Motorola, Inc. — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. Although the request references 2009 Q4, this is an annual 10-K; quarterly figures are identified where relevant. The filing was made by Motorola, Inc.
Business context and reporting period
Motorola operated three segments: Mobile Devices (handsets and related software), Home and Networks Mobility (video, broadband and wireless network equipment), and Enterprise Mobility Solutions (two-way radio, public-safety and enterprise mobility products). FY 2009 results reflect the global downturn, lower customer spending and substantial cost-reduction actions.
Key financial metrics
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Net sales | $22.044 billion | $30.146 billion |
| Gross margin | $7.057 billion; 32.0% of sales | $8.395 billion; 27.8% of sales |
| Operating earnings (loss) | $(148) million; (0.7)% margin | $(2.391) billion; (7.9)% margin |
| Continuing-operations loss attributable to common shareholders | $(111) million; $(0.05) per diluted share | $(4.244) billion; $(1.87) per diluted share |
| Net loss attributable to Motorola | $(51) million | $(4.244) billion |
| Operating cash flow | $629 million | $242 million |
| Capital expenditures | $275 million | $504 million |
| Total debt | $3.901 billion | $4.184 billion |
| Cash and cash equivalents | $2.869 billion | $3.064 billion |
At year-end, the Sigma Fund totaled $5.158 billion ($5.092 billion current and $66 million non-current); short-term investments were $2 million. Current assets were $16.032 billion and current liabilities $8.261 billion. Management said liquidity was more than adequate for expected operating needs. Cash flow benefited chiefly from a $1.3 billion inventory reduction and a $960 million decrease in other current assets, partly offset by a $2.6 billion decrease in accounts payable and accrued liabilities.
Segment results
| Segment | FY 2009 sales | Change vs. 2008 | Operating result |
|---|---|---|---|
| Mobile Devices | $7.146 billion | Down 41% | $(1.077) billion loss |
| Home and Networks Mobility | $7.963 billion | Down 21% | $558 million earnings |
| Enterprise Mobility Solutions | $7.008 billion | Down 13% | $1.057 billion earnings |
Material changes versus the prior comparable period
- Consolidated sales fell 27%, but operating loss narrowed substantially, chiefly because FY 2008 included $1.619 billion of goodwill impairment and other unusually high charges. FY 2009 included $641 million of other charges.
- Gross margin percentage increased 4.2 percentage points, reflecting improved segment mix, including a smaller share of lower-margin Mobile Devices sales, and lower inventory-related charges. Gross margin dollars still fell with sales.
- Mobile Devices handset shipments dropped 45% to 55.1 million; the global handset market declined about 6%. Motorola’s full-year global handset share fell significantly, and the company ranked fifth among handset suppliers. Fourth-quarter Android smartphone launches drew strong initial reception, with two million Android smartphone shipments.
- Home and Networks Mobility sales and earnings declined; digital entertainment device shipments fell 18% to 14.7 million. Enterprise Mobility Solutions sales and earnings also declined amid weak commercial and government demand.
- Operating cash flow rose to $629 million, while inventory fell to $1.308 billion from $2.659 billion. Total debt declined, but the current portion increased to $536 million, including $527 million of notes due November 2010.
- Motorola recorded $60 million of after-tax discontinued-operations earnings from sales of Good Technology and its former biometrics business. It paid $114 million of dividends in 2009, all in the first quarter; quarterly dividends were suspended in February 2009.
Outlook, management commentary, risks and unusual items
- Outlook: Management expected handset demand, particularly smartphones, and some Enterprise Mobility Solutions markets to improve in 2010. It expected little or no growth, or possible contraction, in Home and Networks Mobility markets, and anticipated continued decline in the 2G/3G wireless infrastructure market. The filing gives no company-wide numeric revenue or earnings guidance.
- Mobile Devices strategy: Expand Android/MOTOBLUR smartphones across price points and priority markets, while using ODM partners for a more limited feature-phone range. Management noted the business had recorded substantial operating losses in each of the prior three years and could remain unprofitable in 2010.
- Planned separation: In February 2010, Motorola targeted the first quarter of 2011 to separate into two public companies: Mobile Devices and Home, and Enterprise Mobility Solutions and Networks. Completion, timing and terms remained subject to conditions and were not assured. FY 2009 included $42 million of separation-related costs.
- Restructuring: FY 2009 net reorganization charges were $336 million; about 9,600 employees were separated, and year-end employment fell to approximately 53,000 from 64,000. Management estimated about $555 million of annualized savings from 2009 plans beyond 2009.
- Credit and funding: Ratings were split: S&P BB+ (non-investment grade), Fitch BBB- and Moody’s Baa3, both with negative outlooks. The $1.5 billion revolving facility was subject to eligible receivables and inventory, with no borrowings outstanding. The company had $406 million of commitments to provide long-term customer financing and $1.9 billion of performance bonds outstanding.
- Other risks and contingencies: Risks include continued handset share losses and dependence on Android; customer concentration; economic and operator capital-spending weakness; supplier and manufacturing concentration; foreign exchange and credit-market exposure; pension funding; tax-asset recoverability; and intellectual-property, regulatory and litigation matters. Several securities and ERISA class actions were pending; management said pending matters were not expected to materially adversely affect consolidated financial position, liquidity or results.
- Unusual accounting and operating items: FY 2009 included a $67 million gain from debt repurchases, $80 million of Sigma Fund gains and $77 million of investment impairment charges. No goodwill impairment was recorded in 2009; the Home reporting unit’s estimated fair value exceeded book value by 10%, leaving less headroom than in prior years. Deferred-tax valuation allowances totaled approximately $2.9 billion.
Most important facts for investors to verify
- Whether smartphone launches translated into sustained shipment growth, market-share recovery and a materially lower Mobile Devices operating loss.
- Whether the $555 million expected annualized restructuring savings were realized without impairing product development, execution or employee retention.
- Whether operating cash flow remained adequate after working-capital reductions, particularly given lower accounts payable and accrued liabilities.
- How the $527 million 2010 note maturity and split credit ratings affected refinancing costs, liquidity and access to performance bonds.
- Whether the proposed separation closed on the stated timetable and how debt, cash, pension obligations and the Motorola brand were allocated.
- Whether customer financing commitments, tax examinations, deferred-tax asset assumptions and pending litigation produced material cash or earnings effects.