Motorola Solutions, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter ended September 29, 2012; year-to-date figures cover the nine months ended that date. Comparisons are with the quarter and nine-month period ended October 1, 2011, except balance-sheet comparisons, which are with December 31, 2011. Amounts are in millions unless stated otherwise.
Business context
Motorola Solutions provides mission-critical communications products, software, infrastructure and services. It reports two segments: Government, serving public safety and commercial radio customers, and Enterprise, including mobile computing, data capture, WLAN and iDEN products and services. Government represented 71% of Q3 sales; Enterprise represented 29%. The company reported results from continuing operations after classifying exited radio businesses as discontinued operations.
Financial results and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $2,153 | $2,085 | $6,257 | $5,903 |
| Gross margin | $1,087; 50.5% | $1,055; 50.6% | $3,120; 49.9% | $2,986; 50.6% |
| Operating earnings | $324; 15.0% | $254; 12.2% | $833; 13.3% | $582; 9.9% |
| Continuing-operations earnings attributable to common shareholders | $206 | $153 | $542 | $570 |
| Diluted EPS from continuing operations | $0.72 | $0.45 | $1.80 | $1.66 |
| Net earnings attributable to Motorola Solutions | $206 | $128 | $545 | $974 |
Q3 sales increased 3%; Government sales rose 12% to $1,521, while Enterprise sales fell 13% to $632. For the nine months, Government sales increased 12% to $4,281 and Enterprise sales declined 6% to $1,976. Q3 operating margin improved, while nine-month gross margin percentage declined. Net earnings comparisons are materially affected by discontinued-operation results, including a $404 gain in the 2011 nine-month period.
- Cash flow: Continuing-operations operating cash flow was $504 for the first nine months, down from $804. Capital expenditures were $140 versus $103. Investing activities provided $1,342; financing activities used $1,962.
- Liquidity: Cash and cash equivalents were $1,779, and Sigma Fund and short-term investments totaled $1,760, at September 29. Their combined $3.5 billion balance compared with $5.1 billion at year-end 2011. Current assets were $7,271 and current liabilities $3,125.
- Debt and credit: Total debt was $1,864 ($4 current; $1,860 long-term), compared with $1,535 at year-end 2011. The company issued $750 of 3.750% notes due 2022 and redeemed $400 of 5.375% notes due 2012. Its unused $1.5 billion revolving facility matures June 30, 2014; the company was covenant-compliant.
- Capital returns: The company repurchased 43.5 million shares for $2.1 billion in the first nine months and paid $197 in dividends. It reported $1.8 billion of remaining authority under its $5.0 billion repurchase program, which has no expiration date.
Material changes and unusual items
- Q3 operating earnings improved partly because other charges declined to $16 from $60, including lower intangible amortization. Nine-month other charges fell to $48 from $221; the prior-year period included $150 of intangible amortization and $48 of legal and intellectual-property reserve adjustments.
- Nine-month 2011 continuing-operations earnings included a $244 tax benefit from a valuation-allowance reversal. This contributed to lower nine-month 2012 continuing-operations earnings despite higher sales and operating earnings.
- Share repurchases reduced weighted-average diluted shares; the filing cites this as a driver of higher diluted EPS.
- The company contributed $340 to U.S. pension plans in the first nine months, meeting projected 2012 contributions. A Q3 health-plan amendment reduced the accumulated postretirement obligation by $139 and generated an $87 after-tax reduction in accumulated other comprehensive loss.
- On October 1, 2012, after quarter-end, the company completed its approximately $200 cash acquisition of Psion plc; its results will be included in Enterprise after acquisition.
Outlook, management commentary and risks
Management did not provide overall revenue or earnings guidance in the supplied filing text. It expects the effective tax rate to be close to the U.S. statutory rate, primarily due to its repatriation strategy and accrual of U.S. tax on undistributed foreign earnings. Productivity plans are expected to deliver approximately $9 of savings in the remaining three months of 2012 and approximately $58 in annualized savings thereafter. Plans generated $36 of net charges in the first nine months and included employee separation costs for approximately 700 employees.
- Management said cash, short-term investments and Sigma Fund assets were adequate for operating requirements over the next 12 months. It noted that repatriating some overseas cash may require local approvals or incur adverse cash taxes; $1.4 billion of cash was held outside the U.S.
- Tax examinations and disputes remain uncertain. The company estimated possible changes in unrecognized tax benefits could produce a net tax impact ranging from a $50 charge to a $50 benefit, with cash payments of $0 to $25.
- The company faces ordinary-course litigation and contractual indemnities. Management did not expect pending legal matters to materially affect its financial position, liquidity or results, but acknowledged an unfavorable resolution could materially affect results in the period resolved. Intellectual-property indemnity risk was noted as increasing.
- A $200 Silverman securities-litigation settlement was approved, with $150 payable by insurers; appeals concerning settlement terms and attorneys’ fees were pending.
- Other exposures include contracts where potential damages could exceed contract revenue and uncapped reciprocal indemnities with Motorola Mobility. The filing also identifies foreign-exchange exposure; outstanding currency contracts had $558 notional value.
- The company said disclosure controls were effective and no material internal-control changes occurred during the quarter. It is continuing a phased global ERP upgrade, which involves process changes and implementation risks.
Important facts for investors to verify
- Whether Government growth can offset continued Enterprise weakness, including expected iDEN declines and fewer large deals.
- Whether the stated restructuring savings are achieved and whether additional charges or employee-related costs arise.
- How continued repurchases, dividends and any acquisition spending affect liquidity, debt and share count.
- Whether pension funding, foreign-cash repatriation and tax examinations change cash needs or reported earnings.
- The resolution and potential financial impact of litigation, indemnities and contractual damage claims.
- The post-acquisition performance and integration of Psion, which was completed after the reporting date.