Zebra Technologies Corporation — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; the filing also reports fourth-quarter results. Unless noted otherwise, amounts below are in U.S. dollars.
Business context
Zebra designs and sells specialty printers, supplies, software and services, plus real-time location solutions using RFID and related technologies. Its products support identification, tracking and printing applications across manufacturing, retail, healthcare, logistics and government. In 2012, Zebra acquired LaserBand, a patient-identification wristband business, and StepOne Systems, a retail mobility software company. International customers represented 56.2% of annual sales.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $996.2 million | $983.5 million |
| Gross profit / margin | $491.6 million / 49.4% | $486.8 million / 49.5% |
| Operating income / margin | $164.4 million / 16.5% | $182.0 million / 18.5% |
| Income from continuing operations | $121.9 million | $130.3 million |
| Net income | $122.9 million | $174.6 million |
| Diluted EPS | $2.37 | $3.22 |
| Cash provided by operating activities | $183.3 million | $78.3 million |
Sales rose 1.3%, while net income declined 29.6%; the prior year included substantial gains from the sales of discontinued businesses. Continuing-operations income fell 6.5%, reflecting higher operating expenses, including a $9.1 million goodwill impairment. Supplies revenue increased 13.4% to $212.5 million; hardware revenue declined 1.7% to $730.5 million. Printer shipments grew 6.0% to 1.26 million, while average selling price fell 7.9% to $485, reflecting a shift toward lower-priced products.
At year-end, cash, restricted cash, investments and marketable securities totaled $394.1 million, up from $326.7 million. Working capital was $615.6 million; stockholders’ equity was $857.0 million. Total liabilities were $110.7 million, including $14.2 million of other long-term liabilities; the filing reports no borrowings under its credit agreements. Zebra had a new five-year $250 million revolving facility, with $2.3 million of letters of credit reducing available capacity. Capital expenditures were $22.4 million, acquisitions cost $59.9 million, and treasury-stock purchases were $54.4 million.
Fourth-quarter sales increased 2.4% to $253.2 million. Gross margin was 49.2%, versus 49.1%; operating income increased 4.7% to $44.1 million. Net income was essentially flat at $35.0 million versus $35.0 million, and diluted EPS was $0.68 versus $0.67. Supplies rose 24.9% in the quarter, while hardware declined 3.2%.
Material changes and management commentary
- Full-year growth was led by supplies and higher printer volumes, partly offset by lower average selling prices and weaker hardware revenue. North America sales increased 6.4%; international sales declined 2.4%, including a $12.1 million adverse foreign-exchange effect on EMEA sales.
- Operating expenses increased 7.4%, with higher general and administrative costs, acquisition costs and the goodwill impairment. Gross margin edged down 0.1 percentage point, partly due to foreign currency effects.
- Operating cash flow improved substantially year over year. Management attributed the increase in cash and investments in part to operating cash generation and stated that existing resources and operating funds should meet anticipated capital requirements.
- LaserBand was acquired for approximately $59.9 million; StepOne was acquired for approximately $1.5 million. The company also established an international holding-company structure intended to facilitate cash pooling and reduce international income taxes.
- Zebra recorded a $9.1 million goodwill impairment for a smaller reporting unit after weaker-than-forecast operating results and lower expected growth. A restructuring of location-solutions management began, and the company expected additional costs related to manufacturing optimization and relocation of some support functions.
Outlook, risks and contingencies
The filing provides no specific revenue, earnings or margin guidance. Management described continued investment in product development and international growth, including new printer products and software releases. Key risks include reliance on Jabil Circuit as the sole-source final assembler for thermal printers and location solutions, sole-source component suppliers, intense competition and technology changes, foreign-exchange exposure, international operating risks, acquisition integration, and execution of the company-wide ERP implementation. Zebra reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.
Three distributors each accounted for at least 10% of sales; together they represented approximately 42.1% of FY 2012 net sales. Zebra identified ordinary-course legal proceedings but stated it did not expect them, individually or collectively, to have a material adverse effect. Tax examinations and possible adjustments to tax reserves remain contingencies. Approximately $173.5 million of cash and investments were held by foreign subsidiaries and generally treated as permanently reinvested; repatriation could increase taxes.
Important facts for investors to verify
- Whether supplies growth and higher unit shipments can continue while hardware revenue and average selling prices remain under pressure.
- How the goodwill impairment, restructuring and manufacturing relocation affect future operating costs and the location-solutions business.
- Jabil’s capacity, continuity plans and alternatives given its sole-source manufacturing role.
- Cash deployment, including acquisition spending, share repurchases, foreign-held funds and any future use of the $250 million revolving facility.
- Customer concentration, foreign-exchange impacts, tax exposures and the status and cost of ERP implementation.