Zebra Technologies Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended April 1, 2023; comparable period ended April 2, 2022. Zebra provides enterprise asset intelligence and automatic identification and data capture products, software, and services. Its reportable segments are Asset Intelligence & Tracking (AIT) and Enterprise Visibility & Mobility (EVM).
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $1.405 billion | $1.432 billion | Down 1.9% |
| Gross profit / margin | $667 million / 47.5% | $637 million / 44.5% | Margin up 300 bps |
| Operating income | $225 million | $212 million | Up 6.1% |
| Net income | $150 million | $205 million | Down 26.8% |
| Diluted EPS | $2.90 | $3.83 | Down 24.3% |
| Operating cash flow | $(76) million | $54 million | Down $130 million |
| Capital expenditures | $16 million | $14 million | — |
Services and software sales rose 4.4% to $235 million, while tangible product sales declined 3.1% to $1.170 billion. Management reported consolidated organic sales growth of negative 0.3%, excluding currency and acquisition effects. Gross margin improved mainly on lower premium freight and component costs; operating expenses increased 4.0% to $442 million.
Segments and regions
- AIT: Sales increased 24.6% to $491 million (organic growth 28.4%); segment operating income rose to $132 million from $60 million. Higher printing product sales, pricing, and improved freight and component costs contributed to growth and margin gains.
- EVM: Sales decreased 11.9% to $914 million (organic decline 11.2%); segment operating income fell to $130 million from $189 million. Fewer large deployments and lower mobile computing sales were key factors; gross margin remained 46.5%.
- Geography: North America sales increased 3.7% to $725 million; EMEA declined 11.4% to $443 million; Asia-Pacific increased 3.4% to $154 million; Latin America declined 1.2% to $83 million.
Cash, liquidity, and debt
Cash and cash equivalents were $85 million at April 1, 2023, versus $105 million at December 31, 2022. Total assets were $7.474 billion and current liabilities were $2.074 billion. Total debt was $2.103 billion, including $215 million current; long-term debt was $1.880 billion. Debt increased from $2.032 billion at year-end. The Term Loan A rate was 5.91%, the revolving facility average rate was 5.90%, and receivables financing averaged 5.75%. The company had $1.493 billion available under its revolving facility, net of letters of credit, and reported compliance with debt covenants.
Operating cash outflow reflected cash payments for inventory, taxes, interest, and a settlement installment, partly offset by collection timing and lower incentive compensation payments. Investing cash outflow was $17 million. Financing provided $70 million, primarily reflecting lower share repurchases than in the prior-year quarter. The company uses $800 million of interest-rate swaps to hedge variable-rate exposure. Management believes current resources, borrowing availability, and operating cash generation are sufficient for anticipated requirements and debt service.
Changes, outlook, risks, and unusual items
- Net income was lower despite improved operating income, mainly because other expense was $40 million versus other income of $38 million a year earlier. The change included a $7 million interest-rate-swap loss versus a $34 million gain in the prior period, as well as higher interest expense from increased rates and average debt. The effective tax rate rose to 18.9% from 18.0%.
- Management cited inflation, higher interest rates, a stronger U.S. dollar, moderating demand, and longer sales cycles for large deployments. Supply-chain availability and transportation costs improved versus the prior year. The company expects these trends to continue to varying degrees and cited pricing, cost management, and currency and interest-rate risk management as mitigations.
- The filing discusses a full-year 2023 financial outlook in its forward-looking-statement language, but the provided filing text does not provide a clear numerical guidance value.
- The 2022 Productivity Plan is expected to be completed in 2023 at an estimated initial-scope cost of approximately $25 million; $22 million had been recorded through the quarter, including $10 million in Q1 2023.
- A patent litigation settlement requires eight quarterly payments of $45 million beginning in Q2 2022. The remaining portion is payable within the next 12 months; a $45 million settlement liability was reflected in Q1 operating cash-flow changes. Management says ordinary-course legal matters are not expected to have a material adverse effect.
- Three distributors each exceeded 10% of sales; together they represented 49.4% of Q1 sales and 53.0% of accounts receivable at April 1, 2023. This creates customer concentration exposure.
- The company repurchased 55,811 shares for approximately $15 million in the quarter; $930 million remained authorized. Russia and Ukraine were not material to the business, and management reported no significant operating impact from the war to date.
Most important facts for investors to verify
- Whether EVM demand and large-deployment timing recover, and whether AIT growth and improved margins persist.
- Whether negative operating cash flow is temporary, including the effects of supplier payments, settlement installments, and working-capital movements.
- Debt levels, variable-rate exposure, swap coverage, and refinancing or maturity needs, particularly the receivables facility maturing May 15, 2023 and major debt maturities in 2027.
- Customer concentration and the extent to which factoring arrangements and receivables financing support cash and liquidity.
- Progress and final costs of the productivity plan, and any material developments in litigation, tax incentives, or other contingencies.
- Specific full-year 2023 guidance and assumptions, which are not clearly stated in the provided filing text.