Motorola, Inc. (planned Motorola Solutions) — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended October 2, 2010; comparisons are to the periods ended October 3, 2009. The filing is by Motorola, Inc., before its planned separation into Motorola Mobility and a continuing company intended to become Motorola Solutions. Dollar amounts are in millions unless noted.
Business context
The reported continuing segments were Mobile Devices, Home, and Enterprise Mobility Solutions. Beginning in Q3, the Networks operations included in a planned sale to Nokia Siemens Networks (NSN), along with certain previously disposed businesses, were reported as discontinued operations. Prior periods were reclassified.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $4,890 | $4,336 | $13,619 | $13,361 |
| Gross margin | $1,780; 36.4% | $1,439; 33.2% | $4,865; 35.7% | $4,013; 30.0% |
| Operating earnings (loss) | $225; 4.6% | $(11); (0.3)% | $411; 3.0% | $(580); (4.3)% |
| Continuing earnings (loss) attributable to common shareholders | $7; $0.00 diluted EPS | $(90); $(0.04) diluted EPS | $47; $0.02 diluted EPS | $(418); $(0.18) diluted EPS |
| Net earnings (loss) attributable to Motorola | $109 | $12 | $340 | $(193) |
| Discontinued-operations earnings, net of tax | $102 | $102 | $293 | $225 |
- Q3 sales rose 13% year over year; nine-month sales rose 2%. Gross margin and operating results improved substantially, but high tax expense limited continuing earnings: $196 in Q3 and $278 year to date. Effective tax rates on continuing operations were 96% and 84%, respectively.
- Q3 segment results: Mobile Devices sales $2,034 and operating loss $43; Home sales $912 and operating earnings $49; Enterprise Mobility Solutions sales $1,946 and operating earnings $253. Mobile Devices remained loss-making despite improvement.
- For the first nine months, cash from operating activities of continuing operations was $915, versus cash used of $777 in 2009. Cash generation included $740 of higher accounts payable and accrued liabilities; receivables and inventories used $305 and $257, respectively. Investing activities provided $50; financing activities provided $62. Cash and cash equivalents increased to $3,848 from $2,869 at year-end 2009.
- At October 2, current assets were $17,373 and current liabilities $8,709. Cash and short-term investments included $5,046 of current Sigma Fund investments. Debt was $532 current and $2,864 long-term, or approximately $3.4 billion total. Long-term debt face value was $3.3 billion; its estimated fair value was $3.5 billion.
- No common dividends were paid in the first nine months of 2010; the quarterly dividend suspension announced in 2009 remained in effect.
Material changes and unusual items
- Motorola early-adopted new revenue guidance prospectively from January 1, 2010. Reported sales for new or materially modified arrangements exceeded the pro forma amount under prior guidance by $1,201 in Q3 and $2,054 for the first nine months, primarily due to smartphone arrangements. The company said the guidance’s continuing effect would be concentrated in smartphone revenue recognition.
- A $228 pretax gain from an intellectual-property settlement and patent exchange contributed to the year-to-date improvement. The settlement included an upfront payment of $175 and future royalties. Q3 other charges also included a $37 benefit from legal settlements and intellectual-property reserve adjustments.
- Q3 discontinued operations included sales of $871 and after-tax earnings of $102. The 2010 nine-month discontinued-operations earnings included a $20 pretax gain on the sale of the Israel-based wireless operator.
- The company repurchased $500 principal amount of debt for $477 cash and recorded a $12 loss. Nine-month net reorganization charges were $91, versus $245 in 2009; about 1,400 employees had been separated during the period. Management forecast approximately $43 of savings for the remaining three months of 2010 and annualized savings of about $183 thereafter.
- Accounts receivable and inventory rose from year-end to $3,236 and $1,354, respectively. Management cited the need to balance inventory availability against obsolescence risk. Receivables sales totaled $1.5 billion in the first nine months, and $278 remained due under deferred-payment terms.
Outlook, risks and contingencies
- Motorola planned a tax-free distribution of Motorola Mobility in Q1 2011, subject to conditions including tax treatment and effectiveness of its registration statement. The company said it could contribute up to $3.5 billion of cash to Mobility; the continuing company would retain existing public debt, pension liabilities, and certain litigation exposure.
- NSN agreed to acquire most Networks infrastructure assets for $1.2 billion cash, with closing expected by early 2011 subject to customary conditions and regulatory approvals. iDEN infrastructure, substantially all related patents, and specified assets were excluded.
- Management described smartphone growth opportunities but noted intense competition, short product cycles, and component shortages. It characterized Home market demand as weak in 2010, particularly in the U.S.; Enterprise Mobility demand was more resilient, with commercial enterprise conditions improving.
- Liquidity and execution risks include split debt ratings that may constrain or raise the cost of market access, foreign cash repatriation delays or taxes, customer financing commitments of $297, and potential exposure from legal claims, indemnities, and uncapped contractual damages. Management said pending legal matters were not expected to have a material adverse effect, while acknowledging an unfavorable outcome could be material.
- Management expected unrecognized tax benefits to change within 12 months; the estimated net tax-rate impact ranged from a $50 charge to a $100 benefit, with possible cash payments of $0–$100. The filing also noted that the separation could change valuation allowances and tax outcomes.
Investor verification priorities
- Reconcile reported revenue growth and smartphone-related revenue timing to the new accounting guidance; the filing’s pro forma prior-guidance figures differ materially.
- Assess the sustainability of continuing-operations profitability after unusually high tax expense and the $228 settlement gain.
- Track Mobile Devices unit volumes and operating losses, Home set-top-box demand and pricing, and Enterprise Mobility growth and margins.
- Verify completion, proceeds, tax treatment, and final funding arrangements for the Mobility separation and NSN asset sale, including liabilities retained by the continuing company.
- Monitor operating cash flow quality, working-capital movements, receivables sales and deferred proceeds, customer financing exposure, and the expected restructuring savings.