Motorola Solutions, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 1, 2017; comparable periods ended July 2, 2016. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context and results
Motorola Solutions provides mission-critical communications products, software and services to government, public safety and commercial customers. Its two segments are Products (devices and systems) and Services (integration, managed and support services, and legacy iDEN services).
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $1,497 | $1,430 | $2,777 | $2,623 |
| Gross margin | $690; 46.1% | $676; 47.3% | $1,260; 45.4% | $1,179; 44.9% |
| Operating earnings | $257; 17.2% | $224; 15.7% | $433; 15.6% | $323; 12.3% |
| Net earnings attributable to Motorola Solutions | $131 | $107 | $208 | $124 |
| Diluted EPS | $0.78 | $0.61 | $1.23 | $0.71 |
Q2 Products sales were $848 million, up 6%, and Services sales were $649 million, up 3%. Segment operating earnings were $168 million for Products (up 30%) and $89 million for Services (down 6%). For the first half, Products sales rose 3% and Services sales rose 9%; segment operating earnings increased to $257 million and $176 million, respectively.
Cash flow, debt and liquidity
- First-half operating cash flow was $315 million, versus $304 million a year earlier. Investing used $189 million and financing used $385 million; cash and cash equivalents declined $225 million to $805 million, including $63 million of restricted cash.
- First-half capital expenditures were $121 million. The company returned $412 million to shareholders through $258 million of share repurchases and $154 million of dividends.
- Total debt was approximately $4.47 billion at July 1, 2017, including $46 million current and $4.42 billion long-term. Stockholders’ equity was a deficit of $976 million.
- A new $2.2 billion unsecured revolving credit facility matures in April 2022. There were no borrowings or letters of credit under it in the first half, and the company reported compliance with its financial covenants.
- Commitments to provide long-term customer financing were $209 million, up from $125 million at year-end 2016.
Changes, outlook and notable items
- Q2 revenue increased 5%; first-half revenue increased 6%. Higher sales and lower other charges lifted operating earnings and net income. EPS growth also benefited from fewer shares outstanding after repurchases.
- Q2 gross margin percentage declined year over year, reflecting product mix (more lower-margin Systems sales) and unfavorable foreign exchange effects on Airwave. First-half gross margin percentage improved, supported by favorable Products mix and Services managed-support growth.
- Management said Services is growing faster than Products and expects that growth to support operating-margin expansion. It highlighted continued investment in software and managed services, including opportunities related to Next Generation 9-1-1 and Public Safety LTE. The filing provides no specific numerical full-year earnings or revenue guidance; results are not necessarily indicative of the full year, and management notes historically higher fourth-quarter revenue.
- Other charges included $25 million of first-half non-U.S. pension settlement losses and $73 million of intangible amortization. These were partly offset by a $44 million net legal-settlement gain, including $42 million recovered from a former customer. Reorganization charges were $22 million in the first half, versus $67 million in the prior-year period.
- Interexport was acquired in March for approximately $147 million gross purchase price, including assumed liabilities. The company announced planned acquisitions of Kodiak Networks and, after quarter-end, Plant Holdings, owner of Airbus DS Communications; completion of Kodiak was expected later in 2017.
- Management cited continuing political and economic uncertainty, including Brexit and conditions in parts of Latin America and Europe. The new ERP system was implemented in April; migration continues, and the filing identifies system disruption, cybersecurity and implementation risks. Management said disclosure controls were effective and no material control changes occurred other than those related to ERP implementation.
- Revenue-standard adoption is planned for January 1, 2018 using the modified retrospective method. Management expects devices in certain percentage-of-completion contracts to be recognized earlier, but did not expect a significant acceleration under currently existing contract patterns.
Key facts for investors to verify
- Whether Services growth and operating-margin expansion continue, particularly given Q2 Services earnings weakness and foreign-exchange exposure.
- Cash conversion and working-capital effects: management said first-half operating cash flow was affected by a temporary working-capital increase related to ERP implementation.
- Debt, pension obligations, negative book equity, and the company’s ability to maintain capital returns while funding acquisitions and customer financing commitments.
- Actual costs, timing and integration outcomes for announced and completed acquisitions, and the remaining pension-settlement payments and reorganization accruals.
- Potential impact of ERP migration, cybersecurity or other systems disruption; the company also disclosed legal matters and rare customer contracts whose damages could exceed contract revenue.
- Revenue-recognition transition effects and the extent to which reported growth reflects acquisitions, core growth, currency movements and any future share repurchases.