Zebra Technologies 10-K 2009
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
For the transition period from to
COMMISSION FILE NUMBER 000-19406
Zebra Technologies Corporation
(Exact name of registrant as specified in its charter)
333 Corporate Woods Parkway, Vernon Hills, IL 60061
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (847) 634-6700
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).
Yes X No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act. Yes No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Securities Act) (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Act).
Yes No X
As of June 28, 2008, the aggregate market value of each of the registrants Class A Common held by non-affiliates was approximately $2,157,955,000. The closing price of the Class A Common Stock on June 27, 2008, as reported on the Nasdaq Stock Market, was $33.17 per share.
As of February 20, 2009, 60,570,526 shares of Class A Common Stock, par value $.01 per share, were outstanding.
Documents Incorporated by Reference
Certain sections of the registrants Notice of Annual Meeting of Stockholders and Proxy Statement for its Annual Meeting of Stockholders to be held on May 21, 2009, are incorporated by reference into Part III of this report.
References in this document to Zebra, we, us, or our refer to Zebra Technologies Corporation and its subsidiaries, unless the context specifically indicates otherwise.
Forward-looking statements contained in this filing are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995 and are highly dependent upon a variety of important factors which could cause actual results to differ materially from those reflected in such forward looking statements. These factors include:
When used in this document and documents referenced, the words anticipate, believe, estimate, will and expect and similar expressions as they relate to Zebra or its management are intended to identify such forward-looking statements. We encourage readers of this report to review Item 1A, Risk Factors, in this report for further discussion of issues that could affect Zebras future results. Zebra undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this annual report.
Item 1. Business
Zebra Technologies Corporation was incorporated as an Illinois Corporation in 1969. We became a Delaware corporation in 1991 in connection with our initial public offering, which we completed in August 1991. We remain organized under the laws of the State of Delaware, and our principal offices are located at 333 Corporate Woods Parkway, Vernon Hills, Illinois 60061. In March 2009, our principal offices will relocate to 475 Half Day Road, Lincolnshire, Illinois 60069. Our main telephone number is (847) 634-6700 and our primary Internet Web site address is www.zebra.com. You can find all of Zebras filings with the SEC free of charge through the investor page on this Web site, immediately upon filing.
Zebra delivers products and solutions that improve our customers ability to help our customers put their critical assets to work smarter by identifying, tracking and managing assets, transactions and people. Through the Specialty Printing Group (SPG), we design, manufacture and sell specialty printing devices that print variable information on demand at the point of issuance. These devices are used worldwide by manufacturers, service organizations and governments for automatic identification, data collection and personal identification in applications that improve productivity, deliver better customer service and provide more effective security. Our product range consists of direct thermal and thermal transfer label and receipt printers, passive radio frequency identification (RFID) printer/encoders, dye sublimation card printers and digital photo printers. We also sell a comprehensive range of specialty supplies consisting of self-adhesive labels, thermal transfer ribbons, thermal printheads, batteries and other accessories, including software for label design and printer network management.
In 2007 and 2008, we acquired WhereNet Corp., proveo AG, Navis Holdings, LLC and Multispectral Solutions, Inc. Together, these companies comprise our Zebra Enterprise Solutions Group (ESG). The acquisitions of these companies expanded the range of identification and tracking solutions we deliver to our customers. In addition, they provided us with new technologies to offer our customers including active RFID and global positioning systems
(GPS). The products of these companies consist of battery-powered wireless tags, fixed-position antennae, transponder modules and various application software. These companies also provide consulting services, maintenance contracts and software licenses.
Zebra Specialty Printing Group (SPG)
We design our printer products to operate at the point of issuance to produce and dispense high-quality labels, tickets, receipts, and plastic cards on demand. The exceptional diversity of applications using our printer products for barcoding and personal identification is comprised of routing and tracking, transactions processing, and identification and authentication. These applications require high levels of data accuracy, where speed and reliability are critical. They also include specialty printing for receipts and tickets where improved customer service and productivity gains may be the primary reason for printing, rather than a barcoding application. Plastic cards are used for secure, reliable personal identification or access control.
Applications for our printing technology span most industries and geographies. They include inventory control, small package delivery, baggage handling, automated warehousing, JIT (Just-In-Time) manufacturing, employee time and attendance records, file management systems, hospital information systems, medical specimen labeling, shop floor control, in-store product labeling, employee ID cards, drivers licenses, and access control systems. As of December 31, 2008, management estimates that Zebra has sold more than 7,500,000 printers to customers around the world.
We believe competitive forces on businesses worldwide to strengthen security, reduce costs, improve quality, deliver better customer service, and increase productivity, support the adoption of the printing and automatic identification applications Zebra provides, because these solutions deliver significant and predictable economic benefits. Industry-mandated compliance requirements for bar code labeling and RFID tagging are also important catalysts in the deployment of these systems. We also believe that companies are adopting automatic identification systems that incorporate barcoding and RFID for business improvement applications. Many of these applications make increasing use of enterprise-wide resource planning (ERP) and other process improvement systems in manufacturing and service organizations. Greater emphasis on supply chain management, the drive to reduce errors in healthcare, and heightened concern over safety and security will lead to increased use of automatic identification systems. Still other applications are taking advantage of recent advances in wireless and hand-held computing technologies.
Concern for safety and security and personal identification contribute to demand for our card printer products. This concern has heightened interest in systems that provide personal identification and access control, including secure ID systems for drivers licenses, employee and visitor badges, national identification cards, event passes, club membership cards and keyless entry systems.
Our printers are used to produce bar code labels, passive RFID smart labels, receipts, plastic identification cards, wristbands and tags. We also sell related specialty labeling materials, thermal ink ribbons, and bar code label design and network management software. These products are used to provide bar code labeling, personal identification, and specialty printing solutions principally in the manufacturing supply chain, retail, healthcare and government sectors of the economy. We work closely with distributors, resellers, kiosk manufacturers and end users of our products to design and implement printing solutions that meet their technical demands. To achieve this flexibility, we provide our customers with a broad selection of printer models, each of which can be configured for a specific application. Additionally, we will select and, if necessary, create appropriate labeling stock, ink ribbons and adhesives to suit a particular application. In-house engineering personnel in software, mechanical, electronic and chemical engineering participate in the creation and development of printing solutions for particular applications.
We produce the industrys broadest range of rugged, on-demand thermal transfer and direct thermal printers. Our printing systems include hundreds of optional configurations that can be selected to meet particular customer needs. We believe this breadth of product is a unique and significant competitive strength, because it allows Zebra to satisfy the widest variety of thermal printing applications.
Of the major printing technologies, which include ink jet, laser and impact dot matrix, we believe that direct thermal and thermal transfer technologies are best suited for most bar code labeling and other on-demand printing applications. Thermal transfer printing produces dark, solid blacks and sharply defined lines that are important for printing readily scannable bar codes. These images can be printed on a wide variety of labeling materials, which
enable users to affix bar code labels to virtually any object. This capability is very important in the industrial and service sectors Zebra serves. Direct thermal printing is best suited where ease of use, smaller size and cost are important factors in the application. Accordingly, this technology is found principally in Zebras mobile and desktop units.
As of December 31, 2008, we offered 56 thermal printer models with numerous variations, in eight categories as follows:
In addition to their use in on-demand automatic identification applications, our thermal printers can also be used for on-site batch production of custom bar code labels and other graphics. This capability results in shorter lead times, reduced inventory, and more flexibility than can be provided with traditional off-site printing.
Supplies products consist of stock and customized thermal labels, wristbands, smart labels and tags, plastic cards, card laminates and thermal transfer ribbons. Zebra promotes the use of genuine Zebra brand supplies with its equipment.
Zebra fully supports its printers, resellers and end users with an extensive line of superior quality, high-performance supplies optimized to a particular users needs. Supplies are chosen in consultation with the reseller and end user based on the specific application, printer and environment in which the labeling system must perform. These printing solutions frequently include proprietary ribbon and label formulations that are designed to optimize image resolution and printer performance while meeting the most demanding end user application performance criteria. Factors such as adhesion, resistance to scratches, smudges and abrasion, and chemical and environmental exposures are all taken into account when selecting the type of ribbon and labeling materials. The use of supplies that are not carefully matched to specific printers can degrade image quality, and decrease the part life of key printer components such as printheads.
Printer Related Software
Zebra has specialized printer management, label design and driver solutions to help unlock the full potential of Zebra printers. The ZebraLink Solutions suite of networking, software, firmware offerings, combined with the enhanced printer management capabilities of ZebraNet Bridge, makes Zebras printers easy to use and integrate into small, medium and enterprise-wide environments. Our goal is to provide software that enables high levels of functionality to all major computer network and software systems. Network systems include Ethernet, 802.11b/g and Bluetooth®. In 2008, a Mobile printer-based Software Development Kit was introduced to aid with integration into Windows Mobile® applications. Zebra also introduced ZBI 2.0, an optional printer programming language, which allows customers to create and run customized applications on Zebra printers.
Zebra offers label design and integration software specifically designed to optimize the performance of Zebra bar code label printers. Zebras suite of label design and printer configuration tools includes ZebraDesigner, ZebraDesigner Pro, ZebraDesigner for XML, and ZebraDesigner Label Design Software for use with mySAP Business Suite. In 2008, Zebra added the Enterprise Connector Solution for Oracle® Business Intelligence Publisher, which delivers seamless integration between Oracle and Zebra printers, creating a versatile, easily managed, cost-effective printing platform.
Printer Maintenance and Services
Zebra provides depot maintenance and repair services at repair centers in Vernon Hills, Illinois; Camarillo, California; Canada; Preston, U.K.; Singapore; China; and the Netherlands. Zebra Authorized Service Providers (ZASP) also provide repair services for most Zebra products at their locations. In addition, Zebra offers on-site repair services for tabletop printers in the United States. Outside of the United States, Zebras resellers may provide maintenance service, either directly as ZASPs or through independent service agents. Zebra also provides technical support from in-house support personnel located in the United States, the United Kingdom and Singapore. For most Zebra products, Zebra provides interactive technical support via the Internet at www.zebra.com, 24 hours per day, seven days per week.
In general, Zebra provides warranty coverage of one year on printers against defects in material and workmanship. Printheads are warranted for nine months, and batteries are warranted for three months. Zebra supplies are warranted against defects in material and workmanship for their stated shelf life or twelve months, whichever ends first. Defective equipment and supplies may be returned for repair or replacement during the applicable warranty periods.
Zebras Printer Technology
Our customers rely on Zebra to provide products and systems to identify, authenticate, track or route both items and people, and then process the related transactions. These products and systems use technologies that provide specific benefits in each application.
All Zebra printers and print engines use thermal printing, either direct thermal printing, thermal transfer printing or dye-sublimation printing. This technology creates an image by heating certain pixels of an electrical printhead to selectively image a ribbon or heat-sensitive substrate.
Direct thermal printers apply the heat directly to a thermally-sensitive label, wristband, or receipt to create an image. This benefits applications needing simple, reliable operation such as shelf labeling, patient identification, and kiosk receipts. Some desktop label printers, mobile printers and kiosk printers support only direct thermal printing.
Thermal transfer printers apply heat to a ribbon to release ink onto labels or tags. This allows a wider range of specialty label materials and associated inks to be used for applications like circuit board labels, chemical identification and product labels requiring resistance to chemicals, temperature extremes, abrasion, or long life. Performance, mid-range, print-engines and some desktop printers use thermal transfer printing but can also support direct thermal printing.
Dye-sublimation printers apply heat to a ribbon to release a dye into a plastic card or treated paper. This creates full color, photographic quality images well-suited to driver licenses, access and identification cards, transaction cards, and on-demand photographs. Our card printers use dye-sublimation printing.
Direct thermal and thermal transfer printers create crisp images at high speed, making them ideal for printing easily readable text and machine readable bar codes. Dye sublimation thermal printers quickly create full-color images with visual characteristics more similar to halide-based film than to pixel-based ink jet or laser printers, making them ideal for high quality photographs and personalized plastic cards. Some printers also include HF (13.56 MHz) or UHF (860-960 MHz) RFID technology that can encode data into passive RFID transponders embedded in a label, card, or wristband.
Zebras printers integrate company-designed mechanisms, electrical systems, and firmware. Enclosures of metal or high-impact plastic ensure durability. Special mechanisms optimize handling of labels, ribbons, and plastic cards. Fast, high-current electrical systems provide consistent image quality. Mobile printers use NiMH or LiIon batteries to optimize print quality over an extended operating shift. Firmware supports serial, parallel, Ethernet, USB, infrared, Bluetooth, or 802.11b/g wireless communications with appropriate security protocols. Printing instructions can be received as a proprietary language such as Zebra Programming Language II (ZPL II®), as a print driver-provided image, or as user-defined XML. This makes the printers easy to integrate into virtually all common computer systems including those operating on UNIX, Linux, MS/DOS®, or Microsoft® Windows® operating systems. Some independent software vendors, including Adobe, Oracle and SAP, have included Zebra printing support in applications for healthcare, warehouse management, manufacturing, passenger transportation, and retailing.
Printer Sales and Marketing
Sales. We sell our printer products primarily through distributors, value-added resellers (VARs), and original equipment manufacturers (OEMs). We also sell our printer products directly to a select number of named customer accounts. For media and consumables, we also sell directly to end users through the Internet and telesales operations. Distributors and VARs purchase, stock and sell a variety of automatic identification components from different manufacturers and customize systems for end-user applications using their systems and application integration expertise. Because these sales channels provide specific software, configuration, installation, integration and support services required by end users within various market segments, these relationships allow Zebra to reach end users throughout the world in a wide variety of industries. Zebra experiences a minor amount of seasonality in sales, depending on the geographic region and/or vertical market.
We functionally classify our direct VARs as Premier Partners, Advanced Partners, or Associate Partners, depending on their business competencies, depth and breadth of their sales teams, customer support capabilities, contributions to Zebras strategic goals and sales commitment to Zebra. In addition, we offer VARs the opportunity to earn certifications for mobile/wireless printers, supplies, services and RFID products in vertical markets. We also sell through distributors, which in turn sell to an extended VAR community. All VARs, as well as OEMs and systems integrators, provide customers with a variety of automatic identification components including scanners, accessories, applications software and systems integration expertise, and, in the case of some OEMs, resell the Zebra-manufactured products under their own brands as part of their own product offering. We believe that the breadth of this indirect channel network, both in terms of variety and geographic scope, enhances our ability to compete.
In some instances, we have designated a customer as a strategic account when purchases of Zebra products reach specified levels and support requirements for the account become highly customized. Zebra sales personnel, either alone or together with our partners, manage these strategic accounts to ensure their needs, including consistent support for projects and applications, are being met.
The sales function also encompasses a group that manages a small number of Global Alliances. They direct the business development strategies for a limited number of third-party relationships that are strategic to new demand creation for specific vertical markets and/or specific applications.
Marketing. Marketing operations encompass corporate marketing, marketing communications, product marketing, vertical marketing, solutions marketing, market research and channel marketing functions. Corporate marketing conducts activities to enhance the Zebra corporate brand, corporate public relations, internal corporate communications and our Web site. The product marketing group identifies, evaluates and recommends new product opportunities and manages product introductions, positioning and demand creation. Product marketing also focuses on strategic planning and market definition and analyzes Zebras competitive strengths and weaknesses.
Printer Production and Manufacturing
We design our products to optimize product performance, quality, reliability, durability and versatility. These designs combine cost-efficient materials, sourcing and assembly methods with high standards of workmanship. In February 2008, we announced that final printer assembly will be transferred to a third-party manufacturer, Jabil Circuit, Inc., by the end of 2009. This action is intended to optimize our global printer product supply chain by improving responsiveness to customer needs and increasing Zebras flexibility to meet emerging business
opportunities. See Note 22 to our Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion of the transfer and transition process.
During the transition, we will continue to manufacture some printers at our domestic factories while increasing production by Jabil to ensure consistent flow of product to our customers. In our factories we assemble our products largely on a configure-to-order basis using components that are sourced from around the world. We have the in-house capability to produce mechanical assemblies and design many of our own tools, fixtures and test equipment. We currently buy prefabricated component parts and subassemblies for use in the manufacture of our products. Critical subassemblies include printheads, printed circuit board assemblies, power supplies, integrated circuits, and stepper motors, which are obtained from domestic and foreign suppliers. Purchase contracts provide for price variation in the event of commodity price changes in the cost of raw materials. Zebra typically experiences significant variance in demand and, thus, carries inventory and partners with key suppliers to deal with the variation. Purchases of these components by Zebra will decline as printer assembly directly by Zebra declines and assembly by Jabil increases.
Over the remainder of 2009, we will continue to transfer the assembly of printer product lines to Jabil. During the transition, our goal is to decrease in-house printer production by printer line as the assembly of those printer lines by Jabil increases. We will maintain assembly of those printers in-house until Jabils quality and production yields reach acceptable levels to ensure product availability to meet customer demands. For this reason, we expect inventories could temporarily rise until all printer manufacturing is transferred, in-house assembly lines are shut down and excess inventories are sold down.
Jabil will produce our printers to our design specifications in the quantities we order. Zebra will maintain control of the supply chain including supplier selection and price negotiations of component parts. Jabil is responsible for the procurement of the component parts and subassemblies used in the Zebra printers it produces. Zebra has subsidiary located in Guangzhou, China, and has an office within 10 minutes of the Jabil facility in China where the Zebra products are assembled. This office is staffed with Zebra sourcing, engineering and quality personnel to help ensure that we receive optimal pricing on raw materials and the final printers meet our quality standards. Zebra printers manufactured by Jabil are shipped to Zebras regional distribution centers. The majority of the product will pass directly through to Zebras customers but a small percentage will be reconfigured through firmware downloads, packaging and some other customization before they are shipped to customers. In addition, certain products will be manufactured in accordance with federal procurement regulations and various international trade agreements, and remain eligible for sale to the United States government.
Many companies are engaged in the design, manufacture and marketing of bar code label printers, RFID printer-encoders and card personalization solutions.
We consider our direct competition in bar code label and receipt printing to be producers of on-demand thermal transfer and direct thermal label printing systems, printer-encoders, mobile printers and supplies. We also compete, however, with companies engaged in the design, manufacture and marketing of printing systems that use alternative technologies, such as ink-jet and laser printing. Many of these companies are substantially larger than Zebra.
Dye sublimation, the technology used in our card printers, is only one of several commercially available types of equipment used to personalize cards. We also compete with companies that produce identification cards using alternative technologies, which include ink-jet, thermal transfer, embossing, film-based systems, encoders, laser engraving and large-scale dye sublimation printers. These card personalization technologies offer viable alternatives to Zebras card printers and provide effective competition from a variety of companies, many of which are substantially larger than Zebra. In addition, service bureaus compete for end user business and provide an alternative to the purchase of our card printing equipment and supplies.
Our ability to compete effectively depends on a number of factors. These factors include the reliability, quality and reputation of the manufacturer and its products; hardware and software innovations and specifications; breadth of product offerings; information systems connectivity; price; level of technical support; supplies and applications
support offered by the manufacturer; available distribution channels; and financial resources to support new product design and innovation. We believe that Zebra presently competes favorably with respect to these factors.
We face competition from many competitors, including the following (listed in alphabetical order): Altech; Argox; Avery Dennison; Boca Systems; Brother International; Canon; CIM; Citizen; CognitiveTPG; ColorX; Copal; Custom; Danaher; Datacard; Datamax-ONeil, a unit of Dover Corporation; Dymo, a Newell Rubbermaid Company; Epson; Evolis; Extech; Fargo Electronics; Fuji; Godex; Hewlett-Packard; Hitachi; Intermec Technologies; Lexmark International; LogickaComp; MagiCard; Matica; Microcom; Mitsubishi; NBS; Nisca; Oki Data; Olmec; Olympus; Practical Automation; Printronix; Sato; Seiko Instruments; Shinko; Song Woo Electronics; Sony; Star Micronics; Taiwan Semiconductor; ToshibaTEC; Victor Data Systems; Woosim; and Xerox.
The supplies business is highly fragmented and competition is comprised of numerous competitors of various sizes depending on the geographic area.
Alternative Printer Technologies
We believe thermal printing will be the label, card and receipt printer technology of choice in Zebras target applications for the foreseeable future. Among the many advantages of direct thermal and thermal transfer printing is the ability to print high-resolution, durable images on a wide variety of label materials at relatively low costs and high speeds compared with alternative printing technologies. We view passive RFID smart label encoding and active RFID location systems as complementary technologies to bar coded printing, offering growth opportunities to Zebra as the technologies become more widely adopted.
If other technologies were to evolve or become available to Zebra, it is possible that those technologies would be incorporated into our products. Alternatively, if such technologies were to evolve or become available to our competitors, Zebras products may become obsolete. This obsolescence would have a significant negative effect on Zebras business, financial position, results of operations and cash flows.
Therefore, we continually assess competitive and complementary methods of bar code printing and other means of automatic identification. Alternative print technologies assessed include ink jet, laser and direct marking. While we cannot be sure that new technology will not supplant thermal printing for labels, cards and receipts, we are not aware of any developing technology that offers the advantages of thermal printing for our targeted applications. We continually monitor and evaluate new RFID technologies, support their standards development, and rapidly adopt RFID into new Zebra products and systems as new markets and applications emerge.
Zebra Enterprise Solutions Group (ESG)
Formed in 2008 based upon the acquired businesses of Navis Holdings, LLC, WhereNet Corp., proveo AG, and Multispectral Solutions Inc., Zebra Enterprise Solutions Group offers asset tracking and management solutions to optimize the flow of goods in complex logistical operations. Whether tracking containers and cargo through a major port, managing parts for lean manufacturing or managing ground support equipment at a major airport, the automated asset tracking and management solutions from ESG improve business processes. Utilizing the combined products offered by these businesses, ESG provides greater asset visibility and business efficiency for the aerospace and defense, aviation, automotive, industrial manufacturing, maritime, and transportation and logistics industries. Customers within these industries benefit by increasing productivity, lowering operational costs, and improving safety and security throughout their logistics operations.
A substantial majority of ESGs business consists of perpetual software licenses and related services including maintenance, support and consulting services. In addition, ESG sells hardware including our proprietary real time asset management hardware. These products and services may be bundled and sold together to customers or sold separately.
We believe ESG is uniquely positioned with a broad range of asset tracking and optimization solutions to offer our customers. However, several competitors exist for each solution ESG provides. They include Aeroscout Inc., Trimble Technologies, Ekahau Inc., I.D. Systems Inc., Identec Solutions, Intermec Inc., and RF Code Inc., Cisco Systems Inc., Lockheed Martin Corp., Roper Industries, Inc., Siemens AG, Motorola, Inc., Amicus, Pinnacle VTIS, IBM, Cosmos, and Tideworks Technology.
The ESG products extend Zebras reach beyond passive RFID by employing technologically advanced hardware and software solutions to locate, track, manage and optimize high-value assets, equipment and people. We offer a wide range of scalable real time locating systems (RTLS) technologies used to generate accurate, on-demand information about the physical location and status of high-valued assets. Customers benefit by utilizing the choice or combination of asset tracking products that can be application matched based on ISO/IEC 24730-2, Cisco CCX Wi-Fi, precision global positioning systems (GPS), and ultra wideband (UWB) technologies.
Our selection of RTLS asset tracking product offerings includes battery-powered active RFID WhereTag tags, WhereCall button tags, and precision WhereTrack products. These asset tags enable organizations to access accurate, real-time information on the location and status of their assets both indoors and outdoors.
In addition, we offer a selection of RTLS infrastructure products. These products receive tag transmissions and forward the information to the Visibility Server Software (a middleware application) which provides location calculations, database and system management functions and asset visibility. The flexible infrastructure supports large tag populations and coverage areas that can range from small to large.
We offer a broad set of software development tools for integrating ESG hardware, middleware applications and software applications, with customer and third-party applications. Our middleware application, Visibility Server Software, provides software tools to design, configure, operate and troubleshoot our RTLS products. Visibility Server Software serves as the central repository for all of the real-time location and communication data captured by the ESG RTLS infrastructure.
ESG sells its products and services into the following major vertical markets:
scheduling and routing, among other benefits, to lower costs, manage growth and minimize capital investments in land and berth space. Customers operating rail and truck terminals have begun to use our terminal operating system to improve their logistics operations as well. Our Powerstow® solution helps terminal operators optimize ship stowage to minimize total voyage cost and maximize efficiency. Powerstow® offers easy-to-use planning tools that provide real-time visibility of stowage operations. It uses graphic tools along with proprietary software to help operators configure the placement of cargo on a ship, taking into account several parameters such as weight and destination to improve safety and vessel utilization.
ESG products and services are primarily sold through ESGs global direct sales force which is organized around geographic and vertical markets. We complement our direct sales through the use of other channels including systems integrators with particular vertical market expertise.
ESGs proprietary software and hardware are developed primarily by its internal team of engineers. Generally, our software is warranted for 90 days after going live to function consistently with its specifications, and our hardware is warranted to be free from material defects in materials and workmanship for up to one year after purchase.
Zebra has sold over 7,500,000 thermal printers to customers as of December 31, 2008.
ScanSource, Inc., is our most significant customer. Our net sales to ScanSource, an international distributor of Zebra SPG products, as a percent of our total net sales, were as follows:
No other customer accounted for 10% or more of total net sales during these years.
Net sales by product category for the last three years were (in thousands):
The increase in service and software net sales in 2008 is due to our ESG acquisitions.
Net sales to international customers, as a percent of total net sales, were as follows:
We believe that international sales have the long-term potential to grow faster than domestic sales because of the lower penetration of automatic identification applications outside North America. As a result, Zebra has invested resources to support our international growth and currently operates facilities and sales offices, or has representation, in 26 different countries.
Research and Development
Zebras research and development expenditures for the last three years were as follows (in thousands, except percentages):
We devote significant resources to developing new printing solutions for our target markets and ensuring that our efficiently manufactured products maintain high levels of reliability. Research and development resources are also directed toward enhancing our enterprise solutions systems. The increase in research and development expenditures for ESG in 2008 is mainly attributed to the acquisition of Navis Holdings, LLC late in 2007.
Intellectual Property Rights
Zebra relies on a combination of trade secrets, patents, employee and third party nondisclosure agreements, copyright laws and contractual rights to establish and protect its proprietary rights in its products. We have and actively protect many domestic and international trademarks. We hold 320 United States and foreign patents and have 171 United States and foreign patent applications pending pertaining to products. The duration of these patents ranges from 2 to 23 years. The expiration of any individual patent would not have a significant negative impact on our business.
Despite our efforts to protect our intellectual property rights, it may be possible for unauthorized third parties to copy portions of our products or to reverse engineer or otherwise obtain and use some technology and information that we regard as proprietary. Moreover, the laws of some countries do not afford Zebra the same protection to proprietary rights, as do United States laws. There can be no assurance that legal protections relied upon by Zebra to protect its proprietary position will be adequate. While Zebras intellectual property is valuable and provides certain competitive advantages, we do not believe that the legal protections afforded to our intellectual property are fundamental to our success.
Patents have become increasingly used by businesses generally as a strategic business tool and in recent years the number of patent applications and grants has risen dramatically. As a result, it is increasingly important that Zebra takes appropriate steps to maintain and develop its own patent portfolio and reduce the risk of disputes involving third party intellectual property rights.
Other trademarks mentioned in this report are the property of their respective holders and include IBM, a registered trademark of International Business Machines; Kodak, a registered trademark of Eastman Kodak; UNIX, a registered trademark of UNIX Systems Laboratories; MS/DOS and Windows, registered trademarks of Microsoft; SAP, a
registered trademark of SAP AG; Linux, a registered trademark of Linus Torvalds; and Accelio Present Central, a registered trademark of Accelio. Bluetooth is a trademark owned by Bluetooth SIG and used by Zebra under license.
As of January 30, 2009, Zebra employed approximately 3,200 persons, of which 2,459 are a part of SPG, 545 are a part of ESG and the remaining are corporate employees. None of these employees is a member of a union. We consider our employee relations to be very good.
For financial information regarding Zebra, see Zebras Consolidated Financial Statements and the related Notes, which are included in this Annual Report on Form 10-K. Zebra has two reportable segments for our operations and products. Financial information about segments and geographic areas is found in Note 18 to the Consolidated Financial Statements.
Item 1A. Risk Factors
Investors should carefully consider the risks, uncertainties and other factors described below, as well as other disclosures in Managements Discussion and Analysis of Financial Condition and Results of Operations, because they could have a material adverse effect on Zebras business, financial condition, operating results, and growth prospects.
Current economic conditions and market disruptions may adversely affect Zebras business and results of operations. Adverse economic conditions, in the United States or internationally, or reduced information technology spending may adversely impact our business. A substantial portion of our business depends on our customers demand for our products and services, the overall economic health of our current and prospective customers and general economic conditions. As widely reported, financial markets throughout the world have been experiencing extreme disruption in recent months, including extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others, failure and potential failures of major financial institutions and unprecedented government support of financial institutions. These developments and the related general economic downturn will adversely impact Zebras business and financial condition in a number of ways, including impacts beyond those typically associated with other recent downturns in the U.S. and foreign economies. The slowdown will likely lead to reduced information technology spending by end users, which has already adversely affected and may continue to adversely affect Zebras product sales. If the slowdown is severe enough, it could necessitate further testing for impairment of goodwill, as well as the write-down of other intangible assets, beyond those already recognized. In addition, cost reduction actions may be necessary which would lead to additional restructuring charges. The current tightening of credit in financial markets and the general economic downturn will likely adversely affect the ability of Zebras customers, suppliers, outsource manufacturer and channel partners (e.g., distributors and resellers) to obtain financing for significant purchases. The tightening could result in a decrease in or cancellation of orders for Zebras products and services, could negatively impact Zebras ability to collect its accounts receivable on a timely basis, could result in additional reserves for uncollectible accounts receivable being required, and in the event of the contraction in Zebras sales, could lead to dated inventory and require additional reserves for obsolescence. Significant volatility and fluctuations in the rates of exchange for the U.S. dollar against currencies such as the euro, the British pound and the Brazilian real could negatively impact Zebras customer pricing and adversely affect Zebras results.
Zebra is unable to predict the duration and severity of the current economic downturn and disruption in financial markets or their effects on Zebras business and results of operations, but the consequences may be materially adverse and more severe than other recent economic slowdowns.
Zebra could encounter difficulties in any acquisition it undertakes, including unanticipated integration problems and business disruption. Acquisitions could also dilute stockholder value and adversely affect operating results. Zebra may acquire or make investments in other businesses, technologies, services or products. For example, in 2007 and 2008 Zebra acquired WhereNet Corp., proveo AG, Navis Holdings, LLC, and Multispectral Solutions, Inc., which together comprise what we refer to as the Zebra Enterprise Solutions Group. An acquisition may present business issues which are new to Zebra. The process of integrating any acquired business, technology, service or product into operations may result in unforeseen operating difficulties and expenditures. Integration of an acquired company also may consume considerable management time and attention, which could otherwise be available for ongoing operations and development of the business. The expected benefits of any acquisition may not be realized. Acquisitions also may involve a number of risks, including risks with respect to:
Moreover, Zebra may be unable to identify, negotiate or finance future acquisitions successfully. Future acquisitions could result in potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities or amortization expenses.
Zebra Enterprise Solutions Group is a new business. Prior to the purchases in 2007, Zebra had no experience operating businesses which are in the business conducted by Zebra Enterprise Solutions Group. The Zebra Enterprise Solutions Group provides enterprise software solutions to customers which require implementation in complex environments over extended periods of time and use percentage-of-completion accounting, which has not been Zebras historic business.
Zebra may be a party to fixed price contracts particularly for its ESG Unit that could become unfavorable contracts. From time to time ESG may enter into contracts to provide services to customers for fixed fees. Such a contract could result in material loss to Zebra if the cost to perform such contract ultimately exceeds the fees earned on such contract.
Zebra is transferring final assembly of its thermal printers to Jabil Circuit and will be totally dependent on Jabil for the manufacturing of such printers. A failure by Jabil to provide manufacturing services to Zebra as Zebra requires, or any disruption in such manufacturing services, may adversely affect Zebras business results. Zebra expects this transfer to be complete by the end of 2009. In an effort to achieve additional cost savings and operational benefits, Zebra has expanded its outsourcing activities to include the transfer of the final assembly of its thermal printers to Jabil Circuits facility in HuangPu, China.
However, to the extent Zebra relies on a third party service provider such as Jabil for manufacturing services, Zebra may incur increased business continuity risks. Zebra will no longer be able to exercise control over the assembly of its thermal printers or any related operations or processes, including the internal controls associated with operations and processes conducted by Jabil and the quality of Zebras products assembled by Jabil. If Zebra is unable to effectively develop and implement its outsourcing strategy, it may not realize cost structure efficiencies and its operating and its financial results could be materially adversely affected.
During the transition period, Zebras printers will be manufactured both in the United States by Zebra and in China by Jabil. If Zebra is unable to effectively manage its inventory levels during the period of concurrent manufacturing, it may not have sufficient inventories to meet customer needs. At the same time, difficulty managing inventory during the transition could lead to excess and obsolete inventory and related resulting losses.
In addition, if Jabil experiences business difficulties or fails to meet Zebras manufacturing needs, then Zebra may be unable to meet production requirements, may lose revenue and may not be able to maintain its relationships with its customers. Without Jabils continuing manufacture of Zebras products and the continuing operation of Jabils facility, Zebra will have no other means of final assembly of its thermal printers until Zebra is able to secure the manufacturing capability at another facility or develop an alternative manufacturing facility, which could be costly and time consuming and have a material adverse effect on Zebras operating and financial results.
The increased elements of risk that arise from conducting certain operating processes in foreign jurisdictions may lead to an increase in reputational risk. During periods of transition, greater operational risk and customer concern may exist regarding the continuity of a high level of service delivery. The extent and pace at which Zebra is able to move manufacturing functions to Jabils facility and the extent to which its customers are affected by the transfer may be impacted by regulatory and customer acceptance issues.
Although Zebra carries business interruption insurance to cover lost revenue and profits in an amount it considers adequate, this insurance does not cover all possible situations. In addition, the business interruption insurance would not compensate Zebra for the loss of opportunity and potential adverse impact, both short-term and long-term, on relations with Zebras existing customers resulting from Zebras inability to produce products for them.
A third party service provider such as Jabil will have access to Zebras intellectual property, which increases the risk of infringement or misappropriation of this intellectual property.
Zebra has significant operations outside the United States and sells a significant portion of its products internationally and purchases important components from foreign suppliers. In addition, the transfer of final assembly of its thermal printers to a Chinese facility began in 2008 and is expected to conclude in 2009. These circumstances create a number of risks. Zebra has significant overseas operations including, in particular, an increasing presence in China, which presents added risks. In addition, Zebra sells a significant amount of its products to customers outside the United States. Shipments to international customers are expected to continue to account for a material portion of net sales.
Risks associated with operations, sales and purchases outside the United States include:
Zebra may not be able to continue to develop products to address user needs effectively in an industry characterized by rapid technological change. To be successful, Zebra must adapt to rapidly changing technological and application needs by continually improving its products as well as introducing new products and services to address user demands.
Zebras industry is characterized by:
Future success will depend on Zebras ability to adapt in this rapidly evolving environment. Zebra could incur substantial costs if it has to modify its business to adapt to these changes, and may even be unable to adapt to these changes.
Zebra competes in a highly competitive market, which is likely to become more competitive. Competitors may be able to respond more quickly to new or emerging technology and changes in customer requirements. Zebra faces significant competition in developing and selling its systems. Principal competitors have substantial marketing, financial, development and personnel resources. To remain competitive, Zebra believes it must continue to provide:
Zebra cannot assure it will be able to compete successfully against current or future competitors. Increased competition in printers or supplies may result in price reductions, lower gross profit margins and loss of market share, and could require increased spending on research and development, sales and marketing and customer
support. Some competitors may make strategic acquisitions or establish cooperative relationships with suppliers or companies that produce complementary products. Any of these factors could reduce Zebras earnings.
Zebra is vulnerable to the potential difficulties associated with the rapid increase in the complexity of its business. Zebra has grown rapidly over the last several years through domestic and international growth and acquisitions. This growth has caused increased complexities in the business. We believe our future success depends in part on our ability to manage our rapid growth and increased complexities of our business and the demands from increased responsibility on our management personnel. The following factors could present difficulties to us:
If we do not manage these potential difficulties successfully, our operating results could be adversely affected.
Zebra sources some of its component parts from sole source suppliers. A disruption in the supply of such component parts could have a material adverse effect on our operations and financial results.
Infringement by Zebra or Zebra suppliers on the proprietary rights of others could put Zebra at a competitive disadvantage, and any related litigation could be time consuming and costly. Third parties may claim that Zebra or Zebra suppliers violated their intellectual property rights. To the extent of a violation of a third partys patent or other intellectual property right, Zebra may be prevented from operating its business as planned, and may be required to pay damages, to obtain a license, if available, or to use a non-infringing method, if possible, to accomplish its objectives. Any of these claims, with or without merit, could result in costly litigation and divert the attention of key personnel. If such claims are successful, they could result in costly judgments or settlements. Also, as new technologies emerge, such as RFID, the intellectual property rights of parties in such technologies can be uncertain. As a result, products involving such technologies may have higher risk of claims of infringement of the intellectual proprietary rights of third parties.
The inability to protect intellectual property could harm Zebras reputation, and its competitive position may be materially damaged. Zebras intellectual property is valuable and provides Zebra with certain competitive advantages. Copyrights, patents, trade secrets and contracts are used to protect these proprietary rights. Despite these precautions, it may be possible for third parties to copy aspects of Zebras products or, without authorization, to obtain and use information which Zebra regards as trade secrets.
Zebra may incur liabilities as a result of product failures due to actual or apparent design or manufacturing defects. Zebra may be subject to product liability claims, which could include claims for property or economic damage or personal injury, in the event our products present actual or apparent design or manufacturing defects. Such design or manufacturing defects may occur not only in Zebras own designed products but also in components provided by third party suppliers. A Zebra supplier has in the past provided us with defective lithium-ion battery packs which were subject to a product recall. Zebra generally has insurance protection against property damage and personal injury liabilities and also seeks to limit such risk through product design, manufacturing quality control processes, product testing and contractual indemnification from suppliers. However, due to the large and growing size of Zebras installed printer base, a design or manufacturing defect involving this large installed printer base could result in product recalls or customer service costs that could have material adverse effects on Zebras financial results.
Larger orders may take longer to close and may not be completely fulfilled during a particular quarter. Zebra has been pursuing larger customer orders which typically involve a longer sales cycle. Such orders are more difficult to forecast, and whether a larger order is received by Zebra in a particular quarter or deferred to a later quarter could have a material effect on the financial results of Zebra from quarter to quarter.
Zebras equipment is subject to U.S. and foreign regulations that pertain to electrical and electronic equipment, which may materially adversely affect Zebras business. These regulations influence the design, components or operation of such products. New regulations and changes to current regulations are always possible and, in some jurisdictions, regulations may be introduced with little or no time to bring related products into compliance with these regulations. Zebras failure to comply with these regulations may prevent Zebra from selling our products in a certain country. In addition, these regulations may increase our cost of supplying the products by forcing us to redesign existing products or to use more expensive designs or components. In these cases, Zebra may experience unexpected disruptions in our ability to supply customers with products, or we may incur unexpected costs or operational complexities to bring products into compliance. This could have an adverse effect on Zebras revenues, gross profit margins and results of operations and increase the volatility of our financial results.
Zebra is implementing a new company-wide enterprise resource planning (ERP) system. The implementation process is complex and involves a number of risks that may adversely affect Zebras business and results of operations. Zebra is currently replacing its multiple legacy business systems at its different sites with a new company-wide, integrated enterprise resource planning (ERP) system to handle various business, operating and financial processes for Zebra and its subsidiaries. The new system will provide a variety of important functions, such as order entry, invoicing, accounts receivable, accounts payable, financial consolidation, logistics, and internal and external financial and management reporting matters.
ERP implementations are complex and time-consuming projects that involve substantial expenditures on system hardware and software and implementation activities that can continue for several years. Such an integrated, wide-scale implementation is extremely complex and requires transformation of business and financial processes in order to reap the benefits of the ERP system. Significant efforts are required for requirements identification, functional design, process documentation, data conversion, user training and post implementation support. Problems in any of these areas could result in operational issues including delayed shipments or production, missed sales, billing and accounting errors and other operational issues. System delays or malfunctioning could also disrupt Zebras ability to timely and accurately process and report key components of the results of its consolidated operations, its financial position and cash flows, which could impact Zebras ability to timely complete important business processes such as the evaluation of its internal controls and attestation activities pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.
Until the new ERP system is fully implemented, Zebra expects to incur additional selling, general and administrative expenses to stabilize the system, and there can be no assurance that other issues relating to the ERP system will not occur or be identified. Zebras business and results of operations may be adversely affected if it experiences operating problems and/or cost overruns during the ERP implementation process or if the ERP system and the associated process changes, do not function as expected or give rise to the expected benefits
Economic factors that are outside Zebras control could lead to deterioration in the quality of Zebras accounts receivables. Zebra sells its products to customers in the United States and several other countries around the world. Sales are typically made on unsecured credit terms, which are generally consistent with the prevailing business practices in a given country. A deterioration of economic or political conditions in a country could impair Zebras ability to collect on receivables in the affected country.
Zebra depends on the ongoing service of its senior management and ability to attract and retain other key personnel. The future success of Zebra is substantially dependent on the continued service and continuing contributions of senior management and other key personnel. The loss of the service of any executive officer or other key employees could adversely affect business.
The ability to attract, retain and motivate highly skilled employees is important to Zebras long-term success. Competition for personnel in Zebras industry is intense, and Zebra may be unable to retain key employees or attract, assimilate or retain other highly qualified employees in the future.
Terrorist attacks or war could lead to further economic instability and adversely affect Zebras stock price, operations, and profitability. The terrorist attacks that occurred in the United States on September 11, 2001, caused major instability in the U.S. and other financial markets. Possible further acts of terrorism and current and future war
risks could have a similar impact. Any such attacks could, among other things, cause further instability in financial markets and could directly, or indirectly through reduced demand, negatively affect Zebras 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 Zebras effective tax rate.
Item 2. Properties
Zebras corporate headquarters are currently located in Vernon Hills, Illinois, a northern suburb of Chicago. Zebra conducts its operations from a custom-designed facility at this location, which provides approximately 225,000 square feet of space. Approximately 113,000 square feet have been allocated to office and laboratory functions and 112,000 square feet to manufacturing and warehousing. This facility was constructed in 1989 and expanded in 1993, 1995, 1996 and 1999. It is leased to Zebra under a lease terminating on June 30, 2014.
Zebras principal facilities as of December 31, 2008, are listed below:
S Specialty Printing Group; E Enterprise Solution Group; C - Corporate
In conjunction with our transition of printer manufacturing to a third-party manufacturer, we entered into a sale and leaseback transaction during 2008 for our manufacturing facility located in Camarillo, California. In addition, during March 2009, we will be moving our corporate headquarters to Lincolnshire, Illinois, from the Vernon Hills, Illinois, facility and have, therefore, entered into a lease at that location.
Zebra leases various other facilities around the world, which are dedicated to administrative, research and sales functions. These other leases, solely or in aggregate, are not material to Zebra.
Item 3. Legal Proceedings
See Note 17 in the Notes to the Consolidated Financial Statements included in this Form 10-K.
Item 5. Market for Registrants 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 2008 and 2007, as reported by the NASDAQ Stock Market.
Source: The NASDAQ Stock Market
At February 20, 2009, the last reported price for the Class A Common Stock was $17.03 per share, and there were 352 registered stockholders of record for Zebras Class A Common Stock. In addition, we had approximately 28,000 stockholders who owned Zebra stock in street name.
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.
During the fourth quarter of 2008, Zebra purchased 2,627,532 shares of Zebras Class A common stock as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
Item 6. Selected Financial Data
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) DATA
(In thousands, except per share amounts)
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Net sales for the fourth quarter of 2008, compared with the fourth quarter of 2007, decreased 0.4%, compared to the fourth quarter of 2007. Sales weakness in our Europe, Middle East and Africa (EMEA) territory offset sales growth in Latin America, Asia Pacific and North America. In North America, strength in sales to large key accounts contrasted with declining sales to channel partners and distributors. Sales by the Enterprise Solutions Group (ESG) businesses we acquired in 2007 and 2008 also had a positive impact on our overall sales performance for the fourth quarter of 2008. Lower gross margin was affected by unfavorable changes in foreign exchange rates and product mix. Operating expenses increased as a result of ESG related acquisitions and higher costs for exit, restructuring and integration, offset by reductions in operating expenses to contain costs in the current difficult business environment. During the fourth quarter, we also took charges totaling $157,600,000 for the impairment of goodwill, intellectual property and other assets.
Sales for all of 2008 increased by 12.5% compared to 2007. All geographic regions contributed to this growth, which was also aided by sales related to the acquisitions we made in 2007 to form our ESG business group. Gross profit margin also increased principally because of favorable foreign exchange rates and product mix due to higher margin ESG products. Increased operating expenses were due to our ESG acquisitions, increased amortization of intangibles and costs related to the integration and restructuring of our businesses.
Results of Operations: Fourth Quarter of 2008 versus Fourth Quarter of 2007, Year ended December 31, 2008 versus Year ended December 31, 2007
Net sales by product category, percent change, and percent of total net sales for the three months and year ended December 31, 2008, and December 31, 2007, were (in thousands, except percentages):
The increase in service and software revenue in 2008 is primarily due to the increased sales in ESG since that business sales have a high concentration of service and software, and the Navis business, which constitutes a significant part of ESG, was not acquired until late in the fourth quarter of 2007.
Net sales to customers by geographic region, percent changes and percent of total net sales for the three months and year ended December 31, 2008, and December 31, 2007, were (in thousands, except percentages):
Notable weakness in sales in EMEA from the economic downturn began in the third quarter of 2008 and continued into the fourth quarter. This trend offset continued sales growth in our Latin America, Asia Pacific and North America regions. Service and software increased 85.3% for the fourth quarter of 2008 from the fourth quarter of 2007 principally due to the recent acquisitions in ESG. For the fourth quarter, unfavorable foreign exchange movements decreased consolidated sales growth by 2.8 percentage points and EMEA sales growth by 7.0 percentage points.
For the full year, printer unit volume increased 5.7%, with particular strength in mobile printers. Average unit prices declined principally because of a shift in product mix, with a decline in tabletop printers and relative strength of mobile and desktop printers. We also had ongoing strength in supplies, aftermarket and service revenues. Service and software increased 145.6% principally due to the recent acquisitions in ESG. Favorable foreign exchange movements added 0.6 percentage points to consolidated growth for the full year and 1.7 percentage points to EMEA growth. Cash flow hedging activities decreased revenues by $12,354,000 for the full year as a result of foreign exchange rates of hedging contracts being in excess of the actual month end foreign exchange rates.
Gross profit information is summarized below (in thousands, except percentages):
The decrease in gross profit margin for the fourth quarter was due to unfavorable movements in foreign exchange movements and less favorable product mix in SPG, offset by higher margin ESG products gross margins. Foreign currency movements, net of hedging activities, decreased fourth quarter gross profit by $4,352,000. Foreign currency movements, net of hedging activities, for the full year increased gross profit by $6,391,000.
Selling and Marketing Expenses
Selling and marketing expenses are summarized below (in thousands, except percentages):
Selling and marketing expenses changes, compared to the same periods in 2007, are due to the following (in thousands):
Selling and marketing expenses decreased in the fourth quarter due to a cost reduction program consisting primarily of headcount reductions implemented during the second half of 2008 in response to the current difficult business environment. Offsetting that, in part, were changes related to the ESG acquisitions, which increased selling and marketing expenses by $2,436,000 during the fourth quarter and $12,528,000 for the full year of 2008.
Research and Development Costs
The development of new products and enhancement of existing products are important to Zebras business and growth prospects. To maintain and build our product pipeline, we made investments in research and development, summarized below (in thousands, except percentages):
Quarterly product development expenses fluctuate widely depending on the status of ongoing projects. We are committed to a long-term strategy of significant investment in product development. Changes in research and development costs, compared to the same periods in 2007, are due to the following (in thousands):
The increases are primarily related to the ESG acquisitions, which increased research and development costs by $3,774,000 during the fourth quarter and $18,833,000 for the full year of 2008.
General and Administrative Expenses
General and administrative expenses are summarized in the table below (in thousands, except percentages):
Changes in general and administrative expenses, compared to the same periods in 2007, are due to the following (in thousands):
General and administrative expenses decreased in the fourth quarter due to a cost reduction program consisting primarily of headcount reductions implemented during the second half of 2008 in response to the current difficult business environment. Offsetting that, in part, were changes related to the ESG acquisitions, which increased general and administrative expenses by $1,134,000 during the fourth quarter and $6,640,000 for the full year of 2008.
Amortization of Intangible Assets
Amortization of intangible assets increased $7,447,000 during 2008 due to our acquisitions of Navis, LLC in December 2007 and Multispectral Solutions, Inc., in April 2008. See Note 5 of the Consolidated Financial Statements included in this Annual Report on Form 10-K for a more detailed discussion of the recent acquisitions.
Asset impairment charges
During the fourth quarter, Zebra recorded asset impairment charges in the amount of $157,600,000. These charges related to the write-down of assets related to our recent ESG acquisitions and intellectual property because of changes in valuations as a result of the current economic conditions and the business outlook. See Note 13 of the Consolidated Financial Statements included in this Annual Report on Form 10-K for a more detailed discussion of the asset impairment charges.
Exit, restructuring and integration charges
For the fourth quarter of 2008, Zebra recorded exit costs in the amount of $3,514,000 related to the transfer of our printer manufacturing to a third-party manufacturer and the closure of our Warwick, Rhode Island supplies manufacturing facility. We also recorded restructuring charges in the amount of $2,653,000 related to various organization changes we made in December 2008 in order to reduce costs. Integration costs related to the combination of our most recent acquisitions to form the Enterprise Solutions Group and were $1,624,000 for the fourth quarter. For the year, exit costs were $13,997,000 and integration costs were $3,359,000. See Note 22 of the Consolidated Financial Statements included in this Annual Report on Form 10-K for a more detailed discussion of the exit, restructuring and integration charges.
Operating Income (Loss)
Operating income (loss) is summarized in the following table (in thousands, except percentages):
The operating loss for 2008 is the result of the impairment charges we recorded in the fourth quarter, which totaled $157,600,000. See Note 13 of the Consolidated Financial Statements included in this Annual Report on Form 10-K for a more detailed discussion of the asset impairment charges. Also significantly contributing to the operating loss in 2008 were exit, restructuring and integrations costs of $20,009,000, offset by the WhereNet litigation/claim settlement of $5,302,000. See Note 22 for further information related to the exit, restructuring and integration costs and Note 5 for further information related to the litigation/claim settlement.
Non-operating Income and Expenses
Zebras non-operating income and expense items are summarized in the following table (in thousands, except percentages):
Cash and marketable securities balances and resulting investment income for 2008 have decreased substantially compared to 2007 as a result of payments for recent acquisitions and for the repurchase of Zebra Class A common stock. During the third quarter of 2008, Zebra recorded losses on an auction rate security in the amount of $4,374,000 and on a long-term equity investment which was included in other assets in the amount of $2,897,000. See Note 3 to the Consolidated Financial Statements for further discussion of the valuation of the auction rate securities. Excluding these write-downs, Zebras annualized rate of return would have been 3.4% for 2008.
During 2007, we liquidated all of our interests in our partnership holdings. As a result of these liquidations, we recorded investment income of $9,246,000 related to gains on the liquidations of the partnerships during 2007, $4,369,000 of which was recognized in the fourth quarter. Excluding these gains, Zebras 2007 annualized rate of return would have been 4.5% for the fourth quarter and 3.5% for the year.
The effective income tax rate for the fourth quarter was 8.8% compared with 33.3% for the same quarter last year. For the full year of 2008, the effective income tax rate was not meaningful because a substantial portion of the impairment charges were not deductible for income tax purposes. The fourth quarter effective income tax rate was also affected by the impairment charges. For 2007, the effective income tax rate was 34.2%.
Net Income (Loss)
Zebras net income (loss) is summarized below (in thousands, except per share amounts):
The net loss for 2008 is the result of pre-tax impairment charges of $157,600,000 that we recorded in the fourth quarter. See Note 13 of the Consolidated Financial Statements included in this Annual Report on Form 10-K for a more detailed discussion of the asset impairment charges. Also significantly contributing to the net loss in 2008 were exit, restructuring and integration costs of $20,009,000, offset by the WhereNet litigation/claim settlement of $5,302,000. See Note 22 for further information related to the exit, restructuring and integration costs and Note 5 for further information related to the litigation/claim settlement.
Specialty Printing Group (in thousands, except percentages)
Net sales in our Specialty Printing Group (SPG) decreased 3.1% during the fourth quarter of 2008 compared with the fourth quarter of 2007. Year-over-year sales growth in our Latin America, Asia Pacific and North America regions offset sales weakness in EMEA related to more difficult general economic conditions in the territory. New printer products (defined as printers released within 18 months prior to the end of the applicable fiscal period) as a percent of total printer product sales were as follows:
The diversity of our business across verticals and channels benefited us during the fourth quarter, compared to the fourth quarter of 2007. SPG had its strongest quarter of the year with key accounts, which offset lower demand in the channel. In addition to shipments to retailers and small package delivery, we also experienced strong sales into healthcare, government and mobile workforce.
Our international sales are denominated in multiple currencies, primarily the dollar, pound and euro. This directly causes our reported sales to be subject to fluctuations based on changes in currency rates. To partially protect Zebra against these currency rate fluctuations, we hedge a portion of the anticipated euro-denominated sales. We estimate that foreign exchange movements of the euro and the pound versus the dollar had a negative impact of $6,540,000 on sales, net of the hedging activities, during the fourth quarter of 2008. For the full year, there was a net positive impact of the currency rate fluctuations and hedging activities of $5,586,000. See Note 16 to the Consolidated Financial Statements included in this report for a more detailed discussion of our hedging program.
Printer unit volumes and average selling price information is summarized below:
For 2008, unit volumes increased in our midrange and mobile printer lines while unit volumes decreased in the high-end tabletop and card printer lines compared to the comparable periods in 2007. During the fourth quarter of 2008, average unit selling prices decreased in all printer product lines in large part due to the decrease in euro and pound exchange rates.
Gross profit margin for SPG was affected by unfavorable changes in product mix and foreign exchange rates. Foreign currency movements, net of hedging activities, increased gross profit by $6,391,000 for the full year and decreased fourth quarter gross profit by $4,352,000.
Operating expense changes for SPG in 2008, compared to the same periods in 2007, are due to the following (in thousands):
The 2008 payroll and benefit cost increase includes approximately $550,000 for severance not related to the exit activities. Exit costs relate to the transfer of our printer manufacturing to a third-party manufacturer and the closure of our Warwick, Rhode Island supplies manufacturing facility. Restructuring costs relate to organization changes made in December 2008. See Note 22 to the Consolidated Financial Statements included in this Annual Report on Form 10-K for a more detailed discussion of the exit and restructuring costs. Facility relocation costs relate to the move of our High Wycombe, UK facility into a new location. Impairment charges relate to the write-down of intellectual property because of changes in valuations related to current economic conditions and the business outlook. See Note 13 of the Consolidated Financial Statements included in this Annual Report on Form 10-K for a more detailed discussion of the asset impairment charges. Absent the exit and restructuring costs and impairment charges, the fourth quarter reductions in expenses reflect the cost reduction program initiated during the quarter.
During 2008, we completed a sale and leaseback transaction for our manufacturing facility located in Camarillo, California. Zebra received net proceeds of $14,796,000 against a net book value of $10,669,000. Of the $4,127,000 gain, $3,006,000 was deferred and will be applied against future rental payments, and $1,121,000 was recognized in general and administrative expenses.
Enterprise Solutions Group (in thousands, except percentages)
During 2007 and 2008, Zebra acquired four companies which have been combined to make up our Enterprise Solutions Group (ESG). On January 25, 2007, we acquired WhereNet Corp., a provider of active radio frequency identification (RFID) based wireless solutions used to track and manage enterprise assets. On July 2, 2007, we acquired proveo AG, a provider of complete hardware and software systems for tracking motorized vehicles using global positioning systems (GPS). On December 14, 2007, we acquired Navis Holdings, LLC, a provider of software solutions to optimize the flow of goods through marine terminals and other operations managing cargo movement through ports and intermodal facilities. On April 1, 2008, we acquired Multispectral Solutions Inc., a global provider of ultra wideband (UWB) real-time locating systems and other UWB-based technology. Together, these companies give Zebra the ability to deliver more high-value applications that help our customers identify, track and manage assets, transactions and people.
Gross profit margin for ESG in 2008 were significantly higher than in 2007 due to the margins of the software business added in late 2007, as a result of the Navis acquisition, being significantly higher than the hardware business we had in 2007.
ESG results for the fourth quarter of 2008 reflect spending rates for all of the businesses acquired during 2007 and 2008 that comprise ESG. The operating expenses for ESG for all of 2008 are not comparable to the operating expenses for 2007 because the operating expenses for 2007 do not include the financial results for all of those businesses. ESGs fourth quarter results also reflect a reduction in operating expenses during the second half of the year. These cost reduction efforts reduced ESGs employee count by approximately 40. Operating expenses for the fourth quarter and the full year reflect a write-down of assets in the amount of $142,920,000 related to our recent ESG acquisitions and intellectual property because of changes in valuations as a result of the current economic conditions and the business outlook.
Increases in ESG operating expenses in 2008, compared to the same periods in 2007, are due to the following (in thousands):
See Note 5 of the Notes to the Consolidated Financial Statements for further information related to the WhereNet escrow claim net settlement, Note 23 for further information related to acquisition integration costs, and Note 13 for further information related to the impairment charges.
Comparison of Years Ended December 31, 2007 and 2006
Net sales by product category, related percent changes and percent of total net sales for 2007 and 2006 were as follows (in thousands, except percentages):
Ongoing strength in international territories, with notable growth in Europe, Middle East and Africa (EMEA) of 21.0% for the full year over 2006, helped drive overall sales growth in 2007. For 2007, sales growth benefited from a 12.4% unit volume increase spread broadly across our printer product lines, offset by a decline in average unit prices. Sales growth also benefited from strong growth in service and software sales, which is a result of our recent acquisitions. Favorable foreign exchange movements added 3.9 percentage points to consolidated growth and 11.0 percentage points to growth in EMEA for the fourth quarter.
Printer unit volumes and average selling price information is summarized below:
For all of 2007, printer unit volumes for nearly all printer categories increased, with notable strength in mid-range, mobile and desktop printers. For the full year, lower average selling prices across the full line of printers in addition to a mix shift toward lower priced products resulted in a 2.8% decrease in the average selling price of printers shipped.
Gross profit information is summarized below (in thousands, except percentages)
The improvement in gross profit margin for 2007 was due to favorable foreign exchange movements and lower variances offset by an unfavorable product mix change.
Selling and Marketing Expenses
Selling and marketing expenses are summarized below (in thousands, except percentages):
Higher selling and marketing expenses in 2007 compared to 2006 were a result of increased payroll costs of $17,691,000, increased advertising and market development funding of $1,131,000, increased professional services of $472,000, and higher travel and entertainment expenses of $1,518,000. These increases were related, in part, to recent acquisitions, which increased selling and marketing expenses by $9,255,000 during 2007.
Research and Development Costs
Research and development costs are summarized below (in thousands, except percentages):
For 2007, research and development expenses increased as a result of increased payroll costs of $6,950,000 and higher professional services costs of $1,543,000. These increases were related, in part, to recent acquisitions, which increased research and development expenses by $7,387,000 during 2007.
General and Administrative Expenses
General and administrative expenses are summarized below (in thousands, except percentages):
For 2007, general and administrative expenses increased due to higher payroll costs of $12,911,000 and higher information systems expenses of $1,546,000. These increases were related, in part, to recent acquisitions, which increased general and administrative expenses by $2,138,000 during 2007.
Settlement and Licensing Agreement with Paxar Americas, Inc.
During the third quarter of 2006, Zebra paid $63,750,000 to settle all issues surrounding the litigation with Paxar Americas, Inc. Of this amount, $53,392,000 was included as operating expense. The remaining $10,358,000 was capitalized as an intangible asset related to future use of patents and other licenses and is being amortized over 4 to 7 years resulting in an incremental charge of $456,000 per quarter.
Insurance receivable reserve
During 2006, a Zebra reseller filed for bankruptcy protection in Austria. At the time of the filing, the reseller owed various Zebra subsidiaries a total of $12,065,000. The entire balance due to Zebra had been guaranteed by Condor Insurance, a Nevis-based insurance company through a United Kingdom insurance broker. During June 2006, Zebra initiated a suit in the U.K. courts to enforce the guarantee. However, during the fourth quarter, we discovered that the
insurance companys financial position was such that it was unable to pay the judgment awarded to us. We reviewed the situation and determined that a loss is probable, and, therefore, reserved 100% of the balance due, which was $12,543,000 at December 31, 2006.
Operating income is summarized in the following table (in thousands, except percentages):
Non-operating Income and Expenses
Zebras non-operating income and expense items are summarized in the following table (in thousands, except percentages):
During 2007, we began liquidating all of our interests in our partnership holdings. As a result of these liquidations, we recorded investment income of $9,246,000 related to gains on the liquidations of the partnerships during 2007.
The effective income tax rate for 2007 was 34.2% versus 31.5% for 2006. The increase in the effective tax rate is a result of the increased impact in 2006 of permanent tax differences, including tax-exempt interest income, on the effective income tax rate due to lower taxable income as a result of the Paxar settlement. In addition, we reduced tax reserves in 2006 totaling $1,189,000 related to the completion of various state tax audits and 2005 state income tax returns.
Income before Cumulative Effect of Accounting Change
Zebras income before cumulative effect of accounting change is summarized below (in thousands, except per share amounts):
Cumulative Effect of Accounting Change
During the first quarter of 2006, Zebra adopted SFAS No. 123(R), Share-Based Payment, using the modified retrospective approach. SFAS No. 123(R) requires entities to estimate the number of forfeitures expected to occur and record expense based upon the number of awards expected to vest. Prior to the adoption of SFAS No. 123(R), Zebra accounted for forfeitures as they occurred as permitted under previous accounting standards. The requirement to estimate forfeitures is classified as an accounting change, and SFAS No. 123(R) required a one-time adjustment in the
period of adoption. The one-time adjustment (cumulative effect of accounting change) related to the change in estimating forfeitures increased income by $1,319,000, net of applicable taxes.
Zebras net income is summarized below (in thousands, except per share amounts):
Critical Accounting Policies and Estimates
Management prepared the consolidated financial statements of Zebra Technologies Corporation under accounting principles generally accepted in the United States of America. These principles require the use of estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions we used are reasonable, based upon the information available.
Our estimates and assumptions affect the reported amounts in our financial statements. The following accounting policies comprise those that we believe are the most critical in understanding and evaluating Zebras reported financial results.
Product revenue is recognized once four criteria are met: (1) we have persuasive evidence that an arrangement exits; (2) delivery has occurred and title has passed to the customer, which happens at the point of shipment provided that no significant obligations remain; (3) the price is fixed and determinable; and (4) collectability is reasonably assured. Other items that affect our revenue recognition include:
Customers have the right to return products that do not function properly within a limited time after delivery. We monitor and track product returns and record a provision for the estimated future returns based on historical experience and any notification received of pending returns. Returns have historically been within expectations and the provisions established, but Zebra cannot guarantee that it will continue to experience return rates consistent with historical patterns. Historically, our product returns have not been significant. However, if a significant issue should arise, it could have a material impact on our financial statements.
Some of our channel program partners are offered incentive rebates based on the attainment of specific growth targets related to products they purchase from us over a quarter or year. These rebates are recorded as a reduction to revenue. Each quarter, we estimate the amount of outstanding growth rebates and establish a reserve for them based on shipment history. Historically, actual growth rebates have been in line with our estimates.
Some of our customers are offered price protection by Zebra as an incentive to carry inventory of our product. These price protection plans provide that if we lower prices, we will credit them for the price decrease on inventory they hold. We estimate future payments under price protection programs quarterly and establish a reserve, which is charged against revenue. Our customers typically carry limited amounts of inventory, and Zebra infrequently lowers prices on current products. As a result, the amounts paid under theses plans have been minimal.
We sell four types of software and record revenue as follows:
Maintenance and Support Agreements
We enter into post-contract maintenance and support agreements. Revenues are recognized ratably over the service period and the cost of providing these services is expensed as incurred.
Shipping and Handling
We charge our customers for shipping and handling services based upon our internal price list for these items. The amounts billed to customers are recorded as revenue when the product ships. Any costs incurred related to these services are included in cost of sales.
Zebra enters into sales transactions that include more than one product type. This bundle of products might include printers, current or future supplies, and services. When this type of transaction occurs, we allocate the purchase price to each product type based on the fair value of the individual products determined by vendor specific objective evidence. The revenue for each individual product is then recognized when the recognition criteria for that product is fully met.
Investments and Marketable Securities
Investments and marketable securities at December 31, 2008, consisted of the following:
We classify our debt and marketable equity securities in one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those debt securities that Zebra has the ability and intent to hold until maturity. All securities not included in trading or held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of discounts or premiums. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders equity until realized. As of December 31, 2008, Zebras investments in marketable debt securities are classified as available-for-sale. In addition, as of December 31, 2008, all of our investments in marketable debt securities with
maturities greater than one year are classified as long-term investments on the balance sheet due to our ability to hold them until maturity.
See Note 3 in the Notes to the Consolidated Financial Statements included in this Form 10-K for the fair value discussion of auction rate security investment valuations.
We have standardized credit granting and review policies and procedures for all customer accounts, including:
We reserve for estimated credit losses based upon historical experience and specific customer collection issues. Over the last three years, accounts receivable reserves varied from 0.6% to 3.3% of total accounts receivable. Accounts receivable reserves as of December 31, 2008, were $2,734,000, or 1.8% of the balance due. We feel this reserve level is appropriate considering the quality of the portfolio as of December 31, 2008. While credit losses have historically been within expectations and the provisions established, we cannot guarantee that our credit loss experience will continue to be consistent with historical experience.
We value our inventories at the lower of the actual cost to purchase or manufacture using the first-in, first-out (FIFO) method, or the current estimated market value. We review inventory quantities on hand and record a provision for excess and obsolete inventory based on forecasts of product demand and production requirements for the subsequent twelve months.
Over the last three years, our inventory reserves have ranged from 5.9% to 14.2% of gross inventory. As of December 31, 2008, inventory reserves were $7,172,000, or 6.7% of gross inventory. We feel this reserve level is appropriate considering the quantities and quality of the inventories as of December 31, 2008.
Valuation of Long-Lived and Intangible Assets and Goodwill
We test the impairment of goodwill each year or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We completed our annual assessment during June 2008 and determined that our goodwill was not impaired as of the end of May 2008.
Goodwill of a reporting unit should be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Examples of such events or circumstances include:
Due to the deterioration of the economy and a significant reduction in the price of our stock, we performed an interim test of our goodwill in the fourth quarter of 2008 and determined that the goodwill associated with our ESG segment was impaired. See Note 13 of the Consolidated Financial Statements for further discussion of this impairment charge.
We evaluate the impairment of identifiable intangibles and other long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered that may trigger an impairment review consist of:
If we believe that one or more of the above indicators of impairment have occurred and the undiscounted cash flow test has failed in the case of amortizable assets, we measure impairment based on projected discounted cash flows using a discount rate that incorporates the risk inherent in the cash flows.
During the fourth quarter of 2008, we determined that certain impairment indicators existed related to identified intangible assets in both our SPG and ESG businesses and conducted a special impairment test of intangibles. This test resulted in an impairment charge during the fourth quarter of 2008. See Note 13 of the Consolidated Financial Statements for further discussion of this impairment charge.
Net intangible assets, long-lived assets and goodwill amounted to $293,078,000 as of December 31, 2008.
Income Taxes. On January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109. According to FIN No. 48, we identified, evaluated, and measured the amount of income tax benefits to be recognized for all of our income tax positions. During 2008, we recognized an increase of approximately $4,000,000 in the liability for unrecognized tax benefits related to a recent Zebra acquisition. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Zebras continuing practice is to recognize interest and penalties related to income tax matters as part of income tax expense.
Zebra concluded U.S. federal income tax audits for tax years 2005 and 2006, during 2008. The 2007 tax year is open to audit. As a result of the concluded audits, additional income tax expense in the amount of $758,949 was incurred. In addition, interest expense in the amount of $146,937, net of tax benefits, was incurred. These amounts are included as part of current year income tax expense. The tax years 2004 through 2007 remain open to examination by various state taxing jurisdictions. Tax authorities in the United Kingdom have completed income tax audits through tax years ending December 31, 2006.
We record estimated liabilities related to contingencies based on our estimates of the probable outcomes. Quarterly, we assess the potential liability related to pending litigation, tax audits and other contingencies and confirm or revise estimates and reserves as appropriate.
For further information regarding material pending legal proceedings, see Note 17 in the Notes to the Consolidated Financial Statements included in the Form 10-K.
As of December 31, 2008, Zebra had a general stock-based compensation plan and a stock purchase plan under which our stock was available for future grants and sales. We account for these plans in accordance with SFAS No. 123(R), Share-Based Payment. Zebra recognizes compensation costs over the vesting period of 1 month to 5 years. See Notes 2 and 4 to the Consolidated Financial Statements included in the Form 10-K for further information.
Liquidity and Capital Resources
As of December 31, 2008, Zebra had $224,886,000 in cash, restricted cash, and investments and marketable securities, compared with $281,179,000 at December 31, 2007. The impact of foreign currency was a significant factor in our cash flow changes in 2008. The pound exchange rate decreased from 2.00 at December 31, 2007 to 1.45 at December 31, 2008. Additional factors affecting these balances during 2008 include (note that changes discussed below include the impact of foreign currency):
In February 2008, we announced that printer manufacturing is being transferred to a third-party manufacturer. This transition is expected to be completed by the end of 2009. See Note 22 to our Consolidated Financial Statements in this Annual Report on Form 10-K for further discussion.
Zebras contractual obligations as of December 31, 2008 were (in thousands):
Purchase obligations are for purchases made in the normal course of business to meet operational requirements, primarily raw materials.
On August 14, 2008, Zebra entered into a revolving credit agreement for a five-year $100 million revolving credit facility. The loans under this credit agreement will be available for general corporate purposes of Zebra and its subsidiaries in the ordinary course of business and other purposes permitted by the agreement. We have not yet drawn any funds under this credit agreement.
Management believes that existing capital resources and funds generated from operations are sufficient to finance anticipated capital requirements.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, to create greater consistency in the accounting and financial reporting of business combinations. SFAS No. 141(R) establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This statement applies to fiscal years beginning after December 15, 2008 and will generally affect acquisitions going forward.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133. This Statement requires enhanced disclosures about an entitys derivative and hedging activities and thereby improves the transparency of financial reporting. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. Zebra does not believe this standard will have a material impact upon our consolidated financial statements.
In April 2008, the FASB issued Financial Staff Position FAS 142-3, Determination of the Useful Life of Intangible Assets. This position amends the factors that should be considered in developing renewal or extension assumptions used to determine useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. The position intends to improve the consistency between useful life of a recognized intangible asset under FASB 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), and other GAAP. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. We have not yet determined the effect this standard will have on our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. This statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States. Any effect of applying the provisions of this Statement shall be reported as a change in accounting principle in accordance with SFAS No. 154, Accounting for Changes and Error Corrections. We have not yet determined the effect this standard will have on our consolidated financial statements.
In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-based Payment Transactions Are Participating Securities, (FSP EITF 03-6-1). FSP EITF 03-6-1 states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two class method. FSP EITF 03-6-1 becomes effective on January 1, 2009. We have not yet determined the effect this standard will have on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Zebra is exposed to the impact of changes in interest rates because of our large investment portfolio. As stated in our written investment policy, the investment portfolio is viewed as a strategic resource that will be managed to achieve above market rates of return in exchange for accepting a prudent amount of incremental risk, which includes the risk of interest rate movements. Risk tolerance is constrained by an overriding objective to preserve capital across each quarterly reporting cycle.
Zebra mitigates interest rate risk with an investment policy that requires the use of outside professional investment managers, investment liquidity, and broad diversification across investment strategies, and which limits the types of investments that may be made. Moreover, the policy requires due diligence of each investment manager both before employment and on an ongoing basis.
The following table sets forth the impact of a one-percentage point movement in interest rates on the value of Zebras investment portfolio (in thousands, except per share data).
Because these securities are classified as available-for-sale under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, the impact of a one-percentage point movement in interest rates occurs over an extended period of time as investments are sold and the funds are subsequently reinvested.
Foreign Exchange Risk
We conduct business in approximately 100 countries throughout the world and, therefore, are exposed to risk based on movements in foreign exchange rates. We generally invoice customers in their local currency and have a resulting foreign currency denominated revenue transaction and accounts receivable. We also purchase certain raw materials and other items in foreign currencies. We manage these risks using derivative financial instruments. See Note 16 of the Notes to the Consolidated Financial Statements included in this form 10-K for further discussions of hedging activities.
The following table sets forth the impact of a ten percent movement in the dollar/pound and dollar/euro rates measured as if Zebra did not engage in the selective hedging practices described above and in Note 16. It is based on the dollar/euro and dollar/pound exchange rates and euro and pound denominated assets and liabilities (in thousands, except per share data).
Equity Price Risk
Zebra currently employs two investment managers. These investment funds use a variety of investment strategies, some of which involve the use of equity securities. Zebra utilizes a Value-at-Risk (VaR) model to determine the maximum potential one-day loss in the fair value of its interest rate, foreign exchange and equity price sensitive instruments.
The following table sets forth the impact of a ten percent change in the value of all equity positions held by Zebras investment managers (in thousands, except per share data).
From time to time, Zebra has taken direct equity positions in companies. These investments relate to potential acquisitions and other strategic business opportunities. To the extent that it has a direct investment in the equity securities of another company, Zebra is exposed to the risks associated with such investments.
Item 8. Financial Statements and Supplementary Data
The financial statements and schedule of Zebra are annexed to this report as pages F-2 through F-38. An index to such materials appears on page F-1.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this Form 10-K. The controls evaluation was conducted under the supervision of our Disclosure Committee, and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Office and Chief Financial Officer, have concluded that our disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in this Annual Report on Form 10-K was recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment and those criteria, our management believes that, as of December 31, 2008, our internal control over financial reporting is effective. Our independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on Zebras internal control over financial reporting. That report is included on page 49 of this report on Form 10-K.
Changes in Internal Control over Financial Reporting
In January 2008, Zebra began a program to update substantially all of its key financial systems over a three year period. The requirements for internal controls over financial reporting are a fundamental element of the design and implementation of these systems. As pieces of these systems are implemented, we conduct appropriate levels of testing and monitoring of the systems and update our internal controls over financial reporting with respect to the impacted areas. In 2008, we made additional changes to our controls and procedures as part of our ongoing monitoring of our controls. However, none of these changes has materially affected, or is reasonably likely to materially affect, and there were no other changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within Zebra have been detected.
These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Report of Independent Registered Public Accounting Firm
On Internal Control over Financial Reporting
The Board of Directors and Stockholders
of Zebra Technologies Corporation:
We have audited Zebra Technologies Corporations internal control over financial reporting as of December 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Zebra Technologies Corporations 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 Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys 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 companys 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 companys assets that could have a material effect on the financial statements.
Because of its inherent limitation, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Zebra Technologies Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Zebra Technologies Corporation as of December 31, 2008 and 2007, and the related consolidated statements of earnings (loss), comprehensive income (loss), stockholders equity, and cash flows for each of the three years in the period ended December 31, 2008, and our report dated February 27, 2009 expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
February 27, 2009
Item 10. Directors, Executive Officers and Corporate Governance
We have adopted a Code of Ethics that applies to Zebras 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 Zebras 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 Zebras Web site
All other information in response to this item is incorporated by reference from the Proxy Statement sections entitled Election of Directors, Executive Officers and Corporate Governance.
Item 11. Executive Compensation
The information in response to this item is incorporated by reference from the Proxy Statement sections entitled Executive Compensation and Certain Transactions, Compensation Discussion and Analysis, Director Compensation, Compensation Committee Interlocks and Insider Participation and Compensation Committee Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information in response to this item is incorporated by reference from the Proxy Statement sections entitled Security Ownership of Management and Certain Beneficial Owners and Equity Compensation Plan Information.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information in response to this item is incorporated by reference from the Proxy Statement sections entitled Certain Relationships and Related Transactions and Corporate Governance.
Item 14. Principal Accounting Fees and Services
The information in response to this item is incorporated by reference from the Proxy Statement section entitled Fees of Independent Auditors.
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.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 27th day of February 2009.
ZEBRA TECHNOLOGIES CORPORATION
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.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
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.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
of Zebra Technologies Corporation:
We have audited the accompanying consolidated balance sheets of Zebra Technologies Corporation (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of earnings (loss), comprehensive income (loss), stockholders equity and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Zebra Technologies Corporation at December 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Zebra Technologies Corporations internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2009 expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
February 27, 2009
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(Amounts in thousands, except per share data)
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Dollars in thousands)
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)