Zebra Technologies Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 28, 2020; comparisons are with the three months ended March 30, 2019. Amounts are in U.S. dollars unless noted.
Business context
Zebra provides enterprise asset intelligence and automatic identification and data-capture products, services, and software globally. Its reportable segments are Asset Intelligence & Tracking (AIT) and Enterprise Visibility & Mobility (EVM). The quarter was affected by the emerging COVID-19 pandemic, including supply-chain disruption and uneven customer demand.
Financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $1.052 billion | $1.066 billion | Down 1.3% |
| Gross profit / margin | $473 million / 45.0% | $501 million / 47.0% | Down $28 million / 200 bps |
| Operating expenses | $322 million | $342 million | Down $20 million |
| Operating income | $151 million | $159 million | Down 5.0% |
| Net income | $89 million | $115 million | Down $26 million |
| Diluted EPS | $1.65 | $2.12 | Down $0.47 |
| Operating cash flow | $108 million | $42 million | Up $66 million |
| Cash and cash equivalents at quarter end | $24 million | $61 million | Down $37 million |
Reported net sales fell modestly, while organic net sales declined 0.8% after excluding currency and acquisition effects. Gross margin pressure reflected Chinese import tariffs, higher freight costs, and unfavorable tangible-product mix; lower operating expenses partly offset lower gross profit. Operating cash flow improved mainly because of favorable timing of receivable collections, despite lower net income. Capital expenditures were $13 million.
Segments and regions
- AIT: Sales rose 3.9% to $371 million; organic sales grew 3.2%. Operating income declined 3.3% to $89 million and gross margin fell to 48.8% from 51.5%, primarily due to tariffs and freight costs.
- EVM: Sales fell 3.9% to $681 million; organic sales declined 2.9%. Operating income decreased 12.9% to $88 million and gross margin fell to 43.0% from 44.9%. Mobile-computing and data-capture sales weakened, partly offset by support-services growth.
- Geography: North America sales rose 1.8% to $519 million and EMEA rose 3.2% to $388 million. Asia-Pacific fell 22.4% to $97 million and Latin America fell 12.7% to $48 million.
Balance sheet, debt, and liquidity
- Total assets were $4.540 billion and stockholders’ equity was $1.727 billion at March 28, 2020.
- Total debt was $1.405 billion, compared with $1.286 billion at year-end 2019; $230 million was classified as current. Long-term debt was $1.167 billion.
- The company had $258 million outstanding under its revolving credit facility, with $995 million available after letters of credit. Receivables financing borrowings were $230 million against facilities with a combined $280 million limit; $507 million of receivables were pledged as collateral.
- Term Loan A and the revolving facility mature in August 2024. One $100 million receivables facility was scheduled to mature May 18, 2020; the other, with a $180 million limit, matures March 29, 2021. The company reported compliance with debt covenants at quarter end.
- Management said existing resources, borrowing capacity, and operating cash generation were sufficient for anticipated needs. It expected full-year operating cash flow to remain positive, but lower than 2019.
Outlook, risks, and unusual items
- COVID-19: The pandemic disrupted supply and customer demand during the quarter, including reduced access to China-manufactured products, transportation restrictions, and a temporary closure of a key Americas distribution center. Management could not estimate the pandemic’s duration or fully assess its 2020 effects, but expected full-year net sales, net income, and cash flow to be below 2019. Cost reductions were planned to mitigate the impact.
- Interest-rate swaps: Other expenses, net, increased to $48 million from $28 million. Interest expense was $45 million versus $24 million and included a $35 million loss on non-designated interest-rate swaps, compared with an $8 million loss a year earlier.
- Cost initiatives: The product-sourcing diversification initiative incurred $5 million of costs in the quarter and $10 million cumulatively. The company expected up to $15 million of additional operating costs and approximately $10 million of equipment purchases, with completion still expected around mid-2020 despite disruption. The 2019 Productivity Plan incurred $4 million in the quarter; up to $6 million of further costs were estimated for 2020.
- Capital returns: Zebra repurchased 948,740 shares for $200 million in the quarter; $753 million remained authorized under its $1 billion buyback program.
- Customer concentration: Three distributor customers each represented 17.3%–19.6% of quarterly sales. They represented 18.8%, 11.6%, and 21.7%, respectively, of quarter-end receivables.
- Contingencies and taxes: The company said ordinary-course legal matters were not expected to have a material adverse effect, while noting outcomes are uncertain and some potential losses cannot be estimated. The effective tax rate was 13.6%, versus 12.2% a year earlier. U.S. federal tax audits for 2016 and 2017 were ongoing.
Investor verification priorities
- Track COVID-19 effects on demand, production, supply-chain costs, and the full-year outlook; the filing provides no numerical 2020 forecast.
- Verify refinancing or renewal plans for the receivables facility due May 18, 2020, and monitor total debt, current maturities, and covenant capacity.
- Assess whether margins recover from tariff, freight, product-mix, and sourcing-transition pressures, particularly in EVM.
- Monitor interest-rate swap fair values and related earnings volatility, including the substantial quarter’s swap loss.
- Evaluate customer concentration and receivable exposure, and the pace of share repurchases relative to liquidity needs.