Motorola Solutions, Inc. — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. This is an annual report, not a standalone fourth-quarter filing. The 2010 financial statements include Motorola Mobility’s businesses; its separation was completed January 4, 2011. From 2011, Motorola Solutions consists of Enterprise Mobility Solutions (EMS). Per-share figures reflect the 1-for-7 reverse split, but not the Motorola Mobility distribution.
Financial performance
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Net sales | $19.282 billion | $18.147 billion |
| Gross margin | $6.898 billion; 35.8% | $5.741 billion; 31.6% |
| Operating earnings (loss) | $789 million; 4.1% margin | $(492) million; (2.7)% margin |
| Continuing-operations earnings (loss), attributable to common shareholders | $254 million; diluted EPS $0.75 | $(367) million; diluted EPS $(1.12) |
| Net earnings (loss), attributable to common shareholders | $633 million; diluted EPS $1.87 | $(51) million; diluted EPS $(0.16) |
| Cash from operating activities, continuing operations | $1.534 billion | Cash used: $95 million |
| Cash and cash equivalents at year-end | $4.208 billion | $2.869 billion |
| Total debt at year-end | $2.799 billion | $3.901 billion |
Net earnings include $379 million of after-tax earnings from discontinued operations; continuing-operations earnings are a more relevant measure of the ongoing business. The filing reports aggregate cash, cash equivalents, and Sigma Fund/short-term investment balances of approximately $8.9 billion at year-end, up from $8.0 billion. Total stockholders’ equity was $10.987 billion, and total assets were $25.577 billion.
Business mix and changes versus prior year
- EMS: Sales of $7.857 billion, up 10%; operating earnings of $949 million versus $736 million. Commercial enterprise sales rose 19% and government/public safety sales rose 5%. EMS was 41% of consolidated sales in 2010 and became the sole continuing segment after the separation.
- Mobile Devices: Sales of $7.819 billion, up 9%, but operating loss narrowed to $76 million from $1.215 billion. Shipments fell 32% to 37.3 million units, while average selling price rose 61%; smartphone shipments reached 13.7 million.
- Home: Sales of $3.641 billion, down 7%; operating earnings improved to $152 million from $16 million.
- Consolidated sales increased 6% after falling 28% in 2009. The gross-margin rate improved 4.2 percentage points. SG&A rose 10% to $3.367 billion, while R&D declined 3% to $2.530 billion.
- Fourth-quarter 2010 sales were $5.663 billion, operating earnings $378 million, continuing-operations earnings $207 million, and net earnings $293 million. Fourth-quarter 2009 figures were $4.786 billion, $88 million, $51 million, and $142 million, respectively.
Liquidity, debt, and other financial matters
- Operating cash generation improved substantially. Year-end cash and equivalents were $4.208 billion, including $1.2 billion in the U.S. and $3.0 billion abroad; restricted cash was $226 million.
- Total debt declined by about $1.1 billion year over year. The company repaid $527 million of notes at maturity and repurchased approximately $500 million principal of long-term debt for $477 million. No common-stock dividends were paid in 2010; the quarterly dividend had been suspended in 2009.
- The new $1.5 billion unsecured revolving credit facility, entered into January 4, 2011, matures June 30, 2014, includes customary leverage and interest-coverage covenants, and had no borrowings at filing. The prior facility was terminated.
- Capital expenditures were $335 million. Pension contributions were $204 million in 2010; management expected approximately $240 million of U.S. and $40 million of non-U.S. pension contributions in 2011. The company retained all U.S. pension liabilities and most non-U.S. pension liabilities after the separation.
Outlook, unusual items, and risks
- Management expected government/public-safety and commercial-enterprise spending to support EMS sales growth in 2011, citing mission-critical communications, public-safety LTE, mobile computing, and data capture opportunities. The filing gives no specific consolidated 2011 revenue or earnings guidance.
- EMS backlog was $2.6 billion at year-end, approximately 77% expected to be recognized as 2011 revenue; management described it as generally firm but subject to change. A $50.6 million grant was awarded for a San Francisco Bay-area public-safety broadband deployment.
- The company targeted closing the sale of most Networks infrastructure assets to Nokia Siemens Networks for $1.2 billion cash in Q1 2011. Closing was delayed, including by pending China antitrust approval; Huawei litigation and a temporary restraining order restricted transfer of confidential information. The sale was not assured. iDEN infrastructure and certain assets and patents were excluded.
- Other charges were $212 million, down from $577 million, including $242 million of separation costs and $100 million of reorganization charges, offset in part by gains from IP/legal settlements and reserve adjustments. Two 2010 IP settlements generated reported pretax gains of $228 million and $94 million; rights to royalties under one settlement transferred to Motorola Mobility.
- 2010 effective tax rate was 60%, principally reflecting tax accruals on foreign earnings, the Medicare Part D tax-law change, and nondeductible separation costs. The company adopted new multiple-deliverable revenue guidance prospectively in 2010; reported sales were $19.282 billion versus $15.953 billion on a pro forma prior-guidance basis, primarily due to smartphone revenue timing. This comparability caveat is significant.
- Management cited risks from uncertain government budgets and macroeconomic conditions, component shortages and single-source suppliers, competition and technology changes, government-contract audits/cancellation, pension funding and investment returns, foreign-exchange exposure, and litigation. Following the separation, Motorola Solutions also faced stranded-cost reduction needs, potential loss of purchasing scale, continuing debt and pension obligations, and uncapped separation-agreement indemnities.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile 2010 results with the post-separation continuing-company baseline; 2010 consolidated sales and earnings include businesses no longer owned.
- Track completion and cash proceeds of the NSN Networks transaction, remaining obligations, and the effect of costs formerly allocated to Networks.
- Assess the sustainability of EMS growth, margins, and backlog conversion, and the progress and execution costs of post-separation restructuring.
- Review the revenue-recognition change’s effect on smartphone-related comparisons and future reported revenue timing.
- Monitor pension contributions, retained liabilities, foreign-held cash and repatriation, debt maturities, and compliance with the new credit facility covenants.
- Follow the disclosed litigation, tax examinations, and separation indemnities; management’s view that pending matters are not expected to be materially adverse does not eliminate the possibility of a material unfavorable outcome.