------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31 1995 1994 ------------------------------------------------------------------------------------------------------------------- Net sales $ 27,037 $ 22,245 Earnings before income taxes 2,782 2,437 % to sales 10.3% 11.0% Net earnings 1,781 1,560 % to sales 6.6% 7.0% Primary net earnings per common and common equivalent share (in dollars) 2.93 2.66 Fully diluted net earnings per common and common equivalent share (in dollars) 2.93 2.65 Research and development expenditures 2,197 1,860 Fixed asset expenditures 4,225 3,322 Working capital 2,717 3,008 Current ratio 1.35 1.51 Return on average invested capital (1) 14.7% 17.5% % of net debt to net debt plus equity (2) 19.8% 12.1% Book value per common share (in dollars) 18.68 15.47 Year-end employment (in thousands) 142 132 -------------------------------------------------------------------------------------------------------------------
| (1) | Average invested capital is defined as stockholders' equity plus long and short-term debt less short-term investments (includes short-term investments categorized as cash equivalents). |
| (2) | Includes short-term investments categorized as cash equivalents. |
Motorola's internal controls are designed to provide reasonable assurance as to the integrity and reliability of the financial statements and to adequately safeguard, verify and maintain accountability of assets. Such controls are based on established written policies and procedures, are implemented by trained, skilled personnel with an appropriate segregation of duties and are monitored through a comprehensive internal audit program. These policies and procedures prescribe that the Company and all its employees are to maintain the highest ethical standards and that its business practices throughout the world are to be conducted in a manner which is above reproach.
KPMG Peat Marwick LLP, independent auditors, are retained to audit Motorola's financial statements. Their accompanying report is based on audits conducted in accordance with generally accepted auditing standards, which includes the consideration of the Company's internal controls to establish a basis for reliance thereon in determining the nature, timing and extent of audit tests to be applied.
The Board of Directors exercises its responsibility for these financial statements through its Audit Committee, which consists entirely of independent non-management Board members. The Audit Committee meets periodically with the independent auditors and with the Company's internal auditors, both privately and with management present, to review accounting, auditing, internal controls and financial reporting matters.
Gary L. Tooker Carl F. Koenemann Vice Chairman and Executive Vice President Chief Executive Officer and Chief Financial Officer
We have audited the accompanying consolidated balance sheets of Motorola, Inc. and consolidated subsidiaries as of December 31, 1995 and 1994, and the related statements of consolidated earnings, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Motorola, Inc. and consolidated subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
January 9, 1996, except for Note 6, which is as of February 16, 1996.
Statements of Consolidated Earnings
YEARS ENDED DECEMBER 31
-------------------------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1995 1994 1993
-------------------------------------------------------------------------------------------------------------------
NET SALES $ 27,037 $ 22,245 $ 16,963
-------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Manufacturing and other costs of sales 17,545 13,760 10,351
Selling, general and administrative expenses 4,642 4,381 3,776
Depreciation expense 1,919 1,525 1,170
Interest expense, net 149 142 141
-------------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 24,255 19,808 15,438
-------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 2,782 2,437 1,525
-------------------------------------------------------------------------------------------------------------------
INCOME TAXES PROVIDED ON EARNINGS 1,001 877 503
-------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 1,781 $ 1,560 $ 1,022
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
FULLY DILUTED NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE (1, 2) $ 2.93 $ 2.65 $ 1.78
-------------------------------------------------------------------------------------------------------------------
FULLY DILUTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (1, 2) 609.8 592.7 583.7
-------------------------------------------------------------------------------------------------------------------
| (1) | Primary earnings per common and common equivalent share were the same as fully diluted for all years shown, except in 1994 when they were one cent higher than fully diluted. Average primary common and common equivalent shares outstanding for 1995, 1994 and 1993 were 609.7, 591.7 and 582.6, respectively (which includes the dilutive effects of the convertible zero coupon notes and the outstanding stock options). |
| (2) | Includes adjustments for the 1994 two-for-one stock split effected in the form of a 100 percent stock dividend. |
Statements of Consolidated Stockholders' Equity
COMMON STOCK
AND ADDITIONAL
PAID-IN CAPITAL (1) RETAINED EARNINGS
------------------------------- -------------------------------
YEARS ENDED DECEMBER 31
----------------------------------------------------------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1995 1994 1993 1995 1994 1993
-----------------------------------------------------------------------------------------------------------------------------
Balances at January 1 $ 3,179 $ 1,875 $ 1,510 $ 5,917 $ 4,534 $ 3,634
Net earnings -- -- -- 1,781 1,560 1,022
Conversion of zero coupon notes 23 251 216 -- -- --
Stock issuance (2) -- 973 -- -- -- --
Unrealized net gain (loss) on certain investments 328 (8) -- -- -- --
Stock options exercised and other 57 88 149 -- -- --
Dividends declared ($.40 per share in 1995, $.31 in 1994
and $.22 in 1993) -- -- -- (237) (177) (122)
----------------------------------------------------------------
Balances at December 31 $ 3,587 $ 3,179 $ 1,875 $ 7,461 $ 5,917 $ 4,534
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
| (1) | 1994 Stock Split: An amount equal to the par value of the additional shares issued has been transferred from additional paid-in capital to common stock due to the two-for-one stock split effected in the form of a 100 percent stock dividend. All references to shares outstanding, dividends and per share amounts during 1994 and 1993 have been adjusted on a retroactive basis. |
| (2) | During November 1994, the Company completed a public equity offering of 17.1 million shares of common stock. |
See accompanying notes to consolidated financial statements.
Consolidated Balance Sheets
DECEMBER 31
--------------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1995 1994
------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 725 $ 741
Short-term investments 350 318
Accounts receivable, less allowance for doubtful accounts (1995, $123; 1994, $118) 4,081 3,421
Inventories 3,528 2,670
Future income tax benefits 1,222 928
Other current assets 604 847
--------------------
Total current assets 10,510 8,925
--------------------
Property, plant and equipment, net 9,356 7,073
Other assets 2,935 1,538
--------------------
TOTAL ASSETS $ 22,801 $ 17,536
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and current portion of long-term debt $ 1,605 $ 916
Accounts payable 2,018 1,678
Accrued liabilities 4,170 3,323
--------------------
Total current liabilities 7,793 5,917
--------------------
Long-term debt 1,949 1,127
Deferred income taxes 968 509
Other liabilities 1,043 887
--------------------
STOCKHOLDERS' EQUITY
Common stock, $3 par value
Authorized shares: 1995 and 1994, 1,400
Issued and outstanding shares: 1995, 591.4; 1994, 588.0 1,774 1,764
Preferred stock, $100 par value issuable in series
Authorized shares: 0.5 (none issued) -- --
Additional paid-in capital 1,813 1,415
Retained earnings 7,461 5,917
--------------------
Total stockholders' equity 11,048 9,096
--------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,801 $ 17,536
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Statements of Consolidated Cash Flows
YEARS ENDED DECEMBER 31
-------------------------------
(IN MILLIONS) 1995 1994 1993
----------------------------------------------------------------------------------------------------------------------
OPERATING
Net earnings $ 1,781 $ 1,560 $ 1,022
Add (deduct) non-cash items
Depreciation 1,919 1,525 1,170
Deferred income taxes (55) (177) 50
Amortization of debt discount and issue costs 12 22 26
Gain on disposition of investments in affiliated companies (111) (9) (9)
Change in assets and liabilities, net of effects of acquisitions and dispositions
Accounts receivable, net (653) (945) (439)
Inventories (856) (806) (539)
Other current assets (100) (328) (44)
Accounts payable and accrued liabilities 1,172 1,134 927
Other assets 30 595 (95)
Other liabilities 148 (19) 245
-------------------------------
Net cash provided by operations 3,287 2,552 2,314
----------------------------------------------------------------------------------------------------------------------
INVESTING
Acquisitions and advances to affiliated companies (563) (894) (408)
Dispositions of investments in affiliated companies 252 23 67
Payments for property, plant and equipment (4,225) (3,320) (2,187)
Other changes to property, plant and equipment, net (11) 183 126
(Increase) decrease in short-term investments (32) 40 (105)
-------------------------------
Net cash used for investing activities (4,579) (3,968) (2,507)
----------------------------------------------------------------------------------------------------------------------
FINANCING
Net increase (decrease) in commercial paper and short-term borrowings less than 90
days 686 517 (38)
Proceeds from issuance of debt 851 32 521
Repayment of debt (74) (190) (74)
Issuance of common stock 49 1,061 113
Payment of dividends (236) (149) (120)
-------------------------------
Net cash provided by financing activities 1,276 1,271 402
----------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (16) $ (145) $ 209
----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $ 741 $ 886 $ 677
----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 725 $ 741 $ 886
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Motorola, Inc. and Consolidated Subsidiaries
Supplemental Cash Flow Information
YEARS ENDED DECEMBER 31
-------------------------------
(IN MILLIONS) 1995 1994 1993
----------------------------------------------------------------------------------------------------------------------
NON-CASH ACTIVITIES
Conversion of zero coupon notes $ 23 $ 251 $ 216
Unrealized net gain (loss) on certain investments $ 336 $ (8) --
Issuance of common stock for investment acquisition -- -- $ 36
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Cash Equivalents: The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Marketable Securities: Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." SFAS No. 115 requires that the carrying value of certain investments be adjusted to their fair
value. As of December 31, 1995, the Company recorded an increase to stockholders' equity, other assets and
deferred taxes of $328 million, $543 million and $215 million, respectively, primarily due to the fair value
recognition of the Nextel investment which was completed during July of 1995. As of December 31, 1994, the
effects of SFAS No. 115 were immaterial.
Revenue Recognition: The Company uses the percentage-of-completion method to recognize
revenues and costs associated with most long-term contracts. For contracts involving certain technologies,
revenues and profits or parts thereof, are deferred until technological feasibility is established and customer
acceptance is obtained. For other product sales, revenue is recognized at the time of shipment, and reserves
are established for price protection and cooperative marketing programs with distributors.
Inventories: Inventories are valued at the lower of average cost (which approximates
computation on a first-in, first-out basis) or market (i.e., net realizable value or replacement cost), less
progress payments on certain long-term contracts.
Property, Plant and Equipment: Property, plant and equipment are stated at cost less
accumulated depreciation. Depreciation is recorded principally using the declining-balance method, based
on the estimated useful lives of the assets (buildings and building equipment, 5-50 years; machinery and
equipment, 2-12 years).
Foreign Currency Translation: The Company's European and Japanese operations use the
respective local currencies, instead of the U.S. dollar, as the functional currency. For all other operations, the
Company uses the U.S. dollar as the functional currency. The effects of translating the financial position
and results of operations of local functional currency operations are included in stockholders' equity. The
effects of foreign currency transactions are included in the statement of earnings.
The Company uses financial instruments to hedge, and therefore attempt to reduce, its overall exposure to the effects of currency fluctuations on cash flows of foreign operations and investments in foreign countries. The Company's strategy is to offset the gains or losses of the financial instruments against losses or gains on the underlying operational cash flows or investments based on the operating business units' assessment of risk. Gains and losses on hedges of existing assets or liabilities are marked to market on a monthly basis. Other gains or losses on financial instruments that do not qualify as hedges are recognized immediately as income or expense. Gains and losses on financial instruments which hedge firm future commitments are deferred until such time as the underlying transactions are recognized or immediately when the transaction is no longer expected to occur. The Company does not speculate in these financial instruments for profit on the exchange rate price fluctuation alone. The Company does not trade in currencies for which there are no underlying exposures, nor enter into trades for any currency to intentionally increase the underlying exposure.
Many of the Company's non-functional currency receivables and payables denominated in major currencies which can be traded on open markets are hedged. Some of the Company's exposure is to currencies which are not traded on open markets, such as those in Latin America and China, and these are addressed, to the extent reasonably possible, through managing net asset positions, product pricing, and other means, such as component sourcing. Currently, the Company primarily hedges firm commitments. The Company expects that there could be hedges of anticipated transactions in the future.
Stock Options: The Company has evaluated the effects of the recent accounting
pronouncement, SFAS No. 123, "Accounting for Stock-Based Compensation," which will be effective for the
Company's fiscal year-end 1996. Based on an initial evaluation, the effects are not expected to have a
material effect on the Company's consolidated financial position, liquidity or results of operations.
Disclosure of Certain Significant Risks and Uncertainties: The preparation of financial
statements in conformity with generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. The Company's
periodic filings with the Securities and Exchange Commission include, where applicable, disclosures of
estimates, assumptions, uncertainties and concentrations in products, sources of supply and markets which
could affect the financial statements and future operations of the Company.
Reclassifications: Certain amounts in prior years' financial statements and related notes have
been reclassified to conform to the 1995 presentation.
Components of earnings before income taxes
1995 1994 1993
-------------------------------------------------------------
United States $ 907 $ 1,140 $ 360
Other nations 1,875 1,297 1,165
-------------------------------
Total $ 2,782 $ 2,437 $ 1,525
-------------------------------------------------------------
Components of income taxes provided on earnings
1995 1994 1993
--------------------------------------------------------------
Current:
United States $ 400 $ 728 $ 197
Other nations 386 254 234
State income taxes (U.S.) 50 72 22
-------------------------------
836 1,054 453
Deferred 165 (177) 50
-------------------------------
Income taxes $ 1,001 $ 877 $ 503
--------------------------------------------------------------
Income tax payments were $947 million in 1995, $962 million in 1994 and $286 million in 1993.
Except for certain earnings that Motorola, Inc. intends to reinvest indefinitely, provisions have been made for the cumulative estimated U.S. federal income tax liabilities applicable to undistributed earnings of affiliates and associated companies. Undistributed earnings for which no U.S. income tax has been provided aggregated $3.5 billion and $2.9 billion at December 31, 1995 and 1994, respectively. Should these earnings be distributed, foreign tax credits would reduce the additional U.S. income tax which would be payable. In cases where taxes are provided on such undistributed earnings, those taxes have been included in U.S. income taxes.
At December 31, 1995, certain non-U.S. subsidiaries had loss carryforwards for income tax reporting purposes of $18.7 million, with expiration dates starting in 1996.
Differences between income tax expense computed at the U.S. federal statutory tax rate of 35% for 1995, 1994 and 1993 and income taxes provided on earnings
1995 1994 1993
-------------------------------------------------------------
Income tax expense at statutory
rate $ 974 $ 853 $ 534
Taxes on non-U.S. earnings 47 13 (21)
State income taxes 30 46 14
Foreign Sales Corporation (45) (46) (29)
Tax credits (8) (6) (4)
Other 3 17 9
----------------------------
Income taxes $ 1,001 $ 877 $ 503
-------------------------------------------------------------
Significant deferred tax assets (liabilities)
DECEMBER 31 1995 1994
-------------------------------------------------------------
Depreciation $ (197) $ (135)
Deferred taxes on non-U.S. earnings (382) (165)
Inventory reserves 345 255
Employee benefits 286 248
Capitalized items 89 91
Other deferred income taxes 113 125
--------------------
Net deferred tax asset $ 254 $ 419
------------------------------------------------------------
Gross deferred tax assets were $1,753 million and $1,320 million at December 31, 1995 and 1994, respectively. Gross deferred tax liabilities were $1,499 million and $901 million at December 31, 1995 and 1994, respectively.
The deferred tax assets are considered realizable considering past income and estimates of future income. These include, but are not limited to, carrybacks, earnings trends and tax planning strategies.
The Internal Revenue Service (IRS) has examined the federal income tax returns for Motorola, Inc. through 1987 and has settled the respective returns through 1985. The IRS has completed its field audit of the years 1986 and 1987. In connection with these audits, the IRS has proposed adjustments to the Company's income and tax credits for those years which would result in additional tax. The Company disagrees with most of the proposed adjustments and is contesting them. In the opinion of the Company's management, the final disposition of these matters, and proposed adjustments from other tax authorities, will not have a material adverse effect on the consolidated financial position, liquidity or results of operations of the Company.
Long-term debt
DECEMBER 31 1995 1994
-------------------------------------------------------------
7.5% debentures due 2025 $ 397 $ --
6.5% debentures due 2025 (redeemable
at the holders' option in 2005) 397 --
7.6% notes due 2007 300 300
6.5% debentures due 2008 199 199
Zero coupon notes due 2009 34 55
Zero coupon notes due 2013 325 316
6.75% industrial revenue bonds due
2014 20 20
8.4% debentures due 2031 (redeemable
at the holders' option in 2001) 200 200
Other long-term debt 90 48
--------------------
1,962 1,138
Less current maturities 13 11
--------------------
Long-term debt $ 1,949 $ 1,127
-----------------------------------------------------------
Short-term debt
DECEMBER 31 1995 1994
-------------------------------------------------------------
Notes to banks $ 212 $ 147
Commercial paper 1,375 745
Other short-term debt 5 13
--------------------
1,592 905
Add current maturities 13 11
--------------------
Notes payable and current portion of
long-term debt $ 1,605 $ 916
-----------------------------------------------------------
Weighted average interest rates on short-term borrowings
------------------------------------------------------------- Commercial paper 5.9% 4.6% Other short-term debt 6.8% 7.5% -------------------------------------------------------------
As of December 31, 1995, the outstanding zero coupon notes due 2009, referred to as Liquid Yield OptionTM Notes (LYONsTM), had a face value at maturity of $76 million. The 2009 LYONs were priced at a 6% yield to maturity and are now convertible into 18.268 shares of Motorola common stock for each $1,000 note. During 1995, various holders of the 2009 LYONs exercised conversion rights for approximately 54,000 notes ($54 million face value; $23 million net carrying value).
At December 31, 1995, the LYONs due 2013 had a face value of approximately $480 million at maturity. The 2013 LYONs were priced to yield 2.25% to maturity and are convertible into 11.178 shares of Motorola common stock for each $1,000 note.
Both LYONs issues are subordinated to all existing and future senior indebtedness of the Company, rank on a parity with each other, and may be put back to the Company by the holders on specific dates prior to the stated maturities.
During December 1995, the Company's universal shelf registration totaling $1.0 billion of debt and equity securities was declared effective by the Securities and Exchange Commission. As of December 31, 1995, no securities had been issued under this universal shelf statement.
In 1994, the Company's universal shelf registration statement for $800 million of debt and equity securities was declared effective by the Securities and Exchange Commission. As of December 31, 1995, the Company had issued under this universal shelf registration $400 million in aggregate principal amount of 7.5% debentures due May 2025 and an additional $400 million in aggregate principal amount of 6.5% debentures due September 2025 (which may be put back to the Company in 2005 at 100% of the principal amount, plus accrued interest).
Aggregate requirements for long-term debt maturities, in millions, during the next five years are as follows: 1996, $13; 1997, $23; 1998, $21; 1999, $23; 2000, $5.
During 1995, the Company and its finance subsidiary increased its one and five year revolving domestic credit agreements with a group of banks from $1.5 billion to $2.0 billion. These revolving domestic credit agreements contain various conditions, covenants and representations. At December 31, 1995, the Company's total domestic and foreign credit facilities aggregated $3.5 billion, of which $299 million were used and the remaining $3.2 billion were not drawn, but were available to back up outstanding commercial paper which totaled $1,375 million at December 31, 1995.
Outstanding letters of credit aggregated approximately $285 million and $426 million at December 31, 1995 and 1994, respectively.
LYONs is a trademark of Merrill Lynch & Co., Inc.
Income statement information
1995 1994 1993
-------------------------------------------------------------
Research and development $ 2,197 $ 1,860 $ 1,521
-------------------------------
Maintenance and repairs 343 276 267
-------------------------------
Foreign currency losses 4 25 18
-------------------------------
Interest expense, net:
Interest expense 213 192 182
Interest income (64) (50) (41)
-------------------------------
Interest expense, net $ 149 $ 142 $ 141
-------------------------------------------------------------
The Company's cash payments for interest expense were $193 million in 1995, $209 million in 1994 and $126 million in 1993.
Balance sheet information
DECEMBER 31 1995 1994
--------------------------------------------------------
Inventories:
Finished goods $ 1,026 $ 699
W.I.P. and production materials 2,502 1,971
--------------------
Total $ 3,528 $ 2,670
--------------------
Property, plant and equipment:
Land $ 201 $ 169
Buildings 4,754 3,504
Machinery 12,511 10,057
--------------------
17,466 13,730
Less accumulated depreciation 8,110 6,657
--------------------
Total $ 9,356 $ 7,073
--------------------
Other assets:
Investments in non-consolidated
subsidiaries $ 1,438 $ 739
Fair value adjustment of
qualified SFAS No. 115
investments 543 (13)
Other 954 812
--------------------
Total $ 2,935 $ 1,538
--------------------
Accrued liabilities:
Compensation $ 682 $ 613
Deferred revenue 287 219
Accrued warranties 309 283
Taxes other than income 162 162
Income taxes payable 125 76
Contribution to employees'
profit sharing funds 194 176
Dividends payable 59 59
Other 2,352 1,735
--------------------
Total $ 4,170 $ 3,323
--------------------------------------------------------