Zebra Technologies Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter ended July 2, 2011; comparisons are with the quarter ended July 3, 2010. Six-month figures compare the corresponding periods. Amounts below are in millions of dollars, except per-share data and percentages.
Business context and results
Zebra sells printers and related hardware, supplies, services and software. Q2 marked its sixth consecutive quarter of year-over-year sales growth. Results reflect continuing operations unless noted; Navis and certain other operations were classified as discontinued operations after divestitures.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $245.5 | $218.6 | $482.8 | $430.5 |
| Gross profit / margin | $121.7 / 49.6% | $99.4 / 45.5% | $241.7 / 50.1% | $197.2 / 45.8% |
| Operating income / margin | $46.7 / 19.0% | $31.9 / 14.6% | $91.0 / 18.9% | $64.9 / 15.1% |
| Income from continuing operations | $33.2 | $22.2 | $63.3 | $47.7 |
| Net income | $33.0 | $22.7 | $94.6 | $47.4 |
| Diluted EPS | $0.60 | $0.39 | $1.71 | $0.82 |
Financial position and cash flow
- At July 2, cash and cash equivalents were $93.0 million; cash, restricted cash and investments totaled $342.9 million. Total assets were $871.4 million, current liabilities $103.8 million, and stockholders’ equity $755.7 million.
- The balance sheet reports no borrowings or debt. Current assets were $567.8 million, about 5.5 times current liabilities.
- Six-month operating cash flow was $7.5 million, versus $67.3 million in 2010. Investing activities provided $111.3 million, including $161.0 million of sale proceeds; financing used $73.1 million, mainly $82.4 million for share repurchases. Cash and cash equivalents ended at $93.0 million, up from $46.2 million at year-end.
- Capital expenditures were $11.2 million for the first six months. Management stated existing capital resources and operating cash generation should be sufficient for anticipated capital requirements.
Material changes and notable items
- Q2 sales rose 12.3%; hardware grew 11.6%, supplies 13.8%, and services/software 18.2%. Printer shipments rose 2.1%, while average printer selling price increased 10.4%, attributed to product mix.
- International sales rose 27.3% in Q2, led by Asia-Pacific (+49.5%); North American sales declined 4.6%. Favorable currency movements added $9.5 million to Q2 sales and $8.3 million to gross profit. Lower material and freight costs and higher volumes also supported margin expansion.
- Operating expenses increased 11.2% in Q2 and 13.9% for the six months, reflecting compensation, project, professional-services, travel and other costs. Operating income nevertheless increased substantially as gross profit grew faster.
- Six-month net income includes $31.3 million of after-tax discontinued-operations income, including a $68.0 million pretax gain on the Navis sale, partly offset by $25.1 million tax expense on the sale. Continuing-operations income is a clearer indicator of ongoing-period earnings.
- Zebra sold Navis on March 18, 2011, for approximately $188.6 million cash. The company recorded $27.6 million in buyer receivables, held in escrow and subject to adjustment. On August 3, 2011, it agreed to sell proveo; proceeds were immaterial and accounting was to be reflected in Q3.
- The company repurchased 2.1 million shares for $82.4 million in the first half. Outstanding shares declined to 54.2 million from 55.7 million at year-end.
Outlook, risks and contingencies
- The filing provides no quantified revenue, earnings or margin guidance. Management cited broad-based demand, geographic expansion, new products and expanded sales channels as growth drivers.
- Management expected the Japan earthquake-related disruption to have minimal sales impact, but anticipated additional engineering and shipping costs as supplies normalized; it cautioned that supply-chain disruption could materially affect results, financial condition or cash flows.
- Other identified risks include foreign-exchange movements, market and interest-rate changes affecting the investment portfolio, product acceptance and competition, manufacturing costs and third-party assembly, acquisition integration, and litigation, particularly intellectual-property claims.
- Two auction-rate securities remained subject to failed auctions; one had previously been deemed other-than-temporarily impaired. Management classified them as long-term based on its intent and ability to hold them. The portfolio also includes Level 3 securities valued using estimates.
- Legal proceedings arise in the ordinary course; management believed their outcomes would not have a material adverse effect, while noting inherent uncertainty. U.S. federal tax audits covered 2008–2009, and multiple states could examine 2006–2010 tax years.
- The annual goodwill impairment test found no impairment as of the end of May 2011. Disclosure controls were reported effective; implementation of new EMEA financial systems and related controls remained subject to testing during 2011.
Most important facts to verify
- Whether continuing-operations growth and expanded gross margins persist after separating the Navis sale gain and discontinued operations.
- How much of reported sales and gross-profit growth came from foreign exchange, product mix and lower material and freight costs, and whether these drivers are sustainable.
- Why operating cash flow fell sharply year over year, including the effects of working-capital movements and the Navis divestiture.
- Collection and final adjustment of the $27.6 million escrow receivables, and the Q3 accounting and proceeds from the proveo sale.
- Potential supply-chain, cost and delivery effects from the Japan disruption, together with currency exposure and valuation/liquidity risks in investments.
- Whether share repurchases, tax-audit outcomes, legal matters or new system controls materially change liquidity, reported earnings or risk exposure.