Business Context and Reporting Period
Company: Zebra Technologies Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 27, 2003
Business Overview: Zebra Technologies designs, manufactures, and markets printer and software solutions for the identification and tracking of goods. The company operates globally with significant sales in North America, Europe, and the Asia-Pacific region.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 27, 2003 |
Nine Months Ended Sep 27, 2003 |
Three Months Ended Sep 28, 2002 |
Nine Months Ended Sep 28, 2002 |
|---|---|---|---|---|
| Net Sales | $134,649 | $389,197 | $123,151 | $349,286 |
| Gross Profit | $67,773 | $198,680 | $60,422 | $168,183 |
| Gross Margin % | 50.3% | 51.0% | 49.1% | 48.2% |
| Operating Income | $33,696 | $96,965 | $28,884 | $73,388 |
| Net Income | $22,999 | $67,301 | $19,867 | $51,269 |
| Diluted EPS | $0.48 | $1.42 | $0.42 | $1.10 |
| Cash & Equivalents | $19,883 | (Balance Sheet Item) | ||
| Investments & Securities | $402,739 | (Balance Sheet Item) | ||
| Total Current Assets | $555,525 | (Balance Sheet Item) | ||
| Total Current Liabilities | $45,549 | (Balance Sheet Item) | ||
| Operating Cash Flow (9mo) | $66,005 | $(16,712) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 9.3% in the third quarter and 11.4% year-to-date compared to 2002. International sales grew 15.1% in the quarter, driven by Europe, Middle East, and Africa (18.6% growth) and Asia-Pacific (23.4% growth).
- Margin Expansion: Gross margin improved to 50.3% in Q3 2003 from 49.1% in Q3 2002. This was driven by higher capacity utilization ($3.7M benefit) and favorable foreign exchange rates ($4.6M benefit), partially offset by price decreases ($1.2M).
- Operating Income: Operating income rose 16.7% in the quarter and 32.1% year-to-date, outpacing sales growth due to margin improvements and cost controls.
- Investment Income Adjustment: Investment income decreased significantly in Q3 2003 due to a $2.61M adjustment to correct the amortization of investment premiums for the first two quarters of the year. Without this adjustment, income would have been approximately $1.6M.
- Tax Rate: The effective tax rate for Q3 2003 was 28.9%, lower than the 35% rate in the prior year, due to a $1.95M reduction in tax expense from the elimination of a reserve on research and experimentation tax credits following IRS approval.
Guidance, Outlook, and Risks
Guidance for Fourth Quarter 2003
- Net Sales: $135,000,000 to $140,000,000
- Gross Profit Margins: 50.0% to 51.2%
- Operating Expenses: $36,000,000 to $37,000,000
- Diluted EPS: $0.45 to $0.50
- Investment Income: Expected to be approximately $1,750,000.
- Restructuring: Guidance includes a $1.2M restructuring charge related to closing the Varades, France facility. Total expected charges are approximately $1.95M to be recognized over several quarters.
- Patent Litigation: Paxar Americas, Inc. filed a lawsuit alleging infringement of eight patents. Zebra denies the allegations. No liability has been recorded as the outcome is uncertain and cannot be estimated.
- Tax Litigation: Zebra is appealing an unfavorable Illinois Appellate Court ruling regarding a 1998 tax assessment. The company has paid assessments under protest and is evaluating participation in a tax amnesty program. Potential outcomes range from an additional $2.1M expense to a $5.0M reduction in tax expense.
- Foreign Exchange: A significant portion of sales is denominated in euros and pounds. While a weaker dollar benefited 2003 results, future fluctuations could materially impact financial results.
- Investment Accounting Correction: Verify the impact of the $2.61M adjustment to investment income and the reclassification of securities from "trading" to "available-for-sale."
- Tax Credit Reserve: Confirm the status of the $1.95M tax credit reserve elimination and the likelihood of similar outcomes for state-level refunds (Illinois/California).
- Restructuring Costs: Monitor the execution of the Varades, France facility closure and the timing of the remaining $754,000 in expected exit costs.
- Patent Litigation: Track developments in the Paxar lawsuit, as an unfavorable outcome could result in significant damages or licensing fees.
- Customer Concentration: Note that ScanSource, Inc. accounted for 15.0% of Q3 sales; monitor the stability of this key relationship.
Management Commentary
Management highlighted strong demand for mobile printers and continued investment in RFID technologies. The company initiated a plan to close its engineering site in Varades, France, to consolidate operations and improve efficiency. A 50% stock dividend was issued in August 2003, and all share counts have been restated.