Business context and reporting period
Motorola Solutions, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2012; comparisons are with the three months ended April 2, 2011. The company provides mission-critical communications products, software and services through its Government and Enterprise segments. It completed its exit from amateur, marine and airband radio businesses on January 1, 2012; those results are presented as discontinued operations.
Financial performance and liquidity
- Revenue: $1.956 billion, up 7% year over year. Products generated $1.444 billion and services $512 million.
- Profit and margins: Gross profit was $973 million, with a 49.7% gross margin versus 50.4%. Operating earnings increased to $232 million from $169 million; operating margin rose to 11.9% from 9.2%. Continuing-operations earnings were $159 million, or $0.50 per diluted share, versus $367 million, or $1.07. Net earnings were $157 million versus $497 million; diluted net EPS was $0.49 versus $1.44.
- Cash flow: Continuing-operations operating cash flow was $69 million versus $233 million. Capital expenditures were $49 million. Cash and cash equivalents fell to $1.720 billion from $1.881 billion; Sigma Fund and short-term investments totaled $2.047 billion at quarter end.
- Liquidity and debt: Cash plus Sigma Fund and short-term investments totaled approximately $3.8 billion. Total debt was approximately $1.530 billion ($404 million current and $1.126 billion long-term). The company had an undrawn $1.5 billion revolving credit facility, due June 2014, and reported compliance with its financial covenants.
- Capital returns: The company repurchased 28.0 million shares for $1.4 billion, at an average $48.81 per share, and paid $70 million in dividends. It declared dividends of $0.22 per share.
Changes versus the prior comparable period
- Government revenue rose 11% to $1.301 billion and operating earnings increased 52% to $150 million, reflecting growth across regions and stronger demand for mission-critical infrastructure, commercial radio products and services.
- Enterprise revenue declined 2% to $655 million, primarily due to a $31 million decline in iDEN sales; operating earnings rose 17% to $82 million, helped by lower intangible amortization and other charges.
- Continuing-operations earnings fell largely because the prior-year quarter included a $244 million tax benefit from reversing a U.S. deferred-tax valuation allowance. The 2012 quarter recorded $85 million of tax expense, a 35% effective rate.
- Operating cash flow declined partly because approximately $150 million of annual bonuses were paid in Q1 2012 rather than Q2 2011, and the company paid $50 million related to a legal settlement.
- Share repurchases reduced outstanding shares; weighted-average diluted shares declined to 317.7 million from 344.2 million.
Outlook, commentary, risks and unusual items
- Management forecast approximately $8 million in cost savings during the remaining nine months of 2012 from restructuring begun in Q1, and approximately $17 million in annualized savings thereafter. Q1 net restructuring charges were $9 million; related accruals were $37 million at quarter end.
- Management said available cash, short-term investments and Sigma Fund assets were more than adequate for operating requirements over the next 12 months. It expected 2012 pension contributions of approximately $340 million to U.S. plans and $30 million to non-U.S. plans; $72 million was contributed to the U.S. plan after quarter end.
- The filing provides no specific full-year revenue or earnings guidance. Management expected the effective tax rate to be close to the U.S. statutory rate, but noted it may vary due to non-recurring items.
- Discontinued operations recorded a $2 million after-tax loss, including a pre-tax loss associated with exiting the amateur, marine and airband businesses. The prior-year discontinued-operations earnings were $130 million, primarily from the Networks business and other separated operations.
- A $200 million settlement was agreed in the Silverman securities litigation; insurance carriers were to pay $150 million. The company paid $50 million related to a legal settlement in Q1. Final court approval was scheduled for May 9, 2012.
- Tax examinations could change unrecognized tax benefits within 12 months; management estimated a possible effective-tax-rate impact ranging from a $50 million charge to a $75 million benefit, with cash payments of $0–$25 million. Legal proceedings and indemnities, including uncapped obligations under separation agreements with Motorola Mobility, could result in adverse outcomes; management did not expect pending matters to have a material adverse effect based on information available.
- Foreign-exchange exposure remained a risk: outstanding FX contracts had $316 million notional value. Management also cautioned about potential contractual damages exceeding contract revenue, intellectual-property indemnities, pension obligations, repatriation timing and costs, and access to capital markets.
Important facts for investors to verify
- Whether Government growth and Enterprise performance, including the continuing decline in iDEN, persisted after Q1.
- How operating cash flow develops after the timing effects of bonus payments and the settlement payment, and whether planned pension contributions affect liquidity as expected.
- Remaining repurchase authorization, subsequent share repurchases, dividend payments and the effect of capital returns on cash and share count.
- Final approval and funding of the Silverman settlement, and any material developments in other legal, tax or indemnification matters.
- Whether projected restructuring savings are realized and the related severance and exit-cost accruals are paid as anticipated.