Motorola 2008 Annual Report Download - page 56

Other
Income classified as Other, as presented in Other income (expense), was $22 million in 2007, compared to net
income of $151 million in 2006. The net income in 2007 was primarily comprised of $97 million of foreign
currency gains, partially offset by $44 million of other-than-temporary investment impairment charges. The net
income in 2006 was primarily comprised of: (i) a $99 million net gain due to an increase in market value of a
zero-cost collar derivative entered into to protect the value of the Company’s investment in Sprint Nextel, and
(ii) $60 million of foreign currency gains, partially offset by $27 million of investment impairment charges.
Effective Tax Rate
The Company recorded $285 million of net tax benefits in 2007, compared to $1.3 billion in net tax expense
in 2006. The Company’s net tax benefit for 2007 was favorably impacted by an increase in tax credits compared
to 2006. The Company’s net tax benefit was also favorably impacted by: (i) the settlement of tax positions, (ii) tax
incentives received, and (iii) reversal of deferred tax valuation allowances, and unfavorably impacted by:
(i) adjustments to deferred taxes in non-U.S. locations due to enacted tax rate changes, (ii) an increase in
unrecognized tax benefits, and (iii) a non-deductible IPR&D charge. The Company’s effective tax rate for
continuing operations, excluding the items described above and the tax impact of restructuring charges and asset
impairments, was 26%.
The Company’s net tax expense of $1.3 billion in 2006 was favorably impacted by $348 million of net tax
benefits relating to: (i) the reduction of deferred tax asset 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%.
The effective tax rate for continuing operations excluding identified items of 26% for 2007 is less than the
comparable effective tax rate of 36% for 2006 due to an increase in tax credits in 2007 compared to 2006 and a
change in the mix of income and loss by region.
Earnings (Loss) from Continuing Operations
The Company incurred a net loss from continuing operations before income taxes of $390 million in 2007,
compared to earnings from continuing operations before income taxes of $4.6 billion in 2006. After taxes, the
Company incurred a loss from continuing operations of $105 million, or $0.05 per diluted share, in 2007,
compared to earnings from continuing operations of $3.3 billion, or $1.30 per diluted share, in 2006.
The decrease in earnings (loss) from continuing operations before income taxes in 2007 compared to 2006 is
primarily attributed to: (i) a $2.8 billion decrease in gross margin, driven by decreases in gross margin in the
Mobile Devices and Home and Network Mobility segments, partially offset by an increase in gross margin in the
Enterprise Mobility Solutions segment, (ii) a $959 million increase in Other charges (income), (iii) a $588 million
increase in SG&A expenses, (iv) a $323 million increase in R&D expenditures, (v) a $235 million decrease in net
interest income, and (vi) a $129 million decrease in income classified as Other, as presented in Other income
(expense).
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. 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 consist of future minimum lease payments on vacated facilities and
other contractual terminations. At each reporting date, the Company evaluates its accruals for employee separation
and exit costs to ensure the accruals are still appropriate. In certain circumstances, accruals are no longer needed
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
48 MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS