Zebra Technologies Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended April 4, 2015; comparisons are to the three months ended March 29, 2014. Financial amounts below are in U.S. dollars; millions unless otherwise stated.
Business context
Zebra supplies printing, mobile computing, data capture, wireless networking, software and related services. Results include the Enterprise business acquired from Motorola Solutions on October 27, 2014, for the first time in this comparison. The acquisition materially limits year-over-year comparability.
Financial performance and liquidity
| Metric | Q1 2015 | Prior-year quarter |
|---|---|---|
| Net sales | $893.2 | $288.3 |
| Gross profit / gross margin | $409.5 / 45.8% | $147.9 / 51.3% |
| Operating income / margin | $19.8 / 2.2% | $53.4 / 18.5% |
| Net income (loss) | $(25.3) | $41.6 |
| Diluted earnings (loss) per share | $(0.50) | $0.82 |
| Cash from operating activities | $35.6 | $49.8 |
- Sales increased 209.8%, principally because Enterprise contributed $567.2 million. Legacy Zebra sales rose 15.0% to $331.6 million. International sales were 50.4% of total sales.
- Gross margin fell to 45.8%, mainly reflecting the acquired business’s lower-margin sales mix. Legacy Zebra gross margin improved to 51.7%; Enterprise reported 43.1%.
- Operating income declined 63.0%. Operating expenses included $67.6 million of acquired-intangible amortization, $26.3 million of acquisition and integration costs, and $11.2 million of exit and restructuring costs.
- The net loss also reflected $51.0 million of interest expense and a $27.2 million foreign-exchange loss. The income-tax benefit was $32.9 million; the reported effective tax rate was 56.5%.
- Operating cash flow was $35.6 million. Investing cash use was $48.4 million, including $48.8 million of additional acquisition consideration and $25.5 million of capital expenditures. Financing cash use was $40.3 million, including a $50.0 million term-loan prepayment. Cash declined $64.4 million to $329.5 million.
- At quarter-end, total debt carrying value was $3.14 billion, comprising $1.05 billion of 7.25% senior notes and a $2.15 billion term loan. The term-loan rate was 4.75%; $246.9 million was available under the undrawn revolving facility. A further $30.0 million term-loan prepayment was made May 13, 2015.
- Current assets were $1.62 billion and current liabilities were $895.9 million. Management said available resources and expected operating cash flows should cover anticipated needs and debt service for the next 12 months.
Material changes, outlook and risks
- The October 2014 Enterprise acquisition reshaped the company’s scale, product mix, expenses and debt. Purchase-price allocations remained preliminary; management continued evaluating acquired asset values, goodwill allocation and tax effects.
- Management was executing an integration plan and expected it to produce synergies and cost savings, but gave no quantified savings target or formal earnings guidance in the supplied filing text. April 2015 realignment transactions were expected to create approximately $32 million of income-tax expense in Q2 2015.
- Management cited foreign exchange, interest rates, market demand, competition, manufacturing costs and supply availability, international operations, and successful integration as factors that could affect results. The company used currency and interest-rate derivatives for hedging, not speculation.
- Disclosure controls and internal control over financial reporting were deemed ineffective because of a material weakness in reviewing and preparing the quarterly income-tax provision. Management was developing remediation. It was also assessing and addressing control deficiencies at Enterprise.
- The company reported ordinary-course legal proceedings and said it did not believe their outcomes would materially adversely affect the business or financial results; proceedings remain subject to uncertainty.
Most important facts for investors to verify
- How much of reported growth and future performance is attributable to Enterprise versus organic growth in Legacy Zebra.
- Whether integration delivers expected synergies and whether acquisition-related amortization, restructuring and other costs moderate.
- Debt reduction, interest expense, variable-rate exposure and available liquidity; review the term-loan covenants and scheduled maturities.
- The size and potential recurrence of foreign-exchange impacts, and the effectiveness and accounting effects of the company’s hedges.
- Progress remediating the tax-provision material weakness and Enterprise control deficiencies, including whether any further material weaknesses or restatements arise.
- The Q2 tax charge associated with the April realignment and final purchase-price allocation, including any changes to goodwill or acquired asset values.