Motorola Solutions, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended April 1, 2017; comparisons are with the three months ended April 2, 2016. The company provides mission-critical communications products and services through Products and Services segments. Results for the quarter are not necessarily indicative of full-year results; historically, revenue is higher in Q4.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $1.281 billion | $1.193 billion |
| Gross margin | $570 million; 44.5% | $502 million; 42.1% |
| Operating earnings | $176 million; 13.7% of sales | $100 million; 8.4% of sales |
| Net earnings attributable to Motorola Solutions | $77 million | $17 million |
| Diluted EPS | $0.45 | $0.10 |
| Operating cash flow | $142 million | $13 million |
- Products revenue was $703 million, essentially unchanged year over year; segment operating earnings rose to $89 million from $51 million.
- Services revenue rose 18% to $578 million, mainly reflecting Airwave and organic Managed & Support services growth. Segment operating earnings increased to $87 million from $49 million.
- Cash and cash equivalents, including restricted cash, were $829 million at April 1, 2017, down from $1.030 billion at December 31, 2016. Cash from operations was offset by investing outflows and $255 million returned to shareholders.
- Total debt was approximately $4.458 billion, including $44 million current; shareholders’ equity was a deficit of $1.037 billion. The company reported compliance with credit-facility covenants.
- Quarterly dividends declared were $0.47 per share. The company repurchased 2.2 million shares for $178 million, at an average $80.82 per share.
Changes and drivers
- Sales increased 7%, driven by acquisition-related and organic growth in Services, particularly in EMEA and the Americas. Airwave contributed $58 million of Services revenue in EMEA versus the prior-year quarter.
- Gross margin expansion reflected favorable Products mix and improved Services margins, including Airwave’s higher-margin Managed & Support portfolio. SG&A declined 1% to $232 million; R&D remained $135 million.
- Net earnings also benefited from a $42 million net legal-settlement gain and a $24 million year-over-year improvement in gains and losses on sales of investments and businesses. The effective tax rate rose to 35% from 23%; the prior-year rate benefited from share-based compensation tax benefits and release of tax reserves.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management describes Services growth, Managed & Support offerings, software, and strategic acquisitions as opportunities, while noting continued political and economic uncertainty, including Brexit and conditions in parts of Latin America and Europe.
- Q1 charges included $36 million of intangible amortization, $19 million of reorganization costs, a $9 million non-U.S. pension settlement loss, and an $8 million building impairment, offset in part by the $42 million legal-settlement gain. Reorganization accruals were $90 million at quarter-end.
- The company completed the Interexport acquisition in March for approximately $147 million gross consideration, including assumed liabilities. After quarter-end, it announced an intended Kodiak Networks acquisition, expected to close later in 2017.
- After quarter-end, the company entered a new $2.2 billion unsecured revolving facility expiring in April 2022, replacing the prior facility scheduled to mature in 2019. It also paid an additional $77 million dividend.
- Management cited currency and macroeconomic exposure, possible higher funding costs or reduced market access if credit conditions or ratings deteriorate, legal claims, and rare customer contracts where damages could exceed contract value. Management did not expect pending ordinary-course legal matters to materially affect results, but acknowledged an unfavorable outcome could do so.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. The new ERP system went live in April 2017 and was functioning as designed.
Investor verification checklist
- Assess how much Services growth and margin improvement is organic versus acquisition-driven, and the sustainability of Airwave’s contribution.
- Review cash conversion and the effects of working-capital movements, receivable sales, and the legal-settlement proceeds on operating cash flow.
- Track debt, refinancing terms, covenant headroom, and the company’s capacity to fund dividends and repurchases while equity is in deficit.
- Monitor the Interexport purchase-price allocation, Kodiak transaction completion and cost, and restructuring payments.
- Verify the eventual financial impact of new accounting standards, especially revenue recognition adoption planned for January 1, 2018.