Motorola 2006 Annual Report Download - page 71

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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
underlying collateral, if the receivable is collateralized, or (ii) the present value of expected future cash flows
discounted at the effective interest rate implicit in the underlying receivable.
Inventory Valuation Reserves
The Company records valuation reserves on its inventory for estimated obsolescence or un-marketability. The
amount of the reserve is equal to the difference between the cost of the inventory and the estimated market value
based upon assumptions about future demand and market conditions. On a quarterly basis, management in each
segment performs an analysis of the underlying inventory to identify reserves needed for excess and obsolescence
and, for the remaining inventory, assesses the net realizable value. Management uses its best judgment to estimate
appropriate reserves based on this analysis.
Inventories consisted of the following:
December 31 2006 2005
Finished goods $1,796 $1,252
Work-in-process and production materials 1,782 1,699
3,578 2,951
Less inventory reserves (416) (529)
$3,162 $2,422
The Company balances the need to maintain strategic inventory levels to ensure competitive delivery
performance to its customers against the risk of inventory obsolescence due to rapidly changing technology and
customer requirements. As indicated above, the Company's inventory reserves represented 12% and 18% of the
gross inventory balance at December 31, 2006 and 2005, respectively. The Company has inventory reserves for
pending cancellations of product lines due to technology changes, long-life cycle products, lifetime buys at the end
of supplier production runs, business exits, and a shift of production to outsourcing.
If actual future demand or market conditions are less favorable than those projected by management,
additional inventory writedowns may be required. Likewise, as with other reserves based on management's
judgment, if the reserve is no longer needed, amounts are reversed into income. There were no significant reversals
into income of this type in 2006 or 2005.
Taxes on Income
The Company's effective tax rate is based on pre-tax income and the tax rates applicable to that income in the
various jurisdictions in which the Company operates. An estimated effective tax rate for a year is applied to the
Company's quarterly operating results. In the event that there is a significant unusual or discrete item recognized, or
expected to be recognized, in the Company's quarterly operating results, the tax attributable to that item would be
separately calculated and recorded at the same time as the unusual or discrete item. The Company considers the
resolution of prior year tax matters to be such items. Significant judgment is required in determining the Company's
effective tax rate and in evaluating its tax positions. The Company establishes reserves when it is probable that the
Company will not realize the full tax benefit of the position. The Company adjusts these reserves in light of
changing facts and circumstances.
Tax regulations may require items of income and expense to be included in the tax return in different periods
than the items are reflected in the consolidated financial statements. As a result, the effective tax rate reflected in
the consolidated financial statements may be different than the tax rate reported in the income tax return. Some of
these differences are permanent, such as expenses that are not deductible on the tax return, and some are
temporary differences, such as depreciation expense. Temporary differences create deferred tax assets and liabilities.
Deferred tax assets generally represent items that can be used as a tax deduction or credit in the tax return in future
years for which the Company has already recorded the tax benefit in the consolidated financial statements. The
Company establishes valuation allowances for its deferred tax assets when it is more likely than not that the
amount of expected future taxable income will not support the use of the deduction or credit. Deferred tax
liabilities generally represent tax expense recognized in the consolidated financial statements for which payment has
been deferred or expense for which the Company has already taken a deduction on the income tax return, but has
not yet recognized as expense in the consolidated financial statements.