2003 Annual Report
RAISING THE BAR
I N 2 0 0 3 , A N I N V E S T M E N T I N Z E B R A R E T U R N E D 7 4 % T O S T O C K H O L D E R S
74%
Zebra is delivering stockholder value
Z E B R A S T O C K A P P R E C I A T E D 2 4 6 % O V E R T H E 1 9 9 9 - 2 0 0 3 F I V E - Y E A R P E R I O D
246%
2003
% change
2002
% change
2001
( In thousands, except per share data and percentages)
Operating Results Net sales
$536,397
12.8%
$475,611
5.7%
Gross profit
Operating income
Net income
Diluted earnings per share
273,077
129,218
91,696
1.92
18.3
26.9
28.1
25.5
Capitalization
Cash and cash equivalents
and investments in
marketable securities
Working capital
Total assets
Total stockholders’ equity
$449,964
537,932
701,611
651,915
9.9
10.1
16.4
15.1
230,747
101,805
71,595
1.53
$348,577
427,676
573,088
534,155
$450,008
209,893
92,459
61,529
1.33
$249,349
330,510
479,556
445,007
Zebra Technologies
delivers specialty printing
solutions that improve
the speed and accuracy
of business processes.
Businesses, governments and
other organizations worldwide
depend on Zebra to deliver
innovative, reliable products
that help them reduce costs,
increase productivity, deliver
better customer service,
and strengthen security. Zebra
uses its technology portfolio
to manufacture products for
a wide range of applications
in on-demand barcoding,
radio frequency identification
(RFID), plastic card imaging,
and digital photo printing.
Our commitment to industry
leadership, financial strength,
and growth helps Zebra build
long-term value for its customers,
partners, and stockholders.
L E T T E R T O S T O C K H O L D E R S
We are fortunate to operate in an attractive
specialty printing business with outstanding
growth prospects.
Zebra achieved record sales
which helped deliver record
and earnings in 2003, as our
international sales.
growth strategy yielded its
New product introductions
intended results. The strength of
extended our product leadership
our business spanned nearly all
and supported further product
dimensions of our organization,
differentiation. We had growth in
as companies and governments
all major product lines, especially
accelerated the adoption of
in mobile printers, as businesses
barcoding and other automatic
took increased advantage of
identification technologies to
wireless technology to enhance
improve business processes and
work force productivity.
increase security. We extended
For 2003, our record results
our leading strategic position,
derived from the strength of
added to our technology portfolio,
our core bar code labeling
and pursued a larger set of high-
business, card printer sales,
growth on-demand specialty
mobile and wireless solutions,
printing opportunities.
and international expansion. Net
Our greater focus on delivering
income advanced 28% to $91.7
business improvement solutions,
million, or $1.92 per diluted
building stronger and broader
share, on 13% sales growth to
channels, and strengthening our
$536.4 million, exceeding $500
powerful brand helped turn North
million for the first time in the
America, our largest territory,
company’s history. In August, we
into a source of strength in 2003.
distributed a three-for-two stock
In addition, we expanded our
split to enhance the liquidity of
presence in Eastern Europe,
Zebra stock and to broaden the
Asia Pacific, and Latin America,
company’s stockholder base. We
2
Edward Kaplan
Chairman and Chief Executive Officer
Zebra stock performance versus the market indices
(August 15,1991* through December 2003)
*Zebra’s initial public offering price
In 2003, Zebra achieved
26.9% growth in operating income
12.8% growth in net sales
28.1% growth in net income
ended the year with $450 million
favorable outlook. A sharper
of our core thermal printing
in financial results and build
in cash and investments and no
focus on delivering applications
technology and enabled us
on our impressive record of
long-term debt, with another
to high-growth vertical markets
to enter the emerging area of
increasing stockholder value
year of exceptional free cash
is yielding new avenues of
digital photo printing. We now
over the long term. Zebra’s
flow generation.
opportunity. Targeted solutions
have an OEM relationship with
market reach, financial and
Just as our 2003 financial
are enhancing productivity,
the Eastman Kodak Company,
management strength, and
performance resulted from a
security, and customer service
which markets the ML-500
product and technology
growth strategy focused on new
in a variety of vertical markets,
Professional Photo Printer, a
portfolio have never been
product development, worldwide
including in law enforcement,
high-speed thermal printer.
greater. Nor has our outlook
expansion, and innovative
life sciences, and retail.
We are also at the beginning
been more positive. Zebra is
sales and marketing initiatives,
Further investments in global
of widespread adoption of radio
a clear leader in an attractive
continued investments give us
expansion, including China, also
frequency identification, or
business. We operate with
optimism for further growth
continue to enhance Zebra’s
RFID. As following pages in this
high profitability and cash
in 2004 and beyond. Adoption
prospects. Zebra employees in
report describe, Zebra is well
flow generation. We have a
rates of barcoding technology
18 countries supporting channel
positioned to benefit from this
demonstrated, effective growth
remain high, as companies
partners in approximately 100
exciting technology. It is a natural
strategy. More opportunities
respond to competitive pressures
countries improve our ability to
extension of our rich heritage
are ahead of us than ever
with investments in a proven
serve the worldwide needs of
as a leader in specialty printing.
before, as emerging uses for
technology with predictable,
international customers. They
Our RFID printer/encoders enable
our technologies supplement
meaningful returns. Our card
also help deliver Zebra products
companies to comply with the
growth in our core markets.
imaging printer business remains
to domestic companies for local
growing number of mandates
We appreciate your support
positive supported by the greater
requirements, as countries with
by retailers and others who
and confidence as a stockholder
demand for personal identification,
developing economies build
want to use RFID to improve the
in Zebra Technologies.
and we expect further deployment
infrastructure to support domestic
efficiency of their supply chains.
of mobile and wireless products.
needs and export markets.
All of these activities give
More widespread adoption
Our acquisition of Atlantek in
us confidence in our ability to
of our technology enhances this
November extended the range
deliver further improvements
S&P 500
186%
NASDAQ Composite
Dow Jones Industrial Average
Zebra stock
288%
249%
1,185%
3
E N A B L I N G
E N A B L I N G
E N A B L I N G
E N A B L I N G
B U S I N E S S P R O C E S S I M P R O V E M E N T
Zebra is helping companies solve real business problems.
W H E N T H E L A B E L C O U N T S
By delivering solutions that improve productivity, enhance
customer service, and strengthen security, we enable
our customers to achieve their business
goals. Solutions incorporating Zebra
printers offer users a compelling
investment proposition.
Customers rely on Zebra to help
them solve their most challenging
labeling problems. Optimized with
Zebra printers, we design custom
solutions when media failure is
not an option. Unique media solu-
tions save time, labor and money.
They help companies comply
with regulatory and commercial
labeling requirements. Brand
protection and product authenti-
cation are ensured, and counter-
feit goods more easily identified,
with high-performance labeling
solutions from Zebra.
R x F O R P R O C E S S E F F I C I E N C Y
The accuracy barcoding provides
helps save lives and reduces costly
errors. Zebra is ready to help
companies comply with the recent
U.S. Food and Drug Administration
mandate requiring bar code labeling
of drugs and biological products.
Health care workers will use
automatic identification systems
to conduct a reliable bedside match
of medication and patient, who
is identified with a bar coded
wristband. Zebra’s new
Z-band® direct thermal
poly wristband addresses
HIPPA privacy legislation
and is ideally suited for
patient identification.
4
S U P P LY C H A I N E X E C U T I O N
Increasing efficiency of the
supply chain, or the movement of
goods from the factory through
distribution to the end user, is
vital in a global competitive
environment. Zebra’s broad range
of bar code label printers give
businesses tools to integrate
solutions that track products and
materials more accurately, reduce
cycle times, and improve employee
productivity, increasingly with
wireless technology embedded
in Zebra products.
FA S T C A R R E T U R N S
Car rental companies speed
customers on their way using
wireless Zebra mobile printers
to produce receipts at the point
of car return, one of a growing
number of specialty applications
incorporating Zebra printers.
5
E X T E N D I N G T H E R E A C H O F
TTTT
TTechnology
echnology
By adding to our technology portfolio, we have expanded our
opportunity set for growth. Increasingly, Zebra is moving beyond
barcoding to encompass a greater number of specialty printing solutions.
These solutions incorporate advanced technologies that deliver tangible
benefits and real value in the pursuit of business improvement.
R F I D S M A R T L A B E L S
T H E R F I D S U P P L Y C H A I N P R O C E S S
Radio Frequency Identification, or RFID, uses
radio waves to “read” data put on a chip
embedded within a tag. When these tags are
combined with traditional bar code and
human-readable labels, they form “smart
labels,” because they can be read automatically
and, in some cases, updated with new
information — in real time —
as they move through
the supply chain.
Leading retailers, the U.S. Department of
leadership in bar code labeling
Defense (DoD) and others are turning to
technology and more than eight years’
the productivity-enhancing and tracking
experience in RFID. With Zebra smart
capabilities of RFID to squeeze costs out
label printers/encoders and supplies,
of their supply chains. Zebra is pioneering
companies can conveniently add RFID
the adoption of RFID based on our
tag encoding to their existing bar code
6
AT T H E F A C T O R Y
T H R O U G H D I S T R I B U T I O N
R F
P I C T U R E P E R F E C T
Our Atlantek acquisition built
on our core thermal printing
technology and gave us products
to serve the growing area
of digital photo printing.
Jointly developed with and
marketed by Eastman Kodak,
photographers use the Kodak
ML-500 Professional Photo
Printer in the lab, studio or
at events to print stunning
large-format photographs with
exceptional speed, on demand.
and human-readable label formats and
be compliant with current RFID mandates.
Zebra is a member of the DoD AIT RFID
Vendor Advisory Group and a technology
sponsor of EPCglobal, a standards-
setting organization.
T O T H E S T O R E
I D
I T ’ S I N T H E C A R D S
Zebra’s family of card printers uses a variety of technologies, such as micro printing,
smart card encoding, and hologram overlays, to produce plastic cards, at the point
of issuance. These capabilities address a broad and expanding range of identification
and security applications, driven by heightened concern over personal safety and the
protection of property and assets the world over.
7
Companies are equipping their employees with more productivity-
es ar
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enhancing tools. More than ever, we are seeing systems incorporating
than e
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to
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M
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i
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.
hand-held computers and Zebra mobile printers communicating over
ompu
and
ld
Ze
te
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wireless networks. In the factory, at retail, or on the road, Zebra
ess
rks
wo
ne
th
In
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f
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Going
E
M O B I L E
LL
LL
U N L E A S H I N G B U S I N E S S P R O D U C T I V I T Y
bm
mobile printers provide accurate, real-time
con
control of printing operations wherever
labels, receipts, or other specialty printing
applications are needed.
In addition to citation ticketing, the QL 320
mobile printer is ideally suited for applications
involving roving cashiers; finished goods
labeling; in-store merchandise re-labeling;
drug labeling; return processing; car rental
receipts; lift tickets/park passes; and
parking passes.
8
V E R T I C A L M A R K E T F O C U S : L A W E N F O R C E M E N T
By delivering applications to under-
replacing pen and pad with electronic
penetrated vertical markets, we are fi nding
citation writing for moving and parking
additional high-growth opportunities
violations. Automated ticketing systems,
for Zebra’s printing and connectivity
which incorporate wireless Zebra mobile
technologies. Zebra vertical market
printers, reduce paper work, processing
specialists work with channel partners and
time, and administrative and staff support.
end users to deliver robust solutions that
They also boost offi cer productivity and
solve particular business problems.
simplify ticketing operations over paper-
based systems. Software lowers data
Zebra is helping law enforcement agencies
entry errors and improves ticket legibility,
around the world improve their processes
which leads to higher collection rates and
and effi ciency. Automated systems speed
a faster collection cycle.
information processing and record keeping,
reduce paper work, improve security,
Zebra printers are also used in solutions
and enable more accurate tracking of
that assist law enforcement agencies
evidence, property, and samples. An
in evidence tracking, forms and asset
increasing number of jurisdictions are
management, and personal identifi cation.
D E F E N S E L O G I S T I C S
Governments use rugged Zebra
printers such as the PT 403 to
strengthen security, manage
personnel, and transport mission-
critical goods to equip people
and help save lives.
The PS 2100 series is designed
for businesses on the go.
Transportable and uniquely
modular, the PS 2100
series printing solution
on wheels can be
confi gured with one
printer or two. It gives
personnel the fl exibility
to perform multiple tasks
with a single unit to increase
effi ciency and overall productivity.
QL 420 Warehousing;
shipping; receiving; pick
and run; in-store transfers;
warehouse pick tickets;
cross-docking; work-in-
process tags; put-away;
shelf talkers; work orders
QL 220 Lab samples;
Price markdowns; shelf
edge labeling; postal/
parcel logistics; bin label-
ing; pharmacy labeling;
inspection labels; patient
chart labeling; diagnostics
labeling
TR 220 Shelf labeling;
parts labeling; price
markdowns
CAMEO 3 Meter reading;
route accounting; parking
tickets/violations; airline
roving ticket agent; roving
betting agents; field force
automation; lottery tickets;
cycle count (audit slips)
CAMEO 2 Bus tickets;
table-side credit card
transactions; mobile point
of sale; queue busting;
admission ticket printing;
mobile concessions;
passenger ticketing;
mobile box office
CAMEO PEP Hotel
guest check-in; security
badge encoding
9
E X P A N D I N G G L O B A L
P R E S E N C E
With greater sales representation and expanding channel relationships,
Zebra serves more of the barcoding and specialty printing needs of local businesses
and global organizations in high-growth regions around the world.
I N T E R N A T I O N A L S A L E S
2000
2001
2002
2003
2000
2001
2002
2003
37.4%
40.0%
43.2%
45.5%
$0
50,000 100,000 150,000 200,000 250,000
0%
10%
20%
30%
40%
50%
B Y R E G I O N (in thousands)
A S A P E R C E N T A G E O F T O T A L S A L E S
Europe
Asia Pacific
Latin America
International Growth
Sales to international customers comprised more than 45% of
Zebra’s total sales for 2003, up from only 37% for 2000. Zebra is
well positioned to serve the expanding needs of businesses around
the world with its network of valued reseller and integration partners
in approximately 100 countries. We support our entire business with
23 manufacturing, warehousing and sales facilities worldwide.
10
T R A I N A N D B U S T I C K E T I N G
R E T A I L Q U E U E B U S T I N G
I N T E R N A T I O N A L S O L U T I O N S
D R I V E R ’ S L I C E N S I N G
P O S T A L / P A R C E L D E L I V E R Y
11
F I N A N C I A L T A B L E O F C O N T E N T S
14 Management’s discussion and and analysis
32 Consolidated statements
37 Notes to consolidated financial statements
54
Independent auditors’ report
55 Board of directors and corporate officers
56 Stockholder information
S E L E C T E D C O N S O L I D A T E D F I N A N C I A L D A T A
Z E B R A T E C H N O L O G I E S C O R P O R A T I O N
(In thousands, except per share amounts)
Year Ended December 31,
Consolidated statements
of earnings data
Net sales
Cost of sales
Gross profit
2003
2002
2001
2000
1999
$536,397
$475,611
$450,008
$481,569
$402,213
263,320
244,864
240,115
249,141
273,077
230,747
209,893
232,428
198,942
203,271
Total operating expenses
143,859(1)
128,942(3)(4)
117,434(4)
123,758(4)
99,487(5)
Operating income
129,218(1)
101,805(3)(4)
92,459(4)
108,670(4)
103,784(5)
Income before income taxes
135,992(1)
110,883(3)(4)
96,139(4)
111,911(4)
108,800(5)
Net income
$91,696(1)
$71,595(3)(4)
$61,529(4)
$71,622(4)
$69,632(5)
Earnings per share
Basic
Diluted
$ 1.95(1)
$ 1.54(2)(3)(4)
$ 1.34(2)(4)
$ 1.59(2)(4)
$ 1.49(2)(5)
$ 1.92(1)
$ 1.53(2)(3)(4)
$ 1.33(2)(4)
$ 1.57(2)(4)
$ 1.47(2)(5)
Weighted average shares outstanding
Basic
Diluted
47,098
47,663
45,452(2)
45,949(2)
45,049(2)
46,870(2)
46,305(2)
45,593(2)
46,762(2)
47,281(2)
(In thousands)
December 31,
Consolidated balance sheet data
Cash and cash equivalents and
investments and marketable securities
$449,964
$348,577
$249,349
$156,714
$235,568
Working capital
Total assets
Long-term obligations
Stockholders’ equity
537,932
427,676
330,510
256,799
701,611
573,088
479,556
418,896
2,853
1,613
408
513
302,804
394,643
664
651,915
534,155
445,007
371,288
349,307
(1) Includes pretax charges of $1,232 related to the closure of the Varades, France facility and $701 for integration and in-process research
and development costs related to the acquisition of Atlantek, Inc.
(2) Restated for a 3-for-2 stock split in 2003 that was paid in the form of a 50% stock dividend.
(3) Includes $3,300 in operating expenses related to the terminated acquisition of Fargo Electronics, Inc.
(4) Includes pretax charges for integration costs relating to the acquisition of Comtec Information Systems, Inc., and the merger with
Eltron International, Inc. of $73 in 2002, $1,838 in 2001 and $11,066 in 2000.
(5) Includes a pretax charge for integration costs of $6,341 in 1999 relating to the merger with Eltron International, Inc.
13
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S of Financial Condition and Results of Operations
Results of Operations: Fourth Quarter of 2003 versus Fourth
Quarter of 2002, Year ended December 31, 2003 versus Year
ended December 31, 2002
Geographical Region
Three Months Ended
December 31,
2003
2002
Europe, Middle East and Africa $ 47,893
$ 39,595
Sales
Latin America
Asia-Pacific
Sales by product category, percent change, and percent of total sales for the three
Total International
months and year ended December 31, 2003, and December 31, 2002, were (in thou-
sands, except percentages):
North America
Total sales
7,978
14,215
70,086
77,114
7,291
10,267
57,153
69,171
$147,200
$126,324
Year Ended
December 31,
Geographical Region
2003
2002
Europe, Middle East and Africa $170,544
$142,273
Latin America
Asia-Pacific
Total International
North America
Total sales
29,406
43,904
243,854
292,543
28,097
34,953
205,323
270,288
$536,397
$475,611
Percent
of Total
Sales
2003
Percent
of Total
Sales
2002
32.5
5.4
9.7
47.6
52.4
31.3
5.8
8.1
45.2
54.8
100.0
100.0
Percent
Change
21.0
9.4
38.5
22.6
11.5
16.5
Percent
of Total
Sales
2003
Percent
of Total
Sales
2002
Percent
Change
19.9
4.7
25.6
18.8
8.2
12.8
31.8
5.5
8.2
45.5
54.5
29.9
5.9
7.3
43.1
56.9
100.0
100.0
We have consistently invested in sales, marketing and product development to
support long-term sales growth including:
(cid:127) Expanding our geographic presence by placing Zebra representatives in high-
growth geographic markets to expand channel relationships and to support the
work of existing reseller partners. During 2002, we put new Zebra representatives
in Poland, Dubai, Russia, Australia, Brazil and Argentina. We also added represen-
tatives in Mexico and China during 2003. These additions are an important reason
for the increase in the Asia-Pacific and the Latin American regions during the
fourth quarter and the full year of 2003.
Product Category
Hardware
Supplies
Service and software
Shipping and handling
Cash flow hedging activities
Three Months Ended
December 31,
2003
2002
$113,263
$ 96,031
26,738
6,165
1,184
(150)
23,945
5,451
897
—
Percent
of Total
Sales
2003
Percent
of Total
Sales
2002
76.9
18.2
4.2
0.8
(0.1)
76.0
19.0
4.3
0.7
—
Percent
Change
17.9
11.7
13.1
32.0
—
Total sales
$147,200
$126,324
16.5
100.0
100.0
Year Ended
December 31,
Product Category
2003
2002
Hardware
Supplies
Service and software
Shipping and handling
Cash flow hedging activities
$409,144
$360,185
98,519
24,355
4,113
266
87,981
23,301
4,144
—
Percent
of Total
Sales
2003
Percent
of Total
Sales
2002
76.3
18.4
4.5
0.8
—
75.7
18.5
4.9
0.9
—
Percent
Change
13.6
12.0
4.5
(0.7)
—
Total sales
$536,397
$475,611
12.8
100.0
100.0
Sales to customers by geographic region, percent changes and percent of total
sales for the three months and year ended December 31, 2003, and December 31,
2002, were (in thousands, except percentages):
14
Z E B R A T E C H N O L O G I E S C O R P O R A T I O N
(cid:127) Increasing our European representation in mobile and business development
Although management cannot forecast the future direction of foreign exchange
manager resources in Germany, Italy, France, and Spain during 2003.
rate movements, if rates remain near the levels experienced during 2003, Zebra
(cid:127) Building infrastructure to deliver business improvement applications to high-
may continue to benefit from exchange rate gains during 2004. However, it is pos-
growth vertical markets. During 2003, we also added marketing resources to sup-
sible that a continued weak dollar versus the pound and euro may cause our cur-
port emerging radio frequency identification (RFID) opportunities.
rent pricing to be uncompetitive and require price reductions. These reductions
would decrease the benefits of the current favorable exchange rates.
New printer products (defined as printers released within 18 months prior to the
end of the applicable fiscal period) accounted for 21.8% of printer sales in the
During 2003, we began a program to hedge a portion of our forecasted euro-
fourth quarter of 2003 and 2002. For the full year, new printer products accounted
denominated sales, so that if exchange rate trends reverse, we will still achieve
for 23.3% of printer sales in 2003, compared with 22.2% in 2002.
some benefit from the current favorable rates. See Note 14 to the financial state-
ments for a more detailed discussion of this hedging program.
Our international sales are denominated in multiple currencies, primarily the dol-
lar, pound and euro, which causes our reported sales to be subject to fluctuations
Printer unit volumes and average selling price information is summarized below:
based on changes in currency rates. When significant currency rate fluctuations
occur, we review our pricing and make appropriate changes in order to maintain
our competitive position.
Since the third quarter of 2002, the dollar has weakened significantly against both the
euro and pound. As a result, our fourth quarter sales translated into dollars increased
by $6,253,000 or 4.9 percentage points compared to translating the same sales
using the exchange rates that prevailed a year ago. Competitive pricing adjustments
caused by the currency situation reduced sales by $3,590,000 or 2.8 percentage
points. In total, the net increase related to exchange rate fluctuations was $2,663,000
during the quarter.
Three Months Ended
December 31,
2003
2002
Percent
Change
Year Ended
December 31,
2003
2002
Percent
Change
Total printers shipped
145,834
129,299
12.8
540,431
491,111
10.0
Average selling price
of printers shipped
$640
$617
3.7
$627
$614
2.1
For the fourth quarter of 2003, mobile printers accounted for 9.3 percentage points
of the total 12.8% volume increase. This increase is a result of more companies
adopting technology for wireless networks. The increase in the average unit sell-
ing prices was a result of higher average prices for mid-range tabletop printers and
print engines, offset by the higher mobile printer volumes.
For the full year of 2003, sales translated into dollars increased by $24,783,000 or
5.2 percentage points compared to translating the same sales using the exchange
rates that prevailed in 2002. We adjusted our pricing to remain competitive in mar-
kets experiencing currency strength against the dollar. These competitive pricing
adjustments reduced sales by $12,610,000 or 2.7 percentage points. In total, the net
increase related to exchange rate fluctuations was $12,173,000 during 2003.
For the full year of 2003, the increase in printer volume was due to higher sales vol-
ume of desktop and mobile printers similar to the increases for the fourth quarter.
Average unit selling price increases were related to increases in the average unit
selling prices of mid-range desktop printers, portable printers and print engines.
Average unit selling prices were also being reduced by the increased volume of the
lower priced mobile printers.
15
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S of Financial Condition and Results of Operations
Gross Profit
quarter were advertising, publications and market research, travel and enter-
Gross profit information is summarized below (in thousands, except percentages):
tainment, and demonstration units. Year to-date, in addition to increases in the
December 31,
2003
2002
Three months ended
$ 74,397
$ 62,564
Year ended
273,077
230,747
Percent
Change
18.9
18.3
Percent
of Total
Sales
2003
50.5
50.9
Percent
of Total
Sales
2002
49.5
48.5
The major contributors to the margin improvement were:
(cid:127) Higher capacity utilization related to the higher sales volume, representing
$6,008,000 of the total gross profit increase for the fourth quarter of 2003 and
$17,417,000 for the full year.
(cid:127) Foreign exchange rate movements and related pricing adjustments, which we
items mentioned above, we increased market development fund expenses. These
increases are largely the result of our focus on vertical market development and
international expansion.
Research and Development Costs
Zebra is committed to a long-term strategy of significant investment in product
development. To maintain and build our product pipeline, we made expenditures in
research and development, summarized below (in thousands, except percentages):
December 31,
2003
2002
Percent
Change
30.7
8.7
Percent
of Total
Sales
2003
5.9
5.9
Percent
of Total
Sales
2002
5.3
6.1
estimate increased gross profit by $2,276,000 for the fourth quarter of 2003. For
Three months ended
$ 8,722
$ 6,673
the full year, gross profit is estimated to have been $10,900,000 higher due to for-
Year ended
31,759
29,210
eign exchange rate movements, net of related pricing adjustments.
(cid:127) Component cost reductions contributed $2,255,000 to the margin improvement
Quarterly product development expenses fluctuate widely depending on the
during the fourth quarter and $9,371,000 for the full year.
status of ongoing projects. For the fourth quarter of 2003, research and develop-
Selling and Marketing Expenses
ment expenses increased because of an increase in payroll and benefits with
related increases in headcounts and increases in project expenses. Higher project
Selling and marketing expenses are summarized below (in thousands, except
expenses are related to the reduction of expenses in the fourth quarter of 2002 of
percentages):
December 31,
2003
2002
Three months ended
$19,506
$16,354
Year ended
66,635
56,176
Percent
Change
19.3
18.6
Percent
of Total
Sales
2003
13.3
12.4
Percent
of Total
Sales
2002
12.9
11.8
We continue to make significant investments in demand-generating activities.
During the fourth quarter of 2003, increased selling and marketing expenses were
$1,092,000 for third party funded engineering costs, which did not reoccur in 2003.
This amount represents 16.4% of the total increase in research and development
expenses for the fourth quarter.
For the full year, project expenses were up $1,669,000 with the majority of that
increase related to $1,542,000 in reductions related to third party funded engineer-
ing costs that had occurred in 2002 but did not reoccur in 2003. In addition,
payroll and benefits were up $1,752,000 over 2002, but consulting expenses were
primarily in payroll and benefits. Other costs that increased during the fourth
down $945,000.
16
Z E B R A T E C H N O L O G I E S C O R P O R A T I O N
We believe that there will be long-term growth in the use of radio frequency identifi-
As a percentage of net sales, general and administrative expenses declined,
cation (RFID) in supply chain and other applications, and that Zebra is well positioned
because we took actions to control costs, including the compliance activities dis-
to participate in that growth. We introduced new products that extend RFID technolo-
cussed above. As a result, our general and administrative costs have grown slower
gies into our bar code label printers, and we anticipate investing a larger portion of
than the rate of sales growth. We expect that trend to continue.
our future R&D expenditures on the development of RFID printer/encoders.
General and Administrative Expenses
During the first quarter of 2002, we terminated the acquisition agreement and ten-
General and administrative expenses are summarized in the table below (in thou-
der offer in which Zebra would acquire all outstanding shares of common stock
sands, except percentages):
(including associated rights to purchase preferred stock) of Fargo Electronics, Inc.
December 31,
2003
2002
Three months ended
$11,456
$10,733
Year ended
41,892
38,689
Percent
Change
6.7
8.3
Percent
of Total
Sales
2003
7.8
7.8
Percent
of Total
Sales
2002
8.5
8.1
for $7.25 per share in cash. During the time that the tender offer was active, we
incurred legal, accounting and other expenses related to the proposed acquisition
that would have been treated as part of the purchase price had the tender offer
been completed. We expensed $3,300,000 of these costs at the cancellation of the
Costs Related to Terminated Acquisitions and Merger Costs
For the fourth quarter of 2003, general and administrative expenses increased
$721,000 and include $477,000 of increased legal expenses, which was primarily
tender offer.
Exit Costs
related to litigation with Paxar described in Note 15 to the consolidated financial
During the fourth quarter of 2003, we announced a plan to close our engineer-
statements. Other increases were related to personnel costs.
ing site in Varades, France. This plan will be accounted for under SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. Included in oper-
For the full year of 2003, general and administrative expenses include $596,000 of
ating expenses for the fourth quarter of 2003 and the full year are exit costs, con-
increased legal expenses related to:
(cid:127) Litigation with Paxar
(cid:127) Increased intellectual property work
(cid:127) International activity
(cid:127) General contract review.
sisting of primarily severance, in the amount of $1,232,000.
During January 2004, we announced plans to consolidate our Warwick, Rhode
Island, printer manufacturing and repair service business into our Camarillo,
California and Vernon Hills, Illinois locations. Although no costs have been accrued
in the fourth quarter of 2003, we anticipate that during 2004 we will incur addi-
In addition to legal expenses in 2003, we saw an increase in director and officer lia-
tional expenses of $1,648,000 of which approximately $400,000 will be incurred
bility insurance and administrative personnel costs. A portion of these costs resulted
during the first quarter. See Note 18 to the consolidated financial statements.
from new compliance requirements of the Sarbanes-Oxley Act of 2002 and related
regulations. Offsetting these increases was a decline in consulting expenses.
17
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S of Financial Condition and Results of Operations
Operating Income
Higher investment balances resulted in an increase in investment income for the
Operating income is summarized in the following table (in thousands, except
fourth quarter. While investment balances were higher in 2003, year-to-date invest-
percentages):
December 31,
2003
2002
Three months ended
$ 32,253
$ 28,417
Year ended
129,218
101,805
Percent
Change
13.5
26.9
Percent
of Total
Sales
2003
21.9
24.1
Percent
of Total
Sales
2002
22.5
21.4
The increase in operating income is attributable to the following factors:
(cid:127) Accelerated sales growth compared to 2002,
(cid:127) Improved gross margins resulting from increased overhead utilization,
ment income decreased from last year, because 2002 results included a $1,953,000
realized gain on the sale of 585,000 shares of Fargo Electronics during the first
quarter of 2002.
For the fourth quarter of 2003, we had the following two unusual items that
increased investment income in relation to the fourth quarter of 2002:
(cid:127) Interest income of $422,000 was received, which was related to refunds of taxes
from the Internal Revenue Service research and experimentation credit and the
(cid:127) Favorable changes in foreign exchange rates for Zebra’s non-dollar
State of Illinois tax settlement.
denominated business, and
(cid:127) Investment income includes a $600,000 increase in realized gains from partner-
(cid:127) Cost controls that held operating expense growth slightly below the rate
ship interests during the fourth quarter.
of sales growth.
Income Taxes
As a result of these actions, operating income increased by 3.0 percentage points
The effective income tax rate for the fourth quarter was 31.2%, compared with
more than the rate of sales growth during the fourth quarter, and 14.1 percentage
35.0% for the same quarter last year. This rate is lower than the 35.0% effective tax
points more than the rate of sales growth for the full year.
rate that Zebra has recorded since early 2002, because of the net effect of a nonre-
curring tax item during the quarter.
Non-operating Income and Expenses
Zebra’s non-operating income and expense items are summarized in the following
During the fourth quarter, Zebra settled its long-standing dispute with the Illinois
Three Months Ended
December 31,
Year Ended
December 31,
2003
2002
2003
2002
Department of Revenue. We recorded a decrease to income tax expense of
$1,342,000, because our reserves for this tax dispute exceeded the amount of the
settlement. See Note 11 to the consolidated financial statements for more details.
Without the effect of this settlement, our effective income tax rate would have
$4,079
$2,422
$8,553
$10,004
been 35% for the quarter.
table (in thousands):
Investment income
Interest expense
Foreign exchange gains (losses)
Other, net
(38)
(304)
(524)
(118)
673
(121)
(154)
(552)
(1,073)
(319)
347
(954)
Total other income (expense)
$3,213
$2,856
$6,774
$ 9,078
18
During the third quarter of 2003, we eliminated a reserve related to research
and experimentation tax credits that were claimed and recorded a reduction to
income tax expense of $1,947,000. During the first two quarters of 2003, we filed
refund applications totaling $1,947,000 with the Internal Revenue Service and
Z E B R A T E C H N O L O G I E S C O R P O R A T I O N
Departments of Revenue for Illinois and California related to research and experi-
Sales to customers by geographic region, related percent changes, and percent of
mentation tax credits for 1998 to 2001. Because of the uncertainty of receiving
total sales for 2002 and 2001 were as follows:
the credits, which require significant subjective analysis, we established a 100%
reserve against the contingent receivable for the refunds during each of the first
Year Ended
December 31,
two quarters of 2003. In September 2003 the IRS approved our refund applications.
Geographic Region
2002
2001
Because California and Illinois law mirror the Federal Tax Code, we now expect to
Europe, Middle East and Africa
$142,273
$128,348
have those refunds approved as well.
For 2003, the effective income tax rate was 32.6% versus 35.4% for 2002. Excluding
the two tax adjustments discussed above, our effective tax rate would have been
35% for 2003. With the settlement of the Illinois tax dispute, we anticipate our tax
Latin America
Asia-Pacific
Total International
North America
Total sales
28,097
34,953
205,323
270,288
21,752
29,953
180,053
269,955
$475,611
$450,008
Percent
of Total
Sales
2002
Percent
of Total
Sales
2001
Percent
Change
10.8
29.2
16.7
14.0
0.1
5.7
29.9
5.9
7.3
43.1
56.9
28.5
4.8
6.7
40.0
60.0
100.0
100.0
provision rate will be 34.75% beginning in the first quarter of 2004.
During 2002 and 2001, despite an economic downturn, Zebra implemented a
Net Income
growth strategy including:
Zebra’s net income is summarized below (in thousands, except per share amounts):
(cid:127) New Product Introductions—During 2002, Zebra spent $29 million on new prod-
Three Months Ended
December 31,
Year Ended
December 31,
uct development activities, for salaries, benefits, consulting and legal services,
market research, and related activities. Fourteen new products or derivative
2003
2002
2003
2002
products were introduced during 2002, compared to 11 new products introduced
Net income
Diluted earnings per share
$24,395
$ 0.51
$20,328
$ 0.43
$91,696
$ 1.92
$71,595
$ 1.53
Comparison of Years Ended December 31, 2002 and 2001
Sales
during 2001. Additionally, products introduced within the 18-month period ended
December 31, 2002, represented 22% of printer sales for 2002.
(cid:127) Expanded International Coverage—We opened six new sales offices during
late 2001 through 2002, including Poland, Dubai, Russia, Australia, Brazil, and
Argentina. We believe international regions, particularly Asia-Pacific, Latin
Sales by product category, related percent changes and percent of total sales for
America and Eastern Europe, hold significant growth potential.
2002 and 2001 were as follows:
Year Ended
December 31,
Product Category
2002
2001
Hardware
Supplies
Service and software
Shipping and handling
$360,185
$339,895
87,981
23,301
4,144
85,266
19,336
5,511
Percent
of Total
Sales
2002
Percent
of Total
Sales
2001
75.7
18.5
4.9
0.9
75.6
18.9
4.3
1.2
Percent
Change
6.0
3.2
20.5
(24.8)
Total sales
$475,611
$450,008
5.7
100.0
100.0
(cid:127) New sales and marketing programs—We organized sales and marketing efforts
to support a sales strategy that demonstrates the business benefits associated
with implementing bar code labeling and specialty printing solutions.
In North America, we recorded positive sales growth in the second, third and
fourth quarters of 2002, compared with the corresponding periods of 2001. Overall,
however, the slow U.S. economy continued to limit sales growth of bar code label
and receipt printers to rates below our historical average.
19
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S of Financial Condition and Results of Operations
Total printers shipped
Year Ended
December 31,
2003
2002
491,111
441,300
Average selling price of printers shipped
$614
$641
Percent
Change
11.3
(4.2)
All three of our international regions – Europe, Asia Pacific, and Latin America—had
record sales and contributed to the significant growth in international sales in 2002.
Increased numbers of Zebra representatives in these regions, including the forma-
tion of a sales team in Europe for mobile printing solutions in 2001, was an impor-
tant factor in the growth of international sales.
On a dollar-volume basis, the largest increase occurred in the European region. The
strength of the pound and the euro versus the dollar increased sales for Zebra’s
European region by approximately $5,565,000, compared with exchange rates that
prevailed during 2001.
Gross Profit
Gross profit information is summarized below (in thousands except percentages)
December 31, 2002
December 31, 2001
Percent Change
Year Ended
$230,747
$209,893
9.9
Percent of
Total Sales
48.5
46.6
Gross profit increased due to:
(cid:127) Higher capacity utilization related to the higher sales volume, representing
$8,514,800 of the total gross profit increase for 2002.
(cid:127) Foreign exchange rate movements, which we estimate increased gross profit by
$4,377,000 for 2002, compared with the exchange rates that prevailed during 2001.
(cid:127) Cost reductions, which represented $3,798,000 of the gross profit increase for 2002.
Selling and Marketing Expenses
Selling and marketing expenses are summarized below (in thousands, except
percentages):
December 31, 2002
December 31, 2001
Percent Change
Year Ended
$56,176
$49,688
13.1
Percent of
Total Sales
11.8
11.0
The increase in selling and marketing expenses resulted from:
(cid:127) Increased headcount in selling and marketing staff, including the new interna-
tional offices opened in late 2001 and through 2002.
(cid:127) Performance-related payroll expenses, specifically commissions and bonuses
related to Zebra’s growth in net sales.
(cid:127) Trade show, travel and consulting expenses.
Research and Development Costs
Research and development costs are summarized below (in thousands, except
percentages):
December 31, 2002
December 31, 2001
Percent Change
Year Ended
$29,210
$28,184
3.6
Percent of
Total Sales
6.1
6.3
Printer products introduced over an 18-month period that ended December 31,
2002 accounted for approximately 22% of printer sales for 2002, compared with
20% for the comparable period ending December 31, 2001. Higher project and
personnel expenses were partially offset by lower expenditures for consulting
services. We consider our ability to develop and introduce new products to be a
significant competitive factor. Accordingly, we expect to continue high levels of
expenditures on the development of a broad range of printers and related items.
20
Z E B R A T E C H N O L O G I E S C O R P O R A T I O N
General and Administrative Expenses
Costs Related to Terminated Acquisitions and Merger Costs
General and administrative expenses are summarized below (in thousands, except
During 2002, we terminated the acquisition agreement and tender offer in which
percentages):
December 31, 2002
December 31, 2001
Percent Change
Year Ended
$38,689
$32,491
19.1
Percent of
Total Sales
8.1
7.2
Zebra would acquire all outstanding shares of common stock (including associated
rights to purchase preferred stock) of Fargo Electronics, Inc. for $7.25 per share in
cash. During the time that the tender offer was active, we incurred legal, account-
ing and other expenses related to the proposed acquisition that would have been
treated as part of the purchase price had the tender offer been completed. We
expensed $3,300,000 of these costs at the cancellation of the tender offer.
The increase in general and administrative expenses was due to:
(cid:127) Higher bonus payments related to the growth in net sales and profits,
(cid:127) Consulting expenses for the development and implementation of
growth strategies,
(cid:127) Information systems, and
(cid:127) Increased insurance costs.
Amortization of Intangible Assets
During 2002, Zebra recorded $1,494,000 in amortization of intangible assets,
compared with $5,233,000 for 2001. During the first quarter of 2002, Zebra imple-
mented SFAS No. 142, Goodwill and Other Intangible Assets, which replaces the
requirements to amortize intangible assets with indefinite lives and goodwill with a
requirement for an annual impairment test. SFAS No. 142 also establishes require-
We incurred merger costs of $73,000 in 2002 and $1,838,000 in 2001. These costs
related to the acquisition of Comtec Information Systems in April 2000. These
costs and the related activities were completed during 2002.
Operating Income
Operating income is summarized in the following table (in thousands, except
percentages):
December 31, 2002
December 31, 2001
Percent Change
Year Ended
$101,805
$ 92,459
10.1
Percent of
Total Sales
21.4
20.5
ments for identifiable intangible assets. As a result, during the first quarter of 2002
The increase in operating income is attributable to the following factors:
Zebra reclassified $21,272,000 of intangible assets into goodwill, as such assets,
(cid:127) Sales growth,
which included assembled workforce and customer lists, did not meet the criteria
(cid:127) Improved gross margins resulting from increased overhead utilization,
for recognition as an asset apart from goodwill under SFAS No. 142. Operating
(cid:127) Favorable changes in foreign exchange rates for Zebra’s non-dollar denominated
income for 2001 includes $3,835,000 of amortization of goodwill and other intan-
business, and
gible assets that are not included in the 2002 results due to the implementation of
(cid:127) Cost controls that held operating expense growth slightly below the rate of
SFAS No. 142.
sales growth.
As a result of these actions, operating income increased by 4.4 percentage points
more than the rate of sales growth during 2002.
21
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S of Financial Condition and Results of Operations
Non-operating Income and Expenses
America. These principles require the use of estimates, judgments and assump-
Zebra’s non-operating income and expense items are summarized in the following
tions. We believe that the estimates, judgments and assumptions we used are rea-
table (in thousands):
Year Ended December 31,
Investment income
Interest expense
Foreign exchange gains (losses)
Other, net
2002
$10,004
(319)
347
(954)
2001
$5,419
(231)
(896)
(612)
sonable, based upon the information available.
Our estimates and assumptions affect the reported amounts in our financial state-
ments. The following accounting policies comprise those that we believe are the
most critical in understanding and evaluating Zebra’s reported financial results.
Total other income (expense)
$ 9,078
$3,680
Revenue Recognition
Favorable investment income was a result of a $1,953,000 pre-tax gain on the sale of
of title, which are generally the same. Other items that affect our revenue
585,000 shares of common stock of Fargo Electronics, in addition to the absence of a
recognition include:
Zebra recognizes sales from product sales at the time of shipment and passage
$2,242,000 pre-tax write-down of a long-term investment that occurred in 2001. The
write-down occurred because the decline in the asset’s value was viewed as other
than temporary. This write-down reduced 2001 diluted earnings by $0.03 per share.
Zebra recorded an additional write-down of $193,000 for this investment in 2002.
Income Taxes
The effective income tax rate for 2002 was 35.4% versus 36.0% in 2001. This
change is the result of implementing tax minimization strategies during the third
quarter of 2002.
Net Income
Zebra’s net income is summarized below (in thousands, except per share amounts):
Year Ended December 31,
Net income
Diluted earnings per share
2002
$71,595
$ 1.53
2001
$61,529
$ 1.33
Critical Accounting Policies and Estimates
Management prepared the consolidated financial statements of Zebra Technologies
Corporation under accounting principles generally accepted in the United States of
Customer returns
Customers have the right to return products that do not function properly within
a limited time after delivery. We monitor and track product returns and record a
provision for the estimated future returns based on historical experience and any
notification received of pending returns. Returns have historically been within
expectations and the provisions established, but Zebra cannot guarantee that it
will continue to experience return rates consistent with historical patterns. A sig-
nificant increase in product failure rates and the resulting credit returns could have
a material effect on our operating results. A 10% increase (decrease) in returns
above historical levels would have decreased (increased) operating income for the
fourth quarter of 2003 by $132,000, or 0.4% of operating income.
Volume Rebates
Some of our customers are offered incentive rebates based on the volume of
product they purchase from us over a quarter or year. These rebates are recorded
as a reduction to revenue. Each quarter, we estimate the amount of outstand-
ing volume rebates and establish a reserve for them based on shipment history.
Historically, actual volume rebates have been in line with our estimates.
22
Z E B R A T E C H N O L O G I E S C O R P O R A T I O N
Price Protection
Investments and Marketable Securities
Some of our customers are offered price protection by Zebra as an incentive to
Investments and marketable securities at December 31, 2003, consisted of U.S. gov-
carry inventory of our product. These price protection plans provide that if we
ernment securities (44.8%), state and municipal bonds (45.4%), corporate bonds
lower prices, we will credit them for the price decrease on inventory they hold. We
(4.6%), partnership interests (4.4%) and equity securities (0.8%). We classify our
estimate future payments under price protection programs quarterly and establish
debt and marketable equity securities in one of three categories: trading, available-
a reserve, which is charged against revenue. Our customers typically carry limited
for-sale or held-to-maturity. Trading securities are bought and held principally for
amounts of inventory, and Zebra infrequently lowers prices on current products.
the purpose of selling them in the near term. Held-to-maturity securities are those
As a result, the amounts paid under theses plans have been minimal. We cannot
securities that Zebra has the ability and intent to hold until maturity. All securities
guarantee that this minimal level will continue.
not included in trading or held-to-maturity are classified as available-for-sale.
Software Revenue
We sell three types of software and record revenue as follows:
(cid:127) Our printers contain embedded firmware, which is part of the hardware purchase.
We consider the sale of this firmware to be incidental to the sale of the printer and
do not attribute any revenue to it.
(cid:127) We sell a limited amount of prepackaged, or off-the-shelf, software for the cre-
ation of bar code labels using our printers. There is no customization required
to use this software, and we have no post-shipment obligations on the software.
Revenue is recognized as this prepackaged software is shipped.
(cid:127) We sometimes provide custom software as part of a printer installation project.
We bill custom software development services separate from the related hard-
ware. Revenue related to custom software is recognized once the custom soft-
ware development services have been completed and accepted by the customer.
Shipping and Handling
Trading and available-for-sale securities are recorded at fair value. Held-to-matu-
rity securities are recorded at amortized cost, adjusted for the amortization or
accretion of discounts or premiums. Unrealized holding gains and losses on trad-
ing securities are included in earnings. Unrealized holding gains and losses, net of
the related tax effect, on available-for-sale securities are excluded from earnings
and are reported as a separate component of stockholders’ equity until realized.
During the first quarter of 2003, we changed the classification of certain of our
investments and marketable securities from the trading category to the available-
for-sale category, because we are no longer buying securities with the intent of
selling them in the near-term. In accordance with SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, the market value as of the date
of the change is now the new cost basis, and all future unrealized gains and losses
will be reflected in the accumulated other comprehensive income section of stock-
We charge our customers for shipping and handling services based upon our
holders’ equity in the balance sheet. This change was made because of changes
internal price list for these items. The amounts billed to customers are recorded as
in our investment strategies and is consistent with the classification of our invest-
revenue when the product ships. Any costs incurred related to these services are
ments and marketable securities as defined in SFAS No. 115. Approximately
included in cost of sales.
$256,000,000 of our $330,159,000 of investments was transferred from the trading
category to the available-for-sale category.
23
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S of Financial Condition and Results of Operations
Accounts Receivable
Our forecasted product demand may prove to be inaccurate, in which case the
We have standardized credit granting and review policies and procedures for all
provision required for excess and obsolete inventory may be understated or over-
customer accounts, including:
stated. If inventories were determined to be overvalued, we would recognize such
(cid:127) Credit reviews of all new customer accounts,
costs in cost of goods sold at the time of such determination. We make every effort
(cid:127) Ongoing credit evaluations of current customers,
to ensure the accuracy of our forecasts of product demand; however, any signifi-
(cid:127) Credit limits and payment terms based on available credit information,
cant unanticipated changes in demand or technological developments could have a
(cid:127) Adjustments to credit limits based upon payment history and the customer’s cur-
significant impact on the value of inventories and reported operating results.
rent credit worthiness, and
(cid:127) An active collection effort by regional credit functions, reporting directly to the
Over the last three years, our reserves for excess and obsolete inventories have
corporate financial officers.
ranged from 10.1% to 13.1% of gross inventory. As of December 31, 2003, reserves
for excess and obsolete inventories were $6,408,000, or 13.1% of gross inventory.
We reserve for estimated credit losses based upon historical experience and spe-
Reserves increased during 2003 due to products which are in the process of being
cific customer collection issues. Over the last three years, accounts receivable
discontinued.
reserves varied from 1.7% to 2.9% of total accounts receivable. Accounts receivable
reserves as of December 31, 2003, were $1,388,000, or 1.7% of the balance due.
Valuation of Long-Lived and Intangible Assets and Goodwill
We feel this reserve level is appropriate considering the improved quality of the
We test the impairment of identifiable intangibles and goodwill each year or when-
portfolio as of December 31, 2003. While credit losses have historically been within
ever events or changes in circumstances indicate that the carrying value may not
expectations and the provisions established, we cannot guarantee that our credit
be recoverable. We completed our last assessment during June 2003.
loss experience will continue to be consistent with historical experience.
Inventories
We value our inventories at the lower of the actual cost to purchase or manufacture
We evaluate the impairment of other long-lived assets whenever events or changes
in circumstances indicate that the carrying value may not be recoverable.
using the first-in, first-out (FIFO) method, or the current estimated market value. We
Factors considered that may trigger an impairment review consist of:
review inventory quantities on hand and record a provision for excess and obsolete
(cid:127) Significant underperformance relative to expected historical or projected future
inventory based on forecasts of product demand and production requirements for
operating results
the subsequent twelve months.
(cid:127) Significant changes in the manner of use of the acquired assets or the strategy
A significant increase in the demand for Zebra’s products could result in a short-
(cid:127) Significant negative industry or economic trends
term increase in the cost of inventory purchases; however, this would be offset by
(cid:127) Significant decline in Zebra’s stock price for a sustained period
improved overhead utilization resulting from the additional demand. A significant
(cid:127) Significant decline in market capitalization relative to net book value
decrease in demand could result in an increase in excess inventory quantities on hand.
for the overall business
24
Z E B R A T E C H N O L O G I E S C O R P O R A T I O N
If we believe that one or more of the above indicators of impairment have
On November 25, 2003, Paxar Americas filed a Complaint against ZIH in the United
occurred, we measure impairment based on projected discounted cash flows
States District Court for the Southern District of Ohio, seeking a declaratory judg-
using a discount rate that incorporates the risk inherent in the cash flows. Net
ment that the patents asserted by ZIH in its Massachusetts Complaint are not
intangible assets, long-lived assets and goodwill amounted to $111,242,000 as of
infringed and are invalid and unenforceable. On December 17, 2003, Paxar Americas
December 31, 2003.
Contingencies
amended its complaint to add Zebra Technologies Corporation as a defendant. The
parties have filed a motion to stay this action pending the Massachusetts District
Court’s ruling on Paxar Corporation’s motion to transfer. The parties have agreed
We recorded an estimated liability related to contingencies based on our estimates
to file a motion to transfer this action to the Massachusetts District Court if the
of the probable outcomes. Quarterly, we assess the potential liability related to
Massachusetts District Court denies Paxar Corporation’s pending motion to transfer.
pending litigation, tax audits and other contingencies and confirm or revise esti-
mates and reserves as appropriate.
We are unable at this time to estimate the range of the potential liability that
would result from an unsuccessful defense, and consistent with the requirements
On April 23, 2003, Paxar Americas, Inc. (Paxar Americas) filed a patent infringe-
of SFAS No. 5, Accounting for Contingencies, no liability has been recorded in
ment lawsuit in the United States District Court for the Southern District of Ohio
Zebra’s consolidated financial statements as of December 31, 2003.
against Zebra and certain of its subsidiaries. Paxar Americas’ Complaint alleges
that certain of Zebra’s printer products infringe one or more of eight identified
Stock-Based Compensation
Paxar Americas patents, although not each product is accused of infringing each
As of December 31, 2003, Zebra had three stock-based compensation plans avail-
patent. Zebra has filed an Answer to Paxar Americas’ Complaint, denying Paxar
able for future grants. We account for those plans under the recognition and
Americas’ allegations of infringement and asserting several affirmative defenses,
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
including the invalidity of Paxar Americas’ asserted patent claims.
Employees, and related Interpretations. No stock-based compensation cost is
reflected in net income, as all options granted under those plans had an exercise
On November 21, 2003, ZIH Corp. (ZIH) filed a Complaint in the United States
price equal to the market value of the underlying common stock on the date of
District Court for the District of Massachusetts against Paxar Corporation, alleg-
grant. The following table illustrates the effect on net income and earnings per
ing that Paxar Corporation printers infringe ZIH’s U.S. Patent Nos. 5,813,343 and
share if we had applied the fair value recognition provisions of SFAS No. 123,
5,860,753. Paxar Corporation answered ZIH’s Complaint, denying infringement and
Accounting for Stock-based Compensation, to stock-based compensation (in thou-
seeking a declaratory judgment that ZIH’s patents-in-suit are not infringed and are
sands, except per share amounts):
invalid and/or unenforceable. Paxar Corporation filed a motion to transfer ZIH’s
Massachusetts suit to Ohio federal court. ZIH opposed Paxar Corporation’s motion
to transfer, and the parties are awaiting the Court’s ruling on the transfer motion.
25
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S of Financial Condition and Results of Operations
Year Ended December 31,
Net income, as reported
2003
$91,696
2002
$71,595
2001
$61,529
(cid:127) Operations provided a net cash increase of $109,144,000 primarily from
net income.
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all awards,
net of related tax effects
Pro forma net income
Basic earnings per share:
As reported
Pro forma
Diluted earnings per share:
As reported
Pro forma
Expectations
(5,374)
$86,322
(5,102)
$66,493
(3,558)
$57,971
$ 1.95
1.83
$ 1.92
1.81
$ 1.54
1.43
$ 1.53
1.42
$ 1.34
1.26
$ 1.33
1.25
During our quarterly conference call on February 18, 2004, we provided net sales
and earnings guidance for the first quarter of 2004 as follows (amounts in thou-
sands, except per share data):
Net sales
Gross profit margins
Operating expenses
Earnings per share
First Quarter 2004
$145,000 to $150,000
50.0% to 51.0%
$38,000 to $40,000
$0.47 to $0.53
The effective tax rate is expected to be 34.75% of income before income taxes.
Liquidity and Capital Resources
Zebra continued to generate cash well in excess of its operating requirements.
(cid:127) Accounts receivable increased $5,141,000 (net of the effect of foreign currency
translation adjustment) because of higher sales.
(cid:127) Inventories increased $1,659,000, net of foreign currency translation adjustment. This
is due to higher sales offset by improvements in inventory utilization. Compared to
the same period a year ago, inventory turns increased slightly to 6.8 from 6.7.
(cid:127) Other assets decreased primarily due to the receipt of tax protest deposits
returned from the State of Illinois and a decrease in the value of the foreign
exchange forward contracts, but these decreases are offset by increases in
long-term investments.
(cid:127) With the effect of foreign currency translation adjustment being the predominant
cause, accounts payable decreased by $3,156,000.
(cid:127) Accrued expenses, net of the effect of foreign currency translation adjustment,
increased due to higher payroll accruals and unearned revenue.
(cid:127) Taxes payable decreased $962,000 because of the timing of tax payments and the
settlement of the Illinois tax matter offset by increased profits. In addition, our
effective income tax rate decreased to 32.6% in 2003 from 35.4% in 2002.
(cid:127) Purchases of property and equipment totaled $8,407,000.
(cid:127) Stock option exercises contributed $17,620,000.
Zebra’s contractual obligations as of December 31, 2003 were:
Contractual Obligations
Long-term debt obligations
Total
N/A
Payments due by period
Less than
1 year
1-3 years
3-5 years
More than
5 years
Capital lease obligations
$ 705
$ 190
$ 365
$ 63
$ 87
As a result, Zebra’s cash and investment balances have grown over time. As of
Operating lease obligations
December 31, 2003, Zebra had $449,964,000 in cash, cash equivalents, investments
Purchase obligations
and marketable securities, compared with $348,577,000 at December 31, 2002.
Other long-term liabilities
36,982
38,990
N/A
4,248
38,990
7,146
—
6,486
19,102
—
—
Factors affecting cash and investment balances during 2003 include:
Total
$76,677
$43,428
$7,511
$6,549
$19,189
26
Z E B R A T E C H N O L O G I E S C O R P O R A T I O N
Purchase obligations are for purchases made in the normal course of business to
with characteristics of both liabilities and equity. It requires treating these instru-
meet operational requirements, primarily raw materials.
ments as a liability (or an asset in some circumstances) because the financial instru-
Management believes that existing capital resources and funds generated from
these characteristics, and SFAS No. 150 had no effect on our financial statements.
ment is an obligation of the issuer. Zebra has issued no financial instruments with
operations are sufficient to finance anticipated capital requirements. It is our inten-
tion to actively pursue opportunities to acquire other businesses.
Risk Factors
Recently Issued Accounting Pronouncements
described below, as well as other disclosures in Management’s Discussion and
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities.
Analysis of Financial Condition and Results of Operations, because they could
FIN 46 requires us to consolidate a variable interest entity (VIE) if we have a major-
have a material adverse effect on Zebra’s business, financial condition, operating
Investors should carefully consider the risks, uncertainties and other factors
ity of the risks, rewards or both of that entity. FIN 46 will be effective for most VIEs
results, and growth prospects.
beginning in the fourth quarter of 2003. Zebra has no investments in variable inter-
est entities; therefore, FIN 46 has no effect on our financial statements.
Zebra could encounter difficulties in any acquisition it undertakes, including unantici-
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
stockholder value and adversely affect operating results. Proposed acquisitions that
Compensation - Transition and Disclosure, amending SFAS No. 123, Accounting for
are not consummated may result in the write-off of certain acquisition costs. Zebra
Stock-Based Compensation, to provide alternative transition methods for an entity
may acquire or make investments in other businesses, technologies, services or
that voluntarily changes to the fair value based method of accounting for stock-
products. The process of integrating any acquired business, technology, service
based employee compensation. Zebra does not currently intend to make this change.
or product into operations may result in unforeseen operating difficulties and
pated integration problems and business disruption. Acquisitions could also dilute
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
management time and attention, which could otherwise be available for ongoing
Derivative Instruments and Hedging Activities. SFAS No. 149 clarifies when a con-
development of the business. The expected benefits of any acquisition may not
tract with an initial net investment meets the characteristics of a derivative and
be realized. Moreover, Zebra may be unable to identify, negotiate or finance future
when a derivative contains a financing component that warrants special reporting
acquisitions successfully. Future acquisitions could result in potentially dilutive
in the statements of cash flows. SFAS No. 149 is generally effective for contracts
issuances of equity securities or the incurrence of debt, contingent liabilities or
entered into or modified after June 30, 2003, and had no impact on Zebra’s finan-
amortization expenses. To the extent that a proposed acquisition is not consum-
cial position or results of operations.
mated, Zebra may be required to write off certain costs associated with the acqui-
expenditures. Integration of an acquired company also may consume considerable
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 sets
Zebra may not be able to continue to develop products to address user needs effec-
standards for classification and measurement by an issuer of financial instruments
tively in an industry characterized by rapid technological change. To be successful,
sition, which could be significant.
27
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S of Financial Condition and Results of Operations
Zebra must adapt to rapidly changing technological and application needs by con-
cooperative relationships with suppliers or companies that produce complemen-
tinually improving its products as well as introducing new products and services to
tary products. Any of these factors could reduce Zebra’s earnings.
address user demands.
Zebra’s industry is characterized by:
(cid:127) Rapidly changing technology
(cid:127) Evolving industry standards
(cid:127) Frequent new product and service introductions
(cid:127) Evolving distribution channels
(cid:127) Changing customer demands
The inability to protect intellectual property could harm Zebra’s reputation, and
its competitive position may be materially damaged. Zebra’s intellectual property
is valuable and provides Zebra with certain competitive advantages. Copyrights,
patents, trade secrets and contracts are used to protect these proprietary rights.
Despite these precautions, it may be possible for third parties to copy aspects of
Zebra’s products or, without authorization, to obtain and use information which
Zebra regards as trade secrets.
Future success will depend on Zebra’s ability to adapt in this rapidly evolving
Zebra sells a significant portion of its products internationally and purchases impor-
environment. Zebra could incur substantial costs if it has to modify its business to
tant components from foreign suppliers. These circumstances create a number
adapt to these changes, and may even be unable to adapt to these changes.
of risks. Zebra sells a significant amount of its products to customers outside the
Zebra competes in a highly competitive market, which is likely to become more
account for a material portion of net sales. Risks associated with sales and pur-
competitive. Competitors may be able to respond more quickly to new or emerging
chases outside the United States include:
technology and changes in customer requirements. Zebra faces significant competi-
(cid:127) Fluctuating foreign currency rates could restrict sales, or increase costs of purchas-
tion in developing and selling its systems. Principal competitors have substantial
ing, in foreign countries.
marketing, financial, development and personnel resources. To remain competitive,
(cid:127) Foreign governments may impose burdensome tariffs, quotas, taxes, trade barriers
Zebra believes it must continue to provide:
or capital flow restrictions.
(cid:127) Technologically advanced systems that satisfy the user demands,
(cid:127) Political and economic instability may reduce demand for our products, or put
United States. Shipments to international customers are expected to continue to
(cid:127) Superior customer service,
(cid:127) High levels of quality and reliability, and
(cid:127) Dependable and efficient distribution networks.
our foreign assets at risk.
(cid:127) Restrictions on the export or import of technology may reduce or eliminate the
ability to sell in or purchase from certain markets.
(cid:127) Potentially limited intellectual property protection in certain countries, such as
Zebra cannot assure it will be able to compete successfully against current or
China, may limit recourse against infringing products or cause Zebra to refrain
future competitors. Increased competition in printers or supplies may result in
from selling in certain geographic territories.
price reductions, lower gross profit margins and loss of market share, and could
(cid:127) Staffing and managing international operations may be unusually difficult.
require increased spending on research and development, sales and marketing and
(cid:127) Zebra may not be able to control international distributors working on its behalf.
customer support. Some competitors may make strategic acquisitions or establish
28
Z E B R A T E C H N O L O G I E S C O R P O R A T I O N
Economic factors, which are outside Zebra’s control, could lead to deterioration in
Terrorist attacks or war could lead to further economic instability and adversely affect
the quality of Zebra’s accounts receivables. Zebra sells its products to customers in
Zebra’s stock price, operations, and profitability. The terrorist attacks that occurred
the United States and several other countries around the world. Sales are typically
in the United States on September 11, 2001 caused major instability in the U.S. and
made on unsecured credit terms, which are generally consistent with the prevail-
other financial markets. Possible further acts of terrorism and current and future war
ing business practices in a given country. A deterioration of economic or political
risks could have a similar impact. The United States continues to take military action
conditions in a country could impair Zebra’s ability to collect on receivables in the
against terrorism and is currently engaged in a costly occupation of Iraq. These
affected country.
events may lead to additional armed hostilities or to further acts of terrorism and
civil disturbance in the United States or elsewhere, which may further contribute to
Infringement on the proprietary rights of others could put Zebra at a competitive
economic instability. Any such attacks could, among other things, cause further insta-
disadvantage, and any related litigation could be time consuming and costly. Third
bility in financial markets and could directly, or indirectly through reduced demand,
parties may claim that Zebra violated their intellectual property rights. To the extent
negatively affect Zebra’s facilities and operations or those of its customers or suppli-
of a violation of a third party’s patent or other intellectual property right, Zebra may
ers.
be prevented from operating its business as planned, and may be required to pay
damages, to obtain a license, if available, or to use a non-infringing method, if pos-
Taxing authority challenges may lead to tax payments exceeding current reserves.
sible, to accomplish its objectives. Any of these claims, with or without merit, could
Zebra operates in multiple tax jurisdictions in the United States and worldwide, and
result in costly litigation and divert the attention of key personnel.
uses strategies to minimize its tax expense. Local tax authorities may challenge these
tax positions from time to time. Adverse outcomes in these situations may exceed
Zebra depends on the ongoing service of its senior management and ability to
Zebra’s reserves for tax payments and may increase Zebra’s effective tax rate.
attract and retain other key personnel. Future success of Zebra is substantially
dependent on the continued service and continuing contributions of senior man-
Interest Rate Risk
agement and other key personnel. The loss of the service of any executive officer
Zebra is exposed to the impact of changes in interest rates because of our large
or other key employees could adversely affect business. Zebra has no long-term
investment portfolio. As stated in our written investment policy, the investment port-
employment agreements with key personnel and maintains minimal key man life
folio is viewed as a strategic resource that will be managed to achieve above market
insurance policies on its key employees.
rates of return in exchange for accepting a prudent amount of incremental risk,
which includes the risk of interest rate movements. Risk tolerance is constrained by
The ability to attract, retain and motivate highly skilled employees is important to
an overriding objective to preserve capital across each quarterly reporting cycle.
Zebra’s long-term success. Competition for personnel in Zebra’s industry is intense,
and Zebra may be unable to retain key employees or attract, assimilate or retain
Zebra mitigates interest rate risk with an investment policy that requires the use of
other highly qualified employees in the future.
outside professional investment managers, investment liquidity and broad diver-
sification across investment strategies, and which limits the types of investments
that may be made. Moreover, the policy requires due diligence of each investment
manager both before employment and on an ongoing basis.
29
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S of Financial Condition and Results of Operations
The following table sets forth the impact of a one-percentage point movement in
interest rates on the value of Zebra’s investment portfolio as of December 31, 2003
Notional balance of outstanding contracts:
(in thousands, except per share data).
Pound
Euro
2003
2002
£8,569
€22,000
£3,293
€26,000
Interest rate sensitive instruments
+1 percentage point movement
-1 percentage point movement
Foreign Exchange Risk
Effect on
Pretax Income
Effect on Diluted
EPS (after tax)
$(4,976)
$ 4,976
$(0.07)
$ 0.07
We conduct business in approximately 100 countries throughout the world and,
therefore, are exposed to risk based on movements in foreign exchange rates. We
generally invoice customers in their local currency and have a resulting foreign
currency denominated revenue and accounts receivable. We also purchase certain
raw materials and other items in foreign currencies. We manage these risks using
derivative financial instruments.
Hedging of Net Assets
We use forward contracts and options to manage exposure related to our pound
and euro denominated net assets. We record gains and losses on these contracts
and options in income each quarter along with the translation gains and losses
related to our net euro asset position, which would ordinarily offset each other.
Summary financial information related to these activities follows (in thousands):
Year Ended December 31,
2003
2002
2001
Change in gains (losses) from foreign
exchange derivatives
$(3,756)
Gain (loss) on net foreign currency assets 3,204
Net foreign exchange gain (loss)
$ (552)
$(2,579)
2,926
$ 347
$(1,642)
746
$ (896)
Hedging of Anticipated Sales
During the second quarter of 2003, we began a program to manage the exchange
rate risk of anticipated euro denominated sales using forward contracts and des-
ignated these contracts as cash flow hedges. Gains and losses on these contracts
are deferred in other comprehensive income until the contracts are settled and
the hedged sales are realized, at which time the deferred gains or losses will be
reported as an increase or decrease to sales. Summary financial information
related to the cash flow hedges of future revenues follows (in thousands, except
percentages):
December 31,
Net unrealized losses deferred in other comprehensive income:
Gross
Tax benefit
Net
Net gain (loss) included in sales for the following periods
ended December 31, 2003:
Three months
Year
Notional balance of outstanding contracts:
Hedge effectiveness
2003
$ (1,537)
538
$ (999)
$ (150)
266
€30,420
100%
30
Z E B R A T E C H N O L O G I E S C O R P O R A T I O N
The following table sets forth the impact of a one-percentage point movement in
of investment strategies, some of which involve the use of equity securities. Each
the dollar/pound and dollar/euro rates measured as if Zebra did not engage in the
investment manager’s portfolio is designed to be market neutral, although an indi-
selective hedging practices described above. It is based on the dollar/euro and dol-
vidual fund within a portfolio may be exposed to market risk. By policy, manage-
lar/pound exchange rates and euro and pound denominated assets and liabilities as
ment limits the amount of Zebra’s investments in alternative investment strategies
of December 31, 2003 (in thousands, except per share data).
to a maximum of 20% of the total investment portfolio, with no single investment
Foreign Exchange
Dollar/pound
Dollar/euro
Equity Price Risk
Effect on
Pretax Income
Effect on Diluted
EPS (after tax)
$107
$314
$0.00
$0.00
exceeding $12,000,000.
Zebra utilizes a “Value-at-Risk” (VaR) model to determine the maximum potential
one-day loss in the fair value of its interest rate, foreign exchange and equity price
sensitive instruments.
The following table sets forth the impact of a one-percentage point change in the
From time to time, Zebra has taken direct equity positions in companies. These
value of all equity positions held by Zebra’s investment managers (in thousands,
investments relate to potential acquisitions and other strategic business opportuni-
per share data).
ties. To the extent that it has a direct investment in the equity securities of another
company, Zebra is exposed to the risks associated with such investments.
Zebra currently employs four investment managers, two of which manage portfo-
lios of investment funds (i.e., fund of funds). These investment funds use a variety
Equity price sensitive instruments
+1 percentage point movement
-1 percentage point movement
Effect on
Pretax Income
Effect on Diluted
EPS (after tax)
$ 189
$(189)
$ 0.00
$(0.00)
31
C O N S O L I D A T E D B A L A N C E S H E E T S
(In thousands, except share and per share data)
December 31,
Assets
Current assets:
Cash and cash equivalents
Investments and marketable securities
Accounts receivable, net of allowances of $1,388 in 2003 and $1,236 in 2002
Inventories
Deferred income taxes
Prepaid expenses
Total current assets
Property and equipment at cost, less accumulated depreciation and amortization
Deferred income taxes
Goodwill
Other intangibles
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued liabilities
Current portion of obligation under capital lease
Income taxes payable
Total current liabilities
Obligation under capital lease, less current portion
Deferred income taxes
Deferred rent
Other long-term liability
Total liabilities
Stockholders’ equity:
Preferred stock
Class A Common Stock
Class B Common Stock
Additional paid-in capital
Treasury stock, at cost
Retained earnings
See accompanying notes to
consolidated financial statements.
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity
32
2003
2002
$ 14,266
$ 18,418
435,698
330,159
81,867
42,781
4,507
4,415
583,534
39,286
—
61,150
9,031
8,610
71,299
38,066
4,107
2,531
464,580
39,462
1,722
54,455
3,556
9,313
$701,611
$573,088
$ 16,238
$ 15,447
26,938
153
2,273
45,602
452
723
518
2,401
49,696
—
474
—
62,166
—
585,846
3,429
17,936
145
3,376
36,904
605
—
416
1,008
38,933
—
415
58
56,320
(16,760)
494,150
(28)
651,915
534,155
$701,611
$573,088
C O N S O L I D A T E D S T A T E M E N T S O F E A R N I N G S
Z E B R A T E C H N O L O G I E S C O R P O R A T I O N
(In thousands, except per share data)
Year Ended December 31,
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Amortization of intangible assets
Acquired in-process technology
Exit costs
Costs related to terminated acquisition
Merger costs
Total operating expenses
Operating income
Other income (expense):
Investment income
Interest expense
Foreign exchange gain (loss)
Other, net
Total other income
Income before income taxes
Income taxes
Net income
Basic earnings per share
Diluted earnings per share
See accompanying notes to
consolidated financial statements.
Diluted weighted average and equivalent shares outstanding
Basic weighted average shares outstanding
2003
2002
2001
$536,397
$475,611
$450,008
263,320
244,864
273,077
230,747
240,115
209,893
66,635
31,759
41,892
1,640
692
1,232
—
9
56,176
29,210
38,689
1,494
—
—
3,300
73
143,859
128,942
129,218
101,805
49,688
28,184
32,491
5,233
—
—
—
1,838
117,434
92,459
8,553
10,004
5,419
(154)
(552)
(1,073)
6,774
(319)
347
(954)
9,078
135,992
110,883
44,296
39,288
(231)
(896)
(612)
3,680
96,139
34,610
$ 91,696
$ 71,595
$ 61,529
$ 1.95
$ 1.54
$ 1.34
$ 1.92
$ 1.53
$ 1.33
47,098
47,663
46,452
46,870
45,949
46,305
33
C O N S O L I D A T E D S T A T E M E N T S O F C O M P R E H E N S I V E I N C O M E
(In thousands)
Year Ended December 31,
Net income
Other comprehensive income (loss):
2003
2002
2001
$91,696
$71,595
$61,529
See accompanying notes to
consolidated financial statements.
Foreign currency translation adjustment
4,110
Changes in unrealized gain/loss on hedging transactions, net of income taxes
(999)
2,968
—
(977)
—
Changes in unrealized holding gains/loss on investments, net of income taxes
346
(1,603)
3,000
Comprehensive income
$95,153
$72,960
$63,552
34
C O N S O L I D A T E D S T A T E M E N T S O F S T O C K H O L D E R S ’ E Q U I T Y
Z E B R A T E C H N O L O G I E S C O R P O R A T I O N
(Dollars in thousands)
Balance at December 31, 2000
Conversion of 612,342 shares of Class B Common Stock
to 612,342 shares of Class A Common Stock
Reissuance of 444,585 treasury shares upon exercise of stock options
and purchases under stock purchase plan
Tax benefit resulting from exercise of options
Loss on put options
Net income
Unrealized holding gain on investments (net of income taxes)
Foreign currency translation adjustment
Balance at December 31, 2001
Conversion of 2,462,584 shares of Class B Common Stock
to 2,462,584 shares of Class A Common Stock
Reissuance of 575,976 treasury shares upon exercise of stock options
and purchases under stock purchase plan
Tax benefit resulting from exercise of options
Net income
Unrealized holding loss on investments (net of income taxes)
Foreign currency translation adjustment
Balance at December 31, 2002
Conversion of 5,829,075 shares of Class B Common Stock
to 5,829,075 shares of Class A Common Stock
Reissuance of 567,568 treasury shares upon exercise of stock options
and purchases under stock purchase plan
Issuance of 82,431 common shares upon exercise of stock options
and purchases under stock purchase plan
Payment for fractional shares in 3-for-2 stock split
Tax benefit resulting from exercise of options
Net income
Unrealized holding gain on investments (net of income taxes)
Unrealized holding loss on hedging transactions (net of income taxes)
Foreign currency translation adjustment
Balance at December 31, 2003
Class A
Common
Stock
$ 385
Class B
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
$88
$ 63,333
$ 361,026
(6)
—
Treasury
Stock
$(50,128)
—
14,646
—
—
—
—
—
—
—
—
—
61,529
—
—
—
—
—
71,595
—
—
—
18,722
—
—
—
—
Accumulated
Other
Comprehensive
Income
(Loss)
Total
$(3,416)
$ 371,288
—
—
—
—
—
3,000
(977)
(1,393)
—
—
—
—
(1,603)
2,968
—
8,895
1,273
(1)
61,529
3,000
(977)
445,007
—
13,106
3,082
71,595
(1,603)
2,968
58,854
422,555
(35,482)
(24)
—
—
—
—
—
—
—
82
—
—
—
—
—
58
(5,751)
1,273
(1)
—
—
—
(5,616)
3,082
—
—
—
56,320
494,150
(16,760)
(28)
534,155
(58)
—
—
—
—
—
—
—
—
—
(1,630)
2,631
(142)
4,987
—
—
—
—
—
—
—
—
—
91,696
—
—
—
—
16,760
—
—
—
—
—
—
—
—
—
—
—
—
—
346
(999)
4,110
—
15,130
2,632
(142)
4,987
91,696
346
(999)
4,110
$474
$ —
$62,166
$585,846
$ —
$3,429
$651,915
35
6
—
—
—
—
—
—
391
24
—
—
—
—
—
415
58
—
1
—
—
—
—
—
—
C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S
(In thousands)
Year Ended December 31,
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization
Tax benefit from exercise of options
Acquired in-process technology
Depreciation (appreciation) in market value of investments
and marketable securities
Write-down of long-term investment
Deferred income taxes
Changes in assets and liabilities, net of businesses acquired:
Accounts receivable, net
Inventories
Other assets
Accounts payable
Accrued liabilities
Income taxes payable
Other operating activities
Investments and marketable securities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchases of property and equipment
Acquisition of Atlantek, Inc., net of cash acquired
Purchases of investments and marketable securities
Sales and maturities of investments and marketable securities
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from exercise of stock options and stock purchase plan purchases
Payments for obligation under capital lease
Other financing activities
Net cash provided by financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information:
Interest paid
Income taxes paid
Supplemental disclosures of non-cash transactions:
2003
2002
2001
$91,696
$71,595
$61,529
11,580
4,987
692
—
—
(697)
(5,141)
(1,659)
2,466
(3,156)
6,909
(962)
(2,196)
—
104,519
(8,407)
(13,680)
(1,057,241)
951,702
(127,626)
17,762
(200)
(142)
17,420
1,535
(4,152)
18,418
$14,266
12,259
3,082
—
1,360
193
(616)
(1,629)
2,922
3,969
(939)
2,607
(896)
1,241
(108,498)
(13,350)
(8,481)
—
—
—
(8,481)
13,106
(117)
—
12,989
932
(7,910)
26,328
$18,418
$ 154
38,779
$ 319
33,840
15,691
1,273
—
(1,209)
2,242
2,873
16,223
17,284
(7,895)
(9,424)
3,155
(6,792)
(1,928)
(78,874)
14,148
(9,613)
—
—
—
(9,613)
8,895
(103)
(1)
8,791
(774)
12,552
13,776
$26,328
$ 231
38,604
6
—
36
See accompanying notes to
consolidated financial statements.
Conversion of Class B Common Stock to Class A Common Stock
Assets under capital lease obligation
58
—
25
333
N O T E S to Consolidated Financial Statements
Z E B R A T E C H N O L O G I E S C O R P O R A T I O N
Note 1 Description of Business
those securities that Zebra has the ability and intent to hold until maturity. All secu-
Zebra Technologies Corporation and its wholly-owned subsidiaries (Zebra) design,
rities not included in trading or held-to-maturity are classified as available-for-sale.
manufacture, sell and support a broad range of direct thermal and thermal transfer
bar code label and receipt printers, radio frequency identification printer/encoders,
Trading and available-for-sale securities are recorded at fair value. Held-to-maturity
card imaging printers, digital photo printers and related accessories and support
securities are recorded at amortized cost, adjusted for the amortization or accre-
software. These products are used principally in automatic identification (auto ID),
tion of discounts or premiums. Unrealized holding gains and losses on trading
data collection and personal identification applications and are distributed world-
securities are included in earnings. Unrealized holding gains and losses, net of the
wide through a network of resellers, distributors and end users representing a
related tax effect, on available-for-sale securities are excluded from earnings and
wide cross-section of industrial, service and government organizations.
are reported as a separate component of stockholders’ equity until realized.
Note 2 Summary of Significant Accounting Policies
Inventories. Inventories are stated at the lower of cost or market, and cost is deter-
Principles of Consolidation. These consolidated financial statements were prepared
mined by the first-in, first-out (FIFO) method.
on a consolidated basis to include the accounts of Zebra and its wholly owned sub-
sidiaries. All significant inter-company accounts, transactions and unrealized profit
Property and Equipment. Property and equipment is stated at cost. Depreciation
were eliminated in consolidation.
and amortization is computed primarily using the straight-line method over the
estimated useful lives of the various classes of property and equipment, which are
Use of Estimates. These consolidated financial statements were prepared using
30 years for buildings and range from 3 to 10 years for other property. Property
estimates and assumptions that affect the reported amounts of assets and liabili-
and equipment held under capital leases is amortized using the straight-line
ties and disclosure of contingent assets and liabilities as the date of the consoli-
method over the shorter of the lease term or estimated useful life of the asset.
dated financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Income Taxes. Zebra accounts for income taxes under the asset and liability
method. Accordingly, deferred tax assets and liabilities are recognized for the
Cash and Cash Equivalents. Cash consists primarily of deposits with banks. In addi-
future tax consequences attributable to differences between the financial state-
tion, Zebra considers highly liquid short-term investments with original maturities
ment carrying amounts of existing assets and liabilities and their respective tax
of less than seven days to be cash equivalents.
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differ-
Investments and Marketable Securities. Investments and marketable securities at
ences are expected to be recovered or settled. The effect on deferred tax assets
December 31, 2003, consisted of U.S. government securities, state and municipal
and liabilities of a change in tax rates is recognized in income in the period that
bonds, partnership interests and equity securities, which are held indirectly in
includes the enactment date.
diversified funds actively managed by investment professionals. Zebra classifies
its debt and marketable equity securities in one of three categories: trading, avail-
Intangible Assets. Goodwill represents the unamortized excess of the cost of
able-for-sale or held-to-maturity. Trading securities are bought and held principally
acquiring a business over the fair values of the net assets received at the date of
for the purpose of selling them in the near term. Held-to-maturity securities are
acquisition. Goodwill is no longer being amortized as required by SFAS No. 142,
Goodwill and Other Intangible Assets.
37
N O T E S to Consolidated Financial Statements
Other intangible assets consist primarily of current technology and customer rela-
From time to time, Zebra will provide engineering and development services to
tionships. These assets are recorded at cost and amortized on a straight-line basis
third parties on a contract basis. Zebra does not guarantee the outcome of this
over 5 to 8 years. Accumulated amortization for these other intangible assets was
research and does not retain any obligation to repay third-party funding received
$6,197,000 and $3,865,000 at December 31, 2003 and 2002, respectively.
for these contract services. Since these services are not part of our standard prod-
uct offering, we treat payments received under these arrangements as reductions
Revenue Recognition. Revenue includes sales of hardware, supplies, software
to research and development costs.
and services (including repair services, extended service contracts, and profes-
sional services). Product revenue is recognized when product has been shipped,
Advertising. Advertising costs are expensed as incurred. Advertising expenses for
risk of loss has passed to the purchaser, and Zebra has fulfilled all of its obliga-
the years ended December 31, 2003, 2002 and 2001 totaled $3,721,000, $3,965,000
tions. We provide for an estimate of product returns and doubtful accounts based
and $4,405,000, respectively.
on historical experience. Revenue related to extended warranty and service con-
tracts is recorded as deferred income and recognized over the life of the contract.
Market Development Funds. Zebra makes market development funds available to
Professional services revenue is recorded when performed. Revenue from multiple
its resellers to support demand generation activity by the resellers. These funds
element arrangements is allocated to the various elements based on the relative
require the reseller to provide specific services or benefits to Zebra and sub-
fair value of the elements.
stantiate the fair value of such. Zebra reimburses resellers for agreed activities
up to the fair value of the benefit received by Zebra. These payments are treated
Zebra records payments to resellers of its product as reductions to revenue unless
as marketing costs consistent with the requirements of EITF 01-9, Accounting
these payments meet the requirements for operating expense treatment under EITF
for Consideration Given by a Vendor to a Customer (Including a Reseller of the
01-09 Accounting for Consideration Given by a Vendor to a Customer (Including a
Vendor’s Products). Any payments to resellers that do not meet these require-
Reseller of the Vendor’s Products). See the market development funds accounting
ments are recorded as reductions to revenue.
policy for further details.
Revenue includes all customer billings for shipping and handling charges. The
defects in material and workmanship. A provision for warranty expense is
related costs of shipping and handling revenue are recorded as cost of goods sold.
recorded at the time of shipment and adjusted quarterly based on historical war-
ranty experience. The following is a summary of Zebra’s accrued warranty obliga-
Research and Development Costs. Research and development costs are expensed
tion during the years ended December 31, 2003 and 2002.
Warranty. Zebra provides warranty coverage of up to one year on printers against
as incurred. These costs include:
(cid:127) Salaries, benefits, and other R&D personnel related costs
(cid:127) Consulting and other outside services used in the R&D process
(cid:127) Engineering supplies
(cid:127) Engineering related information systems costs
(cid:127) Allocation of building and related costs
Accrued warranty – beginning balance
Add: warranty expense
Deduct: warranty payments
Accrued warranty – ending balance
2003
$1,675
3,095
3,419
$1,351
2002
$1,021
3,080
2,426
$1,675
38
Z E B R A T E C H N O L O G I E S C O R P O R A T I O N
Fair Value of Financial instruments. Zebra estimates the fair value of its financial
Deferred Compensation Plan. Zebra has a deferred compensation plan that per-
instruments as follows:
Instrument
Method for determining fair value
Cash, cash equivalents, accounts
receivable, accounts payable and
accrued liabilities
Cost, which approximates fair value due to the
short-term nature of these instruments
mits management and highly compensated employees to defer portions of their
compensation. Zebra immediately pays deferred amounts into a Rabbi Trust, and
plan participants select a method of investing these funds. Zebra accrues the cur-
rent balance of the deferred compensation obligation in other long-term liabilities.
As of December 31, 2003, Zebra’s deferred compensation liability was $2,401,000.
Investments and marketable securities Market quotes from independent pricing services
Zebra purchases life insurance policies to fund the ultimate payment of the
Foreign currency forward contracts
Foreign currency option contracts
Estimated using market quoted rates for foreign
currency at the balance sheet date
Estimated using market quoted rates for foreign
currency at the balance sheet date and application
of such rates subject to the option terms
Life insurance policies
Cash surrender value
deferred compensation. These polices are valued at the cash surrender value and
included in investments and marketable securities.
Foreign Currency Translation. The consolidated balance sheets of Zebra’s foreign
subsidiaries are translated into U.S. dollars using the year-end exchange rate, and
statement of earnings items are translated using the average exchange rate for the
Stock-based Compensation. At December 31, 2003, Zebra has three stock-based
year. The resulting translation gains or losses are recorded in stockholders’ equity
compensation plans, which are described more fully in Note 3. Zebra accounts for
as a cumulative translation adjustment, which is a component of accumulated
those plans under the recognition and measurement principles of APB Opinion No. 25,
other comprehensive income.
Accounting for Stock Issued to Employees, and related Interpretations. No stock-based
compensation cost is reflected in net income, as all options granted under those plans
Capitalized Software. Zebra’s investment in software development consists primar-
had an exercise price equal to the market value of the underlying common stock on
ily of enhancements to its existing E-commerce web-based application, which will
the date of grant. The following table illustrates the effect on net income and earnings
include the automation of current business activities. Specifically, the activities
per share if Zebra had applied the fair value recognition provisions of SFAS No. 123,
include the processing of customer orders; the acknowledgement of customer
Accounting for Stock-based Compensation, to stock-based compensation.
orders and delivery; and the financial invoicing for all of Zebra’s products and will
aid in enabling Zebra to create new business efficiencies.
Year Ended December 31,
Net income, as reported
2003
$91,696
2002
$71,595
2001
$61,529
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all awards,
net of related tax effects
Pro forma net income
Basic earnings per share:
As reported
Pro forma
Diluted earnings per share:
As reported
Pro forma
(5,374)
$86,322
(5,102)
$66,493
$ 1.95
1.83
$ 1.92
1.81
$ 1.54
1.43
$ 1.53
1.42
(3,558)
$57,971
$ 1.34
1.26
$ 1.33
1.25
Costs associated with the planning and design phases of web-based development,
including coding and testing activities necessary to establish technological feasi-
bility of the functionality of the website, are charged to research and development
as incurred. Once technological feasibility has been determined, costs incurred
in the construction phase of software development including coding, testing, and
product quality assurance are capitalized.
Acquisition Costs. Zebra periodically invests in potential acquisitions. Any external
costs incurred are recorded as prepaid expenses until such time as Zebra either com-
pletes the transaction or abandons the transaction. If the transaction is completed, the
costs are treated as part of the cost of the acquisition. If the transaction is abandoned,
39
N O T E S to Consolidated Financial Statements
the costs are expensed during the period in which it is abandoned. During 2002, oper-
entered into or modified after June 30, 2003, and had no impact on Zebra’s finan-
ating expenses included $3,300,000 of costs related to such an abandonment.
cial position or results of operations.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of. Zebra
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
accounts for long-lived assets in accordance with the provisions of SFAS No. 144,
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 sets
Accounting for the Impairment or Disposal of Long-Lived Assets. The statement
standards for classification and measurement by an issuer of financial instruments
requires that long-lived assets and certain identifiable intangibles be reviewed for
with characteristics of both liabilities and equity. It requires treating these instru-
impairment whenever events or changes in circumstances indicate that the car-
ments as a liability (or an asset in some circumstances) because the financial
rying amount of an asset may not be recoverable. Recoverability of assets to be
instrument is an obligation of the issuer. Zebra has issued no financial instruments
held and used is measured by a comparison of the carrying amount of an asset to
with these characteristics, and therefore, SFAS No. 150 had no effect on our finan-
the sum of the undiscounted cash flows expected to result from the use and the
cial statements.
eventual disposition of the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
Note 3 Stock Based Compensation
amount of the assets exceeds the fair value of the assets. Assets to be disposed of
As of December 31, 2003, Zebra has three active stock option and stock purchase
are reported at the lower of the carrying amount or fair value less costs to sell.
plans, which are described below.
Recently Issued Accounting Pronouncements. In January 2003, the FASB issued FIN
The Board of Directors adopted the 1997 Stock Option Plan, effective February
46, Consolidation of Variable Interest Entities. FIN 46 requires us to consolidate a
11, 1997, and 6,375,000 shares of Class A Common Stock were reserved for issu-
variable interest entity (VIE) if we have a majority of the risks, rewards or both of
ance under the plan. The 1997 Stock Option Plan is a flexible plan that provides
that entity. FIN 46 will be effective for most VIEs beginning in the fourth quarter of
the committee that administers the Plan broad discretion to fashion the terms of
2003. Zebra has no investments in variable interest entities; therefore, FIN 46 has
the awards to provide eligible participants with stock-based incentives, including:
no effect on our financial statements.
(i) nonqualified and incentive stock options for the purchase of Zebra’s Class A
Common Stock and (ii) dividend equivalents. The persons eligible to participate in
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
the 1997 Stock Option Plan are directors, officers, and employees of Zebra or any
Compensation - Transition and Disclosure, amending SFAS No. 123, Accounting for
subsidiary of Zebra who, in the opinion of the committee administering the plan,
Stock-Based Compensation, to provide alternative transition methods for an entity
are in a position to make contributions to the growth, management, protection and
that voluntarily changes to the fair value based method of accounting for stock-based
success of Zebra or its subsidiaries. As of December 31, 2003, 1,906,126 shares
employee compensation. Zebra does not currently intend to make this change.
were available under the plan.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
The options granted under the 1997 Stock Option Plan have an exercise price equal
Derivative Instruments and Hedging Activities. SFAS No. 149 clarifies when a con-
to the closing market price of Zebra’s stock on the date of grant. The options gener-
tract with an initial net investment meets the characteristics of a derivative and
ally vest over two- to five-year periods and have a legal life of ten years from the
when a derivative contains a financing component that warrants special reporting
date of grant. The Compensation Committee of the Board of Directors administers
in the statements of cash flows. SFAS No. 149 is generally effective for contracts
the plan.
40
Z E B R A T E C H N O L O G I E S C O R P O R A T I O N
Zebra’s Board of Directors adopted the 1997 Director Plan, effective February 11,
Zebra’s Board of Directors adopted the 2002 Director Plan, effective February 1,
1997. The 1997 Director Plan provides for the issuance of options to purchase up to
2002. The 2002 Director Plan provides for the issuance of options to purchase up
115,500 shares of Class A Common Stock, which shares are reserved and available
to 240,000 shares of Class A Common Stock, which shares are reserved and avail-
for purchase upon the exercise of options granted under the 1997 Director Plan.
able for purchase upon the exercise of options granted under the 2002 Director
Only directors who are not employees or officers of Zebra are eligible to participate
Plan. Only directors who are not employees or officers of Zebra are eligible to
in the 1997 Director Plan. Under the 1997 Director Plan, each non-employee direc-
participate in the 2002 Director Plan. Under the 2002 Director Plan, each non-
tor was granted, on the effective date of the plan, an option to purchase 22,500
employee director was granted, on the effective date of the plan, an option to pur-
shares of Class A Common Stock, and each non-employee director subsequently
chase 30,000 shares of Class A Common Stock, and each non-employee director
elected to the Board will be granted an option to purchase shares of Class A
subsequently elected to the Board will be granted an option to purchase shares of
Common Stock on the date of his or her election. Options granted under the 1997
Class A Common Stock on the date of his or her election or appointment. Options
Director Plan provide for the purchase of Class A Common Stock at a price equal to
granted under the 2002 Director Plan provide for the purchase of Class A Common
the fair market value on the date of grant. If there are not sufficient shares remain-
Stock at a price equal to the fair market value on the date of grant. If there are not
ing and available to all non-employee directors eligible for an automatic grant at
sufficient shares remaining and available to all non-employee directors eligible for
the time at which an automatic grant would otherwise be made, then each eligible
an automatic grant at the time at which an automatic grant would otherwise be
non-employee director shall receive an option to purchase a pro rata number of
made, then each eligible non-employee director shall receive an option to purchase
shares. Unless otherwise provided in an option agreement, options granted under
a pro rata number of shares. As of December 31, 2003, 125,288 shares were avail-
the 1997 Director Plan shall become exercisable in five equal increments begin-
able under the plan. Unless otherwise provided in an option agreement, options
ning on the date of the grant and on each of the first four anniversaries thereof.
granted under the 2002 Director Plan shall become exercisable in five equal incre-
All options expire on the earlier of (a) ten years following the grant date or (b) the
ments beginning on the date of the grant and on each of the first four anniversaries
second anniversary of the termination of the non-employee director’s directorship
thereof. All options expire on the earlier of (a) ten years following the grant date,
for any reason other than due to death or disability (as defined in the 1997 Director
(b) the first anniversary of the termination of the non-employee director’s director-
Plan). A total of 78,750 shares were issued under this plan, which was terminated
ship for any reason other than those listed in clause (c) below, or (c) the termina-
February 1, 2002. At December 31, 2003, 7,500 options issued under the 1997
tion of the non-employee director’s directorship by Zebra’s stockholders for cause,
Director Plan remained outstanding and unexercised.
or resignation for cause, in each case as defined in the option agreement.
The Board of Directors and stockholders adopted the 2001 Stock Purchase Plan and
For purposes of calculating the compensation cost consistent with SFAS No. 123,
reserved 750,000 shares of Class A Common Stock for issuance under the plan.
the fair value of each stock option grant is estimated on the date of grant using
Under this plan, employees who work a minimum of 20 hours per week may elect
the Black-Scholes option-pricing model. The following table shows the weighted-
to withhold up to 10% of their cash compensation through regular payroll deduc-
average assumptions used for stock option grants as well as the fair value of the
tions to purchase shares of Class A Common Stock from Zebra over a period not
options granted based on those assumptions:
to exceed 12 months at a purchase price per share equal to the lesser of: (1) 85%
of the fair market value of the shares as of the date of the grant, or (2) 85% of the
fair market value of the shares as of the date of purchase. As of December 31, 2003,
156,786 shares have been purchased under the plan.
41
N O T E S to Consolidated Financial Statements
Expected dividend yield
Volatility
Risk free interest rate
2003
0%
53%
3.29%
2002
0%
53%
4.55%
2001
0%
59%
4.38%
Expected weighted-average life
Six years
Six years
Five years
Fair value of options granted
$11,490,000
$19,676,000
$6,670,000
Weighted-average grant date fair
value of options granted
$21.00
$18.25
$15.47
The fair value of the employees’ purchase rights pursuant to the Stock Purchase
Plan are estimated using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for purchase rights granted. Expected lives of
three months to one year have been used along with these assumptions.
Fair market value
Option price
Expected dividend yield
Expected volatility
Risk free interest rate
2003
$44.17
$37.54
0%
27%
1.26%
2002
$51.14
$43.47
0%
40%
2.17%
2001
$38.18
$32.45
0%
54%
4.38%
Stock option activity for the years ended December 31, 2003, 2002, and 2001 was
as follows:
Fixed Options
Outstanding at
2003
2002
2001
Weighted-
Average
Exercise
Price
Shares
Weighted-
Average
Exercise
Price
Weighted
Average
Exercise
Price
Shares
Shares
beginning of year 2,492,320 $ 29.00
2,120,089
$ 25.58
2,230,931 $ 24.05
Granted
Exercised
Canceled
Outstanding at
547,075
(595,847)
(356,342)
39.47
25.80
32.88
1,078,125
(513,011)
(192,883)
32.68
21.39
32.24
431,250
27.66
(371,760)
18.92
(170,332)
25.34
end of year
2,087,206
32.00
2,492,320
29.00
2,120,089
25.58
Options exercisable
at end of year
466,355
26.45
577,040
23.24
716,013
20.81
42
The following table summarizes information about fixed stock options outstanding
at December 31, 2003:
Options Outstanding
Range of
Exercise Prices
$16.11-$27.25
$28.75-$31.96
$32.43
$33.79-$37.84
$40.42-$58.91
Number
of Shares
600,739
98,692
664,567
446,459
276,749
2,087,206
Weighted-
Average
Remaining
Contractual
Life
5.77 years
6.72 years
8.11 years
9.03 years
6.83 years
Weighted-
Average
Exercise
Price
$22.29
$31.37
$32.43
$37.69
$43.06
Options Exercisable
Weighted-
Average
Exercise
Price
$19.95
$31.59
$32.43
—
Number
of Shares
283,109
25,521
72,073
—
85,652
$41.36
466,355
Note 4 Business Combinations
Atlantek, Inc. On November 17, 2003, Zebra acquired Atlantek, Inc. (Atlantek), by
acquiring all of the outstanding stock of Atlantek for approximately $13,680,000
in cash. Located in Wakefield, Rhode Island, Atlantek had been a privately held
company. Atlantek designs and manufactures thermal digital printers. Additional
payments are contingent upon future revenue of specific products for a two-year
period, the amount for which cannot be reasonably estimated at this time. The con-
solidated statements of earnings reflect the results of operations of Atlantek since
the effective date of the acquisition. The pro forma impact of this acquisition was
not significant.
The following table (in thousands) summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of acquisition. We are still
finalizing our valuations of certain intangible assets; thus, the allocation of the
purchase price is subject to refinement. We expect this valuation to be completed
during the first quarter of 2004. Additionally, when the contingent purchase price
payments discussed above are finalized, these amounts will be added to goodwill.
Current assets
Property and equipment
Intangible assets
Goodwill
Total assets acquired
Current liabilities
Long-term deferred income taxes
Long-term debt
Total liabilities assumed
Net assets acquired
The purchase price has been allocated to identifiable tangible assets and intangible
assets acquired and liabilities assumed based on their estimated fair values. Of
the $7,808,000 of acquired intangible assets, $692,000 was assigned to in-process
technology assets that were written-off at the date of the acquisition in accordance
with FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business
Combinations for by the Purchase Method. The write-off of in-process technology
is stated separately in the operating expense section of the consolidated state-
ments of earnings. The remaining $7,116,000 of acquired intangible assets consist
of current technology of $4,613,000 with useful lives from 5 to 6 years and cus-
tomer relationships of $2,503,000 with a useful life of 8 years. The goodwill is not
deductible for tax purposes.
Acquisition Termination Costs and Sale of Investment. In the first quarter of 2002,
Zebra terminated the acquisition agreement and tender offer in which Zebra would
acquire all outstanding shares of common stock (including associated rights to pur-
chase preferred stock) of Fargo Electronics, Inc. for $7.25 per share in cash. In con-
nection with the termination, Zebra recorded $3,300,000 in expenses for capitalized
acquisition costs and other acquisition costs that would otherwise have been capi-
talized. Also during the quarter ended March 30, 2002, Zebra sold its investment in
common stock of Fargo and realized a pre-tax gain of $1,953,000, which is included
in investment income.
Z E B R A T E C H N O L O G I E S C O R P O R A T I O N
At November 17, 2003
Note 5 Stockholders’ Equity
Share count and par value data related to stockholders’ equity are as follows:
$3,887
670
7,808
6,695
19,060
(2,369)
(2,825)
(186)
(5,380)
$13,680
Shares authorized
December 31,
Preferred Stock
Par value per share
Shares authorized
Shares outstanding
Common Stock—Class A
Par value per share
Shares issued
Shares outstanding
Common Stock—Class B
Par value per share
Shares authorized
Shares issued
Shares outstanding
Treasury Stock
Shares held
2003
2002
$0.01
$0.01
10,000,000
10,000,000
—
—
$0.01
$0.01
78,358,189
50,000,000
47,399,302
47,399,302
41,490,699
40,923,130
$0.01
$0.01
—
—
—
—
28,358,189
5,829,075
5,829,075
567,568
Zebra’s Certificate of Incorporation provides that if the outstanding shares of Zebra
Class B common stock cease to represent at least 10% of the aggregate number of
shares of Zebra common stock then outstanding, each share of Zebra Class B com-
mon stock shall automatically convert into one share of Zebra Class A common
stock. Class B common stock entitles the holder to ten votes per share while Class
A common stock entitles the holder to one vote per share, on each matter submit-
ted to a vote of Zebra’s stockholders. Class B shares fell below 10% of the out-
standing shares on July 1, 2003, and the required automatic conversion occurred at
that time. Upon conversion of the Class B common stock, the number of authorized
shares of Class A common stock increased to 78,358,189, and the number of autho-
rized shares of Class B common stock decreased to zero.
43
N O T E S to Consolidated Financial Statements
On July 24, 2003, the Board of Directors authorized a fifty percent (50%) stock
Note 6 Earnings Per Share
dividend on each issued share of Class A common stock, payable before the close
For the years ended December 31, 2003, 2002, and 2001, earnings per share were
of business on August 21, 2003, to holders of record at the close of business on
computed as follows (in thousands, except per-share amounts):
August 7, 2003. All share counts and per-share amounts were restated to reflect
this stock dividend.
Stockholder Rights Agreement. Zebra’s Board of Directors adopted a Stockholder
Rights Agreement under which stock purchase rights were paid by dividend to
stockholders of record on March 15, 2002 at the rate of one Class A Right for each
outstanding share of Class A Common Stock. Each Class A Right, other than those
Year Ended December 31,
Basic earnings per share:
Net income
2003
2002
2001
$91,696
$71,595
Weighted average common shares outstanding
47,098
46,452
Per share amount
Diluted earnings per share:
Net income
$ 1.95
$ 1.54
$91,696
$71,595
$61,529
45,949
$ 1.34
$61,529
45,949
356
held by the acquiring person, entitles the registered holder to purchase one ten-
Weighted average common shares outstanding
47,098
46,452
thousandth of a share of Series A Junior Participating Preferred Stock, par value
Add: Effect of dilutive securities – stock options
565
418
$0.01 per share, at a price of $300 per one ten-thousandth of Class A Preferred
Diluted weighted average and equivalent
Share after the distribution date. The distribution date is 10 days after the date on
which any person or group announces that it has acquired 15% or more of Zebra’s
outstanding common stock or 10 days (or a later date as determined by the Board
of Directors) after the date on which any person or group announces or com-
mences a tender offer that would result in the person or group becoming an owner
of 15% or more of the outstanding common stock.
shares outstanding
Per share amount
47,663
46,870
46,305
$ 1.92
$ 1.53
$ 1.33
The potentially dilutive securities, which were excluded from the earnings per
share calculation, consisted of stock options for which the exercise price was
greater than the average market price of the Class A Common Stock. For the years
ended December 31, the shares amounted to 52,712 in 2003, 194,875 in 2002, and
The Rights will expire on March 14, 2012 unless that date has been extended by the
436,325 in 2001.
Board of Directors or unless the Rights are redeemed or terminated earlier. A com-
mittee of Zebra’s independent directors will review the Rights Plan at least every
Note 7 Investments and Marketable Securities
three years and decide whether it should continue or be revoked. Zebra generally
During the first quarter of 2003, we changed the classification of certain invest-
may amend the Rights Plan or redeem the Rights at $0.001 per Right at any time
ments and marketable securities from the trading category to the available-for-sale
prior to the time a person or group has acquired at least 15% of the outstanding
category. We made this change because we are no longer buying securities with
common stock.
44
the intent to sell them in the near term. We account for these investments under
the rules in SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities.
SFAS No. 115 requires that changes in the market value of available-for-sale securi-
ties are reflected in the accumulated other comprehensive income section of stock-
holders’ equity in the balance sheet, until disposed of. Once these securities are
disposed of, either by sale or maturity, the accumulated changes in market value
are transferred to investment income.
Z E B R A T E C H N O L O G I E S C O R P O R A T I O N
Changes in market value of trading securities are recorded in investment income as
Unrealized gains and losses on investment securities are included in these financial
they occur, and the related cash flow statement includes changes in the balances of
statements as follows (in thousands):
trading securities as operating cash flows.
Year Ended December 31,
2003
2002
The amortized cost, gross unrealized holding gains, gross unrealized holding losses
and aggregate fair value of investment securities at December 31, 2003, were as
follows (in thousands):
Unrealized gains (losses) on available-for-sale
securities, recorded net of tax, in accumulated
other comprehensive income
Unrealized gains (losses) on trading securities
$346
$(1,603)
Available-for-sale:
U.S. government and agency securities
State and municipal bonds
Equity securities (included in other assets)
Equity securities
Corporate bonds
Partnership interests
Trading securities:
Other
Gross
Gross
Unrealized Unrealized
Amortized
Cost
Holding
Gains
Holding
Losses
Fair
Value
$187,988
197,574
299
3,325
19,900
18,652
427,738
$ 207
464
—
—
100
639
1,410
$(696)
(224)
(28)
—
—
—
$187,499
197,814
271
3,325
20,000
19,291
(948)
428,200
7,709
88
(28)
7,769
$435,447
$1,498
$(976)
$435,969
The amortized cost, gross unrealized holding gains, gross unrealized holding losses
and aggregate fair value of investment securities at December 31, 2002, were as
in investment income
$ 60
$(1,360)
As of December 31, 2003, 29 investments in government securities with market val-
ues aggregating $91,406,000 were less than amortized cost. In addition, 23 invest-
ments in state and municipal bonds with market values aggregating $30,187,000
were less than amortized cost. These lower market values are caused by short-
term fluctuations in interest rates and are not a reflection of the credit worthiness
of the issuer. The market value of these securities has been below amortized cost
for less than twelve months.
Zebra is a limited partner in two non-registered partnerships. The partnerships
seek to provide returns to its partners by making strategic investments in a diversi-
fied portfolio of investment funds. Zebra’s investment as a limited partner allows it
to have liability protection limited to the amount of its investments in the funds.
The contractual maturities of debt securities at December 31, 2003, were as follows
follows (in thousands):
Available-for-sale (included in other assets):
Equity securities
Trading securities:
U.S. government and agency securities
State and municipal bonds
Corporate bonds
Partnership interests
Other
Gross
Gross
Unrealized Unrealized
Amortized
Cost
Holding
Gains
Holding
Losses
Fair
Value
$ 365
$ —
$ (42)
$ 323
(in thousands):
Due within one year
Due after one year through five years
Due after five years
Fair Value
$178,778
180,638
53,666
$413,082
96,195
174,508
34,316
15,676
7,607
328,302
207
275
149
3,139
28
3,798
(152)
(1,565)
(196)
(12)
(16)
96,250
173,218
34,269
18,803
7,619
$328,667
$3,798
$(1,983) $330,482
Realized gains (losses)
(1,941)
330,159
Proceeds
Using the specific identification method, the proceeds and realized gains on the
sales of available-for-sale securities were as follows (in thousands):
2003
$338,557
$ 250
2002
$3,499
$1,760
2001
$ —
$(2,242)
45
N O T E S to Consolidated Financial Statements
The realized gain of $1,760,000 in 2002 includes a gain on the sale of an available-
Note 9 Inventories
for-sale stock offset by an additional write-down of an available-for-sale security
The components of inventories, net of allowances, are as follows (in thousands):
whose decline in value was determined to be other than temporary. The realized
loss of $2,242,000 in 2001 is the result of a write-down of an available-for-sale
security whose decline in value was determined to be other than temporary.
Note 8 Related-Party Transactions
Unique Building Corporation (Unique), an entity controlled by certain officers
and stockholders of Zebra, leases a facility and equipment to Zebra under a lease
described in Note 15. Management believes that the lease payments are substan-
tially consistent with amounts that could have been negotiated with third parties
on an arm’s-length basis and represent conditions at the time of the negotiations.
Lease payments related to the leases, and recorded as a component of all func-
tional areas, were included in the consolidated financial statements as follows
(in thousands):
2003
2002
2001
Unique Operating Lease Payments
$2,198
2,085
2,085
Future minimum lease payments related to this lease as of December 31, 2003, are
as follows (in thousands):
2004
2005
2006
2007
2008
Thereafter
Total minimum lease payments
46
Operating Leases
$ 2,284
2,336
2,336
2,336
2,380
14,962
$26,634
December 31,
Raw material
Work in process
Finished goods
Total inventories
2003
$29,127
645
13,009
$42,781
2002
$21,404
1,104
15,558
$38,066
Note 10 Property and Equipment
Property and equipment, which includes assets under capital leases, is comprised
of the following (in thousands):
December 31,
Buildings
Land
Machinery, equipment and tooling
Machinery and equipment under capital leases
Furniture and office equipment
Computers and software
Automobiles
Leasehold improvements
Projects in progress
Less accumulated depreciation and amortization
Net property and equipment
2003
$ 11,911
1,910
43,674
1,482
6,415
37,486
128
4,878
2,473
110,357
(71,071)
$ 39,286
2002
$ 11,499
1,910
38,941
2,757
6,164
33,899
153
4,012
1,274
100,609
(61,147)
$ 39,462
Amortization of capitalized software was $2,132,000 in 2003, $2,042,000 in 2002,
and $1,834,000 in 2001.
Note 11 Income Taxes
The geographical sources of earnings before income taxes were as follows
(in thousands):
Year Ended December 31,
United States
Outside United States
Total
2003
$132,056
3,936
$135,992
2002
$101,454
9,429
$110,883
2001
$90,272
5,867
$96,139
Zebra does not provide for deferred income taxes on undistributed earnings of for-
Beginning in 1998, we were involved in a series of tax disputes with the State of
eign subsidiaries, which totaled approximately $22,500,000 at December 31, 2003
Illinois covering our Illinois income taxes from 1993 through 2000. Throughout the
and $11,600,000 at December 31, 2002. Should such earnings be remitted to Zebra,
dispute, we regularly reviewed and updated our reserves based on our estimate
foreign tax credits would be available to substantially offset the U.S. income taxes
of the final outcome that would be achieved. During the fourth quarter of 2003, we
due upon repatriation.
reached a settlement with the State of Illinois in the amount of $7,000,000, cover-
Z E B R A T E C H N O L O G I E S C O R P O R A T I O N
The provision for income taxes consists of the following (in thousands):
Year Ended December 31,
2003
2002
2001
ing all disputed issues for 1993 through 2000.
As a result of the settlement, we recorded a reduction to income tax expense for
the amount our reserves exceeded that settlement, or $1,342,000, during the fourth
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Total
$38,954
$30,660
$25,998
quarter of 2003. In addition, we received interest of $306,000 on the protest funds
3,723
2,561
(261)
(35)
(646)
5,247
3,254
296
40
(209)
5,319
2,107
1,132
152
(98)
we had on deposit with the State of Illinois. This interest was recorded as interest
income during the fourth quarter of 2003.
Tax effects of temporary differences that give rise to deferred tax assets and liabili-
ties are as follows (in thousands):
$44,296
$39,288
$34,610
December 31,
2003
2002
The provision for income taxes differs from the amount computed by applying the
U.S. statutory Federal income tax rate of 35%. The reconciliation of statutory and
effective income taxes is presented below (in thousands):
Year Ended December 31,
2003
Provision computed at statutory rate
$47,597
State income tax (net of Federal tax benefit)
2,952
Federal tax benefit of state tax settlement
(2,450)
Tax-exempt interest and dividend income
(1,674)
Tax benefit of exempt foreign trade income
(1,488)
Research & experimental credit study
Other
(1,959)
1,318
2002
$38,809
3,634
—
(2,422)
(1,575)
—
842
2001
$33,649
3,556
—
(1,524)
(1,438)
—
367
Provision for income taxes
$44,296
$39,288
$34,610
Deferred income taxes reflect the impact of temporary differences between the
amounts of assets and liabilities for financial reporting purposes and such amounts
as measured by tax laws. Based on management’s assessment, it is more likely than
not that the deferred tax assets will be realized through future taxable earnings.
Deferred tax assets:
Deferred rent-building
Capital equipment lease
Accrued vacation
Deferred compensation
Inventory items
Allowance for doubtful accounts
Other accruals
Acquisition related items
Unrealized loss on securities
Total deferred tax assets
Deferred tax liabilities:
Unrealized gain on securities
Depreciation and amortization
Total deferred tax liabilities
Net deferred tax asset
$ 205
$ 165
88
643
1,099
2,848
235
3,407
1,886
168
10,579
(11)
(6,784)
(6,795)
$ 3,784
114
647
—
2,008
19
3,424
2,114
189
8,680
—
(2,851)
(2,851)
$ 5,829
47
N O T E S to Consolidated Financial Statements
Note 12 Goodwill and Other Intangible Asset Data
We evaluate the impairment of long-lived assets whenever events or changes in
During the first quarter of 2002, we implemented SFAS No. 142, Goodwill and
circumstances indicate that the carrying value may not be recoverable.
Other Intangible Assets, which replaces the requirements to amortize intangible
assets with indefinite lives and goodwill with a requirement for an annual impair-
Factors considered that might trigger an impairment review consist of:
ment test. SFAS No. 142 also set requirements for identifiable intangible assets. As
(cid:127) Significant underperformance relative to expected historical or projected future
a result, during the first quarter of 2002 Zebra reclassified $21,720,000 of intangible
operating results
assets that did meet the established requirements for goodwill.
(cid:127) Significant changes in the manner of use of the acquired assets or the strategy
Intangible asset data are as follows (in thousands):
December 31,
2003
2002
Gross
Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
Amortized intangible assets
Current technology
$12,033
$(5,466)
$ 7,422
$(3,866)
for the overall business
(cid:127) Significant negative industry or economic trends
(cid:127) Significant decline in Zebra’s stock price for a sustained period
(cid:127) Significant decline in market capitalization relative to net book value
If we believe that one or more of the above indicators of impairment have
occurred, we measure impairment based on a projected discounted cash flow
using a discount rate that incorporates the risk inherent in the cash flows.
In-process research and development
Customer relationships
Unamortized intangible assets
692
2,503
(692)
(39)
Goodwill
$61,150
Aggregate amortization expense
For the year ended December 31, 2002
For the year ended December 31, 2003 $ 1,640
Estimated amortization expense
For the year ended December 31, 2004
For the year ended December 31, 2005
For the year ended December 31, 2006
For the year ended December 31, 2007
For the year ended December 31, 2008
For the year ended December 31, 2009
For the year ended December 31, 2010
For the year ended December 31, 2011
2,551
1,674
1,086
1,086
1,083
965
313
273
$54,455
$ 1,494
Operating income for 2001 includes $3,835,000 of amortization of goodwill and
other intangible assets that are not included in 2002 and 2003 results, because of
the implementation of SFAS No. 142. If adjusted for the impact of the implementa-
tion of SFAS No. 142 (i.e., if goodwill had not been amortized), net income, basic
earnings per share, and diluted earnings per share would have been as follows:
Year Ended December 31,
Net income
Basic earnings per share
Diluted earnings per share
2001
$63,983
$ 1.39
$ 1.38
Note 13 401(k) Savings and Profit Sharing Plans
Zebra has a Retirement Savings and Investment Plan (the 401(k) Plan), which is
intended to qualify under Section 401(k) of the Internal Revenue Code. Qualified
employees may participate in Zebra’s 401(k) Plan by contributing up to 15% of their
gross earnings to the plan subject to certain Internal Revenue Service restrictions.
Zebra matches each participant’s contribution of up to 6% of gross eligible earn-
ings at the rate of 50%. Zebra may contribute additional amounts to the 401(k) Plan
at the discretion of the Board of Directors, subject to certain legal limits.
We test the impairment of identifiable intangibles and goodwill each year or when-
ever events or changes in circumstances indicate that the carrying value may not
be recoverable. We completed our last assessment during June 2003.
48
Zebra has a discretionary profit-sharing plan for qualified employees, to which
Hedging of Anticipated Sales
it contributed 2.4% of eligible payroll for 2003, 1.9% for 2002 and 1.9% for 2001.
During the second quarter of 2003, we began a program to manage the exchange
Participants are not permitted to make contributions under the profit-sharing plan.
rate risk of anticipated euro denominated sales using forward contracts and desig-
Company contributions to these plans, which were charged to operations, approxi-
contracts are deferred in other comprehensive income until the contracts are set-
nated these contracts as cash flow hedges. Unrealized gains and losses on these
Z E B R A T E C H N O L O G I E S C O R P O R A T I O N
mated the following (in thousands):
Year Ended December 31,
401(k)
Profit sharing
Total
2003
$1,572
1,544
$3,116
2002
$1,452
1,146
$2,598
2001
$1,374
1,178
$2,552
tled and the hedged sales are realized, at which time the deferred gains or losses
will be reported as an increase or decrease to sales. Summary financial informa-
tion related to the cash flow hedges of future revenues follows (in thousands,
except percentages):
December 31,
Net unrealized gains (losses) deferred in other comprehensive income:
Note 14 Derivative Instruments
In the normal course of business, portions of Zebra’s operations are subject to
fluctuations in currency values. We manage these risks using derivative financial
Gross
Tax benefit
Net
instruments.
Hedging of Net Assets
We use forward contracts and options to manage exposure related to our pound
Net gain (loss) included in revenue for the following periods ended
December 31, 2003:
Three months
Year
and euro denominated net assets. We record gains and losses on these contracts
Notional balance of outstanding contracts:
and options in income each quarter along with the translation gains and losses
Hedge effectiveness
2003
$ (1,537)
538
$ (999)
$ (150)
265
€30,420
100%
related to our net euro asset position, which would ordinarily offset each other.
Summary financial information related to these activities follows (in thousands):
Year Ended December 31,
2003
2002
2001
Change in gains (losses) from foreign
exchange derivatives
$(3,756)
Gain (loss) on net foreign currency assets 3,204
Net foreign exchange gain (loss)
$ (552)
$(2,579)
2,926
$ 347
$(1,642)
746
$ (896)
December 31,
2003
2002
Notional balance of outstanding contracts:
Pound
Euro
£8,569
€22,000
£3,293
€26,000
Note 15 Commitments and Contingencies
Leases. In September 1989, Zebra entered into a lease agreement for its Vernon
Hills facility and certain machinery, equipment, furniture and fixtures with Unique
Building Corporation, a related party. The facility portion of the lease is the only
remaining portion in existence as of December 31, 2003, and is treated as an operat-
ing lease. An amendment to the lease dated July 1997 added 59,150 square feet and
extended the term of the existing lease through June 30, 2014. The lease agreement
includes a modification to the base monthly rental, which goes into effect if the
prescribed rent payment is less than the aggregate principal and interest payments
required to be made by Unique under an Industrial Revenue Bond (IRB).
49
N O T E S to Consolidated Financial Statements
Minimum future obligations under non-cancelable operating leases and future mini-
On November 21, 2003, ZIH Corp. (ZIH) filed a Complaint in the United States
mum capital lease payments as of December 31, 2003, are as follows (in thousands):
District Court for the District of Massachusetts against Paxar Corporation, alleg-
2004
2005
2006
2007
2008
Thereafter
Total minimum lease payments
Less amount representing interest
Present value of minimum payments
Less current portion of obligation under capital lease
Long-term portion of obligation under capital lease
Operating
Leases
$ 4,248
3,669
3,477
3,260
3,226
19,102
$36,982
Capital
Leases
$190
190
175
34
29
87
705
(100)
605
(153)
$452
Rent expense for operating leases charged to operations for the years ended
December 31, 2003, 2002, and 2001 was $5,591,000, $5,699,000, and $4,917,000,
respectively.
Letter of credit. In connection with the lease agreements described above, Zebra
has guaranteed Unique’s full and prompt payment under Unique’s letter of credit
agreement with a bank. The contingent liability of Zebra under this guaranty as of
December 31, 2003, is $700,000, which is the limit of Zebra’s guaranty throughout
the term of the IRB.
Legal proceedings. On April 23, 2003, Paxar Americas, Inc., (Paxar Americas) filed
a patent infringement lawsuit in the United States District Court for the Southern
District of Ohio against Zebra and certain of its subsidiaries. Paxar Americas’
Complaint alleges that certain of Zebra’s printer products infringe one or more of
eight identified Paxar Americas patents, although not each product is accused of
infringing each patent. Zebra has filed an Answer to Paxar Americas’ Complaint,
denying Paxar Americas’ allegations of infringement and asserting several affirma-
tive defenses, including the invalidity of Paxar Americas’ asserted patent claims.
ing that Paxar Corporation printers infringe ZIH’s U.S. Patent Nos. 5,813,343 and
5,860,753. Paxar Corporation answered ZIH’s Complaint, denying infringement and
seeking a declaratory judgment that ZIH’s patents-in-suit are not infringed and are
invalid and/or unenforceable. Paxar Corporation filed a motion to transfer ZIH’s
Massachusetts suit to Ohio federal court. ZIH opposed Paxar Corporation’s motion
to transfer, and the parties are awaiting the Court’s ruling on the transfer motion.
On November 25, 2003, Paxar Americas filed a Complaint against ZIH in the
United States District Court for the Southern District of Ohio, seeking a declara-
tory judgment that the patents asserted by ZIH in its Massachusetts Complaint
are not infringed and are invalid and unenforceable. On December 17, 2003,
Paxar Americas amended its complaint to add Zebra Technologies Corporation
as a defendant. The parties have filed a motion to stay this action pending
the Massachusetts District Court’s ruling on Paxar Corporation’s motion to
transfer. The parties have agreed to file a motion to transfer this action to the
Massachusetts District Court if the Massachusetts District Court denies Paxar
Corporation’s pending motion to transfer.
We are unable at this time to estimate the range of the potential liability that would
result from an unsuccessful defense, and consistent with the requirements of SFAS
No. 5, Accounting for Contingencies, no liability has been recorded in Zebra’s con-
solidated financial statements as of December 31, 2003.
Note 16 Segment Data and Export Sales
Zebra is organized with two internal business units, bar code and card imaging.
These business units have similar economic characteristics, products and services,
production processes, types of customers, distribution methods, and regulatory
environments. Additionally, there are significant shared services supporting both
business units. Because of these similarities, we have aggregated our internal busi-
ness units and have treated them as one reportable segment as permitted by SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information.
50
Z E B R A T E C H N O L O G I E S C O R P O R A T I O N
Information regarding Zebra’s operations by geographic area for the years ended
for under SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
December 31, 2003, 2002, and 2001 is contained in the following table. These amounts
Activities. All exit costs associated with this activity will be identified on a separate
(in thousands) are reported in the geographic area where the final sale originates.
line of our income statement, as part of operating expenses. Our consolidation
plan is intended to reduce costs and improve manufacturing efficiency.
North
America
Europe,
Middle East
& Africa
Latin
America
Asia
Total
Currently, our Varades facility conducts the product development for our line of card
2003
Net sales
$292,543
$170,544
$29,406
$43,904
$536,397
Long-lived assets
102,962
6,415
3
87
109,467
imaging identification printers and includes the European service center for these
printers. We will transfer the product development activities to Camarillo, California,
where we have manufactured these printers since 2001. We will transfer the
European card imaging printer service operation to our Preston, United Kingdom,
2002
Net sales
$270,288
$142,273
$28,097
$34,953
$475,611
facility where the Europe, Middle East and African distribution of these printers
Long-lived assets
90,873
6,502
—
98
97,473
already occurs. Additionally, we will eliminate the Varades administrative functions
2001
Net sales
$269,955
$128,348
$21,752
$29,953
$450,008
including finance, information systems and human resources support. At the com-
pletion of the plan, the Varades facility will be closed and no employees will remain.
Long-lived assets
93,345
6,749
—
76
100,170
As of December 31, 2003, we expect the following exit costs (in thousands):
Note 17 Deferred Compensation Plan
Type of Cost
Severance, stay bonuses, and other
Total expected to be incurred
Beginning January 1, 2002, Zebra offered a deferred compensation plan that per-
employee-related expenses
mits management and highly compensated employees to defer portions of their
compensation and to select a method of investing these funds. The salaries that
have been deferred since the plan’s inception have been accrued and the only
expense, other than salaries, related to this plan is the unrealized gain/loss on the
deferred amounts. Investment income includes an unrealized loss of $60,000 for
2003 and $16,000 for 2002 related to this plan. Zebra has included $2,401,000 in
other long-term liabilities at December 31, 2003 and $1,008,000 at December 31,
2002, to reflect its liability under this plan. To fund this plan, Zebra purchases cor-
porate-owned whole-life insurance contracts on the related employees, of which
Zebra is the beneficiary. Investments and marketable securities include the cash
surrender value of these policies aggregating $2,116,000 as of December 31, 2003,
and $914,000 as of December 31, 2002.
Note 18 Costs Associated with Exit or Disposal Activities
During the third quarter of 2003, we initiated a plan to close our engineering site in
Varades, France. This plan was announced in October 2003 and will be accounted
Asset disposal costs
Other exit costs
Total
$1,436
278
650
$2,364
As of December 31, 2003, costs of $990,000 have been accrued that are associated
with this program. During the fourth quarter of 2003, $242,000 was paid out for
severance and other related expenses.
During January 2004, we announced plans to consolidate our Warwick, Rhode
Island, printer manufacturing and repair service business into our Camarillo,
California and Vernon Hills, Illinois locations. This transition is expected to take 12
to 18 months to complete. The Warwick facility will continue to manufacture and
distribute bar code label printer supplies, as well as house engineering, product
management, and the key account sales functions for mobile products. We expect
the following exit costs:
51
N O T E S to Consolidated Financial Statements
Type of Cost
Severance, stay bonuses, and other
employee-related expenses
Asset disposal costs
Other exit costs
Total
Total expected to be incurred
The changes in other comprehensive income (loss) are as follows (in thousands):
$ 820
275
553
$1,648
Year Ended December 31,
2003
Foreign currency translation adjustments
$ 4,110
2002
$ 2,968
2001
$ (977)
Changes in unrealized holding losses on
foreign currency hedging activities:
Gross
Income tax (benefit)
Net
$(1,537)
(538)
$ (999)
—
—
—
—
—
—
As of December 31, 2003, no costs have been accrued that are associated with
this program.
Note 19 Other Comprehensive Income (Loss)
Stockholders’ equity contains certain items classified as other comprehensive
income, including:
(cid:127) Foreign currency translation adjustments related to our non-U.S. subsidiary
Net
companies that have designated a functional currency other than the dollar. We
are required to translate the subsidiary functional currency financial statements
to dollars using a combination of historical, month-end, and average foreign
exchange rates. This combination of rates creates the foreign currency translation
adjustments component of other comprehensive income.
Changes in unrealized gains (losses) on
investments classified as available-for-sale:
Gross
Income tax (benefit)
$ 504
158
$ 346
$(2,466)
(863)
$(1,603)
$ 4,688
1,688
$ 3,000
The components of other comprehensive income (loss) appearing in the balance sheet are
as follows:
December 31,
2003
Unrealized holding gain (loss) on investments (net of tax)
$ 318
2002
$(28)
—
—
$(28)
(cid:127) Unrealized holding gains (losses) on foreign currency hedging activities relate to
Unrealized holding loss on hedging transactions (net of tax)
derivative instruments used to hedge the currency exchange rates for forecasted
Cumulative translation adjustment
euro sales. These hedges are designated as cash flow hedges, and we have
deferred income statement recognition of gains and losses until the hedged trans-
action occurs. See Note 14 for more details.
(cid:127) Unrealized gains (losses) on investments classified as available-for-sale are
deferred from income statement recognition. See Note 7 for more details.
(999)
4,110
$3,429
52
Z E B R A T E C H N O L O G I E S C O R P O R A T I O N
Note 20 Quarterly Results of Operations (unaudited)
(Amounts in thousands, except per share data)
2003
Net sales
Cost of sales
Gross profit
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$124,685 $129,863
$134,649 $147,200
60,336
63,305
66,876
72,803
64,349
66,558
67,773
74,397
2002
Net sales
Cost of sales
Gross profit
Selling and marketing
Research and engineering
General and administrative
Amortization of intangibles
Acquired in-process technology
Exit costs
Merger costs
14,504
16,754
15,871
19,506
Selling and marketing
7,579
7,560
7,898
8,722
10,251
10,248
9,937
11,456
371
371
371
—
—
—
—
—
—
—
—
—
527
692
1,232
9
Research and engineering
General and administrative
Amortization of intangibles
Costs related to terminated acquisition
Merger costs
Total operating expenses
Total operating expenses
32,705
34,933
34,077
42,144
Operating income
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$110,185
$115,951
$123,151
$126,324
58,173
52,012
11,949
7,456
9,329
367
3,300
73
32,474
19,538
60,202
55,749
13,531
7,472
9,413
367
—
—
30,783
24,966
62,729
60,422
14,343
7,609
9,213
373
—
—
63,760
62,564
16,354
6,673
10,733
387
—
—
31,538
28,884
34,147
28,417
Operating income
31,644
31,625
33,696
32,253
Investment income (expense)
4,167
1,188
2,227
2,422
Investment income (expense)
Interest expense
Foreign exchange gain (loss)
Other, net
Total other income (expense)
2,439
(38)
(143)
6
2,264
3,017
(14)
(87)
(292)
(982)
4,079
Interest expense
(64)
(18)
(263)
(38)
(304)
(524)
Foreign exchange gain (loss)
Other, net
Total other income (expense)
2,624
(1,327)
3,213
Income before taxes
33,908
34,249
32,369
35,466
Income taxes
Net income
11,868
11,987
9,370
11,071
$ 22,040 $ 22,262
$ 22,999 $ 24,395
Income before taxes
Income taxes
Net income
(55)
(158)
(155)
3,799
(32)
(193)
(220)
743
(114)
25
(458)
(118)
673
(121)
1,680
2,856
23,337
8,397
25,709
9,249
30,564
10,697
31,273
10,945
$ 14,940
$ 16,460
$ 19,867
$ 20,328
Basic earnings per share
$ 0.32(1)
$ 0.35(1)
$ 0.43(1)
$ 0.44(1)
Basic earnings per share
$ 0.47(1) $ 0.47(1) $ 0.49 $ 0.52
Diluted earnings per share
$ 0.32(1)
$ 0.35(1)
$ 0.42(1)
$ 0.43(1)
Diluted earnings per share
$ 0.47(1) $ 0.47(1) $ 0.48 $ 0.51
(1) Restated for a 3-for-2 stock split in August 2003 paid in the form of a 50% stock dividend.
(2) Includes pretax charges of $1,232 related to the closure of the Varades, France facility and $701 for
integration and in-process research and development costs related to the acquisition of Atlantek, Inc.
(3) First quarter 2002 includes $3,300 in operating expenses related to the terminated acquisition of Fargo
Electronics, Inc.
(4) Includes pretax charges for integration costs relating to the acquisition of Comtec Information Systems, Inc.,
of $73 in the first quarter of 2002.
Note 21 Major Customers
Sales to ScanSource, Inc., accounted for 13.8% of net sales in 2003 and 13.6% in
2002. No customer accounted for 10% or more of net sales in 2001.
53
I N D E P E N D E N T A U D I T O R S ’ R E P O R T
The Board of Directors and Stockholders
Zebra Technologies Corporation:
We have audited the accompanying consolidated balance sheets of Zebra
We conducted our audits in accordance with auditing standards generally accepted
Technologies Corporation and Subsidiaries as of December 31, 2003 and 2002, and
in the United States of America. Those standards require that we plan and perform
the related consolidated statements of earnings, comprehensive income, stock-
the audit to obtain reasonable assurance about whether the financial statements
holders’ equity, and cash flows for each of the years in the three-year period ended
are free of material misstatement. An audit includes examining, on a test basis, evi-
December 31, 2003. In connection with our audits of the consolidated financial
dence supporting the amounts and disclosures in the financial statements. An audit
statements, we also have audited the consolidated financial statement schedule of
also includes assessing the accounting principles used and significant estimates
valuation and qualifying accounts. These consolidated financial statements and the
made by management, as well as evaluating the overall financial statement presen-
consolidated financial statement schedule are the responsibility of the Company’s
tation. We believe that our audits provide a reasonable basis for our opinion.
management. Our responsibility is to express an opinion on these consolidated
financial statements and the consolidated financial statement schedule based on
In our opinion, the consolidated financial statements referred to above pres-
our audits.
54
ent fairly, in all material respects, the financial position of Zebra Technologies
Corporation and Subsidiaries as of December 31, 2003 and 2002, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2003, in conformity with accounting principles gen-
erally accepted in the United States of America. Also, in our opinion, the related
consolidated financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
Chicago, Illinois
February 9, 2004
B O A R D O F D I R E C T O R S A N D C O R P O R A T E O F F I C E R S
Z E B R A T E C H N O L O G I E S C O R P O R A T I O N
Board of Directors
Officers
Edward L. Kaplan
Chairman and Chief Executive Officer
Zebra Technologies Corporation
Gerhard Cless
Executive Vice President and Secretary
Zebra Technologies Corporation
Christopher G. Knowles (1)(2)(3)
Retired Chief Executive Officer
Insurance Auto Auctions, Inc.
Ross W. Manire (1)
Chairman and Chief Executive Officer
Clearlinx Network Corporation
Dr. Robert J. Potter (2)
Principal
R.J. Potter Company
Michael A. Smith (1)(3)
Chairman and Chief Executive Officer
FireVision, L.L.C.
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Nominating Committee
Edward L. Kaplan
Chairman and Chief Executive Officer
Gerhard Cless
Executive Vice President and Secretary
Veraje Anjargolian
Vice President, General Manager
Card Imaging Division
Noel Elfant
Vice President and General Counsel
Hugh K. Gagnier
Senior Vice President, Operations
Bar Code Business Unit
John H. Kindsvater
Senior Vice President, Corporate
Development
Todd R. Naughton
Vice President, Controller
Michael H. Terzich
Senior Vice President
Office of the CEO
Charles R. Whitchurch
Chief Financial Officer and Treasurer
55
S T O C K H O L D E R I N F O R M A T I O N
Corporate Headquarters
Zebra Technologies Corporation
333 Corporate Woods Parkway
Vernon Hills, Illinois 60061-3109 U.S.A.
Phone: 847-634-6700
Fax: 847-913-8766
Annual Meeting
Zebra’s Annual Meeting of Stockholders will be held on June 3, 2004,
Equal Employment Opportunity/Affirmative Action
It is the policy of Zebra Technologies Corporation to provide equal opportunity and
affirmative action in all areas of its employment practices without regard to race, reli-
gion, national origin, sex, age, ancestry, citizenship, disability, veteran status, marital
status, sexual orientation or any other reason prohibited by law.
Stock Information: Price Range and Common Stock
The Company’s Class A Common Stock is traded on The NASDAQ Stock Market under
the symbol ZBRA. The following table shows the high and low trade prices for each
10:30 A.M. (Central Time), at the Hilton Northbrook, 2855 North Milwaukee Avenue,
quarter in 2003 and 2002, as reported by The NASDAQ Stock Market. Share prices
Northbrook, Illinois.
Independent Auditors
KPMG LLP
Chicago, Illinois
Corporate Counsel
Katten Muchin Zavis Rosenman
Chicago, Illinois
Transfer Agent and Registrar
Mellon Investor Services
85 Challenger Road
Ridgefield, New Jersey 07660
Phone: 877-870-2368
www.mellon-investor.com
Investor Relations
For corporate or product information, please contact the Corporate Headquarters.
Form 10-K Report
You may receive a free copy of the Zebra Technologies Corporation Form 10-K Report
filed with the Securities and Exchange Commission by contacting the Investor
Relations Department at the Corporate Headquarters.
Web Site
Investors are invited to learn more about Zebra Technologies Corporation by access-
ing the Company’s web site at www.zebra.com
56
were adjusted for a 50% stock dividend that was distributed on August 21, 2003.
2003
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2002
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$43.49
51.93
56.08
67.20
High
$39.33
40.10
38.63
45.73
Low
$35.87
38.33
48.75
51.30
Low
$31.51
31.58
30.08
32.33
Source: The NASDAQ Stock Market
At February 20, 2004, the last reported price for the Class A Common Stock was
$66.39 per share, and there were 380 registered stockholders of record for the
Company’s Class A Common Stock.
Dividend Policy
Since the Company’s initial public offering in 1991, the Company has not declared
any cash dividends or distributions on its capital stock. The Company intends to
retain its earnings to finance future growth and therefore does not anticipate paying
any cash dividends in the foreseeable future.
Number of Employees
The Company had approximately 2,200 associates as of February 25, 2004.
Zebra Technologies Corporation
International Headquarters
333 Corporate Woods Parkway | Vernon Hills, IL | 60061-3109 U.S.A.
847-634-6700 | www.zebra.com