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 ," the "Company," "we," "our," or "us") for the three and six months endedJuly 3, 2021 andJune 27, 2020 , 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, 2020 (the "Form 10-K"). Forward-Looking Statements Statements in this Quarterly Report on Form 10-Q for the quarter endedJuly 3, 2021 (this "Form 10-Q") which are not historical in nature are forward-looking statements within the meaning of applicable federal securities law. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and generally include words such as "believes," "expects," "intends," "aims," "estimates" and similar expressions. We can give no assurance that any future results or events discussed in these statements will be achieved. Any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. Readers are cautioned that such forward-looking statements are subject to a variety of risks and uncertainties that could cause our actual results to differ materially from the statements contained in this Form 10-Q. Some of these risks and uncertainties include, but are not limited to, those discussed in Part I, Item 1A "Risk Factors" of the Form 10-K and those described elsewhere in our otherSEC filings. Forward-looking statements include, but are not limited to, statements included in: (1) "Management's Discussion and Analysis of Financial Condition and Results of Operations," about: (a) the continuing and future impact of COVID-19 on our business; (b) the impact of the American Rescue Plan Act of 2021 on our business; (c) the impact of global economic and political conditions on our business; (d) the impact of acquisitions on our business; (e) market growth/contraction, demand, spending and resulting opportunities; (f) our continued ability to reduce our operating expenses; (g) the growth of sales opportunities in our Products and Systems Integration and Software and Services segments; (h) the success of our business strategy and portfolio; (i) future payments, charges, use of accruals and expected cost-saving benefits associated with our reorganization of business programs and employee separation costs; (j) our ability and cost to repatriate funds; (k) the liquidity of our investments; (l) our ability to settle the principal amount of the Senior Convertible Notes (as defined below) in cash; (m) our ability to borrow and the amount available under our credit facilities; and (n) the adequacy of internal resources to fund expected working capital and capital expenditure requirements, contractual obligations, debt service requirements and other liquidity requirements associated with our operations; (2) the impact of recent accounting pronouncements issued by theFinancial Accounting Standards Board on our financial statements; (3) "Quantitative and Qualitative Disclosures about Market Risk," about the impact of interest rate risks and foreign currency exchange risks; and (4) "Legal Proceedings," about the outcome and effect of pending legal matters.Motorola Solutions undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise, except as legally required. Executive Overview Business Overview During the fourth quarter of 2020, the Company updated its revenue disaggregation presentation of major products and services to provide a more comprehensive view of technologies within our reporting segments. Accordingly, the Company now reports net sales in the following three major products and services (which we refer to as "technologies" in this Form 10-Q):Land Mobile Radio Mission Critical Communications ("LMR" or "LMR Mission Critical Communications "), Video Security and Access Control andCommand Center Software . With the Company's acquisition ofOpenpath Security Inc. ("Openpath") subsequent to quarter end onJuly 15, 2021 , the Company renamed one of its three major products and services technologies from Video Security and Analytics to Video Security and Access Control to better align with its strategic growth initiatives. The change is to the name of the technology only and no financial information has been reclassified from previous periods presented or for the quarter endedJuly 3, 2021 . •LMR Mission Critical Communications: Infrastructure, devices (two-way radio and broadband, including both for public safety and Professional Commercial Radio ("PCR")) and software that enable communications, inclusive of installation and integration, backed by services, to assure availability, security and resiliency. •Video Security and Access Control: Cameras (fixed, body-worn, in-vehicle), access control, infrastructure, video management, software and artificial intelligence-enabled analytics that enable visibility "on scene" and bring attention to what's important. •Command Center Software: Software suite that enables collaboration and seamless information sharing through the public safety workflow from 911 call to case closure. 25
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Second Quarter Financial Results •Net sales were$2.0 billion in the second quarter of 2021 compared to$1.6 billion in the second quarter of 2020. •Operating earnings were$370 million in the second quarter of 2021 compared to$218 million in the second quarter of 2020. •Net earnings attributable toMotorola Solutions, Inc. were$293 million , or$1.69 per diluted common share, in the second quarter of 2021, compared to$135 million , or$0.78 per diluted common share, in the second quarter of 2020. •Operating cash flow increased$241 million to$758 million in the first half of 2021 compared to$517 million in the first half of 2020. •We repurchased$272 million of common stock and paid$242 million in dividends in the first half of 2021. COVID-19 In response to the COVID-19 pandemic, there have been a broad number of governmental and commercial actions taken to limit the spread of the virus, including social distancing measures, stay-at-home orders, travel restrictions, business shutdowns and slowdowns. The COVID-19 pandemic continues to be dynamic, and near-term challenges across the economy remain. Although vaccines are now being distributed and administered across many parts of the world, new variants of the virus have emerged and may continue to emerge that have shown to be more contagious. We continue to adhere to applicable governmental and commercial restrictions and to work to mitigate the impact of COVID-19 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 encouraging office workers to work remotely, reducing employee travel, withdrawing from certain industry events, increasing the frequency of cleaning services, encouraging face coverings, and using thermal scanning. During the second quarter of 2021, we began to allow certain essential business travel to resume; however, we continue to carefully assess conditions on a geographical basis to determine when employees can safely return to our offices. We also facilitated the process for our employees in certain locations to receive the COVID-19 vaccine during the second quarter of 2021, as vaccines are distributed and administered throughout theU.S. and the global community. As conditions continue to fluctuate around the world, with both vaccine administration and the rates of new variants of COVID-19 (particularly the "delta variant") rising in certain regions, governments and organizations have responded by adjusting their restrictions and guidelines accordingly. We continue to monitor the daily evolution of the pandemic, including the spread of the delta variant, in order to ensure the health and safety of our employees remains our top priority. As of the date of this filing, we are following theU.S. Centers for Disease Control and Prevention guidance and state and location restrictions with respect to ourU.S. employees, as well as guidance from corresponding international authorities with respect to our non-U.S. employees. With respect to our customers, 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 Video Security and Access Control, we have adapted our software and hardware offerings to provide analytics addressing occupancy counting, face mask detection, and thermal detection capabilities. We believe our existing balances of cash and cash equivalents, along with other short-term liquidity arrangements, will continue to be sufficient to satisfy our liquidity requirements associated with our existing operations. We were in compliance with all applicable covenants in the 2021 unsecured revolving credit facility as ofJuly 3, 2021 . Additionally, we have no bond maturities until 2024. We continue to assess our operating expenses and identify cost reducing initiatives, including lower travel costs, contractor spend and reducing our real estate footprint. In addition, our supply chain partners have been supportive and continue to work to fulfill the necessary service levels to the Company and its customers. Although the COVID-19 pandemic continued to influence our activities in the second quarter of 2021, as described above, the negative impacts on our business from COVID-19 have begun to ease. Specifically, in our Software and Services segment, with the largely recurring nature of the business and our strong backlog position, we continue to expect that the impacts on net sales and operating margin will be limited for the remainder of 2021. Within the Products and Systems Integration segment, we are encouraged by strong LMR backlog, and the resiliency of the Video Security and Access Control technology that experienced growth in the second quarter of 2021 and which we expect to continue to grow for the remainder of 2021. In addition, inMarch 2021 , the President ofthe United States signed into law the American Rescue Plan Act of 2021 (the "ARPA"), which is intended to provide economic stimulus, specifically additional funding to state and local governments, education and healthcare, as well as other funding relief provisions, in order to address the impact of the COVID-19 pandemic. We continue to evaluate the potential impact of the ARPA on our business and results of operations, although we anticipate that the ARPA will have a positive impact on our business and results of operations during the remainder of 2021 and beyond as we expect our governmental customers to receive funding from the ARPA. Lastly, we evaluated whether there were any impairment indicators as ofJuly 3, 2021 , which included a review of our receivables and contract assets, inventory, right-of-use lease assets, long-lived assets, investments, goodwill and intangible assets. As of the end of the second quarter of 2021, we concluded our assets were fairly stated and recoverable.
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Recent Acquisitions
Technology Segment Acquisition Description Purchase Price Date of Acquisition
Provider of cloud-based mobile
applications for law enforcement in
Command Center Software and North
America, including critical of share-based
Software Services Callyo mobile
technological capabilities compensation of
that enable information to flow million
seamlessly from the field to the
command center.
Products and Systems Global provider of video security
Video Security and Integration
solutions, adding a broad range of
Access Control Software and Pelco, Inc. products for a variety of$110 million July 31,
2020
Services commercial and industrial
environments and use cases.
Products and Systems Provider of video security
Video Security and Integration
June 16 ,
2020
Access Control Software and reach
across a wider customer base.
Services
Provider of vulnerability
Software and Unnamed cybersecurity assessments, cybersecurity
LMR Services services business consulting, and managed services, $32 million April 30, 2020
including security monitoring of
network operations.
Provider of vulnerability $40 million , inclusive
Software and Unnamed cybersecurity assessments, cybersecurity of share-based
LMR Services services business consulting, managed services, and compensation of $6 March 3, 2020
remediation and response million
capabilities.
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Results of Operations
Three Months Ended Six Months Ended
(Dollars in millions, except % of June 27, % of % of June 27, % of
per share amounts) July 3, 2021 Sales* 2020 Sales* July 3, 2021 Sales* 2020 Sales*
Net sales from products $ 1,094 $ 877 $ 2,027 $ 1,764
Net sales from services 877 741 1,717 1,509
Net sales 1,971 1,618 3,744 3,273
Costs of products sales 511 46.7 % 413 47.1 % 952 47.0 % 812 46.0 %
Costs of services sales 508 57.9 % 439 59.2 % 980 57.1 % 908 60.2 %
Costs of sales 1,019 852 1,932 1,720
Gross margin 952 48.3 % 766 47.3 % 1,812 48.4 % 1,553 47.4 %
Selling, general and
administrative expenses 331 16.8 % 297 18.4 % 633 16.9 % 638 19.5 %
Research and development
expenditures 181 9.2 % 161 10.0 % 361 9.6 % 330 10.1 %
Other charges 70 3.5 % 90 5.6 % 150 4.0 % 109 3.3 %
Operating earnings 370 18.8 % 218 13.5 % 668 17.8 % 476 14.5 %
Other income (expense):
Interest expense, net (44) (2.2) % (58) (3.6) % (98) (2.6) % (109) (3.3) %
Other, net 14 0.7 % 16 1.0 % 60 1.6 % 34 1.0 %
Total other expense (30) (1.5) % (42) (2.6) % (38) (1.0) % (75) (2.3) %
Net earnings before income
taxes 340 17.3 % 176 10.9 % 630 16.8 % 401 12.3 %
Income tax expense 46 2.3 % 40 2.5 % 90 2.4 % 67 2.0 %
Net earnings 294 14.9 % 136 8.4 % 540 14.4 % 334 10.2 %
Less: Earnings attributable to
non-controlling interests 1 0.1 % 1 0.1 % 3 0.1 % 2 0.1 %
Net earnings attributable to
Motorola Solutions, Inc. $ 293 14.9 % $ 135 8.3 % $ 537 14.3 % $ 332 10.1 %
Earnings per diluted common
share $ 1.69 $ 0.78 $ 3.10 $ 1.90 * Percentages may not add due to rounding
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Results of Operations-Three months endedJuly 3, 2021 compared to three months endedJune 27, 2020 The results of operations for the second quarter of 2021 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. We use the followingU.S. GAAP key financial performance measures to manage our business on a consolidated basis and by reporting segment, and to monitor and assess our results of operations: •Net sales: a measure of our revenue for the current period. •Operating earnings: a measure of our earnings from operations, before non-operating expenses and income taxes. •Operating margins: a measure of our operating earnings as a percentage of total net sales. Considered together, we believe these measures are strong indicators of our overall performance and our ability to create shareholder value. A discussion of our results of operations and financial condition follows. Three Months Ended July 3, 2021 June 27, 2020 Products and Software and Products and Systems Software and (In millions) Systems Integration Services Total Integration Services Total Net sales by region North America $ 869$ 443 $ 1,312 $ 719$ 374 $ 1,093 International 329 330 659 249 276 525$ 1,198 $ 773 $ 1,971 $ 968$ 650 $ 1,618 Net sales by major products and services LMR $ 986$ 545 $ 1,531 $ 836$ 481 $ 1,317 Video Security and Access Control 212 94 306 132 52 184 Command Center Software - 134 134 - 117 117 Total$ 1,198 $ 773 $ 1,971 $ 968$ 650 $ 1,618 Operating earnings $ 139$ 231 $ 370 $ 49$ 169 $ 218 Operating margins 11.6 % 29.9 % 18.8 % 5.1 % 26.0 % 13.5 % Net Sales The Products and Systems Integration segment's net sales represented 61% of our net sales in the second quarter of 2021 and 60% in the second quarter of 2020. The Software and Services segment's net sales represented 39% of our net sales in the second quarter of 2021 and 40% in the second quarter of 2020. Net sales increased$353 million , or 22%, in the second quarter of 2021 compared to the second quarter of 2020. The$230 million , or 24%, increase in net sales within the Products and Systems Integration segment was driven by an increase of 21% in theNorth America region and an increase of 32% in the International region. The$123 million , or 19%, increase in net sales within the Software and Services segment was driven by an increase of 18% in theNorth America region and an increase of 20% in the International region. Net sales includes: •an increase in the Products and Systems Integration segment, inclusive of$38 million of revenue from acquisitions, driven by an increase in PCR, Video Security and Access Control and public safety LMR; •an increase in the Software and Services segment, inclusive of$9 million of revenue from acquisitions, driven by an increase in LMR services, Video Security and Access Control andCommand Center Software ; and •$66 million from favorable currency rates. Regional results include: •a 20% increase in theNorth America region, inclusive of revenue from acquisitions, driven by an increase in LMR, Video Security and Access Control andCommand Center Software ; and •a 25% increase in the International region, inclusive of revenue from acquisitions, primarily driven by an increase in LMR, Video Security and Access Control andCommand Center Software . Products and Systems Integration The 24% increase in the Products and Systems Integration segment was driven by the following:
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•$150 million, or 18% growth in LMR, driven by both theNorth America and International regions; •$80 million, or 60% growth in Video Security and Access Control, inclusive of revenue from acquisitions, driven by both theNorth America and International regions; and •$32 million from favorable currency rates. Software and Services The 19% increase in the Software and Services segment was driven by the following: •$64 million, or 13% growth in LMR services, driven by both the International andNorth America regions; •$42 million, or 81% growth in Video Security and Access Control, inclusive of revenue from acquisitions, driven by both theNorth America and International regions; •$17 million, or 15% growth inCommand Center Software , inclusive of revenue from acquisitions, driven by both theNorth America and International regions; and •$34 million from favorable currency rates. Gross Margin Three Months Ended (In millions) July 3, 2021 June 27, 2020 % Change Gross margin$ 952 $ 766 24 % Gross margin was 48.3% of net sales in the second quarter of 2021 compared to 47.3% in the second quarter of 2020. The primary drivers of this increase were: •higher gross margin in the Products and Systems Integration segment, inclusive of acquisitions, primarily driven by higher sales volume and reduced reorganization of business charges, partially offset by an increase in employee incentive costs; and •higher gross margin within the Software and Services segment, inclusive of acquisitions, primarily driven by higher gross margin contribution from sales growth and improved mix of service offerings, partially offset by an increase in employee incentive costs. Selling, General and Administrative Expenses Three Months Ended (In millions) July 3, 2021 June 27, 2020 % Change Selling, general and administrative expenses$ 331 $ 297 11 % SG&A expenses increased 11% in the second quarter of 2021 compared to the second quarter of 2020. SG&A expenses were 16.8% of net sales in the second quarter of 2021 compared to 18.4% of net sales in the second quarter of 2020. The increase in SG&A expenses was primarily due to higher employee incentive costs, higher expenses associated with acquired businesses and higher travel expenses. Research and Development Expenditures Three Months Ended (In millions) July 3, 2021 June 27, 2020 % Change Research and development expenditures$ 181 $ 161 12 % R&D expenditures increased 12% in the second quarter of 2021 compared to the second quarter of 2020 primarily due to higher employee incentive costs and higher expenses associated with acquired businesses. R&D expenditures decreased to 9.2% of net sales in the second quarter of 2021 compared to 10.0% of net sales in the second quarter of 2020. Other Charges Three Months Ended (In millions) July 3, 2021 June 27, 2020 Other charges$ 70 $ 90
Other charges decreased by
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•$6 million of net reorganization business charges in the second quarter of 2021 compared to$26 million of net reorganization business charges in the second quarter of 2020 (see further detail in the "Reorganization of Business" section in this Part I, Item 2 of this Form 10-Q); •no fixed asset impairments in the second quarter of 2021 compared to$5 million of fixed asset impairments in the second quarter of 2020; •$3 million of losses on legal settlements in the second quarter of 2021 compared to$7 million of losses on legal settlements in the second quarter of 2020; and •partially offset by$58 million of intangible asset amortization expense in the second quarter of 2021 compared to$51 million of intangible asset amortization expense in the second quarter of 2020. Operating Earnings Three Months Ended (In millions) July 3, 2021 June 27, 2020 Operating earnings from Products and Systems Integration$ 139 $ 49 Operating earnings from Software and Services 231 169 Operating earnings$ 370 $ 218 Operating earnings increased$152 million , or 70%, in the second quarter of 2021 compared to the second quarter of 2020. The increase in Operating earnings was due to: •$90 million increase in the Products and Systems Integration segment, driven by higher sales and gross margin, lower reorganization of business charges and improved operating leverage, partially offset by higher employee incentive costs and higher expenses associated with acquired businesses; and •$62 million increase in the Software and Services segment, driven by higher sales and gross margin contribution, lower reorganization of business charges and improved operating leverage, partially offset by higher employee incentive costs and higher expenses associated with acquired businesses. Interest Expense, net Three Months Ended (In millions) July 3, 2021 June 27, 2020 Interest expense, net$ (44) $ (58) The$14 million decrease in interest expense, net in the second quarter of 2021 compared to the second quarter of 2020 was a result of the reversal of a non-cash interest accrual related to an international tax audit and lower interest rates on debt outstanding for the three months endedJuly 3, 2021 compared to the three months endedJune 27, 2020 . Other, net Three Months Ended (In millions) July 3, 2021 June 27, 2020 Other, net$ 14 $ 16 The$2 million decrease in Other, net in the second quarter of 2021 compared to the second quarter of 2020 was primarily driven by: •$18 million loss on extinguishment of long-term debt in the second quarter of 2021; •$1 million loss on derivatives in the second quarter of 2021 compared to a$12 million gain on derivatives in the second quarter of 2020; partially offset by •$31 million of net periodic pension and postretirement benefit in the second quarter of 2021 compared to$19 million of net periodic pension and postretirement benefit in the second quarter of 2020; and •$6 million of foreign currency losses in the second quarter of 2021 compared to$21 million of foreign currency losses in the second quarter of 2020.
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Effective Tax Rate
Three Months Ended
(In millions) July 3, 2021 June 27, 2020
Income tax expense $ 46 $ 40
Income tax expense increased by $6 million in the second quarter of 2021
compared to the second quarter of 2020, primarily due to an increase in pretax
earnings offset by a tax benefit of $33 million due to a partial release of a
valuation allowance recorded on the U.S. foreign tax credit carryforward,
resulting in an effective tax rate of 14%. Our effective tax rate for the three
months ended July 3, 2021 was lower than the effective tax rate for the three
months ended June 27, 2020 of 23%, primarily due to a tax benefit of $33 million
related to a partial release of a valuation allowance recorded on the U.S.
foreign tax credit carryforward.
Results of Operations-Six months ended July 3, 2021 compared to Six months ended
June 27, 2020
Six Months Ended
July 3, 2021 June 27, 2020
Products and Software and Products and Software and
(In millions) Systems Integration Services Total Systems Integration Services Total
Net sales by region
North America $ 1,611 $ 886 $ 2,497 $ 1,467 $ 742 $ 2,209
International 602 645 1,247 494 570 1,064
$ 2,213 $ 1,531 $ 3,744 $ 1,961 $ 1,312 $ 3,273
Net sales by major products and
services
LMR $ 1,836 $ 1,095 $ 2,931 $ 1,696 $ 970 $ 2,666
Video Security and Access Control 377 182 559 265 119 384 Command Center Software - 254 254 - 223 223 Total$ 2,213 $ 1,531 $ 3,744 $ 1,961 $ 1,312 $ 3,273 Operating earnings 216 452 668 141 335 476 Operating margins 9.8 % 29.5 % 17.8 % 7.2 % 25.5 % 14.5 % Net Sales The Products and Systems Integration segment's net sales represented 59% of our net sales in the first half of 2021 and 60% in the first half of 2020. Net sales from the Software and Services segment represented 41% of our net sales in the first half of 2021 and 40% in the first half of 2020. Net sales increased$471 million , or 14%, in the first half of 2021 compared to the first half of 2020. The$252 million , or 13%, increase in net sales within the Products and Systems Integration segment was driven by an increase of 10% in theNorth America region and an increase of 22% in the International region. The$219 million , or 17%, increase in net sales within the Software and Services segment was driven by an increase of 19% in theNorth America region and an increase of 13% in the International region. Net sales includes: •an increase in the Products and Systems Integration segment, inclusive of$73 million of revenue from acquisitions, driven by an increase in Video Security and Access Control, PCR and public safety LMR; •an increase in Software and Services, inclusive of$23 million of revenue from acquisitions, driven by an increase in LMR services, Video Security and Access Control andCommand Center Software ; and •$98 million from favorable currency rates. Regional results include: •a 13% increase in theNorth America region, inclusive of revenue from acquisitions, driven by an increase in LMR, Video Security and Access Control andCommand Center Software ; and •a 17% increase in the International region, inclusive of revenue from acquisitions, primarily driven by an increase in LMR, Video Security and Access Control andCommand Center Software . Products and Systems Integration The 13% increase in the Products and Systems Integration segment was driven by the following:
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•$140 million, or 8% growth in LMR as well as revenue from acquisitions, driven by both theNorth America and International regions; •$112 million, or 42% growth in Video Security and Access Control, inclusive of revenue from acquisitions, driven by both theNorth America and International regions; and •$47 million from favorable currency rates. Software and Services The 17% increase in the Software and Services segment was driven by the following: •$125 million, or 13% growth in LMR services, inclusive of revenue from acquisitions, driven by both theNorth America and International regions; •$63 million, or 53% growth in Video Security and Access Control, inclusive of revenue from acquisitions, driven by both theNorth America and International regions; •$31 million, or 14% growth inCommand Center Software , inclusive of revenue from acquisitions, driven by both theNorth America and International regions; and •$51 million from favorable currency rates. Gross Margin Six Months Ended
(In millions)
17 %
Gross margin was 48.4% of net sales in the first half of 2021 compared to 47.4%
in the first half of 2020. The primary drivers of this increase were:
•higher gross margin within the Software and Services segment, inclusive of
acquisitions, primarily driven by higher gross margin contribution from sales
growth and improved mix of service offerings, partially offset by higher
employee incentive costs; and
•higher gross margin in the Products and Systems Integration segment, inclusive
of acquisitions, primarily driven by higher sales volume and reduced
reorganization of business charges, partially offset by an increase in employee
incentive costs.
Selling, General and Administrative Expenses
Six Months Ended
(In millions) July 3, 2021 June 27, 2020 % Change Selling, general and administrative expenses$ 633 $ 638 (1) % SG&A expenses decreased 1% in the first half of 2021 compared to the first half of 2020. SG&A expenses were 16.9% of net sales in the first half of 2021 compared to 19.5% of net sales in the first half of 2020. The decrease in SG&A expenses was primarily due to lower third party expenses, lower Hytera-related legal expenses, lower share-based compensation expenses and lower travel expenses. The overall reduction in SG&A expenses was partially offset by higher employee incentive costs and higher expenses associated with acquired businesses. Research and Development Expenditures Six Months Ended (In millions) July 3, 2021 June 27, 2020 % Change Research and development expenditures$ 361 $ 330
9 %
R&D expenditures increased 9% in the first half of 2021 compared to the first
half of 2020 primarily due to higher employee incentive costs and higher
expenses associated with acquired businesses. R&D expenditures decreased to 9.6%
of net sales in the first half of 2021 compared to 10.1% of net sales in the
first half of 2020.
Other Charges
Six Months Ended
(In millions) July 3, 2021 June 27, 2020
Other charges $ 150 $ 109
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Other charges increased by$41 million in the first half of 2021 compared to the first half of 2020. The change was driven primarily by the following: •a$50 million gain on the sale of property, plant and equipment in the first half of 2020 that did not recur in the first half of 2021; •$116 million of intangible asset amortization expense in the first half of 2021 compared to$104 million of intangible asset amortization expense in the first half of 2020; •$7 million of operating lease asset impairments in the first half of 2021; partially offset by •$20 million of net reorganization business charges in the first half of 2021 compared to$38 million in the first half of 2020 (see further detail in the "Reorganization of Business" section in this Part I, Item 2 of this Form 10-Q); and •$3 million of losses on legal settlements in the first half of 2021 compared to$9 million of losses on legal settlements in the first half of 2020. Operating Earnings Six Months Ended (In millions) July 3, 2021 June 27, 2020 Operating earnings from Products and Systems Integration$ 216 $ 141 Operating earnings from Software and Services 452 335 Operating earnings$ 668 $ 476 Operating earnings increased$192 million , or 40%, in the first half of 2021 compared to the first half of 2020. The increase in Operating earnings was due to: •$117 million increase in the Software and Services segment, driven by higher sales and gross margin contribution due to improved mix of service offerings, lower reorganization of business charges, lower share-based compensation expenses and improved operating leverage, partially offset by higher employee incentive costs and higher expenses associated with acquired businesses; and •$75 million increase in the Products and Systems Integration segment, primarily driven by higher gross margin due to increased sales volume, lower reorganization of business charges, lower third party expenses, lower Hytera-related legal expenses and lower travel expenses, partially offset by a$50 million gain on the sale of property, plant and equipment in the first half of 2020 that did not recur in the first half of 2021 and higher employee incentive costs and higher expenses associated with acquired businesses. Interest Expense, net Six Months Ended (In millions) July 3, 2021 June 27, 2020 Interest expense, net$ (98) $ (109) The$11 million decrease in net interest expense in the first half of 2021 compared to the first half of 2020 was a result of the reversal of a non-cash interest accrual related to an international tax audit, lower interest rates on debt outstanding and lower average debt outstanding for the six months endedJuly 3, 2021 compared to the six months endedJune 27, 2020 . Other, net Six Months Ended (In millions) July 3, 2021 June 27, 2020 Other, net$ 60 $ 34 The$26 million increase in Other, net in the first half of 2021 compared to the first half of 2020 was primarily driven by: •$60 million of net periodic pension and postretirement benefit in the first half of 2021 compared to$39 million of net periodic pension and postretirement benefit in the first half of 2020; •$8 million of foreign currency gains in the first half of 2021 compared to$3 million of foreign currency losses in the first half of 2020; •$13 million of gains related to fair value adjustments to equity investments in the first half of 2021 compared to$5 million of gains related to fair value adjustments to equity investments in the first half of 2020; and •partially offset by an$18 million loss on the extinguishment of long-term debt in the first half of 2021.
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Effective Tax Rate
Six Months Ended
(In millions) July 3, 2021 June 27, 2020
Income tax expense $ 90 $ 67
Income tax expense increased by $23 million in the first half of 2021 compared
to first half of 2020, primarily due to an increase in pretax earnings offset by
a $33 million tax benefit due to a partial release of a valuation allowance
recorded on the U.S. foreign tax credit carryforward, resulting in an effective
tax rate of 14%. Our effective tax rate for the six months ended July 3, 2021
was lower than the effective tax rate for the six months ended June 27, 2020 of
17%, primarily due to a tax benefit of $33 million related to a partial release
of a valuation allowance recorded on the U.S. foreign tax credit carryforward.
Reorganization of Business
During the second quarter of 2021, we recorded net reorganization of business
charges of $9 million , including $6 million of charges recorded within Other
charges and $3 million in Costs of sales in our Condensed Consolidated
Statements of Operations. Included in the $9 million were charges of $12 million
related to employee separation costs, partially offset by $3 million of
reversals for accruals no longer needed.
During the first half of 2021, we recorded net reorganization of business
charges of $25 million , including $20 million of charges recorded within Other
charges and $5 million in Costs of sales in our Condensed Consolidated
Statements of Operations. Included in the $25 million were charges of $30
million related to employee separation costs, partially offset by $5 million of
reversals for accruals no longer needed.
During the second quarter of 2020, we recorded net reorganization of business
charges of $41 million , including $26 million of charges in Other charges and
$15 million of charges 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 in Other charges and
$21 million of charges 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.
The following table displays the net charges incurred by segment:
Three Months Ended Six Months Ended
July 3, 2021 June
27, 2020
$ 7 $ 33 $ 19 $ 47
Software and Services 2 8 6 12
$ 9 $ 41 $ 25 $ 59
Cash payments for employee severance in connection with the reorganization of
business plans were $56 million in the first half of 2021 and $41 million in the
first half of 2020. The reorganization of business accrual at July 3, 2021 was
$48 million related to employee separation costs that are expected to be paid
within one year.
© Edgar Online, source
