Zebra Technologies Corporation — Q3 2018 Form 10-Q
Business context and period: Global provider of automatic identification, data capture, mobile computing, printing, tracking and related services and software. The quarter ended September 29, 2018; comparisons are with the three and nine months ended September 30, 2017. Financial figures are in millions, except per-share amounts and percentages.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $1,092 | $935 | $3,081 | $2,696 |
| Gross profit | $505 | $429 | $1,442 | $1,241 |
| Gross margin | 46.2% | 45.9% | 46.8% | 46.0% |
| Operating income | $162 | $91 | $431 | $189 |
| Net income (loss) | $127 | $(12) | $306 | $13 |
| Diluted EPS | $2.34 | $(0.23) | $5.64 | $0.25 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $460 | $210 |
- Q3 sales rose 16.8%; organic sales growth was 15.1%, excluding currency translation and Xplore. Nine-month sales rose 14.3%, with organic growth of 11.9%.
- Q3 performance reflected growth across regions, particularly North America, EMEA and Asia-Pacific, led by mobile computing and barcode printing. EVM sales grew 20.9% in Q3 (18.8% organic); AIT sales grew 8.6% (8.1% organic).
- Management attributed margin improvement to favorable currency and product mix; nine-month margin gains also reflected operational efficiencies. Q3 operating expenses increased 1.5%, while nine-month expenses declined 3.9%, principally due to lower amortization and acquisition costs.
- Nine-month investing cash outflow was $120, including $72 for Xplore net assets; financing cash outflow was $351. Cash declined $17 from year-end to $45.
Balance sheet, debt and liquidity
- At September 29, 2018, cash was $45; current assets were $1,201 and current liabilities were $1,105.
- Total debt carrying value was $1,912, down from $2,249 at December 31, 2017. Debt included $695 Term Loan B, $608 Term Loan A, $473 revolving-credit borrowings and $136 receivables-facility borrowings. Long-term debt, net of issuance costs, discounts and current portion, was $1,829.
- Term loans and revolving-credit commitments mature in 2021; the receivables financing facility matures in November 2019. The company reported compliance with debt covenants as of September 29, 2018.
- Management said existing capital resources and operating cash generation were sufficient for anticipated capital requirements and debt service. The filing reports variable-rate debt and use of interest-rate swaps to manage rate exposure.
Material changes, outlook and notable items
- On August 14, Zebra acquired Xplore Technologies for $87 in total cash outlays, including $72 for net assets, $9 to repay Xplore debt and $6 for other transaction obligations. Xplore contributed approximately 0.8 percentage points to Q3 consolidated sales growth; purchase accounting remained preliminary.
- May 2018 credit-agreement amendments repriced Term Loan B and increased revolving capacity from $500 to $800. The nine-month cash flow statement shows $346 of net debt repayments.
- Q3 total other expense was $19 versus $98 a year earlier; the prior-year quarter included $62 of early debt-extinguishment costs and $6 of debt-modification expenses. Current-period results also benefited from lower debt and interest costs and interest-rate-swap gains.
- A $13 pretax charge for a commercial lawsuit settlement was recorded in Q2. A separate longstanding class action settlement was approved by the court on October 30, 2018; the company said insurers would fund it and recorded no liability.
- The effective tax rate was 11.2% for Q3 and 18.6% for the first nine months. Tax results included U.S. Tax Reform effects, tax credits and discrete items; the company reported $22 of uncertain tax benefits that may be disallowed within 12 months.
- The filing discusses a full-year 2018 financial outlook but provides no clear numerical guidance in the supplied text. Management cautioned that results are subject to market, foreign-exchange, cost, supply, acquisition-integration, interest-rate, litigation and tax risks.
- A new risk factor cites potential adverse effects from U.S. and retaliatory trade duties, particularly given imports involving China. The filing reported no material changes in market risk and no material changes to previously disclosed risk factors apart from this trade-policy risk.
Important facts for investors to verify
- Whether organic growth, margins and demand in mobile computing and barcode printing remain durable, apart from currency effects and the Xplore acquisition.
- Xplore’s final purchase-price allocation, integration progress and contribution to earnings and cash flow.
- Debt repayment capacity, variable-rate exposure, refinancing needs and covenant compliance, given $1.912 billion of debt and $45 million of cash.
- Customer and receivables concentration: three distributors each represented more than 10% of accounts receivable; the largest three represented 26.1%, 22.1% and 20.7%.
- Potential effects of tariffs, supply availability, foreign exchange, pending tax matters and other contingencies; confirm any updated full-year guidance in later filings.