Motorola Solutions, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with the three months ended April 1, 2017. The company provides mission-critical communications products and services through its Products and Services segments. Unless otherwise noted, financial amounts are in millions of dollars.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $1,468 | $1,281 |
| Gross margin | $669; 45.6% | $570; 44.5% |
| Operating earnings | $171; 11.6% of sales | $173; 13.5% of sales |
| Net earnings attributable to Motorola Solutions | $117 | $77 |
| Diluted earnings per share | $0.69 | $0.45 |
| Cash from (used in) operating activities | $(500) | $142 |
| Capital expenditures | $(41) | $(68) |
| Cash and cash equivalents, March 31 | $858 | $829 at April 1, 2017 |
| Total debt, including current portion | $5,796 | $4,471 at December 31, 2017 |
Sales rose 15%, with increases in both segments and every region. Products sales were $801 million, up 14%, and Services sales were $667 million, up 15%. Management attributed $49 million of the total sales increase to acquisitions, $39 million to favorable currency movements, and $15 million to adoption of ASC 606. Gross margin improved, primarily from favorable Products mix, but operating earnings declined slightly as operating costs and other charges increased. Net earnings benefited from higher sales, lower other non-operating expenses, and lower tax expense.
Cash, liquidity, debt, and capital
- Operating cash use was primarily driven by a $500 million contribution to U.S. pension plans, alongside higher incentive and tax payments. The company said this contribution moves its next anticipated required contribution to 2024 or later. Operating cash flow less capital expenditures was approximately $(541) million.
- Cash and cash equivalents fell by $410 million from year-end 2017. Investing activities used $1,089 million, principally for the Avigilon and Plant acquisitions; financing activities provided $1,149 million, including $1,296 million of net debt proceeds.
- Total debt was approximately $5.8 billion, versus $4.5 billion at December 31, 2017. Cash less total debt implies approximate net debt of $4.9 billion. The company had a $2.2 billion revolving facility, with $400 million drawn, and reported compliance with its financial covenants.
- Q1 shareholder returns totaled $150 million: $84 million in dividends and $66 million in share repurchases. The declared dividend was $0.52 per share. The company reported $1.6 billion of remaining repurchase authorization.
- Stockholders’ equity remained in deficit at $(1,539) million. The company issued $500 million of 4.60% senior notes due 2028 and entered into a $400 million variable-rate term loan due 2021.
Material changes and unusual items
- Completed the $974 million acquisition of Avigilon on March 28 and the $237 million acquisition of Plant Holdings, parent of Airbus DS Communications, on March 7. Acquisition accounting remained preliminary at quarter-end; acquired goodwill and identifiable intangibles were substantial.
- Adopted ASC 606 on January 1, 2018 using the modified retrospective method. The company reported a $127 million increase to opening retained earnings from adoption. Q1 reported sales were $15 million higher than they would have been under the prior revenue standard; comparative-period figures were not restated. The new standard also changed contract-balance presentation and the timing of some revenue recognition.
- Other charges increased to $67 million from $18 million, including $41 million of intangible amortization, $17 million of acquisition transaction fees, and $8 million of net reorganization charges. Q1 2017 included a $42 million gain from recovery of former-customer receivables, which makes the year-over-year comparison less favorable.
- The effective tax rate was 16%, down from 35%, primarily reflecting the U.S. corporate tax-rate reduction under the Tax Act and excess share-based compensation tax benefits.
Outlook, risks, and contingencies
- The filing provides no specific full-year earnings or revenue guidance. Management noted that Q1 results are not necessarily indicative of the full year and that sales have historically been higher in Q4 due to customer purchasing patterns.
- Remaining performance obligations were $6.5 billion at March 31: $1.7 billion for Products and $4.8 billion for Services. The company expected to recognize $1.0 billion of Product and $1.7 billion of Services obligations over the next 12 months, subject to contract terms and, for certain Services contracts, customer renewal or termination rights.
- Management cited growth opportunities in Managed & Support Services and software. Forward-looking results remain subject to acquisition execution, customer demand and government funding, foreign exchange, capital-market access and borrowing costs, contract cost estimates, and the company’s ability to achieve expected operating performance.
- The company disclosed lawsuits and claims arising in the ordinary course of business; management did not expect their resolution to materially affect results, liquidity, or financial position, but noted an unfavorable outcome could do so. Certain uncommon customer contracts may expose the company to damages exceeding contract revenue. No indemnification accrual was recorded.
- The company expects adoption of the new lease standard in 2019 to materially increase balance-sheet assets and liabilities. It also reported that disclosure controls were effective at quarter-end.
Important facts for investors to verify
- Whether sales growth and segment performance persist excluding acquisitions, currency effects, and ASC 606 changes.
- Whether operating margins recover as acquisition-related costs, intangible amortization, and other charges evolve.
- How the Avigilon and Plant purchase-price allocations are finalized and whether the acquisitions deliver expected growth and returns.
- Cash generation after the large pension contribution, including working-capital movements and future pension funding needs.
- Debt levels, interest-rate exposure, refinancing needs, and available revolving-facility capacity.
- Recognition timing and collectability of remaining performance obligations, particularly where customer renewal or termination rights apply.
- Potential effects of legal claims, uncapped contractual-damage provisions, foreign-exchange movements, and the forthcoming lease-accounting change.