Business context and reporting period
Motorola, Inc. (the filing registrant; not yet named Motorola Solutions) reported the quarter and six months ended July 3, 2010. Its businesses were Mobile Devices, Home, Enterprise Mobility Solutions, and Networks. The company was preparing to separate Mobile Devices and Home into a standalone company, targeted for the first quarter of 2011.
Key financial metrics
| Metric | Three months ended July 3, 2010 | Six months ended July 3, 2010 |
|---|---|---|
| Net sales | $5.414 billion | $10.458 billion |
| Gross margin | $2.002 billion; 37.0% | $3.788 billion; 36.2% |
| Operating earnings | $363 million; 6.7% margin | $439 million; 4.2% margin |
| Net earnings attributable to Motorola | $162 million; $0.07 diluted EPS | $231 million; $0.10 diluted EPS |
| Cash from operating activities | $242 million | $727 million |
Quarterly sales were down 2% year over year; first-half sales declined 4%. In the first half of 2009, operating cash flow was negative $864 million, and the company reported a $205 million net loss attributable to Motorola. Cash and cash equivalents were $2.893 billion at quarter-end, and current assets were $16.014 billion against current liabilities of $7.887 billion. Total debt, including current maturities, was approximately $3.438 billion, down from $3.901 billion at year-end 2009. The company repurchased $500 million principal amount of debt for $477 million cash during the first half.
Second-quarter segment sales and operating earnings were: Mobile Devices $1.724 billion and $87 million; Home $886 million and $29 million; Enterprise Mobility Solutions $1.850 billion and $181 million; Networks $967 million and $178 million. The company paid no common dividends in the first half; its quarterly dividend had been suspended in 2009.
Material changes versus prior comparable periods
- Second-quarter operating earnings rose from $10 million to $363 million, while first-half results improved from a $439 million operating loss to $439 million of operating earnings. Gross margin increased from 31.1% to 37.0% in the quarter and from 29.5% to 36.2% in the first half.
- Enterprise Mobility Solutions was the strongest sales-growth segment: up 10% in the quarter and 8% in the first half. Home sales fell 13% and 15%, respectively; Mobile Devices fell 6% and 7%; Networks fell 2% and 5%.
- Mobile Devices’ quarterly handset shipments fell 44% year over year to 8.3 million, but average selling price rose 65%, reflecting smartphone mix; Android smartphone shipments were 2.7 million. Home set-top-box shipments declined 10% in the quarter. Management cited pricing and demand pressure in Home.
- Quarterly SG&A increased 9% to $896 million; R&D declined 2% to $762 million. First-half SG&A rose 5% while R&D fell 6%.
- First-half operating cash flow swung to a $727 million inflow from an $864 million outflow a year earlier. Cash balances were broadly stable, while net investing cash flow moved from a $924 million inflow to a $172 million outflow, largely reflecting Sigma Fund investment activity.
Outlook, commentary, risks, and unusual items
- Management expected 2010 demand for Home set-top boxes and 2G/3G wireless infrastructure to decline, while anticipating growth opportunities in smartphones and commercial enterprise solutions. It described government/public-safety demand as resilient and commercial enterprise conditions as improving. No specific consolidated revenue or earnings guidance was provided.
- Management expected about $51 million of savings in the remaining six months of 2010 from first-half restructuring plans, and approximately $92 million in annualized savings thereafter. First-half restructuring charges were $46 million; about 1,300 employees had been separated, with further separations planned.
- On July 19, 2010, after quarter-end, Motorola announced a $1.2 billion cash sale of most Networks infrastructure assets to Nokia Siemens Networks, expected to close by year-end subject to conditions and regulatory approvals. iDEN, substantially all related patents, and certain other assets were excluded. The filing warned that uncertainty around the sale could affect sales and that closing could be delayed or fail.
- Motorola recorded a $228 million pretax gain from a litigation settlement and license agreement, including a $175 million upfront payment to the company and future royalties. This gain materially supported reported operating results. Other notable quarterly items included $105 million of separation transaction costs, $21 million of royalty settlement charges, and a $12 million debt-extinguishment loss.
- The company early adopted new multiple-deliverable revenue guidance prospectively from January 1, 2010. Reported revenue exceeded the comparable amount under prior guidance by $430 million for the quarter and $869 million for the first half, primarily due to smartphone arrangements. This reflects revenue timing, not necessarily additional cash or sales volume; the company said the ongoing impact on smartphone revenue recognition would continue.
- Effective tax rates were 52% for the quarter and 43% for the first half, affected by foreign-earnings repatriation accruals, separation costs without tax benefits, and tax-position adjustments. Unrecognized tax benefits were $277 million; management estimated possible next-12-month tax effects from a $50 million charge to a $125 million benefit, with cash payments of $0–$150 million.
- Risks include component shortages if demand exceeds expectations, intense competition and rapid technology shifts, foreign-exchange and investment valuation exposure, pension funding needs, customer financing commitments, and legal and tax contingencies. Long-term financing commitments totaled $329 million, concentrated among a small number of Middle East network operators. Management said pending legal matters were not expected to have a material adverse effect, but adverse outcomes could be material in the periods resolved.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Separate the $228 million settlement gain and other unusual items from recurring segment profitability; assess whether operating improvement is sustainable.
- Reconcile the large revenue-recognition difference under the new guidance, especially smartphone revenue timing, with shipments, cash collection, and deferred revenue.
- Track the Networks asset sale’s closing conditions, expected proceeds, excluded assets and liabilities, and any effect of customer uncertainty on pre-close sales.
- Monitor Mobile Devices unit volumes and smartphone mix, Home demand and pricing, and continued growth and margins in Enterprise Mobility Solutions.
- Assess liquidity quality, including the composition and valuation of the $5.4 billion Sigma Fund, overseas cash accessibility, receivables sales and deferred proceeds, financing commitments, and debt maturities.
- Review tax audit outcomes, valuation allowances, pension contributions, restructuring savings realization, and the pending securities, derivative, ERISA, and other legal matters.