Motorola Solutions, Inc. annual report, FY2017

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Motorola Solutions, Inc. — 2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report; fourth-quarter figures are included below where relevant. Unless stated otherwise, amounts are U.S. dollars.

Business context and reporting period

Motorola Solutions supplies mission-critical communications infrastructure, devices, software and services to public-safety, government and commercial customers in more than 100 countries. It reports two segments: Products (59% of 2017 sales) and Services (41%). Sales are typically weighted to the second half, with the fourth quarter generally the strongest.

Financial performance and liquidity

  • Revenue: 2017 net sales were $6.380 billion, up 6% from $6.038 billion in 2016. Products sales rose 3% to $3.772 billion; Services sales rose 9% to $2.608 billion. Fourth-quarter sales were $1.957 billion, compared with $1.883 billion in Q4 2016.
  • Profit and margins: Gross margin was $3.024 billion, or 47.4% of sales, versus 47.5% in 2016. Operating earnings increased 20% to $1.282 billion; operating margin rose to 20.1% from 17.7%. Products operating margin was 24.2%; Services operating margin was 14.1%.
  • Net results: The company reported a $155 million loss from continuing operations attributable to Motorola Solutions, or $0.95 per diluted share, compared with $560 million of earnings, or $3.24 per diluted share, in 2016. The principal cause was $874 million of nonrecurring tax expense associated with U.S. tax reform. Q4 net loss attributable to common shareholders was $575 million, or $3.56 per diluted share.
  • Cash flow: Cash from continuing operations was $1.346 billion, up from $1.165 billion in 2016. Capital expenditures were $227 million. Cash and cash equivalents, including restricted cash, totaled $1.268 billion at year-end, compared with $1.030 billion a year earlier.
  • Debt and liquidity: Total debt was approximately $4.471 billion. The company had a $2.2 billion revolving credit facility maturing in 2022 and reported covenant compliance at year-end. Management said available cash, operating cash flow, foreign-fund repatriation and the facility were adequate for expected near-term requirements. Stockholders’ equity was in deficit by $1.727 billion.
  • Capital returns: The company returned $790 million through $483 million of share repurchases and $307 million of dividends. It increased the quarterly dividend 11% to $0.52 per share in November 2017; approximately $1.7 billion remained under its repurchase authorization.
  • Backlog: Record backlog was $9.612 billion, up from $8.371 billion. The company expected to recognize in 2018 approximately 54% of Products backlog and 25% of Services backlog; these estimates are subject to change.

Material changes versus 2016

  • Sales increased 6%, with growth in both segments and every geographic region. Products operating earnings rose to $914 million from $734 million; Services operating earnings rose to $368 million from $333 million.
  • Services’ share of total revenue continued to expand, supported by acquisitions and organic growth in Managed & Support services. The filing states that Services generally has lower gross margins than Products.
  • Operating cash flow increased $181 million. Cash rose by $238 million, while total debt increased to about $4.5 billion from $4.4 billion.
  • Net other charges declined to $195 million from $249 million, including $151 million of intangible amortization, $48 million of non-U.S. pension settlement losses, $33 million of reorganization charges and a $47 million legal-settlement gain.
  • U.S. tax reform drove a sharp reversal in reported earnings: income tax expense was $1.227 billion, versus $282 million in 2016. The 2017 tax amount includes provisional estimates that the company said could be refined during 2018.

Outlook, management commentary, risks and unusual items

  • Management expects continued demand for Managed & Support services, software and public-safety LTE, and anticipates a longer-term revenue mix shift toward software and services. It provided no specific numerical 2018 revenue or earnings guidance in the supplied filing text.
  • Management highlighted its installed base of more than 12,500 systems and reported winning four of the largest public-safety LTE network installations awarded to date. The pace of LTE deployment remains dependent on customer, regulatory and funding factors.
  • Planned acquisitions included Airbus DS Communications’ parent, Plant Holdings, expected to close in Q1 2018, and Avigilon for approximately C$1.3 billion, expected to close in Q2 2018. The company also completed the Kodiak Networks and Interexport acquisitions during 2017.
  • A $500 million contribution to U.S. pension plans, expected to be debt-funded in 2018, is a significant planned cash requirement. The filing also reports substantial underfunded pension obligations and sensitivity to investment returns and interest rates.
  • Key risks include government budget constraints and contract cancellations, reliance on major government customers, competitive bidding and fixed-price contract exposure, currency and geopolitical volatility, cybersecurity threats, dependence on suppliers and outsourced operations, and changing spectrum allocation and LTE deployment.
  • Other items to monitor include $1.0 billion of 2% convertible notes due 2020, which were fully convertible at year-end; the company intends to settle principal in cash but notes that insufficient cash or financing could require stock settlement. Performance bonds outstanding were approximately $2.4 billion.
  • Management reported that pending lawsuits were not expected to have a material adverse effect, while noting an unfavorable resolution could be material. The independent auditor issued an unqualified opinion on the financial statements and internal controls.

Most important facts for investors to verify

  • How the $874 million tax-reform charge and provisional tax estimates affect subsequent-period tax expense, cash taxes and deferred tax assets.
  • How much of Services’ growth and backlog conversion reflects acquisitions versus organic growth, and whether segment margins continue to improve.
  • Whether operating cash flow remains robust after considering the $1.1 billion deferred-tax adjustment in the 2017 cash-flow reconciliation.
  • Funding and financing for the planned $500 million pension contribution, and the company’s ability to manage its pension deficit and debt maturities.
  • Progress, costs and returns from planned acquisitions, as well as the timing and funding of public-safety LTE deployments.
  • Potential cash, dilution and earnings-per-share effects if the convertible notes cannot be settled as intended, and any material changes in contract, legal or performance-bond exposures.