Business Context and Reporting Period
Company: Zebra Technologies Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1998
Business Overview: Zebra designs, manufactures, and distributes bar code label printers, plastic card printers, and related supplies/software for automatic identification and data collection. The company operates globally with over 1,000,000 printers installed in 90+ countries.
Key Event: On October 28, 1998, Zebra merged with Eltron International, Inc. The transaction was accounted for as a pooling-of-interests, and prior period financial data has been restated to reflect the combination.
Key Financial Metrics (Year Ended Dec 31, 1998)
| Metric | 1998 | 1997 (Restated) | 1996 (Restated) |
|---|---|---|---|
| Net Sales | $335,983,000 | $297,100,000 | $252,487,000 |
| Gross Profit | $155,810,000 | $143,708,000 | $117,013,000 |
| Gross Margin | 46.4% | 48.4% | 46.3% |
| Operating Income | $61,636,000 | $71,262,000 | $54,133,000 |
| Net Income | $40,069,000 | $51,792,000 | $36,014,000 |
| Diluted EPS | $1.29 | $1.74 | $1.21 |
| Cash & Marketable Securities | $162,668,000 | $139,320,000 | $103,777,000 |
| Working Capital | $229,688,000 | $209,862,000 | $164,678,000 |
| Long-term Obligations | $36,000 | $314,000 | $3,137,000 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 13.1% to $335.98 million, driven primarily by unit growth in hardware (printers and parts). Hardware sales grew 18.5%, while supplies sales grew 5.4%.
- Profitability Decline: Net income decreased 22.7% to $40.07 million. This decline was significantly impacted by one-time merger-related charges totaling $13.16 million ($8.08 million in merger costs and $5.08 million in accounting adjustments).
- Margin Compression: Gross margin decreased 2.0 percentage points to 46.4%. Excluding one-time merger adjustments, the margin would have been 47.4%. The decline was also attributed to a product mix shift toward lower-margin printers.
- Operating Expenses: General and administrative expenses rose 33.0% due to increased staffing and the activation of a new ERP system. Selling and marketing expenses increased 9.2%.
- Investment Income: Other income dropped significantly from $13.96 million in 1997 to $3.36 million in 1998. The 1997 figure included a one-time $5.46 million gain from the sale of Norand Corporation stock, which was not repeated in 1998.
Guidance, Outlook, and Risks
- Merger Integration: Management expects the merger with Eltron to enhance growth, though integration costs and facility consolidation are ongoing. The company plans to consolidate UK operations in 1999.
- International Expansion: International sales accounted for 40.5% of net sales. Management believes international markets will grow faster than domestic markets due to lower technology penetration. A new sales office was opened in Japan in 1998.
- Year 2000 (Y2K) Compliance: Management believes critical internal systems are compliant or will be by Q3 1999. Estimated compliance costs are $400,000. Risks remain regarding supplier compliance.
- Market Risks: The company is exposed to interest rate fluctuations due to a large investment portfolio and foreign exchange risks (specifically USD/GBP and USD/JPY). The company utilizes selective hedging for currency exposure.
- Customer Concentration: United Parcel Service (UPS) accounted for 10.3% of net sales in 1998. Peak Technologies Group accounted for 9.5%.
Investor Verification Checklist
- Merger Synergies: Verify the timeline and cost savings associated with the Eltron merger integration and facility consolidations.
- Product Mix Trends: Monitor the shift toward lower-priced printer models and its long-term impact on gross margins.
- Investment Portfolio: Assess the composition and risk profile of the $162.7 million cash and marketable securities portfolio, given the volatility in investment income.
- Y2K Readiness: Confirm the status of supplier compliance and the completion of internal system upgrades (payroll and manufacturing control) by Q3 1999.
- Customer Dependency: Evaluate the stability of the top two customers (UPS and Peak Technologies), which collectively represent nearly 20% of revenue.