Motorola Solutions, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 30, 2013; comparable period ended March 31, 2012. Unless stated otherwise, financial amounts are in millions of dollars. Motorola Solutions provides mission-critical communications products, software and services through its Government and Enterprise segments.
Financial performance
- Revenue: Net sales rose 1% to $1,973, with product sales down to $1,381 from $1,444 and service sales up to $592 from $512.
- Profit and margins: Operating earnings declined to $216 from $232; operating margin fell to 10.9% from 11.9%. Gross margin was $955, or 48.4% of sales, versus $973, or 49.7%. Net earnings from continuing operations increased to $192 from $159. Diluted continuing-operations EPS was $0.68 versus $0.50.
- Cash flow: Continuing-operations operating cash flow was negative $31, compared with positive $69 a year earlier. Capital expenditures were $46. Management cited long-term contract milestone billing timing and an approximately $40 foreign tax deposit, expected to be refunded during 2013, as cash-flow headwinds.
- Liquidity: Cash and cash equivalents were $1,470; Sigma Fund and short-term investments were $2,248, for combined balances of approximately $3.7 billion. Current assets were $7,366 and current liabilities $2,889.
- Debt: Long-term debt was $2,450, up from $1,859 at year-end 2012. The company issued $600 of 3.5% senior notes due 2023, receiving $588 net proceeds. Its $1.5 billion revolving credit facility was undrawn; the company reported covenant compliance.
- Capital returns: The company repurchased 5.9 million shares for $357 at an average $60.27 per share and paid $72 in dividends. It declared dividends of $0.26 per share. Weighted-average diluted shares fell to 280.7 million from 317.7 million.
Changes versus the prior-year quarter
- Government sales increased 3% to $1,346 and operating earnings rose to $180 from $150, supported by mission-critical radio products, integration services and lower SG&A.
- Enterprise sales declined 4% to $627; operating earnings fell 56% to $36 from $82. Lower iDEN sales, unfavorable mix and weaker gross margin were key factors. Psion, acquired in Q4 2012, contributed to mobile-computing sales and higher R&D and SG&A costs.
- Despite lower operating earnings, continuing-operations net earnings increased principally because the effective tax rate fell to 6% from 35%, and pension expense decreased. The 2013 tax result included discrete benefits, including a $25 reduction in deferred tax liabilities related to foreign earnings and a $12 R&D tax-credit benefit.
Outlook, risks and unusual items
- Management expected approximately $9 of savings during the remaining nine months of 2013 from new productivity plans, and approximately $12 of annualized savings beyond 2013. The quarter included $11 of net restructuring charges; about 600 employees were covered by the remaining $27 employee-separation accrual.
- Management expected approximately $250 of U.S. pension contributions in 2013. It said cash, short-term investments and Sigma Fund investments were adequate for operating requirements over the next 12 months.
- Management stated that completion of a foreign-subsidiary reorganization was expected to make future cash repatriations more tax-favorable and benefit the effective tax rate for the remainder of 2013. Repatriation can nevertheless face local approvals, delays and cash-tax costs; substantial cash is held outside the U.S.
- Tax audits and unrecognized tax benefits remain uncertain. The company estimated a possible next-12-month effective-tax-rate impact ranging from a $50 charge to a $50 benefit, with cash payments of $0 to $25. Management did not expect current tax disputes or ordinary-course litigation to materially harm the company overall, while noting unfavorable outcomes could affect results when resolved.
- The Silverman securities class-action settlement was $200, of which insurers were to pay $150; appeals concerning settlement terms and attorneys’ fees remained pending. The filing also notes potentially uncapped damages in certain customer contracts and uncapped reciprocal indemnities involving Motorola Mobility.
- Foreign-exchange contract notional value was $618. Management viewed the contracts as generally offsetting underlying exposures. The filing cautions that forward-looking statements are subject to risks, including market access and funding costs, tax and legal outcomes, repatriation, pension obligations and execution of restructuring plans.
Most important facts for investors to verify
- Whether Enterprise sales and margins stabilize, particularly in iDEN, WLAN and data capture, and whether Government growth continues.
- How much of the earnings and EPS improvement is sustainable after the unusually low 6% tax rate and share-count reduction.
- Whether operating cash flow recovers as contract billings normalize and the foreign tax deposit is refunded; monitor pension contributions and working-capital needs.
- Debt and capital-return trajectory, including the impact of the 2023 notes and continued repurchases and dividends.
- Realization of restructuring savings, foreign-cash repatriation plans, tax-audit outcomes and pending litigation or contractual claims.