10-Q 1 a2115145z10-q.htm 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q

(Mark One)  

ý

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the period ended June 28, 2003

Or

o

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                               to                              

Commission file number: 1-7221


MOTOROLA, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State of Incorporation)
  36-1115800
(I.R.S. Employer Identification No.)

1303 E. Algonquin Road
Schaumburg, Illinois

(Address of principal executive offices)

 

60196
(Zip Code)

Registrant's telephone number, including area code: (847) 576-5000


        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        The number of shares outstanding of each of the issuer's classes of common stock as of the close of business on June 28, 2003:

Class
  Number of Shares
Common Stock; $3 Par Value   2,327,241,100




Index


 


 

 


 

Page
Part I Financial Information    

Item 1

 

Financial Statements

 

 
    Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 28, 2003 and June 29, 2002   3
    Condensed Consolidated Balance Sheets as of June 28, 2003 and December 31, 2002   4
    Condensed Consolidated Statement of Stockholders' Equity for the Six Months Ended June 28, 2003   5
    Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 28, 2003 and June 29, 2002   6
    Notes to Condensed Consolidated Financial Statements   7
Item 2   Management's Discussion and Analysis of Financial Condition and Results of Operations   24
Item 3   Quantitative and Qualitative Disclosures About Market Risk   55
Item 4   Controls and Procedures   56
    Business Risks   57

Part II Other Information

 

 

Item 1

 

Legal Proceedings

 

59
Item 2   Changes in Securities and Use of Proceeds   61
Item 3   Defaults Upon Senior Securities   61
Item 4   Submission of Matters to Vote of Security Holders   62
Item 5   Other Information   62
Item 6   Exhibits and Reports on Form 8-K   62

Certifications

 

 

2



Part I—Financial Information


Motorola, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

(In millions, except per share amounts)

 
  Three Months Ended
  Six Months Ended
 
 
  June 28,
2003

  June 29,
2002

  June 28,
2003

  June 29,
2002

 
Net sales   $ 6,163   $ 6,869   $ 12,206   $ 13,050  
Costs of sales     4,155     4,629     8,222     8,957  
   
 
 
 
 
  Gross Margin     2,008     2,240     3,984     4,093  
   
 
 
 
 
Selling, general and administrative expenses     937     1,177     1,834     2,285  
Research & development expenditures     951     925     1,898     1,831  
Reorganization of businesses     (42 )   1,468     21     1,666  
Other charges (income)     (9 )   909     (70 )   912  
   
 
 
 
 
  Operating earnings (loss)     171     (2,239 )   301     (2,601 )
   
 
 
 
 
Other income (expense):                          
  Interest expense, net     (59 )   (100 )   (152 )   (208 )
  Gains on sales of investments and businesses, net     28     24     307     35  
  Other     (28 )   (975 )   (87 )   (1,167 )
   
 
 
 
 
Total other income (expense)     (59 )   (1,051 )   68     (1,340 )
   
 
 
 
 
  Earnings (loss) before income taxes     112     (3,290 )   369     (3,941 )
Income tax expense (benefit)     (7 )   (969 )   81     (1,171 )
   
 
 
 
 
  Net earnings (loss)   $ 119   $ (2,321 ) $ 288   $ (2,770 )
   
 
 
 
 
Earnings (loss) per common share                          
Basic   $ 0.05   $ (1.02 ) $ 0.12   $ (1.22 )

Diluted

 

$

0.05

 

$

(1.02

)

$

0.12

 

$

(1.22

)

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 
Basic     2,319.6     2,277.2     2,316.1     2,265.2  

Diluted

 

 

2,337.0

 

 

2,277.2

 

 

2,332.5

 

 

2,265.2

 

Dividends per share

 

$

0.04

 

$

0.04

 

$

0.08

 

$

0.08

 

See accompanying notes to condensed consolidated financial statements.

3



Motorola, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In millions, except per share amounts)

 
  June 28,
2003

  December 31,
2002

 
 
  (Unaudited)

   
 
Assets              
Cash and cash equivalents   $ 6,213   $ 6,507  
Short-term investments     57     59  
Accounts receivable, net     3,626     4,437  
Inventories, net     2,754     2,869  
Deferred income taxes     2,107     2,358  
Other current assets     817     904  
   
 
 
  Total current assets     15,574     17,134  
   
 
 
Property, plant and equipment, net     5,622     6,104  
Investments     2,517     2,053  
Deferred income taxes     3,297     3,112  
Other assets     2,895     2,749  
   
 
 
  Total assets   $ 29,905   $ 31,152  
   
 
 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 
Notes payable and current portion of long-term debt   $ 1,263   $ 1,629  
Accounts payable     2,129     2,268  
Accrued liabilities     4,932     5,913  
   
 
 
  Total current liabilities     8,324     9,810  
   
 
 
Long-term debt     6,686     7,189  
Other liabilities     2,551     2,429  
Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely company-guaranteed debentures     486     485  
 
Stockholders' Equity

 

 

 

 

 

 

 
Preferred stock, $100 par value          
Common stock, $3 par value     6,982     6,947  
Additional paid-in capital     2,286     2,233  
Retained earnings     2,685     2,582  
Non-owner changes to equity     (95 )   (523 )
   
 
 
  Total stockholders' equity     11,858     11,239  
   
 
 
  Total liabilities and stockholders' equity   $ 29,905   $ 31,152  
   
 
 

See accompanying notes to condensed consolidated financial statements.

4



Motorola, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders' Equity

(Unaudited)

(In millions)

 
   
  Non-Owner Changes To Equity
   
 
 
  Common
Stock
and
Additional
Paid-In
Capital

  Fair Value
Adjustment
to Available-
for-Sale
Securities,
Net of Tax

  Foreign
Currency
Translation
Adjustments,
Net of Tax

  Other
Items,
Net of
Tax

  Retained
Earnings

 
BALANCES AT DECEMBER 31, 2002   $ 9,180   $ 588   $ (418 ) $ (693 ) $ 2,582  
Net earnings                             288  
Unrealized gains on securities, net           362                    
Foreign currency translation adjustments, net                 109              
Issuance of common stock and stock options exercised     88                          
Loss on derivative instruments, net                       (43 )      
Dividends declared                             (185 )
   
 
 
 
 
 
BALANCES AT JUNE 28, 2003   $ 9,268   $ 950   $ (309 ) $ (736 ) $ 2,685  
   
 
 
 
 
 

See accompanying notes to condensed consolidated financial statements.

5



Motorola, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In millions)

 
  Six Months Ended
 
 
  June 28,
2003

  June 29,
2002

 
Operating              
Net earnings (loss)   $ 288   $ (2,770 )
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:              
  Depreciation and amortization     837     1,100  
  Charges for reorganization of businesses and other charges     (64 )   2,615  
  Gains on sales of investments and businesses, net     (307 )   (35 )
  Deferred income taxes     (166 )   (1,351 )
  Investment impairments and other     51     1,136  
  Changes in assets and liabilities, net of effects of acquisitions:              
    Accounts receivable     760     390  
    Inventories     115     303  
    Other current assets     154     123  
    Accounts payable and accrued liabilities     (1,063 )   (877 )
    Other assets and liabilities     171     55  
   
 
 
  Net cash provided by operating activities     776     689  
   
 
 
Investing              
Acquisitions and investments, net     (238 )   (26 )
Proceeds from sale of investments and businesses     355     32  
Capital expenditures     (328 )   (239 )
Proceeds from sale of property, plant and equipment     80     43  
Purchases of short-term investments         (15 )
   
 
 
  Net cash used for investing activities     (131 )   (205 )
   
 
 
Financing              
Repayment of commercial paper and short-term borrowings     (40 )   (175 )
Net proceeds from issuance of debt         29  
Repayment of debt     (832 )   (153 )
Issuance of common stock     74     263  
Payment of dividends     (185 )   (181 )
   
 
 
  Net cash used for financing activities     (983 )   (217 )
   
 
 
Effect of exchange rate changes on cash and cash equivalents     44     43  
   
 
 
Net increase (decrease) in cash and cash equivalents     (294 )   310  
Cash and cash equivalents, beginning of period     6,507     6,082  
   
 
 
Cash and cash equivalents, end of period   $ 6,213   $ 6,392  
   
 
 
Cash paid during the period for:              
Interest, net   $ 248   $ 300  
Income taxes, net of refunds   $ 177   $ 106  

See accompanying notes to condensed consolidated financial statements.

6



Motorola, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Dollars in millions, except as noted)

1.     Basis of Presentation

        The condensed consolidated financial statements as of June 28, 2003 and for the three months and six months ended June 28, 2003 and June 29, 2002, include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to present fairly the financial position, results of operations and cash flows as of June 28, 2003 and for all periods presented.

        Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto incorporated by reference in the Company's Form 10-K for the year ended December 31, 2002. The results of operations for the three months and six months ended June 28, 2003 are not necessarily indicative of the operating results to be expected for the full year. Certain amounts in prior periods' financial statements and related notes have been reclassified to conform to the 2003 presentation.

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2.     Other Financial Data

Statement of Operations Information

Other Charges (Income)

        Other Charges (Income) included in Operating Earnings (Loss) consist of the following:

 
  Three Months Ended
  Six Months Ended
 
  June 28, 2003
  June 29, 2002
  June 28, 2003
  June 29, 2002
Other Charges (Income):                        
  In-process research and development   $ 32   $   $ 32   $ 11
  Iridium     (33 )       (92 )  
  Intangible asset impairment         326         326
  Potentially uncollectible finance receivables         526         526
  Other     (8 )   57     (10 )   49
   
 
 
 
    $ (9 ) $ 909   $ (70 ) $ 912
   
 
 
 

7


Other Income (Expense)

        The following table displays the amounts comprising Interest Expense, net, and Other included in Other Income (Expense) in the Company's condensed consolidated statements of operations:

 
  Three Months Ended
  Six Months Ended
 
 
  June 28,
2003

  June 29,
2002

  June 28,
2003

  June 29,
2002

 
Interest Expense, Net:                          
  Interest expense   $ (165 ) $ (177 ) $ (329 ) $ (339 )
  Interest income     106     77     177     131  
   
 
 
 
 
    $ (59 ) $ (100 ) $ (152 ) $ (208 )
   
 
 
 
 
Other:                          
  Investment impairments   $ (12 ) $ (955 ) $ (59 ) $ (1,143 )
  Foreign currency losses     (28 )   (22 )   (40 )   (25 )
  Other     12     2     12     1  
   
 
 
 
 
    $ (28 ) $ (975 ) $ (87 ) $ (1,167 )
   
 
 
 
 

Income Tax Expense (Benefit)

        The effective tax rate was (6)% in the second quarter of 2003, representing a $7 million net tax benefit, compared to a 29% effective tax rate, representing a $969 million net tax benefit, in the second quarter of 2002. The effective tax rate was 22% for the first six months of 2003, representing an $81 million net tax expense, compared to a 30% effective tax rate, representing a $1.2 billion net tax benefit, in the first six months of 2002. The lower effective tax rate in 2003 reflects a $61 million benefit from the reversal of previously accrued income taxes, partially offset by a $32 million non-deductible acquisition charge. The reversal of the previously accrued income taxes reflects a reassessment of the Company's income tax requirements given the current status of its ongoing income tax audits.

Earnings (Loss) Per Common Share

        The following table presents the computation of basic and diluted earnings (loss) per common share:

 
  Three Months Ended
  Six Months Ended
 
 
  June 28,
2003

  June 29,
2002

  June 28,
2003

  June 29,
2002

 
Basic earnings (loss) per common share:                          
  Net earnings (loss)   $ 119   $ (2,321 ) $ 288   $ (2,770 )
  Weighted average common shares outstanding     2,319.6     2,277.2     2,316.1     2,265.2  
  Per share amount   $ 0.05   $ (1.02 ) $ 0.12   $ (1.22 )
   
 
 
 
 

Diluted earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Net earnings (loss)   $ 119   $ (2,321 ) $ 288   $ (2,770 )
  Add: Interest on zero coupon notes, net                  
   
 
 
 
 
  Net earnings (loss) as adjusted   $ 119   $ (2,321 ) $ 288   $ (2,770 )
   
 
 
 
 
  Weighted average common shares outstanding     2,319.6     2,277.2     2,316.1     2,265.2  
  Add effect of dilutive securities:                          
    Stock options/restricted stock     14.0         13.0      
    Zero coupon notes due 2013     3.4         3.4      
   
 
 
 
 
  Diluted weighted average common shares outstanding     2,337.0     2,277.2     2,332.5     2,265.2  
   
 
 
 
 
  Per share amount   $ 0.05   $ (1.02 ) $ 0.12   $ (1.22 )
   
 
 
 
 

8


        In the computation of diluted earnings per common share for the three months and six months ended June 28, 2003, the assumed conversions of the zero coupon notes due 2009, the equity security units and out-of-the-money stock options were excluded because their inclusion would have been antidilutive. In the computation of diluted earnings (loss) per common share for the three months and six months ended June 29, 2002, the assumed conversions of the zero coupon notes due 2009 and 2013, all stock options, restricted stock and the equity security units were excluded because their inclusion would have been antidilutive.

Balance Sheet Information

Accounts Receivable

        Accounts Receivable, net, consist of the following:

 
  June 28,
2003

  December 31,
2002

 
Accounts receivable   $ 3,851   $ 4,675  
Less allowance for doubtful accounts     (225 )   (238 )
   
 
 
    $ 3,626   $ 4,437  
   
 
 

Inventories

        Inventories, net, consist of the following:

 
  June 28,
2003

  December 31,
2002

 
Finished goods   $ 1,069   $ 1,131  
Work-in-process and production materials     2,570     2,742  
   
 
 
      3,639     3,873  
Less inventory reserves     (885 )   (1,004 )
   
 
 
    $ 2,754   $ 2,869  
   
 
 

Property, Plant, and Equipment

        Property, Plant and Equipment, net, consist of the following:

 
  June 28,
2003

  December 31,
2002

 
Land   $ 322   $ 328  
Building     4,931     5,035  
Machinery and equipment     14,524     15,069  
   
 
 
      19,777     20,432  
Less accumulated depreciation     (14,155 )   (14,328 )
   
 
 
    $ 5,622   $ 6,104  
   
 
 

        For the three months ended June 28, 2003, revisions to prior asset write-downs resulted in reversals of $24 million, primarily for reserves previously established to cover decommissioning costs which are no longer needed due to the sale of the facility by the Semiconductor Products segment, as well as for the correction in classification of assets the Company intends to use which were previously classified as held-for-sale. For the three months ended June 29, 2002, impairment charges were $1.2 billion for certain buildings and equipment that were deemed to be impaired, primarily in

9



connection with facility consolidation activities undertaken by the Semiconductor Products segment. For the six months ended June 28, 2003 and June 29, 2002 impairment charges were $38 million and $1.4 billion, respectively. The $38 million charge for the six months ended June 28, 2003 primarily relates to certain buildings and equipment that were deemed to be impaired in connection with facility consolidations undertaken by the Semiconductor Products segment, partially offset by the reversals discussed above.

        Depreciation expense for the three months ended June 28, 2003 and June 29, 2002 was $380 million and $515 million, respectively. Depreciation expense for the six months ended June 28, 2003 and June 29, 2002 was $786 million and $1.0 billion, respectively.

Investments

        Investments consist of the following:

 
  June 28,
2003

  December 31,
2002

 
Available-for-sale securities:              
  Cost basis   $ 555   $ 615  
  Gross unrealized gains     1,551     974  
  Gross unrealized losses     (11 )   (21 )
   
 
 
  Fair value     2,095     1,568  
Held-to-maturity debt securities, at cost         29  
Other securities, at cost     214     231  
Equity method investments     208     225  
   
 
 
    $ 2,517   $ 2,053  
   
 
 

        The Company recorded impairment charges of $12 million and $955 million for the three months ended June 28, 2003, and June 29, 2002, respectively, and $59 million and $1.1 billion for the six months ended June 28, 2003, and June 29, 2002, respectively. These impairment charges represent other-than-temporary declines in the value of the Company's investment portfolio and are included in the Other statement line of Other Income (Expense) in the Company's condensed consolidated statements of operations.

        The $955 million charge for the three months ended June 29, 2002 was primarily comprised of: (i) a $464 million writedown in the value of the Company's investment in Nextel Communications, Inc., (ii) based on the results of an independent third-party valuation in the second quarter, an impairment of the Company's debt security holdings and associated warrants in a European cable operator of $119 million and $154 million, respectively, and (iii) a $73 million writedown of the Company's investment in Telus Corporation. The $59 million charge for the six months ended June 28, 2003 is primarily comprised of a $29 million charge to write down to zero the Company's debt security holding in a European cable operator and other cost-based investment writedowns. In addition to the $955 million of charges above, the $1.1 billion charge for the six months ended June 29, 2002 also includes a $95 million charge to write down to zero the Company's investment in an Argentine cellular operating company, and $48 million in charges related to the writedown of investments in a European cable operator.

10



        Gains on Sales of Investments and Businesses consist of the following:

 
  Three Months Ended
  Six Months Ended
 
  June 28,
2003

  June 29,
2002

  June 28,
2003

  June 29,
2002

Gains on sale of equity securities, net   $ 22   $   $ 297   $ 9
Gains on sale of businesses and equity method investments     6     24     10     26
   
 
 
 
    $ 28   $ 24   $ 307   $ 35
   
 
 
 

        In March 2003 the Company realized a $255 million gain on the sale of 25 million shares in Nextel Communications, Inc. (Nextel). Concurrently, the Company entered into three agreements to hedge up to 25 million additional shares of Nextel common stock. Under these agreements, the Company received no initial proceeds, but has retained the right to receive, at any time during the contract periods, the present value of the aggregate contract "floor" price. The three agreements are to be settled over periods of three, four and five years, respectively. Pursuant to these agreements and exclusive of any present value discount, the Company is entitled to receive aggregate proceeds of approximately $333 million. The precise number of shares of Nextel common stock that the Company would deliver to satisfy the contracts is dependent upon the price of Nextel common stock on the various settlement dates. The maximum aggregate number of shares the Company would be required to deliver under these agreements is 25 million and the minimum number of shares is 18.5 million. Alternatively, the Company has the exclusive option to settle the contracts in cash. The Company will retain all voting rights associated with the up to 25 million hedged Nextel shares. Although, pursuant to customary market practice, the covered shares are pledged to secure the hedge contracts. As a result of the recent increase in the price of Nextel common stock, the Company has recorded a $64 million liability in Other Liabilities in the condensed consolidated balance sheet to reflect the fair value of the Nextel hedges.

Other Assets

        Other Assets consist of the following:

 
  June 28,
2003

  December 31,
2002

Long-term finance receivables, net of allowances of $2,238 and $2,251   $ 318   $ 381
Goodwill, net of accumulated amortization of $444 and $444     1,472     1,375
Intangible assets, net of accumulated amortization of
$262 and $231
    260     232
Other     845     761
   
 
    $ 2,895   $ 2,749
   
 

        During the three months ended June 29, 2002, the Company recorded an intangible asset impairment charge of $325 million relating to a license to certain intellectual property that enables the Company to provide national authorization services for digital set-top terminals. Historically the Company had amortized this intangible asset based on an expected revenue stream. In the second quarter of 2002, it was determined that the future revenue stream would decline significantly due to a drop in the number of new subscribers utilizing the services provided under the license, caused primarily by the consolidations of cable operators, specifically the acquisition of AT&T Broadband Corporation by Comcast Corporation.

11



Stockholders' Equity Information

Warrants

        For the three months and six months ended June 29, 2002, proceeds from the exercise of stock warrants totaled $167 million (20 million shares). At June 30, 2002, all outstanding stock warrants were exercised.

Comprehensive Earnings (Loss)

        The components of comprehensive earnings (loss) were as follows:

 
  Three Months Ended
  Six Months Ended
 
 
  June 28,
2003

  June 29,
2002

  June 28,
2003

  June 29,
2002

 
Net earnings (loss)   $ 119   $ (2,321 ) $ 288   $ (2,770 )
   
 
 
 
 
Gross unrealized gains (losses) on securities, net of tax     374     (294 )   518     (707 )
Less: Realized (gains) losses, net of tax         376     (156 )   380  
   
 
 
 
 
Net unrealized gains (losses) on securities, net of tax     374     82     362     (327 )
Foreign currency translation gains, net of tax     62     83     109     85  
Loss on derivative instruments, net of tax     (44 )   (7 )   (43 )   (2 )
   
 
 
 
 
Comprehensive earnings (loss)   $ 511   $ (2,163 ) $ 716   $ (3,014 )
   
 
 
 
 

3.     Stock Compensation Costs

        The Company measures compensation cost for stock options and restricted stock using the intrinsic value-based method. Compensation cost, if any, is recorded based on the excess of the quoted market price at grant date over the amount an employee must pay to acquire the stock. The Company has evaluated the pro forma effects of using the fair value-based method of accounting and as such, net earnings (loss), basic earnings (loss) per common share and diluted earnings (loss) per common share would have been as follows:

 
  Three Months Ended
  Six Months Ended
 
 
  June 28,
2003

  June 29,
2002

  June 28,
2003

  June 29,
2002

 
Net earnings (loss):                          
  Net earnings (loss) as reported   $ 119   $ (2,321 ) $ 288   $ (2,770 )
  Add: Stock-based employee compensation expense included in reported net earnings (loss), net of related tax effects     3     7     9     18  
  Deduct: Stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects     (71 )   (85 )   (137 )   (159 )
   
 
 
 
 
  Pro forma   $ 51   $ (2,399 ) $ 160   $ (2,911 )
   
 
 
 
 
Basic earnings (loss) per common share:                          
  As reported   $ .05   $ (1.02 ) $ .12   $ (1.22 )
  Pro forma   $ .02   $ (1.05 ) $ .07   $ (1.28 )
Diluted earnings (loss) per common share:                          
  As reported   $ .05   $ (1.02 ) $ .12   $ (1.22 )
  Pro forma   $ .02   $ (1.05 ) $ .07   $ (1.28 )

        In May 2003, the Company granted approximately 72 million options to approximately 40,000 eligible employees. The options were granted at fair market value and, in general, vest and become exercisable in 25% increments, annually, over the four years following the grant date.

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4.     Debt and Credit Facilities

        In December 2002, the Company entered into an agreement with Goldman, Sachs & Co. ("Goldman") to repurchase all of the Company's $825 million of Puttable Reset Securities (PURS)sm due February 1, 2011 from Goldman. At that time, the Company paid Goldman $106 million to terminate Goldman's annual remarketing rights associated with the PURS. In February 2003, the Company purchased the $825 million of PURS from Goldman with cash on hand.

        In May 2003, the Company completed the renewal of its 364-day revolving domestic credit facility. The Company now has a $700 million 364-day facility expiring in May 2004 and a $900 million three-year facility expiring in May 2005. Important terms of the credit agreements include a springing contingent lien and covenants related to net interest coverage and total debt-to-book capitalization ratios. Under the current facilities, if the Company's corporate credit ratings were to be lower than "BBB-" by S&P or "Baa3" by Moody's (which would be a decline of two levels from current ratings), the Company and its domestic subsidiaries would be obligated to provide the lenders in the Company's domestic revolving credit facilities with a pledge of, and security interest in, domestic inventories and receivables. The Company's current corporate credit ratings are "BBB" with a negative outlook by S&P and "Baa2" on credit watch for possible downgrade by Moody's. The Company has never borrowed under its domestic revolving credit facilities.

        In order to manage the mix of fixed and floating rates in its debt portfolio, the Company periodically enters into interest rate swaps. In May 2003, the Company entered into interest rate swaps to change the characteristics of interest rate payments on all $200 million of its 6.5% notes due 2008, all $325 million of its 5.8% debentures due 2008, and $475 million of its $1.2 billion of its 7.625% debentures due 2010 from fixed-rate payments to short-term LIBOR-based variable rate payments. In March 2002, the Company entered into interest rate swaps to change the characteristics of interest rate payments on all $1.4 billion of its 6.75% debentures due 2006 and all $300 million of its 7.60% notes due 2007 from fixed-rate payments to short-term LIBOR-based variable rate payments. In June 1999, the Company's finance subsidiary entered into interest rate swaps to change the characteristics of the interest rate payments on all $500 million of its 6.75% Guaranteed Bonds due 2004 from fixed-rate payments to short-term LIBOR-based variable rate payments in order to match the funding with its underlying assets. The short-term LIBOR-based variable payments on each of the above interest rate swaps was 3.0% for the three months ended June 28, 2003. The fair value of all interest rate swaps at June 28, 2003 and December 31, 2002 was $243 million and $212 million, respectively. Except for these interest rate swaps, at June 28, 2003 and December 31, 2002, the Company had no outstanding commodity derivatives, currency swaps or options relating to its debt instruments.

        The Company is exposed to credit loss in the event of nonperformance by the counterparties to its swap contracts. The Company minimizes its credit risk on these transactions by only dealing with leading, credit-worthy financial institutions having long-term debt ratings of "A" or better and, therefore, does not anticipate nonperformance. In addition, the contracts are distributed among several financial institutions, thus minimizing credit risk concentration.

        In February 1999, Motorola Capital Trust I, a Delaware statutory business trust and wholly owned subsidiary of the Company (the "Trust"), sold Trust Originated Preferred Securitiessm ("TOPrS") to the public at an aggregate offering price of $500 million. The Trust used the proceeds from this sale, together with the proceeds from its sale of common stock to the Company, to buy a series of 6.68% Deferrable Interest Junior Subordinated Debentures due March 31, 2039 ("Subordinated Debentures") from the Company with the same payment terms as the TOPrS. The sole assets of the Trust are the Subordinated Debentures. The TOPrS are shown as "Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely company-guaranteed debentures" in the Company's condensed consolidated balance sheets. The Company's obligations relating to the TOPrS include obligations to make payments on the Subordinated Debentures and obligations under the

13



related Indenture, Trust Guarantee and Declaration of Trust. Taken together, these obligations represent a full and unconditional guarantee of amounts due under the TOPrS.

5.     Financing Arrangements

        Finance receivables consist of the following:

 
  June 28,
2003

  December 31,
2002

 
Gross finance receivables   $ 2,664   $ 2,718  
Less allowance for losses     (2,238 )   (2,251 )
   
 
 
      426     467  
Less current portion     (108 )   (86 )
   
 
 
Long-term finance receivables   $ 318   $ 381  
   
 
 

        Current finance receivables are included in Accounts Receivable and long-term finance receivables are included in Other Assets in the Company's condensed consolidated balance sheets. Interest income recognized on finance receivables for the three months ended June 28, 2003 and June 29, 2002 was $12 million and $0.3 million, respectively. Interest income recognized on finance receivables for the six months ended June 28, 2003 and June 29, 2002 was $13 million and $5 million, respectively.

        An analysis of impaired finance receivables included in total finance receivables is as follows:

 
  June 28,
2003

  December 31,
2002

 
Impaired finance receivables:              
  Requiring allowance for losses   $ 2,234   $ 2,225  
  Expected to be fully recoverable     325     275  
   
 
 
      2,559     2,500  
Less allowance for losses on impaired finance receivables     (2,231 )   (2,214 )
   
 
 
Impaired finance receivables, net   $ 328   $ 286  
   
 
 

        At both June 28, 2003 and December 31, 2002, the Company had $2.0 billion of gross receivables from one customer, Telsim, in Turkey (the "Telsim Loan"). As a result of difficulties in collecting the amounts due from Telsim, the Company has previously recorded charges reducing the net receivable from Telsim to zero. At both June 28, 2003 and December 31, 2002, the net receivable from Telsim was zero. Although the Company continues to vigorously pursue its recovery efforts, it believes the litigation and collection process will be very lengthy in light of the Uzans' (the family which controls Telsim) repeated decisions to violate court orders.

        As of December 31, 2002, the Motorola Receivables Corporation ("MRC") short-term receivables program provided for up to $400 million of short-term receivables to be outstanding with third parties at any time. In February 2003, the MRC short-term receivables program was amended and the level of allowable outstanding short-term receivables was increased to $425 million. Total receivables sold through the MRC short-term program were $205 million and $249 million for the three months ended June 28, 2003 and June 29, 2002, respectively, and $384 million and $533 million for the six months ended June 28, 2003 and June 29, 2002, respectively. There were approximately $154 million and $240 million of short-term receivables outstanding under the MRC short-term receivables program at June 28, 2003 and December 31, 2002, respectively.

        In addition to the MRC short-term receivables program, the Company also sells other short-term receivables directly to third parties. Total short-term receivables sold by the Company (including those

14



sold directly to third parties and those sold through the MRC short-term receivables program) were $664 million and $771 million during the three months ended June 28, 2003 and June 29, 2002, respectively, and $1.4 billion and $1.5 billion during the six months ended June 28, 2003 and June 29, 2002, respectively. There were approximately $815 million and $802 million of short-term receivables outstanding under these arrangements at June 28, 2003 and December 31, 2002, respectively. The Company's total credit exposure to outstanding short-term receivables that have been sold was $26 million and $40 million at June 28, 2003 and December 31, 2002, respectively, with reserves of $21 million and $19 million recorded for potential losses on this exposure at June 28, 2003 and December 31, 2002, respectively.

        Prior to 2002, the Company had sold a limited number of long-term receivables to an independent third party through Motorola Funding Corporation ("MFC"). In connection with the sale of long-term receivables, the Company retained obligations for the servicing, administering and collection of receivables sold. In May 2003, the Company voluntarily terminated the program for the sale of long-term receivables through MFC. In light of the significant decrease in long-term financing provided by the Company to customers in recent years, no long-term receivables were sold through this program in 2002 or 2003 and the benefits from maintaining the program no longer exceeded the costs. To effect this termination, the Company purchased all outstanding long-term receivables previously sold to, and held by, the independent third party and terminated the credit insurance related to these long-term receivables. Accordingly, at June 28, 2003, the Company had no finance receivables outstanding under this program. At December 31, 2002 receivables outstanding under this program were $71 million with an allowance for first loss of $14 million.

        Certain purchasers of the Company's infrastructure equipment continue to require suppliers to provide financing in connection with equipment purchases. Financing may include all or a portion of the purchase price of the equipment as well as working capital. The Company had outstanding commitments to extend credit to third-parties totaling $166 million and $175 million at June 28, 2003 and December 31, 2002, respectively.

        In addition to providing direct financing to certain infrastructure equipment customers, the Company also assists customers in obtaining financing directly from banks and other sources to fund equipment purchases. The amount of loans from third parties for which the Company has committed to provide financial guarantees totaled $44 million and $50 million at June 28, 2003 and December 31, 2002, respectively. For the six months ended June 28, 2003, no payments were made by the Company under the terms of these guarantees. These financial guarantees are to two customers in the amounts of $29 million and $15 million and are scheduled to expire in 2003 and 2005, respectively. Customer outstanding borrowings under these third-party loan arrangements were $44 million and $50 million at June 28, 2003 and December 31, 2002, respectively. Accrued liabilities of $25 million at June 28, 2003 and December 31, 2002, have been recorded to reflect management's best estimate of probable losses of unrecoverable amounts, should these guarantees be called.

15



6.     Goodwill and Other Intangible Assets

        Amortized intangible assets, excluding goodwill, were comprised of the following:

 
  June 28, 2003
  December 31, 2002
 
  Gross
Carrying
Amount

  Accumulated
Amortization

  Gross
Carrying
Amount

  Accumulated
Amortization

Intangible assets:                        
  Licensed technology   $ 102   $ 50   $ 102   $ 42
  Completed technology     383     196     333     175
  Other intangibles     37     16     28     14
   
 
 
 
    $ 522   $ 262   $ 463   $ 231
   
 
 
 

        During the three months ended June 29, 2002, the Company recorded an intangible asset impairment charge of $325 million relating to a license to certain intellectual property that enables the Company to provide national authorization services for digital set-top terminals. Historically the Company has amortized this intangible asset based on an expected revenue stream. In the second quarter of 2002, it was determined that the future revenue stream would decline significantly due to a drop in the number of new subscribers utilizing the services provided under the license, caused primarily by the consolidations of cable operators, specifically the acquisition of AT&T Broadband Corporation by Comcast Corporation.

        Amortization expense on intangible assets was $16 million and $15 million for the three months ended June 28, 2003 and June 29, 2002, respectively, and $31 million and $29 million for the six months ended June 28, 2003 and June 29, 2002, respectively. Amortization expense is estimated to be $58 million for 2003, $60 million in 2004, $56 million in 2005, $45 million in 2006, and $31 million in 2007.

        The following table displays a rollforward of the carrying amount of goodwill from January 1, 2003 to June 28, 2003, by business segment:

Segment

  January 1, 2003
  Acquired
(Adjustments)

  June 28, 2003
Personal Communications   $ 23   $   $ 23
Semiconductor Products     202         202
Global Telecom Solutions     4     93     97
Commercial, Government and Industrial Solutions     121         121
Integrated Electronic Systems     63     8     71
Broadband Communications     836     (4 )   832
Other Products     126         126
   
 
 
    $ 1,375   $ 97   $ 1,472
   
 
 

        In May 2003, the Company acquired Winphoria Networks, Inc. ("Winphoria"), a core infrastructure provider of next generation packet based mobile switching centers for wireless networks, for approximately $179 million in cash. The results of operations of Winphoria have been included in the Global Telecom Solutions segment in the Company's condensed consolidated financial statements subsequent to the date of acquisition. As a result of the acquisition the Company recorded approximately $93 million in goodwill and $54 million in intangible assets.

16



7.     Commitments and Contingencies

Iridium Program

        A committee of unsecured creditors (the "Creditors Committee") of Iridium LLC and its operating subsidiaries (collectively "Old Iridium"), was, over objections by Motorola, granted leave by the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") to file a complaint on Old Iridium's behalf against Motorola. In March 2001, the Bankruptcy Court approved a settlement between the Creditors Committee and Old Iridium's secured creditors that provides for the creation of a litigation fund to be used in pursuit of the claims against Motorola. Motorola's appeal of this order remains pending. On July 19, 2001, the Creditors Committee filed its complaint against Motorola in Bankruptcy Court on behalf of Old Iridium's debtors and estates, seeking in excess of $4 billion in damages. Discovery in this case is ongoing.

        Motorola has been named as one of several defendants in putative class action securities lawsuits pending in the District of Columbia arising out of alleged misrepresentations or omissions regarding the Iridium satellite communications business. The plaintiffs seek an unspecified amount of damages. On March 15, 2001, the federal district court consolidated the various securities cases under Freeland v. Iridium World Communications, Inc., et al., originally filed on April 22, 1999. Motorola moved to dismiss the plaintiffs' complaint on July 15, 2002, and that motion has not yet been decided. Plaintiffs have filed a motion for partial summary judgment, which is also pending.

        The Iridium India gateway investors ("IITL") have filed a suit against Motorola, and certain current and former Motorola officers, in an India court under the India Penal Code claiming cheating and conspiracy in connection with investments in Old Iridium and the purchase of gateway equipment. Under Indian law if IITL were successful in the suit, IITL could recover compensation of the alleged financial losses. In September 2002, IITL also filed a civil suit in India against Motorola and Old Iridium alleging fraud and misrepresentation in inducing IITL to invest in Old Iridium and to purchase and operate an Iridium gateway in India. IITL claims in excess of $200 million in damages, plus interest.

        The Chase Manhattan Bank, as agent for the lenders under Old Iridium's $800 million Senior Secured Credit Agreement, filed four lawsuits against Motorola. In March 2003, the Company reached a settlement agreement with Chase, pursuant to which all four of the cases, including Motorola's counterclaim, were dismissed with prejudice. Under the settlement agreement, Motorola released to Chase its claim to $371 million that was previously paid into an escrow account in April 2002 and made an additional payment of $12 million.

        The Company had reserves related to the Iridium program of $73 million and $152 million at June 28, 2003 and December 31, 2002, respectively. These reserves are included in Accrued Liabilities in the condensed consolidated balance sheets. The reduction in the reserve balance is comprised of $20 million in cash payments, of which $12 million relates to the Chase settlement agreement, and $59 million for the reduction of reserves after reassessment in light of the wind-down of the program and the settlement agreement reached with Chase. The remaining reserve balance of $73 million at June 28, 2003 relates primarily to termination claims and the settlement of remaining obligations. In addition to the amounts disclosed above, Motorola recognized $33 million of income during the three months ended June 28, 2003 for the sale of Iridium-related assets previously written down.

        These reserves are believed by management to be sufficient to cover Motorola's current exposures related to the Iridium program. However, these reserves do not include additional charges that may arise as a result of litigation related to the Iridium program. While the still pending cases are in very preliminary stages and the outcomes are not predictable, an unfavorable outcome of one or more of these cases could have a material adverse effect on the Company's consolidated financial position, liquidity or results of operations.

17



Other

        The Company is also a party to various agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in connection with contracts and license agreements entered into by the Company or divestitures of Company assets, under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of representations and covenants related to such matters as title to assets sold, certain intellectual property rights, and certain income tax related matters. In each of these circumstances, payment by the Company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party's claims. Further, the Company's obligations under these agreements may be limited in terms of duration, typically not in excess of 24 months, and or amounts not in excess of the contract value, and in some instances, the Company may have recourse against third parties for certain payments made by the Company.

        Historically, the Company has not made significant payments under these types of agreements. It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the unique facts and circumstances involved in each particular agreement. At June 28, 2003 and December 31, 2002, the Company had reserves of $70 million and $65 million, respectively, recorded as liabilities in the Company's condensed consolidated balance sheets which have been provided to cover known estimated indemnification obligations. The Company believes that if it were to incur additional losses with respect to any unknown matters at June 28, 2003, such losses should not have a material adverse effect on the Company's financial position, results of operations or cash flows.

8.     Segment Information

        Summarized below are the Company's segment sales and operating earnings (loss) for the three months and six months ended June 28, 2003, and June 29, 2002:

 
  Three Months Ended
   
  Six Months Ended
   
 
 
  June 28,
2003

  June 29,
2002

  %
Change

  June 28,
2003

  June 29,
2002

  %
Change

 
Segment Sales:                                  
Personal Communications Segment   $ 2,331   $ 2,684   (13 )% $ 4,778   $ 5,090   (6 )%
Semiconductor Products Segment     1,115     1,256   (11 )   2,266     2,383   (5 )
Global Telecom Solutions Segment     1,046     1,262   (17 )   1,998     2,347   (15 )
Commercial, Govt. and Industrial Solutions Segment     996     889   12     1,859     1,691   10  
Integrated Electronic Systems Segment     516     566   (9 )   1,037     1,075   (4 )
Broadband Communications Segment     409     554   (26 )   814     1,079   (25 )
Other Products Segment     99     129   (23 )   194     236   (18 )
Adjustments & Eliminations     (349 )   (471 ) (26 )   (740 )   (851 ) (13 )
   
 
     
 
     
Segment Totals   $ 6,163   $ 6,869   (10 ) $ 12,206   $ 13,050   (6 )
   
 
     
 
     

18


 
  Three Months Ended
 
 
  June 28,
2003

  % Of Sales
  June 29,
2002

  % Of Sales
 
Segment Operating Earnings (Loss):                      
Personal Communications Segment   $ 91   4   % $ 3   —   %
Semiconductor Products Segment     (125 ) (11 )   (1,308 ) (104 )
Global Telecom Solutions Segment     19   2     (525 ) (42 )
Commercial, Govt. and Industrial Solutions Segment     114   11     35   4  
Integrated Electronic Systems Segment     45   9     (11 ) (2 )
Broadband Communications Segment     36   9     (304 ) (55 )
Other Products Segment     (47 ) (47 )   (67 ) (52 )
Adjustments & Eliminations     3   (1 )   (2 )  
   
     
     
Segment Totals     136   2     (2,179 ) (32 )
General Corporate     35         (60 )    
   
     
     
  Operating Earnings (Loss)   $ 171   3   $ (2,239 ) (33 )
   
     
     

 


 

Six Months Ended


 
 
  June 28,
2003

  % Of Sales
  June 29,
2002

  % Of Sales
 
Segment Operating Earnings (Loss):                      
Personal Communications Segment   $ 205   4   % $ (32 ) (1 )%
Semiconductor Products Segment     (246 ) (11 )   (1,546 ) (65 )
Global Telecom Solutions Segment     48   2     (577 ) (25 )
Commercial, Govt. and Industrial Solutions Segment     176   9     74   4  
Integrated Electronic Systems Segment     70   7     (2 )  
Broadband Communications Segment     64   8     (249 ) (23 )
Other Products Segment     (62 ) (32 )   (158 ) (67 )
Adjustments & Eliminations     (8 ) 1     (2 )  
   
     
     
Segment Totals     247   2     (2,492 ) (20 )
General Corporate     54         (109 )    
   
     
     
  Operating Earnings (Loss)   $ 301   2   $ (2,601 ) (20 )
   
     
     

9.     Reorganization of Businesses

        Beginning in 2000 and continuing into 2003, the Company implemented plans to reduce its workforce, discontinue product lines, exit businesses and consolidate manufacturing and administrative operations. The Company initiated these plans in an effort to reduce costs and simplify its product portfolio. Prior to January 1, 2003, the Company recorded provisions for employee separation costs and exit costs based on estimates prepared at the time the restructuring plans were approved by management. On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit and Disposal Activities" which generally requires one-time termination benefits and exit costs to be expensed as incurred and it requires ongoing termination benefits to be recognized when they are probable and estimable. Exit costs primarily consist of future minimum lease payments on vacated facilities and facility closure costs. Employee separation costs consist primarily of ongoing termination benefits, principally severance payments. At each reporting date, the Company evaluates its accruals for exit costs and employee separation to ensure that the accruals are still appropriate. In certain circumstances, accruals are no longer required because of efficiencies in carrying out the plans or because employees previously identified for separation resigned from the Company unexpectedly and did not receive severance or were redeployed due to circumstances not foreseen when the original

19



plans were initiated. The Company reverses accruals to income when it is determined they are no longer required.

Three months ended June 28, 2003

        For the three months ended June 28, 2003, the Company recorded net reversals of $56 million, of which $14 million was included in Costs of Sales and $42 million was recorded under Reorganization of Businesses in the Company's condensed consolidated statements of operations. The aggregate $56 million net reversal is comprised of the following:

 
  Exit Costs
  Employee Separations
  Asset Writedowns
  Total
 
Discontinuation of product lines   $ (1 ) $   $   $ (1 )
Business exits     (2 )           (2 )
Manufacturing and administrative consolidations     (13 )   (16 )   (24 )   (53 )
   
 
 
 
 
    $ (16 ) $ (16 ) $ (24 ) $ (56 )
   
 
 
 
 

Discontinuation of Product Lines

        For the three months ended June 28, 2003, the Semiconductor Products segment reversed exit cost accruals of $1 million.

Business Exits

        For the three months ended June 28, 2003, the Other Products segment reversed exit cost accruals of $2 million.

Manufacturing and Administrative Consolidations

        The Company's actions to consolidate manufacturing operations and to implement strategic initiatives to streamline its global organization resulted in additional charges of $37 million for the three months ended June 28, 2003. The $37 million charge relates to employee separation accruals, primarily in the Semiconductor Products and Commercial, Government and Industrial Solutions segments. These charges were offset by reversals of previous accruals of $90 million, consisting primarily of: (i) $53 million of unused accruals relating to previously expected employee separation costs across all segments, (ii) $24 million, primarily for reserves previously established to cover decommissioning costs which are no longer needed due to the sale of the facility in the Semiconductor Products segment, as well as for the correction in classification of assets which the Company intends to use which were previously classified as held-for-sale, and (iii) $13 million for exit cost accruals no longer required across all segments.

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Reorganization of Businesses Charges—by Segment

        The following table displays the net charges (reversals) incurred by segment for the three months ended June 28, 2003:

Segment

  Exit
Costs

  Employee
Separations

  Asset
Writedowns

  Total
 
Personal Communications   $   $ (13 ) $   $ (13 )
Semiconductor Products     (6 )   9     (12 )   (9 )
Global Telecom Solutions     (2 )   (14 )   (4 )   (20 )
Commercial, Government and Industrial Solutions         9         9  
Integrated Electronic Systems     (1 )   (10 )       (11 )
Broadband Communications         (2 )   (4 )   (6 )
Other Products     (2 )   8         6  
General Corporate     (5 )   (3 )   (4 )   (12 )
   
 
 
 
 
    $ (16 ) $ (16 ) $ (24 ) $ (56 )
   
 
 
 
 

Six months ended June 28, 2003

        For the six months ended June 28, 2003, the Company recorded net charges of $10 million, of which $11 million of reversals was included in Costs of Sales and $21 million of net charges was recorded under Reorganization of Businesses in the Company's condensed consolidated statements of operations. The aggregate $10 million net charge is comprised of the following:

 
  Exit
Costs

  Employee
Separations

  Asset
Writedowns

  Total
 
Discontinuation of product lines   $ (1 ) $   $   $ (1 )
Business exits     (2 )           (2 )
Manufacturing and administrative consolidations     (16 )   (9 )   38     13  
   
 
 
 
 
    $ (19 ) $ (9 ) $ 38   $ 10  
   
 
 
 
 

Discontinuation of Product Lines

        For the six months ended June 28, 2003, the Semiconductor Products segment reversed exit cost accruals of $1 million.

Business Exits

        For the six months ended June 28, 2003, the Other Products segment reversed exit cost accruals of $2 million.

Manufacturing and Administrative Consolidations

        The Company's actions to consolidate manufacturing operations and to implement strategic initiatives to streamline its global organization resulted in additional charges of $154 million for the six months ended June 28, 2003. These charges consisted primarily of: (i) $77 million in the Semiconductor Products segment primarily for fixed asset impairments related to a manufacturing facility in Texas and employee separation accruals, (ii) $30 million in the Commercial, Government and Industrial Solutions segment related to employee separation costs, and (iii) $26 million in General Corporate for the impairment of assets classified as held-for-sale. These charges were partially offset by reversals of previous accruals of $141 million, consisting primarily of: (i) $87 million relating to unused accruals of previously expected employee separation costs across all segments, (ii) $36 million, primarily for assets

21



which the Company intends to use that were previously classified as held-for-sale, as well as for reserves previously established to cover decommissioning costs which are no longer needed due to the sale of the facility in the Semiconductor Products segment, and (iii) $18 million for exit cost accruals no longer required across all segments.

Reorganization of Businesses Charges—by Segment

        The following table displays the net charges (reversals) incurred by segment for the six months ended June 28, 2003:

Segment

  Exit
Costs

  Employee
Separations

  Asset
Writedowns

  Total
 
Personal Communications   $ (1 ) $ (11 ) $ (7 ) $ (19 )
Semiconductor Products     (6 )   11     33     38  
Global Telecom Solutions     (3 )   (17 )   (6 )   (26 )
Commercial, Government and Industrial Solutions     (2 )   20         18  
Integrated Electronic Systems     (1 )   (12 )       (13 )
Broadband Communications     2     (6 )   (4 )   (8 )
Other Products     (2 )   7         5  
General Corporate     (6 )   (1 )   22     15  
   
 
 
 
 
    $ (19 ) $ (9 ) $ 38   $ 10  
   
 
 
 
 

Reorganization of Businesses Accruals

        The following table displays a rollforward of the accruals established for exit costs from January 1, 2003 to June 28, 2003:

Exit Costs

 
  Accruals at
January 1,
2003

  2003 Net Charges (Reversals)
  2003 Amount Used
  Accruals at
June 28,
2003

Discontinuation of product lines   $ 6   $ (1 ) $ (5 ) $
Business exits     82     (2 )   (11 )   69
Manufacturing & administrative consolidations     129     (16 )   (19 )   94
   
 
 
 
    $ 217   $ (19 ) $ (35 ) $ 163
   
 
 
 

        The 2003 net reversals of $19 million represent additional charges of $2 million and reversals into income of $21 million. The $35 million used in 2003 reflects cash payments of $30 million and non-cash utilization of $5 million. The remaining accrual of $163 million, which is included in Accrued Liabilities in the Company's condensed consolidated balance sheets, represents future cash payments, primarily for lease termination obligations, which will extend over several years.

22



        The following table displays a rollforward of the accruals established for employee separation costs from January 1, 2003 to June 28, 2003:

Employee Separation Costs

 
  Accruals at
January 1,
2003

  2003 Net Charges (Reversals)
  2003 Amount Used
  Accruals at
June 28,
2003

Manufacturing & administrative consolidations   $ 419   $ (9 ) $ (235 ) $ 175
   
 
 
 

        At January 1, 2003, the Company had an accrual of $419 million for employee separation costs, representing the severance costs for approximately 7,200 employees. The 2003 net reversals of $9 million represent additional charges of $78 million and reversals of $87 million. The additional charges for employee separation costs represent the severance costs for approximately an additional 1,700 employees.

        During the first half of 2003, approximately 5,400 employees were separated from the Company. The $235 million used in 2003 reflects cash payments of $229 million and non-cash utilization of $6 million to these separated employees. The remaining accrual of $175 million, which is included in Accrued Liabilities in the Company's condensed consolidated balance sheets, is expected to be paid to approximately 3,500 separated employees throughout the remainder of 2003.

10.   Acquisitions of Businesses

Next Level Communications, Inc.

        In April 2003, Motorola completed its cash tender offer of $1.18 per share for all remaining outstanding shares of common stock of Next Level Communications, Inc. ("Next Level"), a leading provider of high speed data, video and voice broadband solutions over existing phone lines. Motorola acquired the remaining ownership of Next Level through a short-form merger and Next Level is now a wholly-owned subsidiary of Motorola. The total purchase price for Motorola to acquire the approximately 26% of Next Level that it did not own at the initiation of the tender offer, excluding Next Level's transaction costs, was approximately $32 million. Prior to the completion of the cash tender offer, due to the Company's controlling ownership interest in Next Level and Next Level's cumulative net deficit equity position, the Company included in its consolidated results the minority interest share of Next Level's operating losses.

Winphoria

        In May 2003, the Company acquired Winphoria Networks, Inc. ("Winphoria"), a core infrastructure provider of next-generation packet-based mobile switching centers for wireless networks, for approximately $179 million in cash. The Company recorded approximately $93 million in goodwill, none of which is expected to be deductible for tax purposes, a $32 million charge for acquired in-process research and development, and $54 million in intangibles. The acquired in-process research and development will have no alternative future uses if the products are not feasible. The allocation of value to in-process research and development was determined using expected future cash flows discounted at average risk adjusted rates reflecting both technological and market risk as well as the time value of money. These research and development costs were written off at the date of acquisition and have been included in Other Charges in the Company's condensed consolidated statements of operations. Goodwill and intangible assets are included in Other Assets in the Company's condensed consolidated balance sheets. The intangible assets will be amortized over periods ranging from 3 to 5 years on a straight-line basis.

        The results of operations of Winphoria have been included in the Global Telecom Solutions segment in the Company's condensed consolidated financial statements subsequent to the date of acquisition. The pro forma effects of this acquisition on the Company's financial statements were not significant.

        At the date of the acquisition, a total of eight projects were in process, ranging from 29% to 82% complete. The average risk adjusted rate used to value these projects ranged from 25% to 28%. Six of these projects are expected to begin generating revenue in 2004 with the remaining two expected to begin generating revenue in 2005.

23



Motorola, Inc. And Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations

        This commentary should be read in conjunction with the Company's condensed consolidated financial statements for the three months and six months ended June 28, 2003 and June 29, 2002, as well as the Company's consolidated financial statements and related notes thereto and management's discussion and analysis of financial condition and results of operations incorporated by reference in the Company's Form 10-K for the year ended December 31, 2002.

Results of Operations

(Dollars in millions, except per share amounts)

  Three Months Ended
  Six Months Ended
 
 
  June 28,
2003

  % of
Sales

  June 29,
2002

  % of
Sales

  June 28,
2003

  % of
Sales

  June 29,
2002

  % of
Sales

 
Net sales   $ 6,163       $ 6,869       $ 12,206       $ 13,050      
Costs of sales     4,155   67.4   %   4,629   67.4   %   8,222   67.4   %   8,957   68.6   %
   
     
     
     
     
Gross margin     2,008   32.6   %   2,240   32.6   %   3,984   32.6   %   4,093   31.4   %
   
     
     
     
     
Selling, general and administrative expenses     937   15.2   %   1,177   17.1   %   1,834   15.0   %   2,285   17.5   %
Research and development expenditures     951   15.4   %   925   13.5   %   1,898   15.5   %   1,831   14.0   %
Reorganization of businesses     (42 ) (0.7 )%   1,468   21.4   %   21   0.2   %   1,666   12.8   %
Other charges (income)     (9 ) (0.1 )%   909   13.2   %   (70 ) (0.6 )%   912   7.0   %
   
     
     
     
     
Operating earnings (loss)     171   2.8   %   (2,239 ) (32.6 )%   301   2.5   %   (2,601 ) (19.9 )%
   
     
     
     
     
Other income (expense):                                          
  Interest expense, net     (59 ) (1.0 )%   (100 ) (1.5 )%   (152 ) (1.2 )%   (208 ) (1.6 )%
  Gains on sales of investments and businesses, net     28   0.5   %   24   0.3   %   307   2.5   %   35   0.3   %
  Other     (28 ) (0.5 )%   (975 ) (14.2 )%   (87 ) (.7 )%   (1,167 ) (8.9 )%
   
     
     
     
     
Total other income (expense)     (59 ) (1.0 )%   (1,051 ) (15.3 )%   68   0.6   %   (1,340 ) (10.3 )%
   
     
     
     
     
Earnings (loss) before income taxes     112   1.8   %   (3,290 ) (47.9 )%   369   3.0   %   (3,941 ) (30.2 )%
Income tax expense (benefit)     (7 ) (0.1 )%   (969 ) (14.1 )%   81   0.7   %   (1,171 ) (9.0 )%
   
     
     
     
     
Net earnings (loss)   $ 119   1.9   % $ (2,321 ) (33.8 )%   288   2.4   %   (2,770 ) (21.2 )%
   
     
     
     
     
Diluted earnings (loss) per common share   $ 0.05       $ (1.02 )     $ 0.12       $ (1.22 )    

Results of Operations—Three months ended June 28, 2003 compared to three months ended June 29, 2002

Net Sales

        Net sales were $6.2 billion in the second quarter of 2003, down 10% from $6.9 billion in the second quarter of 2002. Second-quarter net sales declined in five of the Company's six major segments. The overall decline in net sales was primarily due to: (i) increasing competitive pressure in Asia for both the Personal Communications segment, where segment net sales decreased by $353 million, and the Semiconductor Products segment, where segment net sales decreased by $141 million, and (ii) reduced customer capital spending in the industries served by the Global Telecom Solutions segment, where segment net sales decreased by $216 million, and the Broadband Communications segment, where segment net sales decreased $145 million. Segment net sales increased by $107 million in the Commercial, Government and Industrial Solutions segment, reflecting increased customer spending due to activity in homeland security initiatives.

24



Gross margin

        Gross margin decreased to $2.0 billion in the second quarter of 2003, compared to $2.2 billion in the second quarter of 2002. Despite the 10% decline in sales, gross margin as a percentage of sales remained consistent, at 32.6%, for the second quarter of both 2003 and 2002, primarily due to: (i) a shift in product mix towards higher-margin products and benefits attributed to cost-reduction activities in the Commercial, Government and Industrial Solutions segment, and (ii) a decrease in reorganization of businesses charges, offset by decreased absorption of fixed costs due to lower sales, primarily in the Global Telecom Solutions segment.

Selling, general and administrative expenses

        Selling, general and administrative (SG&A) expenses were $937 million, or 15.2% of net sales, in the second quarter of 2003, compared to $1.2 billion, or 17.1% of net sales, in the second quarter of 2002. SG&A expenses decreased in five of the Company's six major segments, primarily as a result of the Company's cost-reduction activities.

Research and development expenditures

        Research and development (R&D) expenditures increased 3% to $951 million, or 15.4% of net sales, in the second quarter of 2003, compared to $925 million, or 13.5% of net sales, in the second quarter of 2002. The overall increase primarily reflects additional R&D investment by the Personal Communications and Semiconductor Products segments for new product development, partially offset by reduced R&D expenditures in the Global Telecom Solutions and Broadband Communications segments, where spending on low-priority programs was reduced or ended as part of the Company's ongoing cost-reduction initiatives.

Reorganization of businesses

        The Company recorded a net reversal of $56 million of reorganization of businesses charges in the second quarter of 2003, including a $42 million reversal reflected in the condensed consolidated statements of operations under Reorganization of Businesses and a $14 million reversal reflected in Costs of Sales. Total reorganization of businesses charges in the second quarter of 2002 were $1.5 billion, including $1.5 billion reflected in the condensed consolidated statements of operations under Reorganization of Businesses and $40 million included in Costs of Sales. Expenses included under Reorganization of Businesses are expenses associated with plans to exit businesses and consolidate manufacturing and administrative operations. The reorganization of businesses charges included in Costs of Sales are severance charges for direct labor employees. The 2003 charges and reversals are discussed in further detail in the Reorganization of Businesses Charges section below.

Other charges (income)

        The Company recorded income of $9 million in Other Charges (Income) in the second quarter of 2003, compared to charges of $909 million in the second quarter of 2002. The income in the second quarter of 2003 primarily reflects income from the sale of assets related to the Iridium program that had been previously written down, partially offset by in-process research and development charges related to the acquisition of Winphoria Networks, Inc. The charges in the second quarter of 2002 were primarily comprised of: (i) a $526 million charge for potentially uncollectible finance receivables from Telsim, (ii) a $325 million charge for an intangible asset impairment of an intellectual property license, and (iii) an $80 million charge for potential repayments of incentives related to impaired facilities.

25



Net interest expense

        Net interest expense was $59 million in the second quarter of 2003, compared to $100 million in the second quarter of 2002. Net interest expense in the second quarter of 2003 included interest expense of $165 million, partially offset by $106 million of interest income. Net interest expense in the second quarter of 2002 included interest expense of $177 million, partially offset by interest income of $77 million. The decrease in net interest expense is primarily attributed to: (i) a $1.0 billion reduction in total debt since the second quarter of 2002, primarily due to the redemption of $825 million of Puttable Reset Securities (PURS)sm in the first quarter of 2003, (ii) interest received on a tax refund, (iii) interest income earned on long-term finance receivables, and (iv) the benefits of favorable interest rate swaps.

Gains on sales of investments and businesses

        Gains on sales of investments and businesses in the second quarter of 2003 were $28 million, compared to $24 million in the second quarter of 2002. In the second quarter of 2003, the gains primarily resulted from the recognition of a deferred gain from the 2001 sale of cellular properties upon receipt of final payment. In the second quarter of 2002, the gains primarily resulted from the sale of equity securities of other companies held for investment purposes.

Other

        Charges classified as Other, as presented in Other Income (Expense), included net charges of $28 million in the second quarter of 2003, compared to net charges of $975 million in the second quarter of 2002. This decrease was primarily attributable to the decline in investment impairments to $12 million in the second quarter of 2003, compared to $955 million in the second quarter of 2002. The second-quarter 2002 investment impairments were primarily comprised of: (i) a $464 million writedown of the value of the Company's investment in Nextel Communications, Inc., (ii) an impairment of the Company's debt security holdings and associated warrants in a European cable operator by $119 million and $154 million, respectively, and (iii) a $73 million writedown of the Company's investment in Telus Corporation.

Effective tax rate

        The effective tax rate was (6)% in the second quarter of 2003, representing a $7 million net tax benefit, compared to a 29% effective tax rate, representing a $969 million net tax benefit, in the second quarter of 2002. The lower effective tax rate in the second quarter of 2003 reflects a $61 million benefit from the reversal of previously accrued income taxes. The reversal of the accrual reflects a reassessment of the Company's income tax requirements given the current status of its ongoing income tax audits. The tax rate for the second quarter of 2003, excluding the reversal of accrued income taxes and the impact of the non-deductible Winphoria Networks, Inc. acquisition charge, was 37%. This adjusted effective tax rate of 37% for the second quarter of 2003 is greater than the rate of 29% for the second quarter of 2002 primarily due to a change in the mix of earnings and losses by geographic region.

Earnings (Loss)

        The Company had earnings before income taxes of $112 million in the second quarter of 2003, compared with a loss before income taxes of $3.3 billion in the second quarter of 2002. After taxes, the Company had net earnings of $119 million, or $0.05 per share, in the second quarter of 2003, compared with a net loss of $2.3 billion, or ($1.02) per share, in the second quarter of 2002.

        The improvement in financial results for the second quarter of 2003 primarily reflects the absence of a number of significant charges that occurred in the second quarter of 2002. These second-quarter

26



2002 charges included: (i) a $1.5 billion charge related to restructuring activities, (ii) a $955 million charge for investment impairments, (iii) a $526 million charge for potentially uncollectible finance receivables from Telsim, and (iv) a $325 million charge for intangible asset impairments. Additional improvements in financial results in the second quarter of 2003 resulted from: (i) benefits attributed to cost-reduction activities, predominately reflected as a decline in SG&A expenses, and (ii) a decline in interest expense. These cost improvements were partially offset by a 10% decrease in net sales.

Results of Operations—Six months ended June 28, 2003 compared to six months ended June 29, 2002

Net Sales

        Net sales were $12.2 billion in the first half of 2003, down 6% from $13.1 billion in the first half of 2002. First-half net sales declined in five of the Company's six major segments. The overall decline in net sales was primarily due to: (i) reduced customer capital spending in the industries served by the Global Telecom Solutions segment, where segment net sales decreased by $349 million, and the Broadband Communications segment, where segment net sales decreased $265 million, and (ii) the impact of increasing competitive pressure in Asia for the Personal Communications segment, where segment net sales decreased by $312 million, and the Semiconductor Products segment, where segment net sales decreased by $117 million. Segment net sales increased by $168 million in the Commercial, Government and Industrial Solutions segment, reflecting increased customer spending due to activity in homeland security initiatives.

Gross margin

        Gross margin decreased to $4.0 billion in the first half of 2003, compared to $4.1 billion in the first half of 2002. Despite the 6% decline in sales, gross margin as a percentage of sales increased to 32.6% in the first half of 2003, compared to 31.4% in the first half of 2002, primarily due to: (i) a shift in product mix towards higher-margin products in the Commercial, Government and Industrial Solutions segment, (ii) benefits from cost-reduction initiatives in the Semiconductor Products and Commercial, Government and Industrial Solutions segments, and (iii) a decrease in reorganization of businesses charges.

Selling, general and administrative expenses

        Selling, general and administrative (SG&A) expenses were $1.8 billion, or 15.0% of net sales, in the first half of 2003, compared to $2.3 billion, or 17.5% of net sales, in the first half of 2002. SG&A expenses decreased in five of the Company's six major segments, primarily as a result of the Company's cost-reduction activities.

Research and development expenditures

        Research and development (R&D) expenditures increased 4% to $1.9 billion, or 15.5% of net sales, in the first half of 2003, compared to $1.8 billion, or 14.0% of net sales, in the first half of 2002. The overall increase primarily reflects additional R&D investment by the Personal Communications and Semiconductor Products segments for new product development, partially offset by reduced R&D expenditures in the Global Telecom Solutions and Broadband Communications segments, where spending on low-priority programs was reduced or ended as part of the Company's ongoing cost-reduction initiatives.

Reorganization of businesses

        The Company recorded net total reorganization of businesses charges in the first half of 2003 of $10 million, including a $21 million charge reflected in the condensed consolidated statements of operations under Reorganization of Businesses and an $11 million reversal reflected in Costs of Sales.

27



Total reorganization of businesses charges in the first half of 2002 were $1.7 billion, including $1.7 billion reflected in the condensed consolidated statements of operations under Reorganization of Businesses and $48 million included in Costs of Sales. Expenses included under Reorganization of Businesses are expenses associated with plans to exit businesses and consolidate manufacturing and administrative operations. The reorganization of businesses charges included in Costs of Sales are severance charges for direct labor employees. The 2003 charges and reversals are discussed in further detail in the Reorganization of Businesses Charges section below.

Other charges (income)

        The Company recorded income in Other Charges (Income) of $70 million in the first half of 2003, compared to charges of $912 million in the first half of 2002. The income in the first half of 2003, is primarily comprised of $59 million in income relating to the reassessment of the remaining reserve requirements as a result of the Iridium settlement agreement with The Chase Manhattan Bank and $33 million for the sale of Iridium-related assets previously written down, partially offset by in-process research and development charges of $32 million related to the acquisition of Winphoria Networks, Inc. The charges in the first half of 2002 were primarily comprised of: (i) a $526 million charge for potentially uncollectible finance receivables from Telsim, (ii) a $325 million charge for an intangible asset impairment of an intellectual property license, (iii) an $80 million charge for potential repayments of incentives related to impaired facilities, and (iv) an $11 million charge for acquired in-process research and development related to the acquisition of Synchronous, Inc., partially offset by the recognition of pension curtailment income related to the General Instrument pension plan.

Net interest expense

        Net interest expense was $152 million in the first half of 2003, compared to $208 million in the first half of 2002. Net interest expense in the first half of 2003 included interest expense of $329 million, partially offset by $177 million of interest income. Net interest expense in the first half of 2002 included interest expense of $339 million, partially offset by interest income of $131 million. The decrease in net interest expense is primarily attributed to: (i) a $1.0 billion reduction in total debt since the second quarter of 2002, primarily due to the redemption of $825 million of Puttable Reset Securities (PURS)sm in the first quarter of 2003, (ii) interest received on a tax refund, (iii) interest income earned on long-term finance receivables, and (iv) the benefits of favorable interest rate swaps.

Gains on sales of investments and businesses

        Gains on sales of investments and businesses in the first half of 2003 were $307 million, compared to $35 million in the first half of 2002. For the first half of 2003, the gains primarily resulted from the sale of 25 million shares of Nextel Communications, Inc. held by the Company for investment purposes. For the first half of 2002, the gains primarily resulted from the sale of equity securities of other companies held for investment purposes.

Other

        Charges classified as Other, as presented in Other Income (Expense), included net charges of $87 million in the first half of 2003, compared to net charges of $1.2 billion in the first half of 2002. This decrease was primarily attributable to the decline in investment impairments to $59 million in the first half of 2003, compared to $1.1 billion in the first half of 2002. The first-half 2003 investment impairments were primarily comprised of a $29 million charge to write down to zero the Company's debt security holding in a European cable operator and other cost-based investment writedowns. The first half 2002 investment impairment charges were primarily comprised of: (i) $464 million to write down the value of the Company's investment in Nextel Communications, Inc., (ii) an impairment of the Company's debt security holdings and associated warrants in a European cable operator by $123 million

28



and $198 million, respectively, (iii) a $95 million writedown of the Company's investment in an Argentine cellular operating company to zero, and (iv) a $73 million writedown of the Company's investment in Telus Corporation. Additionally, foreign currency losses increased by $15 million in the first half of 2003, compared to first half of 2002.

Effective tax rate

        The effective tax rate was 22% for the first half of 2003, representing an $81 million net tax expense, compared to a 30% effective tax rate, representing a $1.2 billion net tax benefit, in the first half of 2002. The lower effective tax rate in 2003 reflects a $61 million benefit from the reversal of previously-accrued income taxes. The tax reversal relates to a reassessment of the Company's income tax requirements given the current status of its income tax audits. The tax rate for the first half of 2003, excluding the tax reversal and impact of the non-deductible Winphoria Networks, Inc. acquisition charge, was 35%. This adjusted effective tax rate of 35% for the first half of 2003 is greater than the rate of 30% for the first half of 2002 due to a change in the mix of earnings and losses by geographic region.

        The Company currently expects the effective tax rate for the full year 2003 to be approximately 30%, as compared to 28% for the full year 2002. Excluding the tax reversal and impact of the non-deductible Winphoria Networks, Inc. acquisition charge, the adjusted effective tax rate for the full year 2003 is estimated to be 35%. The increase in the effective tax rate for the full year 2003, as compared to the full year 2002, is due primarily to the expected increase in the Company's earnings and the mix of earnings and losses by geographic region.

Earnings (Loss)

        The Company had earnings before income taxes of $369 million in the first half of 2003, compared with a loss before income taxes of $3.9 billion in the first half of 2002. After taxes, the Company had net earnings of $288 million, or $0.12 per share, in the first half of 2003, compared with a net loss of $2.8 billion, or ($1.22) per share, in the first half of 2002.

        The improvement in financial results for the first half of 2003 primarily reflects the absence of a number of significant charges that occurred in the first half of 2002. These first-half 2002 charges included: (i) a $1.7 billion charge related to restructuring activities, (ii) a $1.1 billion charge for investment impairments, (iii) a $526 million charge for potentially uncollectible finance receivables from Telsim, and (iv) a $325 million charge for intangible asset impairments. Additional improvements in financial results in the first half of 2003 resulted from: (i) benefits attributed to cost-reduction activities, reflecting an improved gross margin as a percentage of sales and a decline in SG&A expenses, and (ii) a decline in interest expense. These cost improvements were partially offset by a 6% decrease in net sales.

Sales and Earnings Outlook for the Third Quarter of 2003; Limitations on Guidance Provided

        In the third quarter of 2003, the Company expects net sales to be approximately $6.3 billion to $6.5 billion, as compared to net sales of $6.5 billion in the third quarter of 2002. The Company expects to achieve earnings per share of approximately break-even to $0.02 per share in the third quarter of 2003, compared to earnings per share of $.05 in the third quarter of 2002.

        The Company is only providing sales and earnings guidance for the third quarter of 2003 and is not providing or reaffirming sales and earnings guidance for the full year 2003 or any future periods. Any previous guidance for those periods should no longer be relied upon. In addition to sales and earnings guidance, the Company has previously provided full-year guidance for a number of the line items in its statement of operations and for a number of components that affect its liquidity and capital resources. Other than guidance specifically provided herein, the Company is not providing or

29



reaffirming any guidance with regard to future expectations for either the line items in its statement of operations or the components of its liquidity and capital resources. Any previous guidance provided by the Company in its SEC filings relating to these line items or components should no longer be relied upon.

Reorganization of Businesses Charges

        Beginning in the third quarter of 2000 and continuing through the first half of 2003, the Company has implemented plans to reduce its workforce, discontinue product lines, exit businesses and consolidate manufacturing and administrative operations. The Company initiated these plans in an effort to reduce costs and simplify its product portfolio. During this period, the Company has recorded total reorganization of businesses charges of $6.2 billion, which include $625 million of exit costs, $1.6 billion of employee separation costs, and $4.0 billion of asset writedowns. Exit costs primarily consist of future minimum lease payments on vacated facilities and facility closure costs. Employee separation costs consist primarily of severance payments.

        The Company evaluates its accruals relating to exit costs and employee separation at each reporting period to ensure that the accruals are still appropriate. In certain circumstances, accruals are no longer required because of efficiencies in carrying out the plans or because employees previously identified for separation resigned from the Company unexpectedly and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were initiated. The Company reverses accruals to income when it is determined they are no longer required.

        During the first half of 2003, the Company continued to implement cost-reduction plans by consolidating manufacturing and administrative operations and reducing its workforce. The Company expects to realize cost-saving benefits of approximately $80 million for the full year 2003 for the plans implemented in the first half of 2003. Beyond 2003, the Company expected the reorganization of businesses programs from the first half of 2003 to provide annualized cost savings of approximately $125 million.

Three months ended June 28, 2003

        For the three months ended June 28, 2003, the Company recorded net reversals of $56 million, of which $14 million was included in Costs of Sales and $42 million was recorded under Reorganization of Businesses in the Company's condensed consolidated statements of operations. The aggregate $56 million net reversal is comprised of the following:

 
  Exit Costs
  Employee Separations
  Asset Writedowns
  Total
 
Discontinuation of product lines   $ (1 ) $   $   $ (1 )
Business exits     (2 )           (2 )
Manufacturing and administrative consolidations     (13 )   (16 )   (24 )   (53 )
   
 
 
 
 
    $ (16 ) $ (16 ) $ (24 ) $ (56 )
   
 
 
 
 

Discontinuation of Product Lines

        For the three months ended June 28, 2003, the Semiconductor Products segment reversed exit cost accruals of $1 million.

Business Exits

        For the three months ended June 28, 2003, the Other Products segment reversed exit cost accruals of $2 million.

30



Manufacturing and Administrative Consolidations

        The Company's actions to consolidate manufacturing operations and to implement strategic initiatives to streamline its global organization resulted in additional charges of $37 million for the three months ended June 28, 2003. The $37 million charge relates to employee separation accruals, primarily in the Semiconductor Products and Commercial, Government and Industrial Solutions segments. These charges were offset by reversals of previous accruals of $90 million, consisting primarily of: (i) $53 million of unused accruals relating to previously expected employee separation costs across all segments, (ii) $24 million, primarily for reserves previously established to cover decommissioning costs which are no longer needed due to the sale of the facility in the Semiconductor Products segment, as well as for the correction in classifications of assets which the Company intends to use which were previously classified as held-for-sale, and (iii) $13 million for exit cost accruals no longer required across all segments.

Reorganization of Businesses Charges—by Segment

        The following table displays the net charges (reversals) incurred by segment for the three months ended June 28, 2003:

Segment

  Exit
Costs

  Employee
Separations

  Asset
Writedowns

  Total
 
Personal Communications   $   $ (13 ) $   $ (13 )
Semiconductor Products     (6 )   9     (12 )   (9 )
Global Telecom Solutions     (2 )   (14 )   (4 )   (20 )
Commercial, Government and Industrial Solutions         9         9  
Integrated Electronic Systems     (1 )   (10 )       (11 )
Broadband Communications         (2 )   (4 )   (6 )
Other Products     (2 )   8         6  
General Corporate     (5 )   (3 )   (4 )   (12 )
   
 
 
 
 
    $ (16 ) $ (16 ) $ (24 ) $ (56 )
   
 
 
 
 

Six months ended June 28, 2003

        For the six months ended June 28, 2003, the Company recorded net charges of $10 million, of which $11 million of reversals was included in Costs of Sales and $21 million of net charges was recorded under Reorganization of Businesses in the Company's condensed consolidated statements of operations. The aggregate $10 million net charge is comprised of the following:

 
  Exit
Costs

  Employee
Separations

  Asset
Writedowns

  Total
 
Discontinuation of product lines   $ (1 ) $   $   $ (1 )
Business exits     (2 )           (2 )
Manufacturing and administrative consolidations     (16 )   (9 )   38     13  
   
 
 
 
 
    $ (19 ) $ (9 ) $ 38   $ 10  
   
 
 
 
 

Discontinuation of Product Lines

        For the six months ended June 28, 2003, the Semiconductor Products segment reversed exit cost accruals of $1 million.

31



Business Exits

        For the six months ended June 28, 2003, the Other Products segment reversed exit cost accruals of $2 million.

Manufacturing and Administrative Consolidations

        The Company's actions to consolidate manufacturing operations and to implement strategic initiatives to streamline its global organization resulted in additional charges of $154 million for the six months ended June 28, 2003. These charges consisted primarily of: (i) $77 million in the Semiconductor Products segment primarily for fixed asset impairments related to a manufacturing facility in Texas and employee separation accruals, (ii) $30 million in the Commercial, Government and Industrial Solutions segment related to employee separation costs, and (iii) $26 million in General Corporate for the impairment of assets classified as held-for-sale. These charges were partially offset by reversals of previous accruals of $141 million, consisting primarily of: (i) $87 million relating to unused accruals of previously expected employee separation costs across all segments, (ii) $36 million, primarily for assets which the Company intends to use that were previously classified as held-for-sale, as well as for reserves previously established to cover decommissioning costs which are no longer needed due to the sale of the facility in the Semiconductor Products segment, and (iii) $18 million for exit cost accruals no longer required across all segments.

Reorganization of Businesses Charges—by Segment

        The following table displays the net charges (reversals) incurred by segment for the six months ended June 28, 2003:

Segment

  Exit
Costs

  Employee
Separations

  Asset
Writedowns

  Total
 
Personal Communications   $ (1 ) $ (11 ) $ (7 ) $ (19 )
Semiconductor Products     (6 )   11     33     38  
Global Telecom Solutions     (3 )   (17 )   (6 )   (26 )
Commercial, Government and Industrial Solutions     (2 )   20         18  
Integrated Electronic Systems     (1 )   (12 )       (13 )
Broadband Communications     2     (6 )   (4 )   (8 )
Other Products     (2 )   7         5  
General Corporate     (6 )   (1 )   22     15  
   
 
 
 
 
    $ (19 ) $ (9 ) $ 38   $ 10  
   
 
 
 
 

Reorganization of Businesses Accruals

        The following table displays a rollforward of the accruals established for exit costs from January 1, 2003 to June 28, 2003:

Exit Costs

 
  Accruals at
January 1, 2003

  2003
Net Charges (Reversals)

  2003
Amount Used

  Accruals at
June 28, 2003

Discontinuation of product lines   $ 6   $ (1 ) $ (5 ) $
Business exits     82     (2 )   (11 )   69
Manufacturing & administrative consolidations     129     (16 )   (19 )   94
   
 
 
 
    $ 217   $ (19 ) $ (35 ) $ 163
   
 
 
 

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        The 2003 net reversals of $19 million represent additional charges of $2 million and reversals into income of $21 million. The $35 million used in 2003 reflects cash payments of $30 million and non-cash utilization of $5 million. The remaining accrual of $163 million, which is included in Accrued Liabilities in the Company's condensed consolidated balance sheets, represents future cash payments, primarily for lease termination obligations, which will extend over several years.

        The following table displays a rollforward of the accruals established for employee separation costs from January 1, 2003 to June 28, 2003:

Employee Separation Costs

 
  Accruals at
January 1, 2003

  2003
Net Charges (Reversals)

  2003
Amount Used

  Accruals at
June 28, 2003

Manufacturing & administrative consolidations   $ 419   $ (9 ) $ (235 ) $ 175
   
 
 
 

        At January 1, 2003, the Company had an accrual of $419 million for employee separation costs, representing the severance costs for approximately 7,200 employees. The 2003 net reversals of $9 million represent additional charges of $78 million and reversals of $87 million. The additional charges for employee separation costs represent the severance costs for approximately an additional 1,700 employees.

        During the first half of 2003, approximately 5,400 employees were separated from the Company. The $235 million used in 2003 reflects cash payments of $229 million and non-cash utilization of $6 million to these separated employees. The remaining accrual of $175 million, which is included in Accrued Liabilities in the Company's condensed consolidated balance sheets, is expected to be paid to approximately 3,500 separated employees throughout the remainder of 2003.

Liquidity and Capital Resources

        As highlighted in the condensed consolidated statements of cash flows, the Company's liquidity and available capital resources are impacted by four key components: (i) cash and cash equivalents, (ii) operating activities, (iii) investing activities, and (iv) financing activities.

Cash and Cash Equivalents

        At June 28, 2003, the Company's cash and cash equivalents (which are highly-liquid investments with an original maturity of three months or less) aggregated $6.2 billion, compared to $6.5 billion at December 31, 2002 and $6.4 billion at June 29, 2002. On June 28, 2003, $3.1 billion of this amount was held in the U.S. and $3.1 billion was held by the Company or its subsidiaries in other countries. Repatriation of some of these funds could be subject to delay and could have potential adverse tax consequences.

Operating Activities

        For the six months ended June 28, 2003, the Company generated cash flow from operations of $776 million, as compared to $689 million generated in the first half of 2002. The second quarter of 2003 was the tenth consecutive quarter that the Company has generated positive cash flow from operations. The primary contributors to cash flow from operations in the first half of 2003 were: (i) a $760 million decrease in accounts receivable, reflecting a decrease in accounts receivable in five of the Company's six major segments, and (ii) net earnings, adjusted for non-cash items, of $639 million, partially offset by a $1.1 billion decrease in accounts payable and accrued liabilities, primarily relating

33



to cash payments for employee severance and exit costs, employee incentives, interest and income taxes.

        The Company's net accounts receivable were $3.6 billion at June 28, 2003, compared to $4.4 billion at December 31, 2002 and $4.2 billion at June 29, 2002. The Company's weeks receivable, excluding net long-term finance receivables, were 7.1 weeks at June 28, 2003, compared to 7.0 weeks at December 31, 2002 and 7.6 weeks at June 29, 2002. The decrease in net accounts receivable was primarily due to a decline in the Company's net sales.

        The Company's net inventory was $2.8 billion at June 28, 2003, compared to $2.9 billion at December 31, 2002 and $2.5 billion at June 29, 2002. The Company's inventory turns (calculated based on a 12-month rolling costs of sales divided by average inventory) were 6.0 at June 28, 2003, compared to 6.6 at December 31, 2002 and 6.7 at June 29, 2002. The decrease in net inventory at June 28, 2003, compared to December 31, 2002, is primarily due to improved supply-chain management processes. The decrease in inventory turns was primarily the result of lower costs of sales, due to a decline in net sales, and higher average inventory. Inventory management continues to be an area of focus as the Company balances the need to maintain strategic inventory levels to ensure competitive lead-times with the risk of inventory obsolescence due to rapidly changing technology and customer requirements.

        To improve its future profitability, the Company continued to implement cost-reduction plans in the first half of 2003. Cash payments for exit costs and employee separations in connection with the Company's various reorganization plans were $259 million in the first half of 2003. All of the remaining $338 million reorganization of businesses accruals at June 28, 2003 are expected to result in future cash payments, the majority of which are expected to occur in 2003.

        A cash contribution of $50 million was made to the regular U.S. pension plan during the second quarter of 2003. The Company expects to make additional cash contributions of between $100 million and $150 million to this plan during the remainder of 2003.

Investing Activities

        The most significant components of the Company's investing activities are: (i) capital expenditures, (ii) strategic acquisitions of, or investments in, other companies, and (iii) proceeds from dispositions of investments and businesses.

        Net cash used by investing activities was $131 million for the first half of 2003, as compared to $205 million used by investing activities for the first half of 2002. The $74 million decrease in cash used for investing activities in the first half of 2003, compared to the first half of 2002, was primarily due to an increase of $323 million in proceeds received from dispositions of investments and businesses, partially offset by an increase of $212 million in cash used for acquisitions and investments, and an increase of $89 million for capital expenditures.

        Capital Expenditures:    Capital expenditures in the first half of 2003 were $328 million, compared to $239 million in the first half of 2002. Capital expenditures in the Semiconductor Products segment continued to comprise the largest portion of these expenditures, representing $155 million in the first half of 2003, compared to $70 million in the first half of 2002. For the full year 2003, the Company expects capital expenditures to be no greater than $800 million, of which approximately $300 million is expected to be in the Semiconductor Products segment. Full-year 2002 capital expenditures were $607 million, of which $220 million were by the Semiconductor Products segment.

        Strategic Acquisitions and Investments:    Cash consumed by the Company's acquisition and new investment activities increased to $238 million in the first half of 2003, compared to $26 million in the first half of 2002. The cash consumed in the first half of 2003 was primarily comprised of: (i) $179 million for the acquisition of Winphoria Networks, Inc., a core infrastructure provider of next-generation packet-based mobile switching centers for wireless networks, acquired by the Global

34



Telecom Solutions segment, and (ii) $32 million to acquire the remaining outstanding shares of Next Level Communications, Inc.

        Dispositions of Investments and Businesses:    The Company received $355 million in proceeds from the dispositions of investments and businesses during the first half of 2003, compared to proceeds of $32 million in the first half of 2002. The proceeds in the first half of 2003 were primarily from the sale of 25 million shares of Nextel Communications, Inc. (Nextel) that were held by the Company for investment purposes. The sale of these shares during the first quarter of 2003 generated approximately $335 million in gross proceeds and a gain of approximately $255 million. The first-half 2002 proceeds were primarily from the sale of securities held in the Company's investment portfolio.

        In addition to the sale of 25 million shares of Nextel, in March 2003, the Company entered into three agreements to hedge up to 25 million shares of Nextel common stock. Under these agreements, the Company received no initial proceeds, but has retained the right to receive, at any time during the contract periods, the present value of the aggregate contract "floor" price. The three agreements are to be settled over periods of three, four and five years, respectively. Pursuant to these agreements and exclusive of any present value discount, the Company is entitled to receive aggregate proceeds of approximately $333 million. The precise number of shares of Nextel common stock that the Company would deliver to satisfy the contracts is dependent upon the price of Nextel common stock on the various settlement dates. The maximum aggregate number of shares the Company would be required to deliver under these agreements is 25 million and the minimum number of shares is 18.5 million. Alternatively, the Company has the exclusive option to settle the contracts in cash. The Company will retain all voting rights associated with the up to 25 million hedged Nextel shares. Although, pursuant to customary market practice, the covered shares are pledged to secure the hedge contracts. As a result of the recent increase in the price of Nextel common stock, the Company has recorded a $64 million liability in Other Liabilities in the condensed consolidated balance sheet to reflect the fair value of the Nextel hedges.

        Short-Term Investments:    At June 28, 2003, the Company had $57 million in short-term investments (which are highly-liquid fixed-income investments with an original maturity greater than 3 months but less than one year), compared to $59 million at December 31, 2002 and $95 million at June 29, 2002.

        Available-for-Sale Securities:    In addition to available cash and cash equivalents, the Company views its available-for-sale securities as an additional source of liquidity. The majority of these securities represent investments in technology companies and, accordingly, the fair market values of these securities are subject to substantial price volatility. In addition, the realizable value of these securities is subject to market and other conditions. At June 28, 2003, the Company's available-for-sale securities portfolio had an approximate fair market value of $2.1 billion, which represented a cost basis of $555 million and an unrealized net gain of $1.5 billion. At December 31, 2002, the Company's available-for-sale securities portfolio had an approximate fair market value of $1.6 billion, which represented a cost basis of $615 million and an unrealized net gain of $953 million. During the first half of 2003, the Company impaired $59 million of certain available-for-sale securities as the decline in value of these securities was determined to be other than temporary.

Financing Activities

        The most significant components of the Company's financing activities are: (i) net proceeds from (or repayment of) commercial paper and short-term borrowings, (ii) net proceeds from (or repayment of) long-term debt securities, (iii) the payment of dividends, and (iv) proceeds from the issuances of stock due to the exercise of employee stock options and purchases under the employee stock purchase plan.

35



        Net cash used for financing activities was $983 million in the first half of 2003, compared to $217 million used in the first half of 2002. Net cash used for financing activities in the first half of 2003 was primarily used: (i) to repay $872 million of total debt (including commercial paper), mainly reflecting the redemption of all of the Company's $825 million of Puttable Reset Securities (PURS)sm in the first quarter of 2003, and (ii) to pay dividends of $185 million, partially offset by proceeds of $74 million from the issuance of common stock in connection with the Company's employee stock option plan and employee stock purchase plan. Net cash used for financing activities in the first half of 2002 was primarily used: (i) to repay $328 million of total debt (including commercial paper) and (ii) to pay dividends of $181 million, partially offset by proceeds of $263 million from the issuance of common stock in connection with the Company's employee stock option plan and employee stock purchase plan.

        At June 28, 2003, the Company's outstanding notes payable and current portion of long-term debt was $1.3 billion, compared to $1.6 billion at December 31, 2002 and $1.5 billion at June 29, 2002. The decrease in short-term debt during 2003 reflects the repayment of $825 million of Puttable Reset Securities (PURS)sm due February 1, 2011 in the first quarter of 2003, offset by the reclassification of $500 million of 6.75% debentures due June 2004 from long-term debt to the current portion of long-term debt.

        At June 28, 2003, the Company had $501 million of outstanding commercial paper, compared to $495 million at December 31, 2002 and $509 million at June 29, 2002. The Company currently expects its outstanding commercial paper balances to continue to average around $500 million throughout 2003.

        At June 28, 2003, the Company had long-term debt of $6.7 billion, compared to $7.2 billion at December 31, 2002 and $7.4 billion at June 29, 2002. The reduction in long-term debt during 2003 reflects the reclassification of $500 million from long-term debt to the current portion of long-term debt as described above.

        Given the Company's significant cash position, it may from time to time seek to opportunistically retire certain of its outstanding debt through open market cash purchases, privately-negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, the Company's liquidity requirements, contractual restrictions and other factors.

        Debt Ratings:    Two independent credit rating agencies, Standard & Poor's ("S&P") and Moody's Investor Services ("Moody's"), assign ratings to the Company's short-term and long-term debt. On June 23, 2003, S&P affirmed its credit rating for the Company's senior unsecured non-credit enhanced long-term debt of "BBB", but revised its outlook to "negative" from "stable". On July 16, 2003, Moody's put the Company's senior unsecured non-credit enhanced long-term debt rating of "Baa2" on "credit watch for possible downgrade." S&P explicitly affirmed the Company's commercial paper rating of "A-2". Moody's commercial paper rating of "P-2" is currently on review along with the Company's long-term debt rating.

        The Company continues to have access to the commercial paper and long-term debt markets. However, the Company generally has had to pay a higher interest rate to borrow money than it would have if its credit ratings were higher. Since the end of 2001, the Company has maintained greatly reduced levels of commercial paper outstanding than during its prior history. This reflects the fact that the market for commercial paper rated "A-2/P-2" is much smaller than that for commercial paper rated "A-1/P-1" and commercial paper or other short-term borrowings may be of limited availability to participants in the "A-2/P-2" market from time-to-time or for extended periods.

        The Company's debt rating is considered "investment grade." If the Company's senior long-term debt were rated lower than "BBB-" by S&P or "Baa3" by Moody's (which would be a decline of two levels from current ratings), the Company's long-term debt would no longer be considered "investment grade". If this were to occur, the terms on which the Company could borrow money would become more onerous. In addition, if these debt ratings were to be lower than "BBB-" by S&P or "Baa3" by

36



Moody's (which would be a decline of two levels from current ratings), the Company and its domestic subsidiaries would be obligated to provide the lenders in the Company's domestic revolving credit facilities with a pledge of, and security interest in, domestic inventories and receivables. The Company would also have to pay higher fees related to these facilities. The Company has never borrowed under its domestic revolving credit facilities.

        As further described under "Customer Financing Arrangements" below, for many years the Company has utilized a receivables program to sell a broadly-diversified group of short-term receivables, through Motorola Receivables Corporation ("MRC"), to third parties. The obligations of the third parties to continue to purchase receivables under the MRC short-term receivables program could be terminated if the Company's long-term debt was rated lower than "BB" by S&P or "Ba2" by Moody's (which would be a decline of four levels from current ratings). If the MRC short-term receivables program were terminated, the Company would no longer be able to sell its short-term receivables in this manner, but it would not have to repurchase previously-sold receivables.

        Also as further described under "Customer Financing Arrangements" below, the Company previously sold a limited number of long-term loans to an independent third party through Motorola Funding Corporation ("MFC"). In May 2003, the Company voluntarily terminated the program for the sale of long-term receivables through MFC. In light of the significant decrease in long-term financing provided by the Company to customers in recent years, no long-term receivables have been sold through this program in 2002 or 2003 and the benefits from maintaining the program no longer exceeded the costs. To effect this termination, the Company purchased all outstanding long-term receivables previously sold to, and held by, the independent third party and terminated the credit insurance related to these long-term receivables.

        The Company's ratio of net debt to net debt plus equity was 12.4% at June 28, 2003, compared to 16.7% at December 31, 2002 and 18.2% at June 29, 2002. The decrease in this ratio is primarily due to the Company's $869 million reduction in total debt since December 31, 2002.

        Although the Company believes that it can continue to access the capital markets in 2003 on acceptable terms and conditions, its flexibility with regard to long-term financing activity could be limited by: (i) the Company's credit ratings, and (ii) the level of market demand for debt issued by telecommunications companies. In addition, many of the factors that affect the Company's ability to access the capital markets, such as the liquidity of the overall capital markets and the current state of the economy, in particular the telecommunications industry, are outside of the Company's control. There can be no assurances that the Company will continue to have access to the capital markets on favorable terms.

        At June 28, 2003, the Company's total domestic and non-U.S. credit facilities totaled $3.9 billion, of which $216 million was considered utilized. These facilities are principally comprised of: (i) a $700 million 364-day revolving domestic credit facility (expiring in May 2004) which is not utilized, (ii) a $900 million three-year revolving domestic credit facility (expiring in May 2005) which is not utilized, and (iii) $2.3 billion of non-U.S. credit facilities (of which $216 million was considered utilized at June 28, 2003). Unused availability under the existing credit facilities, together with available cash and cash equivalents and other sources of liquidity, are generally available to support outstanding commercial paper, which was $501 million at June 28, 2003. However, these agreements contain various conditions, covenants and representations with which the Company must be in compliance in order to borrow funds under the domestic revolving credit facilities and have this liquidity.

        In May 2003, the Company completed the renewal of its 364-day revolving domestic credit facility. Important terms of the credit agreements include a springing contingent lien and covenants related to net interest coverage and total debt-to-book capitalization ratios. Under the current facilities, if the Company's corporate credit ratings were to be lower than "BBB-" by S&P or "Baa3" by Moody's (which would be a decline of two levels from current ratings), the Company and its domestic

37



subsidiaries would be obligated to provide the lenders in the Company's domestic revolving credit facilities with a pledge of, and security interest in, domestic inventories and receivables. The Company's current corporate credit ratings are "BBB" with a "negative" outlook by S&P and "Baa2" "on credit watch for possible downgrade" by Moody's. The Company has never borrowed under its domestic revolving credit facilities.

        Return on average invested capital, based on performance of the four preceding quarters ending with June 28, 2003 and June 29, 2002, was 4.1% and (29.5)%, respectively. The Company's current ratio was 1.87 at June 28, 2003, compared to 1.75 at December 31, 2002 and 1.69 at June 29, 2002.

        Based upon cash and cash equivalents in the U.S., the ability to repatriate cash and cash equivalents from foreign jurisdictions, the ability to borrow under existing or future credit facilities, the ability to issue commercial paper, access to the short-term and long-term debt markets, and proceeds from sales of available-for-sale securities and other investments, the Company believes that it has adequate internal and external resources available to fund expected working capital and capital expenditure requirements for the next twelve months. The Company expects to have positive operating cash flow in the third quarter of 2003 and for the full year of 2003.

Customer Financing Arrangements

        Outstanding Commitments:    Although the Company has greatly reduced the level of long-term financing it provides to customers over the past few years, certain purchasers of the Company's infrastructure equipment continue to require suppliers to provide financing in connection with equipment purchases. Financing may include all or a portion of the purchase price of the equipment and working capital. The Company had outstanding commitments to extend credit to third parties totaling $166 million and $175 million at June 28, 2003 and December 31, 2002, respectively. The Company made loans to customers of $6 million and $14 million for the three months ended June 28, 2003 and June 29, 2002, respectively and $7 million and $81 million for the six months ended June 28, 2003 and June 29, 2002, respectively.

        Outstanding Finance Receivables:    During the "telecom boom" that peaked in late 2000, numerous wireless equipment makers, including the Company, made loans to customers, some of which were very large. The Company had net finance receivables of $426 million and $467 million at June 28, 2003, and December 31, 2002 (net of allowances for losses of $2.2 billion at June 28, 2003 and $2.3 billion at December 31, 2002). These finance receivables are generally interest bearing, with rates ranging from 3% to 15%. Interest income on these impaired finance receivables is recognized only when payments are received. Total interest income recognized on finance receivables was $12 million and $0.3 million for the three months ended June 28, 2003 and June 29, 2002, respectively, and $13 million and $5 million for the six months ended June 28, 2003 and June 29, 2002, respectively.

        Telsim Loan:    At both June 28, 2003 and December 31, 2002, the Company had $2.0 billion of gross receivables from one customer, Telsim, in Turkey (the "Telsim Loan"). As a result of difficulties in collecting the amounts due from Telsim, the Company has previously recorded charges reducing the net receivable from Telsim to zero. At both June 28, 2003 and December 31, 2002, the net receivable from Telsim was zero. Although the Company continues to vigorously pursue its recovery efforts, it believes the litigation and collection process will be very lengthy in light of the Uzans' (the family which controls Telsim) repeated decisions to violate court orders.

        Guarantees of Third-Party Debt:    In addition to providing direct financing to certain equipment customers, the Company also assists customers in obtaining financing from banks and other sources to fund equipment purchases and working capital. The amount of loans from third parties for which the Company has committed to provide financial guarantees totaled $44 million at June 28, 2003, as compared to $50 million at December 31, 2002. Customer borrowings outstanding under these

38



guaranteed third-party loan arrangements were $44 million at June 28, 2003, as compared to $50 million at December 31, 2002.

        The Company evaluates its contingent obligations under these financial guarantees by assessing the customer's financial status, account activity and credit risk, as well as the current economic conditions and historical experience. The $44 million of guarantees discussed above is comprised of guarantees for two customers in the amounts of $29 million and $15 million. Management's best estimate of probable losses of unrecoverable amounts, should these guarantees be called, was $25 million at both June 28, 2003 and December 31, 2002.

        Sales of Receivables and Loans:    From time to time, the Company sells short-term receivables and long-term loans to third parties in transactions that qualify as "true-sales". Certain of these receivables are sold through a separate legal entity, Motorola Receivables Corporation ("MRC"). MRC is a special purpose entity and the financial results for MRC are fully consolidated in the Company's financial statements. This receivables funding program is, in turn, administered through separate special purpose entities. Under FASB Interpretation No. 46, "Consolidation of Variable Interest Entities", the Company does not believe it will be required to consolidate these separate special purpose entities.

        As of December 31, 2002, the Motorola Receivables Corporation ("MRC") short-term receivables program provided for up to $400 million of short-term receivables to be outstanding with third parties at any time. In February 2003, the MRC short-term receivables program was amended and the level of allowable outstanding short-term receivables was increased to $425 million. Total receivables sold through the MRC short-term program were $205 million and $249 million for the three months ended June 28, 2003 and June 29, 2002, respectively and $384 million and $533 million for the six months ended June 28, 2003 and June 29, 2002, respectively. There were approximately $154 million of short-term receivables outstanding under the MRC short-term receivables program at June 28, 2003, compared to $240 million outstanding at December 31, 2002.

        In addition to the MRC short-term receivables program, the Company also sells other short-term receivables directly to third parties. Total short-term receivables sold by the Company (including those sold directly to third parties and those sold through the MRC short-term receivables program) were $664 million and $771 million during the three months ended June 28, 2003 and June 29, 2002, respectively and $1.4 billion and $1.5 billion during the six months ended June 28, 2003 and June 29, 2002, respectively. There were approximately $815 million of short-term receivables outstanding under these arrangements at June 28, 2003, compared to $802 million outstanding at December 31, 2002. The Company's total credit exposure to outstanding short-term receivables that have been sold was $26 million at June 28, 2003, compared to $40 million at December 31, 2002. The Company had reserves of $21 million recorded for potential losses pursuant to this credit exposure at June 28, 2003, compared to $19 million recorded at December 31, 2002.

        Prior to 2002, the Company had sold a limited number of long-term receivables to an independent third party through Motorola Funding Corporation ("MFC"). In connection with the sale of long-term receivables, the Company retained obligations for the servicing, administering and collection of receivables sold. In May 2003, the Company voluntarily terminated the program for the sale of long-term receivables through MFC. In light of the significant decrease in long-term financing provided by the Company to customers in recent years, no long-term receivables were sold through this program in 2002 or 2003 and the benefits from maintaining the program no longer exceeded the costs. To effect this termination, the Company purchased all outstanding long-term receivables previously sold to, and held by, the independent third party and terminated the credit insurance related to these long-term receivables. Accordingly, at June 28, 2003, the Company had no finance receivables outstanding under this program. At December 31, 2002, receivables outstanding under this program were $71 million, with an allowance for first loss of $14 million.

39



Iridium Program

        A committee of unsecured creditors (the "Creditors Committee") of Iridium LLC and its operating subsidiaries (collectively "Old Iridium"), was, over objections by Motorola, granted leave by the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") to file a complaint on Old Iridium's behalf against Motorola. In March 2001, the Bankruptcy Court approved a settlement between the Creditors Committee and Old Iridium's secured creditors that provides for the creation of a litigation fund to be used in pursuit of the claims against Motorola. Motorola's appeal of this order remains pending. On July 19, 2001, the Creditors Committee filed its complaint against Motorola in Bankruptcy Court on behalf of Old Iridium's debtors and estates, seeking in excess of $4 billion in damages. Discovery in this case is ongoing.

        Motorola has been named as one of several defendants in putative class action securities lawsuits pending in the District of Columbia arising out of alleged misrepresentations or omissions regarding the Iridium satellite communications business. The plaintiffs seek an unspecified amount of damages. On March 15, 2001, the federal district court consolidated the various securities cases under Freeland v. Iridium World Communications, Inc., et al., originally filed on April 22, 1999. Motorola moved to dismiss the plaintiffs' complaint on July 15, 2002, and that motion has not yet been decided. Plaintiffs have filed a motion for partial summary judgment, which is also pending.

        The Iridium India gateway investors ("IITL") have filed a suit against Motorola, and certain current and former Motorola officers, in an India court under the India Penal Code claiming cheating and conspiracy in connection with investments in Old Iridium and the purchase of gateway equipment. Under Indian law if IITL were successful in the suit, IITL could recover compensation of the alleged financial losses. In September 2002, IITL also filed a civil suit in India against Motorola and Old Iridium alleging fraud and misrepresentation in inducing IITL to invest in Old Iridium and to purchase and operate an Iridium gateway in India. IITL claims in excess of $200 million in damages, plus interest.

        The Chase Manhattan Bank, as agent for the lenders under Old Iridium's $800 million Senior Secured Credit Agreement, filed four lawsuits against Motorola. In March 2003, the Company reached a settlement agreement with Chase, pursuant to which all four of the cases, including Motorola's counterclaim, were dismissed with prejudice. Under the settlement agreement, Motorola released to Chase its claim to $371 million that was previously paid into an escrow account in April 2002 and made an additional payment of $12 million.

        The Company had reserves related to the Iridium program of $73 million and $152 million at June 28, 2003 and December 31, 2002, respectively. These reserves are included in Accrued Liabilities in the condensed consolidated balance sheets. The reduction in the reserve balance is comprised of $20 million in cash payments, of which $12 million relates to the Chase settlement agreement, and $59 million for the reduction of reserves after reassessment in light of the wind-down of the program and the settlement agreement reached with Chase. The remaining reserve balance of $73 million at June 28, 2003 relates primarily to termination claims and the settlement of remaining obligations. In addition to the amounts disclosed above, Motorola recognized $33 million of income during the three months ended June 28, 2003 for the sale of Iridium-related assets previously written down.

        These reserves are believed by management to be sufficient to cover Motorola's current exposures related to the Iridium program. However, these reserves do not include additional charges that may arise as a result of litigation related to the Iridium program. While the still pending cases are in very preliminary stages and the outcomes are not predictable, an unfavorable outcome of one or more of these cases could have a material adverse effect on the Company's consolidated financial position, liquidity or results of operations.

40



Segment Information

        The following commentary should be read in conjunction with the financial results of each reporting segment for the three months and six months ended June 28, 2003 as detailed in Note 8, "Segment Information," of the Company's condensed consolidated financial statements.

        Orders, net sales, and operating results for the Company's major operations for the three months and six months ended June 28, 2003 and June 29, 2002 are presented below. Order information as of any particular date may not be an accurate indicator of future results, as orders are subject to revision or cancellation to reflect changes in customer needs.

        For each of its major operating segments, the Company is only providing sales and earnings guidance for the third quarter of 2003 and is not providing or reaffirming sales and earnings guidance for the full year 2003 or any future periods. Any previous sales and earnings guidance provided by the Company in its SEC filings for any of the Company's operating segments should no longer be relied upon. In addition to sales and earnings guidance, the Company has previously provided forecasts for the growth rates in the end markets served by certain of its operating segments, as well as other specific segment-related guidance. Other than guidance specifically provided herein, the Company is not providing or reaffirming any guidance with regard to end-market growth rates or other specific segment-related guidance. Any previous guidance provided by the Company in its SEC filings relating to these items should no longer be relied upon.

        Within the segment discussion below, solely for purposes of historical period-to period comparisons, the following words shall have the following meanings: "slight" or "slightly" indicates a variance of up to 5 percent; "substantial" or "substantially" indicates a variance from 15 percent up to 25 percent; and "very substantial" or "very substantially" indicates a variance of 25 percent or more. The use of the words "up", "down", "higher" or "lower" without modification by any of the above adjectives will indicate a variance from 5 percent to 15 percent.

Personal Communications Segment

        The Personal Communications segment (PCS) designs, manufactures, sells and services wireless subscriber equipment, including wireless handsets and personal two-way radios, with related software and accessory products. For the second quarter of 2003 and 2002, PCS net sales represented 38% and 39% of the Company's consolidated net sales, respectively. For both the first half of 2003 and 2002, PCS net sales represented 39% of the Company's consolidated net sales.

 
  Three Months Ended
   
  Six Months Ended
   
 
(Dollars in millions)


  June 28,
2003

  June 29,
2002

  % Change
  June 28,
2003

  June 29,
2002

  % Change
 
Orders   $ 2,257   $ 2,608   (13 )% $ 4,751   $ 5,252   (10 )%
Segment net sales   $ 2,331   $ 2,684   (13 )% $ 4,778   $ 5,090   (6 )%
Operating earnings (loss)   $ 91   $ 3   ***   $ 205   $ (32 ) ***  

***
Percent change not meaningful

Three months ended June 28, 2003 compared to three months ended June 29, 2002

        In the second quarter of 2003, segment net sales decreased 13% to $2.3 billion, compared to $2.7 billion in the second quarter of 2002, and orders declined 13% to $2.3 billion, compared to $2.6 billion in the second quarter of 2002. The decrease in net sales was primarily due to the very substantial decrease in unit shipments in the Asia region, reflecting intensified competition in China from locally-based and foreign handset suppliers, as well as an ongoing industry surplus of handsets in the country's distribution channels, largely generated by the locally-based suppliers. Additionally, the outbreak of Severe Acute Respiratory Syndrome (SARS) created consumer anxiety, which intensified market pressures in China. Despite these conditions, the segment remained the market share leader in China, the world's largest handset market. However, the segment's share declined as a result of the

41



intensified competition. Net sales increased very substantially in the Americas region, which was attributed to the increase in unit shipments, partially offset by a decrease in average selling prices (ASPs).

        The decline in orders was primarily due to: (i) a very substantial decrease in orders in the Asia region, for the reasons discussed above, and (ii) the absence of orders associated with the paging business that was phased out during 2002. Both net sales and orders for the paging business were $61 million in the second quarter of 2002.

        Segment unit shipments were 15.8 million in the second quarter of 2003, down approximately 5% from 16.7 million units in the second quarter of 2002. Unit shipments declined at a slower rate than sales due to a shift in product mix toward lower-priced handsets, primarily in the Americas region. This shift occurred because PCS has developed a much broader portfolio of lower-priced handset models that have been well received by wireless service providers and consumers. The segment's ASPs were down 10% in the second quarter of 2003 compared to the second quarter of 2002, due to price reductions and a mix shift in units toward lower-priced handsets. The decline in ASPs is reflective of historical reductions in selling prices. Over the last 5 years, the segment's ASPs have declined an average of 10% to 15% per year.

        On a geographic basis, unit shipments in the second quarter of 2003, compared to the second quarter of 2002, were up very substantially in the Americas, down very substantially in Asia and up slightly in Europe. Sales were up very substantially in the Americas, down very substantially in Asia and down in Europe.

        PCS's primary technologies are: (i) Global System for Mobile Communications ("GSM"), (ii) Code Division Multiple Access ("CDMA"), (iii) Time Division Multiple Access ("TDMA"), and (iv) iDEN® integrated digital enhanced network. Unit shipments in the second quarter of 2003, compared to the second quarter of 2002, were up very substantially in TDMA, down substantially in CDMA and GSM, and up substantially in iDEN. Sales were up very substantially in TDMA, down very substantially in CDMA and GSM, and up substantially in iDEN.

        The segment's operating earnings in the second quarter of 2003 were $91 million, compared to operating earnings of $3 million in the second quarter of 2002. The improvement in operating results was primarily due to the charges that occurred in the second quarter of 2002 that did not occur in the second quarter of 2003. These second quarter 2002 charges primarily were: (i) a $125 million charge related to a potentially uncollectible finance receivable from Telsim, a wireless telephone operator in Turkey, and (ii) a $44 million charge for employee severance costs, primarily attributed to the shut down of an engineering and distribution center in Harvard, Illinois. Additionally, operating results in the second quarter of 2003 benefited from reduced SG&A expenses, reflecting benefits attributed to cost-reduction activities. However, these cost improvements were more than offset by the 13% decrease in sales and an increase in R&D expenses.

Six months ended June 28, 2003 compared to six months ended June 29, 2002

        In the first half of 2003, segment net sales decreased 6% to $4.8 billion, compared to $5.1 billion in the first half of 2002, and orders declined 10% to $4.8 billion, compared to $5.3 billion in the first half of 2002. The decrease in net sales was primarily due to the very substantial decrease in unit shipments in the Asia region, primarily due to the previously-discussed impact of increased competition in China and SARS. For the first half of 2003, net sales increased very substantially in the Americas region, reflecting the increase in unit shipments, partially offset by a decrease in ASPs.

        The decline in orders was primarily due to: (i) a very substantial decrease in orders in the Asia region, for the reasons discussed above, and (ii) the absence of orders associated with the paging business that was phased out during 2002. Net sales and orders for the paging business in the first half of 2002 were $124 million and $153 million, respectively.

        Segment unit shipments were 32.6 million in the first half of 2003, up approximately 6% from 30.9 million units in the first half of 2002. Unit shipments rose, despite a decrease in sales, due to a

42



shift in product mix toward lower-priced handsets. This shift occurred because PCS has developed a much broader portfolio of lower-priced handset models that have been well received by wireless service providers and consumers. The segment's ASP was down 11% in the first half of 2003 compared to the first half of 2002, due to price reductions and a mix shift in units toward lower-priced handsets. The decline in ASP is reflective of historical reductions in selling prices. Over the last 5 years, the segment's ASPs have declined an average of 10% to 15% per year.

        On a geographic basis, unit shipments in the first half of 2003, compared to the first half of 2002, were up very substantially in the Americas, down very substantially in Asia and up slightly in Europe. Sales were up very substantially in the Americas, down very substantially in Asia and down in Europe.

        Unit shipments in the first half of 2003, compared to the first half of 2002, were up very substantially in TDMA, up in CDMA, down in GSM and up in iDEN. Sales were up very substantially in TDMA, down slightly in CDMA, down very substantially in GSM and up in iDEN.

        The segment's operating earnings in the first half of 2003 were $205 million, compared to an operating loss of $32 million in the first half of 2002. The improvement in operating results was primarily due to charges that occurred in the first half of 2002 that did not occur in the first half of 2003. These first-half 2002 charges primarily were: (i) a $147 million charge for fixed asset impairments, primarily related to the shut down of an engineering and distribution center in Harvard, Illinois, (ii) a $125 million charge related to a potentially uncollectible finance receivable from Telsim, and (iii) a $54 million charge for employee severance costs, primarily attributed to direct labor employees in the Harvard, Illinois facility. Additionally, operating results in the first half of 2003 benefited from reduced SG&A expenses, reflecting benefits attributed to cost-reduction activities. However, these cost improvements were more than offset by the 6% decrease in sales, and an increase in R&D expenses.

PCS Third Quarter of 2003 Outlook

        For the third quarter of 2003 compared to the third quarter of 2002, the segment expects sales to increase. The expected increase is anticipated to be driven by the introduction of more than 15 new products in the third quarter of 2003, including a number of new mid-tier and high-tier handsets. The segment expects operating earnings to decrease in the third quarter of 2003 compared to the third quarter of 2002 as competitive pressures, particularly in Asia, continue.

Semiconductor Products Segment

        The Semiconductor Products segment (SPS) designs, produces and sells embedded processors for customers serving the wireless, networking and automotive markets and for standard products. For the second quarter of both 2003 and 2002, SPS net sales represented 18% of the Company's consolidated net sales. For the first half of 2003 and 2002, SPS net sales represented 19% and 18% of the Company's consolidated net sales, respectively.

 
  Three Months Ended
   
  Six Months Ended
   
 
(Dollars in millions)


  June 28,
2003

  June 29,
2002

  %
Change

  June 28,
2003

  June 29,
2002

  %
Change

 
Orders   $ 1,040   $ 1,350   (23 )% $ 2,145   $ 2,669   (20 )%

Segment net sales

 

$

1,115

 

$

1,256

 

(11

)%

$

2,266

 

$

2,383

 

(5

)%

Operating loss

 

$

(125

)

$

(1,308

)

90  

%

$

(246

)

$

(1,546

)

84  

%

Three months ended June 28, 2003 compared to three months ended June 29, 2002

        In the second quarter of 2003, segment net sales decreased 11% to $1.1 billion, compared to $1.3 billion in the second quarter of 2002, and orders decreased 23% to $1.0 billion, compared to $1.4 billion in the second quarter of 2002. The decline in sales and orders is primarily attributed to reduced consumer spending in the segment's wireless and networking markets, primarily due to the

43



previously discussed factors that adversely affected PCS in Asia, namely increased competition, an industry surplus of handsets in the country's distribution channel and SARS.

        On an end-market basis, in the second quarter of 2003 compared to the second quarter of 2002, sales were up slightly in the Transportation and Standard Products group, down in the Networking and Computing Systems group, and down very substantially in the Wireless and Broadband Subscriber Systems group.

        On a geographic basis, in the second quarter of 2003 compared to the second quarter of 2002, sales were down substantially in the Americas, up in Europe and down in Asia.

        The segment's operating loss in the second quarter of 2003 was $125 million, compared to an operating loss of $1.3 billion in the second quarter of 2002. The improvement in operating results was primarily due to charges that occurred in the second quarter of 2002 that did not occur in the second quarter of 2003. These second-quarter 2002 charges were primarily: (i) a $1.1 billion charge for asset impairments for facilities in Arizona, China and Scotland, and (ii) an $80 million charge for potential repayments of incentives. Cost improvements in the second quarter of 2003 that were attributed to cost-reduction activities were more than offset by: (i) the 11% decrease in sales, (ii) a corresponding reduction in manufacturing capacity utilization, (iii) an increase in R&D expenses and (iv) the impact of earthquake damage to the Sendai, Japan manufacturing facility.

        Capital expenditures in the segment were $112 million in the second quarter of 2003, or 10% of segment sales, compared to $47 million, or 3.7% of segment sales, in the second quarter of 2002.

Six months ended June 28, 2003 compared to six months ended June 29, 2002

        In the first half of 2003, segment net sales decreased 5% to $2.3 billion, compared to $2.4 billion in the first half of 2002, and orders decreased 20% to $2.1 billion, compared to $2.7 billion in the first half of 2002. Sales and orders were negatively impacted by the previously-discussed factors that adversely affected PCS in Asia. In addition, the decline in orders is indicative of the significant economic uncertainty in the networking and wireless markets served by the segment, particularly in light of world events.

        On an end-market basis, in the first half of 2003 compared to the first half of 2002, sales were up slightly in the Transportation and Standard Products group, and down in the Networking and Computing Systems and Wireless and Broadband Subscriber Systems groups.

        On a geographic basis, in the first half of 2003 compared to the first half of 2002, sales were down substantially in the Americas, up substantially in Europe and down slightly in Asia.

        The segment's operating loss in the first half of 2003 was $246 million, compared to an operating loss of $1.5 billion in the first half of 2002. The improvement in operating results was primarily due to charges that occurred in the first half of 2002 that did not occur in the first half of 2003. These first-half 2002 charges primarily were: (i) a $1.1 billion charge for asset impairments for facilities in Arizona, China and Scotland, and (ii) an $80 million charge for potential repayments of incentives. Operating results for the first half of 2003 reflect benefits attributed to cost-reduction activities, including: (i) a reduced number of manufacturing locations, and (ii) a reduced break-even sales level. These cost improvements were partially offset by: (i) the 5% decrease in sales, and (ii) an increase in R&D expenses.

        The segment continues to implement its "asset light" business model, which is aimed at achieving substantial improvements in future profitability and cash flow performance by: (i) improving asset efficiency, (ii) maximizing the return on R&D expenditures, and (iii) reducing the segment's historical ratio of capital expenditures to sales. Capital expenditures in the segment were $155 million, or 6.8% of segment net sales, in the first half of 2003, compared to $70 million, or 2.9% of segment net sales, in the first half of 2002. The segment now expects capital expenditures for the full year 2003 to be approximately $300 million, compared to $220 million for the full year 2002. These levels continue to be significantly lower than in earlier years.

44



        One focus of the segment's "asset light" business model has been to replace internal manufacturing capacity by outsourcing an increasing percentage of production to foundries and contract houses. At the beginning of 2003, the segment had 12 manufacturing facilities, 9 of which were wafer fabrication facilities. The segment closed a back-end manufacturing facility in Texas in the first quarter of 2003 and closed a wafer fabrication facility in Scotland in April 2003. Accordingly, SPS has reduced its total manufacturing facilities to 10, of which 8 are wafer fabrication facilities.

SPS Third Quarter of 2003 Outlook

        For the third quarter of 2003 compared to the third quarter of 2002, the segment expects sales to decrease 5% to 15% due to continued market uncertainty and delayed recovery in the end markets served by the segment. As a result of lower sales and lower capacity utilization, the segment expects a third quarter 2003 operating loss, compared to operating earnings in the third quarter of 2002.

Global Telecom Solutions Segment

        The Global Telecom Solutions segment (GTSS) designs, manufactures, sells, installs, and services wireless infrastructure communication systems, including hardware and software. GTSS provides end-to-end wireless networks, including radio base stations, base site controllers, associated software and services and third-party switching for Code Division Multiple Access ("CDMA"), Global System for Mobile Communications ("GSM"), iDEN® integrated digital enhanced network, and Universal Mobile Telecommunications Systems ("UMTS") technologies. For the second quarter of 2003 and 2002, GTSS net sales represented 17% and 18% of the Company's consolidated net sales, respectively. For the first half of 2003 and 2002, GTSS net sales represented 16% and 18% of the Company's consolidated net sales, respectively.

 
  Three Months Ended
   
  Six Months Ended
   
 
(Dollars in millions)


  June 28,
2003

  June 29,
2002

  %
Change

  June 28,
2003

  June 29,
2002

  %
Change

 
Orders   $ 930   $ 1,090   (15 )% $ 1,865   $ 2,383   (22 )%

Segment net sales

 

$

1,046

 

$

1,262

 

(17

)%

$

1,998

 

$

2,347

 

(15

)%

Operating earnings (loss)

 

$

19

 

$

(525

)

***

 

$

48

 

$

(577

)

***

 

***
Percent change not meaningful

Three months ended June 28, 2003 compared to three months ended June 29, 2002

        In the second quarter of 2003, segment net sales decreased 17% to $1.0 billion, compared to $1.3 billion in the second quarter of 2003, and orders decreased 15% to $930 million, compared to $1.1 billion in the second quarter of 2003. The decline in sales and orders is indicative of conditions in the overall wireless infrastructure industry, which continues to be impacted by a steep decline in capital expenditures by wireless service providers in all regions of the world.

        On a geographic basis, in the second quarter of 2003 compared to the second quarter of 2002, sales were up slightly in Europe, down in the Americas and down very substantially in Asia.

        The segment's operating earnings in the second quarter of 2003 were $19 million, compared to an operating loss of $525 million in the second quarter of 2002. The improvement in operating results was primarily due to charges that occurred in the second quarter of 2002 that did not occur in the second quarter of 2003. These second quarter 2002 charges primarily were: (i) a $401 million charge for a potentially uncollectible finance receivable from Telsim, and (ii) reorganization of business charges of $156 million, primarily consisting of a $55 million charge for exit costs related to a lease cancellation, and a $77 million charge for segment-wide employee severance costs. Additionally, operating results in the second quarter of 2003 were aided by benefits attributed to cost-reduction activities and reduced spending on R&D. However, these additional cost improvements were more than offset by: (i) the 17%

45



decrease in sales, (ii) a decrease in gross margin percentage due to less absorption of fixed costs, and (iii) a $32 million charge for in-process research and development charges related to the Winphoria acquisition.

Six months ended June 28, 2003 compared to six months ended June29, 2002

        In the first half of 2003, segment net sales decreased 15% to $2.0 billion, compared to $2.3 billion in the first half of 2002, and orders decreased 22% to $1.9 billion, compared to $2.4 billion in the first half of 2002. The decline in sales and orders is indicative of conditions in the overall wireless infrastructure industry, which continues to be impacted by a steep decline in capital expenditures by wireless service providers in all regions of the world.

        On a geographic basis, in the first half of 2003 compared to the first half of 2002, sales were down slightly in Europe, down substantially in Asia and down in the Americas.

        The segment's operating earnings in the first half of 2003 were $48 million, compared to an operating loss of $577 million in the first half of 2002. The improvement in operating results was primarily due to charges that occurred in the first half of 2002 that did not occur in the first half of 2003. These first-half 2002 charges primarily were: (i) a $401 million charge for a potentially uncollectible finance receivable from Telsim, and (ii) reorganization of business charges of $158 million, primarily consisting of a $55 million charge for exit costs related to a lease cancellation, and a $79 million charge for segment-wide employee severance costs. Additionally, operating results in the first half of 2003 were aided by benefits attributed to cost-reduction activities and reduced spending on R&D, partially offset by the 15% decrease in sales.

        In early May, the Company acquired Winphoria Networks, Inc., a core infrastructure provider of next-generation packet-based mobile switching centers for wireless networks, for approximately $179 million in cash. The acquisition is an important step in the segment's ongoing strategy to enhance its position as a total network systems supplier. The addition of Winphoria's soft-switch technology will enable the segment to provide less expensive, yet more versatile, switching solutions to operators as they migrate to technologies that will support integrated voice, data and video applications.

GTSS Third Quarter of 2003 Outlook

        For the third quarter of 2003 compared to the third quarter of 2002, the segment expects sales to decrease less than 5% due to the uncertain industry conditions. The segment expects third-quarter 2003 operating earnings compared to an operating loss in the third quarter of 2002 due to benefits from continued cost-reduction efforts and a significant decrease in reorganization of business charges.

Commercial, Government and Industrial Solutions Segment

        The Commercial, Government and Industrial Solutions segment (CGISS) designs, manufactures, sells, installs, and services analog and digital two-way radio voice and data products and systems to a wide range of public-safety, government, utility, transportation, and other worldwide markets. In addition, CGISS participates in the emerging market of integrated information solutions for public-safety and enterprise customers. For the second quarter of 2003 and 2002, CGISS net sales represented 16% and 13% of the Company's consolidated net sales, respectively. For the first half of 2003 and 2002, CGISS net sales represented 15% and 13% of the Company's consolidated net sales, respectively.

 
  Three Months Ended
   
  Six Months Ended
   
 
(Dollars in millions)


  June 28,
2003

  June 29,
2002

  %
Change

  June 28,
2003

  June 29,
2002

  %
Change

 
Orders   $ 985   $ 850   16 % $ 1,890   $ 1,727   9 %
Segment net sales   $ 996   $ 889   12 % $ 1,859   $ 1,691   10 %
Operating earnings   $ 114   $ 35   ***   $ 176   $ 74   ***  

***
Percent change not meaningful

46


Three months ended June 28, 2003 compared to three months ended June 29, 2002

        In the second quarter of 2003, segment net sales increased 12% to $996 million, compared to $889 million in the second quarter of 2002, and orders increased 16% to $985 million, compared to $850 million in the second quarter of 2002. The increase in sales and orders primarily reflects increased spending by government customers due to activity in homeland security initiatives.

        On a geographic basis, in the second quarter of 2003 compared to the second quarter of 2002, sales were up very substantially in Europe, up in the Americas, and down in Asia. Net sales in the Americas region accounted for approximately 70% of the segment's total net sales in the second quarter of 2003, the same percentage it represented in the second quarter of 2002.

        The segment's operating earnings in the second quarter of 2003 were $114 million, compared to operating earnings of $35 million in the second quarter of 2002. The improvement in operating results was primarily due to: (i) an increase in sales, (ii) an improved gross margin as a percentage of sales, reflecting a shift in product mix towards higher-margin products and benefits attributed to cost-reduction activities, and (iii) reduced reorganization of business charges, partially offset by an increase in SG&A expenditures attributed to employee incentive programs. In the second quarter of 2003, the segment recorded reorganization of business net charges of $9 million, consisting of segment-wide employee separation costs. In the second quarter of 2002, the segment recorded reorganization of business net charges of $27 million, primarily consisting of a $26 million net charge for segment-wide employee separation costs.

Six months ended June 28, 2003 compared to six months ended June 29, 2002

        In the first half of 2003, segment net sales increased 10% to $1.9 billion, compared to $1.7 billion in the first half of 2002 and orders increased 9% to $1.9 billion, compared to $1.7 billion in the first half of 2002. These increases were primarily attributed to sales growth in the Americas and in Europe.

        On a geographic basis, for the first half of 2003 compared to the first half of 2002, sales were up substantially in Europe, up in the Americas, and down in Asia. Net sales in the Americas region accounted for approximately 70% of the segment's total net sales in the first half of 2003, the same percentage it represented in the first half of 2002.

        The segment's operating earnings in the first half of 2003 were $176 million, compared to operating earnings of $74 million in the first half of 2002. The improvement in operating results was primarily due to: (i) an increase in sales, (ii) an improved gross margin as a percentage of sales, reflecting a shift in product mix towards higher-margin products and benefits attributed to cost-reduction activities, and (iii) reduced reorganization of business charges, partially offset by an increase in SG&A expenditures attributed to employee incentive programs. In the first half of 2003, the segment recorded reorganization of business net charges of $18 million, primarily consisting of a $20 million net charge for segment-wide employee separation costs. In the first half of 2002, the segment recorded reorganization of business net charges of $38 million, primarily consisting of a $44 million net charge for segment-wide employee separation costs.

        In light of increasing safety and security concerns worldwide, customers remain very interested in standards-based, interoperable two-way radio solutions and integrated solutions to enhance prevention, detection, protection and emergency response capabilities. Customer interest is high and government business has increased. CGISS is well positioned to serve these customers as funding continues to become available.

47



CGISS Third Quarter of 2003 Outlook

        For the third quarter of 2003 compared to the third quarter of 2002, the segment expects sales to increase 5% to 15% and operating earnings to increase as customer spending on homeland security programs continues.

Integrated Electronic Systems Segment

        The Integrated Electronic Systems segment (IESS) designs, manufactures and sells: (i) automotive and industrial electronics systems and solutions, (ii) telematics products and solutions, (iii) portable energy storage products and systems, and (iv) multi-function embedded board and computer system products. For both the second quarter of 2003 and 2002, IESS net sales represented 8% of the Company's consolidated net sales. For both the first half of 2003 and 2002, IESS net sales represented 8% of the Company's consolidated net sales.

 
  Three Months Ended
   
  Six Months Ended
   
 
(Dollars in millions)


  June 28,
2003

  June 29,
2002

  %
Change

  June 28,
2003

  June 29,
2002

  %
Change

 
Orders   $ 514   $ 562   (9 )% $ 1,043   $ 1,132   (8 )%

Segment net sales

 

$

516

 

$

566

 

(9

)%

$

1,037

 

$

1,075

 

(4

)%

Operating earnings (loss)

 

$

45

 

$

(11

)

***

 

$

70

 

$

(2

)

***

 

***
Percent change not meaningful

Three months ended June 28, 2003 compared to three months ended June 29, 2002

        In the second quarter of 2003, segment net sales decreased 9% to $516 million, compared to $566 million in the second quarter of 2002 and orders decreased 9% to $514 million, compared to $562 million in the second quarter of 2002.

        There are three primary business groups within the IESS segment: (i) the Automotive Communications and Electronic Systems Group (ACES), (ii) the Energy Systems Group (ESG), and (iii) the Motorola Computer Group (MCG). In the second quarter of 2003, ACES, ESG and MCG, represented 65%, 20% and 15% of the segment's net sales, respectively, compared to 60%, 28% and 12% of the segment's net sales, respectively, in the second quarter of 2002.

        Comparing the second quarter of 2003 to the second quarter of 2002: ACES sales were down slightly and orders were flat due to a reduced level of automotive production demand, as manufacturers lowered inventory levels; ESG sales and orders were down very substantially, primarily due to the previously-discussed factors that adversely affected PCS and SPS in Asia; and MCG sales were up and orders were up very substantially due to temporary supply-chain adjustments and resulting longer order lead times.

        The segment's operating earnings in the second quarter of 2003 were $45 million, compared to an operating loss of $11 million in the second quarter of 2002. The improvement in operating results was primarily due to reduced reorganization of business charges and the benefits attributed to cost-reduction activities, partially offset by the 9% decrease in sales. In the second quarter of 2003, the segment reversed $11 million of reorganization of business accruals that were no longer needed, primarily relating to employee severance programs. In the second quarter of 2002, the segment recorded reorganization of business charges of $50 million, primarily consisting of a $22 million charge for various fixed asset impairments, an $18 million charge for exit costs, and a $10 million charge for segment-wide employee separation costs.

48



Six months ended June 28, 2003 compared to six months ended June 29, 2002

        In the first half of 2003, segment net sales decreased 4% to $1.0 billion, compared to $1.1 billion in the first half of 2002, and orders decreased 8% to $1.0 billion, compared to $1.1 billion in the first half of 2002. In the first half of 2003, ACES, ESG and MCG represented 66%, 21% and 13% of the segment's net sales, respectively, compared to 59%, 29% and 12% of the segment's net sales, respectively, in the first half of 2003.

        Comparing the first half of 2003 to the first half of 2002: ACES sales were up and orders were down slightly; ESG sales and orders were down very substantially; and MCG sales were up slightly and orders were up very substantially.

        The segment's operating earnings in the first half of 2003 were $70 million, compared to an operating loss of $2 million in the first half of 2002. The improvement in operating results was primarily due to reduced reorganization of business charges and the benefits attributed to cost-reduction activities, partially offset by the 4% decrease in sales. In the first half of 2003, the segment reversed $13 million of reorganization of business accruals that were no longer needed, primarily relating to employee severance programs. In the first half of 2002, the segment recorded reorganization of business charges of $63 million, primarily consisting of a $22 million charge for various fixed asset impairments, a $21 million charge for segment-wide employee separation costs and a $20 million charge for exit costs.

IESS Third Quarter of 2003 Outlook

        For the third quarter of 2003 compared to the third quarter of 2002, the segment expects sales to increase by less than 5%. The segment also expects operating earnings to increase in the third quarter of 2003 compared to the third quarter of 2002 due to the expected increase in sales and benefits attributed to cost-reduction activities.

Broadband Communications Segment

        The Broadband Communications segment (BCS) designs, manufactures and sells a wide variety of broadband products for the cable television industry, including: (i) digital systems and set-top terminals for cable television networks, (ii) high speed data products, including cable modems and cable modem termination systems (CMTS), as well as Internet Protocol (IP)-based telephony products, (iii) hybrid fiber coaxial network transmission systems used by cable television operators, (iv) digital satellite television systems for programmers, (v) direct-to-home (DTH) satellite networks and private networks for business communications, and (vi) digital broadcast products for the cable and broadcast industries. For the second quarter of 2003 and 2002, BCS net sales represented 7% and 8% of the Company's consolidated net sales, respectively. For the first half of 2003 and 2002, BCS net sales represented 7% and 8% of the Company's consolidated net sales, respectively.

 
  Three Months Ended
   
  Six Months Ended
   
 
(Dollars in millions)


  June 28,
2003

  June 29,
2002

  %
Change

  June 28,
2003

  June 29,
2002

  %
Change

 
Orders   $ 460   $ 420   10   % $ 802   $ 957   (16 )%

Segment net sales

 

$

409

 

$

554

 

(26

)%

$

814

 

$

1,079

 

(25

)%

Operating earnings (loss)

 

$

36

 

$

(304

)

***

 

$

64

 

$

(249

)

***

 

***
Percent change not meaningful

49


Three months ended June 28, 2003 compared to three months ended June 29, 2002

        In the second quarter of 2003, segment net sales declined 26% to $409 million, compared to $554 million in the second quarter of 2002, and orders increased 10% to $460 million, compared to $420 million in the second quarter of 2002. The decline in sales was the result of continued lower capital spending by cable operators, primarily related to lower digital set-top box sales volume in North America, and a decline in ASPs. The increase in orders is related to deliveries expected in the fourth quarter of 2003.

        In the second quarter of 2003, compared to the second quarter of 2002, sales of digital set-top boxes were down very substantially. The decrease in sales was a result of a very substantial decline in unit shipments and a decline in ASPs. The decline in unit shipments reflects the overall decline in the set-top box industry, and the segment retained its leading market share position. The decline in ASPs reflects overall product price reductions, as well as a shift in product mix towards less expensive, lower-tier products, partially offset by sales of higher-priced, high-definition advanced products.

        In the second quarter of 2003, compared to the second quarter of 2002, sales of cable modems were up slightly. The increase in sales was a result of very substantially higher unit shipments, offset by substantially lower ASPs. The decline in ASPs reflects increased competition in low-end cable modems.

        On a geographic basis, 84% of the segment's net sales were in the North America region in the second quarter of 2003, the same percentage it represented in the second quarter of 2002.

        The segment's operating earnings in the second quarter of 2003 were $36 million, compared to an operating loss of $304 million in the second quarter of 2002. The improvement in operating results was primarily due to charges that occurred in the second quarter of 2002 that did not occur in the second quarter of 2003. These second-quarter 2002 charges primarily were: (i) a $325 million charge for an intangible asset impairment of an intellectual property license, (ii) a $22 million charge for segment-wide employee separation costs, and (iii) a warranty charge due to a product recall. Additionally, operating results in the second quarter of 2003 reflect benefits attributed to cost-reduction activities. However, these cost improvements were offset by the 26% decrease in sales.

Six months ended June 28, 2003 compared to six months ended June 29, 2002

        In the first half of 2003, segment net sales declined 25% to $814 million, compared to $1.1 billion in the first half of 2002, and orders declined 16% to $802 million, compared to $957 million in the first half of 2002. The decline in sales and orders was the result of continued lower capital spending by cable operators, primarily related to lower digital set-top box sales volume in North America, and a decline in ASPs.

        In the first half of 2003, compared to the first half of 2002, sales of digital set-top boxes were down very substantially. The decrease in sales was a result of a substantial decline in unit shipments and a decline in ASPs. The decline in unit shipments reflects the overall decline in the set-top box industry, and the segment retained its leading market share position. The decline in ASPs reflects overall product price reductions, as well as a shift in product mix towards less expensive, lower-tier products, partially offset by sales of higher-priced, high-definition advanced products.

        In the first half of 2003, compared to the first half of 2002, sales of cable modems were up slightly. The increase in sales was a result of very substantially higher unit shipments, offset by substantially lower ASPs. The decline in ASPs reflects increased competition in low-end cable modems.

        On a geographic basis, 85% of the segment's net sales were in the North America region in the first half of 2003, the same percentage it represented in the first half of 2002.

        The segment's operating earnings in the first half of 2003 were $64 million, compared to an operating loss of $249 million in the first half of 2002. The majority of the loss in the first half of 2002

50



related to: (i) a $325 million charge for an intangible asset impairment of an intellectual property license, (ii) a $23 million charge for segment-wide employee separation costs, (iii) an $11 million charge for in-process research and development related to the acquisition of Synchronous, Inc., and (iv) a warranty charge due to a product recall, partially offset by the recognition of pension curtailment income related to the General Instrument pension plan. Additionally, operating results in the first half of 2003 reflect benefits attributed to cost-reduction activities. However, these cost improvements were partially offset by the 25% decrease in sales.

BCS Third Quarter of 2003 Outlook

        For the third quarter of 2003 compared to the third quarter of 2002, the segment expects sales to decrease 15% to 25% and operating earnings to decrease due to lower capital expenditures by cable operators.

Other

        Other is comprised of the Other Products segment and general corporate items. The Other Products segment includes: (i) Next Level Communications, which became a wholly-owned subsidiary of the Company in April 2003, (ii) various corporate programs representing developmental businesses and research and development projects, which are not included in any major segment, and (iii) the Motorola Credit Corporation (MCC), the Company's wholly-owned finance subsidiary.

 
  Three Months Ended
   
  Six Months Ended
   
 
(Dollars in millions)


  June 28, 2003
  June 29, 2002
  % Change
  June 28, 2003
  June 29, 2002
  % Change
 
Segment net sales   $ 99   $ 129   (23 )% $ 194   $ 236   (18 )%

Operating loss

 

$

(12

)

$

(127

)

91  

%

$

(8

)

$

(267

)

97  

%

Three months ended June 28, 2003 compared to three months ended June 29, 2002

        In the second quarter of 2003, Other Products segment net sales decreased 23% to $99 million, compared to $129 million in the second quarter of 2002.

        The segment's operating loss was $12 million in the second quarter of 2003, compared to an operating loss of $127 million in the second quarter of 2002. The improvement in operating results was primarily related to: (i) a $33 million gain on the sale of Iridium-related assets that were previously written down, (ii) a reduction in reorganization of business charges, and (iii) benefits from cost-reduction activities.

        In the second quarter of 2003, the segment recorded reorganization of business net reversals of $6 million. In the second quarter of 2002, the segment recorded reorganization of business net charges of $47 million, primarily consisting of segment-wide employee separation costs and various fixed asset impairments.

Six months ended June 28, 2003 compared to six months ended June 29, 2002

        In the first half of 2003, Other Products segment net sales decreased 18% to $194 million, compared to $236 million in the first half of 2002.

        The segment's operating loss was $8 million in the first half of 2003, compared to an operating loss of $267 million in the first half of 2002. The improvement in operating results was primarily related to: (i) a $59 million reduction in reserves related to the Iridium project in the first half of 2003 after reassessment in light of the wind-down of the program and the settlement agreement reached with The Chase Manhattan Bank, (ii) a $33 million gain in the first half of 2003 on the sale of Iridium-related

51



assets that were previously written down, (iii) a reduction in reorganization of business charges, (iv) a decrease in costs for developmental businesses and research and development projects, and (v) the benefits from cost-reduction activities.

        In the first half of 2003, the segment recorded reorganization of business net charges of $20 million, primarily relating to fixed asset impairments of assets classified as held for sale. In the first half of 2002, the segment recorded reorganization of business net charges of $74 million, primarily consisting of segment-wide employee separation costs and various fixed asset impairments.

        In April 2003, Motorola announced that it had completed its cash tender offer of $1.18 per share for all remaining outstanding shares of common stock of Next Level Communications, Inc. (Next Level), a leading provider of high speed data, video and voice broadband solutions over existing phone lines. Motorola acquired the remaining ownership of Next Level through a short-form merger and Next Level is now a wholly-owned subsidiary of Motorola. The total purchase price to Motorola to acquire the approximately 26% of Next Level that it did not own at the initiation of the tender offer, excluding Next Level's transaction costs, was approximately $32 million. Prior to the completion of the cash tender offer, due to the Company's controlling ownership interest in Next Level and Next Level's cumulative net deficit equity position, the Company included in its consolidated results the minority interest share of Next Level's operating losses.

Significant Accounting Policies

        Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

        Management bases its estimates and judgments on historical experience, current economic and industry conditions and on various other factors that are believed to be reasonable under the circumstances. This forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies require significant judgment and estimates:

    Valuation of investments and long-lived assets

    Restructuring activities

    Allowance for losses on finance receivables

    Retirement-related benefits

    Long-term contract accounting

    Deferred tax asset valuation

    Inventory valuation reserves

        In the first half of 2003, there has been no change in the above critical accounting policies. With the exception of valuation of investments and long-lived assets, there has been no significant change in the underlying accounting assumptions and estimates used in the above critical accounting policies.

52



Valuation of Investments and Long-Lived Assets

        The Company assesses the impairment of investments and long-lived assets, which includes identifiable intangible assets, goodwill and property, plant and equipment, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important which could trigger an impairment review include: (i) underperformance relative to expected historical or projected future operating results; (ii) changes in the manner of use of the assets or the strategy for our overall business; (iii) negative industry or economic trends; (iv) declines in stock price of an investment for a sustained period; and (v) our market capitalization relative to net book value.

        When the Company determines that the carrying value of intangible assets, goodwill and long-lived assets may not be recoverable, an impairment charge is recorded. Impairment is generally measured based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model or prevailing market rates of investment securities, if available.

        At June 28, 2003 and December 31, 2002, the net book value of these assets were as follows (in millions):

 
  June 28, 2003
  December 31, 2002
Property, plant and equipment   $ 5,622   $ 6,104
Investments     2,517     2,053
Intangible assets     260     232
Goodwill     1,472     1,375
   
 
Total   $ 9,871   $ 9,764
   
 

        For the three months ended June 28, 2003, revisions to prior asset write-downs resulted in fixed asset impairment reversals of $24 million primarily for reserves previously established to cover decommissioning costs which are no longer needed due to the previously announced sale of the facility by the Semiconductor Products segment, as well as the correction in classification of assets the Company now intends to use which were previously classified as held-for-sale. Investment impairments for the three months ended June 28, 2003 were $12 million for various cost-based investment write downs.

        For the six months ended June 28, 2003 fixed asset impairment charges were $38 million and primarily relate to certain buildings and equipment that were deemed to be impaired in connection with facility consolidations undertaken by the Semiconductor Products segment, partially offset by the reversals discussed above. Investment impairments for the six months ended June 28, 2003 were $59 million and primarily relate to a $29 million charge to write down to zero the Company's debt security holding in a European cable operator and other cost-based investment writedowns.

        The Company cannot predict the occurrence of future impairment-triggering events nor the impact such events might have on these reported asset values. Such events may include strategic decisions made in response to the economic conditions relative to product lines, operations and the impact of the economic environment on our customer base.

Recent Accounting Pronouncements

        In July 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". Statement 146 generally requires one-time termination benefits and exit costs to be expensed as incurred and it requires ongoing termination benefits to be recognized when they are probable and estimable. Statement 146 is effective for exit plans initiated after December 31, 2002. Statement 146 does not change the accounting for the Company's restructuring activities initiated prior to 2003. The Company adopted this statement January 1, 2003 with no material effect on the

53



Company's financial position, results of operations or cash flows as the Company's current employee separation costs do not qualify as one-time termination benefits as defined in Statement 146.

        In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure", which amends FASB Statement No. 123, "Accounting for Stock-Based Compensation". Statement 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, Statement 148 amends the disclosure requirements of Statement 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The Company adopted the disclosure provisions of this statement in December 2002.

        In November 2002, the FASB published Interpretation No. 45, "Guarantor's Accounting and Disclosure requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". The interpretation requires the Company to recognize a liability for the fair value of certain guarantees issued or modified after December 31, 2002. In addition, certain disclosures are required which identify the nature of the guarantees, the maximum potential future payments that could be required under the guarantees, and the current liability recorded for these guarantees. The Company adopted this statement January 1, 2003 with no material effect on the Company's financial position, results of operations or cash flows.

        In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities," in an effort to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. Interpretation 46 requires the primary beneficiary to consolidate a variable interest entity (VIE). A primary beneficiary is an entity that is subject to a majority of the risk of loss from the VIE's activity or is entitled to receive a majority of the VIE's residual returns or both. The interpretation also requires disclosure about VIEs that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements apply immediately to VIEs created after January 31, 2003. The Company does not have a variable interest in any VIEs created after January 31, 2003. The consolidation requirements apply to existing VIEs for periods beginning after June 15, 2003. The Company does not expect the adoption of these provisions to have a material impact on its financial position, results of operations or cash flows. Certain disclosure requirements were adopted by the Company in its 2002 annual financial statements.

        In May 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." Statement 150 requires that the issuer classify certain financial instruments as liabilities. Many of those instruments were previously classified as equity. The Company adopted Statement 150 as of July 1, 2003. The adoption of this Statement will result in the Company classifying its Trust Originated Preferred Securities (TOPrS) as a component of long-term debt and the related "dividends" as interest expense.

Reclassifications

        As described in a Form 8-K furnished to the SEC on April 8, 2003, beginning in the first quarter of 2003, Motorola made changes in the presentation format of its financial statements in order to align more closely with the financial statement presentation of other technology companies. As a result, and as reflected in the Form 8-K, the presentation format of historical financial information for 2001 and 2002 was changed so that the format was comparable to the presentation format adopted in 2003. This change in presentation format did not change the Company's operating earnings (loss), net earnings (loss) or earnings (loss) per share as historically reported.

54




Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Risk

        As a multinational company, the Company's transactions are denominated in a variety of currencies. The Company uses financial instruments to hedge, and therefore attempts to reduce its overall exposure to the effects of currency fluctuations on cash flows. The Company's policy is not to speculate in financial instruments for profit on the exchange rate price fluctuation, trade in currencies for which there are no underlying exposures, or enter into trades for any currency to intentionally increase the underlying exposure. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the contract. Accordingly, changes in market values of hedge instruments must be highly correlated with changes in market values of underlying hedged items both at inception of the hedge and over the life of the hedge contract.

        The Company's strategy in foreign exchange exposure issues is to offset the gains or losses of the financial instruments against losses or gains on the underlying operational cash flows or investments based on the operating business units' assessment of risk. Almost all of the Company's non-functional currency receivables and payables, which are denominated in major currencies that can be traded on open markets, are hedged. The Company uses forward contracts and options to hedge these currency exposures. In addition, the Company hedges some firmly committed transactions and some forecasted transactions. The Company expects that it may hedge investments in foreign subsidiaries in the future. A portion of the Company's exposure is from currencies that are not traded in liquid markets, such as those in Latin America, and these are addressed, to the extent reasonably possible, through managing net asset positions, product pricing, and component sourcing.

        At June 28, 2003 and December 31, 2002, the Company had net outstanding foreign exchange contracts totaling $1.8 billion and $2.1 billion, respectively. Management believes that these financial instruments should not subject the Company to undue risk due to foreign exchange movements because gains and losses on these contracts should offset losses and gains on the assets, liabilities, and transactions being hedged. The following table shows, in millions of U.S. dollars, the five largest net foreign exchange hedge positions as of June 28, 2003 and December 31, 2002:

Buy (Sell)

  June 28, 2003
  December 31, 2002
 
Chinese Renminbi   (407 ) (702 )
British Pound   (303 ) (323 )
Canadian Dollar   301   251  
Japanese Yen   (157 ) (262 )
Taiwan Dollar   (136 ) (74 )

Interest Rates

        At June 28, 2003, the Company's short-term debt consisted primarily of $501 million of commercial paper, priced at short-term interest rates. The Company has $7.4 billion of long-term debt, including current maturities, which is primarily priced at long-term, fixed interest rates. To change the characteristics of a portion of these interest rate payments, the Company has entered into a number of interest rate swaps.

        In order to manage the mix of fixed and floating rates in its debt portfolio, the Company periodically enters into interest rate swaps. In May 2003, the Company entered into interest rate swaps to change the characteristics of interest rate payments on all $200 million of its 6.5% notes due 2008, all $325 million of its 5.8% debentures due 2008, and $475 million of its $1.2 billion 7.625% debentures due 2010 from fixed-rate payments to short-term LIBOR-based variable rate payments. In March 2002, the Company entered into interest rate swaps to change the characteristics of interest rate payments on

55



all $1.4 billion of its 6.75% debentures due 2006 and all $300 million of its 7.60% notes due 2007 from fixed-rate payments to short-term LIBOR-based variable rate payments. In June 1999, the Company's finance subsidiary entered into interest rate swaps to change the characteristics of the interest rate payments on all $500 million of its 6.75% Guaranteed Bonds due 2004 from fixed-rate payments to short-term LIBOR-based variable rate payments in order to match the funding with its underlying assets. The short-term LIBOR-based variable payments on each of the above interest rate swaps was 3.0% for the three months ended June 28, 2003. The fair value of the interest rate swaps as of June 28, 2003 was approximately $243 million. Except for these interest rate swaps, at June 28, 2003, the Company had no outstanding commodity derivatives, currency swaps or options relating to its debt instruments.

        The Company designates its interest rate hedge agreements as hedges for the underlying debt. Interest expense on the debt is adjusted to include the payments made or received under such hedge agreements.

        The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to its swap contracts. The Company minimizes its credit risk on these transactions by only dealing with leading, credit-worthy financial institutions having long-term debt ratings of "A" or better and, therefore, does not anticipate nonperformance. In addition, the contracts are distributed among several financial institutions, thus minimizing credit risk concentration.

Investments Hedge

        In March 2003, the Company entered into three agreements to hedge up to 25 million shares of Nextel Communications, Inc. (Nextel) common stock. Under these agreements, the Company received no initial proceeds, but has retained the right to receive, at any time during the contract periods, the present value of the aggregate contract "floor" price. The three agreements are to be settled over periods of three, four and five years, respectively. Pursuant to these agreements and exclusive of any present value discount, the Company is entitled to receive aggregate proceeds of approximately $333 million. The precise number of shares of Nextel common stock that the Company would deliver to satisfy the contracts is dependent upon the price of Nextel common stock on the various settlement dates. The maximum aggregate number of shares the Company would be required to deliver under these agreements is 25 million and the minimum number of shares is 18.5 million. Alternatively, the Company has the exclusive option to settle the contracts in cash. The Company will retain all voting rights associated with the up to 25 million hedged Nextel shares. Although, pursuant to customary market practice, the covered shares are pledged to secure the hedge contracts. As a result of the recent increase in the price of Nextel common stock, the Company has recorded a $64 million liability in Other Liabilities in the condensed consolidated balance sheet to reflect the fair value of the Nextel hedges.


Item 4. Controls and Procedures

        (a)   Evaluation of disclosure controls and procedures. Our chief executive officer and our chief financial officer have concluded, based on their evaluation within 90 days before the filing date of this quarterly report, that the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

        (b)   Changes in internal controls. There have been no significant changes in our internal controls or in other factors that could significantly affect our disclosure controls and procedures subsequent to the date of the previously-mentioned evaluation.

56



Business Risks

        Statements that are not historical facts are forward-looking statements based on current expectations that involve risks and uncertainties. Forward-looking statements include, but are not limited to, statements included under the heading "Sales and Earnings Outlook for the Third Quarter of 2003", the "Third Quarter of 2003 Outlook" sections for each of the Company's segments and statements about: (1) effective tax rates, (2) future charges, payments, use of accruals and cost savings in connection with reorganization of businesses programs, (3) the Company's ability and cost to repatriate additional funds, (4) future contributions by the Company to its pension plans, (5) capital expenditures by the Company or any of its segments, (6) level of outstanding commercial paper borrowings, (7) the Company's ability to access the capital markets, (8) the impact on the Company from a change in credit ratings, (9) the outcome of ongoing and future proceedings relating to Iridium, (10) the adequacy of reserves relating to long-term finance receivables and other contingencies, (11) the outcome of pending litigation, (12) the impact of the semiconductor product segment's "asset light" business model, (13) future capital spending by telecommunications service providers, (14) the impact of acquisitions or divestitures, including the ability to integrate the operations of Next Level Communications, Inc. and Winphoria Networks, Inc., (15) the impact of ongoing currency policy in foreign jurisdictions and other foreign currency exchange risks, (16) future hedging activity by the Company, (17) the ability of counterparties to financial instruments to perform their obligations, and (18) the impact of recent accounting pronouncements on the Company.

        The Company wishes to caution the reader that the factors below and those on pages F-33 through F-40 of the appendix to the Company's Proxy Statement for its 2003 annual meeting of stockholders and in its other SEC filings could cause the Company's results to differ materially from those stated in the forward-looking statements. These factors include: (1) the rate of recovery in the overall economy and the uncertainty of current economic and political conditions, (2) the impact on our business of continuing hostilities in Iraq and increased conflict in other countries, (3) the impact of increased competition in the China handset market, (4) the necesssary time for China and other Asian markets to recover from the effects of SARS and the resulting impact on our business and the economy, (5) the Company's ability to effectively carry out planned cost-reduction actions and realize the savings expected from those actions, (6) the potential for unanticipated results from cost-reduction activities on the Company's performance, including productivity and the retention of key employees, (7) the lack of predictability of future operating results, (8) the general economic outlook for the telecommunications, semiconductor, broadband and automotive industries; (9) the Company's continuing ability to access the capital markets on favorable terms, (10) demand for the Company's products, including products related to new technologies, (11) risks related to our dependence on certain key manufacturing suppliers, (12) the Company's ability to increase profitability and market share in its wireless handset business, (13) the Company's success in the 2.5G and 3G markets, (14) the impact of ongoing consolidations in the telecommunications and cable industries, (15) the demand for vendor financing and the Company's ability to provide that financing in order to remain competitive, (16) the creditworthiness of the Company's customers, especially purchasers of large infrastructure systems, (17) unexpected liabilities or expenses, including unfavorable outcomes to any currently pending or future litigation, including any relating to the Iridium project, (18) the levels at which design wins become actual orders and sales, (19) risks related to the Company's high volume of manufacturing in Asia, (20) the success of increased utilization of semiconductor foundries and

57


contract houses for semiconductor manufacturing, (21) the success of alliances and agreements with other companies to develop new products, technologies and services, (22) the timely commercial availability of new products, (23) volatility in the market value of securities held by the Company, (24) difficulties in integrating the operations of newly-acquired businesses and achieving strategic objectives, cost savings and other benefits, (25) the impact of foreign currency fluctuations, (26) changes regarding the actual or assumed performance of the Company's pension plan, and (27) the impact of changes in governmental policies, laws or regulations.


MOTOROLA and the Stylized M Logo are registered in the U.S. Patent and Trademark Office. All other trademarks indicated as such herein are the property of their respective owners.

Iridium® is a registered trademark and service mark of Iridium LLC.

SM "Puttable Reset Securities PURS" is a service mark of Goldman, Sachs & Co.

© Motorola, Inc. 2003

58




Part II—Other Information

Item 1—Legal Proceedings.

    Personal Injury Cases

        Motorola has been a defendant in several cases arising out of its manufacture and sale of wireless telephones. Kane, et al., v. Motorola, Inc., et al., filed December 13, 1993 in the Circuit Court of Cook County, Illinois, alleges that plaintiffs' brain cancer was caused or aggravated by a prototype communication device. On May 11, 2000, the Court entered summary judgment in the Kane case in Motorola's favor, holding that there was no evidence to support plaintiffs' theory of causation. On September 26, 2002, the Illinois Appellate Court affirmed the entry of summary judgment for Motorola and denied plaintiffs' appeal. On March 6, 2003, plaintiffs filed a petition for leave to appeal with the Illinois Supreme Court. On June 6, 2003, the Illinois Supreme Court denied the petition. In June 2003, plaintiffs filed a motion for reconsideration of the petition's denial. That motion is currently pending.

    Telsim-Related Cases

        Motorola is owed approximately $2 billion under loans to a wireless telephone operator in Turkey, Telsim Mobil Telekomunikasyon Hizmetleri A.S. ("Telsim"). Telsim defaulted on the payment of these loans in April 2001. The Company fully reserved the carrying value of the Telsim loans in the second quarter of 2002. The Company is involved in the following legal proceedings related to Telsim. The Uzan family controls Telsim.

          U.S. Case

        On January 28, 2002, Motorola Credit Corporation ("MCC"), a wholly-owned subsidiary of Motorola, initiated a civil action with Nokia Corporation ("Nokia"), Motorola Credit Corporation and Nokia Corporation v. Kemal Uzan, et al., against several members of the Uzan family, as well as one of their employees and controlled companies, alleging that the defendants engaged in a pattern of racketeering activity and violated various state and federal laws. The suit alleges 13 separate counts of wrongdoing, including (i) three counts alleging violations of Illinois fraud and conspiracy laws; (ii) three federal statutory counts alleging computer hacking; (iii) one count alleging violations of the Illinois Trade Secrets Act; (iv) one count seeking imposition of an equitable lien and constructive trust; (v) one count seeking declaratory relief; and (vi) four counts of criminal activity in violation of the Racketeer Influenced and Corrupt Organizations Act, commonly known as "RICO". The suit was filed in the United States District Court for the Southern District of New York (the "U.S. Court"). The U.S. Court issued its final ruling on July 31, 2003. Further information on the ruling will be provided in a subsequent filing after Motorola has had time to review the decision.

        Upon filing the action, MCC and Nokia were able to attach various Uzan-owned real estate in New York. Subsequently, this attachment order was expanded to include a number of bank accounts, including those owned indirectly by the Uzans. On May 9, 2002, the U.S. Court entered a Preliminary Injunction confirming the prejudgment relief previously granted. These attachments remain in place.

        The U.S. Court tried the case without a jury to conclusion on February 19, 2003. Subsequent to the trial of the case, and before a final ruling had been issued, the U.S. Court of Appeals for the Second Circuit ("the Appellate Court") issued an opinion on March 7, 2003 regarding a series of appeals filed by the Uzans from the District Court's earlier rulings. In its opinion, the Appellate Court remanded the case back to the District Court on the grounds that the RICO claims were premature and not yet ripe for adjudication, but concluded that the claims might become timely at some future point. The Appellate Court directed that the RICO claims be dismissed without prejudice to their being later reinstated. The Appellate Court, however, upheld the May 2002 Preliminary Injunction, finding that it was sufficiently supported by the fraud claims under Illinois law, and did not rule on the

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merits of the Uzans' claim that this matter may only be resolved through arbitration in Switzerland. A discussion of the arbitration in Switzerland can be found in the section below entitled "Foreign Proceedings."

        The Company continues its recovery efforts. However, the Company continues to believe that the litigation, collection and/or settlement processes will be very lengthy in light of the Uzans' decision to violate various courts' orders, including orders holding them in contempt of court.

          Foreign Proceedings

        In 2002, the United Kingdom's High Court of Justice, Queen's Bench Division (the "UK Court"), on motion of MCC, entered a worldwide freezing injunction against Cem Uzan, Hakan Uzan, Kemal Uzan and Aysegul Akay, freezing each of their assets up to a value of $200 million. The Uzans were ultimately held in contempt of court and ordered to be incarcerated for failing to make a full disclosure concerning their worldwide assets. Appeals were taken and an opinion was entered by the UK Court of Appeal on June 12, 2003. In that decision, the appeals court affirmed the lower court's decision against Cem Uzan and Aysegul Akay, but concluded that MCC was not able to enforce the freezing order against Hakan and Kemal because they had no assets in England and Wales. Consequently, the lower court's rulings as to Kemal and Hakan were reversed. MCC has appealed this aspect of the Court of Appeal's decision. As a result of the Court of Appeal's decision, the UK assets of Cem and Aysegul, which total approximately $12.7 million, remain frozen and will be executed on by MCC in satisfaction of any judgment that may be entered by the United States District Court in New York after all appeals in the UK are exhausted.

        Motorola has also filed attachment proceedings in several other foreign jurisdictions resulting in the preliminary seizure of assets owned by the Uzans and various entities within their control.

        On February 5, 2002, Telsim initiated arbitration against MCC in Switzerland at the Zurich Chamber of Commerce. In Telsim's request for arbitration, Telsim acknowledged its debt, but has alleged that the disruption in the Turkish economy during 2001 should excuse Telsim's failure to make payments on the MCC loans as required under the agreements between the parties. Telsim seeks a ruling excusing its failure to adhere to the original payment schedule and establishing a new schedule for repayment of Telsim's debt to MCC. Telsim has failed to comply with its proposed new schedule, missing the first three payments totaling approximately $85 million. On June 7, 2002, Rumeli Telfon ("Rumeli") initiated arbitration against MCC in the Zurich Chamber of Commerce requiring that MCC consent to Rumeli's request to place the Diluted Stock into an escrow account in Switzerland. Both of these arbitrations are proceeding.

        On June 19, 2002, Telsim initiated arbitration against Motorola, Ltd. and Motorola Komünikasyon Ticaret ve Servis Ltd. Sti., both wholly-owned subsidiaries of Motorola, before the International Chamber of Commerce in Zurich, Switzerland, initially seeking approximately 179 million pounds (approximately US$281 million) as damages for the defendants' alleged sale of defective products to Telsim. Telsim recently increased the amount of its claim to approximately 300 million pounds (approximately US$479 million). Motorola has denied the claims and has filed a counterclaim. Hearings have been scheduled for November 2003 and January 2004.

          Class Action Securities Lawsuits

          Barry Family LP v. Carl F. Koenemann

        A purported class action lawsuit was filed against the former chief financial officer of Motorola on December 24, 2002 in the United States District Court for the Southern District of New York, alleging breach of fiduciary duty and violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, Barry Family LP v. Carl F. Koenemann. Plaintiff claims that the price of Motorola's

60


stock was artificially inflated by a failure to disclose vendor financing to Telsim Mobil Telekomunikasyon Hizmetleri A.S. (Telsim) in connection with the sale of telecommunications equipment by Motorola. Plaintiff proposed a class period of February 3, 2000 through May 14, 2001, and seeks an unspecified amount of damages.

        Subsequent to the filing of the Barry lawsuit, 18 additional putative class action complaints have been filed in federal court, including the Southern District of California, the Southern District of New York and the Northern District of Illinois, alleging the same or similar violations of the federal securities laws arising out of the failure to disclose vendor financing in connection with the sale of equipment to Telsim, but naming additional defendants, including Motorola, Inc, as well as CEO Chris Galvin and former COO Robert Growney.

        A lead plaintiff has been selected for the Illinois and New York cases, and that is the State of New Jersey on behalf of the Department of Treasury, Division of Investment. Motorola expects that all of the complaints will be consolidated into one case, most likely in either Illinois or New York. Following the consolidation, a new complaint will be filed and the defendants' time to answer or otherwise plead will be extended to a time mutually agreed upon.

          Howell v. Carl F. Koenemann, et al.

        On July 18, 2003, a purported civil class action lawsuit was filed in the United States District Court for the Northern District of Illinois against Motorola, Inc., the former Chief Financial Officer of Motorola, Inc., the former Vice President and Director of Benefits of Motorola, Inc. and other as yet unnamed individual defendants who either were members of administrative committees or committees of the Motorola Board of Directors with oversight authority for the Motorola 401(k)/profit sharing plan. The suit alleges various breaches of fiduciary duty to plan participants who invested in the Motorola Stock Fund option under the plan, in violation of the Employee Retirement Income Security Act ("ERISA"), Howell v. Carl F. Koenemann et al. Among other things, Plaintiff claims that defendants failed to disclose to participants that Motorola's contract with Telsim required "risky" vendor financing and that in failing to do so, defendants improperly continued to offer a Motorola Stock Fund as an investment option under the plan, they acted in their own interest rather than the interest of the plan participants and they overallocated assets into Motorola common stock and failed to diversify plan investments adequately, thereby subjecting plan participants to undue financial risk. Plaintiff proposes a class period of May 16, 2000 through the present and seeks an unspecified amount of damages and equitable relief.

        See Item 3 of the Company's Form 10-K for the fiscal year ended December 31, 2002, as well as Part II, Item 1 of the Company's Form 10-Q for the fiscal quarter ended March 29, 2003, for additional disclosures regarding pending matters.

        Motorola is a defendant in various other suits, claims and investigations that arise in the normal course of business. In the opinion of management, and other than discussed in the Company's most recent Form 10-K with respect to the Iridium cases, the ultimate disposition of the Company's pending legal proceedings will not have a material adverse effect on the consolidated financial position, liquidity or results of operations of Motorola.


Item 2—Changes in Securities and Use of Proceeds.

        Not applicable.


Item 3—Defaults Upon Senior Securities.

        Not applicable.

61




Item 4—Submission of Matters to Vote of Security Holders.

        Not applicable


Item 5—Other Information.

        Not applicable.


Item 6—Exhibits and Reports on Form 8-K.

    (a)
    Exhibits

    31.1*
    Certification of Christopher B. Galvin pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

    31.2*
    Certification of David W. Devonshire pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

    32.1*
    Certification of Christopher B. Galvin pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

    32.2*
    Certification of David W. Devonshire pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*
Document is filed herewith.

(b)
Reports on Form 8-K

    The Company filed a Current Report on Form 8-K on April 3, 2003 and furnished Current Reports on Form 8-K on April 8, 2003, April 15, 2003 and July 15, 2003.

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SIGNATURE

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

    MOTOROLA, INC.

Dated: August 1, 2003

 

By:

/s/  
STEVEN J. STROBEL      
Steven J. Strobel
Senior Vice President and Corporate Controller
(Chief Accounting Officer and Duly
Authorized Officer of the Registrant)

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QuickLinks

Index
Part I—Financial Information
Condensed Consolidated Statements of Operations
Condensed Consolidated Balance Sheets
Condensed Consolidated Statement of Stockholders’ Equity
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Motorola, Inc. And Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations
Part II—Other Information
SIGNATURE