Zebra Technologies Corporation — Q1 2017 Form 10-Q
Business and period. Zebra designs, manufactures, sells, and supports barcode and specialty printers, mobile computing and data-capture products, RFID and location solutions, software, and related services. This unaudited quarter ended April 1, 2017; comparisons are with the three months ended April 2, 2016. The company reports Legacy Zebra and Enterprise segments.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $865 million | $849 million |
| Gross profit / margin | $401 million / 46.4% | $390 million / 45.9% |
| Operating expenses | $361 million | $380 million |
| Operating income | $40 million | $10 million |
| Net income (loss) | $8 million | $(26) million |
| Diluted EPS | $0.16 | $(0.50) |
| Cash from operations | $117 million | $96 million |
| Capital expenditures | $13 million | $19 million |
Cash increased $24 million to $180 million at quarter-end, including $99 million of foreign cash and investments. Current assets were $1.169 billion and current liabilities were $921 million. Long-term debt, net of issuance costs and discounts, was $2.573 billion, down from $2.648 billion at year-end 2016. Zebra repaid $80 million of term-loan principal during the quarter and made an additional $50 million optional prepayment in April. The revolving facility had no borrowings, with $246 million available after letters of credit. The company reported compliance with debt covenants.
Changes and segment performance
- Sales rose 1.9% as reported. Management said sales grew approximately 7% on a constant-currency basis excluding purchase-accounting adjustments and prior-period WLAN results. Hardware growth was partly offset by the 2016 WLAN divestiture and lower services sales.
- Operating income increased $30 million, reflecting higher sales and gross profit and $19 million lower operating expenses. Interest expense fell to $41 million from $50 million, primarily due to debt prepayments, partly offset by higher rates and accelerated amortization costs.
- Legacy Zebra sales increased 2.5% to $322 million, while operating income declined 5.6% to $67 million; gross margin fell to 50.3% from 52.5%, with higher overhead, freight, distribution-center relocation, and services costs.
- Enterprise sales increased 1.1% to $544 million; excluding WLAN prior-period results and on a constant-currency basis, management reported approximately 9% growth. Operating income rose 31% to $55 million, and gross margin improved to 44.1% from 42.4%, mainly on lower hardware material and overhead costs and product mix.
- By region, reported sales increased in EMEA and Latin America, were nearly flat in North America, and declined in Asia-Pacific.
Outlook, risks, and unusual items
- The filing provides no clear numerical full-year 2017 financial guidance. Management said existing capital resources and operating cash generation should be sufficient for anticipated capital needs and debt service.
- A new Productivity Plan may include organizational changes, process improvements, and automation across both segments. Implementation is expected to be substantially complete by the end of fiscal 2018, with the first full year of benefits in 2019; costs and expected benefits had not been finalized. The existing acquisition-related plan is expected to incur a further $5 million to $7 million of charges and conclude by December 31, 2017.
- The quarter included a $10 million income tax benefit despite a $2 million pretax loss; the reported effective tax rate was 500%. Management cited foreign losses, jurisdictional tax rates and credits, acquisition-related effects, and discrete tax benefits, including a $12 million benefit associated with an intercompany intellectual-property transfer under newly adopted accounting standards.
- Key exposures include foreign-exchange and interest-rate movements, international operations and supply availability, acquisition integration, and market acceptance of products. Zebra added uncertainty around Brexit, including potential currency volatility, customer delays, and cross-border trade costs.
- The company is involved in a long-running class action related to Symbol Technologies; it cannot reasonably estimate possible losses and disputes its insurer’s position on reimbursement of defense costs. Management stated that other ordinary-course legal matters were not expected to have a material adverse effect.
- Three customers each represented more than 10% of quarterly sales, together accounting for 46.2%; three customers also represented 19.3%, 16.0%, and 13.6% of accounts receivable, respectively. The named customers are distributors.
Facts investors should verify
- Whether underlying sales growth, excluding WLAN and currency effects, is sustained and translates into reported revenue growth.
- Whether Enterprise margin gains persist and Legacy Zebra resolves higher overhead and services costs.
- Progress and eventual costs and benefits of the Productivity Plan, alongside the remaining acquisition-plan charges.
- Debt-repayment pace, variable-rate exposure, cash availability outside the U.S., and continued covenant compliance.
- Developments in the Symbol class action, tax audits, and Brexit-related commercial and currency risks.