Zebra Technologies Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended July 2, 2016; comparisons are to the periods ended July 4, 2015. Amounts are in millions except per-share data.
Business context and results
Zebra designs and sells data-capture and enterprise asset intelligence products, including barcode printers, mobile computers, scanners, RFID and WLAN solutions, software, and services. It reports Legacy Zebra and Enterprise segments. The company described its strategy as expanding into enterprise asset intelligence, supported by trends such as IoT, mobility, and cloud computing.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $879 | $890 | $1,726 | $1,783 |
| Gross profit / margin | $406 / 46.2% | $393 / 44.2% | $796 / 46.1% | $802 / 45.0% |
| Operating income (loss) | $22 | $(14) | $22 | $6 |
| Net loss | $(49) | $(77) | $(78) | $(102) |
| Loss per diluted share | $(0.95) | $(1.50) | $(1.51) | $(2.00) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $122 | $20 |
Financial position and liquidity
- At July 2, cash and cash equivalents were $141, down from $192 at year-end 2015. Total assets were $4,791 and stockholders’ equity was $831.
- Long-term debt was $2,873 carrying value: $1,050 of 7.25% Senior Notes due 2022 and a $1,890 Term Loan due 2021, net of issuance costs and discounts. The company prepaid $145 of term-loan principal in the first half.
- The June 2016 refinancing amendment reduced the LIBOR spread from 400 to 325 basis points; the Term Loan rate was 4.00% at quarter-end. There were no revolver borrowings and $246 of capacity remained available, net of letters of credit.
- First-half investing cash use was $36 and financing cash use was $144; cash declined by $51. Management said existing resources and operating cash generation should meet anticipated capital needs and debt service. Interest paid in the first half was $99.
Changes and management commentary
- Q2 sales declined 1.2% year over year; first-half sales declined 3.2%. Hardware was the main source of weakness. On a constant-currency basis, sales were roughly flat in Q2 and down about 2% for the first half.
- Q2 gross margin increased 2.0 percentage points, and operating income improved by $36. Management attributed margin improvement to product mix, lower product costs, better service margins, and manufacturing and overhead efficiencies; lower operating expenses also supported operating results.
- First-half sales fell in Legacy Zebra by 5.2% and Enterprise by 2.4%. Q2 Enterprise operating income rose 58.1% to $68, while Legacy Zebra operating income fell 8.1% to $57.
- By region, first-half sales increased 8.5% in Asia-Pacific but fell 6.2% in EMEA, 9.3% in Latin America, and 3.4% in North America.
- Operating expenses included $71 of acquisition and integration costs and $11 of restructuring costs in the first half. Management expected $15–$20 of 2016 acquisition-related restructuring charges; $56 had been incurred cumulatively through July 2, 2016.
Outlook, risks, and unusual items
- The filing refers to a full-year 2016 financial outlook in its forward-looking-statement discussion, but the supplied filing text does not provide a clear numerical outlook.
- Management identified risks from foreign exchange, market and regional economic conditions, customer acceptance and competition, manufacturing costs and component availability, acquisition integration, interest rates, and litigation. It highlighted uncertainty from the UK’s vote to leave the EU, including currency volatility, potential delayed purchases, and possible cross-border trade costs.
- Internal control over financial reporting was deemed ineffective at July 2, 2016 because of a material weakness in controls over the income-tax provision, linked to the increased complexity of the legal-entity structure after the Enterprise acquisition. Remediation was ongoing.
- The company corrected prior-period errors in the first half, recording $11 of additional expense, primarily operating expense; together with tax items, these increased net loss by $6.6. Management said the errors were not material to 2015 and were not expected to be material to 2016.
- A legacy Symbol Technologies securities class action remains pending. The company could not reasonably estimate possible losses; an insurer had denied coverage for certain defense costs. Management said other ordinary-course legal matters were not expected to have a material adverse impact.
- The six-month effective tax rate was 6.2%, versus 8.4% a year earlier, reflecting foreign earnings taxed at lower rates, valuation-allowance changes, and discrete items. Q2 included a $2.7 debt-refinancing charge; the term-loan amendment also included $4.9 paid to creditors and recorded as a debt discount.
Important facts for investors to verify
- Whether the tax-provision material weakness is remediated and whether controls remain reliable.
- Whether operating cash generation and debt repayment can be sustained despite declining sales and substantial leverage.
- Sales trends by segment and region, especially hardware, EMEA, and Latin America, and the durability of margin gains.
- The actual full-year 2016 outlook and any later updates; no clear numerical guidance appears in the supplied text.
- Potential effects of Brexit, the Symbol litigation and insurance dispute, and ongoing acquisition integration and restructuring costs.
- Customer concentration: three distributors represented 20.1%, 13.3%, and 12.0% of first-half sales; three customers each exceeded 10% of receivables.