Annual Reports

  • 10-K (Feb 22, 2018)
  • 10-K (Feb 27, 2017)
  • 10-K (Nov 14, 2016)
  • 10-K (Feb 29, 2016)
  • 10-K (Mar 17, 2015)
  • 10-K (Feb 20, 2014)

 
Quarterly Reports

 
8-K

 
Other

Zebra Technologies 10-K 2009
Form 10-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

 

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                                   to                                                      

COMMISSION FILE NUMBER 000-19406

Zebra Technologies Corporation

(Exact name of registrant as specified in its charter)

 

Delaware   36-2675536

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

333 Corporate Woods Parkway, Vernon Hills, IL 60061

(Address of principal executive offices)             (Zip Code)

Registrant’s telephone number, including area code: (847) 634-6700

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

 

Name of Exchange on which Registered

Class A Common Stock, par value $.01 per share   The NASDAQ Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act: None


Table of Contents

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 registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [    ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Act) (Check one):

 

Large accelerated filer X   Accelerated filer       
Non-accelerated filer          Smaller reporting company       

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Act).

     Yes        No X

As of June 28, 2008, the aggregate market value of each of the registrant’s 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 registrant’s 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.


Table of Contents

ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

INDEX

 

          PAGE
PART I   

Item 1.

   Business    4

Item 1A.

   Risk Factors    15

Item 1B.

   Unresolved Staff Comments    20

Item 2.

   Properties    21

Item 3.

   Legal Proceedings    22

Item 4.

   Submission of Matters to a Vote of Security Holders    22
PART II   

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
   23

Item 6.

   Selected Financial Data    24

Item 7.

   Management’s Discussion and Analysis of Financial Condition and
Results of Operations
   26

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk    44

Item 8.

   Financial Statements and Supplementary Data    46

Item 9.

   Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
   46

Item 9A.

   Controls and Procedures    47

Item 9B.

   Other Information    50
PART III   

Item 10.

   Directors, Executive Officers and Corporate Governance    51

Item 11.

   Executive Compensation    51

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
   51

Item 13.

   Certain Relationships and Related Transactions, and Director Independence    51

Item 14.

   Principal Accounting Fees and Services    51
PART IV   

Item 15.

   Exhibits, Financial Statement Schedules    52
SIGNATURES   

Signatures

   53
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE   

Index to Consolidated Financial Statements and Schedule

   F-1
EXHIBITS   

Index to Exhibits

  

 

3


Table of Contents

PART I

References in this document to “Zebra,” “we,” “us,” or “our” refer to Zebra Technologies Corporation and its subsidiaries, unless the context specifically indicates otherwise.

Safe Harbor

Forward-looking statements contained in this filing are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995 and are highly dependent upon a variety of important factors which could cause actual results to differ materially from those reflected in such forward looking statements. These factors include:

 

   

Market acceptance of Zebra’s printer and software products and competitors’ product offerings and the potential effects of technological changes,

   

The effect of market conditions in North America and other geographic regions,

   

Our ability to control manufacturing and operating costs, including the success of migrating final printer product assembly offshore to a third-party manufacturer,

   

Success of integrating acquisitions,

   

Interest rate and financial market conditions because of our large investment portfolio,

   

Foreign exchange rates due to the large percentage of our international sales and operations, and

   

The outcome of litigation in which Zebra is involved, particularly litigation or claims related to infringement of third-party intellectual property rights.

When used in this document and documents referenced, the words “anticipate,” “believe,” “estimate,” “will” and “expect” and similar expressions as they relate to Zebra or its management are intended to identify such forward-looking statements. We encourage readers of this report to review Item 1A, “Risk Factors,” in this report for further discussion of issues that could affect Zebra’s future results. Zebra undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this annual report.

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 Zebra’s filings with the SEC free of charge through the investor page on this Web site, immediately upon filing.

The Company

Zebra delivers products and solutions that improve our customers’ ability to 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

 

4


Table of Contents

(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, driver’s 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 driver’s 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 industry’s broadest range of rugged, on-demand thermal transfer and direct thermal printers. Our printing systems include hundreds of optional configurations that can be selected to meet particular customer needs. We believe this breadth of product 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

 

5


Table of Contents

enable users to affix bar code labels to virtually any object. This capability is very important in the industrial and service sectors Zebra serves. Direct thermal printing is best suited where ease of use, smaller size and cost are important factors in the application. Accordingly, this technology is found principally in Zebra’s mobile and desktop units.

As of December 31, 2008, we offered 56 thermal printer models with numerous variations, in eight categories as follows:

 

   

Performance tabletop printers for applications requiring continuous operation in high output, mission-critical and industrial settings.

   

RFID printer/encoders for passive high frequency (HF) and ultra-high frequency (UHF) radio frequency identification (RFID) in the retail supply chain, for defense logistics, and other applications. These units are used to print and encode “smart labels” in a single pass. Smart labels are printable labels embedded with an ultra-thin radio frequency transponder. Information encoded in these transponders can then be read and modified by a radio frequency reader.

   

Mid-range tabletop printers, which are designed for demanding commercial applications.

   

Desktop printers to deliver value and performance in applications with lower volume or space restrictions.

   

Mobile printers to meet the printing needs of workers in the field.

   

Print engines, which are sold to manufacturers and integrators of high-speed automatic label applicator systems and are available with or without RFID smart label capabilities.

   

Kiosk and ticket printers for use in kiosks and other unattended printing applications.

   

Card printers, which print national identity cards, driver’s licenses, employee identification badges, gift cards and personalized cards.

In addition to their use in on-demand automatic identification applications, our thermal printers can also be used for on-site batch production of custom bar code labels and other graphics. This capability results in shorter lead times, reduced inventory, and more flexibility than can be provided with traditional off-site printing.

Printer Supplies

Supplies products consist of stock and customized thermal labels, wristbands, 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 user’s needs. Supplies are chosen in consultation with the reseller and end user based on the specific application, printer and environment in which the labeling system must perform. These printing solutions frequently include proprietary ribbon and label formulations that are designed to optimize image resolution and printer performance while meeting the most demanding end user application performance criteria. Factors such as adhesion, resistance to scratches, smudges and abrasion, and chemical and environmental exposures are all taken into account when selecting the type of ribbon and labeling materials. The use of supplies that are not carefully matched to specific printers can degrade image quality, and decrease the part life of key printer components such as printheads.

Printer Related Software

Zebra has specialized printer management, label design and driver solutions to help unlock the full potential of Zebra printers. The ZebraLink Solutions suite of networking, software, firmware offerings, combined with the enhanced printer management capabilities of ZebraNet™ Bridge, makes Zebra’s printers easy to use and integrate into small, medium and enterprise-wide environments. Our goal is to provide software that enables high levels of functionality to all major computer network and software systems. Network systems include Ethernet, 802.11b/g and Bluetooth®. In 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.

 

6


Table of Contents

Zebra offers label design and integration software specifically designed to optimize the performance of Zebra bar code label printers. Zebra’s suite of label design and printer configuration tools includes ZebraDesigner™, ZebraDesigner™ Pro, ZebraDesigner™ for XML, and ZebraDesigner™ Label Design Software for use with mySAP™ Business Suite. In 2008, Zebra added the Enterprise Connector Solution for Oracle® Business Intelligence Publisher™, which delivers seamless integration between Oracle and Zebra printers, creating a versatile, easily managed, cost-effective printing platform.

Printer Maintenance and Services

Zebra provides depot maintenance and repair services at repair centers in Vernon Hills, Illinois; Camarillo, California; 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, Zebra’s resellers may provide maintenance service, either directly as ZASPs or through independent service agents. Zebra also provides technical support from in-house support personnel located in the United States, the United Kingdom and Singapore. For most Zebra products, Zebra provides interactive technical support via the Internet at www.zebra.com, 24 hours per day, seven days per week.

Printer Warranties

In general, Zebra provides 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.

Zebra’s 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.

 

7


Table of Contents

Zebra’s 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 Zebra’s strategic goals and sales commitment to Zebra. In addition, we offer VARs the opportunity to earn certifications for mobile/wireless printers, supplies, services and RFID products in 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 Zebra’s competitive strengths and weaknesses.

Printer Production and Manufacturing

We design our products to optimize product performance, quality, reliability, durability and versatility. These designs combine cost-efficient materials, sourcing and assembly methods with high standards of workmanship. In February 2008, we announced that final printer assembly 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 Zebra’s flexibility to meet emerging business

 

8


Table of Contents

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 Jabil’s 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 Zebra’s regional distribution centers. The majority of the product will pass directly through to Zebra’s 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.

Printer Competition

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 Zebra’s card printers and provide effective competition from a variety of companies, many of which are substantially larger than Zebra. In addition, service bureaus compete for end user business and provide an alternative to the purchase of our card printing equipment and supplies.

Our ability to compete effectively depends on a number of factors. These factors include the reliability, quality and reputation of the manufacturer and its products; hardware and software innovations and specifications; breadth of product offerings; information systems connectivity; price; level of technical support; supplies and applications

 

9


Table of Contents

support offered by the manufacturer; available distribution channels; and financial resources to support new product design and innovation. We believe that Zebra presently competes favorably with respect to these factors.

We face competition from many competitors, including the following (listed in alphabetical order): Altech; Argox; Avery Dennison; Boca Systems; Brother International; Canon; CIM; Citizen; CognitiveTPG; ColorX; Copal; Custom; Danaher; Datacard; Datamax-O’Neil, a unit of Dover Corporation; Dymo, a Newell Rubbermaid Company; Epson; Evolis; 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 Zebra’s target applications for the foreseeable future. Among the many advantages of direct thermal and thermal transfer printing is the ability to print high-resolution, durable images on a wide variety of label materials at relatively low costs and high speeds compared with alternative printing technologies. We view passive RFID smart label encoding and active RFID location systems as complementary technologies to bar coded printing, offering growth opportunities to Zebra as the technologies become more widely adopted.

If other technologies were to evolve or become available to Zebra, it is possible that those technologies would be incorporated into our products. Alternatively, if such technologies were to evolve or become available to our competitors, Zebra’s products may become obsolete. This obsolescence would have a significant negative effect on Zebra’s business, financial position, results of operations and cash flows.

Therefore, we continually assess competitive and complementary methods of bar code printing and other means of automatic identification. Alternative print technologies assessed include ink jet, laser and direct marking. While we cannot be sure that new technology will not supplant thermal printing for labels, cards and receipts, we are not aware of any developing technology that offers the advantages of thermal printing for our targeted applications. We continually monitor and evaluate new RFID technologies, support their standards development, and rapidly adopt RFID into new Zebra products and systems as new markets and applications emerge.

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 ESG’s 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.

 

   

Software Licenses. We sell perpetual software licenses on a fixed fee basis. The amounts of the license fees are based primarily on the scope and functionality of the licenses purchased by the customer. The solutions we provide may also include third-party software.

 

10


Table of Contents
   

Hardware. We sell both proprietary and third-party real time asset management hardware. Most of our hardware products provide electronic tagging of assets and real time information regarding the assets’ locations and telematics. We sell the hardware as part of integrated solutions and as replacement for other parts.

   

Consulting Services. We provide consulting services for the planning and implementation of our solutions including initial installation and training. Zebra’s professional services team works with customers who are implementing our applications for the first time, evaluating new technology automation solutions, integrating with third-party systems or upgrading to new platforms. Services are typically charged on a time and materials basis, although from time-to-time we may enter into fixed fee contracts.

   

Maintenance and Support. We offer support to our customers 24 hours a day, 7 days a week, 365 days a year, usually for an annual fee, which entitles them to software upgrades and technical support.

We believe 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 Zebra’s reach beyond passive RFID by employing technologically advanced hardware and software solutions to locate, track, manage and optimize high-value assets, equipment and people. We offer a wide range of scalable real time locating systems (RTLS) technologies used to generate accurate, on-demand information about the physical location and status of high-valued assets. Customers benefit by utilizing the choice or combination of asset tracking products that can be “application matched” based on ISO/IEC 24730-2, Cisco CCX Wi-Fi, precision global positioning systems (GPS), and ultra wideband (UWB) technologies.

Our selection of RTLS asset tracking product offerings includes battery-powered active RFID WhereTag™ tags, WhereCall™ button tags, and precision WhereTrack™ products. These asset tags enable organizations to access accurate, real-time information on the location and status of their assets both indoors and outdoors.

In addition, we offer a selection of RTLS infrastructure products. These products receive tag transmissions and forward the information to the Visibility Server Software™ (a middleware application) which provides location calculations, database and system management functions and asset visibility. The flexible infrastructure supports large tag populations and coverage areas that can range from small to large.

We offer a broad set of software development tools for integrating 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:

 

   

Airport Operations. Our Airport Visualizer™ provides integrated aviation solutions and helps to optimize motorized ground support equipment and other mobile assets/equipments on the pavement immediately adjacent to an airport terminal area or hangers (commonly referred to as the “apron”). This solution helps improve the operational efficiencies of mobile assets for the global aviation industry which is faced with high costs in maintaining ample amounts of equipment, high fuel consumption, equipment misuse, rising gas emission and high levels of equipment congestion. As of December 31, 2008, our Airport Visualizer solution helps to optimize the processes of approximately 1,200 airport ground service vehicles.

   

Marine and Rail Terminal Operations. Installed and used at approximately 200 marine terminals around the world, our SPARCS™ (synchronous planning and real time control system) terminal operating system (TOS) helps terminal operators optimize the flow of containers through the facility by managing the processes of a terminal operation. Zebra’s TOS provides users real-time visibility of containers for better

 

11


Table of Contents

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.

   

Distribution Operations. Our Yard Management Solution Suite™ provides effective management over gate schedules and dock assignments by providing the ability to track, in real-time, the location and status of all vehicles and their associated inventory throughout the shipping yard or dock. Our Yard Management Suite includes modules for dock and yard management, gate automation and scheduling for enhanced security, enterprise asset visibility, and container tracking. These optimize dock and yard management solutions, improve customer support, lower operating costs and increase yard and dock capacity.

   

Manufacturing Operations. We provide an integrated wireless infrastructure for real-time location, digital messaging, telemetry, and wireless networking applications to give manufacturers the ability to continuously manage the physical location and status of their critical assets for improving lean processes within the core manufacturing functions.

ESG products and services are primarily sold through ESG’s global direct sales force which is organized around geographic and vertical markets. We complement our direct sales through the use of other channels including systems integrators with particular vertical market expertise.

ESG’s proprietary software and hardware are developed primarily by its internal team of engineers. Generally, our software is warranted for 90 days after going live to function consistently with its specifications, and our hardware is warranted to be free from material defects in materials and workmanship for up to one year after purchase.

Customers

Zebra has sold 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:

 

                         Year Ended December 31,                     
     2008    2007   2006

Percent of net sales

      15.4                 16.5               17.1          

No other customer accounted for 10% or more of total net sales during these years.

Sales

Net sales by product category for the last three years were (in thousands):

 

                         Year Ended December 31,                     

Product Category

   2008      2007      2006

Hardware

      $ 704,992             $ 660,034             $ 578,002    

Supplies

        172,106               161,678               150,709    

Service and software

        105,113               42,801               25,664    

Shipping and handling

        6,843               6,826               6,022    

Cash flow hedging activities

        (12,354 )             (3,060 )             (873 )  
                  

   Total net sales

      $ 976,700             $ 868,279             $ 759,524    
                  

The increase in service and software net sales in 2008 is due to our ESG acquisitions.

 

12


Table of Contents

Net sales to international customers, as a percent of total net sales, were as follows:

 

     Year Ended December 31,
             2008                    2007                    2006        

Percent of net sales

      54.5                  52.1                  50.0           

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

Zebra’s research and development expenditures for the last three years were as follows (in thousands, except percentages):

 

     Year Ended December 31,
             2008                    2007                    2006        

Research and development expenses - SPG (excluding acquired in process technology)

          $ 55,735              $ 50,213              $ 48,959   

Percent of SPG net sales

        6.3            6.0            6.4   

Research and development expenses - ESG (excluding acquired in process technology)

          $ 29,385              $ 7,387            —     

Percent of ESG net sales

        31.2            21.0            —     

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 Zebra’s intellectual property is valuable and provides certain competitive advantages, we do not believe that the legal protections afforded to our intellectual property are fundamental to our success.

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

 

13


Table of Contents

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.

Employees

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.

Additional Information

For financial information regarding Zebra, see Zebra’s Consolidated Financial Statements and the related Notes, which are included in this Annual Report on Form 10-K. Zebra has two reportable segments for our operations and products. Financial information about segments and geographic areas is found in Note 18 to the Consolidated Financial Statements.

 

14


Table of Contents

Item 1A.      Risk Factors

Investors should carefully consider the risks, uncertainties and other factors described below, as well as other disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations, because they could have a material adverse effect on Zebra’s business, financial condition, operating results, and growth prospects.

Current economic conditions and market disruptions may adversely affect Zebra’s business and results of operations. Adverse economic conditions, in the United States or internationally, or reduced information technology spending may adversely impact our business. 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 Zebra’s 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 Zebra’s 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 Zebra’s 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 Zebra’s products and services, could negatively impact Zebra’s 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 Zebra’s 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 Zebra’s customer pricing and adversely affect Zebra’s results.

Zebra is unable to predict the duration and severity of the current economic downturn and disruption in financial markets or their effects on Zebra’s 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:

 

   

Difficulties and uncertainties in transitioning the customers or other business relationships from the acquired entities to Zebra,

   

The loss of key employees of acquired entities,

   

Ability of acquired entities to fulfill obligations to their customers,

   

The discovery of unanticipated issues or liabilities,

   

The failure of acquired entities to meet or exceed expected returns, and

   

The acquired entities’ ability to improve internal controls and accounting systems to be compliant with requirements applicable to public companies subject to SEC reporting.

 

15


Table of Contents

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 Zebra’s 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 Zebra’s 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 Circuit’s 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 Zebra’s 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, Zebra’s 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 Zebra’s 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 Jabil’s continuing manufacture of Zebra’s products and the continuing operation of Jabil’s 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 Zebra’s 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 Jabil’s 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 Zebra’s existing customers resulting from Zebra’s inability to produce products for them.

A third party service provider such as Jabil will have access to Zebra’s intellectual property, which increases the risk of infringement or misappropriation of this intellectual property.

 

16


Table of Contents

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:

 

   

Inadequately managing and overseeing operations that are distant and remote from corporate headquarters,

   

Fluctuating foreign currency rates could restrict sales, or increase costs of purchasing, in foreign countries,

   

Adverse changes in, or uncertainty of, local business laws or practices, including the following:

   

Foreign governments may impose burdensome tariffs, quotas, taxes, trade barriers or capital flow restrictions,

   

Restrictions on the export or import of technology may reduce or eliminate the ability to sell in or purchase from certain markets,

   

Political and economic instability may reduce demand for our products, or put our foreign assets at risk,

   

Potentially limited intellectual property protection in certain countries may limit recourse against infringing products or cause Zebra to refrain from selling in certain geographic territories,

   

Staffing and managing international operations may be unusually difficult,

   

A government controlled foreign exchange rate and limitations on the convertibility of the Chinese Renminbi Yuan,

   

The failure to implement and maintain adequate internal controls relating to these operations,

   

Transportation delays that may affect production and distribution of Zebra’s products, and

   

A limited telecommunications infrastructure.

Zebra may not be able to continue to develop products to address user needs effectively in an industry characterized by rapid technological change. To be successful, Zebra must adapt to rapidly changing technological and application needs by continually improving its products as well as introducing new products and services to address user demands.

Zebra’s industry is characterized by:

 

   

Rapidly changing technology,

   

Evolving industry standards,

   

Frequent new product and service introductions,

   

Evolving distribution channels, and

   

Changing customer demands.

Future success will depend on Zebra’s ability to 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:

 

   

Technologically advanced systems that satisfy the user demands,

   

Superior customer service,

   

High levels of quality and reliability, and

   

Dependable and efficient distribution networks.

Zebra cannot assure it will be able to compete successfully against current or future competitors. Increased competition in printers or supplies may result in price reductions, lower gross profit margins and loss of market share, and could require increased spending on research and development, sales and marketing and customer

 

17


Table of Contents

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 Zebra’s 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:

 

   

Manufacturing an increased number of products,

   

Increased administrative and operational burden,

   

Maintaining and improving information technology infrastructure to support growth,

   

Increased logistical problems common to complex, expansive operations, and

   

Managing increasing international operations.

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 party’s patent or other intellectual property right, Zebra may be prevented from operating its business as planned, and may be required to pay damages, to obtain a license, if available, or to use a non-infringing method, if possible, to accomplish its objectives. Any of these claims, with or without merit, could result in costly litigation and divert the attention of key personnel. If such claims are successful, they could result in costly judgments or settlements. Also, as new technologies emerge, such as RFID, the intellectual property rights of parties in such technologies can be uncertain. As a result, products involving such technologies may have higher risk of claims of infringement of the intellectual proprietary rights of third parties.

The inability to protect intellectual property could harm Zebra’s reputation, and its competitive position may be materially damaged. Zebra’s intellectual property is valuable and provides Zebra with certain competitive advantages. Copyrights, patents, trade secrets and contracts are used to protect these proprietary rights. Despite these precautions, it may be possible for third parties to copy aspects of Zebra’s products or, without authorization, to obtain and use information which Zebra regards as trade secrets.

Zebra may incur liabilities as a result of product failures due to actual or apparent design or manufacturing defects. Zebra may be subject to product liability claims, which could include claims for property or economic damage or personal injury, in the event our products present actual or apparent design or manufacturing defects. Such design or manufacturing defects may occur not only in Zebra’s own designed products but also in components provided by third party suppliers. 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 Zebra’s installed printer base, a design or manufacturing defect involving this large installed printer base could result in product recalls or customer service costs that could have material adverse effects on Zebra’s financial results.

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.

 

18


Table of Contents

Zebra’s equipment is subject to U.S. and foreign regulations that pertain to electrical and electronic equipment, which may materially adversely affect Zebra’s business. These regulations influence the design, components or operation of such products. New regulations and changes to current regulations are always possible and, in some jurisdictions, regulations may be introduced with little or no time to bring related products into compliance with these regulations. Zebra’s failure to comply with these regulations may prevent Zebra from selling our products in a certain country. In addition, these regulations may increase our cost of supplying the products by forcing us to redesign existing products or to use more expensive designs or components. In these cases, Zebra may experience unexpected disruptions in our ability to supply customers with products, or we may incur unexpected costs or operational complexities to bring products into compliance. This could have an adverse effect on Zebra’s revenues, gross profit margins and results of operations and increase the volatility of our financial results.

Zebra is implementing a new company-wide enterprise resource planning (ERP) system. The implementation process is complex and involves a number of risks that may adversely affect Zebra’s business and results of operations. Zebra is currently replacing its multiple legacy business systems at its different sites with a new company-wide, integrated enterprise resource planning (ERP) system to handle various business, operating and financial processes for Zebra and its subsidiaries. The new system will 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 Zebra’s ability to timely and accurately process and report key components of the results of its consolidated operations, its financial position and cash flows, which could impact Zebra’s ability to timely complete important business processes such as the evaluation of its internal controls and attestation activities pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.

Until the new ERP system is fully implemented, Zebra expects to incur additional selling, general and administrative expenses to stabilize the system, and there can be no assurance that other issues relating to the ERP system will not occur or be identified. Zebra’s business and results of operations may be adversely affected if it experiences operating problems and/or cost overruns during the ERP implementation process or if the ERP system and the associated process changes, do not function as expected or give rise to the expected benefits

Economic factors that are outside Zebra’s control could lead to deterioration in the quality of Zebra’s 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 Zebra’s 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 Zebra’s long-term success. Competition for personnel in Zebra’s industry is intense, and Zebra may be unable to retain key employees or attract, assimilate or retain other highly qualified employees in the future.

Terrorist attacks or war could lead to further economic instability and adversely affect Zebra’s stock price, operations, and profitability. The terrorist attacks that occurred in the United States on September 11, 2001, caused major instability in the U.S. and other financial markets. Possible further acts of terrorism and current and future war

 

19


Table of Contents

risks could have a similar impact. Any such attacks could, among other things, cause further instability in financial markets and could directly, or indirectly through reduced demand, negatively affect Zebra’s facilities and operations or those of its customers or suppliers.

Taxing authority challenges may lead to tax payments exceeding current reserves. Zebra is subject to ongoing tax examinations in various jurisdictions. As a result, we may record incremental tax expense based on expected outcomes of such matters. In addition, we may adjust previously reported tax reserves based on expected results of these examinations. Such adjustments could result in an increase or decrease to Zebra’s effective tax rate.

Item 1B.       Unresolved Staff Comments

Not applicable.

 

20


Table of Contents

Item 2.      Properties

Zebra’s 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.

Zebra’s principal facilities as of December 31, 2008, are listed below:

 

     Square Footage
Location    Manufacturing,
Production &
Warehousing
   Administrative,
Research & Sales
   Total               Lease Expires

Vernon Hills, Illinois, USA (S)

      111,676              113,429              225,105              June 2014

Vernon Hills, Illinois, USA (S)

      —              34,000              34,000              February 2009

Lincolnshire, Illinois, USA (C)

      —              44,395              44,395              June 2014

Camarillo, California, USA (S)

      97,921              72,156              170,077              March 2011

Warwick, Rhode Island, USA (S)

      24,516              75,324              99,840              April 2009

Santa Clara, California, USA (E)

      —              20,757              20,757              December 2009

Oakland, California, USA (E)

      —              36,553              36,553              July 2013

Greenville, Wisconsin, USA (S)

      45,000              5,000              50,000              March 2018

Otay Mesa, California, USA (S)

      25,100              4,900              30,000              September 2011

McAllen, Texas, USA (S)

      15,500              2,500              18,000              September 2011

Flowery Branch, Georgia, USA (S)

      18,115              2,145              20,260              April 2012

Heerenveen, The Netherlands (S)

      48,427              46,145              94,572              January 2010

Bourne End, UK (S)

      —              24,700              24,700              June 2014

Preston, UK (S)

      30,450              8,600              39,050              Owned by Zebra
          

Total

      416,705              490,604              907,309             
          

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.

 

21


Table of Contents

Item 3.      Legal Proceedings

See Note 17 in the Notes to the Consolidated Financial Statements included in this Form 10-K.

Item 4.      Submission of Matters to a Vote of Security Holders

Not applicable.

 

22


Table of Contents

PART II

Item 5.       Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases                     of Equity Securities

Stock Information: Price Range and Common Stock

Our Class A Common Stock is traded on the NASDAQ Stock Market under the symbol ZBRA. The following table shows the high and low trade prices for each fiscal quarter in 2008 and 2007, as reported by the NASDAQ Stock Market.

 

2008    High          Low        2007      High        Low  

First Quarter

   $  34.80      $  27.50      First Quarter      $     42.38              $    33.70        

Second Quarter

     38.47        32.66      Second Quarter      41.49              37.98        

Third Quarter

     34.13        28.25      Third Quarter      42.50              32.93        

Fourth Quarter

     28.99        16.18      Fourth Quarter      39.09              32.93        

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 Zebra’s Class A Common Stock. In addition, we had approximately 28,000 stockholders who owned Zebra stock in street name.

Dividend Policy

Since our initial public offering in 1991, we have not declared any cash dividends or distributions on our capital stock. Zebra currently does not anticipate paying any cash dividends in the foreseeable future.

Treasury Shares

During the fourth quarter of 2008, Zebra purchased 2,627,532 shares of Zebra’s Class A common stock as follows:

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period    Total
number of
shares
purchased
   Average
price paid
per share
   Total number of
shares
purchased as
part of publicly
announced
program
   Maximum
number of
shares that may
yet be
purchased
under the
program

October 2008 (September 28 – October 25)

              5,000,000        

November 2008 (October 26 – November 22)

   737,137    $ 19.10    737,137    4,262,863        

December 2008 (November 23 – December 31)

   1,890,395    $ 19.04    1,890,395    2,372,468        
               

Total

   2,627,532    $ 19.06    2,627,532    2,372,468        
               

 

  (1) On October 27, 2008, Zebra announced that the Board authorized the purchase of up to 5,000,000 shares of Zebra common stock at prices to be determined at management’s discretion. There was no expiration on the authorization. All shares authorized for purchase and reflected in the above table were authorized under the Board’s 2008 authorization. On February 17, 2009, Zebra announced that the Board authorized the purchase of an additional 3,000,000 shares under the same terms.

 

23


Table of Contents

Item 6.      Selected Financial Data

CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) DATA

(In thousands, except per share amounts)

 

     Year Ended December 31,
     2008    2007    2006    2005    2004

Net sales

   $ 976,700          $     868,279          $     759,524          $     702,271         $     663,054     

Cost of sales

     497,395            451,161            401,104            348,851           320,951     
                                  

Gross profit

     479,305            417,118            358,420            353,420           342,103     

Total operating expenses

     494,651 (1)      273,933            277,991 (2)      207,392           175,494     
                                  

Operating income (loss)

     (15,346)           143,185            80,429            146,028           166,609     

Income (loss) before income taxes and cumulative effect of accounting change

     (11,913)           167,375            101,642            160,282           176,084     

Income (loss) before cumulative effect of accounting change

     (38,421)           110,113            69,627            106,184           115,141     

Cumulative effect of accounting change

     —            —            1,319 (3)      —           —     

Net income (loss)

   $ (38,421)         $     110,113          $       70,946          $     106,184         $   115,141     

Earnings (loss) per share before cumulative effect of accounting change

              

Basic

   $ (0.60)         $ 1.61          $           0.99          $         1.49         $         1.61     

Diluted

   $ (0.60)         $ 1.60          $           0.98          $         1.47         $         1.59     

Earnings (loss) per share

              

Basic

   $ (0.60)         $ 1.61          $           1.01          $         1.49         $         1.61     

Diluted

   $ (0.60)         $ 1.60          $           1.00          $         1.47         $         1.59     

Weighted average shares outstanding

              

Basic

     64,524            68,463            70,516            71,364           71,556     

Diluted

     64,524            68,908            70,956            72,000           72,398     

CONSOLIDATED BALANCE SHEET DATA

(In thousands)

     December 31,
     2008    2007    2006    2005    2004

Cash and cash equivalents, restricted cash, investments and marketable securities (current and long-term) (4)

   $     224,886        $ 281,179        $         559,189        $         544,239        $         557,993    

Working capital

     271,831          298,660          404,836          680,554          665,062    

Total assets

     850,878          1,034,278          963,142          918,415          868,044    

Long-term obligations (5)

     10,250          8,452          9,969          7,709          4,011    

Stockholders’ equity

     710,738          902,693          877,681          857,972          803,893    

 

(1) Includes asset impairment charges of $157,600,000 and exit, restructuring and integration charges of $20,009,000.
(2) Includes litigation settlement of $53,392,000 and insurance receivable reserve of $12,543,000.
(3) Relates to the estimation of forfeitures on prior year compensation expense outstanding at the adoption date of SFAS No. 123(R), Share Based Payment. See Note 4 in the Notes to the Consolidated Financial Statements included in this Form 10-K.
(4) The decrease in cash and cash equivalents, restricted cash and investments and marketable securities in 2007 and 2008 was principally the result of (i) our acquisitions of WhereNet, proveo AG, and Navis during 2007 and our acquisition of Multispectral Solutions Inc., and (ii) purchase of our stock during 2008. See Note 5 in the Notes to the Consolidated Financial Statements included in this Form 10-K for further discussion of the acquisitions.

 

24


Table of Contents
(5) Long-term obligations include deferred compensation and unearned revenue. See Note 19 in the Notes to the Consolidated Financial Statements included in this Form 10-K for further discussion of the Deferred Compensation Plan.

 

25


Table of Contents

Item 7.      Management’s 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

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):

 

     Three Months Ended December 31,   Percent   Percent of   Percent of

Product Category

     2008     2007   Change   Net sales - 2008   Net sales - 2007

Hardware

     $ 163,510          $ 177,394        (7.8)       70.3   75.9 

Supplies

     40,870          41,580        (1.7)       17.6   17.8 

Service and software

     26,158          14,120        85.3        11.2     6.0 

Shipping and handling

     1,498          1,744        (14.1)         0.7     0.8 

Cash flow hedging activities

     532          (1,265)       NM          0.2   (0.5)
                      

Total net sales

     $ 232,568          $ 233,573        (0.4)       100.0   100.0   
                      
     Year Ended December 31,   Percent   Percent of   Percent of

Product Category

   2008   2007   Change   Net sales - 2008   Net sales - 2007

Hardware

     $ 704,992          $ 660,034        6.8        72.2     76.1 

Supplies

     172,106          161,678        6.4        17.6     18.6 

Service and software

     105,113          42,801        145.6        10.8       4.9 

Shipping and handling

     6,843          6,826        0.2          0.7       0.8 

Cash flow hedging activities

     (12,354)         (3,060)       NM         (1.3)     (0.4)
                      

Total net sales

     $ 976,700          $ 868,279        12.5       100.0      100.0   
                      

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.

 

26


Table of Contents

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):

 

     Three Months Ended December 31,    Percent    Percent of    Percent of

Geographic Region

   2008    2007    Change    Net sales - 2008    Net sales - 2007

Europe, Middle East and Africa

     $ 82,375          $ 93,895        (12.3)      35.4        40.2    

Latin America

     17,871          15,452        15.7       7.7        6.6    

Asia-Pacific

     20,338          16,100        26.3       8.7        6.9    
                          

Total International

     120,584          125,447        (3.9)      51.8        53.7    

North America

     111,984          108,126        3.6       48.2        46.3    
                          

Total net sales

     $ 232,568          $ 233,573        (0.4)      100.0        100.0    
                          
     Year Ended December 31,    Percent    Percent of    Percent of

Geographic Region

   2008    2007    Change    Net sales - 2008    Net sales - 2007

Europe, Middle East and Africa

     $ 358,913          $ 320,225        12.1       36.8        36.9    

Latin America

     76,489          60,090        27.3       7.8        6.9    

Asia-Pacific

     97,032          71,871        35.0       9.9        8.3    
                          

Total International

     532,434          452,186        17.1       54.5        52.1    

North America

     444,266          416,093        6.8       45.5        47.9    
                          

Total net sales

     $ 976,700          $ 868,279        12.5       100.0        100.0    
                          

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

Gross profit information is summarized below (in thousands, except percentages):

 

     December 31,    Percent    Percent of    Percent of
             2008                    2007                    Change              Net sales - 2008          Net sales - 2007  

Three months ended

     $ 110,889          $ 113,298        (2.1)    47.7    48.5

Year ended

     479,305          417,118        14.9     49.1    48.0

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.

 

27


Table of Contents

Selling and Marketing Expenses

Selling and marketing expenses are summarized below (in thousands, except percentages):

 

     December 31,    Percent   Percent of    Percent of
             2008                    2007            Change   Net sales - 2008    Net sales - 2007

Three months ended

     $ 32,433          $ 35,683        (9.1)   13.9    15.3

Year ended

     130,764          121,996        7.2    13.4    14.1

Selling and marketing expenses changes, compared to the same periods in 2007, are due to the following (in thousands):

 

    

Three Months Ended
December 31, 2008

       

Year Ended
December 31, 2008

    

Payroll and benefit costs

      $ (1,926 )            $ 5,365    

Advertising and market development fund costs

        (640 )              1,997    

Professional services expenses

        344                1,451    

Travel and entertainment expenses

                       1,334    

Other changes

        (1,028 )              (1,379 )  
    

Total (decreases) increases

      $ (3,250 )            $ 8,768    

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 Zebra’s business and growth prospects. To maintain and build our product pipeline, we made investments in research and development, summarized below (in thousands, except percentages):

 

     December 31,    Percent    Percent of    Percent of
           2008                2007                Change            Net sales - 2008          Net sales - 2007    

Three months ended

     $ 20,653          $ 15,642        32.0    8.9    6.7

Year ended

     85,120          57,600        47.8    8.7    6.6

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):

 

    

Three Months Ended
December 31, 2008

       

Year Ended
December 31, 2008

    

Payroll and benefit costs

      $ 4,029              $ 17,867   

Professional services expenses

        748                2,732   

Project expenses

        (214 )              2,120   

Office services costs

        428                2,121   

Other changes

        20                2,680   
    

Total increases

      $ 5,011              $ 27,520   

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.

 

28


Table of Contents

General and Administrative Expenses

General and administrative expenses are summarized in the table below (in thousands, except percentages):

 

     December 31,    Percent   Percent of    Percent of
           2008                2007          Change   Net sales - 2008    Net sales - 2007

Three months ended

     $ 20,090          $ 21,855        (8.1)   8.6    9.4

Year ended

     87,885          81,356        8.0    9.0    9.4

Changes in general and administrative expenses, compared to the same periods in 2007, are due to the following (in thousands):

 

     Three Months Ended
December 31, 2008
        Year Ended
December 31, 2008
    

Payroll and benefit costs

      $ (2,186 )            $ (375 )  

Information systems and communications costs

        49                1,065    

Sales meeting expenses

                       2,228    

Depreciation expenses

        687                2,343    

Other changes

        (315 )              1,268    
    

Total (decreases) increases

      $ (1,765 )            $ 6,529    

General and administrative expenses decreased in the fourth quarter due to a cost reduction program consisting primarily of headcount reductions implemented during the second half of 2008 in response to the current difficult business environment. Offsetting that, in part, were changes related to the 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.

 

29


Table of Contents

Operating Income (Loss)

Operating income (loss) is summarized in the following table (in thousands, except percentages):

 

     December 31,    Percent    Percent of    Percent of
     2008    2007    Change    Net sales - 2008    Net sales - 2007

Three months ended

   $  (132,349)        $36,862        NM    (56.9)    15.8

Year ended

   (15,346)        143,185        NM      (1.6)    16.5

The operating loss for 2008 is the result of the impairment charges we recorded in the fourth quarter, which totaled $157,600,000. See Note 13 of the Consolidated Financial Statements included in this Annual Report on Form 10-K for a more detailed discussion of the asset impairment charges. Also significantly contributing to the operating loss in 2008 were exit, restructuring and integrations costs of $20,009,000, offset by the WhereNet litigation/claim settlement of $5,302,000. See Note 22 for further information related to the exit, restructuring and integration costs and Note 5 for further information related to the litigation/claim settlement.

Non-operating Income and Expenses

Zebra’s non-operating income and expense items are summarized in the following table (in thousands, except percentages):

 

        Three Months Ended    
December 31,
      Year Ended December 31,    
    2008   2007   2008   2007

Investment income

    $ 1,295          $ 8,545          $ 1,281          $ 23,966     

Foreign exchange gains

    2,640          553          3,518          523     

Other, net

    (277)         231          (1,366)         (299)    
                       

Total other income

    $ 3,658          $ 9,329          $ 3,433          $ 24,190     
                       

Rate of Return Analysis:

       

Average cash and marketable securities balances

    $ 235,871          $ 375,269          $ 253,033          $ 420,184     

Annualized rate of return

    2.2%          9.1%          0.5%          5.7%     

Cash and marketable securities balances and resulting investment income for 2008 have decreased substantially compared to 2007 as a result of payments for recent acquisitions and for the repurchase of Zebra Class A common stock. During the third quarter of 2008, Zebra recorded losses on an auction rate security in the amount of $4,374,000 and on a long-term equity investment which was included in other assets in the amount of $2,897,000. See Note 3 to the Consolidated Financial Statements for further discussion of the valuation of the auction rate securities. Excluding these write-downs, Zebra’s 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, Zebra’s 2007 annualized rate of return would have been 4.5% for the fourth quarter and 3.5% for the year.

Income Taxes

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%.

 

30


Table of Contents

Net Income (Loss)

Zebra’s net income (loss) is summarized below (in thousands, except per share amounts):

 

    Three Months Ended December 31,           Year Ended December 31,        
    2008   2007   2008   2007

Net income (loss)

    $ (117,361)         $ 30,803         $ (38,421)         $ 110,113    

Diluted earnings (loss) per share

    $ (1.88)         $ 0.45         $ (0.60)         $ 1.60    

The net loss for 2008 is the result of pre-tax impairment charges of $157,600,000 that we recorded in the fourth quarter. See Note 13 of the Consolidated Financial Statements included in this Annual Report on Form 10-K for a more detailed discussion of the asset impairment charges. Also significantly contributing to the net loss in 2008 were exit, restructuring and integration costs of $20,009,000, offset by the WhereNet litigation/claim settlement of $5,302,000. See Note 22 for further information related to the exit, restructuring and integration costs and Note 5 for further information related to the litigation/claim settlement.

Business Groups

Specialty Printing Group (in thousands, except percentages)

 

        Three Months Ended                
    December 31,
2008
  December 31,
2007
  Percent
Change
  Percent of
Net sales - 2008
  Percent of
Net sales - 2007

Net sales

    $ 210,494         $ 217,229       (3.1)   100.0       100.0    

Cost of sales

    113,187         111,889         1.2    53.8       51.5    
                     

Gross profit

    97,307         105,340       (7.6)   46.2       48.5    

Operating expenses

    66,781         51,599       29.4    31.7       23.8    
                     

Operating income

    30,526         53,741       (43.2)   14.5       24.7    
                     
    Year Ended            
    December 31,
2008
  December 31,
2007
  Percent
Change
  Percent of
Net sales - 2008
  Percent of
Net sales - 2007

Net sales

    $ 882,459         $ 833,034       5.9        100.0       100.0    

Cost of sales

    454,337         430,782       5.5        51.5       51.7    
                     

Gross profit

    428,122         402,252       6.4        48.5       48.3    

Operating expenses

    221,934         188,661       17.6        25.1       22.6    
                     

Operating income

    206,188         213,591       (3.5)       23.4       25.7    
                     

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:

 

             December 31,        
     2008    2007

Three months ended

   18.6    16.6

Year ended

   19.1    11.1

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.

 

31


Table of Contents

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:

 

     Three Months Ended December 31,    Percent
Change
   Year Ended December 31,    Percent
Change
     2008    2007       2008    2007   

Total printers shipped

   249,902    235,267    6.2    972,478    919,909    5.7

Average selling price of printers shipped

        $538         $600    (10.3)         $594         $581    2.2

For 2008, unit volumes increased in our midrange and mobile printer lines while unit volumes decreased in the high-end tabletop and card printer lines compared to the comparable periods in 2007. 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):

 

     Three Months Ended
December 31, 2008
        Year Ended
December 31, 2008

Payroll and benefit costs

      $ (1,847 )            $ 3,530    

Trade show expenses

        (680 )              (1,013 )  

Advertising and market development fund costs

        (744 )              1,637    

Professional services costs

        578                1,890    

Information technology expenses

        (646 )              (1,794 )  

Sales meeting expenses

                       1,508    

Stock based compensation expenses

        (970 )              (2,770 )  

Exit and restructuring costs

        6,005                16,489    

Impairment charges

        14,680                14,680    

Gain on sale of assets

                       (1,347 )  

Facility relocation costs

                       1,092    

Other changes

        (1,194 )              (629 )  
    

Total increases

      $ 15,182              $ 33,273    

The 2008 payroll and benefit cost increase includes approximately $550,000 for severance not related to the exit activities. Exit costs relate to the transfer of our printer manufacturing to a third-party manufacturer and the closure of our Warwick, Rhode Island supplies manufacturing facility. Restructuring costs relate to organization changes made in December 2008. See Note 22 to the Consolidated Financial Statements included in this Annual Report on Form 10-K for a more detailed discussion of the exit and restructuring costs. Facility relocation costs relate to the move of our High Wycombe, UK facility into a new location. Impairment charges relate to the 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.

 

32


Table of Contents

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)

 

     Three Months Ended               
     December 31,
2008
   December 31,
2007
   Percent
Change
   Percent of
Net sales - 2008
   Percent of
Net sales - 2007

Net sales

     $ 22,074           $ 16,345         35.1    100.0         100.0     

Cost of sales

     8,492           8,366           1.3    38.5         51.3     
                          

Gross profit

     13,582           7,959         70.6    61.5         48.7     

Operating expenses

     163,208           8,961         NM    739.4         54.8     
                          

Operating loss

     (149,626)          (1,002)        NM    (677.9)        (6.1)    
                          
     Year Ended               
     December 31,
2008
   December 31,
2007
   Percent
Change
   Percent of
Net sales - 2008
   Percent of
Net sales - 2007

Net sales

     $ 94,241           $ 35,245         167.4    100.0         100.0     

Cost of sales

     43,059           20,379         111.3    45.7         57.8     
                          

Gross profit

     51,183           14,866         244.3    54.3         42.2     

Operating expenses

     217,149           26,121           NM    230.4         74.1     
                          

Operating loss

     (165,966)          (11,255)          NM    (176.1)        (31.9)    
                          

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. ESG’s fourth quarter results also reflect a reduction in operating expenses during the second half of the year. These cost reduction efforts reduced ESG’s 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.

 

33


Table of Contents

Increases in ESG operating expenses in 2008, compared to the same periods in 2007, are due to the following (in thousands):

 

     Three Months Ended
December 31, 2008
   Year Ended
December 31, 2008
    

General operating expense increase related to
businesses acquired

        $ 7,379                 $ 41,459    

Stock based compensation expenses

        912                   3,152    

Amortization expense

        1,408                   7,316    

Acquired in process technology

        —                   (1,853 )  

Acquisition integration expenses

        1,624                   3,359    

Impairment charges

        142,920                   142,920    

WhereNet escrow claim net settlement

        —                   (5,302 )  

Other changes

        4                   (23 )  
    

Total increases

        $ 154,247                 $ 191,028    

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.

 

34


Table of Contents

Comparison of Years Ended December 31, 2007 and 2006

Net sales

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):

 

     Year Ended December 31,    Percent
Change
   Percent of
Net sales - 2007
   Percent of
Net sales - 2006

Product Category

   2007    2006         

Hardware

     $ 660,034           $ 578,002         14.2        76.1         76.1     

Supplies

     161,678           150,709         7.3        18.6         19.8     

Service and software

     42,801           25,664         66.8        4.9         3.4     

Shipping and handling

     6,826           6,022         13.4        0.8         0.8     

Cash flow hedging activities

     (3,060)          (873)        NM        (0.4)        (0.1)    
                          

Total net sales

     $     868,279               $ 759,524         14.3        100.0         100.0     
                          
Net sales to customers by geographic region, related percent changes, and percent of total net sales for 2007 and 2006 were as follows (in thousands, except percentages):
     Year Ended December 31,    Percent
Change
   Percent of
Net sales - 2007
   Percent of
Net sales - 2006

Geographic Region

   2007    2006         

Europe, Middle East and Africa

     $ 320,225           $ 264,711         21.0        36.9         34.8     

Latin America

     60,090           53,619         12.1        6.9         7.1     

Asia-Pacific

     71,871           61,374         17.1        8.3         8.1     
                          

Total International

     452,186           379,704         19.1        52.1         50.0     

North America

     416,093           379,820         9.6        47.9         50.0     
                          

Total net sales

     $ 868,279           $ 759,524         14.3        100.0         100.0     
                          

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:

 

     Year Ended December 31,    Percent
Change
    
     2007    2006      

Total printers shipped

   919,909        818,413        12.4     

Average selling price of printers shipped

   $581        $598        (2.8)   

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

Gross profit information is summarized below (in thousands, except percentages)

 

For the Year Ended    Gross Profit    Percent of
Net sales
      

December 31, 2007

   $ 417,118        48.0    

December 31, 2006

     358,420        47.2    

Percent Change

     16.4       

 

35


Table of Contents

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):

 

For the Year Ended    Selling and
Marketing Expenses
   Percent of
Net Sales
      

December 31, 2007

   $    121,996                14.1    

December 31, 2006

   96,788                12.7    

Percent Change

   26.0               

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 the Year Ended    Research and
Development Costs
   Percent of
Net sales
      

December 31, 2007

   $    57,600                6.6    

December 31, 2006

   48,959                6.4    

Percent Change

   17.6               

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 the Year Ended    General and
Administrative Expenses
   Percent of
Net sales
      

December 31, 2007

   $    81,356                9.4    

December 31, 2006

   62,656                8.2    

Percent Change

   29.8               

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

 

36


Table of Contents

insurance company’s 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

Operating income is summarized in the following table (in thousands, except percentages):

 

          Percent of
For the Year Ended    Operating Income    Net sales

December 31, 2007

     $  143,185        16.5    

December 31, 2006

   80,429        10.6    

Percent Change

   78.0       

Non-operating Income and Expenses

Zebra’s non-operating income and expense items are summarized in the following table (in thousands, except percentages):

      
     Year Ended December 31,
     2007         2006

Investment income

      $ 23,966              $ 23,182    

Foreign exchange gains (losses)

        523                (635 )  

Other, net

        (299 )              (1,334 )  
            

Total other income (expense)

      $ 24,190              $ 21,213    
            

Rate of Return Analysis:

                  

Average cash and marketable securities balance

      $       420,184              $ 551,714    

Annualized rate of return

        5.7%                4.2%    

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.

Income Taxes

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

Zebra’s income before cumulative effect of accounting change is summarized below (in thousands, except per share amounts):

 

     Year Ended December 31,
            2007                2006      

Income before cumulative effect of accounting change

     $ 110,113          $ 69,627    

Diluted earnings per share before cumulative effect of accounting change

     $ 1.60          $ 0.98    

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

 

37


Table of Contents

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.

Net Income

Zebra’s net income is summarized below (in thousands, except per share amounts):

      
     Year Ended December 31,
     2007    2006

Net income

        $   110,113                $   70,946       

Diluted earnings per share

        $ 1.60                $ 1.00       

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 Zebra’s reported financial results.

Revenue Recognition

Product revenue is recognized once four criteria are met: (1) we have persuasive evidence that an arrangement exits; (2) delivery has occurred and title has passed to the customer, which happens at the point of shipment provided that no significant obligations remain; (3) the price is fixed and determinable; and (4) collectability is reasonably assured. Other items that affect our revenue recognition include:

Customer returns

Customers have the right to return products that do not function properly within a limited time after delivery. We monitor and track product returns and record a provision for the estimated future returns based on historical experience and any notification received of pending returns. Returns have historically been within expectations and the provisions established, but Zebra cannot guarantee that it will continue to experience return rates consistent with historical patterns. Historically, our product returns have not been significant. However, if a significant issue should arise, it could have a material impact on our financial statements.

Growth Rebates

Some of our channel program partners are offered incentive rebates based on the attainment of specific growth targets related to products they purchase from us over a quarter or year. These rebates are recorded as a reduction to revenue. Each quarter, we estimate the amount of outstanding growth rebates and establish a reserve for them based on shipment history. Historically, actual growth rebates have been in line with our estimates.

Price Protection

Some of our customers are offered price protection by Zebra as an incentive to carry inventory of our product. These price protection plans provide that if we lower prices, we will credit them for the price decrease on inventory they hold. We estimate future payments under price protection programs quarterly and establish a reserve, which is charged against revenue. Our customers typically carry limited amounts of inventory, and Zebra infrequently lowers prices on current products. As a result, the amounts paid under theses plans have been minimal.

Software Revenue

We sell four types of software and record revenue as follows:

 

38


Table of Contents
   

Our Enterprise Solutions Group has fixed fee software implementation projects, for which we use the percentage of completion method for revenue recognition. Under this method of accounting, we recognize revenue based on the ratio of costs incurred to total estimated costs. If increases in projected costs-to-complete are sufficient to create a loss contract, the entire estimated loss is charged to operations in the period the loss first becomes known.

   

Our printers contain embedded firmware, which is part of the hardware purchase. We consider the sale of this firmware to be incidental to the sale of the printer and do not attribute any revenue to it.

   

We sell a limited amount of prepackaged, or off-the-shelf, software for the creation of bar code labels using our printers. There is no customization required to use this software, and we have no post-shipment obligations on the software. Revenue is recognized at the time this prepackaged software is shipped.

   

We sometimes provide custom software as part of a printer installation project. We bill custom software development services separate from the related hardware. Revenue related to custom software is recognized once the custom software development services have been completed and accepted by the customer.

   

We recognize license revenue under Statement of Position No. 97-2, “Software Revenue Recognition” (“SOP 97-2”), as amended by Statement of Position No. 98-9, “Software Revenue Recognition, With Respect to Certain Transactions” (“SOP 98-9”), when (1) a signed contract is obtained; (2) delivery of the product has occurred; (3) the license fee is fixed or determinable; and (4) collection is probable.

Maintenance and Support Agreements

We enter into post-contract maintenance and support agreements. Revenues are recognized ratably over the service period and the cost of providing these services is expensed as incurred.

Shipping and Handling

We charge our customers for shipping and handling services based upon our internal price list for these items. The amounts billed to customers are recorded as revenue when the product ships. Any costs incurred related to these services are included in cost of sales.

Zebra enters into sales transactions that include more than one product type. This bundle of products might include printers, current or future supplies, and services. When this type of transaction occurs, we allocate the purchase price to each product type based on the fair value of the individual products determined by vendor specific objective evidence. The revenue for each individual product is then recognized when the recognition criteria for that product is fully met.

Investments and Marketable Securities

Investments and marketable securities at December 31, 2008, consisted of the following:

 

U.S. government securities

   22.5 %  

State and municipal bonds

   76.1 %  

Corporate bonds

   1.4 %  

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, Zebra’s 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

 

39


Table of Contents

maturities greater than one year are classified as long-term investments on the balance sheet due to our ability to hold them until maturity.

See Note 3 in the Notes to the Consolidated Financial Statements included in this Form 10-K for the fair value discussion of auction rate security investment valuations.

Accounts Receivable

We have standardized credit granting and review policies and procedures for all customer accounts, including:

 

   

Credit reviews of all new customer accounts,

   

Ongoing credit evaluations of current customers,

   

Credit limits and payment terms based on available credit information,

   

Adjustments to credit limits based upon payment history and the customer’s current credit worthiness,

   

An active collection effort by regional credit functions, reporting directly to the corporate financial officers, and

   

Credit insurance on the majority of our international revenues.

We reserve for estimated credit losses based upon historical experience and specific customer collection issues. Over the last three years, accounts receivable reserves varied from 0.6% 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.

Inventories

We value our inventories at the lower of the actual cost to purchase or manufacture using the first-in, first-out (FIFO) method, or the current estimated market value. We review inventory quantities on hand and record a provision for excess and obsolete inventory based on forecasts of product demand and production requirements for the subsequent twelve months.

Over the last three years, our inventory reserves have ranged from 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:

 

   

Significant adverse change in legal factors or in the business climate,

   

Adverse action or assessment by a regulator,

   

Unanticipated competition,

   

Loss of key personnel,

   

More-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of,

   

Testing for recoverability under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, of a significant asset group within a reporting unit,

   

Recognition of a goodwill impairment loss in the financial statement of a subsidiary that is a component of a reporting unit, or

   

Allocation of a portion of goodwill to a business to be disposed of.

 

40


Table of Contents

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:

 

   

Significant underperformance relative to expected historical or projected future operating results,

   

Significant changes in the manner of use of the acquired assets or the strategy for the overall business,

   

Significant negative industry or economic trends,

   

Significant decline in Zebra’s stock price for a sustained period, and

   

Significant decline in market capitalization relative to net book value.

If we believe that one or more of the above indicators of impairment have occurred and the undiscounted cash flow test has failed in the case of amortizable assets, we measure impairment based on projected discounted cash flows using a discount rate that incorporates the risk inherent in the cash flows.

During the fourth quarter of 2008, we determined that certain impairment indicators 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):

 

Balance at January 1, 2008

   $   

Additions based on tax positions related to the current year

     4,000   
         

Balance at December 31, 2008

   $   4,000   
         

Zebra’s 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.

Contingencies

We record estimated liabilities related to contingencies based on our estimates of the probable outcomes. Quarterly, we assess the potential liability related to pending litigation, tax audits and other contingencies and confirm or revise estimates and reserves as appropriate.

 

41


Table of Contents

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.

Stock-Based Compensation

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):

 

   

Operations provided a net cash increase of $138,282,000 primarily from net income after adding back non-cash items.

   

Accounts receivable increased $21,891,000 with $19,227,000 of the increase resulting from the impact of foreign currency. Days sales outstanding increased to 60 at the end of 2008 from 59 at the end of 2007.

   

Inventories increased $26,222,000 as a result of our printer manufacturing being transferred to a third-party manufacturer. Of this increase, $11,460,000 resulted from the impact of foreign currency.

   

Accounts payable decreased by $17,891,000 after the foreign currency impact of $22,533,000.

   

Deferred revenue increased $11,281,000 as a result of acquiring more long-term contracts in our ESG business.

   

Taxes payable decreased $1,002,000 due to the timing of tax payments made in 2008.

   

Purchases of property and equipment totaled $40,889,000.

   

Proceeds from the sale of our Camarillo facility were $14,796,000.

   

Purchase of Multispectral Solutions Inc., totaled $18,366,000, and an increase to the purchase price of Navis, LLC, was $222,000.

   

Intangibles increased $1,384,000 due to payments for licenses to use patents.

   

Net sales of investments totaled $67,499,000.

   

Purchases of treasury shares totaled $157,582,000. Zebra made open market repurchases of our shares under authorizations of the Board of Directors announced August 1, 2007, February 25, 2008, and October 27, 2008.

   

Stock option exercises and purchases under the stock purchase plan contributed $7,145,000.

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.

Contractual Obligations

Zebra’s contractual obligations as of December 31, 2008 were (in thousands):

 

          Payments due by period  
          Total    Less than 1
year
   1-3 years    3-5 years    More than 5  
years
 

Operating lease obligations

      $ 48,463    $ 12,023    $ 18,074    $ 13,420    $ 4,946        

Deferred compensation liability

        3,323                     3,323        

Deferred revenue

        24,948      18,366      6,582           —        

Purchase obligations

        66,904      66,904                —        
      

Total

      $   143,638    $ 97,293    $ 24,656    $ 13,420    $ 8,269        
      

Purchase obligations are for purchases made in the normal course of business to meet operational requirements, primarily raw materials.

 

42


Table of Contents

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 entity’s 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.

 

43


Table of Contents

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 Zebra’s investment portfolio (in thousands, except per share data).

 

     As of December 31,
Interest rate sensitive instruments    2008    2007

+1 percentage point movement

               

Effect on Pretax Income

      $ (1,894 )         $ (3,206 )  

Effect on Diluted EPS (after tax)

      $ (0.02 )         $ (0.03 )  

-1 percentage point movement

               

Effect on Pretax Income

      $         1,894           $         3,206    

Effect on Diluted EPS (after tax)

      $ 0.02           $ 0.03    

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).

 

     As of December 31,
Foreign exchange    2008         2007

Dollar/pound

                    

Effect on Pretax Income

      $ 1,620             $ 599   

Effect on Diluted EPS (after tax)

      $ 0.02             $ 0.01   

Dollar/euro

                    

Effect on Pretax Income

      $ 579             $ 2,195   

Effect on Diluted EPS (after tax)

      $ 0.01             $ 0.02   

Euro/pound

                    

Effect on Pretax Income

      $       4,469             $       3,073   

Effect on Diluted EPS (after tax)

      $ 0.05             $ 0.03   

 

44


Table of Contents

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 Zebra’s investment managers (in thousands, except per share data).

 

     As of December 31,
Equity price sensitive instruments    2008         2007

+10 percent movement

                  

Effect on Pretax Income

      $ 25              $ 1,170    

Effect on Diluted EPS (after tax)

      $       0.00              $       0.01    

-10 percent movement

                  

Effect on Pretax Income

      $ (25 )            $ (1,170 )  

Effect on Diluted EPS (after tax)

      $ (0.00 )            $ (0.01 )  

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.

 

45


Table of Contents

Item 8.      Financial Statements and Supplementary Data

The financial statements and schedule of Zebra are annexed to this report as pages F-2 through F-38. An index to such materials appears on page F-1.

Item 9.      Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

Not applicable.

 

46


Table of Contents

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 SEC’s 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.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 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 Zebra’s 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

 

47


Table of Contents

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.

 

48


Table of Contents

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 Corporation’s 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 (the COSO criteria). Zebra Technologies Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent 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

Chicago, Illinois

February 27, 2009

 

49


Table of Contents

Item 9B.     Other Information

Not applicable.

 

50


Table of Contents

PART III

Item 10.     Directors, Executive Officers and Corporate Governance

We have adopted a Code of Ethics that applies to Zebra’s Chief Executive Officer, Chief Financial Officer and the Vice President, Finance. The Code of Ethics is posted on the Investor Relations – Corporate Governance page of Zebra’s Internet Web site, www.zebra.com, and is available for download. Any waiver from the Code of Ethics and any amendment to the Code of Ethics will be disclosed on such page of Zebra’s Web site

All other information in response to this item is incorporated by reference from the Proxy Statement sections entitled “Election of Directors,” “Executive Officers” and “Corporate Governance.”

Item 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.”

 

51


Table of Contents

PART IV

Item 15.     Exhibits, Financial Statement Schedules

The financial statements and schedule filed as part of this report are listed in the accompanying Index to Financial Statements and Schedule. The exhibits filed as a part of this report are listed in the accompanying Index to Exhibits.

 

52


Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 27th day of February 2009.

ZEBRA TECHNOLOGIES CORPORATION        

 

By: /s/ Anders Gustafsson

 

Anders Gustafsson

 

Chief Executive Officer

Pursuant to the requirements of the Securities and Exchange Act of 1934, the report has been signed below by the following persons in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/s/Anders Gustafsson

      Anders Gustafsson

  

Chief Executive Officer and Director

(Principal Executive Officer)

  February 27, 2009

/s/Gerhard Cless

      Gerhard Cless

  

Executive Vice President,

Director

  February 27, 2009

/s/ Michael C. Smiley

      Michael C. Smiley

  

Chief Financial Officer

(Principal Financial Officer)

  February 27, 2009

/s/Todd R. Naughton

      Todd R. Naughton

  

Vice President, Finance

(Principal Accounting Officer)

  February 27, 2009

/s/Michael A. Smith

      Michael A. Smith

  

Director and Chairman of the Board of

Directors

  February 27, 2009

/s/ Andrew Ludwick

      Andrew Ludwick

   Director   February 27, 2009

/s/Ross W. Manire

      Ross W. Manire

   Director   February 27, 2009

/s/Robert J. Potter

      Robert J. Potter

   Director   February 27, 2009

/s/ Richard Keyser

      Richard Keyser

   Director   February 27, 2009

 

53


Table of Contents

ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

 

     Page

Financial Statements

  

Report of Independent Registered Public Accounting Firm

   F-2

Consolidated Balance Sheets as of December 31, 2008 and 2007

   F-3

Consolidated Statements of Earnings (Loss) for the years ended December 31, 2008, 2007, and 2006

   F-4

Consolidated Statements of Comprehensive Income (Loss)
for the years ended December 31, 2008, 2007, and 2006

   F-5

Consolidated Statements of Stockholders’ Equity
for the years ended December 31, 2008, 2007, and 2006

   F-6

Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007, and 2006

   F-7

Notes to Consolidated Financial Statements

   F-8

Financial Statement Schedule

  

The following financial statement schedule is included herein:

  

Schedule II - Valuation and Qualifying Accounts

   F-39

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.


Table of Contents

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 Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Zebra Technologies Corporation at December 31, 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 Corporation’s 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

Chicago, Illinois

February 27, 2009

 

F-2


Table of Contents

ZEBRA TECHNOLOGIES CORPORATION

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

 

     December 31,
2008
   December 31,  
2007

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $    33,267         $    38,211     

Restricted cash

   1,639         2,497     

Investments and marketable securities

   85,654         98,438     

Accounts receivable, net of allowances of $2,734 in 2008 and $5,075 in 2007

   152,679         150,775     

Inventories, net

   100,199         85,038     

Deferred income taxes

   11,679         14,772     

Prepaid expenses and other current assets

   11,701         31,101     
         

Total current assets

   396,818         420,832     

Property and equipment at cost, net of
accumulated depreciation and amortization

   75,363         67,686     

Long term deferred income taxes

   51,251         28,407     

Goodwill

   151,356         246,510     

Other intangibles, net

   66,359         119,424     

Long term investments and marketable securities

   104,326         142,033     

Other assets

   5,405         9,386     
         

Total assets

   $  850,878         $1,034,278     
         

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

Current liabilities:

     

Accounts payable

   $    38,152         $    42,351     

Accrued liabilities

   67,911         69,437     

Deferred revenue

   18,366         9,633     

Income taxes payable

   558         751     
         

Total current liabilities

   124,987         122,172     

Deferred rent

   4,903         961     

Other long-term liabilities

   10,250         8,452     
         

Total liabilities

   140,140         131,585     
         

Commitments and contingencies (Note 17)

     

Stockholders’ equity:

     

Preferred stock

   —         —     

Class A Common Stock

   722         722     

Additional paid-in capital

   144,861         141,522     

Treasury stock

   (344,147)        (205,058)    

Retained earnings

   922,091         960,512     

Accumulated other comprehensive income (loss)

   (12,789)        4,995     
         

Total stockholders’ equity

   710,738         902,693     
         

Total liabilities and stockholders’ equity

   $  850,878         $1,034,278     
         

See accompanying notes to consolidated financial statements.

 

F-3


Table of Contents

ZEBRA TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)

(Amounts in thousands, except per share data)

 

     Year Ended December 31,
     2008           2007           2006

Net sales

   $     976,700             $     868,279             $     759,524    

Cost of sales

     497,395               451,161               401,104    
                              

Gross profit

     479,305               417,118               358,420    

Operating expenses:

                        

Selling and marketing

     130,764               121,996               96,788    

Research and development

     85,120               57,600               48,959    

General and administrative

     87,885               81,356               62,656    

Amortization of intangible assets

     18,575               11,128               3,653    

Litigation/claim settlement

     (5,302 )                           53,392    

Insurance receivable reserve

                                 12,543    

Acquired in-process technology

                   1,853                  

Exit, restructuring and integration costs

     20,009                                

Asset impairment charges

     157,600                                
                              

Total operating expenses

     494,651               273,933               277,991    
                              

Operating income (loss)

     (15,346 )             143,185               80,429    
                              

Other income (expense):

                        

Investment income

     1,281               23,966               23,182    

Foreign exchange gain (loss)

     3,518               523               (635 )  

Other, net

     (1,366 )             (299 )             (1,334 )  
                              

Total other income

     3,433               24,190               21,213    
                              

Income (loss) before income taxes and cumulative effect of accounting change

     (11,913 )             167,375               101,642    

Income taxes

     26,508               57,262               32,015    
                              

Income (loss) before cumulative effect of accounting change

     (38,421 )             110,113               69,627    

Cumulative effect of accounting change, net of income taxes of $694

    (See Note 2)

                                 1,319    
                              

Net income (loss)

   $ (38,421 )           $ 110,113             $ 70,946    
                              

Basic earnings (loss) per share before cumulative effect of accounting change

   $ (0.60 )           $ 1.61             $ 0.99    

Diluted earnings (loss) per share before cumulative effect of accounting change

   $ (0.60 )           $ 1.60             $ 0.98    

Basic earnings (loss) per share

   $ (0.60 )           $ 1.61             $ 1.01    

Diluted earnings (loss) per share

   $ (0.60 )           $ 1.60             $ 1.00    

Basic weighted average shares outstanding

     64,524               68,463               70,516    

Diluted weighted average and equivalent shares outstanding

     64,524               68,908               70,956    

See accompanying notes to consolidated financial statements.

 

F-4


Table of Contents

ZEBRA TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Amounts in thousands)

 

     Year Ended December 31,
         2008                   2007            2006    

Net income (loss)

   $ (38,421 )           $ 110,113            $ 70,946    

Other comprehensive income (loss):

                       

Foreign currency translation adjustment

     (22,991 )             2,277              7,295    

Changes in unrealized gain/(loss) on hedging transactions, net of income taxes

     5,750               (5,205 )            (1,188 )  

Changes in unrealized holding gains/(loss) on investments, net of income taxes

     (543 )             1,111              (1,672 )  
                         

Comprehensive income (loss)

   $ (56,205 )           $ 108,296            $ 75,381    
                         

See accompanying notes to consolidated financial statements.

 

F-5


Table of Contents

ZEBRA TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands)

 

      
 
 
Class A
Common
Stock
    
 
 
Additional
Paid-in
Capital
 
 
 
   
 
Treasury
Stock
 
 
   
 
Retained
Earnings
 
 
   
 
 
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 
 
 
    Total      

Balance at December 31, 2005

       $ 722        $ 139,433         $ (64,013 )       $ 779,453         $ 2,377         $ 857,972    
 

Repurchase of 2,080,911 shares of Class A Common Stock

                (72,925 )                 (72,925 )  

Issuance of 459,816 treasury shares upon exercise of stock options and purchases under stock purchase plan

          (7,201 )     17,603                   10,402    

Additional tax benefit resulting from exercise of options

          1,324                         1,324    

Stock-based compensation

          7,540                         7,540    

Cumulative effect of accounting change

          (2,013 )           1,319             (694 )  

Income before cumulative effect of accounting change

                      69,627             69,627    

Unrealized holding loss on investments (net of income taxes)

                            (1,672 )     (1,672 )  

Unrealized holding loss on hedging transactions (net of income taxes)

                            (1,188 )     (1,188 )  

Foreign currency translation adjustment

                            7,295       7,295    
 

Balance at December 31, 2006

       $ 722        $ 139,083         $ (119,335 )       $ 850,399         $ 6,812         $ 877,681    
 

Repurchase of 3,038,389 shares of Class A Common Stock

                (107,390 )                 (107,390 )  

Issuance of 578,608 treasury shares upon exercise of stock options and purchases under stock purchase plan

          (13,292 )     21,667                   8,375    

Additional tax benefit resulting from exercise of options

          664                         664    

Stock-based compensation

          15,067                         15,067    

Net income

                      110,113             110,113    

Unrealized holding gain on investments (net of income taxes)

                            1,111       1,111    

Unrealized holding loss on hedging transactions (net of income taxes)

                            (5,205 )     (5,205 )  

Foreign currency translation adjustment

                            2,277       2,277    
 

Balance at December 31, 2007

       $ 722        $ 141,522         $ (205,058 )       $ 960,512         $ 4,995         $ 902,693    
 

Repurchase of 6,008,232 shares of Class A Common Stock

                (157,582 )                 (157,582 )  

Issuance of 499,576 treasury shares upon exercise of stock options and purchases under stock purchase plan

          (11,348 )     18,493                   7,145    

Additional tax benefit resulting from exercise of options

          (275 )                       (275 )  

Stock-based compensation

          14,962                         14,962    

Net loss

                      (38,421 )           (38,421 )  

Unrealized holding loss on investments (net of income taxes)

                            (543 )     (543 )  

Unrealized holding gain on hedging transactions (net of income taxes)

                            5,750       5,750    

Foreign currency translation adjustment

                            (22,991 )     (22,991 )  
 

Balance at December 31, 2008

       $ 722        $ 144,861         $ (344,147 )       $ 922,091         $ (12,789 )       $ 710,738    
 

See accompanying notes to consolidated financial statements.

 

F-6


Table of Contents

ZEBRA TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

 

     Year Ended December 31,  
     2008           2007    2006  

Cash flows from operating activities:

                           

Net income (loss)

   $ (38,421 )           $ 110,113             $ 70,946       

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

                           

Depreciation and amortization

     38,581               26,902               16,087       

Share-based compensation

     14,962               15,067               7,540       

Asset impairment charges

     157,600                                   

Impairment of investments

     7,271                                   

Excess tax benefit from share-based compensation

     (192 )             (921 )             (1,514 )     

Cumulative effect of accounting change (net of tax)

                                 (1,319 )     

Gain on sale of asset

     (1,121 )                                 

Acquired in-process technology

                   1,853                     

Insurance receivable reserve

                                 12,543       

Deferred income taxes

     (23,138 )             (5,477 )             (6,737 )     

Changes in assets and liabilities, net of businesses acquired:

                           

Accounts receivable, net

     (21,891 )             4,453               (4,292 )     

Inventories

     (26,222 )             (134 )             (13,430 )     

Other assets

     (2,758 )             (1,321 )             (483 )     

Accounts payable

     17,891               (3,418 )             (1,869 )     

Accrued liabilities

     1,429               16,804               9,486       

Deferred revenue

     11,281               (325 )             (927 )     

Income taxes payable

     (1,002 )             (1,337 )             2,586        

Other operating activities

     4,012               (4,139 )             (552 )     
                           

Net cash provided by operating activities

     138,282               158,120               88,065       
                           

Cash flows from investing activities: