May 7, 2020
Motorola Solutions Reports First-Quarter 2020 Financial Results
- Revenue of $1.7 billion, flat versus a year ago
- GAAP earnings per share (EPS) of $1.12, up 30%
- Non-GAAP EPS* of $1.49, up 16%
- Backlog of $10.4 billion, up $48 million versus a year ago, inclusive of $462 million of unfavorable currency rates
- Generated $308 million of operating cash flow, up 23%
CHICAGO – May 7, 2020 – Motorola Solutions, Inc. (NYSE: MSI) today reported its earnings results for the first quarter of 2020. Click here for a printable news release and financial tables.
“In Q1, we generated strong earnings and cash flow with solid demand for video security and software & services," said Greg Brown, chairman and CEO of Motorola Solutions. "The mission critical nature of our solutions, coupled with our strong balance sheet provides us with a solid foundation to navigate this unprecedented and dynamic environment.”
KEY FINANCIAL RESULTS (presented in millions, except per share data and percentages)
|Q1 2020||Q1 2019||% Change|
|% of Sales||15.6%||13.8%|
|% of Sales||21.0%||19.0%|
|Products and Systems Integration Segment|
|GAAP Operating Earnings||$92||$108||(15)%|
|% of Sales||9.3%||10.1%|
|Non-GAAP Operating Earnings||$123||$147||(16)%|
|% of Sales||12.4%||13.8%|
|Services and Software Segment|
|GAAP Operating Earnings||$167||$121||38%|
|% of Sales||25.2%||20.6%|
|Non-GAAP Operating Earnings*||$224||$168||33%|
|% of Sales||33.8%||28.6%|
- Revenue - Sales were $1.7 billion, flat from the year-ago quarter with North America up 4% offset by a 7% decline in International. Revenue from acquisitions was $48 million, and currency headwinds were $7 million in the quarter. The Products and Systems Integration segment declined 7% primarily due to lower sales of professional and commercial radio (PCR) products, partially offset by growth in video security. The Software and Services segment grew 13%, driven by growth in command center software and services.
- Operating margin - GAAP operating margin was 15.6% of sales, up from 13.8% in the year-ago quarter. Non-GAAP operating margin was 21.0% of sales, up from 19.0% in the year-ago quarter. The improvement in both GAAP and non-GAAP was driven by gross margin expansion in the Software and Services segment.
- Taxes - The GAAP effective tax rate was 12%, compared with 18% in the year-ago quarter. The non-GAAP effective tax rate was 15% compared with 20% in the year-ago quarter. Both the GAAP and non-GAAP tax rates were lower in the current quarter primarily due to higher excess tax benefits on share-based compensation.
- Cash flow - Operating cash flow was $308 million, compared with $251 million in the year-ago quarter. Free cash flow was $260 million, compared with $185 million in the year-ago quarter. Cash flow for the quarter increased year over year primarily due to improved working capital.
- Liquidity - Due to the uncertainty around market liquidity as a result of the COVID-19 pandemic, the company drew down $800 million from its syndicated, unsecured revolving credit facility during the quarter. The company ended the quarter with $1.7 billion in cash and had $1.4 billion of additional committed undrawn capacity on the revolving credit facility. The company ended the quarter with $5.9 billion in debt, inclusive of the $800 million from the revolving credit facility, has no debt maturities in 2020 or 2021, absent the revolver, and has no expected pension contributions until 2023.
- Capital allocation - During the quarter, the company repurchased $253 million of common stock, paid $109 million in cash dividends, incurred $48 million of capital expenditures, and used $36 million for acquisitions.
- Backlog - The company ended the quarter with backlog of $10.4 billion, up $48 million from the year-ago quarter. Software and Services backlog was up 2% or $120 million, inclusive of $423 million of unfavorable currency rates. The growth was primarily driven by multi-year agreements in North America. Products and Systems Integration segment backlog was down 2% or $72 million, inclusive of $39 million of unfavorable currency adjustments. The decline was due to lower International backlog, partially offset by growth in North America.
Software and Services
- $8 million P25 multi-year services contracts with Cleveland, Ohio
- $6 million P25 multi-year services contract with a customer in Latin America
- $4 million command center software suite contract with Brampton, Ontario
- $3 million command center software suite contract with Ft. Wayne, Indiana
- $28 million video security win with a large utility in the U.S.
- Over $50 million of sales into government across the video solutions portfolio
- $12 million P25 order from Dinwiddie County, Virginia
- $8 million TETRA order from Germany's Armed Forces
- Second-quarter 2020 - Motorola Solutions expects revenue decline of (17%) to (14%) compared with the second quarter of 2019. The company expects non-GAAP earnings per share in the range of $1.18 to $1.27. This assumes approximately $30 million of currency headwinds at current rates, approximately 175 million fully diluted shares, and an effective tax rate of 24% to 25%.
- Full-year 2020 - Motorola Solutions is withdrawing its full year guidance, due to uncertainty surrounding the COVID-19 pandemic.
In response to the evolving COVID-19 pandemic, the company has implemented preparedness plans to keep its employees and customers healthy and safe, as well as to ensure continued operations and business continuity. Safety measures during this outbreak include having office workers work remotely, suspending employee travel, withdrawing from certain industry events, increased cleaning, encouraging face coverings and using thermal scanning. The company has ensured customer continuity by fulfilling several emergency orders, completing remote software maintenance where possible, and the visitation by field workers to customer sites to keep mission-critical networks operating. Supply chain partners have been supportive and continue to do their part to ensure that service levels to the company and its customers remain solid. Additionally, the pandemic has impacted the company's professional commercial radio business and delayed engagement and deployments with some of its state and local customers in the near term which may impact future revenue. The company has also taken actions in a number of areas to reduce our operating expenses.
CONFERENCE CALL AND WEBCAST Motorola Solutions will host its quarterly conference call beginning at 4 p.m. U.S. Central Daylight Time (5 p.m. U.S. Eastern Daylight Time) on Thursday, May 7th. The conference call will be webcast live at www.motorolasolutions.com/investors.
CONSOLIDATED GAAP RESULTS (presented in millions, except per share data)
A comparison of results from operations is as follows:
|Q1 2020||Q1 2019|
|Amounts attributable to Motorola Solutions, Inc. common stockholders
|Weighted average diluted common shares outstanding||175.9||174.6|
The table below includes highlighted items, share-based compensation expenses and intangible amortization for the first quarter of 2020.
|(per diluted common share)||Q1 2020|
|Intangibles amortization expense||0.23|
|Share-based compensation expense||0.17|
|Hytera-related legal expenses||0.11|
Reorganization of business charges
|Acquisition-related transaction fees||0.01|
|Fair value adjustments to equity investments||(0.01)|
|Release of uncertain tax positions||(0.01)|
|Gain on sale of property, plant, and equipment||(0.22)|
|Non-GAAP Diluted EPS||$1.49|
In addition to the GAAP results included in this presentation, Motorola Solutions also has included non-GAAP measurements of results. The company has provided these non-GAAP measurements to help investors better understand its core operating performance, enhance comparisons of core operating performance from period to period and allow better comparisons of operating performance to its competitors. Among other things, management uses these operating results, excluding the identified items, to evaluate performance of the businesses and to evaluate results relative to certain incentive compensation targets. Management uses operating results excluding these items because it believes this measurement enables it to make better period-to-period evaluations of the financial performance of core business operations. The non-GAAP measurements are intended only as a supplement to the comparable GAAP measurements and the company compensates for the limitations inherent in the use of non-GAAP measurements by using GAAP measures in conjunction with the non-GAAP measurements. As a result, investors should consider these non-GAAP measurements in addition to, and not in substitution for or as superior to, measurements of financial performance prepared in accordance with generally accepted accounting principles.
Highlighted items: The company has excluded the effects of highlighted items including, but not limited to, acquisition-related transaction costs, tangible and intangible asset impairments, restructuring charges, certain non-cash pension adjustments, legal settlements and other contingencies, gains and losses on investments and businesses, Hytera-related legal expenses, and the income tax effects of significant tax matters, from its non-GAAP operating expenses and net income measurements because the company believes that these historical items do not reflect expected future operating earnings or expenses and do not contribute to a meaningful evaluation of the company's current operating performance or comparisons to the company's past operating performance. For the purposes of management's internal analysis over operating performance, the company uses financial statements that exclude highlighted items, as these charges do not contribute to a meaningful evaluation of the company's current operating performance or comparisons to the company's past operating performance.
Hytera-Related Legal Expenses: On February 14, 2020, we announced that a jury in the U.S. District Court for the Northern District of Illinois decided in our favor in our trade secret theft and copyright infringement case against Hytera Communications Corporation Limited of Shenzhen, China; Hytera America, Inc.; and Hytera Communications America (West), Inc. (collectively, “Hytera”). In connection with this verdict, the jury awarded Motorola Solutions $345.8 million in compensatory damages and $418.8 million in punitive damages, for a total of $764.6 million. In the first quarter of 2020, we revised our definition of non-GAAP operating income to exclude the impact of Hytera-related legal expenses. The $25 million of Hytera-related legal expense incurred in the first quarter of 2020 reflects costs primarily associated with this jury trial. Hytera has filed a motion for a new trial, and given our inability to predict the timing and outcome of this motion, together with the uncertainty of our ability to ultimately collect amounts awarded, at this time we have not recognized in our financial statements any gain related to the Hytera litigation.
Management typically considers legal expenses associated with defending our intellectual property as “normal and recurring” and accordingly, Hytera-related legal expenses were included in both our GAAP and non-GAAP operating income for fiscal years 2017, 2018 and 2019. We anticipate further expenses associated with Hytera-related litigation; however, we believe that these expenses are no longer a part of the “normal and recurring” legal expenses incurred to operate our business. In addition, if any contingent or actual gain associated with the Hytera litigation is recognized in the future, it will be similarly excluded from our non-GAAP operating income. We believe after the jury award, the presentation of excluding both Hytera-related legal expenses and gains related to awards better aligns with how management evaluates our ongoing underlying business performance.
For comparative purposes, $10 million, or $0.05 of earnings per share, net of tax, of Hytera-related legal expense was included in our first quarter 2019 Non-GAAP operating earnings.
Share-based compensation expenses: The company has excluded share-based compensation expenses from its non-GAAP operating expenses and net income measurements. Although share-based compensation is a key incentive offered to the company’s employees and the company believes such compensation contributed to the revenue earned during the periods presented and also believes it will contribute to the generation of future period revenues, the company continues to evaluate its performance excluding share-based compensation expenses primarily because it represents a significant non-cash expense. Share-based compensation expenses will recur in future periods.
Intangible assets amortization expense: The company has excluded intangible assets amortization expense from its non-GAAP operating expenses and net earnings measurements, primarily because it represents a non-cash expense and because the company evaluates its performance excluding intangible assets amortization expense. Amortization of intangible assets is consistent in amount and frequency but is significantly affected by the timing and size of the company’s acquisitions. Investors should note that the use of intangible assets contributed to the company’s revenues earned during the periods presented and will contribute to the company’s future period revenues as well. Intangible assets amortization expense will recur in future periods.
Free cash flow: Free cash flow represents operating cash flow less capital expenditures. We believe that free cash flow is also useful to investors as the basis for comparing our performance and coverage ratios with other companies in our industries, although our measure of free cash flow may not be directly comparable to similar measures used by other companies.
Organic Revenue: Organic revenue reflects net sales calculated under GAAP excluding net sales from acquired business owned for less than four full quarters. The company believes non-GAAP organic revenue growth provides useful information for evaluating the periodic growth of the business on a consistent basis and provides for a meaningful period-to-period comparison and analysis of trends in the business.
Details of the above items and reconciliations of the non-GAAP measurements to the corresponding GAAP measurements can be found at the end of this press release.
The company has not quantitatively reconciled its guidance for non-GAAP metrics to their most comparable GAAP measure because the company does not provide specific guidance for the various reconciling items as certain items that impact these measures have not occurred, are out of the company’s control, or cannot be reasonably predicted. Accordingly, a reconciliation to the most comparable GAAP financial metric is not available without unreasonable effort. Please note that the unavailable reconciling items could significantly impact the company’s results.