ZBRA

Business Context and Reporting Period

Company: Zebra Technologies Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 3, 2010
Business Overview: Zebra operates two primary segments: Specialty Printing Group (SPG), which manufactures thermal printers and supplies, and Zebra Enterprise Solutions (ZES), which provides software and services for asset tracking and management. The company is a large accelerated filer incorporated in Delaware.

Key Financial Metrics

Liquidity & Debt: The company reported no long-term debt on the balance sheet. Total current assets were $426.2 million against current liabilities of $93.2 million, resulting in a strong current ratio. Cash and marketable securities totaled approximately $254.1 million as of April 3, 2010.

Material Changes vs. Prior Period

• Revenue Growth: Total net sales increased 17.6% year-over-year, driven by a 21.2% increase in tangible product sales. Printer unit volume rose 22.7%.
• Profitability Surge: Operating income increased 123.8% and Net Income increased 164.5%. This was driven by higher sales volumes, improved product mix (more high-performance printers), and cost controls from outsourcing manufacturing.
• Segment Performance:
  • SPG: Sales up 21.8% with operating income rising 60.1% to $54.4 million.
  • ZES: Sales declined 15.3% due to lower bookings and project delays. Operating loss widened to $5.4 million from $3.4 million.
• Operating Expenses: Increased 5.6% primarily due to higher selling and marketing costs associated with business growth. Restructuring costs decreased by $480,000 as the manufacturing outsourcing program neared completion.
• Tax Rate: The effective tax rate dropped to 23.7% from 32.0%, largely due to a $2.76 million reduction in federal taxes related to prior year inventory adjustments.

Outlook, Risks, and Unusual Items

• Management Commentary: Management attributes the strong performance to a broad-based increase in demand and a global economic recovery. Growth was particularly strong in Latin America and Asia-Pacific. The company continues to benefit from the transition of printer manufacturing to a third-party provider in China.
• Restructuring: Exit, restructuring, and integration costs were $1.8 million for the quarter. The company expects to incur an additional $0.9 million in total exit costs related to the supply chain optimization program.
• Investments: The company holds four auction rate securities that have failed to auction. While one was deemed permanently impaired in 2008, the remaining three are considered temporarily impaired and classified as long-term investments. Management intends to hold them until maturity or successful auction.
• Risks: Key risks include foreign exchange fluctuations (a weaker euro benefited sales but impacts translation), market acceptance of new products, and the success of ongoing integration of acquired businesses. The company relies heavily on ScanSource, Inc., which accounted for 17.2% of total net sales.
• Capital Allocation: The company repurchased 750,000 shares of common stock for $20.8 million during the quarter. As of April 30, 2010, 1,449,286 shares remained available for purchase under the authorized program.

Investor Verification Checklist

• Segment Divergence: Verify the sustainability of SPG growth versus the continued decline in ZES revenue and operating losses.
• Inventory Levels: Review inventory reserves ($9.5 million) and the impact of the 10.4% reserve ratio on future cost of sales.
• Investment Portfolio: Assess the liquidity risk associated with the failed auction rate securities and the company's ability to hold them to maturity.
• Customer Concentration: Monitor the 17.2% revenue concentration with ScanSource, Inc. and any changes in distributor relationships.
• Foreign Exchange: Evaluate the impact of currency fluctuations on future margins, given that 57.4% of sales are international.