Motorola Solutions, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 29, 2013, compared with the periods ended June 30, 2012. Motorola Solutions provides mission-critical communications products, software, infrastructure and services through Government and Enterprise segments. Dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $2,107 | $2,148 | $4,080 | $4,104 |
| Gross margin | $1,029 (48.8%) | $1,060 (49.3%) | $1,984 (48.6%) | $2,033 (49.5%) |
| Operating earnings | $266 (12.6%) | $278 (12.9%) | $482 (11.8%) | $510 (12.4%) |
| Continuing-operations earnings attributable to common stockholders | $258 | $177 | $450 | $336 |
| Diluted EPS from continuing operations | $0.94 | $0.60 | $1.62 | $1.09 |
| Operating cash flow from continuing operations | Not presented quarterly | $51 | $322 |
- Q2 product sales fell 5% to $1,479; service sales rose 7% to $628. First-half product sales declined to $2,860, while service sales increased to $1,220.
- Government Q2 sales were $1,451, down 1%, while operating earnings increased 9% to $215. Enterprise sales declined 5% to $656, and operating earnings fell 37% to $51. For the first half, Enterprise sales fell 5% and operating earnings fell 47% to $87.
- Q2 net interest expense increased to $32 from $16; first-half expense rose to $57 from $30, mainly due to higher average debt and lower interest income.
- Net earnings benefited from tax benefits: Q2 included a $38 net tax benefit versus $63 tax expense in Q2 2012. Management said Q2’s effective tax rate benefited by $118 from excess foreign tax credits; first-half results also included a $25 benefit from a deferred-tax-liability reversal and a $12 R&D tax benefit. These items materially affect period-to-period earnings comparisons.
Balance sheet, liquidity and capital returns
- At June 29, 2013, cash and cash equivalents were $1,457 and Sigma Fund and short-term investments were $1,759, totaling about $3.2 billion. Long-term debt was $2,452, plus $4 current debt. At December 31, 2012, long-term debt was $1,859, plus $4 current debt.
- Total assets were $12,160, down from $12,679 at year-end; current assets were $6,841 and current liabilities were $2,794. The company had a $1.5 billion revolving credit facility maturing June 30, 2014, with no borrowings and financial covenants in compliance.
- First-half operating cash flow was $51, versus $322 a year earlier. Management cited contract-billing and collection timing, accounts-payable timing, lower operating earnings and a $43 Indian tax deposit. Investing activities provided $308, mainly reflecting $376 of net Sigma Fund and short-term investment sales; financing activities used $341.
- The company issued $600 face amount of 3.5% senior notes due 2023 in Q1, receiving $588 net proceeds. It returned $1.1 billion to shareholders in the first half through $907 of buybacks and $143 of dividends. It repurchased 15.4 million shares at an average $58.75 per share.
- After quarter-end, the board authorized an additional $2.0 billion for repurchases, bringing program authorization to $7.0 billion, and raised the quarterly dividend from $0.26 to $0.31 per share. Management expected to use excess cash for dividends, capital expenditures, repurchases and acquisitions, and anticipated a net-debt position sometime in 2014, depending on market conditions.
Changes, outlook and notable items
- Revenue decreased 2% in Q2 and 1% for the first half. The Enterprise segment’s weakness, including lower iDEN and data-capture sales and reduced customer hardware spending, was partly offset by Government segment growth for the first half and higher service revenue.
- Gross margin contracted, particularly in Enterprise, reflecting lower iDEN sales, product and service mix, and the acquired Psion business’s lower mobile-computing margin profile. Lower pension expense reduced SG&A and helped Government operating earnings.
- Management expected about $20 of savings in the second half of 2013 from reorganization actions initiated in the first half, and approximately $44 of annualized savings thereafter. The first-half actions generated $39 of net charges and involved approximately 700 employee separations; $42 of reorganization accruals remained at June 29.
- No specific revenue or EPS forecast is provided in the supplied filing text. Management said cash, short-term investments and Sigma Fund balances were more than adequate for operating requirements over the next 12 months.
- About $1.1 billion of cash and cash equivalents was held outside the U.S. Management noted that repatriation may be delayed by local approvals or cause adverse cash-tax consequences. After quarter-end, the company paid $150 for previously accrued non-U.S. income and withholding taxes.
- The company reported $43 seized by Indian tax authorities in connection with disputed assessments; it is appealing and believes its reserves are appropriate. Tax examinations may change unrecognized tax benefits, with a possible effective-tax-rate impact ranging from a $50 charge to a $75 benefit and cash payments of $0 to $25 over the next 12 months.
- Management did not expect pending ordinary-course legal matters to have a material adverse effect overall, but noted that unfavorable outcomes could affect results. It also cited potential exposure from certain uncapped contract-damage provisions and indemnities, including patent-related indemnities and uncapped reciprocal obligations with Motorola Mobility.
- Disclosure controls were assessed as effective. The company was continuing a phased global ERP upgrade and expected the second phase to be completed in Q3 2013; management noted process and internal-control transition risks.
Investor verification priorities
- Assess how much of the earnings increase came from tax benefits and whether the favorable tax-rate effect is sustainable.
- Track Enterprise sales and operating earnings, especially iDEN, data capture, customer hardware spending and Psion-related margins.
- Reconcile the sharp year-over-year decline in first-half operating cash flow and monitor working-capital recovery.
- Review debt, the 2014 revolving-facility maturity, capital-return pace and management’s expected transition to net debt.
- Follow the Indian tax dispute, repatriation and related tax payments, pension contributions, reorganization savings, and legal or contractual contingencies.