Zebra Technologies Corporation — Q3 2013 Form 10-Q
Business context and reporting period. The filing covers the quarter ended September 28, 2013, and the nine months then ended. Zebra sells hardware, supplies, and services and software. Unless otherwise stated, financial amounts below are in millions of dollars; the filing presents financial statements in thousands.
Financial performance and condition
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $263.5 | $252.0 | $753.6 | $743.0 |
| Gross profit / margin | $128.6 / 48.8% | $126.9 / 50.4% | $362.6 / 48.1% | $367.2 / 49.4% |
| Operating income / margin | $46.8 / 17.7% | $38.8 / 15.4% | $111.2 / 14.7% | $120.2 / 16.2% |
| Net income | $38.6 | $27.1 | $92.7 | $87.9 |
| Diluted EPS | $0.76 | $0.52 | $1.81 | $1.69 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $137.0 | $135.0 |
Q3 sales rose 4.6%; supplies increased 11.7%, services and software 11.0%, and hardware 2.0%. Nine-month sales grew 1.4%, while gross profit fell 1.3% and operating income fell 7.5%. Nine-month results included $3.5 million of restructuring costs in 2013; 2012 included a $9.1 million impairment charge.
At September 28, cash and cash equivalents were $64.2 million and investments and marketable securities totaled $402.1 million, for combined cash and investments of $466.3 million. Current assets were $779.5 million and current liabilities $98.6 million (approximately 7.9x current-asset coverage). Total liabilities were $117.3 million; the presented balance sheet reports no interest-bearing debt. Cash and investments held by foreign subsidiaries were $232.2 million and generally are not intended for repatriation.
Nine-month investing cash outflow was $90.0 million and financing cash outflow was $47.8 million, including $58.5 million of treasury-stock purchases. Cash and cash equivalents ended at $64.2 million, down $0.5 million from year-end 2012. Management said existing resources and operating cash generation should fund anticipated capital requirements.
Changes, outlook, and notable items
- Margins and earnings: Q3 gross margin declined 1.6 percentage points, attributed to product mix and higher freight-in costs; favorable currency movements added $2.3 million to quarterly gross profit. Nine-month margin fell 1.3 points, reflecting product mix, special pricing on large transactions, lower average selling prices, and freight costs; favorable currency added $3.4 million to gross profit.
- Sales mix and pricing: Q3 printer shipments rose 4.6%, while average selling price declined 2.0% year over year. Nine-month shipments rose 1.6%, but average selling price declined 3.5%. Supplies growth reflected organic growth and the LaserBand acquisition completed in 2012. Currency and hedging reduced sales by $0.9 million in Q3 and $4.8 million year to date.
- Restructuring outlook: Actions cover Location Solutions, manufacturing and supply-chain operations, sales, and corporate functions. Zebra estimated total costs of $6.9 million, including $2.4 million of additional expected costs. Management anticipated $4.0 million annual Location Solutions savings fully realized by Q1 2014, and $2.6 million of cost-of-sales savings from supply-chain changes expected to be completed by year-end 2013.
- Taxes and unusual items: Effective tax rates were 18.1% for Q3 and 18.4% year to date, versus 31.0% and 27.5%. Lower-tax international earnings and tax-planning benefits contributed; year-to-date results also included a $0.4 million R&D credit benefit and a one-time $0.7 million tax benefit from filing the 2012 return. Other income included a net $1.6 million favorable litigation settlement related to a prior-year investment loss.
- Liquidity and exposures: Most operating income earned abroad is treated as permanently reinvested; repatriation could increase taxes, while U.S. borrowing would add interest expense. Three distributors each represented at least 10% of sales in Q3 (17.5%, 12.9%, and 12.6%). The filing identifies market acceptance, competition and technology changes, global conditions, cost control, acquisition integration, investment-market and foreign-exchange risks, natural disasters, and litigation as risks. Management reported no material change in market risk during the quarter.
- Contingencies and controls: Zebra said ordinary-course legal matters were not expected to materially adversely affect the business, cash flows, financial position, or results, while noting inherent uncertainty. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
The filing provides no specific forward-looking sales or earnings guidance. It cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether Q3 supply and service growth can continue and offset weaker hardware pricing and the year-to-date gross-margin decline.
- Progress, remaining costs, timing, and realized savings from the restructuring and supply-chain plans.
- Cash and investment availability, maturity profile, and potential tax cost of repatriating foreign-held funds.
- Exposure to the three major distributor customers and any changes in their share of sales.
- Whether the reduced effective tax rate and one-time tax benefits are sustainable; review tax audits and foreign-exchange hedge effects.
- Developments in legal proceedings and the valuation/liquidity of the failed-auction auction-rate security, reported as a $2.6 million long-term investment.