Zebra Technologies Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; comparisons are to the corresponding periods ended July 2, 2011. Unless stated otherwise, dollar amounts below are in millions.
Business context and financial performance
Zebra sells printing hardware, supplies, and related services and software. Results reflect modest sales growth, with higher printer volumes offset in part by lower average selling prices, foreign-exchange headwinds, and increased operating expenses.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $247.1 | $245.5 | $491.0 | $482.8 |
| Gross profit / margin | $120.4 / 48.7% | $121.7 / 49.6% | $240.3 / 48.9% | $241.7 / 50.1% |
| Operating income / margin | $39.5 / 16.0% | $46.7 / 19.0% | $81.5 / 16.6% | $91.0 / 18.9% |
| Continuing-operations income | $30.4 | $33.2 | $60.5 | $63.3 |
| Net income | $30.7 | $33.0 | $60.8 | $94.6 |
| Diluted EPS | $0.59 | $0.60 | $1.17 | $1.71 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $84.7 | $7.5 |
Q2 sales rose 0.6%; six-month sales rose 1.7%. Six-month printer shipments increased 12.0%, while average printer selling price fell 10.1%, primarily due to product mix. Supplies sales increased 5.6% in the first half. Q2 North American sales grew 10.4%, while international sales declined 5.8%; management attributed $4.8 million of the quarter’s EMEA sales decline to currency movements. For the first half, unfavorable currency movements reduced gross profit by $5.2 million.
Liquidity, capital resources, and balance sheet
- At June 30, cash and cash equivalents were $105.4 million; short- and long-term investments and marketable securities totaled $281.5 million. Combined cash and investments were $386.8 million, versus $326.7 million at December 31, 2011.
- Current assets were $581.8 million and current liabilities $94.3 million. Total liabilities were $107.8 million; the balance sheet reports no debt balance.
- Six-month operating cash flow was $84.7 million. Investing activities provided $7.5 million and financing activities used $23.1 million, including $24.6 million for treasury-stock purchases. Capital expenditures were $10.6 million.
- Management said existing capital resources and operating cash generation were sufficient for anticipated requirements, including the subsequent LaserBand acquisition.
Changes, outlook, and notable items
- Q2 operating income declined 15.5%, as operating expenses increased 7.9% and gross margin narrowed by 0.9 percentage points. Higher selling and marketing, general and administrative, and acquisition costs contributed to expense growth; management linked spending to geographic expansion and market development.
- For the first half, operating income fell 10.5%. Net income fell 35.7%, chiefly because the prior-year period included $31.3 million of discontinued-operations income, including a gain related to the sale of Navis. First-half 2012 discontinued-operations income was $0.3 million.
- The effective tax rate was 25.8% for the first half, down from 30.2%. Management estimated a consolidated effective tax rate of 24.0%–25.0% for the second half of 2012, citing a new international subsidiary structure and a lower UK statutory rate.
- After quarter-end, Zebra completed its acquisition of LaserBand on July 13, 2012. The announced cash price was approximately $58.4 million, subject to working-capital adjustment; the company described the deal as expanding its healthcare and wristband offerings.
- A $13.8 million receivable remained from escrowed proceeds of the Navis sale, subject to adjustments under the sale agreement. The company also disclosed a failed-auction auction-rate security valued using valuation methods that include unobservable inputs; management considered its decline temporary and classified it as a long-term investment.
- Management reported no material change in market risk and said disclosure controls were effective. It believed ordinary-course legal proceedings would not have a material adverse effect, while noting outcomes remain uncertain.
Risks and contingencies
- Foreign exchange, international economic conditions, product acceptance and competition, manufacturing and operating costs, acquisition integration, investment-market conditions, and intellectual-property litigation were identified as risks.
- The smaller goodwill reporting unit’s estimated fair value exceeded carrying value by about 8% under the income approach. Management warned that a 1% discount-rate movement or modest operating deterioration could prompt further impairment testing; a resulting impairment charge could be up to $9.1 million.
- US federal income-tax audits for 2008–2010 were ongoing; multiple state tax years remained open to examination. The company said it did not intend to repatriate foreign-held funds, but repatriation or US financing could raise taxes or interest expense.
- Two distributors each accounted for at least 10% of sales: 20.8% and 10.6% in Q2 2012. Both were distributors, not end users.
Key facts for investors to verify
- Whether printer volume growth and supplies growth can offset lower average selling prices and sustain revenue growth.
- Whether gross and operating margins stabilize after foreign-exchange effects, product mix, and higher growth-related spending.
- Whether operating cash generation remains strong, and how the LaserBand purchase and remaining Navis escrow affect liquidity.
- Whether the smaller reporting unit’s goodwill headroom, tax audit exposures, auction-rate security valuation, and customer concentration change materially.
- How the second-half effective tax rate compares with management’s 24.0%–25.0% estimate; the filing provides no broader quantified earnings or revenue guidance.