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 nine months endedSeptember 26, 2020 andSeptember 28, 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 Third Quarter Financial Results •Net sales were$1.9 billion in the third quarter of 2020 compared to$2.0 billion in the third quarter of 2019. •Operating earnings were$352 million in the third quarter of 2020 compared to$413 million in the third quarter of 2019. •Net earnings attributable toMotorola Solutions, Inc. were$205 million , or$1.18 per diluted common share, in the third quarter of 2020, compared to$267 million , or$1.51 per diluted common share, in the third quarter of 2019. •Our operating cash flow decreased$119 million to$909 million in the first nine months of 2020 compared to the first nine months of 2019. •We repurchased$441 million of common stock and paid$327 million in dividends in the first nine months of 2020. Recent Developments InMarch 2020 , the COVID-19 outbreak was declared a pandemic by theWorld Health Organization . 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, increasing the frequency of cleaning services, 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. Our sales teams have also continued to improve virtual engagement with our customers. Additionally, our engineering teams have adapted our solutions offerings to equip our customers with the latest technology in an effort to protect their workplaces 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, face mask detection, and thermal detection capabilities. We have assessed the adequacy of our liquidity as of the third 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$600 million was repaid during the nine months endedSeptember 26, 2020 and$100 million was repaid subsequent to the quarter. This leaves$2.1 billion of capacity on the committed facility. Additionally, we have no bond maturities until 2023. 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 continue to expect the impacts on revenue and operating margin will be limited. In our Products and Systems Integration segment, the impacts on revenue and operating margin were more significant during the first half of the year and are expected to have a reduced impact in the fourth quarter of 2020. Reduced demand, particularly in our professional and 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 business and expect growth for fiscal year 2020. Given the prioritization of mission-critical communication solutions, we do not anticipate funding at the state and local levels to have a material, negative effect on expected revenues for the remainder of 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 ofSeptember 26, 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 third quarter of 2020, our assets were fairly stated and recoverable. 27 -------------------------------------------------------------------------------- Recent Acquisitions OnAugust 28, 2020 , we acquired the Callyo business ("Callyo"), a cloud-based mobile applications provider for law enforcement inNorth America for$63 million , inclusive of share-based compensation withheld at a fair value of$3 million that will be expensed over an average service period of two years. The acquisition was settled with$61 million in cash, net of cash acquired. This acquisition adds to our existing command center software suite critical mobile technological capabilities that enable information to flow seamlessly from the field to the command center. The business is a part of the Software and Services segment. OnJuly 31, 2020 , we acquiredPelco, Inc. ("Pelco"), a global provider of video security solutions for a purchase price of$110 million . The acquisition was settled with$108 million of cash, net of cash acquired. The acquisition demonstrates our continued investment in video security and analytics, adding a broad range of products that can be used in a variety of commercial and industrial environments and use cases. The business is part of both the Products and Systems Integration segment and the Software and Services segment. 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 Systems 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 third quarter of 2020 is as follows: •In the Products and Systems Integration segment, net sales were$1.2 billion in the third quarter of 2020, a decrease of$186 million , or 14%, compared to$1.3 billion in the third 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, partially offset by growth in video security. Operating earnings were$164 million in the third quarter of 2020, compared to$258 million in the third quarter of 2019. Operating margins decreased in 2020 to 14.1% from 19.1% in 2019 primarily driven by lower sales and gross margin contribution, partially offset by lower operating expenses primarily driven by lower Hytera-related legal expenses, travel expenses, employee incentive costs, indirect expenses, and reorganization charges. •In the Software and Services segment, net sales were$705 million in the third quarter of 2020, an increase of$60 million , or 9%, compared to net sales of$645 million in the third quarter of 2019. On a geographic basis, net sales increased in both theNorth America and International regions compared to the year-ago quarter. Operating earnings were$188 million in the third quarter of 2020, compared to$155 million in the third quarter of 2019. Operating margins increased in 2020 to 26.7% from 24.0% in 2019 driven by higher sales and gross margin contribution, along with reduced operating expenses primarily driven by operating leverage, inclusive of lower employee incentive costs and travel expenses. 28 --------------------------------------------------------------------------------
Results of Operations
Three Months Ended Nine Months Ended
(Dollars in millions, except per September 26, % of September 28, % of September 26, % of September 28, % of
share amounts) 2020 Sales* 2019 Sales* 2020 Sales* 2019 Sales*
Net sales from products $ 1,044 $ 1,196 $ 2,807 $ 3,260
Net sales from services 824 798 2,334 2,251
Net sales 1,868 1,994 5,141 5,511
Costs of products sales 487 46.6 % 501 41.9 % 1,325 47.2 % 1,435 44.0 %
Costs of services sales 472 57.3 % 486 60.9 % 1,354 58.0 % 1,365 60.6 %
Costs of sales 959 987 2,679 2,800
Gross margin 909 48.7 % 1,007 50.5 % 2,462 47.9 % 2,711 49.2 %
Selling, general and
administrative expenses 313 16.7 % 359 18.0 % 951 18.5 % 1,035 18.8 %
Research and development
expenditures 175 9.4 % 172 8.6 % 505 9.8 % 505 9.2 %
Other charges 69 3.7 % 63 3.2 % 178 3.5 % 180 3.3 %
Operating earnings 352 18.9 % 413 20.7 % 828 16.1 % 991 18.0 %
Other income (expense):
Interest expense, net (58) (3.1) % (54) (2.7) % (167) (3.3) % (165) (3.0) %
Gains (losses) on sales of
investments and businesses, net (1) (0.1) % - - % (1) - % 4 0.1 %
Other, net (42) (2.2) % (11) (0.6) % (8) (0.2) % (22) (0.4) %
Total other expense (101) (5.4) % (65) (3.3) % (176) (3.4) % (183) (3.3) %
Net earnings before income taxes 251 13.4 % 348 17.5 % 652 12.7 % 808 14.7 %
Income tax expense 45 2.4 % 80 4.0 % 112 2.2 % 180 3.3 %
Net earnings 206 11.0 % 268 13.4 % 540 10.5 % 628 11.4 %
Less: Earnings attributable to
non-controlling interests 1 - % 1 0.1 % 3 0.1 % 3 0.1 %
Net earnings attributable to
Motorola Solutions, Inc. $ 205 11.0 % $ 267 13.4 % $ 537 10.4 % $ 625 11.3 %
Earnings per diluted common share $ 1.18 $ 1.51 $ 3.08 * Percentages may not add due to rounding
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Results of Operations-Three months ended September 26, 2020 compared to three
months ended September 28, 2019
The results of operations for the third 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
September 26, September 28,
(In millions) 2020 2019 % Change
Net sales from Products and Systems Integration $ 1,163 $ 1,349 (14) %
Net sales from Software and Services 705 645 9 %
Net sales $ 1,868 $ 1,994 (6) %
The Products and Systems Integration segment's net sales represented 62% of our
net sales in the third quarter of 2020 and 68% in the third quarter of 2019. The
Software and Services segment's net sales represented 38% of our net sales in
the third quarter of 2020 and 32% in the third quarter of 2019.
Net sales decreased in the third quarter of 2020 compared to the third quarter
of 2019. The 14% decline in sales within the Products and Systems Integration
segment was driven by a 19% decline in the International region and a 12%
decline in the North America region. The 9% increase in sales within the
Software and Services segment was driven by an 11% increase in the North America
region and a 7% increase in the International region. Net sales includes:
•a decline in the Products and Systems Integration segment, inclusive of
$31 million of revenue from acquisitions, driven by a decline in public safety
LMR and PCR devices, partially offset by growth in video security;
•growth in the Software and Services segment, inclusive of $24 million of
revenue from acquisitions, driven by services and software sales in both North
America and International; and
•$6 million from favorable currency rates.
Regional results include:
•a 6% decline in the North America region, inclusive of revenue from
acquisitions, driven by declines in public safety LMR and PCR devices, partially
offset by growth in services, video security and software; and
•an 8% decline in the International region, inclusive of revenue from
acquisitions, driven by declines in PCR devices and public safety LMR, partially
offset by growth in services, video security and software.
Products and Systems Integration
The 14% decrease in the Products and Systems Integration segment was driven by
the following:
•20% decline in Devices revenue, inclusive of revenue from acquisitions,
primarily driven by a decline in public safety LMR and PCR in both the North
America and International regions;
•2% decline in Systems and Systems Integration revenue, inclusive of revenue
from acquisitions, driven by a delay in customer engagement due to the COVID-19
pandemic; and
•$31 million of revenue from acquisitions.
Software and Services
The 9% increase in the Software and Services segment was driven by the
following:
•7% growth in Services, inclusive of acquisitions, driven by North America ;
•15% growth in Software, driven primarily by acquisitions and increases in both
video security and command center software; and
•$24 million of revenue from acquisitions.
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Gross Margin
Three Months Ended
(In millions) September 26, 2020 September 28, 2019 % Change
Gross margin $ 909 $ 1,007 (10) %
Gross margin was 48.7% of net sales in the third quarter of 2020 compared to
50.5% in the third quarter of 2019. The primary drivers of the decrease are as
follows:
•lower gross margin contribution in Products and Systems Integration primarily
driven by lower sales in public safety LMR and PCR sales; and
•partially offset by higher margins within Software and Services, inclusive of
acquisitions, primarily driven by higher gross margin contribution from sales
growth in both services and software and an improved mix of service offerings,
along with lower travel and incentive costs within the Services business.
Selling, General and Administrative Expenses
Three Months Ended
September 26, September 28,
(In millions) 2020 2019 % Change
Selling, general and administrative expenses $ 313 $ 359 (13) %
SG&A expenses decreased 13% compared to the third quarter of 2019. SG&A expenses
were 16.7% of net sales compared to 18.0% of net sales in the third quarter of
2019. The decrease in SG&A expenditures is primarily due to reduced
Hytera-related legal expenses, travel expenses, employee incentive costs, and
indirect expenses. The overall reduction in SG&A expenses was partially offset
by higher expenses associated with acquired businesses.
Research and Development Expenditures
Three Months Ended
September 26, September 28,
(In millions) 2020 2019 % Change
Research and development expenditures $ 175 $ 172 2 %
R&D expenditures increased 2% primarily due to higher operating expenses
associated with acquired businesses, partially offset by lower employee
incentive costs. R&D expenditures were 9.4% of net sales compared to 8.6% of net
sales in the third quarter of 2019.
Other Charges
Three Months Ended
(In millions) September 26, 2020 September 28, 2019
Other charges $ 69 $ 63
Other charges increased by $6 million in the third quarter of 2020 compared to
the third quarter of 2019. The change is driven by the following:
•$5 million of acquisition-related transaction fees in the third quarter of 2020
compared to $1 million in the third quarter of 2019;
•No legal settlements in the third quarter of 2020 compared to a $5 million
legal settlement gain in the third quarter of 2019; and
•partially offset by $10 million of net reorganization business charges in the
third quarter of 2020 compared to $15 million in the third quarter of 2019 (see
further detail in "Reorganization of Businesses" section).
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Operating Earnings
Three Months Ended
September 26,
(In millions) 2020 September 28, 2019
Operating earnings from Products and Systems Integration $ 164 $ 258
Operating earnings from Software and Services 188 155
Operating earnings $ 352 $ 413
Operating earnings were down $61 million , or 15%, compared to the third quarter
of 2019. The decrease in Operating earnings was due to:
•Products and Systems Integration, which was down $94 million , primarily driven
by lower sales and gross margin contribution, partially offset by lower
operating expenses primarily driven by lower Hytera-related legal expenses,
travel expenses, employee incentive costs, indirect expenses, and reorganization
charges;
•partially offset by Software and Services, which was up $33 million , driven by
higher sales and gross margin contribution, along with reduced operating
expenses primarily driven by operating leverage, inclusive of lower employee
incentive costs and travel expenses.
Interest Expense, net
Three Months Ended
(In millions) September 26, 2020 September 28, 2019
Interest expense, net $ (58) $ (54)
The increase in net interest expense in the third quarter of 2020 compared to
the third quarter of 2019 was a result of lower interest income earned on cash
due to lower interest rates as of and for the period ending September 26, 2020
compared to the period ending September 28, 2019 .
Other, net
Three Months Ended
(In millions) September 26, 2020 September 28, 2019
Other, net $ (42) $ (11)
The increase in net Other expenses in the third quarter of 2020 as compared to
the third quarter of 2019 was driven by:
•$56 million loss on extinguishment of long term debt in the third quarter of
2020 compared to $7 million loss in the third quarter of 2019;
•$15 million of foreign currency losses in the third quarter of 2020 compared to
$3 million of foreign currency gains in the third quarter of 2019;
•partially offset by a $10 million gain on derivatives in the third quarter of
2020 compared to a $9 million loss on derivatives in the third quarter of 2019;
and
•$4 million of losses related to fair value adjustments to equity investments in
the third quarter of 2020 compared to $18 million of losses related to fair
value adjustments to equity investments in the third quarter of 2019.
Effective Tax Rate
Three Months Ended
(In millions) September 26, 2020 September 28, 2019
Income tax expense $ 45 $ 80
Income tax expense decreased by $35 million compared to the third quarter of
2019, resulting in an effective tax rate of 18%. Our effective tax rate for the
three months ended September 26, 2020 is lower than the effective tax rate for
the three months ended September 28, 2019 of 23%, primarily due to an increased
benefit of forecasted research and development tax credit in the annual
effective tax rate and favorable U.S. return-to-provision adjustments recorded
in 2020.
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Results of Operations-Nine months ended September 26, 2020 compared to Nine
months ended September 28, 2019
Net Sales
Nine Months Ended
September 26, September 28,
(In millions) 2020 2019 % Change
Net sales from Products and Systems Integration $ 3,124 $ 3,656 (15) %
Net sales from Software and Services 2,017 1,855 9 %
Net sales $ 5,141 $ 5,511 (7) %
The Products and Systems Integration segment's net sales represented 61% of our
net sales in the first nine months of 2020 and 66% in the first nine months of
2019. The Software and Services segment's net sales represented 39% of our net
sales in the first nine months of 2020 and 34% in the first nine months quarter
of 2019.
Net sales decreased in the first nine months of 2020 compared to the first nine
months of 2019. The Products and Systems Integration segment declined
approximately 15% which was comprised of a 21% decline in the International
region and a 12% decline in the North America region. The Software and Services
segment increased approximately 9% which is comprised of a 12% increase in the
North America region and a 5% increase in the International region. Net sales
includes:
•a decline in the Products and Systems Integration segment, inclusive of
$75 million of revenue from acquisitions, driven by a decline in PCR and public
safety LMR, partially offset by growth in video security;
•growth in Software and Services, inclusive of $68 million of revenue from
acquisitions, driven by Services in North America and Software, driven by
increases in both video security and command center software; and
•$6 million from favorable currency rates.
Regional results include:
•a 9% decline in the International region, inclusive of acquisitions, driven by
a decline in PCR within the Product and Systems Integration segment, partially
offset by growth of video security and a 5% increase in the Software and
Services segment; and
•a 5% decline in the North America region primarily driven 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, inclusive of acquisitions, primarily driven by
a decline in PCR and public safety LMR, partially offset by growth of our video
security business;
•5% decline in Systems and Systems Integration revenue, inclusive of
acquisitions, driven by a decline in customer engagement due to the COVID-19
pandemic; and
•partially offset by $75 million of revenue from acquisitions.
Software and Services
The 9% increase in the Software and Services segment was driven by the
following:
•7% growth in Services, inclusive of acquisitions, driven by North America ;
•16% growth in Software, driven primarily by acquisitions and growth in both
video security and command center software; and
•$68 million of revenue from acquisitions.
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Gross Margin
Nine Months Ended
(In millions) September 26, 2020 September 28, 2019 % Change
Gross margin $ 2,462 $ 2,711 (9) %
Gross margin was 47.9% of net sales in the first nine months of 2020 compared to
49.2% in the first nine months 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 the Software and Services segment,
inclusive of acquisitions, primarily driven by higher gross margin contribution
from sales growth, driven by improved mix of service offerings and lower travel
and incentive costs.
Selling, General and Administrative Expenses
Nine Months Ended
September 28,
(In millions) September 26, 2020 2019 % Change
Selling, general and administrative expenses $ 951 $ 1,035 (8) %
SG&A expenses decreased 8% compared to the first nine months of 2019. SG&A
expenses were 18.5% of net sales compared to 18.8% of net sales in the first
nine months of 2019. The decrease in SG&A expenditures is primarily due to
reduced travel expenses, employee incentive costs, and indirect expenses. The
overall reduction in SG&A expenses was partially offset by expenses associated
with acquired businesses.
Research and Development Expenditures
Nine Months Ended
September 28,
(In millions) September 26, 2020 2019 % Change
Research and development expenditures $ 505 $ 505 - %
R&D expenditures remained consistent compared to the first nine months of 2019.
R&D expenditures were 9.8% of net sales compared to 9.2% of net sales in the
first nine months of 2019.
Other Charges
Nine Months Ended
(In millions) September 26, 2020 September 28, 2019
Other charges $ 178 $ 180
Other charges decreased by $2 million in the first nine months quarter of 2020
compared to the first nine months of 2019. The change is driven by the
following:
•a $50 million gain on the sale of property, plant and equipment from the sale
of a manufacturing facility in Europe in the first nine months of 2020.
•$48 million of net reorganization business charges in the first nine months of
2020 compared to $27 million in the first nine months of 2019 (see further
detail in "Reorganization of Businesses" section);
•$9 million of losses on legal settlements in the first nine months of 2020
compared to a $5 million gain on a legal settlement in the first nine months of
2019;
•$8 million of acquisition-related transactions fees in the first nine months of
2020 compared to $4 million in the first nine months of 2019; and
•$5 million of fixed asset impairments in the first nine months of 2020.
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Operating Earnings
Nine Months Ended
September 26,
(In millions) 2020 September 28, 2019
Operating earnings from Products and Systems Integration $ 305 $ 568
Operating earnings from Software and Services 523 423
Operating earnings $ 828 $ 991
Operating earnings were down $163 million , or 16%, compared to the first nine
months of 2019. The decrease in Operating earnings was due to:
•Products and Systems Integration, which was down $263 million , driven by lower
sales and gross margin contribution, 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)
$27 million higher reorganization of business charges, ii) $11 million higher
share-based compensation expenses, and iii) higher operating expenses from
acquisitions; and
•partially offset by Software and Services, which was up $100 million , primarily
driven by higher sales and gross margin contribution, along with reduced
operating expenses due to operating leverage, inclusive of lower employee
incentive costs and travel expenses. The overall reduction in operating expenses
was partially offset by: i) $7 million of higher reorganization of business
charges and ii) higher operating expenses from acquisitions.
Interest Expense, net
Nine Months Ended
(In millions) September 26, 2020 September 28, 2019
Interest expense, net $ (167) $ (165)
The increase in net interest expense in the first nine months of 2020 compared
to the first nine months of 2019 was primarily a result of lower interest income
earned on cash due to lower interest rates, partially offset by lower interest
rates on debt outstanding for the period ending September 26, 2020 compared to
the period ending September 28, 2019 .
Other, net
Nine Months Ended
(In millions) September 26, 2020 September 28, 2019
Other, net $ (8) $ (22)
The decrease in net Other expense in the first nine months of 2020 as compared
to the first nine months of 2019 was driven by the following:
•$6 million gain on derivatives in the first nine months of 2020 compared to a
$16 million loss on the derivatives in the first nine months of 2019;
•$16 million of investment impairments in the first nine months of 2019;
•partially offset by $19 million of foreign currency loss in the first nine
months of 2020 compared to $7 million of foreign currency loss in the first nine
months of 2019; and
•$56 million loss on extinguishment of long-term debt in the first nine months
of 2020 compared to $50 million loss on extinguishment of long term debt in the
first nine months of 2019.
Effective Tax Rate
Nine Months Ended
(In millions) September 26, 2020 September 28, 2019
Income tax expense $ 112 $ 180
Income tax expense decreased by $68 million compared to the first nine months of
2019, resulting in an effective tax rate of 17%. Our effective tax rate for the
nine months ended September 26, 2020 is lower than the effective tax rate for
the nine months ended September 28, 2019 of 22%, primarily due to an increased
benefit of forecasted research and development tax credit in the annual
effective tax rate and favorable U.S. return-to-provision adjustments recorded
in 2020.
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Reorganization of Business
During the third quarter of 2020, we recorded net reorganization of business
charges of $13 million including $10 million of charges recorded within Other
charges and $3 million in Costs of sales in our Condensed Consolidated
Statements of Operations. Included in the $13 million were charges of $16
million related to employee separation costs, partially offset by $3 million of
reversals for accruals no longer needed.
During the first nine months of 2020, we recorded net reorganization of business
charges of $72 million including $48 million of charges recorded within Other
charges and $24 million in Costs of sales in our Condensed Consolidated
Statements of Operations. Included in the $72 million were charges of $85
million related to employee separation costs, partially offset by $13 million of
reversals for accruals no longer needed.
During the third quarter of 2019, we recorded net reorganization of business
charges of $18 million including $15 million of charges in Other charges and $3
million of charges in Costs of sales in our Condensed Consolidated Statements of
Operations. Included in the $18 million were charges of $19 million related to
employee separation costs and $1 million reversals for accruals no longer
needed.
During the first nine months of 2019, we recorded net reorganization of business
charges of $37 million including $27 million of charges in Other charges and
$10 million of charges in Costs of sales in our Condensed Consolidated
Statements of Operations. Included in the $37 million were charges of
$48 million related to employee separation costs and $11 million reversals for
accruals no longer needed.
The following table displays the net charges incurred by business segment:
Three Months Ended Nine Months Ended
September 26, September 26,
2020 September 28, 2019 2020 September 28, 2019
Products and Systems Integration $ 10 $ 14 $ 58 $ 29
Software and Services 3 4 14 8
$ 13 $ 18 $ 72 $ 37
Cash payments for employee severance in connection with the reorganization of
business plans were $63 million in the first nine months of 2020 and $44 million
in the first nine months of 2019. The reorganization of business accrual at
September 26, 2020 was $87 million related to employee separation costs that are
expected to be paid within one year.
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