Zebra Technologies Corporation — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010, with fourth-quarter comparisons to the three months ended December 31, 2009. Unless noted, amounts are U.S. dollars.
Business context
Zebra designs and sells specialty thermal and card printers, printing supplies and software, and asset-tracking solutions. Its two reported segments were Specialty Printing Group (SPG) and Zebra Enterprise Solutions (ZES). Printer assembly was fully transferred to third-party manufacturer Jabil in 2010. After year-end, Zebra agreed to sell Navis and the WhereNet Marine Terminal Solution software product line; the remaining location-tracking business was to be retained.
Financial performance
| Metric | FY 2010 | FY 2009 | Change |
|---|---|---|---|
| Net sales | $956.8 million | $803.6 million | +19.1% |
| Gross profit / margin | $460.9 million / 48.2% | $360.7 million / 44.9% | Margin +3.3 percentage points |
| Operating income | $143.9 million | $68.8 million | +109.1% |
| Net income | $101.8 million | $47.1 million | +116.1% |
| Diluted EPS | $1.77 | $0.79 | — |
| Cash from operations | $140.5 million | $105.7 million | — |
| Capital expenditures | $30.7 million | $24.9 million | — |
FY 2010 sales growth was led by hardware, up 26.4%; supplies rose 7.6%, while service and software declined 0.9%. Printer shipments increased 24.4% to 1.06 million units; average selling price rose 2.1% to $533. International sales were 57.4% of total sales, versus 54.9% in 2009. Management attributed improved gross margin to greater volume, favorable product mix, cost controls and outsourced production; higher freight costs and unfavorable currency movements were offsets.
SPG generated $871.0 million in sales and $229.9 million in operating income. ZES generated $85.8 million in sales but recorded an operating loss of $19.6 million, wider than its $15.3 million loss in 2009. ZES sales rose 5.9%, but gross margin declined amid product-mix changes and higher costs.
Fourth-quarter results
Q4 net sales increased 11.5% to $248.2 million; operating income rose 54.1% to $40.4 million and net income rose 60.1% to $28.2 million. Diluted EPS was $0.50, compared with $0.30. Gross margin improved to 49.8% from 45.6%. Hardware sales increased 14.8%; printer unit shipments rose 13.3%. International sales grew 20.0%, while North American sales were nearly flat (+0.8%). Management cited broad-based demand recovery and mix/volume benefits. ZES sales grew 8.3%, but the segment remained loss-making, with a $5.4 million operating loss.
Liquidity, debt and capital allocation
At December 31, 2010, cash and cash equivalents were $47.5 million; cash, restricted cash, investments and marketable securities totaled $259.9 million. Working capital was $340.3 million, total assets $878.9 million and stockholders’ equity $730.0 million. No borrowings were outstanding under the $100 million revolving credit facility; $3.9 million of letters of credit reduced available capacity. Management stated that available resources and operating cash generation were sufficient for anticipated capital needs.
Zebra repurchased 3.35 million shares for $102.1 million during 2010. It did not anticipate cash dividends in the foreseeable future. Contractual obligations totaled $154.7 million, including $69.7 million of purchase obligations and $48.0 million of operating leases.
Outlook, material developments and risks
- No quantified revenue or earnings guidance is provided in the filing. Management described demand as improving with the global economic recovery and continued investment in product development and international growth.
- On January 28, 2011, Zebra agreed to sell Navis and the marine terminal software product line to Cargotec for approximately $190 million in cash. Closing was expected in Q1 2011; the 2010 financial statements still include these operations and do not classify them as discontinued operations.
- Inventory increased $33.9 million during 2010, as raw materials and finished goods rose to support higher demand. Monitor inventory conversion and obsolescence risk.
- Zebra is dependent on Jabil for final printer assembly and also identifies reliance on sole-source component suppliers as a risk. Disruption could constrain supply and customer delivery.
- The company is implementing a company-wide ERP system; implementation delays or failures could disrupt operations, reporting and internal processes. Management reported effective disclosure controls and internal control over financial reporting at year-end.
- Foreign currency movements reduced 2010 sales in EMEA by $13.7 million and gross profit by $12.2 million, according to management. International exposure, market competition, technology shifts and economic conditions remain key risks.
- A Brazilian former reseller’s lawsuit seeking unspecified damages remained pending; Zebra said it was vigorously defending the matter and did not expect a material adverse impact. The filing also describes ongoing tax examinations and other ordinary-course legal matters.
- Unusual items included $4.2 million of 2010 exit/restructuring costs, a $1.1 million litigation settlement benefit, and no impairment charge in 2010. The major $157.6 million impairment charge was recorded in 2008.
Important facts for investors to verify
- Whether the Cargotec transaction closed as expected, final proceeds and which ZES assets and liabilities transferred.
- Post-sale revenue, margins and costs of the retained location-tracking business, given ZES’s continuing operating losses.
- Whether inventory growth translated into sales or led to excess/obsolete stock, and how cash conversion developed.
- Jabil’s manufacturing performance, supply continuity and any continuing transition or outsourcing costs.
- ERP implementation milestones and any effects on operations or financial reporting.
- Developments in the reseller litigation, tax examinations and the company’s foreign-exchange exposure.