Motorola Solutions, Inc. — Q3 2022 Form 10-Q
Reporting period: Third quarter and nine months ended October 1, 2022; comparisons are with the periods ended October 2, 2021. The company provides land mobile radio communications, video security and access control, and command center software.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $2.373B | $2.107B | $6.405B | $5.851B |
| Gross margin | $1.031B; 43.4% | $1.045B; 49.6% | $2.878B; 44.9% | $2.857B; 48.8% |
| Operating earnings | $373M; 15.7% | $451M; 21.4% | $970M; 15.1% | $1.118B; 19.1% |
| Net earnings attributable to Motorola Solutions | $279M | $307M | $774M | $844M |
| Diluted EPS | $1.63 | $1.76 | $4.50 | $4.87 |
| Operating cash flow | Not separately provided | Not separately provided | $550M | $1.134B |
Q3 revenue increased 13%, led by Products and Systems Integration, up 15% to $1.529B, and Software and Services, up 8% to $844M. Nine-month revenue grew 9%; Products and Systems Integration rose 11% to $3.918B and Software and Services rose 8% to $2.487B. Video grew in both segments, while LMR remained the largest technology category.
Q3 operating earnings fell 17%; nine-month operating earnings fell 13%. Segment results diverged in Q3: Products and Systems Integration operating earnings increased to $303M from $224M, while Software and Services decreased to $70M from $227M. The latter decline was principally driven by the ESN asset impairment.
Cash, debt and capital
- Cash and cash equivalents were $822M at October 1, 2022, down from $1.874B at December 31, 2021. Nine-month cash from operations was $550M; investing used $735M and financing used $704M. Exchange-rate changes reduced cash by $163M.
- Total debt was approximately $6.013B, versus $5.693B at year-end 2021. The company issued $600M of 5.6% notes due 2032 and used part of the proceeds to repurchase $275M principal of 4.0% notes due 2024. No commercial paper was outstanding.
- The company reported a $2.25B unsecured revolving credit facility maturing in 2026 and compliance with its financial covenants. Management said available resources were sufficient for expected requirements.
- Nine-month share repurchases totaled $749M and dividends paid totaled $398M. The company had $1.4B of repurchase authorization remaining at quarter-end.
Material changes and unusual items
- Gross margin declined year over year, reflecting a $147M fixed-asset impairment related to the UK Emergency Services Network (ESN) contract, higher material and freight costs, and business mix. Pricing actions and volume leverage partly offset costs in Products and Systems Integration.
- The company recorded a $77M net deferred tax benefit in Q1 2022 from an intra-group transfer of intellectual property. The nine-month effective tax rate was 9%, compared with 18% in 2021; Q3 rates were 16% and 24%, respectively.
- Q3 net earnings included volatility in other income: $45M of foreign-currency gains and $54M of derivative losses. Nine-month other income also included a $21M gain on the previously held TETRA Ireland interest.
- Acquisitions included Ava ($388M), TETRA Ireland ($120M), Calipsa ($39M), Videotec ($23M) and Barrett Communications ($18M), net of cash acquired. Futurecom was acquired after quarter-end for $30M, net of cash acquired.
Outlook, commentary and risks
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management said demand and backlog were strong, expected Products and Systems Integration backlog to continue growing, and anticipated demand to exceed available semiconductor supply through the remainder of 2022. Management also expected pricing actions to provide further benefit in Q4.
- Management cited semiconductor shortages, elevated component and freight costs, labor and transportation constraints, inflation, a strong U.S. dollar, and geopolitical and COVID-related disruptions. The company expected elevated inventory levels while supply constraints persisted. Foreign exchange effects had reduced and were expected to continue affecting operating cash flow and earnings.
- The company began negotiating an early exit from the UK ESN contract, including 12 months of transition services, and recorded the $147M impairment based on its expectation of early disposal of related assets. The final contract outcome and financial effects remain uncertain.
- The UK Competition and Markets Authority issued a provisional decision concerning the Airwave emergency-services network; Motorola Solutions disagrees and is pursuing its position. Potential remedies could include price controls, disclosure requirements or structural measures.
- Hytera failed to pay royalties ordered by the court. Motorola Solutions sought civil contempt, and both parties appealed. The outcome and timing of the litigation remain uncertain.
- Other cited exposures include execution and compliance risks from expanding product lines and large, long-term government and services contracts, as well as supply, cybersecurity, currency and customer-funding risks.
Investor verification priorities
- Track ESN negotiations, transition-service terms, and any further impairment or contract-related charges.
- Monitor the Airwave CMA investigation and Hytera appeals, royalty enforcement, and potential recoveries.
- Assess whether semiconductor availability, inflation, pricing actions and currency movements alter margins, backlog conversion or cash generation.
- Reconcile the decline in operating cash flow with inventory growth, cash taxes and incentive payments; monitor cash, debt maturities and capital returns.
- Separate recurring performance from the $147M ESN impairment, $77M tax benefit, acquisition effects and currency/derivative gains and losses.