Motorola Solutions, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 29, 2019. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. The company provides mission-critical communications, software, video security and services through Products and Systems Integration and Services and Software.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $1,860 | $1,760 | $3,517 | $3,227 |
| Gross margin | $931; 50.1% | $822; 46.7% | $1,704; 48.5% | $1,491; 46.2% |
| Operating earnings | $349; 18.8% | $273; 15.5% | $579; 16.5% | $445; 13.8% |
| Net earnings attributable to Motorola Solutions | $207 | $180 | $358 | $297 |
| Diluted EPS | $1.18 | $1.05 | $2.04 | $1.73 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $502 | $(75) |
- Q2 revenue rose 6%; product sales were $1,118 million and service sales $742 million. First-half revenue increased 9%.
- Q2 segment sales and operating margins: Products and Systems Integration, $1,238 million and 16.2% (up from 14.7%); Services and Software, $622 million and 23.8% (up from 17.2%).
- At June 29, cash and cash equivalents, including restricted cash, were $964 million; total debt was $5,343 million. The $2.2 billion revolving credit facility was undrawn, and the company reported compliance with its financial covenants.
- Current assets were $3,831 million versus current liabilities of $2,876 million. Stockholders’ equity was a deficit of $954 million.
- First-half investing cash outflow was $490 million and financing cash outflow was $311 million. The $293 million net cash decrease left $964 million of cash and cash equivalents.
Changes and management commentary
- Management attributed Q2 growth primarily to the Americas. Q2 sales there grew 11%; EMEA declined 7% and Asia Pacific declined 7%. Unfavorable currency reduced Q2 sales by $37 million. First-half currency headwinds were $75 million.
- Management cited strong device demand, growth in software and service-delivery efficiencies behind higher gross margins. Acquisitions contributed $33 million to Q2 revenue; SG&A and R&D also increased, primarily due to acquired businesses and video security investments.
- First-half operating cash flow improved by $577 million year over year, principally because the comparable 2018 period included a $500 million debt-funded voluntary U.S. pension contribution; there was no material U.S. pension contribution in first-half 2019.
- The company issued $650 million of 4.60% notes due 2029 and used the proceeds to fund a debt tender offer. It repurchased $614 million principal for $654 million and recorded a $43 million extinguishment loss.
- Q2 included a $43 million debt-extinguishment loss and $3 million of investment impairments, partly offset by $16 million of fair-value gains on equity investments. First-half tax rate was 22%, compared with 19%, primarily because of a favorable state tax audit settlement in 2018.
- During the first half, the company repurchased $170 million of shares and paid $187 million in common dividends. It had $1.4 billion of repurchase authorization remaining.
Outlook, risks and unusual items
- The filing provides no clear numerical full-year revenue or earnings guidance. Management cautioned that quarterly results are not necessarily indicative of full-year results and noted that sales have historically been higher in Q4 due to customer purchasing patterns.
- Remaining performance obligations were $7.3 billion at quarter end. The company expected to recognize $1.7 billion of Products and Systems Integration and $1.2 billion of Services and Software obligations over the next 12 months; service contract termination rights affect the latter estimate.
- The company finalized a $200 million extension of its U.K. Emergency Services Network contract through 2024. It acquired Avtec and VaaS in 2019; after quarter end, it acquired WatchGuard for $271 million, including share-based compensation, funded with $250 million cash net of acquired cash.
- Legal proceedings arise in the ordinary course. Management did not expect their disposition to materially adversely affect financial position, liquidity or results, while warning an unfavorable resolution could have a material effect. The filing refers investors to risk factors in the 2018 Form 10-K and other SEC filings.
- Adoption of lease accounting standards added operating lease assets and liabilities; at June 29, operating lease assets were $567 million and liabilities totaled $622 million. The company also had $800 million of convertible notes due September 2020.
Important facts for investors to verify
- Whether revenue and margin improvement persists, particularly across regions and in software, services and devices, apart from acquisition contributions and currency effects.
- Whether acquisition integration and expansion of video security solutions support returns sufficient to offset related operating expenses, amortization and financing costs.
- Debt-service and refinancing requirements, including the 2020 convertible notes, and the effect of leverage, dividends and repurchases on liquidity.
- Cash-flow sustainability: the first-half comparison is substantially affected by the prior-year pension contribution, and receivable-sale proceeds are included in operating cash flow.
- Progress and revenue recognition on the $7.3 billion remaining performance obligations, including the U.K. ESN contract and customer termination provisions.