Zebra Technologies Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter ended October 1, 2022; comparisons are with the quarter ended October 2, 2021. Financial amounts are in U.S. dollars, millions, except per-share data.
Business context
Zebra provides automatic identification and data-capture products, software, and services to customers across retail, manufacturing, transportation and logistics, healthcare, and other industries. Its reportable segments are Asset Intelligence & Tracking (AIT) and Enterprise Visibility & Mobility (EVM). Location solutions moved from AIT to EVM effective January 1, 2022; historical segment results were recast for comparison.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $1,378 | $1,436 | $4,278 | $4,160 |
| Gross profit / margin | $628 / 45.6% | $646 / 45.0% | $1,939 / 45.3% | $1,959 / 47.1% |
| Operating income | $202 | $237 | $269 | $756 |
| Net income | $170 | $199 | $277 | $646 |
| Diluted EPS | $3.26 | $3.69 | $5.25 | $11.98 |
| Operating cash flow | — | $221 | $836 |
Q3 sales declined 4.0% year over year; tangible-product sales fell 6.1%, while services and software rose 9.2%. Nine-month sales increased 2.8%, with services and software up 12.7%. Nine-month organic sales growth, a non-GAAP measure, was 2.9%.
Q3 gross margin improved 60 basis points year over year, reflecting favorable mix and lower freight and component-cost impacts, partly offset by currency effects and weaker volume leverage. Nine-month gross margin declined 180 basis points, principally due to higher freight and component costs and unfavorable currency movements.
Nine-month operating income and net income were substantially lower, primarily reflecting a $372 million second-quarter settlement and related legal charge. Excluding that charge, operating expenses were 30.3% of nine-month sales, according to management. Q3 net income also faced higher income tax expense; the effective tax rate was 23.4% for the quarter and 13.2% year to date.
Segments and material changes
- AIT: Q3 sales rose 9.8% to $415 million, led by printing products and supplies; segment operating income increased 6.4% to $83 million. Nine-month sales rose 2.8%, but operating income fell 17.0% to $240 million as margin declined to 42.1% from 46.8%.
- EVM: Q3 sales fell 9.0% to $963 million, including lower mobile-computing sales; segment operating income declined 17.0% to $161 million. Nine-month sales rose 2.6% to $3,023 million, while operating income fell 6.0% to $531 million.
- Q3 reported sales were down in North America and EMEA, while Asia-Pacific and Latin America grew. EVM faced component shortages, North American distribution-center transition challenges, and deferred large-customer orders.
- In June, Zebra acquired Matrox for $878 million in cash, adding machine-vision technology and software. Matrox-related goodwill was preliminarily recorded at $635 million.
Cash, debt, and liquidity
At October 1, 2022, cash and cash equivalents were $81 million, down from $332 million at December 31, 2021. Total debt was $2.170 billion, compared with $996 million at year-end; long-term debt was $2.017 billion. Current debt was $144 million. The company reported $1.493 billion of remaining availability under its $1.5 billion revolving facility, net of letters of credit, and said it was in compliance with debt covenants.
For the first nine months, operating cash flow was $221 million, investing cash outflow was $941 million, and financing cash inflow was $470 million. Inventory increased to $814 million from $491 million at year-end. Investing outflow included $878 million for Matrox; financing included $1.175 billion in net debt proceeds and $655 million of share repurchases. Management stated that available capital resources, borrowing capacity, and operating cash generation were sufficient for anticipated requirements and debt service.
In May, Zebra refinanced its credit facilities, increasing Term Loan A borrowing to $1.75 billion and revolving capacity to $1.5 billion, extending maturities to May 25, 2027, and replacing LIBOR with SOFR. Term Loan A and revolving borrowings were variable-rate; the Term Loan A rate was 3.10% and the revolver average rate was 4.17% at quarter-end.
Outlook, risks, and unusual items
- Management reported preparing for softer customer demand in an uncertain macroeconomic environment and taking steps to address component shortages and the distribution-center transition. The supplied filing text does not provide a clear quantified full-year 2022 guidance figure.
- Elevated input and freight costs, component availability, and supplier concentration may constrain deliveries and margins. The company also cited foreign-exchange exposure, interest-rate risk, acquisition integration, and geopolitical and macroeconomic uncertainty.
- The Honeywell patent dispute was settled: Zebra agreed to pay $360 million in eight quarterly installments of $45 million, beginning in Q2 2022, and recorded the payment plus $12 million of external legal fees as a $372 million charge. The parties also agreed to a royalty-free cross-license and dismissed pending matters.
- A 2022 Productivity Plan for site rationalization and organizational changes is expected to incur at least $10 million of charges and be completed by the end of 2023; $2 million was recorded in Q3.
- Zebra repurchased $655 million of shares in the first nine months. Its remaining authorized repurchase capacity was $1.042 billion at October 1; it repurchased a further $50 million through October 28.
- Three distributor customers together represented 45.8% of nine-month sales and 55.1% of accounts receivable at October 1, creating customer-concentration exposure. The company said Russia and Ukraine were not a material part of its business and had not significantly affected results to date; it suspended operations in Russia.
Most important facts for investors to verify
- Whether component supply and distribution-center execution improve, and whether deferred EVM orders convert to sales.
- The trajectory of demand, product-versus-services mix, and gross margins amid cost, currency, and pricing pressures.
- Cash conversion and inventory levels, including the timing of settlement installments and working-capital needs.
- Debt levels, variable-rate exposure, available revolver capacity, covenant compliance, and future debt repayment requirements.
- Matrox integration and preliminary purchase-price allocation, along with the expected cost and benefits of the productivity plan.
- Customer concentration, the $360 million settlement payment schedule, and progress against any full-year outlook not quantified in the supplied filing text.