ZBRA

Business Context and Reporting Period

Company: Zebra Technologies Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: Zebra designs, manufactures, and sells specialty printing devices (thermal label/receipt printers, RFID printer/encoders, card printers) and supplies. In 2007 and 2008, the company formed the Enterprise Solutions Group (ESG) through acquisitions (WhereNet, proveo AG, Navis, Multispectral) to provide asset tracking and management software/hardware solutions.

Key Financial Metrics (Year Ended Dec 31, 2008)

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 12.5% year-over-year, driven by international growth (up 17.1%) and the inclusion of ESG acquisitions. However, the fourth quarter saw a 0.4% decline in sales due to weakness in Europe, Middle East, and Africa (EMEA).
• Profitability Decline: The company reported a net loss of $38.4 million in 2008 compared to a net income of $110.1 million in 2007. This reversal was primarily caused by a $157.6 million asset impairment charge recorded in the fourth quarter related to goodwill and intangible assets in the ESG segment.
• Operating Expenses: Total operating expenses rose significantly to $494.7 million (from $273.9 million in 2007), largely due to the impairment charges, exit/restructuring costs ($20.0 million), and increased amortization from acquisitions.
• Segment Performance:
  • Specialty Printing Group (SPG): Remained profitable with operating income of $206.2 million, though down 3.5% from 2007 due to restructuring and impairment charges.
  • Enterprise Solutions Group (ESG): Reported an operating loss of $166.0 million, driven by the $113.7 million goodwill impairment and $28.9 million intangible asset impairment.

Guidance, Outlook, Risks, and Unusual Items

• Manufacturing Transition: Zebra is transferring final printer assembly to a third-party manufacturer, Jabil Circuit, Inc., in China. This transition is expected to be complete by the end of 2009. The company anticipates temporary inventory increases during this period.
• Economic Risks: Management highlighted the impact of the global financial crisis, including reduced IT spending, credit tightening affecting customers, and foreign exchange volatility (specifically the weakening Euro and Pound).
• Unusual Items:
  • Impairment Charges: $157.6 million total (Goodwill: $113.7M; Intangibles: $43.9M).
  • Exit/Restructuring: $20.0 million related to facility closures and organizational changes.
  • Investment Losses: $4.4 million loss on auction rate securities and $2.9 million on a long-term equity investment.
• Capital Allocation: The company repurchased 6.0 million shares of common stock for $157.6 million during 2008. A $100 million revolving credit facility was established in August 2008, with no borrowings as of year-end.

Investor Verification Checklist

• Impairment Validity: Verify the assumptions used in the goodwill and intangible asset impairment tests for the ESG segment, given the significant impact on 2008 earnings.
• Manufacturing Transition: Monitor the progress of the printer assembly transfer to Jabil Circuit and the associated inventory levels to ensure no excess obsolescence costs arise.
• ESG Integration: Assess the integration progress of the four acquired companies (WhereNet, proveo, Navis, Multispectral) and their ability to return to profitability absent impairment charges.
• Foreign Exchange Exposure: Review hedging strategies given that 54.5% of sales are international and the significant impact of currency fluctuations on Q4 results.
• Customer Concentration: Note that ScanSource, Inc. accounted for 15.4% of total net sales in 2008.