ZBRA

Business Context and Reporting Period

Company: Zebra Technologies Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 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 and asset management solutions. The company is a large accelerated filer based in Lincolnshire, Illinois.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 21.8% year-over-year to $192.6 million, driven by global economic conditions and a 30.1% drop in hardware sales volume. International sales declined 21.9%, while North American sales fell 21.7%.
• Profitability Compression: Operating income dropped 64.0% to $14.2 million, and net income fell 66.2% to $9.4 million. Gross margin contracted by 530 basis points due to lower volume, unfavorable product mix, and foreign exchange headwinds.
• Cash Flow Shift: Operating cash flow turned negative, using $1.2 million compared to providing $32.2 million in the prior year. This was primarily due to lower net income and significant payments of accrued liabilities and taxes.
• Segment Performance:
  • SPG: Sales fell 24.0% and operating income dropped 44.8% to $34.0 million.
  • ZES: Sales remained relatively flat (+1.5%), but the operating loss narrowed significantly from $7.1 million to $3.4 million due to cost reductions and lower amortization.
• Foreign Exchange: The stronger U.S. dollar negatively impacted sales by approximately $6.7 million and gross profit by $3.7 million. The company recorded a foreign exchange loss of $1.3 million compared to a gain of $0.7 million in the prior year.

Guidance, Outlook, and Risks

• Outlook: Management expects international sales to increase as a percentage of total sales over the foreseeable future due to under-penetration in emerging markets. However, customers in these regions show a preference for lower-priced products.
• Restructuring: The company is transitioning printer manufacturing to a third-party manufacturer (Jabil Circuit) in China, expected to be completed by the end of 2009. Total expected exit costs are $22.1 million, with $15.3 million incurred to date.
• Capital Allocation: Zebra continued share repurchases, buying 1.65 million shares for $28.6 million. The Board authorized an additional 3 million shares in February 2009.
• Investment Portfolio: The company holds auction rate securities where auctions have failed. One security was deemed other-than-temporarily impaired in Q4 2008 ($4.4 million charge). The remaining decline is considered temporary and recorded in other comprehensive income.
• Risks: Key risks include global economic conditions, foreign exchange rate fluctuations, the success of the manufacturing transition, and the outcome of pending litigation (including a dismissed claim in France and an ongoing suit in the U.S. regarding a Brazilian reseller).

Investor Verification Checklist

• Manufacturing Transition: Verify the timeline and cost implications of moving printer assembly to Jabil Circuit in China.
• Auction Rate Securities: Monitor the status of the failed auction rate securities and the potential for further impairment charges if the market does not recover.
• Product Mix: Assess the impact of the shift toward lower-priced products in international markets on long-term gross margins.
• Goodwill Impairment: Review the status of the $157.6 million impairment charge taken in Q4 2008 and whether further adjustments are required in 2009.
• Liquidity: Confirm that the shift to negative operating cash flow is temporary and that existing capital resources remain sufficient for operations and restructuring.