Business Context and Reporting Period
Zebra Technologies Corporation, a Delaware corporation, filed this Form 10-Q for the quarterly period ended April 4, 1998. The company manufactures printer products, supplies, and software. As of April 29, 1998, the company had 19,425,187 shares of Class A Common Stock and 4,890,609 shares of Class B Common Stock outstanding.
Key Financial Metrics
| Metric | Q1 1998 | Q1 1997 |
|---|---|---|
| Net Sales | $50,214,000 | $41,009,000 |
| Gross Profit | $26,140,000 | $20,406,000 |
| Gross Margin | 52.1% | 49.8% |
| Operating Income | $13,180,000 | $11,172,000 |
| Net Income | $10,434,000 | $11,235,000 |
| Diluted EPS | $0.43 | $0.46 |
| Cash and Cash Equivalents | $8,379,000 | $7,155,000 |
| Investments and Marketable Securities | $130,707,000 | $121,698,000 |
| Total Current Liabilities | $21,981,000 | $22,572,000 |
| Net Cash from Operating Activities | $3,882,000 | ($1,637,000) |
Material Changes Versus Prior Period
- Revenue Growth: Net sales increased 22.4% to $50.2 million, driven by unit growth in all product categories rather than price increases. Printer sales rose 28.9%, while supplies sales grew 0.7%.
- Profitability: Gross profit increased 28.1% to $26.1 million, with gross margin expanding to 52.1% due to lower material costs and favorable product mix. However, Net Income decreased 7.1% to $10.4 million.
- Operating Expenses: Total operating expenses rose 40.3% to $12.96 million. Sales and marketing expenses increased 36.9%, R&D increased 44.1%, and G&A increased 41.9%, primarily due to increased staffing and consulting costs.
- Investment Income: Total other income decreased 56.5% to $3.15 million. This decline is largely attributed to a one-time pre-tax investment gain of $5.46 million recorded in Q1 1997, which did not recur. Excluding this one-time gain, investment income actually increased 57.1%.
- Cash Flow: Net cash provided by operating activities turned positive at $3.88 million, compared to a use of $1.64 million in the prior year, despite significant net purchases of investments ($10.38 million).
Guidance, Outlook, Risks, and Unusual Items
- Tax Contingencies: The company settled IRS audits for 1993-1994 for $999,500 and Illinois state audits for $190,400. Additionally, the company made a deposit of $2,665,400 regarding a pending challenge by the State of Illinois on the tax status of intangible entities.
- Discontinued Operations: The company discontinued operations of its subsidiary Zebra Technologies VTI in June 1997. A one-time charge of $2.36 million was recorded in Q2 1997; no discontinued operation loss was recorded in Q1 1998.
- Year 2000 Compliance: The company is implementing a Baan system conversion estimated to cost $8.8 million total ($7.1 million capitalized). While printers have no internal clock, the company notes risks if significant customers or suppliers fail to achieve Year 2000 compliance.
- Customer Concentration: Sales to Peak Technologies (acquired by Moore Corporation) accounted for 13% of Q1 1998 net sales. Management notes potential adverse effects on label sales due to Moore Corporation's role as a label provider.
- Liquidity: Management believes existing capital resources and operating cash flows are sufficient for anticipated requirements. There are no current commitments for acquisitions.
Investor Verification Checklist
- Verify the sustainability of the 52.1% gross margin given the decrease in average unit prices for printer products.
- Confirm the status and potential liability of the $2.67 million tax deposit pending with the State of Illinois.
- Assess the impact of Moore Corporation's acquisition of Peak Technologies on future label sales, which currently represent a small but concentrated portion of revenue.
- Monitor the completion timeline and cost overruns of the Year 2000 system conversion project.
- Review the composition of the $130.7 million investment portfolio and its sensitivity to interest rate changes.