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)
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Delaware |
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36-2675536 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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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, $.01 par value 5,297,882
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
QUARTER ENDED MARCH 30, 2002
INDEX
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Consolidated Balance Sheets as of March 30, 2002 (unaudited) and December 31, 2001 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
(Amounts in thousands, except share and per share data)
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March 30, |
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December 31, |
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2002 |
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2001 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
20,005 |
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$ |
26,328 |
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Investments and marketable securities |
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250,287 |
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223,021 |
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Accounts receivable, net |
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72,317 |
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67,160 |
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Inventories |
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36,817 |
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39,923 |
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Deferred income taxes |
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4,328 |
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4,295 |
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Prepaid expenses |
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2,626 |
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3,611 |
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Total current assets |
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386,380 |
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364,338 |
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Property and equipment at cost, less accumulated depreciation and amortization |
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40,418 |
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40,742 |
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Long-term deferred income taxes |
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1,742 |
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902 |
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Excess of cost over fair value of net assets acquired |
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54,455 |
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32,735 |
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Other intangibles |
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4,606 |
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26,693 |
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Other assets |
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9,900 |
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14,146 |
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Total assets |
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$ |
497,501 |
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$ |
479,556 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
15,606 |
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$ |
14,414 |
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Accrued liabilities |
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11,878 |
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14,993 |
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Short-term note payable |
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285 |
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221 |
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Current portion of obligation under capital lease with related party |
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102 |
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79 |
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Income taxes payable |
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10,096 |
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4,121 |
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Total current liabilities |
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37,967 |
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33,828 |
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Obligation under capital lease with related party, less current portion |
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233 |
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408 |
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Deferred rent |
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339 |
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313 |
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Other long-term liability |
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309 |
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— |
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Total liabilities |
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38,848 |
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34,549 |
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Shareholders’ equity: |
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Preferred stock, $.01 par value; 10,000,000 shares authorized, none outstanding |
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— |
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— |
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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 |
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260 |
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260 |
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Class B Common Stock, $.01 par value; 28,358,189 shares authorized, 5,508,150 and 5,527,773 shares issued and outstanding in 2002 and 2001, respectively |
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55 |
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55 |
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Additional paid-in capital |
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58,222 |
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59,012 |
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Treasury stock, at cost (731,144 shares and 762,363 shares, respectively) |
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(33,810 |
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(35,482 |
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Retained earnings |
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437,495 |
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422,555 |
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Accumulated other comprehensive loss |
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(3,569 |
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(1,393 |
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Total shareholders’ equity |
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458,653 |
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445,007 |
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Total liabilities and shareholders’ equity |
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$ |
497,501 |
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$ |
479,556 |
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See accompanying notes to consolidated financial statements.
3
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands, except per share data)
(Unaudited)
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Three Months Ended |
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March 30, |
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March 31, |
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2002 |
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2001 |
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Net sales |
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$ |
110,185 |
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$ |
115,144 |
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Cost of sales |
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58,173 |
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61,122 |
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Gross profit |
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52,012 |
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54,022 |
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Operating expenses: |
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Selling and marketing |
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11,950 |
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12,074 |
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Research and development |
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7,455 |
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6,596 |
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General and administrative |
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9,329 |
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8,554 |
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Amortization of intangible assets |
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367 |
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1,283 |
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Costs related to terminated acquisition |
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3,300 |
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— |
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Merger costs |
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73 |
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832 |
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Total operating expenses |
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32,474 |
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29,339 |
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Operating income |
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19,538 |
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24,683 |
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Other income (expense): |
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Investment income |
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4,167 |
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2,162 |
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Interest expense |
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(55 |
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(92 |
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Other, net |
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(313 |
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(299 |
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Total other income |
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3,799 |
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1,771 |
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Income before income taxes |
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23,337 |
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26,454 |
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Income taxes |
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8,397 |
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9,524 |
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Net income |
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$ |
14,940 |
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$ |
16,930 |
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Basic earnings per share |
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$ |
0.49 |
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$ |
0.55 |
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Diluted earnings per share |
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$ |
0.48 |
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$ |
0.55 |
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Basic weighted average shares outstanding |
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30,799 |
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30,541 |
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Diluted weighted average and equivalent shares outstanding |
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31,076 |
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30,790 |
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See accompanying notes to consolidated financial statements.
4
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
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Three Months Ended |
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March 30, |
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March 31, |
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2002 |
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2001 |
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Net income |
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$ |
14,940 |
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$ |
16,930 |
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Other comprehensive income (loss): |
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Foreign currency translation adjustment |
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(569 |
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(1,425 |
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Unrealized holding gains (losses) on investments: |
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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 $904 for 2002 |
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(1,607 |
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52 |
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Comprehensive income |
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$ |
12,764 |
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$ |
15,557 |
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See accompanying notes to consolidated financial statements.
5
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
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Three Months Ended |
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March 30, |
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March 31, |
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2002 |
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2001 |
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Cash flows from operating activities: |
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Net income |
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$ |
14,940 |
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$ |
16,930 |
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Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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3,005 |
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3,844 |
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Depreciation in market value of investments and marketable securities |
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(271 |
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(296 |
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Deferred income taxes |
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(873 |
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(475 |
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Changes in assets and liabilities: |
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Accounts receivable, net |
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(5,406 |
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7,368 |
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Inventories |
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2,971 |
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905 |
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Other assets |
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2,639 |
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(1,046 |
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Accounts payable |
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1,192 |
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(5,433 |
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Accrued liabilities |
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(3,115 |
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300 |
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Income taxes payable |
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5,975 |
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3,425 |
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Other operating activities |
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1,011 |
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(365 |
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Investments and marketable securities |
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(26,995 |
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(24,681 |
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Net cash provided by (used in) operating activities |
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(4,927 |
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476 |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(2,314 |
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(1,982 |
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Net cash used in investing activities |
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(2,314 |
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(1,982 |
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Cash flows from financing activities: |
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Proceeds from exercise of stock options |
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882 |
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2,277 |
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Issuance of notes payable |
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373 |
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105 |
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Payments for obligation under capital lease, with related party |
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(152 |
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(169 |
) |
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Net cash provided by financing activities |
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1,103 |
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2,213 |
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Effect of exchange rate changes on cash |
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(185 |
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(1,425 |
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Net decrease in cash and cash equivalents |
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(6,323 |
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(718 |
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Cash and cash equivalents at beginning of period |
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26,328 |
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13,776 |
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Cash and cash equivalents at end of period |
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$ |
20,005 |
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$ |
13,058 |
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Supplemental disclosures of cash flow information: |
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Interest paid |
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$ |
55 |
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$ |
92 |
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Income taxes paid |
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2,360 |
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6,001 |
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See accompanying notes to consolidated financial statements.
6
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
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):
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March 30, |
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December 31, |
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2002 |
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2001 |
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Raw material |
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$ |
22,544 |
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$ |
25,410 |
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Work in process |
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1,045 |
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1,360 |
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Finished goods |
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13,228 |
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13,153 |
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Total inventories |
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$ |
36,817 |
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$ |
39,923 |
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Note 3 — Earnings Per Share
Earnings per share were computed as follows (in thousands, except per-share amounts):
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Three Months Ended |
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March 30, |
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March 31, |
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2002 |
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2001 |
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Basic earnings per share: |
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Net income |
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$ |
14,940 |
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$ |
16,930 |
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Weighted average common shares outstanding |
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30,799 |
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30,541 |
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Per share amount |
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$ |
0.49 |
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$ |
0.55 |
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Diluted earnings per share: |
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Net income |
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$ |
14,940 |
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$ |
16,930 |
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Weighted average common shares outstanding |
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30,799 |
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30,541 |
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Add: Effect of dilutive securities — stock options |
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277 |
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249 |
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Diluted weighted average and equivalent shares outstanding |
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31,076 |
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30,790 |
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Per share amount |
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$ |
0.48 |
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$ |
0.55 |
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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.
7
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 $959,000 of amortization of goodwill and other intangible assets that are not included in 2002 results, because of the implementation of SFAS No. 142.
Intangible asset data are as follows (in thousands):
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As of March 30, 2002 |
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Gross Carrying |
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Accumulated |
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Amortized intangible assets |
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Current technology |
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$ |
7,346 |
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$ |
(2,740 |
) |
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Unamortized intangible assets |
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Goodwill |
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$ |
54,455 |
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Aggregate amortization expense |
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For the quarter ended March 30, 2002 |
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$ |
367 |
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Estimated amortization expense |
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|
|
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For the year ended December 31, 2002 |
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$ |
1,468 |
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|
|
|
For the year ended December 31, 2003 |
|
1,468 |
|
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|
||
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For the year ended December 31, 2004 |
|
1,468 |
|
|
|
||
|
For the year ended December 31, 2005 |
|
569 |
|
|
|
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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.
8
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
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$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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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
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3.1 |
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Amendment to By-laws of the Registrant |
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4.1 |
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Rights Agreement between the Registrant and Mellon Investor Services, as Rights Agent |
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10.1 |
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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
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Date: |
April 30, 2002 |
By: |
/s/Edward L. Kaplan |
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Edward L. Kaplan |
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Chief Executive Officer |
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Date: |
April 30, 2002 |
By: |
/s/Charles R. Whitchurch |
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Charles R. Whitchurch |
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Chief Financial Officer |
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