Zebra Technologies Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023; comparisons are with the quarter ended October 1, 2022. Financial amounts are in millions unless stated otherwise. Zebra provides enterprise asset intelligence and automatic identification and data capture products, software, and services through its AIT and EVM segments.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $956 | $1,378 | $3,575 | $4,278 |
| Gross profit / gross margin | $427 / 44.7% | $628 / 45.6% | $1,675 / 46.9% | $1,939 / 45.3% |
| Operating income (loss) | $(12) | $202 | $407 | $269 |
| Net income (loss) | $(15) | $170 | $279 | $277 |
| Diluted EPS | $(0.28) | $3.26 | $5.40 | $5.25 |
| Cash from operating activities | Not stated quarterly in the filing text | $(145) | $221 |
- Q3 sales fell 30.6%; tangible product sales declined 37.4%, while services and software grew 6.1%. Nine-month sales fell 16.4%.
- Q3 gross margin declined 90 basis points, reflecting volume deleveraging despite lower freight and component costs. Nine-month margin rose 160 basis points, helped by lower supply-chain costs and pricing.
- Nine-month operating income increased largely because the prior-year period included a $372 million patent settlement charge. Q3 operating results instead reflected sharply lower sales and $58 million of restructuring costs.
- Nine-month operating cash flow was negative, versus positive cash flow a year earlier. The company cited cash payments for inventory, taxes, interest, settlement obligations, and restructuring, partly offset by collection timing and lower incentive payments. Cash and cash equivalents were $61 million at September 30, 2023, down from $105 million at year-end 2022.
Segments and balance sheet
- AIT: Q3 sales were $324 million, down 26.7%; operating income was $44 million versus $85 million. Nine-month sales were $1,305 million, down 1.1%, while operating income rose to $287 million from $235 million.
- EVM: Q3 sales were $632 million, down 32.5%; operating income was $30 million versus $159 million. Nine-month sales declined 23.3% to $2,270 million, and operating income declined to $285 million from $536 million.
- Total debt was $2.280 billion, compared with $2.032 billion at December 31, 2022; long-term debt was $2.121 billion. Debt carried variable rates, with reported rates of 6.67% on Term Loan A, 6.65% on the revolver, and 6.80% on receivables facilities. Interest expense for the first nine months was $69 million.
- Revolver availability was $1.489 billion after letters of credit. Receivables facilities had $119 million borrowed against a combined $280 million limit and mature in March and May 2024. The company reported compliance with debt covenants.
- Current assets were $1.652 billion and current liabilities $1.562 billion. Deferred revenue totaled $746 million; remaining performance obligations for contracts with original terms over one year were $1.094 billion, generally expected to be recognized over about two years.
Management outlook, risks, and unusual items
- Management attributed weakness to broad-based demand moderation, customers absorbing previously built capacity, tighter capital budgets, and distributors reducing inventory. It expected these trends to continue into 2024. Targeted price increases and cost management were mitigating factors; supply-chain availability and transportation costs had improved.
- The company expanded its productivity plan and launched a U.S. voluntary retirement plan. Combined program costs are expected to be at least $105 million; $94 million had been recorded by quarter-end. Actions were expected to be substantially completed by year-end 2023, with remaining obligations of $54 million expected to be settled by Q1 2024. Estimated annualized net savings are approximately $100 million; the programs are expected to affect more than 7% of global employees.
- The filing refers to a full-year 2023 financial outlook but the provided filing text does not state clear numerical guidance.
- Variable-rate debt and foreign-currency exposure remain relevant risks; interest-rate swaps hedge portions of rate exposure. Other identified risks include economic and IT-spending weakness, distributor/channel-partner exposure, supplier and component availability, inventory levels, cybersecurity, and litigation. Management reported no material cybersecurity incidents to date and believed ordinary-course legal proceedings would not materially harm the company.
- Three distributors individually exceeded 10% of sales; together they represented 45% of nine-month 2023 sales and 50% of receivables at September 30. The prior patent settlement required eight quarterly payments of $45 million; the remaining two payments were expected by Q1 2024.
Important facts for investors to verify
- Whether demand and distributor inventory reductions persist into 2024, and how they affect product revenue, margins, and cash flow.
- Progress against restructuring timing, the at-least-$105-million cost estimate, and approximately $100-million annualized savings target.
- Debt repayment and refinancing plans for the 2024 receivables-facility maturities, variable-rate exposure, and covenant headroom.
- Cash-flow recovery and working-capital movements, including customer collections, inventory, and supplier payments.
- Customer concentration and any changes in significant distributors’ purchasing or credit position.
- Numerical full-year 2023 guidance and any subsequent updates, since clear figures are not provided in the supplied filing text.