We help our customers
Zebra Technologies Corporation 2008 Annual Report
Identify
Track
Manage
Zebra Technologies improves its customers’ business performance with products and solutions
that identify, track and manage assets, transactions and people. We help our customers track their
critical assets smarter. Industry-leading specialty digital printing and automatic identification
solutions enhance supply chain visibility, optimize asset flow and deliver a rapid investment
payback. Business, government and other organizations use our on-demand thermal printers and
supplies, radio frequency identification (RFID) solutions, real time locating systems (RTLS) and
mission-critical supply chain execution solutions 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 customers, partners and stockholders.
F i n a n C i a l S u m m a R y
(In thousands, except per-share data and percentages)
2008 % change
2007 % change
2006
Operating Results
Net sales
$ 976,700
12.5%
$ 868,279
Gross profit
479,305
14.9
Operating income (loss)
Net income (loss)
(15,346)
(38,421)
Basic earnings (loss) per share
(0.60)
Diluted earnings (loss) per share
(0.60)
–
–
–
–
417,118
143,185
110,113
1.61
1.60
14.3%
16.4
78.0
55.2
59.4
60.0
$ 759,524
358,420
80,429
70,946
1.01
1.00
Capitalization
Cash & cash equivalents
and investments and
marketable securities
(current and long-term)
Working capital
Total assets
Stockholders’ equity
– = Not meaningful
$ 224,886
271,831
850,878
710,738
$ 281,179
298,660
1,034,278
902,693
$ 559,189
404,836
963,142
877,681
Secure, positive identification helps protect
employees, visitors, patrons and residents, as
well as property and assets. Zebra solutions
deliver automated, on-demand production of
highly customized cards, badges and wrist
bands. Features such as bar codes, magnetic
stripes, and radio frequency identification
(RFID) smart card technology enhance security
and expand the range of applications.
Identify
Track
Manage
People Card identity solutions provide positive
personal identification, from employee ID
cards and visitor badges to driver’s licenses
and national ID cards. Zebra technology
and materials make it easy to produce clear,
customized, tamper-resistant cards right at
the point of issuance.
Patient wristbands from Zebra are a
cornerstone of healthcare safety. Hospital
admissions staff can immediately produce
barcoded, antimicrobial, long-lasting
wristbands to identify patients. The wristbands
support safe medication administration and
bedside specimen collection to reduce errors,
improve patient outcomes and increase
staff productivity.
Smart card solutions used by leading ski
mountain operators enhance the customer
experience by speeding patrons through
lift lines. From small businesses to military
and government agencies, organizations use
Zebra solutions to manage access privileges,
track visitors and enhance personal security.
Effective asset management reduces losses,
increases productivity and improves profits.
Zebra solutions increase asset visibility at
every step along today’s complex global supply
chains. Businesses worldwide rely on our
solutions to quickly and accurately determine
asset location, condition and availability.
Identify
Track
Manage
Assets Manufacturing, distribution and retail operations
count on the suite of Zebra solutions to
improve inventory turnover and lower
working capital requirements. Barcoding,
radio frequency identification (RFID) and
real time locating systems (RTLS) from Zebra
help ensure that the right items, in the right
quantity, are correctly shipped, received
and processed.
Airports and airlines optimize ground support
through Zebra solutions that track vehicles on
the tarmac. Greater visibility into the vehicle
operating matrix—knowing who’s using a
vehicle, where and how—helps cut costs,
mitigate risk, improve efficiency and shrink
the carbon footprint.
Pharmacies use Zebra thermal printers to
streamline workflow and improve customer
service. Dedicated label printers are fast and
compact and perform at a lower overall cost.
Barcoding helps pharmacists reconcile patient
and prescription information and better
manage inventories.
Zebra mobile and desktop printers add
convenience and accuracy to every transaction.
Our solutions interface in real time with
handheld computers and wireless networks for
on-the-spot receipt printing, payment processing
and returns management. Faster, more accurate
transaction processing improves customer
service, cuts cash collection time and
increases productivity of workers in the field.
Identify
Track
Manage
Transactions Small package delivery and route sales
representatives can use Zebra printers on the
road, in the truck or at customer locations
for quick and reliable printing of receipts,
invoices and work orders. Our mobile
solutions increase order and invoice accuracy,
shorten billing cycles and improve employee
productivity—for more efficient, profitable
operations.
Law enforcement and public safety officers use
Zebra mobile printers for ticketing and in-field
evidence tracking. Field personnel can quickly
enter and verify data, enhancing emergency
response while improving enforceability and
personnel safety.
Retailers streamline operations from the back
office to point of sale with Zebra printing
solutions. Accurate product and shelf labeling
saves labor, improves inventory management
and speeds customer transactions.
l e T T e R T O S T O C k h O l d e R S
Anders Gustafsson, Chief Executive Officer
Zebra reported solid results for
2008, despite an increasingly
difficult operating environment.
We extended our industry
leadership by delivering more
high-value solutions to help
customers identify, track and
manage critical assets through
increasingly complex supply
chains. Equally important, we
maintained our historically
strong balance sheet, with $225
million in cash and no debt,
even after deploying $158
million for share buybacks.
The resilience of our business
– with our diversified customer
base, global reach, wide range
of products and solutions, and
the industry’s strongest go-to-
market channel network –
helped grow sales 12.5%, to a
record $976.7 million. In 2008,
our growth was aided by:
• Our industry-leading product
base and continued penetration
of attractive industries, including
healthcare, government, and
mobile workforce
• New products and solutions,
including self-service kiosk
applications, wristbands and
wristband printers for improved
patient safety and more effective
card printer solutions, for
increased sales to new and
established customers
• Expansion into new areas of
profitable growth such as marine
terminal operating systems and
asset tracking systems for airport
ground support vehicles, through
our Zebra Enterprise Solutions
(ZES) group
The difficult economic conditions
that affected most companies as
the year unfolded also affected
Zebra. For 2008, we recorded
$157 million in non-cash impair-
ment charges, primarily related to
the economy’s effect on ZES and
the near-term business outlook.
While ZES is taking longer than
projected to meet target metrics,
its value proposition remains
compelling. ZES enhances our
core specialty printing business
by making Zebra a more impor-
tant strategic partner to more
customers in more industries,
thanks to a portfolio of integrated,
high-value solutions. As the only
well-capitalized company with
such a broad set of asset tracking
solutions, Zebra is uniquely
positioned to meet customers’
needs well into the future.
aggressive Focus on
Performance
In 2008, we responded early and
aggressively to the economic
downturn, reducing costs and
improving organizational
efficiency. This action has allowed
us to carefully navigate the
current environment and
positions Zebra for enhanced
performance when conditions
improve. Our initiatives included:
Our work during 2008 has positioned Zebra to increase shareholder value, striking an appropriate balance between preserving near-term profitability and driving long-term growth. In good times and bad, customers choose Zebra solutions because we deliver measurable business improvement and rapid investment payback.
• Reorganizing business functions
While uncertainty in the global
to drive efficiency and strengthen
our global brand
• Giving priority to projects with
the highest, most immediate
investment returns
• Streamlining product offerings to
improve efficiency and profitability
economy presents a challenging
outlook for 2009, Zebra is
well-positioned to enhance
shareholder returns over the
long term. We have made
the right choices to preserve
profitability and extend industry
leadership, deploying resources
to achieve the highest risk-
We also advanced our global
adjusted returns. We remain
supply chain strategy to reduce
nimble in adapting to changing
product costs, improve respon-
business conditions.
siveness and tighten inventory
management. Our multi-year
During challenging economic
investment in a new enterprise
times, all companies look for
resource planning system is
ways to improve their business
another strategic project that will
processes. Zebra’s solutions
help us enhance customer service
help them do that. The diversity
and improve business processes.
of our business, across partners,
customers, products and
Investments to improve our
geographies, positions Zebra to
competitiveness are also vital.
pursue a broader range of
We are focusing resources
where we see opportunities
for the highest risk-adjusted
prospects. Our knowledgeable
and dedicated employees give
me the confidence that Zebra
returns, including:
will succeed.
• Developing new products to
extend our range and help our
customers reduce operating costs
by improving supply chain visibility,
customer service and security
• Enhancing our award-winning
channel partner programs
• Targeting more immediate
business opportunities in
attractive industries
• Deepening our strongest
customer relationships
anders Gustafsson
Chief Executive Officer
Comparison of Five-Year Cumulative Total Return of Zebra Technologies Corporation,
the Hemscott Industry Group 815 Index and the NASDAQ Composite Market Index
Stock Performance Graph
This graph compares the cumulative annual change since December 31, 2003,
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 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 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
December 31, 2003, and assumes that all dividends were reinvested at
the end of the month in which they were paid.
2003
2004
2005
2006
2007
2008
Zebra Technologies
Corporation
Hemscott Industry
Group Index
NASDAQ Composite
Market Index
$ 100.00
$127.13
$ 96.80
$ 78.59
$ 78.38
$45.77
100.00
102.24
88.36
96.62
100.74
49.55
100.00
108.41
110.79
122.16
134.29
79.25
1. Hemscott, Inc. (formerly CoreData LLC and Media General Financial Services) publishes the Hemscott Industry
Group 815 (Computer Peripherals) Index. The index is composed of the following companies: Acorn Energy Inc.,
Aruba Networks Inc., Astro-Med Inc., AU Optronics Corp. ADS, Avocent Corp., Electronics For Imaging, Emulex
Corp., Evans & Sutherland Computer Corp., Hauppage Digital Inc., iCAD Inc., iGo 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., Radcom Ltd., RadiSys Corp., Rimage Corp., SCM Microsystems Inc., Stratasys Inc., Top Image Systems Ltd.,
Transact Technologies Inc., Universal Display Corp., Video Display Corp., Wave Systems Corp. Cl. A, and
Zebra Technologies Corporation
0$25$50$75$100$125$150NASDAQHemscottZebra12/31/200812/31/200712/31/200612/31/200512/31/200412/31/2003Zebra Technologies CorporationHemscott Industry Group IndexNASDAQ Composite Market Index
Zebra Technologies Corporation 2008 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, 2008
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,
a non-accelerated filer or a smaller reporting
company. See definitions of “accelerated filer,”
“large accelerated filer ” and “smaller reporting
company” in Rule 12b-2 of the Securities Act
(Check one): Large accelerated filer __X
Accelerated filer __ Non-accelerated filer __
Smaller reporting company __
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 28, 2008, the aggregate market value of
each of the registrant’s Class A Common held by
non-affiliates was approximately $2,157,955,000.
The closing price of the Class A Common Stock on
June 27, 2008, as reported on the NASdAq Stock
Market, was $33.17 per share.
As of February 20, 2009, 60,570,526 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 21, 2009, are incorporated by
reference into Part III of this report.
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
PART I
INDEX
PAGE
References in this document to “Zebra,” “we,” “us,” or “our” refer to Zebra Technologies
Corporation and its subsidiaries, unless the context specifically states otherwise.
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . 11
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 6. Selected Financial data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 7.
Management’s discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 7A. quantitative and qualitative disclosures About Market Risk . . . . . . . . . . . . . . . 24
Item 8.
Financial Statements and Supplementary data . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 9.
Changes in and disagreements with Accountants on Accounting and
Financial disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
PART III
Item 10. directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . 27
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 12.
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 13. Certain Relationships and Related Transactions,
and director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 14. Principal Accounting Fees and Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
PART IV
Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SIGNATURES
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Index to Consolidated Financial Statements and Schedule . . . . . . . . . . . . . . . . . . . . . . . . F-1
1
Safe Harbor
Forward-looking statements contained in this filing are subject to the safe harbor created
by the Private Securities Litigation Reform Act of 1995 and are highly dependent upon
a variety of important factors which could cause actual results to differ materially from
those reflected in such forward looking statements. These factors include:
• Market acceptance of Zebra’s printer and software products and competitors’
product offerings 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, including the success of
migrating final printer product assembly offshore to a third-party manufacturer,
• 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 and
operations, and
• The outcome of litigation in which Zebra is involved, particularly litigation or claims
related to infringement of third-party intellectual property rights.
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
Zebra Technologies Corporation was incorporated as an Illinois Corporation in 1969. We
became a delaware corporation in 1991 in connection with our initial public offering,
which we completed in August 1991. We 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. In March 2009, our principal offices will relocate to 475 Half day Road,
Lincolnshire, Illinois 60069. 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.
The Company
Zebra delivers products and solutions that improve our customers’ ability to help our
customers put their critical assets to work smarter by identifying, tracking and managing
assets, transactions and people. Through the Specialty Printing Group (SPG), we design,
manufacture and sell 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.
In 2007 and 2008, we acquired WhereNet Corp., proveo AG, Navis Holdings, LLC and
Multispectral Solutions, Inc. Together, these companies comprise our Zebra Enterprise
Solutions Group (ESG). The acquisitions of these companies expanded the range of
identification and tracking solutions we deliver to our customers. In addition, they
provided us with new technologies to offer our customers including active RFId and
global positioning systems (GPS). The products of these companies consist of battery-
powered wireless tags, fixed-position antennae, transponder modules and various
application software. These companies also provide consulting services, maintenance
contracts and software licenses.
Zebra Specialty Printer Group (SPG)
We design our printer products to operate at the point of issuance to produce and dispense
high-quality labels, tickets, receipts, and plastic cards 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. These applications require high levels of data accuracy, 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.
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, 2008, management estimates that Zebra has
sold more than 7,500,000 printers to customers around the world.
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 the printing and automatic identification applications Zebra provides,
because these solutions 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.
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.
Our printers are used to produce bar code labels, passive RFId “smart” labels, receipts,
plastic identification cards, wristbands and tags. 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.
We produce the industry’s broadest range of rugged, on-demand thermal transfer and
direct thermal 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,
we believe that direct thermal and thermal transfer technologies are best suited for
most bar code labeling and other on-demand printing 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, 2008, we offered 56 thermal printer models with numerous
variations, in eight categories as follows:
• Performance tabletop printers for applications requiring continuous operation in
high output, mission-critical and industrial settings.
• RFID printer/encoders for passive 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.
• Mid-range tabletop printers, which are designed for demanding commercial
applications.
• Desktop printers to deliver value and performance in applications with lower volume
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
or space restrictions.
• Mobile printers to meet the printing needs of workers in the field.
2
• Print engines, which 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 ticket printers for use in kiosks and other unattended printing applications.
• Card printers, which print national identity cards, driver’s licenses, employee
identification badges, gift cards and personalized cards.
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.
Printer Supplies
Supplies products consist of stock and customized thermal labels, wristbands, smart
labels and tags, plastic cards, card laminates and thermal transfer ribbons. Zebra
promotes the use of genuine Zebra brand supplies with its equipment.
Zebra fully supports its printers, resellers and end users with an extensive line of superior
quality, high-performance supplies optimized to a particular user’s needs. Supplies are
chosen in consultation with the reseller and end user based on the specific application,
printer and environment in which the labeling system must perform. These printing
solutions frequently include proprietary ribbon and label formulations that are designed
to optimize image resolution 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 image quality,
and decrease the part life of key printer components such as printheads.
Printer Related 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 offerings, combined with the enhanced printer management capabilities of
ZebraNet™ Bridge, makes Zebra’s printers easy to use and integrate into small, medium
and enterprise-wide environments. 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 and Bluetooth®. In 2008, a Mobile printer-based Software
development Kit was introduced to aid with integration into Windows Mobile® applications.
Zebra also introduced ZBI 2.0, an optional printer programming language, which allows
customers to create and run customized applications on Zebra printers.
Zebra offers label design and integration software specifically designed to optimize the
performance of Zebra bar code label printers. Zebra’s suite of label design and printer
configuration tools includes Zebradesigner™, Zebradesigner™ Pro, Zebradesigner™ for
XML, and Zebradesigner™ Label design Software for use with mySAP™ Business Suite.
In 2008, Zebra added the Enterprise Connector Solution for Oracle® Business Intelligence
Publisher™, which delivers seamless integration between Oracle and Zebra printers,
creating a versatile, easily managed, cost-effective printing platform.
Printer Maintenance and Services
Zebra provides depot maintenance and repair services at repair centers in Vernon
Hills, Illinois; Camarillo, California; Canada; Preston, U.K.; Singapore; China; and the
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Netherlands. Zebra Authorized Service Providers (ZASP) also provide repair services for
most Zebra products at their locations. In addition, Zebra offers on-site repair services for
tabletop printers in the United States. Outside of the United States, Zebra’s resellers may
provide maintenance service, either directly as ZASPs or through independent service
agents. Zebra also provides technical support from in-house support personnel located
in the United States, the United Kingdom and Singapore. For most Zebra products, Zebra
provides interactive technical support via the Internet at www.zebra.com, 24 hours per
day, seven days per week.
Printer Warranties
In general, Zebra provides warranty coverage of one year on printers against defects in
material and workmanship. Printheads are warranted for nine 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 or replacement during the applicable
warranty periods.
Zebra’s Printer Technology
Our customers rely on Zebra to provide products and systems to identify, authenticate,
track or route both items and people, and then process the related transactions. These
products and systems use technologies that provide specific benefits in each application.
All Zebra printers and print engines use thermal printing, either direct thermal printing,
thermal transfer printing or dye-sublimation printing. This technology creates an image
by heating certain pixels of an electrical printhead to selectively image a ribbon or heat-
sensitive substrate.
direct thermal printers apply the heat directly to a thermally-sensitive label, wristband, or
receipt to create an image. This benefits applications needing simple, reliable operation
such as shelf labeling, patient identification, and kiosk receipts. Some desktop label
printers, mobile printers and kiosk printers support only direct thermal printing.
Thermal transfer printers apply heat to a ribbon to release ink onto labels or tags. This
allows a wider range of specialty label materials and associated inks to be used for
applications like circuit board labels, chemical identification and product labels requiring
resistance to chemicals, temperature extremes, abrasion, or long life. Performance, mid-
range, print-engines and some desktop printers use thermal transfer printing but can also
support direct thermal printing.
dye-sublimation printers apply heat to a ribbon to release a dye into a plastic card or
treated paper. This creates full color, photographic quality images well-suited to driver
licenses, access and identification cards, transaction cards, and on-demand photographs.
Our card printers use dye-sublimation printing.
direct thermal and thermal transfer printers create crisp images at high speed, making
them ideal for printing easily readable text and machine readable bar codes. dye
sublimation thermal printers quickly create full-color images with visual characteristics
more similar to halide-based film than to pixel-based ink jet or laser printers, making
them ideal for high quality photographs and personalized plastic cards. Some printers
also include HF (13.56 MHz) or UHF (860-960 MHz) RFId technology that can encode data
into passive RFId transponders embedded in a label, card, or wristband.
Zebra’s printers integrate company-designed mechanisms, electrical systems, and
firmware. Enclosures of metal or high-impact plastic ensure durability. Special mechanisms
optimize handling of labels, ribbons, and plastic cards. Fast, high-current electrical systems
provide consistent image quality. Mobile printers use NiMH or LiIon batteries to optimize
print quality over an extended operating shift. Firmware supports serial, parallel, Ethernet,
USB, infrared, Bluetooth, or 802.11b/g wireless communications with appropriate security
protocols. Printing instructions can be received as a proprietary language such as Zebra
Programming Language II (ZPL II®), as a print driver-provided image, or as user-defined
XML. This makes the printers easy to integrate into virtually all common computer systems
including those operating on UNIX, Linux, MS/dOS®, or Microsoft® Windows® operating
systems. Some independent software vendors, including Adobe, Oracle and SAP, have
included Zebra printing support in applications for healthcare, warehouse management,
manufacturing, passenger transportation, and retailing.
Printer Sales and Marketing
Sales. We sell our printer products primarily through distributors, value-added
resellers (VARs), and original equipment manufacturers (OEMs). We also sell our
printer products directly to a select number of named customer 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 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.
Marketing. Marketing operations encompass corporate marketing, marketing
communications, product marketing, vertical marketing, solutions marketing, market
research and channel marketing functions. Corporate marketing conducts activities
to enhance the Zebra corporate brand, corporate public relations, internal corporate
communications and our Web site. 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.
Printer 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. In February 2008, we announced that
final printer assembly will be transferred to a third-party manufacturer, Jabil Circuit, Inc.,
by the end of 2009. This action is intended to optimize our global printer product supply
chain by improving responsiveness to customer needs and increasing Zebra’s flexibility
to meet emerging business opportunities. See Note 22 to our Consolidated Financial
Statements included in this Annual Report on Form 10-K for further discussion of the
transfer and transition process.
during the transition, we will continue to manufacture some printers at our domestic
factories while increasing production by Jabil to ensure consistent flow of product to our
customers. In our factories we assemble our products largely on a configure-to-order
basis using components that are 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. We currently 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. Purchase contracts
provide for price variation in the event of commodity price changes in the cost of raw
materials. Zebra typically experiences significant variance in demand and, thus, carries
inventory and partners with key suppliers to deal with the variation. Purchases of these
components by Zebra will decline as printer assembly directly by Zebra declines and
assembly by Jabil increases.
Over the remainder of 2009, we will continue to transfer the assembly of printer product
lines to Jabil. during the transition, our goal is to decrease in-house printer production
by printer line as the assembly of those printer lines by Jabil increases. We will maintain
assembly of those printers in-house until Jabil’s quality and production yields reach
acceptable levels to ensure product availability to meet customer demands. For this
reason, we expect inventories could temporarily rise until all printer manufacturing is
transferred, in-house assembly lines are shut down and excess inventories are sold down.
Jabil will produce our printers to our design specifications in the quantities we order. Zebra
will maintain control of the supply chain including supplier selection and price negotiations
of component parts. Jabil is responsible for the procurement of the component parts
and subassemblies used in the Zebra printers it produces. Zebra has subsidiary located in
Guangzhou, China, and has an office within 10 minutes of the Jabil facility in China where
the Zebra products are assembled. This office is staffed with Zebra sourcing, engineering
and quality personnel to help ensure that we receive optimal pricing on raw materials
and the final printers meet our quality standards. Zebra printers manufactured by Jabil
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are shipped to Zebra’s regional distribution centers. The majority of the product will pass
directly through to Zebra’s customers but a small percentage will be reconfigured through
firmware downloads, packaging and some other customization before they are shipped to
customers. Some assembly will be conducted in the U.S. to satisfy customer needs.
and high speeds compared with alternative printing technologies. We view passive RFId
smart label encoding and active RFId location systems as complementary technologies
to bar coded printing, offering significant growth opportunities to Zebra as the
technologies become more widely adopted.
Printer Competition
Many companies are engaged in the design, manufacture and marketing of bar code label
printers, RFId printer-encoders and card personalization solutions.
We consider our direct competition in bar code label and receipt printing to be producers
of on-demand thermal transfer and direct thermal label printing systems, printer-encoders,
mobile printers and supplies. We also compete, however, with companies engaged in the
design, manufacture and marketing of printing systems that use alternative technologies, such
as ink-jet and laser printing. Many of these companies are substantially larger than Zebra.
dye sublimation, the technology used in our card printers, is only one of several
commercially available types of equipment used to personalize cards. We also compete
with companies that produce 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.
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 from many competitors, including the following (listed in alphabetical
order): Altech; Argox; Avery dennison; Boca Systems; Brother International; Canon; CIM;
Citizen; CognitiveTPG; ColorX; Copal; Custom; danaher; datacard; datamax-O’Neil, a
unit of dover Corporation; dymo, a Newell Rubbermaid Company; Epson; Evolis; Extech;
Fargo Electronics; Fuji; Godex; Hewlett-Packard; Hitachi; Intermec Technologies; Lexmark
International; LogickaComp; MagiCard; Matica; Microcom; Mitsubishi; NBS; Nisca; Oki
data; Olmec; Olympus; Practical Automation; Printronix; Sato; Seiko Instruments; Shinko;
Song Woo Electronics; Sony; Star Micronics; Taiwan Semiconductor; ToshibaTEC; Victor
data Systems; Woosim; and Xerox.
The supplies business is highly fragmented and competition is comprised of numerous
competitors of various sizes depending on the geographic area.
Alternative Printer Technologies
We believe thermal printing will be the label, card 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
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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
printing and other means of automatic identification. Alternative print technologies
assessed include ink jet, laser and direct marking. While we cannot be sure that new
technology will not supplant thermal printing for labels, cards and receipts, we are not
aware of any developing technology that offers the advantages of thermal printing for
our targeted applications. We continually monitor and evaluate new RFId technologies,
support their standards development, and rapidly adopt RFId into new Zebra products
and systems as new markets and applications emerge.
Zebra Enterprise Solutions Group (ESG)
Formed in 2008 based upon the acquired businesses of Navis Holdings, LLC, WhereNet
Corp., proveo AG, and Multispectral Solutions Inc., Zebra Enterprise Solutions Group
offers asset tracking and management solutions to optimize the flow of goods in complex
logistical operations. Whether tracking containers and cargo through a major port,
managing parts for lean manufacturing or managing ground support equipment at a
major airport, the automated asset tracking and management solutions from ESG improve
business processes. Utilizing the combined products offered by these businesses, ESG
provides greater asset visibility and business efficiency for the aerospace and defense,
aviation, automotive, industrial manufacturing, maritime, and transportation and logistics
industries. Customers within these industries benefit by increasing productivity, lowering
operational costs, and improving safety and security throughout their logistics operations.
A substantial majority of ESG’s business consists of perpetual software licenses and
related services including maintenance, support and consulting services. In addition, ESG
sells hardware including our proprietary real time asset management hardware. These
products and services may be bundled and sold together to customers or sold separately.
• Software Licenses. We sell perpetual software licenses on a fixed fee basis. The
amounts of the license fees are based primarily on the scope and functionality of
the licenses purchased by the customer. The solutions we provide may also include
third-party software.
• Hardware. We sell both proprietary and third-party real time asset management
hardware. Most of our hardware products provide electronic tagging of assets and
real time information regarding the assets’ locations and telematics. We sell the
hardware as part of integrated solutions and as replacement for other parts.
• Consulting Services. We provide consulting services for the planning and
implementation of our solutions including initial installation and training. Zebra’s
professional services team works with customers who are implementing our
applications for the first time, evaluating new technology automation solutions,
integrating with third-party systems or upgrading to new platforms. Services are
typically charged on a time and materials basis, although from time-to-time we may
enter into fixed fee contracts.
• Maintenance and Support. We offer support to our customers 24 hours a day, 7 days
a week, 365 days a year, usually for an annual fee, which entitles them to software
upgrades and technical support.
We believe ESG is uniquely positioned with a broad range of asset tracking and
optimization solutions to offer our customers. However, several competitors exist for
each solution ESG provides. They include Aeroscout Inc., Trimble Technologies, Ekahau
Inc., I.d. Systems Inc., Identec Solutions, Intermec Inc., and RF Code Inc., Cisco Systems
Inc., Lockheed Martin Corp., Roper Industries, Inc., Siemens AG, Motorola, Inc., Amicus,
Pinnacle VTIS, IBM, Cosmos, and Tideworks Technology.
The ESG products extend Zebra’s reach beyond passive RFId by employing
technologically advanced hardware and software solutions to locate, track, manage and
optimize high-value assets, equipment and people. We offer a wide range of scalable
real time locating systems (RTLS) technologies used to generate accurate, on-demand
information about the physical location and status of high-valued assets. Customers
benefit by utilizing the choice or combination of asset tracking products that can be
“application matched” based on ISO/IEC 24730-2, Cisco CCX Wi-Fi, precision global
positioning systems (GPS), and ultra wideband (UWB) technologies.
Our selection of RTLS asset tracking product offerings includes battery-powered active
RFId WhereTag™ tags, WhereCall™ button tags, and precision WhereTrack™ products.
These asset tags enable organizations to access accurate, real-time information on the
location and status of their assets both indoors and outdoors.
In addition, we offer a selection of RTLS infrastructure products. These products
receive tag transmissions and forward the information to the Visibility Server Software™
(a middleware application) which provides location calculations, database and system
management functions and asset visibility. The flexible infrastructure supports large tag
populations and coverage areas that can range from small to large.
We offer a broad set of software development tools for integrating ESG hardware,
middleware applications and software applications, with customer and third-party
applications. Our middleware application, Visibility Server Software, provides software
tools to design, configure, operate and troubleshoot our RTLS products. Visibility
Server Software serves as the central repository for all of the real-time location and
communication data captured by the ESG RTLS infrastructure.
ESG sells its products and services into the following major vertical markets:
• Airport Operations. Our Airport Visualizer™ provides integrated aviation solutions
and helps to optimize motorized ground support equipment and other mobile assets/
equipments on the pavement immediately adjacent to an airport terminal area or
hangers (commonly referred to as the “apron”). This solution helps improve the
operational efficiencies of mobile assets for the global aviation industry which
is faced with high costs in maintaining ample amounts of equipment, high fuel
consumption, equipment misuse, rising gas emission and high levels of equipment
congestion. As of december 31, 2008, our Airport Visualizer solution helps to
optimize the processes of approximately 1,200 airport ground service vehicles.
• Marine and Rail Terminal Operations. Installed and used at approximately 200
marine terminals around the world, our SPARCS™ (synchronous planning and real
time control system) terminal operating system (TOS) helps terminal operators
optimize the flow of containers through the facility by managing the processes of a
terminal operation. Zebra’s TOS provides users real-time visibility of containers for
better scheduling and routing, among other benefits, to lower costs, manage growth
and minimize capital investments in land and berth space. Customers operating rail
and truck terminals have begun to use our terminal operating system to improve
their logistics operations as well. Our Powerstow® solution helps terminal operators
optimize ship stowage to minimize total voyage cost and maximize efficiency.
Powerstow® offers easy-to-use planning tools that provide real-time visibility of
stowage operations. It uses graphic tools along with proprietary software to help
operators configure the placement of cargo on a ship, taking into account several
parameters such as weight and destination to improve safety and vessel utilization.
• distribution Operations. Our Yard Management Solution Suite™ provides effective
management over gate schedules and dock assignments by providing the ability
to track, in real-time, the location and status of all vehicles and their associated
inventory throughout the shipping yard or dock. Our Yard Management Suite
includes modules for dock and yard management, gate automation and scheduling
for enhanced security, enterprise asset visibility, and container tracking. These
optimize dock and yard management solutions, improve customer support, lower
operating costs and increase yard and dock capacity.
• Manufacturing Operations. We provide an integrated wireless infrastructure for real-
time location, digital messaging, telemetry, and wireless networking applications
to give manufacturers the ability to continuously manage the physical location
and status of their critical assets for improving lean processes within the core
manufacturing functions.
ESG products and services are primarily sold through ESG’s global direct sales force
which is organized around geographic and vertical markets. We complement our direct
sales through the use of other channels including systems integrators with particular
vertical market expertise.
ESG’s proprietary software and hardware are developed primarily by its internal team of
engineers. Generally, our software is warranted for 90 days after going live to function
consistently with its specifications, and our hardware is warranted to be free from
material defects in materials and workmanship for up to one year after purchase.
Customers
Zebra has sold over 7,500,000 thermal printers to customers as of december 31, 2008.
ScanSource, Inc., is our most significant customer. Our net sales to ScanSource, an
international distributor of Zebra SPG products, as a percent of our total net sales, were
as follows:
Percent of sales
Year Ended December 31,
2008
15.4
2007
16.5
2006
17.1
No other customer accounted for 10% or more of total net sales during these years.
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Sales
Net sales by product category for the last three years were (in thousands):
Product Category
Hardware
Supplies
Service and software
Shipping and handling
Cash flow hedging activities
Year Ended December 31,
2008
2007
2006
$704,992
172,106
105,113
6,843
(12,354)
$660,034
161,678
42,801
6,826
(3,060)
$578,002
150,709
25,664
6,022
(873)
$759,524
Total net sales
$976,700
$868,279
The increase in service and software net sales in 2008 is due to our ESG acquisitions.
Net sales to international customers, as a percent of total net sales, were as follows:
Percent of net sales
Year Ended December 31,
2008
54.5
2007
52.1
2006
50.0
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.
Research and Development
Zebra’s research and development expenditures for the last three years were as follows
(in thousands, except percentages):
Year Ended December 31,
2008
2007
2006
Research and development expenses – SPG
(excluding acquired in process technology)
Percent of SPG net sales
Research and development expenses – ESG
(excluding acquired in process technology)
Percent of ESG net sales
$55,735
6.3
$29,385
31.2
$50,213
6.0
$ 7,387
21.0
$48,959
6.4
—
—
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. Research and development resources are also directed toward enhancing our
enterprise solutions systems. The increase in research and development expenditures for
ESG in 2008 is mainly attributed to the acquisition of Navis Holdings, LLC late in 2007.
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 many domestic and
international trademarks. We hold 320 United States and foreign patents and have 171
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United States and foreign patent applications pending pertaining to products. The
duration of these patents ranges from 2 to 23 years. The expiration of any individual
patent would not have a significant negative impact on our business.
despite our efforts to protect our intellectual property rights, it may be possible for
unauthorized third parties to copy portions of our products or to reverse engineer
or otherwise obtain and use some technology and information that we regard as
proprietary. Moreover, the laws of some countries do not afford Zebra the same
protection to proprietary rights, as do United States laws. There can be no assurance
that legal protections relied upon by Zebra to protect its proprietary position will be
adequate. While Zebra’s intellectual property is valuable and provides certain competitive
advantages, we do not believe that the legal protections afforded to our intellectual
property are fundamental to our success.
Patents have become increasingly used by businesses generally as a strategic business
tool and in recent years the number of patent applications and grants has risen
dramatically. As a result, it is increasingly important that Zebra takes appropriate steps to
maintain and develop its own patent portfolio and reduce the risk of disputes involving
third party intellectual property rights.
Other trademarks mentioned in this report are the property of their respective holders
and include IBM, a registered trademark of International Business Machines; Kodak, a
registered trademark of Eastman Kodak; UNIX, a registered trademark of UNIX Systems
Laboratories; MS/dOS and Windows, registered trademarks of Microsoft; SAP, a
registered trademark of SAP AG; Linux, a registered trademark of Linus Torvalds; and
Accelio Present Central, a registered trademark of Accelio. Bluetooth is a trademark
owned by Bluetooth SIG and used by Zebra under license.
Employees
As of January 30, 2009, Zebra employed approximately 3,200 persons, of which 2,459
are a part of SPG, 545 are a part of ESG and the remaining are corporate employees.
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 two
reportable segments for our operations and products. Financial information about segments
and geographic areas is found in Note 18 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.
Current economic conditions and market disruptions may adversely affect Zebra’s business
and results of operations. Adverse economic conditions, in the United States or internationally,
or reduced information technology spending may adversely impact our business.
A substantial portion of our business depends on our customers’ demand for our
products and services, the overall economic health of our current and prospective
customers and general economic conditions. As widely reported, financial markets
throughout the world have been experiencing extreme disruption in recent months,
including extreme volatility in security prices, severely diminished liquidity and credit
availability, rating downgrades of certain investments and declining valuations of
others, failure and potential failures of major financial institutions and unprecedented
government support of financial institutions. These developments and the related general
economic downturn will adversely impact Zebra’s business and financial condition in a
number of ways, including impacts beyond those typically associated with other recent
downturns in the U.S. and foreign economies. The slowdown will likely lead to reduced
information technology spending by end users, which has already adversely affected
and may continue to adversely affect Zebra’s product sales. If the slowdown is severe
enough, it could necessitate further testing for impairment of goodwill, as well as the
write-down of other intangible assets, beyond those already recognized. In addition,
cost reduction actions may be necessary which would lead to additional restructuring
charges. The current tightening of credit in financial markets and the general economic
downturn will likely adversely affect the ability of Zebra’s customers, suppliers,
outsource manufacturer and channel partners (e.g., distributors and resellers) to obtain
financing for significant purchases. The tightening could result in a decrease in or
cancellation of orders for Zebra’s products and services, could negatively impact Zebra’s
ability to collect its accounts receivable on a timely basis, could result in additional
reserves for uncollectible accounts receivable being required, and in the event of the
contraction in Zebra’s sales, could lead to dated inventory and require additional reserves
for obsolescence. Significant volatility and fluctuations in the rates of exchange for the
U.S. dollar against currencies such as the euro, the British pound and the Brazilian real
could negatively impact Zebra’s customer pricing and adversely affect Zebra’s results.
Zebra is unable to predict the duration and severity of the current economic downturn
and disruption in financial markets or their effects on Zebra’s business and results of
operations, but the consequences may be materially adverse and more severe than other
recent economic slowdowns.
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.
Zebra may acquire or make investments in other businesses, technologies, services or
products. For example, in 2007 and 2008 Zebra acquired WhereNet Corp., proveo AG, Navis
Holdings, LLC, and Multispectral Solutions, Inc., which together comprise what we refer to
as the Zebra Enterprise Solutions Group. An acquisition may present business issues which
are new to Zebra. The process of integrating any acquired business, technology, service or
product into operations may result in unforeseen operating difficulties and expenditures.
Integration of an acquired company also may consume considerable management time
and attention, which could otherwise be available for ongoing operations and development
of the business. The expected benefits of any acquisition may not be realized.
Acquisitions also may involve a number of risks, including risks with respect to:
• Difficulties and uncertainties in transitioning the customers or other business
relationships from the acquired entities to Zebra,
• The loss of key employees of acquired entities,
• Ability of acquired entities to fulfill obligations to their customers,
• The discovery of unanticipated issues or liabilities,
• The failure of acquired entities to meet or exceed expected returns, and
• The acquired entities’ ability to improve internal controls and accounting systems to be
compliant with requirements applicable to public companies subject to SEC reporting.
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.
Zebra Enterprise Solutions is a new business.
Prior to the purchases in 2007, Zebra had no experience operating businesses which are
in the business conducted by Zebra Enterprise Solutions Group. The Zebra Enterprise
Solutions Group provides enterprise software solutions to customers which require
implementation in complex environments over extended periods of time and use
percentage-of-completion accounting, which has not been Zebra’s historic business.
Zebra may be a party to fixed price contracts particularly for its ESG Unit that could
become unfavorable contracts.
From time to time ESG may enter into contracts to provide services to customers for
fixed fees. Such a contract could result in material loss to Zebra if the cost to perform
such contract ultimately exceeds the fees earned on such contract.
Zebra is transferring final assembly of its thermal printers to Jabil Circuit and will be
totally dependent on Jabil for the manufacturing of such printers. A failure by Jabil to
provide manufacturing services to Zebra as Zebra requires, or any disruption in such
manufacturing services, may adversely affect Zebra’s business results.
Zebra expects this transfer to be complete by the end of 2009. In an effort to achieve
additional cost savings and operational benefits, Zebra has expanded its outsourcing
activities to include the transfer of the final assembly of its thermal printers to Jabil
Circuit’s facility in HuangPu, China.
However, to the extent Zebra relies on a third party service provider such as Jabil for
manufacturing services, Zebra may incur increased business continuity risks. Zebra
will no longer be able to exercise control over the assembly of its thermal printers or
any related operations or processes, including the internal controls associated with
operations and processes conducted by Jabil and the quality of Zebra’s products
assembled by Jabil. If Zebra is unable to effectively develop and implement its
outsourcing strategy, it may not realize cost structure efficiencies and its operating and
its financial results could be materially adversely affected.
during the transition period, Zebra’s printers will be manufactured both in the United
States by Zebra and in China by Jabil. If Zebra is unable to effectively manage its inventory
levels during the period of concurrent manufacturing, it may not have sufficient inventories
to meet customer needs. At the same time, difficulty managing inventory during the
transition could lead to excess and obsolete inventory and related resulting losses.
In addition, if Jabil experiences business difficulties or fails to meet Zebra’s
manufacturing needs, then Zebra may be unable to meet production requirements,
may lose revenue and may not be able to maintain its relationships with its customers.
Without Jabil’s continuing manufacture of Zebra’s products and the continuing operation
8
of Jabil’s facility, Zebra will have no other means of final assembly of its thermal printers
until Zebra is able to secure the manufacturing capability at another facility or develop an
alternative manufacturing facility, which could be costly and time consuming and have a
material adverse effect on Zebra’s operating and financial results.
The increased elements of risk that arise from conducting certain operating processes
in foreign jurisdictions may lead to an increase in reputational risk. during periods
of transition, greater operational risk and customer concern may exist regarding the
continuity of a high level of service delivery. The extent and pace at which Zebra is able to
move manufacturing functions to Jabil’s facility and the extent to which its customers are
affected by the transfer may be impacted by regulatory and customer acceptance issues.
Although Zebra carries business interruption insurance to cover lost revenue and profits in
an amount it considers adequate, this insurance does not cover all possible situations. In
addition, the business interruption insurance would not compensate Zebra for the loss of
opportunity and potential adverse impact, both short-term and long-term, on relations with
Zebra’s existing customers resulting from Zebra’s inability to produce products for them.
Zebra has significant operations outside the United States and sells a significant portion of
its products internationally and purchases important components from foreign suppliers. In
addition, the transfer of final assembly of its thermal printers to a Chinese facility began in
2008 and is expected to conclude in 2009. These circumstances create a number of risks.
Zebra has significant overseas operations including, in particular, an increasing presence
in China, which presents added risks. In addition, 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 operations, sales and purchases outside the United States include:
• Inadequately managing and overseeing operations that are distant and remote from
corporate headquarters,
• Fluctuating foreign currency rates could restrict sales, or increase costs of
purchasing, in foreign countries,
• Adverse changes in, or uncertainty of, local business laws or practices, including
the following:
• Foreign governments may impose burdensome tariffs, quotas, taxes, trade
barriers or capital flow restrictions,
• Restrictions on the export or import of technology may reduce or eliminate the
ability to sell in or purchase from certain markets,
• Political and economic instability may reduce demand for our products, or put our
foreign assets at risk,
• 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,
• A government controlled foreign exchange rate and limitations on the convertibility
of the Chinese Renminbi Yuan,
• The failure to implement and maintain adequate internal controls relating to these
operations,
• Transportation delays that may affect production and distribution of Zebra’s
products, and
• A limited telecommunications infrastructure.
9
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, and
• 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.
Zebra sources some of its component parts from sole source suppliers.
A disruption in the supply of such component parts could have a material adverse effect
on our operations and financial results.
Infringement 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.
Larger orders may take longer to close and may not be completely fulfilled during a
particular quarter.
Zebra has been pursuing larger customer orders which typically involve a longer sales
cycle. Such orders are more difficult to forecast, and whether a larger order is received by
Zebra in a particular quarter or deferred to a later quarter could have a material effect on
the financial results of Zebra from quarter to quarter.
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.
Zebra is implementing a new company-wide enterprise resource planning (ERP) system.
The implementation process is complex and involves a number of risks that may
adversely affect Zebra’s business and results of operations.
Zebra is currently replacing its multiple legacy business systems at its different sites with
a new company-wide, integrated enterprise resource planning (ERP) system to handle
various business, operating and financial processes for Zebra and its subsidiaries. The
new system will provide a variety of important functions, such as order entry, invoicing,
accounts receivable, accounts payable, financial consolidation, logistics, and internal and
external financial and management reporting matters.
ERP implementations are complex and time-consuming projects that involve substantial
expenditures on system hardware and software and implementation activities that can
continue for several years. Such an integrated, wide-scale implementation is extremely
complex and requires transformation of business and financial processes in order to
reap the benefits of the ERP system. Significant efforts are required for requirements
identification, functional design, process documentation, data conversion, user training
and post implementation support. Problems in any of these areas could result in
operational issues including delayed shipments or production, missed sales, billing and
accounting errors and other operational issues. System delays or malfunctioning could
also disrupt Zebra’s ability to timely and accurately process and report key components
of the results of its consolidated operations, its financial position and cash flows, which
could impact Zebra’s ability to timely complete important business processes such as the
evaluation of its internal controls and attestation activities pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002.
Until the new ERP system is fully implemented, Zebra expects to incur additional
selling, general and administrative expenses to stabilize the system, and there can be
no assurance that other issues relating to the ERP system will not occur or be identified.
Zebra’s business and results of operations may be adversely affected if it experiences
operating problems and/or cost overruns during the ERP implementation process or if the
ERP system and the associated process changes, do not function as expected or give rise
to the expected benefits.
Economic factors that 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.
10
Zebra depends on the ongoing service of its senior management and ability to attract and
retain other key personnel.
The 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.
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. 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
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 leased to Zebra under a lease terminating on June 30, 2014.
11
Zebra’s principal facilities as of december 31, 2008, are listed below:
Location
Square Footage
Manufacturing, Administrative,
Production &
Warehousing
Research
& Sales
Total
Lease Expires
Vernon Hills, Illinois, USA (S)
111,676
113,429
225,105
June 2014
Vernon Hills, Illinois, USA (S)
Lincolnshire, Illinois, USA (C)
—
—
34,000
34,000
February 2009
44,395
44,395
June 2014
Camarillo, California, USA (S)
97,921
72,156
170,077
March 2011
Warwick, Rhode Island, USA (S)
24,516
75,324
99,840
April 2009
Santa Clara, California, USA (E)
Oakland, California, USA (E)
—
—
Greenville, Wisconsin, USA (S)
45,000
Otay Mesa, California, USA (S)
25,100
McAllen, Texas, USA (S)
15,500
Flowery Branch, Georgia, USA (S) 18,115
Heerenveen, The Netherlands (S)
48,427
—
Bourne End, UK (S)
Preston, UK (S)
Total
20,757
20,757
december 2009
36,553
36,553
July 2013
5,000
4,900
2,500
2,145
46,145
24,700
50,000
March 2018
30,000
September 2011
18,000
September 2011
20,260
April 2012
94,572
January 2010
24,700
June 2014
30,450
8,600
39,050
Owned by Zebra
416,705
490,604
907,309
S – Specialty Printing Group; E – Enterprise Solution Group; C – Corporate
In conjunction with our transition of printer manufacturing to a third-party manufacturer,
we entered into a sale and leaseback transaction during 2008 for our manufacturing
facility located in Camarillo, California. In addition, during March 2009, we will be moving
our corporate headquarters to Lincolnshire, Illinois, from the Vernon Hills, Illinois, facility
and have, therefore, entered into a lease at that location.
Zebra leases various other facilities around the world, which are dedicated to
administrative, research and sales functions. These other leases, solely or in aggregate,
are not material to Zebra.
Item 3. Legal Proceedings
See Note 17 in the Notes to the Consolidated Financial Statements included in this Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 6. Selected Financial Data
Item 5. Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) DATA
(In thousands, except per share amounts)
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
2008 and 2007, as reported by the NASdAq Stock Market.
2008
High
Low
2007
First quarter
Second quarter
Third quarter
Fourth quarter
$34.80 $27.50
32.66
28.25
16.18
38.47
34.13
28.99
Source: The NASDAQ Stock Market
First quarter
Second quarter
Third quarter
Fourth quarter
High
Low
$42.38 $33.70
37.98
32.93
32.93
41.49
42.50
39.09
At February 20, 2009, the last reported price for the Class A Common Stock was $17.03
per share, and there were 352 registered stockholders of record for Zebra’s Class A
Common Stock. In addition, we had approximately 28,000 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 does not anticipate paying any cash
dividends in the foreseeable future.
Treasury Shares
during the fourth quarter of 2008, Zebra purchased 2,627,532 shares of Zebra’s Class A
common stock as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
Period
October 2008
(September 28 – October 25)
November 2008
(October 26 – November 22)
december 2008
(November 23 – 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
—
$ —
—
5,000,000
737,137
$19.10
737,137
4,262,863
1,890,395
$19.04
2,627,532
$19.06
1,890,395
2,627,532
2,372,468
2,372,468
(1) On October 27, 2008, Zebra announced that the Board authorized the purchase of up to 5,000,000 shares of
Zebra common stock at prices to be determined at management’s discretion. There was no expiration on the
authorization. All shares authorized for purchase and reflected in the above table were authorized under the
Board’s 2008 authorization. On February 17, 2009, Zebra announced that the Board authorized the purchase of an
additional 3,000,000 shares under the same terms.
Net sales
Cost of sales
Gross profit
Total operating expenses
Operating income (loss)
Income (loss) before income
taxes and cumulative effect
of accounting change
Income (loss) before
cumulative effect of
accounting change
Cumulative effect of
accounting change
Year Ended December 31,
2008
2007
2006
2005
2004
$ 976,700
$ 868,279
$ 759,524
$ 702,271
$ 663,054
497,395
479,305
494,651(1)
(15,346)
451,161
417,118
273,933
143,185
401,104
358,420
277,991(2)
80,429
348,851
353,420
207,392
146,028
320,951
342,103
175,494
166,609
(11,913)
167,375
101,642
160,282
176,084
(38,421)
110,113
69,627
106,184
115,141
—
—
1,319(3)
—
—
Net income (loss)
$ (38,421)
$ 110,113
$ 70,946
$ 106,184
$ 115,141
Earnings (loss) per share
before cumulative effect
of accounting change
Basic
diluted
Earnings (loss) per share
Basic
diluted
Weighted average
shares outstanding
Basic
diluted
$
$
$
$
(0,60)
(0.60)
(0.60)
(0.60)
$
$
$
$
1.61
1.60
1.61
1.60
$
$
$
$
0.99
0.98
1.01
1.00
$
$
$
$
1.49
1.47
1.49
1.47
$
$
$
$
1.61
1.59
1.61
1.59
64,524
64,524
68,463
68,908
70,516
70,956
71,364
72,000
71,556
72,398
12
CONSOLIDATED BALANCE SHEET DATA
(In thousands)
Results of Operations: Fourth Quarter of 2008 versus Fourth Quarter of 2007, Year ended
December 31, 2008 versus Year ended December 31, 2007
Cash and cash equivalents,
restricted cash, investments
and marketable securities
(current and long-term)(4)
$ 224,886
2008
2007
2006
2005
2004
December 31,
Net sales
Net sales by product category, percent change, and percent of total net sales for the three
months and year ended december 31, 2008, and december 31, 2007, were (in thousands,
except percentages):
Three Months Ended
December 31,
Percent
2007 Change
Percent of Percent of
Net Sales Net Sales
2007
2008
2008
$ 281,179
$ 559,189
$ 544,239
$ 557,993
Product Category
Working capital
Total assets
Long-term obligations (5)
Stockholders’ equity
271,831
298,660
850,878
1,034,278
8,452
10,250
710,738
404,836
963,142
9,969
680,554
918,415
7,709
665,062
868,044
4,011
902,693
877,681
857,972
803,893
Hardware
Supplies
Service and software
Shipping and handling
$163,510
$ 177,394
40,870
26,158
1,498
41,580
14,120
1,744
(1) Includes asset impairment charges of $157,600,000 and exit, restructuring and integration charges of $20,009,000.
Cash flow hedging activities
532
(1,265)
Total net sales
$232,568
$233,573
(7.8)
(1.7)
85.3
(14.1)
NM
(0.4)
70.3
17.6
11.2
0.7
0.2
100.0
75.9
17.8
6.0
0.88
(0.5)
100.0
(2) Includes litigation settlement of $53,392,000 and insurance receivable reserve of $12,543,000.
(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 4 in the Notes to the Consolidated Financial Statements
included in this Form 10-K.
(4) The decrease in cash and cash equivalents, restricted cash and investments and marketable securities in 2007
and 2008 was principally the result of (i) our acquisitions of WhereNet, proveo AG, and Navis during 2007 and our
acquisition of Multispectral Solutions Inc., and (ii) purchase of our stock during 2008. See Note 5 in the Notes to
the Consolidated Financial Statements included in this Form 10-K for further discussion of the acquisitions.
(5) Long-term obligations include deferred compensation and unearned revenue. See Note 19 in the Notes to
the Consolidated Financial Statements included in this Form 10-K for further discussion of the deferred
Compensation Plan.
Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Net sales for the fourth quarter of 2008, compared with the fourth quarter of 2007,
decreased 0.4%, compared to the fourth quarter of 2007. Sales weakness in our Europe,
Middle East and Africa (EMEA) territory offset sales growth in Latin America, Asia Pacific
and North America. In North America, strength in sales to large key accounts contrasted
with declining sales to channel partners and distributors. Sales by the Enterprise
Solutions Group (ESG) businesses we acquired in 2007 and 2008 also had a positive
impact on our overall sales performance for the fourth quarter of 2008. Lower gross
margin was affected by unfavorable changes in foreign exchange rates and product mix.
Operating expenses increased as a result of ESG related acquisitions and higher costs for
exit, restructuring and integration, offset by reductions in operating expenses to contain
costs in the current difficult business environment. during the fourth quarter, we also
took charges totaling $157,600,000 for the impairment of goodwill, intellectual property
and other assets.
Sales for all of 2008 increased by 12.5% compared to 2007. All geographic regions
contributed to this growth, which was also aided by sales related to the acquisitions
we made in 2007 to form our ESG business group. Gross profit margin also increased
principally because of favorable foreign exchange rates and product mix due to higher
margin ESG products. Increased operating expenses were due to our ESG acquisitions,
increased amortization of intangibles and costs related to the integration and
restructuring of our businesses.
13
Product Category
2008
Year Ended
December 31,
Percent
2007 Change
Percent of Percent of
Net Sales Net Sales
2007
2008
Hardware
Supplies
$704,992
$660,034
172,106
161,678
6.8
6.4
Service and software
105,113
42,801
145.6
Shipping and handling
6,843
6,826
Cash flow hedging activities
(12,354)
(3,060)
Total net sales
$976,700
$868,279
0.2
NM
12.5
72.2
17.6
10.8
0.7
(1.3)
100.0
76.1
18.6
4.9
0.8
(0.4)
100.0
The increase in service and software revenue in 2008 is primarily due to the increased
sales in ESG since that business’ sales have a high concentration of service and software,
and the Navis business, which constitutes a significant part of ESG, was not acquired
until late in the fourth quarter of 2007.
Net sales to customers by geographic region, percent changes and percent of total net
sales for the three months and year ended december 31, 2008, and december 31, 2007,
were (in thousands, except percentages):
Geographic Region
2008
Three Months Ended
December 31,
Percent
2007 Change
Percent of Percent of
Net Sales Net Sales
2007
2008
Europe, Middle East
and Africa
Latin America
Asia-Pacific
$ 82,375
$ 93,895
(12.3)
17,871
20,338
15,452
16,100
Total International
120,584
125,447
North America
Total net sales
111,984
108,126
$232,568
$233,573
15.7
26.3
(3.9)
3.6
(0.4)
35.4
7.7
8.7
51.8
48.2
40.2
6.6
6.9
53.7
46.3
100.0
100.0
Geographic Region
2008
Year Ended
December 31,
Percent
2007 Change
Percent of Percent of
Net Sales Net Sales
2007
2008
Selling and marketing expenses changes, compared to the same periods in 2007, are due to
the following (in thousands):
Three Months Ended
December 31, 2008
Year Ended
December 31, 2008
Europe, Middle East
and Africa
Latin America
Asia-Pacific
Total International
North America
Total net sales
$358,913
$320,225
76,489
97,032
60,090
71,871
532,434
452,186
444,266
416,093
$976,700
$868,279
12.1
27.3
35.0
17.1
6.8
12.5
36.8
7.8
9.9
54.5
45.5
36.9
6.9
8.3
52.1
47.9
Payroll and benefit costs
Advertising and market development fund costs
Professional services expenses
Travel and entertainment expenses
Other changes
100.0
100.0
Total (decreases) increases
$(1,926)
(640)
344
—
(1,028)
$(3,250)
$5,365
1,997
1,451
1,334
(1,379)
$8,768
Notable weakness in sales in EMEA from the economic downturn began in the third
quarter of 2008 and continued into the fourth quarter. This trend offset continued sales
growth in our Latin America, Asia Pacific and North America regions. Service and
software increased 85.3% for the fourth quarter of 2008 from the fourth quarter of 2007
principally due to the recent acquisitions in ESG. For the fourth quarter, unfavorable
foreign exchange movements decreased consolidated sales growth by 2.8 percentage
points and EMEA sales growth by 7.0 percentage points.
For the full year, printer unit volume increased 5.7%, with particular strength in mobile
printers. Average unit prices declined principally because of a shift in product mix, with
a decline in tabletop printers and relative strength of mobile and desktop printers. We
also had ongoing strength in supplies, aftermarket and service revenues. Service and
software increased 145.6% principally due to the recent acquisitions in ESG. Favorable
foreign exchange movements added 0.6 percentage points to consolidated growth for
the full year and 1.7 percentage points to EMEA growth. Cash flow hedging activities
decreased revenues by $12,354,000 for the full year as a result of foreign exchange rates
of hedging contracts being in excess of the actual month end foreign exchange rates.
Gross Profit
Gross profit information is summarized below (in thousands, except percentages):
December 31,
2008
2007
Percent
Change
Percent of
Net Sales
2008
Percent of
Net Sales
2007
Three months ended
Year ended
$110,889
479,305
$113,298
417,118
(2.1)
14.9
47.7
49.1
48.5
48.0
The decrease in gross profit margin for the fourth quarter was due to unfavorable
movements in foreign exchange movements and less favorable product mix in SPG,
offset by higher margin ESG products gross margins. Foreign currency movements, net of
hedging activities, decreased fourth quarter gross profit by $4,352,000. Foreign currency
movements, net of hedging activities, for the full year increased gross profit by $6,391,000.
Selling and Marketing Expenses
Selling and marketing expenses are summarized below (in thousands, except percentages):
December 31,
2008
2007
Percent
Change
Percent of
Net Sales
2008
Percent of
Net Sales
2007
Three months ended
Year ended
$ 32,433
130,764
$ 35,683
121,996
(9.1)
7.2
13.9
13.4
15.3
14.1
Selling and marketing expenses decreased in the fourth quarter due to a cost reduction
program consisting primarily of headcount reductions implemented during the second
half of 2008 in response to the current difficult business environment. Offsetting that,
in part, were changes related to the ESG acquisitions, which increased selling and
marketing expenses by $2,436,000 during the fourth quarter and $12,528,000 for the full
year of 2008.
Research and Development Costs
The development of new products and enhancement of existing products are important
to Zebra’s business and growth prospects. To maintain and build our product pipeline,
we made investments in research and development, summarized below (in thousands,
except percentages):
December 31,
2008
2007
Percent
Change
Percent of
Net Sales
2008
Percent of
Net Sales
2007
Three months ended
Year ended
$20,653
85,120
$15,642
57,600
32.0
47.8
8.9
8.7
6.7
6.6
quarterly product development expenses fluctuate widely depending on the status of
ongoing projects. We are committed to a long-term strategy of significant investment
in product development. Changes in research and development costs, compared to the
same periods in 2007, are due to the following (in thousands):
Payroll and benefit costs
Professional services expenses
Project expenses
Office services costs
Other changes
Total increases
Three Months Ended
December 31, 2008
Year Ended
December 31, 2008
$4,029
$17,867
748
(214)
428
20
2,732
2,120
2,121
2,680
$5,011
$27,520
The increases are primarily related to the ESG acquisitions, which increased research and
development costs by $3,774,000 during the fourth quarter and $18,833,000 for the full
year of 2008.
14
General and Administrative Expenses
General and administrative expenses are summarized in the table below (in thousands,
except percentages):
integration costs were $3,359,000. See Note 22 of the Consolidated Financial Statements
included in this Annual Report on Form 10-K for a more detailed discussion of the exit,
restructuring and integration charges.
December 31,
2008
2007
Percent
Change
Percent of
Net Sales
2008
Percent of
Net Sales
2007
Three months ended
Year ended
$20,090
87,885
$21,855
81,356
(8.1)
8.0
8.6
9.0
9.4
9.4
Changes in general and administrative expenses, compared to the same periods in 2007,
are due to the following (in thousands):
Three Months Ended
December 31, 2008
Year Ended
December 31, 2008
Payroll and benefit costs
Information systems and communications costs
Sales meeting expenses
depreciation expenses
Other changes
Total (decreases) increases
$(2,186)
49
—
687
(315)
$(1,765)
$ (375)
1,065
2,228
2,343
1,268
$6,529
General and administrative expenses decreased in the fourth quarter due to a cost
reduction program consisting primarily of headcount reductions implemented during the
second half of 2008 in response to the current difficult business environment. Offsetting
that, in part, were changes related to the ESG acquisitions, which increased general and
administrative expenses by $1,134,000 during the fourth quarter and $6,640,000 for the
full year of 2008.
Amortization of Intangible Assets
Amortization of intangible assets increased $7,447,000 during 2008 due to our acquisitions
of Navis, LLC in december 2007 and Multispectral Solutions, Inc., in April 2008. See Note 5
of the Consolidated Financial Statements included in this Annual Report on Form 10-K for
a more detailed discussion of the recent acquisitions.
Asset impairment charges
during the fourth quarter, Zebra recorded asset impairment charges in the amount of
$157,600,000. These charges related to the write-down of assets related to our recent
ESG acquisitions and intellectual property because of changes in valuations as a
result of the current economic conditions and the business outlook. See Note 13 of the
Consolidated Financial Statements included in this Annual Report on Form 10-K for a
more detailed discussion of the asset impairment charges.
Exit, restructuring and integration charges
For the fourth quarter of 2008, Zebra recorded exit costs in the amount of $3,514,000
related to the transfer of our printer manufacturing to a third-party manufacturer and the
closure of our Warwick, Rhode Island supplies manufacturing facility. We also recorded
restructuring charges in the amount of $2,653,000 related to various organization
changes we made in december 2008 in order to reduce costs. Integration costs related to
the combination of our most recent acquisitions to form the Enterprise Solutions Group
and were $1,624,000 for the fourth quarter. For the year, exit costs were $13,997,000 and
15
Operating Income (Loss)
Operating income (loss) is summarized in the following table (in thousands, except
percentages):
December 31,
2008
2007
Percent
Change
Percent of
Net Sales
2008
Percent of
Net Sales
2007
Three months ended
Year ended
$(132,349)
(15,346)
$ 36,862
143,185
NM
NM
(56.9)
(1.6)
15.8
16.5
The operating loss for 2008 is the result of the impairment charges we recorded in the
fourth quarter, which totaled $157,600,000. See Note 13 of the Consolidated Financial
Statements included in this Annual Report on Form 10-K for a more detailed discussion of
the asset impairment charges. Also significantly contributing to the operating loss in 2008
were exit, restructuring and integrations costs of $20,009,000, offset by the WhereNet
litigation/claim settlement of $5,302,000. See Note 22 for further information related to
the exit, restructuring and integration costs and Note 5 for further information related to
the litigation/claim settlement.
Non-operating Income and Expenses
Zebra’s non-operating income and expense items are summarized in the following table
(in thousands, except percentages):
Investment income
Foreign exchange gains
Other, net
Three Months Ended
December 31,
Year Ended
December 31,
2008
$1,295
2,640
(277)
2007
$8,545
553
231
2008
$1,281
3,518
(1,366)
2007
$23,966
523
(299)
Total other income
$3,658
$9,329
$3,433
$24,190
Rate of Return Analysis:
Average cash and marketable
securities balances
$235,871
$375,269
$253,033
$420,184
Annualized rate of return
2.2%
9.1%
0.5%
5.7%
Cash and marketable securities balances and resulting investment income for 2008 have
decreased substantially compared to 2007 as a result of payments for recent acquisitions
and for the repurchase of Zebra Class A common stock. during the third quarter of 2008,
Zebra recorded losses on an auction rate security in the amount of $4,374,000 and on
a long-term equity investment which was included in other assets in the amount of
$2,897,000. See Note 3 to the Consolidated Financial Statements for further discussion
of the valuation of the auction rate securities. Excluding these write-downs, Zebra’s
annualized rate of return would have been 3.4% for 2008.
during 2007, we liquidated all of our interests in our partnership holdings. As a result of
these liquidations, we recorded investment income of $9,246,000 related to gains on the
liquidations of the partnerships during 2007, $4,369,000 of which was recognized in the
fourth quarter. Excluding these gains, Zebra’s 2007 annualized rate of return would have
been 4.5% for the fourth quarter and 3.5% for the year.
Income Taxes
The effective income tax rate for the fourth quarter was 8.8% compared with 33.3% for
the same quarter last year. For the full year of 2008, the effective income tax rate was not
meaningful because a substantial portion of the impairment charges were not deductible
for income tax purposes. The fourth quarter effective income tax rate was also affected
by the impairment charges. For 2007, the effective income tax rate was 34.2%.
Net Income (Loss)
Zebra’s net income (loss) is summarized below (in thousands, except per share amounts):
Three Months Ended
December 31,
Year Ended
December 31,
2008
2007
2008
2007
Net income (loss)
$ (117,361)
$ 30,803
$ (38,421)
$ 110,113
diluted earnings (loss)
per share
$
(1.88)
$ 0.45
$
(0.60)
$
1.60
The net loss for 2008 is the result of pre-tax impairment charges of $157,600,000 that we
recorded in the fourth quarter. See Note 13 of the Consolidated Financial Statements
included in this Annual Report on Form 10-K for a more detailed discussion of the asset
impairment charges. Also significantly contributing to the net loss in 2008 were exit,
restructuring and integration costs of $20,009,000, offset by the WhereNet litigation/
claim settlement of $5,302,000. See Note 22 for further information related to the exit,
restructuring and integration costs and Note 5 for further information related to the
litigation/claim settlement.
Business Groups
Specialty Printing Group (in thousands, except percentages)
Three Months Ended
December 31,
Percent
2007 Change
Percent of Percent of
Net Sales Net Sales
2007
2008
2008
Net sales
Cost of sales
Gross profit
Operating expenses
$210,494
$217,229
113,187
111,889
97,307
105,340
66,781
51,599
Operating income
$ 30,526
$ 53,741
(3.1)
1.2
(7.6)
29.4
(43.2)
100.0
100.0
53.8
46.2
31.7
14.5
51.5
48.5
23.8
24.7
Year Ended
December 31,
2008
Percent
2007 Change
Percent of Percent of
Net Sales Net Sales
2007
2008
Net sales
Cost of sales
Gross profit
$882,459
$833,034
454,337
430,782
428,122
402,252
Operating expenses
221,934
188,661
Operating income
$206,188
$213,591
5.9
5.5
6.4
17.6
(3.5)
100.0
100.0
51.5
48.5
25.1
23.4
51.7
48.3
22.6
25.7
Net sales in our Specialty Printing Group (SPG) decreased 3.1% during the fourth
quarter of 2008 compared with the fourth quarter of 2007. Year-over-year sales growth
in our Latin America, Asia Pacific and North America regions offset sales weakness in
EMEA related to more difficult general economic conditions in the territory. 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:
Three months ended
Year ended
December 31,
2008
18.6
19.1
2007
16.6
11.1
The diversity of our business across verticals and channels benefited us during the fourth
quarter, compared to the fourth quarter of 2007. SPG had its strongest quarter of the year
with key accounts, which offset lower demand in the channel. In addition to shipments
to retailers and small package delivery, we also experienced strong sales into healthcare,
government and mobile workforce.
Our international sales are denominated in multiple currencies, primarily the dollar,
pound and euro. This directly causes our reported sales to be subject to fluctuations
based on changes in currency rates. To partially protect Zebra against these currency rate
fluctuations, we hedge a portion of the anticipated euro-denominated sales. We estimate
that foreign exchange movements of the euro and the pound versus the dollar had a
negative impact of $6,540,000 on sales, net of the hedging activities, during the fourth
quarter of 2008. For the full year, there was a net positive impact of the currency rate
fluctuations and hedging activities of $5,586,000. See Note 16 to the Consolidated Financial
Statements included in this report for a more detailed discussion of our hedging program.
Printer unit volumes and average selling price information is summarized below:
Total printers shipped
Average selling price of printers shipped
Total printers shipped
Average selling price of printers shipped
Three Months Ended
December 31,
2008
249,902
$538
2007
235,267
$600
Year Ended December 31,
2008
972,478
$594
2007
919,909
$581
Percent
Change
6.2
(10.3)
Percent
Change
5.7
2.2
For 2008, unit volumes increased in our midrange and mobile printer lines while unit
volumes decreased in the high-end tabletop and card printer lines compared to the
comparable periods in 2007. during the fourth quarter of 2008, average unit selling prices
decreased in all printer product lines in large part due to the decrease in euro and pound
exchange rates.
Gross profit margin for SPG was affected by unfavorable changes in product mix and
foreign exchange rates. Foreign currency movements, net of hedging activities, increased
gross profit by $6,391,000 for the full year and decreased fourth quarter gross profit by
$4,352,000.
16
Operating expense changes for SPG in 2008, compared to the same periods in 2007, are
due to the following (in thousands):
Three Months Ended
December 31, 2008
Year Ended
December 31, 2008
$(1,847)
$ 3,530
Payroll and benefit costs
Trade show expenses
Advertising and market development fund costs
Professional services cost
Information technology expenses
Sales meeting expenses
Stock based compensation expenses
Exit and restructuring costs
Impairment charges
Gain on sale of assets
Facility relocation costs
Other changes
Total increases
(680)
(744)
578
(646)
—
(970)
6,005
14,680
—
—
(1,194)
$15,182
Enterprise Solutions Group (in thousands, except percentages)
Three Months Ended
December 31,
Percent
2007 Change
Percent of Percent of
Net Sales Net Sales
2007
2008
2008
Net sales
Cost of sales
Gross profit
Operating expenses
$ 22,074
$ 16,345
8,492
13,582
163,208
8,366
7,959
8,961
Operating loss
$(149,626)
$ (1,002)
35.1
1.3
70.6
NM
NM
100.0
100.0
38.5
61.5
739.4
(677.9)
51.3
48.7
54.8
(6.1)
Year Ended
December 31,
2008
Percent
2007 Change
Percent of Percent of
Net Sales Net Sales
2007
2008
Net sales
Cost of sales
Gross profit
Operating expenses
$ 94,241
$ 35,245
43,059
51,183
217,149
20,379
14,866
26,121
167.4
111.3
244.3
NM
NM
100.0
100.0
45.7
54.3
230.4
(176.1)
57.8
42.2
74.1
(31.9)
$33,273
Operating loss
$(165,966)
$(11,255)
(1,013)
1,637
1,890
(1,794)
1,508
(2,770)
16,489
14,680
1,347
1,092
(629)
The 2008 payroll and benefit cost increase includes approximately $550,000 for
severance not related to the exit activities. Exit costs relate to the transfer of our printer
manufacturing to a third-party manufacturer and the closure of our Warwick, Rhode Island
supplies manufacturing facility. Restructuring costs relate to organization changes made
in december 2008. See Note 22 to the Consolidated Financial Statements included in this
Annual Report on Form 10-K for a more detailed discussion of the exit and restructuring
costs. Facility relocation costs relate to the move of our High Wycombe, UK facility into
a new location. Impairment charges relate to the write-down of intellectual property
because of changes in valuations related to current economic conditions and the business
outlook. See Note 13 of the Consolidated Financial Statements included in this Annual
Report on Form 10-K for a more detailed discussion of the asset impairment charges.
Absent the exit and restructuring costs and impairment charges, the fourth quarter
reductions in expenses reflect the cost reduction program initiated during the quarter.
during 2008, we completed a sale and leaseback transaction for our manufacturing
facility located in Camarillo, California. Zebra received net proceeds of $14,796,000
against a net book value of $10,669,000. Of the $4,127,000 gain, $3,006,000 was deferred
and will be applied against future rental payments, and $1,121,000 was recognized in
general and administrative expenses.
during 2007 and 2008, Zebra acquired four companies which have been combined
to make up our Enterprise Solutions Group (ESG). On January 25, 2007, we acquired
WhereNet Corp., a provider of active radio frequency identification (RFId) based
wireless solutions used to track and manage enterprise assets. On July 2, 2007, we
acquired proveo AG, a provider of complete hardware and software systems for tracking
motorized vehicles using global positioning systems (GPS). On december 14, 2007,
we acquired Navis Holdings, LLC, a provider of software solutions to optimize the flow
of goods through marine terminals and other operations managing cargo movement
through ports and intermodal facilities. On April 1, 2008, we acquired Multispectral
Solutions Inc., a global provider of ultra wideband (UWB) real-time locating systems and
other UWB-based technology. Together, these companies give Zebra the ability to deliver
more high-value applications that help our customers identify, track and manage assets,
transactions and people.
Gross profit margin for ESG in 2008 were significantly higher than in 2007 due to the
margins of the software business added in late 2007, as a result of the Navis acquisition,
being significantly higher than the hardware business we had in 2007.
ESG results for the fourth quarter of 2008 reflect spending rates for all of the businesses
acquired during 2007 and 2008 that comprise ESG. The operating expenses for ESG for
all of 2008 are not comparable to the operating expenses for 2007 because the operating
expenses for 2007 do not include the financial results for all of those businesses.
ESG’s fourth quarter results also reflect a reduction in operating expenses during the
second half of the year. These cost reduction efforts reduced ESG’s employee count
by approximately 40. Operating expenses for the fourth quarter and the full year
reflect a write-down of assets in the amount of $142,920,000 related to our recent ESG
acquisitions and intellectual property because of changes in valuations as a result of the
current economic conditions and the business outlook.
17
Increases in ESG operating expenses in 2008, compared to the same periods in 2007, are
due to the following (in thousands):
General operating expense increase
related to business acquired
Stock based compensation expenses
Amortization expense
Acquired in process technology
Acquisition integration expenses
Impairment charges
WhereNet escrow claim net settlement
Other changes
Total increases
Three Months Ended
December 31, 2008
Year Ended
December 31, 2008
$ 7,379
$ 41,459
912
1,408
—
1,624
142,920
—
4
$154,247
3,152
7,316
(1,853)
3,359
142,920
(5,302)
(23)
$191,028
Ongoing strength in international territories, with notable growth in Europe, Middle East
and Africa (EMEA) of 21.0% for the full year over 2006, helped drive overall sales growth
in 2007. For 2007, sales growth benefited from a 12.4% 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 service and software sales, which is a result
of our recent acquisitions. Favorable foreign exchange movements added 3.9 percentage
points to consolidated growth and 11.0 percentage points to growth in EMEA for the
fourth quarter.
Printer unit volumes and average selling price information is summarized below:
Total printers shipped
Average selling price of printers shipped
919,909
$581
818,413
$598
12.4
(2.8)
Year Ended December 31,
2006
2007
Percent
Change
See Note 5 of the Notes to the Consolidated Financial Statements for further information
related to the WhereNet escrow claim net settlement, Note 23 for further information
related to acquisition integration costs, and Note 13 for further information related to the
impairment charges.
For all of 2007, printer unit volumes for nearly all printer categories increased, with notable
strength in mid-range, mobile and desktop 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 2.8% decrease in the average selling price of printers shipped.
Comparison of Years Ended December 31, 2007 and 2006
Net sales
Net sales by product category, related percent changes and percent of total net sales for
2007 and 2006 were as follows (in thousands, except percentages):
Product Category
2007
2006 Change
Year Ended
December 31,
Percent of Percent of
Percent Total Sales Total Sales
2006
2007
Gross Profit
Gross profit information is summarized below (in thousands except percentages):
For the Year Ended
december 31, 2007
december 31, 2006
Percent Change
Gross Profit
Percent of
Net Sales
$417,118
358,420
16.4
48.0
47.2
Hardware
Supplies
Service and software
Shipping and handling
$660,034
$578,002
161,678
150,709
42,801
6,826
25,664
6,022
Cash flow hedging activities
(3,060)
(873)
Total net sales
$868,279
$759,524
14.2
7.3
66.8
13.4
NM
14.3
76.1
18.6
4.9
0.8
(0.4)
100.0
76.1
19.8
3.4
0.8
(0.1)
100.0
Net sales to customers by geographic region, related percent changes, and percent of
total net sales for 2007 and 2006 were as follows (in thousands, except percentages):
The improvement in gross profit margin for 2007 was due to favorable foreign exchange
movements and lower variances offset by an unfavorable product mix change.
Selling and Marketing Expenses
Selling and marketing expenses are summarized below (in thousands, except percentages):
For the Year Ended
december 31, 2007
december 31, 2006
Percent Change
Selling and
Marketing Expenses
$121,996
96,788
26.0
Percent of
Net Sales
14.1
12.7
Geographic Region
2007
2006 Change
Year Ended
December 31,
Percent of Percent of
Percent Total Sales Total Sales
2006
2007
Europe, Middle East and Africa $320,225
$264,711
Latin America
Asia-Pacific
Total International
North America
Total sales
60,090
71,871
53,619
61,374
452,186
379,704
416,093
379,820
$868,279
$759,524
21.0
12.1
17.1
19.1
9.6
14.3
36.9
6.9
8.3
52.1
47.9
34.8
7.1
8.1
50.0
50.0
100.0
100.0
Higher selling and marketing expenses in 2007 compared to 2006 were a result of
increased payroll costs of $17,691,000, increased advertising and market development
funding of $1,131,000, increased professional services of $472,000, and higher travel and
entertainment expenses of $1,518,000. These increases were related, in part, to recent
acquisitions, which increased selling and marketing expenses by $9,255,000 during 2007.
18
Research and Development Costs
Research and development costs are summarized below (in thousands, except percentages):
Operating Income
Operating income is summarized in the following table (in thousands, except percentages):
For the Year Ended
december 31, 2007
december 31, 2006
Percent Change
Research and
Development Costs
Percent of
Net Sales
$57,600
48,959
17.6
6.6
6.4
For the Year Ended
december 31, 2007
december 31, 2006
Percent Change
Operating Income
$143,185
80,429
78.0
Percent of
Net Sales
16.5
10.6
For 2007, research and development expenses increased as a result of increased payroll
costs of $6,950,000 and higher professional services costs of $1,543,000. These increases
were related, in part, to recent acquisitions, which increased research and development
expenses by $7,387,000 during 2007.
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,
General and Administrative Expenses
General and administrative expenses are summarized below (in thousands, except
percentages):
For the Year Ended
December 31, 2007
december 31, 2006
Percent Change
General and
Administrative Expenses
Percent of
Net Sales
$81,356
62,656
29.8
9.4
8.2
For 2007, general and administrative expenses increased due to higher payroll costs of
$12,911,000 and higher information systems expenses of $1,546,000. These increases
were related, in part, to recent acquisitions, which increased general and administrative
expenses by $2,138,000 during 2007.
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 patents and other licenses and are being amortized over 4 to 7
years resulting in an incremental charge of $456,000 per quarter.
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 had been 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 was unable
to pay the judgment awarded to us. We reviewed the situation and determined that a loss
is probable, and, therefore, reserved 100% of the balance due, which was $12,543,000 at
december 31, 2006.
Investment income
Foreign exchange gains (losses)
Other, net
Total other income (expense)
Rate of Return Analysis:
Average cash and marketable
securities balances
Annualized rate of return
2007
$ 23,966
523
(299)
$ 24,190
2006
$ 23,182
(635)
(1,334)
$ 21,213
$420,184
5.7%
$551,714
4.2%
during 2007, we began liquidating all of our interests in our partnership holdings. As
a result of these liquidations, we recorded investment income of $9,246,000 related to
gains on the liquidations of the partnerships during 2007.
Income Taxes
The effective income tax rate for 2007 was 34.2% versus 31.5% for 2006. The increase
in the effective tax rate is a result of the increased impact in 2006 of permanent tax
differences, including tax-exempt interest income, on the effective income tax rate due
to lower taxable income as a result of the Paxar settlement. In addition, we reduced tax
reserves in 2006 totaling $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 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
Year Ended December 31,
2007
2006
$110,113
$ 1.60
$ 69,627
$ 0.98
19
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, and SFAS
No. 123(R) required 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.
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,
2007
$110,113
$ 1.60
2006
$ 70,946
$ 1.00
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 four types of software and record revenue as follows:
• Our Enterprise Solutions Group has fixed fee software implementation projects,
for which we use the percentage of completion method for revenue recognition.
Under this method of accounting, we recognize revenue based on the ratio of
costs incurred to total estimated costs. If increases in projected costs-to-complete
are sufficient to create a loss contract, the entire estimated loss is charged to
operations in the period the loss first becomes known.
• 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.
• We recognize license revenue under Statement of Position No. 97-2, “Software
Revenue Recognition” (“SOP 97-2”), as amended by Statement of Position No.
98-9, “Software Revenue Recognition, With Respect to Certain Transactions”
(“SOP 98-9”), when (1) a signed contract is obtained; (2) delivery of the product has
occurred; (3) the license fee is fixed or determinable; and (4) collection is probable.
Maintenance and Support Agreements
We enter into post-contract maintenance and support agreements. Revenues are
recognized ratably over the service period and the cost of providing these services is
expensed as incurred.
20
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.
Zebra enters 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 determined by vendor specific
objective evidence. The revenue for each individual product is then recognized when the
recognition criteria for that product is fully met.
Investments and Marketable Securities
Investments and marketable securities at december 31, 2008, consisted of the following:
U.S. government securities
State and municipal bonds
Corporate bonds
22.5%
76.1%
1.4%
We classify our debt and marketable equity securities in one of three categories: trading,
available-for-sale or held-to-maturity. Trading securities are bought and held principally
for the purpose of selling them in the near term. Held-to-maturity securities are those
debt securities that Zebra has the ability and intent to hold until maturity. All securities
not included in trading or held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value. Held-to-maturity
securities are recorded at amortized cost, adjusted for the amortization or accretion of
discounts or premiums. Unrealized holding gains and losses on trading securities are
included in earnings. Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported as a separate
component of stockholders’ equity until realized. As of december 31, 2008, Zebra’s
investments in marketable debt securities are classified as available-for-sale. In addition,
as of december 31, 2008, all of our investments in marketable debt securities with
maturities greater than one year are classified as long-term investments on the balance
sheet due to our ability to hold them until maturity.
See Note 3 in the Notes to the Consolidated Financial Statements included in this Form
10-K for the fair value discussion of auction rate security investment valuations.
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,
21
• An active collection effort by regional credit functions, reporting directly to the
corporate financial officers, and
• Credit insurance on the majority of our international revenues.
We reserve for estimated credit losses based upon historical experience and specific
customer collection issues. Over the last three years, accounts receivable reserves
varied from 0.6% to 3.3% of total accounts receivable. Accounts receivable reserves
as of december 31, 2008, were $2,734,000, or 1.8% of the balance due. We feel this
reserve level is appropriate considering the quality of the portfolio as of december 31,
2008. While credit losses have historically been within expectations and the provisions
established, we cannot guarantee that our credit loss experience will continue to be
consistent with historical experience.
Inventories
We value our inventories at the lower of the actual cost to purchase or manufacture using
the first-in, first-out (FIFO) method, or the current estimated market value. We review
inventory quantities on hand and record a provision for excess and obsolete inventory
based on forecasts of product demand and production requirements for the subsequent
twelve months.
Over the last three years, our inventory reserves have ranged from 5.9% to 14.2% of
gross inventory. As of december 31, 2008, inventory reserves were $7,172,000, or 6.7% of
gross inventory. We feel this reserve level is appropriate considering the quantities and
quality of the inventories as of december 31, 2008.
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
annual assessment during June 2008 and determined that our goodwill was not impaired
as of the end of May 2008.
Goodwill of a reporting unit should be tested for impairment between annual tests if
an event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount. Examples of such events or
circumstances include:
• Significant adverse change in legal factors or in the business climate,
• Adverse action or assessment by a regulator,
• Unanticipated competition,
• Loss of key personnel,
• More-likely-than-not expectation that a reporting unit or a significant portion of a
reporting unit will be sold or otherwise disposed of,
• Testing for recoverability under SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, of a significant asset group within a reporting unit,
• Recognition of a goodwill impairment loss in the financial statement of a subsidiary
that is a component of a reporting unit, or
• Allocation of a portion of goodwill to a business to be disposed of.
due to the deterioration of the economy and a significant reduction in the price of our stock,
we performed an interim test of our goodwill in the fourth quarter of 2008 and determined
that the goodwill associated with our ESG segment was impaired. See Note 13 of the
Consolidated Financial Statements for further discussion of this impairment charge.
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:
Zebra concluded U.S. federal income tax audits for tax years 2005 and 2006, during 2008.
The 2007 tax year is open to audit. As a result of the concluded audits, additional income
tax expense in the amount of $758,949 was incurred. In addition, interest expense in the
amount of $146,937, net of tax benefits, was incurred. These amounts are included as
part of current year income tax expense. The tax years 2004 through 2007 remain open to
examination by various state taxing jurisdictions. Tax authorities in the United Kingdom
have completed income tax audits through tax years ending december 31, 2006.
• 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
and the undiscounted cash flow test has failed in the case of amortizable assets, we
measure impairment based on projected discounted cash flows using a discount rate that
incorporates the risk inherent in the cash flows.
during the fourth quarter of 2008, we determined that certain impairment indicators
existed related to identified intangible assets in both our SPG and ESG businesses and
conducted a special impairment test of intangibles. This test resulted in an impairment
charge during the fourth quarter of 2008. See Note 13 of the Consolidated Financial
Statements for further discussion of this impairment charge.
Net intangible assets, long-lived assets and goodwill amounted to $293,078,000 as of
december 31, 2008.
Income Taxes
On January 1, 2007, we adopted Financial Accounting Standards Board (FASB)
Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of
FASB Statement No. 109. According to FIN No. 48, we identified, evaluated, and measured
the amount of income tax benefits to be recognized for all of our income tax positions.
during 2008, we recognized an increase of approximately $4,000,000 in the liability for
unrecognized tax benefits related to a recent Zebra acquisition. A reconciliation of the
beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Balance at January 1, 2008
Additions based on tax positions related to the current year
Balance at december 31, 2008
$ —
4,000
$ 4,000
Zebra’s continuing practice is to recognize interest and penalties related to income tax
matters as part of income tax expense.
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.
Stock-Based Compensation
As of december 31, 2008, Zebra had a general stock-based compensation plan and a
stock purchase plan under which our stock was available for future grants and sales.
We account for these plans in accordance with SFAS No. 123(R), Share-Based Payment.
Zebra recognizes compensation costs over the vesting period of 1 month to 5 years. See
Notes 2 and 4 to the Consolidated Financial Statements included in the Form 10-K for
further information.
Liquidity and Capital Resources
As of december 31, 2008, Zebra had $224,886,000 in cash, restricted cash, and
investments and marketable securities, compared with $281,179,000 at december 31,
2007. The impact of foreign currency was a significant factor in our cash flow changes
in 2008. The pound exchange rate decreased from 2.00 at december 31, 2007 to 1.45 at
december 31, 2008. Additional factors affecting these balances during 2008 include (note
that changes discussed below include the impact of foreign currency):
• Operations provided a net cash increase of $138,282,000 primarily from net income
after adding back non-cash items.
• Accounts receivable increased $21,891,000 with $19,227,000 of the increase resulting
from the impact of foreign currency. days sales outstanding increased to 60 at the
end of 2008 from 59 at the end of 2007.
• Inventories increased $26,222,000 as a result of our printer manufacturing being
transferred to a third-party manufacturer. Of this increase, $11,460,000 resulted from
the impact of foreign currency.
• Accounts payable decreased by $17,891,000 after the foreign currency impact of
$22,533,000.
• Deferred revenue increased $11,281,000 as a result of acquiring more long-term
contracts in our ESG business.
• Taxes payable decreased $1,002,000 due to the timing of tax payments made in 2008.
• Purchases of property and equipment totaled $40,889,000.
• Proceeds from the sale of our Camarillo facility were $14,796,000.
22
• Purchase of Multispectral Solutions Inc., totaled $18,366,000, and an increase to the
purchase price of Navis, LLC, was $222,000.
• Intangibles increased $1,384,000 due to payments for licenses to use patents.
• Net sales of investments totaled $67,499,000.
• Purchases of treasury shares totaled $157,582,000. Zebra made open market
repurchases of our shares under authorizations of the Board of directors announced
August 1, 2007, February 25, 2008, and October 27, 2008.
• Stock option exercises and purchases under the stock purchase plan contributed
$7,145,000.
In February 2008, we announced that printer manufacturing is being transferred to a
third-party manufacturer. This transition is expected to be completed by the end of 2009.
See Note 22 to our Consolidated Financial Statements in this Annual Report on Form 10-K
for further discussion.
Contractual Obligations
Zebra’s contractual obligations as of december 31, 2008 were (in thousands):
Payments due by period
Less than
1 year
Total
1-3 years
3-5 years
More than
5 years
Operating lease obligations $ 48,463
$12,023
$18,074
$13,420
$4,946
deferred compensation
liability
3,323
—
—
deferred revenue
24,948
18,366
6,582
Purchase obligations
66,904
66,904
—
—
—
—
3,323
—
—
Total
$143,638
$97,293
$24,656
$13,420
$8,269
Purchase obligations are for purchases made in the normal course of business to meet
operational requirements, primarily raw materials.
On August 14, 2008, Zebra entered into a revolving credit agreement for a five-year $100
million revolving credit facility. The loans under this credit agreement will be available
for general corporate purposes of Zebra and its subsidiaries in the ordinary course of
business and other purposes permitted by the agreement. We have not yet drawn any
funds under this credit agreement.
Management believes that existing capital resources and funds generated from
operations are sufficient to finance anticipated capital requirements.
Recently Issued Accounting Pronouncements
In december 2007, the FASB issued SFAS No. 141(R), Business Combinations, to create
greater consistency in the accounting and financial reporting of business combinations.
SFAS No. 141(R) establishes principles and requirements for how the acquirer in a
business combination (i) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling interest, (ii)
recognizes and measures the goodwill acquired in the business combination or a gain
from a bargain purchase, and (iii) determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects of the
business combination. This statement applies to fiscal years beginning after december
15, 2008 and will generally affect acquisitions going forward.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities – an amendment of FASB Statement No. 133. This Statement requires
enhanced disclosures about an entity’s derivative and hedging activities and thereby
improves the transparency of financial reporting. This Statement is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. This Statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. Zebra does not believe this
standard will have a material impact upon our consolidated financial statements.
In April 2008, the FASB issued Financial Staff Position FAS 142-3, Determination of
the Useful Life of Intangible Assets. This position amends the factors that should be
considered in developing renewal or extension assumptions used to determine useful
life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other
Intangible Assets. The position intends to improve the consistency between useful life
of a recognized intangible asset under FASB 142 and the period of expected cash flows
used to measure the fair value of the asset under SFAS No. 141(R), and other GAAP.
This Statement is effective for financial statements issued for fiscal years and interim
periods beginning after december 15, 2008. Early adoption is prohibited. We have not yet
determined the effect this standard will have on our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. This statement identifies the sources of accounting principles and
the framework for selecting the principles used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with GAAP in the United
States. Any effect of applying the provisions of this Statement shall be reported as a
change in accounting principle in accordance with SFAS No. 154, Accounting for Changes
and Error Corrections. We have not yet determined the effect this standard will have on
our consolidated financial statements.
23
In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments
Granted in Share-based Payment Transactions Are Participating Securities, (FSP EITF
03-6-1). FSP EITF 03-6-1 states that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings per share
pursuant to the two class method. FSP EITF 03-6-1 becomes effective on January 1,
2009. We have not yet determined the effect this standard will have on our consolidated
financial statements.
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 16 of the Notes to the Consolidated Financial Statements
included in this form 10-K for further discussions of hedging activities.
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,
2007
2008
$ (1,894)
$ (0.02)
$ (3,206)
$ (0.03)
$ 1,894
$ 0.02
$ 3,206
$ 0.03
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.
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 16. It is based on the dollar/euro and dollar/pound
exchange rates and euro and pound denominated assets and liabilities (in thousands,
except per share data).
Foreign exchange
dollar/pound
Effect on Pretax Income
Effect on diluted EPS (after tax)
dollar/euro
Effect on Pretax Income
Effect on diluted EPS (after tax)
Euro/pound
Effect on Pretax Income
Effect on diluted EPS (after tax)
As of December 31,
2007
2008
$ 1,620
$ 0.02
$ 579
$ 0.01
$ 4,469
$ 0.05
$ 599
$ 0.01
$ 2,195
$ 0.02
$ 3,073
$ 0.03
Equity Price Risk
Zebra currently employs two investment managers. These investment funds use a variety
of investment strategies, some of which involve the use of equity securities. 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,
2007
2008
$
25
$ 0.00
$ 1,170
$ 0.01
$
(25)
$ (0.00)
$ (1,170)
$ (0.01)
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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 Zebra 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, 2008. 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, 2008, our internal control over financial reporting is
effective. Our independent registered public accounting firm, Ernst & Young LLP, has
issued an attestation report on Zebra’s internal control over financial reporting. That
report is included on page 49 of this report on Form 10-K.
Changes in Internal Control over Financial Reporting
In January 2008, Zebra began a program to update substantially all of its key financial
systems over a three year period. The requirements for internal controls over financial
reporting are a fundamental element of the design and implementation of these systems.
As pieces of these systems are implemented, we conduct appropriate levels of testing
and monitoring of the systems and update our internal controls over financial reporting
with respect to the impacted areas. In 2008, we made additional changes to our controls
and procedures as part of our ongoing monitoring of our controls. However, none
of these changes has materially affected, or is reasonably likely to materially affect,
and there were no other changes that 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.
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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 Zebra Technologies Corporation’s internal control over financial
reporting as of december 31, 2008, 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 included in the accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on 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, assessing the
risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitation, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Zebra Technologies Corporation maintained, in all material respects,
effective internal control over financial reporting as of december 31, 2008, 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 sheets of
Zebra Technologies Corporation as of december 31, 2008 and 2007, and the related
consolidated statements of earnings (loss), comprehensive income (loss), stockholders’
equity, and cash flows for each of the three years in the period ended december 31, 2008,
and our report dated February 27, 2009 expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
Chicago, Illinois
February 27, 2009
26
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 , Finance. The Code of Ethics is posted
on the Investor Relations – Corporate Governance page of Zebra’s Internet Web site,
www.zebra.com, and is available for download. Any waiver from the Code of Ethics and
any amendment to the Code of Ethics will be disclosed on such page of Zebra’s Web site.
All other information in response to this item is incorporated by reference from the
Proxy Statement sections entitled “Election of directors,” “Executive Officers” and
“Corporate Governance.”
Item 15. Exhibits, 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 27th day of February 2009.
ZEBRA TECHNOLOGIES CORPORATION
By: /s/Anders Gustafsson
Anders Gustafsson
Chief Executive Officer
Item 11. Executive Compensation
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.
The information in response to this item is incorporated by reference from the Proxy
Statement sections entitled “Executive Compensation and Certain Transactions,”
“Compensation discussion and Analysis,” “director Compensation,” “Compensation
Committee Interlocks and Insider Participation” and “Compensation Committee Report.”
Signature
Title
/s/Anders Gustafsson
Anders Gustafsson
Chief Executive Officer and director
(Principal Executive Officer)
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
The information in response to this item is incorporated by reference from the Proxy
Statement section entitled “Security Ownership of Management and Certain Beneficial
Owners” and “Equity Compensation Plan Information.”
Item 13. Certain Relationships and Related Transactions,
and Director Independence
The information in response to this item is incorporated by reference from the Proxy
Statement section entitled “Certain Relationships and Related Transactions” and
“Corporate Governance.”
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.”
27
/s/Gerhard Cless
Gerhard Cless
Executive Vice President,
director
/s/Michael C. Smiley
Michael C. Smiley
Chief Financial Officer
(Principal Financial Officer)
/s/Todd R. Naughton
Todd R. Naughton
Vice President, Finance
(Principal Accounting Officer)
/s/Michael A. Smith
Michael A. Smith
director and Chairman of the
Board of directors
/s/Andrew Ludwick
Andrew Ludwick
/s/Ross W. Manire
Ross W. Manire
/s/Robert J. Potter
Robert J. Potter
/s/Richard Keyser
Richard Keyser
director
director
director
director
Date
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
The Board of directors and Stockholders
of Zebra Technologies Corporation:
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of december 31, 2008 and 2007
Consolidated Statements of Earnings (Loss) for the years ended
december 31, 2008, 2007, and 2006
Consolidated Statements of Comprehensive Income (Loss)
for the years ended december 31, 2008, 2007, and 2006
Consolidated Statements of Stockholders’ Equity
for the years ended december 31, 2008, 2007, and 2006
Consolidated Statements of Cash Flows
for the years ended december 31, 2008, 2007, and 2006
Notes to Consolidated Financial Statements
Page
F-1
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-26
All other financial statement schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or related notes.
We have audited the accompanying consolidated balance sheets of Zebra Technologies
Corporation (the Company) as of december 31, 2008 and 2007, and the related
consolidated statements of earnings (loss), comprehensive income (loss), stockholders’
equity and cash flows for each of the three years in the period ended december 31,
2008. Our audits also included the financial statement schedule listed in the Index at
Item 15. 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 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 the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Zebra Technologies Corporation
at december 31, 2008 and 2007, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended december 31, 2008, in
conformity with U.S. generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Zebra Technologies Corporation’s internal
control over financial reporting as of december 31, 2008, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 27, 2009
expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
Chicago, Illinois
February 27, 2009
F-1
December 31,
2008
December 31,
2007
December 31,
2008
December 31,
2007
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
deferred revenue
Income taxes payable
Total current liabilities
deferred rent
Other long-term liabilities
Total liabilities
$
38,152
67,911
18,366
558
124,987
4,903
10,250
140,140
Commitments and contingencies (Note 17)
Stockholders’ equity:
Preferred stock
Class A Common Stock
Additional paid-in capital
Treasury stock
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders’ equity
—
722
144,861
(344,147)
922,091
(12,789)
710,738
$
42,351
69,437
9,633
751
122,172
961
8,452
131,585
—
722
141,522
(205,058)
960,512
4,995
902,693
Total liabilities and stockholders’ equity
$ 850,878
$ 1,034,278
See accompanying notes to consolidated financial statements.
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Investments and marketable securities
Accounts receivable, net of allowances of
$2,734 in 2008 and $5,075 in 2007
Inventories, net
deferred income taxes
Prepaid expenses and other current assets
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
$
33,267
1,639
85,654
$
38,211
2,497
98,438
152,679
100,199
11,679
11,701
396,818
75,363
51,251
151,356
66,359
104,326
5,405
150,775
85,038
14,772
31,101
420,832
67,686
28,407
246,510
119,424
142,033
9,386
Total assets
$ 850,878
$ 1,034,278
F-2
ZEBRA TECHNOLOGIES CORPORATION
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(Amounts in thousands, except per share data)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Amortization of intangible assets
Litigation/claim settlement
Insurance receivable reserve
Acquired in-process technology
Exit, restructuring and integration costs
Asset impairment charges
Total operating expenses
Operating income (loss)
Other income (expense):
Investment income
Foreign exchange gain (loss)
Other, net
Total other income
Income (loss) before income taxes and
cumulative effect of accounting change
Income taxes
Income (loss) before cumulative effect
of accounting change
Cumulative effect of accounting change,
net of income taxes of $694 (See Note 2)
Year Ended December 31,
2007
2008
2006
$976,700
497,395
479,305
$868,279
451,161
417,118
$759,524
401,104
358,420
130,764
85,120
87,885
18,575
(5,302)
—
—
20,009
157,600
494,651
(15,346)
1,281
3,518
(1,366)
3,433
(11,913)
26,508
121,996
57,600
81,356
11,128
—
—
1,853
—
—
273,933
143,185
23,966
523
(299)
24,190
167,375
57,262
96,788
48,959
62,656
3,653
53,392
12,543
—
—
—
277,991
80,429
23,182
(635)
(1,334)
21,213
101,642
32,015
(38,421)
110,113
69,627
—
—
1,319
Net income (loss)
$ (38,421)
$ 110,113
$ 70,946
Basic earnings (loss) per share before
cumulative effect of accounting change
diluted earnings (loss) per share before
cumulative effect of accounting change
$ (0.60)
$ 1.61
$ 0.99
$ (0.60)
$ 1.60
$ 0.98
Basic earnings (loss) per share
diluted earnings (loss) per share
$ (0.60)
$ (0.60)
$ 1.61
$ 1.60
$ 1.01
$ 1.00
Basic weighted average shares outstanding
64,524
68,463
70,516
diluted weighted average and
equivalent shares outstanding
64,524
68,908
70,956
See accompanying notes to consolidated financial statements.
Year Ended December 31,
2007
2008
2006
Net income (loss)
$(38,421)
$ 110,113
$70,946
Other comprehensive income (loss):
Foreign currency translation adjustment
(22,991)
2.277
7,295
Changes in unrealized gain/(loss)
on hedging transactions,
net of income taxes
5,750
(5,205)
(1,188)
Changes in unrealized holding gains/(loss)
on investments, net of income taxes
(543)
1,111
Comprehensive income (loss)
$(56,205)
$108,296
(1,672)
$75,381
See accompanying notes to consolidated financial statements.
F-3
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(dollars in thousands)
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
$722
$139,433
$ (64,013)
$779,453
$ 2,377
$857,972
—
—
—
—
—
—
—
—
—
—
(72,925)
—
—
(72,925)
(7,201)
1,324
7,540
(2,013)
—
—
—
—
17,603
—
—
—
—
—
—
—
—
—
—
1,319
69,627
—
—
—
—
—
—
—
—
(1,672)
(1,188)
7,295
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
Repurchase of 3,038,389 shares of Class A Common Stock
Issuance of 578,608 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 loss on hedging transactions (net of income taxes)
Foreign currency translation adjustment
—
—
—
—
—
—
—
—
—
(107,390)
—
—
(107,390)
(13,292)
664
15,067
—
—
—
—
21,667
—
—
—
—
—
—
—
—
—
110,113
—
—
—
—
—
—
—
1,111
(5,205)
2,277
8,375
664
15,067
110,113
1,111
(5,205)
2,277
Balance at december 31, 2007
$722
$141,522
$(205,058)
$960,512
$ 4,995
$902,693
Repurchase of 6,008,232 shares of Class A Common Stock
Issuance of 499,576 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 loss
Unrealized holding loss on investments (net of income taxes)
Unrealized holding gain on hedging transactions (net of income taxes)
Foreign currency translation adjustment
—
—
—
—
—
—
—
—
—
(157,582)
—
—
(157,582)
(11,348)
(275)
14,962
—
—
—
—
18,493
—
—
—
—
—
—
—
—
—
(38,421)
—
—
—
—
—
—
—
(543)
5,750
(22,991)
7,145
(275)
14,962
(38,421)
(543)
5,750
(22,991)
Balance at december 31, 2008
$722
$144,861
$(344,147)
$922,091
$(12,789)
$710,738
See accompanying notes to consolidated financial statements.
F-4
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Cash flows from operating activities:
Cash flows from investing activities:
Net income (loss)
$(38,421)
$110,713
$70,946
Purchases of property and equipment
(40,889)
(22,070)
(19,197)
Year Ended December 31,
2008
2007
2006
Year Ended December 31,
2008
2007
2006
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
depreciation and amortization
Share-based compensation
Asset impairment charges
Impairment of investments
Excess tax benefit from
share-based compensation
Cumulative effect of accounting
change (net of tax)
Gain on sale of asset
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
deferred revenue
Income taxes payable
Other operating activities
Net cash provided by
operating activities
38,581
14,962
157,600
7,271
26,902
15,067
—
—
16,087
7,540
—
—
(192)
(921)
(1,514)
—
(1,121)
—
—
(23,138)
(21,891)
(26,222)
(2,758)
17,891
1,429
11,281
(1,002)
4,012
—
—
1,853
—
(5,477)
4,453
(134)
(1,321)
(3,418)
16,804
(325)
(1,337)
(4,139)
(1,319)
—
—
12,543
(6,737)
(4,292)
(13,430)
(483)
(1,869)
9,486
(927)
2,586
(552)
Proceeds from sale of asset
14,796
—
—
Acquisition of businesses,
net of cash acquired
Acquisition of intangible assets
(18,588)
(1,384)
(286,761)
(4,800)
(2,681)
(18,091)
Purchases of investments
(723,791)
(1,025,089)
(1,110,472)
Maturities of investments
Sales of investments
592,749
198,541
915,015
366,964
757,249
374,666
Net cash provided by (used in)
investing activities
21,434
(56,741)
(18,526)
Cash flows from financing activities:
Purchase of treasury shares
(157,582)
(112,094)
(68,221)
Proceeds from exercise of stock options
and stock purchase plan purchases
7,145
8,375
10,402
Excess tax benefit from
share-based compensation
192
921
1,514
Net cash used in financing activities
(150,245)
(102,798)
(56,305)
Effect of exchange rate changes on cash
(14,415)
(18)
1,972
Net increase (decrease) in cash and
cash equivalents
Cash and cash equivalents
at beginning of year
Cash and cash equivalents at end of year
$33,267
Supplemental disclosures of cash flow information:
(4,944)
(1,437)
15,206
38,211
39,648
$38,211
24,442
$39,648
138,282
158,120
88,065
Income taxes paid
$49,092
$62,130
$ 33,070
Supplemental disclosures of non-cash transaction:
Purchase of treasury shares
not paid in 2006
$ —
Sale of investments not received in 2007
—
See accompanying notes to consolidated financial statements.
$ —
21,925
$ 4,704
—
F-5
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.
In 2007 and 2008, we acquired WhereNet Corp., proveo AG, Navis Holdings, LLC and
Multispectral Solutions Inc., which we refer to as Zebra Enterprise Solutions Group
(ESG). In 2008, we integrated these businesses into a single business group and are
reporting their results separately from our specialty printing business. Together, these
ESG companies give Zebra the ability to deliver more high-value applications that help
our customers identify, track and manage assets, transactions and people. We consider
these solutions natural adjacencies to our core specialty printing business. The solutions
these companies provide are sold on a contract basis and are typically installed over
several quarters. These contracts cover a range of services, including design, installation
and ongoing maintenance services.
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.
Fiscal Calendar. Zebra operates on a 4 week/4 week/5 week fiscal quarter, and each fiscal
quarter ends on a Saturday. The fiscal year always begins on January 1 and ends on
december 31. This results in some fiscal quarters being either greater than or less than 13
weeks depending on the days of the week those dates fall. during the 2008 fiscal year, our
quarter end dates were as follows:
• March 29,
• June 28,
• September 27, and
• December 31.
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.
F-6
Restricted Cash. Zebra has two types of restricted cash agreements. In the Netherlands,
we have an agreement with the import authorities to place €1,000,000 in a bank deposit
account, which acts as security for the VAT payable. This deferment agreement allows
Zebra to simply quote our deferment number at import and quickly clear customs without
the need to pay VAT. The bank deposit account cannot be accessed or used without
cancelling the deferment agreement. The second type of restricted cash agreement
primarily collateralizes the issuance of letters of credit.
Investments and Marketable Securities. Investments and marketable securities at
december 31, 2008, consisted of U.S. government and agency securities, state and
municipal bonds, corporate bonds, and other interests. 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. As of december 31, 2008, all of our
investments and marketable securities are classified as available-for-sale securities. In
addition, all investments in marketable debt securities with maturities greater than one
year are classified as long-term in the balance sheet due to our ability and intent to hold
them until maturity.
Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable consist
primarily of amounts due to us from our normal business activities. Collateral on trade
accounts receivable is generally not required. 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. Manufactured inventories consist of the following
costs: component, direct labor and manufacturing overhead. Purchased inventories
consist of purchased costs and purchasing overhead.
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. On January 1, 2007, we adopted Financial Accounting Standards Board
(FASB) Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109. According to FIN No. 48, we identified,
evaluated, and measured the amount of income tax benefits to be recognized for all
of our income tax positions. during 2008, we recognized an increase of approximately
$4,000,000 in the liability for unrecognized tax benefits related to a recent Zebra
acquisition. A reconciliation of the beginning and ending amount of unrecognized tax
benefits is as follows (in thousands):
Balance at January 1, 2008
Additions based on tax positions related to the current year
Balance at december 31, 2008
$ —
4,000
$ 4,000
We evaluate the impairment of identifiable intangibles 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, and
• Significant decline in market capitalization relative to net book value.
Zebra’s continuing practice is to recognize interest and penalties related to income tax
matters as part of income tax expense.
Intangible Assets and Goodwill. 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 Statement of Financial
Accounting Standards (“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 annual assessment during June 2008. At that time, no adjustment to goodwill was
necessary due to impairment. due to the current economic conditions, we performed an
additional assessment of our goodwill during december 2008 and found the goodwill
of our Enterprise Solutions Group to be impaired. As a result we recorded impairment
charges related to goodwill of $113,679,000. See Note 13 for further information related to
the goodwill impairment charges.
Goodwill of a reporting unit should be tested for impairment between annual tests if
an event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount. Examples of such events or
circumstances include:
• Significant adverse change in legal factors or in the business climate,
• Adverse action or assessment by a regulator,
• Unanticipated competition,
• Loss of key personnel,
• More-likely-than-not expectation that a reporting unit or a significant portion of a
reporting unit will be sold or otherwise disposed of,
• Testing for recoverability under SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, of a significant asset group within a reporting unit,
• Recognition of a goodwill impairment loss in the financial statement of a subsidiary
that is a component of a reporting unit, or
• Allocation of a portion of goodwill to a business to be disposed of.
If we believe that one or more of the above indicators of impairment have occurred and
the undiscounted cash flow test has failed in the case of amortizable assets, we measure
impairment by comparing the carrying value of the asset to its fair value, which is
estimated using projected discounted cash flows using a discount rate that incorporates
the risk inherent in the cash flows. due to the current economic conditions, we performed
an assessment of our identifiable intangibles during december 2008 and found the
several of our identifiable intangible assets to be impaired. As a result we recorded
impairment charges related to identifiable intangible assets of $43,617,000. See Note 13
for further information related to the asset impairment charges.
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 10 years, which approximates the
estimated useful lives. Accumulated amortization for these other intangible assets was
$23,394,000 and $24,658,000 at december 31, 2008 and 2007, 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)
collectability 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. Zebra enters 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
determined by vendor specific objective evidence. 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.
F-7
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.
quarterly based on historical warranty experience. The following table is a summary of
Zebra’s accrued warranty obligation.
ESG has fixed fee software implementation projects, for which we use the percentage
of completion method for revenue recognition. Under this method of accounting, we
recognize revenue based on the ratio of costs incurred to total estimated costs. Contract
terms generally provide for progress billings on advance terms or based on completion of
certain phases of the work. At december 31, 2008, unbilled revenue was $9,801,000 and
receivables for contracts in progress included in accounts receivable were $11,260,000.
At december 31, 2007, unbilled revenue was $8,013,000 and receivables for contracts in
progress included in accounts receivable were $10,748,000.
Research and Development Costs. Research and development costs are expensed as
incurred. These costs include:
• Salaries, benefits, and other R&D personnel related costs,
• Consulting and other outside services used in the R&D process,
• Engineering supplies,
• Engineering related information systems costs, and
• Allocation of building and related costs
From time to time, Zebra will provide engineering and development services to third parties
on a contract basis. Zebra does not guarantee the outcome of this research and does not
retain any obligation to repay third party funding received for these contract services. Since
these services are not part of our standard product offering, we treat payments received
under these arrangements as reductions to research and development costs.
Advertising. Advertising costs are expensed as incurred. Advertising expenses for the
years ended december 31, 2008, 2007 and 2006 totaled $7,318,000, $6,361,000 and
$5,857,000, respectively.
Market Development Funds. Zebra makes market development funds available to its
resellers to support demand generation activity by the resellers. These funds require the
reseller to provide 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. In general, Zebra provides warranty coverage of one year on SPG printers
against defects in material and workmanship. SPG printheads are warranted for nine
months and batteries are warranted for three months. Warranty coverage for most ESG
hardware products is similar, with coverage periods ranging from 90 days do one year
depending on the nature of the product. Battery based products, such as location tags,
are covered by a 30 day warranty. For ESG software products, the warranty period is
generally 90 days and provides coverage against defects in material and workmanship
as well as performance materially in compliance with the accompanying documentation.
A provision for warranty expense is recorded at the time of shipment and adjusted
F-8
Warranty Reserve (in thousands)
Balance at the beginning of the period
Warranty expense during the period
2008
$ 3,411
4,094
Warranty payments made during the period
(4,691)
$ 2,250
6,522
(5,361)
Balance at the end of the period
$ 2,814
$ 3,411
$ 1,922
5,792
(5,464)
$ 2,250
Year Ended December 31,
2007
2006
In the European Union, we have an obligation to recycle printers. We reserve for this
obligation based on the number of 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.
Recycling Reserve (in thousands)
Balance at the beginning of the period
Recycling expense (reversal of reserve)
during the period
Recycling payments made during the period
Exchange rate impact
2008
$ 3,706
Year Ended December 31,
2007
2006
$ 2,115
$ 632
(2,093)
1,580
1,373
(3)
(403)
—
11
—
110
Balance at the end of the period
$ 1,207
$ 3,706
$ 2,115
We reexamined the environmental recycling reserves based on our three years of
experience of providing for such reserves and decreased our estimate of the reserve.
Therefore, we released $3,757,000 from the reserve during the second quarter of 2008.
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, restricted cash,
accounts receivable and accounts payable
Cost, which approximates fair value due to
the short-term nature of these instruments
Investments in marketable
debt securities
Investments in auction rate securities
Foreign currency forward contracts
Foreign currency option contracts
Market quotes from independent pricing
services
Broker quotations, discounted cash
flow analysis or other types of valuation
adjustment methodologies
Estimated using market quoted rates for
foreign currency at the balance sheet date
Estimated using market quoted rates for
foreign currency at the balance sheet date
and application of such rates subject to the
option terms
In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, we recognize derivative instruments and hedging activities as either assets or
liabilities on the balance sheet and measure them at fair value. Gains and losses resulting
from changes in fair value are accounted for depending on the use of the derivative and
whether it is designated and qualifies for hedge accounting. See Note 16 for additional
information on our derivatives and hedging activities.
Stock-based Compensation. At december 31, 2008, Zebra had a general stock-based
compensation plan and a stock purchase plan under which shares of our common stock
was available for future grants and sales, and which are described more fully in Note 4.
We account for these plans in accordance with SFAS No. 123(R), Share-Based Payment.
Zebra recognizes compensation costs using the straight-line method over the vesting
period of 1 month to 5 years.
The compensation expense and the related income tax benefit for share-based payments
was included in the Consolidated Statement of Earnings (Loss) as follows:
Compensation costs and
related income tax benefit:
Cost of sales
Selling and marketing
Research and development
General and administration
Acquisition integration expenses
Total compensation expense
Income tax benefit
Year Ended December 31,
2007
2008
2006
$ 1,206
$ 1,607
$ 673
2,849
2,426
8,083
398
2,977
2,316
8,167
—
$ 14,962
$ 5,162
$ 15,067
$ 5,198
1,720
1,111
4,036
—
$ 7,540
$ 2,556
On August 31, 2007, Zebra announced the resignation of our Chief Executive Officer
(CEO) and Chairman of the Board in conjunction with our announcement of his successor
as CEO. Zebra entered into an executive transition agreement with the former CEO as
of that date. The agreement specifies that his outstanding unvested options vested on
that date and the option exercise period will continue for the full original maximum
term unaffected by his retirement. As a result, we recorded a modification charge of
approximately $1,702,000 in 2007, representing the difference in fair value of the options
before and after modification.
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. Excess tax benefits classified as
financing cash flows were as follows (in thousands):
Excess tax benefits classified as
financing cash flows
$ 192
$ 921
$ 1,514
Year Ended December 31,
2007
2008
2006
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, and SFAS No. 123(R) required 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
directors, management and highly compensated employees to defer portions of their
compensation. Zebra immediately pays deferred amounts into a Rabbi Trust, and plan
participants select a method of investing these funds into hypothetical investments.
Zebra tracks the performance of these hypothetical investments in order to determine
the value of each participant’s deferral. Zebra accrues the deferred compensation liability
in other long-term liabilities as the amount that is actually owed to the participants. Our
deferred compensation liability was $3,323,000 as of december 31, 2008, and $3,950,000
as of december 31, 2007.
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 (loss).
Acquisition Costs. Zebra periodically has external expenditures related to potential
acquisitions. during 2008 and previously, these expenditures were recorded as prepaid
expenses until such time as Zebra either completed the transaction or abandoned the
transaction. If the transaction completed, the costs were treated as part of the cost of the
acquisition. If the transaction was abandoned, the costs were expensed during the period
in which it was abandoned. Beginning in 2009, Zebra will expense these costs as incurred
in accordance with SFAS No. 141(R), Business Combinations.
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. See Note 13 for further information related to impairment charges.
F-9
Recently Issued Accounting Pronouncements. In december 2007, the FASB issued SFAS
No. 141(R), Business Combinations, to create greater consistency in the accounting and
financial reporting of business combinations. SFAS No. 141(R) establishes principles and
requirements for how the acquirer in a business combination (i) recognizes and measures
in its financial statements the identifiable assets acquired, the liabilities assumed, and
any non-controlling interest, (ii) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase, and (iii) determines what
information to disclose to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. This statement applies to fiscal years
beginning after december 15, 2008 and will generally affect acquisitions going forward.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments
and Hedging Activities – an amendment of FASB Statement No. 133. This Statement
requires enhanced disclosures about an entity’s derivative and hedging activities and
thereby improves the transparency of financial reporting. This Statement is effective
for financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. This Statement encourages,
but does not require, comparative disclosures for earlier periods at initial adoption.
Zebra does not believe this standard will have a material impact upon our consolidated
financial statements.
In April 2008, the FASB issued Financial Staff Position FAS 142-3, Determination of
the Useful Life of Intangible Assets. This position amends the factors that should be
considered in developing renewal or extension assumptions used to determine useful
life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other
Intangible Assets. The position intends to improve the consistency between useful life
of a recognized intangible asset under FASB 142 and the period of expected cash flows
used to measure the fair value of the asset under SFAS No. 141(R), and other GAAP.
This Statement is effective for financial statements issued for fiscal years and interim
periods beginning after december 15, 2008. Early adoption is prohibited. We have not yet
determined the effect this standard will have on our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. This statement identifies the sources of accounting principles and
the framework for selecting the principles used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with GAAP in the United
States. Any effect of applying the provisions of this Statement shall be reported as a
change in accounting principle in accordance with SFAS No. 154, Accounting for Changes
and Error Corrections. We have not yet determined the effect this standard will have on
our consolidated financial statements.
In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments
Granted in Share-based Payment Transactions Are Participating Securities, (FSP EITF
03-6-1). FSP EITF 03-6-1 states that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings per share
pursuant to the two class method. FSP EITF 03-6-1 becomes effective on January 1,
2009. We have not yet determined the effect this standard will have on our consolidated
financial statements.
Reclassifications. Certain amounts in the prior years’ financial statements have been
reclassified to conform to the current year’s presentation.
F-10
Note 3 Fair Value Measurements
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.
SFAS No. 159 permits entities to elect to measure many financial instruments and certain
other items at fair value. Unrealized gains and losses on items for which the fair value
option has been elected will be recognized in earnings at each subsequent reporting date.
SFAS No. 159 was effective for Zebra on January 1, 2008. We have currently chosen not
to elect the fair value option for any items that are not already required to be measured
at fair value in accordance with accounting principles generally accepted in the United
States. The adoption of SFAS No. 159 did not have a material impact on our consolidated
financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines
fair value, establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. SFAS No. 157 was effective for our Company on January 1,
2008. However, in February 2008, the FASB released FASB Staff Position (FSP FAS 157-2 —
Effective date of FASB Statement No. 157), which delayed the effective date of SFAS No.
157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized
or disclosed at fair value in the financial statements on a recurring basis (at least annually).
The adoption of SFAS No. 157 for our financial assets and liabilities did not have a material
impact on our consolidated financial statements. We do not believe the adoption of SFAS
No. 157 for our non-financial assets and liabilities, effective January 1, 2009, will have a
material impact on our consolidated financial statements.
As defined in SFAS No. 157, fair value is based on the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. In order to increase consistency and comparability
in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that
prioritizes observable and unobservable inputs used to measure fair value into three
broad levels, which are described below:
Level 1: quoted prices (unadjusted) in active markets that are accessible at the
measurement date for assets or liabilities. The fair value hierarchy gives the
highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets,
but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The
fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, we utilize valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs to the extent possible as
well as consider counterparty credit risk in the assessment of fair value.
Included in our investment portfolio are four auction rate security instruments, which
are classified as available for sale securities and are reflected at fair value. However, due
to recent events in credit markets, the auction events for the instruments held by Zebra
as of december 31, 2008, have failed. Therefore, the fair values of these securities are
estimated utilizing broker quotations, discounted cash flow analysis or other types of
valuation adjustment methodologies as of december 31, 2008. These analyses consider,
among other items, the collateralization underlying the security instruments, the credit
worthiness of the counterparty, the timing of expected future cash flows, estimates of the
next time the security is expected to have a successful auction, and Zebra’s intent and
ability to hold such securities until credit markets improve. These securities were also
compared, when possible, to other securities with similar characteristics.
Of the four auction rate security instruments, Zebra deemed one item to be other than
temporarily impaired. Therefore, we have recorded the market value decline in the
amount of $4,374,000 for that security as an investment loss in the income statement.
The decline in the market value of the other securities is considered temporary and was
recorded in accumulated other comprehensive income (loss) on the balance sheet. Since
Zebra has the intent and ability to hold these securities until they are sold at auction,
redeemed at carrying value or reach maturity, we have classified them as long term
investments in the balance sheet.
Financial assets and liabilities carried at fair value as of december 31, 2008 are classified
in the table below in one of the three categories described above (in thousands):
Assets:
Level 1
Level 2
Level 3
Level 4
The following table presents Zebra’s activity for assets measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) as defined in SFAS No.
157, for the year ended december 31, 2008 (in thousands):
Balance at december 31, 2007
Transfers to Level 3
Total losses (realized or unrealized):
Included in earnings
Included in other comprehensive income (loss)
Purchases and settlements (net)
Balanced at december 31, 2008
Total gains and (losses) for the period included in earnings
attributable to the change in unrealized losses relating
to assets still held at december 31, 2008
Auction Rate
Securities
$ —
12,350
(4,374)
(929)
—
$ 7,047
$ —
Available-for-sale securities
$ 182,933
$ —
$ 7,047
$ 189,980
Note 4 Stock Based Compensation
Money market investments
related to the deferred
compensation plan
3,426
—
—
3,426
Total assets at fair value
$ 186,359
$ —
$ 7,047
$ 193,406
Liabilities:
Forward contracts (1)
$
2,414
$ 8,015
$ —
$ 10,429
Liabilities related to the
deferred compensation plan
3,323
—
—
3,323
Total liabilities at fair value $
5,737
$ 8,015
$ —
$ 13,752
1) The fair value of forward contracts are calculated as follows:
a. Fair value of forward collar contract associated with forecasted sales hedges are calculated using the midpoint
of ask and bid rates for similar contracts.
b. Fair value of regular forward contracts associated with forecasted sales hedges are calculated using the month-
end exchange rate adjusted for the discount rate (3 month LIBOR rate).
c. Fair value of balance sheet hedges are calculated at the month end exchange rate adjusted for current forward
points unless the hedge has been traded but not settled at month end. If this is the case, the fair value is
calculated at the rate at which the hedge is being settled.
Based on changed conditions in the credit markets, Zebra changed our valuation
methodology for auction rate security instruments as noted above during the third quarter
of 2008. Accordingly, these securities changed from Level 1 to Level 3 within SFAS No.
157’s hierarchy since Zebra’s initial adoption of SFAS No. 157 at January 1, 2008.
As of december 31, 2008, Zebra had a general stock-based compensation plan and a
stock purchase plan under which shares of our common stock were available for future
grants and sales, and which are described below.
On May 9, 2006, the stockholders of Zebra approved the 2006 Zebra Technologies
Corporation Incentive Compensation Plan (the 2006 Plan), which included authorization
for issuance of awards of 5,500,000 shares under 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 Zebra and
its subsidiaries are eligible to participate in the 2006 Plan. As of december 31, 2008,
4,002,771 shares were available for grant under the plan, and options for 1,208,901 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 four or 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.
F-11
The following table shows the number of shares granted in 2008 and the vesting
schedules of the restricted stock awards that were granted under the Plan to certain
executive officers and other members of management.
Number of shares granted
Vesting period
10,140
118,800
One half after each year of service
After three years of service
These restricted stock awards will vest at each vesting date if the executive remains
employed by Zebra throughout the applicable time period, but will vest before the end
of the each vesting 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, 2008, options
for 1,609,141 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, 2008,
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 continuing on each of the four anniversaries thereafter. All such 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
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.
In connection with Zebra’s acquisitions of Navis and WhereNet, Zebra assumed existing
unvested stock options exercisable for shares of Navis’ common stock and WhereNet’s
common stock, respectively, and made them options exercisable for Zebra common
stock. These new options have exercises prices and vesting dates based on their
previous terms. The vesting dates extend in some cases until April 30, 2011 for the Navis
options and until October 23, 2010 for the WhereNet options. As of december 31, 2008,
outstanding Navis and WhereNet options were exercisable for 87,277 shares and 47,787
shares, respectively.
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
F-12
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, 2008, 732,051 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 is estimated on the date of grant using a binomial
model. The following table shows the weighted-average assumptions used for stock
option grants as well as the fair value of the options granted based on those assumptions
(excluding the Navis and WhereNet options):
Expected dividend yield
Forfeiture rate
Volatility
Risk free interest rate
2008
0%
8.99%
37.79%
3.17%
2007
0%
7.69%
34.73%
4.55%
2006
0%
7.43%
38.30%
4.58%
– Range of interest rates
0.81% - 3.87% 4.55% - 5.03% 4.38% - 4.73%
Expected weighted-average life
5.09 years
4.88 years
4.58 years
Fair value of options granted
$7,566,000
$10,790,000
$5,802,000
Weighted-average grant date
fair value of options granted
(per share underlying the options)
$13.33
$13.72
$14.22
The forfeiture rate is based on the historical annualized forfeiture rate, which is consistent
with prior year rates. This rate includes only pre-vesting forfeitures. 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 risk free interest rate used is the
implied yield currently available from the U.S. Treasury zero-coupon yield curve over
the contractual term of the options. The expected weighted-average life is based on the
exercise price at the midpoint, which combines the average life of the options that have
already been exercised or cancelled with the exercise life of all unexercised options.
The exercise life of unexercised options assumes that the option will be exercised at
the midpoint of the vesting date and the full contractual term. These assumptions are
consistent with the assumptions used in prior years.
The fair value of the purchase rights of all Zebra employees issued under the Stock
Purchase Plan is estimated using the following weighted-average assumptions 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
2008
$20.26
$17.22
0%
46%
1.87%
2007
$34.70
$29.50
0%
29%
4.57%
2006
$34.79
$29.57
0%
25%
4.54%
Stock option activity for the years ended december 31, 2008, 2007, and 2006 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
Intrinsic value of options exercised
2008
Weighted-Average
Exercise Price
$34.68
35,72
16.77
36.11
41.38
$35.83
$33.30
Shares
3,029,138
567,676
(202,204)
(213,012)
(42,424)
3,139,174
1,719,434
$3,138,000
2007
Weighted-Average
Exercise Price
$34.08
32.10
18.66
40.18
48.71
$34.68
$30.52
Shares
2,460,367
1,069,290
(332,563)
(149,724)
(18,232)
3,029,138
1,413,352
$6,723,000
2006
Weighted-Average
Exercise Price
$31.04
43.15
20.85
41.12
46.09
$34.08
$26.49
Shares
2,548,484
408,046
(375,222)
(103,551)
(17,390)
2,460,367
1,035,278
$8,209,000
The following table summarizes information about fixed stock options outstanding at december 31, 2008:
Range of
Exercise Prices
$1.29-$24.21
$24.21-$36.39
$36.39-$41.25
$41.25-$46.18
$46.18-$53.92
Aggregate intrinsic value
Weighted-average remaining contractual term
Number
of Shares
547,009
635,430
895,941
630,707
430,087
3,139,174
Options Outstanding
Weighted-Average
Remaining Contractual Life
Weighted-Average
Exercise Price
Number
of Shares
Weighted-Average
Exercise Price
Options Exercisable
3.70 years
4.66 years
8.55 years
7.00 years
5.26 years
$18.28
29.64
38.47
44.29
49.42
483,968
451,414
135,930
364,479
283,643
1,719,434
$18.56
27.70
40.17
44.97
49.10
Options Outstanding
Options Exercisable
$1,511,000
6.2 years
$1,252,000
4.6 years
As of december 31, 2008, there was $21,418,000 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 2.5 years.
The following table (in thousands) summarized the adjusted fair values of the assets
acquired and the liabilities assumed at the date of acquisition:
At April 1, 2008
Note 5 Business Combinations
Multispectral Solutions Inc. On April 1, 2008, Zebra acquired all of the outstanding stock
of Multispectral Solutions Inc. (MSSI) for $18,366,000, which is net of cash acquired
and includes transaction costs. Headquartered in Germantown, Maryland, MSSI is a
global provider of ultra wideband (UWB) real-time locating systems and other UWB-
based wireless technology. Zebra acquired this company to further extend our range
of solutions to help our customers identify, track and manage a broader range of
assets. Zebra acquired this company to further extend our range of solutions to help
our customers identify, track and manage a broader range of assets. The Consolidated
Statements of Earnings (Loss) reflect the results of operations of MSSI since the effective
date of the purchase. The pro forma impact of this acquisition was not significant.
Current assets
Property and equipment
Intangible assets
Goodwill
Total assets acquired
deferred tax liability
Current liabilities
Net assets acquired
$ 700
70
8,000
13,547
$22,317
(3,011)
(940)
$18,366
F-13
On a preliminary basis pending the receipt of final valuations, the purchase price was
allocated to identifiable tangible and intangible assets acquired and liabilities assumed
based on their estimated fair values resulting in goodwill of $13,547,000. The intangible
assets of $8,000,000 consist of the following (in thousands):
Customer relationships
developed technology
The goodwill is not deductible for tax purposes.
Amount
$1,000
7,000
Useful Life
10 years
8 years
Navis, LLC. On december 14, 2007, Zebra acquired all of the outstanding stock of Navis
Holdings, LLC (Navis) for $144,066,000, which is net of cash acquired and transaction
costs. Headquartered in Oakland, California, Navis provides solutions to optimize the flow
of goods through marine terminals and other operations managing cargo in the supply
chain. Zebra acquired this company to further extend our range of solutions to help
our customers identify, track and manage a broader range of assets. The Consolidated
Statements of Earnings (Loss) reflect the results of operations of Navis since the effective
date of the purchase. The pro forma impact 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 December 14, 2007
Current assets
Property and equipment
Intangible assets
Goodwill
Total assets acquired
Current liabilities
Net assets acquired
$ 25,707
2,601
58,400
76,693
$163,401
(19,335)
$144,066
The purchase price was allocated to identifiable tangible and intangible assets acquired
and liabilities assumed based on their estimated fair values resulting in goodwill of
$76,693,000. The intangible assets of $58,400,000 consist of the following (in thousands):
Trade names
Customer relationships
developed technology
The goodwill is deductible for tax purposes.
Amount
$ 2,300
39,000
17,100
Useful Life
2 years
15 years
6 years
proveo AG. On July 2, 2007, Zebra acquired all of the outstanding stock of proveo AG
for $20,224,000 (€14,866,000), which is net of cash acquired and transaction costs.
Headquartered in Crailsheim, Germany, proveo AG provides integrated hardware
and software systems that locate and track airport ground support equipment. Zebra
acquired this company to further extend our range of solutions to help our customers
identify, track and manage a broader range of assets. The Consolidated Statements of
Earnings (Loss) reflect the results of operations of proveo AG since the effective date of
the purchase. The pro forma impact of this acquisition was not significant.
The following table (in thousands) summarizes the adjusted fair values of the assets
acquired and the liabilities assumed at the date of acquisition.
At July 2, 2007
Current assets
Property and equipment
Intangible assets
Goodwill
Total assets acquired
deferred tax liability
Current liabilities
Net assets acquired
$ 2,062
114
4,176
16,331
$22,683
(1,572)
(887)
$20,224
The purchase price was allocated to identifiable tangible and intangible assets acquired
and liabilities assumed based on their estimated fair values resulting in goodwill of
$16,331,000. The intangible assets of $4,176,000 consist of the following (in thousands):
Trade names
Customer relationships
developed technology – hardware
developed technology – software
The goodwill is not deductible for tax purposes.
Amount
Useful Life
$ 130
1,523
1,504
1,019
1.5 years
8 years
8 years
5 years
WhereNet Corp. On January 25, 2007, Zebra acquired all of the outstanding stock of
WhereNet Corp., for $127,450,000, which is net of cash acquired and transaction costs.
Headquartered in Santa Clara, California, WhereNet provides integrated wireless real
time locating systems (RTLS) to companies primarily in the industrial manufacturing,
transportation and logistics, and aerospace and defense sectors. Zebra acquired this
company to add a range of solutions to help our customers identify, track and manage
a broader range of assets. The Consolidated Statements of Earnings (Loss) reflect the
results of operations of WhereNet since the effective date of the purchase. The pro forma
impact of this acquisition was not significant.
F-14
The following table (in thousands) summarizes the adjusted fair values of the assets
acquired and the liabilities assumed at the date of acquisition.
At January 25, 2007
$1,698,000 related to these payments. This expense was netted against the $7,000,000
received from the escrow settlement and is shown on the Consolidated Statements of
Earnings (Loss) on a separate line titled litigation/claim settlement.
Current assets
deferred tax assets, net
Property and equipment
Intangible assets
Goodwill
Total assets acquired
Current liabilities
Net assets acquired
$ 9,254
19,058
360
30,616
87,482
$146,770
(19,320)
$127,450
The purchase price was allocated to identifiable tangible and intangible assets acquired
and liabilities assumed based on their estimated fair values resulting in goodwill of
$87,482,000. The future benefit of the acquired net operating loss of $28,815,000 is
included in the net deferred tax assets. The intangible assets of $30,616,000 consist of the
following (in thousands):
developed technology
Customer relationships
Backlog
Acquired in-process research and development
Amount
$14,978
12,324
1,461
1,853
Useful Life
6 years
10 years
1 year
N/A
The acquired in-process research and development of $1,853,000 was written-off at the
date of the acquisition in accordance with FASB Interpretation No. 4, Applicability of
FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method.
Acquired in-process technology is stated separately in the operating expense section of
the Consolidated Statements of Earnings (Loss).
The goodwill is not deductible for tax purposes.
As part of the acquisition closing, an escrow balance of approximately $13,600,000
was established against the total purchase price. On January 24, 2008, Zebra filed an
indemnification claim against the sellers of WhereNet for the entire escrow balance,
alleging that Zebra was entitled to indemnification from the former shareholders of
WhereNet as a result of, among other things, breaches of the representations and
warranties in the acquisition agreement and potential third party claims. Representatives
of the shareholders disputed the allegations and filed a declaratory action to obtain the
escrowed funds. The dispute was settled and the complaint was dismissed in September
2008. In accordance with the settlement agreement, Zebra received $7,000,000 of the
escrowed funds, and the remainder was distributed to the former shareholders and
vested option holders of WhereNet pursuant to the terms of the acquisition agreement.
Zebra agreed to make payments to its current employees that had been shareholders
and vested option holders of WhereNet to reimburse them for their pro rata portions of
any share of the escrow funds that they did not receive due to Zebra’s recoupment of
amounts from the escrow funds. Accordingly, we recorded expense in the amount of
Note 6 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,
2007
2008
$0.01
10,000,000
—
$0.01
10,000,000
—
$0.01
150,000,000
72,151,857
60,861,592
$0.01
150,000,000
72,151,857
66,370,248
11,290,265
5,781,609
during the year ended december 31, 2008, Zebra purchased 6,008,232 shares of Zebra
Class A Common Stock for $157,582,000. We reissued 499,576 treasury shares during
2008 upon exercise of stock options, purchases under the stock purchase plan and
issuances of restricted stock.
Stockholder Rights Agreement. Zebra’s Board of directors adopted a Stockholder Rights
Agreement under which stock purchase rights were paid by dividend to stockholders
of record on March 15, 2002 at the rate of one Class A Right for each outstanding share
of Class A Common Stock. Each Class A Right, other than those held by the acquiring
person, entitles the registered holder to purchase one ten-thousandth of a share of
Series A Junior Participating Preferred Stock, par value $0.01 per share, at a price of
$300 per one ten-thousandth of Class A Preferred Share after the distribution date. The
distribution date is 10 days after the date on which any person or group announces that
it has acquired 15% or more of Zebra’s outstanding common stock or 10 days (or a later
date as determined by the Board of directors) after the date on which any person or
group announces or commences a tender offer that would result in the person or group
becoming an owner of 15% or more of the outstanding common stock.
The Rights will expire on March 14, 2012 unless that date has been extended by the Board
of directors or unless the Rights are redeemed or terminated earlier. A committee of
Zebra’s independent directors will review the Rights Plan at least every three years and
decide whether it should continue or be revoked. Zebra generally may amend the Rights
Plan or redeem the Rights at $0.001 per Right at any time prior to the time a person or
group has acquired at least 15% of the outstanding common stock.
F-15
Note 7 Earnings (Loss) Per Share
For the years ended december 31, 2008, 2007, and 2006, earnings (loss) per share before
cumulative effect of the accounting change were computed as follows (in thousands,
except per-share amounts):
Year Ended December 31,
2007
2008
2006
Basic earnings (loss) per share:
Income (loss) before cumulative effect
of accounting change
Weighted average common
shares outstanding
Per share amount
Diluted earnings (loss) per share:
Income (loss) before cumulative effect
of accounting change
Weighted average common
shares outstanding
$(38,421)
$110,113
$69,627
664,524
$(0.60)
68,463
$1.61
70,516
$0.99
$(38,421)
$110,113
$69,627
Add: Effect of dilutive securities – stock options
—
diluted weighted average and equivalent
shares outstanding
Per share amount
64,524
$(0.60)
64,524
68,463
445
68,908
$1.60
70,516
440
70,956
$0.98
For the years ended december 31, 2008, 2007, and 2006, earnings (loss) per share after
the cumulative effect of the accounting change were computed as follows (in thousands,
except per-share amounts):
Year Ended December 31,
2007
2008
2006
$(38,421)
$110,113
$70,946
64,524
$(0.60)
68,463
$1.61
70,516
$1.01
$(38,421)
$110,113
$70,946
68,463
445
68,908
$1.60
70,516
440
70,956
$1.00
Basic earnings (loss) per share:
Net income (loss)
Weighted average common
shares outstanding
Per share amount
Diluted earnings (loss) per share:
Net income (loss)
Weighted average common
shares outstanding
64,524
Add: Effect of dilutive securities – stock options
—
diluted weighted average and equivalent
shares outstanding
Per share amount
64,524
$(0.60)
F-16
The potentially dilutive securities that were excluded from the earnings (loss) 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:
Potentially dilutive shares
2,217,940
1,561,918
1,140,689
Year Ended December 31,
2007
2006
2008
Note 8 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, 2008, 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 (loss) 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.
The amortized cost, gross unrealized holding gains, gross unrealized holding losses
and aggregate fair value of investment securities at december 31, 2008, 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
$ 42,842
State and municipal bonds
144,528
Corporate bonds
Other
3,020
320
$190,710
$
30
1,366
—
—
$ 1,366
$ (338) $ 42,534
(1,356)
144,538
(432)
—
2,588
320
$ (2,126) $ 189,980
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,
2008
2007
2006
Changes in unrealized gains and losses
on available-for-sale securities, net of tax,
recorded in accumulated other
comprehensive income (loss)
$(543)
$1,111
$(1,672)
The amortized cost, gross unrealized holding gains, gross unrealized holding losses
and aggregate fair value of investment securities at december 31, 2007, 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
$ 31,989
State and municipal bonds
194,350
Corporate bonds
Other
Partnership interests using
cost method*
3,020
38
229,397
10,933
$240,330
$
56
899
—
—
$ 955
—
$ 955
$
(505) $ 31,540
(289)
194,960
(20)
—
3,000
38
$
(814) $ 229,538
—
10,933
$
(814) $ 240,471
*Amounts are at original cost rather than fair value due to the use of the cost method of accounting.
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, 2008. These lower market values are caused by short-term fluctuations in
interest rates and are not a reflection of the credit worthiness of the issuer. Market values
are expected to recover to the amortized cost prior to maturity.
Unrealized Loss < 12 months
Unrealized Loss > 12 months
Number
of investments
Aggregate
Market Value
Unrealized
Losses
Number of
investments
Aggregate
Market Value
Unrealized
Losses
Government securities
State and municipal bonds
Corporate bonds
Total
2
1
1
4
$ 590
2,900
2,587
$ 6,077
$ (17)
(76)
(432)
$ (525)
16
30
—
46
$ 9,017
24,376
—
$33,393
$ (321)
(1,280)
—
$(1,601)
As of december 31, 2007, 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
3
5
1
9
$ 7,561
8,406
3,000
$18,967
Unrealized
Losses
$ (102)
(3)
(20)
$ (125)
Number of
investments
Aggregate
Market Value
Unrealized
Losses
21
77
—
48
$13,599
30,986
—
$44,585
$ (403)
(286)
—
$ (689)
F-17
The contractual maturities of debt securities at december 31, 2008, 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
$ 85,654
61,047
12,963
30,316
$189,980
Using the specific identification method, the proceeds and realized gains on the sales of
available-for-sale securities were as follows (in thousands):
Proceeds
Realized gains
Realized losses
Net realized losses included in other
comprehensive income (loss)
as of the end of the prior year
2008
2007
2006
$165,177
$343,647
$337,671
376
(901)
594
(781)
215
(1,385)
(441)
(392)
(1,041)
Note 9 Related-Party Transactions
Prior to August 2007, Zebra leased a building from Unique Building Corporation (Unique),
an entity controlled by certain officers and stockholders of Zebra. On August 1, 2007,
the building was sold to an unrelated party. Lease payments made to Unique under the
lease were recorded as a component of all functional areas and were included in the
consolidated financial statements as follows (in thousands):
2007
2006
Unique Operating Lease
$1,358
2,336
Note 10 Inventories
The components of inventories, net of allowances, are as follows (in thousands):
Raw material
Work in process
deferred costs of long-term contracts
Finished goods
Total inventories
December 31,
2008
2007
$ 50,015
$46,572
1,130
628
48,426
1,103
1,469
35,894
$100,199
$85,038
Inventory reserves (included in above numbers)
$ 7,172
$ 8,999
F-18
Note 11 Property and Equipment
Property and equipment, which includes assets under capital leases, is comprised of the
following (in thousands):
Buildings
Land
Machinery, equipment and tooling
Furniture and office equipment
Computers and software
Automobiles
Leasehold improvements
Projects in progress
December 31,
2008
2007
$ 1,844
$ 15,336
289
76,742
9,062
63,638
20
10,328
22,509
1,910
68,571
8,519
56,453
50
10,220
11,729
184,432
172,788
Less accumulated depreciation and amortization
(109,069)
(105,102)
Net property and equipment
$ 75,363
$ 67,686
Other items related to property and equipment are as follows:
December 31,
2008
2007
Unamortized computer software costs
$ 13,330
$ 10,402
Amortization of capitalized software
$ 5,058
$ 4,447
$ 3,600
Total depreciation expense charged to income 20,006
15,774
12,434
Year Ended December 31,
2007
2006
2008
Note 12 Income Taxes
The geographical sources of income (loss) before income taxes and cumulative effect of
accounting change were as follows (in thousands):
United States
Outside United States
Total
Year Ended December 31,
2007
2008
2006
$(30,517)
$142,903
$ 86,609
18,604
24,472
15,033
$ (11,913)
$167,375
$101,642
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 $24,261,000
at december 31, 2008. Should such earnings be remitted to Zebra, foreign tax credits
would be available to substantially offset the U.S. income taxes due upon repatriation.
The provision for income taxes consists of the following (in thousands):
Current:
Federal
State
Foreign
deferred:
Federal
State
Total
Year Ended December 31,
2007
2008
2006
$38,149
$44,737
$29,376
5,213
7,494
(22,309)
(2,039)
5,391
8,399
(1,458)
193
2,804
4,560
(3,748)
(283)
$26,508
$57,262
$32,709
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,
2007
2008
2006
Provision computed at statutory rate
$ (4,170)
$58,582
$36,279
State income tax (net of Federal tax benefit)
Tax-exempt interest income
Acquired in-process technology
Acquisition related items
Asset impairment charges
Tax benefit of exempt foreign trade income
domestic manufacturing deduction
Research and experimental credit
Other
1,127
(1,997)
—
(2,450)
35,360
—
(1,715)
(400)
753
3,636
(4,173)
649
—
—
—
(1,470)
(400)
438
1,412
(4,378)
—
—
—
(1,365)
(665)
(350)
1,776
Provision for income taxes
$26,508
$57,262
$32,709
The amounts in the previous two tables include the tax on the cumulative effect of
accounting principle of $694,000 for 2006.
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,
2008
2007
deferred tax assets:
deferred rent-building
Accrued vacation
deferred compensation
Inventory items
Allowance for doubtful accounts and other receivables
Other accruals
FAS 123(R) stock option expense
Unrealized gain on securities – FAS 115
Unrealized loss on partnership interests
Unrealized loss on hedges
Net operating loss carryforwards
Total deferred tax assets
deferred tax liabilities:
Unrealized gain on hedges
depreciation and amortization
Total deferred tax liabilities
Net deferred tax assets
$ 1,817
1,717
1,576
4,358
272
3,749
18,545
275
10,154
12
21,792
64,267
—
(1,337)
(1,337)
$ 62,930
$
311
1,541
2,879
4,249
4,053
5,464
10,111
—
4,188
3,275
24,884
60,955
(53)
(17,723)
(17,776)
$ 43,179
Included in the line item, acquisition related items, above is deferred tax assets related
to federal and state net operating losses that resulted from the WhereNet acquisition. As
of december 31, 2008, we had approximately $59,887,000 of federal net operating loss
carryforwards available to offset future taxable income which expire in 2012 through
2022. As of december 31, 2008, we also had approximately $19,283,000 of state net
operating loss carryforwards which expire in 2012 through 2022. Zebra’s intention is to
utilize these net operating loss carryforwards to offset future income tax expense. Under
the United States Tax Reform Act of 1986, the amounts of benefits from net operating
loss carryforwards may be impaired or limited in certain circumstances, including
significant changes in ownership interests.
Zebra concluded U.S. federal income tax audits for the years of 2005 and 2006 during
2008. The 2007 tax year is open to audit. As a result of the concluded audits, additional
income tax expense in the amount of $758,949 was incurred. In addition, interest expense
in the amount of $146,937, net of tax benefits, was incurred. These amounts are included
as part of current year income tax expense. The tax years 2004 through 2007 remain open
to examination by various state taxing jurisdictions. Tax authorities in the United Kingdom
have completed income tax audits through tax years ending december 31, 2006.
F-19
Total
$ 89,753
$(23,394)
$144,082
$(24,658)
Goodwill at december 31, 2006
Note 13 Goodwill and Other Intangible Asset Data
Intangible asset data are as follows (in thousands):
December 31, 2008
Gross
Carrying
Amount
December 31, 2007
Gross
Accumulated
Amortization
Carrying Accumulated
Amount Amortization
Amortized intangible assets
Current technology
$ 33,157
$(14,034)
$ 51,700
$(13,526)
Patent and other
intellectual property
Customer relationships
13,328
43,358
(4,448)
(4,912)
31,697
60,685
(6,468)
(4,664)
Unamortized intangible assets
Goodwill
$151,356
$246,510
Aggregate amortization expense
For the year ended
december 31, 2007
For the year ended
december 31, 2008
$ 18,575
Estimated amortization expense for the years ended:
$ 3,653
december 31, 2009
december 31, 2010
december 31, 2011
december 31, 2012
december 31, 2013
Thereafter
10,364
9,181
8,915
8,307
6,855
22,737
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we test
goodwill for impairment on an annual basis or more frequently if we believe indicators
of impairment exist. We performed our annual impairment test in June 2008, and
determined that our goodwill was not impaired as of the end of May 2008.
The performance of the test involves a two step process. The first step of the impairment
test involves comparing the fair values of the applicable reporting units with their
aggregate carrying values, including goodwill. We generally determine the fair value
of our reporting units using the income approach methodology of valuation that
includes the discounted cash flow method as well as other generally accepted valuation
methodologies. If the carrying amount of a reporting unit exceeds the reporting unit’s
fair value, we perform the second step of the goodwill impairment test to determine the
amount of impairment loss. The second step of the goodwill impairment test involves
comparing the implied fair value of the affected reporting unit’s goodwill with the
carrying value of that goodwill.
F-20
due to the deterioration of the economy and a significant reduction in the price of our
stock, we performed an interim test of our goodwill in the fourth quarter of 2008 and
determined that the goodwill associated with our ESG segment was impaired requiring a
charge of $113,679,000. The impairment charge was due to decreased sales and cash flow
estimates in our ESG segment as a result of world-wide depressed economic conditions.
As of december 31, 2008, these amounts are estimates and may be adjusted during the
first quarter of 2009 upon completion of a detailed second step impairment analysis.
Changes in the net carrying value amount of goodwill were as follows (in thousands):
Acquisitions
Foreign exchange impact
Goodwill at december 31, 2007
Acquisitions
Impairment charges
Foreign exchange impact
Enterprise
Solutions
Group
$ —
175,812
—
175,812
19,289
(113,679)
(585)
Specialty
Printing
Group
Total
$70,714
$ 70,714
—
(16)
70,698
—
—
(179)
175,812
(16)
246,510
19,289
(113,679)
(764)
Goodwill at december 31, 2008
$ 80,837
$70,519
$ 151,356
during 2008, we acquired intangible assets in the amount of $1,384,000 for patents
and other intellectual property. These intangible assets have an estimated useful life
of 2 to 9 years. In conjunction with our goodwill impairment testing, we also tested our
identifiable intangible assets and found several of them to be impaired resulting in an
additional impairment charge of $28,937,000 to our ESG segment and $14,680,000 to our
SPG segment. The impairment charges in our SPG segment were related primarily to
radio frequency identification.
Note 14 Other Assets
Other assets consist of the following (in thousands):
Money market investments related to the
deferred compensation plan (See Note 19)
Long-term equity securities
deposits
Other long-term assets
Total
December 31,
2008
2007
$3,426
$2,795
812
957
210
270
1,549
4,772
$5,405
$9,386
Note 15 401(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.
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 (loss) 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):
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
Percentage of eligible payroll contributed
for profit-sharing plan
2008
$ 4,156
1,748
$5,904
Year Ended December 31,
2007
2006
$4,203
1,599
$5,802
$2,030
1,628
$3,658
Net unrealized losses deferred in accumulated
other comprehensive income (loss):
Gross
Income tax benefit
Net
Notional balance of outstanding contracts
Hedge effectiveness
December 31, December 31,
2007
2008
$ (32)
$ (9,252)
(12)
(3,482)
$ (20)
$ (5,770)
€14,680
100%
€108,500
100%
1.5%
1.8%
1.8%
Net gain and (losses) included in revenue
$(12,354)
$(3,060)
Year ended December 31,
2008
2007
2006
$(873)
Note 16 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):
Year Ended December 31,
2007
2008
2006
Change in losses from foreign
exchange derivatives
$(13,196)
$(3,788)
Gain (loss) on net foreign currency assets
16,714
Net foreign exchange gain (loss)
$ 3,518
4,311
$ 523
$ (73)
(562)
$(635)
December 31, December 31, December 31,
2006
2008
2007
Notional balance of outstanding contracts:
Euro
Pound
Euro/Pound
€18,500
£ 5,000
€17,000
€ 14,000
£ 3,000
€20,500
€17,000
£ 2,660
€22,000
Net fair value of outstanding contracts
$(2,414)
$ (104)
$ (172)
The above 2008 gains and losses are the net pretax gains and losses released from other
comprehensive income (loss) into earnings during these years. We expect to release
pretax losses in the amount of $32,000 from other comprehensive income (loss) into
earnings during 2009 along with gains and losses on similar contracts entered into early
in 2009. Currently, the initial duration of our forecasted sales hedge contracts is eight
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 17 Commitments and Contingencies
Leases. Minimum future obligations under non-cancelable operating leases as of
december 31, 2008 are as follows (in thousands):
2009
2010
2011
2012
2013
Thereafter
Total minimum lease payments
Operating Leases
$ 12,023
9,951
8,123
7,069
6,351
4,946
$48,463
F-21
Rent expense for operating leases charged to operations was as follows (in thousands):
Rent expense
2008
$15,695
Year Ended December 31,
2007
2006
$10,675
$9,011
The operating lease information includes a variety of properties around the world.
These properties are used as manufacturing facilities, distribution centers and sales
offices. Lease terms range from one year to 17 years with breaking periods specified in
the lease agreements.
during 2008, Zebra entered into a sale and leaseback transaction for the building we
owned in Camarillo, California. The resulting lease has a term of 30 months and the
minimum monthly lease payments are $111,850 with no rent escalation clause. We are
also moving our corporate headquarters from the current Vernon Hills, Illinois, location to
a new location in Lincolnshire, Illinois as of March 1, 2009. The lease on this building has
a term of 5 years, 4 months with minimum monthly lease payments beginning at $53,644
increasing approximately 2% per year through the end of the lease term.
Letters of credit. In connection with various customer contracts, Zebra has entered into
three letters of credit agreements with a bank. The contingent liability of Zebra under
these agreements as of december 31, 2008 is $756,000.
Revolving credit agreement. On August 14, 2008, Zebra entered into a revolving credit
agreement for a five-year $100 million revolving credit facility. The loans under this credit
facility will be available for general corporate purposes of Zebra and its subsidiaries in
the ordinary course of business and other purposes permitted by the agreement.
This credit agreement is guaranteed by certain of Zebra’s domestic subsidiaries. Loans
under the agreement shall bear interest at a rate equal to the prime rate or a spread over
the applicable LIBOR rate, as selected by Zebra. This spread for LIBOR-based loans is
dependent on our ratio of Total debt to EBITdA, as defined in the agreement, and ranges
from 0.50% to 1.25%. The spread in effect at closing for LIBOR-based loans was .50%.
The credit agreement includes customary representations, warranties, affirmative
and negative covenants (including, among others, restrictions on the payment of cash
dividends) and events of default (and related remedies, including acceleration and
increased interest rates following an event of default). It also contains financial covenants
tied to Zebra’s leverage ratio and fixed charge coverage ratio. As of december 31, 2008, we
had established letters of credit amounting to $456,000, which reduce the funds available
for borrowing under the agreement. At that date, no amounts were outstanding under the
credit agreement.
Legal proceedings. 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. A final hearing to consider statute
of limitations and substantive arguments was held december 11, 2008. The Court is
expected to enter a judgment on March 26, 2009.
On April 9, 2008, a complaint was filed in the U.S. district Court for the Northern district
of Illinois by Barcode Informatica, Ltd. (“Barcode”), a former Brazilian reseller, against
Zebra. The complaint alleges that Zebra wrongfully terminated Barcode’s reseller
status and tortiously interfered with Barcode’s alleged bid for the sale of printers to
Brazilian Post. Barcode’s claim seeks an unspecified amount of damages. We believe that
Barcode’s claims are without merit and we will vigorously defend the action.
Note 18 Segment and Geographic Sales
As a result of the acquisitions of WhereNet Corp., proveo AG, Navis Holdings, LLC, and
Multispectral Solutions Inc., Zebra now has two reportable segments: Specialty Printing
Group (SPG) and Enterprise Solutions Group (ESG).
SPG includes direct thermal and thermal transfer label and receipt printers, passive
radio frequency identification (RFId) printer/encoders, dye sublimation card printers and
digital photo printers. Also included in this group is 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.
ESG has evolved since the beginning of 2007 with the acquisitions of WhereNet Corp.,
proveo AG, Navis Holdings, LLC, and Multispectral Solutions Inc. The solutions that these
companies provide are sold on a contract basis and are typically installed over several
quarters. These contracts cover a range of services, including design, installation and
ongoing maintenance services.
The accounting policies for reportable segments are the same as those described in the
summary of significant accounting policies except that Zebra records its federal and
state deferred tax assets and liabilities in corporate and other. Intersegment sales are
not significant.
F-22
Segment information is as follows (in thousands):
Net sales:
SPG
ESG
Total
Operating income (loss):
SPG
ESG
Corporate and other
Total
Depreciation and amortization:
SPG
ESG
Corporate and other
Total
Identifiable assets:
SPG
ESG
Corporate and other
Total
Year Ended December 31,
2007
2006
2008
$882,459
$833,034
$759,524
94,241
35,245
—
$ 976,700
$868,279
$759,524
$ 206,188
$ 213,591
$191,372
(165,966)
(55,568)
(11,255)
(59,151)
—
(110,943)
$ (15,346)
$ 143,185
$ 80,429
$ 17,515
$ 15,542
$ 11,654
14,885
6,181
5,850
5,510
—
4,433
$ 38,581
$ 26,902
$ 16,087
December 31,
2008
2007
$ 376,515
$ 370,786
190,572
283,791
320,689
342,803
$850,878
$1,034,278
Corporate and other includes corporate administration costs or assets that support both
reporting segments.
Prior period amounts have been restated to conform to requirements of SFAS No. 131,
Disclosures about Segments of and 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.
2008
Net sales
Long-lived assets
2007
Net sales
Long-lived assets
2006
Net sales
Long-lived assets
North Europe, Middle
East & Africa
America
Latin
America
Asia
Total
$444,266
262,615
$ 358,913
28,397
$76,489
340
$97,032
1,726
$976,700
293,078
$416,093
405,903
$ 320,225
26,376
$60,090
401
$71,871
940
$868,279
433,620
$379,820
152,518
$ 264,71
8,935
$53,619
22
$61,374
695
$759,524
162,170
Net sales by major product category are as follows (in thousands):
Hardware
Supplies
Service Shipping Cash Flow
Hedging
Software Handling Activities
and
and
Total
2008
2007
2006
$704,992
$172,106
$105,113
$6,843
$(12,354)
$976,700
660,034
578,002
161,678
150,709
42,801
25,664
6,826
6,022
(3,060)
868,279
(873)
759,524
Note 19 Deferred Compensation Plan
Zebra offers a deferred compensation plan that permits directors and 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 money market investments.
Previously, Zebra purchased corporate-owned whole-life insurance contracts on the
related employees, of which Zebra is the beneficiary. during 2007, the whole-life insurance
policies were liquidated and money market investments were purchased. 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/money market interest included in
investment income
Year Ended December 31,
2008
2007
2006
$55
$516
$584
December 31, December 31,
2007
2008
deferred compensation liability included
in other long-term liability
Money market investments included in other assets
$3,323
3,426
$3,950
2,795
F-23
Note 20 Other Comprehensive Income (Loss)
Stockholders’ equity contains certain items classified as other comprehensive income,
including:
• Foreign currency translation adjustments related to our non-U.S. subsidiary
companies that have designated a functional currency other than the dollar. We
are required to translate the subsidiary functional currency financial statements to
dollars using a combination of historical, month-end, and average foreign exchange
rates. This combination of rates creates the foreign currency translation adjustments
component of other comprehensive income (loss).
• 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 16 for more details.
• Unrealized gains (losses) on investments classified as available-for-sale are
deferred from income statement recognition. See Note 8 for more details.
The components of other comprehensive income (loss) included in the Consolidated
Statements of Comprehensive Income (Loss) are as follows (in thousands):
Foreign currency translation adjustments
$(22,991)
$ 2,277
$ 7,295
Year Ended December 31,
2007
2008
2006
The components of accumulated other comprehensive income (loss) included in the
Consolidated Balance Sheets are as follows (in thousands):
Foreign currency translation adjustments
Unrealized 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
As of December 31,
2008
2007
$ (12,314)
$ 10,677
$
$
(32)
(12)
(20)
$ (9,252)
(3,482)
$ (5,770)
$
(730)
$
141
(275)
$
(455)
$
53
88
Note 21 Major Customers
ScanSource, Inc. is our most significant customer. Our net sales to ScanSource, Inc., an
international distributor of Zebra products related to automatic identification, telephony
and security, as a percentage of total net sales, were as follows:
Changes in unrealized gains and (losses) on
hedging transactions:
ScanSource
Year Ended December 31,
2007
16.5
2006
17.1
2008
15.4
Gross
Income tax (benefit)
Net
$ 9,220
3,470
$ 5,750
$(8,346)
(3,141)
$ (5,205)
$ (1,905)
(717)
$ (1,188)
Changes in unrealized holding gains and
(losses) on investments classified
as available-for-sale:
Gross
Income tax (benefit)
Net
$ (871)
$ 1,782
(328)
671
$ (543)
$ 1,111
$(2,682)
(1,010)
$ (1,672)
F-24
No other customer accounted for 10% or more of total net sales during these years.
Note 22 Costs Associated with Exit or Disposal Activities
during the first quarter of 2008, we initiated two different plans to close facilities. These
plans are being accounted for under SFAS No. 146, Accounting for Cost Associated with
Exit or Disposal Activities. All exit costs associated with these activities are identified on
a separate line of our Consolidated Statement of Earnings (Loss), as part of operating
expenses. These plans are intended to reduce costs and improve manufacturing efficiency.
In January 2008, we initiated a plan to close our supplies manufacturing plant in Warwick,
Rhode Island. This plant’s operations were transferred to a new facility in Flowery Branch,
Georgia, which is now our East Coast supplies manufacturing facility. This transition
was completed during the second quarter. We do not expect to incur any further costs
associated with this plan. Costs incurred through december 31, 2008 were (in thousands):
Type of Cost
Severance, stay bonuses, and
other employee-related expenses
Other exit costs
Total
$341
261
$602
In February 2008, we announced plans to establish regional distribution and
configuration centers, consolidate our supplier base, and transfer final assembly of
thermal printers to Jabil Circuit, Inc., a global third-party electronics manufacturer. These
actions are intended to optimize our global printer product supply chain by improving
responsiveness to customer needs and increasing Zebra’s flexibility to meet emerging
business opportunities. As a result, all printer manufacturing in our Vernon Hills, Illinois
and Camarillo, California will be transferred to Jabil’s facility in Guangzhou, China. This
transition is expected to be completed by the end of 2009. As of december 31, 2008, we
have incurred and expect to incur the following exit costs (in thousands):
All current exit costs are included in operating expenses for the Specialty Printing Group
under the line item exit, restructuring and integration costs.
Also included in the line item exit, restructuring and integration costs, are costs related
to an integration project to combine our most recent acquisitions of WhereNet Corp.,
proveo AG, Navis, LLC, and Multispectral Solutions, Inc., to form the Enterprise Solutions
Group. As a result, Zebra incurred $3,359,000 in acquisition integration expenses,
primarily severance costs during 2008, which are included in operating expenses as a
separate line item.
Cost incurred
as of December 31,
2008
Additional
cost
expected
Total costs
expected to
be incurred
Note 23 Quarterly Results of Operations (unaudited)
(Amounts in thousands, except per share data)
Type of Cost
Severance, stay bonuses, and other
employee-related expenses
Professional services
Relocation and transition costs
$ 4,308
$
1,612
$ 6,000
5,425
3,662
—
10,459
5,425
14,121
2008
Net sales
Total
$ 13,395
$ 12,151
$ 25,546
Cost of sales
Gross profit
Selling and marketing
Research and engineering
General and administrative
Amortization of intangibles
Claim settlement
Exit, restructuring and
integration costs
Asset impairment charges
First
Quarter
$ 246,277
123,362
122,915
30,861
19,907
25,045
4,514
—
3,234
—
Second
Quarter
Third
Quarter
$ 253,782
$ 244,073
126,067
126,287
127,715
117,786
34,322
22,849
33,148
21,711
24,216
4,679
18,534
4,711
—
(5,302)
4,680
—
90,746
4,304
—
77,106
Fourth
Quarter
$ 232,568
121,679
110,889
32,433
20,653
20,090
4,671
—
7,791
157,600
243,238
during december 2008, Zebra made various organization changes in order to reduce
costs. Affected employees received both severance and outplacement services. The total
cost of this action was $2,653,000 and was expensed in the fourth quarter of 2008. No
future costs related to these organizational changes are expected to be incurred.
Liabilities and expenses related to exit activities for the year ended december 31, 2008,
were as follows (in thousands):
Severance,
stay bonuses,
and other
employee-related
expenses
Relocation
and
transition
Professional
services
Other
costs exit costs
Total
Total operating expenses
83,561
Accrued liabilities related
to exit activities at
december 31, 2007
Expenses incurred for the
nine months ended
September 27, 2008
Expenses incurred for the
three months ended
december 31, 2008
Expenses incurred for
the year ended
december 31, 2008
Less: Amounts paid
for the year ended
december 31, 2008
Accrued liabilities related
to exit activities at
december 31, 2008
$ —
$ —
$ —
$ — $ —
3,542
4,294
2,425
223
10,484
3,760
1,131
1,237
38
6,166
7,302
5,425
3,662
261
16,650
Operating income (loss)
39,354
36,969
40,680
(132,349)
Investment income (loss)
Foreign exchange gain (loss)
Other, net
2,405
700
(254)
2,722
(69)
(651)
(5,141)
247
(184)
Total other income (loss)
2,851
2,002
(5,078)
1,295
2,640
(277)
3,658
Income (loss) before taxes
Income taxes
42,205
14,561
38,971
35,602
(128,691)
13,445
9,832
(11,330)
Net income (loss)
$ 27,644
$ 25,526
$ 25,770
$ (117,361)
(1,107)
(5,333)
(3,610)
(222)
(10,272)
diluted earnings (loss) per share $
Basic earnings (loss) per share
$
0.42
0.42
$
$
0.39
0.39
$
$
0.40
0.40
$
$
(1.88)
(1.88)
$ 6,195
$ 92
$ 52
$ 39 $ 6,378
F-25
Fourth
Quarter
$ 233,573
120,275
113,298
35,683
15,642
21,854
3,257
—
76,436
36,862
8,545
553
231
9,329
46,191
15,388
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, 2008
$ 5,075
$ 1,061
$ 3,402
$ 2,734
Year ended december 31, 2007
Year ended december 31, 2006
Valuation accounts for inventories:
Year ended december 31, 2008
Year ended december 31, 2007
Year ended december 31, 2006
3,549
1,116
$ 8,999
9,866
7,598
330
(1,196)
5,075
2,856
423
3,549
$ 6,907
8,800
8,951
$ 8,734
$ 7,172
9,667
8,999
6,683
9,866
See accompanying report of independent registered public accounting firm.
21,694
2,928
—
67,606
37,022
4,393
(23)
(230)
4,140
41,162
14,201
2007
Net sales
Cost of sales
Gross profit
First
Quarter
$ 208,576
108,786
Second
Quarter
Third
Quarter
$ 208,912
$ 217,218
109,510
112,590
99,790
99,402
104,628
Selling and marketing
Research and engineering
General and administrative
Amortization of intangibles
Acquired in-process technology
28,164
14,185
17,933
2,323
1,853
29,069
29,080
13,869
13,904
19,875
2,620
—
Total operating expenses
64,458
65,433
Operating income
35,332
33,969
Investment income
Foreign exchange gain (loss)
Other, net
Total other income
Income before taxes
Income taxes
Net income
5,304
175
76
5,555
40,887
14,171
5,724
(182)
(376)
5,166
39,135
13,502
$ 26,716
$ 25,633
$ 26,961
$ 30,803
Basic earnings per share
diluted earnings per share
$
$
0.39
0.39
$
$
0.37
0.37
$
$
0.39
0.39
$
$
0.46
0.45
F-26
Board of directors
Officers
Stockholder information
Michael A. Smith, Chairman (1, 2, 3)
Chairman and Chief Executive Officer
FireVision, LLC
Anders Gustafsson
Chief Executive Officer
Zebra Technologies Corporation
Gerhard Cless
Executive Vice President
Zebra Technologies Corporation
Richard L. Keyser (2)
Chairman
W. W. Grainger, Inc.
Andrew K. Ludwick (1)
Private Investor
Ross W. Manire (1, 3)
Chairman and Chief Executive Officer
Clearlinx Network Corporation
Dr. Robert J. Potter (2)
President and Chief Executive Officer
R.J. Potter Company
Anders Gustafsson
Chief Executive Officer
Gerhard Cless
Executive Vice President
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, Finance
Michael C. Smiley
Chief Financial Officer
Michael H. Terzich
Senior Vice President, Sales and Marketing
Specialty Printing Solutions
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Nominating Committee
Joanne Townsend
Vice President, Human Resources
William J. Walsh
Senior Vice President, General Manager
Zebra Enterprise Solutions
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, citizenship, disability, veteran
status, marital status, sexual orientation or
any other reason prohibited by law.
Corporate Headquarters
Zebra Technologies Corporation
475 Half Day Road, Suite 500
Lincolnshire, Illinois 60069 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 21, 2009,
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
BNY Mellon Shareowner Services
P.O. Box 358015
Pittsburgh, PA 15252-8015
Overnight Delivery
480 Washington Boulevard
Jersey City, NJ 07310-1900
Zebra Toll Free: 877 870-2368
TDD for hearing impaired: 800 231-5469
Foreign Shareowners: 201 680-6578
TDD for Foreign Shareowners: 201 680-6610
Web Site address:
Shareowner accounts:
www.bnymellon.com/shareowner/isd
General transfer agent:
www.bnymellon.com/shareowner
E-mail contact: shrrelations@bnymellon.com
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
Zebra Technologies Europe, Limited
Zebra Technologies Asia Pacific, L.L.C.
475 Half Day Road
Suite 500
Lincolnshire, IL 60069
USA
+1 847 634 6700
www.zebra.com
Dukes Meadow
Millboard Road
Bourne End
Buckinghamshire SL8 5XF, UK
+ 44 (0) 1628 556000
120 Robinson Road
#06-01 Parakou Building
Singapore 68913
+ 65 6858 0722