Zebra Technologies Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 30, 2024; comparable period ended April 1, 2023. Zebra provides automatic identification and data capture products, software, and services through its AIT and EVM segments.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $1.175 billion | $1.405 billion | Down 16.4%; organic decline 16.8% |
| Gross profit / margin | $563 million / 47.9% | $667 million / 47.5% | Profit down 15.6%; margin up 40 bps |
| Operating income | $159 million | $225 million | Down 29.3% |
| Net income | $115 million | $150 million | Down 23.3% |
| Diluted EPS | $2.23 | $2.90 | Down 23.1% |
| Operating cash flow | $125 million | $(76) million | Improved $201 million |
Tangible-product sales fell 20.6% to $929 million, while services and software sales increased 4.7% to $246 million. Operating expenses declined 8.6% to $404 million, but rose to 34.4% of sales from 31.5%, reflecting lower-revenue deleveraging. The effective tax rate was 19.0%, versus 18.9%.
AIT sales declined 24.9% to $392 million and segment operating income fell 41.1% to $76 million; AIT gross margin was 46.9%, down 250 bps. EVM sales declined 11.3% to $783 million and segment operating income fell 9.8% to $120 million; EVM gross margin rose 210 bps to 48.4%.
Balance sheet, cash flow, and liquidity
- Cash was $127 million at March 30, 2024, versus $137 million at December 31, 2023. Current assets were $1.627 billion and current liabilities $1.643 billion.
- Total debt was $2.093 billion, down from $2.226 billion at year-end; $272 million was classified as current. Debt included a $1.641 billion term loan, $172 million drawn on the revolving facility, and $280 million under receivables financing facilities. The term loan and revolver rates were 6.68%; receivables-facility borrowings averaged 6.56%.
- The company repaid $284 million of long-term debt and issued $151 million during the quarter. It had $1.489 billion available under its $1.5 billion revolving facility, after letters of credit. Management said existing resources, facility capacity, and operating cash generation should meet anticipated needs and debt service; the company reported compliance with debt covenants.
- Operating cash flow benefited from lower inventory-related payments and reduced inventory levels, as well as lower incentive compensation and tax payments; unfavorable collection timing and restructuring payments partly offset those benefits. Capital expenditures were $14 million.
Changes, outlook, and notable items
- Management attributed year-over-year sales weakness to broad-based softness across end markets and all regions. Sales were up 16.5% sequentially from Q4 2023, which management linked to distributor inventory stabilization and modest demand recovery.
- Management expects revenue and profitability to improve sequentially from the first half to the second half of 2024, and expects year-over-year improvement in the second half. The filing text does not provide a clear numerical full-year outlook.
- The 2022 Productivity Plan and completed U.S. voluntary retirement plan had incurred $120 million of charges to date, including $10 million in Q1. Management expects approximately $10 million of additional 2024 charges and substantial completion of remaining plan actions in Q2. The plans are expected to affect over 9% of the global workforce and generate approximately $120 million in annualized net savings; about $75 million had been realized to date, including $25 million in Q1.
- Net income benefited from interest-rate-swap gains compared with losses in the prior-year quarter, partly offset by higher interest expense associated with higher rates and average debt. Gross margin benefited from lower freight rates, while volume deleveraging weighed on margins.
- A $100 million fair-value asset from forward interest-rate swaps was reported, alongside $33 million of swap liabilities. The company uses swaps to hedge variable-rate debt exposure and foreign-exchange contracts to manage currency risk.
- One $100 million receivables financing facility matures May 13, 2024 and is not expected to be renewed. The other facility, with capacity up to $180 million, was extended to March 19, 2027. Receivables pledged under the facilities totaled $504 million; $280 million was borrowed.
- Three distributors each accounted for more than 10% of sales; together they represented 52% of Q1 sales and 51% of accounts receivable at quarter-end. Legal proceedings arise in the ordinary course; management did not expect their outcomes to have a material adverse impact. No material changes to previously reported risk factors were identified.
Important facts for investors to verify
- Whether the modest demand recovery and distributor inventory stabilization continue, particularly given ongoing end-market softness and the steep AIT decline.
- Progress toward the stated second-half improvement and approximately $120 million annualized restructuring savings, including remaining charges and completion timing.
- Debt levels, variable-rate exposure, covenant compliance, and the refinancing or repayment plan for the facility not expected to be renewed in May 2024.
- Exposure to major distributors, which represented over half of sales and receivables, and the sustainability of receivables factoring and financing arrangements.
- Cash conversion and working-capital trends, including the effect of customer collection timing and inventory reductions.