Zebra Technologies Corporation — 2016 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2016; it is not a standalone fourth-quarter filing. Zebra sells automatic identification and data-capture products and services, including mobile computers, scanners, printers, RFID, software, supplies and support. Operations are reported in Legacy Zebra and Enterprise segments. The fourth-quarter figures below are unaudited.
Financial performance and liquidity
Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $3,574 | $3,650 |
| Gross profit / gross margin | $1,642 / 45.9% | $1,644 / 45.0% |
| Operating income | $80 | $37 |
| Net loss / diluted loss per share | $(137) / $(2.65) | $(158) / $(3.10) |
| Cash from operating activities | $372 | $110 |
| Capital expenditures | $77 | $122 |
| Cash and cash equivalents at year-end | $156 | $192 |
| Working capital | $273 | $439 |
- Sales declined 2.1%; hardware revenue fell 3.0%, while supplies increased 3.7% and services and software were nearly flat.
- Operating expenses were $1,562, down 2.8%. Operating margin was approximately 2.2%, versus 1.0% in 2015. Interest expense was $193; the company reported a $129 pretax loss and $8 of income-tax expense.
- At year-end, current assets were $1,222 and current liabilities $949. Long-term debt had a $2,648 carrying value, net of debt costs and discounts; principal outstanding was $2,703. The company had $246 available under its revolving facility and no revolver borrowings.
- Term-loan principal repayments were $382 during 2016. The term-loan rate was 3.45% at year-end; the $1,050 senior notes carry a 7.25% coupon and mature in 2022. Scheduled term-loan principal of approximately $1,653 was due in 2021, absent further prepayments.
Material changes versus the prior year
- Revenue fell $76, primarily from lower hardware sales in North America, EMEA and Latin America, partly offset by Asia-Pacific growth. On a constant-currency basis, excluding purchase-accounting adjustments, sales declined approximately 1%.
- Operating income rose $43 as lower operating expenses and improved Enterprise gross margin more than offset reduced sales. Enterprise sales decreased 1.8%, but segment operating income rose 21.2% to $286; Legacy Zebra sales declined 3.0% and segment operating income fell 7.0% to $240.
- Operating cash flow increased $262, aided by improved working capital, including higher accounts payable. Investing cash use narrowed to $39, including $39 net cash proceeds from the WLAN sale. Financing cash use was $376, mainly reflecting debt repayment.
- Net loss narrowed by $21, but continued interest expense and acquisition-related amortization and costs kept the company loss-making for the full year. Fourth-quarter sales were $942 versus $951; fourth-quarter net income was $17 versus a $28 loss in the year-earlier quarter.
Outlook, commentary, risks and unusual items
- Management said existing cash, operating cash flow and available revolving credit were expected to cover operating needs, capital expenditures and debt service for the next 12 months; it also expected operating cash generation to continue through 2017. The supplied filing text does not provide clear numerical 2017 revenue or earnings guidance.
- Integration of the 2014 Enterprise acquisition continued. More than 75% of transition service agreements had been eliminated; a common ERP rollout and remaining integration were expected before the end of 2017. Management anticipated further efficiency and cost benefits, but execution and disruption risks remain.
- The WLAN business was sold to Extreme Networks in October 2016 for a gross purchase price of $55; net proceeds recorded were $39. The divestiture resulted in a $62 non-cash impairment charge. The business contributed $78 in revenue and $37 in gross profit through its sale date.
- Acquisition and integration costs remained substantial at $125; exit and restructuring costs were $19. Management expected a further $5–$7 of charges in 2017 under the restructuring program.
- Debt, interest-rate exposure, foreign-exchange movements, customer and distributor concentration, reliance on external manufacturers and suppliers, competition, cybersecurity, tax examinations, and completion of integration/ERP work are material risks. Three distributor customers each represented more than 10% of annual sales; together they accounted for 45.7% in 2016.
- A prior material weakness in controls over income-tax provision preparation and review contributed to restatements of 2015 and 2016 interim financial statements. Management reported remediation completed in the fourth quarter of 2016 and effective internal controls at year-end; the auditor issued an unqualified opinion on the financial statements and internal controls.
- The company disclosed a long-running putative class action concerning the acquired Symbol business. It said it could not reasonably estimate possible losses; its D&O insurer disputed reimbursement of defense costs. Management stated that other proceedings were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether sales and margins stabilize, particularly in hardware, Legacy Zebra and regions affected by currency or demand pressures.
- Whether operating cash-flow improvement is repeatable, given the contribution from working-capital changes and vendor payment terms.
- Debt paydown, interest costs, covenant compliance and the timing and funding of the 2021 term-loan maturity.
- Completion and cost of ERP and acquisition integration, including realization of expected savings and the remaining transition-service exits.
- Potential outcomes of tax audits and litigation, and any further impairment or restructuring charges.