ZBRA

Business Context and Reporting Period

Company: Zebra Technologies Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: Zebra designs, manufactures, and supports direct thermal and thermal transfer bar code label printers, RFID printer/encoders, card imaging printers, and digital photo printers. The company serves manufacturing, retail, service, and government sectors globally. As of December 31, 2003, Zebra had sold over 3 million printers in approximately 100 countries.

Key Financial Metrics (Year Ended Dec 31, 2003)

Note: All figures in millions unless otherwise noted. EPS figures are restated for a 50% stock dividend paid in August 2003.

Material Changes vs. Prior Period

• Revenue Growth: Driven by a 13.6% increase in hardware sales and a 12.0% increase in supplies sales. International sales grew 18.8% to $243.9 million (45.5% of total), outpacing North American growth of 8.2%.
• Margin Expansion: Gross margin improved to 50.9% from 48.5%. Key drivers included higher capacity utilization ($17.4M benefit), favorable foreign exchange rates ($10.9M benefit), and component cost reductions ($9.4M benefit).
• Acquisition Activity: On November 17, 2003, Zebra acquired Atlantek, Inc. for approximately $13.7 million in cash to expand its digital photo and card imaging printer portfolio. This resulted in $0.7 million in in-process R&D write-offs.
• Exit Costs: The company incurred $1.2 million in exit costs related to the closure of its engineering site in Varades, France.
• Stock Structure: On July 1, 2003, all Class B Common Stock converted to Class A. A 50% stock dividend was distributed on August 21, 2003.

Guidance, Outlook, and Risks

Management Commentary & Guidance

Management expects continued growth driven by international expansion and RFID adoption. For the first quarter of 2004, Zebra provided the following guidance:

• Net Sales: $145.0 million to $150.0 million
• Gross Profit Margins: 50.0% to 51.0%
• Operating Expenses: $38.0 million to $40.0 million
• Earnings Per Share: $0.47 to $0.53
• Effective Tax Rate: Expected to be 34.75% starting Q1 2004 following the settlement of an Illinois tax dispute.

Risks and Contingencies

• Legal Proceedings: Zebra is engaged in patent infringement litigation with Paxar Americas, Inc. Paxar alleges infringement of eight patents; Zebra has countersued Paxar Corporation. No liability has been recorded as the outcome is uncertain.
• Foreign Exchange: Approximately 45.5% of sales are international. While a weak dollar benefited 2003 results, future fluctuations could require price reductions or negatively impact margins.
• Customer Concentration: Sales to ScanSource, Inc. accounted for 13.8% of net sales in 2003.
• Technology Obsolescence: Rapid technological changes in the printing industry pose a risk to current product lines.

Key Facts for Investor Verification

• Patent Litigation Status: Monitor the progress of the Paxar Americas lawsuit, as an adverse ruling could result in significant damages or licensing fees.
• Atlantek Integration: Verify the successful integration of Atlantek's digital photo printer technology and the realization of projected synergies.
• Foreign Exchange Hedging: Review the effectiveness of the new hedging program for euro-denominated sales initiated in Q2 2003 to mitigate currency risk.
• Exit Cost Execution: Confirm the completion of the Varades, France facility closure and the consolidation of Warwick, Rhode Island operations to ensure projected cost savings are realized.
• Inventory Levels: Note that reserves for excess and obsolete inventory increased to 13.1% of gross inventory in 2003 due to product discontinuations; monitor future write-down risks.