Motorola Solutions, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 28, 2019; comparisons are with the corresponding 2018 periods. Amounts are in millions of dollars except per-share data. Motorola Solutions sells public-safety and commercial communications products and systems, alongside services and software.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $1,994 | $1,862 | $5,511 | $5,089 |
| Gross margin | $1,007; 50.5% | $901; 48.4% | $2,711; 49.2% | $2,392; 47.0% |
| Operating earnings | $413; 20.7% | $294; 15.8% | $991; 18.0% | $739; 14.5% |
| Net earnings attributable to Motorola Solutions | $267 | $247 | $625 | $544 |
| Diluted EPS | $1.51 | $1.43 | $3.56 | $3.17 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $1,028 | $263 |
Q3 revenue grew 7% year over year. Products and Systems Integration sales rose 5% to $1,349, and Services and Software sales rose 12% to $645. For the first nine months, the segments grew 7% and 12%, respectively. Q3 segment operating earnings were $258 (19.1% margin) and $155 (24.0% margin), respectively.
- Cash and liquidity: Cash and cash equivalents were $1,140 at quarter-end, down from $1,257 at December 31, 2018. The company had a $2.2 billion revolving credit facility, with no borrowings or letters of credit outstanding and was in compliance with its covenants.
- Debt: Long-term debt, including current maturities, was $5,729 ($617 current; $5,112 long-term), compared with $5,320 at year-end 2018. The company reported a $1.084 billion stockholders’ deficit.
- Cash flows: Nine-month operating cash flow was $1,028; investing cash outflow was $802; financing cash outflow was $329. Operating cash flow improved substantially, in part because 2018 included a $500 million U.S. pension contribution and a $51 million legacy-settlement payment.
- Capital returns: During the first nine months, the company paid $281 in dividends and repurchased about 1.4 million shares for $170. It reported $1.4 billion remaining under its repurchase authorization.
- Contract visibility: Remaining performance obligations were $7.1 billion; management expected $1.7 billion of Products and Systems Integration and $1.2 billion of Services and Software obligations to be recognized over the next 12 months.
Changes and management commentary
- Q3 sales growth reflected strength in the Americas, including strong demand for land-mobile-radio and video devices, and growth in software. EMEA sales declined 1% and Asia Pacific declined 9% in the quarter; management cited prior-year Middle East system deployments and currency headwinds. Unfavorable currency reduced Q3 revenue by $21 and nine-month revenue by $96.
- Management attributed improved gross margins to product mix and higher-margin software and acquisition contributions. Operating earnings also benefited from the absence of a $57 environmental reserve charge recorded in Q3 2018, including $40 in Products and Systems Integration and $17 in Services and Software.
- Q3 2019 included $18 of net reorganization charges, including employee separation costs. Nine-month net reorganization charges were $37; the remaining employee-separation accrual was $77 and was expected to be paid primarily within one year.
- Other expense included $50 of losses on extinguishment of long-term debt for the nine-month period, as well as investment impairments and fair-value changes. The nine-month effective tax rate was 22%, versus 14% in 2018, when favorable tax audit and return-to-provision items benefited results.
- The company acquired VaaS, Avtec and WatchGuard in 2019 for vehicle analytics, dispatch communications and mobile video capabilities, respectively. Acquisitions contributed $58 to Q3 revenue and $227 to nine-month revenue, according to management.
Outlook, risks and contingencies
- The filing provides no specific forward revenue or earnings guidance. Management noted that fourth-quarter revenue has historically been higher because of customer purchasing patterns and cautioned that Q3 results are not necessarily indicative of full-year results.
- In September, the company issued $1.0 billion of 1.75% convertible notes due 2024 and agreed to settle its remaining 2.00% Silver Lake convertible notes. The $600 million principal payment occurred October 7, 2019, after quarter-end; 5.5 million shares were converted into common stock. The company also issued $265 million of commercial paper after quarter-end.
- The company intends to settle the new notes’ principal in cash. It cautioned that lack of acceptable capital-market access could require settlement in shares, increasing dilution; the notes also create non-cash discount amortization and additional interest expense.
- Management said pending ordinary-course litigation was not expected to materially affect financial position, liquidity or results, while noting an unfavorable resolution could have a material effect. The filing also identifies foreign-exchange exposure, acquisition execution, capital-market access and legal outcomes as risks.
Most important facts for investors to verify
- Whether revenue and margin growth persist after separating acquisition contributions, currency effects and the prior-year environmental charge.
- Cash generation and liquidity after the October $600 million convertible-note settlement, subsequent commercial-paper issuance and ongoing capital returns.
- The cash-versus-share settlement outcome and potential dilution from the 1.75% convertible notes, including the $203.50 initial conversion price.
- Execution and returns from the VaaS, Avtec and WatchGuard acquisitions, and realization of the disclosed remaining performance obligations.
- Potential changes in tax rates, foreign-exchange effects, reorganization costs and legal or environmental contingencies.