Motorola Solutions, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. The quarter ended April 1, 2023, compared with the three months ended April 2, 2022. Motorola Solutions sells land mobile radio communications (LMR), video security and access control, and Command Center solutions. It reports two segments: Products and Systems Integration, and Software and Services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $2,171 | $1,892 | +15% |
| Gross margin | $1,046; 48.2% | $857; 45.3% | +22%; +2.9 percentage points |
| Operating earnings | $399; 18.4% margin | $239; 12.6% margin | +67%; +5.8 percentage points |
| Net earnings attributable to Motorola Solutions | $278 | $267 | +4% |
| Diluted EPS | $1.61 | $1.54 | +5% |
| Cash from operating activities | $(8) | $152 | Down $160 |
| Cash and cash equivalents | $1,022 at April 1 | $1,325 at December 31, 2022 | Down $303 during quarter |
| Total debt | About $6,015 | About $6,014 at December 31, 2022 | Substantially unchanged |
Revenue grew in both segments: Products and Systems Integration increased 18% to $1,303 million, and Software and Services rose 10% to $868 million. Growth reflected LMR, Video and Command Center, with unfavorable currency impacts included in reported results. Management attributed stronger gross margin primarily to pricing actions and lower supply-chain costs in Products and Systems Integration; Software and Services margin was pressured mainly by mix. Operating earnings also benefited from increased sales and improved operating leverage.
Cash flow from operations turned negative, primarily due to higher working capital and a one-time $70 million cash tax payment related to a 2022 intellectual-property reorganization. Investing activities used $53 million, versus $557 million in Q1 2022, largely because acquisition and investment spending was lower. Financing activities used $263 million, including $140 million of share repurchases and $148 million of dividends. The company had $1,022 million of cash and $6,015 million of debt at quarter-end; no commercial paper was outstanding. It also had a $2.25 billion revolving credit facility, maturing in March 2026, and reported covenant compliance.
Material changes and notable items
- Net sales increased $279 million year over year. Segment sales growth was broad-based, though the filing reports $45 million of unfavorable currency impact on consolidated sales.
- Income tax expense was $79 million, versus a $49 million benefit in Q1 2022. The effective tax rate shifted to 22% from negative 22%; the prior-year result included a deferred tax benefit related to an intra-group IP transfer and other tax benefits.
- Other charges declined to $69 million from $92 million, including lower intangible amortization and no repeat of prior-year legal settlement charges. Q1 2023 included $13 million of net reorganization charges, including employee separation costs; approximately 290 employees were associated with the new charges.
- Q1 2022 included a $21 million gain on the TETRA Ireland equity-method investment and a $13 million Hytera settlement gain, neither of which recurred in Q1 2023.
- Remaining performance obligations were $9.2 billion at April 1, 2023. The company expects to recognize $2.9 billion of Products and Systems Integration obligations and $1.6 billion of Software and Services obligations over the next 12 months.
Outlook, risks and contingencies
- Outlook: The filing gives no specific full-year revenue or EPS guidance. Management expects Products and Systems Integration growth to continue through 2023 and says Software and Services margins should be relatively insulated by recurring business and backlog. It expects semiconductor supply constraints, inflationary pressures and elevated supply-chain costs to continue during 2023, with demand for products exceeding available semiconductor supply. Management expects pricing actions and American Rescue Plan Act funding to support results during 2023.
- Airwave/CMA: Subsequent to quarter-end, the UK Competition and Markets Authority issued a final decision stating its intent to impose a prospective price control on Airwave. Motorola Solutions disagrees and intends to appeal; the process is expected to extend through 2023. The company tested the Airwave asset group after the decision and concluded the assets were recoverable. Any eventual price control remains a material regulatory and financial uncertainty.
- Hytera litigation: The company continues seeking collection of a court judgment, including damages, interest, costs and attorneys’ fees. Hytera made quarterly royalty payments into escrow, but the amounts were de minimis and will not be recognized until contingencies are resolved and funds released. Appeals and collection remain unresolved.
- Other risks: Management highlights supply availability and costs, foreign currency movements, global economic and political conditions, large multi-year contract performance and funding risks, and regulatory exposure. The filing says there were no material changes to previously disclosed risk factors except for updates concerning large contracts and international operations.
- Liquidity and controls: Management believes available cash, operating cash flows and credit facilities will be sufficient for anticipated needs. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Track operating cash generation and working-capital trends, particularly the cash impact of contract liabilities, payables, inventory and tax payments.
- Monitor semiconductor availability, inventory levels, inflation, pricing effectiveness and whether demand translates into sales and margins.
- Follow the CMA Airwave appeal and any price-control remedies, and assess potential implications for Airwave’s economics and asset recoverability.
- Check developments in Hytera appeals, royalty escrow and collection; do not treat escrowed royalties as recognized revenue.
- Review capital returns and leverage alongside the $1.0 billion convertible notes due in September 2024 and the company’s significant debt balance.