Motorola Solutions, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended July 2, 2016, compared with the periods ended July 4, 2015. Amounts are in U.S. dollars; financial statement figures are in millions except per-share data.
Business context and results
Motorola Solutions provides mission-critical communications products and services. Its Products segment includes radios, systems and related software; Services includes network integration, managed and support services, and legacy iDEN services. The February 2016 acquisition of Airwave, a UK public-safety network operator, expanded Services.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $1,430 | $1,368 | $2,623 | $2,591 |
| Gross margin | $676; 47.3% | $648; 47.4% | $1,179; 44.9% | $1,196; 46.2% |
| Operating earnings | $224; 15.7% | $254; 18.6% | $323; 12.3% | $373; 14.4% |
| Continuing earnings attributable to Motorola Solutions | $107 | $150 | $124 | $238 |
| Diluted continuing EPS | $0.61 | $0.72 | $0.71 | $1.11 |
| Operating cash flow | Not separately stated for the quarter | $304 | $306 |
- Q2 sales increased 5%; first-half sales increased 1%. Q2 Products sales fell 8% to $801, while Services sales rose 26% to $629, including Airwave.
- First-half sales growth reflected Services expansion, partly offset by weaker Products sales. Products operating earnings fell 25% in Q2 and 24% in the first half; Services operating earnings rose 14% and 4%, respectively.
- At July 2, cash and cash equivalents were $1,545, total debt was $5,033, and stockholders’ equity was a deficit of $678. Cash was $1,980 and debt $4,349 at December 31, 2015.
- First-half investing cash outflow was $664, including the Airwave acquisition; financing cash outflow was $51. Cash declined $435 to $1,545. The company returned $762 to shareholders through repurchases and dividends in the first half.
- Q2 dividend declared was $0.41 per share; first-half dividends declared were $0.82 per share.
Material changes and notable items
- Airwave contributed $207 of first-half sales and $45 of net earnings after its February 19 acquisition. The approximately $1.1 billion purchase consideration included $1.0 billion cash, net of acquired cash, and $82 of fair-valued deferred consideration payable in 2018.
- Q2 and first-half operating results included higher acquisition-related intangible amortization ($38 and $52, respectively) and reorganization charges. First-half reorganization charges were $67, including employee separation costs and impairments. Q2 2015 included a $32 pension curtailment gain, making comparisons less favorable in 2016.
- First-half net investment/business sale losses were $20, versus $50 of gains in 2015, including a $19 loss on UK treasury securities and a $7 loss on the Penang facility sale. Higher debt and lower cash drove first-half net interest expense to $103 from $79.
- Q2 gross margin percentage was nearly unchanged, but first-half gross margin fell 1.3 percentage points. Management cited lower Products volume and margins, partly offset by improved Services margins, particularly from Managed & Support services.
Outlook, management commentary and risks
- Management expected to reduce SG&A and R&D costs by approximately $120 in 2016 versus 2015; $73 of savings had been achieved in the first half. It expected Services to grow faster than Products and consolidated operating margins to continue expanding. The filing provides no specific full-year revenue or earnings guidance.
- Management reported that the stronger U.S. dollar and weak economic conditions and commodity prices pressured sales, particularly in Latin America and Eastern Europe. Following the Brexit vote, sterling weakness reduced backlog by $170 since April 2; management said associated Services costs denominated in sterling mitigated operational impact.
- Management expects continued decline in legacy iDEN sales, which may reduce Services revenue and gross margins because iDEN margins are generally higher than those of the broader Services portfolio. Fourth-quarter revenue has historically been higher due to customer purchasing patterns.
- The $675 term loan is variable-rate and matures in February 2019. The company was in compliance with its credit-facility covenants, but said borrowing capacity under its $2.1 billion revolving facility could be partially limited during Q3 2016. Management nevertheless expected sufficient liquidity.
- Other risks include foreign-exchange exposure, potential customer claims under contracts with uncapped damages, and ordinary-course litigation. Management considered pending legal matters not likely to materially affect results, while noting an unfavorable outcome could do so. Foreign-exchange contract notional was $700.
- Subsequent to quarter-end, the board authorized a $2.0 billion increase in repurchase authority, bringing remaining authority to $2.4 billion. Management’s statements about future performance are forward-looking and subject to risks.
Important facts for investors to verify
- Whether Airwave’s contribution, integration, and customer retention support sustained Services growth and margins after acquisition-related amortization.
- Whether Products demand and margins recover, especially amid currency pressure and weakness in Latin America and other regions.
- Progress against the $120 cost-savings target and the cash costs and timing of restructuring actions.
- Debt, variable-rate interest exposure, revolving-facility availability, and liquidity after acquisition spending and shareholder returns.
- The recurring cash-generation profile, including the effect of receivables sales, capital spending, and continued repurchases and dividends.