Zebra Technologies Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter ended September 29, 2012; year-to-date figures cover the nine months ended that date. Comparative periods ended October 1, 2011. Amounts below are U.S. dollars unless stated otherwise.
Business context and financial performance
Zebra sells printing hardware, supplies, services and software. The quarter’s results included LaserBand, acquired in July 2012, while Navis and proveo results were reported as discontinued operations.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $252.0m | $253.3m | $743.0m | $736.2m |
| Gross profit / margin | $126.9m / 50.4% | $123.6m / 48.8% | $367.2m / 49.4% | $365.2m / 49.6% |
| Operating income / margin | $38.8m / 15.4% | $48.9m / 19.3% | $120.2m / 16.2% | $139.9m / 19.0% |
| Continuing-operations income | $26.6m | $34.2m | $87.1m | $97.5m |
| Net income | $27.1m | $45.0m | $87.9m | $139.6m |
| Diluted EPS | $0.52 | $0.84 | $1.69 | $2.55 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $135.0m | $34.7m |
Liquidity, capital and balance sheet
- At September 29, cash and cash equivalents were $52.3m; current and long-term investments and marketable securities totaled $316.5m. Cash plus investments totaled $368.8m.
- Current assets were $531.0m and current liabilities $93.1m, a current ratio of approximately 5.7x. Total liabilities were $107.7m. The balance sheet lists no borrowings at quarter-end.
- Nine-month investing cash outflow was $82.8m, including the $59.9m LaserBand acquisition; financing cash outflow was $36.3m, including $39.7m of share repurchases. Cash increased $15.8m over the period.
- Foreign subsidiaries held $153.7m of cash and investments. Management said it did not intend to repatriate these funds; repatriation could increase the tax rate.
Changes versus the prior comparable periods
- Q3 sales declined 0.5%: hardware sales fell 5.3%, partly offset by 17.6% growth in supplies and 5.1% growth in services and software. Printer shipments decreased 1.5%; average selling price fell 6.1%, primarily due to product mix.
- Q3 gross margin improved to 50.4% from 48.8%, which management attributed to lower overhead, freight and reserve costs; foreign exchange and product mix partly offset the improvement. Operating expenses rose 18.1%, including a $9.1m goodwill impairment. Excluding that charge, operating expenses rose 5.9% and operating income declined 2.0%.
- For the first nine months, sales rose 0.9%, led by 9.6% supplies growth, while hardware sales fell 1.2%. Printer shipments increased 7.1%, but average selling price decreased 8.7% with product mix. Gross margin eased to 49.4% from 49.6%; operating income fell 14.1%, or 7.6% excluding the impairment.
- Net income comparisons were also affected by discontinued operations: 2011 included substantial sale-related income, while 2012 discontinued-operations income was much smaller.
Outlook, risks and unusual items
- The filing provides no quantified forward guidance. Management cited a challenged business environment in EMEA and Asia-Pacific; North American and Latin American growth partly offset those declines. Currency movements reduced Q3 EMEA sales by $3.8m and nine-month EMEA sales by $10.3m, and reduced gross profit by $2.9m and $8.1m, respectively.
- Zebra recorded a preliminary $9.1m goodwill impairment after weaker-than-forecast results and lower expected growth in its smaller reporting unit. No goodwill remained in that unit after the charge; the estimate could change after detailed analysis.
- LaserBand was acquired for $59.9m cash. Its preliminary purchase-price allocation included $29.6m of intangible assets and $24.8m of goodwill; valuations were not final.
- On October 10, 2012, after quarter-end, Zebra entered a five-year, $250m revolving credit facility, replacing a $100m facility. It had not drawn on the new facility at closing. The agreement includes leverage and interest-coverage covenants and restrictions including limits on cash dividends.
- Management judged ordinary-course legal proceedings not likely to have a material adverse impact, while noting their inherent uncertainty. Other identified risks include product acceptance and technology changes, economic and regional conditions, acquisition integration, currency exposure, investment-market conditions, and intellectual-property litigation.
- Three distributors each represented at least 10% of sales in Q3: 20.8%, 11.2% and 10.5%. Zebra also reported a failed-auction auction-rate security whose market-value decline it considered temporary, and which it intended to hold.
Important facts for investors to verify
- Whether the smaller reporting unit’s impairment estimate or final LaserBand purchase-price allocation changed after the filing.
- Whether hardware demand, printer pricing and regional trends improved, particularly in EMEA and Asia-Pacific.
- How much of operating cash and investments is accessible in the U.S., given foreign-fund repatriation tax considerations.
- Whether the new credit facility was drawn and whether Zebra remained in compliance with its covenants.
- Whether distributor concentration, foreign-exchange exposure, or the valuation of the auction-rate security changed materially.