Zebra Technologies Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended April 2, 2016; comparisons are with the three months ended April 4, 2015. Zebra sells enterprise data-capture, mobile computing, printing, RFID, software and related services. Results include Legacy Zebra and the Enterprise business acquired from Motorola Solutions in 2014.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $847 million | $893 million | Down 5.2% |
| Gross profit / margin | $390 million / 46.0% | $409 million / 45.8% | Profit down $19 million |
| Operating income | $0 million | $20 million | Down $20 million |
| Net loss | $29 million; $0.56 per diluted share | $25 million; $0.50 per diluted share | Loss widened $4 million |
| Operating cash flow | $95 million | $36 million | Up $59 million |
Hardware sales declined 6.4% to $644 million; supplies rose 4.5% to $70 million, while services and software fell 3.6% to $133 million. Sales fell in North America, EMEA and Latin America, partly offset by growth in Asia-Pacific. On a constant-currency basis, consolidated sales declined approximately 3%. Gross margin improved slightly, but operating expenses were essentially flat at $390 million and rose as a share of sales to 46.0% from 43.6%.
By segment, Legacy Zebra sales were $313 million, down 5.7%, and adjusted operating income was $69 million, down 10.4%; its gross margin improved to 52.4% from 51.5%. Enterprise sales were $537 million, down 5.3%, and adjusted operating income was $36 million, down 33.3%; its gross margin fell to 42.6% from 43.0%. Enterprise sales were affected in part by a large data-capture order in Q1 2015 that did not recur.
Cash, debt and liquidity
Cash and cash equivalents were $194 million at April 2, 2016, versus $192 million at year-end 2015. Operating cash flow was $95 million; investing activities used $20 million, including $19 million of capital expenditures; financing activities used $77 million, including $80 million of term-loan repayment. Cash increased $2 million during the quarter. Management said existing resources and operating cash generation were sufficient for anticipated capital needs and debt service.
Long-term debt carrying value was $2.937 billion, down from $3.012 billion at December 31, 2015. It comprised $1.050 billion of 7.25% senior notes due 2022 and a $1.955 billion term loan; the term loan rate was 4.75%. The company had no revolver borrowings and $247 million available, net of letters of credit. The term loan is secured by substantially all company assets; the company reported compliance with debt covenants. Scheduled principal of $1.96 billion is due in October 2021 unless prepaid earlier.
Material changes, outlook and risks
- Management attributed lower sales mainly to weaker hardware volumes, including data capture, barcode printers and location solutions; Latin American sales were also pressured by weak macroeconomic conditions. Segment operating income declined in both businesses.
- Acquisition and integration costs rose to $37 million from $26 million, reflecting ongoing IT transition work and the wind-down of Motorola Solutions transition services. General and administrative expense increased, including higher IT depreciation and legal costs; intangible amortization decreased.
- During Q1, the company corrected errors in its 2015 financial statements, primarily underaccrued estimates including sales commissions. It recorded $10.3 million of additional expense, primarily in operating expenses; with tax-related items, net loss increased by $3.1 million. Management said the errors were not material to 2015 and were not expected to be material to 2016.
- Management expected another $10 million to $20 million of acquisition-related exit and restructuring charges through year-end 2016. Q1 charges were $6 million; cumulative acquisition-related charges were $51 million.
- The filing refers to a full-year 2016 financial outlook in its forward-looking-statements discussion but does not provide a clear numerical guidance value in the supplied text. Management cautioned that results are subject to market and regional economic conditions, customer acceptance, competition, cost and supply risks, acquisition integration, foreign exchange and interest rates, litigation, and tax matters.
- Internal control over financial reporting was deemed ineffective because of a material weakness in income-tax provision controls, linked to increased legal-entity complexity after the acquisition. Management was implementing remediation; the filing said the weakness had not caused a restatement of prior filings.
- A putative securities class action concerning acquired Symbol Technologies was ongoing. The court certified a class, additional discovery was underway, and the company said it could not reasonably estimate possible losses; an insurer had denied coverage for defense costs. Management stated that other ordinary-course legal proceedings were not expected to have a material adverse impact.
Facts investors should verify
- Whether sales and Enterprise profitability recover, particularly in North America and Latin America, and how much results depend on hardware volumes and product mix.
- Progress in debt reduction, cash generation, and the company’s ability to meet the large 2021 term-loan maturity while maintaining liquidity.
- Remediation and effectiveness of income-tax controls, and whether any further accounting errors or related adjustments arise.
- Actual restructuring charges versus the stated $10 million to $20 million additional expected range, and progress on IT integration.
- Developments in the Symbol litigation, including possible exposure and insurance coverage, which the company could not estimate.