Source: https://www.sec.gov/Archives/edgar/data/1495569/000119312511201160/d10q.htm
Timestamp: 2019-04-21 08:39:09+00:00

Document:
Net earnings (loss) attributable to Motorola Mobility Holdings, Inc.
Net loss attributable to Motorola Mobility Holdings, Inc.
Motorola Mobility Holdings, Inc. (Motorola Mobility or the Company) is a provider of innovative technologies, products and services that enable a broad range of mobile and wireline, digital communication, information and entertainment experiences. The Companys integrated products and platforms deliver rich multimedia content, such as voice, video, messaging and Internet-based applications and services to multiple screens, such as mobile devices, televisions and personal computers (multi screens). Our product portfolio primarily includes mobile devices, wireless accessories, set-top boxes and video distribution systems, and wireline broadband infrastructure products and associated customer premises equipment. We are focused on developing differentiated, innovative products to meet the expanding needs of consumers to communicate, to collaborate and to discover, consume, create and share content at a time and place of their choosing on multiple devices.
On January 4, 2011 (the Distribution Date), the separation of Motorola Mobility from Motorola, Inc., which effective January 4, 2011 changed its name to Motorola Solutions, Inc. (hereinafter, the Former Parent) (the Separation), was completed. Motorola Mobility is now an independent public company trading under the symbol MMI on the New York Stock Exchange. On January 4, 2011, Former Parent stockholders of record as of the close of business on December 21, 2010 (the Record Date) received one (1) share of Motorola Mobility common stock for each eight (8) shares of Motorola, Inc. common stock held as of the Record Date (the Distribution). Motorola Mobility did not issue fractional shares of its common stock in the Distribution. Fractional shares that Former Parent stockholders would otherwise have been entitled to receive were aggregated and sold in the public market by the distribution agent and aggregate net cash proceeds of these sales were distributed ratably to those stockholders who would otherwise have been entitled to receive fractional shares.
At the time of the Distribution, the Former Parent contributed $3.2 billion in cash, cash equivalents and cash deposits to the Company (the Distribution Date Contribution). Additional contributions totaling $300 million from the Former Parent are due in cash if and when the Former Parent receives cash distributions as a result of the reduction in registered capital of an overseas subsidiary (the Deferred Contribution). On July 22, 2011, the Company received $75 million of the Deferred Contribution due from the Former Parent.
The condensed consolidated financial statements include the accounts of the Company and all controlled subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The condensed consolidated financial statements as of July 2, 2011 and December 31, 2010 and for the three months and six months ended July 2, 2011 and July 3, 2010 include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to present fairly the Companys consolidated financial position, results of operations and cash flows for all periods presented.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the combined financial statements and notes thereto included in the Companys Form 10-K for the year ended December 31, 2010. The results of operations for the three months and six months ended July 2, 2011 are not necessarily indicative of the operating results to be expected for the full year. Certain amounts in prior period financial statements and related notes have been reclassified to conform to the 2011 presentation.
The preparation of financial statements in conformity with U.S. GAAP 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 the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Prior to Separation, the historical financial statements were derived from the consolidated financial statements and accounting records of the Former Parent principally representing the Mobile Devices and Home business segments, using the historical results of operations and historical basis of assets and liabilities of the Companys businesses. The historical financial statements also include allocations of certain Former Parent general corporate expenses. Management believes the assumptions and methodologies underlying the allocation of general corporate expenses to the historical results of operations were reasonable. However, such expenses may not be indicative of the actual level of expenses that would have been incurred by the Company if it had operated as an independent, publicly traded company or of the costs expected to be incurred in the future. As such, the results of operations prior to Separation, included herein, may not necessarily reflect the Companys results of operations, financial position or cash flows in the future or what its results of operations, financial position or cash flows would have been had the Company been an independent, publicly traded company during the historical periods presented. Because a direct ownership relationship did not exist among all the various worldwide entities comprising the Company, the Former Parents net investment in the Company is presented as Owners net investment, rather than stockholders equity, in the combined balance sheets for periods prior to the Separation. Transactions between the Mobile Devices and Home business segments and other Former Parent businesses have been identified in the historical financial statements as transactions between related parties for periods prior to the Separation.
The Company and the Former Parent considered these leveraged services expenses, employee benefits and incentives, basic research and interest expense (income) allocations to be a reasonable reflection of the services provided to the Company by the Former Parent. For the three months and six months ended July 2, 2011, there are no allocations from the Former Parent in the statement of operations.
The Former Parent used a worldwide centralized approach to cash management and the financing of its operations with all related activity between the Company and the Former Parent reflected as equity transactions in Owners net investment in the Companys historical balance sheets for periods prior to Separation. Types of intercompany transactions between the Company and the Former Parent prior to Separation included: (i) cash receipts from the Companys businesses, which were transferred to the Former Parent on a regular basis, (ii) cash injections from the Former Parent used to fund operations, capital expenditures, or acquisitions, (iii) charges (benefits) for income taxes, and (iv) allocations of the Former Parents corporate expenses, as discussed above.
the Separation-related adjustments are adjustments to foreign currency translation adjustments, net of tax, in Accumulated other comprehensive loss, to reflect the appropriate opening balances related to the Companys legal entities at Separation.
For purposes of the Companys historical financial statements, income tax expense and deferred income tax balances were recorded as if the Company filed tax returns on a separate return basis (hypothetical carve-out basis) from the Former Parent. The Companys historical income tax balances reflected tax losses and tax credits generated by the Company while divisions within the Former Parents legal entities which were available for use by the Former Parents other businesses. Additionally, as part of the Separation, the Former Parent entered into taxable transactions when separating the Companys non-U.S. assets and liabilities into separate non-U.S. subsidiaries of the Company. As a result of these taxable transactions and the use of certain tax losses and credits by the Former Parent, the Companys income tax balances, as presented on the hypothetical carve-out basis, at December 31, 2010 were adjusted after the Separation to reflect the Companys post-Separation income tax positions, including unrecognized tax benefits, tax loss and credit carry forwards, other deferred tax assets and valuation allowances. The adjustment resulted in a decrease in the hypothetical carve-out income tax balances with an offsetting $32 million increase in Stockholders Equity.
In May 2011, the FASB issued authoritative guidance that changes the wording used to describe many of the requirements for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. The guidance also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively during interim and annual periods beginning after December 15, 2011. The Company anticipates that the adoption of this standard will not materially expand its consolidated financial statement footnote disclosures or change the way it measures fair value.
In June 2011, the FASB issued authoritative guidance which amends current comprehensive income guidance. This guidance eliminates the option to present the components of comprehensive income as part of the statement of stockholders equity. Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. This guidance will be effective for the Company during the interim and annual periods beginning after December 15, 2011. The adoption of this guidance will not have an impact on the Companys consolidated statements of operations, balance sheets or cash flows as it only requires a change in the format of the current presentation.
In connection with the Separation, the Company entered into a series of agreements with the Former Parent which are intended to govern the relationship between the Company and the Former Parent going forward. These agreements include a Master Separation and Distribution Agreement, intellectual property agreements, a trademark license agreement, a tax sharing agreement and an employee matters agreement. The Company also entered into other related agreements with the Former Parent including transition services agreements. During the three months and six months ended July 2, 2011, the net expense to the Company related to these agreements was not material. See Note 10, Commitments and Contingencies, regarding indemnifications to and from the Former Parent.
In June 2010, the Company announced that it had entered into a settlement and license agreement with another company, which resolved all outstanding litigation between the two companies. The agreement includes provisions for an upfront payment of $175 million from the other company to the Company, future royalties to be paid by the other company to the Company for the license of certain intellectual property, and the transfer of certain patents between the companies. As a result of this agreement and the valuation of the patents exchanged, the Company recorded a pre-tax gain of $228 million during the three months ended July 3, 2010, related to the settlement of the outstanding litigation between the parties.
For the three months and six months ended July 2, 2011, the Company was in a net loss position and, accordingly, the assumed exercise of 0.6 million and 1.1 million stock options, respectively, and the assumed vesting of 1.7 million and 2.2 million restricted stock units, respectively, were excluded from diluted weighted average shares outstanding because their inclusion would have been anti-dilutive.
The computation of basic earnings (loss) per common share for all periods through December 31, 2010, is calculated using the number of shares of Motorola Mobility common stock outstanding on January 4, 2011, following the Distribution. No measure of diluted loss per common share is presented since there were no actual shares outstanding prior to Separation.
The Companys cash and cash equivalents (which are highly-liquid investments with an original maturity of three months or less) were $3.0 billion at July 2, 2011. In addition, the Company had $203 million of cash deposits, primarily related to various legal disputes, at July 2, 2011. At July 2, 2011, $23 million of this amount was current and included in Other current assets in the Companys condensed consolidated balance sheet (all of which was held in the U.S.) and $180 million of this amount was non-current (including $171 million held outside the U.S.). Prior to Separation, the Company participated in the Former Parents cash management program. As a result, the Company has recorded no cash, cash equivalents or cash deposits on its balance sheet prior to Separation.
Depreciation expense for the three months ended July 2, 2011 and July 3, 2010 was $40 million and $48 million, respectively. Depreciation expense for the six months ended July 2, 2011 and July 3, 2010 was $78 million and $84 million, respectively.
During the three months ended July 2, 2011, the Company disposed of Available-for-sale common stock and equivalents resulting in a gain on sale of investments of $10 million.
During the three months and six months ended July 2, 2011, investment impairment charges recorded by the Company were de minimis. During the three months and six months ended July 3, 2010, the Company recorded investment impairment charges of $1 million and $8 million, respectively, representing other-than-temporary declines in the value of the Companys investment portfolio, primarily related to other securities recorded at cost. Investment impairment charges are included in Other within Other income (expense) in the Companys condensed consolidated statements of operations.
The Company uses financial instruments to reduce its overall exposure to the effects of currency fluctuations on cash flows. The Companys policy prohibits speculation in financial instruments for profit on exchange rate price fluctuations, trading in currencies for which there are no underlying exposures, or entering into transactions for any currency to intentionally increase the underlying exposure. Instruments that are designated as part of a hedging relationship must be effective at reducing the risk associated with the exposure being hedged and are designated as part of a hedging relationship at the inception of the contract. Accordingly, changes in the market values of hedge instruments must be highly correlated with changes in market values of the underlying hedged items both at the inception of the hedge and over the life of the hedge contract.
hedging relationship if it is determined that the transaction qualifies for hedge accounting under the provisions of the authoritative accounting guidance for derivative instruments and hedging activities. A portion of the Companys exposure is from currencies that are not traded in liquid markets and these are addressed, to the extent reasonably possible, by managing net asset positions, product pricing and component sourcing.
As of July 2, 2011 and December 31, 2010, the Company had outstanding foreign exchange contracts with notional values totaling $362 million and $608 million, respectively. 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 generally offset losses and gains on the underlying assets, liabilities and transactions, except for the ineffective portion of the instruments, which are charged to Other within Other income (expense) in the Companys condensed consolidated statements of operations.
The use of derivative financial instruments exposes the Company to counterparty credit risk in the event of nonperformance by counterparties. However, the risk is limited to the fair value of the instruments when the derivative is in an asset position. At the present time, all of the counterparties have investment grade credit ratings. The Company is not exposed to material credit risk with any single counterparty.
The Companys financial instruments include short-term investments, accounts receivable, accounts payable, accrued liabilities, derivative financial instruments and other financing commitments. The Companys available-for-sale investment portfolios and derivative financial instruments are recorded in the Companys condensed consolidated balance sheets at fair value. All other financial instruments are carried at cost, which is not materially different than the instruments fair values.
For purposes of the Companys historical financial statements pre-Separation, income tax expense and deferred income tax balances were recorded as if the Company had filed tax returns on a separate return basis (hypothetical carve-out basis) from the Former Parent. Post-Separation, income tax expense and deferred income tax balances are recorded in accordance with the Companys stand-alone income tax positions.
For the three months ended July 2, 2011 and July 3, 2010, the Company recorded net income tax expense of $39 million and $15 million, respectively, primarily comprised of taxes on foreign earnings and foreign withholding taxes on royalty and other income.
For the six months ended July 2, 2011 and July 3, 2010, the Company recorded net income tax expense of $69 million and $27 million, respectively, primarily comprised of taxes on foreign earnings and foreign withholding taxes on royalty and other income.
The Company has not recorded a tax benefit on its U.S. losses due to its recent history of cumulative U.S. losses.
As of July 2, 2011, the Companys net deferred tax assets, exclusive of valuation allowances, were $2.5 billion, compared to $2.9 billion as of December 31, 2010. As of July 2, 2011, the valuation allowance against the net deferred tax assets was $2.4 billion, as compared to $2.8 billion as of December 31, 2010.
Included in the net deferred tax assets of $2.5 billion as of July 2, 2011 are: (i) approximately $1.0 billion of deferred tax assets related to capitalized R&D costs that may be amortized for tax purposes through 2019; (ii) approximately $600 million of deferred tax assets related to U.S. and foreign tax loss and credit carry forwards; and (iii) approximately $900 million of deferred taxes related to other temporary differences.
The Company had unrecognized tax benefits of $25 million and $101 million, at July 2, 2011 and December 31, 2010, respectively. The decrease in unrecognized tax benefits is attributable to a $76 million decrease relating to post-Separation adjustments.
Upon Separation, all outstanding Former Parent stock options, stock appreciation rights and restricted stock units (RSU) for the Companys employees were replaced with awards in the Company using a formula designed to preserve the intrinsic value and fair value of the award immediately prior to Separation. There was no incremental compensation expense to the Company related to the replacement of the Former Parent share-based compensation awards. Any unrecognized compensation expense related to the replaced awards will be recognized by the Company over the remaining vesting period of the awards. During the six months ended July 2, 2011, the Company began to grant share based compensation to employees and non-employee directors under the Companys incentive plans.
During the six months ended July 2, 2011, the Company granted 9.7 million stock options. The weighted-average estimated fair value of employee stock options granted during the six months ended July 2, 2011 was $11.70. As of July 2, 2011, the Company had 23.9 million stock options and stock appreciation rights outstanding.
During the six months ended July 2, 2011, the Company granted 4.4 million restricted stock (RS) and RSUs with a weighted-average fair market value of $29.33 per RS and RSU. As of July 2, 2011, the Company had 9.2 million RS and RSUs outstanding.
shares of the Companys common stock through payroll deductions of up to 10% of eligible compensation on an after-tax basis. Plan participants cannot purchase more than $25,000 of stock in any calendar year. The price an employee pays per share is 85% of the lower of the fair market value of the Companys stock on the close of the first trading day or last trading day of the purchase period. The plan has two purchase periods, the first one from May 1 through October 31 and the second one from November 1 through April 30. During the three months ended July 2, 2011, there was no purchase of the Companys stock under the plan as the initial offering period had not yet closed.
The Company had no non-financial assets or liabilities that are required to be measured at fair value on a recurring basis as of July 2, 2011.
Level 1Quoted prices for identical instruments in active markets.
Level 2Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.
Level 3Valuations derived from valuation techniques, in which one or more significant inputs are unobservable.
Total sales of accounts receivable were $66 million and $45 million during the three months ended July 2, 2011 and July 3, 2010, respectively, and $97 million and $116 million for the six months ended July 2, 2011 and July 3, 2010, respectively. As of July 2, 2011, there were $66 million of accounts receivable outstanding under these programs for which the Company retained servicing obligations, compared to $43 million at December 31, 2010.
On January 4, 2011, the Company entered into a $500 million unsecured three-year credit agreement (the Credit Agreement) with a syndicate of lenders. The Credit Agreement provides for a revolving credit facility and a letter of credit facility, is guaranteed by certain of the Companys subsidiaries, and contains restrictive covenants. The Company may use any borrowings under the Credit Agreement for general corporate purposes. No obligations are outstanding under the Credit Agreement as of July 2, 2011.
The Company is involved in various lawsuits, claims and investigations arising in the normal course of business and relating to the Companys business. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Companys consolidated financial position, liquidity or results of operations. However, an unfavorable resolution could have a material adverse effect on the Companys consolidated financial position, liquidity or results of operations in the periods in which the matters are ultimately resolved.
In connection with the Companys operations in Brazil, Brazilian tax authorities have proposed assessments against the Companys Brazilian subsidiary relating to various technology transfer taxes, duties, value added taxes, certain other taxes and labor related matters related to the subsidiarys operations for calendar years 1997 through 2010. As of July 2, 2011, these assessments collectively represent reasonably possible loss contingencies under the applicable accounting standards of up to approximately $530 million, based on the exchange rate in effect at July 2, 2011, including interest and penalties. However, the Company is vigorously disputing these matters, believes it has valid defenses that are supported by the law, and believes that this amount is not a meaningful indicator of liability. These matters are progressing through the multiple levels of administrative and judicial review available in Brazil. Due to the complexities and uncertainty surrounding the administrative and judicial process in Brazil and the nature of the claims asserted, the Company does not expect a final resolution of these matters for several years.
The Company routinely assesses the probability of ultimately incurring a loss in each of these matters and records the Companys best estimate of the ultimate loss in situations where the Company assesses the likelihood of an ultimate loss as probable. Based on the Companys assessment of these matters, the Company has recorded accruals on only a small portion of the total exposure. It is, however, very difficult to predict the outcome of legal disputes and controversies, including litigation, in Brazil and our ultimate loss may be significantly greater than our current assessments and related accruals.
As of July 2, 2011, the Company had approximately $166 million of cash deposits, including accrued interest, for these matters, which are included in Cash deposits in the Companys condensed consolidated balance sheet as of July 2, 2011.
The Company may provide indemnifications for losses associated with indemnification and/or warranty provisions contained in certain commercial and intellectual property agreements. Historically, the Company has not made significant payments under these indemnifications. However, there is an increasing risk in relation to intellectual property indemnities given the current legal climate. In particular, two customers of the Company have made indemnification demands of the Company related to patent infringement claims by TiVo, Inc. against our products.
Furthermore, pursuant to the Master Separation and Distribution Agreement and certain other agreements with the Former Parent, the Company agreed to indemnify the Former Parent for certain liabilities, and the Former Parent agreed to indemnify the Company for certain liabilities, in each case for uncapped amounts.
Generally, in indemnification cases, payment by the Company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other partys claims. Further, the Companys obligations under these agreements for indemnification are generally limited in terms of duration and are for amounts not in excess of the contract value, except with respect to certain intellectual property infringement claims. In some instances, the Company may have recourse against third-parties for certain payments made by the Company.
The Mobile Devices segment designs, manufactures, sells and services wireless mobile devices, including smartphones and media tablets, with integrated software and accessory products, and licenses intellectual property.
The Home segment designs, manufactures, sells, installs and services set-top boxes for digital video, Internet Protocol (IP) video, satellite and terrestrial broadcast networks, end-to-end digital video and Internet Protocol Television (IPTV) distribution systems, broadband access network infrastructure platforms, and associated data and voice customer premises equipment and associated software solutions to cable television (TV) and telecommunication service providers.
The Company maintains a formal Involuntary Severance Plan (the Severance Plan), which permits the Company to offer eligible employees severance benefits based on years of service and employment grade level in the event that employment is involuntarily terminated as a result of a reduction-in-force or restructuring. Prior to Separation, the Company participated in the Former Parents Severance Plan. The Company recognizes termination benefits based on formulas per the Severance Plan at the point in time that future settlement is probable and can be reasonably estimated based on estimates prepared at the time a restructuring plan is approved by management. Exit costs consist of future minimum lease payments on vacated facilities and other contractual terminations. At each reporting date, the Company evaluates its accruals for employee separation and exit costs to ensure the accruals are still appropriate. In certain circumstances, accruals are no longer needed because of efficiencies in carrying out the plans or because employees previously identified for separation resigned from the Company and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were initiated. In these cases, the Company reverses accruals through the condensed consolidated statements of operations where the original charges were recorded when it is determined they are no longer needed.
During the three months ended July 2, 2011, the Company recorded $1 million of additional charges related to restructuring actions under Other charges in the Companys condensed consolidated statements of operations, and $1 million of reversals of reorganization of business charges for accruals no longer needed.
During the six months ended July 2, 2011, the Company recorded $6 million of net reversals of reorganization of business charges, including $3 million of Separation-related adjustments for employees that remained with the Former Parent and $4 million of reversals for accruals no longer needed, partially offset by $1 million of additional charges related to restructuring actions under Other charges in the Companys condensed consolidated statements of operations.
Adjustments include foreign currency translation adjustments.
At January 1, 2011, the Company had an accrual of $12 million for exit costs attributable to lease terminations. The $2 million used reflects cash payments. The remaining accrual of $10 million, which is included in Accrued liabilities in the Companys condensed consolidated balance sheet at July 2, 2011, represents future cash payments, primarily for lease termination obligations that are expected to be paid over a number of years.
At January 1, 2011, the Company had an accrual of $32 million for employee separation costs, representing the severance costs for approximately 1,100 employees. The adjustments of $7 million reflect reversals of accruals no longer needed and the additional charges of $1 million relate to restructuring actions taken by the Company. During the six months ended July 2, 2011, approximately 600 employees, of which 100 were direct employees and 500 were indirect employees, were separated from the Company. The $23 million used reflects cash payments to these separated employees. The remaining accrual of $3 million is included in Accrued liabilities in the Companys condensed consolidated balance sheet at July 2, 2011.
During the three months ended July 3, 2010, the Company recorded net reorganization of business charges of $7 million, including $2 million of charges in Costs of sales and $5 million of charges under Other charges in the Companys condensed consolidated statements of operations. Included in the aggregate $7 million are charges of $12 million for employee separation costs, partially offset by $5 million of reversals for accruals no longer needed.
During the six months ended July 3, 2010, the Company recorded net reorganization of business charges of $27 million, including $6 million of charges in Costs of sales and $21 million of charges under Other charges in the Companys condensed consolidated statements of operations. Included in the aggregate $27 million are charges of $36 million for employee separation costs, partially offset by $9 million of reversals for accruals no longer needed.
At January 1, 2010, the Company had an accrual of $39 million for exit costs attributable to lease terminations. There were no material additional charges related to exit costs. The adjustments of $3 million reflect: (i) $2 million of reversals of accruals no longer needed, and (ii) $1 million of foreign currency translation adjustments. The $15 million used reflects cash payments. The remaining accrual of $21 million was included in Accrued liabilities in the Companys condensed combined balance sheet at July 3, 2010.
At January 1, 2010, the Company had an accrual of $33 million for employee separation costs, representing the severance costs for approximately 400 employees. The additional charges of $36 million represent severance costs for approximately an additional 1,000 employees, of which 400 were direct employees and 600 were indirect employees. The adjustments of $8 million reflect: (i) $7 million of reversals of accruals no longer needed and (ii) $1 million of foreign currency translation adjustments. During the six months ended July 3, 2010, approximately 700 employees, of which 200 were direct employees and 500 were indirect employees, were separated from the Company. The $35 million used reflects cash payments to these separated employees. The remaining accrual of $26 million was included in Accrued liabilities in the Companys combined balance sheet at July 3, 2010.
intangible assets, which is included within Other charges, was $32 million and $27 million for the six months ended July 2, 2011 and July 3, 2010, respectively. As of July 2, 2011, annual amortization expense is estimated to be $60 million in 2011, $43 million in 2012, $33 million in 2013, $19 million in 2014 and $11 million in 2015.
During the three months ended April 2, 2011, the Company recorded an impairment of $4 million related to the abandonment of previously acquired in-process research and development.
This commentary should be read in conjunction with Motorola Mobility Holdings, Inc.s (the Companys) condensed consolidated financial statements for the three and six months ended July 2, 2011 and July 3, 2010, as well as the Companys combined financial statements and related notes thereto and managements discussion and analysis of financial condition and results of operations in the Companys Annual Report on Form 10-K for the year ended December 31, 2010.
Separation from Motorola, Inc.This section provides a general discussion of our separation from Motorola, Inc., which changed its name to Motorola Solutions, Inc. (hereinafter, our Former Parent) effective January 4, 2011.
Executive OverviewThis section provides a general description of our business, as well as recent developments we believe are important in understanding our results of operations and financial condition or in understanding anticipated future trends.
Looking ForwardThis section provides a discussion of managements general outlook about market demand, competition and product development.
Results of OperationsThis section provides an analysis of our results of operations for the three and six months ended July 2, 2011 and July 3, 2010.
Liquidity and Capital ResourcesThis section provides a discussion of our current financial condition and an analysis of our cash flows for the six months ended July 2, 2011 and July 3, 2010.
Significant Accounting PoliciesThis section identifies and summarizes those accounting policies that significantly impact our reported results of operations and financial condition and require significant judgment or estimates on the part of management in their application.
On January 4, 2011 (the Distribution Date), Motorola Mobility Holdings, Inc. became an independent, publicly traded company as a result of our Former Parents distribution of its shares of Motorola Mobility to our Former Parents stockholders. On the Distribution Date, Former Parent stockholders of record as of the close of business on December 21, 2010 (the Record Date) received one share of Motorola Mobility common stock for every eight shares of Motorola, Inc. common stock held as of the Record Date (the Distribution). Motorola Mobility is comprised of Motorola, Inc.s former Mobile Devices and Home businesses. Our Former Parents Board of Directors approved the distribution of its shares of Motorola Mobility Holdings, Inc. on November 30, 2010. Motorola Mobility Holdings, Inc. was incorporated on May 28, 2010 and is the parent of Motorola Mobility, Inc., our main U.S. wholly owned operating subsidiary through which we conduct substantially all of the business activities discussed in this Form 10-Q. Our Registration Statement on Form 10 was declared effective by the U.S. Securities and Exchange Commission on December 1, 2010. Our common stock began trading regular-way under the ticker symbol MMI on the New York Stock Exchange on January 4, 2011.
The Motorola Mobility businesses discussed herein represent the historical operating results and financial condition of Motorola Mobility. For operating results prior to the separation, any references to we, us, Motorola Mobility Holdings, Inc., Motorola Mobility or the Company in this MD&A refer to the Mobile Devices and Home businesses as they operated as a part of our Former Parent prior to the Distribution.
Motorola Mobility Holdings, Inc. is a provider of innovative technologies, products and services that enable a range of mobile and wireline digital communication, information and entertainment experiences. The Companys integrated products and platforms deliver rich multimedia content, such as voice, video, messaging and Internet-based applications and services to multiple screens, such as mobile devices, including smartphones and media tablets, televisions and personal computers. Our product portfolio primarily includes mobile devices, wireless accessories, set-top boxes and video distribution systems, and wireline broadband infrastructure products and associated customer premises equipment. We are focused on developing differentiated, innovative products to meet the expanding needs of consumers to communicate, to collaborate and to discover, consume, create and share content at a time and place of their choosing on multiple devices.
We operate our business in two segments. The Mobile Devices segment is focused on mobile wireless devices and related products and services. This segments net revenues were $2.4 billion in the second quarter of 2011 and $1.7 billion in the second quarter of 2010, representing 73% and 66%, respectively, of Motorola Mobilitys consolidated net revenues. The Home segment is focused on technologies to provide video entertainment services to consumers by enabling subscribers to access a variety of interactive digital television services. This segments net revenues were $907 million in the second quarter of 2011 and $886 million in the second quarter of 2010, representing 27% and 34%, respectively, of Motorola Mobilitys consolidated net revenues.
Net Revenues: Our net revenues were $3.3 billion in the second quarter of 2011, up 28% compared to net revenues of $2.6 billion in the second quarter of 2010. Net revenues increased 41% in the Mobile Devices segment and 2% in the Home segment.
Operating Earnings (Loss): We incurred an operating loss of $23 million in the second quarter of 2011, compared to operating earnings of $116 million in the second quarter of 2010.
Net Earnings (Loss): We incurred a net loss of $56 million in the second quarter of 2011, compared to net earnings of $80 million in the second quarter of 2010.
Operating Cash Flows: We generated $107 million of net cash from operating activities in the first half of 2011, compared to generating $57 million of net cash from operating activities in the first half of 2010.
In Our Mobile Devices Business: Net revenues were $2.4 billion in the second quarter of 2011, an increase of 41% compared to net revenues of $1.7 billion in the second quarter of 2010. The increase in net revenues was primarily driven by an 8% increase in average selling price (ASP) and by a 33% increase in unit shipments. We shipped 11.0 million mobile devices in the second quarter of 2011, a 33% increase compared to shipments of 8.3 million mobile devices in second quarter of 2010, and a 19% increase sequentially compared to shipments of 9.3 million mobile devices in the first quarter of 2011. We shipped 4.4 million Android-based smartphones in the second quarter of 2011, a 63% increase compared to shipments of 2.7 million in the second quarter of 2010, and a 7% increase sequentially compared to shipments of 4.1 million in the first quarter of 2011. On a geographic basis, net revenues increased substantially in Asia, Latin America, and the Europe, Middle East and Africa region (EMEA), and decreased in North America.
The segment incurred an operating loss of $85 million in the second quarter of 2011, compared to operating earnings of $87 million in the second quarter of 2010. The change from operating earnings to an operating loss was primarily due to the absence in 2011 of a comparable $228 million gain related to a legal settlement in 2010, partially offset by an increase in gross margin driven by the 41% increase in net revenues. Selling, general and administrative (SG&A) expenses also increased to support the growth in smartphone volumes.
In Our Home Business: Net revenues were $907 million in the second quarter of 2011, an increase of 2% compared to net revenues of $886 million in the second quarter of 2010. The increase in net revenues in the Home segment was primarily driven by a 10% increase in net revenues from sales of set-top boxes, reflecting a 12% increase in shipments of set-top boxes, partially offset by lower ASP. Net revenues from sales of video and access infrastructure equipment declined 10%. On a geographic basis, net revenues increased in North America and Latin America, partially offset by decreased net revenues in EMEA and Asia.
The segment had operating earnings of $62 million in the second quarter of 2011, compared to operating earnings of $29 million in the second quarter of 2010. The increase in operating earnings was primarily due to (i) an increase in gross margin, driven by the 2% increase in net revenues and a favorable product mix shift and (ii) a slight decrease in SG&A expenses, partially offset by an increase in research and development (R&D) expenditures.
In our Mobile Devices business, while we expect the overall global mobile device market to remain intensely competitive, we expect annual growth in total industry demand over the next several years, particularly in smartphones and media tablets. Our strategy is focused on developing and marketing a comprehensive smartphone portfolio and strengthening our position in priority markets. Our smartphone priorities and areas of differentiation include the following areas: (i) providing a broad based portfolio of devices at multiple price points and distributed through carriers, distributors and retailers globally, (ii) expanding our portfolio to include 4G LTE devices, (iii) software applications and services for consumers, including cloud based social networking, media and content related experiences, (iv) Webtop, a proprietary software application, and related accessories that enable enhanced and more interactive computer-like user experiences, and (v) enterprise-ready devices that address the security and device management needs required for business use. Our mid- to high-tier feature phone portfolio will be limited given declining global demand in this segment of the handset industry. We will continue to develop and market our iDEN portfolio of devices, although we expect overall iDEN unit demand in 2011 to be lower than in 2010. For lower-priced, voice-centric mobile devices, our portfolio will also be limited as we deliver devices to meet certain market needs. To address a new growth opportunity, we are developing a portfolio of media tablets, wireless devices which enable enhanced access to the mobile Internet, content consumption, and enterprise experiences for consumers and business users. We shipped our first LTE-upgradable media tablet, the Motorola XOOM, beginning in the first quarter of 2011. We expect significant annual growth in total industry demand for media tablets over the next several years and for this market to be intensely competitive. Mobile Devices market priorities continue to be primarily North America, China and Latin America, followed by Western Europe and other strategic markets. With the growth in demand for smartphones and media tablets, and by accelerating our speed to market, providing rich consumer experiences and strengthening our brand, we expect to continue to improve the financial performance in our Mobile Devices business.
In our Home business, we expect overall industry demand in 2011 to be comparable to 2010 levels. We expect a return to industry growth when market conditions improve, particularly in the U.S., which may drive increased consumer demand for high definition TV set-top boxes, whole-home IP-based network solutions, 3D-TV, advanced interactive services and converged experiences. In addition, consumer demand for video services is expected to drive the need for infrastructure equipment to optimize networks and storage, increase bandwidth and provide new services across multiple screens, including smartphones, media tablets and TVs. We will continue to leverage our market leadership position in set-top boxes and video delivery systems and in intellectual property to develop innovative solutions for new and emerging market opportunities. As we address these opportunities, we will continue to manage our overall cost structure, focus on the profitability of our core business, and position ourselves for profitable growth.
Other opportunities we plan to focus on include those resulting from the convergence of industries like wireless, media, computing and the Internet. These industries are increasingly interacting with each other, which we expect will create demand for new consumer devices, applications and services. We believe we will be well positioned to deliver innovative experiences, both in the home and on the go, across multiple types of devices to address this emerging opportunity.
Important suppliers to the company are located in Japan. While we do not expect any significant disruption in our ability to meet our customer needs in the second half of the year, we continue to carefully monitor the continuing impact of the March 2011 earthquake and ensuing tsunami in Japan. Uncertainties remain, including the potential for unanticipated events, which could have a negative impact on our business.
The Company has an industry leading patent portfolio encompassing many wireless, video, and other innovative technologies. We are also involved in significant patent litigation with industry competitors and other relevant patent holders. Several of these matters could be resolved during the remainder of 2011 or the first half of 2012. The outcome of these disputes could have a significant impact on our business and such matters are discussed in Part II. Item 1. Legal Proceedings.
We conduct our business in highly competitive markets, facing both new and established competitors. The markets for many of our products are characterized by rapidly changing technologies, frequent new product introductions, changing consumer trends, short product life cycles and evolving industry standards. Market disruptions caused by new technologies, the entry of new competitors, consolidations among our customers and competitors, changes in regulatory requirements, or other factors, can introduce volatility into our businesses. We face challenging, but relatively stable, global economic conditions in our largest markets. Meeting all of these challenges requires consistent operational planning and execution and investment in technology, resulting in innovative products that meet the needs of our customers around the world. As we execute on meeting these objectives, we remain focused on taking the necessary action to design and deliver differentiated and innovative products, services and experiences that simplify, connect, and enrich peoples lives.
Net revenues were $3.3 billion in the second quarter of 2011, up 28% compared to net revenues of $2.6 billion in the second quarter of 2010. The increase in net revenues reflects: (i) a $707 million, or 41%, increase in net revenues in the Mobile Devices segment, and (ii) a $21 million, or 2%, increase in net revenues in the Home segment. The 41% increase in net revenues in the Mobile Devices segment was primarily driven by an 8% increase in average selling price (ASP) and by a 33% increase in unit shipments. The 2% increase in net revenues in the Home business was primarily driven by a 10% increase in net revenues from sales of set-top boxes, partially offset by a 10% decline in net revenues from sales of video and access infrastructure equipment.
Gross margin was $864 million, or 25.9% of net revenues, in the second quarter of 2011, compared to $664 million, or 25.5% of net revenues, in the second quarter of 2010. The increase in gross margin reflects higher gross margin in both segments. The increase in gross margin in the Mobile Devices segment was primarily driven by the 41% increase in net revenues. The increase in gross margin in the Home segment was primarily due to the 2% increase in net revenues and a favorable product mix shift. The increase in gross margin as a percentage of net sales in the second quarter of 2011 compared to the second quarter of 2010 reflects an increase in gross margin percentage in the Home segment partially offset by a decrease in gross margin percentage in the Mobile Devices segment. The Companys overall gross margin as a percentage of net revenues can be impacted by the proportion of overall net revenues generated by its two businesses.
SG&A expenses increased 18% to $456 million, or 13.7% of net revenues, in the second quarter of 2011, compared to $385 million, or 14.8% of net revenues, in the second quarter of 2010. The increase in SG&A expenses reflects higher SG&A expenses in the Mobile Devices segment, partially offset by a slight decrease in SG&A expenses in the Home segment. The increase in the Mobile Devices segment was to support the growth in smartphone volumes. SG&A expenses as a percentage of net revenues decreased in both segments.
R&D expenditures increased 6% to $395 million, or 11.8% of net revenues, in the second quarter of 2011, compared to $372 million, or 14.3% of net revenues, in the second quarter of 2010. The increase in R&D expenditures reflects higher R&D expenditures in both segments. R&D expenditures as a percentage of net revenues increased in the Home segment and decreased in the Mobile Devices segment. The Company participates in very competitive industries with constant changes in technology and, accordingly, the Company continues to believe that a strong commitment to R&D is required to drive long-term growth.
The Company recorded other charges of $36 million in the second quarter of 2011, compared to other income of $209 million in the second quarter of 2010. The charges in the second quarter of 2011 were primarily comprised of $20 million of charges related to a legal claim provision and $16 million of charges relating to the amortization of intangibles. The other income in the second quarter of 2010 included a $228 million gain related to a legal settlement, partially offset by: (i) $14 million of charges relating to the amortization of intangibles and (ii) $5 million of net reorganization of business charges. The net reorganization of business charges are discussed in further detail in the section entitled Reorganization of Businesses included elsewhere within this document.
Net interest income was $1 million in the second quarter of 2011, compared to net interest expense of $18 million in the second quarter of 2010. Net interest income in the second quarter of 2011 includes interest income of $6 million, partially offset by interest expense of $5 million. Net interest expense in the second quarter of 2010 included interest expense of $25 million, partially offset by interest income of $7 million. Prior to separation, our interest income and expense primarily represents amounts allocated from our Former Parent.
Gains on sales of investments were $10 million in the second quarter of 2011. We did not have gains on sales of investments in the second quarter of 2010. In the second quarter of 2011, the net gain was primarily comprised of gains related to sales of certain of the Companys available-for-sale securities.
Net expense classified as Other, net, as presented in Other income (expense), was $5 million in the second quarter of 2011, compared to $6 million in the second quarter of 2010. The net expense in the second quarter of 2011 was primarily comprised of $10 million of foreign currency costs. The net expense in the second quarter of 2010 was primarily comprised of $10 million of foreign currency costs.
The Company recorded income tax expense of $39 million in the second quarter of 2011 as compared to $15 million in the second quarter of 2010. The expense for both the second quarters of 2011 and 2010 was comprised of taxes on foreign earnings and foreign withholding taxes on royalty and other income. The Company has not recorded a tax benefit on its U.S. losses due to its recent history of cumulative U.S. losses.
The Companys tax provision may change from period to period based on non-recurring events, such as the settlement of tax audits, changes in valuation allowances and the tax impact of significant unusual or extraordinary items. The Companys tax provision will also change due to the level of pre-tax income or loss and its geographic mix.
The Company incurred a loss before income taxes of $17 million in the second quarter of 2011, compared with earnings before income taxes of $92 million in the second quarter of 2010. After taxes, and excluding Loss attributable to non-controlling interests, the Company incurred a net loss of $56 million in the second quarter of 2011, compared to net earnings of $80 million in the second quarter of 2010.
The change to a loss before income taxes in the second quarter of 2011 compared to earnings before income taxes in the second quarter of 2010 was primarily attributable to: (i) a $245 million change in Other charges (income), primarily due to the absence in 2011 of a comparable $228 million gain related to a legal settlement in 2010, and (ii) a $71 million increase in SG&A expenses, partially offset by a $200 million increase in gross margin, primarily due to an increase in revenues.
Net revenues were $6.4 billion in the first half of 2011, up 25% compared to net revenues of $5.1 billion in the first half of 2010. The increase in net revenues reflects: (i) a $1.2 billion, or 35%, increase in net revenues in the Mobile Devices segment, and (ii) an $87 million, or 5%, increase in net revenues in the Home segment. The 35% increase in net revenues in the Mobile Devices segment was primarily driven by a 14% increase in ASP and by a 20% increase in unit shipments. The 5% increase in net revenues in the Home business was primarily driven by a 10% increase in net revenues from sales of set-top boxes, partially offset by a 5% decline in net revenues from sales of video and access infrastructure equipment.
Gross margin was $1.6 billion, or 25.4% of net revenues, in the first half of 2011, compared to $1.3 billion, or 24.7% of net revenues, in the first half of 2010. The increase in gross margin reflects higher gross margin in both segments. The increase in gross margin in the Mobile Devices segment was primarily driven by (i) the 35% increase in net revenues and (ii) a favorable product mix, specifically due to increased volume of smartphone devices. The increase in gross margin in the Home segment was primarily due to the 5% increase in net revenues and a favorable product mix shift. The increase in gross margin as a percentage of net sales in the first half of 2011 compared to the first half of 2010 reflects an increase in gross margin percentage in both segments. The Companys overall gross margin as a percentage of net revenues can be impacted by the proportion of overall net revenues generated by its two businesses.
SG&A expenses increased 15% to $873 million, or 13.7% of net revenues, in the first half of 2011, compared to $756 million, or 14.8% of net revenues, in the first half of 2010. The increase in SG&A expenses reflects higher SG&A expenses in the Mobile Devices segment. The increase in the Mobile Devices segment was to support the growth in smartphone volumes. SG&A expenses as a percentage of net revenues decreased in both segments.
reflects slightly higher R&D expenditures in both segments. R&D expenditures as a percentage of net revenues decreased in both segments. The Company participates in very competitive industries with constant changes in technology and, accordingly, the Company continues to believe that a strong commitment to R&D is required to drive long-term growth.
The Company recorded other charges of $53 million in the first half of 2011, compared to other income of $180 million in the first half of 2010. The charges in the first half of 2011 were primarily comprised of $32 million of charges relating to the amortization of intangibles and $20 million of charges related to a legal claim provision. The other income in the first half of 2010 included a $228 million gain related to a legal settlement, partially offset by: (i) $27 million of charges relating to the amortization of intangibles and (ii) $21 million of net reorganization of business charges.
Net interest income was $3 million in the first half of 2011, compared to net interest expense of $29 million in the first half of 2010. Net interest income in the first half of 2011 includes interest income of $10 million, partially offset by interest expense of $7 million. Net interest expense in the first half of 2010 included interest expense of $41 million, partially offset by interest income of $12 million.
Gains on sales of investments were $10 million in the first half of 2011. We did not have gains on sales of investments in the first half of 2010. In the first half of 2011, the net gain was primarily comprised of gains related to sales of certain of the Companys available-for-sale securities.
Net expense classified as Other, net, as presented in Other income (expense), was $22 million in the first half of 2011 and the first half of 2010. The net expense in the first half of 2011 was primarily comprised of $22 million of foreign currency costs. The net expense in the first half of 2010 was primarily comprised of (i) $19 million of foreign currency costs and (ii) $8 million of investment impairment charges.
The Company recorded income tax expense of $69 million in the first half of 2011 as compared to $27 million in the first half of 2010. The expense for both the first halves of 2011 and 2010 was comprised of taxes on foreign earnings and foreign withholding taxes on royalty and other income. The Company has not recorded a tax benefit on its U.S. losses due to its recent history of cumulative U.S. losses.
The Company incurred a loss before income taxes of $68 million in the first half of 2011, compared with a loss before income taxes of $107 million in the first half of 2010. After taxes, and excluding Loss attributable to non-controlling interests, the Company incurred a net loss of $137 million in the first half of 2011, compared to a net loss of $132 million in the first half of 2010.
The improvement in the loss before income taxes in the first half of 2011 compared to the first half of 2010 was primarily attributable to a $360 million increase in gross margin, primarily due to an increase in revenues. The increase in gross margin was partially offset by (i) a $233 million change in Other charges (income), primarily due to the absence in 2011 of a comparable $228 million gain related to a legal settlement in 2010, and (ii) a $117 million increase in SG&A expenses.
The following commentary should be read in conjunction with the financial results of each operating business segment as detailed in Note 11, Segment Information, to the Companys condensed consolidated financial statements as of and for the three months and six months ended July 2, 2011. Net revenues and operating results for the Companys two operating business segments for the three months and six months ended July 2, 2011 and July 3, 2010, are presented below.
The Mobile Devices segment designs, manufactures, sells and services wireless mobile devices, including smartphones and media tablets, with integrated software and accessory products, and licenses intellectual property. For the second quarter of 2011, the segments net revenues represented 73% of the Companys consolidated net revenues, compared to 66% for the second quarter of 2010. For the first half of 2011, the segments net revenues represented 72% of the Companys consolidated net revenues, compared to 66% for the first half of 2010.
In the second quarter of 2011, the segments net revenues were $2.4 billion, an increase of 41% compared to net revenues of $1.7 billion in the second quarter of 2010. The increase in net revenues was primarily driven by a 8% increase in ASP and by a 33% increase in unit shipments. On a geographic basis, net revenues increased substantially in Asia, Latin America, and the Europe, Middle East and Africa region (EMEA), and decreased in North America.
The segment incurred an operating loss of $85 million in the second quarter of 2011, compared to operating earnings of $87 million in the second quarter of 2010. The change from operating earnings to an operating loss was primarily due to the absence in 2011 of a comparable $228 million gain related to a legal settlement in 2010, partially offset by an increase in gross margin driven by the 41% increase in net revenues. Selling, general and administrative (SG&A) expenses also increased to support the growth in smartphone volumes. As a percentage of net revenues in the second quarter of 2011 as compared to the second quarter of 2010, gross margin, SG&A and research and development (R&D) expenditures decreased.
The segments industry typically experiences short life cycles for new products. Therefore, it is vital to the segments success that new, compelling products are continually introduced. Accordingly, a strong commitment to R&D is required and, even amidst challenging global economic conditions, the segment expects to continue to make the appropriate investments to develop a differentiated product portfolio and fuel long-term growth.
shipments of 9.0 million units in the first quarter of 2011. Smartphone shipments in the second quarter of 2011 were 4.4 million, a 63% increase compared to shipments of 2.7 million smartphones in the second quarter of 2010 and a 7% increase sequentially compared to shipments of 4.1 million smartphones in the first quarter of 2011. In addition to handsets, we also shipped 440 thousand media tablet units in the second quarter of 2011, a 72% increase sequentially compared to shipments of over 250 thousand units in the first quarter of 2011.
In the second quarter of 2011, segment ASP increased approximately 8% compared to the second quarter of 2010 and decreased approximately 3% compared to the first quarter of 2011. The increase in ASP in the second quarter of 2011 as compared to the second quarter of 2010 was driven by the launch and shipment of media tablets in 2011. ASP is impacted by numerous factors, including product mix, market conditions and competitive product offerings, and ASP trends often vary over time.
In the first half of 2011, the segments net revenues were $4.6 billion, an increase of 35% compared to net revenues of $3.4 billion in the first half of 2010. The increase in net revenues was primarily driven by a 14% increase in ASP and by a 20% increase in unit shipments. On a geographic basis, net revenues increased in all regions, and increased substantially in Asia, Latin America, and EMEA.
The segment incurred an operating loss of $174 million in the first half of 2011, compared to an operating loss of $105 million in the first half of 2010. The increase in the operating loss was primarily due to the absence in 2011 of a comparable $228 million gain related to a legal settlement in 2010, partially offset by an increase in gross margin. The increase in gross margin in the Mobile Devices segment was primarily driven by (i) the 35% increase in net revenues and (ii) a favorable product mix, specifically due to increased volume of smartphone devices. Also contributing to the increase in operating loss were higher SG&A expenses to support the growth in smartphone volumes. As a percentage of net revenues in the first half of 2011 as compared to the first half of 2010, gross margin increased and SG&A and R&D expenditures decreased.
Handset unit shipments in the first half of 2011 were 19.6 million units, a 16% increase compared to shipments of 16.9 million units in the first half of 2010. Smartphone shipments in the first half of 2011 were 8.5 million, a 70% increase compared to shipments of 5.0 million smartphones in the first half of 2010. In addition to handsets, we also shipped nearly 700 thousand media tablet units in the first half of 2011.
In the first half of 2011, segment ASP increased approximately 14% compared to the first half of 2010. The increase in ASP in the first half of 2011 as compared to the first half of 2010 was driven by increased shipments of smartphones and the launch and shipment of media tablets in the first half of 2011. ASP is impacted by numerous factors, including product mix, market conditions and competitive product offerings, and ASP trends often vary over time.
The Home segment designs, manufactures, sells, installs and services set-top boxes for digital video, Internet protocol (IP) video, satellite and terrestrial broadcast networks, end-to-end digital video and Internet protocol television (IPTV) distribution systems, broadband access network infrastructure platforms, and associated data and voice customer premises equipment and associated software solutions to cable TV and telecommunication service providers. For the second quarter of 2011, the segments net revenues represented 27% of the Companys consolidated net revenues, compared to 34% for the second quarter of 2010. For the first half of 2011, the segments net revenues represented 28% of the Companys consolidated net revenues, compared to 34% for the first half of 2010.
In the second quarter of 2011, the segments net revenues were $907 million, an increase of 2% compared to net revenues of $886 million in the second quarter of 2010. The 2% increase in net revenues was primarily driven by a 10% increase in net revenues from sales of set-top boxes, reflecting a 12% increase in shipments of set-top boxes, partially offset by lower ASP. Net revenues of video and access infrastructure equipment declined 10%.
Revenues from high definition (HD) set-top boxes increased primarily due to higher shipments to large telecommunication and cable operators in North America as a result of higher demand. On a geographic basis, net revenues increased in North America and Latin America, partially offset by decreased net revenues in EMEA and Asia. Net revenues in North America continued to comprise a significant portion of the segments business, accounting for approximately 73% of the segments net revenues in the second quarter of 2011, compared to approximately 71% in the second quarter of 2010.
The segment had operating earnings of $62 million in the second quarter of 2011, compared to operating earnings of $29 million in the second quarter of 2010. The increase in operating earnings was primarily due to (i) an increase in gross margin, driven by the 2% increase in net revenues and a favorable product mix shift and (ii) a slight decrease in SG&A expenses, partially offset by an increase in research and development (R&D) expenditures. As a percentage of net revenues in the second quarter of 2011 as compared to the second quarter of 2010, gross margin and R&D expenditures increased and SG&A expenses decreased.
In the first half of 2011, the segments net revenues were $1.8 billion, an increase of 5% compared to net revenues of $1.7 billion in the first half of 2010. The 5% increase in net revenues was primarily driven by a 10% increase in net revenues from sales of set-top boxes, reflecting an 18% increase in shipments of set-top boxes, partially offset by lower ASP. Net revenues of video and access infrastructure equipment declined 5%.
Revenues from high definition (HD) set-top boxes increased primarily due to higher shipments to large telecommunication and cable operators in North America as a result of higher demand. On a geographic basis, net revenues increased in North America, Latin America and Asia, partially offset by decreased net revenues in EMEA. Net revenues in North America continued to comprise a significant portion of the segments business, accounting for approximately 75% of the segments net revenues in the first half of 2011, compared to approximately 71% in the first half of 2010.
The segment had operating earnings of $115 million in the first half of 2011, compared to operating earnings of $49 million in the first half of 2010. The increase in operating earnings was primarily due to an increase in gross margin, driven by the 5% increase in net revenues and a favorable product mix shift. The increase in gross margin was partially offset by an increase in R&D expenditures. As a percentage of net revenues in the first half of 2011 as compared to the first half of 2010, gross margin increased and SG&A and R&D expenditures decreased.
Cash payments for exit costs and employee separations in connection with reorganization plans were $25 million during the six months ended July 2, 2011. The $13 million reorganization of businesses accrual at July 2, 2011, includes (i) $3 million relating to employee separation costs that are expected to be paid in 2011 and (ii) $10 million relating to lease termination obligations that are expected to be paid over a number of years.
Cash payments for exit costs and employee separations in connection with reorganization plans were $50 million during the six months ended July 3, 2010.
As highlighted in the condensed consolidated statements of cash flows, the Companys liquidity and available capital resources are impacted by four key components: (i) cash and cash equivalents, (ii) operating activities, (iii) investing activities, and (iv) financing activities.
to indefinitely reinvest a portion of our earnings from foreign operations. The Company has sufficient U.S. cash and cash equivalents to fund its U.S. operations, without the need for funds from foreign operations. In the event funds from foreign operations are needed to fund operations or other strategic initiatives in the U.S., the Company may incur foreign withholding tax costs in order to distribute the earnings and cash back to the U.S. The Company would not incur a U.S. tax liability as a result of the distribution given its available U.S. tax attributes.
At July 2, 2011, Cash deposits were $203 million. At July 2, 2011, $23 million of this amount was current and included in Other current assets in the Companys condensed consolidated balance sheet (all of which was held in the U.S.) and $180 million of this amount was non-current (including $171 million held outside the U.S.).
Prior to separation, the Company participated in our Former Parents cash management program. Our Former Parent primarily used a worldwide, centralized approach to cash management in which cash accounts are principally consolidated on a daily basis. Therefore, the financing of the Companys operations and the related activity between the Company and our Former Parent prior to the separation is reflected as Net transfers from (to) Motorola, Inc. in our combined statements of business equity and of cash flows. As a result, the Company has recorded no cash, cash equivalents or cash deposits on its combined balance sheet prior to separation.
Additional contributions totaling $300 million from our Former Parent are due in cash if and when our Former Parent receives cash distributions as a result of the reduction in registered capital of an overseas subsidiary (the Deferred Contribution). On July 22, 2011 we received $75 million of the Deferred Contribution from our Former Parent. This contribution will be presented as cash provided by financing activities in the third quarter of 2011. Our Former Parent has notified us that they do not currently know when or if the remaining distribution will be completed.
The net cash generated from operating activities in the first half of 2011 was $107 million, compared to $57 million of cash generated from operating activities in the first half of 2010. The primary contributors to the net cash generation in the first half of 2011 were: (i) a $99 million decrease in net inventories (ii) a $95 million increase in accounts payable and accrued liabilities, (iii) a $80 million net increase in other assets and liabilities, (iv) the net loss (adjusted for non-cash items) of $51 million, and (v) a $45 million decrease in net other current assets, partially offset by a $263 million increase in net accounts receivable. The primary contributors to the net cash generation in the first half of 2010 were: (i) a $79 million decrease in other current assets, (ii) a $60 million decrease in net inventories, (iii) the net loss (adjusted for non-cash items) of $53 million, and (iv) a $51 million decrease in net accounts receivable, partially offset by (i) a $97 million net decrease in other assets and liabilities, and (ii) a $89 million decrease in accounts payable and accrued liabilities.
Accounts Receivable: The Companys net accounts receivable was $1.8 billion at July 2, 2011, compared to $1.6 billion at December 31, 2010. Compared to December 31, 2010, net accounts receivable at July 2, 2011 were higher in the Mobile Devices segment and lower in the Home segment. The Companys businesses sell their products in a variety of markets throughout the world and payment terms can vary by market type and geographic location. Accordingly, the Companys levels of net accounts receivable can be impacted by the timing and level of sales that are made by its various businesses and by the geographic locations in which those sales are made.
As further described below under Sales of Receivables, from time to time, the company elects to sell accounts receivable to third-parties. The Companys levels of net accounts receivable can be impacted by the timing and amount of such sales, which can vary by period and can be impacted by numerous factors.
Inventories: The Companys net inventories were $744 million at July 2, 2011, compared to $843 million at December 31, 2010. The decrease in the Companys net inventories was reflective of a decrease in both segments. Inventory reserves decreased by $120 million in the first half of 2011 primarily due to the scrapping of excess and obsolete inventory. Inventory management continues to be an area of focus as the Company balances the need to maintain strategic inventory levels to ensure delivery to its customers against the risk of inventory excess and obsolescence due to rapidly changing technology and customer demand.
Accounts Payable: The Companys accounts payable were $1.7 billion at July 2, 2011 and December 31, 2010. Accounts payable decreased in the Home segment and increased in the Mobile Devices segment. The Company buys products in a variety of markets throughout the world and payment terms can vary by market type and geographic location. Accordingly, the Companys levels of accounts payable can be impacted by the timing and level of purchases made by its various businesses and by the geographic locations in which those purchases are made.
Reorganization of Businesses: The Company has implemented reorganization of businesses plans. Cash payments for exit costs and employee separations in connection with a number of these plans were $25 million in the first half of 2011, as compared to $50 million in the first half of 2010. Of the $13 million reorganization of businesses accrual at July 2, 2011, $3 million relates to employee separation costs and is expected to be paid over the remainder of 2011. The remaining $10 million in accruals relate to lease termination obligations that are expected to be paid over a number of years.
Net cash used for investing activities was $145 million in the first half of 2011, compared to net cash used of $56 million in the first half of 2010. The $89 million increase in net cash used for investing activities was primarily due to a $54 million increase in capital expenditures.
Strategic Acquisitions and Investments: The Company used $44 million of cash for acquisitions and new investment activities in the first half of 2011, compared to cash used of $20 million in the first half of 2010. The cash used in the first half of 2011 was for small strategic acquisitions and investments across the Company. The cash used in the first half of 2010 was primarily for small strategic investments across the Company.
Capital Expenditures: Capital expenditures were $96 million in the first half of 2011, compared to $42 million in the first half of 2010. The Companys emphasis in making capital expenditures is to focus on strategic investments driven by customer demand, new design capability and process improvements, including IT systems.
Cash deposits: The Company made cash deposits of $23 million in the first half of 2011, compared to no cash deposits in the first half of 2010. The cash deposits made in the first half of 2011 were primarily related to supply chain activities.
Investments: The Company views its investments as an additional source of liquidity. The majority of these securities are available-for-sale and cost-method investments in technology companies. The fair market values of these securities are subject to substantial price volatility. In addition, the realizable values of these securities are subject to market and other conditions. At July 2, 2011, the Company did not have an available-for-sale equity securities portfolio. At December 31, 2010, the Companys available-for-sale equity securities portfolio had an approximate fair market value of $21 million, comprised of a cost basis of $7 million and a net unrealized gain of $14 million. The Companys available-for-sale investments are included in Investments in the Companys condensed consolidated balance sheets.
primarily related to various legal disputes, which are included in Cash deposits in the Companys condensed consolidated balance sheet at July 2, 2011. Cash used for financing activities in the first half of 2010 was due to the net cash transfers to our Former Parent.
Our Former Parent primarily used a worldwide centralized approach to cash management and the financing of its operations with all related activity, prior to separation, between the Company and our Former Parent reflected as equity transactions in Owners net investment in the Companys combined balance sheets. When necessary, our Former Parent had provided the Company funds for its operating cash needs. The Companys funds in excess of working capital needs had been advanced to our Former Parent. Intercompany accounts were maintained for such borrowings that occur between the Companys operations and our Former Parent. Types of intercompany transactions between the Company and our Former Parent included: (i) cash deposits from the Companys businesses which were transferred to our Former Parent on a regular basis, (ii) cash borrowings from our Former Parent used to fund operations, capital expenditures or acquisitions, (iii) charges (benefits) for income taxes, and (iv) allocations of our Former Parents corporate expenses described elsewhere in this document. For purposes of the combined statements of cash flows prior to the separation, the Company reflected intercompany activity as a financing activity. The net cash transferred to our Former Parent was $28 million in the first half of 2010.
Our ability to obtain standby letters of credit, performance bonds, surety bonds (collectively referred to as Letters of Credit), credit facilities, and foreign exchange lines primarily depends upon our capitalization, working capital, past performance, management expertise and reputation, and certain external factors, including the condition of the capital markets, the overall capacity of Letters of Credit and foreign exchange markets. Financial institutions providing these instruments consider such factors in relationship to their underwriting/credit standards, which may change from time to time.
For the three months ended July 2, 2011 and July 3, 2010, total accounts receivable sold by the Company were $66 million and $45 million, respectively. For the six months ended July 2, 2011 and July 3, 2010, total accounts receivable sold by the Company were $97 million and $116 million, respectively. As of July 2, 2011, there were $66 million of accounts receivable outstanding under these programs for which the Company retained servicing obligations, compared to $43 million at December 31, 2010.
contracts could result in expenses to Motorola Mobility that are far in excess of the revenue received from the counterparty in connection with the contract.
Indemnification Provisions: Motorola Mobility may provide indemnifications for losses associated with indemnification and/or warranty provisions contained in certain commercial and intellectual property agreements. Historically, Motorola Mobility has not made significant payments under these indemnifications. However, there is an increasing risk in relation to intellectual property indemnities given the current legal climate. In particular, two customers of the Company have made indemnification demands of the Company related to patent infringement claims by TiVo, Inc. against our products.
Generally, in indemnification cases, payment by Motorola Mobility is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow Motorola Mobility to challenge the other partys claims. Further, Motorola Mobilitys obligations under these agreements for indemnification are generally limited in terms of duration, typically not more than 24 months, and for amounts not in excess of the contract value, except with respect to certain intellectual property infringement claims. In some instances, Motorola Mobility may have recourse against third-parties for certain payments made by Motorola Mobility.
Furthermore, pursuant to the Master Separation and Distribution Agreement and certain other agreements with our Former Parent, Motorola Mobility agreed to indemnify our Former Parent for certain liabilities, and our Former Parent agreed to indemnify Motorola Mobility for certain liabilities, in each case for uncapped amounts.
Legal Matters: The Company is involved in various lawsuits, claims and investigations arising in the normal course of business and relating to our business. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on Motorola Mobilitys consolidated financial position, liquidity or results of operations. However, an unfavorable resolution could have a material adverse effect on the Companys consolidated financial position, liquidity or results of operations in the periods in which the matters are ultimately resolved. See Item 1. Legal Proceedings for more details.
Tax and Regulatory Proceedings in Brazil: The Company had approximately $166 million of cash deposits, including accrued interest, related to various legal disputes in Brazil. This amount may increase before the end of the year because a trade compliance matter is pending in the intermediate administrative level and may be resolved at that level as early as the third quarter of this year. If we receive an adverse ruling and are forced to continue to dispute the matter in Brazils judicial system, we would be required to deposit approximately $360 million, based on the exchange rate in effect at July 2, 2011, of additional collateral with the Brazil judicial system, which could be in the form of cash, bank or insurance bonds or pledged assets.
Managements Discussion and Analysis of Financial Condition and Results of Operations discusses the Companys condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period.
The Companys strategy related to foreign exchange exposure management is to offset the gains or losses on the financial instruments against losses or gains on the underlying operational cash flows or investments based on the operating business units assessment of risk. The Company enters into derivative contracts for some of the Companys non-functional currency receivables and payables, which are primarily denominated in major currencies that can be traded on open markets. The Company typically uses forward contracts and options to hedge these currency exposures. In addition, the Company enters into derivative contracts for some firm commitments and some forecasted transactions, which are designated as part of a hedging relationship if it is determined that the transaction qualifies for hedge accounting under the provisions of the authoritative accounting guidance for derivative instruments and hedging activities. A portion of the Companys exposure is from currencies that are not traded in liquid markets and these are addressed, to the extent reasonably possible, by managing net asset positions, product pricing and component sourcing.
gains and losses on these contracts should generally offset losses and gains on the underlying assets, liabilities and transactions, except for the ineffective portion of the instruments, which are charged to Other within Other income (expense) in the Companys condensed consolidated statements of operations.
Effective July 3, 2011, based on cumulatively significant changes in economic facts and circumstances, the Company has determined that for purposes of financial statement translation the local Brazilian currency should be the functional currency of the Companys wholly owned Brazilian subsidiary, Motorola Industrial Ltda. Prior to July 3, 2011, the functional currency was the U.S. dollar. As a result of this change, the Company anticipates an adjustment to the previously reported values of non-monetary assets which will be offset by an adjustment in the Cumulative translation adjustment, a component of accumulated other comprehensive loss in Stockholders equity in the Consolidated Balance Sheets. As a result of this change in the functional currency, for financial periods beginning on or after July 3, 2011, changes in the Brazilian exchange rates will result in gains or losses, which will be recorded in Other, net in the Consolidated Statements of Operations related to the revaluation of U.S. dollar denominated monetary assets and liabilities, such as cash and cash equivalents and accounts payable held by our Brazilian subsidiary.
At July 2, 2011 and December 31, 2010, the Company did not have any interest rate agreements in place.
Except for historical matters, the matters discussed in this Form 10-Q are forward-looking statements within the meaning of applicable federal securities law. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and generally include words such as believes, expects, intends, anticipates, estimates and similar expressions. We can give no assurance that any future results or events discussed in these statements will be achieved. Any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. Readers are cautioned that such forward-looking statements are subject to a variety of risks and uncertainties that could cause our actual results to differ materially from the statements contained in this Form 10-Q. Forward-looking statements include, but are not limited to, for example: (1) our business strategies, plans and objectives, including the anticipated impact of such strategies, plans and objectives; (2) our future operating and financial performance; (3) remaining cash that our Former Parent is expected to contribute to Motorola Mobility upon repatriation; (4) future levels of revenues, operating margins, income from operations, net income, earnings per share and other financial information; (5) expectations regarding the Companys ability to finance its operations and its ability to obtain, and the cost of, letters of credit, credit facilities and foreign exchange lines; (6) future hedging activities; (7) anticipated levels of demand for our products and services; (8) expectations regarding our research and development activities and intellectual property, including expectations regarding the competitiveness of the patent portfolio; (9) expectations regarding patent litigation, including trends and the impact and timing of a potentially negative result for the Company; (10) the success or timing of completion of ongoing or anticipated capital or maintenance projects; (11) expectations regarding opportunities for growth; (12) expectations regarding availability of materials and components, energy supplies and labor; (13) the resolution, potential effects and timing of judicial or other proceedings on our business, financial condition, results of operations, cash flows and liquidity; (14) the potential effect of the financial markets on our business, financial condition, results of operations, cash flows and liquidity; and (15) the anticipated effects of actions of third-parties such as competitors, counterparties, or federal, foreign, state or local regulatory authorities, or plaintiffs in litigation. Motorola Mobility undertakes no obligation to publicly update any forward-looking statement or risk factor, whether as a result of new information, future events or otherwise.
Some of the risk factors that affect the Companys business and financial results are discussed in Item 1A: Risk Factors on pages 13 through 34 of our 2010 Annual Report on Form 10-K. We wish to caution the reader that the risk factors discussed in each of these documents and those described in our other Securities and Exchange Commission filings, could cause our actual results to differ materially from those stated in the forward-looking statements.
(a) Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this quarterly report (the Evaluation Date). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to Motorola Mobility, including our consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission (SEC) reports, is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) accumulated and communicated to Motorola Mobilitys management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting. Except as described below, there have been no changes in our internal control over financial reporting that occurred during the quarter ended July 2, 2011, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
The Company has an ongoing initiative to upgrade its enterprise resource planning (ERP) system. The upgrade, which began during 2010, will be implemented in stages over multiple years. Management believes that necessary procedures are in place to maintain effective internal control over financial reporting during the upgrade process. The procedures include pre-implementation planning, design and testing, as well as extensive planned post-implementation monitoring and testing of the effectiveness of internal control over financial reporting in the upgraded ERP environment. To date, the Company has not identified any significant internal control issues in connection with the implementation or operation of the ERP system upgrade.
On February 19, 2008, Personalized Media Communications, L.L.C. filed an action for patent infringement against Motorola, Inc. and two other defendants in Personalized Media Communications, L.L.C. v. Motorola, Inc. et al., in the U.S. District Court for the Eastern District of Texas. The amended complaint alleged infringement of five patents by Motorola, Inc. The complaint alleged that Motorola, Inc. directly infringed, contributorily infringed or induced others to infringe the patents-in-suit by marketing, making, using and/or selling broadband transmission products, content origination products, head end products, digital set-top products and software products and services used in conjunction with digital set-top boxes. The complaint sought unspecified monetary damages and injunctive relief. On April 13, 2011, Motorola Mobility, Inc. was substituted for Motorola, Inc. On June 7, 2011, the court ordered that all claims against Motorola Mobility, Inc. be dismissed with prejudice as a result of a settlement agreement between Motorola Mobility, Inc. and Personalized Media Communications, L.L.C.
Microsoft Corporation v. Motorola, Inc.
On October 1, 2010, Microsoft Corporation (Microsoft) filed complaints against Motorola, Inc. in the International Trade Commission (ITC) and the United States District Court for the Western District of Washington (District Court) alleging patent infringement based on products manufactured and sold by Motorola, Inc. The ITC matter is entitled In the Matter of Mobile Devices, Associated Software, and Components Thereof (Inv. No. 337-TA-744). On October 6, 2010 and October 12, 2010, Microsoft amended the District Court and ITC complaints, respectively, to add Motorola Mobility, Inc. as a defendant. The complaints, as amended, allege infringement of claims in nine patents based on Motorola, Inc.s and Motorola Mobility, Inc.s manufacture and sale of Android-based mobile phones. The ITC complaint seeks exclusion and cease and desist orders. On November 5, 2010, the ITC instituted the investigation. The District Court complaint seeks unspecified monetary damages and injunctive relief.
On November 9, 2010, Microsoft filed a complaint in the United States District Court for the Western District of Washington against Motorola, Inc. and Motorola Mobility, Inc. (the Motorola Defendants) alleging that the Motorola Defendants breached a contractual obligation to license certain patents related to 802.11 wireless networking technology and H.264 video coding technology on reasonable and non-discriminatory terms and conditions. The complaint seeks unspecified monetary damages and injunctive relief including a declaration that the Motorola Defendants have not offered royalties to Microsoft under reasonable rates with reasonable terms and conditions that are demonstrably free of any unfair discrimination. On February 23, 2011, Microsoft amended the complaint to add General Instrument Corporation (our indirect wholly-owned subsidiary) as a defendant.
In November 2010, Motorola Mobility, Inc. and General Instrument Corporation (our indirect wholly-owned subsidiary) filed complaints alleging patent infringement against Microsoft in the ITC and in the U.S. District Courts for the Southern District of Florida, Motorola Mobility, Inc. v. Microsoft Corporation, and the Western District of Wisconsin, Motorola Mobility, Inc. and General Instrument Corporation v. Microsoft Corporation and Motorola Mobility, Inc. and General Instrument Corporation v. Microsoft Corporation. The ITC matter is entitled In the Matter of Certain Gaming and Entertainment Consoles, Related Software, and Components Thereof (Inv. No. 337-TA-752). Among the complaints, Motorola Mobility, Inc. and General Instrument Corporation are asserting infringement of claims in seventeen patents by Microsofts PC and Server software, Windows mobile software and Xbox products. The ITC complaint seeks exclusion and cease and desist orders. On December 23, 2010, the ITC instituted the investigation. The District Court complaints seek monetary damages and injunctive relief. In December 2010 and February 2011, Motorola Mobility, Inc. subsequently asserted claims of four additional patents in the Western District of Wisconsin, Motorola Mobility, Inc. v. Microsoft Corporation.
Between December 23, 2010 and January 25, 2011, Microsoft filed counterclaims against Motorola Mobility, Inc. in these actions, alleging infringement of a total of fourteen additional Microsoft patents. Two of the complaints filed by Motorola Mobility, Inc. and General Instrument Corporation in the Western District of Wisconsin have been transferred to the U.S. District Court for the Western District of Washington.
On June 24, 2011, Motorola Mobility, Inc. filed counterclaims against Microsoft Corporation in the ITC proceeding which we subsequently removed to the Northern District of California, and instituted a new action in the Northern District of California, Motorola Mobility, Inc. v. Microsoft Corporation, alleging that Microsoft Corporation breached commitments to license certain patents. The counterclaims include breach of contract, promissory estoppel, violation of Section 2 of the Sherman Act and unfair competition.
On October 6, 2010, Motorola Mobility, Inc. filed a complaint alleging patent infringement against Apple Inc. with the ITC. The matter is entitled In the Matter of Certain Wireless Communication Devices, Portable Music and Data Processing Devices, Computers and Components Thereof (Inv. No. 337-TA-745). The complaint alleges that Apple Inc. directly infringes, contributorily infringes and/or induces others to infringe claims of six patents by importing and selling in the United States after importation certain wireless communication devices, portable music and data processing devices, computers, and components thereof without the authorization of Motorola Mobility, Inc. The complaint seeks the issuance of an exclusion order barring from entry into the United States certain products and a cease and desist order prohibiting Apple from importing, marketing and distributing certain products and other related activities. On November 8, 2010, the ITC instituted the investigation.
On October 6, 2010, Motorola Mobility, Inc. also filed two complaints for patent infringement against Apple Inc., Motorola Mobility, Inc. v. Apple Inc , in the United States District Court for the Northern District of Illinois (the Illinois Complaints). Motorola Mobility, Inc. filed another complaint for patent infringement against Apple Inc., Motorola Mobility, Inc. v. Apple Inc , in the United States District Court for the Southern District of Florida (the Florida Complaint). The complaints allege that Apple Inc. directly and/or indirectly infringes eighteen Motorola Mobility patents by making, using, offering for sale and selling in the United States certain products and services. On November 9, 2010, Motorola Mobility, Inc. voluntarily dismissed the Illinois Complaints, which are now being asserted as counterclaims in the actions brought by Apple Inc. on October 29, 2010 in the United States District Court for the Western District of Wisconsin, as described below. On November 18, 2010, Apple counterclaimed in the Southern District of Florida, alleging infringement of six Apple patents by Motorola Mobility, Inc.s manufacture and sale of mobile devices, set-top boxes and digital video recorders.
On October 8, 2010, Motorola Mobility, Inc. filed a complaint for declaratory relief against Apple Inc. and NeXT Software, Inc. in Motorola Mobility, Inc. v. Apple Inc. and NeXT Software, Inc., in the United States District Court for the District of Delaware. The complaint seeks a judgment declaring that Motorola Mobility, Inc. has not infringed, induced the infringement of, or contributed to the infringement of any valid, enforceable claim of twelve patents owned by Apple Inc. and NeXT Software, Inc. On December 2, 2010, Apple asserted these twelve patents against Motorola, Inc. and Motorola Mobility, Inc. in the Western District of Wisconsin, seeking to transfer the Delaware action to Wisconsin.
On October 29, 2010, Apple Inc. filed two complaints alleging patent infringement against Motorola, Inc. and Motorola Mobility, Inc. in Apple Inc. v. Motorola, Inc. and Motorola Mobility, Inc. , in the United States District Court for the Western District of Wisconsin. The complaints allege infringement of six patents by Motorola, Inc. and Motorola Mobility, Inc. The complaints allege that Motorola, Inc. and Motorola Mobility, Inc. directly infringe, contributorily infringe and/or induce others to infringe the patents-in-suit by making, using, offering for sale and selling in the United States certain mobile devices and related software. The complaint seeks unspecified monetary damages and injunctive relief. On November 9, 2010, Motorola Mobility, Inc. filed counterclaims against Apple Inc. to their complaints alleging infringement by Apple Inc. of twelve Motorola Mobility, Inc. patents originally asserted by Motorola Mobility, Inc. in the Northern District of Illinois as above.
the Matter of Certain Mobile Devices and Related Software (Inv. No. 337-TA-750). The complaint alleges infringement of three patents by Motorola, Inc. and Motorola Mobility, Inc. The complaint alleges that Motorola, Inc. and Motorola Mobility, Inc. directly infringe, contributorily infringe and/or induce others to infringe the three patents by manufacturing, marketing and selling in the United States mobile devices, such as smartphones, and associated software, including operating systems, user interfaces, and other application software designed for use on, and loaded onto, such devices. The complaint seeks the issuance of an exclusion order barring from entry into the United States certain mobile devices and related software and a cease and desist order prohibiting Motorola from importing, selling, transporting, and other related activities of certain mobile devices and related software. On November 30, 2010, the ITC instituted the investigation.
On March 11, 2011, Apple filed counterclaims against Motorola Mobility, Inc. in the ITC proceeding which were subsequently removed to the United States District Court for the Western District of Wisconsin, and instituted a new action in the Western District of Wisconsin, Apple Inc. v. Motorola Mobility, Inc., alleging that Motorola Mobility, Inc. breached commitments to various standards setting organizations. The counterclaims include equitable estoppel, waiver, breach of contract, violation of Section 2 of the Sherman Act, unfair competition and interference with contract. Apple seeks declaratory judgments that Motorola Mobility, Inc.s license offers involving standards essential patents have not been on reasonable and non-discriminatory terms and conditions, that Motorola Mobility, Inc. is not entitled to injunctive relief and that Motorola Mobility, Inc. has committed patent misuse.
In March and April 2011, Motorola Mobility, inc. filed patent infringement complaints in Mannheim, Germany alleging that Apple Retail Germany GmbH, Apple Sales International, and Apple Inc. infringe three patents owned by Motorola Mobility, Inc.
In May and July 2011, Apple Inc. filed patent infringement complaints in Munich and Düsseldorf, Germany alleging that Motorola Mobility, Inc. and Motorola Mobility Germany GmbH infringe four utility patents and three design patents owned by Apple Inc. The design patents are being asserted against Motorola Mobilitys tablet products.
In our rapidly evolving and highly competitive industry, companies invest heavily in developing and acquiring intellectual property rights to seek incremental advantages in the marketplace. Such companies also vigorously pursue and protect their intellectual property rights with patent litigation. The ITC (U.S. International Trade Commission) has increasingly become an important forum to litigate intellectual property disputes because an ultimate loss for a company or its suppliers in an ITC action could result in a prohibition on importing infringing products into the U.S.
As discussed above, we are currently engaged in significant patent litigation with Microsoft and Apple in many different forums within and outside the U.S., including in the ITC. We expect results on Microsoft and Apple matters at the ITC in March 2012 with a sixty-day presidential review period thereafter. The Company and several of our chip suppliers are also facing an ITC matter brought by Rambus, as discussed in the Companys Annual Report on Form 10-K, and a result is expected at the ITC in May 2012 with a sixty-day presidential review period thereafter. An ultimate loss for the Company or its suppliers in an ITC action could result in a prohibition on importing infringing products or products incorporating infringing components into the U.S. In light of the U.S. being a very important market and our substantial manufacturing operations overseas, a prohibition on importation could have a significant negative impact on the Company, including the inability to import many important products into the U.S. The impact also could necessitate workarounds to shift to non-infringing products or limit certain features of our products. Such patent litigation could also result in increased costs for the Company associated with damages, development of non-infringing products, licenses to the subject intellectual property or, when applicable, difficulties seeking indemnification from suppliers. It may also result in our competitors obtaining additional freedom of action. Intellectual property risks are further discussed in Part I. Item 1A. Risk Factors in the Companys Annual Report on Form 10-K.
In August 2009, TiVo, Inc. (TiVo) commenced litigation against two customers of our Home business in TiVo, Inc. v. Verizon Comms., Inc. et. al. and TiVo, Inc. v. AT&T Inc. in the U.S. District Court for the Eastern District of Texas alleging patent infringement related to certain digital video recording (DVR) equipment sold by Motorola Mobility to these customers. The complaints seek damages and injunctions against our customers related to our DVR equipment. Verizon and AT&T have made indemnification demands to us based on the lawsuits.
On February 25, 2011, Motorola Mobility, Inc. and General Instrument Corporation (our indirect wholly-owned subsidiary) filed a patent infringement complaint against TiVo in the U.S. District Court for the Eastern District of Texas, Motorola Mobility, Inc. and General Instrument Corporation v. TiVo, Inc. The complaint alleges infringement of three patents by TiVo DVR products, and requests a declaration that two patents of TiVo are invalid and not infringed by certain DVR products of Motorola Mobility, Inc. and General Instrument Corporation. Our complaint asserts that an actual controversy exists between TiVo and Motorola Mobility, Inc./General Instrument Corporation based on TiVos accusations of infringement related to our Home business DVR products in the TiVo-Verizon lawsuit, Verizons indemnification demand to Motorola Mobility, Inc./General Instrument Corporation, and subsequent discovery in the TiVo-Verizon lawsuit directed at our Home business DVR products. On July 6, 2011, defendants motion to stay Motorola Mobility, Inc. and General Instrument Corporation v. TiVo, Inc. for a six month period was granted.
Brazilian tax authorities have proposed assessments against the Companys Brazilian subsidiary relating to various technology transfer taxes, duties, value added taxes, certain other taxes and labor related matters related to the subsidiarys operations for calendar years 1997 through 2010. As of July 2, 2011, these assessments collectively represent reasonably possible loss contingencies under the applicable accounting standards of up to approximately $530 million, based on the exchange rate in effect at July 2, 2011, including interest and penalties. However, the Company is vigorously disputing these matters, believes it has valid defenses that are supported by the law, and believes that this amount is not a meaningful indicator of liability. These matters are progressing through the multiple levels of administrative and judicial review available in Brazil. Although we are vigorously disputing these matters, in the event of a loss of these matters at the intermediate administrative level, in order to continue to dispute the matters in Brazils judicial system, the Company may be required to deposit additional cash, bank or insurance bonds or pledge assets while the underlying matter is pending judicial review to cover an amount equal to the full value of the alleged tax assessment plus penalties and interest, which may negatively impact the Companys cash liquidity, potentially significantly in some cases. Due to the complexities and uncertainty surrounding the administrative and judicial process in Brazil and the nature of the claims asserted, we do not expect a final resolution of these matters for several years.
For additional information regarding litigation and its potential impact on the Company, see Part I. Item 1A. Risk Factors in the Companys Annual Report on Form 10-K.
The Company is involved in various other lawsuits, claims and investigations arising in the normal course of business and relating to our business, such as intellectual property disputes, contractual disputes, and employment matters. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on Motorola Mobilitys consolidated financial position, liquidity or results of operations. However, an unfavorable resolution could have a material adverse effect on the Companys consolidated financial position, liquidity or results of operations in the periods in which the matters are ultimately resolved.
The reader should carefully consider, in connection with the other information in this report, the factors discussed in Part I, Item 1A: Risk Factors on pages 13 through 34 of the Companys 2010 Annual Report on Form 10-K. These factors could cause our actual results to differ materially from those stated in forward-looking statements contained in this document and elsewhere.
*10.1 Motorola Mobility Holdings, Inc. Change in Control Severance Plan, which replaces Exhibit 10.2 to Motorola Mobility Holdings, Inc.s Report on Form 10-Q for the quarter ended April 2, 2011 to correct certain cross references.
*31.1 Certification of Dr. Sanjay K. Jha pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2 Certification of Marc E. Rothman pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1 Certification of Dr. Sanjay K. Jha pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*32.2 Certification of Marc E. Rothman pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
MOTOROLA and the Stylized M Logo are trademarks or registered trademarks of Motorola Trademark Holdings, LLC.
All other product or service names are the property of their respective owners. © 2011 Motorola Mobility, Inc. All rights reserved.

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