Motorola Solutions, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. Amounts are in U.S. dollars unless noted.
Business context and reporting period
Motorola Solutions provides mission-critical communications equipment, software and services to government, public-safety and commercial customers. Its Products and Services segments represented 60% and 40% of 2016 sales, respectively. The company reported sales in more than 100 countries.
During 2016, the company acquired Guardian Digital Communications Limited (GDCL), parent of U.K. public-safety network operator Airwave, and Spillman Technologies, a public-safety software provider. GDCL contributed $462 million of 2016 revenue. The filing is an annual report, not a standalone fourth-quarter filing.
Financial performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $6.038 billion | $5.695 billion |
| Gross margin | $2.869 billion; 47.5% | $2.719 billion; 47.7% |
| Operating earnings | $1.067 billion; 17.7% of sales | $994 million; 17.5% of sales |
| Continuing-operations earnings attributable to Motorola Solutions | $560 million | $640 million |
| Diluted continuing-operations EPS | $3.24 | $3.17 |
| Net cash from continuing operating activities | $1.165 billion | $1.021 billion |
| Capital expenditures | $271 million | $175 million |
Fourth quarter: Net sales were $1.883 billion, operating earnings were $403 million, continuing-operations earnings attributable to the company were $243 million, and diluted continuing-operations EPS was $1.43.
Segments: Products sales were $3.649 billion, down 1%, with operating earnings of $734 million and a 20.1% operating margin. Services sales were $2.389 billion, up 18%, with operating earnings of $333 million and a 13.9% margin. Managed & Support services grew 49%, primarily due to GDCL; organic growth in that offering was 5%.
Balance sheet and liquidity: Cash and cash equivalents were $1.030 billion at year-end, versus $1.980 billion a year earlier. Total debt was $4.396 billion, versus $4.349 billion. Stockholders’ equity was a deficit of $952 million. A $2.1 billion revolving credit facility was undrawn at year-end, and the company reported compliance with its covenants. The filing states it believes internal resources are adequate for expected working-capital and capital-expenditure needs over the next 12 months.
The company returned $1.122 billion to shareholders in 2016: $842 million in share repurchases and $280 million in dividends. It declared dividends of $1.70 per share for the year and raised the quarterly rate from $0.41 to $0.47 in November.
Material changes versus the prior comparable period
- Sales increased 6%, led by acquired GDCL revenue and growth in North America and Asia Pacific; Latin America declined amid macroeconomic pressure and currency effects.
- Gross margin dollars rose, but the gross-margin rate edged down 0.2 percentage points. Operating earnings increased 7%, while continuing-operations earnings attributable to the company fell 13%.
- The earnings decline reflected $249 million of other charges (up from $84 million), including $113 million of intangible amortization, $97 million of net reorganization charges, $26 million of non-U.S. pension settlement losses and $13 million of GDCL transaction fees. Lower R&D and SG&A partially offset these items.
- Operating cash flow increased $144 million. Cash fell by $950 million, mainly reflecting the GDCL acquisition and shareholder returns. Capital expenditures rose $96 million.
- Services’ share of total revenue grew, while Products sales declined slightly. Total backlog increased to $8.371 billion from $6.475 billion; the filing attributes much of the increase to GDCL. Approximately 50% of Products backlog and 25% of Services backlog was expected to convert to revenue in 2017.
- Compared with 2014, the 2015–2016 results are not directly representative of underlying trends: 2014 included a $1.9 billion U.S. pension settlement charge in continuing operations and $1.996 billion of discontinued-operations earnings related primarily to the Enterprise business sale.
Outlook, risks and unusual items
- Outlook: No specific consolidated revenue or earnings guidance is provided. Management expects Services to grow faster than Products, continued demand for Managed & Support services, a gradual shift toward software and services, and increased public-safety LTE sales. It expects iDEN sales to decline by approximately $50 million in 2017, affecting Services revenue and gross margins.
- Acquisitions and execution: GDCL and software acquisitions expand services and command-center offerings, but integration, expected synergies, acquired-intangible amortization and acquired-business controls warrant attention. GDCL’s controls, representing 13.5% of consolidated assets and 7.6% of revenue, were excluded from management’s 2016 internal-control assessment.
- Market and customer risks: Economic weakness, foreign-exchange movements, customer budget constraints and vendor-financing requests may affect sales, collections and margins. The U.S. federal government and U.K. Home Office represented approximately 9% and 8% of 2016 sales, respectively; government contracts can be cancelled and may be subject to audits.
- Technology, regulatory and operating risks: FirstNet’s nationwide public-safety broadband award was projected for 2017, but timing, state opt-outs, contract terms and adoption remain uncertain. Other risks include competition, spectrum regulation, cybersecurity, data-protection rules, single-source suppliers, outsourced operations and manufacturing concentration.
- Financial and contingent risks: The company has substantial debt, foreign cash subject to repatriation constraints and underfunded pension obligations. Its $1 billion 2% convertible notes mature in 2020; cash settlement on conversion is intended but not assured. Outstanding performance and bid bonds were approximately $2.2 billion. Management said ordinary-course litigation was not expected to have a material adverse effect, while noting an unfavorable resolution could be material.
- Other notable items: The company recorded a $26 million non-U.S. pension settlement loss and $17 million building impairment in 2016. It also reported a $1.6 billion balance of indefinitely reinvested foreign earnings and warned that future repatriation could result in additional tax expense. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of sales and backlog growth is organic versus attributable to GDCL and other acquisitions, and how backlog converts to revenue and cash.
- Whether Managed & Support growth and LTE opportunities can offset declining iDEN revenue and pressure on Products sales and margins.
- The sustainability of earnings and cash generation after adjusting for restructuring, acquisition-related amortization and pension items; also monitor capital spending and shareholder distributions against cash and debt.
- Debt maturities, convertible-note settlement capacity, pension funding requirements, and the availability and cost of repatriating foreign cash.
- Execution of the ERP replacement and integration of acquired businesses, including the acquired GDCL controls excluded from the 2016 control assessment.
- Progress, timing and commercial impact of FirstNet, along with exposure to customer concentration, government-contract cancellation, cybersecurity and supplier risks.