UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
ý Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 30, 2002
Commission File Number: 000-19406
Zebra Technologies Corporation
(Exact name of registrant as specified in its charter)
Delaware
36-2675536
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
333 Corporate Woods Parkway, Vernon Hills, IL 60061
(Address of principal executive offices) (Zip Code)
(847) 634-6700
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and has been subject to such filing requirements for the past 90 days.
ý Yes o No
As of April 24, 2002, there were the following shares outstanding:
Class A Common Stock, $.01 par value 26,248,634
Class B Common Stock, $.01 par value 5,297,882
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
QUARTER ENDED MARCH 30, 2002
INDEX
PART I - FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements
Consolidated Balance Sheets as of March 30, 2002 (unaudited) and December 31, 2001
Consolidated Statements of Earnings (unaudited) for the three months ended March 30, 2002 and March 31, 2001
Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 30, 2002 and March 31, 2001
Consolidated Statements of Cash Flows (unaudited) for the three months ended March 30, 2002 and March 31, 2001
Notes to Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
Item 6.
Exhibits and Reports on Form 8-K
SIGNATURES
2
Item 1. Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
March 30,
December 31,
2002
2001
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
20,005
26,328
Investments and marketable securities
250,287
223,021
Accounts receivable, net
72,317
67,160
Inventories
36,817
39,923
Deferred income taxes
4,328
4,295
Prepaid expenses
2,626
3,611
Total current assets
386,380
364,338
Property and equipment at cost, less accumulated depreciation and amortization
40,418
40,742
Long-term deferred income taxes
1,742
902
Excess of cost over fair value of net assets acquired
54,455
32,735
Other intangibles
4,606
26,693
Other assets
9,900
14,146
Total assets
497,501
479,556
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
15,606
14,414
Accrued liabilities
11,878
14,993
Short-term note payable
285
221
Current portion of obligation under capital lease with related party
102
79
Income taxes payable
10,096
4,121
Total current liabilities
37,967
33,828
Obligation under capital lease with related party, less current portion
233
408
Deferred rent
339
313
Other long-term liability
309
—
Total liabilities
38,848
34,549
Shareholders’ equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized, none outstanding
Class A Common Stock, $.01 par value; 50,000,000 shares authorized, 26,038,366 and 26,018,743 shares issued, and 25,307,222 and 25,256,380 shares outstanding in 2002 and 2001, respectively
260
Class B Common Stock, $.01 par value; 28,358,189 shares authorized, 5,508,150 and 5,527,773 shares issued and outstanding in 2002 and 2001, respectively
55
Additional paid-in capital
58,222
59,012
Treasury stock, at cost (731,144 shares and 762,363 shares, respectively)
(33,810
)
(35,482
Retained earnings
437,495
422,555
Accumulated other comprehensive loss
(3,569
(1,393
Total shareholders’ equity
458,653
445,007
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands, except per share data)
Three Months Ended
March 31,
Net sales
110,185
115,144
Cost of sales
58,173
61,122
Gross profit
52,012
54,022
Operating expenses:
Selling and marketing
11,950
12,074
Research and development
7,455
6,596
General and administrative
9,329
8,554
Amortization of intangible assets
367
1,283
Costs related to terminated acquisition
3,300
Merger costs
73
832
Total operating expenses
32,474
29,339
Operating income
19,538
24,683
Other income (expense):
Investment income
4,167
2,162
Interest expense
(55
(92
Other, net
(313
(299
Total other income
3,799
1,771
Income before income taxes
23,337
26,454
Income taxes
8,397
9,524
Net income
14,940
16,930
Basic earnings per share
0.49
0.55
Diluted earnings per share
0.48
Basic weighted average shares outstanding
30,799
30,541
Diluted weighted average and equivalent shares outstanding
31,076
30,790
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Other comprehensive income (loss):
Foreign currency translation adjustment
(569
(1,425
Unrealized holding gains (losses) on investments:
Net change in unrealized holding gain, net of income tax of $29 for 2001 and reclassification adjustment for (gains) losses included in net income, net of income tax benefit of $904 for 2002
(1,607
52
Comprehensive income
12,764
15,557
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization
3,005
3,844
Depreciation in market value of investments and marketable securities
(271
(296
(873
(475
Changes in assets and liabilities:
(5,406
7,368
2,971
905
2,639
(1,046
1,192
(5,433
(3,115
300
5,975
3,425
Other operating activities
1,011
(365
(26,995
(24,681
Net cash provided by (used in) operating activities
(4,927
476
Cash flows from investing activities:
Purchases of property and equipment
(2,314
(1,982
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from exercise of stock options
882
2,277
Issuance of notes payable
373
105
Payments for obligation under capital lease, with related party
(152
(169
Net cash provided by financing activities
1,103
2,213
Effect of exchange rate changes on cash
(185
Net decrease in cash and cash equivalents
(6,323
(718
Cash and cash equivalents at beginning of period
13,776
Cash and cash equivalents at end of period
13,058
Supplemental disclosures of cash flow information:
Interest paid
92
Income taxes paid
2,360
6,001
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Zebra Technologies Corporation and subsidiaries (the Company) prepared, without audit, the consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K filed with the Securities and Exchange Commission. The consolidated balance sheet as of December 31, 2001, presented herein, has been derived from the audited consolidated balance sheet contained in the Annual Report on Form 10-K. In the opinion of the Company, the interim consolidated financial statements reflect all adjustments necessary to present fairly the consolidated financial position of the Company as of March 30, 2002, and the consolidated results of operations and cash flows for the three months ended March 30, 2002, and March 31, 2001. The results of operations for such interim periods are not necessarily indicative of the results for the full year.
Note 2 — Inventories
The components of inventories are as follows (in thousands):
Raw material
22,544
25,410
Work in process
1,045
1,360
Finished goods
13,228
13,153
Total inventories
Note 3 — Earnings Per Share
Earnings per share were computed as follows (in thousands, except per-share amounts):
Basic earnings per share:
Weighted average common shares outstanding
Per share amount
Diluted earnings per share:
Add: Effect of dilutive securities — stock options
277
249
The potentially dilutive securities, which were excluded from the earnings per share calculation, consisted of stock options for which the exercise price was greater than the average market price of the Class A Common Stock. For the first quarter, the shares amounted to 428,000 for the quarter ended March 30, 2002, and 222,275 for the quarter ended March 31, 2001.
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Note 4 — New Accounting Pronouncements Including Intangible Asset Data
During the first quarter of 2002, Zebra implemented SFAS No. 142, Goodwill and Other Intangible Assets, which replaces the requirements to amortize intangible assets with indefinite lives and goodwill with a requirement for an impairment test. SFAS No. 142 also establishes requirements for identifiable intangible assets. As a result, during the quarter Zebra reclassified $21,720,000 of intangible assets into goodwill. Operating income for the first quarter of 2001 includes $959,000 of amortization of goodwill and other intangible assets that are not included in 2002 results, because of the implementation of SFAS No. 142.
Intangible asset data are as follows (in thousands):
As of March 30, 2002
Gross CarryingAmount
AccumulatedAmortization
Amortized intangible assets
Current technology
7,346
(2,740
Unamortized intangible assets
Goodwill
Aggregate amortization expense
For the quarter ended March 30, 2002
Estimated amortization expense
For the year ended December 31, 2002
1,468
For the year ended December 31, 2003
For the year ended December 31, 2004
For the year ended December 31, 2005
569
Net income, basic earnings per share, and diluted earnings per share would have been $17,544,000, $0.57, and $0.57, respectively, for the three months ended March 31, 2001, if adjusted for the impact of the implementation of SFAS No. 142.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and for the associated asset retirement costs. SFAS 143 must be applied starting with fiscal years beginning after June 15, 2002. Management is currently evaluating the impact that the adoption of SFAS 143 will have on the consolidated financial statements.
Note 5 — Derivative Instruments
In the normal course of business, portions of the Company’s operations are subject to fluctuations in currency values. The Company addresses these risks through a controlled program of risk management that includes the use of derivative financial instruments.
The Company enters into foreign exchange forward contracts to manage exposure to fluctuations in foreign exchange rates related to the funding of its United Kingdom operations. The Company accounts for such contracts by recording any unrealized gains or losses in income each reporting period. The notional principal amounts of outstanding forward contracts were €20,000,000 and £6,659,000 at March 30, 2002, and €18,121,000 and £137,000 at March 31, 2001. The realized gain was $149,000 for the quarter ended March 30, 2002, and the realized gain or loss for the quarter ended March 31, 2001, was not material.
Note 6 — Acquisition Termination Costs and Sale of Investment
In the first quarter of 2002, the Company terminated the acquisition agreement and tender offer in which the Company would acquire all outstanding shares of common stock (including associated rights to purchase preferred stock) of Fargo Electronics, Inc. for $7.25 per share in cash. In connection with the termination, the Company recorded $3,300,000 in expenses for capitalized acquisition costs and other acquisition costs that would otherwise have been capitalized. There was no such expense in the first quarter of 2001. Also during the quarter ended March 30, 2002, the Company sold its investment in common stock of Fargo and realized a pre-tax gain of $1,953,000.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations: First Quarter of 2002 versus First Quarter of 2001
Net sales for the first quarter of 2002 were $110,185,000, down 4.3% from $115,144,000 for the first quarter of 2001. Hardware sales (printers and replacement parts) declined 6.8% and accounted for 74.6% of 2002 first quarter net sales, compared with 76.6% of net sales for the first quarter of 2001. Supplies sales were nearly unchanged and comprised 19.0% of net sales versus 18.2% of net sales for the first quarter of 2001. Service and software revenue accounted for 5.2% of first quarter sales, increasing 20.3% from the first quarter of 2001, in which service and software revenue accounted for 4.1% of net sales. The remaining 1.2% of net sales consisted of freight revenue.
International sales for the first quarter of 2002 increased 3.4% to $45,639,000 from $44,159,000 and accounted for 41.4% of 2002 first quarter sales, compared with 38.4% of net sales for the first quarter of 2001. All of the Company’s geographic regions outside North America contributed to this growth. The strength of the U.S. dollar versus the British pound and the euro reduced sales for the Company’s European region by approximately $1,182,000, compared with exchange rates that prevailed during the first quarter of 2001. It is difficult to accurately forecast the direction of foreign exchange movements, and therefore, to estimate the impact of foreign exchange rates on future financial results, either positive or negative. Sales to North American customers, which continued to be affected by general economic conditions in the United States, decreased 9.1%. During the quarter, the Company invested in new marketing, sales and management personnel as part of its goals to accelerate sales growth and strengthen the Company’s competitive position. Management is unable, however, to predict the success of these programs, or when improved economic conditions will benefit North American sales.
Gross profit for the first quarter of 2002 was $52,012,000, down 3.7% from $54,022,000 for the first quarter of 2001. As a percentage of net sales, gross profit increased to 47.2% from 46.9%. The increase in gross profit margin was principally due to reduced capacity variances and the effect of lower component costs, offset by an unfavorable product mix. The unfavorable product mix incorporates the effect of foreign exchange translation on sales to European customers, which lowered gross profit by $1,045,000, compared with exchange rates that prevailed during the first quarter of 2001.
Selling and marketing expenses decreased 1.0% to $11,950,000 from $12,074,000. As a percentage of net sales, first quarter selling and marketing expenses increased to 10.8% from 10.5%. During the first quarter, a change in reporting responsibilities of certain functions to engineering lowered the number of associates designated as selling and marketing personnel. In addition, the dollar decline in selling and marketing expenses was due to lower advertising, literature and co-op advertising expenses. Higher travel and entertainment expenses partially offset these expense declines.
Research and development expenses for the first quarter of 2002 were $7,455,000, up 13.0% from $6,596,000 for the first quarter of 2001. Higher project expenses related to product development and growth in personnel-related expenses from higher staffing levels were partially offset by lower expenses for consulting services. As a percentage of net sales, quarterly research and development expenses increased to 6.8% from 5.7%.
General and administrative expenses increased by 9.1% to $9,329,000 from $8,554,000. Higher expenses for consulting and information technology operations exceeded lower personnel-related expenses as a result of fewer Zebra associates in administrative roles. As a percentage of net sales, quarterly general and administrative expenses increased to 8.5% from 7.4%.
During the first quarter of 2002, Zebra recorded $367,000 in amortization of intangible assets, compared with $1,283,000 for the first quarter of 2001. During the first quarter of 2002, Zebra implemented SFAS No. 142, Goodwill and Other Intangible Assets, which replaces the requirements to amortize intangible assets with indefinite lives and goodwill with a requirement for an impairment test. SFAS No. 142 also establishes requirements for identifiable intangible assets. As a result, during the quarter Zebra reclassified $21,720,000 of intangible assets into goodwill, as such assets did not meet the criteria for recognition as an asset apart from goodwill under SFAS No. 142. Operating income for the first quarter of 2001 includes $916,000 of amortization of goodwill and other intangible assets that are not included in 2002 results, because of the implementation of SFAS No. 142.
Also in the first quarter of 2002, the Company terminated the acquisition agreement and tender offer in which the Company would acquire all outstanding shares of common stock (including associated rights to purchase preferred stock) of Fargo Electronics, Inc. for $7.25 per share in cash. In connection with the termination, the Company recorded
9
$3,300,000 in expenses for capitalized acquisition costs and other acquisition costs that would otherwise have been capitalized. There was no such expense in the first quarter of 2001.
For the first quarter of 2002, merger costs totaled $73,000, compared with $832,000 for the first quarter of 2001. These costs were related to the acquisition of Comtec Information Systems in April 2000.
First quarter operating income declined 20.8% to $19,538,000 from $24,683,000. As a percentage of net sales, operating income was 17.7% for the first quarter of 2002, compared with 21.4% of net sales for the first quarter of 2001. Excluding merger costs and costs related to the terminated Fargo acquisition described above for both periods, operating income declined 10.2% to $22,911,000, or 20.8% of net sales, from $25,515,000, or 22.2% of net sales.
Investment income for the first quarter of 2002 was $4,167,000 and includes a $1,953,000 pre-tax gain on the sale of 585,000 shares of Fargo common stock. This gain increased earnings by $0.04 per diluted share. The remaining $2,214,000 in investment income was comparable with the $2,162,000 in investment income recorded in the first quarter of 2001. Higher average balances during the first quarter of 2002 offset lower investment returns from the first quarter of 2001.
Income before income taxes for the first quarter of 2002 was $23,337,000, compared with $26,454,000, or down 11.8%, for the first quarter of 2001.
The effective income tax rate for the first quarter of 2002 and 2001 was 36.0%. Net income was $14,940,000, or $0.48 per diluted share, compared with $16,930,000, or $0.55 per diluted share. Excluding merger and terminated acquisition costs as well as the gain on the sale of Fargo common stock, net income for the first quarter of 2002 was $15,849,000, or $0.51 per diluted share, compared with $17,462,000, or $0.57 per diluted share, for 2001.
Liquidity and Capital Resources
The Company continued to maintain high levels of liquidity, principally from cash generated from operations. As of March 30, 2002, the Company had $270,292,000 in cash and cash equivalents and investments and marketable securities, compared with $249,349,000 at December 31, 2001. During the first quarter of 2002, net cash used in operations totaled $4,927,000, and included an increase of $26,995,000 in investments and marketable securities. Accounts receivable increased $5,406,000, net of the effect of foreign currency translation adjustment. The increase was primarily due to the relatively large amount of shipments that occurred close to the end of the first quarter. Also during the first quarter of 2002, inventories declined by $2,971,000, net of foreign currency translation adjustment. Purchases of property and equipment totaled $2,314,000 for the first quarter of 2002. Management believes that existing capital resources and funds generated from operations are sufficient to finance anticipated capital requirements.
Significant Customer
Sales to ScanSource, Inc., accounted for 12.0% of net sales for the first quarter of 2002. No other customer accounted for 10% or more of net sales during the first quarter of 2002 or 2001.
Safe Harbor
Forward-looking statements contained in this filing are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995 and are highly dependent upon a variety of important factors which could cause actual results to differ materially from those reflected in such forward looking statements. These factors include market acceptance of the Company’s printer and software products and competitors’ product offerings. They also include the effect of market conditions in North America and other geographic regions on the Company’s financial results. Profits will be affected by the Company’s ability to control manufacturing and operating costs. Because of the Company’s large investment portfolio, interest rate and financial market conditions will also have an impact on results. Foreign exchange rates will have an effect on financial results, because of the large percentage of the Company’s international sales. When used in this document and documents referenced, the words “anticipate,” “believe,” “estimate,” “will” and “expect” and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. Readers of this document are referred to prior filings with the Securities and Exchange Commission, including the Risk Factors portion of Management’s Discussion and Analysis of Financial Condition and Results of Operation in Zebra’s Form 10-K for the year ended December 31, 2001, for a further discussion of issues that could affect Zebra’s future results. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this report.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in the Company’s market risk during the first quarter ended March 30, 2002. For additional information on market risk, refer to the “Quantitative and Qualitative Disclosures About Market Risk” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
3.1
Amendment to By-laws of the Registrant
4.1
Rights Agreement between the Registrant and Mellon Investor Services, as Rights Agent
10.1
Employment Agreement between the Registrant and John Paxton
(b) Reports.
The Registrant filed two reports on Form 8-K during the quarterly period covered by this report. The Form 8-K dated as of March 13, 2002, was filed in connection with the Company’s Board of Directors adopting a stockholders rights plan. The Form 8-K dated as of March 27, 2002, was filed in connection with the termination of the acquisition agreement and tender offer in which the Company would acquire all outstanding shares of common stock (including associated rights to purchase preferred stock) of Fargo Electronics, Inc. for $7.25 per share in cash.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ZEBRA TECHNOLOGIES CORPORATION
Date:
April 30, 2002
By:
/s/Edward L. Kaplan
Edward L. Kaplan
Chief Executive Officer
/s/Charles R. Whitchurch
Charles R. Whitchurch
Chief Financial Officer
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