Zebra Technologies Corporation 2005 Annual Report
Z is for
Zebra Technologies is a leading global
Operating Results
net sales
$ 702,271
5.9%
$ 663,054
23.6%
$ 536,397
F I n a n c I a l S u m m a R y
2005
% change
2004
% change
2003
( In thousands, except per share data and percentages)
is for
Printing
provider of high-growth specialty digital
printing solutions. Business, government,
and other organizations use our on-demand
thermal bar code label and receipt
printers and supplies, plastic card
printers, radio frequency identification
(RFID) printer/encoders, smart media,
and digital photo printers to deliver
better customer service, increase
productivity, and strengthen security.
Our commitment to industry leadership,
financial strength, and growth helps
Zebra build long-term value for its
customers, partners and stockholders.
Gross profit
Operating income
net income
354,181
154,211
111,603
Diluted earnings per share
1.55
3.2
(11.9)
(7.5)
(6.6)
343,159
175,073
120,643
1.66
25.7
34.9
31.6
29.7
273,077
129,767
91,696
1.28
Capitalization
cash & cash equivalents
and investments in
marketable securities
Working capital
Total assets
Total stockholders’ equity
$ 544,239
678,366
912,199
850,514
$ 557,993
665,062
862,222
797,654
$ 447,848
535,816
701,611
651,915
L e T T e R T O s T O C k h O L d e R s
Edward Kaplan
Chairman and
Chief Executive Officer
Two thousand five was a rare year
reach and generated record sales in all
unexpected weakness with large retailer
for Zebra. Sales were a record
international territories. a stronger, more
customers following peak shipments
$702.3 million, up 6% on the strength
effective selling organization delivered
in 2004. Within this environment, we
of international business, notably in
more printing solutions for manufacturing
extended channel partnerships and
Eastern Europe, china and latin
and field force automation. In asia Pacific
fortified alliances with large information
america, but short of our growth goals.
we also benefited from a considerably
technology integrators, which enhanced
net income was down for only the
greater infrastructure in china, now with
our position in delivering high-growth
second time in Zebra’s history as a
five sales offices, expanded distribution
vertical market applications. Improved
public company, to $1.55 per share.
relationships, and three times the number
quality and delivery, and the addition of
Profits declined, because we chose to
of Zebra associates from a year ago. Our
West coast production capacity enabled
maintain operating expense spending to
new distribution facility in the netherlands
us to grow our supplies business,
our original budget. We took this course,
supported solid performance throughout
including several contract awards with
because we have great confidence in
many areas of the Europe, middle East
strategic accounts that tie Zebra closer
our targeted market opportunities, and
and africa region with increased distribu-
to important customers. We had great
the spending did not put Zebra at risk.
tion capacity and improved service.
first-year success with products serving
Placing more representatives in high-
In north america, sales into non-retail
During the latter part of 2005, the pace
growth regions extended Zebra’s global
applications remained strong versus
of product introductions increased with
mobile route accounting applications.
innovative card and label printers that
Zebra will continue to assist companies
the opportunities in this exciting
meet new price and performance
in meeting emerging labeling
segment of on-demand printing.
profiles to serve more market segments.
requirements for improved supply
chain execution as well as other
maintaining our investment in
We look to the future with great
business processes. Zebra has
geographic expansion also contributes
confidence for sustained long-term
developed a reputation as the most
to this optimism. Greater representation
success. Barcoding remains a robust
knowledgeable and trusted partner
in strategically important regions
business, as global competition and
in the RFID printing/encoding space.
continues to improve our ability to serve
business expansion drive companies
to implement automatic identification
solutions. With our global reach and
· mobile and wireless printing
supports a growing number of
multinational and local enterprises,
and participate more effectively in
the growth of global outsourcing.
best-of-breed labeling solutions, Zebra
solutions that are driving down costs
is assisting more companies to achieve
and improving customer service.
Zebra has a proven business strategy
process improvement in the supply
Innovative new products and
and multiple platforms for growth.
chain and broadly through the enterprise.
industry-leading high-level encryption
The foundation for our success over
We are also extending the benefits of
technology for data security over
more than 20 years – delivering a
barcoding to targeted applications in
wireless networks will help us meet
broader range of innovative specialty
health care, public safety, retail and
demands for greater worker mobility
printing solutions on a global basis
other areas where recent mandates
and field force automation.
for business improvement – remains
and innovative uses of barcoding offer
high-growth opportunities.
· Recently developed card printing
applications such as personalized
secure. Our work in 2005 builds on this
foundation of excellence and creates a
favorable outlook for 2006 and beyond.
as important, we are diversifying
gift cards complement the ongoing
Zebra’s business with products that
security and commercial needs for
Thank you for your investment in
leverage our printing technology and
driver’s licenses, membership IDs and
Zebra Technologies.
extend the company into markets
other forms of personal identification.
outside of barcoding.
· In RFID, Zebra now serves more
companies subject to retail mandates
· With industry projections for rapid
growth in kiosk photo printing,
edward kaplan
Zebra is well positioned with
Chairman and
than any other printer/encoder
digital photo printers and an OEm
Chief Executive Officer
manufacturer. looking forward,
relationship with Kodak to capture
Zebra has built a record of success over more
than 20 years in delivering specialty printing
solutions. Today, we are the clear global leader
in providing solutions incorporating best-of-
breed printers and application-specific
supplies that are recognized for their innova-
tive features, reliability and durability. Our
products incorporate technologies that offer
real value in on-demand printing.
We have systematically expanded the number
of printing devices to serve a wider variety of
applications and vertical markets the world over.
Our commitment to delivering demonstrably
better products that help companies improve
their business processes has forged unequaled
brand equity in attractive growth segments.
The Zebra brand embodies qualities for
performance, confidence and security that
are unmatched in the industry.
With the broadest range of printers and
supplies, the strongest channels, unparalleled
global reach, and great financial resources,
Zebra is well positioned for further growth and
the creation of stockholder value.
Fundamental trends support ongoing high growth in on-demand printing solutions
• The drive to improve business processes in competitive global markets
• The adoption of automatic identification technologies to strengthen security
• The implementation of new technologies, such as RFId and digital photo printing
• The use of specialty digital printing outside the world of bar codes
is for
Zebra is at the forefront of printer
and media solutions that enable
companies to improve their business
processes. mobile and wireless
printers combine with high-level
encryption technology and application-
specific supplies to give users
best-of-breed performance in a
growing number of field force
automation applications. These
applications improve worker
productivity and help companies
deliver better customer service.
Zebra’s broad family of mobile printers, supplies and accessories works on-site, on-demand to keep business on the go. Wireless technology brings printing where it’s needed for an increasing array of in-store, warehouse, and field operations. Cameo 3RW 420QL 220 is for
Industry-leading products, a network
of independent channel partners that
meet customer needs with innovative
solutions, and the variety of support
services we provide to our partners
and end-user customers create great
value in a relationship with Zebra. This
support includes industry expertise,
leading technical knowledge, and other
services to ensure the continuing
dependability of Zebra solutions.
Our channel partnerships and alliances
enhance the value of our solutions in
targeted, high-growth vertical market
applications. Zebra’s bar code and RFID
solutions optimized for use in health-
care environments provide the basis
for patient safety across the industry.
The accurate identification of patients,
medications, records and healthcare
workers reduces errors and saves lives,
and provides the foundation for
improving quality and patient care.
Zebra wristband solutions satisfy requirements for protecting patient privacy and safety, as part of a broad range of healthcare labeling applications. Zebra card printing solutions produce employee and visitor ID cards on site, with a variety of photo, graphics, and security options.SuppliesH 2824-ZP330i
is for
Zebra is the most knowledgeable,
trusted partner in delivering robust
printing solutions to meet the needs of
customers worldwide. For more than 20
years, people have depended on Zebra
for innovative and reliable products.
We back these products with industry-
leading customer service and global
technical support. Our financial strength
enables us to invest in our business,
ensuring that we continue to be a reliable
business partner over the long term.
We extend this reliability and trust
beyond the black and white of bar
codes. On-demand color printing builds
on our core thermal printing technology
expertise. The need for personalized
identification to protect people, property
and assets offers continuing sources of
growth for Zebra card printers. Exciting
new applications such as personalized
gift cards are also emerging. On-demand
digital photo printing in kiosks, event
venues and professional studios is
Zebra’s newest product group and
growth opportunity.
Zebra card printers deliver reliable performance and superior print quality. Our Value, Performance and Security lines incorporate a range of features and connectivity options that are ideal for printing cards with a variety of identification technologies.P420iP120iP640i
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Enabling companies to make their
operations more efficient is the
foundation for Zebra’s clear global
leadership in specialty digital printing.
Zebra continues to lead, as a pioneer
in emerging radio frequency identifi-
cation technology, helping to drive
even more cost out of the supply chain.
more companies worldwide rely on
Zebra RFID printer/encoders than any
other brand to meet current retail
compliance labeling mandates. We
are also the preferred supplier to many
of the major defense contractors for a
variety of RFID technologies. With
demonstrated product performance,
the depth of our technical and
application knowledge, and the
unequaled breadth of our product
offerings, Zebra RFID products are
increasingly being used in applications
for improving business processes
beyond the supply chain. Zebra RFID
smart media are matched with our
printer/encoders to provide a
performance-optimized labeling solution.
Zebra has the industry’s broadest line of RFID printer/encoders, plus smart label production to serve a growing number of applicationsfor this emerging technology. R4MPlusR4MPlusR2844-Z
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Regional percentages for 2005 sales
North America 51%
Latin America 7%
Asia Pacific 9%
Europe, Middle
East and Africa 33%
is for
Developing market economies and
global competition are driving innovation
and organizational needs to improve
business processes. Zebra is helping
companies meet these needs, with an
expanding portfolio of specialty digital
printing solutions and products reaching
into approximately 100 countries. Our
greater presence in emerging regions
such as china, Eastern Europe and
latin america offers Zebra substantial
growth opportunities, as we deliver
greater value in bar code labeling and
automatic identification technologies
to our partners and customers in
manufacturing, distribution, retailing,
and other market segments.
Demonstrating our global and technology
leadership, Zebra offers the only
complete, multi-language, global
printing solution that is unicode-
compliant, for fast multi-language
printing. This solution enables Zebra
printers to quickly and accurately print
in the native language of most countries,
and to print multiple languages on a
single label.
2005 sales by product category
Other 1%
Service and software 3%
Supplies 19%
Hardware 77%
Cumulative number
of printers sold
(In millions)
5
4
3
2
1
2.4
2001
4.9
4.2
3.5
3.0
2002
2003
2004
2005
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
is for
Zebra has enjoyed a long history of
success by focusing on those activities
that have systematically extended our
global competitive leadership. These
activities have given us greater global
reach, stronger channel partnerships
and alliances, and advances in our
products and technologies to serve
a broader range of specialty printing
solutions. Our substantial resources
give us the capacity to invest in our
business so that we can serve our
partners and customers more effectively
on a worldwide basis. With great
confidence in the fundamental health
of our industry, Zebra is well positioned
for further growth and creation of
stockholder value.
UNITED STATES
SECURITIES
AND EXCHANGE
COMMISSION
Washington, D. C. 20549
FORM 10-K
For the fiscal year ended
December 31, 2005
OR
TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period
from to
Commission File Number 000-19406
Zebra Technologies Corporation
(Exact name of registrant
as specified in its charter)
delaware
(State or other
jurisdiction of
incorporation
or organization)
36-2675536
(I.R.S. Employer
Identification No.)
333 Corporate Woods
Parkway, Vernon Hills, IL 60061
(Address of principal (Zip Code)
executive offices)
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 2005 Annual Report
Indicate by check mark if the registrant is a well-
known seasoned issuer (as defined in Rule 405 of
the Securities Act). Yes __X No __
Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in
Rule 405 of the Securities Act). Yes __X No __
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or
Section 15(d) of the Securities Act. Yes __ No __X
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Securities Act. Yes __ No __X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days. Yes __X No __
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such
shorter period that the registrant was required to
file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X No __
Indicate by check mark if disclosure of delinquent filers 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 definitive 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 filer (as defined in Rule 12b-2
of the Securities Act).
Yes __X No __
Indicate by check mark if disclosure of delinquent
filers 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
definitive 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 a shell company (as defined in Rule 12b-2
of the Securities Act).
Yes __ No __X
Indicate by check mark whether the registrant
is an accelerated filer (as defined in Rule 12b-2
of the Securities Act).
Yes __X No __
As of July 1, 2005, the aggregate market value of each of the registrant’s Class A Common held
by non-affiliates was approximately $3,192,500,000. The closing price of the Class A Common
Stock on July 1, 2005, as reported on the Nasdaq Stock Market, was $44.28 per share.
As of February 23, 2006, 70,562,061 shares of Class A Common Stock, par value $.01 per
share, were outstanding.
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of
the Securities Act).
Yes __ No __X
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 9, 2006 are
incorporated by reference into Part III of this report.
As of July 1, 2005, the aggregate market value of
each of the registrant’s Class A Common held by
non-affiliates was approximately $3,192,500,000.
The closing price of the Class A Common Stock on
July 1, 2005, as reported on the NASdAq Stock
Market, was $44.28 per share.
As of February 23, 2006, 70,562,061 shares of
Class A Common Stock, par value $.01 per share,
were outstanding.
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 9, 2006, are incorporated by
reference into Part III of this report.
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 specifically states otherwise.
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1A. Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
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 . . . . . 9
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 . . . . . . . . . . . . . . . 18
Item 8.
Financial Statements and Supplementary data . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 9.
Changes in and disagreements with Accountants on Accounting and
Financial disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PART III
Item 10. directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . 21
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 12.
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 14. Principal Accounting Fees and Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . 21
SIGNATURES
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
EXHIBITS
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Index to Consolidated Financial Statements and Schedule . . . . . . . . . . . . . . . . . . . . . . . . F-1
Safe Harbor
Forward-looking statements contained in this filing are subject to the safe harbor created
by the Private Securities Litigation Reform Act of 1995 and are highly dependent upon
a variety of important factors which could cause actual results to differ materially from
those reflected in such forward looking statements. These factors include market acceptance
of 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 financial results. Profits will be affected by our ability to control manufacturing
and operating costs. Because of a large investment portfolio, interest rate and financial
market conditions will also have an impact on results. Foreign exchange rates will have
an effect on financial results due to the large percentage of 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 designs, manufactures and distributes specialty printing devices
that print variable information on demand at the point of issuance. These devices are
used worldwide by manufacturers, service organizations and governments for automatic
identification, data collection and personal identification in applications that improve
productivity, deliver better customer service and provide more effective security. Our
product range consists of direct thermal and thermal transfer label and receipt printers,
radio frequency identification (RFId) printer/encoders, dye sublimation card printers, and
digital photo printers. We also sell a comprehensive range of specialty supplies consisting
of self-adhesive labels, thermal transfer ribbons, thermal printheads, batteries and other
accessories, including software for label design and printer network management.
We design our products to operate at the point of issuance to produce and dispense
high-quality labels, plastic cards, and photographs on demand. The exceptional diversity
of applications using our printer products for barcoding and personal identification is
comprised of routing and tracking, transactions processing, and identification 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 identification or access control. digital photo printers are sold on an OEM
basis to professional photographers and for use in kiosks at retail and other locations.
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, file management
systems, hospital information systems, medical specimen labeling, shop floor control,
in-store product labeling, employee Id cards, driver’s licenses, and access control
systems. As of december 31, 2005, management estimates that Zebra has sold almost
5,000,000 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 adoption of bar code, RFId and specialty printing applications because
these technologies deliver significant and predictable economic benefits. Industry-
mandated compliance requirements for bar code labeling and RFId tagging are also
important catalysts in the deployment of these systems. We also believe that companies
are adopting automatic identification systems that incorporate barcoding and RFId
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 healthcare, and heightened concern over
safety and security will lead to increased use of automatic identification systems. Still
other applications are taking advantage of recent advances in wireless and hand-held
computing technologies.
Concern for safety and security and personal identification contribute to demand for
our card printer products. This concern has heightened interest in systems that provide
personal identification and access control, including secure Id systems for driver’s
licenses, employee and visitor badges, national identification cards, event passes, club
membership cards, and keyless entry systems.
Zebra completed its initial public offering in August 1991. We are organized under the
laws of the State of delaware, and our principal offices 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 find all of
Zebra’s filings with the SEC free of charge through the investor page on this Web site,
immediately upon filing.
Products
Our printers are used to produce bar code labels, RFId “smart” labels, receipts and tags,
plastic cards, and photographs. We also sell related specialty labeling materials, thermal
ink ribbons, and bar code label design and network management software. These
products are used to provide bar code labeling, personal identification, and specialty
printing solutions principally 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 flexibility, we provide our customers with a broad selection of printer
models, each of which can be configured for a specific application. Additionally, we will
select and, if necessary, create appropriate labeling stock, ink ribbons and adhesives to
suit a particular application. In-house engineering personnel 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,
2005
2004
2003
$540,679
77.0
$129,183
18.4
$518,556
78.2
$116,877
17.6
$409,144
76.3
$ 98,556
18.4
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 configurations
that can be selected to meet particular customer needs. We believe this breadth of
product is a unique and significant competitive strength, because it allows Zebra to
satisfy the widest variety of thermal printing applications.
Of the major printing technologies, which include ink jet, laser and impact dot matrix,
management believes that direct thermal and thermal transfer technologies are best
suited for most bar code labeling applications. Thermal transfer printing produces dark,
solid blacks and sharply defined 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 affix 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, lightweight and cost are important factors in the application.
Accordingly, this technology is found principally in Zebra’s mobile and desktop units.
We offer 33 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 configurations, 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 identification (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 modified by a radio frequency reader. As of december 31, 2005, we offered four
RFId and two RFId-ready printer/encoders, which have list prices from $1,695 to $6,995.
Mid-Range Tabletop Printers. We offer six printer models designed for less demanding
applications. These units have fewer option configurations 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 $1,145 to $3,490.
Desktop Printers. Applications with low volume suit Zebra’s desktop printers. We currently
offer six desktop models consisting of direct thermal and thermal printers in two-, three-
and four-inch widths. List prices range from $395 to $895.
Mobile Printers. Zebra makes 8 mobile printer models, which provide durability, light
weight and wireless connectivity interfaces. These printers print in two-, three- and four-
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 identification 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
flexibility 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 identification badges, smart cards, on-demand access control cards, gift
cards and customer loyalty cards. These cards can typically be printed in seconds for
less than 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, financial transactions,
security access codes and vital statistics. We offer two “c-Series” and nine “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 $7,995.
Photo Printers
digital photo printing is an extension of our core thermal printing technology. With the
November 2003 acquisition of Atlantek we began producing digital photo printers; we
currently manufacture two printers jointly developed with and marketed by Eastman
Kodak. Our high-speed thermal photo printer is sold as the Kodak Professional ML-500
digital Photo Print System. The ML-500 is designed for professional photographers
for use in event and in-studio printing and can print an 8x10 photograph in about 13
seconds. during the fourth quarter of 2005, we introduced a second printer designed to
work as part of a photo kiosk or a standalone in professional photography applications.
We currently sell this printer on an OEM basis to Eastman Kodak, which incorporates
the printer into Kodak photo kiosks and markets the standalone version as the Kodak
Professional 9810 digital Photo Printer.
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.
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 specific 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 specific printers can degrade print speed and print quality.
Software
Zebra has specialized printer management, label design and driver solutions to help
unlock the full potential of Zebra printers. The ZebraLink Solutions suite of networking,
software, firmware, and printer management products is designed for ease of integration
and use, from small business to enterprise supply chain applications. Our goal is to
provide software that enables high levels of functionality 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.
The ZebraNet Bridge Enterprise printer management application enables organizations to
efficiently deploy, manage and monitor Zebra printers from a single location. Leveraging
the powerful printer management features built into many Zebra printers and Zebra
print servers, ZebraNet Bridge Enterprise delivers real-time printer error and status
notifications for maximum up-time performance. Easy to use and flexible tools within
the program allow system administrators to create highly manageable printer groups for
real-time control and monitoring of Zebra printers on their network.
Label design and integration software is specifically designed to optimize the
performance of Zebra bar code label printers. In 2005, we introduced Zebradesigner™
and Zebradesigner™ Pro, label design and printer configuration tools that bring greater
ease of use and improved functionality to the label design and printing process. Zebra
also offers BAR-ONE for mySAP® Business Suite for users of the SAP® ERP system. To
facilitate using Zebra printers with a broad range of software applications, Zebra 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.
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 the Netherlands facilities. We also
provide service at a depot repair center in Toronto, Canada through a partnership with
Getronics. Zebra Authorized Service Providers (ZASP) also provide repair services for
most Zebra products at their locations. In addition, IBM 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 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 five 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.
The card printer depot repair facilities are located in Camarillo, California and Preston,
U.K. 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.zebracard.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 first. 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 specific benefits to the end user.
Thermal transfer printing is used in all performance and some mid-range, desktop and
mobile 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 benefits 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 mobile 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 identification cards,
security access cards and financial 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 specifically 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.
Zebra also sells radio frequency identification (RFId) printer/encoders that can encode
data into RFId transponders embedded in direct thermal or thermal transfer printable
labels. These “smart labels” are finding growing acceptance in commercial and military
supply chain management, as well as many closed-loop proprietary tracking applications.
Zebra-manufactured printer/encoders and smart labels support both HF (13.56 MHz) and
UHF (860-960 MHz) applications for RFId.
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 named accounts. For media and consumables, we also sell directly
to end users through the Internet and telesales operations. distributors and VARs
purchase, stock and sell a variety of automatic identification components from different
manufacturers and customize systems for end-user applications using their systems
and application integration expertise. Because these sales channels provide specific
software, configuration, 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 certifications for mobile/wireless printers, supplies, service and radio frequency
identification (RFId) expertise. Beginning in 2005, we have also added certifications
for demonstrated expertise in vertical markets that we have targeted for future
growth. 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 identification 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.
In some instances, we have designated a customer as a Strategic Account when
purchases of Zebra products reach specified 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.
The sales function also encompasses a group that manages a small number of Global
Alliances. They direct the business development strategies for a limited number of third-
party relationships that are strategic to new demand creation for specific vertical markets
and/or specific applications.
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. Zebra typically experiences significant variance in
demand thus carries inventory and partners with key suppliers to deal with the variation.
Sales to international customers as a percent of net sales were as follows:
Research and Development
Zebra had research and development expenditures as follows (in thousands):
Percent of sales
Year Ended December 31,
2004
2005
48.5
45.8
2003
45.5
Research and development expenditures
Percent of sales
Year Ended December 31,
2004
2005
2003
$46,000
6.6
$37,093
5.6
$31,759
5.9
We believe that international sales have the long-term potential to grow faster than
domestic sales because of the lower penetration of automatic identification applications
outside North America. As a result, Zebra has invested resources to support our
international growth and currently operates facilities and sales offices, or has
representation, in 26 different countries.
Marketing. Marketing operations encompass marketing communications, product
marketing, vertical marketing, solutions marketing, market research and channel
marketing functions. The product marketing group identifies, evaluates and recommends
new product opportunities and manages product introductions, positioning and demand
creation. Product marketing also focuses on strategic planning and market definition and
analyzes Zebra’s competitive strengths and weaknesses.
Customers
Zebra has sold almost 5,000,000 bar code label and card printers to customers in about
100 countries as of december 31, 2005.
Sales to ScanSource, Inc., a distributor of automatic identification products, as a percent
of net sales were as follows:
Percent of sales
Year Ended December 31,
2004
2005
15.6
14.1
2003
13.8
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-efficient materials, sourcing and assembly
methods with high standards of workmanship. We assemble our products in-house
largely on a configure-to-order basis using components that have been sourced from
around the world. We have the in-house capability to produce mechanical and selected
electronic assemblies and design many of our own tools, fixtures and test equipment.
Often, our manufacturing and test engineers coordinate the development of new
products with our new product engineers and vendors. This collaboration increases
manufacturing efficiency by specifying and designing manufacturing processes and
facilities simultaneously with product design.
We devote significant resources to developing new printing solutions for our target markets
and ensuring that our efficiently manufactured products maintain high levels of reliability.
Competition
Many companies are engaged in the design, manufacture and marketing of bar code label
printers, card personalization solutions and dye sublimation photo printers. 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.
dye sublimation, the technology incorporated in our card printer, is only one of several
commercially available types of equipment used to personalize cards. We also compete
with companies that produce identification cards using alternative technologies,
which include ink-jet, thermal transfer, embossing, film-based systems, encoders,
laser engraving 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. 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.
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 specifications; breadth of product offerings; information
systems connectivity; price; level of technical support; supplies and applications support
offered by the manufacturer; available distribution channels; and financial resources to
support new product design and innovation. We believe that Zebra presently competes
favorably with respect to these factors.
We face competition in one or more of our product lines from the many competitors,
including the following (listed in alphabetical order): Altech; Argox; Canon; CIM; Cognitive
Solutions, a subsidiary of Axiohm Transaction Solutions; ColorX; Copal; datacard;
datamax, a unit of dover Corporation; Evolis; Fargo Electronics; Fuji; Godex; Hewlett-
Packard; Hitachi; Intermec Technologies; Lexmark International; LogickaComp; MagiCard;
Matica; Microcom; Mitsubishi; NBS; Nisca; Olmec; O’Neil Product development;
Olympus; Paxar; Poloroid; Printronix; Sato; Shinko; Song Woo Electronics; Sony; Taiwan
Semiconductor; Tokyo Electric Company; Victor data Systems; Woosim; and Xerox.
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 view radio frequency identification (RFId) smart label printing and encoding as a
complementary technology to bar coded label and receipt printing, offering significant
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 significant negative effect on Zebra’s business,
financial position, results of operations and cash flows.
Therefore, we continually assess competitive and complementary methods of bar code
printer and other means of automatic identification. Alternative print technologies
assessed include ink jet, laser, impact dot matrix and laser etching. While we cannot be
sure that new technology will not supplant direct thermal and thermal transfer printing
for bar code labels and receipts, 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. We are continually monitoring and evaluating new
HF and UHF RFId technologies, supporting their standards development, and rapidly
adopting RFId into new Zebra products as new markets and applications emerge.
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 212 United States and foreign patents
and have 290 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 significant 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.
Patents have become increasingly used by businesses generally as a strategic business
tool and in recent years the number of patent applications and grants has risen
dramatically. As a result, it is increasingly important that Zebra takes appropriate steps to
maintain and develop its own patent portfolio and reduce the risk of disputes involving
third party intellectual property rights.
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, 2006, Zebra employed approximately 2,500 persons. None of these
employees is a member of a union. We consider our employee relations to be very good.
Item 1A. 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, financial condition, operating results, and growth prospects.
Zebra could encounter difficulties 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 difficulties 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 benefits of any acquisition may not be realized. Moreover,
Zebra may be unable to identify, negotiate or finance 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 significant.
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 significant competition in developing and selling its systems. Principal
competitors have substantial marketing, financial, 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 efficient distribution networks.
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 profit 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
with suppliers or companies that produce complementary products. Any of these factors
could reduce Zebra’s earnings.
Zebra sources some of its component parts from sole source suppliers.
A disruption in the supply of such component parts could have a material adverse effect
on our operations and financial results.
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. In this regard, Zebra is involved
in costly patent litigation with Paxar Americas, Inc. and an unfavorable outcome could
be materially adverse to Zebra. See Note 16 to the Financial Statements included in this
Form 10-K. Also, as new technologies emerge, such as RFId, the intellectual property
rights of parties in such technologies can be uncertain. As a result, products involving
such technologies may have higher risk of claims of infringement of the intellectual
proprietary rights of third parties.
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 financial 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.
Zebra sells a significant portion of its products internationally and purchases important
components from foreign suppliers. These circumstances create a number of risks.
Zebra sells a significant 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 flow 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.
• Potentially limited intellectual property protection in certain countries may limit
recourse against infringing products or cause Zebra to refrain from selling in certain
geographic territories.
• Staffing and managing international operations may be unusually difficult.
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 officer 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.
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
qualified employees in the future.
Terrorist attacks or war could lead to further economic instability and adversely affect
Zebra’s stock price, operations, and profitability.
The terrorist attacks that occurred in the United States on September 11, 2001 caused
major instability in the U.S. and other financial 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 financial 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 is subject to ongoing tax examinations in various jurisdictions. As a result, we
may record incremental tax expense based on expected outcomes of such matters. In
addition, we may adjust previously reported tax reserves based on expected results of
these examinations. Such adjustments could result in an increase or decrease to Zebra’s
effective tax rate.
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 office 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 officers and directors of Zebra.
Zebra’s major facilities as of december 31, 2005, are listed below:
Location
Square Footage
Manufacturing, Administrative,
Production &
Warehousing
Research
& Sales
Total
Lease Expires
Vernon Hills, Illinois, USA
111,676
113,429
225,105
June 2014
Vernon Hills, Illinois, USA
—
34,000
34,000
February 2008
Camarillo, California, USA
Warwick, Rhode Island, USA
Greenville, Wisconsin, USA
Chula Vista, California, USA
Heerenveen, The Netherlands
High Wycombe, UK
Preston, UK
Total
97,921
50,872
27,000
14,200
48,427
—
30,450
380,546
72,156
170,077 Owned
48,968
99,840
April 2007
3,000
30,000 March 2007
—
14,200
February 2008
46,145
24,700
8,600
94,572 March 2025
24,700 October 2018
39,050 Owned
350,998
731,544
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 financial 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 had a lease that would have expired in October 2010. during december 2005, we
made a payment to surrender the remaining term of the lease, eliminating it from the
properties held as of december 31, 2005.
Item 3. Legal Proceedings
On April 23, 2003, Paxar Americas, Inc. (Paxar Americas) filed a patent infringement See
Note 16 in the Notes to the Consolidated Financial Statements included in this Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 6. Selected Consolidated Financial Data
Item 5. Market for Registrant’s Common Stock
and Related Stockholder Matters
CONSOLIDATED STATEMENTS OF EARNINGS DATA
(In thousands, except per share amounts)
Stock Information: Price Range and Common Stock
ZBRA. The following table shows the high and low trade prices for each fiscal quarter
in 2005 and 2004, as reported by the NASdAq Stock Market. Share prices were adjusted
for the first and second quarter of 2004 for a 50% stock dividend that was distributed
on August 25, 2004.
2005
High
Low
2004
First quarter
Second quarter
Third quarter
Fourth quarter
$55.51 $44.76
40.80
35.30
36.94
47.94
47.39
46.25
First quarter
Second quarter
Third quarter
Fourth quarter
High
Low
$48.43 $41.71
47.23
51.44
48.48
59.19
61.89
60.39
Source: The NASDAQ Stock Market
At February 23, 2006, the last reported price for the Class A Common Stock was $44.10
per share, and there were 387 registered stockholders of record for the Company’s Class
A Common Stock. In addition, we had approximately 22,000 stockholders who owned
Zebra stock in street name.
Dividend Policy
Since our initial public offering in 1991, we have not declared any cash dividends or
distributions on our capital stock. Zebra currently intends to retain its earnings to
finance future growth and therefore does not anticipate paying any cash dividends
in the foreseeable future.
Treasury Shares
during 2005, Zebra purchased 1,866,375 shares of Zebra common stock under a purchase
authorization by the Board of directors. In September 2005, the Board authorized the
purchase of up to an additional 2,500,000 shares of Zebra common stock. The purchase
price is at management’s discretion, and there is no expiration on the authorization.
during 2005, Zebra purchased shares as follows:
Period
August 2005
(July 25 – August 27)
September 2005
(August 28 – October 1)
Total
Total number
of shares
purchased
Average
price paid
per share
Total number of
shares purchased
as part of publicly
announced program
Maximum number
of shares that may
yet be purchased
under the program
1,580,975
$37.64
1,566,375
285,400
1,866,375
38.23
$37.73
115,000
1,681,375
2,500,000
2005
Year Ended December 31,
2004
2003
2002
2001
Net sales
Cost of sales
Gross profit
Total operating
expenses
$ 702,271
$663,054
$536,397
$ 475,611
$450,008
348,090
319,895
263,320
244,864
240,115
354,181
343,159
273,077
230,747
209,893
199,970 (1) 168,086 (1) 143,310
128,950
117,481
Operating income
154,211
175,073
129,767
101,797
92,412
Income before
income taxes
168,465
184,548
135,992
110,883
96,139
Net income
$ 111,603
$ 120,643
$ 91,696
$ 71,595
$ 61,529
Earnings per share
Basic
diluted
$ 1.56
$ 1.55
$ 1.69
$ 1.66
$ 1.30 (2) $ 1.03 (2)
$ 1.28 (2) $ 1.02 (2)
$0.89 (2)
$0.89 (2)
Weighted average
shares outstanding
Basic
diluted
71,364
72,022
71,556
72,539
70,647 (2)
71,495 (2)
69,678 (2)
70,305 (2)
68,923 (2)
69,457 (2)
CONSOLIDATED BALANCE SHEET DATA
(In thousands)
2005
2004
2003
2002
2001
December 31,
Cash and cash
equivalents and
investments and
marketable securities $544,239
$557,993
$447,848
$348,577
$249,349
Working capital
678,366
665,062
535,816
427,676
330,510
Total assets
912,199
862,222
701,611
573,088
479,556
Long-term
obligations (3)
5,521
4,011
2,853
1,613
408
Stockholders’ equity
850,514
797,654
651,915
534,155
445,007
(1) Includes pretax charges related to the closure/consolidation of the Varades, France; the Warwick, Rhode Island;
and the Wakefield, Rhode Island facilities (see Note 19 in the Notes to the Consolidated Financial Statements
included in this Form 10-K) and the in-process research and development costs related to the acquisition of
Atlantek, Inc. in 2003 (see Note 4 in the Notes to the Consolidated Financial Statements included in this Form 10-
K).
(2) Restated for 3-for-2 stock splits in 2003 and 2004 that were paid in the form of 50% stock dividends.
Of the shares purchased, 185,000 shares were purchased in satisfaction of our obligations
related to the exercise of put options issued by Zebra.
(3) Long-term obligations include deferred compensation (see Note 18 in the Notes to the Consolidated Financial
Statements included in this Form 10-K).
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business for the fourth quarter of 2005 reflected strength in international sales offset by minimal sales growth in North America due to a decline in mobile printer shipments to retailers.
We had record sales in Latin America. In our Europe, Middle East and Africa (EMEA) region, unfavorable foreign exchange rate movements reduced sales growth in reported U.S. dollars
from a record in local currencies. High growth in supplies sales also had a positive effect on the quarter’s results. Profitability declined, as lower average unit prices, warranty expenses
and the negative effects of foreign exchange reduced gross margin, and higher payroll expenses, intellectual property work, and new product development and IT project costs
increased operating expenses.
For 2005, sales growth did not meet our expectations. International regions benefited from having more Zebra representatives serving a broader base of customers in emerging
territories. In North America, however, the significant weakness in sales to retailers, versus robust sales to this sector for 2004, contrasted with firm sales into non-retail sectors
and improvements in sales of supplies. delays in new product introductions also restricted sales growth for much of the year. Within this environment, we maintained spending on
key strategic activities to extend our global competitive leadership. These activities include expanding geographically, building stronger channel relationships, and advancing our
products and technology to serve a broader range of specialty printing applications. Zebra also incurred higher legal costs, warranty expense, and write-offs in product development.
Consequently, Zebra experienced declines in annual net income and earnings per share.
Results of Operations: Fourth Quarter of 2005 versus Fourth Quarter of 2004, Year ended December 31, 2005 versus Year ended December 31, 2004
Sales
Sales by product category, percent change, and percent of total sales for the three months
and year ended december 31, 2005, and december 31, 2004, were (in thousands, except
percentages):
Product Category
2005
2004 Change
Three Months Ended
December 31,
Percent of Percent of
Percent Total Sales Total Sales
2004
2005
Hardware
Supplies
Service and software
Shipping and handling
Cash flow hedging activities
$137,803
$137,529
33,581
30,901
6,202
833
875
6,077
1,444
(1,077)
Total sales
$179,294
$174,874
0.2
8.7
2.1
(42.3)
NM
2.5
76.9
18.7
3.5
0.4
0.5
100.0
78.6
17.7
3.5
0.8
(0.6)
100.0
Product Category
2005
2004 Change
Year Ended
December 31,
Percent of Percent of
Percent Total Sales Total Sales
2004
2005
Hardware
Supplies
$540,679
$518,556
129,183
116,877
Service and software
25,217
24,310
Shipping and handling
Cash flow hedging activities
5,575
1,617
4,950
(1,639)
Total sales
$702,271
$663,054
4.3
10.5
3.7
12.6
NM
5.9
77.0
18.4
3.6
0.8
0.2
100.0
78.2
17.6
3.7
0.7
(0.2)
100.0
Sales to customers by geographic region, percent changes and percent of total sales for
the three months and year ended december 31, 2005, and december 31, 2004, were (in
thousands, except percentages):
Geographic Region
2005
2004 Change
Three Months Ended
December 31,
Percent of Percent of
Percent Total Sales Total Sales
2004
2005
Europe, Middle East
and Africa
Latin America
Asia-Pacific
Total International
North America
Total sales
$59,942
$59,398
12,923
15,867
88,732
90,562
10,597
14,534
84,529
90,345
$179,294
$174,874
Year Ended
December 31,
0.9
21.9
9.2
5.0
0.2
2.5
33.4
7.2
8.8
49.4
50.6
34.0
6.1
8.3
48.4
51.6
100.0
100.0
Percent of Percent of
Percent Total Sales Total Sales
2004
2005
Geographic Region
2005
2004 Change
Europe, Middle East
and Africa
Latin America
Asia-Pacific
Total International
North America
Total sales
$230,365
$213,559
46,878
62,974
38,119
52,302
340,217
303,980
362,054
359,074
$702,271
$663,054
7.9
23.0
20.4
11.9
0.8
5.9
32.8
6.7
9.0
48.5
51.5
32.2
5.7
7.9
45.8
54.2
100.0
100.0
Sales growth for the fourth quarter and full year reflect the effect of investments to expand
our global presence and strengthen relationships with value-added resellers and other
distribution channels. The success of these efforts was offset by significantly lower sales
in North America to large retail accounts, which purchased large quantities of primarily
mobile printers the year before, primarily in the preceding fourth quarter.
0
New printer products (defined as printers released within 18 months prior to the end of
the applicable fiscal period) as a percent of total printer product sales were as follows:
Gross Profit
Gross profit information is summarized below (in thousands, except percentages):
Three months ended
Year ended
December 31,
2005
6.6
10.3
2004
19.0
23.9
The decline in sales of new printer products is the result of technical problems that
delayed the introduction of various new products as well as the shifting of some new
product engineering resources to environmental compliance. We expect several new
printer products to begin shipping early in 2006.
Our international sales are denominated in multiple currencies, primarily the dollar,
pound and euro. This directly causes our reported sales to be subject to fluctuations
based on changes in currency rates. We estimate that unfavorable foreign exchange
movements of the euro and the pound versus the dollar had a negative impact of
$4,002,000 on sales during the fourth quarter and $1,929,000 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 gain of $875,000 and a full-year gain of $1,617,000. See Note 15 to the Financial
Statements for a more detailed discussion of this hedging program.
Printer unit volumes and average selling price information is summarized below:
Total printers shipped
Average selling price of printers shipped
Total printers shipped
Average selling price of printers shipped
Three Months Ended
December 31,
2005
192,126
$600
2004
181,691
$638
Year Ended December 31,
2005
719,576
$629
2004
667,044
$646
Percent
Change
5.7
(6.0)
Percent
Change
7.9
(2.6)
For all of 2005, with the exception of mobile printers, unit volumes increased in all printer
product lines, with notable strength in mid-range and desktop printers. For the full year, a
mix toward lower priced products resulted in a 2.6% decrease in the average selling price
of printers shipped.
December 31,
2005
2004
Percent
Change
Percent of
Percent of
Total Sales Total Sales
2004
2005
Three months ended
Year ended
$ 89,791
354,181
$ 90,895
343,159
(1.2)
3.2
50.1
50.4
52.0
51.8
The decline in gross profit margin for the fourth quarter is related to lower average unit
prices, increased warranty costs of $1,411,000 and unfavorable exchange rate movements
of $3,684,000, offset by a 2.5% sales increase. For the full year, gross margin decreased
largely because of lower average unit prices, increased warranty costs of $3,185,000
primarily related to the recall of a now discontinued product, unfavorable exchange rate
movements of $2,327,000 and higher distribution costs of $1,908,000, which were related
to the new distribution center in the Netherlands.
Selling and Marketing Expenses
Selling and marketing expenses are summarized below (in thousands, except percentages):
December 31,
2005
2004
Percent
Change
Percent of
Percent of
Total Sales Total Sales
2004
2005
Three months ended
Year ended
$25,286
89,707
$22,615
77,062
11.8
16.4
14.1
12.8
12.9
11.6
Higher selling and marketing expenses reflect ongoing investments in demand-generating
activities to build brand equity in our core product lines as well as in the emerging
area of radio frequency identification (RFId). during the fourth quarter of 2005,
selling and marketing expenses increased due to higher payroll costs of $1,264,000
from increased staffing as well as higher advertising and market development
funding of $962,000. For the full year, the payroll costs increased $6,836,000 and
advertising and market development funding increased $1,976,000. In addition to
increases in the items mentioned above, outside commissions, offsite meeting and
travel expenses increased during 2005. The increased staffing was primarily focused
on increasing our presence in targeted geographical territories to support growth
in those regions, building sales and marketing teams to deliver vertical market
applications, and strengthening strategic alliances with complementary companies.
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):
December 31,
2005
2004
Percent
Change
Percent of
Percent of
Total Sales Total Sales
2004
2005
Three months ended
Year ended
$11,777
46,000
$ 9,368
37,093
25.7
24.0
6.6
6.6
5.4
5.6
quarterly product development expenses fluctuate widely depending on the status of
ongoing projects. We are committed to a long-term strategy of significant investment
in product development. For the fourth quarter of 2005, project expenses increased
by $1,594,000 as a result of additional expenditures for new products including radio
frequency identification (RFId), and payroll expenses increased $665,000. For the full
year, project expenses increased $5,277,000, payroll costs increased $2,130,000, and
professional services increased $744,000. Included in the year-to date project expenses
are write-offs of tooling and other materials related to product development in the
amount of $2,726,000.
For the full year of 2005, we incurred research and development costs to re-engineer
our products to make them compliant with new environmental laws that go into
effect in 2006. These laws include eliminating the lead content in our products. These
environmental compliance costs totaled $1,049,000 for the fourth quarter and $2,882,000
for the full year.
General and Administrative Expenses
General and administrative expenses are summarized in the table below (in thousands,
except percentages):
December 31,
2005
2004
Percent
Change
Percent of
Percent of
Total Sales Total Sales
2004
2005
Three months ended
Year ended
$13,665
59,910
$11,998
49,240
13.9
21.7
7.6
8.5
6.9
7.4
For the fourth quarter of 2005, general and administrative expenses increased due
to higher information systems expenses of $797,000 and higher legal expenses of
$1,280,000, primarily related to work on intellectual property matters, including the
litigation with Paxar as described in Note 16 to the Financial Statements. We expect
higher legal expenses to continue for subsequent quarters. For the full year of 2005,
general and administrative expenses increased due to higher information system
expenses of $1,220,000, increased relocation expenses of $572,000, higher payroll costs
of $930,000 and higher legal expenses of $6,628,000 primarily related to intellectual
property expenses including the Paxar litigation.
Operating Income
Operating income is summarized in the following table (in thousands, except percentages):
December 31,
2005
2004
Percent
Change
Percent of
Percent of
Total Sales Total Sales
2004
2005
Three months ended
Year ended
$ 38,194
154,211
$ 46,121
175,073
(17.2)
(11.9)
21.3
22.0
26.4
26.4
Non-operating Income and Expenses
Zebra’s non-operating income and expense items are summarized in the following table
(in thousands):
Investment income
Interest expense
Foreign exchange gains (losses)
Other, net
Three Months Ended
December 31,
Year Ended
December 31,
2005
$3,814
(8)
87
(74)
2004
$2,949
(5)
(9)
(419)
2005
$13,417
(79)
1,286
(370)
2004
$10,628
(44)
485
(1,594)
Total other income (expense)
$3,819
$2,516
$14,254
$ 9,475
Rate of Return Analysis:
Average cash and marketable
securities balances
$536,981
$540,517
$551,116
$502,921
Annualized rate of return
2.8%
2.2%
2.4%
2.1%
Income Taxes
The effective income tax rate for the fourth quarter was 32.7% compared with 34.3% for
the same quarter last year. For the full year of 2005, the effective income tax rate was
33.8% versus 34.6% for 2004. during the fourth quarter, we reduced tax reserves as a
result of favorable resolution of certain tax audits. In addition, we took advantage of the
deduction for qualified domestic production activities included in the American Jobs
Creation Act of 2004.
Net Income
Zebra’s net income is summarized below (in thousands, except per share amounts):
Three Months Ended
December 31,
2005
2004
Year Ended
December 31,
2005
2004
Net income
diluted earnings per share
$ 28,293
$ 0.40
$ 31,962
$ 0.44
$ 111,603
1.55
$
$ 120,643
1.66
$
Comparison of Years Ended December 31, 2004 and 2003
Printer unit volumes and average selling price information is summarized below:
Sales
Sales by product category, related percent changes and percent of total sales for 2004
and 2003 were as follows:
Total printers shipped
Average selling price of printers shipped
Year Ended December 31,
2004
667,044
$646
2003
540,431
$627
Percent
Change
23.4
3.0
Product Category
Hardware
Supplies
Service and software
Shipping and handling
Percent of Percent of
Year ended December 31, Percent Total Sales Total Sales
2003
Change
2004
2004
2003
$518,556
$409,144
116,877
24,310
4,950
98,556
24,378
4,113
266
26.7
18.6
(0.1)
20.4
NM
23.6
78.2
17.6
3.7
0.7
(0.2)
100.0
76.3
18.4
4.5
0.8
—
100.0
Cash flow hedging activities
(1,639)
Total sales
$663,054
$536,397
Sales to customers by geographic region, related percent changes, and percent of total
sales for 2004 and 2003 were as follows:
Geographic Region
Europe, Middle East
and Africa
Latin America
Asia-Pacific
Total International
North America
Total sales
Percent of Percent of
Year ended December 31, Percent Total Sales Total Sales
2003
Change
2004
2004
2003
$213,559
$170,544
38,119
52,302
303,980
359,074
29,406
43,904
243,854
292,543
$663,054
$536,397
25.2
29.6
19.1
24.7
22.7
23.6
32.2
5.7
7.9
45.8
54.2
31.8
5.5
8.2
45.5
54.5
100.0
100.0
Sales growth for 2004 reflected the 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.
This growth was well balanced across geographies, products, and channels. We
experienced notable sales growth in mobile printers, as the mainstream adoption of
wireless technology had expanded the uses of mobile printing in applications across
an increasing number of vertical markets. In addition, channel programs implemented
in North America 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.
Our international sales were benefited in 2004 by favorable exchange rates. For the
full year of 2004, sales translated into dollars increased by $17,626,000 compared
to translating the same sales using exchange rates that prevailed in 2003.
For all of 2004, unit volumes increased in nearly all product lines and all regions, with
notable strength in mobile printers. In addition, 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.
Gross Profit
Gross profit information is summarized below (in thousands except percentages):
For the Year Ended
December 31, 2004
December 31, 2003
Percent Change
Gross profit increased due to:
Gross Profit
$343,159
273,077
25.7
Percent of
Total Sales
51.8
50.9
• Higher capacity utilization related to the higher sales volume, representing
$34,010,000 of the total gross profit increase for 2004.
• Foreign exchange rate movements, which we estimate increased gross profit
by $16,239,000 for 2004.
• Changes in product mix, cost reductions and other items accounted for
$19,833,000 of the margin improvement during 2004.
Selling and Marketing Expenses
Selling and marketing expenses are summarized below (in thousands, except percentages):
For the Year Ended
December 31, 2004
December 31, 2003
Percent Change
Selling and
Marketing Expenses
Percent of
Total Sales
$77,062
66,635
15.6
11.6
12.4
The increase in selling and marketing expenses for 2004 resulted from our investments
in demand-generating activities to build brand equity in our core product lines as well
as in the emerging area of radio frequency identification (RFId). Advertising and market
development funding increased $2,475,000. Payroll costs increased $4,052,000 due
to placement of more Zebra representatives in high-growth international regions and
better coverage of strategic accounts. Increases also occurred in outside commissions,
consulting and legal expenses.
Research and Development Costs
Research and development costs are summarized below (in thousands, except
percentages):
For the Year Ended
December 31, 2004
December 31, 2003
Percent Change
Research and
Development Costs
Percent of
Total Sales
$37,093
31,759
16.8
5.6
5.9
business.
The increase in operating income is attributable to the following factors:
• Accelerated sales growth compared to 2003,
• Improved gross margins resulting from increased overhead utilization, and
• Favorable changes in foreign exchange rates for Zebra’s non-dollar denominated
For 2004, research and development expenses increased primarily due to increases in
payroll and benefits of $3,253,000 over 2003. Project expenses and consulting expenses
also increased as a result of additional expenditures for new products including radio
frequency identification (RFId).
General and Administrative Expenses
General and administrative expenses are summarized below (in thousands, except
percentages):
General and
Administrative Expenses
Percent of
Total Sales
For the Year Ended
December 31, 2004
December 31, 2003
Percent Change
Investment income
Interest expense
Foreign exchange gains (losses)
$49,240
41,352
19.1
7.4
7.7
Other, net
Total other income (expense)
As a result of these actions, operating income increased by 11.3 percentage points more
than the rate of sales growth during 2003.
Non-operating Income and Expenses
Zebra’s non-operating income and expense items are summarized in the following table
(in thousands):
Year Ended December 31,
2004
$10,628
(44)
485
(1,594)
$ 9,475
2003
$8,553
(154)
(552)
(1,622)
$6,225
For 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.
Rate of Return Analysis:
Average cash and marketable securities balance
Annualized rate of return
$502,921
2.1%
$397,755
2.2%
Income Taxes
The effective income tax rate for 2004 was 34.6% versus 32.6% in 2003. The rate for
2003 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 2003.
Operating Income
Operating income is summarized in the following table (in thousands, except percentages):
Net Income
Zebra’s net income is summarized below (in thousands, except per share amounts):
For the Year Ended
December 31, 2004
December 31, 2003
Percent Change
Operating Income
Percent of
Total Sales
$175,073
129,767
34.9
26.4
24.2
Net income
diluted earnings per share
Year Ended December 31,
2004
$120,643
$ 1.66
2003
$91,696
$ 1.28
Critical Accounting Policies and Estimates
Management prepared the consolidated financial statements of Zebra Technologies
Corporation under accounting principles generally accepted in the United States of
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 financial statements.
The following accounting policies comprise those that we believe are the most critical in
understanding and evaluating Zebra’s reported financial results.
Revenue Recognition
Product revenue is recognized once four criteria are met: (1) we have persuasive evidence
that an arrangement exits; (2) delivery has occurred and title has passed to the customer,
which happens at the point of shipment provided that no significant obligations remain;
(3) the price is fixed and determinable; and (4) collectibility is reasonably assured. Other
items that affect our revenue recognition include:
Customer returns
Customers have the right to return products that do not function properly within
a limited time after delivery. We monitor and track product returns and record a
provision for the estimated future returns based on historical experience and any
notification received of pending returns. Returns have historically been within
expectations and the provisions established, but Zebra cannot guarantee that it will
continue to experience return rates consistent with historical patterns. Historically,
our product returns have not been significant. However, if a significant issue should
arise, it could have a material impact on our financial statements.
Growth Rebates
Some of our channel program partners are offered incentive rebates based on the
attainment of specific growth targets related to products 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.
Software Revenue
We sell three types of software and record revenue as follows:
• Our printers contain embedded firmware, which is part of the hardware purchase.
We consider the sale of this firmware to be incidental to the sale of the printer and
do not attribute any revenue to it.
• 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, 2005, consisted of U.S.
government securities (12.1%), state and municipal bonds (75.5%), corporate bonds
(4.0%), and partnership interests (8.4%). 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 debt securities that Zebra has the ability
and intent to hold until maturity. All securities not included in trading or held-to-maturity
are classified 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:
Factors considered that may trigger an impairment review consist of:
• Significant underperformance relative to expected historical or projected future
operating results,
• Credit reviews of all new customer accounts,
• Ongoing credit evaluations of current customers,
• Significant changes in the manner of use of the acquired assets or the strategy for
the overall business,
• Credit limits and payment terms based on available credit information,
• Significant negative industry or economic trends,
• Adjustments to credit limits based upon payment history and the customer’s current
• Significant decline in Zebra’s stock price for a sustained period, and
credit worthiness, and
• An active collection effort by regional credit functions, reporting directly to the
corporate financial officers.
We reserve for estimated credit losses based upon historical experience and specific
customer collection issues. Over the last three years, accounts receivable reserves
varied from 1.0% to 2.8% of total accounts receivable. Accounts receivable reserves as of
december 31, 2005, were $1,116,000, or 1.0% of the balance due. We feel this reserve level
is appropriate considering the quality of the portfolio as of december 31, 2005. 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 first-in, first-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.
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, 2005, reserves for excess
and obsolete inventories were $8,755,000, or 12.3% of gross inventory. We feel this
reserve level is appropriate considering the quantities and quality of the inventories as
of december 31, 2005.
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 2005. At that time, no adjustment to goodwill was necessary
due to impairment.
We evaluate the impairment of identifiable intangibles and other long-lived assets
whenever events or changes in circumstances indicate that the carrying value may not
be recoverable.
• Significant decline in market capitalization relative to net book value.
If we believe that one or more of the above indicators of impairment have occurred, we
measure impairment based on projected discounted cash flows using a discount rate that
incorporates the risk inherent in the cash flows. Net intangible assets, long-lived assets
and goodwill amounted to $137,742,000 as of december 31, 2005.
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 confirm or revise estimates and
reserves as appropriate.
For a discussion of all current litigation matters, see Note 16 in the Notes to the
Consolidated Financial Statements included in the Form 10-K.
Stock-Based Compensation
As of december 31, 2005, 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 reflected 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. during the first quarter of 2006, we
will begin expensing stock options as required under SFAS No. 123(R), Share-Based
Payments. See Notes 2 and 3 of the Notes to the Consolidated Financial Statements
included in the Form 10-K for further discussion.
Expectations
during our quarterly conference call on February 8, 2006, we provided net sales and
earnings guidance for the first quarter of 2006 as follows (amounts in thousands, except
per share data):
Net sales
Gross profit margins
Operating expenses
Earnings per share
First Quarter 2006
$175,000 to $185,000
50.0% to 51.0%
$52,000 to $54,000
$0.35 to $0.40
The above expectations include an estimated $0.02 per diluted share for the expensing of
stock options as required under SFAS No. 123 (R), Share-Based Payments. The effective
tax rate is expected to be 34.5% of income before income taxes.
Liquidity and Capital Resources
during the third quarter of 2005, Zebra initiated a program to repurchase our own shares.
Under this program, we repurchased a total of 1,866,375 shares for $70,421,000. As a
result, Zebra’s cash and investment balances have decreased to $544,239,000 as of
december 31, 2005 compared with $557,993,000 at december 31, 2004. Other factors
affecting cash and investment balances during 2005 include (note that changes discussed
below include the impact of foreign currency):
• Operations provided a net cash increase of $92,730,000 primarily from net income.
• Accounts receivable increased $20,422,000 because of higher sales and slower
collections. days sales outstanding increased to 56.8 at the end of 2005 from 50.6 at
the end of 2004.
• Inventories increased $6,204,000. Compared to the same period a year ago,
inventory turns decreased to 5.6 from 5.7.
• Accounts payable increased by $3,792,000, in relation to the increase in inventory.
• Taxes payable decreased $5,170,000 due to the amount of estimated tax payments
made in 2005.
• Purchases of property and equipment totaled $14,286,000.
• Acquisition of assets of Retail Systems International, Inc. totaled $7,797,000.
• Acquisition of intangible assets totaled $13,754,000.
• Net sales of investments and marketable securities totaled $11,364,000.
• Stock option exercises and purchases under the stock purchase plan contributed
$11,753,000.
Zebra’s contractual obligations as of december 31, 2005 were:
Payments due by period
Contractual Obligations
Less than
1 year
Total
1-3 years
3-5 years
More than
5 years
Operating lease obligations
44,438
5,971
8,433
7,661
22,373
Purchase obligations
42,619
42,619
—
—
—
Total
$87,057
$48,590
$8,433
$7,661
$22,373
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 sufficient to finance anticipated capital requirements. It is our intention
to actively pursue opportunities to acquire other businesses.
Recently Issued Accounting Pronouncements
In April 2005, the FASB changed the implementation date for SFAS No. 123(R), Share
Based Payment, which 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 provisions of this statement will now become effective for
Zebra during the first quarter of 2006. We plan to adopt the provisions of this statement
using the modified retrospective method, which requires the restatement of the
financial statements of all prior years as if the fair-value-based method of accounting for
awards granted, modified, or settled in cash had been used in all fiscal years beginning
after december 15, 1994. Accordingly, we expect the impact on Zebra’s consolidated
financial statements to be consistent with the fair value disclosures included in Note
2 to the Consolidated Financial Statements included in this Form 10-K, with additional
restatements made to the balance sheet.
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 fixed 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
financial position or results of operations.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections
– a Replacement of APB Opinion No. 20 and SFAS No. 3, which changes the requirements
for the accounting and reporting of a change in accounting principle. The Statement
applies to all voluntary changes in accounting principle and to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. This Statement requires retrospective application
to prior periods’ financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative effect of
the change. Zebra is required to adopt this statement during the first quarter of 2006. We
do not expect the adoption of this Statement to have a material impact on our financial
condition or results of operations.
In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, The Meaning of Other-
Than-Temporary Impairment and Its Application to Certain Investments, which addresses
the determination as to when an investment is considered impaired, whether that
impairment is other than temporary, and the measurement of an impairment loss. This
FSP also includes accounting considerations subsequent to the recognition of an other-
than-temporary impairment and requires certain disclosures about unrealized losses
that have not been recognized as other-than-temporary impairments. The guidance in
this FSP amends SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and SFAS No. 124, Accounting for Certain Investments Held by Not-for-Profit
Organizations, and APB Opinion No. 18, The Equity Method of Accounting for Investments
in Common Stock. This FSP is effective for reporting periods beginning after december
15, 2005. We do not expect the adoption of this Statement to have a material impact on
our financial condition or results of operations.
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.
Zebra mitigates interest rate risk with an investment policy that requires the use
of outside professional investment managers, investment liquidity, and broad
diversification 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 (in thousands, except per share data).
Interest rate sensitive instruments
+1 percentage point movement
Effect on Pretax Income
Effect on diluted EPS (after tax)
-1 percentage point movement
Effect on Pretax Income
Effect on diluted EPS (after tax)
As of December 31,
2004
2005
$ (6,119)
$ (0.06)
$ 6,119
$ 0.06
$ (6,174)
$ (0.06)
$ 6,174
$ 0.06
Because these securities are classified 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.
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
financial instruments. See Note 15 of the Notes to the Consolidated Financial Statements
included in this form 10-K for further discussions of hedging activities.
The following table sets forth the impact of a ten percent movement in the dollar/pound
and dollar/euro rates measured as if Zebra did not engage in the selective hedging
practices described above and in Note 15. It is based on the dollar/euro and dollar/pound
exchange rates and euro and pound denominated assets and liabilities (in thousands,
except per share data).
Foreign exchange
dollar/pound
Effect on Pretax Income
Effect on diluted EPS (after tax)
dollar/euro
Effect on Pretax Income
Effect on diluted EPS (after tax)
Euro/pound
Effect on Pretax Income
Effect on diluted EPS (after tax)
As of December 31,
2004
2005
$ 304
$ 0.00
$ 2,594
$ 0.02
$ 2,335
$ 0.02
$ 3,210
$ 0.03
$ 4,841
$ 0.04
—
—
Equity Price Risk
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. 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 ten percent change in the value of all equity
positions held by Zebra’s investment managers (in thousands, per share data).
Equity price sensitive instruments
+10 percent movement
Effect on Pretax Income
Effect on diluted EPS (after tax)
-10 percent movement
Effect on Pretax Income
Effect on diluted EPS (after tax)
As of December 31,
2004
2005
$ 4,287
$ 0.04
$ 4,006
$ 0.04
$ (4,287)
$ (0.04)
$ (4,006)
$ (0.04)
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.
Item 8. Financial Statements and Supplementary Data
The financial statements and schedule of the Company are annexed to this Report as
pages F-2 through F-34. An index to such materials appears on page F-1.
Changes in Internal Control over Financial Reporting
during 2005, we made 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 financial reporting.
Inherent Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer,
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 reflect the
fact that there are resource constraints, and the benefits 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.
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 defined 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 Officer and Chief Financial Officer. Based on that
evaluation, our Chief Executive Office and Chief Financial Officer, 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 specified
in the SEC’s rules and forms, and (ii) information required to be disclosed by us in our
reports that we file or submit under the Exchange Act is accumulated and communicated
to our management, including our principal executive and principal financial officers, or
persons performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act to provide reasonable assurance regarding the reliability of our financial
reporting and the preparation of the financial statements for external purposes in
accordance with generally accepted accounting principles. Our management assessed
the effectiveness of our internal control over financial reporting as of december 31, 2005.
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, 2005, our internal control over financial reporting is
effective. Our independent registered public accounting firm, Ernst & Young LLP, has
issued an attestation report on management’s assessment of Zebra’s internal control
over financial reporting. That report is included on page 36 of this Report on Form 10-K.
In our opinion, management’s assessment that Zebra Technologies Corporation
and subsidiaries maintained effective internal control over financial reporting as of
december 31, 2005, is fairly stated, in all material respects, based on COSO criteria.
Also, in our opinion, Zebra Technologies Corporation and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of december 31,
2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Zebra Technologies
Corporation and subsidiaries as of december 31, 2005, and the related consolidated
statements of earnings, comprehensive income, stockholders’ equity, and cash flows for
the year then ended, and our report dated February 24, 2006 expressed an unqualified
opinion thereon.
/s/Ernst & Young LLP
Chicago, Illinois
February 24, 2006
Report of Independent Registered Public Accounting Firm
On Internal Control over Financial Reporting
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 and subsidiaries maintained effective internal control over
financial reporting as of december 31, 2005, based on criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Zebra Technologies Corporation’s
management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial
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 financial 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 financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial 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 financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial 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 financial statements.
Because of its inherent limitation, internal control over financial 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.
0
PART III
SIGNATURES
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 27th day of February 2006.
ZEBRA TECHNOLOGIES CORPORATION
By: /s/Edward L. Kaplan
Edward L. Kaplan
Chairman and
Chief Executive Officer
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
/s/Edward L. Kaplan
Edward L. Kaplan
Chief Executive Officer and
Chairman of the Board of directors
(Principal Executive Officer)
/s/Gerhard Cless
Gerhard Cless
Executive Vice President,
director
/s/Charles R. Whitchurch
Charles R. Whitchurch
Chief Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
/s/Christopher G. Knowles
Christopher G. Knowles
director
/s/Ross W. Manire
Ross W. Manire
/s/Robert J. Potter
Robert J. Potter
/s/Michael A. Smith
Michael A. Smith
director
director
director
Date
February 27, 2006
February 27, 2006
February 27, 2006
February 27, 2006
February 27, 2006
February 27, 2006
February 27, 2006
Item 10. Directors and Executive Officers of the Registrant
We have adopted a Code of Ethics that applies to Zebra’s Chief Executive Officer, Chief
Financial Officer 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 Officers.”
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 Beneficial 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 Beneficial
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 financial statements and schedule filed as part of this report are listed in the
accompanying Index to Financial Statements and Schedule. The exhibits filed as a part
of this report are listed in the accompanying Index to Exhibits.
Index to Exhibits
(1) Certificate of Incorporation of the Registrant.
10.13 (13)
Amendment to the lease between the Registrant and Unique Building
Corporation for the Registrant’s facility in Vernon Hills, Illinois,
dated June 2, 1996.
(2) Certificate of Amendment to Certificate of Incorporation of the Registrant.
10.14 (14)
(3) Certificate of Amendment to Certificate of Incorporation of the Registrant.
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.
(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 certificate representing Class A Common Stock.
10.15
(2)
2002 Non-Employee director Stock Option Plan. +
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-qualified
Stock Option Agreement. +
10.18 (15)
2005 Executive deferred Compensation Plan. +
10.19 (16)
Employment Agreement dated July 17, 1997 and Interoffice Memorandum
dated January 27, 1997 between the Registrant and Charles R. Whitchurch. +
Rights Agreement between the Registrant and Mellon Investor Services,
as Rights Agent.
10.20 (16)
Employment Agreement between the Registrant and Veraje Anjargolian,
dated April 1, 1997. +
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
(6)
(7)
(8)
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. +
10.5
(10) Amendment No. Four to the 1997 Stock Option Plan. +
10.6
10.7
(8)
(4)
Form of Stock Option Agreement. +
Form of Indemnification 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)
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.
10.21 (17)
Employment Agreement between the Registrant and Phil Gerskovich,
dated March 10, 2005. +
10.22 (18)
Employment Agreement between the Registrant and Bruce Ralph,
dated May 9, 2005. +
10.23 (19)
Form of Stock Option Agreement. +
10.24 (19)
Form of Non-Employee director Stock Option Agreement. +
21.0
23.1
23.2
31.1
31.2
32.1
32.2
Subsidiaries of the Registrant.
Consent of Ernst & Young LLP, independent registered public accounting firm.
Consent of KPMG LLP, independent registered public accounting firm.
Certification pursuant to Rule 13a-14(a)/15d-14(a).
Certification pursuant to Rule 13a-14(a)/15d-14(a).
Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
Previously filed 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 filed 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 filed 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 filed 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 filed with the Securities and Exchange Commission as an Exhibit to the
Company’s Annual Report on Form 10-K for the fiscal year ended december 31,
1992, and incorporated herein by reference.
Previously filed 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 filed with the Securities and Exchange Commission as an Exhibit to
the Company’s Annual Report on Form 10-K for the fiscal year ended december
31, 1997, and incorporated herein by reference.
Previously filed 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.
Previously filed 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 filed 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.
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Company’s Annual Report on Form 10-K for the fiscal year ended december 31,
1993, and incorporated herein by reference.
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Company’s Annual Report on Form 10-K for the fiscal year ended december 31,
1994, and incorporated herein by reference.
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Company’s Annual Report on Form 10-K for the fiscal year ended december 31,
1996, and incorporated herein by reference.
Previously filed 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 filed with the Securities and Exchange Commission as an Exhibit
to the Company’s Current Report on Form 8-K filed on February 9, 2005, and
incorporated herein by reference.
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Company’s Annual Report on Form 10-K for the fiscal year ended december 31,
2004, and incorporated herein by reference.
Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company’s Current Report on Form 8-K filed on March 11, 2005, and
incorporated herein by reference.
Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company’s Current Report on Form 8-K filed on May 10, 2005, and
incorporated herein by reference.
Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company’s Current Report on Form 8-K filed on February 10, 2006, and
incorporated herein by reference.
+
Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Annual Report on Form 10-K.
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
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of december 31, 2005 and 2004
Consolidated Statements of Earnings for the years ended
december 31, 2005, 2004, and 2003
Consolidated Statements of Comprehensive Income
for the years ended december 31, 2005, 2004, and 2003
Consolidated Statements of Stockholders’ Equity
for the years ended december 31, 2005, 2004, and 2003
Consolidated Statements of Cash Flows
for the years ended december 31, 2005, 2004, and 2003
Notes to Consolidated Financial Statements
Page
F-1
F-2
F-2
F-3
F-3
F-4
F-5
F-6
Financial Statement Schedule
The following financial statement schedule is included herein:
Schedule II - Valuation and qualifying Accounts
F-22
All other financial statement schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or notes thereto.
We have audited the accompanying consolidated balance sheet of Zebra Technologies
Corporation and subsidiaries (the Company) as of december 31, 2005, and the related
consolidated statements of earnings, comprehensive income, stockholders’ equity,
and cash flows for the year then ended. Our audit also included the financial statement
schedule listed in the index at Item 15(a). These financial statements and schedule are the
responsibility of the Company’s management. Our responsibility is to express an opinion
on these financial statements and schedule based on our audit.
We conducted our audit 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 financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Zebra Technologies Corporation and
subsidiaries at december 31, 2005, and the consolidated results of its operations and
its cash flows for the year then ended in conformity with U. S. generally accepted
accounting principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth therein.
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
financial reporting as of december 31, 2005, 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 February 24, 2006 expressed an
unqualified opinion thereon.
/s/Ernst & Young LLP
Chicago, Illinois
February 24, 2006
F-
Report of Independent Registered Public Accounting Firm
ZEBRA TECHNOLOGIES CORPORATION
The Board of directors and Stockholders
of Zebra Technologies Corporation:
We have audited the accompanying consolidated balance sheet of Zebra Technologies
Corporation and subsidiaries (the Company) as of december 31, 2004, and the related
consolidated statements of earnings, comprehensive income, stockholders’ equity,
and cash flows for each of the years ended december 31, 2004 and 2003. In connection
with our audits of the consolidated financial statements, we also have audited the
consolidated financial statement schedule of valuation and qualifying accounts. These
consolidated financial statements and the consolidated financial statement schedule
are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements and the consolidated financial
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 financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of december 31, 2004, and
the results of their operations and their cash flows for each of the years ended december
31, 2004 and 2003, in conformity with U. S. generally accepted accounting principles.
Also, in our opinion, the related consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/KPMG LLP
Chicago, Illinois
February 24, 2006
F-
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
$1,116 in 2005 and $1,561 in 2004
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
Treasury stock
Retained earnings
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
December 31,
2005
December 31,
2004
$ 25,621
518,618
111,551
63,638
8,188
5,098
732,714
49,643
69,097
19,002
41,743
$ 912,199
$ 24,885
28,928
—
535
54,348
—
1,242
574
5,521
61,685
—
722
93,336
(64,013)
818,092
2,377
850,514
$ 912,199
$ 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
$ 862,222
ZEBRA TECHNOLOGIES CORPORATION
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(Amounts in thousands, except share and per share data)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Amounts in thousands)
Year Ended December 31,
2004
2005
2003
Net income
$111,603
$120,643
$91,696
Other comprehensive income (loss):
Foreign currency translation adjustment
(6,407)
3,402
4,110
Changes in unrealized gain/loss
on hedging transactions,
net of income taxes
Changes in unrealized holding gains/loss
on investments, net of income taxes
2,073
444
(451)
(113)
Comprehensive income
$107,713
$123,481
(999)
346
$95,153
See accompanying notes to consolidated financial statements.
Net sales
Cost of sales
Gross profit
Operating expenses:
2005
Year Ended December 31,
2004
2003
$702,271
$663,054
$536,397
348,090
354,181
319,895
343,159
263,320
273,077
Selling and marketing
Research and development
General and administrative
Amortization of intangible assets
Acquired in-process technology
Exit costs
89,707
46,000
59,910
2,341
—
2,012
77,062
37,093
49,240
2,569
22
2,100
66,635
31,759
41,352
1,640
692
1,232
Total operating expenses
199,970
168,086
143,310
Operating income
154,211
175,073
129,767
Other income (expense):
Investment income
Interest expense
Foreign exchange gain (loss)
Other, net
Total other income
Income before income taxes
Income taxes
Net income
13,417
(79)
1,286
(370)
14,254
10,628
(44)
485
(1,594)
9,475
8,553
(154)
(552)
(1,622)
6,225
168,465
56,862
184,548
63,905
135,992
44,296
$111,603
$120,643
$ 91,696
Basic earnings per share
diluted earnings per share
$ 1.56
$ 1.55
$ 1.69
$ 1.66
$ 1.30
$ 1.28
Basic weighted average shares outstanding
71,364
71,556
70,647
diluted weighted average and
equivalent shares outstanding
72,022
72,539
71,495
See accompanying notes to consolidated financial statements.
F-
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(dollars in thousands)
Balance at december 31, 2002
$623
$87
$56,083
$(16,760)
$494,150
$ (28)
$534,155
Class A
Common
Stock
Class B
Common
Stock
Additional
Paid-in
Capital
Treasusry
Stock
Accumulated
Other
Retained Comprehensive
Earnings
Income (Loss)
Total
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 benefit resulting from exercise of options
Net income
Unrealized holding gain on investments (net of income taxes)
Unrealized holding loss on hedging transactions (net of income taxes)
Foreign currency translation adjustment
Balance at december 31, 2003
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 benefit resulting from exercise of options
Net income
Unrealized holding loss 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
Issuance of 332,051 common shares upon exercise of
stock options and purchases under stock purchase plan
Repurchase of 1,866,375 shares of Class A Common Stock
Issuance of 165,642 treasury shares upon exercise of
stock options and purchases under stock purchase plan
Tax benefit resulting from exercise of options
Net income
Unrealized holding gain on investments (net of income taxes)
Unrealized holding gain on hedging transactions (net of income taxes)
Foreign currency translation adjustment
Balance at december 31, 2005
See accompanying notes to consolidated financial statements.
F-
87
—
1
—
—
—
—
—
—
711
7
—
—
—
—
—
—
718
4
—
—
—
—
—
—
—
$722
(87)
—
—
(1,630)
16,760
2,631
(142)
4,987
—
—
—
—
61,929
15,524
(238)
6,965
—
—
—
—
84,180
7,604
—
(2,263)
3,815
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(70,421)
6,408
—
—
—
—
—
—
—
—
—
—
91,696
—
—
—
—
—
—
—
—
—
346
(999)
4,110
—
15,130
2,632
(142)
4,987
91,696
346
(999)
4,110
585,846
3,429
651,915
—
—
—
120,643
—
—
—
706,489
—
—
—
—
111,603
—
—
—
—
—
—
—
(113)
(451)
3,402
6,267
—
—
—
—
—
444
2,073
(6,407)
15,531
(238)
6,965
120,643
(113)
(451)
3,402
797,654
7,608
(70,421)
4,145
3,815
111,603
444
2,073
(6,407)
$93,336
$(64,013)
$818,092
$2,377
$850,514
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
Cash flows from operating activities:
Cash flows from financing activities:
Net income
$111,603
$120,643
$91,696
Purchase of treasury shares
(70,421)
—
—
Year Ended December 31,
2004
2003
2005
Year Ended December 31,
2004
2003
2005
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
depreciation and amortization
Tax benefit from exercise of options
Acquired in-process technology
deferred income taxes
Changes in assets and liabilities,
net of businesses acquired:
13,104
3,815
—
(834)
Accounts receivable, net
(20,422)
Inventories
Other assets
Accounts payable
Accrued liabilities
Income taxes payable
Other operating activities
Net cash provided by
operating activities
Cash flows from investing activities:
(6,204)
(8,383)
3,792
196
(5,170)
1,233
Proceeds from exercise of stock options
and stock purchase plan purchases
11,753
15,531
17,762
Payments for obligation
under capital lease
Other financing activities
(171)
—
(434)
(238)
(200)
(142)
Net cash provided by
(used in) financing activities
(58,839)
14,859
17,420
Effect of exchange rate changes on cash
(1,780)
273
1,535
Net increase (decrease) in cash
and cash equivalents
Cash and cash equivalents
at beginning of year
7,638
3,717
(4,152)
17,983
14,266
18,418
Cash and cash equivalents at end of year
$25,621
$17,983
$14,266
12,255
6,965
22
(2,358)
(11,491)
(15,456)
(1,464)
6,420
1,974
3,720
54
11,580
4,987
692
(697)
(5,141)
(1,659)
350
(3,156)
6,909
(962)
(2,196)
92,730
121,284
102,403
Interest paid
Income taxes paid
$
79
61,453
$ 44
56,055
$ 154
38,779
Supplemental disclosures of cash flow information:
Purchases of property and equipment
(14,286)
(16,243)
(8,407)
Supplemental disclosures of non-cash transactions:
Acquisition of Atlantek, Inc.,
net of cash acquired
Acquisition of Retail Systems
International, Inc.
Acquisition of intangible assets
Purchases of investments and
marketable securities
Maturities of investments and
marketable securities
Sales of investments and
marketable securities
Net cash used in
investing activities
—
(7,797)
(13,754)
—
—
—
(13,680)
Conversion of Class B Common Stock
to Class A Common Stock
—
—
87
—
—
See accompanying notes to consolidated financial statements.
(1,021,813)
(1,297,416)
(1,055,125)
673,466
861,249
894,165
359,711
319,711
57,537
(24,473)
(132,699)
(125,510)
F-
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 identification printer/encoders, dye sublimation card printers,
digital photo printers and related accessories and support software. These products
are used principally in automatic identification (auto Id), data collection and personal
identification 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 Significant Accounting Policies
Principles of Consolidation. These consolidated financial statements were prepared on a
consolidated basis to include the accounts of Zebra and its wholly owned subsidiaries. All
significant intercompany accounts, transactions and unrealized profit were eliminated in
consolidation.
Use of Estimates. These consolidated financial 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 financial 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, 2005, consisted of U.S. government securities, state and municipal bonds,
partnership interests and equity securities, which are held indirectly in diversified funds
actively managed by investment professionals. Zebra classifies 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 debt securities that Zebra has the ability
and intent to hold until maturity. All securities not included in trading or held-to-maturity
are classified 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.
Allowance for Doubtful Accounts. Zebra maintains an allowance for doubtful accounts for
estimated uncollectible accounts receivable. The allowance is based on our assessment
of known delinquent accounts.
F-
Inventories. Inventories are stated at the lower of cost or market, and cost is determined
by the first-in, first-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. Leasehold improvements are
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 financial 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 2005. At that time, no adjustment to goodwill was necessary
due to impairment.
We evaluate the impairment of identifiable intangibles and other 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:
• Significant underperformance relative to expected historical or projected future
operating results
• Significant changes in the manner of use of the acquired assets or the strategy for
the overall business
• Significant negative industry or economic trends
• Significant decline in Zebra’s stock price for a sustained period
• Significant decline in market capitalization relative to net book value
If we believe that one or more of the above indicators of impairment have occurred, we
measure impairment based on a projected discounted cash flow using a discount rate
that incorporates the risk inherent in the cash flows.
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 a weighted-
average life of 8 years. Accumulated amortization for these other intangible assets was
$10,415,000 and $8,074,000 at december 31, 2005 and 2004, respectively.
Revenue Recognition. Revenue includes sales of hardware, supplies, software and
services (including repair services, extended service contracts, and professional
services). Product revenue is recognized once four criteria are met: (1) we have
persuasive evidence that an arrangement exits; (2) delivery has occurred and title
has passed to the customer, which happens at the point of shipment provided that no
significant obligations remain; (3) the price is fixed and determinable; and (4) collectibility
is reasonably assured. 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.
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 generally 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 table is a summary of Zebra’s accrued warranty obligation.
Warranty Reserve (in thousands)
Balance at the beginning of the period
Warranty expense during the period
2005
$1,691
6,394
Warranty payments made during the period
(6,163)
Balance at the end of the period
$1,922
As of December 31,
2004
$1,351
3,209
(2,869)
$1,691
2003
$1,090
3,095
(2,834)
$1,351
during the third quarter of 2005, Zebra began providing for environmental recycling
reserves similar to warranty reserves. In the European Union, we have an obligation in
the future to recycle printers. This reserve is based on all new printers sold after August
13, 2005, and printers sold prior to that date that are returned to us upon our sale of a new
printer to a customer. The following is a summary of Zebra’s accrued recycling obligation.
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.
Research and Development Costs. Research and development costs are expensed as
incurred. These costs include:
Recycling Reserve (in thousands)
Balance at the beginning of the period
Recycling expense during the period
• Salaries, benefits, and other R&d personnel related costs
Recycling payments made during the period
• Consulting and other outside services used in the R&d process
Balance at the end of the period
As of December 31,
2005
$ —
632
—
$ 632
• 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.
Fair Value of Financial instruments. Zebra estimates the fair value of its financial
instruments as follows:
Instrument
Method for determining fair value
Cash, cash equivalents, accounts
receivable, accounts payable and
accrued liabilities
Investments and marketable securities
Advertising. Advertising costs are expensed as incurred. Advertising expenses for
the years ended december 31, 2005, 2004 and 2003 totaled $5,524,000, $5,117,000 and
$3,721,000, respectively.
Foreign currency forward contracts
Foreign currency option contracts
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 specific services or benefits to Zebra and substantiate the fair value
of such. Zebra reimburses resellers for agreed activities up to the fair value of the benefit
received by Zebra. These payments are treated as marketing costs consistent with the
Life insurance policies
Cash surrender value
F-
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
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 qualifies for hedge accounting. See Note 15 for additional
information on our derivatives and hedging activities.
Stock-based Compensation. At december 31, 2005, 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 Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations. No stock-based compensation cost is
reflected in net income, because all options granted under these 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 data).
Warranty Reserve (in thousands)
Year Ended December 31,
2004
2003
2005
Net income, as reported
$111,603
$120,643
$91,696
deduct: Total stock-based
employee compensation expense
determined under fair value method for
all awards, net of related tax effects
(5,420)
(5,501)
(5,374)
Pro forma net income
Basic earnings per share:
As reported
Pro form
diluted earnings per share:
As reported
Pro forma
$106,183
$115,142
$86,322
$1.56
1.49
$1.55
1.47
$1.69
1.61
$1.66
1.59
$1.30
1.22
$1.28
1.21
For pro forma purposes, the fair value of stock options granted prior to January 1, 2005,
was determined using the Black-Scholes model. Zebra changed its fair value option
pricing model from the Black-Scholes model to a binomial model for all options granted
on or after January 1, 2005. We believe that the binomial model considers characteristics
of fair value option pricing that are not recognized under the Black-Scholes model.
Similar to the Black-Scholes model, the binomial model takes into account variables
such as volatility, dividend yield rate and risk free interest rate. Additionally, the binomial
model considers cancellation and historical exercise experience of Zebra to determine
the option value. It also takes into account the end of its contractual life. For these
reasons, we believe that the binomial model provides an estimated fair value that is
more representative of actual experience and future expected experience than the value
calculated in previous years using the Black-Scholes model.
F-
In April 2005, the FASB changed the implementation date for SFAS No. 123(R), Share-
Based Payment, which 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. Originally, public companies subject to SEC oversight were
required to implement SFAS No. 123(R) as of the beginning of the first interim or annual
reporting period beginning after June 15, 2005. As a result of the action by the SEC, the
provisions of this statement will now be effective for Zebra during the first quarter of
2006. We plan to adopt the provisions of this statement using the modified retrospective
method, which requires the restatement of the financial statements of all prior years as
if the fair-value-based method of accounting for awards granted, modified, or settled in
cash had been used in all fiscal years beginning after december 15, 1994. Accordingly, we
expect the impact on Zebra’s consolidated financial statements to be consistent with the
fair value disclosures included above.
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 $5,521,000 as of december 31, 2005, and $3,894,000 as of december 31, 2004.
Zebra invests the funds in company owned life insurance policies, in which Zebra is the
beneficiary, 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.
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.
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 identifiable 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 flows 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 April 2005, the FASB changed the implementation date for SFAS No. 123(R), Share
Based Payment, which 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 provisions of this statement will now become effective
for Zebra during the first quarter of 2006. We expect the impact on Zebra’s consolidated
financial statements to be consistent with the fair value disclosures included in Note 2 to
the Consolidated Financial Statements included in this Form 10-K.
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 fixed 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
financial position or results of operations.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections
– a Replacement of APB Opinion No. 20 and SFAS No. 3, which changes the requirements
for the accounting and reporting of a change in accounting principle. The Statement
applies to all voluntary changes in accounting principle and to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. This Statement requires retrospective application
to prior periods’ financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative effect of
the change. Zebra is required to adopt this statement during the first quarter of 2006. We
do not expect the adoption of this Statement to have a material impact on our financial
condition or results of operations.
In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, The Meaning of Other-
Than-Temporary Impairment and Its Application to Certain Investments, which addresses
the determination as to when and investment is considered impaired, whether that
impairment is other than temporary, and the measurement of an impairment loss. This
FSP also includes accounting considerations subsequent to the recognition of an other-
than-temporary impairment and requires certain disclosures about unrealized losses
that have not been recognized as other-than-temporary impairments. The guidance in
this FSP amends SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and SFAS No. 124, Accounting for Certain Investments Held by Not-for-Profit
Organizations, and APB Opinion No. 18, The Equity Method of Accounting for Investments
in Common Stock. This FSP is effective for reporting periods beginning after december 15,
2005. We do not expect the adoption of this Statement to have a material impact on our
financial condition or results of operations.
Reclassifications. Certain amounts in the prior years’ financial statements have been
reclassified to conform to the current year’s presentation.
Note 3 Stock Based Compensation
As of december 31, 2005, 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 flexible 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) nonqualified and
incentive stock options for the purchase of Zebra’s Class A Common Stock and (ii)
dividend equivalents. The persons eligible to participate in the 1997 Stock Option Plan
are directors, officers, 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, 2005, 2,353,355 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 five-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.
The 1997 director Plan was terminated February 1, 2002. However, at december 31,
2005, 3,750 options issued under this plan remained outstanding and unexercised. These
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 defined in the 1997 director Plan). A total of
118,125 shares were issued under this plan.
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, 2005, 373,870 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
upon the exercise of options granted under the 2002 director Plan. Only directors who
are not employees or officers 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 sufficient shares remaining and available to all non-employee directors
F-
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, 2005, 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 five equal increments beginning on the
date of the grant and on each of the first four anniversaries thereof. All options expire
on the earlier of (a) ten years following the grant date, (b) the first 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
defined in the option agreement.
On February 7, 2006, Zebra’s Board of directors approved the 2006 Zebra Technologies
Corporation Incentive Compensation Plan (the 2006 Plan) and will submit such plan to
the stockholders at our Annual Meeting of Stockholders scheduled for May 9, 2006. If
approved by the stockholders, the 2006 Plan will become effective immediately and
supersede the 1997 Stock Option Plan (the 1997 Plan) and the 2002 Non-Employee
director Stock Option Plan (the 2002 director Plan). The aggregate number of shares
that would be available under the 2006 Plan is 5,500,000 (which include 2,535,945
unissued shares from the 1997 Plan and the 2002 director Plan). The types of awards that
would be available under the 2006 Plan are incentive stock options, nonqualified stock
options, stock appreciation rights, restricted stock, performance shares and units and
performance-based cash bonuses. Employees, directors and consultants of the Company
and its subsidiaries would be eligible to participate in the 2006 Plan.
For purposes of calculating the compensation cost consistent with SFAS No. 123, the fair
value of each stock option granted prior to January 1, 2005, is estimated on the date of
grant using the Black-Scholes option-pricing model. For stock options granted on or after
January 1, 2005, fair value is estimated on the date of grant using a binomial 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
2005
0%
38.44%
3.74%
- Range of interest rates
2.36% - 4.50%
Expected weighted-average life
4.83 years
2004
0%
50%
3.25%
NA
6 years
2003
0%
53%
3.29%
NA
6 years
Fair value of options granted
$9,701,000
$8,178,000
$11,490,000
Weighted-average grant date
fair value of options granted
$17.16
$24.56
$14.00
The fair value of the employees’ purchase rights issued under the Stock Purchase Plan
are estimated as noted above 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
2005
$42.46
$36.09
0%
32%
2.86%
2004
$49.76
$42.29
0%
32%
1.19%
2003
$29.44
$25.02
0%
27%
1.06%
Stock option activity for the years ended december 31, 2005, 2004, and 2003 was as follows:
2005
Weighted-Average
Exercise Price
$25.37
48.62
20.26
29.85
$31.04
$ 23.11
Shares
2,593,982
565,200
(422,586)
(182,837)
2,553,759
877,068
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
Fixed Options
Outstanding at beginning of year
Granted
Exercised
Canceled
Outstanding at end of year
Options exercisable at end of year
F-0
The following table summarizes information about fixed stock options outstanding at december 31, 2005:
Range of
Exercise Prices
$10.74-$17.22
$17.22-$21.62
$24.21-$28.22
$28.22-$45.62
$45.62-$53.92
Number
of Shares
150,670
841,913
636,159
339,730
585,287
2,553,759
Options Outstanding
Weighted-Average
Remaining Contractual Life
Weighted-Average
Exercise Price
Number
of Shares
Weighted-Average
Exercise Price
Options Exercisable
2.61 years
5.83 years
6.28 years
8.61 years
8.64 years
$12.05
20.79
25.83
42.79
49.50
150,670
359,373
276,327
48,258
42,440
877,068
$12.05
20.57
26.42
36.09
47.41
Note 4 Business Combinations
Retail Systems International, Inc. On February 11, 2005, Zebra acquired certain assets of
Retail Systems International, Inc. (RSI) for $7,797,000. Located in Chula Vista, California,
RSI manufactures labels, tags and other printed media. The consolidated statements of
earnings reflect the results of operations of RSI since the effective date of the purchase.
The pro forma effect of this acquisition was not significant.
The following table (in thousands) summarizes the adjusted fair values of the assets
acquired at the date of acquisition.
Inventory
Property and equipment
Intangible assets
Goodwill
Total assets acquired
At February 11, 2005
$ 238
469
1,073
6,017
$7,797
The purchase price was allocated to identifiable tangible assets and intangible assets
acquired based on their estimated fair values. The intangible assets of $1,073,000 consist
mainly of customer relationships with a useful life of 5 years. The goodwill is fully
deductible for tax purposes.
Atlantek, Inc. On November 17, 2003, Zebra acquired Atlantek, Inc. (Atlantek), by acquiring
all of the outstanding stock of Atlantek for approximately $13,680,000 in cash. Located in
Wakefield, Rhode Island, Atlantek had been a privately held company. Atlantek designs
and manufactures thermal digital printers. The consolidated statements of earnings
reflect the results of operations of Atlantek since the effective date of the acquisition. The
pro forma impact of this acquisition was not significant.
The following table (in thousands) summarizes the 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 identifiable 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 were
contingent upon revenue related to specific products for the first two years after the
acquisition. during the fourth quarter of 2004, the first of these payments was made for
$632,000 and added to goodwill. The final payment for $1,287,000 was made in the first
quarter of 2005 and added to goodwill.
F-
Note 5 Stockholders’ Equity
Share count and par value data related to stockholders’ equity are as follows:
Note 6 Earnings Per Share
For the years ended december 31, 2005, 2004, and 2003, earnings per share were
computed as follows (in thousands, except per-share amounts):
Preferred Stock
Par value per share
Shares authorized
Shares outstanding
Common Stock—Class A
Par value per share
Shares authorized
Shares issued
Shares outstanding
Treasury stock
Shares held
December 31, December 31,
2004
2005
$0.01
10,000,000
—
$0.01
10,000,000
—
$0.01
150,000,000
72,151,857
70,451,124
$0.01
150,000,000
71,819,806
71,819,806
1,700,733
—
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
Year Ended December 31,
2004
2003
2005
$111,603
$120,643
$91,696
71,364
$1.56
71,556
$1.69
70,647
$1.30
$111,603
$120,643
$91,696
during the third quarter of 2005, Zebra repurchased a total of 1,866,375 shares. These
shares are being reissued for exercise of stock options and purchases under the stock
purchase plan. Of the shares repurchased, 185,000 were acquired through a program by
which we sold put options indexed in our own stock. No put options were outstanding as
of december 31, 2005.
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-
Add: Effect of dilutive securities – stock options
658
diluted weighted average and equivalent
shares outstanding
Per share amount
72,022
$1.55
71,364
71,556
983
72,539
$1.66
70,647
848
71,495
$1.28
The potentially dilutive securities, which were excluded from the earnings per share
calculation, consisted of stock options with an exercise price greater than the average
market price of the Class A Common Stock. These options were as follows:
Potentially dilutive shares
804,490
13,800
79,068
Year Ended December 31,
2004
2003
2005
Note 7 Investments and Marketable Securities
We classify our investments and marketable securities as available-for-sale in accordance
with the classifications defined 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 reflected 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 flow 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.
Changes in market value of trading securities are recorded in investment income as they
occur, and the related cash flow statement includes changes in the balances of trading
securities as operating cash flows.
The amortized cost, gross unrealized holding gains, gross unrealized holding losses and
aggregate fair value of investment securities at december 31, 2005, were as follows
(in thousands):
Amortized
Gross
Unrealized
Cost Holding Gains Holding Losses
Gross
Unrealized
Fair
Value
Amortized
Gross
Unrealized
Cost Holding Gains Holding Losses
Gross
Unrealized
Fair
Value
Available-for-sale:
U.S. government
and agency securities
$ 111,492
$
42
$ (1,320) $ 110,214
Available-for-sale:
U.S. government
and agency securities
$ 63,042
State and municipal bonds
393,760
Corporate bonds
Partnership interests
Other
21,202
38,653
920
$ 517,577
$
5
106
—
4,726
—
$ 4,837
$ (1,036) $ 62,011
(2,329)
391,537
(431)
20,771
—
—
43,379
920
$ (3,796) $ 518,618
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):
State and municipal bonds 351,141
Corporate bonds
Partnership interests
Other
42,757
28,652
5,653
785
2
2,075
0
(837)
351,089
(432)
42,327
0
0
30,727
5,653
$ 539,695
$ 2,904
$ (2,589) $ 540,010
Changes in unrealized gains and losses on investment securities are included in these
financial statements as follows (in thousands):
Year Ended December 31,
2004
2003
2005
Changes in unrealized gains and losses
on available-for-sale securities, net of tax,
recorded in accumulated other
comprehensive income
$444
$(113)
$346
All investments and marketable securities are classified as available-for-sale securities;
therefore, there are no unrealized gains or losses on trading securities recorded in
investment income.
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, 2005. These lower market values are caused by short-term fluctuations in interest rates and are not a reflection of the credit worthiness of the issuer. Market values are
expected to recover to the amortized cost prior to maturity.
Unrealized Loss < 12 months
Unrealized Loss > 12 months
Number
of investments
Aggregate
Market Value
Government securities
State and municipal bonds
Corporate bonds
Total
1
57
4
62
$ 5,921
105,499
3,555
$114,975
Unrealized
Losses
$ (21)
(458)
(5)
$ (484)
Number of
of investments
Aggregate
Market Value
Unrealized
Losses
30
138
5
173
$ 39,212
224,594
15,424
$279,230
$(1,014)
(1,872)
(426)
$(3,312)
As of december 31, 2004, the number, aggregate market value and unrealized losses (in thousands) of investments with market values that were less than amortized cost were:
Unrealized Loss < 12 months
Unrealized Loss > 12 months
Number
of investments
Aggregate
Market Value
Government securities
State and municipal bonds
Corporate bonds
Total
16
104
10
130
$ 54,313
173,501
37,596
$265,410
Unrealized
Losses
$ (505)
(676)
(432)
$(1,613)
Number of
of investments
Aggregate
Market Value
16
112
0
128
$ 46,839
12,242
0
$ 59,081
Unrealized
Losses
$ (815)
(161)
0
$ (976)
F-
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 diversified portfolio
of investment funds. Zebra’s investment as a limited partner allows it to have liability
protection limited to the amount of its investments in the funds.
The contractual maturities of debt securities at december 31, 2005, were as follows
(in thousands):
due within one year
due after one year through five years
due after five year through ten years
due after ten years
Fair Value
$137,173
255,010
14,509
67,627
$474,319
Future minimum lease payments related to the lease as of december 31, 2005, are as
follows (in thousands):
Unique Operating Lease
2006
2007
2008
2009
2010
Thereafter
Total minimum lease payments
$ 2,336
2,336
2,380
2,573
2,753
9,636
$22,014
Using the specific identification method, the proceeds and realized gains on the sales of
available-for-sale securities were as follows (in thousands):
Note 9 Inventories
The components of inventories, net of allowances, are as follows (in thousands):
Proceeds
Realized gains
Realized losses
Net realized gains/(losses) included
in other comprehensive income
as of the end of the prior year
2005
2004
$359,711
$319,711
364
(2,060)
1,289
(900)
2003
$57,537
2,371
(2,121)
Raw material
Work in process
Finished goods
Total inventories
December 31,
2005
2004
$39,779
$34,041
134
23,725
569
24,645
$63,638
$59,255
(1,544)
384
213
Inventory reserves (included in above numbers)
$ 7,598
$8,037
Note 10 Property and Equipment
Property and equipment, which includes assets under capital leases, is comprised of the
following (in thousands):
Note 8 Related-Party Transactions
Unique Building Corporation (Unique), an entity controlled by certain officers 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 financial statements as follows (in thousands):
Unique Operating Lease
Buildings
Land
Machinery, equipment and tooling
Furniture and office equipment
2005
2004
2003
F-
$2,336
2,284
2,198
Computers and software
Automobiles
Leasehold improvements
Projects in progress
Less accumulated depreciation and amortization
Net property and equipment
December 31,
2005
2004
$ 12,184
$ 12,510
1,910
50,132
7,090
44,507
14
8,449
6,589
130,875
(81,232)
$49,643
1,910
48,241
6,525
42,690
73
7,658
5,608
125,215
(78,932)
$46,283
Other items related to property and equipment are as follows:
Assets under capital lease
Less: related accumulated depreciation
December 31,
2005
$
—
—
2004
$ 333
144
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):
Provision computed at statutory rate
$58,963
$64,592
$47,597
Year Ended December 31,
2004
2003
2005
Unamortized computer software costs
$9,559
$7,771
State income tax (net of Federal tax benefit)
3,146
Amortization of capitalized software
2005
$2,938
Total depreciation expense charged to income 10,763
Year Ended December 31,
2004
2003
$2,125
9,686
$2,132
9,940
Note 11 Income Taxes
The geographical sources of income before income taxes were as follows (in thousands):
United States
Outside United States
Total
Year Ended December 31,
2004
2003
2005
$142,105
$164,784
$132,056
26,360
19,764
3,936
$168,465
$184,548
$135,992
Zebra does not provide for deferred U.S. income taxes on undistributed earnings of
foreign subsidiaries, which totaled approximately $33,000,000 at december 31, 2005
and $34,000,000 at december 31, 2004. 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,
2004
2003
2005
$44,736
$53,810
$38,954
5,253
8,060
5,874
6,023
(1,104)
(1,568)
(83)
—
(118)
(116)
3,723
2,561
(261)
(35)
(646)
$56,862
$63,905
$44,296
The provision for income taxes differs from the amount computed by applying the
Federal tax benefit of state tax settlement
Tax-exempt interest income
Tax benefit of exempt foreign trade income
domestic manufacturing deduction
Research and experimental credit
Other
—
(3,301)
(1,575)
(735)
(350)
714
3,595
—
(1,767)
(1,750)
—
(350)
(415)
2,952
(2,450)
(1,674)
(1,488)
—
(1,959)
1,318
Provision for income taxes
$56,862
$63,905
$44,296
deferred income taxes reflect the impact of temporary differences between the amounts
of assets and liabilities for financial reporting purposes and such amounts as measured
by tax laws. Based on management’s assessment, it is more likely than not that the
deferred tax assets will be realized through future taxable earnings.
Tax effects of temporary differences that give rise to deferred tax assets and liabilities 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
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,
2005
2004
$ 216
$ 212
28
1,115
2,078
4,142
203
3,338
3,709
—
14,829
(306)
(419)
(7,158)
(7,883)
$ 6,946
65
902
1,466
3,652
224
2,520
2,537
1,245
12,823
—
(649)
(5,966)
(6,615)
$ 6,208
F-
Note 12 Goodwill and Other Intangible Asset Data
during the first quarter of 2002, we implemented SFAS No. 142, Goodwill and Other
Intangible Assets, which replaces the requirements to amortize intangible assets with
indefinite lives and goodwill with a requirement for an annual impairment test. SFAS No.
142 also set requirements for identifiable intangible assets.
Intangible asset data are as follows (in thousands):
December 31, 2005
Gross
Carrying
Amount
December 31, 2004
Gross
Accumulated
Amortization
Carrying Accumulated
Amount Amortization
during 2005, we acquired intangible assets in the amount of $14,827,000 for customer
relationships, patents and licenses to use certain technology. These intangible assets will
have a commercial life of 5 to 10 years.
Note 13 Other Assets
Other assets consist of the following (in thousands):
Life insurance policies related to the deferred
compensation plan (See Note 18)
Life insurance policies on key executives
$(7,746)
(328)
$(8,074)
Long-term equity securities
deposits
Other long-term assets
Total
December 31,
2005
2004
$ 4,751
21,602
100
312
14,978
$41,743
$ 3,401
10,367
100
344
8,779
$22,991
Amortized intangible assets
Current technology
$26,011
$ (9,632)
$12,258
Customer relationships
3,406
(783)
2,333
Total
$29,417
$(10,415)
$14,591
Unamortized intangible assets
Goodwill
$69,097
$61,793
$2,569
Aggregate amortization expense
For the year ended
december 31, 2004
For the year ended
december 31, 2005
$ 2,341
Estimated amortization expense
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
Thereafter
2,812
2,761
2,763
2,639
1,766
6,261
during the first quarter of 2005, a final contingent payment related to the Atlantek
acquisition was made for $1,287,000 and added to goodwill. In addition, we acquired
certain assets of RSI with an adjusted allocation of net goodwill of $6,017,000.
See Note 4 for further details.
F-
Zebra invested $10,028,000 in life insurance policies on 48 key executives in each year
above for a total cost of $20,056,000. These policies currently have a cash surrender value
of $21,602,000 and a guaranteed rate of return of 5.65% through July 28, 2006.
Note 14 401(k) Savings and Profit Sharing Plans
Zebra has a Retirement Savings and Investment Plan (the 401(k) Plan), which is intended
to qualify under Section 401(k) of the Internal Revenue Code. qualified employees may
participate in Zebra’s 401(k) Plan by contributing up to 15% of their gross earnings to
the plan subject to certain Internal Revenue Service restrictions. Zebra matches each
participant’s contribution of up to 6% of gross eligible 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.
Zebra has a discretionary profit-sharing plan for qualified employees, to which it
contributes a percentage of eligible payroll each year. Participants are not permitted to
make contributions under the profit-sharing plan.
Company contributions to these plans, which were charged to operations, approximated
the following (in thousands):
401(k)
Profit sharing
Total
2005
$1,874
1,775
$3,649
Year Ended December 31,
2004
2003
$1,771
2,329
$4,100
$1,579
1,544
$3,123
Percentage of eligible payroll contributed
for profit-sharing plan
2.4%
3.1%
2.4%
Note 15 Derivative Instruments
In the normal course of business, portions of Zebra’s operations are subject to
fluctuations in currency values. We manage these risks using derivative financial
instruments.
Hedging of Net Assets
We use forward contracts and options to manage exposure related to our pound and euro
denominated net assets. We record gains and losses on these contracts and options in
income each quarter along with the translation gains and losses related to our net euro
asset position, which would ordinarily offset each other. Summary financial information
related to these activities follows (in thousands):
Change in gains (losses) from
foreign exchange derivatives
Gain on net foreign currency assets
Net foreign exchange gain (loss)
Notional balance of outstanding contracts:
Pound
Euro
Euro/Pound
Year Ended December 31,
2004
2003
2005
$ (87)
1,373
$1,286
$(1,246)
$(3,756)
1,731
$ 485
3,204
$ (552)
December 31, December 31,
2004
2005
£3,289
€25,000
€16,000
£13,646
€34,000
—
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 flow 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
financial information related to the cash flow hedges of future revenues follows (in
thousands, except percentages):
Net unrealized gains (losses) deferred in
accumulated other comprehensive income:
Gross
Income tax (benefit)
Net
Notional balance of outstanding contracts
Hedge effectiveness
December 31, December 31,
2004
2005
$999
376
$623
€30,750
100%
$(2,231)
(781)
$(1,450)
€30,000
100%
2005
2004
2003
Net gain (loss) included in revenue for the:
Year ended december 31, 2005
$1,617
Year ended december 31, 2004
Year ended december 31, 2003
$(1,639)
266
The above year-to-date gains and losses are the net pretax gains and losses released
from other comprehensive income into earnings during 2005 and 2004. We expect to
release pretax losses in the amount of $999,000 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 flow 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.
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 fixtures with Unique Building
Corporation, a related party. The facility portion of the lease is the only remaining
portion in existence as of december 31, 2005, 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 modification
to the base monthly rental, which goes into effect if the prescribed rent payment is less
than the aggregate principal and interest payments required to be made by Unique under
an Industrial Revenue Bond (IRB).
Minimum future obligations under non-cancelable operating leases as of december 31,
2005 are as follows (in thousands):
Operating Leases
2006
2007
2008
2009
2010
Thereafter
Total minimum lease payments
5,971
4,679
3,754
3,776
3,885
22,373
$44,438
Rent expense for operating leases charged to operations was as follows (in thousands):
Rent expense
Year Ended December 31,
2005
$7,822
2004
$6,404
2003
$5,591
F-
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 offices. Lease terms range from
six months to 25 years with breaking periods specified in the lease agreements.
We have and will continue to incur substantial legal fees to prosecute and defend this
lawsuit. Consistent with the requirements of SFAS No. 5, Accounting for Contingencies,
no liability has been recorded in Zebra’s consolidated financial statements as of
december 31, 2005.
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, 2005
is $700,000, which is the limit of Zebra’s guaranty throughout the term of the IRB.
Legal proceedings. On April 24, 2003, Paxar Americas, Inc. (Paxar Americas) filed a patent
infringement lawsuit in the United States district Court for the Southern district of Ohio
against Zebra and certain of its subsidiaries. Paxar Americas’ Complaint alleges that
certain of Zebra’s products infringe on one or more of eight identified Paxar Americas
patents, although not every product is accused of infringing each patent. Zebra filed
an Answer to Paxar Americas’ Complaint, denying Paxar Americas’ allegations of
infringement and asserting several affirmative defenses, including the invalidity of Paxar
Americas’ asserted patent claims. Paxar Americas moved to amend its Complaint to
add two patents and a trademark-based claim and the Court granted the motion. Paxar
Americas filed its Amended Complaint on March 31, 2005, dropping one of the eight
originally asserted patents and adding two newly asserted patents. Paxar Americas also
filed a motion to withdraw another of the originally asserted patents from the Amended
Complaint. Zebra filed its Answer denying all infringement and asserting affirmative
defenses including the invalidity of Paxar Americas’ asserted patent claims. On July 15,
2004, the Court heard arguments from the parties regarding the proper construction of
the claims of the patents-in-suit and the parties submitted post-argument briefs. On April
20, 2005, at the Court’s request, the parties identified disputed claim terms regarding the
newly asserted patents and provided their respective positions regarding those terms
to the Court. discovery closed on August 16, 2005. No decision has yet been issued in
connection with the July 15, 2004 claim construction hearing. At the Court’s request the
parties included in their summary judgment briefing additional arguments concerning
claim construction in view of patents added to Paxar Americas’ Amended Complaint
as well as developments in patent law subsequent to the claim construction hearing.
On October 7, 2005, the parties completed extensive summary judgment briefing, and
the Court heard arguments from the parties regarding summary judgment motions and
the additional claim construction issues on November 16, 2005. No decision has yet
been issued in connection with the November 16, 2005 summary judgment and claim
construction hearing. The Court has scheduled a trial date beginning on January 16, 2007.
On January 31, 2003, a Writ of Summons was filed in the Nantes Commercial Court, Nantes,
France, by Printherm, a French corporation, and several of its shareholders (collectively,
“Printherm”), against Zebra Technologies France (“ZTF”), a French corporation
and wholly-owned subsidiary of Zebra. Printherm seeks damages in the amount of
€15,304,000 and additional unspecified damages in connection with ZTF’s termination
of negotiations in december 2000 respecting the proposed acquisition by Zebra of the
capital stock of Printherm. The negotiation was terminated based on unsatisfactory
results of the ongoing due diligence. We believe that Printherm’s claims are without merit
and that a loss is not likely to occur. We will vigorously defend the action.
Printherm filed bankruptcy proceedings on August 30, 2004, and the Commercial Court
ordered its liquidation on November 30, 2004. The case was put on hold until the Court
appointed liquidator filed a submission in August 2005, which started the proceedings
again. ZTF filed its answer on November 19, 2005, in anticipation of a Court-ordered
december 19, 2005 hearing date. In response to a request by Printherm’s liquidator,
the Court postponed the hearing date so as to provide time for Printherm to respond to
ZTF’s answer. The hearing is not expected to occur until sometime during the second
quarter of 2006.
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 significant 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.
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 final sale. We manage our business based on these regions rather
than by individual countries.
North Europe, Middle
East & Africa
America
Latin
America
Asia
Total
We believe we have strong defenses to Paxar Americas’ infringement claims, but the
outcome of litigation is inherently uncertain, particularly in cases such as this where
sophisticated factual issues must be assessed and complex technical issues must be
decided. As a result, we cannot accurately predict the outcome of this lawsuit, and we
are unable to conclude that a loss is likely to occur. 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. Based on our damage expert’s report,
we believe damages could be in the range of $100,000 to $20,000,000, but Paxar claims
damages in an amount substantially higher and has alleged willful infringement, which,
if proved, could treble damages. In addition, we may be forced to incur ongoing licensing
expenses or to change how we design, manufacture and market certain of our products.
2005
Net sales
Long-lived assets
2004
Net sales
Long-lived assets
2003
Net sales
Long-lived assets
$362,054
131,547
$230,365
5,917
$46,878
7
$62,974
271
$702,271
137,742
$359,074
108,725
$213,559
5,669
$38,119
3
$52,302
196
$663,054
114,593
$292,543
102,962
$170,544
6,415
$29,406
3
$43,904
87
$536,397
109,467
F-
Net sales by major product category are as follows (in thousands):
Type of Cost
Total Costs Incurred
Hardware
Supplies
Service Shipping Cash Flow
Hedging
Software Handling Activities
and
and
Severance, stay bonuses,
and other employee-related expenses
Total
Asset disposal costs
2005
2004
2003
$540,679
$129,183
$25,217
$5,575
$1,617
$702,271
518,556
116,877
409,144
98,556
24,310
24,318
4,950
4,113
(1,639)
663,054
266
536,397
Other exit costs
Total
$1,746
64
360
$2,170
Note 18 Deferred Compensation Plan
Since January 1, 2002, Zebra offers a deferred compensation plan that permits executive
management 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 beneficiary. The following table
shows the income, asset and liability amounts related to this plan (in thousands):
Year Ended December 31,
2004
2003
2005
Gain on cash surrender value of life insurance
policies included in investment income
$263
$94
$60
deferred compensation liability included
in other long-term liability
Cash surrender value included in other assets
December 31, December 31,
2004
2005
$5,521
$4,751
$3,894
$3,401
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 identified on a separate line of our income
statement, as part of operating expenses. Our consolidation plan is intended to reduce
costs and improve manufacturing efficiency.
Our Varades facility conducted the product development for our line of card printers
and included 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. The Varades facility has been completely closed by the
end of 2004. As of december 31, 2005, we incurred the following exit costs (in thousands):
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 substantially complete by the end of 2004. The
Warwick facility will continue to manufacture and distribute label printer supplies, as well
as house engineering and product management functions for mobile products, and the
key account sales. The following table shows the exit costs incurred as of december 31,
2005 (in thousands).
Type of Cost
Total Costs Incurred to Date
Severance, stay bonuses,
and other employee-related expenses
Other exit costs
Total
$ 783
475
$1,258
during december 2004, we announced plans to close and consolidate our Wakefield,
Rhode Island, facility into our other North American facilities. This transition was
substantially complete by the end of 2005. As of december 31, 2005, we incurred the
following exit costs (in thousands):
Type of Cost
Total Costs Incurred to Date
Severance, stay bonuses,
and other employee-related expenses
Other exit costs
Total
$ 141
252
$ 393
Zebra had a leased warehouse facility in Wokingham, United Kingdom, that was not
being utilized. The lease term was through October 2010, with annual rent of £192,500.
The facility had been subleased through december 2003; however, due to current market
conditions in that area, efforts to market for subleasing the property since that time
did not result in a new subtenant. Therefore, during december 2005, we came to an
agreement with the landlord and paid £860,000 to surrender the remaining term of the
lease. This amount had been fully reserved during the first quarter of 2005.
We expect to incur no further costs for any of these exit activities.
F-
Liabilities and expenses related to exit activities for the year ended december 31, 2005
were as follows (in thousands):
The components of other comprehensive income included in the Consolidated
Statements of Comprehensive Income are as follows (in thousands):
Accrued liabilities related
to exit activities at
december 31, 2004
Total expenses incurred
for the year ended
december 31, 2005
Less: Amounts paid for
the year ended
december 31, 2005
Exchange rate impact
Accrued liabilities related
to exit activities at
december 31, 2005
Varades
Closure Consolidation
Warwick Wakefield Workingham
Lease
Closure
Total
Foreign currency translation adjustments
$(6,407)
$3,402
$4,110
Year Ended December 31,
2004
2005
2003
$155
$439
$90
$550
$1,234
Changes in unrealized gains/(losses) on
hedging transactions:
216
(11)
283
1,524
2,012
Gross
$ 3,230
$ (694)
$(1,537)
Income tax (benefit)
1,157
(243)
(538)
Net
$ 2,073
$ (451)
$ (999)
334
—
410
—
352
—
1,909
3,005
Changes in unrealized holding gains/
(losses) on investments classified
as available-for-sale:
(165)
(165)
Gross
$ 726
$ (174)
$ 531
Income tax (benefit)
282
(61)
185
Net
$ 444
$ (113)
$ 346
$ 37
$ 18
$21
$ —
$ 76
Note 20 Other Comprehensive Income (Loss)
Stockholders’ equity contains certain items classified 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 financial statements to
dollars using a combination of historical, month-end, and average foreign exchange
rates. This combination of rates creates the foreign currency translation adjustments
component of other comprehensive income.
• 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 flow 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 classified as available-for-sale are
deferred from income statement recognition. See Note 7 for more details.
The components of accumulated other comprehensive income (loss) included in the
Consolidated Balance Sheets are as follows (in thousands):
Foreign currency translation adjustments
$ 1,105
$ 7,512
Unrealized losses on foreign currency hedging activities:
As of
December 31, December 31,
2004
2005
Gross
Income tax benefit
Net
Unrealized gains on investments classified as available-for-sale:
Gross
Income tax
Net
$ 999
376
$ 623
$ 1,041
392
$ 649
$ (2,231)
(781)
$ (1,450)
$ 315
110
$ 205
F-0
Note 21 Major Customers
ScanSource, Inc. is our most significant customer and our net sales to them as a percent
of total net sales were as follows:
ScanSource
Year Ended December 31,
2004
14.1
2005
15.6
2003
13.8
No other customer accounted for 10% or more of total net sales during these years.
Note 22 Quarterly Results of Operations (unaudited)
(Amounts in thousands, except per share data)
2005
Net sales
Cost of sales
Gross profit
First
Quarter
$ 170,727
83,362
87,365
Selling and marketing
21,067
Research and engineering
10,668
General and administrative
14,946
Amortization of intangibles
Exit costs
647
1,517
Second
Quarter
$ 176,614
87,266
89,348
22,554
12,054
16,810
387
141
Third
Quarter
$ 175,636
87,959
87,677
20,800
11,501
14,489
509
283
Fourth
Quarter
$ 179,294
89,503
89,791
25,286
11,777
13,665
798
71
Total operating expenses
48,845
51,946
47,582
51,597
Operating income
38,520
37,402
40,095
38,194
Investment income (expense)
3,277
Interest expense
Foreign exchange gain (loss)
(3)
53
Other, net
(304)
Total other income (expense)
3,023
3,072
(27)
812
(243)
3,614
3,254
3,814
(41)
334
251
(8)
87
(74)
3,798
3,819
Income before taxes
Income taxes
Net income
41,543
14,436
$ 27,107
41,016
14,253
43,893
14,453
42,013
13,720
$ 26,763
$ 29,440
$ 28,293
Basic earnings per share
$ 0.38
diluted earnings per share $
0.37
$
$
0.37
0.37
$
$
0.41
0.41
$
$
0.40
0.40
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$154,174
$162,830
$171,176
$174,874
2004
Net sales
Cost of sales
Gross profit
Selling and marketing
Research and engineering
73,571
80,603
17,207
8,896
General and administrative
12,763
Amortization of intangibles
649
Acquired in-process technology
22
Exit costs
Total operating expenses
Operating income
363
39,900
40,703
Investment income (expense)
3,073
Interest expense
(26)
Foreign exchange gain (loss)
(656)
Other, net
(299)
Total other income (expense)
2,092
Income before taxes
Income taxes
Net income
42,795
14,861
78,315
84,515
18,023
9,233
12,562
626
—
876
41,320
43,195
2,091
(6)
413
(537)
1,961
45,156
15,728
84,030
87,146
19,217
9,596
11,917
647
—
715
42,092
45,054
2,515
(7)
737
(339)
2,906
47,960
16,641
83,979
90,895
22,615
9,368
11,998
647
—
146
44,774
46,121
2,949
(5)
(9)
(419)
2,516
48,637
16,675
$ 27,934
$ 29,428
$ 31,319
$ 31,962
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
(1) Restated for a 3-for-2 stock split in August 2004 paid in the form of a 50% stock dividend.
F-
ZEBRA TECHNOLOGIES CORPORATION
Schedule II
Valuation and Qualifying Accounts
(Amounts in thousands)
Description
Balance at Charged to
Costs and
Beginning
Expenses Deductions
of Period
Balance at
End of
Period
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
Valuation account for accounts receivable:
Year ended december 31, 2005
Year ended december 31, 2004
Year ended december 31, 2003
Valuation accounts for inventories:
Year ended december 31, 2005
Year ended december 31, 2004
Year ended december 31, 2003
$ 1,561
$ 1,388
$ 1,236
$ 8,037
$ 6,238
$ 5,075
$ 535
$ 5,653
$ 4,337
See accompanying report of independent registered public accounting firm.
F-
$ (396)
$
49
$ 1,116
$ 368
$ 557
$ 195
$ 1,561
$ 405
$ 1,388
Annual Meeting
Zebra’s Annual Meeting of Stockholders will be held on May 9, 2006, 10:30 A.M. (Central
Time), at the Hilton Northbrook, 2855 North Milwaukee Avenue, Northbrook, Illinois.
$ 974
$ 7,598
Chicago, Illinois
Independent Auditors
Ernst & Young LLP
$ 3,854
$ 8,037
$ 3,174
$ 6,238
Transfer Agent and Registrar
Mellon Investor Services
480 Washington Boulevard
Jersey City, New Jersey 07310
Phone: 877 870 2368
For hearing impaired stockholders: +1 201 680 6610
For foreign stockholders: +1 201 680 6578
Web site: www.melloninvestor.com
E-mail contact: shrrelations@mellon.com
Investor Relations
Please contact Zebra’s Corporate Headquarters for corporate or product information.
Form 10-K Report
You may receive a free copy of the Zebra Technologies Corporation Form 10-K Report
filed with the Securities and Exchange Commission by contacting the Investor Relations
department at the Corporate Headquarters.
Web Site
Investors are invited to learn more about Zebra Technologies Corporation by accessing
our Web site at www.zebra.com
Equal Employment Opportunities/Affirmative Action
It is the policy of Zebra Technologies Corporation to provide equal opportunities and
affirmative 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.
I n t e r n a t I o n a l H e a d q u a r t e r s
333 Corporate Woods Parkway | Vernon Hills, Il | 60061-3109 usa
+1 847 634 6700 | www.zebra.com