Motorola 2005 Annual Report Download - page 93

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86
pro forma effects on both earnings from continuing operations and on net earnings, which includes discontinued
operations.
Continuing Operations Net Earnings
Years Ended December 31
2005
2004 2003
2005
2004 2003
Earnings:
Earnings, as reported $4,599 $2,191 $ 928 $4,578 $1,532 $ 893
Add: Stock-based employee compensation expense included
in reported earnings, net of related tax effects 915 23 919 27
Deduct: Stock-based employee compensation expense
determined under fair value-based method for all awards,
net of related tax effects (170) (150) (187) (170) (188) (249)
Pro forma earnings $4,438 $2,056 $ 764 $4,417 $1,363 $ 671
Basic earnings per common share:
As reported $ 1.86 $ 0.93 $ 0.40 $ 1.85 $ 0.65 $ 0.38
Pro forma $ 1.80 $ 0.87 $ 0.33 $ 1.79 $ 0.58 $ 0.29
Diluted earnings per common share:
As reported $ 1.82 $ 0.90 $ 0.39 $ 1.81 $ 0.64 $ 0.38
Pro forma $ 1.76 $ 0.85 $ 0.33 $ 1.75 $ 0.57 $ 0.29
The weighted-average fair value of options granted was $5.75, $7.74, and $3.21 for 2005, 2004 and 2003,
respectively. The fair value of each option is estimated at the date of grant using a modified Black-Scholes option
pricing model, with the following weighted-average assumptions for 2005, 2004 and 2003, respectively: dividend
yields of 1.0%, 0.9% and 1.8%; expected volatility of 35.2%, 46.8% and 46.6%; risk-free interest rate of 3.9%, 3.7%
and 2.6%; and expected lives of 5 years for each grant.
Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Reclassifications: Certain amounts in prior years' financial statements and related notes have been reclassified
to conform to the 2005 presentation.
Recent Accounting Pronouncements: In October 2005, the FASB issued Statement No. 154, ""Accounting
Changes and Error Corrections'' (""SFAS 154''), which replaces APB Opinion No. 20, ""Accounting Changes'' and
FASB Statement No. 3, ""Reporting Accounting Changes in Interim Financial Statement''. SFAS 154 retained
accounting guidance related to changes in estimates, changes in a reporting entity and error corrections; however,
changes in accounting principles must be accounted for retrospectively by modifying the financial statements of
prior periods. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005.
The Company does not believe adoption of SFAS 154 will have a material impact on our financial condition, results
of operations, or cash flows.
In December 2004, the FASB issued Statement No. 123R (""SFAS 123R''), a revision to Statement No. 123,
""Accounting for Stock-Based Compensation.'' This standard requires the Company to measure the cost of employee
services received in exchange for equity awards based on the grant date fair value of the awards. The cost will be
recognized as compensation expense over the vesting period of the awards. The standard provides for a prospective
application. Under this method, the Company will begin recognizing compensation cost for equity based
compensation for all new or modified grants after the date of adoption. In addition, the Company will recognize
the unvested portion of the grant date fair value of awards issued prior to adoption based on the fair values
previously calculated for disclosure purposes. At December 31, 2005, the aggregate value of unvested options, as
determined using a Black-Scholes option valuation model, was $467 million. Upon adoption of SFAS 123R, a
majority of this amount will be recognized over the remaining vesting period of these options. The Company will
adopt SFAS 123R as of January 1, 2006. The Company believes that the adoption of this standard will result in a
reduction of earnings per share by $0.06 to $0.08 in 2006. This estimate is based on many assumptions including
the level of stock option grants expected in 2006, the Company's stock price, and significant assumptions in the