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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________ 
Form 10-Q
 ____________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended June 29, 2019
or
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 SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
____________________________________________ 
Delaware
 
36-1115800
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
500 W. Monroe Street,
 
60661
Chicago,
 
Illinois
(Address of principal executive offices)
Registrant’s telephone number, including area code:
(847576-5000
____________________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol(s)
 
Name of Each Exchange on Which Registered
Common Stock
$0.01
Par Value
 
MSI
 
New York Stock Exchange
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   No 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer” “accelerated filer” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer

 
Accelerated filer 
 
Non-accelerated filer 
 
Smaller reporting company 
 
Emerging growth company
 
 
 
(Do not check if a smaller reporting company)
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No 
The number of shares outstanding of each of the issuer’s classes of common stock as of the close of business on July 15, 2019 was 165,555,527.



 
Page    
 
Item 1 Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 29, 2019 and June 30, 2018
Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 29, 2019 and June 30, 2018
Condensed Consolidated Balance Sheets as of June 29, 2019 (Unaudited) and December 31, 2018
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three and Six Months Ended June 29, 2019 and June 30, 2018
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 29, 2019 and June 30, 2018
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
Item 4 Mine Safety Disclosures



Part I—Financial Information
Condensed Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended
 
Six Months Ended
(In millions, except per share amounts)
June 29,
2019
 
June 30,
2018
 
June 29,
2019
 
June 30,
2018
Net sales from products
$
1,118

 
$
1,042

 
$
2,063

 
$
1,842

Net sales from services
742

 
718

 
1,454

 
1,385

Net sales
1,860

 
1,760

 
3,517

 
3,227

Costs of products sales
490

 
485

 
934

 
867

Costs of services sales
439

 
453

 
879

 
869

Costs of sales
929

 
938

 
1,813

 
1,736

Gross margin
931

 
822

 
1,704

 
1,491

Selling, general and administrative expenses
351

 
316

 
676

 
594

Research and development expenditures
170

 
162

 
333

 
314

Other charges
61

 
71

 
116

 
138

Operating earnings
349

 
273

 
579

 
445

Other income (expense):
 
 
 
 
 
 
 
Interest expense, net
(56
)
 
(58
)
 
(111
)
 
(104
)
Gains (losses) on sales of investments and businesses, net
3

 
(1
)
 
4

 
10

Other, net
(21
)
 
13

 
(12
)
 
16

Total other expense
(74
)
 
(46
)
 
(119
)
 
(78
)
Net earnings before income taxes
275

 
227

 
460

 
367

Income tax expense
67

 
46

 
100

 
69

Net earnings
208

 
181

 
360

 
298

Less: Earnings attributable to non-controlling interests
1

 
1

 
2

 
1

Net earnings attributable to Motorola Solutions, Inc.
$
207

 
$
180

 
$
358

 
$
297

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
1.25

 
$
1.11

 
$
2.18

 
$
1.83

Diluted
$
1.18

 
$
1.05

 
$
2.04

 
$
1.73

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
164.9

 
162.2

 
164.4

 
161.7

Diluted
176.1

 
171.7

 
175.3

 
171.1

See accompanying notes to condensed consolidated financial statements (unaudited).

1


Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three Months Ended
 
Six Months Ended
(In millions)
June 29,
2019
 
June 30,
2018
 
June 29,
2019
 
June 30,
2018
Net earnings
$
208

 
$
181

 
$
360

 
$
298

Other comprehensive income (loss), net of tax (Note 4):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(23
)
 
(86
)
 
7

 
(38
)
Marketable securities

 

 

 
(6
)
Defined benefit plans
10

 
14

 
21

 
26

Total other comprehensive loss, net of tax
(13
)
 
(72
)
 
28

 
(18
)
Comprehensive income
195

 
109

 
388

 
280

Less: Earnings attributable to non-controlling interests
1

 
1

 
2

 
1

Comprehensive income attributable to Motorola Solutions, Inc. common shareholders
$
194

 
$
108

 
$
386

 
$
279

See accompanying notes to condensed consolidated financial statements (unaudited).


2


Condensed Consolidated Balance Sheets
(In millions, except par value)
June 29,
2019
 
December 31,
2018
 
(Unaudited)
 
 
ASSETS
Cash and cash equivalents
$
953

 
$
1,246

Restricted cash
11

 
11

   Total cash and cash equivalents
964

 
1,257

Accounts receivable, net
1,206

 
1,293

Contract assets
913

 
1,012

Inventories, net
424

 
356

Other current assets
324

 
354

Total current assets
3,831

 
4,272

Property, plant and equipment, net
940

 
895

Operating lease assets
567

 

Investments
175

 
169

Deferred income taxes
913

 
985

Goodwill
1,852

 
1,514

Intangible assets, net
1,332

 
1,230

Other assets
364

 
344

Total assets
$
9,974

 
$
9,409

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current portion of long-term debt
$
28

 
$
31

Accounts payable
544

 
592

Contract liabilities
1,187

 
1,263

Accrued liabilities
1,117

 
1,210

Total current liabilities
2,876

 
3,096

Long-term debt
5,315

 
5,289

Operating lease liabilities
504

 

Other liabilities
2,233

 
2,300

Stockholders’ Equity
 
 
 
Common stock, $.01 par value:
2

 
2

Authorized shares: 600.0
 
 
 
Issued shares: 6/29/19—165.7; 12/31/18—164.0
 
 
 
Outstanding shares: 6/29/19—165.1; 12/31/18—163.5
 
 
 
Additional paid-in capital
714

 
419

Retained earnings
1,051

 
1,051

Accumulated other comprehensive loss
(2,737
)
 
(2,765
)
Total Motorola Solutions, Inc. stockholders’ equity (deficit)
(970
)
 
(1,293
)
Non-controlling interests
16

 
17

Total stockholders’ equity (deficit)
(954
)
 
(1,276
)
Total liabilities and stockholders’ equity
$
9,974

 
$
9,409

See accompanying notes to condensed consolidated financial statements (unaudited).


3


Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In millions)
Shares
 
Common Stock and Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained
Earnings
 
Noncontrolling
Interests
Balance as of December 31, 2018
164.0

 
$
421

 
$
(2,765
)
 
$
1,051

 
$
17

Net earnings


 


 


 
151

 
1

Other comprehensive income


 


 
41

 


 


Issuance of common stock and stock options exercised
1.2

 
45

 


 


 


Share repurchase program
(1.2
)
 


 


 
(145
)
 


Share-based compensation expense


 
27

 


 


 


Issuance of common stock for acquisition of VaaS
1.4

 
160

 
 
 


 
 
Dividends declared $0.57 per share


 


 


 
(94
)
 


Balance as of March 30, 2019
165.4

 
$
653

 
$
(2,724
)
 
$
963

 
$
18

Net earnings
 
 
 
 
 
 
207

 
1

Other comprehensive loss
 
 
 
 
(13
)
 
 
 
 
Issuance of common stock and stock options exercised
0.5

 
33

 
 
 
 
 
 
Share repurchase program
(0.2
)
 
 
 
 
 
(25
)
 
 
Share-based compensation expense
 
 
30

 
 
 
 
 
 
Dividends declared $0.57 per share
 
 
 
 
 
 
(94
)
 
 
Dividends paid to non-controlling interest on subsidiary common stock
 
 
 
 
 
 
 
 
(3
)
Balance as of June 29, 2019
165.7

 
$
716

 
$
(2,737
)
 
$
1,051

 
$
16

(In millions)
Shares
 
Common Stock and Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained
Earnings
 
Noncontrolling
Interests
Balance as of December 31, 2017
161.6

 
$
353

 
$
(2,562
)
 
$
467

 
$
15

Net earnings
 
 
 
 
 
 
117

 
 
Other comprehensive income
 
 
 
 
54

 
 
 
 
Issuance of common stock and stock options exercised
1.7

 
53

 
 
 
 
 
 
Share repurchase program
(0.6
)
 
 
 
 
 
(66
)
 
 
Share-based compensation expense
 
 
17

 
 
 
 
 
 
ASU 2016-16 modified retrospective adoption
 
 
 
 
 
 
(30
)
 
 
ASU 2014-09 modified retrospective adoption
 
 
 
 
 
 
127

 
 
Dividends declared $0.52 per share
 
 
 
 
 
 
(84
)
 
 
Balance as of March 31, 2018
162.7

 
$
423

 
$
(2,508
)
 
$
531

 
$
15

Net earnings
 
 
 
 
 
 
180

 
1

Other comprehensive loss
 
 
 
 
(72
)
 
 
 
 
Issuance of common stock and stock options exercised
0.1

 
6

 
 
 
 
 
 
Share-based compensation expense
 
 
17

 
 
 
 
 
 
Dividends declared $0.52 per share
 
 
 
 
 
 
(84
)
 


Dividends paid to non-controlling interest on subsidiary common stock
 
 
 
 
 
 
 
 
(1
)
Balance as of June 30, 2018
162.8

 
$
446

 
$
(2,580
)
 
$
627

 
$
15

See accompanying notes to condensed consolidated financial statements (unaudited).


4


Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended
(In millions)
June 29,
2019
 
June 30,
2018
Operating
 
 
 
Net earnings attributable to Motorola Solutions, Inc.
$
358

 
$
297

Earnings attributable to non-controlling interests
2

 
1

Net earnings
360

 
298

Adjustments to reconcile Net earnings to Net cash provided by (used for) operating activities:
 
 
 
Depreciation and amortization
191

 
178

Non-cash other charges
4

 
6

Share-based compensation expense
57

 
34

Gains on sales of investments and businesses, net
(4
)
 
(10
)
Loss from the extinguishment of long term debt
43

 

Changes in assets and liabilities, net of effects of acquisitions, dispositions, and foreign currency translation adjustments:
 
 
 
Accounts receivable
110

 
206

Inventories
(61
)
 
37

Other current assets and contract assets
128

 
43

Accounts payable, accrued liabilities, and contract liabilities
(345
)
 
(340
)
Other assets and liabilities
2

 
(558
)
Deferred income taxes
17

 
31

Net cash provided by (used for) operating activities
502

 
(75
)
Investing
 
 
 
Acquisitions and investments, net
(371
)
 
(1,153
)
Proceeds from sales of investments and businesses, net
10

 
79

Capital expenditures
(129
)
 
(82
)
Net cash used for investing activities
(490
)
 
(1,156
)
Financing
 
 
 
Repayment of debt
(666
)
 
(197
)
Net proceeds from issuance of debt
645

 
1,295

Issuance of common stock
70

 
59

Purchases of common stock
(170
)
 
(66
)
Payments of dividends
(187
)
 
(168
)
Payments of dividends to non-controlling interests
(3
)
 
(1
)
Net cash provided by (used for) financing activities
(311
)
 
922

Effect of exchange rate changes on total cash and cash equivalents
6

 
(18
)
Net decrease in total cash and cash equivalents
(293
)
 
(327
)
Total cash and cash equivalents, beginning of period
1,257

 
1,268

Total cash and cash equivalents, end of period
$
964

 
$
941

Supplemental Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Interest, net
$
112

 
$
93

Income and withholding taxes, net of refunds
70

 
56

See accompanying notes to condensed consolidated financial statements (unaudited).

5


Notes to Condensed Consolidated Financial Statements
(Dollars in millions, except as noted)
(Unaudited)
1.
Basis of Presentation
The condensed consolidated financial statements as of June 29, 2019 and for the three and six months ended June 29, 2019 and June 30, 2018 include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to present fairly the Condensed Consolidated Balance Sheets, Statements of Operations, Statements of Comprehensive Income, Statements of Stockholders' Equity, and Statements of Cash Flows of Motorola Solutions, Inc. (“Motorola Solutions” or the “Company”) for all periods presented.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2018. The results of operations for the three and six months ended June 29, 2019 are not necessarily indicative of the operating results to be expected for the full year.
The preparation of financial statements in conformity with U.S. GAAP 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 the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Recent Acquisitions
On July 11, 2019, the Company acquired WatchGuard, Inc. ("WatchGuard"), a provider of in-car and body-worn video solutions for $271 million, inclusive of share-based compensation withheld at a fair value of $16 million that will be expensed over an average service period of two years. The acquisition was settled with $250 million of cash, net of cash acquired. The acquisition expands the Company's video security solutions platform.
On March 11, 2019, the Company announced that it acquired Avtec, Inc. ("Avtec"), a provider of dispatch communication equipment for U.S. public safety and commercial customers for a purchase price of $136 million in cash, net of cash acquired. This acquisition expands the Company's commercial portfolio with new capabilities, allowing it to offer an enhanced platform for customers to communicate, coordinate resources, and secure their facilities.
On January 7, 2019, the Company announced that it acquired VaaS International Holdings ("VaaS"), a company that is a global provider of data and image analytics for vehicle location for $445 million, inclusive of share-based compensation withheld at a fair value of $38 million that will be expensed over an average service period of one year. The acquisition was settled with $231 million of cash, net of cash acquired, and 1.4 million of shares issued at a fair value of $160 million for a purchase price of $391 million.
On March 28, 2018, the Company completed the acquisition of Avigilon Corporation ("Avigilon"), a provider of advanced security and video solutions including video analytics, network video management hardware and software, video cameras and access control solutions for a purchase price of $974 million in cash, net of cash acquired, debt assumed, and transaction costs paid.
On March 7, 2018, the Company completed the acquisition of Plant Holdings, Inc. ("Plant"), the parent company of Airbus DS Communications for a purchase price of $237 million in cash, net of cash acquired. This acquisition expanded the Company's software portfolio in the command center with additional solutions for Next Generation 9-1-1.
Recent Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) - Changes to the Disclosure Requirements for Defined Benefit Plans,” which modifies the disclosure requirements for the defined benefit pension plans and other postretirement plans. The ASU is effective for the Company on January 1, 2021 with early adoption permitted. The ASU requires a retrospective adoption method. The Company does not believe the ASU will have a material impact on its financial statement disclosures.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires the Company to measure and recognize expected credit losses for financial assets held and not accounted for at fair value through net income. In November 2018, April 2019 and May 2019, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses,” “ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, ” “Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” and “ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief,” which provided additional implementation guidance on the previously issued ASU. The ASU is effective for the Company on January 1, 2020. The ASU requires a modified retrospective adoption method. The Company is still evaluating the impact of adoption on its financial statements and disclosures.



6



Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, "Leases," which amends existing guidance to require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. This was subsequently amended by ASU No. 2018-01, “Land Easement Practical Expedient for Transition to Topic 842,” ASU No. 2018-10, “Codification Improvements to Topic 842, Leases,” and ASU No. 2018-11, “Targeted Improvements” (collectively "ASC 842"). ASC 842 establishes a right-of-use model ("ROU") that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with an initial term longer than twelve months. Leases will be classified as finance or operating, with classification affecting the pattern and presentation of expense recognition in the income statement.
The Company adopted ASC 842 as of January 1, 2019 using a modified retrospective transition approach for all leases existing at January 1, 2019, the date of the initial application. Consequently, financial information will not be updated and disclosures required under ASC 842 will not be provided for dates and periods before January 1, 2019.
ASC 842 provides for a number of optional practical expedients in transition. The Company elected the practical expedients, which permit the Company to not reassess prior conclusions about lease identification, lease classification and initial direct costs under ASC 842. The Company did not elect the "use-of hindsight" practical expedient to determine the lease term or in assessing the likelihood that a lease purchase option will be exercised, allowing it to carry forward the lease term as determined prior to adoption of ASC 842. Finally, the Company also elected the practical expedient related to land easements, which enabled it to continue its accounting treatment for land easements on existing agreements as of January 1, 2019.
ASC 842 also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify. A short-term lease is one with a term of 12 months or less, including any optional periods that are reasonably certain of exercise. For those leases that qualify, the exemption allows the Company to not recognize ROU assets or lease liabilities, including not recognizing ROU assets or lease liabilities for existing short-term leases at transition. Short-term lease costs are recognized as rent expense on a straight-line basis over the lease term consistent with the Company’s prior accounting. The Company also elected the practical expedient to not separate lease and non-lease components for all current lease categories.
As of January 1, 2019, the Company recognized operating lease liabilities of $648 million based on the present value of the remaining minimum rental payments determined under prior lease accounting standards and corresponding ROU assets of $588 million. The $60 million difference between operating lease liabilities and ROU assets recognized is due to deferred rent and exit cost accruals recorded under prior lease accounting standards. ASC 842 requires such balances to be reclassified against ROU assets at transition.
For arrangements where the Company is the lessor, the adoption of ASC 842 did not have a material impact on its financial statements as the majority of its leases are operating leases embedded within managed services contracts. ASC 842 provides a practical expedient for lessors in which the lessor may elect, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for these components as a single component if both of the following are met: (i) the timing and pattern of transfer of the non-lease component(s) and associated lease component are the same and (ii) the lease component, if accounted for separately, would be classified as an operating lease. The accounting under the practical expedient depends on which component(s) is predominant in the contract. If the non-lease component is predominant, the single component is accounted under ASC Topic 606 "Revenue from Contracts with Customers" and accounting and disclosure under ASC 842 is not applicable. The Company has elected the above practical expedient and determined that non-lease components are predominant and is accounting for the single components as managed service contracts under ASC Topic 606.













7


2. Revenue from Contracts with Customers
Disaggregation of Revenue
The following table summarizes the disaggregation of our revenue by segment, geography, major product and service type and customer type for the three and six months ended June 29, 2019 and June 30, 2018, consistent with the information reviewed by our chief operating decision maker for evaluating the financial performance of operating segments:
 
Three Months Ended
 
June 29, 2019
 
June 30, 2018
 
Products and Systems Integration
 
Services and Software
 
Products and Systems Integration
 
Services and Software
Regions:
 
 
 
 
 
 
 
Americas
$
969

 
$
378

 
$
878

 
$
331

EMEA
152

 
204

 
188

 
194

Asia Pacific
117

 
40

 
123

 
46

 
$
1,238

 
$
622

 
$
1,189

 
$
571

 
 
 
 
 
 
 
 
Major Products and Services:
 
 
 
 
 
 
 
Devices
$
809

 
$

 
$
725

 
$

Systems and Systems Integration
429

 

 
464

 

Services

 
469

 

 
456

Software

 
153

 

 
115

 
$
1,238

 
$
622

 
$
1,189

 
$
571

 
 
 
 
 
 
 
 
Customer Type:
 
 
 
 
 
 
 
Direct
$
771

 
$
582

 
$
740

 
$
537

Indirect
467

 
40

 
449

 
34

 
$
1,238

 
$
622

 
$
1,189

 
$
571



8


 
Six Months Ended
 
June 29, 2019
 
June 30, 2018
 
Products and Systems Integration
 
Services and Software
 
Products and Systems Integration
 
Services and Software
Regions:
 
 
 
 
 
 
 
Americas
$
1,782

 
$
730

 
$
1,576

 
$
627

EMEA
317

 
402

 
345

 
375

Asia Pacific
208

 
78

 
220

 
84

 
$
2,307

 
$
1,210

 
$
2,141

 
$
1,086

 
 
 
 
 
 
 
 
Major Products and Services:
 
 
 
 
 
 
 
Devices
$
1,495

 
$

 
$
1,356

 
$

Systems and Systems Integration
812

 

 
785

 

Services

 
921

 

 
902

Software

 
289

 

 
184

 
$
2,307

 
$
1,210

 
$
2,141

 
$
1,086

 
 
 
 
 
 
 
 
Customer Type:
 
 
 
 
 
 
 
Direct
$
1,429

 
$
1,135

 
$
1,357

 
$
1,042

Indirect
878

 
75

 
784

 
44

 
$
2,307

 
$
1,210

 
$
2,141

 
$
1,086


Remaining Performance Obligations
Remaining performance obligations represent the revenue that is expected to be recognized in future periods related to performance obligations that are unsatisfied, or partially unsatisfied, as of the end of a period. The transaction price associated with remaining performance obligations which are not yet satisfied as of June 29, 2019 is $7.3 billion. A total of $3.1 billion is from Products and Systems Integration performance obligations that are not yet satisfied, of which $1.7 billion is expected to be recognized in the next 12 months. The remaining amounts will generally be satisfied over time as systems are implemented. A total of $4.2 billion is from Services and Software performance obligations that are not yet satisfied as of June 29, 2019. The determination of Services and Software performance obligations that are not satisfied takes into account a contract term that may be limited by the customer’s ability to terminate for convenience. Where termination for convenience exists in the Company's service contracts, its disclosure of the remaining performance obligations that are unsatisfied assumes the contract term is limited until renewal. The Company expects to recognize $1.2 billion from unsatisfied Services and Software performance obligations over the next 12 months, with the remaining performance obligations to be recognized over time as services are performed and software is implemented.
Contract Balances
 
June 29, 2019
 
December 31, 2018
Accounts receivable, net
$
1,206

 
$
1,293

Contract assets
913

 
1,012

Contract liabilities
1,187

 
1,263

Non-current contract liabilities
263

 
214


Revenue recognized during the three months ended June 29, 2019 which was previously included in Contract liabilities as of March 30, 2019 is $340 million, compared to $365 million of revenue recognized during the three months ended June 30, 2018 which was previously included in Contract liabilities as of April 1, 2018. Revenue recognized during the six months ended June 29, 2019 which was previously included in Contract liabilities as of December 31, 2018 is $600 million, compared to $541 million of revenue recognized during the six months ended June 30, 2018 which was previously included in Contract liabilities as of January 1, 2018. Adjustments to revenue for the three and six months ended June 29, 2019 and June 30, 2018 driven by changes in the estimates of progress on system contracts was immaterial.
There were no material impairment losses recognized on contract assets during the three and six months ended June 29, 2019 and June 30, 2018.

9


Contract Cost Balances
 
June 29, 2019
 
December 31, 2018
Current contract cost assets
$
37

 
$
30

Non-current contract cost assets
98

 
98


Amortization of contract cost assets was $11 million for the three months ended June 29, 2019 and June 30, 2018, respectively, and $22 million and $23 million for the six months ended June 29, 2019 and June 30, 2018, respectively.

3. Leases
The Company leases certain office, factory and warehouse space, land, and other equipment, principally under non-cancelable operating leases.
The Company determines if an arrangement is a lease at inception of the contract. The Company's key decisions in determining whether a contract is or contains a lease include establishing whether the supplier has the ability to use other assets to fulfill its service or whether the terms of the agreement enable the Company to control the use of a dedicated asset during the contract term. In the majority of the Company's contracts where it must identify whether a lease is present, it is readily determinable that the Company controls the use of the assets and obtains substantially all of the economic benefit during the term of the contract. In those contracts where identification is not readily determinable, the Company has determined that the supplier has either the ability to use another asset to provide the service or the terms of the contract give the supplier the rights to operate the asset at its discretion during the term of the contract.
ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The Company's lease payments are typically fixed or contain fixed escalators. The Company has elected to not separate lease and non-lease components for all of its current lease categories and therefore, all consideration is included in the lease liabilities. For the Company's leases consisting of both land and other equipment (i.e. "communication network sites"), future payments are subject to variability due to changes in indices or rates. The Company values its ROU assets and lease liabilities based on the index or rate in effect at lease commencement. Future changes in the indices or rates are accounted for as variable lease costs. Other variable lease costs also include items that are not fixed at lease commencement including property taxes, insurance, and operating charges that vary based on usage. ROU assets also include lease payments made in advance and are net of lease incentives.
As the majority of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rates based on the information available at the commencement date in determining the present value of future payments. The Company's incremental borrowing rates are based on the term of the lease, the economic environment of the lease, and the effect of collateralization.
The Company's lease terms range from one to twenty-one years and may include options to extend the lease by one to ten years or terminate the lease after the initial non-cancelable term. The Company does not include options in the determination of the lease term for the majority of leases as sufficient economic factors do not exist that would compel it to continue to use the underlying asset beyond the initial non-cancelable term. However, for the Company's communication network site leases that are necessary to provide services to customers under managed service arrangements, the Company includes options in the lease term to the extent of the customer contracts to which those leases relate.











10


The components of lease expense are as follows:
June 29, 2019
 
Three Months Ended
 
Six Months Ended
Lease expense:
 
 
 
 
Operating lease cost
 
$
33

 
$
65

Finance lease cost
 
 
 
 
Amortization of right-of-use assets
 
3

 
6

Interest on lease liabilities
 

 
1

Total finance lease cost
 
3

 
7

Short-term lease cost
 
1

 
3

Variable cost
 
8

 
17

Sublease income
 
(1
)
 
(2
)
Net lease expense
 
$
44

 
$
90


Lease assets and liabilities consist of the following:
 
 
Statement Line Classification
 
June 29, 2019
Assets:
 
 
 
 
Operating lease assets
 
Operating lease assets
 
$
567

Finance lease assets
 
Property, plant, and equipment, net
 
50

 
 
 
 
$
617

Current liabilities:
 
 
 
 
Operating lease liabilities
 
Accrued liabilities
 
$
118

Finance lease liabilities
 
Current portion of long-term debt
 
14

 
 
 
 
$
132

Non-current liabilities:
 
 
 
 
Operating lease liabilities
 
Operating lease liabilities
 
$
504

Finance lease liabilities
 
Long-term debt
 
22

 
 
 
 
$
526


Other information related to leases is as follows:
 
Six Months Ended
 
June 29, 2019
Supplemental cash flow information:
 
Net cash used for operating activities related to operating leases
$
80

Net cash used for operating activities related to finance leases
1

Net cash used for financing activities related to finance leases
8

Assets obtained in exchange for lease liabilities:
 
Operating leases
$
45



11


 
June 29, 2019
Weighted average remaining lease terms (years):
 
Operating leases
8

Finance leases
3

Weighted average discount rate:
 
Operating leases
3.76
%
Finance leases
4.97
%


Future lease payments as of June 29, 2019 are as follows:
 
Operating Leases
 
Finance Leases
 
Total
2019
$
58

 
$
8

 
$
66

2020
136

 
14

 
150

2021
121

 
12

 
133

2022
105

 
5

 
110

2023
55

 

 
55

Thereafter
247

 

 
247

Total lease payments
722

 
39

 
761

Less: Interest
100

 
3

 
103

Present value of lease liabilities
$
622

 
$
36

 
$
658


Rental expense, net of sublease income, for the year ended December 31, 2018 was $108 million.
At December 31, 2018, future minimum lease obligations, net of minimum sublease rentals, for the next five years and beyond were as follows:
2019

2020

2021

2022

2023

Beyond

$
131

$
120

$
112

$
101

$
54

$
204



4. Other Financial Data
Statements of Operations Information
Other Charges (Income)
Other charges (income) included in Operating earnings consist of the following:
 
Three Months Ended
 
Six Months Ended