Zebra Technologies Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended July 4, 2015. Financial amounts below are in U.S. dollars; “m” and “b” mean million and billion. The 2014 comparison excludes Enterprise, acquired in October 2014, so reported year-over-year growth is not directly comparable.
Business context and reporting period
Zebra sells barcode printing and asset-tracking products, mobile computing and data-capture products, wireless LAN products, and related services. Following its $3.45b cash acquisition of Motorola Solutions’ Enterprise business, it reports Legacy Zebra and Enterprise segments. Enterprise results are included from the acquisition date.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $889.8m | $288.4m | $1,783.0m | $576.7m |
| Gross profit / margin | $392.9m / 44.2% | $142.2m / 49.3% | $802.4m / 45.0% | $290.1m / 50.3% |
| Operating income (loss) | ($13.8m) | $33.1m | $6.0m | $86.5m |
| Net income (loss) | ($76.3m) | $27.6m | ($101.6m) | $69.2m |
| Basic and diluted EPS | ($1.50) | $0.54 | ($2.00) | $1.37 basic; $1.35 diluted |
- Growth and margins: Reported sales rose 208.5% in Q2 and 209.2% in the first half, principally because of Enterprise. Excluding the acquisition, Legacy Zebra sales grew 11.2% in Q2 and 13.1% in the first half; its gross margin was 49.9% and 50.8%, respectively, versus 49.3% and 50.3% in the comparable periods. Management cited stronger printer and location-solutions volumes, mix and lower product costs, partly offset by currency effects.
- Cash flow: First-half operating cash flow was $19.5m, down from $109.9m. Investing cash outflow was $72.1m, including $49.3m of capital expenditures and $48.8m of additional acquisition consideration. Financing cash outflow was $120.6m, including $130m of term-loan repayments. Cash declined $189.0m to $204.9m.
- Balance sheet and liquidity: At July 4, cash was $204.9m, current assets $1.456b and current liabilities $873.4m. Debt carrying value was $3.040b, comprising $1.05b of 7.25% senior notes due 2022 and a $2.07b term loan; there were no current debt maturities or revolver borrowings. The $250m revolver had $246.9m available after letters of credit. The term-loan rate was 4.75%; the company had made $130m of optional term-loan repayments. Management said available resources and operating cash generation were sufficient for anticipated requirements and debt service.
- Other metrics: First-half interest expense was $100.3m. Foreign-exchange results were a $11.3m gain in Q2 but a $15.9m loss for the first half. The first-half tax benefit was $9.3m, compared with $15.4m of tax expense in the prior-year period.
Material changes versus the prior comparable period
- Reported revenue and gross profit increased sharply with Enterprise, but operating expenses also rose substantially; reported operating income and net income moved to losses in Q2, and first-half net income also became a loss.
- Reported gross margin fell 5.1 percentage points in Q2 and 5.3 points for the first half. Enterprise’s stated gross margins were 41.5% in Q2 and 42.3% for the first half.
- Legacy Zebra’s sales and operating income increased, while acquisition-related costs, purchase-accounting amortization, interest expense and corporate costs weighed on consolidated results.
- Cash from operations declined, and cash and cash equivalents fell from $394.0m at year-end 2014 to $204.9m at July 4, 2015. Long-term debt declined from $3.156b to $3.040b on the reported carrying-value basis.
Outlook, management commentary, risks and unusual items
- No quantified revenue, earnings or margin guidance is provided in the filing. Management said it expected the Enterprise integration plan to produce further synergies and cost savings and to be completed as soon as practicable.
- Acquisition-related exit and restructuring costs were $29.1m in the first half; the company expected further acquisition-related charges through the end of 2016. Cumulative charges for those activities were $34.7m at July 4, 2015.
- A corporate-structure realignment of acquired Enterprise assets resulted in a discrete tax charge of approximately $31.6m in Q2.
- The company disclosed a material weakness in controls over review and preparation of the quarterly income-tax provision; disclosure controls were deemed ineffective at period-end. Remediation efforts had begun, with full remediation expected before year-end, subject to demonstrating sustained effectiveness. Enterprise control deficiencies were also still under review.
- A securities class action concerning pre-acquisition Symbol Technologies was certified as a class in 2015. The company said it could not reasonably estimate possible losses for this matter; it otherwise believed legal proceedings would not have a material adverse effect, while noting inherent uncertainty.
- Principal risks cited include acquisition integration, currency fluctuations, interest rates, international operations and suppliers, product acceptance and competition, component availability, litigation, tax matters and market conditions. The company reported no material change in market risk during the quarter.
Important facts for investors to verify
- How much of future growth and profitability comes from underlying Legacy Zebra and Enterprise performance versus acquisition accounting, currency and integration effects.
- Progress on integration synergies, the remaining restructuring and integration charges, and the expected timing and cost of completion.
- Cash generation, working-capital needs and the ability to service and reduce approximately $3.0b of debt while funding investment.
- Remediation and sustained effectiveness of tax-provision controls, and the status of Enterprise internal-control assessments.
- Developments in the Symbol securities litigation and any change in the company’s ability to estimate potential losses.