Motorola Solutions, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 28, 2014; comparisons are with the periods ended June 29, 2013. Amounts are in millions except per-share data. Following the planned sale, Enterprise is reported as discontinued operations for all periods presented; continuing-operation revenue and results therefore exclude Enterprise.
Business context and reporting period
Continuing operations comprise Products (public-safety and commercial communications products and software) and Services (integration, support, managed and solutions services). The company agreed to sell its Enterprise business to Zebra Technologies for $3.45 billion in cash; closing was expected by year-end 2014. Certain assets, including iDEN, and specified other assets and liabilities are excluded and retained.
Financial performance
| Metric | Q2 2014 | Q2 2013 | H1 2014 | H1 2013 |
|---|---|---|---|---|
| Net sales | $1,393 | $1,497 | $2,622 | $2,893 |
| Gross margin | $656; 47.1% | $750; 50.1% | $1,233; 47.0% | $1,443; 49.9% |
| Operating earnings | $138; 9.9% | $203; 13.6% | $245; 9.3% | $376; 13.0% |
| Continuing earnings attributable to Motorola Solutions | $78 | $223 | $163 | $380 |
| Diluted EPS, continuing operations | $0.30 | $0.81 | $0.63 | $1.37 |
| Net earnings attributable to Motorola Solutions | $824 | $258 | $951 | $450 |
| Diluted EPS, total | $3.22 | $0.94 | $3.70 | $1.62 |
Discontinued operations contributed $746 million of Q2 and $788 million of first-half earnings, principally due to a $721 million tax benefit recognizing a deferred tax asset related to Enterprise. Management expected a tax expense upon the anticipated sale to substantially offset this benefit on a year-to-date basis; reported total earnings and EPS are therefore not representative of continuing operating performance.
Segment results: Q2 Products sales were $887 million (down 10%) and operating earnings $95 million (down 24%); Services sales were $506 million (down 1%) and operating earnings $43 million (down 45%). First-half Products sales were $1.64 billion (down 14%) and operating earnings $134 million (down 42%); Services sales were $982 million (down 1%) and operating earnings $111 million (down 23%).
Cash flow, liquidity and capital
- First-half cash from continuing operating activities was $130 million, versus $100 million used in the prior-year period. Continuing investing activities used $48 million; continuing financing activities used $438 million.
- Cash and cash equivalents were $2.876 billion at June 28, down from $3.225 billion at year-end 2013. Total debt was approximately $2.45 billion, including $4 million current; management reported investment-grade ratings.
- The company returned $631 million in the first half through $473 million of share repurchases and $158 million of dividends. It repurchased 7.1 million shares at an average $66.88 and had approximately $1.3 billion of authorization remaining.
- A new $2.0 billion unsecured revolving facility replaced the former $1.5 billion facility and matures in May 2019. No borrowings were outstanding under either facility, and the company was covenant-compliant.
- Outstanding commitments to provide long-term customer financing rose to $166 million from $50 million at year-end. Cash included $1.7 billion in the U.S. and approximately $1.2 billion abroad; $64 million was restricted.
Material changes and management commentary
- Q2 continuing sales declined 7%; first-half sales fell 9%. Management attributed the largest declines to Products, particularly North American ASTRO equipment and PCR sales and lower APME sales. Fewer ASTRO device sales following narrowbanding contributed. Services sales were comparatively stable, but profitability weakened.
- Gross margin declined as a percentage of sales, reflecting lower ASTRO margins as sales shifted from subscribers to infrastructure with more third-party equipment, product and segment mix, and lower-margin-project mix in Services. Lower iDEN service sales also weighed on mix.
- SG&A and R&D spending fell, primarily due to prior headcount reductions and lower compensation; R&D also reflected reduced spending on programs such as iDEN. Q2 included $34 million of other charges, including $25 million of reorganization charges and an $8 million legal settlement. First-half reorganization charges were $38 million; a $21 million building-and-land gain partly offset first-half other charges.
- Productivity plans were expected to deliver about $23 million of savings in the remaining six months of 2014 and approximately $37 million in annualized savings thereafter. First-half plans involved separation costs for approximately 600 employees; the remaining reorganization accrual was $85 million.
- Management intended to return Enterprise sale proceeds to shareholders in a timely manner after closing. On July 31, 2014, the board raised the quarterly dividend from $0.31 to $0.34 per share.
Risks, contingencies and unusual items
- The Enterprise transaction remained pending and subject to closing; its timing, tax consequences and intended proceeds distribution were forward-looking expectations. Management anticipated a sale-related tax expense substantially offsetting the Q2 deferred-tax benefit.
- Global tax audits and uncertain tax positions could change. Unrecognized tax benefits were $120 million; management estimated the next-12-month effective-tax-rate impact could range from a $50 million charge to a $50 million benefit, with cash payments not expected to exceed $25 million. Management cautioned that adverse tax-dispute outcomes could materially affect results, liquidity or financial position.
- Legal proceedings were described as ordinary-course matters and not expected by management to have a material adverse effect, although unfavorable resolutions could be material in the periods resolved. The filing also describes potential uncapped contractual damage claims and uncapped reciprocal indemnities related to the Motorola Mobility separation.
- Foreign-exchange contracts had $867 million of notional exposure. Management said they generally offset underlying exposures; market access, currency movements, foreign-cash repatriation and pension funding remain relevant risks. The company made a subsequent planned $40 million U.S. pension contribution.
- Disclosure controls were deemed effective. The phased ERP upgrade continued; management said phases implemented in the first half had not significantly changed internal controls, while future phases could involve process and control redesign.
Most important facts for investors to verify
- Whether and when the Zebra Enterprise sale closed, the final cash proceeds and retained assets or liabilities, and the resulting tax impact.
- Underlying continuing-operation sales, gross margins and segment profitability, especially recovery in North American ASTRO/PCR and Services project margins.
- Whether projected reorganization savings are realized and how restructuring charges, severance payments and the $85 million accrual develop.
- Cash generation, cash availability across jurisdictions, customer-financing commitments, pension contributions and planned capital returns.
- Developments in tax examinations, legal matters, contractual indemnities and ERP implementation controls.