with $188 million, or 31 cents per share, in
the first nine months of 1998.
Excluding special items, net margin on sales would have been 4.3 percent
for the third quarter of 1999 compared with 0.6 percent for the third
quarter of 1998. Net margin on sales for the first nine months of 1999
would have been 3.5 percent compared with 0.9 percent in the first nine
months of 1998.
In the third quarter of 1999, the Company recorded a net special charge of
$344 million pre-tax, or 39 cents per share after-tax. Included in this
net special charge were the following items:
Iridium related charge $ 994
In-process research and
development write-off 49
Gains from the sale of
investments and businesses (699)
-----
Net special charge $ 344
=====
The in-process research and development write-off, the gains from the sale
of investments and businesses, and $673 million of the $994 million Iridium
related charge are included in selling, general and administrative expenses
in the condensed consolidated statements of operations. The remaining $321
million of the Iridium related charge is included in manufacturing and
other costs of sales.
In the third quarter of 1998, the Company recorded a net special charge of
$18 million pre-tax, or 3 cents per share after-tax. Included in this net
special charge were the following items:
In-process research and
development write-off $ 109
Gains from the sale of
investments and businesses (91)
-----
Net special charge $ 18
=====
The net special charge is included in selling, general and administrative
expenses in the condensed consolidated statements of operations.
In the first nine months of 1999, the Company recorded a net special charge
of $448 million pre-tax, or 72 cents per share after-tax. Included in this
net special charge were the following items:
Iridium related charge $1,242
In-process research and
development write-off 49
Gains from the sale of
investments and businesses (843)
------
Net special charge $ 448
======
The net special charge is included in selling, general and administrative
expenses in the condensed consolidated statements of operations with the
exception of $321 million of the Iridium related charge which is included
in manufacturing and other costs of sales.
In the first nine months of 1998, the Company recorded a net special charge
of $1.9 billion pre-tax, or $2.19 per share after-tax. Included in this
net special charge were the following items:
Restructuring and other
charges $1,980
In-process research and
development write-off 109
Miscellaneous charges 29
Gains from the sale of
investments and businesses (249)
------
Net special charge $1,869
======
The restructuring and other charges of $1.98 billion are recorded as a
separate line in the condensed consolidated statements of operations. The
in-process research and development write-off, miscellaneous charges, and
gains from the sale of investments and businesses are included in selling,
general and administrative expenses.
Results of Operations for continuing businesses excluding special items
- -----------------------------------------------------------------------
The Company has sold several of its businesses since the beginning of 1998,
of which the sale of the Semiconductor Components Group was the largest
transaction. Excluding the results of these businesses and special items,
sales were $7.6 billion in the third quarter of 1999, up 12 percent from
$6.7 billion a year earlier. Sales were $21.5 billion in the first nine
months of 1999, up 9 percent from $19.7 billion a year earlier. Third-
quarter 1999 earnings were $316 million, or 51 cents per share, compared
with third-quarter 1998 earnings of $45 million, or 7 cents per share.
Nine-month 1999 earnings were $697 million, or $1.12 per share, compared
with $174 million, or 29 cents per share, in the first nine months of 1998.
Excluding the results of these businesses and special items, net margin on
sales was 4.2 percent in the third quarter of 1999 compared with 0.7
percent a year earlier. Net margin on sales for the first nine months of
1999 was 3.2 percent compared with 0.9 percent in the first nine months of
1998.
1998 Restructuring Program
- --------------------------
In the second quarter of 1998, the Company recorded, as a separate line in
the consolidated statements of operations, 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. Restructuring costs include
costs to consolidate manufacturing operations throughout the Company; to
exit non-strategic, poorly-performing businesses; and to reduce worldwide
employment by 20,000 employees. The following tables display rollforwards
from December 31, 1998, to October 2, 1999, and from June 27, 1998, to
December 31, 1998, of the accruals established during the second quarter of
1998:
Accruals Q1 and Q2 Q3 Accruals
At 1999 1999 At
Dec. 31, Amounts Amounts Oct. 2,
1998 Used Used 1999
- ------------------------------------------------------------------
Consolidation of
manufacturing
operations $ 155 $ (81) $ (42) $ 32
Business exits 137 46 (43) 140
Employee separations 187 (76) (20) 91
----- ----- ----- -----
Total restructuring $ 479 $ (111) $ (105) $ 263
- --------------------------------------------------------------
Asset impairments and
other charges 161 (12) (15) 134
- --------------------------------------------------------------
Totals $ 640 $ (123) $ (120) $ 397
- --------------------------------------------------------------
Second
Quarter Accruals
1998 1998 Initial 1998 At
Initial Reclassifi- Charges Amounts Dec. 31,
Charges cations As Adjusted Used 1998
- ---------------------------------------------------------------------------
Consolidation of
manufacturing
operations $ 361 $ (35) $ 326 $ (171) $ 155
Business exits 453 (162) 291 (154) 137
Employee separations 461 197 658 (471) 187
----- ------ ----- ------ -----
Total restructuring $1,275 $ --- $1,275 $ (796) 479
- -------------------------------------------------------------------------
Asset impairments and
other charges 705 --- 705 (544) 161
- -------------------------------------------------------------------------
Totals $1,980 $ --- $1,980 $(1,340) $ 640
- -------------------------------------------------------------------------
Amounts in the 1998 Reclassifications column represent the reallocation of
accruals in 1998 between restructuring categories and not increases in the
initial charges. These reallocations were due to the sale of, rather than
the planned closure of, two of the Company's businesses and the
reclassification of employee severance costs originally accrued for in the
consolidation of manufacturing operations and business exits. These
reallocations were also offset by higher than anticipated severance costs
from special voluntary termination benefits.
The total 1999 amount used of $243 million through October 2, 1999,
reflects approximately $161 million in cash payments and $82 million in
write-offs. The total 1998 amount used of $1.34 billion through December
31, 1998, reflects approximately $600 million in cash payments and $740
million in write-offs. Of the remaining $397 million accrual balance as of
October 2, 1999, the Company expects to make approximately $132 million in
cash payments and $265 million in write-offs.
Consolidation of manufacturing operations relates to the closing of
production and distribution facilities, selling or disposing of the
machinery and equipment that was no longer needed and, in some cases,
scrapping excess assets that had no realizable value. The remaining $32
million accrual, included in accrued liabilities in the consolidated
balance sheets, as of October 2, 1999, for this restructuring category
primarily relates to the finalization of plant closings in the
Semiconductor Products and Personal Communications segments.
Business exit costs include costs associated with shutting down businesses
that did not fit with the Company's new strategy. In many cases, these
businesses used older technologies that produced non-strategic products.
Year-to-date utilization was $68 million, offset by $71 million of
favorable adjustments related to a Semiconductor Products segment
technology agreement and the sale of the Integrated Electronic Systems
Sector's non-silicon component manufacturing business to CTS Corp. The
remaining $140 million accrual, included in accrued liabilities in the
consolidated balance sheets, as of October 2, 1999, for this restructuring
category primarily relates to contract requirements and contingencies as
part of the sales of the Company's printed circuit board business in the
third quarter of 1998 and non-silicon component manufacturing business in
the first quarter of 1999 and the finalization of remaining activities in
the Semiconductor Products segment.
Employee separation costs represent the accrual of severance based upon the
headcount reductions for the involuntary severance package the Company
offered as part of its restructuring plan. As of October 2, 1999,
approximately 18,900 employees have separated from the Company through a
combination of voluntary and involuntary severance programs. Of these
18,900 separated employees, approximately 12,000 were direct employees, and
6,900 were indirect employees. Direct employees are primarily non-
supervisory production employees, and indirect employees are primarily non-
production employees and production managers. In addition, 4,200 employees
separated from the Company with the sale of the non-silicon component
manufacturing business. These 4,200 people were not paid any severance
because the business was sold to another corporation. The remaining $91
million accrual, included in accrued liabilities in the consolidated
balance sheets, as of October 2, 1999, to cover 1,100 positions for the
employee separations restructuring category relates to severance payments
still to be completed in the cellular and paging businesses in Illinois,
Florida and Texas and in the semiconductor products business in Japan, the
U.K. and Arizona.
The asset impairment costs related to reductions in the carrying values of
assets for businesses that the Company was going to continue to operate
but, in doing an impairment analysis, the carrying values of these assets
were not recoverable from the future cash flows of the businesses. The
Company reduced the carrying values of the related asset balances by
approximately $380 million.
The other charges are not restructuring charges, but rather are other costs
primarily comprised of contract termination costs related to agreements
that were associated with businesses that the Company was no longer making
investments in, losses recorded on cellular infrastructure contracts, and
an in-process research and development write-off of $42 million related to
a transaction from the second quarter of 1998. The remaining $134 million
accrual as of October 2, 1999, relates entirely to these other charges.
As the Company's 1998 comprehensive manufacturing consolidation, cost
reduction and restructuring programs reach their planned completion, the
Company achieved its goal of an approximately $1 billion annual rate of
profit improvement. Manufacturing cost reduction programs included reducing
the number of employees, consolidating manufacturing operations and selling
underutilized manufacturing capacity. Selling, general and administrative
cost reduction efforts included reducing the number of employees and
divesting non-strategic, poorly performing businesses. The Company reduced
interest expense and improved cash flows by reducing payroll and other
operating expenses and by generating cash from the sale of businesses and
facilities. Management continues to assess the estimated costs to complete
these programs. Management anticipates completing these programs by
December 31, 1999, and believes the remaining accruals are adequate to
cover these costs.
1997 Programs
- -------------
During 1997, the Company established various restructuring accruals for the
purpose of redirecting resources from businesses which have not met
profitability objectives. The related charges totaled $327 million. The
following tables display rollforwards of the accruals established by
business exit for December 31, 1998, to October 2, 1999, and for the years
ended December 31, 1998, and 1997:
Accruals Accruals
At 1999 At
Dec. 31, Amounts Oct. 2,
1998 Adjustments Used 1999
- ---------------------------------------------------------------------------
Q2 1997: Semiconductor Products
Segment
Exit from DRAM market $ 8 $ (3) $ (5) $ ---
- ---------------------------------------------------------------------------
Q3 1997: Other Products Segment
Exit from MacOS-compatible
computer systems business $ 15 $ --- $ (2) $ 13
- ---------------------------------------------------------------------------
Q4 1997: Messaging, Information and
Media Segment
Exit from retail analog
modem business $ 3 $ (3) $ --- $ ---
- ---------------------------------------------------------------------------
Grand total $ 26 $ (6) $ (7) $ 13
Accruals Accruals
At 1998 At
Dec. 31, Amounts Dec. 31,
1997 Adjustments Used 1998
- ---------------------------------------------------------------------------
Q2 1997: Semiconductor Products
Segment
Exit from DRAM market $ 30 $ (12) $ (10) $ 8
- ---------------------------------------------------------------------------
Q3 1997: Other Products Segment
Exit from MacOS-compatible
computer systems business $ 67 $ (10) $ (42) $ 15
- ---------------------------------------------------------------------------
Q4 1997: Messaging, Information and
Media Segment
Exit from retail analog
modem business $ 62 $ --- $ (59) $ 3
- ---------------------------------------------------------------------------
Grand total $159 $ (22) $(111) $ 26
- ---------------------------------------------------------------------------
Accruals
1997 1997 At
Initial Amounts Dec. 31,
Charges Adjustments Used 1997
- ---------------------------------------------------------------------------
Q2 1997: Semiconductor Products
Segment
Exit from DRAM market $170 $ (9) $(131) $ 30
Q3 1997: Other Products Segment
Exit from MacOS-compatible
computer systems business $ 95 $ --- $ (28) $ 67
- ---------------------------------------------------------------------------
Q4 1997: Messaging, Information and
Media Segment
Exit from retail analog
modem business $ 62 $ --- $ --- $ 62
- ---------------------------------------------------------------------------
Grand total $327 $ (9) $(159) $ 159
- ---------------------------------------------------------------------------
In the second quarter of 1997, the Company's Semiconductor Products Segment
announced its decision to phase out its participation in the dynamic random
access memory (DRAM) market. The decision to exit this business was made
primarily because the business did not meet strategic and profitability
objectives, rather than to generate significant future cost savings. As a
result of this decision, the segment incurred a $170 million charge to
write off technology development costs and to provide for the write-down of
manufacturing equipment which could not be retrofitted for other
production. In the fourth quarter of 1997 and in the first quarter of
1998, the segment sold some of this manufacturing equipment to its joint
venture partner and thus reversed into income $9 million and $12 million,
respectively, of accruals no longer needed. The amounts used in 1997
reflect write-offs. The amounts used in 1998 reflect $3 million in cash
payments for exit fees and $7 million in write-offs. The amounts used in
1999 reflect $4 million in cash payments for exit fees and $1 million in
write-offs. The remaining $3 million accrual as of July 3, 1999, was
reversed into income in the third quarter of 1999.
In the third quarter of 1997, the Company announced its decision to exit
the MacOS(R)-compatible computer systems business, a business included in
the Other Products Segment. The decision was made in response to a
decision by Apple Computer to limit the introduction of its new technology
and phase out future licenses, rather than to generate significant future
cost savings. As a result of this decision, the Company incurred a $95
million charge primarily for the write-down of inventory and the cost of
terminating contractual commitments. In the second quarter of 1998, the
exposures on these contractual commitments were less than anticipated, thus
resulting in the reversal into income of $10 million. The amounts used in
1997 reflect $3 million in employee severance payments and $25 million in
write-offs. The amounts used in 1998 reflect $3 million in employee
severance payments and $39 million in write-offs. The amounts used in 1999
reflect $2 million in write-offs. The remaining $13 million accrual as of
October 2, 1999, relates to contractual commitments and warranty liability
and may extend past the 1999 year end.
In the fourth quarter of 1997, the Company announced its decision to exit
the retail analog modem business based in Huntsville, AL, and formerly part
of the Messaging, Information and Media segment. The decision was made
primarily because the business was not meeting the Company's strategic and
profitability objectives, rather than to generate significant future cost
savings. As a result of this decision, the segment incurred a $62 million
charge for the write-down of inventory and fixed assets, severance costs
and certain other costs relating to the realignment process. The amounts
used in 1998 reflect $37 million in employee severance payments and $22
million in write-offs. The remaining $3 million accrual as of December 31,
1998, was reversed into income in the first quarter of 1999.
The results of operations of each of these exited businesses were not
material to the Company's consolidated financial statements.
A discussion of the Company's 1998 and 1997 restructuring programs is also
detailed in Note 5 to the condensed consolidated financial statements.
Results of the Company's major operations, which include the effect of the
sales of various businesses and special items, for the third quarter of
1999 compared with the third quarter of 1998 are as follows:
Personal Communications Segment
- -------------------------------
Three Months Ended
Oct. 2, Sept. 26, %
(in millions) 1999 1998 Change
- --------------------------------------------------------
Orders $4,332 $2,589 67%
Segment sales $3,084 $2,285 35%
Operating profit before tax $133 $ 9 1,378%
Net special items:
credits(charges) $ (7) $ 64
Segment sales rose 35 percent to $3.1 billion, and orders increased 67
percent to $4.3 billion. Operating profits increased to $133 million from
$9 million in the year earlier quarter primarily due to the increase in
sales.
Excluding special items, operating profits rose to $140 million, compared
to a $55 million loss a year ago primarily due to the increase in sales.
For ongoing businesses, sales rose 37 percent to $3.1 billion from $2.3
billion, and orders were unchanged from the data shown in the table above.
Operating profits for ongoing businesses and excluding special items were
unchanged from the data shown in the table above.
In the wireless phone business, which includes iDEN(R) phones, versus the
year ago quarter, (i) orders increased approximately 90%; (ii) sales
increased approximately 50%; and (iii) operating profits improved very
significantly. Orders were up significantly in the Americas, Europe and
Asia. Sales were higher in all regions led by Asia. Digital phones
accounted for approximately 89% of wireless phone sales dollars in the
third quarter.
Worldwide demand and production of wireless phones has been greater than
manufacturers and component suppliers had anticipated at the beginning of
the year. As a result, there are shortages of certain types of components
used in manufacturing wireless phones, including components used by the
Company. Supply of these components is not expected to match demand until
sometime in 2000. As a result, the Company's rate of sales growth for
wireless phones for the fourth quarter is expected to be significantly
lower than the approximately 90% growth rate of orders discussed above.
Because components shortages may continue through the first half of 2000,
the rate of order growth may continue to be greater than the rate of sales
growth for wireless phones.
Digital phone unit shipments increased by approximately 100% in the third
quarter versus a year ago. Versus the year ago quarter, unit sales for (i)
Global System for Mobile (GSM) products increased approximately 70%; (ii)
Code Division Multiple Access (CDMA) products increased approximately 1,400
percent; (iii) Time Division Multiple Access (TDMA) products were
significantly lower, primarily due to the fact that the Company's first
dual mode/dual band phones began shipping at the very end of the quarter;
and (iv) iDEN products increased approximately 100%. Analog phone unit
sales decreased versus last year.
For digital phones, the overall average selling price versus the year ago
quarter declined less than the normal historical range. For analog phones,
the overall average selling price versus the year ago quarter continued to
decline more quickly than the historical range. Average selling prices can
be subject to changes in product mix and regional mix.
For paging products, orders were lower and sales were significantly lower
than a year ago primarily due to fewer unit sales. The operating loss in
the paging business was smaller than a year ago due to an improved
manufacturing margin and significantly lower selling, general and
administrative expenses.
Network Systems Segment
- -----------------------
Three Months Ended
Oct. 2, Sept. 26, %
(in millions) 1999 1998 Change
- --------------------------------------------------------
Orders $1,482 $1,465 1%
Segment sales $1,594 $1,917 (17%)
Operating profit (loss)
before tax $(639) $337 NMF*
Net special items:
credits(charges) $(825) $--
* NMF = not a meaningful figure
Segment sales declined 17 percent to $1.6 billion, and orders increased 1
percent to $1.5 billion. The segment had an operating loss of $639 million
compared to an operating profit a year earlier of $337 million. The
decline in sales was almost entirely due to lower satellite communications
equipment revenue. The operating loss was due to $825 million of special
charges consisting of $811 million for Iridium related charges and $14
million for acquired in-process research and development charges related to
the acquisition of SpectraPoint Wireless. Of these special charges, $321
million relate to inventory write-downs for Iridium and are included in
manufacturing and other costs of sales. The remaining special charges are
included in selling, general and administrative expenses in the condensed
consolidated statements of operations.
Excluding special items, operating profits were $186 million compared to
$337 million a year earlier. This decrease is primarily due to the decline
in sales of satellite communications equipment, an operating loss in the
satellite communications business, and increased investment in engineering
resources working to develop digital solutions for network operators. This
segment was not impacted by discontinued businesses.
Cellular and personal communications systems infrastructure equipment
orders were higher and sales were slightly lower. Orders were higher in
Europe and Asia but lower in the Americas. Sales were higher in Europe but
lower in Asia and the Americas. Sales were significantly higher in GSM,
lower in CDMA, and very significantly lower for analog and PDC digital for
Japan. Sales and orders were lower for iDEN infrastructure equipment.
Satellite Communications Group sales and orders were down very
significantly due to the Iridium financial situation and sharply reduced
activity from Iridium gateway operators, whose installations were largely
completed in the fourth quarter of 1998. The Company has stopped
recognizing revenue on the operations and maintenance contract with
Iridium.
The Company and Cisco Systems, Inc. purchased the fixed wireless assets of
Bosch Telecom, Inc. and created a jointly owned company called SpectraPoint
Wireless. As discussed above this transaction resulted in an acquired in-
process research and development charge of $14 million.
The Company signed a contract with Teledesic LLC under which the Company
will serve as prime contractor in the design and construction of
Teledesic's "Internet-in-the-Sky" satellite communications network. The
contract is contingent upon Teledesic's approval following a technical
review period. The technical review period was originally scheduled to end
on September 11, 1999, was extended until November 1, 1999 and has recently
been extended until December 1, 1999. Approval of the technical review
period is in the sole discretion of Teledesic and there can be no
assurances that Teledesic will approve the contract.
Commercial, Government and Industrial Systems Segment
- -----------------------------------------------------
Three Months Ended
Oct. 2, Sept. 26, %
(in millions) 1999 1998 Change
- --------------------------------------------------------
Orders $1,074 $ 924 16%
Segment sales $1,020 $ 981 4%
Operating profit before tax $293 $91 222%
Net special items:
credits(charges) $198 $--
Segment sales rose 4 percent to $1.0 billion, and orders increased 16
percent to $1.1 billion. Operating profits rose to $293 million compared
to $91 million a year earlier. Included in operating profits for the three
months ended October 2, 1999, is a $198 million gain from the sale of the
Company's antenna site business.
Excluding special items, operating profits increased to $95 million
compared to $91 million a year ago. For ongoing businesses, sales rose 5
percent to $1.0 billion from $960 million, and orders increased 17 percent
to $1.1 billion from $903 million in the year ago quarter. Operating
profits for ongoing businesses and excluding special items were $93 million
compared to $88 million a year ago.
Two-way radio equipment orders were higher in the Americas and Europe and
lower in Asia. Sales increased significantly in Asia, were higher in the
Americas and lower in Europe.
The Company sold its North American antenna site business to Pinnacle
Towers for $245 million in cash and $10 million in common stock of Pinnacle
Holdings. The sale resulted in a $198 million gain included in selling,
general and administrative expenses in the condensed consolidated
statements of operations. The transaction involved all the assets and
operations of the business, including a portfolio of approximately 1,850
wireless communications facilities located throughout the U.S. and Canada
that were owned, managed or leased by the Company.
Semiconductor Products Segment
- ------------------------------
Three Months Ended
Oct. 2, Sept. 26, %
(in millions) 1999 1998 Change
- --------------------------------------------------------
Orders $1,954 $1,832 7%
Segment sales $1,708 $1,773 (4%)
Operating profit (loss)
before tax $406 $(188) NMF*
Net special items:
credits(charges) $325 $--
* NMF = not a meaningful figure
Segment sales decreased 4 percent to $1.7 billion, and orders increased 7
percent to $2.0 billion. The segment recorded an operating profit of $406
million compared with an operating loss of $188 million a year earlier.
Included in the operating profit for the three months ended October 2, 1999
are $325 million of net special items comprised of a $362 million gain from
the sale of the Semiconductor Components Group and a $35 million charge for
the write-off of acquired in-process research and development related to
the acquisition of Metrowerks.
Excluding special items, operating profits were $81 million compared with
an operating loss of $188 million a year earlier. For ongoing businesses,
sales rose 11 percent to $1.6 billion from $1.4 billion, and orders
increased 24 percent to $1.8 billion. Operating profits for ongoing
businesses and excluding special items were $60 million compared to an
operating loss of $184 million a year earlier.
Orders were significantly higher in the Americas and higher in Asia and
Europe. By end market, orders increased significantly in networking and
computing and wireless communications, increased in transportation, and
were lower in imaging and entertainment.
Sales were higher in all regions led by the Americas. By end market, sales
increased in wireless communications, transportation, and networking and
computing.
In July, the Company completed the sale of two chip-processing facilities,
one in Chung-Li, Taiwan, and the other in Paju, South Korea, to Taiwan's
Advanced Semiconductor Engineering Inc. for $290 million. The sale
resulted in a $5 million gain which is included in selling, general and
administrative expenses in the condensed consolidated statements of
operations.
In August, the Company completed the sale of the Semiconductor Components
Group. The sale resulted in a $362 million gain which is included in
selling, general and administrative expenses in the condensed consolidated
statements of operations. The Company received approximately $1.6 billion
in cash, notes and approximately 9 percent of the stock of the new company.
Other Products Segment
- ----------------------
Integrated Electronic Systems Sector
Sales increased 11 percent to $668 million, and orders increased 15 percent
to $724 million. The sector's operating profit increased to $50 million
from $28 million in the year earlier period. For ongoing businesses, sales
increased 27 percent, orders increased 30 percent, and operating profits
increased 47 percent.
Internet and Networking Group
Sales increased 18 percent to $165 million, and orders declined 2 percent
to $170 million. The group's operating loss was $14 million compared to a
loss of $133 million in the year earlier period. The group recorded, in
selling, general and administrative expenses on the condensed consolidated
statement of operations, a $12 million gain in the third quarter of 1999
from the sale of an investment. In the year earlier period, the group
incurred a $109 million charge for an acquired in-process research and
development write-off related to the Company's acquisition of Starfish
Software, Inc. This in-process research and development write-off was
included in selling, general and administrative expenses on the condensed
consolidated statement of operations.
General Corporate
In the third quarter of 1999, the Company sold 2.8 million shares of Nextel
common stock, and Digital Radio LLC exercised options to purchase an
additional 2 million shares of Nextel common stock the Company held. These
two transactions resulted in a $117 million gain which is included in
selling, general and administrative expenses in the condensed consolidated
statements of operations.
Proposed Merger of General Instrument Corporation with Motorola, Inc.
- ---------------------------------------------------------------------
In September of 1999, the Company and General Instrument Corporation
announced a proposed agreement for the merger of the two companies. Under
the proposed agreement, each share of General Instrument would be exchanged
for 0.575 shares of Motorola. The merger is expected to be completed in
the first quarter of 2000 subject to the satisfaction of certain
conditions, including approval by the General Instrument stockholders and
government regulators. General Instrument Corporation is a leading
worldwide provider of integrated and interactive broadband access solutions
to the cable television industry. A new Motorola business unit will
combine the operations of General Instrument with the cable business of the
Company's Internet and Networking Group.
General
- -------
Manufacturing margin in the third quarter of 1999 declined to 36 percent of
sales from 38 percent a year ago. This decline is caused by a special
charge of $321 million, recorded in the third quarter of 1999 for the
write-down of Iridium inventory. Excluding this special charge,
manufacturing margin in the third quarter of 1999 improved to 40 percent
from 38 percent a year ago. Selling, general and administrative expenses
decreased to 16 percent of sales compared to 19 percent a year earlier.
This decline is primarily attributable to the Company's manufacturing
consolidation, cost reduction and restructuring programs. Depreciation
expense in the third quarter of 1999 as a percentage of sales decreased to
6.8 percent from 7.5 percent a year earlier. Depreciation expense for 1999
is presently expected to be relatively unchanged for the year compared to
1998. Interest expense decreased slightly as a percent of sales. Assuming
stable interest rates for the remainder of 1999, interest expense is
expected to be lower than a year ago in the remaining quarter and the full
year of 1999. The tax rate for the third quarter was 30 percent, the same
as a year ago. The Company currently expects the tax rate to remain at 30
percent for 1999.
Liquidity and Capital Resources:
- -------------------------------
Net cash provided by operations increased to $1.7 billion for the nine-
month period ended October 2, 1999, as compared to $137 million cash used
for operations for the nine-month period ended September 26, 1998. The
increase in 1999 compared to 1998 was primarily due to increased earnings
as well as increases in accounts payable and accrued and other liabilities.
Net cash provided by investing activities was $330 million for the nine-
month period ended October 2, 1999 as compared to $2.2 billion cash used
for the nine-month period ended September 26, 1998. The change was
primarily due to proceeds from dispositions of investments and businesses
and reductions in capital expenditures. Cash of $2.1 billion was generated
from the sales of investments and businesses including the sale of the
Semiconductor Components Group, chip processing facilities in Taiwan and
Korea and the North American antenna site business; shares of Nextel common
stock in the third quarter of 1999; and sale of the non-silicon component
manufacturing business in the first quarter of 1999. Capital expenditures
decreased by $825 million in 1999 as compared to 1998. Approximately $470
million of this reduction occurred in semiconductor capital expenditures.
For the full year of 1999, the Company's capital expenditures are expected
to be less than the $3.2 billion spent in 1998. Semiconductor capital
expenditures are expected to be $1.4 billion in 1999 compared to $1.8
billion in 1998.
Net cash used for financing activities was $352 million for the nine-month
period ended October 2, 1999 as compared to $2.1 billion provided by
financing activities in the nine-month period ended September 26, 1998.
The decrease in 1999 was driven primarily by the Company paying down $1.4
billion in commercial paper and short-term borrowings as compared to
increasing notes payable and current portion of long term debt in the same
period last year in order to finance operations. The Company was able to
pay down short-term borrowings in 1999 due to improved cash flow from
operations and investing activities; $981 million in net proceeds generated
from the sale of bonds and subordinated debentures; and, as discussed
above, $2.1 billion in proceeds from the sale of businesses and
investments.
Net debt to net debt plus equity decreased to 9 percent at October 2, 1999
from 27 percent at December 31, 1998. The Company's total domestic and
non-U.S. credit facilities aggregated $4.9 billion at October 2, 1999, none
of which was used but was all available to back up outstanding commercial
paper which totaled $1.3 billion.
At October 2, 1999, the Company's off-balance sheet commitment to Nextel
Communications, Inc. ("Nextel") for equipment financing aggregated $542
million, of which $259 million was outstanding. The Company's other off-
balance sheet third party financial guarantees, excluding the Iridium LLC
guarantee which is separately discussed below, aggregated $433 million, of
which $393 million was outstanding. The aggregate off-balance sheet
amounts represent the maximum available and may not be completely utilized.
During the third quarter of 1999, Iridium LLC and its operating subsidiary,
Iridium Operating LLC (collectively, referred to as Iridium), went into a
reorganization proceeding under Chapter 11 of the U.S. Federal Bankruptcy
Code and are currently operating as debtors-in-possession under that
Chapter.
At October 2, 1999, the Company owned, directly and indirectly,
approximately 18% of the equity interests in Iridium and a significant
portion of a series of Iridium bonds. The Company also holds equity
investments and notes receivable, in several Iridium gateway companies in
the amount of $47 million. The Company also holds accounts receivable from
Iridium in the amount of $661 million.
The Company recorded a special charge in the third quarter of 1999 of $994
million (i) to increase its reserve related to its financial exposure to
the Iridium project to a level consistent with its expectation of a Chapter
11 financial restructuring of Iridium and (ii) to write-down the remaining
value of the Iridium bonds it holds. This increase in the reserve
primarily relates to accounts receivable and inventory associated with the
Iridium project. The company continues to have investments, accounts
receivable banks guarantees and other financial obligations and contractual
and other obligations related to the Iridium project which may be affected
by the outcome Iridium's financial restructuring. Further understanding of
the impact on the company of the Iridium restructuring may become clearer
in the fourth quarter and may necessitate an additional special charge.
The book value of the Company's equity investments in several Iridium
gateway companies is included in Other Assets in the condensed consolidated
balance sheets. The Company accounts for its investment in Iridium under
the equity method of accounting due to its financial influence on Iridium
in the form of guarantees of Iridium's indebtedness, its contract with
Iridium for the operation and maintenance of the global communications
system and the other financial commitments more fully discussed below.
The following table summarizes the Company's equity and bond investments in
Iridium and investments in the Iridium gateway companies as of October 2,
1999, and the amounts owed to the Company by Iridium under several
contracts as of October 2, 1999, excluding reserves:
Investments:
Equity investment in Iridium $ ---
Bond investment in Iridium ---
Investments in and notes receivables
from Iridium gateway companies 47
-----
Total $ 47
=====
Accounts Receivable:
Operations & Maintenance contract
Deferred amount due to Company $ 400
Other amounts due to Company 130
-----
$ 530
Other contracts 131
-----
Total $ 661
=====
The following table summarizes, as of October 2, 1999, (i) the Company's
bank guarantees and other financial commitments and (ii) the contractual
commitments to Iridium and other obligations, excluding reserves:
Bank Guarantees and Other Financial Commitments:
Senior Secured Credit Agreement capital call $ 50
Senior Guaranteed Credit Agreement $ 750
Conditional Commitment to Provide Guarantee See Below
Contractual Commitments and Other Obligations:
Obligations to subcontractors $ 80
Assets at risk and other estimated potential
contractual obligations $ 722
Iridium's bank facilities are an $800 million Senior Secured Credit
Agreement (the "Secured Credit Agreement") and a $750 million Senior
Guaranteed Credit Agreement (the "Guaranteed Credit Agreement"). The
Guaranteed Credit Agreement is guaranteed by the Company. As of October 2,
1999, Iridium had borrowed all of the funds available under the Guaranteed
Credit Agreement.
Iridium is in default under the Guaranteed Credit Agreement and the Secured
Credit Agreement. Iridium is also in default on approximately $1.4 billion
of public debt.
Under a waiver to the Guaranteed Credit Agreement, the banks providing
loans under that Agreement agreed to waive certain events of default so
long as the Company paid the interest on those loans and monthly fees.
Although the waiver could have stayed in effect through December 15, 1999,
on November 15, 1999, the Company paid the banks approximately $743
million. With this payment, the Company believes it has satisfied all of
its guarantee obligations under this Agreement. By satisfying its
guarantee obligations, the Company avoided paying interest and substantial
monthly fees to the banks.
Subject to the automatic stay provisions of Chapter 11, the lenders under
the Secured Credit Agreement could accelerate Iridium's obligations under
the Secured Credit Agreement and seek to foreclose on their security
interests in substantially all of Iridium's assets. Iridium is subject to
an order which permits it to make only a limited use of some of the assets
subject to these security interests. The order generally permits Iridium,
during the term of the order, to pay only specified budgeted amounts and
prohibits Iridium from making any payments to Motorola. The order is to
remain effective through December 15, 1999. However, Iridium's ability to
make use of these assets automatically terminates earlier if specified
events occur, such as Motorola's failure to provide material services under
the operations and maintenance contract.
The lenders under the Secured Credit Agreement have 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.
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 is 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 is obligated to provide them with this $300 million
guarantee. The Company believes that it is not obligated to do so.
Iridium has also stated that it believes it was not obligated to have the
Company provide this $300 million guarantee to these lenders.
The Company has several contracts with Iridium, primarily for the operation
and maintenance of the global personal communications system. The Company
has stopped recognizing revenue on the operations and maintenance contract
with Iridium at this time. The Company agreed to permit Iridium to defer
up to $400 million of amounts owed under its operations and maintenance
contract with the Company. The Company is currently performing under its
operations and maintenance contract with Iridium without being paid
concurrently, even though the Company has not agreed to waive its right to
receive payment. As of October 2, 1999, the Company had accounts
receivable from Iridium relating to the operations and maintenance contract
of $530 million.
The Company has subcontracts for portions of the system, for which it
generally remains obligated in the amount of $80 million as of October 2,
1999. In addition, the Company has investments in assets related to these
contracts which are at risk, such as inventory, manufacturing equipment and
buildings, as well as other potential obligations in connection with these
contracts, the value of which the Company estimates to be approximately
$722 million as of October 2, 1999. While the Company expects to be able
to use a portion of these assets in connection with other programs, the
Company would still incur substantial costs in winding down operations
related to the Iridium program.
The repayment by Iridium of the contractually deferred amounts owed under
the operations and maintenance contract with the Company is subordinated to
repayment of Iridium's Secured Credit Agreement, as is the repayment to the
Company by Iridium of any amounts the Company may pay to the lenders under
its guarantees and certain other obligations owed to the Company. As a
result of the Chapter 11 filing, Iridium is unlikely to be able to repay in
full the Company amounts previously deferred under its various contracts
with the Company and is unlikely to be able to pay amounts which have since
accrued and not been paid or which may become due under such contracts in
the future. The Company's third-quarter reserve, in part, provided for the
uncollectibility of these accounts receivable from Iridium.
As of October 2, 1999, the Company's development and commercialization
reserve related to the Iridium project was $1.8 billion. Because of the
Company's continued investments, accounts receivable, bank guarantees and
other financial commitments and contractual and other obligations discussed
above, there could be a further impact of approximately $500 million on the
Company's income statement if the Company were to take another special charge
to cover remaining items not included in the existing reserve.
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.
The loss of the value of its investment in Iridium gateway companies, the
Company having to perform under its Iridium guarantee obligations, other
costs or liabilities related to the Company's relationship with Iridium,
and the winding down of operations related to the Iridium program,
collectively, could have a material negative impact on the Company's
consolidated financial position and results of operations.
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 October 2, 1999 and September 26, 1998, the Company had net outstanding
foreign exchange contracts totaling $1.8 billion and $1.9 billion,
respectively. The following table shows, in millions, the five largest
foreign exchange hedge positions at October 2, 1999 and the corresponding
positions at September 26, 1998:
Oct. 2, Sept. 26,
Buy (Sell) 1999 1998
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Euro (673) (621)
Japanese Yen (479) (596)
Chinese Renminbi (200) (75)
Taiwan Dollar (68) (74)
Korean Won (49) (8)
At October 2, 1999 and September 26, 1998, outstanding foreign exchange
contracts primarily consisted of short-term forward contracts which hedge
designated firm commitments. Net deferred gains at October 2, 1999, were
$1.4 million, and net deferred losses at September 26, 1998, were $13.9
million on these forward contracts.
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% 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.
The Company's research and development expenditures in the third quarter of
1999 were $882 million compared to $732 million a year ago. The Company
continues to believe that a strong commitment to research and development
drives long-term growth. Research and development expenditures are
expected to increase as a percentage of sales in 1999 versus 1998.
Return on average invested capital, based on the performance of the four
preceding quarters ending with October 2, 1999, was 4.1 percent, compared
with negative 5.3 percent based on the performance of the four preceding
quarters ending September 26, 1998. The Company's current ratio was 1.35
at October 2, 1999, compared to 1.18 at December 31, 1998.
Year 2000:
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Motorola has been actively addressing Year 2000 issues since 1997. A Year
2000 Enterprise Council was formed and is responsible for coordinating and
facilitating activities across the Company. The Year 2000 Enterprise
Council reports to the Company's President and Chief Operating Officer and
its progress is reported to the Audit and Legal Committee of the Board of
Directors. The Board of Directors also receives periodic updates on the
Company's Year 2000 program.
The Year 2000 issue refers to the risk that systems, products and equipment
having date-sensitive components will not recognize the Year 2000.
Throughout this disclosure the Company uses the generic phrase "year 2000
ready" to mean that a system, product or piece of equipment will perform
its intended functions on or after January 1, 2000 the same as it did
before January 1, 2000. The Company also has a specific definition of Year
2000 Ready for Motorola products described below.
The Six-Phase Year 2000 Program
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Motorola developed the Six-Phase Year 2000 Program to ensure a thorough and
standard approach to addressing the Year 2000 issue across the Company.
The Program summarizes the tasks to be completed while leaving each
business to tailor actions specifically to its environment, to identify the
goals of each phase, and to schedule their targeted completion dates. The
six-phases are Preliminary (identify the issues, create awareness, and
dedicate resources); Discovery/Charter (inventory, categorize, and make
initial cost estimates); Scope (refine inventory and assess business
impacts and risks); Conversion Planning (determine specific implementation
solutions through analysis, formulate strategies, and develop project and
test plans); Conversion (make program changes, perform applications and
acceptance testing and certification); and Deployment and Post
Implementation Review (deploy program and software changes, evaluate and
apply lessons learned).
The Company's Readiness
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As of the end of the third quarter, all of the Company's sectors and groups
had completed Phases 1-5, and all but two of the sectors and one of the
groups had substantially completed Phase 6. As of November 15, 1999, all
but two of the Company's sectors and one of its groups had completed the
entire Six-Phase Program. The two remaining sectors and the one group
continue to work to complete the program, and the remaining work is being
monitored and tracked. The focus of all of the businesses that have not
yet completed Phase 6 is to deploy program and software changes.
Management does not believe that the failure of these sectors or group to
complete the sixth phase, should that occur, will be critical to success of
the Six-Phase Program, given the substantial progress towards completion
made to date by these businesses.
Contingency plans are complete for all sectors and groups, and those plans
are focusing on matters not resolved through the Six-Phase Program at this
time that may have a material negative impact on Motorola's final "year
2000 readiness". Discussion of contingency planning is included below.
As part of the Company's overall program and to ensure adequate means to
measure progress, Motorola has established five functional categories to be
reviewed by each business as follows:
Products. While addressing all five functional categories, the Company has
placed a high priority on ensuring that Motorola products are Year 2000
Ready and is completing a comprehensive review of the Year 2000 Readiness
of Motorola products. The results of these reviews are being made
available to Motorola customers and third parties through the use of a
Motorola Year 2000 website and are supplemented with additional written
communications. The Motorola definition of "Year 2000 Ready," which is the
standard Motorola uses to determine the Year 2000 Readiness of Motorola
products, is as follows:
Year 2000 Ready means the capability of a Motorola product, when used in
accordance with its associated documentation, to correctly process, provide
and/or receive date data in and between the years 1999 and 2000, including
leap year calculations, provided that all other products and systems (for
example, hardware, software and firmware) used with the Motorola product
properly exchange accurate date data with it.
Manufacturing. Some of the tools and equipment (hardware and software)
used to develop and manufacture Motorola products are date-sensitive. The
Company believes, based on the results of the Six-Phase Program to date and
based on assurances from its suppliers, that the critical tools and
equipment used by it to manufacture products will be "year 2000 ready" or
will be made ready through upgrades by the suppliers of the tools or
equipment or by using alternate sources of supplies. As a result, the
Company does not expect significant interruption to its manufacturing
capabilities because of the failure of tools and/or equipment.
Non-Manufacturing Business Applications. Throughout the business the
Company is fixing and testing all non-manufacturing business applications
such as core financial information and reporting, procurement, human
resources/payroll, factory applications, customer service, and revenue, and
does not expect any significant Year 2000 issues in this area.
Facilities and Infrastructure. The Company also is fixing and testing its
facilities and infrastructure (health, safety and environment systems,
buildings, security/alarms/doors, desktop computers, networks) to ensure
they are "year 2000 ready" and does not expect significant interruption to
its operations because of Year 2000 issues with its facilities or
infrastructure.
Logistics. The Company has devoted significant resources to ensure that
its operations are not disrupted because of services or products supplied
to the Company. In addition, the Company has requested assurances from its
joint venture partners and alliance partners of their "year 2000
readiness."
Of critical importance to the Company's Year 2000 Readiness is the
readiness of suppliers and the products the Company procures from
suppliers. Motorola has many thousands of suppliers and has a
comprehensive program to identify and obtain Year 2000 information from its
critical suppliers. The program includes awareness letters, site visits,
questionnaires, compliance agreements and warranties as well as a review of
suppliers' Year 2000 websites. If a supplier is determined to entail a
"high risk" of Year 2000 non-readiness, the Company is developing
contingency and alternate sourcing plans to minimize the Year 2000 risk.
As described in the Company's discussion of most reasonably likely worst
case scenarios, the Company is particularly concerned about energy and
transportation suppliers, especially outside the U.S. Many of these
suppliers are unwilling to provide assurances that they will be "year 2000
ready."
Unique issues related to the readiness of the Company's major businesses
are discussed in more detail below.
Year 2000 Costs
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Motorola estimates that the expected total aggregate costs for its Year
2000 activities from 1997 through 2000 will be in the range of $225 million
to $235 million. These costs do not include estimates for potential
litigation. Total costs incurred through October 2, 1999 were
approximately $214 million, of which approximately $104 million were for
external costs and $110 million were for internal costs. Of the remaining
costs, the majority relate to installation of software upgrades of certain
infrastructure equipment and assessing the Company's critical suppliers.
The Company does not believe the cost of addressing Year 2000 issues will
have a material adverse effect on the Company's consolidated results of
operations, liquidity or capital resources. However, because these costs
do not include estimates for potential litigation and unforeseen events,
the overall impact of the Year 2000 rollover could materially adversely
impact the Company.
The Company reviews and updates data for costs incurred and forecasted
costs each quarter. As the Company continues to assess the last phase of
the Year 2000 Program, estimated costs may change. These costs are based
on management's estimates, which were determined based on assumptions of
future events, some within the Company's control, but many outside of the
Company's control. There can be no guarantee that these estimates will be
correct.
Most Reasonably Likely Worst Case Scenarios for the Company and Company
Contingency Plans
The Company has and will continue to devote substantial resources to
address its Year 2000 issues. However, there can be no assurances that the
Company's products do not contain undetected Year 2000 issues. Further,
there can be no assurances that the Company's assessment of suppliers and
vendors will be accurate. Customers of Motorola could be impacted by Year
2000 issues causing them to reduce purchases from the Company. In
addition, many commentators believe that there will be a significant amount
of litigation arising out of "year 2000 readiness" issues, especially for
product liability. Because of the unprecedented nature of this litigation,
it is impossible for the Company to predict the impact of such litigation
although it could be significant to the Company. In addition to the unique
reasonably likely worst case scenarios described by the specific businesses
and potential litigation, the Company believes its scenarios include: (i)
corruption of data contained in the Company's internal information systems;
(ii) hardware failures; (iii) the failure of infrastructure services
provided by government agencies and other third-party suppliers (including
energy, water, and transport); and (iv) health, environmental and safety
issues relating to its facilities. If any of these were to occur, the
Company' operations could be interrupted, in some cases for a sustained
period of time. These interruptions could be more severe in countries
outside the U.S., where the Company does sizeable business.
The Company's contingency plans focus on customers, products, suppliers and
internal operations. Each sector is establishing emergency operations
centers at key locations. These centers will be staffed ahead of the Year
2000 rollover and into the Year 2000 if the need arises. During critical
times they will be staffed 24-hours a day. The first priority of these
centers is to ensure the performance of a customer's network or system.
Critical facilities have been identified and the Company's plans prioritize
their continued operations. These sites will be supported by generators
capable of maintaining health, safety, communications and environmental
operations if locally provided power sources fail. These sites will have a
number of means of communicating including Intranet, pagers, cellular
phones, and satellite phones.
The businesses are identifying key individuals in a variety of functions to
be on-site at the Company's facilities to monitor the rollover to the Year
2000. Additionally, the Company is establishing rapid response teams that
can be sent to major customer locations when and if needed in connection
with the rollover. There are also plans to shift operations to different
facilities if there are interruptions to operations in particular areas,
countries or regions.
The plans also include procedures to maintain and recover business
operations such as stockpiling critical supplies, identifying alternate
supply sources, inspecting critical functions, reporting operational
status, communicating with interdependent operations, and operating in
contingency mode until a return to normal.
During the third quarter of 1999, the Company implemented a contingency
planning program designating which Motorola sites are to be fully
operational during the rollover, to be partially operational during the
rollover, or to be closed during the rollover. The program also has plans
for continuing critical operations in case of Year 2000 incidents. The
programs also implement an internal incident reporting system for Year 2000
incidents that might affect an individual site, a Motorola product, or a
business system. The business operations conducted self-tests of their
contingency planning procedures and the incident reporting system during
July and August, 1999.
In September, 1999, the Company conducted a global contingency planning
exercise. The purpose of the exercise was to verify procedures for
responding to Year 2000 incidents and to test the internal incident
reporting system. Year 2000 teams at approximately 120 Motorola sites
around the world participated in the exercise. Hypothetical scenarios were
provided to each team including internal incidents, product-related
incidents, and external infrastructure incidents. The exercise identified
ways in which some contingency plans can be enhanced, and identified
desirable refinements to the incident reporting system. Modifications to
contingency plans will be implemented during the fourth quarter of 1999.
Personal Communications Segment
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The Personal Communications Segment includes both the Personal
Communications Sector (PCS) and the iDEN(R) subscriber business. PCS,
which designs, develops, manufactures and sells Motorola cellular
telephones, paging subscriber products, and paging infrastructure equipment
has completed its Year 2000 product review.
All Motorola wireless telephones, cordless phones and accessories ever
placed on the market by Motorola either: (i) do not contain internal date
storage, processing, or display capabilities and thus are not impacted by
the Year 2000 date change; or (ii) contain internal date storage,
processing, or display capabilities that are Year 2000 Ready. In addition,
PCS has systems in place to ensure that future telephones and accessories
sold by the Company will be Year 2000 Ready.
Paging products currently being shipped are Year 2000 Ready. The paging
business has identified customer system upgrades required to enable certain
infrastructure equipment in Asia to be Year 2000 Ready. These upgrades are
scheduled to be complete by December 1999. Paging has posted on its
website and sent in printed form to inquiring customers lists of all its
products that have no internal calendars or clocks and are not materially
impacted by the Year 2000, all products that have such clocks and calendars
and are Year 2000 Ready, and a third group of products that have reached
the end of their supported life and, therefore, have not been tested for
Year 2000 Readiness. Certain infrastructure products that require an
upgrade to be Year 2000 Ready have been listed on the website.
Paging's management believes the worst case scenario is that a mission
critical page may not be sent or received as a result of lack of Year 2000
Readiness of messaging software, infrastructure or pagers and the Company
is sued. Management believes that its efforts at communicating to paging
customers the potential for such failures should reduce the likelihood of
this occurring.
Network Solutions Segment
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The Network Solutions segment includes the cellular infrastructure
business, the satellite communications business and iDEN infrastructure
products.
The cellular infrastructure business designs and develops, manufactures,
installs and services wireless infrastructure equipment for cellular and
personal communications networks. Certain cellular infrastructure products
operate with date sensitivity. The business has developed appropriate
hardware modifications and new versions of software to address the Year
2000 issue. The business has made upgrades (i.e., hardware modifications
and/or new software versions, as appropriate) available to most of its
operator customers. The business sells systems throughout the world and
trained technicians are in the process of installing these upgrades.
The cellular infrastructure business has communicated to customers and
company customer contacts "work-arounds" for certain systems that will not
be upgraded. A "work-around" gives the operator necessary procedures to
keep the system operating on and after January 1, 2000. If a customer does
not follow the recommended procedures it is likely that the system will not
recognize certain dates properly, affecting the accuracy of certain data.
The business has concluded that some of its systems are too old to either
upgrade or provide a work-around for Year 2000 issues. It has notified
customers with outdated systems. Additionally, a website provides Year
2000 information on certain discontinued products. Some customers of
discontinued products have been notified that their system will not work
and information has been provided on needed upgrades and/or replacements.
The business has sent out second notices.
Management believes that its most reasonably likely worst case scenario
related to the Year 2000 issue is system interruption on systems for which
its operator customers have voluntarily elected not to upgrade to Year 2000
Readiness. Notwithstanding the fact that Motorola provided impact
statements and other documentation to these customers identifying the
impacts to the performance of a non-Year 2000 Ready system, these customers
elected not to upgrade. As a result, the business could potentially be sued
as the supplier of those systems, although its efforts to identify the
impacts and make available appropriate Year 2000 Ready upgrades to these
customers should reduce those risks.
The satellite business designs, develops, manufactures, integrates,
deploys, operates and maintains space-based telecommunication systems and
related ground system components. At present, the business consists of one
operating system known as the Iridium(R) System. This system contains
date-sensitive functions. The business made all necessary hardware and/or
software upgrades available to customers by July 1, 1999, and these
upgrades have all been installed. Since then, vendors are providing
additional upgrades The business anticipates that it will need to supply
technicians to install such additional upgrades, and does not presently
anticipate any difficulty in meeting any potential installation needs.
Management believes that the most reasonably likely worst case scenario
related to the Year 2000 issue is a temporary interruption of the Iridium
System due to the inability of the ground segment to communicate with the
satellite constellation. As a result, the satellite business would incur
costs in correcting such a failure. Management believes adequate efforts
are in place to identify potential hardware/software problems and to
implement and test solutions.
Some iDEN(R) infrastructure products operate with date sensitivity. The
iDEN system became Year 2000 Ready when a new system release was completed
on June 30, 1999. The business expects to deploy this release to its last
remaining customers in the fourth quarter.
Commercial, Government and Industrial Solutions Segment
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The segment, consisting of the Commercial, Government and Industrial
Solutions Sector ("CGISS"), manufactures and sells two-way voice and data
products and systems for a variety of worldwide applications. Principal
customers for two-way products include public safety agencies (police,
fire, etc.), utilities, diverse industrial companies, transportation
companies and companies in various other industries. Additionally, CGISS
includes the System Solutions Group (SSG), excluding its satellite
business, that is engaged in the design, development, and production of
advanced electronic communications systems and products.
All two-way products currently shipping from factories are Year 2000 Ready
with a few minor exceptions. All customers buying exceptions are informed
that these products are not Year 2000 Ready before purchases are made and
products shipped. Some older products operate with date sensitivity,
including legacy Special Products (SPs) and "911 Systems." CGISS has
notified or is in the process of notifying customers of certain of its "911
Systems" in the U.S. that their systems are not Year 2000 Ready. New
software for these systems and the code were available in December 1998 and
a test installation of such software was made in late December 1998.
Regular customer installations will continue through the end of the fourth
quarter 1999. SPs are communication systems designed specifically for
particular customers. CGISS cannot assess whether those systems are Year
2000 Ready because the systems must be tested where they are located.
CGISS, in most cases, is contacting customers and developing solutions,
usually software upgrades, to make these systems Year 2000 Ready.
Management believes that the most reasonably likely worst case scenario
involving its business is the failure of a public safety system on January
1, 2000 (or thereafter). As a result, the two-way radio business could
potentially be sued as the supplier of those systems. Management believes
that its efforts to identify the customers of these systems and provide
software solutions or "work arounds" should reduce these risks.
SSG has conducted a comprehensive review of all products and systems sold
under contracts and purchase orders executed since January 1, 1990.
Through that process it has been determined that relatively few of SSG's
products or systems contain date-sensitive functions that are expected to
be adversely affected by the Year 2000 issue. SSG is addressing each of
the few products or systems affected in one of four ways. First, SSG has
developed fixes for some of the Year 2000 issues discovered and is offering
those fixes to its customers. Second, in some cases, SSG is working
directly with customers who have funded specific testing and corrective
actions to products or systems they purchased or are purchasing under
contracts with SSG. One of these customer-funded fixes is not expected to
be complete until the fourth quarter of 1999. Third, "work-arounds" have
been communicated to certain customers when a more elaborate fix is not
necessary for them to keep their products or systems operating on and after
January 1, 2000. Finally, SSG has concluded that some of its products and
systems are too old to either fix or provide a work-around for Year 2000
Readiness. SSG has notified (or made reasonable efforts to notify)
customers of those products or systems for which fixes or work-arounds will
not be available.
SSG believes the most reasonably likely worst case scenario related to the
Year 2000 issue is the failure of a product or system to operate for a
short period of time after January 1, 2000. As a result, SSG may be sued
as a manufacturer of products or systems that failed. Many of these
products or systems were sold to government customers. Management believes
it generally does not have legal liability to these customers.
Semiconductor Products Segment
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The segment, consisting of the Semiconductor Product Sector ("SPS"), has
completed an extensive review of its products to determine if they are Year
2000 Ready. The vast majority of these products are Year 2000 Ready. A
limited number of products that contain a real-time clock function are
identified as having a potential Year 2000 issue with the manner in which
years are tracked. In addition, it is possible that an SPS semiconductor
may experience "year 2000 readiness" issues due to the manner in which a
customer has programmed the semiconductor or due to the manner in which the
semiconductor is incorporated into a customer system or product. SPS is
also making information available to its customers on these potential Year
2000 readiness issues.
Literature on the Year 2000 issue references what is referred to as the
"embedded chip" Year 2000 issue or the "embedded systems" Year 2000 issue.
(The word "chip" is a short-hand reference for a semiconductor product.)
Many common electronic products contain "chips" or "systems" containing
chips that are incorporated or "embedded" into the product. If these
"chips" or "systems" experience Year 2000 readiness issues, due to the
manner in which they are programmed, the product may malfunction. Because
this programming is customer defined, the extent to which the
malfunctioning of these products may occur due to a Year 2000 Readiness
issue with a SPS semiconductor is unknown at this time.
SPS has completed the final phase of the global multi-phase approach and
has deployed all identified solutions throughout the organization. SPS, in
conjunction with the newly formed High Tech Consortium - Year 2000 and
Beyond, continues to focus on external critical suppliers, including
utilities and critical transportation. This effort is global in scope and
influences contingency plans. These plans are in place and will continue
to be tested and updated throughout the fourth quarter In addition, SPS
has made information available on the potential Year 2000 issues with the
real time clocks and the customer programming of SPS semiconductor
products. Finally, the business is reconfirming the readiness of its
environmental health and safety systems.
Integrated Electronic Systems Sector (IESS)
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The Integrated Electronic Systems Sector (IESS) manufactures and sells
automotive and industrial electronics, energy storage products and systems,
electronic fluorescent ballasts and computer system products.
IESS has completed formal assessment of "Year 2000 Readiness" of its
products manufactured within the last eight years and its manufacturing
facilities. Other than embedded board and system products, and Global
Positioning System receivers, these products do not contain date-sensitive
functions, excluding customer provided software incorporated in such
products, for which IESS does not have sufficient information in most cases
to conduct an evaluation of whether such functions are included. Motorola
has advised its customers that responsibility for evaluating this software
is that of the customer. The sector has successfully completed the Six-
Phase Program.
In the case of Global Positioning System receivers, engineering analysis is
complete on the most current version, and the products are Year 2000 Ready.
The operation of such receivers is dependent on the proper functioning of
the Global Positioning satellite system maintained and operated by the
Federal government, and is outside of the control of Motorola. Motorola's
GPS products successfully handled the second date-related issue for these
products, relating to the "1024 weeks" method of date calculation used in
the satellites, which occurred in August, 1999. The products are believed
to be Year 2000 Ready based on completed engineering evaluation and
simulator testing on all but some older products. Simulator testing of
older products will be undertaken when representative samples are
identified.
In the case of embedded boards, systems and software products that are
manufactured by the Motorola Computer Group (MCG), some of the older
products do not meet Motorola's definition of Year 2000 Ready. In many of
these cases, MCG has made fixes available to its customers to cure the
problem. Although it is difficult to measure any potential liability from
non-Year 2000 Ready products, MCG believes the risks are relatively small
based on the following. Since October 1, 1998, MCG has ceased shipping any
products that are not Year 2000 Ready without a waiver from the customer.
Fixes have been made available for products that may remain under warranty
after 1999. Many products which are outside the warranty period, have been
updated over the years with products that are Year 2000 Ready. Other
potential liability may arise in cases where it is not known in what
applications the products are being used. There is always the possibility
that some products have been incorporated by customers into critical use
applications. All of the known cases are being evaluated but Motorola
believes that this is the customer's responsibility.
The business has reviewed the year 2000 readiness of its key suppliers.
Suppliers that are considered "high-risk" vendors because of Year 2000
issues have been identified. The sector continues to assess these
suppliers and has developed contingency plans that may include the use of
alternate suppliers to minimize any potential risk.
Internet and Networking Group (ING)
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ING manufactures and sells modems, data communication devices and equipment
that enables voice, video and data communications over private and public
networks. All data communications equipment and modems currently sold by
ING are Year 2000 Ready. Some of the older products, including some network
management and router software products, do not meet Motorola's definition
of Year 2000 Ready. In many of these cases, ING has made fixes available
to its customers. Some products have also reached the end of their
supported life and, therefore, have not been tested for Year 2000
Readiness.
Management believes that the most reasonably likely worst case scenario
involving its business is the failure of a mission critical or financial
communications system on January 1, 2000 (or thereafter). As a result, ING
could potentially be sued as the supplier of the communications equipment.
Management believes that its efforts to notify its customers of products
with issues and provide software solutions should reduce these risks.
The Company has made forward-looking statements regarding its Year 2000
Program. Those statements include: the Company's expectations about when
it will be "Year 2000 Ready"; the Company's expectations about the impact
of the Year 2000 issue on its ability to continue to operate on and after
January 1, 2000; the readiness of its suppliers; the costs associated with
the Year 2000 Program; and worst case scenarios. The Company has described
many of the risks associated with those forward-looking statements above.
However, the Company wishes to caution the reader that there are many
factors that could cause its actual results to differ materially from those
stated in the forward-looking statements. This is especially the case
because many aspects of its Year 2000 Program are outside its control such
as the performance of many thousands of third-party suppliers, customers
and end-users. As a global company it operates in many different
countries, some of which may not be addressing the Year 2000 issues to the
same extent as in the United States. As a result, there may be unforeseen
issues in different parts of the world. All of these factors make it
impossible for the Company to ensure that it will be able to resolve all
Year 2000 issues in a timely manner to avoid materially adversely affecting
its operations or business or exposing the Company to third-party
liability.
Euro Conversion:
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For disclosure regarding the impact to the Company from the introduction of
the euro, see the information contained under the caption "Euro Conversion"
on pages F-13 and F-14 of the Company's Proxy Statement for its 1999 annual
meeting of stockholders.
Outlook:
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The comprehensive changes the Company has made over the last 18 months are
improving its ability to execute and perform financially. Most
importantly, the changes are enabling the Company to concentrate on the
fastest-growing segments of the communications and embedded electronic
solutions arenas. The Company is now uniquely positioned to serve the
fast-growing worldwide markets of wireless, broadband, Internet and
multimedia access for the person, work team, car and home by being highly
focused on these opportunities at multiple levels of the value chain -
solutions on the chip, integrated embedded systems and end-to-end systems
solutions. With the proposed merger of the Company and General Instrument
Corporation, leadership solutions for broadband multimedia hybrid fiber
coax and DSL (digital subscriber line) solutions would be added to the
Company's growth potential.
In addition, economic conditions continue to improve throughout much of the
world, led by Asia and Europe. The Company believes that as more of its
new products and solutions reach the marketplace, sales and earnings growth
will continue.
Business Risks:
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Statements concerning the Company's expectations about: the impact,
completion and other aspects of its renewal plan; the outcome and impact of
events related to Iridium; the completion and impact of the proposed merger
with General Instrument Corporation; the continuing shortage of certain
components used in manufacturing wireless phones; sales and order growth
for wireless phones; the Company's relationship with Teledesic LLC; the
Company's 1999 depreciation expense, interest expense, tax rate, capital
expenditures and research and development expenditures; the statements in
"Review and Outlook"; and any other statements that are not statements of
historical facts are forward-looking and involve risks and uncertainties.
The Company wishes to caution the reader that the factors below and those
in the Company's 1999 Proxy Statement on pages F-15 through F-18, in its
10-Q for the period ending April 3, 1999, in its 10-Q/A for the period
ending July 3, 1999, and in its other SEC filings could cause the Company's
results to differ materially from those stated in these forward-looking
statements. These factors include: (i) the Company's ability to complete
its renewal plan in a timely manner and the continued success of those
efforts; (ii) the outcome of Iridium's restructuring efforts and the impact
on the Company, including the Company's investment in Iridium LLC and the
Iridium(R) project, its contracts related to the Iridium project and its
satellite business; (iii) the outcome of the proposed merger with General
Instrument Corporation, which is subject to many conditions, a number of
which are out of the Company's control, including the approval of the
shareholders of General Instrument Corporation and the approval of
government regulators; (iv) difficulties in integrating the operations of
newly-acquired businesses and achieving strategic objectives, cost savings
and other benefits; (v) rapid changes in the demand for or the supply of
components used in the manufacture of wireless phones; (vi) the fact that
orders in certain of the Company's businesses are subject to revision or
cancellation to reflect changes in customer needs; (vii) Teledesic's
decision whether to approve the Company as the prime contractor for its
satellite communications network; (viii) continued improvement in the
semiconductor industry and the Company's participation in that improvement;
(ix) continued gains by the Company in the digital wireless telephone
market and market acceptance of new products; (x) continued improvement in
economic conditions throughout much of the world, particularly Asia; (xi)
the conclusion of pending sales of businesses and assets which are subject
to conditions, many of which are out of the Company's control; (xii)
pricing pressures and demand for the Company's products, especially in
light of the current economic conditions in certain emerging markets;
(xiii) the success of alliances and agreements with other companies to
develop new products and services; (xiv) product and technology development
and commercialization risks, including for newer digital products and
Iridium products and services; and (xv) unanticipated impact of Year 2000
issues, particularly the failure of products or services of major suppliers
to function properly in the Year 2000 and reduced purchases by customers
because of the adverse impact of Year 2000 issues on their businesses.
Iridium(R) is a registered trademark and service mark of Iridium LLC.
Part II - Other Information
Item 1 - Legal Proceedings.
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Motorola is currently a named defendant in seven cases arising out of
alleged groundwater, soil and air pollution in Phoenix and Scottsdale,
Arizona. A trial involving the Scottsdale property damage subclass in
Baker, et al., v. Motorola, et al. is currently expected to begin in late
Spring 2000.
Motorola and several of its directors and officers are named
defendants in a consolidated class action, Kaufman, et. al. v. Motorola,
Inc., et. al., for alleged securities law violations. The Kaufman case is
currently expected to begin trial in March 2000.
Motorola has been a defendant in several cases arising out of its
manufacture and sale of portable cellular telephones. Jerald P. Busse, et
al. v. Motorola, Inc. et al., is a purported class action alleging that
defendants have failed to adequately warn consumers of the alleged dangers
of cellular telephones and challenging ongoing safety studies as invasions
of privacy. On July 16, 1999, following dismissal of all claims, the court
allowed the filing of an amended complaint. On September 7, 1999, an
amended complaint was filed in the matter of Phil J. and Terry Medica, et.
al., v. Motorola Cellular Service, Inc. and Motorola Cellular Holding,
Inc., et. al. Plaintiffs allege that Phil Medica's malignant brain tumor
resulted from the use of a Motorola cellular phone.
Silber, et al. v. Motorola, et al., is an action wherein it is alleged
that a traffic accident was caused by the use of a cellular phone. On April
27, 1999, the Court granted defendant's motion for summary judgment and
dismissed the suit. Plaintiffs have appealed.
Motorola has been named as one of several defendants in a number of
nearly identical putative class action securities lawsuits arising out of
alleged material misrepresentations or omissions regarding difficulties in
the satellite communications business of Iridium World Communications, LTD,
Iridium LLC and Iridium Operating LLC. Freeland v. Iridium World
Communications, LTD, et al., Yong v. Iridium World Communications, LTD, et
al., Kleinman v. Iridium World Communications, LTD, et al., Marshall v.
Iridium World Communications, LTD, et al., Ackerman v. Iridium World
Communications, LTD, et al., Hargrove v. Iridium World Communications, LTD,
et al., Turner v. Iridium World Communications, LTD, et al., Astiazaran v.
Iridium World Communications, LTD, et al., Coyle v. Iridium World
Communications, LTD, et al., Demopoulos v. Iridium World Communications,
LTD, et al., Evans v. Iridium World Communications, LTD, et al., Ginechese
v. Iridium World Communications, LTD, et al., Hammerschmidt v. Iridium
World Communications, LTD, et al., Hoyt v. Iridium World Communications,
LTD, et al., Mace v. Iridium World Communications, LTD, et al., Mandelbaum
v. Iridium World Communications, LTD, et al., Maytorena v. Iridium World
Communications, LTD, et al., Phiel v. Iridium World Communications, LTD, et
al., Strougo v. Iridium World Communications, LTD, et al., and Garvin v.
Iridium World Communications, LTD, et al., have all been filed in the US
District Court for the District of Columbia. The alleged classes consist
of purchasers of Iridium securities during the period from July 14, 1998 to
May 13, 1999. A motion to consolidate the cases is currently pending. As a
result of bankruptcy proceedings regarding Iridium LLC and other Iridium
business entities, these cases have been stayed as to the Iridium business
defendants but are continuing as to Motorola and all other defendants. In
addition, Motorola has been named as a defendant in Andrews, et al. v.
Iridium World Communications, Ltd., et al., in the Superior Court of
California (San Diego). The approximately 42 plaintiffs were purchasers of
Iridium securities and allege violations of California law relating to
securities.
See Item 3 of the Company's Form 10-K for the fiscal year ended December
31, 1998, including the amendment thereto, and Item 1 of Part II of the
Company's Form 10-Q for the periods ending April 3, 1999 and July 3, 1999,
including the amendment thereto, 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.
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Not applicable.
Item 3 - Defaults Upon Senior Securities.
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Not applicable.
Item 4 - Submission of Matters to Vote of Security Holders.
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Not applicable.
Item 5 - Other Information.
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Not applicable.
Item 6 - Exhibits and Reports on Form 8-K.
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(a) Exhibits
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10 Consultant Agreement dated September 30, 1999 between
Motorola, Inc. and Gary L. Tooker
27 Financial Data Schedule (filed only electronically with the
SEC).
(b) Reports on Form 8-K
-------------------
The Company filed a Current Report on Form 8-K on September
15, 1999.
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: November 15, 1999 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
- ------ -----------------------
10 Consultant Agreement dated September 30, 1999 between
Motorola, Inc. and Gary L. Tooker
27 Financial Data Schedule (filed only electronically with the SEC)
56
1