Zebra Technologies Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter filing; quarterly figures are included below where relevant. Dollar amounts are U.S. dollars.
Business context
Zebra designs and sells enterprise mobile computers, data-capture and wireless products, barcode and card printers, RFID and location systems, supplies, software, and related services. On October 27, 2014, it acquired Motorola Solutions’ Enterprise business for approximately $3.45 billion, adding mobile computing, data capture, WLAN, and services. The acquisition’s results are included from the closing date; Enterprise contributed $476.0 million of reported 2014 net sales. The combined company reported two segments: Enterprise and Legacy Zebra.
Key financial metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $1,670.6 million | $1,038.2 million |
| Gross profit / margin | $778.0 million / 46.6% | $503.6 million / 48.5% |
| Operating income / margin | $88.6 million / 5.3% | $160.3 million / 15.4% |
| Net income | $32.4 million | $134.4 million |
| Diluted EPS | $0.63 | $2.63 |
| Cash from operating activities | $248.3 million | $194.8 million |
Sales increased 60.9%, principally due to the Enterprise acquisition; Legacy Zebra sales increased 15.1%. Legacy Zebra gross margin improved to 50.0% from 48.5%. Consolidated gross margin declined, reflecting the combined business mix and acquisition accounting. Operating income included $126.7 million of acquisition and integration costs, $54.1 million of acquired-intangible amortization, and $6.0 million of exit and restructuring costs.
Cash used in investing activities was $3.11 billion, mainly reflecting the acquisition; financing activities provided $3.19 billion, primarily from acquisition-related borrowing. At year-end, cash and marketable securities were $418.3 million, working capital was $716.2 million, and current assets and current liabilities were $1.67 billion and $955.8 million, respectively. Principal debt was $3.25 billion ($3.19 billion carrying value after discounts): $2.2 billion term loan and $1.05 billion of 7.25% senior notes due 2022. The term loan bears variable interest, subject to a 4.75% floor; the reported year-end rate was 4.75%. The $250 million revolver was undrawn, with $247.1 million available. Management said cash, operating cash flow, and available revolver capacity should cover anticipated needs and debt service for the next 12 months.
Material changes and unusual items
- Reported fourth-quarter net sales were $790.6 million, versus $284.5 million in fourth-quarter 2013. Fourth-quarter 2014 operating loss was $24.8 million and net loss was $51.7 million, versus operating income of $49.1 million and net income of $41.7 million a year earlier. The quarter included substantial acquisition-related costs, amortization, and interest expense.
- 2014 income before tax was $16.6 million; income tax benefit was $15.8 million, producing the reported $32.4 million net income. The effective tax rate was negative 95.0%, primarily reflecting foreign earnings taxed at lower rates and a domestic pretax loss driven by interest and acquisition costs.
- Total assets rose to $5.57 billion from $1.12 billion, including $2.49 billion goodwill and $1.03 billion net intangible assets at year-end. Enterprise purchase-price allocation remained preliminary.
- Three distributor customers each represented at least 10% of sales: 17.1%, 12.2%, and 10.5%. No end customer accounted for 10% or more.
Outlook, commentary, and risks
Management described integration as a multi-year effort, with priorities including customer continuity, capturing synergies, combining functions and systems, and transitioning from Motorola Solutions-provided services. Zebra expected to complete its organizational talent-selection process during 2015 and to operate separate ERP systems in the interim. It targeted approximately $150 million in annual cost savings, fully achieved by the end of 2016. The filing references 2015 first-quarter and full-year outlook but the supplied text does not provide clear numerical guidance.
Key risks include executing the large acquisition and realizing synergies; elevated debt service and restrictive debt covenants; variable-rate exposure despite interest-rate swaps; reliance on third-party manufacturers and suppliers; competition and technology changes; foreign-exchange and international operating exposure; and customer, channel, and integration disruption. Management’s year-end internal-control assessment excluded Enterprise, which accounted for 81% of total assets; initial reviews identified certain Enterprise control deficiencies, with remediation planned ahead of the required 2015 assessment. The auditor gave an unqualified opinion on the financial statements and on controls within the assessed scope.
The filing reports ongoing tax examinations and $18.9 million of unrecognized tax benefits. Singapore tax authorities assessed withholding tax and penalties of approximately $3.8 million related to royalties; the company said the withholding tax would be offset by a U.S. foreign tax credit with no effective-tax-rate impact. Management believed ordinary-course legal proceedings would not have a material adverse effect, while noting litigation outcomes are uncertain.
Investor verification priorities
- Verify the final Enterprise purchase-price allocation, acquired asset valuations, and any subsequent goodwill or intangible-asset impairment indicators.
- Track integration progress, transition-services costs and exit timing, and realization of the stated $150 million annual savings target.
- Assess cash generation and debt-service capacity against the $3.25 billion principal balance, scheduled amortization, interest costs, and covenant terms.
- Reconcile reported earnings with acquisition charges, amortization, purchase-accounting adjustments, swap effects, and the unusual tax benefit.
- Monitor remediation of Enterprise internal-control deficiencies and completion of the required control assessment.
- Confirm the status and financial consequences of tax examinations, the Singapore assessment, and other contingencies.