News Column

ZEBRA TECHNOLOGIES CORP - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

February 20, 2014

Results of Operations: Fourth Quarter of 2013 versus Fourth Quarter of 2012

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 - 2013 2012 Change 2013 2012 Net Sales Tangible products $ 269,583$ 241,257 11.7 94.7 95.3 Service & software 14,956 11,922 25.4 5.3 4.7 Total net sales 284,539 253,179 12.4 100.0 100.0 Cost of Sales Tangible products 136,547 121,869 12.0 48.0 48.1 Service & software 6,964 6,850 1.7 2.4 2.7 Total cost of sales 143,511 128,719 11.5 50.4 50.8 Gross profit 141,028 124,460 13.3 49.6 49.2 Operating expenses 91,949 80,342 14.4 32.3 31.7 Operating income 49,079 44,118 11.2 17.3 17.5 Other income (expense) 1,127 (56) N/M 0.3 (0.1) Income from continuing operations before income taxes 50,206 44,062 13.9 17.6 17.4 Income taxes 8,681 9,263 (6.3) 3.0 3.7 Income from continuing operations 41,525 34,799 19.3 14.6 13.7 Income from discontinued operations, net of tax 125 191 (34.6) 0.0 0.1 Net income $ 41,650$ 34,990 19.0 14.6 13.8 Diluted earnings per share: Income from continuing operations $ 0.82$ 0.68 20.6 Income from discontinued operations 0.00 0.00 0.0 Net income $ 0.82$ 0.68 20.6



Consolidated Results of Operations - Fourth quarter

Sales

Net sales for the fourth quarter of 2013, compared with the same quarter in 2012, increased 12.4% as a result of increased sales across all product and service categories. Sales benefited from a general improvement in business conditions, with notable sales growth to customers in retail and manufacturing. Printer unit volume growth of 14.6% was partially offset by a 3.1% decline in average printer selling price. The acquisition of Hart Systems LLC, which occurred in December 2013, did not have a material effect on 2013 fourth quarter sales or financial results. 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 2013 2012 Change Net Sales 2013 Net Sales 2012 Hardware $ 202,772$ 182,267 11.2 71.2 72.0 Supplies 65,327 57,607 13.4 23.0 22.8 Service and software 14,956 11,922 25.4 5.3 4.7 Subtotal products 283,055 251,796 12.4 99.5 99.5 Shipping and handling 1,484 1,383 7.3 0.5 0.5 Total net sales $ 284,539$ 253,179 12.4 100.0 100.0 21



--------------------------------------------------------------------------------

Table of Contents

Printer unit volumes and average selling price information is summarized below: Three Months Ended December 31, December 31, Percent 2013 2012 Change Total printers shipped 368,204 321,314 14.6 Average selling price of printers shipped $ 462$ 477 (3.1) For the fourth quarter of 2013, unit volumes increased across all printer categories. The decrease in average selling price is a result of a change in product mix toward lower priced products in the 2013 quarter compared to the corresponding 2012 quarter.



Sales growth in North America, Asia Pacific and the Europe, Middle East and Africa region was partially offset by a sales decline in Latin America. Movement in foreign currency, net of hedge activity, increased sales by $1,979,000.

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 2013 2012



Change Net Sales 2013 Net Sales 2012 Europe, Middle East and Africa$ 88,660$ 83,355

6.4 31.2 32.9 Latin America 25,335 26,255 (3.5) 8.9 10.4 Asia-Pacific 40,936 31,665 29.3 14.4 12.5 Total International 154,931 141,275 9.7 54.5 55.8 North America 129,608 111,904 15.8 45.5 44.2 Total net sales $ 284,539$ 253,179 12.4 100.0 100.0 Gross profit Gross profit increased 13.3% for the fourth quarter of 2013 versus the fourth quarter of 2012. As a percentage of sales, gross margin increased from 49.2% to 49.6%, primarily due to higher volume. Favorable foreign currency movements, net of hedges, increased fourth quarter gross profit by $1,672,000.



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 2013 2012 Change Net Sales 2013 Net Sales 2012 Selling and marketing $ 36,280$ 33,313 8.9 12.8 13.2 Research and development 23,712 22,605 4.9 8.3 8.9 General and administrative 24,434 20,964 16.6 8.6 8.3 Amortization of intangible assets 1,826 1,463 24.8 0.6 0.6 Acquisition costs 3,322 1,037 N/M 1.2 0.4 Exit and restructuring costs 2,375 960 N/M 0.8 0.4 Total operating expenses $ 91,949$ 80,342 14.4 32.3 31.7 Operating expenses for the quarter increased 14.4% primarily from increased expenses for compensation, outside professional services, information systems, and depreciation. The increase in amortization expense is related to the acquisition of certain patent rights in December 2012. Acquisition costs relate to investigated, and completed mergers and acquisitions during the period. Exit and restructuring costs in 2013 relate to the restructuring of the Location Solutions business management structure. 22



--------------------------------------------------------------------------------

Table of Contents

Operating income

Operating income for the fourth quarter of 2013 compared to the same period in 2012, increased 11.2%. The combination of sales growth and related improvement in gross margin contributed to the increase in operating income.



Income taxes

The effective income tax rate for the fourth quarter of 2013 was 17.3% compared with 21.0% for the same quarter in the prior year. This decrease is due to a combination of higher profits in lower-rate international jurisdictions and the implementation of the foreign holding company structure. In addition, the company recorded a favorable provision to return adjustment of $394,000, resulting in a reduction to the effective tax rate following the filing of the companies UK & Singapore income tax returns. 23



--------------------------------------------------------------------------------

Table of Contents

Results of Operations: Year ended December 31, 2013 versus Year ended December 31, 2012

Consolidated Results of Operations

(Amounts in thousands, except percentages)

Year Ended December 31, December 31, Percent of Percent of Percent Net Sales - Net Sales - 2013 2012 Change 2013 2012 Net Sales Tangible products $ 984,532$ 948,227 3.8 94.8 95.2 Service & software 53,627 47,941 11.9 5.2 4.8 Total net sales 1,038,159 996,168 4.2 100.0 100.0 Cost of Sales Tangible products 507,513 479,633 5.8 48.9 48.1 Service & software 27,036 24,891 8.6 2.6 2.5 Total cost of sales 534,549 504,524 6.0 51.5 50.6 Gross profit 503,610 491,644 2.4 48.5 49.4 Operating expenses 343,346 327,293 4.9 33.1 32.9 Operating income 160,264 164,351 (2.5) 15.4 16.5 Other income (expense) 3,563 (177) N/M 0.4 (0.0) Income from continuing operations before income taxes 163,827 164,174 (0.2) 15.8 16.5 Income taxes 29,602 42,277 (30.0) 2.9 4.3 Income from continuing operations 134,225 121,897 10.1 12.9 12.2 Income from discontinued operations, net of tax 133 1,007 (86.8) 0.0 0.1 Net income $ 134,358$ 122,904 9.3 12.9 12.3 Diluted earnings per share: Income from continuing operations $ 2.63$ 2.35 11.9 Income from discontinued operations 0.00 0.02 N/M Net income $ 2.63$ 2.37 11.0



Consolidated Results of Operations - Full Year

Net sales for 2013 compared with 2012 increased 4.2% as a result of growth across most product categories with notable increases in supplies, service and software. The growth in supplies, due to the LaserBand acquisition in July 2012, partially offset weak business conditions from the first half of 2013. Printer unit volumes increased 4.9% for 2013 compared to 2012 due to volume increases in desktop, mobile, kiosk and card printers. Movement towards lower-priced printers partially offset unit volume increases. Movement in foreign currency, net of hedge activity, partially offset sales growth by $2,807,000. 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 2013 2012 Change 2013 2012 Hardware $ 735,123$ 730,489 0.6 70.8 73.4 Supplies 243,965 212,499 14.8 23.5 21.3 Service and software 53,627 47,941 11.9 5.2 4.8 Subtotal products 1,032,715 990,929 4.2 99.5 99.5 Shipping and handling 5,444 5,239 3.9 0.5 0.5 Total net sales $ 1,038,159$ 996,168 4.2 100.0 100.0 24



--------------------------------------------------------------------------------

Table of Contents

Printer unit volumes and average selling price information is summarized below: Year Ended December 31, December 31, Percent 2013 2012 Change Total printers shipped 1,321,624 1,260,141 4.9 Average selling price of printers shipped $ 469$ 485 (3.3) Product unit volumes increased 4.9% in 2013 over the prior year. This was due to increased volumes in desktop, mobile, kiosk and card printers. The average selling price reflects a change in product mix toward lower priced products from year to year. North America, Asia Pacific and Europe, Middle East and Africa contributed to an overall growth of 4.2% with notable increases in supplies and printer sales. The growth in supplies, which includes labels and wristbands, is the result of the Laserband acquisition in July of 2012 plus organic growth in supplies. 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 2013 2012



Change Net Sales 2013 Net Sales 2012 Europe, Middle East and Africa$ 326,470$ 322,970

1.1 31.4 32.4 Latin America 99,041 100,101 (1.1) 9.5 10.0 Asia-Pacific 152,740 137,577 11.0 14.7 13.8 Total International 578,251 560,648 3.1 55.6 56.2 North America 459,908 435,520 5.6 44.4 43.8 Total net sales $ 1,038,159$ 996,168 4.2 100.0 100.0 Gross profit



Gross profit increased 2.4% due to higher volumes partially offset by unfavorable movements in product mix. Movements in foreign currency, net of hedges, decreased gross profit by $1,014,000.

Operating expenses

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

Year Ended December 31, December 31, Percent Percent of Percent of Operating Expenses 2013 2012 Change Net Sales 2013 Net Sales 2012 Selling and marketing $ 138,020$ 129,906 6.2 13.2 13.0 Research and development 91,147 87,364 4.3 8.8 8.8 General and administrative 96,216 92,167 4.4 9.3 9.3 Amortization of intangible assets 7,383 4,673 58.0 0.7 0.5 Acquisition costs 4,690 3,109 50.9 0.5 0.3 Exit and restructuring costs 5,890 960 N/M 0.6 0.1 Asset impairment charge 0 9,114 N/M 0.0 0.9 Total operating expenses $ 343,346$ 327,293 4.9 33.1 32.9 Operating expenses for 2013 increased 4.9%. The increase is due to increased expenses across all functional areas offset by the absence of a goodwill impairment charge which represents 2.8% of 2012 operating expenses. The acquisition of both LaserBand and StepOne contributed to the increase in Zebra's operating expenses. Several categories accounted for these increases, including compensation costs, outside professional services, depreciation and information systems expenses. Acquisition costs are related to investigated and completed acquisitions during the period. Amortization of intangible assets increased from additions of current technology, patent and patent rights and customer relationships during the year, including the acquisition of LaserBand in July 2012. Exit and restructuring costs in 2012 and 2013 primarily relate to the restructuring of the Location Solutions business management structure. 25



--------------------------------------------------------------------------------

Table of Contents

Exit and restructuring costs

During the third quarter of 2012, revenue from Location Solutions fell below plan from slower than anticipated growth in the automotive and process manufacturing industries and weakness in the government sector. As a result, we initiated the Locations Solutions 2012 restructuring plan. In the second quarter of 2013, management determined that additional restructuring actions would be required to meet our financial goals for the Location Solutions business. We anticipate that the results of our restructuring actions will reduce costs of the Location Solutions business by $4,000,000 per year. These savings should be fully realized by the first quarter 2014. The savings from the Location Solutions restructuring plan will primarily benefit cost of goods sold, engineering and selling and marketing expenses. During 2007, Zebra began a plan to outsource printer manufacturing to a third-party contract manufacturer. The transition to the third-party manufacturer was completed during 2010. During the fourth quarter of 2012, we determined that further supply chain cost reductions were possible by moving certain supply chain support operations closer to our contract printer manufacturer's facility, which is located in China. We anticipate these actions will generate $2,600,000 in annual savings to our cost of goods sold. These actions were completed by the end of 2013.



Operating income

The operating income decrease for 2013 was the result of operating expense increases as noted above and partially offset by higher gross profit.

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, 2013 2012 Investment income $ 2,366$ 2,485 Foreign exchange loss (524 ) (941 ) Other, net 1,721 (1,721 ) Total other income (expense) $ 3,563 $ (177 ) The increase in other income is the result of a net $1,557,000 favorable litigation settlement associated with an investment loss that was recorded in prior years. Year Ended December 31, December 31, Rate of return analysis: 2013 2012



Average cash and marketable securities balances $ 404,935 $

360,385 Annualized rate of return 0.6 % 0.7 % Investment income decreased due to a lower yield on invested financial assets compared with 2012, even though cash and investment balances were higher in 2013 versus 2012. Income taxes The effective income tax rate for 2013 was 18.1% compared with an income tax rate of 25.8%. The 2012 rate reflects a discrete item for nondeductible asset impairment charge, increasing the tax rate by 1.9% for the full year. Further, in 2012, in order to streamline the management, financing and capital structure of its foreign affiliates, Zebra established a foreign holding company and restructured the ownership structure of its foreign affiliates. 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 introduced leverage which gives Zebra the ability to facilitate cash pooling and improve the capital structure of its non-US operations. The new capital structure and global financing favorably impacts the Zebra's effective tax rate and facilitates the tax efficient movement of Zebra's foreign cash to finance the ongoing operating and investment needs of the foreign subsidiaries. The restructuring was completed in the second quarter of 2012 and was in place for the full year in 2013. In addition, the US R&D credit reinstatement for the 2012 income tax year resulted in a tax benefit of $900,000. Finally, Zebra recorded a favorable provision to return adjustment resulting in a reduction to the effective tax rate of 1.1% following the filing of Zebra's 2012 income tax returns. 26



--------------------------------------------------------------------------------

Table of Contents

Comparison of Years Ended December 31, 2012 and 2011

Consolidated Results of Operations

(Amounts in thousands, except percentages)

Year Ended December 31, December 31, Percent Percent of Percent of 2012 2011 Change Net Sales - 2012 Net Sales - 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 December 31, December 31, Percent Percent of Percent of Product category 2012 2011 Change Net Sales 2012 Net Sales 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. 27



--------------------------------------------------------------------------------

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, 2012 2011 Percent 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 accounted for 40.4% of the total increase in 2012. Several other 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. Amortization of intangible assets increased 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 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. 28



--------------------------------------------------------------------------------

Table of Contents

Operating income

The operating income decrease for 2012 was the result of operating expense increases as noted above and partially offset by higher gross profit.

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 2011



Average 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 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 introduced leverage and gives Zebra the ability to facilitate cash pooling for its non-US operations. This favorably impacts the Zebra's effective tax rate, and provides for the tax efficient movement of cash within the structure to efficiently deploy cash generated by the foreign subsidiaries for various uses, including potential acquisitions. The structure was put in place in the second quarter of 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.



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. 29



--------------------------------------------------------------------------------

Table of Contents

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.



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

The composition of investments and marketable securities at December 31, 2013, was as follows:

U.S. government and agency securities 25.4 % Obligations of government sponsored enterprises (1) 9.5 % State and municipal bonds 14.6 % Corporate securities 47.2 % Other investments 3.3 %



(1) Includes investments in notes issued by the Federal Home Loan Mortgage

Corporation, the Federal National Mortgage Association and the Federal Home Loan Bank. 30



--------------------------------------------------------------------------------

Table of Contents

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 future 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 0.3% to 0.9% of total accounts receivable. Accounts receivable reserves as of December 31, 2013, were $453,000, or 0.3% of the balance due. We believe this reserve level is appropriate considering the quality of the portfolio as of December 31, 2013. While credit losses have historically been within expectations and the provisions established, we cannot guarantee that our credit loss experience will continue to be consistent with historical experience. Inventories



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

Over the last three years, our inventory reserves have ranged from 8.8% to 11.9% of gross inventory. As of December 31, 2013, inventory reserves were $12,561,000, or 9.4% of gross inventory. We believe this reserve level is appropriate considering the quantities and quality of the inventories as of December 31, 2013.

Valuation of Goodwill

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. We completed our annual qualitative assessment, in accordance with ASU 2011-08 Goodwill and Other (Topic 350), during June 2013 and determined that our goodwill was not impaired as of the end of May 2013. 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, 31



--------------------------------------------------------------------------------

Table of Contents

Testing for recoverability of a significant asset group within a reporting

unit, Allocation of a portion of goodwill to a business to be disposed of. In accordance with ASU 2011-08, Zebra's qualitative analysis determined that it is not more likely than not that the fair value of our goodwill is less than the carrying amount and therefore, performing the two-step impairment test was not necessary. If Zebra concluded otherwise, we would perform the first step of the two-step impairment test by calculating the fair value and comparing the fair value to the carrying amount. If the carrying amount exceeded the fair value, we would perform the second step of 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. Zebra will monitor future results and will perform a test if indicators trigger an impairment review.

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 $334,356,000 as of December 31, 2013.

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



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, 2013 and December 31, 2012, we did not accrue any interest or penalties into income tax expense.

We are currently undergoing an audit of the 2011 and 2012 US federal income tax returns. The tax years 2009 through 2012 remain open to examination by multiple state taxing jurisdictions. Tax authorities in the United Kingdom have completed income tax audits for tax years through 2011. 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, 2013, Zebra had approximately $8,252,000 of net operating loss carryforwards available to offset future taxable income which expire in 2022 through 2027. As of December 31, 2013, Zebra had approximately $26,980,000 of state net operating loss carryforwards which expire in 2013 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, 2013 December 31, 2012 Effective tax rate 18.1% 25.8% 32



--------------------------------------------------------------------------------

Table of Contents

During 2012, in order to streamline the management, financing and capital structure of its foreign affiliates, Zebra established a foreign holding company and restructured the ownership structure of its foreign affiliates. 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 introduced leverage which gives Zebra the ability to facilitate cash pooling and improve the capital structure of its non-US operations. The new capital structure and global financing favorably impacts the Zebra's effective tax rate, and facilitates the tax efficient movement of Zebra's foreign cash to finance the ongoing operating and investment needs of the foreign subsidiaries. The restructuring was completed in the second quarter of 2012 and was in place for the full year in 2013. 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, 2013, 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.



Liquidity and Capital Resources

(Amounts in thousands, except percentages):

Year Ended Rate of Return Analysis: December 31, 2013 December 31, 2012 Average cash and marketable securities balances $ 404,935 $ 360,385 Annualized rate of return 0.6 % 0.7 % Average cash and marketable securities balances for 2013 increased compared to 2012 as a result of increased cash provided by operations, partially offset by the acquisition of LaserBand and Hart as well as stock repurchases.



As of December 31, 2013, Zebra had $415,795,000 in cash, restricted cash, investments and marketable securities, compared with $394,075,000 at December 31, 2012. Factors affecting cash and investment balances during 2013 include the following (changes below include the impact of foreign currency):

Accounts receivable increased $6,488,000 due to the increased sales and

the timing of receipts.

Accounts payable increased $7,544,000 due to the timing of payments at

period end. Purchases of property and equipment totaled $20,211,000. Acquisition of businesses totaled $95,328,000. Purchases of treasury stock totaled $63,102,000.



Management believes that existing capital resources and funds generated from operations are sufficient to meet 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 $251,658,000 as of December 31, 2013, and $173,483,000 as of December 31, 2012 of foreign cash and investments, which are primarily invested in U.S. dollar-denominated holdings. 33



--------------------------------------------------------------------------------

Table of Contents

Contractual Obligations

Zebra's contractual obligations as of December 31, 2013 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 $ 83,375$ 15,619$ 19,210$ 13,741$ 34,805 Deferred compensation liability 4,827

- - - 4,827 Deferred revenue 26,157 15,506 10,651 - - Purchase obligations 118,081 118,081 - - - Total $ 232,440$ 149,206$ 29,861$ 13,741$ 39,632



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 purposes permitted by the agreement. As of December 31, 2013, we had established letters of credit totaling $1,800,000, which reduce the funds available for borrowing under the agreement. No amounts were outstanding under the credit agreement as of December 31, 2013.



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

Recently Issued Accounting Pronouncements

In February 2013, the FASB issued update 2013-02, ASC 220, Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This updated guidance sets requirements for presentation for significant items reclassified to net income in their entirety during the period and for items not reclassified to net income in their entirety during period. This standard is effective for annual and interim periods beginning after December 15, 2012. The adoption of this standard includes additional disclosures in the notes to the consolidated financial statements. 34



--------------------------------------------------------------------------------

Table of Contents


For more stories covering the world of technology, please see HispanicBusiness' Tech Channel



Source: Edgar Glimpses


Story Tools