Motorola Solutions, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended July 3, 2021; comparisons are to periods ended June 27, 2020. Figures are unaudited and in U.S. dollars unless noted.
Business context and reporting period
Motorola Solutions provides mission-critical communications, video security and access control, and command center software. It reports two segments: Products and Systems Integration (PSI) and Software and Services (S&S). The quarter’s results are not necessarily indicative of full-year results; the company notes that revenue has historically been higher in the fourth quarter.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $1.971 billion | $1.618 billion | $3.744 billion | $3.273 billion |
| Gross margin | $952 million; 48.3% | $766 million; 47.3% | $1.812 billion; 48.4% | $1.553 billion; 47.4% |
| Operating earnings | $370 million; 18.8% margin | $218 million; 13.5% margin | $668 million; 17.8% margin | $476 million; 14.5% margin |
| Net earnings attributable to Motorola Solutions | $293 million | $135 million | $537 million | $332 million |
| Diluted EPS | $1.69 | $0.78 | $3.10 | $1.90 |
| Operating cash flow | Not separately stated | Not separately stated | $758 million | $517 million |
- Q2 sales rose 22%, operating earnings rose 70%, and diluted EPS rose to $1.69 from $0.78. First-half sales increased 14% and operating earnings increased 40%.
- Q2 PSI sales were $1.198 billion, up 24%, with a segment operating margin of 11.6% versus 5.1%. S&S sales were $773 million, up 19%, with a margin of 29.9% versus 26.0%.
- Q2 technology sales included LMR of $1.531 billion, Video Security and Access Control of $306 million, and Command Center Software of $134 million.
- At July 3, cash and cash equivalents were $1.921 billion, versus $1.254 billion at year-end 2020. Total debt was approximately $5.7 billion, versus $5.2 billion; stockholders’ equity remained a deficit of $344 million.
- First-half investing cash outflow was $114 million; financing cash inflow was $30 million. The company repurchased $272 million of stock and paid $242 million in dividends during the first half.
Material changes versus the prior comparable period
- Growth reflected increased sales across both segments and regions, including higher LMR, video security and access control, and command center software sales. Favorable currency contributed $66 million to Q2 sales growth and $98 million to first-half growth; acquisitions contributed $47 million and $96 million, respectively.
- Q2 gross margin improved by 1.0 percentage point, primarily on higher sales volume, improved service mix, and lower reorganization charges, partly offset by higher employee incentive costs. First-half gross margin also improved by 1.0 percentage point.
- First-half operating cash flow increased $241 million year over year, which management attributed mainly to higher earnings and improved working capital, partly offset by higher income tax payments.
- The effective tax rate was 14% in both 2021 periods, compared with 23% in Q2 2020 and 17% in the first half of 2020. A $33 million partial release of a valuation allowance on U.S. foreign tax credit carryforwards contributed to the lower 2021 rate.
Outlook, management commentary, risks and unusual items
- Management said COVID-19’s negative business effects had begun to ease, but continued to monitor the pandemic, including the Delta variant, and ongoing economic conditions. It cited strong LMR backlog and expected video security and access control growth to continue through the rest of 2021; it expected limited remaining-2021 sales and margin effects in S&S.
- The company anticipated a positive business impact from the American Rescue Plan Act as government customers receive funding. These are expectations, not quantified financial guidance.
- Remaining performance obligations were $7.1 billion at July 3, 2021: $3.3 billion in PSI and $3.8 billion in S&S. The company expected to recognize $1.7 billion and $1.5 billion, respectively, over the next 12 months. S&S obligations reflect contract termination-for-convenience provisions.
- Management stated it had adequate resources for expected liquidity needs for at least the next 12 months and the foreseeable future. It had a $2.25 billion revolving credit facility maturing in March 2026, no commercial paper outstanding, and was in compliance with credit covenants. It reported no bond maturities until 2024.
- In May 2021, the company issued $850 million of 2.75% senior notes due 2031 and used part of the proceeds to redeem $324 million principal amount of debt for $341 million. It recorded an $18 million debt-extinguishment loss.
- Other notable charges included $25 million of first-half reorganization charges, including employee separation costs; a $7 million operating lease asset impairment; and higher intangible amortization. The first half of 2020 included a $50 million gain on sale of a European manufacturing facility.
- After quarter-end, Motorola Solutions acquired Openpath for $297 million, net of cash acquired, issued $29 million in restricted stock to certain employees, and may owe earn-out payments tied to 2022 financial targets. It also invested $50 million in Evolv-related equity securities after quarter-end.
- In the Hytera trade-secret and copyright case, the court reduced the jury award from $764.6 million to $543.7 million; prejudgment interest and a forward-looking royalty rate remained to be determined. Hytera’s U.S. affiliates were in bankruptcy proceedings. Recovery timing and amount remain uncertain.
- Other risks include COVID-19 and global economic conditions, supply-chain constraints, foreign exchange and interest-rate exposure, acquisition execution, and the company’s ability to fund obligations and maintain liquidity. Management said no material changes had occurred in interest-rate or foreign-currency risk during the first half.
Important facts for investors to verify
- How much of sales and earnings growth was organic versus attributable to favorable currency and acquisitions, and whether margins remain improved as incentive costs rise.
- Conversion and timing of the $7.1 billion remaining performance obligations, including customer cancellation terms and expected 12-month recognition.
- The sustainability of the 14% effective tax rate after the $33 million valuation-allowance benefit.
- Debt and capital-allocation plans, including the $2.4 billion remaining repurchase authorization, dividend commitments, and post-quarter Openpath funding and earn-out exposure.
- Developments in the Hytera judgment, prejudgment interest, royalty determination, and bankruptcy proceedings, as well as continued COVID-19 and supply-chain effects.