Business Context and Reporting Period
Company: Zebra Technologies Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 3, 1998
Business Overview: Zebra Technologies manufactures and markets barcode label and plastic card printers, secure card printing systems, ribbons, self-adhesive labels, and related accessories. The company operates globally with significant international sales exposure.
Key Financial Metrics
| Metric (in thousands) | Q3 1998 | Q3 1997 | YTD 9 Months 1998 | YTD 9 Months 1997 |
|---|---|---|---|---|
| Net Sales | $57,354 | $49,889 | $162,922 | $138,742 |
| Gross Profit | $30,677 | $25,011 | $85,608 | $69,715 |
| Gross Margin % | 53.5% | 50.1% | 52.5% | 50.2% |
| Operating Income | $16,997 | $13,651 | $46,099 | $37,353 |
| Net Income | $11,230 | $9,945 | $32,953 | $28,462 |
| Diluted EPS | $0.46 | $0.41 | $1.35 | $1.17 |
| Cash & Equivalents | $7,140 | $7,155 | $7,140 | $9,749 |
| Investments & Securities | $143,589 | $121,698 | $143,589 | $121,698 |
| Total Current Assets | $214,156 | $187,478 | $214,156 | $187,478 |
| Total Current Liabilities | $24,760 | $22,572 | $24,760 | $22,572 |
Liquidity: Total cash, cash equivalents, and marketable securities totaled $150.7 million as of October 3, 1998, up from $128.9 million at year-end 1997. Net cash provided by operating activities for the nine months ended October 3, 1998, was $9.4 million.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 15.0% in Q3 1998 and 17.4% year-to-date compared to 1997. Growth was driven by a 19.0% increase in hardware unit sales, though average unit prices declined slightly due to a shift toward lower-priced models.
- Margin Expansion: Gross profit margin improved to 53.5% in Q3 1998 from 50.1% in Q3 1997, attributed to lower component costs, manufacturing productivity, and favorable product mix.
- Operating Expenses: Operating expenses rose significantly. Sales and marketing increased 17.6% (Q3) due to new product programs and a new Japan office. R&D increased 25.1% (Q3) due to personnel costs and prototype work. G&A increased 20.7% (Q3) due to staffing and ERP system implementation.
- Investment Income Volatility: Other income decreased 68.2% in Q3 1998 due to unrealized losses on securities caused by abnormal financial market volatility. Year-to-date investment income and gains decreased 46.6% compared to 1997, which included a one-time gain of $5.5 million in Q1 1997.
- International Sales: The percentage of international sales declined to 42.8% in Q3 1998 from 45.8% in Q3 1997, primarily due to declines in the Asia-Pacific region.
Guidance, Outlook, Risks, and Unusual Items
- Subsequent Event (Acquisition): On October 28, 1998, Zebra completed the acquisition of Eltron International, Inc. via a pooling of interests. The transaction involved exchanging 6.9 million shares of Zebra Class B Common Stock for all Eltron stock. Pro forma sales for the nine months ended October 3, 1998, would have been $256 million.
- Tax Litigation: The company settled IRS audits for 1993 and 1994, paying $1.0 million in taxes and $403,700 in interest. The Illinois Department of Revenue is challenging the tax status of intangible entities; the company made deposits of $2.9 million pending resolution.
- Year 2000 Compliance: The company's Baan ERP system is compliant. However, the PC-470 printer controller is not currently compliant, though a software reset is planned. The company is surveying suppliers for compliance, noting that failure of significant suppliers to comply could have a material adverse effect.
- Customer Concentration: Sales to The Peak Technologies Group, Inc. (acquired by Moore Corporation) accounted for 14.6% of Q3 1998 sales. Management notes potential adverse effects on label sales due to Moore's position as a label provider.
- Outlook: Management believes existing capital resources are sufficient for anticipated requirements. Forward-looking statements are subject to risks including market acceptance, integration of Eltron, Asia-Pacific market conditions, and foreign exchange rates.
Investor Verification Checklist
- Eltron Integration: Verify the progress and financial impact of the October 1998 acquisition of Eltron International, Inc., specifically regarding the pooling of interests accounting and pro forma synergies.
- Tax Contingencies: Monitor the status of the Illinois Department of Revenue challenge regarding intangible entities and the potential release or utilization of the $2.9 million deposit.
- Supplier Y2K Compliance: Assess the risk of supply chain disruption given the company's reliance on suppliers who may not achieve Year 2000 compliance on time.
- Investment Portfolio: Review the volatility of the company's large investment portfolio ($143.6 million) and its impact on non-operating income in future quarters.
- Customer Concentration: Track sales trends to The Peak Technologies Group/Moore Corporation to evaluate the risk of declining label sales.