Zebra
Annual Report 2009

Plain-text annual report

The Power of Knowledge 2009 annual report As the pace of business increases daily across the globe, WE KNOW that the need for accuracy, efficiency and security has never been greater. Zebra Technologies helps meet those demands by improving its customers’ business performance with solutions that increase productivity and lower costs. Zebra solutions enable our customers to put the right asset in the right place at the right time to improve sourcing, visibility and deployment of critical assets. Our commitment to industry leadership, financial strength and growth helps Zebra build long-term value for our customers, partners and stockholders. Financial Summary (In thousands, except per-share data and percentages) O P E R A T I N G R E S U L T S 2009 % Change 2008 % Change 2007 net sales Gross profit operating income (loss) net income (loss) Basic earnings (loss) per share diluted earnings (loss) per share $ 803,585 360,721 68,802 47,104 0.79 0.79 -17.7% -24.7 • • • • $ 976,700 479,305 (15,346) (38,421) (0.60) (0.60) 12.5% 14.9 • $ 868,279 417,118 143,185 • • • 110,113 1.61 1.60 C A P I T A L I Z A T I O N cash and cash equivalents, restricted cash, investments and marketable securities, and long-term investments and marketable securities Working capital total assets stockholders’ equity $ 246,721 306,127 830,479 712,129 $ 224,886 271,831 850,878 710,738 $ 281,179 298,660 1,034,278 902,693 Anders Gustafsson Chief Executive Officer Zebra emerged from a very challenging year as a stronger, more responsive company. We took advantage of our financial strength during the downturn to extend industry leadership and position the company for accelerating sales and earnings growth as business conditions improve. the impact of the recession. Earnings of $0.79 per share reflect a 13.1% reduction in operating expenses excluding impairment charges. With free cash flow of $81 million and year-end cash balance of $247 million and no debt, we maintained Zebra’s financial strength, a cornerstone to our long-term success. This strength, along with our global industry leadership, gave us the confidence to maintain investments to provide better customer service and capture more business opportunities. During the year we also made significant advances in the following areas:· We completed the outsourcing of our printer manufacturing to a global third-party electronics manufacturer as part of our global supply chain transformation. This transition has enabled us to improve responsiveness to customer demands and lower product costs.· New products helped us serve customers better and expand the range of available business opportunities. We began shipping our first re-transfer card printer for photo-quality imaging in security, government and other personal During 2009, Zebra balanced preserving near-term profitability with investing to sustain long-term growth, maximize investment returns and deliver strong free cash flow. We took advantage of the global economic downturn to take a hard look at our business, and we made structural changes that streamlined operations and lowered costs. At the same time, we introduced innovative products and solutions that meet more of our customers’ needs to identify, track and manage assets throughout the enterprise and across the supply chain. By focusing on those activities that produce the highest risk-adjusted returns, we also used more than $65 million in 2009 to buy back Zebra shares at attractive prices. Sales declined for only the second time in the company’s history, down 17.7% for the year, as our diversity across products, geographies and industries moderated letter to shareholdersidentification applications. sales of Going forward, we are focused on innovative, new products also remain our new Xi4 high-performance printers four strategic imperatives: vital to our long-term success. We remain kept Zebra as the supplier of choice for mission-critical printing solutions. innovative new iq color labels brought · accelerating Zebra’s expansion in developing countries and drive committed to developing new generations of distinctly superior products and solutions that will build on our color printing to monochrome thermal innovation in new products in terms of industry-leading brand and move Zebra labels, and new printer drivers for performance, features and integration. further ahead of the competition. our plan smart phones increased functionality and ease-of-use for mobile workers. · our Zebra Enterprise solutions business unit achieved its goals of selling its solutions across its targeted industries, increasing sales through channel partners, and implementing container · Expanding our core business by forging stronger channel relationships, including alliances with global partners includes designing printers that meet regional requirements to better serve our customers in attractive territories. and independent software vendors. increasingly, our customers are turning to · developing lean, world-class operations through the expansion of our Zebra as a strategic partner to help them improve their business processes. Zebra is the global leader in an industry with port system solutions around the world. outsourcing initiatives, improved attractive long-term growth prospects. distribution and other it initiatives. We are unique in the breadth of asset Accelerating Investment in 2010 · Building on our history of high-performance teamwork and in 2009, we maintained strong collaboration. financial discipline to improve capital tracking and supply chain solutions we offer. our success has been and continues to be the result of the commitment of more than 2,000 employees around the world dedicated to meeting more of returns and extend global leadership for 2010, we are committing more our customers’ needs. We will continue in an industry with attractive global resources in asia pacific, Europe, latin to focus on generating the highest trends. the aggressive actions we america and the Middle East – key risk-adjusted returns on our investments took during the downturn have territories we have identified as having to drive greater shareholder value. positioned Zebra for improving the highest potential for profitable growth. financial performance and the creation adding new sales professionals supported of greater shareholder value. i am by enhanced country-specific marketing confident that we are now well is a proven high-return, low-risk activity positioned to capture even more to generate greater channel support and business opportunities as global increased revenues. economic conditions improve. Anders Gustafsson Chief Executive Officer We Know > t h At t I m E I s m O N E y < Chrissy Holden, Product Manager - Mobile< G N I R U t C A F U N A m E N I L m A E R t s O t W O h > W O N K E W Direct Store Delivery When south africa’s leading confectioner went looking for ways to improve sales and customer service, it found that Zebra offered the optimal solution. the company outfitted its field sales force with Zebra® rW 420™ mobile printers and vehicle cradles to provide customers with invoices immediately upon delivery of their products. this capability allowed the company to receive faster payment for its products, while improving the efficiency and productivity of its sales staff. What’s more, the confectioner’s customers appreciated receiving accurate and highly legible invoice documents which remain archive-quality for a minimum of five years. Supply Chain Logistics in a time when businesses are scrutinizing operating costs like never before, companies can improve efficiency with asset tracking solutions incorporating Zebra® printers and media. a worldwide leader in manufacturing paints and coatings uses more than 60,000 labels each day to track shipments of its products in more than 80 countries. to improve upon the company’s manual process, the company linked Zebra high-performance and mid-range printers and paX print engines to its enterprise resource planning system for fast, accurate printing of barcoded shipping labels. the result? a dramatic increase in productivity in the company’s warehousing operations and a rapid payback on investment. Richard hughes-Rowlands, product Marketing Manager rW420 Mobile printer 140Xi4 thermal printer Retail self-service kiosks with Zebra® kiosk printers help retailers increase sales and build customer loyalty. a proven win-win solution, Zebra kiosk printers deliver coupons, price checks, product locations, recipes and gift registries. the return on investment is big – better service, happier customers, increased sales and lower operating costs – a combination that checks out well for both retailers and shoppers. < E C A F s ’ R E m O t s U C A N O E L I m s A t U p O t W O h > W O N K E W Real-Time Locating Systems refurbishing aircraft radar antenna systems is a complex job. the task involves disassembling the systems, with parts and components spread across more than two million square feet. the u.s. army’s research and analysis division sought an automated tracking system to help optimize the process—and enlisted the best in Zebra Enterprise solutions’ wireless real -time locating systems (rtls) to do so. using Wheretag active radio frequency identification transmitters, the system allows tagged parts, components and assemblies to be located instantly to dramatically accelerate the refurbishment process. the system also provides critical information on process flow by identifying bottlenecks that are subsequently eliminated. With the proven time and cost savings, the department of defense is exploring additional rtls applications to keep the nation’s armed forces flying high. Kristy Lau, interactive Marketing specialist Kiosk Wheretag We Know > W h E R E t h I N G s A R E At A L L t I m E s < mike shea , Vp, Zebra Enterprise solutions We Know > t h At AC C U R ACy s Av E s L I v E s < patty O’Brien, partner Business Manager Healthcare accuracy is critically important in healthcare. that’s why more hospitals are using printed wristbands incorporating bar codes and radio frequency identification (rfid) to identify their patients. the ids can be scanned anywhere in the hospital for instant access to a patient’s record and visual id confirmation. a patient’s care journey can be tracked through the pre- and post-operative processes. By significantly increasing accuracy and efficiency, the system helps save lives and boost patient trust and quality of care. < U O y t C A F N I E R A U O y t A h t > W O N K E W Personal Identification in an age when security concerns have never been greater, the need for personal identification and access control has become increasingly important. that’s where Zebra® card printers come in. applications range from corporate and school ids that assist with managing facilities access, to tamper-resistant and secure driver’s licenses and voter ids. Zebra security printers have played an important role in the process of registering voters for national elections in several countries. With voter ids containing personal information such as their photo, fingerprint and bar coded data, countries are able to greatly reduce the risk of election ballot fraud. mo Raja, Manager, card technical support Hc100 patient i.d. solution ZXp series 8 retransfer card printer stock performance Graph this graph compares the cumulative annual change since december 31, 2004, 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, 2004, and assumes that all dividends were reinvested at the end of the month in which they were paid. NASDAQ Hemscott Zebra Comparison of 5-year cumulative total return of Zebra Technologies Corporation, the Hemscott Industry Group 815 Index and the Nasdaq Composite Market Index Zebra Technologies Corporation Hemscott Industry Group Index NASDAQ Composite Market Index 150 125 100 75 50 25 0 12/31/2004 12/31/2005 12/31/2006 12/31/2007 12/31/2008 12/31/2009 2004 2005 2006 2007 2008 2009 Zebra technologies corporation Hemscott industry Group index nasdaq composite Market index $ 100.00 $76.14 $ 61.82 $ 61.66 $ 36.00 $50.37 100.00 88.40 92.92 92.60 46.66 68.72 100.00 102.20 112.68 124.68 74.70 108.56 1. Morningstar, inc. publishes the Hemscott industry Group 815 (computer peripherals) index. the index is comprised of the following companies: acorn Energy, inc., alliance distributors Holding, inc., amedia networks, inc., aruba networks, inc., astro-Med, inc., au optronics corporation, avocent corporation, Bio-key international, inc., centerspan communications, inc., chatsworth data solution, china technology Global corporation, communication intelligence corporation, copsync, incorporated, copytele, inc., creative technology, ltd., data translation, inc., datametrics corporation, Electronics for imaging, inc., Emulex corporation, Evans & sutherland computer corporation, fortinet, inc., George risk industries, inc., Hauppauge digital, i.i.s. intelligent information systems, ltd., iGo, inc., immersion corporation, intellectual technology, inc., intermec, inc., interphase corp., Key tronic corporation, lantronix, inc., lexmark international, inc., logitech international s.a., Mcrae industries, inc., Mcrae industries, inc., Media 100, inc., Media sciences international, inc., Mercury computer systems, inc., Mitek systems, inc., Mts Medication technologies, inc., nicE-systems, ltd., novint technologies inc., planar systems, inc., qsGi, inc., radcoM, ltd., radisys corporation, rimage corporation, scM Microsystems, inc., soyo Group, inc., stratasys, top image systems, ltd., transact technologies, inc., universal display corporation, Veridicom international, inc., Video display corporation, Wave systems corporation, Zebra technologies corporation and Zoom telephonics, inc. Zebra Technologies Corporation 2009 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, 2009 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.) 475 Half Day Road, Suite 500, Lincolnshire, IL 60069 (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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes __ 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. [ X ] 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 July 3, 2009, the aggregate market value of each of the registrant’s Class A Common held by non-affiliates was approximately $1,398,619,000. The closing price of the Class A Common Stock on July 3, 2009, as reported on the NASDAq Stock Market, was $23.67 per share. As of February 12, 2010, 57,878,289 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 20, 2010, 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 indicates otherwise. PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . 10 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Safe Harbor Forward-looking statements contained in this filing are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995 and are highly dependent upon a variety of important factors which could cause actual results to differ materially from those reflected in such forward looking statements. These factors include: • Market acceptance of Zebra’s printer and software products and competitors’ product offerings and the potential effects of technological changes, • The effect of market conditions in North America and other geographic regions, • Our ability to control manufacturing and operating costs, • Success of integrating acquisitions, • Interest rate and financial market conditions because of our large investment portfolio, • Foreign exchange rates due to the large percentage of our international sales and Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 operations, and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Item 7A. quantitative and qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . 30 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 • 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. PART III Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . 33 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Item 14. Principal Accounting Fees and Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 PART IV Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SIGNATURES Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE Index to Consolidated Financial Statements and Schedule . . . . . . . . . . . . . . . . . . . . . . . . F-1 1 Item 1. Business Zebra Technologies Corporation is a Delaware corporation. Our principal offices are located at 475 Half Day Road, Suite 500, 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 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 and retail 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 and dye sublimation card 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. These companies comprise the Zebra Enterprise Solutions Group (ZES). The acquisitions of these companies has 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, global positioning systems (GPS), telematics and ultra wideband (UWB) technologies. ZES products consist of battery-powered wireless tags, fixed-position antennae, transponder modules and application software. ZES also provides 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 high- quality labels, tickets, receipts, and plastic cards on demand. The exceptional diversity of applications using our printer products for barcoding and personal identification includes routing and tracking, transactions processing, and identification and authentication. These applications require high levels of data accuracy, where speed, reliability and durability are critical. They also include specialty printing for receipts and tickets where improved customer service and productivity gains may be the primary reason for using our on demand receipt printers. 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, 2009, management estimates that Zebra has sold more than 8,400,000 printers to customers around the world. We believe competitive forces on businesses worldwide to strengthen security, reduce costs, more effectively manage assets, 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. Many of Zebra’s applications enhance the use of enterprise 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 are also increasing the use of automatic identification systems. Still other applications are taking advantage of recent advances in wireless and hand-held computing technologies. Concern for safety and security and personal identification contribute to demand for our card printer products. This concern has heightened interest in systems that provide personal identification and access control, including secure ID systems for driver’s licenses, employee and visitor badges, national identification cards, event passes, club membership cards and keyless entry systems. Our printers are used to print bar code labels, receipts, plastic identification cards, wristbands, tags and encode passive RFID “smart” labels. We also sell related specialty labeling materials, thermal ink ribbons, and bar code label design and network management software. These products are used to support 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, value-added 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 offering is a unique and significant competitive strength, because it allows Zebra to satisfy the widest variety of thermal printing applications and leverage our brand and reputation as customers install new systems that require on demand printing. 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 durable 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, 2009, we offered 58 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. • Mid-range tabletop printers, which are designed for demanding commercial applications. • Desktop printers to deliver value and performance in applications with lower volume or space restrictions. • Mobile printers to meet the printing needs of workers in the field. • 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. • RFID printer/encoders for passive high frequency and ultra-high frequency radio frequency identification 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. 2 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, plastic cards, card laminates and thermal transfer ribbons. Zebra promotes the use of genuine Zebra brand supplies with its printing 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 2009, the ZebraLink Multiplatform Software Development and Smart Phone utility was introduced to aid with printing from Smartphones to 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; Etobicoke, Ontario, Canada; Mexico City, Mexico; Preston, U.K.; Singapore; Shanghai, China; and Heerenveen, 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 3 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 twelve 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 help 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 incorporate thermal printing technology, 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 form of thermal printing technology benefits applications requiring simple and reliable operations 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 form of thermal printing technology allows a wider range of specialty label materials and associated inks to be used for applications such as circuit board labels, chemical identification and product labels that require resistance to chemicals, temperature extremes, abrasion, or labels requiring a long shelf life. Most of our printers in our high performance, midrange, print engine, desktop and mobile categories use thermal transfer printing but can also support direct thermal printing. Dye-sublimation card printers apply heat to a ribbon to release a dye that is absorbed into a plastic card, retransfer film or treated paper. This process creates full-color, photographic quality images that are well-suited for driver’s licenses, access and identification cards, transaction cards, and on-demand photographs. Direct thermal and thermal transfer printers create crisp images at high speeds, 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 the durability of our printers. 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. These features make our 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 industry served. 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 specific industries. 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 and more effectively offer our solutions to a greater number of end users. 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 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 would be transferred to a third-party manufacturer, Jabil Circuit, Inc. We completed the transition of transferring substantially all printer lines to Jabil in 2009. This action is helping to reduce costs and 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. Jabil produces our printers to our design specifications in the quantities we order. We maintain control over the supply chain including supplier selection and price negotiations of key component parts. Jabil is responsible for the procurement of the component parts and subassemblies used in the Zebra printers it produces. Jabil owns the inventory associated with the product until the product is shipped to Zebra. Zebra has a subsidiary located in Guangzhou, China, and has an office located near the Jabil facility in China where our 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 are shipped to Zebra’s regional distribution centers. The majority of the product passes through to Zebra’s distribution centers. A small percentage of products are reconfigured at Zebra’s distribution centers through firmware downloads, packaging and some other customization before they are shipped to customers. In addition, certain products are manufactured in accordance with federal procurement regulations and various international trade agreements, and remain eligible for sale to the United States government. Printer Competition Many companies are engaged in the design, manufacture and marketing of bar code label printers, RFID printer/encoder 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 processes 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, 4 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; 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 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 growth opportunities to Zebra as the technologies become more widely adopted. If other technologies were to evolve or become available to Zebra, it is possible that those technologies would be incorporated into our products. Alternatively, if such technologies were to evolve or become available to our competitors, Zebra’s products may become obsolete. This obsolescence would have a significant negative effect on Zebra’s business, financial position, results of operations and cash flows. Therefore, we continually assess competitive and complementary methods of bar code 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. 5 Zebra Enterprise Solutions Group (ZES) Formed in 2008 principally from 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 ZES improve business processes. Utilizing the combined products offered by these businesses, ZES 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 ZES’s business consists of perpetual software licenses and related services including maintenance, support and consulting services. In addition, ZES 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 an integrated solution and also replacement 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 ZES is uniquely positioned with a broad range of asset tracking and optimization solutions to offer our customers. However, several competitors exist for each solution ZES provides. They include Aeroscout Inc., Ekahau Inc., I.D. Systems Inc., Identec Solutions, Intermec Inc., RF Code Inc., Lockheed Martin Corp., Roper Industries, Inc., Siemens AG, Motorola, Inc., Amicus, Pinnacle VTIS, IBM, Cosmos, Ubisense, Time Domain and Tideworks Technology. The ZES 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 ZES 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 ZES RTLS infrastructure. ZES sells its products and services into the following major industries: • Airport Operations. Our Airport Visualizer™ provides integrated aviation solutions and helps to optimize motorized ground support equipment 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, 2009, our Airport Visualizer solution helped to optimize the processes of approximately 1,500 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 TOS to improve their logistics operations as well. Our Navis Powerstow® solution helps terminal operators optimize ship stowage to minimize total voyage cost and maximize efficiency. Navis 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. ZES products and services are primarily sold through ZES’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. ZES’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 more than 8,400,000 thermal printers to customers as of December 31, 2009. ScanSource, Inc., is our most significant customer. Our net sales to ScanSource, a global distributor of Zebra SPG products, as a percent of our total net sales, were as follows: Percent of net sales Year Ended December 31, 2009 16.1 2008 15.4 2007 16.5 No other customer accounted for 10% or more of total net sales during these years. Sales Net sales by product category for the last three years were (in thousands): Product Category Hardware Supplies Service and software Shipping and handling Total net sales Year Ended December 31, 2009 2008 2007 $539,934 155,847 102,541 5,263 $803,585 $692,638 172,106 105,113 6,843 $976,700 $656,974 161,678 42,801 6,826 $868,279 The increase in service and software net sales in 2008 was primarily due to our ZES acquisitions. 6 Net sales to international customers, as a percent of total net sales, were as follows: Percent of net sales Year Ended December 31, 2009 54.9 2008 54.5 2007 52.1 We believe that international sales have the long-term potential to increase faster than domestic sales because of the lower penetration of automatic identification applications outside North America and Western Europe and generally higher economic growth rates in developing countries. 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, 2009 2008 2007 Research and development expenses – SPG (excluding acquired in process technology) Percent of SPG net sales Research and development expenses – ZES (excluding acquired in process technology) Percent of ZES net sales $54,313 7.5 $30,776 37.9 $61,791 7.0 $32,658 34.7 $56,183 6.7 $ 9,297 26.4 We devote significant resources to developing new printing solutions for our target markets and ensuring that our products maintain high levels of reliability. Research and development resources are also directed toward enhancing our ZES systems. The increase in research and development expenditures for ZES in 2008 was mainly attributed to the acquisition of Navis Holdings, LLC late in 2007. Other trademarks mentioned in this report are the property of their respective holders and include IBM, a registered trademark of International Business Machines; UNIX, a registered trademark of UNIX Systems Laboratories; MS/DOS and Windows, registered trademarks of Microsoft; SAP, a registered trademark of SAP AG; and Linux, a registered trademark of Linus Torvalds. Bluetooth is a trademark owned by Bluetooth SIG and used by Zebra under license. Employees As of January 29, 2010, Zebra employed approximately 2,700 persons, of which 1,975 are a part of SPG, 527 are a part of ZES and the remaining 198 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, cash flows and growth prospects. Zebra may be a party to fixed-price contracts particularly for its ZES business unit that could become unfavorable contracts. From time to time ZES 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. 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 347 United States and foreign patents and have 151 United States and foreign patent applications pending pertaining to products. The duration of these patents ranges from 1 to 23 years. The expiration of any individual patent would not have a significant negative impact on our business. Zebra transferred final assembly of its thermal printers to Jabil Circuit and is now dependent on Jabil for the manufacture 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. To improve responsiveness to customer needs and achieve cost savings and operational benefits, Zebra transferred final assembly of its thermal printers to Jabil Circuit’s facility in Guangzhou, China, in 2009. To the extent Zebra relies on a third-party provider such as Jabil to manufacture its products, Zebra may incur increased business continuity risks. 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. Zebra is no longer able to exercise direct control over the assembly or related operations of its thermal printers Jabil produces. If Jabil experiences business difficulties or fails to meet Zebra’s manufacturing needs, then Zebra may be unable to satisfy customer product demands, lose sales and be unable to maintain customer relationships. Longer production lead times may result in shortages of certain products and inadequate inventories during periods of unanticipated higher demand. Without Jabil’s continuing manufacture of Zebra’s products, 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. This transition could be costly and time consuming. 7 Although Zebra carries business interruption insurance to cover lost sales 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 our existing customers. A third-party provider such as Jabil will have access to Zebra’s intellectual property, which increases the risk of infringement or misappropriation of this intellectual property. Zebra has significant operations outside the United States and sells a significant portion of its products internationally and purchases important components from foreign suppliers. These circumstances create a number of risks. Zebra has significant operations overseas which present 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 exchange rate and limitations on the convertibility of the Chinese Yuan, and • Transportation delays that may affect production and distribution of Zebra’s products. 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: • 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 cost effectively adapt in this 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 competitive market, which may 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 cost effectively 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. 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: • Compliance with evolving laws and regulations, • 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. 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. 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. 8 Acquisitions also may involve a number of risks: • 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. Future acquisitions could result in potentially dilutive issuances of equity securities or the incurrence of debt and contingent liabilities. 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 ability to meet customer demand and negatively affect our 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. 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. 9 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 enhance 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 implement and test 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. 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 ability to attract, retain and motivate highly skilled employees is important to Zebra’s long-term success. Competition for skill sets in certain functions within our 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. The possibility of 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. Economic conditions and financial 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. As widely reported, financial markets throughout the world experienced extreme disruption in 2008 and 2009, including historically high 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 and corporations. A recurrence of these developments and a related general economic downturn could adversely affect Zebra’s business and financial condition through a reduction in demand for our products by our customers. If a slowdown were severe enough, it could require further impairment testing and write-downs of goodwill and other intangible assets. Cost reduction actions may be necessary and lead to restructuring charges. A tightening of financial credit could adversely affect our customers, suppliers, outsource manufacturer and channel partners (e.g., distributors and resellers) from obtaining adequate credit for the financing of significant purchases. Another economic downturn could also result in a decrease in or cancellation of orders for Zebra’s products and services; negatively impact Zebra’s ability to collect its accounts receivable on a timely basis; result in additional reserves for uncollectible accounts receivable; and require additional reserves for inventory obsolescence. Higher volatility and fluctuations in foreign exchange rates for the U.S. dollar against currencies such as the euro, the British pound and the Brazilian real could negatively impact product sales, margins and collections. Item 1B. Unresolved Staff Comments Not applicable. Item 2. Properties Zebra’s corporate headquarters are located in Lincolnshire, Illinois, a northern suburb of Chicago. Zebra also conducts its sales, marketing, engineering and operations activities from facilities in Vernon Hills, Illinois, and in Camarillo, California. Zebra’s principal facilities as of December 31, 2009, 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 Camarillo, California, USA (S) 97,921 72,156 170,077 March 2011 Heerenveen, The Netherlands (S) 48,427 46,145 94,572 January 2012 Greenville, Wisconsin, USA (S) 55,000 5,000 60,000 January 2018 Oakland, California, USA (Z) Lincolnshire, Illinois, USA (C) Lincoln, Rhode Island, USA (S) — — — 47,210 47,210 July 2013 43,400 43,400 June 2014 40,116 40,116 April 2016 Preston, UK (S) 30,450 Flowery Branch, Georgia, USA (S) 28,255 8,600 2,145 39,050 Owned by Zebra 30,400 April 2012 Bourne End, UK (S) Germantown, Maryland, USA (Z) — — 27,251 27,251 June 2014 26,826 26,826 April 2010 Otay Mesa, California, USA (S) 21,739 4,900 26,639 September 2011 San Jose, California, USA (Z) — 24,630 24,630 July 2015 McAllen, Texas, USA (S) 15,500 2,500 18,000 September 2011 Chennai, India (Z) Warsaw, Poland (S) Guangzhou, China (S) Shanghai, China (S) Mexico City, Mexico (S) Singapore, Singapore (S) — 7,750 — — 3,488 — 15,095 15,095 November 2012 3,875 11,625 June 2012 11,624 11,624 May 2011 7,524 3,400 5,360 7,524 January 2014 6,888 5,360 September 2012 February 2012 Total 420,206 511,186 931,392 S – Specialty Printing Group; Z – Zebra Enterprise Solution Group; C – Corporate 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. 10 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) 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, 2009 2008 2007 2006 2005 $ 803,585 $ 976,700 $ 868,279 $ 759,524 $ 702,271 442,864 497,395 360,721 291,919(1) 68,802 479,305 494,651(2) (15,346) 451,161 417,118 273,933 143,185 401,104 358,420 277,991(3) 80,429 348,851 353,420 207,392 146,028 70,523 (11,913) 167,375 101,642 160,282 47,104 (38,421) 110,113 69,627 106,184 — — — 1,319(4) — Net income (loss) $ 47,104 $ (38,421) $ 110,113 $ 70,946 $ 106,184 Earnings (loss) per share before cumulative effect of accounting change Basic Diluted Earnings (loss) per share Basic Diluted Weighted average shares outstanding Basic Diluted $ $ $ $ 0.79 0.79 0.79 0.79 $ $ $ $ (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 59,306 59,425 64,524 64,524 68,463 68,908 70,516 70,956 71,364 72,000 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 2009 and 2008, as reported by the NASDAq Stock Market. 2009 High Low 2008 First quarter Second quarter Third quarter Fourth quarter $21.70 24.55 27.67 28.87 $16.00 18.61 20.98 23.76 Source: The NASDAQ Stock Market First quarter Second quarter Third quarter Fourth quarter High Low $34.80 $27.50 32.66 28.25 16.18 38.47 34.13 28.99 At February 12, 2010, the last reported price for the Class A Common Stock was $29.33 per share, and there were 317 registered stockholders of record for Zebra’s Class A Common Stock. In addition, we had approximately 42,000 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 2009, Zebra purchased 593,552 shares of Zebra’s Class A common stock as follows: ISSUER PURCHASES OF EQUITY SECURITIES Period October 2009 (October 4 – October 31) November 2009 (November 1 – November 28) December 2009 (November 29 – December 31) 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 25,000 $25.01 25,000 2,767,838 462,666 $26.71 462,666 2,305,172 105,886 $26.94 105,886 2,199,286 (1) On February 17, 2009, Zebra announced that the Board authorized the purchase of an additional 3,000,000 shares of Zebra common stock at prices to be determined at management’s discretion. This authorization does not have an expiration date. (2) During the fourth quarter, Zebra acquired 2,039 shares of Zebra Class A common stock through the withholding of shares necessary to satisfy tax withholding obligations upon the vesting of restricted stock awards. These shares were acquired at an average price of $26.98 per share. 11 CONSOLIDATED BALANCE SHEET DATA (In thousands) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 2009 2008 2007 2006 2005 December 31, Results of Operations: Fourth Quarter of 2009 versus Fourth Quarter of 2008 Cash and cash equivalents, restricted cash, investments and marketable securities (current and long-term)(5) $ 246,721 Working capital Total assets Long-term obligations (6) Stockholders’ equity 306,127 830,479 9,432 712,129 $ 224,886 $ 281,179 $ 559,189 $ 544,239 271,831 298,660 850,878 1,034,278 8,452 10,250 710,738 404,836 963,142 9,969 680,554 918,415 7,709 902,693 877,681 857,972 Service & software 25,425 26,158 Net Sales Tangible products $197,097 $ 206,410 (1) Includes asset impairment reversal of $1,058,000 and exit, restructuring and integration charges of $12,191,000. (2) Includes asset impairment charges of $157,600,000 and exit, restructuring and integration charges of $20,009,000. (3) Includes litigation settlement of $53,392,000 and insurance receivable reserve of $12,543,000. (4) Relates to the estimation of forfeitures on prior year compensation expense outstanding at the adoption date of Accounting Standards Codification (“ASC”) 505 ans ASC 718 (formerly SFAS No. 123(R), Share Based Payment). See Note 4 in the Notes to the Consolidated Financial Statements included in this Form 10-K. (5) 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. (6) 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. Consolidated Results of Operations (Amounts in thousands, except percentages) Three Months Ended December 31, Percent 2008 Change Percent of Percent of Net Sales Net Sales 2008 2009 2009 (4.5) (2.8) (4.3) 88.6 11.4 100.0 Total net sales Cost of Sales 222,522 232,568 Tangible products 110,611 109,734 0.8 Service & software 10,433 11,945 (12.7) Total cost of sales Gross profit 121,044 121,679 101,478 110,889 Operating expenses 75,240 243,238 Operating income (loss) 26,238 (132,349) Other income 944 3,658 Income (loss) before income taxes Income taxes 27,182 (128,691) 9,552 (11,330) Net income (loss) $ 17,630 $(117,361) Diluted earnings (loss) per share $ 0.30 $ (1.88) (0.5) (8.5) (69.1) 119.8 (74.2) 121.1 184.3 115.0 49.7 4.7 54.4 45.6 33.8 11.8 0.4 12.2 4.3 7.9 88.8 11.2 100.0 47.2 5.1 52.3 47.7 104.6 (56.9) 1.6 (55.3) (4.9) (50.4) Consolidated Results of Operations – Fourth quarter Sales Net sales for the 2009 quarter compared with the 2008 quarter decreased 4.3% due primarily to lower global economic activity. The decrease in sales was largely attributable to a decline in hardware sales. Hardware sales declined proportionally more for our mobile and photo printers. The photo printer line was discontinued in 2009. Printer unit volume was down 2.3% for the fourth quarter of 2009 compared to levels in 2008. 12 Sales by product category were as follows (amounts in thousands, except percentages): Product Category 2009 Three Months Ended December 31, Percent 2008 Change Percent of Percent of Net Sales Net Sales 2008 2009 Hardware Supplies Service and software Shipping and handling $156,706 $ 164,042 39,011 25,425 1,380 40,870 26,158 1,498 Total sales $222,522 $232,568 (4.5) (4.5) (2.8) (7.9) (4.3) 70.4 17.5 11.4 0.7 70.5 17.6 11.2 0.7 100.0 100.0 Sales increased in all international territories. Late in 2008 a notable weakness in sales in Europe, Middle East and Africa (EMEA), Asia Pacific and Latin America from the economic downturn began and affected sales in the fourth quarter of 2008. These regions started to recover in the fourth quarter of 2009. Sales declined overall in 2009 due to the economic downturn. EMEA sales benefitted from a $7,000,000 increase due to a stronger euro in the fourth quarter of 2009. North American sales declined from the fourth quarter of 2008, as sales a year ago benefitted from shipments of certain larger orders and incremental sales from our ZES business unit. Sales to customers by geographic region were as follows (in thousands, except percentages): Geographic Region 2009 Three Months Ended December 31, Percent 2008 Change Percent of Percent of Net Sales Net Sales 2008 2009 Europe, Middle East and Africa Latin America Asia-Pacific $ 82,377 $ 81,302 20,196 21,984 17,871 21,411 Total International 124,557 120,584 North America Total sales 97,965 111,984 $222,522 $232,568 1.3 13.0 2.7 3.3 (12.5) (4.3) 37.0 9.1 9.9 56.0 44.0 35.0 7.7 9.1 51.8 48.2 100.0 100.0 Gross Profit Gross profit decreased due to reduced volumes and a less favorable product mix, partially offset by a more favorable foreign currency rate environment in 2009. In addition, higher freight costs were incurred in order to meet customer demand in the fourth quarter of 2009. These factors were partially offset by the benefit of outsourcing printer production to a third party. Operating Expenses Lower overall operating expenses for the three-month period resulted from decreases in several categories including compensation costs primarily from lower staffing levels, outside commissions, project costs, and travel and entertainment expenses. Amortization of intangibles decreased $2,063,000 and exit, restructuring and integration costs decreased $5,054,000 in the fourth quarter of 2009 as compared to 2008. Amortization decreases were due to intangible asset impairments recorded in 13 the fourth quarter of 2008. During the fourth quarter of 2008, we took charges totaling $157,600,000 for the impairment of goodwill, intellectual property and other assets. The above reductions in 2009 were partially offset by increases in general and administrative expenses for consulting and healthcare costs. Operating expenses are summarized below (in thousands, except percentages): Operating Expenses 2009 Three Months Ended December 31, Percent 2008 Change Percent of Percent of Net Sales Net Sales 2008 2009 Selling and marketing $28,006 $ 29,982 Research and development General and administrative 21,516 20,373 23,104 20,090 (6.6) (6.9) 1.4 Amortization of intangible assets 2,608 4,671 (44.2) Asset impairment charges — 157,600 (100.0) Exit, restructuring and integration costs 2,737 7,791 Total operating expenses $75,240 $243,238 (64.9) (69.1) 12.6 9.6 9.2 1.2 — 1.2 33.8 12.9 9.9 8.6 2.0 67.8 3.3 104.5 Other Income Investment income for 2009 declined primarily from lower short-term interest rates in the fourth quarter of 2009 compared with 2008. A lower foreign exchange gain in 2009 is due to a more stable foreign exchange rate environment in 2009 as compared with 2008. Zebra’s non-operating income and expense items are summarized in the following table (in thousands): Investment income (loss) Foreign exchange gain (loss) Other net Total other income (loss) Three Months Ended December 31, 2009 December 31, 2008 $695 795 (546) $944 $1,295 2,640 (277) $3,658 Operating Income (Loss) The operating loss for the fourth quarter of 2008 was the result of the non cash impairment charges 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. Income Taxes The effective income tax rate for the fourth quarter of 2009 was 35.1% compared with 8.8% for the same quarter last year. For 2008, the effective income tax rate was not meaningful because a substantial portion of the impairment charges recorded in the fourth quarter of 2008 was not deductible for income tax purposes. Business Groups Specialty Printing Group – Fourth Quarter (Amounts in thousands, except percentages): Three Months Ended December 31, Percent 2008 Change Percent of Percent of Net Sales Net Sales 2008 2009 2009 Net Sales Tangible products $194,566 $ 202,477 Service & software 8,556 8,017 Total net sales Cost of Sales 203,122 210,494 Tangible products 108,521 108,459 Service & software 4,732 4,728 Total cost of sales Gross profit Operating expenses 113,253 113,187 89,869 42,519 97,307 66,781 Operating income $ 47,350 $ 30,526 (3.9) 6.7 (3.5) 0.1 0.1 0.1 (7.6) (36.3) 55.1 95.8 4.2 100.0 53.5 2.3 55.8 44.2 20.9 23.3 96.2 3.8 100.0 51.6 2.2 53.8 46.2 31.7 14.5 Specialty Printing Group – Fourth quarter Net sales in our Specialty Printing Group (SPG) decreased 3.5% reflecting a decline in North America offset by gains in all other regions. New printer products (defined as printers released within 18 months prior to the end of the applicable fiscal period) accounted for 13.2% of printer sales in the fourth quarter of 2009, compared with 18.6% of printer sales in 2008. Our international SPG sales are denominated in multiple currencies, primarily the U.S. dollar, British pound and euro. This diversity causes our reported sales to be subject to fluctuations based on changes in currency rates. The weaker U.S. dollar to the euro and the pound had a positive impact of approximately $7,000,000, net of hedges, on sales during the fourth quarter of 2009 compared with 2008. We typically hedge a portion of anticipated euro-denominated sales to partially protect Zebra against exchange rate movements. For the fourth quarter, this program resulted in a loss on hedges of $122,000. Gross profit margin for SPG was affected by lower volumes and a less favorable product mix. Outsourcing of our manufacturing operations resulted in favorable improvement to gross margin in 2009 offset by higher freight costs. The effect of more favorable foreign currency rate environment also increased fourth quarter gross profit by $6,293,000, net of hedges. Lower overall operating expenses resulted from decreases in payroll costs, business development costs, recruiting and relocation costs, outside commissions, project costs, travel and entertainment expenses, and offsite meetings. Much of the decreased payroll and benefit costs were a result of lower staffing levels and cost reduction initiatives. Amortization expense was reduced due to intangible asset write-downs in the fourth quarter of 2008. Printer unit volumes and average selling price information is summarized below: Total printers shipped Average selling price of printers shipped Three Months Ended December 31, 2009 244,100 $531 2008 249,902 $538 Percent Change (2.3) (1.3) For 2009, unit volumes compared to 2008 declined most notably in mobile, desktop and photo printers partially offset by slightly higher unit sales of high end, mid-range and kiosk printers. Operating expense changes for SPG in 2009, compared to the same periods in 2008, are due to the following (in thousands): Three Months Ended December 31, 2008 2009 Increase/ (Decrease) $24,463 $27,968 Payroll and benefit costs Business development Outside professional services Travel and entertainment Exit, restructuring and integration costs Impairment charges Gain on sale of assets and equipment Amortization expense Other changes Total operating expenses 4,094 2,625 1,698 1,817 — 452 692 6,678 $42,519 5,398 1,954 1,819 6,005 14,680 7 1,445 7,505 $ (3,505) (1,304) 671 (121) (4,188) (14,680) 445 (753) (827) $66,781 $(24,262) The 2009 payroll and benefit cost decrease relates to organization changes made in December 2008 which has resulted in lower staffing levels. Exit and restructuring charges have declined as the activities related to the outsourcing of our printer manufacturing began to ramp down in the fourth quarter of 2009. Impairment charges from 2008 relate to the write-down of intellectual property because of changes in valuations related to current economic conditions and the business outlook. Absent the exit and restructuring costs and impairment charges, the remaining reductions in expenses reflect the cost reduction program initiated during the fourth quarter of 2008 that have continued throughout 2009. 14 Zebra Enterprise Solutions – Fourth Quarter (Amounts in thousands, except percentages) ZES operating expenses in the fourth quarter of 2009 compared to 2008 are summarized below (in thousands): Three Months Ended December 31, Percent 2008 Change Percent of Percent of Net Sales Net Sales 2008 2009 2009 Net Sales Tangible products $ 2,531 $ 3,933 Service & software Total net sales Cost of Sales Tangible products Service & software Cost of sales Gross profit Operating expenses 16,869 19,400 18,141 22,074 2,090 5,701 7,791 1,275 7,217 8,492 11,609 13,582 17,024 163,208 Operating loss $(5,415) $(149,626) (35.6) (7.0) (12.1) 63.9 (21.0) (8.3) (14.5) (89.6) 96.4 13.0 87.0 100.0 10.8 29.4 40.2 59.8 87.8 (28.0) 17.8 82.2 100.0 5.8 32.7 38.5 61.5 739.4 (677.9) Zebra Enterprise Solutions – Fourth quarter ZES sales decreased 12.1% for the fourth quarter of 2009 compared to the fourth quarter of 2008 primarily due to the challenging economic conditions, especially those related to the automotive and maritime industries. Decreases to hardware, services and support were partially offset by increases in license fee revenue. Margins improved due to right sizing initiatives and expenditure monitoring. ZES operating expenses for the fourth quarter of 2009 are lower than 2008 due to the writedown of assets in the amount of $142,920,000 related to our recent ZES acquisitions and intellectual property because of changes in valuations as a result of economic conditions and the business outlook late in 2008. Other operating expense categories were lower in 2009 due to lower staffing levels, which were offset by increased benefit costs, commissions and contract employees. Other operating expense reductions resulted from cost containment efforts, collection of previously reserved accounts, reduced outside service costs and lower amortization expense. 15 Three Months Ended December 31, 2008 2009 $ 9,951 $ 8,264 Increase/ (Decrease) $ 1,687 Payroll and benefit costs Business development Outside professional services Travel and entertainment Exit, restructuring and integration costs Impairment charges Bad debt expense Amortization expense Other changes 276 449 822 866 — 43 1,917 2,700 481 1,328 932 1,624 (205) (879) (110) (758) 142,920 (142,920) 766 3,225 3,668 (723) (1,308) (968) Total operating expenses $17,024 $163,208 $(146,184) Results of Operations: Year ended December 31, 2009 versus Year ended December 31, 2008 Consolidated Results of Operations (Amounts in thousands, except percentages) Year Ended December 31, 2009 Percent 2008 Change Percent of Percent of Net Sales Net Sales 2008 2009 Net Sales Tangible products $701,044 $ 871,587 Service & software 102,541 105,113 Total net sales Cost of Sales 803,585 976,700 Tangible products 401,727 452,208 Service & software 41,137 45,187 Total cost of sales Gross profit 442,864 497,395 360,721 479,305 Operating expenses 291,919 494,651 (19.6) (2.4) (17.7) (11.2) (9.0) (11.0) (24.7) (41.0) Operating income (loss) 68,802 (15,346) 548.3 Other income 1,721 3,433 (49.9) Income (loss) before income taxes Income taxes 70,523 (11,913) 692.0 23,419 26,508 (11.7) Net income (loss) $ 47,104 $ (38,421) 222.6 Diluted earnings (loss) per share $ 0.79 $ (0.60) 87.2 12.8 100.0 89.2 10.8 100.0 50.0 5.1 55.1 44.9 36.3 8.6 0.2 8.8 2.9 5.9 46.3 4.6 50.9 49.1 50.6 (1.5) (0.3) 1.2 2.7 3.9 Consolidated Results of Operations – Year to date Sales Net sales for the year ended December 31, 2009 compared with 2008 decreased 17.7%, due primarily to global economic conditions. Sales in each geographic region also were down by similar percentages. The decreases in sales were largely attributable to a decline in hardware sales volume. Hardware sales declined proportionally more for our high-performance, midrange table top and desk top printers, which carry a higher sales price and are more profitable. Notable weakness in sales from the economic downturn began in the third quarter of 2008 and continued throughout 2009. Cash flow hedging activities in 2009 increased revenues by $603,000 compared with a decrease in revenues from cash flow hedging in 2008 of $12,354,000. Sales by product category were as follows (amounts in thousands, except percentages): Product Category 2009 Year Ended December 31, Percent 2008 Change Percent of Percent of Net Sales Net Sales 2008 2009 Hardware Supplies $539,934 $ 692,638 (22.0) 155,847 172,106 Service and software 102,541 105,113 Shipping and handling 5,263 6,843 Total sales $803,585 $976,700 (9.4) (2.4) (23.1) (17.7) 67.1 19.4 12.8 0.7 70.9 17.6 10.8 0.7 Sales to customers by geographic region were as follows (in thousands, except percentages): Geographic Region 2009 Year Ended December 31, Percent 2008 Change Percent of Percent of Net Sales Net Sales 2008 2009 Operating Expenses Lower overall operating expenses for 2009 compared to 2008 resulted from decreases in several categories including payroll costs primarily from lower staffing levels, outside commissions, project costs, and travel and entertainment expenses. Amortization of intangibles decreased due to impairments recorded in the fourth quarter of 2008 for the impairment of goodwill, intellectual property and other assets. Expenses in 2008 were reduced by the receipt of an escrow claim litigation settlement received in the third quarter of 2008. The above reductions were partially offset by increases in general and administrative expenses for consulting and benefit costs in 2009. During the fourth quarter or 2008, we took charges totaling $157,600,000 for the impairment of goodwill, intellectual property and other assets. During the second quarter of 2009, $1,495,000 of the goodwill impairment charge was reversed and a $437,000 impairment charge was recorded related to an intangible asset in our ZES segment. Exit, restructuring and integration costs decreased in 2009 as compared to 2008 as activities related to the ramp down of our production lines and the integration of our ZES businesses have substantially decreased. Operating expenses are summarized below (in thousands, except percentages): Operating Expenses 2009 Year Ended December 31, Percent 2008 Change Percent of Percent of Net Sales Net Sales 2008 2009 Research and development General and administrative 85,089 85,032 Amortization of intangible assets 10,466 94,449 87,885 18,575 Litigation settlement — (5,302) 100.0 (17.5) (9.9) (3.2) (43.7) 12.5 10.6 10.5 1.3 — 12.4 9.7 9.0 1.9 0.5 100.0 100.0 Selling and marketing $100,199 $121,435 Europe, Middle East and Africa Latin America Asia-Pacific Total International North America Total sales $294,296 $353,273 65,060 76,489 82,120 102,672 441,476 532,434 362,109 444,266 $803,585 $976,700 (16.7) (14.9) (20.0) (17.1) (18.5) (17.7) 36.6 8.1 10.2 54.9 45.1 36.2 7.8 10.5 54.5 45.5 100.0 100.0 Gross Profit Gross profit in 2009 compared with 2008 decreased due to lower volumes and a less favorable product mix. Higher freight costs were incurred in order to meet customer demand in 2009, primarily in the fourth quarter. Unfavorable foreign exchange rates in 2009 decreased gross profit in 2009 by $16,745,000, net of hedges. These factors were partially offset by the benefit of outsourcing and the full year effect of continued cost containment efforts in 2009. Asset impairment charges (1,058) 157,600 (100.7) (0.1) 16.1 Exit, restructuring and integration costs 12,191 20,009 Total operating expenses $291,919 $494,651 (39.1) (41.0) 1.5 36.3 2.0 50.6 Selling and Marketing Expenses Selling and marketing expenses decreased in 2009 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. Expenditures for all types of advertising and marketing costs were reduced in 2009 as part of our corporate wide cost control efforts in a challenging economy. Zebra’s reduced sales volume also resulted in lower commissions. 16 Selling and marketing expenses are summarized below (in thousands): General and Administrative Expenses General and administrative expenses are summarized below (in thousands): Year Ended December 31, 2008 2009 Increase/ (Decrease) Payroll and benefit costs $ 63,565 $ 74,322 $ (10,757) Advertising and market development fund costs Professional services expenses Travel and entertainment expenses Other changes 17,677 2,680 5,428 10,849 22,733 3,337 7,900 13,143 (5,056) (657) (2,472) (2,294) Total selling and marketing expenses $100,199 $121,435 $(21,236) 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 continue to make investments in research and development. In 2009 we introduced an updated two inch “plus” light duty printer and a new Xi4 high-performance printer. In the fourth quarter of 2009 we began shipping our first re-transfer card printer which has photo-quality imaging for security and government use. We also introduced innovative new Iq color labels which enables customers to print spot colors on predetermined areas of a label using any Zebra thermal label printer. This breakthrough product enhances readability, increases business efficiency and improves safety. In 2009, Zebra Enterprise Solutions introduced new gate, vessel, billing, automation, analytics and monitoring capabilities in its TOS solution, support for rack tracking, RFID support, and goods return for our manufacturing solution along with a new tag form factor for parts replenishment and a new Ethernet enabled proximity exciter. ZES also released enhancements to its equipment fleet management solution to provide added visibility for operator safety and equipment maintenance. 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. Research and development costs are summarized below (in thousands): Year Ended December 31, 2008 2009 Increase/ (Decrease) Payroll and benefit costs $ 62,416 $ 65,598 $ (3,182) Professional services expenses Project expenses Other changes 5,143 4,762 12,768 7,109 8,340 13,402 (1,966) (3,578) (634) Total research and development costs $ 85,089 $ 94,449 $ (9,360) The decreases are primarily related to cost reductions taken in 2008 which decreased research and development costs for the full year of 2009. Expenditures in this area were reduced as part of our corporate wide cost control efforts in a challenging economy. 17 Payroll and benefit costs Professional services expenses Recruiting fees Offsite meetings Depreciation expense Other changes Total general and administrative expenses Year Ended December 31, 2008 2009 $ 40,869 12,642 326 140 9,869 21,186 $ 43,110 10,759 2,908 2,569 8,101 20,438 Increase/ (Decrease) $ (2,241) 1,883 (2,582) (2,429) 1,768 748 $ 85,032 $ 87,885 $ (2,853) General and administrative expenses decreased 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 the previously mentioned cost reduction were increases in consulting expenses related to business improvement initiatives and depreciation related to a worldwide enterprise resource planning system implementation. Amortization of Intangible Assets Amortization of intangible assets decreased $8,109,000 during 2009 due to intangible asset write-downs in the fourth quarter of 2008. See Asset impairment charges below for more details. Litigation Settlement In 2008 Zebra received a litigation claim settlement related to our recent acquisition of WhereNet. See Note 5 for further information related to the litigation/claim settlement. Asset Impairment Charges During the fourth quarter of 2008, we determined that certain impairment indicators existed related to identified intangible assets and conducted an additional impairment test of intangibles. Due to the deterioration of the economy and a significant reduction in the price of our stock, we determined that our goodwill and other intangible assets were impaired requiring total estimated impairment charges of $157,600,000 at December 31, 2008. Upon completion of a detailed second step impairment analysis we recorded a credit of $1,495,000 in the second quarter of 2009 to adjust a portion of our original goodwill impairment. In 2009, we also recorded an impairment charge for an intangible asset or $437,000. 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. Exit, Restructuring and Integration Charges For 2009, exit and restructuring costs were $8,985,000 and integration costs were $3,206,000. For 2008, exit and restructuring costs were $16,650,000 and integration costs were $3,359,000. The reduction is due to the substantial completion of our production outsourcing. 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. Business Groups Specialty Printing Group – Year to date (Amounts in thousands, except percentages) Net Sales 2009 Year Ended December 31, Percent 2008 Change Percent of Percent of Net Sales Net Sales 2008 2009 Other Income Zebra’s non-operating income and expense items are summarized in the following table (in thousands): Tangible products $ 688,057 $ 851,561 Service & software 34,499 30,898 (19.2) 11.7 December 31, 2009 December 31, 2008 Year Ended Net sales Cost of Sales 722,556 882,459 (18.1) Investment income (loss) Foreign exchange gain (loss) Other, net Total other income (loss) Rate of Return Analysis: $ 2,933 (45) (1,167) $ 1,721 Average cash and marketable securities balances $235,803 Annualized rate of return 1.2% $ 1,281 3,518 (1,366) $ 3,433 $253,033 0.5% Tangible products 392,298 439,471 (10.7) Service & software 18,013 14,866 Cost of sales Gross profit 410,311 454,337 312,245 428,122 Operating expenses 164,124 221,934 Operating income $ 148,121 $ 206,188 21.2 (9.7) (27.1) (26.0) (28.2) 95.2 4.8 100.0 54.3 2.5 56.8 43.2 22.7 20.5 96.5 3.5 100.0 49.8 1.7 51.5 48.5 25.1 23.4 Investment income for 2009 would have been $958,000 higher due to write-downs recorded in 2009 related to losses on equity investments. Investment income for 2008 would have been $7,271,000 higher due to losses related to the write-down of an auction rate security of $4,374,000 and a long term equity investment in the amount of $2,897,000 in 2008. Excluding these write-downs, investment income for 2009 would have been $3,891,000 compared to $8,552,000 in 2008. Excluding the 2008 write-downs, Zebra’s annualized rate of return would have been 3.4% for 2008, while the 2009 rate of return would have been 1.6%. The investment income for 2008 was higher due to interest rates being higher in 2008 and Zebra’s cash balances also being higher throughout 2008. Cash and marketable securities balances for 2009 have decreased compared to 2008 as a result of payments for acquisitions and for the repurchase of Zebra Class A common stock. Operating Income (Loss) The increase in operating income for 2009 over 2008 is the result of cost containment efforts, reduced exit, restructuring and integration costs and the impairment charge recorded in 2008. The operating loss for 2008 is the result of the impairment charges 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. Income Taxes The effective income tax rate for 2009 was 33.2%. The effective income tax rate for 2008 was not meaningful because a substantial portion of the impairment charges recorded in the fourth quarter of 2008 was not deductible for income tax purposes. Specialty Printing Group – Year to date Net sales for SPG decreased 18.1% for 2009 as compared to 2008, with comparable percentage declines in all regions, except for APAC which decreased modestly more than the other regions. New printer products (defined as printers released within 18 months prior to the end of the applicable fiscal period) accounted for 9.0% of printer sales during 2009, compared with 19.1% of printer sales for 2008. Our international SPG sales are denominated in multiple currencies, primarily the U.S. dollar, British pound and euro. This diversity causes our reported sales to be subject to fluctuations based on changes in currency rates. The stronger U.S. dollar to the euro and the pound had a negative impact of approximately $21,890,000, net of hedges, on sales during 2009 compared with 2008. We typically hedge a portion of anticipated euro- denominated sales to partially protect Zebra against exchange rate movements. For the year, this program resulted in a gain on hedges of $603,000. Gross profit margin for SPG was affected by unfavorable foreign currency rate movements, which decreased year to date gross profit versus 2008 gross profit by $16,745,000, net of hedges. Lower volume and a less favorable product mix reduced gross margins. Outsourcing of our manufacturing operations resulted in favorable improvement to gross margin in 2009. Lower overall operating expenses resulted from decreases in payroll costs, business development costs, recruiting and relocation costs, outside commissions, project costs, travel and entertainment expenses, and offsite meetings. Much of the decreased payroll and benefit costs were a result of lower staffing levels and cost reduction initiatives. Amortization of intangibles was reduced by $3,010,000 for 2009 as compared to 2008 due to asset write-downs taken in 2008. 18 Zebra Enterprise Solutions – Year to date (Amounts in thousands, except percentages) Year Ended December 31, 2009 Percent 2008 Change Percent of Percent of Net Sales Net Sales 2008 2009 Net Sales Tangible products $ 12,987 $ 20,025 Service & software Net sales Cost of Sales Tangible products Service & software Cost of sales Gross profit 68,042 81,029 74,216 94,241 9,429 23,124 32,553 48,476 12,737 30,322 43,059 51,183 Operating expenses 63,730 217,149 Operating loss $(15,254) $(165,966) (35.1) (8.3) (14.0) (26.0) (23.7) (24.4) (5.3) (70.7) (90.8) 16.0 84.0 100.0 11.6 28.5 40.2 59.8 78.7 21.2 78.8 100.0 13.5 32.2 45.7 54.3 230.4 (18.9) (176.1) Zebra Enterprise Solutions – Year to date ZES sales decreased 14.0% for 2009 as compared to 2008 primarily due to the severely challenging economic conditions of ZES’ key markets, namely maritime and automotive markets. Sales declined in hardware and services but remained steady in license fees and maintenance support. Margins improved in services provided to customers due to reduced service costs. ZES operating expenses for 2009 were lower than the 2008 level due to lower staffing levels which were offset by increased benefit costs and contract employees. Other operating expenses reductions resulted from cost containment efforts, collection of previously reserved accounts, reduced outside service costs, and lower amortization of intangibles due to asset write-downs in the fourth quarter of 2008. Amortization of intangibles was reduced by $5,099,000 for 2009 as compared to 2008. Included in operating expenses for 2008 is a $5,302,000 expense reduction related to a payment received from an escrow claim settlement related to our prior acquisition of WhereNet. See Note 5 of the Notes to the Consolidated Financial Statements for further information related to the WhereNet escrow claim net settlement and Note 13 for further information related to the impairment charges. Printer unit volumes and average selling price information is summarized below: Total printers shipped Average selling price of printers shipped Year Ended December 31, 2009 850,230 $527 2008 972,478 $594 Percent Change (12.6) (11.3) For 2009, unit volumes decreased in nearly all printer product lines compared to the same periods of 2008, with notable volume decreases in high-performance and midrange table top, partially offset by an increase in kiosk volumes. Operating expenses for SPG are summarized below (in thousands): Payroll and benefit costs Business development Project expenses Travel & entertainment Sales meeting expenses Exit and restructuring costs Impairment charges Loss (gain) on sale of assets & equipment Facility relocation costs Amortization expense Stock options Other changes 4,411 5,416 441 7,819 — 802 5 2,754 3,787 26,149 Total operating expenses $164,124 Year Ended December 31, 2008 2009 $ 97,010 15,530 $115,461 22,395 Increase/ (Decrease) $(18,451) (6,865) (2,198) (1,782) (2,668) (8,669) (14,680) 1,903 (1,087) (3,010) (1,364) 1,061 $(57,810) 6,609 7,198 3,109 16,488 14,680 (1,101) 1,092 5,764 5,151 25,088 $221,934 Lower operating expenses for 2009 compared to 2008 resulted from decreases in payroll costs primarily from lower staffing levels and reduced spending as part of a corporate wide initiative to reduce costs in a challenging economy. Exit and restructuring costs decreased in 2009 as compared to 2008 due to the reduction in activities associated with the transfer of our printer manufacturing to a third- party manufacturer and the closure in 2008 of our Warwick, Rhode Island, supplies manufacturing facility. Restructuring costs relate to organizational changes made in December 2008. Facility relocation costs relate to the move of our UK facility into a new location. Amortization of intangibles decreased due to impairments recorded in the fourth quarter of 2008. Impairment charges relate to the write-down of intellectual property from changes in valuations related to current economic conditions and the business outlook. The above reductions were partially offset by increases in general and administrative expenses for consulting and benefit costs in 2009. 19 ZES operating expenses are summarized below (in thousands): Comparison of Years Ended December 31, 2008 and 2007 Payroll and benefit costs $37,576 $ 36,841 Year Ended December 31, 2008 2009 Outside professional services Research & development Travel & entertainment Office services and supplies Offsite meetings Building allocation Bad debt expense Exit and restructuring ZES integration Impairment charges Amortization expense WhereNet escrow claim net settlement Other changes Total increase (decrease) 1,696 149 2,569 599 (16) (1,696) (74) 1,004 3,206 (1,059) 7,712 — 12,064 $63,730 Increase/ (Decrease) $ 735 (4,173) (1,678) (1,941) 1,651 (689) (1,124) (1,011) 1,004 (153) (143,979) (5,099) 5,302 (2,264) 5,869 1,827 4,510 (1,052) 673 (572) 937 — 3,359 142,920 12,811 (5,302) 14,328 $217,149 $(153,419) Consolidated Results of Operations (Amounts in thousands, except percentages) Year Ended December 31, 2008 Percent 2007 Change Percent of Percent of Net Sales Net Sales 2007 2008 Net Sales Tangible products $871,587 $825,479 Service & software Total net sales Cost of Sales 105,113 42,800 976,700 868,279 5.6 145.6 12.5 89.2 10.8 100.0 95.1 4.9 100.0 Tangible products 452,208 429,113 5.4 Service & software 45,187 22,048 105.0 Total cost of sales Gross profit Operating expenses 497,395 451,161 479,305 417,118 494,651 273,933 Operating income (loss) (15,346) 143,185 Other income 3,433 24,190 Income (loss) before income taxes Income taxes (11,913) 167,375 26,508 57,262 10.2 14.9 80.6 (110.7) (85.8) (107.1) (53.7) Net income (loss) $(38,421) $110,113 (134.9) Diluted earnings (loss) per share $ (0.60) $ 1.60 46.3 4.6 50.9 49.1 50.6 (1.5) (0.3) 1.2 2.7 3.9 49.5 2.5 52.0 48.0 31.5 16.5 2.8 19.3 6.6 12.7 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 ZES business group. Gross profit margin also increased principally because of favorable foreign exchange rates and product mix due to the sale of higher margin ZES products. Increased operating expenses were due to our ZES acquisitions, increased amortization of intangibles and costs related to the integration and restructuring of our businesses. 20 Net Sales Net sales by product category, percent change, and percent of total net sales for 2008 and 2007 were as follows (in thousands, except percentages): Product Category 2008 Year Ended December 31, Percent 2007 Change Percent of Percent of Net Sales Net Sales 2007 2008 Hardware Supplies $692,638 $ 656,974 172,106 161,678 5.4 6.4 Service and software 105,113 42,801 145.6 Shipping and handling 6,843 6,826 Total net sales $976,700 $868,279 0.2 12.5 70.9 17.6 10.8 0.7 75.7 18.6 4.9 0.8 The increase in service and software revenue in 2008 is primarily due to the acquisition of Navis. Navis’ sales have a high concentration of service and software. The Navis business, which constitutes a significant part of ZES, 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 2008 and 2007 were as follows (in thousands, except percentages): Geographic Region 2008 Year 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 Total International North America Total 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 47.9 100.0 100.0 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 acquisitions in ZES. Cash flow hedging activities decreased revenue in 2008 from 2007 by $12,354,000. Gross Profit Gross profit information is summarized below (in thousands, except percentages): December 31, Percent 2007 Change 2008 Percent of Percent of Net Sales Net Sales 2007 2008 Selling and Marketing Expenses Selling and marketing expenses are summarized below (in thousands, except percentages): December 31, Percent 2007 Change 2008 Percent of Percent of Net Sales Net Sales 2007 2008 Year ended $121,435 $ 114,116 6.4 12.4 13.1 Selling and marketing expenses changes, compared to the same periods in 2007, are due to the following (in thousands): 100.0 100.0 Payroll and benefit costs Advertising and market development fund costs Professional services expenses Travel and entertainment expenses Other changes Total (decreases) increases Year Ended December 31, 2008 $4,020 1,614 1,588 1,194 (1,097) $7,319 These increases were related, in part, to recent ZES acquisitions, which increased selling and marketing expenses by $12,528,000 during 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, Percent 2007 Change 2008 Percent of Percent of Net Sales Net Sales 2007 2008 Year ended $94,449 $ 65,480 44.2 9.7 7.5 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 Year Ended December 31, 2008 $20,270 2,594 2,197 2,265 1,643 $28,969 Year ended $ 479,305 $ 417,118 14.9 49.1 48.0 Total increases Foreign currency movements, net of hedging activities, for the full year decreased gross profit by $1,140,000. 21 The majority of these increases were related to recent ZES acquisitions, which increased total research and development expenses by $18,833,000 for 2008. General and Administrative Expenses General and administrative expenses are summarized in the table below (in thousands, except percentages): December 31, Percent 2007 Change 2008 Percent of Percent of Net Sales Net Sales 2007 2008 Year ended $87,885 $ 81,356 8.0 9.0 9.4 Changes in general and administrative expenses, compared to the same periods in 2007, are due to the following (in thousands): Year Ended December 31, 2008 Exit, Restructuring and Integration Charges For 2008, Zebra recorded exit costs in the amount of $13,997,000 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 Zebra Enterprise Solutions Group and 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. Operating Income (Loss) Operating income (loss) is summarized in the following table (in thousands, except percentages): December 31, Percent 2007 Change 2008 Percent of Percent of Net Sales Net Sales 2007 2008 Payroll and benefit costs $ (375) Year ended $(15,346) $ 143,185 NM (1.6) 16.5 Information systems and communications costs Sales meeting expenses Depreciation expenses Other changes Total (decreases) increases 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 ZES acquisitions, which increased general and administrative expenses by $6,640,000 for 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 ZES 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. 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 Total other income Rate of Return Analysis: Year Ended December 31, 2008 $ 1,281 3,518 (1,366) 2007 $ 23,966 523 (299) $ 3,433 $ 24,190 Average cash and marketable securities balances $253,033 Annualized rate of return 0.5% $ 420,184 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 writedowns, Zebra’s annualized rate of return would have been 3.4% for 2008. 22 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 3.5% for the year. Income Taxes For the full year of 2008, the effective income tax rate was not meaningful because a substantial portion of the impairment charges was not deductible for income tax purposes. 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): Net income (loss) Diluted earnings (loss) per share Year Ended December 31, 2008 $(38,421) $ (0.60) 2007 $110,113 $ 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 (Amounts in thousands, except percentages) SPG had a strong year with its key accounts in 2008, 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 $1,945,000 on sales, net of the hedging activities. 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 Year Ended December 31, 2008 972,478 $594 2007 919,909 $581 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. Gross profit margin for SPG was affected by unfavorable changes in product mix and foreign exchange rates. The impact of foreign currency rates in 2008 versus 2007, net of hedging activities, decreased gross profit by $1,140,000. Operating expense changes for SPG in 2008 compared to 2007, are due to the following (in thousands): Year Ended, December 31, 2008 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 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 region. 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 accounted for 19.1% of printer sales during 2008, compared with 11.1% of printer sales for 2007. 23 Payroll and benefit costs Trade show expenses Advertising and market development fund costs Professional services costs Information technology expenses Sales meeting expenses Equity-based compensation expenses Exit and restructuring costs Impairment charges Gain on sale of assets Facility relocation costs Other changes Total increases $ 3,530 (1,013) 1,637 1,890 (1,794) 1,508 (2,770) 16,489 14,680 (1,347) 1,092 (629) $33,273 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 writedown 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. 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. Zebra Enterprise Solutions (Amounts in thousands, except percentages) 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 Operating loss $(165,966) $(11,255) 167.4 111.3 244.3 NM NM 100.0 45.7 54.3 230.4 (176.1) 100.0 57.8 42.2 74.1 (31.9) During 2007 and 2008, Zebra acquired four companies which have been combined to make up our Zebra Enterprise Solutions Group (ZES). 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 margin for ZES 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. Increases in ZES operating expenses in 2008 compared to 2007, are due to the following (in thousands): Year Ended, December 31, 2008 General operating expense increase related to business acquired $ 41,459 Equity-based compensation expenses Amortization expense Acquired in process technology Acquisition integration expenses Impairment charges WhereNet escrow claim net settlement Other changes Total increases 3,152 7,316 (1,853) 3,359 142,920 (5,302) (23) $191,028 The operating expenses for ZES 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. ZES’s results also reflect a reduction in operating expenses during the second half of 2008. These cost reduction efforts reduced ZES’s employee count by approximately 40. Operating expenses for 2008 reflect a writedown of assets in the amount of $142,920,000 related to our recent ZES acquisitions and intellectual property because of changes in valuations as a result of economic conditions and the business outlook late in 2008. See Note 23 of the Notes to the Consolidated Financial Statements for further information related to acquisition integration expenses. See Note 13 for further information related to the impairment charges and Note 5 for further information related to the WhereNet escrow claim net settlement. Critical Accounting Policies and Estimates Management prepared the consolidated financial statements of Zebra 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. 24 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) collectability 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 rebates and establish a reserve for them based on shipment history. Historically, actual 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: • ZES 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. 25 • 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 Accounting Standards Codification (“ASC”) 985 (formerly Statement of Position No. 97-2, “Software Revenue Recognition”, as amended by Statement of Position No. 98-9, “Software Revenue Recognition, With Respect to Certain Transactions”), 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. 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, 2009, consisted of the following: U.S. Government and agency securities Obligations of government sponsored enterprises (1) State and municipal bonds Corporate securities 6.2% 5.2% 80.5% 8.1% (1) Includes investments in notes issued by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Federal Home Loan Bank. 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, 2009, Zebra’s investments in marketable debt securities are classified as available-for-sale. In addition, as of December 31, 2009, 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, 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 ASC 360 (formerly 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 • Credit limits and payment terms based on available credit information, that is a component of a reporting unit, or • Adjustments to credit limits based upon payment history and the customer’s current • Allocation of a portion of goodwill to a business to be disposed of. credit worthiness, • An active collection effort by regional credit functions, reporting directly to the corporate financial officers, and • Limited 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 1.4% to 3.8% of total accounts receivable. Accounts receivable reserves as of December 31, 2009, were $2,186,000, or 1.4% of the balance due. We believe this reserve level is appropriate considering the quality of the portfolio as of December 31, 2009. 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 6.8% to 12.4% of gross inventory. As of December 31, 2009, inventory reserves were $9,054,000, or 10.2% of gross inventory. We believe this reserve level is appropriate considering the quantities and quality of the inventories as of December 31, 2009. Valuation of 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 2009 and determined that our goodwill was not impaired as of the end of May 2009. 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 ZES segment was impaired. See Note 13 of the Consolidated Financial Statements for further discussion of this impairment charge. If we believe that one or more of the above indicators of impairment have occurred, we perform an impairment test. 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 three valuation methods: Income Approach – Discounted Cash Flow Analysis, Market Approach – Guideline Public Company Method and Market Approach – Comparative Transactions Method. Under the “Income Approach – Discounted Cash Flow Analysis” the key assumptions consider sales, cost of sales and operating expenses projected through the year 2015. These assumptions were determined by management utilizing our internal operating plan and assuming growth rates for revenues and operating expenses, and margin assumptions. The fourth key assumption under this approach is the discount rate which is determined by looking at current risk-free rates of capital, current market interest rates and the evaluation of risk premium relevant to the business segment. If our assumptions relative to growth rates were to change or were incorrect, our fair value calculation may change which could result in impairment. The company’s risk factors are discussed under Item 1A of this Form 10-K. Under the “Market Approach – Guideline Company Method” we identified 12 publicly traded companies, including Zebra, which we believe have significant relevant similarities. For these 12 companies we calculated the mean ratio of invested capital to revenues and invested capital to EBITDA. Similar to the Income approach discussed above, sales, cost of sales, operating expenses and their respective growth rates were the key assumptions utilized. The market prices of Zebra and other guideline company shares are key assumptions. If these market prices increase, the estimated market value would increase. If the market prices decrease, the estimated market value would decrease. 26 Under the “Market Approach – Comparative Transactions Method” we looked at 22 market based transactions for companies that have similarities to our business segment, including similarities to one or more of the business lines, markets, growth prospects, margins and size. We calculated mean revenue and EBITDA multiples for the selected transactions. These multiples were applied to forecasted Zebra results for that segment to estimate market value. The key assumptions and impact to changes to those assumptions would be similar to those assumptions under the “Income Approach – Discounted Cash Flow Analysis” and the “Market Approach – Guideline Company Method”. The results of these three methods are weighted based upon managements’ determination with more weighing upon the Income approach because it considers anticipated future financial performance. The Market approaches are based upon historical and current economic conditions which might not reflect the long term prospects or opportunities for our business segment being evaluated. 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. Due to the deterioration of the economy and a significant reduction in the price of our stock, we determined that our goodwill from our recent ZES acquisitions was impaired requiring total estimated goodwill impairment charges of $113,679,000 at December 31, 2008. Upon completion of a detailed second step impairment analysis we recorded a credit of $1,495,000 in the second quarter of 2009 to adjust a portion of the original estimated goodwill impairment for ZES. Valuation of Long-Lived and Other Intangible Assets We evaluate the impairment of identifiable intangibles and other long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered that may trigger an impairment review consist of: • Significant underperformance relative to expected historical or projected future operating results, • Significant changes in the manner of use of the acquired assets or the strategy for the overall business, • Significant negative industry or economic trends, • Significant decline in Zebra’s stock price for a sustained period, and • Significant decline in market capitalization relative to net book value. If we believe that one or more of the above indicators of impairment have occurred 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 related to identified intangible assets existed and conducted an additional impairment test of intangibles. Due to the deterioration of the economy and a significant reduction in the price of our stock, we determined that our other intangible assets consisting of our recent ZES acquisitions and intellectual property were impaired requiring total 27 estimated impairment charges of $43,921,000 at December 31, 2008. The intangible asset impairment charges in our SPG segment were related primarily to radio frequency identification patents and patent rights. The intangible asset impairment charges in our ZES segment were related to customer relationships, technology, third party technology licenses and non-competition agreements. We recorded an impairment charge to a ZES intangible asset of $437,000 in 2009. Net intangible assets, long-lived assets and goodwill amounted to $286,796,000 as of December 31, 2009. Income Taxes On January 1, 2007, we adopted ASC 740 (formerly FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109). According to ASC 740, 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 an 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 2008 Additions based on tax positions related to 2009 Balance at December 31, 2009 $ — 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. For the years ended December 31, 2009 and December 31, 2008, we did not accrue any interest or penalties into income tax expense. Zebra has concluded all U.S. federal income tax audits for years through 2006. The tax years 2005 through 2008 remain open to examination by multiple state taxing jurisdictions. Tax authorities in the United Kingdom have completed income tax audits for tax years through 2006. Included in deferred tax assets are amounts related to federal and state net operating losses that resulted from our acquisition of WhereNet Corp. As of December 31, 2009, we had approximately $35,003,000 of federal net operating loss carryforwards available to offset future taxable income which expire in 2012 through 2022. As of December 31, 2009, 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. In addition, as of December 31, 2009 Zebra had approximately $8,326,000 of foreign net operating loss carryforwards which currently can be carried forward indefinitely. The effective income tax rate for the year ended December 31, 2009 was 33.2%. Contingencies We record estimated liabilities related to contingencies based on our estimates of the probable outcomes. quarterly, we assess the potential liability related to pending litigation, tax audits and other contingencies and confirm or revise estimates and reserves as appropriate. For further information regarding material pending legal proceedings, see Note 17 in the Notes to the Consolidated Financial Statements included in the Form 10-K. Equity-Based Compensation As of December 31, 2009, Zebra had an active equity-based compensation plan and a stock purchase plan available for future grants. We accounted for these plans in accordance with ASC 505 and ASC 718 (formerly SFAS No. 123(R), Share-Based Payments). Zebra recognizes compensation costs using the straight-line method 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 (Amounts in thousands, except percentages) Average cash and marketable securities balances $235,803 Annualized rate of return 1.2% 2009 2008 $253,033 0.5% Year Ended December 31, Average cash and marketable securities balances for the year of 2009 decreased compared to 2008 as a result of continuing stock repurchases since the second quarter of 2008 and decreased cash provided by operations in 2009 versus 2008. As of December 31, 2009, Zebra had $246,721,000 in cash, restricted cash, investments and marketable securities, compared with $224,886,000 at December 31, 2008. Factors affecting cash and investment balances during 2009 include the following (changes below include the impact of foreign currency): • Operations provided cash in the amount of $105,698,000 primarily from net income, collection of receivables and reduced inventory levels as a result of reduced demand and printer manufacturing outsourcing. • Accounts receivable decreased $8,747,000 because of lower sales and successful collection efforts. Days sales outstanding improved from 66 days to 62 days. • Inventories decreased $22,315,000 because of lower sales, consumption of raw materials and outsourcing of operations. • Accounts payable decreased $16,105,000, due to the timing of vendor payments and decreased purchasing as a result of reduced demand. • Accrued liabilities decreased $16,315,000, due to the payment of payroll-related expenses and reduced foreign exchange forward contract liabilities associated with hedges. • Deferred revenue increased $4,966,000 as a result of acquiring more long-term contracts in our ZES business. • Taxes payable decreased $2,008,000 due to the timing of tax payments made in 2009. • Purchases of property and equipment totaled $24,890,000. • Net sales of investments totaled $56,020,000. • Purchases of treasury shares totaled $65,445,000. Zebra made open market repurchases of our shares under authorizations of the Board of Directors announced February 25, 2008 and October 27, 2008. • Stock option exercises and purchases under the stock purchase plan contributed $4,972,000. Management believes that existing capital resources and funds generated from operations are sufficient to finance anticipated capital requirements. In February 2008, we announced that printer manufacturing is being transferred to a third-party manufacturer. This transition was substantially completed in 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, 2009 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 $ 42,043 $12,008 $18,503 $9,236 $2,296 Deferred compensation liability Deferred revenue Purchase obligations 3,155 30,060 47,336 — 24,082 47,336 — 5,978 — — — — 3,155 — — Total $122,594 $83,426 $24,481 $9,236 $5,451 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. As of December 31, 2009, we had established letters of credit amounting to $4,170,000, which reduce the funds available for borrowing under the agreement. No amounts were outstanding under the credit agreement as of December 31, 2009. Management believes that existing capital resources and funds generated from operations are sufficient to finance anticipated capital requirements. 28 Recently Issued Accounting Pronouncements In May 2008, the FASB issued ASC 105 (formerly 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 ASC 250 (formerly SFAS No. 154, Accounting for Changes and Error Corrections). This standard did not have a significant effect upon our consolidated financial statements. In October 2008, the FASB issued ASC 820 (formerly FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active). The position statement was effective upon issuance. The statement provides guidance for valuing assets that are no longer in active markets. This standard did not have a significant effect upon our consolidated financial statements. In April 2009, the FASB issued ASC 825 (formerly FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments) a statement of position that will require companies to provide disclosures required by ASC 825 (formerly FASB No. 107, Disclosures about Fair Value of Financial Instruments). The position statement is effective for interim reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. This standard did not have a significant effect upon our consolidated financial statements. In April 2009, the FASB issued ASC 320 (formerly FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-than-Temporary Impairments) which amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other- than-temporary impairments on debt and equity securities in the financial statements. This statement does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The position statement is effective for interim and annual reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. Earlier adoption for periods ending before March 15, 2009 is not permitted. This standard did not have a significant effect upon our consolidated financial statements. In April 2009, the FASB issued ASC 820 (formerly FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That are Not Orderly). ASC 820 provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly. ASC 820 becomes effective for interim and annual reporting periods after June 15, 2009 and shall be applied prospectively. This standard did not have a significant effect upon our consolidated financial statements. 29 In May 2009, the FASB issued ASC 855 (formerly SFAS 165, Subsequent Events) which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued. In particular, the standard addresses: the period after the balance sheet date during which management of a reporting entity shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements; and the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. The statement is effective for interim and annual reporting periods ending after June 15, 2009. This standard did not have a significant effect upon our consolidated financial statements. In June 2009, the FASB issued ASC 105 (formerly SFAS 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB SFAS No. 162) which would make the FASB Accounting Standards Codification (“ASC”) the single source of authoritative accounting and reporting standards applicable for all nongovernmental entities, with the exception of guidance issued by the SEC and its staff. The ASC does not change GAAP; instead, it introduces a new structure that is organized into user-friendly research system. The ASC reorganizes thousands of GAAP pronouncements into approximately 90 accounting topics using a consistent structure. The statement is effective for interim and annual reporting periods ending after September 15, 2009. This standard did not have a significant effect upon our consolidated financial statements. In August 2009, the FASB issued update 2009-05, ASC 820, Fair Value Measurements and Disclosures – Measuring Liabilities at Fair Value which provides additional guidance clarifying the measurement of financial liabilities at fair value. This standard is effective after issuance and did not have a significant effect upon our consolidated financial statements. In October 2009, the FASB issued update 2009-13, ASC 605, Revenue Recognition: Multiple –Deliverable Revenue Arrangements-a consensus of the FASB Emerging Issues Task Force. The revised guidance provides for two significant changes to existing multiple element arrangement guidance. The first relates to the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. This change is significant as it will likely result in the requirement to separate more deliverables within an arrangement, ultimately leading to less revenue deferral. The second change modifies the manner in which the transaction consideration is allocated across the separately identifiable deliverables. These changes are likely to result in earlier recognition of revenue for multiple-element arrangements than under previous guidance. This standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We have not yet determined the effect of this standard upon our consolidated financial statements. In October 2009, the FASB issued update 2009-14, ASC 985, Software: Certain Revenue Arrangements That Include Software Elements – a consensus of the FASB Emerging Issues Task Force. This updated guidance is expected to significantly affect how entities account for revenue arrangements that contain both hardware and software elements. This standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We have not yet determined the effect of this standard upon our consolidated financial statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk ebra 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, specified investment liquidity levels, 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, 2008 2009 $ (2,284) $ (0.04) $ (1,894) $ (0.02) $ 2,284 $ 0.04 $ 1,894 $ 0.02 Because these securities are classified as available-for-sale under ASC 320 (formerly SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities), the impact of a one-percentage point movement in interest rates occurs over an extended period of time as investments are sold and the funds are subsequently reinvested. Foreign Exchange Risk We conduct business in over 100 countries throughout the world and, therefore, at times are exposed to risk based on movements in foreign exchange rates. On occasion, we 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. 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, 2008 2009 $ 575 $ 0.01 $2,805 $ 0.05 $ 1,971 $ 0.03 $ 579 $ 0.01 $ 1,620 $ 0.02 $4,469 $ 0.05 Equity Price Risk Zebra’s investment manager uses 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 investments (in thousands, except 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, 2008 2009 $ 0 $ 0.00 $ 25 $ 0.00 $ (0) $ (0.00) $ (25) $ (0.00) 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. However, at the end of 2009, Zebra held no equity positions. 30 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. As pieces of these systems are completed, they will be subject to the requirements related to internal control over financial reporting. The requirements for internal control over financial reporting will be a fundamental element of the design and implementation of these systems. During 2009, we implemented the following financial systems modules in our U.S. facilities: human resources, procurement and payables, payroll, and portions of our general ledger. In 2009, 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 prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Item 8. Financial Statements and Supplementary Data The financial statements and schedule of Zebra are annexed to this report as pages F-2 through F-38. 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 (the “Exchange Act”)) as of the end of the period covered by this Form 10-K. The 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 Officer 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 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 furnish 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, 2009. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on this assessment and those criteria, our management believes that, as of December 31, 2009, 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. Ernst & Young LLP’s report is included on page 56 of this report on Form 10-K. 31 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of Zebra Technologies Corporation: We have audited Zebra Technologies Corporation internal control over financial reporting as of December 31, 2009, 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. Because of its inherent limitations, 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, 2009, based on the COSO criteria. 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. 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, 2009 and 2008, 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, 2009 and the schedule listed in the index at Item 15, our report dated February 23, 2010 expressed an unqualified opinion thereon. /s/Ernst & Young LLP Chicago, Illinois February 23, 2010 32 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 19th day of February 2010. 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,” “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 sections entitled “Ownership of our Common Stock” 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 “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.” 33 /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 23, 2010 February 23, 2010 February 23, 2010 February 23, 2010 February 23, 2010 February 23, 2010 February 23, 2010 February 23, 2010 February 23, 2010 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, 2009 and 2008 Consolidated Statements of Earnings (Loss) for the years ended December 31, 2009, 2008, and 2007 Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2009, 2008, and 2007 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2009, 2008, and 2007 Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008, and 2007 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-30 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, 2009 and 2008, 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, 2009. Our audits also included the financial statement schedule listed in the Index referenced in 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, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, 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, 2009, 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 23, 2010 expressed an unqualified opinion thereon. /s/Ernst & Young LLP Chicago, Illinois February 23, 2010 F-1 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 $2,186 in 2009 and $2,734 in 2008 Inventories, net Deferred income taxes Income taxes receivable 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 Total assets December 31, 2009 December 31, 2008 December 31, 2009 December 31, 2008 LIABILITIES AND STOCKHOLDERS’ EQUITY $ 38,943 $ 33,267 1,725 114,064 150,992 79,926 10,792 4,724 9,771 410,937 77,589 35,842 153,225 55,982 91,989 4,915 1,639 85,654 152,679 100,199 11,679 2,697 9,004 396,818 75,363 51,251 151,356 66,359 104,326 5,405 Current liabilities: Accounts payable Accrued liabilities Deferred revenue Income taxes payable Total current liabilities Deferred rent Other long-term liabilities Total liabilities 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) $ 830,479 $ 850,878 Total stockholders’ equity $ 28,137 $ 38,152 52,591 24,082 — 104,810 4,108 9,432 118,350 — 722 136,104 (385,831) 969,195 (8,061) 712,129 67,911 18,366 558 124,987 4,903 10,250 140,140 — 722 144,861 (344,147) 922,091 (12,789) 710,738 Total liabilities and stockholders’ equity $ 830,479 $ 850,878 See accompanying notes to consolidated financial statements. 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 Net income (loss) $47,104 $(38,421) $ 110,113 Year Ended December 31, 2008 2009 2007 Year Ended December 31, 2008 2009 2007 Net sales of tangible products $701,044 $871,587 Revenue from services and software Total net sales Cost of sales Cost of sales of tangible products Cost of services and software Total cost of sales Gross profit Operating expenses: Selling and marketing Research and development General and administrative Amortization of intangible assets Litigation/claim settlement 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 Income taxes Net income (loss) Basic earnings (loss) per share Diluted earnings (loss) per share 102,541 803,585 401,727 41,137 442,864 360,721 100,199 85,089 85,032 10,466 — — 12,191 (1,058) 291,919 68,802 2,933 (45) (1,167) 1,721 70,523 23,419 105,113 976,700 452,208 45,187 497,395 479,305 121,435 94,449 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 $ 47,104 $ (38,421) $ 0.79 $ 0.79 $ (0.60) $ (0.60) $ 110,113 $ 1.61 $ 1.60 Other comprehensive income (loss): Foreign currency translation adjustment 3,972 (22,991) 2,277 Unrealized gain/(loss) on hedging transactions, net of income taxes Unrealized holding gains/(loss) on investments, net of income taxes 19 737 5,750 (5,205) (543) 1,111 Comprehensive income (loss) $51,832 $(56,205) $108,296 See accompanying notes to consolidated financial statements. $825,479 42,800 868,279 429,113 22,048 451,161 417,118 114,116 65,480 81,356 11,128 — 1,853 — — 273,933 143,185 23,966 523 (299) 24,190 167,375 57,262 Basic weighted average shares outstanding 59,306 64,524 68,463 Diluted weighted average and equivalent shares outstanding 59,425 64,524 68,908 See accompanying notes to consolidated financial statements. F-3 ZEBRA TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Dollars in thousands) Balance at December 31, 2006 Repurchase of 3,038,389 shares of Class A Common Stock Issuance of 578,608 treasury shares upon exercise of stock options, purchases under stock purchase plan and grants of restricted stock awards Additional tax benefit resulting from exercise of options Equity-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 Balance at December 31, 2007 Repurchase of 6,008,232 shares of Class A Common Stock Issuance of 499,576 treasury shares upon exercise of stock options, purchases under stock purchase plan and grants of restricted stock awards Additional tax benefit resulting from exercise of options Equity-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 Balance at December 31, 2008 Repurchase of 3,173,182 shares of Class A Common Stock Issuance of 691,176 treasury shares upon exercise of stock options, purchases under stock purchase plan and grants of restricted stock awards Additional tax benefit resulting from exercise of options Equity-based compensation Net income Unrealized holding gain on investments (net of income taxes) Unrealized holding gain on hedging transactions (net of income taxes) Foreign currency translation adjustment Balance at December 31, 2009 See accompanying notes to consolidated financial statements. F-4 Class A Common Stock Additional Paid-in Capital Treasury Stock Accumulated Other Retained Comprehensive Earnings Income (Loss) Total $722 $139,083 $ (119,335) $850,399 $ 6,812 $ 877,681 — — — — — — — — — (107,390) (13,292) 664 15,067 — — — — 21,667 — — — — — — — — — — 110,113 — — — — — — — — 1,111 (5,205) 2,277 (107,390) 8,375 664 15,067 110,113 1,111 (5,205) 2,277 $722 $ 141,522 $(205,058) $ 960,512 $ 4,995 $902,693 — — — — — — — — — (157,582) (11,348) (275) 14,962 — — — — 18,493 — — — — — — — — — — (38,421) — — — — — — — — (543) 5,750 (157,582) 7,145 (275) 14,962 (38,421) (543) 5,750 (22,991) (22,991) $722 $144,861 $ (344,147) $ 922,091 $(12,789) $ 710,738 — — — — — — — — — (65,445) (18,789) (1,435) 11,467 — — — — 23,761 — — — — — — — — — — 47,104 — — — — — — — — 737 19 3,972 (65,445) 4,972 (1,435) 11,467 47,104 737 19 3,972 $722 $ 136,104 $ (385,831) $ 969,195 $ (8,061) $ 712,129 ZEBRA TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Cash flows from operating activities: Cash flows from investing activities: Net income (loss) $47,104 $(38,421) $110,113 Purchases of property and equipment (24,890) (40,889) (22,070) Year Ended December 31, 2009 2008 2007 Year Ended December 31, 2009 2008 2007 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization Equity-based compensation Asset impairment charges Impairment of investments Excess tax benefit from share-based compensation Loss (gain) on sale of assets Acquired in-process technology 32,913 11,467 (1,058) 958 (13) 829 — 38,581 14,962 157,600 7,271 (192) (1,121) — Deferred income taxes 12,550 (23,138) Changes in assets and liabilities, net of businesses acquired: Accounts receivable, net Inventories, net Other assets Accounts payable Accrued liabilities Deferred revenue Income taxes payable Other operating activities Net cash provided by operating activities 8,747 22,315 (733) (16,105) (16,315) 4,966 (2,008) 81 (21,891) (26,222) (2,758) 17,891 1,429 11,281 (1,002) 4,012 26,902 15,067 — — (921) — 1,853 (5,477) 4,453 (134) (1,321) (3,418) 16,804 (325) (1,337) (4,139) Proceeds from sale of asset Acquisition of businesses, net of cash acquired — — 14,796 — (18,588) (286,761) Acquisition of intangible assets (425) (1,384) (4,800) Purchases of investments (329,292) (723,791) (1,025,089) Maturities of investments Sales of investments 257,936 56,020 592,749 198,541 915,015 366,964 Net cash provided by (used in) investing activities (40,651) 21,434 (56,741) Cash flows from financing activities: Purchase of treasury shares (65,445) (157,582) (112,094) Proceeds from exercise of stock options and stock purchase plan purchases 4,972 7,145 8,375 Excess tax benefit from share-based compensation 13 192 921 Net cash used in financing activities (60,460) (150,245) (102,798) Effect of exchange rate changes on cash 1,089 (14,415) (18) Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year 5,676 (4,944) (1,437) 33,267 38,211 $33,267 39,648 $38,211 Supplemental disclosures of cash flow information: Income taxes paid 10,742 49,092 62,130 Supplemental disclosures of non-cash transaction: Sale of investments not received in 2007 — — 21,925 See accompanying notes to consolidated financial statements. F-5 105,698 138,282 158,120 Cash and cash equivalents at end of year $38,943 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, 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 (ZES). In 2008 and 2009, we integrated these businesses into a single business group and are reporting their results separately from our specialty printing business. Together, these ZES 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 fiscal calendar 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 2009 fiscal year, our quarter end dates were as follows: • April 4, • July 4, • October 3, 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, 2009, 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, 2009, 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 ASC 740 (formerly FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109). According to ASC 740, 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 an acquisition. 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 A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): the overall business, • Significant negative industry or economic trends, Balance at January 1, 2008 Additions based on tax positions related to 2008 Additions based on tax positions related to 2009 Balance at December 31, 2009 $ — 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. For the years ended December 31, 2009 and December 31, 2008, we did not accrue any interest or penalties into income tax expense. Goodwill and Other Intangibles. 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 ASC 350 (formerly 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 2009. At that time, no adjustment to goodwill was necessary due to impairment. Due to economic conditions in late 2008, we performed an additional assessment of our goodwill during December 2008 and found the goodwill of our Zebra Enterprise Solutions Group to be impaired. See Note 13 for further information related to 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. • 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 by comparing the carrying value of the asset group to its fair value, which is estimated by using projected discounted cash flows and using a discount rate that incorporates the risk inherent in the cash flows. Due to economic conditions in 2008, we performed an assessment of our identifiable intangibles during December 2008 and found that several of our identifiable intangible assets were impaired. See Note 13 for further information related to asset impairment charges. Other intangible assets capitalized consist primarily of current technology, customer relationships and patents and patent rights. These assets are recorded at cost and amortized on a straight-line basis over a weighted-average life of 5.3 years, which approximates the estimated useful lives. Weighted average lives remaining by intangible asset class are as follows: Current technology 3.9 years; Patent and patent rights 3.0 years; Customer relationships 7.8 years. Accumulated amortization for these other intangible assets was $34,541,000 at December 31, 2009 and $23,394,000 at December 31, 2008. 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 revenue 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. 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. F-7 Zebra records payments to resellers of its product as reductions to revenue unless these payments meet the requirements for operating expense treatment under ASC 605 (formerly EITF 01-09 Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products). See the market development funds accounting policy for further details. Revenue includes all customer billings for shipping and handling charges. The related costs of shipping and handling revenue are recorded as cost of goods sold. ZES 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, 2009, unbilled revenue was $8,480,000 and receivables for contracts in progress included in accounts receivable were $14,682,000. At December 31, 2008, unbilled revenue was $9,801,000 and receivables for contracts in progress included in accounts receivable were $11,260,000. 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 Advertising. Advertising costs are expensed as incurred. Advertising expenses for the years ended December 31, 2009, 2008 and 2007 totaled $6,118,000, $7,318,000 and $6,361,000, 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 ASC 605 (formerly 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 twelve months. Warranty coverage for most ZES hardware products is similar, with coverage periods ranging from 90 days to one year depending on the nature of the product. Battery based products, such as location tags, are covered by a 30 day warranty. For ZES 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 quarterly based on historical warranty experience. The following table is a summary of Zebra’s accrued warranty obligation (in thousands). Warranty Reserve Balance at the beginning of the year Warranty expense Warranty payments Balance at the end of the period 2009 $ 2,814 4,629 (3,630) $ 3,813 Year Ended December 31, 2008 2007 $ 3,411 4,094 (4,691) $ 2,814 $ 2,250 6,522 (5,361) $ 3,411 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 (in thousands): Recycling Reserve Balance at the beginning of the year Recycling expense Reserve adjustment Recycling payments Exchange rate impact 2009 $1,207 324 (640) (13) 123 Year Ended December 31, 2008 2007 $ 3,706 1,664 (3,757) (3) (403) $ 2,115 1,580 — — 11 Balance at the end of the period $1,001 $ 1,207 $ 3,706 During the second quarter of 2009 and 2008 we reviewed the environmental recycling reserves based on our experience of providing for such reserves and decreased our estimates as noted in the above schedule. 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 ASC 815 (formerly 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. Equity-Based Compensation. At December 31, 2009, Zebra had a general equity-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 ASC 505 and ASC 718 (formerly SFAS No. 123(R), Share-Based Payments). 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 (in thousands): 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 $3,155,000 as of December 31, 2009, and $3,323,000 as of December 31, 2008. 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). 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, 2008 2009 2007 $ 1,198 $ 1,206 $ 1,607 1,954 1,709 6,606 — 2,849 2,426 8,083 398 2,977 2,316 8,167 — $ 11,467 $ 3,956 $ 14,962 $ 5,162 $ 15,067 $ 5,198 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. ASC 505 and ASC 718 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 Year Ended December 31, 2008 2009 2007 $ 13 $ 192 $ 921 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. In 2009, Zebra expensed these costs as incurred in accordance with the adoption of ASC 805 (formerly 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 ASC 350 (formerly 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. Recently Issued Accounting Pronouncements. In May 2008, the FASB issued ASC 105 (formerly 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 ASC 250 (formerly SFAS No. 154, Accounting for Changes and Error Corrections). This standard did not have a significant effect upon our consolidated financial statements. F-9 In October 2008, the FASB issued ASC 820 (formerly FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active). The position statement was effective upon issuance. The statement provides guidance for valuing assets that are no longer in active markets. This standard did not have a significant effect upon our consolidated financial statements. In April 2009, the FASB issued ASC 825 (formerly FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments) a statement of position that will require companies to provide disclosures required by ASC 825 (formerly FASB No. 107, Disclosures about Fair Value of Financial Instruments). The position statement is effective for interim reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. This standard did not have a significant effect upon our consolidated financial statements. In April 2009, the FASB issued ASC 320 (formerly FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-than-Temporary Impairments) which amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other- than-temporary impairments on debt and equity securities in the financial statements. This statement does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The position statement is effective for interim and annual reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. Earlier adoption for periods ending before March 15, 2009 is not permitted. This standard did not have a significant effect upon our consolidated financial statements. In April 2009, the FASB issued ASC 820 (formerly FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That are Not Orderly). ASC 820 provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly. ASC 820 becomes effective for interim and annual reporting periods after June 15, 2009 and shall be applied prospectively. This standard did not have a significant effect upon our consolidated financial statements. In May 2009, the FASB issued ASC 855 (formerly SFAS 165, Subsequent Events) which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued. In particular, the standard addresses: the period after the balance sheet date during which management of a reporting entity shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements; and the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. The statement is effective for interim and annual reporting periods ending after June 15, 2009. This standard did not have a significant effect upon our consolidated financial statements. F-10 In June 2009, the FASB issued ASC 105 (formerly SFAS 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB SFAS No. 162) which would make the FASB Accounting Standards Codification (“ASC”) the single source of authoritative accounting and reporting standards applicable for all nongovernmental entities, with the exception of guidance issued by the SEC and its staff. The ASC does not change GAAP; instead, it introduces a new structure that is organized into user-friendly research system. The ASC reorganizes thousands of GAAP pronouncements into approximately 90 accounting topics using a consistent structure. The statement is effective for interim and annual reporting periods ending after September 15, 2009. This standard did not have a significant effect upon our consolidated financial statements. In August 2009, the FASB issued update 2009-05, ASC 820, Fair Value Measurements and Disclosures – Measuring Liabilities at Fair Value which provides additional guidance clarifying the measurement of financial liabilities at fair value. This standard is effective after issuance and did not have a significant effect upon our consolidated financial statements. In October 2009, the FASB issued update 2009-13, ASC 605, Revenue Recognition: Multiple –Deliverable Revenue Arrangements-a consensus of the FASB Emerging Issues Task Force. The revised guidance provides for two significant changes to existing multiple element arrangement guidance. The first relates to the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. This change is significant as it will likely result in the requirement to separate more deliverables within an arrangement, ultimately leading to less revenue deferral. The second change modifies the manner in which the transaction consideration is allocated across the separately identifiable deliverables. These changes are likely to result in earlier recognition of revenue for multiple-element arrangements than under previous guidance. This standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We have not yet determined the effect of this standard upon our consolidated financial statements. In October 2009, the FASB issued update 2009-14, ASC 985, Software: Certain Revenue Arrangements That Include Software Elements – a consensus of the FASB Emerging Issues Task Force. This updated guidance is expected to significantly affect how entities account for revenue arrangements that contain both hardware and software elements. This standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We have not yet determined the effect of this standard upon our consolidated financial statements. Reclassifications. Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year’s presentation. Selling and marketing expenses of $9,329,000 for the year ended December 31, 2008, and $7,880,000 for the year ended December 31, 2007, have been reclassified to research and development expenses to realign Zebra’s SPG product management group. Prior period amounts will differ in these categories from amounts previously reported. Subsequent events. We have evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through February 23, 2010, the day the financial statements were issued. Note 3 Fair Value Measurements Level 1 Level 2 Level 3 Total Financial assets and liabilities are to be measured using inputs from three levels of the fair value hierarchy. As defined in Accounting Standards Codification (ASC) 820 (formerly Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements) 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, ASC 820 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, Assets: U.S. Government and agency securities Obligations of government- sponsored enterprises (1) State and municipal bonds Corporate securities Other investments Forward contracts (2) Money market investments related to the deferred compensation plan $ 12,811 $ — $ — $ 12,811 10,666 161,839 13,654 36 851 3,155 — — — — — — — 10,666 4,133 2,914 165,972 16,568 — — — 36 851 3,155 but corroborated by market data. Total assets at fair value $ 203,012 $ — $ 7,047 $ 210,059 Level 3: Unobservable inputs are used when little or no market data is available. The Liabilities: 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. These instruments are classified as available-for-sale securities and are reflected at fair value. Due to events in credit markets, however, the auction events for the instruments held by Zebra as of December 31, 2009, failed. Therefore, the fair values of these securities are estimated utilizing broker quotations, discounted cash flow analysis or other types of valuation adjustment methodologies. These analyses consider, among other items, the collateral underlying the security instruments, the creditworthiness 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 and recorded the market value decline in the amount of $4,374,000 for that security in the third quarter of 2008. The decline in the market value of the other securities is considered temporary and has been recorded in accumulated other comprehensive income (loss) on Zebra’s 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 on the balance sheet. Financial assets and liabilities carried at fair value as of December 31, 2009 are classified below (in thousands): Liabilities related to the deferred compensation plan $ 3,155 Total liabilities at fair value $ 3,155 $ — $ — $ — $ 3,155 $ — $ 3,155 Financial assets and liabilities carried at fair value as of December 31, 2008 are classified below (in thousands): Level 1 Level 2 Level 3 Total Assets: U.S. Government and agency securities Obligations of government- sponsored enterprises (1) State and municipal bonds Corporate securities Other investments Money market investments related to the deferred compensation plan $ 37,361 $ — $ — $ 37,361 4,846 140,406 — 320 3,426 — — — — — — 4,846 4,133 2,914 — — 144,539 2,914 320 3,426 Total assets at fair value $ 186,359 $ — $ 7,047 $ 193,406 Liabilities: Forward contracts (2) Liabilities related to the deferred compensation plan $ 2,414 $ 8,015 $ — $ 10,429 Total liabilities at fair value $ 5,737 $ 3,323 $ — $ 8,015 $ — $ 3,323 $ — $ 13,752 1) Includes investments in notes issued by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Federal Home Loan Bank. 2) 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 period- end exchange rate adjusted for the discount rate (3 month LIBOR rate). c. Fair value of balance sheet hedges are calculated at the period end exchange rate adjusted for current forward points unless the hedge has been traded but not settled at period end. If this is the case, the fair value is calculated at the rate at which the hedge is being settled. F-11 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 ASC 820 for the years ended December 31 (in thousands): Year Ended, December 31, December 31, 2008 2009 U.S. Government and agency securities As of December 31, 2008 Gross Amortized Unrealized Unrealized Losses Gross Gains Cost Estimated Fair Value $ 37,598 $ 9 $ (246) $ 37,361 Balance at beginning of the year Transfers to Level 3 Total losses (realized or unrealized): Included in earnings Included in other comprehensive income (loss) Purchases and settlements (net) Balanced at end of period Total gains and (losses) for the period included in earnings attributable to the change in unrealized losses relating to assets still held at end of period $7,047 — — — — $7,047 $ — 12,350 (4,374) (929) — $ 7,047 $ — $ — Obligations of government- sponsored enterprises State and municipal bonds Corporate securities Other investments 4,913 144,528 3,350 320 Total investments $ 190,709 21 1,366 — — $ 1,396 (88) 4,846 (1,355) 144,539 (436) — 2,914 320 $ (2,125) $ 189,980 The maturity dates of investments as of December 31, 2009 are as follows (in thousands): As of December 31, 2009 and December 31, 2008, there were no other Level 3 unrealized losses that Zebra believes to be other-than-temporary. No realized gains or losses were recorded for the years ended December 31, 2009, 2008 and 2007. The following is a summary of short-term and long-term investments at December 31, 2009 and December 31, 2008 (in thousands): As of December 31, 2009 Less than 1 year 1 to 5 years 6 to 10 years Thereafter Total Gross Amortized Unrealized Unrealized Losses Gross Gains Cost Estimated Fair Value The carrying value for Zebra’s financial instruments classified as current assets (other than short-term investments) and current liabilities approximate fair value due to short maturities. U.S. Government and agency securities Obligations of government- sponsored enterprises $ 12,931 $ 45 $ (165) $ 12,811 10,589 82 (5) 10,666 State and municipal bonds 165,366 1,177 (571) 165,972 Corporate securities Other investments Total investments 16,680 36 $ 205,602 306 — $ 1,610 (418) 16,568 — 36 $ (1,159) $ 206,053 F-12 Note 4 Equity-Based Compensation As of December 31, 2009, Zebra had a general equity-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, Zebra’s stockholders 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 (SARs), 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, 2009, 3,024,074 shares were available for grant under the plan, and options for 1,820,907 shares were outstanding under the 2006 Plan. Amortized Cost Estimated Fair Value $ 114,278 $ 114,064 79,931 81,039 2,991 8,402 3,042 7,908 $ 205,602 $ 206,053 The options and SARs granted under the 2006 Plan have an exercise or base price equal to the closing market price of Zebra’s stock on the date of grant. The awards granted to employees generally vest over a four or five-year period. These awards 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. The following table shows the number of shares of restricted stock granted in 2009 and the vesting schedules of the restricted stock awards that were granted under the Plan to certain executive officers and other members of management. Vesting period After two years of service After three years of service Number of shares granted 500 298,203 These restricted stock awards will vest at each vesting date if the employee 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 employee 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 the employee’s employment is terminated by Zebra for Cause or if the employee resigns for other than good reason. The 1997 Plan was superseded by the 2006 Plan. As of December 31, 2009, options for 1,368,104 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, 2009, options for 159,068 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 exercise 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, 2009, outstanding Navis options were exercisable into 65,985 shares of Zebra Class A Common Stock. As of December 31, 2009, outstanding WhereNet options were exercisable into 34,637 shares of Zebra Class A Common Stock. The Board of Directors and stockholders adopted the 2001 Stock Purchase Plan under which employees who work a minimum of 20 hours per week may elect to withhold up to 10% of their cash compensation through regular payroll deductions to purchase shares of Class A Common Stock from Zebra over a period not to exceed 12 months at a purchase price per share which prior to April 1, 2009 was 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. Effective April 1, 2009, the purchase price per share is now equal to the lesser of: (1) 95% of the fair market value of the shares as of the date of the grant, or (2) 95% of the fair market value of the shares as of the date of purchase. The effect of this change to Zebra was to reduce the general and administrative expense related to this portion of Zebra’s stock purchase plan. Stock purchase plan expense for the year ended December 31, 2009 was $514,000. Stock purchase plan expense for the year ended December 31, 2008 was $1,517,000. For purposes of calculating the compensation cost consistent with ASC 505 and ASC 718, the fair value is estimated on the date of grant using a binomial model. Volatility is based on an average of the implied volatility in the open market and the annualized volatility of Zebra’s stock prices over our entire stock history. Stock option grants in the table below include both stock options, all of which were non-qualified, and stock appreciation rights (SAR) that will be settled in Zebra stock. The following table shows the weighted-average assumptions used for grants of stock options and SARs as well as the fair value of the grants based on those assumptions (excluding the Navis and WhereNet options): Expected dividend yield Forfeiture rate Volatility Risk free interest rate 2009 0% 9.92% 43.08% 2.23% 2008 0% 8.99% 37.79% 3.17% 2007 0% 7.69% 34.73% 4.55% – Range of interest rates 0.15% - 3.29% 0.81% - 3.87% 4.55% - 5.03% Expected weighted-average life 5.23 years 5.09 years 4.88 years Fair value of options granted $6,046,000 $7,566,000 $10,790,000 Weighted-average grant date fair value of options granted (per share underlying the options) $8.06 $13.33 $13.72 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 historical exercise behavior, 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. F-13 Stock option and SAR activity for the years ended December 31, 2009, 2008, and 2007, was as follows: Options and SARs Outstanding at beginning of year Granted Exercised Forfeited Expired Outstanding at end of year Exercisable at end of year 2009 Weighted-Average Exercise Price $35.83 19.96 17.53 37.28 39.88 $32.81 $35.23 Shares 3,139,174 749,951 (128,311) (132,646) (176,223) 3,451,945 1,884,449 Intrinsic value of exercised options and SARs $ 738,000 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 For the year ended December 31, 2009, shares granted above include stock options to purchase 48,784 shares of Zebra Class A Common Stock (Zebra stock) and SARs with respect to 701,167 shares of Zebra stock. The terms of the SARs are established under the 2006 Plan and the applicable SAR agreement. Once vested, a SAR entitles the holder to receive a payment equal to the difference between the per-share base price of the SAR and the fair market value of a share of Zebra stock on the date the SAR is exercised, multiplied by the number of shares covered by the SAR. Exercised SARs will be settled in whole shares of Zebra stock, and any fraction of a share will be settled in cash. The SARs granted during 2009 vest annually in four equal amounts on each of the first four anniversaries of the grant date and expire 10 years after the grant date. The following table summarizes information about stock options and SARs outstanding at December 31, 2009: Range of Exercise Prices $1.29-$19.56 $19.57-$28.22 $28.23-$37.20 $37.21-$43.35 $43.36-$53.92 Aggregate intrinsic value Weighted-average remaining contractual term Number of Shares 780,179 695,790 708,850 624,576 642,550 3,451,945 Outstanding Exercisable Weighted-Average Remaining Contractual Life Weighted-Average Exercise Price Number of Shares Weighted-Average Exercise Price 8.29 years 3.36 years 7.56 years 6.88 years 4.95 years $18.52 23.82 35.94 41.82 47.67 Outstanding $10,820,000 6.3 years 131,618 582,655 266,936 327,767 575,473 1,884,449 $13.77 24.08 35.80 41.76 47.45 Exercisable $4,409,000 4.5 years F-14 Rstricted stock award activity, granted under the 2006 Plan, for the years ended December 31, 2009, 2008 and 2007 was as follows: Restricted Stock Awards Outstanding at beginning of year Granted Released Forfeited Outstanding at end of year 2009 Weighted-Average Grant Date Fair Value $30.35 20.02 32.97 32.34 $23.94 Shares 283,567 298,703 (35,904) (38,382) 507,984 2008 Weighted-Average Grant Date Fair Value $31.05 31.42 35.46 34.89 $30.35 Shares 166,415 179,060 (50,114) (11,794) 283,567 2007 Weighted-Average Grant Date Fair Value $36.36 31.23 36.10 0.00 $31.05 Shares 51,042 175,089 (59,716) — 166,415 As of December 31, 2009, there was $18,646,000 of unearned compensation cost related to awards granted under Zebra’s equity-based compensation plans, which is expected to be recognized over a weighted-average period of 2.5 years. The fair value of the purchase rights issued to Zebra employees 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 2009 $21.41 $19.66 0% 34% 0.18% 2008 $20.26 $17.22 0% 46% 1.87% 2007 $34.70 $29.50 0% 29% 4.57% 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. 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. As part of the acquisition closing, an escrow was established, which, as of December 31, 2009 held $2,000,000. On September 17, 2009, Zebra filed a demand against the former shareholders of MSSI seeking recovery for damages resulting from the selling Shareholders’ breach of several representations and warranties contained in the acquisition agreement. Representatives of the selling shareholders of MSSI disputed the allegations contained in Zebra’s demand and after settlement discussions were unsuccessful, on October 28, 2009, filed a Declaratory Action in the Circuit Court of Cook County seeking to obtain a portion of the escrowed funds. On December 9, 2009, Zebra filed its Answer to the Declaratory Action and its Counterclaim against the former shareholders of MSSI and others (the “Defendants”), alleging that Zebra is entitled to indemnification from the Defendants as a result of, among other things, fraud and breaches of the representations and warranties in the acquisition agreement. The dispute has not been settled as of December 31, 2009. The funds in escrow would represent a gain contingency to Zebra if the dispute is settled in Zebra’s favor. The following table (in thousands) summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition. At April 1, 2008 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 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 F-15 Navis Holdings, 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 and the liabilities assumed at the date of acquisition. At December 14, 2007 Current assets Property and equipment Intangible assets Goodwill Total assets acquired Deferred tax liability Current liabilities $ 25,707 Net assets acquired 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 $ 2,062 114 4,176 16,331 $22,683 (1,572) (887) $20,224 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 $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. Current assets Property and equipment Intangible assets Goodwill Total assets acquired Current liabilities Net assets acquired 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 13 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. F-16 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 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 ASC 730 (formerly 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 $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. During the fourth quarter of 2008, we determined that certain impairment indicators existed related to identified intangible assets and conducted an additional impairment test of intangibles. We determined that our goodwill and other intangible assets related to ZES were impaired requiring the intangible assets and goodwill to be written off. See Note 13 for additional details. 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, 2008 2009 $0.01 10,000,000 — $0.01 10,000,000 — $0.01 150,000,000 72,151,857 58,318,983 $0.01 150,000,000 72,151,857 60,861,592 13,832,874 11,290,265 During the year ended December 31, 2009, Zebra purchased 3,173,182 shares of common stock for $65,445,000 under board authorized share repurchase plans compared to the year ended December 31, 2008, in which Zebra purchased 6,008,232 shares of common stock for $157,582,000. During the year ended December 31, 2007, Zebra purchased 3,038,389 shares of common stock for $107,390,000. Zebra issued 281,975 treasury shares of common stock upon the exercise of stock options and purchases under the stock purchase plan during 2009. Zebra also issued from treasury shares 409,201 shares of common stock under restricted stock awards during 2009. During 2008, Zebra issued 373,793 treasury shares of common stock upon the exercise of stock options and purchases under the stock purchase plan and issued 125,783 shares of common stock from treasury shares under restricted stock awards. During 2007, Zebra issued 578,608 treasury shares of common stock upon the exercise of stock options, purchases under the stock purchase plan and for restricted stock awards. F-17 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. Note 7 Earnings (Loss) Per Share For the years ended December 31, 2009, 2008, and 2007, earnings (loss) per share were computed as follows (in thousands, except per-share amounts): 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 2,350,854 2,217,940 1,561,918 Year Ended December 31, 2008 2009 2007 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 ASC 320 (formerly SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities). As of December 31, 2009, 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. ASC 320 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. 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 Year Ended December 31, 2008 2009 2007 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. $47,104 $(38,421) $110,113 59,306 $0.79 64,524 $(0.60) 68,463 $1.61 $47,104 $(38,421) $110,113 Changes in unrealized gains and losses on available-for-sale securities are included in these financial statements as follows (in thousands): Changes in unrealized gains and losses on available-for-sale securities, net of tax, recorded in accumulated other comprehensive income (loss) Year Ended December 31, 2009 2008 2007 $737 $(543) $1,111 Add: Effect of dilutive securities – stock options 119 59,306 64,524 — 68,463 445 Diluted weighted average and equivalent shares outstanding Per share amount 59,425 $ 0.79 64,524 $ (0.60) 68,908 $ 1.60 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. F-18  Unrealized Loss < 12 months Unrealized Loss > 12 months Number of investments Aggregate Market Value Government securities State and municipal bonds Corporate securities Total 12 3 2 17 $ 5,511 5,580 4,187 $15,278 Unrealized Losses $ (164) (1) (413) $ (578) Number of investments Aggregate Market Value Unrealized Losses 2 15 2 19 $ 2,361 19,145 1,391 $22,897 $ (7) (570) (5) $ (582) As of December 31, 2008, 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 Unrealized Losses Number of investments Aggregate Market Value Unrealized Losses Government securities State and municipal bonds Corporate securities 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) 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 2009 2008 2007 $56,020 $165,177 $343,647 260 (219) 376 (901) 594 (781) (26) (441) (392) 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): Unique Operating Lease 2007 $1,358 Note 10 Inventories The components of inventories are as follows (in thousands): Raw material Work in process Deferred costs of long-term contracts Finished goods Total inventories, gross Inventory reserves Total inventories, net As of December 31, 2009 2008 $27,953 $ 52,294 162 1,937 58,928 88,980 (9,054) 1,154 628 55,787 109,863 (9,664) $79,926 $100,199 F-19 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, 2009 2008 $ 2,036 $ 1,844 320 74,311 11,191 81,096 20 11,637 14,869 289 76,742 9,062 63,638 20 10,328 22,509 195,480 184,432 Less accumulated depreciation and amortization (117,891) (109,069) Net property and equipment $ 77,589 $ 75,363 Other items related to property and equipment are as follows: Unamortized computer software costs December 31, 2009 2008 $ 21,545 $ 13,330 Year Ended December 31, 2008 2009 2007 Amortization of capitalized software $ 6,212 $ 5,058 $ 4,447 Total depreciation expense charged to income 22,447 20,006 15,774 Note 12 Income Taxes The geographical sources of income (loss) before income taxes were as follows (in thousands): United States Outside United States Total Year Ended December 31, 2008 2009 2007 $49,514 21,009 $70,523 $(30,517) $142,903 18,604 24,472 $ (11,913) $167,375 Zebra’s intention is to permanently reinvest the undistributed earnings of all of our foreign subsidiaries in accordance with ASC 740 (formerly 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 $38,000,000 at December 31, 2009. Should such earnings be remitted to Zebra, foreign tax credits would be available to substantially offset the U.S. income taxes due upon repatriation. F-20 The provision for income taxes consists of the following (in thousands): Current: Federal State Foreign Total current Deferred: Federal State Foreign Total deferred Total Year Ended December 31, 2008 2009 2007 $4,213 861 5,556 10,630 10,504 509 1,776 12,789 $38,149 $44,737 5,213 7,494 50,856 (22,309) (2,039) — 5,391 8,399 58,527 (1,458) 193 — (24,348) (1,265) $23,419 $26,508 $57,262 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, 2008 2009 2007 Provision computed at statutory rate $24,683 $ (4,170) $58,582 State income tax, net of Federal tax benefit Tax-exempt interest income Acquired in-process technology Acquisition related items Asset impairment charges Domestic manufacturing deduction Research and experimental credit Foreign rate differential Other 566 (1,047) — — — (700) (600) (1,263) 1,780 1,127 (1,997) — (2,450) 35,360 (1,715) (400) 1,094 (341) 3,636 (4,173) 649 — — (1,470) (400) 877 (439) Provision for income taxes $23,419 $26,508 $57,262 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, 2009 2008 Zebra’s continuing practice is to recognize interest and/or penalties related to income tax matters as part of income tax expense. For the years ended December 31, 2009, 2008 and 2007, we did not accrue any interest or penalties into income tax expense. Deferred tax assets: Deferred rent Accrued vacation Deferred compensation Inventory items $ 1,462 1,227 1,525 4,131 Allowance for doubtful accounts and other receivables 410 Other accruals Equity based compensation expense Unrealized gain on securities 3,488 16,132 — $ 1,817 1,717 1,576 4,358 272 3,749 18,545 275 Unrealized loss on other investments 5,552 10,154 Unrealized loss on hedges Net operating loss carryforwards Total deferred tax assets Deferred tax liabilities: Unrealized loss on securities Depreciation and amortization Total deferred tax liabilities Net deferred tax assets — 18,334 52,261 (169) (5,458) (5,627) $ 46,634 12 21,792 64,267 — (1,337) (1,337) $ 62,930 On January 1, 2007, we adopted ASC 740 (formerly FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109). According to ASC 740, 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 an acquisition. This benefit remained unchanged as of December 31, 2009. Included in deferred tax assets are amounts related to federal and state net operating losses that resulted from our acquisition of WhereNet Corp. As of December 31, 2009, we had approximately $35,003,000 of federal net operating loss carryforwards available to offset future taxable income which expire in 2012 through 2022. As of December 31, 2009, 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. In addition, as of December 31, 2009, Zebra had approximately $8,325,776 of foreign net operating loss carryforwards which currently can be carried forward indefinitely. Zebra has concluded all U.S. federal income tax audits for years through 2006. The tax years 2005 through 2008 remain open to examination by multiple state taxing jurisdictions. Tax authorities in the United Kingdom have completed income tax audits for tax years through 2006. Note 13 Goodwill and Other Intangible Asset Data Intangible asset data are as follows (in thousands): December 31, 2009 Gross Carrying Amount December 31, 2008 Gross Accumulated Amortization Carrying Accumulated Amount Amortization Amortized intangible assets Current technology $ 32,038 $ (17,071) $33,157 $(14,034) Patent and patent rights Customer relationships 13,663 44,822 (6,774) (10,696) 13,238 43,358 (4,448) (4,912) Total $ 90,523 $ (34,541) $89,753 $(23,394) $18,575 Aggregate amortization expense For the year ended December 31, 2008 For the year ended December 31, 2009 $ 10,466 Estimated amortization expense For the year ended December 31, 2010 For the year ended December 31, 2011 For the year ended December 31, 2012 For the year ended December 31, 2013 For the year ended December 31, 2014 Thereafter Total $ 9,289 8,867 8,212 6,863 3,883 18,868 $ 55,982 December 31, 2009 December 31, 2008 Unamortized intangible assets Goodwill at gross cost $265,799 Impairment charges (112,184) Foreign exchange impact (390) $ 265,799 (113,679) (764) Goodwill $153,225 $ 151,356 F-21 Certain of our intangible assets including goodwill are denominated in foreign currency and, as such, include the effects of foreign currency translation. In accordance with ASC 350 (formerly 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. Factors considered that may trigger an impairment review consist of: • Significant underperformance relative to historical or projected future operating results, • Significant changes in the manner of use of the acquired assets or the strategy for the overall business, • Significant negative industry or economic trends, • Significant decline in Zebra’s stock price for a sustained period, and • Significant decline in market capitalization relative to net book value. If we believe that one or more of the above indicators of impairment have occurred, we perform an impairment test. 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 three valuation methods: Income Approach – Discounted Cash Flow Analysis, Market Approach – Guideline Public Company Method and Market Approach – Comparative Transactions Method. See detailed discussion on Valuation of Goodwill, Long-Lived and Other Intangible Assets in the Critical Accounting Policies and Estimates Section of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K. During the fourth quarter of 2008, we determined that certain impairment indicators existed related to identified intangible assets and conducted an additional impairment test of intangibles. Due to the deterioration of the economy and a significant reduction in the price of our stock, we determined that our goodwill and other intangible assets were impaired requiring total estimated impairment charges of $157,600,000 at December 31, 2008. (The portion of the goodwill associated with our ZES segment included in the estimated impairment charge was $113,679,000). Upon completion of a detailed second step impairment analysis we recorded a credit of $1,495,000 in the second quarter of 2009 to adjust a portion of our original goodwill impairment for ZES. In addition, we recorded an impairment charge for a ZES intangible asset or $437,000. We performed our annual impairment test in June 2009 and determined that our goodwill was not impaired as of the end of May 2009. Changes in the net carrying value amount of goodwill were as follows (in thousands): Goodwill at December 31, 2007 Acquisitions Impairment charges Foreign exchange impact Goodwill at December 31, 2008 Impairment reversal Foreign exchange impact Zebra Enterprise Solutions Group $175,812 19,289 (113,679) (585) 80,837 1,495 304 Specialty Printing Group Total $70,698 $ 246,510 — — (179) 70,519 — 70 19,289 (113,679) (764) 151,356 1,495 374 Goodwill at December 31, 2009 $ 82,636 $70,589 $ 153,225 During 2009, we acquired intangible assets in the amount of $425,000 for patent rights. 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 ZES segment and $14,680,000 to our SPG segment. The intangible asset impairment charges in our SPG segment were related primarily to radio frequency identification patents and patent rights. The intangible asset impairment charges in our ZES segment were related to customer relationships, technology, third party technology licenses and non-competition agreements. 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, 2009 2008 $3,155 $3,426 532 1,120 108 812 957 210 $4,915 $5,405 F-22 Note 15 401(k) Savings and Profit Sharing Plans Zebra has a Retirement Savings and Investment Plan (401(k) Plan), which is intended to qualify under Section 401(k) of the Internal Revenue Code. During the first quarter of 2009, Zebra announced changes to its 401(k) Plan, profit sharing plan and stock purchase plan. 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. Effective March 1, 2009, Zebra reduced the company match to each participant’s contribution from 6% of gross eligible earnings at the rate of 50%, to 3% of gross eligible earnings at the rate of 50%. Effective January 1, 2010, Zebra increased the company match to each participant’s contribution to a total of 4%. Zebra will match 100% of the first 2% of gross eligible earnings, and also match the next 4% of gross eligible earnings at the rate of 50%. Zebra may contribute additional amounts to its 401(k) Plan at the discretion of the Board of Directors, subject to certain legal limits. Zebra has a discretionary profit-sharing plan for qualified employees, to which it contributes a percentage of eligible payroll each year. Zebra announced that it will suspend any contributions to the profit sharing plan for the 2009 plan 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 2009 $ 2,210 145 $2,355 Year Ended December 31, 2008 2007 $4,156 1,748 $5,904 $4,203 1,599 $5,802 Percentage of eligible payroll contributed for profit-sharing plan 0.0% 1.5% 1.8% Note 16 Derivative Instruments In the normal course of business, portions of our operations are subject to fluctuations in currency values. We manage these risks using derivative financial instruments. We conduct business on a multinational basis in a wide variety of foreign currencies. Our exposure to market risk for changes in foreign currency exchange rates arises from international financing activities between subsidiaries, foreign currency denominated monetary assets and liabilities and transactions arising from international trade. Our objective is to preserve the economic value of non-functional currency denominated cash flows. We attempt to hedge transaction exposures with natural offsets to the fullest extent possible and, once these opportunities have been exhausted, through foreign exchange forward and option contracts with third parties. Credit and market risk Financial instruments, including derivatives, expose us to counterparty credit risk for nonperformance and to market risk related to interest and currency exchange rates. We manage our exposure to counterparty credit risk through specific minimum credit standards, diversification of counterparties, and procedures to monitor concentrations of credit risk. Our counterparties in derivative transactions are commercial banks with significant experience using derivative instruments. We monitor the impact of market risk on the fair value and cash flows of our derivative and other financial instruments considering reasonably possible changes in interest rates and currency exchange rates and restrict the use of derivative financial instruments to hedging activities. We continually monitor the creditworthiness of our customers to which we grant credit terms in the normal course of business. The terms and conditions of our credit sales are designed to mitigate or eliminate concentrations of credit risk with any single customer. Fair Value of Derivative Instruments Zebra has determined that derivative instruments for hedges that have settled are considered Level 1 in the fair value hierarchy, and hedges that have not settled are considered Level 2 in the fair value hierarchy. Derivative instruments are used to manage risk and are not used for trading or other speculative purposes, nor do we use leveraged derivative financial instruments. Our foreign currency exchange contracts are valued using broker quotations or market transactions, in either the listed or over-the-counter markets. Hedging of Net Assets We use forward contracts and options to manage exposure related to our pound and euro denominated net assets. Forward contracts typically mature within three months after execution of the contracts. 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 asset positions, which would ordinarily offset each other. Summary financial information related to these activities included in our consolidated statement of earnings as other income (expense) is as follows (in thousands): Change in losses from foreign exchange derivatives Gain (loss) on net foreign currency assets Net foreign exchange gain (loss) Year Ended December 31, 2008 2009 2007 $(512) $(13,196) 467 $ (45) 16,714 $ 3,518 $(3,788) 4,311 $ 523 December 31, December 31, December 31, 2007 2009 2008 Notional balance of outstanding contracts: Euro Pound Euro/Pound €37,042 £ 7,476 €        — € 18,500 £ 5,000 € 17,000 €14,000 £ 3,000 €20,500 Net fair value of outstanding contracts $ (6) $ (2,414) $ (104) F-23 Summary financial information related to the cash flow hedges is as follows (in thousands): Net unrealized gains (losses) deferred in other comprehensive income: Gross Income tax benefit Net As of December 31, December 31, 2008 2009 $ 31 $ (32) 12 (12) $ 19 $ (20) 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 which mature within twelve months after the execution of the contracts. Gains and losses on these contracts are deferred in other comprehensive income until the contracts are settled and the hedged sales are realized, the deferred gains or losses will then be reported as an increase or decrease to sales. We do not have any outstanding contracts or option collars as of December 31, 2009. Summary financial information related to the cash flow hedges of future revenues follows (in thousands, except percentages): Notional balance of outstanding contracts versus the dollar Hedge effectiveness Net gain and (losses) included in revenue As of December 31, December 31, 2008 2009 €         — — €14,680 100% Year ended December 31, 2009 $603 2008 2007 $(12,354) $(3,060) Forward Contracts We record our forward contracts at fair value on our consolidated balance sheet as either long-term other assets or long-term other liabilities depending upon the fair value calculation as detailed in Note 2 of Zebra’s financial statements. The amounts recorded on our consolidated balance sheets are as follows (in thousands): Assets: Other assets Total Liabilities: Other long-term liabilities Total F-24 As of December 31, December 31, 2008 2009 $ 851 $ 851 $ — $ — $ — $ — $10,429 $10,429 Note 17 Commitments and Contingencies Leases. Minimum future obligations under non-cancelable operating leases as of December 31, 2009 are as follows (in thousands): 2010 2011 2012 2013 2014 Thereafter Total minimum lease payments Operating Leases $ 12,008 10,703 7,800 6,117 3,119 2,296 $42,043 Rent expense for operating leases charged to operations was as follows (in thousands): Rent expense 2009 $13,312 Year Ended December 31, 2008 2007 $15,695 $10,675 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. During March 2009, we moved our corporate headquarters from Vernon Hills, Illinois, to a new location in Lincolnshire, Illinois. The lease on this building has a term of 5 years and 4 months, with minimum monthly lease payments beginning at $53,644 and 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, 2009, is $2,993,000. See below for letters of credit related to our revolving credit agreement. 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, 2009, we had established letters of credit amounting to $4,170,000, 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. In December 2009, the parties resolved this matter with ZTF agreeing to pay €50,000 in full settlement of Printherm’s claims. 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 a Brazilian customer. Barcode’s claim seeks an unspecified amount of damages. Discovery in the case is on-going. Zebra is vigorously defending this action, believes that Barcode’s claims are without merit and that the matter will not have a material adverse impact on our business. We are subject to a variety of investigations, claims, suits and other legal proceedings that arise from time to time in the ordinary course of business, including but not limited to, intellectual property, employment, tort and breach of contract matters. We currently believe that the outcomes of such proceedings, individually and in the aggregate, will not have a material adverse impact on our business, cash flows, financial position, or results of operations. Any legal proceedings are subject to inherent uncertainties, and management’s view of these matters and their potential effects may change in the future. Note 18 Segment and Geographic Sales Zebra has two reportable segments: Specialty Printing Group (SPG) and Zebra Enterprise Solutions (ZES). SPG includes direct thermal and thermal transfer label and receipt printers, passive radio frequency identification (RFID) printer/encoders and dye sublimation card 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. ZES, formerly known as Enterprise Solutions Group, 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 generally 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. Segment information is as follows (in thousands): Net sales: SPG Tangible products SPG Service & software SPG Net Sales ZES Tangible products ZES Service & software ZES Net Sales Total Operating income (loss): SPG ZES Corporate and other Total Depreciation and amortization: SPG ZES Corporate and other Total Identifiable assets: SPG ZES Corporate and other Total Year Ended December 31, 2008 2009 2007 $688,057 $ 851,561 $804,087 34,499 722,556 12,987 68,042 81,029 30,898 882,459 20,025 74,216 94,241 28,947 833,034 21,391 13,854 35,245 $803,585 $ 976,700 $868,279 $ 148,121 $ 206,188 $213,591 (15,254) (64,065) (165,966) (55,568) (11,255) (59,151) $ 68,802 $ (15,346) $143,185 $ 15,565 $ 17,515 $ 15,542 9,518 7,830 14,885 6,181 5,850 5,510 $ 32,913 $ 38,581 $ 26,902 December 31, 2009 2008 $ 336,428 $376,515 185,495 308,556 190,572 283,791 $ 830,479 $850,878 Corporate and other includes corporate administration costs or assets that support both reporting segments. Information regarding Zebra’s operations by geographic area is contained in the F-25 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. 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): 2009 Net sales Long-lived assets 2008 Net sales Long-lived assets 2007 Net sales Long-lived assets North Europe, Middle East & Africa America Latin America Asia Total $362,109 68,852 $ 294,296 6,986 $65,060 346 $ 82,120 1,405 $803,585 77,589 Gain on cash surrender value of life insurance policies/money market interest included in investment income Year Ended December 31, 2009 2008 2007 $ — $ 55 $ 516 December 31, December 31, 2008 2009 $444,266 64,296 $ 353,273 8,642 $76,489 340 $102,672 2,085 $976,700 75,363 $416,093 58,646 $ 314,314 7,233 $60,090 401 $ 77,782 1,406 $868,279 67,686 Money market investments included in other assets $3,155 $3,426 Deferred compensation liability included in other long-term liabilities 3,155 3,323 Net sales by major product category are as follows (in thousands): Hardware Supplies Service and Software Shipping and Handling Note 20 Other Comprehensive Income (Loss) Stockholders’ equity contains certain items classified as other comprehensive income (loss), including: Total • Foreign currency translation adjustments related to our non-U.S. subsidiary 2009 2008 2007 $539,934 $155,847 $102,541 $5,263 $803,585 692,638 656,974 172,106 161,678 105,113 42,801 6,843 6,826 976,700 868,279 The increase in service and software revenue in 2008 is primarily due to the acquisition of Navis. Navis’ sales have a high concentration of service and software. The Navis business, which constitutes a significant part of ZES, was not acquired until late in the fourth quarter of 2007. 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 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. F-26 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 $3,972 $(22,991) $ 2,277 Year Ended December 31, 2008 2009 2007 Note 21 Major Customers ScanSource, Inc. is our most significant customer. Our net sales to ScanSource, Inc., an international distributor of Zebra SPG products related to automatic identification, telephony and security, as a percentage of total net sales, were as follows: Year Ended December 31, 2008 15.4 2007 16.5 2009 16.1 Changes in unrealized gains and (losses) on hedging transactions: ScanSource Gross Income tax (benefit) Net $ 31 $ 9,220 12 3,470 $ 19 $ 5,750 $(8,346) (3,141) $ (5,205) Changes in unrealized holding gains and (losses) on investments classified as available-for-sale: Gross $ 1,182 $ (871) $ 1,782 Income tax (benefit) 445 (328) 671 Net $ 737 $ (543) $ 1,111 The components of accumulated other comprehensive income (loss) included in the Consolidated Balance Sheets are as follows (in thousands): As of December 31, 2009 2008 Foreign currency translation adjustments $ (8,342) $ (12,314) 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 $ $ $ $ (1) — (1) $ $ (32) (12) (20) 452 170 282 $ (730) (275) $ (455) 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 2008, we initiated two different plans to close facilities. These plans are being accounted for under ASC 420 (formerly SFAS No. 146, Accounting for Cost Associated with Exit or Disposal Activities). 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 of 2008. We do not expect to incur any further costs associated with this plan. Costs incurred and included in the December 31, 2008 results were (in thousands): Type of Cost Severance, stay bonuses, and other employee-related expenses Other exit costs Total 2008 $341 261 $602 Also in 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, substantially all printer manufacturing in our Vernon Hills, Illinois, and Camarillo, California, facilities have been transferred to Jabil’s facility in Guangzhou, China as of December 31, 2009. F-27 As of December 31, 2009, we have incurred and expect to incur the following exit costs (in thousands): Type of Cost Severance, stay bonuses, and other employee-related expenses Professional services Relocation and transition costs Other exit costs Total Cost incurred through December 31, 2008 Cost incurred for the year ended December 31, 2009 Total costs incurred as of December 31, 2009 Additional costs expected to be incurred Total costs expected to be incurred $ 4,308 5,425 3,662 — $13,395 $3,325 490 5,140 30 $8,985 $ 7,633 5,915 8,802 30 $22,380 $1,561 292 1,668 30 $3,551 $ 9,194 6,207 10,470 60 $25,931 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 were as follows (in thousands): Balance at beginning of period Charged to earnings Cash paid Balance at the end of period Year Ended December 31, 2008 2009 $ 6,378 8,985 (12,325) $ — 16,650 (10,272) $ 3,038 $ 6,378 Liabilities related to exit activities are included in the accrued liabilities line item on the balance sheet. All current exit costs are included in operating expenses for our SPG segment under the line item exit, restructuring and integration costs. Also included in the line item exit, restructuring and integration costs are expenses related to an integration project to combine our acquisitions of WhereNet Corp., proveo AG, Navis Holdings, LLC, and Multispectral Solutions, Inc., to form our ZES segment. Expenses related to integrating these businesses totaled $3,206,000 for the year ended December 31, 2009, and $3,359,000 for the year ended December 31, 2008. F-28 Note 23 Quarterly Results of Operations (unaudited) (Amounts in thousands, except per share data) 2009 Net sales Cost of sales Gross profit Selling and marketing Research and engineering First Quarter $ 192,609 106,800 85,809 22,676 21,804 Second Quarter Third Quarter $ 187,676 $ 200,778 105,940 109,080 81,736 23,724 20,614 91,698 25,793 21,155 Fourth Quarter $ 222,522 121,044 101,478 28,006 21,516 2008 Net sales Cost of sales Gross profit Selling and marketing Research and engineering First Quarter $ 246,277 123,362 122,915 28,553 22,215 Second Quarter Third Quarter $ 253,782 $ 244,073 126,067 126,287 127,715 117,786 31,920 30,980 25,251 23,879 General and administrative 22,225 19,086 23,348 20,373 General and administrative 25,045 24,216 18,534 Amortization of intangibles 2,634 2,575 2,649 2,608 Amortization of intangibles Exit, restructuring and integration costs Asset impairment charges (reversal) 2,296 3,643 3,515 2,737 — (1,058) — — Total operating expenses 71,635 68,584 76,460 75,240 Operating income (loss) 14,174 13,152 15,238 26,238 Investment income (loss) Foreign exchange gain (loss) Other, net Total other income (loss) 1,178 (1,284) (317) (413) 247 (131) (19) 97 813 575 (286) 1,102 Income (loss) before taxes 13,751 13,249 16,340 Income taxes 4,399 4,238 5,229 695 795 (546) 944 27,182 9,552 Claim settlement Exit, restructuring and integration costs Asset impairment charges Total operating expenses Operating income (loss) Investment income (loss) Foreign exchange gain (loss) Other, net 4,514 — 3,234 — 83,561 39,354 2,405 700 (254) 4,679 4,711 — (5,302) 4,680 4,304 — — 90,746 77,106 2,722 (69) (651) (5,141) 247 (184) Total other income (loss) 2,851 2,002 (5,078) 36,969 40,680 (132,349) Income (loss) before taxes Income taxes 42,205 14,561 38,971 35,602 (128,691) 13,445 9,832 (11,330) Fourth Quarter $ 232,568 121,679 110,889 29,982 23,104 20,090 4,671 — 7,791 157,600 243,238 1,295 2,640 (277) 3,658 Net income (loss) $ 9,352 $ 9,011 $ 11,111 $ 17,630 Net income (loss) $ 27,644 $ 25,526 $ 25,770 $ (117,361) Basic earnings (loss) per share $ Diluted earnings (loss) per share $ 0.16 0.16 $ $ 0.15 0.15 $ $ 0.19 0.19 $ $ 0.30 0.30 Basic earnings (loss) per share $ Diluted earnings (loss) per share $ 0.42 0.42 $ $ 0.39 0.39 $ $ 0.40 0.40 $ $ (1.88) (1.88) F-29 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, 2009 Year ended December 31, 2008 Year ended December 31, 2007 $ 2,734 5,075 3,549 $ 329 1,061 $ 877 $ 2,186 3,402 2,734 330 (1,196) 5,075 Valuation accounts for inventories: Year ended December 31, 2009 Year ended December 31, 2008 Year ended December 31, 2007 $ 9,664 10,004 9,935 $ 6,661 8,394 9,736 $ 7,271 $ 9,054 8,734 9,664 9,667 10,004 See accompanying report of independent registered public accounting firm. F-30 Board of Directors Michael A. Smith, Chairman (1, 2, 3)Chairman and Chief Executive OfficerFireVision, LLC Anders GustafssonChief Executive OfficerZebra Technologies Corporation Gerhard ClessExecutive Vice PresidentZebra Technologies Corporation Richard L. Keyser (2)Chairman EmeritusW. W. Grainger, Inc. Andrew K. Ludwick (1)Private Investor Ross W. Manire (1, 3)Chairman and Chief Executive OfficerExteNet Systems, Inc. Dr. Robert J. Potter (2)President and Chief Executive OfficerR.J. Potter Company (1) Member of Audit Committee(2) Member of Compensation Committee(3) Member of Nominating CommitteeExecutive Officers Anders GustafssonChief Executive Officer Gerhard ClessExecutive Vice President Hugh K. GagnierSenior Vice President, OperationsSpecialty Printing Solutions Philip GerskovichSenior Vice President, Corporate Development Jim L. KaputSenior Vice President, General Counsel and Corporate Secretary Todd R. NaughtonVice President, Finance Michael C. SmileyChief Financial Officer Michael H. TerzichSenior Vice President, Sales and MarketingSpecialty Printing SolutionsJoanne TownsendVice President, Human Resources William J. Walsh Senior Vice President, General ManagerZebra Enterprise SolutionsStockholder Information Corporate HeadquartersZebra Technologies Corporation475 Half Day Road, Suite 500Lincolnshire, Illinois 60069 U. S. A.Phone: +1 847 634 6700Fax +1 847 913 8766 Annual MeetingZebra’s Annual Meeting of Stockholders will be held on May 20, 2010, at 10:30 A.M. (Central Time), at the Hilton Northbrook, 2855 North Milwaukee Avenue, Northbrook, Illinois. Independent AuditorsErnst & Young LLPChicago, Illinois Transfer Agent and RegistrarBNY Mellon Shareowner ServicesP.O. Box 358015Pittsburgh, PA 15252-8015 Overnight Delivery480 Washington BoulevardJersey City, NJ 07310-1900 Zebra Toll Free: 877 870-2368 TDD for hearing impaired: 800 231-5469Foreign Shareowners: 201 680-6578TDD for Foreign Shareowners: 201 680-6610Web Site address:Shareowner accounts: www.bnymellon.com/shareowner/isdGeneral transfer agent: www.bnymellon.com/shareowner E-mail contact: shrrelations@bnymellon.com Investor RelationsPlease contact Zebra’s Corporate Headquarters for corporate or product information. Form 10-KThe Zebra Technologies Corporation Form 10-K Report filed with the Securities and Exchange Commission is incorporated in this annual report. Please contact the Investor Relations Department at the Corporate Headquarters for additional copies, or visit our web site to view an online version. Web SiteInvestors are invited to learn more about Zebra Technologies Corporation by accessing the company’s web site at www.zebra.com. Equal Employment Opportunities/Affirmative ActionIt 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.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 068913 + 65 6858 0722 

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