Motorola 2013 Annual Report Download - page 34

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Gross Margin
Gross margin was $4.3 billion, or 50.0% of net sales in 2012, compared to $4.1 billion, or 50.5% of net sales, in 2011. The
gross margin increase was driven by the 12% increase in net sales in our Government segment, offset by lower gross margin in
our Enterprise segment, primarily related to a decline in volume, including the decline in iDEN sales, and unfavorable foreign
currency fluctuations. The decrease in gross margin as a percent of sales reflects higher gross margin percent from product
sales and lower gross margin percent from service sales. The decline in gross margin percentage from service sales primarily
relates to: (i) the expansion of managed services, which generally have lower gross margin than our traditional service contracts
and (ii) unfavorable foreign currency fluctuations.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses increased 3% to $2.0 billion, or 22.6% of net sales in 2012,
compared to $1.9 billion, or 23.2% of net sales in 2011. The increase in SG&A expenses is driven by an increase in pension
and employee benefit-related expenses, as well as the Psion acquisition that closed in the fourth quarter of 2012.
Research and Development Expenditures
R&D expenditures increased 4% to $1.1 billion, or 12.4% of net sales in 2012, compared to $1.0 billion, or 12.6% of net
sales in 2011. The increase in R&D expenditures reflects higher R&D expenditures in both segments, primarily due to: (i) an
increase in employee benefit-related expenses, and (ii) increased investment in next-generation technology, including strategic
acquisitions.
Other Charges
We recorded net charges of $54 million in Other charges in 2012, compared to net charges of $341 million in 2011. The
charges in 2012 included: (i) $41 million of net reorganization of business charges and (ii) $29 million of charges relating to
amortization of intangibles, partially offset by $16 million of income related to a legal matter. The charges in 2011 included: (i)
$200 million of charges relating to the amortization of intangibles, (ii) $88 million of net charges relating to legal matters, (iii)
$52 million of net reorganization of business charges, and (iv) $10 million related to a long term financing receivable reserve,
partially offset by $9 million in gains related to pension plan adjustments. The net reorganization of business charges are
discussed in further detail in the “Reorganization of Businesses” section.
Net Interest Expense
Net interest expense was $66 million in 2012, compared to net interest expense of $74 million in 2011. Net interest
expense in 2012 included interest expense of $108 million, partially offset by interest income of $42 million. Net interest
expense in 2011 includes interest expense of $132 million, partially offset by interest income of $58 million. The decrease in
net interest expense in 2012 compared to 2011 is primarily attributable to lower interest expense driven by lower average debt
outstanding, partially offset by a decrease in interest income due to lower average cash and cash equivalents during 2012
compared to 2011.
Gains on Sales of Investments and Businesses
Gains on sales of investments and businesses were $39 million in 2012, compared to $23 million in 2011. In 2012 and
2011, the net gains were primarily comprised of gains related to sales of certain of our equity investments.
Other
Net Other expense was $14 million in 2012, compared to net Other expense of $69 million in 2011. The net Other expense
in 2012 was primarily comprised of: (i) a $13 million loss on foreign currency, (ii) a $6 million loss from the extinguishment of
debt, and (iii) investment impairments of $8 million, partially offset by $13 million of other net investment earnings. The net
Other expense in 2011 was primarily comprised of an $81 million loss from the extinguishment of a portion of our outstanding
long-term debt, partially offset by an $8 million foreign currency gain.
Effective Tax Rate
We recorded $337 million of net tax expense in 2012, resulting in an effective tax rate of 28%, compared to a $3 million
net tax benefit in 2011, resulting in a negative effective tax rate. Our effective tax rate in 2012 was lower than the U.S. statutory
tax rate of 35% primarily due to: (i) a $60 million tax benefit related to the reversal of a significant portion of the valuation
allowance established on certain foreign deferred tax assets and (ii) a $13 million reduction in unrecognized tax benefits for
facts that then indicated the extent to which certain tax positions were more-likely-than-not of being sustained. Our negative
effective tax rate in 2011 was primarily due to: (i) a $274 million tax benefit related to the reversal of a significant portion of
the valuation allowance established on U.S. deferred tax assets and (ii) reductions in unrecognized tax benefits for facts that
then indicated the extent to which certain tax positions were more-likely-than-not of being sustained, partially offset by an
increase in the U.S. federal income tax accrual for undistributed foreign earnings.