Motorola 2005 Annual Report Download - page 54

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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Effective Tax Rate
The effective tax rate was 33% in both 2004 and 2003, representing net tax expense of $1.1 billion and
$448 million, in 2004 and 2003, respectively. The 2004 effective tax rate reflects a $241 million benefit from the
reversal of previously-accrued income taxes as the result of settlements reached with taxing authorities and a
reassessment of tax exposures based on the status of current audits. The 2004 effective tax rate also reflects non-
deductible charges of $125 million for goodwill impairment related to the sensor business that was divested in 2005
and $31 million for IPR&D charges related to acquisitions.
The 2003 effective tax rate reflected a $61 million benefit from the reversal of previously-accrued income taxes
as the result of settlements reached with taxing authorities and $32 million of IPR&D charges related to
acquisitions in 2003.
Earnings from Continuing Operations
The Company had earnings from continuing operations before income taxes of $3.3 billion in 2004, compared
to earnings from continuing operations before income taxes of $1.4 billion in 2003. After taxes, the Company had
earnings from continuing operations of $2.2 billion, or $0.90 per diluted share from continuing operations, in 2004,
compared to earnings from continuing operations of $928 million, or $0.39 per diluted share from continuing
operations, in 2003.
The $1.9 billion increase in earnings from continuing operations before income taxes is primarily attributed to:
(i) a $2.9 billion increase in gross margin, primarily due to the $8.2 billion increase in total net sales, as well as
cost savings from improved supply-chain execution, overall cost structure improvements and ongoing cost reduction
activities, and (ii) a $95 million decrease in net interest expense, driven primarily by the reduction in total debt in
2004. These improvements in earnings were partially offset by: (i) a $429 million increase in SG&A expenditures,
primarily driven by increases in: (a) sales commissions resulting from the increase in net sales, (b) advertising and
promotions expenditures in Mobile Devices, and (c) marketing expenditures, (ii) a $433 million increase in R&D
expenditures, due primarily to an increase in developmental engineering expenditures in Mobile Devices due to
additional investment in new product development, and increased investment in new technologies by Government
and Enterprise Mobility Solutions, (iii) a $130 million increase in Other charges, primarily due to charges of
$125 million for the impairment of goodwill related to the sensor business that was divested in 2005 and
$34 million in IPR&D charges related to 2004 acquisitions, and (iv) a $79 million decrease in gains on sales of
investments and businesses.
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 and, therefore, such
benefits are accounted for in accordance with Statement No. 112, ""Accounting for Postemployment Benefits''
(""SFAS 112''). Under the provisions of SFAS 112, 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 $34 million in 2005 from the plans that were
initiated during 2005, representing $16 million of savings in Costs of sales, $7 million of savings in research and
development (""R&D'') expenditures, and $11 million of savings in Selling, general and administrative (""SG&A'')
expenditures. Beyond 2005, the Company expects the reorganization plans initiated during 2005 to provide
annualized cost savings of approximately $172 million, representing $97 million of savings in Cost of sales,
$27 million of savings in R&D expenditures, and $48 million of savings in SG&A expenditures.