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EX-32.2 - EXHIBIT 32.2 - ZEBRA TECHNOLOGIES CORPa322exhibit-signed.htm
EX-32.1 - EXHIBIT 32.1 - ZEBRA TECHNOLOGIES CORPa321exhibit-signed.htm
EX-31.2 - EXHIBIT 31.2 - ZEBRA TECHNOLOGIES CORPa312exhibit-signed.htm
EX-31.1 - EXHIBIT 31.1 - ZEBRA TECHNOLOGIES CORPa311exhibit-signed.htm
EX-23.1 - EXHIBIT 23.1 - ZEBRA TECHNOLOGIES CORPa23116a01consent.htm
EX-21.1 - EXHIBIT 21.1 - ZEBRA TECHNOLOGIES CORPa211subsidiariesofregistra.htm
EX-10.37 - EXHIBIT 10.37 - ZEBRA TECHNOLOGIES CORPa1037exhibitreceivablesfin.htm
EX-10.36 - EXHIBIT 10.36 - ZEBRA TECHNOLOGIES CORPa1036exhibitreceivablespur.htm
EX-10.35 - EXHIBIT 10.35 - ZEBRA TECHNOLOGIES CORPa1035exhibitamendmentto3op.htm
EX-10.34 - EXHIBIT 10.34 - ZEBRA TECHNOLOGIES CORPa1034leaseoverlookpoint.htm
EX-10.12 - EXHIBIT 10.12 - ZEBRA TECHNOLOGIES CORPa1012exhibit2015stip.htm
EX-10.11 - EXHIBIT 10.11 - ZEBRA TECHNOLOGIES CORPa1011exhibit2015ltip.htm
EX-4.1 - EXHIBIT 4.1 - ZEBRA TECHNOLOGIES CORPa41specimentstockcertifica.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
 
FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
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
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Exchange on which Registered
Class A Common Stock, par value $.01 per share
 
The NASDAQ Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).   Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act. Yes  ¨    No  ý
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  ý    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  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes  ý    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 definitions of “accelerated filer,” “large accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Securities Act (Check one):
 
Large accelerated filer
ý
Accelerated filer
¨
 
Non-accelerated filer
¨  (Do not check if smaller reporting company)
Smaller reporting company
¨

 
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Act). Yes  ¨    No  ý
As of July 1, 2017, the aggregate market value of the registrant’s Class A Common held by non-affiliates was approximately $5,260,632,176. The closing price of the Class A Common Stock on June 30, 2017, as reported on the Nasdaq Stock Market, was $100.52 per share.
As of February 15, 2018, there were 53,250,033 shares of Class A Common Stock, par value $.01 per share, outstanding.
Documents Incorporated by Reference
Certain sections of the registrant’s Notice of Annual Meeting of Stockholders and Proxy Statement for its Annual Meeting of Stockholders to be held on May 17, 2018, are incorporated by reference into Part III of this report, as indicated herein.






ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
INDEX
 
  
 
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Signatures
 
 
 
F-1
 
 
 
F-38


2


PART I
References in this document to “the Company,” “we,” “us,” or “our” refer to Zebra Technologies Corporation and its subsidiaries, unless the context specifically indicates otherwise.
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. When used in this document and documents referenced, the words “anticipate,” “believe,” “intend,” “estimate,” “will,” and “expect” and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements but are not the exclusive means of identifying these statements. The forward-looking statements include, but are not limited to, the Company’s financial outlook for the first quarter and full year of 2018. These forward-looking statements are based on current expectations, forecasts and assumptions and are subject to the risks and uncertainties inherent in the Company’s industry, market conditions, general domestic and international economic conditions, and other factors. These factors include:
 
Market acceptance of the Company’s products and solution offerings and competitors’ offerings and the potential effects of technological changes,
The effect of global market conditions, including North America; Europe, Middle East, and Africa; Latin America; and Asia-Pacific regions in which we do business,
The impact of foreign exchange rates due to the large percentage of our sales and operations being outside the United States (“U.S.”),
Our ability to control manufacturing and operating costs,
Risks related to the manufacturing of the Company’s products and conducting business operations in non-U.S. countries, including the risk of depending on key suppliers who are also in non-U.S. countries,
The Company’s ability to purchase sufficient materials, parts, and components to meet customer demand, particularly in light of global economic conditions,
The availability of credit and the volatility of capital markets, which may affect our suppliers, customers, and ourselves,
Success of integrating acquisitions,
Interest rate and financial market conditions,
Access to cash and cash equivalents held outside the U.S.,
The effect of natural disasters on our business,
The impact of changes in foreign and domestic governmental policies, laws, or regulations,
The outcome of litigation in which the Company may be involved, particularly litigation or claims related to infringement of third-party intellectual property rights, and
The outcome of any future tax matters or tax law changes.
We encourage readers of this report to review Item 1A, “Risk Factors,” in this report for further discussion of issues that could affect the Company’s future results. We undertake 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.
 
Item 1.
Business
The Company
We are a global leader in the Automatic Identification and Data Capture (“AIDC”) market. The AIDC market consists of mobile computing, data capture, radio frequency identification devices (“RFID”), barcode printing, and other automation products and services. The Company’s solutions are proven to help our customers and end-users achieve their mission critical strategic business objectives, including improved operational efficiency, optimized workflows, increased asset utilization, and better customer experiences.

We design, manufacture, and sell a broad range of AIDC products, including: mobile computers, barcode scanners, RFID readers, specialty printers for barcode labeling and personal identification, real-time location systems (“RTLS”), related accessories and supplies, such as self-adhesive labels and other consumables, and software utilities and applications. We also provide a full range of services, including maintenance, technical support, repair, managed and professional services, including cloud-based subscriptions. End-users of our products and services include retail and e-commerce, transportation and logistics, manufacturing, health care, hospitality, warehouse and distribution, energy and utilities, government, and education enterprises around the world. We provide our products and services globally through a direct sales force and extensive network of channel

3


partners. We provide products and services in over 180 countries, with 114 facilities and approximately 7,000 employees worldwide.

Through innovative application of our technologies, we are leading an evolution of the AIDC market into Enterprise Asset Intelligence (“EAI”). Specifically, EAI encompasses solutions which “sense” information from enterprise assets, including packages moving through a supply chain, equipment in a factory, workers in a warehouse, and shoppers in a store. Operational data from enterprise assets, including status, location, utilization, and preferences, is then analyzed to provide actionable insights. Finally, with the benefits of mobility, these insights can be delivered to the right user at the right time to drive more effective actions. As a result, our solutions and technologies enable enterprises to “sense, analyze, and act” more effectively to improve operational effectiveness and achieve critical business objectives.

The evolution of the AIDC market toward a more strategically oriented EAI focus is being driven by strong underlying secular trends in technology. These trends include internet of things (“IoT”), cloud-based data analytics, and mobility. The IoT is enabling a proliferation of smart, connected devices. EAI solutions, which include these smart, connected devices, capture a much broader range of information than is possible with traditional AIDC solutions and communicate this information in real-time. Cloud computing and expanded data analytics are allowing enterprises to make better business decisions through improved timeliness and visibility to information and workflows. While traditional AIDC solutions sporadically capture limited amounts of data and populate static enterprise systems, EAI solutions continuously analyze real-time data from many sources to generate actionable insights. Finally, the continued rapid growth of mobile devices and applications are significantly expanding mobile computing use cases to levels of near ubiquity in the enterprise. With this expanded mobility, end-users are able to consume or act upon dynamic enterprise data and information anytime and anywhere. The broad availability of wireless and internet connectivity also supports the adoption and deployment of the Company’s solutions to enable organizations to collect more data in real-time on the location, movement, and condition of their assets.

Integration of Enterprise Business
In October 2014, the Company acquired the Enterprise business (“Enterprise”), excluding its iDEN or Integrated Digital Enhanced Network Business, from Motorola Solutions, Inc. (“MSI”) for $3.45 billion in cash (the “Acquisition”).

The Company funded the Acquisition through a combination of cash on hand of $250 million, the sale of 7.25% senior notes due 2022 in an aggregate principal amount of $1.05 billion (the “Senior Notes”), and a credit agreement with various lenders that provided a term loan of $2.2 billion (the “Term Loan”) due 2021. During 2017, the Company executed a debt restructuring program, which included entering into an Amended and Restated Credit Agreement (“A&R Credit Agreement”) facility and a receivables financing facility which resulted in the redemption of the Senior Notes and a lower cost of debt.

Since closing the Acquisition in October 2014, integration activities by the Company have focused on creating “One Zebra” by integrating the operations of Enterprise to create a single business with common sales, service, supply chain, marketing, finance, information technology (“IT”), and other functions. Our integration priorities centered on maintaining business continuity while identifying and implementing cost synergies, operating efficiencies, and integration of functional organizations and processes. Another key focus of the integration was to conclude MSI-provided transition service agreements (“TSAs”) related primarily to IT support services. These TSAs were an interim measure to continue the operations of the Enterprise business without disruption while integration activities were completed.

During 2017, the Company substantially completed its integration activities, including the implementation of a common enterprise resource planning system, associated with the Acquisition. The Company also exited the TSAs with MSI.

Dispositions
On October 28, 2016, the Company concluded its Asset Purchase Agreement with Extreme Networks, Inc. (“Extreme”) whereby the Company sold its wireless LAN (“WLAN”) business (“Divestiture Group”) for a gross purchase price of $55 million. See Note 3, Business Combinations and Divestitures.
Operations
Our operations consist of two segments. In January 2018, the Company changed the names of the reportable segments to better reflect business operations: (1) Asset Intelligence & Tracking (“AIT”), formerly Legacy Zebra, comprised of barcode and card printing, location solutions, supplies, and services; and (2) Enterprise Visibility & Mobility (“EVM”), formerly Enterprise, comprised of mobile computing, data capture, RFID, and services.
Asset Intelligence & Tracking
Barcode and Card Printing: We design, manufacture, and sell printers, which produce high-quality labels, wristbands, tickets, receipts, and plastic cards on demand. Our customers use our printers in a wide range of applications, including routing and tracking, patient safety, transaction processing, personal identification, and product authentication. These applications require

4


high levels of data accuracy, speed, and reliability. They also include specialty printing for receipts and tickets for improved customer service and productivity gains. Plastic cards are used for secure, reliable personal identification (e.g. state identification cards and drivers’ licenses, healthcare IDs), access control (e.g. employee or student building access), and financial cards (e.g. credit, debit and ATM cards) by financial institutions. Our RFID printers/encoders are used to print and encode passive RFID labels. We offer a wide range of accessories and options for our printers, including vehicle mounts and battery chargers.
Supplies: We produce and sell stock and customized thermal labels, receipts, ribbons, plastic cards, and wristbands suitable for use with our printers, and also wristbands which can be imaged in most commercial laser printers. We support our printing products, resellers, and end-users with an extensive line of superior quality, high-performance supplies optimized to a particular end-user’s needs. We promote the use of genuine Zebra branded supplies with our printing equipment. We also provide a family of self-laminating wristbands for use in laser printers. These wristbands are marketed under the LaserBand® name. We operate supplies production facilities located in the United States and Western Europe. We supplement our in-house production capabilities with those of third-party manufacturers to offer genuine Zebra supplies, principally in Asia.
Services:  We provide a full range of maintenance, technical support, and repair services. We also provide managed and professional services including those which help customers manage their devices and related software applications. Our offerings include cloud-based subscriptions and multiple service levels. They are typically contracted through multi-year service agreements. We provide our services directly and through our global network of partners.
Location Solutions: The Company offers a range of RTLS and services which incorporate active and passive RFID and other tracking technologies to enable users to locate, track, manage, and optimize the utilization of enterprise assets and personnel. We provide substantially all elements of the location solution, including tags, sensors, exciters, middleware software, and application software. Our location solutions are deployed primarily in manufacturing, aerospace, transportation and logistics, sports, and healthcare industries. Various sports teams utilize our MotionWorks® sports solution to track the location and movement of personnel and objects in real-time during sporting events, as well as in training and practice activities.

Enterprise Visibility & Mobility
Mobile Computing: We design, manufacture, and sell rugged and enterprise-grade mobile computing products in a variety of specialized form factors and designs to meet a wide variety of enterprise applications. Industrial applications include inventory management in warehouses and distribution centers; field mobility applications include field service, post and parcel, and direct store delivery; and retail and customer facing applications include e-commerce, omnichannel, mobile point of sale, inventory look-up, and staff collaboration. Our products incorporate both Android™ and Microsoft® Windows® operating systems and support local- and wide-area voice and data communications. Our mobile computing products often incorporate barcode scanning, global position system (“GPS”) and RFID features, and other sensory capabilities. We also provide related software tools, utilities, and applications.

Data Capture and RFID: We design, manufacture, and sell barcode scanners, image capture devices, and RFID readers. Our portfolio of barcode scanners includes laser scanning and imager products and form factors, including fixed, handheld, and embedded original equipment manufacturer (“OEM”) modules. The Company’s data capture products capture business-critical information by decoding barcodes and images, and transmit the resulting data to enterprise systems for analysis and timely decision making. Common applications include asset identification and tracking and workflow management in a variety of industries, including retail, transportation and logistics, manufacturing, and healthcare. Our RFID line of data capture products is focused on ultra-high frequency (“UHF”) technology. These RFID devices comply with the electronic product code (“EPC”) global Generation 2 UHF standard and similar standards around the world. We also provide related accessories.

Services: We provide a full range of maintenance, technical support, and repair services. We also provide managed and professional services that, among other things, help customers design, test, and deploy our solutions as well as manage their mobility devices, software applications and workflows. Our offerings include cloud-based subscriptions and multiple service levels. They are typically contracted through multi-year service agreements. We provide our services directly and through our global network of partners.
Our Competitive Strengths
The following are core competitive strengths that we believe enable us to differentiate ourselves from our competitors:

An industry leader focused solely on improving enterprise operations
We are a market leader in the key technologies of Enterprise Asset Intelligence, including mobile computing, barcode and card printing, data capture, and RFID readers. We also provide related software, services, and accessories. Our leadership position enables us to work with and support customers globally, in a variety of industries, who are focused on implementing leading-edge solutions.

5



High entry and switching barriers
On a global basis, we have long-standing relationships with end customers and with our extensive network of channel partners. We believe these customer relationships and our strong partner network are critical to our success and would be difficult for a new market entrant to replicate. We believe a significant portion of our products are deployed with specialized product performance and software application requirements, which could result in high switching costs.

Commitment to innovation and deep industry-specific expertise
We leverage our strong commitment to innovation and deep industry-specific expertise to deliver end-to-end solutions to a wide array of industries, with a broad portfolio of products and services.
Highly diversified business mix
We are highly diversified across business segments, end markets, geographies, customers, and suppliers. Additionally, we have strong recurring business in services and supplies driven by an extensive global installed base of products.
Global reach and brand
We sell to customers directly and through our network of channel partners around the world. This global presence gives us the capability to supply our customers with products, solutions, and services no matter the location of their operations. In addition, we believe we have strong brand recognition with a reputation in the industry as a trusted and strategic partner.

Scale advantages
We believe the size and scope of our operations, including market leadership, product development investment, portfolio breadth, and global distribution, give us advantages over our competitors. We believe we have the largest installed base of products compared with other companies in our industry. These characteristics enable us to compete successfully, achieve economies of scale, and develop industry-leading solutions.

Our Business Strategies

Leverage our market leadership position and innovation to profitably grow our core business
We expect to drive revenue growth by continuing to outpace our competition in our core businesses, including mobile computing, data capture, barcode printing, and services. We expect to achieve this by leveraging our broad portfolio of solutions and product innovation and continuing to be a strategic partner to end customers. We also expect to drive growth by capitalizing on technology transitions occurring in the industry, including the transition to the Android™ operating system in mobile computing and transitions in data capture to newer technologies involving 2D imaging and RFID. This includes increased focus on market segments and geographies that offer share-gain opportunities. In addition, we plan to leverage our market-leading installed base to accelerate growth in attach-oriented products, including services, supplies, and accessories. Our global channel partner network is vital to helping us achieve these goals. As such, we will ensure that we provide the necessary value and support for our partners to be successful.

Drive our Enterprise Asset Intelligence vision
We believe that secular technology trends, particularly in enterprise mobility, cloud computing, and IoT are transforming our customers’ businesses and our industry and provide us with significant new opportunities to create value for our customers and for the Company. We expect to capitalize on these trends, and in particular the proliferation of smart connected sensors and devices in our core market segments, by providing end-to-end solutions that integrate these sensors and devices with cloud-based workflows and analytics applications. These solutions will enable increased visibility into the enterprise, real-time, actionable information, and improved customer experiences. Our solutions will also increasingly include common features, functions, and user experiences to drive additional competitive differentiation.

Increase our opportunity for growth through expansion in adjacent market segments
We plan to drive growth through expansion in adjacent market segments that share similar technology needs with our core markets. We will focus specifically on segments where our products and solutions, workflow expertise, and customer and industry relationships will enable us to provide significant value to end users.

Continuously improve operating efficiency to expand profitability
We intend to continue to improve profitability through operational execution and increased productivity derived from continuous business process improvement, cost management, and further operating leverage as we grow our business.

Improve cash flow generation and achieve debt leverage target

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Our primary balance sheet priority is to expand operating cash flow generation through growth in the business, margin expansion, and maintaining a strong focus on working capital efficiency. Our primary capital allocation priority is achievement of our target debt leverage ratio.

Competition
We operate in a highly competitive environment. The need for companies to improve productivity and implement their strategies, as well as the secular trends around IoT, cloud computing, and mobility, are some of the factors that are creating growth opportunities for established and new competitors.

Key competitive factors include the design, breadth and quality of products and services, price, product performance, durability, product and service availability, warranty coverage, brand recognition, company relationships with customers and channel partners, and company reputation. We believe we compete effectively with respect to these factors.

Mobile Computing: Competitors in mobile computing include companies that have historically served enterprises with ruggedized devices. For some applications, we compete with companies that provide tablets and smart phones. Competitors include: Datalogic, Honeywell, and Panasonic.

Data Capture and RFID: Competitors that provide a broad portfolio of barcode scanning products that are suitable for the majority of global market applications include Datalogic and Honeywell. In addition, we also compete against smaller companies that focus on limited product subsets or specific regions including Fujian Newland and Impinj.

Barcode and Card Printing: We consider our direct competition in printing to be producers of on-demand thermal transfer and direct thermal label printing systems, RFID printer/encoders, and mobile printers. We also compete with companies engaged in the design, manufacture, and marketing of printing systems that use technologies such as ink-jet, direct marking and laser printing, as well as card printers based on ink-jet, thermal transfer, embossing, film-based systems, encoders, laser engraving, and large-scale dye sublimation printers. In addition, service bureaus, which provide centralized services, compete for end-user business and provide an alternative to our card printing solutions. Competitors include: Fargo Electronics (a unit of HID Global), Honeywell, Sato, and Toshiba TEC.

Location Solutions: We compete with a diverse group of companies marketing location solutions that are primarily based on active RFID technologies. Competitors include: Cisco, Impinj, and Stanley Healthcare.

Supplies: The supplies industry is highly fragmented with competition comprised of numerous companies of various sizes around the world.

Customers
End-users of our products are diversified across a wide variety of industries, including retail and e-commerce, transportation and logistics, manufacturing, and healthcare industries. We have had three customers that each accounted for 10% or more of our sales over the past three years. All three of these customers are distributors and not end-users of our products. No end-user has accounted for 10% or more of our sales during these years. See Note 15, Segment Information and Geographic Data in the Notes to the Consolidated Financial Statements included in this Form 10-K for further information.
 
Year Ended December 31,
 
2017
 
2016
 
2015
Customer A
21.3
%
 
20.1
%
 
19.4
%
Customer B
14.2
%
 
13.2
%
 
12.7
%
Customer C
13.2
%
 
12.4
%
 
11.6
%


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Sales and Marketing
Sales: We sell our products, solutions, and services primarily through distributors (two-tier distribution), value added resellers (“VAR”), independent software vendors (“ISVs”), direct marketers, and OEMs. We also sell directly to a select number of customers through our direct sales force. Distributors purchase our products and sell to VARs, ISVs and others, thereby increasing the distribution of our products globally. VARs, ISVs, OEMs, and systems integrators provide customers with a variety of hardware, accessories, software applications, and services. VARs and ISVs typically customize solutions for specific end-user applications using their industry, systems, and applications expertise. Some OEMs resell the Zebra-manufactured products under their own brands as part of their own product offering. Because these sales channels provide specific software, configuration, installation, integration, and support services to end-users within various industry segments, these relationships are highly valued by end-users and allow our products to reach customers in a wide array of industries around the world. We believe that the breadth of our distributor and channel partner network is a competitive differentiator and enhances our ability to compete. Finally, we experience some seasonality in sales, depending upon the geographic region and industry served.

Marketing: Our marketing function aligns closely with sales and product management functions to market our products and to deliver and promote solutions that address the needs of our customers and partners. Our marketing organization includes global corporate marketing, strategic marketing, regional marketing, product marketing, global demand center, and channel marketing functions. Our corporate marketing function manages our brand, public relations, and other communications activities. Strategic marketing includes vertical marketing, ISV strategy and business intelligence. Regional marketing encompasses field and channel marketing, demand generation, and sales enablement. Product marketing manages our product launches and lifecycle go-to-market strategy. Our global demand center leads content development and digital marketing, including our website and social media. The global channel team develops and executes channel strategy and operations.

Manufacturing and Outsourcing
Final assembly of our hardware products is performed by third-parties, including electronics manufacturing services companies (“EMS”) and joint design manufacturers (“JDMs”). Our products are produced primarily in facilities located in China, Mexico, and Brazil. These JDMs or manufacturers produce our products to our design specifications. We maintain control over portions of the supply chain, including supplier selection and price negotiations for key components. The manufacturers purchase the components and subassemblies used in the production of our products. Our products are shipped to regional distribution centers, operated by 3rd party logistics providers (“3PL’s”) or the Company. A portion of products are reconfigured at the distribution centers through firmware downloads, packaging, and customer specific customization before they are shipped to customers. In addition, certain products are manufactured in accordance with procurement regulations and various international trade agreements, and remain eligible for sale to the United States government. Production facilities for our supplies products are located in the United States and Western Europe. We also supplement our in-house production capabilities with those of third-party manufacturers to offer our supplies, principally in Asia.
Research and Development
The Company devotes significant resources to developing innovative solutions for our target markets and ensuring that our products and services maintain high levels of reliability and provide value to end-users. Research and development expenditures for the years ended 2017, 2016, and 2015 were $389 million, $376 million, and $394 million respectively, or 10.5% of net sales for 2017 and 2016 and 10.8% of net sales in 2015. We have more than 1,500 engineers worldwide focused on strengthening and broadening our extensive portfolio of products and solutions.
Our Technology
Mobile Computing: Our mobile computing products incorporate a wide array of advanced technologies in rugged, ergonomic enclosures to meet the needs of specific use cases. These purpose-built devices couple hardened industry-standard operating systems with specialized hardware and software features to satisfy a customer’s mission-critical applications. Purpose-built rugged housings ensure reliable operations for targeted use cases, surviving years of rough handling and harsh environments. Specialized features such as advanced data capture technologies, voice and video collaboration tools, and advanced battery technologies enable our customers to work more efficiently and better serve their customers. A broad portfolio of enterprise accessories further tailors mobile computers to meet a wide variety of enterprise use cases. Our mobile computers are offered with software tools and services that support application development, device configuration, and field support to facilitate smooth and rapid deployment and ensure maximum customer return on investment.

Data Capture and RFID: Our data capture products allow businesses to track business critical information simply, quickly, and accurately by providing critical visibility into business processes and performance and enabling real-time action in response to the information. These products include barcode scanners in a variety of form factors, including fixed and handheld scanners and standalone modules designed for integration into third-party OEM devices. Our scanners incorporate a variety of technologies including area imagers, linear imagers, lasers, and read linear, and two-dimensional barcodes. They are used in a broad range of applications, ranging from supermarket checkout to industrial warehouse optimization to patient management in

8


hospitals. The design of these products reflects the diverse needs of these markets, with different ergonomics, multiple communication protocols, and varying levels of ruggedness.

Our RFID products include fixed readers, RFID enabled mobile computers, and RFID sleds. These utilize passive Ultra High Frequency (“UHF”) to provide high speed, non-line of sight data capture from hundreds or thousands of RFID tags in near real-time. Using the Electronic Product Code (“EPC”) standard, end-users across multiple industries take advantage of RFID technology to track high-value assets, monitor shipments, and drive increased retail sales though improved inventory accuracy. We also offer mobile computers that support high frequency (“HF”) near-field communications (“NFC”) and low frequency (“LF”) radio technologies.

Barcode and Card Printing: All of the Company’s printers and print engines incorporate thermal printing technology. This technology creates an image by heating certain pixels of an electrical printhead to selectively image a ribbon or heat-sensitive substrate. Thermal printing benefits applications requiring simple and reliable operations, yet it is flexible enough to support a wide range of specialty label materials and associated inks. Our dye-sublimation thermal card printers produce full-color, photographic quality images that are well-suited for driver’s licenses, access and identification cards, transaction cards, and on-demand photographs. Many of our printers also incorporate RFID technology that can encode data into passive RFID transponders embedded in a label or card.

The Company’s printers integrate company-designed mechanisms, electrical systems, and firmware. Enclosures of metal or high-impact plastic ensure the durability of our printers. Special mechanisms optimize handling of labels, ribbons, and plastic cards. Fast, high-current electrical systems provide consistent image quality. Firmware supports serial, parallel, Ethernet, USB, Bluetooth, or 802.11 wireless communications with appropriate security protocols. Printing instructions can be received as a proprietary language such as Zebra Programming Language II (“ZPL II®), as a print driver-provided image, or as user-defined XML. These features make our printers easy to integrate into virtually all common computer systems.

Location Solutions: Our RTLS solutions use active and passive RFID technologies, beacons, and other tracking technologies to locate, track, manage, and optimize high-value assets, equipment, and people. We offer a range of scalable RTLS technologies that generate precise, on-demand information about the physical location and status of high-valued assets. In addition, we offer a selection of RTLS infrastructure products that receive tag transmissions and provide location and motion calculations, database and system management functions and asset visibility. The flexible infrastructure supports large tag populations and coverage areas that range from small to large.

Supplies: Our supplies business includes thermal labels, receipts, ribbons, plastic cards and wristbands suitable for use with our printers, and wristbands which can be imaged in most commercial laser printers. Our wristbands incorporate multi-layer form technology to ensure trouble-free printing, wearer comfort, and reliable barcode reading, even when exposed to harsh chemical environments. We offer many thermal label, card, and receipt materials, and matching ribbons for diverse applications that may require meeting unique or precise specifications, including chemical or abrasion resistance, extreme temperatures, exceptional image quality, or long life.
Intellectual Property
We rely on a combination of trade secrets, patents, trademarks, copyrights, and contractual rights to establish and protect our innovations, and hold a large portfolio of intellectual property rights in the United States and other countries. As of December 31, 2017, the Company owned approximately 1,600 trademark registrations and trademark applications, and approximately 4,300 patents and patent applications, worldwide. We continue to actively seek to obtain patents and trademarks, whenever possible and practical, to secure intellectual property rights in our innovations.

We believe that our intellectual property will continue to provide us with a competitive advantage in our core product areas as well as provide leverage for future technologies. We also believe that we are not dependent upon any single patent or select group of patents. Our success depends more upon our extensive know-how, deep understanding of end-user processes and workflows, innovative culture, technical leadership and marketing and sales abilities. Although we do not rely only on patents or other intellectual property rights to protect or establish our market position, we will enforce our intellectual property rights when and where appropriate.

Employees
As of December 31, 2017, the Company employed approximately 7,000 persons. Some portions of our business, primarily in Europe and China, are subject to labor laws that differ significantly from those in the United States. In Europe, for example, it is common for a works council to represent employees when discussing matters such as compensation, benefits, restructurings and layoffs. We consider our relations with our employees to be very good.
Regulatory Matters

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Wireless Regulatory Matters
Our business is subject to certain wireless regulatory matters.
The use of wireless voice, data, and video communications systems requires radio spectrum, which is regulated by government agencies throughout the world. In the U.S., the Federal Communications Commission (“FCC”) and the National Telecommunications and Information Administration (“NTIA”) regulate spectrum use by non-federal entities and federal entities, respectively. Similarly, countries around the world have one or more regulatory bodies that define and implement the rules for use of the radio spectrum, pursuant to their respective national laws and international coordination under the International Telecommunications Union. We manufacture and market products in spectrum bands already made available by regulatory bodies- these include voice and data infrastructure, mobile radios, and portable or hand-held devices. Consequently, our results of operations could be positively or negatively affected by the rules and regulations adopted from time-to-time by the FCC, NTIA, or regulatory agencies in other countries. Our products operate both on licensed and unlicensed spectrum. The availability of additional radio spectrum may provide new business opportunities, and consequently, the loss of available radio spectrum may result in the loss of business opportunities. Regulatory changes in current spectrum bands may also provide opportunities or may require modifications to some products so they can continue to be manufactured and marketed.
Other Regulatory Matters
Some of our operations use substances regulated under various federal, state, local, and international laws governing the environment and worker health and safety, including those governing the discharge of pollutants into the ground, air and water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. Certain products are subject to various federal, state, local, and international laws governing chemical substances in electronic products. During 2017, compliance with U.S. federal, state and local, and foreign laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment did not have a material effect on our business or results of operations.

Item 1A.
Risk Factors
Investors should carefully consider the risks, uncertainties, and other factors described below, as well as other disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations, because they could have a material adverse effect on our business, financial condition, operating results, cash flows, and growth prospects. These risks are not the only risks we face. Our business operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial.
We have organized the risk factors into two sections: (1) Risks related to our business; and (2) Risks related to our Indebtedness.
Risks related to our business

The Company has substantial operations and sells a significant portion of our products outside of the U.S. and purchases important components, including final products, from suppliers located outside the U.S. Shipments to non-U.S. customers are expected to continue to account for a material portion of net sales. We also expect to continue the use of third-party contract manufacturing services with non-U.S. production and assembly operations for our products.

Risks associated with operations, sales, and purchases outside the United States include:

Fluctuating foreign currency rates could restrict sales, increase costs of purchasing, and impact collection of receivables outside of the U.S.;
Volatility in foreign credit markets may affect the financial well-being of our customers and suppliers;
Violations of anti-corruption laws, including the Foreign Corrupt Practices Act and the U.K. Bribery Act could result in large fines and penalties;
Adverse changes in, or uncertainty of, local business laws or practices, including the following:
Foreign governments may impose burdensome tariffs, quotas, taxes, trade barriers, or capital flow restrictions;
Restrictions on the export or import of technology may reduce or eliminate the ability to sell in or purchase from certain markets;
Political and economic instability may reduce demand for our products or put our non-U.S. assets at risk;
Potentially limited intellectual property protection in certain countries may limit recourse against infringing on our products or cause us to refrain from selling in certain geographic territories;
Staffing may be difficult along with higher turnover at international operations;
A government controlled exchange rate and limitations on the convertibility of currencies, including the Chinese yuan;
Transportation delays and customs related delays that may affect production and distribution of our products;

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Effectively managing and overseeing operations that are distant and remote from corporate headquarters may be difficult; and
Integration and enforcement of laws varies significantly among jurisdictions and may change significantly over time.
The Company may not be able to continue to develop products or solutions to address user needs effectively in an industry characterized by ongoing change. To be successful, we must adapt to rapidly changing technological and application needs by continually improving our products, as well as introducing new products and services, to address user demands.
The Company’s industry is characterized by:
 
Evolving industry standards;
Frequent new product and service introductions;
Evolving distribution channels;
Increasing demand for customized product and software solutions;
Changing customer demands; and
Changing security protocols.
Future success will depend on our ability to effectively and economically adapt in this evolving environment. We could incur substantial costs if we must modify our business to adapt to these changes, and may even be unable to adapt to these changes.
The Company participates in a competitive industry, which may become more competitive. Competitors may be able to respond more quickly to new or emerging technology and changes in customer requirements. We face significant competition in developing and selling our products and solutions. To remain competitive, we believe we must continue to effectively and economically provide:
 
Technologically advanced systems that satisfy user demands;
Superior customer service;
High levels of quality and reliability; and
Dependable and efficient distribution networks.
We cannot assure we will be able to compete successfully against current or future competitors. Increased competition in mobile computing products, data capture products, printers, or supplies may result in price reductions, lower gross profit margins, and loss of market share, and could require increased spending on research and development, sales and marketing, and customer support. Some competitors may make strategic acquisitions or establish cooperative relationships with suppliers or companies that produce complementary products, which may create additional pressures on our competitive position in the marketplace.
The Company is vulnerable to the potential difficulties associated with the increase in the complexity of our business. We have grown rapidly over the last several years through the Acquisition and worldwide growth. This growth has caused increased complexities in the business. We believe our future success depends in part on our ability to manage our growth and increased complexities of our business. The following factors could present difficulties to us:
 
Managing our distribution channel partners;
Managing our contract manufacturing and supply chain;
Manufacturing an increased number of products;
Increased administrative and operational burden;
Maintaining and improving information technology infrastructure to support growth;
Increased logistical problems common to complex, expansive operations;
Increasing international operations; and
Attract, develop and retain individuals with the requisite technical expertise to develop new technologies and introduce new products and solutions.
Inability to consummate future acquisitions at appropriate prices could negatively impact our growth rate and stock price. Our ability to expand revenues, earnings, and cash flow depends in part upon our ability to identify and successfully acquire and integrate businesses at appropriate prices and to realize anticipated synergies. Acquisitions can be difficult to identify and consummate due to competition among prospective buyers and the need to satisfy applicable closing conditions and obtain antitrust and other regulatory approval on acceptable terms.

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The Company could encounter difficulties in any acquisition it undertakes, including unanticipated integration problems and business disruption. Acquisitions could also dilute stockholder value and adversely affect operating results. We may acquire or make investments in other businesses, technologies, services, or products. An acquisition may present business issues which are new to us. The process of integrating any acquired business, technology, service, or product into our operations may result in unforeseen operating difficulties and expenditures. Integration of an acquired company also may consume considerable management time and attention, which could otherwise be available for ongoing operations and the further development of our existing business. These and other factors may result in benefits of an acquisition not being fully realized.
Acquisitions also may involve a number of risks, including:
 
Difficulties and uncertainties in retaining the customers or other business relationships from the acquired entities;
The loss of key employees of acquired entities;
The ability of acquired entities to fulfill their customers’ obligations;
The discovery of unanticipated issues or liabilities;
Pre-closing and post-closing acquisition-related earnings charges could adversely impact operating results and cash flows in any given period, and the impact may be substantially different from period to period;
The failure of acquired entities to meet or exceed expected returns could result in impairment of goodwill or intangible assets acquired;
The acquired entities’ ability to implement internal controls and accounting systems necessary to be compliant with requirements applicable to public companies subject to SEC reporting, which could result in misstated financial reports; and
Future acquisitions could result in potentially dilutive issuances of equity securities or the incurrence of debt and contingent liabilities.
Infringement by the Company or our suppliers on the proprietary rights of others could put us at a competitive disadvantage, and any related litigation could be time consuming and costly. Third parties may claim that we or our suppliers violated their intellectual property rights. To the extent of a violation of a third-party’s patent or other intellectual property right, we may be prevented from operating our business as planned, and may be required to pay damages, to obtain a license, if available, or to use a non-infringing method, if possible, to accomplish our objectives. Any of these claims, with or without merit, could result in costly litigation and divert the attention of key personnel. If such claims are successful, they could result in costly judgments or settlements. Also, as new technologies emerge the intellectual property rights of parties in such technologies can be uncertain. As a result, our products involving such technologies may have higher risk of claims of infringement of the intellectual proprietary rights of third parties.
The inability to protect intellectual property could harm our reputation, and our competitive position may be materially damaged. Our intellectual property is valuable and provides us with certain competitive advantages. We use copyrights, patents, trademarks, trade secrets, and contracts to protect these proprietary rights. Despite these precautions, third parties may be able to copy or reproduce aspects of our intellectual property and our products or, without authorization, to misappropriate and use information, which we regard as trade secrets. Additionally, the intellectual property rights we obtain may not be sufficient to provide us with a competitive advantage and may be successfully challenged, invalidated, circumvented, or infringed. In any infringement litigation that the Company may undertake to protect our intellectual property, any award of monetary damages may be unlikely or very difficult to obtain, and any such award we may receive may not be commercially valuable. Furthermore, efforts to enforce or protect our proprietary rights may be ineffective and could result in the invalidation or narrowing of the scope of our intellectual property and incurring substantial litigation costs. Because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of the Company’s confidential information could be compromised by disclosure during this type of litigation. Some aspects of our business and services also rely on technologies, software, and content developed by or licensed from third parties, and we may not be able to maintain our relationships with such third parties or enter into similar relationships in the future on reasonable terms or at all.
We currently use third party and/or open source operating systems and associated application ecosystems in certain of our products. Such parties ceasing continued development of the operating system or restricting our access to such operating system could adversely impact our business and financial results. We are dependent on third-parties’ continued development of operating systems, software application ecosystem infrastructures, and such third-parties’ approval of our implementations of their operating system and associated applications. If such parties cease to continue development or support of such operating systems or restrict our access to such operating systems, we would be required to change our strategy for such devices. As a result, our financial results could be negatively impacted because a resulting shift away from the operating systems we currently use and the associated applications ecosystem could be costly and difficult. A strategy shift could increase the burden of development on the Company and potentially create a gap in our portfolio for a period of time, which could competitively disadvantage us.

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Cybersecurity incidents could disrupt business operations. Like many companies, we continually strive to meet industry information security standards relevant to our business. We periodically perform vulnerability assessments, remediate vulnerabilities, review log/access, perform system maintenance, manage network perimeter protection, implement and manage disaster recovery testing, and provide periodic educational sessions to our employees to foster awareness of schemes to access sensitive information. A cybersecurity incident could include an attempt to gain unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. “Phishing” and other types of attempts to obtain unauthorized information or access are often sophisticated and difficult to detect or defeat.
A cybersecurity incident, including deliberate attacks and unintentional events, may lead to a material disruption of our core business systems, the loss or corruption of confidential business information and/or the disclosure of personal data that in each case could result in an adverse business impact, as well as, possible damage to our brand. This could also lead to a public disclosure or theft of private intellectual property and a possible loss of customer confidence.
While we have experienced and expect to continue to experience these types of threats and incidents, there have been no material incidents incurred to-date at the Company. If our core business operations, or that of one of our third-party service providers, were to be breached, this could affect the confidentiality, integrity, and availability of our systems and data. While we continue to perform security due diligence, there is always the possibility of a significant breach affecting the confidentiality, integrity, and availability of our systems and/or data.

Our products that are deployed in customer environments also have the possibility of being breached, which could result in damage to a customer’s confidentiality, integrity, and availability of the customer’s data and systems. It is possible that such a breach could result in delays in, or loss of market acceptance of, our products and services; diversion of our resources; injury to our reputation; increased service and warranty expenses; and payment of damages. To date, we have had no material incidents related to the security on our products.

Laws and regulations relating to the handling of personal data may result in increased costs, legal claims, or fines against the Company. As part of our operations, the Company collects, uses, stores, and transfers personal data of third parties and employees in and across jurisdictions. The governing bodies in such jurisdictions have adopted or are considering adopting laws and regulations regarding the collection, use, transfer, storage and disclosure of personal data obtained from third parties and employees; for example, General Data Protection Regulation effective May 2018. These laws may result in burdensome or inconsistent requirements affecting the collection, use, storage, transfer and disclosure of our third party and employee personal data. Compliance may require changes in services, business practices, or internal systems that result in increased costs, lower revenue, reduced efficiency, or greater difficulty in competing with foreign-based firms. Failure to comply with existing or new rules may result in claims against the Company or significant penalties or orders to stop the alleged noncompliant activity.

We may incur liabilities as a result of product failures due to actual or apparent design or manufacturing defects. We may be subject to product liability claims, which could include claims for property or economic damage or personal injury, in the event our products present actual or apparent design or manufacturing defects. Such design or manufacturing defects may occur not only in our own designed products but also in components provided by third party suppliers. We generally have insurance protection against property damage and personal injury liabilities and also seek to limit such risk through product design, manufacturing quality control processes, product testing and contractual indemnification from suppliers. However, due to the large and growing size of the Company’s installed product base, a design or manufacturing defect involving this large installed product base could result in product recalls or customer service costs that could have material adverse effects on our financial results.
Defects or errors in the Company’s software products could harm our reputation, result in significant cost to us, and impair our ability to market such products. Our software may contain undetected errors, defects, or bugs. Although we have not suffered significant harm from any errors, defects, or bugs to date, we may discover significant errors, defects, or bugs in the future that we may not be able to correct or correct in a timely manner. It is possible that errors, defects, or bugs will be found in our existing or future software products and related services with the possible results of delays in, or loss of market acceptance of, our products and services, diversion of our resources, injury to our reputation, increased service and warranty expenses, and payment of damages.
We depend on the ongoing services of our senior management and the ability to attract and retain key personnel. The future success of the Company is substantially dependent on the continued services and continuing contributions of senior management and other key personnel. The ability to attract, retain, and motivate highly skilled employees is important to our long-term success. Competition for skill sets in certain functions within our industry is intense, and we may be unable to retain key employees or attract, assimilate, or retain other highly qualified employees in the future. Any disruption in the services of senior management or our ability to attract and retain key personnel may have a material adverse effect on our business and results of operations.

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Terrorist attacks or war could lead to further economic instability and adversely affect the Company’s stock price, operations, and profitability. The terrorist attacks that occurred in the United States on September 11, 2001 caused major instability in the U.S. and other financial markets. Since then, a number of significant acts of terrorism have occurred, and war continues in the Middle East, all of which may contribute to instability in financial markets. Additional acts of terrorism and current and future war risks could have a similar impact. Any such attacks could, among other things, cause further instability in financial markets and could directly, or indirectly through reduced demand, negatively affect our facilities and operations or those of our customers or suppliers.

The impact of potential changes in customs and trade policies in the United States and the potential corresponding actions by other countries in which the Company does business could adversely affect our financial performance. The U.S. government has made proposals that are intended to address trade imbalances, which include encouraging increased production in the United States. These proposals could result in increased customs duties and the renegotiation of some U.S. trade agreements. The Company imports a significant percentage of our products into the United States, and an increase in customs duties with respect to these imports could negatively impact the Company’s financial performance. If such customs duties are implemented, it also may cause the U.S.’ trading partners to take actions with respect to U.S. imports or U.S. investment activities in their respective countries. Any potential changes in trade policies in the United States and the potential corresponding actions by other countries in which the Company does business could adversely affect the Company’s financial performance. Given the level of uncertainty over which provisions will be enacted, the Company cannot predict with certainty the impact of the proposals.

The effects of the Tax Cuts and Jobs Act on our business have not yet been fully analyzed and could have an adverse effect on our results of operations. On December 22, 2017, U.S. President Donald Trump signed into law the Tax Cuts and Jobs Act (the “TCJA”) that significantly reforms the Internal Revenue Code of 1986, as amended. The TCJA, among other things, includes changes to U.S. federal corporate income tax rate, imposes significant additional limitations on the deductibility of interest, allows for the accelerated expensing of capital expenditures, and puts into effect the migration from a “worldwide” system of taxation to a territorial system. We continue to analyze the impact the TCJA may have on the Company’s business. Notwithstanding the reduction in the U.S federal corporate income tax rate, the overall impact of the TCJA is uncertain, and the Company’s business and financial condition could be adversely affected. We describe the estimated impact of the TCJA on our business where appropriate throughout this Form 10-K, and specifically in Note 12, Income Taxes in the Notes to the Consolidated Financial Statements included in this Form 10-K.
Taxing authority challenges may lead to tax payments exceeding current reserves. We are subject to, and may become subject to, ongoing tax examinations in various jurisdictions. As a result, we may record incremental tax expense based on expected outcomes of such matters. In addition, we may adjust previously reported tax reserves based on expected results of these examinations. Such adjustments could result in an increase or decrease to the Company’s effective tax rate and cash flows. Future changes in tax law in various jurisdictions around the world and income tax holidays could have a material impact on our effective tax rate, foreign rate differential, future income tax expense, and cash flows.

Forecasting our estimated annual effective tax rate is complex and subject to uncertainty, and there may be material differences between our forecasted and actual tax rates. Forecasts of our income tax position and effective tax rate are complex, subject to uncertainty and periodic updates because our income tax position for each year combines the effects of a mix of profits earned and losses incurred by us in various tax jurisdictions with a broad range of income tax rates, as well as changes in the valuation of deferred tax assets and liabilities, the impact of various accounting rules and changes to these rules and tax laws, the results of examinations by various tax authorities, and the impact of any acquisition, business combination, disposition or other reorganization, or financing transaction.

As a multinational corporation, we conduct our business in many countries and are subject to taxation in many jurisdictions. The taxation of our business is subject to the application of multiple and sometimes conflicting tax laws and regulations, as well as multinational tax conventions. Many countries are adopting revisions to their respective tax laws based on the on-going reports issued by the Organization for Economic Co-operation and Development (“OECD”)/G20 Base Erosion and Profit Shifting (“BEPS”) Project, which, if enacted, could materially impact our tax liability due to our organizational structure and significant operations outside of the U.S. Our effective tax rate is highly dependent upon the geographic distribution of our worldwide earnings or losses resulting from our structure and operating model, the tax regulations and tax holidays in each geographic region, and the availability of tax credits and carry-forwards. The application of tax laws and regulations is subject to legal and factual interpretation, judgment, and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, and the evolution of regulations and court rulings. Consequently, taxing authorities may impose tax assessments or judgments against us that could materially impact our tax liability and/or our effective income tax rate.


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Economic conditions and financial market disruptions may adversely affect our business and results of operations. Adverse economic conditions or reduced information technology spending may adversely impact our business. General disruption of financial markets and a related general economic downturn could adversely affect our business and financial condition through a reduction in demand for our products by our customers. If a slowdown were severe enough, it could require further impairment testing and write-downs of goodwill and other intangible assets. Cost reduction actions may be necessary and might lead to restructuring charges. A tightening of financial credit could adversely affect our customers, suppliers, outsourced manufacturers, and channel partners (e.g., distributors and resellers) from obtaining adequate credit for the financing of significant purchases. An economic downturn could also result in a decrease in or cancellation of orders for our products and services; negatively impacting the ability to collect accounts receivable on a timely basis; result in additional reserves for uncollectible accounts receivable; and require additional reserves for inventory obsolescence. Higher volatility and fluctuations in foreign exchange rates for the U.S. dollar against currencies such as the euro, the British pound, the Chinese yuan, and the Brazilian real could negatively impact product sales, margins, and cash flows.

A natural disaster may cause supply disruptions that could adversely affect our business and results of operations. Natural disasters may occur in the future, and the Company is not able to predict to what extent or duration any such disruptions will have on our ability to maintain ordinary business operations. The consequences of an unfortunate natural disaster may have a material adverse effect on our business and results of operations.

Zebra could be adversely impacted by the United Kingdom’s withdrawal from the European Union. Zebra maintains its European regional headquarters and a label converting facility in the U.K. and has significant operations and sales throughout Europe. Although the U.K. has formally notified the E.U. of its intention to withdraw, such notice only triggered a two-year period ending in March 2019 to negotiate the terms of the withdrawal, which period could be followed by a transition period. Because the terms of the U.K.’s withdrawal are uncertain, we are unable at this time to determine the impact on Zebra’s operations and business in the U.K. and Europe. Since the U.K.’s referendum in June 2016 to withdraw from the E.U., markets have been more volatile, including fluctuations in the British pound, that could adversely impact Zebra’s operating costs in the U.K. Such market volatility could also cause customers to alter or delay buying decisions that would adversely impact Zebra’s sales in the U.K. and throughout Europe. A significant portion of our business involves cross border transactions throughout the region. The future trade relationship between the U.K. and the E.U. could adversely impact Zebra’s operations in the region by increasing costs on or importation requirements on shipments between our distribution center in the Netherlands and customers in the U.K. or between our facility in the U.K. and customers in the E.U.

We are exposed to risks under large, multi-year system and solutions and services contracts that may negatively impact our business. We enter into large, multi-year system and solutions and services contracts with our customers. This exposes us to risks, including among others: (i) technological risks, especially when the contracts involve new technology; (ii) financial risks, including the estimates inherent in projecting costs associated with large, long-term contracts and the related impact on operating results; and (iii) cyber security risk, especially in managed services contracts with customers that process personal data. Recovery of front loaded capital expenditures in long-term managed services contracts with customers is dependent on the continued viability of such customers. The insolvency of customers could result in a loss of anticipated future revenue attributable to that program or product, which could have an adverse impact on our profitability.
We enter into fixed-price contracts that could subject us to losses in the event we fail to properly estimate our costs. If our initial cost estimates are incorrect, we can lose money on these contracts. Because many of these contracts involve new technologies and applications and require the Company to engage subcontractors and can last multiple years, unforeseen events, such as technological difficulties, fluctuations in the price of raw materials, problems with our subcontractors or suppliers and other cost overruns, can result in the contract pricing becoming less favorable or even unprofitable to us and have an adverse impact on our financial results. In addition, a significant increase in inflation rates could have an adverse impact on the profitability of longer-term contracts.
We utilize the services of subcontractors to perform under many of our contracts and the inability of our subcontractors to perform in a timely and compliant manner could negatively impact our performance obligations as the prime contractor. We engage subcontractors on many of our contracts and as we expand our global solutions and services business, our use of subcontractors has and will continue to increase. Our subcontractors may further subcontract performance and may supply third-party products and software. We may have disputes with our subcontractors, including disputes regarding the quality and timeliness of work performed by the subcontractor or our subcontractors and the functionality, warranty and indemnities of products, software, and services supplied by our subcontractor. We are not always successful in passing along customer requirements to our subcontractors, and thus in some cases may be required to absorb contractual risks from our customers without corresponding back-to-back coverage from our subcontractor. Our subcontractors may not be able to acquire or maintain the quality of the materials, components, subsystems and services they supply, or secure preferred warranty and indemnity coverage from their suppliers which might result in greater product returns, service problems, warranty claims and costs and regulatory compliance issues and could harm our business, financial condition, and results of operations.

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Over the last several years we have outsourced portions of certain business operations such as repair, distribution, engineering services and information technology services and may outsource additional business operations, which limits our control over these business operations and exposes us to additional risk as a result of the actions of our outsource partners. When we outsource certain business operations, we are not able to directly control these activities. Our outsource partners may not prioritize our business over that of their other customers and they may not meet our desired level of service, cost reductions, or other metrics. In some cases, their actions may result in our being found to be in violation of laws or regulations like import or export regulations. As many of our outsource partners operate outside of the U.S., our outsourcing activity exposes us to information security vulnerabilities and increases our global risks. In addition, we are exposed to the financial viability of our outsource partners. Once a business activity is outsourced, we may be contractually prohibited from, or may not practically be able to, bring such activity back within the Company or move it to another outsource partner. The actions of our outsource partners could result in reputational damage to us and could negatively impact our financial results.
Failure of our suppliers, subcontractors, distributors, resellers, and representatives to use acceptable legal or ethical business practices could negatively impact our business. It is our policy to require suppliers, subcontractors, distributors, resellers, and third-party sales representatives (“TPSRs”) to operate in compliance with applicable laws, rules, and regulations regarding working conditions, employment practices, environmental compliance, anti-corruption, and trademark and copyright licensing. However, we do not control their labor and other business practices. If one of our suppliers, subcontractors, distributors, resellers, or TPSRs violates labor or other laws or implements labor or other business practices that are regarded as unethical, the shipment of finished products to us could be interrupted, orders could be canceled, relationships could be terminated, and our reputation could be damaged. If one of our suppliers or subcontractors fails to procure necessary license rights to trademarks, copyrights, or patents, legal action could be taken against us that could impact the saleability of the Company’s products and expose us to financial obligations to a third-party. Any of these events could have a negative impact on our sales and results of operations.
We rely on third-party dealers, distributors, and resellers to sell many of our products. In addition to our own sales force, we offer our products through a variety of third-party dealers, distributors, and resellers. These third-parties may also market other products that compete with our products. Failure of one or more of our dealers, distributors, or resellers to effectively promote our products could affect our ability to bring products to market and have a negative impact on our results of operations. As the Company refines our channel program, some of our third-party dealers, distributors or resellers may exit the program due to modifications to the program structure, thereby reducing our ability to bring products to market and have a negative impact on our results of operations.
Some of these third-parties are smaller and more likely to be impacted by a significant decrease in available credit that could result from a weakness in the financial markets. If credit pressures or other financial difficulties result in insolvency for third-party dealers, distributors, or retailers and we are unable to successfully transition end-customers to purchase our products from other third-parties or from us directly, it may cause, and in some cases, has caused, a negative impact on our financial results.
Final assembly of certain of our products is performed by third-party electronics manufacturers. We may be dependent on these third-party electronics manufacturers as a sole-source of supply for the manufacture of such products. A failure by such manufacturers to provide manufacturing services to us as we require, or any disruption in such manufacturing services up to and including a catastrophic shut-down, may adversely affect our business results. Because we rely on these third-party electronics manufacturers to manufacture our products, we may incur increased business continuity risks. We are not able to exercise direct control over the assembly or related operations of certain of our products. If these third-party manufacturers experience business difficulties or fail to meet our manufacturing needs, then we may be unable to satisfy customer product demands, lose sales, and be unable to maintain customer relationships. Longer production lead times may result in shortages of certain products and inadequate inventories during periods of unanticipated higher demand. Without such third parties continuing to manufacture our products, we may have no other means of final assembly of certain of our products until we are able to secure the manufacturing capability at another facility or develop an alternative manufacturing facility. This transition could be costly and time consuming.
Although we carry business interruption insurance to cover lost sales and profits in an amount it considers adequate, in the event of supply disruption, this insurance does not cover all possible situations. In addition, the business interruption insurance would not compensate us for the loss of opportunity and potential adverse impact, both short-term and long-term, on relations with our existing customers going forward.
Our future operating results depend on our ability to purchase a sufficient amount of materials, parts, and components, as well as services and software to meet the demands of customers. We source some of our components from sole source suppliers. Any disruption to our suppliers or significant increase in the price of supplies could have a negative impact on our results of operations. Our ability to meet customers’ demands depends, in part, on our ability to obtain in a timely manner an adequate

16


delivery of quality materials, parts, and components, as well as services and software from our suppliers. In addition, certain supplies are available only from a single source or limited sources and we may not be able to diversify sources in a timely manner. If demand for our products or services increases from our current expectations or if suppliers are unable to meet our demand for other reasons, including as a result of natural disasters or financial issues, we could experience an interruption in supplies or a significant increase in the price of supplies that could have a negative impact on our business. We have experienced shortages in the past that have negatively impacted our results of operations and may experience such shortages in the future. Credit constraints at our suppliers could cause us to accelerate payment of accounts payable by us, impacting our cash flow.
In addition, our current contracts with certain suppliers may be canceled or not extended by such suppliers and, therefore, not afford us with sufficient protection against a reduction or interruption in supplies. Moreover, in the event any of these suppliers breach their contracts with us, our legal remedies associated with such a breach may be insufficient to compensate us for any damages it may suffer.
The unfavorable outcome of any pending or future litigation, arbitration, or administrative action could have a material adverse effect on our financial condition or results of operations. From time to time we are a party to litigation, arbitration, or administrative actions. Our financial results and reputation could be negatively impacted by unfavorable outcomes to any pending or future litigation or administrative actions, including those related to the Foreign Corrupt Practices Act, the U.K. Bribery Act, or other anti-corruption laws. There can be no assurances as to the favorable outcome of any litigation or administrative proceedings. In addition, it can be very costly to defend litigation or administrative proceedings and these costs could negatively impact our financial results.
It is important that we are able to obtain many different types of insurance, and if we are not able to obtain insurance or exhaust our coverage we may be forced to retain the risk. We have many types of insurance coverage and are also self-insured for some risks and obligations. While the cost and availability of most insurance is stable, there are still certain types and levels of insurance that remain difficult to obtain, such as professional liability insurance, which is expensive to obtain for the amount of coverage often requested by certain customers. As we grow our global solutions and services business, we are being asked to obtain higher amounts of professional liability insurance, which could result in higher costs to do business. Natural disasters and certain risks arising from securities claims, professional liability, and public liability are potential self-insured events that could negatively impact our financial results. In addition, while we maintain insurance for certain risks, the amount of our insurance coverage may not be adequate to cover all claims or liabilities, and we may be forced to bear substantial costs from an accident, incident, or claim.
We are subject to a wide range of product regulatory and safety, consumer, worker safety, and environmental laws. Our operations and the products we manufacture and/or sell are subject to a wide range of product regulatory and safety, consumer, worker safety, and environmental laws and regulations. Compliance with such existing or future laws and regulations could subject us to future costs or liabilities, impact our production capabilities, constrict our ability to sell, expand or acquire facilities, restrict what products and services we can offer, and generally impact our financial performance. Some of these laws are environmental and relate to the use, disposal, remediation, emission and discharge of, and exposure to hazardous substances. These laws often impose liability and can require parties to fund remedial studies or actions regardless of fault. We continue to incur disposal costs and have ongoing remediation obligations. Environmental laws have tended to become more stringent over time and any new obligations under these laws could have a negative impact on our operations or financial performance.
Laws focused on the energy efficiency of electronic products and accessories; recycling of both electronic products and packaging; reducing or eliminating certain hazardous substances in electronic products; and the transportation of batteries continue to expand significantly. Laws pertaining to accessibility features of electronic products, standardization of connectors and power supplies, the transportation of lithium-ion batteries, and other aspects are also proliferating. There are also demanding and rapidly changing laws around the globe related to issues such as product safety, radio interference, radio frequency radiation exposure, medical related functionality, and consumer and social mandates pertaining to use of wireless or electronic equipment. These laws, and changes to these laws, could have a substantial impact on whether we can offer certain products, solutions, and services, and on what capabilities and characteristics our products or services can or must include.
These laws impact our products and negatively affect our ability to manufacture and sell products competitively. We expect these trends to continue. In addition, we anticipate that it will see increased demand to meet voluntary criteria related to reduction or elimination of certain constituents from products, increasing energy efficiency, and providing additional accessibility.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to document and test our internal controls over financial reporting and to report on our assessment as to the effectiveness of these controls. Any negative reports concerning our internal controls

17


could adversely affect our future results of operations and financial condition. We may discover areas of our internal controls that need improvement. We cannot be certain that any remedial measures we take will ensure appropriate implementation and maintenance of adequate internal controls over the financial reporting processes and reporting in the future. We may incur significant additional costs in order to ensure we adequately remediate any weaknesses identified in our internal control environment, which, in turn, would reduce our earnings. Implementing any remedial measures may be complicated by the limited timeframe in which to implement such measures, and the possibility that implementation of such measures may require a substantial amount of work and time by our personnel.
Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we are unable to conclude that we have effective internal controls over financial reporting, or if our independent registered public accounting firm is unable to provide us with an unqualified report regarding the effectiveness of our internal controls over financial reporting, investors could lose confidence in the reliability of our financial statements. Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 could potentially subject us to sanctions or investigations by the SEC, or other regulatory authorities. In addition, failure to comply with our reporting obligations with the SEC may cause an event of default to occur under the Debt Agreements, or similar instruments governing any debt we or our subsidiaries incur in the future.
We could be adversely impacted by changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters. Generally accepted accounting principles and related accounting pronouncements, implementation guidelines, and interpretations with regard to a wide range of matters that are relevant to our businesses, including, but not limited to, revenue recognition, asset impairment, impairment of goodwill and other intangible assets, inventories, customer rebates and other customer consideration, tax matters, and litigation and other contingent liabilities are highly complex and involve many subjective assumptions, estimates, and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates, or judgments could significantly change our reported or expected financial performance or financial condition. New accounting guidance may also require systems and other changes that could increase our operating costs and/or change our financial statements. For example, implementing future accounting guidance related to revenue, accounting for leases and other areas could require us to make significant changes to our accounting systems, impact to existing Credit Agreements and could result in adverse changes to our financial statements.
Risks Related to our Indebtedness
In connection with the Acquisition, we incurred substantial debt obligations. Our total outstanding debt for borrowed money was approximately $3.25 billion on October 27, 2014. At December 31, 2017, the remaining principal amount of indebtedness was $2.2 billion, gross of unamortized discounts and debt issuance costs. In addition, subject to restrictions in agreements governing our existing and future indebtedness, we may incur additional indebtedness. Our substantial level of indebtedness could have important consequences, including the following:
 
We may experience difficulty in satisfying our obligations with respect to our existing indebtedness or future indebtedness;
Our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired;
We plan to use a substantial portion of cash flow from operations to pay interest and principal on our indebtedness, which may reduce the funds available to ourselves for other purposes, such as acquisitions and capital expenditures;
We may be at a competitive disadvantage with reduced flexibility in planning for, or responding to, changing conditions in the industry, including increased competition; and
We may be more vulnerable to economic downturns and adverse developments in the business.
We expect to fund our expenses and to pay the principal and interest on our indebtedness from cash flow from operations. Our ability to meet our expenses and to pay principal and interest on our indebtedness when due depends on our future performance, which will be affected by financial, business, economic, and other factors. We will not be able to control many of these factors, such as economic conditions in the markets where we operate and pressure from competitors.
Despite our indebtedness, we may need to incur substantially more indebtedness and take other actions that could further exacerbate the risk associated with our existing indebtedness. At December 31, 2017, the remaining principal amount of indebtedness was $2.2 billion, gross of unamortized discounts and debt issuance costs. In addition to our current financing activities, we may need to incur substantially more indebtedness in the future, resulting in higher leverage. Subject to the limits contained in our Debt Agreements, we may incur additional indebtedness from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. To the extent we incur additional indebtedness, the risks associated with our substantial indebtedness will be exacerbated.

18


Our use of derivative financial instruments to reduce interest rate risk may result in added volatility in our quarterly operating results. We do not hold or issue derivative financial instruments for trading purposes. However, we do utilize derivative financial instruments to reduce interest rate risk associated with our indebtedness. To manage variable interest rate risk, we entered into forward interest rate swap agreements, which will effectively convert a portion of our indebtedness into a fixed rate loan. Under generally accepted accounting principles, the fair values of the swap contracts, which will either be amounts receivable from or payable to counterparties, are reflected as either assets or liabilities on our Consolidated Balance Sheets. We record our fair value change in our Consolidated Statements of Operations, as a component of “Other, net” if not hedged. The associated impact on our quarterly operating results is directly related to changes in prevailing interest rates. If interest rates increase, we would have a non-cash gain on the swaps, and vice versa in the event of a decrease in interest rates. Consequently, these swap contracts introduce complexity to our operating results.
Restrictive covenants in the Debt Agreements may limit our current and future operations, particularly our ability to respond to changes in our business or to pursue our business strategies. The Debt Agreements contain, and instruments governing any future indebtedness may contain, a number of restrictive covenants that impose significant operating and financial restrictions, including restrictions on our ability to take actions that we believe may be in our interest. We expect these covenants will limit our ability to:
incur additional indebtedness or guarantees;
pay dividends or make other distributions or repurchase or redeem our stock or prepay or redeem certain indebtedness;
sell or dispose of assets and issue capital stock of restricted subsidiaries;
incur liens or enter into sale-leaseback transactions;
enter into agreements restricting our subsidiaries’ ability to pay dividends;
enter into transactions with affiliates;
engage in new lines of business;
consolidate, merge or enter into other fundamental changes;
make loans, investments and/or acquisitions; and
enter into amendments or modifications of certain material subordinated debt agreements or organizational documents.
Additionally, the debt instruments entered into to fund a portion of the Acquisition requires us to maintain in certain circumstances compliance with a consolidated total secured net leverage ratio. Our ability to comply with this ratio may be affected by events beyond our control, and we cannot assure you that we will meet this ratio. The restrictions could adversely affect our ability to:
 
finance operations;
make needed capital expenditures;
make strategic acquisitions or investments or enter into alliances;
withstand a future downturn in our business or the economy in general;
engage in business activities, including future opportunities, that may be in our interest; and
plan for or react to market conditions or otherwise execute our business strategies.
A breach of any of the covenants contained in the Debt Agreements (including an inability to comply with the financial maintenance covenants) that is not remedied within the applicable cure period, if any, would result in an event of default under the Debt Agreements. If, when required, we are unable to repay or refinance our indebtedness or amend the covenants contained in the Debt Agreements, or if a default otherwise occurs that is not cured or waived, the lenders or holders of our debt could elect to declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable or institute foreclosure proceedings against those assets that secure the borrowings. Should the outstanding obligations be accelerated and become due and payable because of any failure to comply with the applicable covenants in the future, we would be required to search for alternative measures to finance current and ongoing obligations of our business. There can be no assurance that such financing will be available on acceptable terms, if at all. Any of these scenarios could adversely impact our liquidity, financial condition and results of operations.
A significant amount of cash will be required to service our indebtedness. Our ability to make payments on and to refinance our indebtedness and to fund working capital needs, general corporate expenditures and planned capital expenditures depends on our ability to generate a significant amount of cash. This, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory, and other factors that are beyond our control.
If our business does not generate sufficient cash flows from operations or if future borrowings are not available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs, we may need to refinance all or a portion of our indebtedness on or before the maturity thereof, sell assets, reduce or delay capital investments, or seek to raise additional capital, any of which could have a material adverse effect on our operations. In addition, we may not be able to affect

19


any of these actions, if necessary, on commercially reasonable terms or at all. Our ability to restructure or refinance our indebtedness will depend on the condition of the capital and debt markets and our financial condition at such time. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict business operations. The terms of anticipated or future debt instruments may limit or prevent us from taking any of these actions. In addition, any failure to make scheduled payments of interest and/or principal on outstanding indebtedness would likely result in a reduction of our credit rating, which could harm our ability to access additional capital on commercially reasonable terms or at all. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would have an adverse effect, which could be material, on our business, financial condition and results of operations, as well as on our ability to satisfy the obligations in respect of our indebtedness.
 
Item 1B.
Unresolved Staff Comments
Not applicable.
 
Item 2.
Properties

Our corporate headquarters are located in Lincolnshire, Illinois; a northern suburb of Chicago. We also operate manufacturing, production and warehousing, administrative, research, and sales facilities in other U.S. and international locations.

As of December 31, 2017, the Company owned three laboratory and warehouse facilities located in Holtsville, NY, Preston, UK, and Mississauga, Ontario, Canada. The Company leases seven facilities for the purposes of manufacturing, production, and warehousing; five of which are located in the U.S. and two are located in other countries.

As of December 31, 2017, the Company had a total of 111 leased facilities with locations spread globally; 32 of which are located in the U.S. and 79 are located in 45 other countries.

We generally consider the productive capacity of the plants to be adequate and sufficient for our requirements. The extent of utilization of each manufacturing facility varies throughout the year.

Item 3.
Legal Proceedings
See Note 10, Contingencies in the Notes to Consolidated Financial Statements included in this Form 10-K.
 
Item 4.
Mine Safety Disclosures
Not applicable.

20



PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Stock Information: Price Range and Common Stock
Our Class A common stock is traded on the NASDAQ Stock Market, LLC under the symbol “ZBRA”. The following table shows the high and low trade prices for each fiscal quarter in 2017 and 2016, as reported by the NASDAQ Stock Market, LLC.
2017
 
High
 
Low
 
2016
 
High
 
Low
First Quarter
 
$
93.61

 
$
81.02

 
First Quarter
 
$
70.30

 
$
52.14

Second Quarter
 
109.30

 
86.82

 
Second Quarter
 
68.49

 
48.51

Third Quarter
 
109.89

 
94.78

 
Third Quarter
 
71.61

 
46.13

Fourth Quarter
 
117.44

 
101.49

 
Fourth Quarter
 
88.00

 
62.91

Source: The NASDAQ Stock Market, LLC
At February 15, 2018, the last reported price for the Class A common stock was $120.54 per share, and there were 134 registered stockholders of record for Zebra’s Class A common stock. In addition, we had approximately 29,049 stockholders who owned our stock in street name.
Dividend Policy
Since our initial public offering in 1991, we have not declared any cash dividends or distributions on our capital stock. We currently do not anticipate paying any cash dividends in the foreseeable future.
Treasury Shares
We did not purchase shares of Zebra Class A common stock during 2017 as part of the purchase plan program.
In November 2011, our Board authorized the purchase of up to 3,000,000 shares under the purchase plan program with a maximum of 665,475 shares remaining available for purchase. The November 2011 authorization does not have an expiration date.
Stock Performance Graph
This graph compares the cumulative annual change since December 31, 2012, of the total stockholder return of Zebra Technologies Corporation Class A common stock with the cumulative return on the following published indices: (i) the RDG Technology Composite; and (ii) the NASDAQ Composite Market Index, during the same period. The comparison assumes that $100 was invested in each of the Company’s Class A common stock, the stocks comprising the RDG Technology Composite and the stocks comprising the NASDAQ Composite Market Index on December 31, 2012. The comparison assumes that all dividends were reinvested at the end of the month in which they were paid.

21


comparisonof5yearcumulati03.jpg



22


Item 6.
Selected Financial Data
FIVE YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
(In millions, except shares and per share amounts)
 
 
 
Year Ended December 31,
Consolidated Statements of Operations(1)
 
2017
 
2016
 
2015
 
2014
 
2013
Total Net sales
 
$
3,722

 
$
3,574

 
$
3,650

 
$
1,671

 
$
1,038

Gross profit
 
1,710

 
1,642

 
1,644

 
778

 
503

Net income (loss)
 
$
17

 
$
(137
)
 
$
(158
)
 
$
32

 
$
134

 
 
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
$
0.33

 
$
(2.65
)
 
$
(3.10
)
 
$
0.64

 
$
2.65

 
 
 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share
 
$
0.32

 
$
(2.65
)
 
$
(3.10
)
 
$
0.63

 
$
2.63

Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
 
Basic
 
53,021,761

 
51,579,112

 
50,996,297

 
50,789,173

 
50,692,942

Diluted
 
53,688,832

 
51,579,112

 
50,996,297

 
51,379,698

 
51,063,189


 
 
December 31,
Consolidated Balance Sheets(1)
 
2017
 
2016
 
2015
 
2014
 
2013
Cash and cash equivalents, investments and marketable securities
 
$
62

 
$
156

 
$
192

 
$
418

 
$
416

Total Assets
 
4,275

 
4,632

 
5,040

 
5,539

 
1,120

Long-term liabilities
 
2,441

 
2,891

 
3,252

 
3,346

 
15

Total Stockholders’ Equity
 
834

 
792

 
893

 
1,040

 
959


(1)
Includes the Enterprise business from its date of acquisition, October 27, 2014.


23


Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview
The Company is a global leader respected for innovative EAI solutions in the automatic information and data capture solutions industry. We design, manufacture, and sell a broad range of products that capture and move data, including: mobile computers; barcode scanners and imagers; RFID readers; specialty printers for barcode labeling and personal identification; RTLS; related accessories and supplies, such as self-adhesive labels and other consumables; and software utilities and applications. We also provide a full range of services, including maintenance, technical support, and repair, managed and professional services, including cloud-based subscriptions. End-users of our products and services include those in the retail and e-commerce, transportation and logistics, manufacturing, healthcare, hospitality, warehouse and distribution, energy and utilities, government and education enterprises around the world. Benefits of our solutions include improved efficiency and workflow management, increased productivity and asset utilization, real-time, actionable enterprise information, and better customer experiences. We provide our products and services globally through a direct sales force and an extensive network of partners. We provide products and services in over 180 countries, with 114 facilities and approximately 7,000 employees worldwide.

Segments
The Company’s operations consist of two reportable segments: Asset Intelligence & Tracking (“AIT”) and Enterprise Visibility & Mobility (“EVM”).  In January 2018, the Company changed the names of the reportable segments to better reflect business operations: (1) Asset Intelligence & Tracking (“AIT”), formerly Legacy Zebra, comprised of barcode and card printing, location solutions, supplies, and services; and (2) Enterprise Visibility & Mobility (“EVM”), formerly Enterprise, comprised of mobile computing, data capture, RFID, and services.

Asset Intelligence & Tracking
The AIT segment is an industry leader in barcode printing and asset tracking technologies. Its major product lines include barcode and card printers, supplies, services and location solutions. Industries served include retail and e-commerce, transportation and logistics, manufacturing, healthcare, and other end markets within the following regions: North America; Europe, Middle East, and Africa; Asia-Pacific; and Latin America.

Enterprise Visibility & Mobility
The EVM segment is an industry leader in automatic information and data capture solutions. Its major product lines include mobile computing, data capture, RFID, and services. Industries served include retail and e-commerce, transportation and logistics, manufacturing, healthcare, and other end markets within the following regions: North America; Europe, Middle East, and Africa; Asia-Pacific; and Latin America.

Geographic Information
For the year ended December 31, 2017, the Company recorded $3.7 billion of net sales in its consolidated statements of operations, of which approximately 48.3% were attributable to North America; approximately 32.8% were attributable to Europe, Middle East, and Africa (“EMEA”); and other foreign locations accounted for the remaining 18.9%. Net sales attributable from each region are relatively consistent with the prior year period.

Acquisition and Integration
In October 2014, the Company acquired the Enterprise business (“Enterprise”), from Motorola Solutions, Inc. (“MSI”) (the “Acquisition”) and began integration activities focused on creating “One Zebra”. Our integration priorities centered on maintaining business continuity while identifying and implementing cost synergies, operating efficiencies, and integration of functional organizations and processes. Another key focus of the integration was to exit MSI-provided transition service agreements (“TSAs”) related primarily to IT systems and support services. These TSAs were an interim measure to continue the operations of the Enterprise business without disruption while integration activities were completed. The Company substantially completed its integration activities, including the implementation of a common enterprise resource planning system and has exited the last TSAs with MSI.

Restructuring Programs
In the first quarter 2017, the Company’s executive leadership approved an initiative to continue the Company’s efforts to increase operational efficiency (the “Productivity Plan”). The Company expects the Productivity Plan to build upon the exit and restructuring initiatives specific to the acquisition of the Enterprise business (“Enterprise”) from Motorola Solutions, Inc. in October 2014, (the “Acquisition Plan”). Actions under the Productivity Plan include organizational design changes, process improvements and automation. Implementation of actions identified through the Productivity Plan is expected to be substantially complete by December 2018. Exit and restructuring costs are not included in the operating results of our segments as they are not deemed to impact the specific segment measures as reviewed by our Chief Operating Decision Maker and

24


therefore are reported as a component of Corporate, eliminations. See Note 15, Segment Information and Geographic Data in the Notes to Consolidated Financial Statements included in this Form 10-K for further information.

Total exit and restructuring charges of $12 million life-to-date and year-to-date specific to the Productivity Plan have been recorded through December 31, 2017 and relate to severance and related benefits, lease exit costs and other expenses. Total remaining charges associated with this plan are expected to be in the range of $8 million to $12 million with activities expected to be substantially complete by the end of fiscal 2018.

Total exit and restructuring charges of $69 million life-to-date specific to the Acquisition Plan have been recorded through December 31, 2017 and include severance and related benefits, lease exit costs and other expenses. Charges related to the Acquisition Plan for the twelve-month period ended December 31, 2017 and 2016, were $4 million and $19 million, respectively. The Company has substantially completed the activities associated with the Acquisition Plan.

See Note 5, Costs Associated with Exit and Restructuring Activities in the Notes to Consolidated Financial Statements included in this Form 10-K for further information.

Impact of U.S. Tax Reform
The Company is in the process of analyzing the impact of the Tax Cut and Jobs Act (“TCJA” or “the Act”) signed into law on December 22, 2017 and has provisionally provided income tax expense of $72 million, including remeasurement of its net deferred tax assets at 21% of $35 million and the one-time transition tax of $37 million. The one-time transition tax impact has been reduced by approximately $10 million of income tax credit carryfowards, resulting in an estimated cash tax liability of $26 million, of which $2 million has been classified as a short term liability and $24 million as a long term liability, both to be remitted over the next eight years as follows (in millions):
 
One-Time Transition Tax - Payments Due for Calendar Year Tax Returns
 
2017
 
2018
 
2019
 
2020
 
2021
 
2022
 
2023
 
2024
Unremitted Earnings Payments
$
2

 
$
2

 
$
2

 
$
2

 
$
2

 
$
4

 
$
5

 
$
7


The Company expects that the greatest factor impacting its future effective tax rate is the federal reduction in the tax rate from 35% to 21%. Primarily due to uncertainties in the interpretation of the one-time transition tax rules and the determination of cash or other specified assets, the December 31, 2017 effective tax rate could differ materially from the amount disclosed in the financial statements. As permitted, the Company will update the estimates disclosed herein on a quarterly basis throughout 2018. See Note 12, Income Taxes in the Notes to Consolidated Financial Statements included in this Form 10-K for further information.

The Company has reviewed the impact of other provisions of the Act which took effect on January 1, 2018 and after. Based on current operations, we estimate that the Company will be subject to the Global Intangible Low-Taxed Income and the Deduction for Foreign-Derived Intangible Income provisions of the Act. We estimate that the new limitations which defer U.S. interest deductions in excess of 30% of Adjusted Taxable Income will not be applicable. Additionally, the Company will no longer be able to deduct compensation for its covered employees which exceeds the limitation under Internal Revenue Code Section 162(m).


25


    
Results of Operations: Year Ended 2017 versus 2016 and Year Ended 2016 versus 2015
Consolidated Results of Operations
(amounts in millions, except percentages)
 
Year Ended December 31,
 
Percent
Change 2017 vs 2016
 
Percent
Change 2016 vs 2015
 
2017
 
2016
 
2015
 
 
Net sales
$
3,722

 
$
3,574

 
$
3,650

 
4.1
 %
 
(2.1
)%
Gross profit
$
1,710

 
$
1,642

 
$
1,644

 
4.1
 %
 
(0.1
)%
Operating expenses
1,388

 
1,562

 
1,607

 
(11.1
)%
 
(2.8
)%
Operating income
$
322

 
$
80

 
$
37

 
302.5
 %
 
116.2
 %
Gross margin
45.9
%
 
45.9
%
 
45.0
%
 
 
 
 
Net sales to customers by geographic region were as follows (amounts in millions, except percentages):
 
Year Ended December 31,
 
Percent
Change 2017 vs 2016
 
Percent
Change 2016 vs 2015
 
2017
 
2016
 
2015
 
 
Europe, Middle East, and Africa
$
1,221

 
$
1,138

 
$
1,194

 
7.3
 %
 
(4.7
)%
Latin America
235

 
214

 
219

 
9.8
 %
 
(2.3
)%
Asia-Pacific
468

 
483

 
463

 
(3.1
)%
 
4.3
 %
Total International
1,924

 
1,835

 
1,876

 
4.9
 %
 
(2.2
)%
North America
1,798

 
1,739

 
1,774

 
3.4
 %

(2.0
)%
Total Net sales
$
3,722

 
$
3,574

 
$
3,650

 
4.1
 %

(2.1
)%

Operating expenses are summarized below (amounts in millions, except percentages):
 
Year Ended December 31,
 
Percent
Change 2017 vs 2016
 
Percent
Change 2016 vs 2015
 
2017
 
2016
 
2015
 
 
Selling and marketing
$
448

 
$
444

 
$
494

 
0.9
 %
 
(10.1
)%
Research and development
389

 
376

 
394

 
3.5
 %
 
(4.6
)%
General and administrative
301

 
307

 
283

 
(2.0
)%
 
8.5
 %
Amortization of intangible assets
184

 
229

 
251

 
(19.7
)%
 
(8.8
)%
Acquisition and integration costs
50

 
125

 
145

 
(60.0
)%
 
(13.8
)%
Impairment of goodwill and other intangibles

 
62

 

 
(100.0
)%
 
NMF

Exit and restructuring costs
16

 
19

 
40

 
(15.8
)%
 
(52.5
)%
Total Operating expenses
$
1,388

 
$
1,562

 
$
1,607

 
(11.1
)%
 
(2.8
)%

Consolidated Organic Net sales growth:
 
December 31,
 
2017
 
2016
Reported GAAP Consolidated Net sales growth
4.1
 %
 
(2.1
)%
Adjustments:
 
 
 
Impact of Wireless LAN Net sales (1)
3.2
 %
 
1.4
 %
Impact of foreign currency translation (2)
(0.6
)%
 
1.3
 %
Corporate, eliminations (3)
(0.2
)%
 
(0.2
)%
Consolidated Organic Net sales growth
6.5
 %
 
0.4
 %

26



(1) The Company sold the wireless LAN business in October 2016. The Company excludes the impact of the net sales of this business in the prior year period when computing organic net sales growth.
(2) Operating results reported in U.S. dollars are affected by foreign currency exchange rate fluctuations. Foreign currency translation impact represents the difference in results that are attributable to fluctuations in the currency exchange rates used to convert the results for businesses where the functional currency is not the U.S. dollar. This impact is calculated by translating, for certain currencies, the current period results at the currency exchange rates used in the comparable prior year period, rather than the exchange rates in effect during the current period. In addition, we exclude the impact of the company’s foreign currency hedging program in both the current and prior year periods.
(3) Amounts included in Corporate, eliminations consist of purchase accounting adjustments not reported in segments related to the Acquisition.

2017 compared to 2016
Net sales increased by $148 million or 4.1% compared with the prior year period. The increase in net sales was due to higher hardware sales in North America, EMEA, and Latin America, offset by lower hardware sales in Asia-Pacific. The increase in hardware sales was largely attributable to increased sales of mobile computing, data capture, and barcode printing products, partially offset by the impact of the divestiture of the wireless LAN business in October 2016. Services sales were lower primarily due to the impact of the wireless LAN divestiture. Consolidated Organic Net sales growth was 6.5%, reflecting growth in all four geographic regions, most notably in EMEA and North America, and Latin America.

Gross margin as a percent of sales was 45.9%, or flat compared to the prior year. This reflects an increase in gross margin in the EVM segment primarily due to changes in business mix and improved product costs, offset by lower AIT segment gross margin driven primarily by higher overhead and services costs, and increased customer sales incentives.

Operating expenses for the year ended December 31, 2017 and 2016, were $1.4 billion, or 37.3% of net sales and $1.6 billion or 43.7% of net sales, respectively. The reduction in operating expenses was primarily due to impairment charges related to the disposal of the Company’s wireless LAN business in the prior year period, lower acquisition and integration costs, and lower amortization of intangible assets. During 2017, the Company substantially completed its integration activities, including the implementation of a common enterprise resource planning system, associated with the Acquisition. The Company also exited the transition services agreements with Motorola Solutions. The decrease in amortization of intangible assets was due to certain assets reaching full amortization in 2017. Exit and restructuring costs were also lower than the year-ago period due to the prior year charges that included costs associated with the divestiture of the wireless LAN business. Research and development costs were higher primarily due to increased incentive compensation expense associated with improved financial performance partially offset by the impact of the divestiture of the wireless LAN business. General and administrative expenses were lower compared to the prior year period due primarily to reduced facility and IT expenses, professional fees, and employee benefits costs, as well as the impact of the divestiture of the wireless LAN business being offset partially by increased incentive compensation expense associated with improved financial performance.
Operating income increased $242 million compared to the prior year. The increase was due to the decline in operating expenses as well as the increase in sales and gross profit.

Interest expense was $227 million for the year ended December 31, 2017 compared to $193 million in the prior year. The increase over the prior year was driven by the payments for early debt extinguishment of $65 million and accelerated amortization of debt issuance costs related to the redemption of Senior Notes of $16 million offset, in part, by the impact of early repayments of debt and lower interest rates.

Other non-operating expenses decreased $5 million to $6 million for the year ended December 31, 2017. This decrease is driven by long-term investment impairments of $1 million in the current year compared to $7 million in the prior year.

The Company recognized tax expense of $71 million and $8 million for the period ending December 31, 2017 and 2016, respectively. The Company’s effective tax rates were 80.7% and (6.2)% as of December 31, 2017 and 2016, respectively. The Company’s effective tax rate was higher than the federal statutory rate of 35% primarily due to deferred income taxed on the outbound transfer of U.S. assets, an increase in uncertain tax benefits, increased valuation allowance for its foreign deferred tax assets, foreign non-deductible expenses, the one-time transition tax and remeasurement of its net U.S. deferred tax assets under U.S. tax reform. These increases were partially offset by the benefit of lower tax rates in foreign jurisdictions, recognition of deferred tax assets on intercompany asset transfers, the generation of tax credits in the current year, and deductions from vesting of equity compensation.

2016 compared to 2015

27


Net sales decreased by $76 million or 2.1% compared with the prior year period. The decline in net sales is due to lower hardware sales in North America, EMEA, and Latin America, including the unfavorable impact of foreign currency changes, partially offset by higher hardware sales in Asia-Pacific. The decline in hardware sales is largely attributable to lower sales of barcode printer, data capture, wireless LAN products, and location solutions. Organic net sales increased 0.4% compared to the prior year period, reflecting growth in Asia-Pacific and North America, offset by declines in EMEA, and Latin America.

Gross margin as a percent of sales was 45.9% compared to the prior year period of 45.0%. This improvement in gross margin reflects an increase in the EVM segment gross margin primarily due to lower services and hardware product costs. AIT segment gross margin decreased primarily due to lower sales demand and the impact of incentive programs, including the concessions to distributors of printer products imported into China, partially offset by product cost improvements.

Operating expenses for the year ended December 31, 2016 and 2015, were $1.6 billion, or 43.7% and 44.0% of net sales, respectively. The reduction in operating expenses as a percentage of net sales reflects the Company’s continued focus on improving operating efficiency and controlling expenses. Selling and marketing expenses were lower compared to the prior year due to the full-year impact of staff reductions implemented in 2015 and lower discretionary expenses and promotional spending. The decrease in research and development costs was primarily due to a reduction in headcount and other third-party resources, the impact from the divestiture of the wireless LAN business, and shifting of headcount to lower cost engineering locations. The increase in general and administrative costs was primarily due to higher IT related expenses, including increased support and maintenance costs for IT infrastructure and business systems as we exit transition services agreements with Motorola Solutions, and increased legal fees and litigation related expenses. The decrease in amortization of intangibles was due to impairment charges taken in the current year along with other intangible assets becoming fully amortized. Impairment of goodwill and other intangibles of $62 million was recorded during the third quarter related to the wireless LAN business divestiture. The Company has made significant progress on its integration activities associated with the Acquisition, including exiting many transition services agreements with Motorola Solutions. This has resulted in a decline in acquisition and integration costs compared to the prior year period. Exit and restructuring costs were lower due to a reduced level of restructuring activity as the Company progresses with its restructuring plan related to the Acquisition, partially offset by expenses associated with the Company’s divestiture of its wireless LAN business.
Operating income increased $43 million or 116.2% compared to the prior year. The increase was primarily due to the decline in operating expenses.

The Company conducts business in multiple currencies throughout the world, thus has exposure to movements in foreign exchange rates with regard to non-functional denominated revenue, cash assets, and cash liabilities.  As a result of these exposures, the Company recognized a foreign exchange loss of $5 million for 2016.

Interest expense was $193 million for the year ended December 31, 2016, flat compared to the prior year. Early repayments of debt resulted in accelerated amortization costs while debt refinancing savings were offset by closing costs of the refinancing.

Other non-operating expenses increased $10 million to $11 million for the year ended December 31, 2016. This increase is driven by long-term investment impairments of $7 million and an increase in accelerated loan discount amortization of $3 million due to the debt refinancing. See Note 8, Long-Term Debt for further information on the debt refinancing amendments.

In the period ending December 31, 2016, the Company recognized tax expense of $8 million compared to a tax benefit of $22 million for 2015. The Company’s effective tax rates were (6.2)% and 12.2% as of December 31, 2016 and December 31, 2015, respectively. The Company’s effective tax rate was lower than the federal statutory rate of 35% primarily due to deferred income taxed on the outbound transfer of U.S. assets, pre-tax losses in the United States, and the rate differential between U.S. and foreign jurisdictions.
Results of Operations by Segment
The following commentary should be read in conjunction with the financial results of each operating business segment as detailed in Note 15, Segment Information and Geographic Data in the Notes to the Consolidated Financial Statements included in this Form 10-K. The segment results exclude purchase accounting adjustments, amortization of intangible assets, acquisition and integration costs, impairment of goodwill and intangibles, and exit and restructuring costs.
Asset Intelligence & Tracking Segment (“AIT”)

28


(amounts in millions, except percentages)
 
Year Ended December 31,
 
Percent
Change 2017 vs 2016
 
Percent
Change 2016 vs 2015
 
2017
 
2016
 
2015
 
 
Net sales
$
1,311

 
$
1,247

 
$
1,286

 
5.1
%
 
(3.0
)%
Gross profit
$
640

 
$
620

 
$
654

 
3.2
%
 
(5.2
)%
Operating expenses
380

 
380

 
396

 
%
 
(3.9
)%
Operating income
$
260

 
$
240

 
$
258

 
8.3
%
 
(7.0
)%
Gross margin
48.8
%
 
49.7
%
 
50.9
%
 
 
 
 

AIT Organic Net sales growth:
 
December 31,
 
2017
 
2016
AIT Reported GAAP Net sales growth
5.1
 %
 
(3.0
)%
Adjustments:
 
 
 
Impact of foreign currency translations (1)
(0.5
)%
 
1.8
 %
AIT Organic Net sales growth
4.6
 %
 
(1.2
)%

(1) Operating results reported in U.S. dollars are affected by foreign currency exchange rate fluctuations. Foreign currency translation impact represents the difference in results that are attributable to fluctuations in the currency exchange rates used to convert the results for businesses where the functional currency is not the U.S. dollar. This impact is calculated by translating, for certain currencies, the current period results at the currency exchange rates used in the comparable prior year period, rather than the exchange rates in effect during the current period. In addition, we exclude the impact of the company’s foreign currency hedging program in both the current and prior year periods.

2017 compared to 2016
AIT net sales for the period ending December 31, 2017 increased $64 million or 5.1% compared to prior year period. The increase in net sales was largely driven by higher sales of barcode and card printers, primarily in the EMEA and Asia-Pacific regions. Sales of supplies and services were also higher than the prior year. The year-on-year growth also reflects a price concession to distributors of barcode printer products imported into China in the third quarter of 2016. During 2017, no additional price concession provisions were required and a reduction of the 2016 provision was recorded due to a change in import classification for barcode printers. AIT organic Net sales growth for the year-ended December 31, 2017 was 4.6%.
Gross margin as a percentage of sales was 48.8% compared to 49.7% for comparable prior year period. The decrease in gross margin reflects higher overhead costs, including freight and costs associated with our regional distribution center transitions, higher services costs and increased customer sales incentives offset partially by lower provisions for price concessions to distributors of barcode printer products imported into China.

Operating income increased 8.3% as a result of increased net sales and gross profit. Operating expenses were comparable to the prior year period.

2016 compared to 2015
AIT net sales for the period ending December 31, 2016 decreased $39 million or 3.0% compared to prior year period. The decline in net sales was primarily due to lower net sales of barcode printers and location solutions, and the unfavorable impact of foreign currency changes, most notably in EMEA which was partially offset by an increase in sales of supplies. The barcode printer sales decline was primarily due to lower sales in North America and EMEA. AIT organic net sales declined compared to the prior year period by 1.2%.
Gross margin as a percentage of sales was 49.7% compared to 50.9% for comparable prior year period. The decrease in gross margin included impacts from lower sales of barcode printers, the impact of incentive programs, including the concession to distributors of printer products imported into China, costs associated with the relocation of North American distribution operations, and the unfavorable impact of foreign currency changes. These factors were partially offset by manufacturing cost improvements in supplies and lower hardware product costs.

Operating income declined 7.0% as a result of lower net sales and gross profit, partially offset by lower operating expenses.


29


Enterprise Visibility & Mobility Segment (“EVM”)
(amounts in millions, except percentages)
 
Year Ended December 31,
 
Percent
Change 2017 vs 2016
 
Percent
Change 2016 vs 2015
 
2017
 
2016
 
2015
 
 
Net sales
$
2,414

 
$
2,337

 
$
2,380

 
3.3
%
 
(1.8
)%
Gross profit
$
1,073

 
$
1,032

 
$
1,010

 
4.0
%
 
2.2
 %
Operating expenses
758

 
746

 
774

 
1.6
%
 
(3.6
)%
Operating income
$
315

 
$
286

 
$
236

 
10.1
%
 
21.2
 %
Gross margin
44.4
%
 
44.2
%
 
42.4
%
 
 
 
 

EVM Organic Net sales growth:
 
December 31,
 
2017
 
2016
EVM Reported GAAP Net sales growth
3.3
 %
 
(1.8
)%
Adjustments:
 
 
 
Impact of Wireless LAN Net sales (1)
4.9
 %
 
2.2
 %
Impact of foreign currency translation (2)
(0.7
)%
 
0.9
 %
EVM Organic Net sales growth
7.5
 %
 
1.3
 %

(1) The Company sold the wireless LAN business in October 2016 and excludes the net sales of this business in the prior year period when computing organic net sales growth.

(2) Operating results reported in U.S. dollars are affected by foreign currency exchange rate fluctuations. Foreign currency translation impact represents the difference in results that are attributable to fluctuations in the currency exchange rates used to convert the results for businesses where the functional currency is not the U.S. dollar. This impact is calculated by translating, for certain currencies, the current period results at the currency exchange rates used in the comparable prior year period, rather than the exchange rates in effect during the current period. In addition, the Company excludes the impact of it’s foreign currency hedging program in both the current and prior year periods.

2017 compared to 2016
EVM net sales for the period ending December 31, 2017 increased $77 million or 3.3% compared to prior year period. The increase in net sales was driven by higher sales of mobile computing and data capture products, primarily in the North America and EMEA regions, partially offset by impact of the divestiture of the wireless LAN business in October 2016. EVM organic net sales growth for the year-ended December 31, 2017 was 7.5%.
Gross margin for the year ended December 31, 2017 was 44.4% compared to 44.2% in the prior year period. The increase in gross margin primarily reflects changes in business mix and improvements in hardware product costs.

Operating income increased 10.1% primarily as a result of higher sales and gross profit, partially offset by an increase in operating expenses.

2016 compared to 2015
EVM net sales for the period ending December 31, 2016 decreased $43 million or 1.8% compared to prior year period. The decline in net sales was primarily driven by lower sales of wireless LAN and data capture products and the unfavorable impact of foreign currency changes in EMEA, partially offset by higher sales of mobile computing products. EVM organic net sales increased compared to the prior year period by 1.3%.
Gross profit margin for the year ended December 31, 2016 was 44.2% compared to 42.4% in the prior year period. The improvement in gross margin was due primarily to lower service and hardware product costs, including lower excess and obsolescence expense. The prior year costs also included higher product rebranding expenses. This improvement was partially offset by product mix and the unfavorable impact of foreign currency changes.


30


Operating income increased 21.2% primarily as a result of higher gross profit and lower operating expenses, partially offset by lower sales.

Critical Accounting Policies and Estimates
Management prepared the consolidated financial statements of the Company under accounting principles generally accepted in the United States of America. These principles require the use of estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions we used are reasonable based upon the information available at that time.
Our estimates and assumptions affect the reported amounts in our consolidated financial statements. See Note 2, Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in this Form 10-K.

Recently Issued Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in this Form 10-K.
Liquidity and Capital Resources
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, repatriation of foreign cash and investments, and acquisitions of third-parties. Management believes that our 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 years indicated (in millions):
 
Year Ended December 31,
 
2017
 
2016
 
2015
Cash flow (used in) provided by:
 
 
 
 
 
Operating activities
$
478

 
$
380

 
$
122

Investing activities
(51
)
 
(39
)
 
(148
)
Financing activities
(517
)
 
(384
)
 
(161
)
Effect of exchange rates on cash balances
(4
)
 
7

 
(15
)
Net decrease in cash and cash equivalents
$
(94
)
 
$
(36
)
 
$
(202
)
The change in our cash and cash equivalents balance is reflective of the following:
2017 vs. 2016
Cash flows from operations increased $98 million during 2017 to $478 million. This improvement was driven by an increase in net earnings of $154 million, partially offset by a decline in working capital primarily related to higher inventory levels and lower accounts payable. Net inventory increased primarily as a result of growth in the business and changes in product mix, an increased backlog level compared to the prior year, and our recent transition to a new distribution model for our European operations. In addition, the prior year working capital benefited from the successful renegotiation of longer payment terms with vendors.

Net cash used in the purchase of property, plant and equipment declined $27 million as compared to the prior year, as capital expenditures related to the Acquisition integration were substantially completed in 2016. The prior year investing activities also included net cash proceeds of $39 million related to the sale of the wireless LAN business.

Net cash used in financing activities during 2017 consisted of proceeds related to the A&R Credit agreement for Term Loan A of $688 million, a draw on the Revolving Credit Facility of $275 million, and proceeds related to the receivables financing facility of $145 million. These proceeds were primarily used to redeem $1.1 billion in principal of the 7.25% Senior Notes, maturing October 2022. The Company also had debt principal prepayments on Term Loan A and Term Loan B of $502 million and on the receivables financing facility of $10 million. As part of the repricing of Term Loan B, a portion of the debt was deemed to be modified and therefore, the Company included $263 million in proceeds from the issuance of long-term debt, offset by $263 million in payments of long-term debt within the Consolidated Statements of Cash Flows.
2016 vs. 2015
Cash flows from operations increased $258 million during 2016 to $380 million. This improvement was driven by lower net losses of $21 million, which included significant non-cash drivers of a lower deferred income tax benefit of $98 million and asset impairment for goodwill, intangibles and other assets of $69 million, primarily related to the wireless LAN business divestiture. Additionally, the Company had improved working capital related items of $90 million during 2016. Working capital

31


related improvements consisted primarily of accounts payable increases due to the Company successfully renegotiating longer payment terms with vendors being partially offset by an increase in income tax cash outflows.

Net cash used in investing activities during 2016 included capital expenditures of $77 million compared to $122 million in 2015. The decrease consisted primarily of a reduction in integration and real estate related capital expenditures. This was offset somewhat by the sale of the wireless LAN business resulting in net cash received of $39 million.

Net cash used in financing activities during 2016 consisted primarily of early debt principal repayments of $382 million under the Term Loan compared to early debt principal repayments of $165 million in the comparable prior year period. Resulting from the debt refinancing amendments entered into during fiscal 2016, the Company recognized $102 million of proceeds from the issuance of long-term debt, offset by $102 million in payments of long-term debt within the Consolidated Statements of Cash Flows. Additionally, proceeds received from the exercise of stock options and employee stock purchase plan purchases (“ESPP”) were $11 million in 2016 compared to $17 million in 2015 reflecting decreased option exercises and stock purchase plan purchases. The taxes paid related to the net share settlement of equity awards were $8 million in 2016 compared to $13 million in 2015 reflecting decreased stock exercises.

See Note 8, Long-Term Debt in the Notes to the Consolidated Financial Statements included in this Form 10-K for further details.
The following table shows the carrying value of the Company’s debt (in millions):
 
December 31,
 
2017
 
2016
Senior Notes
$

 
$
1,050

Term Loan B
1,160

 
1,653

Term Loan A
679

 

Revolving Credit Facility
275

 

Receivables Financing Facility
135

 

Total debt
2,249

 
2,703

Less: Debt issuance costs
(7
)
 
(22
)
Less: Unamortized discounts
(15
)
 
(33
)
Less: Current portion of long-term debt
(51
)
 

Total long-term debt
$
2,176

 
$
2,648


Credit Facilities
On July 26, 2017, the Company entered into the A&R Credit Agreement, which amended, modified and added provisions to the Company’s previous credit agreement. The A&R Credit Agreement provides for a Term Loan A of $688 million and increased the existing Revolving Credit Facility from $250 million to $500 million. The Company incurred and capitalized debt issuance costs of $5 million related to Term Loan A and the increased Revolving Credit Facility under the A&R Credit Agreement.

In addition, as part of the A&R Credit Agreement, the Company partially paid down and repriced its Term Loan B. The A&R Credit Agreement also lowered the index rate spread for LIBOR loan from LIBOR + 250 bp to LIBOR + 200 bp for its Term Loan B.

In accounting for the early termination and repricing of Term Loan B, the Company applied the provisions of ASC 470-50, Modifications and Extinguishments (“ASC 470-50”). The evaluation of the accounting under ASC 470-50 was done on a creditor by creditor basis in order to determine if the terms of the debt were substantially different and, as a result, whether to apply modification or extinguishment accounting. The Company determined that the terms of the debt were not substantially different for approximately 80.4% of the lenders, and applied modification accounting. For the remaining 19.6% of the lenders, extinguishment accounting was applied. Certain lenders elected not to participate in the debt repricing, which resulted in a debt principal prepayment of $75 million of the Company’s outstanding debt balance. The debt repricing transaction also resulted in one-time pre-tax charges including third-party fees for arranger, legal and other services and accelerated discount and amortization of debt issuance costs on the debt principal prepayment of approximately $6 million. These costs are reflected as non-operating expenses in Other, net on the Company’s Consolidated Statements of Operations.

As of December 31, 2017, the Term Loan A interest rate was 3.35%, and the Term Loan B interest rate was 3.37%. Borrowings under the Term Loan B, as amended, bear interest at a variable rate subject to a floor of 2.75%. The facility allows for interest payments payable monthly or quarterly on Term Loan A and quarterly on Term Loan B. The Company has entered into interest

32


rate swaps to manage interest rate risk on its long-term debt on Term Loan B. See Note 7, Derivative Instruments in the Notes to the Consolidated Financial Statements included in this Form 10-K.

The A&R Credit Agreement also requires the Company to prepay certain amounts in the event of certain circumstances or transactions, as defined in the A&R Credit Agreement. The Company may make prepayments against the Term Loans, in whole or in part, without premium or penalty. Under Term Loan A, the Company made debt principal prepayments of $9 million during the year ended December 31, 2017. Under Term Loan B, the Company made debt principal prepayments of $493 million during the year ended December 31, 2017. The Term Loan A, unless amended, modified, or extended, will mature on July 27, 2021 (the “Term Loan A Maturity Date”). The Term Loan B, unless amended, modified, or extended, will mature on October 27, 2021 (the “Term Loan B Maturity Date”).  To the extent not previously paid, the Term Loans are due and payable on, respectively, the Term Loan A Maturity Date and Term Loan B Maturity Date.  At such time, the Company will be required to repay all outstanding principal, accrued and unpaid interest and other charges in accordance with the A&R Credit Agreement. Assuming the Company makes no further optional debt principal prepayments on Term Loan A, the outstanding principal as of the Term Loan A Maturity Date will be approximately $498 million. Assuming the Company makes no further optional debt principal prepayments on the Term Loan B, the outstanding principal as of the Term Loan B Maturity Date will be approximately $1.2 billion.

The Revolving Credit Facility is available for working capital and other general corporate purposes including letters of credit. The amount (including letters of credit) cannot exceed $500 million. As of December 31, 2017, the Company had letters of credit totaling $5 million, which reduced funds available for other borrowings under the Revolving Credit Facility to $495 million. The Revolving Credit Facility will mature and the related commitments will terminate on July 27, 2021.

Borrowings under the Revolving Credit Facility bear interest at a variable rate plus an applicable margin. As of December 31, 2017, the Revolving Credit Facility had an average interest rate of 3.39%. The facility allows for interest payments payable monthly or quarterly. As of December 31, 2017, the Company had borrowings of $275 million against the Revolving Credit Facility. There were no borrowings against the Revolving Credit Facility in the prior year comparable period.

Senior Notes
During fiscal 2017, the Company used proceeds from Term Loan A, the Revolving Credit Facility and the receivables financing facility to redeem $1.1 billion in outstanding principal of the 7.25% Senior Notes (the “Senior Notes”), maturing October 2022. In accounting for the early termination of Senior Notes, the Company applied the provisions of ASC 470-50, Modifications and Extinguishments (“ASC 470-50”). Based on the terms of the debt, the Company concluded extinguishment accounting was appropriate to apply. The Company recognized a $65 million make whole premium, which was recorded as Interest expense, net on the Company’s Consolidated Statements of Operations. The Company also recognized accelerated debt issuance costs of $16 million which were recorded as Interest expense, net on the Company’s Consolidated Statements of Operations.

Receivables Financing Facility
On December 1, 2017, a wholly-owned, bankruptcy-remote, special-purpose entity (“SPE”) of the Company entered into the Receivables Purchase Agreement, which provides for a receivables financing facility of up to $180 million. The SPE utilizes the receivables financing facility in the normal course of business as part of its management of cash flows. Under its committed receivables financing facility, a subsidiary of the Company sells its domestically originated accounts receivables at fair value, on a revolving basis, to the SPE which was formed for the sole purpose of buying the receivables. The SPE, in turn, pledges a valid and perfected first-priority security interest in the pool of purchased receivables to a financial institution for borrowing purposes. The subsidiary retains an ownership interest in the pool of receivables that are sold to the SPE and services those receivables. Accordingly, the Company has determined that these transactions do not qualify for sale accounting under ASC 860, Transfers and Servicing of Financial Assets, and has, therefore, accounted for the transactions as secured borrowings.

At December 31, 2017, the Company’s Consolidated Balance Sheets included $421 million of receivables that were pledged and $135 million of associated liabilities. The SPE borrowed $145 million on the receivables financing facility and repaid $10 million in 2017. In 2017, the Company recorded expenses related to its receivables financing facility of $1 million as Interest expense, net on the Company’s Consolidated Statements of Operations. The receivables financing facility will mature on November 29, 2019.

Borrowings under the receivables financing facility bear interest at a variable rate plus an applicable margin. As of December 31, 2017, the receivables financing facility had an average interest rate of 2.35% and requires monthly interest payments.

Both the Revolving Credit Facility and receivables financing facility include terms and conditions that limit the incurrence of additional borrowings and require that certain financial ratios be maintained at designated levels.


33


From January 1, 2018 through February 22, 2018, the Company made principal debt repayments of $63 million

The company was in compliance with all covenants as of December 31, 2017 and is currently not aware of any events that would cause non-compliance with any covenants in the future.

Summary of fiscal 2017 actions
The actions taken during fiscal 2017 resulted in net repayments of $454 million and included the following:

Term Loan A borrowings of $688 million,
Term Loan A debt principal payments of $9 million,
Revolving Credit Facility borrowings of $275 million,
Senior Note debt principal prepayments of $1.05 billion,
Term Loan B debt principal prepayments of $493 million,
Receivables financing facility borrowings of $145 million, and
Receivables financing facility payments of $10 million.

Historically, significant portions of our cash inflows were generated by our operations. We currently expect this trend to continue throughout 2018. We believe that our existing cash and investments, borrowings available under our Revolving Credit Facility and receivables financing 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.

Certain domestic subsidiaries of the Company (the “Guarantor Subsidiaries”) guarantee the Term Loans and the Revolving Credit Facility on a senior basis: For the period ended December 31, 2017, the non-Guarantor Subsidiaries would have (a) accounted for 57.3% of our total revenue and (b) held 86.9% or $4.3 billion of our total assets and approximately 87.6% or $3.0 billion of our total liabilities including trade payables but excluding intercompany liabilities.
As of December 31, 2017, the Company’s cash position of $62 million included foreign cash and investments of $54 million.
Management believes that existing capital resources and funds generated from operations are sufficient to finance anticipated capital requirements.
Contractual Obligations
Zebra’s contractual obligations as of December 31, 2017 were (in millions):
 
Payments due by period
 
Total
 
Less than 1
year
 
1-3 years
 
3-5 years
 
More than 5
years
Operating lease obligations
$
138

 
$
32

 
$
47

 
$
23

 
$
36

Deferred compensation liability
15

 

 

 

 
15

Long-term debt – principal payments
2,249

 
51

 
230

 
1,968

 

Interest payments
286

 
80

 
153

 
53

 

Payments on interest rate swaps
46

 
8

 
24

 
14

 

Purchase obligations
357

 
357

 

 

 

Total
$
3,091

 
$
528

 
$
454

 
$
2,058

 
$
51


Purchase obligations are for purchases made in the normal course of business to meet operational requirements, primarily raw materials and finished goods.

Uncertain tax benefits of $51 million have been excluded from the above table. $20 million is a current liability as of December 31, 2017. The remainder is classified as long-term in nature as we cannot make a reasonably reliable estimate of the period of cash settlement with the respective taxing authority. See Note 12, Income Taxes in the Notes to Consolidated Financial Statements included in this Form 10-K for further information.





34


Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the sensitivity of income to changes in interest rates, commodity prices, and foreign currency changes. Zebra is exposed to the following types of market risk: interest rates and foreign currency.
Interest Rate Risk
We are exposed to interest rate volatility with regard to existing debt issuances. Primary exposures include LIBOR rates. From time to time, we use interest rate derivative contracts including interest rate swaps to hedge our exposure to the impact of interest rate changes on existing debt and future debt issuances to reduce the volatility of our financing costs and, based on current and projected market conditions, achieve a desired proportion of fixed versus floating-rate debt. Generally, under these swaps, we agree with a counterparty to exchange floating-rate for fixed-rate interest amounts with an agreed upon notional principal amount.

As of December 31, 2017, we had $2.2 billion of debt outstanding under our debt facilities, which bears interest determined by reference to a variable rate index. A one percentage point increase or decrease in interest rates on the various debt instruments we hold would increase or decrease the annual interest expense we recognize and the cash we pay for interest expense by approximately $22 million. This amount excludes the impact of any associated derivative contracts. To mitigate this risk, we entered into forward interest rate swaps to hedge the interest rate risk associated with the variable interest payments on our debt facilities. Refer to Note 7, Derivative Instruments in the Notes to Consolidated Financial Statements included in this Form 10-K for further discussion of hedging activities.

Foreign Exchange Risk
We provide products and services in over 180 countries throughout the world and, therefore, at times are exposed to risk based on movements in foreign exchange rates. On occasion, we invoice customers in their local currency and have a resulting foreign currency denominated revenue transaction and accounts receivable. We also purchase certain raw materials and other items in foreign currencies. We manage these risks using derivative financial instruments. See Note 7, Derivative Instruments in the Notes to the Consolidated Financial Statements included in this Form 10-K for further discussions of hedging activities.

We are exposed to fluctuations in foreign currency exchange rates, primarily with respect to the Euro, British Pound Sterling, Czech koruna, Brazilian real, Canadian dollar, Australian dollar, Singapore dollar, Japanese yen, and Swedish krona. In general, we are a net receiver of foreign currencies and therefore benefit from a weakening of the U.S. dollar and are adversely affected by a strengthening of the U.S. dollar. A 1% increase or decrease in exchange rates relative to the U.S. dollar would increase or decrease our pre-tax income by approximately $2 million. This amount excludes the impact of any associated derivative contracts, which would largely offset this foreign exchange exposure. We enter into foreign currency forward contracts to hedge against the effect of exchange rate fluctuations on the Consolidated Balance Sheets of certain entities with exposures denominated in foreign currencies. These transactions are typically three months in maturity and are not designated as hedges.









35


Item 8.
Financial Statements and Supplementary Data
The financial statements and schedules of Zebra are annexed to this report as pages F-2 through F-37. An index to such materials appears on page F-1.
 
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Not applicable.
 
Item 9A.
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-K. The evaluation was conducted under the supervision of our Disclosure Committee, and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in this Form 10-K was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) information required to be disclosed by us in our reports that we file or furnish under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework as released in 2013. Based on this assessment and those criteria, our management believes that, as of December 31, 2017, our internal control over financial reporting is effective. 

Our independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on Zebra’s internal control over financial reporting. Ernst & Young LLP’s report is included on page 37 of this report on Form 10-K.

Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the fourth quarter of 2017, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Inherent Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent or detect 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 misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within Zebra have been prevented or 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.




36


Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Zebra Technologies Corporation

Opinion on Internal Control over Financial Reporting

We have audited Zebra Technologies Corporation’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Zebra Technologies Corporation (the “Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Zebra Technologies Corporation as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes and financial statement schedule listed in Index Item 15 and our report dated February 22, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/Ernst & Young LLP
Chicago, Illinois
February 22, 2018


37


Item 9B.
Other Information
Not applicable.

38


PART III
 
Item 10.
Directors, Executive Officers and Corporate Governance
We have adopted a Code of Ethics for Senior Financial Officers that applies to Zebra’s Chief Executive Officer, Chief Financial Officer and the Chief Accounting Officer. The Code of Ethics is posted on the Investor Relations – Corporate Governance page of Zebra’s Internet web site, www.zebra.com, and is available for download. Any waiver from the Code of Ethics and any amendment to the Code of Ethics will be disclosed on such page of Zebra’s web site
All other information in response to this item is incorporated by reference from the Proxy Statement sections entitled “Corporate Governance,” “Election of Directors,” “Board and Committees of the Board,” “Executive Officers,” and “Section 16(a) Beneficial Ownership Reporting Compliance.”
 
Item 11.
Executive Compensation
The information in response to this item is incorporated by reference from the Proxy Statement sections entitled “Compensation Discussion and Analysis-Executive Summary,” “Compensation Discussion and Analysis,” “Executive Compensation,” “Director Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report.”
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information in response to this item is incorporated by reference from the Proxy Statement sections entitled “Ownership of our Common Stock” and “Equity Compensation Plan Information.”
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information in response to this item is incorporated by reference from the Proxy Statement section entitled “Corporate Governance.”
 
Item 14.
Principal Accounting Fees and Services
The information in response to this item is incorporated by reference from the Proxy Statement section entitled “Fees of Independent Auditors.”


39


PART IV
 
Item 15.
Exhibits, Financial Statements and Schedule
The financial statements and schedule filed as part of this report are listed in the accompanying Index to Financial Statements and Schedule. The exhibits filed as a part of this report are listed in the accompanying Index to Exhibits.


40


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized, on the 22nd day of February 2018.
ZEBRA TECHNOLOGIES CORPORATION
By: /s/ Anders Gustafsson
Anders Gustafsson
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, the report has been signed below by the following persons in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Anders Gustafsson
Anders Gustafsson
Chief Executive Officer and Director
(Principal Executive Officer)
February 22, 2018
 
 
 
 
 
 
/s/ Olivier Leonetti
Olivier Leonetti
Chief Financial Officer
(Principal Financial Officer)
February 22, 2018
 
 
 
/s/ Colleen O’Sullivan
Colleen O’Sullivan
Vice President, Chief Accounting Officer
(Principal Accounting Officer)
February 22, 2018
 
 
 
/s/ Michael A. Smith
Michael A. Smith
Director and Chairman of the Board of
Directors
February 22, 2018
 
 
 
/s/ Andrew K. Ludwick
Andrew K. Ludwick
Director
February 22, 2018
 
 
 
/s/ Ross W. Manire
Ross W. Manire
Director
February 22, 2018
 
 
 
/s/ Richard L. Keyser
Richard L. Keyser
Director
February 22, 2018
 
 
 
/s/ Janice M. Roberts
Janice M. Roberts
Director
February 22, 2018
 
 
 
/s/ Chirantan J. Desai
Chirantan J. Desai
Director
February 22, 2018
 
 
 
/s/ Frank B. Modruson
Frank B. Modruson
Director
February 22, 2018


41


ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
 
All other financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or related notes.


F-1



Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Zebra Technologies Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Zebra Technologies Corporation (the “Company“) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial statement schedule listed in Index Item 15 (collectively referred to as the “consolidated financial statements“). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 22, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company‘s management. Our responsibility is to express an opinion on the Company‘s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.


/s/ Ernst & Young LLP        


We have served as the Company’s auditor since 2005.

Chicago, Illinois
February 22, 2018




F-2


ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
 
 
December 31,
 
2017
 
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
62

 
$
156

Accounts receivable, net
479

 
625

Inventories, net
458

 
345

Income tax receivable
40

 
32

Prepaid expenses and other current assets
24

 
64

Total Current assets
1,063

 
1,222

Property, plant and equipment, net
264

 
292

Goodwill
2,465

 
2,458

Other intangibles, net
299

 
480

Long-term deferred income taxes
119

 
113

Other long-term assets
65

 
67

Total Assets
$
4,275

 
$
4,632

Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
51

 
$

Accounts payable
383

 
413

Accrued liabilities
337

 
323

Deferred revenue
186

 
191

Income taxes payable
43

 
22

Total Current liabilities
1,000

 
949

Long-term debt
2,176

 
2,648

Long-term deferred income taxes

 
3

Long-term deferred revenue
148

 
124

Other long-term liabilities
117

 
116

Total Liabilities
3,441

 
3,840

Stockholders’ Equity:
 
 
 
Preferred stock, $.01 par value; authorized 10,000,000 shares; none issued

 

Class A common stock, $.01 par value; authorized 150,000,0000 shares; issued 72,151,857 shares
1

 
1

Additional paid-in capital
257

 
210

Treasury stock at cost, 18,915,762 and 19,267,269 shares at December 31, 2017 and December 31, 2016, respectively
(620
)
 
(614
)
Retained earnings
1,248

 
1,240

Accumulated other comprehensive loss
(52
)
 
(45
)
Total Stockholders’ Equity
834

 
792

Total Liabilities and Stockholders’ Equity
$
4,275

 
$
4,632

See accompanying Notes to Consolidated Financial Statements.


F-3



ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except share data)

 
Year Ended December 31,
 
2017
 
2016
 
2015
Net sales





Net sales of tangible products
$
3,223


$
3,056


$
3,131

Revenue from services and software
499


518


519

Total Net sales
3,722


3,574


3,650

Cost of sales:





Cost of sales of tangible products
1,677


1,593


1,629

Cost of services and software
335


339


377

Total Cost of sales
2,012


1,932


2,006

Gross profit
1,710


1,642


1,644

Operating expenses:





Selling and marketing
448


444


494

Research and development
389


376


394

General and administrative
301


307


283

Amortization of intangible assets
184


229


251

Acquisition and integration costs
50


125


145

Impairment of goodwill and other intangibles


62



Exit and restructuring costs
16


19


40

Total Operating expenses
1,388


1,562


1,607

Operating income
322


80


37

Other expenses:





Foreign exchange loss
(1
)

(5
)

(23
)
Interest expense, net
(227
)

(193
)

(193
)
Other, net
(6
)

(11
)

(1
)
Total Other expenses
(234
)

(209
)

(217
)
Income (loss) before income taxes
88


(129
)

(180
)
Income tax expense (benefit)
71


8


(22
)
Net income (loss)
$
17


$
(137
)

$
(158
)
Basic earnings (loss) per share
$
0.33


$
(2.65
)

$
(3.10
)
Diluted earnings (loss) per share
$
0.32


$
(2.65
)

$
(3.10
)
Basic weighted average shares outstanding
53,021,761


51,579,112


50,996,297

Diluted weighted average and equivalent shares outstanding
53,688,832


51,579,112


50,996,297

See accompanying Notes to Consolidated Financial Statements.



F-4


ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
 
 
Year Ended December 31,
 
2017
 
2016
 
2015
Net income (loss)
$
17

 
$
(137
)
 
$
(158
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
Unrealized (loss) gain on anticipated sales hedging transactions
(15
)
 
7

 
(6
)
Unrealized gain (loss) on forward interest rate swaps hedging transactions
6

 

 
(7
)
       Foreign currency translation adjustment
2

 
(4
)
 
(26
)
Comprehensive income (loss)
$
10

 
$
(134
)
 
$
(197
)
See accompanying Notes to Consolidated Financial Statements.




F-5


ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, except share data)
 
 
 
Class A Common Stock Shares
 
Class A
Common
Stock Amount
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Balance at December 31, 2014
 
51,654,337

 
$
1

 
$
147

 
$
(634
)
 
$
1,535

 
$
(9
)
 
$
1,040

Issuance of treasury shares upon exercise of stock options, purchases under stock purchase plan and grants of restricted stock awards, net of cancellations
 
646,395

 

 
1

 
16

 

 

 
17

Shares withheld related to net share settlement
 
(138,881
)
 

 

 
(13
)
 

 

 
(13
)
Issuance of warrants exercisable for 250,000 shares, exercise price $89.34, expiration April 5, 2017
 

 

 
4

 

 

 

 
4

Additional tax benefit resulting from exercise of options
 

 

 
11

 

 

 

 
11

Share-based compensation
 

 

 
31

 

 

 

 
31

Net loss
 

 

 

 

 
(158
)
 

 
(158
)
Unrealized loss anticipated sales hedging transactions (net of income taxes)
 

 

 

 

 

 
(6
)
 
(6
)
Unrealized loss on forward interest rate swaps hedging transactions (net of income taxes)
 

 

 

 

 

 
(7
)
 
(7
)
Foreign currency translation adjustment
 

 

 

 

 

 
(26
)
 
(26
)
Balance at December 31, 2015
 
52,161,851

 
$
1

 
$
194

 
$
(631
)
 
$
1,377

 
$
(48
)
 
$
893

Issuance of treasury shares upon exercise of stock options, purchases under stock purchase plan and grants of restricted stock awards, net of cancellations
 
817,943

 

 
(14
)
 
25

 

 

 
11

Shares withheld related to net share settlement
 
(95,206
)
 

 

 
(8
)
 

 

 
(8
)
Additional tax benefit resulting from exercise of options
 

 

 
3

 

 

 

 
3

Share-based compensation
 

 

 
27

 

 

 

 
27

Net loss
 

 

 

 

 
(137
)
 

 
(137
)
Unrealized loss on anticipated sales hedging transactions (net of income taxes)
 

 

 

 

 

 
7

 
7

Unrealized gain on forward interest rate swaps hedging transactions (net of income taxes)
 

 

 

 

 

 

 

Foreign currency translation adjustment
 

 

 

 

 

 
(4
)
 
(4
)
Balance at December 31, 2016
 
52,884,588

 
$
1

 
$
210

 
$
(614
)
 
$
1,240

 
$
(45
)
 
$
792

Cumulative effect of change in accounting principle
 

 

 

 

 
(9
)
 

 
(9
)
Issuance of treasury shares upon exercise of stock options, purchases under stock purchase plan and grants of restricted stock awards, net of cancellations
 
410,239

 

 
12

 

 

 

 
12

Shares withheld related to net share settlement
 
(58,732
)
 

 

 
(6
)
 

 

 
(6
)
Share-based compensation