NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 Description of Business and Basis of Presentation
Zebra Technologies Corporation and its wholly-owned subsidiaries (“Zebra” or the “Company”) is a global leader providing innovative Enterprise Asset Intelligence (“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. We also provide a full range of services, including maintenance, technical support, repair, and managed services, including cloud-based subscriptions. End-users of our products and services include those in retail, transportation and logistics, manufacturing, healthcare, hospitality, warehouse and distribution, energy and utilities, and education industries around the world. We provide our products and services globally through a direct sales force and an extensive network of partners.
Management prepared these unaudited interim consolidated financial statements according to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information and notes. These consolidated financial statements do not include all of the information and notes required by United States generally accepted accounting principles (“GAAP”) for complete financial statements, although management believes that the disclosures are adequate to make the information presented not misleading. Therefore, these consolidated 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, 2016.
In the opinion of the Company, these interim financial statements include all adjustments (of a normal, recurring nature) necessary to present fairly its Consolidated Balance Sheet as of July 1, 2017 and the Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended July 1, 2017 and July 2, 2016, and the Consolidated Statements of Cash Flows for the six months ended July 1, 2017 and July 2, 2016. These results, however, are not necessarily indicative of the results expected for the full year.
Note 2 Significant Accounting Policies
Income Taxes
The Company’s interim period tax provision is determined as follows:
|
|
•
|
At the end of each fiscal quarter, the Company estimates the income tax provision that will be provided for the fiscal year.
|
|
|
•
|
The forecasted annual effective tax rate is applied to the year-to-date ordinary income (loss) at the end of each quarter to compute the year-to-date tax applicable to ordinary income (loss). The term ordinary income (loss) refers to income (loss) from continuing operations, before income taxes, excluding significant, unusual, or infrequently occurring items.
|
|
|
•
|
The tax effects of significant, unusual, or infrequently occurring items are recognized as discrete items in the interim periods in which the events occur. The impact of changes in tax laws or rates on deferred tax amounts, the effects of changes in judgment about valuation allowances established in prior years, and changes in tax reserves resulting from the finalization of tax audits or reviews are examples of significant, unusual, or infrequently occurring items.
|
The determination of the forecasted annual effective tax rate is based upon a number of significant estimates and judgments, including the forecasted annual income (loss) before income taxes of the Company in each tax jurisdiction in which it operates, the development of tax planning strategies during the year, and the need for a valuation allowance. In addition, the Company’s tax expense can be impacted by changes in tax rates or laws, the finalization of tax audits and reviews, as well as other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.
Recently Adopted Accounting Pronouncement
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, “
Intangibles - Goodwill and Other (Topic 350)
.” The amendments in this ASU simplify goodwill impairment testing by removing the requirement of Step 2 to determine the implied fair value of goodwill of a reporting unit which fails Step 1. The implication of this update results in the amount by which a carrying amount exceeds the reporting unit’s fair value to be recognized as an impairment charge in the interim or annual period identified. The standard is effective for public companies in the first calendar quarter of 2020 with early adoption permitted on a prospective basis. The Company has adopted this ASU on
a prospective basis effective as of January 1, 2017 and has concluded that this pronouncement has no material impact on its consolidated financial statements or existing accounting policies.
In January 2017, the FASB issued ASU 2017-01, “
Business Combinations (Topic 850)
,” which clarifies the definition of a business when considering whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The clarified definition requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This definition reduces the number of transactions that need to be further evaluated as to be considered a business, an asset must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. The standard will be effective for public companies in the first calendar quarter of 2018, with early adoption permitted on a prospective basis. The Company has adopted this ASU effective as of January 1, 2017 on a prospective basis and has concluded that this pronouncement has no material impact on its consolidated financial statements or existing accounting policies.
In October 2016, the FASB issued ASU 2016-16,
“Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than Inventory
.” The ASU allows for an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this ASU eliminate the exception for an intra-entity transfer of an asset other than inventory. The standard will be effective for public companies in the first calendar quarter of 2018, with early adoption permitted and on a modified retrospective basis as of the beginning of the period of adoption. The Company has adopted this ASU effective January 1, 2017. The Company recorded a reduction to retained earnings for the prior period catch-up of approximately
$9 million
for the unamortized prepaid tax on an intra-entity transfer of workforce in place. The Company recognized an additional tax benefit of
$3 million
and
$4 million
in the quarter and six months ended July 1, 2017, respectively.
In March 2016, the FASB issued ASU 2016-09, “
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
.” The ASU requires that entities recognize excess tax benefits and deficiencies related to employee share-based payment transactions as income tax expense and benefit versus additional paid in capital. This ASU also eliminates the requirement to reclassify excess tax benefits and deficiencies from operating activities to financing activities within the statement of cash flows. The Company has adopted recognition of excess tax benefits and deficiencies within income tax expense effective January 1, 2017 on a prospective basis. The Company has adopted presentation of excess tax benefits and deficiencies within operating activities effective January 1, 2017 on a retrospective basis. There are no material impacts to the Company’s consolidated financial statements or disclosures as a result of the adoption of this ASU.
In July 2015, the FASB issued ASU 2015-11,
“Inventory (Topic 330): Simplifying the Measurement of Inventory
,” which changes the measurement principle for inventory from the lower of cost or market to the lower of cost or net realizable value for entities that measure inventory using first-in, first-out (FIFO) or average cost. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company has adopted this ASU effective January 1, 2017 on a prospective basis. There are no material impacts to the Company's consolidated financial statements or disclosures resulting from the adoption of this ASU.
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09, “
Revenue from Contracts with Customers (Topic 606)
.” The core principle is that a company should recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. There are two transition methods available under the new standard, either modified retrospective (cumulative effect to retained earnings) or retrospective. Certain costs to obtain a contract, which have generally been expensed as incurred under the current guidance, would be capitalized and amortized in a pattern consistent with the transfer to the customer of the goods or services to which the asset relates. This standard will be effective for the Company in the first quarter of 2018. Earlier adoption is permitted only for annual periods after December 15, 2016.
We completed the assessment phase of this new standard in 2016 and developed a project plan to guide the implementation phase. We are in the process of updating our accounting policy around revenue recognition, evaluating new disclosure requirements, and identifying and implementing appropriate changes to our business processes, systems, and controls to support recognition and disclosure under the new standard. Observations from the implementation phase indicate that certain contractual provisions in some of our agreements could result in a different number of performance obligations and therefore different revenue recognition timing patterns under the new standard as compared to the current standard. Further, the new disclosure requirements are expected to generate changes to the content and presentation of the financial statement footnotes. The Company plans to apply the modified retrospective approach when adopting the standard in the first quarter of 2018.
In August 2016, the FASB issued ASU 2016-15, “
Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments
.” This pronouncement provides clarification guidance on eight specific cash flow presentation issues that have developed due to diversity in practice. The issues include, but are not limited to, debt prepayment or extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and cash receipts from payments on beneficial interests in securitization transactions. The amendments in this ASU where practicable will be applied retrospectively. The standard will be effective for the Company in the first quarter of 2018. Earlier adoption is permitted. Management does not believe this pronouncement will have a material impact on its consolidated financial statements or existing accounting policies.
In June 2016, the FASB issued ASU 2016-13, “
Financial Instruments-Credit Losses (Topic 326) -Measurement of Credit Losses on Financial Instruments
.” The new standard requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. It replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. There are two transition methods available under the new standard dependent upon the type of financial instrument, either cumulative effect or prospective. The standard will be effective for the Company in the first quarter of 2020. Earlier adoption is permitted only for annual periods after December 15, 2018. Management is currently assessing the impact of adoption on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “
Leases (Subtopic 842)
.” This ASU increases the transparency and comparability of organizations by recognizing lease assets and liabilities on the consolidated balance sheet and disclosing key quantitative and qualitative information about leasing arrangements. The principal difference from previous guidance is that the lease assets and lease liabilities arising from operating leases were not previously recognized in the consolidated balance sheet. The recognition, measurement, presentation, and cash flows arising from a lease by a lessee have not significantly changed. This standard will be effective for the Company in the first quarter of 2019, with early adoption permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply. Management is currently assessing the impact of adoption on its consolidated financial statements. The impact of this ASU is non-cash in nature and will not affect the Company’s cash position.
In January 2016, the FASB issued ASU 2016-01, “
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
.” ASU 2016-01 amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. With respect to the Company’s consolidated financial statements, the most significant impact relates to the accounting for cost investments. This standard will be effective for the Company in the first quarter of 2018. Early adoption is prohibited for those provisions that apply to the Company. Amendments should be applied by means of cumulative effect adjustment to the consolidated balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values including disclosure requirements should be applied prospectively to equity investments that exist as of the date of adoption of the ASU. Management is still assessing the impact of adoption on its consolidated financial statements.
Note 3 Inventories
Inventories are stated at the lower of cost or net realizable value, and cost is determined by the first-in, first-out (“FIFO”) method. Manufactured inventories consist of the following costs: components, direct labor, and manufacturing overhead. Purchased inventories also include internal purchasing overhead costs. We review inventory quantities on hand and record a provision for excess and obsolete inventory based on forecasts of product demand and production requirements or historical consumption when appropriate.
The components of inventories, net are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
July 1,
2017
|
|
December 31,
2016
|
Raw material
|
$
|
154
|
|
|
$
|
172
|
|
Work in process
|
2
|
|
|
1
|
|
Finished goods
|
339
|
|
|
254
|
|
Inventories, gross
|
495
|
|
|
427
|
|
Inventory reserves
|
(81
|
)
|
|
(82
|
)
|
Inventories, net
|
$
|
414
|
|
|
$
|
345
|
|
Note 4 Business Divestiture
On September 13, 2016, the Company entered into an Asset Purchase Agreement with Extreme Networks, Inc. to dispose of the Company’s wireless LAN (“WLAN”) business (“Divestiture Group”) for a gross purchase price of
$55 million
. On October 28, 2016, the Company completed the disposition of the Divestiture Group and recorded net proceeds of
$39 million
. In August 2017, the Company and Extreme Networks, Inc. finalized the net working capital amount for the Divestiture Group. The finalized amount did not differ materially from the original estimate.
WLAN operating results are reported in the Enterprise segment through the closing date of the WLAN divestiture of October 28, 2016. Within the quarter ended July 2, 2016 Consolidated Statement of Operations, the Company generated revenue and gross profit from these assets of
$32 million
and
$15 million
, respectively. For the six month period ended July 2, 2016 Consolidated Statement of Operations, the Company generated revenue and gross profit from these assets of
$65 million
and
$29 million
, respectively.
Note 5 Costs Associated with Exit and Restructuring Activities
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 and further defined in the Company’s Form 10-K, (the “Acquisition Plan” or the “Acquisition”) that the Company previously announced and began implementing during the first quarter 2015. Expected actions under the Productivity Plan may include actions related to organizational design changes, process improvements, and automation. Implementation of actions identified through the Productivity Plan is expected to be substantially complete by the end of our 2018 fiscal year with the first full year of financial benefits realized in 2019. The Company has not finalized its estimate of one-time implementation costs, exit and restructuring charges, or expected benefits that may result from these efforts and will provide updates on these items in future periodic filings. Exit and restructuring costs are not included in the operating results of segment reporting as they are not deemed to impact the specific segment measures as reviewed by our Chief Operating Decision Maker and therefore are reported as a component of corporate eliminations.
Total exit and restructuring charges of
$5 million
life-to-date specific to the Productivity Plan have been recorded through
July 1, 2017
and relate to severance, related benefits, and other expenses. Exit and restructuring charges of
$1 million
were recorded in the current quarter and relate to severance, related benefits, and other expenses.
Total exit and restructuring charges of
$65 million
life-to-date specific to the Acquisition Plan have been recorded through
July 1, 2017
and include severance, related benefits, and other expenses. Charges related to the Acquisition Plan for the six month period and quarter ended
July 1, 2017
were less than
$1 million
. The Company expects to complete the actions of the Acquisition Plan by December 31, 2017. Total remaining charges associated with this plan are expected to be in the range of
$5 million
to
$7 million
.
During the period ended July 1, 2017, the Company incurred exit and restructuring costs as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative costs incurred through December 31, 2016
|
|
Costs incurred for the six months ended July 1, 2017
|
|
Cumulative costs incurred through July 1, 2017
|
Severance, related benefits and, other expenses
|
$
|
54
|
|
|
$
|
5
|
|
|
$
|
59
|
|
Obligations for future non-cancellable lease payments
|
11
|
|
|
—
|
|
|
11
|
|
Total
|
$
|
65
|
|
|
$
|
5
|
|
|
$
|
70
|
|
Total exit and restructuring charges for the three and six month periods ended
July 1, 2017
were
$1 million
and
$5 million
, respectively.
A rollforward of the exit and restructuring accruals is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
Balance at the beginning of the period
|
$
|
11
|
|
|
$
|
13
|
|
|
$
|
10
|
|
|
$
|
15
|
|
Charged to earnings, net
|
1
|
|
|
5
|
|
|
5
|
|
|
10
|
|
Cash paid
|
(5
|
)
|
|
(5
|
)
|
|
(8
|
)
|
|
(12
|
)
|
Balance at the end of the period
|
$
|
7
|
|
|
$
|
13
|
|
|
$
|
7
|
|
|
$
|
13
|
|
Liabilities related to exit and restructuring activities are included in the following accounts in the consolidated balance sheets (in millions):
|
|
|
|
|
|
|
|
|
|
July 1,
2017
|
|
December 31,
2016
|
Accrued liabilities
|
$
|
4
|
|
|
$
|
7
|
|
Other long-term liabilities
|
3
|
|
|
3
|
|
Total liabilities related to exit and restructuring activities
|
$
|
7
|
|
|
$
|
10
|
|
Settlement of the specified long-term balance will be completed by May 2023 due to the remaining obligation of non-cancellable lease payments associated with the exited facilities.
Note 6 Fair Value Measurements
Financial assets and liabilities are to be measured using inputs from three levels of the fair value hierarchy in accordance with 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 & money market funds).
Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. In addition, the Company considers counterparty credit risk in the assessment of fair value.
Financial assets and liabilities carried at fair value as of
July 1, 2017
, are classified below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Money market investments related to the deferred compensation plan
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13
|
|
Total Assets at fair value
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13
|
|
Liabilities:
|
|
|
|
|
|
|
|
Forward interest rate swap contracts (2)
|
$
|
—
|
|
|
$
|
25
|
|
|
$
|
—
|
|
|
$
|
25
|
|
Foreign exchange contracts (1)
|
11
|
|
|
6
|
|
|
—
|
|
|
17
|
|
Liabilities related to the deferred compensation plan
|
13
|
|
|
—
|
|
|
—
|
|
|
13
|
|
Total Liabilities at fair value
|
$
|
24
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
55
|
|
Financial assets and liabilities carried at fair value as of December 31, 2016, are classified below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Foreign exchange contracts (1)
|
$
|
11
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
23
|
|
Money market investments related to the deferred compensation plan
|
11
|
|
|
—
|
|
|
—
|
|
|
11
|
|
Total Assets at fair value
|
$
|
22
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
34
|
|
Liabilities:
|
|
|
|
|
|
|
|
Forward interest rate swap contracts (2)
|
$
|
—
|
|
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
27
|
|
Liabilities related to the deferred compensation plan
|
11
|
|
|
—
|
|
|
—
|
|
|
11
|
|
Total Liabilities at fair value
|
$
|
11
|
|
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
38
|
|
(1) The fair value of the derivative contracts is calculated as follows:
a. Fair value of a put option contract associated with forecasted sales hedges is calculated using bid and ask
rates for similar contracts.
b. Fair value of regular forward contracts associated with forecasted sales hedges is calculated using the period-end
exchange rate adjusted for current forward points.
c. Fair value of hedges against net assets is calculated at the period-end exchange rate adjusted for current forward
points (Level 2). If the hedge has been traded but not settled at period-end, the fair value is calculated at the
rate at which the hedge is being settled (Level 1). As a result, transfers from Level 2 to Level 1 of the fair
value hierarchy totaled
$11 million
and
$11 million
as of
July 1, 2017
and
December 31, 2016
, respectively.
(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. See gross balance reporting in Note 7,
Derivative Instruments
.
Note 7 Derivative Instruments
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 815, “
Derivatives and Hedging
.” 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, “
Derivative and Hedging
,” 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) Derivatives
|
|
Balance Sheet Classification
|
|
Fair Value
|
|
|
|
July 1,
2017
|
|
December 31, 2016
|
Derivative instruments designated as hedges:
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
$
|
—
|
|
|
$
|
12
|
|
Foreign exchange contracts
|
Accrued liabilities
|
|
(6
|
)
|
|
—
|
|
Forward interest rate swaps
|
Accrued liabilities
|
|
(5
|
)
|
|
(3
|
)
|
Forward interest rate swaps
|
Other long-term liabilities
|
|
(11
|
)
|
|
(13
|
)
|
Total derivative instruments designated as hedges
|
|
|
$
|
(22
|
)
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
Derivative instruments not designated as hedges:
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
$
|
—
|
|
|
$
|
11
|
|
Foreign exchange contracts
|
Accrued liabilities
|
|
(11
|
)
|
|
—
|
|
Forward interest rate swaps
|
Accrued liabilities
|
|
(3
|
)
|
|
(1
|
)
|
Forward interest rate swaps
|
Other long-term liabilities
|
|
(6
|
)
|
|
(10
|
)
|
Total derivative instruments not designated as hedges
|
|
|
(20
|
)
|
|
—
|
|
Total Net Derivative Liability
|
|
|
$
|
(42
|
)
|
|
$
|
(4
|
)
|
See also Note 6,
Fair Value Measurements
.
The following table presents the (losses) gains from changes in fair values of derivatives that are not designated as hedges (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Income
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
Statement of Operations Classification
|
July 1, 2017
|
|
July 2, 2016
|
|
July 1, 2017
|
|
July 2, 2016
|
Derivative instruments not designated as hedges:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Foreign exchange (loss) gain
|
$
|
(11
|
)
|
|
$
|
2
|
|
|
$
|
(16
|
)
|
|
$
|
(3
|
)
|
Forward interest rate swaps
|
Interest expense, net
|
—
|
|
|
1
|
|
|
1
|
|
|
2
|
|
Total (loss) gain recognized in income
|
|
$
|
(11
|
)
|
|
$
|
3
|
|
|
$
|
(15
|
)
|
|
$
|
(1
|
)
|
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 credit risk 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 sales are designed to mitigate or eliminate concentrations of credit risk with any single customer.
Foreign Currency Exchange Risk Management
The Company conducts business on a multinational basis in a wide variety of foreign currencies. Exposure to market risk for changes in foreign currency exchange rates arises from euro denominated external revenues, cross-border financing activities between subsidiaries, and foreign currency denominated monetary assets and liabilities. The Company realizes 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.
The Company manages the exchange rate risk of anticipated euro denominated sales using put options, forward contracts, and participating forwards, all of which typically mature within
twelve
months of execution. The Company designates these derivative contracts as cash flow hedges. Gains and losses on these contracts are deferred in accumulated other comprehensive loss until the contract is settled and the hedged sale is realized. The gain or loss is then reported as an increase or decrease to net sales. As of
July 1, 2017
and
December 31, 2016
, the notional amounts of the Company’s foreign exchange cash flow hedges were
€349 million
and
€341 million
, respectively. The Company has reviewed cash flow hedges for effectiveness and determined they are highly effective.
The Company uses forward contracts, which are not designated as hedging instruments, to manage its exposures related to its Brazilian real, British pound, Canadian dollar, Czech koruna, Euro, Australian dollar, Swedish krona, Japanese yen, and Singapore dollars denominated net assets. These forward contracts typically mature within
three
months after execution. Monetary gains and losses on these forward contracts are recorded in income each quarter and are generally offset by the transaction gains and losses related to their net asset positions. The notional values and the net fair value of these outstanding contracts are as follow (in millions):
|
|
|
|
|
|
|
|
|
|
July 1, 2017
|
|
December 31, 2016
|
Notional balance of outstanding contracts:
|
|
|
|
British Pound/U.S. dollar
|
£
|
18
|
|
|
£
|
3
|
|
Euro/U.S. dollar
|
€
|
107
|
|
|
€
|
148
|
|
British Pound/Euro
|
£
|
5
|
|
|
£
|
8
|
|
Canadian Dollar/U.S. dollar
|
$
|
15
|
|
|
$
|
13
|
|
Czech Koruna/U.S. dollar
|
Kč
|
|
|
|
Kč
|
147
|
|
Brazilian Real/U.S. dollar
|
R$
|
58
|
|
|
R$
|
56
|
|
Malaysian Ringgit/U.S. dollar
|
RM
|
—
|
|
|
RM
|
16
|
|
Australian Dollar/U.S. dollar
|
$
|
18
|
|
|
$
|
50
|
|
Swedish Krona/U.S. dollar
|
kr
|
15
|
|
|
kr
|
7
|
|
Japanese yen/U.S. dollar
|
¥
|
323
|
|
|
¥
|
48
|
|
Singapore dollar/U.S. dollar
|
S$
|
9
|
|
|
S$
|
15
|
|
Net fair value asset (liability) of outstanding contracts
|
$
|
(11
|
)
|
|
$
|
11
|
|
Interest Rate Risk Management
In October 2014, the Company entered into a credit agreement (the “Credit Agreement”), which provides for a term loan (“Term Loan”) of
$2.2 billion
and a revolving credit facility (“Revolving Credit Facility”) of
$250 million
. See Note 8,
Long-Term Debt
. Borrowings under the Term Loan bear interest at a variable rate plus an applicable margin. As a result, the Company is exposed to market risk associated with the variable interest rate payments on the Term Loan. The Company has entered into forward interest rate swaps to hedge a portion of this interest rate risk.
Upon receiving a commitment in June 2014 for the Term Loan, the Company entered into floating-to-fixed forward interest rate swaps. In July 2014, these swaps were designated as cash flow hedges of interest rate exposure associated with variability in future cash flows on this variable rate loan commitment. Upon funding in October 2014, the Company terminated these swaps and discontinued hedge accounting treatment. The change in fair value of the terminated swaps which had been included in other comprehensive (loss) income up to termination will continue to be amortized to interest expense, net as the interest payments under the Term Loan affect earnings. The Company then issued new floating-to-fixed forward interest rate swaps to a syndicated group of commercial banks. These swaps were not designated as hedges and the changes in fair value are recognized in interest expense, net. To offset this impact to earnings, the Company, in November 2014, entered into fixed-to-floating forward interest rate swaps, which were also not designated in a hedging relationship and thus the changes in the fair value are recognized in interest expense, net. At the same time, the Company entered into additional floating-to-fixed interest rate swaps and designated them as cash flow hedges for hedge accounting treatment.
The changes in fair value of the swaps designated as cash flow hedges are recognized in accumulated other comprehensive loss, with any ineffectiveness immediately recognized in earnings. At
July 1, 2017
, the Company estimated that approximately
$7 million
in losses on the forward interest rate swaps designated as cash flow hedges will be reclassified from accumulated other comprehensive income (loss) into earnings during the next four quarters.
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. The following table presents the gross fair values and related offsetting counterparty fair values as well as the net fair value amounts at
July 1, 2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Fair
Value
|
|
Counterparty
Offsetting
|
|
Net Fair
Value in the
Consolidated
Balance
Sheets
|
Counterparty A
|
$
|
12
|
|
|
$
|
7
|
|
|
$
|
5
|
|
Counterparty B
|
4
|
|
|
2
|
|
|
2
|
|
Counterparty C
|
4
|
|
|
2
|
|
|
2
|
|
Counterparty D
|
8
|
|
|
3
|
|
|
5
|
|
Counterparty E
|
4
|
|
|
1
|
|
|
3
|
|
Counterparty F
|
4
|
|
|
1
|
|
|
3
|
|
Counterparty G
|
5
|
|
|
—
|
|
|
5
|
|
Total
|
$
|
41
|
|
|
$
|
16
|
|
|
$
|
25
|
|
The notional amount of the designated interest rate swaps effective in each year of the cash flow hedge relationships does not exceed the principal amount of the Term Loan, which is hedged. The Company has reviewed the interest rate swap hedges for effectiveness and determined they are
100%
effective.
The interest rate swaps have the following notional amounts per year (in millions):
|
|
|
|
|
Year 2017
|
$
|
—
|
|
Year 2018
|
544
|
|
Year 2019
|
544
|
|
Year 2020
|
272
|
|
Year 2021
|
272
|
|
Notional balance of outstanding contracts
|
$
|
1,632
|
|
Note 8 Long-Term Debt
The following table summarizes the carrying value of the Company’s long-term debt (in millions):
|
|
|
|
|
|
|
|
|
|
July 1,
2017
|
|
December 31, 2016
|
Senior Notes
|
$
|
1,050
|
|
|
$
|
1,050
|
|
Term Loan
|
1,413
|
|
|
1,653
|
|
Less: Debt Issuance Costs
|
(20
|
)
|
|
(22
|
)
|
Less: Unamortized Discounts
|
(25
|
)
|
|
(33
|
)
|
Total outstanding debt
|
$
|
2,418
|
|
|
$
|
2,648
|
|
At
July 1, 2017
, the future maturities of long-term debt, excluding debt discounts and issuance costs, consisted of the following (in millions):
|
|
|
|
|
|
|
|
2017
|
$
|
—
|
|
2018
|
—
|
|
2019
|
—
|
|
2020
|
—
|
|
2021
|
1,413
|
|
Thereafter
|
1,050
|
|
Total maturities of long-term debt
|
$
|
2,463
|
|
The estimated fair value of our long-term debt approximated
$2.5 billion
at
July 1, 2017
and
$2.8 billion
at
December 31, 2016
. These fair value amounts represent the estimated value at which the Company’s lenders could trade its debt within the financial markets and does not represent the settlement value of these long-term debt liabilities to the Company. The fair value of the long-term debt will continue to vary each period based on fluctuations in market interest rates, as well as changes to the Company’s credit ratings. This methodology resulted in a Level 2 classification in the fair value hierarchy.
Credit Facilities
On October 27, 2014, the Company entered into a credit agreement (the “Credit Agreement”) which provided for a term loan of
$2.2 billion
(“Term Loan”) and a revolving credit facility of
$250 million
(“Revolving Credit Facility”). The Company entered into amendments to the Credit Agreement on, respectively, June 2, 2016 and December 6, 2016 (the “2016 Amendments”), which lowered the index rate spread for LIBOR loans by an aggregate of
150 bps
from LIBOR +
400
bps down to LIBOR +
250
bps. In accounting for the 2016 Amendments, the Company applied the provisions of ASC 470-50,
Modifications and Extinguishments
. The evaluation of the accounting 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. As a result, the Company recorded expenses related to the June 2, 2016 amendment in the three months ended July 2, 2016, primarily related to costs incurred with third-parties for arranger, legal, and other services and the loss incurred on the extinguished debt totaling
$2.7 million
. The Company incurred additional one-time expenses related to third-party arranger, legal, and other services and the loss incurred on extinguishment of debt of
$1.7 million
for the December 6, 2016 amendment. These expenses are reflected as non-operating expenses on the Consolidated Statement of Operations. As a result of the June 2, 2016 amendment, the Company paid
$4.9 million
to the creditors in exchange for the modifications and reported such payments as debt discount which are being amortizing over the life of the modified debt using the interest method. There were no modification charges for the December 6, 2016 amendment. Borrowings under the Term Loan, as amended, bear interest at a variable rate subject to a floor of
3.25%
.
As of
July 1, 2017
, the Term Loan interest rate was
3.72%
. Interest payments are payable quarterly. The Company has entered into interest rate swaps to manage interest rate risk on its long-term debt. See Note 7,
Derivative Instruments
for further details.
The Credit Agreement, as amended, requires the Company to repay a set amount of principal and accrued interest on the Term Loan on a quarterly basis. The Credit Agreement also requires the Company to prepay certain amounts in the event of certain circumstances or transactions, as defined in the Credit Agreement. The Company may make optional prepayments against the Term Loan, in whole or in part, without premium or penalty. The Company made optional principal prepayments of
$160 million
in the current quarter and
$240 million
in the fiscal year-to-date. The Term Loan, unless amended, modified, or extended, will mature on October 27, 2021 (the “Term Loan Maturity Date”). To the extent not previously paid, the Term Loan (or Term Loans, as the case may be) are due and payable on the Term Loan 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 Credit Agreement. Assuming the Company makes no further optional prepayments on the Term Loan, the outstanding principal as of the Term Loan Maturity Date will be approximately
$1.4 billion
. See Note 15,
Subsequent Events
for information regarding updates to the Credit Agreement after the financial statement date.
The Credit Agreement requires the Company to prepay the Revolving Credit Facility, under certain circumstances or transactions defined in the Credit Agreement. 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
$250 million
. As of
July 1, 2017
, the Company established letters of credit totaling
$4 million
, which reduced funds available for other borrowings under the agreement to
$246 million
. The Revolving Credit Facility will mature and the related commitments will terminate on October 27, 2019.
Borrowings under the Revolving Credit Facility bear interest at a variable rate plus an applicable margin. As of
July 1, 2017
, the Revolving Credit Facility interest rate was
3.55%
. Interest payments are payable quarterly. As of
July 1, 2017
and
July 2, 2016
, the Company did
no
t have any borrowings against the Revolving Credit Facility.
On
July 1, 2017
, the Company was in compliance with all covenants.
Debt issuance costs have a remaining balance to be amortized of
$20 million
and are recorded within Long-term debt on the Consolidated Balance Sheet for the quarter ending
July 1, 2017
;
$16 million
relates to the Senior Notes,
$1 million
relates to the Term Loan, and
$3 million
relates to the Revolver. These costs are amortized over
8
,
7
and
5 years
, respectively.
Note 9 Commitments and Contingencies
Warranty
In general, the Company provides warranty coverage of
1
year on mobile computers. Advanced data capture products are warrantied from
1
to
5
years, depending on the product. Printers are warrantied for
1
year against defects in material and workmanship. Thermal printheads are warrantied for
6
months and batteries are warrantied for
1
year. Battery-based products, such as location tags, are covered by a
90
-day warranty. The provision for warranty expense is adjusted quarterly based on historical warranty experience.
The following table is a summary of the Company’s accrued warranty obligation (in millions):
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
July 1
2017
|
|
July 2
2016
|
Balance at the beginning of the period
|
$
|
21
|
|
|
$
|
22
|
|
Warranty expense
|
13
|
|
|
14
|
|
Warranty payments
|
(15
|
)
|
|
(15
|
)
|
Balance at the end of the period
|
$
|
19
|
|
|
$
|
21
|
|
Contingencies
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 its potential effects may change in the future.
In connection with the acquisition of the Enterprise business from Motorola Solutions, Inc., the Company acquired Symbol Technologies, Inc., a subsidiary of Motorola Solutions (“Symbol”). A putative federal class action lawsuit, Waring v. Symbol Technologies, Inc., et al., was filed on August 16, 2005 against Symbol Technologies, Inc. and
two
of its former officers in the United States District Court for the Eastern District of New York by Robert Waring. After the filing of the Waring action, several additional purported class actions were filed against Symbol and the same former officers making substantially similar allegations (collectively, the New Class Actions”). The Waring action and the New Class Actions were consolidated for all purposes and on April 26, 2006, the Court appointed the Iron Workers Local # 580 Pension Fund as lead plaintiff and approved its retention of lead counsel on behalf of the putative class. On August 30, 2006, the lead plaintiff filed a Consolidated Amended Class Action Complaint (the “Amended Complaint”), and named additional former officers and directors of Symbol as defendants. The lead plaintiff alleges that the defendants misrepresented the effectiveness of Symbol’s internal controls and forecasting processes, and that, as a result, all of the defendants violated Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and the individual defendants violated Section 20(a) of the Exchange Act. The lead plaintiff alleges that it was damaged by the decline in the price of Symbol’s stock following certain purported corrective disclosures and seeks unspecified damages. The court has certified a class of investors that includes those that purchased Symbol common stock between March 12, 2004 and August 1, 2005. The parties have substantially completed fact and expert discovery. However, there is
one
(
1
) discovery motion pending that could, if granted, reopen fact discovery. The court has held in abeyance all other deadlines, including the deadline for the filing of dispositive motions, and has not set a date for trial. The current lead Directors and Officers (“D&O”) insurer continues to maintain its position of not agreeing to reimburse defense costs incurred by the Company in connection with this matter, and the Company disputes the position taken by the current D&O insurer.
The Company establishes an accrued liability for loss contingencies related to legal matters when the loss is both probable and estimable. In addition, for some matters for which a loss is probable or reasonably possible, an estimate of the amount of loss or range of loss is not possible, and we may be unable to estimate the possible loss or range of losses that could potentially result from the application of non-monetary remedies. Currently, the Company is unable to reasonably estimate the amount of reasonably possible losses for the above mentioned matter.
Note 10 Share-Based Compensation
The Zebra Technologies Corporation 2015 Long-Term Incentive Plan (“2015 Plan”) which became effective in fiscal 2015, provides for incentive compensation to the Company’s non-employee directors, officers and employees. The awards available under the 2015 Plan include stock-settled Stock Appreciation Rights (“SARs”), Restricted Stock Awards (“RSAs”), Performance Share Awards (“PSAs”), cash-settled Stock Appreciation Rights (“CSRs”), Restricted Stock Units (“RSUs”), and Performance Stock Units (“PSUs”). Non-qualified stock options were available under the 2006 Long-Term Incentive Plan (“2006 Plan”). Non-qualified stock options are no longer granted under the 2015 Plan. A total of
4 million
shares became available for delivery under the 2015 Plan.
A summary of the equity awards authorized and available for future grants under the 2015 Plan is as follows:
|
|
|
|
Available for future grants at December 31, 2016
|
2,164,297
|
|
Newly authorized options
|
—
|
|
Granted
|
(722,763
|
)
|
Cancellation and forfeitures
|
—
|
|
Plan termination
|
—
|
|
Available for future grants at July 1, 2017
|
1,441,534
|
|
Pre-tax share-based compensation expense recognized in the statements of operations was
$16 million
and
$12 million
for the six month period ended
July 1, 2017
and
July 2, 2016
, respectively. Tax related benefits of
$5 million
and
$4 million
were recognized for the six month period ended
July 1, 2017
and
July 2, 2016
, respectively. As of
July 1, 2017
, total unearned compensation costs related to the Company’s share-based compensation plans was
$65 million
, which will be amortized over the weighted average remaining service period of
2.7
years.
Stock Appreciation Rights (“SARs”)
A summary of the Company’s SARs outstanding under the 2015 Plan is as follows:
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
July 1,
2017
|
SARs
|
Shares
|
|
Weighted-Average
Exercise Price
|
Outstanding at beginning of period
|
1,740,786
|
|
|
$
|
56.15
|
|
Granted
|
400,682
|
|
|
98.85
|
|
Exercised
|
(147,350
|
)
|
|
48.88
|
|
Forfeited
|
(30,134
|
)
|
|
69.81
|
|
Expired
|
(4,065
|
)
|
|
108.20
|
|
Outstanding at end of period
|
1,959,919
|
|
|
$
|
65.12
|
|
Exercisable at end of period
|
972,304
|
|
|
$
|
50.57
|
|
The fair value of share-based compensation is estimated on the date of grant using a binomial model. Volatility is based on an average of the implied volatility in the open market and the annualized volatility of the Company’s stock price over its entire stock history. Grants in the table above include SARs that will be settled in the Class A common stock or cash.
The following table shows the weighted-average assumptions used for grants of SARs, as well as the fair value of the grants based on those assumptions:
|
|
|
|
|
|
July 1, 2017
|
|
July 2, 2016
|
Expected dividend yield
|
0%
|
|
0%
|
Forfeiture rate
|
9.37%
|
|
9.01%
|
Volatility
|
35.49%
|
|
43.14%
|
Risk free interest rate
|
1.77%
|
|
1.29%
|
Range of interest rates
|
0.71% - 2.41%
|
|
0.25% - 1.75%
|
Expected weighted-average life
|
4.13
|
|
5.33
|
Fair value of SARs granted (in millions)
|
$12
|
|
$12
|
Weighted-average grant date fair value of SARs granted
(per underlying share)
|
$29.84
|
|
$19.95
|
The following table summarizes information about SARs outstanding at
July 1, 2017
:
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
Aggregate intrinsic value - (in millions)
|
$
|
61
|
|
|
$
|
43
|
|
Weighted-average remaining contractual term
|
6.6
|
|
|
5.3
|
|
The intrinsic value for SARs exercised during the six months ended
July 1, 2017
and
July 2, 2016
was
$8 million
and
$1 million
, respectively. The total fair value of SARs vested during the period of
July 1, 2017
and
July 2, 2016
was
$6 million
and
$2 million
, respectively.
Cash received from the exercise of SARs during the first two quarters of 2017 was
$7 million
compared to
$2 million
in the prior year. The related tax benefit realized was
$2 million
during the first two quarters of 2017 compared to less than
$1 million
in the prior year.
The Company’s SARs are expensed over the vesting period of the related award, which is typically
4
years.
Restricted Stock Awards (“RSAs”) and Performance Share Awards (“PSAs”)
The Company’s restricted stock grants consist of time-vested restricted stock awards (“RSAs”) and performance vested restricted stock awards (“PSAs”). The RSAs and PSAs vest at each vesting date subject to restrictions such as continuous employment except in certain cases as set forth in each stock agreement. The Company’s restricted stock awards are expensed over the vesting period of the related award, which is typically
3 years
. Some awards, including those granted annually to non-employee directors as an equity retainer fee, were vested upon grant. Compensation cost is calculated as the market date fair value on grant date multiplied by the number of shares granted.
The Company also issues stock awards to nonemployee directors. Each director receives an equity grant of shares every year during the month of May. The number of shares granted to each director is determined by dividing the value of the annual grant by the price of a share of common stock. During the first six months of 2017, there were
12,488
shares granted to nonemployee directors compared to
25,088
shares in the first six months of prior year. New directors in any fiscal year earned a prorated amount. The shares vest immediately upon the grant date.
A summary of information relative to the Company’s restricted stock awards, inclusive of nonemployee director stock awards, is as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
July 1,
2017
|
Restricted Stock Awards
|
|
Shares
|
|
Weighted-Average
Grant Date Fair Value
|
Outstanding at beginning of year
|
|
622,814
|
|
|
$
|
70.19
|
|
Granted
|
|
196,877
|
|
|
98.80
|
|
Released
|
|
(147,654
|
)
|
|
75.91
|
|
Forfeited
|
|
(15,567
|
)
|
|
69.56
|
|
Outstanding at end of year
|
|
656,470
|
|
|
$
|
77.49
|
|
The fair value of each performance award granted includes assumptions around the Company’s performance goals. A summary of information relative to the Company’s performance awards is as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
July 1,
2017
|
Performance Share Awards
|
|
Shares
|
|
Weighted-Average
Grant Date Fair Value
|
Outstanding at beginning of year
|
|
379,226
|
|
|
$
|
70.14
|
|
Granted
|
|
79,423
|
|
|
98.87
|
|
Released
|
|
(2,029
|
)
|
|
62.70
|
|
Forfeited
|
|
(183,961
|
)
|
|
73.07
|
|
Outstanding at end of year
|
|
272,659
|
|
|
$
|
76.72
|
|
Other Award Types
The Company also has cash-settled compensation awards including Cash-settled Stock Appreciation Rights (“CSRs”), Restricted Stock Units (“RSUs”), and Performance Stock Units (“PSUs”) (the “Awards”) that are expensed over the vesting period of the related award, which is not more than
4 years
. Compensation cost is calculated at the market date fair value on grant date multiplied by the number of share-equivalents granted and the fair value is remeasured at the end of each reporting period. Share-based liabilities paid for these awards was
$1 million
during the six months ended
July 1, 2017
compared to less than
$1 million
during the same period of prior year. Share-equivalents issued under these programs totaled
45,781
and
77,809
during the six months ended
July 1, 2017
and
July 2, 2016
, respectively.
Non-qualified Stock Options
A summary of the Company’s options outstanding under the 2006 Plan is as follows:
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
July 1,
2017
|
Non-qualified Options
|
Shares
|
|
Weighted-
Average
Exercise Price
|
Outstanding at beginning of year
|
154,551
|
|
|
$
|
35.96
|
|
Granted
|
—
|
|
|
—
|
|
Exercised
|
(81,705
|
)
|
|
36.94
|
|
Forfeited
|
—
|
|
|
—
|
|
Expired
|
(5,941
|
)
|
|
41.25
|
|
Outstanding at end of year
|
66,905
|
|
|
$
|
34.30
|
|
Exercisable at end of year
|
66,905
|
|
|
$
|
34.30
|
|
The following table summarizes information about non-qualified stock options outstanding at
July 1, 2017
:
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
Aggregate intrinsic value - (in millions)
|
$
|
4
|
|
|
$
|
4
|
|
Weighted-average remaining contractual term
|
0.9
|
|
|
0.9
|
|
There were
no
non-qualified stock options issued during the six months ended
July 1, 2017
.
The intrinsic value for non-qualified options exercised during the six months ended
July 1, 2017
and
July 2, 2016
was
$5 million
and less than
$1 million
, respectively.
Cash received from the exercise of non-qualified options during the six months ended
July 1, 2017
was
$3 million
compared to less than
$1 million
in the prior year. The related tax benefit realized was
$1 million
during the six months ended
July 1, 2017
compared to less than
$1 million
in the prior year.
Employee Stock Purchase Plan
The Zebra Technologies Corporation 2011 Employee Stock Purchase Plan (“2011 Plan”) which became effective in fiscal 2011, and the 2011 Plan permits eligible employees to purchase common stock at
95%
of the fair market value at the date of purchase. Employees may make purchases by cash or payroll deductions up to certain limits. The aggregate number of shares that may be purchased under this plan is
1.5 million
. At July 1, 2017,
1 million
shares were available for future purchase.
Note 11 Income Taxes
The Company’s effective tax rates for the six-month periods ended
July 1, 2017
and
July 2, 2016
were
(47.1)%
and
1.4%
, respectively. The current and prior period variances from the federal statutory rate of
35%
are attributable to 1) increases related to state income taxes, unbenefited foreign losses, impact of the Enterprise acquisition, and reduction of the state effective rate as a result of the change in business operations during the quarter when applied to deferred tax assets, 2) reductions related to benefits of foreign rates, and credits against U.S. income tax, and 3) benefits related to an intercompany sale of intellectual property, benefits from a rate decrease in Singapore, and windfall benefits related to stock compensation.
Quarterly, Management evaluates all jurisdictions based on historical pre-tax earnings and taxable income to determine the need for valuation allowances. Based on this analysis, a valuation allowance has been recorded for any jurisdictions where, in the Company’s judgment, tax benefits will not be realized.
Pre-tax earnings outside the United States are primarily generated in the United Kingdom, Singapore, and Luxembourg, with statutory rates of
19%
,
17%
, and
27%
, respectively. During 2017, the Company received approval from the Singapore Economic Development Board for a tax rate of
10%
with the Company’s commitment to make increased investments in Singapore.
The Company’s effective tax rates for the three month periods ended July 1, 2017 and July 2, 2016 were
10.5%
and
(36.4)%
respectively. The Company’s current period effective tax rate was lower than the federal statutory rate of
35%
primarily attributable to the rate differential between U.S. and foreign jurisdictions and the impact of discrete items, partially offset by unbenefited foreign losses. The discrete provision for income taxes recorded in the current quarter results from windfall benefits related to stock compensation and expenses due to a reduction of the state effective rate as a result of the change in business operations during the quarter when applied to deferred tax assets.
The Company is currently undergoing audits of the 2013 through 2015 U.S. federal income tax returns and 2012 and 2014 UK income tax returns. The tax years 2004 through 2016 remain open to examination by multiple foreign and U.S. state taxing jurisdictions. Due to uncertainties in any tax audit outcome, the Company’s estimates of the ultimate settlement of uncertain tax positions may change and the actual tax benefits may differ significantly from the estimates.
Note 12 Earnings (loss) per Share
Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income (loss) by the weighted average number of shares assuming dilution. Dilutive common shares outstanding is computed using the Treasury Stock method and reflects the additional shares that would be outstanding if dilutive stock options were exercised and restricted stock awards and warrants were settled for common shares during the period.
Earnings per share (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
July 1, 2017
|
|
July 2, 2016
|
|
July 1, 2017
|
|
July 2, 2016
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to the Company
|
|
$
|
17
|
|
|
$
|
(45
|
)
|
|
$
|
25
|
|
|
$
|
(71
|
)
|
|
Weighted-average shares outstanding
|
|
51,996,353
|
|
|
51,533,236
|
|
|
51,928,911
|
|
|
51,405,373
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.33
|
|
|
$
|
(0.88
|
)
|
|
$
|
0.49
|
|
|
$
|
(1.38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to the Company
|
|
$
|
17
|
|
|
$
|
(45
|
)
|
|
$
|
25
|
|
|
$
|
(71
|
)
|
|
Weighted-average shares outstanding
|
|
51,996,353
|
|
|
51,533,236
|
|
|
51,928,911
|
|
|
51,405,373
|
|
|
Dilutive shares
(1)
|
|
1,132,304
|
|
|
—
|
|
|
1,109,045
|
|
|
—
|
|
|
Diluted weighted-average shares outstanding
|
|
53,128,657
|
|
|
51,533,236
|
|
|
53,037,956
|
|
|
51,405,373
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.32
|
|
|
$
|
(0.88
|
)
|
|
$
|
0.48
|
|
|
$
|
(1.38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1) Due to net losses in the second quarter and fiscal year-to-date of 2016, options, awards and warrants were anti-dilutive and therefore excluded from the earnings per share calculation.
|
|
There were
273,216
outstanding options and awards to purchase common shares that were anti-dilutive and excluded from the second quarter earnings per share calculation as of
July 1, 2017
compared to
1,313,435
as of
July 2, 2016
. There were
701,272
outstanding options and awards to purchase common shares that were anti-dilutive and excluded from the six months ended earnings per share calculation as of
July 1, 2017
compared to
1,356,668
as of
July 2, 2016
. Anti-dilutive securities consist primarily of stock appreciation rights (“SARs”) with an exercise price greater than the average market closing price of the Class A common stock.
Note 13 Accumulated Other Comprehensive Income (loss)
Stockholders’ equity includes certain items classified as accumulated other comprehensive income (loss), including:
|
|
•
|
Unrealized (loss) gain 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 7,
Derivative Instruments
for more details.
|
|
|
•
|
Unrealized (loss) gain on forward interest rate swaps hedging transactions
refers to the hedging of the interest rate risk exposure associated with the variable rate commitment entered into for the Acquisition. See Note 7,
Derivative Instruments
for more details.
|
|
|
•
|
Foreign currency translation adjustment
relates 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 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 accumulated other comprehensive income.
|
The components of accumulated other comprehensive income (loss) (“AOCI”) for the three months ended
July 1, 2017
and
July 2, 2016
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on sales hedging
|
|
Unrealized (loss)/ gain on forward interest rate swaps
(1)
|
|
Currency translation adjustments
|
|
Total
|
Balance at December 31, 2015
|
|
$
|
(1
|
)
|
|
$
|
(15
|
)
|
|
$
|
(32
|
)
|
|
$
|
(48
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
(11
|
)
|
|
(16
|
)
|
|
(2
|
)
|
|
(29
|
)
|
Amounts reclassified from AOCI
|
|
6
|
|
|
1
|
|
|
—
|
|
|
7
|
|
Tax benefit
|
|
1
|
|
|
5
|
|
|
—
|
|
|
6
|
|
Other comprehensive (loss) income
|
|
(4
|
)
|
|
(10
|
)
|
|
(2
|
)
|
|
(16
|
)
|
Balance at July 2, 2016
|
|
$
|
(5
|
)
|
|
$
|
(25
|
)
|
|
$
|
(34
|
)
|
|
$
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
6
|
|
|
$
|
(15
|
)
|
|
$
|
(36
|
)
|
|
$
|
(45
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
(16
|
)
|
|
1
|
|
|
—
|
|
|
(15
|
)
|
Amounts reclassified from AOCI
|
|
(1
|
)
|
|
1
|
|
|
—
|
|
|
—
|
|
Tax benefit (expense)
|
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Other comprehensive (loss) income
|
|
(14
|
)
|
|
2
|
|
|
—
|
|
|
(12
|
)
|
Balance at July 1, 2017
|
|
$
|
(8
|
)
|
|
$
|
(13
|
)
|
|
$
|
(36
|
)
|
|
$
|
(57
|
)
|
(1) See Note 7,
Derivative Instruments
regarding timing of reclassifications.
Reclassifications out of AOCI to earnings during the three and six months ended
July 1, 2017
and
July 2, 2016
were immaterial in the respective periods.
Note 14 Segment Information
The Company has
two
reportable segments: Legacy Zebra and Enterprise. The operating segments have been identified based on the financial data utilized by the Company’s Chief Executive Officer (the chief operating decision maker) to assess segment performance and allocate resources among the Company’s segments. The chief operating decision maker uses adjusted operating income to assess segment profitability. Adjusted operating income excludes purchase accounting adjustments, amortization, acquisition, integration and exit and restructuring costs. Segment assets are not reviewed by the Company’s chief operating decision maker and therefore are not disclosed below.
Financial information by segment is presented as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
Net sales:
|
|
|
|
|
|
|
|
Legacy Zebra
|
$
|
313
|
|
|
$
|
305
|
|
|
$
|
635
|
|
|
$
|
619
|
|
Enterprise
|
584
|
|
|
577
|
|
|
1,128
|
|
|
1,115
|
|
Total segment
|
897
|
|
|
882
|
|
|
1,763
|
|
|
1,734
|
|
Corporate, eliminations
(1)
|
(1
|
)
|
|
(3
|
)
|
|
(2
|
)
|
|
(6
|
)
|
Total
|
$
|
896
|
|
|
$
|
879
|
|
|
$
|
1,761
|
|
|
$
|
1,728
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
Legacy Zebra
|
$
|
63
|
|
|
$
|
57
|
|
|
$
|
130
|
|
|
$
|
128
|
|
Enterprise
|
68
|
|
|
69
|
|
|
123
|
|
|
111
|
|
Total segment
|
131
|
|
|
126
|
|
|
253
|
|
|
239
|
|
Corporate, eliminations
(2)
|
(73
|
)
|
|
(103
|
)
|
|
(155
|
)
|
|
(206
|
)
|
Total
|
$
|
58
|
|
|
$
|
23
|
|
|
$
|
98
|
|
|
$
|
33
|
|
|
|
(1)
|
Amounts included in Corporate, eliminations consist of purchase accounting adjustments not reported in segments related to the Acquisition.
|
|
|
(2)
|
Amounts included in Corporate, eliminations consist of purchase accounting adjustments not reported in segments, amortization expense, acquisition and integration expenses, and exit and restructuring costs.
|
Note 15 Subsequent Events
On July 26, 2017, the Company entered into an Amended and Restated Credit Agreement (the “A&R Credit Agreement”), which amends, modifies and adds provisions to the Credit Agreement, as defined in Note 8, L
ong-Term Debt
.
The A&R Credit Agreement provides for (i) a new term loan of
$687.5 million
(“Term Loan A”), maturing July 2021, initially priced at LIBOR +
2.00%
, with the opportunity for reduced pricing upon attainment of certain debt leverage levels; (ii) an upsized
$500 million
revolving credit facility (increased from
$250 million
), on which
$105 million
was drawn at closing (together, the Term Loan A and revolving credit facility are the “New Facility”). On August 7, proceeds from the New Facility, including an additional draw of
$110 million
on the revolving credit facility, were used to redeem
$750 million
of its
7.25%
senior notes, maturing October 2022 (notice was provided on July 6) and pay related redemption costs. The company plans to redeem the remaining
$300 million
of its
7.25%
senior notes by the end of 2017 through lower-cost financing arrangements, including an accounts receivable securitization facility.
The Company also amended its
$1.4 billion
Term Loan B facility maturing October 2021, reducing the interest rate by
50 bps
to LIBOR +
2.00%
effective July 26, 2017. In addition, the Company retired
$75 million
of the principal balance of Term Loan B upon closing of the A&R Credit Agreement. As previously communicated, the company expects to continue to make prepayments of principal on the Term Loan B.
The outstanding long-term debt balance following the August 7, 2017 transactions was
$2.5 billion
. The Company has incurred
$55 million
of redemption and transaction fees and
$13 million
of non-cash accelerated amortization of debt issuance costs and discounts as of August 7, 2017.
During fiscal 2017 and as a result of this debt restructuring, the Company expects to incur approximately
$72 million
of redemption costs and transaction fees, and approximately
$18 million
of non-cash accelerated amortization of debt issuance costs and discounts.