Motorola Solutions, Inc. — Q2 2022 Form 10-Q
Business context and period: The company provides land mobile radio communications, video security and access control, and command center software. This unaudited quarterly report covers the 13 weeks ended July 2, 2022, and the six months ended that date; comparable periods ended July 3, 2021.
Key financial results
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $2.140 billion | $1.971 billion | $4.032 billion | $3.744 billion |
| Gross margin | $990 million; 46.3% | $952 million; 48.3% | $1.846 billion; 45.8% | $1.812 billion; 48.4% |
| Operating earnings | $358 million; 16.7% margin | $370 million; 18.8% margin | $597 million; 14.8% margin | $668 million; 17.8% margin |
| Net earnings attributable to Motorola Solutions | $228 million | $293 million | $495 million | $537 million |
| Diluted EPS | $1.33 | $1.69 | $2.88 | $3.10 |
| Cash from operating activities | Not separately stated | Not separately stated | $162 million | $758 million |
Q2 sales grew 9% year over year. Products and Systems Integration sales rose 7% to $1.285 billion; Software and Services rose 11% to $855 million. First-half sales grew 8%. The filing attributes growth to LMR, video, and command center software, partly offset by unfavorable currency translation.
Cash flow and liquidity: First-half operating cash flow fell $596 million year over year, primarily due to higher inventory and employee incentive payments. Investing cash use was $673 million, including $571 million for acquisitions and investments; financing cash use was $564 million. Capital expenditures were $113 million, making operating cash flow less capital expenditures $49 million (calculated from reported figures). Cash and equivalents were $717 million at July 2, down from $1.874 billion at year-end 2021.
Debt and balance sheet: Long-term debt was $6.011 billion, versus $5.688 billion at year-end. Current debt was $2 million. The company issued $600 million of 5.6% notes due 2032 and used part of the proceeds to tender $275 million principal amount of 4.0% notes due 2024. It had a $2.25 billion revolving credit facility maturing in 2026, no commercial paper outstanding, and reported compliance with credit covenants. Total stockholders’ equity was a deficit of $430 million, compared with a $23 million deficit at year-end.
Material changes and unusual items
- Revenue increased, but gross and operating margins declined. Management cited higher material and freight costs, supply constraints, and year-over-year mix; operating earnings fell 3% in Q2 and 11% in the first half.
- First-half results included a $77 million net deferred tax benefit from an intra-group transfer of intellectual property, contributing to a 4% effective tax rate versus 14% in the prior-year period. Q2’s effective tax rate was 24%.
- Acquisitions included Ava ($388 million), TETRA Ireland ($120 million), Calipsa ($40 million), and Videotec ($22 million), all acquired during the first half. Acquisition spending contributed to the cash decline. TETRA Ireland also generated a $21 million gain on remeasurement of the company’s prior investment.
- Other charges were $85 million in Q2 and $177 million in the first half, including intangible amortization, impairments, acquisition-related fees, legal settlements, and reorganization charges. The first half also included a $13 million gain from Hytera bankruptcy recoveries.
- The company repurchased $655 million of shares and paid $266 million in dividends in the first half. It had $1.5 billion of repurchase authorization remaining at quarter-end.
Outlook, management commentary and risks
Management gave no numerical full-year earnings or revenue guidance in the provided filing text. It said customer demand and backlog remained strong, particularly in Products and Systems Integration, and expected that segment’s backlog to continue growing. Management also expected demand to exceed available semiconductor supply through 2022, elevated material and supply-chain costs to persist, and pricing actions to benefit the second half. It expected ARPA funding to support demand and said Software and Services’ recurring business and backlog should limit operating-margin impact during 2022.
Key risks include semiconductor shortages, freight and labor constraints, inflation, COVID-related disruptions, foreign-exchange movements and a strong U.S. dollar, and geopolitical disruption related to Russia’s invasion of Ukraine. The company suspended sales, services, and shipments to Russia and Belarus; their 2021 sales were less than $25 million. The company said it believed cash and available liquidity were sufficient for expected needs, and that assets were fairly stated and recoverable at quarter-end.
Contingencies: In the Hytera litigation, a prior damages award was reduced to $543.7 million, with additional awards of $51.1 million in prejudgment interest, $2.6 million in costs, and $34.2 million in attorneys’ fees. Hytera failed to make a required royalty payment into escrow by July 31, 2022; Motorola filed a motion for civil contempt on August 3. Appeals and other proceedings remain pending. Management stated ordinary-course legal matters were not expected to have a material adverse effect, while acknowledging an unfavorable resolution could be material. The UK competition authority’s investigation of the Airwave emergency-services network could lead to additional obligations or remedies.
Important facts for investors to verify
- Whether semiconductor availability, input costs, and pricing actions evolve as management expected, and their effects on margins and cash generation.
- Cash-flow and working-capital trends, especially inventory, given the sharp first-half operating cash-flow decline and lower cash balance.
- Acquisition integration, purchase accounting, and the performance of recently acquired video, analytics, and software businesses.
- Developments in Hytera royalty enforcement, litigation, appeals, and the recoverability and timing of any further amounts.
- The assumptions supporting the $77 million tax benefit and realizability of the resulting deferred tax asset.
- Debt maturities and liquidity: $1.0 billion of convertible notes and other notes are due in 2024; the filing reports no bond maturities before then.