Business context and reporting period
Motorola Solutions, Inc. filed this Form 10-K for the fiscal year ended December 31, 2019. The company provides mission-critical communications, command-center software, video security and related services to government, public-safety and commercial customers. Its two segments are Products and Systems Integration and Software and Services. The filing also presents unaudited fourth-quarter results; it is an annual report, not a standalone Q4 filing.
Financial results and liquidity
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Net sales | $7.887 billion | $7.343 billion | Up 7% |
| Gross margin | $3.931 billion; 49.8% | $3.480 billion; 47.4% | Up 13%; margin +2.4 percentage points |
| Operating earnings | $1.581 billion; 20.0% margin | $1.255 billion; 17.1% margin | Up 26% |
| Net earnings attributable to Motorola Solutions | $868 million | $966 million | Down 10% |
| Diluted EPS | $4.95 | $5.62 | Down 12% |
| Operating cash flow | $1.823 billion | $1.075 billion | Up $748 million |
Revenue grew in both segments: Products and Systems Integration sales rose 5% to $5.329 billion, while Software and Services rose 14% to $2.558 billion. The Americas grew 12%; EMEA and Asia Pacific each declined 3%. Management attributed consolidated growth partly to $312 million of incremental acquisition revenue, partly offset by $113 million of unfavorable currency effects. Product revenue was $4.746 billion and services revenue was $3.141 billion.
At year-end, cash and cash equivalents were $1.001 billion and total debt was $5.129 billion, implying net debt of approximately $4.1 billion. Current assets were $4.178 billion and current liabilities $3.439 billion. The company had an undrawn $2.2 billion revolving credit facility, no commercial paper outstanding, and reported compliance with its financial covenants. Capital expenditures were $248 million; R&D expenditures were $687 million. Dividends paid were $379 million and share repurchases were $315 million.
Backlog was $11.259 billion, up $659 million from 2018. The filing separately reports $7.3 billion of remaining performance obligations, including $2.8 billion expected to be recognized over the next 12 months.
Material changes versus comparable periods
- Operating earnings improved by $326 million, reflecting higher sales and gross margins in both segments, as well as lower 2018 environmental-reserve and restructuring charges.
- Net earnings fell despite stronger operating results. Other expense was $580 million versus $153 million in 2018, primarily including a $359 million U.S. pension settlement loss and $50 million of losses on long-term debt extinguishments. The effective tax rate was 13.0%, compared with 12.1% in 2018.
- Operating cash flow increased substantially, in part because the company made a $500 million debt-funded U.S. pension contribution in 2018 and no comparable material contribution in 2019.
- Acquisitions included VaaS, Avtec, WatchGuard and a vehicle-location data business. The company reported $709 million of acquisition and investment cash outflows in 2019, versus $1.164 billion in 2018.
- Debt declined from $5.320 billion to $5.129 billion. The company refinanced and repurchased certain notes, repaid a $400 million term loan, settled its remaining 2.00% convertible notes, and issued $1.0 billion of 1.75% convertible notes due 2024.
- Fourth-quarter sales were $2.377 billion versus $2.254 billion in Q4 2018; operating earnings were $590 million versus $516 million. Q4 net earnings were $244 million versus $423 million, and diluted EPS was $1.39 versus $2.44.
Outlook, risks and unusual items
Management provided qualitative, not numerical, forward-looking commentary in the supplied filing text. It sees growth opportunities in video-security cross-selling, command-center software, domestic-vendor demand and deeper service penetration among LMR customers. It expects operating leverage as these businesses scale and says it will continue a capital-allocation framework of 50% of operating cash flow for acquisitions and repurchases, 30% for dividends and 20% for capital expenditures. Management stated it expected adequate resources for the next 12 months and no material pension contributions in 2020.
- Unusual items: A $359 million pension settlement loss followed a voluntary lump-sum election by approximately 6,300 U.S. plan participants; $836 million was paid from plan assets and the action reduced the projected benefit obligation by approximately $1.0 billion before actuarial effects. Debt extinguishment losses totaled $50 million. A $57 million environmental remediation charge was recorded in 2018, not 2019.
- Principal risks: cybersecurity and privacy regulation; regulation of AI, biometrics and license-plate recognition; government-contract cancellation, audits and compliance; spectrum allocation changes; intense competition in video and software; acquisition integration and execution; fixed-price contract cost overruns; currency and geopolitical exposure; supplier concentration and manufacturing disruption; pension funding and investment risk; and access to capital markets.
- Contingencies: Management said ordinary-course litigation was not expected to materially affect consolidated financial position or liquidity, but adverse resolutions could affect results. Outstanding performance bonds were approximately $2.5 billion. Long-term customer financing commitments were $78 million. The company disclosed no significant off-balance-sheet arrangements apart from the convertible-note conversion settlement obligation.
- Reporting considerations: The auditor identified estimates of costs to complete systems-integration contracts as a critical audit matter. The company reported effective internal control over financial reporting. It also recorded an out-of-period $30 million adjustment to deferred tax assets and retained earnings related to prior adoption of an accounting standard, stating it was not material to the periods presented.
Important facts for investors to verify
- How much of segment sales and backlog growth reflects acquired businesses versus organic demand, particularly in software, video and services.
- Whether gross-margin gains and operating leverage persist as acquisition costs, amortization and restructuring evolve.
- The impact of the $359 million pension settlement loss on reported earnings, and the plans’ ongoing funded status, assumptions and future contribution needs.
- Debt maturities, cash availability and the company’s ability to settle the 1.75% convertible notes’ principal in cash if converted.
- How the $7.3 billion of remaining performance obligations and $11.3 billion backlog convert to revenue, including contract funding, customer cancellation rights and system-project cost estimates.
- Developments in privacy, AI, video-surveillance and spectrum regulation, and any material cybersecurity, supplier or government-contract events.