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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 29, 2014
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-19406
Zebra Technologies Corporation
(Exact name of registrant as specified in its charter)
Delaware | 36-2675536 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
475 Half Day Road, Suite 500, Lincolnshire, IL 60069
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (847) 634-6700
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of April 25, 2014, there were 50,488,772 shares of Class A Common Stock, $.01 par value, outstanding.
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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
QUARTER ENDED MARCH 29, 2014
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PART I - FINANCIAL INFORMATION
Item 1. | Consolidated Financial Statements |
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
(Amounts in thousands)
March 29, 2014 | December 31, 2013 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 51,424 | $ | 62,827 | ||||
Investments and marketable securities | 414,143 | 350,380 | ||||||
Accounts receivable, net | 181,618 | 176,917 | ||||||
Inventories, net | 119,373 | 121,023 | ||||||
Deferred income taxes | 19,810 | 19,810 | ||||||
Income tax receivable | 768 | 7,622 | ||||||
Prepaid expenses and other current assets | 13,879 | 15,524 | ||||||
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Total current assets | 801,015 | 754,103 | ||||||
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Property and equipment at cost, less accumulated depreciation and amortization | 107,511 | 109,588 | ||||||
Goodwill | 155,800 | 155,800 | ||||||
Other intangibles, net | 66,296 | 68,968 | ||||||
Long-term investments and marketable securities | 2,588 | 2,588 | ||||||
Other assets | 29,169 | 28,765 | ||||||
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Total assets | $ | 1,162,379 | $ | 1,119,812 | ||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 34,637 | $ | 34,688 | ||||
Accrued liabilities | 52,306 | 61,962 | ||||||
Deferred revenue | 16,411 | 15,506 | ||||||
Income taxes payable | 8,010 | 6,898 | ||||||
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Total current liabilities | 111,364 | 119,054 | ||||||
Long-term deferred tax liability | 25,510 | 25,492 | ||||||
Deferred rent | 1,050 | 1,131 | ||||||
Other long-term liabilities | 15,515 | 15,477 | ||||||
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Total liabilities | 153,439 | 161,154 | ||||||
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Stockholders’ equity: | ||||||||
Class A Common Stock | 722 | 722 | ||||||
Additional paid-in capital | 146,910 | 143,295 | ||||||
Treasury stock | (673,989 | ) | (678,456 | ) | ||||
Retained earnings | 1,544,484 | 1,502,878 | ||||||
Accumulated other comprehensive loss | (9,187 | ) | (9,781 | ) | ||||
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Total stockholders’ equity | 1,008,940 | 958,658 | ||||||
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Total liabilities and stockholders’ equity | $ | 1,162,379 | $ | 1,119,812 | ||||
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See accompanying notes to consolidated financial statements.
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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands, except per share data)
(Unaudited)
Three Months Ended | ||||||||
March 29, 2014 | March 30, 2013 | |||||||
Net sales: | ||||||||
Net sales of tangible products | $ | 261,892 | $ | 225,121 | ||||
Revenue from services and software | 26,376 | 11,816 | ||||||
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Total net sales | 288,268 | 236,937 | ||||||
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Cost of sales: | ||||||||
Cost of sales of tangible products | 130,449 | 117,111 | ||||||
Cost of services and software | 9,881 | 6,761 | ||||||
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Total cost of sales | 140,330 | 123,872 | ||||||
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Gross profit | 147,938 | 113,065 | ||||||
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Operating expenses: | ||||||||
Selling and marketing | 35,416 | 33,515 | ||||||
Research and development | 22,857 | 21,858 | ||||||
General and administrative | 28,391 | 25,277 | ||||||
Amortization of intangible assets | 2,672 | 1,863 | ||||||
Acquisition costs | 4,927 | 482 | ||||||
Exit and restructuring costs | 267 | 1,895 | ||||||
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Total operating expenses | 94,530 | 84,890 | ||||||
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Operating income | 53,408 | 28,175 | ||||||
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Other income (expense): | ||||||||
Investment income | 421 | 677 | ||||||
Foreign exchange loss | (292 | ) | (98 | ) | ||||
Other, net | 8 | 10 | ||||||
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Total other income | 137 | 589 | ||||||
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Income before income taxes | 53,545 | 28,764 | ||||||
Income taxes | 11,939 | 5,222 | ||||||
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Net income | $ | 41,606 | $ | 23,542 | ||||
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Basic earnings per share | $ | 0.83 | $ | 0.46 | ||||
Diluted earnings per share | $ | 0.82 | $ | 0.46 | ||||
Basic weighted average shares outstanding | 50,402 | 50,980 | ||||||
Diluted weighted average and equivalent shares outstanding | 50,974 | 51,366 |
See accompanying notes to consolidated financial statements.
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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
Three Months Ended | ||||||||
March 29, 2014 | March 30, 2013 | |||||||
Net income | $ | 41,606 | $ | 23,542 | ||||
Other comprehensive income (loss): | ||||||||
Unrealized gains on hedging transactions, net of income taxes | 613 | 1,743 | ||||||
Unrealized holding gains (losses) on investments, net of income taxes | 148 | (72 | ) | |||||
Foreign currency translation adjustment | (167 | ) | 94 | |||||
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Comprehensive income | $ | 42,200 | $ | 25,307 | ||||
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See accompanying notes to consolidated financial statements.
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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Three Months Ended | ||||||||
March 29, 2014 | March 30, 2013 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 41,606 | $ | 23,542 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 9,003 | 7,372 | ||||||
Share-based compensation | 2,966 | 2,146 | ||||||
Excess tax benefit from share-based compensation | (395 | ) | (358 | ) | ||||
Loss on sale of property and equipment | 12 | 136 | ||||||
Deferred income taxes | 18 | 990 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable, net | (4,793 | ) | (516 | ) | ||||
Inventories, net | 1,663 | 6,943 | ||||||
Other assets | 2,419 | (137 | ) | |||||
Accounts payable | (2,435 | ) | (7,119 | ) | ||||
Accrued liabilities | (9,670 | ) | (12,787 | ) | ||||
Deferred revenue | 682 | 1,618 | ||||||
Income taxes | 8,146 | 649 | ||||||
Other operating activities | 533 | 1,685 | ||||||
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Net cash provided by operating activities | 49,755 | 24,164 | ||||||
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Cash flows from investing activities: | ||||||||
Purchases of property and equipment | (2,374 | ) | (1,952 | ) | ||||
Acquisition of intangible assets | 0 | (500 | ) | |||||
Purchases of long-term investments | (405 | ) | (604 | ) | ||||
Purchases of investments and marketable securities | (151,817 | ) | (106,947 | ) | ||||
Maturities of investments and marketable securities | 15,996 | 3,144 | ||||||
Proceeds from sales of investments and marketable securities | 72,206 | 65,094 | ||||||
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Net cash used in investing activities | (66,394 | ) | (41,765 | ) | ||||
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Cash flows from financing activities: | ||||||||
Purchase of treasury stock | 0 | (3,888 | ) | |||||
Proceeds from exercise of stock options and stock purchase plan purchases | 4,936 | 5,913 | ||||||
Excess tax benefit from share-based compensation | 395 | 358 | ||||||
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Net cash provided by financing activities | 5,331 | 2,383 | ||||||
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Effect of exchange rate changes on cash | (95 | ) | 70 | |||||
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Net decrease in cash and cash equivalents | (11,403 | ) | (15,148 | ) | ||||
Cash and cash equivalents at beginning of period | 62,827 | 64,740 | ||||||
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Cash and cash equivalents at end of period | $ | 51,424 | $ | 49,592 | ||||
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Supplemental disclosures of cash flow information: | ||||||||
Income taxes paid, net | $ | 3,304 | $ | 2,271 |
See accompanying notes to consolidated financial statements.
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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Basis of Presentation
Management prepared these unaudited interim consolidated financial statements for Zebra Technologies Corporation and subsidiaries (“Zebra”) according to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. These financial statements do not include all of the information and footnotes required by United States generally accepted accounting principles (“GAAP”) for complete financial statements. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in Zebra’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
The consolidated balance sheet as of December 31, 2013 included in this Form 10-Q is taken from the audited consolidated balance sheet in our Form 10-K. These interim financial statements include all adjustments (of a normal, recurring nature) necessary to present fairly Zebra’s consolidated financial position as of March 29, 2014, consolidated statement of earnings, consolidated statement of comprehensive income and consolidated statement of cash flow for the three months ended March 29, 2014 and March 30, 2013. These results, however, are not necessarily indicative of results for the full year.
Note 2 – Fair Value Measurements
Financial assets and liabilities are to be measured using inputs from three levels of the fair value hierarchy. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Zebra uses a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in the assessment of fair value. Included in our investment portfolio at March 29, 2014, is an auction rate security which is classified as available for sale and is reflected at fair value. Due to events in credit markets, however, the auction event for the instrument held by Zebra is failed. Therefore, the fair value of this security is estimated utilizing broker quotations, discounted cash flow analysis and other types of valuation adjustment methodologies at March 29, 2014. These analyses consider, among other items, the collateral underlying the security instruments, the creditworthiness of the counterparty, the timing of expected future cash flows, estimates of the next time the security is expected to have a successful auction, and Zebra’s intent and ability to hold such securities until credit markets improve. The security was also compared, when possible, to other securities with similar characteristics.
The decline in the market value of our auction rate security discussed above is considered temporary and has been recorded in accumulated other comprehensive income loss on Zebra’s balance sheet. Since Zebra has the intent and ability to hold this auction rate security until it is sold, we have classified it as a long-term investment on the balance sheet.
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Financial assets and liabilities carried at fair value as of March 29, 2014, are classified below (in thousands):
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: | ||||||||||||||||
U.S. government and agency securities | $ | 114,598 | $ | 0 | $ | 0 | $ | 114,598 | ||||||||
Obligations of government-sponsored enterprises (1) | 0 | 30,146 | 0 | 30,146 | ||||||||||||
State and municipal bonds | 0 | 56,710 | 0 | 56,710 | ||||||||||||
Corporate securities | 0 | 189,850 | 2,588 | 192,438 | ||||||||||||
Other investments | 0 | 22,839 | 0 | 22,839 | ||||||||||||
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Investments subtotal | 114,598 | 299,545 | 2,588 | 416,731 | ||||||||||||
Money market investments related to the deferred compensation plan | 5,094 | 0 | 0 | 5,094 | ||||||||||||
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Total assets at fair value | $ | 119,692 | $ | 299,545 | $ | 2,588 | $ | 421,825 | ||||||||
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Liabilities: | ||||||||||||||||
Forward contracts (2) | $ | 4 | $ | 1,070 | $ | 0 | $ | 1,074 | ||||||||
Liabilities related to the deferred compensation plan | 5,094 | 0 | 0 | 5,094 | ||||||||||||
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Total liabilities at fair value | $ | 5,098 | $ | 1,070 | $ | 0 | $ | 6,168 | ||||||||
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Financial assets and liabilities carried at fair value as of December 31, 2013, are classified below (in thousands):
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: | ||||||||||||||||
U.S. government and agency securities | $ | 89,626 | $ | 0 | $ | 0 | $ | 89,626 | ||||||||
Obligations of government-sponsored enterprises (1) | 0 | 33,510 | 0 | 33,510 | ||||||||||||
State and municipal bonds | 0 | 51,627 | 0 | 51,627 | ||||||||||||
Corporate securities | 0 | 163,832 | 2,588 | 166,420 | ||||||||||||
Other investments | 0 | 11,785 | 0 | 11,785 | ||||||||||||
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Investments subtotal | 89,626 | 260,754 | 2,588 | 352,968 | ||||||||||||
Money market investments related to the deferred compensation plan | 4,827 | 0 | 0 | 4,827 | ||||||||||||
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Total assets at fair value | $ | 94,453 | $ | 260,754 | $ | 2,588 | $ | 357,795 | ||||||||
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Liabilities: | ||||||||||||||||
Forward contracts (2) | $ | 1,165 | $ | 1,578 | $ | 0 | $ | 2,743 | ||||||||
Liabilities related to the deferred compensation plan | 4,827 | 0 | 0 | 4,827 | ||||||||||||
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Total liabilities at fair value | $ | 5,992 | $ | 1,578 | $ | 0 | $ | 7,570 | ||||||||
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1) | Includes investments in notes issued by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Federal Farm Credit Banks and the Federal Home Loan Bank. |
2) | The fair value of forward contracts are calculated as follows: |
a. | Fair value of a collar or put option contract associated with forecasted sales hedges are calculated using bid and ask rates for similar contracts. |
b. | Fair value of regular forward contracts associated with forecasted sales hedges are calculated using the period-end exchange rate adjusted for current forward points. |
c. | Fair value of balance sheet hedges are calculated at the period end exchange rate adjusted for current forward points unless the hedge has been traded but not settled at period end. If this is the case, the fair value is calculated at the rate at which the hedge is being settled. |
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The following table presents Zebra’s activity for assets measured at fair value on a recurring basis using significant unobservable inputs, Level 3, for the following periods (in thousands):
Three Months Ended | ||||||||
March 29, 2014 | March 30, 2013 | |||||||
Balance at beginning of the year | $ | 2,588 | $ | 2,588 | ||||
Transfers to Level 3 | 0 | 0 | ||||||
Total losses (realized or unrealized): | ||||||||
Included in earnings | 0 | 0 | ||||||
Included in other comprehensive income (loss) | 0 | 0 | ||||||
Purchases and settlements (net) | 0 | 0 | ||||||
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Balance at end of period | $ | 2,588 | $ | 2,588 | ||||
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Total gains and (losses) for the period included in earnings attributable to the change in unrealized losses relating to assets still held at end of period | $ | 0 | $ | 0 | ||||
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The following is a summary of short-term and long-term investments (in thousands):
As of March 29, 2014 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
U.S. government and agency securities | $ | 114,611 | $ | 38 | $ | (51 | ) | $ | 114,598 | |||||||
Obligations of government-sponsored enterprises | 30,141 | 5 | 0 | 30,146 | ||||||||||||
State and municipal bonds | 56,671 | 74 | (35 | ) | 56,710 | |||||||||||
Corporate securities | 192,404 | 622 | (588 | ) | 192,438 | |||||||||||
Other investments | 22,849 | 16 | (26 | ) | 22,839 | |||||||||||
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Total investments | $ | 416,676 | $ | 755 | $ | (700 | ) | $ | 416,731 | |||||||
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As of December 31, 2013 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
U.S. government and agency securities | $ | 89,617 | $ | 27 | $ | (18 | ) | $ | 89,626 | |||||||
Obligations of government-sponsored enterprises | 33,506 | 5 | (1 | ) | 33,510 | |||||||||||
State and municipal bonds | 51,573 | 82 | (28 | ) | 51,627 | |||||||||||
Corporate securities | 166,642 | 453 | (675 | ) | 166,420 | |||||||||||
Other investments | 11,771 | 15 | (1 | ) | 11,785 | |||||||||||
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Total investments | $ | 353,109 | $ | 582 | $ | (723 | ) | $ | 352,968 | |||||||
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The maturity dates of investments are as follows (in thousands):
As of March 29, 2014 | ||||||||
Amortized Cost | Estimated Fair Value | |||||||
Less than 1 year | $ | 113,737 | $ | 113,835 | ||||
1 to 5 years | 294,039 | 294,435 | ||||||
6 to 10 years | 8,900 | 8,461 | ||||||
Thereafter | 0 | 0 | ||||||
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Total | $ | 416,676 | $ | 416,731 | ||||
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The carrying value for Zebra’s financial instruments classified as current assets (other than short-term investments) and current liabilities approximate fair value due to their short maturities.
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Note 3 – Investments and Marketable Securities
Investments in marketable debt securities are classified based on intent and ability to sell the investment securities. We intend to use Zebra’s available-for-sale securities to fund future acquisitions and other operating needs and therefore may 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.
Changes in the market value of available-for-sale securities are reflected in the “Accumulated other comprehensive income” caption of stockholders’ equity in the balance sheet, until we dispose of the securities. Once these securities are disposed of, either by sale or maturity, the accumulated changes in market value are transferred to investment income. On the statement of cash flows, changes in the balances ofavailable-for-sale securities are shown as purchases, sales and maturities of investments and marketable securities under investing activities.
Changes in market value oftrading securities would be recorded in investment income as they occur, and the related statement of cash flows would include changes in the balances of trading securities as operating cash flows.
Included in Zebra’s cash and investments and marketable securities are amounts held by foreign subsidiaries which are generally invested in U.S. dollar-denominated holdings. Zebra had foreign cash and investments of $273,704,000 as of March 29, 2014, and $251,658,000 as of December 31, 2013. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation upon repatriation, however, Zebra does not see a need to repatriate these funds.
Note 4 – Accounts Receivable
The components of accounts receivable are as follows (in thousands):
As of | ||||||||
March 29, 2014 | December 31, 2013 | |||||||
Accounts receivable, gross | $ | 182,200 | $ | 177,370 | ||||
Accounts receivable reserves | (582 | ) | (453 | ) | ||||
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Accounts receivable, net | $ | 181,618 | $ | 176,917 | ||||
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Note 5 – Inventories
The components of inventories are as follows (in thousands):
As of | ||||||||
March 29, 2014 | December 31, 2013 | |||||||
Raw material | $ | 28,185 | $ | 31,335 | ||||
Work in process | 603 | 415 | ||||||
Deferred costs of long-term contracts | 281 | 294 | ||||||
Finished goods | 103,238 | 101,540 | ||||||
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Inventories, gross | 132,307 | 133,584 | ||||||
Inventory reserves | (12,934 | ) | (12,561 | ) | ||||
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Inventories, net | $ | 119,373 | $ | 121,023 | ||||
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Note 6 – Goodwill and Other Intangible Assets
Intangible assets are as follows (in thousands):
As of March 29, 2014 | ||||||||||||
Gross Amount | Accumulated Amortization | Net Amount | ||||||||||
Current technology | $ | 23,778 | $ | (14,716 | ) | $ | 9,062 | |||||
Patent and patent rights | 29,569 | �� | (18,721 | ) | 10,848 | |||||||
Customer relationships | 52,893 | (6,507 | ) | 46,386 | ||||||||
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Other intangibles, net | $ | 106,240 | $ | (39,944 | ) | $ | 66,296 | |||||
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Amortization expense for the three months ended March 29, 2014 |
| $ | 2,672 | |||||||||
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As of December 31, 2013 | ||||||||||||
Gross Amount | Accumulated Amortization | Net Amount | ||||||||||
Current technology | $ | 23,778 | $ | (14,060 | ) | $ | 9,718 | |||||
Patent and patent rights | 29,569 | (17,919 | ) | 11,650 | ||||||||
Customer relationships | 52,893 | (5,293 | ) | 47,600 | ||||||||
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Other intangibles, net | $ | 106,240 | $ | (37,272 | ) | $ | 68,968 | |||||
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Amortization expense for the three months ended March 30, 2013 |
| $ | 1,863 | |||||||||
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Zebra has $155,800,000 of goodwill recorded as of March 29, 2014 and December 31, 2013.
In the fourth quarter 2013, Zebra acquired all of the outstanding membership interests in Hart Systems, LLC (a New York limited liability company) with $60,858,000 of the purchase price allocated to goodwill. This acquisition is considered a separate reporting unit for purposes of Zebra’s goodwill impairment test.
Note 7 – Costs Associated with Exit and Restructuring Activities
Costs incurred through December 31, 2013 and costs expected to be incurred relate to the following: restructuring of Zebra’s manufacturing operations; relocation of a significant portion of Zebra’s supply chain operations from the U.S. to China; consolidating activities domestically; restructuring of our sales operations; restructuring certain corporate functions; and amending the Location Solutions “2012 restructuring plan” by adding additional restructuring charges to be incurred.
As of March 29, 2014, we have incurred the following exit and restructuring costs related to the Location Solutions business management structure and manufacturing operations relocation and restructuring (in thousands):
Type of Cost | Cost incurred through December 31, 2013 | Costs incurred for the three months ended March 29, 2014 | Total costs incurred as of March 29, 2014 | Additional costs expected to be incurred | Total costs expected to be incurred | |||||||||||||||
Severance, stay bonuses, and other employee-related expenses | $ | 6,650 | $ | 267 | $ | 6,917 | $ | 15 | $ | 6,932 | ||||||||||
Professional services | 180 | 0 | 180 | 0 | 180 | |||||||||||||||
Relocation and transition costs | 20 | 0 | 20 | 0 | 20 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 6,850 | $ | 267 | $ | 7,117 | $ | 15 | $ | 7,132 | ||||||||||
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|
|
|
|
|
|
|
|
Liabilities and expenses below relate to the 2011 and 2012 exit and restructuring plans (in thousands):
Three Months Ended | ||||||||
March 29, 2014 | March 30, 2013 | |||||||
Balance at beginning of period | $ | 1,252 | $ | 967 | ||||
Charged to earnings | 267 | 1,895 | ||||||
Cash paid | (1,190 | ) | (2,161 | ) | ||||
|
|
|
| |||||
Balance at the end of period | $ | 329 | $ | 701 | ||||
|
|
|
|
Liabilities related to exit and restructuring activities are included in the accrued liabilities line item on the balance sheet. All exit costs are included in operating expenses under the line item exit and restructuring costs.
Note 8 – Derivative Instruments
Portions of our operations are subject to fluctuations in currency values. We manage these risks using derivative financial instruments. We conduct business on a multinational basis in a wide variety of foreign currencies. Our exposure to market risk for changes in foreign currency exchange rates arises from international financing activities between subsidiaries, foreign currency denominated monetary assets and liabilities and transactions arising from international trade. Our objective is to preserve the economic value of non-functional currency denominated cash flows. We attempt to hedge transaction exposures with natural offsets to the fullest extent possible and, once these opportunities have been exhausted, through foreign exchange forward and option contracts with third parties.
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Credit and market risk
Financial instruments, including derivatives, expose us to counter party credit risk for nonperformance and to market risk related to interest and currency exchange rates. We manage our exposure to counterparty credit risk through specific minimum credit standards, diversification of counterparties, and procedures to monitor concentrations of credit risk. Our counterparties in derivative transactions are commercial banks with significant experience using derivative instruments. We monitor the impact of market risk on the fair value and cash flows of our derivative and other financial instruments considering reasonably possible changes in interest rates and currency exchange rates and restrict the use of derivative financial instruments to hedging activities. We continually monitor the creditworthiness of our customers to which we grant credit terms in the normal course of business. The terms and conditions of our credit sales are designed to mitigate or eliminate concentrations of credit risk with any single customer.
Fair Value of Derivative Instruments
Zebra has determined that derivative instruments for hedges that have traded but have not settled are considered Level 1 in the fair value hierarchy, and hedges that have not traded are considered Level 2 in the fair value hierarchy. Derivative instruments are used to manage risk and are not used for trading or other speculative purposes, nor do we use leveraged derivative financial instruments. Our foreign currency exchange contracts are valued using broker quotations or market transactions, in either the listed or over-the-counter markets.
Hedging of Net Assets
We use forward contracts to manage exposure related to our pound and euro denominated net assets. Forward contracts typically mature within three months after execution of the contracts. We record gains and losses on these contracts and options in income each quarter along with the transaction gains and losses related to our net asset positions, which would ordinarily offset each other.
Summary financial information related to these activities included in our consolidated statement of earnings as other income (expense) is as follows (in thousands):
Three Months Ended | ||||||||
March 29, 2014 | March 30, 2013 | |||||||
Change in gains (losses) from foreign exchange derivatives | $ | 25 | $ | 1,581 | ||||
Loss on net foreign currency assets | (317 | ) | (1,679 | ) | ||||
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|
|
| |||||
Foreign exchange loss | $ | (292 | ) | $ | (98 | ) | ||
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|
|
|
As of | ||||||||
March 29, 2014 | December 31, 2013 | |||||||
Notional balance of outstanding contracts: | ||||||||
Pound/US dollar | £ | 1,556 | £ | 0 | ||||
Euro/US dollar | € | 36,620 | € | 41,021 | ||||
Net fair value of outstanding contracts | $ | 61 | $ | 33 |
Hedging of Anticipated Sales
We can manage the exchange rate risk of anticipated euro-denominated sales using purchased options, forward contracts, and participating forwards. We designate these contracts as cash flow hedges which mature within twelve months after the execution of the contracts. Gains and losses on these contracts are deferred in other comprehensive income until the contracts are settled and the hedged sales are realized. The deferred gains or losses will then be reported as an increase or decrease to sales.
Summary financial information related to the cash flow hedges is as follows (in thousands):
As of | ||||||||
March 29, 2014 | March 30, 2013 | |||||||
Unrealized gains on hedging transactions: | ||||||||
Gross | $ | 780 | $ | 2,270 | ||||
Income tax expense | 167 | 527 | ||||||
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|
|
| |||||
Net | $ | 613 | $ | 1,743 | ||||
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|
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Summary financial information related to the cash flow hedges of future revenues follows (in thousands, except percentages):
As of | ||||||||
March 29, 2014 | December 31, 2013 | |||||||
Notional balance of outstanding contracts versus the dollar | € | 88,513 | € | 85,627 | ||||
Hedge effectiveness | 100 | % | 100 | % |
Three Months Ended | ||||||||
March 29, 2014 | March 30, 2013 | |||||||
Net losses included in revenue | $ | (971 | ) | $ | (1,046 | ) |
Forward Contracts
We record our forward contracts at fair value on our consolidated balance sheet as either long-term other assets or long-term other liabilities, depending upon the fair value calculation as detailed in Note 2 of Zebra’s financial statements. The amounts recorded on our consolidated balance sheet are as follows (in thousands):
As of | ||||||||
March 29, 2014 | December 31, 2013 | |||||||
Liabilities: | ||||||||
Accrued liabilities | $ | 1,074 | $ | 2,743 | ||||
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|
|
| |||||
Total | $ | 1,074 | $ | 2,743 | ||||
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|
|
Note 9 – Warranty
In general, Zebra provides warranty coverage of one year on printers against defects in material and workmanship. Thermal printheads are warranted for six months and batteries are warranted for one year. Battery based products, such as location tags, are covered by a 90-day warranty. A provision for warranty expense is recorded at the time of sale and is adjusted quarterly based on historical warranty experience.
The following table is a summary of Zebra’s accrued warranty obligation (in thousands), which is included in accrued liabilities:
Three Months Ended | ||||||||
March 29, 2014 | March 30, 2013 | |||||||
Balance at the beginning of the year | $ | 4,125 | $ | 4,252 | ||||
Warranty expense | 1,510 | 1,837 | ||||||
Warranty payments | (1,673 | ) | (1,707 | ) | ||||
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|
|
| |||||
Balance at the end of the period | $ | 3,962 | $ | 4,382 | ||||
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|
|
|
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Note 10 – Contingencies
We are subject to a variety of investigations, claims, suits and other legal proceedings that arise from time to time in the ordinary course of business, including but not limited to, intellectual property, employment, tort and breach of contract matters. We currently believe that the outcomes of such proceedings, individually and in the aggregate, will not have a material adverse impact on our business, cash flows, financial position, or results of operations. Any legal proceedings are subject to inherent uncertainties, and management’s view of these matters and their potential effects may change in the future.
Note 11 – Stockholders’ Equity
Share count and par value data related to stockholders’ equity are as follows:
As of | ||||||||
March 29, 2014 | December 31, 2013 | |||||||
Preferred Stock | ||||||||
Par value per share | $ | 0.01 | $ | 0.01 | ||||
Shares authorized | 10,000,000 | 10,000,000 | ||||||
Shares outstanding | 0 | 0 | ||||||
Common Stock—Class A | ||||||||
Par value per share | $ | 0.01 | $ | 0.01 | ||||
Shares authorized | 150,000,000 | 150,000,000 | ||||||
Shares issued | 72,151,857 | 72,151,857 | ||||||
Shares outstanding | 50,472,565 | 50,349,546 | ||||||
Treasury stock | ||||||||
Shares held | 21,679,292 | 21,802,311 |
During the three-month period ended March 30, 2013, Zebra purchased 87,254 shares of common stock for $3,888,000 under a board authorized share repurchase plan. Zebra did not purchase shares of its common stock for the three-months ended March 29, 2014.
A roll forward of Class A common shares outstanding is as follows:
Three Months Ended | ||||||||
March 29, 2014 | March 30, 2013 | |||||||
Balance at the beginning of the year | 50,349,546 | 50,908,267 | ||||||
Repurchases | 0 | (87,254 | ) | |||||
Stock option and ESPP issuances | 125,592 | 199,715 | ||||||
Restricted share issuances | 1,295 | 3,698 | ||||||
Restricted share forfeitures | (1,632 | ) | (708 | ) | ||||
Shares withheld for tax obligations | (2,236 | ) | (5,851 | ) | ||||
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|
|
| |||||
Balance at the end of the period | 50,472,565 | 51,017,867 | ||||||
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|
|
|
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Note 12 – Earnings Per Share
Earnings per share were computed as follows (in thousands, except per share amounts):
Three Months Ended | ||||||||
March 29, 2014 | March 30, 2013 | |||||||
Weighted average shares: | ||||||||
Weighted average common shares outstanding | 50,402 | 50,980 | ||||||
Effect of dilutive securities outstanding | 572 | 386 | ||||||
|
|
|
| |||||
Diluted weighted average shares outstanding | 50,974 | 51,366 | ||||||
|
|
|
| |||||
Basic per share amounts: | ||||||||
Net income | $ | 41,606 | $ | 23,542 | ||||
Weighted average common shares outstanding | 50,402 | 50,980 | ||||||
Per share amount | $ | 0.83 | $ | 0.46 | ||||
Diluted per share amounts: | ||||||||
Net income | $ | 41,606 | $ | 23,542 | ||||
Diluted weighted average shares outstanding | 50,974 | 51,366 | ||||||
Per share amount | $ | 0.82 | $ | 0.46 |
Potentially dilutive securities that were excluded from the earnings per share calculation consist of stock options and stock appreciation rights (SARs) with an exercise price greater than the average market closing price of the Class A common stock. These excluded options and SARs were as follows:
Three Months Ended | ||||||||
March 29, 2014 | March 30, 2013 | |||||||
Potentially dilutive shares | 0 | 601,000 |
Note 13 – Share-Based Compensation
Zebra has a share-based compensation plan and a stock purchase plan available for future grants. Zebra recognizes compensation costs using the straight-line method over the vesting period of up to 5 years.
The compensation expense and the related tax benefit for share-based payments were included in the Consolidated Statement of Earnings as follows (in thousands):
Three Months Ended | ||||||||
March 29, 2014 | March 30, 2013 | |||||||
Cost of sales | $ | 242 | $ | 184 | ||||
Selling and marketing | 553 | 465 | ||||||
Research and development | 366 | 325 | ||||||
General and administrative | 1,805 | 1,172 | ||||||
|
|
|
| |||||
Total compensation | $ | 2,966 | $ | 2,146 | ||||
|
|
|
| |||||
Income tax benefit | $ | 993 | $ | 730 | ||||
|
|
|
|
Cash flows resulting from the tax benefits from tax deductions in excess of the compensation cost recognized (excess tax benefits) are classified as financing cash flows in the statement of cash flows. The tax benefits classified as financing cash flows for the three months ended March 29, 2014 was $395,000 and for the three months ended March 30, 2013 was $358,000.
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The fair value of share-based compensation is estimated on the date of grant using a binomial model. Volatility is based on an average of the implied volatility in the open market and the annualized volatility of Zebra stock prices over our entire stock history. Stock option grants in the table below include both stock options, all of which were non-qualified, and stock appreciation rights (SAR) that will be settled in Zebra stock. Restricted stock grants are valued at the market closing price on the date of the grant. The following table shows the weighted-average assumptions used for grants of SARs as well as the fair value of the grants based on those assumptions:
Three Months Ended | ||||||||
March 29, 2014 | March 30, 2013 | |||||||
Expected dividend yield | 0 | % | 0 | % | ||||
Forfeiture rate | 10.31 | % | 10.21 | % | ||||
Volatility | 32.00 | % | 35.90 | % | ||||
Risk free interest rate | 0.82 | % | 0.94 | % | ||||
Range of interest rates | 0.02% - 1.78 | % | 0.07% - 1.95 | % | ||||
Expected weighted-average life | 5.42 years | 5.48 years | ||||||
Fair value of stock appreciation rights (SARs) granted | $ | 85,149 | $ | 82,910 | ||||
Weighted-average grant date fair value of SARs granted | $ | 65.75 | $ | 15.08 |
Stock option activity was as follows:
Three Months Ended March 29, 2014 | ||||||||
Options | Shares | Weighted-Average Exercise Price | ||||||
Outstanding at beginning of year | 955,777 | $ | 42.78 | |||||
Granted | 0 | 0.00 | ||||||
Exercised | (116,000 | ) | 44.77 | |||||
Forfeited | 0 | 0.00 | ||||||
Expired | 0 | 0.00 | ||||||
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|
| |||||
Outstanding at end of period | 839,777 | $ | 42.50 | |||||
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|
| |||||
Exercisable at end of period | 839,777 | $ | 42.50 | |||||
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|
| |||||
Intrinsic value of exercised options | $ | 2,048,000 | ||||||
|
|
The following table summarizes information about stock options outstanding at March 29, 2014:
Outstanding | Exercisable | |||||||
Aggregate intrinsic value | $ | 15,700,000 | $ | 15,700,000 | ||||
Weighted-average remaining contractual term | 2.3 years | 2.3 years |
SAR activity was as follows:
Three Months Ended March 29, 2014 | ||||||||
SARs | Shares | Weighted-Average Exercise Price | ||||||
Outstanding at beginning of year | 1,402,784 | $ | 36.36 | |||||
Granted | 0 | 0.00 | ||||||
Exercised | (17,584 | ) | 30.30 | |||||
Forfeited | (5,485 | ) | 41.47 | |||||
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|
|
| |||||
Outstanding at end of period | 1,379,715 | $ | 36.41 | |||||
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|
|
| |||||
Exercisable at end of period | 507,992 | $ | 30.56 | |||||
|
|
|
| |||||
Intrinsic value of exercised SARs | $ | 648,000 | ||||||
|
|
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The terms of the SARs are established under either the 2006 Incentive Compensation Plan or the 2011 Long-term Incentive Plan (the “Plans”) and the applicable SAR agreement. Once vested, a SAR entitles the holder to receive a payment equal to the difference between the per-share grant price of the SAR and the fair market value of a share of Zebra stock on the date the SAR is exercised, multiplied by the number of SARs exercised. Exercised SARs are settled in whole shares of Zebra stock, and any fraction of a share is settled in cash. The SARs granted typically vest annually in four equal amounts on each of the first four anniversaries of the grant date, with some SARs vesting over a period of five years. All SARs expire 10 years after the grant date.
The following table summarizes information about SARs outstanding at March 29, 2014:
Outstanding | Exercisable | |||||||
Aggregate intrinsic value | $ | 34,193,000 | $ | 15,564,000 | ||||
Weighted-average remaining contractual term | 7.4 years | 6.4 years |
Restricted stock award activity granted under the Plans, are as follows:
Three Months Ended March 29, 2014 | ||||||||
Restricted Stock Awards | Shares | Weighted-Average Grant Date Fair Value | ||||||
Outstanding at beginning of year | 435,377 | $ | 40.92 | |||||
Granted | 1,295 | 65.75 | ||||||
Released | (6,940 | ) | 38.88 | |||||
Forfeited | (1,632 | ) | 42.62 | |||||
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|
| |||||
Outstanding at end of period | 428,100 | $ | 41.03 | |||||
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|
|
The terms of Zebra’s restricted stock grants are defined in the Plans and the applicable award agreements. Restricted stock grants consist of time vested restricted stock awards (RSA’s) and performance share awards (PSA’s). Zebra’s restricted stock awards are expensed over the vesting period of the related award, typically three to five years. Compensation cost is calculated as the market date fair value on the grant date multiplied by the number of shares granted.
Performance share award activity granted under the Plans, are as follows:
Three Months Ended March 29, 2014 | ||||||||
Performance Share Awards | Shares | Weighted-Average Grant Date Fair Value | ||||||
Outstanding at beginning of year | 195,159 | $ | 42.25 | |||||
Granted | 0 | 0.00 | ||||||
Released | 0 | 0.00 | ||||||
Forfeited | 0 | 0.00 | ||||||
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|
|
| |||||
Outstanding at end of period | 195,159 | $ | 42.25 | |||||
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|
|
As of | ||||
March 29, 2014 | ||||
Awards granted under Zebra’s equity based compensation plans: | ||||
Unearned compensation costs related to awards granted | $ | 14,947,000 | ||
Period expected to be recognized over | 2.0 years |
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The fair value of the purchase rights issued under the stock purchase plan is estimated using the following weighted-average assumptions for purchase rights granted. Expected lives of three months to one year have been used along with these assumptions.
Three Months Ended | ||||||||
March 29, 2014 | March 30, 2013 | |||||||
Fair market value | $ | 54.08 | $ | 39.31 | ||||
Option price | $ | 51.38 | $ | 37.34 | ||||
Expected dividend yield | 0 | % | 0 | % | ||||
Expected volatility | 33 | % | 17 | % | ||||
Risk free interest rate | 0.07 | % | 0.05 | % |
Note 14 – Income Taxes
Zebra has identified, evaluated, and measured the amount of income tax benefits to be recognized for all of our income tax positions. Included in deferred tax assets are amounts related to federal and state net operating losses that resulted from our acquisition of WhereNet Corp in 2007. We intend to utilize these net operating loss carryforwards to offset future income taxes prior to expiration. 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. The company has reviewed the impact of ownership changes and believes that this will not have an impact on the realizability on the related Deferred Tax Asset recorded as of March 31, 2014.
Zebra earns a significant amount of our operating income outside of the U.S., which is deemed to be permanently reinvested in foreign jurisdictions. We do not intend to repatriate funds. Repatriation would result in higher effective tax rates. Borrowing in the U.S. would result in increased interest expense.
In 2014, we completed an audit of the 2011 and 2012 US federal income tax returns with no material impact on the financial statements. Various tax years 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 with no material impact on the financial statements.
.
At March 31, 2014 Zebra’s unrealized tax benefit was $4,000. Zebra’s continuing practice is to recognize interest and/or penalties related to income tax matters as part of income tax expense. For the three months ended March 29, 2014 and March 30, 2013, we did not accrue any interest or penalties into income tax expense.
Three Months Ended | ||||||||
March 29, 2014 | March 30, 2013 | |||||||
Effective tax rate | 22.3 | % | 18.2 | % |
The effective income tax rate for the first quarter of 2014 was 22.3% compared with 18.2% for the first quarter of 2013. In order to streamline the management, financing and capital structure of its foreign affiliates, in 2012, Zebra established a foreign holding company and restructured the ownership 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. The 2014 effective rate reflects $3,700,000 of acquisition expenses incurred for which no tax benefit was recorded. The acquisition expenses were incurred in the first quarter of 2014 and relate to the recent announcement that Zebra has entered into a definitive agreement to acquire the Enterprise business of Motorola Solutions. See Note 16 for more details.
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Table of Contents
Note 15 – Other Comprehensive Income
Stockholders’ equity includes certain items classified as accumulated other comprehensive income (AOCI), including:
• | Unrealized gains (losses) on hedging transactions relate to derivative instruments used to hedge the currency exchange rates for forecasted euro sales. These hedges are designated as cash flow hedges, and we have deferred income statement recognition of gains and losses until the hedged transaction occurs. See Note 8 for more details. |
• | Unrealized gains (losses) on investmentsare deferred from income statement recognition until the gains or losses are realized. |
• | Foreign currency translation adjustment relates to our non-U.S. subsidiary companies that have designated a functional currency other than the U.S. dollar. We are required to translate the subsidiary functional currency financial statements to dollars using a combination of historical, period-end, and average foreign exchange rates. This combination of rates creates the foreign currency translation adjustment component of other comprehensive income. |
The components of other comprehensive income are as follows (in thousands):
As of December 31, 2013 | Gain (Loss) recognized in OCI | Gain (Loss) reclassified from AOCI to income | Subtotal | As of March 29, 2014 | ||||||||||||||||
Unrealized gains (losses) on hedging transactions: | ||||||||||||||||||||
Gross | $ | (2,373 | ) | $ | 1,771 | $ | (991 | ) (1) | $ | 780 | $ | (1,593 | ) | |||||||
Income tax (benefit) | (509 | ) | 380 | (213 | ) | 167 | (342 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net | (1,864 | ) | 1,391 | (778 | ) | 613 | (1,251 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Unrealized gains (losses) on investments: | ||||||||||||||||||||
Gross | (151 | ) | 121 | 81 | (2) | 202 | 51 | |||||||||||||
Income tax (benefit) | (73 | ) | 29 | 25 | 54 | (19 | ) | |||||||||||||
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|
|
|
|
|
|
|
|
| |||||||||||
Net | (78 | ) | 92 | 56 | 148 | 70 | ||||||||||||||
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|
|
|
|
|
|
|
|
| |||||||||||
Foreign currency translation adjustments | (7,839 | ) | (160 | ) | (7 | ) (3) | (167 | ) | (8,006 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total accumulated other comprehensive loss | $ | (9,781 | ) | $ | 1,323 | $ | (729 | ) | $ | 594 | $ | (9,187 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012 | Gain (Loss) recognized in OCI | Gain (Loss) reclassified from AOCI to income | Subtotal | As of March 30, 2013 | ||||||||||||||||
Unrealized gains (losses) on hedging transactions: | ||||||||||||||||||||
Gross | $ | (2,581 | ) | $ | 3,292 | $ | (1,022 | ) (1) | $ | 2,270 | $ | (311 | ) | |||||||
Income tax (benefit) | (599 | ) | 782 | (255 | ) | 527 | (72 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net | (1,982 | ) | 2,510 | (767 | ) | 1,743 | (239 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Unrealized gains (losses) on investments: | ||||||||||||||||||||
Gross | 540 | (287 | ) | 179 | (2) | (108 | ) | 432 | ||||||||||||
Income tax (benefit) | 162 | (94 | ) | 58 | (36 | ) | 126 | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net | 378 | (193 | ) | 121 | (72 | ) | 306 | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Foreign currency translation adjustments | (8,721 | ) | 94 | 0 | (3) | 94 | (8,627 | ) | ||||||||||||
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|
|
|
|
|
|
|
|
| |||||||||||
Total accumulated other comprehensive loss | $ | (10,325 | ) | $ | 2,411 | $ | (646 | ) | $ | 1,765 | $ | (8,560 | ) | |||||||
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|
|
|
|
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|
|
|
(1) | Transfer of unrealized gains and (losses) from AOCI to income on hedging transactions are included in net sales of tangible products. |
(2) | Transfer of unrealized gains and (losses) from AOCI to income on investments are included in investment income. |
(3) | Transfer of foreign currency translation gains and (losses) from AOCI to income, are included in foreign exchange. |
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Table of Contents
Note 16 – Subsequent Event
On April 14, 2014, Zebra entered into a definitive agreement under which Zebra will acquire the Enterprise business of Motorola Solutions, Inc. for $3.45 billion in an all-cash transaction. Zebra intends to fund the acquisition with a combination of approximately $200 million of available cash on hand and the issuance of $3.25 billion in new debt. The transaction is subject to customary closing conditions including regulatory approvals. The transaction is expected to be completed by the end of 2014.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Results of Operations: First Quarter of 2014 versus First Quarter of 2013
Consolidated Results of Operations
(Amounts in thousands, except percentages):
Three Months Ended | ||||||||||||||||||||
March 29, | March 30, | Percent | Percent of | Percent of | ||||||||||||||||
2014 | 2013 | Change | Net Sales - 2014 | Net Sales - 2013 | ||||||||||||||||
Net Sales | ||||||||||||||||||||
Net sales of tangible products | $ | 261,892 | $ | 225,121 | 16.3 | 90.9 | 95.0 | |||||||||||||
Revenue from services & software | 26,376 | 11,816 | 123.2 | 9.1 | 5.0 | |||||||||||||||
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|
|
|
|
|
| |||||||||||||
Total net sales | 288,268 | 236,937 | 21.7 | 100.0 | 100.0 | |||||||||||||||
Cost of Sales | ||||||||||||||||||||
Cost of sales of tangible products | 130,449 | 117,111 | 11.4 | 45.3 | 49.4 | |||||||||||||||
Cost of services & software | 9,881 | 6,761 | 46.1 | 3.4 | 2.9 | |||||||||||||||
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Total cost of sales | 140,330 | 123,872 | 13.3 | 48.7 | 52.3 | |||||||||||||||
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Gross profit | 147,938 | 113,065 | 30.8 | 51.3 | 47.7 | |||||||||||||||
Operating expenses | 94,530 | 84,890 | 11.4 | 32.8 | 35.8 | |||||||||||||||
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Operating income | 53,408 | 28,175 | 89.6 | 18.5 | 11.9 | |||||||||||||||
Other income (expense) | 137 | 589 | N/M | 0.0 | 0.2 | |||||||||||||||
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Income before income taxes | 53,545 | 28,764 | 86.2 | 18.5 | 12.1 | |||||||||||||||
Income taxes | 11,939 | 5,222 | N/M | 4.1 | 2.2 | |||||||||||||||
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Net income | $ | 41,606 | $ | 23,542 | 76.7 | 14.4 | 9.9 | |||||||||||||
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Diluted earnings per share | $ | 0.82 | $ | 0.46 | 78.3 | |||||||||||||||
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Consolidated Results of Operations – First quarter
Sales
Net sales for the first quarter of 2014 compared with the corresponding 2013 quarter, increased 21.7% as a result of growth across all product categories with notable increases in supplies, service contracts, tabletop, desktop and mobile printers. Increased services and software revenue is primarily due to growth in services revenue attributable to both organic growth and the December 2013 acquisition of Hart Systems.
Sales by product category were as follows (amounts in thousands, except percentages):
Three Months Ended | ||||||||||||||||||||
Product Category | March 29, 2014 | March 30, 2013 | Percent Change | Percent of Net Sales - 2014 | Percent of Net Sales - 2013 | |||||||||||||||
Hardware | $ | 196,217 | $ | 166,692 | 17.7 | 68.1 | 70.3 | |||||||||||||
Supplies | 63,504 | 57,123 | �� | 11.2 | 22.0 | 24.1 | ||||||||||||||
Service and software | 26,376 | 11,816 | 123.2 | 9.1 | 5.0 | |||||||||||||||
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Subtotal products | 286,097 | 235,631 | 21.4 | 99.2 | 99.4 | |||||||||||||||
Shipping and handling | 2,171 | 1,306 | 66.2 | 0.8 | 0.6 | |||||||||||||||
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Total net sales | $ | 288,268 | $ | 236,937 | 21.7 | 100.0 | 100.0 | |||||||||||||
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Sales increased across all geographic regions as a result of higher sales in printers, supplies and service contracts. Movement in foreign currency and hedge activity increased sales growth by $3,168,000.
Sales to customers by geographic region were as follows (in thousands, except percentages):
Three Months Ended | ||||||||||||||||||||
Geographic Region | March 29, 2014 | March 30, 2013 | Percent Change | Percent of Net Sales – 2014 | Percent of Net Sales – 2013 | |||||||||||||||
Europe, Middle East and Africa | $ | 91,439 | $ | 77,673 | 17.7 | 31.7 | 32.8 | |||||||||||||
Latin America | 25,640 | 23,131 | 10.8 | 8.9 | 9.8 | |||||||||||||||
Asia-Pacific | 37,967 | 32,909 | 15.4 | 13.2 | 13.9 | |||||||||||||||
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Total International | 155,046 | 133,713 | 16.0 | 53.8 | 56.5 | |||||||||||||||
North America | 133,222 | 103,224 | 29.1 | 46.2 | 43.5 | |||||||||||||||
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Total net sales | $ | 288,268 | $ | 236,937 | 21.7 | 100.0 | 100.0 | |||||||||||||
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Gross Profit
Gross profit of 51.3%, versus 47.7% in 2013, reflects higher sales across all regions and across all product categories, sales related to the December 2013 acquisition of Hart Systems LLC and a reduction in freight. Favorable movements in foreign currency and hedging activity increased first quarter gross profit by $2,254,000.
Operating Expenses
Operating expenses for the first quarter increased 11.4% as a result of increased compensation, outside professional services, acquisition and amortization costs as a result of the December 2013 acquisition of Hart Systems LLC. Acquisition expenses increased primarily due to the recent announcement that Zebra has entered into a definitive agreement to acquire the Enterprise business of Motorola Solutions.
Operating expenses are summarized below (in thousands, except percentages):
Three Months Ended | ||||||||||||||||||||
Operating Expenses | March 29, 2014 | March 30, 2013 | Percent Change | Percent of Net Sales 2014 | Percent of Net Sales 2013 | |||||||||||||||
Selling and marketing | $ | 35,416 | $ | 33,515 | 5.7 | 12.3 | 14.1 | |||||||||||||
Research and development | 22,857 | 21,858 | 4.6 | 7.9 | 9.2 | |||||||||||||||
General and administrative | 28,391 | 25,277 | 12.3 | 9.9 | 10.7 | |||||||||||||||
Amortization of intangible assets | 2,672 | 1,863 | 43.4 | 0.9 | 0.8 | |||||||||||||||
Acquisition costs | 4,927 | 482 | N/M | 1.7 | 0.2 | |||||||||||||||
Exit and restructuring | 267 | 1,895 | N/M | 0.1 | 0.8 | |||||||||||||||
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Total operating expenses | $ | 94,530 | $ | 84,890 | 11.4 | 32.8 | 35.8 | |||||||||||||
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Income Taxes
The effective income tax rate for the first quarter of 2014 was 22.3% compared with 18.2% for the first quarter of 2013. The 2014 effective rate reflects $3,700,000 of acquisition expenses incurred for which no tax benefit was recorded. The acquisition expenses that were incurred in the first quarter of 2014 relate to the recent the announcement that Zebra has entered into a definitive agreement to acquire the Enterprise business of Motorola Solutions. See Note 16 for more details.
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Liquidity and Capital Resources
(Amounts in thousands, except percentages):
Three Months Ended | ||||||||
Rate of Return Analysis: | March 29, 2014 | March 30, 2013 | ||||||
Average cash and marketable securities balances | $ | 441,975 | $ | 405,820 | ||||
Annualized rate of return | 0.4 | % | 0.7 | % |
As of March 29, 2014, Zebra had $468,155,000 in cash and investments and marketable securities, compared with $415,795,000 at December 31, 2013. Factors affecting cash and investment balances during the first three months of 2014 include the following (changes below include the impact of foreign currency):
• | Accounts receivable increased $4,793,000 due to increased sales and timing of receipts. |
• | Accrued liabilities decreased $9,670,000 due to the timing of annual bonus payments and regular payroll. |
• | Income taxes payable increased $8,146,000 due to the timing of tax payments. |
• | Stock option exercises and purchases under the stock purchase plan contributed $4,936,000. |
Zebra earns a significant amount of our operating income outside of the U.S., which is deemed to be permanently reinvested in foreign jurisdictions.
On April 14, 2014, Zebra entered into a definitive agreement under which Zebra will acquire the Enterprise business of Motorola Solutions, Inc. for $3.45 billion in an all-cash transaction. Zebra intends to fund the acquisition with a combination of approximately $200 million of available cash on hand and the issuance of $3.25 billion in new debt. The transaction is subject to customary closing conditions including regulatory approvals. The transaction is expected to be completed by the end of 2014.
Significant Customer
Our net sales to significant customers as a percentage of total net sales were as follows:
Three Months Ended | ||||||||
March 29, 2014 | March 30, 2013 | |||||||
Customer A | 15.2 | % | 16.6 | % | ||||
Customer B | 12.5 | % | 12.0 | % | ||||
Customer C | 12.4 | % | 11.9 | % |
No other customer accounted for 10% or more of total net sales during these periods. The customers disclosed above are distributors (i.e. not end users) of Zebra’s products.
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Safe Harbor
Forward-looking statements contained in this filing are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995 and are highly dependent upon a variety of important factors which could cause actual results to differ materially from those expressed or implied in such forward looking statements. These forward-looking statements are based on current expectations, forecasts and assumptions and are subject to the risks and uncertainties inherent in Zebra’s industry, market conditions, general domestic and international economic conditions, and other factors. These factors include:
• | Market acceptance of Zebra’s printer and software products and competitors’ product offerings and the potential effects of technological changes, |
• | The effect of global market conditions, including North America, Latin America, Asia Pacific, Europe, Middle East and Africa and other regions in which we do business, |
• | Our ability to control manufacturing and operating costs, |
• | Risks related to the manufacturing of Zebra’s products in foreign countries as well as business operations in foreign countries including the risk of depending on key suppliers who are also in foreign countries, |
• | Zebra’s ability to purchase sufficient materials, parts and components to meet customer demand, particularly in light of global economic conditions, |
• | The availability of credit and the volatility of capital markets, which may affect our suppliers and customers, |
• | Success of integrating acquisitions, including the Hart Systems business we acquired in December 2013, |
• | Interest rate and financial market conditions because of our large investment portfolio, |
• | The impact of the percentage of cash and cash equivalents held outside the United States, |
• | The effect of natural disasters on our business, |
• | The impact of changes in foreign and domestic governmental policies, laws or regulations |
• | Foreign exchange rates due to the large percentage of our international sales and operations, |
• | The outcome of litigation in which Zebra is involved, particularly litigation or claims related to infringement of third-party intellectual property rights and, |
• | The outcome of any future tax matters. |
When used in this document and documents referenced, the words “anticipate,” “believe,” “estimate,” “will” and “expect” and similar expressions as they relate to Zebra or its management are intended to identify such forward-looking statements. We encourage readers of this report to review Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, for a further discussion of issues that could affect Zebra’s future results. Zebra undertakes no obligation, other than as may be required by law, to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this report.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
There were no material changes in Zebra’s market risk during the quarter ended March 29, 2014. For additional information on market risk, refer to the “Quantitative and Qualitative Disclosures About Market Risk” section of our Form 10-K for the year ended December 31, 2013.
In the normal course of business, portions of Zebra’s operations are subject to fluctuations in currency values. We manage these risks using derivative financial instruments. See Note 8 to the Consolidated Financial Statements included in this report for further discussion of derivative instruments.
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Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this Form 10-Q. The evaluation was conducted under the supervision of our Disclosure Committee, and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in this report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) information required to be disclosed by us in our reports that we file or furnish under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the quarter covered by this report, there have been no changes in our internal controls that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Inherent Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Zebra have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
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Item 1. | Legal Proceedings |
See Note 10 to the Consolidated Financial Statements included in this report.
Item 1A. | Risk Factors |
Recent Developments
On April 14, 2014, Zebra Technologies Corporation, a Delaware corporation, and Motorola Solutions, Inc., a Delaware corporation (“Motorola Solutions”), entered into a Master Acquisition Agreement (the “Master Acquisition Agreement”), an Intellectual Property Agreement and an Employee Matters Agreement (the “Employee Matters Agreement” and collectively, the “Principal Agreements”). Upon the terms and subject to the conditions set forth in the Principal Agreements, which have been approved by our board of directors, we have agreed to acquire (the “Acquisition”) Motorola Solution’s Enterprise business (the “Enterprise business”). Certain assets of Motorola Solutions relating to the Enterprise business will be excluded from the transaction and retained by it, including Motorola Solution’s iDEN infrastructure business, and other assets and certain liabilities as specified in the definitive agreement. The Acquisition is structured as a combination of stock and asset sales and a merger of certain U.S. entities. Upon the closing of the Acquisition, we will pay to Motorola Solutions $3.45 billion in cash, subject to a working capital adjustment. In addition, we will assume certain liabilities related to the Enterprise business under the terms of the Principal Agreements.
Completion of the Acquisition is subject to various conditions, including, among others, (i) no order or other legal restraint or prohibition being in effect that would prohibit or prevent the transactions from being consummated; (ii) no legal proceeding having been commenced by any governmental entity that seeks to prevent, prohibit or make illegal the transactions to be consummated; (iii) certain specified filings with governmental entities having been made; (iv) all consents and approvals of certain specified governmental entities having been obtained; and (v) the applicable waiting period (and any extensions thereof) under the Hart-Scott-Rodino Antitrust Improvements Act having expired or otherwise having been terminated. Each party’s obligation to consummate the Acquisition is also subject to certain additional conditions, including performance in all material respects by the other party of its obligations under the Principal Agreements. The Master Acquisition Agreement contains certain termination rights for both us and Motorola Solutions, including if the initial closing of the Acquisition has not occurred by April 13, 2015.
We intend to fund the Acquisition and the related fees, commissions and expenses with a combination of cash on hand and new financing. Concurrently with the signing of the Master Acquisition Agreement, we entered into a financing commitment letter (the “Commitment Letter”) with Morgan Stanley Senior Funding, Inc. (the “Lender”) whereby the Lender committed to fund $2.0 billion under a new senior secured term loan facility, provide a $250 million new senior secured revolving credit facility, and up to $1.25 billion under a bridge facility (less the aggregate proceeds of new unsecured senior notes that would be issued in a Rule 144A offering) (together, the “Financing”). We expect the Financing, together with cash balances, to be sufficient to provide the financing necessary to consummate the Acquisition. The financing commitment of the Lender is subject to certain conditions set forth in the Commitment Letter. We have agreed to use reasonable best efforts to obtain the Financing, and Motorola Solutions has agreed to reasonably cooperate in our efforts to obtain the Financing. There is no financing condition to the Acquisition. However, in the event of a Financing Failure (as defined in the Master Acquisition Agreement) and subsequent termination of the Master Acquisition Agreement, Motorola Solutions may be entitled to a termination fee in the amount of $250 million as Motorola Solution’s sole and exclusive remedy. In circumstances where the fee is not the sole and exclusive remedy, Motorola Solutions will have available to it all other remedies as permitted by the Master Acquisition Agreement.
The foregoing description of the Principal Agreements and Commitment Letter does not purport to be a complete description and is qualified in its entirety by reference to the full text of the Master Acquisition Agreement, the IP Agreement, the Employee Matters Agreement and the Commitment Letter, which were filed as Exhibits 2.1, 10.1, 10.2 and 10.3 to our Form 8-K filed April 16, 2014 and incorporated herein by reference. The Principal Agreements and the Commitment Letter are filed to provide security holders with information regarding their terms. They are not intended to provide any other factual information about us, Motorola Solutions or their respective subsidiaries and affiliates, or the Enterprise business. These agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties were made solely for the benefit of the other parties to each such agreement and (a) are not intended to be treated as categorical statements of fact, but rather as a way of allocating risk to one of the parties if those statements prove to be inaccurate, (b) may have been qualified in the applicable agreement by confidential disclosure schedules that were delivered to the other party in connection with the signing of the agreements,
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which disclosure schedules contain information that modifies, qualifies and creates exceptions to the representations, warranties and covenants set forth in such agreements, (c) may be subject to standards of materiality applicable to the parties that differ from what might be viewed as material to stockholders and (d) were made only as of the date of the agreement or such other date or dates as may be specified in the agreement. Accordingly, investors should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of us, our subsidiaries and affiliates, Motorola Solutions, their subsidiaries and affiliates or the Enterprise business.
Risks Related to the Acquisition
There can be no assurance that the Acquisition will be consummated on the terms or timetable currently anticipated or at all.
Although we expect to close the Acquisition prior to December 31, 2014, there can be no assurance that the acquisition will be consummated on the terms or timetable currently anticipated or at all. In order to consummate the acquisition, we must obtain certain regulatory and other approvals and consents in a timely manner. If these approvals or consents are not received, or they are not received on terms that satisfy the conditions set forth in the Master Acquisition Agreement, then we and/or Motorola Solutions will not be obligated to complete the acquisition. The Master Acquisition Agreement also contains other closing conditions, which may not be satisfied or waived. In addition, under circumstances specified in the Master Acquisition Agreement, we or Motorola Solutions may terminate the Master Acquisition Agreement. There is no financing condition to the Acquisition. However, in the event of a Financing Failure (as defined in the Master Acquisition Agreement) and subsequent termination of the Master Acquisition Agreement, Motorola Solutions may be entitled to a termination fee in the amount of $250 million as its sole and exclusive remedy. In circumstances where the fee is not the sole and exclusive remedy, Motorola Solutions will have available to it all other remedies as permitted by the Master Acquisition Agreement. Additionally, we will be required to pay significant costs incurred in connection with the Acquisition, including legal, accounting, financial advisory and other costs, whether or not the Acquisition is completed. The occurrence of any of these events individually or in combination could have a material adverse effect on our business, financial condition, operating results, cash flows and growth prospects.
If we do not obtain financing, we will be unable to consummate the Acquisition.
We intend to fund the Acquisition and the related fees, commissions and expenses with a combination of cash on hand and new financing. Concurrently with the signing of the Master Acquisition Agreement, we entered into the Commitment Letter with the Lender to provide Financing for the Acquisition. We currently expect the financing under the Commitment Letter, together with cash balances, to be sufficient to provide the financing necessary to consummate the Acquisition. However, the financing commitment of the Lender is subject to certain conditions set forth in the Commitment Letter and we can provide no assurance that the Lender will ultimately provide the financing contemplated by the Commitment Letter. If the necessary financing is not available pursuant to the Commitment Letter, we will seek alternative sources of financing for the Acquisition. We cannot assure you that any additional financing will be available to us on acceptable terms, if at all. To the extent that financing proves to be unavailable when needed to consummate the Acquisition, we may be unable to complete the Acquisition. See “There can be no assurance that the Acquisition will be consummated on the terms or timetable currently anticipated or at all.”
We may be unable to effectively integrate the Enterprise business into our existing business after the acquisition.
We cannot assure you that we will be able to integrate the Enterprise business effectively into the Company. The integration of the Enterprise business, which is significantly larger than our existing business, into our operations will be a significant undertaking and will require significant attention from our management. The Acquisition, with an approximate enterprise value of $3.45 billion, is significantly larger than prior acquisitions we have completed and will significantly increase the size of our operations, increase our number of employees and operating facilities and expand our geographic scope. There can be no assurance that we will be able to successfully integrate the Enterprise business, or if such integration is successfully accomplished, that such integration will not be more costly than presently contemplated. There can also be no assurance that we can successfully manage the combined business due to our greatly increased size and scope. If we cannot successfully integrate and manage the Enterprise business within a reasonable time following the acquisition, we may not be able to realize the potential and anticipated benefits of the acquisition, which could have a material adverse effect on our business, financial condition, operating results, cash flows and growth prospects.
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We may be unable to realize the expected growth opportunities and cost savings from the Acquisition.
In connection with the integration of the Enterprise business into our existing operating structure, we will seek to realize growth opportunities, along with cost savings. We currently expect to realize cost savings of approximately $100 million per year to be fully achieved by 2017. The anticipated cost savings are based upon assumptions about our ability to implement integration measures in a timely fashion and within certain cost parameters. Our ability to achieve the planned cost synergies is dependent upon a significant number of factors, some of which may be beyond our control. For example, we may be unable to eliminate duplicative costs in a timely fashion or at all. Our inability to realize anticipated cost savings, and revenue enhancements from the acquisition could have a material adverse effect on our business, financial condition, operating results, cash flows and growth prospects.
The Acquisition could divert the attention of management.
If we complete the Acquisition, we will be entering new lines of business that we lack experience managing. Similarly, because the Enterprise business is significantly larger than our existing business, we will be required to manage new and larger lines of business, and consequently the integration process will require significant attention from management, which may divert management’s attention from our existing businesses. Management may also have difficulty assimilating the corporate cultures, maintaining employee morale and retaining key employees. These diversions, together with other difficulties we may have integrating the Enterprise business, could have a material adverse effect on our business, financial condition, operating results, cash flows and growth prospects.
We may be unable to retain key employees who are currently employed by the Enterprise business.
Generally, employees of the Enterprise business are not contractually obligated to continue their employment with the Enterprise business. Our ability to successfully integrate and operate the Enterprise business depends in part on the continued service of senior management and other key personnel of the Enterprise business. We can provide no assurance that we will be successful in retaining the service of the Enterprise business’s senior managers and key employees, and the failure to do so could have a material adverse effect on our ability to integrate the Enterprise business.
The Enterprise business may have liabilities that are not known to us.
As part of the acquisition, we will assume certain liabilities of the Enterprise business. There may be liabilities that we failed or were unable to discover in the course of performing due diligence investigations into the Enterprise business. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business, financial condition, operating results, cash flows and growth prospects.
The acquisition will entitle certain customers of the Enterprise business to terminate their agreements with it as a result of change of control provisions.
The acquisition may entitle certain Enterprise customers to terminate certain of their agreements with the Enterprise business. We cannot avoid the possibility that some customers may exercise their termination rights and opt to discontinue business with the Enterprise business once we complete the acquisition, which could have an adverse effect on our expected revenues following the acquisition.
Moreover, the acquisition may cause some of our existing customers to conclude that they are overly reliant on a single provider. In such circumstance, our customers may engage our competitors or facilitate the emergence of new competitors to diversify sourcing and service options, which could have an adverse effect on our expected revenues following the acquisition.
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Risks Related to the Indebtedness
In connection with the Acquisition, we will incur substantial debt obligations, which could adversely affect our financial condition.
As of March 29, 2014, after giving pro forma effect to the Acquisition, our total outstanding debt for borrowed money would have been approximately $3.25 billion, assuming we did not issue any convertible preferred stock to finance the acquisition. In addition, subject to restrictions in the agreements governing our existing and future indebtedness, we may incur additional indebtedness. Our substantial level of indebtedness could have important consequences, including the following:
• | it may be more difficult for us to satisfy our obligations with respect to our existing indebtedness or future indebtedness, including indebtedness we incur in connection with the Acquisition; |
• | our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired; |
• | a substantial portion of cash flow from operations will be used to pay interest and principal on the indebtedness, which may reduce the funds available to us for other purposes, such as acquisitions and capital expenditures; |
• | it may limit our ability to borrow additional funds; |
• | result in our being at a competitive disadvantage with reduced flexibility in planning for, or responding to, changing conditions in the industry, including increased competition; and |
• | make us more vulnerable to economic downturns and adverse developments in the business. |
We expect to fund our expenses and to pay the principal and interest on our indebtedness from cash flow from operations. Our ability to meet our expenses and to pay principal and interest on our indebtedness when due thus depends on our future performance, which will be affected by financial, business, economic and other factors. We will not be able to control many of these factors, such as economic conditions in the markets where we operate and pressure from competitors. Additionally, we have not previously undertaken substantial amounts of indebtedness. Historically, we have operated our business without incurring significant indebtedness for borrowed money and have limited experience operating our business subject to the constraints imposed by agreements governing such indebtedness.
Despite the indebtedness to be incurred in connection with the Acquisition, we may be able to incur substantially more indebtedness and take other actions that could further exacerbate the risk associated with our substantial indebtedness.
We plan to incur approximately $3.25 billion of indebtedness in connection with the Acquisition. In addition to the planned financing activities, we may be able to incur substantially more indebtedness in the future, resulting in higher leverage. Subject to the limits contained in the agreements governing our indebtedness, we may incur additional indebtedness from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. To the extent we incur additional indebtedness, the risks associated with our substantial indebtedness will be exacerbated.
Restrictive covenants in the agreements governing our indebtedness may limit our current and future operations, particularly our ability to respond to changes in our business or to pursue our business strategies.
The agreements governing the indebtedness we expect to incur to fund the Acquisition, and instruments governing any future indebtedness will contain, a number of restrictive covenants that impose significant operating and financial restrictions, including restrictions on our ability to take actions that we believe may be in our interest. We expect these covenants will limit our ability to:
• | incur additional indebtedness or guarantees; |
• | pay dividends or make other distributions or repurchase or redeem our stock or prepay or redeem certain indebtedness; |
• | sell or dispose of assets and issue capital stock of restricted subsidiaries; |
• | incur liens or enter into sale-lease-back transactions; |
• | enter into agreements restricting our subsidiaries’ ability to pay dividends; |
• | enter into transactions with affiliates; |
• | engage in new lines of business; |
• | consolidate, merge or enter into other fundamental changes; |
• | make loans, investments and/or acquisitions; and |
• | enter into amendments or modifications of certain material subordinated debt agreements or organizational documents. |
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Additionally, the senior credit facility we plan to enter into to fund a portion of the Enterprise acquisition will require us to maintain in certain circumstances compliance with a consolidated total secured net leverage ratio. Our ability to comply with this ratio may be affected by events beyond our control, and we cannot assure you that we will meet this ratio.
The restrictions could adversely affect our ability to:
• | finance operations; |
• | make needed capital expenditures; |
• | make strategic acquisitions or investments or enter into alliances; |
• | withstand a future downturn in our business or the economy in general; |
• | engage in business activities, including future opportunities, that may be in our interest; and |
• | plan for or react to market conditions or otherwise execute our business strategies. |
A breach of any of the covenants contained in the agreements governing the indebtedness (including an inability to comply with the financial maintenance covenants) that is not remedied within the applicable cure period, if any, would result in an event of default under the indebtedness we plan to incur to fund the Acquisition. If, when required, we are unable to repay or refinance our indebtedness or amend the covenants contained in the agreements governing our indebtedness, or if a default otherwise occurs that is not cured or waived, the lenders or holders of our debt securities could elect to declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable or institute foreclosure proceedings against those assets that secure the borrowings. Should the outstanding obligations be accelerated and become due and payable because of any failure to comply with the applicable covenants in the future, we would be required to search for alternative measures to finance current and ongoing obligations of our business. There can be no assurance that such financing will be available on acceptable terms, if at all. Any of these scenarios could adversely impact our liquidity, financial condition and results of operations.
A significant amount of cash will be required to service the indebtedness we plan to incur to fund the Acquisition.
Our ability to make payments on and to refinance the indebtedness we plan to incur to fund the Acquisition and to fund working capital needs, general corporate expenditures and planned capital expenditures will depend on our ability to generate a significant amount of cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that are beyond our control. Additionally, the specific interest rates with respect to the Financing have not been determined, and will not be determined for some time. As a result, we currently do not know with certainty the exact amount of interest expense we will be subject to as a result of the Financing.
If our business does not generate sufficient cash flows from operations or if future borrowings are not available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs, we may need to refinance all or a portion of our indebtedness on or before the maturity thereof, sell assets, reduce or delay capital investments or seek to raise additional capital, any of which could have a material adverse effect on our operations. In addition, we may not be able to effect any of these actions, if necessary, on commercially reasonable terms or at all. Our ability to restructure or refinance our indebtedness will depend on the condition of the capital and debt markets and our financial condition at such time. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict business operations. The terms of anticipated or future debt instruments may limit or prevent us from taking any of these actions. In addition, any failure to make scheduled payments of interest and/or principal on outstanding indebtedness would likely result in a reduction of our credit rating, which could harm our ability to access additional capital on commercially reasonable terms or at all. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would have an adverse effect, which could be material, on our business, financial condition and results of operations, as well as on our ability to satisfy the obligations in respect of our indebtedness.
In addition to the other information included in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, and the factors identified under “Safe Harbor” at the end of Item 2 of Part I of this Quarterly Report on Form 10-Q, which could materially affect our business, financial condition, cash flows or results of operations. The risks described in our Annual Report on Form 10-K are not the only risks facing Zebra. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, cash flows and/or results of operations.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Treasury Shares
Zebra did not purchase shares of Zebra Class A Common Stock during the first quarter of 2014.
ISSUER PURCHASES OF EQUITY SECURITIES
Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced programs | Maximum number of shares that may yet be purchased under the program | ||||||||||||
January 2014 (January 1 – January 25) | 0 | $ | 0.00 | 0 | 665,475 | |||||||||||
February 2014 (January 26 – February 22) | 0 | $ | 0.00 | 0 | 665,475 | |||||||||||
March 2014 (February 23 – March 29) | 0 | $ | 0.00 | 0 | 665,475 |
(1) | On November 4, 2011, Zebra’s Board authorized the purchase of up to an additional 3,000,000 shares under our stock repurchase program. This authorization does not have an expiration date. |
(2) | During the first quarter, Zebra acquired 2,236 shares of Zebra Class A Common Stock through the withholding of shares necessary to satisfy tax withholding obligations upon the vesting of restricted stock awards. These shares were acquired at an average price of $56.92 per share. |
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Item 6. | Exhibits |
10.1 | Form of 2014 performance-based restricted stock agreement for employees other than CEO. + | |
10.2 | Form of 2014 time-vested restricted stock agreement for employees other than CEO. + | |
31.1 | Rule 13a-14(a)/15d-14(a) Certification | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification | |
32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101 | The following financial information from Zebra Technologies Corporation Quarterly Report on Form 10-Q, for the quarter ended March 29, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the consolidated balance sheets; (ii) the consolidated statements of earnings; (iii) the consolidated statements of comprehensive income; (iv) the consolidated statements of cash flows; and (v) notes to consolidated financial statements. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ZEBRA TECHNOLOGIES CORPORATION | ||||||
Date: May 6, 2014 | By: | /s/ Anders Gustafsson | ||||
Anders Gustafsson | ||||||
Chief Executive Officer | ||||||
Date: May 6, 2014 | By: | /s/ Michael C. Smiley | ||||
Michael C. Smiley | ||||||
Chief Financial Officer |
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