Zebra
Annual Report 2012

Plain-text annual report

2 0 1 2 a n n u a l r e p o r t increasing visibilityT O O U R S T O C K H O L D E R S We further extended our industry leadership by maintaining a deep commitment physical assets a digital voice and provides them visibility into their increasingly Anders Gustafsson Chief Executive Officer The diversity of our business helped Zebra achieve record sales of $996 million for 2012. to innovation and investments in emerging technology trends that will meet complex value chains. By giving their valued assets a digital voice with our customers’ evolving needs. Weakness in our Europe and Asia businesses, enabling technologies, Zebra solutions help our customers gain better due in part to economic challenges in those regions, was more than offset by visibility into their extended value chains to achieve improved management record sales in North America and Latin America. For the year, we maintained over their assets, people and transactions. We call this the Visible Value Chain. high profit margins and delivered $2.35 per share in earnings from continuing operations. With $188 million in free cash flow, we used $73 million for Emerging technology trends are increasing Zebra’s opportunity for new acquisitions to supplement investments in our core business, and returned revenue streams, as our customers recognize the value of deploying $54 million to stockholders in the form of share buybacks. At year-end, Zebra solutions in new ways. Merchants can deliver an improved shopper we maintained a solid financial condition, with no debt and $394 million experience by using Zebra mobile point-of-sale and other retail solutions, in cash and investments. which facilitate higher levels of engagement and product availability. In hospitals, health care providers are improving patient safety with the use Zebra’s performance for 2012 was due to our clearly defined and well-executed of Zebra wristbands for positive identification and connection to electronic strategies. Together with our partners, we are creating a smarter, more health records. We are also optimistic about emerging opportunities in connected global business community by intensifying innovation, expanding new industries for Zebra, such as sports, travel and leisure. into new markets, maximizing operational effectiveness, penetrating existing markets further and inspiring our people and culture. Through these strategic We will take advantage of our financial strength to invest in opportunities initiatives, we have gained a deeper understanding of unique customer that deliver the highest risk-adjusted returns to sustain our competitive needs and challenges, so we can continue to serve them better. advantage. These investments include maintaining a high cadence of product development, as we expand and enhance this foundation for Zebra’s Throughout 2012, the cadence of product and solution development remained long-term success. We will also support long-term growth with further high, with the introduction of a record 14 new printer-related products. channel development as well as the capacity for offering a broader array This broader portfolio has enabled us to serve more customer needs for of solutions and services to our expanding base of customers worldwide. established and emerging applications. These products include new card printers with industry-leading performance for personal identification We look forward to providing you with further details of our progress as 2013 applications. The acquisition of LaserBand supplemented record sales of our unfolds. Together with our partners, the more than 2,500 Zebra employees label and ribbon supplies business in 2012 and gives us a solid platform to around the world are working to penetrate existing markets more deeply, take advantage of high-growth opportunities in healthcare. expand our presence in new, exciting areas of growth, and position the We are expanding our relevance in other key industries as well, including developments is that Zebra will be able to serve more of our customers’ manufacturing and retail where more effective sales and marketing needs, while building increasing value for our shareholders. company to benefit from important new trends. The tangible result of these programs have led to deeper engagements with strategic accounts. We also strengthened our leading go-to-market channels. Globally, we continue Thank you for your support for Zebra. to benefit from investments that have extended our geographic reach in emerging markets including China, India, Brazil and Turkey. As we look to the future, Zebra is positioned well for higher growth and returns in a fundamentally attractive industry. Companies and organizations continue to seek opportunities to meaningfully enhance their businesses as they participate more deeply in the Internet of Things, which gives their Anders Gustafsson Chief Executive Officer 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 2012 % Change 2011 % Change 2010 Net sales Gross profit Operating income Income from continuing operations Net income Diluted earnings per share: $ 996,168 491,644 164,351 121,897 122,904 1.3% 1.0 (9.7) (6.5) (29.6) Income from continuing operations Income (loss) from discontinued operations Net income 2.35 0.02 2.37 (2.1) • (26.4) Diluted weighted average shares outstanding 51,843 C A P I T A L I Z A T I O N Cash and cash equivalents, restricted cash, investments and marketable securities (current and long-term) Working capital Total assets Stockholders’ equity 2012 $ 394,075 615,649 967,748 857,002 10.0% 15.7 22.8 24.6 71.6 31.9 • 81.9 $ 983,488 486,769 182,036 130,343 174,643 2.40 0.82 3.22 54,191 December 31, 2011 $ 326,695 475,899 899,006 776,925 $ 894,359 420,775 148,215 104,614 101,778 1.82 (0.05) 1.77 57,428 2010 $ 258,598 455,143 878,864 730,032 net sales (In thousands) operating income (In thousands) earnings per share* (In dollars) $1,000,000 1000000 800,000 800000 600,000 600000 400,000 400000 200,000 200000 0 0 1000000 20 800000 15 600000 10 400000 5 200000 0 0 $200,000 2.5 20 1000000 2.5 20 2.0 800000 150,000 15 1.5 600000 100,000 10 1.0 400000 50,000 0.5 5 200000 0 0 0 0 2.0 1.5 1.0 0.5 15 10 5 0 0 $2.50 2.5 2.00 2.0 1.50 1.5 1.00 1.0 0.50 0.5 0 0 * diluted, from continuing operations Zebra Technologies Corporation 2012 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, 2012 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 __X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ 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 __ (Do not check if a smaller reporting company) Smaller reporting company __ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Act). Yes __ No __X As of June 30, 2012, the aggregate market value of each of the registrant’s Class A Common held by non-affiliates was approximately $1,775,843,000. The closing price of the Class A Common Stock on June 29, 2012, as reported on the Nasdaq Stock Market, was $34.36 per share. As of February 8, 2013, 50,951,204 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 16, 2013, are incorporated by reference into Part III of this report. 101112101112101112  ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES PART I Item 1. Business 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . 27 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 PART III Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . 30 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Item 14. Principal Accounting Fees and Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 PART IV Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SIGNATURES Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE Index to Consolidated Financial Statements and Schedule . . . . . . . . . . . . . . . . . . . . . . . . F-1 Safe Harbor Forward-looking statements contained in this filing are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995 and are highly dependent upon a variety of important factors which could cause actual results to differ materially from those expressed or implied in such forward-looking statements. These forward-looking statements are based on current expectations, forecasts and assumptions and are subject to the risks and uncertainties inherent in Zebra’s industry, market conditions, general domestic and international economic conditions, and other factors. 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 global market conditions, including North America, Latin America, Asia Pacific, Europe, Middle East and Africa and other regions in which we do business, • Our ability to control manufacturing and operating costs, • The availability of credit and the volatility of capital markets, which may affect our suppliers and customers, • Success of integrating acquisitions, • Interest rate and financial market conditions because of our large investment portfolio, • The effect of natural disasters on our business, • Foreign exchange rates due to the large percentage of our international sales and operations, and • The outcome of litigation in which Zebra is involved, particularly litigation or claims related to infringement of third-party intellectual property rights. When used in this document and documents referenced, the words “anticipate,” “believe,” “estimate,” “will” and “expect” and similar expressions as they relate to Zebra or its management are intended to identify such forward-looking statements, but are not the exclusive means of identifying these 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, other than as may be required by law, 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 report. The Company Zebra is a global leader respected for innovation and reliability which offers products and solutions that enable organizations to gain greater insight into their operations. Improved visibility allows our customers to create value by managing their assets, transactions and people better. Zebra’s extensive portfolio of marking and printing technologies, which including barcode, RFID, GPS and sensoring, captures physical events in digital form to give operational events a virtual voice. This capture enables organizations to know in real-time the location, condition, timing and accuracy of events occurring throughout their value chain. Once the events are seen, organizations can create new value from what is already there. 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, application development and printer network management. Zebra also designs and sells solutions incorporating active RFID, telematics and ultra wideband radio (UWB) technologies. These solutions help businesses locate and or track assets and people in real time. They use battery-powered wireless tags, fixed-position antennae, transponder modules and application software. We also provide consulting services, maintenance contracts and software licenses related to these solutions. In July of 2012, Zebra acquired LaserBand LLC (a Missouri limited liability company). LaserBand is a leader in patient identification wristbands and related products. LaserBand strengthens Zebra’s product and patent portfolio and enables Zebra to offer a wider array of products to hospitals, other healthcare organizations and other customers that use wristbands in their operations. In December of 2012, Zebra acquired StepOne Systems. StepOne is a mobility software company that empowers store associates by giving them access to product details as well as store and company inventories to better serve their customers. StepOne’s retail application platform is incorporated into Zebra’s fully integrated mobile point-of-sale (POS) offering, which retail customers use to create a more personal customer engagement and improve the overall shopping experience. Discontinued Operations Sale of Navis, LLC – On March 18, 2011, we sold our Navis marine terminal solutions business and the related WhereNet marine terminal solutions product line of our ZES business to Cargotec Corporation. Sale of proveo AG – On August 3, 2011, we entered into a Share Purchase Agreement with F Two NV (a Belgium company) and sold all of our interest in Zebra Enterprise Solutions GmbH (formerly proveo AG) business. Beginning in the first quarter of 2011, Zebra reported the results of these businesses as discontinued operations. The amounts presented in Zebra’s financial statements for discontinued operations include Navis and proveo assets and liabilities, and the operating results of these businesses for 2012, 2011 and 2010. With the sale of Navis, we integrated the remaining ZES business into our location solutions operations. Continuing Operations Zebra’s continuing operations include our printers, supplies and services business and our location solutions operations. Zebra’s printer operations We design our printer products to produce high-quality labels, wristbands, 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, patient safety, transaction 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 for improved customer service and productivity gains. Plastic cards are used for secure, reliable personal identification (state id cards and drivers licenses), access control and financial cards (credit, debit and ATM cards) by financial institutions. Applications for our printing solutions span most industries and geographies. They include inventory control, small package delivery, baggage handling, automated warehousing, just-in-time (JIT) manufacturing, employee time and attendance records, file management systems, patient barcode wrist banding, medical specimen labeling, shop floor control, in-store product labeling, employee ID cards, driver’s licenses, and access control systems. As of December 31, 2012, management estimates that Zebra has sold more than 11,900,000 printers to customers around the world. We believe competitive forces on businesses worldwide drive them 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. These solutions deliver significant and predictable economic benefits. 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. 2 3 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. Financial institutions utilize card printers for credit, debit and ATM cards. Our printers are used to print barcode labels, receipts, plastic identification cards, wristbands, and tags and to encode passive RFID “smart” labels and cards. We also sell related specialty labeling materials, thermal ink ribbons, and barcode label design and network management software. These products are used to support barcode 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 specific applications. 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. 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 barcode 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 barcodes. These images can be printed on a wide variety of labeling materials, which enable users to affix barcode 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, 2012, we offered 54 thermal printer models with numerous variations, in seven categories as follows: • Tabletop printers for applications requiring continuous operation in high output, mission-critical and industrial settings as well as 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 mobile workers in a broad range of industries. • 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 and encode national identity cards, driver’s licenses, employee identification badges, gift cards, personalized cards and financial cards (credit, debit and ATM 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. 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 barcode 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. Zebra’s location solutions Zebra offers a range of solutions and services that enable businesses to have visibility into the location and movement of its personnel and assets with real-time locating systems. Zebra’s location solutions incorporate active RFID technology. Our software and hardware locate, track, manage, and maximize the utilization of high-value assets, equipment, and people. Whether tracking pallets through a supply chain, the flow of work in process, optimizing product fulfillment, or providing wide-area asset traceability, our real-time location solutions provide constant visibility and accurate location. Zebra provides asset tags, call tags, sensors, exciters and application software. Each tag contains a unique ID that users can associate to a specific asset, part, workstation or person. The complementary technologies in our location solutions work seamlessly together to provide customers with asset visibility and tracking. Applications for our location solutions span a broad array of industries where tracking assets, transactions and people are critical. Our location solutions are deployed primarily in industrial manufacturing, process industries, aerospace, transportation and logistics and healthcare environments. 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. We fully support our 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 life of key printer components such as printheads. Zebra also provides a family of self-laminating wristbands for use in laser printers. These wristbands are marketed under the LaserBand name. Printer related software Our goal is to provide solutions that enable high levels of functionality to all major computer network and software systems. Zebra has specialized printer management, label design, printer drivers and application development solutions to help unlock the full potential of Zebra printers. Our Link-OS™ suite of networking, software, device operating system offerings, makes Zebra’s printers easy to use and integrate into small, medium and enterprise-wide environments. Zebra connectivity solutions include support for Ethernet, 802.11a/b/g/n, and Bluetooth®. Integration with multiple device operating systems, such as Microsoft® Windows® , Android™, iOS, UNIX and Linux, are supported. We also offer design and integration software specifically designed to optimize the performance of Zebra label and card printers. Our suite of tools includes CardStudio™, ZebraDesigner™, ZebraDesigner™ Pro, ZebraDesigner™ for XML, and ZebraDesigner™ Label Design Software for use with mySAP™ Business Suite. Zebra’s Enterprise Connector Solution for Oracle® Business Intelligence Publisher™, 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, United States; Etobicoke, Ontario, Canada; Mexico City, Mexico; Preston, United Kingdom; Singapore; Shanghai, China; Heerenveen, Netherlands; Sydney, Australia; and Sao Paulo, Brazil. Zebra Authorized Service Providers (ZASP) also provide repair services for most Zebra products at their locations. In addition, Zebra offers on-site repair services for tabletop printers in the United States. Outside of the United States, Zebra’s resellers may provide maintenance service, either directly as ZASPs or through independent service agents. Zebra also provides technical support from in-house support personnel located in the United States, the United Kingdom and Singapore. For most Zebra products, Zebra provides interactive technical support via the Internet at www.zebra.com, 24 hours per day, seven days per week. Printer warranties In general, Zebra provides one year of warranty coverage on our printers against defects in material and workmanship. Our printheads are warranted for nine months, and our 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 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, on-demand photographs, and financial cards (credit, debit and ATM cards). Direct thermal and thermal transfer printers create crisp images at high speeds, making them ideal for printing easily readable text and machine readable barcodes. 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. 4 5 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 802.11a/b/g/n 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, 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 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 us to reach end users throughout the world in a wide variety of industries. We experience 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 the customer is in a targeted high-growth industry with applications for Zebra solutions that span our product categories. Zebra sales personnel, either alone or together with our channel partners, manage these strategic accounts to ensure their needs are being met. The sales function also encompasses a team that manages three global alliances. They direct the business development strategies for third-party relationships that are strategic to new demand creation for specific vertical markets and/or specific applications. Marketing. Marketing operations encompass global corporate marketing, field marketing, product marketing, industry marketing, market research and channel marketing functions. Corporate marketing manages our Zebra brand globally, corporate public relations, internal communications and our web site. Corporate marketing is also responsible for market research and planning and industry marketing. Product marketing focuses on market analysis, positioning, product launch support and analyzes Zebra’s competitive strengths and weaknesses. Field marketing encompasses demand generation, channel program management and marketing and sales enablement. 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 2010 we completed the transfer of final printer assembly to a third-party manufacturer, Jabil Circuit, Inc. This action reduces product costs and optimized our global printer product supply chain. It has enabled us to be more responsive to customer needs and increase Zebra’s flexibility to meet emerging business opportunities. Jabil produces our printers to our design specifications in the quantities we order. We maintain control over portions of 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. 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 our sourcing, engineering and quality personnel to help ensure that we receive optimal raw material pricing, manufacturing process controls are maintained and the final printers meet our quality standards. The majority of our printers manufactured by Jabil are shipped to our regional distribution centers. A small percentage of products are reconfigured at Zebra’s distribution centers through firmware downloads, packaging and customer specific 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. Competition Many companies are engaged in the design, manufacture and marketing of barcode label printers, RFID printer/encoders, card personalization and active RFID/Real Time Locating System (RTLS) solutions. We consider our direct competition in barcode 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 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 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, 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 us. In addition, service bureaus compete for end user business and provide an alternative to the purchase of our card printing equipment and supplies. We compete with a diverse group of small companies marketing RTLS solutions. Our ability to compete effectively depends on a number of factors. These factors include the reliability, quality and reputation of the manufacturer and its products; hardware and software innovations and specifications; breadth of product offerings; information systems connectivity; price; level of technical support; supplies and applications support offered by the manufacturer; available distribution channels; and financial resources to support new product design and innovation. We believe that Zebra presently competes favorably with respect to these factors. We face competition in our printing business from many printer companies, including the following (listed in alphabetical order): Argox; Avery Dennison; Bixolon; Blue Bamboo; Boca Systems; Brother International; Canon; CIM; Citizen; Cognitive TPG; Custom; Danaher; Datacard; Datamax-O’Neil, a unit of Dover Corporation; Dymo, a Newell Rubbermaid Company; Epson; Evolis; Fargo Electronics, a unit of HID Global; Godex; Hewlett-Packard; Hitachi; Intermec Inc.; Lexmark International; MagiCard; Matica; Microcom; Mitsubishi; NBS Technologies; Nisca; Oki Data; Olympus; Practical Automation; Printronix; Sato; Seiko Instruments; Song Woo Electronics; Sony; Star Micronics; Taiwan Semiconductor; Toshiba TEC; 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. Zebra’s competitors in the location solutions products include Aeroscout, Ekahau and Ubisense. Alternative printing technologies We believe thermal printing will be the preferred label, card and receipt printer technology 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 barcoded printing, offering growth opportunities for Zebra as the technologies become more widely adopted. If other technologies were to evolve or become available, 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, our products may become obsolete. This obsolescence would have a significant negative effect on our business, financial position, results of operations and cash flows. Therefore, we continually assess competitive and complementary methods of barcode printing and other means of automatic identification. Alternative print technologies 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 standards development and rapidly adopt RFID into new Zebra products and systems as new markets and applications emerge. Customers Zebra has sold more than 11,900,000 thermal printers to customers as of December 31, 2012. Zebra had three customers that accounted for 10% or more of its sales. All three of these customers are distributors and not end users. Our net sales to significant customers as a percentage of total net sales were as follows: Customer A Customer B Customer C Year Ended December 31, 2012 20.4% 11.4% 10.3% 2011 20.7% 10.5% 8.9% 2010 19.8% 9.8% 8.0% No other customer accounted for 10% or more of total net sales during these years. 6 7 Sales Net sales by product category for the last three years were (in thousands): Product Category Hardware Supplies Service and software Subtotal Shipping and handling Total net sales Year Ended December 31, 2012 2011 2010 $730,489 212,499 47,941 990,929 5,239 $996,168 $743,308 187,457 47,206 977,971 5,517 $983,488 $676,738 167,633 44,829 889,200 5,159 $ 894,359 Net sales to international customers, as a percent of total net sales, were as follows: Percent of net sales Year Ended December 31, 2012 56.2% 2011 58.4% 2010 55.9% We believe that international sales are likely 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 30 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, 2012 2011 2010 Research and development expenses Percent of net sales $ 87,364 8.8% $ 89,926 9.1% $ 82,575 9.2% We devote significant resources to developing new printing solutions for our target markets and ensuring that our products maintain high levels of reliability and value to our customers. Intellectual Property Rights Zebra relies on a combination of trade secrets, patents, trademarks, copyrights and contractual rights to establish and protect its innovations. We hold over 200 domestic and international trademarks. We hold over 700 United States and foreign patents and patent applications. The expiration of any individual patent would not have a significant negative impact on our business. Despite our efforts to protect our intellectual property rights, it may be possible for unauthorized third parties to copy portions of our products or to reverse engineer or otherwise obtain and use some technology and information that we regard as proprietary. Moreover, the laws of some countries do not afford Zebra the same protection to proprietary rights, as do United States laws. There can be no assurance that legal protections relied upon by Zebra to protect its proprietary position will be adequate. While Zebra’s intellectual property is valuable and provides certain competitive advantages, we do not believe that the legal protections afforded to our intellectual property are fundamental to our success. 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 26, 2013, Zebra employed approximately 2,544 persons, of which 265 are corporate employees. None of our employees are members of a union. Some portions of our business, primarily in Europe and China, are subject to labor laws that differ significantly from those in the United States. For example, in Europe, it is common for a works council to represent employees when discussing matters such as compensation, benefits or terminations of employment. We consider our employee relations to be very good. Contact Information 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. 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. 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. Final assembly of our thermal printers and our location solutions products is performed by Jabil Circuit, a third-party electronics manufacturer. We are dependent on Jabil as a sole source of supply for the manufacture of such products. 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. Because we rely on a third-party provider such as Jabil to manufacture our products, Zebra may incur increased business continuity risks. Zebra is no longer able to exercise direct control over the assembly or related operations of its thermal printers and location solution products. 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 and location solution products 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. Although Zebra carries business interruption insurance to cover lost sales and profits in an amount it considers adequate, in the event of supply disruption, 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. Zebra has significant operations outside the United States and sells a significant portion of its products internationally and purchases important components, including final products, from foreign suppliers. These circumstances create a number of risks. Zebra has significant operations outside the United States 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. Zebra also expects to continue the use of third-party contract manufacturing services with overseas production and assembly of our products. Risks associated with operations, sales and purchases outside the United States include: • Fluctuating foreign currency rates could restrict sales, or increase costs of purchasing, in foreign countries, • Volatility in foreign credit markets may affect our customers and suppliers, • 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 turnover at international operations may be unusually difficult, • A government controlled exchange rate and limitations on the convertibility of the Chinese yuan, • Transportation delays that may affect production and distribution of Zebra’s products, and • Inadequately managing and overseeing operations that are distant and remote from corporate headquarters. Customers have the right to return products that do not function properly within a limited time after delivery. Zebra monitors and tracks product returns and records a provision for the estimated future returns based on historical experience and any notification received of pending returns. Zebra, however, cannot guarantee that it will continue to experience return rates consistent with historical patterns. Zebra may not be able to continue to develop products to address user needs effectively in an industry characterized by ongoing 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, • Increasing demand for customized product and software solutions, and • Changing customer demands. Future success will depend on Zebra’s ability to effectively and economically 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 industry, 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 products and solutions. Some competitors have substantial marketing, financial, development and personnel resources. To remain competitive, Zebra believes it must continue to effectively and economically provide: • Technologically advanced systems that satisfy 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, which may create additional pressures on Zebra’s competitive position in the marketplace. 8 9 Zebra is vulnerable to the potential difficulties associated with the increase in the complexity of its business. Zebra has grown rapidly over the last several years through domestic and international growth. This growth has caused increased complexities in the business. We believe our future success depends in part on our ability to manage our 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 in multiple international jurisdictions, • Managing our distribution channel partners, • Managing our contract manufacturing and supply chain, • 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. 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, • The 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, trademarks, trade secrets and contracts are used to protect these proprietary rights. Despite these precautions, third parties may be able to copy or reproduce aspects of Zebra’s intellectual property and its products or, without authorization, to misappropriate and use information which Zebra regards as its 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. Zebra’s products are subject to U.S. and non-U.S. 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. The system implementation has progressed well with EMEA implemented in January 2011 and North America in February 2012. ERP implementations are complex and time-consuming projects that involve substantial expenditures on system hardware and software and implementation activities that often 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 and capital expenditures 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 or reduced information technology spending may adversely impact our business. As widely reported, financial markets throughout the world experienced extreme disruption since 2008, 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, the Chinese yuan, and the Brazilian real could negatively impact product sales, margins and collections. A natural disaster may cause supply disruptions that could adversely affect Zebra’s business and results of operations. As widely reported, a powerful earthquake centered off the northeastern coast of Japan on March 11, 2011, resulted in the loss of many lives, wide-spread damage to and destruction of property, disruption of electric power, and the release of radiation from a crippled nuclear power plant. This devastation disrupted the operations to varying degrees of companies with business activity in the affected region, including the business of Zebra suppliers. Other natural disasters may occur in the future and Zebra is not able to predict to what extent or duration any such disruptions will have on our ability to maintain ordinary business operations. The consequences of an unfortunate natural disaster may have a material adverse effect on Zebra’s business and results of operations. Item 1B. Unresolved Staff Comments Not applicable. 10 11 Item 2. Properties Item 4. Mine Safety Disclosures Item 6. Selected Financial Data 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 Agoura Hills, California. Not applicable. PART II Zebra’s principal facilities as of December 31, 2012, are listed below: Location Square Footage Manufacturing, Administrative, Production & Warehousing Research & Sales Total Lease Expires Vernon Hills, Illinois, USA 110,000 115,000 225,000 June 2015 Heerenveen, The Netherlands 47,286 Agoura Hills, California, USA Buffalo Grove, Illinois, USA Preston, UK Greenville, Wisconsin, USA Lincolnshire, Illinois, USA — 63,189 51,450 60,000 — Flowery Branch, Georgia, USA 40,520 Lincoln, Rhode Island, USA Guangzhou, China Bourne End, UK — — — Otay Mesa, California, USA 26,639 47,286 75,077 — 8,600 — 47,334 — 40,116 32,655 27,251 — San Jose, California, USA — 24,630 McAllen, Texas, USA 18,000 Germantown, Maryland, USA Chicago, Illinois, USA — — Rogersville, Tennessee, USA 9,780 Singapore, Singapore Shanghai, China Detroit, Michigan, USA Mexico City, Mexico Clayton, Missouri, USA Sao Paulo, Brazil Miami, Florida, USA Shanghai, China — — — 3,400 — — — — — 13,134 10,417 — 9,427 7,524 7,085 3,488 6,171 5,812 5,786 5,287 94,572 75,077 63,189 60,050 60,000 47,334 40,520 January 2015 March 2021 July 2014 Owned by Zebra May 2028 June 2015 June 2017 40,116 April 2016 32,655 January 2014 27,251 June 2014 26,639 24,630 18,000 13,134 10,417 9,780 9,427 7,524 7,085 6,888 6,171 5,812 5,786 5,287 September 2014 July 2015 September 2016 January 2016 June 2014 April 2014 February 2017 January 2014 November 2017 October 2015 September 2013 February 2015 October 2017 January 2015 Total 430,264 492,080 922,344 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 12 in the Notes to the Consolidated Financial Statements included in this Form 10-K. 12 Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Stock Information: Price Range and Common Stock Our Class A Common Stock is traded on The NASDAQ Stock Market under the symbol ZBRA. The following table shows the high and low trade prices for each fiscal quarter in 2012 and 2011, as reported by The NASDAQ Stock Market. 2012 High Low 2011 First Quarter Second Quarter Third Quarter Fourth Quarter $41.88 $34.61 31.79 33.25 34.92 41.79 38.74 40.41 Source: The NASDAQ Stock Market First Quarter Second Quarter Third Quarter Fourth Quarter High Low $41.48 $34.66 36.55 44.53 28.20 43.61 29.54 38.48 At February 8, 2013, the last reported price for the Class A Common Stock was $44.07 per share, and there were 465 registered stockholders of record for Zebra’s Class A Common Stock. In addition, we had approximately 14,000 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 2012, Zebra purchased 400,000 shares of Zebra’s Class A Common Stock at a weighted average share price of $36.69 per share, as follows: ISSUER PURCHASES OF EQUITY SECURITIES Period October 2012 (September 30 – October 27) November 2012 (October 28 – November 24) December 2012 (November 25 – 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 392,146 $36.71 392,146 2,030,190 7,854 $ 35.67 7,854 2,022,336 0 $ 0.00 0 2,022,336 (1) On November 4, 2011, Zebra’s Board authorized the purchase of up to an additional 3,000,000 shares under the purchase plan program. The November 2011 authorization does not have an expiration date. (2) During the fourth quarter, Zebra acquired 3,651 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 $38.44 per share. CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) DATA (In thousands, except per share amounts) CONSOLIDATED BALANCE SHEET DATA (In thousands) Net sales Cost of sales Gross profit Total operating expenses Operating income Income from continuing operations before income taxes Income (loss) from continuing operations Income (loss) from discontinued operations, net of tax Year Ended December 31, December 31, 2012 2011 2010 2009 2008 2012 2011 2010 2009 2008 $ 996,168 $ 983,488 $ 894,359 $ 738,482 $ 910,065 Cash and cash equivalents, 504,524 496,719 473,584 420,895 471,546 491,644 327,293(1) 164,351 486,769 304,733(2) 182,036 420,775 272,560(3) 148,215 317,587 247,308(4) 70,279 438,519 427,730(5) 10,789 164,174 179,719 149,607 72,319 15,085 121,897 130,343 104,614 48,491 (19,047) 1,007 44,300 (2,836) (1,387) (19,374) restricted cash, investments and marketable securities (current and long-term) $ 394,075 $ 326,695 $ 258,598 $ 245,027 $ 221,409 Working capital(6) Total assets Long-term obligations (7) Stockholders’ equity 615,649 967,748 14,229 857,002 475,899 899,006 11,515 455,143 878,864 10,191 429,277 830,479 9,012 400,883 850,878 9,345 776,925 730,032 712,129 710,738 (1) Includes asset impairment charges of $9,114,000 and exit and restructuring costs of $960,000. (2) Includes exit and restructuring costs of $2,041,000. (3) Includes litigation settlement proceeds received of $1,082,000 and exit and restructuring costs of $2,262,000. (4) Includes exit and restructuring costs of $9,902,000. (5) Includes asset impairment charges of $144,950,000 and exit and restructuring costs of $17,932,000. Net income (loss) $ 122,904 $ 174,643 $ 101,778 $ 47,104 $ (38,421) (6) Calculated as current assets minus current liabilities. (7) Long-term obligations include deferred compensation and unearned revenue. See Note 17 Deferred Compensation Plan in the Notes to the Consolidated Financial Statements included in this Form 10-K. Basic earnings per share: Income (loss) from continuing operations $ 2.36 $ 2.42 $ 1.83 $ 0.81 $ (0.30) Income (loss) from discontinued operations 0.02 0.82 (0.05) (0.02) (0.30) Net income (loss) $ 2.38 $ 3.24 $ 1.78 $ 0.79 $ (0.60) Diluted earnings per share: Income (loss) from continuing operations Income (loss) from discontinued operations $ 2.35 $ 2.40 $ 1.82 $ 0.81 $ (0.30) 0.02 0.82 (0.05) (0.02) (0.30) Net income (loss) $ 2.37 $ 3.22 $ 1.77 $ 0.79 $ (0.60) Weighted average shares outstanding Basic Diluted 51,566 51,843 53,854 54,191 57,143 57,428 59,306 59,425 64,524 64,524 13 Item 7. Management’s Discussion and Analysis of Financial Condition Consolidated Results of Operations – Fourth quarter Sales to customers by geographic region were as follows (in thousands, except percentages): and Results of Operations Results of Operations: Fourth Quarter of 2012 versus Fourth Quarter of 2011 Consolidated Results of Operations (Amounts in thousands, except percentages) Three Months Ended December 31, Percent 2011 Change Percent of Percent of Net Sales Net Sales 2011 2012 2012 Net Sales Tangible products $241,257 $235,714 Service & software 11,922 11,594 Total net sales Cost of Sales 253,179 247,308 Tangible products 121,869 118,792 Service & software 6,850 6,996 Total cost of sales Gross profit Operating expenses Operating income 128,719 125,788 124,460 121,520 80,342 44,118 79,397 42,123 2.4 2.8 2.4 2.6 (2.1) 2.3 2.4 1.2 4.7 95.3 4.7 100.0 48.1 2.7 50.8 49.2 31.7 17.5 95.3 4.7 100.0 48.1 2.8 50.9 49.1 32.1 17.0 Other income (expense) (56) (1,011) (94.5) (0.1) (0.4) Income from continuing operations before income taxes Income taxes Income from continuing operations Income from discontinued operations, net of tax Net income Diluted earnings per share: Income from continuing operations Income from discontinued operations 44,062 9,263 41,112 8,253 7.2 12.2 34,799 32,859 5.9 191 2,185 $ 34,990 $ 35,044 (91.3) (0.2) 17.4 3.7 13.7 0.1 13.8 16.6 3.3 13.3 0.9 14.2 $ 0.68 $ 0.63 7.9 0.00 0.04 100.0 Net income $ 0.68 $ 0.67 1.5 Sales Net sales for the fourth quarter of 2012 compared with the 2011 quarter increased 2.4% primarily due to increased sales in supplies and aftermarket services. Printer unit volume increased 2.9% for 2012 compared to 2011 principally from unit volume increases in desktop and tabletop printers. Sales by product category were as follows (amounts in thousands, except percentages): Product category 2012 Three Months Ended December 31, Percent 2011 Change Percent of Percent of Net Sales Net Sales 2011 2012 Hardware Supplies Service and software $182,267 $188,198 57,607 11,922 46,135 11,594 Subtotal products 251,796 245,927 Shipping and handling 1,383 1,381 Total net sales $253,179 $247,308 (3.2) 24.9 2.8 2.4 0.1 2.4 72.0 22.8 4.7 99.5 0.5 76.1 18.6 4.7 99.4 0.6 100.0 100.0 Sales declines in Europe, Middle East and Africa, and Asia Pacific, primarily from a challenged business environment, were offset by increased sales in North America and Latin America. Sales increased in Latin America in part from improved geographic coverage, with notable increases in supplies, tabletop, desktop, and mobile printers. Sales in North America increased due to increased sales in supplies and aftermarket services. Zebra continues to build a broader base of customers to penetrate targeted industries more deeply. Movements in foreign exchange rates decreased sales by $1,858,000 in the Europe, Middle East and Africa region for the quarter, due to a weaker euro against the U.S. dollar compared to the same period in the prior year. Geographic region 2012 Three Months Ended December 31, Percent 2011 Change Percent of Percent of Net Sales Net Sales 2011 2012 Europe, Middle East and Africa Latin America Asia-Pacific $ 83,355 $ 88,360 26,255 31,665 21,578 32,470 Total International 141,275 142,408 North America Total net sales 111,904 104,900 $253,179 $247,308 (5.7) 21.7 (2.5) (0.8) 6.7 2.4 32.9 10.4 12.5 55.8 44.2 35.7 8.7 13.1 57.5 42.5 100.0 100.0 Gross profit Gross profit increased 2.4% reflecting reduced overhead and freight costs, partially offset by unfavorable movements in foreign exchange rates and product mix. Unfavorable foreign currency movements decreased fourth quarter gross profit by $1,806,000. As a percentage of sales, gross margin improved from 49.1% to 49.2%. Printer unit volumes and average selling price information is summarized below: Total printers shipped Three Months Ended December 31, 2012 2011 321,314 312,409 Average selling price of printers shipped $ 477 $ 506 Percent Change 2.9 (5.7) For the fourth quarter of 2012, unit volumes increased in tabletop and desktop printers. Desktop printers achieved record sales. The decrease in average selling price is a result of a change in product mix toward lower priced products in the 2012 quarter compared to the 2011 quarter. Operating expenses Operating expenses are summarized below (in thousands, except percentages): Operating expenses 2012 Three Months Ended December 31, Percent 2011 Change Percent of Percent of Net Sales Net Sales 2011 2012 Selling and marketing $ 33,313 $ 36,377 Research and development General and administrative 22,605 20,964 23,174 18,973 Amortization of intangible assets 1,463 Acquisition costs Exit and restructuring costs 1,037 960 806 116 (49) Total operating expenses $ 80,342 $ 79,397 (8.4) (2.5) 10.5 81.5 N/M N/M 1.2 13.2 14.7 8.9 8.3 0.6 0.4 0.4 9.4 7.7 0.3 0.0 0.0 31.7 32.1 Operating expenses for the quarter increased 1.2% due mainly to higher general and administrative expenses, amortization and acquisition expenses, and exit and restructuring costs. Compensation costs and depreciation increased over 2011 levels. Amortization expense increases are primarily related to the intangibles acquired with the LaserBand acquisition. Acquisition costs relate to investigated and completed merger and acquisition activity during the period. Exit and restructuring costs in 2012 relate to the restructuring of the location solutions business management structure. Other income (expense) Zebra’s non-operating income and expense items are summarized in the following table (in thousands): Investment income Foreign exchange loss Other, net Total other income (expense) Three Months Ended December 31, 2012 December 31, 2011 $ 526 (5) (577) $ (56) $ 594 (706) (899) $(1,011) Other expense decreased in the fourth quarter of 2012 as a result of decreases in foreign exchange losses. Operating income Operating income for the fourth quarter of 2012, compared to the same period in 2011, increased 4.7%. See comments above for explanation of changes in individual categories. Income taxes The effective income tax rate for the fourth quarter of 2012 was 21.0% compared with 20.1% for the same quarter in the prior year. The fourth quarter 2012 effective tax rate increased slightly due to an increase in income in higher rate tax jurisdictions in 2012 when compared to the prior years quarter. The increase in 2012 was offset by an August 2012 decrease in the UK statutory tax rate from 25.5% to 24.5%. During 2012 Zebra implemented a new international holding company structure to facilitate the investment of overseas cash and international acquisitions. This new structure has also decreased our international income taxes. In addition, the fourth quarter of 2012 benefitted from one-time adjustments resulting from amended tax returns for 2010 and prior years. Income from discontinued operations The income in the fourth quarter of 2012 is related to a reversal of amounts previously reserved, which were related to the finalization of the accounting and taxes related to discontinued operations transactions during 2011. 14 15 Results of Operations: Year ended December 31, 2012 versus Year ended December 31, 2011 Sales to customers by geographic region were as follows (in thousands, except percentages): Consolidated Results of Operations (Amounts in thousands, except percentages) Year Ended December 31, 2012 Percent 2011 Change Percent of Percent of Net Sales Net Sales 2011 2012 Net Sales Tangible products $948,227 $936,282 Service & software 47,941 47,206 Total net sales Cost of Sales 996,168 983,488 Tangible products 479,633 469,834 Service & software 24,891 26,885 Total cost of sales Gross profit 504,524 496,719 491,644 486,769 Operating expenses 327,293 304,733 1.3 1.6 1.3 2.1 (7.4) 1.6 1.0 7.4 Operating income 164,351 182,036 (9.7) 95.2 4.8 100.0 48.1 2.5 50.6 49.4 32.9 16.5 95.2 4.8 100.0 47.8 2.7 50.5 49.5 31.0 18.5 Other income (expense) (177) (2,317) (92.4) (0.0) (0.2) Income from continuing operations before income taxes Income taxes Income from continuing operations Income from discontinued operations, net of tax Net income Diluted earnings per share: Income from continuing operations Income from discontinued operations 164,174 179,719 42,277 49,376 (8.6) (14.4) 121,897 130,343 (6.5) 1,007 44,300 $122,904 $174,643 (97.7) (29.6) 16.5 4.3 12.2 0.1 12.3 18.3 5.0 13.3 4.5 17.8 $ 2.35 $ 2.40 (2.1) Net income $ 2.37 $ 3.22 0.02 0.82 (97.6) (26.4) Consolidated Results of Operations – Full Year Sales Net sales for 2012 compared with 2011 increased 1.3%. This increase is primarily due to growth in sales of supplies, including the impact of the acquisition of LaserBand LLC in July 2012. Printer unit volumes increased 6.0% for 2012 compared to 2011 due to volume increases in desktop, mobile and card printers. Movement towards lower-priced printers partially offset unit volume increases. Sales by product category were as follows (amounts in thousands, except percentages): Product category 2012 Year Ended December 31, Percent 2011 Change Percent of Percent of Net Sales Net Sales 2011 2012 Hardware Supplies $730,489 $743,308 212,499 187,457 Service and software 47,941 47,206 Subtotal products 990,929 977,971 Shipping and handling 5,239 5,517 Total net sales $996,168 $983,488 (1.7) 13.4 1.6 1.3 (5.0) 1.3 73.4 21.3 4.8 99.5 0.5 75.5 19.1 4.8 99.4 0.6 100.0 100.0 Sales increased in Latin America due to improved geographic coverage with notable increases in supplies, mobile, and card printer sales compared to 2011. Sales in North America increased due to increased sales of supplies and continued demand for desktop, card and tabletop printers. Zebra continues to build a broader base of customers to penetrate targeted industries more deeply. Movements in foreign exchange rates decreased sales by $12,139,000 in the Europe, Middle East and Africa regions due principally to a weaker euro against the U.S. dollar. Geographic region 2012 Year Ended December 31, Percent 2011 Change Percent of Percent of Net Sales Net Sales 2011 2012 Europe, Middle East and Africa Latin America Asia-Pacific $322,970 $342,578 100,101 89,715 137,577 141,987 Total International 560,648 574,280 North America Total net sales 435,520 409,208 $996,168 $983,488 (5.7) 11.6 (3.1) (2.4) 6.4 1.3 32.4 10.0 13.8 56.2 43.8 34.8 9.1 14.5 58.4 41.6 100.0 100.0 Gross profit Gross profit increased 1.0% due to higher volumes and lower material costs. Lower freight costs in 2012 of $5,042,000 versus 2011 helped improve gross profit while unfavorable movements in foreign currency decreased gross profit by $9,923,000. The above factors contributed to the slight decrease in gross margin from 49.5% to 49.4%. Printer unit volumes and average selling price information is summarized below: Total printers shipped 1,260,141 1,188,892 Average selling price of printers shipped $ 485 $ 527 Year Ended December 31, 2012 2011 Percent Change 6.0 (7.9) Product unit volumes increased 6.0% in 2012 over the prior year. This was due to increased volumes in desktop, mobile and card printers. The average selling price reflects a change in product mix toward lower priced products from year to year. Operating expenses Operating expenses are summarized below (in thousands, except percentages): Operating expenses 2012 Year Ended December 31, Percent 2011 Change Percent of Percent of Net Sales Net Sales 2011 2012 Selling and marketing $129,906 $127,797 Research and development General and administrative 87,364 92,167 Amortization of intangible assets 4,673 Acquisition costs Exit and restructuring costs Asset impairment charge 3,109 960 9,114 89,926 81,345 3,320 304 0 Total operating expenses $ 327,293 $304,733 1.7 (2.8) 13.3 40.8 N/M N/M 7.4 2,041 (53.0) 13.0 13.1 8.8 9.3 0.5 0.3 0.1 0.9 9.1 8.3 0.3 0.0 0.2 0.0 32.9 31.0 Operating expenses for 2012 increased 7.4%. This is primarily due to greater selling and marketing and general and administrative expenses. The asset impairment charge was accounted for 40.4% of the total increase in 2012. Several categories accounted for these increases, including compensation costs, outside professional services, rent, depreciation and information systems expenses. Acquisition costs are related to investigated and completed acquisitions during the period. Exit and restructuring costs in 2012 relate to the restructuring of the location solutions business management structure while costs in 2011 relate to the relocation and consolidation of administrative, accounting and distribution functions of our location solutions operations to Illinois. The asset impairment charge in 2012 relates to the goodwill associated with Zebra’s smaller reporting unit. Selling and marketing expenses Selling and marketing expenses are summarized below (in thousands): Year Ended December 31, 2011 2012 Payroll and benefit costs $ 78,894 $ 75,436 Business development Travel and entertainment expenses Offsite meetings Other changes 23,434 8,451 1,141 17,986 23,022 8,068 3,362 17,909 Total selling and marketing expenses $129,906 $127,797 Increase/ (Decrease) $ 3,458 412 383 (2,221) 77 $ 2,109 Selling and marketing expenses were higher in 2012 primarily due to increased payroll and benefit costs related to the addition of more sales-related Zebra personnel in geographic regions with high-growth opportunities. Payroll and benefit cost increases include salaries, commissions, benefits, and payroll taxes. Other selling and marketing expense categories also increased over 2011 levels due to higher expenses relating to the addition of Zebra sales representatives to expand Zebra’s global reach into new developing geographic regions. 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 2012 we introduced 14 new printer related products and 19 location software and hardware releases. Zebra introduced its latest generation of print engine during the year which enables Zebra to expand into new markets. The ZE500 is designed for reliable operations in mission critical applications and is well suited for use in the food and beverage industries and other environments where dust and moisture can create printing challenges. Zebra has enhanced its printers for cloud based connectivity through Zebra’s Link-OS, an ecosystem enabled by Zebra’s printer architecture which makes Zebra printers significantly easier to integrate, manage and use in a company’s operations, with greater capabilities for customization with the development of specialized apps. 16 17 Quarterly product development expenses fluctuate 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, 2011 2012 Increase/ (Decrease) Payroll and benefit costs $ 58,464 $ 59,087 Project expenses Other changes 5,710 23,190 7,838 23,001 Total research and development costs $ 87,364 $ 89,926 $ (623) (2,128) 189 $(2,562) The decreases in research and development costs relate to decreased payroll and benefit costs and project expenses. Project expenses decreased due primarily due to the completion on new mid-range and print engine products in 2012. General and administrative expenses General and administrative expenses are summarized below (in thousands): Exit and restructuring costs Exit and restructuring costs in 2012 of $960,000 relate to the restructuring of our location solutions business management structure. Costs in 2011 of $2,041,000 relate to the consolidation of our location solutions operations following the divestiture of Navis in the first quarter of 2011. Operating income The operating income decrease for 2012 was the result of operating expense increases as noted above. Other income (expense) Zebra’s non-operating income and expense items are summarized in the following table (in thousands): Investment income Foreign exchange loss Other, net December 31, 2012 December 31, 2011 Year Ended $ 2,485 (941) (1,721) $ (177) $ 1,944 (2,006) (2,255) $ (2,317) Year Ended December 31, 2011 2012 Increase/ (Decrease) Total other income (expense) Payroll and benefit costs $ 46,606 $ 40,975 Professional services expenses Information systems expenses Other changes Total general and administrative expenses 13,890 13,046 18,625 10,544 12,138 17,688 $ 5,631 3,346 908 937 Other expense decreased in 2012 as a result of decreases in foreign exchange losses. Rate of return analysis: December 31, 2012 December 31, 2011 Year Ended $ 92,167 $ 81,345 $10,822 Annualized rate of return 0.7% Average cash and marketable securities balances $360,385 $292,646 0.7% General and administrative expenses increased over 2011 due to larger incentive costs related to merit increases and equity incentives. Professional fees increased slightly due to the acquisition of LaserBand and other long-term investments in 2012. Professional services were also utilized for the implementation of Zebra’s new international structure and to expand geographic regions. Information systems costs increased slightly in the maintenance and service contracts area. Amortization of intangible assets Amortization of intangible assets increased $1,353,000 during 2012 due to additions of current technology, patent and patent rights and customer relationships during the year as a result of the acquisition of LaserBand. Investment income increased overall from higher cash and investment balances in 2012 versus 2011. Income taxes The effective income tax rate for 2012 was 25.8% compared with an income tax rate of 27.5% for 2011. During 2012 Zebra implemented a new international holding company structure to facilitate the investment of overseas cash and international acquisitions. This new structure also decreased our international income taxes. In addition, the UK statutory rate decreased from 25.5% to 24.5% in August 2012. These reductions were offset by a discrete item in the third quarter of 2012 related to a non-deductible asset impairment charge which increased the effective tax rate for 2012 by 1.9%. The rate in 2011 included a tax valuation allowance in the first quarter of 2011 against a subsequently divested subsidiary. Income from discontinued operations The income from discontinued operations in 2012 is related to an amendment and extension of the proveo loan agreement and reversal of amounts previously reserved which were related to the finalization of the accounting and taxes. The income from discontinued operations in 2011 relates to the sale of Navis LLC and proveo AG, offset by losses on discontinued operations. Comparison of Years Ended December 31, 2011 and 2010 Consolidated Results of Operations (Amounts in thousands, except percentages) Year Ended December 31, 2011 Percent 2010 Change Percent of Percent of Net Sales Net Sales 2010 2011 10.2 5.3 10.0 4.3 17.1 4.9 15.7 11.8 22.8 N/M 20.1 9.7 Net Sales Tangible products $936,282 $849,530 Service & software 47,206 44,829 Total net sales Cost of Sales 983,488 894,359 Tangible products 469,834 450,630 Service & software 26,885 22,954 Total cost of sales Gross profit 496,719 473,584 486,769 420,775 Operating expenses 304,733 272,560 Operating income 182,036 148,215 Other income (expense) (2,317) 1,392 Income from continuing operations before income taxes Income taxes Income from continuing operations Income (loss) from discontinued operations, net of tax Net income Diluted earnings per share: Income from continuing operations Income (loss) from discontinued operations 179,719 149,607 49,376 44,993 130,343 104,614 24.6 44,300 (2,836) $174,643 $101,778 N/M 71.6 $ 2.40 $ 1.82 31.9 Net income $ 3.22 $ 1.77 0.82 (0.05) 95.2 4.8 100.0 95.0 5.0 100.0 47.8 2.7 50.5 49.5 31.0 18.5 (0.2) 18.3 5.0 13.3 4.5 17.8 50.4 2.6 53.0 47.0 30.5 16.5 0.2 16.7 5.0 11.7 (0.3) 11.4 Consolidated Results of Operations – Year to date Sales Net sales for the 2011 year compared with 2010 increased 10.0% due to a broad-based increase in demand, complemented by a focused business strategy of geographic expansion, new product introductions and expansion of go-to-market channels. New products introduced over the past year helped us meet more of our customers’ needs for improving asset visibility in complex supply chain environments. The increase in sales was largely attributable to increased hardware sales with notable volume increases in high-performance and mid-range tabletop, desktop, mobile printers and aftermarket parts. Supplies sales increased from greater shipments of labels and thermal ribbons. Printer unit volume increased 12.4% for 2011 compared to levels in 2010. Sales by product category were as follows (amounts in thousands, except percentages): Product category 2011 Year Ended December 31, Percent 2010 Change Percent of Percent of Net Sales Net Sales 2010 2011 Hardware Supplies $743,308 $676,738 187,457 167,633 Service and software 47,206 44,829 Subtotal 977,971 889,200 Shipping and handling 5,517 5,159 Total net sales $983,488 $894,359 9.8 11.8 5.3 10.0 6.9 10.0 75.5 19.1 4.8 99.4 0.6 75.7 18.7 5.0 99.4 0.6 100.0 100.0 Sales increased in all geographic regions, in part from the impact of our investments in sales and sales-related personnel to expand Zebra’s presence in high-growth regions including China, Brazil and Eastern Europe. Sales in the regions targeted by Zebra for geographic expansion increased by 22%. Movements in foreign exchange rates increased sales by $14,412,000 in the Europe, Middle East and Africa region due principally to a stronger euro against the U.S. dollar for the first three quarters of 2011. Sales to customers by geographic region were as follows (in thousands, except percentages): Geographic region 2011 Year Ended December 31, Percent 2010 Change Percent of Percent of Net Sales Net Sales 2010 2011 N/M 81.9 Europe, Middle East and Africa Latin America Asia-Pacific $342,578 $305,659 89,715 80,679 141,987 113,156 Total International 574,280 499,494 North America Total net sales 409,208 394,865 $983,488 $894,359 12.1 11.2 25.5 15.0 3.6 10.0 34.8 9.1 14.5 58.4 41.6 34.2 9.0 12.7 55.9 44.1 100.0 100.0 18 19 Gross profit Gross profit increased 15.7% due to higher volumes and lower material costs. Lower freight costs in 2011 of $4,963,000 versus 2010 helped improve profit. Gross profit was also affected by favorable foreign currency movements which also improved gross profit by $12,730,000. The above factors contributed to the increase in gross margin from 47.0% to 49.5%. Printer unit volumes and average selling price information is summarized below: Total printers shipped 1,188,892 1,057,744 Average selling price of printers shipped $ 527 $ 533 Year Ended December 31, 2011 2010 Percent Change 12.4 (1.1) For 2011, product unit volumes increased in nearly all printer product lines with notable volume increases in high-performance and mid-range table top, desktop, and mobile. Operating expenses Operating expenses are summarized below (in thousands, except percentages): Operating expenses 2011 Year Ended December 31, Percent 2010 Change Percent of Percent of Net Sales Net Sales 2010 2011 Selling and marketing $127,797 $112,365 Research and development General and administrative 89,926 81,345 Amortization of intangible assets 3,320 82,575 73,229 3,211 13.7 8.9 11.1 3.4 Litigation settlement Acquisition costs 0 304 (1,082) (100.0) 0 Exit and restructuring costs 2,041 2,262 Total operating expenses $ 304,733 $272,560 N/M (9.8) 11.8 13.1 9.1 8.3 0.3 0.0 0.0 0.2 31.0 12.5 9.2 8.2 0.4 (0.1) 0.0 0.3 30.5 Operating expenses for 2011 increased 11.8% due to higher expenses in all three operating expense line items. Several categories accounted for these increases, including compensation costs which include salaries, stock option expense, and commissions. These increases are primarily related to more employees in 2011 versus 2010. Business development, outside professional services, travel and entertainment, rent, information systems, recruiting, offsite meetings, shipping and depreciation expenses all increased over 2010 levels. Selling and marketing expenses Selling and marketing expenses are summarized below (in thousands): Year Ended December 31, 2010 2011 Payroll and benefit costs Business development Professional services expense Travel and entertainment expenses Offsite meetings Other changes $ 75,436 23,022 3,538 8,068 3,362 14,371 $ 70,539 20,608 2,308 6,421 884 11,605 Increase/ (Decrease) $ 4,897 2,414 1,230 1,647 2,478 2,766 Total selling and marketing expenses $127,797 $112,365 $15,432 Selling and marketing expenses were higher in 2011 primarily due to increased payroll and benefit costs related to the addition of more sales-related Zebra personnel in geographic regions with high-growth opportunities and increased sales volume. Payroll and benefit cost increases include salaries, bonus, commissions, benefits and payroll taxes. Other selling and marketing expense categories also increased over 2010 levels due to higher expenses relating to the addition of Zebra sales representatives to expand Zebra’s global reach into new developing geographic regions and a global partner conference in 2011. 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 2011 we introduced 13 new printer related products and 10 location software and hardware releases. Products introduced in 2011 include printers in the mobile, desktop, and card lines as well as related accessories. Zebra is receiving positive customer responses to its recently introduced QLn wireless mobile printer which incorporates a flexible user interface for easy configuration. Zebra’s ZXP8 retransfer card printer which is utilized for printing secure employee IDs. In 2010, we introduced an updated two inch light duty printer and a new Xi4 high-performance printer. 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. Quarterly product development expenses fluctuate 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): Litigation settlement In 2010 Zebra received litigation settlement proceeds of $1,082,000 related to our acquisition of MSSI in 2008. Year Ended December 31, 2010 2011 Payroll and benefit costs $ 59,087 $ 54,602 Professional services expenses Travel and entertainment expenses Shipping expense Other changes 8,708 2,585 693 18,853 7,802 2,164 238 17,769 Total research and development costs $ 89,926 $ 82,575 Increase/ (Decrease) $ 4,485 906 421 455 1,084 $ 7,351 The increases in research and development costs relate to increased payroll and benefit costs, compliance and project expenses to bring new products to market. General and administrative expenses General and administrative expenses are summarized below (in thousands): Exit and restructuring costs Exit and restructuring costs in 2011 of $2,041,000 relate to the consolidation of our Location solutions product line following the divestiture of Navis in the first quarter of 2011. Costs in 2010 of $2,262,000 relate to the completion of the production transfer to Jabil. See Note 10 of the Consolidated Financial Statements included in this Annual Report on Form 10-K for a more detailed discussion of exit and restructuring charges. Operating income The operating income increase for 2011 was the result of increased sales and gross profit as noted above. Other income (expense) Zebra’s non-operating income and expense items are summarized in the following table (in thousands): December 31, 2011 December 31, 2010 Year Ended $ 1,944 (2,006) (2,255) $ (2,317) $ 2,678 (169) (1,117) $ 1,392 Payroll and benefit costs $ 40,975 $ 36,833 Year Ended December 31, 2010 2011 Increase/ (Decrease) $ 4,142 Investment income Foreign exchange loss Other, net Professional services expenses Information systems expenses Depreciation expense Other changes Total general and administrative expenses 10,544 12,138 9,232 8,456 9,987 10,547 8,221 7,641 557 1,591 1,011 815 $ 81,345 $ 73,229 $ 8,116 Annualized rate of return 0.7% Average cash and marketable securities balances $292,646 $251,812 1.1% Rate of return analysis: December 31, 2011 December 31, 2010 Year Ended Total other income (expense) General and administrative expenses increased over 2010 amounts from larger incentive costs related to merit increases and equity incentives. Professional fees increased slightly due to the Navis and proveo dispositions in 2011, and the utilization of professional services in the expanding geographic regions. Information systems costs increased slightly primarily in the maintenance and service contracts area. Amortization of intangible assets Amortization of intangible assets increased $109,000 during 2011 due to additions of patents during the year. Investment income declined overall from lower short-term interest rates in 2011 compared with 2010 even though cash and investment balances were higher in 2011 versus 2010. Income taxes The effective income tax rate for 2011 was 27.5% compared with an income tax rate of 30.1% for 2010. Zebra’s effective tax rate for the first quarter of 2010 included a $2,764,000 reduction of federal taxes related to improperly accounting for the tax impact on intercompany profit generated from intercompany sales in 2009. This adjustment reduced our effective rate for 2010 by approximately 1.8%. Zebra’s effective rate has also decreased in 2011 due to higher profits in lower rate international jurisdictions. Income (loss) discontinued operations The income from discontinued operations in 2011 relates to the sale of Navis LLC and proveo AG, offset by losses on discontinued operations. The loss from discontinued operations for 2010 represents the results of operations for the entities we divested in 2011. 20 21 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. 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 (except in Asia where the terms are FOB destination) 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 these plans have been minimal. Software Revenue We sell four types of software and record revenue as follows: • Our printers contain embedded firmware, which is part of the hardware purchase. We consider the sale of this firmware to be incidental to the sale of the printer and do not attribute any revenue to it. • We sell a limited amount of prepackaged, or off-the-shelf, software for the creation of barcode labels using our printers. There is no customization required to use this software, and we have no post-shipment obligations on the software. Revenue is recognized at the time this prepackaged software is shipped. • We sometimes provide custom software as part of a printer installation project. We bill custom software development services separate from the related hardware. Revenue related to custom software is recognized once the custom software development services have been completed and accepted by the customer. • We recognize license revenue under ASC (Accounting Standards Codification) 985, 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, 2012, consisted of the following: U.S. government and agency securities Obligations of government sponsored enterprises (1) State and municipal bonds Corporate securities 29.4% 1.5% 29.3% 39.8% (1) Includes investments in notes issued by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Federal Home Loan Bank. 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. 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. 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 8.0% to 11.9% of gross inventory. As of December 31, 2012, inventory reserves were $13,655,000, or 10.0% of gross inventory. We believe this reserve level is appropriate considering the quantities and quality of the inventories as of December 31, 2012. Zebra’s investments in marketable debt securities are classified as available-for-sale except for securities held in Zebra’s deferred compensation plan which are considered to be trading securities. Investments in marketable debt securities are classified based on intent and ability to sell investment securities. Zebra’s available-for-sale securities are used to fund further acquisitions and other operating needs and therefore can be sold prior to maturity. Investments in marketable debt securities for which Zebra intends to sell within the next year are classified as current and those that we intend to hold in excess of one-year are classified as non-current. Accounts Receivable We have standardized credit granting and review policies and procedures for all customer accounts, including: • Credit reviews of all new customer accounts, • Ongoing credit evaluations of current customers, • Credit limits and payment terms based on available credit information, • Adjustments to credit limits based upon payment history and the customer’s current credit worthiness, • Active collection efforts 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 0.4% to 1.2% of total accounts receivable. Accounts receivable reserves as of December 31, 2012, were $669,000, or 0.4% of the balance due. We believe this reserve level is appropriate considering the quality of the portfolio as of December 31, 2012. 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. Valuation of Goodwill Goodwill of a reporting unit is tested for impairment between annual tests if an event occurs or circumstances 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 of a significant asset group within a reporting unit, or • Allocation of a portion of goodwill to a business to be disposed of. If we believe that one or more of the above indicators of impairment have occurred, 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. The approach defined below is based upon our last impairment test conducted in June 2012 as of the end of May 2012. Zebra did perform an interim impairment test in October 2012 for its smaller reporting unit as of the end of September 2012. The October 2012 test only utilized the income approach as discussed below. 22 23 Under the “Income Approach – Discounted Cash Flow Analysis” the key assumptions consider sales, cost of sales and operating expenses projected through the year 2021. 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 20 publicly traded companies, including Zebra, which we believe have significant relevant similarities. For these 20 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. Under the “Market Approach – Comparative Transactions Method” we looked at 19 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 weight attached to 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. There have not been any significant changes to our impairment testing methodology other than updating the assumptions to reflect the current market environment. As discussed above, key assumptions used in the first step of the goodwill impairment test were determined by management utilizing the internal operating plan. The key assumptions utilized include forecasted growth rates for revenues and operating expenses as well as a discount rate which is determined by looking at current risk-free rates of capital, current market interest rates and the evaluation of a risk premium relevant to the business segment. Zebra will monitor future results and will perform a test if indicators trigger an impairment review. We test the impairment of goodwill each year as of the end of May or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Zebra has two reporting units required for its annual goodwill impairment test. We completed our annual assessment during June 2012 and determined that our goodwill was not impaired as of the end of May 2012.As part of Zebra’s annual impairment test in the second quarter, Management determined that the larger of the two reporting units’ fair value exceeded its carrying value by a significant amount. The second smaller reporting unit’s amount by which the fair value exceeded the carrying value ranged from approximately 8% under the Income Approach to 31% under the Market Approach. Due to the deterioration in the smaller reporting unit’s operating results during the third quarter, failing to meet our forecasted revenues and operating expenses, and a decline in expected growth rates, our fair value calculation for the smaller reporting unit changed and we determined our goodwill associated with the smaller reporting unit was impaired. The above impairment indicators led us to conclude an interim goodwill test was necessary. Zebra performed the first step of the impairment test which failed. As a result, Zebra also performed a second step analysis and recorded a goodwill impairment charge of $9,114,000 as of September 29, 2012. After this impairment charge, there is no remaining goodwill in the smaller reporting unit. Valuation of Long-Lived and Other Intangible Assets Zebra evaluates 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 Zebra believes 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, Zebra measures impairment based on projected discounted cash flows using a discount rate that incorporates the risk inherent in the cash flows. Net intangible assets, long-lived assets and goodwill amounted to $235,442,000 as of December 31, 2012. Income Taxes On January 1, 2007, we adopted ASC 740. According to ASC 740, Zebra identified, evaluated, and measured the amount of income tax benefits to be recognized for all of our income tax positions. During 2008, Zebra recognized an increase of approximately $4,000,000 in the liability for unrecognized tax benefits related to an acquisition. During 2012 Zebra recognized an increase of $680,000 for tax benefits related to the foreign restructuring. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): Contingencies Zebra records estimated liabilities related to contingencies based on our estimates of the probable outcomes. Quarterly, Zebra assesses 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 12 in the Notes to the Consolidated Financial Statements included in the Form 10-K. Balance at January 1, 2011 Additions based on tax positions related to 2011 Additions based on tax positions related to 2012 Balance at December 31, 2012 $4,000 — 680 $4,680 Equity-Based Compensation As of December 31, 2012, 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. Zebra recognizes compensation costs using the straight-line method over the vesting period of up to 5 years. See Notes 2 and 16 to the Consolidated Financial Statements included in the Form 10-K for further information. 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, 2012 and December 31, 2011, we did not accrue any interest or penalties into income tax expense. Liquidity and Capital Resources (Amounts in thousands, except percentages): An audit of U.S. federal income tax returns for years of 2008 through 2010 was completed in 2012. The tax years 2008 through 2010 remain open to examination by multiple state taxing jurisdictions. Tax authorities in the United Kingdom have completed income tax audits for tax years through 2008. Included in deferred tax assets are amounts related to federal and state net operating losses that resulted from Zebra’s acquisition of WhereNet Corp. As of December 31, 2012, Zebra had approximately $2,518,000 of federal net operating loss carryforwards available to offset future taxable income which expire in 2022 through 2027. As of December 31, 2012, Zebra also had approximately $27,391,000 of state net operating loss carryforwards which expire in 2012 through 2020. 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 amount of benefits from net operating loss carryforwards may be impaired or limited in certain circumstances, including significant changes in ownership interests. Rate of Return Analysis: 2012 Average cash and marketable securities balances $360,385 Annualized rate of return 0.7% 2011 $292,646 0.7% Year Ended December 31, Average cash and marketable securities balances for 2012 increased compared to 2011 as a result of increased cash provided by operations. As of December 31, 2012, Zebra had $394,075,000 in cash, restricted cash, investments and marketable securities, compared with $326,695,000 at December 31, 2011. Factors affecting cash and investment balances during 2012 include the following (changes below include the impact of foreign currency): • Accounts receivable increased $8,647,000 due to the increased sales and the timing of receipts. Year Ended • Inventories decreased $11,530,000 due to decreases in raw materials inventory. December 31, 2012 December 31, 2011 • Accounts payable decreased $14,605,000 due to the timing of payments at period end. Effective tax rate 25.8% 27.5% • Income taxes increased $16,335,000 due to the timing of tax payments and During 2012, Zebra established a foreign holding company structure that is designed to accomplish various international business objectives. This new holding company structure allows Zebra to consolidate the ownership of its significant foreign affiliates under a single holding company. In addition, the structure gives the company the ability to facilitate cash pooling for its non-US operations and provide for the tax efficient movement of cash within the structure to efficiently deploy cash generated by the foreign subsidiaries. Zebra’s international income taxes have also decreased as result of this project. taxes incurred. • Purchases of property and equipment totaled $22,443,000. • Escrowed proceeds received from the sale of Navis totaled $27,580,000. • Acquisition of businesses totaled $59,876,000. • Purchases of treasury stock totaled $54,373,000. Management believes that existing capital resources and funds generated from operations are sufficient to finance anticipated capital requirements. 24 25 Zebra earns a significant amount of our operating income outside the U.S., which is deemed to be permanently reinvested in foreign jurisdictions. Zebra does not currently foresee a need to repatriate funds, however, should Zebra require more capital in the U.S. than is generated by our operations locally, Zebra could elect to repatriate funds held in foreign jurisdictions or raise capital in the U.S. through debt or equity issuances. These alternatives could result in higher effective tax rates or increased interest expense. Included in Zebra’s cash, restricted cash, investments and marketable securities are amounts held by foreign subsidiaries. Zebra had $173,483,000 as of December 31, 2012, and $96,829,000 as of December 31, 2011 of foreign cash and investments, which are generally invested in U.S. dollar-denominated holdings. Contractual Obligations Zebra’s contractual obligations as of December 31, 2012 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 $ 31,497 $ 10,699 $ 11,125 $4,574 $5,099 Deferred compensation liability 3,553 — — Deferred revenue 24,001 13,326 10,675 Purchase obligations 104,366 104,366 — — — — 3,553 — — Total $163,417 $128,391 $21,800 $4,574 $8,652 Purchase obligations are for purchases made in the normal course of business to meet operational requirements, primarily raw materials and finished goods. On October 10, 2012, Zebra entered into a revolving credit agreement for a five-year $250 million revolving credit facility with a syndicate of banks led by J. P. Morgan Securities LLC as Administrative Agent. The funds under this credit facility are 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, 2012, we had established letters of credit amounting to $2,300,000, which reduce the funds available for borrowing under the agreement. No amounts were outstanding under the credit agreement as of December 31, 2012. Management believes that existing capital resources and funds generated from operations are sufficient to finance anticipated capital requirements. Recently Issued Accounting Pronouncements In June 2011, the FASB issued update 2011-05, ASC 220, Comprehensive Income: Presentation of Comprehensive Income and in December 2011, the FASB issued update 2011-12, ASC 220, Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU No. 2011-12 is to defer only those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments. Entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. This standard is effective for interim and annual periods beginning after December 15, 2011. The adoption of this standard moved the Other Comprehensive Income statement disclosure from our footnote to its own financial statement for our 10-Q filings in 2012. In September 2011, the FASB issued update 2011-08, ASC 350, Intangibles Goodwill and Other: Testing Goodwill for Impairment. This updated guidance simplifies how companies test goodwill for impairment. Essentially, companies are no longer required to calculate the fair value of a reporting unit unless the entity determines that it is more-likely-than- not that its fair value is less than its carrying amount using a qualitative assessment. This standard is effective for fiscal years beginning after December 15, 2011. The adoption of this standard did not have any effect upon our consolidated financial statements. In July 2012, the FASB issued update 2012-03, ASC 350, Intangibles Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment. This updated guidance provides entities with the option to make qualitative assessments about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. This standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this standard did not have any effect upon our consolidated financial statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk Zebra is exposed to the impact of changes in interest rates because of our large investment portfolio. As stated in our written investment policy’s objective is to achieve stable and predictable targeted rates of return, and to provide the liquidity necessary for the operation of the business. 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 investments, 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 full-year 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, 2011 2012 $ (3,657) $ (0.05) $ (3,423) $ (0.05) $ 3,657 $ 0.05 $ 3,423 $ 0.05 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. 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) As of December 31, 2011 2012 $ 824 $ 0.01 $ 5,193 $ 0.07 $ 895 $ 0.01 $ 5,970 $ 0.08 Equity Price Risk Zebra’s investment manager uses an investment strategy that is principally designed to preserve capital. 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. 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. 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. 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-29. An index to such materials appears on page F-1. 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 11 of the Notes to the Consolidated Financial Statements included in this form 10-K for further discussions of hedging activities. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures Not applicable. 26 27 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, 2012. 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, 2012, 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 43 of this report on Form 10-K. Changes in Internal Control over Financial Reporting In January 2008, Zebra began a program to update substantially all of its key financial systems. 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. As of January 31, 2011, we completed the implementation of the new systems for our EMEA region. This implementation included customer order entry and invoicing, inventory procurement and management, certain accounts payable activity, and other related operational systems. As part of the implementation, we changed many of the related internal controls, primarily by replacing manual controls with system controls and streamlining Zebra’s internal operations. These new controls were subject to testing throughout 2011 and 2012. As of February 27, 2012, we completed the implementation of the new systems for our North America region. This implementation included customer order entry and invoicing, inventory procurement and management, certain accounts payable activity, and other related operational systems. As part of the implementation, we changed many of the related internal controls substantially by reducing the number of manual controls with system controls and streamlining Zebra’s internal operations. These new controls were subject to testing throughout 2012. During 2012, we made additional changes to our controls and procedures as part of our ongoing monitoring of our controls. None of these changes has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. In addition, 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. Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of Zebra Technologies Corporation: We have audited Zebra Technologies Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2012, 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 and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent 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 and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Zebra Technologies Corporation and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of earnings, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012, our report dated February 21, 2013 expressed an unqualified opinion thereon. /s/Ernst & Young LLP Chicago, Illinois February 21, 2013 28 29 Item 9B. Other Information PART IV ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES Report of Independent Registered Public Accounting Firm Item 15. Exhibits, Financial Statement Schedules INDEX TO FINANCIAL STATEMENTS AND SCHEDULE To the Board of Directors and Stockholders of Zebra Technologies Corporation Not applicable. PART III Item 10. Directors, Executive Officers and Corporate Governance We have adopted a Code of Ethics for Senior Financial Officers 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 “Corporate Governance,” “Election of Directors,” “Board and Committees of the Board,” “Executive Officers,” and “Section 16(a) Beneficial Ownership Reporting Compliance.” Item 11. Executive Compensation The information in response to this item is incorporated by reference from the Proxy Statement sections entitled “Compensation Discussion and Analysis-Executive Summary,” “Compensation Discussion and Analysis,” “Executive Compensation,” “Director Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report.” 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.” 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, there unto duly authorized, on the 21st day of February 2013. ZEBRA TECHNOLOGIES CORPORATION By: /s/ Anders Gustafsson Anders Gustafsson Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, the report has been signed below by the following persons in the capacities and on the dates indicated. Date February 21, 2013 February 21, 2013 Signature Title /s/Anders Gustafsson Anders Gustafsson Chief Executive Officer and Director (Principal Executive Officer) /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 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.” /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 Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2012 and 2011 Consolidated Statements of Earnings for the years ended December 31, 2012, 2011, and 2010 Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011, and 2010 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2012, 2011, and 2010 Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011, and 2010 Notes to Consolidated Financial Statements Financial Statement Schedule The following financial statement schedule is included herein: Page F-1 F-2 F-3 F-3 F-4 F-5 F-6 February 21, 2013 Schedule II - Valuation and Qualifying Accounts F-29 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. February 21, 2013 February 21, 2013 February 21, 2013 February 21, 2013 February 21, 2013 February 21, 2013 We have audited the accompanying consolidated balance sheets of Zebra Technologies Corporation and subsidiaries (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of earnings, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2012. Our audits also included the financial statement schedule listed in Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Zebra Technologies Corporation and subsidiaries at December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, 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, 2012, 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 21, 2013 expressed an unqualified opinion thereon. /s/Ernst & Young LLP Chicago, Illinois February 21, 2013 30 F-1 ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands) ASSETS Current assets: Cash and cash equivalents Investments and marketable securities Accounts receivable, net Receivable from buyer Inventories, net Deferred income taxes Income tax receivable Prepaid expenses and other current assets Long-term deferred income taxes Goodwill Other intangibles, net Long-term investments and marketable securities Other assets Total assets December 31, 2012 December 31, 2011 December 31, 2012 December 31, 2011 LIABILITIES AND STOCKHOLDERS’ EQUITY $ 64,740 324,140 168,732 0 123,357 13,484 0 16,410 $ 36,418 182,398 155,230 27,580 133,288 13,931 13,111 22,917 2,602 94,942 39,151 5,195 13,646 97,822 11,866 79,703 12,667 107,879 4,196 $ 967,748 $ 899,006 Current liabilities: Accounts payable Accrued liabilities Deferred revenue Income taxes payable Total current liabilities Deferred rent Other long-term liabilities Total liabilities Stockholders’ equity: Preferred Stock Class A Common Stock Additional paid-in capital Treasury stock Retained earnings Accumulated other comprehensive loss Total stockholders’ equity 57,234 13,326 1,609 95,214 1,303 14,229 110,746 0 722 139,523 (641,438) 64,612 11,089 0 108,974 1,592 11,515 122,081 0 722 131,422 (596,622) 1,368,520 1,245,616 (10,325) 857,002 (4,213) 776,925 Total liabilities and stockholders’ equity $ 967,748 $ 899,006 See accompanying notes to consolidated financial statements. Total current assets 710,863 584,873 Property and equipment at cost, less accumulated depreciation and amortization 101,349 $ 23,045 $ 33,273 Revenue from services and software CONSOLIDATED STATEMENTS OF EARNINGS (Amounts in thousands, except per share data) Year Ended December 31, 2011 2012 2010 Year Ended December 31, 2011 2012 2010 Net sales Net sales of tangible products 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 Acquisition costs Litigation settlement Exit and restructuring costs Asset impairment charge Total operating expenses Operating income Other income (expense): Investment income Foreign exchange loss Other, net Total other income (expense) Income from continuing operations before income taxes Income taxes $948,227 47,941 996,168 479,633 24,891 504,524 $ 936,282 47,206 983,488 469,834 26,885 496,719 491,644 486,769 129,906 87,364 92,167 4,673 3,109 0 960 9,114 127,797 89,926 81,345 3,320 304 0 2,041 0 $ 849,530 44,829 894,359 450,630 22,954 473,584 420,775 112,365 82,575 73,229 3,211 0 (1,082) 2,262 0 327,293 164,351 304,733 182,036 272,560 148,215 2,485 (941) (1,721) (177) 1,944 (2,006) (2,255) (2,317) 2,678 (169) (1,117) 1,392 164,174 42,277 179,719 49,376 149,607 44,993 Basic earnings per share Income from continuing operations $ Income (loss) from discontinued operations Net Income Diluted earnings per share Income from continuing operations $ $ Income (loss) from discontinued operations Net Income $ 2.36 0.02 2.38 2.35 0.02 2.37 $ $ $ $ 2.42 0.82 3.24 2.40 0.82 3.22 $ 1.83 (0.05) $ 1.78 $ 1.82 (0.05) $ 1.77 Basic weighted average shares outstanding 51,566 53,854 57,143 Diluted weighted average and equivalent shares outstanding 51,843 54,191 57,428 See accompanying notes to consolidated financial statements. ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands) Net income $122,904 $174,643 $ 101,778 Year Ended December 31, 2011 2012 2010 Other comprehensive income (loss): Unrealized gain (loss) on hedging transactions, net of income taxes Unrealized holding gain (loss) on investments, net of income taxes (7,241) 6,209 887 242 (385) (688) (949) (406) 67 Income from continuing operations 121,897 130,343 104,614 Income (loss) from discontinued operations, net of tax 1,007 44,300 (2,836) Foreign currency translation adjustment F-2 F-3 Net income $ 122,904 $ 174,643 $ 101,778 Comprehensive income $ 116,792 $179,779 $100,490 See accompanying notes to consolidated financial statements. ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Dollars in thousands) Balance at December 31, 2009 Repurchase of 3,349,286 shares of Class A Common Stock Issuance of 765,078 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 loss on investments (net of income taxes) Unrealized holding loss on hedging transactions (net of income taxes) Foreign currency translation adjustment Balance at December 31, 2010 Repurchase of 4,353,801 shares of Class A Common Stock Issuance of 809,084 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 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, 2011 Repurchase of 1,473,863 shares of Class A Common Stock Issuance of 488,863 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, 2012 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 $ 136,104 $(385,831) $ 969,195 $ (8,061) $ 712,129 — — — — — — — — — (102,091) (16,918) (1,342) 11,871 — — — — 25,893 — — — — — — — — — — 101,778 — — — — — — — — (406) (949) 67 (102,091) 8,975 (1,342) 11,871 101,778 (406) (949) 67 $722 $ 129,715 $(462,029) $1,070,973 $ (9,349) $730,032 — — — — — — — — — (160,200) (12,598) 210 14,095 — — — — 25,607 — — — — — — — — — — 174,643 — — — — — — — — (385) 6,209 (688) (160,200) 13,009 210 14,095 174,643 (385) 6,209 (688) $722 $ 131,422 $(596,622) $1,245,616 $ (4,213) $776,925 — — — — — — — — — (54,373) (6,196) (430) 14,727 — — — — 9,557 — — — — — — — — — — 122,904 — — — — — — — — 887 (7,241) 242 (54,373) 3,361 (430) 14,727 122,904 887 (7,241) 242 $722 $ 139,523 $(641,438) $1,368,520 $ (10,325) $857,002 ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year Ended December 31, 2012 2011 2010 Year Ended December 31, 2012 2011 2010 Cash flows from operating activities: Cash flows from investing activities: Net income $122,904 $174,643 $101,778 Purchases of property and equipment (22,443) Proceeds from the sale of business 27,580 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization Equity-based compensation Asset impairment charges Impairment of investments Excess tax benefit from share-based compensation Loss on sale of property and equipment Gain on sale of business Deferred income taxes Changes in assets and liabilities, net of businesses acquired: Accounts receivable, net Inventories, net Other assets Accounts payable Accrued liabilities Deferred revenue Income taxes Other operating activities Net cash provided by operating activities 26,177 14,727 9,114 0 (1,578) 311 (930) 8,067 (8,647) 11,530 7,304 (14,605) (4,193) 4,351 16,335 (7,536) 24,000 14,095 0 219 (1,392) 284 (68,745) 10,796 (3,269) (19,545) (12,721) (5,439) (11,086) (14,131) (14,983) 5,582 31,209 11,871 0 0 (244) (58) 0 (1,347) (4,603) (33,884) (2,615) 6,619 15,386 3,414 16,980 (2,669) 183,331 78,308 141,837 Acquisition of businesses, net of cash acquired Acquisition of intangible assets Purchases of long-term investments Purchases of investments and marketable securities Maturities of investments and marketable securities Proceeds from sales of investments and marketable securities Net cash provided by (used in) investing activities Cash flows from financing activities: (26,918) 161,206 0 (30,721) 0 0 (1,232) (3,497) 0 0 (59,876) (3,500) (9,125) (347,609) (991,633) (382,091) 145,028 607,996 274,208 164,410 303,801 102,485 (105,535) 53,220 (39,616) Purchase of treasury stock (54,373) (160,200) (102,091) Proceeds from exercise of stock options and stock purchase plan purchases Excess tax benefit from equity-based compensation 3,361 13,009 8,975 1,578 1,392 244 Net cash used in financing activities (49,434) (145,799) (92,872) Effect of exchange rate changes on cash (40) 1,835 562 Net increase (decrease) in cash and cash equivalents Cash balance of discontinued operations at beginning of period Less: Cash balance of discontinued operations at end of period Cash and cash equivalents at beginning of period 28,322 (12,436) 9,911 0 0 1,301 0 1,694 1,301 36,418 47,553 37,249 Cash and cash equivalents at end of period $ 64,740 $ 36,418 $ 47,553 Supplemental disclosures of cash flow information: Income taxes paid $ 20,059 $ 65,364 $ 26,563 See accompanying notes to consolidated financial statements. F-5 ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES 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, real-time locating solutions, 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 2008 and 2007, we acquired WhereNet Corp., proveo AG, Navis Holdings, LLC (Navis) and Multispectral Solutions Inc., which we referred to as Zebra Enterprise Solutions Group (ZES). On January 31, 2011, we announced a definitive agreement to sell the Navis operations and certain other assets of ZES. Upon completion of the transaction we consolidated the remaining operations of ZES and no longer report ZES as a separate segment since it is not greater than 10% of Zebra’s consolidated totals. Reclassifications. Prior-period amounts will differ from amounts previously reported because certain immaterial amounts in the prior years’ financial statements have been reclassified to conform to the current year’s presentation. 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 2012 fiscal year, our quarter end dates were as follows: • March 31, • June 30, • September 29, 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 three months to be cash equivalents. These highly liquid short-term investments are readily convertible to known amounts of cash and are so near their maturity that they present insignificant risk of a change in value because of changes in interest rates. Investments and Marketable Securities. Investments and marketable securities at December 31, 2012, consisted of U.S. government and agency securities, state and municipal bonds, corporate bonds, and other security interests. 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, unless we determine them to be other-than-temporarily impaired. Zebra’s investments and marketable securities are classified as available-for-sale securities except for securities held in Zebra’s deferred compensation plan which are considered trading securities. Investments in marketable debt securities are classified based on intent and ability to sell investment securities. Zebra’s available-for-sale securities are used to fund further acquisitions and other operating needs and therefore can be sold prior to maturity. Investments in marketable debt securities for which Zebra intends to sell within the next year are classified as current and those that we intend to hold in excess of one-year are classified as non-current. 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. Zebra’s continuing practice is to recognize interest and penalties related to income tax matters as part of income tax expense. During 2012 Zebra recognized an increase of $680,000 in the liability for tax benefits related to the foreign restructuring. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): Balance at January 1, 2011 Additions based on tax positions related to 2011 Additions based on tax positions related to 2012 Balance at December 31, 2012 $ 4,000 0 680 $ 4,680 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 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 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. We evaluate the impairment of identifiable intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered that might trigger an impairment review consist of: • Significant underperformance relative to expected historical or projected future operating results, • Significant changes in the manner of use of the acquired assets or the strategy for the overall business, • Significant negative industry or economic trends, • Significant decline in Zebra’s stock price for a sustained period, and • Significant decline in market capitalization relative to net book value. 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. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. F-6 F-7 We performed our annual impairment test in June 2012 and determined that our goodwill was not impaired as of the end of May 2012. Zebra has two reporting units required for its annual goodwill impairment test. As of our May 2012 testing date, the larger of the two reporting units’ fair value exceeded its carrying value by a significant amount. The fair value amount by which the second smaller reporting unit exceeded the carrying value ranged from approximately 8% under the Income Approach and 31% under the Market Approach. Key assumptions used in the first step of the goodwill impairment test were determined by management utilizing the internal operating plan. The key assumptions utilized included forecasted growth rates for revenues and operating expenses as well as a discount rate which is determined by looking at current risk-free rates of capital, current market interest rates, and the evaluation of a risk premium relevant to the business segment. Due to the deterioration in the smaller reporting unit’s operating results during the third quarter our fair value calculation for the smaller reporting unit changed and we determined our goodwill associated with the smaller reporting unit to be impaired. The above impairment indicators led us to conclude an interim goodwill test was necessary. Zebra performed the first step of the impairment test which failed. As a result, Zebra also performed a second step analysis and recorded a goodwill impairment charge of $9,114,000 as of September 29, 2012. After this impairment charge, there is no remaining goodwill in the smaller reporting unit. Other intangible assets capitalized consist primarily of current technology, customer relationships, 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 4.0 years; Patent and patent rights 4.4 years; Customer relationships 7.3 years. 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. 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. 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. 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 is expensed as incurred. Advertising costs totaled $8,983,000 for the year ended December 31, 2012, $8,070,000 for the year ended December 31, 2011 and $6,836,000 for the year ended December 31, 2010. 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 services rendered. Zebra reimburses resellers for agreed activities up to the amounts approved by Zebra. These payments are treated as marketing costs consistent with the requirements of ASC 605. 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 printers against defects in material and workmanship. Printheads are warranted for nine months and batteries are warranted for twelve months. Battery based products, such as location tags, are covered by a 30 day warranty. A provision for warranty expense is recorded at the time of sale and adjusted 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 2012 $ 4,613 6,828 (7,189) $ 4,252 Year Ended December 31, 2011 2010 $ 4,554 5,856 (5,797) $ 4,613 $ 3,813 6,427 (5,686) $ 4,554 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 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 11 for additional information on our derivatives and hedging activities. Equity-Based Compensation. At December 31, 2012, 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 more fully in Note 16. We account for these plans in accordance with ASC 505 and ASC 718. Zebra recognizes compensation costs using the straight-line method over the vesting period of upon grant to up to 5 years. The compensation expense and the related income tax benefit for share-based payments were included in the Consolidated Statement of Earnings as follows (in thousands): Compensation costs and related income tax benefit: Cost of sales Selling and marketing Research and development General and administration Total compensation expense Income tax benefit For the years ended December 31, 2010 2011 2012 $ 1,061 $ 1,029 $ 882 1,792 1,593 10,281 $14,727 $ 5,132 1,463 1,387 9,228 $13,107 $ 4,522 1,368 1,282 6,580 $ 10,112 $ 3,489 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 cash flows from financing activities. Cash flows resulting from the tax benefits of tax deductions in excess of the compensation cost recognized (excess tax benefits) are classified as financing cash flows in the statement of cash flows. The tax benefits classified as financing cash flows was $1,578,000 as of December 31, 2012, $1,392,000 as of December 31, 2011, and $244,000 as of December 31, 2010. 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. Foreign Currency Translation. The consolidated balance sheets of Zebra’s foreign subsidiaries, not having a U.S. dollar functional currency, are translated into U.S. dollars using the year-end exchange rate, and statement of earnings items are translated using the average exchange rate for the year. The resulting translation gains or losses are recorded in stockholders’ equity as a cumulative translation adjustment, which is a component of accumulated other comprehensive income (loss). Acquisition Costs. Zebra expenses acquisition costs as incurred. Concentration risks. Final assembly of our thermal printers is performed by Jabil Circuit, a third-party electronics manufacturer. We are now dependent on Jabil for the manufacture of such printers. A failure by Jabil to provide manufacturing services to Zebra as Zebra now requires, or any disruption in such manufacturing services, may adversely affect Zebra’s business results. Because we rely on a third-party provider such as Jabil to manufacture its products, Zebra may incur increased business continuity risks. 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. 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 8 for further information related to impairment charges. F-8 F-9 Recently Issued Accounting Pronouncements. In June 2011, the FASB issued update 2011-05, ASC 220, Comprehensive Income: Presentation of Comprehensive Income and in December 2011, the FASB issued update 2011-12, ASC 220, Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU No. 2011-12 is to defer only those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments. Entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. This standard is effective for interim and annual periods beginning after December 15, 2011. The adoption of this standard moved the Other Comprehensive Income statement disclosure from our footnote to its own financial statement for our 10-Q filings in 2012. In September 2011, the FASB issued update 2011-08, ASC 350, Intangibles Goodwill and Other: Testing Goodwill for Impairment. This updated guidance simplifies how companies test goodwill for impairment. Essentially, companies are no longer required to calculate the fair value of a reporting unit unless the entity determines that it is more-likely-than- not that its fair value is less than its carrying amount using a qualitative assessment. This standard is effective for fiscal years beginning after December 15, 2011. The adoption of this standard did not have any effect upon our consolidated financial statements. In July 2012, the FASB issued update 2012-03, ASC 350, Intangibles Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment. This updated guidance provides entities with the option to make qualitative assessments about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. This standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this standard did not have any effect upon our consolidated financial statements. Subsequent events. We have evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through the date the financial statements were issued. Note 3 Fair Value Measurements Financial assets and liabilities are to be measured using inputs from three levels of the fair value hierarchy. 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. Zebra uses a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels: 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. (i.e. U.S. Treasuries and money market funds) Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data. Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in the assessment of fair value. Included in our investment portfolio at December 31, 2012, is an auction rate security which is classified as available for sale and is reflected at fair value. Due to events in credit markets, however, the auction event for the instrument held by Zebra is failed. Therefore, the fair value of this security is estimated utilizing broker quotations, discounted cash flow analysis or other types of valuation adjustment methodologies at December 31, 2012. 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. The security was also compared, when possible, to other securities with similar characteristics. The decline in the market value of the auction rate security 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 this auction rate security until it is sold at auction, redeemed at carrying value or reach maturity, we have classified it as a long-term investment on the balance sheet. Financial assets and liabilities carried at fair value as of December 31, 2012, are classified below (in thousands): Financial assets and liabilities carried at fair value as of December 31, 2011, are classified below (in thousands): Level 1 Level 2 Level 3 Total 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 $ 83,532 $ 13,455 $ 4,840 96,516 0 0 0 0 0 0 0 $ 96,987 4,840 96,516 Assets: U.S. government and agency securities Obligations of government- sponsored enterprises (1) State and municipal bonds 128,368 2,588 130,956 Corporate securities 36 0 36 Other investments $ 25,540 $ 25,307 $ 0 0 0 $ 50,847 16,612 142,873 16,612 142,873 0 0 0 0 77,321 2,588 79,909 36 0 36 Investments subtotal 83,532 243,215 2,588 329,335 Investments subtotal 25,540 262,149 2,588 290,277 Money market investments related to the deferred compensation plan 3,553 0 0 3,553 Total assets at fair value $ 87,085 $ 243,215 $ 2,588 $ 332,888 Liabilities: Forward contracts (2) 2,626 6,584 Money market investments related to the deferred compensation plan 3,199 0 0 0 9,210 3,199 Total assets at fair value $ 31,365 $ 268,733 $ 2,588 $ 302,686 Forward contracts (2) Liabilities related to the deferred compensation plan $ 1,174 $ 871 3,553 0 Total liabilities at fair value $ 4,727 $ 871 $ $ 0 0 0 $ 2,045 Liabilities: 3,553 $ 5,598 Liabilities related to the deferred compensation plan $ 3,199 Total liabilities at fair value $ 3,199 $ $ 0 0 $ $ 0 0 $ 3,199 $ 3,199 1) Includes investments in notes issued by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Federal Farm Credit Banks and the Federal Home Loan Bank. 2) The fair value of forward contracts are calculated as follows: a. Fair value of a collar or put option contract associated with forecasted sales hedges are calculated using bid and ask 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 current forward points. 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-10 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, 2011 2012 U.S. government and agency securities 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) Balance at end of period Total gains (losses) for the period included in earnings attributable to the change in unrealized losses relating to assets still held at end of period $ 2,588 0 0 0 0 $ 2,588 $ 5,597 0 (255) 317 (3,071) $ 2,588 $ 0 $ 0 Obligations of government- sponsored enterprises State and municipal bonds Corporate securities Other investments As of December 31, 2012 and December 31, 2011, 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, 2012 and 2011. The following is a summary of short-term and long-term investments at December 31, 2012 and December 31, 2011 (in thousands): As of December 31, 2012 Less than 1 year 1 to 5 years 6 to 10 years Thereafter Total As of December 31, 2011 Gross Amortized Unrealized Unrealized Losses Gross Gains Cost Estimated Fair Value $ 50,738 $ 115 $ (6) $ 50,847 16,581 142,586 81,132 36 32 330 164 0 (1) 16,612 (43) 142,873 (1,387) 79,909 0 36 As of December 31, 2012 Amortized Cost Estimated Fair Value $ 323,210 $ 324,140 0 5,586 0 0 5,195 0 $ 328,796 $ 329,335 Total investments $ 291,073 $ 641 $ (1,437) $ 290,277 The maturity dates of investments as of December 31, 2012 are as follows (in thousands): Gross Amortized Unrealized Unrealized Losses Gross Gains Cost Estimated Fair Value U.S. government and agency securities Obligations of government- sponsored enterprises State and municipal bonds Corporate securities Other investments $ 96,913 $ 77 $ (3) $ 96,987 4,830 96,383 130,634 36 10 161 790 0 0 4,840 (28) 96,516 (468) 130,956 0 36 Total investments $ 328,796 $ 1,038 $ (499) $ 329,335 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 term maturities. Note 4 Investments and Marketable Securities Investments in marketable debt securities are classified based on intent and ability to sell investment securities. Zebra’s available-for-sale securities are used to fund further acquisitions and other operating needs and therefore can be sold prior to maturity. Investments in marketable debt securities for which Zebra intends to sell within the next year are classified as current and those that we intend to hold in excess of one-year are classified as non-current. Changes in the market value of available-for-sale securities are reflected in the accumulated other comprehensive income caption of stockholders’ equity in the balance sheet, until we dispose of the securities. Once these securities are disposed of, either by sale or maturity, the accumulated changes in market value are transferred to investment income. On the statement of cash flows, changes in the balances of available-for-sale securities are shown as purchases, sales and maturities of investments and marketable securities under investing activities. Changes in market value of trading securities 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. 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, 2012 2011 2010 $887 $(385) $(406) 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, 2012. These lower market values are primarily caused by fluctuations in credit spreads. Market values are expected to recover to the amortized cost prior to maturity. Government securities State and municipal bonds Corporate Securities Total Unrealized Loss < 12 months Unrealized Loss > 12 months Number of investments Aggregate Market Value Unrealized Losses Number of investments Aggregate Market Value Unrealized Losses 4 19 33 56 $ 5,179 24,969 15,429 $45,577 $ (3) (27) (23) $ (53) 1 1 14 16 $ 1,790 1,092 7,262 $ 10,144 $ (0) (1) (445) $ (446) As of December 31, 2011, 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 5 16 35 56 $ 4,599 24,556 31,461 $60,616 $ (3) (7) (855) $(865) 6 11 53 70 $ 6,708 18,612 17,057 $42,377 $ (4) (36) (532) $ (572) F-12 F-13 Using the specific identification method, the proceeds and realized gains on the sales of available-for-sale securities were as follows (in thousands): Note 7 Property and Equipment Property and equipment, which includes assets under capital leases, is comprised of the following (in thousands): Note 8 Goodwill and Other Intangible Asset Data Intangible asset data are as follows (in thousands): Changes in the net carrying value amount of goodwill were as follows (in thousands): 285 159 (264) Computers and software Buildings Land Machinery, equipment and tooling Furniture and office equipment Automobiles Leasehold improvements Projects in progress – computers and software Projects in progress – other As of December 31, 2011 2012 $ 2,134 $ 2,086 504 88,222 12,672 130,357 18 16,380 2,217 15,561 504 81,464 12,003 111,793 18 15,494 9,135 11,332 Amortized intangible assets Current technology Patent and patent rights Customer relationships Total Amortization expense for the year ended December 31, 2012 Estimated amortization expense: As of December 31, 2012 Gross Accumulated Amount Amortization Net Amount Unamortized intangible assets: Goodwill at gross cost Impairment charge – 2008 $ 18,978 $ (12,391) $ 6,587 Goodwill as of December 31, 2011 Acquisitions – LaserBand Impairment charge – 2012 29,569 20,493 (14,618) (2,880) $69,040 $(29,889) 14,951 17,613 $39,151 $ 4,673 Total $ 180,731 (101,028) 79,303 24,353 (9,114) 268,065 243,829 For the year ended December 31, 2013 $ 7,382 Less accumulated depreciation and amortization (166,716) (146,007) Net property and equipment $ 101,349 $ 97,822 Other items related to property and equipment are as follows (in thousands): For the year ended December 31, 2014 For the year ended December 31, 2015 For the year ended December 31, 2016 For the year ended December 31, 2017 As of December 31, 2011 2012 Thereafter Total 7,133 6,669 6,231 5,000 6,736 $39,151 Unamortized computer software costs $ 48,873 $ 42,134 Amortization of capitalized software $ 7,912 $ 6,180 $ 5,624 Total depreciation expense charged to income 21,504 20,680 20,291 Year Ended December 31, 2011 2012 2010 In 2012, we acquired intangible assets in the amount of $31,157,000 for patents, technology and customer relationships. These intangible assets have an estimated useful life ranging from 5 to 9 years. See Note 24 Business Combinations for specific information regarding the acquisition. In 2011, we acquired intangible assets in the amount of $6,232,000 for patents and other intellectual property, of which, $5,000,000 was accrued as of December 31, 2011. During 2012, Zebra paid $3,500,000 towards intangible asset commitments previously accrued. Amortized intangible assets Current technology Patent and patent rights Customer relationships Total Amortization expense for the year ended December 31, 2011 As of December 31, 2011 Gross Accumulated Amount Amortization Net Amount $ 12,718 $ (11,403) 23,392 1,773 (12,079) (1,734) $ 1,315 11,313 39 $37,883 $(25,216) $12,667 $ 3,320 Goodwill as of December 31, 2012 $ 94,942 Unamortized intangible assets Goodwill at gross cost Impairment charges Goodwill Note 9 Other Assets Other assets consist of the following (in thousands): Money market investments related to the deferred compensation plan (See Note 17) Long-term investments Deposits Total As of December 31, 2012 2011 $ 205,084 $ 180,731 (110,142) (101,028) $ 94,942 $ 79,703 As of December 31, 2011 2012 $ 3,553 $3,199 9,195 898 80 917 $13,646 $4,196 During 2012, Zebra acquired interests ranging from 4.7% to 19.7% in several venture capital technology companies for $9,125,000 during the year. These investments are classified as long term. Proceeds Realized gains Realized losses Net realized gains (losses) included in other comprehensive income (loss) as of the end of the prior year Year Ended December 31, 2012 2011 2010 $164,410 $ 303,801 $ 102,485 423 (78) 388 (306) 458 (198) Included in Zebra’s cash, restricted cash, investments and marketable securities are amounts held by foreign subsidiaries which are generally invested in U.S. dollar- denominated holdings. Zebra had $173,483,000 as of December 31, 2012, and $96,829,000 as of December 31, 2011 of foreign cash and investments. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation upon repatriation, however, Zebra does not see a need to repatriate these funds. Note 5 Accounts Receivable Reserves The components of accounts receivable are as follows (in thousands): Gross accounts receivable Accounts receivable reserves Accounts receivable, net Note 6 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 As of December 31, 2012 2011 $ 169,401 $156,790 (669) (1,560) $ 168,732 $155,230 As of December 31, 2012 2011 $ 31,350 $ 45,795 921 604 104,137 137,012 (13,655) 872 220 101,111 147,998 (14,710) Total inventories, net $123,357 $133,288 F-14 F-15 Note 10 Costs Associated with Exit or Disposal Activities In December 2012, Zebra began a plan to restructure its Location Solutions business management structure and announced a project to further optimize our manufacturing operations costs, which includes the consolidation and relocation of support functions. The costs below incurred for the year ended December 31, 2012 represent the costs related to the restructuring of Location solutions business management structure. The costs expected to be incurred relate to the restructuring of Zebra’s manufacturing operations and relocation of this portion of Zebra’s business from the U.S. to China and consolidating some activities domestically. As of December 31, 2012, we have incurred the following exit and restructuring costs related to the location solutions business management structure and manufacturing operations relocation and restructuring (in thousands): Costs incurred for the year ended December 31, 2012 Additional costs expected to be incurred Total costs expected to be incurred As of December 31, 2012, we have incurred the following exit and restructuring costs related to consolidating the former ZES administrative and accounting function into our corporate facilities (in thousands): Type of Cost Severance, stay bonuses, and other employee-related expenses Professional services Relocation and transition costs Total for the year ended Cost incurred Costs incurred for the year ended December 31, December 31, 2012 2011 Total costs incurred as of 2012 $ 1,113 $ 0 $ 1,113 890 38 0 0 890 38 $ 2,041 $ 0 $ 2,041 Liabilities and expenses related to exit activities were as follows (in thousands): Type of Cost Severance, stay bonuses, and other employee-related expenses Professional services Relocation and transition costs Total $960 $4,590 $ 5,550 0 0 310 480 310 480 Balance at beginning of period Charged to earnings Cash paid $960 $5,380 $6,340 Balance at the end of period Year Ended December 31, 2011 2012 $ 1,048 $ 1,479 960 (1,041) 2,041 (2,472) $ 967 $ 1,048 In January 2011, we announced an agreement to sell Navis, to Cargotec Corporation. Following the transaction which was completed on March 18, 2011, we retained the location solutions products from the former ZES, which includes active RFID real-time location solutions and associated tags and readers. In the first quarter of 2011, we also announced a plan to consolidate any remaining administrative and accounting functions from the former ZES into our corporate facilities in Illinois. The costs below incurred for the year ended December 31, 2011, represent the costs related to the consolidation and relocation of the administrative and accounting functions. There are no costs in 2012 related to this restructuring as this project was completed in 2011. Liabilities related to exit activities are included in the accrued liabilities line item on the balance sheet. Exit costs are included in operating expenses under the line item exit and restructuring costs. Note 11 Derivative Instruments 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. F-16 Credit and Market Risk Financial instruments, including derivatives, expose us to counter party 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 traded but have not settled are considered Level 1 in the fair value hierarchy, and hedges that have not traded 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 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): Year Ended December 31, 2012 2011 2010 Change in gains (losses) from foreign exchange derivatives Gain (loss) on net foreign currency assets Net foreign exchange loss $(1,347) 406 $ (941) $ (825) (1,181) $(2,006) $ 5,074 (5,243) $ (169) Hedging of Anticipated Sales We can manage the exchange rate risk of anticipated euro-denominated sales using purchased options, forward contracts, and participating forwards. 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. Summary financial information related to the cash flow hedges is as follows (in thousands): Net unrealized gains (losses) in other comprehensive income: Gross Income tax expense (benefit) Net As of December 31, December 31, 2011 2012 $ (9,936) (2,695) $ (7,241) $ 8,878 2,669 $ 6,209 Summary financial information related to the cash flow hedges of future revenues follows (in thousands, except percentages): As of December 31, December 31, 2011 2012 Notional balance of outstanding contracts versus the dollar Hedge effectiveness € 88,680 100% € 85,105 100% Net gains and (losses) included in revenue $4,201 $ (4,159) $ (630) Year Ended December 31, 2012 2011 2010 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 3 of Zebra’s financial statements. The amounts recorded on our consolidated balance sheets are as follows (in thousands): Notional balance of outstanding contracts: Euro/US dollar Pound/US dollar Net fair value of outstanding contracts As of December 31, December 31, 2011 2012 Assets: Prepaid expenses and other current assets € 37,598 £ 3,810 $ 18 € 36,684 £ 6,016 $ (54) Total Liabilities: Accrued liabilities Total As of December 31, December 31, 2011 2012 $ 0 $ 0 $ 2,045 $ 2,045 $ 9,210 $ 9,210 $ 0 $ 0 F-17 Note 12 Commitments and Contingencies Leases. Minimum future obligations under all non-cancelable operating leases as of December 31, 2012 are as follows (in thousands): 2013 2014 2015 2016 2017 Thereafter Total minimum lease payments Operating Leases $ 10,699 7,336 3,788 2,501 2,074 5,099 $ 31,497 Rent expense for operating leases charged to operations was as follows (in thousands): Rent expense Year Ended December 31, 2011 2012 2010 $15,254 $13,907 $ 11,469 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 9 years with breaking periods specified in the lease agreements. Letters of Credit. In connection with various customer contracts, Zebra has entered into two letters of credit agreements with a bank. The contingent liability of Zebra under these agreements as of December 31, 2012, is $482,000. See below for letters of credit related to our revolving credit agreement. Revolving Credit Agreement. On October 10, 2012, Zebra entered into a revolving credit agreement for a five-year $250,000,000 revolving credit facility with a syndicate of banks led by J. P. Morgan Securities LLC as Administrative Agent. The funds under this credit facility are 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 bear interest at a rate equal to a spread over the base rate, which base rate is the greater of: the prime rate, the Federal Funds Effective Rate plus one-half of one percent (0.50%), or an adjusted LIBOR rate, plus one percent (1%). The spread is dependent on Zebra’s ratio of Total Debt to EBITDA, and ranges from 0.25% to 1.75%. The spread in effect at closing for prime rate and Federal Funds based loans was 0.00%. The spread for LIBOR-based loans ranges from 1.00% to 1.75%. The spread in effect at closing for LIBOR-based loans was 1.00%. Zebra did not make any barrow any monies under the New Credit Agreement at the time of closing. The credit agreement includes customary representations, warranties, affirmative and negative covenants and events of default. It also contains financial covenants tied to Zebra’s leverage ratio and interest coverage ratio. As of December 31, 2012, we had established letters of credit amounting to $2,300,000, which reduce the funds available for borrowing under the agreement. As of December 31, 2012 and 2011, no amounts were outstanding under the company’s credit agreement. The credit agreement above replaced Zebra’s August 2008 five year $100,000,000 credit agreement. Legal Proceedings. 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 13 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. Qualified employees may participate in Zebra’s 401(k) Plan by contributing up to 15% of their gross earnings to the plan subject to certain Internal Revenue Service restrictions. Zebra matches 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. Company contributions to these plans, which were charged to operations, approximated the following (in thousands): 401(k) Total Year Ended December 31, 2011 2010 $4,813 $4,813 $ 4,586 $4,586 2012 $5,138 $5,138 Note 14 Stockholders’ Equity Share count and par value data related to stockholders’ equity are as follows: As of December 31, December 31, 2011 2012 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 $ 0.01 $ 10,000,000 0 0.01 10,000,000 0 $ 0.01 $ 150,000,000 72,151,857 50,908,267 0.01 150,000,000 72,151,857 52,095,166 21,243,590 20,056,691 During the year ended December 31, 2012, Zebra purchased 1,473,863 shares of common stock for $54,373,000 under board authorized share repurchase plans compared to the year ended December 31, 2011, in which Zebra purchased 4,353,801 shares of common stock for $160,200,000. During the year ended December 31, 2010, Zebra purchased 3,349,286 shares of common stock for $102,091,000. A roll forward of Class A common shares outstanding is as follows: Balance at the beginning of the year Repurchases Stock options, rights and ESPP issuances Restricted share issuances Restricted share forfeitures Shares withheld for tax obligations Balance at the end of the period Year Ended December 31, 2011 2012 52,095,166 55,711,325 (1,473,863) (4,353,801) 246,625 242,238 (130,119) (71,780) 593,574 215,510 (17,138) (54,304) 50,908,267 52,095,166 Note 15 Earnings (Loss) Per Share For the years ended December 31, 2012, 2011, and 2010, earnings (loss) per share were computed as follows (in thousands, except per-share amounts): Weighted average shares: Weighted average common shares outstanding Effect of dilutive securities outstanding Diluted weighted average shares outstanding Earnings (loss): Year Ended December 31, 2011 2012 2010 51,566 53,854 57,143 277 337 285 51,843 54,191 57,428 Income from continuing operations $121,897 $130,343 $104,614 Income (loss) from discontinued operations Net Income Basic per share amounts: 1,007 $122,904 44,300 $174,643 (2,836) $101,778 Income from continuing operations $ 2.36 $ 2.42 $ 1.83 Income (loss) from discontinued operations Net Income Diluted per share amounts: 0.02 0.82 (0.05) $ 2.38 $ 3.24 $ 1.78 Income from continuing operations $ 2.35 $ 2.40 $ 1.82 Income (loss) from discontinued operations Net Income 0.02 0.82 (0.05) $ 2.37 $ 3.22 $ 1.77 The potentially dilutive securities that were excluded from the earnings (loss) per share calculation consist of stock options and stock appreciation rights (SARs) with an exercise price greater than the average market price of the Class A Common Stock. These options were as follows: Potentially dilutive shares 1,753,311 1,425,880 1,844,038 Year Ended December 31, 2011 2012 2010 F-18 F-19 Note 16 Equity-Based Compensation As of December 31, 2012, 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 19, 2011, Zebra’s stockholders approved the 2011 Zebra Technologies Corporation Long Term Incentive Plan (the 2011 Plan), which included authorization for issuance of awards of 5,500,000 shares under the 2011 Plan. The 2011 Plan became effective immediately and superseded the 2006 Incentive Compensation Plan (the 2006 Plan), 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 awards granted under the prior plans until such awards have been exercised, forfeited, cancelled, expired or otherwise terminated in accordance with the terms of such grants. The types of awards available under the 2011 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 2011 Plan. The Compensation Committee of the Board of Directors administers the plan. As of December 31, 2012, 4,805,599 shares were available for grant under the plan, and options for 438,671 shares were outstanding under the 2011 Plan. The options and SARs granted under the 2011 Plan have an exercise or grant price equal to the closing market price of Zebra’s stock on the date of grant. Options and SAR’s 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 after termination of employment if the employee is terminated involuntarily other than for cause, (d) thirty days after termination of employment if the employee voluntarily terminates his or her employment, or (e) one year after termination of employment if the employee’s employment terminates due to death, disability, or retirement. Zebra’s time-vested restricted stock grants consist of restricted stock awards (RSA’s) and performance share awards (PSA’s). The following table shows the number of shares of time-vested restricted stock granted in 2012 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 At grant After three years of service Total RSA’s 6,955 162,126 169,081 PSA’s 0 72,470 72,470 Total 6,955 234,596 241,551 These RSA’s will vest at each vesting date if the employee remains employed by Zebra throughout the applicable time period, but will vest in whole or in part (as set forth in each Restricted Stock Agreement) 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 2011 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 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. Zebra’s restricted stock awards are expensed over the vesting period of the related award, which is typically three to five years. However, some recent awards vested upon grant. Compensation cost is calculated as the market date fair value on grant date multiplied by the number of shares granted. The 2006 Plan was superseded by the 2011 Plan. As of December 31, 2012, options and SARs for 1,830,544 shares were outstanding and exercisable under the 2006 Plan. These options and SARs expire on the earlier of (a) ten years following the grant date, or (b) immediately if the employee is terminated for cause, (c) ninety days after termination of employment if the employee is terminated involuntarily other than for cause, (d) thirty days after termination of employment if the employee voluntarily terminates his or her employment, or (e) one year after termination of employment if the employee’s employment terminates due to death, disability, or retirement. The 1997 Plan was superseded by the 2006 Plan. As of December 31, 2012, options for 705,445 shares were outstanding and exercisable under the 1997 Plan. These options terms are the same as noted in the paragraph above in the 2006 Plan. The 2002 Director Plan was superseded by the 2006 Plan. As of December 31, 2012, options for 80,000 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 acquisition of WhereNet, Zebra assumed existing unvested stock options exercisable for shares of WhereNet’s common stock and converted them into options exercisable for Zebra common stock. These converted options have exercise prices and vesting dates based on their previous terms and all of these options that are outstanding are fully vested. As of December 31, 2012, outstanding WhereNet options were exercisable into 12,988 shares of Zebra Class A Common Stock. On May 19, 2011 Zebra’s stockholders adopted the 2011 Employee Stock Purchase Plan (which replaced 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 is 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. Stock purchase plan expense for the year ended December 31, 2012 was $242,000. Stock purchase plan expense for the year ended December 31, 2011 was $321,000 and for the year ended December 31, 2010 was $315,000. For purposes of calculating the compensation cost, 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 SARs as well as the fair value of the grants based on those assumptions: Expected dividend yield Forfeiture rate Volatility Risk free interest rate 2012 0% 10.21% 35.90% .94% 2011 0% 11.50% 35.33% 2.01% 2010 0% 9.78% 39.50% 2.26% – Range of interest rates 0.07%-1.95% 0.01% - 3.18% 0.06% - 3.41% Expected weighted-average life 5.48 years 5.42 years 5.36 years Fair value of SARs granted $5,533,000 $5,495,000 $6,527,000 Weighted-average grant date fair value of options and SARs granted (per underlying share) $12.84 $14.29 $10.64 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. Stock option activity for the years ended December 31, 2012, 2011, and 2010, was as follows: Options Outstanding at beginning of year Granted Exercised Forfeited Expired Outstanding at end of year Exercisable at end of year Intrinsic value of exercised options 2012 Weighted-Average Exercise Price $40.43 0 27.02 36.36 43.63 $41.69 $41.75 Shares 1,702,650 0 (148,802) (1,663) (20,341) 1,531,844 1,527,814 $1,700,000 2011 Weighted-Average Exercise Price $ 37.35 0 26.63 32.29 40.76 $40.43 $40.84 Shares 2,340,959 0 (490,715) (63,714) (83,880) 1,702,650 1,589,096 $6,400,000 2010 Weighted-Average Exercise Price $35.98 0 23.43 35.87 35.08 $ 37.35 $37.50 Shares 2,767,887 0 (273,564) (62,798) (90,566) 2,340,959 1,893,346 $2,214,000 There were no stock options granted in 2012, 2011 or 2010. The following table summarizes information about stock options outstanding at December 31, 2012. Aggregate intrinsic value Weighted-average remaining contractual term Outstanding Exercisable $1,379,000 $1,306,000 3.4 years 3.4 years F-20 F-21 SAR activity for the years ended December 31, 2012, 2011, and 2010, was as follows: SARs Outstanding at beginning of year Granted Exercised Forfeited Expired Outstanding at end of year Exercisable at end of year Intrinsic value of exercised SARs 2012 Weighted-Average Exercise Price $28.91 38.51 23.83 34.10 41.57 $31.66 $26.52 Shares 1,287,724 431,040 (102,972) (75,978) (4,010) 1,535,804 514,787 $1,500,000 2011 Weighted-Average Exercise Price $23.82 41.14 22.20 25.15 19.56 $ 28.91 $ 23.27 Shares 1,234,787 387,847 (95,672) (238,965) (273) 1,287,724 305,228 $1,700,000 2010 Weighted-Average Exercise Price $19.97 27.82 19.56 22.14 19.56 $23.82 $20.19 Shares 684,058 612,681 (31,001) (30,678) (273) 1,234,787 149,318 $353,000 The terms of the SARs are established under the applicable 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 grant 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. Vesting of SARs granted in 2012 is as follows: 20,155 SARs vested upon grant and 410,885 SARs vest annually in four equal amounts on each of the first four anniversaries of the grant date. Vesting of SARs granted in 2011 is as follows: 16,045 SARs vested after one year, 371,802 SARs vest annually in four equal amounts on each of the first four anniversaries of the grant date. All SARs expire 10 years after the grant date. The following table summarizes information about SARs outstanding at December 31, 2012: Aggregate intrinsic value Outstanding Exercisable $10,551,000 $5,926,000 Weighted-average remaining contractual term 7.7 years 6.9 years Restricted stock award activity, granted under the 2011 and 2006 Plans, for the years ended December 31, 2012, 2011 and 2010 was as follows: Restricted Stock Awards Outstanding at beginning of year Granted Released Forfeited Outstanding at end of year 2012 Weighted-Average Grant Date Fair Value $28.20 38.45 21.39 34.90 $35.43 Shares 529,880 169,081 (235,580) (19,019) 444,362 2011 Weighted-Average Grant Date Fair Value $25.51 41.17 30.08 29.08 $ 28.20 Shares 594,090 152,636 (197,472) (19,374) 529,880 Performance share award activity, granted under the 2011 and 2006 Plans, for the years ended December 31, 2012, 2011 and 2010 was as follows: Performance Share Awards Outstanding at beginning of year Granted Released Forfeited Outstanding at end of year F-22 2012 Weighted-Average Grant Date Fair Value $28.58 38.68 41.57 23.06 $35.55 Shares 306,261 72,470 (1,802) (111,100) 265,829 2011 Weighted-Average Grant Date Fair Value $25.35 41.47 28.79 0.0 $ 28.58 Shares 250,596 62,874 (7,209) 0 306,261 2010 Weighted-Average Grant Date Fair Value $24.43 27.85 29.11 26.19 $25.51 2010 Weighted-Average Grant Date Fair Value $21.68 27.82 0.0 0.0 Shares 406,682 225,985 (22,325) (16,252) 594,090 Shares 100,660 149,936 0 0 250,596 $25.35 As of December 31, 2012, there was $18,534,000 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 2.4 years. Deferred income taxes are not provided on undistributed earnings of foreign subsidiaries, aggregating approximately $256,000,000 at December 31, 2012 and $175,000,000 at December 31, 2011. 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 2012 $ 35.43 $33.66 0% 21% 0.07% 2011 $34.77 $33.03 0% 33% 0.07% 2010 $27.95 $26.55 0% 25% 0.14% Note 17 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 mutual funds in the form of stock or bond funds. The following table shows the income, asset and liability amounts related to this plan (in thousands): As of December 31, 2011 2012 Mutual funds included in other assets $3,553 $3,199 Deferred compensation liability included in other long-term liabilities $3,553 $3,199 Note 18 Income Taxes The geographical sources of income before income taxes were as follows (in thousands): United States Outside United States Total Year Ended December 31, 2011 2012 2010 $ 60,388 103,786 $ 164,174 $ 78,593 $ 72,298 101,126 77,309 $179,719 $149,607 Zebra earns a significant amount of our operating income outside the U.S., which is deemed to be permanently reinvested in foreign jurisdictions. Zebra does not currently foresee a need to repatriate funds, however, should Zebra require more capital in the U.S. than is generated by our operations locally, Zebra could elect to repatriate funds held in foreign jurisdictions or raise capital in the U.S. through debt or equity issuances. These alternatives could result in higher effective tax rates or increased interest expense. 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, 2011 2012 2010 $ 17,744 $ 7,250 $25,795 1,324 14,258 33,326 1,191 28,175 36,616 8,656 12,477 375 (80) 8,951 405 (122) 3,108 17,157 46,060 (3,591) 2,524 0 12,760 (1,067) $ 42,277 $49,376 $44,993 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, 2011 2012 2010 Provision computed at statutory rate $ 57,461 $ 62,905 State income tax, net of Federal tax benefit Asset impairment charge Tax-exempt interest income Acquisition related items Domestic manufacturing deduction Research and experimental credit Foreign rate differential Other 1,353 3,190 (8,118) 322 (105) 0 (13,710) 1,884 1,432 0 (334) 0 (212) (508) (13,899) (8) $ 51,714 1,884 0 (554) (315) (70) (713) (8,134) 1,181 Provision for income taxes $42,277 $ 49,376 $ 44,993 In conjunction with the opening of Zebra’s Singapore distribution center and the establishment of Singapore as a regional headquarter location in 2009, Zebra negotiated a 10% income tax rate with the Singapore Economic Development Board. The negotiated rate is a reduction from the then current statutory rate of 17%. The 10% rate expires at the end of 2014 unless Zebra meets agreed commitments for employees and business expenditures in Singapore. If these requirements are met, the 10% rate extends through 2018. This agreement reduced Zebra’s consolidated income taxes by $2,002,000 in 2012, $2,030,000 in 2011, and $1,247,000 in 2010. F-23 Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. Based on management’s assessment, it is more likely than not that the deferred tax assets will be realized through future taxable earnings. Tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows (in thousands): Deferred tax assets: Deferred rent Accrued vacation Accrued bonus Deferred compensation Inventory items Allowance for doubtful accounts and other receivables Other accruals Equity based compensation expense Unrealized gain on securities Unrealized loss on other investments Net operating loss carry-forwards Valuation allowance Total deferred tax assets Deferred tax liabilities: Unrealized loss on other investments Depreciation and amortization Total deferred tax liabilities Net deferred tax assets As of December 31, 2011 2010 $ 508 2,480 2,747 1,497 6,967 211 6,531 16,620 438 419 $ 623 1,926 4,342 1,451 7,072 355 7,355 16,124 288 0 2,462 4,511 (267) (267) 40,613 43,780 0 (24,527) (24,527) $ 16,086 (931) (17,052) (17,983) $25,797 On January 1, 2007, Zebra 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, Zebra identified, evaluated, and measured the amount of income tax benefits to be recognized for all of its income tax positions. During 2008, Zebra recognized an increase of approximately $4,000,000 in the liability for unrecognized tax benefits related to an acquisition. During 2012 Zebra recognized an increase of $680,000 in one of its UK subsidiaries. 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, 2012, Zebra had approximately $2,518,000 of federal net operating loss carryforwards available to offset future taxable income which expire in 2022 through 2027. As of December 31, 2011, Zebra also had approximately $27,391,000 of state net operating loss carryforwards which expire in 2013 through 2021. 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. F-24 Deferred tax asset valuation allowances included in the temporary differences above are as follows (in thousands): The components of other comprehensive income (loss) included in the Consolidated Statements of Comprehensive Income (Loss) are as follows (in thousands): Valuation allowance Balance at the beginning of the year Additions Subtractions 2012 $267 0 0 Year Ended December 31, 2011 $267 0 0 Balance at the end of the period $267 $267 2010 $ 0 267 0 $267 Zebra’s deferred tax valuation allowance is the result of uncertainties regarding the future realization of recorded tax benefits on state income tax loss carry-forwards. The addition in 2010 is primarily related to state income tax law changes in 2011 for that year and tax years going forward. An audit of U.S. federal tax returns for years 2008 through 2010 was completed in 2012. The tax years 2008 through 2010 remain open to examination by multiple state taxing jurisdictions. Tax authorities in the United Kingdom have completed income tax audits for tax years through 2009. Year Ended December 31, 2012 2011 2010 Changes in unrealized gains and (losses) on hedging transactions: Gross Income tax (benefit) Net $(9,936) (2,695) $ 8,878 2,669 $ (7,241) $ 6,209 $ (1,522) (573) $ (949) Changes in unrealized holding gains and (losses) on investments classified as available-for-sale: Gross $ 1,337 $ (597) $ (652) Income tax (benefit) 450 (212) (246) Net $ 887 $ (385) $ (406) Foreign currency translation adjustments $ 242 $ (688) $ 67 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, 2012, 2011 and 2010, Zebra did not accrue any interest or penalties into income tax expense. Changes in unrealized gains (losses) on hedging transactions included in net income totaled $7,203,000 for the year ended December 31, 2012, $(5,109,000) for the year ended December 31, 2011, and $3,689,000 for the year ended December 31, 2010. Note 19 Other Comprehensive Income (Loss) Stockholders’ equity contains certain items classified as other comprehensive income (loss), including: • Foreign currency translation adjustments related to our non-U.S. subsidiary companies that have designated a functional currency other than the dollar. We are required to translate the subsidiary functional currency financial statements to dollars using a combination of historical, month-end, and average foreign exchange rates. This combination of rates creates the foreign currency translation adjustments component of other comprehensive income (loss). • Unrealized holding gains (losses) on foreign currency hedging activities relate to derivative instruments used to hedge the currency exchange rates for forecasted euro sales. These hedges are designated as cash flow hedges, and we have deferred income statement recognition of gains and losses until the hedged transaction occurs. See Note 11 for more details. • Unrealized gains (losses) on investments classified as available-for-sale are deferred from income statement recognition. See Note 4 for more details. The components of accumulated other comprehensive income (loss) included in the Consolidated Balance Sheets are as follows (in thousands): Unrealized gains and (losses) on hedging transactions: Gross Income tax expense (benefit) Net Unrealized gains and (losses) on investments classified as available-for-sale: Gross Income tax expense (benefit) Net As of December 31, 2012 2011 $ (2,581) (599) (1,982) $ 7,355 2,096 5,259 540 162 378 (797) (288) (509) Foreign currency translation adjustments (8,721) (8,963) Total accumulated other comprehensive income (loss) $ (10,325) $ (4,213) Note 20 Geographic Data Information regarding Zebra’s operations by geographic area is contained in the following table. These amounts (in thousands) are reported in the geographic area of the destination of the final sale. We manage our business based on these regions rather than by individual countries. 2012 Net sales Long-lived assets 2011 Net sales Long-lived assets 2010 Net sales Long-lived assets North Europe, Middle East & Africa America Latin America Asia Total $ 435,520 90,363 $ 322,970 7,522 $ 100,101 538 $137,577 2,926 $ 996,168 101,349 $ 409,208 88,382 $ 342,578 5,965 $ 89,715 362 $141,987 3,113 $ 983,488 97,822 $ 394,865 78,938 $ 305,659 6,566 $ 80,679 332 $113,156 1,257 $ 894,359 87,093 Net sales by country that are greater than 10% of total net sales are as follows (in thousands): 2012 2011 2010 United States $539,504 $504,283 $482,891 United Kingdom Singapore Other Total $ 317,793 $134,349 $ 4,522 $ 996,168 $ 339,027 $136,757 $ 3,421 $ 983,488 $303,604 $105,286 $ 2,578 $894,359 Net sales by major product category are as follows (in thousands): Hardware Supplies Service and Software Shipping and Handling Total 2012 2011 2010 $730,489 $743,308 $676,738 $ 212,499 $ 47,941 $ 5,239 $ 996,168 $ 187,457 $ 47,206 $ 5,517 $ 983,488 $ 167,633 $ 44,829 $ 5,159 $ 894,359 Note 21 Major Customers Our net sales to significant customers as a percentage of total net sales were as follows: Customer A Customer B Customer C Year Ended December 31, 2011 2010 20.7% 10.5% 8.9% 19.8% 9.8% 8.0% 2012 20.4% 11.4% 10.3% All three of the above customers are distributors and not end users. No other customer accounted for 10% or more of total net sales during these years. F-25 Note 22 Quarterly Results of Operations (unaudited) (Amounts in thousands, except per share data) 2012 Net Sales Net sales of Cost of Sales Cost of sales of tangible products Cost of sales services and software Cost of sales Gross Profit Operating expenses: 119,033 119,980 118,751 121,869 4,959 6,720 6,362 6,850 123,992 126,700 125,113 128,719 119,883 120,377 126,924 124,460 Selling and marketing 32,114 32,158 32,321 Research and development 20,416 22,336 22,007 General and administrative 24,320 24,402 22,481 Amortization of intangible assets Acquisition costs Exit and restructuring costs Asset impairment charge 770 254 0 0 770 1,252 0 0 Total operating expenses 77,874 80,918 Operating income 42,009 39,459 Other income (loss) Investment income Foreign exchange loss Other, net Total other income (loss) 592 (342) (364) (114) 826 (80) (486) (260) 1,670 566 0 9,114 88,159 38,765 541 (514) (294) (267) 33,313 22,605 20,964 1,463 1,037 960 0 80,342 44,118 526 (5) (577) (56) Income from continuing operations before income taxes 41,895 39,719 38,498 44,062 Income taxes 11,731 9,366 11,917 9,263 Income from continuing operations 30,164 30,353 26,581 34,799 Income from discontinued operations, net of tax 0 300 516 191 Net income $ 30,164 $ 30,653 $ 27,097 $ 34,990 F-26 First Quarter Second Quarter Third Quarter Fourth Quarter 2012 First Quarter Second Quarter Third Quarter Fourth Quarter First Quarter Second Quarter Third Quarter Fourth Quarter 2011 First Quarter Second Quarter Third Quarter Fourth Quarter tangible products $ 232,476 $ 234,708 $ 239,786 $ 241,257 Revenue from services and software 11,399 12,369 12,251 11,922 $ 0.58 $ 0.58 $ 0.52 $ 0.69 tangible products $ 226,120 $ 232,762 $ 241,686 $ 235,714 $ 0.54 $ 0.60 $ 0.64 $ 0.63 0.00 0.01 0.01 Revenue from services and software 11,181 12,779 11,652 11,594 0.57 0.00 0.20 Total net sales 243,875 247,077 252,037 253,179 Net Income $ 0.58 $ 0.59 $ 0.53 $ Total net sales 237,301 245,541 253,338 247,308 Net Income $ 1.11 $ 0.60 $ 0.84 $ $ 0.58 $ 0.58 $ 0.51 $ 0.68 $ 0.54 $ 0.60 $ 0.64 $ 0.63 Basic earnings per share: Income from continuing operations Income from discontinued operations Diluted earnings per share: Income from continuing operations Income from discontinued operations Net Income $ 0.58 $ 0.59 $ 0.52 $ 0.00 0.01 0.01 Basic weighted average shares outstanding 51,998 51,771 51,566 50,968 Diluted weighted average and equivalent shares outstanding 52,301 52,030 51,809 51,262 2011 Net Sales Net sales of 0.00 0.69 0.00 0.68 Cost of Sales Cost of sales of tangible products Cost of sales services and software Cost of sales Gross Profit Operating expenses: 110,781 117,732 122,529 118,792 6,522 6,111 7,256 6,996 117,303 123,843 129,785 125,788 119,998 121,698 123,553 121,520 Selling and marketing 28,528 30,950 31,942 36,377 Research and development 21,681 22,487 22,584 23,174 General and administrative 22,706 20,688 18,978 18,973 Amortization of intangible assets Acquisition costs 835 0 Exit and restructuring costs 1,886 836 0 66 843 188 138 806 116 (49) Total operating expenses 75,636 75,027 74,673 79,397 Operating income 44,362 46,671 48,880 42,123 Other income (loss) Investment income Foreign exchange loss Other, net Total other income (loss) 560 (294) (254) 12 656 (833) (243) (420) 134 (173) (859) (898) 594 (706) (899) (1,011) Income from continuing operations before income taxes 44,374 Income taxes 14,246 Income from continuing operations 30,128 46,251 13,082 33,169 47,982 13,795 34,187 41,112 8,253 32,859 Income (loss) from discontinued operations, net of tax 31,506 (205) 10,814 2,185 Net income $ 61,634 $ 32,964 $ 45,001 $ 35,044 Basic earnings per share: Income from continuing operations Income from discontinued operations Diluted earnings per share: Income from continuing operations Income from discontinued operations 0.04 0.67 0.04 0.67 Net Income $ 1.10 $ 0.60 $ 0.84 $ 0.56 0.00 0.20 Basic weighted average shares outstanding 55,353 54,546 55,339 52,108 Diluted weighted average and equivalent shares outstanding 55,774 54,958 53,628 52,354 F-27 Note 23 Discontinued Operations Sale of Navis, LLC – On March 18, 2011, we sold our Navis marine terminal solutions business and the related WhereNet marine terminal solutions product line of our Zebra Enterprise Solutions (“ZES”) business segment for approximately $188,588,000 in cash to Cargotec Corporation. As of December 31, 2011, Zebra had a short term receivable from the buyer in the amount of $27,580,000 which represented funds held in escrow, of which, we received $13,790,000 in the first quarter of 2012 and the remaining $13,790,000 in the third quarter of 2012. Sale of proveo AG – On August 3, 2011, we entered into a Share Purchase Agreement with F Two NV (a Belgium company) to sell all of our interest in Zebra Enterprise Solutions GmbH (formerly proveo AG) business. The loss recorded upon divestiture was $1,248,000. As part of the sale, Zebra agreed with the buyer to provide a revolving loan of up to €1,000,000 which was due on August 3, 2012 and bore interest at 6.5%. Zebra realized tax benefits in the amount of $13,308,000 with the divestiture of proveo AG. These tax benefits are primarily related to the difference in book basis versus tax basis. On June 29, 2012 F Two NV (a Belgium company) sold the business and assigned the revolving loan to OBQ SA (a Luxembourg company) with Zebra’s consent. The revolving loan commitment was reduced to a lesser amount of up to €526,058. The due date for borrowings under the agreement was extended from August 3, 2012 to December 31, 2012. The interest rate remains unchanged at 6.5%. In 2012, Zebra realized a gain of $930,000 related to payments received under the loan agreement. The balance of the loan outstanding at December 31, 2012 was €376,058. Beginning in the first quarter of 2011, Zebra reported the results of these businesses as discontinued operations. The amounts presented below for discontinued operations include Navis and proveo assets and liabilities, and the operating results of these businesses for the years ended December 31, 2012, 2011 and 2010. With the Navis sale, Zebra consolidated the remaining ZES location solutions operations. Summary results for discontinued operations in our consolidated statement of earnings are as follows (in thousands): Net sales Year Ended December 31, 2011 2010 $ 13,945 $62,489 2012 $ 0 Loss from discontinued operations $ (141) $(13,971) $ (4,673) Income tax benefit Gain on sale of discontinued operations Income tax expense on sale 218 930 0 1,299 68,745 (11,773) 1,837 0 0 Income (loss) from discontinued operations $1,007 $ 44,300 $ (2,836) The components of cash flows of discontinued operations in our consolidated statement of cash flows are as follows (in thousands): The following table (in thousands) summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition: Cash flows from discontinued operations: Net cash (used) by operating activities Net cash provided by (used in) investing activities Net cash provided by (used in) financing activities Effect of exchange rate changes on cash Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of period Year Ended December 31, 2011 2012 2010 $ 0 $ (1,301) $ (2,164) 0 0 0 0 0 0 0 0 0 0 1,771 (1,301) (393) 1,301 1,694 Cash and cash equivalents at end of period $ 0 $ 0 $ 1,301 Note 24 Business Combinations LaserBand LLC. On July 13, 2012, Zebra acquired all of the outstanding membership interests in LaserBand LLC (a Missouri limited liability company) for a cash purchase price of $59,874,000, included in this amount is cash acquired of $1,431,000. As part of the acquisition closing, an escrow balance of approximately $8,700,000 was established against the total purchase price. LaserBand LLC is based in St. Louis, Missouri, and is a leader in patient identification wristbands and related products. LaserBand strengthens Zebra’s product and patent portfolio and enables Zebra to offer a wider array of products to hospitals, other healthcare organizations and other wristband customers. The consolidated financial statements include the operating results of LaserBand from the date of acquisition. Pro forma results have not been presented because the effect of the acquisition is not material to the company’s financial results. Current assets Property and equipment Other assets Goodwill Other intangibles Total assets acquired Current liabilities Net assets acquired As of July 13, 2012 $ 7,017 46 17 24,353 29,560 $ 60,993 1,119 $ 59,874 On a preliminary basis pending the receipt of final valuations, the purchase price was allocated to identifiable tangible and intangible assets acquired and liabilities assumed based on their estimated fair values resulting in goodwill of $24,353,000. The intangible assets of $29,560,000 consist of the following (in thousands): Current technology Patents and patent rights Customer relationships Acquired other intangibles Amount Useful life $ 6,260 4,580 5 years 7 years 18,720 5 to 9 years $ 29,560 The goodwill is deductible for tax purposes. StepOne Systems. On December 21, 2012, Zebra acquired StepOne Systems for a cash purchase price of $1,543,000, included in this amount is cash acquired of $110,000. The cash purchase price is subject to certain working capital conditions. As part of the closing, an escrow balance of $320,000 was established against the total purchase price. StepOne is a specialty software company focused on solving business retailer’s challenges through mobile technology. StepOne is located in Pittsburgh, Pennsylvania. StepOne has been able to increase sales via customer facing technologies, reduced out-of-stock, labor cost reduction, increased inventory/shipping accuracy and reduction in manual errors. Retail is an important part of our strategy to further penetrate existing markets. Retail organizations worldwide are increasingly embracing technology to improve the customer experience, build brand loyalty and enhance operational efficiency in the front and back of the store. This investment gives Zebra’s a more comprehensive solution in mobile POS and makes Zebra more competitive in this market space. ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES 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, 2012 Year ended December 31, 2011 Year ended December 31, 2010 Valuation accounts for inventories: Year ended December 31, 2012 Year ended December 31, 2011 Year ended December 31, 2010 $ 1,560 $ 1,459 $ 1,406 $ 14,710 $ 9,837 $ 9,054 $ 0 $ 343 $ 315 $ 6,758 $ 8,762 $ 5,470 $ 891 $ 669 $ 242 $ 1,560 $ 262 $ 1,459 $ 7,813 $ 13,655 $ 3,889 $ 14,710 $ 4,687 $ 9,837 See accompanying report of independent registered public accounting firm. F-28 F-29 120 100 80 60 40 12/07 12/08 12/09 12/10 12/11 12/12 C O M P A R I S O N O F 5 Y E A R C U M U L AT I V E T O T A L R E T U R N * Among Zebra Technologies Corporation, the NASDAQ Composite Index, the RDG Tec hnology Composite Index, and Peer Group Index Zebra Technologies Corporation RDG Technology Composite NASDAQ Composite Peer Group Index Board of Directors Executive Officers Stockholder Information Stock Performance Graph This graph compares the cumulative annual change since December 31, 2007, of the total stockholder return of Zebra Technologies Corporation Class A Common Stock with the cumulative return on the following published indices: (i) the RDG Technology Composite1; and (ii) the NASDAQ Composite Market Index, during the same period. The comparison assumes that $100 was invested in each of the Company’s Class A Common Stock, the stocks comprising the RDG Technology Composite and the stocks comprising the NASDAQ Composite Market Index on December 31, 2007. The comparison assumes that all dividends were reinvested at the end of the month in which they were paid. 120 100 80 60 40 20 0 12/07 12/08 12/09 12/10 12/11 12/12 12/07 12/08 12/09 12/10 12/11 12/12 Zebra Technologies Corporation NASDAQ Composite Market Index RDG Technology Composite Peer Group Index $100.00 $58.39 $81.70 $109.48 $103.11 $113.29 100.00 59.03 82.25 97.32 98.63 110.78 100.00 100.00 56.89 46.44 91.53 71.03 103.10 103.14 69.15 42.07 117.75 42.08 *$100 invested on 12/31/07 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. 1. Research Data Group, Inc. publishes the RDG Technology Composite. The RDG Technology Composite is comprised of: Acorn Energy Inc., Astro-Med Inc., AU Optronics Corp., Electronics For Imaging Inc., Hauppauge Digital Inc., Identive Group Inc., Immersion Corp., Intermec Inc., Interphase Corp., Key-Tronic Corp., MAD Catz Interactive Inc., Mercury Computer Systems Inc., Radcom Limited, Socket Mobile Inc., Synaptics Inc., Top Image Systems Limited, Transact Technologies Inc., Universal Display Corp., Video Display Corp. 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 PresidentMichael ChoSenior Vice President, Corporate Development Hugh K. GagnierSenior Vice President, Operations Philip GerskovichSenior Vice President, New Growth Platforms 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, Global Sales and MarketingStockholder 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 16, 2013 at 10:30 A.M. (Central Time), at Zebra’s headquarters, 475 Half Day Road, Lincolnshire, Illinois 60069 Independent AuditorsErnst & Young LLPChicago, Illinois Transfer Agent and RegistrarComputershare Trust Co., N.A.P.O. Box 43069Providence, RI 02940-3069 Overnight Delivery250 Royall St.Canton, MA 02021 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.computershare.com/shareowner/equityaccessGeneral transfer agent: www.computershare.com E-mail contact: shrrelations@bnymellon.com Investor RelationsPlease contact Zebra’s Corporate Headquarters for corporate or product information. Or, visit our Web site at www.zebra.com. Form 10-KThe Zebra Technologies Corporation Form 10-K Report filed with the Securities and Exchange Commission is incorporated in this annual report. The Code of Ethics for Senior Financial Officers is posted on Zebra’s web site. Please contact the Investor Relations Department at the Corporate Headquarters for addition copies of the Form 10-K, or visit our web site to view an online version of the Form 10-K or the Code of Ethics for Senior Financial Officers. 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.070809101112120100806040200 www.zebra .com Corporate Headquarters Asia Pacific Headquarters 475 Half Day Road, Suite 500 71 Robinson Road Lincolnshire, IL 60069 USA #05-02/03 + 1 847 634 6700 North America Headquarters 333 Corporate Woods Parkway Singapore 068895 Singapore + 65 6858 0722 Vernon Hills, IL 60061-3109 USA Europe, Middle East and Africa Headquarters + 1 847 634 6700 Dukes Meadow, Millboard Road Bourne End Buckinghamshire SL8 5XF Latin America Headquarters UK 9850 NW 41st St., Suite 110 +44 (0)1628 556000 Doral, FL 33178 USA + 1 305 558 8470 

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