Zebra Technologies Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter ended June 29, 2019; comparisons are with the quarter ended June 30, 2018. Unless stated otherwise, financial amounts are in millions.
Business context
Zebra provides enterprise asset intelligence and automatic identification and data-capture products, software, and services globally. Its reportable segments are Asset Intelligence & Tracking (AIT) and Enterprise Visibility & Mobility (EVM).
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $1,097 | $1,012 | $2,163 | $1,989 |
| Gross profit | $520 | $472 | $1,021 | $937 |
| Gross margin | 47.4% | 46.6% | 47.2% | 47.1% |
| Operating income | $160 | $125 | $319 | $269 |
| Net income | $124 | $70 | $239 | $179 |
| Diluted EPS | $2.26 | $1.29 | $4.37 | $3.30 |
- Q2 revenue increased 8.4% year over year; six-month revenue increased 8.7%. Organic net sales growth, a non-GAAP measure excluding acquisition and currency effects, was 7.0% for Q2 and 7.4% year to date.
- Q2 operating expenses were $360, up from $347; as a share of sales, they declined to 32.8% from 34.3%. Six-month operating expenses were $702 versus $668.
- Six-month operating cash flow was $195, down from $266. Investing used $306, principally reflecting acquisition payments; financing provided $94. Cash declined to $27 from $44 at year-end 2018.
- Total debt was $1,724 at June 29, 2019, versus $1,600 at December 31, 2018; long-term debt was $1,561 and current debt was $156. The company reported covenant compliance. Debt is primarily variable-rate; reported facility rates ranged from 3.30% to 4.18%.
- At June 29, current assets were $1,188 and current liabilities $1,200. The filing says management believes available capital resources and operating cash generation are sufficient for anticipated requirements and debt service.
Changes and segment performance
- EVM drove most of the growth: Q2 sales rose 10.0% to $727 and segment operating income increased 54.8% to $113. EVM organic growth was 9.2%; gross margin rose to 46.8% from 45.2%.
- AIT Q2 sales rose 5.4% to $370 and operating income increased 9.1% to $84. AIT organic growth was 2.9%; gross margin edged down to 49.2% from 49.3%.
- Management attributed sales growth primarily to mobile computing products, supplies, and support services, partly offset by lower data-capture product sales. North America sales grew 11.6% in both the quarter and first half; Latin America declined 1.8% in each comparison.
- Six-month operating cash flow fell 26.7%, with management citing payment and collection timing, higher incentive compensation and income-tax payments, partly offset by higher earnings, lower inventory, and reduced interest payments.
Outlook, risks, and unusual items
- The filing refers to a full-year 2019 financial outlook in its forward-looking-statement discussion but the provided filing text does not provide a clear numerical guidance value.
- Temptime was acquired in February for $180 cash, net of cash acquired; Profitect was acquired in May for $90 total consideration. Their purchase-price allocations remain preliminary. Profitect remeasurement generated a $4 gain. The acquisitions contributed to higher goodwill and intangible assets; goodwill recorded was $73 for Temptime and $58 for Profitect.
- Q2 and first-half results included interest-rate-swap losses of $15 and $23, respectively. The Q2 effective tax rate was 3.9% versus 30.0% a year earlier; the six-month rate was 8.1% versus 23.2%, reflecting tax benefits including share-based compensation and other discrete items.
- Foreign-exchange exposure, variable-rate debt, acquisition integration, global economic and supply conditions, and product acceptance are among the cited risks. Three distributors each accounted for more than 10% of receivables at quarter-end; the largest represented 23.0%. Management said ordinary-course legal matters were not expected to have a material adverse impact, while noting outcomes remain uncertain.
- On July 26, 2019, after quarter-end, the board authorized a share repurchase program of up to $1 billion, with no stated expiration date. The company reported no repurchases under the prior program during the period.
- The company adopted lease accounting standard ASC 842 in 2019, recording a $114 right-of-use asset and $136 of lease liabilities at June 29. Management reported effective disclosure controls and no material changes in internal controls during the quarter.
Important facts for investors to verify
- Whether organic growth and EVM’s stronger results persist, and how much reported growth reflects acquisitions and currency movements.
- Cash conversion and working-capital trends, given lower year-over-year operating cash flow and cash of $27.
- Debt repayment and refinancing needs, covenant headroom, and sensitivity to variable interest rates; a large portion of stated debt maturities falls in 2021.
- Final acquisition valuations, integration progress, and the contribution of Temptime and Profitect to earnings and cash flow.
- Customer and receivables concentration, along with the planned scale and funding of the newly authorized buyback.
- Tax-audit outcomes and the sustainability of the unusually low 2019 effective tax rate.