Motorola Solutions, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 27, 2020; comparisons are with the periods ended June 29, 2019. Amounts are in millions except per-share data.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $1,618 | $1,860 | $3,273 | $3,517 |
| Gross margin | $766; 47.3% | $931; 50.1% | $1,553; 47.4% | $1,704; 48.5% |
| Operating earnings | $218; 13.5% | $349; 18.8% | $476; 14.5% | $579; 16.5% |
| Net earnings attributable to Motorola Solutions | $135 | $207 | $332 | $358 |
| Diluted earnings per share | $0.78 | $1.18 | $1.90 | $2.04 |
| Cash provided by operating activities | Not stated for quarter | $517 | $502 |
- Q2 sales fell 13%; product sales declined to $877 from $1,118, while services sales were nearly flat at $741 versus $742.
- For the first half, operating cash flow was $517. Investing activities used $141 and financing activities used $17; cash increased $340 to $1,341.
- At June 27, cash and cash equivalents were $1,341, versus $1,001 at year-end 2019. Total debt was $5.6 billion, including $517 of current debt, versus $5.1 billion and $16 current at year-end. Stockholders’ equity was negative $815.
Changes and business trends
- Products and Systems Integration Q2 sales declined 22% to $968, and operating earnings fell to $49 from $201. Management cited weaker professional commercial radio and public-safety LMR demand, and COVID-related delays in systems engagements.
- Software and Services Q2 sales rose 5% to $650; operating earnings increased to $169 from $148, with operating margin rising to 26.0% from 23.8%. Management pointed to services and software growth, margin expansion, and acquisitions.
- Q2 operating earnings declined 38%. Lower sales and gross margin in Products and Systems Integration were partly offset by reduced expenses and stronger Software and Services results. Consolidated gross margin decreased 2.8 percentage points.
- First-half sales declined 7% and operating earnings fell 18%. Acquisitions contributed $88 of first-half revenue; unfavorable currency reduced sales by $38.
Outlook, risks, and notable items
- Management said COVID-19’s effects were expected to be more pronounced in Products and Systems Integration, with year-over-year segment sales declines likely in 2020; it expected the largest impact in Q2. Software and Services was expected to be more resilient due to recurring revenue and backlog, while video security devices were expected to grow for fiscal 2020. No specific consolidated earnings or revenue guidance was provided.
- The company reported $6.6 billion of remaining performance obligations at quarter-end; $2.7 billion was expected to be recognized over the next 12 months, subject to contract terms and timing.
- Management cited expense reductions, including lower variable compensation, travel, contractor spending, and real-estate costs. A first-half $50 gain on a European manufacturing-facility sale partly offset higher restructuring costs. First-half reorganization charges were $59, including separation costs for approximately 700 employees; the remaining severance accrual was $96.
- COVID-related precautionary borrowing: the company drew $800 under its revolving facility in Q1, repaid $300 during Q2 and another $200 after quarter-end. At June 27, $500 remained outstanding and $1.9 billion of facility capacity was available. The company said it had adequate liquidity and was in compliance with covenants.
- First-half operating cash flow included a $54 net benefit from a new receivables discounting facility. The company also reported $156 of first-half accounts-receivable sale proceeds.
- A jury awarded Motorola Solutions $764.6 in its Hytera trade-secret and copyright case. Hytera sought a new trial; two Hytera U.S. entities filed for Chapter 11, and Motorola Solutions subsequently moved to dismiss those proceedings. The ultimate outcome and collection remain uncertain.
- Acquisitions included IndigoVision and two cybersecurity services businesses during the period. After quarter-end, the company acquired Pelco for $110 in cash.
- The company paid $218 in first-half dividends and repurchased $336 of shares. It reported no material asset impairment indicators at quarter-end.
Important facts for investors to verify
- Whether COVID-related demand weakness and customer delays persist, particularly in Products and Systems Integration, and how segment margins respond.
- Debt repayment plans, liquidity and covenant headroom, including the effect of the $517 current debt classification and subsequent revolver repayment.
- Cash-flow quality, including working-capital timing and the impact of receivable sales and discounting.
- The procedural status, collectability, and financial-statement treatment of the Hytera award and bankruptcy proceedings.
- Integration, purchase accounting, and expected performance of recent acquisitions, including post-quarter Pelco.