10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

 

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

For the quarterly period ended April 4, 2015

OR

 

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

For the transition period from              to             

Commission File Number: 000-19406

Zebra Technologies Corporation

(Exact name of registrant as specified in its charter)

 

Delaware   36-2675536

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3 Overlook Point, 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 May 1, 2015, there were 51,725,074 shares of Class A Common Stock, $.01 par value, outstanding.


Table of Contents

ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

QUARTER ENDED APRIL 4, 2015

INDEX

 

         PAGE  

PART I - FINANCIAL INFORMATION

  

Item 1.

  Consolidated Financial Statements   
 

Consolidated Balance Sheets as of April 4, 2015 (unaudited) and December 31, 2014

     3   
 

Consolidated Statements of Operations (unaudited) for the three months ended April 4, 2015 and March  29, 2014

     4   
 

Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three months ended April  4, 2015 and March 29, 2014

     5   
 

Consolidated Statements of Cash Flows (unaudited) for the three months ended April 4, 2015 and March  29, 2014

     6   
 

Notes to Consolidated Financial Statements

     7   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      25   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      32   

Item 4.

  Controls and Procedures      33   

PART II - OTHER INFORMATION

  

Item 1.

  Legal Proceedings      34   

Item 1A.

  Risk Factors      34   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      34   

Item 6.

  Exhibits      35   

SIGNATURES

     36   

 

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PART I - FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share amounts)

 

     April 4,
2015
    December 31,
2014
 
     (Unaudited)        
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 329,534      $ 393,950   

Investments and marketable securities

     0        24,385   

Accounts receivable, net

     637,953        670,402   

Inventories, net

     405,469        394,176   

Deferred income taxes

     116,707        122,772   

Income tax receivable

     60,340        12,988   

Prepaid expenses and other current assets

     68,971        53,377   
  

 

 

   

 

 

 

Total current assets

  1,618,974      1,672,050   
  

 

 

   

 

 

 

Property and equipment at cost, less accumulated depreciation and amortization

  270,228      255,092   

Goodwill

  2,482,528      2,489,510   

Other intangibles, net

  961,704      1,029,293   

Debt issuance cost

  28,919      29,785   

Other assets

  92,277      93,121   
  

 

 

   

 

 

 

Total assets

$ 5,454,630    $ 5,568,851   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$ 284,730    $ 326,524   

Accrued liabilities

  371,106      421,070   

Deferred revenue

  225,112      196,213   

Current portion of long-term debt

  0      7,522   

Income taxes payable

  14,903      4,518   
  

 

 

   

 

 

 

Total current liabilities

  895,851      955,847   

Long-term debt

  3,144,177      3,182,962   

Long-term deferred tax liability

  192,544      199,853   

Long-term deferred revenue

  107,687      115,847   

Other long-term liabilities

  88,373      74,434   
  

 

 

   

 

 

 

Total liabilities

  4,428,632      4,528,943   
  

 

 

   

 

 

 

Stockholders’ equity:

Preferred Stock, $.01 par value; authorized 10,000 shares; issued 0 shares

  0      0   

Class A Common Stock, $.01 par value; authorized 150,000 shares; issued 72,152 shares

  722      722   

Additional paid-in capital

  160,305      147,090   

Treasury stock at cost, 20,322 and 20,498 shares, respectively

  (629,403   (634,664

Retained earnings

  1,510,010      1,535,307   

Accumulated other comprehensive loss

  (15,636   (8,547
  

 

 

   

 

 

 

Total stockholders’ equity

  1,025,998      1,039,908   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

$ 5,454,630    $ 5,568,851   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)

 

     Three Months Ended  
     April 4,
2015
    March 29,
2014
 

Net sales:

    

Net sales of tangible products

   $ 755,322      $ 261,892   

Revenue from services and software

     137,862        26,376   
  

 

 

   

 

 

 

Total net sales

  893,184      288,268   
  

 

 

   

 

 

 

Cost of sales:

Cost of sales of tangible products

  385,370      130,449   

Cost of services and software

  98,292      9,881   
  

 

 

   

 

 

 

Total cost of sales

  483,662      140,330   
  

 

 

   

 

 

 

Gross profit

  409,522      147,938   
  

 

 

   

 

 

 

Operating expenses:

Selling and marketing

  122,106      35,416   

Research and development

  96,417      22,857   

General and administrative

  66,136      28,391   

Amortization of intangible assets

  67,589      2,672   

Acquisition and integration costs

  26,331      4,927   

Exit and restructuring costs

  11,169      267   
  

 

 

   

 

 

 

Total operating expenses

  389,748      94,530   
  

 

 

   

 

 

 

Operating income

  19,774      53,408   
  

 

 

   

 

 

 

Other income (expense):

Investment income (loss) gain

  (197   421   

Foreign exchange loss

  (27,191   (292

Forward interest rate swaps gain

  1,689      0   

Interest expense

  (50,965   (18

Other, net

  (1,273   26   
  

 

 

   

 

 

 

Total other (expense) income

  (77,937   137   
  

 

 

   

 

 

 

(Loss) income before income taxes

  (58,163   53,545   

Income tax (benefit) expense

  (32,866   11,939   
  

 

 

   

 

 

 

Net (loss) income

$ (25,297 $ 41,606   
  

 

 

   

 

 

 

Basic (loss) earnings per share

$ (0.50 $ 0.83   

Diluted (loss) earnings per share

$ (0.50 $ 0.82   

Basic weighted average shares outstanding

  50,667      50,402   

Diluted weighted average and equivalent shares outstanding

  50,667      50,974   

See accompanying notes to consolidated financial statements

 

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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Amounts in thousands)

(Unaudited)

 

     Three Months Ended  
     April 4,
2015
    March 29,
2014
 

Net (loss) income

   $ (25,297   $ 41,606   

Other comprehensive income (loss):

    

Unrealized gain on anticipated sales hedging transactions, net of tax

     1,690        613   

Unrealized loss on forward interest rate swaps hedging transactions, net of tax

     (7,051     0   

Unrealized holding (loss) gain on investments, net of taxes

     (16     148   

Foreign currency translation adjustment

     (1,712     (167
  

 

 

   

 

 

 

Comprehensive (loss) income

$ (32,386 $ 42,200   
  

 

 

   

 

 

 

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  
     April 4,
2015
    March 29,
2014
 

Cash flows from operating activities:

    

Net (loss) income

   $ (25,297   $ 41,606   

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

    

Depreciation and amortization

     79,703        9,003   

Amortization of debt issuance cost and discount

     4,559        0   

Share-based compensation

     8,796        2,966   

Excess tax benefit from share-based compensation

     (1,492     (395

Deferred income taxes

     (199     18   

Unrealized gain on forward interest rate swaps

     (1,689     0   

All other, net

     (144     12   

Changes in assets and liabilities, net of businesses acquired:

    

Accounts receivable, net

     28,232        (4,793

Inventories, net

     (24,656     1,663   

Other assets

     (13,330     2,419   

Accounts payable

     (27,075     (2,435

Accrued liabilities

     10,027        (9,670

Deferred revenue

     29,424        682   

Income taxes

     (33,393     8,146   

Other operating activities

     2,130        533   
  

 

 

   

 

 

 

Net cash provided by operating activities

  35,596      49,755   
  

 

 

   

 

 

 

Cash flows from investing activities:

Purchases of property and equipment

  (25,522   (2,374

Acquisition of businesses, net of cash acquired

  (48,805   0   

Proceeds from sale of long-term investments

  1,748      0   

Purchases of long-term investments

  (168   (405

Purchases of investments and marketable securities

  (739   (151,817

Maturities of investments and marketable securities

  0      15,996   

Proceeds from sales of investments and marketable securities

  25,108      72,206   
  

 

 

   

 

 

 

Net cash used in investing activities

  (48,378   (66,394
  

 

 

   

 

 

 

Cash flows from financing activities:

Payment of debt

  (50,000   0   

Proceeds from exercise of stock options and stock purchase plan purchases

  8,199      4,936   

Excess tax benefit from share-based compensation

  1,492      395   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

  (40,309   5,331   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

  (11,325   (95
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

  (64,416   (11,403

Cash and cash equivalents at beginning of period

  393,950      62,827   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

$ 329,534    $ 51,424   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

Income taxes paid, net

$ 4,841    $ 3,304   

Interest paid

  26,706      0   

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, 2014.

These interim financial statements include all adjustments (of a normal, recurring nature) necessary to present fairly Zebra’s consolidated financial position as of April 4, 2015, consolidated statements of operations, consolidated statements of comprehensive income (loss) and consolidated statements of cash flows for the three months ended April 4, 2015 and March 29, 2014. These results, however, are not necessarily indicative of results for the full year.

Reclassifications: Prior-period amounts differ from amounts previously reported because certain immaterial amounts in the prior years’ financial statements have been reclassified to conform to the current year’s presentation.

Note 2 – Recently Issued Accounting Pronouncement

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2015-03 “Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” This guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this ASU. This standard is effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods. Management is assessing the impact of adoption on its consolidated financial statements.

In May 2014, the FASB issued update 2014-09, ASC 606, Revenue from Contracts with Customers. This guidance is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This standard is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. In April 2015, the FASB issued an exposure draft that would delay by one year the effective date of its new revenue recognition standard; comments are due by May 29, 2015. Management is assessing the impact of adoption on its consolidated financial statements.

Note 3 Business Combinations

On October 27, 2014, Zebra completed its acquisition of the Enterprise Business (“Enterprise”) from Motorola Solutions Inc. (“MSI”) for a purchase price of $3.45 billion (the “Acquisition”). This transaction positions Zebra as a leading technology innovator, with the accelerating convergence of mobility, data analytics and cloud computing. It will enable Zebra to further sharpen its strategic focus on providing mission-critical solutions for its customers. Certain assets and liabilities historically associated with the Enterprise business were retained by MSI, including MSI’s iDEN infrastructure business. The Acquisition was pursuant to the Master Acquisition Agreement dated April 14, 2014, as amended (the “Master Acquisition Agreement”) and was structured as a combination of stock and asset acquisitions and a merger of certain US entities, resulting in 100% ownership of Enterprise.

Zebra financed the Acquisition through a combination of cash on hand and borrowings of $3.25 billion (the “Indebtedness”), including the sale of 7  14% senior notes due 2022 with an aggregate principal amount of $1.05 billion (the “Notes”) and a new credit agreement with various lenders that provided a term loan of $2.2 billion (the “Term Loan”) due 2021. See Note 13 Long Term Debt footnote. Consideration was paid in the form of cash to MSI in the amount of $3.45 billion, including working capital adjustments.

The allocations of the purchase price for the Acquisition have been prepared on a preliminary basis based on third-party valuations and changes to these allocations may occur as additional information becomes available. We are in the process of evaluating third-party valuations related to the fair value of our tangible and intangible assets, in addition to determining and recording the tax effects of the transaction to include all assets and liabilities at fair value. Acquired goodwill represents the premium paid over the fair value of the net tangible and intangible assets acquired. Zebra paid this premium for a number of reasons, including acquiring an experienced workforce and enhancing technology capabilities as further described above.

 

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During the first quarter of 2015, Zebra adjusted certain preliminary values. The fair value adjustments are reflected in the table below and primarily result in an increase of $0.9 million in assets and a decrease of $6.1 million in liabilities and a corresponding decrease to goodwill of $7.0 million.

Also, additional consideration of $48.8 million was paid to MSI in relation to the opening the cash balance. The income statement impact relating to these fair value adjustments is not significant.

The following table summarizes the preliminary estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition (in thousands):

 

Cash and cash equivalents

$  101,441   

Accounts receivable (1)

  436,577   

Inventories

  261,366   

Deferred income taxes, current

  113,745   

Other current assets

  22,061   

Property and equipment

  125,846   

Intangible assets

  1,014,421   

Other non-current assets

  49,592   

Deferred revenue

  (172,161

Tax liabilities

  (9,410

Other current liabilities (2)

  (366,453

Long-term deferred revenue

  (102,424

Unrecognized tax benefits

  (9,526

Other non-current liabilities

  (24,884

Deferred income taxes

  (219,712
  

 

 

 

Total identifiable net assets

$ 1,220,479   
  

 

 

 

 

(1) Based on the preliminary purchase price allocations, accounts receivable estimated fair value is $436.6 million and gross contractual value of $457.4 million. The difference represents Zebra’s best estimate of the contractual cash flows that will not be collected.
(2) Other current liabilities include accounts payable, customer reserves, and employee compensation and related benefits

On a preliminary basis pending the receipt of final valuations, the purchase price was allocated to identifiable tangible and intangible assets acquired and liabilities assumed based on their estimated fair values resulting in goodwill of $2.329 billion.

Currently, the entire goodwill is assigned to the Enterprise segment. The final assignment of goodwill to reporting units has not been completed as of the date these financial statements are issued.

 

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Note 4 – 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. In addition we consider counterparty credit risk in the assessment of fair value.

Financial assets and liabilities carried at fair value as of April 4, 2015, are classified below (in thousands):

 

     Level 1      Level 2      Level 3      Total  

Assets:

           

Forward contracts (1)

   $ 3,794       $ 10,280       $ 0       $ 14,074   

Money market investments related to the deferred compensation plan

     7,254         0         0         7,254   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

$ 11,048    $ 10,280    $ 0    $ 21,328   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

Forward interest rate swap contracts (2)

$ 0    $ 26,762    $ 0    $ 26,762   

Liabilities related to the deferred compensation plan

  7,254      0      0      7,254   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

$ 7,254    $ 26,762    $ 0    $ 34,016   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial assets and liabilities carried at fair value as of December 31, 2014, are classified below (in thousands):

 

     Level 1      Level 2      Level 3      Total  

Assets:

           

U.S. government and agency securities

   $ 10,720       $ 0       $ 0       $ 10,720   

Obligations of government-sponsored enterprises (3)

     0         705         0         705   

State and municipal bonds

     0         5,179         0         5,179   

Corporate securities

     0         7,781         0         7,781   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investments subtotal

  10,720      13,665      0      24,385   

Forward contracts (1)

  2,039      7,279      0      9,318   

Money market investments related to the deferred compensation plan

  6,008      0      0      6,008   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

$ 18,767    $ 20,944    $ 0    $ 39,711   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

Forward interest rate swap contracts (2)

$ 0    $ 16,718    $ 0    $ 16,718   

Liabilities related to the deferred compensation plan

  6,008      0      0      6,008   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

$ 6,008    $ 16,718    $ 0    $ 22,726   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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1) The fair value of forward contracts is calculated as follows:

 

  a. Fair value of a collar or put option contract associated with forecasted sales hedges is calculated using bid and ask rates for similar contracts.

 

  b. Fair value of regular forward contracts associated with forecasted sales hedges is calculated using the period-end exchange rate adjusted for current forward points.

 

  c. Fair value of balance sheet hedges is 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.

 

2) The fair value of forward interest rate swap contracts is based upon a valuation model that uses relevant observable market inputs at quoted intervals, such as forward yield curves, and is adjusted for Zebra’s own credit risk and the interest rate swap terms.

 

3) Includes investments in notes issued by the Federal Home Loan Mortgage Corporation and the Federal Home Loan Bank.

The following is a summary of investments (in thousands):

 

     As of December 31, 2014  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 

U.S. government and agency securities

   $ 10,720       $ 0       $ 0      $ 10,720   

Obligations of government-sponsored enterprises

     705         0         0        705   

State and municipal bonds

     5,156         27         (4     5,179   

Corporate securities

     7,779         12         (10     7,781   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments

$ 24,360    $ 39    $ (14 $ 24,385   
  

 

 

    

 

 

    

 

 

   

 

 

 

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.

Note 5 – Accounts Receivable

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

 

     As of  
     April 4, 2015      December 31, 2014  

Gross Accounts receivable

   $ 639,873       $ 671,471   

Accounts receivable reserves

     (1,920      (1,069
  

 

 

    

 

 

 

Accounts receivable, net

$ 637,953    $ 670,402   
  

 

 

    

 

 

 

Note 6 – Inventories

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

 

     As of  
     April 4, 2015      December 31, 2014  

Raw material

   $ 157,271       $ 139,647   

Work in process

     472         476   

Finished goods

     256,973         259,872   
  

 

 

    

 

 

 

Inventories, gross

  414,716      399,995   

Inventory reserves

  (9,247   (5,819
  

 

 

    

 

 

 

Inventories, net

$ 405,469    $ 394,176   
  

 

 

    

 

 

 

 

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Note 7 – Goodwill and Other Intangible Assets

In 2014, we acquired intangible assets in the amount of $1.014 billion for developed technology, customer relationships and trade names associated with the Acquisition. These intangible assets have an estimated useful life ranging from 1 to 15 years. See Note 3 Business Combinations for specific information regarding the Acquisition.

Intangible assets are as follows (in thousands):

 

     As of  
     April 4, 2015      December 31, 2014  

Current technology

   $ 23,201       $ 23,201   

Trade names

     40,300         40,300   

Unpatented technology

     280,000         280,000   

Patents and patent rights

     244,569         244,569   

Customer relationships

     532,591         532,591   

Accumulated amortization

     (158,957      (91,368
  

 

 

    

 

 

 

Other intangibles, net

$ 961,704    $ 1,029,293   
  

 

 

    

 

 

 

Amortization of intangibles assets was $67.6 million and $2.7 million for the three months ended April 4, 2015 and March 29, 2014 respectively.

In 2014, we acquired goodwill in the amount of $2.329 billion, see Note 3 Business Combinations for specific information regarding the Acquisition.

Note 8 Other Assets

Other assets consist of the following (in thousands):

 

     As of  
     April 4, 2015      December 31, 2014  

Investments related to the deferred compensation plan

   $ 7,254       $ 6,008   

Long-term investments

     30,180         31,759   

Other long-term assets

     23,163         22,652   

Long-term trade receivable

     15,888         16,985   

Long-term notes receivable

     14,231         14,231   

Deposits

     1,561         1,486   
  

 

 

    

 

 

 

Total

$ 92,277    $ 93,121   
  

 

 

    

 

 

 

The long-term investments are primarily in venture capital backed technology companies and our ownership interest is between 2.0% to 8.3%.

Note 9 Accrued Liabilities

The components of accrued liabilities are as follows (in thousands):

 

     As of  
     April 4, 2015      December 31, 2014  

Accrued payroll

   $ 55,201       $ 73,582   

Accrued warranty

     26,913         24,666   

Accrued taxes

     6,928         11,446   

Interest payable

     54,207         34,727   

Amount owed to seller

     0         48,806   

Customer reserves

     54,977         39,201   

Accrued other expenses

     172,880         188,642   
  

 

 

    

 

 

 

Total accrued liabilities

$ 371,106    $ 421,070   
  

 

 

    

 

 

 

Note 10 – Costs Associated with Exit and Restructuring Activities

During the first quarter 2015, Zebra incurred exit and restructuring costs resulting from organizational design changes primarily related to the Acquisition as follows (in thousands):

 

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Type of Cost

   Costs incurred for
the three months
ended April 4,
2015
     Total costs
incurred as
of April 4,
2015
     Total costs
expected to
be incurred
 

Severance, stay bonuses, and other employee-related expenses

   $ 11,097       $ 11,097       $ 11,097   

Professional services

     72         72         72   
  

 

 

    

 

 

    

 

 

 

Total

$ 11,169    $ 11,169    $ 11,169   
  

 

 

    

 

 

    

 

 

 

Exit and restructuring charges for the three months ended April 4, 2015 were $1.5 million and $9.7 million for the Legacy Zebra segment and Enterprise segment, respectively. Additional costs to be incurred in connection with this program are not expected to be significant.

As of December 31, 2014, we have incurred the following exit and restructuring costs related to the 2014 organization design changes, 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 twelve months
ended December 31,
2014
     Total costs
incurred as
of December 31,
2014
     Total costs
expected to
be incurred
 

Severance, stay bonuses, and other employee-related expenses

   $ 6,650       $ 5,991       $ 12,641       $ 12,641   

Professional services

     180         16         196         196   

Relocation and transition costs

     20         0         20         20   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 6,850    $ 6,007    $ 12,857    $ 12,857   
  

 

 

    

 

 

    

 

 

    

 

 

 

A rollforward of the exit and restructuring accruals is as follows (in thousands):

 

     Three Months Ended  
     April 4, 2015      March 29, 2014  

Balance at the beginning of period

   $ 6,830       $ 1,252   

Charged to earnings

     11,169         267   

Cash paid

     (9,758      (1,190
  

 

 

    

 

 

 

Balance at the end of period

$ 8,241    $ 329   
  

 

 

    

 

 

 

Liabilities related to exit and restructuring activities are included in accrued liabilities.

Note 11 – 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.

In addition, we have exposure to market risk for changes in interest rates resulting from the variable interest payments on the term facility that was used to fund the Acquisition. We entered into forward interest rate swaps to hedge the interest rate risk associated with the Term Loan.

The fair value of the forward starting interest rate swap contracts is estimated using market quoted forward interest rates for the London Interbank Offered Rate “LIBOR” at the balance sheet date and the application of such rates subject to the interest rate swap terms. In accordance with ASC 815, Derivative and Hedging we recognize derivative instruments as either assets or liabilities on the balance sheet and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated as and qualifies for hedge accounting.

 

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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 statements of operations as other income (expense) is as follows (in thousands):

 

     Three Months Ended  
     April 4, 2015      March 29, 2014  

Realized gains from foreign exchange derivatives

   $ 1,100       $ 25   

Loss on net foreign currency assets

     (28,291      (317
  

 

 

    

 

 

 

Foreign exchange (loss)

$ (27,191 $ (292
  

 

 

    

 

 

 

 

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     As of  
     April 4, 2015      December 31, 2014  

Notional balance of outstanding contracts:

     

Pound/US dollar

   £ 6,643       £ 4,574   

Euro/US dollar

   40,852       40,218   

Net fair value of outstanding contracts

   $ 259       $ 250   

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  
     April 4, 2015      March 29, 2014  

Change in unrealized gains on anticipated sales hedging:

     

Gross

   $ 2,112       $ 780   

Income tax expense

     422         167   
  

 

 

    

 

 

 

Net

$ 1,690    $ 613   
  

 

 

    

 

 

 

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

 

     As of  
     April 4, 2015     December 31, 2014  

Notional balance of outstanding contracts versus the dollar

   90,306      88,969   

Hedge effectiveness

     100     100

 

     Three Months Ended  
     April 4, 2015      March 29, 2014  

Net gains (losses) included in revenue

   $ 6,435       $ (971

Forward Contracts

We record our forward contracts at fair value on our consolidated balance sheet as a current asset or current liability, depending upon the fair value calculation as detailed in Note 4 of Zebra’s consolidated financial statements. The amounts recorded on our consolidated balance sheet are as follows (in thousands):

 

     As of  
     April 4, 2015      December 31, 2014  

Assets:

     

Prepaid expenses and other current assets

   $ 14,074       $ 9,318   
  

 

 

    

 

 

 

Total

$ 14,074    $ 9,318   
  

 

 

    

 

 

 

 

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Table of Contents

Forward Interest Rate Swaps

The forward interest rate swaps hedge the interest rate risk associated with the variable interest payments on our Term Loan that was used to fund the Acquisition.

In June 2014, we entered into a commitment letter for a new variable rate credit facility to fund the Acquisition and we also entered into two tranches of floating-to-fixed forward interest rate swaps (“Original Swaps”). These Original Swaps were used to economically hedge interest rate risk associated with the variable rate commitment until July 30, 2014, and as such, changes in their fair value were recognized in earnings in other income (expense). Effective July 30, 2014, the Original Swaps were designated as cash flow hedges of interest rate exposure associated with variability in future cash flows on the variable rate commitment. On October 27, 2014, the variable rate commitment was funded and we entered into a Term Loan that accrues interest at a variable rate of LIBOR (subject to a floor of 0.75% per annum) plus a margin of 4.0%. On October 30, 2014, we discontinued hedge accounting for the Original Swaps due to the syndication of the Original Swaps to a group of commercial banks (“Syndicated Swaps”), which resulted in their termination. The changes in fair value of the Original Swaps between July 30, 2014 and their termination were included in other comprehensive income (loss), and any ineffectiveness was insignificant. The amounts included in other comprehensive income (loss) will be amortized to earnings in other income (expense) as the interest payments under the Term Loan affect earnings. The Syndicated Swaps were not designated as hedges and the changes in fair value are recognized in earnings in other income (expense).

On November 20, 2014 we entered into additional floating-to-fixed forward starting interest rate swaps (“New Swaps”) and designated these as cash flow hedges of interest rate exposure associated with variability in future cash flows on our Term Loan. To offset the impact to earnings of the changes in fair value of the Syndicated Swaps, we also entered into fixed-to-floating forward starting interest rate swaps (“Offsetting Swaps”), which were not designated in a hedging relationship and the changes in the fair value are recognized in earnings in other income (expense). Changes in fair value of the New Swaps that are designated as cash flow hedges and are effective at offsetting variability in the future cash flows on our Term Loan are recognized in other comprehensive income (loss). Ineffectiveness is immediately recognized in earnings.

The location of the forward interest rate swaps designated in a hedge relationship is as follows (in thousands):

 

     As of  
     April 4, 2015      December 31, 2014  

Liabilities:

     

Other long-term liabilities

   $ 13,904       $ 2,170   
  

 

 

    

 

 

 

Total

$ 13,904    $ 2,170   
  

 

 

    

 

 

 

The interest rate swap designated in a hedging relationship is highly effective.

The forward interest rate swaps not designated in a hedging relationship are recorded in a net liability position of $12.9 million in the Consolidated Balance Sheets.

The gross and net amounts offset at April 4, 2015 were as follows (in thousands):

 

     Gross Fair
Value
     Counterparty
Offsetting
     Net Fair
Value in the
Consolidated
Balance
Sheets
 

Counterparty A

   $ 11,543       $ 5,862       $ 5,681   

Counterparty B

     3,697         1,140         2,557   

Counterparty C

     4,221         1,422         2,799   

Counterparty D

     7,962         2,760         5,202   

Counterparty E

     4,058         1,343         2,715   

Counterparty F

     4,103         1,377         2,726   

Counterparty G

     5,082         0         5,082   
  

 

 

    

 

 

    

 

 

 

Total

$ 40,666    $ 13,904    $ 26,762   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The volume of the forward interest rate swaps, New Swaps, designated in a hedge relationship is as follows (in thousands):

 

     As of  
     April 4, 2015      December 31, 2014  

Notional balance of outstanding contracts

   $ 3,339,000       $ 3,339,000   

The New Swaps, each with a term of one year, are designated as cash flow hedges of interest rate exposure associated with variability in future cash flows on the Term Loan. The notional amount of the designated New Swaps effective in each year of the cash flow hedge relationships does not exceed the principal amount of the Term Loan which is hedged. The New Swaps have the following notional amounts per year (in thousands):

 

Year 2015

   $  1,010,000   

Year 2016

     697,000   

Year 2017

     544,000   

Year 2018

     544,000   

Year 2019

     272,000   

Year 2020

     272,000   
  

 

 

 

Notional balance of outstanding contracts

$ 3,339,000   
  

 

 

 

The gain (loss) recognized on the forward interest rate swaps not designated in a hedge relationship is as follows (in thousands):

 

     Three Months Ended  
     April 4, 2015      March 29, 2014  

Gain on forward interest-rate swaps

   $ 1,689       $ 0   

The gain (loss) recognized in other comprehensive income (loss) on the forward interest rate swaps designated in a hedging relationship is as follows (in thousands):

 

     As of  
     April 4, 2015      March 29, 2014  

Change in unrealized loss on forward interest rate swap hedging:

     

Gross

   $ (11,734    $ 0   

Income tax (benefit)

     (4,683      0   
  

 

 

    

 

 

 

Total

$ (7,051 $ 0   
  

 

 

    

 

 

 

No gain (loss) was reclassified from accumulated other comprehensive income (loss) into earnings on the forward interest rate swaps designated in a hedging relationship during the three month periods ended April 4, 2015 and March 29, 2014.

At April 4, 2015, we expect that approximately $6.0 million in losses on the forward interest rate swaps designated in a hedging relationship will be reclassified from accumulated other comprehensive loss into earnings during the next 4 quarters.

 

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Note 12 – Warranty

In general, Zebra provides warranty coverage of one year on mobile computing products and WLAN products. Advanced data capture products are warranted from 1-5 years, depending on the product. Printers are warranted for one year 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):

 

     Three Months Ended  
     April 4, 2015      March 29, 2014  

Balance at the beginning of period

   $ 24,666       $ 4,125   

Warranty expense

     8,652         1,510   

Warranty payments

     (6,405      (1,673
  

 

 

    

 

 

 

Balance at the end of period

$ 26,913    $ 3,962   
  

 

 

    

 

 

 

Note 13 – Long-Term Debt

The following table summarizes the carrying value of our debt (in thousands):

 

     As of  
     April 4, 2015      December 31, 2014  

Senior Notes

   $ 1,050,000       $ 1,050,000   

Term loan

     2,150,000         2,200,000   

Less unamortized discounts

     (55,823      (59,516
  

 

 

    

 

 

 

Total outstanding debt

  3,144,177      3,190,484   

Current maturities of long-term debt

  0      16,500   

Less: current portion of unamortized discounts

  0      (8,978
  

 

 

    

 

 

 

Total short-term debt

  0      7,522   
  

 

 

    

 

 

 

Long-term debt, less current maturities

$ 3,144,177    $ 3,182,962   
  

 

 

    

 

 

 

The estimated fair value of our long-term debt approximated $3.3 billion at April 4, 2015 and December 31, 2014. These fair value amounts represent the estimated value at which our lenders could trade our debt within the financial markets and does not represent the settlement value of these long-term debt liabilities to us. The fair value of the long-term debt will continue to vary each period based on fluctuations in market interest rates, as well as changes to our credit ratings. This methodology resulted in a Level 2 classification in the fair value hierarchy.

Private Offering

On October 15, 2014, Zebra completed a private offering of $1.05 billion aggregate principal of 7.25% Senior Notes due October 15, 2022 (the “Senior Notes”). The Senior Notes yielded an effective interest rate of 7.61% at issuance. The Senior Notes are governed by the terms of an indenture, dated as of October 15, 2014, by and among Zebra and U.S. Bank National Association, as Trustee. Interest on the Senior Notes is payable in cash on April 15 and October 15 of each year, commencing on April 15, 2015.

The Indenture covering the Senior Notes contains certain various restrictive and affirmative covenants. In addition, the Senior Notes are guaranteed jointly and severally, on a senior and unsecured basis by Zebra’s direct and indirect wholly-owned existing and future domestic restricted subsidiaries, subject to certain exceptions.

Credit Facilities

On October 27, 2014, Zebra entered into a new credit agreement which provides for a term loan of $2.2 billion (“Term Loan”) and a revolving credit facility of $250.0 million (“Revolving Credit Facility”). Borrowings under the Term Loan bear interest at a variable rate plus an applicable margin, subject to an all-in floor of 4.75%. As of April 4, 2015, the Term Loan interest rate was 4.75%. Interest payments are payable quarterly, starting January 27, 2015. Zebra has entered into interest rate swaps to manage interest rate risk on its long-term debt. See Note 11 Derivative Instruments.

 

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Table of Contents

The credit agreement requires Zebra to prepay the Term Loan and Revolving Credit Facility, under certain circumstances or transactions defined in the credit agreement. Also, Zebra may make optional prepayments of the Term Loans, in whole or in part, without premium or penalty. Zebra made such optional principal prepayments of $50.0 million and $30.0 million on March 15, 2015 and May 13, 2015 respectively. Unless satisfied by further optional prepayments Zebra is required to make scheduled quarterly principal payments of $5.5 million beginning March 31, 2019, with the balance of $2.1 billion due on October 27, 2021.

The Revolving Credit Facility is available for working capital and other general corporate purposes including letters of credit. The amount (including letters of credit) shall not exceed $250.0 million. As of April 4, 2015, Zebra had established letters of credit amounting to $3.1 million, which reduced funds available for other borrowings under the agreement to $246.9 million. The Revolving Credit Facility will mature and the commitments thereunder will terminate on October 27, 2019.

Borrowings under the Revolving Credit Facility bear interest at a variable rate plus an applicable margin. As of April 4, 2015, the Revolving Credit Facility interest rate was 3.25%. Interest payments are payable quarterly. As of April 4, 2015 and December 31 2014, Zebra did not have any borrowings against the Revolving Credit Facility.

The Credit Facilities contains various restrictive and affirmative covenants and are collateralized by a security interest in substantially all of Zebra’s assets as defined in the security agreement and guaranteed by its direct and indirect wholly-owned existing and future domestic restricted subsidiaries, subject to certain exceptions.

Note 14 – Contingencies

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

 

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Table of Contents

Note 15 – Earnings (Loss) Per Share

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

 

     Three Months Ended  
     April 4, 2015      March 29, 2014  

Weighted average shares:

     

Weighted average common shares outstanding

     50,667         50,402   

Effect of dilutive securities outstanding

     0         572   
  

 

 

    

 

 

 

Diluted weighted average shares outstanding

  50,667      50,974   
  

 

 

    

 

 

 

Basic per share amounts:

Net (loss) income

$ (25,297 $ 41,606   

Weighted average common shares outstanding

  50,667      50,402   

Per share amount

$ (0.50 $ 0.83   

Diluted per share amounts:

Net (loss) income

$ (25,297 $ 41,606   

Diluted weighted average shares outstanding

  50,667      50,974   

Per share amount

$ (0.50 $ 0.82   

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  
     April 4, 2015      March 29, 2014  

Potentially dilutive shares

     0         0   

Note 16 – Equity-Based Compensation

Zebra has an equity-based compensation plan and an employee stock purchase plan under which shares of our common stock were available for future grants and sales. Zebra recognizes compensation costs using the straight-line method over the vesting period upon grant of up to 5 years.

Pre-tax equity-based compensation expense recognized in income was $8.8 million and $3.0 million for the three month periods ending April 4, 2015 and March 29, 2014, respectively. Tax related benefits of $3.1 million and $1.0 million were also recognized for the three month periods ending April 4, 2015 and March 29, 2014, respectively.

The company issued 175,261 and 123,019 shares in connection with stock based compensation and employee stock purchase programs during the three months ended April 4, 2015 and March 29, 2014 respectively.

The fair value of equity-based compensation is estimated on the date of grant using a binomial model. Volatility is based on an average of the implied volatility in the open market and the annualized volatility of Zebra stock prices over our entire stock history. Stock option grants in the table below include both stock options, all of which were non-qualified, and stock appreciation rights (SARs) that will be settled in Zebra stock. Restricted stock grants are valued at the market closing price on the grant date. 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  
     April 4, 2015     March 29, 2014  

Expected dividend yield

     0     0

Forfeiture rate

     10.32     10.31

Volatility

     34.92     32.00

Risk free interest rate

     1.73     0.82

Range of interest rates

     0.02% - 2.61     0.02% - 1.78

Expected weighted-average life

     5.36 years        5.42 years   

Fair value of SARs granted

   $ 70,234      $ 85,149   

Weighted-average grant date fair value of SARs granted (per underlying share)

   $ 28.82      $ 65.75   

 

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Stock option activity was as follows:

 

     Three Months Ended April 4, 2015                

Options

   Shares     Weighted-Average
Exercise Price
     Weighted-Average
remaining contractual
term
     Aggregate
Intrinsic
Value
 

Outstanding at beginning of year

     415,960      $ 40.19         

Exercised

     (133,981     44.36         

Expired

     (1,550     51.62         
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding at end of period

  280,429    $ 38.13      2.5 Years    $ 13.6 million   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at end of period

  280,429    $ 38.13      2.5 Years    $ 13.6 million   
  

 

 

   

 

 

    

 

 

    

 

 

 

Intrinsic value of exercised options

$ 5,709,000   
  

 

 

         

SARs activity was as follows:

 

     Three Months Ended April 4, 2015                

SARs

   Shares     Weighted-Average
Exercise Price
     Weighted-Average
remaining contractual
term
     Aggregate
Intrinsic
Value
 

Outstanding at beginning of year

     1,292,142      $ 42.20         

Granted

     2,437        85.82         

Exercised

     (32,159     34.34         

Forfeited

     (3,569     50.62         
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding at end of period

  1,258,851    $ 42.46      6.8 years    $ 55.6 million   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at end of period

  556,517    $ 32.99      5.8 years    $ 29.9 million   
  

 

 

   

 

 

    

 

 

    

 

 

 

Intrinsic value of exercised SARs

$ 1,688,000   
  

 

 

         

Restricted stock award activity was as follows:

 

     Three Months Ended April 4, 2015  

Restricted Stock Awards

   Shares      Weighted-Average
Grant Date Fair Value
 

Outstanding at beginning of year

     691,621       $ 60.06   

Granted

     2,053         85.82   

Released

     (4,239      42.56   

Forfeited

     (12,437      71.82   
  

 

 

    

 

 

 

Outstanding at end of period

  676,998    $ 60.06   
  

 

 

    

 

 

 

Performance share award activity was as follows:

 

     Three Months Ended April 4, 2015  

Performance Share Awards

   Shares      Weighted-Average
Grant Date Fair Value
 

Outstanding at beginning of year

     374,180       $ 61.53   

Released

     1,703         85.82   

Forfeited

     (3,530      73.07   
  

 

 

    

 

 

 

Outstanding at end of period

  372,353    $ 61.53   
  

 

 

    

 

 

 

 

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Table of Contents

Restricted stock unit activity was as follows:

 

     Three Months Ended April 4, 2015  

Restricted Stock Units

   Shares  

Outstanding at beginning of year

     41,964   

Released

     (34

Forfeited

     (1,305
  

 

 

 

Outstanding at end of period

  40,625   
  

 

 

 

Performance stock unit activity was as follows:

 

     Three Months Ended April 4, 2015  

Performance Stock Units

   Shares  

Outstanding at beginning of year

     10,345   

Forfeited

     (680
  

 

 

 

Outstanding at end of period

  9,665   
  

 

 

 

As of April 4, 2015 total unearned compensation costs related to Zebra’s equity based compensation plans was $45.7 million which will be amortized over the weighted average remaining service period of 1.7 years.

The fair value of the purchase rights issued to Zebra employees 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  
     April 4, 2015     March 29, 2014  

Fair market value

   $ 77.41      $ 54.08   

Option price

   $ 73.54      $ 51.38   

Expected dividend yield

     0     0

Expected volatility

     23     33

Risk free interest rate

     0.04     0.07

Note 17 – Income Taxes

In the first quarter of 2015 we recognized a tax benefit of $32.9 million compared to a tax provision of $11.9 million for the corresponding period in the prior year. Zebra’s effective tax rates were 56.5% and 22.3% as of April 4, 2015 and March 29, 2014, respectively. Zebra’s effective tax rate was higher than the statutory rate of 35% in 2015 primarily due to pre-tax losses in the Unites States and pre-tax income in various non-US jurisdictions. Zebra’s effective tax rate in 2014 benefited from lower taxes on income in various non-US jurisdictions.

 

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Note 18 – Other Comprehensive Income

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

 

    Unrealized gains (losses) on anticipated sales 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 11 for more details.
    Unrealized gains (losses) on forward interest rate swap hedging transactions refer to the hedging of the interest rate risk associated with the variable rate commitment entered into for the Acquisition. See Note 11 for more details.
    Unrealized gains (losses) on investments are 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):

 

2015   As of
December 31,
2014
    Gain (Loss)
recognized in
OCI
    Gain (Loss)
reclassified from
AOCI to income
    Three Months
ended April 4,
2015
    As of
April 4, 2015
 

Unrealized gains (losses) on anticipated sales hedging transactions:

         

Gross

  $ 6,658      $ (4,323   $ 6,435 (1)      2,112      $ 8,770   

Income tax (benefit)

    1,332        (865     1,287        422        1,754   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net

  5,326      (3,458   5,148      1,690      7,016   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on forward interest rate swaps hedging transactions:

Gross

  (12,069   (11,734   0 (2)    (11,734   (23,803

Income tax (benefit)

  (4,370   (4,683   0      (4,683   (9,053
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net

  (7,699   (7,051   0      (7,051   (14,750
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on investments:

Gross

  102      0      (25 )(3)    (25   77   

Income tax (benefit)

  (245   0      (9   (9   (254
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net

  347      0      (16   (16   331   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustment

  (6,521   (1,712   0 (4)    (1,712   (8,233
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total accumulated other comprehensive gains (losses)

$ (8,547 $ (12,221 $ 5,132    $ (7,089 $ (15,636
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
2014   As of
December 31,
2013
    Gain (Loss)
recognized in
OCI
    Gain (Loss)
reclassified from
AOCI to income
    Three Months
ended March 29,
2014
    As of
March 29, 2014
 

Unrealized gains (losses) on anticipated sales 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 (3)    202      51   

Income tax (benefit)

  (73   29      25      54      (19
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net

  (78   92      56      148      70   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustment

  (7,839   (160   (7 )(4)    (167   (8,006
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total accumulated other comprehensive gains (losses)

$ (9,781 $ 1,323    $ (729 $ 594    $ (9,187
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Transfer of unrealized gains and (losses) from AOCI to income on anticipated sales hedging transactions are included in net sales of tangible products.
(2) Transfer from AOCI to income and (losses) on forward interest rate swap hedging transactions are reported in forward swaps gain.
(3) Transfer of unrealized gains and (losses) from AOCI to income on investments are included in investment income.
(4) Transfer of foreign currency translation gains and (losses) from AOCI to income, are included in foreign exchange loss.

Note 19 – Segment Information

Subsequent to the Acquisition, on October 27, 2014, Zebra has two reportable segments: Legacy Zebra (“Z”) and Enterprise (“E”). Segment assets are not reviewed by Zebra’s chief operating decision maker and therefore are not disclosed below:

 

     Three Months Ended  
     April 4, 2015      March 29, 2014  

Net Sales:

     

Z – Net sales

   $ 331,643       $ 288,268   

E – Net sales

     567,174         0   
  

 

 

    

 

 

 

Total segment net sales

$ 898,817    $ 288,268   

Corporate, eliminations (1)

  (5,633   0   
  

 

 

    

 

 

 

Total

$ 893,184    $ 288,268   
  

 

 

    

 

 

 

Operating income (loss):

Z – Operating income

$ 77,449    $ 61,286   

E – Operating income

  53,895      0   
  

 

 

    

 

 

 

Total segment operating income

$ 131,344    $ 61,286   

Corporate, eliminations (2)

  (111,570   (7,878
  

 

 

    

 

 

 

Total

$ 19,774    $ 53,408   
  

 

 

    

 

 

 

 

(1) Amount included in Corporate, eliminations consist of purchase accounting adjustments related to the Acquisition.
(2) Amounts included in Corporate, eliminations consist of purchase accounting adjustments not reported in segments: amortization expense, acquisition integration expense and exit and restructuring costs.

 

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Note 20 – Subsequent Events

Since the date of the Enterprise acquisition Zebra has been working on and executing against its integration plan for the Enterprise business (the “Integration Plan”). Zebra anticipates completing the Integration Plan as soon as practicable and expects that the Integration Plan will allow the combined businesses to achieve further synergies and cost savings associated with the acquisition. As part of the Integration Plan, Zebra began realigning certain acquired assets of the Enterprise business with and into the Zebra corporate structure and business model in April 2015. The April 2015 transactions are expected to result in a charge of approximately $32 million to income tax expense in the second quarter of 2015.

On May 13, 2015 Zebra made principal prepayments of $30.0 million under its Term Loan. See Note 13 Long-Term Debt.

 

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

Description of the Company

Zebra is a global leader respected for innovation and reliability. We offer products and services that give organizations greater visibility and insights into their operations, which we call Enterprise Asset Intelligence. Our products and services allow our customers to manage their assets, transactions and people more effectively, and thereby improve their operational efficiency, deliver a better customer experience, provide more effective security and achieve other objectives of their organization. We provide products and services in approximately 100 countries, with 122 facilities and approximately 6,800 employees worldwide.

In October 2014, Zebra acquired the Enterprise business (“Enterprise”) from Motorola Solutions Inc., excluding iDEN, for $3.45 billion in cash. Enterprise is an industry leader in mobile computing and data capture products. It also provides wireless LAN products, in addition to repair, maintenance, integration and device management services. Zebra’s financial results reflect the addition of Enterprise from the date of acquisition.

Executive Summary

This Executive Summary provides significant highlights from the discussion and analysis that follows.

 

    Net sales increased 209.8% in the quarter to $893 million, primarily due to the acquisition of Enterprise and continued strength in the Legacy Zebra business.

 

    Gross profit, as a percent of sales, decreased to 45.8% in the current quarter from 51.3% a year ago. The decline was primarily due to mix reflecting the acquisition of Enterprise.

 

    Zebra reported a 63.0% decline in operating income to $19.8 million reflecting increased acquisition, integration, exit and restructuring costs and an increase in the amortization of intangible assets.

 

    Zebra reported a net loss for the quarter of $25.3 million, compared to net income of $41.6 million a year ago. The reduction in profitability reflects lower operating income and the impacts of higher interests costs and foreign exchange losses.

Results of Operations: First Quarter of 2015 versus First Quarter of 2014

Consolidated Results of Operations

(Amounts in thousands, except percentages):

 

     Three Months Ended                      
     April 4,
2015
     March 29,
2014
     Percent
Change
    Percent of
Net Sales - 2015
     Percent of
Net Sales - 2014
 

Net sales

   $ 893,184       $ 288,268         209.8        100.0         100.0   

Gross profit

   $ 409,522       $ 147,938         176.8        45.8         51.3   

Operating income

   $ 19,774       $ 53,408         (63.0     2.2         18.5   

Net sales increased across all regions and all Legacy Zebra product categories in the first quarter of 2015 which resulted in an increase of 209.8% compared to the first quarter in 2014. Sales related to the October 2014 acquisition of Motorola’s Enterprise Business increased sales for the first quarter of 2015 by $567.2 million.

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

 

     Three Months Ended                       

Product

Category

   April 4, 2015      March 29, 2014      Percent
Change
     Percent of
Net Sales - 2015
     Percent of
Net Sales - 2014
 

Hardware

   $ 688,070       $ 198,388         246.8         77.1         68.9   

Supplies

     67,252         63,504         5.9         7.5         22.0   

Service and software

     137,862         26,376         422.7         15.4         9.1   
  

 

 

    

 

 

       

 

 

    

 

 

 

Total net sales

$ 893,184    $ 288,268      209.8      100.0      100.0   
  

 

 

    

 

 

       

 

 

    

 

 

 

 

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Table of Contents

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

 

     Three Months Ended                

Geographic Region

   April 4, 2015      March 29, 2014      Percent
Change
     Percent of
Net Sales - 2015
     Percent of
Net Sales - 2014
 

Europe, Middle East and Africa

   $ 290,544       $ 91,439         217.7         32.5         31.7   

Latin America

     53,286         25,640         107.8         6.0         8.9   

Asia-Pacific

     106,383         37,967         180.2         11.9         13.2   
  

 

 

    

 

 

       

 

 

    

 

 

 

Total International

  450,213      155,046      190.4      50.4      53.8   

North America

  442,971      133,222      232.5      49.6      46.2   
  

 

 

    

 

 

       

 

 

    

 

 

 

Total net sales

$ 893,184    $ 288,268      209.8      100.0      100.0   
  

 

 

    

 

 

       

 

 

    

 

 

 

Gross Profit

Gross profit in the first quarter of 2015 increased 176.8% to $ 409.5 million. $ 244.6 million of the increase was due to the October 2014 acquisition of Enterprise. Gross profit in the Legacy Zebra segment increased to $171.4 million from $147.9 million from the first quarter of 2014.

Operating Income

Operating income decreased 63.0% from prior year. This was mainly due to acquisition costs, amortization of intangibles and exit and restructuring costs related to the acquisition of Enterprise. In addition, expenses across all functional areas increased due to the October 2014 acquisition of Enterprise.

Segment Information

Commencing with the acquisition of Enterprise in October 2014, our continuing operations consist of two reporting segments (1) Legacy Zebra, comprised of barcode and card printing, location and motion sensing and related services, and supplies products, and (2) Enterprise, comprised of our mobile computing, data capture, WLAN products and related services. The following commentary should be read in conjunction with the financial results of each operating business segment as detailed in Note 19, Segment Information in the Notes to the Consolidated Financial Statements. The segment results exclude acquisition and integration costs, amortization of intangible assets and exit and restructuring costs.

Legacy Zebra Segment

(Amounts in thousands, except percentages)

 

     Three Months Ended                       
     April 4, 2015      March 29, 2014      Percent
Change
     Percent of
Net Sales - 2015
     Percent of
Net Sales - 2014
 

Net sales

   $ 331,643       $ 288,268         15.0         100.0         100.0   

Gross profit

   $ 171,352       $ 147,938         15.8         51.7         51.3   

Operating income

   $ 77,449       $ 61,286         26.4         23.4         21.3   

Legacy Zebra Net Sales

Net sales for the first quarter of 2015 increased 15.0%, compared to the first quarter of 2014. Growth was primarily attributable to solid demand in the North America and EMEA regions. Increased sales were widespread across both distribution and end-user customers. From a product perspective, key areas of growth were in tabletop, desktop and mobile printers, aftermarket parts, supplies and location solution products. Movement in foreign currency, net of hedges, decreased sales growth by $2.5 million.

Legacy Zebra Gross Profit

Gross profit margin was 51.7% in the first quarter of 2015, compared to 51.3% in the first quarter of 2014. The increase in gross profit margin was principally due to increased volume leverage on fixed costs, lower freight costs, and favorable product mix.

Legacy Zebra Operating Income

Operating income for the first quarter increased 26.4% as a result of higher sales and gross profit partially offset by increases in operating expenses.

 

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Table of Contents

Enterprise Segment

(Amounts in thousands, except percentages)

 

     Three months Ended         
     April 4, 2015      Percent of
Net Sales - 2015
 

Net sales

   $ 567,174         100.0   

Gross profit

   $ 244,595         43.1   

Operating income

   $ 53,895         9.5   

Enterprise Net Sales

On October 27, 2014, Zebra acquired Enterprise, a provider of industry-leading data capture, mobile computing and wireless LAN solutions.

For the three months ended April 4, 2015, net sales for Enterprise were $567.2 million. For the period, overall Enterprise sales reflected solid customer demand, particularly in the North America and Asia Pacific regions. Unfavorable changes in foreign currency adversely affected sales in Europe. Sales of mobile computing and data capture products continue to represent the majority of total enterprise sales while North America and EMEA continue to represent the largest geographic regions. Services sales were consistent with recent levels.

Enterprise Gross Profit

Gross profit for Enterprise in the first quarter of 2015 was $244.6 million. Gross margin for Enterprise for the first quarter of 2015, was 43.1% of sales.

The gross profit margin was adversely affected by the strengthening of the U.S. dollar and higher service costs. Excluding currency effects, hardware gross profit margin was relatively consistent with recent trends while service margin was lower. The mix of hardware and services sales was essentially consistent with recent trends.

Enterprise Operating Income

Enterprise operating income for the first quarter of 2015 was $53.9 million.

Consolidated Operating expenses

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

 

     Three Months Ended                       

Operating Expenses

   April 4, 2015      March 29, 2014      Percent
Change
     Percent of
Net Sales 2015
     Percent of
Net Sales 2014
 

Selling and marketing

   $ 122,106       $ 35,416         244.8         13.6         12.3   

Research and development

     96,417         22,857         321.8         10.8         7.9   

General and administrative

     66,136         28,391         132.9         7.4         9.9   

Amortization of intangible assets

     67,589         2,672         N/M         7.6         0.9   

Acquisition and integration costs

     26,331         4,927         434.4         2.9         1.7   

Exit and restructuring costs

     11,169         267         N/M         1.3         0.1   
  

 

 

    

 

 

       

 

 

    

 

 

 

Total operating expenses

$ 389,748    $ 94,530      312.3      43.6      32.8   
  

 

 

    

 

 

       

 

 

    

 

 

 

Operating expenses for the first quarter of 2015 increased 312.3% mainly due to acquisition costs, amortization of intangibles, exit and restructuring costs and increased costs across all functional areas as a result of the October 2014 acquisition of Enterprise.

 

    Selling and marketing expenses increased 244.8% of which 229.3% is related to the October 2014 acquisition of the Enterprise business. In addition, expenses have increased due to the higher level of sales of legacy Zebra products compared to prior year.

 

    Research and development increased 321.8%, primarily due to the October 2014 acquisition of the Enterprise business. Enterprise contributed 305.8 % to the year over year increase. Expenditures in the legacy Zebra segment are relatively flat compared to prior year.

 

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Table of Contents
    General and administrative expenses increased 132.9% primarily due to the October 2014 acquisition of the Enterprise business with the October 2014 acquisition contributing 98.9% to the overall increase from prior year.

 

    In connection with the October 2014 acquisition of the Enterprise business, Zebra acquired $1.014 billion of intangible assets that are being amortized over useful lives of between 1 to 15 years. Consequently, amortization of intangible assets increased to $67.6 million in the first quarter of 2015 from $2.6 million in the first quarter last year.

 

    Acquisition and integration costs include costs associated with completing the acquisition, costs of consolidating and integrating processes and information systems, the costs to plan and prepare for the effective separation from the transition services agreements; costs of organizational redesign and rebranding initiatives and the costs of certain regulatory filings consequential of the acquisition. The increase in acquisition and integration costs to $26.3 million in the first quarter of 2015 from $4.9 million in the first quarter last year reflects the timing of the acquisition of Enterprise.

 

    Exit and restructuring costs of $11.2 million consist primarily of employee separation costs arising from organizational design changes related to the acquisition of Enterprise.

Consolidated other income (expense)

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

 

     Three Months Ended  
     April 4, 2015      March 29, 2014  

Investment income (loss)

   $ (197    $ 421   

Foreign exchange loss

     (27,191      (292

Forward interest rate swaps gain

     1,689         0   

Interest expense

     (50,965      (18

Other, net

     (1,273      26   
  

 

 

    

 

 

 

Total other (expense) income

$ (77,937 $ 137   
  

 

 

    

 

 

 

Foreign Exchange Loss

The company recognized a foreign exchange loss of $27.2 million, which reflects the change in value of non-USD assets and liabilities that were not hedged during the period.

Interest Expense

Interest expense increased $51.0 million reflecting the indebtedness incurred for the Acquisition.

Income Taxes

In the first quarter of 2015 we recognized a tax benefit of $32.9 million compared to a tax provision of $11.9 million for the corresponding period in the prior year. Zebra’s effective tax rates were 56.5% and 22.3% as of April 4, 2015 and March 29, 2014, respectively. Zebra’s effective tax rate was higher than the statutory rate of 35% in 2015 primarily due to pre-tax losses in the Unites States and pre-tax income in various non-US jurisdictions. Zebra’s effective tax rate in 2014 benefited from lower taxes on income in various non-US jurisdictions.

Liquidity and Capital Resources

In connection with the Acquisition in October 2014, we incurred indebtedness totaling $3.25 billion. As of April 4, 2015, we had cash of $329.5 million and long-term debt totaling $3.1 billion. We did not have any borrowings against our revolving credit facility with $246.9 million available ($250 million less $3.1 million of letters of credit). See Note 13 Long term debt in the Notes to the Consolidated Financial Statements for further details. The primary factors that influence our liquidity include, but are not limited to, the amount and timing of our revenues, cash collections from our customers, capital expenditures and acquisitions of third-parties. Management believes that existing capital resources and funds generated from operations are sufficient to meet anticipated capital requirements and service our indebtedness. The following table summarizes our cash flow activities for the periods indicated (in thousands):

 

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Table of Contents
     Three Months Ended  

Cash Flow provided by (used in):

   April 4, 2015      March 29, 2014  

Operating activities

   $ 35,596       $ 49,755   

Investing activities

     (48,378      (66,394

Financing activities

     (40,309      5,331   

Effect of exchange rates on cash balances

     (11,325      (95

Net decrease in cash and cash equivalents

     (64,416      (11,403

The change in our cash and cash equivalents balance is reflective of the following:

Operating activities

During the first quarter 2015, Zebra had cash provided by operating cash flows of $35.6 million compared to $50.0 million in the prior year. The year over year decrease in operating cash flow is primarily a result of increased working capital requirements.

Investing activities

Cash used in investing activities during the first quarter of 2015 include additional consideration of $48.8 million paid to MSI in relation to the opening the cash balance and capital expenditures of $25.5 million which consists primarily of investments in our corporate office. Reflecting Zebra’s changing capital structure, cash used for investing activities reflect $25.1 of proceeds from the sale of investments in marketable securities during the first quarter of 2015 and purchases of marketable securities of $151.8 million during the first quarter of 2014.

Financing activities

On March 15, 2015, Zebra made principal prepayments of $50.0 million under its term loan. Proceeds received from the exercise of stock options and stock purchase plan purchases were $8.2 million this year compared to $4.9 million last year reflecting increased option exercises and ESPP purchases.

The following table shows our level of indebtedness and other information as of April 4, 2015 (in thousands):

 

Senior notes

   $ 1,050,000   

Term loans

     2,150,000   

Less unamortized discounts

     (55,823
  

 

 

 

Total indebtedness

$ 3,144,177   
  

 

 

 

Private Offering

On October 15, 2014, Zebra completed a private offering of $1.05 billion aggregate principal of 7.25% Senior Notes due October 15, 2022 (the “Senior Notes”). The Senior Notes yielded an effective interest rate of 7.61% at issuance. The Senior Notes are governed by the terms of an indenture, dated as of October 15, 2014, by and among Zebra and U.S. Bank National Association, as Trustee. Interest on the Senior Notes is payable in cash on April 15 and October 15 of each year, commencing on April 15, 2015.

The Indenture covering the Senior Notes contains certain various restrictive and affirmative covenants. In addition, the Senior Notes are guaranteed jointly and severally, on a senior and unsecured basis by Zebra’s direct and indirect wholly-owned existing and future domestic restricted subsidiaries, subject to certain exceptions.

Credit Facilities

On October 27, 2014, Zebra entered into a new credit agreement which provides for a term loan of $2.2 billion (“Term Loan”) and a revolving credit facility of $250.0 million (“Revolving Credit Facility”). Borrowings under the Term Loan bear interest at a variable rate plus an applicable margin, subject to an all-in floor of 4.75%. As of April 4, 2015, the Term Loan interest rate was 4.75%. Interest payments are payable quarterly, starting January 27, 2015. Zebra has entered into interest rate swaps to manage interest rate risk on its long-term debt. See Note 11 Derivative Instruments.

 

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Table of Contents

The credit agreement requires Zebra to prepay the Term Loan and Revolving Credit Facility, under certain circumstances or transactions defined in the credit agreement. Also, Zebra may make optional prepayments of the Term Loans, in whole or in part, without premium or penalty. Zebra made such optional principal prepayments of $50.0 million and $30.0 million on March 15, 2015 and May 13, 2015 respectively. Unless satisfied by further optional prepayments Zebra is required to make scheduled quarterly principal payments of $5.5 million beginning March 31, 2019, with the balance of $2.1 billion due on October 27, 2021.

The Revolving Credit Facility is available for working capital and other general corporate purposes including letters of credit. The amount (including letters of credit) shall not exceed $250.0 million. As of April 4, 2015, Zebra had established letters of credit amounting to $3.1 million, which reduced funds available for further borrowings under the agreement to $246.9 million. The Revolving Credit Facility will mature and the commitments thereunder will terminate on October 27, 2019.

Borrowings under the Revolving Credit Facility bear interest at a variable rate plus an applicable margin. As of April 4, 2015, the Revolving Credit Facility interest rate was 3.25%. Interest payments are payable quarterly. As of April 4, 2015 and December 31 2014, Zebra did not have any borrowings against the Revolving Credit Facility.

The Revolving Credit Facility contains various restrictive and affirmative covenants and are collateralized by a security interest in substantially all of Zebra’s assets as defined in the security agreement and guaranteed by its direct and indirect wholly-owned existing and future domestic restricted subsidiaries, subject to certain exceptions. Zebra is in compliance with the covenants.

Certain domestic subsidiaries of Zebra (the “Guarantor Subsidiaries”) guarantee the Notes, the Term Loan and the Revolving Credit Facility on a senior basis: For the three months ended April 4, 2015, the non-Guarantor Subsidiaries would have (a) accounted for approximately 41.6% of our total revenue and (b) held approximately 14.5% of our total assets and approximately 13.0%, or $576.6 million, of our total liabilities including trade payables but excluding intercompany liabilities.

Historically, significant portions of our cash inflows were generated by our operations. We currently expect this trend to continue throughout 2015. We believe that our existing cash and investments, borrowings available under our Revolving Credit Facility, together with cash flows expected from operations will be sufficient to meet expected operating, capital expenditure and debt obligation requirements for the next 12 months.

Zebra had $219.9 million as of April 4, 2015, and $273.7 million as of March 29, 2014 of foreign cash and investments, which are primarily invested in U.S. dollar-denominated holdings.

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

Significant Customer

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

 

     Three Months Ended  
     April 4, 2015     March 29, 2014  

Customer A

     16.9     15.2

Customer B

     7.9     12.5

Customer C

     8.7     12.4

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 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 countries outside the United States as well as business operations in countries outside the United States, including the risk of depending on key suppliers who are also in countries outside the United States,

 

    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 also affect our suppliers and customers,

 

    Success of integrating acquisitions, including the Enterprise business we acquired in October 2014 from Motorola Solutions, Inc.,

 

    Interest rate and financial market conditions,

 

    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 governmental policies, laws or regulations in the United States and outside the United States,

 

    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, 2014, 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 April 4, 2015. 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, 2014.

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 11 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, we have concluded that our disclosure controls and procedures were not effective as of April 4, 2015, as a result of a material weakness related to the process to review and prepare our quarterly income tax provision.

Remediation Plan

Management and the Board of Directors are committed to the continued improvement of our overall system of internal controls over financial reporting and have already begun to implement additional controls and procedures to remediate the review and preparation process relating to our quarterly income tax provision prior to the end of the year.

Changes in Internal Control over Financial Reporting

As noted in our 2014 Form 10K, in connection with our initial reviews of internal controls for Enterprise, we have identified certain internal control deficiencies related to Enterprise. We continue to identify and review the internal controls of the Enterprise business and are establishing a plan of remediation that is consistent with our obligation to assess the effectiveness of Enterprise’s internal controls over financial reporting as of December 31, 2015.

The identification, review, assessment and remediation of internal control deficiencies is overseen by senior management and our audit committee, and is undertaken primarily through the integration of processes and procedures with existing Zebra processes and procedures, development and implementation of formal policies, improved processes and documented procedures, as well as the hiring of additional finance personnel.

During the quarter covered by this report, there have been no other 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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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

See Note 14 to the Consolidated Financial Statements included in this report.

 

Item 1A. Risk Factors

In addition to the other information included in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014. The risks described in our Annual Report on Form 10-K could materially adversely affect our business, financial condition or future results. The risks described in our Annual Report are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently consider immaterial also may materially adversely affect our business, financial condition, and/or operating results. There have been no material changes to the risk factors included in our Annual Report for the year ended December 31, 2014, other than the risk entitled “We have identified a material weakness in our internal control over financial reporting which could, if not remediated, result in additional material misstatements in our financial statements” which risk is described below.

We have identified a material weakness in our internal control over financial reporting which could, if not remediated, result in additional material misstatements in our financial statements.

Our management is responsible for establishing and maintaining adequate internal controls over our financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act. As disclosed in Item 4 of Part I of this report, management identified a material weakness in our internal control over financial reporting related to the process to review and prepare our quarterly income tax provision. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of this material weakness, our management concluded that our internal control over financial reporting was not effective as of the last day of the period covered by this report. We are actively engaged in developing a remediation plan designed to address this material weakness. If our remedial measures are insufficient to address the material weakness or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results.

 

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 2015.

On November 2011, Zebra’s Board authorized the purchase of up to an additional 3,000,000 shares under the purchase plan program and the maximum number of shares that may yet be purchased under the program is 665,475. The November 2011 authorization does not have an expiration date.

During the first quarter, Zebra acquired 1,240 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 $90.26 per share.

 

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Item 6. Exhibits

 

31.1 Rule 13a-14(a)/15d-14(a) Certification
31.2 Rule 13a-14(a)/15d-14(a) Certification
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101 The following financial information from Zebra Technologies Corporation Quarterly Report on Form 10-Q, for the quarter ended April 4, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) the consolidated balance sheets; (ii) the consolidated statements of operations; (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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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    ZEBRA TECHNOLOGIES CORPORATION
Date: May 14, 2015 By: /s/ Anders Gustafsson
Anders Gustafsson
Chief Executive Officer
Date: May 14, 2015 By: /s/ Michael C. Smiley
Michael C. Smiley
Chief Financial Officer

 

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