Motorola Solutions, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended April 4, 2015; comparable period ended March 29, 2014. Motorola Solutions provides mission-critical communications products and services, reported in Products and Services segments. The Enterprise business was sold to Zebra Technologies in October 2014 and is presented as discontinued operations.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $1,223 million | $1,228 million |
| Gross margin | $548 million; 44.8% | $577 million; 47.0% |
| Operating earnings | $119 million; 9.7% of sales | $107 million; 8.7% of sales |
| Continuing earnings attributable to Motorola Solutions | $87 million; $0.40 diluted EPS | $85 million; $0.33 diluted EPS |
| Net earnings attributable to Motorola Solutions | $74 million; $0.34 diluted EPS | $127 million; $0.49 diluted EPS |
| Operating cash flow from continuing operations | $151 million | $12 million |
At April 4, 2015, cash and cash equivalents were $3.353 billion, versus $3.954 billion at year-end 2014. Long-term debt was $3.392 billion, with $4 million current; total current liabilities were $1.977 billion. The company had a $2.1 billion undrawn revolving credit facility maturing in 2019 and reported compliance with its covenants. It declared dividends of $0.34 per share.
Material changes and drivers
- Sales were essentially flat: Products sales rose 1% to $758 million, while Services sales fell 2% to $465 million. Management attributed the overall result partly to $43 million of North American growth offset by $40 million of unfavorable foreign exchange effects.
- Gross margin declined by 2.2 percentage points, primarily because of lower Services margins. Management cited lower-margin deployments on large integration projects and a declining mix of higher-margin iDEN services.
- Operating earnings increased despite lower gross margin, as SG&A fell $51 million to $256 million and R&D fell $15 million to $159 million. Cost initiatives, foreign exchange benefits, and lower pension expense contributed to these reductions.
- Continuing earnings improved modestly, but reported net earnings fell as discontinued operations shifted from $42 million of income to a $13 million loss. The 2015 discontinued-operations loss included $20 million of sale-related adjustments and a $7 million tax benefit.
- Cash from continuing operations increased to $151 million, supported by improved receivables collections and proceeds from sales of long-term receivables. Cash declined overall by $601 million, principally reflecting $653 million of share repurchases, $75 million of dividends, and $52 million of foreign-exchange effects.
Outlook, commentary, and risks
- Management expected to reduce SG&A and R&D expenses in 2015 by approximately $150 million versus 2014. It expected Services gross margins in the mid-30% range and continued expansion of consolidated operating margins; no specific full-year earnings guidance is provided in the filing text.
- First-quarter productivity plans carried $14 million of charges. Management expected approximately $8 million of savings during the remaining nine months of 2015 and approximately $13 million in annualized savings beyond 2015. The remaining reorganization accrual was $44 million.
- Management expected iDEN sales to continue declining as service contracts expire and customers move to newer technology, pressuring Services revenue and gross margin. Foreign-exchange volatility, project margins, and capital-market access were also identified as relevant uncertainties.
- The company disclosed potential contractual damage claims that could exceed contract revenue, routine legal matters, and indemnification obligations; management reported no indemnification accruals and did not expect pending legal matters to have a material adverse effect, while noting adverse outcomes could be material.
- The sale of the Enterprise business transferred the existing ERP system to Zebra. The companies were operating in a shared IT environment under transition services agreements, and Motorola Solutions was planning its future ERP requirements. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Services margin pressure from large integration projects and declining iDEN activity persists, and whether management’s margin expectations are achieved.
- Progress against the stated 2015 expense-reduction target and the timing and realization of reorganization savings.
- Cash generation after substantial repurchases and dividends, including the sustainability of the shareholder-return pace and remaining $3.6 billion repurchase authorization.
- The effect of foreign exchange, customer financing and receivables sales on reported results and operating cash flow.
- Final purchase-price allocations for the public-safety software acquisitions and any material developments in legal, contractual, or ERP-transition risks.