Zebra Technologies Corporation — Q3 2015 Form 10-Q
Business context and reporting period
The quarter ended October 3, 2015; comparative periods ended September 27, 2014. Zebra supplies barcode printing, mobile computing, data capture, wireless LAN, software and related services. Results include the Enterprise business acquired from Motorola Solutions on October 27, 2014, so reported year-over-year growth is not directly comparable with the prior year, which did not include Enterprise.
Financial results
Amounts below are in millions, except per-share data and margins.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $916.3 | $303.3 | $2,699.2 | $880.0 |
| Gross profit | $414.1 | $151.5 | $1,216.5 | $441.6 |
| Gross margin | 45.2% | 50.0% | 45.1% | 50.2% |
| Operating income | $25.0 | $27.0 | $31.0 | $113.4 |
| Net income (loss) | $(29.0) | $14.9 | $(130.5) | $84.1 |
| Diluted EPS | $(0.57) | $0.29 | $(2.56) | $1.64 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $115.9 | $129.7 |
- Q3 sales increased 202.1% and nine-month sales increased 206.7%, principally reflecting the acquired Enterprise business. Excluding the acquisition and on a constant-currency basis, sales rose 8.0% for Q3 and 14.0% for the nine-month period.
- Enterprise contributed Q3 sales of $605.1 million and operating income of $64.2 million; nine-month sales were $1,745.7 million and operating income was $160.9 million. Legacy Zebra Q3 sales rose 3.5% and operating income rose 2.2%.
- Consolidated operating income was pressured by acquisition-related costs, amortization, integration and restructuring expenses. Q3 interest expense was $45.0 million and foreign-exchange loss was $5.3 million; for nine months, those amounts were $145.3 million and $21.2 million.
- Nine-month investing cash outflow was $112.3 million, including $87.4 million of capital expenditures and $50.9 million of additional acquisition consideration. Financing cash outflow was $117.2 million, including $130.0 million of term-loan prepayments. Cash declined $135.9 million to $258.0 million.
Balance sheet, debt and liquidity
- At October 3, 2015, cash was $258.0 million, current assets $1,489.3 million and current liabilities $898.9 million. The filing reports no current debt maturities.
- Long-term debt carrying value was $3,043.2 million: $1.05 billion of 7.25% senior notes due 2022 and a $2.07 billion term loan. The term-loan rate was 4.75%. The company made a further $20 million optional term-loan payment on November 3, 2015.
- The $250 million revolving facility had no borrowings; $246.8 million remained available after letters of credit. Management stated that cash, capital resources and operating cash generation were sufficient for anticipated requirements and debt service.
- Working capital was approximately $590.3 million; the current ratio was approximately 1.66. These are calculations from reported balance-sheet amounts.
Material changes, outlook and risks
- Enterprise acquisition effects drove the large reported revenue increase, while consolidated gross margin fell to 45.2% from 50.0%. Management reported Legacy Zebra gross margin, excluding acquisition effects, improved to 51.2% in Q3 from 50.0%; Enterprise gross margin was 42.5%.
- Management cited growth in North America and Asia-Pacific and, on a constant-currency basis, Europe, Middle East and Africa. Latin America was weaker, reflecting a weak macroeconomic environment. Enterprise sales rose 5.5% sequentially from Q2; its margin improved sequentially by 1.0 percentage point.
- No specific numerical full-year guidance is provided. Management expected the Enterprise integration plan to generate further synergies and cost savings, and expected additional acquisition-related restructuring charges through the end of 2016.
- Management identified a potential goodwill impairment at the Retail Solutions Group: its preliminary test indicated fair value below carrying value, but the second test was incomplete and any impairment was not reasonably estimable.
- Disclosure controls were deemed ineffective as of quarter-end due to a material weakness in the review and preparation of the quarterly income-tax provision. Remediation was underway, but sustained effectiveness had not yet been demonstrated. The company also continued remediation work on Enterprise internal controls.
- A legacy Symbol securities class action was certified in 2015; the company could not reasonably estimate possible losses. Management said other ordinary-course legal matters were not expected to have a material adverse impact.
- Key stated risks include acquisition integration, foreign exchange and interest rates, international economic conditions, product acceptance and competition, supply and manufacturing costs, litigation, tax matters and remediation of the control weakness. The company reported no material change in market risk during the quarter.
Important facts for investors to verify
- Separate underlying Legacy Zebra and Enterprise performance from acquisition and purchase-accounting effects when assessing growth and margins.
- Track debt repayment, interest expense, covenant compliance and cash generation against the company’s substantial debt burden.
- Follow the completion and outcome of the Retail Solutions Group goodwill impairment test.
- Confirm remediation of the income-tax control material weakness and Enterprise control deficiencies, including whether controls become demonstrably effective.
- Monitor integration costs, restructuring charges expected through 2016, and progress toward the anticipated synergies.
- Review developments in the Symbol litigation and any change in the company’s ability to estimate potential losses.