Business Context and Reporting Period
Company: Zebra Technologies Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 3, 2010
Business Overview: Zebra operates two primary segments: Specialty Printing Group (SPG), focusing on thermal printers and supplies, and Zebra Enterprise Solutions (ZES), providing software and services. The company reported strong growth driven by global economic recovery and increased demand for hardware and supplies.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended July 3, 2010 |
Six Months Ended July 3, 2010 |
|---|---|---|
| Total Net Sales | $235,735 | $462,166 |
| Gross Profit | $111,179 | $218,514 |
| Gross Margin | 47.2% | 47.3% |
| Operating Income | $32,841 | $64,561 |
| Net Income | $22,677 | $47,410 |
| Diluted EPS | $0.39 | $0.82 |
| Cash from Operations (6mo) | $67,330 | |
| Total Cash & Investments | $255,194 (as of July 3, 2010) | |
| Total Debt | None reported (No long-term debt listed on balance sheet) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 25.6% for the quarter and 21.5% for the six-month period compared to the same periods in 2009. This was driven by a 30.7% increase in hardware sales and a 22.4% increase in supplies sales.
- Profitability: Operating income surged 149.7% for the quarter and 136.3% year-to-date. Net income increased 151.6% for the quarter and 158.2% year-to-date.
- Margin Expansion: Gross margin improved from 43.6% to 47.2% in the quarter, attributed to higher volumes, improved product mix, and cost controls from outsourcing manufacturing.
- Restructuring Costs: Exit, restructuring, and integration costs decreased significantly ($3.1 million reduction in the quarter) as the manufacturing outsourcing program neared completion.
- Foreign Exchange: A weaker euro against the dollar negatively impacted sales by $5.0 million and gross profit by $4.4 million in the quarter.
Outlook, Risks, and Management Commentary
- Segment Performance: SPG operating income increased 75.9% to $52.9 million. ZES reported an operating loss of $3.9 million, though sales increased 14.4% due to software license revenue, offset by project implementation delays.
- Liquidity: Management stated that existing capital resources and funds from operations are sufficient to finance anticipated requirements. The company repurchased $46.8 million of treasury stock in the first six months.
- Goodwill Impairment: The company performed its annual goodwill impairment test in June 2010 and determined goodwill was not impaired.
- Risks: Key risks include market acceptance of products, foreign exchange rate fluctuations, success of offshore manufacturing migration, and potential litigation regarding intellectual property.
- Accounting Changes: New FASB standards regarding revenue recognition for multiple-deliverable arrangements and software elements are effective for fiscal years beginning after June 15, 2010; the impact has not yet been determined.
Investor Verification Checklist
- Customer Concentration: Verify the impact of ScanSource, Inc., which accounted for 18.3% of net sales in the quarter and 17.8% year-to-date.
- Inventory Levels: Monitor inventory reserves, which stood at $9.9 million (10.4% of gross inventory), to ensure they remain adequate given product mix changes.
- Foreign Exchange Exposure: Assess the sensitivity of future earnings to currency fluctuations, particularly the Euro, given 55% of sales are international.
- Restructuring Completion: Confirm that the manufacturing outsourcing program is fully complete and that no further significant exit costs will be incurred.
- Investment Portfolio: Review the status of auction rate securities held in the investment portfolio, which are subject to valuation adjustments due to failed auctions.