Motorola Solutions, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. Motorola Solutions provides mission-critical communications, video, software, and services to public-safety, government, commercial, and industrial customers. Its reportable segments are Products and Systems Integration and Services and Software; the segment reporting structure changed in 2018, so segment comparisons reflect reclassified reporting.
Financial results
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $7.343 billion | $6.380 billion | +15% |
| Gross margin | $3.480 billion; 47.4% | $3.024 billion; 47.4% | +15% in dollars |
| Operating earnings | $1.255 billion; 17.1% margin | $1.284 billion; 20.1% margin | -2% |
| Net earnings (loss) attributable to Motorola Solutions | $966 million | $(155) million | Returned to profit |
| Diluted EPS | $5.62 | $(0.95) | Returned to profit |
| Cash from operating activities | $1.075 billion | $1.346 billion | Down $271 million |
| Capital expenditures | $197 million | $227 million | Down $30 million |
| Cash and cash equivalents, including restricted cash | $1.257 billion | $1.268 billion | Down $11 million |
| Total debt | $5.320 billion | $4.471 billion | Up $849 million |
FY2018 operating cash flow less capital expenditures was approximately $878 million, a simple calculation from reported figures. Operating cash flow fell primarily because of a $500 million voluntary U.S. pension contribution, partly offset by higher earnings. Cash was $1.246 billion excluding restricted cash; $750 million was held in the U.S. The company reported total current assets of $4.272 billion and current liabilities of $3.096 billion.
Fourth-quarter results
Q4 2018 net sales were $2.254 billion, versus $1.957 billion in Q4 2017. Operating earnings were $516 million versus $503 million, and net earnings attributable to the company were $423 million versus a $575 million loss. The prior-year quarterly loss reflected the tax reform charge recorded in 2017.
Segments and operating drivers
- Products and Systems Integration: Sales were $5.100 billion, up 13%; operating earnings were $854 million versus $969 million. Segment margin declined to 16.7% from 21.5%, reflecting European supply-chain closure costs, environmental remediation expense, acquisition-related costs, and lower margins on certain large integration projects.
- Services and Software: Sales were $2.243 billion, up 20%; operating earnings rose to $401 million from $315 million, and margin increased to 17.9% from 16.9%. Software sales rose 89%, primarily from acquisitions and command-center software growth.
- Consolidated sales growth included $507 million of incremental revenue from acquisitions, $83 million from adoption of ASC 606, and $32 million from favorable currency movements. Americas sales grew 17%, EMEA 18%, and Asia Pacific was relatively flat.
Material changes, capital, and unusual items
- The company acquired Avigilon for a stated purchase price of $974 million and Plant Holdings for $237 million in 2018; reported acquisition and investment cash outflows were $1.164 billion. Avigilon expanded its video and analytics portfolio, and Plant expanded command-center and Next Generation 9-1-1 software capabilities.
- Backlog increased to $10.600 billion from $9.612 billion. The company expected to recognize approximately 52% of Products and Systems Integration backlog and 21% of Services and Software backlog as 2019 revenue; backlog firmness is subject to change.
- Other charges rose to $334 million from $147 million. FY2018 included $188 million of intangible amortization, $61 million of reorganization charges in other charges, $57 million for environmental remediation, and $24 million of acquisition transaction fees. Total reorganization charges, including amounts in cost of sales, were $120 million and related to approximately 1,200 employee separations.
- The environmental charge increased the Superfund-site reserve to $107 million; remediation is expected to extend over 30 years.
- Income tax expense was $133 million in 2018 versus $1.227 billion in 2017. The 2017 result included $874 million of non-recurring Tax Act charges; the 2018 effective tax rate was 12% and included $79 million of Tax Act measurement-period benefits.
- The company issued $500 million of 4.60% senior notes due 2028 and borrowed a $400 million term loan due 2021, among other debt transactions. It contributed $500 million of note proceeds to its U.S. pension plan. Its $2.2 billion revolving credit facility was undrawn at year-end, and the company reported compliance with its financial covenants.
- Dividends paid were $337 million and share repurchases were $132 million in 2018. The quarterly dividend was raised 10% to $0.57 per share. Approximately $1.6 billion of repurchase authorization remained at year-end.
Outlook, risks, and contingencies
Management said it was positioned for continued leadership, expects land-mobile-radio solutions to remain preferred by customers, and anticipates continued growth in value-added services and a longer-term shift in revenue mix toward services and software. It highlighted command-center software, public-safety broadband, video analytics, and access-control solutions as growth areas. The filing does not provide a clear quantified 2019 revenue or earnings guidance. Management said it did not expect material pension contributions in 2019 and believed internal resources were adequate for expected working capital and capital expenditures over the next 12 months.
- Key disclosed risks include government contract cancellations and audits, customer budget and financing constraints, competitive bidding and fixed-price contract cost overruns, and dependence on public-safety spectrum allocation and broadband deployment.
- Cybersecurity, privacy and data-protection compliance, foreign exchange, geopolitical and trade uncertainty, and reliance on suppliers, subcontractors, and outsourced operations could affect results. Certain components have single-source suppliers; manufacturing disruption at Penang or Illinois could materially reduce capacity.
- Large acquisitions bring integration, execution, goodwill, and financing risks. The 2019 VaaS acquisition, announced January 7 for $445 million, occurred after the reporting date.
- Debt and liquidity considerations include $800 million principal remaining on 2% convertible notes due 2020. The company intends to settle principal in cash but warns that insufficient cash or financing could require stock settlement and dilution. Pension plans remain underfunded; market returns and interest rates can change future funding needs.
- Contractual obligations totaled $6.304 billion, including $5.382 billion of gross long-term debt obligations and $722 million of lease obligations. Adoption of the new lease standard in 2019 was expected to add $600–$650 million of operating lease liabilities.
- Management said ordinary-course litigation was not expected to have a material adverse effect, while acknowledging an unfavorable outcome could be material. Outstanding performance bonds were approximately $2.5 billion.
The financial-statement auditor issued an unqualified opinion, and management and the auditor reported effective internal control over financial reporting. Avigilon was excluded from the company’s 2018 internal-control assessment and audit, representing 12.6% of consolidated assets and 5.2% of sales.
Most important facts for investors to verify
- How much of sales and backlog growth is organic versus acquisition-related, and how ASC 606 affects comparability; the company did not restate prior-year results under the new revenue standard.
- Whether Products and Systems Integration margins recover after 2018 project mix, reorganization, acquisition, and remediation costs, and whether Services and Software growth continues.
- Cash generation after the unusually large pension contribution, and the company’s capacity to fund acquisitions, dividends, repurchases, debt service, and convertible-note settlement.
- Progress and economics of Avigilon and Plant integration, the VaaS acquisition, the U.K. Emergency Services Network agreement, and the Airwave contract extension through 2022.
- Developments in the $107 million environmental reserve, pension funding assumptions, government contract exposure, cybersecurity and privacy obligations, and supplier concentration.