Business Context and Reporting Period
Company: Zebra Technologies Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended October 3, 2009
Business Overview: Zebra operates in two segments: Specialty Printing Group (SPG), focusing on printers and supplies, and Zebra Enterprise Solutions (ZES), providing real-time locating and asset management solutions. The company is a large accelerated filer incorporated in Delaware.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Oct 3, 2009 | 9 Months Ended Oct 3, 2009 | 3 Months Ended Sep 27, 2008 | 9 Months Ended Sep 27, 2008 |
|---|---|---|---|---|
| Net Sales | $200,778 | $581,063 | $244,073 | $744,132 |
| Gross Profit | $91,698 | $259,243 | $117,786 | $368,416 |
| Gross Margin % | 45.7% | 44.6% | 48.3% | 49.5% |
| Operating Income | $15,150 | $41,709 | $40,680 | $117,003 |
| Net Income | $11,111 | $29,474 | $25,770 | $78,940 |
| Diluted EPS | $0.19 | $0.49 | $0.40 | $1.20 |
| Cash from Operations (9mo) | $62,983 | $80,506 | ||
| Cash & Equivalents (Oct 3, 2009) | $39,048 | $46,877 (Sep 27, 2008) | ||
| Total Investments (Oct 3, 2009) | $182,476 | $189,980 (Dec 31, 2008) |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 17.7% in the quarter and 21.9% year-to-date compared to 2008, primarily due to global economic conditions and a significant drop in hardware sales volume, particularly in high-performance printers.
- Profitability Compression: Operating income fell 62.8% in the quarter and 64.4% year-to-date. Gross margins contracted due to lower overhead absorption from reduced volumes and unfavorable product mix.
- Expense Management: Operating expenses decreased slightly (0.7% in the quarter) due to reduced staffing, lower commissions, and decreased travel. Amortization of intangibles dropped significantly due to impairments recorded in late 2008.
- Non-Operating Income: Other income improved significantly in 2009 compared to 2008, which included large writedowns of auction rate securities ($4.4M) and equity investments ($2.9M) in Q3 2008.
- Segment Performance:
- SPG: Sales down 17.3% (Q3) and 22.7% (YTD). Operating income declined 32.7% (Q3) and 42.6% (YTD).
- ZES: Sales down 21.9% (Q3) and 14.6% (YTD). Operating loss widened in the quarter but narrowed year-to-date due to cost containment.
Guidance, Outlook, and Risks
Management Commentary: Management attributes the decline to the challenging global economy. They note that outsourcing manufacturing has provided some margin benefits. The company continues to execute cost reduction initiatives, including lower staffing levels and reduced travel.
Liquidity and Capital Resources:
- Cash and marketable securities totaled approximately $223.3 million as of October 3, 2009.
- Operating cash flow provided $63.0 million for the nine months ended October 3, 2009.
- The company repurchased $49.6 million of treasury stock during the nine-month period.
- Management believes existing resources are sufficient to finance anticipated capital requirements.
Risks and Contingencies:
- Market Risk: Exposure to foreign currency fluctuations (Euro, Pound) and interest rate changes affecting the investment portfolio.
- Legal Proceedings: A lawsuit filed by Barcode Informatica, Ltd. regarding wrongful termination of reseller status; management believes claims are without merit.
- Investment Portfolio: Holds auction rate securities with failed auctions; fair values are estimated using broker quotations. One security was deemed other-than-temporarily impaired in 2008.
- Customer Concentration: ScanSource, Inc. accounted for 16.8% of net sales in the quarter and 14.9% year-to-date.
Investor Verification Checklist
- Inventory Levels: Verify the adequacy of inventory reserves ($9.9M) given the 16% drop in printer unit volumes and potential obsolescence risks.
- Investment Valuation: Review the fair value methodology for the $7.0M Level 3 assets (auction rate securities) and the intent to hold them to maturity.
- Restructuring Costs: Monitor the remaining expected exit costs of $4.7M related to facility closures and manufacturing transitions to China.
- Goodwill Impairment: Confirm the status of goodwill ($153.5M) following the 2008 impairment and the 2009 annual test which found no impairment.
- Revenue Recognition: Assess the impact of new FASB guidance (ASC 605/985) on multiple-deliverable arrangements effective in 2010.