Business Context and Reporting Period
Company: Zebra Technologies Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter ended July 4, 1998 (Second Quarter) and six months ended July 4, 1998.
Business Overview: The Company manufactures and markets bar code label printers, supplies, and related software. As of August 12, 1998, the Company had 19,429,874 shares of Class A Common Stock and 4,890,609 shares of Class B Common Stock outstanding.
Key Financial Metrics
| Metric (in thousands) | Q2 1998 | Q2 1997 | YTD 1998 | YTD 1997 |
|---|---|---|---|---|
| Net Sales | $55,353 | $47,844 | $105,567 | $88,853 |
| Gross Profit | $28,790 | $24,298 | $54,930 | $44,729 |
| Gross Margin % | 52.0% | 50.8% | 52.0% | 50.3% |
| Operating Income | $15,930 | $12,530 | $29,101 | $23,700 |
| Net Income | $11,288 | $7,282 | $21,721 | $18,516 |
| Diluted EPS | $0.46 | $0.30 | $0.89 | $0.76 |
| Cash & Equivalents | $9,372 | $7,155 | $9,372 | $7,155 |
| Investments & Securities | $135,170 | $121,698 | $135,170 | $121,698 |
| Total Current Liabilities | $23,767 | $22,572 | $23,767 | $22,572 |
Liquidity: Total cash, cash equivalents, and marketable securities totaled $144,542,000 as of July 4, 1998, up from $128,853,000 at year-end 1997. Net cash provided by operating activities for the six months ended July 4, 1998, was $8,624,000.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 15.7% in Q2 1998 and 18.8% year-to-date compared to 1997. Growth was driven by a 21.3% increase in hardware unit sales, partially offset by a decline in average unit price due to volume growth in lower-priced models.
- Profitability: Gross margin improved to 52.0% from 50.8% in Q2 1997, attributed to lower component costs, manufacturing productivity, and favorable product mix. Operating income rose 27.1% in Q2 1998.
- Expense Trends: Sales and marketing expenses increased 11.1% in Q2 due to higher staffing and new regional offices. Research and development expenses rose 5.0% in Q2. General and administrative expenses increased 9.9% in Q2.
- International Sales: International sales as a percentage of total net sales declined to 43.0% in Q2 1998 from 47.4% in Q2 1997, primarily due to declines in the Asia-Pacific region.
- Discontinued Operations: The 1997 comparative period included a one-time charge of $2,363,000 related to the discontinuance of the VTI subsidiary and PC retail channel, which is not present in 1998 results.
Guidance, Outlook, Risks, and Unusual Items
- Merger with Eltron: On July 9, 1998, the Company announced a definitive agreement to acquire Eltron International, Inc. in a tax-free pooling-of-interests merger. The transaction is expected to close by early October 1998, subject to shareholder and regulatory approval. Pro-forma sales for the combined entity would exceed $325 million.
- Tax Litigation: The Company settled IRS audits for 1993 and 1994, paying $999,500 in taxes and $403,700 in interest in Q2 1998. Additionally, the Illinois Department of Revenue challenged the tax status of intangible entities, requiring a $2,665,400 deposit pending resolution.
- Year 2000 Compliance: The Company is implementing the Baan enterprise system, which is Year 2000 compliant. Expenditures to date total $8,164,000. The PC-470 printer controller is not currently compliant but can be reset via instructions on the Company's website. Risks remain regarding supplier compliance.
- Significant Customer: Sales to The Peak Technologies Group, Inc. (acquired by Moore Corporation) accounted for 16.5% of Q2 1998 sales. Management notes potential adverse effects on label sales due to Moore's position as a label provider.
- Forward-Looking Risks: Results depend on market acceptance, competitor offerings, cost control, interest rate conditions (due to large investment portfolio), and foreign exchange rates.
Investor Verification Checklist
- Merger Closing: Verify the status of the Eltron International merger, including shareholder approval and regulatory clearance (Hart-Scott-Rodino).
- Tax Contingency: Monitor the resolution of the Illinois Department of Revenue challenge regarding intangible entities and the potential release or forfeiture of the $2.67 million deposit.
- Customer Concentration: Assess the impact of Moore Corporation's acquisition of Peak Technologies on future label supply sales.
- Year 2000 Readiness: Confirm the timeline for completing the Baan system implementation at the UK location and the replacement of the payroll system by year-end 1998.
- Investment Portfolio: Review the composition and performance of the $135 million investment portfolio, given the sensitivity of results to interest rate changes.