ZBRA

Business Context and Reporting Period

Company: Zebra Technologies Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter ended September 28, 2002 (Third Quarter) and nine months ended September 28, 2002.
Business Overview: Zebra Technologies designs, manufactures, and markets hardware, software, and services for automatic identification and data capture. The company reported strong growth in hardware sales and international revenue, driven by favorable foreign exchange rates and recovery in North American sales.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Q3 2002 net sales increased 11.6% year-over-year, driven by a 15.4% increase in hardware sales (printers and parts). International sales rose 13.1%, benefiting from a stronger British pound and Euro.
• Margin Expansion: Gross margin improved to 49.1% from 47.2% due to higher capacity utilization and favorable foreign exchange impacts ($1.974 million benefit).
• Operating Expenses: Selling and marketing expenses rose 16.1% due to performance-based commissions. General and administrative expenses increased 23.2% due to bonuses and higher insurance/consulting costs.
• Accounting Changes: Implementation of SFAS No. 142 eliminated goodwill amortization. Consequently, 2002 results do not include the $2.876 million in goodwill amortization recorded in the first nine months of 2001.
• One-Time Items: The company recorded $3.3 million in expenses related to the termination of the acquisition of Fargo Electronics, Inc. in Q1 2002. Conversely, Q3 2002 investment income improved significantly due to the absence of a $2.241 million write-down of a long-term investment that occurred in Q3 2001.

Guidance, Outlook, and Risks

Management Guidance (Q4 2002)

• Net Sales: $120,000,000 to $125,000,000.
• Earnings Per Share: $0.61 to $0.66.
• Gross Margin: Expected between 48.5% and 49.5%.
• Operating Expenses: $30,500,000 to $32,000,000.
• Investment Income: Approximately $2,000,000.
• Effective Tax Rate: 35%.

Risks and Contingencies

• Tax Litigation: The company is litigating a 1998 tax assessment of approximately $2.0 million with the Illinois Department of Revenue (years 1993-1995). An additional assessment of $3.2 million for 1996-1997 has been paid under protest. Management estimates a potential additional one-time tax expense of $1.7 million if all appeals are lost, or a $4.0 million reduction if all are won.
• Accounts Receivable: Includes a $2.1 million disputed balance with a $500,000 reserve. Full collectibility is not guaranteed.
• Inventory Obsolescence: Reserves for excess and obsolete inventory were 13.2% of gross inventory as of September 28, 2002. Significant changes in demand could impact these reserves.
• Market Risks: Results are sensitive to foreign exchange rates, interest rates affecting investment income, and market acceptance of printer and software products.

Investor Verification Checklist

• Goodwill Impairment: Verify the results of the annual goodwill impairment test required under SFAS No. 142, as no amortization is currently recorded.
• Tax Litigation Outcome: Monitor the status of the Illinois Department of Revenue appeals, as the outcome could swing tax expense by $5.7 million ($1.7M loss vs. $4.0M gain).
• Disputed Receivable: Track the resolution of the $2.1 million disputed account receivable to confirm the adequacy of the $500,000 reserve.
• Inventory Levels: Review future quarters for changes in inventory obsolescence reserves, which are currently at the high end of the historical range (13.2%).
• Q4 Execution: Compare actual Q4 2002 results against the provided guidance range for sales ($120M-$125M) and EPS ($0.61-$0.66).