Zebra Technologies Corporation — Q1 2014 Form 10-Q
Business context and period: Unaudited results for the three months ended March 29, 2014, compared with the three months ended March 30, 2013. Zebra sells hardware, supplies, services and software, including printer and location solutions. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $288.3 | $236.9 | +21.7% |
| Gross profit / margin | $147.9 / 51.3% | $113.1 / 47.7% | Margin +3.6 percentage points |
| Operating income / margin | $53.4 / 18.5% | $28.2 / 11.9% | Income +89.6% |
| Net income / margin | $41.6 / 14.4% | $23.5 / 9.9% | Income +76.7% |
| Diluted EPS | $0.82 | $0.46 | +78.3% |
| Operating cash flow | $49.8 | $24.2 | +$25.6 |
- Product sales increased 16.3%; services and software revenue rose 123.2%, primarily reflecting organic services growth and the December 2013 Hart Systems acquisition. Hardware, supplies and services/software were 68.1%, 22.0% and 9.1% of sales, respectively.
- Revenue grew across all reported geographic regions. North America increased 29.1%; international sales increased 16.0% and represented 53.8% of total sales. Foreign currency and hedging increased sales by $3.2 million and gross profit by $2.3 million.
- Operating expenses rose 11.4% to $94.5 million. Acquisition costs were $4.9 million, versus $0.5 million a year earlier; management attributed the increase primarily to the announced Motorola Solutions transaction. Restructuring costs declined to $0.3 million from $1.9 million.
- Cash and investments totaled $468.2 million at quarter-end, versus $415.8 million at December 31, 2013; cash and cash equivalents alone were $51.4 million. Operating cash flow was $49.8 million and capital expenditures were $2.4 million. The company reported no borrowed debt on the quarter-end balance sheet.
- Current assets were $801.0 million and current liabilities $111.4 million. Total liabilities were $153.4 million; stockholders’ equity was $1,008.9 million. The company held $273.7 million of foreign cash and investments and said it did not expect to repatriate those funds.
Material changes, outlook and notable items
- Gross margin improved as sales increased across regions and product categories, Hart Systems contributed, and freight costs declined. Operating income grew faster than sales despite higher acquisition, amortization and other operating expenses.
- The effective tax rate increased to 22.3% from 18.2%. The 2014 rate included $3.7 million of acquisition expenses for which no tax benefit was recorded.
- On April 14, 2014, after quarter-end, Zebra agreed to acquire Motorola Solutions’ Enterprise business for $3.45 billion in cash, subject to customary conditions and regulatory approvals. The company expected closing by year-end 2014 and planned to use approximately $200 million of cash and $3.25 billion of new debt. The filing describes financing commitments, including a $2.0 billion term loan, a $250 million revolving facility and up to $1.25 billion of bridge financing, subject to conditions. There is no financing condition to the acquisition; a financing failure and resulting termination could trigger a $250 million fee in specified circumstances.
- Zebra expected approximately $100 million of annual cost savings from the acquisition, fully achieved by 2017. These are expectations, not realized results. Risks disclosed include regulatory or financing delays, integration challenges, employee retention, customer contract termination rights, unidentified liabilities and the substantial new debt burden. Pro forma debt after the deal was described as approximately $3.25 billion, assuming no convertible preferred stock issuance; interest rates were not yet determined.
- No separate forward-looking financial guidance for Zebra’s existing business is provided in the supplied filing text. Management cautioned that interim results are not necessarily indicative of full-year results.
- Ordinary-course legal proceedings were disclosed; management did not expect them, individually or in aggregate, to materially adversely affect the company. A failed-auction security valued at $2.6 million remained classified as a long-term investment; management considered its decline temporary and intended to hold it.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material change in market risk.
Important facts for investors to verify
- Whether the Motorola Enterprise acquisition closed on the anticipated terms and timetable, and whether regulatory approvals and financing conditions were satisfied.
- Actual acquisition debt, financing costs, covenant requirements and resulting cash available for operations, particularly given the company’s stated intention not to repatriate foreign funds.
- Whether the expected $100 million of annual savings and anticipated growth benefits were achieved, and at what integration cost.
- How much of the sales and margin improvement persisted beyond Q1, including the contributions from Hart Systems, foreign exchange and hedging.
- Customer concentration: three distributors represented 15.2%, 12.5% and 12.4% of Q1 sales; confirm the associated exposure and any changes in customer relationships.