Zebra Technologies Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter ended September 26, 2020; comparisons are with the quarter ended September 28, 2019. Financial amounts are in millions of dollars unless noted. Zebra sells data-capture hardware, software and services through its AIT and EVM segments.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,132 | $1,130 | $3,140 | $3,293 |
| Gross profit / margin | $493 / 43.6% | $535 / 47.3% | $1,385 / 44.1% | $1,556 / 47.3% |
| Operating income | $150 | $185 | $420 | $504 |
| Net income | $116 | $136 | $305 | $375 |
| Diluted EPS | $2.16 | $2.50 | $5.65 | $6.87 |
Q3 sales were nearly flat year over year, while organic sales increased 0.3% excluding acquisition and currency effects. Nine-month sales declined 4.6% (4.2% organic). Q3 gross margin contracted 370 basis points and operating income fell 18.9%; for the nine months, gross margin declined 320 basis points and operating income fell 16.7%. Management attributed margin pressure principally to unfavorable mix, including larger deals, and premium freight; nine-month results also reflected Chinese tariffs. Lower operating expenses partly offset reduced gross profit.
Segment trends: Q3 AIT sales declined 7.2% to $346 and operating income fell 15.1% to $79; AIT organic sales declined 7.1%. EVM sales rose 4.1% to $788 and operating income declined 9.8% to $120; EVM organic sales grew 4.0%. For the nine months, AIT sales fell 9.8% and EVM sales fell 2.0%.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $531, versus $420 in 2019. Management cited collection and payment timing, including receivables factoring, as drivers; lower net income and higher inventory partly offset these effects.
- Investing cash outflow was $623, including $548 for the Reflexis acquisition and $32 for long-term investments. Financing provided $131, including net borrowings; the company repurchased $200 of shares during Q1 and none in Q2 or Q3.
- Cash and cash equivalents were $39 at September 26, 2020; cash including restricted cash was $68, of which $29 was restricted. Current assets were $1,192 and current liabilities $1,765.
- Total debt was $1,575, up from $1,286 at year-end 2019; $481 was classified as current. Debt included a $200 term loan due August 2021 and $264 drawn under receivables financing facilities. The company reported $996 of available capacity under its $1 billion revolver and no borrowings under its $20 uncommitted facility. It was in compliance with debt covenants.
Material developments, outlook and risks
- Reflexis acquisition: Acquired September 1 for $548 net of cash acquired, funded partly with a new $200 term loan. Preliminary purchase accounting recorded $376 of goodwill, allocated to EVM. Q3 acquisition and integration costs were $19; the filing also identifies $5 of other transaction and advisory costs. The purchase-price allocation remains preliminary.
- COVID-19: Management said the pandemic had negatively affected sales and profitability through demand declines and higher fulfillment costs. Some customer activity improved, but performance differed by customer and region. The duration and ultimate impact remain uncertain; supply-chain disruption, reduced or volatile demand, employee absences and customer payment issues are identified risks.
- Management outlook: No specific full-year revenue or earnings guidance is stated in the provided filing text. Management expected full-year operating cash flows to remain strong and believed available capital resources and borrowing capacity were sufficient for anticipated needs and debt service.
- Cost initiatives: Product-sourcing diversification was substantially complete and expected to finish by year-end 2020; up to $5 of additional operating costs and $3 of equipment purchases were anticipated in Q4. The 2019 productivity plan was expected to be substantially complete by year-end, with up to $3 of Q4 restructuring costs.
- Other items and exposures: Nine-month results included $55 of losses on non-designated derivatives, mainly interest-rate swaps. The company’s three largest customers accounted for 16.5%, 12.2% and 18.7% of nine-month sales, respectively; they are distributors. Legal proceedings were described as not expected to have a material adverse impact, though outcomes remain uncertain.
Important facts for investors to verify
- Whether demand recovery and regional trends persist, particularly in Asia-Pacific and Latin America, and whether COVID-19 continues to affect sales, costs or collections.
- Whether gross margins recover as mix, freight costs and tariff impacts change, and whether sourcing diversification delivers the expected mitigation.
- Reflexis integration, acquired-business performance, and any revisions to its preliminary purchase-price allocation or associated costs.
- Near-term debt maturities and refinancing or repayment needs, including the 2021 term loan and receivables financing facilities; also monitor covenant compliance and available liquidity.
- The sustainability of operating cash flow, given the reported influence of collection/payment timing and factoring arrangements.
- Customer concentration and the impact if major distributor customers reduce purchases or delay payments.