Motorola Solutions, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 30, 2019, compared with the three months ended March 31, 2018. Amounts are in millions of dollars except per-share data.
Business context and results
Motorola Solutions provides mission-critical communications, video, software and services globally. It reports two segments: Products and Systems Integration, and Services and Software. Q1 results include acquisitions completed in 2018 and 2019; management cautions that the quarter is not necessarily indicative of full-year results and notes that sales have historically been higher in Q4.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $1,657 | $1,468 | +13% |
| Gross margin | $773; 46.7% | $669; 45.6% | +16% in dollars |
| Operating earnings | $229; 13.8% margin | $171; 11.6% margin | +34% |
| Net earnings attributable to Motorola Solutions | $151 | $117 | +29% |
| Diluted EPS | $0.86 | $0.69 | +25% |
| Operating cash flow | $251 | $(500) | Improved $751 |
| Capital expenditures | $66 | $41 | +$25 |
Revenue, margins and material changes
- Products and Systems Integration sales were $1,069, up 12%; operating earnings were $108, with a 10.1% margin versus 9.5%.
- Services and Software sales were $588, up 14%; operating earnings were $121, with a 20.6% margin versus 15.7%.
- Management attributed consolidated sales growth to the Americas and EMEA, partly offset by Asia Pacific. Revenue included $137 from acquisitions and was reduced by $38 from unfavorable currency movements. Asia Pacific sales declined 5%.
- Gross margin improvement reflected higher-margin software contributions from acquisitions, service delivery efficiencies and stronger systems integration margins; device mix partly offset improvement.
- SG&A rose 17% to $327, primarily due to acquired businesses. R&D rose 7% to $162. Other charges declined to $55 from $67, including $50 of intangible amortization.
Cash flow, debt and liquidity
- Cash and cash equivalents, including restricted cash, were $897 at quarter-end, down from $1,257 at December 31, 2018. Current assets were $3,714 and current liabilities were $2,979.
- Operating cash flow was $251; investing cash use was $432, including $368 for acquisitions and investments; financing cash use was $201. The prior-year operating cash outflow included a $500 voluntary U.S. pension contribution. Q1 2019 cash flow also reflected higher earnings and incentive-compensation payment timing.
- Long-term debt was approximately $5.3 billion, including $800 of 2.0% convertible notes due September 2020 and $400 of variable-rate term debt due March 2021. The company had no revolver borrowings against its $2.2 billion facility, which matures in April 2022, and reported compliance with its financial covenants.
- Operating lease liabilities totaled $669 at March 30, following adoption of the lease standard in January 2019. The balance sheet reported a stockholders’ deficit of $1,090.
- The company repurchased $145 of shares and paid $93 in dividends during the quarter. It had $1.4 billion of repurchase authorization remaining. Cash was $405 in the U.S. and $492 outside the U.S.
Outlook, commentary and risks
- Management expected to sign an agreement with the U.K. Home Office on the new direction of the Emergency Services Network during Q2 2019; the filing provides no quantified earnings or revenue guidance.
- Remaining performance obligations were $7.0 billion; $2.9 billion was expected to be recognized over the next 12 months ($1.6 billion Products and Systems Integration and $1.3 billion Services and Software).
- VaaS was acquired for a stated purchase price of $391 for purchase-accounting purposes, funded with $231 cash and $160 in shares; Avtec was acquired for $136 cash, net of cash acquired. Purchase accounting for both was incomplete at quarter-end. Acquisitions contributed to growth and expenses, including higher amortization.
- Reorganization charges were $8; the remaining employee-separation accrual was $78, primarily expected to be paid within one year. The company reported ordinary-course legal matters and no significant changes to contingencies; management said an unfavorable legal outcome could nevertheless have a material effect.
- Key exposures noted include foreign currency movements, acquisition integration and purchase accounting, customer purchasing seasonality, and execution of the U.K. ESN program. The company reported $897 of foreign-exchange contract notional exposure and described the contracts as generally offsetting underlying exposures.
Important facts for investors to verify
- How much of sales and margin growth is sustainable and organic, apart from acquisitions and currency effects.
- Progress and commercial terms of the expected U.K. ESN agreement, and related network-build spending.
- Cash conversion and liquidity needs alongside approximately $5.3 billion of debt, the 2020 convertible-note maturity and the pension position.
- Final purchase-price allocations and integration performance for VaaS and Avtec, as well as the trajectory of acquisition-related amortization and expenses.
- Developments in legal matters and other contingencies, which could have material effects if resolved unfavorably.