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EX-32.2 - EXHIBIT 32.2 - Motorola Solutions, Inc.msiex322q12016.htm
EX-32.1 - EXHIBIT 32.1 - Motorola Solutions, Inc.msiex321q12016.htm
EX-31.1 - EXHIBIT 31.1 - Motorola Solutions, Inc.msiex311q12016.htm
EX-10.1 - EXHIBIT 10.1 - Motorola Solutions, Inc.msiex101q12016.htm
EX-31.2 - EXHIBIT 31.2 - Motorola Solutions, Inc.msiex312q12016.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 April 2, 2016
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 April 2, 2016:
Class
 
Number of Shares
Common Stock; $.01 Par Value
 
174,604,364



 
Page    
 
Item 1 Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended April 2, 2016 and April 4, 2015
Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended April 2, 2016 and April 4, 2015
Condensed Consolidated Balance Sheets as of April 2, 2016 (Unaudited) and December 31, 2015
Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) for the Three Months Ended April 2, 2016
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended April 2, 2016 and April 4, 2015
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
(In millions, except per share amounts)
April 2,
2016
 
April 4,
2015
Net sales from products
$
702

 
$
758

Net sales from services
491

 
465

Net sales
1,193

 
1,223

Costs of products sales
366

 
359

Costs of services sales
325

 
316

Costs of sales
691

 
675

Gross margin
502

 
548

Selling, general and administrative expenses
234

 
256

Research and development expenditures
135

 
159

Other charges
33

 
14

Operating earnings
100

 
119

Other income (expense):
 
 
 
Interest expense, net
(49
)
 
(40
)
Gains (losses) on sales of investments and businesses, net
(21
)
 
46

Other
(8)

 
3

Total other income (expense)
(78
)
 
9

Earnings from continuing operations before income taxes
22

 
128

Income tax expense
5

 
40

Earnings from continuing operations
17

 
88

Loss from discontinued operations, net of tax

 
(13
)
Net earnings
17

 
75

Less: Earnings attributable to noncontrolling interests

 
1

Net earnings attributable to Motorola Solutions, Inc.
$
17

 
$
74

Amounts attributable to Motorola Solutions, Inc. common stockholders:
 
 
 
Earnings from continuing operations, net of tax
$
17

 
$
87

Loss from discontinued operations, net of tax

 
(13
)
Net earnings attributable to Motorola Solutions, Inc.
$
17

 
$
74

Earnings (loss) per common share:
 
 
 
Basic:
 
 
 
Continuing operations
$
0.10

 
$
0.40

Discontinued operations

 
(0.06
)
 
$
0.10

 
$
0.34

Diluted:
 
 
 
Continuing operations
$
0.10

 
$
0.40

Discontinued operations

 
(0.06
)
 
$
0.10

 
$
0.34

Weighted average common shares outstanding:
 
 
 
Basic
174.5

 
215.3

Diluted
177.0

 
217.8

Dividends declared per share
$
0.41

 
0.34

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

1


Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three Months Ended
(In millions)
April 2,
2016
 
April 4,
2015
Net earnings
$
17

 
$
75

Other comprehensive income (loss), net of tax (Note 3):
 
 
 
Foreign currency translation adjustments
13

 
(26
)
Marketable securities
4

 
(33
)
Defined benefit plans
4

 
1

Total other comprehensive income (loss), net of tax
21

 
(58
)
Comprehensive income
38

 
17

Less: Earnings attributable to noncontrolling interest

 
1

Comprehensive income attributable to Motorola Solutions, Inc. common shareholders
$
38

 
$
16

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


2


Condensed Consolidated Balance Sheets
(In millions, except par value)
April 2,
2016
 
December 31,
2015
 
(Unaudited)
 
 
ASSETS
Cash and cash equivalents
$
1,940

 
$
1,980

Accounts receivable, net
1,148

 
1,362

Inventories, net
287

 
296

Other current assets
626

 
954

Current assets held for disposition

 
27

Total current assets
4,001

 
4,619

Property, plant and equipment, net
997

 
487

Investments
228

 
231

Deferred income taxes
2,330

 
2,278

Goodwill
590

 
420

Other assets
884

 
271

Non-current assets held for disposition
19

 
40

Total assets
$
9,049

 
$
8,346

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

 
$
4

Accounts payable
424

 
518

Accrued liabilities
1,604

 
1,671

Total current liabilities
2,032

 
2,193

Long-term debt
5,023

 
4,345

Other liabilities
2,131

 
1,904

Stockholders’ Equity
 
 
 
Preferred stock, $100 par value

 

Common stock, $.01 par value:
2

 
2

Authorized shares: 600.0
 
 
 
Issued shares: 4/2/16—174.8; 12/31/15—174.5
 
 
 
Outstanding shares: 4/2/16—174.6; 12/31/15—174.3
 
 
 
Additional paid-in capital
99

 
42

Retained earnings
1,597

 
1,716

Accumulated other comprehensive loss
(1,845
)
 
(1,866
)
Total Motorola Solutions, Inc. stockholders’ equity (deficit)
(147
)
 
(106
)
Noncontrolling interests
10

 
10

Total stockholders’ equity (deficit)
(137
)
 
(96
)
Total liabilities and stockholders’ equity
$
9,049

 
$
8,346

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, 2015
174.5

 
$
44

 
$
(1,866
)
 
$
1,716

 
$
10

Net earnings


 


 


 
17

 


Other comprehensive income


 


 
21

 


 


Issuance of common stock and stock options exercised
1.2

 
40

 


 


 


Share repurchase program
(0.9
)
 


 


 
(64
)
 


Share-based compensation expense


 
17

 


 


 


Dividends declared


 


 


 
(72
)
 


Balance as of April 2, 2016
174.8

 
$
101

 
$
(1,845
)
 
$
1,597

 
$
10

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


4


Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended
(In millions)
April 2,
2016
 
April 4,
2015
Operating
 
 
 
Net earnings attributable to Motorola Solutions, Inc.
$
17

 
$
74

Earnings attributable to noncontrolling interests

 
1

Net earnings
17

 
75

Loss from discontinued operations, net of tax

 
(13
)
Earnings from continuing operations, net of tax
17

 
88

Adjustments to reconcile Earnings from continuing operations to Net cash provided by operating activities from continuing operations:
 
 
 
Depreciation and amortization
62

 
41

Non-cash other charges
11

 
1

Share-based compensation expense
17

 
21

Losses (gains) on sales of investments and businesses, net
21

 
(46
)
Deferred income taxes
35

 
23

Changes in assets and liabilities, net of effects of acquisitions, dispositions, and foreign currency translation adjustments:
 
 
 
Accounts receivable
277

 
309

Inventories
(4
)
 
(44
)
Other current assets
(43
)
 
26

Accounts payable and accrued liabilities
(363
)
 
(247
)
Other assets and liabilities
(17
)
 
(16
)
Net cash provided by operating activities from continuing operations
13

 
156

Investing
 
 
 
Acquisitions and investments, net
(1,053
)
 
(74
)
Proceeds from sales of investments and businesses, net
481

 
88

Capital expenditures
(51
)
 
(33
)
Proceeds from sales of property, plant and equipment

 
1

Net cash used for investing activities from continuing operations
(623
)
 
(18
)
Financing
 
 
 
Repayment of debt
(1
)
 
(1
)
Net proceeds from issuance of debt
673

 

Issuance of common stock
40

 
41

Purchase of common stock
(64
)
 
(653
)
Excess tax benefit from share-based compensation

 
1

Payment of dividends
(71
)
 
(75
)
Net cash provided by (used for) financing activities from continuing operations
577

 
(687
)
Effect of exchange rate changes on cash and cash equivalents from continuing operations
(7
)
 
(52
)
Net decrease in cash and cash equivalents
(40
)
 
(601
)
Cash and cash equivalents, beginning of period
1,980

 
3,954

Cash and cash equivalents, end of period
$
1,940

 
$
3,353

Supplemental Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Interest, net
$
59

 
$
50

Income and withholding taxes, net of refunds
52

 
39

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 April 2, 2016 and for the three months ended April 2, 2016 and April 4, 2015 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, 2015. The results of operations for the three months ended April 2, 2016 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 Developments
On February 19, 2016, the Company completed the acquisition of Guardian Digital Communications Limited ("GDCL"), a holding company of Airwave Solutions Limited ("Airwave"), the largest private operator of a public safety network in the world. All of the outstanding equity of GDCL was acquired for the sum of £1, after which the Company invested into GDCL £698 million, net of cash acquired, or approximately $1.0 billion, to settle all third party debt. The Company will make a deferred cash payment of £64 million on November 15, 2018. The Company funded the investment with a $675 million term loan (the “Term Loan”) and approximately $400 million of international cash on hand. The acquisition will be reported within our Services segment. It will enable the Company to geographically diversify its global Managed & Support services offerings within its Services segment, while offering a proven service delivery platform to build on for providing innovative, leading, mission-critical communications solutions and services to customers. See discussion in Note 14.
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. In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" which clarifies the implementation guidance on principal versus agent considerations and includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. 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 February 2016, the FASB issued ASU No. 2016-02, "Leases," which amends existing guidance to require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. The ASU is effective for the Company January 1, 2019 and interim periods within that reporting period. The ASU requires a modified retrospective method upon adoption. The Company is in the process of assessing the impact of this ASU on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07, "Investments - Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting," which eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. ASU 2016-07 is effective for the Company January 1, 2017 and interim periods within that reporting period. The adoption of ASU 2016-07 is not expected to have a material effect on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company has elected to adopt this accounting standard as of January 1, 2016. The impact of the prospective adoption of the provisions related to the recognition of excess tax benefits in income tax

6


expense was a $2 million income tax benefit during the three months ended April 2, 2016. Additionally, as a result of the adoption of this accounting standard, excess tax benefits on share-based compensation have been reported as a component of operating cash rather than within financing cash flows as previously presented, while the payment of withholding taxes on the settlement of share-based awards has been reported as a component of financing cash flows rather than within operating cash flows as previously presented. The change in presentation of withholding taxes within the condensed consolidated statements of cash flows has been adopted retrospectively, thereby increasing operating cash flows and reducing financing cash flows by $9 million and $5 million for the three months ended April 2, 2016 and April 4, 2015. The presentation of excess tax benefits on share-based compensation has been adjusted prospectively within the condensed consolidated statement of cash flows, increasing operating cash flow and decreasing financing cash flow by $2 million for the three months ended April 2, 2016.
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. We have retrospectively adopted ASU 2015-03 effective January 1, 2016. As a result, debt issuance costs which were previously capitalized in other assets in the condensed consolidated balance sheet have been presented as a reduction to long-term debt. As of April 2, 2016 and December 31, 2015$40 million and $41 million, respectively, have been presented as a component of long-term debt.

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.
During the three months ended April 2, 2016, the Company had no activity in the condensed consolidated statements of operations for discontinued operations. During the three months ended April 4, 2015, the Company recorded a $13 million loss from discontinued operations.

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
  
April 2,
2016
 
April 4,
2015
Other charges:
 
 
 
Intangibles amortization
$
13

 
$
2

Reorganization of business
7

 
12

Acquisition related transaction fees
13

 

 
$
33

 
$
14


7


Other Income (Expense)
Interest expense, net, and Other, both included in Other income (expense), consist of the following: 
 
Three Months Ended
  
April 2,
2016
 
April 4,
2015
Interest income (expense), net:
 
 
 
Interest expense
$
(53
)
 
$
(43
)
Interest income
4

 
3

 
$
(49
)
 
$
(40
)
Other:
 
 
 
Foreign currency gain
$
13

 
$
18

Loss on derivative instruments
(12
)
 
(17
)
Gains on equity method investments
1

 

Realized foreign currency loss on acquisition
(10
)
 

Other

 
2

 
$
(8
)
 
$
3

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
April 2,
2016
 
April 4,
2015
 
April 2,
2016
 
April 4,
2015
Basic earnings per common share:
 
 
 
 
 
 
 
Earnings
$
17

 
$
87

 
$
17

 
$
74

Weighted average common shares outstanding
174.5

 
215.3

 
174.5

 
215.3

Per share amount
$
0.10

 
$
0.40

 
$
0.10

 
$
0.34

Diluted earnings per common share:
 
 
 
 
 
 
 
Earnings
$
17

 
$
87

 
$
17

 
$
74

Weighted average common shares outstanding
174.5

 
215.3

 
174.5

 
215.3

Add effect of dilutive securities:
 
 
 
 
 
 
 
Share-based awards
2.5

 
2.5

 
2.5

 
2.5

Diluted weighted average common shares outstanding
177.0

 
217.8

 
177.0

 
217.8

Per share amount
$
0.10

 
$
0.40

 
$
0.10

 
$
0.34

In the computation of diluted earnings per common share from both continuing operations and on a net earnings basis for the three months ended April 2, 2016, the assumed exercise of 4.0 million options and the assumed vesting of 0.6 million restricted stock units ("RSUs") were excluded because their inclusion would have been antidilutive. For the three months ended April 4, 2015, the assumed exercise of 2.2 million stock options and the assumed vesting of 0.5 million RSUs were excluded because their inclusion would have been antidilutive.
On August 25, 2015, the Company issued $1.0 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 upon conversion, 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. In this case, 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

8


upon the amount by which the average stock price exceeds the conversion price of $68.50. For the three months ended April 2, 2016, there was no dilutive impact of the Senior Convertible Notes.
Balance Sheet Information
Cash and Cash Equivalents
The Company’s cash and cash equivalents were $1.9 billion at April 2, 2016 and $2.0 billion at December 31, 2015. Of these amounts, $63 million was restricted at both April 2, 2016 and December 31, 2015.
Accounts Receivable, Net
Accounts receivable, net, consists of the following: 
 
April 2,
2016
 
December 31,
2015
Accounts receivable
$
1,179

 
$
1,390

Less allowance for doubtful accounts
(31
)
 
(28
)
 
$
1,148

 
$
1,362

Inventories, Net
Inventories, net, consist of the following: 
 
April 2,
2016
 
December 31,
2015
Finished goods
$
163

 
$
151

Work-in-process and production materials
271

 
287

 
434

 
438

Less inventory reserves
(147
)
 
(142
)
 
$
287

 
$
296

Other Current Assets
Other current assets consist of the following: 
 
April 2,
2016
 
December 31,
2015
Available-for-sale securities
$
47

 
$
438

Costs and earnings in excess of billings
324

 
374

Tax-related refunds receivable
110

 
44

Other
145

 
98

 
$
626

 
$
954

Property, Plant and Equipment, Net
Property, plant and equipment, net, consists of the following: 
 
April 2,
2016
 
December 31,
2015
Land
$
17

 
$
17

Building
521

 
523

Machinery and equipment
2,109

 
1,585

 
2,647

 
2,125

Less accumulated depreciation
(1,650
)
 
(1,638
)
 
$
997

 
$
487

Depreciation expense for the three months ended April 2, 2016 and April 4, 2015 was $49 million and $39 million, respectively.
On February 1, 2016, the Company completed the sale of its Penang, Malaysia manufacturing operations, including the land, building, equipment, and inventory, as well as the transfer of employees to a contract manufacturer. During the three

9


months ended April 2, 2016, the Company incurred a loss of $7 million on the sale of its Penang, Malaysia facility and manufacturing operations, which is included within Gains (losses) on sales of investments and businesses, net.
Subsequent to the three months ended April 2, 2016, the Company entered into an agreement for the sale of its corporate aircraft. The Company recognized an impairment loss of $3 million within Other charges during the three months ended April 2, 2016 based on the contracted sales price of the aircraft held for sale and has presented the aircraft as assets held for sale in its condensed consolidated balance sheets.
The Company acquired property, plant and equipment, including network assets, of $481 million in the acquisition of GDCL. The valuation of acquired property, plant and equipment is not yet finalized and may be subject to a fair value adjustment. See discussion in Note 14.
Investments
Investments consist of the following:
April 2, 2016
  Cost  
Basis
 
  Unrealized  
Gains
 
Investments  
Available-for-sale securities:
 
 
 
 
 
Government, agency, and government-sponsored enterprise obligations
$
52

 
$

 
$
52

Corporate bonds
7

 

 
7

Common stock

 
2

 
2

 
59

 
2

 
61

Other investments, at cost
204

 

 
204

Equity method investments
10

 

 
10

 
$
273

 
$
2

 
$
275

Less: current portion of available-for-sale securities
 
 
 
 
47

 
 
 
 
 
$
228

December 31, 2015
  Cost  
Basis
 
  Unrealized  
Gains
 
  Unrealized  
Losses
 
Investments  
Available-for-sale securities:
 
 
 
 
 
 
 
Government, agency, and government-sponsored enterprise obligations
$
455

 
$

 
$
(11
)
 
$
444

Corporate bonds
7

 

 

 
7

Common stock

 
6

 

 
6

 
462

 
6

 
(11
)
 
457

Other investments, at cost
203

 

 

 
203

Equity method investments
9

 

 

 
9

 
674

 
6

 
(11
)
 
669

Less: current portion of available-for-sale securities
 
 
 
 
 
 
438

 
 
 
 
 
 
 
$
231

In December 2015, the Company invested $401 million in United Kingdom treasury securities in order to partially offset the risk associated with fluctuations in the British Pound Sterling in the period before the closing of the purchase of GDCL. The investments were recorded within Other current assets in the Company's consolidated balance sheets. The Company liquidated these investments in February 2016 to partially fund the acquisition of GDCL. During the three months ended April 2, 2016, the Company realized a loss of $19 million associated with the sale, of which, $11 million was unrealized as of December 31, 2015.
Other Assets
Other assets consist of the following: 
 
April 2,
2016
 
December 31,
2015
Intangible assets, net
$
669

 
$
49

Long-term receivables
29

 
47

Defined benefit plan assets
135

 
128

Other
51

 
47

 
$
884

 
$
271


10



Accrued Liabilities
Accrued liabilities consist of the following: 
 
April 2,
2016
 
December 31,
2015
Deferred revenue
$
399

 
$
390

Compensation
167

 
241

Billings in excess of costs and earnings
301

 
337

Tax liabilities
49

 
48

Dividend payable
72

 
71

Trade liabilities
133

 
135

Other
483

 
449

 
$
1,604

 
$
1,671

Other Liabilities
Other liabilities consist of the following: 
 
April 2,
2016
 
December 31,
2015
Defined benefit plans
$
1,511

 
$
1,512

Postretirement Health Care Benefit Plan
46

 
49

Deferred revenue
113

 
113

Unrecognized tax benefits
42

 
50

Deferred income taxes
141

 

Deferred consideration (Note 14)
82

 

Other
196

 
180

 
$
2,131

 
$
1,904

During the three months ended April 2, 2016, the Company recorded an increase to its deferred income tax liability as a result of the acquisition of GDCL, as well as a liability of $82 million in the accounting for the acquisition of GDCL related to a payment of deferred consideration due on November 15, 2018 to the former owners. See discussion in Note 14.
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.
During the three months ended April 2, 2016, the Company paid an aggregate of $64 million, including transaction costs, to repurchase approximately 0.9 million shares at an average price of $71.41 per share. As of April 2, 2016, the Company had used approximately $11.0 billion of the share repurchase authority, including transaction costs, to repurchase shares, leaving $1.0 billion of authority available for future repurchases.
Payment of Dividends: During the three months ended April 2, 2016 and April 4, 2015, the Company paid $71 million and $75 million, respectively, in cash dividends to holders of its common stock.


11


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 months ended April 2, 2016 and April 4, 2015:
 
Three Months Ended
 
April 2,
2016
 
April 4,
2015
Foreign Currency Translation Adjustments:
 
 
 
Balance at beginning of period
$
(266
)
 
$
(204
)
Other comprehensive income (loss) before reclassification adjustment
14

 
(27
)
Tax (expense) benefit
(1
)
 
1

Other comprehensive income (loss), net of tax
13

 
(26
)
Balance at end of period
$
(253
)
 
$
(230
)
Available-for-Sale Securities:
 
 
 
Balance at beginning of period
$
(3
)
 
$
44

Other comprehensive loss before reclassification adjustment

 
(7
)
Tax benefit

 
3

Other comprehensive loss before reclassification adjustment, net of tax

 
(4
)
Reclassification adjustment into Gains (losses) on sales of investments and businesses, net
6

 
(46
)
Tax expense (benefit)
(2
)
 
17

Reclassification adjustment into Gains (losses) on sales of investments and businesses, net of tax
4

 
(29
)
Other comprehensive income (loss), net of tax
4

 
(33
)
Balance at end of period
$
1

 
$
11

Defined Benefit Plans:
 
 
 
Balance at beginning of period
$
(1,597
)
 
$
(1,695
)
Reclassification adjustment - Actuarial net losses into Selling, general, and administrative expenses
10

 
19

Reclassification adjustment - Prior service benefits into Selling, general, and administrative expenses
(5
)
 
(17
)
Tax benefit
(1
)
 
(1
)
Reclassification adjustment into Selling, general, and administrative expenses, net of tax
4

 
1

Other comprehensive income, net of tax
4

 
1

Balance at end of period
$
(1,593
)
 
$
(1,694
)
 
 
 
 
Total Accumulated other comprehensive loss
$
(1,845
)
 
$
(1,913
)


12


4.
Debt and Credit Facilities
As of April 2, 2016, 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 April 2, 2016. The Company did not borrow or issue any letters of credit under the 2014 Motorola Solutions Credit Agreement during the three months ended April 2, 2016.
On August 25, 2015, the Company entered into an agreement with Silver Lake Partners to issue $1.0 billion of 2% Senior Convertible Notes which mature in September 2020. 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.
In connection with the completion of the acquisition of GDCL, the Company entered into a new term loan credit agreement (the “Term Loan Agreement”), under which the Company borrowed a Term Loan with an initial principal amount of $675 million and a maturity date of February 18, 2019. Interest on the Term Loan is variable and indexed to LIBOR. The interest expense on the Term Loan is payable semi-annually in May and November. No additional borrowings are permitted under the Term Loan Agreement and amounts borrowed and repaid or prepaid may not be re-borrowed. The Company's borrowing capacity under the 2014 Motorola Solutions Credit Agreement may be partially limited during the second quarter of 2016 due to the additional indebtedness incurred in connection with the Term Loan.
Effective January 1, 2016, the Company retrospectively adopted ASU No. 2015-03, "Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs." Under this guidance, we have revised the presentation of debt issuance costs which were previously capitalized in other assets in the consolidated balance sheet to be presented as a reduction to long-term debt. As of April 2, 2016 and December 31, 2015$40 million and $41 million, respectively, have been reclassified to be presented as a component of long-term debt.

5.
Risk Management
Foreign Currency Risk
As of April 2, 2016, the Company had outstanding foreign exchange contracts with notional amounts totaling $708 million, compared to $494 million outstanding at December 31, 2015. 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 April 2, 2016, and the corresponding positions as of December 31, 2015
 
Notional Amount
Net Buy (Sell) by Currency
April 2,
2016
 
December 31,
2015
Euro
$
233

 
$
99

British Pound
150

 
62

Chinese Renminbi
(95
)
 
(114
)
Australian Dollar
(51
)
 
(60
)
Brazilian Real
(49
)
 
(44
)
Interest Rate Risk
One of the Company’s European subsidiaries has Euro-denominated loans. The interest on the Euro-denominated loans is variable. The Company has interest rate swap agreements in place which change the characteristics of interest rate payments from variable to maximum fixed-rate payments. The interest rate swaps are not designated as a hedge. As such, the changes in the fair value of the interest rate swaps 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 both April 2, 2016 and December 31, 2015.


13


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 April 2, 2016, all of the counterparties have investment grade credit ratings. As of April 2, 2016, the Company had $3 million of exposure to aggregate net credit risk with all counterparties.
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 April 2, 2016 and December 31, 2015:
 
Fair Values of Derivative Instruments
 
Assets
 
Liabilities
April 2, 2016
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange contracts
$
3

 
Other current assets
 
$
5

 
Accrued liabilities
Interest rate swap

 
Other current assets
 
1

 
Accrued liabilities
Total derivatives
$
3

 
 
 
$
6

 
 
 
Fair Values of Derivative Instruments
 
Assets
 
Liabilities
December 31, 2015
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange contracts
6

 
Other current assets
 
2

 
Accrued liabilities
Interest rate swap

 
Other current assets
 
1

 
Accrued liabilities
Total derivatives
6

 
 
 
3

 
 
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 months ended April 2, 2016 and April 4, 2015:
 
Three Months Ended
 
Statements of
Operations Location
Loss on Derivative Instruments
April 2,
2016
 
April 4,
2015
 
Interest rate swap
$

 
$
(1
)
 
Other income (expense)
Foreign exchange contracts
(12
)
 
(16
)
 
Other income (expense)
Total derivatives
$
(12
)
 
$
(17
)
 
 
The Company had no instruments designated as hedging instruments for the three months ended April 2, 2016 and April 4, 2015.

6.
Income Taxes
At the end of each interim reporting period, the Company makes an estimate of its annual effective income tax rate. Tax expense in interim periods is calculated at the estimated annual effective tax rate plus or minus the tax effects of items of income and expense that are discrete to the period. The estimate used in providing for income taxes on a year-to-date basis may change in subsequent interim periods.

14


The following table provides details of income taxes:
 
Three Months Ended
 
April 2,
2016
 
April 4,
2015
Earnings from continuing operations before income taxes
$
22

 
$
128

Income tax expense
5

 
40

Effective tax rate
23
%
 
31
%
The Company recorded $5 million of net tax expense in the first quarter of 2016 resulting in an effective tax rate of 23%, compared to $40 million of net tax expense in the first quarter of 2015 resulting in an effective tax rate of 31%. The effective tax rate in the first quarter of 2016 was lower than the U.S. statutory tax rate of 35% primarily due to the recognition of excess tax benefits on share-based compensation in income tax expense as a result of the Company's adoption of ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." The rate was also positively impacted by the release of unrecognized tax benefit reserves, offset by increases in state valuation allowances and other adjustments to certain deferred tax assets. The effective tax rate in the first quarter of 2015 was lower than the U.S. statutory tax rate of 35% primarily due to the U.S. domestic production tax deduction and rate differential for foreign affiliates.

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
April 2, 2016
 
April 4, 2015
 
April 2, 2016
 
April 4, 2015
 
April 2, 2016
 
April 4, 2015
Service cost
$

 
$

 
$
2

 
$
3

 
$

 
$

Interest cost
46

 
49

 
14

 
16

 
1

 
2

Expected return on plan assets
(55
)
 
(54
)
 
(24
)
 
(26
)
 
(2
)
 
(2
)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Unrecognized net loss
9

 
12

 
3

 
4

 
1

 
3

Unrecognized prior service benefit

 

 

 
(2
)
 
(5
)
 
(15
)
Net periodic cost (benefit)
$

 
$
7

 
$
(5
)
 
$
(5
)
 
$
(5
)
 
$
(12
)
Effective January 1, 2016, the Company changed the method used to estimate the interest and service cost components of net periodic cost for defined benefit pension and other post-retirement benefit plans. Historically, the interest and service cost components were estimated using a single weighted-average discount rate derived from the yield curve used to measure the projected benefit obligation at the beginning of the period. The Company has elected to use a full yield curve approach in the estimation of these components of net periodic cost by applying the specific spot rates along the yield curve used in the determination of the projected benefit obligation to the relevant projected cash flows. The Company made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of interest and service costs. This change does not affect the measurement of total benefit obligations as the change in interest and service cost is completely offset in the actuarial loss reported in the period. The Company has concluded that this change is a change in estimate and, therefore, has accounted for it prospectively beginning January 1, 2016. Based on the change in estimate, the Company experienced no reduction in service costs and a $7 million reduction in interest costs for the three months ended April 2, 2016 compared to the prior approach. The overall reduction in the quarterly interest cost is comprised of $5 million related to the U.S. Pension Benefit Plans, $1 million related to the Postretirement Health Care Benefit Plans, and $1 million related to the Non U.S. Pension Benefits Plan.


15


8.
Share-Based Compensation Plans
Compensation expense for the Company’s share-based compensation plans was as follows: 
 
Three Months Ended
  
April 2,
2016
 
April 4,
2015
Share-based compensation expense included in:
 
 
 
Costs of sales
$
2

 
$
3

Selling, general and administrative expenses
12

 
13

Research and development expenditures
3

 
5

Share-based compensation expense included in Operating earnings
17

 
21

Tax benefit
5

 
7

Share-based compensation expense, net of tax
$
12

 
$
14

Decrease in basic earnings per share
$
(0.07
)
 
$
(0.07
)
Decrease in diluted earnings per share
$
(0.07
)
 
$
(0.06
)
Share-based compensation expense in discontinued operations
$

 
$

During the three months ended April 2, 2016, the Company granted 0.6 million RSUs and market stock units ("MSUs") and 0.6 million stock options and performance options ("POs"). The total aggregate compensation expense, net of estimated forfeitures, for these RSUs and MSUs was $36 million and stock options and POs was $10 million, respectively, which will generally be recognized over the vesting period of three years.

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 April 2, 2016 and December 31, 2015 were as follows: 
April 2, 2016
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Foreign exchange derivative contracts
$

 
$
3

 
$
3

Available-for-sale securities:
 
 
 
 
 
Government, agency, and government-sponsored enterprise obligations
$

 
$
52

 
$
52

Corporate bonds

 
7

 
7

Common stock
2

 

 
2

Liabilities:
 
 
 
 
 
Foreign exchange derivative contracts
$

 
$
5

 
$
5

Interest rate swap

 
1

 
1


16


December 31, 2015
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Foreign exchange derivative contracts
$

 
$
6

 
$
6

Available-for-sale securities:
 
 
 
 
 
Government, agency, and government-sponsored enterprise obligations

 
444

 
444

Corporate bonds

 
7

 
7

Common stock
6

 

 
6

Liabilities:
 
 
 
 
 
Foreign exchange derivative contracts
$

 
$
2

 
$
2

Interest rate swap

 
1

 
1

The Company had no Level 3 holdings as of April 2, 2016 or December 31, 2015.
At both April 2, 2016 and December 31, 2015, the Company had $1.3 billion of investments in money market mutual funds (Level 2) classified as Cash and cash equivalents in its condensed consolidated balance sheets. The money market funds had quoted market prices that are equivalent to par.
Using quoted market prices and market interest rates, the Company determined that the fair value of long-term debt at April 2, 2016 and December 31, 2015 was $5.0 billion and $4.1 billion (Level 2), respectively.
All other financial instruments are carried at cost, which is not materially different from the instruments’ fair values.

10.
Long-term Financing and Sales of Receivables
Long-term Financing
Long-term receivables consist of receivables with payment terms greater than twelve months, long-term loans and lease receivables under sales-type leases. Long-term receivables consist of the following: 
 
April 2,
2016
 
December 31,
2015
Long-term receivables
$
42

 
$
60

Less current portion
(13
)
 
(13
)
Gross non-current long-term receivables
$
29

 
$
47

The current portion of long-term receivables is included in Accounts receivable, net and the non-current portion of long-term receivables is included in Other assets in the Company’s condensed consolidated balance sheets. The Company had outstanding commitments to provide long-term financing to third parties totaling $91 million at April 2, 2016, compared to $112 million at December 31, 2015.
Sales of Receivables
The following table summarizes the proceeds received from sales of accounts receivable and long-term receivables for the three months ended April 2, 2016 and April 4, 2015
 
Three Months Ended
  
April 2,
2016
 
April 4,
2015
Accounts receivable sales proceeds
$
2

 
$
6

Long-term receivables sales proceeds
42

 
65

Total proceeds from receivable sales
$
44

 
$
71

At both April 2, 2016 and December 31, 2015, the Company had retained servicing obligations for $668 million of long-term receivables. Servicing obligations are limited to collection activities related to the sales of accounts receivables and long-term receivables.

17


Credit Quality of Financing Receivables and Allowance for Credit Losses
An aging analysis of financing receivables at April 2, 2016 and December 31, 2015 is as follows: 
April 2, 2016
Total
Long-term
Receivable
 
Current Billed
Due
 
Past Due Under 90 Days
 
Past Due Over 90 Days
Municipal leases secured tax exempt
$
4

 
$

 
$

 
$

Commercial loans and leases secured
38

 
4

 

 
1

Total gross long-term receivables, including current portion
$
42

 
$
4

 
$

 
$
1

December 31, 2015
Total
Long-term
Receivable
 
Current Billed
Due
 
Past Due Under 90 Days
 
Past Due Over 90 Days
Municipal leases secured tax exempt
$
35

 
$

 
$

 
$

Commercial loans and leases secured
25

 
1

 
1

 
1

Total gross long-term receivables, including current portion
$
60

 
$
1

 
$
1

 
$
1


11.
Commitments and Contingencies
Legal Matters
The Company is a defendant in various lawsuits, claims, and actions, which arise in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's condensed consolidated financial position, liquidity, or results of operations. However, an unfavorable resolution could have a material adverse effect on the Company's consolidated financial position, liquidity, or results of operations in the periods in which the matters are ultimately resolved, or in the periods in which more information is obtained that changes management's opinion of the ultimate disposition.
Other Indemnifications
The Company is a party to a variety of agreements pursuant to which it is obligated to indemnify the other party with respect to certain matters. In indemnification cases, payment by the Company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party's claims. In some instances, the Company may have recourse against third parties for certain payments made by the Company.
Some of these obligations arise as a result of divestitures of the Company's assets or businesses and require the Company to indemnify the other party against losses arising from breaches of representations and warranties and covenants and, in some cases, the settlement of pending obligations. The Company's obligations under divestiture agreements for indemnification based on breaches of representations and warranties are generally limited in terms of duration and to amounts not in excess of a percentage of the contract value. The Company had no accruals for any such obligations at April 2, 2016.
In addition, the Company may provide indemnifications for losses that result from the breach of general warranties contained in certain commercial and intellectual property agreements. Historically, the Company has not made significant payments under these agreements.

12.
Segment Information
The Company conducts its business globally and manages it through the following two segments:
Products: The Products segment is comprised of Devices and Systems. Devices includes two-way portable and vehicle-mounted radios, accessories, software features, and upgrades. Systems includes the radio network core and central processing software, base stations, consoles, repeaters, and software applications and features. The primary customers of the Products segment are government, public safety and first-responder agencies, municipalities, and commercial and industrial customers who operate private communications networks and manage a mobile workforce.
Services: The Services segment provides a full set of offerings for government, public safety and commercial communication networks including: (i) Integration services, (ii) Managed & Support services, and (iii) iDEN services. Integration services includes implementation, optimization, and integration of networks, devices, software, and applications. Managed & Support services includes a continuum of service offerings beginning with repair, technical support and hardware maintenance. More advanced offerings include network monitoring, software maintenance and cyber security services. Managed service offerings range from partial or full operation of customer owned networks to operation of Motorola Solutions owned networks. Services are provided across all radio network technologies,

18


Command Center Consoles and Smart Public Safety Solutions. iDEN services consists primarily of hardware and software maintenance services for our legacy iDEN customers.
The following table summarizes Net sales by segment: 
 
Three Months Ended
  
April 2,
2016
 
April 4,
2015
Products
$
702

 
$
758

Services
491

 
465

 
$
1,193

 
$
1,223

The following table summarizes the Operating earnings by segment: 
 
Three Months Ended
  
April 2,
2016
 
April 4,
2015
Products
$
51

 
$
64

Services
49

 
55

Operating earnings
100

 
119

Total other income (expense)
(78
)
 
9

Earnings from continuing operations before income taxes
$
22

 
$
128


13.
Reorganization of Business
2016 Charges
During the three months ended April 2, 2016, the Company recorded net reorganization of business charges of $23 million including $7 million of charges in Other charges and $16 million of charges in Cost of sales in the Company's condensed consolidated statements of operations. Included in the $23 million were charges of: (i) $24 million for employee separation costs and (ii) $3 million for the impairment of the corporate aircraft, partially offset by $4 million of reversals for accruals no longer needed.
The following table displays the net charges incurred by segment: 
April 2, 2016
Three Months Ended
Products
$
21

Services
2

 
$
23

The following table displays a rollforward of the reorganization of business accruals established for lease exit costs and employee separation costs from January 1, 2016 to April 2, 2016:
 
January 1, 2016
 
Additional
Charges
 
Adjustments
 
Amount
Used
 
April 2, 2016
Exit costs
$
9

 
$

 
$

 
$
(2
)
 
$
7

Employee separation costs
51

 
24

 
(4
)
 
(21
)
 
50

 
$
60

 
$
24

 
$
(4
)
 
$
(23
)
 
$
57

Exit Costs
At January 1, 2016, the Company had $9 million of accruals for exit costs. During the three months ended April 2, 2016, there were no additional charges and $2 million of cash payments related to the exit of leased facilities. The remaining accrual of $7 million, which is included in Accrued liabilities in the Company’s condensed consolidated balance sheets at April 2, 2016, primarily represents future cash payments for lease obligations that are expected to be paid over a number of years.

19


Employee Separation Costs
At January 1, 2016, the Company had an accrual of $51 million for employee separation costs. The 2016 additional charges of $24 million represent severance costs for approximately 250 employees. The adjustment of $4 million reflects reversals for accruals no longer needed. The $21 million used reflects cash payments to severed employees. The remaining accrual of $50 million, which is included in Accrued liabilities in the Company’s condensed consolidated balance sheets at April 2, 2016, is expected to be paid, primarily within one year, to approximately 400 employees, who have either been severed or have been notified of their severance and have begun or will begin receiving payments.
2015 Charges
During the three months ended April 4, 2015, the Company recorded net reorganization of business charges of $14 million, including $12 million of charges in Other charges and $2 million of charges in Cost of sales in the Company's condensed consolidated statements of operations. Included in the aggregate $14 million were charges of $10 million related to employee separation costs and $4 million related to exit costs.
The following table displays the net charges incurred by segment: 
April 4, 2015
Three Months Ended
Products
$
10

Services
4

 
$
14


14.
Intangible Assets and Goodwill
Acquisitions
During the year ended December 31, 2015 the Company completed the acquisitions of two providers of public safety software-based solutions for an aggregate purchase price of $50 million, recognizing an additional $31 million of goodwill, $22 million of identifiable intangible assets, and $3 million of acquired liabilities related to these acquisitions. The $22 million of identifiable intangible assets were classified as: (i) $11 million of completed technology, (ii) $8 million of customer-related, and (iii) $3 million of other intangibles. These intangible assets will be amortized over periods ranging from five to ten years. The results of operations for these acquisitions have been included in the Company’s condensed consolidated statements of operations subsequent to the acquisition date. The pro forma effects of these acquisitions are not significant individually or in the aggregate.
On February 19, 2016, the Company completed the acquisition of GDCL, a holding company of Airwave, the largest private operator of a public safety network in the world. All of the outstanding equity of GDCL was acquired for the sum of £1, after which the Company invested into GDCL £698 million, net of cash acquired, or approximately $1.0 billion, to settle all third party debt. The Company will make a deferred cash payment of £64 million on November 15, 2018. 
The acquisition of GDCL enables the Company to geographically diversify its global Managed & Support services offerings within its Services segment, while offering a proven service delivery platform to build on for providing innovative, leading, mission-critical communications solutions and services to customers. During the three months ended April 2, 2016, the Company recorded $61 million within Net sales and $3 million within Net earnings from the operations of Airwave.
The acquisition of GDCL has been accounted for at fair value as of the acquisition date, based on the fair value of the total consideration transferred which has been attributed to all identifiable assets acquired and liabilities assumed and measured at fair value. The valuation of assets acquired and liabilities assumed in the acquisition has not yet been finalized as of April 2, 2016. As a result, the Company recorded preliminary estimates for the fair value of assets acquired and liabilities assumed as of the acquisition date. The final allocation could differ materially from the preliminary allocation. The final allocation may include: (i) changes in fair values of property, plant and equipment, (ii) changes in allocations to intangible assets such as trade names, customer relationships, and goodwill, and (iii) other changes to assets and liabilities.

20


The total consideration for the acquisition of GDCL was approximately $1.1 billion, consisting of cash payments of $1.0 billion, net of cash acquired, and deferred consideration valued at fair value based on its net present value on the date of the acquisition of $82 million. The net present value has been calculated using a discount rate of 4.2%, which is reflective of the credit standing of the combined entity. The following table summarizes preliminary fair values of assets acquired and liabilities assumed as of the February 19, 2016 acquisition date:
Cash
 
$
86

Accounts receivable, net
 
55

Other current assets
 
36

Property, plant and equipment, net
 
481

Deferred income taxes
 
79

Intangible assets
 
631

Accounts payable
 
(18
)
Accrued liabilities
 
(184
)
Other liabilities
 
(254
)
Goodwill
 
170

Total consideration
 
$
1,082

Net present value of deferred consideration payment to former owners
 
(82
)
Net cash consideration at purchase
 
$
1,000

Acquired intangible assets consist of $602 million of customer relationships and $29 million of trade names. All intangibles have a useful life of 7 years, over which amortization expense will be recognized on a straight line basis.
The fair values of trade names and customer relationships were estimated using the income approach. Customer relationships were valued under the excess earnings method which assumes that the value of an intangible asset is equal to the present value of the incremental after-tax cash flows attributable specifically to the intangible asset. Trade names were valued under the relief from royalty method, which assumes value to the extent that the acquired company is relieved of the obligation to pay royalties for the benefits received from them.
 Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from the other assets acquired that could not be individually identified and separately recognized. Goodwill is not deductible for tax purposes.
Pro Forma Financial Information
The following table presents the unaudited pro forma combined results of operations of the Company and GDCL for the three months ended April 2, 2016 and April 4, 2015 as if the acquisition of GDCL had occurred on January 1, 2016 and January 1, 2015, respectively, (in millions, except per share amounts):
 
Three Months Ended
  
April 2, 2016
 
April 4, 2015
Revenues
$
1,264

 
$
1,364

Earnings from continuing operations
41

 
100

Basic earnings per share
0.24

 
0.46

Diluted earnings per share
0.23

 
0.46

The pro forma results are based on estimates and assumptions, which the Company believes are reasonable. They are not necessarily indicative of its consolidated results of operations in future periods or the results that actually would have been realized had we been a combined company during the periods presented. The pro forma results include adjustments primarily related to amortization of acquired intangible assets, interest expense, and transaction costs expensed during the period.

21


Intangible Assets
Amortized intangible assets were comprised of the following: 
 
April 2, 2016
 
December 31, 2015
  
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Completed technology
$
60

 
$
33

 
$
60

 
$
32

Patents
8

 
5

 
8

 
5

Customer-related
629

 
21

 
23

 
10

Other intangibles
46

 
15

 
20

 
15

 
$
743

 
$
74

 
$
111

 
$
62

Amortization expense on intangible assets was $13 million for the three months ended April 2, 2016 and $2 million for the three months ended April 4, 2015. The increase in amortization expense is due to the acquisition of GDCL. As of April 2, 2016, annual amortization expense is estimated to be $87 million in 2016, $98 million in 2017 and 2018, $97 million in 2019, and $94 million in 2020 and 2021.
Amortized intangible assets, excluding goodwill, were comprised of the following by segment:
 
April 2, 2016
 
December 31, 2015
  
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Products
$
86

 
$
59

 
$
89

 
$
60

Services
657

 
15

 
22

 
2

 
$
743

 
$
74

 
$
111

 
$
62

Goodwill
The following table displays a rollforward of the carrying amount of goodwill by segment from January 1, 2016 to April 2, 2016
 
Products
 
Services
 
Total
Balance as of January 1, 2016
 
 
 
 
 
Aggregate goodwill
$
270

 
$
150

 
$
420

Accumulated impairment losses

 

 

Goodwill, net of impairment losses
$
270

 
$
150

 
$
420

Goodwill acquired

 
170

 
170

Balance as of April 2, 2016
 
 
 
 
 
Aggregate goodwill
$
270

 
$
320

 
$
590

Accumulated impairment losses

 

 

Goodwill, net of impairment losses
$
270

 
$
320

 
$
590


22


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This commentary should be read in conjunction with the condensed consolidated financial statements and related notes thereto of Motorola Solutions, Inc. (“Motorola Solutions” or the “Company,” “we,” “our,” or “us”) for the three months ended April 2, 2016 and April 4, 2015, as well as our consolidated financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations in our Annual Report on Form 10-K for the year ended December 31, 2015.
Executive Overview
Recent Developments
On February 19, 2016, we completed the acquisition of Guardian Digital Communications Limited ("GDCL"), a holding company of Airwave Solutions Limited ("Airwave"), the largest private operator of a public safety network in the world. All of the outstanding equity of GDCL was acquired for the sum of £1, after which we invested into GDCL £698 million, net of cash acquired, or approximately $1.0 billion, to settle all third party debt. We will make a deferred cash payment of £64 million on November 15, 2018. We funded the investment with a $675 million term loan (the “Term Loan”) and approximately $400 million of international cash on hand. The acquisition of GDCL enables us to geographically diversify our global Managed & Support services offerings within our Services segment, while offering a proven service delivery platform to build on for providing innovative, leading, mission-critical communications solutions and services to customers.
Our Business
We are a leading global provider of mission-critical communication infrastructure, devices, accessories, software, and services. Our products and services help government, public safety and commercial customers improve their operations through increased effectiveness, efficiency, and safety of their mobile workforces. We serve our customers with a global footprint of sales in more than 100 countries and 13,000 employees worldwide, based on our industry leading innovation and a deep portfolio of products and services.
We conduct our business globally and manage it by two segments:
Products: The Products segment is comprised of Devices and Systems. Devices includes two-way portable and vehicle mounted radios, accessories, and software features and upgrades. Systems includes the radio network core and central processing software, base stations, consoles, repeaters, and software applications and features. The primary customers of the Products segment are government, public safety and first-responder agencies, municipalities, and commercial and industrial customers who operate private communications networks and manage a mobile workforce. In the first quarter of 2016, the segment’s net sales were $702 million, representing 59% of our consolidated net sales.
Services: The Services segment provides a full set of service offerings for government, public safety, and commercial communication networks including: (i) Integration services, (ii) Managed & Support services, and (iii) iDEN services. Integration services includes the implementation, optimization, and integration of systems, devices, software, and applications. Managed & Support services includes a continuum of service offerings beginning with repair, technical support, and hardware maintenance. More advanced offerings include network monitoring, software maintenance, and cyber security services. Managed service offerings range from partial or full operation of customer owned networks to operation of Motorola Solutions owned networks. Services are provided across all radio network technologies, Command Center Consoles, and Smart Public Safety Solutions. iDEN services consists primarily of hardware and software maintenance services for our legacy iDEN customers. In the first quarter of 2016, the segment’s net sales were $491 million, representing 41% of our consolidated net sales.
Trends Affecting Our Business
Impact of Macroeconomic Conditions: The stronger U.S. dollar has had a negative impact on sales denominated in currencies other than the U.S. dollar. In addition, weakening economic conditions and a significant drop in global commodity prices have negatively impacted sales in Latin America and Eastern Europe. The strengthening dollar has reduced the purchasing power of our customers, and the lower price of commodities has negatively impacted government budgets and funds available for the purchase of our products in these regions.
The impact of foreign exchange rate fluctuations on net earnings is partially mitigated by the following: (i) the majority of our revenues are derived from contracts within North America denominated in U.S. dollars, (ii) the cost of sales for the delivery of our Services offerings are predominately labor costs incurred within the same geographic region as the associated sales, resulting in minimal impact of foreign exchange rates on gross margin within the Services segment, and (iii) a significant portion of our operating expenses are denominated in foreign currencies as a result of our offshore research and development ("R&D") and selling, general, and administrative ("SG&A") footprint.
Cost Savings Initiatives: We are committed to employing disciplined financial policies and driving continuous efficiencies and improvements in our cost structure. We expect to reduce SG&A and R&D expenses during 2016 by approximately $120 million in comparison to 2015.

23


Growth of Our Services Portfolio: Our Services segment is expected to grow at a higher rate than our Products segment. Overall, the Services segment has a lower gross margin percentage than the Products segment, but we expect consolidated operating margins to continue to expand.
iDEN: We have experienced a downward trend in iDEN product and services sales over recent years due to decreased demand as a result of the dated nature of the technology. We expect the downward trend to continue as service contracts expire and new technology replaces iDEN equipment in the marketplace. This trend primarily relates to our Services segment as the majority of iDEN sales are hardware and software maintenance services. The expected decline in iDEN sales will impact both revenues and gross margins within the Services segment as iDEN services’ gross margins are generally higher than the remainder of our services portfolio.
Change in Presentation
During the first quarter of 2016, we restructured our regions operationally combining the Europe and Africa and Middle East regions into one region which is now reflected as Europe, Middle East, and Africa ("EMEA"). Accordingly, we now report net sales in the following four geographic regions: North America, Latin America, EMEA, and Asia Pacific ("AP"). We have updated all periods presented to reflect this change in presentation.
Geographic market sales measured by the locale of the end customer as a percent of total net sales are as follows:
 
Three Months Ended
 
Year Ended December 31
 
April 2, 2016
 
April 4, 2015
 
2015
 
2014
 
2013
North America
66
%
 
63
%
 
65
%
 
61
%
 
63
%
Latin America
5
%
 
8
%
 
6
%
 
9
%
 
8
%
EMEA
19
%
 
18
%
 
17
%
 
19
%
 
17
%
AP
10
%
 
11
%
 
12
%
 
11
%
 
12
%
 
100
%
 
100
%

100
%

100
%

100
%
First Quarter Summary
Net sales were $1.2 billion in the first quarter of 2016, a $30 million, or 2% decrease from the first quarter of 2015. Net sales in the first quarter of 2016 included the unfavorable impact of foreign currency fluctuations primarily within EMEA, AP, and Latin America, partially offset by growth in North America.
We generated operating earnings of $100 million, or 8% of net sales, in the first quarter of 2016, compared to $119 million, or 10% of net sales, in the first quarter of 2015. Profitability declined primarily as a result of: (i) lower gross margin in the Products segment and (ii) higher costs within Other charges associated with the acquisition of GDCL, including $13 million of transaction fees and increased intangible amortization expense.
We had earnings from continuing operations attributable to Motorola Solutions, Inc. of $17 million, or $0.10 per diluted common share, in the first quarter of 2016, compared to $87 million, or $0.40 per diluted common share, in the first quarter of 2015.
We generated net cash from operating activities of $13 million during the first quarter of 2016, compared to $156 million in the first quarter of 2015. Operating cash flows decreased primarily as a result of decreased earnings from continuing operations, higher working capital needs, higher incentive compensation, and increased payments of interest and income taxes.
We returned $135 million in capital to shareholders through dividends and share repurchases during the first quarter of 2016.
A summary of our segment results is as follows:
Products: Net sales were $702 million in the first quarter of 2016, a decrease of $56 million, or 7% compared to net sales of $758 million during the first quarter of 2015. On a geographic basis, net sales decreased in EMEA, Latin America, and AP, and increased in North America, compared to the year-ago quarter.
Services: Net sales were $491 million in the first quarter of 2016, an increase of $26 million, or 6% compared to net sales of $465 million in the first quarter of 2015. On a geographic basis, net sales increased in EMEA, North America, and AP and decreased in Latin America, compared to the year-ago quarter.



24


Results of Operations
 
Three Months Ended
(Dollars in millions, except per share amounts)
April 2, 2016
 
% of
Sales**
 
April 4, 2015
 
% of
Sales**
Net sales from products
$
702

 
 
 
$
758

 
 
Net sales from services
491

 
 
 
465

 
 
Net sales
1,193

 
 
 
1,223

 
 
Costs of product sales
366

 
52.1
 %
 
359

 
47.4
 %
Costs of services sales
325

 
66.2
 %
 
316

 
68.0
 %
Costs of sales
691

 
 
 
675

 
 
Gross margin
502

 
42.1
 %
 
548

 
44.8
 %
Selling, general and administrative expenses
234

 
19.6
 %
 
256

 
20.9
 %
Research and development expenditures
135

 
11.3
 %
 
159

 
13.0
 %
Other charges
33

 
2.8
 %
 
14

 
1.1
 %
Operating earnings
100

 
8.4
 %
 
119

 
9.7
 %
Other income (expense):
 
 
 
 
 
 
 
Interest expense, net
(49
)
 
(4.1
)%
 
(40
)
 
(3.3
)%
Gain (loss) on sales of investments and businesses, net
(21
)
 
(1.8
)%
 
46

 
3.8
 %
Other
(8)

 
(0.7
)%
 
3

 
0.2
 %
Total other income (expense)
(78
)
 
(6.5
)%
 
9

 
0.7
 %
Earnings from continuing operations before income taxes
22

 
1.8
 %
 
128

 
10.5
 %
Income tax expense
5

 
0.4
 %
 
40

 
3.3
 %
Earnings from continuing operations
17

 
1.4
 %
 
88

 
7.2
 %
Less: Earnings attributable to noncontrolling interests

 
 %
 
1

 
0.1
 %
Earnings from continuing operations*
17

 
1.4
 %
 
87

 
7.1
 %
Loss from discontinued operations, net of tax

 
 %
 
(13
)
 
(1.1
)%
Net earnings*
$
17

 
1.4
 %