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EX-31.1 - EXHIBIT 31.1 - Motorola Solutions, Inc.msiex311q32015.htm
EX-31.2 - EXHIBIT 31.2 - Motorola Solutions, Inc.msiex312q32015.htm
EX-32.2 - EXHIBIT 32.2 - Motorola Solutions, Inc.msiex322q32015.htm
EX-32.1 - EXHIBIT 32.1 - Motorola Solutions, Inc.msiex321q32015.htm
EX-10.4 - EXHIBIT 10.4 - Motorola Solutions, Inc.msiex104q32015.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________ 
Form 10-Q
 ____________________________________________
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended October 3, 2015
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission file number: 1-7221
____________________________________________ 
MOTOROLA SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
____________________________________________ 
DELAWARE
(State of Incorporation)
 
36-1115800
(I.R.S. Employer Identification No.)
1303 E. Algonquin Road,
Schaumburg, Illinois
(Address of principal executive offices)
 
60196
(Zip Code)
Registrant’s telephone number, including area code:
(847) 576-5000
____________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer ¨
 
Non-accelerated filer 
 
Smaller reporting company ¨
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨  No x
The number of shares outstanding of each of the issuer’s classes of common stock as of the close of business on October 3, 2015:
Class
 
Number of Shares
Common Stock; $.01 Par Value
 
176,561,670



 
Page    
 
Item 1 Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended October 3, 2015 and September 27, 2014
Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended October 3, 2015 and September 27, 2014
Condensed Consolidated Balance Sheets as of October 3, 2015 (Unaudited) and December 31, 2014
Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) for the Nine Months Ended October 3, 2015
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended October 3, 2015 and September 27, 2014
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
Item 4 Mine Safety Disclosures



Part I—Financial Information
Condensed Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
(In millions, except per share amounts)
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
Net sales from products
$
925

 
$
921

 
$
2,550

 
$
2,561

Net sales from services
497

 
515

 
1,463

 
1,497

Net sales
1,422

 
1,436

 
4,013

 
4,058

Costs of product sales
395

 
414

 
1,139

 
1,165

Costs of services sales
342

 
337

 
993

 
974

Costs of sales
737

 
751

 
2,132

 
2,139

Gross margin
685

 
685

 
1,881

 
1,919

Selling, general and administrative expenses
259

 
287

 
769

 
902

Research and development expenditures
153

 
166

 
468

 
516

Other charges
42

 
25

 
39

 
49

Operating earnings
231

 
207

 
605

 
452

Other income (expense):
 
 
 
 
 
 
 
Interest expense, net
(43
)
 
(31
)
 
(122
)
 
(85
)
Gains on sales of investments, net
10

 
1

 
60

 
4

Other
(1
)
 
(26
)
 
(3
)
 
(34
)
Total other expense
(34
)
 
(56
)
 
(65
)
 
(115
)
Earnings from continuing operations before income taxes
197

 
151

 
540

 
337

Income tax expense
71

 
84

 
175

 
107

Earnings from continuing operations
126

 
67

 
365

 
230

Earnings (loss) from discontinued operations, net of tax
(11
)
 
81

 
(32
)
 
869

Net earnings
115

 
148

 
333

 
1,099

Less: Earnings attributable to noncontrolling interests

 
1

 
2

 
1

Net earnings attributable to Motorola Solutions, Inc.
$
115

 
$
147

 
$
331

 
$
1,098

Amounts attributable to Motorola Solutions, Inc. common stockholders:
 
 
 
 
 
 
 
Earnings from continuing operations, net of tax
$
126

 
$
66

 
$
363

 
$
229

Earnings (loss) from discontinued operations, net of tax
(11
)
 
81

 
(32
)
 
869

Net earnings attributable to Motorola Solutions, Inc.
$
115

 
$
147

 
$
331

 
$
1,098

Earnings (loss) per common share:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Continuing operations
$
0.63

 
$
0.27

 
$
1.75

 
$
0.91

Discontinued operations
(0.05
)
 
0.33

 
(0.15
)
 
3.46

 
$
0.58

 
$
0.60

 
$
1.60

 
$
4.37

Diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.63

 
$
0.27

 
$
1.74

 
$
0.90

Discontinued operations
(0.06
)
 
0.32

 
(0.16
)
 
3.42

 
$
0.57

 
$
0.59

 
$
1.58

 
$
4.32

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
199.2

 
246.3

 
207.2

 
251.1

Diluted
201.3

 
248.2

 
209.2

 
254.0

Dividends declared per share
$
0.34

 
0.34

 
$
1.02

 
0.96

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

1


Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three Months Ended
(In millions)
October 3,
2015
 
September 27,
2014
Net earnings
$
115

 
$
148

Other comprehensive loss, net of tax (Note 3):
 
 
 
Foreign currency translation adjustments
(16
)
 
(34
)
Marketable securities
(5
)
 

Defined benefit plans

 
(345
)
Total other comprehensive loss, net of tax
(21
)
 
(379
)
Comprehensive income (loss)
94

 
(231
)
Less: Earnings attributable to noncontrolling interest

 
1

Comprehensive income (loss) attributable to Motorola Solutions, Inc. common shareholders
$
94

 
$
(232
)
 
Nine Months Ended
(In millions)
October 3,
2015
 
September 27,
2014
Net earnings
$
333

 
$
1,099

Other comprehensive income (loss), net of tax (Note 3):
 
 
 
Foreign currency translation adjustments
(35
)
 
(19
)
Derivative instruments

 
1

Marketable securities
(34
)
 
2

Defined benefit plans
(82
)
 
(322
)
Total other comprehensive loss, net of tax
(151
)
 
(338
)
Comprehensive income
182

 
761

Less: Earnings attributable to noncontrolling interest
2

 
1

Comprehensive income attributable to Motorola Solutions, Inc. common shareholders
$
180

 
$
760

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


2


Condensed Consolidated Balance Sheets
(In millions, except par value)
October 3,
2015
 
December 31,
2014
 
(Unaudited)
 
 
ASSETS
Cash and cash equivalents
$
2,200

 
$
3,954

Accounts receivable, net
1,222

 
1,409

Inventories, net
334

 
345

Deferred income taxes
430

 
431

Other current assets
574

 
740

Current assets held for disposition
27

 

Total current assets
4,787

 
6,879

Property, plant and equipment, net
467

 
549

Investments
292

 
316

Deferred income taxes
1,889

 
2,151

Goodwill
423

 
383

Other assets
183

 
145

Non-current assets held for disposition
45

 

Total assets
$
8,086

 
$
10,423

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current portion of long-term debt
$
4

 
$
4

Accounts payable
443

 
540

Accrued liabilities
1,582

 
1,706

Total current liabilities
2,029

 
2,250

Long-term debt
4,386

 
3,396

Other liabilities
1,969

 
2,011

Stockholders’ Equity
 
 
 
Preferred stock, $100 par value

 

Common stock, $.01 par value:
2

 
2

Authorized shares: 600.0
 
 
 
Issued shares: 10/3/15—176.7; 12/31/14—220.5
 
 
 
Outstanding shares: 10/3/15—176.6; 12/31/14—219.8
 
 
 
Additional paid-in capital
8

 
1,178

Retained earnings
1,689

 
3,410

Accumulated other comprehensive loss
(2,006
)
 
(1,855
)
Total Motorola Solutions, Inc. stockholders’ equity (deficit)
(307
)
 
2,735

Noncontrolling interests
9

 
31

Total stockholders’ equity (deficit)
(298
)
 
2,766

Total liabilities and stockholders’ equity
$
8,086

 
$
10,423

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


3


Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
(In millions)
Shares
 
Common Stock and Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained
Earnings
 
Noncontrolling
Interests
Balance as of December 31, 2014
220.5

 
$
1,180

 
$
(1,855
)
 
$
3,410

 
$
31

Net earnings


 


 


 
331

 
2

Other comprehensive loss


 


 
(151
)
 


 


Issuance of common stock and stock options exercised
1.6

 
71

 


 


 


Share repurchase program
(45.4
)
 
(1,147
)
 


 
(1,849
)
 


Tax shortfalls from share-based compensation


 
(160
)
 


 


 


Share-based compensation expense


 
58

 


 


 


Sale of controlling interest in subsidiary common stock


 


 


 


 
(24
)
Dividends declared


 


 


 
(203
)
 


Equity component of Senior Convertible Notes


 
8

 


 


 


Balance as of October 3, 2015
176.7

 
$
10

 
$
(2,006
)
 
$
1,689

 
$
9

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


4


Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended
(In millions)
October 3,
2015
 
September 27,
2014
Operating
 
 
 
Net earnings attributable to Motorola Solutions, Inc.
$
331

 
$
1,098

Earnings attributable to noncontrolling interests
2

 
1

Net earnings
333

 
1,099

Earnings (loss) from discontinued operations, net of tax
(32
)
 
869

Earnings from continuing operations, net of tax
365

 
230

Adjustments to reconcile Earnings from continuing operations to Net cash provided by operating activities from continuing operations:
 
 
 
Depreciation and amortization
113

 
131

Gain on sale of building and land

 
(21
)
Non-cash other charges (income)
43

 
(2
)
Non-U.S. pension curtailment gain
(32
)


Share-based compensation expense
58

 
74

Gains on sales of investments and businesses, net
(60
)
 
(4
)
Loss from the extinguishment of long term debt

 
37

Deferred income taxes
127

 
69

Changes in assets and liabilities, net of effects of acquisitions, dispositions, and foreign currency translation adjustments:
 
 
 
Accounts receivable
167

 
202

Inventories
(21
)
 
12

Other current assets
38

 
(9
)
Accounts payable and accrued liabilities
(168
)
 
(170
)
Other assets and liabilities
(39
)
 
(534
)
Net cash provided by operating activities from continuing operations
591

 
15

Investing
 
 
 
Acquisitions and investments, net
(150
)
 
(21
)
Proceeds from sales of investments and businesses, net
150

 
23

Capital expenditures
(131
)
 
(130
)
Proceeds from sales of property, plant and equipment
2

 
30

Net cash used for investing activities from continuing operations
(129
)
 
(98
)
Financing
 
 
 
Repayment of debt
(3
)
 
(461
)
Net proceeds from issuance of debt
976

 
1,375

Issuance of common stock
85

 
94

Purchase of common stock
(2,996
)
 
(1,123
)
Excess tax benefit from share-based compensation
1

 
11

Payment of dividends
(218
)
 
(236
)
Distributions from discontinued operations

 
66

Net cash used for financing activities from continuing operations
(2,155
)
 
(274
)
Discontinued Operations
 
 
 
Net cash provided by operating activities from discontinued operations

 
63

Net cash provided by investing activities from discontinued operations

 
5

Net cash used for financing activities from discontinued operations

 
(66
)
Effect of exchange rate changes on cash and cash equivalents from discontinued operations

 
(2
)
Net cash provided by discontinued operations

 

Effect of exchange rate changes on cash and cash equivalents from continuing operations
(61
)
 
(23
)
Net decrease in cash and cash equivalents
(1,754
)
 
(380
)
Cash and cash equivalents, beginning of period
3,954

 
3,225

Cash and cash equivalents, end of period
$
2,200

 
$
2,845

Supplemental Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Interest, net
$
130

 
$
92

Income and withholding taxes, net of refunds
86

 
36

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

5


Notes to Condensed Consolidated Financial Statements
(Dollars in millions, except as noted)
(Unaudited)
1.
Basis of Presentation
The condensed consolidated financial statements as of October 3, 2015 and for the three and nine months ended October 3, 2015 and September 27, 2014, include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to present fairly the condensed consolidated balance sheets, statements of operations, statements of comprehensive income, statement of stockholders' equity, and statements of cash flows of Motorola Solutions, Inc. (“Motorola Solutions” or the “Company”) for all periods presented.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2014. The results of operations for the three and nine months ended October 3, 2015 are not necessarily indicative of the operating results to be expected for the full year.
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. This new standard will replace most existing revenue recognition guidance in U.S. GAAP. The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount it expects to receive for those goods and services. This ASU requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and estimates and changes in those estimates. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date that delayed the effective date of ASU 2014-09 by one year to January 1, 2018 as the Company’s annual reporting period begins after December 15, 2017. ASU 2014-09 allows for both retrospective and modified-retrospective methods of adoption. The Company is in the process of determining the method of adoption it will elect and is currently assessing the impact of this ASU on its consolidated financial statements and footnote disclosures.
In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. Under this guidance, debt issuance costs related to a recognized debt liability are required to be presented in the balance sheet as a direct reduction from the carrying amount of such debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this guidance. In adopting the ASU, the Company will be required to apply a full retrospective approach to all periods presented. This guidance will be effective January 1, 2016 and, upon adoption, debt issuance costs capitalized in other assets in the consolidated balance sheet will be reclassified and presented as a reduction to long-term debt. As of October 3, 2015, debt issuance costs, net of accumulated amortization, recognized in the condensed consolidated balance sheet were $44 million.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 340): Simplifying the Measurement of Inventory. Under this guidance, entities utilizing the FIFO or average cost method should measure inventory at the lower of cost or net realizable value, where net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU should be applied prospectively and will be effective for the Company beginning January 1, 2017 with early adoption permitted. The Company does not expect this ASU will have a material impact on its consolidated financial statements.



6


2.
Discontinued Operations
On October 27, 2014, the Company completed the sale of its Enterprise business to Zebra Technologies Corporation for $3.45 billion in cash. Certain assets of the Enterprise business were excluded from the transaction and retained by the Company, including the Company’s iDEN business. The historical financial results of the Enterprise business, excluding those assets and liabilities retained in the transaction, are reflected in the Company's condensed consolidated financial statements and footnotes as discontinued operations for all periods presented.
The following table displays summarized activity in the Company's condensed consolidated statements of operations for discontinued operations during the three and nine months ended October 3, 2015 and September 27, 2014:
 
Three Months Ended
 
Nine Months Ended
  
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
Net sales
$

 
$
605

 
$

 
$
1,737

Operating earnings

 
78

 

 
195

Losses on sales of investments and businesses, net

 

 
(28
)
 

Earnings (loss) before income taxes

 
68

 
(28
)
 
181

Income tax expense (benefit)
11

 
(13
)
 
4

 
(688
)
Earnings (loss) from discontinued operations, net of tax
$
(11
)
 
$
81

 
$
(32
)
 
$
869

During the three months ended October 3, 2015, the Company recorded $11 million of tax expense on the gain on the sale of the Enterprise business to reflect actual amounts filed in the income tax return.

7


3.
Other Financial Data
Statements of Operations Information
Other Charges (Income)
Other charges (income) included in Operating earnings consist of the following:
 
Three Months Ended
 
Nine Months Ended
  
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
Other charges (income):
 
 
 
 
 
 
 
Intangibles amortization
$
2

 
$
1

 
$
6

 
$
3

Reorganization of business
14

 
13

 
39

 
48

Legal settlement

 

 

 
8

Non-U.S. pension curtailment gain

 

 
(32
)
 

Pension-related transaction fees


11




11

Impairment of corporate aircraft
26




26



Gain on sale of building and land

 

 

 
(21
)
 
$
42

 
$
25

 
$
39

 
$
49

Other Income (Expense)
Interest expense, net, and Other, both included in Other income (expense), consist of the following: 
 
Three Months Ended
 
Nine Months Ended
  
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
Interest income (expense), net:
 
 
 
 
 
 
 
Interest expense
$
(47
)
 
$
(38
)
 
$
(132
)
 
$
(102
)
Interest income
4

 
7

 
10

 
17

 
$
(43
)
 
$
(31
)
 
$
(122
)
 
$
(85
)
Other:
 
 
 
 
 
 
 
Loss from the extinguishment of long-term debt
$

 
$
(37
)
 
$

 
$
(37
)
Investment impairments

 

 
(3
)
 

Foreign currency gain (loss)
(29
)
 
10

 
$
(23
)
 
$
2

Gain (loss) on derivative instruments
25

 
(6
)
 
13

 
(8
)
Gains on equity method investments
2

 
11

 
6

 
13

Other
1

 
(4
)
 
4

 
(4
)
 
$
(1
)
 
$
(26
)
 
$
(3
)
 
$
(34
)

8


Earnings Per Common Share
The computation of basic and diluted earnings per common share is as follows:
 
Amounts attributable to Motorola Solutions, Inc. common stockholders
 
Earnings from Continuing Operations, net of tax
 
Net Earnings
Three Months Ended
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
Basic earnings per common share:
 
 
 
 
 
 
 
Earnings
$
126

 
$
66

 
$
115

 
$
147

Weighted average common shares outstanding
199.2

 
246.3

 
199.2

 
246.3

Per share amount
$
0.63

 
$
0.27

 
$
0.58

 
$
0.60

Diluted earnings per common share:
 
 
 
 
 
 
 
Earnings
$
126

 
$
66

 
$
115

 
$
147

Weighted average common shares outstanding
199.2

 
246.3

 
199.2

 
246.3

Add effect of dilutive securities:
 
 
 
 
 
 
 
Share-based awards
2.1

 
1.9

 
2.1

 
1.9

Diluted weighted average common shares outstanding
201.3

 
248.2

 
201.3

 
248.2

Per share amount
$
0.63

 
$
0.27

 
$
0.57

 
$
0.59

 
Amounts attributable to Motorola Solutions, Inc. common stockholders
 
Earnings from Continuing Operations, net of tax
 
Net Earnings
Nine Months Ended
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
Basic earnings per common share:
 
 
 
 
 
 
 
Earnings
$
363

 
$
229

 
$
331

 
$
1,098

Weighted average common shares outstanding
207.2

 
251.1

 
207.2

 
251.1

Per share amount
$
1.75

 
$
0.91

 
$
1.60

 
$
4.37

Diluted earnings per common share:
 
 
 
 
 
 
 
Earnings
$
363

 
$
229

 
$
331

 
$
1,098

Weighted average common shares outstanding
207.2

 
251.1

 
207.2

 
251.1

Add effect of dilutive securities:
 
 
 
 
 
 
 
Share-based awards
2.0

 
2.9

 
2.0

 
2.9

Diluted weighted average common shares outstanding
209.2

 
254.0

 
209.2

 
254.0

Per share amount
$
1.74

 
$
0.90

 
$
1.58

 
$
4.32

In the computation of diluted earnings per common share from both continuing operations and on a net earnings basis for the three months ended October 3, 2015, the assumed exercise of 3.9 million options were excluded because their inclusion would have been antidilutive. For the nine months ended October 3, 2015, the assumed exercise of 2.6 million options were excluded because their inclusion would have been antidilutive.
For the three and nine months ended September 27, 2014, the assumed exercise of 4.9 million and 4.8 million stock options, respectively, were excluded because their inclusion would have been antidilutive.
On August 25, 2015, the Company issued $1 billion of 2% Senior Convertible Notes which mature in September 2020 (the "Senior Convertible Notes"). The notes are convertible based on a conversion rate of 14.5985 per $1,000 principal amount (which is equal to an initial conversion price of $68.50 per share). See discussion in Note 4. In the event of conversion, the Company intends to settle the principal amount of the Senior Convertible Notes in cash.
Because of the Company’s intention to settle the par value of the Senior Convertible Notes in cash, Motorola Solutions does not reflect any shares underlying the Senior Convertible Notes in its diluted weighted average shares outstanding until the average stock price per share for the period exceeds the conversion price. Only the number of shares that would be issuable (under the treasury stock method of accounting for share dilution) will be included, which is based upon the amount by which the

9


average stock price exceeds the conversion price of $68.50. For the period ended October 3, 2015, there was no dilutive effect of the Senior Convertible Notes on diluted earnings per share attributable to Motorola Solutions, Inc. as the average stock price for the period outstanding was below the conversion price.
Balance Sheet Information
Cash and Cash Equivalents
The Company’s cash and cash equivalents were $2.2 billion at October 3, 2015 and $4.0 billion at December 31, 2014. Of these amounts, $63 million was restricted at both October 3, 2015 and December 31, 2014.
Investments
Investments consist of the following:
October 3, 2015
  Cost  
Basis
 
  Unrealized  
Gains
 
Investments  
Available-for-sale securities:
 
 
 
 
 
Government, agency, and government-sponsored enterprise obligations
$
58

 
$
1

 
$
59

Corporate bonds
9

 

 
9

Common stock

 
15

 
15

 
67

 
16

 
83

Other investments, at cost
201

 

 
201

Equity method investments
8

 

 
8

 
$
276

 
$
16

 
$
292

December 31, 2014
  Cost  
Basis
 
  Unrealized  
Gains
 
Investments  
Available-for-sale securities:
 
 
 
 
 
Government, agency, and government-sponsored enterprise obligations
$
14

 
$

 
$
14

Corporate bonds
16

 

 
16

Mutual funds
2

 

 
2

Common stock
1

 
70

 
71

 
33

 
70

 
103

Other investments, at cost
191

 

 
191

Equity method investments
22

 

 
22

 
$
246

 
$
70

 
$
316

During the three months ended October 3, 2015, the Company sold various cost method investments recognizing a gain of $10 million. During the nine months ended October 3, 2015, the Company recorded Gains on sales of investments, net of $60 million, primarily related to the sale of one individual investment which represented $54 million of the total gain.
Accounts Receivable, Net
Accounts receivable, net, consists of the following: 
 
October 3,
2015
 
December 31,
2014
Accounts receivable
$
1,247

 
$
1,444

Less allowance for doubtful accounts
(25
)
 
(35
)
 
$
1,222

 
$
1,409


10


Inventories, Net
Inventories, net, consist of the following: 
 
October 3,
2015
 
December 31,
2014
Finished goods
$
153

 
$
163

Work-in-process and production materials
323

 
313

 
476

 
476

Less inventory reserves
(142
)
 
(131
)
 
$
334

 
$
345

Other Current Assets
Other current assets consist of the following: 
 
October 3,
2015
 
December 31,
2014
Costs and earnings in excess of billings
$
397

 
$
417

Tax-related refunds receivable
77

 
103

Zebra receivable for cash transferred

 
49

Other
100

 
171

 
$
574

 
$
740

In conjunction with the sale of the Enterprise business to Zebra Technologies, the Company transferred legal entities which maintained cash balances. During the nine months ended October 3, 2015, approximately $49 million of transferred cash balances were reimbursed by Zebra in accordance with the sales agreement.
Property, Plant and Equipment, Net
Property, plant and equipment, net, consists of the following: 
 
October 3,
2015
 
December 31,
2014
Land
$
18

 
$
18

Building
528

 
559

Machinery and equipment
1,536

 
1,672

 
2,082

 
2,249

Less accumulated depreciation
(1,615
)
 
(1,700
)
 
$
467

 
$
549

Depreciation expense for the three months ended October 3, 2015 and September 27, 2014 was $30 million and $44 million, respectively. Depreciation expense for the nine months ended October 3, 2015 and September 27, 2014 was $107 million and $128 million, respectively.
Subsequent to the three months ended October 3, 2015, the Company entered into an arrangement to transfer its Penang, Malaysia manufacturing operations, including the land, building, equipment, inventory, and employees to a contract manufacturer. In the three months ended October 3, 2015, the Company recognized an impairment loss of $6 million on the building that is held for sale within Other charges, in its condensed consolidated statements of operations, and presented the assets as held for sale in its condensed consolidated balance sheets.
During the three months ended October 3, 2015, the Company entered into an agreement to broker the sale of its corporate aircraft. In the three months ended October 3, 2015, the Company recognized an impairment loss of $26 million within Other charges based on the indicated market value of the aircraft held for sale and has presented the aircraft as assets held for sale in its condensed consolidated balance sheets.

11


Other Assets
Other assets consist of the following: 
 
October 3,
2015
 
December 31,
2014
Intangible assets, net
$
50

 
$
23

Long-term receivables
16

 
31

Other
117

 
91

 
$
183

 
$
145

Accrued Liabilities
Accrued liabilities consist of the following: 
 
October 3,
2015
 
December 31,
2014
Deferred revenue
$
363

 
$
355

Compensation
216

 
190

Billings in excess of costs and earnings
357

 
358

Tax liabilities
59

 
91

Dividend payable
60

 
75

Other
527

 
637

 
$
1,582

 
$
1,706

Other Liabilities
Other liabilities consist of the following: 
 
October 3,
2015
 
December 31,
2014
Defined benefit plans
$
1,590

 
$
1,611

Postretirement Health Care Benefit Plan
47

 
49

Deferred revenue
116

 
139

Unrecognized tax benefits
50

 
54

Other
166

 
158

 
$
1,969

 
$
2,011

Stockholders’ Equity
Share Repurchase Program: Through actions taken on July 28, 2011, January 30, 2012, July 25, 2012, July 22, 2013, and November 3, 2014, the Board of Directors has authorized the Company to repurchase in the aggregate up to $12.0 billion of its outstanding shares of common stock (the “share repurchase program”). The share repurchase program does not have an expiration date.
On August 4, 2015, the Board of Directors authorized the Company to commence a modified "Dutch auction" tender offer to repurchase up to $2 billion of its outstanding shares of common stock. The repurchase of these shares was authorized under the existing share repurchase authority, as outlined above. The tender offer commenced on August 7, 2015 and expired on September 3, 2015. The Company paid $2 billion, including transaction costs, to repurchase approximately 30.1 million shares at a tender price of $66.50 per share.
In addition, excluding shares repurchased under the tender offer mentioned above, the Company paid an aggregate of $55 million during the three months ended October 3, 2015, including transaction costs, to repurchase approximately 0.8 million shares at an average price of $67.62 per share.
During the nine months ended October 3, 2015, the Company paid an aggregate of $3.0 billion, including transaction costs, to repurchase approximately 45.4 million shares at an average price of $66.04 per share. As of October 3, 2015, the Company had used approximately $10.8 billion of the share repurchase authority, including transaction costs, to repurchase shares, leaving $1.2 billion of authority available for future repurchases.


12


Payment of Dividends: During the three months ended October 3, 2015 and September 27, 2014, the Company paid $70 million and $78 million, respectively, in cash dividends to holders of its common stock. During the nine months ended October 3, 2015 and September 27, 2014, the Company paid $218 million and $236 million, respectively, in cash dividends to holders of its common stock.




13


Accumulated Other Comprehensive Loss
The following table displays the changes in Accumulated other comprehensive loss, including amounts reclassified into income, and the affected line items in the condensed consolidated statements of operations during the three and nine months ended October 3, 2015 and September 27, 2014:
 
Three Months Ended
 
Nine Months Ended
 
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
Foreign Currency Translation Adjustments:
 
 
 
 
 
 
 
Balance at beginning of period
$
(223
)
 
$
(81
)
 
$
(204
)
 
$
(96
)
Other comprehensive loss before reclassification adjustment
(17
)
 
(35
)
 
(35
)
 
(24
)
Tax benefit
1

 
1

 

 
5

Other comprehensive loss, net of tax
(16
)
 
(34
)
 
(35
)
 
(19
)
Balance at end of period
$
(239
)
 
$
(115
)
 
$
(239
)
 
$
(115
)
Derivative instruments:
 
 
 
 
 
 
 
Balance at beginning of period
$

 
$

 
$

 
$
(1
)
Reclassification adjustment into Cost of sales

 

 

 
1

Tax expense

 

 

 

Reclassification adjustment into Cost of sales, net of tax

 

 

 
1

Other comprehensive income, net of tax

 

 

 
1

Balance at end of period
$

 
$

 
$

 
$

Unrealized Gains and Losses on Available-for-Sale Securities:
 
 
 
 
 
 
 
Balance at beginning of period
$
15

 
$

 
$
44

 
$
(2
)
Other comprehensive loss before reclassification adjustment

 

 
(2
)
 

Tax benefit

 

 
1

 
2

Other comprehensive income (loss) before reclassification adjustment, net of tax

 

 
(1
)
 
2

Reclassification adjustment into Gains on sales of investments and businesses, net
(8
)
 

 
(54
)
 

Tax expense
3

 

 
21

 

Reclassification adjustment into Gains on sales of investments and businesses, net of tax
(5
)
 

 
(33
)
 

Other comprehensive income (loss), net of tax
(5
)
 

 
(34
)
 
2

Balance at end of period
$
10

 
$

 
$
10

 
$

Defined Benefit Plans:
 
 
 
 
 
 
 
Balance at beginning of period
(1,777
)
 
(2,164
)
 
(1,695
)
 
(2,188
)
Other comprehensive loss before reclassification adjustment

 
(647
)
 
(53
)
 
(647
)
Tax benefit

 
294

 

 
294

Other comprehensive loss before reclassification adjustment, net of tax

 
(353
)
 
(53
)
 
(353
)
Reclassification adjustment - Actuarial net losses into Selling, general, and administrative expenses
20

 
27

 
56

 
84

Reclassification adjustment - Prior service benefits into Selling, general, and administrative expenses
(20
)
 
(16
)
 
(52
)
 
(39
)
Reclassification adjustment - Non-U.S. pension curtailment gain into Selling, general, and administrative expenses

 

 
(32
)
 

Tax benefit

 
(4
)
 
(1
)
 
(14
)
Reclassification adjustment into Selling, general, and administrative expenses, net of tax

 
7

 
(29
)
 
31

Other comprehensive loss, net of tax

 
(346
)
 
(82
)
 
(322
)
Balance at end of period
$
(1,777
)
 
$
(2,510
)
 
$
(1,777
)
 
$
(2,510
)
 
 
 
 
 
 
 
 
Total Accumulated other comprehensive loss
$
(2,006
)
 
$
(2,625
)
 
$
(2,006
)
 
$
(2,625
)

14



4.
Debt and Credit Facilities
As of October 3, 2015, the Company had a $2.1 billion unsecured syndicated revolving credit facility, which includes a $450 million letter of credit sub-limit, (the “2014 Motorola Solutions Credit Agreement”) scheduled to mature on May 29, 2019. The Company must comply with certain customary covenants, including maximum leverage ratio as defined in the 2014 Motorola Solutions Credit Agreement. The Company was in compliance with its financial covenants as of October 3, 2015. The Company did not borrow or issue any letters of credit under the 2014 Motorola Solutions Credit Agreement during the nine months ended October 3, 2015.
On August 25, 2015, the Company entered into an agreement with Silver Lake Partners to issue $1 billion of 2% Senior Convertible Notes which mature in September 2020 (the "Senior Convertible Notes"). Interest on these notes is payable semiannually. The notes are convertible anytime on or after two years from their issuance date, except in certain limited circumstances. The notes are convertible based on a conversion rate of 14.5985 per $1,000 principal amount (which is equal to an initial conversion price of $68.50 per share). In the event of conversion, the Company intends to settle the principal amount of the Senior Convertible Notes in cash.
The Company has recorded a debt liability associated with the Senior Convertible Notes by determining the fair value of an equivalent debt instrument without a conversion option. Using a discount rate of 2.4%, which was determined based on a review of relevant market data, the Company has calculated the debt liability to be $992 million, indicating an $8 million discount to be amortized over the expected life of the debt instrument. The total of proceeds received in excess of the fair value of the debt liability of $8 million has been recorded within Additional paid-in capital.

5.
Risk Management
Foreign Currency Risk
As of October 3, 2015, the Company had outstanding foreign exchange contracts with notional amounts totaling $521 million, compared to $628 million outstanding at December 31, 2014. The Company does not believe these financial instruments should subject it to undue risk due to foreign exchange movements because gains and losses on these contracts should generally offset gains and losses on the underlying assets, liabilities and transactions.
The following table shows the five largest net notional amounts of the positions to buy or sell foreign currency as of October 3, 2015, and the corresponding positions as of December 31, 2014
 
Notional Amount
Net Buy (Sell) by Currency
October 3,
2015
 
December 31,
2014
Euro
$
142

 
$
214

Chinese Renminbi
(131
)
 
(161
)
Australian Dollar
(44
)
 
(42
)
Brazilian Real
(39
)
 
(28
)
Norwegian Krone
(38
)
 
(90
)
Interest Rate Risk
As of October 3, 2015, the Company had $4.4 billion of long-term debt, including the current portion, which is priced at fixed interest rates.
One of the Company’s European subsidiaries has Euro-denominated loans. The interest on the Euro-denominated loans is variable and the Company has an interest rate swap in place which is not designated as a hedge. As such, the changes in the fair value of the interest rate swap are included in Other income (expense) in the Company’s condensed consolidated statements of operations. The fair value of the interest rate swap was in a liability position of $1 million at October 3, 2015 and a liability position of $2 million December 31, 2014.
Counterparty Risk
The use of derivative financial instruments exposes the Company to counterparty credit risk in the event of non-performance by counterparties. However, the Company’s risk is limited to the fair value of the instruments when the derivative is in an asset position. The Company actively monitors its exposure to credit risk. As of October 3, 2015, all of the counterparties have investment grade credit ratings. As of October 3, 2015, the Company had de minimis exposure to aggregate net credit risk with all counterparties.

15


The following tables summarize the fair values and locations in the condensed consolidated balance sheets of all derivative financial instruments held by the Company as of October 3, 2015 and December 31, 2014:
 
Fair Values of Derivative Instruments
 
Assets
 
Liabilities
October 3, 2015
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange contracts
$

 
Other current assets
 
$
2

 
Accrued liabilities
Interest rate swap

 
Other current assets
 
1

 
Accrued liabilities
Total derivatives
$

 
 
 
$
3

 
 
 
Fair Values of Derivative Instruments
 
Assets
 
Liabilities
December 31, 2014
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange contracts
1

 
Other current assets
 
5

 
Accrued liabilities
Interest rate swap

 
Other current assets
 
2

 
Accrued liabilities
Total derivatives
1

 
 
 
7

 
 
The following table summarizes the effect of derivatives not designated as hedging instruments on the Company's condensed consolidated statements of operations for the three and nine months ended October 3, 2015 and September 27, 2014:
 
Three Months Ended
 
Nine Months Ended
 
Statements of
Operations Location
Gain (loss) on Derivative Instruments
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
 
Interest rate swap
$

 
$

 
$
1

 
$

 
Other income (expense)
Foreign exchange contracts
25

 
(6
)
 
12

 
(8
)
 
Other income (expense)
Total derivatives
$
25

 
$
(6
)
 
$
13

 
$
(8
)
 
 
The following table summarizes the gains and losses reclassified from Accumulated other comprehensive loss into Net earnings during the three and nine months ended October 3, 2015 and September 27, 2014
 
Three Months Ended
 
Nine Months Ended
 
Financial Statement
Location
Foreign Exchange Contracts
October 3,
2015
 
September 27,
2014
 
October 3, 2015
 
September 27, 2014
 
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
Losses reclassified from Accumulated other comprehensive loss into Net earnings
$

 
$

 
$

 
$
(1
)
 
Cost of sales

6.
Income Taxes
At the end of each interim reporting period, the Company makes an estimate of its annual effective income tax rate. Tax items included in the annual effective income tax rate are pro-rated for the full year and tax items discrete to a specific quarter are included in the effective income tax rate for that quarter. The estimate used in providing for income taxes on a year-to-date basis may change in subsequent interim periods.

16


The following table provides details of income taxes:
 
Three Months Ended
 
Nine Months Ended
 
October 3, 2015
 
September 27, 2014
 
October 3, 2015
 
September 27, 2014
Earnings from continuing operations before income taxes
$
197

 
$
151

 
$
540

 
$
337

Income tax expense
71

 
84

 
175

 
107

Effective tax rate
36
%
 
56
%
 
32
%
 
32
%
The Company recorded $71 million of net tax expense in the third quarter of 2015 resulting in an effective tax rate of 36%, compared to $84 million of net tax expense in the third quarter of 2014 resulting in an effective tax rate of 56%. The effective tax rate in the third quarter of 2015 was higher than the U.S. statutory tax rate of 35% primarily due to higher income in the U.S. relative to foreign operations. The effective tax rate in the third quarter of 2014 was unfavorably impacted by $55 million of tax expense related to the recording of a valuation allowance on certain foreign deferred tax assets.
The Company recorded $175 million of net tax expense in the first nine months of 2015 resulting in an effective tax rate of 32%, compared to $107 million of net tax expense resulting in an effective tax rate of 32% in the first nine months of 2014. The effective tax rate for the first nine months of 2015 was lower than the U.S. statutory tax rate of 35% primarily due to the rate differential for foreign affiliates and the U.S domestic production tax deduction. The effective tax rate in the first nine months of 2014 was lower than the U.S. statutory tax rate of 35% due to tax benefits associated with the net reduction in unrecognized tax benefits and revaluing of deferred tax assets for state effective rates.

7.
Retirement and Other Employee Benefits
Pension and Postretirement Health Care Benefits Plans
The net periodic costs (benefits) for Pension and Postretirement Health Care Benefits Plans were as follows:
 
U.S. Pension Benefit Plans
 
Non U.S. Pension Benefit Plans
 
Postretirement Health Care Benefits Plan
Three Months Ended
October 3, 2015
 
September 27, 2014
 
October 3, 2015
 
September 27, 2014
 
October 3, 2015
 
September 27, 2014
Service cost
$

 
$

 
$
3

 
$
4

 
$

 
$

Interest cost
48

 
93

 
14

 
20

 
2

 
2

Expected return on plan assets
(53
)
 
(97
)
 
(23
)
 
(23
)
 
(2
)
 
(3
)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Unrecognized net loss
12

 
23

 
5

 
3

 
3

 
1

Unrecognized prior service benefit

 

 
(1
)
 
(2
)
 
(15
)
 
(13
)
Net periodic pension cost (benefit)
$
7

 
$
19

 
$
(2
)
 
$
2

 
$
(12
)
 
$
(13
)
The Company made no contributions to its U.S. Pension Benefit Plans during the three months ended October 3, 2015 and $397 million of contributions to its U.S. Pension Benefit plans for the three months ended September 27, 2014. During the three months ended October 3, 2015 and September 27, 2014, contributions of $2 million and $7 million were made to the Company’s Non U.S. Pension Benefit Plans, respectively.

17


 
U.S. Pension Benefit Plans
 
Non U.S. Pension Benefit Plans
 
Postretirement Health Care Benefits Plan
Nine Months Ended
October 3, 2015
 
September 27, 2014
 
October 3, 2015
 
September 27, 2014
 
October 3, 2015
 
September 27, 2014
Service cost
$

 
$

 
$
10

 
$
11

 
$
1

 
$
1

Interest cost
144

 
278

 
49

 
61

 
6

 
8

Expected return on plan assets
(159
)
 
(294
)
 
(79
)
 
(69
)
 
(7
)
 
(7
)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Unrecognized net loss
35

 
68

 
13

 
9

 
8

 
7

Unrecognized prior service benefit

 

 
(3
)
 
(5
)
 
(45
)
 
(35
)
Curtailment gain

 

 
(32
)
 

 

 

Net periodic pension cost (benefit)
$
20

 
$
52

 
$
(42
)
 
$
7

 
$
(37
)
 
$
(26
)
During the nine months ended October 3, 2015, the Company amended its Non U.S. defined benefit plan within the United Kingdom by closing future benefit accruals to all participants effective December 31, 2015.  As a result, the Company recorded a curtailment gain of $32 million to Other charges in the Company’s condensed consolidated statements of operations.
The Company made no contributions to its U.S. Pension Benefit Plans during the nine months ended October 3, 2015 and $463 million of contributions to its U.S. Pension Benefit Plans for the nine months ended September 27, 2014. During the nine months ended October 3, 2015 and September 27, 2014, contributions of $8 million and $27 million were made to the Company’s Non U.S. Pension Benefit Plans, respectively.

8.
Share-Based Compensation Plans
Compensation expense for the Company’s employee stock options, stock appreciation rights, employee stock purchase plan, restricted stock and restricted stock units (“RSUs”) was as follows: 
 
Three Months Ended
 
Nine Months Ended
  
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
Share-based compensation expense included in:
 
 
 
 
 
 
 
Costs of sales
$
2

 
$
2

 
$
7

 
$
9

Selling, general and administrative expenses
13

 
14

 
38

 
47

Research and development expenditures
3

 
4

 
13

 
18

Share-based compensation expense included in Operating earnings
18

 
20

 
58

 
74

Tax benefit
6

 
6

 
19

 
23

Share-based compensation expense, net of tax
$
12

 
$
14

 
$
39

 
$
51

Decrease in basic earnings per share
$
(0.06
)
 
$
(0.06
)
 
$
(0.19
)
 
$
(0.20
)
Decrease in diluted earnings per share
$
(0.06
)
 
$
(0.06
)
 
$
(0.19
)
 
$
(0.20
)
Share-based compensation expense in discontinued operations
$

 
$
5

 
$

 
$
18

During the nine months ended October 3, 2015, the Company granted 0.8 million RSUs and 2.6 million stock options. The total aggregate compensation expense, net of estimated forfeitures, for these RSUs and stock options was $44 million and $17 million, respectively, which will generally be recognized over the vesting period of three years.
During the third quarter of 2015, the Company approved a one-time grant of performance-contingent stock options (the “PCSOs”) to certain officers under the Motorola Solutions Omnibus Incentive Plan of 2015 (the “Omnibus Plan”). The PCSOs have a seven-year term and a per share exercise price of $68.50. The PCSOs would vest upon satisfaction of the following Company stock price hurdles which must be maintained for 10-consecutive trading days during the three-year period following the grant date: 20% of the total award would vest at an $85 stock price; an additional 30% of the total award would vest at a $102.50 stock price; and the final 50% of the total award would vest at a $120 stock price. If any stock price hurdles are not met during the three-year period, the corresponding portion of the PCSOs would not vest and would be forfeited. PCSOs are generally not exercisable prior to the end of the three-year performance period.


18


9.
Fair Value Measurements
The Company holds certain fixed income securities, equity securities and derivatives, which are recognized and disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Fair value is measured using the fair value hierarchy and related valuation methodologies as defined in the authoritative literature. This guidance specifies a hierarchy of valuation techniques based on whether the inputs to each measurement are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's assumptions about current market conditions.
The fair value hierarchy and related valuation methodologies are as follows:
Level 1—Quoted prices for identical instruments in active markets.
Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.
Level 3—Valuations derived from valuation techniques, in which one or more significant inputs are unobservable.
The fair values of the Company’s financial assets and liabilities by level in the fair value hierarchy as of October 3, 2015 and December 31, 2014 were as follows: 
October 3, 2015
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
Government, agency, and government-sponsored enterprise obligations
$

 
$
59

 
$
59

Corporate bonds

 
9

 
9

Common stock
15

 

 
15

Liabilities:
 
 
 
 
 
Foreign exchange derivative contracts
$

 
$
2

 
$
2