MOTOROLA SOLUTIONS, INC. This commentary should be read in conjunction with the condensed consolidated financial statements and related notes thereto ofMotorola Solutions, Inc. ("Motorola Solutions" or the "Company," "we," "our," or "us") for the three and six months endedJune 27, 2020 andJune 29, 2019 , as well as our consolidated financial statements and related notes thereto and management's discussion and analysis of financial condition and results of operations in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Executive Overview Second Quarter Financial Results •Net sales were$1.6 billion in the second quarter of 2020 compared to$1.9 billion in the second quarter of 2019. •Operating earnings were$218 million in the second quarter of 2020 compared to$349 million in the second quarter of 2019. •Net earnings attributable toMotorola Solutions, Inc. were$135 million , or$0.78 per diluted common share, in the second quarter of 2020, compared to$207 million , or$1.18 per diluted common share, in the second quarter of 2019. •Our operating cash flow increased$15 million to$517 million in the first half of 2020 compared to the first half of 2019. •We repurchased$336 million of common stock and paid$218 million in dividends in the first half of 2020. Recent Developments InMarch 2020 , the COVID-19 outbreak was declared a pandemic by theWorld Health Organization ("WHO"). In response, there have been a broad number of governmental and commercial actions including social distancing measures, stay-at-home orders, travel restrictions, business shutdowns and slowdowns in an effort to limit the spread of COVID-19. These events have resulted in a significant decline in global economic activity, and accordingly, we have assessed the impact on our employees, customers, communities, liquidity and financial position. We continue to abide by a number of measures in an effort to protect the health and well-being of our employees and customers, including having office workers work remotely, suspending employee travel, withdrawing from certain industry events, increased cleaning, encouraging face coverings and using thermal scanning. We have continued to ensure customer continuity by fulfilling several emergency orders, completing remote software maintenance where possible, and continuing to service our mission-critical networks on-site as needed to ensure seamless operations. The Sales teams' virtual engagement with our customers has improved in the second quarter and is expected to continue throughout the second half of 2020. Additionally, our engineering teams have adapted our solutions offerings to equip our customers with the latest technology in the fight to protect their workplace from the spread of COVID-19. Specifically, in our video security business, we have adapted our software and hardware offerings to provide analytics over occupancy counting, facemask detection, and thermal detection capabilities. We have assessed the adequacy of our liquidity as of the second quarter of 2020 and believe the measures taken over the past few years and months allow us the ability to operate under the current conditions. During the first quarter of 2020, we proactively withdrew$800 million from our unsecured revolving credit facility, of which$300 million was repaid during the quarter and$200 million was repaid subsequent to the quarter. This leaves$1.9 billion of capacity on the committed facility. Additionally, we have no bond maturities until 2022. We continue to evaluate our financial position during this economic slowdown. Specifically, in our Software and Services segment, with the largely recurring nature of the business and strong backlog position, we expect that the impacts should be somewhat limited on revenue and operating margin. In our Products and Systems Integration segment, the impacts on revenue and operating margin are likely to be more significant with the largest impact expected during the second quarter of 2020. Reduced demand, particularly in our professional commercial radio business ("PCR"), as well as delays in engagements with our state and local customers in the near term, will most likely lead to year-over-year sales declines for the segment in 2020, as compared to 2019. Within the Products and Systems Integration segment, we are encouraged by the resiliency of the video security Device business and expect growth for fiscal year 2020. We have also taken actions in a number of areas to reduce our operating expenses, mostly driven by lower variable compensation, travel costs, contractor spend and reduced real estate footprint to limit the negative effect on operating margins for the year despite the expected reduction of revenue. In addition, our supply chain partners have been supportive and continue to do their part to ensure that service levels to the company and its customers remain fulfilled. Lastly, we evaluated whether there were any impairment indicators as ofJune 27, 2020 , which included a review of our receivables and contract assets, inventory, right-of-use lease assets, long-lived assets, investments, goodwill and intangible assets. We concluded that as of the end of the second quarter of 2020, our assets were fairly stated and recoverable. Recent Acquisitions OnJuly 31, 2020 , we acquiredPelco, Inc. , a global provider of video security solutions for$110 million in cash. The acquisition demonstrates our continued investment in video security and analytics, adding to our existing video portfolio a broad range of products that can be used in a variety of commercial and industrial environments and use cases. The business will be part of both the Products and Systems Integration segment and the Software and Services segment. 25 -------------------------------------------------------------------------------- OnJune 16, 2020 we acquiredIndigoVision Group plc ("IndigoVision") for a purchase price of$37 million . The acquisition was settled with$35 million of cash, net of cash acquired and debt assumed. The acquisition complements our video security and analytics portfolio, providing enhanced geographical reach across a wider customer base. The business is a part of both the Product and System Integration segment and the Software and Services segment. OnApril 30, 2020 , we acquired a cybersecurity services business for$32 million of cash, net of cash acquired. The acquisition expands our ability to assist customers with cybersecurity needs through vulnerability assessments, cybersecurity consulting, and managed services including security monitoring of network operations. The business is a part of the Software and Services segment. OnMarch 3, 2020 , we acquired a cybersecurity services business for$40 million , inclusive of share-based compensation withheld at a fair value of$6 million that will be expensed over a service period of two years. The acquisition was settled with$33 million of cash, net of cash acquired. The acquisition expands our ability to assist customers with cybersecurity needs through vulnerability assessments, cybersecurity consulting, managed services and remediation and response capabilities. The business is a part of the Software and Services segment. OnOctober 16, 2019 , we acquired a data solutions business for vehicle location information for a purchase price of$85 million , net of cash acquired. The acquisition enhances our video security platform by adding data to our existing license plate recognition ("LPR") database within our Software and Services segment. OnJuly 11, 2019 , we acquiredWatchGuard, Inc. ("WatchGuard"), a provider of in-car and body-worn video solutions for$271 million , inclusive of share-based compensation withheld at a fair value of$16 million that will be expensed over an average service period of two years. The acquisition was settled with$250 million of cash, net of cash acquired. The acquisition expands our video security platform within both the Product and Systems Integration segment and the Software and Services segment. OnMarch 11, 2019 , we acquiredAvtec, Inc. ("Avtec"), a provider of dispatch communications forU.S. public safety and commercial customers for a purchase price of$136 million in cash, net of cash acquired. This acquisition expands our commercial portfolio with new capabilities, allowing us to offer an enhanced platform for customers to communicate, coordinate resources and secure their facilities. The business is part of both the Product and Systems Integration segment and the Software and Services segment. OnJanuary 7, 2019 , we announced that we acquiredVaaS International Holdings ("VaaS"), a company that is a global provider of data and image analytics for vehicle location for$445 million , inclusive of share-based compensation withheld at a fair value of$38 million that will be expensed over an average service period of one year. The acquisition was settled with$231 million of cash, net of cash acquired, and 1.4 million of shares issued at a fair value of$160 million for a purchase price of$391 million . This acquisition expands our video security platform within both the Product and Systems Integration segment and the Software and Services segment. Segment Financial Highlights A summary of our segment results for the second quarter of 2020 is as follows: •In the Products and Systems Integration segment, net sales were$968 million in the second quarter of 2020, a decrease of$270 million , or 22%, compared to$1.2 billion in the second quarter of 2019. On a geographic basis, net sales decreased in both theNorth America and International regions compared to the year-ago quarter primarily driven by lower PCR and public safety land mobile radio ("LMR") sales. Operating earnings were$49 million in the second quarter of 2020, compared to$201 million in the second quarter of 2019. Operating margins decreased in 2020 to 5.1% from 16.2% in 2019 primarily driven by lower sales and partially offset by lower operating expenses primarily driven by lower employee incentive costs, indirect expenses and travel expenses. The overall reduction in operating expenses was offset by: i)$24 million higher reorganization of business charges, ii)$6 million higher legal settlements, iii)$3 million higher share-based compensation expenses, and iv) higher operating expenses from acquisitions. •In the Software and Services segment, net sales were$650 million in the second quarter of 2020, an increase of$28 million , or 5%, compared to net sales of$622 million in the second quarter of 2019. On a geographic basis, net sales increased in theNorth America region partially offset by a decrease in the International region compared to the year-ago quarter. Operating earnings were$169 million in the second quarter of 2020, compared to$148 million in the second quarter of 2019. Operating margins increased in 2020 to 26.0% from 23.8% in 2019 driven by higher sales, gross margin expansion, and reduced operating expenses primarily driven by lower employee incentive costs and travel expenses. The overall reduction in operating expenses was offset by: i)$5 million higher reorganization of business charges and ii) higher operating expenses from acquisitions. 26 --------------------------------------------------------------------------------
Results of Operations
Three Months Ended Six Months Ended
(Dollars in millions, except per % of % of % of % of
share amounts) June 27, 2020 Sales* June 29, 2019 Sales* June 27, 2020 Sales* June 29, 2019 Sales*
Net sales from products $ 877 $ 1,118 $ 1,764 $ 2,063
Net sales from services 741 742 1,509 1,454
Net sales 1,618 1,860 3,273 3,517
Costs of products sales 413 47.1 % 490 43.8 % 812 46.0 % 934 45.3 %
Costs of services sales 439 59.2 % 439 59.2 % 908 60.2 % 879 60.5 %
Costs of sales 852 929 1,720 1,813
Gross margin 766 47.3 % 931 50.1 % 1,553 47.4 % 1,704 48.5 %
Selling, general and
administrative expenses 297 18.4 % 351 18.9 % 638 19.5 % 676 19.2 %
Research and development
expenditures 161 10.0 % 170 9.1 % 330 10.1 % 333 9.5 %
Other charges 90 5.6 % 61 3.3 % 109 3.3 % 116 3.3 %
Operating earnings 218 13.5 % 349 18.8 % 476 14.5 % 579 16.5 %
Other income (expense):
Interest expense, net (58) (3.6) % (56) (3.0) % (109) (3.3) % (111) (3.2) %
Gains on sales of investments and
businesses, net - - % 3 0.2 % - - % 4 0.1 %
Other, net 16 1.0 % (21) (1.1) % 34 1.0 % (12) (0.3) %
Total other expense (42) (2.6) % (74) (4.0) % (75) (2.3) % (119) (3.4) %
Net earnings before income taxes 176 10.9 % 275 14.8 % 401 12.3 % 460 13.1 %
Income tax expense 40 2.5 % 67 3.6 % 67 2.0 % 100 2.8 %
Net earnings 136 8.4 % 208 11.2 % 334 10.2 % 360 10.2 %
Less: Earnings attributable to
non-controlling interests 1 0.1 % 1 0.1 % 2 0.1 % 2 0.1 %
Net earnings attributable to
Motorola Solutions, Inc. $ 135 8.3 % $ 207 11.1 % $ 332 10.1 % $ 358 10.2 %
Earnings per diluted common share $ 0.78 $ 1.18 $ 1.90 * Percentages may not add due to rounding
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Results of Operations-Three months ended June 27, 2020 compared to three months
ended June 29, 2019
The results of operations for the second quarter of 2020 are not necessarily
indicative of the operating results to be expected for the full year.
Historically, we have experienced higher revenues in the fourth quarter as
compared to the rest of the quarters of our fiscal year as a result of the
purchasing patterns of our customers.
Net Sales
Three Months Ended
(In millions) June 27, 2020 June 29, 2019 % Change
Net sales from Products and Systems Integration $ 968 $ 1,238 (22) %
Net sales from Software and Services 650 622 5 %
Net sales $ 1,618 $ 1,860 (13) %
The Products and Systems Integration segment's net sales represented 60% of our
consolidated net sales in the second quarter of 2020 and 67% in the second
quarter of 2019. The Software and Services segment's net sales represented 40%
of our consolidated net sales in the second quarter of 2020 and 33% in the
second quarter of 2019.
Net sales decreased in the second quarter of 2020 compared to the second quarter
of 2019. The 22% decline in sales within the Products and Systems Integration
segment was driven by a 24% decline in the International region and a 21%
decline in the North America region. The 5% increase in sales within the
Software and Services segment was driven by a 9% increase in the North America
region and partially offset by a 2% decrease in the International region. Net
sales includes:
•a decline in the Products and System Integration segment, inclusive of
acquisitions, driven by a decline in PCR and public safety LMR, partially offset
by growth in video security;
•$30 million from unfavorable currency rates;
•partially offset by $40 million of revenue from acquisitions; and
•growth in Software and Services driven by services in North America and
software sales, inclusive of acquisitions.
Regional results include:
•a decrease in the North America region of 13% driven by a decline in the
Products and System Integration segment, partially offset by growth in the
Software and Services segment, inclusive of revenue from acquisitions; and
•a decrease in the International region of 14% driven by a decline in sales in
both the Products and Systems Integration segment and the Software and Services
segment.
Products and Systems Integration
The 22% decrease in the Products and Systems Integration segment was driven by
the following:
•28% decline in Devices revenue, primarily driven by a decline in PCR and public
safety LMR in both the International and North America regions, inclusive of
revenue from acquisitions;
•10% decline in Systems and Systems Integration revenue driven by a decline in
customer engagement due to the COVID-19 pandemic; and
•partially offset by $20 million of revenue from acquisitions.
Software and Services
The 5% increase in the Software and Services segment was driven by the
following:
•3% growth in Services, driven by services in North America , inclusive of
acquisitions;
•8% growth in Software, driven primarily by acquisitions and growth in command
center software; and
•$20 million of revenue from acquisitions.
Gross Margin
Three Months Ended
(In millions) June 27, 2020 June 29, 2019 % Change
Gross margin $ 766 $ 931 (18) %
Gross margin was 47.3% of net sales in the second quarter of 2020 compared to
50.1% in the second quarter of 2019. The primary drivers of the decrease are as
follows:
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•lower gross margin contribution in Products and Systems Integration as a result
of the decline in PCR and public safety LMR sales, as well as lower margins in
Systems and Systems Integration driven by a delay in engagements from COVID-19;
and
•partially offset by higher margins within Software and Services primarily
driven by margin expansion within the Services and Software businesses and the
increased mix of Software to the total segment, inclusive of acquisitions.
Selling, General and Administrative Expenses
Three Months Ended
(In millions) June 27, 2020 June 29, 2019 % Change
Selling, general and administrative expenses $ 297 $ 351 (15) %
SG&A expenses decreased 15% compared to the second quarter of 2019. SG&A
expenses were 18.4% of net sales compared to 18.9% of net sales in the second
quarter of 2019. The decrease in SG&A expenditures is primarily due to reduced
employee incentive costs, travel expenses and indirect expenses. The overall
reduction in SG&A expenses was partially offset by expenses associated with
acquired businesses.
Research and Development Expenditures
Three Months Ended
(In millions) June 27, 2020 June 29,
2019 % Change
Research and development expenditures$ 161 $ 170 (5) % R&D expenditures decreased 5% primarily due to lower operating expenses in the second quarter of 2020 driven by lower employee incentive costs, partially offset by expenses associated with acquired businesses. R&D expenditures were 10.0% of net sales compared to 9.1% of net sales in the second quarter of 2019. Other Charges Three Months Ended (In millions) June 27, 2020 June 29, 2019 Other charges$ 90 $ 61 Other charges increased by$29 million in the second quarter of 2020 compared to the second quarter of 2019. The change is driven by the following: •$26 million of net reorganization business charges in the second quarter of 2020 compared to$8 million in the second quarter of 2019 (see further detail in "Reorganization of Businesses" section); •$7 million of legal settlements in the second quarter of 2020 compared to$1 million in the second quarter of 2019; and •$5 million of fixed asset impairments in the second quarter of 2020. Operating Earnings Three Months Ended (In millions) June 27, 2020 June 29, 2019 Operating earnings from Products and Systems Integration $ 49 $ 201 Operating earnings from Software and Services 169 148 Operating earnings $ 218 $ 349 Operating earnings were down$131 million , or 38%, compared to the second quarter of 2019. The decrease in Operating earnings was due to: •Products and Systems Integration, which was down$152 million , driven by lower sales, gross margin and partially offset by lower operating expenses primarily driven by lower employee incentive costs, indirect expenses and travel expenses. The overall reduction in operating expenses was partially offset by: i)$24 million of higher reorganization of business charges, ii)$6 million higher legal settlements, iii)$3 million higher share-based compensation expenses, and iv) higher operating expenses from acquisitions; and •partially offset by Software and Services, which was up$21 million , driven by higher sales, gross margin expansion, and reduced operating expenses primarily driven by lower employee incentive costs and travel expenses. The overall reduction in operating expenses was partially offset by: i)$5 million higher reorganization of business charges and ii) higher operating expenses from acquisitions. 29 --------------------------------------------------------------------------------
Interest Expense, net
Three Months Ended
(In millions) June 27, 2020 June 29, 2019
Interest expense, net $ (58) $ (56)
The increase in net interest expense in the second quarter of 2020 compared to
the second quarter of 2019 was a result of higher average debt outstanding,
partially offset by lower interest rates as of and for the period ending June
27, 2020 as compared to the period ending June 29, 2019 .
Other, net
Three Months Ended
(In millions) June 27, 2020 June 29, 2019
Other, net $ 16 $ (21)
The increase in net Other income in the second quarter of 2020 as compared to
the second quarter of 2019 was driven by:
•a $43 million loss of extinguishment of long term debt in the second quarter of
2019;
•$21 million of foreign currency losses in the second quarter of 2020 compared
to $7 million of foreign currency losses in the second quarter of 2019;
•$3 million of investment impairments in the second quarter of 2019;
•partially offset by a $12 million gain on derivatives in the second quarter of
2020 compared to a $3 million loss on the derivatives in the second quarter of
2019; and
•$4 million of gains related to fair value adjustments to equity investments in
the second quarter of 2020 compared to $16 million of gains related to fair
value adjustments to equity investments in the second quarter of 2019.
Effective Tax Rate
Three Months Ended
(In millions) June 27, 2020 June 29, 2019
Income tax expense $ 40 $ 67
Income tax expense decreased by $27 million compared to the second quarter of
2019, resulting in an effective tax rate of 23%. Our effective tax rate for the
three months ended June 27, 2020 is lower than the effective tax rate for the
three months ended June 29, 2019 of 24%, primarily due to an increased benefit
of forecasted research and experimental development investment tax credit in our
annual effective tax rate.
Results of Operations-Six months ended June 27, 2020 compared to Six months
ended June 29, 2019
Net Sales
Six Months Ended
(In millions) June 27, 2020 June 29, 2019 % Change
Net sales from Products and Systems Integration $ 1,961 $ 2,307 (15) %
Net sales from Software and Services 1,312 1,210 8 %
Net sales $ 3,273 $ 3,517 (7) %
The Products and Systems Integration segment's net sales represented 60% of our
consolidated net sales in the first half of 2020 and 66% in the first half of
2019. The Software and Services segment's net sales represented 40% of our
consolidated net sales in the first half of 2020 and 34% in the first half
quarter of 2019.
Net sales decreased in the first half of 2020 compared to the first half of
2019. The Products and Systems Integration segment declined approximately 15%
which was comprised of a 23% decline in the International region and a 12%
decline in the North America region. The Software and Services segment increased
approximately 8% which is comprised of a 12% increase in the North America
region and a 4% increase in the International region. Net sales includes:
•a decline in the Products and System Integration segment, inclusive of
acquisitions, driven by a decline in PCR and public safety LMR, partially offset
by growth in video security;
•$38 million from unfavorable currency rates;
•partially offset by $88 million of revenue from acquisitions; and
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•growth in Software and Services driven by Services in North America and
Software primarily from acquisitions and growth in command center software.
Regional results include:
•a 10% decline in the International region driven by a decline in PCR within the
Product and System Integration segment, partially offset by a 4% increase in the
Software and Services segment, inclusive of acquisitions; and
•a 5% decline in the North America region driven primarily by a decline in PCR
and public safety LMR within the Products and System Integration segment,
partially offset by growth of video security, and a 12% increase in the Software
and Services segment driven by Services in North America and Software primarily
from acquisitions.
Products and Systems Integration
The 15% decrease in the Products and Systems Integration segment was driven by
the following:
•20% decline in Devices revenue, primarily driven by a decline in PCR and public
safety LMR, partially offset by growth of our video security business, inclusive
of acquisitions;
•7% decline in Systems and Systems Integration revenue driven by a decline in
customer engagement due to the COVID-19 pandemic; and
•partially offset by $44 million of revenue from acquisitions.
Software and Services
The 8% increase in the Software and Services segment was driven by the
following:
•6% growth in Services, driven by services in North America , inclusive of
acquisitions;
•16% growth in Software, driven primarily by acquisitions and growth in command
center software; and
•$44 million of revenue from acquisitions.
Gross Margin
Six Months Ended
(In millions)
(9) %
Gross margin was 47.4% of net sales in the first half of 2020 compared to 48.5%
in the first half of 2019. The primary drivers of the decrease are as follows:
•lower gross margin contribution in Products and Systems Integration as a result
of the decline in PCR and public safety LMR sales, as well as lower margins in
Systems and Systems Integration driven by a delay in engagements from COVID-19;
and
•partially offset by higher margins within Software and Services primarily
driven by margin expansion within the Services and Software businesses and the
increased mix of Software to the total segment, inclusive of acquisitions.
Selling, General and Administrative Expenses
Six Months Ended
(In millions) June 27, 2020 June
29, 2019 % Change
Selling, general and administrative expenses
(6) %
SG&A expenses decreased 6% compared to the first half of 2019. SG&A expenses
were 19.5% of net sales compared to 19.2% of net sales in the first half of
2019. The decrease in SG&A expenditures is primarily driven by reduced employee
incentive costs, travel expenses and indirect expenses, partially offset by $14
million higher Hytera-related legal expenses. The overall reduction in SG&A
expenses was partially offset by expenses associated with acquired businesses.
Research and Development Expenditures
Six Months Ended
(In millions) June 27, 2020 June 29, 2019 % Change
Research and development expenditures
(1) %
R&D expenditures decreased 1% primarily due to lower operating expenses in the
first half of 2020 driven by lower employee incentive costs partially offset by
expenses associated with acquired businesses. R&D expenditures were 10.1% of net
sales compared to 9.5% of net sales in the first half of 2019.
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Other Charges
Six Months Ended
(In millions) June 27, 2020 June 29, 2019
Other charges $ 109 $ 116
Other charges decreased by $7 million in the first half quarter of 2020 compared
to the first half of 2019. The change is driven by the following:
•a $50 million gain on the sale of property, plant and equipment in the first
half of 2020;
•partially offset by, $38 million of net reorganization business charges in the
first half of 2020 compared to $12 million in the first half of 2019 (see
further detail in "Reorganization of Businesses" section);
•$9 million of legal settlements in the first half of 2020; and
•$5 million of fixed asset impairments in the first half of 2020.
Operating Earnings
Six Months Ended
(In millions) June 27, 2020 June 29, 2019
Operating earnings from Products and Systems Integration $ 141 $ 310
Operating earnings from Software and Services 335 269
Operating earnings $ 476 $ 579
Operating earnings were down $103 million , or 18%, compared to the first half of
2019. The decrease in Operating earnings was due to:
•Products and Systems Integration, which was down $169 million , driven by lower
sales and partially offset by lower operating expenses primarily driven by a $50
million gain from the sale of a manufacturing facility in Europe and lower
employee incentive costs, indirect expenses and travel expenses. The overall
reduction in operating expenses was offset by: i) $32 million higher
reorganization of business charges, ii) $14 million of additional Hytera-related
legal expenses, iii) $10 million higher share-based compensation expenses, and
iv) higher operating expenses from acquisitions; and
•partially offset by Software and Services, which was up $66 million , primarily
driven by higher sales and gross margin expansion, acquisitions, and reduced
operating expenses due to lower employee incentive costs and travel expenses.
The overall reduction in operating expenses was partially offset by: i) $8
million of higher reorganization of business charges and ii) higher operating
expenses from acquisitions.
Interest Expense, net
Six Months Ended
(In millions) June 27, 2020 June 29, 2019
Interest expense, net $ (109) $ (111)
The decrease in net interest expense in the first half of 2020 compared to the
first half of 2019 was a result of lower interest rates, partially offset by
higher average debt outstanding as of and for the period ending June 27, 2020 as
compared to the period ending June 29, 2019 .
Other, net
Six Months Ended
(In millions) June 27, 2020 June 29, 2019
Other, net $ 34 $ (12)
The increase in net Other income in the first half of 2020 as compared to the
first half of 2019 was driven by the following:
•a $43 million loss of extinguishment of long term debt in the second quarter of
2019;
•$11 million of investment impairments in the second quarter of 2019;
•$3 million of foreign currency losses in the second quarter of 2020 compared to
$11 million of foreign currency losses in the second quarter of 2019;
•$4 million loss on derivatives in the second quarter of 2020 compared to a $7
million loss on the derivatives in
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the second quarter of 2019;
•$3 million of other operating expense in the second quarter of 2020 compared to
$11 million of other operating income the second quarter of 2019;
•$5 million of fair value adjustments to equity investments in the second
quarter of 2020 compared to $15 million of fair value adjustments to equity
investments in the second quarter of 2019; and
•$39 million in net periodic pension and postretirement benefits in the second
quarter of 2020 compared to 33 million in the second quarter of 2019.
Effective Tax Rate
Six Months Ended
(In millions) June 27, 2020 June 29, 2019
Income tax expense $ 67 $ 100
Income tax expense decreased by $33 million compared to the first half quarter
of 2019, resulting in an effective tax rate of 17%. Our effective tax rate for
the six months ended June 27, 2020 is lower than the effective tax rate for the
six months ended June 29, 2019 of 22%, primarily due to higher excess tax
benefits on share-based compensation.
Reorganization of Business
During the second quarter of 2020, we recorded net reorganization of business
charges of $41 million including $26 million of charges recorded within Other
charges and $15 million in Costs of sales in our Condensed Consolidated
Statements of Operations. Included in the $41 million were charges of $46
million related to employee separation costs, partially offset by $5 million of
reversals for accruals no longer needed.
During the first half of 2020, we recorded net reorganization of business
charges of $59 million including $38 million of charges recorded within Other
charges and $21 million in Costs of sales in our Condensed Consolidated
Statements of Operations. Included in the $59 million were charges of $68
million related to employee separation costs, partially offset by $9 million of
reversals for accruals no longer needed.
During the second quarter of 2019, we recorded net reorganization of business
charges of $12 million including $8 million of charges in Other charges and $4
million of charges in Costs of sales in our Condensed Consolidated Statements of
Operations. Included in the $12 million were charges of $18 million related to
employee separation costs and $6 million reversals for accruals no longer
needed.
During the first half of 2019, we recorded net reorganization of business
charges of $20 million including $12 million of charges in Other charges and
$8 million of charges in Costs of sales in our Condensed Consolidated Statements
of Operations. Included in the $20 million were charges of $30 million related
to employee separation costs and $10 million reversals for accruals no longer
needed.
The following table displays the net charges incurred by business segment:
Three Months Ended Six Months Ended
June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019
Products and Systems Integration $ 33 $ 9 $ 47 $ 16
Software and Services 8 3 12 4
$ 41 $ 12 $ 59 $ 20
Cash payments for employee severance in connection with the reorganization of
business plans were $41 million in the first half of 2020 and $28 million in the
first half of 2019. The reorganization of business accrual at June 27, 2020 was
$96 million related to employee separation costs that are expected to be paid
within one year.
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