Zebra Technologies Corporation — FY2011 Form 10-K
Business context and reporting period
For the fiscal year ended December 31, 2011, Zebra designed, manufactured, sold and supported specialty thermal printers, supplies, software and real-time location solutions. Its products serve automatic identification, data collection and personal-identification applications. The filing also presents fourth-quarter results for the three months ended December 31, 2011.
In 2011, Zebra sold its Navis marine-terminal business and proveo AG; their results are reported as discontinued operations. Zebra retained and integrated its Location Solutions product line.
Financial performance and liquidity
- FY2011 revenue: $983.5 million, up 10.0% from $894.4 million in 2010. Hardware revenue was $743.3 million (+9.8%), supplies $187.5 million (+11.8%), and service and software $47.2 million (+5.3%). Printer shipments rose 12.4% to 1,188,892; average selling price fell 1.1% to $527.
- FY2011 profit: Gross profit was $486.8 million, with a 49.5% gross margin versus 47.0% in 2010. Operating income increased 22.8% to $182.0 million (18.5% operating margin). Continuing-operations income was $130.3 million; net income was $174.6 million, or $3.22 diluted EPS, including $44.3 million from discontinued operations.
- Fourth quarter: Revenue was $247.3 million (+5.7% year over year); gross margin was 49.1% versus 48.9%. Operating income was $42.1 million versus $43.0 million, while net income was $35.0 million versus $28.2 million ($0.67 versus $0.50 diluted EPS). Printer shipments rose 12.9%, but average selling price declined 5.4% to $506, mainly due to product mix.
- Cash flow: FY2011 operating cash flow was $79.6 million, down from $140.5 million in 2010. Investing activities provided $53.2 million, including $161.2 million of proceeds from business sales; capital expenditures were $26.9 million. Financing activities used $145.8 million, including $160.2 million for repurchases of 4.35 million shares.
- Liquidity and obligations: Cash, restricted cash, investments and marketable securities totaled $326.7 million at year-end, versus $258.6 million in 2010; working capital was $475.9 million. Total assets were $899.0 million and stockholders’ equity $776.9 million. No borrowings were outstanding under the $100 million revolving credit facility; $3.5 million of letters of credit reduced availability. Reported long-term obligations of $11.5 million include deferred compensation and unearned revenue, not just debt.
- Other metrics: The effective tax rate was 27.5%, versus 30.1% in 2010. International customers generated 58.4% of revenue. Two customers represented 20.7% and 10.5% of sales, respectively.
Material changes and unusual items
- Annual revenue growth reflected broad-based demand, new products and expanded sales channels and geographic reach. International sales increased 15.0%; Asia-Pacific grew 25.5%. Management attributed improved annual gross margin to higher volume, lower material and freight costs, and favorable foreign-exchange effects.
- Operating expenses increased 11.8% to $304.7 million, driven by higher selling and marketing, R&D and administrative costs, including personnel and expansion-related spending. R&D was $89.9 million, or 9.1% of revenue.
- FY2011 discontinued-operations income included a $68.7 million gain on sale, partly offset by $11.8 million of tax expense on the sale and operating losses. The Navis sale generated approximately $188.6 million in cash; $27.6 million remained receivable from the buyer in escrow, subject to contractual adjustments. The proveo sale generated stated tax benefits of $13.3 million.
- Quarterly net income growth should be distinguished from continuing-operations performance: fourth-quarter continuing-operations income rose 10.9%, while operating income declined 2.1%. The lower quarterly tax rate (20.1% versus 30.7%) supported after-tax growth.
Outlook, risks and contingencies
The filing gives no specific revenue or earnings guidance. Management said existing capital resources and funds generated from operations should be sufficient for anticipated capital requirements. It expects no material additional 2012 costs for consolidating former ZES administrative functions. Zebra did not anticipate repatriating foreign funds; doing so could increase taxes, and U.S. borrowing could add interest expense.
- Thermal-printer final assembly depends on third-party manufacturer Jabil; disruption could constrain supply and sales. Zebra also relies on some sole-source component suppliers.
- International operations and sales expose results to foreign-exchange movements, economic and political conditions, trade restrictions, and supply and logistics disruptions. Natural disasters, including those in Japan and Thailand, could affect suppliers.
- Other risks include competition and technology shifts, customer concentration, intellectual-property claims, product defects, acquisition integration, and implementation of the company-wide ERP system, which could cause operating issues or cost overruns.
- Zebra reported a $4.0 million unrecognized-tax-benefit balance and ongoing U.S. federal and state tax examinations. The Barcode Informatica lawsuit was settled in Brazil in January 2012 for an amount described as not significant; management did not expect other ordinary-course legal proceedings to have a material adverse effect.
- The investment portfolio included $2.6 million of Level 3 assets, including an auction-rate security valued using less-observable inputs. Management reported no goodwill impairment in its 2011 annual test. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Most important facts for investors to verify
- Reconcile the $44.3 million discontinued-operations contribution to the sale gain, related taxes, operating losses, escrow receivable and proveo transaction terms.
- Assess the durability of revenue and margin gains against falling printer average selling prices, product mix, foreign-exchange effects and rising operating expenses.
- Investigate the decline in operating cash flow and working-capital movements, particularly inventory growth and the effects of the divestitures.
- Review customer concentration and the operating continuity plan for Jabil and sole-source suppliers.
- Confirm the amount and accessibility of foreign-held liquidity, investment-portfolio risks, available revolver capacity and the sustainability of share repurchases.