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 September 30, 2000
------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to _________
Commission file number: 1-7221
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MOTOROLA, INC.
--------------
(Exact name of registrant as specified in its charter)
Delaware 36-1115800
------------------------ ------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
1303 E. Algonquin Road, Schaumburg, Illinois 60196
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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 September 30, 2000:
Class Number of Shares
----- ----------------
Common Stock; $3 Par Value 2,184,365,601
1
Motorola, Inc. and Subsidiaries
Index
Part I
Financial Information Page
Item 1 Financial Statements
Condensed Consolidated Statements of Earnings for the
Three-Month and Nine-Month Periods Ended
September 30, 2000 and October 2, 1999 3
Condensed Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999 4
Condensed Consolidated Statement of Stockholders'
Equity for the Nine-Month Period Ended
September 30, 2000 5
Condensed Consolidated Statements of Cash Flows for
the Nine-Month Periods Ended September 30, 2000 and
October 2, 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
Part II
Other Information
Item 1 Legal Proceedings 44
Item 2 Changes in Securities 44
Item 3 Defaults Upon Senior Securities 44
Item 4 Submission of Matters to a Vote of Security Holders 44
Item 5 Other Information 44
Item 6 Exhibits and Reports on Form 8-K 44
2
Part I - Financial Information
Motorola, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(Unaudited)
(In millions, except per share amounts)
Three Months Ended Nine Months Ended
------------------ ------------------
Sept. 30, Oct. 2, Sept. 30, Oct. 2,
2000 1999 2000 1999
--------- ------- --------- -------
Net sales $ 9,493 $ 8,223 $27,516 $23,989
------- ------- ------- -------
Costs and expenses
Manufacturing and other
costs of sales 6,130 5,281 16,838 14,612
Selling, general and
administrative expenses 768 1,295 3,674 4,226
Research & development
expenditures 1,171 913 3,293 2,528
Depreciation expense 592 537 1,718 1,680
Interest expense, net 74 33 175 118
------- ------- ------- -------
Total costs and expenses 8,735 8,059 25,698 23,164
------- ------- ------- -------
Earnings before income taxes 758 164 1,818 825
Income tax provision 227 50 635 257
------- ------- ------- -------
Net earnings $ 531 $ 114 $ 1,183 $ 568
======= ======= ======= =======
Net earnings per common share
- -----------------------------
Basic $ .24 $ .05 $ .55 $ .27
======= ======= ======= =======
Diluted $ .23 $ .05 $ .52 $ .26
======= ======= ======= =======
Weighted average common shares
- ------------------------------
outstanding
- -----------
Basic 2,182.3 2,123.8 2,164.1 2,114.7
======= ======= ======= =======
Diluted 2,266.0 2,201.1 2,258.2 2,191.2
======= ======= ======= =======
Dividends paid per share (1) $ .04 $ .04 $ .12 $ .12
======= ======= ======= =======
(1) Dividends per share for 1999 represent dividends on Motorola shares
outstanding prior to the General Instrument merger.
See accompanying notes to condensed consolidated financial statements.
3
Motorola, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In millions, except per share amounts)
(Unaudited)
Sept. 30, Dec. 31,
2000 1999
----------- --------
Assets
Cash and cash equivalents $ 2,757 $ 3,537
Short-term investments 336 699
Accounts receivable, net 6,718 5,627
Inventories, net 5,557 3,707
Deferred income taxes 2,373 3,247
Other current assets 1,682 768
------- -------
Total current assets 19,423 17,585
------- -------
Property, plant and equipment, net 10,664 9,591
Investments 9,022 9,039
Other assets 5,068 4,274
------- -------
Total assets $44,177 $40,489
======= =======
Liabilities and Stockholders' Equity
Notes payable and current portion of
long-term debt $ 5,262 $ 2,504
Accounts payable 3,960 3,285
Accrued liabilities 6,248 7,117
------- -------
Total current liabilities 15,470 12,906
------- -------
Long-term debt 3,106 3,089
Deferred income taxes 3,243 3,719
Other liabilities 1,216 1,598
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely company-guaranteed debentures 484 484
Stockholders' Equity
Preferred stock, $100 par value issuable
in series -- --
Common stock, $3 par value 6,554 6,418
Additional paid-in capital 928 --
Retained earnings 9,680 8,757
Non-owner changes to equity 3,496 3,518
------- -------
Total stockholders' equity 20,658 18,693
------- -------
Total liabilities and stockholders' equity $44,177 $40,489
======= =======
See accompanying notes to condensed consolidated financial statements.
4
Motorola, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
(In millions)
Non-Owner Changes To Equity
----------------------------------------------------
Common Fair Value
Stock Adjustment
and to Available Foreign Minimum
Additional for Sale Currency Pension
Paid-In Securities, Translation Liability Retained
Capital Net of Tax Adjustments Adjustment Earnings
- --------------------------------------------------------------------------------------------------------------------------
BALANCES AT 12/31/99 $6,418 $3,830 $(239) $(73) $8,757
- --------------------------------------------------------------------------------------------------------------------------
Net earnings 1,183
Conversion of zero coupon notes 6
Fair value adjustment to available
for sale securities, net 179
Change in foreign currency translation
adjustments (201)
Issuance of common stock 609
Stock options exercised and other 449
Dividends declared (260)
- -------------------------------------------------------------------------------------------------------------------------
BALANCES AT 9/30/00 $7,482 $4,009 $(440) $(73) $9,680
- -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
5
Motorola, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In millions)
Nine Months Ended
----------------------
Sept. 30, Oct. 2,
2000 1999
--------- --------
Operating
Net earnings $ 1,183 $ 568
Adjustments to reconcile net earnings to net
cash (used for) provided by operating activities:
Depreciation 1,718 1,680
Deferred income taxes 382 (281)
Charges for discontinuation of product lines
and business exits 719 --
Acquired in-process research and development
charges 319 49
Gain on disposition of investments and businesses (840) (772)
Change in assets and liabilities, net of
effects of acquisitions and dispositions:
Accounts receivable (1,119) (56)
Inventories (2,274) (172)
Other current assets (878) (33)
Accounts payable and accrued liabilities (405) 1,502
Other assets and liabilities 54 (497)
------- -------
Net cash (used for) provided by operating activities $(1,141) $ 1,988
Investing
Acquisitions and advances to affiliates $(1,112) $ (456)
Proceeds from dispositions of investments
and businesses 1,116 2,152
Capital expenditures (2,815) (1,615)
Proceeds from dispositions of property, plant and
equipment 104 383
Sales (purchases) of short-term investments 363 (231)
------- -------
Net cash (used for) provided by investing activities $(2,344) $ 233
Financing
Net proceeds from (repayment of) commercial
paper and short-term borrowings $ 2,756 $(1,412)
Proceeds from issuance of debt 1 497
Repayment of debt (4) (23)
Issuance of common stock 413 405
Issuance of preferred securities of subsidiary
trust -- 484
Payment of dividends (260) (217)
------- -------
Net cash provided by (used for) financing activities $ 2,906 $ (266)
Effect of exchange rate changes on cash and
cash equivalents $ (201) $ (17)
------- -------
Net (decrease) increase in cash and cash equivalents $ (780) $ 1,938
Cash and cash equivalents, beginning of period $ 3,537 $ 1,602
------- -------
Cash and cash equivalents, end of period $ 2,757 $ 3,540
======= =======
See accompanying notes to condensed consolidated financial statements.
6
Motorola, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
On January 5, 2000, Motorola, Inc. ("Motorola") completed its previously
announced merger with General Instrument Corporation ("General Instrument") by
exchanging 301 million shares (reflecting adjustment for the 3-for-1 common
stock split described below) of its common stock for all of the common stock of
General Instrument. Each share of General Instrument was exchanged for 1.725
shares (reflecting adjustment for the 3-for-1 common stock split described
below) of Motorola's common stock. Motorola has accounted for the merger as a
pooling-of-interests and accordingly, all prior period consolidated financial
statements of Motorola have been restated to include the results of operations,
financial position and cash flows of General Instrument. The effects of
conforming General Instrument's accounting policies to those of Motorola were
not material.
For the three-month period ended October 2, 1999, net sales for Motorola and
General Instrument were $7.7 billion and $544 million, respectively. Net
earnings for Motorola and General Instrument were $91 million and $23 million,
respectively. For the nine-month period ended October 2, 1999, net sales for
Motorola and General Instrument were $22.4 billion and $1.6 billion,
respectively. Net earnings for Motorola and General Instrument were $468 million
and $100 million, respectively. Results of operations for the three-month and
nine-month periods ended September 30, 2000, already reflect the
pooling-of-interests. From this point onward, all references to Motorola, Inc.
or the Company reflect the pooling-of-interests.
On June 1, 2000, the Company had a 3-for-1 common stock split in the form of a
200% stock dividend. On that date, the Company distributed 1.4 billion common
shares to stockholders of record on May 15, 2000. The par value of the common
stock remained at $3 per share. The effect of the stock split has been
recognized retroactively in the stockholders' equity accounts as of December 31,
1999, and in all share and per share data in the accompanying condensed
consolidated financial statements and the notes to condensed consolidated
financial statements. The stockholders' equity accounts have been restated to
reflect the reclassification of an amount equal to the par value of the increase
in issued common shares from additional paid-in capital and retained earnings to
common stock.
The condensed consolidated financial statements as of September 30, 2000 and for
the three-month and nine-month periods ended September 30, 2000 and October 2,
1999, include, in the opinion of management, all adjustments (consisting of
normal recurring adjustments and reclassifications) necessary to present fairly
the financial position, results of operations and cash flows as of September 30,
2000 and for all periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto incorporated by reference in the Company's Form
10-K for the year ended December 31, 1999, as supplemented
7
by Form 8-K/As filed on March 24, 2000 and on June 2, 2000. The results of
operations for the three-month and nine-month periods ended September 30, 2000
are not necessarily indicative of the operating results to be expected for the
full year. Certain amounts in prior years' financial statements and related
notes have been reclassified to conform to the 2000 presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. Other Financial Data
Statement of Earnings Information
The following table presents a reconciliation of the numerators and denominators
of basic and diluted earnings per common share:
Three Months Ended
-------------------
Sept. 30, Oct. 2,
(In millions, except per share amounts) 2000 1999
-------- --------
Basic earnings per common share:
Net earnings $ 531 $ 114
Weighted average common shares
outstanding 2,182.3 2,123.8
-------- --------
Per share amount $ .24 $ .05
======== ========
Diluted earnings per common share:
Net earnings $ 531 $ 114
Add: Interest on zero coupon
notes, net -- --
-------- --------
Net earnings as adjusted $ 531 $ 114
-------- --------
Weighted average common shares
outstanding 2,182.3 2,123.8
Add: Effect of dilutive securities
Stock options 51.6 56.0
Warrants 27.1 21.3
Zero coupon notes 5.0 --
-------- --------
Diluted weighted average common
shares outstanding 2,266.0 2,201.1
-------- --------
Per share amount $ .23 $ .05
======== ========
8
In the computation of diluted earnings per common share for the three-month
period ended September 30, 2000, approximately 60.4 million stock options with
exercise prices greater than the average market price of the underlying common
stock were excluded because their inclusion would have been antidilutive.
In the computation of diluted earnings per common share for the three-month
period 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
-------------------
Sept. 30, Oct. 2,
(In millions, except per share amounts) 2000 1999
-------- --------
Basic earnings per common share:
Net earnings $ 1,183 $ 568
Weighted average common shares
outstanding 2,164.1 2,114.7
-------- --------
Per share amount $ .55 $ .27
======== ========
Diluted earnings per common share:
Net earnings $ 1,183 $ 568
Add: Interest on zero coupon
notes, net 1 1
-------- --------
Net earnings as adjusted $ 1,184 $ 569
-------- --------
Weighted average common shares
outstanding 2,164.1 2,114.7
Add: Effect of dilutive securities
Stock options 60.8 53.1
Warrants 28.3 19.7
Zero coupon notes 5.0 3.7
-------- --------
Diluted weighted average common
shares outstanding 2,258.2 2,191.2
-------- --------
Per share amount $ .52 $ .26
======== ========
In the computation of diluted earnings per common share for the nine-month
period ended September 30, 2000, approximately 56.9 million stock options with
exercise prices greater than the average market price of the underlying common
stock were excluded because their inclusion would have been antidilutive.
In the computation of diluted earnings per common share for the nine-month
period ended October 2, 1999, the assumed conversion of the zero coupon notes
due 2009 was excluded because their inclusion would have been antidilutive.
Balance Sheet Information
Inventories, net of reserves, consist of the following (in millions):
Sept. 30, Dec. 31,
2000 1999
-------- -------
Finished goods $ 1,774 $ 1,199
Work-in-process and production materials 3,783 2,508
------- -------
$ 5,557 $ 3,707
======= =======
9
Investments include available for sale securities at fair value and investments
under the cost and equity methods of accounting. The following table displays
the fair value, cost basis, and unrealized gain before tax of the Company's
available for sale securities (in millions):
At At
Sept. 30, 2000 Dec. 31, 1999
-------------------------------------------------------
Fair Cost Unrealized Fair Cost Unrealized
Value Basis Gain Value Basis Gain
-------------------------------------------------------
Nextel Communications,
Inc. $4,699 $ 807 $3,892 $5,170 $ 807 $4,363
Broadcom Corporation 1,388 14 1,374 22 22 --
Other securities 1,888 664 1,224 2,416 457 1,959
-------------------------------------------------------
Totals $7,975 $1,485 $6,490 $7,608 $1,286 $6,322
=======================================================
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", requires the carrying value
of available for sale securities to be adjusted to fair value. As such, the
Company recorded changes to investments, deferred income taxes and stockholders'
equity of an increase of $168 million, a decrease of $11 million and an increase
of $179 million, respectively, for the period ended September 30, 2000; and an
increase to investments, deferred income taxes and stockholders' equity of $5.5
billion, $2.2 billion and $3.3 billion, respectively, for the period ended
December 31, 1999.
At December 31, 1999, the Company's investment in Broadcom Corporation carried
certain restrictions related to the sale of the securities. Such restrictions
did not lapse until April 2000. Accordingly, at December 31, 1999, the Company
carried this investment at its cost of $22 million and did not record a fair
value adjustment at that time.
Stockholders' Equity Information
Comprehensive Earnings (Loss)
- -----------------------------
Comprehensive earnings (loss) for the three-month periods ended September 30,
2000 and October 2, 1999 were ($797) million and $808 million, respectively, and
include reclassification adjustments, net of tax, of $418 million and $12
million, respectively, related to the sale of securities. Comprehensive earnings
for the nine-month periods ended September 30, 2000 and October 2, 1999 were
$1.2 billion and $2.3 billion, respectively, and include reclassification
adjustments, net of tax, of $463 million and $64 million, respectively, related
to the sale of securities.
Cash Flow Information
Cash paid for interest during the first nine months of 2000 and 1999 was $319
million and $122 million, respectively. Cash received related to income taxes
during the first nine months of 2000 was $72 million. Cash paid for income taxes
during the first nine months of 1999 was $103 million.
10
3. Reorganization of Businesses - 1997 Programs
During 1997, the Company recorded restructuring charges of $327 million
resulting from decisions to exit three unprofitable businesses that no longer
had long-term strategic value to the Company. As of December 31, 1999, the
business exits from the dynamic random access memory market and the retail
analog modem business had been completed. For the exit from the MacOS(R)-
compatible computer systems business, $2 million was utilized during the first
nine months of 2000 for contractual and warranty payments. The remaining $11
million accrual as of September 30, 2000, relates to contractual commitments and
warranty liability and may extend past the 2000 year end.
4. Segment Information
Beginning with the first quarter of 2000, the Company added two operating
segments for financial reporting purposes. The Broadband Communications Segment
combines the operations of General Instrument Corporation with the existing
cable modem and telephony business of the Company's Internet and Networking
Group, which is part of the Other Products Segment. The Integrated Electronic
Systems Sector, which was previously included in the Other Products Segment, is
now reported as a separate segment. Historical segment data has been restated to
reflect these changes.
During the third quarter of 2000, the Network Systems Segment changed its name
to the Global Telecom Solutions Segment. This was only a name change, and there
have been no changes to the financial information.
Summarized below are the Company's segment sales and operating profit (loss)
before taxes by new reportable segment for the three months ended September 30,
2000, and October 2, 1999.
Three Months Ended
Sept. 30, Oct. 2, %
2000 1999 Change
--------- ------- ------
Segment Sales:
- --------------
Personal Communications Segment $3,221 $3,084 4
Global Telecom Solutions Segment 1,960 1,594 23
Commercial, Govt. and Industrial
Systems Segment 1,145 1,020 12
Broadband Communications Segment 917 623 47
Semiconductor Products Segment 2,071 1,708 21
Integrated Electronic Systems Segment 737 663 11
Other Products Segment 272 176 55
Adjustments & Eliminations (830) (645) 29
------ ------
Segment Totals $9,493 $8,223 15
====== ======
11
% Of % Of
Sales Sales
----- -------
Segment Operating Profit
(Loss) Before Taxes:
- --------------------
Personal Communications Segment $(197) (6) $ 133 4
Global Telecom Solutions Segment 136 7 (639) (40)
Commercial, Govt. and Industrial
Systems Segment 109 10 293 29
Broadband Communications Segment 757 83 53 9
Semiconductor Products Segment 68 3 406 24
Integrated Electronic Systems Segment 14 2 50 8
Other Products Segment (172) (63) (211) (120)
Adjustments & Eliminations (1) -- 1 --
----- -----
Segment Totals 714 8 86 1
General Corporate 44 78
----- -----
Earnings Before Income Taxes $ 758 8 $ 164 2
===== =====
Summarized below are the Company's segment sales and operating profit (loss)
before taxes by new reportable segment for the nine months ended September 30,
2000, and October 2, 1999:
Nine Months Ended
Sept. 30, Oct. 2, %
2000 1999 Change
-------- ------- -------
Segment Sales:
- --------------
Personal Communications Segment $ 9,789 $ 8,474 16
Global Telecom Solutions Segment 5,726 4,804 19
Commercial, Govt. and Industrial
Systems Segment 3,280 2,860 15
Broadband Communications Segment 2,363 1,838 29
Semiconductor Products Segment 5,971 5,594 7
Integrated Electronic Systems Segment 2,105 1,858 13
Other Products Segment 776 569 36
Adjustments & Eliminations (2,494) (2,008) 24
------- -------
Segment Totals $27,516 $23,989 15
======= =======
12
% Of % Of
Sales Sales
----- -----
Segment Operating Profit
(Loss) Before Taxes:
- --------------------
Personal Communications Segment $ 47 -- $ 341 4
Global Telecom Solutions Segment 674 12 (277) (6)
Commercial, Govt. and Industrial
Systems Segment 307 9 439 15
Broadband Communications Segment 972 41 207 11
Semiconductor Products Segment 136 2 533 10
Integrated Electronic Systems Segment 131 6 127 7
Other Products Segment (379) (49) (611) (107)
Adjustments & Eliminations -- -- (6) --
------ -----
Segment Totals 1,888 7 753 3
General Corporate (70) 72
------ -----
Earnings Before Income Taxes $1,818 7 $ 825 3
====== =====
5. Commitments and Contingencies
Iridium Program
- ---------------
At September 30, 2000, the Company owned, directly and indirectly, approximately
18% of the equity interests in Iridium LLC and its operating subsidiaries
(Iridium LLC and its operating subsidiaries are collectively referred to as
"Iridium") and a significant portion of a series of Iridium bonds. Since August
1999, Iridium has operated as debtors-in-possession under Chapter 11 of the U.S.
Federal Bankruptcy Code. On March 17, 2000, Iridium began the process of winding
down and liquidating its operations because no qualified bid to purchase the
Iridium satellites was timely received. At the same time, the Company began the
process of finalizing a plan for the decommissioning of the Iridium
constellation and continued with the process of shutting down its Iridium-
related operations.
On October 26, 2000, Iridium Satellite LLC, a newly formed entity, submitted a
bid to the United States Bankruptcy Court in the Southern District of New York
to acquire the assets of Iridium. A hearing has been scheduled for November 8,
2000, for the bankruptcy court to approve this bid. If so approved, the terms of
the bid currently provide that the acquisition should be completed no later than
November 30, 2000.
The Company had several contracts with Iridium, primarily for the operation and
maintenance of the global personal communications system. The Company stopped
recognizing revenue on the operations and maintenance contract with Iridium
after the second quarter of 1999, and continued to perform its services under
that contract throughout 1999 without being paid, although the Company has not
waived its right to receive payment. Although not contractually required to do
so, the Company is continuing to operate the Iridium system without
compensation. The Company currently expects to continue operating the system
only until Iridium Satellite LLC acquires Iridium's assets or until a plan to
decommission the Iridium constellation is finalized. The Company currently
expects to continue to perform some services without compensation during this
period, although it has not waived its right to seek compensation.
At December 31, 1999 the Company had $1.8 billion of reserves related to the
Iridium program. There have been no charges recorded in 2000 related to the
Iridium program. In the third quarter of 1999 the Company recorded a special
charge 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
Chapter 11 financial restructuring of Iridium and (ii) to write down the
remaining value of the Iridium bonds it held.
The following table displays a rollforward by category from December 31, 1999 to
September 30, 2000, of the remaining accrual balances:
13
Accruals Q1 & Q2 Accruals
At 2000 Q3 2000 At
Dec. 31, Amounts Amounts Sept. 30,
1999 Used Used 2000
-------- ------- ------- ---------
Accounts Receivable $ 661 $ (661) $ -- $ --
Bank Guarantees
and Other Financial Commitments $ 50 $ -- $ -- $ 50
Investments, Contractual
Commitments and Other Obligations $1,087 $ (686) $ (46) $ 355
------ -------- ------ ------
Totals $1,798 $(1,347) $ (46) $ 405
====== ======== ====== ======
Through September 30, 2000 the Company utilized $1.4 billion of reserves
including $661 million for accounts receivable write-offs and $732 million
primarily for inventory and other asset write-offs. The total amount used
through September 30, 2000 of $1.4 billion reflects approximately $155 million
in cash payments and $1.2 billion in write-offs. The cash payments were
primarily for costs associated with the wind-down of Iridium operations and
Iridium gateway debt guarantees. Of the remaining $405 million accrual balance
as of September 30, 2000, the Company expects to make approximately $318 million
in cash payments and $87 million in write-offs. There were no reserves used in
the first three quarters of 1999.
The reserve related to the Iridium program as of September 30, 2000 was $405
million, of which $282 million was included in accrued liabilities, $53 million
was included as a contra asset, in inventories, $45 million was included as a
contra asset, in property, plant and equipment, and $25 million was included as
a contra asset, in other assets. The development and commercialization reserve
as of December 31, 1999 was $1.8 billion, of which $869 million was included in
accrued liabilities, $734 million was included as a contra asset, in
inventories, $79 million was included as a contra asset, in property, plant and
equipment, $72 million was included as a contra asset, in other assets, $39
million was included in other liabilities, $4 million was included in accounts
payable, and $1 million was included as a contra asset, in accounts receivable,
in the condensed consolidated balance sheets. These reserves are believed by
management to be sufficient to cover the Company's Iridium exposures. These
reserves do not include additional special charges that may arise as a result of
litigation related to the Iridium project.
The Company had agreed under a Memorandum of Understanding to provide a
guarantee of up to an additional $350 million of Iridium debt for Iridium's use,
subject to certain conditions. Iridium requested Motorola to provide this
guarantee during the third quarter of 1999, however, Motorola believes it was
not obligated to do so. In certain circumstances and subject to certain
conditions, $300 million of such guarantee could have been required to be used
to guarantee amounts borrowed under the Secured Credit Agreement. The lenders
under the Secured Credit Agreement asserted that Iridium failed to have the
Company provide such guarantee as required, and that the Company was obligated
to provide them with this $300 million guarantee. The Company believes that it
was not obligated to do so. Iridium has also stated that it believed it was not
obligated to have the Company provide this $300 million guarantee to these
lenders. On June 9, 2000, the Chase Manhattan Bank, the agent under the Secured
Credit
14
Agreement, filed a complaint in the Supreme Court of the State of New York, New
York County, demanding that Motorola pay this $300 million to Chase plus
interest and legal fees. The lenders under the Secured Credit Agreement have
also demanded that the investors in Iridium comply with their capital call
requirements. In the Company's case, this could require an additional equity
investment of $50 million. On June 9, 2000, the Chase Manhattan Bank also filed
a complaint in the U.S. District Court in the District of Delaware demanding
that Motorola and other investors in Iridium LLC pay their capital call
requirements, plus interest and legal fees.
Creditors and other stakeholders in Iridium may seek to bring various other
claims against the Company, with respect to payments previously made by Iridium
to the Company, and otherwise. A number of purported class action lawsuits
alleging securities law violations have been filed naming Iridium, certain
current and former officers of Iridium, other entities and the Company as
defendants.
Other
- -----
At September 30, 2000, the Company's aggregate commitment to provide financing
to third-party vendors was $3.8 billion, of which $2.8 billion had been
utilized.
At September 30, 2000, the Company's commitment for off-balance sheet third-
party financial guarantees aggregated $691 million, of which $516 million had
been utilized.
The Company's aggregate commitments represent the maximum amounts available.
Present and future commitments may not be completely utilized.
6. Acquisitions and Disposition of Businesses
The following table summarizes acquisitions involving acquired in-process
research and development and the business disposition that the Company made
during the first three quarters of 2000:
In-Process
Quarter Form of Research and
Acquired/ Consider- Consider- Development
(in millions) Disposed ation ation Charge
- --------------------------------------------------------------------------------
Acquisitions:
Hiware AG Q3 $ 11 Cash $ 4
C-Port Corporation Q2 $430 Common stock $214
Assumed stock
options
Clinical Micro Sensors,
Inc. Q2 $280 Cash $ 80
Assumed stock
options
WaveMark Technologies, Inc. Q2 $ 30 Cash $ 6
Communication Systems
Technology, Inc. Q2 $ 22 Cash $ 6
Intec, Ltd. Q1 $ 31 Cash $ 9
Disposition:
Motorola Lighting, Inc. Q1 $110 Cash Not Applicable
15
For the three-month period ended September 30, 2000, the Company recorded a $4
million acquired in-process research and development charge for the acquisition
of Hiware AG. For the nine-month period ended September 30, 2000, the Company
recorded a total of approximately $319 million in acquired in-process research
and development charges. These charges were recorded in selling, general and
administrative expenses in the Company's condensed consolidated statements of
earnings. The Company incurred $49 million in acquired in-process research and
development charges during the three-month and nine-month periods ended October
2, 1999.
For each acquisition, the in-process research and development will have no
alternative future uses if the products are not feasible. Historical pricing,
margins and expense levels, where applicable, 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
average risk adjusted rates reflecting both technological and market risk as
well as the time value of money.
In addition to the acquired in-process research and development charges, the
acquisitions above resulted in a total of approximately $422 million in goodwill
and other intangibles which are to be amortized over periods ranging from 3 to
10 years on a straight-line basis. The goodwill and other intangibles were
recorded in other assets in the Company's condensed consolidated balance sheets.
The acquisitions of Hiware AG, C-Port Corporation, Clinical Micro Sensors, Inc.
and WaveMark Technologies, Inc. were accounted for under the purchase method and
accordingly, the results of operations for each acquiree have been included in
the Company's consolidated financial statements since the date of acquisition.
The pro forma effects of these acquisitions on the Company's financial
statements were not significant.
The Company made no significant acquisitions during the third quarter of 2000.
Following is information relating to significant pending transactions of the
Company:
Printrak International - Pending Transaction
- --------------------------------------------
In August 2000, the Company signed a definitive agreement to acquire Printrak
International Inc., a publicly traded Anaheim, CA-based company, for
approximately $160 million in cash. Printrak is a worldwide supplier of
enterprise software and related services for information management and decision
support targeted at national, state and local governmental and civil agencies.
This transaction is expected to close in the fourth quarter of 2000.
Propel - Pending Transaction
- ----------------------------
In October 2000, the Company reached a definitive agreement to sell four
cellular telephone operating companies in Northern Mexico to Telefonica Moviles
of Madrid. In addition, agreements have been reached to sell the Company's
interests in wireless communications businesses in Brazil,
16
Israel, Honduras, the Dominican Republic, and Southern Mexico (Portatel). The
finalization of these transactions is subject to rights of first refusal of
other shareholders in these businesses.
In the event that all of these transactions are completed, the total sales price
is expected to be approximately $2.65 billion, subject to adjustment, which may
be paid in cash or a slightly higher amount in shares of Telefonica, S.A.
All transactions are subject to customary regulatory approvals. If these and
other conditions are met, all transactions are currently expected to be
completed in 2001.
In June 2000, the Company caused its wholly owned subsidiary, Propel, Inc., to
file a registration statement with the Securities & Exchange Commission (SEC)
for a public offering of up to 20% of Propel's common stock. In light of the
pending transaction with Telefonica Moviles, Propel's public offering process is
currently on hold. In the event that the wireless communications businesses
described above are sold to Telefonica Moviles, Propel would not complete its
public offering.
7. Charges for Discontinuation of Product Lines and Business Exits
Discontinuation of Product Lines
During the third quarter of 2000, the Company implemented a plan to discontinue
unprofitable product lines, primarily analog wireless telephone products and
certain 5-inch and 6-inch wafer technologies. As a result, the Company recorded
in the third quarter of 2000 a special charge of $570 million, of which $428
million was included in manufacturing and other costs of sales and $142 million
was included in selling, general and administrative expenses in the condensed
consolidated statements of earnings. The $570 million charge was comprised of
$413 million in inventory writedowns, $142 million in capital asset writedowns,
and $15 million in exit costs.
This plan impacted the Personal Communications, Global Telecom Solutions,
Semiconductor Products, and Integrated Electronic Systems segments. The
following table displays by segment the charges incurred for inventory
writedowns, capital asset writedowns, and exit costs:
Capital
Inventory Asset Exit
Segment Writedowns Writedowns Costs Total
- -------------------------- ---------- ---------- ----- -----
Personal Communications $373 $ 15 $ -- $388
Global Telecom Solutions 15 -- -- 15
Semiconductor Products -- 125 15 140
Integrated Electronic
Systems 25 2 -- 27
- -------------------------- ---- ---- ---- ----
Total $413 $142 $ 15 $570
- -------------------------- ---- ---- ---- ----
The inventory writedowns were recorded to reflect the discontinued product lines
at net realizable value. The capital asset writedowns were recorded to reflect
the impairment of two semiconductor wafer fabrication facilities in Arizona and
Texas and machinery and equipment. The impairment for these assets was based
upon an estimate of the undiscounted future cash flows expected from the use of
the assets. The impairment charge was calculated
17
using discounted cash flows. The exit costs were recorded in conjunction with
the two semiconductor wafer fabrication facilities. These costs included site
and equipment decontamination costs and equipment, chemical, and gas line
removal costs. As of September 30, 2000, the $15 million accrual, included in
accrued liabilities in the condensed consolidated balance sheets, had not yet
been utilized and represented cash payments to be made in 2001.
Business Exit and Realignments
During the third quarter of 2000, the Company implemented a plan to exit an
unprofitable business and realign the operations of two other businesses. The
unprofitable business is the Company's joint venture with Cisco Systems, Inc. in
SpectraPoint Wireless LLC (SpectraPoint). The realignment of operations relates
to the Company's multi-network service business (MND) and the European and Latin
American locations of the global market and sales organization. As a result of
this plan, the Company recorded in the third quarter of 2000 a special charge of
$149 million, of which $71 million was included in manufacturing and other costs
of sales and $78 million was included in selling, general and administrative
expenses in the condensed consolidated statements of earnings. The $149 million
charge was comprised of $42 million in exit costs, $26 million in employee
separation costs, $45 million in inventory writedowns, and $36 million in asset
writedowns.
This plan impacted the Global Telecom Solutions; Commercial, Government, and
Industrial Systems; and Other Products segments. The following table displays
by segment the charges incurred for exit costs, employee separation costs,
inventory writedowns, and asset writedowns:
Employee
Exit Separation Inventory Asset
Segment Costs Costs Writedowns Writedowns Total
- ------------------------------------------------------------------------
Global Telecom Solutions $ 32 $ 7 $ 35 $ 22 $ 96
Commercial, Govt., and
Industrial -- 6 -- -- 6
Other Products 10 13 10 14 47
- -----------------------------------------------------------------------
Total $ 42 $ 26 $ 45 $ 36 $149
- -----------------------------------------------------------------------
Exit costs primarily include customer and supplier termination costs and lease
payment and cancellation costs. Employee separation costs represent the costs
of involuntary severance benefits for 520 positions in the impacted businesses.
As of September 30, 2000, approximately 190 employees have separated from the
Company. The accruals for exit costs and employee separation costs are included
in accrued liabilities in the condensed consolidated balance sheets. The
following table displays a rollforward of these accruals to September 30, 2000:
Initial Amounts Accruals at
Charges Used Sept. 30, 2000
------- -------- --------------
Exit costs $42 $(13) $29
Employee separation costs 26 (10) 16
- --------------------------- --- ---- ---
Total $68 $(23) $45
- --------------------------- --- ---- ---
The amount used of $23 million reflects actual cash payments. The remaining
accrual of $45 million represents approximately $33 million in
18
cash payments and $12 million in non-cash utilization and is expected to be
completely used in 2001.
The inventory writedowns were recorded to reflect the SpectraPoint and MND
inventory at net realizable value. The asset writedowns were for the capital
assets used in the manufacture of SpectraPoint and MND products and for the
writeoff of the SpectraPoint goodwill.
8. Trust Originated Preferred Securities/SM/
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 assets of the Trust are 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.
The Company's obligations relating to the TOPrS include obligations to make
payments on the Subordinated Debentures and obligations under the related
Indenture, Trust Guarantee and Declaration of Trust. Taken together, these
obligations represent a full and unconditional guarantee of amounts due under
the TOPrS.
/SM/ "Trust Originated Preferred Securities" and "TOPrS" are service marks of
Merrill Lynch & Co., Inc.
19
Motorola, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
On January 5, 2000, Motorola, Inc. ("Motorola") completed its previously
announced merger with General Instrument Corporation ("General Instrument") by
exchanging 301 million shares (reflecting adjustment for the 3-for-1 common
stock split described below) of its common stock for all of the common stock of
General Instrument. Each share of General Instrument was exchanged for 1.725
shares (reflecting adjustment for the 3-for-1 common stock split described
below) of Motorola's common stock. Motorola has accounted for the merger as a
pooling-of-interests and accordingly, all prior period consolidated financial
statements of Motorola have been restated to include the results of operations,
financial position and cash flows of General Instrument. From this point
onward, all references to Motorola, Inc. or the Company reflect the pooling-of-
interests.
On June 1, 2000, the Company had a 3-for-1 common stock split in the form of a
200% stock dividend. On that date, the Company distributed 1.4 billion common
shares to stockholders of record on May 15, 2000. The par value of the common
stock remained at $3 per share. All historical information has been restated to
reflect the stock split.
This commentary should be read in conjunction with the Company's consolidated
financial statements and related notes thereto and management's discussion and
analysis of financial condition and results of operations incorporated by
reference in the Company's Form 10-K for the year ended December 31, 1999, as
supplemented by Form 8-K/As filed on March 24, 2000 and on June 2, 2000.
20
Results of Operations:
- ----------------------
- --------------------------------------------------------------------------------------------
Motorola, Inc.
Three Months Ended Sept. 30, % of Oct. 2, % of
(in millions, except per share amounts) 2000 Sales 1999 Sales
------------------- -----------------
Net sales $ 9,493 $ 8,223
Percent change from prior year 15%
Costs and expenses
Manufacturing and other costs of sales 6,130 65% 5,281 64%
Selling, general and administrative expenses 768 8% 1,295 16%
Research and development expenditures 1,171 12% 913 11%
Depreciation expense 592 6% 537 7%
Interest expense, net 74 1% 33 0%
--------- -------
Total costs and expenses 8,735 8,059
--------- -------
Earnings before income taxes 758 8% 164 2%
Income tax provision 227 50
--------- -------
Net earnings $ 531 6% $ 114 1%
========= =======
Diluted earnings per common share $ 0.23 $ 0.05
- -------------------------------------------------------------------------------------------
Sales were $9.5 billion in the third quarter of 2000, up 15 percent from $8.2
billion a year earlier. Sales growth was attributed primarily to a very
significant increase in sales of internet protocol (IP) network and digital
network systems and continuing increases in sales of terrestrial infrastructure
equipment and semiconductor products.
Third-quarter 2000 net earnings were $531 million, or 23 cents per share,
compared with third-quarter 1999 net earnings of $114 million, or 5 cents per
share. Net margin on sales was 6 percent in the third quarter of 2000 compared
with 1 percent a year earlier.
Manufacturing margin in the third quarter of 2000 decreased to 35 percent from
36 percent a year earlier, attributable in part to special inventory writedowns.
Selling, general and administrative expenses decreased to 8 percent of sales
compared to 16 percent a year earlier. The decrease in selling, general and
administrative expenses is primarily attributable to $673 million of Iridium
charges included in selling, general and administrative expenses during third
quarter 1999. There were no Iridium related expenses incurred during the third
quarter of 2000. The gains from the sale of investments reflected in selling,
general and administrative expenses for each period were comparable.
Research and development expenditures increased 28 percent to $1.2 billion, or
12 percent of sales, in the third quarter of 2000 compared to $913 million, or
11 percent of sales, a year earlier. Over the past three years, the Company has
been increasing the percentage of its sales that is spent on research and
development. The Company continues to believe that a strong commitment to
research and development is required to drive long-
21
term growth. Research and development spending in 2000 is expected to continue
to increase at a rate higher than the rate of sales growth.
Depreciation expense in the third quarter of 2000 as a percentage of sales
decreased to 6 percent from 7 percent a year earlier. This decline was
attributable to the increase in sales, while depreciation expense remained
fairly constant. Depreciation expense for 2000 is expected to increase, but at a
rate below the expected rate of sales growth.
Interest expense increased versus a year ago to $74 million from $33 million due
to increased commercial paper and short-term borrowings. Interest expense for
the full year of 2000 is expected to increase at a rate greater than the
expected rate of sales growth.
The tax rate for the third quarter of 2000 was 30 percent, the same as the year-
earlier quarter. The Company had no significant non-deductible charges in the
third quarter of 2000 and 1999. The Company currently expects the annual tax
rate for 2000, excluding the impact of significant non-deductible charges, from
both prior and potential future acquisitions, to be 30 percent. This estimate is
based on current tax law, the current estimate of earnings and the expected
distribution of income among various tax jurisdictions.
Motorola, Inc.
Nine Months Ended Sept. 30, % of Oct. 2, % of
(in millions, except per share amounts) 2000 Sales 1999 Sales
------------------ ----------------
Net sales $27,516 $23,989
Percent change from prior year 15%
Costs and expenses
Manufacturing and other costs of sales 16,838 61% 14,612 61%
Selling, general and
administrative expenses 3,674 13% 4,226 18%
Research and development expenditures 3,293 12% 2,528 11%
Depreciative expense 1,718 6% 1,680 7%
Interest expense, net 175 1% 118 0%
------ ------
Total costs and expenses 25,698 23,164
------ ------
Earnings before income taxes 1,818 7% 825 3%
Income tax provision 635 257
------- -------
Net earnings $ 1,183 4% $ 568 2%
======= =======
Diluted earnings per common share $ 0.52 $ 0.26
Sales were $27.5 billion in the first nine months of 2000, up 15 percent from
$24.0 billion a year earlier. Sales growth was attributed primarily to a very
significant increase in sales of IP network and digital network systems and
continuing increases in sales of terrestrial infrastructure equipment,
semiconductor products and digital wireless telephones.
Earnings for the first nine months of 2000 were $1.2 billion, or 52 cents per
share, compared with earnings for the first nine months of 1999 of $568 million,
or 26 cents per share. Net margin on sales was 4 percent in the
22
first nine months of 2000 compared with 2 percent for the first nine months of
1999. The increase in earnings for the first nine months of 2000 compared to the
first nine months of 1999 was attributed to: (i) increased sales, (ii) higher
operating margins in the global telecom solutions and broadband communications
businesses, and (iii) lower selling, general and administrative expenses. These
improvements were partially offset by an increase in research and development
expenditures and an increase in the effective tax rate.
Manufacturing margin for the first nine months of 2000 remained constant at 39
percent compared to the first nine months of 1999.
Selling, general and administrative expenses decreased to 13 percent of sales
compared to 18 percent a year earlier. The decrease in selling, general and
administrative expenses is primarily attributable to $921 million of Iridium
charges included in selling, general and administrative expenses during the
first nine months of 1999. There were no Iridium related expenses incurred
during the first nine months of 2000.
Research and development expenditures increased 30 percent to $3.3 billion, or
12 percent of sales, in the first nine months of 2000 compared to $2.5 billion,
or 11 percent of sales, a year earlier.
Depreciation expense in the first nine months of 2000 as a percentage of sales
decreased to 6 percent from 7 percent a year earlier. This decline was
attributable to the increase in sales, while depreciation expense remained
fairly constant.
Interest expense increased in the first nine months of 2000 versus a year ago to
$175 million from $118 million due to increased commercial paper and short-term
borrowings.
The tax rate for the first nine months of 2000 increased to 35 percent from 31
percent for the first nine months of 1999. The increased tax rate reflects the
impact of significant non-deductible charges for acquired in-process research
and development (IPR&D) from acquisitions completed in the second quarter of
2000. Excluding the impact of significant non-deductible charges for IPR&D, the
Company's effective income tax rate for the first nine months of 2000 was 30
percent. There were no significant non-deductible charges in the first nine
months of 1999.
23
Results of Operations Excluding Net Special Items
- -------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Motorola, Inc., Excluding Net Special Items
Three Months Ended
(in millions, except per share amount) Sept. 30, % of Oct. 2 % of
2000 Sales 1999 Sales
--------------------- -------------------
Net sales $9,493 $8,223
Percent change from prior year 15%
Costs and expenses
Manufacturing and other costs of sales 5,631 59% 4,960 60%
Selling, general and administrative expenses 1,172 12% 1,236 15%
Research and development expenditures 1,171 12% 913 11%
Depreciation expense 592 6% 537 7%
Interest expense, net 74 1% 33 0%
------ ------
Total costs and expenses 8,640 7,679
------ ------
Earnings before income taxes 853 9% 544 7%
Income tax provision 255 168
------ ------
Net earnings $ 598 6% $ 376 5%
====== ======
Diluted earnings per common share $ 0.26 $ 0.17
- ---------------------------------------------------------------------------------------------------
Excluding net special items, third-quarter 2000 earnings were $598 million, or
26 cents per share, compared with third-quarter 1999 earnings of $376 million,
or 17 cents per share.
Excluding net special items, net margin on sales was 6 percent for the third
quarter of 2000 compared with 5 percent for the third quarter of 1999.
In the third quarter of 2000, the Company recorded a net special charge of $95
million pre-tax, or 3 cents per share after tax. Of this net special charge,
$499 million was recorded in manufacturing and other costs of sales as a special
charge, and $404 million was recorded in selling, general and administrative
expenses as a special gain in the condensed consolidated statements of earnings.
Included in this net special charge were the following items (in millions):
Inventory writedowns $ 458
Asset writedowns 178
Litigation costs 87
Business exit costs 83
Merger and integration costs related
to the General Instrument merger 5
Acquired in-process research and
development write-off 4
Other charges 7
Gains from the sales of investments (727)
-----
Net special charge $ 95
=====
In the third quarter of 1999, the Company recorded a net special charge of $380
million pre-tax, or 12 cents per share after-tax. Of this net special charge,
$321 million was recorded in manufacturing and other costs of sales, and $59
million was recorded in selling, general and administrative
24
expenses in the condensed consolidated statements of earnings. Included in this
net special charge were the following items (in millions):
Iridium-related charge $ 994
Acquired in-process research and
development write-off 49
Litigation costs 43
Gains from the sales of investments
and businesses (706)
-----
Net special charge $ 380
=====
- ---------------------------------------------------------------------------------------------------
Motorola, Inc., Excluding Net Special Items
Nine Months Ended
(in millions, except per share amount) Sept. 30, % of Oct. 2 % of
2000 Sales 1999 Sales
--------------------- -------------------
Net sales $27,516 $23,989
Percent change from prior year 15%
Costs and expenses
Manufacturing and other costs of sales 16,339 59% 14,289 60%
Selling, general and administrative expenses 3,760 14% 4,068 17%
Research and development expenditures 3,293 12% 2,528 11%
Depreciation expense 1,718 6% 1,680 7%
Interest expense, net 175 1% 118 0%
------- -------
Total costs and expenses 25,285 22,683
------- -------
Earnings before income taxes 2,231 8% 1,306 5%
Income tax provision 669 406
------- -------
Net earnings $ 1,562 6% $ 900 4%
======= =======
Diluted earnings per common share $ 0.69 $ 0.41
- ---------------------------------------------------------------------------------------------------
Excluding net special items, earnings for the nine months ended September 30,
2000 were $1.6 billion, or 69 cents per share, compared with earnings for the
nine months ended October 2, 1999 of $900 million, or 41 cents per share.
Excluding net special items, net margin on sales was 6 percent for the first
nine months of 2000 compared with 4 percent for the first nine months of 1999.
For the nine months ended September 30, 2000, the Company recorded a net special
charge of $413 million pre-tax, or 17 cents per share. Of this net special
charge, $499 million was recorded in manufacturing and other costs of sales as a
special charge, and $86 million was recorded in selling, general and
administrative expenses as a special gain in the condensed consolidated
statements of earnings. Included in this net special charge were the following
items (in millions):
Inventory writedowns $ 458
Acquired in-process research and
development write-off 319
Asset writedowns 178
Merger and integration costs related
to the General Instrument merger 110
Litigation costs 87
Business exit costs 83
Plant consolidation costs 24
Other charges 1
Gains from the sales of investments
and a business (847)
-----
Net special charge $ 413
=====
25
For the nine months ended October 2, 1999, the Company recorded a net special
charge of $481 million pre-tax, or 15 cents per share after tax. Of this net
special charge, $323 million was recorded in manufacturing and other costs of
sales, and $158 million was recorded in selling, general and administrative
expenses in the condensed consolidated statements of earnings. Included in this
net special charge were the following items (in millions):
Iridium-related charge $1,242
Acquired in-process research and
development write-off 49
Litigation costs 43
Other charges 9
Gains from the sales of investments
and businesses (862)
------
Net special charge $ 481
======
Results of Operations for Ongoing Businesses Excluding Net Special Items
Motorola, Inc., Ongoing Businesses, Excluding Net Special Items
Three Months Ended Sept. 30, % of Oct. 2, % of
(in millions, except per share amounts) 2000 Sales 1999 Sales
--------------- --------------
Net sales $9,493 $8,062
percent change from prior year 18%
Costs and expenses
Manufacturing and other costs of sales 5,631 59% 4,846 60%
Selling, general and administrative expenses 1,172 12% 1,213 15%
Research and development expenditures 1,171 12% 910 11%
Depreciation expense 592 6% 537 7%
Interest expense, net 74 1% 33 0%
------ ------
Total costs and expenses 8,640 7,539
------ ------
Earnings before income taxes 853 9% 523 6%
Income tax provision 255 162
------ ------
Net earnings $ 598 6% $ 361 4%
====== ======
Diluted earnings per common share $ 0.26 $ 0.16
In March of 2000, the Company completed the sale of Motorola Lighting, Inc. to
Osram Sylvania, the North American operation of Osram GmbH of Germany. In 1999,
the Company sold several businesses, of which the sale of the Semiconductor
Components Group was the largest transaction.
Although excluding the results of these exited businesses has no impact on
results for the third quarter of 2000, their exclusion does impact the
26
year-earlier quarter. Excluding the results of these exited businesses, third-
quarter 2000 sales from ongoing businesses were $9.5 billion, up 18 percent from
$8.1 billion a year earlier. Excluding the results of exited businesses and net
special items, third-quarter 2000 earnings from ongoing businesses were $598
million, or 26 cents per share, compared with third-quarter 1999 earnings of
$361 million, or 16 cents per share.
Excluding the results of exited businesses and net special items, net margin on
sales for ongoing businesses was 6 percent in the third quarter of 2000 compared
with 4 percent a year earlier.
Motorola, Inc., Ongoing Businesses, Excluding Net Special Items
Nine Months Ended Sept. 30, % of Oct. 2, % of
(in millions, except per share amounts) 2000 Sales 1999 Sales
------------------- -----------------
Net sales $27,500 $22,967
Percent change from prior year 20%
Costs and expenses
Manufacturing and other costs of sales 16,324 59% 13,565 59%
Selling, general and administrative expenses 3,760 14% 3,923 17%
Research and development expenditures 3,293 12% 2,505 11%
Depreciation expense 1,718 6% 1,677 7%
Interest expense, net 175 1% 114 0%
------- -------
Total costs and expenses 25,270 21,784
------- -------
Earnings before income taxes 2,230 8% 1,183 5%
Income tax provision 669 369
------- -------
Net earnings $ 1,561 6% $ 814 4%
======= =======
Diluted earnings per common share $ 0.69 $ 0.37
Excluding the results of exited businesses, sales from ongoing businesses for
the first nine months of 2000 were $27.5 billion, up 20 percent from $23.0
billion a year earlier. Excluding the results of exited businesses and net
special items, earnings from ongoing businesses for the first nine months of
2000 were $1.6 billion, or 69 cents per share, compared with $814 million, or 37
cents per share, for the first nine months of 1999.
Excluding the results of exited businesses and net special items, net margin on
sales for ongoing businesses was 6 percent for the first nine months of 2000,
compared with 4 percent for the first nine months of 1999.
Charges for Discontinuation of Product Lines and Business Exits
During the third quarter of 2000, the Company implemented a plan to discontinue
unprofitable product lines, primarily analog wireless telephone products and
certain 5-inch and 6-inch wafer technologies. As a result, the Company recorded
in the third quarter of 2000 a special charge of $570 million, of which $428
million was included in manufacturing and other costs of sales and $142 million
was included in selling, general and administrative expenses in the condensed
consolidated statements of earnings. The $570 million charge was comprised of
$413 million in inventory writedowns, $142 million in capital asset writedowns,
and $15 million in exit costs.
27
This plan impacted the Personal Communications, Global Telecom Solutions,
Semiconductor Products, and Integrated Electronic Systems segments. The
following table displays by segment the charges incurred for inventory
writedowns, capital asset writedowns, and exit costs:
Capital
Inventory Asset Exit
Segment Writedowns Writedowns Costs Total
- ----------------------------------------------------------------
Personal Communications $373 $ 15 $-- $388
Global Telecom Solutions 15 -- -- 15
Semiconductor Products -- 125 15 140
Integrated Electronic
Systems 25 2 -- 27
- ----------------------------------------------------------------
Total $413 $142 $15 $570
- ----------------------------------------------------------------
The inventory writedowns were recorded to reflect the discontinued product lines
at net realizable value. The capital asset writedowns were recorded to reflect
the impairment of two semiconductor wafer fabrication facilities in Arizona and
Texas and machinery and equipment. The impairment for these assets was based
upon an estimate of the undiscounted future cash flows expected from the use of
the assets. The impairment charge was calculated using discounted cash flows.
The exit costs were recorded in conjunction with the two semiconductor wafer
fabrication facilities. These costs included site and equipment decontamination
costs and equipment, chemical, and gas line removal costs. As of September 30,
2000, the $15 million accrual, included in accrued liabilities in the condensed
consolidated balance sheets, had not yet been utilized and represented cash
payments to be made in 2001.
During the third quarter of 2000, the Company implemented a plan to exit an
unprofitable business and realign the operations of two other businesses. The
unprofitable business is the Company's joint venture with Cisco Systems, Inc. in
SpectraPoint Wireless LLC (SpectraPoint). The realignment of operations relates
to the Company's multi-network service business (MND) and the European and Latin
American locations of the global market and sales organization. As a result of
this plan, the Company recorded in the third quarter of 2000 a special charge of
$149 million, of which $71 million was included in manufacturing and other costs
of sales and $78 million was included in selling, general and administrative
expenses in the condensed consolidated statements of earnings. The $149 million
charge was comprised of $42 million in exit costs, $26 million in employee
separation costs, $45 million in inventory writedowns, and $36 million in asset
writedowns.
This plan impacted the Global Telecom Solutions; Commercial, Government, and
Industrial Systems; and Other Products segments. The following table displays
by segment the charges incurred for exit costs, employee separation costs,
inventory writedowns, and asset writedowns:
Employee
Exit Separation Inventory Asset
Segment Costs Costs Writedowns Writedowns Total
- ------------------------------------------------------------------------------
Global Telecom Solutions $32 $ 7 $ 35 $ 22 $ 96
Commercial, Govt., and
Industrial -- 6 -- -- 6
Other Products 10 13 10 14 47
- ------------------------------------------------------------------------------
Total $42 $26 $ 45 $ 36 $149
- ------------------------------------------------------------------------------
28
Exit costs primarily include customer and supplier termination costs and lease
payment and cancellation costs. Employee separation costs represent the costs
of involuntary severance benefits for 520 positions in the impacted businesses.
As of September 30, 2000, approximately 190 employees have separated from the
Company. The accruals for exit costs and employee separation costs are included
in accrued liabilities in the condensed consolidated balance sheets. The
following table displays a rollforward of these accruals to September 30, 2000:
Initial Amounts Accruals at
Charges Used Sept. 30, 2000
- -----------------------------------------------------------------
Exit costs $42 $(13) $29
Employee separation costs 26 (10) 16
- -----------------------------------------------------------------
Total $68 $(23) $45
- -----------------------------------------------------------------
The amount used of $23 million reflects actual cash payments. The remaining
accrual of $45 million represents approximately $33 million in cash payments and
$12 million in non-cash utilization and is expected to be completely used in
2001.
The inventory writedowns were recorded to reflect the SpectraPoint and MND
inventory at net realizable value. The asset writedowns were for the capital
assets used in the manufacture of SpectraPoint and MND products and for the
writeoff of the SpectraPoint goodwill.
1997 Restructuring Program
- --------------------------
During 1997, the Company recorded restructuring charges of $327 million
resulting from decisions to exit three unprofitable businesses that no longer
had long-term strategic value to the Company. As of December 31, 1999, the
business exits from the dynamic random access memory market and the retail
analog modem business had been completed. For the exit from the MacOS(R)-
compatible computer systems business, $2 million was utilized during the first
nine months of 2000 for contractual and warranty payments. The remaining $11
million accrual as of September 30, 2000, relates to contractual commitments and
warranty liability and may extend past the 2000 year end.
Segment Information
- -------------------
Results of the Company's major operations, which include the effect of the sales
of various businesses and net special items, for the third quarter of 2000
compared with the third quarter of 1999 are reflected below.
During the third quarter of 2000, the Network Systems Segment changed its name
to the Global Telecom Solutions Segment. This was only a name change, and there
have been no changes to the financial information.
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.
29
Personal Communications Segment
- -------------------------------
Three Months Ended
Sept. 30, Oct. 2, %
(in millions) 2000 1999 Change
- -------------------------------------------------------
Orders $3,349 $4,332 (23)%
Segment sales $3,221 $3,084 4 %
Operating profit(loss)
before tax $ (197) $ 133 (248)%
Net special items:
income(expense) $ (382) $ (7) 5,357 %
Operating profit excluding
net special items $ 185 $ 140 32 %
- -----------------------------------------------------
Segment sales rose 4 percent to $3.2 billion, and orders declined 23 percent to
$3.3 billion. Customer concerns over supply shortages of wireless telephones
and many components used in their manufacture resulted in significant pre-
ordering in the year-earlier quarter. These supply constraints are no longer a
factor. As such, no significant pre-ordering occurred in the quarter resulting
in a decline in order growth when compared to the year-earlier quarter.
The segment had an operating loss of $197 million compared to an operating
profit of $133 million in the year-earlier quarter. The decrease in operating
results was due to a net special charge of $382 million included in the
operating loss for the three months ended September 30, 2000. This net special
charge is comprised of a $388 million writedown of inventory and capital assets
related to analog wireless telephone products and a $6 million gain from the
sale of an investment. In the condensed consolidated statements of earnings,
the writedown is included in manufacturing and other costs of sales, and the
gain from the sale of the investment is included in selling, general and
administrative expenses. Evaluation of the segment's strategy to simplify its
product portfolio will continue in the fourth quarter and is expected to result
in a special charge in that quarter. This charge is expected to be smaller than
the charge in the third quarter. Included in the operating profits for the
three months ended October 2, 1999, is a net special charge of $7 million
comprised of a $10 million gain from the sale of an investment and a $17 million
charge related to Iridium. This net special charge is included in selling,
general and administrative expenses in the condensed consolidated statements of
earnings.
Excluding net special items, operating profits rose 32 percent to $185 million
compared to $140 million a year ago. An increase in sales of digital wireless
telephones contributed to the improved operating results. Operating margin
increased to 6 percent of sales compared with 5 percent of sales in the year-
earlier quarter.
The segment's results were not impacted by sold businesses. Therefore, for
ongoing businesses, sales, orders and operating profits excluding net special
items were unchanged from the data shown in the table above.
In the wireless telephone business, which includes iDEN(R) phones, sales
increased 6 percent, orders were down, and operating profits were lower. Sales
increased significantly in the Americas, were higher in Asia and
30
decreased significantly in Europe. Orders were higher in Asia, lower in the
Americas and very significantly lower in Europe. Results in the European region
were negatively impacted by the weakening Euro and very high penetration rates
resulting in slower growth in new subscribers. Digital wireless telephone sales
represented approximately 98 percent of phone sales in the quarter.
Digital phone unit sales increased by approximately 38 percent in the third
quarter versus a year ago. Versus the year ago quarter, unit sales for (i)
Global System for Mobile (GSM) products increased by almost 30 percent; (ii)
Code Division Multiple Access (CDMA) products increased approximately 25
percent; (iii) Time Division Multiple Access (TDMA) products increased by over
300 percent; and (iv) iDEN(R) phones increased approximately 50 percent. Analog
wireless telephone unit sales decreased approximately 80 percent from a year
ago. Including the very significant decline in analog wireless telephone unit
sales, total unit sales of wireless telephones increased by approximately 15
percent from a year ago.
The overall average selling price for digital phones declined approximately 10
percent versus a year ago. The overall average selling price for analog phones
increased about 15 percent versus a year ago. Average selling prices can be
subject to changes in product mix and regional mix.
Sales and orders for paging products were lower than a year ago due to fewer
unit sales. By region, sales were lower in the Americas and significantly lower
in Europe and Asia. Orders were lower in Europe and significantly lower in the
Americas and Asia.
Global Telecom Solutions Segment
- --------------------------------
Three Months Ended
Sept. 30, Oct. 2, %
(in millions) 2000 1999 Change
- --------------------------------------------------------
Orders $1,798 $1,482 21 %
Segment sales $1,960 $1,594 23 %
Operating profit(loss)
before tax $ 136 $ (639) NMF*
Net special items:
income (expense) $ (111) $ (825) (87)%
Operating profit excluding
net special items $ 247 $ 186 33 %
- --------------------------------------------------------
* NMF = Not a meaningful figure
Segment sales rose 23 percent to $2.0 billion, and orders increased 21 percent
to $1.8 billion. The segment had an operating profit of $136 million compared
to an operating loss of $639 million in the year-earlier quarter. Included in
operating profits for the three months ended September 30, 2000, is a $111
million charge comprised of a $15 million writedown of inventory related to the
wireless access systems business and a $96 million charge for business exit
costs, inventory writedowns, and asset writedowns related to the exit from the
SpectraPoint Wireless joint venture with Cisco Systems, Inc. Of the $111
million special charge, $67 million is included in manufacturing and other costs
of sales, and $44 million is included in selling, general and administrative
expenses in the condensed consolidated statements of earnings. Included in the
operating
31
loss for the three months ended October 2, 1999, is a special charge of $825
million comprised of an $811 million charge related to Iridium and a $14 million
acquired in-process research and development charge for the acquisition of
SpectraPoint Wireless. Of the $825 million special charge, $321 million relates
to inventory writedowns for Iridium and is included in manufacturing and other
costs of sales, and $504 million is included in selling, general and
administrative expenses in the condensed consolidated statements of earnings.
Excluding net special items, operating profits increased 33 percent to $247
million compared to $186 million a year ago due primarily to the continuing
increase in terrestrial infrastructure equipment sales.
The segment's results were not impacted by sold businesses. Therefore, for
ongoing businesses, sales, orders and operating profits excluding net special
items were unchanged from the data shown in the table above.
Sales and orders for the three months ended September 30, 2000, and October 2,
1999, are no longer affected by any satellite communications business. By
region, sales were up significantly in the Americas, up in Europe, and up in
Asia. Orders were up significantly in the Americas, up in Asia, and down in
Europe. Sales of iDEN(R) infrastructure equipment were up very significantly
versus a year ago. Sales of GSM and CDMA infrastructure equipment increased.
PDC sales in Japan were very significantly higher. Analog sales were zero.
On October 6, 2000, the Company and Teledesic LLC mutually agreed to terminate
their contract for the design and construction of a satellite communications
network. However, the Company remains an investor in Teledesic LLC.
Commercial, Government and Industrial Systems Segment
- -----------------------------------------------------
Three Months Ended
Sept. 30, Oct. 2, %
(in millions) 2000 1999 Change
- --------------------------------------------------------
Orders $1,199 $1,074 12%
Segment sales $1,145 $1,020 12%
Operating profit before
tax $ 109 $ 293 (63)%
Net special items:
income (expense) $ (6) $ 198 (103)%
Operating profit excluding
net special items $ 115 $ 95 21%
- --------------------------------------------------------
Segment sales rose 12 percent to $1.1 billion, and orders increased 12 percent
to $1.2 billion. Operating profits decreased to $109 million from $293 million
in the year-earlier quarter. Included in operating profits for the three months
ended September 30, 2000, is a special charge of $6 million related to business
exit costs. Included in operating profits for the three months ended October 2,
1999, is a special gain of $198 million related to the sale of the Company's
antenna site business. This special item is included in selling, general and
administrative expenses in the condensed consolidated statements of earnings.
32
Excluding net special items, operating profits rose to $115 million compared to
$95 million a year ago primarily due to the increase in sales.
For ongoing businesses, sales increased 14 percent to $1.1 billion from $1.0
billion, and orders increased 13 percent to $1.2 billion. Operating profits for
ongoing businesses excluding net special items increased to $115 million
compared to $94 million a year ago.
Two-way radio equipment sales were significantly higher in Europe, higher in the
Americas and lower in Asia. Orders were very significantly higher in Asia and
higher in the Americas and Europe.
In July 2000, the Company acquired Suncoast Scientific for approximately $14
million in cash. Suncoast Scientific, headquartered in Shalimar, FL, develops
business management software used by large enterprises, state and local
government agencies and municipalities.
In August 2000, the Company signed a definitive agreement to acquire Printrak
International Inc., a publicly traded Anaheim, CA-based company, for
approximately $160 million in cash. Printrak is a worldwide supplier of
enterprise software and related services for information management and decision
support targeted at national, state and local governmental and civil agencies.
This transaction is expected to close in the fourth quarter of 2000.
Broadband Communications Segment
- --------------------------------
Three Months Ended
Sept. 30, Oct. 2, %
(in millions) 2000 1999 Change
- -------------------------------------------------------
Orders $ 941 $ 669 41%
Segment sales $ 917 $ 623 47%
Operating profit before
tax $ 757 $ 53 1,328%
Net special items:
income (expense) $ 603 $ (24) NMF*
Operating profit excluding
net special items $ 154 $ 77 100%
- -------------------------------------------------------
* NMF = Not a meaningful figure
Segment sales rose 47 percent to $917 million, and orders increased 41 percent
to $941 million. Operating profits increased to $757 million from $53 million
in the year-earlier quarter. Included in operating profits for the three months
ended September 30, 2000, is a net special gain of $603 million. This net
special gain is comprised of a $695 million gain from the sale of an
investment, an $87 million charge for the settlement of the Gemstar-TV Guide
International, Inc. (Gemstar) litigation, and a $5 million charge for
integration costs from the General Instrument merger. Included in operating
profits for the three months ended October 2, 1999 is a net special charge of
$24 million. This net special charge is comprised of a $43 million charge
related to an American Arbitration Association panel's interim decision in the
breach of contract dispute with Gemstar and a $19 million gain from the sale of
investments. These special items are included in selling, general and
administrative expenses in the condensed consolidated statements of earnings.
33
Excluding net special items, operating profits rose 100 percent to $154 million
compared to $77 million a year ago due to increases in sales, primarily in the
IP Network Systems and Digital Network Systems businesses, and from benefits
resulting from the synergies achieved through the merger with General
Instrument.
The segment's results were not impacted by sold businesses. Therefore, for
ongoing businesses, sales, orders and operating profits excluding net special
items were unchanged from the data shown in the table above.
Sales were up very significantly in the IP Network Systems and Digital Network
Systems businesses. They were higher in the Satellite Network Systems business
and lower in the Transmission Network Systems business.
Orders were up very significantly in the IP Network Systems and Digital Network
Systems businesses. They were up significantly in the Satellite Network Systems
business and lower in the Transmission Network Systems business.
By region, North America accounted for approximately 83 percent of the segment's
total sales and 85 percent of the segment's total orders. Sales and order growth
for this region were 42 percent and 39 percent, respectively, compared to 80
percent and 48 percent, respectively, for the international markets.
In July 2000, the Company purchased the assets of Zenith Electronics
Corporation's Network Systems division for approximately $15 million in cash.
Semiconductor Products Segment
- ------------------------------
Three Months Ended
Sept. 30, Oct. 2, %
(in millions) 2000 1999 Change
- ---------------------------------------------------------------
Orders $2,182 $1,954 12%
Segment sales $2,071 $1,708 21%
Operating profit before
tax $ 68 $ 406 (83)%
Net special items:
income (expense) $ (122) $ 325 (138)%
Operating profit excluding
net special items $ 190 $ 81 135%
- ----------------------------------------------------------------
Segment sales increased 21 percent to $2.1 billion, and orders increased 12
percent to $2.2 billion. Operating profits decreased to $68 million from $406
million in the year-earlier quarter. Included in operating profits for the
three months ended September 30, 2000, is a net special charge of $122 million.
This net special charge is comprised of a $1 million writedown of an investment,
a $4 million acquired in-process research and development charge related to the
acquisition of Hiware AG, a $23 million gain from the sale of an investment, and
a $140 million charge for capital asset writedowns and business exit costs for
two semiconductor wafer fabrication facilities in Arizona and Texas. The net
special charge is included in selling, general and administrative expenses in
the condensed
34
consolidated statements of earnings. Included in operating profits for the three
months ended October 2, 1999, is a net special gain of $325 million. This net
special gain is comprised of a $35 million acquired in-process research and
development charge related to the acquisition of Metrowerks and a $360 million
gain from the sale of the Semiconductor Components Group. The net special gain
is included in selling, general and administrative expenses in the condensed
consolidated statements of earnings.
Excluding net special items, operating profits rose 135 percent to $190 million
compared to $81 million a year ago primarily due to an increase in operating
margin resulting from the impact of restructuring programs undertaken over the
past few years, including the exit of low growth or unprofitable businesses, the
consolidation of manufacturing facilities and the reduction of employees. These
restructuring programs included the strategic decision to focus the business on
high-growth end markets and to emphasize systems-on-chip solutions, providing
opportunities to reap the benefits of higher gross margins from value-added
hardware, software and services.
For ongoing businesses, sales rose 30 percent to $2.1 billion from $1.6 billion,
and orders increased 19 percent to $2.2 billion. Operating profits for ongoing
businesses excluding net special items increased to $190 million from $60
million in the year-earlier quarter. The increase in profits for ongoing
businesses excluding net special items is primarily the result of the factors
discussed above and an increase in sales driven partially by the growth of
worldwide semiconductor demand.
By region, sales were up very significantly in Asia and higher in Europe and the
Americas. Orders were up significantly in Asia and higher in Europe and the
Americas. By end market, sales were up very significantly in networking and
computing, were up significantly in wireless and in standard embedded solutions,
and were higher in transportation and in imaging and entertainment. Orders,
which increased in all end markets, were up very significantly in networking and
computing and were higher in wireless, in standard embedded solutions, in
transportation, and in imaging and entertainment.
In July 2000, the Company acquired Hiware AG (Hiware) for approximately $11
million in cash. Headquartered in Basel, Switzerland, Hiware is a leading
provider of development tools for the automotive and industrial automation
industries focusing primarily on 8- and 16-bit processor architectures.
Integrated Electronic Systems Segment
- -------------------------------------
Three Months Ended
Sept. 30, Oct. 2, %
(in millions) 2000 1999 Change
- ---------------------------------------------------------------
Orders $ 781 $ 719 9%
Segment sales $ 737 $ 663 11%
Operating profit before
tax $ 14 $ 50 (72)%
Net special items:
income (expense) $ (31) $ -- --
Operating profit excluding
net special items $ 45 $ 50 (10)%
- ---------------------------------------------------------------
35
Segment sales rose 11 percent to $737 million, and orders increased 9 percent to
$781 million. Operating profits decreased to $14 million from $50 million in the
year-earlier quarter primarily due to a net special charge of $31 million. This
net special charge is comprised of a net $4 million loss on the sale of
investments and businesses and a $27 million writedown of battery inventory and
equipment related to analog wireless telephone products. Of the $31 million net
special charge, $6 million is included in selling, general and administrative
expenses, and $25 million is included in manufacturing and other costs of sales
in the condensed consolidated statements of earnings.
Excluding net special items, operating profits decreased to $45 million compared
to $50 million a year ago due to lower sales in the automotive and industrial
electronics and in the energy systems businesses. However, these lower sales
were partially offset by significantly higher sales in the computer and in the
telematics communications businesses.
For ongoing businesses, sales increased 17 percent to $737 million compared to
$631 million in the year-earlier quarter. Orders increased 15 percent to $781
million. Operating profits for ongoing businesses excluding net special items
decreased 13 percent from $52 million in the year-earlier quarter.
Other Products
- --------------
In the third quarter of 2000, the Company incurred a net special charge of $40
million comprised of a $7 million gain from the sale of an investment and a $47
million charge for business exit costs, inventory writedowns, and asset
writedowns related to the multi-service networks business. Of the $40 million
net special charge, $24 million is included in selling, general and
administrative expenses, and $16 million is included in manufacturing and other
costs of sales in the condensed consolidated statements of earnings.
In the third quarter of 1999, the Company incurred a special charge of $166
million related to Iridium. This special item was included in selling, general
and administrative expenses in the condensed consolidated statements of
earnings.
General Corporate
- -----------------
In the third quarter of 2000, the Company incurred a special charge of $6
million from the sale of a building in Brazil. This special charge is included
in selling, general and administrative expenses in the condensed consolidated
statements of earnings.
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 $118 million gain which is included in selling, general and
administrative expenses in the condensed consolidated statements of earnings.
36
Liquidity and Capital Resources:
- --------------------------------
Cash and cash equivalents aggregated $2.8 billion as of September 30, 2000,
compared to $3.5 billion as of October 2, 1999.
Net cash used by operations was $1.1 billion for the nine months ended September
30, 2000, as compared to $2.0 billion in cash provided by operations for the
nine months ended October 2, 1999. The change in the cash flow from operations
was primarily due to an increase in accounts receivable in the Personal
Communications and Global Telecom Solutions segments, an increase in inventory
in the Personal Communications Segment, and a decrease in accounts payable and
accrued liabilities.
Net cash used by investing activities was $2.3 billion for the nine months
ended September 30, 2000, as compared to $233 million in cash provided by
investing activities for the nine months ended October 2, 1999. The increase in
cash used by investing activities for the first nine months of 2000 compared to
the first nine months of 1999 was primarily due to increased capital
expenditures. Capital expenditures for the first nine months of 2000 aggregated
$2.8 billion, as compared to $1.6 billion for the first nine months of 1999. Of
these expenditures, approximately $1.7 billion and $815 million, respectively,
were spent in the Semiconductor Products Segment. For 2000, total capital
expenditures are expected to be $4.6 billion, of which $2.6 billion is expected
to be spent in the Semiconductor Products Segment, compared to $2.9 billion in
1999. For the nine months ended September 30, 2000, the Company received $1.1
billion in proceeds from the sale of investments. The Company utilized these
proceeds for acquisitions and additional investments during the period of $1.1
billion.
Net cash provided by financing activities was $2.9 billion for the nine months
ended September 30, 2000, as compared to $266 million cash used for financing
activities for the nine months ended October 2, 1999. The increase in cash from
financing activities for the first nine months of 2000 compared to the first
nine months of 1999 was primarily due to $2.8 billion in proceeds from
commercial paper and short-term borrowings to meet the increase in cash needs
from operations primarily related to working capital. The Company's ratio of
net debt to net debt plus equity was 22.1 percent at September 30, 2000 compared
to 8.2 percent at December 31, 1999.
The Company's total domestic and non-U.S. credit facilities were $4.2 billion at
September 30, 2000, of which $275 million was used. The remaining $3.9 billion,
together with available cash and cash equivalents and other sources of
liquidity, was available to support outstanding commercial paper that totaled
$5.3 billion.
Some purchasers of the Company's infrastructure equipment continue to require
suppliers to provide financing in connection with equipment purchases.
Financing may include all or a portion of the purchase price and working
capital. The Company may also assist customers in obtaining financing from
banks and other sources. As the Company seeks to obtain contracts to provide
infrastructure equipment for third-generation (3G) wireless networks, there is a
likelihood that the Company will provide an increased amount of financing in
connection with some of these contracts.
37
At September 30, 2000, the Company's aggregate commitment to provide financing
to third party vendors was $3.8 billion, of which $2.8 billion had been
utilized.
At September 30, 2000, the Company's commitment for off-balance sheet third-
party financial guarantees aggregated $691 million, of which $516 million had
been utilized.
The Company's aggregate commitments represent the maximum amounts available.
Present and future commitments may not be completely utilized.
The Company believes that it can continue to access the capital markets in 2000,
if necessary, on acceptable terms and conditions. However, factors outside of
the Company's control, such as the liquidity of the capital markets, may affect
the Company's ability to access the capital markets on favorable terms.
Return on average invested capital, based on the performance of the four
preceding quarters ending with September 30, 2000, was 7.9 percent, compared
with 4.6 percent based on the performance of the four preceding quarters ending
October 2, 1999. The Company's current ratio, weeks receivable, and inventory
turns (using the cost-of-sales calculation method) were 1.26, 8.6, and 5.3,
respectively, at September 30, 2000, compared to 1.36, 7.7, and 5.9,
respectively, at December 31, 1999.
Iridium Program
- ---------------
At September 30, 2000, the Company owned, directly and indirectly, approximately
18% of the equity interests in Iridium LLC and its operating subsidiaries
(Iridium LLC and its operating subsidiaries are collectively referred to as
"Iridium") and a significant portion of a series of Iridium bonds. Since August
1999, Iridium has operated as debtors-in-possession under Chapter 11 of the U.S.
Federal Bankruptcy Code. On March 17, 2000, Iridium began the process of
winding down and liquidating its operations because no qualified bid to purchase
the Iridium satellites was timely received. At the same time, the Company began
the process of finalizing a plan for the decommissioning of the Iridium
constellation and continued with the process of shutting down its Iridium-
related operations.
On October 26, 2000, Iridium Satellite LLC, a newly formed entity, submitted a
bid to the United States Bankruptcy Court in the Southern District of New York
to acquire the assets of Iridium. A hearing has been scheduled for November 8,
2000, for the bankruptcy court to approve this bid. If so approved, the terms of
the bid currently provide that the acquisition should be completed no later than
November 30, 2000.
The Company had several contracts with Iridium, primarily for the operation and
maintenance of the global personal communications system. The Company stopped
recognizing revenue on the operations and maintenance contract with Iridium
after the second quarter of 1999, and continued to perform its services under
that contract throughout 1999 without being paid, although the Company has not
waived its right to receive payment. Although not contractually required to do
so, the Company is continuing to operate the Iridium system without
compensation. The Company currently expects to continue operating the system
only until Iridium Satellite LLC acquires Iridium's assets or until a plan to
decommission the Iridium constellation is finalized. The Company currently
expects to continue to perform some
38
services without compensation during this period, although it has not waived its
right to seek compensation.
At December 31, 1999 the Company had $1.8 billion of reserves related to the
Iridium program. There have been no charges recorded in 2000 related to the
Iridium program. In the third quarter of 1999 the Company recorded a special
charge 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
Chapter 11 financial restructuring of Iridium and (ii) to write down the
remaining value of the Iridium bonds it held.
The following table displays a rollforward by category from December 31, 1999 to
September 30, 2000, of the remaining accrual balances:
Accruals Q1 & Q2 Accruals
At 2000 Q3 2000 At
Dec. 31, Amounts Amounts Sept. 30,
1999 Used Used 2000
-------- ------- ------- ---------
Accounts Receivable $ 661 $ (661) $ - $ -
Bank Guarantees and Other Financial Commitments $ 50 $ - $ - $ 50
Investments, Contractual Commitments and Other Obligations $1,087 $ (686) $(46) $355
------ ------- ----- ----
Totals $1,798 $(1,347) $(46) $405
====== ======= ===== ====
Through September 30, 2000 the Company utilized $1.4 billion of reserves
including $661 million for accounts receivable write-offs and $732 million
primarily for inventory and other asset write-offs. The total amount used
through September 30, 2000 of $1.4 billion reflects approximately $155 million
in cash payments and $1.2 billion in write-offs. The cash payments were
primarily for costs associated with the wind-down of Iridium operations and
Iridium gateway debt guarantees. Of the remaining $405 million accrual balance
as of September 30, 2000, the Company expects to make approximately $318 million
in cash payments and $87 million in write-offs. There were no reserves used in
the first three quarters of 1999.
The reserve related to the Iridium program as of September 30, 2000 was $405
million, of which $282 million was included in accrued liabilities, $53 million
was included as a contra asset, in inventories, $45 million was included as a
contra asset, in property, plant and equipment, and $25 million was included as
a contra asset, in other assets. The development and commercialization reserve
as of December 31, 1999 was $1.8 billion, of which $869 million was included in
accrued liabilities, $734 million was included as a contra asset, in
inventories, $79 million was included as a contra asset, in property, plant and
equipment, $72 million was included as a contra asset, in other assets, $39
million was included in other liabilities, $4 million was included in accounts
payable, and $1 million was included as a contra asset, in accounts receivable,
in the condensed consolidated balance sheets. These reserves are believed by
management to be sufficient to cover the Company's Iridium exposures. These
reserves do not include additional special charges that may arise as a result of
litigation related to the Iridium project.
39
The Company had agreed under a Memorandum of Understanding to provide a
guarantee of up to an additional $350 million of Iridium debt for Iridium's use,
subject to certain conditions. Iridium requested Motorola to provide this
guarantee during the third quarter of 1999, however, Motorola believes it was
not obligated to do so. In certain circumstances and subject to certain
conditions, $300 million of such guarantee could have been required to be used
to guarantee amounts borrowed under the Secured Credit Agreement. The lenders
under the Secured Credit Agreement asserted that Iridium failed to have the
Company provide such guarantee as required, and that the Company was obligated
to provide them with this $300 million guarantee. The Company believes that it
was not obligated to do so. Iridium has also stated that it believed it was not
obligated to have the Company provide this $300 million guarantee to these
lenders. On June 9, 2000, the Chase Manhattan Bank, the agent under the Secured
Credit Agreement, filed a complaint in the Supreme Court of the State of New
York, New York County, demanding that Motorola pay this $300 million to Chase
plus interest and legal fees. The lenders under the Secured Credit Agreement
have also demanded that the investors in Iridium comply with their capital call
requirements. In the Company's case, this could require an additional equity
investment of $50 million. On June 9, 2000, the Chase Manhattan Bank also filed
a complaint in the U.S. District Court in the District of Delaware demanding
that Motorola and other investors in Iridium LLC pay their capital call
requirements, plus interest and legal fees.
Creditors and other stakeholders in Iridium may seek to bring various other
claims against the Company, with respect to payments previously made by Iridium
to the Company, and otherwise. 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. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Company's consolidated
financial position, liquidity or results of operations.
Risk Management
- ---------------
As a multinational company, the Company's transactions are denominated in a
variety of currencies. The Company uses financial instruments to hedge, and
therefore attempts to reduce its overall exposure to the effects of currency
fluctuations on cash flows. The Company's policy is not to speculate in
financial instruments for profit on the exchange rate price fluctuation, trade
in currencies for which there are no underlying exposures, or enter into trades
for any currency to intentionally increase the underlying exposure. Instruments
used as hedges must be effective at reducing the risk associated with the
exposure being hedged and must be designated as a hedge at the inception of the
contract. Accordingly, changes in market values of hedge instruments must be
highly correlated with changes in market values of underlying hedged items both
at inception of the hedge and over the life of the hedge contract.
The Company's strategy in foreign exchange exposure issues is to offset the
gains or losses of the financial instruments against losses or gains on the
underlying operational cash flows or investments based on the operating business
units' assessment of risk. Currently, the Company primarily hedges firm
commitments, including assets and liabilities currently on the balance sheet.
The Company expects that it may hedge anticipated
40
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 September 30, 2000 and October 2, 1999, the Company had net outstanding
foreign exchange contracts totaling $4.2 billion and $1.9 billion, respectively.
Management believes that these financial instruments should not subject the
Company to undue risk due to foreign exchange movements because gains and losses
on these contracts should offset losses and gains on the assets, liabilities,
and transactions being hedged. At September 30, 2000, deferred gains totaled
$40.7 million, and deferred losses totaled $1.8 million. At October 2, 1999,
deferred gains totaled $2.1 million, and deferred losses totaled $14.0 million.
The following table shows, in millions, the five largest net foreign exchange
hedge positions as of September 30, 2000 and October 2, 1999:
Sept. 30, Oct. 2,
Buy (Sell) 2000 1999
- ---------------------------------------------
Japanese Yen (1,623) (479)
Euro (710) (677)
British Pound (710) 39
Chinese Renminbi (600) (200)
Malaysia Ringgit 134 45
- ---------------------------------------------
The Company is exposed to credit-related losses if counterparties to financial
instruments fail to perform their obligations. However, it does not expect any
counterparties, which presently have high credit ratings, to fail to meet their
obligations.
In June 1999, the Company's finance subsidiary entered into interest rate swaps
to change the characteristics of the interest rate payments on its $500 million
6.75% 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.
Euro Conversion:
- ----------------
On January 1, 1999, the Euro was created and eleven of the fifteen member
countries of the European Union (EU) established fixed conversion rates between
their existing national currencies and the Euro. The participating countries
adopted the Euro as their common legal currency on that date. In June 2000,
Greece became the twelfth EU country to adopt the Euro. Until January 1, 2002,
either the Euro or a participating country's present currency (a `national
currency') will be accepted as legal currency. On or
41
before January 1, 2002, Euro-denominated notes and coins will begin to be issued
and national currencies will start to be withdrawn from circulation.
The Company has established a Euro project plan with two phases. Each business
segment is responsible for following this plan, and internal audit is reviewing
progress against established milestones. Phase I of the plan was to enable the
Company to be `Euro-capable', meaning able to process Euro transactions and
comply with all relevant EU and national regulations. This was accomplished by
January 1, 1999 by all business segments. Phase II of the plan is intended to
enable all Motorola businesses in Europe to become `Euro-functional', meaning
that the functional currency used by the businesses in relevant countries will
be the Euro. Completion of Phase II has been targeted for January 1, 2001, with
the exception of 2 business units that are targeting completion by July 1, 2001
and certain HR-related functions that will convert with the introduction of the
Euro on January 1, 2002.
The Company will continue to evaluate the issues relating to the Euro
conversion. However, based on its work to date, the Company believes that the
introduction of the Euro and the phasing out of national currencies is unlikely
to have a material adverse effect on its consolidated financial position,
liquidity or results of operations.
For additional disclosure regarding the impact to the Company from the
introduction of the Euro, see the information contained under the caption "Euro
Conversion" on page F-23 of the appendix to the Company's Proxy Statement for
its 2000 annual meeting of stockholders.
Recent Accounting Pronouncements:
- ---------------------------------
In June 1998, the Financial Accounting Standards Board (the FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities", subsequently amended by SFAS No.
137 and SFAS No. 138 (as amended, hereafter referred to as SFAS 133), which the
Company is required to adopt in the first quarter of 2001. SFAS 133 will require
the Company to record all derivatives on the balance sheet at fair value. The
impact of SFAS 133 on the Company's consolidated financial position, liquidity,
and results of operations will depend upon a variety of factors, including
future interpretive guidance from the FASB and the extent of the Company's
hedging activities. The Company is continuing to take the necessary steps to
implement SFAS 133. The Company does not expect the adoption of SFAS 133 to
materially affect its consolidated financial position, liquidity, or results of
operations.
In December 1999, the Securities & Exchange Commission issued Staff Accounting
Bulletin Number 101, "Revenue Recognition in Financial Statements" (SAB 101).
The guidelines in SAB 101 must be adopted during the fourth quarter of 2000. The
Company does not expect the adoption of these guidelines will have a material
impact on its consolidated financial position, liquidity or results of
operations.
In March 2000, the FASB issued its Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation - an interpretation of APB
Opinion No. 25" (FIN 44). FIN 44 applies prospectively to new awards, exchanges
of awards in a business combination, modifications to outstanding awards, and
changes in grantee status that occur on or after July 1, 2000, except for the
provisions related to repricings and the definition of an
42
employee which apply to awards issued after December 15,1998. The Company does
not expect the implementation of these guidelines will have a material impact on
its consolidated financial position, liquidity, or results of operations.
Business Risks:
- ---------------
Statements that are not historical facts are forward-looking statements based on
current expectations that involve risks and uncertainties. Forward-looking
statements include, but are not limited to, statements about research and
development expenditures, depreciation expense, interest expense, tax rates,
future special charges by the Company, the future of the Company's relationship
with Teledesic LLC, the completion of pending transactions, capital
expenditures, the need to provide or arrange financing for customers, the
Company's ability to access the capital markets on acceptable terms and
conditions, the outcome of Iridium's bankruptcy proceedings, future actions
relating to the Iridium project, the impact of lawsuits and other claims in
connection with the Iridium project on the Company, the impact of the Euro
conversion, future hedging activity by the Company, the ability of
counterparties to financial instruments to perform their obligations and the
impact of recent accounting pronouncements on the Company. The Company wishes to
caution the reader that the factors below and those on pages F-25 through F-28
of the appendix to Company's Proxy Statement for its 2000 annual meeting of
stockholders and in its other SEC filings could cause the Company's results to
differ materially from those stated in the forward-looking statements. These
factors include: (i) the impact of foreign currency fluctuations on the company,
including the impact of the weakening Euro; (ii) the impact that lower than
anticipated demand worldwide for cellular telephones will have on the Company's
performance; (iii) the demand for the Company's products, including products
related to new technologies such a Internet-ready phones; (iv) the Company's
ability to achieve continued improvement in the profitability of its digital
wireless telephone business, especially as it competes in the lower-tier
wireless telephone market; (v) the Company's success in the emerging 3G market;
(vi) the demand for vendor financing and the Company's ability to provide that
financing in order to remain competitive; (vii) continued improvement in the
worldwide semiconductor industry and the Company's participation in that
improvement; (viii) difficulties, delays or unexpected liabilities or expenses
encountered in connection with the implementation of Iridium's liquidation
proceedings or unfavorable outcomes to any currently pending or future
litigation involving the Iridium project; (ix) pricing pressures and demand for
the Company's products, especially if economic conditions worsen in the
Company's markets; (x) the success of alliances and agreements with other
companies to develop new products and services; (xi) unexpected revisions or
cancellations to orders for products; (xii) product and technology development
and commercialization risks, including for newer digital products; (xiii)
difficulties in integrating the operations of newly-acquired businesses and
achieving strategic objectives, cost savings and other benefits; and (xiv)
unexpected changes in the requirements for manufacturing capacity, which may
necessitate different levels of capital expenditures.
Iridium(R) is a registered trademark and service mark of Iridium LLC.
43
Part II - Other Information
Item 1 - Legal Proceedings.
- ---------------------------
Silber, et al. v. Motorola, Inc., et al., filed on August 1, 1995 in the Supreme
Court of The State of New York, County of Suffolk, is an action wherein it is
alleged that a traffic accident was caused by the use of a cellular phone. On
July 24, 2000, the Appellate Division, Second Department, affirmed the summary
judgment decision that Motorola had obtained on April 27, 1999. On August 23,
2000, plaintiffs filed a motion for reargument or, alternatively, leave to
appeal to the Court of Appeals.
See Item 3 of the Company's Form 10-K for the fiscal year ended December 31,
1999 and Item 1 of Part II of the Company's Form 10-Qs for the periods ended
April 1, 2000 and July 1, 2000 for additional disclosures regarding pending
matters.
In the opinion of management, the ultimate disposition of these matters will not
have a material adverse effect on the consolidated financial position, liquidity
or results of operations of Motorola.
Item 2 - Changes in Securities and Use of Proceeds.
- ---------------------------------------------------
Not applicable.
Item 3 - Defaults Upon Senior Securities.
- -----------------------------------------
Not applicable.
Item 4 - Submission of Matters to Vote of Security Holders.
- -----------------------------------------------------------
Not applicable.
Item 5 - Other Information.
- ---------------------------
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) Exhibits
--------
10.1 Motorola Incentive Plan of 2000, as amended through June 2,
2000.
10.2 Motorola Long Range Incentive Plan (LRIP) of 2000.
12 Statement re: Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule (filed only electronically with the SEC).
(b) Reports on Form 8-K
-------------------
Not applicable.
44
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 6, 2000 By:/s/Anthony Knapp
------------------------------------
Anthony Knapp
Senior Vice President and Controller
(Chief Accounting Officer and Duly
Authorized Officer of the Registrant)
45
EXHIBIT INDEX
Number Description of Exhibits
- ------ -----------------------
10.1 Motorola Incentive Plan of 2000, as amended through June 2,
2000.
10.2 Motorola Long Range Incentive Plan (LRIP) of 2000.
12 Statement re: Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule (filed only electronically with the
SEC).
46