Motorola 2009 Annual Report Download - page 75

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain healthcare benefits are available to eligible domestic employees meeting certain age and service
requirements upon termination of employment (the ‘‘Postretirement Health Care Benefits Plan’’). For eligible
employees hired prior to January 1, 2002, the Company offsets a portion of the postretirement medical costs to
the retired participant. As of January 1, 2005, the Postretirement Health Care Benefits Plan has been closed to
new participants.
Accounting methodologies use an attribution approach that generally spreads individual events over the
service lives of the employees in the plan. Examples of ‘‘events’’ are plan amendments and changes in actuarial
assumptions such as discount rate, expected long-term rate of return on plan assets, and rate of compensation
increases. The principle underlying the required attribution approach is that employees render service over their
service lives on a relatively consistent basis and, therefore, the income statement effects of pension benefits or
postretirement health care benefits are earned in, and should be expensed in, the same pattern.
There are various assumptions used in calculating the net periodic benefit expense and related benefit
obligations. One of these assumptions is the expected long-term rate of return on plan assets. The required use of
the expected long-term rate of return on plan assets may result in recognized pension income that is greater or
less than the actual returns of those plan assets in any given year. Over time, however, the expected long-term
returns are designed to approximate the actual long-term returns and therefore result in a pattern of income and
expense recognition that more closely matches the pattern of the services provided by the employees. Differences
between actual and expected returns are recognized in the net periodic pension calculation over five years.
The Company uses long-term historical actual return experience with consideration of the expected
investment mix of the plans’ assets, as well as future estimates of long-term investment returns, to develop its
expected rate of return assumption used in calculating the net periodic pension cost and the net retirement
healthcare expense. The Company’s investment return assumptions for the Regular Pension Plan and
Postretirement Healthcare Benefits Plan were 8.25% and 8.5% for 2009 and 2008, respectively. The investment
return assumption for the Officers’ Plan was 6% in both 2009 and 2008. At December 31, 2008, the Regular
Pension Plan and the Postretirement Health Care Benefits Plan investment portfolios were predominantly equity
investments and the Officers’ Plan investment portfolio was predominantly fixed-income securities.
A second key assumption is the discount rate. The discount rate assumptions used for pension benefits and
postretirement health care benefits accounting reflects, at December 31 of each year, the prevailing market rates
for high-quality, fixed-income debt instruments that, if the obligation was settled at the measurement date, would
provide the necessary future cash flows to pay the benefit obligation when due. The Company’s discount rates for
measuring its U.S. pension obligations were 6% and 6.75% at December 2009 and 2008, respectively. The
Company’s discount rates for measuring the Postretirement Health Care Benefits Plan obligation were 5.75% and
6.75% at December 31, 2009 and 2008, respectively.
A final set of assumptions involves the cost drivers of the underlying benefits. The rate of compensation
increase is a key assumption used in the actuarial model for pension accounting and is determined by the
Company based upon its long-term plans for such increases. The Company’s 2009 and 2008 rate for future
compensation increase for the Regular Pension Plan and Officers’ Plan was 0%, as the salaries to be utilized for
calculation of benefits under these plans have been frozen. For the Postretirement Health Care Benefits Plan, the
Company reviews external data and its own historical trends for health care costs to determine the health care
cost trend rates. Based on this review, the health care cost trend rate used to determine the December 31, 2009
accumulated postretirement benefit obligation is 8.5% for 2010, with a declining trend rate of about 0.7% each
year until it reaches 5% by 2015, with a flat 5% rate for 2015 and beyond.
For the year ended December 31, 2009, the Company recognized net periodic pension expense of $72 million
related to its U.S. pension plans. For the year ended December 31, 2008, the Company recognized net periodic
pension expense for its U.S. pension plans of $64 million and a $237 million curtailment gain related to the plan
amendments that were effective March 1, 2009. Cash contributions of $90 million were made to the U.S. pension
plans during 2009. The Company expects to make cash contributions of approximately $150 million to its U.S.
pension plans and approximately $50 million to its non-U.S. pension plans during 2010.
The Company recognized net postretirement health care expense of $20 million and $15 million for the years
ended December 31, 2009 and 2008, respectively. No cash contributions were made to this plan in 2009. The
Company expects to make no cash contributions to the Postretirement Health Care Benefits Plan in 2010.
The Company maintains a number of endorsement split-dollar life insurance policies that were taken out on
now-retired officers under a plan that was frozen prior to December 31, 2004. The Company had purchased the
life insurance policies to insure the lives of employees and then entered into a separate agreement with the