Motorola (MOT)

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

the commercial enterprise market, and (ii) a 4% increase in net sales in the government and public safety market, primarily driven by the net sales by Vertex Standard Co., Ltd., a business the Company took a controlling interest of in January 2008. The increase in net sales in the Home and Networks Mobility segment was primarily driven by: (i) higher net sales of digital entertainment devices, due to higher ASPs driven by a favorable shift in product mix, and (ii) higher net sales of broadband gateways, partially offset by lower net sales of wireless networks, primarily driven by the absence of net sales by the embedded communication computing business (“ECC”) that was divested at the end of 2007.

 

Gross Margin

 

Gross margin was $2.1 billion, or 28.8% of net sales, in the first quarter of 2008, compared to $2.5 billion, or 26.0% of net sales, in the first quarter of 2007. The decrease in gross margin reflects lower gross margin in the Mobile Devices and Home and Networks Mobility segments, partially offset by increased gross margin in the Enterprise Mobility Solutions segment. The decrease in gross margin in the Mobile Devices segment was primarily due to the 39% decrease in net sales, partially offset by savings from cost-reduction initiatives. The decrease in gross margin in the Home and Networks Mobility segment was primarily due to lower net sales of CDMA and iDEN infrastructure equipment and the absence of net sales by the divested ECC business. The increase in gross margin in the Enterprise Mobility Solutions segment was primarily due to: (i) an inventory-related charge in connection with the acquisition of Symbol Technologies, Inc. (“Symbol”) during the first quarter of 2007, and (ii) the 5% increase in net sales in the first quarter of 2008 as compared to the first quarter of 2007.

 

Gross margin as a percentage of net sales increased in the first quarter of 2008 compared to the first quarter of 2007, primarily driven by increases in the Mobile Devices and Enterprise Mobility Solutions segments, partially offset by a decrease in the Home and Networks Mobility segment. The Company’s overall gross margin as a percentage of net sales can be impacted by the proportion of overall net sales generated by its various businesses.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative (“SG&A”) expenses decreased 10% to $1.2 billion, or 15.9% of net sales, in the first quarter of 2008, compared to $1.3 billion, or 13.9% of net sales, in the first quarter of 2007. The decrease in the first quarter of 2008 compared to the first quarter of 2007 was primarily driven by decreases in the Mobile Devices and Home and Networks Mobility segments, partially offset by a slight increase in the Enterprise Mobility Solutions segment. The decrease in the Mobile Devices segment was primarily driven by lower marketing expenses and savings from cost-reduction initiatives. The decrease in the Home and Networks Mobility segment was primarily due to cost-reduction initiatives. The increase in the Enterprise Mobility Solutions segment was primarily due to increased selling and marketing expenses related to the increase in net sales. SG&A expenses as a percentage of net sales increased in the Mobile Devices segment and decreased in the Enterprise Mobility Solutions and Home and Networks Mobility segments.

 

Research and Development Expenditures

 

Research and development (“R&D”) expenditures decreased 6% to $1.1 billion, or 14.2% of net sales, in the first quarter of 2008, compared to $1.1 billion, or 11.8% of net sales, in the first quarter of 2007. The decrease in the first quarter of 2008 compared to the first quarter of 2007 was primarily driven by decreases in the Mobile Devices and Home and Networks Mobility segments, partially offset by an increase in the Enterprise Mobility Solutions segment. The decreases in the Mobile Devices and Home and Networks Mobility segments were primarily due to savings from cost-reduction initiatives. The increase in the Enterprise Mobility Solutions segment was primarily due to developmental engineering expenditures for new product development and investment in next-generation technologies. R&D expenditures as a percentage of net sales increased in the Mobile Devices and Enterprise Mobility Solutions segments and decreased in the Home and Networks Mobility segment. The Company participates in very competitive industries with constant changes in technology and, accordingly, the Company continues to believe that a strong commitment to R&D is required to drive long-term growth.

 

Other Charges

 

The Company recorded net charges of $177 million in Other charges in the first quarter of 2008, compared to net charges of $390 million in the first quarter of 2007. The charges in the first quarter of 2008 include: (i) $83 million of charges relating to the amortization of intangibles, (ii) $74 million of net reorganization of business charges included in Other charges, and (iii) a $20 million charge related to a legal settlement. The charges in the first quarter of 2007 include: (i) $115 million of net charges for the settlement of a class action lawsuit relating to Telsim, (ii) $95 million of charges

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

relating to the amortization of intangibles, (iii) $95 million of in-process research and development charges (“IPR&D”) relating to the acquisition of Symbol, and (iv) $85 million of net reorganization of business charges.

 

Net Interest Income (Expense)

 

Net interest expense was $2 million in the first quarter of 2008, compared to net interest income of $41 million in the first quarter of 2007. Net interest expense in the first quarter of 2008 included interest expense of $78 million, partially offset by interest income of $76 million. Net interest income in the first quarter of 2007 included interest income of $134 million, partially offset by interest expense of $93 million. The decrease in interest income is primarily attributed to the lower average cash, cash equivalents and Sigma Fund balances, as compared to these average balances during the first quarter of 2007, and the significant decrease in short-term interest rates.

 

Gains (Loss) on Sales of Investments and Businesses

 

Gains on sales of investments and businesses were $19 million in the first quarter of 2008, compared to a loss of $1 million in the first quarter of 2007. In the first quarter of 2008, the net gain primarily relates to the sale of the Company’s shares in an equity investment. In the first quarter of 2007, the net loss was related to the sale of several small investments.

 

Other

 

Charges classified as Other, as presented in Other income (expense), were $9 million in the first quarter of 2008, compared to net charges of $1 million in the first quarter of 2007. The net charges in the first quarter of 2008 were primarily comprised of $22 million of investment impairment charges, partially offset by: (i) $24 million of gains relating to several interest rate swaps not designated as hedges, and (ii) $1 million of foreign currency gains. The net charges in the first quarter of 2007 were primarily comprised of $19 million of investment impairment charges, partially offset by $15 million of foreign currency gains.

 

Effective Tax Rate

 

The Company recorded $67 million of net tax benefits in the first quarter of 2008, compared to $109 million of net tax benefits in the first quarter of 2007. During the first quarter of 2008 the Company’s net tax benefit was favorably impacted by tax net benefits on restructuring charges and legal settlements and unfavorably impacted by a tax charge on derivative gains. The Company’s ongoing effective tax rate, excluding these items, was 34%.

 

The Company’s net tax benefit of $109 million for the first quarter of 2007 was favorably impacted by restructuring charges, legal settlements and tax adjustments and unfavorably impacted by non-deductible IPR&D charges. The Company’s effective tax rate excluding these items was 34%.

 

Loss from Continuing Operations

 

The Company incurred a net loss from continuing operations before income taxes of $261 million in the first quarter of 2008, compared with a net loss from continuing operations before income taxes of $327 million in the first quarter of 2007. After taxes, the Company incurred a net loss from continuing operations of $194 million, or $0.09 per diluted share, in the first quarter of 2008, compared to a net loss from continuing operations of $218 million, or $0.09 per diluted share, in the first quarter of 2007.

 

The decrease in the loss from continuing operations before income taxes in the first quarter of 2008 compared to the first quarter of 2007 is primarily attributed to: (i) a $213 million decrease in Other charges, (ii) a $130 million decrease in SG&A expenses, (iii) a $63 million decrease in R&D expenditures, and (vi) a $20 million increase in gains on the sale of investments and businesses. These factors, which decreased the operating loss, were partially offset by: (i) a $309 million decrease in gross margin, primarily due to the $2.0 billion decrease in net sales, (ii) a $43 million decrease in net interest income (expense), and (iii) an $8 million increase in charges classified as Other, as presented in Other income (expense).