Motorola Solutions, Inc. — Form 10-Q summary
Reporting period: Third quarter ended September 27, 2014; comparisons are with the quarter ended September 28, 2013. Nine-month figures cover the corresponding periods. Amounts are in U.S. dollars; financial statement figures are in millions except per-share data.
Business context
Motorola Solutions provides mission-critical communications products and services. Its continuing operations are reported in Products and Services. The Enterprise business was classified as discontinued operations for all periods presented. The sale to Zebra Technologies closed on October 27, 2014, after quarter-end, for $3.45 billion in cash; certain assets, including iDEN, were retained.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $1,436 | $1,517 | $4,058 | $4,410 |
| Gross margin | $685; 47.7% | $765; 50.4% | $1,919; 47.3% | $2,208; 50.1% |
| Operating earnings | $207; 14.4% of sales | $246; 16.2% | $452; 11.1% | $622; 14.1% |
| Continuing-operations earnings attributable to common stockholders | $66; diluted EPS $0.27 | $261; diluted EPS $0.98 | $229; diluted EPS $0.90 | $641; diluted EPS $2.34 |
| Net earnings attributable to Motorola Solutions | $147; diluted EPS $0.59 | $307; diluted EPS $1.16 | $1,098; diluted EPS $4.32 | $757; diluted EPS $2.77 |
- Revenue and segments: Q3 Products sales were $921 million, down 8%; Services sales were $515 million, down 1%. Products operating earnings were $141 million versus $171 million; Services operating earnings were $66 million versus $75 million.
- Cash flow: Continuing-operations operating cash flow was $15 million in the first nine months, compared with $25 million used in the prior-year period. Capital expenditures were $130 million. Cash and cash equivalents were $2.845 billion at quarter-end, down $380 million from year-end 2013.
- Debt and liquidity: Long-term debt was $3.401 billion, versus $2.457 billion at December 31, 2013. The company issued $1.4 billion of notes and redeemed $400 million principal of 6.0% notes for about $456 million, recording a $37 million extinguishment loss. Its $2.0 billion revolving facility matures in 2019; no borrowings were outstanding and the company reported covenant compliance.
- Capital returns: In the first nine months, the company repurchased $1.1 billion of shares and paid $236 million in dividends. The board had authorized $12.0 billion in aggregate repurchases; about $5.6 billion remained available at quarter-end.
Material changes and unusual items
- Q3 sales fell 5%; first-nine-month sales fell 8%. The declines were concentrated in Products, reflecting lower device and systems sales in North America, Latin America, and Asia Pacific/Middle East. European and African sales grew. Gross margin contracted, which management attributed to lower sales and product and segment mix, including systems with more third-party equipment.
- Lower SG&A and R&D partly offset weaker gross profit: Q3 SG&A declined 10% and R&D declined 9%. Q3 operating earnings nevertheless fell 16%.
- Q3 continuing-operations earnings were affected by $84 million of tax expense, including a $55 million valuation allowance against certain foreign deferred tax assets. Q3 effective tax rate was 56%; the prior-year quarter benefited from $96 million of net tax benefits.
- Nine-month discontinued-operations earnings included a $748 million tax benefit from recognizing a deferred tax asset related to the Enterprise business. Management expected a tax expense upon the fourth-quarter sale to substantially offset this benefit on a year-to-date basis. Thus, nine-month net earnings and EPS are not a straightforward measure of continuing operating performance.
- Other notable charges included $20 million of Q3 reorganization costs and $11 million of pension-related transaction fees. Nine-month reorganization charges were $58 million; a $21 million building and land sale gain partly offset other charges.
- Cash use reflected shareholder returns, debt repayment and substantially higher pension contributions. Nine-month U.S. pension contributions were $463 million versus $122 million in 2013.
Outlook, commentary and risks
- Management expected about $15 million of savings in the final three months of 2014 from 2014 productivity plans, and approximately $42 million of annualized savings thereafter. These are expectations, not reported results.
- Management expected fiscal 2014 pension contributions of approximately $1.1 billion. A proposed group annuity contract would transfer future payments for about 30,000 retirees to Prudential, subject to closing conditions; management expected the transaction and associated plan termination expense in Q4 2014. A separate lump-sum offer had a maximum aggregate value of $1.0 billion.
- The Enterprise sale closed after quarter-end for $3.45 billion cash. The filing does not provide a clear value for net sale proceeds after any transaction-related adjustments or taxes.
- Risks include foreign-cash repatriation delays or tax costs; potential changes in tax examinations and uncertain tax positions; foreign exchange exposure (contracts had $931 million notional value); capital-market access and funding costs; and legal claims or customer-contract damages that could exceed contract revenue. Management said pending legal matters were not expected to have a material adverse effect, but unfavorable outcomes could affect results.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. ERP implementation phases were on hold while the company planned future needs following the Enterprise sale and anticipated transition-service arrangements.
Important facts for investors to verify
- How the Enterprise sale proceeds, retained assets and post-sale tax expense affected fourth-quarter cash, debt and earnings.
- Whether continuing Products and Services revenue, operating earnings and gross margins stabilized after the reported declines.
- Actual pension contributions, annuity-contract completion, plan termination expense and lump-sum distributions versus management’s expectations.
- Delivery of planned restructuring savings and the cash costs required to achieve them.
- Changes in tax valuation allowances, uncertain tax positions, repatriation plans and any material legal or contractual contingencies.