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MMI > SEC Filings for MMI > Form 10-Q on 29-Jul-2011All Recent SEC Filings

Show all filings for MOTOROLA MOBILITY HOLDINGS, INC

Form 10-Q for MOTOROLA MOBILITY HOLDINGS, INC


29-Jul-2011

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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.

Introduction

Management's discussion and analysis of financial condition and results of operations ("MD&A") is a supplement to the accompanying condensed consolidated financial statements and provides additional information on Motorola Mobility's business, recent developments, financial condition, liquidity and capital resources, cash flows and results of operations. MD&A is organized as follows:

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.

Separation from Motorola, Inc.

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.


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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.

Executive Overview

The Company

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.

Motorola Mobility's Financial Results for the quarter ended July 2, 2011

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.

Financial results for our two business segments for the quarter ended July 2, 2011

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.


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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.

Looking Forward

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.


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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.


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Results of Operations



                                               Three Months Ended                                   Six Months Ended
(Dollars in millions, except
per share                        July 2,        % of       July 3,        % of       July 2,        % of       July 3,        % of
amounts)                           2011        Sales         2010        Sales         2011        Sales         2010        Sales
Net revenues                       $3,337                    $2,609                    $6,369                    $5,089
Costs of sales                      2,473        74.1%        1,945        74.5%        4,750        74.6%        3,830        75.3%

Gross margin                          864        25.9%          664        25.5%        1,619        25.4%        1,259        24.7%

Selling, general and
administrative expenses               456        13.7%          385        14.8%          873        13.7%          756        14.8%
Research and development
expenditures                          395        11.8%          372        14.3%          752        11.8%          739        14.5%
Other charges (income)                 36         1.1%        (209)       (8.0)%           53         0.8%        (180)       (3.5)%

Operating earnings (loss)            (23)       (0.7)%          116         4.4%         (59)       (0.9)%         (56)       (1.1)%

Other income (expense):
Interest income (expense), net          1           -%         (18)       (0.7)%            3           -%         (29)       (0.6)%
Gains on sales of investments          10         0.3%            -           -%           10         0.2%            -           -%
Other, net                            (5)       (0.1)%          (6)       (0.2)%         (22)       (0.3)%         (22)       (0.4)%

Total other income (expense)            6         0.2%         (24)       (0.9)%          (9)       (0.1)%         (51)       (1.0)%

Earnings (loss) before income
taxes                                (17)       (0.5)%           92         3.5%         (68)       (1.1)%        (107)       (2.1)%
Income tax expense                     39         1.2%           15         0.5%           69         1.1%           27         0.5%

Net earnings (loss)                  (56)       (1.7)%           77         3.0%        (137)       (2.2)%        (134)       (2.6)%
Less: Loss attributable to
non-controlling interests               -           -%          (3)       (0.1)%            -           -%          (2)       (0.0)%

Net earnings (loss)
attributable to Motorola
Mobility Holdings, Inc.             $(56)       (1.7)%          $80         3.1%       $(137)       (2.2)%       $(132)       (2.6)%

Three months ended July 2, 2011 compared to three months ended July 3, 2010

Net Revenues

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

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.


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Selling, General and Administrative Expenses

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.

Research and Development Expenditures

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.

Other Charges (Income)

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.

Interest Income (Expense), Net

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

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.

Other, Net

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.

Income Tax Expense

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.


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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.

Net Earnings (Loss)

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.

Six months ended July 2, 2011 compared to six months ended July 3, 2010

Net 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

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.

Selling, General and Administrative Expenses

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.

Research and Development Expenditures

R&D expenditures increased 2% to $752 million, or 11.8% of net revenues, in the . . .

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