Business Context and Reporting Period
Company: Zebra Technologies Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 29, 2001
Business Overview: Zebra Technologies designs and manufactures bar code label printers, supplies, and related software. The company is currently undergoing integration following the acquisition of Comtec Information Systems and is in the process of acquiring Fargo Electronics, Inc.
Key Financial Metrics
| Metric | Q3 2001 | Q3 2000 | YTD 2001 | YTD 2000 |
|---|---|---|---|---|
| Net Sales | $110.3 million | $129.7 million | $338.4 million | $359.3 million |
| Gross Profit | $52.0 million | $64.2 million | $158.4 million | $175.9 million |
| Gross Margin | 47.2% | 49.5% | 46.8% | 48.9% |
| Operating Income | $23.7 million | $34.9 million | $69.7 million | $84.0 million |
| Net Income | $14.9 million | $22.6 million | $46.3 million | $54.5 million |
| Diluted EPS | $0.48 | $0.73 | $1.50 | $1.74 |
| Cash & Equivalents | $9.4 million | $13.8 million (Dec 2000) | N/A | |
| Total Investments | $201.7 million | $142.9 million (Dec 2000) | ||
| Operating Cash Flow (YTD) | ($1.3 million) | $133.9 million | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Q3 net sales fell 15.0% year-over-year, driven primarily by a 20.0% drop in hardware sales (printers and parts) due to weakness in the U.S. economy. Supplies sales increased 3.1%.
- Profitability Compression: Operating income decreased 31.9% in Q3. Gross margin contracted from 49.5% to 47.2% as lower production volumes were only partially offset by reduced component costs.
- Expense Growth: Selling and marketing expenses rose 4.4% in Q3, and R&D expenses increased 3.6%, increasing as a percentage of sales due to the revenue decline.
- Investment Losses: The company recorded a $2.2 million pre-tax write-down of a long-term investment in Q3 2001, contributing to a shift from investment income in 2000 to an investment loss in 2001.
- Geographic Shift: International sales increased slightly in Q3 (0.7%), while North American sales declined 23.2%, causing international sales to represent 41.0% of total revenue (up from 34.6% in Q3 2000).
Guidance, Outlook, and Risks
- Pending Acquisition: Zebra signed a definitive agreement to acquire Fargo Electronics, Inc. for approximately $86.0 million in cash plus $16.5 million in debt. The transaction is subject to Hart-Scott-Rodino antitrust review and a tender offer expiring November 26, 2001. Completion is not guaranteed.
- Liquidity: The company holds $211.1 million in cash and marketable securities. Management believes existing resources are sufficient to fund the Fargo acquisition and ongoing operations, though operating cash flow turned negative YTD due to increased investment purchases.
- Accounting Changes: The company is evaluating the impact of new FASB standards (SFAS 141, 142, 143, 144) regarding business combinations, goodwill, and asset retirement obligations, which may affect future reporting.
- Customer Concentration: Scansource, Inc. represented 10.3% of Q3 sales. No other single customer exceeded 10%.
- Risks: Key risks include the failure to consummate the Fargo acquisition, integration challenges with Comtec, continued U.S. economic weakness, and foreign exchange rate fluctuations.
Investor Verification Checklist
- Fargo Acquisition Status: Verify the current status of the Hart-Scott-Rodino antitrust review and the tender offer for Fargo Electronics, Inc.
- Hardware Demand: Assess the sustainability of the 20% decline in hardware sales and the impact of the U.S. economic slowdown on future printer demand.
- Cash Flow Reversal: Investigate the reasons for the shift from positive operating cash flow ($133.9M YTD 2000) to negative operating cash flow ($1.3M YTD 2001), specifically the $56.9M increase in investments.
- Investment Write-down: Review the details of the $2.2 million write-down of the long-term investment to understand the nature of the asset and potential future impairments.
- Merger Costs: Monitor ongoing merger integration costs related to the Comtec acquisition and potential future costs associated with the Fargo deal.