Motorola Solutions, Inc. annual report, FY2015

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Motorola Solutions, Inc. — FY2015 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results; full-year comparisons below are primarily against FY2014.

Business context

Motorola Solutions provides mission-critical communications equipment, software and services to government, public-safety and commercial customers. Its two segments are Products (65% of FY2015 sales) and Services (35%). The U.S. federal government was its largest customer, at approximately 8% of sales; North America represented 65% of sales.

Financial performance and liquidity

  • Revenue: FY2015 net sales were $5.695 billion, down 3% from $5.881 billion. Products sales were $3.676 billion, down 3%; Services sales were $2.019 billion, down 3%.
  • Profitability: Gross margin was $2.719 billion (47.7% of sales), versus $2.831 billion (48.1%) in 2014. Operating earnings were $994 million (17.5% margin), compared with an operating loss of $1.006 billion in 2014. Continuing-operations earnings attributable to common shareholders were $640 million, or $3.17 diluted EPS, versus a $697 million loss, or $(2.84) per share.
  • Net earnings: $610 million attributable to common shareholders, compared with $1.299 billion in 2014. The prior-year result included $1.996 billion of discontinued-operations earnings, primarily related to the Enterprise business sale; FY2015 discontinued operations recorded a $30 million loss.
  • Cash flow and investment: Cash from continuing operating activities was $1.005 billion, versus $685 million used in 2014. Capital expenditures were $175 million. Pension contributions fell to $13 million from $1.3 billion in 2014.
  • Liquidity and debt: Cash and cash equivalents were $1.980 billion, down from $3.954 billion. Total debt was $4.390 billion, up from $3.400 billion; stockholders’ equity was a $96 million deficit. The company had a $2.1 billion undrawn revolving credit facility and reported compliance with its covenants at year-end.
  • Capital returns: The company repurchased approximately 48.0 million shares for $3.2 billion and paid $277 million in dividends. It declared $1.43 per share in dividends for the year; the quarterly dividend was raised to $0.41 in November.
  • Backlog: $6.475 billion at year-end, up 12% from $5.776 billion. Management estimated that about 52% of Products backlog and 22% of Services backlog would be recognized as revenue in 2016.

Fourth-quarter results

Q4 2015 net sales were $1.682 billion, compared with $1.824 billion in Q4 2014. Operating earnings were $390 million, versus an operating loss of $1.458 billion in the prior-year quarter, which included a large pension settlement charge. Q4 2015 earnings from continuing operations attributable to common shareholders were $277 million, or $1.56 diluted EPS; net earnings attributable to common shareholders were $279 million, or $1.57 per diluted share.

Changes, outlook and notable items

  • Revenue declined amid foreign-exchange headwinds and weaker macroeconomic conditions, particularly in Latin America and Eastern Europe; North America grew. Services margins were pressured by lower-margin integration projects and declining, higher-margin legacy iDEN services.
  • The operating-profit improvement largely reflects the absence of the $1.9 billion 2014 U.S. pension settlement charge, alongside lower SG&A and R&D expenses. FY2015 included $117 million of reorganization charges, including a $31 million corporate-aircraft impairment, partly offset by a $32 million non-U.S. pension curtailment gain and $107 million of gains on investment sales.
  • Management expected approximately $150 million of additional organic SG&A and R&D reductions in 2016, and forecast Services to grow faster than Products, with the revenue mix continuing to shift toward Services. It expected consolidated operating margins to continue expanding, despite Services’ lower gross-margin percentage.
  • Management identified public-safety LTE, Managed & Support services, and software and smart-public-safety solutions as growth areas. It also expected continued decline in iDEN revenue. FirstNet deployment timing and procurement structure remained uncertain.
  • On February 19, 2016, after year-end, the company acquired Airwave, a UK public-safety network operator, for a reported net purchase price of approximately $1.1 billion. Funding included a $675 million term loan and international cash; approximately $90 million was deferred consideration.

Principal risks and contingencies

  • Foreign-exchange movements, weak economic conditions, commodity-price declines, customer budget constraints and possible order deferrals could pressure sales and margins.
  • Government contracts may be cancelled, audited or competitively rebid. Fixed-price and long-term projects carry execution, cost-estimation, subcontractor and performance risks.
  • Cybersecurity incidents, dependence on suppliers and outsourced operations, single-source components, and ERP transition execution could disrupt operations or customer services.
  • FirstNet’s implementation, spectrum regulation, LTE deployment choices and competition from carriers, telecom providers and other technology vendors could affect growth opportunities.
  • Debt increased and two rating agencies downgraded the company’s ratings in 2015; the company also disclosed risks related to refinancing, convertible-note settlement, and access to performance bonds. Pension obligations remain substantial and underfunded.
  • Other exposures include tax audits and repatriation restrictions, intellectual-property claims, divestiture-related obligations and ordinary-course legal proceedings. Management did not expect pending legal matters to have a material adverse effect, while acknowledging an unfavorable resolution could be material.

The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.

Important facts for investors to verify

  • Whether 2016 expense reductions and the projected margin expansion are achieved without impairing product development or service delivery.
  • How Airwave affects debt, cash generation, Services growth and integration costs after acquisition.
  • Whether the record backlog converts to revenue on the expected schedule and at sustainable margins.
  • Progress and funding decisions for FirstNet and public-safety LTE, alongside continued iDEN declines.
  • Debt and credit-rating developments, pension funding needs, and the company’s capacity to sustain dividends and share repurchases.