Motorola Solutions, Inc. — Q1 2020 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 28, 2020, compared with the three months ended March 30, 2019. Motorola Solutions reports Products and Systems Integration and Software and Services segments. Unless otherwise noted, amounts are in millions of dollars.
Financial performance and position
- Revenue: Net sales were $1,655, essentially unchanged from $1,657. Product sales fell to $884 from $945; services sales rose to $771 from $712.
- Profit and margins: Gross margin was $787 (47.6% of sales), up from $773 (46.7%). Operating earnings rose 13% to $259, or 15.6% of sales, from $229, or 13.8%. Net earnings attributable to Motorola Solutions increased to $197 from $151; diluted EPS was $1.12 versus $0.86.
- Segments: Products and Systems Integration sales declined 7% to $993; operating earnings fell to $92 from $108, with operating margin of 9.3% versus 10.1%. Software and Services sales grew 13% to $662; operating earnings increased to $167 from $121, with margin of 25.2% versus 20.6%.
- Cash flow: Operating cash flow was $308, up from $251, primarily due to favorable working-capital timing. Investing activities used $26, compared with $432 used in the prior-year quarter, which included significant acquisition spending. Financing activities provided $439, including an $800 revolver draw. Cash increased $671 to $1,672.
- Liquidity and debt: Total debt was approximately $5.9 billion, including $800 outstanding under the $2.2 billion revolving credit facility; $1.4 billion of facility capacity remained. Cash was $1.7 billion. The company reported covenant compliance and no commercial paper outstanding. Current debt on the balance sheet rose to $814 from $16; long-term debt was $5,111, roughly unchanged from $5,113.
- Capital returns: The company repurchased $253 of shares and paid $109 in dividends. It declared a quarterly dividend of $0.64 per share, compared with $0.57 a year earlier; $1.0 billion of repurchase authorization remained.
Material changes and unusual items
- Software and Services growth, including maintenance, managed services, video security and command-center software, offset weakness in Products and Systems Integration, particularly professional commercial radio devices. Acquisitions contributed $48 of revenue, and unfavorable currency rates reduced sales by $7.
- Operating earnings included a $50 gain from selling a European manufacturing facility. Other charges were $19, down from $55, partly reflecting that gain; the quarter also included $18 of net reorganization charges.
- Hytera-related legal expenses were $25, compared with $10 in the prior-year quarter. A jury awarded Motorola Solutions $764.6 in its trade-secret and copyright case; Hytera filed a motion for a new trial after the quarter. The filing does not report the award as recognized revenue or earnings.
- Foreign-currency translation produced a $138 loss in other comprehensive income, contributing to total comprehensive income of $72 versus $193 in the prior-year quarter.
- The company drew $800 on its revolver as a precaution amid COVID-19-related financial-market turmoil. It also acquired a cybersecurity services business for $40, including $33 cash net of cash acquired. A proposed $37 cash acquisition of IndigoVision was expected to close in Q2, subject to customary conditions.
Outlook, commentary and risks
The filing provides no quantified full-year earnings or revenue guidance. Management expected COVID-19 to have its largest segment impact in Q2: reduced demand, especially in professional commercial radio, and delayed customer engagements were expected to contribute to year-over-year 2020 sales declines in Products and Systems Integration. Management expected Software and Services to be relatively more resilient given recurring revenue and backlog, and expected video-security devices to grow for fiscal 2020. The company said it was reducing expenses, including variable compensation, travel and contractor costs, to limit margin pressure.
Risks include pandemic-related demand declines, supply-chain and transportation disruption, possible facility or distribution-center restrictions, and broader economic and capital-market volatility. Management said it assessed asset impairment indicators and concluded assets were fairly stated and recoverable at quarter-end. The first-quarter results are not necessarily indicative of full-year results; the filing notes that revenue has historically been higher in Q4.
Important facts for investors to verify
- How COVID-19 affected Q2 and full-year sales, margins, customer activity, and supply-chain operations, particularly in Products and Systems Integration.
- Whether the $800 revolver borrowing remained outstanding, and the company’s subsequent liquidity, debt classification, covenant position, and cash needs.
- The status and potential financial effect of the Hytera verdict, including the new-trial motion and any appeal or collection risk.
- Whether recurring Software and Services growth and video-security demand continued, and how much reported performance depended on acquisitions and the one-time $50 facility-sale gain.
- Progress and final purchase accounting for the cybersecurity acquisition and the proposed IndigoVision transaction.