Motorola Solutions, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. The quarter and six-month period ended July 4, 2015. Motorola Solutions provides mission-critical communications products and services through its Products and Services segments. Comparisons are with the periods ended June 28, 2014. The prior-year results include the Enterprise business as discontinued operations; that business was sold in October 2014.
Financial performance
- Revenue: Q2 net sales were $1.368 billion, down 2% from $1.393 billion. First-half sales were $2.591 billion, down 1% from $2.622 billion. Q2 Products sales were $867 million (down 2%); Services sales were $501 million (down 1%). Management cited unfavorable currency effects, partially offset by North American growth.
- Margins and operating earnings: Q2 gross margin was $648 million, or 47.4% of sales, versus $656 million, or 47.1%. First-half gross margin was $1.196 billion, or 46.2%, versus $1.233 billion, or 47.0%. Operating earnings were $254 million in Q2 (18.6% margin), versus $138 million (9.9%); first-half operating earnings were $373 million (14.4%), versus $245 million (9.3%). Lower SG&A and R&D spending and a pension curtailment gain contributed to the improvement.
- Profit and EPS: Q2 earnings from continuing operations attributable to Motorola Solutions were $150 million, or $0.72 diluted EPS, versus $78 million, or $0.30. First-half continuing-operations earnings were $238 million, or $1.11 diluted EPS, versus $163 million, or $0.63. Q2 net earnings were $142 million versus $824 million; first-half net earnings were $217 million versus $951 million. The prior-year net income comparisons include large discontinued-operations gains and tax benefits: $746 million for Q2 and $788 million for the first half. Q2 2015 discontinued operations recorded an $8 million loss; the first-half loss was $21 million.
- Cash flow and capital returns: First-half cash from continuing operating activities was $291 million, up from $130 million. Capital expenditures were $81 million. Cash and cash equivalents fell to $3.112 billion from $3.954 billion at year-end, primarily reflecting $938 million of share repurchases and $148 million of dividends. The company repurchased 14.5 million shares in the first half at an average $64.69 per share.
- Debt and liquidity: Long-term debt, including current portion, was approximately $3.397 billion, broadly unchanged from year-end. Current assets were $5.632 billion and current liabilities $1.971 billion. The $2.1 billion revolving credit facility was undrawn, and the company reported compliance with its financial covenants.
Material changes and management outlook
- Q2 sales were affected by an estimated $53 million of unfavorable currency impact; North America contributed $42 million of growth. Management said currency effects on earnings were largely offset by favorable effects on costs and expenses.
- Management attributed lower SG&A and R&D to cost reductions, headcount actions, lower pension costs, and favorable currency. It expected to reduce SG&A and R&D expenses in 2015 by approximately $175 million versus 2014.
- First-half Services gross margin weakened, principally due to lower-margin deployment of large integration projects and declining, higher-margin iDEN services. Management expects iDEN sales to continue declining as contracts expire and technology is replaced. It expects growth in software maintenance, managed services, and Smart Public Safety solutions, and expects consolidated operating margins to continue expanding.
- Reorganization charges were $30 million in the first half, including employee separation and exit costs. Management estimated approximately $16 million of savings in the second half of 2015 and approximately $32 million in annualized savings beyond 2015 from plans initiated in the first half.
- After quarter-end, the board authorized a modified Dutch auction tender offer for up to $2 billion of shares. The company also agreed to issue $1 billion of 2% convertible notes due 2020 to Silver Lake Partners, at an initial conversion price of $68.50 per share; closing was expected August 25, 2015. These were announced transactions, not completed as of the quarter-end.
- Management notes that revenue has historically been higher in the fourth quarter. The filing does not provide a numerical full-year revenue or earnings forecast.
Risks, contingencies and unusual items
- Q2 operating results benefited from a $32 million non-U.S. pension curtailment gain; first-half earnings also included a $50 million net gain on sales of investments and businesses. These items affect comparability.
- Foreign-exchange movements, declining iDEN demand, and project mix in Services may pressure revenue or margins. Management also cautioned that capital-market disruption could raise funding costs or limit access to financing.
- The company disclosed customary litigation and indemnification matters; management did not expect pending legal matters to materially affect results, financial position, or liquidity, while noting an adverse outcome could do so. Certain customer contracts may expose the company to damage claims exceeding contract revenue. No accruals for the disclosed indemnification obligations were recorded at quarter-end.
- The company had $1.5 billion of foreign earnings intended to remain permanently reinvested; future repatriation could require additional tax. Management reported effective disclosure controls and no material quarter changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the $2 billion tender offer and $1 billion convertible-note issuance closed as expected, and their effect on cash, debt, and diluted share count.
- Whether sales stabilize despite currency headwinds and continued iDEN declines, and whether Services project mix improves.
- Whether cost savings and margin expansion persist after excluding the pension curtailment gain and other investment-related gains.
- Whether operating cash generation can support dividends and repurchases while preserving liquidity and investment-grade credit metrics.
- How the effective tax rate, foreign-currency exposure, and potential customer-contract or legal contingencies develop.