QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 2022
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, IL60069
(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
Trading Symbol(s)
Name of exchange on which registered
Class A Common Stock, par value $.01 per share
ZBRA
The NASDAQ Stock Market, LLC
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☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
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 provided 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 Exchange Act). Yes ☐ No ☒
As of April 29, 2022, there were 52,513,827 shares of Class A Common Stock, $.01 par value, outstanding.
Note 1 Description of Business and Basis of Presentation
Zebra Technologies Corporation and its subsidiaries (“Zebra” or the “Company”) is a global leader providing innovative Enterprise Asset Intelligence (“EAI”) solutions in the automatic identification and data capture solutions industry. We design, manufacture, and sell a broad range of products and solutions, including cloud-based software subscriptions, that capture and move data. We also provide a full range of services, including maintenance, technical support, repair, managed and professional services. End-users of our products, solutions and services include those in retail and e-commerce, manufacturing, transportation and logistics, healthcare, public sector, and other industries. We provide our products, solutions and services globally through a direct sales force and an extensive network of channel partners.
Management prepared these unaudited interim consolidated financial statements according to the rules and regulations of the Securities and Exchange Commission for interim financial information and notes. As permitted under Article 10 of Regulation S-X and the instructions of Form 10-Q, these consolidated financial statements do not include all the information and notes required by United States Generally Accepted Accounting Principles (“GAAP”) for complete financial statements, although management believes that the disclosures made are adequate to make the information not misleading. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
In the opinion of the Company, these interim financial statements include all adjustments (of a normal, recurring nature) necessary to fairly present its Consolidated Balance Sheet as of April 2, 2022, the Consolidated Statements of Operations, Comprehensive Income, Stockholders’ Equity, and Cash Flows for the three months ended April 2, 2022 and April 3, 2021. These results, however, are not necessarily indicative of the results expected for the full fiscal year ending December 31, 2022.
Effective January 1, 2022, the location solutions offering, which provides a range of real-time location systems (“RTLS”) and services that generate on-demand information about the physical location and status of assets, equipment, and people, moved from our Asset Intelligence & Tracking (“AIT”) segment into our Enterprise Visibility & Mobility (“EVM”) segment contemporaneous with a change in our organizational structure and management of the business. We have reported our results reflecting this change, including historical periods, on a comparable basis. This change does not have an impact to the Consolidated Financial Statements. See Note 15, Segment Information & Geographic Data for additional information related to each segment’s results.
Note 2 Significant Accounting Policies
For a discussion of our significant accounting policies, see Note 2, Significant Accounting Policies within Part II, Item 8. “Financial Statements and Supplementary Data” in the Annual Report on Form 10-K for the year ended December 31, 2021. There have been no changes to our significant accounting policies since our Annual Report on Form 10-K for the year ended December 31, 2021.
The Company recognizes revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration which it expects to receive for providing those goods or services.
Revenues for products are generally recognized upon shipment, whereas revenues for services and solution offerings are generally recognized over time by using an output or time-based method, assuming all other criteria for revenue recognition have been met. Revenues for software are recognized either upon delivery or over time using a time-based method, depending upon how control is transferred to the customer. In cases where a bundle of products, services, solutions and/or software are delivered to the customer, judgment is required to select the method of progress which best reflects the transfer of control.
Disaggregation of Revenue
The following table presents our Net sales disaggregated by product category for each of our segments, AIT and EVM, for the three months ended April 2, 2022 and April 3, 2021 (in millions):
Three Months Ended
April 2, 2022
April 3, 2021
Segment
Tangible Products
Services and Software
Total
Tangible Products
Services and Software
Total
AIT
$
370
$
24
$
394
$
407
$
22
$
429
EVM
837
201
1,038
746
175
921
Corporate, eliminations(1)
—
—
—
—
(3)
(3)
Total
$
1,207
$
225
$
1,432
$
1,153
$
194
$
1,347
(1)Amounts included in Corporate, eliminations consist of purchase accounting adjustments.
In addition, refer to Note 15, Segment Information & Geographic Data for Net sales to customers by geographic region.
Performance Obligations
The Company’s remaining performance obligations primarily relate to repair and support services, as well as solution offerings. The aggregated transaction price allocated to remaining performance obligations for arrangements with an original term exceeding one year was $1,078 million and $1,033 million, inclusive of deferred revenue, as of April 2, 2022 and December 31, 2021, respectively. On average, remaining performance obligations as of April 2, 2022 and December 31, 2021 are expected to be recognized over a period of approximately two years.
Contract Balances
Progress on satisfying performance obligations under contracts with customers related to billed revenues is reflected on the Consolidated Balance Sheets in Accounts receivable, net. Progress on satisfying performance obligations under contracts with customers related to unbilled revenues (“contract assets”) is reflected on the Consolidated Balance Sheets as Prepaid expenses and other current assets for revenues expected to be billed within the next twelve months, and Other long-term assets for revenues expected to be billed thereafter. The total contract asset balances were $10 million each as of April 2, 2022 and December 31, 2021. These contract assets result from timing differences between billing and satisfying performance obligations, as well as the impact from the allocation of the transaction price among performance obligations for contracts that include multiple performance obligations. Contract assets are evaluated for impairment and no impairment losses have been recognized during the three months ended April 2, 2022 and April 3, 2021, respectively.
Deferred revenue on the Consolidated Balance Sheets consists of payments and billings in advance of our performance. The combined short-term and long-term deferred revenue balances were $715 million and $695 million as of April 2, 2022 and December 31, 2021, respectively. During the three months ended April 2, 2022, the Company recognized $129 million in revenue, which was previously included in the beginning balance of deferred revenue as of December 31, 2021. During the three months ended April 3, 2021, the Company recognized $110 million in revenue, which was previously included in the beginning balance of deferred revenue as of December 31, 2020.
The components of Inventories, net are as follows (in millions):
April 2, 2022
December 31, 2021
Raw materials
$
200
$
196
Work in process
2
3
Finished goods
267
292
Total Inventories, net
$
469
$
491
Note 5 Business Acquisitions
On March 14, 2022, the Company entered into a definitive agreement to acquire Matrox Electronic Systems Ltd., a developer of advanced machine vision components and systems. The purchase price of approximately $875 million is expected to be funded with a combination of cash on hand and financing from our credit facility. The transaction is subject to customary closing conditions and is expected to close mid 2022. The acquired business will become part of the EVM segment.
Note 6 Investments
The carrying value of the Company’s venture investments was $106 million and $101 million as of April 2, 2022 and December 31, 2021, respectively, which are included in Other long-term assets on the Consolidated Balance Sheets.
The Company paid $5 million and $13 million for the purchases of long-term investments during the three months ended April 2, 2022 and April 3, 2021, respectively.
Net gains and losses related to the Company’s investments are included within Other income, net on the Consolidated Statements of Operations. The Company recognized net gains of $0 million and $1 million during the three months ended April 2, 2022 and April 3, 2021, respectively.
Note 7 Fair Value Measurements
Financial assets and liabilities are measured using inputs from three levels of the fair value hierarchy in accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into the following three broad levels:
•Level 1: Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs (e.g. U.S. Treasuries and money market funds).
•Level 2: Observable prices that are based on inputs not quoted in active markets but corroborated by market data.
•Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs to the extent possible. In addition, the Company considers counterparty credit risk in the assessment of fair value.
The Company’s financial assets and liabilities carried at fair value as of April 2, 2022, are classified below (in millions):
Level 1
Level 2
Level 3
Total
Assets:
Foreign exchange contracts (1)
$
1
$
29
$
—
$
30
Forward interest rate swap contracts (2)
—
27
—
27
Money market investments related to deferred compensation plan
38
—
—
38
Total Assets at fair value
$
39
$
56
$
—
$
95
Liabilities:
Forward interest rate swap contracts (2)
$
—
$
5
$
—
$
5
Liabilities related to the deferred compensation plan
38
—
—
38
Total Liabilities at fair value
$
38
$
5
$
—
$
43
The Company’s financial assets and liabilities carried at fair value as of December 31, 2021, are classified below (in millions):
Level 1
Level 2
Level 3
Total
Assets:
Foreign exchange contracts (1)
$
—
$
23
$
—
$
23
Money market investments related to deferred compensation plan
$
37
$
—
$
—
$
37
Total Assets at fair value
$
37
$
23
$
—
$
60
Liabilities:
Forward interest rate swap contracts (2)
$
—
$
16
$
—
$
16
Liabilities related to the deferred compensation plan
37
—
—
37
Total Liabilities at fair value
$
37
$
16
$
—
$
53
(1)The fair value of the foreign exchange contracts is calculated as follows:
•Fair value of regular forward contracts associated with forecasted sales hedges is calculated using the period-end exchange rate adjusted for current forward points.
•Fair value of hedges against net assets is calculated at the period-end exchange rate adjusted for current forward points unless the hedge has been traded but not settled at year end (Level 2). If this is the case, the fair value is calculated at the rate at which the hedge is being settled (Level 1).
(2)The fair value of forward interest rate swaps is based upon a valuation model that uses relevant observable market inputs at the quoted intervals, such as forward yield curves, and is adjusted for the Company’s credit risk and the interest rate swap terms.
In the normal course of business, the Company is exposed to global market risks, including the effects of changes in foreign currency exchange rates and interest rates. The Company uses derivative instruments to manage its exposure to such risks and may elect to designate certain derivatives as hedging instruments under ASC Topic 815, Derivatives and Hedging (“ASC 815”). The Company formally documents all relationships between designated hedging instruments and hedged items as well as its risk management objectives and strategies for undertaking hedge transactions. The Company does not hold or issue derivatives for trading or speculative purposes.
In accordance with ASC 815, the Company recognizes derivative instruments as either assets or liabilities on the Consolidated Balance Sheets and measures them at fair value.The following table presents the fair value of its derivative instruments (in millions):
Asset (Liability)
Fair Values as of
Balance Sheet Classification
April 2, 2022
December 31, 2021
Derivative instruments designated as hedges:
Foreign exchange contracts
Prepaid expenses and other current assets
$
29
$
23
Total derivative instruments designated as hedges
$
29
$
23
Derivative instruments not designated as hedges:
Foreign exchange contracts
Prepaid expenses and other current assets
$
1
$
—
Forward interest rate swaps
Prepaid expenses and other current assets
2
—
Forward interest rate swaps
Other long-term assets
25
—
Forward interest rate swaps
Accrued liabilities
(5)
(15)
Forward interest rate swaps
Other long-term liabilities
—
(1)
Total derivative instruments not designated as hedges
$
23
$
(16)
Total net derivative asset
$
52
$
7
The following table presents the net gains (losses) from changes in fair values of derivatives that are not designated as hedges (in millions):
Gains (Losses) Recognized in Income
Three Months Ended
Statements of Operations Classification
April 2, 2022
April 3, 2021
Derivative instruments not designated as hedges:
Foreign exchange contracts
Foreign exchange gain
$
(1)
$
6
Forward interest rate swaps
Interest income, net
34
8
Total gains recognized in income
$
33
$
14
Activities related to derivative instruments are reflected within Net cash provided by operating activities on the Consolidated Statements of Cash Flows.
Credit and Market Risk Management
Financial instruments, including derivatives, expose the Company to counterparty credit risk of nonperformance and to market risk related to currency exchange rate and interest rate fluctuations. The Company manages its exposure to counterparty credit risk by establishing minimum credit standards, diversifying its counterparties, and monitoring its concentrations of credit. The Company’s counterparties are commercial banks with expertise in derivative financial instruments. The Company evaluates the impact of market risk on the fair value and cash flows of its derivative and other financial instruments by considering reasonably possible changes in interest rates and currency exchange rates. The Company continually monitors the
creditworthiness of the customers to which it grants credit terms in the normal course of business. The terms and conditions of the Company’s credit policies are designed to mitigate concentrations of credit risk.
The Company’s master netting and other similar arrangements with the respective counterparties allow for net settlement under certain conditions, which are designed to reduce credit risk by permitting net settlement with the same counterparty. We present the assets and liabilities of our derivative financial instruments, for which we have net settlement agreements in place, on a net basis on the Consolidated Balance Sheets. If the derivative financial instruments had been presented gross on the Consolidated Balance Sheets, the asset and liability positions would have been unchanged as of April 2, 2022 and increased by $1 million as of December 31, 2021.
Foreign Currency Exchange Risk Management
The Company conducts business on a multinational basis in a variety of foreign currencies. Exposure to market risk for changes in foreign currency exchange rates arises primarily from Euro-denominated external revenues, cross-border financing activities between subsidiaries, and foreign currency denominated monetary assets and liabilities. The Company manages its objective of preserving the economic value of non-functional currency denominated cash flows by initially hedging transaction exposures with natural offsets to the fullest extent possible and, once these opportunities have been exhausted, through foreign exchange forward and option contracts, as deemed appropriate.
The Company manages the exchange rate risk of anticipated Euro-denominated sales using forward contracts, which typically mature within twelve months of execution. The Company designates these derivative contracts as cash flow hedges. Unrealized gains and losses on these contracts are deferred in Accumulated other comprehensive income (loss) (“AOCI”) on the Consolidated Balance Sheets until the contract is settled and the hedged sale is realized. The realized gain or loss is then recorded as an adjustment to Net sales on the Consolidated Statements of Operations. Realized amounts reclassified to Net sales were $16 million of gains and $12 million of losses for the three months ended April 2, 2022 and April 3, 2021, respectively. As of April 2, 2022 and December 31, 2021, the notional amounts of the Company’s foreign exchange cash flow hedges were €602 million and €675 million, respectively. The Company has reviewed its cash flow hedges for effectiveness and determined that they are highly effective.
The Company uses forward contracts, which are not designated as hedging instruments, to manage its exposures related to net assets denominated in foreign currencies. These forward contracts typically mature within one month after execution. Monetary gains and losses on these forward contracts are recorded in income and are generally offset by the transaction gains and losses related to their net asset positions. The notional values and the net fair values of these outstanding contracts were as follows (in millions):
April 2, 2022
December 31, 2021
Notional balance of outstanding contracts:
British Pound/U.S. Dollar
£
17
£
13
Euro/U.S. Dollar
€
94
€
142
Euro/Czech Koruna
€
16
€
16
Singapore Dollar/U.S. Dollar
S$
20
S$
16
Mexican Peso/U.S. Dollar
Mex$
98
Mex$
64
Polish Zloty/U.S. Dollar
zł
7
zł
103
Net fair value of assets of outstanding contracts
$
1
$
—
Interest Rate Risk Management
The Company’s debt consists of borrowings under a term loan (“Term Loan A”), Revolving Credit Facility, and Receivables Financing Facilities, which bear interest at variable rates plus applicable margins. As a result, the Company is exposed to market risk associated with the variable interest rate payments on these borrowings. See Note 9, Long-Term Debt for further details about these borrowings.
The Company manages its exposure to changes in interest rates by utilizing long-term forward interest rate swaps to hedge this exposure and to achieve a desired proportion of fixed versus floating-rate debt, based on current and projected market conditions.
The Company has one active long-term forward interest rate swap agreement with a notional amount of $800 million to lock into a fixed LIBOR interest rate base, which is subject to monthly net cash settlements effective through December 2022.
The Company also previously held fixed LIBOR interest rate swaps with an $800 million total notional amount that were subject to net cash settlements effective between December 2022 and August 2024.In the first quarter of 2022, the Company terminated those interest rate swaps and entered into new interest rate swap agreements that contain a total notional amount of $800 million to lock into a fixed SOFR interest rate base and will be subject to monthly net cash settlements effective in December 2022 and ending in October 2027. There was no cash settlement, or significant impact on the Consolidated Statement of Operations, as a result of these transactions in the first quarter of 2022.
The Company’s interest rate swaps are not designated as hedges and changes in fair value are recognized immediately as Interest expense, net on the Consolidated Statements of Operations.
Note 9 Long-Term Debt
The following table shows the carrying value of the Company’s debt (in millions):
April 2, 2022
December 31, 2021
Term Loan A
$
875
$
888
Revolving Credit Facility
10
—
Receivables Financing Facilities
216
108
Total debt
$
1,101
$
996
Less: Debt issuance costs
(3)
(3)
Less: Unamortized discounts
(2)
(2)
Less: Current portion of debt
(183)
(69)
Total long-term debt
$
913
$
922
As of April 2, 2022, the future maturities of debt are as follows (in millions):
2022
$
164
2023
81
2024
856
Total future debt maturities
$
1,101
All borrowings as of April 2, 2022 were denominated in U.S. Dollars.
The estimated fair value of the Company’s debt approximated $1.1 billion and $1.0 billion as of April 2, 2022 and December 31, 2021, respectively. These fair value amounts, developed based on inputs classified as Level 2 within the fair value hierarchy, represent the estimated value at which the Company’s lenders could trade its debt within the financial markets and do not represent the settlement value of these liabilities to the Company. The fair value of debt will continue to vary each period based on a number of factors, including fluctuations in market interest rates as well as changes to the Company’s credit ratings.
Term Loan A
The principal on Term Loan A is due in quarterly installments, with the next quarterly installment due in June 2022 and the majority due upon the August 9, 2024 maturity date. The Company may make prepayments, in whole or in part, without premium or penalty, and would be required to prepay certain outstanding amounts in the event of certain circumstances or transactions. As of April 2, 2022, the Term Loan A interest rate was 1.49%. Interest payments are made monthly and are subject to variable rates plus an applicable margin.
Revolving Credit Facility
The Company has a Revolving Credit Facility that is available for working capital and other general business purposes, including letters of credit. As of April 2, 2022, the Company had letters of credit totaling $7 million, which reduced funds available for borrowings under the Revolving Credit Facility from $1 billion to $993 million. As of April 2, 2022, the Revolving Credit Facility had an average interest rate of 1.69%. Upon borrowing, interest payments are made monthly and are subject to variable rates plus an applicable margin. The Revolving Credit Facility matures on August 9, 2024.
The Company has two Receivables Financing Facilities with financial institutions that have a combined total borrowing limit of up to $280 million. As collateral, the Company pledges perfected first-priority security interests in its U.S. domestically originated accounts receivable. The Company has accounted for transactions under its Receivables Financing Facilities as secured borrowings. The Company’s first Receivables Financing Facility allows for borrowings of up to $180 million and matures on March 19, 2024. The Company’s second Receivable Financing Facility allows for borrowings of up to $100 million and matures on May 16, 2022.
As of April 2, 2022, the Company’s Consolidated Balance Sheets included $692 million of receivables that were pledged under the two Receivables Financing Facilities. As of April 2, 2022, $216 million had been borrowed, of which $121 million was classified as current. Borrowings under the Receivables Financing Facilities bear interest at a variable rate plus an applicable margin. As of April 2, 2022, the Receivables Financing Facilities had an average interest rate of 1.36%. Interest is paid on these borrowings on a monthly basis.
Each of the Company’s borrowing arrangements described above include terms and conditions that limit the incurrence of additional borrowings and require that certain financial ratios be maintained at designated levels.
The Company uses interest rate swaps to manage the interest rate risk associated with its debt. See Note 8, Derivative Instrumentsfor further information.
As of April 2, 2022, the Company was in compliance with all debt covenants.
Note 10 Accrued Liabilities, Commitments and Contingencies
Accrued Liabilities
The components of Accrued liabilities are as follows (in millions):
April 2, 2022
December 31, 2021
Accrued payroll and benefits
$
80
$
96
Accrued incentive compensation
51
155
Accrued warranty
26
26
Customer reserves
44
51
Current portion of lease liabilities
33
33
Unremitted cash collections due to banks on factored accounts receivable
116
141
Short-term interest rate swaps
5
15
Accrued freight and duty
31
45
Other accrued expenses
73
77
Accrued liabilities
$
459
$
639
Warranties
The following table is a summary of the Company’s accrued warranty obligations (in millions):
The Company is subject to a variety of investigations, claims, suits, and other legal proceedings that arise from time to time in the ordinary course of business, including but not limited to, intellectual property, employment, tort, and breach of contract matters. The Company currently believes that the outcomes of such proceedings, individually and in the aggregate, will not have a material adverse impact on its business, cash flows, financial position, or results of operations. Any legal proceedings are subject to inherent uncertainties, and the Company’s view of these matters and their potential effects may change in the future.
Note 11 Income Taxes
The Company’s effective tax rate for the three months ended April 2, 2022 and April 3, 2021 was 18.0% and 17.4%, respectively. In the current period, the variance from the 21% federal statutory rate was primarily attributable to lower tax rates on foreign earnings and U.S. tax credits. In the prior period, the variance from the 21% federal statutory rate was primarily attributable to share-based compensation deductions, lower tax rates on foreign earnings and U.S. tax credits.
The Company evaluated the provisions of the American Rescue Plan Act, signed into law on March 11, 2021; the Consolidated Appropriations Act of 2021, signed into law on December 27, 2020; and the Coronavirus Aid, Relief and Economic Security Act, signed into law on March 27, 2020. The provisions of these laws did not have a significant impact to our effective tax rate in either the current or prior year. Management continues to monitor guidance regarding these laws and developments related to other coronavirus tax relief throughout the world for potential impacts.
The Company earns a significant amount of its operating income outside of the U.S that is taxed at rates different than the U.S. federal statutory rate. The Company’s principal foreign jurisdictions that provide sources of operating income are the U.K. and Singapore. The Company has received an incentivized tax rate from the Singapore Economic Development Board, which reduces the income tax rate in that jurisdiction effective for calendar years 2019 to 2023. The Company has committed to making additional investments in Singapore over the period 2019 to 2022. However, should the Company not make these investments in accordance with the agreement, any incentive benefit would have to be repaid to the Singapore tax authorities.
The Company is not permanently reinvested with respect to its U.S. directly-owned foreign subsidiaries. The Company is subject to U.S. income tax on substantially all foreign earnings under Global Intangible Low-Taxed Income, while any remaining foreign earnings are eligible for a dividends received deduction. As a result, future repatriation of earnings will not be subject to additional U.S. federal income tax but may be subject to currency translation gains or losses. Where required, the Company has recorded a deferred tax liability for foreign withholding taxes on current earnings. Additionally, gains and losses on any future taxable dispositions of U.S.-owned foreign affiliates continue to be subject to U.S. income tax.
Management evaluates all jurisdictions based on historical pre-tax earnings and taxable income to determine the need for valuation allowances on a quarterly basis. Based on this analysis, a valuation allowance has been recorded for any jurisdictions where, in the Company’s judgment, tax benefits are not expected to be realized. There were no changes to our valuation allowance during the three months ended April 2, 2022.
Uncertain Tax Positions
The Company is currently undergoing U.S. federal income tax audits for tax years 2017 and 2018. Additionally, fiscal years 2009 through 2022 remain open to examination by multiple foreign and U.S. state taxing jurisdictions. As of April 2, 2022, no significant uncertain tax positions are expected to be settled within the next twelve months. Due to uncertainties in any tax audit or litigation outcome, the Company’s estimates of the ultimate settlements of uncertain tax positions may change and the actual tax benefits may differ significantly from estimates.
Basic net earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares assuming dilution. Dilutive common shares outstanding is computed using the Treasury Stock method and, in periods of income, reflects the additional shares that would be outstanding if dilutive share-based compensation awards were converted into common shares during the period.
Earnings per share (in millions, except share data):
Three Months Ended
April 2, 2022
April 3, 2021
Basic:
Net income
$
205
$
228
Weighted-average shares outstanding
53,021,423
53,484,265
Basic earnings per share
$
3.86
$
4.26
Diluted:
Net income
$
205
$
228
Weighted-average shares outstanding
53,021,423
53,484,265
Dilutive shares
425,317
480,065
Diluted weighted-average shares outstanding
53,446,740
53,964,330
Diluted earnings per share
$
3.83
$
4.22
Anti-dilutive share-based compensation awards are excluded from diluted earnings per share calculations. There were 40,771 and 570 shares that were anti-dilutive for the three months ended April 2, 2022 and April 3, 2021, respectively.
Note 13 Accumulated Other Comprehensive Income (Loss)
Stockholders’ equity includes certain items classified as AOCI, including:
•Unrealized gain (loss) on anticipated sales hedging transactions relates to derivative instruments used to hedge the exposure related to currency exchange rates for forecasted Euro sales. These hedges are designated as cash flow hedges, and the Company defers income statement recognition of gains and losses until the hedged transaction occurs.See Note 8, Derivative Instruments for more details.
•Foreign currency translation adjustments relate to the Company’s non-U.S. subsidiary companies that have designated a functional currency other than the U.S. Dollar. The Company is required to translate the subsidiary functional currency financial statements to U.S. Dollars using a combination of historical, period end, and average foreign exchange rates. This combination of rates creates the foreign currency translation adjustment component of AOCI.
The components of AOCI for the three months ended April 2, 2022 and April 3, 2021 are as follows (in millions):
Unrealized gain (loss) on sales hedging
Foreign currency translation adjustments
Total
Balance at December 31, 2020
$
(28)
$
(41)
$
(69)
Other comprehensive income (loss) before reclassifications
27
(3)
24
Amounts reclassified from AOCI(1)
12
—
12
Tax effect
(7)
—
(7)
Other comprehensive income (loss), net of tax
32
(3)
29
Balance at April 3, 2021
$
4
$
(44)
$
(40)
Balance at December 31, 2021
$
18
$
(47)
$
(29)
Other comprehensive income (loss) before reclassifications
22
(5)
17
Amounts reclassified from AOCI(1)
(16)
—
(16)
Tax effect
(1)
—
(1)
Other comprehensive income (loss), net of tax
5
(5)
—
Balance at April 2, 2022
$
23
$
(52)
$
(29)
(1) See Note 8, Derivative Instruments regarding timing of reclassifications to operating results.
Note 14 Accounts Receivable Factoring
The Company has Receivables Factoring arrangements, pursuant to which certain receivables are sold to banks without recourse in exchange for cash. Transactions under the Receivables Factoring arrangements are accounted for as sales under ASC 860, Transfers and Servicing of Financial Assets, with the sold receivables removed from the Company’s balance sheet. Under these Receivables Factoring arrangements, the Company does not maintain any beneficial interest in the receivables sold. The banks’ purchase of eligible receivables is subject to a maximum amount of uncollected receivables. The Company services the receivables on behalf of the banks, but otherwise maintains no significant continuing involvement with respect to the receivables. Sale proceeds that are representative of the fair value of factored receivables, less a factoring fee, are reflected in Net cash provided by operating activities on the Consolidated Statements of Cash Flows, while sale proceeds in excess of the fair value of factored receivables are reflected in Net cash used in financing activities on the Consolidated Statements of Cash Flows.
The Company currently has two active Receivables Factoring arrangements. One arrangement allows for the factoring of up to $25 million of uncollected receivables originated from the Europe, Middle East, and Africa (“EMEA”) region. The second arrangement allows for the factoring of up to €150 million of uncollected receivables originated from the EMEA and Asia-Pacific regions. With respect to the second arrangement, the Company is required to maintain a portion of sales proceeds as deposits in a restricted cash account that is released to the Company as it satisfies its obligations as servicer of sold receivables, which totaled $16 million and $12 million as of April 2, 2022 and December 31, 2021, respectively, and is classified within Prepaid expenses and other current assets on the Consolidated Balance Sheets.
During the three months ended April 2, 2022 and April 3, 2021, the Company received cash proceeds of $408 million and $413 million, respectively, from the sales of accounts receivables under its factoring arrangements. As of April 2, 2022 and December 31, 2021, there were a total of $68 million and $24 million, respectively, of uncollected receivables that had been sold and removed from the Company’s Consolidated Balance Sheets.
As servicer of sold receivables, the Company had $116 million and $141 million of obligations that were not yet remitted to banks as of April 2, 2022 and December 31, 2021, respectively. These obligations are included within Accrued liabilities on the Consolidated Balance Sheets, with changes in such obligations reflected within Net cash used in financing activities on the Consolidated Statements of Cash Flows.
Fees incurred in connection with these arrangements were not significant.
The Company’s operations consist of two reportable segments: Asset Intelligence & Tracking (“AIT”) and Enterprise Visibility & Mobility (“EVM”). The reportable segments have been identified based on the financial data utilized by the Company’s Chief Executive Officer (the chief operating decision maker or “CODM”) to assess segment performance and allocate resources among the Company’s segments. The CODM reviews adjusted operating income to assess segment profitability. To the extent applicable, segment operating income excludes business acquisition purchase accounting adjustments, amortization of intangible assets, acquisition and integration costs, impairment of goodwill and other intangibles, and exit and restructuring costs. Segment assets are not reviewed by the Company’s CODM and therefore are not disclosed below.
Effective January 1, 2022, the location solutions offering, which provides a range of RTLS and services that generate on-demand information about the physical location and status of assets, equipment, and people, moved from our AIT segment into our EVM segment contemporaneous with a change in our organizational structure and management of the business. We have reported our results reflecting this change, including historical periods, on a comparable basis. This change did not have an impact to the Consolidated Financial Statements.
Financial information by segment is presented as follows (in millions):
Three Months Ended
April 2, 2022
April 3, 2021
Net sales:
AIT
$
394
$
429
EVM
1,038
921
Total segment Net sales
1,432
1,350
Corporate, eliminations(1)
—
(3)
Total Net sales
$
1,432
$
1,347
Operating income:
AIT(2)
$
60
$
111
EVM(2)
189
191
Total segment operating income
249
302
Corporate, eliminations(1)
(37)
(30)
Total Operating income
$
212
$
272
(1)To the extent applicable, amounts included in Corporate, eliminations consist of business acquisition purchase accounting adjustments, amortization of intangible assets, acquisition and integration costs, impairment of goodwill and other intangibles, and exit and restructuring costs.
(2)AIT and EVM segment operating income includes depreciation and share-based compensation expense. The amounts of depreciation and share-based compensation expense attributable to AIT and EVM are proportionate to each segment’s Net sales.
Information regarding the Company’s operations by geographic area is contained in the following tables. Net sales amounts are attributed to geographic area based on customer location. We manage our business based on regions rather than by individual countries.
Geographic data for Net sales is as follows (in millions):
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Zebra Technologies Corporation and its subsidiaries (“Zebra” or the “Company”) is a global leader respected for innovative Enterprise Asset Intelligence (“EAI”) solutions in the automatic identification and data capture solutions industry. We design, manufacture, and sell a broad range of products and solutions, including cloud-based software subscriptions, that capture and move data. These products and solutions include mobile computers; barcode scanners and imagers; radio frequency identification device (“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 related software applications. We also provide a full range of services, including maintenance, technical support, repair, managed and professional services, as well as various workflow optimization solutions, including cloud-based software subscriptions and robotic automation solutions. End-users of our products, solutions and services include those in the retail and e-commerce, manufacturing, transportation and logistics, healthcare, public sector, and other industries within the following regions: North America; Europe, Middle East, and Africa (“EMEA”); Asia-Pacific; and Latin America.
Our customers have traditionally benefited from proven solutions that increase productivity and improve asset efficiency and utilization. The Company is poised to drive, and capitalize on, the evolution of the data capture industry into the broader EAI industry, supported by technology trends including the Internet of Things (“IoT”), ubiquitous mobility, automation, cloud computing, and the increasingly on-demand global economy. EAI solutions offer additional benefits to our customers including real-time, data-driven insights that improve operational visibility and drive workflow optimization.
The Company’s operations consist of two reportable segments that provide complementary offerings to our customers: Asset Intelligence & Tracking (“AIT”) and Enterprise Visibility & Mobility (“EVM”).
•The AIT segment is an industry leader in barcode printing and asset tracking technologies. Its major product lines include barcode and card printers, supplies, including temperature-monitoring labels, and services.
•The EVM segment is an industry leader in automatic information and data capture solutions. Its major product lines include mobile computing, data capture, location solutions, RFID, fixed industrial scanning and machine vision, services, and workflow optimization solutions. Our workflow optimization solutions include cloud-based software subscriptions, retail solutions, and robotic automation solutions.
In the first quarter of 2022, the location solutions offering, which provides a range of RTLS and services that generate on-demand information about the physical location and status of high-valued assets, equipment, and people, moved from our AIT segment into our EVM segment contemporaneous with a change in our organizational structure and management of the business. We have reported our results reflecting this change, including historical periods, on a comparable basis. This change did not have an impact to the Consolidated Financial Statements.
Recent Developments
Russia and Ukraine War
We are closely monitoring Russia’s invasion of Ukraine, which remains an evolving and uncertain situation. On March 5, 2022, we announced the suspension of our business operations in Russia. Neither Russia nor Ukraine comprises a material portion of our business, and therefore, the war thus far has not had a significant effect on our results of operations. Additionally, the war has not significantly affected our ability to source supplies or deliver our products and services to our customers in the surrounding EMEA region. However, the implications of this war may expand beyond the current scope, potentially resulting in significant adverse impact on our business.
COVID-19 Outbreak
The global coronavirus (“COVID-19”) pandemic continues to evolve. Governmental agencies, to varying degrees, have imposed, and continue to impose, several protocols and regulations restricting activities of individuals in an effort to limit the spread of COVID-19 when rates of infection rise, with some relaxation of these measures when infections rates are relatively low. We have implemented a number of measures in an effort to protect our employees’ health and well-being over the course of the pandemic tailored to address the local impacts, including having the majority of office workers work remotely during the height of the pandemic and high risk times and gradually returning to offices as restrictions are lifted when risks decrease,
limiting employee travel, and implementing more strenuous health and safety measures for hosting and attending in-person industry events. Throughout the pandemic, distribution centers and repair centers have remained open at varying capacity levels to ensure continued support to our customers, many of whom provide essential goods and services to communities. As governments ease their restrictions, our employees have been coming back to work in our offices in a controlled approach, with modified business practices, including, when appropriate, masking and social distancing protocols consistent with government regulations, vaccine verification, health screening, office capacity restrictions and tracking and tracing protocols where applicable, provision of personal protective equipment, increasing air exchange/ventilation and extensively and frequently disinfecting our workspaces.
While customer demand has remained strong, the limited availability of certain product components has resulted in lengthened lead times and higher input costs, including freight, and in some cases, has impacted our ability to meet customer demand. The Company expects input costs to remain elevated for some period of time, which we believe will be partially mitigated through higher pricing where permitted by market conditions. The limited availability of certain component parts may continue to negatively impact our ability to meet forecasted customer demand. The Company’s 2021 sales and profitability, particularly in the first half of the year, benefited from pent-up demand from customers who we believe had previously delayed purchases due to the pandemic, as well as the resulting acceleration of the underlying trend to digitize and automate workflows.
Acquisitions
Matrox Imaging: On March 14, 2022, the Company entered into a definitive agreement to acquire Matrox Electronic Systems, Ltd., a developer of advanced machine vision components and systems. The purchase price of approximately $875 million is expected to be funded with a combination of cash on hand and financing from our credit facility. The transaction is subject to customary closing conditions and is expected to close mid 2022. The acquired business will become part of the EVM segment.
Antuit.ai: On October 7, 2021, the Company acquired Antuit Holdings Pte. Ltd. (“Antuit”) for $145 million in cash, net of cash acquired. Antuit is a provider of demand-sensing and pricing optimization software solutions for retail and consumer products companies. Through this acquisition, the Company expands its portfolio of software solution offerings to customers in these industries by combining Antuit’s platform with its existing software solutions and EVM products. The operating results of Antuit are included in the EVM segment.
Fetch: On August 9, 2021, the Company acquired Fetch Robotics, Inc. (“Fetch”) for total purchase consideration of $301 million, which consisted of $290 million in cash paid, net of cash acquired, and the fair value of the Company’s existing minority ownership interest in Fetch of $11 million, as remeasured upon acquisition. Fetch is a provider of autonomous mobile robot solutions for customers who operate in the manufacturing, distribution, and fulfillment industries, enabling customers to optimize workflows through robotic automation. Through this acquisition, the Company intends to expand its automation solution offerings within these industries. The operating results of Fetch are included within the EVM segment.
Adaptive Vision: On May 17, 2021, the Company acquired Adaptive Vision Sp. z o.o. (“Adaptive Vision”) for $18 million in cash, net of cash acquired. Adaptive Vision is a provider of graphical machine vision software with applications in the manufacturing industry, as well as a provider of libraries and other offerings for machine vision developers. The operating results of Adaptive Vision are included within the EVM segment.
Net sales to customers by geographic region were as follows (amountsin millions, except percentages):
Three Months Ended
April 2, 2022
April 3, 2021
$ Change
% Change
North America
$
699
$
673
$
26
3.9
%
EMEA
500
490
10
2.0
%
Asia-Pacific
149
120
29
24.2
%
Latin America
84
64
20
31.3
%
Total Net sales
$
1,432
$
1,347
$
85
6.3
%
Operating expenses are summarized below (amounts in millions, except percentages):
Three Months Ended
April 2, 2022
April 3, 2021
As a % of Net sales
2022
2021
Selling and marketing
$
152
$
134
10.6
%
9.9
%
Research and development
137
140
9.6
%
10.4
%
General and administrative
99
82
6.9
%
6.1
%
Amortization of intangible assets
33
26
NM
NM
Acquisition and integration costs
4
1
NM
NM
Total Operating expenses
$
425
$
383
29.7
%
28.4
%
Consolidated Organic Net sales growth:
Three Months Ended
April 2, 2022
Reported GAAP Consolidated Net sales growth
6.3
%
Adjustments:
Impact of foreign currency translation (1)
0.1
%
Impact of acquisitions (2)
(1.0)
%
Consolidated Organic Net sales growth (3)
5.4
%
(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 the current period results at the currency exchange rates used in the comparable prior year period, inclusive of the Company’s foreign currency hedging program.
(2)For purposes of computing Organic Net sales growth, amounts directly attributable to the acquisitions of Adaptive Vision, Fetch and Antuit are excluded for twelve months following their respective acquisitions.
(3)Consolidated Organic Net sales growth is a non-GAAP financial measure. See the Non-GAAP Measures section at the end of this item.
First quarter 2022 compared to first quarter 2021
Total Net sales increased $85 million or 6.3% compared to the prior year as our customers continue to digitize and automate their workflows. EVM Net sales growth was partially offset by a decline in AIT Net sales. Current year Net sales of both segments included the negative effects of supply constraints, which were particularly pronounced in AIT. Prior year Net sales of both segments benefited from pent-up demand from customers who we believe delayed purchases in fiscal 2020 due to the COVID-19 pandemic. Excluding the effects of acquisitions and currency changes, the increase in Consolidated Organic Net sales was 5.4%.
Gross margin decreased to 44.5% for the current quarter compared to 48.6% for the prior year. Gross margins were lower in both of our segments primarily due to higher premium freight and component part costs, as well as unfavorable business mix, which were partially offset by higher support service margins.
Operating expenses for the quarters ended April 2, 2022 and April 3, 2021 were $425 million and $383 million, or 29.7% and 28.4% of Net sales, respectively. The increase in Operating expenses over the prior year was primarily due to the inclusion of operating expenses and amortization of intangible assets associated with recently acquired businesses, as well as increased marketing program activities and employee travel as in-person activities resumed. These increases were partially offset by timing of research and development program activity, as well as lower employee incentive-based compensation.
Operating income decreased 22.1% to $212 million for the current quarter compared to $272 million for the prior year. The decrease was due to lower Gross Profit and higher Operating expenses.
Net income decreased 10.1% compared to the prior year due to lower Operating income and a higher effective income tax rate, which were partially offset by favorability in Other income, net as follows:
•Other income, net was $38 million in the current year compared to $4 million in the prior year primarily due to higher interest income and foreign exchange gains in the current year. The current year interest income benefited from a $34 million gain on interest rate swaps compared to an $8 million gain in the prior year.
•The Company’s effective income tax rate for the three months ended April 2, 2022 and April 3, 2021 was 18.0% and 17.4%, respectively. The increase in the effective rate was primarily due to reduced benefits from share-based compensation deductions, partially offset by an increased benefit from a higher foreign-derived intangible income deduction.
Diluted earnings per share decreased to $3.83 as compared to $4.22 in the prior year primarily due to lower Net income, partially offset by lower average diluted shares outstanding.
The following commentary should be read in conjunction with the financial results of each operating business segment as detailed in Note 15, Segment Information & Geographic Data in the Notes to Consolidated Financial Statements. To the extent applicable, segment results exclude purchase accounting adjustments, amortization of intangible assets, acquisition and integration costs, impairment of goodwill and other intangibles, and exit and restructuring costs.
Asset Intelligence & Tracking Segment (“AIT”)
(in millions, except percentages)
Three Months Ended
April 2, 2022
April 3, 2021
$ Change
% Change
Net sales:
Tangible products
$
370
$
407
$
(37)
(9.1)
%
Services and software
24
22
2
9.1
%
Total Net sales
394
429
(35)
(8.2)
%
Gross profit
154
207
(53)
(25.6)
%
Gross margin
39.1
%
48.3
%
(920) bps
Operating expenses
94
96
(2)
(2.1)
%
Operating income
$
60
$
111
$
(51)
(45.9)
%
AIT Organic Net sales growth:
Three Months Ended
April 2, 2022
AIT Reported GAAP Net sales growth
(8.2)
%
Adjustments:
Impact of foreign currency translation (1)
0.1
%
AIT Organic Net sales growth (2)
(8.1)
%
(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 the current period results at the currency exchange rates used in the comparable prior year period, inclusive of the Company’s foreign currency hedging program.
(2)AIT Organic Net sales growth is a non-GAAP financial measure. See the Non-GAAP Measures section at the end of this item.
First quarter 2022 compared to first quarter 2021
Total Net sales for AIT decreased $35 million or 8.2% compared to the prior year primarily due to lower sales of printing products, particularly within our North America region, which were partially offset by higher sales of supplies. Current year Net sales included the negative effects of supply constraints; while prior year Net sales benefited from pent-up demand from customers who we believe delayed purchases in fiscal 2020 due to the COVID-19 pandemic. Excluding the impact of foreign currency changes, AIT Organic Net sales declined 8.1%.
Gross margin decreased to 39.1% for the current quarter compared to 48.3% for the prior year, primarily due to higher premium freight and component part costs, as well as unfavorable business mix and volume leverage.
Operating income decreased 45.9% in the current quarter compared to the prior year period. The decrease was primarily due to lower Gross profit.
(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 the current period results at the currency exchange rates used in the comparable prior year period, inclusive of the Company’s foreign currency hedging program.
(2)For purposes of computing EVM Organic Net sales growth, amounts directly attributable to the acquisitions of Adaptive Vision, Fetch and Antuit are excluded for twelve months following their respective acquisitions.
(3)EVM Organic Net sales growth is a non-GAAP financial measure. See the Non-GAAP Measures section at the end of this item.
First quarter 2022 compared to first quarter 2021
Total Net sales for EVM increased $117 million or 12.7% compared to the prior year primarily due to higher sales of mobile computing products (contributing the majority of the total increase), data capture products, and support services across all regions. In addition, our recent acquisitions contributed to the growth of Services and software sales in the current year. Current year Net sales included the negative effects of supply constraints; while prior year Net sales benefited from pent-up demand from customers who we believe delayed purchases in fiscal 2020 due to the COVID-19 pandemic. Excluding the impacts of acquisitions and foreign currency changes, EVM Organic Net sales growth was 11.6%.
Gross margin decreased to 46.5% in the current quarter compared to 49.0% in the prior year, primarily due to higher premium freight and component part costs, as well as unfavorable business mix, which were partially offset by higher support service margins.
Operating income for the current quarter decreased 1.0% compared to the prior year period. The decrease was due to higher Gross profit, which was partially offset by higher Operating expenses.
The primary factors that influence our liquidity include the amount and timing of our revenues, cash collections from our customers, cash payments to our suppliers, capital expenditures, repatriation of foreign cash, acquisitions, and share repurchases. Management believes that our existing capital resources, inclusive of available borrowing capacity on debt and other financing facilities and funds generated from operations, are sufficient to meet anticipated capital requirements and service our indebtedness. The following table summarizes our cash flow activities for the periods indicated (in millions):
Three Months Ended
Cash flows provided by (used in):
April 2, 2022
April 3, 2021
$ Change
Operating activities
$
54
$
224
$
(170)
Investing activities
(19)
(23)
4
Financing activities
(220)
(181)
(39)
Effect of exchange rates on cash balances
(2)
(2)
—
Net (decrease) increase in cash and cash equivalents, including restricted cash
$
(187)
$
18
$
(205)
The change in our cash and cash equivalents balance during the three months ended April 2, 2022 compared to the prior year period is reflective of the following:
•The decrease in cash provided by operating activities compared to the prior year was primarily due to higher incentive compensation payments, higher accounts receivable balances reflecting the timing of customer transactions within the period, and lower operating profitability, partly offset by lower inventory levels.
•Cash used in investing activities was comparable to the prior year. The Company had lower payments for the purchases of long-term investments, partly offset by higher capital expenditures.
•The increase in cash used in financing activities was primarily related to $305 million of share repurchases, partly offset by net borrowings of $105 million in the current period compared to net debt repayments of $156 million in the prior period.
Company Debt
The following table shows the carrying value of the Company’s debt (in millions):
April 2, 2022
December 31, 2021
Term Loan A
$
875
$
888
Revolving Credit Facility
10
—
Receivables Financing Facilities
216
108
Total debt
$
1,101
$
996
Less: Debt issuance costs
(3)
(3)
Less: Unamortized discounts
(2)
(2)
Less: Current portion of debt
(183)
(69)
Total long-term debt
$
913
$
922
Term Loan A
The principal on Term Loan A is due in quarterly installments, with the next quarterly installment due in June 2022 and the majority due upon the August 9, 2024 maturity date. The Company may make prepayments, in whole or in part, without premium or penalty, and would be required to prepay certain outstanding amounts in the event of certain circumstances or transactions. As of April 2, 2022, the Term Loan A interest rate was 1.49%. Interest payments are made monthly and are subject to variable rates plus an applicable margin.
The Company has a Revolving Credit Facility that is available for working capital and other general business purposes, including letters of credit. As of April 2, 2022, the Company had letters of credit totaling $7 million, which reduced funds available for borrowings under the Revolving Credit Facility from $1 billion to $993 million. As of April 2, 2022, the Revolving Credit Facility had an average interest rate of 1.69%. Upon borrowing, interest payments are made monthly and are subject to variable rates plus an applicable margin. The Revolving Credit Facility matures on August 9, 2024.
Receivables Financing Facilities
The Company has two Receivables Financing Facilities with financial institutions that have a combined total borrowing limit of up to $280 million. As collateral, the Company pledges perfected first-priority security interests in its U.S. domestically originated accounts receivable. The Company has accounted for transactions under its Receivables Financing Facilities as secured borrowings. The Company’s first Receivables Financing Facility allows for borrowings of up to $180 million and matures on March 19, 2024. The Company’s second Receivable Financing Facility allows for borrowings of up to $100 million and matures on May 16, 2022.
As of April 2, 2022, the Company’s Consolidated Balance Sheets included $692 million of receivables that were pledged under the two Receivables Financing Facilities. As of April 2, 2022, $216 million had been borrowed, of which $121 million was classified as current. Borrowings under the Receivables Financing Facilities bear interest at a variable rate plus an applicable margin. As of April 2, 2022, the Receivables Financing Facilities had an average interest rate of 1.36%. Interest is paid on these borrowings on a monthly basis.
See Note 9, Long-Term Debt in the Notes to Consolidated Financial Statements for further details related to the Company’s debt instruments.
Receivables Factoring
The Company currently has two Receivables Factoring arrangements, pursuant to which certain receivables are sold to banks without recourse in exchange for cash.One arrangement allows for the factoring of up to $25 million of uncollected receivables originated from the EMEA region. The second arrangement allows for the factoring of up to €150 million of uncollected receivables originated from the EMEA and Asia-Pacific regions. Transactions under the Receivables Factoring arrangements are accounted for as sales under Accounting Standards Codification 860, Transfers and Servicing of Financial Assets, with the sold receivables removed from the Company’s balance sheet. Under these Receivables Factoring arrangements, the Company does not maintain any beneficial interest in the receivables sold. The banks’ purchase of eligible receivables is subject to a maximum amount of uncollected receivables. The Company services the receivables on behalf of the banks, but otherwise maintains no significant continuing involvement with respect to the receivables. Sale proceeds that are representative of the fair value of factored receivables, less a factoring fee, are reflected in Net cash provided by operating activities on the Consolidated Statements of Cash Flows, while sale proceeds in excess of the fair value of factored receivables are reflected in Net cash used in financing activities on the Consolidated Statements of Cash Flows.
As of April 2, 2022 and December 31, 2021, there were a total of $68 million and $24 million, respectively, of uncollected receivables that had been sold and removed from the Company’s Consolidated Balance Sheets.
As servicer of sold receivables, the Company had $116 million and $141 million of obligations that were not yet remitted to banks as of April 2, 2022 and December 31, 2021, respectively. These obligations are included within Accrued liabilities on the Consolidated Balance Sheets, with changes in such obligations reflected within Net cash used in financing activities on the Consolidated Statements of Cash Flows.
See Note 14, Accounts Receivable Factoring in the Notes to Consolidated Financial Statements for further details.
On July 30, 2019, the Company announced that its Board of Directors authorized a share repurchase program for up to an aggregate amount of $1 billion of its outstanding shares of common stock. The share repurchase program does not have a stated expiration date. The level of the Company’s repurchases depends on a number of factors, including its financial condition, capital requirements, cash flows, results of operations, future business prospects and other factors its management may deem relevant. The timing, volume, and nature of repurchases are subject to market conditions, applicable securities laws and other factors and may be amended, suspended or discontinued at any time. Repurchases may be effected from time to time through open market purchases, including pursuant to a pre-set trading plan meeting the requirements of Rule 10b5-1(c) of the Securities Exchange Act of 1934. During the first three months of 2022, the Company repurchased 648,875 shares of common stock for approximately $305 million. As of April 2, 2022, the Company has cumulatively repurchased 1,944,616 shares of common stock for approximately $608 million under the plan, resulting in a remaining amount of share repurchases authorized under the plan of approximately $392 million. Subsequent to the first quarter, the Company has repurchased 274,166 shares of common stock for approximately $108 million through April 29, 2022.
Significant Customers
The Company has three customers, who are distributors of the Company’s products, services and solutions, that individually accounted for more than 10% of total Company Net sales for the periods presented. In the aggregate, the approximate percentage of our segment and Company total Net sales was as follows:
Three Months Ended
April 2, 2022
April 3, 2021
AIT
EVM
Total
AIT
EVM
Total
Significant customers as a % of Net sales
14.3
%
28.7
%
43.0
%
19.0
%
32.6
%
51.6
%
These customers accounted for 55.8% of accounts receivable as of April 2, 2022. No other customer accounted for more than 10% of total Net sales during the periods ended April 2, 2022 and April 3, 2021, or more than 10% of total outstanding accounts receivables as of April 2, 2022.
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 full year of 2022. 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, services and solution offerings and competitors’ offerings and the potential effects of emerging technologies and changes in customer requirements,
•The effect of global market conditions, including the North America; EMEA; Latin America; and Asia-Pacific regions in which we do business,
•The impact of changes in foreign exchange rates, customs duties and trade policies due to the large percentage of our sales and operations being outside the 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 as well as our ability to provide services and software 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,
•Our ability to attract, retain, develop, and motivate key personnel,
•Interest rate and financial market conditions,
•Access to cash and cash equivalents held outside the U.S.,
•The effect of natural disasters, man-made disasters, public health issues (including pandemics), and cybersecurity incidents 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 Part II, 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.
New Accounting Pronouncements
We do not expect any recently issued accounting pronouncements to have a material impact to our consolidated financial statements.
Non-GAAP Measures
The Company has provided reconciliations of the supplemental non-GAAP financial measures, as defined under the rules of the Securities and Exchange Commission, presented herein to the most directly comparable financial measures calculated and presented in accordance with GAAP.
These supplemental non-GAAP financial measures – Consolidated Organic Net sales growth, AIT Organic Net sales growth, and EVM Organic Net sales growth – are presented because our management evaluates our financial results both including and excluding the effects of business acquisitions and foreign currency translation, as applicable. Management believes that the supplemental non-GAAP financial measures presented provide additional perspective and insights when analyzing the core operating performance of our business from period to period and trends in our historical operating results. These supplemental non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with the GAAP financial measures presented.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in the Company’s market risk during the quarter ended April 2, 2022. For additional information on market risk, refer to Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in the Annual Report on Form 10-K for the year ended December 31, 2021.
Item 4.
Controls and Procedures
Management’s Report on Disclosure Controls
Our management is responsible for establishing and maintaining adequate disclosure controls as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Our management assessed the effectiveness of our disclosure controls as of April 2, 2022. Based on this assessment and those criteria, our management believes that, as of April 2, 2022, our disclosure controls were effective.
Changes in Internal Controls over Financial Reporting
During the quarter ended April 2, 2022, there have been no changes in our internal controls that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Inherent Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal 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.
In September 2021, Honeywell filed patent infringement lawsuits against Zebra in multiple jurisdictions, including the International Trade Commission and Federal District Court in the Western District of Texas in the United States, as well as foreign courts in the United Kingdom, Germany and China. Honeywell has made substantially similar allegations of patent infringement in all cases filed. The technology addressed in the various actions generally includes aspects of data capture, barcode reading, and scanning. The allegedly infringing Zebra products identified in the actions are described as barcode scanners, mobile computers with barcode scanning capabilities, scan engines, and components thereof. The remedies sought in these lawsuits include damages and injunctive relief. The same Zebra products and technology are implicated in all of the lawsuits. Zebra is vigorously defending against these infringement allegations. In February 2022, Zebra filed patent infringement lawsuits against Honeywell in multiple jurisdictions, including the International Trade Commission and Federal District Court in the Eastern District of New York in the United States, as well as foreign courts in the United Kingdom, Germany and China. Zebra’s allegations against Honeywell in each case vary based on the underlying technology in the Zebra patent that is alleged to have been infringed by Honeywell. The technology addressed in the various actions includes scan engine functionality generally, distance scanning, power management and security. The Honeywell products that are accused of infringing Zebra’s patents in the various actions include scan engines and components thereof, barcode scanners, mobile computers, RFID printers and other wireless devices. The remedies sought in these lawsuits include damages and injunctive relief.
See Note 10, Accrued Liabilities, Commitments and Contingencies in the Notes to Consolidated Financial Statements included in this report.
Item 1A.
Risk Factors
In addition to the other information included in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in the Annual Report on Form 10-K for the year ended December 31, 2021, and the factors identified under “Safe Harbor” in Part I, Item 2 of this Quarterly Report on Form 10-Q, which could materially affect our business, financial condition, cash flows, or results of operations. The risks described in the Annual Report are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently considers immaterial also may materially adversely affect its business, financial condition, and/or operating results. There have been no material changes to the risk factors included in our Annual Report for the year ended December 31, 2021, other than as described below.
The Company has substantial operations and sells a significant portion of our products, solutions and services outside of the U.S. and purchases important components, including final products, from suppliers located outside the U.S., many of whom with operations concentrated in China. 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 affect 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:
•Imposition of 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;
•Limited intellectual property protection in certain countries may limit recourse against infringement on our products or may cause us to refrain from selling in certain geographic territories;
•Staffing may be difficult including higher than anticipated turnover;
•A government-controlled exchange rate and limitations on the convertibility of currencies, including the Chinese Yuan;
•Transportation delays and customs related delays may affect production and distribution of our products;
•Geopolitical uncertainty or turmoil could negatively affect our operations or those of our customers or suppliers;
•Difficulty in effectively managing and overseeing operations that are distant and remote from corporate headquarters; and
•Integration and enforcement of laws varies significantly among jurisdictions and may change over time.
Further, the war between Russia and Ukraine and the global response to this war could have an adverse impact on our business and results of operations. On March 5, 2022, we suspended our business operations in Russia. While this suspension has not had, and is not expected to have, a material impact on our operating results, it is not possible to predict the broader or long-term consequences of the war between Russia and Ukraine, which may include further sanctions, embargoes, regional instability, geopolitical shifts and adverse effects on macroeconomic conditions, cybersecurity conditions, currency exchange rates, financial markets and energy markets. Such geopolitical instability and uncertainty could have a negative impact on our ability to sell and ship products, collect payments from and support customers in certain regions, and could increase the costs, risks and adverse impacts from supply chain and logistics challenges.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth information with respect to repurchases of the Company’s common stock for the three months ended April 2, 2022:
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) (1)
January 1, 2022 - January 29, 2022
299,576
$
512.38
299,576
$
543
January 30, 2022 - February 26, 2022
349,099
432.50
349,099
392
February 27, 2022 - April 2, 2022
200
400.03
200
392
Total
648,875
$
469.37
648,875
$
392
(1)On July 30, 2019, the Company announced that its Board of Directors authorized a share repurchase program for up to an aggregate amount of $1 billion of its outstanding shares of common stock. Repurchases may be effected from time to time through open market purchases, including pursuant to a pre-set trading plan meeting the requirements of Rule 10b5-1(c) of the Securities Exchange Act of 1934. The program does not have a stated expiration date.
The following financial information from Zebra Technologies Corporation Quarterly Report on Form 10-Q, for the quarter ended April 2, 2022, formatted in Inline XBRL: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Stockholders’ Equity; (v) the Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements. The instance document does not appear in the interactive data file because Inline XBRL tags are embedded in the iXBRL document.
104
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended April 2, 2022, formatted in Inline XBRL (included in Exhibit 101).
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
