UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2000
Commission File Number: 000-19406
Zebra Technologies Corporation (Exact name of registrant as specified in its charter)
(847) 634-6700(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 9, 2000, there were the following shares outstanding:
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES QUARTER ENDED SEPTEMBER 30, 2000 INDEX
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PART I — FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Independent Auditors' Review Report
The Board of DirectorsZebra Technologies Corporation:
We have reviewed the consolidated balance sheet of Zebra Technologies Corporation and subsidiaries as of September 30, 2000, and the related consolidated statements of earnings and comprehensive income for the three-month and nine-month periods ended September 30, 2000 and October 2, 1999, and cash flows for the nine-month periods ended September 30, 2000 and October 2, 1999. 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, 1999, 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 January 31, 2000, 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, 1999 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ KPMG LLP
Chicago, IllinoisOctober 13, 2000
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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share and per share data)
See accompanying notes to consolidated financial statements.
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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Amounts in thousands, except per share data)(Unaudited)
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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands) (Unaudited)
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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
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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, 1999, 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 September 30, 2000, and the consolidated results of operations for the three months and nine months ended September 30, 2000, and cash flows for the nine months ended September 30, 2000, and October 2, 1999. The results of operations for such interim periods are not necessarily indicative of the results for the full year.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations: Third Quarter of 2000 versus Third Quarter of 1999, and Year-to-Date 2000 versus Year-to-Date 1999
Net sales for the third quarter of 2000 increased 23.3% to $128,230,000 from $103,988,000 and included sales from Comtec Information Systems, Inc., which the Company acquired in April 2000. Sales of hardware (printers and replacement parts) increased 21.5%, sales of supplies increased 19.5%, and service and software revenue increased 127.2%. As a percentage of net sales, hardware sales accounted for 79.8%, compared with 81.0% for the third quarter of 1999. Supplies sales accounted for 16.4% of net sales for the third quarter of 2000 versus 16.9% for the third quarter of 1999, and service and software revenue accounted for 3.8% of net sales versus 2.0%. The decline in percentage of sales derived from supplies and increasing percentage of service and software revenue were principally due to the effect of Comtec on the Company's sales mix. For the year to-date, net sales increased 22.0% to $355,204,000 from $291,131,000.
International sales for the third quarter were $44,693,000, or 34.9% of net sales in 2000, compared with $39,341,000, or 37.8% of net sales, in 1999, and amounted to a 13.6% increase. The decline in the percentage of international sales was principally due to the lower proportion of international sales from Comtec. In addition, for the third quarter of 2000, sales growth was restricted by the strength of the U.S. dollar versus the U.K. pound. Management estimates that this change in foreign exchange rates reduced sales for the third quarter of 2000 by approximately $2,200,000. It is difficult for management to forecast the direction of foreign exchange movements, and therefore, the potential impact of foreign exchange rates will have on future financial results, either positively or negatively.
For the third quarter of 2000, net sales in North America increased 29.2%. The incremental sales provided by Comtec contributed to the sales growth in North America, which otherwise experienced sales growth below historical rates. Management expects this trend to continue in the fourth quarter of 2000 but cannot predict the long-term sales outlook. All of the Company's international geographic territories recorded sales increases, with Asia Pacific and Latin America experiencing particularly high growth rates. Management expects that international markets hold significant long-term growth opportunities for the Company, since it believes that barcoding and other auto-id technologies are not as well adopted in international markets as in North America. For the first nine months of 2000, international sales increased 19.2% to $136,786,000, or 38.5% of net sales, from $114,710,000, or 39.4% of net sales.
Gross profit for the third quarter increased 15.4% to $64,180,000 in 2000 from $55,617,000 in 1999. As a percentage of net sales, quarterly gross profit decreased to 50.1% from 53.5%. Foreign currency translation on products sold into Europe, generally lower gross margin percentages on Comtec products, increased prices for some electronic components, and lower average unit product prices contributed to the lower gross profit margin. Higher production volumes partially offset the affect of these factors. For the year to-date, gross profit for 2000 totaled $175,873,000, or 49.5% of net sales, compared with $146,777,000, or 50.4% of net sales, for overall growth of 19.8%.
Selling and marketing expenses for the third quarter of 2000 increased 20.4% to $11,837,000 from $9,831,000 for the third quarter of 1999. This growth was primarily due to increased payroll and benefits related to the Comtec acquisition. As a percentage of net sales, third quarter selling and marketing expenses decreased to 9.2% from 9.5%. For the first nine months of 2000, selling and marketing expenses increased 22.2% to $34,920,000 from $28,587,000 for the corresponding period in 1999. As a percentage of net sales for the year to-date, selling and marketing expenses were unchanged at 9.8%.
Research and development expenses for the third quarter of 2000 were $6,609,000, up 24.7% from $5,299,000 in 1999. Increases in personnel-related expenses from higher staffing levels, primarily related
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to the Comtec acquisition were largely responsible for the increase. As a percentage of net sales, quarterly research and development expenses increased to 5.2% from 5.1%. For the first nine months of 2000, research and development expenses increased 20.1% to $19,727,000 from $16,422,000. Year to-date, research and development expenses represented 5.6% of net sales in 2000 and 1999.
For the third quarter of 2000, general and administrative expenses increased by 2.8% to $7,892,000 from $7,676,000. Lower expenses for business development, outside professional services, and other non-payroll expenses significantly offset higher payroll-related expenses. Quarterly general and administrative expenses decreased to 6.2% of net sales in 2000 from 7.4% of net sales in 1999. For the first nine months of 2000, general and administrative expenses increased 1.9% to $24,127,000 from $23,677,000, but decreased to 6.8% of net sales from 8.1% of net sales.
Amortization of intangible assets totaled $1,336,000 for the third quarter of 2000, compared with $71,000 for the same period in 1999. The increase in amortization of intangible assets was related to the Comtec acquisition. For the first nine months of 2000, amortization of intangible assets totaled $2,747,000, compared with $223,000 for the corresponding period in 1999.
For the third quarter of 2000, the Company recorded $1,651,000 in merger costs related to the integration of Comtec Information Systems. These costs, which could not be provided for at the time of the transaction, consisted principally of expenditures on information technology infrastructure and product line rationalization. For the third quarter of 1999, merger costs of $1,581,000 were related to the October 1998 acquisition of Eltron International, Inc. The Company expects to incur merger costs related to the Comtec acquisition through the fourth quarter of 2001. For the year to-date in 2000, merger costs totaled $4,392,000, compared with $4,741,000 for the same period in 1999.
Operating income for the third quarter of 2000 increased 11.9% to $34,855,000, or 27.2% of net sales, from $31,159,000, or 30.0% of net sales. Excluding the merger-related costs described above, operating income increased 11.5% to $36,506,000, or 28.5% of net sales from $32,740,000, or 31.5% of net sales. For the first nine months of 2000, operating income totaled $84,007,000, or 23.7% of net sales, which was up 14.9% from $73,127,000 for the same period in 1999. Excluding the merger-related costs and the $5,953,000 charge for acquired in-process technology recorded in the second quarter of 2000 for the Comtec acquisition, year-to-date operating income increased 21.2% to $94,352,000, or 26.6% of net sales, from $77,868,000, or 26.7% of net sales.
Investment income for the third quarter of 2000 decreased $114,000, or 8.2%, to $1,275,000 from $1,389,000. The decline was due to lower invested balances in marketable securities and approximately $1,000,000 in interest expense on short-term notes payable, partially offset by higher investment returns. For the year to-date, investment income totaled $7,807,000 in 2000, up 18.4% from $6,595,000 in 1999.
Other expenses for the third quarter of 2000 included $513,000 in foreign currency losses on the value of net monetary assets denominated in non-functional currencies, principally euro-denominated cash and receivable balances from the Company's U.K. subsidiary. For the third quarter of 1999, the Company recorded a foreign currency gain of $65,000. During the third quarter of 2000, the Company had in place a hedging program to reduce losses related to fluctuating exchange rates between the U.S. dollar and the euro and pound sterling. The Company estimates that it would have incurred an additional $1,100,000 in losses related to foreign exchange rate movements without this hedging program, which remains in force for the fourth quarter of 2000. For the first nine months of 2000, other income totaled $1,099,000, compared with $4,937,000 for the same period in 1999.
Income before income taxes for the third quarter of 2000 was $35,296,000, compared with $31,056,000 for the same period in 1999, for an increase of 13.7%. For the year to-date, income before income taxes amounted to $85,106,000, up 9.0% from $78,064,000 for the first nine months of 1999.
The Company's effective income tax rate for the third quarter of 2000 was 36.0%, compared with 35.8% for the third quarter of 1999. Net income was $22,590,000, or $0.73 per diluted share, compared
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with $19,932,000, or $0.63 diluted per share. Excluding merger costs, net income for the third quarter of 2000 was $23,646,000, or $0.77 per diluted share, compared with $20,950,000, or $0.66 per diluted share, for the third quarter in 1999.
For the year to-date, the Company's effective income tax rate for 2000 was 36.0%, compared with 36.3% for the first nine months of 1999. Net income was $54,468,000, up 9.6% from $49,704,000. On a per-share basis, diluted earnings were $1.74 for the first nine months of 2000, compared with $1.58 for the same period in 1999. Excluding merger costs and the charge for acquired in-process technology recorded in the second quarter of 2000 for the Comtec acquisition, net income for the first nine months of 2000 was $61,089,000, or $1.95 per diluted share, up 15.9% from $52,723,000, or $1.68 per diluted share, for the corresponding period in 1999.
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 $143,350,000 at September 30, 2000, compared with $235,568,000 at December 31, 1999.
Management believes that existing capital resources and funds generated from operations are sufficient to finance anticipated capital requirements.
Significant Customer
During the third quarter of 2000, sales to one customer, ScanSource, Inc., comprised 10.0% or more of the Company's net sales. No customer comprised 10.0% or more of net sales for the year to-date in 2000.
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 Comtec, as well as the effect of market conditions in the North America and other geographic regions 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 the Company's Form 10-K for the year ended December 31, 1999, for further discussions of issues that could affect the Company's future results.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in the Company's market risk during the third quarter ended September 30, 2000. 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, 1999.
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PART II — OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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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.
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