Motorola Solutions, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended October 1, 2011. Unless stated otherwise, amounts are in millions of U.S. dollars. Results are presented for continuing operations; Motorola Mobility and specified Networks and Wireless Broadband activities are classified as discontinued operations.
Business context and reporting period
Motorola Solutions reported two segments: Government, which sells two-way radios and public-safety systems and related services; and Enterprise, which sells mobile computing, data-capture, wireless-networking and iDEN products and related services. The company completed the distribution of Motorola Mobility in January 2011 and sold certain Networks business assets to Nokia Siemens Networks in April. In August, it agreed to sell its Wireless Broadband businesses to Vector Capital; that sale was pending at quarter-end.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales, continuing operations | $2,105 | $1,908 | $5,969 | $5,498 |
| Gross margin | $1,060; 50.4% | $964; 50.5% | $3,001; 50.3% | $2,737; 49.8% |
| Operating earnings | $253; 12.0% | $211; 11.1% | $580; 9.7% | $477; 8.7% |
| Continuing earnings attributable to common shareholders | $152; diluted EPS $0.45 | $(13); diluted EPS $(0.04) | $567; diluted EPS $1.65 | $78; diluted EPS $0.23 |
| Net earnings, including discontinued operations | $128 | $110 | $974 | $341 |
- Q3 product sales were $1,572 and service sales $533. Sales rose 10% year over year; Government sales increased 9% to $1,379 and Enterprise sales increased 13% to $726.
- For the first nine months, operating cash flow from continuing operations was $803, versus $471 in 2010. Capital expenditures were $103. Investing activities provided $1,172; financing activities used $4,347.
- Cash and cash equivalents were $1,785 at October 1, down from $4,208 at December 31, 2010. The company also reported $4,465 of current Sigma Fund and short-term investments. Management said cash, current investments and the Sigma Fund were adequate for operating needs over the next 12 months. Cash balances include $63 of restricted cash.
- Debt was approximately $2,143, comprising $605 current and $1,538 long-term, compared with $2,703 at year-end 2010. A $1.5 billion revolving credit facility, maturing in 2014, had no borrowings; the company reported covenant compliance.
- Q3 income tax expense was $84, a 35% effective rate, versus $203 and 106% a year earlier. Nine-month continuing results included a $91 tax benefit, substantially reflecting a $244 benefit from reversing part of the U.S. deferred-tax-asset valuation allowance.
Material changes versus prior comparable periods
- Q3 continuing sales increased 10%, and operating earnings rose 20%. Both segments grew sales in all regions; Enterprise growth was led by mobile computing, advanced data capture and wireless LAN products, partly offset by lower iDEN infrastructure sales.
- Q3 gross margin dollars increased, while gross margin percentage was nearly flat year over year. Operating margin improved to 12.0% from 11.1%.
- Q3 continuing earnings improved from a loss to profit, driven principally by stronger operating results and $119 lower income tax expense. The prior-year quarter had an unusually high 106% effective tax rate.
- Nine-month net earnings included $407 of discontinued-operations earnings, compared with $263 in 2010. The 2011 result substantially reflected the Networks transaction, including a $436 pretax net gain recorded during the nine months; Q3 discontinued operations recorded a $24 after-tax loss, including a $52 pretax estimated Networks purchase-price reduction.
- Cash declined substantially from year-end, principally reflecting $3.3 billion of contributions to Motorola Mobility, partly offset by about $1.0 billion of net cash proceeds from the Networks sale. Comparisons with 2010 and year-end are affected by the spin-off, divestitures and discontinued-operations reclassifications.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific consolidated revenue or earnings guidance. Management cited continued Government growth, while noting challenging public-sector budgets, particularly in the U.S. and parts of Western Europe. It highlighted customer interest in public-safety communications, interoperability and spectrum upgrades, and expected continued Enterprise momentum from retail technology investment. Public-safety LTE was described as a strategic growth opportunity.
- Costs and restructuring: Q3 other charges were $60, including $50 of intangible amortization and $10 of reorganization charges. The first nine months included $221 of other charges, including $48 for legal matters and $32 of reorganization charges. Management expected about $6 of cost savings in the remainder of 2011 and approximately $17 of annualized savings thereafter from plans initiated in the first nine months.
- Capital returns and debt: The company repurchased 18.4 million shares for $744 in Q3 at an average $40.38 under a program authorizing up to $2.0 billion through December 2012. It initiated a $0.22 quarterly dividend, paid October 14, 2011. It repurchased $540 principal of long-term debt for $615 and recorded an $81 debt-extinguishment loss; management expected to repay $600 of 8.0% notes in Q4 2011.
- Transaction and tax uncertainty: The Networks sale remained subject to a purchase-price adjustment; an additional estimated $52 reduction was recorded in Q3. The company had $223 of unrecognized tax benefits and said examination outcomes could change within 12 months; estimated potential net tax impact ranged from a $50 charge to a $100 benefit, with cash payments of $0–$50.
- Business and legal risks: Management identified Thailand flooding as a potential disruption to raw-material and component supply, with possible material adverse effects. The company also cited competitive technology change, customer spending and inventory-obsolescence risk, foreign exchange and capital-market risks, and ongoing litigation. Management did not expect pending matters to materially harm overall results, but noted an unfavorable resolution could materially affect the period resolved. A securities class action had a trial date set for April 2012. The filing also describes uncapped reciprocal indemnities with Motorola Mobility and potential intellectual-property indemnity exposure.
- Other: The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Networks sale’s final purchase-price adjustment differs from the $52 Q3 estimate, and the status and proceeds of the pending Wireless Broadband sale.
- How much of reported earnings growth reflects ongoing operations versus the $244 tax valuation-allowance benefit and discontinued-operation sale gains.
- Cash availability and repatriation costs, given that most cash was held outside the U.S., alongside the planned $600 debt repayment and remaining Motorola Mobility funding obligation.
- Whether Government budget conditions, Enterprise demand and Thailand-related component supply disruption affect sales, margins or delivery schedules.
- Progress on share repurchases, dividend payments, restructuring savings, tax examinations and significant litigation.