Zebra Technologies Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars.
Business context
Zebra designs and sells automatic identification and data capture products and services, including mobile computers, barcode scanners and printers, RFID and tracking solutions, supplies, software, and support services. Its two segments are Asset Intelligence & Tracking (AIT) and Enterprise Visibility & Mobility (EVM). Sales span more than 180 countries. In August 2018, Zebra acquired rugged-tablet maker Xplore for $87 million in cash; Xplore contributed about 1% to consolidated sales growth for the year.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $4.218 billion | $3.722 billion |
| Gross profit / margin | $1.981 billion / 47.0% | $1.710 billion / 45.9% |
| Operating income / margin | $610 million / approximately 14.5% | $322 million / approximately 8.7% |
| Net income | $421 million | $17 million |
| Diluted EPS | $7.76 | $0.32 |
| Cash from operations | $785 million | $478 million |
| Cash and cash equivalents, year-end | $44 million | $62 million |
| Total debt, year-end | $1.600 billion | $2.249 billion |
Revenue rose 13.3%; organic growth was 11.1%. Gross margin improved by 1.1 percentage points. The company reported $64 million of capital expenditures; operating cash flow less capital expenditures was approximately $721 million, a simple derived cash-flow measure, not company-reported free cash flow. Net cash used in financing was $661 million, primarily reflecting $657 million of net debt repayments. Current assets were $1.162 billion against current liabilities of $1.301 billion.
AIT revenue increased 8.5% to $1.423 billion and segment operating income rose 18.6% to $325 million. EVM revenue increased 15.8% to $2.795 billion and segment operating income rose 34.2% to $404 million. Growth was led by mobile computing, data capture, and barcode printing. Both segments reported higher gross margins, citing mix and operating efficiencies.
Fourth quarter: Revenue was $1.137 billion, gross profit $539 million, net income $115 million, and diluted EPS $2.11. Versus Q4 2017, revenue increased from $1.026 billion and net income from $4 million.
Material changes and notable items
- Operating income increased 89.4% year over year, reflecting higher sales and gross profit and lower operating expenses. Lower intangible amortization and acquisition/integration costs contributed to the expense reduction.
- Other expenses fell to $86 million from $234 million, mainly because debt extinguishment and modification costs were $81 million lower than in 2017; lower debt and interest costs also helped.
- The effective tax rate declined to 19.7% from 80.7%. The 2017 rate included significant U.S. tax-reform effects. Zebra recorded $103 million of income tax expense in 2018, including $10 million related to GILTI.
- A $13 million pretax charge for settlement of a commercial lawsuit was recorded in general and administrative expense. The filing says a separate long-running class action was settled and concluded without amounts recorded, with insurers funding the settlement.
- Zebra completed its 2018 debt restructuring, including a new $670 million Term Loan A, an increase in revolving credit commitments, and partial repayment and repricing of Term Loan B. Debt fell by $649 million from year-end 2017.
- Three distributors accounted for 50.1% of 2018 revenue; each individually represented at least 10%. These were distributors, not end-users.
Outlook, risks, and contingencies
Management said cash resources, available borrowing capacity, receivables factoring, and expected operating cash flows should cover anticipated operating and investing needs and debt service for the next 12 months. The filing refers to 2019 financial outlook statements, but the supplied text does not provide clear numerical guidance. A Temptime Corporation acquisition agreement was signed in January 2019; closing was expected in Q1 2019, subject to customary conditions, and funding was expected from cash and the revolving facility.
Key disclosed risks include international operations and foreign exchange exposure; tariffs and changing trade policies; reliance on third-party manufacturers and suppliers, including sole-source components; competitive and technological change; cybersecurity and data privacy; product or software defects; acquisition integration; litigation and tax examinations; and substantial variable-rate debt. The company estimated that a one-percentage-point interest-rate change would affect annual interest expense by about $8 million. Debt covenants were met at year-end. Goodwill was $2.495 billion; the 2018 impairment test found reporting-unit fair values at least 40% above carrying values, but future impairment remains possible if assumptions or business performance weaken.
The 2018 financial statements received an unqualified audit opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting.
Important facts for investors to verify
- Whether organic sales growth and margin improvement continue, particularly in EVM and mobile computing.
- How much of operating cash flow reflects sustainable earnings versus working-capital timing and the new receivables-factoring arrangement; $33 million of receivables had been sold at year-end.
- Debt repayment and refinancing capacity: most debt matures in 2021, while the $139 million receivables financing balance matures in 2019.
- Customer concentration, especially the three distributors representing half of revenue and significant shares of receivables.
- Final Xplore purchase accounting and integration outcomes, and the timing and financing of the proposed Temptime acquisition.
- Potential effects of tariffs, currency movements, tax audits and uncertain tax benefits; $50 million of unrecognized tax benefits was disclosed, with $20 million expected to be settled within 12 months.