Motorola 2008 Annual Report Download - page 69

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with these types of uncapped damage provisions are fairly rare, but individual contracts could still represent
meaningful risk. There is a possibility that a damage claim by a counterparty to one of these contracts could result
in expenses to the Company that are far in excess of the revenue received from the counterparty in connection
with the contract.
Indemnification Provisions: In addition, the Company may provide indemnifications for losses that result
from the breach of general warranties contained in certain commercial, intellectual property and divestiture
agreements. Historically, the Company has not made significant payments under these agreements, nor have there
been significant claims asserted against the Company. However, there is an increasing risk in relation to intellectual
property indemnities given the current legal climate. 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. Further, the Company’s
obligations under these agreements for indemnification based on breach of representations and warranties are
generally limited in terms of duration, typically not more than 24 months, and for amounts not in excess of the
contract value, and in some instances the Company may have recourse against third parties for certain payments
made by the Company.
Legal Matters: The Company is a defendant in various lawsuits, claims and actions, which arise in the
normal course of business. These include actions relating to products, contracts and securities, as well as matters
initiated by third parties or Motorola relating to infringements of patents, violations of licensing arrangements and
other intellectual property-related matters. In the opinion of management, the ultimate disposition of these matters
will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of
operations.
Segment Information
The following commentary should be read in conjunction with the financial results of each reporting segment
as detailed in Note 12, “Information by Segment and Geographic Region,” to the Company’s consolidated
financial statements. Net sales and operating results for the Company’s three operating segments for 2008, 2007
and 2006 are presented below.
Mobile Devices Segment
The Mobile Devices segment designs, manufactures, sells and services wireless handsets with integrated
software and accessory products, and licenses intellectual property. In 2008, the segment’s net sales represented
40% of the Company’s consolidated net sales, compared to 52% in 2007 and 66% in 2006.
(Dollars in millions) 2008 2007 2006 2008—2007 2007—2006
Years Ended December 31 Percent Change
Segment net sales $12,099 $18,988 $28,383 (36)% (33)%
Operating earnings (loss) (2,199) (1,201) 2,690 83% ***
*** Percentage change is not meaningful.
Segment Results—2008 Compared to 2007
In 2008, the segment’s net sales were $12.1 billion, a decrease of 36% compared to net sales of $19.0 billion in
2007. The 36% decrease in net sales was primarily driven by a 37% decrease in unit shipments. The segment’s net
sales were negatively impacted by the segment’s limited product offerings in critical market segments, particularly 3G
products, including smartphones, as well as very low-tier products. In addition, the segment’s net sales were impacted
by the global economic downturn in the second half of 2008, which resulted in the slowing of end user demand. On a
product technology basis, net sales decreased substantially for GSM and CDMA technologies and, to a lesser extent,
decreased for iDEN and 3G technologies. On a geographic basis, net sales decreased substantially in North America,
the Europe, Middle East and Africa region (“EMEA”) and Asia and, to a lesser extent, decreased in Latin America.
The segment incurred an operating loss of $2.2 billion in 2008, compared to an operating loss of $1.2 billion
in 2007. The increase in the operating loss was primarily due to a decrease in gross margin, driven by: (i) a 36%
decrease in net sales, (ii) excess inventory and other related charges of $370 million in 2008 due to a decision to
61
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS