FINANCIAL HIGHLIGHTS
(In millions, except as noted) Motorola, Inc. and Consolidated Subsidiaries ------------------------------------------------------------------------------------ Years ended December 31 1996 1995 ------------------------------------------------------------------------------------ Net sales $ 27,973 $ 27,037 Earnings before income taxes 1,775 2,782 % to sales 6.3% 10.3% Net earnings 1,154 1,781 % to sales 4.1% 6.6% Fully diluted net earnings per common and common equivalent share (in dollars) (1) 1.90 2.93 Research and development expenditures 2,394 2,197 Fixed asset expenditures 2,973 4,225 Working capital 3,324 2,717 Current ratio 1.42 1.35 Return on average invested capital (2) 8.4% 14.7% Return on average stockholders' equity 10.0% 17.7% % of net debt to net debt plus equity (3) 13.4% 19.9% Book value per common share (in dollars) 19.88 18.57 Year-end employment (in thousands) 139 142 ------------------------------------------------------------------------------------(1)Primary earnings per common and common equivalent share were the same as fully diluted for the full years ended December 31, 1996 and December 31, 1995.
(2)Average invested capital is defined as stockholders' equity plus long and short-term debt less short-term investments (including those short-term investments categorized as cash equivalents).
(3)Includes short-term investments categorized as cash equivalents.
MANAGEMENT'S RESPONSIBILITY FOR
FINANCIAL STATEMENTS
Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other financial information presented in this report. The accompanying consolidated financial statements were prepared in accordance with generally accepted accounting principles, applying certain estimates and judgments as required.
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 include 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.
Christopher B. Galvin
Chief Executive Officer
Carl F. Koenemann
Executive Vice President
and Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of Motorola, Inc.:
We have audited the accompanying consolidated balance sheets of Motorola, Inc. and consolidated subsidiaries as of December 31, 1996 and 1995, 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, 1996. 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 at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles.
LOGO
KPMG Peat Marwick LLP
Chicago, Illinois
January 9, 1997, except as to Note 9, which
is as of March 14, 1997
Motorola, Inc. and Consolidated Subsidiaries
Statements of Consolidated Earnings
Years ended December 31
(In millions, except per share amounts) 1996 1995 1994
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NET SALES $ 27,973 $ 27,037 $ 22,245
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COSTS AND EXPENSES
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Manufacturing and other costs of sales 18,990 17,545 13,760
Selling, general and administrative expenses 4,715 4,642 4,381
Depreciation expense 2,308 1,919 1,525
Interest expense, net 185 149 142
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TOTAL COSTS AND EXPENSES 26,198 24,255 19,808
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EARNINGS BEFORE INCOME TAXES 1,775 2,782 2,437
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INCOME TAXES PROVIDED ON EARNINGS 621 1,001 877
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NET EARNINGS $1,154 $1,781 $1,560
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FULLY DILUTED NET EARNINGS PER COMMON AND COMMON EQUIVALENT
SHARE (1, 2) $1.90 $2.93 $2.65
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FULLY DILUTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING (1, 2) 609.6 609.8 592.7
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(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 1996, 1995 and 1994 were 609.0, 609.7 and 591.7, 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.
Motorola, Inc. and Consolidated Subsidiaries
Statements of Consolidated Stockholders' Equity
Common Stock
and Additional
Paid-in Capital (1) Retained Earnings
------------------------ ------------------------
Years ended December 31
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(In millions, except per share amounts) 1996 1995 1994 1996 1995 1994
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Balances at January 1 $3,524 $3,138 $1,875 $7,461 $5,917 $4,534
Net earnings - - - 1,154 1,781 1,560
Conversion of zero coupon notes 7 23 251 - - -
Stock issuance (2) - - 973 - - -
Unrealized net gain (loss) on certain investments (86) 328 (8) - - -
Stock options exercised and other 7 35 47 - - -
Dividends declared ($.46 per share in 1996,
$.40 in 1995 and $.31 in 1994) - - - (272) (237) (177)
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Balances at December 31 $3,452 $3,524 $3,138 $8,343 $7,461 $5,917
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(1)1994 Stock Split: An amount equal to the par value of the additional shares issued was 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 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.
Motorola, Inc. and Consolidated Subsidiaries Consolidated Balance Sheets
December 31
----------------------
(In millions, except per share amounts) 1996 1995
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ASSETS
Current assets
Cash and cash equivalents $1,513 $725
Short-term investments 298 350
Accounts receivable, less allowance for doubtful
accounts (1996, $137; 1995, $123) 4035 4081
Inventories 3220 3528
Future income tax benefits 1580 1222
Other current assets 673 604
----------------------
Total current assets 11319 10510
----------------------
Property, plant and equipment, less accumulated
depreciation (1996, $9,830; 1995, $8,110) 9768 9356
Other assets 2989 2872
----------------------
TOTAL ASSETS $24,076 $22,738
==============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable and current portion of long-term debt $1,382 $1,605
Accounts payable 2050 2018
Accrued liabilities 4563 4170
----------------------
Total current liabilities 7995 7793
----------------------
Long-term debt 1931 1949
Deferred income taxes 1108 968
Other liabilities 1247 1043
----------------------
Stockholders' equity
Common stock, $3 par value
Authorized shares: 1996 and 1995, 1,400
Issued and outstanding shares: 1996, 593.4; 1995, 591.4 1780 1774
Preferred stock, $100 par value issuable in series
Authorized shares: 0.5 (none issued) - -
Additional paid-in capital 1672 1750
----------------------
Retained earnings 8343 7461
----------------------
Total stockholders' equity 11795 10985
----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $24,076 $22,738
==============================================================================================
See accompanying notes to consolidated financial statements.
Motorola, Inc. and Consolidated Subsidiaries
Statements of Consolidated Cash Flows
(In millions) Motorola, Inc. and Consolidated Subsidiaries
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Years ended December 31 1996 1995 1994
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Operating
Net earnings $1,154 $1,781 $1,560
Add (deduct) non-cash items
Depreciation 2,308 1,919 1,525
Deferred income taxes (160) (55) (177)
Amortization of debt discount and issue costs 8 12 22
Gain on disposition of investments in
affiliated companies (78) (111) (9)
Change in assets and liabilities, net of
effects of acquisitions and dispositions
Accounts receivable, net 101 (653) (945)
Inventories 308 (856) (806)
Other current assets (69) (100) (328)
Accounts payable and accrued liabilities 398 1,172 1,134
Other assets 14 8 554
Other liabilities 206 148 (19)
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Net cash provided by operations 4,190 3,265 2,511
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Investing
Acquisitions and advances to affiliated companies (346) (563) (894)
Dispositions of investments in affiliated companies 119 252 23
Payments for property, plant and equipment (2,973) (4,225) (3,320)
Other changes to property, plant and equipment, net 242 (11) 183
(Increase) decrease in short-term investments 52 (32) 40
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Net cash used for investing activities (2,906) (4,579) (3,968)
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Financing
Net increase (decrease) in commercial paper
and short-term borrowings less than 90 days (260) 686 517
Proceeds from issuance of debt 55 851 32
Repayment of debt (37) (74) (190)
Issuance of common stock 7 71 1,102
Payment of dividends (261) (236) (149)
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Net cash provided by (used for)
financing activities (496) 1,298 1,312
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Net increase (decrease) in cash and
cash equivalents $788 $(16) $(145)
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Cash and cash equivalents, beginning of year $725 $741 $886
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Cash and cash equivalents, end of year $1,513 $725 $741
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Supplemental Cash Flow Information
(In millions) Motorola, Inc. and Consolidated Subsidiaries ------------------------------------------------------------------------------------------ Years ended December 31 1996 1995 1994 ------------------------------------------------------------------------------------------ NON-CASH ACTIVITIES Conversion of zero coupon notes $7 $23 $251 Unrealized net gain (loss) on certain investments $(86) $336 $(8) ------------------------------------------------------------------------------------------See accompanying notes to consolidated financial statements.
1. Summary of Significant Accounting Policies
Consolidation and Investments: The consolidated financial statements include the accounts of the Company and all those majority-owned subsidiaries where the Company has control. The Company's non-controlled investments in entities in which it has the ability to exercise significant influence over operating and financial policies are accounted for by the equity method. Accordingly, the Company's share of the net earnings of these entities is included in consolidated net income. The Company's non-controlled investments in other entities are carried at cost. Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," requires the carrying value of certain cost-based investments to be adjusted to fair value, which resulted in the Company recording an increase to stockholders' equity, other assets and deferred taxes of $242 million, $401 million and $159 million as of December 31, 1996; and of $328 million, $543 million and $215 million as of December 31, 1995.
Cash Equivalents: The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
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 new technologies, revenues and profits or parts thereof are deferred until technological feasibility is established, customer acceptance is obtained and other contract specific factors have been completed. 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). As of December 31, 1996, contract field inventories (inventory held by the customer for which no sale has yet been recorded) were $222 million.
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 and certain non-consolidated affiliates 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 and of remeasuring the financial position and results of non-U.S. operations into the functional currency are included in the statement of earnings.
Use of Estimates: 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 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 1996 presentation.
2. Income Taxes
Components of earnings before income taxes
1996 1995 1994
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United States $433 $907 $1,140
Other nations 1,342 1,875 1,297
----------------------
Total $1,775 $2,782 $2,437
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Components of income taxes provided on earnings
1996 1995 1994
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Current:
United States $547 $400 $728
Other nations 276 386 254
State income taxes (U.S.) 16 50 72
----------------------
839 836 1,054
Deferred (218) 165 (177)
----------------------
Income taxes $621 $1,001 $877
--------------------------------------------------
Income tax payments were $506 million in 1996, $947 million in 1995 and $962 million in 1994. 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 $4.0 billion and $3.5 billion at December 31, 1996 and 1995, respectively. Should these earnings be distributed, foreign tax credits may 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, 1996, certain non-U.S. subsidiaries had loss carryforwards for income tax reporting purposes of $141.6 million, with expiration dates starting in 1997.
Differences between income tax expense computed at the U.S. federal statutory tax rate of 35% for 1996, 1995 and 1994 and income taxes provided on earnings
1996 1995 1994
------------------------------------------------------------
Income tax expense at statutory rate $621 $974 $853
Taxes on non-U.S. earnings 92 47 13
State income taxes 7 30 46
Foreign Sales Corporation (73) (45) (46)
Tax credits (10) (8) (6)
Other (16) 3 17
Income taxes $621 $1,001 $877
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Significant deferred tax assets (liabilities)
December 31 1996 1995 ------------------------------------------------------------ Inventory reserves $440 $345 Contract accounting methods 231 157 Employee benefits 291 286 Capitalized items 138 89 SFAS No. 115 fair value adjustment (159) (215) Depreciation (213) (197) Deferred taxes on non-U.S. earnings (545) (382) Other deferred income taxes 289 171 Net deferred tax asset $472 $254 ------------------------------------------------------------Gross deferred tax assets were $2,264 million and $1,753 million at December 31, 1996 and 1995, respectively. Gross deferred tax liabilities were $1,792 million and $1,499 million at December 31, 1996 and 1995, respectively.
The deferred tax assets are considered realizable given past income and estimates of future income. These considerations 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 the 1986 and 1987 tax years, the Company settled the return for adjustments agreed to at the field level. Certain adjustments were referred to the Appeals level of the IRS and are expected to result in a net refund. The IRS is currently reviewing the 1988 through 1991 period and has proposed certain adjustments. 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.
3. Debt and Credit Facilities
Long-term debt
December 31 1996 1995
------------------------------------------------------------
7.5% debentures due 2025 $397 $397
6.5% debentures due 2025 (redeemable
at the holders' option in 2005) 397 397
7.6% notes due 2007 300 300
6.5% debentures due 2008 199 199
Zero coupon notes due 2009 29 34
Zero coupon notes due 2013 330 325
8.4% debentures due 2031 (redeemable
at the holders' option in 2001) 200 200
Other long-term debt 126 110
--------------
1,978 1,962
Less current maturities 47 13
--------------
Long-term debt $1,931 $1,949
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Short-term debt
December 31 1996 1995
------------------------------------------------------------
Notes to banks $360 $212
Commercial paper 970 1375
Other short-term debt 5 5
1335 1592
Add current maturities of long-term debt 47 13
Notes payable and current portion of
long-term debt $1,382 $1,605
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Weighted average interest rates on short-term borrowings
------------------------------------------------------------ Commercial paper 5.4% 5.9% Other short-term debt 7.1% 6.8% ------------------------------------------------------------As of December 31, 1996, the outstanding zero coupon notes due 2009, referred to as Liquid Yield OptionTM Notes (LYONsTM), had a face value at maturity of $62 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 1996, various holders of the 2009 LYONs exercised conversion rights for approximately 14,000 notes ($14 million face value; $6.5 million net carrying value).
At December 31, 1996, 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.
The 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 filed and declared effective a universal shelf registration statement totaling $1.0 billion of debt and equity securities with the Securities and Exchange Commission. As of December 31, 1996, no securities have been issued under this universal shelf registration statement.
Aggregate requirements for long-term debt maturities, in millions, during the next five years are as follows: 1997, $47; 1998, $25; 1999, $21; 2000, $3; 2001, $2.
The Company and its finance subsidiary have one- and five- year revolving domestic credit agreements with a group of banks for $2.0 billion. These domestic credit agreements contain various conditions, covenants and representations. At December 31, 1996, the Company's total domestic and non-U.S. credit facilities aggregated $4.3 billion, of which $461 million were used and the remaining $3.8 billion were not drawn, but were available to back up outstanding commercial paper which totaled $970 million at December 31, 1996.
Outstanding letters of credit aggregated approximately $175 million and $285 million at December 31, 1996 and 1995, respectively.
LYONs is a trademark of Merrill Lynch & Co., Inc.
4. Other Financial Data
Income Statement and Balance Sheet Information
Income statement information
1996 1995 1994
---------------------------------------------------------
Research and development $2,394 $2,197 $1,860
--------------------------
Foreign currency (gains)/losses (8) 4 25
--------------------------
Interest expense, net:
Interest expense 249 213 192
Interest income (64) (64) (50)
--------------------------
Interest expense, net $185 $149 $142
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The Company's cash payments for interest expense were $237 million in 1996, $193 million in 1995 and $209 million in 1994. Balance sheet information
1996 1995
---------------------------------------------------------
Inventories:
Finished goods $830 $1,026
W.I.P. and production materials 2,390 2,502
-----------------
Total $3,220 $3,528
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Property, plant and equipment:
Land $261 $201
Buildings 5,362 4,754
Machinery 13,975 12,511
-----------------
19,598 17,466
Less accumulated depreciation (9,830) (8,110)
-----------------
Total $9,768 $9,356
-----------------
Other assets:
Equity based investments in
non-consolidated subsidiaries $928 $823
Cost based investments in
non-consolidated subsidiaries 689 676
Fair value adjustment of qualified
SFAS No. 115 investments 401 543
Other 971 830
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Total $2,989 $2,872
-----------------
Accrued liabilities:
Compensation $460 $682
Customer reserves 385 349
Deferred revenue 218 287
Accrued warranties 314 309
Taxes other than income 185 162
Income taxes payable 246 125
Contribution to employees' profit
sharing funds 82 194
Dividends payable 71 59
Other 2,602 2,003
-----------------
Total $4,563 $4,170
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Derivative Financial Instruments The Company uses financial instruments to hedge, and therefore attempt to reduce, its overall exposure to the effects of currency fluctuations on cash flows. The Company does not speculate in financial instruments for profit on the exchange rate price fluctuation, trade in currencies for which there are no underlying exposures, or enter into trades for any currency to intentionally increase the underlying exposure.
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.
Currently, the Company primarily hedges firm commitments. 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 expects that there could be hedges of anticipated transactions in the future.
Many of the Company's non-functional currency receivables and payables are denominated in major currencies which can be traded on open markets that 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.
As of December 31, 1996 and 1995, the Company had net outstanding foreign exchange contracts totaling $1.3 billion and $1.2 billion, respectively. Most of the hedge contracts, which are over-the-counter instruments, mature within three months with the longest maturity extending out two years. Management believes that these financial instruments should not subject the Company to undue risk due to foreign exchange movements because gains and losses on these contracts should offset losses and gains on the assets, liabilities and transactions being hedged. At December 31, 1996, deferred gains totaled $1.5 million and deferred losses totaled $2.1 million. At December 31, 1995, deferred gains totaled $1.5 million and deferred losses totaled $0.5 million. The following schedule shows the five largest net foreign exchange hedge positions as of December 31, 1996:
Foreign Exchange Net Hedge Positions at December 31
In millions of U.S. dollars
Buy (Sell) 1996 1995 --------------------------------------------------------- British Pound Sterling $(363) $(226) Japanese Yen (258) (373) Italian Lira (115) (91) Singapore Dollar 84 83 French Franc (82) (44) ---------------------------------------------------------The Company is exposed to credit-related losses if counterparties to financial instruments fail to perform their obligations. However, it does not expect any counterparties, which presently have high credit ratings, to fail to meet their obligations.
At December 31, 1996, the Company had no outstanding interest rate swaps or options.