Motorola Solutions, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter ended July 1, 2023; comparisons are with the quarter ended July 2, 2022. Unless noted, amounts are in U.S. dollars.
Business context
Motorola Solutions sells land mobile radio communications (LMR), video security and access control, and command-center software. It reports two segments: Products and Systems Integration, and Software and Services.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $2.403 billion | $2.140 billion | $4.574 billion | $4.032 billion |
| Gross margin | $1.189 billion; 49.5% | $990 million; 46.3% | $2.235 billion; 48.9% | $1.846 billion; 45.8% |
| Operating earnings | $518 million; 21.6% margin | $358 million; 16.7% margin | $917 million; 20.0% margin | $597 million; 14.8% margin |
| Net earnings attributable to Motorola Solutions | $371 million | $228 million | $649 million | $495 million |
| Diluted EPS | $2.15 | $1.33 | $3.76 | $2.88 |
| Operating cash flow | Not separately provided for the quarter | $85 million | $162 million |
Q2 sales rose 12%; operating earnings increased 45%. Both segments grew: Q2 Products and Systems Integration sales were $1.437 billion, up 12%, and Software and Services sales were $966 million, up 13%. Growth included LMR, Video and Command Center. First-half sales increased 13%, and operating earnings rose 54%.
Management attributed improved gross margin mainly to higher sales and pricing, lower direct material costs in Products and Systems Integration, and higher sales in Software and Services. Operating earnings also benefited from improved operating leverage and lower intangible amortization. Results included favorable movements in derivatives and equity-investment valuations, partly offset by foreign-currency losses.
Cash, debt and liquidity
- Cash and cash equivalents were $710 million at July 1, 2023, down from $1.325 billion at December 31, 2022. First-half cash from operations was $85 million; investing activities used $111 million and financing activities used $629 million.
- Management attributed lower operating cash flow year over year mainly to a one-time $70 million cash tax payment related to an intellectual-property reorganization and higher working capital, partly offset by higher earnings.
- Long-term debt was $6.015 billion, with no current portion reported. The $1.0 billion 1.75% convertible notes mature in September 2024. The company also has a $2.25 billion revolving credit facility due March 2026 and reported no commercial paper outstanding.
- The company was in compliance with its credit-facility covenants. Management said cash, operating cash generation, repatriation capacity and available credit arrangements should meet expected liquidity needs. Moody’s upgraded the company’s rating to Baa2 from Baa3 on July 31, after quarter-end.
- First-half capital returns included $364 million of share repurchases and $296 million of common dividends. At quarter-end, $921 million remained under the repurchase authorization.
Outlook, risks and unusual items
- No quantified full-year guidance is provided in the supplied filing text. Management said pricing actions had benefited results and were expected to continue benefiting the second half of 2023. It also expected to keep inventory elevated until supply conditions stabilize.
- Management reported gradual improvement in supply conditions, particularly semiconductor availability, while continuing to cite inflation, component and labor costs, global economic and political conditions, foreign exchange, and supply-chain risks. The company concluded its assets were fairly stated and recoverable at quarter-end.
- The UK Competition and Markets Authority’s Airwave price-control remedies order, adopted July 31, was suspended pending the company’s appeal. The company said that, beginning August 1, Airwave revenue would be recognized under the prospective price control until a successful appeal. The outcome could affect revenue; further appeals may occur.
- A $15 million Q2 charge increased the environmental remediation reserve for a legacy Superfund site to $127 million. The filing reports $4 million as current and the remainder as non-current.
- Hytera made quarterly royalty payments into escrow, but the amounts were de minimis and were not recognized because contingencies remain unresolved. Motorola continues seeking collection of its judgment; appeals and related proceedings remain pending.
- Other notable factors include a first-half effective tax rate of 23%, versus 4% in 2022, when a net deferred tax benefit and other tax items reduced the rate; and reorganization charges, with a $28 million employee-separation accrual at quarter-end.
Important facts for investors to verify
- Whether the Airwave appeal succeeds and how the price-control order affects revenue and contract economics.
- Whether operating cash flow and working capital improve, given the first-half cash-flow decline and continued elevated inventory.
- The company’s ability to refinance or repay the $1.0 billion convertible notes due September 2024 and maintain liquidity and covenant compliance.
- Developments in Hytera litigation and escrowed royalties, environmental remediation estimates, and the company’s ongoing exposure to large government and managed-services contracts.