Zebra Technologies Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended July 2, 2022. Amounts are in millions of dollars unless noted. The company provides enterprise asset intelligence products, software and services. Results are unaudited.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $1,468 | $1,377 | $2,900 | $2,724 |
| Gross profit | $674 | $658 | $1,311 | $1,313 |
| Gross margin | 45.9% | 47.8% | 45.2% | 48.2% |
| Operating income (loss) | $(145) | $247 | $67 | $519 |
| Net income (loss) | $(98) | $219 | $107 | $447 |
| Diluted EPS | $(1.87) | $4.07 | $2.02 | $8.29 |
| Operating cash flow | Six-month 2022: $154; 2021: $539 | — |
Q2 sales increased 6.6% year over year; six-month sales rose 6.5%. Organic sales growth, a non-GAAP measure, was 6.9% for Q2 and 6.1% for the six-month period. Services and software grew faster than tangible products. Gross margin fell 190 basis points in Q2 and 300 basis points year to date, mainly from higher premium freight and component costs and unfavorable foreign currency effects; higher support-service margins and favorable mix partly offset these pressures.
Q2 operating results include a $372 million charge for a patent settlement and related legal costs. Excluding that charge, operating expenses were 30.4% of sales in Q2 and 30.1% year to date, according to management; reported operating expenses increased substantially versus 2021. The filing does not provide a corresponding adjusted net income or EPS measure.
Segments and notable changes
- AIT: Q2 sales rose 7.7% to $446; six-month sales were down 0.4% to $840. Six-month operating income declined 25.6% to $157, with margin pressure from supply costs and product mix.
- EVM: Q2 sales rose 5.8% to $1,022; six-month sales increased 9.2% to $2,060. Six-month operating income was broadly flat at $370. Growth reflected mobile computing, data capture, services and acquisitions.
- Geographies: Six-month sales rose across all reported regions, led by Latin America (+24.1%) and Asia-Pacific (+17.1%); North America increased 2.4%.
- Matrox acquisition: Acquired June 3 for $878, including $875 paid at closing and $3 payable in Q3. Preliminary purchase accounting included $664 of goodwill allocated to EVM; amounts remain subject to measurement-period adjustments.
- Segment reporting: Location solutions moved from AIT to EVM effective January 1, 2022; prior periods were recast for comparability without changing consolidated results.
Cash, debt and liquidity
Cash and cash equivalents were $98 at July 2, down from $332 at December 31, 2021. Six-month operating cash flow was $154, compared with $539 a year earlier; investing cash outflow was $912, primarily reflecting the Matrox acquisition. Financing provided $518, including $1,175 of net debt proceeds, partly offset by $605 of share repurchases. Working-capital needs also increased, including higher receivables and inventory.
Total debt was $2,171, versus $996 at year-end 2021; long-term debt, net of current portion and discounts, was $2,017. In May, Zebra increased Term Loan A borrowings to $1,750 and revolving capacity to $1,500, extended both facilities to May 2027 and transitioned the benchmark from LIBOR to SOFR. At quarter-end, $235 was drawn on the revolver and $186 on receivables financing facilities; $1,493 of revolving capacity remained available after letters of credit. The company reported compliance with debt covenants and said existing resources, borrowing capacity and operating cash generation should meet anticipated requirements.
Outlook, risks and unusual items
- The filing references a full-year 2022 financial outlook in its forward-looking-statement discussion, but the supplied filing text does not provide clear numerical guidance.
- Management said customer demand remained strong, but component shortages lengthened lead times and constrained fulfillment; elevated component and freight costs were expected to persist for some time. Pricing may partly offset costs where market conditions permit.
- The $360 patent-damages settlement with Honeywell, plus $12 of external legal fees, was expensed in Q2. The $360 payment is due in eight quarterly installments of $45, beginning in Q2; pending disputes were dismissed and the parties entered a royalty-free cross-license.
- Russia operations were suspended in March. The company reported no significant effect so far, while warning that the war could affect markets, currencies, logistics and supply chains. COVID-19 developments and supply availability remain uncertainties.
- Three distributors together represented 45.6% of six-month sales and 53.0% of accounts receivable at July 2, creating customer concentration exposure. Foreign currency, interest rates, supplier concentration, acquisition integration, litigation and tax matters are also risks.
- The company repurchased $605 of shares in the first six months and authorized an additional $1 billion program. Total remaining authorization under both programs was $1,092 at July 2.
Most important facts for investors to verify
- Whether supply constraints ease and input-cost inflation moderates, and the resulting impact on sales, gross margin and fulfillment.
- Cash generation and working-capital trends, including whether receivables factoring and pledged receivables remain important sources of liquidity.
- Debt levels, variable-rate exposure, covenant headroom and the effect of the 2022 refinancing and SOFR-based facilities.
- Settlement payment schedule and the earnings and cash-flow effects of the $372 Q2 charge.
- Matrox integration, acquisition returns and final purchase-price allocation; concentration among major distributor customers.
- Any numerical full-year guidance and subsequent developments, which are not clearly stated in the supplied filing text.