Zebra Technologies Corporation | 2006 annual report
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Product labelMembership cardReceiptEvent ticketWristbandBoarding passLoyalty cardEmployee IDShelf labelPhotographClearance tagDriver’s licenseVoter registration cardShipping labelFishing licenseTraffic citationTax stampSerial numberWarranty labelRFID smart labelFood safety labelPacking slipTruck manifestGift cardPicking slipTote IDUtility billRTLS transponderKanban cardSignageMembership cardKanban cardTool labelSki lift ticketSpecimen labelLot numberAmusement park wristbandOil change reminderMarkdown labelProduct priceVisitor badgePredictive maintenance tagUnit dose packageProduct assembly parts Parking ticketInventory management tagRental return receiptFood labelHotel room keyUID labelCheck-in receiptProduct identification labelPrice check ticketPlant ID tagWarranty labelWarehouse rack bar codeInventory IDInvoiceQA checkReceiving labelCouponBill of ladingJewelry tagAuthentication labelAnti-tamper closureLibrary book labelSafety instructionVehicle license tag Zebra Technologies is a leading global
provider of high-growth specialty digital
printing and automatic identification solutions.
Businesses, governments, and other organizations
use our on-demand thermal bar code label
and receipt printers and supplies, plastic card
printers, radio frequency identification (RFID)
solutions, real time locating systems (RTLS)
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.
2006 % change
2005
% change
2004
(Inthousands,exceptper-sharedataandpercentages)
Operating Results
Net sales
Gross profit
Operating income
Net income
$ 759,524
358,420
80,429
70,946
Diluted earnings per share
1.00
8.2%
$ 702,271
5.9%
$ 663,054
1.4
(44.9)
(33.2)
(32.0)
353,420
146,028
106,184
1.47
3.3
(12.4)
(7.8)
(7.5)
342,103
166,609
115,141
1.59
Capitalization
Cash & cash equivalents
and investments and
marketable securities
Working capital
Total assets
$ 559,189
404,836
963,142
Total stockholders’ equity
877,681
$ 544,239
680,554
918,415
857,972
$ 557,993
665,062
868,044
803,893
Financial Summary
L E T T E R T O S T O C k h O L D E R S
Zebra posted its fourth consecu-
specifications to a company dedi-
tive year of record sales in 2006.
cated to understanding and satisfy-
Net sales were $759.5 million, up
ing customer specialty printing and
8.2%. Earnings of $1.00 per diluted
automatic identification needs.
share, compared with $1.47 for
We are oriented toward finding
2005, did not reflect the underlying
solutions with a compelling busi-
strength at the core of our business.
ness proposition to solve problems
Two one-time events reduced
in targeted vertical markets with
profitability. We settled a litigation
high-growth potential. Today our
The improvement in our business has been built
dispute and entered into a related
customers’ needs and the value
upon our accomplishments of the past several
years and gives me great optimism about Zebra’s
future and capacity to increase stockholder value.
licensing agreement. We also took
proposition we deliver guide our
a charge for the reserve of a
product specifications. These
receivable related to the debt of
factors determine the selection
a reseller customer. These items
of channel and alliance partners,
lowered reported 2006 income by
technology investments and
$0.61 per share. Clearly, however,
geographic concentrations.
the improvement in our business
has been built upon our accom-
Zebra entered the bar code world
plishments of the past several
more than 20 years ago with print-
years and gives me great optimism
ers for compliance labeling appli-
about Zebra’s future and capacity
cations. We now deliver a broad
to increase stockholder value.
range of reliable products for an
increasing number of business
Positioned to Grow Sales
improvement solutions. Sales in
and Stockholder Value
2006 came from this broad range
Zebra has moved from an organiza-
of products, including our new metal
tion focused on printers and their
S4M, mobile RW and QL Plus, and
A h i S T O R y O f i N N O v A T i O N :
2
card, kiosk and photo printers.
enables new dimensions in asset
Retirement and Zebra’s Future
and management team for their
Supplies were another source of
control and security.
As i retire from the day-to-day
contributions to the company’s
growth. During the year, we further
management of Zebra, i look back
enduring success. integrity was at
enhanced our capability to deliver
The strength and vitality of our sales
with tremendous satisfaction on our
the core of the company Gary Cless
robust, optimized solutions with
channels add to my confidence in
record of stockholder value creation.
and i founded in 1969. i am per-
increased label production capacity
Zebra. Zebra’s sales team has
Since its initial public offering in
sonally gratified that, even after
and new facilities that are geo-
worked very hard to forge stronger
1991, the company’s market capital-
nearly four decades of growth and
graphically closer to customers.
ties with global channel partners,
ization has increased nearly 1,200%,
acquisitions, this value remains
distributors and strategic alliances.
an average of 18% per year. i look
just as strong within our culture
On top of thermal printing, Zebra is
international regions accounted for
forward with enthusiasm and confi-
at Zebra today. Research shows
now the recognized leader in pas-
half of our sales in 2006, up from
dence to further success. Zebra is
Zebra is the most trusted brand
sive radio frequency identification
approximately 40% a few years ago.
well positioned as the clear industry
in our industry, and our associates
technology, with our RfiD printer/
Continued growth in market econo-
leader. it is led by an outstanding
receive the highest marks for
encoders and smart labels. Our
mies supports the prospects for the
management team. We have more
delivering on our promises.
expertise in incorporating wireless
further adoption of Zebra solutions.
than 2,800 dedicated and capable
Our record of integrity, now an
communication and high-level data
associates who design and deliver
ingrained core principle of our
encryption into our products
We enter 2007 with more sources
innovative solutions to our customers
organization, will continue to add
enhances worker mobility. Most
of growth than ever to drive busi-
worldwide. Zebra has an excellent
long-term value for the company
recently, we added real time locat-
ness value. More large companies
business strategy that differentiates
and for you, our stockholders.
ing systems, or RTLS, to our portfo-
are viewing Zebra as a strategic
the company from its competitors
lio with the acquisition of WhereNet.
technology partner that brings
and builds on its strengths.
RTLS incorporates battery-powered
higher levels of productivity,
active RfiD technology to extend
security and customer satisfac-
i want to express my deepest
automatic identification range and
tion to their organizations.
appreciation for your support over
utility. This exciting growth platform
complements our leadership in bar-
coding and RfiD labeling, and
the years. Many of our initial
Edward Kaplan
Chairman and
investors are still stockholders. i
Chief Executive Officer
also want to thank our employees
3
Value Creation Zebra’s focus on value creation has benefited its
Over the years, we have systematically expanded our range of printers and
customers and stockholders alike. value creation at Zebra has always started
specialty supplies to deliver a wider variety of high-growth applications to a
with providing the best specialty printing and automatic identification
greater number of companies and industries. This expansion also includes
solutions to meet vital business needs. in 1985, we pioneered the use of
incorporating enabling technologies such as wireless communications and
on-demand thermal printing to reliably print bar coded labels for compliance
high-level encryption for greater work force mobility and business security.
labeling mandates. from that time, Zebra has become the most recognized,
Our drive to serve the customer better and build value has also led to global
trusted brand in our industry.
1985
Zebra 60
N O W
4
high performance printers
Mobile printers
Networking products
coverage through the industry’s strongest network of value-added resellers
for efficient and effective distribution. Today, Zebra stands as the clear global
leader in its industry with the largest installed base of products. We are well
positioned in attractive growth segments. Global competition, development
of market economies and greater concern for personal safety continue to
drive further adoption of specialty printing and identification technologies.
Midrange printers
RfiD smart labels
Performance class card printers
Print engines
Label design software
Desktop printers
RfiD printer/encoders
value class card printers
kiosk printers
Digital photo printers
Security card printers
Real time locating systems
Specialty supplies
Card printer supplies
Printer management software
5
Performance Wristband
6
Patient: Alan HoffmanBirth date: 16 May 2006Physician: Susan Langford, MDAdmittance: 09 April 2007Blood type: A PositiveAllergies: PenicillinDurable bar coded Zebra wristbands serve as the foundation for preventing errors by enabling immediate, automated access to critical patient information at the point of care, all in conformance with HIPAA standards. SafetyEVERYTELLS A STORY Zebra Technologies Corporation 2006 Annual Report
With people individual identification is at the heart of personal safety and
security. Zebra printing solutions incorporate bar codes, RfiD and other
technologies into wristbands and photo iDs for fast, accurate identification.
Accurately matching the right patient with the right procedure, medication,
and materials reduces errors and saves lives. A high-security access badge,
employee iD or driver’s license promotes greater security and protection
with the unique personal information embedded into each card. Zebra card
printers produce more than 1.5 million personal identification cards every
ID Card
business day.
7
Company: Atwood IndustriesEmployee: Henry RoengardnerAge: 49Position: Engineer, Chemical DivisionSecurity Clearance: BHire Date: 13 July 1998Companies and organizations around the world rely on Zebra card printers to produce personal identification cards, which promote greater security for people and property. SecurityEVERYTELLS A STORY E V E R Y
Receipt
T E L L S A S T O R Y
improving customer service and satisfaction.
On the road Zebra printing solutions help people manage their business
better. Route sales representatives eliminate cumbersome, time-consuming
paperwork with the use of rugged and reliable wireless mobile printers to
generate accurate receipts, invoices and orders. Printing on demand, on
site, cuts errors out of the system and days out of the billing cycle, all while
8
Customer: EZ Go MartInvoice Number: 2633091Delivery Date: 22 September 20062.5 cases cola1.5 cases cherry sodaDocumentation printed on-demand in the field, using Zebra mobile printers, streamlines business operations by linking a transaction to a company’s enterprise system in real time, thereby reducing paperwork and exception reporting and reducing back-end administration. Efficiency Citation
9
Infraction: Parking violationDate: 19 March 2007 10:54 A.M.Officer: Ryan, 10-049836Auto: 2005 Vauxhall, Corsa (Blue)Amount Due: £40Court Date: 1 May Government and law enforcement agencies count on productivity-improving solutions from Zebra to help manage public safety, including citation printing, evidence tracking and crime scene investigation. MobilityEVERYTELLS A STORY Registry
Bride: Jaclyn Frederick
Groom: Steve Lieberman
Wedding Date: 3 November 2007
Registered For: Various home appliances
Self-serve kiosks to print registries, tickets and
receipts offer new levels of convenience for
consumers at many locations within the store.
10
ConvenienceEVERYTELLS A STORYConvenience At the store you’ll find a Zebra application nearly everywhere. Shelf
edge and merchandise marking complements printers for self-service
kiosks and digital photos, as well as for club membership and personalized
Prescription
gift cards. This unparalleled broad range of printing solutions is one reason
why top retailers around the world rely on Zebra solutions to enhance
employee productivity, lower costs and generate more business.
P h O T O P R i N T i N G
S h E L f L A b E L i N G
C u S T O M i Z E D G i f T C A R D S
Q u E u E b u S T i N G
11
Patient: Edward NewmanAge: 54Instructions: One pill a day by mouth. Take with food.Zebra pharmacy print solutions for unit-dose and retail dispensing lower costs. They are an effective way to meet patient safety goals for medication labeling established by health care accreditation and professional organizations. AccuracyEVERYTELLS A STORY E V E R Y
UID Label
T E L L S A S T O R Y
Across the enterprise Companies improve their processes with
automatic identification solutions from Zebra. bar code, RfiD and RTLS
technologies work to deliver optimized systems to locate, track and trace
materials, from individual components to the finished product. All Zebra
label printers operate with a common hardware, firmware and software
architecture for easy integration and real-time control of mission-critical
printing over the entire network.
12
Product: ComputerCustomer: U.S. Department of DefenseRequirement: Unique IdentificationGenuine Zebra Supplies matched with reliable high-performance Zebra label printers help companies comply with item-level labeling requirements, including the Defense Department’s UID marking mandate. Protection E V E R Y
RTLS Transponder
T E L L S A S T O R Y
Asset: Newly manufactured vehicle
Location: Somewhere on the
factory staging lot
Real time locating systems provided by WhereNet,
which was acquired by Zebra in January 2007,
extend the range of automatic identification to help
companies to identify, locate and track valuable
assets over wide areas such as parking lots,
warehouses, factory floors and shipping yards.
13
Visibility E V E R Y
Packing List
T E L L S A S T O R Y
14
Contents: Mom’s birthday presentOrdered: 13 AprilExpected Delivery: 21 AprilThe ability to track a package through the supply chain, from the manufacturer or retailer to the end user, is accomplished millions of times a day worldwide using bar code labeling solutions from Zebra. Control In the supply chain Ever-increasing competition demands superior
efficiency. Zebra barcoding and RfiD solutions connect products, processes
and partners to gain greater visibility and control over the movement
of goods, from the factory to the end user. industry-leading networking
and connectivity options tightly integrate label printing operations with
enterprise information systems. Layered security and brand-protection
systems authenticate products and deter counterfeiting and diversion.
E V E R Y
RFID Smart Label
T E L L S A S T O R Y
Customer: Major Retailer
Mandate: Ship cases and pallets
using RFID smart labels
Suppliers use Zebra more than any other company
for their printer/encoders and smart labels to meet
RfiD compliance mandates in the retail and
Defense Department supply chains.
15
ControlProductivity Global reach Wherever there are developing market economies
to drive investments in factories, distribution and infrastructure,
Zebra will be there with a growing range of innovative specialty
printing, automatic identification and connectivity products and
technologies. These solutions provide great value in delivering
lower costs, improved security, and greater customer satisfaction.
Zebra meets these needs through its valued worldwide reseller
network. Global enterprises and local organizations alike are
deploying Zebra solutions to solve their most demanding
identification and tracking challenges.
16
LeadershipReceipt event ticket WRistband boaRding pass LoyaLty caRd MeMbeRship caRd dRiveR’s License eMpLoyee id voteR RegistRation caRd sheLf LabeL photogRaph shipping LabeL cLeaRance tag vehicLe License tag fishing License tRaffic citation tax staMp seRiaL nuMbeR WaRRanty LabeL RtLs tRanspondeR Rfid sMaRt LabeL pRoduct LabeL food safety LabeL picking sLip packing sLip tRuck Manifest tote id kanban caRd utiLity biLL Zebra Technologies Corporation 2006 Annual Report
UNITED STATES
SECURITIES
AND EXCHANGE
COMMISSION
Washington, D. C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION
REPORTS PURSUANT TO SECTIONS
13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
X
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 2006
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:
Name of Exchange
Title of Each Class
on which Registered
Class A Common Stock, The NASDAQ Stock
par value $.01 per share Market, LLC
Securities registered pursuant to Section 12(g)
of the Act: None
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 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 a large accelerated filer, an accelerated filer or a
non-accelerated filer. See definition of “accelerated
filer and large accelerated filer ” in Rule 12b-2
of the Securities Act (Check one):
Large accelerated filer __X Accelerated filer __
Non-accelerated filer __
indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of
the Securities Act).
yes __ No __X
As of June 30, 2006, 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
June 30, 2006, as reported on the NASDAQ Stock
Market, was $44.28 per share.
As of february 26, 2007, 68,940,433 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 24, 2007, are incorporated by
reference into Part iii of this report.
Receipt event ticket WRistband boaRding pass LoyaLty caRd MeMbeRship caRd dRiveR’s License eMpLoyee id voteR RegistRation caRd sheLf LabeL photogRaph shipping LabeL cLeaRance tag vehicLe License tag fishing License tRaffic citation tax staMp seRiaL nuMbeR WaRRanty LabeL RtLs tRanspondeR Rfid sMaRt LabeL pRoduct LabeL food safety LabeL picking sLip packing sLip tRuck Manifest tote id kanban caRd utiLity biLL
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
item 1b. unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
item 4. Submission of Matters to a vote of Security holders . . . . . . . . . . . . . . . . . . . . . 10
PART II
item 5.
Market for Registrant’s Common Stock, Related Stockholder Matters
and issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
item 6. Selected Consolidated financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
item 7.
Management’s Discussion and Analysis of financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . 20
item 8.
financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . 21
item 9.
Changes in and Disagreements with Accountants on Accounting and
financial Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
item 9b. Other information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
PART III
item 10. Directors, Executive Officers, and Corporate Governance . . . . . . . . . . . . . . . . . 23
item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
item 12.
Security Ownership of Certain beneficial Owners and
Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 23
item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 23
item 14. Principal Accounting fees and Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
PART IV
item 15. Exhibits and financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SIGNATURES
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
index to Consolidated financial Statements and Schedule . . . . . . . . . . . . . . . . . . . . . . . . f-1
EXHIBITS
index to Exhibits
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 and the potential effects of technological changes,
• The effect of market conditions in North America and other geographic regions,
• Our ability to control manufacturing and operating costs,
• Success of integrating acquisitions,
• interest rate and financial market conditions because of our large investment portfolio,
• foreign exchange rates due to the large percentage of our international sales,
• The outcome of litigation in which Zebra is involved, particularly litigation or claims
related to infringement of third-party intellectual property rights, and
• New regulations in the European union that restrict the use of certain hazardous
substances in electrical and electronic equipment.
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 item 1A, “Risk factors,” in this report for
further discussion of issues that could affect Zebra’s future results. 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 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, passive 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. On
January 25, 2007, we acquired WhereNet Corp., which added active RfiD systems to our
product portfolio, and which is discussed separately at the end of this item 1, “business.”
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 printing 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, 2006, management estimates that Zebra has
sold over 5,700,000 printers to users in approximately 100 countries.
Our active RfiD solutions are designed to locate, track and manage enterprise assets. We
provide integrated wireless Real Time Locating Systems (RTLS) to companies primarily
in the industrial manufacturing, transportation and logistics, and aerospace and defense
sectors. These systems encompass wireless tags, fixed-position antennas in addition to
middleware, application software, and services for project management, maintenance
and support.
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, passive and active 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 Technologies Corporation was incorporated as an illinois Corporation in 1969.
We became a Delaware corporation in 1991 in connection with its initial public offering,
which we completed in August 1991. We currently remain 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, passive RfiD “smart” labels, receipts,
wristbands 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 supply
chain, retail, healthcare and government sectors of the economy. We work closely with
distributors, resellers, kiosk manufacturers and end users of our products to design
and implement printing 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
printing 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,
2006
2005
$578,002
76.1
$150,709
19.8
$540,679
77.0
$129,183
18.4
2004
$518,556
78.2
$116,877
17.6
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
ease of use, smaller size and cost are important factors in the application. Accordingly, this
technology is found principally in Zebra’s mobile and desktop units.
As of December 31, 2006, we offered 42 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 and industrial 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 manufactures and markets a growing line of printer/
encoders used for high frequency (hf) and ultra-high frequency (uhf) 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. Zebra offers five RfiD and two RfiD-ready printer/encoders,
which have list prices from $1,695 to $6,995.
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 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.
Mid-Range Tabletop Printers. We offer five printer models designed for demanding
commercial applications. These units offer a range of configurations and features designed
to optimize price and performance. Products in this category include the Zebra Stripe®,
S4M, 105Si and the popular Z Series printers. List prices range from $1,145 to $3,490.
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.
Desktop Printers. Applications with lower volume or space restrictions suit Zebra’s
desktop printers. We currently offer 10 desktop models consisting of direct thermal and
thermal printers in two- and four-inch widths. List prices range from $395 to $895.
Mobile Printers. Zebra makes nine mobile printer models, which offer durability, light
weight and the industry’s highest levels of secure wireless connectivity. These printer
models come in two-, three- and four-inch widths and are marketed under the Cameo, QL,
MZ and RW lines. List prices range from $450 to $1,095.
Print Engines. Zebra’s PAX print engines are sold to manufacturers and integrators of
high-speed automatic label applicator systems and are available with or without RfiD
smart label capabilities.
Kiosk and TicketPrinters. Zebra also supplies seven thermal receipt, ticket and document
printers for use in kiosks and other unattended printing applications. Zebra’s Swecoin
print engines are sold to systems integrators to incorporate into kiosks and other
unattended printing applications. They are available in a variety of models with widths
from two to eight inches.
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 10 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. from the middle of 2006, all Zebra color card printers
are “i-Series” card printers, which incorporate features that automatically optimize
printer settings for a given ribbon. The list prices for all of Zebra’s card printers range
from $1,995 to $7,995.
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 bar code decoding and printer performance
while meeting the most demanding end user application 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 bar code decoding rates, 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, 802.11b/g with advanced
securities 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. Since introducing the label design and
printer configuration tools ZebraDesigner™ and ZebraDesigner™ Pro in 2005, the product
line has been enhanced with the release of ZebraDesigner™ for XML, offering integration
capabilities with XML based enterprise applications. Zebra also continues to offer 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.
in 2006, Zebra began offering a unicode based Global Printing Solution for the industrial
and high performance Xi Series, 105SL, Z4mplus/Z6mplus and PAX print engines. The
Zebra Global Printing Solution lets the printer automatically output any language, with no
need for the operator to select the language, font, codepage or otherwise adjust the printer.
Also released in 2006 were additions to Zebra’s family of XML enabled printing solutions.
Zebra’s award winning QL Plus and RW Series mobile printers now offer XML direct
connect printing capabilities as a standard feature.
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, and batteries are warranted
for three 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.
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 passive 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.
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
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, contributions 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, services and radio frequency identification (RfiD)
products in vertical markets. 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.
Sales to international customers as a percent of net sales were as follows:
Customers
Zebra has sold over 5,700,000 bar code label and card printers to customers in about 100
countries as of December 31, 2006.
ScanSource, inc., is our most significant customer. Our net sales to ScanSource, an
international distributor of Zebra product, as a percent of total net sales, were as follows:
Percent of sales
Year Ended December 31,
2005
15.6
2004
14.1
2006
16.7
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 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 buy prefabricated component parts and subassemblies for use in the manufacture of
our products. Critical subassemblies include printheads, printed circuit board assemblies,
power supplies, integrated circuits, and stepper motors, which are obtained from
domestic and foreign suppliers at competitive prices. Purchase contracts provide for
price increases only 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.
Research and Development
Zebra had research and development expenditures as follows (in thousands):
Percent of sales
Year Ended December 31,
2005
48.5
2004
45.8
2006
50.0
Research and development expenditures
Percent of sales
Year Ended December 31,
2005
2004
2006
$48,959
6.4
$47,359
6.7
$38,609
5.8
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.
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 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; Polaroid; Printronix; Sato; Shinko; Song Woo Electronics; Sony; Taiwan
Semiconductor; Tokyo Electric Company; victor Data Systems; Woosim; and Xerox.
Competition in the kiosk arena is vast. A few of the competitors we face include Custom
Engineering, Star Micronics, Epson, Citizen, boca Systems and Practical Automation.
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 252 united States and foreign patents and have
225 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.
During 2006, we acquired patents as a result of a payment for the settlement of a
lawsuit with Paxar Americas, inc. A portion of this settlement was applied to future use
of patents. This portion of the settlement has been recorded as intangibles and will be
amortized over the estimated useful lives of the patents, which range from 4 to 7 years. in
some cases, the useful lives may be less than the patent lives. See Note 16 to the Notes to
the Consolidated financial Statements included in this form 10-k for further discussion
of the settlement.
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.
WhereNet Acquisition
On January 25, 2007, we extended our automatic identification technology portfolio
by acquiring WhereNet Corp., a provider of active radio frequency identification (RfiD)
based wireless solutions to track and manage enterprise assets, for $126 million in
cash. headquartered in Santa Clara, CA, WhereNet provides integrated wireless Real
Time Locating Systems (RTLS) to companies primarily in the industrial manufacturing,
transportation and logistics, and aerospace and defense sectors. These systems help
companies locate and track high-value assets using battery-powered wireless tags, fixed-
position antennas and Web-enabled software. They are employed in parts replenishment,
vehicle inventory tracking, truck yard management, marine cargo tracking, and work-in-
process tracking, among many other applications.
WhereNet’s solutions encompass hardware, middleware, application software, and
services for project management, maintenance and support. hardware consists primarily
of proprietary battery-powered RfiD transponders and various reading devices.
Manufacturing of these products are accomplished by third-party contract manufacturers.
Middleware, application software and services are designed and delivered by WhereNet
personnel. Sales and service are made on a direct basis through contracts with end-user
customers, in addition to follow-on sales of transponders and support services.
Active RfiD technology is the basis on which WhereNet solutions are designed and built.
Several companies compete with WhereNet employing multiple technologies aimed at
optimizing the performance of supply chain, asset tracking and logistics networks. These
technologies include passive RfiD, other active RfiD platforms, GPS-based technologies,
Wifi-based technologies, and software platforms. Competing wireless location and
RfiD-focused companies include Aeroscout inc., Ekahau inc., i.D. Systems inc., identec
Solutions, intermec inc., and Rf Code inc. Larger, diversified companies competing with
WhereNet include Cisco Systems inc., Lockheed Martin Corp., Roper industries inc.,
Siemens AG, and Motorola inc.
Employees
As of february 23, 2007, Zebra employed approximately 2,800 persons. None of these
employees is a member of a union. We consider our employee relations to be very good.
Additional Information
for financial information regarding Zebra, see Zebra’s Consolidated financial Statements
and the related Notes, which are included in this Annual Report on form 10-k. Zebra has
a single reportable segment for all of our operations and products. financial information
about geographic areas is found in Note 17 to the Consolidated financial Statements.
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. for example, it acquired WhereNet Corp. (“WhereNet”), in January 2007.
The process of integrating any acquired business, technology, service or product
into operations may result in unforeseen operating difficulties and expenditures. An
acquisition may present business issues which are new to Zebra. 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 is vulnerable to the potential difficulties associated with the rapid increase in the
complexity of its business. Zebra has grown rapidly over the last several years through
domestic and international growth and acquisitions. This growth has caused increased
complexities in the business. We believe our future success depends in part on our
ability to manage our rapid growth and increased complexities of our business and the
demands from increased responsibility on our management personnel. The following
factors could present difficulties to us:
• Manufacturing an increased number of products;
• increased administrative and operational burden;
• Maintaining and improving information technology infrastructure to support growth;
• increased logistical problems common to complex, expansive operations; and
• Managing increasing international operations.
if we do not manage these potential difficulties successfully, our operating results
could be adversely affected. in addition, we may have difficulties managing associated
increased costs, which could adversely affect our operating margins.
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. in particular, a key microprocessor used in Zebra
products has been the subject of patent litigation against the manufacturer. While Zebra
expects the manufacturer to prevail, an adverse result is such proceedings could have a
material adverse effect on Zebra’s financial results.
Infringement by Zebra or Zebra suppliers 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 or Zebra suppliers 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. 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.
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 may incur liabilities as a result of product failures due to actual or apparent design
or manufacturing defects.
Zebra may be subject to product liability claims, which could include claims for property
or economic damage or personal injury, in the event our products present actual or
apparent design or manufacturing defects. Such design or manufacturing defects may
occur not only in Zebra’s own designed products but also in components provided by
third party suppliers. A Zebra supplier has in the past provided us with defective lithium-
ion battery packs which were subject to a product recall. Zebra generally has insurance
protection against property damage and personal injury liabilities and also seeks to limit
such risk through product design, manufacturing quality control processes, product
testing and contractual indemnification from suppliers. however, due to the large and
growing size of Zebra’s installed printer base, a design or manufacturing defect involving
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 planned retirement of Zebra’s chief executive officer could cause dislocations in
management and changes in strategic direction. During the third quarter of 2006, we
announced that Edward L. kaplan, Zebra’s co-founder, chairman and chief executive
officer, plans to retire as CEO following the recruitment of a successor CEO. This current
period of transition and future change in leadership could result in changes in other
senior and mid-level management personnel. Such changes could have an adverse
affect on Zebra’s business. in addition, no assurances can be provided as to whether the
successor CEO, who has yet to be named, will seek to change Zebra’s strategies.
Zebra’s equipment is subject to U.S. and foreign regulations that pertain to electrical and
electronic equipment, which may materially adversely affect Zebra’s business.
These regulations influence the design, components or operation of such products.
New regulations and changes to current regulations are always possible and, in some
jurisdictions, regulations may be introduced with little or no time to bring related
products into compliance with these regulations. Zebra’s failure to comply with these
regulations may prevent Zebra from selling our products in a certain country. in addition,
these regulations may increase our cost of supplying the products by forcing us to
redesign existing products or to use more expensive designs or components. in these
cases, Zebra may experience unexpected disruptions in our ability to supply customers
with products, or we may incur unexpected costs or operational complexities to bring
products into compliance. This could have an adverse effect on Zebra’s revenues, gross
profit margins and results of operations and increase the volatility of our financial results.
in January 2003, the European union, (“Eu”), issued two directives relating to chemical
substances in electronic products. The Waste Electrical and Electronic Equipment
Directive requires producers of electrical goods to pay for specified collection, recycling,
treatment and disposal of past and future covered products. Eu governments were
required to enact and implement legislation that complies with this directive (such
legislation together with the directive, the “WEEE Legislation”), and certain producers
are to be financially responsible under the WEEE Legislation. The Eu issued another
directive that requires electrical and electronic equipment placed on the Eu market
after July 1, 2006, to be free of lead, mercury, cadmium, hexavalent chromium (above
a threshold limit) and brominated flame retardants. Eu governments were required
to enact and implement legislation that complies with this directive (such legislation
together with this directive, the “RohS Legislation”). We are currently in compliance;
however, if we do not comply with these directives, we may suffer a loss of revenue, be
unable to sell in certain markets and/or countries, be subject to penalties and enforced
fees, and/or suffer a competitive disadvantage. Also, complying with these directives has
presented additional complexities to manufacturing and operations which could result in
adverse results. We cannot assure you that the costs to comply with these new laws, or
with current and future environmental laws, will not have a material adverse effect on our
results of operations, expenses and financial condition.
Added risks are associated with our international operations which may have a material
adverse effect on Zebra’s business.
Zebra has significant overseas operations, notably in the u.k., Middle East and Africa,
Latin America and Asia-Pacific, including, in particular, an increasing presence in China,
which present added risks that may materially adversely affect the financial results and
condition of Zebra. These risks include the following:
• Adverse changes in, or uncertainty of, local business laws or practices;
• inadequately managing and overseeing operations that are distant and remote from
corporate headquarters;
• The inability to hire and retain appropriate employees in highly competitive job
markets; and
• The failure to implement and maintain adequate internal controls relating to
these operations.
if we are not able to effectively manage these risks, they may harm our business and the
trading price of our common stock.
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 maintains minimal key man life insurance policies on its co-founders.
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 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
PART II
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 by
Edward kaplan and Gerhard Cless, both executive officers and directors of Zebra.
Zebra’s principal facilities as of December 31, 2006, are listed below:
Location
Square Footage
Manufacturing, Administrative,
Production &
Warehousing
Research
& Sales
Total
Lease Expires
Item 5. Market for Registrant’s Common Stock, Related Stockholder
Matters and Issuer Purchases of Equity Securities
Stock Information: Price Range and Common Stock
Our Class A Common Stock is traded on the NASDAQ Stock Market under the symbol
ZbRA. The following table shows the high and low trade prices for each fiscal quarter in
2006 and 2005, as reported by the NASDAQ Stock Market.
2006
High
Low
2005
first Quarter
Second Quarter
Third Quarter
fourth Quarter
$47.97 $42.16
32.41
45.39
29.23
36.60
33.98
37.74
first Quarter
Second Quarter
Third Quarter
fourth Quarter
High
Low
$56.90 $44.53
39.60
34.88
36.65
48.67
47.58
46.66
vernon hills, illinois, uSA
111,676
113,429
225,105
June 2014
Source: The NASDAQ Stock Market
vernon hills, illinois, uSA
—
34,000
34,000
february 2008
Camarillo, California, uSA
Warwick, Rhode island, uSA
Greenville, Wisconsin, uSA
Otay Mesa, California, uSA
McAllen, Texas, uSA
heerenveen, The Netherlands
high Wycombe, uk
97,921
24,516
45,000
25,100
15,500
48,427
—
72,156
170,077
Owned by Zebra
75,324
99,840
April 2009
5,000
4,900
2,500
46,145
24,700
50,000
february 2018
30,000
february 2008
18,000
September 2011
94,572
March 2025
24,700
October 2018
Preston, uk
Total
30,450
8,600
39,050
Owned by Zebra
398,590
386,754
785,344
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.
Item 3. Legal Proceedings
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.
At february 26, 2007, the last reported price for the Class A Common Stock was $41.79
per share, and there were 372 registered stockholders of record for the Company’s Class
A Common Stock. in addition, we had approximately 17,000 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 2006, Zebra purchased 2,080,911 shares of common stock. The repurchase
was under a purchase authorization approved by the board of Directors. in September
2005, the board authorized the purchase of up to 2,500,000 shares of common stock.
The purchase price is at management’s discretion, and there is no expiration on the
authorization. During 2006, Zebra purchased shares as follows:
Period
September 2006
(August 27 – September 30)
October 2006
(October 1 – October 28)
November 2006
(October 29 – November 25)
December 2006
(November 26 – December 31)
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
116,800
$34.83
116,800
329,111
36.09
329,111
—
—
—
1,635,000
34.85
2,080,911
$35.04
1,635,000
2,080,911
419,089
See item 12 for information related to Zebra’s equity compensation plans.
STOCK PERFORMANCE GRAPH
STOCK PERFORMANCE GRAPH
The graph depicted below compares the cumulative annual change since December 31,
The graph depicted below compares the cumulative annual change since December 31,
2001, of the total stockholder return on Zebra Technologies Corporation Class A Common
2001, of the total stockholder return on Zebra Technologies Corporation Class A Common
Stock with the cumulative total return on the following published indices: (i) the hemscott
Stock with the cumulative total return on the following published indices: (i) the Hemscott
industry Group 815 (Computer Peripherals) index1 and (ii) the NASDAQ Composite Market
Industry Group 815 (Computer Peripherals) Index1 and (ii) the NASDAQ Composite Market
index, during the same period. This comparison assumes that $100 was invested in each
Index, during the same period. This comparison assumes that $100 was invested in each
of the Company’s Class A Common Stock, the stocks comprising the hemscott industry
of the Company’s Class A Common Stock, the stocks comprising the Hemscott Industry
Group 815 index, and the stocks comprising the NASDAQ Composite Market index, on
Group 815 Index, and the stocks comprising the NASDAQ Composite Market Index, on
December 31, 2001, and assumes that all dividends were reinvested at the end of the
December 31, 2001, and assumes that all dividends were reinvested at the end of the
month in which they were paid.
month in which they were paid.
Comparison of Five-Year Cumulative Total Return
Comparison of Five-Year Cumulative Total Return
of Zebra Technologies Corporation, the Hemscott Industry Group Index
of Zebra Technologies Corporation, the Hemscott Industry Group Index
and the NASDAQ Composite Market Index
and the NASDAQ Composite Market Index
2004
2005
2003
2002
2001
2006
$300
Zebra Technologies
Corporation
$250
hemscott industry
Group index
Zebra Technologies Corporation
$ 100.00
Hemscott Industry Group Index
NASDAQ Composite Market Index
100.00
$103.22
74.88
$179.26
$227.89
$173.51
$140.87
128.77
131.65
113.78
124.42
$200
NASDAQ Composite
Market index
100.00
69.75
104.88
113.70
116.19
128.12
$100
1. hemscott, inc. (formerly CoreData LLC and Media General financial Services) publishes the hemscott industry Group
$150
815 (Computer Peripherals) index. The index is comprised of the following companies: Acme Packet inc., Astro-Med
inc., Au Optronics Corp. ADS, Avocent Corp., Creative Technology Ltd., Electronics for imaging, Emulex Corp.,
Evand & Sutherland Computer Corp., foundry Networks inc., Global imaging Systems inc., hauppage Digital inc.,
iCAD inc., immersion Corp., infocus Corp., intermec inc., interphase Corp., key Tronic Corp., Lantronix inc., Lexmark
international inc., Logitech international SA ADR, Media Sciences international inc., Mercury Computer Systems
inc., MTS Medication Technologies inc., Nice Systems Ltd. ADR, O2Micro international Ltd., Opnet Technologies inc.,
Planar Systems inc., Printronix inc., Radcom Ltd., RadiSys Corp., Rimage Corp., SbE inc., SCM Microsystems inc.,
$50
Secure Computing Corp., Stratasys inc., Symbol Technologies inc., Top image Systems Ltd., Transact Technologies
inc., universal Display Corp., video Display Corp., Wave Systems Corp. Cl. A, and Zebra Technologies Corporation.
$0
12/31/2001
12/31/2004
Item 6. Selected Consolidated Financial Data
12/31/2002
12/31/2003
12/31/2005
12/31/2006
Zebra Technologies
Corporation
2001
CONSOLIDATED STATEMENTS OF EARNINGS DATA
(in thousands, except per share amounts)
2004
2003
2002
2005
$ 100.00
$103.22
$179.26
$227.89
Year Ended December 31,
$173.51
2006
$140.87
2006
69.75
2005(1)
74.88
128.77
100.00
100.00
401,104
348,851
$702,271
$759,524
$ 663,054
2003(1)
113.78
2004(1)
131.65
Hemscott Industry
Group Index
Net sales
NASDAQ Composite
Cost of sales
Market Index
Gross profit
1. Hemscott, Inc. (formerly CoreData LLC and Media General Financial Services) publishes the Hemscott Industry Group
Total operating expenses
135,806
815 (Computer Peripherals) Index. The index is comprised of the following companies: Acme Packet Inc., Astro-Med
93,876
Inc., AU Optronics Corp. ADS, Avocent Corp., Creative Technology Ltd., Electronics For Imaging, Emulex Corp.,
Evand & Sutherland Computer Corp., Foundry Networks Inc., Global Imaging Systems Inc., Hauppage Digital Inc.,
iCAD Inc., Immersion Corp., InFocus Corp., Intermec Inc., Interphase Corp., Key Tronic Corp., Lantronix Inc., Lexmark
International Inc., Logitech International SA ADR, Media Sciences International Inc., Mercury Computer Systems
102,981
Inc., MTS Medication Technologies Inc., Nice Systems Ltd. ADR, O2Micro International Ltd., Opnet Technologies Inc.,
Planar Systems Inc., Printronix Inc., Radcom Ltd., RadiSys Corp., Rimage Corp., SBE Inc., SCM Microsystems Inc.,
Secure Computing Corp., Stratasys Inc., Symbol Technologies Inc., Top Image Systems Ltd., Transact Technologies
66,464
Inc., Universal Display Corp., Video Display Corp., Wave Systems Corp. Cl. A, and Zebra Technologies Corporation.
income before income taxes
and cumulative effect of
accounting change
income before cumulative
effect of accounting change
358,420
277,991(2)
80,429
2002(1)
124.42
$475,611
245,929
128.12
229,682
Operating income
$536,397
264,564
353,420
166,609
150,882
175,494
160,282
271,833
146,028
320,951
176,084
207,392
120,951
101,642
342,103
106,184
127,725
104.88
115,141
113.70
86,357
116.19
69,627
11
Item 6. Selected Consolidated Financial Data
Cumulative effect of
accounting change
1,319(3)
—
—
—
—
Net income
CONSOLIDATED STATEMENTS OF EARNINGS DATA
(In thousands, except per share amounts)
$ 115,141
$ 70,946
$106,184
$ 86,347
$ 66,464
Earnings per share before
cumulative effect of
accounting change
basic
Net sales
Diluted
Cost of sales
Gross profi t
Earnings per share
basic
Total operating expenses
Diluted
Operating income
Income before income taxes
Weighted average
and cumulative effect of
shares outstanding
accounting change
basic
Income before cumulative
Diluted
effect of accounting change
Year Ended December 31,
2006
$ 0.99
$759,524
$ 0.98
401,104
358,420
$ 1.01
277,991(2)
$ 1.00
80,429
2005(1)
$ 1.49
$702,271
$ 1.47
348,851
353,420
$ 1.49
207,392
$ 1.47
146,028
2004(1)
$
1.61
$ 663,054
1.59
$
320,951
2003(1)
2002(1)
$ 1.22(4) $ 0.95(4)
$536,397
$ 1.21(4) $ 0.95(4)
264,564
$475,611
245,929
342,103
1.61
175,494
1.59
166,609
$
$
271,833
229,682
$ 1.22(4) $ 0.95(4)
$ 1.21(4) $ 0.95(4)
135,806
93,876
150,882
120,951
101,642
70,516
70,956
69,627
160,282
71,364
72,000
106,184
176,084
71,556
72,398
115,141
127,725
70,647(4)
71,495(4)
86,357
102,981
69,678(4)
70,305(4)
66,464
1,319(3)
$ 70,946
Cumulative effect of
—
accounting change
(1) Amounts have been restated to reflect the adoption of SfAS No. 123(R), Share-Based Payment, using the modified
retrospective approach. See Note 2 in the Notes to the Consolidated financial Statements included in this form 10-k.
$ 66,464
$106,184
Net income
(2) includes litigation settlement of $53,392,000 and insurance receivable reserve of $12,543,000. See Note 16 in the
Earnings per share before
cumulative effect of
(3) Relates to the estimation of forfeitures on prior year compensation expense outstanding at the adoption date
accounting change
of SfAS No. 123(R), Share-Based Payment. See Note 3 in the Notes to the Consolidated financial Statements
included in this form 10-k.
Notes to the Consolidated financial Statements included in this form 10-k for further discussion of the settlement.
Basic
(4) Restated for 3-for-2 stock splits in 2003 and 2004 that were paid in the form of 50% stock dividends.
Diluted
$ 1.22(4) $ 0.95(4)
$ 1.21(4) $ 0.95(4)
$ 115,141
$ 86,347
$ 0.98
$ 0.99
$ 1.47
$ 1.49
1.59
1.61
—
—
—
$
$
Earnings per share
Basic
Diluted
Weighted average
shares outstanding
Basic
Diluted
$ 1.01
$ 1.49
$ 1.00
$ 1.47
$
$
1.61
1.59
$ 1.22(4) $ 0.95(4)
$ 1.21(4) $ 0.95(4)
70,516
70,956
71,364
72,000
71,556
72,398
70,647(4)
71,495(4)
69,678(4)
70,305(4)
(1) Amounts have been restated to refl ect the adoption of SFAS No. 123(R), Share-Based Payment, using the modifi ed
retrospective approach. See Note 2 in the Notes to the Consolidated Financial Statements included in this Form 10-K.
(2) Includes litigation settlement of $53,392,000 and insurance receivable reserve of $12,543,000. See Note 16 in the
Notes to the Consolidated Financial Statements included in this Form 10-K for further discussion of the settlement.
(3) Relates to the estimation of forfeitures on prior year compensation expense outstanding at the adoption date
of SFAS No. 123(R), Share-Based Payment. See Note 3 in the Notes to the Consolidated Financial Statements
included in this Form 10-K.
(4) Restated for 3-for-2 stock splits in 2003 and 2004 that were paid in the form of 50% stock dividends.
CONSOLIDATED BALANCE SHEET DATA
(in thousands)
Results of Operations: Fourth Quarter of 2006 versus Fourth Quarter of 2005, Year ended
December 31, 2006 versus Year ended December 31, 2005
Cash and cash equivalents
and investments and
marketable securities
(current and long-term)
2006
2005
2004
2003
2002
December 31,
Sales
Sales by product category, percent change, and percent of total sales for the three
months and year ended December 31, 2006, and December 31, 2005, were (in thousands,
except percentages):
$559,189
$544,239
$557,993
$447,848
$348,577
Product Category
2006
2005 Change
Three Months Ended
December 31,
Percent of Percent of
Percent Total Sales Total Sales
2005
2006
Working capital
Total assets
Long-term obligations (5)
Stockholders’ equity
404,836
963,142
9,969
680,554
918,415
7,709
665,062
868,044
4,011
535,816
706,530
2,853
427,676
578,701
1,613
877,681
857,972
803,893
657,557
539,768
(5) Long-term obligations include deferred compensation and unearned revenue. See Note 18 in the Notes to
the Consolidated financial Statements included in this form 10-k for further discussion of the Deferred
Compensation Plan.
hardware
Supplies
Service and software
Shipping and handling
Cash flow hedging activities
$163,081 $ 137,803
38,578
33,581
6,954
1,610
(320)
6,202
833
875
Total sales
$209,903
$179,294
18.3
14.9
12.1
93.3
NM
17.1
77.7
18.4
3.3
0.8
(0.2)
100.0
76.9
18.7
3.5
0.4
0.5
100.0
Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Sales for the fourth quarter of 2006 were up a strong 17.1% from the prior year, reaching
a record of $209,903,000. Particularly encouraging was the strong growth in North
America, which had its best performance in two years, up 15.8% from the prior year
comparable period. Lower gross margins were the result of manufacturing variances
caused partially by the lingering effects the RohS Legislation, which mandated that
we convert our products to comply with the RohS Legislation by its mid-2006 deadline
(the “RohS Conversion”). variances also resulted from three facility moves during
the quarter, as we opened a new supplies converting operation in Texas and moved
into larger converting facilities in Wisconsin and California; all of which increased
manufacturing capacity. higher operating expenses resulting from the Swecoin
acquisition, consulting expenses, the costs of radio certifications, advertising costs, and
increases to bad debt reserves reduced operating margins. fourth quarter operating
expenses also include a 100% reserve for an insurance receivable.
Product Category
2006
2005 Change
Year Ended
December 31,
Percent of Percent of
Percent Total Sales Total Sales
2005
2006
hardware
Supplies
$578,002
$540,679
150,709
129,183
Service and software
25,664
25,217
Shipping and handling
Cash flow hedging activities
6,022
(873)
5,575
1,617
Total sales
$759,524
$702,271
6.9
16.7
1.8
8.0
NM
8.2
76.1
19.8
3.4
0.8
(0.1)
100.0
77.0
18.4
3.6
0.8
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, 2006, and December 31, 2005, were (in
thousands, except percentages):
Geographic Region
2006
2005 Change
Three Months Ended
December 31,
Percent of Percent of
Percent Total Sales Total Sales
2005
2006
Sales for the full year increased by 8.2% over 2005, with North American growth holding
in the mid single digits until the fourth quarter. international sales, particularly in Europe,
were stronger and generally more consistent throughout most of the year. Gross margin
was down from 2005 by 3.1 points with first half results being affected by mix and pricing
and second half by manufacturing variances which were, in part, the result of the RohS
Conversion previously mentioned. The company continued to add sales and marketing
staff to support its sales growth with a resulting increase in operating expenses. in
addition, we settled a large patent litigation in the third quarter and reserved for an
insurance receivable in the fourth quarter. The combined impact of these two events was
approximately $65,935,000 of expense.
Europe, Middle East
and Africa
Latin America
Asia-Pacific
Total international
North America
Total sales
$ 73,109
$ 59,942
13,854
18,054
105,017
104,886
12,923
15,867
88,732
90,562
$209,903
$179,294
22.0
7.2
13.8
18.4
15.8
17.1
34.8
6.6
8.6
50.0
50.0
33.4
7.2
8.8
49.4
50.6
100.0
100.0
Geographic Region
2006
2005 Change
Year Ended
December 31,
Percent of Percent of
Percent Total Sales Total Sales
2005
2006
Printer unit volumes and average selling price information is summarized below:
Europe, Middle East
and Africa
Latin America
Asia-Pacific
Total international
North America
Total sales
$260,125
$230,365
53,619
65,960
46,878
62,974
379,704
340,217
379,820
362,054
$759,524
$702,271
12.9
14.4
4.7
11.6
4.9
8.2
34.2
7.1
8.7
50.0
50.0
32.8
6.7
9.0
48.5
51.5
100.0
100.0
Total printers shipped
Average selling price of printers shipped
Total printers shipped
Average selling price of printers shipped
Three Months Ended
December 31,
2006
226,625
$596
2005
192,583
$605
Year Ended December 31,
2006
818,413
$598
2005
720,306
$633
Percent
Change
17.7
(1.5)
Percent
Change
13.6
(5.5)
Ongoing strength in international territories, with notable growth in Latin America of 14.4%
for 2006 and Europe, Middle East and Africa (EMEA) of 12.9% for the full year and 22% for
the fourth quarter, and a material improvement in North American sales in the fourth quarter
helped drive overall sales growth in 2006. for 2006, sales growth benefited from a 13.6%
unit volume increase spread broadly across our printer product lines, offset by a decline
in average unit prices. Sales growth also benefited from strong growth in supplies sales,
resulting from recently implemented sales and marketing programs and additional label
manufacturing capacity. favorable foreign exchange movements added 3.1 percentage points
to consolidated growth and 9.3 percentage points to growth in EMEA for the fourth quarter.
Zebra is required to comply with two new European union (Eu) directives that pertain
to electrical and electronic equipment. The Waste Electrical and Electronic Equipment
Directive requires producers of electrical goods to pay for specified collection, recycling,
treatment and disposal of past and future covered products. Another directive (i.e., the
RohS Legislation) requires electrical and electronic equipment placed in the Eu market
after July 1, 2006, to be free of lead, mercury, cadmium, hexavalent chromium (above a
threshold limit) and brominated flame retardants. Costs to comply with these new laws
affected results during 2006 and may continue to impact future periods.
for 2006, with the exception of card printers, unit volumes increased in all printer product
lines, with notable strength in mobile, desktop and high-end printers. for the full year, lower
average selling prices across the full line of printers in addition to a mix shift toward lower
priced products resulted in a 5.5% decrease in the average selling price of printers shipped.
Gross Profit
Gross profit information is summarized below (in thousands, except percentages):
December 31,
2006
2005
Percent
Change
Percent of
Percent of
Total Sales Total Sales
2005
2006
Three months ended
year ended
$ 98,410
358,420
$ 89,612
353,420
9.8
1.4
46.9
47.2
50.0
50.3
The decline in gross profit margin for the fourth quarter was due to the following:
• increases to excess inventory and cost change reserves
• Less favorable purchase price variances,
• Cycle count adjustments,
• Overhead spending and labor variances related to facility expansion in the supplies
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:
organization, and
• higher cost components required for RohS Legislation compliance
Three months ended
year ended
December 31,
full year gross profit was also affected by:
2006
12.1
12.5
2005
7.2
10.7
• Pricing and negative product mix in the first and second quarters and
• Negative foreign exchange comparisons in the first quarter.
New product releases planned for upcoming quarters is expected by management to
increase these percentages in future periods.
Zebra’s international sales are denominated in multiple currencies, primarily the dollar,
pound and euro, which subjects our reported sales to fluctuations based on changes in
currency rates. We hedge a portion of anticipated euro-denominated sales to protect
Zebra against exchange rate movements. inclusive of all hedging activities, the impact
of foreign exchange movements on reported sales during the fourth quarter was a
gain of $5,556,000. The full year impact was a gain of $3,606,000. See Note 15 to the
Consolidated financial Statements included in this report for a more detailed discussion
of the above hedging program.
Selling and Marketing Expenses
Selling and marketing expenses are summarized below (in thousands, except percentages):
December 31,
2006
2005
Percent
Change
Percent of
Percent of
Total Sales Total Sales
2005
2006
Three months ended
year ended
$27,702
96,788
$25,725
91,630
7.7
5.6
13.2
12.7
14.3
13.0
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 2006, selling and
marketing expenses increased due to higher payroll costs of $1,457,000 from increased
staffing partially as a result of the Swecoin acquisition. Trade show expenses also
increased by $324,000. for the full year, the payroll costs increased $4,587,000 and trade
show expenses increased $690,000. in addition to increases in the items mentioned
above, outside commissions, advertising and building expenses increased, and market
development costs and consulting costs decreased during 2006. 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):
Three months ended
year ended
December 31,
2006
$12,768
48,959
2005
$12,103
47,359
Percent
Change
Percent of
Percent of
Total Sales Total Sales
2005
2006
5.5
3.4
6.1
6.4
6.8
6.7
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 2006, increases in payroll costs of
$896,000 and professional services of $716,000 were offset by a decrease in project
expenses of $1,007,000. for the full year, payroll costs increased $4,533,000, professional
services increased $230,000 and project expenses decreased $3,179,000. included in the
2005 year-to date project expenses are write-offs of tooling and other materials related to
product development in the amount of $2,726,000.
During 2005, we incurred research and development costs to re-engineer our products
to make them compliant with new environmental laws that went 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 of 2005 and $2,882,000 for the
full year. During 2006, we did not incur any significant research and development costs
related to environmental compliance.
payroll costs increased $2,350,000, information systems expense increased $1,718,000,
bad debt expense increased $944,000, and professional services and recruiting increased
$725,000. The decrease in legal expenses was $7,373,000.
Settlement and Licensing Agreement with Paxar Americas, Inc.
During the third quarter of 2006, Zebra paid $63,750,000 to settle all issues surrounding
the litigation with Paxar Americas, inc. Of this amount, $53,392,000 was included as
operating expense. The remaining $10,358,000 was capitalized as an intangible asset
related to future use of these patents and will be amortized over 4 to 7 years resulting in
an incremental charge of $456,000 per quarter. for further information, see Notes 12 and
16 to the Consolidated financial Statements.
Insurance Receivable Reserve
During 2006, a Zebra reseller filed for bankruptcy protection in Austria. At the time of the
filing, the reseller owed various Zebra subsidiaries a total of $12,065,000. The entire balance
due to Zebra is guaranteed by Condor insurance, a Nevis-based insurance company
through a united kingdom insurance broker. During June 2006, Zebra initiated a suit in the
u.k. courts to enforce the guarantee. however, during the fourth quarter, we discovered
that the insurance company’s financial position was such that it may not be able to pay
the judgment awarded to us. We have reviewed the situation and determined that a loss is
probable, and have, therefore, reserved 100% of the balance due, which is $12,543,000 at
December 31, 2006. however, we are continuing to take legal action to collect the judgment
against the insurance company and reduce Zebra’s loss. if Zebra is able to recover some or
all of the loss, we will reverse the reserve and record a gain at that time.
Operating Income
Operating income is summarized in the following table (in thousands, except percentages):
December 31,
2006
2005
Percent
Change
Percent of
Percent of
Total Sales Total Sales
2005
2006
Three months ended
year ended
$ 25,719
80,429
$ 36,099
146,028
(28.8)
(44.9)
12.3
10.6
20.1
20.8
Non-operating Income and Expenses
Zebra’s non-operating income and expense items are summarized in the following table
(in thousands):
General and Administrative Expenses
General and administrative expenses are summarized in the table below (in thousands,
except percentages):
December 31,
2006
2005
Percent
Change
Percent of
Percent of
Total Sales Total Sales
2005
2006
investment income
interest expense
Three months ended
year ended
$18,284
62,656
$14,816
64,050
23.4
(2.2)
8.7
8.2
8.3
9.1
foreign exchange gains (losses)
Other, net
Three Months Ended
December 31,
Year Ended
December 31,
2006
$6,980
(16)
(822)
(170)
2005
$3,814
(8)
87
(74)
2006
$23,182
(252)
(635)
(1,082)
2005
$13,417
(79)
1,286
(370)
for the fourth quarter of 2006, general and administrative expenses increased due to
higher payroll costs of $1,435,000, information systems expenses of $989,000, bad
debt expenses of $650,000 and professional services and recruiting of $964,000. These
increases were partially offset by lower legal expenses of $1,094,000. The decrease
in legal expense was primarily related to the resolution of the litigation with Paxar as
described in Note 16 to the Consolidated financial Statements. for the full year of 2006,
Total other income (expense)
$5,972
$3,819
$21,213
$14,254
Rate of Return Analysis:
Average cash and marketable
securities balances
$553,406
$536,981
$551,714
$551,116
Annualized rate of return
5.0%
2.8%
4.2%
2.4%
Income Taxes
The effective income tax rate for the fourth quarter was 32.3% compared with 32.7%
for the same quarter last year. for the full year of 2006, the effective income tax rate
was 31.5% versus 33.8% for 2005. The decrease in the effective tax rate is a result of the
increased impact of permanent tax differences, including tax-exempt interest income, on
the effective income tax rate due to lower taxable income from the Paxar settlement. in
addition, we reduced tax reserves in the amount of $1,189,000 related to the completion
of various state tax audits and 2005 state income tax returns.
Income before Cumulative Effect of Accounting Change
Zebra’s income (loss) before cumulative effect of accounting change is summarized
below (in thousands, except per share amounts):
income before cumulative
effect of accounting change
Diluted earnings per share
before cumulative effect
of accounting change
Three Months Ended
December 31,
Year Ended
December 31,
2006
2005
2006
2005
$ 21,446
$ 26,845
$ 69,627
$ 106,184
$ 0.30
$ 0.38
$
0.98
$
1.47
Comparison of Years Ended December 31, 2005 and 2004
Sales
Sales by product category, related percent changes and percent of total sales for 2005
and 2004 were as follows:
Percent of Percent of
Year ended December 31, Percent Total Sales Total Sales
2004
Change
2004
2005
2005
Product Category
hardware
Supplies
Service and software
Shipping and handling
Cash flow hedging activities
$540,679
$518,556
129,183
116,877
25,217
5,575
1,617
24,310
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, related percent changes, and percent of total
sales for 2005 and 2004 were as follows:
Cumulative Effect of Accounting Change
During the first quarter of 2006, Zebra adopted SfAS No. 123(R), Share-Based Payment,
using the modified retrospective approach. SfAS No. 123(R) requires entities to estimate
the number of forfeitures expected to occur and record expense based upon the number
of awards expected to vest. Prior to the adoption of SfAS No. 123(R), Zebra accounted
for forfeitures as they occurred as permitted under previous accounting standards. The
requirement to estimate forfeitures is classified as an accounting change under APb
Opinion No. 20, Accounting Changes, which requires a one-time adjustment in the period of
adoption. The one-time adjustment (cumulative effect of accounting change) related to the
change in estimating forfeitures increased income by $1,319,000, net of applicable taxes.
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
2004
Change
2004
2005
2005
$230,365
$213,559
46,878
62,974
340,217
362,054
38,119
52,302
303,980
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
Net Income
Zebra’s net income is summarized below (in thousands, except per share amounts):
Three Months Ended
December 31,
Year Ended
December 31,
2006
2005
2006
2005
Net income
Diluted earnings per share
$ 21,446
$ 0.30
$26,845
$ 0.38
$ 70,946
1.00
$
$ 106,184
1.47
$
Sales growth for 2005 reflected 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.
During 2005, we experienced a decline in sales of new printer products as a 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.
Printer unit volumes and average selling price information is summarized below:
Total printers shipped
Average selling price of printers shipped
Year Ended December 31,
2005
720,306
$633
2004
667,461
$652
Percent
Change
7.9
(2.9)
for all of 2005, with the exception of mobile printers, unit volumes increased in nearly
all product lines, with notable strength in mid-range and desktop printers. in addition,
a product mix toward lower priced products resulted in a 2.9% decrease 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, 2005
December 31, 2004
Percent Change
Gross Profit
$353,420
342,103
3.3
Percent of
Total Sales
50.3
51.6
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):
For the Year Ended
December 31, 2005
December 31, 2004
Percent Change
Selling and
Marketing Expenses
Percent of
Total Sales
$91,630
79,111
15.8
13.0
11.9
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). 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
Research and development costs are summarized below (in thousands, except percentages):
Research and
Development Costs
Percent of
Total Sales
For the Year Ended
December 31, 2005
December 31, 2004
Percent Change
for 2005, research and development expenses increased primarily due to increases in
project expenses of $5,277,000, payroll costs of $2,130,000, and professional services of
$744,000. included in the project expenses increase are write-offs of tooling and other
materials related to product development in the amount of $2,726,000. Also during
2005, we incurred research and development costs, which totaled of $2,882,000, to re-
engineer our products to make them compliant with new environmental laws that went
into effect in 2006.
General and Administrative Expenses
General and administrative expenses are summarized below (in thousands, except
percentages):
For the Year Ended
December 31, 2005
December 31, 2004
Percent Change
General and
Administrative Expenses
Percent of
Total Sales
$64,050
53,083
20.7
9.1
8.0
for 2005, general and administrative expenses increased due to:
• higher information systems 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
expense including Paxar litigation.
Operating Income
Operating income is summarized in the following table (in thousands, except percentages):
For the Year Ended
December 31, 2005
December 31, 2004
Percent Change
Operating Income
$146,028
166,609
(12.4)
Percent of
Total Sales
20.8
25.1
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,
investment income
interest expense
foreign exchange gains (losses)
Other, net
Total other income (expense)
2005
$13,417
(79)
1,286
(370)
$14,254
2004
$10,628
(44)
485
(1,594)
$ 9,475
$47,359
38,609
22.7
6.7
5.8
Rate of Return Analysis:
Average cash and marketable securities balance
Annualized rate of return
$551,116
2.4%
$502,921
2.1%
Income Taxes
The effective income tax rate for 2005 was 33.8% versus 34.6% in 2004. During 2005, 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):
Net income
Diluted earnings per share
Year Ended December 31,
2005
$ 106,184
$ 1.47
2004
$ 115,141
$ 1.59
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
fully met.
Investments and Marketable Securities
investments and marketable securities at December 31, 2006, consisted of u.S.
government securities (18.7%), state and municipal bonds (72.0%), corporate bonds
(1.6%), and partnership interests (7.7%). We classify our debt and marketable equity
securities in one of three categories: trading, available-for-sale or held-to-maturity.
Trading securities are bought and held principally for the purpose of selling them in the
near term. held-to-maturity securities are those 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 except for partnership interests described below.
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. As of December 31, 2006,
Zebra’s investments in marketable debt securities are classified as available-for-sale. in
addition, as of December 31, 2006, all of our investments in marketable debt securities
with maturities greater than one year are classified as long-term in the balance sheet due
to our ability to hold them until maturity.
All investments in marketable securities except the partnership interests are classified
as available-for-sale securities. We account for the partnership interests using the cost
method until our ownership percentage reaches 5% of the total partnership portfolio
value. At that time, we begin using the equity method to account for the partnership.
During 2006, we reached the 5% threshold on one of our partnership interests.
Accounts Receivable
We have standardized credit granting and review policies and procedures for all customer
accounts, including:
• Credit reviews of all new customer accounts,
• Ongoing credit evaluations of current customers,
• Credit limits and payment terms based on available credit information,
• Adjustments to credit limits based upon payment history and the customer’s current
credit worthiness, and
• 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 and notes receivable
reserves varied from 0.6% to 2.8% of total accounts receivable. Accounts receivable
reserves as of December 31, 2006, were $3,549,000, or 2.8% of the balance due.
included in the accounts receivable reserve is $2,307,000 related to the reseller noted
in the following paragraph. in addition, other assets include an additional reserve of
$10,236,000 related to this reseller. We feel this reserve level is appropriate considering
the quality of the portfolio as of December 31, 2006. 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.
During 2006, a Zebra reseller filed for bankruptcy protection in Austria. At the time of
the filing, the reseller owed various Zebra subsidiaries a total of $12,065,000. The entire
balance due to Zebra is guaranteed by Condor insurance, a Nevis insurance company
through a united kingdom insurance broker. During June 2006, Zebra initiated a suit
in the u.k. courts to enforce the guarantee. however, during the fourth quarter, we
discovered that the insurance company’s financial position was such that it may not be
able to pay the judgment awarded to us. We have reviewed the situation and determined
that a loss is probable, and have, therefore, reserved 100% of the balance due, which is
now $12,543,000. however, we are continuing to take legal action to collect the judgment
against the insurance company and reduce Zebra’s loss. if Zebra is able to recover some
or all of the loss, we will reverse the reserve and record a gain at that time.
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 10.0% to 12.8% of gross inventory. As of December 31, 2006, reserves for excess
and obsolete inventories were $9,866,000, or 12.1% of gross inventory. We feel this
reserve level is appropriate considering the quantities and quality of the inventories as of
December 31, 2006.
At the end of December, inventory levels are high in comparison to historical balances
due to Rohs Conversion issues and other operational issues. Zebra believes that the
inventory balances need to be reduced significantly and is implementing plans to do so
within the next year. An insufficient reduction in these inventory balances could result in
increased inventory obsolescence expenses.
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 2006. 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 may 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, and
• 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 $162,170,000 as of December 31, 2006.
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.
• inventories increased $13,430,000. Compared to the same period a year ago,
inventory turns decreased to 5.5 from 5.6.
Stock-Based Compensation
As of December 31, 2006, Zebra had two stock-based compensation plans available
for future grants. Prior to January 1, 2006, we accounted for these plans using the
intrinsic value method required by the recognition and measurement principles of APb
Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations,
as permitted by SfAS No. 123, Accounting for Stock Based Compensation. Accordingly,
we recognized no compensation cost as all options granted under these plans had grant
prices equal to the market value of the underlying common stock on the date of grant.
Effective January 1, 2006, Zebra adopted SfAS No. 123(R), Share-Based Payment,
utilizing the modified retrospective approach, which requires the prior period financial
statements to be restated to recognize compensation costs in the amounts previously
reporting in the pro forma footnote disclosures. See Notes 2 and 3 to the Consolidated
financial Statements included in the form 10-k for further information on the adoption
and impact of SfAS No. 123(R).
Expectations
During our quarterly conference call on february 14, 2007, we provided net sales and
earnings guidance for the first quarter of 2007 as follows (amounts in thousands, except
per share data):
Net sales
Gross profit margins
Operating expenses
Diluted earnings per share
First Quarter 2007
$195,000 to $205,000
46.0% to 47.0%
$60,000 to $62,000
$0.33 to $0.37
The effective tax rate is expected to be 34.5% of income before income taxes for the first
quarter of 2007.
Liquidity and Capital Resources
During 2006, Zebra settled the outstanding litigation with Paxar Americas, inc., with
a payment of $63,750,000. We also repurchased a total of 2,080,911 shares of our
own stock for $72,925,000 during the year. Cash, cash equivalents, investments and
marketable securities balances as of December 31, 2006 were $559,189,000, compared
with $544,239,000 at December 31, 2005. Other factors affecting cash and investment
balances during 2006 include (note that changes discussed below include the impact of
foreign currency):
• Operations provided a net cash increase of $88,252,000 primarily from net income,
which includes $53,392,000 of pre-tax expense related to the Paxar settlement and
an insurance receivable reserve of $12,543,000.
• Deferred tax assets increased $6,737,000, primarily due to deferred taxes on
compensation costs.
• Accounts receivable increased $4,292,000 because of higher sales offset by
aggressive collection efforts. Days sales outstanding decreased to 53.3 at the end of
2006 from 56.8 at the end of 2005.
• Accrued expenses increased by $8,559,000 for bonus, warranty and recycling
accruals in addition to other transactions settled by the end of the year for which
payment had not yet been made.
• Taxes payable increased $2,586,000 due to the timing of tax payments made in 2006.
• Purchases of property and equipment totaled $19,197,000.
• Acquisition of assets of Swecoin Ab totaled $2,681,000.
• intangibles increased $18,091,000 due to payments for licenses to use patents,
including $10,358,000 of Paxar intangibles.
• Net sales of investments totaled $21,443,000.
• Purchases of treasury shares totaled $68,221,000. Zebra made open market
repurchases of our shares under an authorization of the board of Directors dated
October 4, 2005. An additional 135,000 of shares for $4,704,000 were repurchased as
of 12/31/2006, but the cash had not yet been transferred.
• Stock option exercises and purchases under the stock purchase plan contributed
$10,402,000.
On January 25, 2007, Zebra purchased WhereNet Corp., for $126,000,000 in cash from
Zebra’s working capital.
Contractual Obligations
Zebra’s contractual obligations as of December 31, 2006 were:
Payments due by period
Less than
1 year
Total
1-3 years
3-5 years
More than
5 years
Operating lease obligations $44,569
$ 6,163
$9,872
$8,701
$19,833
Purchase obligations
54,938
54,938
—
—
—
Total
$99,507
$61,101
$9,872
$8,701
$19,833
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 June 2006, the fASb issued Emerging issues Task force issue No. 06-3 (EiTf 06-3),
How Sales Taxes Collected from Customers and Remitted to Governmental Authorities
Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation),
which discusses taxes imposed on, and imposed concurrent with, a specific revenue-
producing transaction between a seller and its customer. it requires entities to disclose,
if significant, on an interim and annual basis for all periods presented: (a) the accounting
policy elected for these taxes and (b) the amounts of the taxes reflected gross (as
revenue) in the income statement. This issue will become effective for Zebra during
the first quarter of 2007. We do not expect it to have a material impact on our financial
condition or results of operations.
in June 2006, the fASb issued fiN 48, Accounting for Uncertainty in Income Taxes—an
interpretation of FASB Statement No. 109, which prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This interpretation also provides
guidance on de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. This interpretation will become effective for Zebra
during the first quarter of 2007. The impact, if any, of this interpretation on our financial
condition or results of operations has not yet been determined.
in September 2006, the fASb issued SfAS No. 157, Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. This
Statement applies under other accounting pronouncements that require or permit
fair value measurements. it does not require any new fair value measurements. This
Statement will become effective for Zebra during the first quarter of 2007. We do not
expect it to have a material impact on our financial condition or results of operations.
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).
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,
2005
2006
$ (7,140)
$ (0.07)
$ 7,140
$ 0.07
$ (6,119)
$ (0.06)
$ 6,119
$ 0.06
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,
2005
2006
$ 490
$ 0.00
$ 2,240
$ 0.02
$ 2,775
$ 0.03
$ 304
$ 0.00
$ 2,594
$ 0.02
$ 2,335
$ 0.02
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,
2005
2006
$ 4,333
$ 0.04
$ 4,287
$ 0.04
$ (4,333)
$ (0.04)
$ (4,287)
$ (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-22. An index to such materials appears on page f-1.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures
Not applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures (as 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 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, 2006. 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, 2006, 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 40 of this report on form 10-k.
Changes in Internal Control over Financial Reporting
During 2006, 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.
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.
in our opinion, management’s assessment that Zebra Technologies Corporation and
subsidiaries maintained effective internal control over financial reporting as of December
31, 2006, 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, 2006,
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, 2006 and 2005, and the
related consolidated statements of earnings, comprehensive income, stockholders’
equity, and cash flows for the years then ended, and our report dated february 28, 2007
expressed an unqualified opinion thereon.
/s/Ernst & young LLP
Chicago, Illinois
February 28, 2007
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, 2006, 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.
Item 9B. Other Information
PART IV
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
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.
Item 15. Exhibits and Financial Statement Schedules
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.
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 1st day of March 2007.
All other information in response to this item is incorporated by reference from the Proxy
Statement sections entitled “Election of Directors” and “Executive Officers.”
ZEBRA TECHNOLOGIES CORPORATION
Item 11. Executive Compensation
The information in response to this item is incorporated by reference from the Proxy
Statement sections entitled “Executive Compensation and Certain Transactions” and
“Compensation Discussion and Analysis.”
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, Related Transactions and
Director Independence
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.”
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
Date
March 1, 2007
March 1, 2007
/s/Charles R. Whitchurch
Charles R. Whitchurch
Chief financial Officer and Treasurer March 1, 2007
(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
March 1, 2007
March 1, 2007
March 1, 2007
March 1, 2007
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, 2006 and 2005
Consolidated Statements of Earnings for the years ended
December 31, 2006, 2005, and 2004
Consolidated Statements of Comprehensive income
for the years ended December 31, 2006, 2005, and 2004
Consolidated Statements of Stockholders’ Equity
for the years ended December 31, 2006, 2005, and 2004
Consolidated Statements of Cash flows
for the years ended December 31, 2006, 2005, and 2004
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 sheets of Zebra Technologies
Corporation and subsidiaries (the Company) as of December 31, 2006 and 2005, and
the related consolidated statements of earnings, comprehensive income, stockholders’
equity, and cash flows for the years then ended. Our audits 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 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 financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Zebra Technologies Corporation
and subsidiaries at December 31, 2006 and 2005, and the consolidated results of its
operations and its cash flows for the years 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.
As discussed in Note 2 to the consolidated financial statements, the Company adopted
the provisions of Statement of financial Accounting Standards No. 123(R) “Share based
Payment” effective January 1, 2006 using the modified retrospective transition method.
in conjunction with this adoption, the consolidated financial statements as of December
31, 2005 and for the year then ended have been restated.
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, 2006, 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 28,
2007 expressed an unqualified opinion thereon.
/s/Ernst & young LLP
Chicago, Illinois
February 28, 2007
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 statement of earnings, comprehensive
income, stockholders’ equity, and cash flows of Zebra Technologies Corporation and
subsidiaries (the Company) for the year ended December 31, 2004. in connection with
our audit 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 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 consolidated financial statements referred to above present fairly, in
all material respects, the results of operations and the cash flows for Zebra Technologies
Corporation for the year ended December 31, 2004, 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.
As discussed in Note 2, the consolidated financial statements for the year ended December 31,
2004 have been restated for the adoption of Statement of financial Accounting Standards
No. 123(R), Share-based Payment, using the modified retrospective application method.
/s/kPMG LLP
Chicago, Illinois
March 2, 2005, except as to the 2004 adjustments in Note 2,
which is as of February 28, 2007
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
$3,549 in 2006 and $1,116 in 2005
inventories, net
Deferred income taxes
Prepaid expenses
Total current assets
Property and equipment at cost, net of
accumulated depreciation and amortization
Long term deferred income taxes
Goodwill
Other intangibles, net
Long term investments and marketable securities
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
income taxes payable
Total current liabilities
Deferred rent
Other long-term liability
Total liabilities
Commitments and contingencies (Note 16)
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
*Restated – See Note 2
See accompanying notes to consolidated financial statements.
December 31,
2006
December 31,
2005*
$ 41,014
219,930
122,540
81,190
9,464
5,552
479,690
57,431
11,917
70,714
34,025
298,245
11,120
$ 963,142
$ 28,980
43,191
2,683
74,854
638
9,969
85,461
—
722
139,083
(119,335)
850,399
6,812
877,681
$ 963,142
$ 25,621
518,618
111,551
63,638
8,188
5,098
732,714
49,643
6,216
69,097
19,002
—
41,743
$ 918,415
$ 24,885
26,740
535
52,160
574
7,709
60,443
—
722
139,433
(64,013)
779,453
2,377
857,972
$ 918,415
ZEBRA TECHNOLOGIES CORPORATION
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands, except per share data)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Year Ended December 31,
2005*
2006
2004*
Net income
$70,946
$106,184
$115,141
Other comprehensive income (loss):
foreign currency translation adjustment
7,295
(6,407)
3,402
Changes in unrealized gain/loss
on hedging transactions,
net of income taxes
(1,188)
2,073
Changes in unrealized holding gains/loss
on investments, net of income taxes
(1,672)
444
(451)
(113)
Comprehensive income
$75,381
$102,294
$117,979
*Restated – See Note 2
See accompanying notes to consolidated financial statements.
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Amortization of intangible assets
Litigation settlement
insurance receivable reserve
Acquired in-process technology
Exit costs
Total operating expenses
Operating income
Other income (expense):
investment income
interest expense
foreign exchange gain (loss)
Other, net
Total other income
income before income taxes and
cumulative effect of accounting change
income taxes
income before cumulative effect
of accounting change
Cumulative effect of accounting change,
net of income taxes of $694 (See Note 2)
Year Ended December 31,
2005*
2006
2004*
$759,524
401,104
358,420
$702,271
348,851
353,420
$663,054
320,951
342,103
96,788
48,959
62,656
3,653
53,392
12,543
—
—
277,991
80,429
23,182
(252)
(635)
(1,082)
21,213
91,630
47,359
64,050
2,341
—
—
—
2,012
207,392
146,028
13,417
(79)
1,286
(370)
14,254
79,111
38,609
53,083
2,569
—
–
22
2,100
175,494
166,609
10,628
(44)
485
(1,594)
9,475
101,642
32,015
160,282
54,098
176,084
60,943
69,627
106,184
115,141
1,319
—
—
Net income
$ 70,946
$ 106,184
$ 115,141
basic earnings per share before
cumulative effect of accounting change
Diluted earnings per share before
cumulative effect of accounting change
$ 0.99
$ 1.49
$ 1.61
$ 0.98
$ 1.47
$ 1.59
basic earnings per share
Diluted earnings per share
$ 1.01
$ 1.49
$ 1.00
$ 1.47
$ 1.61
$ 1.59
basic weighted average shares outstanding
70,516
71,364
71,556
Diluted weighted average and
equivalent shares outstanding
*Restated – See Note 2
70,956
72,000
72,398
See accompanying notes to consolidated financial statements.
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in thousands)
balance at December 31, 2003
Adjustment to beginning balance for adoption of SfAS No. 123(R) (See Note 2)
Adjusted 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
Additional tax benefit resulting from exercise of options
Stock-based compensation
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
Additional tax benefit resulting from exercise of options
Stock-based compensation
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
Repurchase of 2,080,911 shares of Class A Common Stock
issuance of 459,816 treasury shares upon exercise of
stock options and purchases under stock purchase plan
Additional tax benefit resulting from exercise of options
Stock-based compensation
Cumulative effect of accounting change
income before cumulative effect of accounting change
unrealized holding loss on investments (net of income taxes)
unrealized holding loss on hedging transactions (net of income taxes)
foreign currency translation adjustment
Class A
Common
Stock
Additional
Paid-in
Capital
Treasury
Stock
Accumulated
Other
Retained Comprehensive
Earnings
Income (Loss)
Total
$711
$ 61,929
$ —
$585,846
$ 3,429
$651,915
—
711
7
—
—
—
—
—
—
—
33,360
95,289
15,524
(238)
4,600
8,464
—
—
—
—
718
123,639
4
—
—
—
—
—
—
—
—
7,604
—
(2,263)
2,270
8,183
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(70,421)
6,408
—
—
—
—
—
—
722
—
139,433
—
(64,013)
(72,925)
—
—
—
—
—
—
—
—
(7,201)
1,324
7,540
(2,013)
—
—
—
—
17,603
—
—
—
—
—
—
—
(27,718)
558,128
—
—
—
—
115,141
—
—
—
673,269
—
—
—
—
—
106,184
—
—
—
779,453
—
—
—
—
1,319
69,627
—
—
—
—
5,642
3,429
657,557
—
—
—
—
—
(113)
(451)
3,402
6,267
—
—
—
—
—
—
444
2,073
(6,407)
2,377
—
—
—
—
—
—
(1,672)
(1,188)
7,295
15,531
(238)
4,600
8,464
115,141
(113)
(451)
3,402
803,893
7,608
(70,421)
4,145
2,270
8,183
106,184
444
2,073
(6,407)
857,972
(72,925)
10,402
1,324
7,540
(694)
69,627
(1,672)
(1,188)
7,295
balance at December 31, 2006
$722
$139,083
$(119,335)
$850,399
$ 6,812
$877,681
See accompanying notes to consolidated financial statements.
Note: All prior year amounts have been restated for adoption of SfAS 123(R), Stock Based Payment. (See Note 2)
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Cash flows from operating activities:
Net income
$70,946
$106,184
$115,141
Year Ended December 31,
2006
2005*
2004*
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization
Share-based compensation
Excess tax benefit from
share-based compensation
Cumulative effect of accounting
change (net of tax)
Acquired in-process technology
insurance receivable reserve
Deferred income taxes
Changes in assets and liabilities,
net of businesses acquired:
Accounts receivable, net
inventories
Other assets
Accounts payable
Accrued liabilities
income taxes payable
Other operating activities
Net cash provided by
operating activities
Cash flows from investing activities:
16,087
7,540
13,104
8,183
12,255
8,464
(1,514)
(2,258)
(5,164)
(1,319)
—
12,543
(6,737)
(4,292)
(13,430)
(296)
(1,869)
8,559
2,586
(552)
—
—
—
—
22
—
(2,053)
(2,955)
(20,422)
(6,204)
(8,383)
3,792
(1,992)
(2,900)
3,421
(11,491)
(15,456)
(1,464)
6,420
1,974
8,320
54
Year Ended December 31,
2006
2005*
2004*
Cash flows from financing activities:
Purchase of treasury shares
(68,221)
(70,421)
—
Proceeds from exercise of stock options
and stock purchase plan purchases
10,402
11,753
15,531
Excess tax benefit from
share-based compensation
Payments for obligation
under capital lease
Other financing activities
Net cash provided by
(used in) financing activities
1,514
2,258
5,164
—
—
(171)
—
(434)
(238)
(56,305)
(56,581)
20,023
Effect of exchange rate changes on cash
1,972
(1,780)
273
Net increase in cash and cash equivalents
15,393
7,638
3,717
Cash and cash equivalents
at beginning of year
25,621
17,983
14,266
Cash and cash equivalents at end of year
$41,014
$25,621
$17,983
Supplemental disclosures of cash flow information:
interest paid
income taxes paid
$ 252
33,070
$ 79
61,453
$ 44
56,055
88,252
90,472
116,120
Supplemental disclosures of non-cash transaction:
Purchase of treasury shares
not paid in 2006
$ 4,704
—
—
Purchases of property and equipment
(19,197)
(14,286)
(16,243)
*Restated – See Note 2
Acquisition of businesses acquired,
net of cash acquired
Acquisition of intangible assets
(2,681)
(18,091)
(7,797)
(13,754)
—
—
Purchases of investments
(1,110,472)
(1,021,813)
(1,297,416)
Maturities of investments
Sales of investments
Net cash used in
investing activities
757,249
374,666
673,466
359,711
861,249
319,711
(18,526)
(24,473)
(132,699)
See accompanying notes to consolidated financial statements.
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, 2006, consisted of u.S. government securities, state and municipal bonds,
corporate bonds, and partnership interests, 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.
All investments in marketable debt securities except the partnership interests are classified
as available-for-sale securities. We account for the partnership interests using the cost
method until our ownership percentage reaches 5% of the total partnership portfolio value.
At that time, we begin using the equity method to account for the partnership. During 2006,
we reached the 5% threshold on one of our partnership interests.
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. Accounts are written off against the allowance account
when they are determined to be no longer collectible.
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 2006. 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.
Advertising. Advertising costs are expensed as incurred. Advertising expenses for the
years ended December 31, 2006, 2005 and 2004 totaled $5,857,000, $5,524,000 and
$5,117,000, respectively.
Other intangible assets consist primarily of customer relationships, current technology
and patents and patent licenses. These assets are recorded at cost and amortized on
a straight-line basis over a weighted-average life of 8 years, which approximates the
estimated useful lives. Accumulated amortization for these other intangible assets was
$13,501,000 and $10,415,000 at December 31, 2006 and 2005, 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.
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.
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
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. Printheads are warranted for six months
and batteries are warranted for three months. 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
2006
$1,922
5,792
Warranty payments made during the period
(5,464)
balance at the end of the period
$2,250
Year Ended December 31,
2005
2004
$1,691
6,394
(6,163)
$1,922
$1,351
3,209
(2,869)
$1,691
During 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.
Research and Development Costs. Research and development costs are expensed as
incurred. These costs include:
• Salaries, benefits, and other R&D personnel related costs
Recycling Reserve (in thousands)
balance at the beginning of the period
Recycling expense during the period
• Consulting and other outside services used in the R&D process
Recycling payments made during the period
• Engineering supplies
• Engineering related information systems costs
• Allocation of building and related costs
Exchange rate impact
balance at the end of the period
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.
Year Ended December 31,
2005
2006
$ 632
1,373
—
110
$ —
632
—
—
$2,115
$ 632
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 and accounts payable
Cost, which approximates fair value due to
the short-term nature of these instruments
investments and marketable debt
securities
Market quotes from independent pricing
services
Partnership interests
foreign currency forward contracts
foreign currency option contracts
Cost method, unless Zebra’s ownership
interest is greater than 5% of the total
portfolio value, then equity method
Estimated using market quoted rates for
foreign currency at the balance sheet date
Estimated using market quoted rates for
foreign currency at the balance sheet date
and application of such rates subject to the
option terms
Life insurance policies
Cash surrender value
in accordance with SfAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, we recognize derivative instruments and hedging activities as either assets or
liabilities on the balance sheet and measure them at fair value. Gains and losses resulting
from changes in fair value are accounted for depending on the use of the derivative and
whether it is designated and qualifies for hedge accounting. See Note 15 for additional
information on our derivatives and hedging activities.
Stock-based Compensation. At December 31, 2006, we had two stock-based
compensation plans available for future grants, which are described more fully in
Note 3. Prior to January 1, 2006, we accounted for these plans using the intrinsic value
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, as permitted by SfAS No. 123, Accounting for Stock Based
Compensation. Accordingly, we recognized no compensation cost as all options granted
under these plans had grant prices equal to the market value of the underlying common
stock on the date of grant.
Effective January 1, 2006, Zebra adopted SfAS No. 123(R), Share-Based Payment,
utilizing the modified retrospective approach, which requires the prior period financial
statements to be restated to recognize compensation costs in the amounts previously
reported in the pro forma footnote disclosures. Zebra recognizes compensation costs
using the straight-line method over the vesting period of 2 to 5 years. The following table
summarized the adjustments made to the consolidated financial statements as a result of
these restatements:
(in thousands)
Selected Balance Sheet Data:
Long-term deferred income tax
(liability) asset
Additional paid-in capital
Retained earnings
(in thousands)
As Previously
Reported
December 31, 2005
Share-Based
Compensation
As Restated
$ (1,242)
93,336
818,092
$ 7,458
46,097
(38,639)
$ 6,216
139,433
779,453
As Previously
Reported
December 31, 2003
Share-Based
Compensation
As Restated
Selected Statement of Stockholders’ Equity:
Additional paid-in capital
Retained earnings
Total stockholders’ equity
61,929
585,846
651,915
33,360
(27,718)
5,642
95,289
558,128
657,557
Additional paid-in capital was adjusted as follows:
(in thousands)
Selected Statement of Stockholders’ Equity:
Reversal of the tax benefit of stock options
exercised, previously recorded in accordance
with Accounting Principles board Opinion
No. 25, Accounting for Stock Issued to
Employees, and related interpretations
For the Year Ended December 31,
2004
2005
$ (3,815)
$ (6,965)
Additional tax benefit resulting from exercise of options
2,270
4,600
(in thousands, except per share data)
Selected Statement of Earnings Data:
Cost of sales
Gross profit
Selling and marketing
Research and development
General and administration
Total operating expenses
Operating income
income before income taxes
income taxes
Net income
basic earnings per share
Diluted earnings per share
For the Year Ended December 31, 2005
Share-Based
Compensation
As Previously
Reported
As Restated
$348,090
354,181
89,707
46,000
59,910
199,970
154,211
168,465
56,862
111,603
$ 1.56
$ 1.55
$ 761
(761)
1,923
1,359
4,140
7,422
(8,183)
(8,183)
(2,764)
(5,419)
$348,851
353,420
91,630
47,359
64,050
207,392
146,028
160,282
54,098
106,184
$ (0.07)
$ (0.08)
$ 1.49
$ 1.47
(in thousands, except per share data)
Selected Statement of Earnings Data:
Cost of sales
Gross profit
Selling and marketing
Research and development
General and administration
Total operating expenses
Operating income
income before income taxes
income taxes
Net income
For the Year Ended December 31, 2004
Share-Based
Compensation
As Previously
Reported
As Restated
$319,895
343,159
77,062
37,093
49,240
168,086
175,073
184,548
63,905
$ 1,056
(1,056)
$320,951
342,103
2,049
1,516
3,843
7,408
(8,464)
(8,464)
(2,962)
79,111
38,609
53,083
175,494
166,609
176,084
60,943
115,141
$120,643
$ (5,502)
basic earnings per share
Diluted earnings per share
$ 1.69
$ 1.66
$ (0.08)
$ (0.07)
$ 1.61
$ 1.59
(in thousands)
Selected Statement of Cash Flows Data:
For the Year Ended December 31,
2004
2005
Net cash provided by operating activities – as reported
$ 92,730
$121,284
Change in net income
Change in deferred income taxes
Change in income taxes payable
Stock-based compensation
Excess tax benefit from share-based compensation
Reverse tax benefit from exercise of stock options
(5,419)
(1,219)
2,270
8,183
(2,258)
(3,815)
(5,502)
(597)
4,600
8,464
(5,164)
(6,965)
Net cash provided by operating activities – as restated
$ 90,472
$116,120
Net cash provided by (used in) financing activities – as reported $(58,839)
$ 14,859
Excess tax benefit from share-based compensation
2,258
5,164
Net cash provided by (used in) financing activities – as restated $ (56,581)
$ 20,023
The impact of compensation expense and the adoption of SfAS No. 123(R) on the
Statement of Earnings for the year ended December 31, 2006, was as follows:
Year Ended December 31, 2006 (in thousands)
Cost of sales
Gross profit
Selling and marketing
Research and development
General and administration
Total operating expenses
Operating income
$
673
(673)
1,720
1,111
4,036
6,867
(7,540)
income before income taxes and the cumulative effect of accounting change
(7,540)
income taxes
Net income before cumulative effect of accounting change
Cumulative effect of accounting change
Net income
basic earnings per share before cumulative effect of accounting change
Diluted earnings per share before cumulative effect of accounting change
basic earnings per share
Diluted earnings per share
(2,556)
(4,984)
1,319
$ (3,665)
$
$
$
$
(0.07)
(0.07)
(0.05)
(0.05)
Prior to adopting SfAS No. 123(R), Zebra presented all tax benefits of deductions
resulting from the exercise of stock grants as operating cash flows in the consolidated
statements of cash flows. SfAS No. 123(R) requires the cash flows resulting from the tax
benefits from tax deductions in excess of the compensation cost recognized (excess tax
benefits) to be classified as financing cash flows. As a result, $1,514,000 of excess tax
benefits for the year ended December 31, 2006, have been classified as financing cash
flows. in accordance with the modified retrospective method of SfAS No. 123(R), the
cash flow statement has been restated to show an excess tax benefit of $2,258,000 for the
year ended December 31, 2005 and $5,164,000 for the year ended December 31, 2004, as a
financing cash flows.
SfAS No. 123(R) requires entities to estimate the number of forfeitures expected to occur
and record expense based upon the number of awards expected to vest. Prior to the
adoption of SfAS No. 123(R), Zebra accounted for forfeitures as they occurred as permitted
under previous accounting standards. The requirement to estimate forfeitures is classified
as an accounting change under APb Opinion No. 20, Accounting Changes, which requires a
one-time adjustment in the period of adoption. The one-time adjustment (cumulative effect
of accounting change) related to the change in estimating forfeitures increased income by
$1,319,000, net of applicable taxes, for the year ended December 31, 2006.
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 $6,803,000 as of December 31, 2006, and $5,521,000 as
of December 31, 2005. 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 in 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 June 2006, the fASb issued Emerging
issues Task force issue No. 06-3 (EiTf 06-3), How Sales Taxes Collected from Customers
and Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That Is, Gross Versus Net Presentation), which discusses taxes imposed on, and imposed
concurrent with, a specific revenue-producing transaction between a seller and its
customer. it requires entities to disclose, if significant, on an interim and annual basis
for all periods presented: (a) the accounting policy elected for these taxes and (b) the
amounts of the taxes reflected gross (as revenue) in the income statement. This issue will
become effective for Zebra during the first quarter of 2007. We do not expect it to have a
material impact on our financial condition or results of operations.
in June 2006, the fASb issued fiN 48, Accounting for Uncertainty in Income Taxes—an
interpretation of FASB Statement No. 109, which prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This interpretation also provides
guidance on de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. This interpretation will become effective for Zebra
during the first quarter of 2007. The impact, if any, of this interpretation on our financial
condition or results of operations has not yet been determined.
in September 2006, the fASb issued SfAS No. 157, Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. This
Statement applies under other accounting pronouncements that require or permit
fair value measurements. it does not require any new fair value measurements. This
Statement will become effective for Zebra during the first quarter of 2007. We do not
expect it 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, 2006, Zebra has two active stock option and stock purchase plans,
which are described below.
On May 9, 2006, the stockholders of Zebra approved the 2006 Zebra Technologies
Corporation incentive Compensation Plan (the 2006 Plan). The 2006 Plan became effective
immediately and superseded the 1997 Stock Option Plan (the 1997 Plan) and the 2002
Non-Employee Director Stock Option Plan (the 2002 Director Plan), except that the prior
plans will remain in effect with respect to stock options granted under the prior plans until
such options have been exercised, forfeited, cancelled, expired or otherwise terminated in
accordance with the terms of such grants. The types of awards 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. As of December 31, 2006, 5,413,033 shares were available for
grant, and options for 33,174 shares were outstanding under the 2006 Plan.
The options granted under the 2006 Plan have an exercise price equal to the closing
market price of Zebra’s stock on the date of grant. The options granted to employees
generally vest over a five-year period. These options expire on the earlier of (a) ten years
following the grant date, (b) immediately if the employee is terminated for cause, (c)
ninety days if the employee is terminated involuntarily other than for cause, (d) thirty
days if the employee voluntarily terminates his or her employment, or (e) one year if
the employee’s employment terminates due to death, disability, or retirement. The
Compensation Committee of the board of Directors administers the plan.
On October 20, 2006, 53,793 shares of restricted stock were granted under the Plan to
certain executive officers and other managers. These restricted stock awards will vest
one year after the grant date if the executive remains employed by Zebra throughout the
one-year period, but will vest before the end of the one-year period in the event of death,
disability, resignation for good reason, a change in control (as defined in the 2006 Plan),
or termination by Zebra other than for Cause, as defined in the restricted stock agreement
entered into by Zebra with each executive officer who was granted restricted stock
(the Restricted Stock Agreement). The restricted stock is forfeited in certain situations
specified in the Restricted Stock Agreement, including, if before the restricted stock
vests, the executive’s employment is terminated by Zebra for Cause (as defined in the
Restricted Stock Agreement) or if the executive resigns for other than good reason.
The 1997 Plan was superseded by the 2006 Plan. As of December 31, 2006, options
for 2,242,195 shares were outstanding and exercisable under the 1997 Plan. These
options expire on the earlier of (a) ten years following the grant date, (b) immediately
if the employee is terminated for cause, (c) ninety days if the employee is terminated
involuntarily other than for cause, (d) thirty days if the employee voluntarily terminates
his or her employment, or (e) one year if the employee’s employment terminates due to
death, disability, or retirement.
The 2002 Director Plan was superseded by the 2006 Plan. As of December 31, 2006, options
for 186,068 shares were outstanding and exercisable under the 2002 Director Plan. unless
otherwise provided in an option agreement, options granted under the 2002 Director Plan
become exercisable in five equal increments beginning on the date of the grant and on
each of the four anniversaries thereafter. 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.
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, 2006, 458,464 shares have been purchased under the plan.
for purposes of calculating the compensation cost consistent with SfAS No. 123(R), 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.
volatility is based on an average of the implied volatility in the open market and the
annualized volatility of Zebra’s stock prices over our entire stock history. 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
forfeiture rate
volatility
Risk free interest rate
2006
0%
7.43%
38.30%
4.58%
2005
0%
0%
38.44%
3.74%
– Range of interest rates
4.38% - 4.73% 2.36% - 4.50%
Expected weighted-average life
4.58 years
4.83 years
2004
0%
0%
50%
3.25%
NA
6 years
fair value of options granted
$5,802,000
$9,701,000
$8,178,000
Weighted-average grant date
fair value of options granted
$14.22
$17.16
$24.56
The fair value of the employees’ purchase rights issued under the Stock Purchase Plan
are estimated 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
2006
$34.79
$29.57
0%
25%
4.54%
2005
$42.46
$36.09
0%
32%
2.86%
2004
$49.76
$42.29
0%
32%
1.19%
Stock option activity for the years ended December 31, 2006, 2005, and 2004 was as follows:
Fixed Options
Outstanding at beginning of year
Granted
Exercised
forfeited
Canceled
Outstanding at end of year
Options exercisable at end of year
2006
Weighted-Average
Exercise Price
$31.04
43.15
20.85
41.29
46.09
$34.07
$26.49
Shares
2,548,484
408,046
(375,222)
(102,481)
(17,390)
2,461,437
1,035,278
2005
Weighted-Average
Exercise Price
$25.37
48.62
20.26
29.70
34.51
$31.04
$ 23.11
Shares
2,593,982
565,200
(422,586)
(184,087)
(4,025)
2,548,484
877,068
2004
Weighted-Average
Exercise Price
$ 21.61
47.37
18.64
24.95
21.44
$25.37
$ 19.77
Shares
3,159,243
333,001
(660,466)
(234,838)
(2,958)
2,593,982
712,088
The following table summarizes information about fixed stock options outstanding at December 31, 2006:
Range of
Exercise Prices
$10.89-$21.02
$21.02-$24.21
$24.21-$36.39
$36.39-$46.18
$46.18-$53.92
Aggregate intrinsic value
Weighted-average remaining contractual term
Number
of Shares
244,856
460,469
609,423
619,777
526,912
2,461,437
Options Outstanding
Weighted-Average
Remaining Contractual Life
Weighted-Average
Exercise Price
Number
of Shares
Weighted-Average
Exercise Price
Options Exercisable
3.12 years
5.09 years
5.44 years
8.69 years
7.64 years
$15.76
21.67
27.12
44.25
49.49
244,856
276,685
342,448
47,347
123,942
1,035,278
$15.76
21.65
27.62
43.79
48.75
Options Outstanding
Options Exercisable
$15,400,000
6.4 years
$10,762,000
4.9 years
As of December 31, 2006, there was $14,358,000 of unearned compensation cost related
to stock options granted under the plans. That cost is expected to be recognized over a
weighted-average period of 1.5 years.
The purchase price was allocated to identifiable tangible assets and intangible assets
acquired and liabilities assumed based on their estimated fair values resulting in goodwill
of $1,557,000. The intangible assets of $1,242,000 consist mainly of the following:
Note 4 Business Combinations
Swecoin AB. On October 4, 2006, Zebra acquired all of the outstanding stock of Swecoin
Ab for $2,681,000. based in Stockholm, Sweden, with a u.S. office in Rhode island,
Swecoin Ab is a leading supplier of thermal receipt, ticket and document printers for use
in kiosks and other unattended printing applications. The consolidated statements of
earnings reflect the results of operations of Swecoin Ab since the effective date of the
purchase. The pro forma effect of this acquisition was not significant.
The following table (in thousands) summarized the adjusted fair values of the assets
acquired and the liabilities assumed at the date of acquisition:
At October 4, 2006
Current assets
Property and equipment
intangible assets
Goodwill
Total assets acquired
Current liabilities
Net assets acquired
$ 3,948
235
1,242
1,557
6,982
(4,301)
$ 2,681
Developed technology
backlog
Customer relationships
Trade name
Amount
Useful Life
$830
42
310
60
5 years
4 months
6 years
2.5 years
The goodwill is not deductible for tax purposes.
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.
At February 11, 2005
inventory
Property and equipment
intangible assets
Goodwill
Total assets acquired
$ 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 resulting in goodwill of $6,017,000. 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.
WhereNet Corp. On January 25, 2007, Zebra acquired all of the shares of WhereNet Corp.
for $126,000,000, less applicable post-closing price adjustments, if any, and subject to an
escrow amount of $13,600,000. headquartered in Santa Clara, CA, WhereNet provides
integrated wireless Real Time Locating Systems (RTLS) to companies primarily in the
industrial manufacturing, transportation and logistics, and aerospace and defense sectors.
This transaction had no impact on our 2006 financial condition or results of operations.
Note 6 Earnings Per Share
for the years ended December 31, 2006, 2005, and 2004, earnings per share before
cumulative effect of the accounting change were computed as follows (in thousands,
except per-share amounts):
Year Ended December 31,
2006
2005*
2004*
Note 5 Stockholders’ Equity
Share count and par value data related to stockholders’ equity are as follows:
Preferred Stock
Par value per share
Shares authorized
Shares outstanding
Common Stock—Class A
Par value per share
Shares authorized
Shares issued
Shares outstanding
Treasury stock
Shares held
December 31, December 31,
2005
2006
$0.01
10,000,000
—
$0.01
10,000,000
—
$0.01
150,000,000
72,151,857
68,830,029
$0.01
150,000,000
72,151,857
70,451,124
3,321,828
1,700,733
During 2006, Zebra sold put options indexed in our own stock that would, if exercised,
require us to repurchase 100 shares for each option exercised at a specified strike price.
As of December 31, 2006, 2,350 options were outstanding and have an expiration of
february 2007. All options have a strike price of $35 per share. if all of the options were to
be exercised, Zebra would be required to repurchase 235,000 shares of Class A Common
Stock at a total price of $8,225,000.
Stockholder Rights Agreement. Zebra’s board of Directors adopted a Stockholder Rights
Agreement under which stock purchase rights were paid by dividend to stockholders
of record on March 15, 2002 at the rate of one Class A Right for each outstanding share
of Class A Common Stock. Each Class A Right, other than those held by the acquiring
person, entitles the registered holder to purchase one ten-thousandth of a share of
Series A Junior Participating Preferred Stock, par value $0.01 per share, at a price of
$300 per one ten-thousandth of Class A Preferred Share after the distribution date. The
distribution date is 10 days after the date on which any person or group announces that
it has acquired 15% or more of Zebra’s outstanding common stock or 10 days (or a later
date as determined by the board of Directors) after the date on which any person or
group announces or commences a tender offer that would result in the person or group
becoming an owner of 15% or more of the outstanding common stock.
The Rights will expire on March 14, 2012 unless that date has been extended by the board
of Directors or unless the Rights are redeemed or terminated earlier. A committee of
Zebra’s independent directors will review the Rights Plan at least every three years and
decide whether it should continue or be revoked. Zebra generally may amend the Rights
Plan or redeem the Rights at $0.001 per Right at any time prior to the time a person or
group has acquired at least 15% of the outstanding common stock.
Basic earnings per share:
income before cumulative effect
of accounting change
Weighted average common
shares outstanding
Per share amount
Diluted earnings per share:
income before cumulative effect
of accounting change
Weighted average common
shares outstanding
$69,627
$106,184
$115,141
70,516
$0.99
71,364
$1.49
71,556
$1.61
$69,627
$106,184
$115,141
70,516
Add: Effect of dilutive securities – stock options
440
Diluted weighted average and equivalent
shares outstanding
Per share amount
*Restated – See Note 2
70,956
$0.98
71,364
636
72,000
$1.47
71,556
842
72,398
$1.59
for the years ended December 31, 2006, 2005, and 2004, earnings per share after the
cumulative effect of the accounting change were computed as follows (in thousands,
except per-share amounts):
Basic earnings per share:
Net income
Weighted average common
shares outstanding
Per share amount
Diluted earnings per share:
Net income
Weighted average common
shares outstanding
Year Ended December 31,
2006
2005*
2004*
$70,946
$106,184
$115,141
70,516
$1.01
71,364
$1.49
71,556
$1.61
$70,946
$106,184
$115,141
70,516
Add: Effect of dilutive securities – stock options
440
Diluted weighted average and equivalent
shares outstanding
Per share amount
*Restated – See Note 2
70,956
$1.00
71,364
636
72,000
$1.47
71,556
842
72,398
$1.59
The potentially dilutive securities that were excluded from the earnings per share
calculation consist of stock options with an exercise price greater than the average
market price of the Class A Common Stock. These options were as follows:
The amortized cost, gross unrealized holding gains, gross unrealized holding losses and
aggregate fair value of investment securities at December 31, 2006, were as follows
(in thousands):
Potentially dilutive shares
1,140,689
804,490
13,800
Available-for-sale:
Year Ended December 31,
2005
2004
2006
Amortized
Gross
Unrealized
Cost Holding Gains Holding Losses
Gross
Unrealized
Fair
Value
Note 7 Investments and Marketable Securities
We classify our investments in marketable debt securities as available-for-sale in
accordance with the classifications defined in SfAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. As of December 31, 2006, all of our
investments in marketable debt securities with maturities greater than one year are
classified as long-term in the balance sheet due to our ability to hold them until maturity.
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 included in purchases, sales and maturities of
investments under investing activities.
Changes in market value of trading securities would be 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.
All investments in marketable debt securities except the partnership interests are
classified as available-for-sale securities. We account for the partnership interests using
the cost method until our ownership percentage reaches 5% of the total partnership
portfolio value, because at that point we begin using the equity method to account for the
partnership interest. During 2006, we reached the 5% threshold on one of our partnership
interests. Therefore, we recorded $1,064,000 in equity in earnings related to this
partnership interest, which is included in investment income. No other gains or losses on
trading securities were recorded in investment income.
u.S. government
and agency securities
$ 96,885
State and municipal bonds
373,998
Corporate bonds
Other
8,199
1,017
480,099
$
2
364
—
—
$ 366
$
(730) $ 96,157
(1,193)
373,169
(84)
—
8,115
1,017
$ (2,007) $ 478,458
Partnership interests using
cost method
Partnership interests using
equity method
28,653
—
—
28,653
10,000
$ 518,752
1,064
$ 1,430
—
11,064
$ (2,007) $ 518,175
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
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
Changes in unrealized gains and losses on available-for-sale securities are included in
these financial statements as follows (in thousands):
Year Ended December 31,
2005
2006
2004
Changes in unrealized gains and losses
on available-for-sale securities, net of tax,
recorded in accumulated other
comprehensive income
$(1,672)
$444
$(113)
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, 2006. 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
Number
of investments
Aggregate
Market Value
Government securities
State and municipal bonds
Corporate bonds
Total
1
50
2
53
$ 5,954
101,851
6,034
$113,839
Unrealized
Losses
$ (4)
(396)
(61)
$ (461)
Unrealized Loss > 12 months
Number of
investments
Aggregate
Market Value
25
84
1
110
$ 24,111
136,752
1,977
$162,840
Unrealized
Losses
$ (726)
(797)
(23)
$(1,546)
As of December 31, 2005, 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
1
57
4
62
$ 5,921
105,499
3,555
$114,975
Unrealized
Losses
$ (21)
(458)
(5)
$ (484)
Number 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)
Zebra is a limited partner in four 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, 2006, were as follows
(in thousands):
Due within one year
Due after one year through five years
Due after five years through ten years
Due after ten years
Fair Value
$208,866
198,873
18,006
52,713
$478,458
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):
2006
2005
2004
Unique Operating Lease
$2,336
2,336
2,284
using the specific identification method, the proceeds and realized gains on the sales of
available-for-sale securities were as follows (in thousands):
future minimum lease payments related to the lease as of December 31, 2006, are as
follows (in thousands):
Unique Operating Lease
Proceeds
Realized gains
Realized losses
Net realized gains/(losses) included
in other comprehensive income
as of the end of the prior year
2006
2005
2004
$337,671
$359,711
$319,711
215
(1,385)
364
(2,060)
1,289
(900)
2007
2008
2009
2010
2011
Thereafter
(1,041)
(1,544)
384
Total minimum lease payments
$ 2,336
2,380
2,573
2,753
2,753
6,882
$19,677
Note 9 Inventories
The components of inventories, net of allowances, are as follows (in thousands):
Raw material
Work in process
finished goods
Total inventories
December 31,
2006
2005
$49,172
$39,779
1,014
31,004
134
23,725
$81,190
$63,638
Note 11 Income Taxes
The geographical sources of income before income taxes and cumulative effect of
accounting change were as follows (in thousands):
united States
Outside united States
Total
Year Ended December 31,
2005
2006
2004
$ 86,609
$133,922
$156,320
15,033
26,360
19,764
$101,642
$160,282
$176,084
inventory reserves (included in above numbers)
$ 9,866
$ 7,598
Note 10 Property and Equipment
Property and equipment, which includes assets under capital leases, is comprised of the
following (in thousands):
December 31,
2006
2005
Zebra’s intention is to permanently reinvest the undistributed earnings of all of our
foreign subsidiaries in accordance with APb Opinion No. 23, Accounting for Income Taxes
– Special Areas. Accordingly, we have not provided for deferred u.S. income taxes on
undistributed earnings of foreign subsidiaries, which totaled approximately $37,400,000
at December 31, 2006 and $33,000,000 at December 31, 2005. Should such earnings be
remitted to Zebra, foreign tax credits would be available to substantially offset the u.S.
income taxes due upon repatriation.
$ 14,760
$ 12,184
The provision for income taxes consists of the following (in thousands):
buildings
Land
Machinery, equipment and tooling
furniture and office equipment
Computers and software
Automobiles
Leasehold improvements
Projects in progress
Less accumulated depreciation and amortization
Net property and equipment
Other items related to property and equipment are as follows:
unamortized computer software costs
1,910
59,915
7,669
51,650
14
8,345
6,659
150,922
(93,491)
$57,431
1,910
50,132
7,090
44,507
14
8,449
6,589
130,875
(81,232)
$49,643
December 31,
2006
2005
$ 11,755
$ 9,559
Amortization of capitalized software
2006
$ 3,600
Total depreciation expense charged to income 12,434
Year Ended December 31,
2005
2004
$ 2,938
10,763
$ 2,125
9,686
Current:
federal
State
foreign
Deferred:
federal
State
foreign
Total
Year Ended December 31,
2005
2006
2004
$29,376
$ 42,146
$ 48,014
2,804
4,560
(3,748)
(283)
—
4,706
8,070
(766)
(58)
—
5,531
6,023
1,387
104
(116)
$32,709
$54,098
$60,943
The provision for income taxes differs from the amount computed by applying the
u.S. statutory federal income tax rate of 35% to income before income taxes. The
reconciliation of statutory and effective income taxes is presented below (in thousands):
Year Ended December 31,
2005
2006
2004
Provision computed at statutory rate
$36,279
$56,099
$ 61,629
State income tax (net of federal tax benefit)
Tax-exempt interest income
Tax benefit of exempt foreign trade income
Domestic manufacturing deduction
Research and experimental credit
Other
1,412
(4,378)
(1,365)
(665)
(350)
1,776
2,816
(3,301)
(1,575)
(735)
(350)
1,144
3,371
(1,767)
(1,750)
—
(350)
(190)
Provision for income taxes
$32,709
$54,098
$60,943
The amounts in the previous two tables include the tax on the cumulative effect of
accounting principle of $694,000 for 2006.
Note 12 Goodwill and Other Intangible Asset Data
intangible asset data are as follows (in thousands):
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):
December 31,
2006
2005
Deferred tax assets:
Deferred rent-building
Capital equipment lease
Accrued vacation
Deferred compensation
inventory items
Allowance for doubtful accounts and other receivables
Other accruals
fAS 123(R) stock option expense
unrealized loss on securities – fAS 115
Recognized tax gain on partnership interests
unrealized loss on 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
$ 240
—
1,369
2,503
4,636
4,057
5,217
6,675
617
3,863
341
29,518
—
(182)
(7,955)
(8,137)
$21,381
$ 216
28
1,115
2,078
4,142
203
3,338
7,458
—
3,709
—
22,287
(306)
(419)
(7,158)
(7,883)
$14,404
December 31, 2006
December 31, 2005
Gross
Amortized intangible assets
Current technology
Patent and patent rights
Customer relationships
Total
Gross
Carrying
Amount
$15,481
28,247
3,798
$47,526
Accumulated
Amortization
Carrying Accumulated
Amount Amortization
$ (9,566)
$12,258
$ (9,067)
(2,645)
(1,290)
13,753
3,406
(565)
(783)
$(13,501)
$29,417
$(10,415)
unamortized intangible assets
Goodwill
$70,714
$69,097
Aggregate amortization expense
for the year ended
December 31, 2005
for the year ended
December 31, 2006
$ 3,653
Estimated amortization expense for the years ended:
$ 2,341
December 31, 2007
December 31, 2008
December 31, 2009
December 31, 2010
December 31, 2011
Thereafter
5,513
5,503
5,387
4,621
4,276
8,725
During 2006, we acquired intangible assets in the amount of $18,091,000 for customer
relationships, current technology, patents and patent rights. These intangible assets will
have an estimated useful life of 4 months to 10 years. Also during 2006, we reviewed the
usefulness of certain other intangibles and found them to be impaired. As a result of this
impairment, we incurred a write-off of net intangibles of $730,000.
During 2006, goodwill increased by $1,617,000 due primarily to the acquisition of
Swecoin. See Note 4. The remaining difference is due to foreign currency translations of
the Swecoin goodwill.
included in the acquisition of intangible assets was a payment for the settlement of a
lawsuit with Paxar Americas, inc. A portion, $10,358,000, of this settlement has been
applied to future use of patents. This portion of the settlement has been recorded as
intangibles and will be amortized over the estimated useful lives of the patents, which
range from 4 to 7 years. in some cases, the useful lives may be less than the patent lives.
See Note 16 for further discussion of the settlement.
Note 13 Other Assets
Other assets consist of the following (in thousands):
Cash value of life insurance policies related to the
deferred compensation plan (See Note 18)
Cash value of life insurance policies on key executives
Long-term equity securities
Deposits
Other long-term assets
Total
December 31,
2006
2005
$ 5,888
—
100
507
4,625
$11,120
$ 4,751
21,602
100
312
14,978
$41,743
Zebra invested $10,028,000 in life insurance policies on 48 key executives in each of the
last three years for a total cost of $30,084,000. These policies were sold during 2006.
included in other long-term assets at December 31, 2005 was a note receivable from a Zebra
reseller for $9,126,000. During 2006, this reseller filed for bankruptcy protection. Accordingly,
we have recorded a reserve for the entire balance. See Note 16 for further discussion.
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
Year Ended December 31,
2005
2004
$ 1,874
1,775
$ 3,649
$ 1,771
2,329
$ 4,100
2006
$2,030
1,628
$3,658
Percentage of eligible payroll contributed
for profit-sharing plan
1.8%
2.4%
3.1%
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 transaction gains and losses related to
our net euro asset position. Summary financial information related to these activities
follows (in thousands):
Change in gains and losses from
foreign exchange derivatives
Gain on net foreign currency assets
Net foreign exchange gain
Notional balance of outstanding contracts:
Pound
Euro
Euro/Pound
Year Ended December 31,
2005
2006
2004
$ (73)
(562)
$(635)
$ 883
403
$1,286
$(1,246)
1,731
$ 485
December 31, December 31,
2005
2006
£2,660
€17,000
€22,000
£3,289
€25,000
€16,000
Net fair value of outstanding contracts
$(172,000)
$553,000
Hedging of Anticipated Sales
We manage the exchange rate risk of anticipated euro denominated sales using forward
contracts and option collars. We designate these contracts as cash flow hedges. Gains and
losses on these contracts are deferred in other comprehensive income until the contracts
are settled and the hedged sales are realized, at which time the deferred gains or losses will
be reported as an increase or decrease to sales. Summary financial information related to
the cash flow hedges of future revenues follows (in thousands, except percentages):
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,
2005
2006
$(906)
(341)
$(565)
€44,075
100%
$999
376
$623
€30,750
100%
2006
2005
2004
Net gain and (losses) included in revenue for the:
year ended December 31, 2006
$(873)
year ended December 31, 2005
year ended December 31, 2004
$1,617
(1,639)
The above year-to-date gains and losses are the net pretax gains and losses released
from other comprehensive income into earnings during these years. We expect to release
pretax losses in the amount of $906,000 from other comprehensive income into earnings
during 2007 along with gains and losses on similar contracts entered into early in 2007.
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
currently in existence 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,
2006 are as follows (in thousands):
Operating Leases
2007
2008
2009
2010
2011
Thereafter
Total minimum lease payments
6,163
5,056
4,816
4,407
4,294
19,833
$44,569
Rent expense for operating leases charged to operations was as follows (in thousands):
Rent expense
Year Ended December 31,
2005
2004
$7,822
$6,404
2006
$9,011
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.
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, 2006
is $700,000, which is the limit of Zebra’s guaranty throughout the term of the iRb.
Legal proceedings. On September 14, 2006, Zebra settled all issues surrounding the
litigation with Paxar Americas, inc., and the case was dismissed with prejudice. Zebra
paid Paxar $63,750,000 in exchange for a general release and a fully paid, perpetual,
worldwide license to all of the patents in suit, as well as a number of related u.S. and
foreign patents that Paxar had not asserted in the suit. The license to sell products in the
united States under four u.S. patents not subject to the lawsuit is limited until September
14, 2009. There is no such limitation on the license under the patents in suit. Of the
amount paid to Paxar, $10,358,000 was applied to future use of patents based on their
estimated fair value and will be amortized over an estimated useful life of 4 to 7 years.
The remaining $53,392,000 was recorded as operating expenses in the Consolidated
Statement of Earnings (Loss) in the third quarter of 2006.
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 has not been scheduled, and we are unsure when it will be scheduled.
On July 3, 2006, a Zebra reseller filed for bankruptcy protection. At the time of the filing, the
reseller owed various Zebra subsidiaries a total of $12,065,000. The entire balance due to
Zebra is guaranteed by Condor insurance, a Nevis insurance company, through a united
kingdom insurance broker. During June 2006, Zebra initiated a suit in the u.k. courts to
enforce the guarantee. On January 18, 2007, a summary judgment hearing was held in the
case. At the conclusion of that hearing, Zebra’s petition for summary judgment was granted,
and we were awarded damages of €11,119,000 (approximately $14,650,000). however, we
have become aware that Condor’s financial position has deteriorated such that Condor may
not be able to pay the judgment awarded to us. Management has reviewed the situation
and determined that a loss is probable as defined in SfAS No. 5, Loss Contingencies. Our
range of estimated losses ranges from insignificant up to 100%. Our best estimate is that
the loss will be at the high end of the range, and we have, therefore, reserved 100% of
the balance due. however, we are continuing to take legal action to collect the judgment
against the insurance company and reduce Zebra’s loss. if Zebra is able to recover some
or all of the loss, we will reverse our reserve and record a gain at that time.
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.
2006
Net sales
Long-lived assets
2005
Net sales
Long-lived assets
2004
Net sales
Long-lived assets
North Europe, Middle
East & Africa
America
Latin
America
Asia
Total
$379,820
50,077
$ 260,125
6,637
$53,619
22
$65,960
695
$759,524
57,431
$362,054
43,448
$230,365
5,917
$46,878
7
$62,974
271
$702,271
49,643
$359,074
40,415
$213,559
5,669
$ 38,119
3
$52,302
196
$663,054
46,283
Net sales by major product category are as follows (in thousands):
Hardware
Supplies
Service Shipping Cash Flow
Hedging
Software Handling Activities
and
and
2006
2005
2004
$578,002
$150,709
$25,664
$6,022
$ (873)
$759,524
540,679
129,183
518,556
116,877
25,217
24,310
5,575
4,950
1,617
702,271
(1,639)
663,054
Note 18 Deferred Compensation Plan
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 or 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):
Gain on cash surrender value of life insurance
policies included in investment income
$584
$263
$94
Year Ended December 31,
2005
2006
2004
Deferred compensation liability included
in other long-term liability
Cash surrender value included in other assets
December 31, December 31,
2005
2006
$6,803
5,888
$5,521
4,751
Note 19 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.
Total
• 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 other comprehensive income included in the Consolidated
Statements of Comprehensive income are as follows (in thousands):
Note 21 Quarterly Results of Operations (unaudited)
(Amounts in thousands, except per share data)
Year Ended December 31,
2005
2006
2004
foreign currency translation adjustments
$ 7,295
$(6,407)
$3,402
Changes in unrealized gains and (losses) on
hedging transactions:
Gross
income tax (benefit)
Net
$(1,905)
$ 3,230
(717)
1,157
$ (1,188)
$ 2,073
$ (694)
(243)
$ (451)
Changes in unrealized holding gains and
(losses) on investments classified
as available-for-sale:
Gross
income tax (benefit)
Net
$(2,682)
(1,010)
$ 726
282
$ (1,672)
$ 444
$ (174)
(61)
$ (113)
The components of accumulated other comprehensive income (loss) included in the
Consolidated balance Sheets are as follows (in thousands):
As of
December 31, December 31,
2005
2006
foreign currency translation adjustments
$ 8,400
$ 1,105
unrealized gains and (losses) on foreign currency
hedging activities:
Gross
income tax (benefit)
Net
unrealized gains and (losses) on investments
classified as available-for-sale:
Gross
income tax (benefit)
Net
$
(906)
(341)
$
(565)
$ (1,641)
(618)
$ (1,023)
$ 999
376
$ 623
$ 1,041
392
$ 649
Note 20 Major Customers
ScanSource, inc. is our most significant customer. Our net sales to ScanSource, an
international distributor of Zebra product, as a percent of total net sales were as follows:
ScanSource
Year Ended December 31,
2005
15.6
2006
16.7
2004
14.1
No other customer accounted for 10% or more of total net sales during these years.
2006
Net sales
Cost of sales
Gross profit
First
Quarter
Second
Quarter
Third
Quarter
$ 175,814
$ 187,421
$ 186,386
93,116
97,895
98,600
82,698
89,526
87,786
Selling and marketing
Research and engineering
22,109
12,035
General and administrative
14,649
Amortization of intangibles
Litigation settlement
insurance receivable write-off
747
—
—
23,510
12,382
15,081
723
23,467
11,774
14,642
789
—
—
53,392
—
Total operating expenses
49,540
51,696
104,064
Fourth
Quarter
$ 209,903
111,493
98,410
27,702
12,768
18,284
1,394
—
12,543
72,691
Operating income (loss)
33,158
37,830
(16,278)
25,719
investment income (expense)
interest expense
foreign exchange gain (loss)
Other, net
5,207
(218)
110
(448)
Total other income (expense)
4,651
4,987
(13)
(380)
(177)
4,417
6,008
(5)
457
(287)
6,173
6,980
(16)
(822)
(170)
5,972
income (loss) before taxes
and cumulative effect
of accounting change
income taxes
income (loss) before
cumulative effect
of accounting change
Cumulative effect of
accounting change
(net of tax of $694)
37,809
13,037
42,247
14,575
(10,105)
(5,842)
31,691
10,245
24,772
27,672
(4,263)
21,446
1,319
—
—
—
Net income (loss)
$ 26,091
$ 27,672
$
(4,263)
$ 21,446
basic earnings (loss) per
share before cumulative
effect of accounting change
$
0.35
$
0.39
$
(0.06)
$
0.31
Diluted earnings (loss) per
share before cumulative
effect of accounting change
$
basic earnings (loss) per share $
0.35
0.37
Diluted earnings (loss)
per share
$
0.37
$
$
$
0.39
0.39
$
$
(0.06)
(0.06)
0.39
$
(0.06)
$
$
$
0.30
0.31
0.30
2005
Net sales
Cost of sales
Gross profit
Selling and marketing
Research and engineering
83,599
87,128
21,564
11,052
General and administrative
15,802
Amortization of intangibles
Exit costs
Total operating expenses
Operating income
647
1,517
50,582
36,546
investment income (expense)
3,277
interest expense
foreign exchange gain (loss)
Other, net
(3)
53
(304)
Total other income (expense)
3,023
income before taxes
income taxes
Net income
39,569
13,750
First
Quarter(1)
Second
Quarter(1)
Third
Quarter(1)
Fourth
Quarter(1)
$170,727
$176,614
$175,636
$179,294
88,103
87,533
21,291
11,818
15,631
509
283
49,532
38,001
89,682
89,612
25,725
12,103
14,816
798
71
53,513
36,099
ZEBRA TECHNOLOGIES CORPORATION
Schedule II
Valuation and Qualifying Accounts
(Amounts in thousands)
Description
Balance at Charged to
Beginning Costs and Deductions/
(Recoveries)
Expenses
of Period
Balance at
End of
Period
valuation account for accounts receivable:
year ended December 31, 2006
$ 1,116
$ 2,856
year ended December 31, 2005
$ 1,561
$ (396)
year ended December 31, 2004
$ 1,388
$ 368
$ 423
$
49
$ 195
$ 3,549
$ 1,116
$ 1,561
3,254
3,814
valuation accounts for inventories:
(41)
334
251
3,798
41,799
13,724
(8)
87
(74)
3,819
39,918
13,073
year ended December 31, 2006
year ended December 31, 2005
year ended December 31, 2004
$ 7,598
$ 8,037
$ 6,238
$ 8,951
$ 4,064
$ 5,653
$ 6,683
$ 4,503
$ 9,866
$ 7,598
$ 3,854
$ 8,037
See accompanying report of independent registered public accounting firm.
Note: 2006 amounts include insurance receivable reserves of $2,307,000 in accounts receivable. An
additional reserve of $10,236,000 is included in other assets.
87,467
89,147
23,050
12,386
17,801
387
141
53,765
35,382
3,072
(27)
812
(243)
3,614
38,996
13,551
$ 25,819
$ 25,445
$ 28,075
$ 26,845
basic earnings per share
Diluted earnings per share
$
$
0.36
0.36
$
$
0.35
0.35
$
$
0.39
0.39
$
$
0.38
0.38
(1) Restated for the adoption of SfAS No. 123(R), Share-Based Payment. See Note 2.
Stockholder Information
Board of Directors
Officers
edward l. Kaplan
chairman and chief executive officer
Zebra technologies corporation
edward l. Kaplan
chairman and chief executive officer
Gerhard cless
executive Vice President
Zebra technologies corporation
christopher G. Knowles (1)(2)(3)
retired chief executive officer
insurance auto auctions, inc.
ross W. manire(1)
chairman and chief executive officer
extenet systems, inc.
dr. robert J. Potter(2)
President and chief executive officer
r.J. Potter company
michael a. smith (1)(3)
chairman and chief executive officer
fireVision, l.l.c.
Gerhard cless
executive Vice President
Veraje anjargolian
Vice President, General manager
card Printer solutions
noel elfant
Vice President, General counsel
and corporate secretary
Hugh K. Gagnier
senior Vice President, operations
specialty Printing solutions
Philip Gerskovich
senior Vice President, corporate development
todd r. naughton
Vice President, controller
bruce r. ralph
Vice President, Human resources
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Nominating Committee
michael H. terzich
senior Vice President, Global sales and marketing
specialty Printing solutions
charles r. Whitchurch
chief financial officer and treasurer
corporate Headquarters
Zebra technologies corporation
333 corporate Woods Parkway
Vernon Hills, illinois 60061-3109 u. s. a.
Phone: +1 847 634 6700
fax +1 847 913 8766
annual meeting
Zebra’s annual meeting of stockholders will be
held on may 24, 2007, at 10:30 a. m. (central time),
at the Hilton northbrook, 2855 north milwaukee
avenue, northbrook, illinois.
independent auditors
ernst & Young llP chicago, illinois
transfer agent and registrar
mellon investor services l.l.c.
480 Washington boulevard
Jersey city, new Jersey 07310-1900
Phone: 877 870 2368
for hearing impaired stockholders: +1 201 680 6610
for foreign stockholders: +1 201 680 6578
Web site: www.melloninvestor.com/isd
e-mail contact: shrrelations@mellon.com
investor relations
Please contact Zebra’s corporate Headquarters
for corporate or product information.
form 10-K
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
the company’s 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, citizen-
ship, disability, veteran status, marital status, sexual
orientation or any other reason prohibited by law.
G l o b a l / a m e r i c a s H e a d q u a r t e r s
e u r o P e , m i d d l e e a s t a n d a f r i c a H e a d q u a r t e r s
a s i a P a c i f i c H e a d q u a r t e r s
Zebra technologies corporation
333 corporate Woods Parkway
Vernon Hills, il 60061-3109
usa
Zebra technologies europe, limited
Zebra House, unit 14, the Valley centre
Gordon road, High Wycombe
buckinghamshire HP13 6eq, uK
Zebra technologies asia Pacific, l.l.c.
120 robinson road
#06-01 Parakou building
singapore 68913
+1 847 634 6700
www.zebra.com
+ 44 (0) 494 472872
+ 65 6858 0722
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