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ZEBRA TECHNOLOGIES CORP - Quarter Report: 2011 July (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 July 2, 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 July 29, 2011, there were 53,857,740 shares of Class A Common Stock, $.01 par value, outstanding.


Table of Contents

ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

QUARTER ENDED JULY 2, 2011

INDEX

 

         

PAGE

PART I - FINANCIAL INFORMATION

  

Item 1.

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

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    21

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    32

Item 4.

   Controls and Procedures    33

PART II - OTHER INFORMATION

  

Item 1.

   Legal Proceedings    34

Item 1A.

   Risk Factors    34

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    34

Item 6.

   Exhibits    35

SIGNATURES

   36

 

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PART I - FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

 

     July 2,
2011
    December 31,
2010
 
     (Unaudited)        
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 92,956      $ 46,175   

Restricted cash

     65        1,378   

Investments and marketable securities

     163,509        125,567   

Accounts receivable, net

     145,991        130,143   

Receivable from buyer

     13,790        0   

Inventories, net

     118,109        112,970   

Deferred income taxes

     18,593        15,670   

Prepaid expenses and other current assets

     13,675        11,505   

Assets of discontinued operations

     1,157        148,169   
  

 

 

   

 

 

 

Total current assets

     567,845        591,577   
  

 

 

   

 

 

 

Property and equipment at cost, less accumulated depreciation and amortization

     93,462        87,093   

Long-term deferred income taxes

     17,926        21,254   

Goodwill

     79,703        79,703   

Other intangibles, net

     8,084        9,755   

Long-term investments and marketable securities

     86,348        85,478   

Long-term receivable from buyer

     13,790        0   

Other assets

     4,211        4,004   
  

 

 

   

 

 

 

Total assets

   $ 871,369      $ 878,864   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 35,728      $ 34,578   

Accrued liabilities

     54,368        65,163   

Deferred revenue

     11,928        8,966   

Income taxes payable

     990        5,900   

Liabilities of discontinued operations

     801        21,827   
  

 

 

   

 

 

 

Total current liabilities

     103,815        136,434   

Deferred rent

     1,810        2,207   

Other long-term liabilities

     10,044        10,191   
  

 

 

   

 

 

 

Total liabilities

     115,669        148,832   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Preferred Stock

     —          —     

Class A Common Stock

     722        722   

Additional paid-in capital

     127,004        129,715   

Treasury stock

     (525,002     (462,029

Retained earnings

     1,165,571        1,070,973   

Accumulated other comprehensive income (loss)

     (12,595     (9,349
  

 

 

   

 

 

 

Total stockholders’ equity

     755,700        730,032   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 871,369      $ 878,864   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Amounts in thousands, except per share data)

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     July 2,
2011
    July 3,
2010
    July 2,
2011
    July 3,
2010
 

Net sales

        

Net sales of tangible products

   $ 232,762      $ 207,748      $ 458,882      $ 409,211   

Revenue from services and software

     12,779        10,810        23,960        21,322   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     245,541        218,558        482,842        430,533   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of sales

        

Cost of sales of tangible products

     117,732        114,081        228,513        223,156   

Cost of services and software

     6,111        5,068        12,633        10,205   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of sales

     123,843        119,149        241,146        233,361   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     121,698        99,409        241,696        197,172   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Selling and marketing

     30,950        27,682        59,478        52,355   

Research and development

     22,487        20,653        44,168        38,977   

General and administrative

     20,688        17,955        43,394        37,273   

Amortization of intangible assets

     836        740        1,671        1,481   

Exit and restructuring costs

     66        466        1,952        2,232   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     75,027        67,496        150,663        132,318   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     46,671        31,913        91,033        64,854   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Investment income

     656        634        1,216        1,476   

Foreign exchange gain (loss)

     (833     424        (1,127     592   

Other, net

     (243     (455     (497     (725
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (420     603        (408     1,343   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     46,251        32,516        90,625        66,197   

Income taxes

     13,082        10,331        27,328        18,465   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     33,169        22,185        63,297        47,732   

Income (loss) from discontinued operations, net of tax

     (205     492        31,301        (322
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 32,964      $ 22,677      $ 94,598      $ 47,410   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share:

        

Income from continuing operations

   $ 0.60      $ 0.38      $ 1.15      $ 0.83   

Income (loss) from discontinued operations

     0.00        0.01        0.57        (0.01
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 0.60      $ 0.39      $ 1.72      $ 0.82   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share:

        

Income from continuing operations

   $ 0.60      $ 0.38      $ 1.14      $ 0.83   

Income (loss) from discontinued operations

     0.00        0.01        0.57        (0.01
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 0.60      $ 0.39      $ 1.71      $ 0.82   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average shares outstanding

     54,546        57,489        54,981        57,756   

Diluted weighted average and equivalent shares outstanding

     54,958        57,737        55,395        58,003   

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)

 

     Six Months Ended  
     July 2,
2011
    July 3,
2010
 

Cash flows from operating activities:

    

Net income

   $ 94,598      $ 47,410   

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

    

Depreciation and amortization

     12,151        16,021   

Equity-based compensation

     8,013        5,155   

Excess tax benefit from equity-based compensation

     (1,234     (16

Loss (gain) on sale of fixed assets

     5        (58

Gain on sale of business

     (68,001     0   

Deferred income taxes

     3,899        2,961   

Changes in assets and liabilities:

    

Accounts receivable, net

     5,862        (1,956

Inventories, net

     (4,704     (5,383

Other assets

     (2,319     (8,664

Accounts payable

     (4,695     6,672   

Accrued liabilities

     (13,614     779   

Deferred revenue

     (14,738     (337

Income taxes

     (4,333     5,429   

Other operating activities

     (3,402     (683
  

 

 

   

 

 

 

Net cash provided by operating activities

     7,488        67,330   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (11,232     (15,053

Payments for patents and licensing arrangements

     0        (1,634

Proceeds from the sale of business

     161,008        0   

Purchases of investments and marketable securities

     (573,686     (200,939

Maturities of investments and marketable securities

     351,722        149,929   

Sales of investments and marketable securities

     183,485        44,567   
  

 

 

   

 

 

 

Net cash provided (used) by investing activities

     111,297        (23,130
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Purchase of treasury stock

     (82,388     (46,767

Proceeds from exercise of stock options and stock purchase plan purchases

     8,096        5,033   

Excess tax benefit from equity-based compensation

     1,234        16   
  

 

 

   

 

 

 

Net cash (used) in financing activities

     (73,058     (41,718
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     239        (143
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     45,966        2,339   

Cash balance of discontinued operations at beginning of period

     1,301        1,693   

Cash balance of discontinued operations at end of period

     (486     (412

Cash and cash equivalents at beginning of period

     46,175        37,250   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 92,956      $ 40,870   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Income taxes paid

   $ 52,819      $ 9,472   

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 July 2, 2011, the consolidated statement of earnings for the three and six months ended July 2, 2011 and July 3, 2010, and consolidated statement of cash flows for the six months ended July 2, 2011 and July 3, 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”) and other immaterial Zebra operations. In January 2011, Zebra announced its entry into an agreement to sell Navis to Cargotec Corporation. Our audited balance sheet at December 31, 2010, has been adjusted to reflect this announcement by separately classifying assets and liabilities of discontinued operations. On March 18, 2011, Zebra completed the sale of Navis. As a result, the statements of earnings for the Navis business 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 Navis and these 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 July 2, 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 July 2, 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 quarter at a loss of $36,000.

 

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Of the two auction rate security instruments still owned as of July 2, 2011, Zebra deemed one to be other than temporarily impaired and recorded the estimated value decline in 2008. 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 July 2, 2011, are classified below (in thousands):

 

     Level 1      Level 2      Level 3      Total  

Assets:

           

U.S. government and agency securities

   $ 27,651       $ —         $ —         $ 27,651   

Obligations of government-sponsored enterprises (1)

     3,836         —           —           3,836   

State and municipal bonds

     151,873         —           —           151,873   

Corporate securities

     63,547         —           2,914         66,461   

Other investments

     36         —           —           36   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investments subtotal

     246,943         —           2,914         249,857   

Money market investments related to the deferred compensation plan

     3,487         —           —           3,487   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 250,430       $ —         $ 2,914       $ 253,344   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Forward contracts (2)

     1,833         1,769         —           3,602   

Liabilities related to the deferred compensation plan

   $ 3,487       $ —         $ —         $ 3,487   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ 5,320       $ 1,769       $ —         $ 7,089   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     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 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 six month periods (in thousands):

 

     Six Months Ended  
     July 2, 2011     July 3, 2010  

Balance at beginning of the year

   $ 5,597      $ 7,047   

Transfers to Level 3

     —          —     

Total losses (realized or unrealized):

    

Included in earnings

     (36     —     

Included in other comprehensive income (loss)

     317        200   

Purchases and settlements (net)

     (2,964     (1,650
  

 

 

   

 

 

 

Balance at end of period

   $ 2,914      $ 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 July 2, 2011 and December 31, 2010 (in thousands):

 

     As of July 2, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 

U.S. government and agency securities

   $ 27,556       $ 95       $ —        $ 27,651   

Obligations of government-sponsored enterprises

     3,805         31         —          3,836   

State and municipal bonds

     151,459         422         (8     151,873   

Corporate securities

     66,668         369         (576     66,461   

Other investments

     36         —           —          36   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments

   $ 249,524       $ 917       $ (584   $ 249,857   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     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):

 

     As of July 2, 2011  
     Amortized
Cost
     Estimated
Fair  Value
 

Less than 1 year

   $ 163,366       $ 163,509   

1 to 5 years

     86,158         86,348   

6 to 10 years

     —           —     

Thereafter

     —           —     
  

 

 

    

 

 

 

Total

   $ 249,524       $ 249,857   
  

 

 

    

 

 

 

 

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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 July 2, 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):

 

     Three Months Ended      Six Months Ended  
     July 2,
2011
     July 3,
2010
     July 2,
2011
     July 3,
2010
 

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

   $ 347       $ 205       $ 333       $ (42
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 4 – Accounts Receivable Reserves

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

 

     As of  
     July 2,
2011
    December 31,
2010
 

Gross accounts receivable

   $ 147,392      $ 131,602   

Accounts receivable reserves

     (1,401     (1,459
  

 

 

   

 

 

 

Accounts receivable, net

   $ 145,991      $ 130,143   
  

 

 

   

 

 

 

Note 5 – Inventories

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

 

     As of  
     July 2,
2011
    December 31,
2010
 

Raw material

   $ 42,592      $ 33,441   

Work in process

     626        171   

Deferred costs of long-term contracts

     723        482   

Finished goods

     86,567        88,713   
  

 

 

   

 

 

 

Total inventories, gross

     130,508        122,807   

Inventory reserves

     (12,399     (9,837
  

 

 

   

 

 

 

Total inventories, net

   $ 118,109      $ 112,970   
  

 

 

   

 

 

 

 

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Table of Contents

Note 6 Goodwill and Other Intangible Assets

Intangible asset data are as follows (in thousands):

 

     As of July 2, 2011  
     Gross
Amount
     Accumulated
Amortization
    Net
Amount
 

Current technology

   $ 12,718       $ (11,154   $ 1,564   

Patent and patent rights

     17,160         (10,705     6,455   

Customer relationships

     1,773         (1,708     65   
  

 

 

    

 

 

   

 

 

 

Total

   $ 31,651       $ (23,567   $ 8,084   
  

 

 

    

 

 

   

 

 

 

Amortization expense for the six months ended July 2, 2011

  

   $ 1,671     
     

 

 

   

 

     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 six months ended July 3, 2010

  

   $ 1,481     
     

 

 

   

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. As a result, goodwill attributable to the former Zebra Enterprise Solutions (“ZES”) segment was allocated at the reporting unit level between continuing operations ($9,114,000) and discontinued operations ($72,795,000) based on the relative fair value of each reporting unit. 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. These operations were combined because the size of the remaining component is not material. 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 six months ended July 2, 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 six months ended July 3, 2010, relate to the completion of this transfer.

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

 

     Three Months Ended     Six Months Ended  

Type of Cost:

   July 2, 2011     July 3, 2010     July 2, 2011      July 3, 2010  

Severance, stay bonuses, and other employee-related expenses

   $ (208   $ (327   $ 1,071       $ 100   

Professional services

     295        77        847         110   

Relocation and transition costs

     5        653        34         1,959   

Other exit costs

     (26     63        —           63   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 66      $ 466      $ 1,952       $ 2,232   
  

 

 

   

 

 

   

 

 

    

 

 

 

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

 

     Six Months Ended  
     July 2, 2011     July 3, 2010  

Balance at beginning of period

   $ 1,301      $ 3,038   

Charged to earnings

     1,952        2,232   

Cash paid

     (1,696     (3,032
  

 

 

   

 

 

 

Balance at the end of period

   $ 1,557      $ 2,238   
  

 

 

   

 

 

 

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.

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. Our sales are not materially dependent on a single customer or a small group of customers.

 

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Table of Contents

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):

 

     Three Months Ended     Six Months Ended  
     July 2,
2011
    July 3,
2010
    July 2,
2011
    July 3,
2010
 

Change in gains (losses) from foreign exchange derivatives

   $ (1,442   $ 5,159      $ (6,263   $ 9,072   

Gain (loss) on net foreign currency assets

     609        (4,735     5,136        (8,480
  

 

 

   

 

 

   

 

 

   

 

 

 

Foreign exchange gain (loss)

   $ (833   $ 424      $ (1,127   $ 592   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     As of  
     July 2,
2011
     December 31,
2010
 

Notional balance of outstanding contracts:

     

Pound/US dollar

   £ 4,285       £ 6,162   

Euro/US dollar

     50,791       46,307   

Net fair value of outstanding contracts

   $ 745       $ 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):

 

     As of  
     July 2,
2011
    December 31,
2010
 

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

    

Gross

   $ (4,453   $ (1,522

Income tax benefit

     (1,676     (573
  

 

 

   

 

 

 

Net

   $ (2,777   $ (949
  

 

 

   

 

 

 

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

 

     As of  
     July 2,
2011
    December 31,
2010
 

Notional balance of outstanding contracts versus the dollar

     84,585      73,800   

Hedge effectiveness

     100     100

 

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Table of Contents
     Three Months Ended      Six Months Ended  
     July 2,
2011
     July 3,
2010
     July 2,
2011
     July 3,
2010
 

Net gains and (losses) included in revenue

   $ 1,819       $ —         $ 2,785       $ —     

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  
     July 2,
2011
     December 31,
2010
 

Assets:

     

Prepaid expenses and other current assets

   $ —         $ 3,275   
  

 

 

    

 

 

 

Total

   $ —         $ 3,275   
  

 

 

    

 

 

 

Liabilities:

     

Accrued liabilities

   $ 3,602       $ —     
  

 

 

    

 

 

 

Total

   $ 3,602       $ —     
  

 

 

    

 

 

 

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):

 

     Six Months Ended  
     July 2, 2011     July 3, 2010  

Balance at the beginning of the year

   $ 4,554      $ 3,813   

Warranty expense

     2,167        2,594   

Warranty payments

     (2,461     (2,667
  

 

 

   

 

 

 

Balance at the end of the period

   $ 4,260      $ 3,740   
  

 

 

   

 

 

 

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.

Note 11 – Stockholders’ Equity

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

 

    July 2, 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

    54,170,138        55,711,325   

Treasury Stock

   

Shares held

    17,981,719        16,440,532   

 

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Table of Contents

During the six-month period ended July 2, 2011, Zebra purchased 2,100,000 shares of common stock for $82,388,000 under board authorized share repurchase plans compared to the six-month period ended July 3, 2010, in which Zebra purchased 1,684,537 shares of common stock for $46,676,000.

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

 

    Six Months Ended  
    July 2, 2011     July 3, 2010  

Balance at the beginning of the year

    55,711,325        58,318,983   

Repurchases

    (2,100,000     (1,684,537

Stock option, rights and ESPP issuances

    409,550        205,961   

Restricted share issuances

    209,168        375,279   

Restricted share forfeitures

    (8,445     (14,627

Shares withheld for tax obligations

    (51,460     (5,129
 

 

 

   

 

 

 

Balance at the end of the period

    54,170,138        57,195,930   
 

 

 

   

 

 

 

Note 12 – Earnings Per Share

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

 

    Three Months Ended     Six Months Ended  
    July 2, 2011     July 3, 2010     July 2, 2011     July 3, 2010  

Weighted average shares:

       

Weighted average common shares outstanding

    54,546        57,489        54,981        57,756   

Effect of dilutive securities outstanding

    412        248        414        247   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average shares outstanding

    54,958        57,737        55,395        58,003   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss):

       

Income from continuing operations

  $ 33,169      $ 22,185      $ 63,297      $ 47,732   

Income (loss) from discontinued operations

    (205     492        31,301        (322
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 32,964      $ 22,677      $ 94,598      $ 47,410   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic per share amounts:

       

Income from continuing operations

  $ 0.60      $ 0.38      $ 1.15      $ 0.83   

Income (loss) from discontinued operations

  $ (0.00   $ 0.01      $ 0.57      $ (0.01
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 0.60      $ 0.39      $ 1.72      $ 0.82   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted per share amounts:

       

Income from continuing operations

  $ 0.60      $ 0.38      $ 1.14      $ 0.83   

Income (loss) from discontinued operations

  $ (0.00   $ 0.01      $ 0.57      $ (0.01
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 0.60      $ 0.39      $ 1.71      $ 0.82   
 

 

 

   

 

 

   

 

 

   

 

 

 

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:

 

    Three Months Ended     Six Months Ended  
    July 2, 2011     July 3, 2010     July 2, 2011     July 3, 2010  

Potentially dilutive shares

    1,436,000        1,928,000        1,437,000        1,908,000   

 

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Table of Contents

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      Six Months Ended  
     July 2, 2011      July 3, 2010      July 2, 2011      July 3, 2010  

Cost of sales

   $ 299       $ 233       $ 537       $ 420   

Selling and marketing

     264         355         774         546   

Research and development

     347         345         694         661   

General and administrative

     2,570         1,452         4,945         2,712   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total compensation

     3,480         2,385         6,950         4,339   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income tax benefit

   $ 1,201       $ 823       $ 2,398       $ 1,497   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash flows resulting from the tax benefits from tax deductions in excess of the compensation cost recognized (excess tax benefits) are classified as financing cash flows in the statement of cash flows. The tax benefits classified as financing cash flows for the six months ended July 2, 2011 was $1,234,000, and for the six months ended July 3, 2010 was $16,000.

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:

 

     Six Months Ended  
     July 2, 2011     July 3, 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

   $ 5,347,000      $ 6,527,000   

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

   $ 14.39      $ 10.65   

SAR activity was as follows:

 

     Six Months Ended July 2, 2011  

SARs

   Shares     Weighted-Average
Exercise Price
 

Outstanding at beginning of year

     1,234,787      $ 23.82   

Granted

     371,551        41.51   

Exercised

     (74,117     22.01   

Forfeited

     (210,841     24.36   

Expired

     (273     19.56   
  

 

 

   

 

 

 

Outstanding at end of period

     1,321,107      $ 28.81   
  

 

 

   

 

 

 

Exercisable at end of period

     318,637      $ 23.19   
  

 

 

   

 

 

 

Intrinsic value of exercised SARs

   $ 1,411,000     
  

 

 

   

For the six months ended July 2, 2011, equity granted above includes SARs with respect to 371,551 shares of Zebra common stock.

 

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Table of Contents

The terms of the SARs are established under the 2006 Zebra Technologies Corporation Incentive Compensation Plan (the 2006 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 July 2, 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
 

$ 19.56-$19.56

     430,997       7.79 years    $ 19.56         191,840       $ 19.56   

$ 19.57-$27.50

     63,389       8.33 years      24.84         37,432         24.42   

$ 27.51-$27.82

     442,705       8.77 years      27.82         70,409         27.82   

$ 27.83-$39.19

     24,925       9.06 years      32.16         2,911         28.57   

$ 39.20-$42.36

     359,091       9.80 years      41.61         16,045         42.36   
  

 

 

          

 

 

    
     1,321,107               318,637      
  

 

 

          

 

 

    

 

     Outstanding      Exercisable  

Aggregate intrinsic value

   $ 14,761,000       $ 5,208,000   

Weighted-average remaining contractual term

     8.7 years         8.2 years   

Stock option activity was as follows:

 

     Six Months Ended July 2, 2011  

Options

   Shares     Weighted-Average
Exercise Price
 

Outstanding at beginning of year

     2,340,959      $ 37.36   

Granted

     0        0.00   

Exercised

     (348,332     25.87   

Forfeited

     (53,802     32.36   

Expired

     (45,009     39.51   
  

 

 

   

 

 

 

Outstanding at end of period

     1,893,816      $ 39.55   
  

 

 

   

 

 

 

Exercisable at end of period

     1,734,673      $ 39.94   
  

 

 

   

 

 

 

Intrinsic value of exercised options

   $ 5,192,000     
  

 

 

   

The following table summarizes information about stock options outstanding at July 2, 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-$35.75

     378,715       2.82 years    $ 26.81         338,734       $ 26.55   

$ 35.76-$37.20

     399,652       6.61 years      36.60         300,114         36.60   

$ 37.21-$43.35

     512,947       5.34 years      41.82         493,323         41.83   

$ 43.36-$47.12

     444,629       3.50 years      46.21         444,629         46.21   

$ 47.13-$53.92

     157,873       3.61 years      51.41         157,873         51.41   
  

 

 

          

 

 

    
     1,893,816               1,734,673      
  

 

 

          

 

 

    

 

     Outstanding      Exercisable  

Aggregate intrinsic value

   $ 5,903,000       $ 5,204,000   

Weighted-average remaining contractual term

     4.5 years         4.3 years   

 

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Table of Contents

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

 

     Six Months Ended July 2, 2011  

Restricted Stock Awards

   Shares     Weighted-Average
Grant Date Fair Value
 

Outstanding at beginning of year

     844,686      $ 25.46   

Granted

     209,465        41.53   

Vested

     (195,071     30.24   

Forfeited

     (10,212     28.83   
  

 

 

   

 

 

 

Outstanding at end of period

     848,868      $ 28.29   
  

 

 

   

 

 

 

For the six months ended July 2, 2011, shares of restricted stock awards granted totaled 209,465.

 

     As of
July 2, 2011
 

Awards granted under Zebra’s equity based compensation plans:

  

Unearned compensation costs related to awards granted

   $ 23,329,000   

Period expected to be recognized over

     2.7 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.

 

     Six Months Ended  
     July 2, 2011     July 3, 2010  

Fair market value

   $ 38.52      $ 26.79   

Option price

   $ 36.60      $ 25.45   

Expected dividend yield

     0     0

Expected volatility

     26     26

Risk free interest rate

     0.11     0.11

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.

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 six months ended July 2, 2011 and July 3, 2010, we made no accruals into income tax expense for any interest or penalties.

 

     Three Months Ended     Six Months Ended  
     July 2, 2011     July 3, 2010     July 2, 2011     July 3, 2010  

Effective tax rate

     28.3     31.8     30.2     27.9

Zebra’s effective tax rate for the first quarter of 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 for the first six months of 2010 by approximately 4.2%. Zebra’s effective rate has decreased slightly in 2011 due to higher profits in lower rate international jurisdictions.

 

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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):

 

     Three Months Ended     Six Months Ended  
     July 2,
2011
    July 3,
2010
    July 2,
2011
    July 3,
2010
 

Net income

   $ 32,964      $ 22,677      $ 94,598      $ 47,410   

Other comprehensive income (loss):

        

Foreign currency translation adjustment

     (247     (967     (802     (1,410

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

     (21     129        (2,777     129   

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

     347        205        333        (42
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 33,043      $ 22,044      $ 91,352      $ 46,087   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Three Months Ended      Six Months Ended  
     July 2,
2011
    July 3,
2010
     July 2,
2011
    July 3,
2010
 

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

         

Gross

   $ (34   $ 207       $ (4,453   $ 207   

Income tax (benefit)

     (13     78         (1,676     78   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net

   $ (21   $ 129       $ (2,777   $ 129   
  

 

 

   

 

 

    

 

 

   

 

 

 

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

         

Gross

   $ 556      $ 328       $ 534      $ (68

Income tax (benefit)

     209        123         201        (26
  

 

 

   

 

 

    

 

 

   

 

 

 

Net

   $ 347      $ 205       $ 333      $ (42
  

 

 

   

 

 

    

 

 

   

 

 

 

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

 

     As of  
     July 2,
2011
    December 31,
2010
 

Foreign currency translation adjustments

   $ (9,077   $ (8,275
  

 

 

   

 

 

 

Unrealized gains and (losses) on hedging transactions:

    

Gross

   $ (5,976   $ (1,523

Income tax (benefit)

     (2,249     (573
  

 

 

   

 

 

 

Net

   $ (3,727   $ (950
  

 

 

   

 

 

 

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

    

Gross

   $ 334      $ (200

Income tax (benefit)

     125        (76
  

 

 

   

 

 

 

Net

   $ 209      $ (124
  

 

 

   

 

 

 

 

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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.

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.

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 recorded a short-term receivable from buyer in the amount of $13,790,000, which is due 12 months from the sale date. Zebra also recorded a long-term receivable from the buyer in the amount of $13,790,000, which is due 18 months from the transaction date. These receivables represent funds held in escrow that are subject to adjustment according to terms of the sales 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 proceeds received from the buyer were immaterial. The accounting for the proveo transaction will be included in the 2011 third quarter results.

Beginning in the first quarter of 2011, Zebra is required to report the results of these businesses as discontinued operations. The amounts presented below for discontinued operations include Navis and proveo operations 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.

 

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Table of Contents

The components of assets and liabilities of discontinued operations in our unaudited consolidated balance sheet are as follows (in thousands):

 

    As of  
    July 2, 2011     December 31, 2010  

Assets:

   

Cash and cash equivalents

  $ 486      $ 1,301   

Accounts receivable, net

    299        24,003   

Inventories

    372        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

  $ 1,157      $ 148,169   
 

 

 

   

 

 

 

Liabilities:

   

Accounts payable

  $ 291      $ 726   

Accrued liabilities

    238        2,927   

Deferred revenue

    272        17,791   

Deferred rent

    0        199   

Other long-term liabilities

    0        184   
 

 

 

   

 

 

 

Liabilities of discontinued operations

  $ 801      $ 21,827   
 

 

 

   

 

 

 

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

 

    Three Months Ended     Six Months Ended  
    July 2, 2011     July 3, 2010     July 2, 2011     July 3, 2010  

Net sales

  $ 1,079      $ 17,176      $ 13,712      $ 31,632   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

    (1,097     833        (12,724     (436

Income tax benefit

    104        (341     1,105        114   

Gain on sale of discontinued operations

    788        0        68,001        0   

Income tax (expense) on sale

    0        0        (25,081     0   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations

  $ (205   $ 492      $ 31,301      $ (322
 

 

 

   

 

 

   

 

 

   

 

 

 

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

 

    Six Months Ended  
    July 2, 2011     July 3, 2010  

Cash flows from discontinued operations:

   

Net cash provided (used) by operating activities

  $ (827   $ (4,260

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

    12        2,979   
 

 

 

   

 

 

 

Net decrease in cash and cash equivalents

  $ (815   $ (1,281

Cash and cash equivalents at beginning of period

  $ 1,301      $ 1,693   
 

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 486      $ 412   
 

 

 

   

 

 

 

 

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

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

Consolidated Results of Operations

(Amounts in thousands, except percentages):

 

    Three Months Ended              
    July 2,
2011
    July 3,
2010
    Percent
Change
    Percent of
Net Sales - 2011
    Percent of
Net Sales - 2010
 

Net Sales

         

Tangible products

  $ 232,762      $ 207,748        12.0        94.8        95.1   

Service & software

    12,779        10,810        18.2        5.2        4.9   
 

 

 

   

 

 

     

 

 

   

 

 

 

Total net sales

    245,541        218,558        12.3        100.0        100.0   

Cost of Sales

         

Tangible products

    117,732        114,081        3.2        47.9        52.2   

Service & software

    6,111        5,068        20.6        2.5        2.3   
 

 

 

   

 

 

     

 

 

   

 

 

 

Total cost of sales

    123,843        119,149        3.9        50.4        54.5   
 

 

 

   

 

 

     

 

 

   

 

 

 

Gross profit

    121,698        99,409        22.4        49.6        45.5   

Operating expenses

    75,027        67,496        11.2        30.6        30.9   
 

 

 

   

 

 

     

 

 

   

 

 

 

Operating income

    46,671        31,913        46.2        19.0        14.6   

Other income (expense)

    (420     603        (169.7     (0.2     0.3   
 

 

 

   

 

 

     

 

 

   

 

 

 

Income from continuing operations before income taxes

    46,251        32,516        NM        18.8        14.9   

Income taxes

    13,082        10,331        26.6        5.3        4.7   
 

 

 

   

 

 

     

 

 

   

 

 

 

Income from continuing operations

    33,169        22,185        49.5        13.5        10.2   

Income (loss) discontinued operations, net of tax

    (205     492        NM        (0.1     0.2   
 

 

 

   

 

 

     

 

 

   

 

 

 

Net Income

  $ 32,964      $ 22,677        45.4        13.4        10.4   
 

 

 

   

 

 

     

 

 

   

 

 

 

Diluted earnings per share

         

Income from continuing operations

  $ 0.60      $ 0.38        57.9       

Income (loss) from discontinued operations

    (0.00     0.01        NM       
         

Net income

  $ 0.60      $ 0.39        53.8       
 

 

 

   

 

 

       

Consolidated Results of Operations – Second quarter

Sales

Net sales for the second quarter of 2011, compared with the corresponding 2010 quarter, increased 12.3% 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 second quarter of 2011 was the sixth consecutive quarter of year-over-year growth. The increase in sales was largely attributable to 11.6% 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 2.1% from the second quarter of 2010.

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

 

    Three Months Ended              

Product Category

  July 2,
2011
    July 3,
2010
    Percent
Change
    Percent of
Net Sales - 2011
    Percent of
Net Sales - 2010
 

Hardware

  $ 181,758      $ 162,908        11.6        74.0        74.6   

Supplies

    49,578        43,573        13.8        20.2        19.9   

Service and software

    12,779        10,810        18.2        5.2        4.9   
 

 

 

   

 

 

     

 

 

   

 

 

 

Subtotal products

    244,115        217,291        12.3        99.4        99.4   

Shipping and handling

    1,426        1,267        12.5        0.6        0.6   
 

 

 

   

 

 

     

 

 

   

 

 

 

Total net sales

  $ 245,541      $ 218,558        12.3        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 have increased by 25% in the second quarter of 2011 over comparable 2010 sales in the regions targeted by Zebra for geographic expansion. Movements in foreign exchange rates increased sales by $9,518,000 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      Percent
Change
    Percent of
Net Sales - 2011
     Percent of
Net Sales - 2010
 

Geographic Region

   July 2,
2011
     July 3,
2010
         

Europe

   $ 85,391       $ 71,238         19.9        34.8         32.6   

Latin America

     24,065         19,224         25.2        9.8         8.8   

Asia-Pacific

     38,299         25,614         49.5        15.6         11.7   
  

 

 

    

 

 

      

 

 

    

 

 

 

Total International

     147,755         116,076         27.3        60.2         53.1   

North America

     97,786         102,482         (4.6     39.8         46.9   
  

 

 

    

 

 

      

 

 

    

 

 

 

Total net sales

   $ 245,541       $ 218,558         12.3        100.0         100.0   
  

 

 

    

 

 

      

 

 

    

 

 

 

Gross Profit

Gross profit increased 22.4% due to higher volumes and lower material and freight costs in 2011. Gross profit was affected by favorable foreign currency movements which increased second quarter gross profit by $8,316,000. The above factors contributed to the increase in gross margin from 45.5% to 49.6%.

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

 

     Three Months Ended  
     July 2, 2011      July 3, 2010      Percent Change  

Total printers shipped

     276,563         270,799         2.1   

Average selling price of printers shipped

   $ 558       $ 506         10.4   

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

Operating Expenses

Operating expenses for the quarter increased 11.2% across all expense categories. Several categories accounted for these increases, including compensation costs, which include salaries, benefits, stock option expense, and commissions. These increases are primarily related to more employees in 2011 versus 2010. Outside professional services and travel and entertainment expenses also increased over 2010 levels. 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):

 

     Three Months Ended      Percent
Change
    Percent of
Net  Sales 2011
     Percent of
Net  Sales 2010
 

Operating Expenses

   July 2,
2011
     July 3,
2010
         

Selling and marketing

   $ 30,950       $ 27,682         11.8        12.6         12.7   

Research and development

     22,487         20,653         8.9        9.2         9.5   

General and administrative

     20,688         17,955         15.2        8.4         8.2   

Amortization of intangible assets

     836         740         13.0        0.3         0.3   

Exit, restructuring and integration costs

     66         466         (85.8     0.1         0.2   
  

 

 

    

 

 

      

 

 

    

 

 

 

Total operating expenses

   $ 75,027       $ 67,496         11.2        30.6         30.9   
  

 

 

    

 

 

      

 

 

    

 

 

 

 

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Table of Contents

Operating Income

The operating income increase for the second quarter of 2011was the result of increased sales and gross profit as noted above.

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 recorded a foreign exchange gain in 2010 as the U.S. dollar strengthened against the euro during the second quarter of 2010 versus a loss in 2011.

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

 

     Three Months Ended  
     July 2,     July 3,  
     2011     2010  

Investment income

   $ 656      $ 634   

Foreign exchange gain (loss)

     (833     424   

Other, net

     (243     (455
  

 

 

   

 

 

 

Total other income (expense)

   $ (420   $ 603   
  

 

 

   

 

 

 

Income Taxes

The effective income tax rate for the second quarter of 2011 was 28.3% compared with 31.8% for the second quarter of 2010. Zebra’s effective rate has decreased slightly in 2011 due to higher profits in lower rate international jurisdictions.

Results of Operations: Six months ended July 2, 2011 versus six months ended July 3, 2010

Consolidated Results of Operations

(Amounts in thousands, except percentages):

 

     Six Months Ended               
     July 2,
2011
    July 3,
2010
    Percent
Change
     Percent of
Net Sales - 2011
    Percent of
Net Sales - 2010
 

Net Sales

           

Tangible products

   $ 458,882      $ 409,211        12.1         95.0        95.0   

Service & software

     23,960        21,322        12.4         5.0        5.0   
  

 

 

   

 

 

      

 

 

   

 

 

 

Total net sales

     482,842        430,533        12.1         100.0        100.0   

Cost of Sales

           

Tangible products

     228,513        223,156        2.4         47.3        51.8   

Service & software

     12,633        10,205        23.8         2.6        2.4   
  

 

 

   

 

 

      

 

 

   

 

 

 

Total cost of sales

     241,146        233,361        3.3         49.9        54.2   
  

 

 

   

 

 

      

 

 

   

 

 

 

Gross profit

     241,696        197,172        22.6         50.1        45.8   

Operating expenses

     150,663        132,318        13.9         31.2        30.7   
  

 

 

   

 

 

      

 

 

   

 

 

 

Operating income

     91,033        64,854        40.4         18.9        15.1   

Other income (expense)

     (408     1,343        NM         (0.1     0.3   
  

 

 

   

 

 

      

 

 

   

 

 

 

Income from continuing operations before income taxes

     90,625        66,197        36.9         18.8        15.4   

Income taxes

     27,328        18,465        48.0         5.7        4.3   
  

 

 

   

 

 

      

 

 

   

 

 

 

Income from continuing operations

     63,297        47,732        32.6         13.1        11.1   

Income (loss) discontinued operations, net of tax

   $ 31,301      $ (322     NM         6.5        (0.1
  

 

 

   

 

 

      

 

 

   

 

 

 

Net Income

   $ 94,598      $ 47,410        99.5         19.6        11.0   
  

 

 

   

 

 

      

 

 

   

 

 

 

Diluted earnings per share

           

Income from continuing operations

   $ 1.14      $ 0.83        37.3        

Income (loss) from discontinued operations

     0.57        (0.01     NM        
  

 

 

   

 

 

        

Net income

   $ 1.71      $ 0.82        108.5        
  

 

 

   

 

 

        

 

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Consolidated Results of Operations – Year to date

Sales

Net sales for the first six months of 2011 compared with the same 2010 period increased 12.1% due to a broad-based increase in demand for Zebra products and global economic recovery. 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 8.8% for the first six months of 2011 compared to levels in 2010.

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

 

     Six Months Ended                

Product Category

   July 2,
2011
     July 3,
2010
     Percent
Change
     Percent of
Net Sales - 2011
     Percent of
Net Sales - 2010
 

Hardware

   $ 361,895       $ 322,317         12.3         75.0         74.8   

Supplies

     94,213         84,270         11.8         19.5         19.6   

Service and software

     23,960         21,322         12.4         4.9         5.0   
  

 

 

    

 

 

       

 

 

    

 

 

 

Subtotal products

     480,068         427,909         12.2         99.4         99.4   

Shipping and handling

     2,774         2,624         5.7         0.6         0.6   
  

 

 

    

 

 

       

 

 

    

 

 

 

Total net sales

   $ 482,842       $ 430,533         12.1         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 $9,132,000 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):

 

     Six Months Ended      Percent
Change
     Percent of
Net Sales - 2011
     Percent of
Net Sales - 2010
 

Geographic Region

   July 2,
2011
     July 3,
2010
          

Europe, Middle East and Africa

   $ 169,621       $ 147,555         15.0         35.1         34.3   

Latin America

     44,169         38,706         14.1         9.1         9.0   

Asia-Pacific

     70,794         48,734         45.3         14.7         11.3   
  

 

 

    

 

 

       

 

 

    

 

 

 

Total International

     284,584         234,995         21.1         58.9         54.6   

North America

     198,258         195,538         1.4         41.1         45.4   
  

 

 

    

 

 

       

 

 

    

 

 

 

Total net sales

   $ 482,842       $ 430,533         12.1         100.0         100.0   
  

 

 

    

 

 

       

 

 

    

 

 

 

Gross Profit

Gross profit increased 22.6% 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 $8,022,000. The above factors contributed to the increase in gross margin from 45.8% to 50.1%.

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

 

     Six Months Ended  
     July 2, 2011      July 3, 2010      Percent Change  

Total printers shipped

     560,740         515,185         8.8   

Average selling price of printers shipped

   $ 541       $ 525         3.0   

Operating Expenses

Operating expenses for the six-month period increased 13.9% due to greater selling and marketing, research and development, and general and administrative expenses. Several categories accounted for these increases, including compensation costs, project expenses, outside professional services, travel and entertainment, information systems expenses and rent expense. Exit costs decreased $280,000 for the first six months of 2011 as compared to 2010. Restructuring costs in 2011 relate to the consolidation of our Location Solutions product line and remaining administrative and accounting operations following the Navis divestiture in March 2011.

 

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

 

     Six Months Ended      Percent
Change
    Percent of
Net  Sales 2011
     Percent of
Net  Sales 2010
 

Operating Expenses

   July 2,
2011
     July 3,
2010
         

Selling and marketing

   $ 59,478       $ 52,355         13.6        12.3         12.2   

Research and development

     44,168         38,977         13.3        9.1         9.0   

General and administrative

     43,394         37,273         16.4        9.0         8.7   

Amortization of intangible assets

     1,671         1,481         12.8        0.4         0.3   

Exit, restructuring, and integration costs

     1,952         2,232         (12.5     0.4         0.5   
  

 

 

    

 

 

      

 

 

    

 

 

 

Total operating expenses

   $ 150,663       $ 132,318         13.9        31.2         30.7   

Other Income

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

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

 

     Six Months Ended  
     July 2,
2011
    July 3,
2010
 

Investment income

   $ 1,216      $ 1,476   

Foreign exchange gain (loss)

     (1,127     592   

Other, net

     (497     (725
  

 

 

   

 

 

 

Total other income (loss)

   $ (408   $ 1,343   
  

 

 

   

 

 

 

Operating Income (Loss)

The operating income increase for the first six months of 2010 was the result of increased sales and gross profit as noted above.

Income Taxes

The effective income tax rate for the first six months of 2011 was 30.2% compared with an income tax rate of 27.9% for the first six months of 2010. Zebra’s effective tax rate for the six months ended July 3, 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 actually decreased slightly in 2011 due to higher profits in lower rate international jurisdictions.

Liquidity and Capital Resources

(Amounts in thousands, except percentages):

 

     Six Months Ended  

Rate of Return Analysis:

   July 2,
2011
    July 3,
2010
 

Average cash and marketable securities balances

   $ 300,738      $ 249,905   

Annualized rate of return

     0.8     1.2

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

As of July 2, 2011, Zebra had $342,878,000 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 six months of 2011 include the following (changes below include the impact of foreign currency):

 

   

Accounts receivable decreased $5,862,000 due to the sale of Navis.

 

   

Inventories increased $4,704,000 due to an increase in raw materials.

 

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Accounts payable decreased $4,695,000 due to the timing of payments at period end.

 

   

Accrued liabilities decreased $13,614,000 due to the payout of benefit accruals.

 

   

Deferred revenue decreased $14,738,000 due to the divestiture of Navis.

 

   

Income taxes payable decreased $4,333,000 due to the timing of tax payments.

 

   

Purchases of property and equipment totaled $11,232,000.

 

   

Proceeds from the sale of Navis provided $161,008,000.

 

   

Net sales of investments totaled $183,485,000.

 

   

Purchases of treasury shares totaled $82,388,000.

 

   

Stock option exercises and purchases under the stock purchase plan contributed $8,096,000.

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

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 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.

 

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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.

Investments and Marketable Securities

Investments and marketable securities at July 2, 2011, consisted of the following:

 

U.S. government and agency securities

     11.1

Obligations of government sponsored enterprises (1)

     1.5

State and municipal bonds

     60.8

Corporate securities

     26.6

 

(1) Includes investments in notes issued by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association 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 July 2, 2011, Zebra’s investments in marketable debt securities are classified as available-for-sale. In addition, as of July 2, 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.

 

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Table of Contents

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 2.4% of total accounts receivable. Accounts receivable reserves as of July 2, 2011, were $1,401,000, or 0.9% 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 July 2, 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 7.0% to 11.4% of gross inventory. As of July 2, 2011, inventory reserves were $12,399,000, or 9.5% 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 July 2, 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.

During the first quarter of 2011, Zebra announced its entry into an agreement to sell Navis and its decision to divest certain other operations. As a result, goodwill attributable to the former Zebra Enterprise Solutions (“ZES”) segment was allocated at the reporting unit level between continuing operations ($9,114,000) and discontinued operations ($72,795,000) based on the relative fair value of each reporting unit. 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,

 

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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”.

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.

 

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Net intangible assets, long-lived assets and goodwill amounted to $181,249,000 as of July 2, 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 six month periods ended July 2, 2011 and July 3, 2010, we did not accrue any interest or penalties into income tax expense.

 

     Six Months Ended  
     July 2,
2011
    July 3,
2010
 

Effective tax rate

     30.2     27.9

Zebra’s effective tax rate for the six months ended July 3, 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 actually 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     Six Months Ended  
     July 2,
2011
    July 3,
2010
    July 2,
2011
    July 3,
2010
 

Customer A

     18.9     19.8     19.2     19.1

Customer B

     10.4     10.0     10.7     9.1

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

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,

 

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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 July 2, 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 six 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.

The recent natural disaster in Japan may cause supply disruptions that could adversely affect Zebra’s business and results of operations.

As widely reported, a powerful earthquake centered off the northeastern coast of Japan on March 11, 2011, resulted in the loss of many lives, wide-spread damage to and destruction of property, disruption of electric power, and the release of radiation from a crippled nuclear power plant. This devastation has disrupted the operations to varying degrees of companies with business activity in the affected region. We are unable to predict at this time whether, to what extent, or the duration any of these disruptions will have on our ability to maintain adequate supplies of components used in the manufacture of our products to meet customer demand. The consequences of this unfortunate natural disaster, however, may have a material adverse effect on Zebra’s business and results of operations.

 

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

Treasury Shares

During the second quarter of 2011, Zebra purchased 1,000,000 shares of Zebra’s Class A Common Stock at a weighted average share price of $40.82 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
 

April 2011 (April 3 – April 30)

     103,905       $ 36.96         103,905         646,095   

May 2011 (May 1 – May 28)

     377,436       $ 41.56         377,436         3,268,659   

June 2011 (May 29 – July 2)

     518,659       $ 41.06         518,659         2,750,000   

 

(1) On August 3, 2010, Zebra’s Board authorized the purchase of up to an additional 3,000,000 shares under our stock repurchase program. This authorization does not have an expiration date.

 

(2) 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.

 

(3) During the second quarter, Zebra acquired 16,303 shares of Zebra Class A Common Stock through the withholding of shares necessary to satisfy tax withholding obligations upon the vesting of restricted stock awards. These shares were acquired at an average price of $38.27 per share.

 

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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 April 2, 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: August 5, 2011   By:  

  /s/ Anders Gustafsson

      Anders Gustafsson
      Chief Executive Officer
Date: August 5, 2011   By:  

  /s/ Michael C. Smiley

      Michael C. Smiley
      Chief Financial Officer

 

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