Good morning, and thank you for holding. Welcome to the Motorola Solutions conference call. Today's call is being recorded. If you have any objections, please disconnect at this time. The presentation is currently posted on the Motorola Solutions investor relations website. In addition, a replay of this call will be available approximately 3 hours after the conclusion of this call over the Internet. The website address is www.motorolasolutions.com/investor. At this time, all participants have been placed in a listen-only mode, and the line will be open for your questions following the presentation.
I would now like to introduce Mr. Shep Dunlap, Vice President of Investor Relations. Mr. Dunlap, you may begin your conference.
Thank you. Good morning, and thank you for joining us today as we discuss changes to our U.S. pension plan. With me today are Gino A. Bonanotte, Executive Vice President and CFO, and Rob O'Keefe, Corporate Vice President and Treasurer. Today, we will only be discussing material and answering questions related to our pension plans and transaction announced today. As a reminder, we will provide our full earnings results on November fourth, and I would ask that you hold questions on the quarter until that time.
Next, I'd like to remind you that all statements made during this call that relate to future results and events are forward-looking statements that are based on our current expectations. Actual results and events could differ materially from those projected in the forward-looking statements because of a number of risks and uncertainties, which are discussed in our annual and quarterly SEC filings and in the cautionary statement contained in our press release and on our website. We assume no obligation to update our forward-looking statements. With that, I'd like to turn it over to Gino.
Thank you, Shep, and thank you to all of you who are joining us on short notice today. This is a pivotal time at MSI as we continue to take a number of actions aimed at addressing our legacy, operational, and cost structure. We're working to reduce complexity in a number of ways, improving sales and R&D efficiency, real estate footprint, and IT complexity, as well as back-office functions. With respect to the balance sheet, the major area of legacy burden is our pension obligation. Today's announcement represents aggressive action to address one of the company's largest legacy issues, its outsized global pension liabilities.
The actions we're announcing today will reduce our U.S. pension liability by $4.2 billion, or approximately 50%, while retaining existing benefits for all of our plan participants. It will significantly reduce volatility and improve visibility to cash flow by mitigating the risk of large, unexpected cash calls to fund legacy pension obligations. And finally, inclusive of the incremental funding, which Rob will detail later in the call, will eliminate required contributions over the next five to six years while ensuring the plan remains on solid footing.
We're taking this action now for several reasons. First and foremost, our global pension liabilities are too large relative to the scale of the business. Secondly, timing and market conditions are favorable now in terms of historically low interest rates and an attractive market for annuities from insurance companies. And finally, I'm very pleased we were able to defease the liabilities below PBO value and well below economic valuation. This is an unprecedented outcome for this type of transaction. Now, I'd like to turn the call over to Rob to take you through the key details of today's announcement and the actions surrounding our U.S. pension plan.
Thanks, Gino. Listen, I, I'd like to tee this up with just a brief overview of what we're doing here. There are three key components to the actions we're taking. First, we're planning to fund $1.1 billion of cash into the U.S. plans this calendar year. That's an incremental $800 million above the $300 or so minimum that we've talked about all year long. This incremental funding will ensure the plan remains on solid footing, and coupled with the other actions we're gonna discuss, will eliminate required contributions, as Gino said, over the next five to six years, freeing up cash for more productive uses.
The second component is lump sums. We'll be offering up to $1 billion of cash lump sum payments to our terminated vested participants, targeting a reduction in that portion of the plan liability of $1.1 billion. We'll spend more time with you on that in a minute. And third, we have entered into an agreement with Prudential Insurance Company of America to purchase annuity contracts for the retiree population to reduce our liability by an additional $1.1 billion. And again, we'll take you through all this in more detail in a minute.
These are just the headlines. Benefits will not change for participants as a result of these actions. Benefits will remain secure, but payment options and/or the form of payment will change. From a company perspective, the net result is that our U.S. pension liability will be reduced by about $4.2 billion, which will reduce earnings and cash flow volatility and significantly reduce the balance sheet. You know, this is a rare case where all the constituents win, and we'll talk more about that too. These transactions are good for the company, they're good for the retirees, they're good for the term- vested and active participants.
The retirees maintain a secure benefit backed by a highly rated and regulated insurance company. The term vested participants receive a new option, an option to receive lump sum or annuity payments. And all participants that remain in the plan will benefit from a well-funded, smaller, and more manageable plan. The company, by reducing our U.S. liability by $4.2 billion, as Gino mentioned, about 50%, will benefit from significantly reduced earnings and cash flow volatility and improve financial flexibility. All this achieved with positive economics.
Next slide, talking about, U.S. pension actions taken. I mean, this slide provides some context. These are actions we're taking. These are really the next steps in the de-risking path we've been marching down. We've already taken a number of important steps to manage our exposure. As a first step in containing the growth of the obligation, the U.S. pension plan was closed to new participants in 2005, and benefits were frozen for existing participants in 2009. That's a critical first step. The company has also committed a significant amount of capital over the years to fund this obligation.
Looking back 10 years, we've contributed approximately $3 billion into the U.S. pension plan. You know, listen, unfortunately, similar to many plans, a considerable sum was lost in the market collapse of 2008 and 2009, and, you know, we recognize this happens from time to time. I think the peak losses were 40%, in those years, and it's taken some time for the plan to recover, but the plan's recovered. We've also taken actions similar to other plan sponsors to better match plan assets with the liabilities and employ liability investing technology, a liability-driven investing technology, to further manage the risk within the plan.
Now, with today's actions, we're taking the next steps in de-risking the plan. These are the most aggressive and significant reductions in the gross liabilities. Slide five provides an overview of the scale of the issue we're dealing with here. This looks at the global plans and the U.S. plans. As at the end of 2013, the company's total global pension liability, as measured by GAAP PBO, was about $9.3 billion, covering 95,000 participants, with a global funded status of 82%, a deficit of $1.6 billion. The U.S. plan, which is gonna be our focus today, about 80% of the global pension footprint.
It covers 80,000 participants and at year-end, carried a PBO of about $7.3 billion, which was funded at 83%, with a deficit of $1.2 billion. Notably, the U.S. plan is in a significantly better funded position than it was a year prior in 2012, when the funded status was 65%, and the deficit was about $2.9 billion. Again, this is the type of volatility we're looking to mitigate with these actions. Now, listen, the liabilities you see on this chart represent the legacy of a company that once had six major businesses, $45 billion in revenue and 150,000 employees.
We are not that company anymore. Simply put, it's not prudent for a pure play company with $6 billion in revenue and about 15,000 employees to carry a $9-$10 billion global pension liability servicing 95,000 participants. We do have strong confidence, and we'll talk more about that, that the new MSI is well positioned to continue to generate robust earnings and free cash flow. However, it's not prudent to expose this smaller balance sheet to outsize risk and volatility that a pension liability of this scale can create. Doesn't make sense. Flipping to slide six of our posted presentation, there's a lot of numbers here.
I'm gonna walk you through the pension maze for a few minutes just to make it perfectly clear what's happening here. Focusing on the U.S. pension obligation, which is where the action is, this chart walks from year-end 2013 status at the top of the table, down to an estimate of pro forma status following the transactions we're talking about today. That's the last line of the table. Starting from the top of the table, we display the year-end 2003 at 13 funded status that you just saw. Since that time, interest rates have moved down, and, you know, again, we can take you through that.
The liability is accrued interest, as it always does, and actuarial estimates, such as mortality, have moved around, as they always do, which has increased our liability by about $1.1 billion to $8.4 billion, which is where it stands today. That's the U.S. liability. Additionally, the year-to-date returns on our asset portfolio, net of benefit payments, is about $300 million, increasing plan assets by that amount, which you see in the second line as well.
Lastly, in order to provide you with a clean pro forma status prior to the risk transfer actions we want to focus on, in the third line, we're adding this year's minimum required contributions of $300 million, which we would have contributed to the plan in any case, in the absence of these transactions. So in the middle of the table, you see the pro forma pre-transaction status is a PBO of about $8.4 billion, with $6.7 billion of assets. This should be viewed as our best estimate of the liability valuation and overall plan status just prior to the risk transfer actions we're discussing today, so we can focus you on, precisely on what's happening today.
Focusing now on the impact of the transaction, summarizing the bottom half of the table. As part of the de-risking, the company will voluntarily contribute an incremental $800 million of cash into the plan. Recall that in August, we borrowed one point four billion of debt, taking funding risk off the table, the majority of which was earmarked for this purpose. Finally, when the transactions closed in December, and now I'm pointing you to the second to last line on the table, the plan will transfer liabilities with a combined PBO of about $4.2 billion, along with about $4.1 billion in assets.
Specifically, upon closing, and we'll, again, we'll go into this in more detail in the Q&A, but the plan will issue up to $1 billion of cash payments to the term-vested participants who elect to receive lump sum payments, reducing plan assets by $1 billion and reducing the PBO by about $1.1 billion if fully subscribed. Upon closing the annuitization with Prudential, based on current market conditions and other estimates, the plan will transfer about $3.1 billion of assets to Prudential in payment for Prudential's group annuity contract, covering the 30,000 retirees with a PBO liability of about $3.1 billion.
You should note these estimates are going to move around based on many different assumptions, including interest rates, mortality estimates, and other estimates. But based on our current estimates, we're settling the retiree obligation with Prudential approximately at par, which is unprecedented. And, you know, while I'd caution you, it's very difficult to compare these types of transactions and trades with other deals in the markets, the GMs, the Verizons, the other jumbos. You know, this is the third-largest trade, so those are natural places to look.
Those trades did involve premiums in the 10% range, and we're settling at par. Coming back to the last line in the table here, all else equal, we would expect to reduce the U.S. liability by about $4.2 billion, or about 50%, all while maintaining a funded status at about 80%. Importantly, all the way to the right of this table, we're talking about participants. While it's very difficult to estimate which lump sum eligible people are going to actually elect to take the lump sum, we do estimate these transactions will reduce our participant population by 40,000-50,000, down to a range of 30,000-40,000. More to come on that as we get smarter about who's taking the lump sum.
Lastly, on the next slide, listen, there are several important drivers for undertaking this transaction now. First, we're going to be a smaller company with the divestiture of enterprise, and the legacy pension liabilities have become significantly outsized relative to the scale of the remaining business. As we've said, we need to put this business on the right capital structure footing now and eliminate undue risk and volatility. Second, as a result of favorable capital market conditions, we were able to opportunistically borrow long-term capital at a very attractive rate to support the planned funding, which we did in August.
Third, the market for annuities, and we'll talk more about that, is very strong right now for a lot of reasons, allowing us to deliver a favorable economic result and defease the liabilities below PBO value and well below economic valuation. Again, these actions significantly reduce volatility and cash flow, mitigating the risk of large, unexpected cash calls to fund the plan that could disrupt our business. This positions the balance sheet to better support the new MSI, and importantly, these actions improve stability for all plan participants.
Lastly, just, you know, one final note on this. Our core business is mission-critical communications. It's not managing retirement assets and liabilities. Prudential's core business is managing assets and retirement assets and liabilities. That's where these activities belong. Our employees, our customers, our shareholders, they don't want earnings and cash flow to be whipsawed by changes in interest rates and stock prices. They don't want our ability to invest in our business to be compromised by this type of volatility.
That's what you're exposed to when you run an outsized pension fund. Prudential is fully equipped to manage these risks. That's what they get paid for. So essentially, in the way we look at this, you know, Gino and I, what we've done here is defeased a large non-core business that exposes our core business to significant risk, and we've done it at a very, very economically favorable cost. Now I'll turn it back over to Gino.
Thank you, Rob. This is a significant transaction, and I'm exceedingly pleased with the outcome. I want to thank Rob, Akash Raj, our assistant treasurer, our entire treasury team, our advisors, and our partner for the substantial work that went into executing this in really an unprecedented timeframe. It's a very important step in our efforts to simplify the company and reduce risk. These transactions enable us to minimize the risk of future cash funding requirements, as we've talked about, while improving the stability of the plan for all pension participants.
And it does so while preserving a strong funding status. Lastly, these transactions will provide greater flexibility to move to a more efficient capital structure that supports the needs of the firm and our goal of running an appropriately leveraged balance sheet. I'll now turn the call over to Shep.
Thanks, Gino and Rob. Let's open it up for questions now. As a reminder, please limit yourself to one question and one follow-up. Operator, can you get us started?
Certainly. The floor is now open for questions. At this time, if you have a question or comment, please press the star, then one on your touch-tone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question, please pick up your handset to provide optimal sound quality. Our first question is coming from Keith Housum with North Coast Research. Your line is open.
Thanks, guys. I appreciate the opportunity to ask a question. Congratulations on the move. I've got to ask a question, of course, Gino. Is there any EPS impact from this transaction?
No. Thanks, Keith. Thanks for the question, and I'm glad you brought it up. This was not a cost reduction exercise. It was about reducing volatility around pension obligation and improving cash flow visibility. It does not impact the 2015. In and of itself, this transaction will not impact 2015 pension expense. Obviously, as we talked about, it certainly will impact the minimum funding requirement, but does not necessarily impact expense in 2015.
All right, appreciate it. And a follow-up question for you. You've taken off a good chunk of liability here, but why not do more? You, you still have, you know, 30,000-40,000 retirees out there with a benefit coming to them.
Yeah, it's a great question. First, certainly we don't want to risk being overfunded. This transaction reduces the size of the MSI pension liability to a level we think is manageable for us on the balance sheet. The marginal benefit of doing more wasn't worthwhile. Rob, I don't know if there's anything you want to add.
I, I think that's right. So that's one cornerstone principle. The other is really the credit rating. And, you know, our cornerstone principle with our capital structure, and we can talk more about this, is maintaining an investment-grade credit rating for our customers, these long-term contracts, on and on. There are a whole lot of reasons why we need that. Doing more would have probably required putting more capital into the plan, borrowing more money to do that. And we spent a lot of time with the agencies, believe me, over the last six months, in detailed discussions assessing their comfort level with how far we could push the envelope, and we've pushed it as far as we can.
So we're comfortable we hold the rating based on these transactions. Doing more would have stressed the rating. You know, at the right time, though, looking forward, there's going to be a time and a place where we can take another bite. And by the way, you know, legging into these transactions makes some sense, too, right? We're not in the business of making big, chunky capital markets bets. So we're going to have plenty of opportunity with our cash flow, you know, as this business grows, to do more over time.
Great. Thanks. I appreciate it.
Again, as a reminder, it is star then one to ask a question today. Our next question is coming from Travis McCourt with Raymond James. Your line is open.
Hey, guys, just wanted to confirm a couple of things. So the near-term cash outflow is $2.1 billion, the $1.1 billion contributed, plus the $1 billion for lump sum payment. Is that correct?
I'd say that differently. $1.1 billion comes from the corporate into the plan, so off the company's balance sheet-
Right.
into the plan. We borrowed $1 billion for. $1 billion of that will go into the plan. So that is effectively self-funded and trading, trading one liability for another. So we're not reducing corporate cash in that effect.
Yep.
We're just trading leverage for leverage.
Yep.
So number one, it's $1 billion of company cash that's been borrowed going into the plan. The $1 billion of the lump sums will come out of the plan. So the plan balance sheet will reduce by $1 billion of cash and about $1.1 billion of liability with respect to the lump sums.
Okay, got you. And so just to be clear, there's no earmark of the cash coming in from the enterprise sale for any of these exits?
No, Travis, there isn't.
Okay, great. Thanks a lot.
Our next question is coming from Kulbinder Garcha with Credit Suisse. Your line is now open.
Thanks for the question. I'm trying to just understand on a go-forward basis, once this is completed, what this means for MSI's balance sheet and cash flow. So would your $300 million contributions you would have made this year come down fairly markedly, and by what amount? I'm not sure if you've mentioned that, but what's the go-forward level of contribution you may need to make? And then also, previously, I was treating this net, this net deficit that you have with the pension as effectively a form of debt.
To the degree that it's going to be smaller going forward, does that free up your balance sheet for other things you want to do with that cash?
Sure. So the first part of the question was the cash impact, and we talked about right now our view is, for five to six years, there would be no minimum funding requirement for the pension plan, for the next five to six years. So that's the impact, the impact on cash.
When you rewind, you know, historically, right, we're in this 200-250, this year was $300 million a year contribution range, minimum contribution range. That goes to zero for the next five to six years. So that does free up cash flow for other, more productive uses, number one. Number two, in terms of the plan that remains, it's actually interesting and it's a nuance, but we've divested the retiree plan, which is the shortest duration portion of the liability. We're left with the younger people with a much longer duration, and the company's left with, if you will, a much longer timeframe to resolve that issue.
So in addition to no minimum cash contributions required for five to six years, assuming markets hold up, right? We have a longer timeframe with the longer duration to make those payments. The benefit payments coming out of the plan, you can see this in our K, used to be $300 million-$350 million a year. With the retirees coming out, that number goes down to $70 million-$80 million a year. So the plan's going to have many years where it's going to rehabilitate itself, if you will, from within. and we're gonna have a much longer timeframe to build this plan out.
So it works on that level, too. It's a nuance, but it's a really important nuance to understanding the economics of what we've done here.
So, I guess a question for Greg then. With this added flexibility, what do you do with it on a go-forward basis, given that MSI will be actually generating more cash, it sounds like? What do you do with that?
Well, so Kulbinder, we've talked about this. This is Gino. We've talked about the fact that we'd have, obviously have better visibility to cash, lower volatility to cash, and the ability to use that cash for other purposes. We haven't updated our use of capital yet, and we will do that post-enterprise transaction. But for the time being, you should expect nothing different in our model from a the use of cash perspective. I think, Kulbinder, I'd just add, I mean, we've talked about the evolution of our balance sheet, and this is just a key step in enabling us to get there in a way that we've talked about.
Does that answer your question, Kulbinder?
Yes, thank you. Very clear.
Thank you.
Again, as a reminder, it is star then one to ask a question today. We'll pause briefly to allow any additional questions to queue. Our next question comes from Ashwin Kesireddy with JP Morgan. Your line is open.
Yeah, hi. Thanks for taking my question. This is Ashwin on behalf of Rod. I was wondering if you could give us more color around this, the with one of the comments you made on, you know, you're left with more younger people now, with much longer duration. Is there any way for us to think about the split between government and, you know, the enterprise businesses here when it comes to the, you know, duration of employees here?
You know, listen, not really. The split of enterprise is having no material impact on our plan at all. Really, that hasn't factored in. Not many people are leaving the plan, so no material impact from the enterprise split.
I will turn the floor back over to Mr. Shep Dunlap, Vice President of Investor Relations, for any additional or closing remarks today.
Thanks. No, I think, that's it. I appreciate everybody joining us today on short notice, and, we'll be back to you soon. Thanks.
Ladies and gentlemen, this does conclude today's teleconference. A replay of this call will be available over the Internet in approximately three hours. The website address is www.motorolasolutions.com/investor. We thank you for your participation and ask that you please disconnect your lines at this time. Have a wonderful day.