Motorola Solutions, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended July 2, 2011; comparisons are with the periods ended July 3, 2010. Financial results reflect Motorola Mobility as discontinued operations following its January 4, 2011 distribution. The Networks business sale to Nokia Siemens Networks closed April 29, 2011 and is also presented as discontinued operations.
Business context and performance
- The continuing business reports two segments: Government, focused on public-safety radios and systems, and Enterprise, including mobile computing, scanning, wireless broadband, RFID and iDEN infrastructure.
- Q2 net sales rose 6% to $2.055 billion. Product sales were $1.524 billion and service sales were $531 million.
- Gross margin increased to $1.039 billion, or 50.6% of sales, from $965 million, or 49.8%. Operating earnings were $170 million versus $161 million; operating margin was 8.3% in both periods.
- Continuing-operations earnings attributable to common stockholders were $58 million, or $0.17 diluted EPS, versus $3 million, or $0.01. The improvement primarily reflected lower tax expense; pre-tax continuing earnings fell to $73 million from $129 million.
- Reported net earnings were $349 million, or $1.00 diluted EPS, including $291 million of earnings from discontinued operations. The discontinued-operations result included a $488 million pre-tax gain on the Networks sale.
- For the first half, sales increased 7% to $3.939 billion; gross margin was 50.3% versus 49.5%, and operating earnings were $340 million versus $281 million. Continuing-operations earnings attributable to common stockholders were $423 million, or $1.22 diluted EPS, versus $100 million, or $0.30. The 2011 result included a $244 million tax benefit from releasing part of the U.S. deferred-tax valuation allowance. Net earnings were $846 million, including $423 million from discontinued operations.
Segments and material comparisons
- Government: Q2 sales increased 4% to $1.308 billion, while operating earnings declined 5% to $111 million. Management cited higher legal charges and SG&A, partly offset by improved gross margin. First-half sales rose 4% to $2.497 billion and operating earnings rose 3% to $215 million.
- Enterprise: Q2 sales increased 11% to $747 million and operating earnings rose 34% to $59 million. Growth in mobile computing, wireless network solutions and advanced data capture was partly offset by lower iDEN infrastructure sales. First-half sales rose 12% to $1.442 billion and operating earnings rose 74% to $125 million.
- Q2 SG&A rose 4% to $492 million, but declined as a share of sales to 23.9% from 24.3%. R&D was $271 million versus $269 million, or 13.2% versus 13.9% of sales. Other charges increased to $106 million from $64 million, including $48 million of legal charges and $17 million of reorganization charges.
Cash flow, liquidity and debt
- First-half cash from continuing operating activities was $333 million, versus $162 million. Continuing investing activities provided $1.292 billion, primarily reflecting $1.078 billion of net proceeds from investment and business sales. Continuing financing activities used $3.613 billion, mainly due to the $3.2 billion cash contribution to Motorola Mobility and debt repurchases.
- Cash and cash equivalents were $2.203 billion at July 2, down from $4.208 billion at year-end, largely due to the Motorola Mobility contribution, partly offset by Networks-sale proceeds. The Sigma Fund and short-term investments totaled $4.424 billion; management said cash, current short-term investments and current Sigma Fund investments were more than adequate for expected operating needs over the next 12 months.
- Total debt, including current debt, was approximately $2.154 billion ($606 million current and $1.548 billion long term), compared with approximately $2.703 billion at year-end. The company paid $615 million to repurchase $540 million principal of debt and recorded an $81 million extinguishment loss. A new $1.5 billion revolving facility, maturing June 2014, was undrawn; the company reported compliance with its covenants.
- Management noted $1.9 billion of cash held outside the U.S. and potential foreign-tax, approval and timing considerations for repatriation. It expected approximately $125 million of additional U.S. regular-pension-plan contributions and $17 million to non-U.S. plans during the remainder of 2011.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management described Government demand as supported by public-safety priorities, while noting challenging U.S. and some Western European government budgets. It cited continued Enterprise momentum, particularly retailer technology investment, and positioned public-safety LTE networks as a longer-term growth opportunity.
- Networks-sale regulatory approvals in some countries remained in process, expected in the second half of 2011; a purchase-price adjustment was also expected to be settled in that period. An additional $300 million Motorola Mobility funding obligation was recorded, subject to receipt of specified overseas-subsidiary cash distributions; $75 million was paid July 22, 2011.
- After quarter-end, on July 28, the board authorized up to $2.0 billion of share repurchases through December 31, 2012 and initiated a quarterly dividend of $0.22 per share, payable October 14, 2011 to holders of record September 15.
- Key exposures include pending litigation and intellectual-property indemnities, tax audits and uncertain tax positions, currency and market risks, customer financing commitments, and possible contractual damages. A $48 million net legal charge was recorded in Q2; management said an unfavorable resolution of legal or tax matters could materially affect results in the period resolved. Certain customer contracts may have uncapped damages provisions.
- The company recorded a $244 million first-quarter tax benefit from a valuation-allowance reversal. The effective tax rate may vary with tax-audit outcomes, valuation allowances, unusual items and geographic earnings mix. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Underlying continuing-business earnings and cash generation, separately from discontinued operations and the Networks-sale gain.
- Final Networks-sale approvals, purchase-price adjustment and remaining held-for-disposition balances.
- Cash availability and repatriation costs, particularly the large offshore cash balance and post-distribution funding obligations.
- Use of the announced buyback authorization and ability to sustain the new dividend alongside pension contributions and debt obligations.
- Resolution and financial impact of legal proceedings, tax examinations, indemnities and any uncapped contract claims.