Motorola, Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended April 3, 2010; comparisons are with the three months ended April 4, 2009 unless otherwise stated. The filing is by Motorola, Inc. (the historical registrant), not Motorola Solutions, Inc. Results are unaudited and are not necessarily indicative of full-year performance.
Financial results and liquidity
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net sales | $5.044 billion | $5.371 billion |
| Gross margin | $1.786 billion; 35.4% of sales | $1.496 billion; 27.9% of sales |
| Operating earnings (loss) | $76 million; 1.5% margin | $(449) million; (8.4)% margin |
| Continuing-operations earnings (loss) attributable to common shareholders | $69 million; $0.03 diluted EPS | $(291) million; $(0.13) diluted EPS |
| Net earnings (loss) attributable to Motorola | $69 million | $(231) million |
| Cash from (used in) operating activities | $485 million | $(1.014) billion |
SG&A was $876 million (17.4% of sales), up from $869 million; R&D was $757 million (15.0% of sales), down from $847 million. Net interest expense was $33 million. The company recorded a $5 million tax benefit and an approximately negative 8% effective tax rate, versus a $146 million benefit in the prior-year quarter.
At April 3, 2010, cash and cash equivalents were $3.188 billion, including $215 million restricted; the Sigma Fund was $5.290 billion ($5.174 billion current and $116 million non-current). Current assets were $15.896 billion and current liabilities $7.873 billion. Debt comprised $532 million of notes payable/current maturities and $3.372 billion long-term debt; total debt including current maturities was about $3.9 billion. Long-term debt fair value was estimated at $3.8 billion versus $3.9 billion face value.
Operating cash generation reflected a $411 million reduction in receivables and $262 million of continuing-operations income adjusted for non-cash items, partly offset by a $388 million decrease in accounts payable and accrued liabilities. Cash increased $319 million during the quarter. Capital expenditures were $70 million. No common dividends were paid; quarterly dividends had been suspended in February 2009.
Material changes and segment performance
Sales declined 6% year over year, while gross margin improved by $290 million and operating results moved from a substantial loss to profit. Management attributed the improvement chiefly to better product mix, lower excess-inventory-related charges, reduced reorganization charges, and lower R&D. Prior-year results included $204 million of net reorganization charges and $60 million of after-tax discontinued-operations earnings from businesses sold in 2009.
| Segment | Sales | Operating earnings (loss) | Year-over-year sales change |
|---|---|---|---|
| Mobile Devices | $1.641 billion | $(192) million | (9)% |
| Home | $838 million | $20 million | (18)% |
| Enterprise Mobility Solutions | $1.694 billion | $141 million | 6% |
| Networks | $896 million | $112 million | (7)% |
Mobile Devices shipped 8.5 million handsets, down 42% year over year; average selling price rose 57%, and Android smartphone shipments were 2.3 million. Home digital entertainment device shipments fell 29% to 3.1 million. Enterprise Mobility Solutions growth reflected stronger commercial and government/public-safety sales. Networks sales weakened in legacy GSM, CDMA and iDEN equipment, partly offset by WiMAX.
Segment reporting was realigned in Q1 2010 in anticipation of the proposed separation, and certain corporate costs were newly allocated to segments; prior-period segment figures were revised for comparison.
Outlook, risks and unusual items
- Management targeted completion in Q1 2011 of a tax-free separation into Mobile Devices and Home, and Enterprise Mobility Solutions and Networks, subject to conditions including tax treatment and SEC registration effectiveness. The latter company was expected to assume Motorola’s public-market debt and be capitalized toward an investment-grade rating.
- Management expected global handset demand to increase in 2010, particularly smartphones, but expected feature-phone volumes to be lower. It anticipated contraction in 2010 demand for Home digital entertainment devices and in the 2G/3G wireless-infrastructure market. Government customers faced budget constraints; commercial enterprise demand was expected to improve.
- Management forecast approximately $36 million of savings during the remaining nine months of 2010 from the Q1 reorganization plans and approximately $54 million annualized thereafter. Q1 net reorganization charges were $21 million; about 500 employees were separated, with an accrual of $107 million remaining at quarter-end.
- New revenue-recognition guidance was adopted prospectively from January 1, 2010. Q1 reported sales were $5.044 billion versus a pro forma $4.604 billion under prior guidance, primarily because of smartphone arrangements. Management noted that future revenue effects could vary as sales and pricing practices evolve.
- Potentially material uncertainties include tax examinations and unrecognized tax benefits of $401 million. Over the next 12 months, the company estimated a possible tax impact ranging from a $75 million charge to a $175 million benefit, with cash payments of $0–$150 million.
- Long-term customer-financing commitments were $443 million, mainly to a small number of Middle Eastern network operators; only $10 million was supported by letters of credit or bank purchase commitments. The filing also describes legal proceedings, indemnification exposure, foreign-exchange risks and market-access risks. Management did not expect ordinary-course litigation to materially adversely affect results, but outcomes remain uncertain.
- A goodwill impairment test was performed for Access Networks after an impairment indicator was identified; management concluded fair value exceeded book value by a significant margin and recorded no impairment. The valuation depended on estimates and assumptions.
Investor verification priorities
- Assess whether operating improvement and cash generation are sustainable, particularly given sales declines, working-capital movements and receivables sales.
- Reconcile smartphone revenue timing under the newly adopted accounting guidance and monitor future reported-versus-prior-guidance effects.
- Track Mobile Devices losses, handset shipment trends, product mix and execution of smartphone launches.
- Verify separation milestones, tax-free status, debt allocation and expected capitalization against subsequent filings.
- Monitor tax audit outcomes, pension contributions, customer-financing exposure, and the assumptions behind goodwill and investment valuations.