Zebra Technologies Announces Third-Quarter 2023 Results

Third-Quarter Financial Highlights

• Net sales of $956 million; year-over-year decrease of 30.6%
• Net loss of $15 million and net loss per diluted share of $(0.28)
• Non-GAAP diluted EPS decreased year-over-year to $0.87
• Adjusted EBITDA decreased year-over-year to $111 million
• Previously announced cost reduction plans now expected to drive $100 million annualized net expense savings, an increase from $85 million

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 30, 2023.

"As expected, our third quarter results were impacted by broad-based end market softness and elongated sales cycles across our product categories, as well as distributor destocking," said Bill Burns, Chief Executive Officer of Zebra Technologies. "As we enter the fourth quarter, with most of our cost restructuring actions now implemented, we expect to see a significant sequential improvement in profitability. While we believe demand trends are leveling, we are not seeing signs of a market recovery based on customer behavior, and remain cautious in our planning for the remainder of the year and first half of 2024. We will continue to take decisive actions to position us well for profitable growth as our end markets recover, and elevate our position with customers through our innovative portfolio of solutions."

Net sales were $956 million in the third quarter of 2023 compared to $1,378 million in the prior year. Net sales in the Enterprise Visibility & Mobility ("EVM") segment were $632 million in the third quarter of 2023 compared with $936 million in the prior year. Asset Intelligence & Tracking ("AIT") segment net sales were $324 million in the third quarter of 2023 compared to $442 million in the prior year. Consolidated organic net sales for the third quarter decreased 29.6% year-over-year, with a 31.4% decrease in the EVM segment and 25.8% decrease in the AIT segment.

Third quarter 2023 gross profit was $427 million compared to $628 million in the prior year. Gross margin decreased to 44.7% for the third quarter of 2023 compared to 45.6% in the prior year. The decrease was primarily due to volume deleveraging partially offset by lower premium supply chain costs. Adjusted gross margin was 44.8% in the third quarter of 2023 compared to 45.8% in the prior year.

Operating expenses increased in the third quarter of 2023 to $439 million from $426 million in the prior year. Operating expenses increased primarily due to higher exit and restructuring costs partially offset by lower employee incentive compensation associated with financial performance, cost reductions and lower amortization expense. Adjusted operating expenses decreased in the third quarter of 2023 to $334 million from $356 million in the prior year.

Net loss for the third quarter of 2023 was $15 million, or $0.28 loss per diluted share, compared to net income of $170 million, or $3.26 income per diluted share, for the prior year. Non-GAAP net income for the third quarter of 2023 decreased to $45 million, or $0.87 per diluted share, compared to $215 million, or $4.12 per diluted share, for the prior year.

Adjusted EBITDA for the third quarter of 2023 decreased to $111 million, or 11.6% of adjusted net sales, compared to $291 million, or 21.1% of adjusted net sales for the prior year primarily due to lower gross margin and higher operating expense as a percent of revenue.

Balance Sheet and Cash Flow

As of September 30, 2023, the Company had cash and cash equivalents of $61 million and total debt of $2,280 million.

For the first nine months of 2023, net cash used in operating activities was $145 million and the Company made capital expenditures of $48 million, resulting in negative free cash flow of $193 million. The Company made share repurchases under its existing authorization of $52 million, and had net debt borrowings of $248 million.

Cost Initiatives

As previously announced, the Company is executing on the 2022 Productivity Plan and initiated a Voluntary Retirement Plan to generate cost efficiencies. Both of these Exit and Restructuring plans are expected to be substantially complete in 2023. The total charges are expected to be approximately $105 million, and the net annualized expense savings resulting from these actions is expected to total approximately $100 million, an increase from $85 million.

Outlook

The Company expects fourth quarter 2023 net sales to decrease between 32% and 36% compared to the prior year. Foreign currency translation is expected to have a negligible impact.

Adjusted EBITDA margin for the fourth quarter of 2023 is expected to be approximately 16%. Non-GAAP diluted earnings per share are expected to be in the range of $1.40 to $1.80. This assumes an adjusted effective tax rate of approximately 17%.

Free cash flow is expected to be positive for the second half of 2023, and negative for the full year reflecting lower profitability and elevated inventory, higher cash taxes and is inclusive of the anticipated $180 million of previously-announced settlement payments.

The Company does not provide a reconciliation for non-GAAP estimates on a forward-looking basis 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 the most directly comparable forward-looking GAAP financial measure as discussed under the "Forward-Looking Statements" caption below. This would include items that have not yet occurred, are out of the Company's control and/or cannot be reasonably predicted, and that would impact diluted net earnings per share. 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.

Conference Call Notification

Investors are invited to listen to a live webcast of Zebra's conference call regarding the Company's financial results. The conference call will be held today at 7:30 a.m. Central Time (8:30 a.m. Eastern Time). To view the webcast, visit the investor relations section of the Company's website at investors.zebra.com.

About Zebra

Zebra (NASDAQ:ZBRA) helps organizations monitor, anticipate, and accelerate workflows by empowering their frontline and ensuring that everyone and everything is visible, connected and fully optimized. Our award-winning portfolio spans software to innovations in robotics, machine vision, automation and digital decisioning, all backed by a +50-year legacy in scanning, track-and-trace and mobile computing solutions. With an ecosystem of 10,000 partners across more than 100 countries, Zebra's customers include over 80% of the Fortune 500. Newsweek recently recognized Zebra as one of America's Most Loved Workplaces and Greatest Workplaces for Diversity, and we are on Fast Company's list of the Best Workplaces for Innovators. Learn more at www.zebra.com or sign up for news alerts. Follow Zebra's Your Edge blog, LinkedIn, Twitter and Facebook, and check out our Story Hub: Zebra Perspectives.

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 company's outlook. Actual results may differ from those expressed or implied in the company's 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 Zebra's industry, market conditions, general domestic and international economic conditions, and other factors. These factors include customer acceptance of Zebra's offerings and competitors' offerings, and the potential effects of emerging technologies and changes in customer requirements. The effect of global market conditions, and the availability of credit and capital markets volatility may have adverse effects on Zebra, its suppliers and its customers. In addition, natural disasters, man-made disasters, public health issues (including pandemics), and cybersecurity incidents may have negative effects on Zebra's business and results of operations. Zebra's ability to purchase sufficient materials, parts, and components, and ability to provide services, software and products to meet customer demand could negatively impact Zebra's results of operations and customer relationships. Profits and profitability will be affected by Zebra's ability to control manufacturing and operating costs. Because of its debt, interest rates and financial market conditions may also have an adverse impact on results. Foreign exchange rates, customs duties and trade policies may have an adverse effect on financial results because of the large percentage of Zebra's international sales. The impacts of changes in foreign and domestic governmental policies, regulations, or laws, as well as the outcome of litigation or tax matters in which Zebra may be involved are other factors that could adversely affect Zebra's business and results of operations. The success of integrating acquisitions could also adversely affect profitability, reported results and the company's competitive position in its industry. These and other factors could have an adverse effect on Zebra's sales, gross profit margins and results of operations and increase the volatility of Zebra's 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 certain risks, uncertainties and other factors that could adversely affect the company's future operations and results can be found in Zebra's filings with the Securities and Exchange Commission, including the company's 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," "adjusted gross margin," "EBITDA," "Adjusted EBITDA," "Adjusted EBITDA margin," "Adjusted EBITDA % of adjusted net sales," "Non-GAAP net income," "Non-GAAP earnings per share," "Non-GAAP diluted earnings per share," "free cash flow," "organic net sales," "organic net sales growth (decline)," "organic net sales decline," 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 company's 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 company's 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 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 the prior year periods. The company believes these measures should be considered a supplement to and not in lieu of the company's performance measures calculated in accordance with GAAP.

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