Zebra Technologies Corporation — Q3 2017 Form 10-Q
Business context and period. Global provider of enterprise asset intelligence, automatic identification and data-capture products, software and services. The filing covers the quarter and nine months ended September 30, 2017; comparisons are with the periods ended October 1, 2016. Amounts are in U.S. dollars.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $935 million | $904 million | $2,696 million | $2,632 million |
| Gross profit / margin | $429 million / 45.9% | $414 million / 45.8% | $1,241 million / 46.0% | $1,210 million / 46.0% |
| Operating income (loss) | $91 million | $(24) million | $189 million | $9 million |
| Net income (loss) | $(12) million | $(83) million | $13 million | $(154) million |
| Diluted earnings (loss) per share | $(0.23) | $(1.61) | $0.25 | $(2.99) |
- Q3 sales rose 3.4%; organic sales growth was 5.9%. Nine-month sales rose 2.4%; organic growth was 6.1%. Organic growth adjusts for the WLAN divestiture, foreign currency and corporate eliminations.
- Q3 product sales were $810 million and services/software revenue was $125 million. Higher mobile computing, data capture and barcode-printing sales supported growth; WLAN divestiture reduced the comparison, especially in services.
- Q3 interest expense was $95 million, versus $46 million a year earlier; nine-month expense was $176 million versus $145 million. Q3 included a $49 million make-whole premium and $13 million of accelerated debt discount and issuance-cost charges related to debt transactions.
- Nine-month operating cash flow was $210 million, compared with $252 million. Investing cash use was $37 million, including $36 million of capital expenditure. Financing cash use was $237 million. Cash fell $68 million to $88 million; $66 million was held outside the U.S.
Financial position and material changes
- At September 30, 2017, total debt principal was $2.516 billion ($2.451 billion reported long-term debt, including $34 million current portion); cash was $88 million. Current assets were $1.266 billion and current liabilities $1.039 billion.
- Debt principal declined from $2.703 billion at December 31, 2016. The July refinancing added a $688 million Term Loan A and increased the revolving facility to $500 million. Zebra redeemed $750 million of 7.25% Senior Notes, prepaid $360 million of Term Loan B principal year to date, and had $235 million drawn on the revolver at quarter-end. The Term Loan A and B rates were 3.23% and 3.31%, respectively; both are variable-rate borrowings.
- Following the quarter, on November 3, 2017, the company gave conditional redemption notice for the remaining $300 million of 7.25% Senior Notes due 2022. At quarter-end, it reported compliance with all debt covenants and $495 million of available revolving capacity, net of letters of credit.
- Inventory increased to $492 million from $345 million at year-end, mainly reflecting business growth, product mix, backlog and a transition to a new European distribution model. Management attributed lower operating cash flow principally to a $168 million working-capital outflow, including higher inventory and lower accounts payable.
Management commentary, outlook and risks
- Management attributed improved operating income versus the prior-year periods mainly to sales and gross-profit growth and lower operating expenses. Prior-year expenses included a $62 million WLAN-related impairment; acquisition and integration costs also declined as integration activities were substantially completed.
- Legacy Zebra Q3 sales increased 8.0%, but gross margin declined to 47.4% from 48.2%, with higher overhead, service costs and customer incentives. Enterprise sales increased 1.0% reported (5.5% organic); its gross margin improved to 45.2% from 44.8%.
- The Productivity Plan is expected to be substantially complete by December 2018, with the first full year of financial benefits in 2019. Costs and benefits have not been finalized. The separate Acquisition Plan is expected to conclude by Q1 2018, with $3–$4 million of remaining charges estimated.
- Management said existing capital resources and operating cash generation should cover anticipated capital needs and debt service. The filing refers to a full-year 2017 financial outlook but the supplied filing text does not provide a clear quantified forecast.
- Risks include variable interest rates, foreign-exchange exposure, availability of components and supply-chain disruption, access to foreign-held cash, customer and distributor concentration, and litigation and tax uncertainty. Zebra disclosed a longstanding Symbol-related securities class action for which it could not reasonably estimate possible losses; its insurer disputed reimbursement of defense costs. Management did not expect ordinary-course legal matters, individually or collectively, to materially affect results, but noted litigation uncertainty.
- Three distributors each represented more than 10% of nine-month sales; together they accounted for 48.1%. Three customers each represented more than 10% of receivables at quarter-end.
Important facts for investors to verify
- Whether the remaining $300 million Senior Notes redemption was completed and its resulting cash, interest and debt effects.
- Subsequent inventory, backlog and operating cash-flow trends, including the impact of the European distribution transition.
- Debt repayment plans, variable-rate exposure, covenant headroom and the company’s ability to sustain debt service.
- Updated cost and benefit estimates for the Productivity Plan and remaining Acquisition Plan charges.
- Developments in the Symbol litigation, insurance-cost dispute, tax audits and uncertain tax positions.
- Revenue growth and margins by segment, especially whether organic growth persists after adjusting for the WLAN divestiture and foreign exchange.