Motorola Solutions, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012; comparative periods ended July 2, 2011. Financial statements are unaudited. Amounts are in millions except per-share data.
Business context
Motorola Solutions provides mission-critical communications infrastructure, devices, software and services. Its two segments are Government (public-safety and commercial radio systems, software and services) and Enterprise (mobile computing, data capture, WLAN and iDEN products and services). Government accounted for 68% of Q2 sales and Enterprise 32%. Results exclude amateur, marine and airband radio businesses, which were classified as discontinued operations after the January 2012 exit.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $2,148 | $1,984 | $4,104 | $3,818 |
| Gross margin | $1,060; 49.3% | $1,007; 50.8% | $2,033; 49.5% | $1,931; 50.6% |
| Operating earnings | $278; 12.9% | $159; 8.0% | $510; 12.4% | $328; 8.6% |
| Continuing-operations earnings attributable to common stockholders | $177; diluted EPS $0.60 | $50; diluted EPS $0.14 | $336; diluted EPS $1.09 | $417; diluted EPS $1.20 |
| Net earnings attributable to Motorola Solutions | $182 | $349 | $339 | $846 |
| Operating cash flow from continuing operations | Not separately presented for the quarter | $322 | $327 |
Q2 revenue increased 8%; first-half revenue increased 7%. Government sales grew 14% in Q2 and 13% in the first half, while Enterprise sales declined 2% in both periods. Q2 operating earnings rose substantially, helped by higher sales and lower other charges. First-half continuing-operations earnings fell from the prior year, principally because 2011 included a $244 million tax benefit from a U.S. deferred-tax valuation-allowance reversal. Prior-year discontinued-operations earnings also included a significant Networks-business sale gain, making reported net earnings comparisons misleading.
Gross margin percentage declined in both comparative periods. Management cited product mix, including more infrastructure sales, lower-margin managed-services contract growth, and Enterprise mix and foreign-exchange effects. Q2 other charges were $17 million versus $106 million; first-half charges were $32 million versus $161 million, largely reflecting lower intangible amortization and the absence of prior-year legal and intellectual-property reserve charges.
Liquidity, cash flow and capital structure
- At June 30, cash and cash equivalents were $1.772 billion and Sigma Fund and short-term investments were $1.933 billion, totaling about $3.7 billion. Combined cash and investments were down about $1.4 billion from year-end, primarily reflecting shareholder returns and debt repayment.
- First-half continuing-operations cash from operating activities was $322 million, compared with $327 million. Investing activities provided $1.186 billion, including $1.277 billion of net Sigma Fund investment-sale proceeds. Financing activities used $1.606 billion.
- Total debt was approximately $1.865 billion: $4 million current and $1.861 billion long-term, versus $1.535 billion at year-end. In May, the company issued $750 million of 3.750% notes due 2022 and redeemed $400 million of 5.375% notes due 2012 for approximately $408 million.
- The company had an undrawn $1.5 billion revolving credit facility due June 2014 and reported compliance with its financial covenants. Management stated that available cash, short-term investments and Sigma Fund assets were more than adequate for operating requirements over the next 12 months.
- First-half share repurchases totaled $1.804 billion for 37.1 million shares; cash dividends were $134 million. The company reported $3,873 million in total stockholders’ equity at June 30, down from $5,274 million at year-end.
Outlook, developments and risks
- No formal full-year revenue or earnings guidance is stated in the provided filing. Management expected approximately $19 million in savings during the second half of 2012 from reorganization plans begun in the first half, and approximately $34 million in annualized savings beyond 2012.
- Management expected 2012 pension contributions of approximately $340 million to U.S. plans and $30 million to non-U.S. plans; $132 million and $18 million, respectively, had been contributed in the first half. A further $72 million was contributed to U.S. plans after June 30.
- On June 15, 2012, the company announced a recommended cash offer of approximately $200 million for Psion Plc.; completion was expected in Q4 2012, subject to closing conditions. It also assumed responsibility for implementation and operation of Norway’s TETRA public-safety network in February.
- On July 25, 2012, the company announced an increase in its quarterly dividend from $0.22 to $0.26 per share and authorized an additional $2.0 billion for repurchases, bringing the program to $5.0 billion and extending it indefinitely.
- Key exposures include foreign-exchange movements, pension obligations, tax examinations and uncertain tax positions, legal proceedings, and indemnification or contractual damage claims. Management said pending legal matters were not expected to materially affect consolidated financial position, liquidity or results, while cautioning that an unfavorable resolution could affect results in the period resolved. Appeals remained pending in the Silverman securities class action settlement, totaling $200 million, of which insurers were paying $150 million.
- The company was upgrading and consolidating enterprise resource planning systems; the first scheduled implementation was in Q3 2012. Management described added monitoring, verification and testing to support controls during implementation. Disclosure controls were assessed as effective at quarter-end.
Important facts for investors to verify
- Underlying Government and Enterprise demand, particularly the continued Enterprise decline in iDEN and WLAN and the factors behind lower gross-margin percentages.
- Cash generation and cash availability, including the location and tax consequences of offshore cash repatriation, and the sustainability of substantial repurchases and dividend increases.
- Execution of expected reorganization savings, pension funding requirements, and the effect of those obligations on future free cash flow.
- Completion and financial impact of the Psion offer and Norway TETRA contract, and the timing and effectiveness of ERP implementation and related control procedures.
- Developments in tax audits, the Silverman settlement appeals, other litigation and indemnification exposures, and compliance with debt covenants.