What’s in it? Are you a member? Is it under warranty? How much did you pay? Does he have access? Is it on sale? How many are there? Who approved
hen will it arrive? Where is it from? Is it authentic? How much does it cost? What is it? Who owns it? Where is it going? Who is it? When was it made?
When does it expire? What needs to be done? Where was it found? What does he look like? What is her rank? How much does it weigh? Who is the doctor
F I N A N C I A L S U M M A R Y
2004 % change
2003 % change
2002
( In thousands, except per share data and percentages)
Operating Results
Net sales
$ 663,054
23.6%
$ 536,397
12.8%
$ 475,611
Gross profit
Operating income
Net income
343,159
175,170
120,643
Diluted earnings per share
1.66
25.7
35.6
31.6
29.7
273,077
129,218
91,696
1.28
18.3
26.9
28.1
25.5
230,747
101,805
71,595
1.02
Capitalization
Cash & cash equivalents
and investments in
marketable securities
Working capital
Total assets
Total stockholders’ equity
$ 557,993
665,062
862,222
797,654
$ 447,848
535,816
701,611
651,915
$ 348,577
427,676
573,088
534,155
Zebra Technologies delivers specialty digital printing solutions to targeted high-growth markets.
We are a leading global provider of on-demand thermal bar code label and receipt printers and
supplies, plastic card printers, radio frequency identifi cation (RFID) smart label printer/encoders,
smart media, and digital photo printers. Business, governments and other organizations depend
on Zebra products to improve business processes, deliver better customer service, increase
productivity, and strengthen security. Our commitment to industry leadership, fi nancial strength
and growth helps Zebra build long-term value for its customers, partners and stockholders.
it?
When
r?
A more effective
Zebra organization
is capturing more
business in a broader
spectrum of high-
growth specialty
digital printing
applications.
2
Edward Kaplan
Chairman and Chief Executive Officer
L E T T E R T O S T O C K H O L D E R S
By any measure, 2004 was an
outstanding year. We achieved
record financial results, as virtually
all dimensions of our business
attained new performance records.
Our activities during the year
extended our industry leadership
and demonstrated the effectiveness
of our strategy to deliver specialty
digital printing solutions to targeted
high-growth markets. We enter
2005 with more sources of growth
than ever and great capacity to
increase stockholder value further
over the long term.
Net sales of $663.1 million were
up 24%, the highest sales growth
for Zebra since 1996. Higher
profitability leveraged this growth
into a 32% increase in net
income to $120.6 million, or
$1.66 per diluted share. In
August, we distributed the second
three-for-two stock split in two
years to enhance the liquidity
of Zebra stock and broaden the
company’s stockholder base. A
year-end position in cash and
investments of $558 million
and no long-term debt gives
us substantial capacity to make
acquisitions, which are an important
element in our strategy to grow
stockholder value.
Zebra’s growth came from a variety
of sources: All product lines,
geographies, and channels
contributed to our record results.
A broad portfolio of innovative
printers, supplies and connectivity
tools to support specialty printing
applications remained the foundation
for our success. Mobile printers
stood out, enabling more enterprise
mobility solutions, with large
deployments in retail venues and
finding new application in ware-
housing, distribution, and hospitality.
In addition, Zebra’s printer/encoders
and recognized technical leadership
enabled the first companies to
adopt radio frequency identification
technology to comply with new
labeling mandates. More Zebra
representatives placed in high-growth
territories over the past several
years extended global reach. This
expansion has made Zebra a truly
global company, with now nearly
half of our business generated
outside North America. Stronger
channel partnerships aided in our
goal to gain market share. With
improved business execution, we
delivered greater value in products,
solutions, and services to our partners
and customers on a global basis.
Several drivers support ongoing
high growth for Zebra. Global
business expansion and competition
are leading companies to
implement barcoding and automatic
identification technologies deeper
in the enterprise for business
process improvement. In addition,
with the industry’s broadest
product line and our clear global
leadership, we are well positioned
to assist companies comply with
radio frequency identification
mandates from large retailers
and the U.S. Department of
Defense. Introductions of additional
products will support wider
adoption for both current
compliance labeling activities and
emerging applications beyond
supply chain management.
Mandates and initiatives by the
Food and Drug Administration
and other agencies are now
leading to wider use of auto-ID
technologies in health care. Zebra
is at the forefront of this trend to
improve patient safety in ways
that reduce errors and save lives.
Heightened concern for personal
safety and the protection of assets
sustain further growth of card
printing solutions. Our expertise in
color imaging from card printing
enhances our prospects in digital
photo printing. With digital camera
sales now exceeding film-based
camera sales, we have extended
opportunities in this area.
A sharper focus on vertical market
applications adds to our favorable
outlook. Opportunities in retail
remain high, as more companies
deploy productivity-enhancing
technologies to lower costs and
improve customer satisfaction.
Mobile and wireless printing
support growth in several vertical
market applications. We are also
moving aggressively into new areas
with innovative products. The
RW 420, the first thermal printer
optimized for route accounting
and direct store delivery, has
already opened several new
incremental sales opportunities
since its introduction late last year.
avenues for growth. By extending
our global reach, we will help
more companies improve business
processes in developing market
economies around the world.
Zebra’s future is bright. Thanks to
the hard work and commitment of
all Zebra associates, our business
strategy is working and building
stockholder value. Favorable
underlying forces support high
adoption rates of barcoding and
automatic identification technologies
worldwide. A more effective
Zebra organization is capturing
more business in a broader spectrum
of high-growth specialty digital
printing applications. With
industry-leading products, brand
equity, financial strength, and
global reach, all of this makes us
look to 2005 and beyond with
great optimism for further growth
and success. Thank you for your
continuing investment in Zebra.
Further deployments of Zebra
representatives in international
regions continue to offer substantial
Edward Kaplan
Chairman and
Chief Executive Officer
P R O D U C T L I N E E V O L U T I O N
DIGITAL PHOTO
RFID
MOBILE
PLASTIC CARD
DESKTOP
MIDRANGE
HIGH
PERFORMANCE
85 92 98 00 03
The breadth of printer
devices feeds more
printer applications on
a global basis.
3
Product Excellence
Superior Reputation
Advanced Technology
Best-of-breed Solutions
Outstanding Customer Service
Knowledgeable Associates
Trusted Brand
Global Distribution
4
Many companies talk about creating stockholder value. Few actually do it.
Since our initial public offering in 1991, Zebra’s market capitalization,
a measure of stockholder value, increased from $186 million to $4 billion at the
end of 2004 for a 25% average annual return. Few companies can boast Zebra’s
23% average annual sales growth and 21% growth in earnings, with returns on
invested capital often exceeding 50%.
With effective technology, product leadership, broad-based distribution and
support, and global reach, Zebra has a unique set of competitive advantages.
We use these advantages to provide best-of-breed products for solutions that
deliver real value to our customers and end-users. Our focus on clear global
leadership in specialty digital printing solutions for targeted niche markets offers
abundant opportunities for Zebra to deliver further growth in stockholder value.
5
C
O M P
L
I
A
N
C
E
L
A
B
E
L
I
N
G
R F I D Solutions
A pioneer in the targeted adoption of radio
frequency identifi cation technology, Zebra is
building on its leadership in bar code labeling
solutions to assist companies charged with
meeting the new wave of compliance labeling
mandates. Zebra’s broad line of RFID printer/
encoders and smart labels offer customers
the quality, reliability and ease of integration
that is vital to mission-critical situations.
Technology expertise, product leadership,
and key alliances reinforce the trust companies
place in Zebra as a partner in implementing
this emerging technology.
R 110 Xi
6
D I G I
T A L
C O L O R P R I N T
I N G
Positive Identifi cation
The world of color expands Zebra’s on-demand
specialty printing opportunities. Zebra plastic
card printers create customized driver’s licenses,
credit cards, membership cards, and employee
badges right at the point of issuance. These
cards incorporate a wide range of security
features. New digital photo printers build
on our core thermal printing technology and
enable users to print high-quality keepsakes
for enduring memories.
Kodak 880 0 Photo Printer
7
B U S I N E S S
I M P R O V E M E N T
Supply Chain Logistics
Global competition demands the greatest
effi ciency in moving goods through the supply
chain, from farms and factories through
distribution to the end user. Zebra’s bar code
labeling solutions improve the speed and
accuracy of data management, and integrate
with enterprise applications to increase asset
visibility and control. Real-time tracking of
raw materials, work in process and customer
orders reduces cycle time, improves employee
productivity and lowers costs.
Z4 Mp lus TM
8
V E R T I C A L M A R K E T A P P L I C A T I O N S
Patient Safety
Accurate patient identifi cation is essential to
prevent errors in the delivery of medication
and other health care services. Zebra printers
and specialized Z-band® direct thermal poly
wristbands give health care workers the ability
to conduct a reliable bedside match of patient
and medication, and to meet HIPPA privacy
laws. Printing solutions from Zebra, a pioneer
in bar code solutions for life sciences, provide
a foundation to extend safeguards throughout
the health care delivery system.
44-Z
9
M O
B
I
L
E
A
N
D
W I
R
E
L
E
S
S
Route Accounting
Mobile and wireless printing extends the benefi ts
of barcoding, labeling, ticketing and receipt
printing beyond the walls of an enterprise. Field
service and route drivers can serve customers
on the spot, making this one of the fastest-
growing applications in the world of enterprise
mobility. Zebra’s new line of mobile printers,
optimized for route accounting and direct store
delivery, save time, improve quality and cash
fl ow, and help provide better customer service.
10
R W 420
G L O B A L
R
E A C H
New Markets
Every day, Zebra is helping people in more
organizations improve business processes.
Global competition, developing market
economies and the ongoing drive for innovation
offer Zebra abundant opportunities for growth
worldwide. We are capturing these opportunities
with an expanding portfolio of specialty
digital printing solutions to feed more printer
applications, along with the systematic delivery
of greater value in products and services to our
partners and customers on a global basis.
11
S T O C K P R I C E
Zebra Technologies Corp. [ZBRA]
N E T S A L E S
In millions
D I L U T E D E P S
In dollars
$65
60
55
50
45
40
35
30
25
20
15
10
5
0
$650
600
550
500
450
400
350
300
250
200
150
100
50
0
$1.95
1.80
1.65
1.50
1.35
1.20
1.05
.90
.75
.60
.45
.30
.15
0
00 01 02 03 04
00 01 02 03 04
00 01 02 03 04
Indicates closing price
12
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
□X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fi scal year ended December 31, 2004
OR
□ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Indicate by check mark whether the registrant (1) has fi led all reports required to be fi led
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to fi le such reports)
and (2) has been subject to such fi ling requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent fi lers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of the
registrant’s knowledge, in defi nitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated fi ler (as defi ned in
Exchange Act Rule 12b-2).
Yes X No __
As of February 25, 2005, the aggregate market value of each of the registrant’s Class A
Common held by non-affi liates was approximately $3,598,923,000. The closing price
of the Class A Common Stock on February 25, 2005, as reported on the Nasdaq Stock
Market, was $50.07 per share.
As of February 25, 2005, the registrant had outstanding 71,877,827 shares of Class A
Common Stock, par value $.01 per share
Documents Incorporated by Reference
Certain sections of the registrant’s Notice of Annual Meeting of Stockholders and
Proxy Statement for its Annual Meeting of Stockholders to be held on May 17, 2005 are
incorporated by reference into Part III of this report.
Commission File Number 000-19406
Zebra Technologies Corporation
(Exact name of registrant as specifi ed in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
36-2675536
(I.R.S. Employer
Identifi cation No.)
333 Corporate Woods Parkway, Vernon Hills, IL 60061
(Zip Code)
(Address of principal executive offi ces)
Registrant’s telephone number, including area code: (847) 634-6700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $.01 per share
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
PART I
INDEX
PAGE
References in this document to “Zebra,” “we,” “us,” or “our” refer to Zebra Technologies
Corporation and its subsidiaries, unless the context specifi cally states otherwise.
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . 8
PART II
Item 5. Market for Registrant’s Common Stock and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 6. Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . 20
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PART III
Item 10. Directors and Executive Offi cers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . 24
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 12. Security Ownership of Certain Benefi cial Owners and
Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 14. Principal Accounting Fees and Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . 24
SIGNATURES
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
EXHIBITS
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Index to Consolidated Financial Statements and Schedule . . . . . . . . . . . . . . . . . . . . . . . . F-1
1
Safe Harbor
Forward-looking statements contained in this fi ling are subject to the safe harbor created
by the Private Securities Litigation Reform Act of 1995 and are highly dependent upon
a variety of important factors which could cause actual results to differ materially
from those refl ected in such forward looking statements. These factors include
market acceptance of Zebra’s printer and software products and competitors’ product
offerings. They also include the effect of market conditions in North America and other
geographic regions on our fi nancial results. Profi ts will be affected by our ability to
control manufacturing and operating costs. Because of a large investment portfolio,
interest rate and fi nancial market conditions will also have an impact on results. Foreign
exchange rates will have an effect on fi nancial results due to the large percentage of
our international sales. When used in this document and documents referenced, the
words “anticipate,” “believe,” “estimate,” “will” and “expect” and similar expressions
as they relate to Zebra or its management are intended to identify such forward-looking
statements. We encourage readers of this report to review the Risk Factors portion of
Management’s Discussion and Analysis of Financial Condition and Results of Operations,
which discusses additional risks. Zebra undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information, future
events, changed circumstances or any other reason after the date of this annual report.
Item 1. Business
The Company
Zebra Technologies is in the business of making products that enable companies and
organizations to improve productivity, deliver better customer service and provide more
effective security. We design, manufacture and support a broad range of direct thermal
and thermal transfer label and receipt printers, radio frequency identifi cation (RFID)
printer/encoders, dye sublimation card printers, and digital photo printers. We also sell
related accessories and support software. Manufacturers, service organizations, and
governments worldwide use our products in automatic identifi cation, data collection and
personal identifi cation applications.
We design our products to operate at the user’s location or on a mobile basis to produce
and dispense high-quality labels, plastic cards, and photographs at the point of issuance
on demand. The exceptional diversity of applications using our printer products for
barcoding and personal identifi cation is comprised of routing and tracking, transactions
processing, and identifi cation and authentication. They include applications that require
high levels of data accuracy and where speed and reliability are critical. They also
include specialty printing for receipts and tickets where improved customer service
and productivity gains may be the primary reason for printing, rather than a barcoding
application. Plastic cards are used for secure, reliable personal identifi cation or access
control. Digital photo printers are sold on an OEM basis to professional photographers.
Applications for our technology span most industries and geographies. They include
inventory control, small package delivery, baggage handling, automated warehousing,
JIT (Just-In-Time) manufacturing, employee time and attendance records, fi le
management systems, hospital information systems, medical specimen labeling, shop
fl oor control, in-store product labeling, employee ID cards, driver’s licenses, and access
control systems. As of December 31, 2004, management estimates that Zebra has sold
more than 4,000,000 printers to users in approximately 100 countries.
We believe competitive forces on businesses worldwide to strengthen security, reduce
costs, improve quality, deliver better customer service, and increase productivity support
the growth of bar code labeling solutions and specialty printing. Industry-mandated
standardization for compliance labeling is an important catalyst in the deployment of
bar code systems. We also believe that companies are adopting automatic identifi cation
systems that incorporate barcoding for business improvement applications. Many of
these applications make increasing use of enterprise-wide resource planning (ERP) and
other process improvement systems in manufacturing and service organizations. Greater
emphasis on supply chain management, the drive to reduce errors in health care, and
heightened concern over safety and security will lead to increased use of automatic
identifi cation systems. Still other applications are taking advantage of recent advances in
wireless and hand-held computing technologies.
Concern for safety and security and personal identifi cation contribute to demand for
our card printer products. This concern has heightened interest in systems that provide
personal identifi cation and access control, including secure ID systems for driver’s
licenses, employee and visitor badges, national identifi cation cards, event passes, club
membership cards, and keyless entry systems.
Acquisitions are an important part of Zebra’s growth strategy. Since 1998, we have made
three acquisitions. On October 28, 1998, Zebra merged with Eltron International, Inc.,
which manufactured and marketed low-cost direct thermal and thermal transfer label and
receipt printers, card printers, and related accessories. On April 3, 2000, Zebra acquired
Comtec Information Systems, Inc. Comtec was a privately held company that produced
a complete line of mobile wireless thermal printing solutions. On November 17, 2003, we
acquired all of the outstanding stock of Atlantek, Inc. Located in Wakefi eld, RI, Atlantek
produced a variety of thermal digital printers, including digital photo and card printers.
Zebra completed its initial public offering in August 1991. We are organized under the
laws of the State of Delaware, and our principal offi ces are located at 333 Corporate
Woods Parkway, Vernon Hills, Illinois 60061. Our main telephone number is (847) 634-
6700 and our primary Internet Web site address is www.zebra.com. You can fi nd all of
Zebra’s fi lings with the SEC free of charge through the investor page on this Web site,
immediately upon fi ling.
Products
Our broad line of computerized printers is used to produce bar code labels, RFID “smart”
labels, receipts and tags, plastic cards, and photographs. We also sell related specialty label-
ing materials, ink ribbons, and bar code label design software. These products are used to
provide bar code labeling, personal identifi cation, and specialty printing solutions princi-
pally in the manufacturing, retail, service, and government sectors of the economy. We work
closely with distributors, resellers and end users of our products to design and implement
labeling solutions that meet their technical demands. To achieve this fl exibility, we provide
our customers with a broad selection of printer models, each of which can be confi gured for a
specifi c application. Additionally, we will select and, if necessary, create appropriate labeling
stock, ink ribbons and adhesives to suit a particular application. In-house engineering person-
nel in software, mechanical, electronic and chemical engineering participate in the creation
and development of bar code labeling solutions for particular applications.
Sales of hardware (printers and replacement parts) and supplies were as follows (in
thousands):
Hardware
Percent of sales
Supplies
Percent of sales
Year Ended December 31,
2004
2003
$518,556
78.2
$116,849
17.6
$409,144
76.3
$ 98,519
18.4
2002
$360,185
75.7
$ 87,981
18.5
Label and Receipt Printers
We produce the industry’s broadest range of on-demand thermal transfer and direct
thermal label printers. Our printing systems include hundreds of optional confi gurations
that can be selected to meet particular customer needs. We believe this breadth of
product is a unique and signifi cant competitive strength, because it allows Zebra to
satisfy the widest variety of thermal printing applications.
Management believes that of the major printing technologies, which include ink jet,
laser and impact dot matrix, direct thermal and thermal transfer are best suited for most
bar code labeling applications. Thermal transfer printing produces dark, solid blacks
and sharply defi ned lines that are important for printing readily scannable bar codes.
These images can be printed on a wide variety of labeling materials, which enable users
to affi x bar code labels to virtually any object. This capability is very important in the
industrial and service sectors Zebra serves. Direct thermal printing is best suited where
simplicity, light weight and cost are important factors in the application. Accordingly, this
technology is found principally in Zebra’s wireless and desktop units.
We offer 36 bar code printer models with numerous variations, including:
Performance Tabletop Printers. Zebra produces high-end printers targeted at applications
requiring continuous operation in high output, mission-critical settings. These units
provide a wide variety of optional confi gurations, features, print widths, speeds and dot
densities. We offer four models under the XiIII Plus Series line. List prices range from
$2,995 to $7,495.
RFID Printer/Encoders. Zebra also manufactures and markets a growing line of printer/
encoders used for radio frequency identifi cation (RFID) in the retail supply chain, for
defense logistics, and other applications. These units are used to print and encode “smart
labels” in a single pass. Smart labels are printable labels embedded with an ultra-thin
radio frequency transponder. Information encoded in these transponders can then be
read and modifi ed by a radio frequency reader. As of December 31, 2004, we offered six
RFID and one RFID-ready printer/encoders, which have list prices from $1,695 to $6,995.
Products in this category consist of the R110Xi, R170Xi, R402, R2844-Z, R-140, R4Mplus,
and R110XiIII Plus.
2
Mid-Range Tabletop Printers. We offer fi ve printer models designed for less demanding
applications. These units have fewer option confi gurations and features for a lower price.
Products in this category consist of the Zebra Stripe®, S and Z Series as well as the TLP
2746e printers. List prices range from $1,395 to $3,490.
Desktop Printers. Applications with low volume suit Zebra’s desktop printers. We
currently offer six desktop models consisting of the Ht-146, LP/TLP 2844, LP/TLP 2844-Z,
TLP 3842, TLP 3844-Z, and LP/TLP 2824 printers. List prices range from $395 to $995.
Mobile Printing Solutions. Zebra makes 12 mobile printer models, which provide
durability, light weight and wireless connectivity interfaces. These printers print in 2-,
3- and 4-inch widths and are marketed under the Cameo, QL, TR, PS, PA/PT and RW lines.
List prices range from $550 to $4,795.
Print Engines. Zebra’s 170PAX3 and 110PAX3 print engines are sold to manufacturers of
high-speed automatic label applicator systems. We also offer the R110PAX3 RFID print
engine targeted at emerging packaged goods RFID labeling applications.
In addition to their use in on-demand automatic identifi cation applications, our thermal
printers can also be used for on-site batch production of custom bar code labels and
other graphics. This capability results in shorter lead times, reduced inventory and more
fl exibility than can be provided with traditional off-site printing.
Card Printers
Zebra makes 11 card printer models for printing national identity cards, driver’s licenses,
employee identifi cation badges, smart cards, on-demand access control cards, and
customer loyalty cards. These cards can typically be created in seconds for under one
dollar each. Users can select from a number of printer options, including monochrome
and color printing, single- and two-sided printing, lamination, and magnetic stripe and
smart card encoding. Bar codes, smart chips and magnetic stripe encoding can be used
to record such personal data as health records, fi nancial transactions, security access
codes and vital statistics. We offer fi ve “P” series and six “i” series card printers. Printers
in the “i” series incorporate features that automatically optimize printer settings for a
given ribbon. The list prices for all of Zebra’s card printers range from $1,795 to $9,995.
Photo Printers
With the November 2003 acquisition of Atlantek, we began producing digital photo
printers. We currently manufacture a high-speed thermal printer jointly developed with
and marketed by Eastman Kodak as the Kodak ML500 Professional Photo Printer. The
ML500 can print 8x10 photographs in about 13 seconds and can produce up to 270 8x10
prints per hour. It is designed for professional photographers for event and in-studio
printing. Digital photo printing is an extension of our core thermal printing technology.
Supplies
Supplies products consist of stock and customized thermal labels, wristbands, smart
labels and tags, plastic cards, card laminates, and thermal transfer ribbons. Zebra
promotes the use of genuine Zebra brand supplies with its equipment.
3
Zebra fully supports its printers, resellers and end users with an extensive line of superior
quality, high performance supplies optimized to a particular user’s needs. Supplies are
chosen in consultation with the reseller and end user based on the specifi c application,
printer and environment in which the labeling system must perform. In the case of bar
code labeling solutions, supplies also include proprietary ribbon and label formulations
that are designed to maximize printer performance and meet the most demanding end
user performance criteria. Factors such as adhesion, resistance to scratches, smudges
and abrasion and chemical and environmental exposures are all taken into account
when selecting the type of ribbon and labeling materials. The use of supplies that are not
carefully matched to specifi c printers can degrade print speed and print quality.
Software
Zebra offers software packages to its customers to ease integration of Zebra printers into
specialty printing systems.
Label design and integration software is specifi cally designed to optimize the
performance of Zebra bar code label printers. Known as BAR-ONE®, this software
provides the capability to design and integrate sophisticated labels from standalone or
legacy applications through a powerful, easy-to-use Windows® interface. Our goal is to
provide software that enables high levels of connectivity to all major computer network
and software systems. Network systems include Ethernet, 802.11 and Bluetooth™
wireless systems. Operating systems include Windows, Unix®, Linux® and various IBM®
systems. Zebra also offers BAR-ONE for mySAP® Business Suite for users of the SAP®
ERP system and a version of BAR-ONE that supports XML-enabled printing directly
with Zebra printers through Oracle’s warehouse management system (WMS), Oracle’s
SensorEdge Server for RFID printing and SAP’s Auto ID Infrastructure without the need
for middleware. In order to facilitate using Zebra printers with a broad range of software
applications, Zebra also offers Windows printer drivers designed to optimize the printer
experience. To expand the global applications for its software and printers, we are
developing multi-lingual capabilities in our software and user interfaces.
ZebraLink, introduced in 2000, gives users the ability to set up and control Zebra
printers remotely using Web-enabled devices. It also enables Zebra printers to provide
real-time printer error and status notifi cation via e-mail to a wired or wireless device. In
addition, ZebraLink’s programming language, ZBI, can be used to control and interpret
incoming text and data streams. ZBI gives users the ability to confi gure Zebra printers
to interpret various non-Zebra printer based languages. In January 2005, ZebraNet
Bridge printer management application was introduced as a fi rst step toward enterprise
printer management of all Zebra printers. Leveraging the power of ZebraLink, ZebraNet
Bridge merges printer and print server management capabilities with automatic printer
discovery “heartbeat” and critical alert monitoring.
Maintenance Services
For bar code label and receipt printers, we currently provide service at depot repair
centers at our Vernon Hills, Illinois, Preston, U.K., and Singapore facilities. Zebra
Authorized Service Providers (ZASP) also provide repair services for most Zebra
products at their locations. In addition, IBM, Optimal Systems Services and National
Service Center (NSC) provide on-site repair services in the United States. We share the
revenue for on-site service contracts sold by IBM, Optimal and NSC for Zebra printing
systems installed in the United States, and with IBM in Europe. Outside of the United
States, Zebra’s resellers in each country may provide maintenance service, either
directly as ZASPs or through independent service agents. Zebra also provides service
and technical support assistance from in-house support personnel located in the United
States, the United Kingdom and Singapore, who are available by telephone hotline fi ve
days a week during regular local business hours. Also, for most Zebra products, Zebra
provides interactive technical support via the Internet, which can be accessed through
Zebra’s Web site, www.zebra.com, 24 hours a day, seven days a week. We perform our
North American depot repair services for thermal printers in Vernon Hills, Illinois.
The card printer depot repair facilities are located in Camarillo, California, Preston,
U.K., and Wakefi eld, Rhode Island. Card printer resellers can receive technical support
assistance from in-house support personnel located in the United States, the United
Kingdom and Singapore, who are available by telephone during regular business hours.
In addition, on-line support for card printers can be accessed through the Web site, www.
eltroncards.com, 24 hours a day, seven days a week.
Warranties
All Zebra printing equipment is warranted against defects in material and workmanship
for up to one year. Printheads are warranted for six months. Zebra supplies are warranted
against defects in material and workmanship for their stated shelf life or twelve months,
whichever ends fi rst. Defective equipment and supplies may be returned for repair,
replacement or refund during the applicable warranty periods.
Zebra’s Technology
Our products use thermal transfer, direct thermal and thermal dye sublimation
technologies. Each technology has characteristics that provide specifi c benefi ts to the
end user.
Thermal transfer printing is used in all performance and some mid-range, desktop and
portable bar code label printers, as well as high-speed print engines. This technology
creates an image by applying an electrically heated printhead to a ribbon that releases ink
onto labeling/ticketing media. The benefi ts of thermal transfer printing include superior
image quality, the ability to print on a wide variety of smooth-surfaced materials, no
requirement for specially coated or formulated labeling/ticketing media and the ability to
use inks that are not viable with alternative printing technologies.
Direct thermal printing is used in some mid-range, desktop and portable printer products.
Direct thermal printing creates an image by applying the heated printhead directly to
specially treated paper, which changes color when heated. Direct thermal technology is
preferable where image durability is less critical and where the application does not require
specialty-labeling materials such as plastics or metal foils.
Our card printers and digital photo printers incorporate thermal dye sublimation for color
printing. This capability allows for the creation of personalized full color, photographic
quality plastic cards and high-quality photographs. Traditional photographic processes
are both more expensive and time consuming. We believe that personalized card
applications such as driver’s licenses, loyalty cards, school and work identifi cation cards,
security access cards and fi nancial transaction cards are well suited to this technology.
The growing acceptance of digital photography, over traditional halide-based technology,
offers growth opportunities for Zebra in certain areas of photo printing.
Zebra’s printing systems incorporate Company-designed computer hardware, electrical
mechanisms and software, which operate the printing functions of the system and
communicate with the host computer. Zebra’s bar code label printers operate using
Zebra Programming Language (ZPL®), Zebra Programming Language II (ZPL II®), Eltron
Programming Language (EPL) or Comtec Printer Control Language (CPCL), each of which
is a proprietary printer driver language. These languages are compatible with virtually all
computer operating systems, including UNIX, MS/DOS® and Windows.
Zebra guarantees backward compatibility in ZPL and ZPL II to allow users to replace older
Zebra printers with newer equipment without costly reprogramming of label design
programs. This compatibility also allows users to operate multiple Zebra printers in
different applications using standardized programs and to integrate these printers into
a local area network. We believe that ZPL and ZPL II give us a competitive advantage
by ensuring compatibility across a broad range of present and future printer products
and by facilitating system upgrades and customer loyalty to Zebra products. Some
independent software vendors have written label preparation programs with ZPL and ZPL
II drivers specifi cally for Zebra printers. ZPL and ZPL II label format programs can be run
on a personal computer with ordinary word processing programs, making ZPL and ZPL II
particularly adaptable to PC-based systems.
Users of Zebra’s instant-issuance card printers typically operate these printers with
software programs designed and sold by independent vendors.
Sales and Marketing
Sales. We sell our products primarily through distributors, value-added resellers (VARs),
and original equipment manufacturers (OEMs). We also sell our products directly to
a select number of designated accounts. For media and consumables, we also have
a limited amount of sales directly to end users through the Internet and telesales
operations. Distributors and VARs purchase, stock and sell a variety of automatic
identifi cation components from different manufacturers and customize systems for
end-user applications using their systems and application integration expertise. Because
these sales channels provide specifi c software, confi guration, installation, integration
and support services required by end users within various market segments, these
relationships allow Zebra to reach end users throughout the world in a wide variety of
industries. Zebra experiences a minor amount of seasonality in sales, depending on the
geographic region and/or vertical market.
We functionally classify our direct VARs as Premier Partners, Advanced Partners, or
Associate Partners, depending on their business competencies, depth and breadth
of their sales teams, customer support capabilities, contribution to Zebra’s strategic
goals, and sales commitment to Zebra. In addition, we offer VARs the opportunity to
earn certifi cations for mobile/wireless printers, supplies, service and radio frequency
identifi cation (RFID) expertise. We also sell through distributors, which in turn sell to an
extended VAR community. All VARs, as well as OEMs and systems integrators, provide
customers with a variety of automatic identifi cation components including scanners,
accessories, applications software and systems integration expertise, and, in the case of
some OEMs, resell the Zebra-manufactured products under their own brands as part of
their own product offering. We believe that the breadth of this indirect channel network,
both in terms of variety and geographic scope, enhances our ability to compete.
4
In some instances, we have designated a customer as a Strategic Account when
purchases of Zebra products reach specifi ed levels and support requirements for the
account become highly customized. Zebra sales personnel, either alone or together
with our partners, manage these Strategic Accounts to ensure their needs, including
consistent support for projects and applications, are being met.
Sales to international customers as a percent of net sales were as follows:
Percent of sales
Year Ended December 31,
2003
2002
45.5
43.1
2004
45.8
We believe that international sales have the long-term potential to grow faster than
domestic sales because of the lower penetration of automatic identifi cation applications
outside North America. As a result, Zebra has invested resources to support our
international growth and currently operates facilities and sales offi ces, or has
representation, in 24 different countries.
Marketing. Marketing operations encompass marketing communications, product
marketing, vertical marketing, solutions marketing, market research, alliance
management and channel marketing functions. The product marketing group identifi es,
evaluates and recommends new product opportunities and manages product
introductions, positioning and demand creation. Product marketing also focuses on
strategic planning and market defi nition and analyzes Zebra’s competitive strengths and
weaknesses.
The vertical marketing group works with reselling and non-reselling partners to develop
and promote high-potential application solutions that have signifi cant Zebra content.
The vertical marketing group also focuses on industry trends, participates in business
development activities at the technical and applications standards levels and provides
subject matter expertise.
Alliance management directs a limited number of third party relationships that are
strategic to new demand creation for specifi c vertical markets and/or specifi c applications.
Solutions marketing seeks to identify business solutions that incorporate Zebra products
and which are repeatable over a range of like customers. Solutions marketing develops
and executes go-to-market and demand creation programs for those applications that are
selected.
The marketing communications group operates as an internal advertising, event
marketing, promotion, internet marketing and public relations resource. This group,
working with advertising agencies and contractors, creates advertisements, and
brochures, manages trade show exhibits, maintains Zebra’s Web sites, and places articles
highlighting Zebra and applications of its products in the trade, industry, business and
consumer media.
5
The market research group is a strategic planning, research-oriented group that focuses
on market defi nition and analysis of our relative competitive strengths and weaknesses.
This group identifi es and analyzes market opportunities for current, planned and
potential products and gathers and analyzes competitive and market information.
The channel marketing group is responsible for developing programs to push and pull
Zebra products through its network of distributors and Value Added Resellers. This
group also prepares application and product training programs and on-line information
resources, which are available to certifi ed channel partners around the world.
Customers
Zebra has sold more than 4,000,000 bar code label and card printers to customers in
about 100 countries as of December 31, 2004.
Sales to ScanSource, Inc. as a percent of net sales were as follows:
Percent of sales
Year Ended December 31,
2004
14.1
2003
13.8
2002
13.6
No other customer accounted for 10% or more of total net sales during these years.
Production and Manufacturing
We design our products to optimize product performance, quality, reliability, durability
and versatility. These designs combine cost-effi cient materials, sourcing and assembly
methods with high standards of workmanship. We assemble our products in-house
largely on a confi gure-to-order basis using components that have been sourced from
around the world. We have the in-house capability to produce mechanical and electronic
assemblies and design many of our own tools, fi xtures and test equipment. Often, our
manufacturing engineers coordinate the development of new products with our new
product engineers and vendors. This collaboration increases manufacturing effi ciency
by specifying and designing manufacturing processes and facilities simultaneously with
product design.
We buy prefabricated component parts and subassemblies for use in the manufacture
of our products. Critical subassemblies include printheads, power supplies, integrated
circuits, and stepper motors, which are obtained from domestic and foreign suppliers
at competitive prices. Purchase contracts provide for price increases in the event of
certain increases in the costs of raw materials. We typically maintain several sources
for our component parts and subassemblies to reduce the risk of parts shortages or
unavailability. We do not currently believe that we face diffi culties in obtaining an
adequate supply of these materials.
Research and Development
Zebra had research and development expenditures as follows (in thousands):
Research and development
expenditures
Percent of sales
Year Ended December 31,
2004
2003
2002
$37,093
5.6
$31,759
5.9
$29,210
6.1
We devote signifi cant resources to developing new printing solutions for our target
markets and ensuring that our effi ciently manufactured products maintain high levels of
reliability.
Competition
Many companies are engaged in the design, manufacture and marketing of bar code label
printers and card personalization solutions. We consider our direct competition in bar
code label and receipt printing to be producers of on-demand thermal transfer and direct
thermal label printing systems and supplies. We also compete, however, with companies
engaged in the design, manufacture and marketing of printing systems that use
alternative technologies, such as impact dot matrix, ink-jet and laser printing. Similarly,
we consider manufacturers of card personalization systems that are based on a broad
range of alternative technologies as competition.
Our ability to compete effectively depends on a number of factors. These factors include
the reliability, quality and reputation of the manufacturer and its products; hardware
and software innovations and specifi cations; breadth of product offerings; information
systems connectivity; price; level of technical support; supplies and applications support
offered by the manufacturer; available distribution channels; and fi nancial resources to
support new product design and innovation. We believe that Zebra presently competes
favorably with respect to these factors.
No single competitor competes across the entire breadth of our product line. Signifi cant
competition, however, is faced in each product segment. For low-cost desktop label
printer products, our principal competitors are Argox; Godex; Cognitive Solutions, a
subsidiary of Axiohm Transaction Solutions; Tokyo Electric Company (TEC); Taiwan
Semiconductor; Microcom; Woosim; and Datamax, a unit of Dover Corporation. In the
mid-range printer market, our principal competitors are Datamax; UBI and Intermec,
subsidiaries of Unova; Monarch Marking Systems, a subsidiary of Paxar; Sato; and TEC.
Principal competition in the high end of the market derives from Sato, TEC, Printronix,
and Intermec. For print engines, the principal competitor is Sato. For mobile printers, the
principal competitors are Monarch Marking Systems and O’Neil Product Development.
The potential for greater competition is increasing, we believe, as companies view mobile
printing applications to be an attractive market. Many of the same companies with whom
we compete in thermal printing also compete with us in RFID. The notable companies in
this area are Printronix, Intermec, Sato and Monarch.
Several competitors manufacture card personalization equipment using dye sublimation
technology. These competitors include Nisca, Datacard, Fargo Electronics, ColorX,
Polaroid, MagiCard, Evolis, LogickaComp, Printherm, CIM, NBS, Matica, Song Woo
Electronics, and Victor Data Systems.
Dye sublimation, the technology incorporated in our card printers, is only one of several
commercially available types of equipment used to personalize cards. We also compete
with companies that produce identifi cation cards using alternative technologies, which
include ink-jet, thermal transfer, embossing, fi lm-based systems, encoders, laser engrav-
ing and large-scale dye sublimation printers. These card personalization technologies
offer viable alternatives to Zebra’s card printers and provide effective competition from a
variety of companies, many of which are substantially larger than Zebra, including Canon,
Hewlett-Packard, Hitachi, and Lexmark International. In addition, service bureaus compete
for end user business and provide an alternative to the purchase of our card printing
equipment and supplies.
Manufacturers also use dye sublimation technology in their digital photo printers.
Companies participating in this area include Sony, Mitsubishi, Copal, Shinko, Altech,
Olmec, and Olympus. In addition, there are several other companies that participate in
producing photo printers using other technologies. These companies include Hewlett-
Packard, Xerox, Polaroid, and Fuji.
The supplies business is highly fragmented and competition is comprised of numerous
competitors of various sizes depending on the geographic area.
Alternative Technologies
We believe that direct thermal and thermal transfer printing will be the label and receipt
printer technology of choice in Zebra’s target applications for the foreseeable future.
Among the many advantages of direct thermal and thermal transfer printing is the ability
to print high-resolution, durable images on a wide variety of label materials at relatively
low costs and very high speeds compared with alternative printing technologies. We
continually assess competitive and complementary methods of bar code printing and
automatic identifi cation. These technologies include ink jet, laser, impact dot matrix, laser
etching, and RFID.
We cannot be sure that new technology will not supplant direct thermal and thermal
transfer printing for bar code labels and receipts, but we are not aware of any developing
technology that offers the advantages of direct thermal and thermal transfer printing
for our targeted label and receipt printer applications. To complement thermal printing
technology, we produce the printer/encoders for printing and encoding “smart labels,”
which are printable labels embedded with an ultra-thin radio frequency transponder.
Information encoded in these transponders can then be read and modifi ed by a radio
frequency reader. Our printer/encoders are targeted at emerging RFID applications,
where line-of-sight reading or scanning a label may not be possible. We view RFID as a
complementary technology to barcoding, offering growth opportunities to Zebra as the
technology becomes more widely adopted.
If other technologies were to evolve or become available to Zebra, it is possible that those
technologies would be incorporated into our products. Alternatively, if such technologies
were to evolve or become available to our competitors, Zebra’s products may become
obsolete. This obsolescence would have a signifi cant negative effect on Zebra’s business,
fi nancial position, results of operations and cash fl ows.
6
Intellectual Property Rights
Zebra relies on a combination of trade secrets, patents, employee and third party
nondisclosure agreements, copyright laws and contractual rights to establish and protect
its proprietary rights in its products. We have and actively protect several domestic
and international trademarks. We hold 192 United States and foreign patents and have
174 United States and foreign patent applications pending pertaining to products. The
duration of these patents ranges from 14 to 20 years. The expiration of any individual
patent would not have a signifi cant negative impact on our business.
Despite our efforts to protect our intellectual property rights, it may be possible for
unauthorized third parties to copy portions of our products or to reverse engineer
or otherwise obtain and use some technology and information that we regard as
proprietary. Moreover, the laws of some countries do not afford Zebra the same
protection to proprietary rights, as do United States laws. There can be no assurance that
legal protections relied upon by Zebra to protect its proprietary position will be adequate.
While Zebra’s intellectual property is valuable and provides certain competitive
advantages, we do not believe that the legal protections afforded to our intellectual
property are fundamental to our success.
Other trademarks mentioned in this report are the property of their respective holders
and include IBM, a registered trademark of International Business Machines; Kodak,
a registered trademark of the Eastman Kodak; UNIX, a registered trademark of UNIX
Systems Laboratories; MS/DOS and Windows, registered trademarks of Microsoft; SAP,
a registered trademark of SAP AG; Linux, a registered trademark of Linus Torvalds; and
Accelio Present Central, a registered trademark of Accelio. Bluetooth is a trademark
owned by Bluetooth SIG and used by Zebra under license.
Employees
As of February 25, 2005, Zebra employed approximately 2,300 persons. None of these
employees is a member of a union. We consider our employee relations to be very good.
7
Item 2. Properties
Zebra’s corporate headquarters are located in Vernon Hills, Illinois, a northern suburb of
Chicago. Zebra conducts its operations from a custom-designed facility at this location,
which provides approximately 225,000 square feet of space. Approximately 113,000
square feet have been allocated to offi ce and laboratory functions and 112,000 square
feet to manufacturing and warehousing. This facility was constructed in 1989 and
expanded in 1993, 1995, 1996 and 1999. It is owned and leased to Zebra, under a lease
terminating on June 30, 2014, by Unique Building Corporation, a corporation owned in
part by Edward Kaplan and Gerhard Cless, both executive offi cers and directors of Zebra.
Zebra’s major facilities as of December 31, 2004, are listed below:
Location
Vernon Hills, Illinois, USA
Camarillo, California, USA
Warwick, Rhode Island, USA
Wakefi eld, Rhode Island, USA
Greenville, Wisconsin, USA
High Wycombe, UK
Preston, UK
Square Footage
Manufacturing, Administrative,
Production &
Warehousing
111,676
97,921
50,872
24,618
27,000
—
30,450
Research
& Sales
113,429
72,156
48,968
8,725
3,000
24,700
8,600
Total
Lease Expires
June 2014
225,105
170,077 Owned
99,840
33,343
30,000 March 2007
24,700 October 2018
39,050 Owned
April 2007
June 2005
Total
342,537
279,578
622,115
Zebra leases various other facilities around the world, which are dedicated to
administrative, research and sales functions. The amounts related to these leases, solely
or in aggregate, are not material to the consolidated fi nancial statements.
During 1999, Zebra consolidated United Kingdom facilities, moving distribution of
its Wokingham and High Wycombe facilities to the Preston location, and transferring
Wokingham associates to the renovated High Wycombe location. The vacant Wokingham
facility totals 27,000 square feet and has a lease that expires in October 2010. Zebra
is actively marketing the property, seeking to sublease it through October 2010. We
believe that the current rent is approximately equal to the amount we will receive from a
sublease. We have accrued for rent during an estimated 18-month marketing period.
Zebra announced plans to close its Varades, France facility in early 2004. See Note 19 to
our consolidated fi nancial statements, which are part of this report, for further details
related to the closing. Zebra France previously leased the Varades building under a series
of capital leases. During 2004, we exercised our option to purchase the building under
those capital leases and sold the building. The resale value was slightly less than the
book value of the building.
We also announced plans to consolidate our Warwick, Rhode Island and Wakefi eld,
Rhode Island printer manufacturing and repair service business into our Camarillo,
California, and Vernon Hills, Illinois locations. Supplies manufacturing and some
administrative functions will remain in Rhode Island. We have a series of four additional
two-year option periods to continue the use of the Warwick facility. We have evaluated
our space requirements in Rhode Island and intend to extend this lease and consolidate
the two Rhode Island facilities into the Warwick location during 2005.
Since December 31, 2004, we committed to lease three additional properties. In Vernon Hills,
Illinois, we committed to lease an additional 34,000 square feet of offi ce space for three years
beginning March 1, 2005. In Heerenveen, Netherlands, we committed to lease approximately
95,000 square feet of offi ce and warehousing space for 20 years beginning February 15,
2005 with an option to terminate the lease at each fi ve-year anniversary date. In Chula Vista,
California, we committed to a lease of approximately 14,000 square feet of manufacturing
and warehouse space for two years beginning February 11, 2005. See Note 16 to our
consolidated fi nancial statements, which are part of this report, for additional information
regarding our leases.
Item 3. Legal Proceedings
On April 23, 2003, Paxar Americas, Inc. (Paxar Americas) fi led 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 identifi ed Paxar Americas patents,
although not each product is accused of infringing each patent. Zebra has fi led an Answer
to Paxar Americas’ Complaint, denying Paxar Americas’ allegations of infringement
and asserting several affi rmative defenses, including the invalidity of Paxar Americas’
asserted patent claims. Paxar has sought to amend its original complaint to add two
additional patents to the lawsuit and to expand the scope of accused products. Zebra has
opposed Paxar’s motions in this regard and the court has the issue under advisement.
On November 21, 2003, Zebra’s subsidiary, ZIH Corp. (ZIH), fi led a Complaint in the
United States District Court for the District of Massachusetts against Paxar Corporation,
alleging 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 seek-
ing a declaratory judgment that ZIH’s patents-in-suit are not infringed and are invalid
and/or unenforceable. Paxar Corporation fi led a motion to transfer ZIH’s Massachusetts
suit to Ohio federal court, and the court denied Paxar’s motion.
On November 25, 2003, Paxar Americas fi led a Complaint against ZIH in the United States
District Court for the Southern District of Ohio, seeking a declaratory 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. In view of the Massachusetts’ District
Court’s denial of Paxar Corporation’s motion to transfer to Ohio ZIH’s corresponding
patent infringement suit against Paxar Corporation, the parties to Paxar America’s Ohio
declaratory judgment action have agreed to transfer this case to Massachusetts.
The outcome of litigation is inherently uncertain, particularly in cases such as these
where sophisticated factual issues must be assessed and complex technical issues must
be decided. As a result, we cannot accurately predict the outcome of these lawsuits. In
the event we are unsuccessful in our defense of Paxar Americas’ infringement claims, we
could be liable for economic and other damages, which could be material, and we may
be forced to incur ongoing licensing expenses or to change how we design, manufacture
and market our products. The patents that ZIH has asserted against Paxar Corporation
could be found invalid. We have and will continue to incur substantial fees to prosecute
and defend these lawsuits. 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 consolidated fi nancial statements as of December 31, 2004.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant’s Common Stock
and Related Stockholder Matters
Stock Information: Price Range and Common Stock
Our 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 quarter in 2004
and 2003, as reported by the NASDAQ Stock Market. We adjusted all share prices for a
50% stock dividend that was distributed on August 25, 2004.
2004
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
2003
$48.56 $41.22
45.96
49.90
45.97
58.10
62.40
61.94
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$28.99 $23.91
25.55
32.50
34.20
34.62
37.39
44.80
Source: The NASDAQ Stock Market
At February 25, 2005, the last reported price for the Class A Common Stock was $50.07
per share, and there were 389 registered stockholders of record for the Company’s Class
A Common Stock.
Dividend Policy
Since our initial public offering in 1991, we have not declared any cash dividends or distri-
butions on our capital stock. Zebra intends to retain its earnings to fi nance future growth
and therefore does not anticipate paying any cash dividends in the foreseeable future.
8
Item 6. Selected Consolidated Financial Data
Net sales
Cost of sales
Gross profi t
Total operating expenses
Operating income
Income before income taxes
Net income
Earnings per share
Basic
Diluted
Weighted average shares outstanding
Basic
Diluted
CONSOLIDATED STATEMENTS OF EARNINGS DATA
(In thousands, except per share amounts)
Year Ended December 31,
2004
$663,054
319,895
343,159
167,989 (1)
175,170
184,548
$120,643
$ 1.69
$ 1.66
71,556
72,539
2003
$536,397
263,320
273,077
143,859 (1)
129,218
135,992
$ 91,696
$ 1.30 (2)
$ 1.28 (2)
70,647 (2)
71,495 (2)
2002
$475,611
244,864
230,747
128,942 (1)(3)
101,805
110,883 (4)
$ 71,595
$ 1.03 (2)
$ 1.02 (2)
69,678 (2)
70,305 (2)
CONSOLIDATED BALANCE SHEET DATA
(In thousands)
Cash and cash equivalents and investments and
marketable securities
Working capital
Total assets
Long-term obligations
Stockholders’ equity
$557,993
665,062
862,222
4,011
797,654
$447,848
535,816
701,611
2,853
651,915
2004
2003
December 31,
2002
$348,577
427,676
573,088
1,613
534,155
2001
$450,008
240,115
209,893
117,434 (1)
92,459
96,139
$ 61,529
$ 0.89 (2)
$ 0.89 (2)
68,923 (2)
69,457 (2)
2001
$249,349
330,510
479,556
408
445,007
2000
$481,569
249,141
232,428
123,758 (1)
108,670
111,911
$ 71,622
$ 1.06 (2)
$ 1.05 (2)
67,573 (2)
68,390 (2)
2000
$156,714
256,799
418,896
513
371,288
(1) Includes the following pretax charges related to the closure/consolidation of the Varades, France, the Warwick, Rhode Island and the Wakefi eld, Rhode Island facilities and the integration and in-process research and
development costs related to the acquisition of Atlantek, Inc. in 2003, the acquisition of Comtec Information Systems, Inc. in 2000, and the merger with Eltron International, Inc. in 1998:
Exit costs for the Varades closure
Exit costs for the Warwick consolidation
Exit costs for the Wakefi eld closure
In-process research and development
Integration costs
2004
$ 722
1,269
109
22
46
2003
$1,232
—
—
692
9
2002
$ —
—
—
—
73
2001
$ —
—
—
—
1,838
2000
$ —
—
—
5,953
5,113
(2) Restated for 3-for-2 stock splits in 2003 and 2004 that were paid in the form of 50% stock dividends.
(3) Includes $3,300 in operating expenses related to the terminated acquisition of Fargo Electronics, Inc.
(4) Includes a pre-tax realized gain of $1,953 related to the sale of 585,000 shares of common stock of Fargo Electronics.
9
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations: Fourth Quarter of 2004 versus Fourth Quarter of 2003, Year ended December 31, 2004 versus Year ended December 31, 2003
Sales
Sales by product category, percent change, and percent of total sales for the three months and year ended December 31, 2004, and December 31, 2003, were (in thousands, except
percentages):
Product Category
Hardware
Supplies
Service and software
Shipping and handling
Cash fl ow hedging activities
Total sales
Product Category
Hardware
Supplies
Service and software
Shipping and handling
Cash fl ow hedging activities
Total sales
Three Months Ended December 31,
2003
2004
Percent
Change
Percent of
Total Sales - 2004
Percent of
Total Sales - 2003
$137,529
30,895
6,083
1,444
(1,077)
$174,874
$113,263
26,738
6,165
1,184
(150)
$147,200
Year Ended December 31,
2004
$518,556
116,849
24,338
4,950
(1,639)
$663,054
2003
$409,144
98,519
24,355
4,113
266
$536,397
21.4
15.5
(1.3)
22.0
—
18.8
78.6
17.7
3.5
0.8
(0.6)
100.0
76.9
18.2
4.2
0.8
(0.1)
100.0
Percent
Change
Percent of
Total Sales - 2004
Percent of
Total Sales - 2003
26.7
18.6
(0.1)
20.4
—
23.6
78.2
17.6
3.7
0.7
(0.2)
100.0
76.3
18.4
4.5
0.8
—
100.0
Sales to customers by geographic region, percent changes and percent of total sales for the three months and year ended December 31, 2004, and December 31, 2003, were (in thousands,
except percentages):
Geographic Region
Europe, Middle East and Africa
Latin America
Asia-Pacifi c
Total International
North America
Total sales
Geographic Region
Europe, Middle East and Africa
Latin America
Asia-Pacifi c
Total International
North America
Total sales
Three Months Ended December 31,
2003
2004
Percent
Change
Percent of
Total Sales - 2004
Percent of
Total Sales - 2003
$ 59,398
10,597
14,534
84,529
90,345
$174,874
$ 47,893
7,978
14,215
70,086
77,114
$147,200
Year Ended December 31,
2004
$213,559
38,119
52,302
303,980
359,074
$663,054
2003
$170,544
29,406
43,904
243,854
292,543
$536,397
24.0
32.8
2.2
20.6
17.2
18.8
34.0
6.1
8.3
48.4
51.6
100.0
32.5
5.4
9.7
47.6
52.4
100.0
Percent
Change
Percent of
Total Sales - 2004
Percent of
Total Sales - 2003
25.2
29.6
19.1
24.7
22.7
23.6
32.2
5.7
7.9
45.8
54.2
100.0
31.8
5.5
8.2
45.5
54.5
100.0
We believe that our sales growth for the fourth quarter and the full year of 2004 refl ects
the increasing success of sales and marketing programs to improve demand for Zebra
products, strengthen distribution channel relationships and increase the awareness of
Zebra products and the Zebra brand in targeted markets, within a favorable environment
for the adoption of barcoding and specialty printing applications. The growth in
Zebra’s business was well balanced across geographies, products, and channels. We
experienced notable sales growth in mobile printers, as the mainstream adoption of
wireless technology has expanded the uses of mobile printing in applications across
10
an increasing number of vertical markets. In addition, we believe that channel programs
implemented in North America supported higher sales in the region with strengthened
and expanded channel partner relationships. More Zebra sales representatives in
international territories helped increase the number of channel relationships in overseas
regions and support sales growth.
Gross Profi t
Gross profi t information is summarized below (in thousands, except percentages):
December 31,
2004
2003
Percent of
Percent Total Sales
2004
Change
Percent of
Total Sales
2003
New printer products (defi ned as printers released within 18 months prior to the end of the
applicable fi scal period) as a percent of total printer product sales were as follows:
Three months ended
Year ended
$ 90,895
343,159
$ 74,397
273,077
22.2
25.7
52.0
51.8
50.5
50.9
Three months ended
Year ended
December 31,
2004
18.9
23.9
2003
21.8
23.3
Our international sales are denominated in multiple currencies, primarily the dollar, pound
and euro. This directly causes our reported sales to be subject to fl uctuations based on
changes in currency rates. When signifi cant currency rate fl uctuations occur, we review our
product pricing and make appropriate changes to maintain our competitive position. We
estimate that favorable foreign exchange movements of the euro and the pound versus
the dollar had a net positive effect of $4,258,000 on sales during the fourth quarter and
$17,626,000 for the full year.
We currently hedge a portion of anticipated euro-denominated sales to partially protect
Zebra against exchange rate movements. For the fourth quarter, this program resulted
in a loss of $1,077,000 and a full-year loss of $1,639,000. See Note 15 to the fi nancial
statements for a more detailed discussion of this hedging program.
The major contributors to the margin improvement were:
• Higher capacity utilization related to the higher sales volume, representing
$6,518,000 of the total gross profi t increase for the fourth quarter of 2004 and
$34,010,000 for the full year.
• Foreign exchange rate movements, which we estimate increased gross profi t by
$4,178,000 for the fourth quarter of 2004. For the full year, gross profi t is estimated to
have been $16,239,000 higher due to foreign exchange rate movements.
• Changes in product mix cost reductions and other items accounted for
$5,802,000 of the margin improvement during the fourth quarter and $19,833,000 for
the full year.
Selling and Marketing Expenses
Selling and marketing expenses are summarized below (in thousands, except
percentages):
December 31,
2004
2003
Percent
Change
Percent of
Total Sales
2004
Percent of
Total Sales
2003
Printer unit volumes and average selling price information is summarized below:
Three months ended
Year ended
$22,615
77,062
$19,506
66,635
15.9
15.6
12.9
11.6
13.3
12.4
Total printers shipped
Average selling price of printers shipped
Total printers shipped
Average selling price of printers shipped
Three Months Ended
December 31,
2004
181,691
$638
2003
Change
145,834
$640
24.6
(0.3)
Year Ended
December 31,
2004
667,044
$646
2003
Change
540,431
$627
23.4
3.0
We continue to invest heavily in demand-generating activities to build brand equity in our
core product lines as well as in the emerging area of radio frequency identifi cation (RFID).
During the fourth quarter of 2004, selling and marketing expenses increased due to
higher payroll costs of $608,000 from increased staffi ng as well as higher advertising and
market development funding of $906,000. For the full year, the payroll costs increased
$4,052,000 and advertising and market development funding increased $2,475,000. In
addition to increases in the items mentioned above, we increased outside commission,
consulting and legal expenses. Much of the additional headcount related to placing more
Zebra representatives in high-growth international regions as part of our geographic
expansion activities. We also increased staff for better coverage of strategic accounts.
For all of 2004, unit volumes increased in nearly all product lines and all regions, with
notable strength in mobile printers. For the full year, a favorable product mix toward
higher priced products and a richer feature set within product segments, on balance,
supported a 3.0% increase in the average selling price of printers shipped. Average unit
prices were comparable between the fourth quarter of 2004 and 2003.
11
Research and Development Costs
The development of new products and enhancement of existing products are important
to Zebra’s business and growth prospects. To maintain and build our product pipeline,
we made investments in research and development, summarized below (in thousands,
except percentages):
Three months ended
Year ended
December 31,
2004
$ 9,368
37,093
2003
$ 8,722
31,759
Percent of
Percent Total Sales
2004
Change
Percent of
Total Sales
2003
7.4
16.8
5.4
5.6
5.9
5.9
Varades closure
Warwick consolidation
Wakefi eld closure
Total exit costs
Three Months Ended
December 31,
Year Ended
December 31,
2004
$(110)
147
109
$ 146
2003
$1,232
—
—
$1,232
2004
$ 722
1,269
109
$2,100
2003
$1,232
—
—
$1,232
Exit costs related to these consolidation and closure activities were as follows (in
thousands):
Quarterly product development expenses fl uctuate widely depending on the status of
ongoing projects. We are committed to a long-term strategy of signifi cant investment
in product development. For the fourth quarter of 2004, research and development
expenses increased because of an increase in payroll costs of $587,000. For the full
year, payroll costs increased $3,253,000. Project expenses and consulting expenses
also increased as a result of additional expenditures for new products including radio
frequency identifi cation (RFID). We expect to invest a larger portion of our research and
development expenditures in the future on the development of RFID printer/encoders.
General and Administrative Expenses
General and administrative expenses are summarized in the table below (in thousands,
except percentages):
December 31,
2004
2003
Percent of
Percent Total Sales
2004
Change
Percent of
Total Sales
2003
Three months ended
Year ended
$11,959
49,097
$11,456
41,892
4.4
17.2
6.8
7.4
7.8
7.8
For the fourth quarter of 2004, general and administrative expenses increased primarily as
a result of increased legal expenses. For the full year of 2004, general and administrative
expenses include $4,111,000 of increased legal expenses related to:
• Litigation with Paxar,
• Increased intellectual property work, and
• International expansion activity.
In addition to legal expenses in 2004, we saw an increase in payroll costs and information
system expenses.
Exit Costs
Since the fourth quarter of 2003, we announced several facility consolidation and
closure activities. During the fourth quarter of 2003, we announced plans to close
our engineering site in Varades, France. 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. During
December 2004, we announced plans to close and consolidate our Wakefi eld, Rhode
Island facility into our other North American facilities, primarily into the Warwick, Rhode
Island facility. These plans are accounted for under SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities.
Operating Income
Operating income is summarized in the following table (in thousands, except
percentages):
December 31,
2004
2003
Percent of
Percent Total Sales
2004
Change
Percent of
Total Sales
2003
Three months ended
Year ended
$ 46,160
175,170
$ 32,253
129,218
43.1
35.6
26.4
26.4
21.9
24.1
The increase in operating income is attributable to the following factors:
• Accelerated sales growth compared to 2003,
• Improved gross margins resulting from better overhead utilization, and
• Favorable changes in foreign exchange rates for Zebra’s non-dollar denominated
businesses.
As a result of these factors, operating income increased by 24.3 percentage points more
than the rate of sales growth during the fourth quarter, and 12.0 percentage points more
than the rate of sales growth for the full year.
Non-operating Income and Expenses
Zebra’s non-operating income and expense items are summarized in the following table
(in thousands):
Three Months Ended
December 31,
Year Ended
December 31,
2004
$2,949
(5)
(9)
(457)
2003
$4,079
(38)
(304)
(524)
2004
$10,628
(44)
485
(1,691)
2003
$ 8,553
(154)
(552)
(1,073)
Investment income
Interest expense
Foreign exchange
gains (losses)
Other, net
Total other income
(expense)
$2,478
$3,213
$ 9,378
$ 6,774
During the fourth quarter of 2004, Zebra earned $2,949,000 on average cash and
marketable securities balances of $540,517,000, which equates to an annualized 2.2% rate
of return. For the full year, investment income was $10,628,000, or 2.1%, of average cash
and marketable securities balances of $502,921,000.
12
Income Taxes
The effective income tax rate for the fourth quarter was 34.3% compared with 31.2% for
the same quarter last year. The 2003 rate is lower, because of the resolution of our long-
standing dispute with the Illinois Department of Revenue and the related decrease to
income tax expense of $1,342,000 during that quarter. For 2004, the effective income tax
rate was 34.6% versus 32.6% for 2003 for the reason noted above.
Net Income
Zebra’s net income is summarized below (in thousands, except per share amounts):
Net income
Diluted earnings
per share
Three Months Ended
December 31,
2004
$31,963
2003
$24,395
Year Ended
December 31,
2004
2003
$120,643
$91,696
$ 0.44
$ 0.34
$ 1.66
$ 1.28
Comparison of Years Ended December 31, 2003 and 2002
Sales
Sales by product category, related percent changes and percent of total sales for 2003 and 2002 were as follows:
Product Category
Hardware
Supplies
Service and software
Shipping and handling
Cash fl ow hedging activities
Total sales
Year Ended December 31,
2003
$409,144
98,519
24,355
4,113
266
$536,397
2002
$360,185
87,981
23,301
4,144
—
$475,611
Percent
Change
Percent of
Total Sales - 2003
Percent of
Total Sales - 2002
13.6
12.0
4.5
(0.7)
—
12.8
76.3
18.4
4.5
0.8
—
100.0
75.7
18.5
4.9
0.9
—
100.0
Sales to customers by geographic region, related percent changes, and percent of total sales for 2003 and 2002 were as follows:
Geographic Region
Europe, Middle East and Africa
Latin America
Asia-Pacifi c
Total International
North America
Total sales
Year Ended December 31,
2003
$170,544
29,406
43,904
243,854
292,543
$536,397
2002
$142,273
28,097
34,953
205,323
270,288
$475,611
Percent
Change
Percent of
Total Sales - 2003
Percent of
Total Sales - 2002
19.9
4.7
25.6
18.8
8.2
12.8
31.8
5.5
8.2
45.5
54.5
100.0
29.9
5.9
7.3
43.1
56.9
100.0
Higher sales growth in 2003 was a result of additional geographic expans ion in Asia,
Latin America and Europe. In addition, we placed a greater emphasis on high-growth
vertical markets and added marketing resources to support emerging radio frequency
identifi cation (RFID) opportunities. New printer products accounted for 23.3% of printer
sales in 2003, compared with 22.2% in 2002.
Our international sales were benefi ted in 2003 by favorable exchange rates. 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 exchange rates that prevailed in
2002. To remain competitive in markets experiencing currency strength against the
dollar, we adjusted our pricing resulting in a $12,610,000 reduction in sales. The net sales
increase related to exchange rate fl uctuations and offsetting pricing adjustments was
$12,173,000 for 2003.
13
Printer unit volumes and average selling price information is summarized below:
Total printers shipped
Average selling price of printers shipped
Year Ended December 31,
2003
540,431
$627
2002
491,111
$614
Percent
Change
10.0
2.1
For 2003, the increase in printer volume was due to high sales of desktop and mobile
printers as a result of more companies adopting technology for wireless networks.
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 and is offset by
higher volumes of the lower priced mobile printers.
Gross Profi t
Gross profi t information is summarized below (in thousands except percentages)
For the Year Ended
December 31, 2003
December 31, 2002
Percent Change
Gross Profi t
$273,077
230,747
18.3
Percent of
Total Sales
50.9
48.5
Gross profi t increased due to:
• Higher capacity utilization related to the higher sales volume, representing
$17,417,000 of the total gross profi t increase for 2003.
• Foreign exchange rate movements and related pricing adjustments, which
we estimate increased gross profi t by $10,900,000 for 2003 due to foreign exchange
movements, net of related pricing adjustments.
• Cost reductions, which contributed $9,371,000 to the margin improvement during
2003.
Selling and Marketing Expenses
Selling and marketing expenses are summarized below (in thousands, except
percentages):
For the Year Ended
December 31, 2003
December 31, 2002
Percent Change
Selling and
Marketing Expenses
Percent of
Total Sales
$66,635
56,176
18.6
12.4
11.8
The increase in selling and marketing expenses for 2003 resulted from our investments in
demand-generating activities with higher advertising, publications and market research,
travel, demonstration units and market development fund expenses.
Research and Development Costs
Research and development costs are summarized below (in thousands, except
percentages):
For the Year Ended
December 31, 2003
December 31, 2002
Percent Change
Research and
Development Costs
Percent of
Total Sales
$31,759
29,210
8.7
5.9
6.1
General and Administrative Expenses
General and administrative expenses are summarized below (in thousands, except
percentages):
For the Year Ended
December 31, 2003
December 31, 2002
Percent Change
General and
Administrative Expenses
Percent of
Total Sales
$41,892
38,689
8.3
7.8
8.1
For 2003, general and administrative expenses include $596,000 of increased legal
expenses related to:
• Litigation with Paxar,
• Increased intellectual property work,
• International activity, and
• General contract review.
In addition to legal expenses in 2003, we saw an increase in director and offi cer liability
insurance and administrative personnel costs. A portion of these costs resulted from
new compliance requirements of the Sarbanes-Oxley Act of 2002 and related regulations.
Offsetting these increases was a decline in consulting expenses.
Costs Related to Terminated Acquisitions and Merger Costs
During 2002, we terminated the acquisition agreement and tender offer in which 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, 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 tender offer.
Exit Costs
During the fourth quarter of 2003, we announced a plan to close our engineering site in
Varades, France. This plan is being accounted for under SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. Included in operating expenses for 2003
are exit costs, consisting of primarily severance, in the amount of $1,232,000.
Operating Income
Operating income is summarized in the following table (in thousands, except
percentages):
For 2003, research and development expenses increased primarily due to increases in
project expenses, which were higher because of reductions related to third-party funded
engineering costs that had occurred in 2002 but did not reoccur in 2003. In addition,
payroll and benefi ts were up $1,752,000 over 2002, but consulting expenses were down
$945,000.
For the Year Ended
December 31, 2003
December 31, 2002
Percent Change
Operating Income
$129,218
101,805
26.9
Percent of
Total Sales
24.1
21.4
14
The increase in operating income is attributable to the following factors:
• Accelerated sales growth compared to 2002,
• Improved gross margins resulting from increased overhead utilization,
• Favorable changes in foreign exchange rates for Zebra’s non-dollar denominated
business, and
• Cost controls that held operating expense growth slightly below the rate of
sales growth.
As a result of these actions, operating income increased by 14.1 percentage points more
than the rate of sales growth during 2002.
Non-operating Income and Expenses
Zebra’s non-operating income and expense items are summarized in the following table
(in thousands):
Critical Accounting Policies and Estimates
Management prepared the consolidated fi nancial statements of Zebra Technologies
Corporation under accounting principles generally accepted in the United States of
America. These principles require the use of estimates, judgments and assumptions. We
believe that the estimates, judgments and assumptions we used are reasonable, based
upon the information available.
Our estimates and assumptions affect the reported amounts in our fi nancial statements.
The following accounting policies comprise those that we believe are the most critical in
understanding and evaluating Zebra’s reported fi nancial results.
Revenue Recognition
Zebra recognizes sales from product sales at the time of shipment and passage of title,
which are generally the same. Other items that affect our revenue recognition include:
Investment income
Interest expense
Foreign exchange gains (losses)
Other, net
Total other income (expense)
Year Ended December 31,
2003
$ 8,553
(154)
(552)
(1,073)
$ 6,774
2002
$10,004
(319)
347
(954)
$ 9,078
For 2003, investment income decreased because 2002 results included a $1,953,000 pre-
tax realized gain on the sale of 585,000 shares of common stock of Fargo Electronics.
Income Taxes
The effective income tax rate for 2003 was 32.6% versus 35.4% in 2002. The rate for 2003 is
less than the 35% Zebra had previously recorded because of the following nonrecurring tax
items during the year:
• During the fourth quarter of 2003, we settled our long-standing dispute with the Illinois
Department of Revenue and recorded a decrease to income tax expense for $1,342,000
since our reserves for this tax dispute exceeded the amount of the settlement.
• 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.
Excluding these two tax adjustments, our effective tax rate would have been 35% for 2003.
Net Income
Zebra’s net income is summarized below (in thousands, except per share amounts):
Net income
Diluted earnings per share
15
Year Ended December 31,
2002
2003
$91,696
$ 1.28
$71,595
$ 1.02
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
notifi cation 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. Historically, our
product returns have not been signifi cant. However, if a signifi cant issue should arise,
it could have a material impact on our fi nancial statements.
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 outstanding volume
rebates and establish a reserve for them based on shipment history. Historically,
actual volume rebates have been in line with our estimates.
Price Protection
Some of our customers are offered price protection by Zebra as an incentive to carry
inventory of our product. These price protection plans provide that if we lower prices,
we will credit them for the price decrease on inventory they hold. We estimate future
payments under price protection programs quarterly and establish a reserve, which is
charged against revenue. Our customers typically carry limited amounts of inventory,
and Zebra infrequently lowers prices on current products. As a result, the amounts
paid under theses plans have been minimal. We cannot guarantee that this minimal
level will continue.
Software Revenue
We sell three types of software and record revenue as follows:
• Our printers contain embedded fi rmware, which is part of the hardware purchase.
We consider the sale of this fi rmware to be incidental to the sale of the printer and do
not attribute any revenue to it.
• We sell a limited amount of prepackaged, or off-the-shelf, software for the creation
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 at the time this prepackaged software is shipped.
• We sometimes provide custom software as part of a printer installation project. We
bill custom software development services separate from the related hardware.
Revenue related to custom software is recognized once the custom software
development services have been completed and accepted by the customer.
Shipping and Handling
We charge our customers for shipping and handling services based upon our internal
price list for these items. The amounts billed to customers are recorded as revenue
when the product ships. Any costs incurred related to these services are included in
cost of sales.
From time to time, Zebra will enter into sales transactions that include more than one
product type. This bundle of products might include printers, current or future supplies,
and services. When this type of transaction occurs, we allocate the purchase price to
each product type based on the fair value of the individual products. The revenue for
each individual product is then recognized when the earning process for that product is
complete.
Investments and Marketable Securities
Investments and marketable securities at December 31, 2004, consisted of U.S.
government securities (21.5%), state and municipal bonds (65.0%), corporate bonds
(7.8%), and partnership interests (5.7%). We classify our debt and marketable equity
securities in one of three categories: trading, available-for-sale or held-to-maturity.
Trading securities are bought and held principally for the purpose of selling them in the
near term. Held-to-maturity securities are those securities that Zebra has the ability and
intent to hold until maturity. All securities not included in trading or held-to-maturity are
classifi ed as available-for-sale.
Trading and available-for-sale securities are recorded at fair value. Held-to-maturity
securities are recorded at amortized cost, adjusted for the amortization or accretion of
discounts or premiums. Unrealized holding gains and losses on trading 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.
Accounts Receivable
We have standardized credit granting and review policies and procedures for all customer
accounts, including:
• Credit reviews of all new customer accounts,
• Ongoing credit evaluations of current customers,
• Credit limits and payment terms based on available credit information,
• Adjustments to credit limits based upon payment history and the customer’s current
credit worthiness, and
as of December 31, 2004, were $1,561,000, or 1.6% of the balance due. We feel this
reserve level is appropriate considering the quality of the portfolio as of December 31,
2004. While credit losses have historically been within expectations and the provisions
established, we cannot guarantee that our credit 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 using
the fi rst-in, fi rst-out (FIFO) method, or the current estimated market value. We review
inventory quantities on hand and record a provision for excess and obsolete inventory
based on forecasts of product demand and production requirements for the subsequent
twelve months.
A signifi cant increase in the demand for Zebra’s products could result in a short-term
increase in the cost of inventory purchases; however, this would be offset by improved
overhead utilization resulting from the additional demand. A signifi cant decrease in
demand could result in an increase in excess inventory quantities on hand.
Our forecasted product demand may prove to be inaccurate, in which case the provision
required for excess and obsolete inventory may be understated or overstated. If
inventories were determined to be overvalued, we would recognize such costs in cost
of goods sold at the time of such determination. We make every effort to ensure the
accuracy of our forecasts of product demand; however, any signifi cant unanticipated
changes in demand or technological developments could have a signifi cant impact on the
value of inventories and reported operating results.
Over the last three years, our reserves for excess and obsolete inventories have ranged
from 10.4% to 13.1% of gross inventory. As of December 31, 2004, reserves for excess
and obsolete inventories were $7,338,000, or 10.9% of gross inventory. We feel this
reserve level is appropriate considering the quantities and quality of the inventories as of
December 31, 2004.
Valuation of Long-Lived and Intangible Assets and Goodwill
We test the impairment of goodwill each year or whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. We completed our
last assessment during June 2004.
We evaluate the impairment of other long-lived assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable.
Factors considered that may trigger an impairment review consist of:
• Signifi cant underperformance relative to expected historical or projected future
operating results,
• Signifi cant changes in the manner of use of the acquired assets or the strategy for the
• An active collection effort by regional credit functions, reporting directly to the
overall business,
corporate fi nancial offi cers.
We reserve for estimated credit losses based upon historical experience and specifi c
customer collection issues. Over the last three years, accounts receivable reserves
varied from 1.6% to 2.8% of total accounts receivable. Accounts receivable reserves
• Signifi cant negative industry or economic trends,
• Signifi cant decline in Zebra’s stock price for a sustained period, and
• Signifi cant decline in market capitalization relative to net book value.
16
If we believe that one or more of the above indicators of impairment have occurred, we
measure impairment based on projected discounted cash fl ows using a discount rate that
incorporates the risk inherent in the cash fl ows. Net intangible assets, long-lived assets
and goodwill amounted to $114,593,000 as of December 31, 2004.
and defend these lawsuits. 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 consolidated fi nancial statements as of December 31, 2004.
Contingencies
We record estimated liabilities related to contingencies based on our estimates of
the probable outcomes. Quarterly, we assess the potential liability related to pending
litigation, tax audits and other contingencies and confi rm or revise estimates and
reserves as appropriate.
On April 23, 2003, Paxar Americas, Inc. (Paxar Americas) fi led 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 identifi ed Paxar Americas patents,
although not each product is accused of infringing each patent. Zebra has fi led an Answer
to Paxar Americas’ Complaint, denying Paxar Americas’ allegations of infringement
and asserting several affi rmative defenses, including the invalidity of Paxar Americas’
asserted patent claims. Paxar has sought to amend its original complaint to add two
additional patents to the lawsuit and to expand the scope of accused products. Zebra has
opposed Paxar’s motions in this regard and the court has the issue under advisement.
On November 21, 2003, Zebra’s subsidiary, ZIH Corp. (ZIH), fi led a Complaint in the United
States District Court for the District of Massachusetts against Paxar Corporation, alleging
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 fi led a motion to transfer ZIH’s Massachusetts suit to
Ohio federal court, and the court denied Paxar’s motion.
On November 25, 2003, Paxar Americas fi led a Complaint against ZIH in the United States
District Court for the Southern District of Ohio, seeking a declaratory 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. In view of the Massachusetts’ District
Court’s denial of Paxar Corporation’s motion to transfer to Ohio ZIH’s corresponding
patent infringement suit against Paxar Corporation, the parties to Paxar America’s Ohio
declaratory judgment action have agreed to transfer this case to Massachusetts.
The outcome of litigation is inherently uncertain, particularly in cases such as these
where sophisticated factual issues must be assessed and complex technical issues must
be decided. As a result, we cannot accurately predict the outcome of these lawsuits. In
the event we are unsuccessful in our defense of Paxar Americas’ infringement claims, we
could be liable for economic and other damages, which could be material, and we may
be forced to incur ongoing licensing expenses or to change how we design, manufacture
and market our products. The patents that ZIH has asserted against Paxar Corporation
could be found invalid. We have and will continue to incur substantial fees to prosecute
Stock-Based Compensation
As of December 31, 2004, Zebra had three stock-based compensation plans available
for future grants. We account for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based compensation cost is refl ected in net income, as all
options granted under those plans had an exercise price equal to the market value of
the underlying common stock on the date of grant. The following table illustrates the
effect on net income and earnings per share if we had applied the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-based Compensation, to stock-based
compensation (in thousands, except per share amounts):
Net income, as reported
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects
Year Ended December 31,
2003
2004
2002
$120,643
$91,696
$71,595
(5,501)
(5,374)
(5,102)
Pro forma net income
$115,142
$86,322
$66,493
Basic earnings per share:
As reported
Pro forma
Diluted earnings per share:
As reported
Pro forma
$1.69
1.61
$1.66
1.59
$1.30
1.22
$1.28
1.21
$1.03
0.95
$1.02
0.95
Expectations
During our quarterly conference call on February 9, 2005, we provided net sales and
earnings guidance for the fi rst quarter of 2005 as follows (amounts in thousands, except
per share data):
Net sales
Gross profi t margins
Operating expenses
Earnings per share
First Quarter 2005
$175,000 to $178,000
52.0% to 52.5%
$46,000 to $46,500
$0.43 to $0.45
The effective tax rate is expected to be 34.75% of income before income taxes.
17
Liquidity and Capital Resources
Zebra continued to generate cash well in excess of its operating requirements. As a result,
Zebra’s cash and investment balances have continually grown over time. As of December
31, 2004, Zebra had $557,993,000 in cash, cash equivalents, investments and marketable
securities, compared with $447,848,000 at December 31, 2003. Factors affecting cash and
investment balances during 2004 include (note that changes discussed below include the
impact of foreign currency):
• Operations provided a net cash increase of $111,256,000 primarily from net income.
• Accounts receivable increased $11,491,000 because of higher sales.
• Inventories increased $15,456,000. Compared to the same period a year ago, inventory
turns decreased to 5.7 from 6.8.
• Other assets increased $11,492,000, primarily due to the purchase of life insurance policies
on key executives with guaranteed returns, which due to the nature of these investments
are classifi ed as long-term.
• Accounts payable increased by $6,420,000, in relation to the increase in inventory.
• Accrued expenses increased $1,974,000.
• Taxes payable increased $3,720,000 due to increased profi ts.
• Purchases of property and equipment totaled $16,243,000.
• Net purchases of investments and marketable securities totaled $106,428,000.
• Stock option exercises and purchases under the stock purchase plan contributed
$15,531,000.
Zebra’s contractual obligations as of December 31, 2004 were:
Contractual Obligations
Total
Capital lease obligations
Operating lease obligations
Purchase obligations
Total
$ 183
36,287
42,946
$79,416
Payments due by period
Less than
1 year
$ 62
5,116
42,946
$48,124
1-3 years 3-5 years
More than
5 years
$ 121
8,170
—
$8,291
$ —
6,917
—
$6,917
$ —
16,084
—
$16,084
Purchase obligations are for purchases made in the normal course of business to meet
operational requirements, primarily raw materials.
Management believes that existing capital resources and funds generated from operations
are suffi cient to fi nance anticipated capital requirements. It is our intention to actively
pursue opportunities to acquire other businesses.
Recently Issued Accounting Pronouncements
In March 2004, the FASB issued Emerging Issues Task Force Issue No. 03-1 (EITF
03-1), The Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments, which provides new guidance for assessing impairment losses
on investments. Additionally, EITF 03-1 includes new disclosure requirements for
investments that are deemed to be temporarily impaired. In September 2004, the FASB
delayed the accounting provisions of EITF 03-1; however, the disclosure requirements
remain effective for annual periods ending after June 15, 2004. We will evaluate the
impact of EITF 03-1 once fi nal guidance is issued. See Note 7 to our consolidated fi nancial
statements for added disclosures.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs – an amendment
of ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARB No. 43, Chapter
4, “Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB
43, Chapter 4, previously stated that these costs may be “so abnormal” that they would
require treatment as current period charges. This statement requires that those items be
recognized as current-period charges regardless of whether they meet the criterion of “so
abnormal”. This statement also requires that allocation of fi xed production overheads to
the costs of conversion be based on the normal capacity of the production facilities. This
statement describes our current process; therefore, it will not have any impact on our
fi nancial position or results of operations.
In December 2004, the FASB issued SFAS No. 123(R) (revised 2004), Share Based
Payment, which is a revision of SFAS 123, Accounting for Stock-Based Compensation,
and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its
related implementation guidance. SFAS No. 123 (R) focuses primarily on accounting for
transactions in which an entity obtains employee services through share-based payment
transactions. It requires a public entity to measure the cost of employee services
received in exchange for the award of equity instruments based on the fair value of the
award at the date of grant. The cost will be recognized over the period during which an
employee is required to provide services in exchange for the award. The provisions of
this statement become effective for Zebra during the third quarter of 2005. We expect the
impact on Zebra’s consolidated fi nancial statements to be consistent with the fair value
disclosures included in our critical accounting policies and Note 2 to the consolidated
fi nancial statements.
In December 2004, the FASB issued FSP FAS 109-1, Application of FASB No. 109,
Accounting forIincome Taxe, to the Tax Deduction on Qualifi ed Production Activities
Provided by the American Jobs Creation Act of 2004. FSP FAS No. 109-1 clarifi es SFAS No.
109’s guidance that applies to the new tax deduction for qualifi ed domestic production
activities. FSP No. 109-1 became effective upon issuance and we believe that this
pronouncement will have an insignifi cant impact on our effective tax rate in 2005.
In December 2004, the FASB issued FSP FAS 109-2, Accounting and Disclosure Guidance
for the Foreign Repatriation Provision within the American Jobs Creation Act of 2004. FSP
FAS 109-2 provides implementation guidance related to the repatriation provision of the
American Jobs Creation Act of 2004. We have completed our assessment of earnings of
foreign subsidiaries that might be repatriated. At this time we do not expect to repatriate
the earnings of our foreign subsidiaries as dividends to take advantage of this tax credit.
Risk Factors
Investors should carefully consider the risks, uncertainties and other factors described
below, as well as other disclosures in Management’s Discussion and Analysis of Financial
Condition and Results of Operations, because they could have a material adverse effect
on Zebra’s business, fi nancial condition, operating results, and growth prospects.
18
Zebra could encounter diffi culties in any acquisition it undertakes, including unanticipated
integration problems and business disruption. Acquisitions could also dilute stockholder
value and adversely affect operating results. Proposed acquisitions that are not
consummated may result in the write-off of certain acquisition costs.
Zebra may acquire or make investments in other businesses, technologies, services
or products. The process of integrating any acquired business, technology, service or
product into operations may result in unforeseen operating diffi culties and expenditures.
Integration of an acquired company also may consume considerable management
time and attention, which could otherwise be available for ongoing development of
the business. The expected benefi ts of any acquisition may not be realized. Moreover,
Zebra may be unable to identify, negotiate or fi nance future acquisitions successfully.
Future acquisitions could result in potentially dilutive issuances of equity securities or
the incurrence of debt, contingent liabilities or amortization expenses. To the extent that
a proposed acquisition is not consummated, Zebra may be required to write off certain
costs associated with the acquisition, which could be signifi cant.
Zebra may not be able to continue to develop products to address user needs effectively
in an industry characterized by rapid technological change.
To be successful, Zebra must adapt to rapidly changing technological and application
needs by continually improving its products as well as introducing new products and
services to address user demands.
Zebra’s industry is characterized by:
• Rapidly changing technology
• Evolving industry standards
• Frequent new product and service introductions
• Evolving distribution channels
• Changing customer demands
Future success will depend on Zebra’s ability to adapt in this rapidly evolving
environment. Zebra could incur substantial costs if it has to modify its business to adapt
to these changes, and may even be unable to adapt to these changes.
Zebra competes in a highly competitive market, which is likely to become more
competitive. Competitors may be able to respond more quickly to new or emerging
technology and changes in customer requirements.
Zebra faces signifi cant competition in developing and selling its systems. Principal
competitors have substantial marketing, fi nancial, development and personnel resources.
To remain competitive, Zebra believes it must continue to provide:
• Technologically advanced systems that satisfy the user demands,
• Superior customer service,
• High levels of quality and reliability, and
• Dependable and effi cient distribution networks.
with suppliers or companies that produce complementary products. Any of these factors
could reduce Zebra’s earnings.
Zebra may incur liabilities as a result of Zebra installed product failures due to design or
manufacturing defects.
Zebra generally has insurance for such risks and also seeks to limit such risk though
product design, manufacturing quality control processes, product testing and contractual
limitations. However, due to the large and growing size of Zebra’s installed printer base,
a design or manufacturing defect attributable to this large installed printer base could
result in product recalls or customer service costs that could have material adverse
effects on Zebra’s fi nancial results.
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.
Infringement on the proprietary rights of others could put Zebra at a competitive
disadvantage, and any related litigation could be time consuming and costly.
Third parties may claim that Zebra violated their intellectual property rights. To the
extent of a violation of a third party’s patent or other intellectual property right, Zebra
may 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 possible,
to accomplish its objectives. Any of these claims, with or without merit, could result in
costly litigation and divert the attention of key personnel. If such claims are successful,
they could result in costly judgments or settlements.
Zebra sells a signifi cant portion of its products internationally and purchases important
components from foreign suppliers. These circumstances create a number of risks.
Zebra sells a signifi cant amount of its products to customers outside the United States.
Shipments to international customers are expected to continue to account for a material
portion of net sales. Risks associated with sales and purchases outside the United States
include:
• Fluctuating foreign currency rates could restrict sales, or increase costs of purchasing,
in foreign countries.
• Foreign governments may impose burdensome tariffs, quotas, taxes, trade barriers or
capital fl ow restrictions.
• Political and economic instability may reduce demand for our products, or put our
foreign assets at risk.
• Restrictions on the export or import of technology may reduce or eliminate the ability to
sell in or purchase from certain markets.
Zebra cannot assure it will be able to compete successfully against current or future
competitors. Increased competition in printers or supplies may result in price reductions,
lower gross profi t margins and loss of market share, and could require increased
spending on research and development, sales and marketing and customer support.
Some competitors may make strategic acquisitions or establish cooperative relationships
• Potentially limited intellectual property protection in certain countries, such as China,
may limit recourse against infringing products or cause Zebra to refrain from selling in
certain geographic territories.
• Staffi ng and managing international operations may be unusually diffi cult.
• Zebra may not be able to control international distributors working on its behalf.
19
Economic factors, which are outside Zebra’s control, could lead to deterioration in the
quality of Zebra’s accounts receivables.
Zebra sells its products to customers in the United States and several other countries
around the world. Sales are typically made on unsecured credit terms, which are
generally consistent with the prevailing business practices in a given country. A
deterioration of economic or political conditions in a country could impair Zebra’s ability
to collect on receivables in the affected country.
Zebra depends on the ongoing service of its senior management and ability to attract and
retain other key personnel.
Future success of Zebra is substantially dependent on the continued service and
continuing contributions of senior management and other key personnel. The loss of the
service of any executive offi cer or other key employees could adversely affect business.
Zebra has no long-term employment agreements with key personnel and maintains
minimal key man life insurance policies on its key employees.
Zebra mitigates interest rate risk with an investment policy that requires the use of
outside professional investment managers, investment liquidity and broad diversifi cation
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.
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, 2004 (in thousands,
except per share data).
Interest rate sensitive instruments
+ 1 percentage point movement
- 1 percentage point movement
Effect on
Pretax
Income
Effect on
Diluted EPS
(after tax)
$(6,174)
$ 6,174
$(0.06)
$ 0.06
The ability to attract, retain and motivate highly skilled employees is important to 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 other highly
qualifi ed employees in the future.
Because these securities are classifi ed as available-for-sale under SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, the impact of a one-
percentage point movement in interest rates occurs over an extended period of time as
investments are sold and the funds are subsequently reinvested.
Terrorist attacks or war could lead to further economic instability and adversely affect
Zebra’s stock price, operations, and profi tability.
The terrorist attacks that occurred in the United States on September 11, 2001 caused
major instability in the U.S. and other fi nancial markets. Possible further acts of terrorism
and current and future war risks could have a similar impact. The United States continues
to take military action against terrorism and is currently engaged in a costly occupation of
Iraq. These 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 economic instability. Any such attacks could, among other things, cause further
instability in fi nancial markets and could directly, or indirectly through reduced demand,
negatively affect Zebra’s facilities and operations or those of its customers or suppliers.
Taxing authority challenges may lead to tax payments exceeding current reserves.
Zebra operates in multiple tax jurisdictions in the United States and worldwide. Local tax
authorities may challenge Zebra’s tax positions from time to time. Adverse outcomes in
these situations may exceed Zebra’s reserves for tax payments and may increase Zebra’s
effective tax rate.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
Interest Rate Risk
Zebra is exposed to the impact of changes in interest rates because of our large
investment portfolio. As stated in our written investment policy, the investment portfolio
is viewed as a strategic resource that will be managed to achieve above market 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 an overriding
objective to preserve capital across each quarterly reporting cycle.
Foreign Exchange Risk
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 transaction and accounts receivable. We also purchase certain raw
materials and other items in foreign currencies. We manage these risks using derivative
fi nancial 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 fi nancial information
related to these activities follows (in thousands):
Change in gains (losses) from foreign
exchange derivatives
Gain on net foreign currency assets
$(1,246)
1,731
$(3,756)
3,204
Net foreign exchange gain (loss)
$ 485
$ (552)
$(2,579)
2,926
$ 347
Year Ended December 31,
2003
2004
2002
Notional balance of outstanding contracts:
Pound
Euro
December 31, December 31,
2003
2004
£13,646
€34,000
£8,569
€22,000
20
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 designated these
contracts as cash fl ow 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 fi nancial information related to the cash fl ow hedges of future revenues
follows (in thousands, except percentages):
Net unrealized losses deferred in other
comprehensive income:
Gross
Tax benefi t
Net
Notional balance of outstanding contracts
Hedge effectiveness
Net gain (loss) included in revenue for the:
Three months ended December 31, 2004
Three months ended December 31, 2003
Year ended December 31, 2004
Year ended December 31, 2003
December 31, December 31,
2003
2004
$(2,231)
781
$(1,450)
€30,000
100%
$(1,537)
538
$ (999)
€30,420
100%
2004
2003
$(1,077)
(1,639)
$(150)
266
The following table sets forth the impact of a one-percentage point movement in the
dollar/pound and dollar/euro rates measured as if Zebra did not engage in the selective
hedging practices described above. It is based on the dollar/euro and dollar/pound
exchange rates and euro and pound denominated assets and liabilities as of December
31, 2004 (in thousands, except per share data).
Foreign exchange
Dollar/pound
Dollar/euro
Effect on
Pretax
Income
Effect on
Diluted EPS
(after tax)
$ 321
$484
$0.00
$0.00
Equity Price Risk
From time to time, Zebra has taken direct equity positions in companies. These
investments relate to potential acquisitions and other strategic business opportunities.
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 portfolios of
investment funds (i.e., fund of funds). These investment funds use a variety of investment
strategies, some of which involve the use of equity securities. Each investment
manager’s portfolio is designed to be market neutral, although an individual fund within
a portfolio may be exposed to market risk. By policy, management limits the amount of
Zebra’s investments in alternative investment strategies to a maximum of 15% of the total
investment portfolio, with no single investment exceeding $15,000,000.
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 value of all equity positions held by Zebra’s investment managers (in thousands,
per share data).
Equity price sensitive instruments
+ 1 percentage point movement
- 1 percentage point movement
Effect on
Pretax
Income
Effect on
Diluted EPS
(after tax)
$ 400
$(400)
$ 0.00
$(0.00)
Item 8. Financial Statements and Supplementary Data
The fi nancial statements and schedule of the Company are annexed to this Report as
pages F-1 through F-22. An index to such materials appears on page F-1.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures
Not applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures (as defi ned in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of
the period covered by this Form 10-K. The controls evaluation was conducted under the
supervision of our Disclosure Committee, and with the participation of management,
including our Chief Executive Offi cer and Chief Financial Offi cer. Based on that evaluation,
our Chief Executive Offi ce and Chief Financial Offi cer, have concluded that our disclosure
controls and procedures were effective to provide reasonable assurance that (i) the
information required to be disclosed by us in this Annual Report on Form 10-K was recorded,
processed, summarized and reported within the time periods specifi ed in the SEC’s rules and
forms, and (ii) information required to be disclosed by us in our reports that we fi le or submit
under the Exchange Act is accumulated and communicated to our management, including
our principal executive and principal fi nancial offi cers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required disclosure.
21
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over fi nancial reporting as defi ned in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act to provide reasonable assurance regarding the reliability of our fi nancial
reporting and the preparation of the fi nancial statements for external purposes in
accordance with generally accepted accounting principles. Our management assessed
the effectiveness of our internal control over fi nancial reporting as of December 31, 2004.
In making this assessment, our management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-
Integrated Framework. Based on this assessment and those criteria, our management
believes that, as of December 31, 2004, our internal control over fi nancial reporting is
effective. Our independent registered public accounting fi rm, KPMG LLP, has issued an
attestation report on management’s assessment of Zebra’s internal control over fi nancial
reporting. That report is included on page 23 of this Report on Form 10-K.
Changes in Internal Control over Financial Reporting
During 2004, we made numerous changes to our controls and procedures as part of
our ongoing monitoring of our controls. However, none of these changes has materially
affected, or are reasonably likely to materially affect, our internal control over fi nancial
reporting.
Inherent Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Offi cer and Chief Financial Offi cer,
does not expect that our disclosure controls and procedures or our internal controls will
prevent or detect all errors and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the objectives
of the control system are met. Further, the design of a control system must refl ect the
fact that there are resource constraints, and the benefi ts of controls must be considered
relative to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that misstatements due to error or
fraud will not occur or that all control issues and instances of fraud, if any, within Zebra
have been detected.
These inherent limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake. Controls can
also be circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any system of controls is
based in part on certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under all potential
future conditions. Projections of any evaluation of controls effectiveness to future periods
are subject to risks. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with policies or procedures.
22
Commission (COSO). Also, in our opinion, the Company maintained, in all material
respects, effective internal control over fi nancial reporting as of December 31, 2004,
based on criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of Zebra
Technologies Corporation and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of earnings, comprehensive income, stockholders’
equity, and cash fl ows for each of the years in the three-year period ended December 31,
2004, and our report dated March 2, 2005 expressed an unqualifi ed opinion on those
consolidated fi nancial statements.
/s/KPMG LLP
Chicago, Illinois
March 2, 2005
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
of Zebra Technologies Corporation:
We have audited management’s assessment, included in the accompanying
Management’s Report on Internal Control over Financial Reporting, that Zebra
Technologies Corporation (the Company) maintained effective internal control over
fi nancial reporting as of December 31, 2004, based on criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). The Company’s management is responsible for
maintaining effective internal control over fi nancial reporting and for its assessment
of the effectiveness of internal control over fi nancial reporting. Our responsibility is to
express an opinion on management’s assessment and an opinion on the effectiveness of
the Company’s internal control over fi nancial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal
control over fi nancial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over fi nancial reporting,
evaluating management’s assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.
A company’s internal control over fi nancial reporting is a process designed to provide
reasonable assurance regarding the reliability of fi nancial reporting and the preparation
of fi nancial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over fi nancial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly refl ect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of fi nancial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the fi nancial statements.
Because of its inherent limitation, internal control over fi nancial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
In our opinion, management’s assessment that the Company maintained effective
internal control over fi nancial reporting as of December 31, 2004, is fairly stated, in
all material respects, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
23
PART III
SIGNATURES
Item 10. Directors and Executive Offi cers of the Registrant
We have adopted a Code of Ethics that applies to Zebra’s Chief Executive Offi cer, Chief
Financial Offi cer and the Vice President and Controller. The Code of Ethics is posted
on the investor page of Zebra’s Internet Web site, www.zebra.com, and is available for
download.
All other information in response to this item is incorporated by reference from the Proxy
Statement sections entitled “Election of Directors” and “Executive Offi cers.”
Item 11. Executive Compensation
The information in response to this item is incorporated by reference from the Proxy
Statement section entitled “Executive Compensation and Certain Transactions.”
Item 12. Security Ownership of Certain Benefi cial Owners and
Management and Related Stockholder Matters
The information in response to this item is incorporated by reference from the Proxy
Statement section entitled “Security Ownership of Management and Certain Benefi cial
Owners” and “Equity Compensation Plan Information.”
Item 13. Certain Relationships and Related Transactions
The information in response to this item is incorporated by reference from the Proxy
Statement section entitled “Executive Compensation and Certain Transactions.”
Item 14. Principal Accounting Fees and Services
The information in response to this item is incorporated by reference from the Proxy
Statement section entitled “Fees of Independent Auditors.”
PART IV
Item 15. Exhibits, Financial Statement Schedules
and Reports on Form 8-K
The fi nancial statements and schedule fi led as part of this report are listed in the
accompanying Index to Financial Statements and Schedule. The exhibits fi led as a part of
this report are listed in the accompanying Index to Exhibits.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 28th day of February 2005.
ZEBRA TECHNOLOGIES CORPORATION
By: /s/Edward L. Kaplan
Edward L. Kaplan
Chairman and
Chief Executive Offi cer
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Report has
been signed below by the following persons in the capacities and on the dates indicated.
Signature
Title
Date
/s/Edward L. Kaplan
Edward L. Kaplan
Chief Executive Offi cer and
Chairman of the Board of Directors
(Principal Executive Offi cer)
/s/Gerhard Cless
Gerhard Cless
Executive Vice President
and Director
February 28, 2005
February 28, 2005
/s/Charles R. Whitchurch
Charles R. Whitchurch
Chief Financial Offi cer and Treasurer
(Principal Financial and Accounting Offi cer)
February 28, 2005
/s/Christopher G. Knowles Director
Christopher G. Knowles
/s/Ross W. Manire
Ross W. Manire
/s/Robert J. Potter
Robert J. Potter
/s/Michael A. Smith
Michael A. Smith
Director
Director
Director
February 28, 2005
February 28, 2005
February 28, 2005
February 28, 2005
24
Index to Exhibits
(1) Certifi cate of Incorporation of the Registrant.
10.16
(2) Amendment No. 1 to the 2002 Non-Employee Director Stock Option Plan. +
10.17
(2)
2002 Non-Employee Director Stock Option Plan Non-Qualifi ed Stock
Option Agreement. +
(2) Certifi cate of Amendment to Certifi cate of Incorporation of the Registrant.
10.18 (15)
2005 Executive Deferred Compensation Plan. +
(3) Certifi cate of Amendment to Certifi cate of Incorporation of the Registrant.
(4) Bylaws of the Registrant.
(5) Amendment to Bylaws of the Registrant.
(2) Amendment to Bylaws of the Registrant.
(3) Amendment to Bylaws of the Registrant.
(3) Amendment to Bylaws of the Registrant.
(6) Amendment to Bylaws of the Registrant.
(4) Specimen stock certifi cate representing Class A Common Stock.
(6)
(7)
(8)
Rights Agreement between the Registrant and Mellon Investor Services,
as Rights Agent.
1997 Stock Option Plan. +
First Amendment to the 1997 Stock Option Plan. +
(8) Second Amendment to the 1997 Stock Option Plan. +
(9) Third Amendment to the 1997 Stock Option Plan. +
10.19
10.20
21.0
23.1
31.1
31.2
32.1
32.2
Employment Agreement dated July 17, 1997 and Interoffi ce Memorandum
dated January 27, 1997 between the Registrant and Charles R. Whitchurch. +
Employment Agreement between the Registrant and Veraje Anjargolian,
dated April 1, 1997. +
Subsidiaries of the Registrant.
Consent of KPMG LLP, independent auditors.
Certifi cation pursuant to Rule 13a-14(a)/15d-14(a).
Certifi cation pursuant to Rule 13a-14(a)/15d-14(a).
Certifi cation Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Certifi cation Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
4.0
4.1
10.1
10.2
10.3
10.4
10.5
(10) Amendment No. Four to the 1997 Stock Option Plan. +
10.6
10.7
(8)
(4)
Form of Stock Option Agreement. +
Form of Indemnifi cation Agreement between the Registrant and each
of its directors.
10.8
(4)
Lease between the Registrant and Unique Building Corporation for the
Registrant’s facility in Vernon Hills, Illinois, as amended.
10.9
(7) Directors’ 1997 Stock Option Plan.+
10.10 (11)
10.11 (12)
10.12 (13)
10.13 (13)
10.14 (14)
Amendment to the lease between the Registrant and Unique Building
Corporation for the Registrant’s facility in Vernon Hills, Illinois,
dated April 1, 1993.
Amendment to the lease between the Registrant and Unique Building
Corporation for the Registrant’s facility in Vernon Hills, Illinois,
dated December 1, 1994.
Amendment to the lease between the Registrant and Unique Building
Corporation for the Registrant’s facility in Vernon Hills, Illinois,
dated June 1, 1996.
Amendment to the lease between the Registrant and Unique Building
Corporation for the Registrant’s facility in Vernon Hills, Illinois,
dated June 2, 1996.
Amendment to the lease between the Registrant and Unique Building
Corporation for the Registrant’s facility in Vernon Hills, Illinois,
dated as of July 1, 1999.
10.15
(2)
2002 Non-Employee Director Stock Option Plan. +
25
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Previously fi led with the Securities and Exchange Commission as an
Exhibit to the Company’s Registration Statement on Form S-3, File No. 333-
33315, and incorporated herein by reference.
Previously fi led with the Securities and Exchange Commission as an
Exhibit to the Company’s Form 10-Q for the quarterly period ended June
29, 2002, and incorporated herein by reference.
Previously fi led with the Securities and Exchange Commission as an
Exhibit to the Company’s Form 10-Q for the quarterly period ended June
28, 2003.
Previously fi led with the Securities and Exchange Commission as an
Exhibit to the Company’s Registration Statement on Form S-1, as amended,
File No. 33-41576, and incorporated herein by reference.
Previously fi led with the Securities and Exchange Commission as an
Exhibit to the Company’s Annual Report on Form 10-K for the fi scal year
ended December 31, 1992, and incorporated herein by reference.
Previously fi led with the Securities and Exchange Commission as an
Exhibit to the Company’s Form 10-Q for the quarterly period ended March
30, 2002, and incorporated herein by reference.
Previously fi led with the Securities and Exchange Commission as an
Exhibit to the Company’s Annual Report on Form 10-K for the fi scal year
ended December 31, 1997, and incorporated herein by reference.
Previously fi led with the Securities and Exchange Commission as an
Exhibit to the Company’s Registration Statement on Form S-8, File No.
333-63009, and incorporated herein by reference.
(9)
(10)
(11)
(12)
(13)
(14)
(15)
Previously fi led with the Securities and Exchange Commission as an
Exhibit to the Company’s Registration Statement on Form S-8, File No. 333-
84512, and incorporated herein by reference.
Previously fi led with the Securities and Exchange Commission as an
Exhibit to the Company’s Form 10-Q for the quarterly period ended
September 28, 2002, and incorporated herein by reference.
Previously fi led with the Securities and Exchange Commission as an
Exhibit to the Company’s Annual Report on Form 10-K for the fi scal year
ended December 31, 1993, and incorporated herein by reference.
Previously fi led with the Securities and Exchange Commission as an
Exhibit to the Company’s Annual Report on Form 10-K for the fi scal year
ended December 31, 1994, and incorporated herein by reference.
Previously fi led with the Securities and Exchange Commission as an
Exhibit to the Company’s Annual Report on Form 10-K for the fi scal year
ended December 31, 1996, and incorporated herein by reference.
Previously fi led with the Securities and Exchange Commission as an
Exhibit to the Company’s Form 10-Q for the quarterly period ended April 1,
2000, and incorporated herein by reference.
Previously fi led with the Securities and Exchange Commission as an
Exhibit to the Company’s Current Report on Form 8-K fi led on February 9,
2005, and incorporated herein by reference.
+
Management contract or compensatory plan or arrangement required to be
fi led as an exhibit to this Annual Report on Form 10-K.
26
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
The Board of Directors and Stockholders
of Zebra Technologies Corporation:
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2004 and 2003
Consolidated Statements of Earnings for the years ended
December 31, 2004, 2003, and 2002
Consolidated Statements of Comprehensive Income
for the years ended December 31, 2004, 2003, and 2002
Consolidated Statements of Stockholders’ Equity
for the years ended December 31, 2004, 2003, and 2002
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003, and 2002
Notes to Consolidated Financial Statements
Financial Statement Schedule
Page
F-1
F-2
F-3
F-4
F-5
F-6
F-7
The following fi nancial statement schedule is included herein:
Schedule II - Valuation and Qualifying Accounts
F-22
All other fi nancial statement schedules are omitted because they are not applicable or the
required information is shown in the consolidated fi nancial statements or notes thereto.
We have audited the accompanying consolidated balance sheets of Zebra Technologies
Corporation and subsidiaries (the Company) as of December 31, 2004 and 2003, and the
related consolidated statements of earnings, comprehensive income, stockholders’ equity,
and cash fl ows for each of the years in the three-year period ended December 31, 2004. In
connection with our audits of the consolidated fi nancial statements, we also have audited
the consolidated fi nancial statement schedule of valuation and qualifying accounts. These
consolidated fi nancial statements and the consolidated fi nancial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an opinion on
these consolidated fi nancial statements and the consolidated fi nancial statement schedule
based on our audits.
We conducted our audits in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the fi nancial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the fi nancial statements. An audit also includes
assessing the accounting principles used and signifi cant estimates made by management,
as well as evaluating the overall fi nancial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated fi nancial statements referred to above present fairly, in
all material respects, the fi nancial position of the Company as of December 31, 2004 and
2003, and the results of their operations and their cash fl ows for each of the years in the
three-year period ended December 31, 2004, in conformity with U. S. generally accepted
accounting principles. Also, in our opinion, the related consolidated fi nancial statement
schedule, when considered in relation to the basic consolidated fi nancial statements taken
as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal control over
fi nancial reporting as of December 31, 2004, based on the criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated March 2, 2005 expressed an
unqualifi ed opinion on management’s assessment of, and the effective operation of, internal
control over fi nancial reporting.
/s/KPMG LLP
Chicago, Illinois
March 2, 2005
F-1
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents
Investments and marketable securities
Accounts receivable, net of allowances of $1,561 in 2004 and $1,388 in 2003
Inventories, net
Deferred income taxes
Prepaid expenses
Total current assets
Property and equipment at cost, net of accumulated depreciation and amortization
Goodwill
Other intangibles, net
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
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated fi nancial statements.
December 31,
2004
December 31,
2003
$ 17,983
540,010
96,881
59,255
6,625
3,884
724,638
46,283
61,793
6,517
22,991
$862,222
$ 24,130
29,248
54
6,144
59,576
117
417
564
3,894
64,568
—
718
84,180
706,489
6,267
797,654
$ 14,266
433,582
81,867
42,781
4,507
4,415
581,418
39,286
61,150
9,031
10,726
$701,611
$ 16,238
26,938
153
2,273
45,602
452
723
518
2,401
49,696
—
711
61,929
585,846
3,429
651,915
$862,222
$701,611
F-2
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands, except per share data)
Net sales
Cost of sales
Gross profi t
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
Basic weighted average shares outstanding
Diluted weighted average and equivalent shares outstanding
See accompanying notes to consolidated fi nancial statements.
F-3
2004
$663,054
319,895
343,159
77,062
37,093
49,097
2,569
22
2,100
—
46
167,989
175,170
10,628
(44)
485
(1,691)
9,378
184,548
63,905
Year Ended December 31,
2003
$536,397
263,320
273,077
66,635
31,759
41,892
1,640
692
1,232
—
9
143,859
129,218
8,553
(154)
(552)
(1,073)
6,774
135,992
44,296
2002
$475,611
244,864
230,747
56,176
29,210
38,689
1,494
—
—
3,300
73
128,942
101,805
10,004
(319)
347
(954)
9,078
110,883
39,288
$120,643
$ 91,696
$ 71,595
$ 1.69
$ 1.66
71,556
72,539
$ 1.30
$ 1.28
70,647
71,495
$ 1.03
$ 1.02
69,678
70,305
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Net income
Other comprehensive income (loss):
Foreign currency translation adjustment
Changes in unrealized gain/loss on hedging transactions, net of income taxes
Changes in unrealized holding gains/loss on investments, net of income taxes
Comprehensive income
See accompanying notes to consolidated fi nancial statements.
2004
$120,643
3,402
(451)
(113)
$123,481
Year Ended December 31,
2003
$91,696
4,110
(999)
346
$95,153
2002
$71,595
2,968
—
(1,603)
$72,960
F-4
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in thousands)
Balance at December 31, 2001
$586
$124
$58,617
$422,555
$(35,482)
$(1,393)
$445,007
Class A
Common
Stock
Class B
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Treasury Comprehensive
Stock
Income (Loss)
Total
Conversion of 3,693,876 shares of Class B Common Stock
to 3,693,876 shares of Class A Common Stock
Reissuance of 575,976 treasury shares upon exercise of
stock options and purchases under stock purchase plan
Tax benefi t 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 8,743,612 shares of Class B Common Stock
to 8,743,612 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 benefi t 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
Issuance of 725,274 common shares upon exercise of stock
options and purchases under stock purchase plan
Payment for fractional shares in 3-for-2 stock split
Tax benefi t 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, 2004
See accompanying notes to consolidated fi nancial statements.
F-5
37
—
—
—
—
—
623
87
—
1
—
—
—
—
—
—
711
7
—
—
—
—
—
—
$718
(37)
—
—
—
—
—
—
—
—
—
—
87
(5,616)
3,082
—
—
—
56,083
(87)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,630)
2,631
(142)
4,987
—
—
—
—
61,929
15,524
(238)
6,965
—
—
—
—
$84,180
—
—
71,595
—
—
494,150
—
—
—
—
—
91,696
—
—
—
585,846
—
—
—
120,643
—
—
—
$706,489
18,722
—
—
—
—
(16,760)
—
16,760
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,603)
2,968
13,106
3,082
71,595
(1,603)
2,968
(28)
534,155
—
—
—
—
—
—
346
(999)
4,110
3,429
—
—
—
—
(113)
(451)
3,402
—
15,130
2,632
(142)
4,987
91,696
346
(999)
4,110
651,915
15,531
(238)
6,965
120,643
(113)
(451)
3,402
$ 6,267
$797,654
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Cash fl ows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization
Tax benefi t 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 fl ows from investing activities:
Purchases of property and equipment
Acquisition of Atlantek, Inc., net of cash acquired
Purchases of investments and marketable securities
Maturities of investments and marketable securities
Sales of investments and marketable securities
Net cash used in investing activities
Cash fl ows from fi nancing activities:
Proceeds from exercise of stock options and stock purchase plan purchases
Payments for obligation under capital lease
Other fi nancing activities
Net cash provided by fi nancing 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 fl ow information:
Interest paid
Income taxes paid
Supplemental disclosures of non-cash transactions:
Conversion of Class B Common Stock to Class A Common Stock
Assets under capital lease obligation
See accompanying notes to consolidated fi nancial statements.
2004
Year Ended December 31,
2003
2002
$ 120,643
$ 91,696
$ 71,595
12,255
6,965
22
—
—
(2,358)
(11,491)
(15,456)
(11,492)
6,420
1,974
3,720
54
—
111,256
(16,243)
—
(1,287,388)
861,249
319,711
(122,671)
15,531
(434)
(238)
14,859
273
3,717
14,266
11,580
4,987
692
—
—
(697)
(5,141)
(1,659)
350
(3,156)
6,909
(962)
(2,196)
—
102,403
(8,407)
(13,680)
(1,055,125)
894,165
57,537
(125,510)
17,762
(200)
(142)
17,420
1,535
(4,152)
18,418
$ 17,983
$ 14,266
$ 44
56,055
$ 154
38,779
—
—
87
—
12,259
3,082
—
1,360
193
(616)
(1,629)
2,922
3,969
(939)
2,607
(896)
1,241
(111,997)
(16,849)
(8,481)
—
—
—
3,499
(4,982)
13,106
(117)
—
12,989
932
(7,910)
26,328
$ 18,418
$ 319
33,840
37
333
F-6
ZEBRA TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Description of Business
Zebra Technologies Corporation and its wholly-owned subsidiaries (Zebra) design,
manufacture, sell and support a broad range of direct thermal and thermal transfer label
printers, radio frequency identifi cation printer/encoders, dye sublimation card printers,
digital photo printers and related accessories and support software. These products
are used principally in automatic identifi cation (auto ID), data collection and personal
identifi cation applications and are distributed world-wide through a network of resellers,
distributors and end users representing a wide cross-section of industrial, service and
government organizations.
Note 2 Summary of Signifi cant Accounting Policies
Principles of Consolidation. These consolidated fi nancial statements were prepared on a
consolidated basis to include the accounts of Zebra and its wholly owned subsidiaries. All
signifi cant intercompany accounts, transactions and unrealized profi t were eliminated in
consolidation.
Use of Estimates. These consolidated fi nancial statements were prepared using estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities as of the date of the consolidated fi nancial statements
and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents. Cash consists primarily of deposits with banks. In addition,
Zebra considers highly liquid short-term investments with original maturities of less than
seven days to be cash equivalents.
Investments and Marketable Securities. Investments and marketable securities at
December 31, 2004, consisted of U.S. government securities, state and municipal bonds,
partnership interests and equity securities, which are held indirectly in diversifi ed funds
actively managed by investment professionals. Zebra classifi es its debt and marketable
equity securities in one of three categories: trading, available-for-sale or held-to-maturity.
Trading securities are bought and held principally for the purpose of selling them in the
near term. Held-to-maturity securities are those securities that Zebra has the ability and
intent to hold until maturity. All securities not included in trading or held-to-maturity are
classifi ed as available-for-sale.
Trading and available-for-sale securities are recorded at fair value. Held-to-maturity
securities are recorded at amortized cost, adjusted for the amortization or accretion of
discounts or premiums. Unrealized holding gains and losses on trading 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.
Inventories. Inventories are stated at the lower of cost or market, and cost is determined
by the fi rst-in, fi rst-out (FIFO) method.
Property and Equipment. Property and equipment is stated at cost. Depreciation 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 30 years for
buildings and range from 3 to 10 years for other property. Property and equipment held
under capital leases is amortized using the straight-line method over the shorter of the
lease term or estimated useful life of the asset.
Income Taxes. Zebra accounts for income taxes under the asset and liability method.
Accordingly, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the fi nancial statement carrying
amounts of existing assets and liabilities and their respective tax 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 differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Intangible Assets. Goodwill represents the unamortized excess of the cost of acquiring
a business over the fair values of the net assets received at the date of acquisition.
Goodwill is no longer being amortized as required by SFAS No. 142, Goodwill and Other
Intangible Assets.
We test the impairment of goodwill each year or whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. We completed our
last assessment during June 2004.
We evaluate the impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable.
Factors considered that might trigger an impairment review consist of:
• Signifi cant underperformance relative to expected historical or projected future
operating results
• Signifi cant changes in the manner of use of the acquired assets or the strategy for the
overall business
• Signifi cant negative industry or economic trends
• Signifi cant decline in Zebra’s stock price for a sustained period
• Signifi cant 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 fl ow using a discount rate
that incorporates the risk inherent in the cash fl ows.
Other intangible assets consist primarily of current technology and customer
relationships. These assets are recorded at cost and amortized on a straight-line basis
over 5 to 8 years. Accumulated amortization for these other intangible assets was
$8,074,000 and $5,505,000 at December 31, 2004 and 2003, respectively.
F-7
Revenue Recognition. Revenue includes sales of hardware, supplies, software and
services (including repair services, extended service contracts, and professional
services). Product revenue is recognized when product has been shipped, risk of loss
has passed to the purchaser, and Zebra has fulfi lled all of its obligations. We provide
for an estimate of product returns based on historical experience. Revenue related to
extended warranty and service contracts is recorded as deferred income and recognized
over the life of the contract. Professional services revenue is recorded when performed.
From time to time, Zebra will enter into sales transactions that include more than one
product type. This bundle of products might include printers, current or future supplies,
and services. When this type of transaction occurs, we allocate the purchase price to
each product type based on the fair value of the individual products. The revenue for
each individual product is then recognized when the earning process for that product is
complete.
Zebra records payments to resellers of its product as reductions to revenue unless these
payments meet the requirements for operating expense treatment under EITF 01-09
Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of
the Vendor’s Products). See the market development funds accounting policy for further
details.
received by Zebra. These payments are treated as marketing costs consistent with the
requirements of EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor’s Products). Any payments to resellers that do not
meet these requirements are recorded as reductions to revenue.
Warranty. Zebra provides warranty coverage of up to one year on printers against defects
in material and workmanship. A provision for warranty expense is recorded at the time of
shipment and adjusted quarterly based on historical warranty experience. The following
is a summary of Zebra’s accrued warranty obligation during the years ended December
31, 2004 and 2003.
Accrued warranty – beginning balance
Add: warranty expense
Deduct: warranty payments
Accrued warranty – ending balance
2004
$ 1,351
3,209
2,869
$ 1,691
2003
$ 1,090
3,095
2,834
$ 1,351
2002
$ 1,021
2,564
2,495
$ 1,090
Fair Value of Financial instruments. Zebra estimates the fair value of its fi nancial
instruments as follows:
Revenue includes all customer billings for shipping and handling charges. The related
costs of shipping and handling revenue are recorded as cost of goods sold.
Instrument
Method for determining fair value
Research and Development Costs. Research and development costs are expensed as
incurred. These costs include:
• Salaries, benefi ts, and other R&D personnel related costs
• Consulting and other outside services used in the R&D process
• Engineering supplies
• Engineering related information systems costs
• Allocation of building and related costs
From time to time, Zebra will provide engineering and development services to third
parties on a contract basis. Zebra does not guarantee the outcome of this research
and does not retain any obligation to repay third-party funding received for these
contract services. Since these services are not part of our standard product offering,
we treat payments received under these arrangements as reductions to research and
development costs.
Advertising. Advertising costs are expensed as incurred. Advertising expenses for
the years ended December 31, 2004, 2003 and 2002 totaled $5,117,000, $3,721,000 and
$3,965,000, respectively.
Market Development Funds. Zebra makes market development funds available to its
resellers to support demand generation activity by the resellers. These funds require the
reseller to provide specifi c services or benefi ts to Zebra and substantiate the fair value
of such. Zebra reimburses resellers for agreed activities up to the fair value of the benefi t
Cash, cash equivalents, accounts
receivable, accounts payable and
accrued liabilities
Investments and marketable securities
Foreign currency forward contracts
Foreign currency option contracts
Cost, which approximates fair value due to
the short-term nature of these instruments
Market quotes from independent pricing
services
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
In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, we recognize derivative instruments and hedging activities as either assets or
liabilities on the balance sheet and measure them at fair value. Gains and losses resulting
from changes in fair value are accounted for depending on the use of the derivative and
whether it is designated and qualifi es for hedge accounting. See Note 15 for additional
information on our derivatives and hedging activities.
F-8
Stock-based Compensation. At December 31, 2004, Zebra has three stock-based
compensation plans, which are described more fully in Note 3. Zebra accounts for those
plans using the intrinsic method in accordance with the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based compensation cost is refl ected in net income, as all
options granted under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates the effect
on net income and earnings per share if Zebra had applied the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-based Compensation, to stock-based
compensation.
Net income, as reported
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
Year Ended December 31,
2004
2003
$120,643
$91,696
2002
$71,595
(5,501)
(5,374)
(5,102)
$ 115,142
$86,322
$66,493
$ 1.69
1.61
$ 1.66
1.59
$ 1.30
1.22
$ 1.28
1.21
$ 1.03
0.95
$ 1.02
0.95
Deferred Compensation Plan. Zebra has a deferred compensation plan that permits
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 into hypothetical investments.
Zebra tracks the performance of these hypothetical investments in order to determine
the value of each participant’s deferral. Zebra accrues the deferred compensation liability
in other long-term liabilities as the amount that is actually owed to the participants. Our
deferred compensation liability was $3,894,000 as of December 31, 2004, and $2,401,000
as of December 31, 2003. Zebra actually invests the funds in company owned life
insurance policies, in which Zebra is the benefi ciary, to fund the ultimate payment of the
deferred compensation. These polices are valued at the cash surrender value and are
included other assets.
Foreign Currency Translations. 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
year. The resulting translation gains or losses are recorded in stockholders’ equity
as a cumulative translation adjustment, which is a component of accumulated other
comprehensive income.
Capitalized Software. Zebra’s investment in software development consists primarily
of enhancements to its existing E-commerce web-based application, which will include
the automation of current business activities. Specifi cally, the activities include the
processing of customer orders; the acknowledgement of customer orders and delivery;
and the fi nancial invoicing for all of Zebra’s products and will aid in enabling Zebra to
create new business effi ciencies.
Costs associated with the planning and design phases of web-based development,
including coding and testing activities necessary to establish technological feasibility 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 and are amortized over their estimated useful lives.
Acquisition Costs. Zebra periodically has expenditures related to potential acquisitions.
These expenditures are recorded as prepaid expenses until such time as Zebra either
completes 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,
the costs are expensed during the period in which it is abandoned. During 2002,
operating expenses included $3,300,000 of costs related to such an abandonment.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of. Zebra
accounts for long-lived assets in accordance with the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. The statement requires
that long-lived assets and certain identifi able intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to the sum of the undiscounted cash
fl ows expected to result from the use and the 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 amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
Recently Issued Accounting Pronouncements. In March 2004, the FASB issued Emerging
Issues Task Force Issue No. 03-1 (EITF 03-1), The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments, which provides new guidance
for assessing impairment losses on investments. Additionally, EITF 03-1 includes new
disclosure requirements for investments that are deemed to be temporarily impaired. In
September 2004, the FASB delayed the accounting provisions of EITF 03-1; however, the
disclosure requirements remain effective for annual periods ending after June 15, 2004.
We will evaluate the impact of EITF 03-1 once fi nal guidance is issued. See Note 7 for
added disclosures.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs – an amendment
of ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4,
“Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43,
F-9
Chapter 4, previously stated that these costs may be “so abnormal” that they would
require treatment as current period charges. This statement requires that those items be
recognized as current-period charges regardless of whether they meet the criterion of “so
abnormal”. This statement also requires that allocation of fi xed production overheads to
the costs of conversion be based on the normal capacity of the production facilities. This
statement describes our current process; therefore, it will not have any impact on our
fi nancial position or results of operations.
In December 2004, the FASB issued SFAS No. 123(R) (revised 2004), Share Based
Payment, which is a revision of SFAS 123, Accounting for Stock-Based Compensation,
and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees and its
related implementation guidance. SFAS No. 123 (R) focuses primarily on accounting for
transactions in which an entity obtains employee services through share-based payment
transactions. It requires a public entity to measure the cost of employee services
received in exchange for the award of equity instruments based on the fair value of the
award at the date of grant. The cost will be recognized over the period during which an
employee is required to provide services in exchange for the award. The provisions of
this statement become effective for Zebra during the third quarter of 2005. We expect the
impact on Zebra’s consolidated fi nancial statements to be consistent with the fair value
disclosures included in our critical accounting policies and Note 2 to the consolidated
fi nancial statements.
In December 2004, the FASB issued FSP FAS 109-1, Application of FASB No. 109,
Accounting forIincome Taxe, to the Tax Deduction on Qualifi ed Production Activities
Provided by the American Jobs Creation Act of 2004. FSP FAS No. 109-1 clarifi es SFAS No.
109’s guidance that applies to the new tax deduction for qualifi ed domestic production
activities. FSP No. 109-1 became effective upon issuance and we believe that this
pronouncement will have an insignifi cant impact on our effective tax rate in 2005.
In December 2004, the FASB issues FSP FAS 109-2, Accounting and Disclosure Guidance
for the Foreign Repatriation Provision within the American Jobs Creation Act of 2004. FSP
FAS 109-2 provides implementation guidance related to the repatriation provision of the
American Jobs Creation Act of 2004. We have completed our assessment of earning of
foreign subsidiaries that might be repatriated. At this time we do not expect to repatriate
the earnings of our foreign subsidiaries as dividends to take advantage of this tax credit.
Reclassifi cations. Certain amounts in the prior years’ fi nancial statements have been
reclassifi ed to conform to the current year’s presentation.
Note 3 Stock Based Compensation
As of December 31, 2004, Zebra has three active stock option and stock purchase plans,
which are described below.
The Board of Directors adopted the 1997 Stock Option Plan, effective February 11, 1997,
and 9,562,500 shares of Class A Common Stock were reserved for issuance under the
plan. The 1997 Stock Option Plan is a fl exible plan that provides the committee that
administers the Plan broad discretion to fashion the terms of the awards to provide
eligible participants with stock-based incentives, including: (i) nonqualifi ed and
incentive stock options for the purchase of Zebra’s Class A Common Stock and (ii)
dividend equivalents. The persons eligible to participate in the 1997 Stock Option Plan
are directors, offi cers, and employees of Zebra or any subsidiary of Zebra who, in the
opinion of the committee administering the plan, are in a position to make contributions
to the growth, management, protection and success of Zebra or its subsidiaries. As of
December 31, 2004, 2,735,718 shares were available under the plan.
The options granted under the 1997 Stock Option Plan have an exercise price equal to
the closing market price of Zebra’s stock on the date of grant. The options generally vest
over two- to fi ve-year periods and have a legal life of ten years from the date of grant. The
Compensation Committee of the Board of Directors administers the plan.
Zebra’s Board of Directors adopted the 1997 Director Plan, effective February 11, 1997.
The 1997 Director Plan provides for the issuance of options to purchase up to 173,250
shares of Class A Common Stock, which shares are reserved and available for purchase
upon the exercise of options granted under the 1997 Director Plan. Only directors who
are not employees or offi cers of Zebra are eligible to participate in the 1997 Director Plan.
Under the 1997 Director Plan, each non-employee director was granted, on the effective
date of the plan, an option to purchase 33,750 shares of Class A Common Stock, and
each non-employee director subsequently elected to the Board will be granted an option
to purchase shares of Class A Common Stock on the date of his or her election. Options
granted under the 1997 Director Plan provide for the purchase of Class A Common Stock at
a price equal to the fair market value on the date of grant. If there are not suffi cient shares
remaining and available to all non-employee directors eligible for an automatic grant at
the time at which an automatic grant would otherwise be made, then each eligible non-
employee director shall receive an option to purchase a pro rata number of shares. Unless
otherwise provided in an option agreement, options granted under the 1997 Director
Plan shall become exercisable in fi ve equal increments beginning on the date of the grant
and on each of the fi rst four anniversaries thereof. All options expire on the earlier of (a)
ten years following the grant date or (b) the second anniversary of the termination of the
non-employee director’s directorship for any reason other than due to death or disability
(as defi ned in the 1997 Director Plan). A total of 118,125 shares were issued under this
plan, which was terminated February 1, 2002. At December 31, 2004, 11,250 options issued
under the 1997 Director Plan remained outstanding and unexercised.
The Board of Directors and stockholders adopted the 2001 Stock Purchase Plan and
reserved 1,125,000 shares of Class A Common Stock for issuance under the plan. Under
this plan, employees who work a minimum of 20 hours per week may elect to withhold
up to 10% of their cash compensation through regular payroll deductions to purchase
shares of Class A Common Stock from Zebra over a period not 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, 2004, 298,763 shares have been purchased
under the plan.
Zebra’s Board of Directors adopted the 2002 Director Plan, effective February 1, 2002.
The 2002 Director Plan provides for the issuance of options to purchase up to 360,000
shares of Class A Common Stock, which shares are reserved and available for purchase
F-10
upon the exercise of options granted under the 2002 Director Plan. Only directors who
are not employees or offi cers of Zebra are eligible to participate in the 2002 Director
Plan. Under the 2002 Director Plan, each non-employee director was granted, on the
effective date of the plan, an option to purchase 45,000 shares of Class A Common Stock,
and each non-employee director subsequently elected to the Board will be granted an
option to purchase shares of Class A Common Stock on the date of his or her election
or appointment. Options granted under the 2002 Director Plan provide for the purchase
of Class A Common Stock at a price equal to the fair market value on the date of grant.
If there are not suffi cient shares remaining and available to all non-employee directors
eligible for an automatic grant at the time at which an automatic grant would otherwise
be made, then each eligible non-employee director shall receive an option to purchase a
pro rata number of shares. As of December 31, 2004, 187,932 shares were available under
the plan. Unless otherwise provided in an option agreement, options granted under the
2002 Director Plan shall become exercisable in fi ve equal increments beginning on the
date of the grant and on each of the fi rst four anniversaries thereof. All options expire
on the earlier of (a) ten years following the grant date, (b) the fi rst anniversary of the
termination date of the non-employee director’s directorship for any reason other than
those listed in clause (c) below, or (c) the termination of the non-employee director’s
directorship by Zebra’s stockholders for cause, or resignation for cause, in each case as
defi ned in the option agreement.
For purposes of calculating the compensation cost consistent with SFAS No. 123, the fair
value of each stock option grant is estimated on the date of grant using the Black-Scholes
option-pricing model. The following table shows the weighted-average assumptions
used for stock option grants as well as the fair value of the options granted based on
those assumptions:
Expected dividend yield
Volatility
Risk free interest rate
Expected weighted-average life
Fair value of options granted
Weighted-average grant date fair value
of options granted
2004
2003
2002
0%
50%
3.25%
Six years
$8,178,000
0%
53%
3.29%
Six years
$11,490,000
0%
53%
4.55%
Six years
$19,676,000
$24.56
$14.00
$12.17
The fair value of the employees’ purchase rights issued under 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
2004
$49.76
$42.29
0%
32%
1.19%
2003
$29.44
$25.02
0%
27%
1.06%
2002
$22.73
$19.32
0%
40%
2.17%
Stock option activity for the years ended December 31, 2004, 2003, and 2002 was as follows:
Fixed Options
Outstanding at beginning of year
Granted
Exercised
Canceled
Outstanding at end of year
Options exercisable at end of year
2004
Weighted-Average
Exercise Price
$21.61
47.37
18.64
24.91
$25.37
$19.77
Shares
3,159,243
333,001
(660,466)
(237,796)
2,593,982
712,088
2003
Weighted-Average
Exercise Price
$19.34
27.02
17.20
21.92
$21.61
$17.64
Shares
3,729,805
867,865
(893,698)
(544,729)
3,159,243
693,855
2002
Weighted-Average
Exercise Price
$ 17.05
21.79
14.26
21.41
$19.34
$15.49
Shares
3,176,715
1,617,192
(769,478)
(294,624)
3,729,805
861,203
The following table summarizes information about fi xed stock options outstanding at December 31, 2004:
Range of
Exercise Prices
$ 10.74-$18.17
$ 19.33-$21.62
$ 21.62-$25.23
$ 25.23-$39.27
$ 39.27-$53.92
F-11
Number
of Shares
534,899
828,925
547,938
367,669
315,551
2,593,982
Options Outstanding
Weighted-Average
Remaining Contractual Life
Weighted-Average
Exercise Price
Number
of Shares
Weighted-Average
Exercise Price
Options Exercisable
4.95 years
7.00 years
8.08 years
6.26 years
9.14 years
$15.30
21.57
25.16
30.07
47.38
338,099
159,970
42,654
171,365
—
712,088
$13.66
21.57
25.15
28.80
—
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
Wakefi eld, Rhode Island, Atlantek had been a privately held company. Atlantek designs
and manufactures thermal digital printers. The consolidated statements of earnings
refl ect the results of operations of Atlantek since the effective date of the acquisition. The
pro forma impact of this acquisition was not signifi cant.
The following table (in thousands) summarizes the adjusted fair values of the assets
acquired and liabilities assumed at the date of acquisition.
At November 17, 2003
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
$ 3,887
670
7,884
6,619
19,060
(2,369)
(2,825)
(186)
(5,380)
$ 13,680
The purchase price was allocated to identifi able tangible assets and intangible assets
acquired and liabilities assumed based on their estimated fair values. Of the $7,884,000
of acquired intangible assets, $714,000 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 Accounted for by
the Purchase Method. The write-off of in-process technology is stated separately in the
operating expense section of the consolidated statements of earnings. The remaining
$7,170,000 of acquired intangible assets consists of current technology of $4,837,000 with
useful lives from 5 to 6 years and customer relationships of $2,333,000 with a useful life
of 8 years. The goodwill is not deductible for tax purposes.
The transaction called for two payments in addition to the original payment, which are
contingent upon revenue related to specifi c products for the fi rst two years after the
acquisition. These payments were not assured beyond a reasonable doubt at the time of
the acquisition. During the fourth quarter of 2004, the fi rst of these payments was made
for $632,000 and added to goodwill. One additional and fi nal payment may be made in
the fourth quarter of 2005 and would be added to goodwill at that time.
Acquisition Termination Costs and Sale of Investment. In the fi rst 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 purchase preferred
stock) of Fargo Electronics, Inc. for $7.25 per share in cash. In connection with the
termination, Zebra recorded $3,300,000 in expenses for capitalized acquisition costs
and other acquisition costs that would otherwise have been capitalized. 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.
Note 5 Stockholders’ Equity
Share count and par value data related to stockholders’ equity are as follows:
Preferred Stock
Par value per share
Shares authorized
Shares outstanding
Common Stock—Class A
Par value per share
Shares authorized
Shares issued
Shares outstanding
December 31,
2004
December 31,
2003
$0.01
10,000,000
—
$0.01
78,358,189
71,819,806
71,819,806
$0.01
10,000,000
—
$0.01
78,358,189
71,098,953
71,098,953
On July 15, 2004, the Board of Directors authorized a fi fty percent (50%) stock dividend
on each issued share of Class A common stock payable before the close of business on
August 25, 2004, to holders of all such shares at the close of business on July 29, 2004.
All share counts and per-share amounts have been restated to refl ect this stock dividend.
During 2004, Zebra sold put options indexed in our own stock that would, if exercised,
require us to repurchase 100 shares for each option exercised at a specifi ed strike
price. As of December 31, 2004, 800 options were outstanding and have an expiration
of February 2005. Of the outstanding options, 400 options have a strike price of $45 per
share, and 400 options have a strike price of $50 per share. If all of the options were to
be exercised, Zebra would be required to repurchase 80,000 shares of Class A Common
Stock at a total price of $3,800,000.
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 held by the acquiring
person, entitles the registered holder to purchase one ten-thousandth of a share of
Series A Junior Participating Preferred Stock, par value $0.01 per share, at a price of
$300 per one ten-thousandth of Class A Preferred 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 commences a tender offer that would result in the person or group
becoming an owner of 15% or more of the outstanding common stock.
The Rights will expire on March 14, 2012 unless that date has been extended by the Board
of Directors or unless the Rights are redeemed or terminated earlier. A committee of
Zebra’s independent directors will review the Rights Plan at least every three years and
decide whether it should continue or be revoked. Zebra generally may amend the Rights
Plan or redeem the Rights at $0.001 per Right at any time prior to the time a person or
group has acquired at least 15% of the outstanding common stock.
F-12
Note 6 Earnings Per Share
For the years ended December 31, 2004, 2003, and 2002, earnings per share were
computed as follows (in thousands, except per-share amounts):
Basic earnings per share:
Net income
Weighted average common shares
outstanding
Per share amount
Diluted earnings per share:
Net income
Weighted average common shares
outstanding
Add: Effect of dilutive securities –
stock options
Year Ended December 31,
2004
2003
2002
$120,643
$91,696
$71,595
71,556
$1.69
70,647
$1.30
69,678
$1.03
$120,643
$91,696
$71,595
71,556
70,647
69,678
983
848
627
Diluted weighted average and equivalent
shares outstanding
Per share amount
72,539
$ 1.66
71,495
$ 1.28
70,305
$ 1.02
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 13,800 in 2004, 79,068 in 2003, and 438,469 in 2002.
Note 7 Investments and Marketable Securities
We classify the majority of our investments and marketable securities as available-
for-sale in accordance with the classifi cations defi ned 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 securities
are refl ected in the accumulated other comprehensive income caption of stockholders’
equity in the balance sheet, until we dispose of the securities. Once these securities
are disposed of, either by sale or maturity, the accumulated changes in market value
are transferred to investment income. On the cash fl ow statements, changes in the
balances of available-for-sale securities are shown as purchases, sales and maturities of
investments and marketable securities under investing activities.
Amortized
Gross
Unrealized
Cost Holding Gains Holding Losses
Gross
Unrealized
Fair
Value
Available-for-sale:
U.S. government and
agency securities
State and municipal bonds
Corporate bonds
Partnership interests
Trading securities:
Other
$ 111,492
351,141
42,757
28,652
534,042
5,653
$539,695
$ 42
785
2
2,075
2,904
—
$2,904
$(1,320) $110,214
351,089
42,327
30,727
(837)
(432)
—
(2,589)
534,357
—
5,653
$(2,589) $540,010
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):
Amortized
Gross
Unrealized
Cost Holding Gains Holding Losses
Gross
Unrealized
Fair
Value
Available-for-sale:
U.S. government and
agency securities
State and municipal bonds
Equity securities
Corporate bonds
Partnership interests
Trading securities:
Other
$187,988
197,575
3,325
19,900
18,652
427,440
5,653
$433,093
$ 207
464
—
100
639
1,410
—
$1,410
$(696) $ 187,499
197,814
3,325
20,000
19,291
(225)
—
—
—
(921)
427,929
—
5,653
$(921) $433,582
Unrealized gains and losses on investment securities are included in these fi nancial
statements as follows (in thousands):
Year Ended December 31,
2004
2003
2002
Changes in unrealized gains and losses
on available-for-sale securities, net of
tax, recorded in accumulated other
Changes in market value of trading securities are recorded in investment income as they
occur, and the related cash fl ow statement includes changes in the balances of trading
securities as operating cash fl ows.
comprehensive income
$(113)
$346
$(1,603)
Unrealized gains on trading securities
recorded in investment income
$ —
$ —
$(1,360)
The amortized cost, gross unrealized holding gains, gross unrealized holding losses and
aggregate fair value of investment securities at December 31, 2004, were as follows (in
thousands):
F-13
The following table shows the number, aggregate market value and unrealized losses (in
thousands) of investments with market values that were less than amortized cost as of
December 31, 2004. These lower market values are caused by short-term fl uctuations in
interest rates and are not a refl ection of the credit worthiness of the issuer. Market values
are expected to recover to the amortized cost prior to maturity.
Government securities
State and municipal bonds
Corporate bonds
Total
Government securities
State and municipal bonds
Corporate bonds
Total
Unrealized Loss < 12 months
Number of
Investments
Aggregate
Market Value
Unrealized
Losses
16
104
10
130
$ 54,313
173,501
37,596
$265,410
$ (505)
(676)
(432)
$(1,613)
Unrealized Loss > 12 months
Number of
Investments
Aggregate
Market Value
Unrealized
Lossses
16
112
—
128
$46,839
12,242
—
$59,081
$(815)
(161)
—
$(976)
As of December 31, 2003, the number, aggregate market value and unrealized losses (in
thousands) of investments with market values that were less than amortized cost were:
Government securities
State and municipal bonds
Total
Unrealized Loss < 12 months
Number of
Investments
Aggregate
Market Value
Unrealized
Losses
13
14
27
$ 85,706
22,861
$108,567
$(677)
(97)
$(774)
The contractual maturities of debt securities at December 31, 2004, were as follows (in
thousands):
Due within one year
Due after one year through fi ve years
Due after fi ve years
Fair Value
$136,268
269,450
117,333
$523,051
Using the specifi c identifi cation method, the proceeds and realized gains on the sales of
available-for-sale securities were as follows (in thousands):
Proceeds
Realized gains
Realized losses
Net realized gains included in other
comprehensive income as of the end
of the prior year
2004
$319,711
1,289
(900)
2003
$57,537
2,371
(2,121)
2002
$3,499
1,953
(193)
384
213
1,760
Note 8 Related-Party Transactions
Unique Building Corporation (Unique), an entity controlled by certain offi cers and
stockholders of Zebra, leases a facility to Zebra under a lease described in Note 16.
Management believes that the lease payments are substantially consistent with amounts
that could have been negotiated with third parties on an arm’s-length basis and represent
market conditions at the time of the negotiations.
Lease payments related to the lease, and recorded as a component of all functional areas,
were included in the consolidated fi nancial statements as follows (in thousands):
Unrealized Loss > 12 months
Number of
Investments
Aggregate
Market Value
Unrealized
Lossses
2004
2003
2002
Unique Operating Lease
$2,284
2,198
2,085
Government securities
State and municipal bonds
Total
18
9
27
$ 5,755
9,923
$15,678
$ (19)
(128)
$(147)
Future minimum lease payments related to the lease as of December 31, 2004, are as
follows (in thousands):
Unique Operating Lease
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 diversifi ed 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.
2005
2006
2007
2008
2009
Thereafter
Total minimum lease payments
$ 2,336
2,336
2,336
2,380
2,573
12,389
$24,350
F-14
Note 9 Inventories
The components of inventories, net of allowances, are as follows (in thousands):
Note 11 Income Taxes
The geographical sources of income before income taxes were as follows (in thousands):
Raw material
Work in process
Finished goods
Total inventories
December 31,
2004
$34,041
569
24,645
$59,255
2003
$29,127
645
13,009
$42,781
United States
Outside United States
Total
Year Ended December 31,
2003
2004
2002
$164,784
19,764
$184,548
$132,056
3,936
$135,992
$101,454
9,429
$110,883
Note 10 Property and Equipment
Property and equipment, which includes assets under capital leases, is comprised of the
following (in thousands):
Buildings
Land
Machinery, equipment and tooling
Furniture and offi ce equipment
Computers and software
Automobiles
Leasehold improvements
Projects in progress
Less accumulated depreciation and amortization
December 31,
2004
2003
$ 12,510
1,910
48,241
6,525
42,690
73
7,658
5,608
125,215
(78,932)
$ 11,911
1,910
45,156
6,415
37,486
128
4,878
2,473
110,357
(71,071)
Net property and equipment
$ 46,283
$ 39,286
Other items related to property and equipment are as follows:
Assets under capital lease
Less: related accumulated depreciation
Unamortized computer software costs
December 31,
2004
$ 333
144
$7,771
2003
$ 333
78
$6,054
Amortization of capitalized software
$2,125
$2,132
$2,042
Year Ended December 31,
2003
2004
2002
Zebra does not provide for deferred income taxes on undistributed earnings of foreign
subsidiaries, which totaled approximately $34,000,000 at December 31, 2004 and
$22,500,000 at December 31, 2003. Should such earnings be remitted to Zebra, foreign
tax credits would be available to substantially offset the U.S. income taxes due upon
repatriation.
The provision for income taxes consists of the following (in thousands):
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Total
Year Ended December 31,
2003
2004
2002
$53,810
5,874
6,023
(1,568)
(118)
(116)
$38,954
3,723
2,561
$30,660
5,247
3,254
(261)
(35)
(646)
296
40
(209)
$63,905
$44,296
$39,288
The provision for income taxes differs from the amount computed by applying the
U.S. statutory Federal income tax rate of 35% to income before income taxes. The
reconciliation of statutory and effective income taxes is presented below (in thousands):
Year Ended December 31,
2003
2004
2002
Provision computed at statutory rate
State income tax (net of Federal tax benefi t)
Federal tax benefi t of state tax settlement
Tax-exempt interest income
Tax benefi t of exempt foreign trade income
Research and experimental credit
Other
Provision for income taxes
$64,592
3,595
—
(1,767)
(1,750)
(350)
(415)
$63,905
$ 47,597
2,952
(2,450)
(1,674)
(1,488)
(1,959)
1,318
$44,296
$38,809
3,634
—
(2,422)
(1,575)
—
842
$39,288
F-15
Deferred income taxes refl ect the impact of temporary differences between the amounts
of assets and liabilities for fi nancial 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.
Note 12 Goodwill and Other Intangible Asset Data
During the fi rst quarter of 2002, we implemented SFAS No. 142, Goodwill and Other
Intangible Assets, which replaces the requirements to amortize intangible assets with
indefi nite lives and goodwill with a requirement for an annual impairment test. SFAS No.
142 also set requirements for identifi able intangible assets.
Tax effects of temporary differences that give rise to deferred tax assets and liabilities are
as follows (in thousands):
Intangible asset data are as follows (in thousands):
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 partnership interests
Unrealized loss on securities and hedges
Total deferred tax assets
Deferred tax liabilities:
Unrealized gain on securities
Acquisition related items
Depreciation and amortization
Total deferred tax liabilities
Net deferred tax assets
December 31,
2004
2003
$ 212
65
902
1,466
3,652
224
2,520
—
2,537
1,245
12,823
—
(649)
(5,966)
(6,615)
$ 205
88
643
1,099
2,848
235
898
1,886
2,019
658
10,579
(11)
—
(6,784)
(6,795)
$ 6,208
$ 3,784
Amortized intangible assets
Current technology
Customer relationships
Total
Unamortized intangible assets
Goodwill
December 31, 2004 December 31, 2003
Gross
Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
$12,258
2,333
$14,591
$(7,746) $12,033
2,503
(328)
$(8,074) $14,536
$(5,466)
(39)
$(5,505)
$61,793
$61,150
Aggregate amortization expense
For the year ended December 31, 2003
For the year ended December 31, 2004
Estimated amortization expense
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
$ 2,569
$ 1,613
1,180
1,103
1,099
975
292
255
$ 1,640
During the fourth quarter of 2004, a contingent payment related to the Atlantek
acquisition was made for $632,000 and added to goodwill. See Note 4 for further details.
Note 13 Other Assets
Other assets consists of the following (in thousands):
Life insurance policies related to the deferred
compensation plan (See Note 18)
Life insurance policies on key executives
Long-term equity securities
Deposits
Other long-term assets
Total
December 31,
2004
2003
$ 3,401
10,367
100
344
8,779
$22,991
$ 2,116
—
271
1,140
7,199
$10,726
Zebra invested $10,027,000 in life insurance policies on 48 key executives during 2004,
which currently has a cash surrender value of $10,367,000 and a guaranteed rate of return
of 8% through July 28, 2005.
F-16
Note 14 401(k) Savings and Profi t 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. Qualifi ed 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 earnings 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.
Hedging of Anticipated Sales
During 2003, we began managing the exchange rate risk of anticipated euro denominated
sales using forward contracts and designate these contracts as cash fl ow hedges.
Unrealized 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
fi nancial information related to the cash fl ow hedges of future revenues follows (in
thousands, except percentages):
Net unrealized losses deferred in accumulated
other comprehensive income:
Gross
Tax benefi t
Net
Notional balance of outstanding contracts
Hedge effectiveness
Net gain (loss) included in revenue for the:
Three months ended December 31, 2004
Three months ended December 31, 2003
Year ended December 31, 2004
Year ended December 31, 2003
We recorded no gain or loss for 2002.
December 31, December 31,
2003
2004
$ (2,231)
781
$ (1,450)
€30,000
100%
$ (1,537)
538
$ (999)
€30,420
100%
2004
2003
$ (1,077)
(1,639)
$ (150)
266
The above year-to-date gains and losses are the net pretax gains and losses released
from other comprehensive income into earnings during 2004 and 2003. We expect to
release pretax losses in the amount of $2,231,000 from other comprehensive income
into earnings during 2005 along with gains and losses on similar contracts entered into
early in 2005. Currently, the initial duration of our forecasted sales hedge contracts is
six months. Effectiveness testing is performed on each contract monthly. We have not
experienced any gains or losses due to ineffectiveness. If we were to experience such
gains or losses, we would record them as a foreign exchange gain or loss. If we were
to cancel or net settle a hedge designated as a cash fl ow hedge prior to the scheduled
settlement date, we would recognize the gain or loss on that settlement immediately as
a foreign exchange gain or loss.
Zebra has a discretionary profi t-sharing plan for qualifi ed employees, to which it
contributes a percentage of eligible payroll each year. Participants are not permitted to
make contributions under the profi t-sharing plan.
Company contributions to these plans, which were charged to operations, approximated
the following (in thousands):
401(k)
Profi t sharing
Total
Year Ended December 31,
2003
2004
2002
$ 1,742
2,329
$4,071
$1,572
1,544
$ 3,116
$1,452
1,146
$2,598
Percentage of eligible payroll contributed
for profi t-sharing plan
3.1%
2.4%
1.9%
Note 15 Derivative Instruments
In the normal course of business, portions of Zebra’s operations are subject to
fl uctuations in currency values. We manage these risks using derivative fi nancial
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 fi nancial information
related to these activities follows (in thousands):
Year Ended December 31,
2003
2004
2002
Change in gains (losses) from foreign
exchange derivatives
Gain on net foreign currency assets
$(1,246)
1,731
$(3,756)
3,204
Net foreign exchange gain (loss)
$ 485
$ (552)
$(2,579)
2,926
$ 347
Notional balance of outstanding contracts:
Pound
Euro
F-17
December 31, December 31,
2003
2004
£13,646
€34,000
£ 8,569
€22,000
Note 16 Commitments and Contingencies
Leases. In September 1989, Zebra entered into a lease agreement for its Vernon Hills
facility and certain machinery, equipment, furniture and fi xtures with Unique Building
Corporation, a related party. The facility portion of the lease is the only remaining
portion in existence as of December 31, 2004, and is treated as an operating 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 modifi cation
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).
Minimum future obligations under non-cancelable operating leases and future minimum
capital lease payments as of December 31, 2004 are as follows (in thousands):
2005
2006
2007
2008
2009
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
Capital
Leases
Operating
Leases
$ 5,116
4,512
3,658
3,360
3,557
16,084
$36,287
$ 62
121
—
—
—
—
183
(12)
171
(54)
$117
Rent expense for operating leases charged to operations was as follows (in thousands):
Rent expense
Year Ended December 31,
2003
2004
2002
$6,404
$5,591
$5,699
In addition to the related party lease noted above, the operating lease information
includes a variety of other properties around the world. These properties are used as
manufacturing facilities, distribution centers and sales offi ces. Lease terms range from
six months to 25 years with breaking periods specifi ed in the lease agreements.
Since December 31, 2004, Zebra signed three additional operating lease agreements,
which are not included in the schedule above. In Vernon Hills, Illinois, we leased an
additional 34,000 square feet of offi ce space for 3 years beginning March 1, 2005 with
annual payments of $612,000. In Heervenveen, the Netherlands, we leased approximately
95,000 square feet of offi ce and warehouse space for 20 years beginning February 15,
2005 with an option to terminate the lease at each fi ve-year anniversary date. The annual
payments on this lease will be €350,000, or approximately $440,000. In Chula Vista,
California, we leased approximately 14,000 square feet of manufacturing and warehouse
space for two years beginning February 11, 2005 with annual payments of $135,000.
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, 2004
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) fi led 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 identifi ed Paxar Americas
patents, although not each product is accused of infringing each patent. Zebra has
fi led an Answer to Paxar Americas’ Complaint, denying Paxar Americas’ allegations of
infringement and asserting several affi rmative defenses, including the invalidity of Paxar
Americas’ asserted patent claims. Paxar has sought to amend its original complaint to
add two additional patents to the lawsuit and to expand the scope of accused products.
Zebra has opposed Paxar’s motions in this regard and the court has the issue under
advisement.
On November 21, 2003, Zebra’s subsidiary, ZIH Corp. (ZIH), fi led a Complaint in the United
States District Court for the District of Massachusetts against Paxar Corporation, alleging
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 fi led a motion to transfer ZIH’s Massachusetts suit to
Ohio federal court, and the court denied Paxar’s motion.
On November 25, 2003, Paxar Americas fi led a Complaint against ZIH in the United States
District Court for the Southern District of Ohio, seeking a declaratory 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. In view of the Massachusetts’ District
Court’s denial of Paxar Corporation’s motion to transfer to Ohio ZIH’s corresponding
patent infringement suit against Paxar Corporation, the parties to Paxar America’s Ohio
declaratory judgment action have agreed to transfer this case to Massachusetts.
The outcome of litigation is inherently uncertain, particularly in cases such as these
where sophisticated factual issues must be assessed and complex technical issues must
be decided. As a result, we cannot accurately predict the outcome of these lawsuits. In
the event we are unsuccessful in our defense of Paxar Americas’ infringement claims, we
could be liable for economic and other damages, which could be material, and we may
be forced to incur ongoing licensing expenses or to change how we design, manufacture
and market our products. The patents that ZIH has asserted against Paxar Corporation
could be found invalid. We have and will continue to incur substantial fees to prosecute
and defend these lawsuits. 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 consolidated fi nancial statements as of December 31, 2004.
F-18
Note 17 Segment Data and Export Sales
Zebra is organized with two internal business units, bar code and card printers. These
business units have similar economic characteristics, products and services, production
processes, types of customers, distribution methods, and regulatory environments.
Additionally, there are signifi cant shared services supporting both business units.
Because of these similarities, we have aggregated our internal business units and have
treated them as one reportable segment as permitted by SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information.
Gain (loss) on cash surrender value of
life insurance policies included in
investment income
Year Ended December 31,
2003
2004
2002
$94
$60
$(16)
Information regarding Zebra’s operations by geographic area is contained in the
following table. These amounts (in thousands) are reported in the geographic area of the
destination of the fi nal sale.
Deferred compensation liability included in other
long-term liability
Cash surrender value included in other assets
December 31, December 31,
2003
2004
$3,894
$3,401
$2,401
$2,116
Europe,
North Middle East
& Africa
America
Latin
America
Asia
Total
$359,074
108,725
$213,559
5,669
$38,119
3
$52,302
196
$663,054
114,593
During February 2005, we adopted the 2005 Executive Deferred Compensation Plan, a
new nonqualifi ed deferred compensation plan. The plan is virtually the same as the plan
noted above except that it now complies with the requirements of the new Section 409A
of the Internal Revenue Code, enacted under the American Jobs Creation Act of 2004.
Section 409A imposes a number of requirements on nonqualifi ed deferred compensation
plans, primarily relating to the timing of elections and distributions and is effective for
deferrals made after December 31, 2004.
2004
Net sales
Long-lived assets
2003
Net sales
Long-lived assets
2002
Net sales
Long-lived assets
$292,543
102,962
$170,544
6,415
$29,406
3
$43,904
87
$536,397
109,467
$270,288
90,873
$142,273
6,502
$28,097
—
$34,953
98
$475,611
97,473
We manage our business based on these regions rather than by individual countries.
Net sales by major product category are as follows (in thousands):
2004
2003
2002
Hardware
Supplies
$518,556
409,144
360,185
$116,849
98,519
87,981
Service
and
Software
$24,338
24,355
23,301
Shipping
and
Handling
$4,950
4,113
4,144
Cash Flow
Hedging
Activities
$(1,639)
266
—
Total
$663,054
536,397
475,611
Note 18 Deferred Compensation Plan
Beginning January 1, 2002, Zebra offered a deferred compensation plan that
permits 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 gain/loss from the changes to the deferred
compensation liability, which is charged to compensation expense. To fund this plan,
Zebra purchases corporate-owned whole-life insurance contracts on the related
employees, of which Zebra is the benefi ciary. The following table shows the income,
asset and liability amounts related to this plan (in thousands):
F-19
Note 19 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 is accounted for under
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. All
exit costs associated with this activity are identifi ed on a separate line of our income
statement, as part of operating expenses. Our consolidation plan is intended to reduce
costs and improve manufacturing effi ciency.
Currently, our Varades facility conducts the product development for our line of card
printers and includes the European service center for these printers. We transferred the
product development activities to Camarillo, California, where we have manufactured
these printers since 2001. We transferred the European card printer service operation
to our Preston, United Kingdom, facility where the Europe, Middle East and African
distribution of these printers already occurs. To date, we have closed substantially all of
this facility with only minor administrative functions remaining. As of December 31, 2004,
we incurred the following exit costs (in thousands):
Type of Cost
Total Costs Incurred
Severance, stay bonuses, and other employee-related expenses
Asset disposal costs
Other exit costs
Total
$1,605
64
285
$1,954
We expect to incur no further costs for this project.
During January 2004, we announced plans to consolidate our Warwick, Rhode Island,
printer manufacturing and repair service into our Camarillo, California and Vernon Hills,
Illinois locations. This transition was 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. As of December 31, 2004, we expect the following exit
costs (in thousands):
Type of Cost
Severance, stay bonuses, and other
employee-related expenses
Other exit costs
Total
Costs
Incurred
to Date
Additional
Costs
Expected
Total Costs
Expected to
be Incurred
$ 838
431
$1,269
$ —
210
$210
$ 838
641
$1,479
During December 2004, we announced plans to close and consolidate our Wakefi eld,
Rhode Island facility into our other North American facilities primarily into the Warwick,
Rhode Island facility. This transition is expected to take 6 months to complete. As of
December 31, 2004, we expect the following exit costs (in thousands):
Type of Cost
Severance, stay bonuses, and other
employee-related expenses
Other exit costs
Total
Costs
Incurred
to Date
Additional
Costs
Expected
Total Costs
Expected to
be Incurred
$109
—
$109
$ 54
317
$371
$163
317
$480
Liabilities and expenses related to exit activities for the year ended December 31, 2004
were as follows (in thousands):
Accrued liabilities related to exit
activities at December 31, 2003
Total expenses incurred for the
year ended December 31, 2004
Less: Amounts paid for the year
ended December 31, 2004
Accrued liabilities related to exit
activities at December 31, 2004
Varades
Closure
Warwick Wakefi eld
Closure
Consolidation
Total
$ 990
$ —
$ —
$ 990
722
1,557
1,269
109
2,100
830
19
2,406
$ 155
$ 439
$ 90
$ 684
Note 20 Other Comprehensive Income (Loss)
Stockholders’ equity contains certain items classifi ed as other comprehensive income,
including:
• Foreign currency translation adjustments related to our non-U.S. subsidiary
companies that have designated a functional currency other than the dollar. We are
required to translate the subsidiary functional currency fi nancial 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.
• Unrealized holding gains (losses) on foreign currency hedging activities relate
to derivative instruments used to hedge the currency exchange rates for forecasted
euro sales. These hedges are designated as cash fl ow hedges, and we have deferred
income statement recognition of gains and losses until the hedged transaction occurs.
See Note 15 for more details.
• Unrealized gains (losses) on investments classifi ed as available-for-sale are
deferred from income statement recognition. See Note 7 for more details.
The components of other comprehensive income included in the Consolidated
Statements of Comprehensive Income are as follows (in thousands):
Year Ended December 31,
2003
2004
2002
Foreign currency translation adjustments
$3,402
$ 4,110
$ 2,968
Changes in unrealized gains/(losses) on
hedging transactions:
Gross
Income tax benefi t
Net
Changes in unrealized holding gains/ (losses)
on investments classifi ed as available-for-sale:
Gross
Income tax (benefi t)
Net
$ (694)
(243)
$ (451)
$ (174)
(61)
$ (113)
$(1,537)
(538)
$ (999)
$ 531
185
$ 346
—
—
—
$(2,466)
(863)
$(1,603)
F-20
The components of accumulated other comprehensive income (loss) included in the
Consolidated Balance Sheets are as follows (in thousands):
Note 21 Quarterly Results of Operations (unaudited)
(Amounts in thousands, except per share data)
Foreign currency translation adjustments
$ 7,512
$ 4,110
As of
December 31, December 31,
2003
2004
Unrealized losses on foreign currency
hedging activities:
Gross
Income tax benefi t
Net
Unrealized gains on investments classifi ed
as available-for-sale:
Gross
Income tax
Net
$(2,231)
(781)
$(1,450)
$(1,537)
(538)
$ (999)
$ 315
110
$ 205
$ 489
171
$ 318
2004
Net sales
Cost of sales
Gross profi t
First
Quarter
$154,174
73,571
Second
Quarter
$162,830
78,315
Third
Quarter
$171,176
84,030
Fourth
Quarter (2)
$174,874
83,979
80,603
84,515
87,146
90,895
Selling and marketing
Research and engineering
General and administrative
Amortization of intangibles
Acquired in-process technology
Exit costs
Merger costs
Total operating expenses
Operating income
17,207
8,896
12,746
649
22
363
23
39,906
40,697
Investment income (expense)
Interest expense
Foreign exchange gain (loss)
Other, net
3,073
(26)
(656)
(293)
18,023
9,233
12,527
626
—
876
13
41,298
43,217
2,091
(6)
413
(560)
19,217
9,596
11,865
647
—
715
10
42,050
45,096
2,515
(7)
737
(381)
Total other income (expense)
2,098
1,938
2,864
22,615
9,368
11,959
647
—
146
—
44,735
46,160
2,949
(5)
(9)
(457)
2,478
Income before taxes
Income taxes
Net income
42,795
14,861
45,155
15,728
47,960
16,641
48,638
16,675
$ 27,934
$ 29,427
$ 31,319
$ 31,963
Basic earnings per share
Diluted earnings per share
$ 0.39 (1)
$ 0.39 (1)
$ 0.41(1)
$ 0.41(1)
$ 0.44
$ 0.43
$ 0.45
$ 0.44
F-21
2003
Net sales
Cost of sales
Gross profi t
First
Quarter (2)
Second
Quarter (2)
Third
Fourth
Quarter (2) Quarter (2)
$124,685
60,336
$129,863
63,305
$134,649
66,876
$147,200
72,803
64,349
66,558
67,773
74,397
Selling and marketing
Research and engineering
General and administrative
Amortization of intangibles
Acquired in-process technology
Exit costs
Merger costs
Total operating expenses
Operating income
Investment income (expense)
Interest expense
Foreign exchange gain (loss)
Other, net
14,504
7,579
10,251
371
—
—
—
32,705
31,644
2,439
(38)
(143)
6
16,754
7,560
10,248
371
—
—
—
34,933
31,625
3,017
(14)
(87)
(292)
15,871
7,898
9,937
371
—
—
—
34,077
33,696
(982)
(64)
(18)
(263)
Total other income (expense)
2,264
2,624
(1,327)
19,506
8,722
11,456
527
692
1,232
9
42,144
32,253
4,079
(38)
(304)
(524)
3,213
Note 22 Major Customers
ScanSource, Inc., is our most signifi cant customer and our net sales to them as a percent
of total net sales were as follows:
ScanSource
Year Ended December 31,
2003
2004
14.1
13.8
2002
13.6
No other customer accounted for 10% or more of total net sales during these years.
ZEBRA TECHNOLOGIES CORPORATION
Schedule II
Valuation and Qualifying Accounts
(Amounts in thousands)
Income before taxes
Income taxes
Net income
33,908
11,868
34,249
11,987
32,369
9,370
35,466
11,071
Description
$ 22,040
$ 22,262
$ 22,999
$ 24,395
Valuation account for accounts receivable:
Balanceat Charged to
Costs and
Beginning
Expenses Deductions
of Period
Balance at
End of
Period
Basic earnings per share
Diluted earnings per share
$ 0.31(1)
$ 0.31(1)
$ 0.32(1)
$ 0.31(1)
$ 0.32(1) $ 0.34(1)
$ 0.32(1) $ 0.34(1)
Year ended December 31, 2004
Year ended December 31, 2003
Year ended December 31, 2002
$1,388
$1,236
$1,975
$ 368
$ 557
$ 909
$ 195
$ 405
$1,648
$1,561
$1,388
$1,236
(1) Restated for a 3-for-2 stock split in August 2004 paid in the form of a 50% stock dividend.
(2) Includes the following pretax charges related to the closure/consolidation of the Varades, France,
the Warwick, Rhode Island and the Wakefi eld, Rhode Island facilities and the integration and in-
process research and development costs related to the acquisition of Atlantek, Inc.:
Valuation accounts for inventories:
Year ended December 31, 2004
Year ended December 31, 2003
Year ended December 31, 2002
$6,238
$5,075
$5,916
$5,653
$4,337
$1,664
$3,854
$3,174
$2,505
$8,037
$6,238
$5,075
Q4 2003 Q1 2004 Q2 2004 Q3 2004 Q4 2004
See accompanying report of independent registered public accounting fi rm.
Exit costs for the Varades closure
Exit costs for the Warwick
consolidation
Exit costs for the Wakefi eld closure
In-process research and development
Integration costs
$1,232
$224
$390
$218
$(110)
—
—
692
9
139
—
22
23
486
—
—
13
497
—
—
10
147
109
—
—
F-22
STOCKHOLDER INFORMATION
Corporate Headquarters
Zebra Technologies Corporation
333 Corporate Woods Parkway
Vernon Hills, Illinois 60061-3109 U.S.A.
Phone: +1 847 634 6700
Fax: +1 847 913 8766
Annual Meeting
Zebra’s Annual Meeting of Stockholders will be on May 17, 2005, 10:30 A.M. (Central
Time), at the Hilton Northbrook, 2855 North Milwaukee Avenue, Northbrook, Illinois.
Independent Auditors
Ernst & Young LLP
Chicago, Illinois
Transfer Agent and Registrar
Mellon Investor Services LLC
Overpeck Center
85 Challenger Road
Ridgefi eld, New Jersey 07660-2108
Phone: 877 870 2368
http://melloninvestor.com/isd
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
fi led 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 accessing
the Company’s Web site at www.zebra.com
Equal Employment Opportunities/Affi rmative Action
It is the policy of Zebra Technologies Corporation to provide equal opportunities and
affi rmative action in all areas of its employment practices without regard to race, religion,
national origin, sex, age, ancestry, citizenship, disability, veteran status, marital status,
sexual orientation or any other reason prohibited by law.
Board of Directors
Officers
Edward L. Kaplan
Chairman and Chief Executive Officer
Zebra Technologies Corporation
Edward L. Kaplan
Chairman and Chief Executive Officer
Gerhard Cless
Executive Vice President
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.
Gerhard Cless
Executive Vice President
Veraje Anjargolian
Vice President, General Manager
Card Printer Solutions
Noel Elfant
Vice President, General Counsel
and Corporate Secretary
Hugh K. Gagnier
Senior Vice President, Operations
Specialty Printing Solutions
Philip Gerskovich
Senior Vice President, Corporate Development
Todd R. Naughton
Vice President, Controller
Michael H. Terzich
Senior Vice President,
Office of the CEO
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Nominating Committee
Charles R. Whitchurch
Chief Financial Officer and Treasurer
Zebra Technologies Corporation
International Headquarters
333 Corporate Woods Parkway | Vernon Hills, IL | 60061-3109 USA
+1 847 634 6700 | www.zebra.com