TMCnet News
ZEBRA TECHNOLOGIES CORP - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Results of Operations: Fourth Quarter of 2012 versus Fourth Quarter of 2011 Consolidated Results of Operations (Amounts in thousands, except percentages) Three Months Ended Percent of Percent of December 31, December 31, Percent Net Sales - Net Sales - 2012 2011 Change 2012 2011 Net Sales Tangible products $ 241,257 $ 235,714 2.4 95.3 95.3 Service & software 11,922 11,594 2.8 4.7 4.7 Total net sales 253,179 247,308 2.4 100.0 100.0 Cost of Sales Tangible products 121,869 118,792 2.6 48.1 48.1 Service & software 6,850 6,996 (2.1) 2.7 2.8 Total cost of sales 128,719 125,788 2.3 50.8 50.9 Gross profit 124,460 121,520 2.4 49.2 49.1 Operating expenses 80,342 79,397 1.2 31.7 32.1 Operating income 44,118 42,123 4.7 17.5 17.0 Other income (expense) (56) (1,011) (94.5) (0.1) (0.4) Income from continuing operations before income taxes 44,062 41,112 7.2 17.4 16.6 Income taxes 9,263 8,253 12.2 3.7 3.3 Income from continuing operations 34,799 32,859 5.9 13.7 13.3 Income from discontinued operations, net of tax 191 2,185 (91.3) 0.1 0.9 Net income $ 34,990 $ 35,044 (0.2) 13.8 14.2 Diluted earnings per share: Income from continuing operations $ 0.68 $ 0.63 7.9 Income from discontinued operations 0.00 0.04 100.0 Net income $ 0.68 $ 0.67 1.5 Consolidated Results of Operations - Fourth quarter Sales Net sales for the fourth quarter of 2012 compared with the 2011 quarter increased 2.4% primarily due to increased sales in supplies and aftermarket services. Printer unit volume increased 2.9% for 2012 compared to 2011 principally from unit volume increases in desktop and tabletop printers. Sales by product category were as follows (amounts in thousands, except percentages): Three Months Ended December 31, December 31, Percent Percent of Percent of Product category 2012 2011 Change Net Sales 2012 Net Sales 2011 Hardware $ 182,267 $ 188,198 (3.2) 72.0 76.1 Supplies 57,607 46,135 24.9 22.8 18.6 Service and software 11,922 11,594 2.8 4.7 4.7 Subtotal products 251,796 245,927 2.4 99.5 99.4 Shipping and handling 1,383 1,381 0.1 0.5 0.6 Total net sales $ 253,179 $ 247,308 2.4 100.0 100.0 21 -------------------------------------------------------------------------------- Table of Contents Sales declines in Europe, Middle East and Africa, and Asia Pacific, primarily from a challenged business environment, were offset by increased sales in North America and Latin America. Sales increased in Latin America in part from improved geographic coverage, with notable increases in supplies, tabletop, desktop, and mobile printers. Sales in North America increased due to increased sales in supplies and aftermarket services. Zebra continues to build a broader base of customers to penetrate targeted industries more deeply. Movements in foreign exchange rates decreased sales by $1,858,000 in the Europe, Middle East and Africa region for the quarter, due to a weaker euro against the U.S. dollar compared to the same period in the prior year. Sales to customers by geographic region were as follows (in thousands, except percentages): Three Months Ended December 31, December 31, Percent Percent of Percent of Geographic region 2012 2011 Change Net Sales 2012 Net Sales 2011 Europe, Middle East and Africa $ 83,355 $ 88,360 (5.7) 32.9 35.7 Latin America 26,255 21,578 21.7 10.4 8.7 Asia-Pacific 31,665 32,470 (2.5) 12.5 13.1 Total International 141,275 142,408 (0.8) 55.8 57.5 North America 111,904 104,900 6.7 44.2 42.5 Total net sales $ 253,179 $ 247,308 2.4 100.0 100.0 Gross profit Gross profit increased 2.4% reflecting reduced overhead and freight costs, partially offset by unfavorable movements in foreign exchange rates and product mix. Unfavorable foreign currency movements decreased fourth quarter gross profit by $1,806,000. As a percentage of sales, gross margin improved from 49.1% to 49.2%. Printer unit volumes and average selling price information is summarized below: Three Months Ended December 31, December 31, Percent 2012 2011 Change Total printers shipped 321,314 312,409 2.9 Average selling price of printers shipped $ 477 $ 506 (5.7) For the fourth quarter of 2012, unit volumes increased in tabletop and desktop printers. Desktop printers achieved record sales. The decrease in average selling price is a result of a change in product mix toward lower priced products in the 2012 quarter compared to the 2011 quarter. Operating expenses Operating expenses are summarized below (in thousands, except percentages): Three Months Ended December 31, December 31, Percent Percent of Percent of Operating expenses 2012 2011 Change Net Sales 2012 Net Sales 2011 Selling and marketing $ 33,313 $ 36,377 (8.4) 13.2 14.7 Research and development 22,605 23,174 (2.5) 8.9 9.4 General and administrative 20,964 18,973 10.5 8.3 7.7 Amortization of intangible assets 1,463 806 81.5 0.6 0.3 Acquisition costs 1,037 116 N/M 0.4 0.0 Exit and restructuring costs 960 (49) N/M 0.4 0.0 Total operating expenses $ 80,342 $ 79,397 1.2 31.7 32.1 Operating expenses for the quarter increased 1.2% due mainly to higher general and administrative expenses, amortization and acquisition expenses, and exit and restructuring costs. Compensation costs and depreciation increased over 2011 levels. Amortization expense increases are primarily related to the intangibles acquired with the LaserBand acquisition. Acquisition costs relate to investigated and completed merger and acquisition activity during the period. Exit and restructuring costs in 2012 relate to the restructuring of the location solutions business management structure. 22-------------------------------------------------------------------------------- Table of Contents Other income (expense) Zebra's non-operating income and expense items are summarized in the following table (in thousands): Three Months Ended December 31, December 31, 2012 2011 Investment income $ 526 $ 594 Foreign exchange loss (5) (706) Other, net (577) (899) Total other income (expense) $ (56) $ (1,011) Other expense decreased in the fourth quarter of 2012 as a result of decreases in foreign exchange losses. Operating income Operating income for the fourth quarter of 2012, compared to the same period in 2011, increased 4.7%. See comments above for explanation of changes in individual categories. Income taxes The effective income tax rate for the fourth quarter of 2012 was 21.0% compared with 20.1% for the same quarter in the prior year. The fourth quarter 2012 effective tax rate increased slightly due to an increase in income in higher rate tax jurisdictions in 2012 when compared to the prior years quarter. The increase in 2012 was offset by an August 2012 decrease in the UK statutory tax rate from 25.5% to 24.5%. During 2012 Zebra implemented a new international holding company structure to facilitate the investment of overseas cash and international acquisitions. This new structure has also decreased our international income taxes. In addition, the fourth quarter of 2012 benefitted from one-time adjustments resulting from amended tax returns for 2010 and prior years. Income from discontinued operations The income in the fourth quarter of 2012 is related to a reversal of amounts previously reserved, which were related to the finalization of the accounting and taxes related to discontinued operations transactions during 2011. 23-------------------------------------------------------------------------------- Table of Contents Results of Operations: Year ended December 31, 2012 versus Year ended December 31, 2011 Consolidated Results of Operations (Amounts in thousands, except percentages) Year Ended December 31, December 31, Percent of Percent of Percent Net Sales - Net Sales - 2012 2011 Change 2012 2011 Net Sales Tangible products $ 948,227 $ 936,282 1.3 95.2 95.2 Service & software 47,941 47,206 1.6 4.8 4.8 Total net sales 996,168 983,488 1.3 100.0 100.0 Cost of Sales Tangible products 479,633 469,834 2.1 48.1 47.8 Service & software 24,891 26,885 (7.4) 2.5 2.7 Total cost of sales 504,524 496,719 1.6 50.6 50.5 Gross profit 491,644 486,769 1.0 49.4 49.5 Operating expenses 327,293 304,733 7.4 32.9 31.0 Operating income 164,351 182,036 (9.7) 16.5 18.5 Other income (expense) (177) (2,317) (92.4) (0.0) (0.2) Income from continuing operations before income taxes 164,174 179,719 (8.6) 16.5 18.3 Income taxes 42,277 49,376 (14.4) 4.3 5.0 Income from continuing operations 121,897 130,343 (6.5) 12.2 13.3 Income from discontinued operations, net of tax 1,007 44,300 (97.7) 0.1 4.5 Net income $ 122,904 $ 174,643 (29.6) 12.3 17.8 Diluted earnings per share: Income from continuing operations $ 2.35 $ 2.40 (2.1) Income from discontinued operations 0.02 0.82 (97.6) Net income $ 2.37 $ 3.22 (26.4) Consolidated Results of Operations - Full Year Net sales for 2012 compared with 2011 increased 1.3%. This increase is primarily due to growth in sales of supplies, including the impact of the acquisition of LaserBand LLC in July 2012. Printer unit volumes increased 6.0% for 2012 compared to 2011 due to volume increases in desktop, mobile and card printers. Movement towards lower-priced printers partially offset unit volume increases. Sales by product category were as follows (amounts in thousands, except percentages): Year Ended Percent of Percent of December 31, December 31, Percent Net Sales Net Sales Product category 2012 2011 Change 2012 2011 Hardware $ 730,489 $ 743,308 (1.7) 73.4 75.5 Supplies 212,499 187,457 13.4 21.3 19.1 Service and software 47,941 47,206 1.6 4.8 4.8 Subtotal products 990,929 977,971 1.3 99.5 99.4 Shipping and handling 5,239 5,517 (5.0) 0.5 0.6 Total net sales $ 996,168 $ 983,488 1.3 100.0 100.0 Sales increased in Latin America due to improved geographic coverage with notable increases in supplies, mobile, and card printer sales compared to 2011. Sales in North America increased due to increased sales of supplies and continued demand for desktop, card and tabletop printers. Zebra continues to build a broader base of customers to penetrate targeted industries more deeply. Movements in foreign exchange rates decreased sales by $12,139,000 in the Europe, Middle East and Africa regions due principally to a weaker euro against the U.S. dollar. 24 -------------------------------------------------------------------------------- Table of Contents Sales to customers by geographic region were as follows (in thousands, except percentages): Year Ended December 31, December 31, Percent Percent of Percent of Geographic region 2012 2011 Change Net Sales 2012 Net Sales 2011 Europe, Middle East and Africa $ 322,970 $ 342,578 (5.7) 32.4 34.8 Latin America 100,101 89,715 11.6 10.0 9.1 Asia-Pacific 137,577 141,987 (3.1) 13.8 14.5 Total International 560,648 574,280 (2.4) 56.2 58.4 North America 435,520 409,208 6.4 43.8 41.6 Total net sales $ 996,168 $ 983,488 1.3 100.0 100.0 Gross profit Gross profit increased 1.0% due to higher volumes and lower material costs. Lower freight costs in 2012 of $5,042,000 versus 2011 helped improve gross profit while unfavorable movements in foreign currency decreased gross profit by $9,923,000. The above factors contributed to the slight decrease in gross margin from 49.5% to 49.4%. Printer unit volumes and average selling price information is summarized below: Year Ended December 31, December 31, Percent 2012 2011 Change Total printers shipped 1,260,141 1,188,892 6.0 Average selling price of printers shipped $ 485 $ 527 (7.9) Product unit volumes increased 6.0% in 2012 over the prior year. This was due to increased volumes in desktop, mobile and card printers. The average selling price reflects a change in product mix toward lower priced products from year to year. Operating expenses Operating expenses are summarized below (in thousands, except percentages): Year Ended December 31, December 31, Percent Percent of Percent of Operating Expenses 2012 2011 Change Net Sales 2012 Net Sales 2011 Selling and marketing $ 129,906 $ 127,797 1.7 13.0 13.1 Research and development 87,364 89,926 (2.8) 8.8 9.1 General and administrative 92,167 81,345 13.3 9.3 8.3 Amortization of intangible assets 4,673 3,320 40.8 0.5 0.3 Acquisition costs 3,109 304 N/M 0.3 0.0 Exit and restructuring costs 960 2,041 (53.0) 0.1 0.2 Asset impairment charge 9,114 0 N/M 0.9 0.0 Total operating expenses $ 327,293 $ 304,733 7.4 32.9 31.0 Operating expenses for 2012 increased 7.4%. This is primarily due to greater selling and marketing and general and administrative expenses. The asset impairment charge was accounted for 40.4% of the total increase in 2012. Several categories accounted for these increases, including compensation costs, outside professional services, rent, depreciation and information systems expenses. Acquisition costs are related to investigated and completed acquisitions during the period. Exit and restructuring costs in 2012 relate to the restructuring of the location solutions business management structure while costs in 2011 relate to the relocation and consolidation of administrative, accounting and distribution functions of our location solutions operations to Illinois. The asset impairment charge in 2012 relates to the goodwill associated with Zebra's smaller reporting unit. 25 -------------------------------------------------------------------------------- Table of Contents Selling and marketing expenses Selling and marketing expenses are summarized below (in thousands): Year Ended December 31, December 31, 2012 2011 Increase / (Decrease) Payroll and benefit costs $ 78,894 $ 75,436 $ 3,458 Business development 23,434 23,022 412 Travel and entertainment expenses 8,451 8,068 383 Offsite meetings 1,141 3,362 (2,221) Other changes 17,986 17,909 77 Total selling and marketing expenses $ 129,906 $ 127,797 $ 2,109 Selling and marketing expenses were higher in 2012 primarily due to increased payroll and benefit costs related to the addition of more sales-related Zebra personnel in geographic regions with high-growth opportunities. Payroll and benefit cost increases include salaries, commissions, benefits, and payroll taxes. Other selling and marketing expense categories also increased over 2011 levels due to higher expenses relating to the addition of Zebra sales representatives to expand Zebra's global reach into new developing geographic regions. Research and development costs The development of new products and enhancement of existing products are important to Zebra's business and growth prospects. To maintain and build our product pipeline, we continue to make investments in research and development. In 2012 we introduced 14 new printer related products and 19 location software and hardware releases. Zebra introduced its latest generation of print engine during the year which enables Zebra to expand into new markets. The ZE500 is designed for reliable operations in mission critical applications and is well suited for use in the food and beverage industries and other environments where dust and moisture can create printing challenges. Zebra has enhanced its printers for cloud based connectivity through Zebra's Link-OS, an ecosystem enabled by Zebra's printer architecture which makes Zebra printers significantly easier to integrate, manage and use in a company's operations, with greater capabilities for customization with the development of specialized apps. Quarterly product development expenses fluctuate depending on the status of ongoing projects. We are committed to a long-term strategy of significant investment in product development. Research and development costs are summarized below (in thousands): Year Ended December 31, December 31, 2012 201110 Increase / (Decrease) Payroll and benefit costs $ 58,464 $ 59,087 $ (623) Project expenses 5,710 7,838 (2,128) Other changes 23,190 23,001 189 Total research and development costs $ 87,364 $ 89,926 $ (2,562) The decreases in research and development costs relate to decreased payroll and benefit costs and project expenses. Project expenses decreased due primarily due to the completion on new mid-range and print engine products in 2012. General and administrative expenses General and administrative expenses are summarized below (in thousands): Year Ended December 31, December 31, 2012 2011 Increase / (Decrease) Payroll and benefit costs $ 46,606 $ 40,975 $ 5,631 Professional services expenses 13,890 10,544 3,346 Information systems expenses 13,046 12,138 908 Other changes 18,625 17,688 937 Total general and administrative expenses $ 92,167 $ 81,345 $ 10,822 26 -------------------------------------------------------------------------------- Table of Contents General and administrative expenses increased over 2011due to larger incentive costs related to merit increases and equity incentives. Professional fees increased slightly due to the acquisition of LaserBand and other long-term investments in 2012. Professional services were also utilized for the implementation of Zebra's new international structure and to expand geographic regions. Information systems costs increased slightly in the maintenance and service contracts area. Amortization of intangible assets Amortization of intangible assets increased $1,353,000 during 2012 due to additions of current technology, patent and patent rights and customer relationships during the year as a result of the acquisition of LaserBand. Exit and restructuring costs Exit and restructuring costs in 2012 of $960,000 relate to the restructuring of our location solutions business management structure. Costs in 2011 of $2,041,000 relate to the consolidation of our location solutions operations following the divestiture of Navis in the first quarter of 2011. Operating income The operating income decrease for 2012 was the result of operating expense increases as noted above. Other income (expense) Zebra's non-operating income and expense items are summarized in the following table (in thousands): Year Ended December 31, December 31, 2012 2011 Investment income $ 2,485 $ 1,944 Foreign exchange loss (941 ) (2,006 ) Other, net (1,721 ) (2,255 ) Total other income (expense) $ (177 ) $ (2,317 ) Other expense decreased in 2012 as a result of decreases in foreign exchange losses. Year Ended December 31, December 31, Rate of return analysis: 2012 2011Average cash and marketable securities balances $ 360,385 $ 292,646 Annualized rate of return 0.7 % 0.7 % Investment income increased overall from higher cash and investment balances in 2012 versus 2011. Income taxes The effective income tax rate for 2012 was 25.8% compared with an income tax rate of 27.5% for 2011. During 2012 Zebra implemented a new international holding company structure to facilitate the investment of overseas cash and international acquisitions. This new structure also decreased our international income taxes. In addition, the UK statutory rate decreased from 25.5% to 24.5% in August 2012. These reductions were offset by a discrete item in the third quarter of 2012 related to a non-deductible asset impairment charge which increased the effective tax rate for 2012 by 1.9%. The rate in 2011 included a tax valuation allowance in the first quarter of 2011 against a subsequently divested subsidiary. Income from discontinued operations The income from discontinued operations in 2012 is related to an amendment and extension of the proveo loan agreement and reversal of amounts previously reserved which were related to the finalization of the accounting and taxes. The income from discontinued operations in 2011 relates to the sale of Navis LLC and proveo AG, offset by losses on discontinued operations. 27-------------------------------------------------------------------------------- Table of Contents Comparison of Years Ended December 31, 2011 and 2010 Consolidated Results of Operations (Amounts in thousands, except percentages) Year Ended December 31, December 31, Percent Percent of Percent of 2011 2010 Change Net Sales - 2011 Net Sales - 2010 Net Sales Tangible products $ 936,282 $ 849,530 10.2 95.2 95.0 Service & software 47,206 44,829 5.3 4.8 5.0 Total net sales 983,488 894,359 10.0 100.0 100.0 Cost of Sales Tangible products 469,834 450,630 4.3 47.8 50.4 Service & software 26,885 22,954 17.1 2.7 2.6 Total cost of sales 496,719 473,584 4.9 50.5 53.0 Gross profit 486,769 420,775 15.7 49.5 47.0 Operating expenses 304,733 272,560 11.8 31.0 30.5 Operating income 182,036 148,215 22.8 18.5 16.5 Other income (expense) (2,317) 1,392 N/M (0.2) 0.2 Income from continuing operations before income taxes 179,719 149,607 20.1 18.3 16.7 Income taxes 49,376 44,993 9.7 5.0 5.0 Income from continuing operations 130,343 104,614 24.6 13.3 11.7 Income (loss) from discontinued operations, net of tax 44,300 (2,836) N/M 4.5 (0.3) Net income $ 174,643 $ 101,778 71.6 17.8 11.4 Diluted earnings per share: Income from continuing operations $ 2.40 $ 1.82 31.9 Income (loss) from discontinued operations 0.82 (0.05) N/M Net income $ 3.22 $ 1.77 81.9 Consolidated Results of Operations - year to date Sales Net sales for the 2011 year compared with 2010 increased 10.0% due to a broad-based increase in demand, complemented by a focused business strategy of geographic expansion, new product introductions and expansion of go-to-market channels. New products introduced over the past year helped us meet more of our customers' needs for improving asset visibility in complex supply chain environments. The increase in sales was largely attributable to increased hardware sales with notable volume increases in high-performance and mid-range tabletop, desktop, mobile printers and aftermarket parts. Supplies sales increased from greater shipments of labels and thermal ribbons. Printer unit volume increased 12.4% for 2011 compared to levels in 2010. Sales by product category were as follows (amounts in thousands, except percentages): Year Ended December 31, December 31, Percent Percent of Percent of Product Category 2011 2010 Change Net Sales 2011 Net Sales 2010 Hardware $ 743,308 $ 676,738 9.8 75.5 75.7 Supplies 187,457 167,633 11.8 19.1 18.7 Service and software 47,206 44,829 5.3 4.8 5.0 Subtotal 977,971 889,200 10.0 99.4 99.4 Shipping and handling 5,517 5,159 6.9 0.6 0.6 Total net sales $ 983,488 $ 894,359 10.0 100.0 100.0 28 -------------------------------------------------------------------------------- Table of Contents Sales increased in all 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 in the regions targeted by Zebra for geographic expansion increased by 22%. Movements in foreign exchange rates increased sales by $14,412,000 in the Europe, Middle East and Africa region due principally to a stronger euro against the U.S. dollar for the first three quarters of 2011. Sales to customers by geographic region were as follows (in thousands, except percentages): Year Ended December 31, December 31, Percent Percent of Percent of Geographic Region 2011 2010 Change Net Sales 2011 Net Sales 2010 Europe, Middle East and Africa $ 342,578 $ 305,659 12.1 34.8 34.2 Latin America 89,715 80,679 11.2 9.1 9.0 Asia-Pacific 141,987 113,156 25.5 14.5 12.7 Total International 574,280 499,494 15.0 58.4 55.9 North America 409,208 394,865 3.6 41.6 44.1 Total net sales $ 983,488 $ 894,359 10.0 100.0 100.0 Gross profit Gross profit increased 15.7% due to higher volumes and lower material costs. Lower freight costs in 2011 of $4,963,000 versus 2010 helped improve profit. Gross profit was also affected by favorable foreign currency movements which also improved gross profit by $12,730,000. The above factors contributed to the increase in gross margin from 47.0% to 49.5%. Printer unit volumes and average selling price information is summarized below: Year Ended December 31, 2011 2010 Percent Change Total printers shipped 1,188,892 1,057,744 12.4Average selling price of printers shipped $ 527 $ 533 (1.1) For 2011, product unit volumes increased in nearly all printer product lines with notable volume increases in high-performance and mid-range table top, desktop, and mobile. Operating expenses Operating expenses are summarized below (in thousands, except percentages): Year Ended December 31, December 31, Percent Percent of Percent of Operating Expenses 2011 2010 Change Net Sales 2011 Net Sales 2010 Selling and marketing $ 127,797 $ 112,365 13.7 13.1 12.5 Research and development 89,926 82,575 8.9 9.1 9.2 General and administrative 81,345 73,229 11.1 8.3 8.2 Amortization of intangible assets 3,320 3,211 3.4 0.3 0.4 Litigation settlement 0 (1,082) (100.0) 0.0 (0.1) Acquisition costs 304 0 N/M 0.0 0.0 Exit and restructuring costs 2,041 2,262 (9.8) 0.2 0.3 Total operating expenses $ 304,733 $ 272,560 11.8 31.0 30.5 Operating expenses for 2011 increased 11.8% due to higher expenses in all three operating expense line items. Several categories accounted for these increases, including compensation costs which include salaries, stock option expense, and commissions. These increases are primarily related to more employees in 2011 versus 2010. Business development, outside professional services, travel and entertainment, rent, information systems, recruiting, offsite meetings, shipping and depreciation expenses all increased over 2010 levels. 29-------------------------------------------------------------------------------- Table of Contents Selling and marketing expenses Selling and marketing expenses are summarized below (in thousands): Year Ended December 31, December 31, 2011 2010 Increase / (Decrease) Payroll and benefit costs $ 75,436 $ 70,539 $ 4,897 Business development 23,022 20,608 2,414 Professional services expense 3,538 2,308 1,230 Travel and entertainment expenses 8,068 6,421 1,647 Offsite meetings 3,362 884 2,478 Other changes 14,371 11,605 2,766 Total selling and marketing expenses $ 127,797 $ 112,365 $ 15,432 Selling and marketing expenses were higher in 2011 primarily due to increased payroll and benefit costs related to the addition of more sales-related Zebra personnel in geographic regions with high-growth opportunities and increased sales volume. Payroll and benefit cost increases include salaries, bonus, commissions, benefits and payroll taxes. Other selling and marketing expense categories also increased over 2010 levels due to higher expenses relating to the addition of Zebra sales representatives to expand Zebra's global reach into new developing geographic regions and a global partner conference in 2011. Research and development costs The development of new products and enhancement of existing products are important to Zebra's business and growth prospects. To maintain and build our product pipeline, we continue to make investments in research and development. In 2011 we introduced 13 new printer related products and 10 location software and hardware releases. Products introduced in 2011 include printers in the mobile, desktop, and card lines as well as related accessories. Zebra is receiving positive customer responses to its recently introduced QLn wireless mobile printer which incorporates a flexible user interface for easy configuration. Zebra's ZXP8 retransfer card printer which is utilized for printing secure employee IDs. In 2010, we introduced an updated two inch light duty printer and a new Xi4 high-performance printer. We also introduced innovative new IQ color labels which enables customers to print spot colors on predetermined areas of a label using any Zebra thermal label printer. This breakthrough product enhances readability, increases business efficiency and improves safety. Quarterly product development expenses fluctuate depending on the status of ongoing projects. We are committed to a long-term strategy of significant investment in product development. Research and development costs are summarized below (in thousands): Year Ended December 31, December 31, 2011 2010 Increase / (Decrease) Payroll and benefit costs $ 59,087 $ 54,602 $ 4,485 Professional services expenses 8,708 7,802 906 Travel and entertainment expenses 2,585 2,164 421 Shipping expense 693 238 455 Other changes 18,853 17,769 1,084 Total research and development costs $ 89,926 $ 82,575 $ 7,351 The increases in research and development costs relate to increased payroll and benefit costs, compliance and project expenses to bring new products to market. 30 -------------------------------------------------------------------------------- Table of Contents General and administrative expenses General and administrative expenses are summarized below (in thousands): Year Ended December 31, December 31, 2011 2010 Increase /(Decrease) Payroll and benefit costs $ 40,975 $ 36,833 $ 4,142 Professional services expenses 10,544 9,987 557 Information systems expenses 12,138 10,547 1,591 Depreciation expense 9,232 8,221 1,011 Other changes 8,456 7,641 815 Total general and administrative expenses $ 81,345 $ 73,229 $ 8,116 General and administrative expenses increased over 2010 amounts from larger incentive costs related to merit increases and equity incentives. Professional fees increased slightly due to the Navis and proveo dispositions in 2011, and the utilization of professional services in the expanding geographic regions. Information systems costs increased slightly primarily in the maintenance and service contracts area. Amortization of intangible assets Amortization of intangible assets increased $109,000 during 2011 due to additions of patents during the year. Litigation settlement In 2010 Zebra received litigation settlement proceeds of $1,082,000 related to our acquisition of MSSI in 2008. Exit and restructuring costs Exit and restructuring costs in 2011 of $2,041,000 relate to the consolidation of our Location solutions product line following the divestiture of Navis in the first quarter of 2011. Costs in 2010 of $2,262,000 relate to the completion of the production transfer to Jabil. See Note 10 of the Consolidated Financial Statements included in this Annual Report on Form 10-K for a more detailed discussion of exit and restructuring charges. Operating income The operating income increase for 2011 was the result of increased sales and gross profit as noted above. Other income (expense) Zebra's non-operating income and expense items are summarized in the following table (in thousands): Year Ended December 31, December 31, 2011 2010 Investment income $ 1,944 $ 2,678 Foreign exchange loss (2,006) (169) Other, net (2,255) (1,117) Total other income (expense) $ (2,317) $ 1,392 Year Ended December 31, December 31, Rate of return analysis: 2011 2010Average cash and marketable securities balances $ 292,646 $ 251,812 Annualized rate of return 0.7% 1.1% 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. 31 -------------------------------------------------------------------------------- Table of Contents Income taxes The effective income tax rate for 2011 was 27.5% compared with an income tax rate of 30.1% for 2010. Zebra's effective tax rate for the first quarter of 2010 included a $2,764,000 reduction of federal taxes related to improperly accounting for the tax impact on intercompany profit generated from intercompany sales in 2009. This adjustment reduced our effective rate for 2010 by approximately 1.8%. Zebra's effective rate has also decreased in 2011 due to higher profits in lower rate international jurisdictions. Income (loss) discontinued operations The income from discontinued operations in 2011 relates to the sale of Navis LLC and proveo AG, offset by losses on discontinued operations. The loss from discontinued operations for 2010 represents the results of operations for the entities we divested in 2011. 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 exits; (2) delivery has occurred and title has passed to the customer, which happens at the point of shipment (except in Asia where the terms are FOB destination) 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 rebates and establish a reserve for them based on shipment history. Historically, actual rebates have been in line with our estimates. Price Protection Some of our customers are offered price protection by Zebra as an incentive to carry inventory of our product. These price protection plans provide that if we lower prices, we will credit them for the price decrease on inventory they hold. We estimate future payments under price protection programs quarterly and establish a reserve, which is charged against revenue. Our customers typically carry limited amounts of inventory, and Zebra infrequently lowers prices on current products. As a result, the amounts paid under these plans have been minimal. Software Revenue We sell four types of software and record revenue as follows: • Our printers contain embedded firmware, which is part of the hardware purchase. We consider the sale of this firmware to be incidental to the sale of the printer and do not attribute any revenue to it. • We sell a limited amount of prepackaged, or off-the-shelf, software for the creation of barcode labels using our printers. There is no customization required to use this software, and we have no post-shipment obligations on the software. Revenue is recognized at the time this prepackaged software is shipped. • We sometimes provide custom software as part of a printer installation project. We bill custom software development services separate from the related hardware. Revenue related to custom software is recognized once the custom software development services have been completed and accepted by the customer. • We recognize license revenue under ASC (Accounting Standards Codification) 985, 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. 32 -------------------------------------------------------------------------------- Table of Contents Maintenance and Support Agreements We enter into post-contract maintenance and support agreements. Revenues are recognized ratably over the service period and the cost of providing these services is expensed as incurred. Shipping and Handling We charge our customers for shipping and handling services based upon our internal price list for these items. The amounts billed to customers are recorded as revenue when the product ships. Any costs incurred related to these services are included in cost of sales. Zebra enters into sales transactions that include more than one product type. This bundle of products might include printers, current or future supplies, and services. When this type of transaction occurs, we allocate the purchase price to each product type based on the fair value of the individual products determined by vendor specific objective evidence. The revenue for each individual product is then recognized when the recognition criteria for that product is fully met. Investments and Marketable Securities Investments and marketable securities at December 31, 2012, consisted of the following: U.S. government and agency securities 29.4 % Obligations of government sponsored enterprises (1) 1.5 % State and municipal bonds 29.3 % Corporate securities 39.8 % (1) Includes investments in notes issued by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Federal Home Loan Bank. 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. Securities not included in trading or held-to-maturity are classified as available-for-sale. Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of discounts or premiums. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized. Zebra's investments in marketable debt securities are classified as available-for-sale except for securities held in Zebra's deferred compensation plan which are considered to be trading securities. Investments in marketable debt securities are classified based on intent and ability to sell investment securities. Zebra's available-for-sale securities are used to fund further acquisitions and other operating needs and therefore can be sold prior to maturity. Investments in marketable debt securities for which Zebra intends to sell within the next year are classified as current and those that we intend to hold in excess of one-year are classified as non-current. Accounts Receivable We have standardized credit granting and review policies and procedures for all customer accounts, including: • Credit reviews of all new customer accounts, • Ongoing credit evaluations of current customers, • Credit limits and payment terms based on available credit information, • Adjustments to credit limits based upon payment history and the customer's current credit worthiness, • Active collection efforts by regional credit functions, reporting directly to the corporate financial officers, and • Limited credit insurance on the majority of our international revenues. We reserve for estimated credit losses based upon historical experience and specific customer collection issues. Over the last three years, accounts receivable reserves varied from 0.4% to 1.2% of total accounts receivable. Accounts receivable reserves as of December 31, 2012, were $669,000, or 0.4% of the balance due. We believe this reserve level is appropriate considering the quality of the portfolio as of December 31, 2012. 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. 33 -------------------------------------------------------------------------------- Table of Contents Inventories We value our inventories at the lower of the actual cost to purchase or manufacture using the first-in, first-out (FIFO) method, or the current estimated market value. We review inventory quantities on hand and record a provision for excess and obsolete inventory based on forecasts of product demand and production requirements for the subsequent twelve months. Over the last three years, our inventory reserves have ranged from 8.0% to 11.9% of gross inventory. As of December 31, 2012, inventory reserves were $13,655,000, or 10.0% of gross inventory. We believe this reserve level is appropriate considering the quantities and quality of the inventories as of December 31, 2012. Valuation of Goodwill Goodwill of a reporting unit is tested for impairment between annual tests if an event occurs or circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount. Examples of such events or circumstances include: • Significant adverse change in legal factors or in the business climate, • Adverse action or assessment by a regulator, • Unanticipated competition, • Loss of key personnel, • More-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of, • Testing for recoverability of a significant asset group within 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 2012 as of the end of May 2012. Zebra did perform an interim impairment test in October 2012 for its smaller reporting unit as of the end of September 2012. The October 2012 test only utilized the income approach as discussed below. Under the "Income Approach - Discounted Cash Flow Analysis" the key assumptions consider sales, cost of sales and operating expenses projected through the year 2021. 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 premium 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. The company's risk factors are discussed under Item 1A of this Form 10-K. Under the "Market Approach - Guideline Company Method" we identified 20 publicly traded companies, including Zebra, which we believe have significant relevant similarities. For these 20 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 19 market based transactions for companies that have similarities to our business segment, 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 managements' determination with more weight attached to 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. 34 -------------------------------------------------------------------------------- Table of Contents 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. There have not been any significant changes to our impairment testing methodology other than updating the assumptions to reflect the current market environment. As discussed above, key assumptions used in the first step of the goodwill impairment test were determined by management utilizing the internal operating plan. The key assumptions utilized include forecasted growth rates for revenues and operating expenses as well as a discount rate which is determined by looking at current risk-free rates of capital, current market interest rates and the evaluation of a risk premium relevant to the business segment. Zebra will monitor future results and will perform a test if indicators trigger an impairment review. We test the impairment of goodwill each year as of the end of May or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Zebra has two reporting units required for its annual goodwill impairment test. We completed our annual assessment during June 2012 and determined that our goodwill was not impaired as of the end of May 2012.As part of Zebra's annual impairment test in the second quarter, Management determined that the larger of the two reporting units' fair value exceeded its carrying value by a significant amount. The second smaller reporting unit's amount by which the fair value exceeded the carrying value ranged from approximately 8% under the Income Approach to 31% under the Market Approach. Due to the deterioration in the smaller reporting unit's operating results during the third quarter, failing to meet our forecasted revenues and operating expenses, and a decline in expected growth rates, our fair value calculation for the smaller reporting unit changed and we determined our goodwill associated with the smaller reporting unit was impaired. The above impairment indicators led us to conclude an interim goodwill test was necessary. Zebra performed the first step of the impairment test which failed. As a result, Zebra also performed a second step analysis and recorded a goodwill impairment charge of $9,114,000 as of September 29, 2012. After this impairment charge, there is no remaining goodwill in the smaller reporting unit. Valuation of Long-Lived and Other Intangible Assets Zebra evaluates 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 Zebra believes 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, Zebra measures impairment based on projected discounted cash flows using a discount rate that incorporates the risk inherent in the cash flows. Net intangible assets, long-lived assets and goodwill amounted to $235,442,000 as of December 31, 2012. Income Taxes On January 1, 2007, we adopted ASC 740. According to ASC 740, Zebra identified, evaluated, and measured the amount of income tax benefits to be recognized for all of our income tax positions. During 2008, Zebra recognized an increase of approximately $4,000,000 in the liability for unrecognized tax benefits related to an acquisition. During 2012 Zebra recognized an increase of $680,000 for tax benefits related to the foreign restructuring. 35-------------------------------------------------------------------------------- Table of Contents A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): Balance at January 1, 2011 $ 4,000 Additions based on tax positions related to 2011 - Additions based on tax positions related to 2012 680 Balance at December 31, 2012 $ 4,680 Zebra's continuing practice is to recognize interest and penalties related to income tax matters as part of income tax expense. For the years ended December 31, 2012 and December 31, 2011, we did not accrue any interest or penalties into income tax expense. An audit of U.S. federal income tax returns for years of 2008 through 2010 was completed in 2012. The tax years 2008 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 2008. Included in deferred tax assets are amounts related to federal and state net operating losses that resulted from Zebra's acquisition of WhereNet Corp. As of December 31, 2012, Zebra had approximately $2,518,000 of federal net operating loss carryforwards available to offset future taxable income which expire in 2022 through 2027. As of December 31, 2012, Zebra also had approximately $27,391,000 of state net operating loss carryforwards which expire in 2012 through 2020. Zebra's intention is to utilize these net operating loss carryforwards to offset future income tax expense. Under the United States Tax Reform Act of 1986, the amount of benefits from net operating loss carryforwards may be impaired or limited in certain circumstances, including significant changes in ownership interests. Year Ended December 31, 2012 December 31, 2011 Effective tax rate 25.8% 27.5% During 2012, Zebra established a foreign holding company structure that is designed to accomplish various international business objectives. This new holding company structure allows Zebra to consolidate the ownership of its significant foreign affiliates under a single holding company. In addition, the structure gives the company the ability to facilitate cash pooling for its non-US operations and provide for the tax efficient movement of cash within the structure to efficiently deploy cash generated by the foreign subsidiaries. Zebra's international income taxes have also decreased as result of this project. Contingencies Zebra records estimated liabilities related to contingencies based on our estimates of the probable outcomes. Quarterly, Zebra assesses the potential liability related to pending litigation, tax audits and other contingencies and confirm or revise estimates and reserves as appropriate. For further information regarding material pending legal proceedings, see Note 12 in the Notes to the Consolidated Financial Statements included in the Form 10-K. Equity-Based Compensation As of December 31, 2012, Zebra had an active equity-based compensation plan and a stock purchase plan available for future grants. We accounted for these plans in accordance with ASC 505 and ASC 718. Zebra recognizes compensation costs using the straight-line method over the vesting period of up to 5 years. See Notes 2 and 16 to the Consolidated Financial Statements included in the Form 10-K for further information. 36 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources (Amounts in thousands, except percentages): Year Ended Rate of Return Analysis: December 31, 2012 December 31, 2011 Average cash and marketable securities balances $ 360,385 $ 292,646 Annualized rate of return 0.7 % 0.7 % Average cash and marketable securities balances for 2012 increased compared to 2011 as a result of increased cash provided by operations. As of December 31, 2012, Zebra had $394,075,000 in cash, restricted cash, investments and marketable securities, compared with $326,695,000 at December 31, 2011. Factors affecting cash and investment balances during 2012 include the following (changes below include the impact of foreign currency): • Accounts receivable increased $8,647,000 due to the increased sales and the timing of receipts. • Inventories decreased $11,530,000 due to decreases in raw materials inventory. • Accounts payable decreased $14,605,000 due to the timing of payments at period end. • Income taxes increased $16,335,000 due to the timing of tax payments and taxes incurred. • Purchases of property and equipment totaled $22,443,000. • Escrowed proceeds received from the sale of Navis totaled $27,580,000. • Acquisition of businesses totaled $59,876,000. • Purchases of treasury stock totaled $54,373,000. Management believes that existing capital resources and funds generated from operations are sufficient to finance anticipated capital requirements. Zebra earns a significant amount of our operating income outside the U.S., which is deemed to be permanently reinvested in foreign jurisdictions. Zebra does not currently foresee a need to repatriate funds, however, should Zebra require more capital in the U.S. than is generated by our operations locally, Zebra could elect to repatriate funds held in foreign jurisdictions or raise capital in the U.S. through debt or equity issuances. These alternatives could result in higher effective tax rates or increased interest expense. Included in Zebra's cash, restricted cash, investments and marketable securities are amounts held by foreign subsidiaries. Zebra had $173,483,000 as of December 31, 2012, and $96,829,000 as of December 31, 2011 of foreign cash and investments, which are generally invested in U.S. dollar-denominated holdings. Contractual Obligations Zebra's contractual obligations as of December 31, 2012 were (in thousands): Payments due by period Less than 1 More than 5 Total year 1-3 years 3-5 years years Operating lease obligations $ 31,497 $ 10,699 $ 11,125 $ 4,574 $ 5,099 Deferred compensation liability 3,553 - - - 3,553 Deferred revenue 24,001 13,326 10,675 - - Purchase obligations 104,366 104,366 - - - Total $ 163,417 $ 128,391 $ 21,800 $ 4,574 $ 8,652 Purchase obligations are for purchases made in the normal course of business to meet operational requirements, primarily raw materials and finished goods. On October 10, 2012, Zebra entered into a revolving credit agreement for a five-year $250 million revolving credit facility with a syndicate of banks led by J. P. Morgan Securities LLC as Administrative Agent. The funds under this credit facility are available for general corporate purposes of Zebra and its subsidiaries in the ordinary course of business and other 37-------------------------------------------------------------------------------- Table of Contents purposes permitted by the agreement. As of December 31, 2012, we had established letters of credit amounting to $2,300,000, which reduce the funds available for borrowing under the agreement. No amounts were outstanding under the credit agreement as of December 31, 2012. Management believes that existing capital resources and funds generated from operations are sufficient to finance anticipated capital requirements. Recently Issued Accounting Pronouncements In June 2011, the FASB issued update 2011-05, ASC 220, Comprehensive Income: Presentation of Comprehensive Incomeand in December 2011, the FASB issued update 2011-12, ASC 220, Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU No. 2011-12 is to defer only those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments. Entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. This standard is effective for interim and annual periods beginning after December 15, 2011. The adoption of this standard moved the Other Comprehensive Income statement disclosure from our footnote to its own financial statement for our 10-Q filings in 2012. In September 2011, the FASB issued update 2011-08, ASC 350, Intangibles Goodwill and Other: Testing Goodwill for Impairment. This updated guidance simplifies how companies test goodwill for impairment. Essentially, companies are no longer required to calculate the fair value of a reporting unit unless the entity determines that it is more-likely-than-not that its fair value is less than its carrying amount using a qualitative assessment. This standard is effective for fiscal years beginning after December 15, 2011. The adoption of this standard did not have any effect upon our consolidated financial statements. In July 2012, the FASB issued update 2012-03, ASC 350, Intangibles Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment. This updated guidance provides entities with the option to make qualitative assessments about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. This standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this standard did not have any effect upon our consolidated financial statements. 38-------------------------------------------------------------------------------- Table of Contents |