Zebra Technologies Corporation — Q1 2019 Form 10-Q
Business and period: Zebra provides enterprise asset intelligence products, services and software, including barcode printing, mobile computing and data-capture solutions. This unaudited filing covers the three months ended March 30, 2019, compared with the three months ended March 31, 2018.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $1.066 billion | $977 million | Up 9.1%; organic growth 7.9% |
| Gross profit / margin | $501 million / 47.0% | $465 million / 47.6% | Profit up 7.7%; margin down 0.6 percentage points |
| Operating income | $159 million | $144 million | Up 10.4% |
| Net income | $115 million | $109 million | Up 5.5% |
| Diluted EPS | $2.12 | $2.01 | Up 5.5% |
| Operating cash flow | $42 million | $116 million | Down $74 million |
| Capital expenditures | $15 million | $18 million |
Revenue growth was led by mobile computing and data capture products. EVM sales grew 13.4% (organic growth 11.6%), while AIT sales grew 1.4% (organic growth 1.2%). Gross margin pressure reflected unfavorable product mix in both segments. Operating expenses were $342 million, or 32.1% of sales, versus $321 million, or 32.9%.
Cash, debt and liquidity
- Cash and equivalents were $61 million at March 30, 2019, versus $44 million at December 31, 2018. Cash increased $17 million during the quarter.
- Total debt carrying value was $1.744 billion, up from $1.600 billion at year-end; $131 million was classified as current and $1.605 billion as long-term debt. Debt proceeds helped fund the Temptime acquisition.
- Quarter-end debt rates were 3.99% for Term Loan A, 4.24% for Term Loan B, 3.56% for the revolving facility and 3.33% for receivables financing. The company reported compliance with debt covenants.
- Operating cash flow fell primarily because of payment timing for accounts payable, higher incentive compensation and income-tax payments. Investing cash outflow included $179 million for Temptime, net of cash acquired.
- Management stated that existing capital resources and operating cash generation should be sufficient for anticipated capital requirements and debt service.
Material changes and notable items
- Temptime, a temperature-monitoring products company, was acquired on February 21 for $179 million net of acquired cash. It contributed approximately 0.4% to consolidated sales growth; preliminary purchase accounting included $75 million of goodwill.
- Q1 results included Xplore, acquired in 2018, which contributed approximately 1.7% to consolidated sales growth. Acquisitions together reduced reported sales growth by 2.1 percentage points in the company’s organic-growth reconciliation; currency translation added 0.9 percentage points.
- Other expenses were $28 million versus $11 million, mainly reflecting an $8 million loss on interest-rate swaps compared with a $13 million gain in the prior-year quarter. Net interest expense was $24 million versus $11 million.
- The effective tax rate declined to 12.2% from 18.0%, principally due to a greater share of foreign earnings taxed at lower rates and favorable discrete items.
- Adoption of lease accounting standard ASC 842 added a $110 million right-of-use asset and lease liabilities to the balance sheet; the company said adoption did not affect quarterly earnings or cash flows.
Outlook, risks and contingencies
The filing refers to a full-year 2019 financial outlook but does not provide a clear numerical guidance value in the supplied text. Management cited market demand and acceptance, competition and technology change, foreign exchange, cost control, component availability, acquisition integration, interest rates, access to overseas cash, litigation and tax matters as factors that could affect results. It reported no material change in market risk during the quarter.
- Three distributors each represented more than 10% of accounts receivable; together, their stated shares were 21.0%, 8.0% and 19.5%. Three customers represented 47.2% of quarterly sales in aggregate.
- The company disclosed ongoing U.S. federal tax audits for 2016–2017 and a U.K. audit for 2012–2014 and 2016; it anticipated that $22 million of uncertain tax benefits might be settled within 12 months.
- Ordinary-course legal proceedings were not expected by management to have a material adverse effect, though outcomes remain uncertain. A newly identified risk factor concerns product failures or alleged design/manufacturing defects, including in supplier components, potentially resulting in recalls, service costs or legal claims.
- A Singapore tax incentive for 2019–2023 depends on the company making specified investments during 2019–2022; benefits may be repayable if commitments are not met.
Facts investors should verify
- Whether subsequent results sustain organic growth, particularly EVM momentum, and address the lower gross margin.
- Cash conversion and working-capital trends after the sharp year-over-year decline in operating cash flow.
- Debt repayment, refinancing and interest-rate exposure, including the 2021 maturities and the receivables facility maturing in November 2019.
- Temptime integration, final purchase-price allocation and the contribution of acquired businesses to reported growth.
- Developments in significant-customer receivable concentration, tax audits and the Singapore investment commitments.