Motorola Solutions, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; quarterly figures below refer to Q4 2011. The company reports Government and Enterprise segments. Results reflect a major portfolio change: Motorola Mobility was distributed to shareholders in January 2011, and the Networks business and other operations were classified as discontinued operations.
Financial performance and position
- Full-year revenue: $8.203 billion, up 8% from $7.617 billion in 2010. Product sales were $6.068 billion and services sales were $2.135 billion.
- Profit and margins: Gross margin was $4.146 billion, or 50.5% of sales, versus 50.0% in 2010. Operating earnings were $858 million and operating margin was 10.5%, compared with $751 million and 9.9%. Continuing-operations earnings attributable to common shareholders were $747 million, or $2.20 diluted EPS, versus $244 million, or $0.72.
- Net earnings: $1.158 billion, including $411 million from discontinued operations. Discontinued-operations earnings included gains from the Networks and Wireless Broadband business sales; continuing-operations profit also benefited from a $274 million tax valuation-allowance reversal.
- Q4 2011: Revenue was $2.300 billion; operating earnings were $276 million; continuing-operations earnings attributable to common shareholders were $177 million, or $0.54 diluted EPS; net earnings were $184 million, or $0.56 diluted EPS.
- Cash flow and investment: Continuing-operations operating cash flow was $848 million, versus $803 million in 2010. Investing activities provided $2.426 billion, substantially reflecting investment and business-sale proceeds. Capital expenditures were $186 million.
- Liquidity: Year-end cash and cash equivalents were $1.881 billion and Sigma Fund/short-term investments were $3.210 billion. Current assets were $8.768 billion and current liabilities were $3.815 billion. Management said available cash and investments were adequate for expected needs over the next 12 months.
- Debt and capital returns: Total debt was approximately $1.535 billion, down from $2.703 billion; the company repaid about $1.2 billion of debt. It repurchased $1.1 billion of shares and paid $72 million in dividends. A $1.5 billion revolving credit facility was unused at year-end; the company reported compliance with its covenants.
Segments and changes versus 2010
- Government: Sales of $5.358 billion, up 6%; operating earnings of $616 million versus $534 million. Operating margin rose to 11.5% from 10.6%, driven primarily by sales growth, product mix and expense leverage. Backlog was about $2.0 billion, unchanged year over year; approximately 73% was expected to convert to revenue in 2012.
- Enterprise: Sales of $2.845 billion, up 11%; operating earnings of $242 million versus $217 million. Growth in mobile computing, WLAN and data capture partly offset iDEN declines. Backlog fell to $480 million from $570 million; approximately 97% was expected to convert to revenue in 2012.
- Consolidated gross margin improved modestly. SG&A was 23.2% of sales versus 24.5%, and R&D was 12.6% versus 13.6%. Other charges increased to $341 million from $150 million, including $88 million of net legal charges, $52 million of reorganization charges, $200 million of intangible amortization and a $10 million financing-receivable reserve.
- The effective tax result shifted from $403 million of tax expense in 2010 to a $3 million tax benefit in 2011, mainly due to the valuation-allowance reversal and tax-position adjustments. Net earnings therefore include significant tax and discontinued-operations effects and should not be read as a like-for-like measure of continuing operating performance.
Outlook, risks and unusual items
- Management described U.S. and parts of Western Europe government budgets as challenging, while saying public-safety communication needs remained a priority. It saw growth opportunities in public-safety LTE/broadband and enterprise mobility, but expected continued decline in iDEN infrastructure and related services. The filing provides no specific consolidated 2012 revenue or EPS guidance.
- Management expected about $60 million of annualized savings from 2011 reorganization plans, after approximately $18 million of savings in 2011. It forecast 2012 pension contributions of about $340 million to U.S. plans and $30 million to non-U.S. plans, and an approximately $60 million increase in 2012 operating expense from Regular Pension Plan costs versus 2011.
- Key risks include constrained public-sector budgets and order deferrals; dependence on government contracts, grants and customer financing; execution, cost and performance exposure on large multiyear and managed-services contracts; competition and rapid technology change; radio-spectrum and regulatory decisions; single-source suppliers and supply disruptions; foreign exchange and European economic exposure; and substantial, market-sensitive pension obligations.
- Other notable exposures include retained Networks-business customer financing (about $130 million outstanding, with related receivables and a $10 million allowance), uncapped reciprocal indemnities with Motorola Mobility, and about $1.1 billion of performance and bid bonds. Management said pending legal matters were not expected to materially affect results, but adverse outcomes could be material. The Silverman securities case settlement was signed in February 2012 and remained subject to court approval.
- The company completed the Mobility separation and Networks sale during 2011, contributed $3.425 billion to Motorola Mobility, and retained significant U.S. and most non-U.S. pension liabilities. Total assets declined to $13.929 billion from $25.577 billion, substantially reflecting the separation and discontinued-operation reclassifications.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- Separate recurring operating performance from the $274 million tax benefit and the $411 million of discontinued-operations earnings, including business-sale gains.
- Confirm conversion and timing of segment backlogs, particularly the lower Enterprise backlog and expected iDEN declines.
- Track pension funding, discount-rate sensitivity, planned 2012 contributions and the forecast increase in pension expense.
- Assess collectability of retained Networks-related financing and the scope of indemnity, legal and performance-bond exposures.
- Review post-separation cash needs and capital allocation, including the continued share-repurchase authorization, dividends and the remaining Motorola Mobility contribution.