Zebra Technologies Corporation — Q1 2012 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2012; comparisons are to the three months ended April 2, 2011. Zebra sells printers, supplies, services and software. Prior-period results were recast to present the Navis, proveo AG and certain other operations as discontinued operations.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2012 | Comparable 2011 |
|---|---|---|
| Net sales | $243.9 | $237.3 |
| Gross profit / margin | $119.9 / 49.1% | $120.0 / 50.6% |
| Operating income / margin | $42.0 / 17.2% | $44.4 / 18.7% |
| Income from continuing operations | $30.2 | $30.1 |
| Net income | $30.2 | $61.6 |
| Diluted EPS | $0.58 | $1.10 |
| Cash from operating activities | $36.6 | $(5.2) |
- Sales rose 2.8%; tangible-product sales increased 2.8%, and services and software revenue rose 1.9%. Supplies grew 11.9%, while hardware increased 0.6%.
- Gross margin declined 1.5 percentage points. Management attributed the pressure to product mix and unfavorable foreign exchange; currency movements reduced gross profit by $1.2 million. Printer shipments grew 4.7%, while average selling price fell 4.0%, mainly due to product mix.
- Operating expenses increased 2.9% to $77.9 million. Higher selling and marketing and general and administrative costs were partly offset by lower R&D and the absence of prior-year restructuring charges.
- Net income fell 51.1% year over year, principally because Q1 2011 included $31.5 million of income from discontinued operations, including the after-tax effect of the Navis sale. Continuing-operations income was essentially unchanged; diluted EPS from continuing operations increased to $0.58 from $0.54.
- Operating cash flow was $36.6 million; capital expenditures were $7.7 million, implying approximately $28.9 million of operating cash flow less capital expenditures. Cash and cash equivalents were $41.9 million at quarter-end.
- Cash, current and long-term investments and marketable securities totaled $362.2 million at March 31, 2012, versus $326.7 million at December 31, 2011. Total current assets were $550.3 million and current liabilities $92.9 million. The balance sheet reports no debt.
- Total liabilities were $106.0 million and stockholders’ equity $799.1 million. Zebra repurchased 264,567 shares for $9.8 million during the quarter.
Material changes, outlook and risks
- Sales increased across all international regions; Latin America grew 10.9%. International markets generated 58.0% of sales. Sales in targeted geographic-expansion regions rose 7.8%.
- Two distributor customers represented 21.5% and 11.0% of sales, respectively, increasing customer-concentration exposure. No other customer accounted for at least 10%.
- Management stated that existing capital resources and operating cash generation should be sufficient for anticipated capital requirements. The filing provides no specific revenue, earnings or margin guidance.
- Management cited market acceptance and competition, economic conditions, cost control, foreign-exchange movements, investment-market conditions, acquisitions, natural disasters and litigation—particularly intellectual-property matters—as risks. It reported no material change in market risk during the quarter.
- Foreign subsidiaries held $116.5 million of cash and investments; Zebra said it did not intend to repatriate these funds. Repatriation or U.S. financing could increase taxes or interest expense.
- An auction-rate security remained subject to failed auctions and was valued using estimates; management considered the decline temporary and intended to hold the security. Cash-flow hedges had $4.6 million of net unrealized losses recorded in other comprehensive income.
- At quarter-end, $13.8 million remained receivable from the Navis buyer in escrow, subject to agreement adjustments. Management believed ordinary-course legal proceedings would not materially adversely affect the company. U.S. federal tax years 2008–2010 were under audit.
- Disclosure controls were assessed as effective. A North America financial-systems implementation was completed in February 2012, with new controls scheduled for testing through the year.
Important facts for investors to verify
- Whether sales growth can continue while product mix, pricing and foreign exchange weigh on gross margin.
- How much of the reported cash and investment balance is readily available in the U.S., given foreign-held funds Zebra does not plan to repatriate.
- The status, valuation and eventual recovery of the failed-auction security and the remaining Navis escrow receivable.
- Whether the two large distributor customers’ concentration and the ongoing North America systems-control testing create material operating or reporting risks.
- How the federal tax audits and any changes to international earnings or repatriation plans could affect future tax rates.