Business Context and Reporting Period
Company: Zebra Technologies Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 4, 2009
Business Overview: Zebra operates in two reportable segments: Specialty Printing Group (SPG), which manufactures printers and supplies, and Zebra Enterprise Solutions (ZES), which provides real-time locating systems and software solutions. The company is a large accelerated filer incorporated in Delaware.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended July 4, 2009 |
Six Months Ended July 4, 2009 |
|---|---|---|
| Net Sales | $187,676 | $380,285 |
| Gross Profit | $81,736 | $167,545 |
| Gross Margin | 43.6% | 44.1% |
| Operating Income | $12,385 | $26,559 |
| Net Income | $9,011 | $18,363 |
| Diluted EPS | $0.15 | $0.31 |
| Cash and Cash Equivalents | $44,792 | $44,792 |
| Total Investments & Securities | $160,530 | $160,530 |
| Operating Cash Flow (6mo) | N/A | $32,428 |
Liquidity: As of July 4, 2009, total cash, restricted cash, and investments amounted to approximately $207 million. The company reported no long-term debt on the balance sheet.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 26.0% for the quarter and 24.0% for the six-month period compared to the same periods in 2008. This was attributed to global economic conditions and a decline in hardware sales volume, particularly in high-performance and mid-range printers.
- Profitability Compression: Net income fell 64.7% for the quarter and 65.5% year-to-date. Operating income dropped 66.5% for the quarter. Gross margins contracted from 50.3% to 43.6% (quarterly) due to lower sales volume, unfavorable product mix, and foreign exchange headwinds.
- Expense Reduction: Operating expenses decreased 23.6% for the quarter, driven by lower staffing levels, reduced travel, and lower amortization of intangible assets following impairment charges in late 2008.
- Segment Performance:
- SPG: Sales down 26.6% (quarterly); Operating income down 49.5%.
- ZES: Sales down 21.0% (quarterly); Operating loss narrowed to $4.3 million from $7.6 million in the prior year quarter.
Outlook, Risks, and Unusual Items
- Manufacturing Transition: The company is transferring final printer assembly to a third-party manufacturer (Jabil Circuit) in China, expected to be completed by the end of 2009. This is intended to optimize the supply chain.
- Restructuring Costs: Exit, restructuring, and integration costs for the six months ended July 4, 2009, totaled $5.9 million. Total expected costs for these initiatives are approximately $22.8 million.
- Asset Impairment: The company recorded a net credit of $291,000 in asset impairment charges for the quarter, reversing a portion of the $157.6 million impairment recognized in Q4 2008. Management determined goodwill was not impaired as of May 2009.
- Investment Portfolio: The company holds auction rate securities with failed auctions. One security was deemed other-than-temporarily impaired in 2008; others are classified as long-term with temporary declines recorded in other comprehensive income.
- Risk Factors: Key risks include global economic conditions, foreign exchange rate fluctuations (stronger USD negatively impacted sales), and the success of the manufacturing transition.
Investor Verification Checklist
- Revenue Mix: Verify the sustainability of the shift toward lower-priced products in emerging markets and the impact on long-term margins.
- Manufacturing Outsourcing: Monitor the timeline and cost savings associated with the transition of printer assembly to Jabil Circuit in China.
- Investment Liquidity: Assess the valuation and liquidity of the auction rate securities held in the investment portfolio given the failed auctions.
- Customer Concentration: Note that ScanSource, Inc. accounted for 13.6% of sales in the quarter; verify the stability of this key distributor relationship.
- Restructuring Completion: Track the remaining $5.1 million in expected exit costs to ensure no further unexpected charges.