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 April 4, 1998
Commission File Number: O-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 April 29, 1998, there were the following shares outstanding:
Class A Common Stock, $.01 par value 19,425,187
Class B Common Stock, $.01 par value 4,890,609
1
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
QUARTER ENDED APRIL 4, 1998
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Independent Auditors' Review Report 3
Consolidated Balance Sheets (unaudited)
as of April 4, 1998 and December 31, 1997 4
Consolidated Statements of Earnings and Comprehensive
Income (unaudited) for the three months ended April 4,
1998 and March 29,1997 5
Consolidated Statements of Cash Flows (unaudited)
for the three months ended April 4, 1998 and March 29,1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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 as of April 4, 1998, and the related
consolidated statements of earnings and comprehensive income and cash flows
for the three-month periods ended April 4, 1998 and March 29, 1997. These
consolidated financial statements are the responsibility of the Company's
management.
We conducted our review 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 review, 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, 1997, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for the year
then ended (not presented herein); and in our report dated February 27, 1998,
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, 1997 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which
it has been derived.
KPMG Peat Marwick LLP
Chicago, Illinois
April 21, 1998
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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
APRIL 4, DECEMBER 31,
1998 1997
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ASSETS
Current assets:
Cash and cash equivalents $8,379 $7,155
Investments and marketable securities 130,707 121,698
Accounts receivable, net of allowance of $1,524 in 1998 and $1,788 in 1997 31,731 31,032
Inventories 21,518 22,443
Deferred income taxes 1,889 4,307
Prepaid expenses 943 843
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Total current assets 195,167 187,478
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Machinery and equipment at cost, less
accumulated depreciation and amortization 14,203 12,753
Other assets 3,802 3,353
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TOTAL ASSETS $213,172 $203,584
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $11,329 $11,141
Accrued liabilities 4,758 6,900
Short-term note payable 137 137
Current portion of obligation under capitalized lease with related party 66 65
Income taxes payable 5,691 4,329
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Total current liabilities 21,981 22,572
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Obligation under capitalized lease with related party, less current portion 34 51
Long-term liability 0 212
Deferred income taxes 579 911
Other 285 287
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TOTAL LIABILITIES 22,879 24,033
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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, 19,424,812 and 19,413,933 shares issued
and outstanding in 1998 and 1997, respectively 194 194
Class B Common Stock, $.01 par value; 28,358,189 shares
authorized, 4,890,609 shares issued and outstanding
in 1998 and 1997 49 49
Paid-in capital 30,154 29,984
Retained earnings 159,213 148,779
Accumulated other comprehensive income 683 545
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TOTAL SHAREHOLDERS' EQUITY 190,293 179,551
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $213,172 $203,584
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4
ZEBRA TECHNOLOGIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
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APRIL 4, MARCH 29,
1998 1997
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Net sales $50,214 $41,009
Cost of sales 24,074 20,603
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Gross profit 26,140 20,406
Operating Expenses:
Sales and marketing 5,303 3,875
Research and development 3,446 2,392
General and administrative 4,211 2,967
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Total operating expenses 12,960 9,234
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Income from operations 13,180 11,172
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Other income (expense):
Investment income 1,275 1,082
Gain on securities 1,321 6,028
Other, net 552 121
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Total other income 3,148 7,231
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Income from continuing operations before taxes 16,328 18,403
Provision for income taxes 5,894 6,876
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Income from continuing operations 10,434 11,527
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Discontinued operation:
Loss from discontinued operation (less
applicable income tax benefit) -- (292)
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Net income $10,434 $11,235
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Other comprehensive income,
foreign currency translation adjustments 138 (763)
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Comprehensive income $10,572 $10,472
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Basic earnings per share from continuing operations $0.43 $0.48
Diluted earnings per share from continuing operations $0.43 $0.47
Basic earnings per share $0.43 $0.46
Diluted earnings per share $0.43 $0.46
Basic weighted-average shares outstanding 24,312 24,240
Diluted weighted-average and equivalent shares
outstanding 24,393 24,269
5
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
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APRIL 4, MARCH 29,
1998 1997
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Cash flows from operating activities:
Net income $10,434 $11,235
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,150 909
Appreciation in market value of investments &
marketable securities 1,370 564
Deferred income taxes 2,086 1,578
Decrease (increase) in accounts receivable (699) 3,455
Decrease in inventories 925 1,069
Decrease (increase) in other assets (549) 165
Increase (decrease) in accounts payable 188 (3,051)
Increase (decrease) in accrued expenses (2,142) 810
Increase in income taxes payable 1,362 3,526
Net increase (decrease) in other operating activities 136 (986)
Net purchases of investments and marketable securities (10,379) (20,911)
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Net cash provided by (used in) operating activities 3,882 (1,637)
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Cash flows from investing activities:
Purchases of machinery and equipment (2,600) (706)
Net sales of investments and marketable securities 0 5,479
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Net cash provided by (used in) investing activities (2,600) 4,773
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Cash flows from financing activities:
Net proceeds from exercise of stock options 170 0
Issuance of short-term notes payable 0 82
Payment of long-term notes payable (212) 0
Payments for obligation under capital lease (16) (15)
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Net cash provided by (used in) financing activities (58) 67
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Net increase in cash and cash equivalents 1,224 3,203
Cash and cash equivalents at beginning of period 7,155 5,168
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Cash and cash equivalents at end of period $8,379 $8,371
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Supplemental disclosures of cash flow information:
Interest paid $2 $3
Income taxes paid $928 $1,100
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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, 1997 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 consolidated financial statements reflect all
adjustments necessary to present fairly the consolidated financial position
of Zebra Technologies Corporation and subsidiaries as of April 4, 1998 and
December 31, 1997, and the consolidated results of their operations and their
cash flows for the three months ended April 4, 1998 and March 29, 1997. The
results of operations for such interim periods are not necessarily indicative
of the results for the full year.
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" for the quarter ended April 4, 1998.
Required changes are reported in the Consolidated Statements of Earnings and
Comprehensive Income.
Note 2 - Discontinued Business Operations
As of June 28, 1997, the Company made the decision to discontinue the
operations of its subsidiary, Zebra Technologies VTI ("VTI"). A one-time
charge of $2,363,000, before income tax benefits, was recorded in the second
quarter of 1997 and was related to the discontinuance of VTI and the
Company's presence in the PC retail channel. The one-time charge includes a
provision for expected product returns from present retail channel partners,
provision for slow moving/obsolete product, and provisions for estimated
contingent liabilities. Due to the discontinuance of Zebra Technologies VTI,
the Company's 1997 quarterly financial statements have been revised to
reflect such discontinuance.
Note 3 - Tax Audits and Related Litigation
As of April 4, 1998, the Company has completed the IRS audits covering
federal income tax returns from 1993 and 1994. Settlements with the IRS for
both years amounted to $999,500 and were recorded during the quarter ended
April 4, 1998.
The State of Illinois income tax audit covering the same tax years was also
settled during the quarter. A settlement of $190,400 was paid in April 1998
for tax years 1993 and 1994.
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The Company has recently been challenged by the State of Illinois, Department
of Revenue on the tax status and treatment of the Company's intangible
entities. Although the Company believes they have a sustainable tax position,
they were required to make a deposit of $2,665,400 while the matter is
pending. This deposit was made in April 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FIRST QUARTER OF 1998 VERSUS FIRST QUARTER OF 1997
Net sales for the first quarter of 1998 increased 22.4% to $50,214,000 versus
sales of $41,009,000 for the first quarter of 1997. This sales increase is
attributed to unit growth in all product categories rather than price
increases, as the average unit price of printer products has decreased due to
product mix changes. Printer sales increased by 28.9% and supplies sales by
0.7% over the first quarter of 1997, bringing printer sales to 76.9% and
supplies sales to 20.2% of consolidated net sales, respectively. The
remaining 3.0% of net sales consisted of service and software revenue.
Approximately 44.4% of first quarter net sales were derived from
international sources as compared to 47.0% during the first quarter of 1997.
Gross profit increased to $26,140,000 for the first quarter of 1998, a 28.1%
gain over gross profit of $20,406,000 for the first quarter of 1997. As a
percentage of net sales, gross profit increased 2.3% from 49.8% to 52.1%.
This increase is principally due to decreased material costs of high volume
printer parts plus a favorable product mix within the Company's printer
products and a lower percentage of supplies sales.
Sales and marketing expenses of $5,303,000 were up 36.9% for the first
quarter of 1998 compared to $3,875,000 in the first quarter of 1997. As a
percentage of net sales, first quarter sales and marketing expenses were
10.6% compared to 9.4% for the same period last year. Increased spending was
the result of increased staffing in the Vernon Hills and Europe locations,
advertising, trade show, co-op, and travel expenses. The increases were
offset in part by decreased bad debt and consulting expenses.
Research and product development expenses for the first quarter of 1998
increased by 44.1% to $3,446,000 (6.9% of net sales) as compared to
$2,392,000 (5.8% of net sales) in the first quarter of 1997. Increases
resulted from increased staffing, product development expenses, and
consulting.
General and administrative expenses for the first quarter of 1998 increased
by 41.9% to $4,211,000 (8.4% of net sales) as compared to $2,967,000 (7.2% of
net sales) in the first quarter of 1997. The dollar increases were the
result of increases in staffing, recruiting, computer software, computer
repair and maintenance, outside consulting, tax planning, 401(k) services,
and shareholder services.
Income from operations for the first quarter of 1998 increased by $2,008,000
or 18.0% to $13,180,000 (26.2% of net sales) compared to $11,172,000 (27.2%
of net sales) for the first quarter of 1997. This was due to increased gross
profit offset in part by increased operating expenses, as previously
indicated.
Investment income and gain on securities for the first quarter of 1998
decreased by $4,514,000 or 63.5% to $2,596,000 versus $7,110,000 for the
first quarter of 1997. Excluding a one-time pre-tax investment gain of
$5,458,000 in the first quarter of 1997, investment income and gain on
securities rose by $944,000 or 57.1%.
9
Net income from continuing operations before income taxes was $16,328,000 in
the first quarter of 1998 compared to $18,403,000 in the same quarter of
1997, a decrease of $2,075,000 or 11.3% due to the one-time investment gain
last year as previously discussed. Income taxes were provided at a rate of
36.1% in the first quarter of 1998 resulting in income from continuing
operations and net income of $10,434,000 or 20.8% of net sales, and $0.43 per
basic share and $0.43 per diluted share. In the first quarter of 1997, the
provision for taxes was 37.4% resulting in income from continuing operations
of $11,527,000 or 28.1% of net sales and $0.48 per basic share and $.47 per
diluted share.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity continue to be cash generated
from operations. At the end of the first quarter, the Company had
$139,086,000 in cash and cash equivalents, and investments and marketable
securities versus $128,853,000 at the end of 1997.
Management believes that existing capital resources and funds generated from
operations are sufficient to finance anticipated capital requirements. The
Company has no commitments or agreements with respect to acquisitions or
other significant capital expenditures.
YEAR 2000 CONSIDERATIONS
The Company initiated an enterprise-wide system conversion in 1994 to meet
changing business needs, using the Baan system. This system is year 2000
compliant and its implementation is planned to be completed in the second
quarter of 1998 for Vernon Hills and completed by year-end 1998 for the
United Kingdom location. In addition, the Company's payroll system, not
covered by the Baan system, will also be replaced by the end of 1998. The
payroll system will integrate payroll with the Company's human resources
software and will be year 2000 compliant. To date, expenditures on the Baan
project have aggregated $5,128,000 of which $3,877,000 has been capitalized.
At completion, total expenditures are estimated to be $8,800,000 of which
$7,100,000 is estimated to be capitalized.
The Company is in the process of analyzing its significant customers and
suppliers to determine whether they are Year 2000 compliant. There can be no
guarantee that such customers or suppliers will achieve such compliance on a
timely basis. The failure by one or more significant customers or suppliers
to achieve such compliance could have a material adverse effect on the
Company.
The Company's printers have no internal clock or dating mechanism and will
not be effected by the change in dates. The Company's labeling and other
software is Year 2000 compliant with the exception of the LABEL software,
which is dependent on the BIOS of the systems on which the software runs or
the external data source being Year 2000 compliant.
SIGNIFICANT CUSTOMER
Sales to Peak Technologies accounted for 13% of the Company's total net sales
in the first quarter of 1998 and 18% in the first quarter of 1997. Peak
Technologies was acquired by Moore Corporation in June 1997. Management
recognizes that Moore Corporation is a major provider of labels, which
10
could have an adverse affect on Zebra sales of its label products to Peak
Technologies. Label sales to Peak Technologies accounted for 2% of Zebra's
total net sales in the first quarter of 1998 and 3% in the first quarter of
1997.
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 the acceptance of the Company's
printer and software products by the market, and product offerings made by
its competitors. Profits will be affected by the Company's ability to control
manufacturing and operating costs. Due to the Company's large investment
portfolio, interest rate conditions will also have an impact on results, as
will foreign exchange rates due to the large percentage of the Company's
sales in international markets. 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 release
are referred to prior filings with the Securities and Exchange Commission,
and Zebra's prospectus of September 4, 1997 for further discussions of
factors that could affect Zebra's future results.
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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
(b) Reports.
No reports on Form 8-K have been filed by the Registrant for the
quarterly period covered by this report.
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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: April 29, 1998 By: /s/Edward L. Kaplan
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Edward L. Kaplan
Chief Executive Officer
Date: April 29, 1998 By: /s/Charles R. Whitchurch
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Charles R. Whitchurch
Chief Financial Officer
13