Business Context and Reporting Period
Company: Zebra Technologies Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: Zebra designs, manufactures, and supports bar code label and receipt printers, plastic card printers, and related supplies and software. Products are used for automatic identification, data collection, and personal identification across manufacturing, retail, service, and government sectors. As of year-end 2002, approximately 3 million Zebra printers were installed in roughly 100 countries.
Key Financial Metrics
| Metric (in thousands) | 2002 | 2001 | 2000 |
|---|---|---|---|
| Net Sales | $475,611 | $450,008 | $481,569 |
| Gross Profit | $230,747 | $209,893 | $232,428 |
| Gross Margin | 48.5% | 46.6% | 48.3% |
| Operating Income | $101,805 | $92,459 | $108,670 |
| Net Income | $71,595 | $61,529 | $71,622 |
| Diluted EPS | $2.29 | $1.99 | $2.30 |
| Cash & Investments | $348,577 | $249,349 | $156,714 |
| Working Capital | $427,676 | $330,510 | $256,799 |
| Long-term Obligations | $1,613 | $408 | $513 |
Cash Flow (2002): Net cash used in operating activities was $13,393,000, primarily due to a $108,498,000 increase in investments and marketable securities. Net cash used in investing activities was $8,481,000 (capital expenditures). Net cash provided by financing activities was $13,032,000, largely from stock option exercises.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 5.7% to $475.6 million, driven by a 14.0% increase in international sales ($205.3 million) which now represent 43.2% of total sales. North American sales remained flat (0.1% growth).
- Product Mix: Hardware sales grew 6.0% to $360.2 million. Service and software sales surged 20.5% to $23.3 million. Supplies sales grew 3.2% to $88.0 million.
- Profitability: Gross profit margin improved to 48.5% from 46.6%, aided by higher capacity utilization, cost reductions, and favorable foreign exchange movements (estimated $4.4 million benefit).
- Accounting Changes: Implementation of SFAS No. 142 in Q1 2002 eliminated goodwill amortization. This resulted in a $3.8 million reduction in operating expenses compared to 2001, where goodwill amortization was recorded.
- One-Time Items: The company recorded $3.3 million in expenses related to the termination of the proposed acquisition of Fargo Electronics, Inc. Conversely, investment income increased 84.6% due to a $1.95 million gain on the sale of Fargo stock and the absence of a $2.2 million investment write-down recorded in 2001.
Guidance, Outlook, Risks, and Contingencies
Outlook: Management expects international territories to continue offering significant growth opportunities. They anticipate selling and marketing expenses will remain elevated to support vertical market expansion. The effective tax rate is expected to remain near 35.0% due to tax minimization strategies.
Risks:
- Competition: Intense competition in printer and supply markets could lead to price reductions and margin compression.
- Technology: Rapid technological changes and the potential obsolescence of thermal printing technologies pose risks.
- Foreign Exchange: Significant exposure to currency fluctuations (Euro, Pound Sterling, Yen) impacts financial results.
- Customer Concentration: ScanSource, Inc. accounted for 13.6% of net sales in 2002.
Contingencies:
- Legal Proceedings: Printherm (France) filed a lawsuit seeking approximately €15.3 million in damages regarding terminated acquisition negotiations. Zebra believes the claims are without merit.
- Tax Litigation: Zebra is litigating a dispute with the Illinois Department of Revenue regarding a 1998 assessment of approximately $2.0 million (years 1993-1995). An additional assessment of $3.2 million for years 1996-1997 has been paid under protest. Management estimates a potential additional one-time tax expense of $1.3 million if all issues are lost on appeal, or a reduction of $4.4 million if all are won.
Investor Verification Checklist
- International Growth Sustainability: Verify if the 14% international sales growth is sustainable given the favorable foreign exchange impact ($5.6 million benefit to sales) and potential currency volatility.
- Customer Concentration: Assess the risk associated with ScanSource, Inc. representing 13.6% of total revenue.
- Tax Liability Exposure: Review the status of the Illinois Department of Revenue litigation and the potential $1.3 million additional tax expense if the appeal is unsuccessful.
- Investment Portfolio: Confirm the valuation and liquidity of the $330 million investment portfolio, noting the unrealized losses and the impact of interest rate changes on fair value.
- Operating Expense Trends: Monitor the trajectory of selling and marketing expenses, which increased 13.1% as the company invests in vertical market expansion.