Motorola Solutions, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended June 30, 2018; comparisons are with the three and six months ended July 1, 2017. Unless noted, amounts are in U.S. dollars, millions. Results are unaudited.
Business context
Motorola Solutions provides mission-critical communications infrastructure, devices, software and services to government, public-safety and commercial customers. It reports two segments: Products and Systems Integration, and Services and Software. The company changed its segment reporting structure in Q2; prior-period segment results may not be directly comparable under the new presentation.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $1,760 | $1,497 | $3,227 | $2,777 |
| Gross margin | $822; 46.7% | $690; 46.1% | $1,491; 46.2% | $1,260; 45.4% |
| Operating earnings | $273; 15.5% | $261; 17.4% | $445; 13.8% | $433; 15.6% |
| Net earnings attributable to Motorola Solutions | $180 | $131 | $297 | $208 |
| Diluted EPS | $1.05 | $0.78 | $1.73 | $1.23 |
| Operating cash flow | Not separately stated | Not separately stated | $(75) | $315 |
Q2 sales rose 18%, with growth across regions. Products and Systems Integration sales increased 14% to $1,189, while segment operating earnings fell 8% to $175. Services and Software sales rose 27% to $571 and segment operating earnings rose 38% to $98. Management attributed growth to acquisitions and organic demand; the Services and Software segment increased sales in every region.
For the first half, sales increased 16%. The gross-margin percentage improved, while operating margin declined, reflecting higher operating expenses and other charges. Net earnings growth reflected higher sales, lower non-operating expense and lower income-tax expense, partly offset by higher operating costs.
Cash, debt and liquidity
- Cash and cash equivalents were $878 at June 30, plus $63 of restricted cash, for total cash of $941; total cash was $1,268 at December 31, 2017.
- Long-term debt, including its current portion, was approximately $5.6 billion, versus $4.5 billion at year-end. The company issued $500 of 4.60% notes due 2028 and borrowed under a $400 term loan to help fund the Avigilon acquisition. It had $300 outstanding under its $2.2 billion revolving credit facility at quarter-end and reported compliance with its financial covenants.
- First-half investing cash use was $1,156, including $1,153 for acquisitions and investments; financing provided $922, including $1,295 of debt proceeds. The $327 decrease in cash left $941 at period-end.
- The company contributed $500 to U.S. pension plans during the first half, which management said moves the next anticipated required contribution to 2024 or later. It returned $234 to shareholders through dividends and repurchases; $168 was paid in dividends and $66 was used for repurchases.
Material changes, outlook and risks
- Acquisitions and accounting: Avigilon was acquired for stated consideration of $974, and Plant Holdings for $237 net cash. Acquisitions contributed $154 to Q2 sales and $201 to first-half sales. ASC 606 adoption affected reported results: compared with the former ASC 605 basis, 2018 sales were higher by $24 in Q2 and $39 for the first half, while attributable earnings were higher by $8 and $10, respectively. The company also recorded a $127 opening retained-earnings adjustment for ASC 606.
- Charges and other items: First-half other charges were $138, including $94 of intangible amortization, $26 of reorganization charges and $17 of acquisition-related fees. Reorganization charges totaled $38 for the first half and included severance costs associated with approximately 600 employees. First-half foreign-exchange derivative losses were $23.
- Revenue visibility: Remaining performance obligations were $6.2 billion at June 30. The company expected $1.7 billion from Products and Systems Integration and $1.1 billion from Services and Software to be recognized over the next 12 months. Services contract disclosures may reflect customer termination rights.
- Outlook: The filing provides no specific financial guidance. Management cautioned that quarterly results are not necessarily indicative of full-year results and noted that sales have historically been higher in the fourth quarter due to customer purchasing patterns. It cited growth opportunities in Services and Software, while noting that segment growth may affect operating margin.
- Risks and contingencies: Management identified foreign-exchange exposure, access to capital markets and funding costs, possible contractual damages exceeding contract revenue in rare cases, and ongoing litigation. A new risk-factor disclosure highlights GDPR and other privacy and data-protection requirements, including potential fines and costs. The company expects lease-accounting adoption in 2019 to materially increase balance-sheet assets and liabilities.
Important facts for investors to verify
- How much reported revenue and earnings growth reflects acquisitions and ASC 606 timing or presentation changes versus organic performance.
- Whether Services and Software growth continues and whether operating margins recover, particularly given the Q2 decline in total operating margin and Products and Systems Integration earnings.
- Cash generation excluding the $500 pension contribution, alongside acquisition spending, debt levels and scheduled maturities.
- The completion of purchase accounting for Avigilon and Plant, and the expected amortization burden from acquired intangibles.
- The eventual costs or effects of privacy-law compliance, contractual claims, litigation and the 2019 lease-accounting adoption.