Zebra Technologies Corporation — 2019 Form 10-K Summary
Business context and reporting period
Fiscal year ended December 31, 2019; the filing was signed February 13, 2020. Zebra provides enterprise asset intelligence and automatic identification and data capture products and services, including mobile computers, barcode scanners and printers, RFID, supplies, software, and support services. Operations are reported in Asset Intelligence & Tracking (AIT) and Enterprise Visibility & Mobility (EVM). The company serves customers in approximately 180 countries.
Financial performance
| Metric | 2019 | 2018 | Change or context |
|---|---|---|---|
| Net sales | $4.485 billion | $4.218 billion | Up 6.3%; organic growth was 5.5% |
| Gross profit / margin | $2.100 billion / 46.8% | $1.981 billion / 47.0% | Margin down 20 basis points |
| Operating income | $692 million | $610 million | Up 13.4%; operating margin was 15.4% |
| Net income | $544 million | $421 million | Net margin was 12.1% |
| Diluted EPS | $9.97 | $7.76 | Up from prior year |
| Operating cash flow | $685 million | $785 million | Down $100 million |
| Capital expenditures | $61 million | $64 million | Cash purchases of property, plant and equipment |
Fourth quarter: Net sales were $1.192 billion, gross profit $544 million, net income $169 million, and diluted EPS $3.10. In fourth-quarter 2018, these were $1.137 billion, $539 million, $115 million, and $2.11, respectively.
Segments: EVM sales were $3.006 billion, up 7.5%, and operating income was $483 million, up 19.6%. AIT sales were $1.479 billion, up 3.9%, and operating income was $355 million, up 9.2%. Consolidated organic growth was led by mobile computing and support services; lower data-capture sales partially offset growth.
Liquidity and debt: Year-end cash was $30 million; current assets were $1.195 billion and current liabilities $1.404 billion. Total debt was $1.286 billion, including $197 million current and $1.080 billion long-term debt. Debt declined from $1.600 billion in 2018. The company had $995 million available under its $1 billion revolving facility, subject to facility terms, and reported compliance with debt covenants. Management said existing resources, borrowing capacity, and operating cash flow were sufficient for anticipated needs.
Material changes versus 2018
- Sales increased 6.3%, but gross margin eased from 47.0% to 46.8%. Operating expenses rose 2.7% to $1.408 billion, while expenses as a share of sales declined to 31.4% from 32.5%.
- Operating cash flow fell to $685 million, primarily reflecting payment and collection timing, higher tax and incentive-compensation payments, partly offset by higher net income, lower inventories, and lower interest payments.
- Investing cash outflow increased to $335 million, mainly due to $262 million of business acquisitions. Financing cash outflow was $365 million.
- 2019 acquisitions included Temptime for $180 million, Profitect for $79 million, and Cortexica for $7 million. Management said recent acquisitions contributed 1.9% to consolidated sales growth.
- Year-end goodwill rose to $2.622 billion from $2.495 billion; the annual impairment test identified no impairment.
- The company repurchased 237,886 shares for $47 million and had $953 million remaining under its $1 billion repurchase authorization. It reported no cash dividends and did not anticipate paying them in the foreseeable future.
Outlook, commentary, risks, and unusual items
- The filing refers to first-quarter and full-year 2020 financial outlook but the provided filing text does not state clear numerical guidance.
- COVID-19-related supply-chain disruptions in China were developing after year-end. As of February 10, 2020, some suppliers had resumed operations to varying degrees; Zebra estimated a possible sales impact of $0 to $50 million, with potentially greater impact if conditions worsened.
- To diversify sourcing away from China and mitigate tariffs, Zebra incurred $5 million in 2019 and expected up to $25 million of additional one-time operating costs and $10 million to $15 million of equipment purchases by mid-2020. Management expected these actions, together with U.S. pricing measures, to substantially mitigate ongoing tariff effects.
- A new productivity plan initiated in the fourth quarter incurred $8 million in 2019 charges, with up to $10 million of additional 2020 costs expected, principally for severance in North America and EMEA.
- The 2019 effective tax rate was 9.0%, down from 19.7%, mainly due to favorable changes in uncertain tax positions, share-based compensation benefits, and tax credits. The company settled a tax dispute for $19 million and recorded a $20 million benefit from statute expirations.
- Other expenses included a $19 million loss on interest-rate swaps and $7 million of debt-refinancing costs. Variable-rate debt creates interest-rate exposure; management estimated that a one-percentage-point rate change would affect annual interest expense by about $5 million.
- Key risks include trade tariffs and sourcing transitions, dependence on contract manufacturers and suppliers, customer and distributor concentration, competition and technology change, foreign exchange, cybersecurity, acquisition integration, and debt service. Three distributors represented 48.6% of 2019 sales combined; no end-user represented 10% or more.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Track 2020 sales and operating performance against management’s outlook, and assess the realized effect of the China-related disruption.
- Verify whether sourcing diversification and pricing actions offset tariffs without materially harming margins or customer demand.
- Monitor operating cash flow, working-capital movements, and cash available after acquisitions, capital spending, debt service, and buybacks.
- Review debt maturities, floating-rate exposure, facility availability, covenant headroom, and refinancing needs, particularly the $197 million current debt portion.
- Assess distributor concentration and receivable exposure: the three largest customers accounted for 48.6% of sales, and the three largest represented 45.2% of year-end receivables.
- Follow acquisition integration, restructuring costs, goodwill and intangible-asset assumptions, and the sustainability of the unusually low tax rate.