Zebra Technologies Announces Third-Quarter 2018 Results

Zebra Technologies Corporation (NASDAQ: ZBRA), an innovator at the edge of the enterprise with solutions and partners that enable businesses to gain a performance edge, today announced results for the third quarter ended September 29, 2018.

Our exceptional third quarter results were driven by broad-based demand for our solutions and disciplined operational execution. We delivered sales, EBITDA margin, and earnings per share that exceeded our outlook. Strong cash flow funded our strategic acquisition of Xplore Technologies as well as the reduction of our net debt leverage ratio to 2.2x, said Anders Gustafsson, chief executive officer of Zebra Technologies. Our leading portfolio of solutions, investments in our employees and innovation, and strong order backlog provide us confidence for a strong finish to the year and solid momentum into 2019. We remain focused on providing innovative solutions that transform workflows, enabling every worker and asset on the edge of business operations to be connected and optimally utilized.

$ in millions, except per share amounts3Q183Q17Change
Select reported measures:
Net sales$1,092$93516.8%
Gross profit50542917.7%
Net income (loss)127(12)NM
Net income (loss) per diluted share$2.34$(0.23)NM
Select Non-GAAP measures:
Adjusted net sales$1,092$93616.7%
Organic net sales growth15.1%
Adjusted gross profit50743117.6%
Adjusted gross margin46.4%46.0%40 bps
Adjusted EBITDA23018027.8%
Adjusted EBITDA margin21.1%19.2%190 bps
Non-GAAP net income$156$10154.5%
Non-GAAP earnings per diluted share$2.88$1.8754.0%

Reported (GAAP) results

Net sales were $1,092 million in the third quarter of 2018 compared to $935 million in the third quarter of 2017. Net sales in the Enterprise Visibility & Mobility (“EVM”) segment were $739 million in the third quarter of 2018 compared with $611 million in the third quarter of 2017. Asset Intelligence & Tracking (“AIT”) segment net sales were $353 million in the third quarter of 2018 compared to $325 million in the prior year period. Third-quarter 2018 gross profit was $505 million compared to $429 million in the comparable prior year period. Net income for the third quarter of 2018 was $127 million, or $2.34 per diluted share, compared to net loss of $12 million, or $0.23 loss per diluted share, for the third quarter of 2017.

Adjusted (Non-GAAP) results

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Consolidated adjusted net sales were $1,092 million in the third quarter of 2018 compared to $936 million in the prior year period, an increase of 16.7%. Consolidated organic net sales growth for the third quarter was 15.1% reflecting growth in all regions, led by APAC, North America and EMEA. Third-quarter year-over-year organic net sales growth was 18.8% in the EVM segment and 8.1% in the AIT segment.

Consolidated adjusted gross margin increased to 46.4% for the third quarter of 2018, compared to 46.0% in the prior year period. This increase was primarily due to favorable business mix and the favorable impact of currency changes. Adjusted operating expenses increased in the third quarter of 2018 to $297 million from $270 million in the prior year period primarily due to growth in the business and increased incentive compensation expense related to improved operating results.

Adjusted EBITDA for the third quarter of 2018 increased to $230 million, or 21.1% of adjusted net sales, compared to $180 million, or 19.2% of adjusted net sales, for the third quarter of 2017 primarily due to operating expense leverage on higher sales and higher gross profit margin.

Non-GAAP net income for the third quarter of 2018 was $156 million, or $2.88 per diluted share, compared with $101 million, or $1.87 per diluted share, for the third quarter of 2017. A lower tax rate and lower interest costs also contributed to the year-over-year improvement.

Balance Sheet and Cash Flow

As of September 29, 2018, the company had cash and cash equivalents of $45 million and total debt of $1,912 million.

Free cash flow was $412 million for the first nine months of 2018. The company generated $460 million of operating cash flow and incurred capital expenditures of $48 million. For the first nine months of 2018, the company made payments of long-term debt of $1,307 million and received proceeds from the issuance of long-term debt of $961 million, resulting in a $346 million net reduction of total debt. The company made cash interest payments of $73 million for the first nine months of 2018.

In the third quarter of 2018, the company acquired Xplore Technologies Corporation. In connection with this acquisition, the company paid $87 million in cash, which included $72 million for the net assets acquired, $9 million to retire Xplore debt, and $6 million of other Xplore transaction-related obligations.

Outlook

The company expects fourth-quarter 2018 net sales to increase approximately 7% to 10% from the fourth quarter of 2017. This expectation includes an approximately 2 percentage point positive impact from the acquisition of Xplore Technologies, which closed in the third quarter of 2018, and a neutral impact from foreign currency translation.

Adjusted EBITDA margin is expected to be approximately 20% for the fourth quarter 2018, favorable to the prior year period. Non-GAAP earnings per diluted share are expected to be in the range of $2.80 to $3.00. This assumes an adjusted effective tax rate of approximately 16%.

Additionally, for the full year 2018, the company expects free cash flow of at least $575 million.

Conference Call Notification

Investors are invited to listen to a live webcast of Zebras conference call regarding the companys financial results for the third quarter of 2018. The conference call will be held today, Tuesday, Nov. 6, at 7:30 a.m. Central Time (8:30 a.m. Eastern Time). To view the webcast, visit the investor relations section of the companys website at investors.zebra.com.

About Zebra

Zebra (NASDAQ: ZBRA) empowers the front line of business in retail/ecommerce, manufacturing, transportation and logistics, healthcare and other industries to achieve a performance edge. With more than 10,000 partners across 100 countries, we deliver industry-tailored, end-to-end solutions that intelligently connect people, assets and data to help our customers make business-critical decisions. Our market-leading solutions elevate the shopping experience, track and manage inventory as well as improve supply chain efficiency and patient care. Ranked on Forbes list of Americas Best Employers for the last three years, Zebra helps our customers capture their edge. For more information, visit www.zebra.com or sign up for our news alerts. Follow us on LinkedIn, Twitter and Facebook.

Forward-Looking Statements

This press release contains forward-looking statements, as defined by the Private Securities Litigation Reform Act of 1995, including, without limitation, the statements regarding the companys outlook. Actual results may differ from those expressed or implied in the companys forward-looking statements. These statements represent estimates only as of the date they were made. Zebra undertakes no obligation, other than as may be required by law, to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this release.

These forward-looking statements are based on current expectations, forecasts and assumptions and are subject to the risks and uncertainties inherent in Zebras industry, market conditions, general domestic and international economic conditions, and other factors. These factors include customer acceptance of Zebras hardware and software products and competitors product offerings, and the potential effects of technological changes. The continued uncertainty over future global economic conditions, the availability of credit and capital markets volatility may have adverse effects on Zebra, its suppliers and its customers. In addition, a disruption in our ability to obtain products from vendors as a result of supply chain constraints, natural disasters or other circumstances could restrict sales and negatively affect customer relationships. Profits and profitability will be affected by Zebras ability to control manufacturing and operating costs. Because of its debt, interest rates and financial market conditions will also have an impact on results. Foreign exchange rates will have an effect on financial results because of the large percentage of our international sales. The outcome of litigation in which Zebra may be involved is another factor. The success of integrating acquisitions could also affect profitability, reported results and the companys competitive position in its industry. These and other factors could have an adverse effect on Zebras sales, gross profit margins and results of operations and increase the volatility of our financial results. When used in this release and documents referenced, the words anticipate, believe, outlook, and expect and similar expressions, as they relate to the company or its management, are intended to identify such forward-looking statements, but are not the exclusive means of identifying these statements. Descriptions of the risks, uncertainties and other factors that could affect the companys future operations and results can be found in Zebras filings with the Securities and Exchange Commission, including the companys most recent Form 10-K and Form 10-Q.

Use of Non-GAAP Financial Information

This press release contains certain Non-GAAP financial measures, consisting of adjusted net sales, adjusted gross profit, EBITDA, Adjusted EBITDA, Non-GAAP net income, Non-GAAP earnings per share, free cash flow, organic net sales growth, and adjusted operating expenses. Management presents these measures to focus on the on-going operations and believes it is useful to investors because they enable them to perform meaningful comparisons of past and present operating results. The company believes it is useful to present Non-GAAP financial measures, which exclude certain significant items, as a means to understand the performance of its ongoing operations and how management views the business. Please see the Reconciliation of GAAP to Non-GAAP Financial Measures tables and accompanying disclosures at the end of this press release for more detailed information regarding non-GAAP financial measures herein, including the items reflected in adjusted net earnings calculations. These measures, however, should not be construed as an alternative to any other measure of performance determined in accordance with GAAP.

The company does not provide a reconciliation for non-GAAP estimates on a forward-looking basis (including the information under Outlook above) where it is unable to provide a meaningful or accurate calculation or estimation of reconciling items and the information is not available without unreasonable effort. This is due to the inherent difficulty of forecasting the timing or amount of various items that have not yet occurred, are out of the companys control and/or cannot be reasonably predicted, and that would impact diluted net earnings per share, the most directly comparable forward-looking GAAP financial measure. For the same reasons, the company is unable to address the probable significance of the unavailable information. Forward-looking non-GAAP financial measures provided without the most directly comparable GAAP financial measures may vary materially from the corresponding GAAP financial measures.

As a global company, Zebra’s operating results reported in U.S. dollars are affected by foreign currency exchange rate fluctuations because the underlying foreign currencies in which the company transacts change in value over time compared to the U.S. dollar; accordingly, the company presents certain organic growth financial information, which includes impacts of foreign currency translation, to provide a framework to assess how the companys businesses performed excluding the impact of foreign currency exchange rate fluctuations. Foreign currency impact represents the difference in results that are attributable to fluctuations in the currency exchange rates used to convert the results for businesses where the functional currency is not the U.S. dollar. This impact is calculated by translating, for certain currencies, current period results at the currency exchange rates used in the comparable period in the prior year, rather than the exchange rates in effect during the current period. In addition, the company excludes the impact of its foreign currency hedging program in both the current year and prior year periods. The company believes these measures should be considered a supplement to and not in lieu of the companys performance measures calculated in accordance with GAAP.

ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

September 29,December 31,
20182017
(Unaudited)
Assets
Current assets:
Cash and cash equivalents$45$62
Accounts receivable, net of allowances for doubtful accounts of $3 million as of September 29, 2018 and December 31, 2017575479
Inventories, net493458
Income tax receivable3740
Prepaid expenses and other current assets5124
Total Current assets1,2011,063
Property, plant and equipment, net251264
Goodwill2,4962,465
Other intangibles, net260299
Long-term deferred income taxes91119
Other long-term assets10165
Total Assets$4,400$4,275
Liabilities and Stockholders Equity
Current liabilities:
Current portion of long-term debt$71$51
Accounts payable498424
Accrued liabilities285296
Deferred revenue199186
Income taxes payable5243
Total Current liabilities1,1051,000
Long-term debt1,8292,176
Long-term deferred revenue161148
Other long-term liabilities92117
Total Liabilities3,1873,441
Stockholders Equity:
Preferred stock, $.01 par value; authorized 10,000,000 shares; none issued
Class A common stock, $.01 par value; authorized 150,000,000 shares; issued 72,151,857 shares11
Additional paid-in capital282257
Treasury stock at cost, 18,349,215 and 18,915,762 shares at September 29, 2018 and December 31, 2017, respectively(614)(620)
Retained earnings1,5731,248
Accumulated other comprehensive income (loss)(29)(52)
Total Stockholders Equity1,213834
Total Liabilities and Stockholders Equity$4,400$4,275
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except share data)

(Unaudited)

Three Months EndedNine Months Ended
September 29,September 30,September 29,September 30,
2018201720182017
Net sales:
Tangible products$959$810$2,687$2,324
Services and software133125394372
Total Net sales1,0929353,0812,696
Cost of sales:
Tangible products4954201,3681,207
Services and software9286271248
Total Cost of sales5875061,6391,455
Gross profit5054291,4421,241
Operating expenses:
Selling and marketing120113361336
Research and development11396323291
General and administrative7571239214
Amortization of intangible assets254971151
Acquisition and integration costs64850
Exit and restructuring costs45910
Total Operating expenses3433381,0111,052
Operating income16291431189
Other (expenses) income:
Foreign exchange (loss) gain(1)1(5)2
Interest expense, net(18)(95)(52)(176)
Other, net(4)2(5)
Total Other expenses, net(19)(98)(55)(179)
Income (loss) before income tax143(7)37610
Income tax expense (benefit)16570(3)
Net income (loss)$127$(12)$306$13
Basic earnings per share$2.37$(0.23)$5.72$0.25
Diluted earnings per share$2.34$(0.23)$5.64$0.25
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

Nine Months Ended
September 29,September 30,
20182017
Cash flows from operating activities:
Net income$306$13
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization131209
Amortization of debt issuance costs and discounts1230
Share-based compensation3425
Debt extinguishment costs149
Deferred income taxes17(19)
Unrealized gain on forward interest rate swaps(24)(2)
Other, net23
Changes in operating assets and liabilities:
Accounts receivable, net(93)38
Inventories, net(16)(145)
Other assets(10)19
Accounts payable6910
Accrued liabilities(5)(2)
Deferred revenue2825
Income taxes2(37)
Other operating activities6(6)
Net cash provided by operating activities460210
Cash flows from investing activities:
Purchases of property, plant and equipment(48)(36)
Acquisition of businesses, net of cash acquired(72)
Proceeds from sale of long-term investments2
Purchases of long-term investments(2)(1)
Net cash used in investing activities(120)(37)
Cash flows from financing activities:
Payment of debt issuance costs and discounts(2)(5)
Payments of long-term debt(1,307)(1,373)
Proceeds from issuance of long-term debt9611,186
Payments of debt extinguishment costs(1)(49)
Proceeds from exercise of stock options and stock purchase plan purchases89
Taxes paid related to net share settlement of equity awards(10)(5)
Net cash used in financing activities(351)(237)
Effect of exchange rate changes on cash(6)(4)
Net increase in cash and cash equivalents(17)(68)
Cash and cash equivalents at beginning of period62156
Cash and cash equivalents at end of period$45$88
Supplemental disclosures of cash flow information:
Income taxes paid$46$54
Interest paid$73$148
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
RECONCILIATION OF ORGANIC NET SALES GROWTH

(UNAUDITED)

Three Months Ended
September 29, 2018
AITEVMConsolidated
Reported GAAP Consolidated Net sales growth8.6%20.9%16.8%
Adjustments:
Impact of foreign currency translation(1)(0.5)%(0.9)%(0.9)%
Impact of Xplore acquisition(2)(1.2)%(0.8)%
Organic Net sales growth8.1%18.8%15.1%
Nine Months Ended
September 29, 2018
AITEVMConsolidated
Reported GAAP Consolidated Net sales growth10.0%16.4%14.3%
Adjustments:
Impact of foreign currency translation(1)(1.9)%(2.1)%(2.1)%
Impact of Xplore acquisition(2)(0.4)%(0.3)%
Organic Net sales growth8.1%13.9%11.9%
(1) Operating results reported in U.S. dollars are affected by foreign currency exchange rate fluctuations. Foreign currency translation impact represents the difference in results that are attributable to fluctuations in the currency exchange rates used to convert the results for businesses where the functional currency is not the U.S. dollar. This impact is calculated by translating, for certain currencies, the current period results at the currency exchange rates used in the comparable prior year period, rather than the exchange rates in effect during the current period. In addition, we exclude the impact of the companys foreign currency hedging program in both the current and prior year periods.
(2) For purposes of computing Organic Net Sales, amounts directly attributable to the Xplore acquisition (included in our consolidated results beginning August 14, 2018) will be excluded for 12-months following the acquisition date.
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
RECONCILIATION OF GAAP TO NON-GAAP GROSS MARGIN

(In millions)

(Unaudited)

Three Months Ended
September 29, 2018September 30, 2017
AITEVMConsolidatedAITEVMConsolidated

GAAP

Reported Net sales (1)

$353$739$1,092$325$611$935
Reported Gross profit (2)172334505154276429
Gross Margin48.7%45.2%46.2%47.4%45.2%45.9%

Non-GAAP

Adjusted Net sales$353$739$1,092$325$611$936
Adjusted Gross profit (3)173334507154277431
Adjusted Gross Margin49.0%45.2%46.4%47.4%45.3%46.0%
(1) Fiscal 2017 consolidated results include corporate eliminations which are related to the Enterprise Acquisition in October 2014 and are not reported in segment results.
(2) Fiscal 2018 consolidated results include corporate eliminations which are related to the Xplore Acquisition in August 2018 and are not reported in segment results.
(3) Adjusted Gross profit excludes purchase accounting adjustments and share-based compensation expense.
Nine Months Ended
September 29, 2018September 30, 2017
AITEVMConsolidatedAITEVMConsolidated

GAAP

Reported Net sales (1)$1,056$2,025$3,081$960$1,739$2,696
Reported Gross profit (2)5289151,4424717731,241
Gross Margin50.0%45.2%46.8%49.1%44.5%46.0%

Non-GAAP

Adjusted Net sales$1,056$2,025$3,081$960$1,739$2,699
Adjusted Gross profit (3)5299171,4464727741,246
Adjusted Gross Margin50.1%45.3%46.9%49.2%44.5%46.2%
(1) Fiscal 2017 consolidated results include corporate eliminations which are related to the Enterprise Acquisition in October 2014 and are not reported in segment results.
(2) Fiscal 2018 consolidated results include corporate eliminations which are related to the Xplore Acquisition in August 2018 and are not reported in segment results.
(3) Adjusted Gross profit excludes purchase accounting adjustments and share-based compensation expense.
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
RECONCILIATION OF GAAP TO NON-GAAP NET INCOME

(In millions, except share data)

(Unaudited)

Three Months EndedNine Months Ended
September 29,September 30,September 29,September 30,
2018201720182017
Net income (loss)$127$(12)$306$13
Adjustments to Net sales(1)
Purchase accounting adjustments13
Total adjustment to Net sales13
Adjustments to Cost of sales(1)
Purchase accounting adjustments11
Share-based compensation1132
Total adjustments to Cost of sales2142
Adjustments to Operating expenses(1)
Amortization of intangible assets254971151
Acquisition and integration costs64850
Legal Settlement13
Share-based compensation11103725
Exit and restructuring costs45910
Total adjustments to Operating expenses4668138236
Adjustments to Other expenses, net(1)
Debt extinguishment costs4949
Amortization of debt issuance costs and discounts3201330
Gain on Sale of Investments(1)
Foreign exchange loss (gain)1(1)5(2)
Forward interest rate swaps gain(6)(24)(1)
Total adjustments to Other expenses, net(2)68(7)76
Income tax effect of adjustments(2)
Reported income tax expense (benefit)16570(3)
Adjusted income tax(33)(30)(82)(74)
Total adjustments to income tax(17)(25)(12)(77)
Total adjustments29113123240
Non-GAAP Net income$156$101$429$253
GAAP earnings per share
Basic$2.37$(0.23)$5.72$0.25
Diluted$2.34$(0.23)$5.64$0.25
Non-GAAP earnings per share
Basic$2.92$1.89$8.02$4.78
Diluted$2.88$1.87$7.92$4.72
Non-GAAP weighted average shares outstanding (3)
Basic53,740,17453,143,91453,516,85952,964,066
Diluted54,424,88053,791,54154,237,55353,631,499
(1) Presented on a pre-tax basis.
(2) Represents the adjustment to the GAAP basis tax provision commensurate with non-GAAP adjustments.
(3) In periods of loss, Non-GAAP weighted-average shares exclude restricted stock awards and performance stock awards within basic and dilutive weighted-average share computations. Share-based compensation awards that are dilutive in nature are included within weighted-average dilutive share computations.
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATION

(In millions)

(Unaudited)

EBITDA

Three Months EndedNine Months Ended
September 29,September 30,September 29,September 30,
2018201720182017
Net income (loss)$127$(12)$306$13
Add back:
Depreciation20196058
Amortization of intangible assets254971151
Total Other expenses, net199855179
Income tax expense (benefit)16570(3)
EBITDA (Non-GAAP)207159562398
Adjustments to Net sales
Purchase accounting adjustments13
Total adjustments to Net sales13
Adjustments to Cost of sales
Purchase accounting adjustments11
Share-based compensation1132
Total adjustments to Cost of sales2142
Adjustments to Operating expenses
Acquisition and integration costs64850
Legal Settlement13
Share-based compensation11103725
Exit and restructuring costs45910
Total adjustments to Operating expenses21196785
Total adjustments to EBITDA23217190
Adjusted EBITDA (Non-GAAP)$230$180$633$488
Adjusted EBITDA % of Adjusted Net Sales21.1%19.2%20.5%18.1%

FREE CASH FLOW

Nine Months Ended
September 29,September 30,
20182017
Net cash provided by operating activities$460$210
Less: Purchases of property, plant and equipment(48)(36)
Free cash flow (Non-GAAP)(1)$412$174
(1) Free cash flow is defined as Net cash provided by operating activities in a period minus purchases of property, plant and equipment (capital expenditures) made in that period. This measure does not represent residual cash flows available for discretionary expenditures as the measure does not deduct the payments required for debt service and other contractual obligations or payments for future business acquisitions. Therefore, we believe it is important to view free cash flow as a measure that provides supplemental information to our entire statements of cash flows.

Zebra Technologies Corporation
Investors
Michael
Steele, CFA, IRC
Vice President, Investor Relations
Phone: + 1
847 793 6707
or
Media
Therese
Van Ryne
Director, Global Public Relations
Phone: + 1 847 370
2317