Zebra Technologies Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with the three months ended April 1, 2017. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and performance
Zebra provides enterprise asset intelligence and automatic identification and data-capture products and services. Its reportable segments are Asset Intelligence & Tracking (AIT) and Enterprise Visibility & Mobility (EVM). Management attributed quarterly growth primarily to higher hardware sales, notably mobile computing and barcode printing, as well as favorable currency effects and product mix.
| Metric | Q1 2018 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $977 | $865 | +12.9%; organic growth 9.8% |
| Gross profit / margin | $465 / 47.6% | $401 / 46.4% | Margin +1.2 percentage points |
| Operating expenses | $321 | $361 | −11.1% |
| Operating income | $144 | $40 | +$104 |
| Net income | $109 | $8 | +$101 |
| Diluted earnings per share | $2.01 | $0.16 | +$1.85 |
| Operating cash flow | $116 | $117 | −$1 |
Segments and material changes
- EVM: Sales of $625, up 14.9% (11.7% organic); operating income of $80, up 66.7%. Growth was led by mobile computing.
- AIT: Sales of $352, up 9.3% (6.4% organic); operating income of $92, up 24.3%. Growth was led by barcode printing.
- Both segments improved gross margin. Consolidated margin gains reflected favorable currency and business mix.
- Operating expenses declined mainly because amortization fell after certain intangible assets became fully amortized in 2017 and acquisition/integration costs declined as integration work neared completion. Selling and marketing and R&D costs increased.
- Net interest expense fell to $11 from $41, reflecting a reported interest-rate-swap gain, lower debt, and lower interest rates. The effective tax rate was 18.0%, versus 500.0% in the prior quarter, when a small pretax loss and tax benefits made the rate unusually high.
Cash, debt, and liquidity
- Operating cash flow was $116; capital expenditures were $18, and net cash used in investing was $20. The company repaid $95 of long-term debt; net cash used in financing was $92.
- Cash and cash equivalents were $64 at quarter-end, including $45 held outside the U.S. Cash increased $2 during the quarter.
- Total debt carrying value was $2,154, down from $2,249 at December 31, 2017. Cash less total debt implies net debt of about $2,090, calculated from reported balances.
- Debt maturities are concentrated in 2021, with $1,931 due that year. The company reported compliance with all debt covenants and said existing capital resources and operating cash generation should cover anticipated needs.
- The $500 revolving facility had $273 drawn; the receivables financing facility had $86 drawn against a stated $180 limit. The latter is accounted for as secured borrowing, with $351 of receivables pledged.
Outlook, risks, and unusual items
- The filing provides no specific numerical revenue or earnings guidance in the supplied text. Management’s liquidity outlook was that resources and funds from operations would be sufficient for anticipated capital requirements and debt service.
- U.S. tax reform remains subject to estimation. Following IRS Notice 2018-26, the company recalculated its transition-tax liability and expects an additional $8 tax expense in Q2 2018; the amount was not included in Q1 results.
- The company expects $4–$8 of additional charges under its productivity restructuring plan, with activities expected to be substantially complete by year-end 2018.
- A long-running class action related to acquired Symbol Technologies reached an agreement in principle to settle, subject to court approval; Zebra said it had agreements with certain insurers to fund the settlement. The filing does not state a settlement amount.
- State unclaimed-property audits and a Delaware voluntary disclosure process are ongoing; the company had not yet quantified a potential liability. The company also disclosed U.S. and U.K. tax audits and said $22 of uncertain tax benefits might be disallowed within 12 months.
- Newly highlighted risk: potential U.S. tariffs and retaliatory trade measures could affect costs and financial performance because a significant percentage of products are imported into the U.S. and China. Other stated risks include foreign-exchange exposure, interest rates, supply availability, competition, and litigation.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method; management said adoption had no material effect. Q1 revenue would have been $1 higher under the previous revenue guidance.
Important facts for investors to verify
- Whether sales growth, especially EVM mobile-computing and EMEA performance, is sustainable apart from currency effects.
- Debt repayment capacity and refinancing exposure given the large 2021 maturity concentration and variable-rate borrowings.
- The final U.S. transition-tax estimate and the expected $8 Q2 tax expense, plus outcomes of tax audits and uncertain tax positions.
- Resolution and funding of the Symbol litigation settlement, and any liability from unclaimed-property reviews.
- Whether proposed trade tariffs or other supply-chain pressures affect costs, margins, or customer demand.