Zebra Technologies Corporation — Q1 2011 Form 10-Q
Business context and reporting period: Unaudited results for the three months ended April 2, 2011, compared with the three months ended April 3, 2010. The filing presents continuing operations separately after reclassifying Navis and certain other operations as discontinued.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Continuing net sales | $237.3 | $212.0 | +11.9% |
| Gross profit / gross margin | $120.0 / 50.6% | $97.8 / 46.1% | Margin +4.5 points |
| Operating income / margin | $44.4 / 18.7% | $32.9 / 15.5% | Income +34.7% |
| Continuing-operations income | $30.1 | $25.5 | +17.9% |
| Net income | $61.6 | $24.7 | +149.2% |
| Diluted EPS | $1.10 | $0.42 | +161.9% |
| Operating cash flow | $(5.2) | $30.2 | Down $35.3 |
| Capital expenditures | $3.9 | $5.8 |
Continuing revenue growth reflected broad-based demand, with tangible-product sales up 12.2%; hardware sales rose 13.0% and printer unit shipments increased 16.3%. Average printer selling price declined 4.2% to $524. Gross-margin improvement reflected higher volume, lower material and freight costs, outsourcing of printer production, and ongoing cost reductions. Operating expenses rose 16.7%, led by selling and marketing, R&D, and general and administrative costs.
Net income included $31.5 million of income from discontinued operations, principally the Navis sale gain. The gain on sale was $67.2 million before $25.1 million of tax expense; discontinued businesses also recorded an operating loss. Thus, net income growth substantially exceeded growth in continuing-operations income.
At April 2, 2011, cash, restricted cash, and short- and long-term investments totaled $375.4 million. Current assets were $548.5 million and current liabilities were $128.0 million. Total liabilities were $139.8 million; the filing reports no borrowings or debt balance. Stockholders’ equity was $754.4 million. The company repurchased 1.1 million shares for $41.6 million during the quarter.
Material changes and significant transactions
- Zebra completed the sale of its Navis marine terminal solutions business and related WhereNet marine product line to Cargotec on March 18, 2011, for approximately $189 million in cash. The company recorded $24.6 million in buyer receivables held in escrow, split equally between short- and long-term receivables and subject to purchase-agreement adjustments.
- Continuing operations generated negative operating cash flow despite higher earnings. Management cited inventory purchases and benefit-accrual payments; cash flow also reflected movements in receivables, accrued liabilities, deferred revenue, and taxes.
- The effective tax rate rose to 32.1% from 24.1%. The prior-year rate benefited from a $2.8 million adjustment related to prior-year intercompany-profit taxes.
- ScanSource, the largest customer, represented 19.6% of sales, up from 18.3%. No other customer accounted for 10% or more.
Outlook, commentary, and risks
- Management said existing capital resources and funds generated from operations should be sufficient for anticipated capital requirements. No numerical revenue or earnings guidance is provided.
- Management expected the Japan earthquake, tsunami, and nuclear crisis to have a minimal revenue effect, but anticipated additional engineering and shipping costs over the next three quarters as component supplies were restored. The company had not experienced shipment disruption at the time of filing, but warned that supply constraints could materially affect results, financial condition, or cash flows.
- Other identified risks include product and technology competition, manufacturing-cost control, market and interest-rate conditions, foreign-exchange exposure, and intellectual-property litigation. The company uses derivatives for hedging, not speculation; foreign-exchange movements reduced Q1 sales by $0.4 million and gross profit by $0.3 million.
- Three auction-rate securities had failed auctions. Their estimated fair value was $5.6 million; management classified two securities’ declines as temporary and one as other-than-temporary impaired previously. The company stated it intended and was able to hold the securities.
- Exit and restructuring costs were $1.9 million, mainly related to WhereNet restructuring and relocation of administrative and accounting functions. Management believed ordinary-course legal proceedings would not have a material adverse impact, while noting inherent uncertainty.
Important facts for investors to verify
- Separate underlying continuing-operations performance from the one-time Navis disposal gain when assessing earnings and EPS.
- Track whether operating cash flow recovers and whether inventory, accrued liabilities, deferred revenue, and tax payments continue to absorb cash.
- Monitor the resolution and final adjustments of the $24.6 million escrow receivable and any related sale contingencies.
- Assess the persistence of gross-margin gains against lower average printer prices, rising operating expenses, and expected Japan-related costs.
- Review customer concentration, component availability, and valuation/liquidity developments for the failed-auction securities.