Motorola Solutions, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 28, 2013; comparisons are to the periods ended September 29, 2012. Dollar amounts are in millions unless stated otherwise.
Business context and results
Motorola Solutions provides mission-critical communications infrastructure, devices, software and services. Its Government segment accounted for 69% of Q3 sales; Enterprise accounted for 31%.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $2,112 | $2,153 | $6,192 | $6,257 |
| Gross margin | $1,043 (49.4%) | $1,087 (50.5%) | $3,028 (48.9%) | $3,120 (49.9%) |
| Operating earnings | $320 (15.2%) | $324 (15.0%) | $802 (13.0%) | $833 (13.3%) |
| Net earnings attributable to Motorola Solutions | $307 | $206 | $757 | $545 |
| Diluted EPS | $1.16 | $0.72 | $2.77 | $1.80 from continuing operations |
| Operating cash flow, continuing operations | Not separately stated for the quarter | $203 | $504 |
Financial position and liquidity
- At September 28, cash and cash equivalents were $1.721 billion, and Sigma Fund and short-term investments were approximately $1.169 billion; management described the combined balance as approximately $2.9 billion.
- Total debt was approximately $2.462 billion, up from $1.863 billion at December 31, 2012. The increase principally reflects issuance of $600 million face value of 3.500% senior notes due 2023. The company had no borrowings under its $1.5 billion revolving facility and was in covenant compliance; the facility matures June 30, 2014.
- Current assets were $6.580 billion and current liabilities $2.840 billion. Cash increased $253 million during the first nine months, while cash plus Sigma Fund and short-term investments declined by $713 million from year-end, largely reflecting shareholder returns.
- Capital returned in the first nine months totaled approximately $1.5 billion: $1.332 billion of repurchases and $212 million of dividends. The quarterly dividend increased from $0.26 to $0.31 per share. Approximately $2.1 billion of repurchase authorization remained.
Material changes and management commentary
- Q3 revenue fell 2%. Government sales decreased 4% to $1.465 billion, while Enterprise sales rose 2% to $647 million. Nine-month revenue declined 1% overall; Government was approximately flat and Enterprise fell 2%.
- Q3 gross margin declined mainly because of Government product and product/service mix. For the nine-month period, lower Enterprise margins reflected lower iDEN sales, lower data-capture margins and a higher mix of lower-margin Psion products.
- Q3 net earnings increased substantially despite lower sales, chiefly because the effective tax rate fell to 5% from 36%, and pension expense decreased. The company recorded a $96 million Q3 tax benefit related to excess foreign tax credits. The nine-month tax benefit was $224 million from those credits, plus a $25 million benefit from a change in the treatment of certain foreign earnings and $14 million of prior-year R&D tax credits. These items materially affect comparison of reported earnings.
- Operating cash flow for the first nine months fell to $203 million from $504 million. Management cited timing of contract milestone billings and receivable collections, accounts payable timing, lower operating earnings and $43 million of Indian tax deposits, partly offset by $218 million lower pension contributions.
- The company issued $600 million face value of 3.500% senior notes due 2023 in Q1. It repurchased approximately 23 million shares at an average $58.05 per share in the first nine months.
Outlook, risks and unusual items
- No specific full-year revenue or EPS guidance is provided in the supplied filing text. Management said it expects to use excess cash over the next 12 months for dividends, capital expenditures, and a combination of repurchases and acquisitions; it expects the capital structure could move to net debt during 2014, depending on market conditions.
- Productivity actions generated $71 million of net reorganization charges in the first nine months, including employee separation and exit costs. Management expects approximately $14 million of savings in the remaining three months of 2013 and approximately $82 million of annualized savings thereafter. A $61 million reorganization accrual remained at quarter-end.
- Approximately $1.2 billion of cash was held outside the U.S. Management noted that repatriation can involve delays and potential tax costs. It repatriated $141 million during the first nine months.
- Indian tax authorities seized $43 million from a subsidiary in Q1 in connection with tax and interest assessments under review. The company appealed and said it believes it will prevail.
- Potential exposures include ongoing tax audits and legal proceedings, indemnification obligations (including uncapped obligations under agreements with Motorola Mobility), and rare customer contracts where damages could exceed contract revenue. Management did not expect pending matters to materially harm the company overall, but noted unfavorable resolutions could have material period-specific effects.
- Foreign-exchange contract notional amounts were $762 million, up from $523 million at year-end. Management said gains and losses generally offset underlying exposures. The ERP-system upgrade’s second phase was expected to finish in Q1 2014; management reported effective disclosure controls and no material control changes during the quarter.
Important facts for investors to verify
- How much reported earnings growth is attributable to tax benefits, and what tax rate and cash-tax profile are sustainable after 2013?
- Whether operating cash flow recovers as contract billing, collections and payables timing normalize.
- Whether the expected $82 million annualized reorganization savings are achieved, and how they compare with remaining restructuring costs.
- Whether Government demand, including U.S. federal orders, and Enterprise demand for data capture, WLAN and iDEN products improve or weaken.
- Debt and liquidity requirements around the June 2014 revolving-facility maturity, the expected net-debt position, and continued shareholder returns.
- Outcomes of the Indian tax dispute, global tax examinations, and other legal or contractual contingencies.