Zebra Technologies Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 27, 2020; comparisons are to the periods ended June 29, 2019. Amounts are in millions of dollars unless noted. Zebra provides enterprise asset intelligence products and services through its AIT and EVM segments.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $956 | $1,097 | $2,008 | $2,163 |
| Gross profit / margin | $419 / 43.8% | $520 / 47.4% | $892 / 44.4% | $1,021 / 47.2% |
| Operating income | $119 | $160 | $270 | $319 |
| Net income | $100 | $124 | $189 | $239 |
| Diluted EPS | $1.85 | $2.26 | $3.49 | $4.37 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $355 | $195 |
Q2 sales declined 12.9% year over year; first-half sales declined 7.2%. First-half tangible-product sales fell to $1,712 from $1,887, while services and software sales rose to $296 from $276. Operating expenses declined, but lower sales, gross profit and margins reduced operating income. The effective tax rate was 2.9% for Q2 and 8.3% for the first half.
Segments and geographic trends
- AIT: Q2 sales fell 25.7% to $275 and operating income fell 42.9% to $48. First-half sales declined 11.1% to $646 and operating income fell 22.2% to $137.
- EVM: Q2 sales fell 6.3% to $681 and operating income fell 17.7% to $93. First-half sales declined 5.2% to $1,362 and operating income fell 15.4% to $181.
- All regions recorded lower Q2 sales. First-half declines were steepest in Asia-Pacific (22.2%) and Latin America (22.5%); North America fell 2.8% and EMEA 5.7%.
Cash, liquidity and debt
- Cash and cash equivalents were $63 at June 27, 2020, versus $30 at year-end 2019. The cash-flow statement reports $86 including $23 of restricted cash.
- First-half operating cash flow was $355, compared with $195 a year earlier. Management attributed the increase mainly to collection and vendor-payment timing, including receivables factoring; higher inventory and lower net income partly offset it. Capital expenditures were $33.
- Total debt was $1,227, down from $1,286 at year-end; cash less reported debt was therefore approximately negative $1,164. Debt included $917 on Term Loan A, $81 on the revolver and $229 under receivables financing facilities. $233 was classified current. The company reported compliance with debt covenants.
- Revolving credit availability was $996, after $4 of letters of credit. Receivables facilities had a combined $280 borrowing limit, with $229 drawn; $417 of receivables were pledged as collateral.
- Factoring proceeds were $508 in the first half, versus $143 in the prior-year period. Sold but uncollected receivables were $103 at quarter-end, compared with $60 at year-end.
Outlook, commentary and notable items
- Management said it could not reliably estimate the pandemic’s duration or full-year effect. It expected full-year 2020 sales, net income and operating cash flow to be below 2019, while expecting positive full-year operating cash flow under current plans. No numerical earnings or sales guidance was provided.
- COVID-19 reduced customer demand and disrupted supply chains, while increasing fulfillment costs. Lower product sales—particularly printing and data capture—were partly offset by services and software. Premium freight, unfavorable mix and Chinese import tariffs weighed on margins.
- Cost actions included lower discretionary spending, reduced incentive compensation and temporary salary reductions beginning late in Q2. Management also described plans to diversify sourcing beyond China; it expected up to $12 of additional one-time operating costs and up to $4 of additional equipment purchases in 2020. It expected sourcing changes and U.S. pricing actions to substantially mitigate ongoing tariff impacts by the end of Q3.
- The company repurchased $200 of stock in Q1 and none in Q2; $753 remained authorized. First-half financing cash flow included $200 of repurchases and net debt repayments.
- After quarter-end, Zebra agreed to acquire Reflexis Systems for approximately $575, subject to customary adjustments and closing conditions, with completion expected by early Q4 2020. Funding was expected from cash and committed revolver financing.
- Other notable items included a $7 investment gain in Q2 and first-half losses of $42 on interest rate swaps. The 2019 Productivity Plan incurred $6 of charges in the first half, with up to $4 of further 2020 costs expected. Management reported no material adverse expected outcome from ordinary-course legal proceedings.
Key investor verification points
- Track whether demand and supply-chain conditions recover, and whether the company’s below-2019 full-year outlook and positive operating-cash-flow expectation are achieved.
- Assess whether margin pressure from product mix, freight costs and tariffs eases, and whether sourcing diversification delivers the expected tariff mitigation within stated cost estimates.
- Evaluate the quality and sustainability of reported operating cash flow, given the stated contribution of collection/payment timing and increased use of receivables factoring.
- Review debt maturities and refinancing needs, including the $229 receivables-facility balance classified current and facility maturities in 2021, as well as funding and integration of the proposed Reflexis acquisition.
- Monitor customer concentration: three distributor customers represented 52.2% of first-half sales in aggregate; one represented 27.2% of quarter-end receivables.