B E T T E R T O G E T H E R
2014 annual report
T O O U R S H A R E H O L D E R S
I am delighted to report on one of the most transformative
years in the history of Zebra Technologies. With the
acquisition of the Enterprise business from Motorola
Solutions in October, we enhanced our position as a leading
global provider of visibility solutions that deliver greater
productivity for businesses of all sizes.
The combination has created a company with nearly 7,000 employees and approximately $3.5 billion in annual sales. Our products and solutions give companies the information they need to improve their operations and deliver better service to their customers - a category we call enterprise asset intelligence. It positions Zebra to benefit more fully from important technology trends, as organizations seek to obtain real-time insights into their assets, transactions, and people so they can make better, more informed decisions. The transaction expands our range of growth opportunities and enhances our ability to continue building value for our shareholders. In addition to completing this acquisition, we maintained strong, positive momentum in a healthy business environment. The result was record sales of $1.7 billion, up 61% for the year. The Enterprise business contributed $476 million to sales for the two months we owned it in 2014, or 46% to the sales growth. Mobile, desktop, and tabletop printers as well as supplies posted the strongest growth, as we achieved record sales in all geographic regions. In North America, shipments to our retail customers were notably strong, while our Europe, Middle East and Africa (EMEA) region benefited from several large deals in postal as well as transportation and logistics accounts. Zebra and the Enterprise business have worked side-by-side for more than twenty years, offering complementary products and solutions to many of the same customers through common go-to-market channels. The transaction brings together two of the industry’s leading brands: Zebra for barcode and receipt printers, supplies, and location solutions; and Enterprise for mobile computers, scanners, wireless LAN, and services. Integration of Zebra and the Enterprise business is well underway as we come together as One Zebra. 2 0 1 4 S H A R E H O L D E R S L E T T E R A N D A N N U A L R E P O R T O N F O R M 10 - K
•
•
•
industries such as retail, healthcare and transportation and logistics, and aggressively pursuing new business with our expanded geographic reach. As a larger company with greater resources, we are also more prepared to expand in areas such as supplies, wireless LAN, software, and services. All of these initiatives will help us achieve our long-term goal of 4-5% sales growth over a business cycle. Zebra has a rich history of operational excellence. As we pursue our growth goals, we also remain committed to solid execution and smart capital deployment. In the first months of the acquisition, we improved service levels in key areas of the business while maintaining continuity in our customer relationships. We also integrated the sales force and put a plan in place to streamline our supply chain, systems, and other functions over the next two years to drive efficiencies and further operational improvements. These actions will help us achieve $150 million in cost synergies and generate 18-20% EBITDA profit margins by the end of 2016. The Enterprise business acquisition was made possible by Zebra’s financial strength. With favorable credit ratings, attractive interest rates, and ready access to the capital markets, we issued $3.25 billion in debt to finance the transaction. The strong cash flow profile of the combined business provides us the confidence to deploy the cash generated by the company and significantly pay down debt within three years. Building the company on the strengths and best practices of both organizations is also a top priority. We have assembled the industry’s strongest leadership team. All of us are committed to the values of integrity, respect, collaboration, agility, and innovation in our pursuit of serving our customers and channel partners with best-in-class products and solutions. Our employees are energized and share the common goal of helping our customers succeed. This is an exciting time for Zebra. The opportunities for growth and value creation are tremendous. We will be able to achieve our goals because of the dedication of Zebra employees worldwide. I would like to thank them for their commitment. With our industry leadership, the increasing relevance of our solutions to important technology trends, and our focus on execution, Zebra is well positioned to continue creating shareholder value. Thank you for your continued support.Anders Gustafsson Chief Executive OfficerWe now provide our customers a complete end-to-end solution to meet all of their asset-visibility needs. With this comprehensive portfolio, Zebra has become a more trusted technology provider and business partner. We are now engaged in many more business opportunities and strategic discussions regarding companies’ investments in the Internet of Things (IoT), cloud computing and mobility. Both organizations share a deep heritage of innovation. In 2014, we intro-duced approximately sixty new products on a combined basis, including the ZQ110 mobile printer for point-of-sale applications, the ZT400 Series of next-generation tabletop printers, and the QLn Series of printers designed for healthcare applications, a significant area of growth for Zebra. In Enter-prise, we have received strong customer response to the DS4800 Series of 2D array imagers. In 2014, customers embraced many of the innovative products and solutions we introduced over the past few years. We were particularly pleased with the strong adoption of Android-based mobile computers, of which we are an industry pioneer. Our flagship, semi-ruggedized TC-70 and TC-55 products are finding strong placements with customers in retail, transportation and logistics, and small package delivery. They value the enterprise-grade functionality, security, durability, and scalability that our products deliver. Our partnership with the National Football League (NFL) received global recognition in 2014, as our Zebra MotionWorks sports solution provided real-time visibility into player performance to enhance the fan experience and enable next-gen stats and data analytics. Showcasing our robust solution across 17 stadiums during the regular season, plus the Pro Bowl and Super Bowl, has led to multiple business opportunities in several industries including manufacturing and healthcare, as companies increasingly recog-nize the value in tracking the movement of their assets in real-time. The outlook for Zebra is very bright. In 2015, we are focused on three strategic priorities, as we work towards building a new and bolder company: growing the business;executing on integration; andbuilding on the best of both cultures.As one organization, we are better positioned to grow by serving more of the diverse needs of our partners and customers. With our broader portfolio of products and solutions, these prospects include capturing a greater share of our channel partners’ business and strengthening relationships with key strategic customers. We have greater potential for cross-selling in targeted 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
2014
% Change
2013
% Change
2012
Net sales
Gross profit
Operating income
$ 1,670,572
778,025
88,590
(1)
60.9%
54.5
(44.7)
$ 1,038,159
503,610
160,264
(2)
4.2%
2.4%
(2.5)
$ 996,168
491,644
164,351
(3)
Income from continuing operations
Net income
Diluted earnings per share:
Income from continuing operations
Income from discontinued operations
Net income
32,429
32,429
0.63
0.00
0.63
(75.8)
(75.9)
(76.0)
•
(76.0)
Diluted weighted average shares outstanding
51,380
134,225
134,358
2.63
0.00
2.63
51,063
10.1
9.3
11.9
•
11.0
(1) Includes acquisition and integration costs of $126.7 million and exit and restructuring costs of $6.0 million.
(2) Includes exit and restructuring costs of $5.9 million.
(3) Includes asset impairment charges of $9.1 million and exit and restructuring costs of $0.9 million.
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
Long-term obligations
Stockholders’ equity
2014
$ 418,335
716,203
5,568,851
3,356,718
1,039,908
December 31,
2013
$ 415,795
635,049
1,119,812
15,477
958,658
121,897
122,904
2.35
0.02
2.37
51,843
2012
$ 394,075
615,649
967,748
14,229
857,002
net sales (In thousands)
operating income (In thousands)
earnings per share* (In dollars)
$1,750,000
1,593,750
1,437,500
1,281,250
1,125,000
968,750
812,500
656,250
500,000
200,000
150,000
100,000
50,000
0
$3.00
2.40
1.80
1.20
.60
0
* diluted, from
continuing
operations
121314121314121314
Zebra Technologies Corporation 2014 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, 2014
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 28, 2014, the aggregate market value of
each of the registrant’s Class A Common held by
non-affiliates was approximately $4,111,264,305.
The closing price of the Class A Common Stock on
June 27, 2014, as reported on the NASDAQ Stock
Market, was $81.01 per share.
As of February 13, 2015, 51,747,349 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 14, 2015, are incorporated by
reference into Part III of this report.
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
PART I
INDEX
PAGE
References in this document to “Zebra,” “we,” “us,” or “our” refer to Zebra Technologies
Corporation and its subsidiaries, unless the context specifically indicates otherwise.
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 7.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
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
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. When used in
this document and documents referenced, the words “anticipate,” “believe,” “intend,”
“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. The forward-looking statements
include, but are not limited to, Zebra’s financial outlook for the first quarter and full year
of 2015. 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 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,
• Risks related to the manufacturing of Zebra’s products in foreign countries as well
as business operations in foreign countries including the risk of depending on key
suppliers who are also in foreign countries,
• Zebra’s ability to purchase sufficient materials, parts and components to meet
customer demand, particularly in light of global economic conditions,
• The availability of credit and the volatility of capital markets, which may affect our
suppliers and customers,
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
• Success of integrating acquisitions, including the Enterprise business we acquired in
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
October 2014 from Motorola Solutions, Inc,
• Interest rate and financial market conditions,
• The impact of the percentage of cash and cash equivalents held outside the
United States,
• The effect of natural disasters on our business,
• The impact of changes in foreign and domestic governmental policies, laws or
regulations,
• Foreign exchange rates due to the large percentage of our international sales and
Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
operations,
SIGNATURES
• The outcome of litigation in which Zebra may be involved, particularly litigation or
claims related to infringement of third-party intellectual property rights and,
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
• The outcome of any future tax matters.
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Index to Consolidated Financial Statements and Schedule . . . . . . . . . . . . . . . . . . . . . . . . F-1
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.
2
Item 1. Business
Acquisition of Enterprise Business
In October 2014, Zebra acquired the Enterprise business (“Enterprise”) from Motorola
Solutions, Inc. (“MSI”), excluding its iDEN, or Integrated Digital Enhanced Network
Business, for $3.45 billion in cash (the “Acquisition”). Enterprise is an industry leader
in mobile computing and advanced data capture technologies and services, which
complement Zebra’s printing and RFID products. Its products include rugged and
enterprise-grade mobile computers; laser imaging and radio frequency identification
based data capture products; wireless LAN (“WLAN”) solutions and software; and
applications that are associated with these products and services.
The Acquisition expanded Zebra’s product line with complementary products that
together are employed by customers to obtain greater visibility and insight into their
operations. It enables us to deliver end-to-end solutions supporting the Internet of
Things (“IoT”) in targeted industries. The Acquisition strengthened our global reach. We
believe that the greater real-time capabilities of the combined company will make Zebra
a more valued strategic vendor to our customers, as well as a more important supplier of
products and solutions to our channel partners.
Similar to Zebra’s business, Enterprise’s products and services are sold to a wide range
of enterprise customers, including those in the retail, hospitality, transportation and
logistics, manufacturing, warehouse and distribution centers, energy and utilities,
education and healthcare industries.
Zebra funded the Acquisition through a combination of foreign cash on hand of $250
million, the sale of 7¼% senior notes due 2022 with an aggregate principal amount of
$1.05 billion (the “Notes”), and a new credit agreement with various lenders that provided
a term loan of $2.2 billion (the “Term Loan”). The new credit agreement also included a
revolving credit facility providing $250 million (the “Revolving Facility”; and, together
with the Notes and the Term Loan, the “Debt Agreements”).
Integration of Enterprise Business
We commenced integration planning soon after announcing the Acquisition in April
2014. Prior to closing, integration activities focused on understanding the carve-out of
Enterprise from MSI. We needed to understand the systems and operations requirements
of Enterprise and ensure that we had appropriate systems and personnel in place to
handle Enterprise requirements. After closing the Acquisition, integration activities have
focused on creating one Zebra by integrating the operations of Enterprise with Zebra
to create a single business with common sales, marketing, finance, supply chain and
other functions. Over the next few years, the integration will transform how we operate.
Our priorities have centered on maintaining business and customer continuity while
identifying and accelerating synergies and integrating organizations, processes and
systems. As part of integration, we have been undergoing organizational review that
involves a talent selection process that we expect to complete over the course of 2015.
To leverage our ability to deliver end-to-end solutions, we are creating a unified
go-to-market strategy. This involves an evaluation of the current channel programs for
Enterprise and Zebra along with understanding our new capabilities for delivering value
directly to end users. For the near term, we foresee continuing with separate channel
partner programs with differing program requirements until we are able to redesign our
channel programs to best address the combined organization.
As part of the Acquisition, Zebra acquired a new enterprise resource planning (“ERP”)
system that Enterprise uses for its operations and financial reporting. Until such time as
Zebra is able to move onto a single ERP system, Zebra and Enterprise will be operating
on separate ERP systems. In the interim, Zebra is implementing processes to address the
multiple ERP systems and investigating the appropriate path to having a unified ERP system.
Another key focus of the post-closing integration activities relates to transitioning off
of MSI-provided transition services related primarily to information technology. These
services are an interim measure to facilitate the integration of Enterprise and enable us to
continue operating Enterprise without disruption.
The remaining discussion of the “Business” section in this Annual Report addresses the
way we currently operate. We expect that the continuing integration of Enterprise will
significantly impact most of these processes in future periods.
The Company
Zebra is a global leader respected for innovation and reliability. We offer products and
services that give organizations greater visibility and insights into their operations, which
we call Enterprise Asset Intelligence. Our products and services allow our customers
to manage their assets, transactions and people more effectively, and thereby improve
their operational efficiency, deliver a better customer experience, provide more effective
security and achieve other objectives of their organization. We provide products and
services in approximately 100 countries, with 122 facilities and approximately 6,800
employees worldwide.
We design, manufacture and sell a broad range of products, including: enterprise
mobile computers; advanced data capture devices such as laser, 2D and RFID scanners
and readers; WLAN products; specialty printers for barcode labeling and personal
identification; real-time location systems; related supplies such as self-adhesive labels; and
utilities, frameworks and application software. Retailers, manufacturers, transportation and
logistics companies, governments, healthcare institutions and other organizations around
the world use our devices in solutions for automatic identification of assets, data collection
and personal identification.
We believe strong underlying technology trends support growth in our industry and the
further adoption of our products and solutions. Global competitive forces continue to drive
enterprises to improve workflow and deliver better service to their customers. The broad
availability of wireless and Internet connectivity supports the adoption and deployment
of Zebra mobile computers, data capture devices and printers to enable organizations to
collect more data in real time on the location, movement and condition of their assets.
This information, which is generated with the increasing use of barcodes, RFID and
other sensors, can help enterprises make smarter business decisions. Organizations are
increasingly taking advantage of cloud computing for data analysis, as well as device
management with solutions supported by the IoT. Zebra is well positioned to benefit from
the further adoption of mobility, cloud computing, and IoT.
3
Acquisitions (other than the Acquisition of the Enterprise Business)
LaserBand Acquisition – In July 2012, Zebra acquired LaserBand LLC. 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, healthcare organizations and other customers that use wristbands in their
operations.
embedded OEM modules, in both laser scanners and imagers. The devices collect and
decode barcodes and transmit the resulting data to enterprise systems. Our RFID line of
data capture products is focused on ultra-high frequency (UHF) technology. These RFID
devices comply with the electronic product code global Generation 2 UHF standard and
similar standards around the world. We also provide related accessories and software for
our data capture products.
Hart Systems Acquisition – In December 2013, Zebra acquired Hart Systems, a leading
provider of self-directed physical inventory management solutions to the retail industry.
Hart has distinguished itself in the market by offering retailers high ROI, self-managed
inventory solutions. This acquisition enables us to expand our presence in the retail
market segment by offering additional inventory management services as part of Zebra’s
dedicated retail solutions. It adds software as a service (SaaS) to Zebra’s product portfolio.
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 business to Cargotec Corporation.
Sale of proveo AG – On August 3, 2011, we entered into a Share Purchase Agreement
with F Two NV and sold all of our interest in Zebra Enterprise Solutions GmbH (formerly
proveo AG) business. proveo AG provided integrated aviation solutions to help optimize
motorized ground support equipment and other mobile assets in airport terminal areas.
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 2013, 2012, 2011 and 2010. With the sale of
Navis, we integrated the remaining ZES business into our Location Solutions operations.
Continuing Operations
Commencing with the acquisition of Enterprise in October 2014, our continuing
operations consist of two segments – (1) Enterprise, comprised of our mobile computing,
data capture, and WLAN products and (2) Legacy Zebra, comprised of barcode and card
printing, location and motion sensing and supplies products.
Enterprise
Mobile Computing: We design, manufacture and sell rugged and enterprise-grade mobile
computing products in a variety of specialized form factors and features for specific
enterprise applications. These specialized computers are used in industrial applications
including inventory management in warehouses and distribution centers; field mobility
applications including field service, post and parcel and direct store delivery; and
customer facing applications including mobile point of sale and staff communication. Our
products incorporate both Android and Microsoft operating systems and support local-
and wide-area voice and data communications. Our mobile computing products often
incorporate barcode scanning, global position system (GPS) and RFID features. We also
provide related accessories and software applications.
Data Capture: We produce a wide variety of barcode scanners, RFID readers and image
capture devices. Our portfolio of barcode scanning products includes fixed, handheld and
4
Wireless LAN: We sell WLAN switches, controllers and access points to provide wireless
broadband and WLAN capabilities primarily to customers in retail, transportation and
logistics and hospitality enterprises. We optimize the architecture of these solutions to
minimize the resources required for installation and maintenance.
Legacy Zebra
Barcode and Card Printing: We design our printers to produce high-quality labels,
wristbands, tickets, receipts, and plastic cards on demand. Our customers use our
printers in a wide range of applications, including routing and tracking, patient safety,
transaction processing, personal identification and product 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 identification cards and drivers licenses, healthcare IDs),
access control and financial cards (credit, debit and ATM cards) by financial institutions.
Our RFID printer/encoders are used to print and encode passive RFID labels. We also
provide related accessories and software to our data capture products.
Location and Motion Sensing: Zebra offers a range of solutions and services that provide
visibility into the location and movement of a business’ personnel and assets with
real-time locating systems. Zebra’s Location Solutions incorporates active RFID and
other tracking technologies with software and services that offer benefits to users over
systems using other technologies. The benefits of Zebra’s active RFID hardware include
delivering high levels of location accuracy and the ability to be deployed indoors. Our
software and hardware locate, track, manage, and optimize the utilization of high-value
assets, equipment, and people. Zebra provides substantially all elements of the location
solution, including asset tags, call tags, sensors, exciters and application software. The
complementary technologies in our location solutions work seamlessly together to
provide customers with asset visibility, tracking, and motion monitoring.
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. Sports teams are increasingly using our Zebra
MotionWorks sports solution to track the movement of players in real time on the field of
play and in practice.
Supplies: We produce stock and customized thermal labels, wristbands, plastic cards,
card laminates and thermal transfer ribbons. Zebra supports its printing products, its
resellers and its end users with an extensive line of superior quality, high-performance
supplies optimized to a particular end user’s needs. Zebra promotes the use of genuine
Zebra branded supplies with its printing equipment. Zebra also provides a family of self-
laminating wristbands for use in laser printers. These wristbands are marketed under
the LaserBand name. Zebra operates supplies production facilities located in the United
States and Western Europe. We supplement our in-house production capabilities with
those of third-party manufacturers to offer Genuine Zebra supplies, principally in Asia.
Service and Software
Each of our segments – Enterprise and Legacy Zebra – sells services and software that
complement our hardware products described above.
Service: We provide maintenance, product support and repair services at our repair centers
around the globe. Where appropriate, we also work with our network of resellers who
may provide maintenance service, either directly or through independent service agents,
to extend the geographic reach of maintenance and repair services. We also perform
network integration, network and device management, as well as mobility consulting.
Our expanded product line and services operations, which we acquired in the Enterprise
Acquisition, increases our capability to provide services to our global customer base.
Software: Zebra’s software products enhance our customers’ ability to integrate,
operate and manage their Zebra devices as well as gain visibility into their increasingly
complex value chains, all to achieve improved management over their assets, people and
transactions. We offer design and integration software, which is specifically designed
to optimize the performance of Zebra label and card printers. We also offer a portfolio
of software applications, utilities and platforms to enable optimal use of our devices,
to assist in application development and integration, and to allow the management of
devices and applications. Software for mobile computers, data capture devices and
WLAN products include support for native operating systems, HTML5 application
development frameworks, push-to-talk (“PTT”) technology, voice-over-IP (“VoIP”),
device management, and custom applications. We use connectivity, mobility and IoT
technologies delivered via packaged, on-premise software products, as well as through
Software as a Service (“SaaS”), Platform as a Service (“PaaS”), and Hardware as a
Service (“HaaS”) models. Our software products include Zatar, a cloud-based service
that makes it easy for businesses to adopt and use an IoT solution in their operations.
of our products are deployed in applications that are focused on rugged or semi-rugged
environments, with specialized product performance requirements. These characteristics
provide high switching barriers for our products.
Depth and breadth of products and services for delivering end-to-end solutions
We are able to deliver full end-to-end solutions across targeted industries, with a broad
portfolio of products and our wide network of business and reseller partners.
Strong brands with multiple growth opportunities
We have strong brands in our relevant markets, and are well positioned to benefit from
attractive global and secular trends in, including, mobility computing, data sensing,
tracking and capturing devices, secure wireless networks, cloud-based applications and
edge sensor analytics.
Highly diversified business mix
We are highly diversified across business segments, end markets, geographies,
customers and suppliers. Additionally, we have strong recurring business in services and
supplies driven by an extensive installed worldwide base of products.
Global reach
We sell to customers in approximately 100 countries around the world. This global
presence gives us the capability to supply our customers with products, solutions and
services no matter the location of their operations.
Scale advantages
We believe the size and scope of our operations, including product development,
distribution and procurement capabilities, give us advantages over our competitors. We
believe we have the largest installed base of products, compared with other companies
in our industry. These characteristics allow us to achieve economies of scale and develop
industry-leading solutions.
Zebra connectivity solutions include support for Ethernet, 802.11a/b/g/n, and Bluetooth®.
We support integration with multiple device operating systems, such as Android™, iOS,
Linux, Microsoft® Windows® and UNIX. We have programs supporting the development
of application software from independent third parties, as well as the integration of Zebra
devices in systems developed by independent software vendors (ISVs).
Our Business Strategy
Our business strategy is to deliver compelling value propositions and solutions, including
IoT solutions, to our customers in Enterprise Asset Intelligence by leveraging and
expanding our engineering, product development and distribution capabilities and best-in-
class offerings. The following are key elements to our strategy for achieving this objective:
Our Competitive Strengths
The following are our core competitive strengths that we believe enable us to
differentiate ourselves from our competitors:
An industry leader focused solely on Enterprise Asset Intelligence
We focus on seven key technologies of Enterprise Asset Intelligence: (1) mobile
computing, (2) barcode and card printing, (3) data capture, (4) RFID, (5) location and
motion sensing; (6) cloud-based device management, and (7) WLAN. We believe we are
the only pure play Enterprise Asset Intelligence supplier in the world.
Capitalize on attractive longer-term secular growth trends
We intend to fuel long-term growth by capitalizing on transformational secular trends,
particularly in mobility, the cloud and IoT. We expect to extend our leadership in mobile
computing by delivering innovative solutions that increase productivity and revenues
for customers through untethering their workforce. We intend to drive new business
models and revenue streams for customers through delivering solutions that seamlessly
integrate smart devices with cloud-based software applications. Finally, we will capitalize
on the accelerating IoT trend by providing solutions that take advantage of proliferation of
data from smart connected devices to drive increased visibility into customer operations.
High entry and switching barriers
We have deep and long-standing relationships with end customers for our products and
services, and with our channel partners on a global basis. We believe a significant portion
Build upon and extend our leadership position in Enterprise Asset Intelligence
We intend to continue to deliver best-in-class offerings in core barcode, RFID and mobile
computing and data capture solutions and use our product, services and distribution
5
capabilities to offer an expanded set of solutions that provide increased visibility into
customer operations. We intend to accelerate penetration of the industries and geographies
we serve through the continued development of compelling Enterprise Asset Intelligence
solutions, and by taking advantage of global channel relationships and industry leadership.
Provide customers with highly differentiated solutions that deliver compelling value
We intend to develop and use our knowledge and expertise of our customers’ industries
and account relationships to drive customer-focused innovations in product and service
offerings. Our sales and product development teams focus on delivering integrated end-
to-end solutions that take advantage of our full suite of product and service offerings. We
aim to provide differentiated solutions by:
• strengthening “premiumness” against hardware-centric competitors through
increasing “beyond the box” value propositions (e.g., software, services, supplies);
• expanding into underpenetrated markets by delivering disruptive XaaS business model
solutions (e.g., Hart Systems hardware / software-as-a-service physical inventory
solution); and
• investing in a broader set of technologies that help customers unlock and create new
value through gaining greater real-time visibility and insights into their operations.
Leverage unmatched scale and scope advantages to accelerate share gain
We aim to capture a significant share of the Enterprise Asset Intelligence industry
through leveraging transformative scale advantage and by outdistancing competition
through a broad portfolio of best-in-class products, research and development scale,
go-to-market reach and global footprint.
Increase speed and trajectory of expanding profitability
We intend to improve profit margins through operational excellence, cost reductions
and operating efficiencies derived from business process improvement activities and
integration of Enterprise. We also intend to increase profitability through delivering
innovative end-to-end solutions that provide significant value to customers.
Competition
We operate in a highly competitive environment. Competitive pressures on companies
worldwide, growth in the number of mobile workers globally, industry consolidation and
trends in technology are some of the factors that are creating business opportunities for
established and new competitors.
Key competitive factors include the design, breadth and quality of products and services,
product performance, product and service availability, warranty coverage, brand
recognition, company relationships with customers and go-to-market channel partners and
company reputation. We believe Zebra competes effectively with respect to these factors.
Many companies are engaged in the design, manufacture and marketing of mobile
computing devices, barcode and card printers, data capture solutions, WLAN and
location systems.
Mobile Computing
Competitors in mobile computing include companies that have historically served
enterprises with ruggedized devices. We also compete with companies engaged in the
6
design, manufacture and marketing of devices for broader consumer and commercial
applications, including notebook computers and tablets, smart phones, cordless phones,
and cellular/WLAN/wired infrastructure equipment.
We face competition in our mobile computing products and WLAN products and solutions
from many companies, including the following (listed in alphabetical order): Apple, Aruba,
Cisco, Bluebird, Datalogic, HP, Honeywell, Panasonic, Ruckus and Samsung.
Data Capture
Competition is robust among suppliers of data capture products. Each company seeks to
provide a broad portfolio of barcode scanning products that are suitable for the majority
of global market needs. In addition, we also compete against several smaller segment-
focused competitors, which focus on limited product subsets or specific regional
strengths. These competitors include Code Corporation, Fujian Newland, and Opticon.
We provide competitive scanning products based distinct technologies – flying spot
lasers, area (2D) imagers, and linear (1D) imagers. This diversity is required to meet a
variety of customer needs.
We also offer a broad portfolio of both fixed and hand-held UHF (Ultra High Frequency)
RFID readers, which are based on the Electronic Product Code (“EPC”) standard.
Competition in this product segment remains highly fragmented.
Barcode and Card Printing
We consider our direct competition in printing to be producers of on-demand thermal
transfer and direct thermal label printing systems, RFID printer/encoders, and mobile
printers. 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 engaged in the design, manufacture and marketing of printing systems that use
alternative technologies, such as ink-jet and laser printing, as well as card printers based
on 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 we are. In addition, service
bureaus, which provide centralized services, compete for end-user business and provide
an alternative to the purchase of our card printing equipment and supplies.
We face competition in our printing products 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; Dymo, a Newell Rubbermaid Company; Epson; Evolis; Fargo
Electronics, a unit of HID Global; Godex; Hewlett-Packard; Hitachi; Honeywell International
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.
Location Solutions
We compete with a diverse group of companies marketing location solutions that are
primarily based on active RFID technologies. These competitors include Aeroscout,
Ekahau, Ubisense, Nebusens, Prozone, ZXY Sport Tracking, Sportsvision, IsoLynx,
GE Healthcare, Versus Technology, Mojix, Impinj, Alien Technology, ThingMagic,
TeleTracking Technologies, ARISTA, Centrak, Plus Location Systems and STATS LLC.
Supplies
The supplies business is highly fragmented and competition is comprised of numerous
competitors of various sizes depending on the geographic area. We focus our supplies
business primarily on providing differentiated products, which have unique performance
characteristics, backed by reliable service.
Customers
Zebra’s customers are diversified across a wide variety of industries, including retail,
manufacturing, transportation and logistics, and healthcare industries. Over the past
three years, we had three customers that each accounted for 10% or more of its sales. All
three of these customers are distributors and not end users. No end customers account
for 10% or more of net sales during these years.
Customer A
Customer B
Customer C
Year Ended December 31,
2014
17.1%
12.2%
10.5%
2013
16.8%
13.1%
12.3%
2012
20.4%
11.4%
10.3%
Sales and Marketing
Sales. We sell our products and solutions primarily through distributors (two-tier
distribution), VARs, independent software vendors, direct marketers, and original
equipment manufacturers (“OEMs”). We also sell our products directly to a select number
of named customer accounts through our in-house sales force. Distributors purchase,
stock and sell a variety of AIDC components from different manufacturers and sell to
VARs, thereby increasing the distribution of our products. VARs customize systems for
end-user applications using their systems and application integration expertise. Some
OEMs resell the Zebra-manufactured products under their own brands as part of their own
product offering. VARs, OEMs and systems integrators provide customers with a variety
of AIDC hardware, accessories, application software, and systems integration expertise.
Because these sales channels provide specific software, configuration, installation,
integration and support services to end users within various industry segments, these
relationships allow us to reach customers around the world. We experience a minor
amount of seasonality in sales, depending on the geographic region and industry served.
We believe that the breadth of our distributor, VAR and OEM channel network, both
in terms of variety of channel and extent of geographic reach, enhances our ability to
compete and to effectively offer our solutions to a greater number of end users.
Marketing. Our marketing function aligns closely with sales and product management
functions to deliver solutions that address the business needs of our customers and
partners. Our marketing operations encompass global corporate marketing, field marketing,
solutions marketing, product marketing, industry marketing, business intelligence, global
demand center and channel marketing functions. Our corporate marketing function
manages our global Zebra brand, corporate public relations, industry analyst relations,
internal communications and crisis communications. Field marketing encompasses regional
demand generation, channel program management and marketing and sales enablement.
Our solutions marketing function includes product and industry marketing. Business
intelligence focuses on market analysis, positioning and competitive analysis. Our global
demand center leads content development and digital marketing, including our corporate
website and social media. Our global channel team executes the corporate go-to-market
strategy by building partner loyalty and attracting emerging partners.
Manufacturing and Outsourcing
Final assembly of our hardware products is performed by third-party electronics
manufacturers. The manufacturing facility of our printers is located in China. Our mobile
computing and data capture products are primarily produced in facilities located in
Brazil, Israel, Mexico and China. We also use the services of joint design manufacturers
(JDMs) for certain products. These manufacturers produce our products 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 components. The
manufacturers purchase the components and subassemblies used in the production
of our products. The majority of our products are shipped to our regional distribution
centers. A portion of products are reconfigured at our 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
procurement regulations and various international trade agreements, and remain eligible
for sale to the United States government.
Research and Development
Zebra devotes significant resources developing new innovative solutions for our target
markets and ensuring that our products and services maintain high levels of reliability and
value to our customers. Research and development expenditures for 2014, 2013 and 2012
were $151.1 million, $91.1 million and $87.4 million, respectively, or 9.0% of net sales for
2014, and 8.8% of net sales in each of 2013 and 2012. Following the Acquisition, Zebra has
more than 1,700 product development engineers worldwide focused on strengthening and
broadening the already extensive product platform of the combined business.
Our Technology
Zebra’s mobile computing products incorporate a wide array of advanced technologies
and sensors in rugged, ergonomic enclosures to meet the needs of specific use cases.
These devices couple industry-standard operating systems with specialized hardware
and software features to satisfy a customer’s mission-critical applications. Purpose-built
rugged housings ensure reliable operations, surviving years of rough handling and harsh
environments. Specialized features such as advanced data capture technologies, voice
and video collaboration tools and advanced battery technologies enable our customers to
work more efficiently and better serve their customers. A broad portfolio of accessories
further tailors mobile computers to meet a wide variety of enterprise needs. Zebra
mobile computers are offered with software tools and services that support application
development, device configuration and field support to facilitate smooth and rapid
deployment and ensure maximum customer return on investment.
Zebra’s advanced data capture products allow the rapid and accurate capture of business
critical information simply, quickly, and accurately – enabling critical visibility into
business processes and providing key metrics for enterprise operations. These products
include barcode scanners in a variety of form factors, including handheld scanners,
presentation scanners, and standalone engines designed for integration into third-party
7
devices. These scanners incorporate a variety of technologies – area imagers, linear
imagers, and lasers – to read linear and two-dimensional barcodes. They are used in a
broad range of applications, ranging from supermarket checkout to industrial warehouse
optimization to patient management in hospitals. The design of these products reflects
the diverse needs of these markets, with different ergonomics, multiple communication
protocols, and varying levels of ruggedness.
Zebra’s RFID readers use passive ultra-high frequency (UHF) to provide high speed,
non-line of sight data capture, reading data from hundreds or thousands of RFID tags
in near real time. Using the EPC (Electronic Product Code) standard, our customers
take advantage of RFID technology across multiple industries to track high-value
assets, monitor shipments, and drive increased retail sales though improved inventory
accuracy. Zebra also offers mobile computers that support high frequency (HF) near-field
communications (NFC), and low frequency (LF) radio technologies.
Zebra’s WLAN products provide the wireless backbone throughout an enterprise. Built
upon industry standard Wi-Fi protocols, our products are differentiated by massive
scalability, enhanced capacity controls, site survivability, comprehensive security and
location-based services for enterprises. Zebra’s WiNG 5 technology enables geographically
distributed enterprises to rapidly deploy controller-less WLAN solutions at multiple branch
locations for corporate and guest access, all managed centrally. Integrated network, RF
management, and application services at the edge allow an enterprise to prioritize mission
critical or latency sensitive traffic like voice and video and provide proactive assurance for
the wireless network. Network security brings a comprehensive threat library to protect
the network from a broad spectrum of intruders. Device management protocols allow a
single network infrastructure to onboard mobile users, campus and remote employees,
authorized visitors and guest users bringing their own devices.
All Zebra printers and print engines incorporate thermal printing technology. This
technology creates an image by heating certain pixels of an electrical printhead to
selectively image a ribbon or heat-sensitive substrate. Thermal printing benefits
applications requiring simple and reliable operations, yet it is flexible enough to support
a wide range of specialty label materials and associated inks. Our dye-sublimation
thermal card printers produce full-color, photographic quality images that are well-suited
for driver’s licenses, access and identification cards, transaction cards, and on-demand
photographs. Our printers also incorporate RFID technology that can encode data into
passive RFID transponders embedded in a label, card, or wristband.
Zebra’s printers integrate company-designed mechanisms, electrical systems, and
firmware. Enclosures of metal or high-impact plastic ensure the durability of our printers.
Special mechanisms optimize handling of labels, ribbons, and plastic cards. Fast, high-
current electrical systems provide consistent image quality. Firmware supports serial,
parallel, Ethernet, USB, Bluetooth, or 802.11 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.
Our Real Time Locating System (“RTLS”) solutions, which use active RFID technologies,
extend Zebra’s reach by employing technologically advanced hardware and software
solutions to locate, track, manage and optimize high-value assets, equipment and people.
8
We offer a range of scalable RTLS technologies that generate accurate, on-demand
information about the physical location and status of high-valued assets. Customers
benefit by utilizing the choice or combination of asset tracking products that can be
“application matched” based on ISO/IEC 24730-2, Cisco CCX Wi-Fi, precision GPS, and
ultra wideband (UWB) technologies. In addition, we offer a selection of RTLS infrastructure
products that receive tag transmissions and provide location and motion calculations,
database and system management functions and asset visibility. The flexible infrastructure
supports large tag populations and coverage areas that can range from small to large.
Zebra’s supplies business includes labels, receipts, ribbons, plastic cards and wristbands
suitable for use with Zebra’s printers, and also wristbands which can be imaged in most
commercial laser printers. Our wristbands incorporate multi-layer form technology to
ensure trouble-free printing, wearer comfort, and reliable barcode reading, even when
exposed to harsh chemical environments. Zebra offers many thermal label, card, and
receipt materials, and matching ribbons, for diverse applications that may require chemical
resistance, temperature extremes, abrasion, exceptional image quality, or long life.
Intellectual Property
Zebra relies on a combination of trade secrets, patents, trademarks, copyrights and
contractual rights to establish and protect its innovations, and holds a large portfolio of
U.S. and foreign registered intellectual property rights. As of December 31, 2014, such
portfolio consisted of more than 800 trademark registrations, 500 trademark applications,
3,100 patents and 1,100 patent applications.
We believe that our intellectual property will continue to provide us with a competitive
advantage in our core product areas as well as provide leverage for future technologies.
We also believe that we are not dependent upon any single patent or select group of
patents. Our success depends more upon our extensive know-how, innovative culture,
technical leadership and marketing abilities. Although we do not rely only on patents
or other intellectual property rights to protect or establish our market position; we will
enforce our intellectual property rights when and where appropriate.
Employees
As of January 31, 2015, Zebra employed approximately 6,800 persons, of which 740 were
corporate employees. Some portions of our business, primarily in Europe and China, are
subject to labor laws that differ significantly from those in the United States. In Europe, for
example, it is common for a works council to represent employees when discussing matters
such as compensation, benefits, restructurings and layoffs. We consider our relations with
our employees to be very good.
Regulatory Matters
Wireless Regulatory Matters
Our business is subject to certain wireless regulatory matters.
The use of wireless voice, data and video communications systems requires radio
spectrum, which is regulated by government agencies throughout the world. In the U.S.,
the Federal Communications Commission (“FCC”) and the National Telecommunications
and Information Administration (“NTIA”) regulate spectrum use by non-federal entities
and federal entities, respectively. Similarly, countries around the world have one or more
regulatory bodies that define and implement the rules for use of the radio spectrum,
pursuant to their respective national laws and international coordination under the
International Telecommunications Union. We manufacture and market products in
spectrum bands already made available by regulatory bodies. These include voice and
data infrastructure, mobile radios and portable or hand held devices. Consequently,
our results of operations could be positively or negatively affected by the rules and
regulations adopted from time to time by the FCC, NTIA or regulatory agencies in
other countries. Our products operate both on licensed and unlicensed spectrum. The
availability of additional radio spectrum may provide new business opportunities, and
consequently, the loss of available radio spectrum may result in the loss of business
opportunities. Regulatory changes in current spectrum bands may also provide
opportunities or may require modifications to some products so they can continue to be
manufactured and marketed.
Other Regulatory Matters
Some of our operations use substances regulated under various federal, state, local and
international laws governing the environment and worker health and safety, including those
governing the discharge of pollutants into the ground, air and water, the management
and disposal of hazardous substances and wastes and the cleanup of contaminated sites.
Certain products are subject to various federal, state, local and international laws governing
chemical substances in electronic products. During 2014, compliance with U.S. federal, state
and local, and foreign laws regulating the discharge of materials into the environment, or
otherwise relating to the protection of the environment did not have a material effect on our
business or results of operations.
Contact Information
Zebra Technologies is a Delaware corporation. Our principal offices are located at 475 Half
Day Road, Suite 500, Lincolnshire, Illinois 60069. Our main telephone number is +1 (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. During the second quarter of 2015, our principal offices will move
to Three Overlook Point, Lincolnshire, Illinois 60069.
Additional Information
For financial information regarding Zebra, see Zebra’s Consolidated Financial Statements
and the related Notes, which are included in the 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.
We have organized the risk factors into three sections: (1) Risks related to our business
generally, (2) Risks related to the Acquisition and Integration of Enterprise, and (3) Risks
related to the Indebtedness.
Risks related to our business
Zebra has substantial operations outside the United States and sells a significant portion of
its products internationally and purchases important components, including final products,
from foreign suppliers. Zebra has substantial operations outside of the United States
which create significant risks. In addition, Zebra sells a substantial amount of its products
to customers outside of 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 non-US production
and assembly operations for 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 the financial well-being of 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 on our products or cause Zebra to refrain from selling in
certain geographic territories;
• Staffing may be difficult and turnover higher at international operations;
• A government controlled exchange rate and limitations on the convertibility of
currencies, including the Chinese yuan;
• Transportation delays and customs related delays that may affect production and
distribution of Zebra’s products; and
• Effectively managing and overseeing operations that are distant and remote from
corporate headquarters may be difficult.
We also are subject to risks that our operations could be conducted by our employees,
contractors, representatives or agents in ways that violate the Foreign Corrupt Practices
Act, the U.K. Bribery Act or other similar anti-corruption laws. While we have policies and
procedures to comply with these laws, our employees, contractors, representatives and
agents may take actions that violate our policies. Any such violations could have a negative
impact on our business. Moreover, we face risks that our anti-corruption policies and
procedures may be violated by third-party sales representatives or other third-parties that
help sell our products or provide other solutions and services, because such representatives
or agents are not our employees and it may be more difficult to oversee their conduct.
9
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,
• Changing customer demands, and
• Changing security protocols.
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 mobile computing products, data capture
products, printers, WLAN products and solutions 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.
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.
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
the Acquisition and 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. The following factors could present difficulties to Zebra:
• Compliance with evolving laws and regulations in multiple international jurisdictions,
• Managing our distribution channel partners,
• Managing our contract manufacturing and supply chain,
10
• 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
• Increasing international operations.
Inability to consummate future acquisitions at appropriate prices could negatively impact
our growth rate and stock price. Zebra’s ability to grow revenues, earnings and cash
flow depends in part upon our ability to identify and successfully acquire and integrate
businesses at appropriate prices and to realize anticipated synergies. Acquisitions can be
difficult to identify and consummate due to competition among prospective buyers and
the need to satisfy applicable closing conditions and obtain antitrust and other regulatory
approval on acceptable terms.
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 our 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 the further development of our existing business.
The expected benefits of any acquisition may not be realized.
Acquisitions also may involve a number of risks, including:
• Difficulties and uncertainties in retaining the customers or other business
relationships from the acquired entities,
• The loss of key employees of acquired entities,
• The ability of acquired entities to fulfill their customers’ obligations,
• The discovery of unanticipated issues or liabilities,
• Pre-closing and post-closing acquisition-related earnings charges could adversely
impact operating results in any given period, and the impact may be substantially
different from period to period,
• The failure of acquired entities to meet or exceed expected returns could result in
impairment of goodwill or intangible assets acquired, and
• The acquired entities’ ability to implement internal controls and accounting systems
necessary 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.
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’s 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 the intellectual property rights of parties in such technologies can be
uncertain. As a result, Zebra’s products involving such technologies may have higher risk
of claims of infringement of the intellectual proprietary rights of third parties.
A cyber-attack that breaches our external perimeter may lead to a material disruption
of our core business systems and/or lead to the loss or corruption of confidential
business information that could result in an adverse business impact, as well as, possible
damage to the Zebra brand. This could also lead to a public disclosure or theft of private
intellectual property and a possible loss of customer confidence.
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. Zebra uses copyrights, patents,
trademarks, trade secrets and contracts 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. Additionally, the intellectual
property rights Zebra obtains may not be sufficient to provide it with a competitive
advantage and may be successfully challenged, invalidated, circumvented, or infringed.
In any infringement litigation that Zebra may undertake to protect its intellectual property,
any award of monetary damages may be unlikely or very difficult to obtain, and any such
award Zebra may receive may not be commercially valuable. Furthermore, efforts to
enforce or protect Zebra’s proprietary rights may be ineffective and could result in the
invalidation or narrowing of the scope of Zebra’s intellectual property and its incurring
substantial litigation costs, and, because of the substantial amount of discovery required
in connection with intellectual property litigation, there is a risk that some of Zebra’s
confidential information could be compromised by disclosure during this type of litigation.
Some aspects of Zebra’s business and services also rely on technologies, software
and content developed by or licensed from third parties, and Zebra may not be able to
maintain its relationships with such third parties or enter into similar relationships in the
future on reasonable terms or at all.
We currently use third party and/or open source operating systems and associated
application ecosystems in certain of our mobile computing products. Such parties
ceasing continued development of the operating system or restricting our access to such
operating system could adversely impact our business and financial results. We currently
use third-party and/or open source operating systems and associated application
ecosystems in certain of our mobile computing products. As a result, we are dependent
on third-parties’ continued development of operating systems, software application
ecosystem infrastructures and such third-parties’ approval of our implementations of
their operating system and associated applications. If such parties cease to continue
development or support of such operating systems or restrict our access to such
operating systems, we would be required to change our strategy for such devices. As a
result, our financial results could be negatively impacted because a resulting shift away
from the operating systems we currently use and the associated applications ecosystem
could be costly and difficult. A strategy shift could increase the burden of development
on Zebra and potentially create a gap in our portfolio for a period of time, which could
competitively disadvantage Zebra.
Cybersecurity incidents could disrupt business operations. Like many companies, Zebra
continually strives to meet industry information security standards relevant to our
business. We regularly perform vulnerability assessments, remediate vulnerabilities,
review log/access, perform system maintenance, manage network perimeter protection
and implement and manage disaster recovery testing.
While we have experienced, and expect to continue to experience, these types of threats
and incidents, there have been no material incidents incurred to-date at Zebra. If Zebra’s
core business operations, or that of one of our third-party service providers, were to be
breached, this could affect the confidentiality, integrity and availability of our systems
and data. While we continue to perform security due diligence, there is always the
possibility of a significant breach effecting the confidentiality, integrity and availability of
our systems and/or data.
Zebra products that are deployed in customer environments also have the possibility of
being breached, which could result in damage to a customer’s confidentiality, integrity
and availability of the customer’s data and systems. It is possible that such a breach
could result in delays in, or loss of market acceptance of, Zebra’s products and services;
diversion of our resources; injury to our reputation; increase service and warranty
expenses and payment of damages.
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 product base, a design or manufacturing defect involving this large
installed product base could result in product recalls or customer service costs that could
have material adverse effects on Zebra’s financial results.
Defects or errors in Zebra’s software products could harm its reputation, result in significant
cost to Zebra and impair Zebra’s ability to market such products. Zebra’s software may
contain undetected errors, defects or bugs. Although Zebra has not suffered significant
harm from any errors, defects or bugs to date, we may discover significant errors, defects
or bugs in the future that we may not be able to correct or correct in a timely manner. It is
possible that errors, defects or bugs will be found in Zebra’s existing or future software
products and related services with the possible results of delays in, or loss of market
acceptance of, Zebra’s products and services, diversion of our resources, injury to our
reputation, increased service and warranty expenses and payment of damages.
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. Any disruption
11
in the service of senior management or our ability to attract and retain key personnel may
have a material adverse effect on our business and results of operations.
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. Future changes in tax law in various jurisdictions around the world and
income tax holidays could have a material impact on Zebra’s effective tax rate, foreign
rate differential, future income tax expense and cash flows.
Forecasting our estimated annual effective tax rate is complex and subject to uncertainty,
and there may be material differences between our forecasted and actual tax rates.
Forecasts of our income tax position and effective tax rate are complex, subject to
uncertainty and periodic updates because our income tax position for each year combines
the effects of a mix of profits earned and losses incurred by us in various tax jurisdictions
with a broad range of income tax rates, as well as changes in the valuation of deferred tax
assets and liabilities, the impact of various accounting rules and changes to these rules
and tax laws, the results of examinations by various tax authorities, and the impact of any
acquisition, business combination or other reorganization or financing transaction.
As a multinational corporation, we conduct our business in many countries and are
subject to taxation in many jurisdictions. The taxation of our business is subject to
the application of multiple and sometimes conflicting tax laws and regulations as well
as multinational tax conventions. Our effective tax rate is highly dependent upon the
geographic distribution of our worldwide earnings or losses, the tax regulations and tax
holidays in each geographic region, the availability of tax credits and carry-forwards,
and the effectiveness of our tax planning strategies. The application of tax laws and
regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax
laws themselves are subject to change as a result of changes in fiscal policy, changes
in legislation, and the evolution of regulations and court rulings. Consequently, taxing
authorities may impose tax assessments or judgments against us that could materially
impact our tax liability and/or our effective income 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. Financial markets throughout
the world experienced extreme disruption from 2008 through 2009, resulting in
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
12
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 manufacturers 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 cash flows.
A natural disaster may cause supply disruptions that could adversely affect Zebra’s
business and results of operations. As 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’s 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.
Zebra is exposed to risks under large, multi-year system and solutions and services
contracts that may negatively impact its business. Zebra enters into large, multi-year
system and solutions and services contracts with our customers. This exposes Zebra
to risks, including among others: (i) technological risks, especially when the contracts
involve new technology; (ii) financial risks, including the estimates inherent in projecting
costs associated with large, long-term contracts and the related impact on operating
results; (iii) cyber security risk, especially in managed services contracts with customers
that process personal data; and (iv) political risk. Recovery of front loaded capital
expenditures in long-term managed services contracts with customers is dependent on
the continued viability of such customers. The insolvency of customers could result in a
loss of anticipated future revenue attributable to that program or product, which could
have an adverse impact on Zebra’s profitability.
Zebra enters into fixed-price contracts that could subject it to losses in the event Zebra
fails to properly estimate its costs. Zebra enters into a number of firm fixed-price
contracts. If Zebra’s initial cost estimates are incorrect, Zebra can lose money on these
contracts. Because many of these contracts involve new technologies and applications,
require Zebra to engage subcontractors and can last multiple years, unforeseen events,
such as technological difficulties, fluctuations in the price of raw materials, problems with
Zebra’s subcontractors or suppliers and other cost overruns, can result in the contract
pricing becoming less favorable or even unprofitable to Zebra and have an adverse
impact on Zebra’s financial results. In addition, a significant increase in inflation rates
could have an adverse impact on the profitability of longer-term contracts.
Zebra utilizes the services of subcontractors to perform under many of its contracts and
the inability of its subcontractors to perform in a timely and compliant manner could
negatively impact Zebra’s performance obligations as the prime contractor. Zebra engages
subcontractors on many of its contracts and as Zebra expands its global solutions and
services business Zebra’s use of subcontractors has and will continue to increase.
Zebra’s subcontractors may further subcontract performance and may supply third-party
products and software. Zebra may have disputes with its subcontractors, including
disputes regarding the quality and timeliness of work performed by the subcontractor or
its subcontractors and the functionality, warranty and indemnities of products, software
and services supplied by Zebra’s subcontractor. Zebra is not always successful in passing
along customer requirements to its subcontractors, and thus in some cases may be
required to absorb contractual risks from its customers without corresponding back-to-
back coverage from Zebra’s subcontractor. Zebra’s subcontractors may not be able to
acquire or maintain the quality of the materials, components, subsystems and services
they supply, or secure preferred warranty and indemnity coverage from their suppliers
which might result in greater product returns, service problems, warranty claims and
costs and regulatory compliance issues and could harm Zebra’s business, financial
condition and results of operations.
Over the last several years we have outsourced portions of certain business operations
like repair, distribution and engineering services and may outsource additional business
operations which limits our control over these business operations and exposes us to
additional risk as a result of the actions of our outsource partners. As we outsource more of
our business operations we are not able to directly control these activities. Our outsource
partners may not prioritize our business over that of their other customers and they may
not meet our desired level of service, cost reductions or other metrics. In some cases their
actions may result in our being found to be in violation of laws or regulations like import
or export regulations. As many of our outsource partners operate outside of the U.S.,
our outsourcing activity exposes us to information security vulnerabilities and increases
our global risks. In addition, we are exposed to the financial viability of our outsource
partners. Once a business activity is outsourced we may be contractually prohibited from,
or may not practically be able to, bring such activity back within the Company or move
it to another outsource partner. The actions of our outsource partners could result in
reputational damage to us and could negatively impact our financial results.
Failure of Zebra’s suppliers, subcontractors, distributors, resellers and representatives to
use acceptable legal or ethical business practices could negatively impact our business.
It is Zebra’s policy to require its suppliers, subcontractors, distributors, resellers, and
third-party sales representatives (“TPSRs”) to operate in compliance with applicable
laws, rules and regulations regarding working conditions, employment practices,
environmental compliance, anti-corruption and trademark and copyright licensing.
However, Zebra does not control their labor and other business practices. If one of Zebra’s
suppliers, subcontractors, distributors, resellers, or TPSRs violates labor or other laws or
implements labor or other business practices that are regarded as unethical, the shipment
of finished products to Zebra could be interrupted, orders could be canceled, relationships
could be terminated and Zebra’s reputation could be damaged. If one of Zebra’s suppliers
or subcontractors fails to procure necessary license rights to trademarks, copyrights
or patents, legal action could be taken against Zebra that could impact the salability of
Zebra’s products and expose Zebra to financial obligations to a third-party. Any of these
events could have a negative impact on Zebra’s sales and results of operations.
Zebra relies on third-party dealers, distributors, and resellers to sell many of its products.
In addition to Zebra’s own sales force, Zebra offers its products through a variety of
third-party dealers, distributors and retailers. These third-parties may also market other
products that compete with Zebra’s products. Failure of one or more of Zebra’s dealers,
distributors or retailers to effectively promote Zebra’s products could affect its ability to
bring products to market and have a negative impact on its results of operations.
Some of these third-parties are smaller and more likely to be impacted by a significant
decrease in available credit that could result from a weakness in the financial markets. If
credit pressures or other financial difficulties result in insolvency for third-party dealers,
distributors or retailers and we are unable to successfully transition end-customers to
purchase our products from other third-parties or from Zebra directly, it may cause, and
in some cases has caused, a negative impact on our financial results.
Final assembly of certain of Zebra’s products is performed by third-party electronics
manufacturers. Zebra is dependent on these third-party electronics manufacturers as a
sole-source of supply for the manufacture of such products. A failure by such manufacturers
to provide manufacturing services to Zebra as Zebra requires, or any disruption in such
manufacturing services, may adversely affect Zebra’s business results. Because Zebra relies
on these third-party electronics manufacturers to manufacture its products, Zebra may incur
increased business continuity risks. Zebra is not able to exercise direct control over the
assembly or related operations of certain of its products. If these third party manufacturers
experience business difficulties or fail 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 such third parties continuing to manufacture Zebra’s products, Zebra will have no
other means of final assembly of certain of its 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 going forward.
Zebra’s future operating results depend on its ability to purchase a sufficient amount of
materials, parts and components, as well as services and software to meet the demands
of its customers and any disruption to its suppliers or significant increase in the price
of supplies could have a negative impact on its results of operations. Zebra’s ability to
meet customers’ demands depends, in part, on its ability to timely obtain an adequate
delivery of quality materials, parts and components, as well as services and software
from its suppliers. In addition, certain supplies are available only from a single source
or limited sources and Zebra may not be able to diversify sources in a timely manner.
If demand for Zebra’s products or services increases from its current expectations or if
suppliers are unable to meet Zebra’s demand for other reasons, including as a result of
natural disasters or financial issues, Zebra could experience an interruption in supplies
or a significant increase in the price of supplies that could have a negative impact on its
business. Zebra has experienced shortages in the past that have negatively impacted its
results of operations and may experience such shortages in the future. In addition, credit
13
constraints at Zebra’s suppliers could cause Zebra to accelerate payment of accounts
payable by Zebra, impacting Zebra’s cash flow.
In addition, Zebra’s current contractual arrangements with certain suppliers may be
cancelled or not extended by such suppliers and, therefore, not afford Zebra with sufficient
protection against a reduction or interruption in supplies. Moreover, in the event any of
these suppliers breach their contracts with Zebra, Zebra’s legal remedies associated with
such a breach may be insufficient to compensate Zebra for any damages it may suffer.
The unfavorable outcome of any pending or future litigation, arbitration or administrative
action could have a material adverse effect on Zebra’s financial condition or results
of operations. From time to time Zebra is made a party to litigation, arbitration or
administrative actions. Zebra’s financial results and reputation could be negatively
impacted by unfavorable outcomes to any pending or future litigation or administrative
actions, including those related to the Foreign Corrupt Practices Act, the U.K. Bribery Act
or other anti-corruption laws. There can be no assurances as to the favorable outcome of
any litigation or administrative proceedings. In addition, it can be very costly to defend
litigation or administrative proceedings and these costs could negatively impact Zebra’s
financial results.
It is important that Zebra is able to obtain many different types of insurance, and if
Zebra is not able to obtain insurance or exhausts its coverage Zebra is forced to retain
the risk. Zebra has many types of insurance coverage and is also self-insured for some
risks and obligations. While the cost and availability of most insurance is stable, there
are still certain types and levels of insurance that remain difficult to obtain, such as
professional liability insurance, which is expensive to obtain for the amount of coverage
often requested by certain customers. As Zebra grows its global solutions and services
business, Zebra is being asked to obtain higher amounts of professional liability
insurance, which could result in higher costs to do business. Natural disasters and certain
risks arising from securities claims, professional liability and public liability are potential
self-insured events that could negatively impact Zebra’s financial results. In addition,
while Zebra maintains insurance for certain risks, the amount of its insurance coverage
may not be adequate to cover all claims or liabilities, and Zebra may be forced to bear
substantial costs from an accident, incident or claim.
Zebra is subject to a wide range of product regulatory and safety, consumer, worker safety
and environmental laws. Zebra’s operations and the products it manufactures and/or sells
are subject to a wide range of product regulatory and safety, consumer, worker safety
and environmental laws and regulations. Compliance with such existing or future laws
and regulations could subject Zebra to future costs or liabilities, impact its production
capabilities, constrict its ability to sell, expand or acquire facilities, restrict what products
and services Zebra can offer, and generally impact its financial performance. Some of
these laws are environmental and relate to the use, disposal, remediation, emission and
discharge of, and exposure to hazardous substances. These laws often impose liability and
can require parties to fund remedial studies or actions regardless of fault. Zebra continues
to incur disposal costs and have ongoing remediation obligations. Environmental laws
have tended to become more stringent over time and any new obligations under these laws
could have a negative impact on Zebra’s operations or financial performance.
Laws focused on: the energy efficiency of electronic products and accessories; recycling
of both electronic products and packaging; reducing or eliminating certain hazardous
14
substances in electronic products; and the transportation of batteries continue to
expand significantly. Laws pertaining to accessibility features of electronic products,
standardization of connectors and power supplies, the transportation of lithium-ion
batteries and other aspects are also proliferating. There are also demanding and
rapidly changing laws around the globe related to issues such as product safety, radio
interference, radio frequency radiation exposure, medical related functionality, and
consumer and social mandates pertaining to use of wireless or electronic equipment.
These laws, and changes to these laws, could have a substantial impact on whether
Zebra can offer certain products, solutions and services, on product costs, and on what
capabilities and characteristics Zebra’s products or services can or must include.
These laws impact Zebra’s products and negatively affect Zebra’s ability to manufacture
and sell products competitively. Zebra expects these trends to continue. In addition,
Zebra anticipates that it will see increased demand to meet voluntary criteria related
to reduction or elimination of certain constituents from products, increasing energy
efficiency, and providing additional accessibility.
Risks Related to the Acquisition and Integration of the Enterprise Business
Zebra may be unable to effectively integrate Enterprise into its existing business. The
integration of Enterprise, which is significantly larger than Zebra’s business prior to the
Acquisition, into Zebra’s operations will be a significant undertaking and will require
significant attention from Zebra’s management. The Acquisition, with an approximate
enterprise value of $3.45 billion, is significantly larger than prior acquisitions Zebra
completed and significantly increased the size of Zebra’s operations, increased its
number of employees and operating facilities and expanded its geographic scope. There
can be no assurance that Zebra will be able to successfully integrate Enterprise, or if such
integration is successfully accomplished, that such integration will not be more costly
than presently contemplated. There can also be no assurance that Zebra can successfully
manage the combined business due to Zebra’s greatly increased size and scope. If Zebra
cannot successfully integrate and manage Enterprise within a reasonable time following
the Acquisition, Zebra may not be able to realize the potential and anticipated benefits
of the Acquisition, which could have a material adverse effect on its business, financial
condition, operating results, cash flows and growth prospects.
Zebra may be unable to realize the expected growth opportunities and cost savings from
the Acquisition. In connection with the integration of Enterprise into Zebra’s existing
operating structure, Zebra will seek to realize growth opportunities, along with cost
savings. Zebra currently expects to realize annual cost savings of approximately $150
million per year to be fully achieved by the end of 2016. The anticipated cost savings
are based upon assumptions about Zebra’s ability to implement integration measures
in a timely fashion and within certain cost parameters. Zebra’s ability to achieve the
planned cost synergies relies upon a significant number of factors, some of which may
be beyond its control. For example, Zebra may be unable to eliminate duplicative costs in
a timely fashion or at all. Zebra’s inability to realize anticipated cost savings, and revenue
enhancements from the Acquisition could have a material adverse effect on its business,
financial condition, operating results, cash flows and growth prospects.
The Acquisition could divert the attention of management. After completing the
Acquisition, Zebra entered new lines of business that it lacks experience managing.
Similarly, because Enterprise is significantly larger than Zebra’s business prior to the
Acquisition, Zebra will be required to manage new and larger lines of business, and
consequently the integration process will require significant attention from management,
which may divert management’s attention from Zebra’s other businesses. Management
may also have difficulty assimilating the corporate cultures, maintaining employee
morale and retaining key employees. These diversions, together with other difficulties
Zebra may have integrating Enterprise, could have a material adverse effect on Zebra’s
business, financial condition, operating results, cash flows and growth prospects.
Zebra may be unable to retain key employees who transferred as part of Enterprise.
Generally, employees of Enterprise are not contractually obligated to continue their
employment with Zebra. Zebra’s ability to successfully integrate and operate Enterprise
depends in part on the continued service of senior management and other key personnel
of Enterprise. Zebra can provide no assurance that it will be successful in retaining the
service of Enterprise’s senior managers and key employees, and the failure to do so could
have a material adverse effect on Zebra’s ability to integrate Enterprise.
Enterprise may have liabilities that are not known to Zebra. As part of the Acquisition,
Zebra assumed certain liabilities of Enterprise. There may be liabilities that Zebra failed
or were unable to discover in the course of performing due diligence investigations into
Enterprise. Any such liabilities, individually or in the aggregate, could have a material
adverse effect on Zebra’s business, financial condition, operating results, cash flows and
growth prospects.
The Acquisition may entitle certain customers of Enterprise to terminate their agreements
with it as a result of change of control provisions. Certain Enterprise customers may
be entitled to terminate certain of their agreements with Enterprise as a result of the
Acquisition. Zebra cannot avoid the possibility that some customers may exercise their
termination rights and opt to discontinue business with Enterprise as a result of the
Acquisition, which could have an adverse effect on Zebra’s expected revenues following
the Acquisition.
Moreover, some of Zebra’s existing customers may conclude that as a result of the
Acquisition they are overly reliant on a single provider. In such circumstance, Zebra’s
customers may engage its competitors or facilitate the emergence of new competitors
to diversify sourcing and service options, which could have an adverse effect on Zebra’s
expected revenues following the Acquisition.
Zebra relies on MSI to perform certain critical transition services and there can be no
assurance that those services will be performed timely and effectively or that Zebra can
replace those services prior to the expiration of the transition services agreement or
successfully develop its own operations going forward. Under the terms of the transition
services agreement that Zebra entered into with MSI in connection with the Acquisition,
MSI will provide Zebra with services critical for the operation and continuity of Zebra
operation of Enterprise for a period of twelve to twenty-four months (which may be
extended an additional six to twelve months upon Zebra’s request). Zebra is in the
process of transitioning these critical functions, which include primarily information
technology. Until Zebra transitions such functions, it will continue to rely on MSI for those
services. There can be no assurances that these services will be performed timely and
effectively or that Zebra will be able to successfully or timely transition such functions
away and assume responsibility over them. Significant disruption in these transition
services, or unanticipated costs related to these services, could materially and adversely
affect Zebra’s business, financial condition and results of operations. Additionally, if we
are unable to transition such services to Zebra in a timely fashion or without disruption
to Zebra’s operations, we could experience an adverse effect on our business, financial
condition and results of operations.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to document and test our
internal controls over financial reporting and to report on our assessment as to the
effectiveness of these controls. Any delays or difficulty in satisfying these requirements
or negative reports concerning our internal controls could adversely affect our future
results of operations and financial condition. These documentation and reporting
requirements apply to the portion of our business relating to the Enterprise as of Business
of December 31, 2015. Because of the timing, size and complexity of the Acquisition Zebra
has not completed its documentation and assessment of internal controls over financial
reporting related to Enterprise. We may discover areas of our internal controls that need
improvement, particularly with respect to Enterprise. We cannot be certain that any
remedial measures we take will ensure appropriate implementation and maintenance
of adequate internal controls over the financial reporting processes and reporting in the
future. We may incur significant additional costs in order to ensure the financial reporting
related to Enterprise complies with the requirements of the Sarbanes-Oxley Act of 2002
and its other public company requirements, which, in turn, would reduce our earnings.
Implementing such remedial measures may be complicated by the limited timeframe
in which to implement such measures, the possibility that implementation of such
measures may require a substantial amount of work and time by Zebra personnel, and
the challenge of migrating to a new ERP while implementing such remedial measures. In
addition, development of an adequate financial reporting system and the internal controls
for Enterprise to achieve compliance with the Sarbanes-Oxley Act of 2002 may increase
the time and costs necessary to complete integration of Enterprise or cause us to miss
our reporting obligations. To the extent the financial reporting function of Enterprise has
deficiencies in its internal controls, it may impact our internal controls.
Any failure to implement required new or improved controls, or difficulties encountered
in their implementation, could harm our operating results or cause us to fail to meet
our reporting obligations. If we are unable to conclude that we have effective internal
controls over financial reporting, or if our independent registered public accounting firm
is unable to provide us with an unqualified report regarding the effectiveness of our
internal controls over financial reporting, investors could lose confidence in the reliability
of our financial statements. Failure to comply with Section 404 of the Sarbanes-Oxley Act
of 2002 could potentially subject us to sanctions or investigations by the SEC, or other
regulatory authorities. In addition, failure to comply with our reporting obligations with
the SEC may cause an event of default to occur under the Debt Agreements, or similar
instruments governing any debt we or our subsidiaries incur in the future.
Risks Related to the Indebtedness
In connection with the Acquisition, Zebra has incurred substantial debt obligations,
which could adversely affect Zebra’s financial condition. Zebra’s total outstanding debt
for borrowed money in connection with the acquisition was approximately $3.25 billion
on October 27, 2014. In addition, subject to restrictions in the agreements governing
Zebra’s existing and future indebtedness, Zebra may incur additional indebtedness.
Zebra’s substantial level of indebtedness could have important consequences, including
the following:
15
• Zebra may experience difficulty in satisfying its obligations with respect to its existing
Consequently, these swap contracts introduce complexity to Zebra’s operating results.
indebtedness or future indebtedness, including the Indebtedness;
• Zebra’s ability to obtain additional financing for working capital, capital expenditures,
acquisitions or general corporate purposes may be impaired;
• Zebra plans to use a substantial portion of cash flow from operations to pay interest
and principal on the indebtedness, which may reduce the funds available to Zebra for
other purposes, such as acquisitions and capital expenditures;
• Zebra’s may be at a competitive disadvantage with reduced flexibility in planning for,
or responding to, changing conditions in the industry, including increased competition;
and
• Zebra may be more vulnerable to economic downturns and adverse developments in
the business.
Zebra expects to fund its expenses and to pay the principal and interest on the
Indebtedness from cash flow from operations. Zebra’s ability to meet its expenses and
to pay principal and interest on the Indebtedness when due thus depends on its future
performance, which will be affected by financial, business, economic and other factors.
Zebra will not be able to control many of these factors, such as economic conditions in
the markets where Zebra operates and pressure from competitors. Additionally, Zebra
has not previously undertaken substantial amounts of indebtedness. Historically, Zebra
has operated its business without incurring significant indebtedness for borrowed money
and has limited experience operating its business subject to the constraints imposed by
the Debt Agreements.
Despite the Indebtedness, Zebra may be able to incur substantially more indebtedness
and take other actions that could further exacerbate the risk associated with its substantial
indebtedness. Zebra incurred approximately $3.25 billion of indebtedness. In addition
to the financing activities, Zebra may be able to incur substantially more indebtedness
in the future, resulting in higher leverage. Subject to the limits contained in the Debt
Agreements, Zebra may incur additional indebtedness from time to time to finance
working capital, capital expenditures, investments or acquisitions, or for other purposes.
To the extent Zebra incurs additional indebtedness, the risks associated with its
substantial indebtedness will be exacerbated.
Zebra’s use of derivative financial instruments to reduce interest rate risk associated with
the Acquisition may result in added volatility in its quarterly operating results. Zebra
does not hold or issue derivative financial instruments for trading purposes. However,
Zebra does utilize derivative financial instruments to reduce interest rate risk associated
with the indebtedness. To manage variable interest rate risk, Zebra entered into
forward interest rate swap agreements, which will effectively convert a portion of the
Indebtedness into a fixed rate loan. Under generally accepted accounting principles, the
fair values of the swap contracts, which will either be amounts receivable from or payable
to counterparties, are reflected as either assets or liabilities on Zebra’s Consolidated
Balance Sheets. Zebra records its fair value change in our Consolidated Statements of
Earnings, as a component of “Other income (expense)”. The associated impact on Zebra’s
quarterly operating results is directly related to changes in prevailing interest rates. If
interest rates increase, Zebra would have a non-cash gain on the swaps, and vice versa.
16
Restrictive covenants in the Debt Agreements may limit Zebra’s current and future
operations, particularly its ability to respond to changes in its business or to pursue its
business strategies. The Debt Agreements contain, and instruments governing any future
indebtedness will contain, a number of restrictive covenants that impose significant
operating and financial restrictions, including restrictions on Zebra’s ability to take
actions that Zebra believes may be in its interest. Zebra expects these covenants will limit
its ability to:
• incur additional indebtedness or guarantees;
• pay dividends or make other distributions or repurchase or redeem its stock or prepay
or redeem certain indebtedness;
• sell or dispose of assets and issue capital stock of restricted subsidiaries;
• incur liens or enter into sale-lease-back transactions;
• enter into agreements restricting its subsidiaries’ ability to pay dividends;
• enter into transactions with affiliates;
• engage in new lines of business;
• consolidate, merge or enter into other fundamental changes;
• make loans, investments and/or acquisitions; and
• enter into amendments or modifications of certain material subordinated debt
agreements or organizational documents.
Additionally, the Term Loan entered into to fund a portion of the Acquisition will require
Zebra to maintain in certain circumstances compliance with a consolidated total secured
net leverage ratio. Zebra’s ability to comply with this ratio may be affected by events
beyond its control, and Zebra cannot assure you that Zebra will meet this ratio. The
restrictions could adversely affect Zebra’s ability to:
• finance operations;
• make needed capital expenditures;
• make strategic acquisitions or investments or enter into alliances;
• withstand a future downturn in our business or the economy in general;
• engage in business activities, including future opportunities, that may be in Zebra’s
interest; and
• plan for or react to market conditions or otherwise execute Zebra’s business strategies.
A breach of any of the covenants contained in the Debt Agreements (including an
inability to comply with the financial maintenance covenants) that is not remedied within
the applicable cure period, if any, would result in an event of default under the Debt
Agreements. If, when required, Zebra is unable to repay or refinance the Indebtedness or
amend the covenants contained in the Debt Agreements, or if a default otherwise occurs
that is not cured or waived, the lenders or holders of Zebra’s debt securities could elect to
declare all borrowings outstanding, together with accrued interest and other fees, to be
immediately due and payable or institute foreclosure proceedings against those assets
that secure the borrowings. Should the outstanding obligations be accelerated and
become due and payable because of any failure to comply with the applicable covenants
in the future, Zebra would be required to search for alternative measures to finance
current and ongoing obligations of its business. There can be no assurance that such
financing will be available on acceptable terms, if at all. Any of these scenarios could
adversely impact Zebra’s liquidity, financial condition and results of operations.
A significant amount of cash will be required to service the Indebtedness. Zebra’s ability
to make payments on and to refinance the Indebtedness and to fund working capital
needs, general corporate expenditures and planned capital expenditures will depend on
Zebra’s ability to generate a significant amount of cash in the future. This, to a certain
extent, is subject to general economic, financial, competitive, business, legislative,
regulatory and other factors that are beyond Zebra’s control.
If Zebra’s business does not generate sufficient cash flows from operations or if future
borrowings are not available to Zebra in an amount sufficient to enable Zebra to pay the
Indebtedness or to fund its other liquidity needs, Zebra may need to refinance all or a
portion of the Indebtedness on or before the maturity thereof, sell assets, reduce or delay
capital investments or seek to raise additional capital, any of which could have a material
adverse effect on Zebra’s operations. In addition, Zebra may not be able to effect any of
these actions, if necessary, on commercially reasonable terms or at all. Zebra’s ability to
restructure or refinance the Indebtedness will depend on the condition of the capital and
debt markets and its financial condition at such time. Any refinancing of the Indebtedness
could be at higher interest rates and may require Zebra to comply with more onerous
covenants, which could further restrict business operations. The terms of anticipated
or future debt instruments may limit or prevent Zebra from taking any of these actions.
In addition, any failure to make scheduled payments of interest and/or principal on
outstanding indebtedness would likely result in a reduction of Zebra’s credit rating, which
could harm its ability to access additional capital on commercially reasonable terms or at
all. Zebra’s inability to generate sufficient cash flow to satisfy its debt service obligations,
or to refinance or restructure its obligations on commercially reasonable terms or at all,
would have an adverse effect, which could be material, on Zebra’s business, financial
condition and results of operations, as well as on its ability to satisfy the obligations in
respect of the Indebtedness.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Zebra’s corporate headquarters are located in Lincolnshire, Illinois, a northern suburb
of Chicago. Zebra also operates manufacturing, production and warehousing facilities,
administrative, research and sales facilities in other U.S. locations and other countries.
As of December 31, 2014, Zebra owned 3 facilities located in: Holtsville, NY; Preston,
UK; and Mississauga, Ontario, Canada. As of December 31, 2014, we operated from
13 facilities for the purposes of manufacturing, production and warehousing, eight of
which were located in the United States and five were located in other countries. As of
December 31, 2014, the Company leased 88 facilities, 35 of which were located in the
United States and 53 were located in other countries.
We generally consider the productive capacity of the plants to be adequate and sufficient
for our requirements. The extent of utilization of each manufacturing facility varies
throughout the year.
Item 3. Legal Proceedings
See Note 15 in the Notes to the Consolidated Financial Statements included in this Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
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
2014 and 2013, as reported by The NASDAQ Stock Market.
2014
High
Low
2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$72.76
87.53
86.02
79.11
$52.61
60.06
72.10
58.95
Source: The NASDAQ Stock Market
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$47.24 $40.04
42.51
42.86
45.00
47.20
49.38
55.22
At February 13, 2015, the last reported price for the Class A Common Stock was $90.53
per share, and there were 187 registered stockholders of record for Zebra’s Class A
Common Stock. In addition, we had approximately 23,900 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
Zebra did not purchase shares of Zebra Class A Common Stock during the fourth quarter
of 2014.
On November 2011, Zebra’s Board authorized the purchase of up to an additional
3,000,000 shares under the purchase plan program and the maximum number of
shares that may yet be purchased under the program is 665,475. The November 2011
authorization does not have an expiration date.
17
Item 6. Selected Financial Data
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 from
continuing operations
Income (loss) from
discontinued operations,
net of tax
Year Ended December 31,
December 31,
2014(1)
2013
2012
2011
2010
2014(8)
2013
2012
2011
2010
$1,670,572
$1,038,159
$ 996,168
$ 983,488
$ 894,359
Cash and cash equivalents,
892,547
778,025
534,549
503,610
504,524
491,644
496,719
486,769
473,584
420,775
689,435(2)
343,346(4)
327,293(5)
304,733(6)
272,560(7)
88,590
160,264
164,351
182,036
148,215
16,629(3)
163,827
164,174
179,719
149,607
32,429
134,225
121,897
130,343
104,614
restricted cash, investments
and marketable securities
(current and long-term)
$ 418,335
$ 415,795
$ 394,075
$ 326,695
$ 258,598
Working capital(9)
Total assets
Long-term obligations(10)
Stockholders’ equity
716,203
635,049
5,568,851
1,119,812
3,356,718
15,477
615,649
967,748
14,229
475,899
899,006
11,515
455,143
878,864
10,191
1,039,908
958,658
857,002
776,925
730,032
(1) On October 27, 2014, we acquired Enterprise; Consolidated Statements of Earnings (loss) data include Enterprise’s
results from the acquisition date through December 31, 2014. Net Sales in 2014 include $476.0 million from
Enterprise operations.
(2) Includes acquisition and integration costs of $126.7 million and exit and restructuring costs of $6.0 million.
0
133
1,007
44,300
(2,836)
(3) Includes interest expense costs of $56.8 million.
Net income
$ 32,429
$ 134,358
$ 122,904
$ 174,643
$ 101,778
Basic earnings per share:
Income from
continuing operations
$
0.64
$
2.65
$
2.36
$
2.42
$
1.83
0.00
0.00
0.02
0.82
(0.05)
(4) Includes exit and restructuring costs of $5.9 million.
(5) Includes asset impairment charges of $9.1 million and exit and restructuring costs of $0.9 million.
(6) Includes exit and restructuring costs of $2.0 million.
(7) Includes litigation settlement proceeds received of $1.1 million and exit and restructuring costs of $2.3 million.
(8) The consolidated balance sheet data includes Enterprise data as of December 31, 2014. Total assets include
$2.336 billion of goodwill and $1.014 billion of intangibles, see Note 3 Business Combinations in the Notes to the
Consolidated Financial Statements included in this Form 10-K. Long term obligations include $3.2 billion of long
term debt, see Note 14 Long-term debt in the Notes to the Consolidated Financial Statements included in this
Form 10-K.
0.64
$
2.65
$
2.38
$
3.24
$
1.78
(9) Calculated as current assets minus current liabilities.
(10) Long-term obligations include deferred compensation, unearned revenue and long-term debt.
0.63
$
2.63
$
2.35
$
2.40
$
1.82
0.00
0.00
0.02
0.82
(0.05)
and Results of Operations
Item 7. Management’s Discussion and Analysis of Financial Condition
Income (loss) from
discontinued operations
Net income
Diluted earnings per share:
Income from
continuing operations
Income (loss) from
discontinued operations
$
$
Net income
$
0.63
$
2.63
$
2.37
$
3.22
$
1.77
Weighted average
shares outstanding
Basic
Diluted
50,789
51,380
50,693
51,063
51,566
51,843
53,854
54,191
57,143
57,428
Overview
Zebra is a global leader respected for innovation and reliability. We offer products and
services that give organizations greater visibility and insights into their operations, which
we call Enterprise Asset Intelligence. Our products and services allow our customers
to manage their assets, transactions and people more effectively, and thereby improve
their operational efficiency, deliver a better customer experience, provide more effective
security and achieve other objectives of their organization.
In October 2014, Zebra acquired the Enterprise business (“Enterprise”) from Motorola
Solutions, Inc. (“MSI”), excluding its iDEN, or Integrated Digital Enhanced Network
Business, for $3.45 billion in cash (the “Acquisition”). Enterprise is an industry leader
in mobile computing and advanced data capture technologies and services, which
complement Zebra’s printing and RFID products. Its products include rugged and
enterprise-grade mobile computers; laser, imaging and radio frequency identification
18
based data capture products; wireless LAN (“WLAN”) solutions and software; and
applications that are associated with these products and services. Enterprise service
revenues include revenues arising from maintenance, integration services and device
and network management.
Similar to Zebra’s business, Enterprise’s products and services are sold to a wide range
of enterprise customers, including those in the retail, hospitality, transportation and
logistics, manufacturing, warehouse and distribution centers, energy and utilities,
education and healthcare industries. Zebra financed the Acquisition through a
combination of cash on hand and borrowings of $3.25 billion (the “Indebtedness”),
including the sale of 7 1⁄4% senior notes due 2022 with an aggregate principal amount of
$1.05 billion (the “Notes”) and a new credit agreement with various lenders that provided
a term loan of $2.2 billion (the “Term Loan”) due 2021.
Results of Operations: Year Ended December 31, 2014 versus Year Ended December 31, 2013
Consolidated Results of Operations
(Amounts in thousands, except percentages)
Year Ended
Dec. 31,
2014
Dec. 31, Percent Net Sales
2014
2013 Change
Percent of Percent of
Net Sales
2013
Net sales
Gross profit
Operating income
$1,670,572
$1,038,159
778,025
88,590
503,610
160,264
60.9
54.5
(44.7)
100.0
46.6
5.3
100.0
48.5
15.4
Zebra experienced sales growth across all regions and all product categories in 2014
which resulted in an increase of 60.9% compared to 2013. Sales growth is primarily
from the October 2014 acquisition of Enterprise and the December 2013 acquisition of
Hart Systems LLC which increased sales for the year by $482.2 million and $23.7 million
respectively, in services, software and hardware. Sales of printers and supplies also
contributed meaningfully to the annual sales growth.
Sales by product category were as follows (amounts in thousands, except percentages):
Product category
Hardware
Supplies
Service and software
Year Ended
Dec. 31,
2014
Dec. 31, Percent Net Sales
2014
2013 Change
Percent of Percent of
Net Sales
2013
$1,233,386
265,176
172,010
$ 740,567
243,965
53,627
66.5
8.7
220.8
60.9
73.8
15.9
10.3
71.3
23.5
5.2
100.0
100.0
Total net sales
$1,670,572
$1,038,159
Sales to customers by geographic region were as follows (in thousands, except percentages):
Geographic region
Europe, Middle East
and Africa
Latin America
Asia-Pacific
Total International
North America
Year Ended
Dec. 31,
2014
Dec. 31, Percent Net Sales
2014
2013 Change
Percent of Percent of
Net Sales
2013
$ 583,005
$ 326,470
134,638
215,911
933,554
737,018
99,041
152,740
578,251
459,908
78.6
35.9
41.4
61.4
60.3
60.9
34.9
8.1
12.9
55.9
44.1
31.4
9.5
14.7
55.6
44.4
100.0
100.0
Total net sales
$1,670,572
$1,038,159
Gross profit
Gross profit increased $274.4 million or 54.5%. $214.8 million was due to the October 2014
acquisition of Enterprise and $15.3 million was due to the December 2013 acquisition of
Hart Systems LLC.
Operating income
Operating income decreased 44.7% from prior year. This was mainly due to acquisition
costs and amortization of intangibles related to the October 2014 acquisition of
Motorola’s Enterprise Business. In addition, expenses across all functional areas
increased due to the October 2014 acquisition of Enterprise and the December 2013
acquisition of Hart Systems LLC.
Segment Information
Commencing with the acquisition of Enterprise in October 2014, our continuing
operations consist of two segments – (1) Enterprise, comprised of our mobile computing,
data capture, and WLAN products and (2) Legacy Zebra, comprised of barcode and card
printing, location and motion sensing and supplies products. The following commentary
should be read in conjunction with the financial results of each operating business
segment as detailed in Note 21, Segment Information and Geographic Data in the Notes
to the Consolidated Financial Statements. The segment data excludes acquisition costs,
amortization of intangibles and exit and restructuring costs.
Segment information is as follows (in thousands):
Legacy Zebra Segment – Year to date
(Amounts in thousands, except percentages)
Year Ended
Dec. 31,
2014
Dec. 31, Percent Net Sales
2014
2013 Change
Percent of Percent of
Net Sales
2013
Net sales
Gross profit
Operating income
$1,194,536
$1,038,159
597,853
238,162
503,610
178,539
15.1
18.7
33.4
100.0
50.0
19.9
100.0
48.5
17.2
19
Enterprise Operating Income
Operating income for Enterprise for the two months ended December 31, 2014 was $65.0
million. Excluded from this amount are accounting adjustments of $28.5 million in cost
of sales and $6.2 million in service revenue, amortization expense of $43.6 million and
acquisition expense of $10.5 million associated with the October 2014 acquisition of
Enterprise and $5.7 million of restructuring costs.
Consolidated Operating Expenses
Operating expenses are summarized below (in thousands, except percentages):
Operating Expenses
Selling and marketing
Research and development
General and administrative
Amortization of intangible assets
Acquisition costs
Exit and restructuring costs
Total operating expenses
Year Ended
Dec. 31,
2014
Dec. 31,
2013
Percent
Change
$ 213,304 $ 138,020
151,103
91,147
138,214
96,216
54,096
126,711
6,007
7,383
4,690
5,890
54.5
65.8
43.6
N/M
N/M
2.0
$ 689,435 $ 343,346
100.8
Operating expenses for 2014 increased 100.8% mainly due to acquisition costs, amortization
of intangibles and increased costs across all functional areas as a result of the October
2014 acquisition of Enterprise and the December 2013 acquisition of Hart Systems LLC.
• Selling and marketing expenses increased 54.5% of which 46.4% is related to the
October 2014 acquisition of Enterprise. This remaining increase of 8.1% is mainly due to
increases in compensation costs related to higher sales and improved operating results
in the legacy Zebra business.
• Research and development increased 65.8% in comparison to 2013 with Enterprise
contributing 55.4% to the year over year increase. Compensation costs and outside
professional services make up the majority of the incremental change from prior year.
• General and administrative expenses increased 43.6% due to increases in
compensation costs due to higher sales and outside professional services. The October
2014 acquisition of Enterprise contributed 19.0% to the overall increase from prior year.
Legacy Zebra Segment Sales
Net sales for 2014 increased 15.1%, compared to 2013. This increase is a result of
growth across all regions and across all product categories, with notable increases
in supplies and service contracts, tabletop, desktop and mobile printers. Increased
services and software revenue is attributable to both organic growth and the December
2013 acquisition of Hart Systems increased sales by $23.7 million. Movement in foreign
currency, net of hedges, increased sales growth by $10.2 million.
Legacy Zebra Segment Gross Profit
Gross margin of 50.0%, versus 48.5% for 2013, reflects the favorable impact of lower
product costs, improved absorption of fixed costs, lower freight costs, and revenue
related to the December 2013 acquisition of Hart Systems LLC. Favorable movements in
foreign currency, net of hedges, increased gross profit by $7.1 million.
Legacy Zebra Segment Operating Income
Operating income increased 33.4% from prior year. This is the result of favorable
movements in gross profit offset by increases in operating expenses. These expenses
exclude acquisition costs, amortization of intangibles and exit and restructuring costs.
Enterprise Segment – For two months ended December 31, 2014
(Amounts in thousands, except percentages)
Two Months
Ended
Percent of
December 31, Net Sales
2014
2014
Net sales
Gross profit
Operating income
$482,217
214,806
65,032
100.0
44.5
13.5
Enterprise Sales
On October 27, 2014, Zebra acquired Enterprise, a provider of industry-leading data
capture, mobile computing, specialty printing and asset tracking solutions and services.
This transaction strengthens and expands Zebra’s product portfolio and geographic reach.
For the two months ended December 31, 2014, net sales for Enterprise was $482.2 million,
excluding a reduction of $6.2 million in a purchase price accounting adjustment related
to the valuation of service contracts. For the period, sales of mobile computing products
were strong, with shipments to customers in retail, transportation and logistics and
postal, particularly in North America and EMEA. Sales of Enterprise products were also
strong to distributors, also particularly in North America and EMEA.
Enterprise Gross Profit
Gross profit for Enterprise for the two months ended December 31, 2014, was $214.8
million, or 44.5% of sales, excluding reductions of $28.5 million in cost of sales and $6.2
million in service revenue, as purchase accounting adjustments. The gross profit margin
reflects the mix of product sales and service revenue for the two-month period.
20
Consolidated Other Income (Expense)
Zebra’s non-operating income and expense items are summarized in the following table
(in thousands):
Year Ended
December 31, 2014
December 31, 2013
Comparison of Years Ended December 31, 2013 and 2012
Consolidated Results of Operations
(Amounts in thousands, except percentages)
Year Ended
Investment income (loss)
Foreign exchange loss
Forward swaps loss
Interest expense
Other, net
Total other income (expense)
$
(714)
(8,759)
(4,649)
(56,836)
(1,003)
$ (71,961)
$ 2,366
(524)
0
(98)
1,819
$ 3,563
Foreign Exchange Loss
The increase in foreign exchange loss is due to losses on net foreign currency assets of
$14.4 million offset by gains of $5.7 million from foreign exchange derivatives.
Interest Expense
The increase in interest expense is due to interest expense of $16.0 million related to the
senior notes, $20.0 million related to the term loan and bridge loan fees of $19.0 million.
Forward Interest Rate Swaps
The increase in forward swap loss is due to the loss on the forward interest rate swaps
not designated in a hedge relationship. We entered into New Swaps and Offsetting
Swaps on November 20, 2014, which we designated as cash flow hedges of interest rate
exposure associated with variability in future cash flows on the Term Loan. Subsequent
to the hedge designation, the effective portion of changes in their fair value is recognized
in other comprehensive income (loss) and the ineffective portion is recognized in
earnings. The effective portion recognized in other comprehensive income (loss) will
be reclassified to earnings in other income (expense) as the interest payments under
the Term Loan affect earnings. The Syndicated Swaps and the Offsetting Swaps are
not designated in a hedging relationship and the changes in fair values are recognized
in earnings in other income (expense). Refer to Note 13, Derivative Instruments to the
Consolidated Financial Statements included in the Form 10-K.
Income Taxes
The effective income tax rate for 2014 was (95.0%) compared to prior year’s effective
income tax rate of 18.1%. The 2014 rate benefit is primarily driven by foreign earnings
taxed at a lower rates and domestic pre-tax loss, which is attributable to third-party
interest expense and acquisition expenses.
Dec. 31,
2013
Dec. 31, Percent
2012 Change
Percent of Percent of
Net Sales Net Sales
2012
2013
Net Sales
Tangible products
$ 984,532
$948,227
Service & software
53,627
47,941
Total net sales
Cost of Sales
1,038,159
996,168
Tangible products
507,513
479,633
Service & software
27,036
24,891
Total cost of sales
Gross profit
534,549
504,524
503,610
491,644
Operating expenses
343,346
327,293
Operating income
160,264
164,351
Other income (expense)
3,563
(177)
3.8
11.9
4.2
5.8
8.6
6.0
2.4
4.9
(2.5)
N/M
Income from continuing
operations before
income taxes
Income taxes
Income from continuing
operations
Income from discontinued
operations, net of tax
163,827
164,174
29,602
42,277
(0.2)
(30.0)
134,225
121,897
10.1
133
1,007
(86.8)
Net income
$ 134,358
$122,904
9.3
94.8
5.2
100.0
95.2
4.8
100.0
48.9
2.6
51.5
48.5
33.1
15.4
0.4
15.8
2.9
12.9
0.0
12.9
48.1
2.5
50.6
49.4
32.9
16.5
(0.0)
16.5
4.3
12.2
0.1
12.3
Diluted earnings per share:
Income from continuing
operations
Income from
discontinued operations
$ 2.63
$ 2.35
11.9
Net income
$ 2.63
$ 2.37
0.00
0.02
N/M
11.0
Consolidated Results of Operations – Full Year
Net sales for 2013 compared with 2012 increased 4.2% as a result of growth across most
product categories with notable increases in supplies, service and software. The growth
in supplies, due to the LaserBand acquisition in July 2012, partially offset weak business
conditions from the first half of 2013. Printer unit volumes increased 4.9% for 2013
compared to 2012 due to volume increases in desktop, mobile, kiosk and card printers.
Movement towards lower-priced printers partially offset unit volume increases. Movement
in foreign currency, net of hedge activity, partially offset sales growth by $2.8 million.
21
Sales by product category were as follows (amounts in thousands, except percentages):
Year Ended
Dec. 31,
2013
Dec. 31, Percent
2012 Change
Percent of Percent of
Net Sales Net Sales
2012
2013
Product category
Hardware
Supplies
$ 735,123
$730,489
243,965
212,499
Service and software
53,627
47,941
Subtotal products
1,032,715
990,929
Shipping and handling
5,444
5,239
Total net sales
$1,038,159
$996,168
0.6
14.8
11.9
4.2
3.9
4.2
70.8
23.5
5.2
99.5
0.5
73.4
21.3
4.8
99.5
0.5
100.0
100.0
North America, Asia Pacific and Europe, Middle East and Africa contributed to an overall
growth of 4.2% with notable increases in supplies and printer sales. The growth in
supplies, which includes labels and wristbands, is the result of the LaserBand acquisition
in July of 2012 plus organic growth in supplies.
Sales to customers by geographic region were as follows (in thousands, except percentages):
Year Ended
Dec. 31,
2013
Dec. 31, Percent
2012 Change
Percent of Percent of
Net Sales Net Sales
2012
2013
Geographic region
Europe, Middle East
and Africa
Latin America
Asia-Pacific
$ 326,470
$322,970
99,041
100,101
152,740
137,577
Total International
578,251
560,648
North America
459,908
435,520
Total net sales
$1,038,159
$996,168
1.1
(1.1)
11.0
3.1
5.6
4.2
31.4
9.5
14.7
55.6
44.4
32.4
10.0
13.8
56.2
43.8
100.0
100.0
Gross profit
Gross profit increased 2.4% due to higher volumes partially offset by unfavorable
movements in product mix. Movements in foreign currency, net of hedges, decreased
gross profit by $1.0 million.
22
Operating expenses
Operating expenses are summarized below (in thousands, except percentages):
Operating expenses
Dec. 31,
2013
Dec. 31, Percent
2012 Change
Percent of Percent of
Net Sales Net Sales
2012
2013
Year Ended
Selling and marketing
$138,020
$129,906
Research and development
General and administrative
Amortization of intangible assets
Acquisition costs
Exit and restructuring costs
Asset impairment charge
91,147
96,216
7,383
4,690
5,890
0
87,364
92,167
4,673
3,109
960
9,114
Total operating expenses
$343,346 $ 327,293
6.2
4.3
4.4
58.0
50.9
N/M
N/M
4.9
13.2
13.0
8.8
9.3
0.7
0.5
0.6
0.0
8.8
9.3
0.5
0.3
0.1
0.9
33.1
32.9
Operating expenses for 2013 increased 4.9%. The increase is due to increased expenses
across all functional areas offset by the absence of a goodwill impairment charge which
represents 2.8% of 2012 operating expenses. The acquisition of both LaserBand and
StepOne contributed to the increase in Zebra’s operating expenses. Several categories
accounted for these increases, including compensation costs, outside professional
services, depreciation and information systems expenses. Acquisition costs are related
to investigated and completed acquisitions during the period. Amortization of intangible
assets increased from additions of current technology, patent and patent rights and
customer relationships during the year, including the acquisition of LaserBand in July
2012. Exit and restructuring costs in 2012 and 2013 primarily relate to the restructuring of
the Location Solutions business management structure.
Exit and restructuring costs
During the third quarter of 2012, revenue from Location Solutions fell below plan from
slower than anticipated growth in the automotive and process manufacturing industries
and weakness in the government sector. As a result, we initiated the Locations Solutions
2012 restructuring plan.
In the second quarter of 2013, management determined that additional restructuring
actions would be required to meet our financial goals for the Location Solutions business.
We anticipate that the results of our restructuring actions will reduce costs of the Location
Solutions business by $4.0 million per year. These savings should be fully realized by
the first quarter 2014. The savings from the Location Solutions restructuring plan will
primarily benefit cost of goods sold, engineering and selling and marketing expenses.
During 2007, Zebra began a plan to outsource printer manufacturing to a third-party
contract manufacturer. The transition to the third-party manufacturer was completed
during 2010. During the fourth quarter of 2012, we determined that further supply chain
cost reductions were possible by moving certain supply chain support operations closer
to our contract printer manufacturer’s facility, which is located in China. We anticipate
these actions will generate $2.6 million in annual savings to our cost of goods sold. These
actions were completed by the end of 2013.
Operating income
The operating income decrease for 2013 was the result of operating expense increases as
noted above and partially offset by higher gross profit.
Other income (expense)
Zebra’s non-operating income and expense items are summarized in the following table
(in thousands):
December 31, 2013
December 31, 2012
Year Ended
Investment income
Foreign exchange loss
Interest income (expense)
Other, net
Total other income (expense)
$2,366
(524)
(98)
1,819
$3,563
$ 2,485
(941)
(207)
(1,514)
$ (177)
The increase in other income is the result of a net $1.6 million favorable litigation
settlement associated with an investment loss that was recorded in prior years.
Income taxes
The effective tax rate for 2013 was 18.1% compared to an effective tax rate of 25.8%
for 2012. The 2012 rate reflects a discrete item for nondeductible asset impairment
charge, increasing the tax rate by 1.9% for the full year. Further, in 2012, in order to
streamline the management, financing and capital structure of its foreign affiliates, Zebra
established a foreign holding company and restructured the ownership structure of its
foreign affiliates. 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 introduced leverage which gives Zebra the ability to facilitate cash pooling
and improve the capital structure of its non-US operations. The new capital structure
and global financing favorably impacts the Zebra’s effective tax rate and facilitates the
tax efficient movement of Zebra’s foreign cash to finance the ongoing operating and
investment needs of the foreign subsidiaries. The restructuring was completed in the
second quarter of 2012 and was in place for the full year in 2013. In addition, the US R&D
credit reinstatement for the 2012 income tax year resulted in a tax benefit of $0.9 million.
Finally, Zebra recorded a favorable provision to return adjustment resulting in a reduction
to the effective tax rate of 1.1% following the filing of Zebra’s 2012 income tax returns.
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
Revenue includes sales of hardware, supplies, software and services (including repair
services, extended service contracts, and professional services) and bundled sales
of equipment, software and services. We enter into revenue arrangements that may
consist of multiple deliverables of our products and services due to the needs of our
customers. Zebra recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred and title has passed to the customer, which happens at the
point of shipment, provided that no significant obligations remain, the price is fixed and
determinable and collectability of the sales price is reasonably assured. For hardware
sales, in addition to the criteria discussed above, revenue recognition occurs when no
significant obligations remain and allowances for discounts, price protection, returns and
customer incentives can be reasonably estimated. In addition to cooperative marketing
and other incentive programs, Zebra has arrangements with some distributors which
allow for price protection and limited rights of return, generally through stock rotation
programs. Under the price protection programs, Zebra gives distributors credits for the
difference between the original price paid and Zebra’s then current price. Under the
stock rotation programs, distributors are able to exchange certain products based on
the number of qualified purchases made during the period. We monitor and track these
programs and record a provision for future payments or credits granted as reductions
of revenue based on historical experience. Recorded revenues are reduced by these
allowances. Zebra enters into post contract maintenance and support agreements;
revenues are deferred and then recognized ratably over the service period and the cost of
providing these services is expensed as incurred. Zebra includes shipping and handling
charges billed to customers as revenue when the product ships; any costs incurred
related to these services are included in cost of sales.
Fair Value of Financial Instruments
Fair value is 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. Our financial assets and financial liabilities that require recognition under the
accounting guidance generally include available-for-sale investments, employee deferred
compensation plan, foreign currency derivatives and interest rate swaps. The guidance
establishes a hierarchy for inputs used in measuring fair value that maximizes the use
of observable inputs and minimizes the use of unobservable inputs by requiring that
the observable inputs be used when available. Observable inputs are inputs that market
participants would use in pricing the asset or liability developed based on market
data obtained from sources independent of us. Unobservable inputs that reflect our
assumptions about the assumptions market participants would use in pricing the asset or
liability developed based on the best information available in the circumstances.
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. In general we use quoted prices in active markets for identical
assets to determine fair value. If active markets for identical assets are not available
to determine fair value, then we use quoted prices for similar assets or inputs that are
observable either directly or indirectly.
Zebra has foreign currency forwards to hedge certain foreign currency exposures and
interest rate swaps to hedge a portion of the variability in future cash flows on debt. We
use broker quotations or market transactions, in either the listed or over-the-counter
markets to value our foreign currency exchange contracts and relevant observable
market inputs at quoted intervals, such as forward yield curves and Zebra’s own credit
risk to value our interest rate swaps.
23
Accounts Receivable
We maintain an allowance for doubtful accounts for losses that we estimate will arise
from our customers’ inability to make required payments. We make estimates of the
collectability of our accounts receivable by considering factors such as historical bad
debt experience, specific customer creditworthiness, the age of the accounts receivable
balances and current economic trends that may affect a customer’s ability to pay. If the
data we use to calculate the allowance for doubtful accounts does not reflect the future
ability to collect outstanding receivables, additional provisions for doubtful accounts
may be needed and our results of operations could be materially affected. Accounts
receivable reserves as of December 31, 2014, were $1.1 million or 0.2% of the balance due.
(undiscounted and without interest charges) is less than the carrying amount of the asset,
an impairment is recognized. Determining whether an impairment has occurred typically
requires various estimates and assumptions, including determining which undiscounted
cash flows are directly related to the potentially impaired asset, the useful life over which
cash flows will occur, their amount, and the asset’s residual value, if any. Any related
impairment loss is calculated based upon comparison of the fair value to the carrying
value of the asset. Separate intangible assets that have finite useful lives are amortized
over their useful lives. An impaired long-lived or intangible asset would be written down
to fair value, based on various available valuation techniques, including the discounted
cash flow method.
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 1.5% to 11.9% of
gross inventory. As of December 31, 2014, inventory reserves were $5.8 million, or 1.5%
of gross inventory. We believe this reserve level is appropriate considering the quantities
and quality of the inventories as of December 31, 2014.
Goodwill and other Intangible Assets
We perform an annual review of goodwill or sooner if indicators of potential impairment
are identified. We review performance and other indicators and determine at that time
if the goodwill test associated with the acquisition should be evaluated on a qualitative
or quantitative basis. If quantitative, the process we would expect to use, and have used
historically, compares the book value of net assets to the fair value of the reporting units.
If the fair value is determined to be less than the book value or qualitative factors indicate
that it is more likely than not that goodwill is impaired, a second step is performed to
compute the amount of impairment as the difference between the estimated fair value
of goodwill and the carrying value at the testing date. We estimate the fair value of the
reporting units using discounted cash flow and certain market value data.
Of the goodwill recognized at December 31, 2014, approximately $2.336 billion relates to
the Enterprise Acquisition transaction. Approximately $153.5 million of goodwill existed
prior to the Enterprise Acquisition and is recorded in the Legacy Zebra business. Net
intangible assets excluding goodwill amounted to $1.014 billion as of December 31, 2014.
The annual evaluation of goodwill requires the use of estimates about future operating
results, valuation multiples, and discount rates to determine their estimated fair value.
Changes in these assumptions can materially affect these estimates. If our future
performance is below our projections, goodwill impairment charges can result. Zebra will
monitor future results and will perform a test if indicators trigger an impairment review.
Long-Lived Assets and Other Intangible Assets
Long-lived assets held and used are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. We estimate the future cash flows expected to result from the use of
the asset and its eventual disposition. If the sum of the expected future cash flows
24
Income Taxes
Income taxes are recognized during the year in which transactions enter into the
determination of financial statement income, with deferred taxes being provided
for temporary differences between financial and tax reporting. Zebra recognizes in
the financial statements a provision for tax uncertainties, resulting from application
of complex tax regulations in multiple jurisdictions. See Note 19 in the Notes to the
Consolidated Financial Statements included in the Form 10-K.
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 15 in the
Notes to the Consolidated Financial Statements included in the Form 10-K.
Equity-Based Compensation
As of December 31, 2014, 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 18 to the
Consolidated Financial Statements included in the Form 10-K for further information.
Acquisitions
We account for acquired businesses using the acquisition method of accounting. This
method requires that the purchase price be allocated to the identifiable assets acquired
and liabilities assumed at their estimated fair values. The excess of the purchase price
over the identifiable assets acquired and liabilities assumed is recorded as goodwill.
The estimates used to determine the fair value of long-lived assets, such as intangible
assets, can be complex and require significant judgments. We use information available
to us to make fair value determinations and engage independent valuation specialists,
when necessary, to assist in the fair value determination of significant acquired long-lived
assets. While we use our best estimates and assumptions as a part of the purchase price
allocation process, our estimates are inherently uncertain and subject to refinement.
Critical estimates in valuing certain intangible assets include, but are not limited to, future
expected cash flows from customer relationships, customer attrition rates and discount
rates. Management’s estimates of fair value are based upon assumptions believed to be
reasonable, but due to the inherent uncertainty during the measurement period, which
may be up to one year from the acquisition date, we record adjustments to the assets
acquired and liabilities assumed, with the corresponding offset to goodwill. The purchase
price allocation of the Enterprise Acquisition is based upon a preliminary valuation and
the estimates and assumptions are subject to change within the measurement period as
additional information is obtained.
the amount and timing of our revenues, cash collections from our customers, capital
expenditures and acquisitions of third-parties. Management believes that existing capital
resources and funds generated from operations are sufficient to meet anticipated capital
requirements and service our indebtedness. The following table summarizes our cash
flow activities for the periods indicated (in thousands):
Recently Issued Accounting Pronouncements
In July 2013, the FASB issued Accounting Standard Update (“ASU”) 2013-11 “Presentation
of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar
Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013 -11 was issued to promote
consistency among financial statement issuers and amends ASC 740, “Income Taxes,”
to provide clarification of the financial statement presentation of an unrecognized
tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit
carryforward exists. According to ASU 2013-11, an unrecognized tax benefit or a portion
of an unrecognized tax benefit should be presented in the financial statements as a
reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss,
or a tax credit carryforward, with certain exceptions. The revised guidance is effective
for interim and annual periods beginning after December 15, 2013 with early adoption
permitted. We adopted this guidance for our fiscal year beginning January 1, 2014. The
adoption did not have a material impact on our financial statements.
In April 2014, the FASB issued ASU 2014-08 “Reporting Discontinued Operations and
Disclosures of Disposals of Components of an Entity.” This update amends the criteria
for reporting discontinued operations to, among other things, raise the threshold
for disposals to qualify as discontinued operations. Under the revised standard, a
discontinued operation must represent a strategic shift that has or will have a major
effect on an entity’s operations and financial results. The revised standard will also allow
an entity to have certain continuing cash flows or involvement with the component after
the disposal. This update is effective for interim and annual reporting periods, beginning
after December 15, 2014, with early adoption permitted. We will adopt this guidance
for our fiscal year beginning January 1, 2015. We do not expect the adoption to have a
material impact on our financial statements.
In May 2014, the FASB issued update 2014-09, ASC 606, Revenue from Contracts with
Customers. This guidance is a comprehensive new revenue recognition model that
requires a company to recognize revenue to depict the transfer of goods or services to a
customer at an amount that reflects the consideration it expects to receive in exchange
for those goods or services. This standard is effective for annual periods beginning after
December 15, 2016 and interim periods within those annual periods. Management is still
assessing the impact of adoption on its consolidated financial statements.
Cash flow provided by (used in):
Operating activities
Investing activities
Financing activities
As of December 31,
2013
2014
2012
$ 248,325 $ 194,766
$ 183,331)
(3,111,336)
(153,149)
(105,535)
3,192,234
(44,173)
(49,434)
Effect of exchange rates on cash balances
1,900
643
(40)
Net increase (decrease) in cash and cash equivalents
331,123
(1,913)
28,322)
The change in our cash and cash equivalents balance is reflective of the following:
Operating activities
During 2014, Zebra generated operating cash flows of $248.3 million increasing $53.6
million from 2013. The operating cash flows increase is a result of strong legacy Zebra
performance in addition to operating cash from the acquisition of Enterprise.
Receivables increased $69.6 million which was a result of fourth quarter 2014 sales from
both legacy Zebra and the acquisition of Enterprise.
Accounts payable increased $62.2 million primarily due to increase in business activity as
a result of the acquisition of Enterprise.
Accrued liabilities increased $164.3 million as of December 31, 2014. This increase in
accrued liabilities is related to an increase in compensation accruals and professional
service fees which are related to the acquisition of Enterprise.
Movements in deferred revenue reflect the increased level of service contracts. Deferred
revenue primarily consists of billings and payments received in advance of revenue
recognition from service contracts.
Investing activities
Cash used for investing increased to $3.1 billion due to the $3.4 billion paid to acquire
Enterprise, refer to Note 3 Business Combinations in the Notes to the Consolidated
Financial Statements for further discussion regarding the Acquisition.
Liquidity and Capital Resources
In connection with the Acquisition in October 2014, we incurred indebtedness totaling
$3.25 billion. As of December 31, 2014, we had cash and marketable securities balances
of $418.3 million and long-term debt totaling $3.2 billion. We did not have any borrowings
against our revolving credit facility with $247.1 million available ($250 million less $2.9
million of letters of credit available). See Note 14 Long term debt in the Notes to the
Consolidated Financial Statements for further details and under Financing activities
below. The primary factors that influence our liquidity include, but are not limited to,
Financing activities
In 2014, financing activities were a source of cash of $3.2 billion compared to uses of
cash of $44.2 million and $49.4 million in 2013 and 2012. Financing activities were higher
in 2014 primarily to fund the purchase price related to the acquisition of Enterprise, see
further discussion below. In addition we paid deferred financing costs of $24.0 million
related to this debt; these costs are capitalized in Zebra’s financial results. In 2013 and
2012, cash used for financing activities was primarily to repurchase shares of Zebra’s
common stock.
25
The following table shows our level of indebtedness and other information as of
December 31, 2014 (in thousands):
Term loan
Senior notes
Total indebtedness
$ 1,050,000
2,200,000
$ 3,250,000
Private Offering
On October 15, 2014, Zebra completed a private offering of $1.05 billion aggregate
principal of 7.25% Senior Notes due October 15, 2022 (the “Senior Notes”). Interest on the
Senior Notes is payable in cash on April 15 and October 15 of each year, commencing on
April 15, 2015.
The Indenture covering the Senior Notes contains certain covenants limiting among
other things, the ability of Zebra and its restricted subsidiaries, with certain exceptions
as described in the indenture, to; (i) incur indebtedness or issue certain preferred stock;
(ii) incur liens; (iii) pay dividends or make distributions in respect of capital stock; (iv)
purchase or redeem capital stock; (v) make investments or certain other restricted
payments; (vi) sell assets; (vii) issue or sell stock of restricted subsidiaries; (viii) enter into
transactions with stockholders or affiliates; or (ix) effect a consolidation or merger. On
December 31, 2014, Zebra was in compliance with the covenants.
New Credit Facilities
On October 27, 2014, Zebra entered into a new credit agreement which provides for a
term loan of $2.2 billion (“Term Loan”) and a revolving credit facility of $250.0 million
(“Revolving Credit Facility”). Borrowings under the Term Loan bear interest at a variable
rate plus an applicable margin, subject to an all-in floor of 4.75%. As of December 31
2014, the Term Loan interest rate was 4.75%. Interest payments are payable quarterly,
starting January 27, 2015. The October 2012 revolving credit agreement for $250.0 million
with a syndicate of banks was terminated upon execution of this credit agreement. The
Company has entered into interest rate swaps to manage interest rate risk on its long-
term debt. See Note 13 Derivative Instruments in the Notes to the Consolidated Financial
Statements for further details.
The credit agreement requires Zebra to prepay the Term Loan and Revolving Credit
Facility, under certain circumstances or transactions defined in the credit agreement.
Also, Zebra may voluntarily prepay its obligations under the Term Loan at any time;
however, we are required to make scheduled quarterly principal payments of $5.5 million
beginning June 30, 2015, with the balance of $2.1 billion due on October 27, 2021.
The Revolving Credit Facility is available for working capital and other general corporate
purposes including letters of credit. The amount (including letters of credit) shall not
exceed $250.0 million. As of December 31, 2014, Zebra had established letters of credit
amounting to $2.9 million, which reduced funds available for other borrowings under
the agreement to $247.1 million. The Revolving Credit Facility will mature and the
commitments thereunder will terminate on October 27, 2019.
Borrowings under the Revolving Credit Facility bear interest at a variable rate plus an
applicable margin. The applicable margin for borrowings under the Revolving Credit
Facility ranges from 2.25% to 2.75% depending on Zebra’s consolidated total secured
net leverage ratio which is evaluated on a quarterly basis. Interest payments are payable
quarterly. As of December 31 2014, Zebra did not have any borrowings against the
Revolving Credit Facility.
The Revolving Credit Facility contains certain covenants limiting among other things, the
ability of Zebra and its restricted subsidiaries, with certain exceptions as described in the
agreement, to: (i) incur indebtedness, make guarantees or issue certain equity securities;
(ii) pay dividends on its capital stock or redeem, repurchase or retire its capital stock; (iii)
make certain investments, loans and acquisitions; (iv) sell certain assets or issue capital
stock of restricted subsidiaries; (v) create liens or engage in sale-leaseback transactions; (vi)
merge, consolidate or transfer or dispose of substantially all of their assets; (vii) engage in
certain transactions with affiliates; (viii) alter the business it conducts; (ix) amend, prepay,
redeem or purchase subordinated debt and (x) enter into agreements limiting subsidiary
dividends and distributions. The Revolving Credit Facility also requires Zebra to comply
with a financial covenant consisting of a quarterly maximum consolidated Total Secured
Net Leverage Ratio, (as defined in the Revolving Credit Facility). This test is only required
to be performed at the end of the fiscal quarter and when 20% of the commitments under
the Revolving Credit Facility have been drawn and remain outstanding.
The Term Loan and obligations under the Revolving Credit Facility are collateralized by a
security interest in substantially all of Zebra’s assets as defined in the security agreement
and guaranteed by its direct and indirect wholly-owned existing and future domestic
restricted subsidiaries, subject to certain exceptions.
Certain domestic subsidiaries of Zebra (the “Guarantor Subsidiaries”) guarantee the
Notes, the Term Loan and the Revolving Credit Facility on a senior basis: For the twelve
months ended December 31, 2014, after giving pro forma effect to the acquisition of
Enterprise, the non-Guarantor Subsidiaries would have (a) accounted for approximately
44% of our total revenue and (b) held approximately 16% of our total assets and
approximately 15.6%, or $704.1 million, of our total liabilities including trade payables but
excluding intercompany liabilities.
On December 31, 2014, Zebra was in compliance with the covenants.
Historically, significant portions of our cash inflows were generated by our operations.
We currently expect this trend to continue throughout 2015. We believe that our existing
cash and investments, borrowings available under our Revolving Credit Facility, together
with cash flows expected from operations will be sufficient to meet expected operating,
capital expenditure and debt obligation requirements for the next 12 months.
Zebra had $268.4 million as of December 31, 2014, and $251.7 million as of December 31,
2013, of foreign cash and investments, which are primarily invested in U.S. dollar-
denominated holdings.
Management believes that existing capital resources and funds generated from
operations are sufficient to finance anticipated capital requirements.
26
Contractual Obligations
Zebra’s contractual obligations as of December 31, 2014 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 $ 160,517
$ 33,991
$ 48,850
$ 32,694
$ 44,982
Deferred compensation
liability
Enterprise purchase price
adjustment
Long-term debt – principal
payments
6,008
—
48,806
48,806
—
—
—
—
6,008
—
3,250,000
16,500
44,000
44,000
3,145,500
Interest payments
1,187,971
178,777
344,168
339,230
325,796
Interest rate swap
55,534
3,009
19,584
24,522
Purchase obligations
392,974
392,974
—
—
8,329
—
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 13 of the Notes to the Consolidated Financial Statements
included in this form 10-K for further discussions of hedging activities.
The following table sets forth the impact of a ten percent movement in the dollar/pound
and dollar/euro rates measured as if Zebra did not engage in the selective hedging
practices described above. The risk is increased through additional exposure as it relates
to the acquisition of Enterprise. 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).
Total
$5,101,810
$674,147
$456,602
$440,446 $3,530,615
Dollar/pound
Purchase obligations are for purchases made in the normal course of business to meet
operational requirements, primarily raw materials and finished goods.
Uncertain tax position liabilities of $18.9 million have been excluded from the above table
as we cannot make a reasonably reliable estimate of the period of cash settlement with
the respective taxing authority.
Effect on Pretax Income
Effect on Diluted EPS (after tax)
Dollar/euro
Effect on Pretax Income
Effect on Diluted EPS (after tax)
Foreign exchange
As of December 31,
2013
2014
$
311
$ 0.00
$ 4,595
$ 0.07
$
313
$ 0.00
$ 5,562
$ 0.09
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the sensitivity of income to changes in interest rates, commodity prices and
foreign currency changes. Zebra is exposed to the following types of market risk: interest
rates and foreign currency.
Interest Rate Risk
Historically, we mitigated interest rate risk on marketable security investments with an
investment policy and use of outside professional investment managers; our objective
was to achieve stable and predictable targeted rates of return and to provide the liquidity
necessary for the operation of the business.
In connection with the acquisition of Enterprise, Zebra incurred significant debt, including
variable rate debt (subject to interest rate caps). As of December 31, 2014, we had $2.2
billion debt outstanding under our Term Loan, which debt bears interest determined by
reference to a variable rate index. To mitigate this risk, we entered into forward interest
rate swaps to hedge the interest rate risk associated with the variable interest payments
on our Term Loan that was used to fund the acquisition of Enterprise. Refer to Note 13
Derivative Instruments in the Notes to Consolidated Financial Statements included in this
form 10-K for further discussions of hedging activities.
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-33. An index to such materials appears on page F-1.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures
Not applicable.
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,
2014. 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 as released in 2013. Based on this assessment and those
criteria, our management believes that, as of December 31, 2014, our internal control
over financial reporting is effective. Management’s assessment of internal control over
financial reporting as of December 31, 2014 excludes the internal control over financial
reporting related to Enterprise (acquired on October 27, 2014). Enterprise is included in
the 2014 consolidated financial statements and constituted 78% of net assets and 81%
of total assets as of December 31, 2014 and 28% and (26%) of revenues and net income,
respectively, for the year then ended.
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 46 of this report on Form 10-K.
Changes in Internal Control over Financial Reporting
In connection with our initial reviews of internal controls for Enterprise, we have
identified certain internal control deficiencies related to Enterprise. We continue to
identify and review the internal controls of the Enterprise business and are establishing
a plan of remediation that is consistent with our obligation to assess the effectiveness of
Enterprise’s internal controls over financial reporting as of December 31, 2015.
The identification review, assessment and remediation of internal control deficiencies is
overseen by senior management and our audit committee, and is undertaken primarily
through the integration of processes and procedures with existing Zebra processes and
procedures, development and implementation of formal policies, improved processes
and documented procedures, as well as the hiring of additional finance personnel.
During the quarter covered by this report, there have been no other changes in our
internal controls that have materially affected, or are reasonably likely to materially
affect, our internal controls 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.
28
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Zebra Technologies Corporation:
We have audited Zebra Technologies Corporation’s internal control over financial
reporting as of December 31, 2014, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework) (the COSO criteria). Zebra Technologies
Corporation’s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our audit.
As indicated in the accompanying Management’s Report on Internal Control over
Financial Reporting, management’s assessment of and conclusion on the effectiveness
of internal control over financial reporting did not include the internal controls of the
Motorola Solutions Enterprise business, which is included in the 2014 consolidated
financial statements of Zebra Technologies Corporation and constituted 78% of net
assets and 81% of total assets as of December 31, 2014 and 28% and (26%) of revenues
and net income, respectively. Our audit of internal control over financial reporting of
Zebra Technologies Corporation also did not include an evaluation of the internal control
over financial reporting of the Motorola Solutions Enterprise business.
In our opinion, Zebra Technologies Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2014, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Zebra Technologies
Corporation as of December 31, 2014 and 2013, and the related consolidated statements
of operations, comprehensive income, shareholders’ equity, and cash flows for each of
the three years in the period ended December 31, 2014, of Zebra Technologies Corporation
and our report dated March 17, 2015, expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
Chicago, Illinois
March 17, 2015
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.
29
Item 9B. Other Information
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.”
PART IV
Item 15. Exhibits, Financial Statement Schedules
The financial statements and schedule filed as part of this report are listed in the
accompanying Index to Financial Statements and Schedule. The exhibits filed as a part
of this report are listed in the accompanying Index to Exhibits.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf by the
undersigned, there unto duly authorized, on the 17th day of March 2015.
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.
Signature
Title
Date
/s/ Anders Gustafsson
Anders Gustafsson
Chief Executive Officer and Director March 17, 2015
(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)
March 17, 2015
March 17, 2015
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
/s/ Gina E. Vascsinec
Gina E. Vascsinec
Chief Accounting Officer
March 17, 2015
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.”
/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.”
30
/s/ Richard Keyser
Richard Keyser
/s/ Andrew Ludwick
Andrew Ludwick
/s/ Ross W. Manire
Ross W. Manire
/s/ Frank B. Modruson
Frank B. Modruson
/s/ Robert J. Potter
Robert J. Potter
/s/ Janice M. Roberts
Janice M. Roberts
Director
Director
Director
Director
Director
Director
March 17, 2015
March 17, 2015
March 17, 2015
March 17, 2015
March 17, 2015
March 17, 2015
March 17, 2015
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
To the Board of Directors and Stockholders of
Zebra Technologies Corporation
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Earnings for the years ended
December 31, 2014, 2013, and 2012
Consolidated Statements of Comprehensive Income
for the years ended December 31, 2014, 2013, and 2012
Consolidated Statements of Stockholders’ Equity
for the years ended December 31, 2014, 2013, and 2012
Consolidated Statements of Cash Flows
for the years ended December 31, 2014, 2013, and 2012
Notes to Consolidated Financial Statements
Page
F-1
F-2
F-3
F-3
F-4
F-5
F-6
Financial Statement Schedule
The following financial statement schedule is included herein:
Schedule II - Valuation and Qualifying Accounts
F-33
All other financial statement schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or related notes.
We audited the accompanying consolidated balance sheets of Zebra Technologies
Corporation (the Company) as of December 31, 2014 and 2013, and the related consolidated
statements of operations, comprehensive income, shareholders’ equity and cash flows for
each of the three years in the period ended December 31, 2014. 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 at
December 31, 2014 and 2013, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 2014, 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, 2014, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) and our report dated
March 17, 2015 expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
Chicago, Illinois
March 17, 2015
F-1
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
December 31,
2014
December 31,
2013
December 31,
2014
December 31,
2013
ASSETS
Current assets:
Cash and cash equivalents
Investments and marketable securities
Accounts receivable, net
Inventories, net
Deferred income taxes
Income tax receivable
Prepaid expenses and other current assets
$ 393,950
24,385
670,402
394,176
122,772
12,988
53,377
$ 62,827
350,380
176,917
121,023
19,810
7,622
15,524
Total current assets
1,672,050
754,103
Property and equipment at cost,
less accumulated depreciation and amortization
Goodwill
Other intangibles, net
Debt issuance cost
Other assets
Total assets
255,092
2,489,510
1,029,293
23,989
98,917
109,588
155,800
68,968
0
31,353
$ 5,568,851
$1,119,812
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Deferred revenue
Current portion of long-term debt
Income taxes payable
Total current liabilities
Long-term debt
Long-term deferred tax liability
Long-term deferred revenue
Other long-term liabilities
Total liabilities
Stockholders’ equity:
Class A Common Stock
Additional paid-in capital
Treasury stock
Retained earnings
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
$ 326,524
$
34,688
421,070
196,213
7,522
4,518
955,847
3,182,962
199,853
115,847
74,434
4,528,943
61,962
15,506
0
6,898
119,054
0
25,492
10,651
5,957
161,154
722
147,090
(634,664)
722
143,295
(678,456)
1,535,307
1,502,878
(8,547)
1,039,908
$ 5,568,851
(9,781)
958,658
$ 1,119,812
F-2
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands, except per share data)
Year Ended December 31,
2013
2014
2012
Year Ended December 31,
2013
2014
2012
Net sales
Basic earnings per share
Net sales of tangible products
$ 1,498,562 $ 984,532
$ 948,227
Income from continuing operations
Revenue from services and software
172,010
1,670,572
53,627
1,038,159
47,941
996,168
Income from discontinued operations
Net Income
$ 0.64
0.00
$ 0.64
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:
792,137
100,410
507,513
27,036
892,547
534,549
778,025
503,610
479,633
24,891
504,524
491,644
Diluted earnings per share
Income (loss) from continuing operations
$ 0.63
Income from discontinued operations
Net Income
0.00
$ 0.63
$
$
$
$
2.65
0.00
2.65
2.63
0.00
2.63
$
$
$
$
2.36
0.02
2.38
2.35
0.02
2.37
Selling and marketing
213,304
138,020
129,906
Research and development
General and administrative
Amortization of intangible assets
Acquisition and integration costs
Exit and restructuring costs
Asset impairment charge
Total operating expenses
Operating income
Other income (expense):
Investment income gain (loss)
Foreign exchange loss
Forward swaps loss
Interest expense
Other, net
Total other (expense) income
Income from continuing operations
before income taxes
Income taxes (benefit)
151,103
138,214
54,096
126,711
6,007
0
91,147
96,216
7,383
4,690
5,890
0
87,364
92,167
4,673
3,109
960
9,114
689,435
88,590
343,346
160,264
327,293
164,351
(714)
(8,759)
(4,649)
(56,836)
(1,003)
(71,961)
2,366
(524)
0
(98)
1,819
3,563
2,485
(941)
0
(207)
(1,514)
(177)
16,629
(15,800)
163,827
29,602
164,174
42,277
Income from continuing operations
32,429
134,225
121,897
Basic weighted average shares outstanding
50,789
50,693
51,566
Diluted weighted average and
equivalent shares outstanding
51,380
51,063
51,843
See accompanying notes to consolidated financial statements.
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Net income
$32,429
$134,358
$122,904
Year Ended December 31,
2013
2014
2012
Other comprehensive income (loss):
Unrealized gains (losses) on anticipated
sales hedging transactions, net of tax
Unrealized loss on forward interest rate
swaps hedging transaction, net of tax
Unrealized holding gain (loss)
on investments, net of tax
7,190
(7,699)
425
118
0
(456)
882
(7,241)
0
887
242
Income from discontinued operations,
net of tax
0
133
1,007
Foreign currency translation adjustment
1,318
Net income
$ 32,429
134,358
$
$ 122,904
Comprehensive income
$33,663
$134,902
$116,792
See accompanying notes to consolidated financial statements.
F-3
Unrealized holding gain on forward interest rate swaps hedging transactions (net of income taxes) —
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in thousands)
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 gain anticipated sales hedging transactions (net of income taxes)
Foreign currency translation adjustment
Balance at December 31, 2012
Repurchase of 1,356,861 shares of Class A Common Stock
Issuance of 980,999 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 anticipated sales hedging transactions (net of income taxes)
Foreign currency translation adjustment
Balance at December 31, 2013
Issuance of 1,383,195 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 anticipated sales hedging transactions (net of income taxes)
Unrealized holding gain on forward interest rate swaps hedging transactions (net of income taxes) —
Unrealized holding loss on forward interest rate swaps hedging transactions (net of income taxes) —
Foreign currency translation adjustment
Balance at December 31, 2014
See accompanying notes to consolidated financial statements.
—
$722
F-4
Class A
Common
Stock
Additional
Paid-in
Capital
Treasury
Stock
Accumulated
Other
Retained Comprehensive
Earnings
Income (Loss)
Total
$722
$ 131,422
$(596,622)
$1,245,616
$ (4,213)
$ 776,925
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$722
$ 139,523
$(641,438)
$1,368,520
$ (10,325)
$ 857,002
—
(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)
0
242
—
(63,102)
(11,432)
2,095
13,109
—
—
—
—
—
26,084
—
—
—
—
—
—
—
—
—
—
—
134,358
—
—
—
—
—
—
—
—
—
(456)
118
—
882
(63,102)
14,652
2,095
13,109
134,358
(456)
118
0
882
$722
$ 143,295
$(678,456)
$1,502,878
$ (9,781)
$ 958,658
(22,067)
5,971
19,891
—
—
—
—
—
43,792
—
—
—
—
—
—
—
—
—
—
32,429
—
—
—
—
—
—
—
—
425
7,190
(7,699)
1,318
21,725
5,971
19,891
32,429
425
7,190
(7,699)
1,318
$ 147,090
$(634,664)
$1,535,307
$ (8,547)
$1,039,908
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended December 31,
2013
2014
2012
Year Ended December 31,
2014
2013
2012
Cash flows from operating activities:
Net income
$ 32,429
$134,358
$122,904
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization
81,371
32,110
26,177
Amortization of debt issuance cost
and discount
Equity-based compensation
Goodwill impairment charges
2,113
19,891
0
Impairment of long term investment
2,333
Excess tax benefit from
share-based compensation
(6,127)
Loss on sale of property and equipment
1,793
Gain on sale of business
Deferred income taxes
0
(44,340)
Loss on forward interest rate swaps
4,649
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
(69,628)
(2,398)
(12,947)
62,188
164,269
10,034
(5,691)
8,386
0
13,109
0
0
(4,277)
224
(201)
7,929
0
(6,488)
2,743
(342)
7,544
6,220
2,133
(242)
(54)
0
14,727
9,114
0
(1,578)
311
(930)
8,067
0
(8,647)
11,530
7,304
(14,605)
(4,193)
4,351
16,335
(7,536)
248,325
194,766
183,331
Cash flows from investing activities:
Acquisition of businesses,
net of cash acquired
(3,398,600)
Purchases of property and equipment
(39,291)
Proceeds from the sale of business
Acquisition of intangible assets
0
0
Purchases of long-term investments
(2,454)
(95,328)
(20,211)
0
(1,500)
(12,021)
(59,876)
(22,443)
27,580
(3,500)
(9,125)
Purchases of investments and
marketable securities
Maturities of investments and
marketable securities
Proceeds from sales of investments
and marketable securities
Net cash used in
investing activities
Cash flows from financing activities:
(651,698)
(410,283)
(347,609)
336,329
49,453
145,028
644,378
336,741
164,410
(3,111,336)
(153,149)
(105,535)
Payment of debt issuance costs
(24,473)
Proceeds from issuance of long-term debt 3,188,855
0
0
0
0
Purchase of treasury stock
0
(63,102)
(54,373)
Proceeds from exercise of stock options
and stock purchase plan purchases
21,725
14,652
Excess tax benefit from
equity-based compensation
Net cash provided by (used in)
financing activities
6,127
4,277
3,192,234
(44,173)
(49,434)
3,361
1,578
Effect of exchange rate changes on cash
1,900
643
(40)
Net increase (decrease) in cash and
cash equivalents
Cash and cash equivalents
at beginning of period
331,123
(1,913)
28,322
62,827
64,740
36,418
Cash and cash equivalents at end of period $ 393,950
$ 62,827
$ 64,740
Supplemental disclosures of cash flow information:
Income taxes paid
$ 17,433
$ 18,418
$ 20,059
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 October 2014, Zebra acquired the Enterprise business (“Enterprise”) from Motorola
Solutions, Inc. (“MSI”), for $3.45 billion in cash (the “Acquisition”). Enterprise is an
industry leader in mobile computing and advanced data capture technologies and
services, which complement Zebra’s printing and RFID products. Its products include
rugged and enterprise-grade mobile computers; laser, imaging and radio frequency
identification based data capture products; wireless LAN (“WLAN”) solutions and
software; and applications that are associated with these products and services.
Enterprise service revenues include revenues arising from maintenance, integration
services and device and network management.
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
2014 fiscal year, our quarter end dates were as follows:
• March 29,
• June 28,
• September 27, and
• December 31.
Use of Estimates. These consolidated financial statements were prepared using estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities as of the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-6
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.
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 also
include internal purchasing overhead costs.
Property and Equipment. Property and equipment is stated at cost. Depreciation and
amortization is computed primarily using the straight-line method over the estimated
useful lives of the various classes of property and equipment, which are 30 years for
buildings and range from 3 to 10 years for other property. Leasehold improvements are
amortized using the straight-line method over the shorter of the lease term or estimated
useful life of the asset.
Income Taxes. Zebra accounts for income taxes under the liability method in accordance
with ASC 740, Income Taxes. Accordingly, deferred income taxes are provided for the
future tax consequences attributable to differences between the carrying amounts of
assets and liabilities for financial reporting and income tax purposes. Deferred tax assets
and liabilities are measured using tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. A valuation allowance is established
when necessary to reduce deferred tax assets to the amount that is more likely than not
to be realized. The Company recognizes the benefit of tax positions when it is more likely
than not to be sustained on its technical merits. Zebra recognizes interest and penalties
related to income tax matters as part of income tax expense.
Goodwill and Other Intangibles. Goodwill represents the unamortized excess of the cost of
acquiring a business over the fair values of the net assets acquired at the date of acquisition.
We perform an annual review of goodwill or sooner if indicators of potential impairment
are identified. Because the purchase price allocation related to the Acquisition has not
yet been finalized due to the timing of the acquisition, the goodwill from this acquisition
has not been allocated to the reporting units. We will review performance and other
indicators during 2015 and determine at that time if the goodwill test associated with the
Acquisition should be evaluated on a qualitative or quantitative basis. If quantitative, the
process we would expect to use, and have used historically, compares the book value
of net assets to the fair value of the reporting units. If the fair value is determined to be
less than the book value or qualitative factors indicate that it is more likely than not that
goodwill is impaired, a second step is performed to compute the amount of impairment
as the difference between the estimated fair value of goodwill and the carrying value at
the testing date. We estimate the fair value of the reporting units using discounted cash
flow and certain market value data.
Goodwill of a reporting unit is 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.
In accordance with ASU 2011-08, Zebra’s qualitative analysis determined that it is not
more likely than not that the fair value of our goodwill is less than the carrying amount
and therefore, performing the two-step impairment test was not necessary. If Zebra
concluded otherwise, we would perform the first step of the two-step impairment test
by calculating the fair value and comparing the fair value to the carrying amount. If the
carrying amount exceeded the fair value, we would perform the second step of 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.
Zebra elected to perform its annual test for Hart Systems, LLC., which was acquired in
December 2013, effective the first day of the fourth quarter.
Other intangible assets capitalized consist primarily of current technology, customer
relationships, trade names, unpatented technology, and patent rights. These assets are
recorded at cost and amortized on a straight-line basis over a weighted-average life of 4.1
years, which approximates the estimated useful lives. Weighted average lives remaining
by intangible asset class are as follows: Current technology 3.3 year; Trade names; 3.7
years; Unpatented Technology 3.5 years; Patent and patent rights 3.2 years and customer
relationship 5.3 years.
Amortization of Debt Issuance Costs. The Company capitalizes costs incurred in connection
with borrowings or establishment of credit facilities. These costs are amortized over the
life of the borrowing or life of the credit facility using the effective interest method.
Revenue Recognition. Revenue includes sales of hardware, supplies, software and
services (including repair services, extended service contracts, and professional
services) and bundled sales of equipment, software and services. We enter into revenue
arrangements that may consist of multiple deliverables of our products and services due
to the needs of our customers. Zebra recognizes revenue when persuasive evidence of
an arrangement exists, delivery has occurred and title has passed to the customer, which
happens at the point of shipment, provided that no significant obligations remain, the
price is fixed and determinable and collectability of the sales price is reasonably assured.
For hardware sales, in addition to the criteria discussed above, revenue recognition occurs
when no significant obligations remain and allowances for discounts, price protection,
returns and customer incentives can be reasonably estimated. In addition to cooperative
marketing and other incentive programs, Zebra has arrangements with some distributors
which allow for price protection and limited rights of return, generally through stock
rotation programs. Under the price protection programs, Zebra gives distributors credits
for the difference between the original price paid and Zebra’s then current price. Under
the stock rotation programs, distributors are able to exchange certain products based on
the number of qualified purchases made during the period. We monitor and track these
programs and record a provision for future payments or credits granted as reductions
of revenue based on historical experience. Recorded revenues are reduced by these
allowances. Zebra enters into post contract maintenance and support agreements;
revenues are deferred and then recognized ratably over the service period and the cost of
providing these services is expensed as incurred. Zebra includes shipping and handling
charges billed to customers as revenue when the product ships; any costs incurred related
to these services are included in cost of sales.
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 $13.2 million
for the year ended December 31, 2014, $7.6 million for the year ended December 31, 2013
and $9.0 million for the year ended December 31, 2012.
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. Zebra generally, provides warranty coverage of one year on printers against
defects in material and workmanship. Thermal printheads are warranted for six months
and batteries are warranted for one year. Battery-based products, such as location tags,
are covered by a 90 day warranty. Mobile computing products and WLAN products are
warranted for one year. Advanced data capture products are warranted from 1-5 years,
depending on the product. 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
Acquisition
Warranty expense
Warranty payments
Balance at the end of the period
2014
$ 4,125
20,501
12,909
(12,869)
$24,666
Year Ended December 31,
2013
2012
$ 4,252
$ 4,613
0
7,440
(7,567)
$ 4,125
0
6,828
(7,189)
$ 4,252
F-7
Fair Value of Financial Instruments. Fair value is 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. Our financial assets and financial liabilities that
require recognition under the accounting guidance generally include our available-for-
sale investments, employee deferred compensation plan investments, foreign currency
derivatives and interest rate swaps. 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 13 for additional information on our derivatives
and hedging activities.
Zebra has foreign currency forwards to hedge certain foreign currency exposures and
interest rate swaps to hedge a portion of the variability in future cash flows on debt. We
use broker quotations or market transactions, in either the listed or over-the-counter
markets to value our foreign currency exchange contracts and relevant observable
market inputs at quoted intervals, such as forward yield curves and Zebra’s own credit
risk to value our interest rate swaps.
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. In general we use quoted prices in active markets for identical
assets to determine fair value. If active markets for identical assets are not available
to determine fair value, then we use quoted prices for similar assets or inputs that are
observable either directly or indirectly.
Equity-Based Compensation. At December 31, 2014, Zebra had a general equity-based
compensation plan and an employee 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 18. 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 upon grant of 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):
For the years ended December 31,
2012
2013
2014
$ 1,350
$ 871
$ 1,061
3,595
2,777
12,169
$19,891
$ 6,842
2,100
1,616
8,522
$ 13,109
$ 4,531
1,792
1,593
10,281
$14,727
$ 5,132
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
F-8
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 were $6.1 million as of December 31, 2014,
$4.3 million as of December 31, 2013, and $1.6 million as of December 31, 2012.
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. Zebra incurred
transaction expenses of approximately $126.7 million, $4.7 million, and $3.1 million which
have been recorded in acquisition and integration costs in the consolidated statements of
operations for the years ended December 31, 2014, 2013 and 2012, respectively.
Concentration Risks. We rely on third-parties to develop and/or manufacture many of
our components and some of our finished products, and to design certain components
and finished products, as well as provide us with software necessary for the operation
of those products and we may increase our reliance on such third-parties in the future.
We could have difficulties fulfilling our orders and our sales and profits could decline
if: (i) we are not able to engage such third-parties with the capabilities or capacities
required by our business, (ii) such third-parties lack sufficient quality control and fail to
deliver quality components, products, services or software on time and at reasonable
prices or deliver products, services or software that do not meet regulatory or industry
standards or requirements, (iii) if there are significant changes in the financial or
business condition of such third-parties, or (iv) if we have difficulties transitioning
operations to such third-parties.
Acquisitions. We account for acquired businesses using the acquisition method of
accounting. This method requires that the purchase price be allocated to the identifiable
assets acquired and liabilities assumed at their estimated fair values. The excess of the
purchase price over the identifiable assets acquired and liabilities assumed is recorded
as goodwill.
The estimates used to determine the fair value of long-lived assets, such as intangible
assets, can be complex and require significant judgments. We use information available
to us to make fair value determinations and engage independent valuation specialists,
when necessary, to assist in the fair value determination of significant acquired long-lived
assets. While we use our best estimates and assumptions as a part of the purchase price
allocation process, our estimates are inherently uncertain and subject to refinement.
Critical estimates in valuing certain intangible assets include, but are not limited to, future
expected cash flows from customer relationships, customer attrition rates and discount
rates. Management’s estimates of fair value are based upon assumptions believed to
be reasonable, but due to the inherent uncertainty during the measurement period,
which may be up to one year from the acquisition date, we record adjustments to the
assets acquired and liabilities assumed, with the corresponding offset to goodwill. The
purchase price allocation of the Acquisition is based upon a preliminary valuation and
the estimates and assumptions are subject to change within the measurement period as
additional information is obtained.
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 360. The
statement requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to the sum of the
undiscounted cash flows expected to result from the use and the eventual disposition of
the asset. If such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Recently Issued Accounting Pronouncements. In July 2013, the FASB issued Accounting
Standard Update (“ASU”) 2013-11 “Presentation of an Unrecognized Tax Benefit When a Net
Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU
2013 -11 was issued to promote consistency among financial statement issuers and amends
ASC 740, “Income Taxes,” to provide clarification of the financial statement presentation
of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss,
or a tax credit carryforward exists. According to ASU 2013-11, an unrecognized tax benefit
or a portion of an unrecognized tax benefit should be presented in the financial statements
as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax
loss, or a tax credit carryforward, with certain exceptions. The revised guidance is effective
for interim and annual periods beginning after December 15, 2013 with early adoption
permitted. We adopted this guidance for our fiscal year beginning January 1, 2014. The
adoption did not have a material impact on our financial statements.
In April 2014, the FASB issued ASU 2014-08 “Reporting Discontinued Operations and
Disclosures of Disposals of Components of an Entity.” This update amends the criteria
for reporting discontinued operations to, among other things, raise the threshold
for disposals to qualify as discontinued operations. Under the revised standard, a
discontinued operation must represent a strategic shift that has or will have a major
effect on an entity’s operations and financial results. The revised standard will also allow
an entity to have certain continuing cash flows or involvement with the component after
the disposal. This update is effective for interim and annual reporting periods, beginning
after December 15, 2014, with early adoption permitted. We will adopt this guidance
for our fiscal year beginning January 1, 2015. We do not expect the adoption to have a
material impact on our financial statements.
In May 2014, the FASB issued update 2014-09, ASC 606, Revenue from Contracts with
Customers. This guidance is a comprehensive new revenue recognition model that
requires a company to recognize revenue to depict the transfer of goods or services to a
customer at an amount that reflects the consideration it expects to receive in exchange
for those goods or services. This standard is effective for annual periods beginning after
December 15, 2016 and interim periods within those annual periods. Management is still
assessing the impact of adoption on its consolidated financial statements.
Note 3 Business Combinations
On October 27, 2014, Zebra completed its acquisition of the Enterprise Business with
Motorola Solutions Inc. (“MSI”) for a purchase price of $3.45 billion. Zebra is a leading
provider of solutions that deliver greater intelligence and insights into our customers’
enterprises and extended value chains. The Enterprise Business will generate significant
value by driving further product innovation and deeper engagement with our customers
and partners. It positions Zebra as a leading technology innovator, with the accelerating
convergence of mobility, data analytics and cloud computing. This transaction will
enable Zebra to further sharpen its strategic focus on providing mission-critical
solutions for its customers. Certain assets and liabilities historically associated with
the Enterprise Business have been retained by MSI, including MSI’s iDEN infrastructure
business. The Acquisition was pursuant to the Master Acquisition Agreement dated
April 14, 2014, as amended (the “Master Acquisition Agreement”) and was structured
as a combination of stock and asset acquisitions and a merger of certain US entities,
resulting in 100% ownership of Enterprise.
Zebra financed the Acquisition through a combination of cash on hand and borrowings
of $3.25 billion (the “Indebtedness”), including the sale of 7¼% senior notes due 2022
with an aggregate principal amount of $1.05 billion (the “Notes”) and a new credit
agreement with various lenders that provided a term loan of $2.2 billion (the “Term
Loan”) due 2021. See Note 14 Long Term Debt footnote. Consideration paid was in
the form of cash paid to MSI, plus additional adjustments including expected working
capital which totaled $3.5 billion.
In connection with this acquisition, Zebra incurred related transaction expenses of
approximately $126.7 million which have been recorded in acquisition and integration
costs in the consolidated statements of earnings for the year ended December 31, 2014.
As part of the Acquisition of Enterprise, Zebra issued stock-based awards with value
equivalent to the unvested portion of Enterprise employees’ awards as of the date
of close. The new awards issued were in the form of both stock options and RSUs.
Based on the contractual terms of MSI’s legacy equity awards, in the event that an
employee’s employment is terminated as a result of a divestiture of a portion of the
MSI business, unvested awards vest based on a pro rata basis up until the divestiture
date, and the remaining awards are forfeited. The original MSI awards vested up to
the date of Acquisition and the remainder were forfeited. The new grants of awards by
Zebra require future service to be rendered to the combined company, beginning on the
issuance date. As a result, the fair value of the replacement awards will be recognized
as compensation cost in the post-combination financial statements and there was no
adjustment to purchase price.
The allocations of the purchase price for the Acquisition have been prepared on a
preliminary basis based on third-party valuations and changes to these allocations may
occur as additional information becomes available. We are in the process of obtaining
third-party valuations related to the fair value of our tangible and intangible assets, in
addition to determining and recording the tax effects of the transaction to include all
assets/liabilities since those are recorded at fair value. Acquired goodwill represents
the premium paid over the fair value of the net tangible and intangible assets acquired.
Zebra paid this premium for a number of reasons, including acquiring an experienced
workforce and enhancing technology capabilities as further described above.
F-9
The following table summarizes preliminary the estimated fair values of the assets
acquired and the liabilities assumed at the date of acquisition (in thousands):
Cash and cash equivalents
Accounts receivable(2)
Inventories
Deferred income taxes, current
Other current assets
Property and equipment
Deferred income taxes
Intangible assets
Other non-current assets
Deferred revenue
Tax liabilities
Other current liabilities(1)
Long-term deferred revenue
Unrecognized tax benefits
Other non-current liabilities
Deferred income taxes
Total identifiable net assets
$ 102,163
424,355
270,755
113,745
24,742
126,424
0
1,014,421
47,567
173,450
11,394
421,700
102,424
9,526
24,742
216,169
$ 1,164,767
(1) Other current liabilities include accounts payable, customer reserves, and employee compensation and
related benefits.
(2) Based on the preliminary purchase price allocations, accounts receivable estimated fair value is $424.4 million
and gross contractual value of $445.2 million. The difference represents Zebra’s best estimate of the contractual
cash flows that will not be collected.
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 $2.336 billion.
The intangible assets of $1.014 billion consist of the following (in millions):
Weighted Average
Amortization
Period (in years)
Amount
$ 460
280
215
40
19
$ 1,014
7.0 years
3.9 years
3.5 years
2 years
1 year
Customer relationships
Unpatented technology
Patented technology
Trade names
Backlog
Acquired other intangibles
F-10
As of the acquisition date, there were $19.9 million of indemnification assets recorded
to reflect MSI’s obligation to reimburse Zebra for pre-acquisition tax liabilities, statutory
bonus accruals, and sales incentive plan accruals assumed. The amounts were recorded
in relation to the Master Acquisition Agreement.
Currently, the entire goodwill is assigned to the Enterprise segment. The final assignment
of goodwill to reporting units has not been completed as of the date these financial
statements are issued. The preliminary amount of tax deductible goodwill is $74.4 million.
The amount of Enterprise revenue and net income (including integration costs of $10.5
million) included in Zebra’s Consolidated Statements of Earnings for 2014 was $476.0
million and $1.3 million, respectively.
The following table presents certain unaudited pro forma information for illustrative
purposes only, for 2014 and 2013 as if Enterprise had been acquired on January 1, 2013.
The unaudited estimated pro forma information combines the historical results of
Enterprise with Zebra’s consolidated historical results and includes certain adjustments
reflecting the estimated impact of certain fair value adjustments for the respective
periods. The pro forma information is not indicative of what would have occurred
had the acquisition taken place on January 1, 2013, and does not include the impact
of possible business model changes. Additionally, Zebra expects to achieve further
operating cost savings and other business synergies, including revenue growth, as a
result of the acquisition that are not reflected in the pro forma amounts that follow. As a
result, actual results will differ from the unaudited pro forma information presented.
In thousands, except per share data:
Total revenues
Net loss
Basic earnings per share
Diluted earnings per share
For the Year Ended December 31,
2013
(unaudited)
2014
(unaudited)
$3,562,556
$3,498,571
43,064
0.85
0.84
(77,044)
(1.52)
(1.52)
The unaudited pro forma gives effect to actual operation results prior to the Acquisition
and has been adjusted with respect to certain aspects of the Acquisition to reflect:
• the fair value adjustment to Enterprise’s inventory resulting in an increase in cost of
sales in the 2013 pro forma year of $30.1 million;
• inclusion in the 2013 pro forma year of $48.1 million in transaction costs directly
attributable to the Acquisition incurred by both Enterprise and Zebra through year end
2014;
• additional depreciation and amortization expenses that would have been recognized
assuming fair value adjustments to the Enterprise’s assets acquired, including
intangibles and property and equipment; to eliminate the historical interest expense
recorded in the results of Enterprise; and to reflect the estimated interest expense,
amortization of original issue discount (“OID”), amortization of debt issuance cost and
other recurring financing costs associated with the Indebtedness.
Concurrent with the closing of the transaction, we entered into a Transition Services
Agreement (“TSA”) with MSI, whereby MSI is to provide various services; primarily
information technology from the acquisition date through October 2016. Our costs under
the TSA commenced in November 2014, for approximately $6 million per month. These
costs are being reduced as we discontinue certain services and transition these services
into our own processes. Monthly costs, under the TSA can also increase if services are
extended beyond October 2015. We incurred $9.6 million under the TSA from October
28th through December 31, 2014.
Hart Systems In the fourth quarter 2013, Zebra acquired all of the outstanding membership
interests in Hart Systems, LLC (a New York limited liability company) for approximately
$95.7 million with $60.9 million of the purchase price allocated to goodwill. As of
September 27, 2014 the purchase price allocation was finalized and the amount of
goodwill was reduced to $58.6 million for adjustments related to deferred taxes. The
Consolidated Statement of Earnings includes the impact of this acquisition subsequent
to the December 18, 2013 acquisition date. Pro forma results have not been presented
because the effect of the acquisition is not material to the company’s financial results.
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, 2013, was an auction rate security which was
classified as available for sale and reflected at fair value. Due to events in credit markets,
however, the auction event for the instruments was failed. Therefore, the fair value of
this security was estimated utilizing broker quotations, discounted cash flow analysis or
other types of valuation adjustment methodologies at December 31, 2013. On October 1,
2011, Zebra deemed the decline in the market value of the auction rate security temporary
and recorded the estimated decline of $412,000 in accumulated other comprehensive
income. As of the third quarter 2014, Zebra decided to dispose of the security, deemed the
investment to be permanently impaired and recorded a loss of $600,000. During the fourth
quarter Zebra sold the security for $2.4 million and recorded an additional loss of $30,000.
Financial assets and liabilities carried at fair value as of December 31, 2014, are classified
below (in thousands):
Level 1
Level 2
Level 3
Total
Note 4 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).
Assets:
U.S. government and
agency securities
Obligations of government-
sponsored enterprises(1)
State and municipal bonds
Corporate securities
$ 10,720
$
0
$
0
0
0
705
5,179
7,781
Investments subtotal
10,720
13,665
Forward contracts(2)
2,039
7,279
Money market investments
related to the deferred
compensation plan
6,008
0
Level 2: Observable prices that are based on inputs not quoted on active markets,
Total assets at fair value
$ 18,767
$ 20,944
$
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.
Liabilities:
Forward interest rate swap
contracts(3)
Liabilities related to the
deferred compensation plan
$
0
$ 16,718
6,008
0
Total liabilities at fair value
$ 6,008
$ 16,718
$
$
0
0
0
0
0
0
0
0
0
0
0
$ 10,720
705
5,179
7,781
24,385
9,318
6,008
$ 39,711
$ 16,718
6,008
$ 22,726
F-11
Financial assets and liabilities carried at fair value as of December 31, 2013, are classified
below (in thousands):
The following is a summary of investments at December 31, 2014 and December 31, 2013
(in thousands):
Level 1
Level 2
Level 3
Total
As of December 31, 2014
Assets:
U.S. government and
agency securities
Obligations of government-
sponsored enterprises(1)
State and municipal bonds
Corporate securities
Other investments
Money market investments
related to the deferred
compensation plan
$ 89,626
$
10
$
0
$ 89,626
Gross
Amortized Unrealized Unrealized
Losses
Gross
Gains
Cost
0
0
0
0
33,510
51,627
163,832
11,785
0
0
2,588
0
2,588
33,510
51,627
166,420
11,785
352,968
U.S. government and
agency securities
Obligations of government-
sponsored enterprises
State and municipal bonds
Corporate securities
$ 10,720
$
705
5,156
7,779
Total investments
$ 24,360
$
0
0
27
12
39
$
$
0
0
(4)
(10)
(14)
Estimated
Fair
Value
$ 10,720
705
5,179
7,781
$ 24,385
Estimated
Fair
Value
Investments subtotal
89,626
260,754
4,827
0
0
4,827
Total assets at fair value
$ 94,453
$ 260,754
$ 2,588
$ 357,795
Liabilities:
Forward contracts(2)
Liabilities related to the
deferred compensation plan
$ 1,165
$
1,578
4,827
0
Total liabilities at fair value
$ 5,992
$
1,578
$
$
0
0
0
$ 2,743
4,827
$ 7,570
1) Includes investments in notes issued by the Federal Home Loan Mortgage Corporation 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.
3) The fair value of forward interest rate swap contracts is based upon a valuation model that uses relevant
observable market inputs at quoted intervals, such as forward yield curves, and is adjusted for Zebra’s own credit
risk and the interest rate swap terms.
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,
2013
2014
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
F-12
$ 2,588
0
(630)
412
(2,370)
$ 2,588
0
0
0
0
$ 0
$ 2,588
$ 0
$ 0
As of December 31, 2013
Gross
Amortized Unrealized Unrealized
Losses
Gross
Gains
Cost
U.S. government and
agency securities
Obligations of government-
sponsored enterprises
State and municipal bonds
Corporate securities
Other investments
$ 89,617
$
27
$
(18)
$ 89,626
33,506
51,573
166,642
11,771
5
82
453
15
(1)
33,510
(28)
51,627
(675)
166,420
(1)
11,785
Total investments
$ 353,109
$ 582
$ (723)
$ 352,968
The maturity dates of investments as of December 31, 2014 are as follows (in thousands):
Less than 1 year
1 to 5 years
6 to 10 years
Thereafter
Total
As of December 31, 2014
Amortized
Cost
Estimated
Fair
Value
$ 6,241
$ 6,248
16,824
16,837
1,295
1,300
0
0
$ 24,360
$ 24,385
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 5 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 future
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 Consolidated 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,
2014
2013
2012
$425
$(456)
$887
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,
2014. These lower market values are primarily caused by fluctuations in interest rates and credit spreads. Market values are expected to recover to the amortized cost prior to maturity.
Government securities
State and municipal bonds
Corporate Securities
Other
Total
Unrealized Loss < 12 months
Unrealized Loss > 12 months
Number of
investments
0
0
1
0
1
Aggregate
Market Value
$ 0
Unrealized
Losses
$ 0
0
446
0
0
0
0
$ 446
$ 0
Number of
investments
1
2
11
1
15
Aggregate
Market Value
$ 8,098
1,169
2,813
5
$12,085
Unrealized
Losses
$ (0)
(4)
(10)
(0)
$ (14)
As of December 31, 2013, the number, aggregate market value and unrealized losses (in thousands) of investments with market values that were less than amortized cost were:
Government securities
State and municipal bonds
Corporate Securities
Other
Total
Unrealized Loss < 12 months
Unrealized Loss > 12 months
Number
of investments
0
5
9
1
15
Aggregate
Market Value
$ 0
7,368
3,031
1,018
$ 11,417
Unrealized
Losses
$ 0
(8)
(2)
0
$ (10)
Number of
investments
Aggregate
Market Value
3
4
60
2
69
$23,207
6,559
51,757
2,982
$84,505
Unrealized
Losses
$ (19)
(20)
(673)
(1)
$ (713)
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 8 Property and Equipment
Property and equipment, which includes assets under capital leases, is comprised of the
following (in thousands):
Proceeds
Realized gains
Realized losses
Net realized gains included in
other comprehensive income (loss)
as of the end of the prior year
Year Ended December 31,
2013
2014
2012
$644,378
$ 336,741
$ 164,410
1,100
(833)
727
(81)
423
(78)
Buildings
Land
Machinery, equipment and tooling
Furniture and office equipment
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 $268.4 million as of December 31, 2014, and $251.7
million as of December 31, 2013 of foreign cash and investments.
Automobiles
Leasehold improvements
Projects in progress – computers and software
Projects in progress – other
4
603
285
Computers and software
As of December 31,
2013
2014
$ 48,732
$ 4,613
10,344
178,220
13,965
146,474
46
21,274
0
28,818
447,873
504
110,728
13,448
139,723
18
17,880
2,079
6,675
295,668
Note 6 Accounts Receivable
The components of accounts receivable are as follows (in thousands):
Less accumulated depreciation and amortization
(192,781)
(186,080)
Net property and equipment
$ 255,092
$109,588
Other items related to property and equipment are as follows (in thousands):
As of December 31,
2013
2014
Unamortized computer software costs
$ 40,579
$ 43,317
Amortization of capitalized software
$ 8,818
Total depreciation expense charged to income 27,275
$ 8,688
24,727
$ 7,912
21,504
Year Ended December 31,
2013
2014
2012
Gross accounts receivable
Accounts receivable reserves
Accounts receivable, net
Note 7 Inventories
The components of inventories are as follows (in thousands):
Raw material
Work in process
Finished goods
Total inventories, gross
Inventory reserves
As of December 31,
2013
2014
$ 671,471
$177,370
(1,069)
(453)
$ 670,402
$176,917
As of December 31,
2013
2014
$ 139,647
$ 31,335
476
259,872
399,995
(5,819)
415
101,834
133,584
(12,561)
Total inventories, net
$ 394,176
$121,023
F-14
Note 9 Goodwill and Other Intangible Asset Data
In 2014, we acquired intangible assets in the amount of $1.014 billion for developed
technology, customer relationships and trade names associated with the Acquisition.
These intangible assets have an estimated useful life ranging from 1 to 15 years. See
Note 3 Business Combinations for specific information regarding the Acquisition.
In 2013, we acquired intangible assets in the amount of $37.2 million for developed
technology, customer relationships and trade names associated with the acquisition of
Hart Systems, LLC.
Amortized intangible assets
Current technology
Trade names
Patent and patent rights
Customer relationships
As of December 31, 2013
Gross Accumulated
Amount Amortization
Net
Amount
$ 23,778
$ (14,060)
$ 9,718
300
29,569
52,593
(300)
(17,919)
(4,993)
0
11,650
47,600
Intangible asset data are as follows (in thousands):
Amortized intangible assets
Current technology
Trade names
Unpatented technology
Patent and patent rights
Customer relationships
As of December 31, 2014
Gross Accumulated
Amount Amortization
Net
Amount
$ 23,201
$ (16,499)
$ 6,702
40,300
280,000
244,569
532,591
(1,967)
(12,889)
(31,832)
(28,181)
38,333
267,111
212,737
504,410
Total
$1,120,661
$ (91,368)
$1,029,293
Amortization expense for the
year ended December 31, 2014
$ 54,096
Estimated amortization expense:
For the year ended December 31, 2015
$ 244,376
For the year ended December 31, 2016
230,825
For the year ended December 31, 2017
For the year ended December 31, 2018
For the year ended December 31, 2019
Thereafter
Total
212,023
117,534
90,441
134,094
$1,029,293
Total
$ 106,240
$ (37,272)
$ 68,968
Amortization expense for the
year ended December 31, 2013
$ 7,383
Changes in the net carrying value amount of goodwill were as follows (in thousands):
Total
Goodwill as of December 31, 2011
$ 79,703
Acquisition – LaserBand
Impairment charge – 2012
Goodwill as of December 31, 2012
Acquisition – Hart Systems
24,353
(9,114)
94,942
60,858
Goodwill as of December 31, 2013
155,800
Goodwill adjustment – Hart Systems 2014
(2,284)
Acquisition – Enterprise
2,335,994
Goodwill as of December 31, 2014
$ 2,489,510
Gross goodwill was $180.7 million and accumulated impairments through 2011 were
$101.0 million. In 2014, we acquired goodwill in the amount of $2.336 billion and because
the purchase price allocation related to the Acquisition has not been finalized, the entire
goodwill is assigned to the Enterprise segment. The assignment of goodwill to reporting
units has not been completed as of date these financial statements are issued.
In the fourth quarter 2013, Zebra acquired all of the outstanding membership interests
in Hart Systems, LLC (a New York limited liability company) with $60.9 million of the
purchase price allocated to goodwill. As of September 27, 2014 the purchase price
allocation was finalized and the amount of goodwill was reduced to $58.6 million for
adjustments related to deferred taxes. Zebra performed a quantitative assessment
of goodwill related to Hart Systems, LLC., as of the first day of the fourth quarter and
determined there was no impairment of goodwill.
F-15
Note 12 Costs Associated with Exit and Restructuring
During the fourth quarter 2014, Zebra incurred restructuring costs resulting from
organizational design changes. The costs below incurred for the year ended December 31,
2014 and costs expected to be incurred represent the costs related to these restructuring
activities primarily related to the acquisition.
Costs incurred through December 31, 2013 and costs expected to be incurred relate to the
following: restructuring of Zebra’s manufacturing operations; relocation of a significant
portion of Zebra’s supply chain operations from the U.S. to China; consolidating activities
domestically; restructuring of our sales operations; restructuring certain corporate
functions; and amending the Location Solutions “2012 restructuring plan” by adding
additional restructuring charges to be incurred. These restructuring charges were
complete by the third quarter 2014.
As of December 31, 2014, we have incurred the following exit and restructuring costs
related to the 2014 organization design changes, Location Solutions business management
structure and manufacturing operations relocation and restructuring (in thousands):
Cost Costs incurred
Type of Cost
Severance, stay
bonuses, and
other employee-
related expenses
incurred
through months ended
Dec. 31
2013
for the twelve Total costs Additional
incurred as
costs Total costs
Dec. 31, of Dec. 31, expected to expected to
2014 be incurred be incurred
2014
$6,650
$5,991
$ 12,641
$ 0
$12,641
Professional services
180
Relocation and
transition costs
Total
20
$6,850
16
0
196
20
0
0
196
20
$6,007
$12,857
$ 0
$12,857
Note 10 Other Assets
Other assets consist of the following (in thousands):
As of December 31,
2013
2014
Investments related to the deferred compensation plan
$ 6,008
$ 4,827
Long-term investments
Other long-term assets
Long-term trade receivable
Long-term notes receivable
Long-term investments and marketable securities
Deposits
Total
31,759
28,448
16,985
14,231
0
1,486
21,242
1,522
0
0
2,588
1,174
$ 98,917
$31,353
As a result of the Acquisition, Zebra acquired $10.4 million of long-term investments
which are accounted for under the cost method of accounting. These investments are
primarily in venture capital backed technology companies and our ownership interest
is in the range of 2.0% to 8.3%. These investments are in addition to the cost method
investments in venture capital backed technology companies already owned by Zebra.
Zebra also acquired as a result of the Acquisition $16.9 million of long-term trade
receivables and $11.3 million of other long-term assets.
Note 11 Accrued Liabilities
The components of accrued liabilities are as follows (in thousands):
As of December 31,
2013
2014
$ 73,582
$30,338
24,666
11,446
0
34,727
48,806
39,201
188,642
4,125
284
2,743
0
0
9,332
15,140
$421,070
$ 61,962
Accrued payroll
Accrued warranty
Accrued taxes
Accrued forward contracts
Interest payable
Amount owed to seller
Customer reserves
Accrued other expenses
Total accrued liabilities
F-16
As of December 31, 2013, we incurred the following exit and restructuring costs related
to the Location Solutions business management structure and manufacturing operations
relocation and restructuring (in thousands):
Cost Costs incurred
Type of Cost
Severance, stay
bonuses, and
other employee-
related expenses
incurred
through months ended
Dec. 31
2012
for the twelve Total costs Additional
incurred as
costs Total costs
Dec. 31, of Dec. 31, expected to expected to
2013 be incurred be incurred
2013
$ 960
$5,690
$ 6,650
$61
$ 6,711
Professional services
Relocation and
transition costs
0
0
180
20
180
20
0
0
180
20
Total
$ 960
$5,890
$ 6,850
$61
$ 6,911
Liabilities and expenses related to exit activities were as follows (in thousands):
Balance at beginning of period
Charged to earnings
Cash paid
Balance at the end of period
Year Ended December 31,
2013
2014
2012
$1,252
6,007
(429)
$6,830
$ 967
5,890
(5,605)
$ 1,252
$ 1,048
960
(1,041)
$ 967
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 13 Derivative Instruments
Portions of our operations are subject to fluctuations in foreign exchange rates. 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.
In addition, we have exposure to market risk for changes in interest rates resulting from
the variable interest payments on the term facility that was used to fund the Acquisition.
In June 2014, we entered into a commitment letter for a new variable rate credit facility to
fund the announced acquisition and we also entered into two tranches of floating-to-fixed
forward interest rate swaps (“Original Swaps”) to hedge the interest rate risk. In July
2014, we designated the Original Swaps as cash flow hedges of interest rate exposure
associated with variability in future cash flows on our variable rate commitment. On
October 27, 2014, the variable rate commitment was funded and we entered into a term
loan of $2.2 billion (the “Term Loan”). Through October 31, 2014, the Original Swaps
continued to hedge the variability in future cash flows on the Term Loan and the changes
in fair value of the Original Swaps were recorded to accumulated other comprehensive
income (loss). Ineffectiveness was insignificant.
On October 30, 2014, we discontinued hedge accounting on the Original Swaps due to
syndication of the Original Swaps to a group of commercial banks, which resulted in the
termination of the Original Swaps and entry into the syndicated forward starting interest
rate swaps (“Syndicated Swaps”). The Syndicated Swaps were not designated as hedges
and the changes in fair value is recognized in earnings in other income (expense).
On November 20, 2014 we entered into additional floating-to-fixed forward starting
interest rate swaps (“New Swaps”) and designated these as cash flow hedges of interest
rate exposure associated with variability in future cash flows on our Term Loan. To offset
the impact to earnings of the changes in fair value of the Syndicated Swaps, we also
entered into fixed-to-floating forward starting interest rate swaps (“Offsetting Swaps”),
which were not designated in a hedging relationship and the changes in the fair value
are recognized in earnings in other income (expense). Changes in fair value of the New
Swaps that are designated as cash flow hedge and are effective at offsetting variability
in the future cash flows on our Term Loan are recognized in other comprehensive income
(loss). Ineffectiveness is immediately recognized in earnings.
The fair value of the forward starting interest rate swap contracts is estimated using
market quoted forward interest rates for the London Interbank Offered Rate “LIBOR”
at the balance sheet date and the application of such rates subject to the interest rate
swap terms. In accordance with ASC 815 we recognize derivative instruments 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 as and qualifies for hedge accounting.
F-17
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,
Notional balance of outstanding contracts:
Euro/US dollar
Pound/US dollar
Net fair value of outstanding contracts
As of
December 31, December 31,
2013
2014
€ 40,218
£ 4,574
$
250
€ 41,021
0
£
$
33
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):
Unrealized gains (losses) on anticipated sales hedging:
Gross
Income tax expense (benefit)
Net
As of
December 31, December 31,
2013
2014
$ 9,031
$ 208
1,841
90
$ 7,190
$ 118
Summary financial information related to the cash flow hedges of future revenues follows
(in thousands, except percentages):
As of
December 31, December 31,
2013
2014
2014
2013
2012
Notional balance of outstanding contracts versus the dollar
Change in gains (losses) from
foreign exchange derivatives
$ 5,675
$ (1,998)
$ (1,347)
Hedge effectiveness
Gain (loss) on net foreign currency assets
(14,434)
1,474
406
Net foreign exchange loss
$ (8,759)
$ (524)
$ (941)
€ 88,969
100%
€ 85,627
100%
Year Ended December 31,
2013
2014
2012
Net gains (losses) included in revenue
$1,578
$ (4,294)
$ 4,201
F-18
As of
December 31, December 31,
2013
2014
$ 2,170
$ 2,170
$ 0
$ 0
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 4 of Zebra’s financial statements. The amounts
recorded on our consolidated balance sheets are as follows (in thousands):
The location of the forward interest rate swaps designated in a hedge relationship is as
follows (in thousands):
As of
December 31, December 31,
2013
2014
Liabilities:
Other long term liabilities
Total
Assets:
Prepaid expenses and other current assets
Total
Liabilities:
Accrued liabilities
Total
$ 9,318
$ 9,318
$ 0
$ 0
$ 0
$ 0
$ 2,743
$ 2,743
The interest rate swap designated in a hedging relationship is highly effective.
The forward interest rate swaps not designated in a hedging relationship are recorded in
a net liability position of $14.5 million in the Consolidated Balance Sheets.
The gross and net amounts offset at December 31, 2014 were as follows (in thousands):
Forward Interest Rate Swaps
The forward interest rate swaps hedge the interest rate risk associated with the variable
interest payments on our Term Loan that was used to fund the Acquisition.
These Original Swaps were used to economically hedge interest rate risk associated
with the variable rate commitment until July 30, 2014, and as such, changes in their fair
value were recognized in earnings in other income (expense). Effective July 30, 2014, the
Original Swaps were designated as cash flow hedges of interest rate exposure associated
with variability in future cash flows on the variable rate commitment. On October 27,
2014, the variable rate commitment was funded and we entered into a Term Loan that
accrues interest at a variable rate of LIBOR (subject to a floor of 0.75% per annum) plus a
margin of 4.0%. On October 30, 2014, we discontinued hedge accounting for the Original
Swaps due to the syndication of the Original Swaps to a group of commercial banks,
which resulted in their termination. The changes in fair value of the Original Swaps
between July 30, 2014 and their termination were included in other comprehensive
income (loss), and any ineffectiveness was insignificant. The amounts included in other
comprehensive income (loss) will be amortized to earnings in other income (expense) as
the interest payments under the Term Loan affect earnings.
We entered into New Swaps and Offsetting Swaps on November 20, 2014. We designated
the New Swaps as cash flow hedges of interest rate exposure associated with variability
in future cash flows on the Term Loan. Subsequent to the hedge designation, the
effective portion of changes in their fair value is recognized in other comprehensive
income (loss) and the ineffective portion is recognized in earnings. The effective portion
recognized in other comprehensive income (loss) will be reclassified to earnings in other
income (expense) as the interest payments under the Term Loan affect earnings.
The Syndicated Swaps and the Offsetting Swaps are not designated in a hedging
relationship and the changes in fair values are recognized in earnings in other income
(expense).
Counterparty A
Counterparty B
Counterparty C
Counterparty D
Counterparty E
Counterparty F
Counterparty G
Total
Fair Value
Gross Counterparty
Offsetting
Net Fair Value in
the Consolidated
Balance Sheets
$ 4,631
$ 1,236
$ 3,395
2,400
2,074
3,636
1,956
1,988
3,251
312
369
631
326
344
0
2,088
1,705
3,005
1,630
1,644
3,251
$19,936
$ 3,218
$16,718
The volume of the forward interest rate swaps, New Swaps, designated in a hedge
relationship is as follows (in thousands):
Notional balance of outstanding contracts
$3,339,000
$ 0
As of
December 31,
2014
December 31,
2013
F-19
The New Swaps, each with a term of one year, are designated as cash flow hedges of
interest rate exposure associated with variability in future cash flows on the Term Loan.
The notional amount of the designated New Swaps effective in each year of the cash
flow hedge relationships does not exceed the principal amount of the Term Loan which is
hedged. The New Swaps have the following notional amounts per year (in thousands):
Year 2015
Year 2016
Year 2017
Year 2018
Year 2019
Year 2020
Notional balance of outstanding contracts
$ 1,010,000
$ 697,000
$ 544,000
$ 544,000
$ 272,000
$ 272,000
$3,339,000
The gain (loss) recognized on the forward interest rate swaps not designated in a hedge
relationship is as follows (in thousands):
Year Ended December 31,
Gain (loss) on forward interest-rate swaps $ (4,649)
$ 0
2014
2013
2012
$ 0
The gain (loss) recognized in other comprehensive income (loss) on the forward interest
rate swaps designated in a hedging relationship is as follows (in thousands):
Unrealized loss on forward interest rate swap hedging:
Gross
Income tax benefit
Net
As of
December 31, December 31,
2013
2014
$(12,069)
$ 0
4,370
0
$ (7,699) $ 0
No gain (loss) was reclassified from accumulated other comprehensive income (loss) into
earnings on the forward interest rate swaps designated in a hedging relationship during
the year ended December 31, 2014.
At December 31, 2014, we expect that approximately $4.1 million in losses on the forward
interest rate swaps designated in a hedging relationship will be reclassified from
accumulated other comprehensive loss into earnings during the next 12 months.
Note 14 Long-Term Debt
The following table summarizes the carrying value of our debt as of December 31, 2014
(in thousands):
Senior Notes
Term loan
Less unamortized discounts
Total outstanding debt
Current maturities of long-term debt
Less: current portion of unamortized discounts
Total short-term debt
Long-term debt, less current maturities
$ 1,050,000
2,200,000
(59,516)
3,190,484
16,500
(8,978)
7,522
$3,182,962
Zebra did not have any long-term debt outstanding at December 31, 2013.
The following table summarizes the contractual maturities of our debt over the next five
years, at December 31, 2014 (in thousands):
Year Ended December 31,
2015
2016
2017
2018
2019
$ 16,500
22,000
22,000
22,000
22,000
The estimated fair value of our long-term debt approximated $3.3 billion at December 31,
2014. This fair value amount represents the estimated value at which our lenders could trade
our debt within the financial markets and does not represent the settlement value of these
long-term debt liabilities to us. The fair value of the long-term debt will continue to vary
each period based on fluctuations in market interest rates, as well as changes to our credit
ratings. This methodology resulted in a Level 2 classification in the fair value hierarchy.
Private Offering
On October 15, 2014, Zebra completed a private offering of $1.05 billion aggregate
principal of 7.25% Senior Notes due October 15, 2022 (the “Senior Notes”). The Senior
Notes yielded an effective interest rate of 7.61% at issuance. The Senior Notes are
governed by the terms of an indenture, dated as of October 15, 2014, by and among Zebra
and U.S. Bank National Association, as Trustee. Interest on the Senior Notes is payable in
cash on April 15 and October 15 of each year, commencing on April 15, 2015.
F-20
The Indenture covering the Senior Notes contains certain covenants limiting among
other things, the ability of Zebra and its restricted subsidiaries, with certain exceptions
as described in the indenture, to; (i) incur indebtedness or issue certain preferred stock;
(ii) incur liens; (iii) pay dividends or make distributions in respect of capital stock; (iv)
purchase or redeem capital stock; (v) make investments or certain other restricted
payments; (vi) sell assets; (vii) issue or sell stock of restricted subsidiaries; (viii) enter into
transactions with stockholders or affiliates; or (ix) effect a consolidation or merger.
The Senior Notes are guaranteed, jointly and severally, on a senior and unsecured
basis by its direct and indirect wholly-owned existing and future domestic restricted
subsidiaries, subject to certain exceptions. The Senior Notes rank equal in right of
payment to all of our existing and future unsecured, unsubordinated obligations. The
Senior Notes are effectively subordinated to the secured obligations of the Company and
subsidiaries to the extent of the value of the assets securing such obligations.
New Credit Facilities
On October 27, 2014, Zebra entered into a new credit agreement which provides for a
term loan of $2.2 billion (“Term Loan”) and a revolving credit facility of $250.0 million
(“Revolving Credit Facility”). Borrowings under the Term Loan bear interest at a variable
rate plus an applicable margin, subject to an all-in floor of 4.75%. As of December 31 2014,
the Term Loan interest rate was 4.75%. Interest payments are payable quarterly, starting
January 27, 2015. The October 2012 revolving credit agreement for $250.0 million with a
syndicate of banks was terminated upon execution of this credit agreement. Zebra has
entered into interest rate swaps to manage interest rate risk on its long-term debt. See
Note 13 Derivative Instruments.
The credit agreement requires Zebra to prepay the Term Loan and Revolving Credit
Facility, under certain circumstances or transactions defined in the credit agreement.
Also, Zebra may voluntarily prepay outstanding loans under the Term Loan at any time;
however, we are required to make scheduled quarterly principal payments of $5.5 million
beginning June 30, 2015, with the balance of $2.1 billion due on October 27, 2021.
The Revolving Credit Facility is available for working capital and other general corporate
purposes including letters of credit. The amount (including letters of credit) shall not
exceed $250.0 million. As of December 31, 2014, Zebra had established letters of credit
amounting to $2.9 million, which reduced funds available for other borrowings under
the agreement to $247.1 million. The Revolving Credit Facility will mature and the
commitments thereunder will terminate on October 27, 2019.
Borrowings under the Revolving Credit Facility bear interest at a variable rate plus an
applicable margin. The applicable margin for borrowings under the Revolving Credit Facility
ranges from 2.25% to 2.75% depending on Zebra’s consolidated total secured net leverage
ratio which is evaluated on a quarterly basis. As of December 31 2014, the Revolving Credit
Facility interest rate was 3.25%. Interest payments are payable quarterly. As of December 31,
2014, Zebra did not have any borrowings against the Revolving Credit Facility.
In addition to paying interest on outstanding principal amounts under the Revolving
Credit Facility, the Company is required to pay a commitment fee to the lenders with
respect to the unutilized commitments. The commitment fee rate is currently 0.375% per
year. The commitment fee rate will be adjusted to 0.250%, 0.375% or 0.500% depending
on Zebra’s consolidated total secured net leverage ratio.
The Revolving Credit Facility contains certain covenants limiting among other things, the
ability of Zebra and its restricted subsidiaries, with certain exceptions as described in the
agreement, to; (i) incur indebtedness, make guarantees or issue certain equity securities;
(ii) pay dividends on its capital stock or redeem, repurchase or retire its capital stock; (iii)
make certain investments, loans and acquisitions; (iv) sell certain assets or issue capital
stock of restricted subsidiaries; (v) create liens or engage in sale-leaseback transactions;
(vi) merge, consolidate or transfer or dispose of substantially all of their assets; (vii)
engage in certain transactions with affiliates; (viii) alter the business it conducts; (ix)
amend, prepay, redeem or purchase subordinated debt and (x) enter into agreements
limiting subsidiary dividends and distributions. The Revolving Credit Facility also
requires Zebra to comply with a financial covenant consisting of a quarterly maximum
consolidated total secured net leverage ratio test that will be tested only when at the end
of any fiscal quarter, 20% of the commitments under the Revolving Credit Facility have
been drawn and remain outstanding.
The Term Loan and obligations under the Revolving Credit Facility are collateralized by a
security interest in substantially all of Zebra’s assets as defined in the security agreement
and guaranteed by its direct and indirect wholly-owned existing and future domestic
restricted subsidiaries, subject to certain exceptions.
Debt issue costs of $24.0 million were recorded as of December 31, 2014; $21.8 million
relates to the Senior Notes and $2.2 million relates to the Term Loan, these costs are
amortized over 8 and 7 years respectively.
Zebra entered into a bridge financing facility prior to the acquisition, to ensure financing
would be in place to consummate the transaction. Upon the closing of the Acquisition at
which time Zebra had secured other long-term financing Zebra incurred $18.8 million of
costs related to the bridge financing facility, which are included in interest expense for
the year ended December 31, 2014.
F-21
Note 16 Stockholders’ Equity
Share count and par value data related to stockholders’ equity are as follows:
As of
December 31, December 31,
2013
2014
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
51,654,337
0.01
150,000,000
72,151,857
50,349,546
20,497,520
21,802,311
During the year ended December 31, 2013, Zebra purchased 1,356,861 shares of common
stock for $63.1 million under Board authorized share repurchase plan and purchased
1,473,863 shares of common stock for $54.4 million in 2012. Zebra did not purchase
shares of Zebra Class A Common Stock during the year ended December 31, 2014.
A roll forward of Class A common shares outstanding is as follows:
Year Ended December 31,
2013
2014
2012
Balance at the beginning of the year
50,349,546
50,908,267
52,095,166
Repurchases
0
(1,356,861)
(1,473,863)
Stock options, rights and ESPP issuances
Restricted share issuances
Restricted share forfeitures
Shares withheld for tax obligations
726,440
656,755
(12,490)
(65,914)
739,148
241,851
(165,610)
(17,249)
246,625
242,238
(130,119)
(71,780)
Balance at the end of the period
51,654,337
50,349,546
50,908,267
Note 15 Commitments and Contingencies
Leases. Minimum future obligations under all non-cancelable operating leases as of
December 31, 2014 are as follows (in thousands):
2015
2016
2017
2018
2019
Thereafter
Total minimum lease obligations
Operating Leases
$ 33,991
27,105
21,745
17,743
14,951
44,982
$160,517
Rent expense for operating leases charged to operations was as follows (in thousands):
Year Ended December 31,
2013
2014
2012
Rent expense
$ 21,101
$ 15,750
$ 15,254
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 20 years with breaking periods specified in the lease
agreements.
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.
F-22
Note 17 Earnings (Loss) Per Share
For the years ended December 31, 2014, 2013, and 2012, 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,
2013
2014
2012
50,789
50,693
51,566
591
370
277
51,380
51,063
51,843
Income (loss) from continuing operations $32,429
$134,225
$121,897
Income from discontinued operations
0
133
1,007
Net income (loss)
$32,429
$134,358
$122,904
Basic per share amounts:
Income (loss) from continuing operations $ 0.64
$ 2.65
$ 2.36
Income from discontinued operations
0.00
0.00
0.02
Net income (loss)
$ 0.64
$ 2.65
$ 2.38
Diluted per share amounts:
Income (loss) from continuing operations $ 0.63
$ 2.63
$ 2.35
Income from discontinued operations
0.00
0.00
0.02
Net income (loss)
$ 0.63
$ 2.63
$ 2.37
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
175,902
168,472
1,753,311
Year Ended December 31,
2013
2014
2012
Note 18 Equity-Based Compensation
As of December 31, 2014, Zebra had a general equity-based compensation plan and an
employee 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 2011
Plan. As of December 31, 2014, 3,307,608 shares were available for grant under the 2011
Plan, and SARs in respect of 818,949 shares were outstanding under the 2011 Plan.
The 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. SAR’s general 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 (RSAs)
and performance vested restricted stock awards (PSAs). The following table shows the
number of RSAs and PSAs granted in 2014 and the generally vesting schedule of the
awards that were granted under the 2011 Plan.
Vesting period
At grant
After three years of service
Total
RSAs
15,026
408,618
423,644
PSAs
0
233,111
233,111
Total
15,026
641,729
656,755
F-23
These RSAs and PSAs 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 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 each Restricted
Stock Agreement. The restricted stock is forfeited in certain situations specified in the
Restricted Stock Agreement, including, if the employee’s employment is terminated by
Zebra for Cause or if the employee resigns for other than good reason. Zebra’s restricted
stock awards are expensed over the vesting period of the related award, which is typically
three years. Some awards, including those granted annually to non-employee directors
as an equity retainer fee, were 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, 2014, options and
SARs for 774,661 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, 2014, options for
85,197 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, 2014,
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, 2014, outstanding WhereNet options
were exercisable into 1,604 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, 2014 was $326,000. Stock
purchase plan expense for the year ended December 31, 2013 was $224,000 and for the
year ended December 31, 2012 was $242,000.
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 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
2014
0%
10.32%
34.92%
1.73%
2013
0%
10.31%
32.00%
.82%
2012
0%
10.21%
35.90%
.94%
– Range of interest rates
0.02%-2.61%
0.02% - 1.78% 0.07% - 1.95%
Expected weighted-average life
5.36 years
5.42 years
5.48 years
Fair value of SARs granted
$4,884,000
$4,528,000
$5,533,000
Weighted-average grant date fair
value of SARs granted
(per underlying share)
$24.98
$13.86
$12.84
The forfeiture rate is based on the historical annualized forfeiture rate, which is consistent
with prior year rates. This rate includes only pre-vesting forfeitures. Volatility is based
on an average of the implied volatility in the open market and the annualized volatility of
Zebra’s stock prices over our entire stock history. The risk free interest rate used is the
implied yield currently available from the U.S. Treasury zero-coupon yield curve over the
contractual term of the options. The expected weighted-average life is based on historical
exercise behavior, which combines the average life of the options that have already been
exercised or cancelled with the exercise life of all unexercised options. The exercise life
of unexercised options assumes that the option will be exercised at the midpoint of the
vesting date and the full contractual term. These assumptions are consistent with the
assumptions used in prior years.
F-24
Stock option activity for the years ended December 31, 2014, 2013, and 2012, was as follows:
Options
Outstanding at beginning of year
Granted
Exercised
Forfeited
Expired
Outstanding at end of year
Exercisable at end of year
2014
Weighted-Average
Exercise Price
$42.77
0
44.76
0
0
$40.19
$40.19
Shares
956,502
0
(540,542)
0
0
415,960
415,960
Intrinsic value of exercised options
$15,200,000
There were no stock options granted in 2014, 2013 or 2012.
The following table summarizes information about stock options outstanding at December 31, 2014.
Aggregate intrinsic value
Outstanding
Exercisable
$12,882,000
$12,882,000
Weighted-average remaining contractual term
2.2 years
2.2 years
SAR activity for the years ended December 31, 2014, 2013, and 2012, was as follows:
2013
Weighted-Average
Exercise Price
$41.69
0
39.54
0
45.81
$42.77
$42.77
Shares
1,532,569
0
(543,922)
0
(32,145)
956,502
956,502
$4,300,000
2012
Weighted-Average
Exercise Price
$40.42
0
27.02
36.36
43.63
$41.69
$41.75
Shares
1,703,375
0
(148,802)
(1,663)
(20,341)
1,532,569
1,528,539
$1,700,000
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
2014
Weighted-Average
Exercise Price
$36.36
74.59
34.03
50.57
46.07
$42.20
$33.03
Shares
1,402,784
195,560
(267,077)
(38,738)
(387)
1,292,142
586,344
$10,800,000
2013
Weighted-Average
Exercise Price
$31.66
46.13
25.44
37.54
33.70
$36.36
$30.51
Shares
1,535,804
326,811
(376,673)
(80,515)
(2,643)
1,402,784
520,426
$7,900,000
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
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 2014
is as follows: 195,560 SARs vest annually in four equal amounts on each of the first four
anniversaries of the grant date.
Vesting of SARs granted in 2013 is as follows: 326,811 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, 2014:
Aggregate intrinsic value
Outstanding
Exercisable
$38,061,000
$22,354,000
Weighted-average remaining contractual term
7.0 years
6.0 years
F-25
Restricted stock award activity, granted under the 2011 and 2006 Plans, for the years ended December 31, 2014, 2013 and 2012 was as follow:
Restricted Stock Awards
Outstanding at beginning of year
Granted
Released
Forfeited
Outstanding at end of year
2014
Weighted-Average
Grant Date Fair Value
$40.92
73.42
43.16
54.08
$60.06
Shares
435,377
423,644
(153,200)
(14,200)
691,621
2013
Weighted-Average
Grant Date Fair Value
$35.43
46.17
31.28
40.79
$40.92
Shares
444,362
167,515
(161,976)
(14,524)
435,377
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
Restricted stock units of 42,071 were awarded for the year ended December 31, 2014. Restricted units of 4 were released and 103 units were forfeited during the same period.
Performance stock units of 10,345 were awarded for the year ended December 31, 2014. There were no performance stock units released or forfeited in 2014.
Performance share award activity, granted under the 2011 and 2006 Plans, for the years ended December 31, 2014, 2013 and 2012 was as follows:
Performance Share Awards
Outstanding at beginning of year
Granted
Released
Forfeited
Outstanding at end of year
2014
Weighted-Average
Grant Date Fair Value
$42.25
73.00
41.45
41.45
$61.53
Shares
195,159
233,111
(33,535)
(20,555)
374,180
2013
Weighted-Average
Grant Date Fair Value
$35.55
35.17
27.90
41.46
$42.25
Shares
265,829
187,794
(253,484)
(4,980)
195,159
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
As of December 31, 2014, there was $53.5 million 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 2.0 years.
Note 19 Income Taxes
The geographical sources of income before income taxes were as follows (in thousands):
Year Ended December 31,
2013
2014
2012
$(122,766)
$ 47,636
139,395
116,191
$ 16,629
$163,827
$ 60,388
103,786
$ 164,174
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.
United States
Outside United States
Total
Fair market value
Option price
Expected dividend yield
Expected volatility
Risk free interest rate
2014
$64.99
$ 61.74
0%
31%
0.05%
2013
$42.45
$40.33
0%
19%
0.05%
2012
$ 35.43
$33.66
0%
21%
0.07%
F-26
The provision (benefit) 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,
2013
2014
2012
$ 5,752
$ 9,556
$ 17,744
3,442
19,346
28,540
(37,772)
(5,657)
(911)
(44,340)
808
11,638
22,002
7,118
289
193
7,600
1,324
14,258
33,326
8,656
375
(80)
8,951
$(15,800)
$29,602
$ 42,277
The primary reason for the difference between the US statutory rate of 35% and Zebra’s
effective tax rate is due to a combination of higher profits in lower rate international
jurisdictions, the Singapore tax holiday, the research & experimental credit, which is
offset by changes in the valuation allowance, uncertain tax positions, the non-deductible
portion of the acquisition expenses and other items. 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%. This agreement reduced Zebra’s consolidated
income taxes by approximately $2.0 million, $1.9 million and $2.0 million in 2014, 2013
and 2012, respectively. Due to Zebra’s increased business operations in Malaysia, it is
unclear whether Zebra’s Singapore headquarters will meet the additional requirements
necessary to qualify for the 10% rate in 2015 and 2016.
Tax effects of temporary differences that give rise to deferred tax assets and liabilities are
as follows (in thousands):
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. A reconciliation
of the provision for income taxes is below (in thousands):
Year Ended December 31,
2013
2014
2012
Deferred tax assets:
Deferred rent
Accrued vacation
Accrued bonus
Deferred compensation
Inventory items
Provision computed at statutory rate
$ 5,820
$57,339
$ 57,461
Allowance for doubtful accounts and other receivables
State income tax, net of Federal tax benefit
Asset impairment charge
Acquisition related items
Tax credits
(844)
0
6,499
(3,263)
1,191
0
0
(970)
1,353
3,190
322
0
Foreign rate differential
(32,970)
(26,798)
(21,598)
Change in valuation allowance
Section 162(m) limitation
Change in contingent income tax reserves
Other
2,987
740
3,105
2,126
0
111
0
0
0
0
(1,271)
1,549
Provision for income taxes
$(15,800)
$29,602
$ 42,277
Other accruals
Deferred revenue
Equity based compensation expense
Unrealized gain on securities
Unrealized loss on other investments
Net operating loss carry-forwards
Tax credits
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Unrealized loss on other investments
Depreciation and amortization
Undistributed Earnings
Total deferred tax liabilities
Net deferred tax assets (liabilities)
As of December 31,
2013
2014
$
752
5,318
11,642
2,208
1,493
5,361
50,491
78,351
14,189
4,621
4,075
27,016
62,040
(56,712)
$
409
2,153
2,916
1,816
6,061
118
5,680
5,469
12,337
558
410
597
0
(267)
210,845
38,257
(1,332)
(283,847)
(2,747)
(1,450)
(42,489)
0
(287,926)
(43,939)
$ (77,081)
$ (5,682)
F-27
Zebra earns a significant amount of our operating income outside the U.S. With the
exception of the acquired unrepatriated earnings related to the Enterprise acquisition,
it is the company’s policy to consider foreign earnings and profits to be permanently
reinvested in foreign jurisdictions. As part of Enterprise, the acquired earnings & profits
and previously taxed income (“PTI”), including excess cash balances pursuant to the
Master Acquisition Agreement (“MAA”) of the newly acquired MSI foreign subsidiaries
will not be permanently reinvested. As a result, Zebra has established a deferred tax
liability in purchase accounting in the amount of $2.7 million. Zebra has not recognized
deferred tax liabilities for unremitted earnings of approximately $466.4 million and
$354.2 million as of December 31, 2014 and 2013, respectively. It is not practicable to
determine the amount of unrecognized deferred tax liabilities on these indefinitely
reinvested earnings.
Included in deferred tax assets are amounts related to federal and state net operating
losses (“NOL”) that resulted from Zebra’s acquisition of WhereNet Corp and Enterprise.
As of December 31, 2014, Zebra has approximately $156.3 million of net operating
loss carry-forwards, of which $8.8 million is limited by Section 382, available to offset
future taxable income that begin to expire in 2022. As of December 31, 2014, Zebra
had approximately $26.8 million of state net operating loss carry-forwards that begin
to expire in 2017. Zebra has approximately $30.1 million of research & experimental
credits that begin to expire in 2025 and approximately $1.7 million of foreign tax credits
that begin to expire in 2017. Lastly, Zebra has approximately $3.9 million of alternative
minimum tax credits.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as
follows (in thousands):
Balance at January 1, 2014
Additions for tax positions related to the current year
Additions for tax positions related to prior years
Additions related to 2014 acquisition
Reductions for tax positions of prior years
Balance at December 31, 2014
$ 4,000
700
2,400
11,800
0
$18,900
The total impact of unrecognized tax benefits, if recognized, that would impact the
effective tax rate is $0.7 million. Zebra believes it is reasonably possible that the recorded
amount of gross unrecognized tax benefit may decrease by $2.8 million within the next
twelve months as a result of tax planning.
The Singapore tax authorities have issued an assessment resulting in additional
withholding tax and penalties relating to royalty payments made from 2009 to 2013.
These royalty payments relate to commercial rights not covered by the current royalty
exemption in place resulting in a withholding tax of approximately $3.2 million and
penalties of approximately $0.6 million. The withholding tax will be offset as a foreign tax
credit in the U.S. resulting in no impact to the effective tax rate.
F-28
Zebra’s continuing practice is to recognize interest and/or penalties related to income tax
matters as part of income tax expense. Zebra has accrued $3.1 million and $0 of interest
and penalties in the consolidated balance sheet as of December 31, 2014 and 2013,
respectively.
Zebra is currently undergoing an audit of the 2013 US federal income tax returns. The tax
years 2010 through 2014 remain open to examination by multiple state taxing jurisdictions.
Below is a summary of open tax years by major jurisdiction outside of the United States.
China
2002 - 2014
France
2010 - 2014
Germany
2008 - 2014
India
1997 - 2014
2011 - 2014
Japan
United Kingdom 2008 - 2014
Note 20 Other Comprehensive Income (Loss)
Stockholders’ equity contains certain items classified as other comprehensive income
(loss), including:
• Unrealized gains (losses) on anticipated sales hedging transactions relate to
derivative instruments used to hedge the currency exchange rates for forecasted
euro sales and interest rates on variable rate commitments. 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 13 for
more details.
• Unrealized gains (losses) on forward interest rate swap hedging transactions refers
to the hedging of the interest rate risk associated with the variable rate commitment
entered into for the Acquisition. See Note 13 for more details.
• Unrealized gains (losses) on investments are deferred from income statement
recognition until the gains or losses are realized.
• Foreign currency translation adjustment relates to our non-U.S. subsidiary
companies that have designated a functional currency other than the U.S.
dollar. We are required to translate the subsidiary functional currency financial
statements to dollars using a combination of historical, period-end, and average
foreign exchange rates. This combination of rates creates the foreign currency
translation adjustment component of other comprehensive income.
The components of other comprehensive income (loss) included in the Consolidated
Statements of Comprehensive Income (Loss) are as follows (in thousands):
Gain (Loss)
recognized
in OCI
Gain (Loss)
reclassified
from AOCI
to income
Year
ended
As of
Dec. 31, Dec. 31,
Gain (Loss)
recognized
in OCI
Gain (Loss)
reclassified
from AOCI
to income
Year
ended
As of
Dec. 31, Dec. 31,
2014
Unrealized gains (losses) on anticipated
sales hedging transactions:
Gross
Income tax (benefit)
Net
$ 9,632
$ (601)
(1)
$ 9,031
$ 6,658
2012
Unrealized gains (losses) on anticipated
sales hedging transactions:
Gross
1,970
7,662
(129)
(472)
1,841
7,190
1,332
5,326
Income tax (benefit)
Net
$(14,757)
$ 4,821
(1)
$(9,936) $ (2,581)
(3,900)
(10,857)
1,205
3,616
(2,695)
(599)
(7,241)
(1,982)
Unrealized gains (losses) forward interest
rate swaps hedging transactions:
Gross
Income tax (benefit)
Net
Unrealized gains (losses) on investments:
Gross
Income tax (benefit)
Net
(12,069)
(4,370)
(7,699)
(249)
(111)
360
0
(2)
(12,069)
(12,069)
0
0
(4,370)
(7,699)
(4,370)
(7,699)
4
(3)
(61)
65
253
(172)
425
102
(245)
347
Unrealized gains (losses) forward interest
rate swaps hedging transactions:
Gross
Income tax (benefit)
Net
Unrealized gains (losses) on investments:
Gross
Income tax (benefit)
Net
Foreign currency translation adjustments
1,324
(4)
(6)
1,318
(6,521)
Foreign currency translation adjustments
0
0
0
1,052
349
703
321
0
(2)
0
0
0
0
0
0
0
0
285
(3)
1,337
101
184
(4)
(79)
450
887
242
540
162
378
(8,721)
Total accumulated other
comprehensive gains (losses)
2013
Unrealized gains (losses) on anticipated
sales hedging transactions:
Gross
Income tax (benefit)
Net
$ 1,647
$ (413)
$ 1,234
$ (8,547)
Total accumulated other
comprehensive gains (losses)
$ (9,833)
$ 3,721
$(6,112) $(10,325)
$ 3,297
$(3,089)
(1)
$ 208
$ (2,373)
862
2,435
(772)
(2,317)
90
118
(509)
(1,864)
(1) Transfer of unrealized gains and (losses) from AOCI to income on anticipated sales hedging transactions are
included in net sales of tangible products.
(2) Transfer from AOCI to income and (losses) on forward interest rate swap hedging transactions are reported in
forward swaps gain (loss).
(3) Transfer of unrealized gains and (losses) from AOCI to income on investments are included in investment income.
(4) Transfer of foreign currency translation gains and (losses) from AOCI to income, are included in foreign exchange.
Unrealized gains (losses) forward interest
rate swaps hedging transactions:
Gross
Income tax (benefit)
Net
Unrealized gains (losses) on investments:
Gross
Income tax (benefit)
Net
Foreign currency translation adjustments
Total accumulated other
comprehensive gains (losses)
0
0
0
(1,294)
(423)
(871)
566
0
(2)
0
0
(603)
(3)
188
415
316
(4)
0
0
0
(691)
(235)
(456)
0
0
0
(151)
(73)
(78)
882
(7,839)
$ 2,130
$(1,586)
$ 544
$ (9,781)
F-29
Note 21 Segment Information and Geographic Data
On October 27, 2014, Zebra acquired a portion of the Enterprise business of Motorola
Solutions, Inc. for $3.45 billion in an all-cash transaction. As a result of this acquisition,
Zebra is in a period of transition as it relates to organizational alignment and
management reporting which could impact segment reporting in future periods.
However, at December 31, 2014, Zebra has two reportable segments: Legacy Zebra
(“Z”) and Enterprise (“E”). Segment assets are not reviewed by Zebra’s chief operating
decision maker and therefore are not disclosed below (in thousands):
Net sales:
Z - Net sales
E - Net sales
Total segment net sales
Corporate, eliminations(1)
Total
Operating income (loss):
Z - operating income
E - operating income
Year Ended December 31,
2013
2014
2012
$1,194,536
$1,038,159
$996,168
482,217
0
0
$1,676,753
$1,038,159
996,168
(6,181)
0
0
$1,670,572
$1,038,159
$996,168
$ 238,162
$ 178,539
$182,518
65,032
0
0
Total segment operating income
$ 303,194
$ 178,539
$182,518
Corporate, eliminations(2)
(214,604)
(18,275)
(18,167)
Total
$ 88,590
$ 160,264
$164,351
Net sales by country that are greater than 10% of total net sales are as follows
(in thousands):
2014
2013
2012
United
States
$874,592
$562,848
$539,504
United
Kingdom
$ 558,279
$ 323,708
$ 317,793
Singapore
Other
Total
$154,357
$140,588
$134,349
$83,344
$ 11,015
$ 4,522
$1,670,572
$1,038,159
$ 996,168
Net sales by country are determined by the country from where the products are invoiced
when they leave Zebra’s warehouse. Generally, our United States sales company serves
North America and Latin America while our United Kingdom sales company serves the
Europe, Middle East and Africa markets and our Singapore sales company serves all of
the Asia Pacific market.
Net sales by major product category are as follows (in thousands):
2014
2013
2012
Hardware
Supplies
$1,233,386
$ 740,567
$ 735,728
$ 265,176
$ 243,965
$ 212,499
Service
and
Software
$ 172,010
$ 53,627
$ 47,941
Total
$1,670,572
$1,038,159
$ 996,168
Note 22 Major Customers
Our net sales to significant customers as a percentage of total net sales were as follows:
(1) Amount included in Corporate, eliminations consist of purchase accounting adjustments related to the
Acquisition.
(2) Amounts included in Corporate, eliminations consist of purchase accounting adjustments not reported in
segments: amortization expense, acquisition integration expense and exit and restructuring costs; for the year
ended December 31, 2012, also includes a $9.1 million impairment charge.
Customer A
Customer B
Customer C
2014
17.1%
12.2%
10.5%
Year Ended December 31,
2013
2012
16.8%
13.1%
12.3%
20.4%
11.4%
10.3%
Information regarding Zebra’s operations by geographic area is contained in the
following table. These amounts 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. (in thousands):
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. No customers accounted
for more than 10% of outstanding accounts receivable at December 31, 2014 and 2013,
respectively.
North Europe, Middle
East & Africa
America
Latin
America
Asia
Total
$ 737,018
237,891
$ 583,005
9,962
$ 134,638
1,862
$215,911
5,377
$1,670,572
255,092
$ 459,908
97,768
$ 326,470
8,149
$ 99,041
502
$152,740
3,169
$1,038,159
109,588
$ 435,520
90,363
$ 322,970
7,522
$ 100,101
538
$137,577
2,926
$ 996,168
101,349
2014
Net sales
Long-lived assets
2013
Net sales
Long-lived assets
2012
Net sales
Long-lived assets
F-30
Note 23 Quarterly Results of Operations (unaudited)
(Amounts in thousands, except per share data)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2014
2014
Net Sales
Net sales of
tangible products
$ 261,892
$ 270,049
$ 282,643
$ 683,978
Revenue from services
and software
26,376
18,372
20,629
106,633
Total net sales
288,268
288,421
303,272
790,611
Cost of Sales
Cost of sales of
tangible products
Cost of sales services
and software
Cost of sales
Gross profit
Operating expenses:
130,449
136,962
141,842
382,884
9,881
140,330
9,290
9,924
146,252
151,766
71,315
454,199
147,938
142,169
151,506
336,412
Selling and marketing
35,416
Research and development
22,857
35,755
23,710
36,781
25,225
General and administrative
28,391
26,321
24,741
Amortization of
intangible assets
Acquisition costs
Exit and restructuring costs
2,672
4,927
267
2,667
2,597
20,364
35,326
287
(120)
105,352
79,311
58,761
46,160
66,094
5,573
Total operating expenses
94,530
109,104
124,550
361,251
Operating income (loss)
53,408
33,065
26,956
(24,839)
Other income (loss)
Investment income (loss)
Foreign exchange income (loss)
Gain (loss) on forward interest
rate swap
Interest expense
Other, net
Total other income (loss)
421
(292)
0
(18)
26
137
379
43
(2,448)
(83)
(2,433)
(87)
30
185
(14)
210
934
(8,427)
(2,401)
(56,715)
(1,271)
(2,068)
(2,150)
(67,880)
Income (loss) before income taxes 53,545
30,997
24,806
Income tax (benefit)
11,939
3,440
9,861
(92,719)
(41,040)
Net income (loss)
$ 41,606
$ 27,557
$ 14,945
$ (51,679)
Basic earnings per share:
Diluted earnings per share:
Basic weighted average
shares outstanding
First
Quarter
$
$
0.83
0.82
Second
Quarter
Third
Quarter
$
$
0.54
0.54
$
$
0.29
0.29
Fourth
Quarter
$
$
(1.02)
(1.02)
50,402
50,606
50,835
50,452
Diluted weighted average and
equivalent shares outstanding 50,974
51,278
51,461
50,452
F-31
2013
Net Sales
Net sales of
Revenue from services
and software
Total net sales
Cost of Sales
Cost of sales of
tangible products
Cost of sales services
and software
Cost of sales
Gross profit
Operating expenses:
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2013
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
tangible products
$ 225,121
$ 239,909
$ 249,919
$ 269,583
Basic earnings per share:
Income from
continuing operations
$
0.46
$
0.60
$
0.76
$
0.83
11,816
236,937
13,251
13,604
253,160
263,523
14,956
284,539
Income from
discontinued operations
0.00
Net Income
$
0.46
$
0.00
0.60
0.00
0.76
$
0.00
0.83
$
117,111
125,664
128,191
136,547
6,761
123,872
6,589
6,722
6,964
132,253
134,913
143,511
113,065
120,907
128,610
141,028
Diluted earnings per share:
Income from
continuing operations
$
0.46
$
0.60
$
0.76
$
0.82
Income from
discontinued operations
0.00
Net Income
$
0.46
$
0.00
0.60
0.00
0.76
$
0.00
0.82
$
Basic weighted average
shares outstanding
50,980
50,990
50,590
50,289
Diluted weighted average and
equivalent shares outstanding 51,366
51,283
50,924
50,666
Selling and marketing
33,515
33,830
34,395
Research and development
21,858
23,201
22,376
General and administrative
25,277
24,053
22,452
Amortization of
intangible assets
Acquisition costs
Exit and restructuring costs
1,863
482
1,895
1,863
618
1,101
Total operating expenses
Operating income
84,890
28,175
84,666
36,241
Other income (loss)
Investment income
Foreign exchange loss
Interest income (expense)
Other, net
Total other income
677
(98)
(47)
57
589
473
(462)
(9)
1,473
1,475
1,831
268
519
81,841
46,769
550
(173)
(11)
6
372
36,280
23,712
24,434
1,826
3,322
2,375
91,949
49,079
666
209
(30)
282
1,127
Income from continuing
operations before income taxes 28,764
Income taxes
5,222
37,716
7,158
47,141
8,541
50,206
8,681
Income from continuing operations 23,542
30,558
38,600
41,525
Income from discontinued
operations, net of tax
0
8
0
125
Net income
$ 23,542
$ 30,566
$ 38,600
$ 41,650
F-32
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, 2014
Year ended December 31, 2013
Year ended December 31, 2012
$
$
453
669
$ 1,560
$ 1,361
$ 373
$
0
$ 745
$ 1,069
$ 589
$ 453
$ 891
$ 669
Valuation accounts for inventories:
Year ended December 31, 2014
Year ended December 31, 2013
$ 12,561
$ 13,655
$ 6,415
$ 8,473
$ 13,157
$ 5,819
$ 9,567
$ 12,561
Year ended December 31, 2012
$ 14,710
$ 6,758
$ 7,813
$ 13,655
See accompanying report of independent registered public accounting firm.
F-33
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 TA L R E T U R N *
Among Zebra Technologies Corporation, the NASDAQ Composite Index,
and the RDG Te c hnology Composite Index
Zebra Technologies Corporation
NASDAQ Composite Market Index
RDG Technology Composite
Stock Performance Graph
This graph compares the cumulative annual change since December 31, 2009,
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, 2009. The comparison
assumes that all dividends were reinvested at the end of the month in which
they were paid.
$300
$250
$200
$150
$100
$50
$0
12/09
12/10
12/11
12/12
12/13
12/14
Zebra Technologies
Corporation
NASDAQ Composite
Index
RDG Technology
Composite Index
12/09
12/10
12/11
12/12
12/13
12/14
$100.00
$134.00
$126.21
$138.66
$190.76
$273.05
100.00
117.61
118.70
139.00
196.83
223.74
100.00
111.01
110.85
126.07
167.16
193.22
*$100 invested on 12/31/09 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
091011121314$300$250$200$150$100$50$0
Corporate Headquarters
Zebra Technologies Corporation
Three Overlook Point
Lincolnshire, Illinois 60069 U. S. A.
Phone: +1 847 634 6700
Fax +1 847 913 8766
Transfer agent:
www.computershare.com
Shareholder online inquiries:
https://www-us.computershare.com/
investor/contact
Board of Directors
Executive Officers
Stockholder Information
Michael A. Smith, Chairman (1, 2, 3)
Chairman and Chief Executive Officer
FireVision, LLC
Anders Gustafsson
Chief Executive Officer
Zebra Technologies Corporation
Gerhard Cless
Executive Vice President
Zebra Technologies Corporation
Richard L. Keyser (2,4)
Chairman Emeritus
W. W. Grainger, Inc.
Andrew K. Ludwick (1,4)
Private Investor
Ross W. Manire (1,3,4)
Chairman and Chief Executive Officer
ExteNet Systems, Inc.
Frank B. Modruson (1,4)
Chief Information Officer (Retired)
Accenture
Dr. Robert J. Potter (2)
President and Chief Executive Officer
R.J. Potter Company
Janice M. Roberts (2)
Partner, Benhamou Global Ventures
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Nominating Committee
(4) Member of IT Committee
Anders Gustafsson
Chief Executive Officer
Gerhard Cless
Executive Vice President
Michael Cho
Senior Vice President,
Corporate Development
Tom Collins
Senior Vice President,
Supply Chain Operations
Hugh K. Gagnier
Senior Vice President,
Asset Identification and Tracking
Philip Gerskovich
Senior Vice President,
New Growth Platforms
Joachim Heel
Senior Vice President,
Global Sales
Jim L. Kaput
Senior Vice President, General Counsel
and Corporate Secretary
Annual Meeting
Zebra’s Annual Meeting of Stockholders
will be held on May 14, 2015,
at 10:30 A.M. (Eastern Time), at
Hyatt Regency Long Island at Wind Watch
Golf Club, 1717 Motor Parkway, Hauppauge,
New York 11788.
Independent Auditors
Ernst & Young LLP
Chicago, Illinois
Transfer Agent and Registrar
Computershare
P.O. Box 30170
College Station, TX 77842-3170
Overnight Delivery
211 Quality Circle, Suite 210
College Station, TX 77845
Zebra Toll Free: 800 522-6645
Juliann S. Larimer
Senior Vice President, Chief Marketing Officer
TDD for hearing impaired: 800 231-5469
Foreign Shareowners: 201 680-6578
TDD for Foreign Shareowners: 201 680-6610
Web Site address:
Shareowner accounts:
www.computershare.com/investor
Girish Rishi
Senior Vice President,
Enterprise Visibility and Mobility
Michael C. Smiley
Chief Financial Officer
Michael H. Terzich
Senior Vice President,
Chief Administrative Officer
Gina Vascsinec
Vice President,
Chief Accounting Officer
Investor Relations
Please contact Zebra’s Corporate Headquarters
for corporate or product information. Or, visit
our Web site at www.zebra.com.
Form 10-K
The 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
website. Please contact the Investor Relations
Department at the Corporate Headquarters
for additional 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 Site
Investors are invited to learn more about
Zebra Technologies Corporation by accessing
the company’s Web site at www.zebra.com.
Equal Employment
Opportunities/Affirmative Action
It is the policy of Zebra Technologies
Corporation to provide equal opportunities
and affirmative action in all areas of its
employment practices without regard to race,
religion, national origin, sex, age, ancestry,
citizenship, disability, veteran status, marital
status, sexual orientation or any other reason
prohibited by law.
G L O B A L / A M E R I C A S H E A D Q U A R T E R S
E U R O P E , M I D D L E E A S T A N D A F R I C A H E A D Q U A R T E R S
A S I A P A C I F I C H E A D Q U A R T E R S
Zebra Technologies Corporation
Three Overlook Point
Lincolnshire, IL 60069
USA
+1 847 634 6700
www.zebra.com
Zebra Technologies Europe, Limited
Dukes Meadow
Millboard Road
Bourne End
Buckinghamshire SL8 5XF, UK
+ 44 (0) 1628 556000
Zebra Technologies Asia Pacific, L.L.C.
71 Robinson Road
#05-02/03
Singapore 068895
+ 65 6858 0722