Zebra Technologies Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter ended October 1, 2011; comparisons are with the quarter ended October 2, 2010. Nine-month results compare the same respective periods. Dollar figures are in millions unless noted.
Business context and reporting period
Zebra sells printing hardware and supplies, along with services and software. Management attributed growth to broad-based demand, geographic expansion, new products and wider sales channels. The company reported seven consecutive quarters of year-over-year sales growth. Results were reclassified to present Navis, proveo AG and other immaterial operations as discontinued operations.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Change |
|---|---|---|---|
| Net sales | $253.3 | $229.8 | +10.2% |
| Gross profit / margin | $123.6 / 48.8% | $109.2 / 47.5% | Margin +1.3 pts |
| Operating income / margin | $48.9 / 19.3% | $40.3 / 17.5% | +21.2% |
| Continuing-operations income | $34.2 | $27.2 | +25.5% |
| Net income | $45.0 | $26.2 | +72.1% |
| Diluted EPS, continuing operations / total | $0.64 / $0.84 | $0.48 / $0.46 |
- For the first nine months, sales were $736.2 million, up 11.5%; gross margin was 49.6% versus 46.4%; operating income was $139.9 million versus $105.2 million; and continuing-operations income was $97.5 million versus $75.0 million.
- Nine-month net income was $139.6 million versus $73.6 million, and diluted EPS was $2.55 versus $1.28. The increase includes material discontinued-operations and divestiture effects; discontinued operations contributed $42.1 million in the 2011 period.
- Q3 hardware sales rose 10.1%, supplies 13.1%, and services and software 1.0%. Printer shipments increased 18.7%, while average printer selling price declined 3.9% to $524, principally due to product mix.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $34.7 million, down from $101.7 million. Capital expenditures were $17.8 million, implying approximately $16.9 million of operating cash flow after capital expenditures, compared with approximately $78.0 million in 2010.
- Investing activities provided $98.4 million, including $161.2 million of proceeds from business sales; financing activities used $135.9 million, primarily due to $146.4 million of share repurchases. Cash and cash equivalents ended at $43.8 million.
- Cash, restricted cash and current and long-term investments totaled $299.0 million at October 1, 2011, versus $258.6 million at December 31, 2010. Current assets were $539.7 million and current liabilities $94.4 million.
- Total liabilities were $105.8 million. The balance sheet presents no debt balance; the filing text does not provide a separate debt discussion or debt figure.
- Accounts receivable rose to $162.3 million from $130.1 million, and net inventory to $120.4 million from $113.0 million. Inventory reserves increased to $14.2 million from $9.8 million.
Material changes, outlook and risks
- Management cited higher volumes, lower raw-material costs and favorable foreign exchange as contributors to Q3 gross-margin expansion. Foreign exchange added an estimated $5.0 million to Q3 gross profit; the stronger euro also increased reported sales in Europe, Middle East and Africa.
- International sales rose 16.7% in Q3 and represented 58.2% of sales; North American sales increased 2.4%. For nine months, Asia-Pacific sales grew 35.5% and international sales 19.5%.
- Navis was sold to Cargotec on March 18, 2011; the transaction price was approximately $188.6 million in cash. A $27.6 million buyer receivable represented funds held in escrow subject to adjustment. Zebra sold proveo AG in August and recorded a $1.2 million loss on that divestiture. The nine-month discontinued-operations result includes a $66.8 million gain on sale and related tax effects.
- Q3 operating expenses rose 8.4%, slower than sales growth; management attributed expense increases mainly to staffing and business-development costs. Nine-month restructuring and exit costs were $2.1 million.
- Management said existing capital resources and operating cash generation should fund anticipated capital needs. No specific earnings or revenue guidance was provided in the filing text.
- Risks noted include foreign-exchange exposure, investment-market and interest-rate conditions, product acceptance and competition, cost control, litigation and potential supply-chain effects from the Japan earthquake and related events. Management expected a minimal sales effect from Japan but anticipated possible additional engineering and shipping costs; it could not rule out a material adverse impact.
- Customer A accounted for 22.1% of Q3 sales (20.2% for nine months); Customer B represented 9.7% and 10.4%, respectively. Zebra reported ongoing U.S. federal tax audits for 2008–2009 and open state tax years 2006–2010. Ordinary-course legal proceedings were not expected by management to have a material adverse effect.
- Two auction-rate securities remained subject to failed auctions; one security’s remaining $326,000 carrying value was written down to zero in Q3. Management reported no material change in market risk and concluded disclosure controls were effective.
Important facts for investors to verify
- How much of reported earnings growth reflects continuing operations versus business-sale gains and related tax benefits, and how discontinued operations will affect comparisons.
- Whether operating cash flow improves after the sharp year-over-year decline, including the effect of working-capital movements and divestitures.
- The collectability and final adjustment of the $27.6 million Navis escrow receivable.
- Whether international growth, foreign-exchange benefits and improving gross margins persist, particularly given slower North American growth and lower Q3 printer average selling prices.
- The implications of the large share-repurchase program for liquidity, share count and capital allocation, alongside the customer concentration and Japan-related supply risks.