Motorola 2007 Annual Report Download - page 54

Company’s investment in Sprint Nextel, and (ii) $60 million of foreign currency gains, partially offset by
$27 million of investment impairment charges. In 2005, the net charges were primarily comprised of:
(i) $137 million of debt retirement costs, relating to the Company’s repurchase of an aggregate principal amount of
$1.0 billion of long-term debt through cash tender offers, (ii) $38 million of foreign currency losses, and
(iii) $25 million in investment impairment charges, partially offset by: (i) a $51 million gain due to an increase in
the market value of variable forward instruments entered into to protect the value of the Company’s investment in
Nextel common stock prior to the merger of Sprint and Nextel, and (ii) $30 million in income from the repayment
of a previously-reserved loan related to Iridium.
Effective Tax Rate
The Company recorded $1.3 billion of net tax expense in 2006, compared to $1.9 billion of net tax expense
in 2005. During 2006, the Company recorded $348 million of net tax benefits relating to: (i) the reduction of
valuation allowances, (ii) incremental tax benefits related to 2005 cash repatriations, (iii) favorable tax settlements
reached with foreign jurisdictions, (iv) tax benefits for foreign earnings permanently reinvested, (v) contribution of
appreciated investments to the Company’s charitable foundation and unfavorably impacted by: (i) the incurrence of
non-deductible IPR&D charges, and (ii) restructuring charges in low tax jurisdictions. The effective tax rate for
2006 excluding these items was 36%.
During 2005, the tax rate reflected a $265 million net tax benefit related to the repatriation of foreign
earnings under the provisions of the American Jobs Creation Act of 2004 and an $81 million net tax benefit on the
stock sale of a sensor business that was divested in 2005.
Earnings from Continuing Operations
The Company had earnings from continuing operations before income taxes of $4.6 billion in 2006, compared
to earnings from continuing operations before income taxes of $6.4 billion in 2005. After taxes, the Company had
earnings from continuing operations of $3.3 billion, or $1.30 per diluted share, in 2006, compared with earnings
from continuing operations of $4.5 billion, or $1.79 per diluted share, in 2005.
The decrease in earnings from continuing operations before income taxes in 2006 compared to 2005 is
primarily attributed to: (i) a $1.8 billion decrease in gains on the sale of investments and businesses, (ii) an
$876 million increase in SG&A expenses, (iii) a $506 million increase in R&D expenditures, and (iv) a
$429 million change in Other charges (income). These negative impacts on operating earnings were partially offset
by: (i) a $1.3 billion increase in gross margin, primarily due to the $7.5 billion increase in net sales, (ii) a
$260 million increase in income classified as Other, as presented in Other income (expense), and (iii) a $255 million
increase in net interest income.
Reorganization of Businesses
The Company maintains a formal Involuntary Severance Plan (the “Severance Plan”) which permits the
Company to offer eligible employees severance benefits based on years of service and employment grade level in
the event that employment is involuntarily terminated as a result of a reduction-in-force or restructuring. Each
separate reduction-in-force has qualified for severance benefits under the Severance Plan. The Company recognizes
termination benefits based on formulas per the Severance Plan at the point in time that future settlement is
probable and can be reasonably estimated based on estimates prepared at the time a restructuring plan is approved
by management. Exit costs primarily consist of future minimum lease payments on vacated facilities. At each
reporting date, the Company evaluates its accruals for exit costs and employee separation costs to ensure the
accruals are still appropriate. In certain circumstances, accruals are no longer required because of efficiencies in
carrying out the plans or because employees previously identified for separation resigned from the Company and
did not receive severance or were redeployed due to circumstances not foreseen when the original plans were
initiated. The Company reverses accruals through the income statement line item where the original charges were
recorded when it is determined they are no longer required.
The Company realized cost-saving benefits of approximately $165 million in 2007 from the plans that were
initiated during 2007, representing: (i) $93 million of savings in R&D expenditures, (ii) $46 million of savings in
SG&A expenses, and (iii) $26 million of savings in Costs of sales. Beyond 2007, the Company expects the
reorganization plans initiated during 2007 to provide annualized cost savings of approximately $548 million,
46 MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS