Motorola Solutions, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended October 3, 2015; comparisons are to the periods ended September 27, 2014, unless otherwise noted. Dollars are in millions except per-share amounts. Motorola Solutions provides mission-critical communications products and services through its Products and Services segments. The former Enterprise business was sold in October 2014 and is reported as discontinued operations.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $1,422 | $1,436 | $4,013 | $4,058 |
| Gross margin | $685; 48.2% | $685; 47.7% | $1,881; 46.9% | $1,919; 47.3% |
| Operating earnings | $231; 16.2% | $207; 14.4% | $605; 15.1% | $452; 11.1% |
| Continuing earnings attributable to Motorola Solutions | $126 | $66 | $363 | $229 |
| Diluted EPS from continuing operations | $0.63 | $0.27 | $1.74 | $0.90 |
| Net earnings attributable to Motorola Solutions | $115 | $147 | $331 | $1,098 |
| Diluted EPS, total | $0.57 | $0.59 | $1.58 | $4.32 |
Q3 sales fell 1% year over year; nine-month sales also fell 1%. Continuing operations improved, while total net earnings comparisons were heavily affected by discontinued operations: 2014 included $869 million of nine-month discontinued-operations earnings, while 2015 included a $32 million loss. Q3 2015 included an $11 million discontinued-operations tax expense related to the Enterprise sale.
Segments
- Products: Q3 sales were $925 million, up $4 million, and operating earnings were $178 million versus $141 million. Nine-month sales were $2,550 million versus $2,561 million; operating earnings rose to $413 million from $276 million.
- Services: Q3 sales were $497 million, down 3%, and operating earnings were $53 million versus $66 million. Nine-month sales fell 2% to $1,463 million; operating earnings increased to $192 million from $176 million.
Cash flow, balance sheet and capital
- Nine-month cash from operating activities was $591 million, compared with $15 million in 2014. Management attributed the improvement to higher continuing earnings, reduced pension contributions and proceeds from long-term receivable sales. Capital expenditures were $131 million.
- Cash and cash equivalents were $2.2 billion at October 3, 2015, down from $4.0 billion at December 31, 2014. Cash declined by $1.754 billion during the nine months. The company had a $2.1 billion undrawn revolving credit facility, maturing in 2019, and reported compliance with its financial covenants.
- Long-term debt, including current maturities, was $4.390 billion, versus $3.400 billion at year-end 2014. The company issued $1 billion of 2% convertible senior notes due in 2020. Net interest expense rose to $122 million for the nine months from $85 million.
- Stockholders’ equity moved from $2.766 billion at year-end to a $298 million deficit. The company repurchased $3.0 billion of shares and paid $218 million in dividends during the nine months. It repurchased approximately 45.4 million shares; $1.2 billion of repurchase authorization remained. A further $60 million dividend was paid after quarter-end.
- Current assets were $4.787 billion and current liabilities were $2.029 billion. The balance sheet also reported $1.590 billion of defined-benefit plan liabilities.
Material changes and management commentary
- Operating earnings increased despite slightly lower sales, primarily from lower SG&A and R&D expenses attributed to cost reductions, lower pension expense and favorable currency effects. Nine-month gross margin percentage declined, mainly because of lower Services margins on large projects and declining higher-margin iDEN services.
- Management cited challenging macroeconomic conditions and currency devaluation in Latin America, reduced customer purchasing power and government-budget pressures, as well as foreign-exchange headwinds. The company said currency effects on net earnings were partly mitigated by its cost and operating footprint.
- Management expected 2015 SG&A and R&D expenses to be approximately $200 million lower than in 2014. Reorganization plans were expected to yield about $11 million of savings in the remaining three months of 2015 and approximately $46 million in annualized savings thereafter. These are cost-savings expectations, not full-year earnings guidance.
- Management expected growth in Lifecycle Support, Managed Services and Smart Public Safety, while warning that declining iDEN sales would pressure Services revenue and gross margins. The filing notes the company historically has higher fourth-quarter revenue, but cautions quarterly results are not necessarily indicative of full-year results.
Unusual items, risks and contingencies
- Q3 included $42 million of other charges, including a $26 million corporate-aircraft impairment, employee separation costs and a $6 million building impairment. Nine-month other charges were $39 million net, including $65 million of reorganization charges and a $32 million non-U.S. pension curtailment gain. Reorganization charges included severance for approximately 400 employees.
- Nine-month gains on investment sales were $60 million, primarily including a $54 million gain on one investment. The company also completed public-safety software acquisitions for an aggregate purchase price of $50 million during 2015.
- Subsequent to quarter-end, the company arranged to transfer its Penang, Malaysia manufacturing operations to a contract manufacturer.
- Two rating agencies downgraded the company’s debt ratings in August 2015; Moody’s changed its outlook to negative and Fitch also changed its outlook to negative. Management said it expected to retain access to capital markets, but warned that further rating deterioration or market disruption could increase funding costs or limit access.
- The company intends to settle the principal of its convertible notes in cash. It warned that insufficient cash or financing could require settlement in shares, causing dilution, and could affect its ability to repurchase notes following a fundamental change.
- Management did not expect pending legal matters to materially affect the company, but acknowledged an adverse outcome could have a material impact. The filing also flags rare customer contracts with potential damages exceeding contract value. No accrual was recorded for the described indemnification obligations.
- Approximately $1.6 billion of foreign earnings was designated as permanently reinvested; repatriation could trigger additional tax. Foreign currency contracts had $521 million of notional value, and the company reported minimal aggregate counterparty credit exposure.
Important facts for investors to verify
- Whether cost reductions and stated savings are sustainable without impairing product development, service delivery or future growth.
- Whether Latin American and other foreign-market weakness, currency movements and iDEN declines continue to constrain sales and Services margins.
- How the $3.0 billion of share repurchases, negative stockholders’ equity and increased debt affect liquidity, credit ratings and capital-allocation flexibility.
- Whether operating cash generation remains robust after considering pension funding, working-capital changes and the company’s cash-settlement intentions for convertible notes.
- The realization and timing of expected reorganization savings, and the cash costs associated with severance and other exit obligations.
- The effect of the Penang manufacturing transfer, ongoing legal and contractual exposures, and future tax or accounting changes, including adoption of the new revenue-recognition standard.