UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended October 2, 1999
Commission File Number: 000-19406
Zebra Technologies Corporation
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(Exact name of registrant as specified in its charter)
Delaware 36-2675536
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Corporate Woods Parkway, Vernon Hills, IL 60061
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(Address of principal executive offices) (Zip Code)
(847) 634-6700
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and has been subject to such filing requirements
for the past 90 days.
[ X ] Yes [ ] No
As of November 10, 1999, there were the following shares outstanding:
Class A Common Stock, $.01 par value 24,467,604
Class B Common Stock, $.01 par value 6,871,716
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
QUARTER ENDED OCTOBER 2, 1999
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Independent Auditors' Review Report 3
Consolidated Balance Sheets
as of October 2, 1999 (unaudited) and December 31, 1998 4
Consolidated Statements of Earnings (unaudited)
for the three months and nine months ended October 2, 1999
and October 3, 1998 5
Consolidated Statements of Comprehensive Income (unaudited)
for the three months and nine months ended October 2, 1999
and October 3, 1998 6
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended October 2, 1999 and October 3, 1998 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors and Shareholders
Zebra Technologies Corporation:
We have reviewed the consolidated balance sheet of Zebra Technologies
Corporation and subsidiaries (the Company) as of October 2, 1999, and the
related consolidated statements of earnings and comprehensive income for the
three-month and nine-month periods ended October 2, 1999, and October 3, 1998,
and the related statements of cash flows for the nine-month periods ended
October 2, 1999, and October 3, 1998. These consolidated financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Zebra Technologies Corporation and
subsidiaries as of December 31, 1998, and the related consolidated statements of
earnings, comprehensive income, shareholders' equity, and cash flows for the
year then ended (not presented herein); and in our report dated February 24,
1999, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1998 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/KPMG LLP
Chicago, Illinois
October 27, 1999
3
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
OCTOBER 2, DECEMBER 31,
1999 1998
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ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 19,767 $ 11,391
Investments and marketable securities 196,335 151,277
Accounts receivable, net 70,836 57,654
Inventories 36,057 39,684
Deferred income taxes 5,842 5,137
Prepaid expenses 2,806 1,328
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Total current assets 331,643 266,471
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Property and equipment at cost, less
accumulated depreciation and amortization 39,560 38,850
Other assets 4,477 4,681
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TOTAL ASSETS $ 375,680 $ 310,002
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 25,646 $ 20,565
Accrued liabilities 11,686 11,498
Short-term note payable 185 183
Current portion of obligation under capital lease 16 51
Income taxes payable 7,592 4,486
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Total current liabilities 45,125 36,783
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Obligation under capital lease with related party, less current portion 42 -
Long-term liability 16 36
Deferred income taxes 2,649 1,932
Other 133 367
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TOTAL LIABILITIES 47,965 39,118
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Shareholders' equity:
Preferred Stock, $.01 par value; 10,000,000 shares authorized,
none outstanding - -
Class A Common Stock, $.01 par value; 50,000,000 shares
authorized, 24,362,445 and 22,323,094 shares issued
and outstanding in 1999 and 1998, respectively 244 223
Class B Common Stock, $.01 par value; 28,358,189 shares
authorized, 6,953,401 and 8,619,919 shares issued
and outstanding in 1999 and 1998, respectively 70 86
Additional paid-in capital 57,597 49,854
Retained earnings 269,476 219,772
Accumulated other comprehensive income 328 949
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TOTAL SHAREHOLDERS' EQUITY 327,715 270,884
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 375,680 $ 310,002
============== =================
See accompanying notes to consolidated financial statements.
4
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
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OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
-------------- --------------- -------------- ---------------
Net sales $ 103,988 $ 88,068 $ 291,131 $ 255,906
Cost of sales 48,139 45,687 144,607 132,963
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Gross profit 55,849 42,381 146,524 122,943
Operating expenses:
Selling and marketing 9,937 9,028 29,679 26,441
Research and development 5,219 5,437 16,225 15,972
General and administrative 7,721 6,544 23,005 19,812
Merger-related costs 1,581 -- 4,741 --
-------------- --------------- -------------- ---------------
Total operating expenses 24,458 21,009 73,650 62,225
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Operating income 31,391 21,372 72,874 60,718
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Other income (expense):
Investment income (expense) 1,389 (401) 6,595 3,215
Interest income (expense) (3) 6 (19) (402)
Other, net (1,721) (240) (1,386) 42
-------------- --------------- -------------- ---------------
Total other income (expense) (335) (635) 5,190 2,855
-------------- --------------- -------------- ---------------
Income before income taxes 31,056 20,737 78,064 63,573
Income taxes 11,124 7,524 28,360 23,160
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Net income $ 19,932 $ 13,213 $ 49,704 $ 40,413
============== =============== ============== ===============
Basic earnings per share $ 0.64 $ 0.43 $ 1.60 $ 1.30
Diluted earnings per share $ 0.63 $ 0.42 $ 1.58 $ 1.30
Basic weighted average shares outstanding 31,247 30,894 31,109 30,921
Diluted weighted average
and equivalent shares outstanding 31,648 31,137 31,401 31,189
See accompanying notes to consolidated financial statements.
5
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
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OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
-------------- --------------- -------------- ---------------
Net income $ 19,932 $ 13,213 $ 49,704 $ 40,413
Other comprehensive income (loss):
Foreign currency translation adjustment 1,497 694 (621) 127
-------------- --------------- -------------- ---------------
Comprehensive income $ 21,429 $ 13,907 $ 49,083 $ 40,540
============== =============== ============== ===============
See accompanying notes to consolidated financial statements.
6
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
NINE MONTHS ENDED
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OCTOBER 2, OCTOBER 3,
1999 1998
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Cash flows from operating activities:
Net income $ 49,704 $ 40,413
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 7,318 6,771
Depreciation (appreciation) in market value
of investments and marketable securities (903) 281
Deferred income taxes 12 1,570
Gain on sale of subsidiary's assets - (404)
Changes in assets and liabilities:
Accounts receivable, net (13,182) (14,705)
Inventories 3,627 2,137
Other assets (18) (502)
Accounts payable 5,081 2,708
Accrued liabilities 188 (1,014)
Income taxes payable 3,106 324
Other operating activities (1,478) (3,689)
Net purchases of investments
and marketable securities (44,155) (11,128)
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Net cash provided by operating activities 9,300 22,762
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Cash flows from investing activities:
Purchases of property and equipment (7,806) (19,676)
Proceeds from sale of subsidiary - 2,660
Purchase of investments and marketable securities - (180)
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Net cash used in investing activities (7,806) (17,196)
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Cash flows from financing activities:
Proceeds from exercise of stock options 7,748 1,025
Common stock purchased in connection
with Eltron merger - (8,092)
Borrowings on (repayment of) notes payable (252) 84
Payments for obligation under capital lease 7 (49)
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Net cash provided by (used in) financing activities 7,503 (7,032)
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Effect of exchange rate changes on cash (621) 127
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Net increase in cash and cash equivalents 8,376 (1,339)
Cash and cash equivalents at beginning of period 11,391 10,925
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Cash and cash equivalents at end of period $ 19,767 $ 9,586
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Supplemental disclosures of cash flow information:
Interest paid $ 19 $ 402
Income taxes paid 25,989 17,357
Supplemental disclosures of noncash transactions:
Book value of net assets sold and obligations recorded in
connection with sale of subsidiary - 2,256
See accompanying notes to consolidated financial statements.
7
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
Zebra Technologies Corporation and subsidiaries (the Company), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
latest Annual Report on Form 10-K filed with the Securities and Exchange
Commission. The consolidated balance sheet as of December 31, 1998, presented
herein, has been derived from the audited consolidated balance sheet contained
in the Annual Report on Form 10-K. In the opinion of the Company, the interim
consolidated financial statements reflect all adjustments necessary to present
fairly the consolidated financial position of the Company as of October 2, 1999,
the consolidated results of operations and comprehensive income for the three
months and nine months ended October 2, 1999, and October 3, 1998, and cash
flows for the nine months ended October 2, 1999, and October 3, 1998. The
results of operations for such interim periods are not necessarily indicative of
the results for the full year.
On October 28, 1998, the Company merged with Eltron International, Inc.
(Eltron). Eltron manufactures and markets high-quality, low-cost direct thermal
and thermal transfer bar code printers, plastic card printers, secure card
printing systems, ribbons, self-adhesive labels, and related accessories
throughout the world. Financial results for the Company have been restated to
reflect the merger as a pooling-of-interests.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS: THIRD QUARTER OF 1999 VERSUS THIRD QUARTER OF 1998, AND
YEAR-TO-DATE 1999 VERSUS YEAR-TO-DATE 1998
Net sales for the third quarter increased 18.1% to $103,988,000 from
$88,068,000. Hardware sales (printers and replacement parts) increased 20.0%,
driven by unit volume increases that were partially offset by lower average unit
prices. For the third quarter, hardware sales accounted for 81.0% of net sales.
Supplies sales increased 10.3% to comprise 16.9% of net sales. The remaining
2.0% of net sales consisted of service and software revenue. For the year
to-date, net sales increased 13.8% to $291,131,000 from $255,906,000 in 1998.
International sales for the third quarter of 1999 were $39,341,000, compared
with $34,062,000 for a 15.5% increase. The Company's sales to North American
customers increased 19.7% to $64,648,000 from $54,006,000. International sales
comprised 37.8% of net sales in the third quarter of 1999 and 38.7% in the third
quarter of 1998. For the first nine months of 1999, international sales
increased 13.7% to $114,710,000 from $100,851,000 for the same period in 1998.
Gross profit for the third quarter of 1999 increased 31.8% to $55,849,000 from
$42,381,000. Gross profit margin increased to 53.7% from 48.1%. The increase in
gross profit margin was due to lower average unit production costs and the
higher sales volume, partially offset by lower average selling prices resulting
from a change in product mix toward lower-margin products. For the first nine
months of 1999, gross profit increased 19.2% to $146,524,000, or 50.3% of net
sales, from $122,943,000, or 48.0% of net sales, in the same period of 1998.
Selling and marketing expenses for the third quarter increased 10.1% to
$9,937,000 from $9,028,000. The increase resulted primarily from higher trade
show and advertising expenses, followed by higher personnel-related expenses
resulting from increased staffing levels. As a percentage of net sales, third
quarter selling and marketing expenses decreased to 9.6% from 10.3%. For the
year to-date, selling and marketing expenses increased 12.2% to $29,679,000 from
$26,441,000, but declined as a percentage of net sales to 10.2% from 10.3%.
Research and development expenses for the third quarter decreased 4.0% to
$5,219,000 from $5,437,000. This decrease was due to lower project, production
supplies, and personnel-related expenses, partially offset by higher expenses
related to outside consulting services. As a percentage of net sales, quarterly
research and development expenses declined to 5.0% from 6.2%. For the year
to-date, research and development expenses increased 1.6% to $16,225,000 from
$15,972,000, but declined to 5.6% of net sales from 6.2% of net sales.
General and administrative expenses for the third quarter increased by 18.0% to
$7,721,000 from $6,544,000. The increase primarily resulted from higher expenses
for computers and related equipment, building operations, and personnel
resulting from higher staffing levels. As a percentage of net sales, quarterly
general and administrative expenses were unchanged at 7.4%. For the year
to-date, general and administrative expenses increased 16.1% to $23,005,000 from
$19,812,000, and represented 7.9% of net sales compared with 7.7% of net sales.
During the third quarter of 1999, Zebra recorded $1,581,000 in merger-related
costs for the integration of Eltron operations. These costs, which could not be
provided for at the time of the merger, include expenditures on consulting fees,
as well as personnel-related expenses for relocation, severance, and
recruitment. The Company expects to incur additional merger costs in the fourth
quarter of 1999 and through the second quarter of 2000, the amounts of which are
not currently estimable. For the year to-date, merger costs totaled $4,741,000.
Operating income for the third quarter increased 46.9% to $31,391,000, or 30.2%
of net sales, from $21,372,000, or 24.3% of net sales. Excluding the $1,581,000
in merger costs, operating income increased 54.3% to $32,972,000, or 31.7% of
net sales. For the year to-date, operating income was $72,874,000, or 25.0% of
net sales, up 20.0% from $60,718,000, or 23.7% of net sales. Excluding
$4,741,000 in merger costs, 1999 year-to-date operating income increased 27.8%
to $77,615,000, or 26.7% of net sales.
Investment income increased to $1,389,000 from a loss of $401,000. The increase
was principally due to a more normalized return on the Company's investment
portfolio, compared with the loss resulting from the unusually high
9
volatility in the capital markets during the third quarter of 1998. For the year
to-date, investment income increased 105.1% to $6,595,000 from $3,215,000,
related to a more normalized return on the investment portfolio in 1999 as well
as higher invested balances.
Other expense for the third quarter of 1999 totaled $1,721,000, compared with
$240,000 for the third quarter of 1998. The expense increase contains certain
one-time items, including a settlement for some claims that were settled prior
to any litigation and were unrelated to the company's operations.
Income before income taxes for the third quarter of 1999 was $31,056,000, up
49.8% from $20,737,000 for the same period in 1998. For the year to-date, income
before income taxes increased 22.8% to $78,064,000 from $63,573,000.
The effective income tax rate for the third quarter of 1999 was 35.8%, compared
with 36.3% for the same period in 1998. Net income was $19,932,000, or $0.63 per
diluted share, compared with $13,213,000, or $0.42 per diluted share. Excluding
the $1,581,000 in merger-related costs and related income tax benefit, net
income for the third quarter of 1999 was $20,950,000, or $0.66 per diluted
share. For the year to-date, the Company's effective income tax rate was 36.3%,
compared with 36.4%. Net income was $49,704,000, or $1.58 per diluted share,
compared with $40,413,000, or $1.30 per share on a diluted and primary basis.
Excluding the $4,741,000 in merger-related costs and related income tax benefit
in 1999, year-to-date net income was $52,723,000, or $1.68 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity continues to be cash generated from
operations. Cash and cash equivalents and investments and marketable securities
totaled $216,102,000 at October 2, 1999, compared with $162,668,000 at December
31, 1998.
Management believes that existing capital resources and funds generated from
operations are sufficient to finance anticipated capital requirements.
YEAR 2000 CONSIDERATIONS
INTERNAL SYSTEMS. Management believes that substantially all of the Company's
critical internal computer systems and technical infrastructure are Year 2000
(Y2K) compliant.
PRODUCTS. The Company has reviewed its entire product line for Y2K compliance
issues and has identified those products that will be affected. In general, Y2K
issues do not affect the Company's printer products because they contain no
internal clock or timing mechanism. The Company recently introduced an internal
real time clock feature on a limited number of Zebra-brand printers. In
addition, certain Eltron-brand printer products are available with an optional
internal time and date clock. These features are Y2K compliant. In addition, the
Company's PC-470 printer controller contains a real-time clock that must be
reset to function properly after January 1, 2000. All but one of the Company's
current software products are Y2K compliant, although in some cases previous
versions of these software products were not Y2K compliant. An updated
Y2K-compliant version of the one software product that is not currently Y2K
compliant has been completed and is in quality testing. This upgrade is expected
to be released for distribution around the end of November 1999. In all cases
where products are not Y2K compliant, customers have been notified via letter or
postings on the Company's web site about any corrective action that is needed,
including, where appropriate, a requirement to upgrade certain software
products.
SUPPLIERS. The Company surveyed each of its significant suppliers to determine
their ability to provide necessary products and services that are critical to
business continuation through Y2K. They have advised us that they expect no
adverse affect from Y2K on their ability to support Zebra's manufacturing and
distribution operations.
Despite these assurances of compliance, the Company does not warrant the
performance of its suppliers. The failure by one or more significant suppliers
to achieve compliance could have a material adverse effect on the Company. The
Company has not undertaken to quantify the effect of such possible
non-compliance or to determine the likely worst-case scenario or to develop
contingency plans to deal with such a scenario.
Management estimates that it will have incurred approximately $400,000 of costs
to ensure Y2K compliance by December 31, 1999. This includes approximately
$200,000 of direct expenditures to upgrade its systems and products and
approximately $200,000 of management and internal technical support to upgrade
systems and ensure the status of compliance within the Company's supplier base.
This estimate does not include the cost of new systems
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or system upgrades that were made for reasons other than Y2K compliance but
included Y2K compliance as part of the upgrade package. Specifically excluded
from the cost of Y2K compliance is the cost of the Company's recent conversion
to the Baan ERP system and the cost of its new payroll/human resources system,
both of which were made for reasons other than Y2K compliance.
SIGNIFICANT CUSTOMER
During the third quarter of 1999, sales to ScanSource, Inc., represented 12.5%
of net sales, but represented less than 10.0% of net sales for the year to-date
and for the corresponding periods in 1998. No other single customer comprised
10.0% or more of the Company's sales for the third quarter of 1999 or the year
to-date. Sales to one of the Company's designated key accounts, United Parcel
Service (UPS), however, accounted for 11.0% of total sales for the first nine
months of 1998.
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SAFE HARBOR
Forward-looking statements contained in this filing are subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995 and are
highly dependent upon a variety of important factors which could cause actual
results to differ materially from those reflected in such forward looking
statements. These factors include market acceptance of the Company's printer and
software products and competitors' product offerings. They also include the
success and speed of the Company's integration with Eltron, as well as the
effect of market conditions in the various regions of the world in which the
Company conducts business on the Company's financial results. Profits will be
affected by the Company's ability to control manufacturing and operating costs.
Because of the Company's large investment portfolio, interest rate and financial
market conditions will also have an impact on results. Foreign exchange rates
will have an effect on financial results due to the large percentage of the
Company's international sales. When used in this document and documents
referenced, the words "anticipate," "believe," "estimate," and "expect" and
similar expressions as they relate to the Company or its management are intended
to identify such forward-looking statements. Readers of this document are
referred to prior filings with the Securities and Exchange Commission, including
Zebra's Form 10-K for the year ended December 31, 1998, and the joint proxy
statement/prospectus dated September 21, 1998, particularly the "Risk Factors"
section, for further discussions of issues that could affect Zebra's future
results.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk during the
third quarter ended October 2, 1999. For additional information on market risk,
refer to the "Quantitative and Qualitative Disclosures About Market Risk"
section of the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
13
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
15.1 Acknowledgment of Independent Certified Public Accountants
Regarding Independent Auditors' Review Report
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
(b) Reports.
No reports on Form 8-K have been filed by the Registrant for
the quarterly period covered by this report.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZEBRA TECHNOLOGIES CORPORATION
Date: November 10, 1999 By: /s/Edward L. Kaplan
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Edward L. Kaplan
Chief Executive Officer
Date: November 10, 1999 By: /s/Charles R. Whitchurch
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Charles R. Whitchurch
Chief Financial Officer
15