Zebra Technologies Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter ended July 1, 2023; comparisons are with the quarter ended July 2, 2022. Financial figures are in millions of dollars unless stated otherwise. Statements are unaudited.
Business context and results
Zebra provides enterprise asset intelligence and automatic identification and data capture products, software, and services. Its reportable segments are Asset Intelligence & Tracking (AIT) and Enterprise Visibility & Mobility (EVM). Advanced location technology offerings were moved from EVM to AIT, with historical segment results recast for comparison.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $1,214 | $1,468 | $2,619 | $2,900 |
| Gross profit | $581 | $674 | $1,248 | $1,311 |
| Gross margin | 47.9% | 45.9% | 47.7% | 45.2% |
| Operating income (loss) | $194 | $(145) | $419 | $67 |
| Net income (loss) | $144 | $(98) | $294 | $107 |
| Diluted EPS | $2.78 | $(1.87) | $5.68 | $2.02 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(110) | $154 |
Q2 sales fell 17.3% year over year; organic sales declined 16.0% after currency and acquisition adjustments. Tangible product sales decreased 21.7%, while services and software grew 9.1%. For the first half, sales declined 9.7% and organic sales declined 8.2%.
Segment performance and material changes
- AIT: Q2 sales were $459, down 1.7%; operating income was $114 versus $94. Gross margin improved to 49.0% from 43.7%. First-half sales rose 11.7% and operating income rose to $243 from $150.
- EVM: Q2 sales were $755, down 24.6%; operating income was $122 versus $184. First-half sales fell 19.0% and operating income fell to $255 from $377. Management attributed the decline mainly to fewer large mobile-computing deployments and distributor inventory reductions.
- Q2 operating income and net income improved substantially versus the prior year, but the comparison includes a $372 prior-year patent settlement charge. The prior-year six-month period also included this charge.
- Gross margin improved as lower premium freight and component costs, pricing, and mix benefits outweighed headwinds in some areas. EVM’s first-half margin edged down to 46.7% from 46.8%, reflecting volume deleveraging, currency, and inventory-related charges.
Cash, debt, and liquidity
- Cash and cash equivalents were $68 at July 1, 2023, down from $105 at December 31, 2022. Current assets were $1,753 and current liabilities were $1,770.
- Total debt carrying value was $2,216, compared with $2,032 at year-end; $166 was current and $2,042 was long-term. The revolving facility balance was $388, Term Loan A was $1,684, and receivables-facility borrowings were $144.
- The company reported $1,491 of available revolving-credit capacity after letters of credit. Debt rates were variable; reported average rates were 6.20% on Term Loan A, 6.15% on the revolver, and 6.50% on receivables financing. The company was in compliance with debt covenants.
- First-half operating cash use was $110, versus $154 provided in the prior year. Management cited cash payments for inventory, taxes, the settlement, and interest, partly offset by collection timing and lower incentive compensation payments. Capital expenditures were $34.
- Management said existing resources, available borrowing capacity, and operating cash generation should be sufficient for anticipated needs and debt service. This is management’s assessment, not a guarantee.
Outlook, risks, and unusual items
- Management said broad-based demand moderation began late in Q2, especially in EVM mobile computing, as large customers absorb prior capacity investments and face tighter capital budgets; distributors are also reducing inventory. It expects these trends to continue through at least the remainder of 2023. The supplied filing text does not provide a clear numerical full-year revenue or earnings forecast.
- The 2022 Productivity Plan was expanded; estimated total cost is at least $60, with $36 incurred to date. A voluntary retirement plan is expected to cost approximately $45 and be recorded in Q3. Combined costs are estimated at $105, affecting more than 7% of the global workforce; expected annualized net savings are approximately $85, primarily in operating expenses. Settlement of obligations is expected substantially by Q1 2024.
- The prior-year patent settlement involved eight quarterly payments of $45; three remained due by Q1 2024 at the reporting date. General litigation was not expected by the company to have a material adverse effect, though outcomes remain uncertain.
- Three distributors each accounted for more than 10% of sales; together they represented 50.7% of first-half sales and 48.1% of accounts receivable at July 1. This creates meaningful channel and customer-concentration exposure.
- Key disclosed risks include economic and IT-spending weakness, distributor credit and inventory reductions, supply constraints and purchase commitments, foreign exchange, interest rates, acquisition integration, and cybersecurity. The company reported no material cybersecurity incidents to date and no material change in other risk factors beyond disclosures in this filing.
Important facts for investors to verify
- Whether demand weakness and distributor destocking persist through the rest of 2023, and how they affect EVM sales and margins.
- Whether the projected $85 annualized savings are achieved, and whether the $105 combined restructuring and retirement costs remain consistent with estimates.
- Operating cash conversion, inventory levels, and the effect of receivables factoring and pledged receivables on liquidity.
- Debt balances, variable-rate exposure, refinancing and maturity needs, and continued covenant compliance.
- Sales and receivables concentration among major distributors, and progress on remaining patent-settlement payments.