Motorola Solutions, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 29, 2014; comparisons are to the three months ended March 30, 2013. Amounts are in millions except per-share data. Motorola Solutions supplies mission-critical communications products, software, infrastructure and services. It reported Government and Enterprise segments.
Financial results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $1,801 | $1,973 |
| Gross margin | $845 (46.9%) | $955 (48.4%) |
| Operating earnings | $170 (9.4%) | $216 (10.9%) |
| Net earnings | $127 | $192 |
| Diluted EPS | $0.49 | $0.68 |
| Operating cash flow | $46 | $(31) |
| Capital expenditures | $45 | $46 |
| Cash and equivalents, period-end | $3,141 | $3,225 at Dec. 31, 2013 |
| Long-term debt, including current portion | $2,466 | $2,461 at Dec. 31, 2013 |
Product sales fell to $1,211 from $1,381; services sales were $590 versus $592. Income tax expense was $24 (16% effective rate), compared with $13 (6%). The 2014 rate included a $30 net tax benefit from adjustments to uncertain tax positions. Dividends declared were $0.31 per share versus $0.26.
Business and material changes
- Sales declined $172, or 9%; gross margin fell $110 and declined 1.5 percentage points. Management cited weaker ASTRO subscriber demand in North America and iDEN declines, alongside lower sales.
- Government: Sales were $1,201, down 11%; operating earnings were $113, down 37%. Lower ASTRO subscriber and North American PCR sales contributed to the decline.
- Enterprise: Sales were $600, down 4%; operating earnings increased to $57 from $36, primarily as SG&A and R&D expenses declined. Lower iDEN and mobile computing sales were partly offset by WLAN and data capture growth.
- SG&A declined to $427 from $460, while R&D declined to $243 from $262. Net earnings fell primarily due to lower gross margin and the higher effective tax rate; reduced compensation expenses partly offset the decline.
- Cash decreased $84 during the quarter, mainly reflecting $136 returned through repurchases and dividends, partly offset by operating cash generation. The company repurchased about 1 million shares for $57 and paid $79 in dividends.
Liquidity, outlook, risks and unusual items
- Current assets were $6,781 and current liabilities $3,026. The company had $2.5 billion of long-term debt and reported compliance with its credit facility covenants. Its $1.5 billion revolving credit facility was scheduled to mature June 30, 2014; it had no borrowings under the facility during the quarter.
- On April 14, 2014, after quarter-end, the company agreed to sell its Enterprise business to Zebra Technologies for $3.45 billion cash. Closing was expected by year-end 2014, subject to conditions; Motorola Solutions said it intended to return the proceeds to shareholders. The filing identifies risks of delay or failure to close, and possible Enterprise sales weakness during the pending sale.
- Q1 included $22 of net reorganization charges, including $12 of employee separation costs, a $6 impairment charge and $6 of exit costs, partly offset by $2 of reversals. Management expected about $7 of savings over the remaining nine months of 2014 and approximately $12 annualized thereafter. A $21 gain on a building and land sale offset other charges in the income statement.
- Operating cash flow benefited from the return of $43 seized by Indian tax authorities in 2013, as well as contract-billing timing and lower incentive and legal settlement payments. Subsequent to quarter-end, the company contributed another $40 to U.S. pension plans.
- Risks include pending legal matters, tax examinations and uncertain tax positions, potential contractual damages and indemnification obligations, foreign-currency exposure, and repatriation constraints or tax costs. Management did not expect pending legal or tax matters to have a material adverse effect based on information then available, but noted unfavorable outcomes could be material.
- No specific full-year financial guidance was provided in the filing. Management cautioned that quarterly results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether the Zebra transaction closes on expected terms and timing, and the ultimate use of proceeds.
- Whether Government sales and margins stabilize after ASTRO subscriber demand and PCR weakness.
- Whether Enterprise performance and customer demand are affected by the pending sale.
- Cash conversion and working-capital trends, alongside the sustainability of shareholder returns and debt access.
- The maturity or replacement of the revolving credit facility, and developments in tax, legal, pension and other contingent exposures.