Zebra Technologies Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 28, 2019; comparisons are to the periods ended September 29, 2018. Amounts are in U.S. dollars.
Business context
Zebra provides enterprise asset intelligence and automatic identification/data-capture products, software, and services. Its two reportable segments are Asset Intelligence & Tracking (AIT) and Enterprise Visibility & Mobility (EVM). The company reported results that include Temptime from February 21, 2019 and Profitect from May 31, 2019.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Net sales | $1.130 billion | $1.092 billion | $3.293 billion | $3.081 billion |
| Gross profit / margin | $535 million / 47.3% | $505 million / 46.2% | $1.556 billion / 47.3% | $1.442 billion / 46.8% |
| Operating income | $185 million | $162 million | $504 million | $431 million |
| Net income | $136 million | $127 million | $375 million | $306 million |
| Diluted EPS | $2.50 | $2.34 | $6.87 | $5.64 |
| Operating cash flow | Not separately presented for quarter | Not separately presented for quarter | $420 million | $460 million |
- Q3 sales increased 3.5%; organic sales growth was 3.0%. Nine-month sales increased 6.9%; organic growth was 5.9%.
- Quarterly growth reflected higher mobile computing sales and support services, partly offset by lower data-capture sales. North America led regional growth; EMEA, Asia-Pacific, and Latin America declined year over year in Q3.
- Q3 AIT sales rose 5.7% and segment operating income rose 14.8%. EVM sales rose 2.4% and segment operating income rose 13.7%. Nine-month segment sales increased 4.2% for AIT and 8.3% for EVM.
- At September 28, cash was $33 million; current assets were $1.231 billion and current liabilities were $1.306 billion. Total debt was $1.528 billion, including $205 million current and $1.314 billion long-term. The company reported compliance with debt covenants.
- Nine-month investing cash outflow was $310 million, primarily reflecting acquisitions; financing cash outflow was $120 million. Cash declined $11 million from year-end 2018.
Material changes and unusual items
- Gross margin improved year over year, attributed primarily to operational efficiencies and favorable business mix. Operating income grew faster than sales in both the quarter and year to date.
- Q3 other expense included a $4 million loss on interest-rate swaps and $7 million of debt-refinancing costs; Q3 2018 included a $6 million swap gain. Nine-month 2019 other expense included a $27 million swap loss and a $4 million gain from remeasuring the prior Profitect investment.
- In August, Zebra refinanced and amended its credit facilities: Term Loan A increased to $1.0 billion, the revolving facility capacity increased to $1.0 billion, and both maturities were extended to August 2024. It repaid the $445 million Term Loan B. Refinancing generated $7 million of stated costs, including accelerated amortization and fees.
- Temptime was acquired for $180 million cash, net of cash acquired. Profitect’s purchase consideration was $79 million, including $75 million cash and a remeasured $4 million prior investment. Purchase allocations remained preliminary for both acquisitions.
- The company repurchased 101,062 shares for $20 million in Q3 and had approximately $980 million remaining under its newly authorized $1 billion repurchase program.
Outlook, risks, and contingencies
- The filing refers to a full-year 2019 financial outlook but the supplied filing text does not provide clear numerical guidance.
- Zebra anticipated up to $30 million of product-sourcing diversification costs through mid-2020, principally operating expense, plus approximately $10 million to $15 million of incremental equipment purchases. The company expects sourcing changes and U.S. pricing actions to partially mitigate China-related tariffs; tariffs and execution of the sourcing transition could nevertheless pressure results or product availability.
- Other stated risks include foreign-exchange and interest-rate movements, global market conditions, acquisition integration, supplier and component availability, reliance on third-party electronics manufacturers, and product defects or liability claims.
- Three distributors each represented more than 10% of accounts receivable at quarter end (20.2%, 10.1%, and 22.6%). Three customers accounted for 18.6%, 13.9%, and 16.5% of nine-month sales, respectively.
- Management said ordinary-course legal matters were not expected to have a material adverse impact, while noting uncertainty in outcomes. A $19 million tax dispute was settled after quarter end and reflected in current liabilities; it did not significantly affect Q3 tax expense. Singapore’s reduced tax rate depends on the company meeting investment commitments.
- Management stated that existing capital resources and operating cash generation should be sufficient for anticipated capital needs, debt service, and share repurchases. Operating cash flow fell 8.7% year over year for the first nine months, partly due to payment timing, higher tax and incentive-compensation payments, and lower accounts payable.
Most important facts for investors to verify
- Whether organic sales growth and margin improvement continue, especially given regional softness and foreign-exchange effects.
- Full-year 2019 guidance and the expected timing and total cost of sourcing diversification; numerical guidance is not clear in the supplied text.
- Debt, interest-rate exposure, refinancing effects, receivables-financing maturities, and continued compliance with covenants.
- Acquisition integration and the final purchase-price allocations for Temptime and Profitect.
- Customer and receivables concentration, tariff exposure, and dependence on third-party manufacturers and suppliers.
- Cash generation and the pace of share repurchases relative to acquisition spending and debt obligations.