|
|
 | | | |
- close
- close
- close
- close
| |||||||||
Zebra Technologies 10-Q 2010 Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q
For the quarterly period ended October 2, 2010 OR
For the transition period from to Commission File Number: 000-19406 Zebra Technologies Corporation (Exact name of registrant as specified in its charter)
475 Half Day Road, Suite 500, Lincolnshire, IL 60069 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (847) 634-6700 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x As of October 29, 2010, there were 56,528,911 shares of Class A Common Stock, $.01 par value, outstanding.
Table of Contents
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES QUARTER ENDED OCTOBER 2, 2010 INDEX
2
Table of Contents
PART I - FINANCIAL INFORMATION
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands)
See accompanying notes to consolidated financial statements.
3
Table of Contents
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Amounts in thousands, except per share data) (Unaudited)
See accompanying notes to consolidated financial statements.
4
Table of Contents
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
See accompanying notes to consolidated financial statements.
5
Table of Contents
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 – Basis of Presentation Management prepared these unaudited interim consolidated financial statements for Zebra Technologies Corporation and subsidiaries (“Zebra”) according to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles (“GAAP”) for complete financial statements. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in Zebra’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009. The consolidated balance sheet as of December 31, 2009 in this Form 10-Q is taken from the audited consolidated balance sheet in our Form 10-K. These interim financial statements include all adjustments (of a normal, recurring nature) necessary to present fairly Zebra’s consolidated financial position as of October 2, 2010, the consolidated statement of earnings for the three and nine months ended October 2, 2010 and October 3, 2009, and consolidated statement of cash flows for the nine months ended October 2, 2010 and October 3, 2009. These results, however, are not necessarily indicative of results for the full year. Reclassifications. Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year’s presentation. For the three and nine months ended October 3, 2009, general and administrative expenses of $602,000 and $1,799,000 were reclassified to selling and marketing expenses. For the three and nine months ended October 3, 2009, general and administrative expenses of $299,000 and $979,000 were reclassified to research and development expenses. These reclassifications were made to better reflect costs as they relate to their functional areas. In addition, write-offs of an equity investment in an international technology company in the amount of $88,000 and $855,000 for the three and nine months ended October 3, 2009 that were previously presented netted against asset impairment charges were reclassified to investment income in order to be consistent with the 2009 year end presentation. Prior period amounts will differ in the above categories from amounts previously reported. Note 2 – Fair Value Measurements Financial assets and liabilities are to be measured using inputs from three levels of the fair value hierarchy. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Zebra uses a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels: Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data. Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in the assessment of fair value. Included in our investment portfolio are three auction rate security instruments. These instruments are classified as available-for-sale securities and are reflected at fair value. Due to events in credit markets, however, the auction events for the instruments held by Zebra as of October 2, 2010, are failed. Therefore, the fair values of these securities are estimated utilizing broker quotations, discounted cash flow analysis or other types of valuation adjustment methodologies at October 2, 2010. These analyses consider, among other items, the collateral underlying the security instruments, the creditworthiness of the counterparty, the timing of expected future cash flows, estimates of the next time the security is expected to have a successful auction, and Zebra’s intent and ability to hold such securities until credit markets improve.
6
Table of ContentsThese securities were also compared, when possible, to other securities with similar characteristics. In June 2010, one of the four auction rate securities held at the end of the first quarter of 2010 was called by the issuer and redeemed at par value. Zebra received proceeds in the amount of $1,650,000 and adjusted other comprehensive income by $200,000. See Level 3 table below for more details. Of the three auction rate security instruments still held, Zebra deemed one to be other than temporarily impaired and recorded the market value decline in 2008. The decline in the market value of the other securities is considered temporary and has been recorded in accumulated other comprehensive income (loss) on Zebra’s balance sheet. Since Zebra has the intent and ability to hold these securities until they are sold at auction, redeemed at carrying value or reach maturity, we have classified them as long-term investments on the balance sheet. Financial assets and liabilities carried at fair value as of October 2, 2010, are classified below (in thousands):
Financial assets and liabilities carried at fair value as of December 31, 2009, are classified below (in thousands):
7
Table of Contents
The following table presents Zebra’s activity for assets measured at fair value on a recurring basis using significant unobservable inputs, Level 3, for the three month periods (in thousands):
The following is a summary of short-term and long-term investments at October 2, 2010 and December 31, 2009 (in thousands):
8
Table of Contents
The maturity dates of investments are as follows (in thousands):
The carrying value for Zebra’s financial instruments classified as current assets (other than short-term investments) and current liabilities approximate fair value due to short maturities. Note 3 – Investments and Marketable Securities We classify our investments in marketable debt securities as available-for-sale. As of October 2, 2010, all of our investments in marketable debt securities with maturities greater than one year are classified as long-term investments on the balance sheet due to our ability and intent to hold them until maturity. Changes in the market value of available-for-sale securities are reflected in the accumulated other comprehensive income caption of stockholders’ equity in the balance sheet, until we dispose of the securities. Once these securities are disposed of, either by sale or maturity, the accumulated changes in market value are transferred to investment income. On the statement of cash flows, changes in the balances of available-for-sale securities are shown as purchases, sales and maturities of investments and marketable securities under investing activities. Changes in market value of trading securities would be recorded in investment income as they occur, and the related statement of cash flows would include changes in the balances of trading securities as operating cash flows. Change in unrealized gains and losses on available-for-sale securities are included in these financial statements as follows (in thousands):
Note 4 – Inventories The components of inventories are as follows (in thousands):
9
Table of Contents
Note 5 – Goodwill and Other Intangible Assets Intangible asset data are as follows (in thousands):
During the second quarter of 2010, Zebra entered into an agreement with an international technology provider to acquire patents and patent rights related to card printer solutions technology. The agreement requires total consideration in the amount of € 2,400,000. Zebra has paid € 1,950,000 or $2,399,000 in accordance with the agreement through the end of September 2010, and has an obligation to pay an additional € 450,000 in the fourth quarter upon completion of the agreement. This agreement provides Zebra with a new distribution partner and enhanced technology solutions and software. Certain of our intangible assets including goodwill are denominated in foreign currency and, as such, include the effects of foreign currency translation. We test goodwill for impairment on an annual basis or more frequently if we believe indicators of impairment exist. Factors considered that may trigger an impairment review consist of:
If we believe that one or more of the above indicators of impairment have occurred, we perform an impairment test. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. We generally determine the fair value of our reporting units using three valuation methods: Income Approach – Discounted Cash Flow Analysis, Market Approach – Guideline Public Company Method and Market Approach – Comparative Transactions Method. If
10
Table of Contentsthe carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. We performed our annual impairment test in June 2010 and determined that our goodwill was not impaired as of the end of May 2010. Note 6 – Costs Associated with Exit or Disposal Activities In 2008, we announced plans to establish regional distribution and configuration centers, consolidate our supplier base, and transfer final assembly of thermal printers to Jabil Circuit, Inc., a global third-party electronics manufacturer. These actions are intended to optimize our global printer product supply chain by improving responsiveness to customer needs and increasing Zebra’s flexibility to meet emerging business opportunities. As a result, substantially all printer manufacturing in our Vernon Hills, Illinois, and Camarillo, California, facilities has been transferred to Jabil’s facility in Guangzhou, China, and there are no further related exit costs that are expected to be incurred. As of October 2, 2010, we have incurred the following exit costs (in thousands):
For the nine months ended October 2, 2010, we have incurred the following exit costs by segment (in thousands):
For the nine months ended October 3, 2009, we incurred the following exit, restructuring and integration costs by segment (in thousands):
11
Table of Contents
Liabilities and expenses related to exit activities were as follows (in thousands):
Liabilities related to exit activities are included in the accrued liabilities line item on the balance sheet. All current exit costs are included in operating expenses under the line item exit, restructuring and integration costs. Note 7 – Derivative Instruments In the normal course of business, portions of our operations are subject to fluctuations in currency values. We manage these risks using derivative financial instruments. We conduct business on a multinational basis in a wide variety of foreign currencies. Our exposure to market risk for changes in foreign currency exchange rates arises from international financing activities between subsidiaries, foreign currency denominated monetary assets and liabilities and transactions arising from international trade. Our objective is to preserve the economic value of non-functional currency denominated cash flows. We attempt to hedge transaction exposures with natural offsets to the fullest extent possible and, once these opportunities have been exhausted, through foreign exchange forward and option contracts with third parties. Credit and market risk Financial instruments, including derivatives, expose us to counter party credit risk for nonperformance and to market risk related to interest and currency exchange rates. We manage our exposure to counterparty credit risk through specific minimum credit standards, diversification of counterparties, and procedures to monitor concentrations of credit risk. Our counterparties in derivative transactions are commercial banks with significant experience using derivative instruments. We monitor the impact of market risk on the fair value and cash flows of our derivative and other financial instruments considering reasonably possible changes in interest rates and currency exchange rates and restrict the use of derivative financial instruments to hedging activities. We continually monitor the creditworthiness of our customers to which we grant credit terms in the normal course of business. The terms and conditions of our credit sales are designed to mitigate or eliminate concentrations of credit risk with any single customer. Our sales are not materially dependent on a single customer or a small group of customers. Fair Value of Derivative Instruments Zebra has determined that derivative instruments for hedges that have traded but have not settled are considered Level 1 in the fair value hierarchy, and hedges that have not traded are considered Level 2 in the fair value hierarchy. Derivative instruments are used to manage risk and are not used for trading or other speculative purposes, nor do we use leveraged derivative financial instruments. Our foreign currency exchange contracts are valued using broker quotations or market transactions, in either the listed or over-the-counter markets. Hedging of Net Assets We use forward contracts and options to manage exposure related to our pound and euro-denominated net assets. Forward contracts typically mature within three months after execution of the contracts. We record gains and losses on these contracts and options in income each quarter along with the transaction gains and losses related to our net asset positions, which would ordinarily offset each other. Summary financial information related to these activities included in our consolidated statement of earnings as other income (expense) is as follows (in thousands):
12
Table of Contents
Summary financial information related to the cash flow hedges is as follows (in thousands):
Hedging of Anticipated Sales We can manage the exchange rate risk of anticipated euro-denominated sales using purchased options, forward contracts, participating forwards and option collars. We designate these contracts as cash flow hedges which mature within twelve months after the execution of the contracts. Gains and losses on these contracts are deferred in other comprehensive income until the contracts are settled and the hedged sales are realized, the deferred gains or losses will then be reported as an increase or decrease to sales. Summary financial information related to the cash flow hedges of future revenues follows (in thousands, except percentages):
Forward contracts We record our forward contracts at fair value on our consolidated balance sheet as either other assets or other liabilities depending upon the fair value calculation as detailed in Note 2 of Zebra’s financial statements. The amounts recorded on our consolidated balance sheet are as follows (in thousands):
13
Table of Contents
Note 8 – Warranty In general, Zebra provides warranty coverage of one year on SPG printers against defects in material and workmanship. SPG printheads are warranted for nine months and batteries are warranted for twelve months. Warranty coverage for most ZES hardware products is similar, with coverage periods ranging from 90 days to one year depending on the nature of the product. Battery based products, such as location tags, are covered by a 30 day warranty. For ZES software products, the warranty period is generally 90 days and provides coverage against defects in material and workmanship as well as performance materially in compliance with the accompanying documentation. A provision for warranty expense is recorded at the time of shipment and adjusted quarterly based on historical warranty experience. The following table is a summary of Zebra’s accrued warranty obligation (in thousands):
In the European Union, we have an obligation to recycle printers. We reserve for this obligation based on the number of new printers sold after August 13, 2005, and printers sold prior to that date that are returned to us upon our sale of a new printer to a customer. The following is a summary of Zebra’s accrued recycling obligation (in thousands):
Note 9 – Contingencies We are subject to a variety of investigations, claims, suits and other legal proceedings that arise from time to time in the ordinary course of business, including but not limited to, intellectual property, employment, tort and breach of contract matters. We currently believe that the outcomes of such proceedings, individually and in the aggregate, will not have a material adverse impact on our business, cash flows, financial position, or results of operations. Any legal proceedings are subject to inherent uncertainties, and management’s view of these matters and their potential effects may change in the future. Note 10 – Changes to Benefit Programs Zebra has a Retirement Savings and Investment Plan (401(k) Plan), which is intended to qualify under Section 401(k) of the Internal Revenue Code. During the first quarter of 2009, Zebra announced changes to its 401(k) Plan, profit sharing plan and stock purchase plan. Qualified employees may participate in Zebra’s 401(k) Plan by contributing up to 15% of their gross earnings to the plan subject to certain Internal Revenue Service restrictions. Effective March 1, 2009, Zebra reduced the company match to each participant’s contribution from 6% of gross eligible earnings at the rate of 50%, to 3% of gross eligible earnings at the rate of 50%. Effective January 1, 2010, Zebra increased the company match to each participant’s contribution to 4% of gross eligible earnings. Zebra will match 100% of the first 2% of gross eligible earnings, and also match the next 4% of gross eligible earnings at the rate of 50%. Zebra may contribute additional amounts to its 401(k) Plan at the discretion of the Board of Directors, subject to certain legal limits. Zebra also has a discretionary profit-sharing plan for qualified employees, to which it contributes a percentage of eligible payroll each year. Zebra announced that it will suspend any contributions to the profit sharing plan for the 2009 plan year and plan years going forward. Participants are not permitted to make contributions under the discretionary profit-sharing plan.
14
Table of Contents
Note 11 – Stockholders’ Equity Share count and par value data related to stockholders’ equity are as follows:
During the nine-month period ended October 2, 2010, Zebra purchased 2,449,286 shares of common stock for $67,384,000 under board authorized share repurchase plans compared to the nine-month period ended October 3, 2009, in which Zebra purchased 2,579,630 shares of common stock for $49,609,000. A roll forward of Class A common shares outstanding is as follows:
Note 12 – Earnings Per Share Earnings per share were computed as follows (in thousands, except per share amounts):
15
Table of Contents
Potentially dilutive securities that were excluded from the earnings per share calculation consist of options with an exercise price greater than the average market closing price of the Class A common stock during the respective three and nine month periods. These options were as follows:
Note 13 – Equity-Based Compensation Zebra has an equity-based compensation plan and a stock purchase plan available for future grants. Zebra recognizes compensation costs using the straight-line method over the vesting period of 1 month to 5 years. The compensation expense and the related tax benefit for equity-based payments were included in the Consolidated Statement of Earnings as follows (in thousands):
Cash flows resulting from the tax benefits from tax deductions in excess of the compensation cost recognized (excess tax benefits) are classified as financing cash flows in the statement of cash flows. The tax benefits classified as financing cash flows for the nine months ended October 2, 2010 was $83,000 and for the nine months ended October 3, 2009, was $11,000. The fair value of equity-based compensation is estimated on the date of grant using a binomial model. Volatility is based on an average of the implied volatility in the open market and the annualized volatility of Zebra stock prices over our entire stock history. Stock option grants in the table below include both stock options, all of which were non-qualified, and stock appreciation rights (SAR) that will be settled in Zebra stock. The following table shows the weighted-average assumptions used for grants of stock options and SARs as well as the fair value of the grants based on those assumptions:
16
Table of Contents
SAR activity was as follows:
There were no equity grants of SARs during the three months ended October 2, 2010. The terms of the SARs are established under the 2006 Zebra Technologies Corporation Incentive Compensation Plan (the 2006 Plan) and the applicable SAR agreement. Once vested, a SAR entitles the holder to receive a payment equal to the difference between the per-share base price of the SAR and the fair market value of a share of Zebra stock on the date the SAR is exercised, multiplied by the number of SAR’s exercised. Exercised SARs are settled in whole shares of Zebra stock, and any fraction of a share is settled in cash. The SARs granted during the first nine months of 2010 vest annually in four equal amounts on each of the first four anniversaries of the grant date and expire 10 years after the grant date. The following table summarizes information about SARs outstanding at October 2, 2010:
Stock option activity was as follows:
17
Table of Contents
The following table summarizes information about stock options outstanding at October 2, 2010:
Restricted stock award activity, granted under the 2006 Plan, was as follows:
There were no equity grants of restricted stock awards during the three months ended October 2, 2010. As of October 2, 2010, there was $20,576,000 of unearned compensation cost related to awards granted under Zebra’s equity-based compensation plans, which is expected to be recognized over a weighted-average period of 2.6 years. The fair value of the purchase rights of all Zebra employees issued under the stock purchase plan is estimated using the following weighted-average assumptions for purchase rights granted. Expected lives of three months to one year have been used along with these assumptions.
Note 14 – Income Taxes Zebra has identified, evaluated, and measured the amount of income tax benefits to be recognized for all of our income tax positions. Included in deferred tax assets are amounts related to federal and state net operating losses that resulted from our acquisition of WhereNet Corp. Zebra’s intention is to utilize these net operating loss carryforwards to offset future income taxes owed. Zebra has concluded all U.S. federal income tax audits for years through 2006. The tax years 2006 through 2009 remain open to examination by multiple state taxing jurisdictions. Tax authorities in the United Kingdom have completed income tax audits for tax years through 2006. Zebra’s continuing practice is to recognize interest and/or penalties related to income tax matters as part of income tax expense. For the three and nine month periods ended October 2, 2010 and October 3, 2009, we did not accrue any interest or penalties into income tax expense.
18
Table of Contents
The effective income tax rate for the third quarter of 2010 was 32.9% compared with 32.0% for the third quarter of 2009. The effective income tax rate for the first nine months of 2010 was 29.7% compared to 32.0% for the first nine months of 2009. Zebra’s effective tax rate for the first quarter of 2010 included a $2,764,000 reduction of federal taxes related to prior years’ adjustments for intercompany profit in ending inventory which reduced our effective rate for the first nine months of 2010 by 2.6%. Note 15 – Other Comprehensive Income Stockholders’ equity includes certain items classified as accumulated other comprehensive income, including:
The Consolidated Statements of Comprehensive Income are as follows (in thousands):
The components of other comprehensive income gross and net of income tax are as follows (in thousands):
19
Table of Contents
The components of accumulated other comprehensive income (loss) included in the Consolidated Balance Sheets are as follows (in thousands):
Note 16 – Segment Information Zebra has two reportable segments: Specialty Printing Group (SPG) and Zebra Enterprise Solutions (ZES). SPG includes direct thermal and thermal transfer label and receipt printers, passive radio frequency identification (RFID) printer/encoders and dye sublimation card printers. Also included in this group is a comprehensive range of specialty supplies consisting of self-adhesive labels, thermal transfer ribbons, thermal printheads, batteries and other accessories, including software for label design and printer network management. ZES has evolved since the beginning of 2007 with the acquisitions of WhereNet Corp., proveo AG, Navis Holdings, LLC and Multispectral Solutions, Inc. The solutions that these companies provide are generally sold on a contract basis and are typically installed over several quarters. These contracts cover a range of services, including design, installation and ongoing maintenance services. Segment information is as follows (in thousands):
20
Table of Contents
Zebra records its federal and state deferred tax assets and liabilities in corporate and other as reflected above. Intersegment sales are not significant. Corporate and other includes corporate administration costs or assets that support both reporting segments. Note 17 – New Accounting Pronouncements In October 2009, the FASB issued update 2009-13, ASC 605, Revenue Recognition: Multiple –Deliverable Revenue Arrangements-a consensus of the FASB Emerging Issues Task Force. The revised guidance provides for two significant changes to existing multiple element arrangement guidance. The first relates to the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. This change is significant as it may result in the requirement to separate more deliverables within an arrangement, ultimately leading to less revenue deferral. The second change modifies the manner in which the transaction consideration is allocated across the separately identifiable deliverables. These changes may result in earlier recognition of revenue for multiple-element arrangements than under previous guidance. This standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We have not yet determined the effect of this standard upon our consolidated financial statements. In October 2009, the FASB issued update 2009-14, ASC 985, Software: Certain Revenue Arrangements That Include Software Elements – a consensus of the FASB Emerging Issues Task Force. This updated guidance is expected to significantly affect how entities account for revenue arrangements that contain both hardware and software elements. This standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We have not yet determined the effect of this standard upon our consolidated financial statements. In January 2010, the FASB issued update 2010-06, ASC 820, Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements. This updated guidance requires new disclosures related to transfers in and out of Levels 1 and 2. The standard also provides guidance on the disclosures related to Level 3 activities. In addition, existing disclosures related to disaggregation levels and disclosures about inputs and valuation techniques are clarified. This standard is effective for interim and annual periods beginning after December 15, 2009. This standard did not have a material effect upon our consolidated financial statements.
21
Table of Contents
Results of Operations: Third Quarter of 2010 versus Third Quarter of 2009 Consolidated Results of Operations (Amounts in thousands, except percentages):
Consolidated Results of Operations – Third quarter Sales Net sales for the third quarter of 2010 compared with the 2009 quarter increased 22.8% due to a broad-based increase in demand for Zebra products, driven by global economic recovery. This was the third consecutive quarter of strong year-over-year growth. The increase in sales was largely attributable to 36.8% growth in hardware sales (including all printer categories and aftermarket parts). Printer unit volume increased 32.0% for the third quarter of 2010 compared to levels in 2009. Sales by product category were as follows (amounts in thousands, except percentages):
Sales increased in all geographic territories due primarily to the global economic recovery. The sales growth on a percentage basis was greatest in Latin America and Asia Pacific because of higher rates of economic growth in those regions and as a result of greater investment in sales and marketing. Movements in foreign exchange rates decreased sales by $6,633,000 in the Europe, Middle East and Africa regions for the quarter due principally to a stronger euro against the dollar.
22
Table of Contents
Sales to customers by geographic region were as follows (in thousands, except percentages):
Gross Profit Gross profit increased 29.5% due to higher volumes and an improved product mix, with increased sales primarily in mobile, high-performance and mid-range table top printers, partially offset by $3,653,000 in higher freight costs in 2010. Gross profit was affected by unfavorable foreign currency movements which decreased third quarter gross profit by $5,809,000. As a percentage of sales, gross margin improved from 45.7% to 48.2%. The benefit of outsourcing printer production to a third party, higher volumes, improved product mix and continued cost control contributed to the increase in gross margin. Operating Expenses Operating expenses for the quarter increased 4.4% due mainly to greater selling and marketing expenses and research and development expenses. Several categories accounted for these increases, including compensation costs which include salaries, benefits, bonuses and commissions. Business development, outside professional services, project expenses, and travel and entertainment expenses all increased over 2009 levels. Exit, restructuring and integration costs decreased $3,515,000 in the third quarter of 2010 as compared to 2009. Zebra’s program for outsourcing its manufacturing operations is complete and the related restructuring costs for this program ended in the second quarter of 2010. Integration costs associated with the Zebra Enterprise Solutions (ZES) businesses were completed in 2009. Operating expenses are summarized below (in thousands, except percentages):
Other Income Investment income declined from lower short-term interest rates in the third quarter of 2010 compared with 2009. Zebra recorded a foreign exchange gain in the third quarter of 2009 as the U.S. dollar strengthened against the euro. Zebra’s non-operating income and expense items are summarized in the following table (in thousands):
23
Table of Contents
Operating Income The operating income increase for the third quarter of 2010 was the result of increased sales and gross profit as noted above. Income Taxes The effective income tax rate for the third quarter of 2010 was 32.9% compared with 32.0% for the third quarter of 2009. Business Groups Specialty Printing Group (Amounts in thousands, except percentages):
Specialty Printing Group – Third quarter Net sales in our Specialty Printing Group (SPG) increased 23.3% with the highest percentage growth in sales occurring in Latin America and Asia Pacific, and the highest dollar growth occurring in Asia-Pacific, North America and the Europe, Middle East and Africa region. The increase in sales was largely attributable to increased hardware sales, with notable increases in sales of high-performance and mid-range tabletop, desktop, mobile printers and aftermarket parts. Gross profit increased due to higher volumes and an improved product mix, with increased sales primarily in mobile, high-performance and mid-range table top printers, partially offset by $3,653,000 in higher freight costs in 2010. Gross profit for SPG was affected by unfavorable foreign currency movements which decreased third quarter gross profit by $5,809,000. As a percentage of sales, gross margin increased. The benefit of outsourcing printer production to a third party, higher volumes, improved product mix and continued cost control contributed to the increase in gross margin. Printer unit volumes and average selling price information is summarized below:
For the third quarter of 2010, unit volumes increased in nearly all printer product lines compared to the same period of 2009, with notable volume increases in high-performance tabletop, desktop and mobile printers.
24
Table of Contents
Operating expense related changes for SPG are as follows (in thousands):
Operating expenses for SPG increased primarily to greater selling and marketing expenses from the higher level of business activity and expansion into new geographic markets. Operating expenses are higher due to increases in payroll and benefit costs, advertising and marketing costs, compliance costs, project expenses and travel and entertainment expenses. Exit, restructuring and integration costs were completed in second quarter. Zebra Enterprise Solutions (Amounts in thousands, except percentages):
Zebra Enterprise Solutions – Third quarter ZES sales increased 18.3% for the third quarter of 2010 compared to 2009 primarily due to increased hardware revenue. This was offset by a reduction to installation services revenue associated with customer project implementations delays. Gross margin decline for the third quarter of 2010 compared to 2009 was primarily driven by revenue mix change and license revenue being delayed due to customer project implementation delays. Operating expense changes for ZES are due to the following (in thousands):
ZES operating expenses for the third quarter of 2010 are higher than 2009 due to increases in payroll and benefit costs, selling and marketing, consulting, project expenses and travel and entertainment costs. These increases were offset by reductions to exit, restructuring and integration costs which were completed during the second quarter, and lower amortization expense due to an intangible asset being fully amortized at the end of 2009.
25
Table of Contents
Results of Operations: Nine months ended October 2, 2010 versus nine months ended October 3, 2009 Consolidated Results of Operations (Amounts in thousands, except percentages):
Consolidated Results of Operations – Year to date Sales Net sales for the first nine months of 2010 compared with the same 2009 period increased 22.0% due to a broad-based increase in demand for Zebra products and global economic recovery. The increase in sales was largely attributable to increased hardware sales with notable volume increases in high-performance tabletop, desktop, mobile printers and aftermarket parts. Supplies sales increased from greater shipments of labels and thermal ribbons. Printer unit volume increased 28.9% for the first nine months of 2010 compared to levels in 2009. Sales by product category were as follows (amounts in thousands, except percentages):
Sales increased in all geographic territories due primarily to the global economic recovery. The sales growth on a percentage basis was greatest in Latin America and Asia Pacific because of higher rates of economic growth in those regions and as a result of greater investment in sales and marketing. Movements in foreign exchange rates decreased sales by $7,369,000 in the Europe, Middle East and Africa regions principally due to a stronger euro against the dollar.
26
Table of Contents
Sales to customers by geographic region were as follows (in thousands, except percentages):
Gross Profit Gross profit increased 30.1% due to higher volumes and an improved product mix, with increased sales primarily in mobile, high-performance and mid-range table top printers, partially offset by $14,776,000 in higher freight costs in 2010. Gross profit was affected by unfavorable foreign currency movements which decreased gross profit by $6,544,000. As a percentage of sales, gross margin improved from 44.6% to 47.6%. The benefit of outsourcing printer production to a third party, higher volumes, improved product mix and continued cost control contributed to the increase in gross margin. Operating Expenses Operating expenses for the nine-month period increased 7.9% due to greater selling and marketing expenses and research and development expenses. Several categories accounted for these increases, including compensation costs, business development, project expenses, outside professional services, travel and entertainment, and offsite meeting expenses. Amortization of intangibles decreased $710,000 and exit costs decreased $7,063,000 in the first nine months of 2010 as compared to 2009. Amortization decreases were due to an intangible asset being fully amortized at the end of 2009. Zebra’s program for outsourcing its manufacturing operations is complete and the related restructuring costs for this program ended. In addition, integration costs associated with integrating the Zebra Enterprise Solutions (ZES) businesses were completed in 2009. Operating expenses are summarized below (in thousands, except percentages):
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||