Zebra Technologies Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended April 2, 2022, compared with the three months ended April 3, 2021. Zebra provides enterprise asset intelligence products, software and services through its Asset Intelligence & Tracking (AIT) and Enterprise Visibility & Mobility (EVM) segments.
Financial performance
| Metric | Q1 2022 | Prior year | Change |
|---|---|---|---|
| Net sales | $1.432 billion | $1.347 billion | +6.3%; organic growth 5.4% |
| Gross profit / margin | $637 million / 44.5% | $655 million / 48.6% | Margin down 410 bps |
| Operating income | $212 million | $272 million | Down 22.1% |
| Net income | $205 million | $228 million | Down 10.1% |
| Diluted EPS | $3.83 | $4.22 | Down 9.2% |
| Operating cash flow | $54 million | $224 million | Down $170 million |
Revenue from tangible products rose 4.7% to $1.207 billion; services and software revenue increased 16.0% to $225 million. Higher premium freight and component costs and unfavorable product mix weighed on gross margin. Operating expenses grew 11.0% to $425 million, reflecting acquired businesses and related amortization, increased marketing and travel; lower R&D activity and incentive compensation partly offset the increase.
Segments: EVM sales increased 12.7% to $1.038 billion (organic growth 11.6%); operating income was $189 million, down 1.0%. AIT sales declined 8.2% to $394 million (organic decline 8.1%); operating income fell 45.9% to $60 million. Supply constraints particularly affected AIT. A January 2022 realignment moved location solutions from AIT to EVM; prior-period segment results were recast for comparison, with no effect on consolidated statements.
Liquidity, debt and capital allocation
Cash and cash equivalents were $141 million at quarter-end, versus $332 million at December 31, 2021. Cash including restricted cash was $157 million. Total debt was $1.101 billion, compared with $996 million at year-end; $183 million was classified as current. The company reported $913 million of long-term debt and was in compliance with debt covenants. Its revolving facility had $993 million available, net of letters of credit. Debt borrowings carry variable rates; the Term Loan A rate was 1.49% and average rates on the revolver and receivables facilities were 1.69% and 1.36%, respectively.
Operating cash flow was lower mainly due to incentive compensation payments, higher receivables and lower operating profitability, partly offset by lower inventories. Investing cash use was $19 million. Financing cash use was $220 million, including $305 million of share repurchases, partly offset by $105 million of net borrowings. The company repurchased 648,875 shares for approximately $305 million during the quarter; about $392 million remained authorized at April 2. It repurchased a further 274,166 shares for approximately $108 million through April 29.
Outlook, developments and risks
The filing says management believes available capital resources, borrowing capacity and operating funds are sufficient for anticipated capital needs and debt service. It does not provide a clear quantified full-year 2022 guidance value in the supplied filing text. Management reported strong customer demand but warned that component shortages, longer lead times, elevated freight and input costs could continue to limit deliveries and pressure margins; higher pricing may partly offset costs where market conditions permit.
Zebra agreed to acquire Matrox Electronic Systems for approximately $875 million, funded with cash and credit-facility financing, with closing expected mid-2022 subject to customary conditions. The business is expected to join EVM. The filing also notes prior acquisitions of Antuit, Fetch and Adaptive Vision.
The company suspended operations in Russia on March 5, 2022, and said Russia and Ukraine were not a material part of its business and had not significantly affected results or regional supply and delivery to date. Broader effects of the war remain uncertain. COVID-19, supply-chain and logistics disruption, foreign exchange, interest rates, geopolitical developments, international operations and acquisition integration are among the stated risks.
Three distributor customers collectively represented 43.0% of Q1 sales, down from 51.6% in the prior-year quarter, and 55.8% of accounts receivable at April 2. The company disclosed patent litigation between Zebra and Honeywell in multiple U.S. and foreign jurisdictions, with damages and injunctive relief sought; Zebra is defending Honeywell’s claims and has brought its own claims. Management said ordinary-course legal matters were not expected to have a material adverse impact, while noting litigation uncertainty. The company reported its disclosure controls were effective and no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether supply availability, freight and component costs improve, and whether pricing can offset remaining cost pressure.
- Whether cash generation recovers after the sharp year-over-year decline in operating cash flow.
- Funding, closing conditions, timing and integration risks for the Matrox acquisition, including the planned use of debt financing.
- Debt levels, variable-rate exposure, receivables-facility maturities and covenant compliance; $121 million of receivables-facility borrowings was current.
- Customer concentration and the effect of major distributor orders or collections on sales and receivables.
- Developments in the Honeywell patent cases and any material changes in the Russia-Ukraine, COVID-19 or supply-chain risks.