Zebra Technologies Corporation — Q3 2010 Form 10-Q
Reporting period: Quarter ended October 2, 2010; comparisons are with the quarter ended October 3, 2009. Nine-month figures compare the corresponding 2009 period. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where shown.
Business context and results
Zebra sells specialty printers, supplies, software and related enterprise solutions through two reportable segments: Specialty Printing Group (SPG) and Zebra Enterprise Solutions (ZES). Management attributed broad-based sales growth to stronger demand amid a global economic recovery. The interim results are not necessarily indicative of full-year results.
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Net sales | $246.5M | $200.8M | $708.7M | $581.1M |
| Gross profit / margin | $118.7M / 48.2% | $91.7M / 45.7% | $337.2M / 47.6% | $259.2M / 44.6% |
| Operating income / margin | $38.9M / 15.8% | $15.2M / 7.6% | $103.4M / 14.6% | $42.6M / 7.3% |
| Net income | $26.2M | $11.1M | $73.6M | $29.5M |
| Diluted EPS | $0.46 | $0.19 | $1.28 | $0.49 |
| Operating cash flow | Not presented by quarter | $101.7M | $63.0M |
Financial position and cash flows
- At October 2, 2010, cash and cash equivalents were $47.4M; restricted cash was $1.6M; and investments and marketable securities totaled $213.1M. Together these were $262.2M, versus $246.7M at December 31, 2009.
- Current assets were $455.7M and current liabilities $128.4M. The balance sheet shows no interest-bearing debt.
- Nine-month investing cash outflow was $33.7M, including $23.8M of property and equipment purchases. Financing cash outflow was $59.5M, including $67.4M of treasury-share purchases. Cash and cash equivalents increased $8.5M to $47.4M.
- Management said existing capital resources and funds generated from operations should be sufficient for anticipated capital requirements.
Material changes and segment performance
- Q3 sales rose 22.8%; tangible product sales increased 26.5%, while services and software declined 2.9%. Hardware sales grew 36.8%, and printer unit volume increased about 32%.
- Gross margin improved, which management attributed to higher volume, a favorable product mix, outsourced manufacturing and cost control. These benefits were partly offset by higher freight costs ($3.7M for Q3; $14.8M for nine months) and adverse currency effects on gross profit ($5.8M for Q3; $6.5M for nine months).
- SPG Q3 sales increased 23.3% to $222.8M and operating income rose to $60.1M from $36.7M. Printer shipments increased 31.9%; average selling price rose 2.8% to $545.
- ZES Q3 sales increased 18.3% to $23.7M, but its operating loss widened to $4.9M from $2.9M. Management cited customer implementation delays affecting installation and license revenue, as well as an unfavorable sales mix. For nine months, ZES sales increased 5.1%, while its operating loss widened to $14.2M from $9.8M.
- Operating expenses increased 4.4% in Q3 and 7.9% for nine months. Lower restructuring and integration charges helped offset increased selling, marketing and R&D spending. The manufacturing outsourcing program and related restructuring were reported complete by the second quarter of 2010.
Outlook, risks and unusual items
- The filing provides no numerical revenue, earnings or margin guidance. Management described demand as strong for a third consecutive quarter but did not give a quantified forecast.
- Foreign exchange remains a notable exposure: international markets represented 56.9% of Q3 sales, and currency movements reduced EMEA sales by $6.6M in the quarter. Zebra uses currency derivatives to hedge exposures.
- ScanSource, Inc. accounted for 17.1% of Q3 sales and 17.5% of nine-month sales. No other customer represented 10% or more.
- Three auction-rate securities remained subject to failed auctions, with a total Level 3 fair value of $5.6M. One security had previously been deemed other-than-temporarily impaired; management considered declines on the others temporary and said it intended and was able to hold them. One other security was redeemed at par in June 2010 for $1.65M.
- The nine-month effective tax rate was 29.7%, versus 32.0% in 2009, including a $2.8M reduction in federal taxes related to prior-year intercompany inventory adjustments. Q3 effective tax rate was 32.9%, compared with 32.0%.
- Legal proceedings arise in the ordinary course of business; management did not expect their outcomes, individually or together, to materially adversely affect the company. State tax years 2006–2009 remained open to examination.
- New accounting guidance on multiple-deliverable and software-related revenue arrangements was due to apply prospectively to qualifying arrangements; Zebra had not determined its effect. Management also identified product acceptance and competition, cost control and outsourced manufacturing, acquisitions, investment-market conditions, foreign exchange and intellectual-property litigation as risks.
- After quarter-end, the board approved an amendment to executive employment agreements intended to provide that any severance payments would commence by the 60th day after termination.
Important facts for investors to verify
- Whether hardware-led sales growth and improved gross margins continued after the quarter, and how freight and currency pressures evolved.
- Whether ZES project delays were resolved and the segment’s operating losses narrowed.
- Whether receivables and inventory growth—up $14.5M and $16.0M, respectively, in nine-month operating cash-flow adjustments—converted into cash without increased collection or obsolescence issues.
- The valuation and liquidity implications of the remaining failed-auction securities and the portfolio’s interest-rate and credit exposures.
- The sustainability of earnings in light of the one-time tax benefit, share repurchases and ScanSource customer concentration.