avatar Motorola Solutions, Inc. Manufacturing
  • Location: Illinois 
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    Motorola,฀Inc. 2004฀Annual฀Report to฀Stockholders


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    March฀2005 Fellow฀Stockholders, As฀I฀close฀my฀first฀full฀year฀as฀CEO฀of฀Motorola,฀I฀look฀back฀with฀gratification฀at฀฀ 2004฀–฀A฀Year฀of฀Progress.฀ We฀gained฀momentum฀on฀many฀fronts฀–฀sales,฀earnings,฀cash฀flow฀and฀market฀share.฀ We฀focused฀on฀meeting฀customer฀commitments฀with฀quality฀as฀the฀pivotal฀theme฀in฀ every฀product฀we฀deliver,฀every฀single฀day.฀We฀captured฀the฀world’s฀attention฀with฀iconic฀ products฀like฀the฀RAZR,฀the฀thinnest฀mobile฀device฀ever฀made,฀that฀is฀both฀an฀engineering฀ and฀a฀design฀marvel.฀Our฀vision฀around฀Seamless฀Mobility฀is฀redefining฀the฀future฀of฀ mobile฀communications. The฀progress฀we฀made฀in฀2004฀is฀just฀the฀beginning,฀as฀we฀continue฀to฀deliver฀increased฀ value฀to฀our฀shareholders.฀We฀are฀moving฀ahead฀on฀the฀path฀to฀transform฀this฀great฀ company฀into฀the฀greatest฀company฀–฀with฀vision,฀consistent฀performance฀and฀superior฀ financial฀results. MOTOMOMENTUM Let฀me฀share฀some฀specific฀highlights฀for฀2004. Earnings฀from฀continuing฀operations฀increased฀136%฀while฀revenue฀grew฀35%฀from฀ the฀previous฀year.฀Market฀share฀increased฀in฀most฀of฀our฀businesses,฀especially฀in฀ mobile฀devices.฀Our฀balance฀sheet,฀with฀more฀than฀$5฀billion฀in฀net฀cash,฀is฀the฀best฀it฀ has฀been฀in฀our฀history.฀On-time฀launches฀of฀great฀new฀products฀with฀improved฀quality฀ delighted฀many฀of฀our฀customers.฀Every฀member฀of฀my฀management฀team฀is฀now฀held฀ accountable฀for฀a฀few฀of฀our฀key฀customer฀accounts฀to฀ensure฀that฀we฀never฀lose฀฀ sight฀of฀our฀commitments. ฀ Just฀as฀important฀as฀our฀operational฀improvements,฀our฀organizational฀structure฀was฀ aligned฀to฀implement฀key฀strategies฀around฀our฀vision.฀We฀simplified฀our฀market฀focus฀ and฀eliminated฀redundancies฀by฀consolidating฀into฀four฀integrated฀business฀units฀–฀mobile฀ devices,฀networks,฀government฀&฀enterprise฀and฀connected฀home.฀Support฀functions฀are฀ streamlined฀to฀reduce฀cost฀and฀drive฀common฀business฀processes฀across฀the฀company.฀ We฀invested฀in฀our฀core฀competencies,฀including฀technology,฀brand฀and฀marketing.฀ We฀move฀into฀2005฀as฀a฀nimbler,฀higher-performance฀team.฀Without฀a฀doubt,฀none฀of฀this฀ would฀have฀been฀possible฀without฀the฀hard฀work฀and฀dedication฀of฀talented฀Motorolans฀ worldwide. continued –


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    SEAMLESS฀MOBILITY฀ Central฀to฀Motorola’s฀vision฀for฀the฀future฀of฀communications฀is฀a฀concept฀we฀call฀ “Seamless฀Mobility.”฀Seamless฀Mobility฀aims฀to฀provide฀easy,฀uninterrupted฀access฀to฀ what฀people฀value฀most฀–฀your฀communication฀needs,฀the฀information฀you฀want,฀the฀ entertainment฀you฀desire,฀the฀monitoring฀and฀control฀you฀wish.฀ To฀realize฀that฀vision,฀we฀are฀building฀solutions฀that฀give฀people฀the฀experience฀of฀being฀ connected฀from฀any฀location,฀at฀any฀time฀they฀choose฀to฀be฀connected,฀to฀any฀device฀they฀ prefer,฀regardless฀of฀the฀service.฀Seamless฀Mobility฀is฀about฀the฀enhanced฀experience,฀not฀ the฀channel฀that฀brings฀the฀information.฀ Lifestyle฀and฀societal฀changes฀are฀increasing฀the฀demand฀for฀mobility฀and฀flexibility฀in฀ our฀lives.฀Boundaries฀are฀blurring฀between฀working,฀living,฀driving฀and฀moving.฀Today,฀ consumers฀want฀technology฀to฀simplify฀the฀complexities฀in฀life.฀Tomorrow,฀people฀will฀฀ want฀MORE฀mobility฀with฀LESS฀effort.฀ Seamless฀Mobility฀accelerates฀the฀intersection฀of฀full฀mobility฀and฀less฀effort฀to฀drive฀a฀ discontinuity฀in฀the฀adoption฀of฀mobile฀communications฀and฀transform฀the฀industry฀as฀we฀ know฀it฀today. NEXT฀YEAR’S฀PRIORITIES The฀priorities฀for฀my฀management฀team฀as฀we฀roll฀into฀the฀future฀are฀clear.฀First฀and฀ foremost฀are฀execution฀and฀improved฀financial฀performance.฀Next,฀we฀not฀only฀want฀to฀ satisfy฀our฀customers,฀we฀expect฀to฀delight฀them฀with฀the฀highest฀quality฀in฀what฀we฀ deliver.฀We฀intend฀to฀innovate฀to฀create฀iconic฀products฀that฀draw฀a฀stunning฀response฀as฀ people฀enjoy฀the฀experience.฀We฀plan฀to฀continue฀to฀improve฀market฀share฀and฀streamline฀ our฀cost฀structure.฀With฀a฀solid฀foundation฀of฀thought฀leadership,฀we฀intend฀to฀refine฀฀ and฀execute฀on฀our฀strategic฀direction.฀We฀aim฀to฀make฀Motorola฀the฀most฀desirable฀฀ workplace฀–฀diverse,฀inclusive฀and฀where฀people฀perform฀to฀their฀fullest฀potential. As฀I฀close฀this฀letter,฀I฀look฀forward฀to฀2005฀–฀A฀Year฀to฀Win. Ed฀Zander Chairman฀and฀CEO Motorola,฀Inc.


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    Motorola,฀Inc.’s฀ 2004฀ Form฀10-K


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    UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ≤ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Ñscal year ended December 31, 2004 or n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File number 1-7221 MOTOROLA, INC. (Exact name of registrant as speciÑed in its charter) DELAWARE 36-1115800 (State of Incorporation) (I.R.S. Employer IdentiÑcation No.) 1303 East Algonquin Road, Schaumburg, Illinois 60196 (Address of principal executive oÇces) (847) 576-5000 (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock, $3 Par Value per Share New York Stock Exchange Chicago Stock Exchange Rights to Purchase Junior Participating New York Stock Exchange Preferred Stock, Series B Chicago Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has Ñled all reports required to be Ñled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to Ñle such reports), and (2) has been subject to such Ñling requirements for the past 90 days. Yes ≤ No n. Indicate by check mark if disclosure of delinquent Ñlers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in deÑnitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ≤ Indicate by check mark whether the registrant is an accelerated Ñler (as deÑned in Rule 12b-2 of the Act). Yes ≤ No n. The aggregate market value of voting and non-voting common equity held by non-aÇliates of the registrant as of July 2, 2004 was approximately $42.0 billion (based on closing sale price of $17.77 per share as reported for the New York Stock Exchange-Composite Transactions). The number of shares of the registrant's Common Stock, $3 par value per share, outstanding as of January 31, 2005 was 2,450,481,840. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's deÑnitive Proxy Statement to be delivered to stockholders in connection with its Annual Meeting of Stockholders to be held on May 2, 2005 are incorporated by reference into Part III.


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    Table of Contents Page PART I ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 Item 1. Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 General ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 Business Segments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 Personal Communications SegmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 Global Telecom Solutions Segment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 Commercial, Government and Industrial Solutions SegmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8 Integrated Electronic Systems Segment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11 Broadband Communications Segment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14 Other Products Segment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17 Other InformationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18 Financial Information About Segments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18 Customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18 Backlog ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18 Research and Development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18 Patents and Trademarks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19 Environmental Quality ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19 EmployeesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19 Financial Information About Foreign and Domestic Operations and Export Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19 Available Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19 Item 2. Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20 Item 3. Legal Proceedings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20 Item 4. Submission of Matters to a Vote of Security Holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27 Executive OÇcers of the Registrant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27 PART II ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29 Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29 Item 6. Selected Financial Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30 Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsÏÏÏÏÏÏÏÏ 31 Business Risk Factors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 70 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 80 Item 8. Financial Statements and Supplementary Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 84 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ÏÏÏÏÏÏÏ 126 Item 9A. Controls and Procedures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 126 Item 9B. Other Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 128 PART IIIÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 129 Item 10. Directors and Executive OÇcers of the Registrant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 129 Item 11. Executive Compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 129 Item 12. Security Ownership of Certain BeneÑcial Owners and Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 129 Item 13. Certain Relationships and Related TransactionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 129 Item 14. Principal Accounting Fees and Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 129 PART IVÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 129 Item 15. Exhibits and Financial Statement Schedules ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 130 15(a)(1) Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 130 15(a)(2) Financial Statement Schedule and Independent Auditors' ReportÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 130 15(a)(3) Exhibits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 130 i


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    1 PART I Throughout this 10-K report we ""incorporate by reference'' certain information in parts of other documents Ñled with the Securities and Exchange Commission (the ""SEC''). The SEC allows us to disclose important information by referring to it in that manner. Please refer to such information. We are making forward-looking statements in this report. Beginning on page 70 we discuss some of the business risks and factors that could cause actual results to diÅer materially from those stated in the forward- looking statements. ""Motorola'' (which may be referred to as the ""Company'', ""we'', ""us'' or ""our'') means Motorola, Inc. or Motorola, Inc. and its subsidiaries, or one of our segments, as the context requires. ""Motorola'' is a registered trademark of Motorola, Inc. Item 1: Business General Motorola, Inc. is a global leader in wireless, broadband and automotive communications technologies and embedded electronic products. ‚ Wireless Handsets: We are one of the world's leading providers of wireless handsets, which transmit and receive voice, text, images and other forms of information and communication. Wireless Networks: We also develop, manufacture and market public and enterprise wireless infrastructure communications systems, including hardware, software and services. Mission-Critical Information Systems: In addition, we are a leading provider of customized, mission-critical radio communications and information systems. ‚ Broadband We are a global leader in developing and deploying end-to-end digital broadband entertainment, communication and information systems for the home and for the oÇce. Motorola broadband technology enables network operators and retailers to deliver products and services that connect consumers to what they want, when they want it. ‚ Automotive We are the world's market leader in embedded telematics systems that enable automated roadside assistance, navigation and advanced safety features for automobiles. Motorola also provides integrated electronics for the powertrain, chassis, sensors and interior controls. In April 2004, the Company separated its semiconductor operations into a separate subsidiary, Freescale Semiconductor, Inc. (""Freescale Semiconductor''). In July 2004, an initial public oÅering of a minority interest of approximately 32.5% of Freescale Semiconductor was completed. On December 2, 2004, Motorola completed the spin-oÅ of Freescale Semiconductor from the Company by distributing its remaining 67.5% equity interest in Freescale Semiconductor to Motorola shareholders. As of that date, Freescale Semiconductor is an entirely independent company. In general, discussions of the Company contained in this document reÖect the Company's structure at December 31, 2004, after the complete spin-oÅ of Freescale Semiconductor. Motorola is a corporation organized under the laws of the State of Delaware as the successor to an Illinois corporation organized in 1928. Motorola's principal executive oÇces are located at 1303 East Algonquin Road, Schaumburg, Illinois 60196.


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    2 Business Segments Motorola reports six segments as described below. Personal Communications Segment The Personal Communications segment (""PCS'' or the ""segment'') designs, manufactures, sells and services wireless handsets with integrated software and accessory products. In 2004, PCS net sales represented 54% of the Company's consolidated net sales. Principal Products and Services Our wireless subscriber products include wireless handsets, with related software and accessory products. We market our products worldwide to carriers and consumers through direct sales, distributors, dealers, retailers and, in certain markets, through licensees. Our Industry We believe that total industry shipments of wireless handsets (also referred to as industry ""sell-in'') increased in 2004 by approximately 25% compared to 2003. Demand from new subscribers was strong in emerging markets, including China, Latin America and Eastern Europe. Replacement sales in highly-penetrated markets were also strong due to generally improved economic conditions and compelling new phone designs and attractive features, such as cameras, large color displays, expanded software applications, advanced messaging functionality, advanced gaming features and an increased opportunity for personalization. In this environment, we were able to grow faster than the market and increase our overall market share. The industry forecasters predict that the wireless handset industry will continue to grow over the next several years as the transition to next-generation data-rich services, such as point-to-point video and higher speed data, continues. Our Strategy PCS is focused on proÑtable and sustainable growth through close partnerships with our carrier customers, technology leadership and improving cost competitiveness. We are investing in the development of industry-leading GSM, CDMA, iDEN», and 3G UMTS products, with an emphasis on winning greater market share through compelling designs, more feature-rich handsets, including handsets with large color displays and cameras, and on- time delivery of products to our customers. We are focused on enhanced partnerships with our customers by aligning with their business strategies and objectives. A core component of our customer partnership strategy is the expansion of opportunities for carrier customers to increase average revenue per user (ARPU). By utilizing customizable platforms, we enable our carrier customers to go to market with handsets that feature diÅerentiated user interfaces, such as consumer personalization, to help them build consumer loyalty. These platforms also generate revenue opportunities for our carrier customers by supporting data productivity applications, gaming, music and other entertainment oÅerings and customized content. During 2004, we continued to build on our technology leadership with the launch of 60 new products, resulting in a strong, well-balanced portfolio across regions, technologies, price tiers and form factors. The new portfolio includes iconic models such as the RAZR V3 and the StarTac Classic; the continued delivery of 3G UMTS handsets; the introduction of EDGE-enabled GSM handsets; and products using Open Source technologies such as Linux and Javatm, as well as products featuring the Microsoft Windows Mobiletm operating system. We believe we have the most comprehensive and proven line-up of 3G UMTS handsets in the industry. We introduced many products based on our platform design strategy that leverages design eÅectiveness and supply chain operations, improving product quality and time to market. Many of our products feature Bluetooth» technology to support advanced wireless functions, including wireless headsets. For handsets using iDEN technology, we Note: When discussing the net sales for each of our six segments, we express the segment's net sales as a percentage of the Company's consolidated net sales. Because certain of our segments sell products to other Motorola businesses, $963 million of intracompany sales were eliminated as part of the consolidation process in 2004. As a result, the percentages of consolidated net sales for each of our business segments sum to greater than 100% of the Company's consolidated net sales.


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    3 introduced the Ñrst product with an integrated camera, increased our portfolio of GPS-enabled handsets and expanded the portfolio of handsets targeted speciÑcally at the prepaid market. As part of our eÅorts to improve our brand, we are developing youth-driven brand partnerships that will support a consumer-centric design philosophy and further reinforce the brand strength generated by our MOTO marketing activities. Additionally, PCS product oÅerings have played a key role in reinvigorating the Motorola brand among consumers worldwide, which we expect will help fuel demand for new products and experiences during 2005 and beyond. The success of our strategy is evidenced by our continued market leadership in several key markets and signiÑcant sales growth for the full year 2004 compared to the full year 2003. We attribute this success to our strong replacement sales in developed markets and sales to new subscribers in developing countries. Customers The PCS customer partnership strategy continues to focus on strengthening relationships with our top customers. PCS has several large customers, worldwide, the loss of one or more of which could have a negative impact on our results. In 2004, purchases of iDEN» products by Nextel Communications, Inc. (""Nextel'') and its aÇliates comprised approximately 14% of our segment's net sales. In addition to Nextel, the largest of our end customers include Cingular, China Mobile and Vodafone. Besides selling directly to carriers and operators, PCS also sells products through a variety of third-party distributors and retailers, which account for approximately 30% of the segment's net sales. The largest of these represented approximately 5% of the segment's net sales in 2004 and is our primary distributor in Latin America. Although the U.S. market continued to be the segment's largest individual market, many of our customers, and more than 60% of our net sales, are outside the U.S. The largest of these international markets are China, the United Kingdom and Brazil. Compared to 2003, the segment saw substantial sales growth in all regions of the world as a result of an improved product portfolio, strong market growth in the emerging markets, and high replacement sales in the more mature markets. In North America, the industry saw consolidation of some major carriers, including some of the segment's largest customers. The segment did not see any signiÑcant impact on its business in 2004 as a result of these consolidations, nor do we foresee any signiÑcant impact from these consolidations in the future. Nextel is our largest customer and we have been their sole supplier of iDEN handsets and core network infrastructure equipment for over ten years. Nextel uses Motorola's proprietary iDEN technology to support its nationwide wireless service business. In December 2004, Motorola announced that it reached an agreement with Nextel to extend the companies' iDEN infrastructure and iDEN subscriber supply agreements for a period from January 1, 2005 through December 31, 2007. Motorola also announced an agreement with Nextel for implementation of Next Generation Dispatch, a new Internet Protocol-based call processing engine designed to replace the current call-processing system. In addition, Motorola has developed a new 6:1 vocoder which will allow Nextel to increase capacity on its current system. Nextel has announced its intention to activate the 6:1 vocoder in substantially all of its markets in 2005. In December 2004, Nextel and Sprint Corp. (""Sprint'') announced an intended merger of their companies. The segment does not anticipate any signiÑcant impact to its business in 2005 as compared to 2004 as a result of this merger. Competition The segment believes it increased overall market share in 2004 and solidiÑed its hold on the second-largest worldwide market share of wireless handsets. The segment experiences intense competition in worldwide markets from numerous global competitors, including some of the world's largest companies. The segment's primary competitors are European and Asian manufacturers. Currently, its largest competitors include Nokia, Samsung, LG, Siemens and Sony Ericsson. We believe the ability to diÅerentiate our products and provide additional value to our customers will be increasingly realized, primarily through the continued introduction of unique and compelling product designs, the addition of new features to enhance our products and through consumer experiences. These consumer experiences will be shaped by the user interface and software applications that can be delivered on handsets at point of purchase and beyond. The segment utilizes JavaTM technology to better leverage the largest wireless developer community in the world. The segment also uses the Microsoft Windows MobileTM operating system for its MPx product line.


  • Page 12

    4 General competitive factors in the market for our products include: time-to-market; brand awareness; technology oÅered; price; product performance, features, design, quality, delivery and warranty; the quality and availability of service; company image and relationship with key customers. Payment Terms The segment's customers and distributors buy from us regularly with payment terms that are competitive with current industry practices. These terms vary globally and range from cash-with-order to 60 days. Payment terms allow the customer or distributor to purchase products from us on a periodic basis and pay for those products at the end of the agreed term applicable to each purchase. A customer's outstanding credit at any point in time is limited to a predetermined amount as established by management. Extended payment terms beyond 60 days are provided to customers on a case-by-case basis. Such extended terms are not related to a signiÑcant portion of our revenues. Regulatory Matters Radio frequencies are required to provide wireless services. The allocation of frequencies is regulated in the U.S. and other countries throughout the world, and limited spectrum space is allocated to wireless services. The growth of the wireless and personal communications industry may be aÅected if adequate frequencies are not allocated or, alternatively, if new technologies are not developed to better utilize the frequencies currently allocated for such use. Industry growth may also be aÅected by the cost of the new licenses required to use frequencies and any related frequency relocation costs. The U.S. leads the world in spectrum deregulation, allowing new wireless communications technologies to be developed and oÅered for sale. Examples include Wireless Local Area Network systems such as WiFi, and Wide Area Network systems such as WiMax. Other countries also deregulated portions of the available spectrum to allow these and other new technologies, which can be oÅered without spectrum license costs and may introduce new competition and new opportunities for Motorola and our customers. Backlog The segment's backlog was $1.5 billion at December 31, 2004, compared to $2.2 billion at December 31, 2003. The 2004 backlog is believed to be generally Ñrm and 100% of that amount is expected to be recognized as revenue in 2005. The forward-looking estimates of the Ñrmness of such orders is subject to future events which may cause the amount recognized to change. In 2004, the segment had strong order growth but backlog decreased as a result of the segment's improved ability to meet demand for new products in a more timely manner. Backlog at the end of 2003 was above normal due to a key component supply constraint which resulted in the segment's inability to meet the demand for certain new products in the fourth quarter of 2003. Intellectual Property Matters Patent protection is extremely important to the segment's operations. The segment has an extensive portfolio of patents relating to its products, technologies and manufacturing processes. The segment licenses certain of its patents to third parties and generates revenue from these licenses. Motorola is also licensed to use certain patents owned by others. Royalty and licensing fees vary from year to year and are subject to the terms of the agreements and sales volumes of the products subject to licenses. The protection of these licenses is also important to the segment's operations. Reference is made to the material under the heading ""Other Information'' for information relating to patents and trademarks and research and development activities with respect to this segment. Inventory, Raw Materials, Right of Return and Seasonality PCS's practice is to carry reasonable amounts of inventory in distribution centers in order to meet customer delivery requirements in a manner consistent with industry standards. At the end of 2004, the segment had a slightly higher inventory balance than at the end of 2003. The increased inventory is to support anticipated higher Ñrst quarter 2005 sales compared to the Ñrst quarter of 2004. We also made certain strategic purchases of critical components to support the anticipated sales.


  • Page 13

    5 Where economically and technically feasible, materials used in the segment's operations are generally second- sourced to ensure a continuity of supply. Occasionally, shortages or extended delivery periods occur for various component parts, the eÅects of which are generally short in duration. Energy necessary for the segment's manufacturing facilities consists of electricity, natural gas and gasoline, all of which are currently in generally adequate supply. The segment's facilities contain automation and, therefore, require a reliable source of electrical power. Labor is generally available in reasonable proximity to the segment's manufacturing facilities. DiÇculties in obtaining any of the aforementioned items could aÅect the segment's results. The segment permits returns under certain circumstances, generally pursuant to warranties which we consider to be competitive with current industry practices. The segment typically experiences increased sales in the fourth calendar quarter and lower sales in the Ñrst calendar quarter of each year. Sales of wireless handsets and related products increase during the year-end holiday season. Our Facilities/Manufacturing Our headquarters are located in Libertyville, Illinois. Our major facilities are located in Libertyville, Illinois; Plantation, Florida; Flensburg, Germany; Tianjin, China; Singapore; Jaguariuna, Brazil; and Seoul, Korea. We also maintain interests in joint ventures in Hangzhou, China. Additional engineering, software development and administration oÇces are located in San Diego and Sunnyvale, California; South PlainÑeld, New Jersey; Champaign, Illinois; Fort Worth, Texas; Boynton Beach, Florida; Basingstoke, England; Toulouse, France; Torino, Italy; Taipei, Taiwan; and Beijing, China. As planned, certain manufacturing was ceased in Flensburg, Germany during the Ñrst quarter of 2004 and the Boynton Beach, Florida facility was vacated in 2004. We also use several electronics manufacturing suppliers (EMS) and original design-manufacturers (ODM) to enhance our ability to lower our costs and deliver products that meet consumer demands in the rapidly-changing technological environment. In 2004, our handsets were primarily manufactured in Asia, including products manufactured for us by third parties. We expect this trend to continue in 2005. Our largest manufacturing facilities are located in China, Singapore, Brazil, Malaysia and Korea. Each of these facilities serves multiple countries and regions of the world. In 2004, approximately one-third of our handsets were manufactured by third parties, who primarily manufacture in Asia. In 2005, this percentage is expected to remain consistent. Global Telecom Solutions Segment The Global Telecom Solutions segment (""GTSS'' or the ""segment'') designs, manufactures, sells, installs and services wireless infrastructure communication systems, including hardware and software. In 2004, GTSS net sales represented 17% of the Company's consolidated net sales. Principal Products and Services GTSS provides end-to-end wireless networks, including radio base stations, base site controllers, associated software and services, mobility soft switching, application platforms and third-party switching for CDMA, GSM, iDEN» and UMTS technologies. GTSS products are marketed to wireless service providers worldwide through a direct sales force, licensees and agents. Our Industry The wireless infrastructure industry experienced signiÑcant growth in 2004 after three years of decline. The segment believes that its 24% increase in net sales outpaced overall sales growth in the industry, and resulted in increased market share for the segment in 2004. The industry's migration to 3G systems, which are high-capacity wireless networks designed to provide enhanced data services, improved Internet access and increased voice capacity, is currently focused primarily on two technologiesÌCDMA2000 1X and UMTS. GTSS is a supplier for both of these technologies. CDMA markets have begun to deploy CDMA2000 1X-EVDO technology, which provides increased data bandwidth compared to


  • Page 14

    6 CDMA2000 1X. In addition, many GSM markets, particularly those in Western Europe, have begun to deploy UMTS. Our Strategy We are executing on a strategy to enhance our position as an end-to-end supplier of wireless infrastructure. GTSS continues to invest in major radio access technologies: CDMA2000 1X, CDMA2000 1X-EVDO, iDEN», GSM, GPRS (General Packet Radio Service, which is a 2.5G technology), EDGE (a technology that provides data bandwidth higher than GPRS in existing GSM spectrum assignments), UMTS and HSDPA (High Speed Downlink Packet Access, an evolution from UMTS technology that oÅers improved performance beneÑts and reduced costs to operators). In 2004, GTSS deployed its soft switch product in certain markets in Asia and Latin America. The market for wireless soft switch continues to grow, and we believe GTSS is a leader in providing these next- generation wireless soft switch IP networks. Our network products are further enhanced by a portfolio of services that reduce operator capital expenditure requirements, increase network capacity and improve system quality. These quality improvements beneÑt operators through increased customer satisfaction, greater usage and lower churn, all of which can have a positive impact on operator Ñnancial results. GTSS also expanded its market presence in emerging markets, many of which have higher subscriber growth rates than those in mature markets. We also continue to build on our industry-leading position in push-to-talk over cellular (PoC) technology. We have executed agreements to launch our PoC product application on both GPRS and CDMA2000 1X networks. To date, the segment has 23 contracts in 27 countries. Customers Due to the nature of the segment's business, the agreements it enters into are primarily long-term contracts with major operators that require sizeable investments by customers. In 2004, Ñve customers represented approximately 54% of the segment's net sales (China Mobile; China Unicom; KDDI, a service provider in Japan; Nextel and its aÇliates; and Verizon). The loss of any of the segment's large customers, in particular these customers, could have a material adverse eÅect on the segment's business. Further, because contracts are long-term, the loss of a major customer would impact revenue and earnings over several quarters. Nextel is our largest customer, representing 17% of the segment's net sales in 2004, and we have been their sole supplier of iDEN handsets and core network infrastructure equipment for over ten years. Nextel uses Motorola's proprietary iDEN technology to support its nationwide wireless service business. In December 2004, Motorola announced that it reached an agreement with Nextel to extend the companies' iDEN infrastructure and iDEN subscriber supply agreements for a period from January 1, 2005 through December 31, 2007. Motorola also announced an agreement with Nextel for implementation of Next Generation Dispatch, a new Internet Protocol- based call processing engine designed to replace the current call-processing system. In addition, Motorola has developed a new 6:1 vocoder which will allow Nextel to increase capacity on its current system. Nextel has announced its intention to activate the 6:1 vocoder in substantially all of its markets in 2005. In December 2004, Nextel and Sprint announced an intended merger of their companies. The segment does not anticipate any signiÑcant impact to its business in 2005 as compared to 2004 as a result of this merger. KDDI has been successful with its all-Motorola 800MHZ CDMA2000 1X network in Japan. In 2004, Motorola and KDDI began deployment of a CDMA2000 1X network in the 2GHZ band. This new packet-based 2GHz network is expected to allow KDDI to provide more advanced features and expand its subscriber base. Competition GTSS experiences competition in worldwide markets from numerous competitors, ranging in size from some of the world's largest companies to small, specialized Ñrms. Ericsson has maintained its market leadership position. Five vendors with similar market share positions including Motorola, Nokia, Siemens, Lucent and Nortel trail Ericsson. Alcatel, Samsung and NEC are also signiÑcant competitors. Competition will continue to intensify as new Chinese infrastructure vendors like Huawei and ZTE enter the market.


  • Page 15

    7 We have experienced signiÑcant competition in the markets for our products and services, especially as the industry transitions to 3G technologies. GTSS is a supplier of 3G equipment for both CDMA2000 1X and UMTS technologies, although we have a much stronger position in CDMA2000 1X. Competitive factors in the market for the segment's products include: technology oÅered; price; payment terms; availability of vendor Ñnancing; product and system performance; product features, quality, delivery, availability and warranty; the quality and availability of service; company image; relationship with key customers; and time-to- market. Price is a major area of competition and often impacts margins for initial system bids, particularly in emerging markets. Time-to-market has also been an important competitive factor, especially for new systems and technologies. Payment Terms GTSS contracts typically include implementation milestones, such as delivery, installation and system acceptance. Generally, these milestones can take anywhere from 30 to 180 days to complete. Customer payments are typically tied to the completion of these milestones. Once a milestone is reached, payment terms are generally 30 to 60 days. As required for competitive reasons, we may arrange or provide for extended payment terms or long- term Ñnancing in connection with equipment purchases. We directly provided long-term Ñnancing of approximately $23 million to one customer in 2004; approximately $16 million to two customers in 2003; and approximately $47 million to four customers in 2002. Regulatory Matters Radio frequencies are required to provide wireless services. The allocation of frequencies is regulated in the U.S. and other countries throughout the world, and limited spectrum space is allocated to wireless services. The growth of the wireless and personal communications industry may be aÅected if adequate frequencies are not allocated or, alternatively, if new technologies are not developed to better utilize the frequencies currently allocated for such use. Industry growth may also be aÅected by the cost of the new licenses required to use frequencies and any related frequency relocation costs. The U.S. leads the world in spectrum deregulation, allowing new wireless communications technologies to be developed and oÅered for sale. Examples include Wireless Local Area Network systems such as WiFi, and Wide Area Network systems such as WiMax. Other countries also deregulated portions of the available spectrum to allow these and other new technologies, which can be oÅered without spectrum license costs and may introduce new competition and new opportunities for Motorola and our customers. Backlog The segment's backlog was $1.9 billion at December 31, 2004, compared to $1.6 billion at December 31, 2003. The 2004 order backlog is believed to be generally Ñrm and 100% of that amount is expected to be recognized as revenue during 2005. The forward-looking estimates of the Ñrmness of such orders are subject to future events that may cause the amount recognized to change. Intellectual Property Matters Patent protection is extremely important to the segment's operations. The segment has an extensive portfolio of patents relating to its products, systems, technologies, and manufacturing processes. The segment licenses certain of its patents to third parties and generates modest revenue from these licenses. Motorola is also licensed to use certain patents owned by others. Royalty and licensing fees vary from year to year and are subject to the terms of the agreements and sales volumes of the products subject to licenses. The protection of these licenses is also important to the segment's operations. Reference is made to the material under the heading ""Other Information'' for information relating to patents and trademarks and research and development activities with respect to this segment.


  • Page 16

    8 Inventory, Raw Materials, Right of Return and Seasonality The segment's practice is to carry reasonable amounts of inventory in order to meet customer delivery requirements in a manner consistent with industry standards. At the end of 2004, the segment had a 26% increase in inventory as compared to the end of 2003, primarily due to expected increased sales volumes in 2005. Where economically and technically feasible, materials used in the segment's operations are generally second- sourced to ensure a continuity of supply. Occasionally, shortages or extended delivery periods occur for various component parts, the eÅects of which are generally short in duration. Natural gas, electricity and, to a lesser extent, oil are primary sources of energy for the segment's operations. Current supplies of these forms of energy are generally considered to be adequate for this segment's operations in both U.S. and non-U.S. locations. Labor is generally available in reasonable proximity to the segment's manufacturing facilities. However, diÇculties in obtaining any of these items could aÅect the segment's results. Generally the segment's contracts do not include a right of return other than for standard warranty provisions. For new product introductions, we may enter into milestone contracts wherein if we do not achieve the milestones, the product could be returned. Our business does not have seasonal patterns for sales. Our Facilities/Manufacturing Our headquarters are located in Arlington Heights, Illinois. Major design centers include Arlington Heights and Schaumburg, Illinois; Chandler, Arizona; Fort Worth, Texas; Tewksbury, Massachusetts; Cork, Ireland; Bangalore, India; and Swindon, U.K. We operate manufacturing facilities in Schaumburg, Illinois; Fort Worth, Texas; Hangzhou and Tianjin, China; Swindon, U.K.; and Jaguariuna, Brazil. A majority of our manufacturing is conducted in China, with nearly 100% of printed circuit board assembly for the segment performed by outsourcers in China. Commercial, Government and Industrial Solutions Segment The Commercial, Government and Industrial Solutions segment (""CGISS'' or the ""segment'') provides customized and commercial oÅ-the-shelf, mission-critical integrated communications and information systems. In 2004, CGISS net sales represented 15% of the Company's consolidated net sales. Principal Products and Services CGISS designs, manufactures, sells, installs and services analog and digital two-way radio, voice and data communications products and systems to a wide range of public-safety, government, utility, courier, transportation and other worldwide markets. The business continues to invest in the market for broadband data, including infrastructure, devices, service and applications. In addition, the segment participates in the expanding market for integrated information management, mobile and biometric applications and services. These applications and services provide our customers with computer-aided dispatch, Ñeld based reporting, records management and Ñngerprint matching capabilities. Our products are sold directly through our own distribution force or through independent authorized distributors and dealers, commercial mobile radio service operators and independent commission sales representatives. Our distribution organization provides systems engineering and installation and other technical and systems management services to meet our customers' particular needs. The customer may also choose to install and maintain the equipment with its own employees, or may obtain installation, service and parts from a network of our authorized service stations (most of whom are also authorized dealers) or from other non-Motorola service stations. Our Industry SigniÑcant events since 2001 have heightened the need for safety and security products and systems worldwide. Public-safety, government and enterprise organizations are seeking a wide range of detection and prevention capabilities; interoperable communications and information sharing across many users; and integrated voice, data and video capabilities. We have been a leader in providing mission-critical communications and information


  • Page 17

    9 products and systems for more than 65 years, and our business is well positioned to continue to beneÑt from increased spending for safety and security products and systems. Spending by the segment's government and public safety customers is aÅected by government budgets at the national, state and local levels. In the U.S., where the majority of the segment's sales occur, the 2005 Department of Homeland Security Appropriations Act was passed in October 2004, providing for an increase over 2004's discretionary spending budget. However, it is very diÇcult to tell how much of that funding will be used for communications needs. Also, recent U.S. federal government budget proposals have indicated potential funding reductions to state and local agencies that purchase our products and systems. In addition, even in light of limited budgets for local governments and public safety agencies, the segment sees increased prioritization of limited government funds towards funding of safety and security projects. Particularly, customers in the government market are interested in two-way radio systems and integrated solutions that enhance interoperability and compatibility. Accordingly, the segment does not expect reductions in U.S. federal government funding to state and local agencies to have a material impact on its business in 2005. The segment will continue to work closely with all pertinent government departments and agencies to ensure that two-way radio and wireless communications is positioned as a critical need for homeland security. The scope and size of systems requested by some of our customers are increasing, including requests for countrywide and statewide systems. These larger systems are more complex and include a wide range of capabilities. Larger system projects will impact how contracts are bid, which companies compete for bids and how companies partner on projects. In 2004, we were awarded several larger system projects, including projects for the U.S. Postal Service, the Austrian Ministry of Interior and the Commonwealth of Virginia. The scope of these and related projects vary, however, they are: (i) generally longer term arrangements, up to 25 years, (ii) cover a wider geography or a larger user group, and (iii) include the sale of infrastructure, systems integration, subscriber products and/or managed services. In 2005, we expect the trend towards larger systems to continue. Our Strategy Key elements in our strategy include: (i) providing integrated voice, data and broadband over wireless systems at the local, state and national government levels globally; (ii) continued migration from analog to digital end-to- end radio systems; (iii) providing Project 25 and TETRA standards-based voice and data networking systems around the world; (iv) the implementation of interoperable communications and information systems, especially related to global homeland security; and (v) increasing sales to enterprise customers. We are working with national governments to design and sell countrywide radio systems that are shared by police, Ñre, emergency services and, in some cases, military agencies. We are also providing essential integrated software applications. These applications, which have been the result of internal development and acquisitions, enhance our customer's business processes, enabling them to fulÑll their missions in public safety, criminal justice and public service. Our product lines include computer-aided dispatch, records management systems, criminal and civil automated Ñngerprint identiÑcation systems, mobile data applications and devices, corrections management systems, and customer service request systems, as well as other related products. Customers The principal customers for two-way radio products and systems include: public-safety agencies, such as police, Ñre, emergency management services and military; petroleum companies; gas, electric and water utilities; courier companies; telephone companies; diverse industrial companies; transportation companies, such as railroads, airlines, taxicab operations and trucking Ñrms; institutions, such as schools and hospitals; and companies in construction, manufacturing and service businesses. We sell our products to various local, state, provincial and national agencies for many uses, including homeland security. Net sales to customers in North America accounted for 66% of the segment's net sales in 2004. We have a large number of customers worldwide. The combined net sales from our top 5 customers worldwide represent about 11% of 2004 segment net sales. A loss or reduction in purchasing levels by a single customer or a few customers could, but is not likely to, have a material adverse eÅect on our Ñnancial results. Competition We are a leading worldwide supplier of two-way radio communications products, services and systems. We provide communications and information systems compliant with both existing industry digital standards, TETRA


  • Page 18

    10 and Project 25. We experience widespread, intense competition from numerous competitors ranging from some of the world's largest diversiÑed companies to foreign, state-owned telecommunications companies to many small, specialized Ñrms. Many competitors have their principal manufacturing operations located outside the U.S., which may serve to reduce their manufacturing costs and enhance their brand recognition in their locale. Major competitors include: M/A-Com (Tyco), Nokia, Kenwood, E.F. Johnson, EADS Telecommunications and large system integrators. We may also act as a subcontractor to large system integrators based on a number of competitive factors and customer requirements. As demand for fully-integrated voice, data and broadband over wireless systems at the local, state and national government levels continues, we may face additional competition from public telecommunications carriers. Competitive factors for our products and systems include: price; technology oÅered and standards compliance; product features, performance, quality, availability, delivery and support; and the quality and availability of support services and systems engineering, with no one factor being dominant. An additional factor is the availability of vendor Ñnancing, as customers continue to look to equipment vendors as an additional source of Ñnancing. Payment Terms Payment terms vary worldwide. Generally, contract payment terms range from net 30 to 60 days. As required for competitive reasons, we may provide or arrange for long-term Ñnancing in connection with equipment purchases. Financing may cover all or a portion of the purchase price. Regulatory Matters Users of two-way radio communications are regulated by a variety of governmental and other regulatory agencies throughout the world. In the U.S., users of two-way radios are licensed by the FCC, which has broad authority to make rules and regulations and prescribe restrictions and conditions to carry out the provisions of the Communications Act of 1934. Regulatory agencies in other countries have similar types of authority. Consequently, the business and results of this segment could be aÅected by the rules and regulations adopted by the FCC or regulatory agencies in other countries from time to time. Motorola has developed products using trunking and data communications technologies to enhance spectral eÇciencies. The growth and results of the two-way radio communications industry may be aÅected by the regulations of the FCC or other regulatory agencies relating to access to allocated frequencies for land mobile communications users, especially in urban areas where such frequencies are heavily used. The U.S. leads the world in spectrum deregulation, allowing new wireless communications technologies to be developed and oÅered for sale. Examples include Wireless Local Area Network systems such as WiFi, and Wide Area Network systems such as WiMax. Other countries also deregulated portions of the available spectrum to allow these and other technologies, which can be oÅered without spectrum license costs and may introduce new competition and new opportunities for Motorola and our customers. On February 7, 2005, Nextel Communications agreed to a plan by federal regulators designed to address interference from Nextel cellular phones with hundreds of public safety communications systems in the U.S. According to the FCC, the agreement should dramatically reduce the likelihood of interference. Nextel will be required to fund certain costs necessary to relocate those impacted users into the 800MHz spectrum. CGISS will continue to work with our customers that are impacted by this plan and expects that this will have an overall positive impact on the CGISS business over the next several years. However, the impact in the short term is uncertain and yet to be quantiÑed, as all of the details of the plan are not Ñnalized. Backlog The segment's backlog was $2.1 billion at December 31, 2004, compared to $1.7 billion as of December 31, 2003. The 2004 backlog amount is believed to be generally Ñrm, and approximately 66% of that amount is expected to be recognized as revenue during 2005. This forward-looking estimate of the Ñrmness of such orders is subject to future events that may cause the amount recognized to change.


  • Page 19

    11 Intellectual Property Matters Patent protection is very important to the segment's business. We actively participate in the development of open standards for interoperable, mission critical digital two-way radio systems. We have published our technology and licensed patents to signatories of the industry's two primary memorandums of understanding deÑned by the Telecommunications Industry Association (TIA) Project 25 and European Telecommunications Standards Institute (ETSI) Terrestrial Trunked Radio (TETRA). Royalties associated with these licenses are not expected to be material to the segment's Ñnancial results. Reference is made to the material under the heading ""Other Information'' for information relating to patents and trademarks, and research and development activities with respect to this segment. Inventory, Raw Materials, Right of Return and Seasonality The segment provides custom products based on assembling basic units into a large variety of models or combinations. This requires the stocking of inventories and large varieties of piece parts and replacement parts, as well as a variety of basic level assemblies in order to meet delivery requirements. Relatively short delivery requirements and historical trends determine the amounts of inventory to be stocked. To the extent suppliers' product life cycles are shorter than the segment's, stocking of lifetime buy inventories is required. In addition, replacement parts are stocked for delivery on customer demand within a short delivery cycle, including radios that have been canceled within the last 10 years. Availability of the materials and components required by the segment is relatively dependable, but normal Öuctuations in market demand and supply could cause temporary, selective shortages and aÅect results. Direct sourcing of materials and components from foreign suppliers is becoming more extensive. We operate certain oÅshore manufacturing plants, the loss of one or more of which could constrain our production capabilities and aÅect the segment's Ñnancial results. We currently source certain raw materials from single vendors. Any material disruption from a single-source vendor may have a material adverse impact on our operations. Natural gas, electricity and, to a lesser extent, oil are the primary sources of energy for the segment's operations. Current supplies of these forms of energy are generally considered to be adequate for this segment's operations. Labor is generally available in reasonable proximity to the segment's manufacturing facilities. However, diÇculties in obtaining any of these items could aÅect the segment's results. Generally, we do not permit customers to return products. We typically have stronger sales in the fourth quarter of the year because of government and commercial spending patterns, as well as the timing of new product releases. Our Facilities/Manufacturing Our headquarters are located in Schaumburg, Illinois, and our major manufacturing and distribution facilities are located in Elgin and Schaumburg, Illinois; Tianjin, China; Penang, Malaysia; Berlin and Taunusstein, Germany; and Arad, Israel. The majority of our products are integrated/manufactured in Schaumburg, Illinois; Berlin, Germany; and Penang, Malaysia. Integrated Electronic Systems Segment The Integrated Electronic Systems segment (""IESS'' or the ""segment'') designs, manufactures and sells: (i) automotive and industrial electronics systems, (ii) telematics systems that enable automated roadside assistance, navigation and advanced safety features for automobiles, (iii) portable energy storage products and systems, and (iv) embedded computing systems. In 2004, IESS net sales represented 9% of the Company's consolidated net sales. Principal Products and Services The Automotive Communications and Electronic Systems Group (""ACES'') consists of three businesses: the Powertrain Chassis and Systems Group (""PCSG''), the Interior Electronics Division (""IED''), and the Telematics Communications Group (""TCG''). PCSG and IED use application and engineering expertise to design and sell custom electronic systems for original equipment manufacturers (""OEMs''), which may include foreign and domestic automobile manufacturers, heavy vehicle manufacturers, farm equipment manufacturers and industrial customers, as well as Ñrst-tier suppliers to such manufacturers. TCG provides automotive customers with embedded


  • Page 20

    12 telematics control units, integrated wireless handsets, navigation and driver safety products and systems controls for automotive vehicles. The Energy Systems Group (""ESG'') delivers complete portable energy storage products and systems for many of today's leading brand-name wireless handsets, handheld computers and other portable electronic products. A signiÑcant portion of ESG's sales are to other businesses within Motorola, including the wireless handset business, PCS, and the public safety and enterprise communications business, CGISS. The Embedded Communications Computing Group (""ECCG''), formerly known as the Motorola Computer Group (""MCG''), specializes in standards-based, embedded computing systems that are integrated by OEMs into a wide variety of products in the telecommunications, industrial automation, defense, medical and aerospace industries. In August 2004, the Company acquired Force Computers, a worldwide designer and supplier of open, standards-based and custom embedded computing solutions. Force Computers was integrated with MCG, and the two combined entities were renamed the Embedded Communications Computing Group. The segment markets its products through a direct sales force, channel distributors and strategic distribution partners. Our Industry The segment participates in three industries. We provide: (i) products and systems used in automotive vehicles, (ii) portable energy systems, such as batteries used in wireless devices, and (iii) embedded computing systems. Demand for our products is linked to various factors, including consumer demand for cars and wireless devices and industrial demand for embedded computing systems. In 2004, net sales were up for ACES due to new electronic controls and telematics products. ESG net sales increased primarily due to increased shipments of wireless handset devices by PCS. ECCG net sales increased due to the Force Computers acquisition and increased demand for commercial, oÅ-the-shelf embedded computing systems. Our Strategy The strategy of the businesses that make up the segment is to accelerate growth by increasing share in existing markets and by expanding into related market segments. ACES continues to grow as automotive OEMs expand the electronic content in their vehicle's powertrain, chassis, sensor, interior electronics and telematics systems. Going forward, the growth in the global automotive electronics market is expected to outpace the growth rate of global vehicle production. ACES is well positioned to take advantage of this growth. We expect ECCG to grow by leading the move to higher utilization of standards-based embedded computing systems. Growth also is expected as a result of the acquisition of Force Computers, which we expect to enable ECCG to provide solutions for a wider range of customer applications needs, supported by a broader portfolio of boards, systems and services. These products enable OEMs in telecommunications, industrial automation, defense and aerospace industries to acquire commercial, oÅ-the-shelf computing systems instead of creating these systems with in-house engineering resources. This change enables OEMs to provide more cost-eÅective computing systems and to focus their own research and development on applications that add value to and diÅerentiate the computing system. ESG's growth is tied to the volume of portable devices in the mobile computing and portable communications markets. Customers In 2004, 60% of the segment's net sales were to four customers: 19% to Motorola, 17% to General Motors, 12% to Ford and 12% to Daimler Chrysler. Our largest customer within Motorola is the wireless handset business, PCS. The loss of a signiÑcant portion of any of these customers' business could have a material adverse eÅect upon the segment.


  • Page 21

    13 Competition Demand for the products of ACES is linked to automobile sales in the U.S. and other countries and the level of electronic content per vehicle. Demand for ESG products is strongly linked to the sales of other Motorola businesses, particularly the sales of our wireless handset business, the group's largest customer. Demand for ECCG products is linked to sales of telecommunications, manufacturing, and other infrastructure systems in the U.S. and other countries. The segment experiences competition from numerous global competitors, including automobile manufacturers' aÇliated electronic control suppliers. ACES is the leader for embedded telematics systems and products, as well as a leader for pressure sensor products; key competitors include Delphi and Visteon. ESG is one of the largest providers of portable energy storage products and systems; key competitors include Sony, Panasonic, and Sanyo. ECCG is a leader in VME technology (the industry's Ñrst widely-adopted embedded computing standard) and the leading CompactPCI Systems supplier; key competitors include Radisys and Kontron. Competitive factors in the sale of the segment's products include: price; product quality, performance and delivery; supply integrity; quality reputation; responsiveness; and design and manufacturing technology. Payment Terms Generally, contract payment terms range from 30 to 60 days. Backlog The segment's backlog was $424 million at December 31, 2004, compared to $347 million at December 31, 2003. The 2004 backlog is believed to be generally Ñrm and approximately 100% of that amount is expected to be recognized as revenue during 2005. This forward looking estimate of the Ñrmness of such orders is subject to future events that may cause the amount recognized to change. Intellectual Property Matters Patent protection is important to the segment's business. Reference is made to the material under the heading ""Other Information'' for information relating to patents and trademarks and research and development activities with respect to this segment. Inventory, Raw Materials, Right of Return and Seasonality The segment does not carry signiÑcant amounts of inventory. All materials used by our operations are readily available at this time. We use electricity and gas in our operations, which are currently adequate in supply. Labor is generally available in reasonable proximity to the segment's manufacturing facilities. However, diÇculties in obtaining any of the aforementioned items could aÅect our results. In certain circumstances generally pursuant to warranties, we permit customers to return products. We believe that the return policies in all businesses conform to standard industry practices. Our business has not experienced signiÑcant seasonal buying patterns. Our Facilities/Manufacturing Our headquarters are located in Deer Park, Illinois. We also have major facilities located in Tempe, Arizona; Lawrenceville, Georgia; Farmington Hills, Michigan; Elma, New York; Seguin, Texas; Nogales, Mexico; Tianjin, China; Angers, France; Munich, Germany; and Penang, Malaysia. Most of our ACES products are manufactured in our Seguin, Texas and Nogales, Mexico facilities. We manufacture all of our ESG products in Asia, primarily in two of our facilities in China and Malaysia. The manufacture of ECCG products has been transferred to contract manufacturers and our facility in Nogales, Mexico.


  • Page 22

    14 Broadband Communications Segment The Broadband Communications segment (""BCS'' or the ""segment'') designs, manufactures and sells a wide variety of broadband products, including: (i) digital systems and set-top terminals for cable television and broadcast networks, (ii) high speed data products, including cable modems and cable modem termination systems (""CMTS''), as well as Internet Protocol (""IP'')-based telephony products, (iii) access network technology, including hybrid Ñber coaxial network transmission systems and Ñber-to-the-premise (""FTTP'') transmission systems, used by cable television operators, (iv) digital satellite television systems; (v) direct-to-home (""DTH'') satellite networks and private networks for business communications, and (vi) high-speed data, video and voice broadband systems over existing phone lines. In 2004, BCS net sales represented 7% of the Company's consolidated net sales. Principal Products and Services The segment is a leading provider of end-to-end networks used in the cable television industry for the delivery of video, voice and data services over hybrid Ñber coaxial networks. These broadband networks include products used to transport programming by broadcasters, products used at the cable operator's headend (central oÇce) and products used at the cable operator's outside transmission plant. We also sell a suite of interactive digital set-top terminals for the end customer's home that enable advanced interactive entertainment and informational services, including video-on-demand (""VOD''), digital video recording (""DVR''), Internet access, e-mail, e-commerce, chat rooms, pay-per view, and decoding and processing of high deÑnition television (""HDTV'') to be transmitted over networks using our technology and other IP services. Our interactive digital set-top terminals also deliver advanced interactive services focused on digital video broadcast-compliant (""DVB-compliant'') markets around the world. We also provide digital system control equipment, encoders, access control equipment and a wide range of digital satellite receivers. Our digital business (set top boxes and video infrastructure equipment) accounted for approximately 60% of our revenue in 2004 and is expected to account for a substantial portion of our revenues for the foreseeable future. Our Surfboard» family of cable modems delivers high-speed Internet access to subscribers over cable networks. These Surfboard» products also include wireless networking devices with high-speed Internet access for a complete home, small oÇce or small-to-medium enterprise communications system. To complete the end-to-end broadband network system, we design and manufacture a diverse family of broadband infrastructure access applications for broadband services including video, voice, and data communications. These products include CMTS, headend products, ampliÑers, taps, passives and optoelectronics. Our products are marketed primarily to cable television operators, satellite television programmers, and other communications providers worldwide and are sold primarily by our sales personnel who are skilled in the technology of these systems. We have also expanded our traditional distribution channels by selling directly to consumers in a variety of retail markets. Through retail, we market and sell cable modems, cordless telephones, home networking products and advanced digital set-top terminals. We have also expanded our product solutions for speciÑc applications, including home and family monitoring. Our Industry Demand for our products depends primarily on: (i) capital spending by providers of broadband services for constructing, rebuilding or upgrading their communications systems, and (ii) the marketing of advanced communications services by those providers. The amount of spending by these providers, and therefore a majority of our sales and proÑtability, are aÅected by a variety of factors, including: (i) general economic conditions; (ii) the continuing trend of consolidation within the cable and telecommunications industries; (iii) the Ñnancial condition of cable television system operators and alternative communications providers, including their access to Ñnancing; (iv) the rate of digital penetration; (v) technological developments; (vi) standardization eÅorts that impact the deployment of new equipment; and (vii) new legislation and regulations aÅecting the equipment sold by the segment. In 2004, our customers increased their spending on our products, primarily due to the increase in digital video and data subscribers and the deployment of advanced video platforms by cable operators for HDTV/DVR applications.


  • Page 23

    15 Our Strategy We continue to focus on our strategy to innovate and enhance our end-to-end network portfolio. We are focused on accelerating the rate of digital penetration by broadband operators in North America through the introduction of an enhanced suite of digital set-top terminals, including more cost-eÅective products designed to increase the number of set-tops per household, as well as higher-end products for premium service, including HDTV and DVR applications. We also continue to focus on opportunities in regions outside of North America, including the development of digital video products designed to be compliant with technology required in these regions. We are focused on enhancing and expanding our infrastructure oÅerings, including next-generation products in the CMTS and Ñber optic network markets. Sales of our CMTS infrastructure products increased in 2004 and are expected to continue to increase in 2005 as cable operators build out their networks to accommodate enhanced data and voice over IP applications. We also will continue to expand our portfolio of data products beyond the traditional cable modem business and into voice modems. We are focused on providing home networking and monitoring products, including wireless networking devices with high-speed Internet access for a complete home, small oÇce or small-to-medium enterprise communications system. Customers We are dependent upon a small number of customers for a signiÑcant portion of our sales. The vast majority of our sales are in the U.S.Ìwhere a small number of large cable television multiple system operators (MSOs) own a large portion of the cable systems and account for a signiÑcant portion of the total capital spending in the industry. Comcast Corporation accounted for approximately 30% of the segment's net sales in 2004. The loss of business in the future from Comcast or any of the other major MSOs could have a material adverse eÅect on the segment's business. Competition The businesses in which we operate are highly competitive. The rapid technological changes occurring in each of the markets in which we compete are expected to lead to the entry of many new competitors. We compete worldwide in the market for digital set-top terminals for broadband and satellite networks. Based on 2004 annual sales, we believe we are the leading provider of digital cable set-top terminals in North America. Our digital cable set-top terminals compete with products from a number of diÅerent companies, including: (i) those that develop and sell substitute products that are distributed by direct broadcast satellite (DBS) service providers through retail channels, (ii) those that develop, manufacture and sell products of their own design, and (iii) those that license technology from us or other competitors. In North America, our largest competitor is ScientiÑc-Atlanta. Other competitors in North America include Cisco, Arris, and C-COR. Outside of North America, where we have a smaller market position, we compete with many equipment suppliers, including several consumer electronics companies. The traditional competitive environment in the North American cable market continues to change for several reasons. First, based on our customers' requirements, we have begun and will continue to license certain of our technology to certain competitors. In 2005, we expect to license our technology to more licensees, which may result in increased competition for sales of digital set-top terminals in our markets. Second, per OpenCable speciÑcations, televisions were introduced in 2004 that will no longer require a digital set-top box for one-way broadcast digital services. Future versions of this speciÑcation will enable similar devices to access pay-per-view and VOD applications without a set-top box. The FCC also has mandated that digital tuners be incorporated into all television sets sold in the U.S. by 2006. Television manufacturers are expected to integrate technology that is available in our set-top terminals into their products in the future and bypass the need for a set-top terminal for certain applications. Historically, reception of digital television programming from the cable broadband network required a set-top terminal with security technology that was compatible with the network. This security technology has limited the availability of set-top terminals to those manufactured by a few cable network manufacturers, including Motorola. The FCC has enacted regulations requiring separation of security functionality from set-top terminals by July 1, 2006. To meet this requirement, we have developed security modules for sale to cable operators for use with our own and third-party set-top terminals. As a step towards this implementation, in 2002, the cable industry and


  • Page 24

    16 consumer electronic manufacturers agreed to a uni-directional security interface that allows third-party devices to access broadcast programming (not pay-per-view or VOD) with a security device. These devices became widely available in 2004. A full two-way security interface speciÑcation is in development, and compliant devices are likely to be available in 2006. These changes are expected to increase competition and encourage the sale of set-top terminals to consumers in the retail market. Traditionally, cable service providers have leased the set-top terminal to their customers. All of these changes could adversely impact our competitive position and our sales and proÑtability. Most of our sales and proÑts arise from the sale of our set-top terminals. We also compete worldwide in the market for broadband data products. We believe that we are the leading provider of cable modems worldwide, competing with a number of consumer electronic companies and various original design manufacturers worldwide. Competitive factors for our products and systems include: technology oÅered, product and system performance, features, quality, delivery, availability and price. We believe that we enjoy a strong competitive position because of our large installed cable television equipment base, strong relationships with major communication system operators worldwide, technological leadership and new product development capabilities. Payment Terms Generally, our payment terms are consistent with the industry and range from 30 to 60 days. Extended payment terms are provided to customers from time to time on a case-by-case basis. Such extended terms are isolated in nature and historically have not related to a signiÑcant portion of our revenues. Regulatory Matters Many of our products are subject to regulation by the FCC or other communications regulatory agencies. In addition, our customers and their networks, into which our products are incorporated, are subject to government regulation. Government regulatory policies aÅecting either the willingness or the ability of cable operators to oÅer certain services, or the terms on which the companies oÅer the services and conduct their business, may aÅect the segment's results. Regulatory actions also have impacted competition, as discussed above. Backlog The segment's backlog was $314 million at December 31, 2004, compared to $299 million at December 31, 2003. The increase in backlog and related orders primarily reÖects increased orders from our customers for advanced set tops. The 2004 order backlog is believed to be generally Ñrm and 100% of that amount is expected to be recognized as revenue in 2005. The forward-looking estimates of the Ñrmness of such orders is subject to future events, which may cause the amount recognized to change. Intellectual Property Matters We seek to build upon our core enabling technologies, such as digital compression, encryption and conditional access systems, in order to lead worldwide growth in the market for broadband communications networks. Our policy is to protect our proprietary position by, among other methods, Ñling U.S. and foreign patent applications to protect technology and improvements that we consider important to the development of our business. We also rely on our proprietary knowledge and ongoing technological innovation to develop and maintain our competitive position, and will periodically seek to include our proprietary technologies in certain patent pools that support the implementation of standards. We are a founder of MPEG LA, the patent licensing authority established to foster broad deployment of MPEG-2 compliant systems. We have also licensed our digital conditional access technology, DigiCipher» II, to other equipment suppliers. We also enter into other license agreements, both as licensor and licensee, covering certain products and processes with various companies. These license agreements require the payment of certain royalties that are not expected to be material to the segment's Ñnancial results.


  • Page 25

    17 Inventory, Raw Materials, Right of Return and Seasonality Substantially all of our products are manufactured at our facilities in Taipei, Taiwan and Nogales, Mexico. Inventory levels are managed in line with existing business conditions. We source our raw materials primarily from large multinational corporations that supply the electronics and telecommunications industries. In general, we have access to several sources of supply for each component in our major products; however, we have some components that are currently available only from limited sources. We have inventory controls and other policies intended to minimize the eÅect of any interruption in the supply of components. We currently source certain parts from Broadcom Corporation and Texas Instruments Corporation for our digital set-top terminals and cable modems. Any material disruption in supply from Broadcom or Texas Instruments for certain products would have a material adverse impact on our operations. Electricity is the primary source of energy required for our manufacturing operations. These operations do not have signiÑcant risk relating to the availability of this energy source; however, possible shortages in the supply of electricity would aÅect the segment's operations. Labor is generally available in reasonable proximity to the segment's manufacturing facilities. Generally, we do not permit customers to return products. We have not experienced seasonal buying patterns for our products recently. However, as our retail cable modem and digital set-top terminal sales increase, we may have increased sales during the holiday season at the end of each year. Our Facilities/Manufacturing Our headquarters are located in Horsham, Pennsylvania. We also have research and development and administrative oÇces in Rohnert Park, San Diego and San Jose, California; Andover and Marlboro, Massachusetts; and Lawrenceville, Georgia. We have several sales oÇces throughout North America, Europe, Latin America and Asia, and we operate manufacturing facilities in Taipei, Taiwan and Nogales, Mexico. Substantially all of our manufacturing is in Taiwan and Mexico. Other Products Segment The Other Products segment includes: (i) various corporate programs representing developmental businesses and research and development projects, which are not included in any major segment, and (ii) Motorola Credit Corporation (""MCC''), the Company's wholly-owned Ñnance subsidiary. In 2004, Other Products net sales represented 1% of the Company's consolidated net sales. 2005 Change in Organizational Structure In December 2004, the Company announced a reorganization of its businesses and functions to align with the Company's seamless mobility strategy, which was eÅective on January 1, 2005. The Company will be organized into four main business groups, focused on mobile devices, networks, government and enterprise, and the connected home. The Mobile Devices business will be primarily comprised of the current Personal Communications segment and the Energy Systems group from the Integrated Electronic Systems segment (""IESS''). The Networks business will be primarily comprised of the current Global Telecom Solutions segment, the Embedded Computing and Communications group from IESS, and the next-generation wireline networks business from the Broadband Communications segment (""BCS''). The Government and Enterprise business will be primarily comprised of the current Commercial, Government and Industrial Solutions segment and the Automotive Communications and Electronics Systems group from IESS. The Connected Home business will be primarily comprised of the current BCS, excluding the next generation wireline networks business. In addition, the Company's key support functions, including supply-chain operations, information technology, Ñnance, human resources, legal, strategy and business development, marketing, quality and technology will be architected centrally and distributed throughout the Company. The Company will be aligned into these four main operating segments with the analysis of reportable segments to be completed in the Ñrst quarter of 2005.


  • Page 26

    18 Other Information Financial Information About Segments. The response to this section of Item 1 incorporates by reference Note 10, ""Information by Segment and Geographic Region,'' of Part II, Item 8: Financial Statements and Supplementary Data of this document. Customers. Motorola sold approximately 10% of its products and services to Nextel and its aÇliates in 2004. In addition to Nextel, Motorola has several other large customers, the loss of one or more of which could have a material adverse eÅect on Motorola. Based on 2004 annual sales, in addition to Nextel, other large Motorola customers include China Mobile, Cingular and Vodafone. Approximately 2% of Motorola's net sales in 2004 were to various branches and agencies, including the armed services, of the U.S. Government. All contracts with the U.S. Government are subject to cancellation at the convenience of the Government. Government contractors, including Motorola, are routinely subjected to numerous audits and investigations, which may be either civil or criminal in nature. The consequences of these audits and investigations may include administrative action to suspend business dealings with the contractor and to exclude it from receiving new business. In addition, Motorola, like other contractors, reviews aspects of its government contracting operations, and, where appropriate, takes corrective actions and makes voluntary disclosures to the U.S. Government. These audits and investigations could adversely aÅect Motorola's ability to obtain new business from the U.S. Government. Backlog. Motorola's aggregate backlog position, including the backlog relating to other Motorola segments, as of the end of the last two Ñscal years was approximately as follows: December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $6.3 billion December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $6.2 billion Except as previously discussed in this Item 1, the orders supporting the 2004 backlog amounts shown in the foregoing table are believed to be generally Ñrm, and approximately 92% of the backlog on hand at December 31, 2004 is expected to be shipped or earned, with respect to contracts accounted for under percentage-of-completion of accounting, during 2005. However, this is a forward-looking estimate of the amount expected to be shipped, and future events may cause the percentage actually shipped to change. Generally, Motorola recognizes revenue for product sales when: (1) title transfers, (2) the risks and rewards of ownership have been transferred to the customer, (3) the fee is Ñxed and determinable, and (4) collection of the related receivable is probable, which is generally at the time of shipment. Accruals are established, with related reduction to revenue, for allowances for discounts and for price protection, returns and incentive programs for distributors and end customers related to these sales based on actual historical exposure at the time the related reserves are recognized. For long-term contracts, Motorola uses the percentage-of-completion method to recognize revenues and costs based on the percentage of costs incurred to date compared to the total estimated contract costs. For contracts involving new and unproven technologies, revenues and proÑts are deferred until technological feasibility is established, customer acceptance is obtained and other contract-speciÑc terms have been completed. Provisions for losses are recognized during the period in which the loss Ñrst becomes apparent. Revenue for services is recognized ratably over the contract term or as services are performed. Revenue related to licensing agreements is recognized over the licensing period or at the time the Company has fulÑlled its obligations and the fee is Ñxed and determinable. Research and Development. Motorola's business segments participate in very competitive industries with constant changes in technology. Throughout its history, Motorola has relied, and continues to rely, primarily on its research and development (""R&D'') programs for the development of new products, and on its production engineering capabilities for the improvement of existing products. Technical data and product application ideas are exchanged among Motorola's business segments on a regular basis. Management believes, looking forward, that Motorola's commitment to R&D programs, both to improve existing products and services and to develop new products and services, together with its utilization of state-of-the-art technology, should allow each of its segments to remain competitive. R&D expenditures relating to new product development or product improvement were approximately $3.1 billion in 2004, compared to $2.8 billion in both 2003 and 2002. R&D expenditures increased 9% in 2004 as compared to 2003, after increasing 1% in 2003 as compared to 2002. Motorola continues to believe that a strong


  • Page 27

    19 commitment to research and development is required to drive long-term growth. Approximately 21,600 professional employees were engaged in such research activities during 2004. Patents and Trademarks. Motorola seeks to obtain patents and trademarks to protect our proprietary position whenever possible and practical. As of December 31, 2004, Motorola owned approximately 8,416 utility and design patents in the U.S. and 12,885 patents in foreign countries. These foreign patents are mostly counterparts of Motorola's U.S. patents, but a number result from research conducted outside the U.S. and are originally Ñled in the country of origin. During 2004, Motorola was granted 572 U.S. utility and design patents. The numbers of patents reported exclude Freescale Semiconductor. Many of the patents owned by Motorola are used in its operations or licensed for use by others, and Motorola is licensed to use certain patents owned by others. Royalty and licensing fees vary from year to year and are subject to the terms of the agreements and sales volumes of the products subject to licenses. Environmental Quality. Compliance with federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has no material eÅect on capital expenditures, earnings or the competitive position of Motorola. Employees. At December 31, 2004, there were approximately 68,000 employees of Motorola and its subsidiaries, as compared to approximately 88,000 employees at December 31, 2003. The employment decrease in 2004 primarily reÖects the impact of the spin-oÅ of Motorola's former semiconductor operations during 2004. Financial Information About Foreign and Domestic Operations and Export Sales. Domestic export sales to third parties were $2.7 billion, $1.9 billion and $1.3 billion for the years ended December 31, 2004, 2003 and 2002, respectively. Domestic export sales to aÇliates and subsidiaries, which are eliminated in consolidation, were $1.8 billion, $1.8 billion and $1.3 billion for the years ended December 31, 2004, 2003 and 2002, respectively. The remainder of the response to this section of Item 1 incorporates by reference Note 9, ""Commitments and Contingencies'' and Note 10, ""Information by Segment and Geographic Region'' of Part II, Item 8: Financial Statements and Supplementary Data of this document, the ""Results of OperationsÌ2004 Compared to 2003'' and ""Results of OperationsÌ2003 Compared to 2002'' sections of Part II, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations of this document. Available Information We make available free of charge through our website, www.motorola.com/investor, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, other Exchange Act reports and all amendments to those reports as soon as reasonably practicable after such material is electronically Ñled with the Securities and Exchange Commission (""SEC''). Our reports are also available free of charge on the SEC's website, www.sec.gov. Also available free of charge on our website are the following corporate governance documents: ‚ Motorola, Inc. Restated CertiÑcate of Incorporation ‚ Motorola, Inc. Amended and Restated Bylaws ‚ Motorola, Inc. Board Governance Guidelines ‚ Motorola, Inc. Director Independence Guidelines ‚ Principles of Conduct for Members of the Motorola, Inc. Board of Directors ‚ Motorola Code of Business Conduct, which is applicable to all Motorola employees, including the principal executive oÇcer, the principal Ñnancial oÇcer and the controller (principal accounting oÇcer) ‚ Audit and Legal Committee Charter ‚ Compensation and Leadership Committee Charter ‚ Governance and Nominating Committee Charter All of our reports and corporate governance documents may also be obtained without charge by contacting Investor Relations, Motorola, Inc., Corporate OÇces, 1303 East Algonquin Road, Schaumburg, Illinois 60196, E-mail: investors@motorola.com, phone: 1-800-262-8509. Our Internet website and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K.


  • Page 28

    20 Item 2: Properties Motorola's principal executive oÇces are located at 1303 East Algonquin Road, Schaumburg, Illinois 60196. Motorola also operates manufacturing facilities and sales oÇces in other U.S. locations and in many other countries. (See ""Item 1: Business'' for information regarding the location of the principal manufacturing facilities for each of Motorola's business segments.) Motorola owns 55 facilities (manufacturing, sales, service and oÇce), 31 of which are located in North America and 24 of which are located in other countries. Motorola leases 295 facilities, 118 of which are located in North America and 177 of which are located in other countries. As compared to 2003, the number of facilities owned or leased was reduced primarily because of the spin-oÅ of Freescale Semiconductor, the entity comprised of Motorola's former semiconductor operations, during 2004. In addition, as part of Motorola's overall strategy to reduce operating costs and improve the Ñnancial performance of the corporation, a number of businesses and facilities have either been sold or are currently for sale. During 2004, facilities in Tempe, Arizona; Northbrook, Illinois; Mesa, Arizona; and Swindon, England were sold. A facility in Harvard, Illinois is currently up for sale. Motorola generally considers the productive capacity of the plants operated by each of its business segments to be adequate and suÇcient for the requirements of each business group. The extent of utilization of such manufacturing facilities varies from plant to plant and from time to time during the year. A substantial portion of Motorola's products are manufactured in Asia, primarily China, either in our own facilities or in the facilities of others who manufacture and assemble products for Motorola. If manufacturing in the region was disrupted, Motorola's overall productive capacity could be signiÑcantly reduced. Item 3: Legal Proceedings Personal Injury Cases Cases relating to Wireless Telephone Usage Motorola has been a defendant in several cases arising out of its manufacture and sale of wireless telephones. Jerald P. Busse, et al. v. Motorola, Inc. et al., Ñled October 26, 1995 in the Circuit Court of Cook County, Illinois, is a class action alleging the defendants have failed to adequately warn consumers of the alleged dangers of cellular telephones and challenging ongoing safety studies as invasions of privacy. The Circuit Court entered summary judgment in defendants' favor in 2002. In June 2004, the Illinois Appellate Court aÇrmed the summary judgment and dismissal of the case. In January 2005, the Illinois Supreme Court denied plaintiÅs' Petition for Leave to Appeal. During 2001, the Judicial Panel on Multidistrict Litigation transferred Ñve cases, Naquin, et al., v. Nokia Mobile Phones, et al., Pinney and Colonell v. Nokia, Inc., et al., Gillian et al., v. Nokia, Inc., et al., Farina v. Nokia, Inc., et al., and Gimpelson v. Nokia Inc, et. al., which allege that the failure to incorporate a remote headset into cellular phones rendered the phones defective and that cellular phones cause undisclosed injury to cells and other health risks, to the United States District Court for the District of Maryland for coordinated or consolidated pretrial proceedings in the matter called In re Wireless Telephone Radio Frequency Emissions Products Liability Litigation. On March 5, 2003, the MDL Court dismissed with prejudice, on federal preemption grounds, the Ñve cases. PlaintiÅs appealed to the United States Court of Appeals for the Fourth Circuit; the appeal has been briefed and argued, but no decision has been announced. During 2002, the MDL panel transferred and consolidated six additional cases, Murray v. Motorola, Inc., et al., Agro et. al., v. Motorola, Inc., et al., Cochran et. al., v. Audiovox Corporation, et al., SchoÑeld et al., v. Matsushita Electric Corporation of America, et al., each of which alleges that use of a cellular phone caused a malignant brain tumor, Dahlgren v. Motorola, Inc., et al., which alleges that defendants manufactured and sold cell phones that increase the risk of adverse cellular reaction and or cellular dysfunction and failed to disclose biological eÅects, and Brower v. Motorola, Inc., et al., which contains allegations similar to Murray and Dahlgren, with the MDL Proceeding. On July 19, 2004, the District Court for the District of Maryland found that there was no federal court jurisdiction over Murray, Agro, Cochran and SchoÑeld and remanded those cases to the Superior Court for the District of Columbia. On November 30, 2004, defendants moved to dismiss the Murray, Agro, Cochran and SchoÑeld complaints.


  • Page 29

    21 Case relating to Two-Way Radio Usage On January 23, 2004, Motorola was added as a co-defendant with New York City in Virgilio et al. v. Motorola et al., Ñled in the United States District Court for the Southern District of New York. The suit was originally Ñled in December 2003 (against New York City alone) on behalf of twelve New York City ÑreÑghters who died in the attack on the World Trade Center on September 11, 2001. The amended complaint alleges that the twelve ÑreÑghters died because the Motorola two-way radios they were using were defective and did not receive evacuation orders and because the City of New York and Motorola committed wrongful acts in connection with a bid process that was designed to provide new radios to the New York City Fire Department. PlaintiÅs have asserted claims for wrongful death due to a defect in product design, wrongful death for failure to warn, wrongful death due to fraudulent misrepresentations and deceitful conduct, wrongful death due to negligent misrepresentations, and concerted action against both Motorola and the City of New York. PlaintiÅs seek compensatory and punitive damages against Motorola in excess of $5 billion. On March 10, 2004, the court, to which all September 11 litigation has been assigned, granted Motorola's and the other defendant's motion to dismiss the complaint on the grounds that all of the Virgilio plaintiÅs had Ñled claims with the September 11th Victims' Compensation Fund, that the statutory scheme clearly required injured parties to elect between the remedy provided by this Fund and the remedy of traditional litigation and that plaintiÅs, by pursuing the Fund, had chosen not to pursue litigation. On April 12, 2004, plaintiÅs appealed to the United States Court of Appeal for the Second Circuit. Iridium-Related Cases Class Action Securities Lawsuits Motorola has been named as one of several defendants in putative class action securities lawsuits arising out of alleged misrepresentations or omissions regarding the Iridium satellite communications business, which on March 15, 2001, were consolidated in the District of Columbia under Freeland v. Iridium World Communications, Inc., et al., originally Ñled on April 22, 1999. On August 31, 2004, the court denied the motions to dismiss that had been Ñled on July 15, 2002 by Motorola and the other defendants. Bankruptcy Court Lawsuit Motorola was sued by the OÇcial Committee of the Unsecured Creditors of Iridium in the Bankruptcy Court for the Southern District of New York on July 19, 2001. In re Iridium Operating LLC, et al. v. Motorola asserts claims for breach of contract, warranty, Ñduciary duty, and fraudulent transfer and preferences, and seeks in excess of $4 billion in damages. Iridium India Lawsuits Motorola and certain of its current and former oÇcers and directors were named as defendants in a private criminal complaint Ñled by Iridium India Telecom Ltd. (""Iridium India'') in October 2001 in the Court of the Extra Judicial Magistrate, First Class, Khadki, Pune, India. The Iridium India Telecom Ltd. v. Motorola, Inc. et al. complaint alleges that the defendants conspired to, and did, commit the criminal oÅense of ""cheating'' by fraudulently inducing Iridium India to purchase gateway equipment from Motorola, acquire Iridium stock, and invest in developing a market for Iridium services in India. Under the Indian penal code, ""cheating'' is punishable by imprisonment for up to 7 years and a Ñne of any amount. The court may also require defendants to compensate the victim for its losses, which the complaint estimates at about $100 million. In August 2003, the Bombay High Court granted Motorola's petition to dismiss the criminal action against Motorola and the individual defendants. Iridium India has petitioned the Indian Supreme Court to exercise its discretion to review that dismissal, and that petition is pending. In September 2002, Iridium India also Ñled a civil suit in the Bombay High Court against Motorola and Iridium. The suit alleges fraud, intentional misrepresentation and negligent misrepresentation by Motorola and Iridium in inducing Iridium India to purchase gateway equipment from Motorola, acquire Iridium stock, and invest in developing a market for Iridium services in India. Iridium India claims in excess of $200 million in damages and interest. Following extensive proceedings in the trial court and on appeal related to Iridium India's motion for


  • Page 30

    22 interim relief, Motorola has deposited approximately $44 million in a specially designated account in India, and the Indian Supreme Court has accepted for a full hearing at a later date Motorola's appeal regarding interim relief. Shareholder Derivative Case M&C Partners III v. Galvin, et al., Ñled January 10, 2002, in the Circuit Court of Cook County, Illinois, is a shareholder derivative action Ñled derivatively on behalf of Motorola against Ñfteen current and former members of the Motorola Board of Directors and Motorola as a nominal defendant. The lawsuit alleges that the Motorola directors breached their Ñduciary duty to the Company and/or committed gross mismanagement of Motorola's business and assets by allowing Motorola to engage in improper practices with respect to Iridium. In October 2003, the court dismissed plaintiÅ's amended complaint in its entirety without prejudice. In May 2004, plaintiÅ Ñled a motion for leave to Ñle a second amended complaint and served a demand on the Motorola Board of Directors to investigate the alleged wrongful conduct. At a July 10, 2004 Special Board Meeting, Motorola's Board appointed an investigatory committee to: (i) evaluate the plaintiÅ's demand, and (ii) report back to the Board with a recommendation. An unfavorable outcome in one or more of the Iridium-related cases still pending could have a material adverse eÅect on Motorola's consolidated Ñnancial position, liquidity or results of operations. Telsim-Related Cases Motorola is owed approximately $2 billion under loans to Telsim Mobil Telekomunikasyon Hizmetleri A.S. (""Telsim''), a wireless telephone operator in Turkey. Telsim defaulted on the payment of these loans in April 2001. The Company fully reserved the carrying value of the Telsim loans in the second quarter of 2002. The Company is involved in the following legal proceedings related to Telsim. The Uzan family formerly controlled Telsim. Telsim and its related companies are now under the control of the Turkish government. U.S. Case On January 28, 2002, Motorola Credit Corporation (""MCC''), a wholly-owned subsidiary of Motorola, initiated a civil action with Nokia Corporation (""Nokia''), Motorola Credit Corporation and Nokia Corporation v. Kemal Uzan, et al., against several members of the Uzan family, as well as one of their employees and controlled companies, alleging that the defendants engaged in a pattern of racketeering activity and violated various state and federal laws including Illinois common law fraud and the Racketeer InÖuenced and Corrupt Organizations Act, commonly known as ""RICO''. The suit was Ñled in the United States District Court for the Southern District of New York (the ""U.S. District Court''). The U.S. District Court issued its Ñnal ruling on July 31, 2003 as described below. Upon Ñling the action, MCC and Nokia were able to attach various Uzan-owned real estate in New York. Subsequently, this attachment order was expanded to include a number of bank accounts, including those owned indirectly by the Uzans. On May 9, 2002, the U.S. District Court entered a preliminary injunction conÑrming the prejudgment relief previously granted. These attachments remain in place. The U.S. District Court tried the case without a jury to conclusion on February 19, 2003. Subsequent to the trial of the case, and before a Ñnal ruling had been issued, the U.S. Court of Appeals for the Second Circuit (""the Appellate Court'') issued an opinion on March 7, 2003 regarding a series of appeals Ñled by the Uzans from the U.S. District Court's earlier rulings. In its opinion, the Appellate Court remanded the case back to the U.S. District Court on the grounds that the RICO claims were premature and not yet ripe for adjudication. The Appellate Court directed that the RICO claims be dismissed without prejudice to their being later reinstated. The Appellate Court, however, upheld the May 2002 Preliminary Injunction, Ñnding that it was suÇciently supported by the fraud claims under Illinois law. In accordance with the mandate from the Appellate Court, on April 3, 2003, the U.S. District Court dismissed the RICO claims without prejudice. On July 8, 2003, MCC Ñled a motion seeking to have its RICO claims reinstated on the grounds that pursuing further actions against Telsim would be ""futile.'' On July 31, 2003, the U.S. District Court entered a judgment in favor of MCC for $4.26 billion. The U.S. District Court declined to reinstate the RICO claims (without prejudice to reinstatement), but held that the court had jurisdiction to decide the merits of the Illinois fraud claims. MCC's fraud claims under Illinois common


  • Page 31

    23 law fraud and civil conspiracy were suÇcient to support a full judgment on behalf of MCC in the amount of $2.13 billion in compensatory damages. The U.S. District Court also awarded $2.13 billion in punitive damages. In addition, the preliminary injunction was converted into a permanent injunction, essentially unaltered in scope, and the U.S. District Court also ordered the Uzans arrested and imprisoned if they are found within 100 miles of the court's jurisdiction for being in contempt of court. Thereafter, the Uzans appealed the U.S. District Court decision to the Appellate Court. Over the next nine months, execution on the judgment was, at diÅerent times, allowed to go forward and then stayed by the Appellate Court. For some period of time, the Uzans' appeal was dismissed by the Appellate Court. On April 16, 2004, the Appellate Court reinstated the Uzans' appeal and reinstated a stay of execution on the judgment. On August 11, 2004, the Appellate Court lifted the stay of execution, in part, and allowed MCC to execute on its judgment up to the full amount of the compensatory damages, $2.13 billion. The Appellate Court kept the stay in place with respect to the punitive damages and on that portion of the judgment which would have allowed Motorola to execute against entities owned and controlled by the Uzans. As a result, MCC's eÅorts to execute on its judgment against the Uzans were recommenced in the United States, United Kingdom, Bermuda and France, and the Company has begun to realize some collections on its judgment. On October 22, 2004, the Appellate Court aÇrmed the July 31, 2003 judgment as to the compensatory damages of $2.13 billion. The Appellate Court remanded three issues to the U.S. District Court for additional Ñndings and analysis. The issues are: (1) whether the U.S. District Court was correct in imposing a constructive trust over the stolen shares in favor of Motorola (the constructive trust was aÇrmed as to Nokia); (2) whether Motorola may collect its judgment against non-party companies owned and controlled by the Uzans, and (3) the amount of punitive damages the U.S. District Court may impose against defendants in favor of Motorola. As a result of this decision, enforcement actions have also recommenced in Switzerland and Germany. On November 5, 2004, defendants Ñled a petition for rehearing and rehearing en banc by the entire Appellate Court. On December 16, 2004, the Appellate Court denied the Uzans' petition for rehearing and rehearing en banc with respect to the Appellate Court's October 22, 2004 decision aÇrming the July 31, 2003 judgment as to compensatory damages of $2.13 billion. The mandate was issued by the Second Circuit on December 30, 2004, making this decision Ñnal. A remand to the district court on the issues on which the Appellate Court requested clariÑcation is pending. As the result of the lifting of the stay and the re-commencing of the Company's collection eÅorts, Motorola realized $44 million in the fourth quarter of 2004 on its judgment against the Uzans. The Company continues to believe that the litigation, collection and/or settlement processes will be very lengthy in light of the Uzans' continued resistance to satisfy the judgment against them and their decision to violate various courts' orders, including orders holding them in contempt of court. In addition, the Turkish government has asserted control and priority over Telsim and certain other interests and assets of the Uzans and this may make Motorola's collection eÅorts in Turkey more diÇcult. Foreign Proceedings In 2002, the United Kingdom's High Court of Justice, Queen's Bench Division (the ""UK Court''), on motion of MCC, entered a worldwide freezing injunction against Cem Uzan, Hakan Uzan, Kemal Uzan and Aysegul Akay, freezing each of their assets up to a value of $200 million. The Uzans were ultimately held in contempt of court and ordered to be incarcerated for failing to make a full disclosure concerning their worldwide assets. On June 12, 2003, the UK Court of Appeal aÇrmed the lower court's decision against Cem Uzan and Aysegul Akay, but concluded that MCC was not able to enforce the freezing order against Hakan Uzan and Kemal Uzan because they had no assets in England and Wales. Consequently, the lower court's rulings as to Hakan Uzan and Kemal Uzan were reversed. As a result of the Court of Appeal's decision, the UK assets of Cem Uzan and Aysegul Akay, which total approximately $12.7 million, remain frozen and MCC previously commenced the execution process in satisfaction of the U.S. District Court judgment. A hearing was held on December 6, 2004 at MCC's request to domesticate its U.S. District Court judgment in the United Kingdom. MCC's request was granted and the U.S. judgment is now recognized in the United Kingdom, allowing MCC to execute on Uzan assets in the UK. Motorola has also Ñled attachment proceedings in several other foreign jurisdictions resulting in the preliminary seizure of assets owned by the Uzans and various entities within their control. As set forth above, some of these execution proceedings are now ongoing (with some resulting payments to the Company), while others remain stayed.


  • Page 32

    24 On February 5, 2002, Telsim initiated arbitration against MCC in Switzerland at the Zurich Chamber of Commerce. In Telsim's request for arbitration, Telsim acknowledged its debt, but has alleged that the disruption in the Turkish economy during 2001 should excuse Telsim's failure to make payments on the MCC loans as required under the agreements between the parties. Telsim seeks a ruling excusing its failure to adhere to the original payment schedule and establishing a new schedule for repayment of Telsim's debt to MCC. Telsim has failed to comply with its proposed new schedule, missing the Ñrst three payments totaling approximately $85 million. In August 2003, MCC made a motion to the arbitration panel for a partial award, seeking a judgment for the $85 million. On January 26, 2004, the arbitral tribunal granted MCC's request and entered a Partial Final Award in favor of MCC and against Telsim in the amount of $85 million. MCC has initiated proceedings to enforce this award against Telsim in Turkey. This proceeding has been discontinued (without prejudice) while MCC appeals the Turkish court's ruling that MCC pay a multi-million dollar court fee. MCC requested a second partial award of $40 million from the arbitration panel to account for a loan payment that would have been due at year-end 2003 even under Telsim's proposed loan repayment schedule. In June 2004, MCC Ñled a request for a further award of $1.73 billion based on alleged further breaches of the Ñnancing agreements and a reply in support of MCC's request for the $40 million partial award. On November 25, 2004, the arbitral tribunal granted MCC's request and entered a Partial Final Award in favor of MCC and against Telsim in the amount of $40 million. Motorola expects to initiate proceedings to enforce this award against Telsim in Turkey. Motorola is awaiting a ruling from the arbitral tribunal with respect to the request for $1.73 billion. In December 2004, a Ñnal round of hearings was held on all outstanding issues and the case is now before the panel for Ñnal adjudication. On June 7, 2002, Rumeli Telfon (""Rumeli'') initiated arbitration against MCC in the Zurich Chamber of Commerce seeking a ruling requiring that MCC consent to Rumeli's request to place the stock that was pledged to MCC (including improperly issued new shares, that eÅectively diluted MCC's pledge from the contractually mandated 66% interest to a 22% interest) into an escrow account in Switzerland. Pursuant to the request of Rumeli, this arbitration was stayed. Upon the Company's request, the panel has re-started this arbitration. On June 19, 2002, Telsim initiated arbitration against Motorola, Ltd. and Motorola Komunikasyon Ticaret v.p. Servis Ltd. Sti., both wholly-owned subsidiaries of Motorola, before the International Chamber of Commerce in Zurich, Switzerland, initially seeking approximately 179 million pounds as damages for the defendants' alleged sale of defective products to Telsim. Telsim increased the amount of its claim to approximately 300 million pounds. Motorola has denied the claims and has Ñled a counterclaim valued at approximately $20 million. On July 16, 2004, the arbitral panel ruled in favor of Motorola's contention that an overall cap of liability applied to Telsim's claims, but has not yet ruled on how the cap is to be computed. On October 13, 2004, Motorola Ñled an arbitration claim in Washington, D.C., under a United States-Turkey bilateral investment treaty involving the Turkish government, which currently controls Telsim and claims priority over Motorola's interest in Telsim. Motorola claims that the Turkish government has ""expropriated'' Motorola's investment in Telsim by taking over Telsim, obtaining injunctions purportedly prohibiting Telsim from paying MCC's debt, and passing legislation requiring that Telsim be sold and that the proceeds of the sale be distributed Ñrst to the Turkish government, in priority over MCC's claims. Motorola seeks, among other things, a judgment in the amount of $2 billion. On December 28, 2004, the International Centre for the Settlement of Investment Disputes registered Motorola's Request for Arbitration, thus Ñnding that, at a minimum, there is a possibility of jurisdiction for Motorola's claims. Class Action Securities Lawsuits A purported class action lawsuit, Barry Family LP v. Carl F. Koenemann, was Ñled against the former chief Ñnancial oÇcer of Motorola on December 24, 2002 in the United States District Court for the Southern District of New York, alleging breach of Ñduciary duty and violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. It has been consolidated before the United States District Court for the Northern District of Illinois (the ""Illinois District Court'') with 18 additional putative class action complaints which were Ñled in various federal courts against the Company, its former chief Ñnancial oÇcer and various other individuals, alleging that the price of Motorola's stock was artiÑcially inÖated by a failure to disclose vendor Ñnancing to Telsim Mobil Telekomunikasyon Hizmetleri A.S. (Telsim), in connection with the sale of telecommunications equipment by Motorola. In each of the complaints, plaintiÅs proposed a class period of February 3, 2000 through May 14, 2001, and sought an unspeciÑed amount of damages. On August 25, 2004, the Illinois District Court issued its decision on Motorola's motion to dismiss, granting the motion in part and denying it in part. The court dismissed without prejudice the fraud claims against the individual defendants and denied the motion to dismiss as to Motorola. The plaintiÅs chose not to Ñle an amended complaint; therefore, the fraud claims against the individual defendants are


  • Page 33

    25 dismissed. The court, however, declined to dismiss the plaintiÅs' claims that the individual defendants were ""controlling persons of Motorola.'' In addition, a purported class action, Howell v. Motorola, Inc., et al., was Ñled against Motorola and various of its oÇcers and employees in the Illinois District Court on July 21, 2003, alleging breach of Ñduciary duty and violations of the Employment Retirement Income Security Act (""ERISA''). The complaint alleged the defendants had improperly permitted participants in Motorola's 401(k) ProÑt Sharing Plan (the ""Plan'') to purchase or hold shares of common stock of Motorola because the price of Motorola's stock was artiÑcially inÖated by a failure to disclose vendor Ñnancing to Telsim in connection with the sale of telecommunications equipment by Motorola. The plaintiÅ sought to represent a class of participants in the Plan for whose individual accounts the Plan purchased or held shares of common stock of Motorola from ""May 16, 2000 to the present'', and sought an unspeciÑed amount of damages. On October 3, 2003, plaintiÅ Ñled an amended complaint asserting three claims for breach of Ñduciary duties under ERISA against 24 defendants grouped into Ñve categories. The amended complaint alleges the defendants violated ERISA by: (1) continuing to oÅer Motorola stock as an investment option under the Plan, even though it had become an imprudent investment due to Motorola's dealings with Telsim and other third parties; (2) negligently making misrepresentations and negligently failing to disclose material information necessary for Participants to make informed decisions concerning their participation in the Plan; and (3) failing to appoint Ñduciaries with the knowledge and expertise necessary to manage Plan assets, failing to monitor those Ñduciaries properly, and failing to provide suÇcient information to Participants and other Plan Ñduciaries. On December 9, 2003, all but one of the defendants Ñled their motion to dismiss. On September 23, 2004, the Illinois District Court granted the motion in part and denied it in part. The court dismissed the plan committee defendants from the case, without prejudice, and left all other defendants in the lawsuit. On October 15, 2004, Howell Ñled a second amended complaint and a motion for class certiÑcation. On December 3, 2004, Defendants Ñled a Motion for Summary Judgment seeking to dismiss PlaintiÅ Howell's individual claims. Charter Communications Class Action Securities Litigation On August 5, 2002, Stoneridge Investment Partners LLC Ñled a purported class action in the United States District Court for the Eastern District of Missouri against Charter Communications, Inc. (""Charter'') and certain of its oÇcers, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. This complaint did not name Motorola as a defendant, but asserted that Charter and the other named defendants had violated the securities laws in connection with, inter alia, a transaction with Motorola. In August 2003, the plaintiÅ amended its complaint to add Motorola, Inc. as a defendant. The amended complaint alleges that Motorola participated in a ""scheme'' with Charter in connection with this transaction to artiÑcially inÖate Charter's earnings. On October 12, 2004, the court granted Motorola's motion to dismiss, holding that there is no civil liability under the federal securities laws for aiding and abetting. On October 26, 2004, the plaintiÅ Ñled a motion for the reconsideration of the court's decision. On December 20, 2004, the court issued its ruling denying plaintiÅ's motion for reconsideration of its earlier decision to dismiss the complaint against Motorola. The court issued a Ñnal judgement dismissing Motorola from the case on February 15, 2005. In re Adelphia Communications Corp. Securities and Derivative Litigation On December 22, 2003, Motorola was named as a defendant in two cases relating to the In re Adelphia Communications Corp. Securities and Derivative Litigation (the ""Adelphia MDL''). The Adelphia MDL consists of at least eleven individual cases and one purported class action that were Ñled in or have been transferred to the United States District Court for the Southern District of New York. First, Motorola was named as a defendant in the Second Amended Complaint in the individual case of W.R. HuÅ Asset Management Co. L.L.C. v. Deloitte & Touche, et al. This case was originally Ñled by W.R. HuÅ Asset Management Co. L.L.C. on June 7, 2002, in the United States District Court for the Western District of New York and was subsequently transferred to the Southern District of New York as related to the Adelphia MDL. Several other individual and corporate defendants are also named in the amended complaint along with Motorola. As to Motorola, the complaint alleges a claim arising under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and seeks recovery of the consideration paid by plaintiÅ for Adelphia debt securities, compensatory damages, costs and expenses of litigation and other relief. Motorola has recently been served with this complaint, the case is in its early stages, and fact discovery has not yet begun. Motorola Ñled a motion to dismiss this complaint on March 8, 2004.


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    26 Also on December 22, 2003, Motorola was named as a defendant in Stocke v. John J. Rigas, et al. This case was originally Ñled in Pennsylvania and was subsequently transferred to the Southern District of New York as related to the Adelphia MDL. Several other individual and corporate defendants are also named in the amended complaint along with Motorola. As to Motorola, the complaint alleges a federal law claim arising under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and a state law claim of aiding and abetting fraud relating to Adelphia securities. The complaint seeks return of the consideration paid by plaintiÅ for Adelphia securities, punitive damages, pre-judgment and post-judgment interest, costs and expenses of litigation and other relief. Motorola Ñled a motion to dismiss this complaint on April 12, 2004. On July 23, 2004, Motorola was named as a defendant in Argent Classic Convertible Arbitrage Fund L.P., et al. v. ScientiÑc-Atlanta, Inc., et al. (the ""Argent Complaint''). The Argent Complaint was Ñled against ScientiÑc Atlanta and Motorola in the Southern District of New York. The Argent Complaint alleges a federal law claim arising under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder relating to Adelphia securities. On October 12, 2004, Motorola Ñled a motion to dismiss the Argent Complaint. On September 15, 2004, Motorola was named in a complaint Ñled in state court in Los Angeles, California, naming Motorola and ScientiÑc Atlanta and certain oÇcers of ScientiÑc Atlanta, Los Angeles County Employees Retirement Association et al. v. Motorola, Inc., et al. The complaint raises claims under California law for aiding and abetting fraud and conspiracy to defraud and generally makes the same allegations as the other previously- disclosed cases relating to the In re Adelphia Communications Corp. Securities and Derivative Litigation that have been transferred to the Southern District of New York. There are no new substantive allegations. On October 8, 2004, Motorola Ñled a motion to remove the California state court case to federal court in California. On December 1, 2004, the Multi-District Litigation Panel issued a conditional transfer order transferring the case to federal court in New York. PlaintiÅs did not object to the conditional transfer order, and the order transferring the case to New York is now Ñnal. On October 25, 2004, Motorola was named in a complaint Ñled in state court in Fulton County, Georgia, naming Motorola and ScientiÑc Atlanta and certain oÇcers of ScientiÑc Atlanta, AIG DKR SoundShore Holdings, Ltd., et al. v. ScientiÑc Atlanta, et al. The complaint raises claims under Georgia law of conspiracy to defraud and generally makes the same allegations as the other previously disclosed cases relating to the In re Adelphia Communications Corp. Securities and Derivative Litigation that have already been Ñled and transferred or are in the process of being transferred to the Southern District of New York. On November 22, 2004, Motorola Ñled a petition to remove the state court case to federal court in Georgia and a notice with the Multi District Panel requesting the case be transferred to New York. On January 5, 2005, the Multi-District Panel issued a conditional transfer order, transferring the case to federal court in New York. On January 20, 2005, the plaintiÅs Ñled an objection before the Multi District Panel, contesting the conditional transfer order. Motorola has Ñled an opposition brief to their objection. Motorola is a defendant in various other suits, claims and investigations that arise in the normal course of business. In the opinion of management, and other than discussed above with respect to the Iridium cases, the ultimate disposition of the Company's pending legal proceedings will not have a material adverse eÅect on the consolidated Ñnancial position, liquidity or results of operations.


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    27 Item 4: Submission of Matters to a Vote of Security Holders Not applicable. Executive OÇcers of the Registrant Following are the persons who were the executive oÇcers of Motorola as of February 28, 2005, their ages as of January 1, 2005, their current titles and positions they have held during the last Ñve years: Edward J. Zander; age 57; Chairman and Chief Executive OÇcer since January 2004. Prior to joining Motorola, Mr. Zander was a managing director of Silver Lake Partners from July 2003 to December 2003. Prior to holding that position, Mr. Zander was President and COO of Sun Microsystems, Inc. from January 1998 until June 2002. Gregory Q. Brown; age 44; Executive Vice President and President, Government & Enterprise Mobility Solutions since January 2005; Executive Vice President and President, Commercial, Government and Industrial Solutions Sector from January 2003 to January 2005; Chairman of the Board and Chief Executive OÇcer of Micromuse, Inc. from February 1999 to December 2002. Dennis J. Carey; age 58; Executive Vice President since January 2005; Executive Vice President and President, Integrated Electronic Systems Sector from November 2002 to January 2005; Executive Vice President, Business Development, Strategy and Corporate Operations of The Home Depot, Inc. from May 2001 to March 2002; Executive Vice President and Chief Financial OÇcer of The Home Depot, Inc. from May 1998 to May 2001. Eugene A. Delaney; age 48; Executive Vice President and President, Global Relations and Resources Organization since July 2002; Senior Vice President and President, Global Relations and Resources Organization from February 2002 to July 2002; Senior Vice President and General Manager, Global Customer Solutions Operations Asia/PaciÑc from October 2001 to February 2002; Senior Vice President and General Manager, Telecom Carrier Solutions Group, Global Telecom Solutions Sector from August 2000 to October 2001; Senior Vice President and General Manager, Global Telecom Solutions Group, Communications Enterprise from April 1999 to August 2000. David W. Devonshire; age 59; Executive Vice President and Chief Financial OÇcer since April 2002; Executive Vice President and Chief Financial OÇcer of Ingersoll-Rand Company from January 2000 to January 2002. Ruth A. Fattori; age 52; Executive Vice President, Human Resources since November 2004; Senior Vice President, JP Morgan Chase & Co., from April 2003 to November 2004; Executive Vice President, Process and Productivity, Conseco, Inc. from January 2001 to December 2002; Senior Vice President, Human Resources, Siemens Corporation from October 1999 to January 2001. Ronald Garriques; age 40; Executive Vice President and President, Mobile Devices since January 2005; Executive Vice President and President, Personal Communications Sector (""PCS'') from September 2004 to January 2005; Senior Vice President and General Manager, Europe, Middle East & Africa, PCS from September 2002 to September 2004; Senior Vice President and General Manager, Worldwide Product Line Management, PCS from February 2001 to September 2002; Corporate Vice President and General Manager, Goal Oriented Product Line, PCS from September 2000 to February 2001; Vice President and Director, Program Management, PCS from April 2000 to September 2000; Vice President and General Manager, Performance Category, Communications Enterprise from December 1998 to April 2000. A. Peter Lawson; age 58; Executive Vice President, General Counsel and Secretary since May 1998. Daniel M. Moloney; age 45; Executive Vice President and President, Connected Home Solutions since January 2005; Executive Vice President and President, Broadband Communications Sector (""BCS'') from June 2002 to January 2005; Senior Vice President and General Manager, IP Systems Group, BCS from February 2000 to June 2002. Adrian R. Nemcek; age 57; Executive Vice President and President, Networks since January 2005; Executive Vice President and President, Global Telecom Solutions Sector (""GTSS'') from August 2002 to January 2005; Senior Vice President and President, GTSS from September 2001 to August 2002; Senior Vice President and General Manager, OÇce of Strategy, GTSS from August 2000 to September 2001; Senior Vice President and General Manager, Customer Solutions Group, Network Solutions Sector from January 1999 to August 2000.


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    28 Richard N. Nottenburg; age 50; Executive Vice President and Chief Strategy OÇcer since March 2005; Senior Vice President and Chief Strategy OÇcer from July 2004 to March 2005; Strategic Advisor to Motorola, Inc. February 2004 to July 2004; Vice President and General Manager of Vitesse Semiconductor Corporation from August 2003 to January 2004; Chairman of the Board, President and Chief Executive OÇcer of Multilink from January 1995 to August 2003. Padmasree Warrior; age 44; Executive Vice President and Chief Technology OÇcer since March 2005; Senior Vice President and Chief Technology OÇcer from January 2003 to March 2005; Corporate Vice President and General Manager, Energy Systems Group, Integrated Electronic Systems Sector from April 2002 to January 2003; Corporate Vice President and General Manager, Thoughtbeam, Inc., a wholly-owned subsidiary of Motorola, Inc., from October 2001 to April 2002; Corporate Vice President, Chief Technology OÇcer and Director, DigitalDNA Laboratories, Semiconductor Products Sector (""SPS'') from December 2000 to October 2001; Vice President, Chief Technology OÇcer and Director, DigitalDNA Laboratories, SPS from July 2000 to December 2000; Vice President and Assistant Director, DigitalDNA Laboratories, SPS from August 1999 to July 2000. The above executive oÇcers will serve as executive oÇcers of Motorola until the regular meeting of the Board of Directors in May 2005 or until their respective successors shall have been elected. There is no family relationship between any of the executive oÇcers listed above.


  • Page 37

    29 PART II Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Motorola's common stock is listed on the New York, Chicago and Tokyo Stock Exchanges. The number of stockholders of record of Motorola common stock on January 31, 2005 was 85,517. The remainder of the response to this Item incorporates by reference Note 15, ""Quarterly and Other Financial Data (unaudited)'' of the Notes to Consolidated Financial Statements appearing on page 125 under ""Item 8: Financial Statements and Supplementary Data''. The following table provides information with respect to acquisitions by the Company of shares of its common stock during the quarter ended December 31, 2004. ISSUER PURCHASES OF EQUITY SECURITIES (d) Maximum Number (c) Total Number (or Approximate Dollar of Shares Purchased Value) of Shares that (a) Total Number as Part of Publicly May Yet Be Purchased of Shares (b) Average Price Announced Plans Under the Plans or Period Purchased(1) Paid per Share(1) or Programs Programs 10/03/04 to 10/30/04 8,285 $18.12 Ì Ì 10/31/04 to 11/27/04 26,792 $17.35 Ì Ì 11/28/04 to 12/31/04 73,259 $12.03 Ì Ì Total 108,336 $13.81 Ì Ì (1) All transactions involved the delivery to the Company of shares of Motorola common stock by employees under the Company's equity compensation plans. Shares were delivered to satisfy tax withholding obligations in connection with the vesting of restricted stock granted to employees under such plans and in payment of the option exercise price and tax withholding obligation in connection with the exercise of stock options granted under such plans.


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    30 Item 6: Selected Financial Data Motorola, Inc. and Subsidiaries Five Year Financial Summary Years Ended December 31 (Dollars in millions, except as noted) 2004 2003 2002 2001 2000 Operating Results Net sales $ 31,323 $ 23,155 $ 23,422 $ 26,468 $ 32,107 Costs of sales 20,826 15,588 15,741 19,673 22,401 Gross margin 10,497 7,567 7,681 6,795 9,706 Selling, general and administrative expenses 4,209 3,529 3,991 4,369 5,031 Research and development expenditures 3,060 2,799 2,774 3,312 3,426 Reorganization of businesses (15) 23 605 1,245 326 Other charges (income) 111 (57) 754 2,091 293 Operating earnings (loss) 3,132 1,273 (443) (4,222) 630 Other income (expense): Interest expense, net (199) (294) (355) (390) (164) Gains on sales of investments and businesses, net 460 539 81 1,931 1,526 Other (141) (142) (1,354) (1,201) (72) Total other income (expense) 120 103 (1,628) 340 1,290 Earnings (loss) from continuing operations before income taxes 3,252 1,376 (2,071) (3,882) 1,920 Income tax expense (beneÑt) 1,061 448 (721) (876) 711 Earnings (loss) from continuing operations 2,191 928 (1,350) (3,006) 1,209 Earnings (loss) from discontinued operations, net of tax (659) (35) (1,135) (931) 109 Net earnings (loss) $ 1,532 $ 893 $ (2,485) (3,937) 1,318 Per Share Data (in dollars) Diluted earnings (loss) from continuing operations per common share $ 0.90 $ 0.39 $ (0.59) $ (1.36) $ 0.54 Diluted earnings (loss) per common share 0.64 0.38 (1.09) (1.78) $ 0.58 Diluted weighted average common shares outstanding (in millions) 2,472.0 2,351.2 2,282.3 2,213.3 2,256.6 Dividends paid per share $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.16 Balance Sheet Total assets $ 30,889 $ 32,046 $ 31,233 $ 33,398 $ 42,343 Long-term debt and redeemable preferred securities 4,578 7,159 7,660 8,769 4,777 Total debt and redeemable preferred securities 5,295 8,028 9,159 9,462 11,167 Total stockholders' equity 13,331 12,689 11,239 13,691 18,612 Other Data Capital expenditures $ 494 $ 344 $ 387 $ 708 $ 1,724 % of sales 1.6% 1.5% 1.7% 2.7% 5.4% Research and development expenditures $ 3,060 $ 2,799 $ 2,774 $ 3,312 $ 3,426 % of sales 9.8% 12.1% 11.8% 12.5% 10.7% Year-end employment (in thousands)* 68 88 97 111 147 * Employment decrease in 2004 primarily reÖects the impact of the spin-oÅ of Freescale Semiconductor.


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    MANAGEMENT'S DISCUSSION AND ANALYSIS 31 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations The following is a discussion and analysis of our Ñnancial position and results of operations for each of the three years in the period ended December 31, 2004. This commentary should be read in conjunction with our consolidated Ñnancial statements and the notes thereto which appear beginning on page 84 under ""Item 8: Financial Statements and Supplementary Data.'' Executive Overview What businesses are we in? Motorola reports six segments as described below. The Personal Communications segment (""PCS'') designs, manufactures, sells and services wireless handsets with integrated software and accessory products. PCS's net sales in 2004 were $16.8 billion, representing 54% of the Company's consolidated net sales. The Global Telecom Solutions segment (""GTSS'') designs, manufactures, sells, installs and services wireless infrastructure communication systems, including hardware and software. GTSS provides end-to-end wireless networks, including radio base stations, base site controllers, associated software and services, mobility soft switching, application platforms and third-party switching for CDMA, GSM, iDEN» and UMTS. GTSS's net sales in 2004 were $5.5 billion, representing 17% of the Company's consolidated net sales. The Commercial, Government and Industrial Solutions segment (""CGISS'') designs, manufactures, sells, installs and services analog and digital two-way radio, voice and data communications products and systems to a wide range of public-safety, government, utility, courier, transportation and other worldwide markets. The business continues to invest in the market for broadband data, including infrastructure, devices, service and applications. In addition, the segment participates in the expanding market for integrated information management, mobile and biometric applications and services. CGISS's net sales in 2004 were $4.6 billion, representing 15% of the Company's consolidated net sales. The Integrated Electronic Systems segment (""IESS'') designs, manufactures and sells: (i) automotive and industrial electronics systems, (ii) telematics systems that enable automated roadside assistance, navigation and advanced safety features for automobiles, (iii) portable energy storage products and systems, and (iv) embedded computing systems. IESS's net sales in 2004 were $2.7 billion, representing 9% of the Company's consolidated net sales. The Broadband Communications segment (""BCS'') designs, manufactures and sells a wide variety of broadband products, including: (i) digital systems and set-top terminals for cable television and broadcast networks, (ii) high speed data products, including cable modems and cable modem termination systems, as well as Internet Protocol-based telephony products, (iii) access network technology, including hybrid Ñber coaxial network transmission systems and Ñber-to-the-premise transmission systems, used by cable television operators, (iv) digital satellite television systems, (v) direct-to-home satellite networks and private networks for business communications, and (vi) high-speed data, video and voice broadband systems over existing phone lines. BCS's net sales in 2004 were $2.3 billion, representing 7% of the Company's consolidated net sales. The Other Products segment includes: (i) various corporate programs representing developmental businesses and research and development projects that are not included in any major segment and (ii) Motorola Credit Corporation, the Company's wholly-owned Ñnance subsidiary. The segment's net sales in 2004 were $387 million, representing 1% of the Company's consolidated net sales. In April 2004, the Company separated its semiconductor operations into a separate subsidiary, Freescale Semiconductor, Inc. (""Freescale Semiconductor''). In July 2004, an initial public oÅering of a minority interest of approximately 32.5% of Freescale Semiconductor was completed. On December 2, 2004, Motorola completed the spin-oÅ of Freescale Semiconductor from the Company by distributing its remaining 67.5% equity interest in Note: When discussing the net sales for each of our six segments, we express the segment's net sales as a percentage of the Company's consolidated net sales. Because certain of our segments sell products to other Motorola businesses, $963 million of intracompany sales were eliminated as part of the consolidation process in 2004. As a result, the percentages of consolidated net sales for each of our business segments sum to greater than 100% of the Company's consolidated net sales.


  • Page 40

    MANAGEMENT'S DISCUSSION AND ANALYSIS 32 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Freescale Semiconductor to Motorola shareholders. As of that date, Freescale Semiconductor is an entirely independent company. The Ñnancial results of Freescale Semiconductor have been presented in Motorola's consolidated Ñnancial statements as a discontinued operation. What were our key 2004 Ñnancial results? ‚ Our net sales were $31.3 billion in 2004, up 35% from $23.2 billion in 2003. ‚ We generated operating earnings of $3.1 billion in 2004, compared to operating earnings of $1.3 billion in 2003. ‚ Our earnings per diluted common share from continuing operations were $0.90 in 2004, compared to $0.39 in 2003. ‚ We had positive operating cash Öow of $3.1 billion in 2004, compared to $2.0 billion in 2003, and have generated positive operating cash Öow in each of the last four years. ‚ We reduced our total debt* by $2.7 billion in 2004, from $8.0 billion to $5.3 billion. ‚ We are in a net cash** position of $5.4 billion at the end of 2004, compared to a net debt** position of $99 million at the end of 2003. ‚ We had net reversals of $12 million for reserves no longer needed relating to reorganization of businesses in 2004, compared to net reorganization of business charges of $39 million in 2003. The net reversals of $12 million in 2004 included $59 million of charges for employee separation costs, $66 million of reversals for employee separation and exit cost reserves no longer needed, and income of $5 million related to Ñxed asset adjustments. The $66 million of reversals constitute 2% of the Company's $3.3 billion in earnings from continuing operations before income taxes in 2004. What did we focus on in 2004? In 2004, we were focused Ñrst and foremost on increasing proÑtable sales and growing market share. We increased our net sales signiÑcantly, with 35% growth in 2004 compared to 2003. We also achieved our goal of increasing the proÑtability of these sales, as evidenced by the 146% increase in operating earnings in 2004, compared to 2003. Operating earnings increased in four of the Company's Ñve major segments. Contributing to the improvement in proÑtability were: (i) improvements in supply chain processes in PCS, GTSS and CGISS, (ii) overall cost-structure improvements, (iii) ongoing cost reduction activities, and (iv) improved average selling price (""ASP'') in PCS due to a product mix shift towards higher-end products. In addition, we believe we improved our market share position in our two largest businesses, PCS and GTSS. Both the wireless handset and wireless network industries experienced signiÑcant growth in 2004. In PCS, total unit shipments outpaced the industry as our market share grew and we solidiÑed our number two position in the worldwide handset market. In GTSS, the business' net sales growth was larger than the wireless infrastructure industry, also resulting in increased market share. In addition, CGISS remains the market share leader in supplying two-way radio communications systems, and BCS remains the market share leader for both digital set-tops and cable modems. What challenges and opportunities did our businesses face in 2004? ‚ In PCS: Our wireless handset business had a very strong year in 2004, reÖected by a 53% increase in net sales, a 257% increase in operating earnings and increased market share. The increase in net sales was driven by an increase in unit shipments, which increased 39% in 2004 compared to 2003, and improved ASP, which increased 15% in 2004 compared to 2003. 2004 was a record year for the wireless handset industry, as total industry unit shipments increased approximately 25% compared to 2003. Our wireless handset business increased its unit shipments 39% to 104.5 million and, since this growth outpaced overall industry * Total Debt • Notes Payable and Current Portion of Long-term Debt ° Long-term Debt ° Trust Originated Preferred Securities(""TOPrS'') ** Net Cash (Net Debt) • Cash and Cash Equivalents ° Short-term Investments - Notes Payable and Current Portion of Long-term Debt - Long-term Debt - TOPrS


  • Page 41

    MANAGEMENT'S DISCUSSION AND ANALYSIS 33 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS growth, we believe we gained market share in 2004 and solidiÑed our hold on the second-largest worldwide market share of wireless handsets. This increase in net sales, accompanied by process improvements in the supply chain and beneÑts from ongoing cost reduction activities resulted in increased gross margin, which drove the increase in overall operating earnings for the business. The segment continues to experience intense competition in worldwide markets from numerous global competitors. As these strong competitive pressures continue in the industry, which typically experiences short life cycles for new products, the time to market for new product oÅerings becomes increasingly more important. The segment will continue to focus on investment in innovative and next-generation technologies to ensure we introduce industry-leading products. ‚ In GTSS: Our wireless networks business experienced a 24% increase in net sales in 2004, reÖecting increased net sales in all technologies and all regions. In addition to the increase in net sales, the business also had a 207% increase in operating earnings. Although the increase in net sales was the key driver of the increased earnings, further cost containment in the segment's supply chain also contributed. The wireless infrastructure industry experienced signiÑcant growth in 2004 after three years of decline. We believe that our wireless networks business' net sales growth outpaced the industry, resulting in increased market share in 2004. The business continues to face signiÑcant competition in worldwide markets. In particular, the competition to win awards to supply equipment for next-generation 3G UMTS equipment remains intense. ‚ In CGISS: Our public safety and enterprise communications business had an 11% increase in net sales and a 34% increase in operating earnings in 2004 compared to 2003. The net sales growth reÖects increased spending for communications equipment in the public safety markets, primarily in response to homeland security needs, as well as increased spending by our business customers in the enterprise markets. In addition to the increase in net sales, improved supply chain eÇciencies and overall cost structure improvements drove the improvement in earnings. The segment continues to expand their product and technology oÅerings and is increasing its focus on large enterprise customers by oÅering a broader set of communication solutions, evidenced by their acquisition of MeshNetworks, Inc., a leading developer of mobile mesh networking and position location technologies. In the government market, the business continues to work closely with the appropriate government departments and agencies to ensure that wireless communication is positioned as a critical need for homeland security. ‚ In IESS: Our automotive, embedded computing and energy systems business had a 19% increase in net sales in 2004, although operating earnings decreased 12%. The growth in net sales was driven by the success of the Automotive Communications and Electronic Systems Group, primarily from telematics products, as well as the success of several new electronic controls products. Also contributing to the increase in net sales was the acquisition of Force Computers, a worldwide designer and supplier of open, standards-based and custom embedded computing solutions. The primary reason for the decrease in operating earnings was increased employee incentive accruals, increased research and development and selling, general and administrative expenditures, and integration costs associated with the addition of Force Computers. ‚ In BCS: Our broadband business had a strong year in 2004, as net sales increased 26% and the business reported operating earnings versus an operating loss in 2003. The increase in net sales was driven by increased demand for digital cable set-top boxes, increased ASP for digital set-top boxes due to a product mix shift towards higher-end products, and increased retail sales. The segment remains the market share leader in both digital set-top boxes and cable modems. As the digital business continues to account for a substantial portion of the segment's business, we continue to focus on producing a suite of digital set-top terminals, primarily higher end set-top boxes. As the product mix shifts towards these higher-end products, the business continues to seek ways in which to reduce the cost, as we have historically seen lower initial margins on these products. Focusing on 2005 In 2005, we will continue to pursue proÑtable market share growth. After aligning our structure to better enable our vision of seamless mobility, we will serve our customers through four distinct but integrated business units: mobile devices, networks, government & enterprise and connected home. Within this framework, we will continue to design and develop devices (consumer and professional) for mobile communications, partnering with retail and enterprise operators to create compelling, ""must-have'' designs and functionality. We will continue to design and develop networks to connect people to people, people to things


  • Page 42

    MANAGEMENT'S DISCUSSION AND ANALYSIS 34 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and things to things Ì building the infrastructure that makes communication possible. We will also continue to oÅer end-to-end solutions for specialized markets such as mission critical, governments and automotive. Targeted plans for improving our competitive positioning and operating results include: ‚ Improve execution Ó Our new organizational structure was in part designed to enhance our speed and ability to execute on customer commitments. ‚ Improve Ñnancial performance Ó We intend to continue strengthening our balance sheet Ó which is the strongest in decades Ì and continue improving our cash Öow, sales and earnings. In addition, we continue to deploy operational eÇciencies to streamline our cost structure and maximize shareholder value. ‚ Elevate customer delight and quality Ó We believe that customers must not only be satisÑed but delighted. Quality metrics and programs have been implemented throughout the Company to help achieve this goal. ‚ OÅering ""WOW'' products and end-to-end solutions Ó Our products and solutions will help us establish Motorola as a world leader in seamless mobility technologies. We are combining our heritage of technology leadership with design leadership to present customers and consumers with innovative solutions. ‚ Strengthen our brand and thought leadership Ó We are investing to position Motorola as a globally recognized symbol of quality and innovation. ‚ ReÑne and execute on strategic direction Ó We will continue to prioritize our investments in R&D, as well as identify partnerships, alliances and niche technologies to build a strong portfolio. We conduct our business in highly-competitive markets, facing both new and established competitors. However, with our new structure and focus in place, we believe we are well positioned to execute our strategy and, in turn, increase our overall business performance, including higher sales and earnings.


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    MANAGEMENT'S DISCUSSION AND ANALYSIS 35 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Years Ended December 31 (Dollars in millions, except per share amounts) 2004 % of sales 2003 % of sales 2002 % of sales Net sales $31,323 $23,155 $23,422 Costs of sales 20,826 66.5% 15,588 67.3% 15,741 67.2% Gross margin 10,497 33.5% 7,567 32.7% 7,681 32.8% Selling, general and administrative expenses 4,209 13.4% 3,529 15.2% 3,991 17.0% Research and development expenditures 3,060 9.8% 2,799 12.1% 2,774 11.9% Reorganization of businesses (15) (0.1)% 23 0.1% 605 2.6% Other charges(income) 111 0.4% (57) (0.2)% 754 3.2% Operating earnings(loss) 3,132 10.0% 1,273 5.5% (443) (1.9)% Other income(expense): Interest expense, net (199) (0.6)% (294) (1.3)% (355) (1.5)% Gains on sales of investments and businesses, net 460 1.5% 539 2.3% 81 0.4% Other (141) (0.5)% (142) (0.6)% (1,354) (5.8)% Earnings(loss) from continuing operations before income taxes 3,252 10.4% 1,376 5.9% (2,071) (8.8)% Income tax expense(beneÑt) 1,061 3.4% 448 1.9% (721) (3.1)% Earnings(loss) from continuing operations 2,191 7.0% 928 4.0% (1,350) (5.7)% Loss from discontinued operations, net of tax (659) (2.1)% (35) (0.0)% (1,135) (4.9)% Net earnings(loss) $ 1,532 4.9% $ 893 4.0% $(2,485) (10.6)% Earnings(loss) per diluted common share: Continuing operations $ 0.90 $ 0.39 $ (0.59) Discontinued operations (0.26) (0.01) (0.50) $ 0.64 $ 0.38 $ (1.09) Geographic market sales measured by the locale of the end customer as a percent of total net sales for 2004, 2003 and 2002 are as follows: Geographic Market Sales by Locale of End Customer 2004 2003 2002 United States 47% 54% 51% Europe 19% 13% 12% China 9% 9% 14% Latin America 9% 8% 6% Asia, excluding China and Japan 7% 7% 9% Japan 3% 2% 2% Other Markets 6% 7% 6% 100% 100% 100% Results of OperationsÌ2004 Compared to 2003 Net Sales Net sales were $31.3 billion in 2004, up 35% from $23.2 billion in 2003. Net sales increased in all Ñve of the Company's major segments in 2004 compared to 2003. The overall increase in net sales was primarily related to: (i) a $5.8 billion increase in net sales by the Personal Communications segment (""PCS''), driven by a 39% increase in unit shipments and a 15% increase in average selling price (""ASP''), reÖecting strong consumer demand for new products, (ii) a $1.0 billion increase in net sales by the Global Telecom Solutions segment (""GTSS''), driven by a continued increase in spending by the segment's wireless service provider customers and reÖecting sales growth in all


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    MANAGEMENT'S DISCUSSION AND ANALYSIS 36 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS technologies and regions, (iii) a $478 million increase in net sales by the Broadband Communications segment (""BCS''), primarily due to increased purchases of digital cable set-top boxes by cable operators and an increase in ASP for digital set-top boxes due to a mix shift towards higher-end products, (iv) a $457 million increase in net sales by the Commercial, Government and Industrial Solutions segment (""CGISS''), reÖecting increased spending by customers in both the segment's government market, in response to global homeland security initiatives, and in the segment's enterprise market, for business-critical communications needs, and reÖects increased net sales in all regions, and (v) a $431 million increase in the Integrated Electronic Systems segment (""IESS''), primarily due to increased net sales in the automotive electronics market, particularly telematics products, and additional net sales from the addition of Force Computers, which was acquired in August 2004. Gross Margin Gross margin was $10.5 billion, or 33.5% of net sales, in 2004, compared to $7.6 billion, or 32.7% of net sales, in 2003. Three of the Ñve major segments had a higher gross margin as a percentage of net sales, including: (i) PCS, primarily due to the increase in net sales and cost savings from ongoing cost-reduction activities and improvements in the supply-chain, (ii) GTSS, primarily due to the increase in net sales and cost savings from improvements in the supply-chain, and (iii) CGISS, primarily due to the increase in net sales, cost savings from supply chain eÇciencies and overall cost structure improvements. These improvements in gross margin percentage were partially oÅset by a decrease in gross margin as a percentage of net sales in BCS, primarily due to higher sales of new, higher-tier products carrying lower initial margins. Selling, General and Administrative Expenses Selling, general and administrative (""SG&A'') expenditures increased 19% to $4.2 billion, or 13.4% of net sales, in 2004, compared to $3.5 billion, or 15.2% of net sales, in 2003. Four of the Company's Ñve major segments had increased SG&A expenditures in 2004 compared to 2003, although SG&A expenditures as percentage of net sales decreased in four of the Ñve major segments. The increase in SG&A expenditures in 2004 compared to 2003 was driven by increased general and selling expenditures, partially oÅset by a decrease in administrative expenditures. General expenditures increased in all Ñve major segments, primarily due to an increase in employee incentive program accruals. The increase in selling expenditures was due to: (i) increased advertising and promotional expenditures in PCS to support higher sales and promote brand awareness, (ii) increased selling and sales support expenditures, which increased in four of the Ñve major segments, driven by the increase in sales commissions resulting from the increase in net sales, and (iii) increased marketing expenditures in all Ñve of the major segments. Research and Development Expenditures Research and development (""R&D'') expenditures increased 9% to $3.1 billion, or 9.8% of net sales, in 2004, compared to $2.8 billion, or 12.1% of net sales, in 2003. Four of the Company's Ñve major segments had increased R&D expenditures in 2004 compared to 2003, although R&D expenditures as percentage of net sales decreased in four of the Ñve major segments. The increase in R&D expenditures was primarily due to increased expenditures by: (i) PCS, reÖecting an increase in developmental engineering expenditures due to additional investment in new product development, (ii) CGISS, driven by increased investment in new technologies, (iii) the Other Products segment, due to increased spending on developmental businesses and R&D projects, and (iv) IESS, primarily to support business wins across the segment and due to increased expenditures from the addition of Force Computers. Reorganization of Businesses In 2004, the Company recorded net reversals of $12 million for reserves no longer needed, including $15 million of reversals in the consolidated statements of operations under Reorganization of Businesses and $3 million of charges in Costs of Sales. The 2004 net reversals of $12 million included $59 million of charges for employee separation costs, $66 million of reversals for employee separation and exit cost reserves no longer needed, and income of $5 million related to Ñxed asset adjustments. The $66 million of reversals constitute 2% of the Company's $3.3 billion in earnings from continuing operations before income taxes in 2004. Net reorganization of businesses charges in 2003 were $39 million, including $23 million reÖected in the consolidated statements of operations under Reorganization of Businesses and $16 million included in Costs of Sales. The 2003 net charges of $39 million included $174 million of charges for employee separation and exit costs,


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    MANAGEMENT'S DISCUSSION AND ANALYSIS 37 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS $145 million of reversals for employee separation and exit cost reserves no longer needed, $38 million in charges for the impairment of assets classiÑed as held-for-sale, and $28 million in Ñxed asset adjustments, primarily for assets which the Company intends to use that were previously classiÑed as held-for-sale. The $145 million of reversals constituted 11% of the Company's $1.4 billion in earnings from continuing operations before income taxes in 2003. These charges are discussed in further detail in the ""Reorganization of Businesses Programs'' section below. Other Charges (Income) The Company recorded net charges of $111 million in Other Charges (Income) in 2004, compared to net income of $57 million in 2003. The net charges of $111 million in 2004 primarily consist of: (i) a $125 million impairment charge related to goodwill associated with a sensor business within the Other Products segment, and (ii) $34 million of charges for in-process research and development (""IPR&D'') related to the acquisitions by CGISS of MeshNetworks, Inc. and CRISNET, Inc., by BCS of Quantum Bridge, and by IESS of Force Computers. These items were partially oÅset by $44 million in income from the reversal of Ñnancing receivable reserves due to the partial collection of the previously-uncollected receivable from Telsim. The net income of $57 million in 2003 primarily consisted of: (i) $69 million in income from the reversal of accruals no longer needed due to a settlement with the Company's insurer on items related to previous environmental claims, (ii) $59 million in income due to the reassessment of remaining reserve requirements as a result of a litigation settlement agreement with The Chase Manhattan Bank regarding Iridium, and (iii) $41 million in income from the sale of Iridium-related assets that were previously written down. These items were partially oÅset by: (i) a $73 million impairment charge relating to goodwill associated with the infrastructure business of BCS, and (ii) $32 million of IPR&D charges related to the acquisition of Winphoria Networks, Inc. by GTSS. Net Interest Expense Net interest expense was $199 million in 2004, compared to $294 million in 2003. Net interest expense in 2004 included interest expense of $353 million, partially oÅset by interest income of $154 million. Net interest expense in 2003 included interest expense of $423 million, partially oÅset by interest income of $129 million. The decrease in net interest expense in 2004 compared to 2003 reÖects: (i) a reduction in total debt during 2004, (ii) beneÑts derived from Ñxed-to-Öoating interest rate swaps, and (iii) an increase in interest income due to higher average cash balances. Gains on Sales of Investments and Businesses Gains on sales of investments and businesses were $460 million in 2004, compared to $539 million in 2003. The 2004 net gains were primarily: (i) a $130 million gain on the sale of the Company's remaining shares in Broadcom Corporation, (ii) a $122 million gain on the sale of a portion of the Company's shares in Nextel Communications, Inc. (""Nextel''), (iii) an $82 million gain on the sale of a portion of the Company's shares in Telus Corporation, and (iv) a $68 million gain on the sale of a portion of the Company's shares in Nextel Partners, Inc. (""Nextel Partners''). The 2003 net gains were primarily: (i) a $255 million gain on the sale of a portion of the Company's shares in Nextel, (ii) an $80 million gain on the sale of the Company's shares in Symbian Limited, (iii) a $65 million gain on the sale of the Company's shares in UAB Omnitel of Lithuania, and (iv) a $61 million gain on the sale of a portion of the Company's shares in Nextel Partners. Other Charges classiÑed as Other, as presented in Other Income (Expense), were $141 million in 2004, compared to $142 million in 2003. The $141 million of charges in 2004 primarily related to: (i) net charges of $81 million for costs related to the redemption of debt, (ii) foreign currency losses of $44 million, (iii) $36 million of investment impairment charges, and (iv) $18 million in minority interest expense. These items were partially oÅset by: (i) $29 million of equity in net earnings of aÇliated companies, and (ii) $20 million in income related to the recovery of a previously-impaired debt holding in a European cable operator. The $142 million of charges in 2003 primarily related to: (i) $96 million of investment impairment charges, partially comprised of a $29 million charge to write down to zero the Company's debt holding in a European cable


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    MANAGEMENT'S DISCUSSION AND ANALYSIS 38 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS operator, and (ii) foreign currency losses of $73 million, partially oÅset by $30 million of equity in net earnings of aÇliated companies. EÅective Tax Rate The eÅective tax rate was 33% in both 2004 and 2003, representing tax expense of $1.1 billion and $448 million, in 2004 and 2003, respectively. The 2004 eÅective tax rate reÖects a $241 million beneÑt from the reversal of previously-accrued income taxes as a result of settlements reached with taxing authorities and a reassessment of tax exposures based on the status of current audits. The 2004 eÅective tax rate also reÖects nondeductible charges of $125 million for the impairment of goodwill related to a sensor business and $31 million for IPR&D charges related to acquisitions. The 2003 eÅective tax rate reÖected a $61 million beneÑt from the reversal of previously-accrued income taxes as a result of settlements reached with taxing authorities and $32 million for 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, (ii) a $95 million decrease in net interest expense, driven primarily by the reduction in total debt in 2004, (iii) a $51 million decrease in overall reorganization of businesses charges, including a $13 million decrease in reorganization of businesses costs recognized in Costs of Sales and a $38 million decrease in costs recognized in Reorganization of Businesses. These improvements in earnings were partially oÅset by: (i) a $680 million increase in SG&A expenditures, primarily driven by increases in: (a) employee incentive program accruals, (b) sales commissions resulting from the increase in net sales, (c) advertising and promotions expenditures in PCS, and (d) marketing expenditures, (ii) a $261 million increase in R&D expenditures, due primarily to an increase in developmental engineering expenditures in PCS due to additional investment in new product development, and increased investment in new technologies by CGISS, (iii) a $168 million increase in Other Charges, primarily due to a $125 million impairment charge related to goodwill associated with a sensor business 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. Results of OperationsÌ2003 Compared to 2002 Net Sales Net sales were $23.2 billion in 2003, down 1% from $23.4 billion in 2002. The overall decline in net sales was primarily related to: (i) a $286 million decrease in net sales by BCS, reÖecting continued reductions in capital spending by cable service providers, (ii) a $196 million decrease in net sales by PCS, primarily due to: (a) increased competition in Asia, (b) an estimated loss in market share during 2003, resulting from delays in the introduction of new products, driven by supply constraints for a key component, and (c) the discontinued sale of paging products during 2002, and (iii) a $194 million decrease in net sales by GTSS, reÖecting continued reductions in capital spending by cellular operators during 2003, speciÑcally in mature markets. These decreases were partially oÅset by: (i) a $382 million increase in net sales by CGISS, reÖecting increased customer spending due to homeland security initiatives in the government market, as well as an increase in sales due to the conÖict in the Middle East and the reconstruction of public safety systems in Iraq, and (ii) a $76 million increase in net sales by IESS, primarily due to the success of several new products in the automotive market and increased demand from industrial automation, medical and telecommunications customers.


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    MANAGEMENT'S DISCUSSION AND ANALYSIS 39 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Gross Margin Gross margin was $7.6 billion, or 32.7% of net sales, in 2003, compared to $7.7 billion, or 32.8% of net sales, in 2002. Three of the Company's Ñve major segments had a higher gross margin and higher gross margin as a percentage of net sales in 2003. The improvement in gross margin as a percentage of net sales reÖects: (i) an increase in CGISS, primarily from the increase in net sales and a favorable product mix, as well as continued beneÑts from prior cost-reduction actions, and (ii) an increase in GTSS, primarily due to beneÑts from prior cost- reduction actions and a decline in reorganization of business charges reÖected in costs of sales, and (iii) an increase in IESS, primarily from the increase in net sales and a decline in reorganization of business charges reÖected in costs of sales. These improvements in gross margin percentage were partially oÅset by declines in BCS and PCS, primarily due to the decline in net sales in these two segments. The 2003 gross margin included reorganization of business charges of $16 million, which were included in Costs of Sales and primarily related to direct labor employee severance costs. The 2002 gross margin included reorganization of business charges of $68 million, which were included in Costs of Sales and primarily related to direct labor employee severance costs. Selling, General and Administrative Expenses SG&A expenses declined 12% to $3.5 billion, or 15.2% of net sales, in 2003, compared to $4.0 billion, or 17.0% of net sales, in 2002. Four of the Company's Ñve major segments had lower SG&A expenses in 2003 than in 2002. The decrease in SG&A expenses was primarily driven by: (i) decreased general and administrative spending by PCS, reÖecting beneÑts from cost-reduction eÅorts, (ii) decreased selling and sales support costs by GTSS, reÖecting beneÑts from prior cost-reduction eÅorts, partially oÅset by an increase in employee incentive program costs, and (iii) decreased general and administrative spending by IESS and BCS, reÖecting beneÑts from prior cost- reduction actions. These beneÑts were partially oÅset by increased SG&A expenditures in CGISS, primarily due to an increase in employee incentive program accruals. Research and Development Expenditures R&D expenditures increased slightly to $2.8 billion, or 12.1% of net sales, in 2003, compared to $2.8 billion, or 11.9% of net sales, in 2002. Four of the Company's Ñve major segments had increased R&D expenditures in 2003. The increase in R&D expenditures was primarily due to increased expenditures by: (i) PCS, reÖecting an increase in developmental engineering expenditures due to the high volume of new product oÅerings, and (ii) IESS, reÖecting a reduction in customer funding of R&D. These increased expenditures were partially oÅset by a decrease in R&D expenditures by GTSS, reÖecting beneÑts from prior restructuring actions. Reorganization of Businesses Net reorganization of businesses charges in 2003 were $39 million, including $23 million reÖected in the consolidated statements of operations under Reorganization of Businesses and $16 million included in Costs of Sales. The 2003 net charges of $39 million included $174 million of charges for employee separation and exit costs, $145 million of reversals for employee separation and exit cost reserves no longer needed, $38 million in charges for the impairment of assets classiÑed as held-for-sale, and $28 million in Ñxed asset adjustments, primarily for assets which the Company intends to use that were previously classiÑed as held-for-sale. Net reorganization of businesses charges in 2002 were $673 million, including $605 million reÖected under Reorganization of Businesses and $68 million included in Costs of Sales. The 2002 net charges of $673 million included $623 million of charges for employee separation and exit costs, $185 million of reversals for employee separation and exit cost reserves no longer needed, $306 million in charges for the impairment of assets classiÑed as held-for-sale, primarily related to the shut-down of an engineering and distribution center in Illinois, and $71 million in Ñxed asset adjustments, primarily for assets which the Company intends to use that were previously classiÑed as held-for-sale. These charges are discussed in further detail in the ""Reorganization of Businesses Programs'' section below. Other Charges (Income) The Company recorded net income of $57 million in Other Charges (Income) in 2003, compared to net charges of $754 million in 2002. The net income of $57 million in 2003 primarily consisted of: (i) $69 million in


  • Page 48

    MANAGEMENT'S DISCUSSION AND ANALYSIS 40 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS income from the reversal of accruals no longer needed due to a settlement with the Company's insurer on items related to previous environmental claims, (ii) $59 million in income due to the reassessment of remaining reserve requirements as a result of a litigation settlement agreement with The Chase Manhattan Bank regarding Iridium, and (iii) $41 million in income from the sale of Iridium-related assets that were previously written down. These items were partially oÅset by: (i) a $73 million impairment charge relating to goodwill associated with the infrastructure business of BCS, and (ii) $32 million of in-process research and development charges related to the acquisition of Winphoria Networks, Inc. by GTSS. The net charge of $754 million in 2002 was primarily comprised of: (i) a $526 million charge for potentially uncollectible Ñnance receivables to fully reserve a loan to Telsim, a wireless service provider in Turkey, that defaulted on a $2.0 billion loan from the Company, (ii) a $325 million intangible asset impairment charge relating to an intellectual property license that enabled the Company to provide national authorization services for digital set-top terminals, and (iii) $12 million for acquired in-process research and development charges, primarily related to the acquisition of Synchronous, Inc. by BCS. These items were partially oÅset by: (i) $63 million of income from the reduction of accruals, primarily related to termination settlements relating to Iridium, and (ii) $24 million of income from the reduction of accruals no longer needed due to the settlement with the Company's insurer on items related to previous environmental claims. Net Interest Expense Net interest expense was $294 million in 2003, compared to $355 million in 2002. Net interest expense in 2003 included interest expense of $423 million, partially oÅset by interest income of $129 million. Net interest expense in 2002 included interest expense of $538 million, partially oÅset by interest income of $183 million. The decrease in net interest expense in 2003 compared to 2002 reÖects: (i) a reduction in total debt during 2003, (ii) beneÑts derived from Ñxed-to-Öoating interest rate swaps due to lower interest rates, (iii) lower rates of interest paid for commercial paper and other short-term borrowings due to the low general interest rate environment during 2003, and (iv) an increase in interest income due to higher average cash balances. Gains on Sales of Investments and Businesses Gains on sales of investments and businesses were $539 million in 2003, compared to $81 million in 2002. The 2003 net gains primarily related to: (i) a $255 million gain on the sale of a portion of the Company's shares in Nextel, (ii) an $80 million gain on the sale of the Company's shares in Symbian Limited, (iii) a $65 million gain on the sale of the Company's shares in UAB Omnitel of Lithuania, and (iv) a $61 million gain on the sale of a portion of the Company's shares in Nextel Partners. The 2002 net gains primarily related to: (i) the sale of equity securities of other companies held for investment purposes, (ii) the sale of the CodeLinkTM bioarray business, and (iii) the reduction of accruals after the settlement of contingencies associated with the prior sales of certain businesses. Other Charges classiÑed as Other, as presented in Other Income (Expense), were $142 million in 2003, compared to $1.4 billion in 2002. These charges or income primarily include: (i) foreign currency transaction gains (losses), (ii) equity in net earnings (losses) of aÇliated companies, and (iii) investment impairment charges. The $142 million of charges classiÑed as Other in 2003 primarily related to: (i) $96 million of investment impairment charges, partially comprised of a $29 million charge to write down to zero the Company's debt holding in a European cable operator, and (ii) foreign currency losses of $73 million, partially oÅset by $30 million of equity in earnings of aÇliated companies. The $1.4 billion of charges classiÑed as Other in 2002 primarily consisted of $1.2 billion of investment impairment charges. These impairment charges were primarily comprised of: (i) a $464 million writedown in the value of the Company's investment in Nextel, (ii) a $321 million writedown of the Company's debt security holdings and associated warrants in a European cable operator, (iii) a $95 million charge to write the value of the Company's investment in an Argentine cellular operating company to zero, and (iv) a $73 million writedown of the Company's investment in Telus Corporation. Other charges included: (i) $98 million of debt redemption charges paid in 2002 that related to the $825 million of Puttable Reset Securities (PURS) that were redeemed in February 2003, and (ii) foreign currency losses of $36 million.


  • Page 49

    MANAGEMENT'S DISCUSSION AND ANALYSIS 41 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EÅective Tax Rate The eÅective tax rate was 33% in 2003, representing a $448 million net tax expense, compared to a 35% eÅective tax rate, representing a $721 million net tax beneÑt, in 2002. The 2003 eÅective tax rate reÖects a $61 million beneÑt from the reversal of previously-accrued income taxes. The tax reversal relates to a reassessment of the Company's income tax requirements given the settlement of certain previously-pending income tax audits. The eÅective tax rate also reÖects nondeductible charges taken of $32 million for IPR&D charges related to the 2003 acquisition of Winphoria Networks, Inc. Earnings (loss) from continuing operations The Company had earnings from continuing operations before income taxes of $1.4 billion in 2003, compared to a net loss from continuing operations before income taxes of $2.1 billion in 2002. After taxes, the Company had earnings from continuing operations of $928 million, or $0.39 per diluted share from continuing operations, in 2003, compared to a loss from continuing operations of $1.4 billion, or ($0.59) per diluted share from continuing operations, in 2002. The $3.4 billion improvement in earnings from continuing operations before income taxes is primarily attributed to: (i) a $1.2 billion decrease in charges classiÑed as Other, primarily due to the reduction in investment impairment charges, (ii) an $811 million decrease in Other Charges (Income), primarily due to charges that occurred in 2002 that did not occur in 2003, which primarily consisted of a $526 million charge related to potentially uncollectible Ñnance receivables from Telsim and a $325 million intangible asset impairment charge relating to a license of certain intellectual property, (iii) a $634 million decrease in overall reorganization of business charges, including a $52 million decrease in reorganization of businesses costs recognized in Costs of Sales and a $582 million decrease in costs recognized in Reorganization of Businesses, (iv) a $462 million decline in SG&A expenditures, primarily due to the beneÑts from prior restructuring actions, (v) a $458 million increase in gains on sales of investments and businesses, primarily due to a $255 million gain from the sale of a portion of the Company's shares in Nextel and gains from the sale of equity securities of other companies held for investment purposes, and (vi) a $61 million decrease in net interest expense. These items were partially oÅset by: (i) a $114 million decrease in gross margin, primarily due to the 1% decline in net sales, and (ii) a slight increase in R&D expenditures. Reorganization of Businesses The Company records provisions for employee separation and exit costs when they are probable and estimable. The Company maintains a formal Involuntary Severance Plan (Severance Plan) which permits Motorola to oÅer eligible employees severance beneÑts based on years of service in the event that employment is involuntarily terminated as a result of a reduction-in-force or restructuring. Each separate reduction-in-force has qualiÑed for severance beneÑts under the Severance Plan and, therefore, such beneÑts are accounted for in accordance with SFAS No. 112, ""Accounting for Postemployment BeneÑts'' (SFAS 112). Under the provisions of SFAS 112, the Company recognizes termination beneÑts 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 eÇciencies in carrying out the plans or because employees previously identiÑed 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 Reorganization of Businesses income statement line item when it is determined they are no longer required. The Company realized cost-saving beneÑts of approximately $5 million in 2004 from the plans that were initiated during 2004, representing $1 million of savings in Costs of Sales, $1 million of savings in R&D expenditures, and $3 million of savings in SG&A expenditures. Beyond 2004, the Company expects the plans implemented in 2004 to provide annualized cost savings of approximately $79 million, representing $25 million of savings in Costs of Sales, $22 million of savings in R&D expenditures and $32 million of savings in SG&A expenditures.


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    MANAGEMENT'S DISCUSSION AND ANALYSIS 42 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the Year Ended December 31, 2004 For the year ended December 31, 2004, the Company recorded net reversals of $12 million for reserves no longer needed, including $3 million of charges in Costs of Sales and $15 million of reversals under Reorganization of Businesses in the Company's consolidated statements of operations. Included in the aggregate $12 million of net reversals are $59 million of charges for employee separation costs, $66 million of reversals for employee separation and exit cost reserves no longer needed, and income of $5 million related to Ñxed asset adjustments. The additional charges of $59 million are a result of the Company's commitment to productivity improvement plans aimed at improving the Company's ability to meet customer demands and reduce operating costs. The productivity plans are designed to adjust the Company's workforce to align it with the Company's focus on seamless mobility and to eliminate positions in its corporate functions in connection with the separation of the Company's former semiconductor operations into an entirely independent Company, Freescale Semiconductor. Businesses impacted by these plans include the Commercial, Government and Industrial Solutions segment, the Integrated Electronic Systems segment and the Broadband Communications segment, as well as various corporate functions. Reorganization of Businesses ChargesÌby Segment The following table displays the net charges (reversals) for employee separation and exit cost reserves by segment for the year ended December 31, 2004: Year Ended December 31, Segment 2004 Personal Communications $(27) Global Telecom Solutions (7) Commercial, Government and Industrial Solutions 6 Integrated Electronic Systems 10 Broadband Communications (4) Other Products Ì (22) General Corporate 15 $ (7) Reorganization of Businesses Accruals The following table displays a rollforward of the accruals established for exit costs and employee separation costs from January 1, 2004 to December 31, 2004: Accruals at 2004 2004 Accruals at January 1, Additional 2004(1) Amount December 31, 2004 Charges Adjustments Used 2004 Exit costsÌlease terminations $143 $Ì $(21) $ (38) $ 84 Employee separation costs 116 59 (34) (95) 46 $259 $59 $(55) $(133) $130 (1) Includes translation adjustments. Exit CostsÌLease Terminations At January 1, 2004, the Company had an accrual of $143 million for exit costs attributable to lease terminations. The 2004 adjustments of $21 million represent reversals of $32 million for accruals no longer needed, partially oÅset by an $11 million translation adjustment. The $38 million used in 2004 reÖects cash payments. The remaining accrual of $84 million, which is included in Accrued Liabilities in the Company's consolidated balance sheets, represents future cash payments for lease termination obligations.

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