Motorola Solutions, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023; comparisons are with the quarter ended October 1, 2022. Unless noted, amounts are in millions of dollars. The company provides mission-critical communications, video security and access control, and command-center software and services.
Financial performance
| Metric | Q3 2023 | Q3 2022 | First nine months 2023 | First nine months 2022 |
|---|---|---|---|---|
| Revenue | $2,556 | $2,373 | $7,129 | $6,405 |
| Gross margin | $1,280; 50.1% | $1,031; 43.4% | $3,515; 49.3% | $2,878; 44.9% |
| Operating earnings | $639; 25.0% | $373; 15.7% | $1,556; 21.8% | $970; 15.1% |
| Net earnings attributable to Motorola Solutions | $464 | $279 | $1,113 | $774 |
| Diluted EPS | $2.70 | $1.63 | $6.46 | $4.50 |
| Operating cash flow | Not provided for the quarter | $799 | $550 |
Q3 revenue rose 8%; operating earnings rose 71%. For the first nine months, revenue grew 11% and operating earnings 60%. Segment revenue in Q3 was $1,612 for Products and Systems Integration (up 5%) and $944 for Software and Services (up 12%). Across the first nine months, segment revenue was $4,352 (up 11%) and $2,777 (up 12%), respectively. Growth reflected LMR, Video and Command Center demand, acquisitions and favorable currency; Airwave revenue deferral partly offset Software and Services growth.
Q3 gross-margin expansion reflected higher sales, lower direct material costs, and the absence of a $147 million UK Emergency Services Network (ESN) asset impairment recorded in Q3 2022. Lower intangible amortization and improved operating leverage also supported operating earnings. These comparisons therefore include a significant nonrecurring prior-year charge.
Cash, debt and liquidity
- Cash and cash equivalents were $910 at September 30, 2023, down from $1,325 at December 31, 2022. Nine-month cash flow was $799 from operations, $172 used in investing and $1,043 used in financing; cash declined by $415.
- Total debt was $6,017, comprising $1,313 current and $4,704 long-term, versus $6,014 at year-end 2022. The current portion includes $1.0 billion of 1.75% convertible notes and $313 million of 4.0% senior notes, both due September 2024.
- The company reported a $2.25 billion revolving credit facility maturing in March 2026, no commercial paper outstanding, and compliance with credit-facility covenants. It stated that it expects adequate liquidity and capital-market access.
- During the first nine months, the company repurchased $686 of stock and paid $443 in dividends. Remaining repurchase authorization was approximately $599 at quarter-end.
Outlook, risks and notable items
- Airwave/CMA: The UK Competition and Markets Authority adopted a prospective price-control remedy, which the company is appealing. The remedy was suspended pending the appeal, but the company began deferring Airwave revenue from August 1, 2023 in accordance with the control. Management estimated an approximately $80 million year-over-year Airwave revenue reduction in 2023, partly offset by ongoing services and favorable foreign exchange. The appeal hearing occurred in August; further appeals may follow. Airwave assets were assessed as recoverable.
- Demand and operations: Management reported gradual improvement in pandemic-related supply conditions, particularly semiconductor availability, and said pricing actions helped mitigate inflation. It expects elevated inventory until supply stabilizes and cited ongoing supply-chain, cost, global economic and political risks. The filing notes that results are historically higher in Q4; it does not provide a clear full-year earnings or revenue guidance figure.
- Backlog: Remaining performance obligations were $9.3 billion at quarter-end. The company expected to recognize $3.1 billion from Products and Systems Integration and $1.5 billion from Software and Services over the next 12 months. Software and Services obligations may exclude cancellable contract periods.
- Hytera litigation: Hytera paid $56 million into escrow in September following a contempt ruling, in addition to de minimis quarterly royalty payments. The company will not recognize escrowed amounts until contingencies are resolved and funds are released. Appeals remained pending, with oral argument scheduled for December 5, 2023.
- Other items: A $15 million environmental reserve charge increased the Superfund remediation reserve to $127 million. Nine-month reorganization charges were $22 million, including severance costs affecting approximately 560 employees. The nine-month effective tax rate was 22%, versus 9% a year earlier, when a $77 million deferred tax benefit from an intra-group IP transfer reduced the prior-year rate.
Important facts for investors to verify
- Outcome and timing of the Airwave price-control appeal, and resulting revenue, cash-flow and asset implications.
- 2024 refinancing, repayment or conversion plans for the $1.313 billion of debt classified as current.
- Whether operating cash flow remains strong after working-capital movements, cash taxes and shareholder returns.
- Progress in Hytera appeals and whether escrowed royalties or judgment proceeds are ultimately released and recognized.
- Supply-chain and inventory normalization, the durability of pricing and margin improvements, and the extent to which year-over-year earnings growth reflects the nonrecurrence of the 2022 ESN impairment.