Motorola Solutions, Inc. — Q3 2020 Form 10-Q
Reporting period: Third quarter ended September 26, 2020; year-to-date results cover the nine months then ended. Amounts below are in millions of dollars, except per-share data. Financial statements are unaudited.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,868 | $1,994 | $5,141 | $5,511 |
| Operating earnings | $352 | $413 | $828 | $991 |
| Net earnings attributable to Motorola Solutions | $205 | $267 | $537 | $625 |
| Diluted EPS | $1.18 | $1.51 | $3.08 | $3.56 |
| Gross margin | 48.7% | 50.5% | 47.9% | 49.2% |
| Operating margin | 18.9% | 20.7% | 16.1% | 18.0% |
Q3 sales fell 6% year over year; operating earnings declined 15%. For the first nine months, sales decreased 7% and operating earnings decreased 16%. The effective tax rate was 18% for Q3 and 17% year to date, versus 23% and 22% in the comparable 2019 periods.
Segments and material changes
- Products and Systems Integration: Q3 sales were $1,163, down 14%; operating earnings were $164 versus $258. Lower public-safety land mobile radio and professional/commercial radio sales, plus COVID-related delays in customer engagements, weighed on results. Video security partially offset declines. Q3 operating margin was 14.1%, versus 19.1%.
- Software and Services: Q3 sales were $705, up 9%; operating earnings were $188 versus $155. Growth in services, video security and command-center software supported a Q3 operating margin of 26.7%, up from 24.0%.
- Lower sales and gross-margin contribution in Products and Systems Integration were partly offset by Software and Services growth and lower expenses. SG&A fell 13% in Q3, in part due to lower legal, travel and incentive costs.
Cash flow, debt and liquidity
- Cash from operations was $909 for the first nine months, down from $1,028 in 2019. The company attributed the decline primarily to lower earnings from reduced sales volume. Investing cash use was $369; financing cash use was $532.
- Cash and equivalents were $1,007 at September 26, 2020, compared with $1,001 at year-end 2019. Total debt was approximately $5.4 billion, including $212 current and $5,162 long-term.
- The company issued $900 of 2.30% notes due 2030 and used proceeds in part to redeem or repurchase debt; the transactions generated a $56 loss on debt extinguishment. It had $200 outstanding on its $2.2 billion revolving facility at quarter-end and repaid another $100 after quarter-end. Management reported covenant compliance and stated it believed liquidity was sufficient; no bond maturities were due before 2023.
- Share repurchases were $441 and dividends paid were $327 year to date. Remaining repurchase authorization was $820 at quarter-end. Remaining performance obligations were $6.8 billion, of which $2.8 billion was expected to be recognized over the next twelve months.
Outlook, risks and unusual items
- Management said COVID-19 effects were more significant in Products and Systems Integration during the first half and expected a reduced impact in Q4. It anticipated year-over-year 2020 sales declines in that segment, particularly due to PCR demand and near-term delays with state and local customers. Management expected Software and Services effects to be limited, citing recurring revenue and backlog, and expected fiscal 2020 video security growth. No full-year numerical guidance is stated in the provided filing text.
- Management described expense reductions, including lower variable compensation, travel and contractor costs, and a reduced real-estate footprint. It reported no impairment indicators requiring asset write-downs at quarter-end.
- COVID-19-related economic disruption, customer demand and purchasing delays, government funding, foreign-exchange movements, access to capital, and execution of acquisitions and cost actions are among the forward-looking uncertainties described.
- The company recorded $72 of net reorganization charges year to date, including $85 of employee-separation charges partly offset by reversals; approximately 900 employees were associated with the additional charges. The remaining separation accrual was $87.
- A jury awarded Motorola Solutions $764.6 in its Hytera trade-secret and copyright case. After quarter-end, on October 20, 2020, the court denied Hytera’s new-trial motion and upheld the award; other post-trial motions, including requests for an injunction and additional damages, remained pending. Two Hytera U.S. affiliates were in Chapter 11 proceedings. The filing does not provide a clear value for any recognized recovery from the award.
- Five acquisitions were completed in 2020, including Callyo, Pelco, IndigoVision and two cybersecurity services businesses. Purchase accounting for these acquisitions was not yet complete.
Important facts for investors to verify
- Whether demand and customer engagement in Products and Systems Integration recover as management expected, and whether Software and Services growth continues.
- Subsequent cash conversion and liquidity, including revolving-credit repayment, debt maturities, and the effects of receivable sales. The company reported $353 of receivable-sale proceeds year to date, including use of a new discounting facility.
- The timing, collectability and accounting treatment of the Hytera award, pending motions and bankruptcy proceedings.
- Final purchase-accounting allocations and the realized contribution of 2020 acquisitions.
- Execution and cash costs of restructuring, dividends and remaining share-repurchase authorization.