Zebra Technologies Corporation — Q2 2013 Form 10-Q
Business context and period. The unaudited report covers the quarter and six months ended June 29, 2013, compared with the corresponding 2012 periods. Zebra sells hardware, supplies, and services/software. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where shown.
Financial performance
- Q2 revenue: $253.2 million, up 2.5% year over year. Supplies rose 20.4% and services/software 7.1%; hardware fell 2.7%. Printer shipments declined 0.5%, and average printer selling price declined 1.9% to $462.
- Q2 profitability: Gross profit was $120.9 million; gross margin was 47.8%, versus 48.7%. Operating income was $36.2 million, down 8.2%, with a 14.3% operating margin versus 15.9%. Net income was $30.6 million, down 0.3%; diluted EPS was $0.60 versus $0.59.
- Six-month results: Revenue was $490.1 million, down 0.2%; gross margin was 47.7% versus 48.9%. Operating income fell 20.9% to $64.4 million, net income fell 11.0% to $54.1 million, and diluted EPS was $1.05 versus $1.17.
- Cash flow: Six-month operating cash flow was $91.1 million, versus $84.7 million. Capital expenditures were $8.5 million; operating cash flow less capital expenditures was approximately $82.5 million. Cash and cash equivalents decreased to $55.9 million from $64.7 million at year-end.
- Liquidity and balance sheet: Cash plus current and long-term investments was approximately $454.0 million at June 29, compared with $394.1 million at December 31, 2012. Current assets were $762.6 million and current liabilities $101.8 million. Total liabilities were $122.0 million; the balance sheet presents no borrowings or debt line item.
- Capital returns: Zebra repurchased 627,042 shares for $28.6 million during the first half. Stockholders’ equity was $896.6 million.
Material changes and management commentary
- Q2 sales growth reflected higher supplies revenue, including the July 2012 LaserBand acquisition and organic growth in labels and wristbands, plus increased service-contract revenue. For the first half, hardware revenue declined 5.4%, while supplies increased 17.4%.
- Management attributed lower gross margins to product mix, special pricing on large transactions, lower average selling prices, and higher freight-in costs. Favorable currency movements added $1.1 million to Q2 gross profit and $1.2 million for the first half.
- Operating expenses rose 4.6% in Q2 and 6.8% in the first half. Drivers included sports-industry market-entry activities, higher amortization following the LaserBand acquisition, and restructuring costs. The first-half discussion also cites $1.4 million in increased legal fees, primarily for patent-rights enforcement.
- Other income included a net favorable litigation settlement of $1.6 million related to an investment loss recorded in prior years. Investment income was lower due to reduced yields.
- The effective tax rate was 19.0% for Q2 and 18.6% for the first half, compared with 23.6% and 25.8%, respectively. Management cited higher profits in lower-tax international jurisdictions and a retroactive U.S. R&D tax credit, including an approximately $0.4 million one-time credit in Q1.
Outlook, risks, and contingencies
- No company-wide revenue or earnings guidance is stated. Management expects Location Solutions restructuring to reduce annual costs by approximately $4.0 million, with savings fully realized by Q4 2013. Supply-chain relocations and related actions are expected to save approximately $2.6 million in cost of goods sold and be completed by year-end 2013.
- Location Solutions faced slower-than-expected growth in automotive and process manufacturing, weakness in government, and limited near-term improvement; management determined further restructuring was needed. Total expected costs for the disclosed restructuring activities were $7.65 million, of which $3.96 million had been incurred by June 29.
- Risks identified include product acceptance and technology changes, economic and regional market conditions, cost control, acquisition integration, investment-market and interest-rate exposure, foreign exchange, natural disasters, and litigation, including intellectual-property matters. Management reported no material change in market risk during the quarter.
- Legal proceedings arise in the ordinary course of business; management believed their outcomes would not have a material adverse effect, while noting the inherent uncertainty. Approximately $206.0 million of cash and investments was held by foreign subsidiaries; repatriation could increase the effective tax rate. Three distributors each represented at least 10% of Q2 sales: 15.7%, 14.2%, and 12.2%.
- Management stated existing capital resources and operating cash generation were sufficient for anticipated capital requirements. The interim statements are unaudited, and the filing cautions that results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the supplies-led growth can offset ongoing hardware declines and lower printer selling prices.
- Whether gross margin stabilizes and planned restructuring savings are achieved on schedule and net of implementation costs.
- How much of the $454.0 million cash-and-investment balance is available for U.S. needs, given foreign funds are intended to remain reinvested abroad.
- Whether customer concentration, regional demand—particularly in Europe—and foreign-exchange movements change materially.
- The impact of the litigation settlement, patent-enforcement spending, and any developments in other legal proceedings.