In accordance with Rule 14a-3(c) under the Securities Exchange Act of 1934 (the "Exchange Act"), as adapted to the "Summary Annual Report" procedure, the information contained in the following commentary and consolidated financial statements and notes are provided solely for the information of stockholders and of the Securities and Exchange Commission. Such information shall not be deemed to be "soliciting material" or to be "filed" with the Commission or subject to Regulation 14A under the Exchange Act (except as provided in Rule 14a-3) or to the liabilities of Section 18 of the Exchange Act, unless, and only to the extent that, it is expressly incorporated by reference into the Form 10-K of Motorola, Inc. for its fiscal year ending December 31, 1995.
Segment operating profits were $3.2 billion in 1995 compared with $2.9 billion in 1994. During 1995, the Company's results were principally influenced by three trends: increasing worldwide price competition in the Company's wireless communications businesses; a moderating growth rate in the cellular subscriber base in the United States and to a lesser extent, in Europe; and costs and inefficiencies resulting from the Company's addition of major elements of new manufacturing capacity in its semiconductor business. The Company expects significant price competition in its wireless communication businesses to continue in 1996, resulting in continued pressure on average selling prices, and currently plans to continue with its strategy to remain price-competitive in the cellular telephone and paging industries worldwide, to influence the continuing growth of these markets, and to retain its established market share for the long term. The combined effect of these trends is reflected in the Company's lower manufacturing margins during 1995. These conditions may continue to result in lower sales growth and difficult earnings comparisons for the first few quarters of 1996.
Additionally, the Company's major investments in technology and manufacturing capacity have had a negative impact on net earnings in 1995. While this trend is expected to continue, the Company believes that these investments are setting the stage for its long-term growth.
During 1996, the Company will continue to experience a large number of transitions to major new technologies in the telecommunications equipment industry. At present, these technology transitions are expected to be important to the Company's long-term growth potential. These technologies include two-way and voice paging, code division multiple access (CDMA) for cellular and personal communication services (PCS), wireless local loop, telephony and high speed data for cable systems, and integrated dispatch radio. The Company does not currently expect to recognize significant amounts of revenue from any of these products until late 1996, at the earliest. It is expected that, as these new products enter the Company's revenue base, profits will be relatively lower until markets mature and manufacturing economies of scale develop to reduce unit costs.
Net earnings in 1995 were $1.78 billion, or $2.93 per fully diluted common and common equivalent share, compared with $1.56 billion in 1994, or $2.65 per fully diluted common and common equivalent share. Net margin on sales was 6.6%, compared with 7.0% during 1994.
Sales in the fourth quarter of 1995 were $7.3 billion, up 13% from $6.5 billion in the fourth quarter of 1994. Earnings in the fourth quarter were $432 million, or 72 cents per fully diluted common and common equivalent share compared with $515 million, or 86 cents per fully diluted common and common equivalent share during the fourth quarter of 1994.
Motorola's selling, general and administrative expenses during 1995 were $4.6 billion or 17% of sales, compared with $4.4 billion, or 20% of sales in the same period a year ago. By comparison to 1994, expenses during 1995 included a significantly lower level of costs resulting from the Company's ongoing evaluation of its operations, organizational structure and asset valuations. During 1995, management continued its focus on holding the growth of the budgeted portion of selling, general, and adminstrative expenses excluding the impact of unusual items, for the Company overall, to a level less than the growth of sales, in anticipation of continuing pressure on gross margins.
Property, plant and equipment, less accumulated depreciation, increased by $2.3 billion during 1995, primarily due to the expansion of the Company's semiconductor business. Depreciation expense increased 26% for 1995 compared with 1994 due to increased fixed asset expenditures, and is expected to increase significantly in 1996 over 1995 levels. Fixed asset expenditures for 1995 were $4.2 billion, compared with $3.3 billion in 1994. This increase was primarily from the expansion of manufacturing capacity, primarily in the Semiconductor Products segment.
The effective tax rate for 1995 of 36% was unchanged from the 1994 rate and higher than the 1993 rate of 33%. The Company currently expects an effective tax rate of 35% during 1996.
As of January 1, 1996, the Company adopted Statements on Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and No. 123, "Accounting for Stock-Based Compensation." Statement No. 121 establishes new accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used, and for long-lived assets and certain identifiable intangibles to be disposed of. Statement No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. The standard covers all arrangements by which employees are eligible to receive shares of stock or other equity instruments of the employer. The impact of the adoption of these standards on the Company's financial position and results of operations is not expected to be material.
In recent years, a large and increasing portion of the Company's net sales, operating profits and growth have come from its international operations. Because of the economic dynamics of international markets, particularly in emerging markets led by China, overall operating profits from all international operations, when measured by the locale of the end customer, were significantly higher than those when measured by the locale of the revenue-producing operations. As a result, the Company's business activities and its financial results could be significantly affected by the policies of foreign governments and prevailing social and economic conditions, such as unstable governments, inflation rates, monetary fluctuations, balance of payments, foreign exchange rates or trade restrictions and prohibitions.
Segment operating profits were $2.9 billion in 1994 compared with $1.9 billion in 1993. The Company's increased profitability during 1994 was primarily affected by significant volume increases combined with its efforts to contain costs.
Motorola's selling, general and administrative expenses during 1994 were $4.4 billion or 20% of sales, compared with $3.8 billion or 22% of sales in 1993. By comparison with 1993, expenses during 1994 included a significantly lower level of costs resulting from the Company's ongoing evaluation of its operations, organizational structure and asset valuations.
Net earnings in 1994 were $1.56 billion, or $2.65 per fully diluted common and common equivalent share, compared with $1.02 billion in 1993, or $1.78 per fully diluted common and common equivalent share. Net margin on sales was 7.0%, compared with 6.0% during 1993.
Segment sales advanced 24% to $10.7 billion and orders rose 15%. Sales increased over 1994 due to increased unit volume, despite declining sales prices. Overall, sales were affected by a moderating growth rate in the cellular subscriber base in the United States and, to some extent, in Europe as well. The segment expects that the United States and European markets could continue to experience substantially lower growth rates than other regions of the world. Segment operating profits were higher.
The segment's cellular subscriber sales and orders were slightly higher. Sales were significantly higher in Japan and Asia-Pacific including Greater China. Sales were higher in Europe, but significantly lower in Pan America. Pan America is composed of both the North and South American continents. Orders grew in Japan and Asia-Pacific, were flat in Europe, and were significantly lower in Pan America, where excess inventory accumulated in the United States distribution channels during late 1994. Inventories of cellular telephones in distribution channels appeared to remain in a normal range in the fourth quarter of 1995.
The moderating growth of the cellular subscriber base is adversely affecting the results of other Motorola businesses, principally the Semiconductor Products segment and the Automotive, Energy and Controls Group, which supply products to the General Systems Products segment.
The segment's Cellular Subscriber Group introduced the StarTACTM wearable cellular telephone, the smallest and lightest product of its kind, shortly after the end of 1995. Availability of authentication-ready cellular phones was announced. Authentication is the process by which information is exchanged between a cellular phone and the cellular network, confirming the identity of the phone and reducing the opportunity for fraud. Under an agreement with American Personal Communications (APC), a Sprint Telecommunications affiliate, the group will supply PCS1900 handsets for use in APC's network in the Washington-Baltimore area. MicroTAC® personal cellular telephones were produced at the group's interim manufacturing facility in Harvard, Illinois. Construction on the segment's Harvard, Illinois manufacturing facility is underway. Motorola invested in CellStar Corporation to facilitate expansion of CellStar's distribution business and expand growth of Motorola's wireless businesses.
The segment's cellular infrastructure sales and orders were higher, and increased at greater rates than the segment as a whole. Demand in international markets during 1995 was strong. Order growth was strongest in Europe, Japan, and Asia-Pacific, including Greater China, while order growth was flat in Pan America. The segment's infrastructure sales and profit performance continues to be increasingly focused on large system orders, including those for new technologies, which increases the potential for volatility of revenues, profits and orders recognized during any particular period.
The Cellular Infrastructure Group (CIG) solidified its position as the leading equipment provider of a new digital radio access technology, Code Division Multiple Access, or CDMA, by winning major contracts from PCS PrimeCo and GTE Mobilnet to provide cell site and switching equipment for their new Personal Communication Services (PCS) networks. In Hong Kong, the first cellular operator in the world to begin commercial cellular phone service using CDMA launched its network with Motorola infrastructure equipment. The group won contracts to provide digital Global System for Mobile Communications (GSM) cellular systems in India's largest cities-Bombay, Calcutta and Delhi. CIG also was awarded significant GSM contracts in Kuwait, Lithuania, the United Kingdom, Malaysia, Spain and the former Soviet state, Georgia. In Japan, three cellular operators awarded contracts to CIG worth about $70 million for new Personal Digital Cellular (PDC) systems. CIG also was awarded contracts valued at more than $80 million to expand one-year-old PDC systems in Tokyo and Tokai. CIG won contracts worth $150 million to expand the analog cellular systems in two eastern provinces in China and signed two supply contracts, worth more than $268 million, which enable China's Hangzhou Communications Equipment Factory to distribute analog and digital cellular infrastructure equipment. CIG also won a contract worth nearly $160 million to expand and upgrade analog cellular phone service in Thailand and a $270 million contract to replace a competitor's existing cellular equipment in the Philippines. CIG was awarded a $100 million contract to deploy its WiLL®, Wireless Local Loop system throughout Hungary. Contracts for WiLL systems were also awarded in the Central African Republic, Nigeria, Zambia, Sri Lanka and Colombia.
The group announced the world's first true micro cell, plus twenty other compact GSM cell sites for personal communications services (PCS) and digital communication system (DCS1800) networks worldwide. Also announced was the new SC4800TM, the industry's first cell site equipment to support both Narrowband Advanced Mobile Phone Service (NAMPS) and CDMA, two of the leading technologies for PCS in the United States.
The segment plans to continue to invest in the new digital radio access and personal communications technologies.
The Motorola Computer Group expanded its line of PowerPCTM single board computers and PowerStackTM family of reduced instruction set (RISC) computers and expanded its offering of the AIXTM and Microsoft® WindowsNTTM operating environments with the addition of the Sunsoft SolarisTM operating system available on PowerStack systems and embedded single board computers. The group plans to manufacture the new PowerPC Hardware Reference Platform motherboards and systems during the second half of 1996. The Power PCTM platform will support a number of advanced 32-bit operating systems, in addition to those already licensed.
In international markets, the group invested in, and continued its PowerPC development activities with, Groupe Bull in France, and formed a joint venture with Panda Consumer Electronics Group Company in Nanjing, China. The new company, Nanjing Power Computer, Ltd., will initially manufacture PowerPC microprocessor-based multimedia personal computers for Chinese and other Asian markets.
World-wide price competition is continuing across all of the segment's businesses. Other competitive factors in the market for its products are service, delivery, technological capability, product quality and performance.
The segment experienced a decline in its manufacturing margins, primarily as a result of continuing price pressures. Margins were also affected by a product mix shift towards digital telephone sales that realize lower margins, and reduced utilization of manufacturing capacity caused by relatively lower growth of demand for cellular phones.
Device types include discrete products, as well as integrated circuits, with a 1995 sales mix of 18% discretes, 23% microcontrollers, 11% microprocessors, 33% logic and analog and 15% memories. Orders increased in all product categories in 1995 versus 1994, but were up significantly for memories and microprocessors.
The end market sales mix in 1995 was 11% to the consumer electronics market, 12% to the automotive market, 18% to the personal computer/workstation market, 9% to the computer market, 33% to the communications market, and 17% to the industrial market. Orders increased from all end markets, but were up significantly in the automotive, computer and industrial markets.
The geographic sales mix in 1995 was 46% to the Pan-American region, 25% to the European Region, 19% to the Asia-Pacific region and 10% to Japan. Orders increased in all regions but were up signficantly in the European and Asia-Pacific regions.
Compared with 1994, segment operating profits were higher, even though manufacturing and operating margins were lower. The segment continued, in general during 1995, to offset increases in the costs of labor, material and manufacturing expenses by improved yields and productivity and higher factory utilization rates. Manufacturing and operating margins declined primarily due to start-up costs, increased depreciation and inefficiencies related to the addition of new manufacturing capacity. The segment's results could continue to be adversely affected if these new plants or expansions are delayed, if the segment's plants are not operated at planned utilization levels, or by the loss of, or a reduction in purchases by a major customer.
Segment results reflect its global focus on creating and delivering leadership technologies and market-driven products that are intended to enable the mutual success of the segment and its customers.
In computing, the PowerPC architecture achieved a significant milestone with availability in June, 1995 of the Microsoft® Windows NTTM operating system and popular Microsoft software including Office, Word and Excel for PowerPC systems. The segment also announced specifications for the PowerPC Platform, an architecture to facilitate development of computers that run on multiple operating systems. The PowerPC 603TM architecture was expanded with the introduction of the PowerPC 603eTM, targeted for high performance, low-power needs of notebook, laptop and portable personal computers.
The segment also announced two higher-speed versions of the Power PC 604TM microprocessor for desktop systems. The PowerPC 602TM microprocessor was introduced for consumer electronic products, and the MPC821microcontroller expanded PowerPC embedded control technology to enable systems manufacturers to build a wide range of PowerPC-based portable electronic devices. The MPC860 family was introduced to address the telecommunications networking and wireless infrastructure markets. The segment also played a key role as a leading supplier of Fast Static Random Access Memories (FSRAMs), of embedded microprocessors used in printers, and in the disc drive semiconductor market. For printers, the segment's first shipment of embedded controllers based on the new ColdFireTM architecture went to Hewlett-Packard for HP LaserJETTM printers.
The segment also addressed a broad range of customer needs for microprocessors (MPUs) and microcontrollers (MCUs) used in embedded applications that span virtually every key market segment. According to Dataquest, Motorola has the No. 1 position in the global MCU market. The segment sold its one billionth 8-bit MCU based on the 68HC05 family, and continued to expand that line, with introduction of devices for embedded applications and infrared remote controls for computers and consumer products. The DragonballTM MPU, used in digital consumer products, received the "1995 Component Design Award" by "EDN Asia Magazine." In Smartcards, the segment developed a manufacturing process that enhances Smartcard security, and will participate with Visa and Schlumberger in a major Smartcard trial in conjunction with the 1996 Summer Olympics.
Multimedia uses for a wide range of semiconductors are growing. The segment continued to expand its leadership with manufacturers of digital set-top boxes. Digital signal processors (DSPs) are among numerous devices required for the wireless and communication markets, in addition to multimedia markets.
The segment continued to build on its leadership in wireless and wireline communications. Integrated solutions for the wireless data market included the debut of radio frequency circuit chip sets of gallium arsenide integrated circuits for Digital European Cordless Telephone (DECT) and for Japan Personal Handy System (JPHS) phones. Single-chip communications processors based on the 68000 family addressed low-power PC card applications. The segment enhanced its 68302 family of integrated communication controllers for low-cost portable and internetworking applications. Using BiCMOS (bipolar complementary metal-oxide semiconductor) technology, the segment integrated nearly all major cordless telephone functions on a single semiconductor for Universal Cordless Telephone handsets and bases. A highly integrated communications processor debuted which addresses opportunities in the V.34 modem market.
As the leading semiconductor supplier to global automotive manufacturers, the segment has capitalized on the increasing semiconductor content in automobiles. Airbags, antilock brakes, navigation, entertainment, and environmental/pollution control systems continue to expand the use and application of semiconductors. The segment announced plans to integrate a Controller Area Network (CAN) module onto a 32-bit MCU to reduce system cost, power consumption and increase reliability.
SMARTMOSTM (smart metal-oxide semiconductor) continues to be an integral part of the segment's combinational technologies thrust to meet systems requirements, whether they be for powertrain or safety/security functions. For use in air bags, the segment announced production quantity availability of SENSEONTM surface-micromachined acceleration sensors. Initiatives to expand sensor technology beyond automotive uses continued. The type of accelerometers first developed for crash detection can be applied to diverse applications such as predicting mechanical failure of bearings, virtual reality gear and disc drive protection. The segment is partnering with Keithley Instruments, Inc. to develop environmental monitoring systems, and announced a development pact with American Sensors Inc. for carbon monoxide sensors.
For energy-saving and environmental applications, the segment introduced hybrid power modules such as an integrated intelligent power module and a new technology platform for high voltage insulated gate bipolar transistors (IGBTs). The segment also debuted new variable speed motor controls, RF power transistors and the GreenlineTM portfolio of small-signal devices.
To help drive customers' success, the segment introduced the "Guarantee of a Lifetime." The program increases the standard warranty period of the segment's entire semiconductor product portfolio to match OEM and distributor customers' end product warranty, or to three years, whichever is greater.
The segment experiences intense competition from numerous competitors. The competitive environment is changing as a result of increased alliances between competitors. Price, service, technology and product quality are important factors, in addition to the ability to develop new products to meet customers' requirements and delivery schedules.
The investment in additional manufacturing facilities has somewhat eased the capacity constraints the segment has experienced. However, continuing high demand could result in instances where capacity limitations may restrict the segment's ability to produce adequate supplies of certain kinds of semiconductors used in other Motorola equipment businesses.
The segment continues to make global investments in new capacity and advanced technologies to meet the world's growing demand for semiconductors. The segment believes that these investments are setting the stage for its long-term growth. Ground was broken for the submicron 8-inch wafer fab in Tianjin, China, where products based on SMARTMOSTM and BiCMOS technology will be produced. A major expansion in East Kilbride, Scotland, brought additional MCU capacity on line. The segment purchased land near Richmond, Virginia for future production of devices based upon 0.25 micron technology. A new facility in Austin, Texas, will begin volume production of 0.35 micron PowerPCTM devices in 1996. In Japan, land was purchased in Aizu for expanding an existing fab. The joint venture with Toshiba, Tohoku Semiconductor Corporation, completed a new 16-megabit DRAM manufacturing facility in Sendai, Japan. New research and development centers were opened in Scotland, France, the Czech Republic, Russia, Japan and the United States.
Segment sales rose 23 percent to $3.7 billion and orders increased 36 percent. Operating profits were higher as a result of the strong growth and performance of the Paging Products Group, as well as from net gains realized from the sale of investments in the International Networks Division.
The segment designs, manufactures, and distributes paging subscriber, infrastructure, and related products. The segment also provides network services for paging and wireless data subscribers through wholly-owned and operated businesses, as well as domestic and international joint ventures. In addition, the segment designs, manufactures and distributes wireless data hardware and software products, infrastructure equipment and systems. It also manufactures and sells modems, analog and digital transmission devices, and similar products.
The segment's Multimedia Group, formed in early 1995, is entering a new marketplace made possible by the development of technology and products that enable hybrid fiber coax networks to expand their capacity to carry telephony and high speed data traffic for residential and commercial marketplaces. Customers of the Multimedia Group are expected to be local exchange carriers (telephone companies) and cable television operators worldwide. The group's products are under development. The commercial deployment of some products is expected in late 1996.
Growth in the Paging Products Group continued worldwide. Strong performance in the United States was fueled by the retail channel, while developing markets in South Asia and China led international growth. In Korea, character display service was introduced, and wide-area paging service increased. Paging services grew rapidly in India, while markets in Thailand, the Philippines and Indonesia posted steady growth. Continued success from "Calling Party Pays" service has expanded paging markets in Europe. Paging services targeted to consumers were launched in several European countries.
The pager penetration rate in Singapore reached 31% of the population and continues to grow. This is the highest rate in the world, followed by Hong Kong.
The group expanded efforts to develop the FLEXTM family which includes FLEX, ReFLEXTM, and InFLEXionTM technologies as a transport protocol standard. The FLEX protocol which offers high speed one-way messaging has now been adopted by seven of the world's ten largest paging markets and is operational in over ten countries including China and the United States. In addition, eleven of the thirteen narrowband Personal Communications Services (PCS) licensees in the United States have either selected ReFLEX or InFLEXion or stated intentions for field trials. ReFLEX provides both data messaging and two-way wireless messaging, while the InFLEXion enables one-way voice capability as well as high speed data. The first ReFLEXTM two-way paging system became operational during the year in the United States.
In an effort to make the FLEX technology widely available to the wireless marketplace, PPG also announced the FLEX chip set. It is planned that the chip set will be manufactured by several leading semiconductor companies.
The Paging Products Group continued to introduce many new products throughout the year. New FLEX products offering many new features were introduced for markets around the world. In addition, the RSVPTM numeric pager, which is built into a cellular phone battery was introduced. The device enables users to screen calls, which extends the life of the phone battery, and the pager remains accessible even when the cellular phone is turned off.
A line of fashion pagers in a mix of colors used in the Benetton clothes collection was introduced.
The Wireless Data Group (WDG) introduced AirMobileTM Wireless Software for Lotus® cc:MailTM and AirMobileTMWireless Software for Lotus Notes®. The group also introduced the Personal MessengerTM 100D Wireless Modem Card in North America. It can be inserted into portable computers or personal digital assistants.
WDG signed a contract with Modacom AG, Switzerland's first wireless data network operator, to provide a country-wide DataTACTM system for two-way mobile data communications. WDG also provided the infrastructure for South Korea's first commercial wireless data service, operated by Dacom Corporation of Seoul. Sprint Cellular Network selected Motorola's CelTACTM cellular digital packet data (CDPD) wireless data communications network.
At the segment's Information Systems Group (ISG), strong new order growth was led by the Asia-Pacific region and Europe. Expansion into retail channels with modem products continued to be strong, with key retailers in Europe and the United States stocking ISG's products.
ISG announced an agreement with Shiva Corporation to jointly develop remote access devices for corporate customers. ISG also announced Voice RelayTM technology, which allows customers to mix voice with data traffic when using frame relay networks. Voice Relay is offered on ISG's MPRouterTM (multimedia periphery router) product family. Other new products included the BitSURFR ProTM, an enhanced version of the BitSURFRTM integrated services digital network terminal adapter; PC cards for frame relay access devices; and 28.8 kilobit-per-second analog modems that connect to cellular phones and pagers.
The Multimedia Group's CableComm technology which enables voice, video and high speed data communications over cable networks was demonstrated in a 1995 cable telephony trial conducted with TCI Telephony Services Inc. and Teleport Communications Group in Arlington Heights, Illinois. As a result of the demonstration, TCI agreed to purchase 220,000 cable telephony units during the first year of a multi-year agreement.
The group also entered into agreements in principle to provide 350,000 CyberSURFRTM cable modems and related infrastructure products to three leading cable operators, TCI, Time Warner Cable and Comcast Corporation. This will enable cable subscribers to access on-line services at speeds many times faster than conventional modems. Commercial deployment of these products is expected in 1996. The group also announced an agreement to deliver CableComm voice and data products to Shaw Communications of Canada.
The Lexicus Division announced the Lexicus QuickPrintTM handwriting recognition package, which turns handwritten notes into typed messages. It can be used on handheld devices such as the Envoy® wireless communicator.
The segment's 1995 revenue growth primarily resulted from volume increases and sales of new products. The segment experiences widespread, intense competition from numerous competitors ranging from some of the world's largest diversified companies, to foreign state-owned telecommunications companies, to many small, specialized firms. Competition is based primarily on price, quality, time-to-market, technology, company image, service, warranty, product features, and availability. Price competition affected revenues during 1995, but was more than offset by volume increases driven by strong demand for products of the Paging Products Group. At the end of 1995, order backlog for paging products was much higher than recent averages as a result of semiconductor shortages and selective factory capacity constraints brought about by stronger than expected demand for new products.
The segment plans to continue to invest heavily in new multimedia and wireless communication technologies.
Markets in the People's Republic of China were the source of a significant portion of the Paging Products Group's revenue during 1995 and 1994. As this market has matured, a seasonal pattern has developed in which orders have declined sequentially in the fourth and first quarters of the year. The segment also experienced a seasonal pattern in the United States, when demand for subscriber products increased during the fourth-quarter holiday season.
The segment is a principal supplier of mobile and portable FM two-way radio products and systems. Its products provide voice and data communication between vehicles, persons and base stations. Its customers include many different types of business, institutional, and government organizations. The segment also manufactures and sells signaling and control systems, and communication control centers used in two-way radio operations.
Competition for the segment's products is worldwide and includes price, product performance, product quality, service and systems quality and availability. No single factor is dominant, although price competition has increased throughout 1995. In recent years, the business of the Land Mobile Products segment has become increasingly focused on large system orders and their associated subscriber equipment, including those for new technologies, which could increase the volatility of orders, revenues and profits recognized during any particular period.
Segment sales rose 6 percent to $3.6 billion, orders increased 2 percent, and operating profits were higher. The segment posted strong order growth in its more traditional businesses, as demand increased for large, advanced two-way radio systems for large industrial, public safety and government market customers and for the portable and mobile two-way radios sold through dealers and distributors. The newer iDEN business, which continued to have order input delays because of customer merger completions, technology development, and other issues, experienced a significant decline in orders from a year ago. This decline adversely affected the segment's manufacturing margin, offsetting improved results in the segment's non-iDEN business.
Orders for iDENTM equipment were received from Movicom in Argentina, which will provide integrated two-way radio and telephone interconnect services for subscribers, and from Singapore Technologies Trunked Radio PTE, Ltd. for an iDENTM dispatch system in Singapore. The iDENTM communication systems in Japan and Israel were expanded. During the year, new orders for iDENTM equipment were received from Clearnet Communications, Inc. for its systems in Canada and from Nextel Communications, Inc. for its United States network. Nextel is the largest customer for the segment's iDENTM technology. The segment continued significant investments to improve system performance with software enhancements designed to improve the level of market acceptance for the technology used in the iDENTM radio equipment. The segment also announced early in the year that it will license technically essential intellectual property rights of iDENTM products.
During the third quarter of 1995, Motorola completed a transaction with Nextel Communications, Inc. whereby Motorola contributed most of its 800 MHz Specialized Mobile Radio (SMR) licenses and assets in the continental United States to Nextel in exchange for 59.5 million shares of Nextel. On the same day, Digital Radio L. L. C., a company controlled by Craig O. McCaw invested $300 million in Nextel and received Nextel stock and options exercisable over a six-year period. Simultaneous with that investment, Motorola sold 4 million Nextel shares to Digital Radio L. L. C. and granted it options to purchase up to 9 million additional Nextel shares over a six-year period. However, the Company does not expect these agreements to favorably affect sales of iDEN equipment for a number of months. Nextel will require financing in addition to Motorola's vendor financing to complete its currently planned networks and acquisitions. Nextel's failure to obtain additional financing or to meet the conditions for any financing could adversely affect future sales and orders of the segment's iDENTM equipment. There can be no assurance that such additional financing will be obtained or such conditions met. The segment has made and will continue to make significant investments in iDENTM products and technology.
In the segment's other businesses, order growth in 1995 was led by Asia and the United States. The segment received first-phase orders for several large, multi-year contracts awarded during the year for advanced communications systems, including a $92 million award from the Indonesia Ministry of Forestry for a two-way radio system that will be installed throughout seven of Indonesia's provinces.
The segment was awarded a contract to supply an ASTROTM SmartZoneTM digital two-way communications system to the Korea High Speed Rail Construction Authority (KHRC). The system will provide voice and data radio communications along the entire 460 kilometers of the high speed rail route from Seoul to Pusan. The contract, which is expected to take five years to complete, is worth in excess of $80 million.
In Brazil, the segment received the initial order for an ASTROTM digital communications system from a mining company for communications along one of its railroad lines. Other key orders were received in South Africa for 5,000 portable two-way radios to be used by the national police; in Australia for a SmartZoneTM trunking system to be used by the Department of Bushfire Services; in Thailand from a major distributor of portable two-way radios for the Royal Thai Police; in Lithuania from the Lithuanian Ministry of Information for advanced communications systems; from Romania Oil & Gas for 2,000 two-way radios; and from the Turkish National Police for compact VISAR® portable radios.
In the United States, a major award for a SmartZoneTM communications system was received from the County of San Diego, California, which joined together with participating cities and fire districts within the county along with the State of California Department of Transportation to form this system. The first phase will provide an ASTROTM dispatch system, followed by a data communications system throughout the county. Other major awards for ASTROTM digital communications systems were received from Sarasota County, Florida, and from the City of Baltimore, to eventually serve all city public safety and public service agencies. A contract from the Los Angeles Police Department includes a two-way radio data communications system for accessing department records and the California Justice Information System for warrant checks and license plate verification.
A major order was received from Jersey Central Power and Light Company for a sixteen site Smart ZoneTM simulcast trunked two-way radio system, featuring twelve hundred mobiles, three hundred portables and the new Centracom Gold SeriesTM Console.
New products ranged from new portable and mobile two-way radios to new software and control centers. The FORTÉTM Wireless CommPad is a hand-held computer designed to operate on Motorola's two-way radio communications networks for customers such as public safety, utilities and other industries with a highly mobile, information dependent workforce.
The segment announced RadioWareTM Software Solutions, a new business designed to greatly enhance the capability of wireless communications systems through software. As part of its RadioWare offering, the segment introduced MagicPipeTM software to make it easier to integrate applications on a variety of computer operating systems, devices and wireless networks, and the WaveSoft-FireTM application that can access both textual and graphical documents on a computer installed in an emergency vehicle.
The Radius® SMTM series of two-way radios, which will be distributed through Motorola's dealer network in North and South America and Asia, is targeted at a variety of industrial and commercial applications, such as delivery services. The MCS 2000TM mobile radio is an advanced systems radio which meets a variety of global standards to serve the diverse needs of customers worldwide.
The JT 1000TM portable two-way radio is a front-panel programmable handheld radio that users can program or re-program on-site, including the capability of a public safety agency to change the radio to work with other agencies' radios during an emergency. New portable radios specifically designed for amateur, light industrial and commercial markets in Asia also were introduced. The CENTRACOM GoldTM series of radio dispatch control centers allows dispatchers in a variety of markets, from public safety and utilities to transportation and health care, to communicate more effectively with field personnel.
The segment completed development and initial testing of the radio communications network that will support the 1996 Centennial Olympic Games in Atlanta, Georgia. The ASTROTM wide-area network is the largest two-way radio system ever created for a sporting event, and will link each venue at the Olympic Games next summer and support thousands of security, transportation and event management personnel. Before shipping the network to Atlanta, the segment completely assembled and tested the network in its 38,000 square foot Customer's Center for Systems Integration in its Schaumburg, Illinois, headquarters. The segment is also incorporating its iDEN technology to meet the wireless communications needs of the Olympic Family Transportation system, which will transport members of the international Olympic community.
The Automotive, Energy and Controls Group (AECG) manufactures and sells products in three major categories: automotive and industrial electronics; energy storage products and systems, and ceramic and quartz electronic components. The moderating growth of the cellular subscriber base is adversely affecting the results of the Automotive, Energy and Controls Group, which supplies products to the General Systems Products segment.
AECG sales were 15% higher and orders rose 11%. Operating profits were lower. AECG's performance was affected by a slowing of demand for automotive electronics and component and energy products for wireless communications equipment, including quartz, ceramic and printed circuit board components, batteries and chargers, as well as for electronic ballasts and radio frequency identification (RFID) cards, tags and readers. The group's performance in the automotive market continues to be led by the increased application of electronics in automobiles. Automotive orders included major new programs for engine control modules, body electronics and sensors for both new and existing customers.
AECG announced a new Cellular Positioning and Emergency Messaging Unit, which allows drivers to talk to a service provider and simultaneously signal their position, emergency status or equipment failure information to auto clubs, security services or central dispatch services.
The group expanded its customer base for energy and component products with orders from original equipment manufacturers in the portable communications and computing markets. The group also expanded operations for its component and energy products businesses in China and Singapore to meet the requirements of its increasingly global customers.
In its component businesses, the group continued to experience good market acceptance of its recently introduced TempestTM 3-Volt Temperature Compensated Crystal Oscillator (TCXO). The product offers a variety of performance features with industry-leading pricing, size and weight. Potential applications are increasing as customers in cellular telephone, two-way paging, wireless modem and cordless telephone markets move toward this leading-edge product configuration.
AECG established a Flat Panel Display Division to develop the next generation of flat panel displays. The group joined an alliance of manufacturers to drive the development of displays based on Field Emission Display (FED) technology.
GSTG sales rose 51% due to increased sales by the Satellite Communications Division to Iridium, Inc. Orders were 17 percent lower than a year ago. The group recorded an operating profit compared with a loss a year ago.
GSTG was awarded an initial $71 million contract to develop the Common Ground Station module battlefield sensor and attack control system for the United States Army's Joint STARS (Surveillance, Target, Attack, Radar System) program. The total value of the program over eight years is $236 million.
The Jet Propulsion Laboratory selected GSTG to develop the next-generation X-Band small deep space transponder for the National Aeronautics and Space Administration.
GSTG will lead a team in developing a new radio communications system for the United States military, under a contract awarded by Rome Laboratory on behalf of the Department of Defense Advanced Research Projects Agency.
GSTG won a contract to develop a network security management system for the United States government's National Information Highway network. The system includes software used by computer networks to grant or deny access to the highway. Contracts were received from Hong Kong and South Korea for air traffic communications products and systems.
The group's revenues and profits continue to be adversely affected by the decrease in the United States federal defense budgets. The segment has traditionally competed on the basis of price, technology, and quality of product.
Development of the Iridium global communications system continued on schedule, as Motorola met all contractual milestones during the year. The group is recording reserves in connection with the IRIDIUM® project so that, to date, minimal profit has been recognized under this contract. These reserves are reevaluated periodically.
In February, 1996, the Company committed to purchase approximately $160 million of securities to be issued by Iridium, Inc. during 1996. Iridium, Inc. will require additional financing beginning in mid-1996 to continue to make payments to Motorola under a contract to construct its global communications system. Iridium, Inc. will require additional funding, and quite possibly, other financial support from various sources in order to complete the global communications system, which is expected to take place over the next three years. There can be no assurance that Motorola or any other person will provide such funding or financial support. Motorola is the largest investor in Iridium, Inc. and a failure of Iridium, Inc. to obtain additional funding would have a material adverse effect on Motorola's investment in Iridium, Inc. and in ancillary products being developed for the system. In addition, the Company will have significant contractual and financial obligations remaining under several subcontracts in the event that Iridium, Inc. is unable to obtain additional funding.
The Company continues to experience a significant increase in its cash requirements because of higher fixed asset expenditures, especially for the Semiconductor Products segment.
The number of weeks that accounts receivable were outstanding increased to 7.0 for 1995 compared to 6.8 for 1994. Accounts receivable weeks for 1993 were 6.1. The main reasons for the increase was a general shift towards large system orders, which tend to have higher balances and longer customer-approval processes, and the continuing shift of sales to international markets, where payment terms are generally longer. Inventory turns decreased to 4.7 in 1995 from 5.7 in 1994.
The Company's ratio of net debt to net debt plus equity was 19.8% at December 31, 1995 compared with 12.1% in 1994 and 11.9% in 1993. The higher ratio for 1995 reflects the Company's increased need for financing during 1995, again mainly to fund semiconductor manufacturing expansion projects.
During 1995, the Company and its finance subsidiary increased their one and five year revolving domestic credit agreements with a group of banks from $1.5 billion to $2.0 billion. These 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 $1.4 billion at December 31, 1995.
During 1994, the Company filed, and had declared effective, a universal shelf registration statement with the Securities and Exchange Commission covering up to $800 million of debt and equity securities. Under this registration, the Company issued on May 15, 1995 and September 1, 1995, $400 million each in debt securities, at 7.5% and 6.5%, respectively. These issues are due in the year 2025. The 6.5% debentures contain a holder's put option of 100% of the principal amount, plus accrued interest, exercisable in the year 2005. During the fourth quarter of 1995, the Company filed, and had declared effective, a universal shelf registration statement with the Securities and Exchange Commission covering up to $1 billion of debt and equity securities. No securities have been issued under this shelf registration.
Capital expenditures required to support current and long-term growth increased to $4.2 billion from $3.3 billion in 1994. The 1993 expenditures totaled $2.2 billion. The Semiconductor Products segment continues to comprise the largest portion of fixed asset expenditures, with more than 50% of all such investments in 1995.
A discussion of the Company's commitments and contingencies is detailed in Note 6 to the Consolidated Financial Statements and Notes in this Proxy Statement.
IRIDIUM® is a registered trademark of Iridium, Inc. PowerPCTM is a trademark of IBM Corporation. All other brand names mentioned are registered trademarks or trademarks of their respective holders, and are herein acknowledged.
Research and Development: Expenditures increased to $2.20 billion in 1995, up from $1.86 billion in 1994 and $1.52 billion in 1993. Over the past three years, the Company has invested 8 to 9% of every sales dollar in product development and technological advances, and continues to believe that a strong commitment to research and development is required to drive long-term growth.
Cautionary Statement For Purposes of the "Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995
With the exception of historical matters, the matters discussed in this commentary are forward-looking statements that involve risks and uncertainties. Forward-looking statements include, but are not limited to, statements under the following headings: (i) under "Motorola, Inc., 1995 Compared with 1994" statements about expected relatively slower economic expansion in the United States and Europe, expected significant price competition in the wireless communications businesses, expected effects of the Company's continuing major investments in technology and manufacturing capacity, expected importance of new technology transitions and their effects on the Company's results as they enter the revenue base, and the expected effective tax rate for 1996 (ii) under "General Systems Products" statements about expected growth rate, expected investment in technology, manufacturing plans, new products performance, expected effect of competition and all statements regarding the impact of new contracts for cellular infrastructure products: (iii) under "Semiconductor Products," statements about planned technology, expected effects of competition, new plants and plant expansions, the loss of or reduction in purchases by customers, expected utilization of plants, and capacity limitations; (iv) under "Messaging, Information and Media," statements about expected deployment of new technology and products and their use and performance, expected customers, the success of "Calling Party Pays," the impact of new contracts, and planned investments; (v) under "Land Mobile Products," statements about planned licensing of intellectual property rights, expected completion dates of contracts, use for, and performance of new products, expected effect of growth rate, expected impact of new contracts, and expected investment in technology; (vi) under "Automotive, Energy and Controls Group," statements about expected performance and applications of products; and (vii) under "Government and Space Technology Group," statements about the impact of new contracts, expected effect of decreased government spending and the impact of the Company's investment in Iridium, Inc..
Motorola wishes to caution readers that the following important factors, and those important factors described elsewhere in this commentary, or in other Securities and Exchange Commission filings, among others, in some cases have affected, and in the future could affect, Motorola's actual results and could cause Motorola's actual consolidated results during 1996, and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, Motorola: