Business Context and Reporting Period
Company: Zebra Technologies Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 3, 1999
Business Overview: Zebra Technologies manufactures and markets bar code printers, plastic card printers, secure card printing systems, ribbons, self-adhesive labels, and related accessories. The company merged with Eltron International, Inc. in October 1998, and financial results have been restated to reflect this pooling-of-interests.
Key Financial Metrics
| Metric | Q2 1999 (3 Months) | Q2 1998 (3 Months) | YTD 1999 (6 Months) | YTD 1998 (6 Months) |
|---|---|---|---|---|
| Net Sales | $97,321,000 | $87,040,000 | $187,143,000 | $167,838,000 |
| Gross Profit | $48,195,000 | $41,701,000 | $90,675,000 | $80,562,000 |
| Gross Margin | 49.5% | 47.9% | 48.5% | 48.0% |
| Operating Income | $23,529,000 | $21,237,000 | $41,483,000 | $39,346,000 |
| Net Income | $17,122,000 | $14,037,000 | $29,772,000 | $27,200,000 |
| Diluted EPS | $0.55 | $0.45 | $0.95 | $0.87 |
| Cash & Equivalents | $28,016,000 | N/A | N/A | N/A |
| Total Investments | $165,614,000 | N/A | N/A | N/A |
| Total Current Liabilities | $37,031,000 | N/A | N/A | N/A |
Note: Balance sheet figures are as of July 3, 1999, compared to December 31, 1998. Cash flow from operations for the six months ended July 3, 1999, was $20,332,000.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 11.8% in Q2 1999 and 11.5% year-to-date compared to 1998. Hardware sales grew 12.6%, while supplies sales grew 8.8%.
- Margin Expansion: Gross profit margin improved to 49.5% in Q2 1999 from 47.9% in Q2 1998, driven by lower raw material costs, higher volume, and a better product mix.
- Operating Expenses: General and administrative expenses rose 22.0% in Q2 due to higher payroll and building operations costs. Merger costs of $1,291,000 were recorded in Q2 1999 (totaling $3,160,000 YTD) related to the Eltron integration.
- Investment Income: Investment income surged 55.0% in Q2 to $2,922,000 due to higher average balances in marketable securities.
- Liquidity: Total cash, cash equivalents, and marketable securities increased to $193,630,000 as of July 3, 1999, from $162,668,000 at year-end 1998.
Guidance, Outlook, and Risks
- Merger Integration: The company expects to incur additional merger costs in future quarters of 1999, though specific amounts are not currently estimable.
- Year 2000 (Y2K) Compliance: Management estimates total Y2K compliance costs of approximately $400,000 by December 31, 1999. Most critical systems are compliant, but a manufacturing control system in England is scheduled for upgrade by Q3 1999. The PC-470 printer controller requires a clock reset after January 1, 2000.
- Supplier Risk: While 119 of 126 critical suppliers have confirmed Y2K compliance, the company does not warrant supplier performance. Failure of significant suppliers to comply could have a material adverse effect.
- Market Risks: Results are sensitive to foreign exchange rates (39.8% of sales are international), interest rate fluctuations affecting the large investment portfolio, and market acceptance of products.
- Customer Concentration: No single customer exceeded 10% of sales in 1999. However, United Parcel Service (UPS) accounted for 11.9% of sales in the first six months of 1998.
Investor Verification Checklist
- Verify the trajectory of merger-related costs and their impact on future operating margins.
- Confirm the status of the Y2K upgrade for the Preston, England manufacturing control system.
- Monitor the remaining seven critical suppliers regarding their Y2K compliance status.
- Assess the sustainability of the gross margin expansion given the noted decline in average selling prices for lower-priced printers.
- Review the composition of the $165.6 million investment portfolio and its sensitivity to interest rate changes.