Zebra Technologies Corporation — Q2 2014 Form 10-Q
Business context and period. This unaudited filing covers the three and six months ended June 28, 2014, compared with the corresponding 2013 periods. Zebra sells hardware, supplies, services and software. It also reported the pending $3.45 billion all-cash acquisition of Motorola Solutions’ Enterprise business, announced April 14, 2014, and the effects of its December 2013 Hart Systems acquisition.
Financial performance
Amounts are in USD millions except per-share data. Margins are calculated from reported figures.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $288.4 (+13.9%) | $253.2 | $576.7 (+17.7%) | $490.1 |
| Gross profit / margin | $142.2 / 49.3% | $120.9 / 47.8% | $290.1 / 50.3% | $234.0 / 47.7% |
| Operating income / margin | $33.1 / 11.5% | $36.2 / 14.3% | $86.5 / 15.0% | $64.4 / 13.1% |
| Net income | $27.6 | $30.6 | $69.2 | $54.1 |
| Diluted EPS | $0.54 | $0.60 | $1.35 | $1.05 |
| Operating cash flow | Not reported quarterly | Not reported quarterly | $109.9 | $91.1 |
- Q2 revenue growth reflected gains across product categories and regions. Services and software revenue grew 38.6%, including Hart Systems’ contribution; hardware grew 13.6% and supplies 9.5%. North American sales rose 16.0%; EMEA rose 16.4%. Foreign currency, net of hedges, added $3.5 million to Q2 sales.
- Q2 gross margin improved 1.5 percentage points, attributed to lower product and freight costs and better fixed-cost absorption. Operating expenses rose 28.9%, including $20.4 million of acquisition and integration costs, versus $0.6 million a year earlier. Operating income fell 8.8%, and net income fell 9.8%.
- For the first half, operating income rose 34.2% and net income 27.8%. Acquisition and integration costs were $25.3 million versus $1.1 million in the prior-year period. Foreign currency, net of hedges, added $6.7 million to first-half sales.
- Six-month capital expenditures were $8.0 million; operating cash flow less capital expenditures was approximately $102.0 million. Investing activities used $113.9 million, principally reflecting purchases of marketable securities net of maturities and sales. Cash increased $7.5 million during the period.
Financial position and liquidity
- At June 28, 2014, cash and cash equivalents were $70.3 million, current investments and marketable securities were $455.6 million, and long-term investments were $2.6 million. Management reported total cash and investments of $528.6 million, up from $415.8 million at year-end 2013.
- Current assets were $859.2 million and current liabilities $123.3 million. Total liabilities were $170.9 million; the balance sheet does not present a borrowings balance at period-end.
- Foreign subsidiaries held $301.3 million of cash and investments. Management said these funds were generally permanently reinvested and did not currently expect to repatriate them; repatriation could increase U.S. income taxes.
- The acquisition was expected to be funded with approximately $200 million of cash and $3.25 billion of new debt. Financing commitments included a $2.0 billion term loan, a $250 million revolver and up to $1.25 billion of bridge financing, reduced by proceeds from any new unsecured notes. A portion of planned debt would have variable rates.
Outlook, material items and risks
- The filing did not provide a general revenue or earnings forecast. Zebra expected the acquisition to close by year-end 2014, subject to customary conditions including regulatory approvals. It projected approximately $100 million of annual cost savings from the acquisition, fully achieved by 2017.
- Zebra recorded a $2.433 million loss on forward interest-rate swaps in Q2. The swaps were intended to hedge interest-rate exposure on planned acquisition financing but did not qualify for hedge accounting at quarter-end, so fair-value changes affected earnings.
- A July 17, 2014 UK tax-law change was expected to result in a $6.1 million discrete tax charge in Q3. Management expected the charge and a related interest-deduction benefit to be offset in Q4 if the acquisition closed in 2014.
- Key acquisition risks include failure to obtain approvals or financing, integration challenges, loss of key employees or customers, undiscovered liabilities, and failure to realize projected synergies. The filing cites a possible $250 million termination fee in specified financing-failure circumstances. Planned debt would materially increase leverage, interest expense and covenant restrictions; exact financing interest rates were not yet determined.
- Other stated risks include foreign-exchange and market exposure, manufacturing and supply-chain constraints, competition and technology changes, and litigation. Management said ordinary-course legal proceedings were not expected to have a material adverse effect. Disclosure controls were assessed as effective, and no material change in internal control was reported.
Important facts for investors to verify
- Whether the Motorola Enterprise acquisition closed as expected, its final financing mix and terms, and the resulting debt, interest expense and covenant headroom.
- Whether the projected $100 million annual synergies were achieved by 2017, and the integration’s impact on costs, revenue, customers and employees.
- The actual Q3 and Q4 tax effects of the UK law change and whether the expected offset depended on acquisition timing.
- How much of reported liquidity was available for U.S. use, given the $301.3 million held by foreign subsidiaries and management’s stated reinvestment intent.
- Customer concentration: three distributors represented 15.5%, 12.4% and 11.3% of Q2 sales, respectively; no other customer accounted for 10% or more.