Motorola 2015 Annual Report Download - page 28

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Item 7: Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The following is a discussion and analysis of our financial position as of December 31, 2015 and 2014 and results of
operations for each of the three years in the period ended December 31, 2015. This commentary should be read in conjunction
with our consolidated financial statements and the notes thereto appearing under “Item 8: Financial Statements and
Supplementary Data.”
Executive Overview
Recent Developments
On February 19, 2016, we completed the acquisition of 100% of the equity interest in Guardian Digital Communications
Limited ("GDCL"), a holding company of Airwave Solutions Limited ("Airwave"), the largest private operator of a public safety
network in the world. The equity interest was acquired for the sum of £1, after which we invested into GDCL net cash of
approximately £700 million, or approximately $1 billion, to settle all third party debt. We will make a deferred cash payment of
£64 million, or approximately $90 million, on November 15, 2018. We funded the investment with a $675 million term loan and
approximately $400 million of international cash on hand. The acquisition of Airwave enables us to grow revenue
and geographically diversify our global Managed & Support services offerings within our Services segment, while offering a
proven service delivery platform to build on for providing innovative, leading, mission-critical communications solutions and
services to customers.
Our Business
We are a leading global provider of mission-critical communication infrastructure, devices, accessories, software, and
services. Our products and services help government, public safety, and commercial customers improve their operations through
increased effectiveness, efficiency, and safety of their mobile workforces. We serve our customers with a global footprint of sales
in more than 100 countries based on our industry leading innovation and a deep portfolio of products and services.
We conduct our business globally and manage it through two segments:
Products: The Products segment is comprised of Devices and Systems. Devices includes two-way portable and
vehicle mounted radios, accessories, and software features and upgrades. Systems includes the radio network core
and central processing software, base stations, consoles, repeaters, and software applications and features. The
primary customers of the Products segment are government, public safety and first-responder agencies, municipalities,
and commercial and industrial customers who operate private communications networks and manage a mobile
workforce. In 2015, the segment’s net sales were $3.7 billion, representing 65% of our consolidated net sales.
Services: The Services segment provides a full set of service offerings for government, public safety, and
commercial communication networks including: (i) Integration services, (ii) Managed & Support services, and (iii) iDEN
services. Integration services includes the implementation, optimization, and integration of systems, devices, software,
and applications. Managed & Support services includes a continuum of service offerings beginning with repair,
technical support, and hardware maintenance. More advanced offerings include network monitoring, software
maintenance, and cyber security services. Managed service offerings range from partial or full operation of customer
owned networks to operation of Motorola Solutions owned networks. Services are provided across all radio network
technologies, Command Center Consoles, and Smart Public Safety Solutions. iDEN services consists primarily of
hardware and software maintenance services for our legacy iDEN customers. In 2015, the segment’s net sales were
$2.0 billion, representing 35% of our consolidated net sales.
Trends Affecting Our Business
Impact of Macroeconomic Conditions: The stronger U.S. dollar has had a negative impact on sales denominated in
currencies other than the U.S. dollar. In addition, weakening economic conditions and a significant drop in global commodity
prices has negatively impacted sales in Latin America and Eastern Europe. The weakening dollar has reduced the purchasing
power of our customers, and the lower price of commodities has negatively impacted government budgets and funds available
for the purchase of our products in these regions.
The impact of foreign exchange rate fluctuations on net earnings is partially mitigated by the following: (i) the majority of
our revenues are derived from contracts within North America denominated in U.S. dollars, (ii) the cost of sales for the delivery of
our Services offerings are predominately labor costs incurred within the same geographic region as the associated sales,
resulting in minimal impact of foreign exchange rates on gross margin within the Services segment, and (iii) a significant portion
of our operating expenses are denominated in foreign currencies as a result of our offshore R&D and selling, general, and
administrative ("SG&A") footprint.
Cost Savings Initiatives: We are committed to employing disciplined financial policies and driving continuous efficiencies
and improvements in our cost structure. We expect to reduce SG&A and R&D expenses during 2016 by approximately $150
million in comparison to 2015.
Growth of Our Services Portfolio: Our Services segment is expected to grow at a higher rate than our Products
segment. Overall, the Services segment has a lower gross margin percentage than the Products segment, but we expect
consolidated operating margins to continue to expand.