Motorola Solutions, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter ended October 2, 2021; comparisons are with the quarter ended September 26, 2020. Unless noted, amounts are in millions of dollars.
Business context
Motorola Solutions provides land mobile radio (LMR) communications, video security and access control, and command center software. It reports Products and Systems Integration and Software and Services segments. The filing presents both Q3 and first-nine-month results.
Financial performance
| Metric | Q3 2021 | Q3 2020 | First 9 months 2021 | First 9 months 2020 |
|---|---|---|---|---|
| Net sales | $2,107 | $1,868 | $5,851 | $5,141 |
| Gross margin | $1,045; 49.6% | $909; 48.7% | $2,857; 48.8% | $2,462; 47.9% |
| Operating earnings / margin | $451; 21.4% | $352; 18.9% | $1,118; 19.1% | $828; 16.1% |
| Net earnings attributable to Motorola Solutions | $307 | $205 | $844 | $537 |
| Diluted earnings per share | $1.76 | $1.18 | $4.87 | $3.08 |
Q3 sales rose 13%, operating earnings 28%, and diluted EPS 49%. Nine-month sales increased 14% and operating earnings 35%. Q3 segment sales were $1,325 for Products and Systems Integration (+14%) and $782 for Software and Services (+11%). Growth reflected gains across LMR, video security/access control, and command center software, as well as favorable currency and acquisition contributions.
Q3 operating margins were 16.9% for Products and Systems Integration versus 14.1% a year earlier, and 29.1% for Software and Services versus 26.7%. Nine-month segment margins were 12.4% versus 9.8% and 29.3% versus 25.9%, respectively.
Cash flow, debt and liquidity
- Operating cash flow for the first nine months was $1,134, up from $909; investing cash flow was $(525) and financing cash flow was $(179). Cash increased by $399 to $1,653.
- Cash and cash equivalents were $1,653 at October 2, 2021. Total debt was approximately $5,693, up from $5,175 at year-end 2020; cash less debt implies approximate net debt of $4.0 billion.
- Current assets were $4,735 and current liabilities $3,429. Stockholders’ equity remained in deficit at $(248), improving from $(541) at year-end.
- The company issued $850 of 2.75% senior notes due 2031 and used part of the proceeds to redeem $324 principal of existing debt, recording an $18 extinguishment loss. Its $2.25 billion revolving facility matures in 2026; no commercial paper was outstanding and the company reported covenant compliance.
- During the first nine months, the company repurchased $409 of stock and paid $362 in common dividends. It had $2.2 billion of repurchase authorization remaining at quarter-end.
Changes, outlook and notable items
- Management said semiconductor and other supply-chain constraints, freight costs, reduced transport capacity and labor constraints were disrupting supply and limiting its ability to meet demand. It expected constraints to continue at least into the first half of 2022; LMR demand was expected to outpace available supply for the remainder of 2021.
- Management reported encouraging demand and strong LMR backlog. It expected Software and Services’ recurring business and backlog to limit the pandemic’s sales and margin effects for the rest of 2021, and expected video security/access control growth to continue. The filing does not provide a clear numerical earnings or revenue forecast.
- Management anticipated that the American Rescue Plan could benefit results as government customers receive funding. It also warned that the federal contractor vaccine mandate could constrain its workforce or suppliers. The UK Competition and Markets Authority opened a market investigation into the Airwave police and emergency-services radio network.
- Openpath was acquired in July for $297 net of cash acquired, with potential earn-out payments of up to $40 based on 2022 targets; management estimated no earn-out payout. Subsequent to quarter-end, Envysion was acquired on October 29 for $124 net of cash acquired.
- In the Hytera trade-secret and copyright case, the court awarded Motorola $543.7 in damages after reducing the jury award, plus $51.1 in prejudgment interest, $2.6 in costs and, after quarter-end, $34.2 in attorneys’ fees. Hytera appealed; the forward royalty rate and appeal remained unresolved.
- Q3 other income included an $18 fair-value loss on the company’s Evolv equity investment. Other notable items included $29 of nine-month net reorganization charges and a $7 operating-lease impairment.
Important facts for investors to verify
- Whether component shortages, freight and logistics constraints affect deliveries, backlog conversion, margins and the stated supply outlook.
- Whether revenue and operating-margin growth persist across both segments as acquisition contributions, currency effects and costs change.
- Debt, cash generation, capital returns and covenant headroom, including the implications of the convertible notes becoming fully convertible in September 2021.
- Developments in the Hytera appeal, royalty determination and collection of awarded amounts, as well as the Airwave market investigation.
- Integration and purchase accounting for Openpath and Envysion, including Openpath’s potential earn-out and expected benefits from acquisitions.