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ZEBRA TECHNOLOGIES CORP - Quarter Report: 2011 October (Form 10-Q)

Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

 

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

For the quarterly period ended October 1, 2011

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.)

475 Half Day Road, Suite 500, Lincolnshire, IL 60069

(Address of principal executive offices) (Zip Code)

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if smaller reporting company)    Smaller reporting company   ¨

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

Act).     Yes  ¨    No  x

As of October 28, 2011, there were 51,963,438 shares of Class A Common Stock, $.01 par value, outstanding.


Table of Contents

ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

QUARTER ENDED OCTOBER 1, 2011

INDEX

 

          PAGE  

PART I - FINANCIAL INFORMATION

  

Item1.

   Consolidated Financial Statements   
   Consolidated Balance Sheets as of October 1, 2011 (unaudited) and December 31, 2010      3   
   Consolidated Statements of Earnings (unaudited) for the three and nine months ended October 1, 2011 and October 2, 2010      4   
   Consolidated Statements of Cash Flows (unaudited) for the nine months ended October 1, 2011 and October 2, 2010      5   
   Notes to Consolidated Financial Statements      6   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      22   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      33   

Item 4.

   Controls and Procedures      34   

PART II - OTHER INFORMATION

  

Item 1.

   Legal Proceedings      35   

Item 1A.

   Risk Factors      35   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      35   

Item 6.

   Exhibits      36   

SIGNATURES

     37   

 

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PART I - FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

 

     October 1,
2011
    December 31,
2010
 
     (Unaudited)        
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 43,781      $ 46,175   

Restricted cash

     65        1,378   

Investments and marketable securities

     147,115        125,567   

Accounts receivable, net

     162,314        130,143   

Receivable from buyer

     27,580        0   

Inventories, net

     120,378        112,970   

Deferred income taxes

     16,470        15,670   

Income tax receivable

     1,707        0   

Prepaid expenses and other current assets

     20,303        11,505   

Assets of discontinued operations

     0        148,169   
  

 

 

   

 

 

 

Total current assets

     539,713        591,577   
  

 

 

   

 

 

 

Property and equipment at cost, less accumulated depreciation and amortization

     94,726        87,093   

Long-term deferred income taxes

     18,241        21,254   

Goodwill

     79,703        79,703   

Other intangibles, net

     7,441        9,755   

Long-term investments and marketable securities

     108,086        85,478   

Other assets

     3,862        4,004   
  

 

 

   

 

 

 

Total assets

   $ 851,772      $ 878,864   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 30,924      $ 34,578   

Accrued liabilities

     53,236        65,163   

Deferred revenue

     10,276        8,966   

Income taxes payable

     0        5,900   

Liabilities of discontinued operations

     0        21,827   
  

 

 

   

 

 

 

Total current liabilities

     94,436        136,434   

Deferred rent

     1,695        2,207   

Other long-term liabilities

     9,693        10,191   
  

 

 

   

 

 

 

Total liabilities

     105,824        148,832   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Preferred Stock

     0        0   

Class A Common Stock

     722        722   

Additional paid-in capital

     129,608        129,715   

Treasury stock

     (587,510     (462,029

Retained earnings

     1,210,572        1,070,973   

Accumulated other comprehensive income (loss)

     (7,444     (9,349
  

 

 

   

 

 

 

Total stockholders’ equity

     745,948        730,032   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 851,772      $ 878,864   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Amounts in thousands, except per share data)

(Unaudited)

 

000000000000 000000000000 000000000000 000000000000
     Three Months Ended     Nine Months Ended  
     October 1,
2011
    October 2,
2010
    October 1,
2011
    October 2,
2010
 

Net sales

        

Net sales of tangible products

   $ 241,686      $ 218,271      $ 700,568      $ 627,482   

Revenue from services and software

     11,652        11,536        35,612        32,858   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     253,338        229,807        736,180        660,340   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of sales

        

Cost of sales of tangible products

     122,529        114,924        351,042        338,080   

Cost of services and software

     7,256        5,636        19,889        15,841   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of sales

     129,785        120,560        370,931        353,921   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     123,553        109,247        365,249        306,419   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Selling and marketing

     31,942        28,068        91,420        80,423   

Research and development

     22,584        21,862        66,752        60,839   

General and administrative

     19,166        18,147        62,560        55,420   

Amortization of intangible assets

     843        839        2,514        2,320   

Exit and restructuring costs

     138        0        2,090        2,232   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     74,673        68,916        225,336        201,234   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     48,880        40,331        139,913        105,185   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Investment income

     134        635        1,350        2,111   

Foreign exchange gain (loss)

     (173     (148     (1,300     444   

Other, net

     (859     (160     (1,356     (885
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (898     327        (1,306     1,670   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     47,982        40,658        138,607        106,855   

Income taxes

     13,795        13,411        41,123        31,876   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     34,187        27,247        97,484        74,979   

Income (loss) from discontinued operations, net of tax

     10,814        (1,096     42,115        (1,418
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 45,001      $ 26,151      $ 139,599      $ 73,561   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share:

        

Income from continuing operations

   $ 0.64      $ 0.48      $ 1.79      $ 1.30   

Income (loss) from discontinued operations

     0.20        (0.02     0.77        (0.02
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 0.84      $ 0.46      $ 2.56      $ 1.28   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share:

        

Income from continuing operations

   $ 0.64      $ 0.48      $ 1.78      $ 1.30   

Income (loss) from discontinued operations

     0.20        (0.02     0.77        (0.02
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 0.84      $ 0.46      $ 2.55      $ 1.28   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average shares outstanding

     53,339        56,739        54,405        57,405   

Diluted weighted average and equivalent shares outstanding

     53,628        56,998        54,770        57,657   

See accompanying notes to consolidated financial statements.

 

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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

000000000000 000000000000
     Nine Months Ended  
     October 1,
2011
    October 2,
2010
 

Cash flows from operating activities:

    

Net income

   $ 139,599      $ 73,561   

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

    

Depreciation and amortization

     17,985        23,698   

Equity-based compensation

     11,060        8,155   

Impairment of investments

     326        0   

Excess tax benefit from equity-based compensation

     (1,265     (83

Loss (gain) on sale of fixed assets

     53        (58

Gain on sale of business

     (66,753     0   

Deferred income taxes

     5,703        3,208   

Changes in assets and liabilities:

    

Accounts receivable, net

     (10,112     (14,463

Inventories, net

     (6,635     (15,972

Other assets

     (10,150     (1,192

Accounts payable

     (8,493     6,747   

Accrued liabilities

     (14,917     13,861   

Deferred revenue

     (16,707     (1,530

Income taxes

     (7,087     9,197   

Other operating activities

     2,116        (3,391
  

 

 

   

 

 

 

Net cash provided by operating activities

     34,723        101,738   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (17,829     (23,752

Payments for patents and licensing arrangements

     (200     (2,882

Proceeds from the sale of businesses

     161,206        0   

Purchases of investments and marketable securities

     (791,811     (312,201

Maturities of investments and marketable securities

     493,649        230,715   

Sales of investments and marketable securities

     253,377        74,371   
  

 

 

   

 

 

 

Net cash provided (used) by investing activities

     98,392        (33,749
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Purchase of treasury stock

     (146,373     (67,384

Proceeds from exercise of stock options and stock purchase plan purchases

     9,197        7,772   

Excess tax benefit from equity-based compensation

     1,265        83   
  

 

 

   

 

 

 

Net cash (used) in financing activities

     (135,911     (59,529
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (899     44   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (3,695     8,504   

Cash balance of discontinued operations at beginning of period

     1,301        1,693   

Less: Cash balance of discontinued operations at end of period

     0        653   

Cash and cash equivalents at beginning of period

     46,175        37,250   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 43,781      $ 46,794   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Income taxes paid

   $ 53,512      $ 9,764   

See accompanying notes to consolidated financial statements.

 

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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Presentation

Management prepared these unaudited interim consolidated financial statements for Zebra Technologies Corporation and subsidiaries (“Zebra”) according to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles (“GAAP”) for complete financial statements. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in Zebra’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

The consolidated balance sheet as of December 31, 2010, in this Form 10-Q is taken from the audited consolidated balance sheet in our Form 10-K. These interim financial statements include all adjustments (of a normal, recurring nature) necessary to present fairly Zebra’s consolidated financial position as of October 1, 2011, the consolidated statement of earnings for the three and nine months ended October 1, 2011 and October 2, 2010, and consolidated statement of cash flows for the nine months ended October 1, 2011 and October 2, 2010. These results, however, are not necessarily indicative of results for the full year.

Reclassifications. Prior-period financial results have been reclassified to account for the impact of the disposition of Navis Holdings LLC (“Navis”), Zebra Enterprise Solutions GmbH (formerly “proveo AG”), and other immaterial Zebra operations. In January 2011, Zebra announced its entry into an agreement to sell Navis to Cargotec Corporation and on March 18, 2011, Zebra completed the transaction. In August 2011 Zebra sold its interest in proveo AG to F Two NV. Our audited balance sheet at December 31, 2010, has been adjusted to reflect these transactions by separately classifying assets and liabilities of discontinued operations. As a result, the statements of earnings for the Navis business, proveo AG and other immaterial Zebra operations as of and for all periods presented are reported as discontinued operations. See Note 17 Discontinued Operations to the consolidated financial statements for further information. Prior-period amounts will differ from amounts previously reported because of the classification of the above operations as discontinued.

Note 2 – Fair Value Measurements

Financial assets and liabilities are to be measured using inputs from three levels of the fair value hierarchy. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Zebra uses a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in the assessment of fair value.

Included in our investment portfolio are two auction rate security instruments. These instruments are classified as available-for-sale securities and are reflected at fair value. Due to events in credit markets, however, the auction events for the instruments held by Zebra as of October 1, 2011, are failed. Therefore, the fair values of these securities are estimated utilizing broker quotations, discounted cash flow analysis or other types of valuation adjustment methodologies at October 1, 2011. These analyses consider, among other items, the collateral underlying the security instruments, the creditworthiness of the counterparty, the timing of expected future cash flows, estimates of the next time the security is expected to have a successful auction, and Zebra’s intent and ability to hold such securities until credit markets improve. These securities were also compared, when possible, to other securities with similar characteristics. In June 2010, one of the four auction rate securities held at the end of the first quarter of 2010 was called by the issuer and redeemed at par value. In May 2011, one of the three auction rate securities held at the end of the first quarter of 2011 was converted to actively traded securities in the amount of $2,550,000. The remaining $450,000 was sold during the second quarter of 2011 at a loss of $36,000.

 

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Of the two auction rate security instruments still owned as of October 1, 2011, Zebra deemed one to be other than temporarily impaired and recorded the estimated value decline in 2008, and further reduced the remaining carrying value of $326,000 to zero in the third quarter of 2011. The decline in the market value of the other security is considered temporary and has been recorded in accumulated other comprehensive income (loss) on Zebra’s balance sheet. Since Zebra has the intent and ability to hold these securities until they are sold at auction, redeemed at carrying value or reach maturity, we have classified them as long-term investments on the balance sheet.

Financial assets and liabilities carried at fair value as of October 1, 2011, are classified below (in thousands):

 

0000000000 0000000000 0000000000 0000000000
     Level 1      Level 2      Level 3      Total  

Assets:

           

U.S. government and agency securities

   $ 43,461       $ —         $ —         $ 43,461   

Obligations of government-sponsored enterprises (1)

     14,117         —           —           14,117   

State and municipal bonds

     123,214         —           —           123,214   

Corporate securities

     71,785         —           2,588         74,373   

Other investments

     36         —           —           36   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investments subtotal

     252,613         —           2,588         255,201   

Forward contracts (2)

     3,611         3,500         —           7,111   

Money market investments related to the deferred compensation plan

     3,157         —           —           3,157   

Total assets at fair value

   $ 259,381       $ 3,500       $ 2,588       $ 265,469   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Liabilities related to the deferred compensation plan

     3,157         —           —           3,157   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ 3,157       $ —         $ —         $ 3,157   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial assets and liabilities carried at fair value as of December 31, 2010, are classified below (in thousands):

 

0000000000 0000000000 0000000000 0000000000
     Level 1      Level 2      Level 3      Total  

Assets:

           

U.S. government and agency securities

   $ 21,318       $ —         $ —         $ 21,318   

Obligations of government-sponsored enterprises (1)

     5,785         —           —           5,785   

State and municipal bonds

     131,626         —           2,683         134,309   

Corporate securities

     46,683         —           2,914         49,597   

Other investments

     36         —           —           36   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investments subtotal

     205,448         —           5,597         211,045   

Forward contracts (2)

     1,569         1,706         —           3,275   

Money market investments related to the deferred compensation plan

     3,427         —           —           3,427   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 210,444       $ 1,706       $ 5,597       $ 217,747   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Liabilities related to the deferred compensation plan

     3,427         —           —           3,427   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ 3,427       $ —         $ —         $ 3,427   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes investments in notes issued by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Federal Farm Credit Banks, and the Federal Home Loan Bank.

 

(2) The fair value of forward contracts are calculated as follows:

 

  a. Fair value of forward collar contract associated with forecasted sales hedges are calculated using the midpoint of ask and bid rates for similar contracts.

 

  b. Fair value of regular forward contracts associated with forecasted sales hedges are calculated using the period-end exchange rate adjusted for the discount rate (3 month LIBOR rate).

 

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  c. Fair value of balance sheet hedges are calculated at the period end exchange rate adjusted for current forward points unless the hedge has been traded but not settled at period end. If this is the case, the fair value is calculated at the rate at which the hedge is being settled.

The following table presents Zebra’s activity for assets measured at fair value on a recurring basis using significant unobservable inputs, Level 3, for the nine month periods (in thousands):

 

     Nine Months Ended  
     October 1, 2011     October 2, 2010  

Balance at beginning of the year

   $ 5,597      $ 7,047   

Transfers to Level 3

     —          —     

Total losses (realized or unrealized):

    

Included in earnings

     (362     —     

Included in other comprehensive income (loss)

     317        200   

Purchases and settlements (net)

     (2,964     (1,650
  

 

 

   

 

 

 

Balance at end of period

   $ 2,588      $ 5,597   
  

 

 

   

 

 

 

Total gains and (losses) for the period included in earnings attributable to the change in unrealized losses relating to assets still held at end of period

   $ —        $ —     
  

 

 

   

 

 

 

The following is a summary of short-term and long-term investments at October 1, 2011 and December 31, 2010 (in thousands):

 

0000000000 0000000000 0000000000 0000000000
     As of October 1, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 

U.S. government and agency securities

   $ 43,404       $ 93       $ (36   $ 43,461   

Obligations of government-sponsored enterprises

     14,091         28         (2     14,117   

State and municipal bonds

     122,864         384         (34     123,214   

Corporate securities

     75,459         4,512         (5,598     74,373   

Other investments

     36         —           —          36   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments

   $ 255,854       $ 5,017       $ (5,670   $ 255,201   
  

 

 

    

 

 

    

 

 

   

 

 

 
     As of December 31, 2010  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 

U.S. government and agency securities

   $ 21,226       $ 98       $ (6   $ 21,318   

Obligations of government-sponsored enterprises

     5,731         54         —          5,785   

State and municipal bonds

     134,370         402         (463     134,309   

Corporate securities

     49,884         199         (486     49,597   

Other investments

     36         —           —          36   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments

   $ 211,247       $ 753       $ (955   $ 211,045   
  

 

 

    

 

 

    

 

 

   

 

 

 

The maturity dates of investments are as follows (in thousands):

 

0000000000 0000000000
     As of October 1, 2011  
     Amortized
Cost
     Estimated
Fair Value
 

Less than 1 year

   $ 147,651       $ 147,115   

1 to 5 years

     106,889         106,787   

6 to 10 years

     1,314         1,299   

Thereafter

     —           —     
  

 

 

    

 

 

 

Total

   $ 255,854       $ 255,201   
  

 

 

    

 

 

 

 

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The carrying value for Zebra’s financial instruments classified as current assets (other than short-term investments) and current liabilities approximate fair value due to short maturities.

Note 3 – Investments and Marketable Securities

We classify our investments in marketable debt securities as available-for-sale. As of October 1, 2011, all of our investments in marketable debt securities with maturities greater than one year are classified as long-term investments on the balance sheet due to our ability and intent to hold them until maturity.

Changes in the market value of available-for-sale securities are reflected in the accumulated other comprehensive income (loss) caption of stockholders’ equity in the balance sheet, until we dispose of the securities. Once these securities are disposed of, either by sale or maturity, the accumulated changes in market value are transferred to investment income. On the cash flow statements, changes in the balances of available-for-sale securities are shown as purchases, sales and maturities of investments and marketable securities under investing activities.

Changes in market value of trading securities are recorded in investment income as they occur, and the related cash flow statement includes changes in the balances of trading securities as operating cash flows.

Change in unrealized gains and losses on available-for-sale securities are included in these financial statements as follows (in thousands):

 

0000000 0000000 0000000 0000000
    Three Months Ended     Nine Months Ended  
    October 1, 2011     October 2, 2010     October 1, 2011     October 2, 2010  

Changes in unrealized gains and (losses) on available- for-sale securities, net of tax, recorded in accumulated other comprehensive income

  $ (636   $ 8      $ (303   $ (34
 

 

 

   

 

 

   

 

 

   

 

 

 

Note 4 – Accounts Receivable Reserves

The components of accounts receivable are as follows (in thousands):

 

0000000000 0000000000
     As of  
     October 1, 2011     December 31, 2010  

Gross accounts receivable

   $ 163,899      $ 131,602   

Accounts receivable reserves

     (1,585     (1,459
  

 

 

   

 

 

 

Accounts receivable, net

   $ 162,314      $ 130,143   
  

 

 

   

 

 

 

Note 5 – Inventories

The components of inventories are as follows (in thousands):

 

0000000000 0000000000
     As of  
     October 1, 2011     December 31, 2010  

Raw material

   $ 46,270      $ 33,441   

Work in process

     525        171   

Deferred costs of long-term contracts

     99        482   

Finished goods

     87,677        88,713   
  

 

 

   

 

 

 

Total inventories, gross

     134,571        122,807   

Inventory reserves

     (14,193     (9,837
  

 

 

   

 

 

 

Total inventories, net

   $ 120,378      $ 112,970   
  

 

 

   

 

 

 

 

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Note 6 Goodwill and Other Intangible Assets

Intangible asset data are as follows (in thousands):

 

000000000 000000000 000000000
     As of October 1, 2011  
     Gross
Amount
     Accumulated
Amortization
    Net
Amount
 

Current technology

   $ 12,718       $ (11,300   $ 1,418   

Patent and patent rights

     17,360         (11,389     5,971   

Customer relationships

     1,773         (1,721     52   
  

 

 

    

 

 

   

 

 

 

Total

   $ 31,851       $ (24,410   $ 7,441   
  

 

 

    

 

 

   

 

 

 

Amortization expense for the nine months ended October 1, 2011

  

   $ 2,514     
     

 

 

   

 

0000000000 0000000000 0000000000
     As of December 31, 2010  
     Gross
Amount
     Accumulated
Amortization
    Net
Amount
 

Current technology

   $ 12,718       $ (10,863   $ 1,855   

Patent and patent rights

     17,160         (9,351     7,809   

Customer relationships

     1,773         (1,682     91   
  

 

 

    

 

 

   

 

 

 

Total

   $ 31,651       $ (21,896   $ 9,755   
  

 

 

    

 

 

   

 

 

 

Amortization expense for the nine months ended October 2, 2010

  

   $ 2,320     
     

 

 

   

We test goodwill for impairment on an annual basis or more frequently if we believe indicators of impairment exist.

Factors considered that may trigger an impairment review consist of:

 

   

Significant underperformance relative to historical or projected future operating results,

 

   

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

 

   

Significant negative industry or economic trends,

 

   

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

 

   

Significant decline in market capitalization relative to net book value.

If we believe that one or more of the above indicators of impairment have occurred, we perform an impairment test. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. We generally determine the fair value of our reporting units using three valuation methods: Income Approach – Discounted Cash Flow Analysis, Market Approach – Guideline Public Company Method and Market Approach – Comparative Transactions Method. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill.

During the first quarter of 2011, we announced an agreement to sell Navis and our decision to divest certain other operations, which constituted a portion, but not all, of our Zebra Enterprise Solutions (ZES) segment, which was also deemed to be the reporting unit for goodwill impairment testing purposes. As a result of our decision to sell Navis, goodwill attributable to the ZES segment was allocated to the three businesses that constituted the prior reporting unit based on the relative fair value of those businesses. Goodwill was allocated between continuing operations ($9,114,000) and discontinued operations ($72,795,000) based on the relative fair value of each of the businesses. The goodwill allocated above to continuing operations was tested for impairment, and we determined that our goodwill related to this reporting unit was not impaired.

Beginning with the first quarter of 2011, the continuing operations of the former ZES reporting unit have been combined with the former Specialty Printing Group (“SPG”) operating segment to form one Zebra operating segment. Future goodwill impairment tests will be conducted at the consolidated Zebra level.

We performed our annual impairment test in June 2011 and determined that our goodwill was not impaired as of the end of May 2011.

 

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Note 7 – Costs Associated with Exit or Disposal Activities

In January 2011, we announced an agreement to sell a portion of ZES, which primarily consists of Navis, to Cargotec Corporation. Following the transaction which was completed on March 18, 2011, we retained the Location Solutions products from the former ZES, which includes active RFID real-time location solutions and associated tags and readers. In the first quarter of 2011, we also announced a plan to consolidate any remaining administrative and accounting functions from the former ZES into our corporate facilities in Illinois. The costs below for the three and nine months ended October 1, 2011, represent the costs related to the consolidation and relocation of the administrative and accounting functions.

In 2008, we announced plans to establish regional distribution and configuration centers, consolidate our supplier base, and transfer final assembly of thermal printers to Jabil Circuit, Inc., a global third-party electronics manufacturer. We substantially completed these actions in 2010, and the costs noted below for the three and nine months ended October 2, 2010, relate to the completion of this transfer.

The following is a summary of exit and restructuring costs incurred (in thousands):

 

    Three Months Ended     Nine Months Ended  

Type of Cost:

  October 1, 2011     October 2, 2010     October 1, 2011     October 2, 2010  

Severance, stay bonuses, and other employee-related expenses

  $ 100      $ 0      $ 1,171      $ 100   

Professional services

    38        0        885        110   

Relocation and transition costs

    0        0        34        1,959   

Other exit costs

    0        0        0        63   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 138      $ 0      $ 2,090      $ 2,232   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and expenses related to exit activities were as follows (in thousands):

 

     Nine Months Ended  
     October 1, 2011     October 2, 2010  

Balance at beginning of period

   $ 1,301      $ 3,038   

Charged to earnings

     2,090        2,232   

Cash paid

     (2,086     (3,999
  

 

 

   

 

 

 

Balance at the end of period

   $ 1,305      $ 1,271   
  

 

 

   

 

 

 

Liabilities related to exit activities are included in the accrued liabilities line item on the balance sheet. All current exit costs are included in operating expenses under the line item exit and restructuring costs.

Note 8 – Derivative Instruments

In the normal course of business, portions of our operations are subject to fluctuations in currency values. We manage these risks using derivative financial instruments. We conduct business on a multinational basis in a wide variety of foreign currencies. Our exposure to market risk for changes in foreign currency exchange rates arises from international financing activities between subsidiaries, foreign currency denominated monetary assets and liabilities and transactions arising from international trade. Our objective is to preserve the economic value of non-functional currency denominated cash flows. We attempt to hedge transaction exposures with natural offsets to the fullest extent possible and, once these opportunities have been exhausted, through foreign exchange forward and option contracts with third parties.

Credit and market risk

Financial instruments, including derivatives, expose us to counter party credit risk for nonperformance and to market risk related to interest and currency exchange rates. We manage our exposure to counterparty credit risk through specific minimum credit standards, diversification of counterparties, and procedures to monitor concentrations of credit risk. Our counterparties in derivative transactions are commercial banks with significant experience using derivative instruments. We monitor the impact of market risk on the fair value and cash flows of our derivative and other financial instruments considering reasonably possible changes in interest rates and currency exchange rates and restrict the use of derivative financial instruments to hedging activities.

 

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We continually monitor the creditworthiness of our customers to which we grant credit terms in the normal course of business. The terms and conditions of our credit sales are designed to mitigate or eliminate concentrations of credit risk with any single customer.

Fair Value of Derivative Instruments

Zebra has determined that derivative instruments for hedges that have traded are considered Level 1 in the fair value hierarchy, and hedges that have not settled are considered Level 2 in the fair value hierarchy. Derivative instruments are used to manage risk and are not used for trading or other speculative purposes, nor do we use leveraged derivative financial instruments. Our foreign currency exchange contracts are valued using broker quotations or market transactions, in either the listed or over-the-counter markets.

Hedging of Net Assets

We use forward contracts and options to manage exposure related to our pound and euro-denominated net assets. Forward contracts typically mature within three months after execution of the contracts. We record gains and losses on these contracts and options in income each quarter along with the transaction gains and losses related to our net asset positions, which would ordinarily offset each other. Summary financial information related to these activities included in our consolidated statement of earnings as other income (expense) is as follows (in thousands):

 

0000000000 0000000000 0000000000 0000000000
     Three Months Ended     Nine Months Ended  
     October 1, 2011     October 2, 2010     October 1, 2011     October 2, 2010  

Change in gains (losses) from foreign exchange derivatives

   $ 3,108      $ (6,446   $ (3,155   $ 2,626   

Gain (loss) on net foreign currency assets

     (3,281     6,298        1,855        (2,182
  

 

 

   

 

 

   

 

 

   

 

 

 

Foreign exchange gain (loss)

   $ (173   $ (148   $ (1,300   $ 444   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

0000000000 0000000000
     As of  
     October 1, 2011      December 31, 2010  

Notional balance of outstanding contracts:

     

Pound/US dollar

   £ 6,263       £ 6,162   

Euro/US dollar

   37,378       46,307   

Net fair value of outstanding contracts

   $ 242       $ 667   

Hedging of Anticipated Sales

We can manage the exchange rate risk of anticipated euro-denominated sales using purchased options, forward contracts, participating forwards and option collars. We designate these contracts as cash flow hedges which mature within twelve months after the execution of the contracts. Gains and losses on these contracts are deferred in other comprehensive income until the contracts are settled and the hedged sales are realized, the deferred gains or losses will then be reported as an increase or decrease to sales. Summary financial information related to the cash flow hedges is as follows (in thousands):

 

0000000000 0000000000
     As of  
     October 1, 2011      December 31, 2010  

Net unrealized gains (losses) deferred in other comprehensive income:

     

Gross

   $ 4,164       $ (1,522

Income tax expense (benefit)

     1,326         (573
  

 

 

    

 

 

 

Net

   $ 2,838       $ (949
  

 

 

    

 

 

 

Summary financial information related to the cash flow hedges of future revenues follows (in thousands, except percentages):

 

0000000000 0000000000
     As of  
     October 1, 2011     December 31, 2010  

Notional balance of outstanding contracts versus the dollar

   92,245      73,800   

Hedge effectiveness

     100     100

 

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0000000000 0000000000 0000000000 0000000000
    Three Months Ended     Nine Months Ended  
    October 1, 2011     October 2, 2010     October 1, 2011     October 2, 2010  

Net gains and (losses) included in revenue

  $ (1,487   $ 0      $ (4,272   $ 0   

Forward contracts

We record our forward contracts at fair value on our consolidated balance sheet as prepaid expenses and other current assets or accrued liabilities depending upon the fair value calculation as detailed in Note 2 of Zebra’s financial statements. The amounts recorded on our consolidated balance sheet are as follows (in thousands):

 

     As of  
     October 1, 2011      December 31, 2010  

Assets:

     

Prepaid expenses and other current assets

   $ 7,111       $ 3,275   
  

 

 

    

 

 

 

Total

   $ 7,111       $ 3,275   
  

 

 

    

 

 

 

Liabilities:

     

Accrued liabilities

   $ 0       $ 0   
  

 

 

    

 

 

 

Total

   $ 0       $ 0   
  

 

 

    

 

 

 

Note 9 – Warranty

In general, Zebra provides warranty coverage of one year on printers against defects in material and workmanship. Printheads are warranted for nine months and batteries are warranted for twelve months. Battery based products, such as location tags, are covered by a 30-day warranty. A provision for warranty expense is recorded at the time of shipment and adjusted quarterly based on historical warranty experience.

The following table is a summary of Zebra’s accrued warranty obligation (in thousands):

 

     Nine Months Ended  
     October 1, 2011     October 2, 2010  

Balance at the beginning of the year

   $ 4,554      $ 3,813   

Warranty expense

     4,051        4,490   

Warranty payments

     (4,115     (4,101
  

 

 

   

 

 

 

Balance at the end of the period

   $ 4,490      $ 4,202   
  

 

 

   

 

 

 

Note 10 – Contingencies

We are subject to a variety of investigations, claims, suits and other legal proceedings that arise from time to time in the ordinary course of business, including but not limited to, intellectual property, employment, tort and breach of contract matters. We currently believe that the outcomes of such proceedings, individually and in the aggregate, will not have a material adverse impact on our business, cash flows, financial position, or results of operations. Any legal proceedings are subject to inherent uncertainties, and management’s view of these matters and their potential effects may change in the future.

 

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Note 11 – Stockholders’ Equity

Share count and par value data related to stockholders’ equity are as follows:

 

December 31, 2010 December 31, 2010
     October 1, 2011      December 31, 2010  

Preferred Stock

     

Par value per share

   $ 0.01       $ 0.01   

Shares authorized

     10,000,000         10,000,000   

Shares outstanding

     —           —     

Common Stock - Class A

     

Par value per share

   $ 0.01       $ 0.01   

Shares authorized

     150,000,000         150,000,000   

Shares issued

     72,151,857         72,151,857   

Shares outstanding

     52,388,510         55,711,325   

Treasury Stock

     

Shares held

     19,763,347         16,440,532   

During the nine-month period ended October 1, 2011, Zebra purchased 3,924,910 shares of common stock for $146,373,000 under board authorized share repurchase plans compared to the nine-month period ended October 2, 2010, in which Zebra purchased 2,449,286 shares of common stock for $67,384,000.

A roll forward of Class A common shares outstanding is as follows:

 

     Nine Months Ended  
     October 1, 2011     October 2, 2010  

Balance at the beginning of the year

     55,711,325        58,318,983   

Repurchases

     (3,924,910     (2,449,286

Stock option, rights and ESPP issuances

     453,728        296,512   

Restricted share issuances

     214,324        375,279   

Restricted share forfeitures

     (14,013     (14,627

Shares withheld for tax obligations

     (51,944     (7,198
  

 

 

   

 

 

 

Balance at the end of the period

     52,388,510        56,519,663   
  

 

 

   

 

 

 

Note 12 – Earnings Per Share

Earnings per share were computed as follows (in thousands, except per share amounts):

 

    Three Months Ended     Nine Months Ended  
    October 1, 2011     October 2, 2010     October 1, 2011     October 2, 2010  

Weighted average shares:

       

Weighted average common shares outstanding

    53,339        56,739        54,405        57,405   

Effect of dilutive securities outstanding

    289        259        365        252   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average shares outstanding

    53,628        56,998        54,770        57,657   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss):

       

Income from continuing operations

  $ 34,187      $ 27,247      $ 97,484      $ 74,979   

Income (loss) from discontinued operations

    10,814        (1,096     42,115        (1,418
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 45,001      $ 26,151      $ 139,599      $ 73,561   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic per share amounts:

       

Income from continuing operations

  $ 0.64      $ 0.48      $ 1.79      $ 1.30   

Income (loss) from discontinued operations

  $ 0.20      $ (0.02   $ 0.77      $ (0.02
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 0.84      $ 0.46      $ 2.56      $ 1.28   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted per share amounts:

       

Income from continuing operations

  $ 0.64      $ 0.48      $ 1.78      $ 1.30   

Income (loss) from discontinued operations

  $ 0.20      $ (0.02   $ 0.77      $ (0.02
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 0.84      $ 0.46      $ 2.55      $ 1.28   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Potentially dilutive securities that were excluded from the earnings per share calculation consist of options with an exercise price greater than the average market closing price of the Class A common stock during the respective periods. These options were as follows:

 

October 1, 2011 October 1, 2011 October 1, 2011 October 1, 2011
     Three Months Ended      Nine Months Ended  
     October 1, 2011      October 2, 2010      October 1, 2011      October 2, 2010  

Potentially dilutive shares

     1,851,000         1,887,000         1,446,000         1,893,000   

Note 13 – Equity-Based Compensation

Zebra has an equity-based compensation plan and a stock purchase plan available for future grants. Zebra recognizes compensation costs using the straight-line method over the vesting period of up to 5 years.

The compensation expense and the related tax benefit for equity-based payments were included in the Consolidated Statement of Earnings as follows (in thousands):

 

     Three Months Ended      Nine Months Ended  
     October 1, 2011      October 2, 2010      October 1, 2011      October 2, 2010  

Cost of sales

   $ 218       $ 207       $ 755       $ 627   

Selling and marketing

     333         390         1,107         936   

Research and development

     343         302         1,037         963   

General and administrative

     2,204         1,600         7,149         4,312   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total compensation

   $ 3,098       $ 2,499       $ 10,048       $ 6,838   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income tax benefit

   $ 1,069       $ 862       $ 3,467       $ 2,359   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash flows resulting from the excess tax benefits attributed to tax deductions in excess of the compensation cost recognized are classified as financing cash flows in the statement of cash flows. The tax benefits classified as financing cash flows for the nine months ended October 1, 2011 was $1,265,000, and for the nine months ended October 2, 2010 was $83,000.

The fair value of equity-based compensation is estimated on the date of grant using a binomial model. Volatility is based on an average of the implied volatility in the open market and the annualized volatility of Zebra stock prices over our entire stock history. Stock option grants in the table below include both stock options, all of which were non-qualified, and stock appreciation rights (SAR) that will be settled in Zebra stock. The following table shows the weighted-average assumptions used for grants of stock options and SARs as well as the fair value of the grants based on those assumptions:

 

October 1, 2011 October 1, 2011
     Nine Months Ended  
     October 1, 2011     October 2, 2010  

Expected dividend yield

     0     0

Forfeiture rate

     11.50     9.78

Volatility

     35.33     39.50

Risk free interest rate

     2.01     2.26

– Range of interest rates

     0.01% - 3.18     0.06% - 3.41

Expected weighted-average life

     5.42 years        5.36 years   

Fair value of options and SARs granted

   $ 5,495,000      $ 6,527,000   

Weighted-average grant date fair value of options and SARs granted

   $ 14.29      $ 10.65   

 

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Table of Contents

SAR activity was as follows:

 

Weighted-Average Weighted-Average
     Nine Months Ended October 1, 2011  

SARs

   Shares     Weighted-Average
Exercise Price
 

Outstanding at beginning of year

     1,234,787      $ 23.82   

Granted

     384,649        41.20   

Exercised

     (81,793     22.02   

Forfeited

     (221,914     24.71   

Expired

     (273     19.56   
  

 

 

   

 

 

 

Outstanding at end of period

     1,315,456      $ 28.87   
  

 

 

   

 

 

 

Exercisable at end of period

     318,857      $ 23.26   
  

 

 

   

 

 

 

Intrinsic value of exercised SARs

   $ 1,539,000     
  

 

 

   

The terms of the SARs are established under the Zebra Technologies Corporation 2006 Incentive Compensation Plan and 2011 Long-Term Incentive Plan (the 2006 Plan and 2011 Plan) and the applicable SAR agreement. Once vested, a SAR entitles the holder to receive a payment equal to the difference between the per-share base price of the SAR and the fair market value of a share of Zebra stock on the date the SAR is exercised, multiplied by the number of SARs exercised. Exercised SARs are settled in whole shares of Zebra stock, and any fraction of a share is settled in cash. Except for SARs granted to Zebra’s five independent directors, which were vested in full at the May 19, 2011 grant date, the SARs granted above vest annually in four equal amounts on each of the first four anniversaries of the grant date and expire 10 years after the grant date.

The following table summarizes information about SARs outstanding at October 1, 2011:

 

Weighted-Average Weighted-Average Weighted-Average Weighted-Average Weighted-Average
     Outstanding      Exercisable  

Range of Exercise Prices

   Number of
Shares
     Weighted-Average
Remaining  Contractual Life
   Weighted-Average
Exercise Price
     Number
of Shares
     Weighted-Average
Exercise Price
 

$ 19.56-$19.56

     422,735       7.60 years    $ 19.56         186,490       $ 19.56   

$ 19.57-$27.50

     63,389       8.08 years      24.84         45,328         24.57   

$ 27.51-$27.82

     436,750       8.59 years      27.82         68,083         27.82   

$ 27.83-$40.10

     38,023       9.17 years      32.26         2,911         28.57   

$ 40.11-$42.36

     354,559       9.59 years      41.61         16,045         42.36   
  

 

 

          

 

 

    
     1,315,456               318,857      
  

 

 

          

 

 

    

 

     Outstanding      Exercisable

Aggregate intrinsic value

   $ 6,591,000       $2,631,000

Weighted-average remaining contractual term

     8.5 years       8.0 years

Stock option activity was as follows:

 

     Nine Months Ended October 1, 2011  

Options

   Shares     Weighted-Average
Exercise Price
 

Outstanding at beginning of year

     2,340,959      $ 37.36   

Granted

     0        0.00   

Exercised

     (370,612     25.88   

Forfeited

     (61,813     32.62   

Expired

     (57,683     40.07   
  

 

 

   

 

 

 

Outstanding at end of period

     1,850,851      $ 39.69   
  

 

 

   

 

 

 

Exercisable at end of period

     1,730,494      $ 40.08   
  

 

 

   

 

 

 

Intrinsic value of exercised options

   $ 5,079,000     
  

 

 

   

 

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The following table summarizes information about stock options outstanding at October 1, 2011:

 

     Outstanding      Exercisable  

Range of Exercise Prices

   Number
of Shares
     Weighted-Average
Remaining Contractual Life
   Weighted-Average
Exercise Price
     Number
of Shares
     Weighted-Average
Exercise Price
 

$ 1.29-$36.39

     369,165       2.68 years    $ 27.22         330,588       $ 27.02   

$ 36.40-$37.20

     384,751       6.44 years      36.61         305,896         36.63   

$ 37.21-$43.35

     496,233       4.78 years      41.81         493,308         41.84   

$ 43.36-$47.12

     442,829       3.27 years      46.21         442,829         46.21   

$ 47.13-$53.92

     157,873       3.36 years      51.41         157,873         51.41   
  

 

 

          

 

 

    
     1,850,851               1,730,494      
  

 

 

          

 

 

    

 

October 1, 2011 October 1, 2011
     Outstanding      Exercisable  

Aggregate intrinsic value

   $ 1,964,000       $ 1,797,000   

Weighted-average remaining contractual term

     4.2 years         4.1 years   

Restricted stock award activity, granted under the 2006 Plan and 2011 Plan, was as follows:

 

     Nine Months Ended October 1, 2011  

Restricted Stock Awards

   Shares     Weighted-Average
Grant Date Fair Value
 

Outstanding at beginning of year

     844,686      $ 25.46   

Granted

     214,324        41.32   

Vested

     (196,606     30.27   

Forfeited

     (15,780     28.75   
  

 

 

   

 

 

 

Outstanding at end of period

     846,624      $ 28.30   
  

 

 

   

 

 

 

Zebra’s restricted stock awards are expensed over the vesting period of the related award, typically three to five years. Compensation cost is calculated as the market date fair value on the grant date multiplied by the number of shares granted.

 

     As of
October 1, 2011
 

Awards granted under Zebra’s equity based compensation plans:

  

Unearned compensation costs related to awards granted

   $  20,619,000   

Period expected to be recognized over

     2.6 years   

The fair value of the purchase rights of all Zebra employees issued under the stock purchase plan is estimated using the following weighted-average assumptions for purchase rights granted. Expected lives of three months to one year have been used along with these assumptions.

 

     Nine Months Ended  
     October 1, 2011     October 2, 2010  

Fair market value

   $ 35.86      $ 26.34   

Option price

   $ 34.07      $ 25.02   

Expected dividend yield

     0     0

Expected volatility

     32     27

Risk free interest rate

     0.09     0.13

Note 14 – Income Taxes

Zebra has identified, evaluated, and measured the amount of income tax benefits to be recognized for all of our income tax positions. Included in deferred tax assets are amounts related to federal and state net operating losses that resulted from our acquisition of WhereNet Corp in 2007. We intend to utilize these net operating loss carryforwards to offset future income taxes owed.

 

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Zebra is currently under U.S. federal income tax audits for years of 2008 and 2009. The tax years 2006 through 2010 remain open to examination by multiple state taxing jurisdictions. Tax authorities in the United Kingdom have completed income tax audits for tax years through 2006.

Zebra’s continuing practice is to recognize interest and/or penalties related to income tax matters as part of income tax expense. For the nine months ended October 1, 2011 and October 2, 2010, we made no accruals into income tax expense for any interest or penalties.

 

     Three Months Ended     Nine Months Ended  
     October 1, 2011     October 2, 2010     October 1, 2011     October 2, 2010  

Effective tax rate

     28.8     33.0     29.7     29.8

Zebra’s effective tax rate for the first quarter of 2010 included a $2,764,000 reduction of federal taxes related to improperly accounting for the tax impact on intercompany profit generated from intercompany sales in 2009. This adjustment reduced our effective rate for the first nine months of 2010 by approximately 2.6%. Zebra’s effective rate has decreased in 2011 due to higher profits in lower rate international jurisdictions and reduction in state rates due to state tax law changes.

Note 15 – Other Comprehensive Income (Loss)

Stockholders’ equity includes certain items classified as accumulated other comprehensive income (loss), including:

 

   

Foreign currency translation adjustment relates to our non-U.S. subsidiary companies that have designated a functional currency other than the U.S. dollar. We are required to translate the subsidiary functional currency financial statements to dollars using a combination of historical, period-end, and average foreign exchange rates. This combination of rates creates the foreign currency translation adjustment component of other comprehensive income.

 

   

Unrealized gains (losses) on foreign currency hedging activities relate to derivative instruments used to hedge the currency exchange rates for forecasted euro sales. These hedges are designated as cash flow hedges, and we have deferred income statement recognition of gains and losses until the hedged transaction occurs. See Note 8 for more details.

 

   

Unrealized gains (losses) on investments classified as available-for-sale are deferred from income statement recognition until the gains or losses are realized. See Note 3 for more details.

The Consolidated Statements of Comprehensive Income are as follows (in thousands):

 

October 1, 2011 October 1, 2011 October 1, 2011 October 1, 2011
    Three Months Ended     Nine Months Ended  
    October 1, 2011     October 2, 2010     October 1, 2011     October 2, 2010  

Net income

  $ 45,001      $ 26,151      $ 139,599      $ 73,561   

Other comprehensive income (loss):

       

Foreign currency translation adjustment

    173        1,237        (630     (173

Changes in unrealized gains (losses) on hedging transactions, net of tax

    5,615        (2,185     2,838        (2,056

Changes in unrealized gains (losses) on investments, net of tax

    (636     8        (303     (34
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 50,153      $ 25,211      $ 141,504      $ 71,298   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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The components of other comprehensive income gross and net of income tax are as follows (in thousands):

 

    Three Months Ended     Nine Months Ended  
    October 1, 2011     October 2, 2010     October 1, 2011     October 2, 2010  

Changes in unrealized gains and (losses) on foreign currency hedging activities:

       

Gross

  $ 8,617      $ (3,504   $ 4,164      $ (3,297

Income tax expense (benefit)

    3,002        (1,319     1,326        (1,241
 

 

 

   

 

 

   

 

 

   

 

 

 

Net

  $ 5,615      $ (2,185   $ 2,838      $ (2,056
 

 

 

   

 

 

   

 

 

   

 

 

 

Changes in unrealized gains and (losses) on investments classified as available-for-sale:

       

Gross

  $ (989   $ 13      $ (455   $ (55

Income tax expense (benefit)

    (353     5        (152     (21
 

 

 

   

 

 

   

 

 

   

 

 

 

Net

  $ (636   $ 8      $ (303   $ (34
 

 

 

   

 

 

   

 

 

   

 

 

 

The components of accumulated other comprehensive income (loss) included in the Consolidated Balance Sheets are as follows (in thousands):

 

December 31, 2010 December 31, 2010
     As of  
     October 1, 2011     December 31, 2010  

Foreign currency translation adjustments

   $ (8,905   $ (8,275
  

 

 

   

 

 

 

Unrealized gains and (losses) on hedging transactions:

    

Gross

     2,641        (1,523

Income tax expense (benefit)

     753        (573
  

 

 

   

 

 

 

Net

     1,888        (950
  

 

 

   

 

 

 

Unrealized gains and (losses) on investments classified as available-for-sale:

    

Gross

     (655     (200

Income tax expense (benefit)

     (228     (76
  

 

 

   

 

 

 

Net

     (427     (124
  

 

 

   

 

 

 

Total accumulated other comprehensive income (loss)

   $ (7,444   $ (9,349
  

 

 

   

 

 

 

Note 16 – New Accounting Pronouncements

In October 2009, the FASB issued update 2009-13, ASC 605, Revenue Recognition: Multiple –Deliverable Revenue Arrangements-a consensus of the FASB Emerging Issues Task Force. The revised guidance provides for two significant changes to existing multiple-element arrangement guidance. The first relates to the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. This change is significant as it will likely result in the requirement to separate more deliverables within an arrangement, ultimately leading to less revenue deferral. The second change modifies the manner in which the transaction consideration is allocated across the separately identifiable deliverables. These changes are likely to result in earlier recognition of revenue for multiple-element arrangements than under previous guidance. This standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. This standard did not have a material effect upon our consolidated financial statements.

In October 2009, the FASB issued update 2009-14, ASC 985, Software: Certain Revenue Arrangements that include Software Elements – a consensus of the FASB Emerging Issues Task Force. This updated guidance is expected to significantly affect how entities account for revenue arrangements that contain both hardware and software elements. This standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. This standard did not have a material effect upon our consolidated financial statements.

In December 2010, the FASB issued update 2010-28, ASC 350, Intangibles – Goodwill and Other: When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force). This updated guidance requires entities with reporting units with zero or negative carrying amounts to perform an additional test to determine if goodwill has been impaired and to calculate the amount of impairment (Step 2). This standard is effective for interim and annual periods beginning after December 15, 2010. This standard did not have a material effect upon our consolidated financial statements.

 

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In June 2011, the FASB issued update 2011-05, ASC 220, Comprehensive Income: Presentation of Comprehensive Income. This updated guidance eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. This update also provides guidance on reporting items of other comprehensive income in which an entity has the option to present comprehensive income in either one or two consecutive financial statements. This standard is effective for interim and annual periods beginning after December 15, 2011. This standard will not have a material effect upon our consolidated financial statements.

In September 2011, the FASB issued update 2011-08, ASC 350, Intangibles Goodwill and Other: Testing Goodwill for Impairment. This updated guidance simplifies how companies test goodwill for impairment. Essentially, companies are no longer required to calculate the fair value of a reporting unit unless the entity determines that it is more-likely-than-not that its fair value is less than its carrying amount using a qualitative assessment. This standard is effective for fiscal years beginning after December 15, 2011. This standard will not have a material effect upon our consolidated financial statements.

Note 17 Discontinued Operations

Sale of Navis, LLC

On March 18, 2011, we sold our Navis marine terminal solutions business and the related WhereNet marine terminal solutions product line of our Zebra Enterprise Solutions (“ZES”) business segment for approximately $188,588,000 in cash to Cargotec Corporation. Zebra has a short term receivable from the buyer in the amount of $27,580,000 which represents funds held in escrow that are subject to adjustment according to terms of the agreement.

Sale of proveo AG

On August 3, 2011, we entered into a Share Purchase Agreement with F Two NV (a Belgium company) to sell all of our interest in Zebra Enterprise Solutions GmbH (formerly proveo AG) business. The loss recorded upon divestiture was $1,248,000. As part of the sale, Zebra agreed with the buyer to provide a loan of up to €1,000,000 which is due one year from the sale date and bears interest at 6.5%. Zebra realized tax benefits in the amount of $13,308,000 with the divestiture of proveo AG. These tax benefits are primarily related to the difference in book basis versus tax basis.

Beginning in the first quarter of 2011, Zebra reported the results of these businesses as discontinued operations. The amounts presented below for discontinued operations include Navis and proveo assets and liabilities, and the operating results of these businesses for both 2011 and 2010 periods. With the Navis sale, Zebra consolidated the former ZES Location Solutions product line. The reporting of separate business segments will no longer be required.

The components of assets and liabilities of discontinued operations are as follows (in thousands):

 

     As of  
     October 1, 2011      December 31, 2010  

Assets:

     

Cash and cash equivalents

   $ 0       $ 1,301   

Accounts receivable, net

     0         24,003   

Inventories

     0         772   

Deferred income taxes

     0         3,492   

Prepaid expenses and other current assets

     0         3,328   

Property and equipment, net

     0         1,890   

Goodwill

     0         72,230   

Other intangibles, net

     0         39,951   

Other assets

     0         1,202   
  

 

 

    

 

 

 

Assets of discontinued operations

   $ 0       $ 148,169   
  

 

 

    

 

 

 

Liabilities:

     

Accounts payable

   $ 0       $ 726   

Accrued liabilities

     0         2,927   

Deferred revenue

     0         17,791   

Deferred rent

     0         199   

Other long-term liabilities

     0         184   
  

 

 

    

 

 

 

Liabilities of discontinued operations

   $ 0       $ 21,827   
  

 

 

    

 

 

 

 

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Summary results for discontinued operations in our consolidated statement of earnings are as follows (in thousands):

 

    Three Months Ended     Nine Months Ended  
    October 1, 2011     October 2, 2010     October 1, 2011     October 2, 2010  

Net sales

  $ 233      $ 16,701      $ 13,945      $ 48,333   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

    (1,246     (1,707     (13,970     (2,143

Income tax benefit

    0        611        1,105        725   

Gain (loss) on sale of discontinued operations

    (1,248     0        66,753        0   

Income tax benefit (expense) on sale

    13,308        0        (11,773     0   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations

  $ 10,814      $ (1,096   $ 42,115      $ (1,418
 

 

 

   

 

 

   

 

 

   

 

 

 

The components of cash flows of discontinued operations in our consolidated statement of cash flows are as follows (in thousands):

 

     Nine Months Ended  
     October 1, 2011     October 2, 2010  

Cash flows from discontinued operations:

    

Net cash provided (used) by operating activities

   $ (1,301   $ (2,152

Net cash provided (used) by investing activities

     0        0   

Net cash provided (used) by financing activities

     0        0   

Effect of exchange rate changes on cash

     0        1,112   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

   $ (1,301   $ (1,040

Cash and cash equivalents at beginning of period

   $ 1,301      $ 1,693   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 0      $ 653   
  

 

 

   

 

 

 

 

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations: Third Quarter of 2011 versus Third Quarter of 2010

Consolidated Results of Operations

(Amounts in thousands, except percentages):

 

    Three Months Ended              
    October 1, 2011     October 2, 2010     Percent
Change
    Percent of
Net Sales - 2011
    Percent of
Net Sales - 2010
 

Net Sales

         

Tangible products

  $ 241,686      $ 218,271        10.7        95.4        95.0   

Service & software

    11,652        11,536        1.0        4.6        5.0   
 

 

 

   

 

 

     

 

 

   

 

 

 

Total net sales

    253,338        229,807        10.2        100.0        100.0   

Cost of Sales

         

Tangible products

    122,529        114,924        6.6        48.3        50.0   

Service & software

    7,256        5,636        28.7        2.9        2.5   
 

 

 

   

 

 

     

 

 

   

 

 

 

Total cost of sales

    129,785        120,560        7.7        51.2        52.5   
 

 

 

   

 

 

     

 

 

   

 

 

 

Gross profit

    123,553        109,247        13.1        48.8        47.5   

Operating expenses

    74,673        68,916        8.4        29.5        30.0   
 

 

 

   

 

 

     

 

 

   

 

 

 

Operating income

    48,880        40,331        21.2        19.3        17.5   

Other income (expense)

    (898     327        (374.6     (0.4     0.2   
 

 

 

   

 

 

     

 

 

   

 

 

 

Income from continuing operations before income taxes

    47,982        40,658        18.0        18.9        17.7   

Income taxes

    13,795        13,411        2.9        5.4        5.8   
 

 

 

   

 

 

     

 

 

   

 

 

 

Income from continuing operations

    34,187        27,247        25.5        13.5        11.9   

Income (loss) discontinued operations, net of tax

    10,814        (1,096     N/M        4.3        (0.5
 

 

 

   

 

 

     

 

 

   

 

 

 

Net Income

  $ 45,001      $ 26,151        72.1        17.8        11.4   
 

 

 

   

 

 

     

 

 

   

 

 

 

Diluted earnings per share

         

Income from continuing operations

  $ 0.64      $ 0.48        33.3       

Income (loss) from discontinued operations

    0.20        (0.02     N/M       
 

 

 

   

 

 

       

Net income

  $ 0.84      $ 0.46        82.6       
 

 

 

   

 

 

       

Consolidated Results of Operations – Third quarter

Sales

Net sales for the third quarter of 2011, compared with the corresponding 2010 quarter, increased 10.2% primarily due to a broad-based increase in demand, complemented by a focused business strategy of geographic expansion, new product introductions and expansion of go-to-market channels. New products introduced over the past year helped us meet more of our customers’ needs for improving asset visibility in complex supply chain environments. The third quarter of 2011 was the seventh consecutive quarter of year-over-year growth. The increase in sales was largely attributable to 10.1% growth in hardware sales (mainly tabletop printers and aftermarket parts). Supplies sales increased from greater shipments of labels and thermal ribbons. Printer unit volume increased 18.7% from the third quarter of 2010.

Sales by product category were as follows (amounts in thousands, except percentages):

 

     Three Months Ended                

Product Category

   October 1, 2011      October 2, 2010      Percent
Change
     Percent of
Net Sales - 2011
     Percent of
Net Sales - 2010
 

Hardware

   $ 193,214       $ 175,489         10.1         76.3         76.4   

Supplies

     47,110         41,644         13.1         18.6         18.1   

Service and software

     11,652         11,536         1.0         4.6         5.0   
  

 

 

    

 

 

       

 

 

    

 

 

 

Subtotal products

     251,976         228,669         10.2         99.5         99.5   

Shipping and handling

     1,362         1,138         19.7         0.5         0.5   
  

 

 

    

 

 

       

 

 

    

 

 

 

Total net sales

   $ 253,338       $ 229,807         10.2         100.0         100.0   
  

 

 

    

 

 

       

 

 

    

 

 

 

 

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Table of Contents

Sales increased in all international geographic regions, in part from the impact of our investments in sales and sales-related personnel to expand Zebra’s presence in high-growth regions including China, Brazil and Eastern Europe. Sales increased by 20% in the third quarter of 2011 over comparable 2010 sales in the regions targeted by Zebra for geographic expansion. Movements in foreign exchange rates increased sales by $5,699,000 in the Europe, Middle East and Africa region due principally to a stronger euro against the U.S. dollar.

Sales to customers by geographic region were as follows (in thousands, except percentages):

 

     Three Months Ended                

Geographic Region

   October 1, 2011      October 2, 2010      Percent
Change
     Percent of
Net Sales - 2011
     Percent of
Net Sales - 2010
 

Europe

   $ 84,597       $ 73,573         15.0         33.4         32.0   

Latin America

     23,968         20,593         16.4         9.5         9.0   

Asia-Pacific

     38,723         32,088         20.7         15.3         14.0   
  

 

 

    

 

 

       

 

 

    

 

 

 

Total International

     147,288         126,254         16.7         58.2         55.0   

North America

     106,050         103,553         2.4         41.8         45.0   
  

 

 

    

 

 

       

 

 

    

 

 

 

Total net sales

   $ 253,338       $ 229,807         10.2         100.0         100.0   
  

 

 

    

 

 

       

 

 

    

 

 

 

Gross Profit

Gross profit increased 13.1% due to lower costs for raw materials, higher volumes and favorable foreign exchange rates in 2011. Gross profit was affected by favorable foreign currency movements which increased third quarter gross profit by $5,038,000. The above factors contributed to the increase in gross margin from 47.5% to 48.8%.

Printer unit volumes and average selling price information is summarized below:

 

     Three Months Ended  
     October 1, 2011      October 2, 2010      Percent Change  

Total printers shipped

     315,743         265,962         18.7   

Average selling price of printers shipped

   $ 524       $ 545         (3.9

The decrease in selling price is a result primarily of a change in product mix from one quarter compared to the other.

Operating Expenses

Operating expenses for the quarter increased 8.4%. Several expense categories accounted for these increases, including compensation costs, which include salaries, stock option expense, and commissions. These increases are primarily related to more employees in 2011 versus 2010. Business development, outside professional services, travel and entertainment, rent, information systems, shipping, offsite meetings and depreciation expenses increased over 2010 levels. Restructuring costs in 2011 relate to the relocation of our Location Solution product line following the divestiture of Navis in the first quarter of 2011.

Operating expenses are summarized below (in thousands, except percentages):

 

     Three Months Ended                       

Operating Expenses

   October 1, 2011      October 2, 2010      Percent
Change
     Percent of
Net Sales  2011
     Percent of
Net Sales  2010
 

Selling and marketing

   $ 31,942       $ 28,068         13.8         12.6         12.2   

Research and development

     22,584         21,862         3.3         8.9         9.5   

General and administrative

     19,166         18,147         5.6         7.6         7.9   

Amortization of intangible assets

     843         839         0.5         0.3         0.4   

Exit and restructuring costs

     138         0         N/A         0.1         N/A   
  

 

 

    

 

 

       

 

 

    

 

 

 

Total operating expenses

   $ 74,673       $ 68,916         8.4         29.5         30.0   
  

 

 

    

 

 

       

 

 

    

 

 

 

Operating Income

The operating income increase for the third quarter of 2011was the result of increased sales and gross profit from above, as well as the slower growth in operating expenses relative to the growth rate in sales.

 

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Table of Contents

Other Income

Investment income declined overall from lower short-term interest rates in 2011 compared with 2010 even though cash and investment balances were higher in 2011 versus 2010.

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

 

     Three Months Ended  
     October 1, 2011     October 2, 2010  

Investment income

   $ 134      $ 635   

Foreign exchange gain (loss)

     (173     (148

Other, net

     (859     (160
  

 

 

   

 

 

 

Total other income (expense)

   $ (898   $ 327   
  

 

 

   

 

 

 

Income Taxes

The effective income tax rate for the third quarter of 2011 was 28.8% compared with 33.0% for the third quarter of 2010. Zebra’s effective rate has decreased in 2011 due to higher profits in lower rate international jurisdictions and reduction in state rates due to state tax law changes.

Income (loss) discontinued operations

The income from discontinued operations in 2011 relates to a $13,308,000 tax benefit realized upon the sale of proveo AG offset by losses on discontinued operations and losses on the sale of discontinued operations.

Results of Operations: Nine Months ended October 1, 2011 versus Nine Months ended October 2, 2010

Consolidated Results of Operations

(Amounts in thousands, except percentages):

 

    Nine Months Ended              
    October 1, 2011     October 2, 2010     Percent
Change
    Percent of
Net Sales - 2011
    Percent of
Net Sales - 2010
 

Net Sales

         

Tangible products

  $ 700,568      $ 627,482        11.6        95.2        95.1   

Service & software

    35,612        32,858        8.4        4.8        4.9   
 

 

 

   

 

 

     

 

 

   

 

 

 

Total net sales

    736,180        660,340        11.5        100.0        100.0   

Cost of Sales

         

Tangible products

    351,042        338,080        3.8        47.7        51.2   

Service & software

    19,889        15,841        25.6        2.7        2.4   
 

 

 

   

 

 

     

 

 

   

 

 

 

Total cost of sales

    370,931        353,921        4.8        50.4        53.6   
 

 

 

   

 

 

     

 

 

   

 

 

 

Gross profit

    365,249        306,419        19.2        49.6        46.4   

Operating expenses

    225,336        201,234        12.0        30.6        30.5   
 

 

 

   

 

 

     

 

 

   

 

 

 

Operating income

    139,913        105,185        33.0        19.0        15.9   

Other income (expense)

    (1,306     1,670        (178.2     (0.2     0.3   
 

 

 

   

 

 

     

 

 

   

 

 

 

Income from continuing operations before income taxes

    138,607        106,855        29.7        18.8        16.2   

Income taxes

    41,123        31,876        29.0        5.6        4.8   
 

 

 

   

 

 

     

 

 

   

 

 

 

Income from continuing operations

    97,484        74,979        30.0        13.2        11.4   

Income (loss) discontinued operations, net of tax

  $ 42,115      $ (1,418     N/M        5.7        (0.3
 

 

 

   

 

 

     

 

 

   

 

 

 

Net Income

  $ 139,599      $ 73,561        89.8        18.9        11.1   
 

 

 

   

 

 

     

 

 

   

 

 

 

Diluted earnings per share

         

Income from continuing operations

  $ 1.78      $ 1.30        36.9       

Income (loss) from discontinued operations

    0.77        (0.02     N/M       
 

 

 

   

 

 

       

Net income

  $ 2.55      $ 1.28        99.2       
 

 

 

   

 

 

       

 

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Consolidated Results of Operations – Year to date

Sales

Net sales for the first nine months of 2011 compared with the same 2010 period increased 11.5% due to a broad-based increase in demand, complemented by a focused business strategy of geographic expansion, new product introductions and expansion of go-to-market channels. New products introduced over the past year helped us meet more of our customers’ needs for improving asset visibility in complex supply chain environments. The increase in sales was largely attributable to increased hardware sales with notable volume increases in high-performance tabletop, desktop, mobile printers and aftermarket parts. Supplies sales increased from greater shipments of labels and thermal ribbons. New products introduced over the past year are helping Zebra to meet more of customers’ asset tagging needs in complex supply chain environments. Printer unit volume increased 12.2% for the first nine months of 2011 compared to levels in 2010.

Sales by product category were as follows (amounts in thousands, except percentages):

 

     Nine Months Ended                

Product Category

   October 1, 2011      October 2, 2010      Percent
Change
     Percent of
Net Sales - 2011
     Percent of
Net Sales - 2010
 

Hardware

   $ 555,108       $ 497,806         11.5         75.4         75.4   

Supplies

     141,323         125,914         12.2         19.2         19.1   

Service and software

     35,612         32,858         8.4         4.8         4.9   
  

 

 

    

 

 

       

 

 

    

 

 

 

Subtotal products

     732,043         656,578         11.5         99.4         99.4   

Shipping and handling

     4,137         3,762         10.0         0.6         0.6   
  

 

 

    

 

 

       

 

 

    

 

 

 

Total net sales

   $ 736,180       $ 660,340         11.5         100.0         100.0   
  

 

 

    

 

 

       

 

 

    

 

 

 

Sales increased in all geographic territories due in part to the impact of more Zebra sales and sales-related personnel in high-growth geographic territories. Movements in foreign exchange rates increased sales by $14,832,000 in the Europe, Middle East and Africa region due principally to a stronger euro against the dollar.

Sales to customers by geographic region were as follows (in thousands, except percentages):

 

     Nine Months Ended                

Geographic Region

   October 1, 2011      October 2, 2010      Percent
Change
     Percent of
Net Sales - 2011
     Percent of
Net Sales - 2010
 

Europe, Middle East and Africa

   $ 254,218       $ 221,128         15.0         34.5         33.5   

Latin America

     68,137         59,300         14.9         9.3         9.0   

Asia-Pacific

     109,518         80,821         35.5         14.9         12.2   
  

 

 

    

 

 

       

 

 

    

 

 

 

Total International

     431,873         361,249         19.5         58.7         54.7   

North America

     304,307         299,091         1.7         41.3         45.3   
  

 

 

    

 

 

       

 

 

    

 

 

 

Total net sales

   $ 736,180       $ 660,340         11.5         100.0         100.0   
  

 

 

    

 

 

       

 

 

    

 

 

 

Gross Profit

Gross profit increased 19.2% due to higher volumes and lower material and freight costs in 2011. Gross profit was affected by favorable foreign currency movements which increased gross profit by $13,060,000. The above factors contributed to the increase in gross margin from 46.4% to 49.6%.

Printer unit volumes and average selling price information is summarized below:

 

     Nine Months Ended  
     October 1, 2011      October 2, 2010      Percent Change  

Total printers shipped

     876,483         781,147         12.2   

Average selling price of printers shipped

   $ 535       $ 532         0.5   

 

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Table of Contents

Operating Expenses

Operating expenses for the nine-month period increased 12.0% due to greater selling and marketing, research and development, and general and administrative expenses. Several categories accounted for these increases, including compensation costs which include salaries, stock option expense, and commissions. These increases are primarily related to more employees in 2011 versus 2010. Business development, outside professional services, travel and entertainment, rent, information systems, recruiting, offsite meetings, shipping and depreciation expenses all increased over 2010 levels. Amortization expense increased $194,000 due to patents acquired over the past year. Exit costs decreased $142,000 for the first nine months of 2011 as compared to 2010. Restructuring costs in 2011 relate to the consolidation of our Location Solutions product line following the divestiture of Navis in the first quarter of 2011 while costs in 2010 relate to the completion of the production transfer to Jabil.

Operating expenses are summarized below (in thousands, except percentages):

 

     Nine Months Ended                      

Operating Expenses

   October 1, 2011      October 2, 2010      Percent
Change
    Percent of
Net Sales  2011
     Percent of
Net Sales  2010
 

Selling and marketing

   $ 91,420       $ 80,423         13.7        12.4         12.2   

Research and development

     66,752         60,839         9.7        9.1         9.2   

General and administrative

     62,560         55,420         12.9        8.5         8.4   

Amortization of intangible assets

     2,514         2,320         8.4        0.3         0.4   

Exit and restructuring costs

     2,090         2,232         (6.4     0.3         0.3   
  

 

 

    

 

 

      

 

 

    

 

 

 

Total operating expenses

   $ 225,336       $ 201,234         12.0        30.6         30.5   

Operating Income (Loss)

The operating income increase for the first nine months of 2010 was the result of increased sales and gross profit, as well as the slower growth in operating expenses relative to sales growth, as noted above.

Other Income

Investment income declined from lower short-term interest rates in 2011 compared with 2010. Zebra recorded a foreign exchange gain in 2010 versus a loss in 2011.

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

 

     Nine Months Ended  
     October 1, 2011     October 2, 2010  

Investment income

   $ 1,350      $ 2,111   

Foreign exchange gain (loss)

     (1,300     444   

Other, net

     (1,356     (885
  

 

 

   

 

 

 

Total other income (loss)

   $ (1,306   $ 1,670   
  

 

 

   

 

 

 

Income Taxes

The effective income tax rate for the first nine months of 2011 was 29.7% compared with an income tax rate of 29.8% for the first nine months of 2010. Zebra’s effective tax rate for the first quarter of 2010 included a $2,764,000 reduction of federal taxes related to improperly accounting for the tax impact on intercompany profit generated from intercompany sales in 2009. This adjustment reduced our effective rate for the first nine months of 2010 by approximately 2.6%. Zebra’s effective rate has also decreased in 2011 due to higher profits in lower rate international jurisdictions and reduction in state rates due to state tax law changes.

Income (loss) discontinued operations

The income from discontinued operations in 2011 relates to the sale of Navis LLC and proveo AG offset by losses on discontinued operations.

 

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Table of Contents

Liquidity and Capital Resources

(Amounts in thousands, except percentages):

 

     Nine Months Ended  

Rate of Return Analysis:

   October 1, 2011     October 2, 2010  

Average cash and marketable securities balances

   $ 278,823      $ 253,285   

Annualized rate of return

     0.7     1.1

Average cash and marketable securities balances for the first nine months of 2011 increased compared to 2010 as a result of increased cash provided by the divestiture of Navis.

As of October 1, 2011, Zebra had $299,047,000 in cash, restricted cash, investments and marketable securities, compared with $258,598,000 at December 31, 2010. Factors affecting cash and investment balances during the first nine months of 2011 include the following (changes below include the impact of foreign currency):

 

   

Accounts receivable increased $10,112,000 due to the sale of Navis.

 

   

Inventories increased $6,635,000 due to an increase in raw materials.

 

   

Accounts payable decreased $8,493,000 due to the timing of payments at period end.

 

   

Accrued liabilities decreased $14,917,000 due to the payout of benefit accruals.

 

   

Deferred revenue decreased $16,707,000 due to the divestiture of Navis.

 

   

Income taxes decreased $7,087,000 due to the timing of tax payments.

 

   

Purchases of property and equipment totaled $17,829,000.

 

   

Proceeds from the sale of Navis and proveo AG provided $161,206,000.

 

   

Sales of investments totaled $253,377,000.

 

   

Purchases of treasury stock totaled $146,373,000.

 

   

Stock option exercises and purchases under the stock purchase plan contributed $9,197,000.

Management believes that existing capital resources and funds generated from operations are sufficient to finance anticipated capital requirements.

Zebra earns a significant amount of our operating income outside the U.S., which is deemed to be permanently reinvested in foreign jurisdictions. Zebra does not currently foresee a need to repatriate funds, however, should Zebra require more capital in the U.S. than is generated by our operations locally, Zebra could elect to repatriate funds held in foreign jurisdictions or raise capital in the U.S. through debt or equity issuances. These alternatives could result in higher effective tax rates or increased interest expense.

Critical Accounting Policies and Estimates

Management prepared the consolidated financial statements of Zebra under accounting principles generally accepted in the United States of America. These principles require the use of estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions we used are reasonable, based upon the information available.

Our estimates and assumptions affect the reported amounts in our financial statements. The following accounting policies comprise those that we believe are the most critical in understanding and evaluating Zebra’s reported financial results.

Revenue Recognition

Product revenue is recognized once four criteria are met: (1) we have persuasive evidence that an arrangement exists; (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

 

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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.

Pass Through Rebate Program

Some of our distributors are offered monthly rebates based on distribution of products to our program partners. These rebates are recorded as a reduction to revenue. Each month we estimate the amount of rebate earned and establish a reserve for them based on recent trends of actual activity. The actual distributor rebates paid have historically been in line with our estimates.

Price Protection

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

Software Revenue

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

 

   

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

 

   

We sell a limited amount of prepackaged, or off-the-shelf, software for the creation of 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 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.

 

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Table of Contents

Investments and Marketable Securities

Investments and marketable securities at October 1, 2011, consisted of the following:

 

U.S. government and agency securities

     17.0

Obligations of government sponsored enterprises (1)

     5.5

State and municipal bonds

     48.3

Corporate securities

     29.2

 

(1) Includes investments in notes issued by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Federal Farm Credit Banks, and the Federal Home Loan Bank.

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 investments in marketable securities are classified as available-for-sale securities.

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 October 1, 2011, Zebra’s investments in marketable debt securities are classified as available-for-sale. In addition, as of October 1, 2011, all of our investments in marketable debt securities with maturities greater than one year are classified as long-term in the consolidated balance sheet due to our ability and intent to hold them until maturity.

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 creditworthiness,

 

   

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

 

   

Limited credit insurance on the majority of our international receivables.

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 0.9% to 1.5% of total accounts receivable. Accounts receivable reserves as of October 1, 2011, were $1,585,000, or 1.0% of the balance due. Accounts receivable reserves as of December 31, 2010, were $1,459,000, or 1.1% of the balance due. We believe our reserve level is appropriate considering the quality of the portfolio as of October 1, 2011. 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 reserves for excess and obsolete inventories have ranged from 8.0% to 11.4% of gross inventory. As of October 1, 2011, inventory reserves were $14,193,000, or 10.5% of gross inventory compared to inventory reserves of $9,837,000, or 8.0% of gross inventory as of December 31, 2010. We believe our reserve level is appropriate considering the quantities and quality of the inventories as of October 1, 2011.

Valuation of Goodwill

We test the impairment of goodwill each year at the end of May or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We completed our annual assessment during June 2011 and determined that our goodwill was not impaired as of the end of May 2011.

 

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Table of Contents

During the first quarter of 2011, we announced an agreement to sell Navis and our decision to divest certain other operations, which constituted a portion, but not all, of our Zebra Enterprise Solutions (ZES) segment, which was also deemed to be the reporting unit for goodwill impairment testing purposes. As a result of our decision to sell Navis, goodwill attributable to the ZES segment was allocated to the three businesses that constituted the prior reporting unit based on the relative fair value of those businesses. Goodwill was allocated between continuing operations ($9,114,000) and discontinued operations ($72,795,000) based on the relative fair value of each of the businesses.

The goodwill allocated above to continuing operations was tested for impairment and we determined that our goodwill related to this reporting unit was not impaired.

Beginning with the first quarter of 2011, the continuing operations of the former ZES reporting unit have been combined with the former Specialty Printing Group (“SPG”) operating segment to form one Zebra operating segment. Future goodwill impairment tests will be conducted at the consolidated Zebra level.

Goodwill of a reporting unit is tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Examples of such events or circumstances include:

 

   

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

 

   

Adverse action or assessment by a regulator,

 

   

Unanticipated competition,

 

   

Loss of key personnel,

 

   

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

 

   

Testing for recoverability under ASC 360 (formerly SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets) of a significant asset group within a reporting unit,

 

   

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

 

   

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

If we believe that one or more of the above indicators of impairment have occurred, we perform an impairment test. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. We generally determine the fair value of our reporting units using three valuation methods: Income Approach – Discounted Cash Flow Analysis, Market Approach – Guideline Public Company Method and Market Approach – Comparative Transactions Method. The approach defined below is based upon our last impairment test conducted in June 2011 as of the end of May 2011.

Under the “Income Approach – Discounted Cash Flow Analysis” the key assumptions consider sales, cost of sales and operating expenses projected through the year 2018. These assumptions were determined by management utilizing our internal operating plan and assuming growth rates for revenues and operating expenses, and margin assumptions. The fourth key assumption under this approach is the discount rate which is determined by looking at current risk-free rates of capital, current market interest rates and the evaluation of risk premia relevant to the business segment. If our assumptions relative to growth rates were to change or were incorrect, our fair value calculation may change which could result in impairment.

Under the “Market Approach – Guideline Company Method” we identified 5 publicly traded companies, including Zebra, which we believe have significant relevant similarities. For these 5 companies we calculated the mean ratio of invested capital to revenues and invested capital to EBITDA. Similar to the Income approach discussed above, sales, cost of sales, operating expenses and their respective growth rates were the key assumptions utilized. The market prices of Zebra and other guideline company shares are key assumptions. If these market prices increase, the estimated market value would increase. If the market prices decrease, the estimated market value would decrease.

Under the “Market Approach – Comparative Transactions Method” we looked at 8 market based transactions for companies that have similarities to our business, including similarities to one or more of the business lines, markets, growth prospects, margins and size. We calculated mean revenue and EBITDA multiples for the selected transactions. These multiples were applied to forecasted Zebra results for that segment to estimate market value. The key assumptions and impact to changes to those assumptions would be similar to those assumptions under the “Income Approach – Discounted Cash Flow Analysis” and the “Market Approach – Guideline Company Method”.

 

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The results of these three methods are weighted based upon management’s determination with more weighing upon the Income approach because it considers anticipated future financial performance. The Market approaches are based upon historical and current economic conditions which might not reflect the long term prospects or opportunities for our business segment being evaluated.

If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill.

Valuation of Long-Lived and Other Intangible Assets

We evaluate the impairment of identifiable intangibles and other long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered that may trigger an impairment review consist of:

 

   

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

 

   

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

 

   

Significant negative industry or economic trends,

 

   

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

 

   

Significant decline in market capitalization relative to net book value.

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

Net intangible assets, long-lived assets and goodwill amounted to $181,870,000 as of October 1, 2011.

Income Taxes

Zebra has identified, evaluated, and measured the amount of income tax benefits to be recognized for all of our income tax positions. Included in deferred tax assets are amounts related to federal and state net operating losses that resulted from our acquisition of WhereNet Corp. Zebra’s intention is to utilize these net operating loss carryforwards to offset future income taxes paid.

Zebra is currently under U.S. federal income tax audits for years of 2008 and 2009. The tax years 2006 through 2010 remain open to examination by multiple state taxing jurisdictions. Tax authorities in the United Kingdom have completed income tax audits for tax years through 2006.

Zebra’s continuing practice is to recognize interest and/or penalties related to income tax matters as part of income tax expense. For the nine month periods ended October 1, 2011 and October 2, 2010, we did not accrue any interest or penalties into income tax expense.

 

     Nine Months Ended  
     October 1, 2011     October 2, 2010  

Effective tax rate

     29.7     29.8

Zebra’s effective tax rate for the nine months ended October 2, 2010 included a $2,764,000 reduction of federal taxes related to prior years’ adjustments for intercompany profit in ending inventory which reduced our effective rate by 4.2%. Zebra’s effective rate has decreased slightly in 2011 due to higher profits in lower rate international jurisdictions.

Significant Customers

Our net sales to significant customers as a percentage of total net sales were as follows:

 

     Three Months Ended     Nine Months Ended  
     October 1, 2011     October 2, 2010     October 1, 2011     October 2, 2010  

Customer A

     22.1     19.7     20.2     19.3

Customer B

     9.7     11.1     10.4     10.8

No other customers accounted for 10% or more of total net sales during these periods.

 

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Table of Contents

Market Risks

As widely reported, a powerful earthquake centered off the northeastern coast of Japan on March 11, 2011, resulted in the loss of many lives, wide-spread damage to and destruction of property, disruption of electric power, and the release of radiation from a crippled nuclear power plant. This devastation has disrupted the operations, to varying degrees, of companies with business activity in the affected region. The consequences of this unfortunate natural disaster may adversely affect Zebra’s business and results of operations. We currently expect the crisis to have a minimal effect upon sales, but do expect to incur additional engineering costs and shipping expenses in future quarters as supplies are restored to more normalized levels. We cannot give any assurance that the supply chain disruption will not have a material adverse effect upon Zebra’s business, results of operations, financial condition or cash flows.

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 or implied 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 acquisitions and their integration,

 

   

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

 

   

The effect of the earthquake, tsunami and radiation leak in Japan on our business,

 

   

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

 

   

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

When used in this document and documents referenced, the words “anticipate,” “believe,” “estimate,” “will” and “expect” and similar expressions as they relate to Zebra or its management are intended to identify such forward-looking statements. We encourage readers of this report to review Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, for a further discussion of issues that could affect Zebra’s future results. Zebra undertakes no obligation, other than as may be required by law, to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this report.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There were no material changes in Zebra’s market risk during the quarter ended October 1, 2011. For additional information on market risk, refer to the “Quantitative and Qualitative Disclosures About Market Risk” section of our Form 10-K for the year ended December 31, 2010. See Note 3 to the Consolidated Financial Statements included in this report for further discussion of investments and marketable securities.

In the normal course of business, portions of Zebra’s operations are subject to fluctuations in currency values. We manage these risks using derivative financial instruments. See Note 8 to the Consolidated Financial Statements included in this report for further discussion of derivative instruments.

 

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this Form 10-Q. The evaluation was conducted under the supervision of our Disclosure Committee, and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in this report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) information required to be disclosed by us in our reports that we file or furnish under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

In January 2008, Zebra began a program to update substantially all of its key financial systems. As pieces of these systems are completed, they will be subject to the requirements related to internal control over financial reporting. The requirements for internal control over financial reporting will be a fundamental element of the design and implementation of these systems.

As of January 31, 2011, we completed the implementation of the new systems for our EMEA region. This implementation included customer order entry and invoicing, inventory procurement and management, certain accounts payable activity, and other related operational systems. As part of the implementation, we changed many of the related internal controls, primarily by replacing manual controls with system controls and streamlining Zebra’s internal operations. These new controls will subject to testing throughout 2011. The effectiveness of these new controls will be disclosed in our December 31, 2011 internal control report.

During the first nine months of 2011, we made additional changes to our controls and procedures as part of our ongoing monitoring of our controls. None of these changes has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. In addition, there were no other changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on the Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent 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 all control issues and instances of fraud, if any, within Zebra have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

See Note 10 to the Consolidated Financial Statements included in this report.

 

Item 1A. Risk Factors

In addition to the other information included in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, and the factors identified under “Safe Harbor” at the end of Item 2 of Part I of this Quarterly Report on Form 10-Q, which could materially affect our business, financial condition, cash flows or results of operations. The risks described in our Annual Report on Form 10-K are not the only risks facing Zebra. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, cash flows and/or results of operations.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Treasury Shares

During third quarter of 2011, Zebra purchased 1,824,910 shares of Zebra’s Class A Common Stock at a weighted average share price of $35.06 per share, 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
programs
     Maximum
number of
shares that may
yet be purchased
under the
program
 

July 2011 (July 3 – July 30)

     364,787       $ 41.28         364,787         2,385,213   

August 2011 (July 31 – August 27)

     871,704       $ 34.26         871,704         1,513,509   

September 2011 (August 28 – October 1)

     588,419       $ 32.39         588,419         925,090   

 

(1) In June 2011 the remaining shares yet to be purchased under the program were depleted. On May 19, 2011, Zebra’s Board authorized the purchase of up to an additional 3,000,000 shares under the same terms. The May 2011 authorization does not have an expiration date.

 

(2) During the third quarter, Zebra acquired 484 shares of Zebra Class A Common Stock through the withholding of shares necessary to satisfy tax withholding obligations upon the vesting of restricted stock awards. These shares were acquired at an average price of $35.47 per share.

 

(3) On November 4, 2011, Zebra’s Board authorized the purchase of up to an additional 3,000,000 shares under the same terms. The November 2011 authorization does not have an expiration date.

 

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Item 6. Exhibits

 

31.1    Rule 13a-14(a)/15d-14(a) Certification
31.2    Rule 13a-14(a)/15d-14(a) Certification
32.1    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101    The following financial information from Zebra Technologies Corporation Quarterly Report on Form 10-Q, for the quarter ended October 1, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the consolidated balance sheets; (ii) the consolidated statements of earnings; (iii) the consolidated statements of cash flows; and (iv) notes to consolidated financial statements.

 

 

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SIGNATURES

Pursuant to the requirements 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.

 

    ZEBRA TECHNOLOGIES CORPORATION
         
Date: November 8, 2011   By:  

  /s/ Anders Gustafsson

      Anders Gustafsson
      Chief Executive Officer
Date: November 8, 2011   By:  

  /s/ Michael C. Smiley

      Michael C. Smiley
      Chief Financial Officer

 

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