Business context and reporting period
Zebra Technologies Corporation filed this Form 10-K for the fiscal year ended December 31, 2017. It designs and sells automatic identification and data-capture products—including mobile computers, barcode scanners and printers, RFID and location systems—along with supplies, software and services. Its two reportable segments are Asset Intelligence & Tracking (AIT) and Enterprise Visibility & Mobility (EVM). The company serves customers in more than 180 countries.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $3.722 billion | $3.574 billion |
| Gross profit / margin | $1.710 billion / 45.9% | $1.642 billion / 45.9% |
| Operating income | $322 million | $80 million |
| Net income (loss) | $17 million | $(137) million |
| Diluted EPS | $0.32 | $(2.65) |
| Operating cash flow | $478 million | $380 million |
| Capital expenditures | $50 million | $77 million |
| Cash and cash equivalents, year-end | $62 million | $156 million |
| Total debt principal, year-end | $2.249 billion | $2.703 billion |
Net sales rose 4.1%; management reported organic growth of 6.5%, adjusting for the wireless LAN divestiture, foreign currency translation and corporate eliminations. Gross margin was unchanged. Operating income improved substantially as operating expenses fell 11.1%, including lower acquisition and integration costs, intangible amortization and prior-year impairment charges. Interest expense increased to $227 million from $193 million, primarily due to costs of redeeming the Senior Notes. The 2017 effective tax rate was 80.7%, affected by U.S. tax reform and other tax items.
Segment results: AIT sales were $1.311 billion, up 5.1%, with operating income of $260 million; EVM sales were $2.414 billion, up 3.3%, with operating income of $315 million. EVM organic sales growth was 7.5%; AIT organic growth was 4.6%.
In the fourth quarter, sales were $1.026 billion versus $942 million a year earlier; gross profit was $469 million versus $432 million; net income was $4 million versus $17 million; and diluted EPS was $0.07 versus $0.34.
Year-end current assets were $1.063 billion and current liabilities were $1.000 billion. The company reported $2.176 billion of long-term debt, in addition to $51 million current debt. Most debt principal—$1.968 billion—was scheduled for 2021. The company had $495 million of remaining revolving-credit availability, subject to facility terms. Cash-flow generation strengthened, while cash declined as the company made debt repayments and funded other activities.
Material changes versus the prior period
- Revenue recovered from a 2.1% decline in 2016; 2017 growth came mainly from mobile computing, data capture and barcode printing. Hardware sales increased in North America, EMEA and Latin America, but declined in Asia-Pacific.
- Net income turned positive from losses in 2016 and 2015. The operating-income gain reflected higher sales and lower operating expenses; the prior year included $62 million of wireless LAN impairment charges.
- The company completed most integration work related to its 2014 Enterprise acquisition, implemented a common enterprise resource planning system and exited the remaining Motorola Solutions transition-service agreements.
- In 2017, Zebra refinanced and restructured debt, redeemed $1.05 billion principal of 7.25% Senior Notes, and made $493 million of Term Loan B principal prepayments. The refinancing included a $65 million make-whole premium and $16 million of accelerated debt-issuance-cost expense.
- Cash from operations increased by $98 million. Working capital was affected by higher inventory and lower accounts payable; year-end inventory rose to $458 million from $345 million.
Outlook, commentary, risks and unusual items
The provided filing text refers to 2018 financial outlook but does not provide clear numeric guidance for first-quarter or full-year 2018. Management expects operating cash flows to continue and believes cash, available facilities and expected operating cash flows will cover operating, capital-expenditure and debt needs for the next 12 months.
The Productivity Plan, covering organizational changes, process improvements and automation, is expected to be substantially complete by the end of 2018. Zebra recorded $12 million of related charges through year-end and estimated a further $8 million to $12 million. The acquisition-related restructuring plan was substantially complete.
U.S. tax reform produced a provisional $72 million tax expense: $35 million from deferred-tax remeasurement and $37 million from the transition tax. After credits, the estimated transition-tax cash liability was $26 million, payable over eight years. The company stated that its tax analysis remained incomplete and estimates could change.
Key risks include substantial debt and variable-rate exposure; dependence on distributors, contract manufacturers and certain suppliers; international operations, foreign exchange and potential trade-policy changes; competition and technology shifts; acquisition integration; cybersecurity and privacy; product or software defects; and tax uncertainty. A one-percentage-point interest-rate change was estimated to affect annual interest expense and cash interest by approximately $22 million before derivative effects.
The filing describes a longstanding Symbol Technologies securities class action; Zebra could not reasonably estimate possible losses. It also reported state unclaimed-property audits and a Delaware voluntary disclosure agreement, for which it had not yet quantified or recorded a reserve. Management said ordinary-course legal matters were not expected to have a material adverse impact. The company was in compliance with debt covenants at December 31, 2017. Management and the auditor reported effective internal control over financial reporting, and the auditor gave an unqualified opinion on the financial statements.
Important facts for investors to verify
- Review the actual 2018 guidance and subsequent results; numeric guidance is not clear in the provided filing text.
- Track debt repayment, the concentration of maturities in 2021, floating-rate exposure, covenant headroom and available borrowing capacity.
- Assess whether improved operating cash flow is sustainable, particularly given higher inventory and lower year-end cash.
- Monitor the final accounting and cash effects of tax reform, uncertain tax positions and the company’s unusually high 2017 effective tax rate.
- Check progress and final costs for the Productivity Plan, and any developments in the Symbol litigation and unclaimed-property assessments.
- Consider customer concentration: three distributor customers represented 48.7% of 2017 sales; no end-user accounted for 10% or more.