Business Context and Reporting Period
Company: Zebra Technologies Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: Zebra Technologies designs, manufactures, and markets identification and data capture solutions, including printers, supplies, and software. The quarter was significantly impacted by the acquisition of WhereNet Corp. on January 25, 2007, a provider of Real Time Locating Systems (RTLS).
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2007 | Q1 2006 |
|---|---|---|
| Net Sales | $208,576 | $175,814 |
| Gross Profit | $99,790 | $82,698 |
| Gross Margin | 47.8% | 47.0% |
| Operating Income | $35,333 | $33,158 |
| Net Income | $26,716 | $26,091 |
| Diluted EPS | $0.39 | $0.37 |
| Cash from Operations | $26,855 | $25,623 |
| Cash & Equivalents (End of Period) | $41,330 | $17,543 |
| Total Investments & Securities | $411,155 | $N/A (Combined) |
Note: Total Investments & Securities for Q1 2007 combines Current ($143,906) and Long-term ($267,249) balances.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 18.6% year-over-year, driven by strong performance in North America and the Europe, Middle East, and Africa (EMEA) regions. Hardware sales rose 19.6% due to record printer unit volume shipments.
- Acquisition Impact: The acquisition of WhereNet Corp. for $127.2 million contributed to sales growth and increased operating expenses. Goodwill increased by approximately $80.5 million due to this transaction.
- Expense Increases: Operating expenses rose significantly due to personnel additions from acquisitions, increased advertising, and a one-time write-off of $1.853 million for acquired in-process research and development (IPR&D).
- Foreign Exchange: Favorable currency movements (Euro and Pound vs. Dollar) positively impacted sales by approximately $5.7 million and gross profit by $4.6 million.
- Liquidity: While cash from operations remained strong, total cash and investment balances decreased from $559.2 million (Dec 31, 2006) to $452.5 million (Mar 31, 2007) primarily due to the WhereNet acquisition.
Guidance, Outlook, and Risks
Q2 2007 Guidance
- Net Sales: $208 million to $220 million.
- Gross Profit Margins: 47.0% to 48.0%.
- Operating Expenses: $66 million to $68 million.
- Diluted EPS: $0.34 to $0.40.
- Effective Tax Rate: Expected to be 34.5%.
Risks and Contingencies
- Reseller Bankruptcy: A significant reseller filed for bankruptcy in 2006 owing $12.065 million. Although Zebra obtained a judgment against the guarantor (Condor Insurance), the insurer's financial position has deteriorated. Zebra has reserved 100% of the balance ($12.538 million) as a probable loss but continues legal action to recover funds.
- Legal Proceedings: Ongoing litigation in France with Printherm regarding a terminated acquisition negotiation. Zebra believes the claims are without merit.
- Market Risks: Exposure to foreign exchange rate fluctuations and interest rate changes affecting the large investment portfolio.
Investor Verification Checklist
- Acquisition Integration: Verify the integration progress of WhereNet Corp. and the realization of projected synergies.
- Reseller Recovery: Monitor the status of legal proceedings against Condor Insurance regarding the $12.5 million reserved loss.
- Inventory Levels: Review inventory turns (5.3 in Q1 2007 vs. 5.5 in Q4 2006) and reserves for excess/obsolete inventory (11.8% of gross inventory).
- Days Sales Outstanding (DSO): Note the increase in DSO to 60 days from 53 days at year-end 2006, indicating slower collections relative to sales growth.
- Stock-Based Compensation: Assess the impact of SFAS No. 123(R) on future operating expenses, with $17.14 million of unearned compensation cost remaining to be recognized.