Zebra Technologies Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 30, 2013; comparable period ended March 31, 2012. Financial statement amounts below are in millions of dollars unless stated otherwise. Zebra sells printers and related hardware, supplies, services, and software.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $236.9 | $243.9 | Down 2.8% |
| Gross profit / margin | $113.1 / 47.7% | $119.9 / 49.2% | Profit down 5.7%; margin down 1.5 points |
| Operating income / margin | $28.2 / 11.9% | $42.0 / 17.3% | Down 32.9% |
| Net income / margin | $23.5 / 9.9% | $30.2 / 12.4% | Down 22.0% |
| Diluted EPS | $0.46 | $0.58 | Down 20.7% |
| Operating cash flow | $24.2 | $36.6 | Down $12.4 |
Cash and investments totaled $417.6 million at March 30, 2013, versus $394.1 million at December 31, 2012. Cash and cash equivalents were $49.6 million; current assets were $730.1 million and current liabilities $79.9 million. The balance sheet shows no borrowings or debt line item. Total liabilities were $97.2 million and stockholders’ equity was $886.4 million.
Performance drivers and changes
- Tangible-product sales fell 3.2%; services and software revenue rose 3.7%. By product category, hardware sales declined 8.0%, while supplies increased 14.3%.
- Management attributed lower sales chiefly to a weak European economy and reduced sales to significant customers. EMEA sales fell 9.8%, Asia-Pacific sales 0.7%, and total international sales 5.5%; North America grew 0.9% and Latin America 3.8%.
- Printer shipments increased 0.7% to 299,633 units, but average selling price fell 6.7% to $469, reflecting a mix shift toward lower-priced products. Management said pricing within product categories remained stable.
- Gross margin declined amid lower sales in EMEA and Asia-Pacific and product-mix changes. Operating expenses rose 9.0%, including higher compensation, professional-services, project, and travel costs, as well as increased amortization and $1.9 million of restructuring costs.
- The effective tax rate fell to 18.2% from 28.0%, reflecting a greater share of profits in lower-tax international jurisdictions, a new international subsidiary structure, and a retroactive U.S. R&D tax-credit benefit of about $0.4 million.
Liquidity, outlook, risks, and unusual items
- Cash flow from operations was $24.2 million. Investing activities used $41.8 million, primarily reflecting net purchases of investments and marketable securities; financing activities provided $2.4 million. Cash and cash equivalents decreased $15.1 million during the quarter.
- Management said existing capital resources and operating cash generation should be sufficient for anticipated capital requirements. No numerical revenue or earnings guidance is provided in the filing.
- Management does not intend to repatriate foreign funds. Foreign cash and investments were $195.9 million; repatriation could increase the effective tax rate, while U.S. borrowing could increase interest expense.
- The 2012 restructuring plan includes manufacturing and supply-chain changes, including relocating a significant portion of supply-chain operations from the U.S. to China, and sales and corporate restructuring. Costs incurred through March 30 were $2.9 million; total expected costs are $6.3 million, including $3.5 million of additional expected costs.
- The investment portfolio includes a failed-auction auction-rate security carried as a long-term investment using valuation estimates. Management considers the decline temporary and states it has the intent and ability to hold the security.
- Three distributors each represented at least 10% of quarterly sales: 16.6%, 12.0%, and 11.9%. Management says ordinary-course legal proceedings are not expected to have a material adverse impact, while noting litigation outcomes are inherently uncertain.
- Key disclosed risks include global economic conditions, competition and technology changes, cost control, acquisition integration, investment-market and interest-rate exposure, foreign exchange, natural disasters, and litigation, particularly intellectual-property claims. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether hardware weakness, especially in EMEA and among significant distributors, persists and whether supply growth can offset it.
- Whether lower printer average selling prices and product mix continue to pressure gross margin.
- Actual restructuring costs and savings versus the $6.3 million estimated total cost.
- Valuation, liquidity, and recovery prospects for the failed-auction security, and any material change in the investment portfolio.
- Potential tax and liquidity implications of foreign cash holdings and any change in repatriation plans.