Motorola Solutions, Inc. — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars.
Business context
Motorola Solutions designs, manufactures and sells communications infrastructure, devices, software and applications, and related services. Its Government segment provides public-safety and professional communications systems and services; its Enterprise segment provides rugged mobile computing, data capture, WLAN and related products and services. Government generated about 69% of 2013 sales and Enterprise about 31%.
Financial results and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $8.696 billion | $8.698 billion |
| Product sales | $6.118 billion | $6.363 billion |
| Service sales | $2.578 billion | $2.335 billion |
| Gross margin | $4.241 billion (48.8%) | $4.348 billion (50.0%) |
| Operating earnings | $1.215 billion (14.0%) | $1.256 billion (14.4%) |
| Earnings from continuing operations attributable to common shareholders | $1.099 billion; diluted EPS $4.06 | $878 million; diluted EPS $2.95 |
| Cash provided by operating activities | $944 million | $1.068 billion |
| Capital expenditures | $191 million | $187 million |
| Cash and cash equivalents at year-end | $3.225 billion | $1.468 billion |
| Total debt at year-end | $2.461 billion | $1.863 billion |
Fourth-quarter 2013 sales were $2.504 billion versus $2.441 billion in Q4 2012. Operating earnings were $413 million versus $423 million; net earnings attributable to the company were $343 million versus $336 million; diluted EPS was $1.31 versus $1.18.
Government segment sales were $6.030 billion, up 1%, and operating earnings were $979 million, up from $965 million. Enterprise sales were $2.666 billion, down 2%, and operating earnings were $236 million, down from $291 million. Year-end backlog was $6.216 billion, up from $5.719 billion; the company expected to recognize approximately 32% of Government backlog and 75% of Enterprise backlog as 2014 revenue.
Changes versus the prior period and unusual items
- Consolidated sales were essentially unchanged, as Government growth and higher service revenue offset lower product sales and Enterprise weakness.
- Gross margin and operating margin declined. Management attributed the pressure to segment and product mix, lower-margin Psion sales, and the decline in higher-margin iDEN sales.
- Net income rose despite lower operating earnings, primarily because the effective tax rate fell to 3% from 28%. The 2013 tax result included a $337 million benefit from foreign tax credits realized on repatriated earnings, plus other tax benefits.
- Other charges were $133 million, including $107 million of reorganization charges and $26 million of intangible amortization. Reorganization plans affected about 2,200 employees; management reported $27 million of savings in 2013 and expected approximately $159 million in annualized savings beyond 2013.
- Operating cash flow declined year over year, reflecting higher cash taxes and lower collections and sales of long-term receivables, partly offset by lower pension contributions and improved accounts-payable metrics.
- The company issued $600 million of 3.50% senior notes due 2023. It repurchased approximately 28.6 million shares for $1.7 billion and paid $292 million in dividends during 2013.
Outlook, risks and contingencies
Management described Government demand and backlog as solid entering 2014, supported by state and local government and international markets. It expected public-safety LTE revenue to increase beginning in 2015 and beyond, initially led by international deployments; delays in standards and network deployment had deferred opportunities. Management expected Enterprise spending trends to improve in 2014, while noting customer delays and operating-system uncertainty. iDEN revenue was expected to continue declining over the next three years, with the largest step-down in 2014. The filing provides no consolidated numerical earnings or revenue guidance.
- Key business risks include economic and government budget pressures, customer financing and payment risk, competitive and technology shifts, fixed-price and multi-year contract execution, supplier and subcontractor dependence, and cybersecurity and data privacy exposures.
- FirstNet timing, specifications, funding and state participation could affect U.S. public-safety LTE opportunities. Government contracts may be subject to cancellation, audits and funding changes.
- The company reported an underfunded U.S. pension position of approximately $1.2 billion and expected 2014 cash contributions of approximately $300 million to U.S. pension plans and $35 million to non-U.S. plans.
- Contractual obligations totaled $3.160 billion, including $2.457 billion of long-term debt and $491 million of lease obligations. A $1.5 billion revolving credit facility was scheduled to expire June 30, 2014; the company had not borrowed under it and was in compliance with its covenants at year-end.
- Unrecognized tax benefits were $156 million. Management estimated possible tax changes over the next 12 months could range from a $50 million charge to a $75 million benefit; expected cash payments were not to exceed $25 million.
- Management said ordinary-course litigation was not expected to have a material adverse effect, while acknowledging an unfavorable resolution could be material. Performance bonds outstanding were approximately $809 million; draws were described as rare.
The financial statements received an unqualified audit opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting. Management concluded disclosure controls and internal controls were effective as of year-end.
Important facts for investors to verify
- How much of the 2013 EPS increase reflects the $337 million tax benefit, and what earnings level is sustainable without similar discrete tax benefits?
- Whether Government backlog converts to revenue and cash on schedule, and whether large system contracts meet estimated costs and margins.
- Whether Enterprise demand and margins recover, including the pace of iDEN decline and results from the expanded mobile-computing portfolio.
- Whether management realizes the projected $159 million annualized restructuring savings without undermining sales, delivery or product development.
- How pension funding needs, foreign cash repatriation and the 2014 credit-facility renewal affect cash available for investment and shareholder returns.