Motorola Solutions, Inc. — Q1 2011 Form 10-Q
Business context and period. The quarter ended April 2, 2011. After distributing Motorola Mobility on January 4, 2011, Motorola Solutions reported continuing operations in two segments: Government and Enterprise. The Networks business was classified as discontinued operations and was sold to Nokia Siemens Networks on April 29, 2011, after quarter-end. Accordingly, 2010 comparisons include businesses that are not part of continuing operations in 2011.
Financial performance
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net sales from continuing operations | $1.884 billion | $1.740 billion |
| Gross margin | $942 million; 50.0% | $853 million; 49.0% |
| Operating earnings | $170 million; 9.0% margin | $120 million; 6.9% margin |
| Continuing-operations earnings attributable to common stockholders | $365 million; $1.06 diluted EPS | $97 million; $0.29 diluted EPS |
| Discontinued-operations earnings (loss), net of tax | $132 million | $(28) million |
| Net earnings attributable to Motorola Solutions | $497 million; $1.44 diluted EPS | $69 million; $0.21 diluted EPS |
| Cash from continuing operating activities | $231 million | $59 million |
Revenue grew 8%. Government sales increased 5% to $1.189 billion and segment operating earnings rose to $104 million from $92 million. Enterprise sales increased 14% to $695 million and segment operating earnings rose to $66 million from $28 million. Management attributed improved gross margin to higher sales and product mix, and lower R&D and SG&A as a share of sales to cost-reduction measures.
Continuing-operations earnings included a $244 million tax benefit from reversing part of the U.S. deferred-tax valuation allowance. The company reported $186 million of net tax benefits overall, compared with $13 million of tax expense in the prior-year quarter. The earnings increase therefore does not solely reflect operating improvement.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $2.764 billion at April 2, down from $4.208 billion at year-end. Cash, current Sigma Fund investments and short-term investments totaled approximately $6.2 billion; the company said available liquidity was adequate for expected operating needs over the next 12 months.
- Total debt was approximately $2.7 billion, broadly unchanged from year-end: $605 million of notes payable and current debt and $2.093 billion of long-term debt. The company had no borrowings under its new $1.5 billion revolving credit facility, which matures in 2014, and was in compliance with its covenants.
- Continuing-operations cash flow included a $175 million reduction in accounts receivable, partly offset by a $221 million decrease in accounts payable and accrued liabilities. Capital expenditures were $27 million. Operating cash flow less capital expenditures was $204 million; this is a simple calculation, not a company-reported free-cash-flow measure.
- Cash declined primarily following the $3.2 billion cash contribution to Motorola Mobility before its distribution. The contribution drove much of the change in cash and financing activity.
Material changes, outlook and risks
- The Networks sale agreement was amended before closing: cash consideration was reduced from $1.2 billion to $975 million. Management expected approximately $1.0 billion of net cash proceeds after taxes, assignment fees and other transaction costs, including collection of $150 million of accounts receivable after closing. The filing reports the sale closed April 29, 2011.
- Management described Government demand as resilient despite challenging U.S. public-sector budgets, and cited continuing Enterprise momentum, particularly in retail technology investment. It expected iDEN sales to decline for full-year 2011 despite year-over-year growth in Q1. No specific company-wide revenue or earnings guidance is provided.
- The company highlighted public-safety LTE broadband as a strategic growth opportunity, including continued investment in next-generation technology. It also expected supply disruption in Q2 2011 and possibly beyond due to the Japan earthquake and tsunami; some suppliers were sole sources for components.
- Q1 reorganization charges were $8 million. Management expected about $6 million of savings over the remaining nine months of 2011 and approximately $10 million in annualized savings thereafter. The quarter-end restructuring accrual was $61 million.
- Unrecognized tax benefits were $202 million. Potential developments in tax examinations could produce an estimated net tax impact ranging from a $50 million charge to a $125 million benefit, with possible cash payments of $0–$100 million within 12 months. Management did not expect pending tax disputes or ordinary-course litigation to materially affect the company overall, but acknowledged an unfavorable outcome could materially affect results in the period resolved.
- Other exposures include customer financing commitments, indemnification obligations (including certain uncapped obligations with Motorola Mobility), and potential contractual damage claims that could exceed contract revenue. The filing also describes substantial patent and securities-related litigation involving Motorola entities.
Most important facts for investors to verify
- How the April 29 Networks divestiture affected final proceeds, retained assets and liabilities, and subsequent operating results.
- Whether the $244 million deferred-tax valuation-allowance reversal is sustainable and how future effective tax rates compare without this benefit.
- Whether revenue growth and margin improvement continue in both segments, especially amid public-sector budget constraints and expected iDEN decline.
- The actual operational and financial impact of Japan-related supply disruptions and the extent to which contingency plans mitigated them.
- Cash availability, including the location and repatriation of overseas funds, and the effect of the remaining $300 million potential Motorola Mobility funding obligation.
- Developments in tax examinations, legal proceedings, indemnification claims and other contingencies that could change the company’s exposure.