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 <
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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.
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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.
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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.
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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