NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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 around the world. 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, 2020.
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 July 3, 2021, the Consolidated Statements of Operations, Comprehensive Income, and Stockholders’ Equity for the three and six months ended July 3, 2021 and June 27, 2020, and the Consolidated Statements of Cash Flows for the six months ended July 3, 2021 and June 27, 2020. These results, however, are not necessarily indicative of the results expected for the full fiscal year ending December 31, 2021.
Effective January 1, 2021, our retail solutions offering 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. Prior period results have been reclassified to conform to the current period’s presentation. This change does not have an impact on the Consolidated Financial Statements. See Note 17, Segment Information & Geographic Data for additional information related to each segment’s results.
Note 2 Significant Accounting Policies
Recently Issued Accounting Pronouncements Not Yet Adopted
In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). Subject to meeting certain criteria, ASU 2020-04 provides optional expedients and exceptions to applying contract modification accounting under existing generally accepted accounting principles for contracts that are modified to address the expected phase out of the London Inter-bank Offered Rate (“LIBOR”). Some of the Company’s contracts with respect to its borrowings and interest rate swap contracts already contain comparable alternative reference rates that would automatically take effect upon the phasing out of LIBOR, while for others, the Company anticipates negotiating comparable replacement rates with its counterparties. At this stage of its contract assessment, the Company does not expect ASU 2020-04 to have a material impact on its financial results.
Note 3 Revenues
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 solutions offerings are generally recognized 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 using a time-based method, depending upon how control is transferred to the customer. In cases where a bundle of products, services, 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 and six months ended July 3, 2021 and June 27, 2020 (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
July 3, 2021
|
|
June 27, 2020
|
Segment
|
Tangible Products
|
|
Services and Software
|
|
Total
|
|
Tangible Products
|
|
Services and Software
|
|
Total
|
AIT
|
$
|
393
|
|
|
$
|
28
|
|
|
$
|
421
|
|
|
$
|
251
|
|
|
$
|
22
|
|
|
$
|
273
|
|
EVM
|
799
|
|
|
160
|
|
|
959
|
|
|
560
|
|
|
123
|
|
|
683
|
|
Corporate, eliminations(1)
|
—
|
|
|
(3)
|
|
|
(3)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
1,192
|
|
|
$
|
185
|
|
|
$
|
1,377
|
|
|
$
|
811
|
|
|
$
|
145
|
|
|
$
|
956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
July 3, 2021
|
|
June 27, 2020
|
Segment
|
Tangible Products
|
|
Services and Software
|
|
Total
|
|
Tangible Products
|
|
Services and Software
|
|
Total
|
AIT
|
$
|
803
|
|
|
$
|
54
|
|
|
$
|
857
|
|
|
$
|
584
|
|
|
$
|
44
|
|
|
$
|
628
|
|
EVM
|
1,542
|
|
|
331
|
|
|
1,873
|
|
|
1,128
|
|
|
252
|
|
|
1,380
|
|
Corporate, eliminations(1)
|
—
|
|
|
(6)
|
|
|
(6)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
2,345
|
|
|
$
|
379
|
|
|
$
|
2,724
|
|
|
$
|
1,712
|
|
|
$
|
296
|
|
|
$
|
2,008
|
|
(1)Amounts included in Corporate, eliminations consist of purchase accounting adjustments.
In addition, refer to Note 17, 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 solutions offerings. The aggregated transaction price allocated to remaining performance obligations for arrangements with an original term exceeding one year was $1,005 million and $974 million, inclusive of deferred revenue, as of July 3, 2021 and December 31, 2020, respectively. On average, remaining performance obligations as of July 3, 2021 and December 31, 2020 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 July 3, 2021 and December 31, 2020, respectively. These contract assets result from timing differences between the billing and delivery schedules of products, services and software, 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 and six months ended July 3, 2021 and June 27, 2020.
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 $647 million and $581 million as of July 3, 2021 and December 31, 2020, respectively. During the three and six months ended July 3, 2021, the Company recognized $75 million and $185 million in revenue, respectively, which was previously included in the beginning balance of deferred revenue as of December 31, 2020. During the three and six months ended June 27, 2020, the Company recognized $84 million and $157 million in revenue, respectively, which was previously included in the beginning balance of deferred revenue as of December 31, 2019.
Note 4 Inventories
The components of Inventories, net are as follows (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
July 3,
2021
|
|
December 31,
2020
|
Raw materials
|
$
|
108
|
|
|
$
|
117
|
|
Work in process
|
4
|
|
|
4
|
|
Finished goods
|
373
|
|
|
390
|
|
Total Inventories, net
|
$
|
485
|
|
|
$
|
511
|
|
Note 5 Business Acquisitions
Adaptive Vision
On May 17, 2021, the Company acquired Adaptive Vision Sp. z o.o. (“Adaptive Vision”), 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 Company’s cash purchase consideration of $18 million, net of cash on-hand, was primarily allocated to technology-related intangible assets of $13 million and associated deferred tax liabilities, and goodwill of $7 million. The technology-related intangible assets have an estimated useful life of 8 years. The acquisition was accounted for under the acquisition method of accounting for business combinations. While we believe these estimates provide a reasonable basis to record the net assets acquired, the purchase price allocation is considered preliminary and subject to adjustment during the measurement period, which is up to one year from the acquisition date. The goodwill, which will be non-deductible for tax purposes, has been allocated to the EVM segment and principally relates to the planned expansion of the Adaptive Vision technologies into new product offerings and markets.
Reflexis
During the second quarter of 2021, the Company recorded measurement period adjustments related to its September 1, 2020 acquisition of Reflexis Systems, Inc. (“Reflexis”). The primary measurement period adjustments included a $9 million increase to the trade name intangible assets and a $4 million increase to deferred tax liabilities. These adjustments, relating to facts and circumstances existing as of the acquisition date, resulted in a $5 million reduction of goodwill. The fair value estimates still considered preliminary as of July 3, 2021 primarily relate to income tax items.
Additionally, during the second quarter of 2021, the Company received escrow proceeds of $1 million related to resolution of contractual items resulting from the Reflexis acquisition. These proceeds were reflected as a reduction in purchase price with a corresponding decrease of goodwill.
Fetch Robotics
On June 30, 2021, the Company entered into a definitive agreement to acquire Fetch Robotics, Inc. (“Fetch”), a provider of autonomous mobile robots for customers in the manufacturing and warehousing markets. The aggregate purchase consideration, inclusive of the fair value of the Company’s existing minority ownership interest in Fetch, is expected to be approximately $305 million, subject to customary adjustments. Zebra expects to fund the transaction primarily with cash on hand. The transaction is subject to customary closing conditions and is expected to close in the third quarter of 2021. The acquired business will become part of the EVM segment.
Acquisition and integration costs
We incurred approximately $4 million of acquisition-related costs, primarily related to third-party transaction and advisory fees, in the second quarter of 2021 associated with our business acquisitions. These costs are included within Acquisition and integration costs on the Consolidated Statements of Operations.
Note 6 Goodwill
Changes in the net carrying value of goodwill by segment were as follows (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
AIT
|
|
EVM
|
|
Total
|
Goodwill as of December 31, 2020
|
$
|
228
|
|
|
$
|
2,760
|
|
|
$
|
2,988
|
|
Retail solutions offering move to EVM segment, effective January 1, 2021
|
(59)
|
|
|
59
|
|
|
—
|
|
Adaptive Vision acquisition
|
—
|
|
|
7
|
|
|
7
|
|
Reflexis purchase price allocation adjustments
|
—
|
|
|
(5)
|
|
|
(5)
|
|
Reflexis purchase price reduction
|
—
|
|
|
(1)
|
|
|
(1)
|
|
|
|
|
|
|
|
Goodwill as of July 3, 2021
|
$
|
169
|
|
|
$
|
2,820
|
|
|
$
|
2,989
|
|
See Note 5, Business Acquisitions for further details related to the Company’s acquisitions and purchase price allocation adjustments.
Note 7 Investments
The carrying value of the Company’s venture investments was $93 million and $77 million as of July 3, 2021 and December 31, 2020, respectively, which are included in Other long-term assets on the Consolidated Balance Sheets.
During the three and six months ended July 3, 2021, the Company paid $4 million and $17 million for the purchases of new long-term investments, respectively. Comparatively, during the first half of 2020, the Company paid $32 million for the purchases of long term investments, which primarily related to the acquisition of additional shares in an existing investment in the second quarter of 2020. In connection with that additional investment, during the second quarter of 2020 the Company identified an observable price change that resulted in a $7 million gain.
Net gains and losses related to the Company’s investments are included within Other, net on the Consolidated Statements of Operations. During the three months ended July 3, 2021 and June 27, 2020, the Company recognized losses of $1 million and gains of $7 million, respectively. During the six months ended July 3, 2021 and June 27, 2020, the Company recognized net gains of $0 million and $7 million, respectively.
Note 8 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 July 3, 2021, are classified below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Foreign exchange contracts (1)
|
$
|
2
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
Money market investments related to deferred compensation plan
|
35
|
|
|
—
|
|
|
—
|
|
|
35
|
|
Total Assets at fair value
|
$
|
37
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
46
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward interest rate swap contracts (2)
|
$
|
—
|
|
|
$
|
33
|
|
|
$
|
—
|
|
|
$
|
33
|
|
Liabilities related to the deferred compensation plan
|
35
|
|
|
—
|
|
|
—
|
|
|
35
|
|
Total Liabilities at fair value
|
$
|
35
|
|
|
$
|
33
|
|
|
$
|
—
|
|
|
$
|
68
|
|
The Company’s financial assets and liabilities carried at fair value as of December 31, 2020, are classified below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market investments related to deferred compensation plan
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30
|
|
Total Assets at fair value
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30
|
|
Liabilities:
|
|
|
|
|
|
|
|
Foreign exchange contracts (1)
|
$
|
3
|
|
|
$
|
34
|
|
|
$
|
—
|
|
|
$
|
37
|
|
Forward interest rate swap contracts (2)
|
—
|
|
|
46
|
|
|
—
|
|
|
46
|
|
Liabilities related to the deferred compensation plan
|
30
|
|
|
—
|
|
|
—
|
|
|
30
|
|
Total Liabilities at fair value
|
$
|
33
|
|
|
$
|
80
|
|
|
$
|
—
|
|
|
$
|
113
|
|
(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.
Note 9 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 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
|
|
July 3,
2021
|
|
December 31,
2020
|
Derivative instruments designated as hedges:
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
$
|
9
|
|
|
$
|
—
|
|
Foreign exchange contracts
|
Accrued liabilities
|
|
—
|
|
|
(34)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative instruments designated as hedges
|
|
|
$
|
9
|
|
|
$
|
(34)
|
|
|
|
|
|
|
|
Derivative instruments not designated as hedges:
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
$
|
2
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Accrued liabilities
|
|
—
|
|
|
(3)
|
|
Forward interest rate swaps
|
Accrued liabilities
|
|
(17)
|
|
|
(17)
|
|
Forward interest rate swaps
|
Other long-term liabilities
|
|
(16)
|
|
|
(29)
|
|
Total derivative instruments not designated as hedges
|
|
|
$
|
(31)
|
|
|
$
|
(49)
|
|
Total net derivative liability
|
|
|
$
|
(22)
|
|
|
$
|
(83)
|
|
The following table presents the net (losses) gains from changes in fair values of derivatives that are not designated as hedges (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Losses) Gains Recognized in Income
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
Statements of Operations Classification
|
|
July 3,
2021
|
|
June 27,
2020
|
|
July 3,
2021
|
|
June 27,
2020
|
Derivative instruments not designated as hedges:
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Foreign exchange (loss) gain
|
|
$
|
(6)
|
|
|
$
|
(7)
|
|
|
$
|
—
|
|
|
$
|
(8)
|
|
Forward interest rate swaps
|
Interest expense, net
|
|
(3)
|
|
|
(7)
|
|
|
5
|
|
|
(42)
|
|
Total (losses) gains recognized in income
|
|
|
$
|
(9)
|
|
|
$
|
(14)
|
|
|
$
|
5
|
|
|
$
|
(50)
|
|
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 each would have been increased by $1 million as of July 3, 2021 and would have been unchanged as of December 31, 2020.
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 $8 million of losses and $6 million of gains for the three months ended July 3, 2021 and June 27, 2020, respectively. Realized amounts reclassified to Net sales were $20 million of losses and $14 million of gains for the six months ended July 3, 2021 and June 27, 2020, respectively. As of July 3, 2021 and December 31, 2020, the notional amounts of the Company’s foreign exchange cash flow hedges were €587 million and €585 million, respectively. The Company has reviewed its cash flow hedges for effectiveness and determined that they are highly effective.
The Company uses forward contracts, which are not designated as hedging instruments, to manage its exposures related to net assets denominated in foreign currencies. These forward contracts typically mature within one month after execution. Monetary gains and losses on these forward contracts are recorded in income and are generally offset by the transaction gains and losses related to their net asset positions. The notional values and the net fair value of these outstanding contracts are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
July 3,
2021
|
|
December 31,
2020
|
Notional balance of outstanding contracts:
|
|
|
|
British Pound/U.S. Dollar
|
£
|
34
|
|
|
£
|
10
|
|
Euro/U.S. Dollar
|
€
|
120
|
|
|
€
|
123
|
|
|
|
|
|
|
|
|
|
Euro/Czech Koruna
|
€
|
16
|
|
|
€
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japanese Yen/U.S. Dollar
|
¥
|
—
|
|
|
¥
|
354
|
|
Singapore Dollar/U.S. Dollar
|
S$
|
16
|
|
|
S$
|
12
|
|
Mexican Peso/U.S. Dollar
|
Mex$
|
55
|
|
|
Mex$
|
36
|
|
|
|
|
|
|
|
|
|
Polish Zloty/U.S. Dollar
|
zł
|
79
|
|
|
zł
|
—
|
|
Net fair value of assets (liabilities) of outstanding contracts
|
$
|
2
|
|
|
$
|
(3)
|
|
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 10, Long-Term Debt for further details about these borrowings.
The Company manages its exposure to changes in interest rates by utilizing 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.
In December 2017, the Company entered into a long-term forward interest rate swap agreement with a notional amount of $800 million to lock into a fixed LIBOR interest rate base for its debt facilities subject to monthly interest payments. Under the terms of the agreement, $800 million in variable-rate debt will be swapped for a fixed interest rate with net settlement terms starting in December 2018 and ending in December 2022. During the third quarter of 2019, the Company entered into additional long-term forward interest rate swap agreements with a total notional amount of $800 million, containing net settlement terms, which start in December 2022 and end in August 2024. The additional interest rate swap agreements effectively extend the risk management initiative of the Company to coincide with the maturities of Term Loan A and the Revolving Credit Facility. These 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 10 Long-Term Debt
The following table shows the carrying value of the Company’s debt (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
July 3,
2021
|
|
December 31,
2020
|
Term Loan A
|
$
|
888
|
|
|
$
|
917
|
|
2020 Term Loan
|
—
|
|
|
100
|
|
|
|
|
|
Receivables Financing Facilities
|
108
|
|
|
235
|
|
|
|
|
|
Total debt
|
$
|
996
|
|
|
$
|
1,252
|
|
Less: Debt issuance costs
|
(3)
|
|
|
(5)
|
|
Less: Unamortized discounts
|
(2)
|
|
|
(2)
|
|
Less: Current portion of debt
|
(47)
|
|
|
(364)
|
|
Total long-term debt
|
$
|
944
|
|
|
$
|
881
|
|
As of July 3, 2021, the future maturities of debt are as follows (in millions):
|
|
|
|
|
|
|
|
|
2021
|
|
$
|
22
|
|
2022
|
|
56
|
|
2023
|
|
81
|
|
2024
|
|
837
|
|
|
|
|
|
|
|
Total future debt maturities
|
|
$
|
996
|
|
All borrowings as of July 3, 2021 were denominated in U.S. Dollars.
The estimated fair value of the Company’s debt approximated $1.0 billion and $1.3 billion as of July 3, 2021 and December 31, 2020, 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 the debt may 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 March 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 July 3, 2021, the Term Loan A interest rate was 1.35%. Interest payments are made monthly and are subject to variable rates plus an applicable margin.
2020 Term Loan
In September 2020, the Company entered into a new $200 million term loan (“2020 Term Loan”), with the proceeds used to partly fund the acquisition of Reflexis. The Company repaid $100 million of principal in the fourth quarter of 2020 and repaid the remaining $100 million of principal in the first quarter of 2021.
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. During the first half of 2021, the Company amended each of these facilities to extend the respective maturities, but otherwise did not substantially change the terms of the facilities.
As of July 3, 2021, the Company’s Consolidated Balance Sheets included $548 million of receivables that were pledged under the two Receivables Financing Facilities. As of July 3, 2021, $108 million had been borrowed, of which $22 million was classified as current. Borrowings under the Receivables Financing Facilities bear interest at a variable rate plus an applicable margin. As of July 3, 2021, the Receivables Financing Facilities had an average interest rate of 0.97%. Interest is paid on these borrowings on a monthly basis.
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 July 3, 2021, the Company had letters of credit totaling $5 million, which reduced funds available for borrowings under the Revolving Credit Facility from $1 billion to $995 million. No borrowings were outstanding under the Revolving Credit Facility as of July 3, 2021. 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.
Uncommitted Short-Term Credit Facility
The Company also entered into an uncommitted short-term credit facility (“Uncommitted Facility”) in August 2020. The Uncommitted Facility matures on August 26, 2021 and allows for borrowings of up to $20 million. Each borrowing must be repaid within 90 days, or earlier if the facility matures beforehand, and bears interest at a variable rate plus an applicable margin. Along with the Company’s Revolving Credit Facility, the Uncommitted Facility is available for working capital and other general business purposes. As of July 3, 2021, the Company had no outstanding borrowings under the Uncommitted Facility.
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 9, Derivative Instruments for further information.
As of July 3, 2021, the Company was in compliance with all debt covenants.
Note 11 Commitments and Contingencies
Warranties
The following table is a summary of the Company’s accrued warranty obligations, which are included in Accrued liabilities on the Consolidated Balance Sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
July 3,
2021
|
|
June 27,
2020
|
Balance at the beginning of the period
|
$
|
24
|
|
|
$
|
21
|
|
Warranty expense
|
16
|
|
|
15
|
|
Warranties fulfilled
|
(15)
|
|
|
(14)
|
|
Balance at the end of the period
|
$
|
25
|
|
|
$
|
22
|
|
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 their potential effects may change in the future.
In 2020, the Company received approval of its exclusion request of customs duties that had been paid on certain products under Section 301 of the U.S. Trade Act of 1974 from September 1, 2019 through September 1, 2020 and commenced a process to request recovery of previously assessed amounts. Recoveries are recognized when the Company has completed all regulatory filing requirements and determined that receipt of amounts is virtually certain. Recoveries totaling $12 million were recorded in the fourth quarter of 2020, of which $4 million related to our AIT segment and $8 million related to our EVM segment. During the three months ended July 3, 2021, the Company recorded recoveries of $12 million, of which $7 million related to our AIT segment and $5 million related to our EVM segment. During the six months ended July 3, 2021, the Company recorded recoveries of $15 million, of which $8 million related to our AIT segment and $7 million related to our EVM segment. Both the initially incurred costs and related recoveries were included within Cost of sales for Tangible products on the Consolidated Statements of Operations. As of the second quarter, the Company believes that it has recovered substantially all of the import duties that it expects to receive on previously paid amounts. The final amounts and the timings of any additional recoveries remain uncertain and, therefore, the Company has not recorded any amounts related to potential future recoveries in its financial statements as of July 3, 2021.
Note 12 Share-Based Compensation
In May 2018, the Company’s stockholders approved the Zebra Technologies 2018 Long-Term Incentive Plan (“2018 Plan”). The 2018 Plan superseded and replaced the Zebra Technologies Corporation 2015 Long-Term Incentive Plan (“2015 Plan”) on the approval date, except that the 2015 Plan, as well as the Zebra Technologies Corporation 2011 Long-Term Incentive Plan that was previously superseded by the 2015 Plan, remain in effect with respect to outstanding stock appreciation rights that were granted under those plans until such awards have been exercised, forfeited, cancelled, expired or otherwise terminated in accordance with their terms. Awards available under the 2018 Plan include stock-settled awards, including stock-settled restricted stock units, stock-settled performance stock units, restricted stock awards, performance share awards, stock appreciation rights, incentive stock options, and non-qualified stock options. Awards available under the 2018 Plan also include cash-settled awards, including cash-settled stock appreciation rights, cash-settled restricted stock units, and cash-settled performance stock units. No awards remain available for future grants under the 2015 Plan or previous plans.
The Company uses treasury shares as its source for issuing shares under the share-based compensation programs. As of July 3, 2021, the Company had 3,212,007 shares of Class A Common stock available to be issued under the 2018 Plan.
The compensation expense from the Company’s share-based compensation plans and associated income tax benefit, excluding the effects of excess tax benefits or shortfalls, were included in the Consolidated Statements of Operations as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
Compensation costs and related income tax benefit
|
July 3, 2021
|
|
June 27, 2020
|
|
July 3, 2021
|
|
June 27, 2020
|
Cost of sales
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
4
|
|
|
$
|
2
|
|
Selling and marketing
|
7
|
|
|
5
|
|
|
13
|
|
|
6
|
|
Research and development
|
8
|
|
|
4
|
|
|
14
|
|
|
6
|
|
General and administration
|
10
|
|
|
7
|
|
|
17
|
|
|
9
|
|
Total compensation expense
|
$
|
27
|
|
|
$
|
17
|
|
|
$
|
48
|
|
|
$
|
23
|
|
Income tax benefit
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
7
|
|
|
$
|
4
|
|
As of July 3, 2021, total unearned compensation costs related to the Company’s share-based compensation plans was $109 million, which will be recognized over the weighted average remaining service period of approximately 1.6 years.
Stock-Settled Restricted Stock Units (“stock-settled RSUs”) and Stock-Settled Performance Share Units (“stock-settled PSUs”)
The Company began issuing stock-settled RSUs and stock-settled PSUs in the second quarter of 2021. Stock-settled RSUs and stock-settled PSUs each typically vest over a three-year service period, with stock-settled RSUs vesting ratably in three annual installments and stock-settled PSUs vesting at the end of the three-year period. Vesting for each participant is subject to restrictions, such as continuous employment, except in certain cases as set forth in each stock agreement. Upon vesting, stock-settled RSUs and stock-settled PSUs are converted into shares of Class A Common Stock that are released to participants.
Compensation cost for the Company’s stock-settled RSUs and stock-settled PSUs is expensed over each participant’s required service period. Compensation cost is calculated as the fair market value of the Company’s Class A Common Stock on grant
date multiplied by the number of units granted, net of estimated forfeitures. The fair value of PSUs also includes assumptions around achievement of certain Company-wide financial performance goals.
Restricted Stock Awards (“RSAs”) and Performance Share Awards (“PSAs”)
Previously, the Company’s restricted stock grants consisted of time-vested RSAs and PSAs as part of the Company’s annual share-based compensation award issuances during the second quarter of each year. These awards hold voting rights and therefore are considered participating securities. Accordingly, the outstanding RSAs and PSAs are included as part of the Company’s Class A Common Stock outstanding. 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. Upon vesting, RSAs and PSAs are released to holders and are no longer subject to restrictions.
Compensation cost for the Company’s RSAs and PSAs is expensed over each participant’s required service period, which is typically three years. Compensation cost is calculated as the fair market value of the Company’s Class A Common Stock on grant date multiplied by the number of units granted, net of estimated forfeitures. The fair value of PSAs also includes assumptions around achievement of certain Company-wide financial performance goals.
The Company also issues Class A Common Stock to non-employee directors. Each director receives such stock award annually in the second quarter. The number of shares granted to each non-employee director is determined by dividing the value of the annual grant by the price of a share of the Company’s Class A Common Stock. New directors in any fiscal year earn a prorated amount. During the first six months of 2021, there were 2,877 shares granted to non-employee directors compared to 6,314 shares during the first six months of 2020. The shares vest immediately on the grant date.
A summary of the Company’s restricted and performance stock-settled awards for the six months ended July 3, 2021 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
|
|
PSUs
|
|
RSAs
|
|
|
PSAs
|
|
Units
|
|
Weighted-Average Grant Date Fair Value
|
|
Units
|
|
Weighted-Average Grant Date Fair Value
|
|
Shares
|
|
Weighted-Average
Grant Date Fair Value
|
|
|
Shares
|
|
Weighted-Average Grant Date Fair Value
|
Outstanding at beginning of period
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
318,565
|
|
|
$
|
228.08
|
|
|
|
126,022
|
|
|
$
|
199.77
|
|
Granted
|
79,057
|
|
|
482.45
|
|
|
38,393
|
|
|
482.42
|
|
|
5,832
|
|
|
483.17
|
|
|
|
—
|
|
|
—
|
|
Released
|
(101)
|
|
|
482.42
|
|
|
—
|
|
|
—
|
|
|
(147,135)
|
|
|
202.92
|
|
|
|
(44,023)
|
|
|
151.72
|
|
Forfeited
|
(541)
|
|
|
482.42
|
|
|
(296)
|
|
|
482.42
|
|
|
(5,088)
|
|
|
228.99
|
|
|
|
(2,102)
|
|
|
237.03
|
|
Outstanding at end of period
|
78,415
|
|
|
$
|
482.45
|
|
|
38,097
|
|
|
$
|
482.42
|
|
|
172,174
|
|
|
$
|
258.20
|
|
|
|
79,897
|
|
|
$
|
225.65
|
|
Stock Appreciation Rights (“SARs”)
SARs were previously granted primarily as part of the Company’s annual share-based compensation award issuances during the second quarter of each year. Beginning in 2021, the Company no longer included SARs in its annual share-based compensation award issuances; however, may from time-to-time issue additional SARs in the future.
A summary of the Company’s SARs for the six months ended July 3, 2021 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs
|
|
SARs
|
|
Weighted-Average Exercise Price
|
Outstanding at beginning of period
|
|
638,124
|
|
|
$
|
113.98
|
|
Granted
|
|
—
|
|
|
—
|
|
Exercised
|
|
(94,306)
|
|
|
78.73
|
|
Forfeited
|
|
(3,826)
|
|
|
211.28
|
|
|
|
|
|
|
Outstanding at end of period
|
|
539,992
|
|
|
$
|
119.46
|
|
Exercisable at end of period
|
|
446,171
|
|
|
$
|
97.73
|
|
The following table summarizes information related to the SARs outstanding as of July 3, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
Aggregate intrinsic value (in millions)
|
$
|
227
|
|
|
$
|
197
|
|
Weighted-average remaining contractual life
|
4.0
|
|
3.8
|
The intrinsic value of SARs exercised during the six months ended July 3, 2021 and June 27, 2020 was $38 million and $31 million, respectively. The total fair value of SARs vested during the six months ended July 3, 2021 and June 27, 2020 was $5 million and $8 million, respectively.
Reflexis Replacement Options
In connection with the Company’s September 2020 acquisition of Reflexis, the Company assumed the 2016 Stock Incentive Plan of Reflexis Systems, Inc. (the “Reflexis Plan”) and replaced certain unvested options under the Reflexis Plan with Zebra incentive stock options (“Reflexis Replacement Options”). Upon exercise of Reflexis Replacement Options, the Company receives cash proceeds equal to the exercise price and issues whole shares of Class A Common Stock to participants.
A summary of the Reflexis Replacement Options outstanding is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Reflexis Replacement Options
|
Options
|
|
Weighted-Average Exercise Price
|
Outstanding at beginning of period
|
34,424
|
|
|
$
|
58.09
|
|
Granted
|
—
|
|
|
—
|
|
Exercised
|
(4,706)
|
|
|
58.85
|
|
Forfeited
|
(1,529)
|
|
|
63.01
|
|
|
|
|
|
Outstanding at end of period
|
28,189
|
|
|
$
|
57.78
|
|
Exercisable at end of period
|
14,016
|
|
|
$
|
54.88
|
|
The following table summarizes information related to the Reflexis Replacement Options outstanding as of July 3, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
Aggregate intrinsic value (in millions)
|
$
|
14
|
|
|
$
|
7
|
|
Weighted-average remaining contractual life
|
6.9
|
|
6.6
|
The intrinsic value for options exercised during the six months ended July 3, 2021 was $2 million. The total fair value of options vested during the six months ended July 3, 2021 was $3 million.
Cash-settled awards
The Company also has cash-settled share-based compensation awards, including cash-settled stock appreciation rights, cash-settled restricted stock units and cash-settled performance stock units, which are expensed over the vesting period of the related award, which is up to 4 years. Compensation cost is calculated at the fair value on grant date multiplied by the number of share-equivalents granted. The fair value is remeasured at the end of each reporting period based on the Company’s stock price, with remeasurements reflected as an adjustment to compensation expense in the Consolidated Statements of Operations. Cash settlement is based on the fair value of share equivalents at the time of vesting, which was $9 million and $5 million for the six months ended July 3, 2021 and June 27, 2020, respectively. Share-equivalents issued under these programs totaled 9,262 and 16,194 during the six months ended July 3, 2021 and June 27, 2020, respectively.
Employee Stock Purchase Plan
In May 2020, the Company’s stockholders approved the Zebra Technologies Corporation 2020 Employee Stock Purchase Plan (“2020 ESPP”), which supersedes the 2011 Employee Stock Purchase Plan (“2011 ESPP”) and became effective on July 1, 2020. Like the 2011 ESPP, the 2020 ESPP permits eligible employees to purchase Company Class A 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 the 2020 ESPP is 1,500,000 shares. As of July 3, 2021, 1,461,757 shares remained available for future purchase.
Note 13 Income Taxes
The Company’s effective tax rate for the three and six months ended July 3, 2021 was 8.0% and 13.0%, respectively, compared to 2.9% and 8.3%, respectively, for the comparable periods ended June 27, 2020. In both the current and prior year periods, the variance from the 21% federal statutory rate was attributable to the benefits of share-based compensation deductions, lower tax rates on foreign earnings, and U.S. tax credits. The three and six month periods ended July 3, 2021 benefited from the remeasurement of deferred tax assets associated with the enactment of a corporate tax rate increase in the U.K. during the second quarter of 2021.
The Company is continually monitoring 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. During the second quarter of 2021, the U.K. government enacted a change in law that increases the corporate tax rate from 19% to 25%, with such rate change becoming effective in April 2023. Upon enactment, we remeasured our deferred tax assets to reflect the 25% statutory rate to the extent such tax benefits are expected to be realized in the future at the amended statutory rate. In addition, 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 the Global Intangible Low-Taxed Income provisions of the Tax Cuts and Jobs Act (the “Act”), while any remaining foreign earnings are eligible for a dividends received deduction under the Act. As a result, future repatriation of earnings will not be subject to 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 and six months ended July 3, 2021.
Uncertain Tax Positions
The Company is currently undergoing U.S. federal income tax audits for tax years 2017 and 2018. Additionally, fiscal years 2004 through 2018 remain open to examination by multiple foreign and U.S. state taxing jurisdictions. As of July 3, 2021, 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.
Note 14 Earnings Per Share
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 stock options were exercised for common shares during the period.
Earnings per share (in millions, except share data):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
July 3,
2021
|
|
June 27,
2020
|
|
July 3,
2021
|
|
June 27,
2020
|
Basic:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
219
|
|
|
$
|
100
|
|
|
$
|
447
|
|
|
$
|
189
|
|
Weighted-average shares outstanding
|
|
53,449,143
|
|
|
53,188,486
|
|
|
53,460,495
|
|
|
53,533,116
|
|
Basic earnings per share
|
|
$
|
4.10
|
|
|
$
|
1.87
|
|
|
$
|
8.36
|
|
|
$
|
3.53
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
219
|
|
|
$
|
100
|
|
|
$
|
447
|
|
|
$
|
189
|
|
Weighted-average shares outstanding
|
|
53,449,143
|
|
|
53,188,486
|
|
|
53,460,495
|
|
|
53,533,116
|
|
Dilutive shares
|
|
459,152
|
|
|
487,244
|
|
|
469,608
|
|
|
522,208
|
|
Diluted weighted-average shares outstanding
|
|
53,908,295
|
|
|
53,675,730
|
|
|
53,930,103
|
|
|
54,055,324
|
|
Diluted earnings per share
|
|
$
|
4.07
|
|
|
$
|
1.85
|
|
|
$
|
8.29
|
|
|
$
|
3.49
|
|
Anti-dilutive options to purchase common shares are excluded from diluted earnings per share calculations. No shares were anti-dilutive for the three and six months ended July 3, 2021. 108,950 and 89,091 shares were anti-dilutive for the three and six months ended June 27, 2020, respectively.
Note 15 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 9, 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 six months ended July 3, 2021 and June 27, 2020 are as follows (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on sales hedging
|
|
|
|
Foreign currency translation adjustments
|
|
Total
|
Balance at December 31, 2019
|
|
$
|
2
|
|
|
|
|
$
|
(46)
|
|
|
$
|
(44)
|
|
Other comprehensive income (loss) before reclassifications
|
|
7
|
|
|
|
|
(8)
|
|
|
(1)
|
|
Amounts reclassified from AOCI(1)
|
|
(14)
|
|
|
|
|
—
|
|
|
(14)
|
|
Tax effect
|
|
1
|
|
|
|
|
—
|
|
|
1
|
|
Other comprehensive loss, net of tax
|
|
(6)
|
|
|
|
|
(8)
|
|
|
(14)
|
|
Balance at June 27, 2020
|
|
$
|
(4)
|
|
|
|
|
$
|
(54)
|
|
|
$
|
(58)
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020
|
|
$
|
(28)
|
|
|
|
|
$
|
(41)
|
|
|
$
|
(69)
|
|
Other comprehensive income (loss) before reclassifications
|
|
23
|
|
|
|
|
(3)
|
|
|
20
|
|
Amounts reclassified from AOCI(1)
|
|
20
|
|
|
|
|
—
|
|
|
20
|
|
Tax effect
|
|
(9)
|
|
|
|
|
—
|
|
|
(9)
|
|
Other comprehensive income (loss), net of tax
|
|
34
|
|
|
|
|
(3)
|
|
|
31
|
|
Balance at July 3, 2021
|
|
$
|
6
|
|
|
|
|
$
|
(44)
|
|
|
$
|
(38)
|
|
(1) See Note 9, Derivative Instruments regarding timing of reclassifications to operating results.
Note 16 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.
In May 2021, one of the Company’s Receivables Factoring arrangements that was no longer actively utilized expired. As of July 3, 2021, the Company has two remaining active Receivables Factoring arrangements. One arrangement allows for the factoring of up to $50 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. 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 $21 million and $24 million as of July 3, 2021 and December 31, 2020, respectively, and is classified within Prepaid expenses and other current assets on the Consolidated Balance Sheets.
During the six months ended July 3, 2021 and June 27, 2020, the Company received cash proceeds of $814 million and $508 million, respectively, from the sales of accounts receivables under its factoring arrangements. As of July 3, 2021 and December 31, 2020, there were a total of $45 million and $70 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 $140 million and $142 million of obligations that were not yet remitted to banks as of July 3, 2021 and December 31, 2020, 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.
Note 17 Segment Information & Geographic Data
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, exit and restructuring costs, and product sourcing diversification costs. Segment assets are not reviewed by the Company’s CODM and therefore are not disclosed below.
Effective January 1, 2021, the retail solutions offering moved from our AIT segment into our EVM segment contemporaneous with a change in our organizational structure and management of the business. Prior period results have been revised to conform to the current segment presentation. This change does not have an impact on the Consolidated Financial Statements.
Financial information by segment is presented as follows (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
July 3,
2021
|
|
June 27,
2020
|
|
July 3,
2021
|
|
June 27,
2020
|
Net sales:
|
|
|
|
|
|
|
|
AIT
|
$
|
421
|
|
|
$
|
273
|
|
|
$
|
857
|
|
|
$
|
628
|
|
EVM
|
959
|
|
|
683
|
|
|
1,873
|
|
|
1,380
|
|
Total segment Net sales
|
1,380
|
|
|
956
|
|
|
2,730
|
|
|
2,008
|
|
Corporate, eliminations(1)
|
(3)
|
|
|
—
|
|
|
(6)
|
|
|
—
|
|
Total Net sales
|
$
|
1,377
|
|
|
$
|
956
|
|
|
$
|
2,724
|
|
|
$
|
2,008
|
|
Operating income:
|
|
|
|
|
|
|
|
AIT(2)
|
$
|
97
|
|
|
$
|
52
|
|
|
$
|
206
|
|
|
$
|
134
|
|
EVM(2)
|
183
|
|
|
89
|
|
|
376
|
|
|
184
|
|
Total segment operating income
|
280
|
|
|
141
|
|
|
582
|
|
|
318
|
|
Corporate, eliminations(1)
|
(33)
|
|
|
(22)
|
|
|
(63)
|
|
|
(48)
|
|
Total Operating income
|
$
|
247
|
|
|
$
|
119
|
|
|
$
|
519
|
|
|
$
|
270
|
|
(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, exit and restructuring costs, and product sourcing diversification 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 table. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
July 3,
2021
|
|
June 27,
2020
|
|
July 3,
2021
|
|
June 27,
2020
|
North America
|
$
|
707
|
|
|
$
|
502
|
|
|
$
|
1,380
|
|
|
$
|
1,021
|
|
EMEA
|
464
|
|
|
306
|
|
|
954
|
|
|
694
|
|
Asia-Pacific
|
137
|
|
|
110
|
|
|
257
|
|
|
207
|
|
Latin America
|
69
|
|
|
38
|
|
|
133
|
|
|
86
|
|
Total Net sales
|
$
|
1,377
|
|
|
$
|
956
|
|
|
$
|
2,724
|
|
|
$
|
2,008
|
|