NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Description of Business
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 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 and e-commerce, 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 channel partners.
Note 2 Significant Accounting Policies
Principles of Consolidation
These accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States and include the accounts of Zebra and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Fiscal Calendar
The Company’s fiscal year is a 52-week period ending on December 31. Interim fiscal quarters end on a Saturday and generally include 13 weeks of operating activity. During the 2019 fiscal year, the Company’s quarter end dates were March 30, June 29, September 28 and December 31.
Use of Estimates
These consolidated financial statements were prepared using estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Examples of accounting estimates include: cash flow projections and other valuation assumptions included in business acquisition purchase price allocations as well as annual goodwill impairment testing; the measurement of variable consideration and allocation of transaction price to performance obligations in revenue transactions; inventory and product warranty reserves; useful lives of our tangible and intangible assets; and the recognition and measurement of income tax assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash consists primarily of deposits with banks. In addition, the Company considers highly liquid short-term investments with original maturities of less than three months to be cash equivalents. These highly liquid short-term investments are readily convertible to known amounts of cash and are so near their maturity that they present insignificant risk of a change in value because of changes in interest rates.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist primarily of amounts due to us from our customers in the normal course of business. Collateral on trade accounts receivable is generally not required. The Company maintains an allowance for doubtful accounts for estimated uncollectible accounts receivable. The allowance is based on historical experience and our assessment of delinquent accounts. Accounts are written off against the allowance account when they are determined to be no longer collectible.
Inventories
Inventories are stated at the lower of a moving-average cost (which approximates cost on a first-in, first-out basis) and net realizable value. Manufactured inventory cost includes materials, labor, and manufacturing overhead. Purchased inventory cost also includes internal purchasing overhead costs. Raw material inventories largely consist of supplies used in repair operations.
Provisions are made to reduce excess and obsolete inventories to their estimated net realizable values. Inventory provisions are based on forecasted demand, experience with specific customers, the age and nature of the inventory, and the ability to redistribute inventory to other programs or to rework into other consumable inventory.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation is computed primarily using the straight-line method over the estimated useful lives of the various classes of property, plant and equipment, which are 30 years for buildings and range from 3 to 10 years for all other asset categories. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or 10 years.
Leases
The Company recognizes Right-of-Use (“ROU”) assets and lease liabilities for its lease commitments with terms greater than one year. Contractual options to extend or terminate lease agreements are reflected in the lease term when they are reasonably certain to be exercised.
The initial measurements of new ROU assets and lease liabilities are based on the present value of future lease payments over the lease term as of the commencement date. In determining future lease payments, the Company has elected not to separate lease and non-lease components. As the Company’s lease arrangements do not provide an implicit interest rate, we apply the Company’s incremental borrowing rate based on the information available at the commencement date in determining the present value of future lease payments. Relevant information used in determining the Company’s incremental borrowing rate includes the duration of the lease, transaction currency of the lease, and the Company’s credit risk relative to risk-free market rates.
The Company’s ROU assets also include any initial direct costs incurred and exclude lease incentives. The Company’s lease agreements do not contain any material residual value guarantees or restrictive covenants.
All leases of the Company are classified as operating leases, with lease expense being recognized on a straight-line basis.
Income Taxes
The Company accounts for income taxes under the liability method in accordance with Accounting Standards Codification (“ASC”) 740 Topic, Income Taxes. Accordingly, deferred income taxes are provided for the future tax consequences attributable to differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. Deferred tax assets and liabilities are measured using tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized. The Company recognizes the benefit of tax positions when it is more likely than not to be sustained on its technical merits. The Company recognizes interest and penalties related to income tax matters as part of income tax expense. The Company has elected consolidated tax filings in certain of its jurisdictions which may allow the group to offset one member’s income with losses of other members in the current period and on a carryover basis. The income tax effects of non-inventory intra-entity asset transfers are recognized in the period in which the transfer occurs. The Company classifies its balance sheet accounts by applying jurisdictional netting principles for locations where consolidated tax filing elections are in place.
The Tax Cut and Jobs Act (“the Act”, or “U.S. Tax Reform”), enacted on December 22, 2017, contains the Global Intangible Low-Taxed Income (“GILTI”), Base Erosion Anti-Avoidance Tax (“BEAT”), and Deduction for Foreign-Derived Intangible Income (“FDII”) provisions, which relate to the taxation of certain foreign income and are effective for tax years beginning on or after January 1, 2018. The Company recognizes its GILTI, BEAT, and FDII inclusions, when applicable, as a charge to tax expense in the year included in its U.S. tax return.
The effects of changes in tax rates and laws on deferred tax balances are recorded in the period of enactment as a component of income tax expense within continuing operations, even if they relate to items recorded within accumulated other comprehensive income (loss) (“AOCI”). The Company elected to not reclassify the tax effects of these changes associated with the Act from AOCI to retained earnings. Such tax effects are released into earnings when the underlying portfolio of assets or liabilities giving rise to the AOCI position are fully derecognized.
Goodwill
Goodwill is not amortized, rather it is tested annually for impairment, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Our annual impairment testing consists of comparing the estimated fair value of each reporting unit to its carrying value. If the carrying value of a reporting unit exceeds its estimated fair value, goodwill would be considered to be impaired and reduced to its implied fair value. We estimate the fair value of reporting units with valuation techniques, including both the income and market approaches. The income approach requires management to estimate a number of factors for each reporting unit, including projected future operating results, economic projections, anticipated future cash flows and discount rates. The market approach estimates fair value using comparable marketplace fair value data from within a comparable industry group.
Fair value determinations require judgment and are sensitive to changes in underlying assumptions, estimates, as well as market factors. Estimating the fair value of reporting units requires that we make a number of assumptions and estimates regarding our long-term growth and cash flow expectations as well as overall industry and economic conditions. These estimates and assumptions include, but are not limited to, projections of revenue and income growth rates, capital investments, competitive and customer trends, appropriate peer group selection, market-based discount rates and other market factors.
We performed our annual goodwill impairment testing in the fourth quarter of 2019 using a quantitative approach which did not result in any impairments. See Note 6, Goodwill and Other Intangibles for additional information. We believe our fair value estimates are reasonable. If actual financial results differ materially from current estimates or there are significant negative changes in market factors beyond our control, there could be an impairment of goodwill in the future.
Other Intangible Assets
Other intangible assets consist primarily of technology and patent rights, customer and other relationships, and trade names. These assets are recorded at cost and amortized on a straight-line basis over the asset’s useful life which typically range from 3 years to 15 years.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
The Company accounts for long-lived assets in accordance with the provisions of ASC Topic 360, Property, Plant and Equipment, which requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the sum of the undiscounted cash flows expected to result from the use and the eventual disposition of the asset. If such assets are impaired, the impairment to be recognized is the excess of the carrying amount over the fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Investments in Securities
The Company’s investments primarily include equity securities that are accounted for at cost, adjusted for impairment losses or changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. These investments are primarily in venture capital backed technology companies where the Company's ownership interest is less than 20% of each investee and the Company does not have the ability to exercise significant influence. See Note 8, Investments for additional information.
Revenue Recognition
Revenues are primarily comprised of sales of hardware, services, and supplies. The Company also generates revenues from its solutions and software offerings, primarily licenses and maintenance. Our service offerings are principally product repair and maintenance service contracts, which typically occur over time, and professional services such as installation, integration and provisioning, which typically occur in the early stages of a project. The average life of repair and maintenance service contracts is approximately three years. Professional service arrangements range in duration from a day to several weeks or months. We recognize revenues when we transfer control of promised goods or services to our customers in an amount that reflects the consideration to which we expect to receive, which includes estimates of variable consideration, in exchange for those goods or services. We are typically the principal in all elements of our transactions and record Net sales and Cost of sales on a gross basis.
The Company elects to exclude from the transaction price sales and other taxes assessed by a governmental authority and collected by the Company from a customer. The Company also considers shipping and handling activities as part of its fulfillment costs and not as a separate performance obligation. See Note 3, Revenues for additional information.
Research and Development Costs
Research and development (“R&D”) costs are expensed as incurred, and include:
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•
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Salaries, benefits, and other R&D personnel related costs;
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•
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Consulting and other outside services used in the R&D process;
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•
|
Engineering related information systems costs; and
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•
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Allocation of building and related costs.
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Advertising
Advertising is expensed as incurred. Advertising costs totaled $19 million, $18 million, and $18 million for the years ended 2019, 2018 and 2017, respectively.
Warranties
In general, the Company provides warranty coverage of one year on mobile computers, printers and batteries. Advanced data capture products are warrantied from one to five years, depending on the product. Thermal printheads are warrantied for six months and battery-based products, such as location tags, are covered by a 90-day warranty. A provision for warranty expense is adjusted quarterly based on historical and expected warranty experience.
Contingencies
The Company establishes a liability for loss contingencies 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.
Fair Value of Financial Instruments
Fair value is 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. Our financial assets and liabilities that require recognition and fair value measurement under the accounting guidance generally include our employee deferred compensation plan investments, foreign currency forwards, and interest rate swaps. In accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”), we recognize derivative instruments and hedging activities as either assets or liabilities on the Consolidated Balance Sheets and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. See Note 11, Derivative Instruments for additional information on the Company’s derivatives and hedging activities.
The Company utilizes foreign currency forwards to hedge certain foreign currency exposures and interest rate swaps to hedge a portion of the variability in future cash flows on debt. We use broker quotations or market transactions, in either the listed or over-the-counter markets, to value our foreign currency exchange contracts and relevant observable market inputs at quoted intervals, such as forward yield curves and the Company’s own credit risk to value our interest rate swaps.
The Company’s securities held for its deferred compensation plans are measured at fair value using quoted prices in active markets for identical assets. If active markets for identical assets are not available to determine fair value, then we use quoted prices for similar assets or inputs that are observable either directly or indirectly.
The carrying amounts of cash and cash equivalents, receivables and accounts payable approximate fair value due to the short-term nature of those financial instruments. See Note 10, Fair Value Measurements for information related to financial assets and liabilities carried at fair value.
Share-Based Compensation
The Company has share-based compensation plans and an employee stock purchase plan under which shares of Class A Common Stock are available for future grants and sales. The Company recognizes compensation costs over the vesting period of up to 4 years, net of estimated forfeitures. Compensation costs associated with awards with graded vesting terms are recognized on a straight-line basis. See Note 15, Share-Based Compensation for additional information.
Foreign Currency Translation
The balance sheet accounts of the Company’s subsidiaries that have not designated the U.S. Dollar as its functional currency are translated into U.S. Dollars using the period-end exchange rate, and statement of earnings items are translated using the average exchange rate for the period. The resulting translation gains or losses are recorded in Stockholders’ equity as a cumulative translation adjustment, which is a component of AOCI within the Consolidated Balance Sheets.
Acquisitions
We account for acquired businesses using the acquisition method of accounting. This method requires that the purchase price be allocated to the identifiable assets acquired and liabilities assumed at their estimated fair values. The excess of the purchase price over the identifiable assets acquired and liabilities assumed is recorded as goodwill.
The estimates used to determine the fair values of long-lived assets, such as intangible assets, can be complex and require judgment. We use information available to us to make fair value determinations and engage independent valuation specialists, when necessary, to assist in the fair value determinations of significant acquired long-lived assets. While we use our best estimates and assumptions as a part of the purchase price allocation process, our estimates are inherently uncertain and subject to refinement during the measurement period, which is up to one year after the acquisition date. Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from revenues and operating activities, customer attrition rates, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but due to the inherent uncertainty during the measurement period, we may record adjustments to the fair value of assets acquired and liabilities assumed with a corresponding adjustment to goodwill.
Recently Adopted Accounting Pronouncements
On January 1, 2019, the Company adopted ASC Topic 842, Leases (“ASC 842”), which increases the transparency and comparability of organizations by recognizing ROU assets and lease liabilities on the Consolidated Balance Sheets and disclosing key quantitative and qualitative information about leasing arrangements. The principal difference from previous guidance is that the ROU assets and lease liabilities arising from operating leases were not previously recognized on the Consolidated Balance Sheet. Results for reporting periods beginning after January 1, 2019 are reported under ASC 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC Topic 840, Leases (“ASC 840”). In transition, we elected a number of practical expedients, including the election to not reassess existing or expired contracts to determine if such contracts contain a lease or if the lease classification would differ, as well as the election to not separate lease and non-lease components for arrangements where the Company is a lessee.
The impact of the adoption of ASC 842 to the Company’s Consolidated Balance Sheets as of January 1, 2019 was as follows (in millions):
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As Reported December 31, 2018
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Adjustment
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As Adjusted January 1, 2019
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Assets:
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Prepaid expenses and other current assets(1)
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$
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54
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|
$
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(1
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)
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|
$
|
53
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|
Right-of-use assets
|
—
|
|
|
110
|
|
|
110
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|
|
|
|
|
|
|
Liabilities:
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|
|
|
|
|
Accrued liabilities(2)
|
322
|
|
|
28
|
|
|
350
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|
Long-term lease liabilities
|
—
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|
|
103
|
|
|
103
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|
Other long-term liabilities(1)
|
89
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|
(22
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)
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67
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|
(1) Reflects an adjustment related to prepaid and accrued rent balances, which are included in the measurement of ROU assets.
(2) Reflects the current portion of the lease liabilities.
As a result of the transition, there was no impact to the Company’s Consolidated Statements of Operations or Cash Flows for the year ended December 31, 2019, compared to what would have been reported in accordance with ASC 840.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU clarifies existing guidance related to implementation costs incurred in cloud computing arrangements, including the recognition, subsequent measurement, and financial statement presentation of such costs. The standard was early adopted prospectively by the Company during the second quarter of 2019 and did not have a material impact to the Company’s consolidated financial statements or disclosures.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments. The ASU 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. With respect to the Company’s financial assets, including trade receivables and contract assets, a cumulative effect transition approach will be applied. The standard will be effective for the Company in the first quarter of 2020. Management has assessed the impact of the ASU and determined, based on current operations, that it will not have a material impact to the Company’s consolidated financial statements or disclosures.
Note 3 Revenues
On January 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), applying the modified retrospective method to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC Topic 605, Revenue Recognition (“ASC 605”). The adoption of ASC 606 did not have a material effect on the Company’s consolidated financial statements or results of operations.
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. To determine total expected consideration, the Company estimates elements of variable consideration, which primarily include product rights of return, rebates, price
protection and other incentives. These estimates are developed using the expected value or the most likely amount method and are reviewed and updated, as necessary, at each reporting period. Revenues, inclusive of variable consideration, are recognized to the extent it is probable that a significant reversal in cumulative revenues recognized will not occur in future periods.
We enter into contract arrangements that may include various combinations of tangible products, services, solution and software offerings, which are generally capable of being distinct and accounted for as separate performance obligations. We evaluate whether two or more contracts should be combined and accounted for as a single contract and whether the combined or single contract has more than one performance obligation. This evaluation requires judgment, and the decision to combine a group of contracts or separate the combined or single contract into multiple distinct performance obligations may impact the amount of revenue recorded in a reporting period. We deem performance obligations to be distinct if the customer can benefit from the product or service on its own or together with readily available resources (“capable of being distinct”) and if the transfer of products or services is separately identifiable from other promises in the contract (“distinct within the context of the contract”).
For contract arrangements that include multiple performance obligations, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices for each performance obligation. In general, standalone selling prices are observable for tangible products and software licenses, while standalone selling prices for professional services, repair and maintenance services, and solutions are developed with an expected cost-plus margin or residual approach. When the residual approach cannot be applied, regional pricing, marketing strategies and business practices are evaluated to derive the estimated standalone selling price using a cost-plus margin methodology.
The Company recognizes revenue for each performance obligation upon transfer of control of the promised goods or services. Control is deemed to have been transferred when the customer has the ability to direct the use of and has obtained substantially all of the remaining benefits from the goods and services. The determination of whether control transfers at a point in time or over time requires judgment and includes consideration of the following : 1) the customer simultaneously receives and consumes the benefits provided as the Company performs its promises; 2) the Company’s performance creates or enhances an asset that is under control of the customer; 3) the Company’s performance does not create an asset with an alternative use to the Company; and 4) the Company has an enforceable right to payment for its performance completed to date. Substantially all revenue for tangible products and perpetual or term software licenses is recognized at a point in time, which is generally upon shipment, transfer of control and risks of ownership to the customer, and the Company having contractual right to payment. Revenue for services and Company-hosted software license and maintenance agreements, as well as solutions, is predominantly recognized over time.
Assuming all other criteria for revenue recognition have been met, for products and services sold on a standalone basis, revenue is generally recognized upon shipment and by using an output method or time-based method, respectively. In cases where a bundle of products and services are delivered to the customer, judgment is required to select the method of progress which best reflects the transfer of control.
The Company’s remaining obligations that are greater than one year in duration relate primarily to repair and support services. The aggregated transaction price allocated to remaining performance obligations related to these types of service arrangements, inclusive of deferred revenue, was $724 million and $489 million as of December 31, 2019 and 2018, respectively. On average, remaining performance obligations as of December 31, 2019 and 2018 are expected to be recognized over a period of approximately two years.
Disaggregation of Revenue
The following table presents our Net sales disaggregated by product category for each of our segments, Asset Intelligence & Tracking (“AIT”) and Enterprise Visibility & Mobility (“EVM”), for the years ended December 31, 2019 and 2018 (in millions):
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Year Ended December 31, 2019
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Year Ended December 31, 2018
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Segment
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Tangible Products
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Services and Software
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Total
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|
Tangible Products
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|
Services and Software
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Total
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AIT
|
$
|
1,347
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|
|
$
|
132
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|
|
$
|
1,479
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|
|
$
|
1,298
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|
|
$
|
125
|
|
|
$
|
1,423
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|
EVM
|
2,560
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|
|
446
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|
|
3,006
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|
|
2,387
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|
|
408
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|
|
2,795
|
|
Total
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$
|
3,907
|
|
|
$
|
578
|
|
|
$
|
4,485
|
|
|
$
|
3,685
|
|
|
$
|
533
|
|
|
$
|
4,218
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|
In addition, refer to Note 20, Segment Information & Geographic Data for Net sales to customers by geographic region.
Contract Balances
Progress on satisfying performance obligations under contracts with customers is reflected on the Consolidated Balance Sheets in Accounts receivable, net for billed revenues. 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 12-months, and Other long-term assets for revenues expected to be billed thereafter. The total closing contract asset balances were $8 million and $5 million as of December 31, 2019 and 2018, respectively. The opening contract asset balance upon the Company’s transition to ASC 606 as of January 1, 2018 was $7 million. 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 years ended December 31, 2019 and 2018.
Deferred revenue on the Consolidated Balance Sheets consist of payments and billings in advance of our performance. The combined short-term and long-term deferred revenue balances were $459 million and $382 million as of December 31, 2019 and 2018, respectively. The Company recognized $219 million and $181 million in revenue that was previously included in the beginning balance of deferred revenue during the years ended December 31, 2019 and 2018, respectively.
Our payment terms vary by the type and location of our customer and the products or services offered. The time between invoicing and when payment is due is not significant. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined that our contracts do not include a significant financing component.
Costs to Obtain a Contract
Our incremental direct costs of obtaining a contract, which consist of sales commissions and incremental fringe benefits, are deferred and amortized over the weighted-average contract term. The incremental costs to obtain a contract, which were previously expensed as incurred under ASC 605, as well as the determination of the amortization period, are derived at a portfolio level and amortized on a straight-line basis. The ending balance of deferred commission costs, which are recorded in Other long-term assets on the Consolidated Balance Sheets, was $21 million and $15 million as of December 31, 2019 and 2018, respectively. The opening deferred commission balance upon the Company’s transition to ASC 606 as of January 1, 2018 was $12 million. Amortization of deferred commission costs, which are recorded in Selling and Marketing expense on the Consolidated Statements of Operations, was $11 million and $10 million during the years ended December 31, 2019 and 2018, respectively. Incremental costs of obtaining a contract are expensed as incurred if the amortization period would otherwise be one year or less.
Note 4 Inventories
The components of Inventories, net are as follows (in millions):
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|
|
|
|
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December 31,
2019
|
|
December 31,
2018
|
Raw materials
|
$
|
128
|
|
|
$
|
125
|
|
Work in process
|
4
|
|
|
3
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|
Finished goods
|
342
|
|
|
392
|
|
Total
|
$
|
474
|
|
|
$
|
520
|
|
Note 5 Business Acquisitions
Cortexica
On November 5, 2019, the Company acquired 100% of the equity interests in Cortexica Vision Systems Limited (“Cortexica”), a provider of computer vision-based artificial intelligence solutions primarily for the retail industry. The purchase consideration was $7 million, which was primarily allocated to technology-related intangible assets of $4 million and goodwill of $4 million based on the estimated fair values of identifiable assets acquired and liabilities assumed. 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. Additionally, we incurred approximately $2 million of acquisition-related costs in 2019, which are included within Acquisition and integration costs on the Consolidated Statements of Operations. 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 Cortexica technologies into new markets, industries, and product offerings.
Profitect
On May 31, 2019, the Company acquired 100% of the equity interests of Profitect, Inc. (“Profitect”), a provider of prescriptive analytics primarily for the retail industry. In acquiring Profitect, the Company seeks to enhance its existing software solutions within the retail industry, with possible future applications in other industries, markets and product offerings.
The Profitect acquisition was accounted for under the acquisition method of accounting for business combinations. The total purchase consideration was $79 million, which consisted of $75 million in cash paid, net of cash on-hand, and the fair value of the Company’s existing ownership interest in Profitect of $4 million, as remeasured upon acquisition. This remeasurement resulted in a $4 million gain reflected within Other, net on the Consolidated Statements of Operations. Additionally, we incurred $13 million of acquisition-related costs in 2019, which primarily consisted of payments to settle Profitect employee stock option awards, as well as third party transaction and advisory fees. Those acquisition-related costs are included within Acquisition and integration costs on the Consolidated Statements of Operations.
The Company utilized estimated fair values as of May 31, 2019 to allocate the total purchase consideration to the net tangible and intangible assets acquired and liabilities assumed. The fair value of the net assets acquired was based on a number of estimates and assumptions as well as customary valuation procedures and techniques, principally the excess earnings methodology. 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 primary fair value estimates considered preliminary include identifiable intangible assets and income tax-related items.
The preliminary purchase price allocation to assets acquired and liabilities assumed was as follows (in millions):
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|
|
|
|
Identifiable intangible assets
|
$
|
35
|
|
Other assets acquired
|
4
|
|
Deferred tax liabilities
|
(4
|
)
|
Other liabilities assumed
|
(10
|
)
|
Net Assets Acquired
|
$
|
25
|
|
Goodwill on acquisition
|
54
|
|
Total purchase consideration
|
$
|
79
|
|
The $54 million of 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 Profitect software offerings and technologies into current and new markets, industries and product offerings.
The preliminary purchase price allocation to identifiable intangible assets acquired was:
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|
|
|
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Fair Value (in millions)
|
|
Useful Life
(in years)
|
Technology and patents
|
$
|
33
|
|
|
8
|
Customer and other relationships
|
2
|
|
|
1
|
Total identifiable intangible assets
|
$
|
35
|
|
|
|
Temptime
On February 21, 2019, the Company acquired 100% of the equity interests of Temptime Corporation (“Temptime”), a developer and manufacturer of temperature-monitoring labels and devices. The Company intends to expand Temptime’s product offerings within the healthcare industry, with possible future applications in other industries involving temperature-sensitive products.
The Temptime acquisition was accounted for under the acquisition method of accounting for business combinations. The Company paid $180 million in cash, net of cash on-hand, to acquire Temptime. Additionally, we incurred $3 million of acquisition-related costs in 2019, which primarily included third-party transaction and advisory fees that are included within Acquisition and integration costs on the Consolidated Statements of Operations.
The Company utilized estimated fair values as of February 21, 2019 to allocate the total consideration paid to the net tangible and intangible assets acquired and liabilities assumed. The fair value of the net assets acquired was based on a number of estimates and assumptions as well as customary valuation procedures and techniques, including the relief from royalty and excess earnings methodologies. 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 primary fair value estimates considered preliminary are income tax-related items.
The preliminary purchase price allocation to assets acquired and liabilities assumed was as follows (in millions):
|
|
|
|
|
Inventory
|
$
|
14
|
|
Property, plant and equipment
|
10
|
|
Identifiable intangible assets
|
106
|
|
Other assets acquired
|
13
|
|
Deferred tax liabilities
|
(24
|
)
|
Other liabilities assumed
|
(12
|
)
|
Net Assets Acquired
|
$
|
107
|
|
Goodwill on acquisition
|
73
|
|
Total purchase consideration
|
$
|
180
|
|
The $73 million of goodwill, which will be non-deductible for tax purposes, has been allocated to the AIT segment and principally relates to the planned expansion of its product offerings and technologies into current and new markets and industries.
The preliminary purchase price allocation to identifiable intangible assets acquired was:
|
|
|
|
|
|
|
|
Fair Value
(in millions)
|
|
Useful Life
(in years)
|
Customer and other relationships
|
$
|
79
|
|
|
8
|
Technology and patents
|
25
|
|
|
8
|
Trade Names
|
2
|
|
|
3
|
Total identifiable intangible assets
|
$
|
106
|
|
|
|
Xplore
On August 14, 2018, the Company acquired Xplore Technologies Corporation (“Xplore”). The Xplore business designs, integrates, markets and sells rugged tablets that are primarily used by industrial, government, and field service organizations. The acquisition of Xplore is intended to expand the Company’s portfolio of mobile computing devices to serve a wider range of customers.
The Xplore acquisition was accounted for under the acquisition method of accounting for business combinations. The Company paid $72 million in cash, net of cash on-hand, to acquire Xplore.
The final purchase price allocation to assets acquired and liabilities assumed was as follows (in millions):
|
|
|
|
|
Accounts receivable
|
$
|
10
|
|
Inventory
|
22
|
|
Identifiable intangible assets
|
32
|
|
Other assets acquired
|
10
|
|
Debt
|
(9
|
)
|
Accounts payable
|
(8
|
)
|
Deferred revenues
|
(7
|
)
|
Other liabilities assumed
|
(7
|
)
|
Net Assets Acquired
|
$
|
43
|
|
Goodwill on acquisition
|
29
|
|
Total consideration
|
$
|
72
|
|
At closing, in connection with the acquisition, the Company also made a $9 million payment of Xplore debt and $6 million in payments of other Xplore transaction-related obligations. Additionally, we incurred $8 million of acquisition-related costs in 2018, which primarily included third-party transaction and advisory fees, and we incurred $2 million of system integration costs in 2019. These costs are reflected within Acquisition and integration costs on the Consolidated Statements of Operations.
The $29 million of 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 Xplore product offerings into current and new markets.
Included within the final purchase price allocation are measurement period adjustments relating to facts and circumstances existing as of the acquisition date, primarily an increase to deferred tax assets and a corresponding decrease to goodwill of $6 million, which were recorded during 2019. The Xplore purchase price allocation was finalized in the second quarter of 2019.
The purchase price allocation to identifiable intangible assets acquired was:
|
|
|
|
|
|
|
|
Fair Value
(in millions)
|
|
Useful Life
(in years)
|
Customer and other relationships
|
$
|
16
|
|
|
9
|
Technology and patents
|
15
|
|
|
7
|
Trade names
|
1
|
|
|
3
|
Total identifiable intangible assets
|
$
|
32
|
|
|
|
The operating results of each acquired company have been included in the Company’s Consolidated Balance Sheets and Statements of Operations beginning on their respective acquisition dates. The Company has not included unaudited proforma results, as if each of these companies had been acquired as of January 1, 2018, as doing so would not yield materially different results.
Note 6 Goodwill and Other Intangibles
Goodwill
Changes in the net carrying value amount of goodwill by segment were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AIT
|
|
EVM
|
|
Total
|
Goodwill as of December 31, 2017
|
|
$
|
154
|
|
|
$
|
2,311
|
|
|
$
|
2,465
|
|
Xplore acquisition
|
|
—
|
|
|
35
|
|
|
35
|
|
Foreign exchange impact
|
|
—
|
|
|
(5
|
)
|
|
(5
|
)
|
Goodwill as of December 31, 2018
|
|
$
|
154
|
|
|
$
|
2,341
|
|
|
$
|
2,495
|
|
Xplore purchase price allocation adjustments
|
|
—
|
|
|
(6
|
)
|
|
(6
|
)
|
Temptime acquisition
|
|
73
|
|
|
—
|
|
|
73
|
|
Profitect acquisition
|
|
—
|
|
|
54
|
|
|
54
|
|
Cortexica acquisition
|
|
—
|
|
|
4
|
|
|
4
|
|
Foreign exchange impact
|
|
—
|
|
|
2
|
|
|
2
|
|
Goodwill as of December 31, 2019
|
|
$
|
227
|
|
|
$
|
2,395
|
|
|
$
|
2,622
|
|
See Note 5, Business Acquisitions for further details related to the Company’s acquisitions and purchase price allocation adjustments.
The Company’s goodwill balance consists of five reporting units. The majority of the goodwill relates to the acquisition of the Enterprise Business of Motorola Solutions, Inc. (“Enterprise”). The Company completed its annual goodwill impairment testing during the fourth quarter of 2019 utilizing a quantitative approach. The estimated fair value of each reporting unit exceeded its carrying value by at least 55%. There is risk of future impairment to the extent that an individual reporting unit’s performance does not meet projections. Additionally, if our current assumptions and estimates, including projected revenues and income growth rates, terminal growth rates, competitive and consumer trends, market-based discount rates, and other market factors, are not met, or if other valuation factors outside of our control change unfavorably, the estimated fair value of our reporting units could be adversely affected, leading to a potential impairment in the future.
No events occurred during the fiscal years ended 2019, 2018, or 2017 that indicated it was more likely than not that our goodwill was impaired.
Other Intangibles, net
The balances in Other Intangibles, net consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
As of December 31, 2018
|
|
Gross Carrying Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross Carrying Amount
|
|
Accumulated
Amortization
|
|
Net
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
Technology and patents
|
$
|
578
|
|
|
$
|
(508
|
)
|
|
$
|
70
|
|
|
$
|
514
|
|
|
$
|
(470
|
)
|
|
$
|
44
|
|
Customer and other relationships
|
575
|
|
|
(371
|
)
|
|
204
|
|
|
493
|
|
|
(305
|
)
|
|
188
|
|
Trade Names
|
43
|
|
|
(42
|
)
|
|
1
|
|
|
41
|
|
|
(41
|
)
|
|
—
|
|
Total
|
$
|
1,196
|
|
|
$
|
(921
|
)
|
|
$
|
275
|
|
|
$
|
1,048
|
|
|
$
|
(816
|
)
|
|
$
|
232
|
|
Amortization expense was $103 million, $97 million, and $184 million for fiscal years ended 2019, 2018 and 2017, respectively.
Estimated future intangible asset amortization expense is as follows (in millions):
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
$
|
64
|
|
2021
|
60
|
|
2022
|
54
|
|
2023
|
23
|
|
2024
|
23
|
|
Thereafter
|
51
|
|
Total
|
$
|
275
|
|
Note 7 Property, Plant and Equipment
Property, plant and equipment, net is comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Buildings
|
$
|
63
|
|
|
$
|
57
|
|
Land
|
7
|
|
|
7
|
|
Machinery and equipment
|
232
|
|
|
204
|
|
Furniture and office equipment
|
20
|
|
|
18
|
|
Software and computer equipment
|
168
|
|
|
161
|
|
Leasehold improvements
|
84
|
|
|
75
|
|
Projects in progress
|
36
|
|
|
24
|
|
|
610
|
|
|
546
|
|
Less accumulated depreciation
|
(351
|
)
|
|
(297
|
)
|
Property, plant and equipment, net
|
$
|
259
|
|
|
$
|
249
|
|
Depreciation expense was $72 million, $78 million and $79 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Note 8 Investments
The carrying value of the Company’s investments was $45 million and $25 million as of December 31, 2019 and 2018, respectively, which are included in Other long-term assets on the Consolidated Balances Sheets.
The Company adopted ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”) on January 1, 2018. In conjunction therewith, the Company has elected to measure equity investments without readily determinable fair values at cost, adjusted only for impairment losses or for observable changes in orderly transactions for the identical or similar investment of the same issuer for periods beginning after January 1, 2018. Prior to the adoption of ASU 2016-01, such equity investments were measured at cost, adjusted only for impairment losses.
Net gains (losses) related to the Company’s investments, which are included within Other, net on the Consolidated Statements of Operations, were $3 million, $10 million, and $(1) million during the years ended December 31, 2019, 2018, and 2017, respectively.
Note 9 Exit and Restructuring Costs
In the fourth quarter of 2019, the Company committed to certain organizational changes designed to generate operational efficiencies (collectively referred to as the “2019 Productivity Plan”), which are incremental to the Company’s 2017 exit and restructuring program (the “2017 Productivity Plan”). The organizational design changes under the 2019 Productivity Plan will principally occur within the North America and Europe, Middle East, and Africa (“EMEA”) regions, relate primarily to employee severance and related benefits, and are expected to be substantially completed in fiscal 2020. Exit and restructuring charges for the 2019 Productivity Plan were $8 million for the year ended December 31, 2019. Estimated remaining costs to be incurred in fiscal 2020 under the 2019 Productivity Plan are expected to be up to $10 million.
The 2017 Productivity Plan, focused on organizational design changes, process improvements, and automation, built upon the exit and restructuring initiatives specific to the October 2014 Enterprise acquisition (the “Acquisition Plan”). The Company substantially completed all initiatives under the 2017 Productivity Plan and the Acquisition Plan in fiscal 2018 and 2017, respectively. Exit and restructuring charges relating to the 2017 Productivity Plan were $2 million, $11 million and $12 million for fiscal 2019, 2018 and 2017, respectively. Exit and restructuring charges relating to the Acquisition Plan were $4 million for fiscal 2017. Cumulative costs associated with the 2017 Productivity Plan and the Acquisition Plan were $25 million and $69 million, respectively, and primarily consisted of severance and related benefits and lease exit costs. As of December 31, 2019, no significant obligations remain with respect to the 2017 Productivity Plan or the Acquisition Plan.
The Company’s total remaining obligations under its exit and restructuring programs as of December 31, 2019 were approximately $9 million, which are expected to be settled primarily within the next year and reflected within Accrued liabilities on the Consolidated Balance Sheets.
Note 10 Fair Value Measurements
Financial assets and liabilities are 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 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 December 31, 2019, are classified below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Foreign exchange contracts(1)
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
Money market investments related to the deferred compensation plan
|
24
|
|
|
—
|
|
|
—
|
|
|
24
|
|
Total Assets at fair value
|
$
|
24
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
27
|
|
Liabilities:
|
|
|
|
|
|
|
|
Forward interest rate swap contracts(2)
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
13
|
|
Liabilities related to the deferred compensation plan
|
24
|
|
|
—
|
|
|
—
|
|
|
24
|
|
Total Liabilities at fair value
|
$
|
24
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
37
|
|
The Company’s financial assets and liabilities carried at fair value as of December 31, 2018, are classified below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Foreign exchange contracts(1)
|
$
|
1
|
|
|
$
|
15
|
|
|
$
|
—
|
|
|
$
|
16
|
|
Forward interest rate swap contracts(2)
|
—
|
|
|
5
|
|
|
—
|
|
|
5
|
|
Money market investments related to the deferred compensation plan
|
17
|
|
|
—
|
|
|
—
|
|
|
17
|
|
Total Assets at fair value
|
$
|
18
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
38
|
|
Liabilities:
|
|
|
|
|
|
|
|
Liabilities related to the deferred compensation plan
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17
|
|
Total Liabilities at fair value
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17
|
|
|
|
(1)
|
The fair value of the foreign exchange contracts is calculated as follows:
|
|
|
a.
|
Fair value of regular forward contracts associated with forecasted sales hedges is calculated using the year-end exchange rate adjusted for current forward points.
|
|
|
b.
|
Fair value of hedges against net assets is calculated at the year-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 11 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. 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 December 31,
|
|
Balance Sheets Classification
|
|
2019
|
|
2018
|
Derivative instruments designated as hedges:
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
$
|
3
|
|
|
$
|
15
|
|
Total derivative instruments designated as hedges
|
|
|
$
|
3
|
|
|
$
|
15
|
|
|
|
|
|
|
|
Derivative instruments not designated as hedges:
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
$
|
—
|
|
|
$
|
1
|
|
Forward interest rate swaps
|
Prepaid expenses and other current assets
|
|
—
|
|
|
2
|
|
Forward interest rate swaps
|
Other long-term assets
|
|
—
|
|
|
3
|
|
Forward interest rate swaps
|
Accrued liabilities
|
|
(5
|
)
|
|
—
|
|
Forward interest rate swaps
|
Other long-term liabilities
|
|
(8
|
)
|
|
—
|
|
Total derivative instruments not designated as hedges
|
|
|
$
|
(13
|
)
|
|
$
|
6
|
|
Total net derivative (liability) asset
|
|
|
$
|
(10
|
)
|
|
$
|
21
|
|
The following table presents the net (losses) gains from changes in fair values of derivatives that are not designated as hedges (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Gain Recognized in Income
|
|
|
|
Year Ended December 31,
|
|
Statements of Operations Classification
|
|
2019
|
|
2018
|
|
2017
|
Derivative instruments not designated as hedges:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Foreign exchange loss
|
|
$
|
(3
|
)
|
|
$
|
1
|
|
|
$
|
(24
|
)
|
Forward interest rate swaps
|
Interest expense, net
|
|
(19
|
)
|
|
8
|
|
|
2
|
|
Total (loss) gain recognized in income
|
|
|
$
|
(22
|
)
|
|
$
|
9
|
|
|
$
|
(22
|
)
|
Activities related to derivative instruments are included within Net cash provided by operating activities on the 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 elect to 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 $3 million and $1 million as of December 31, 2019 and 2018, respectively.
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 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 by 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 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 Statement of Operations. Realized gains (losses) reclassified to Net sales were $42 million, $13 million, and $(8) million for the years ending December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019 and 2018, the notional amounts of the Company’s foreign exchange cash flow hedges were €564 million and €496 million, respectively. The Company has reviewed its cash flow hedges for effectiveness and determined they are highly effective.
The Company uses forward contracts, which are not designated as hedging instruments, to manage its exposures related to net assets denominated in foreign currencies. These forward contracts typically mature within one month after execution. Monetary gains and losses on these forward contracts are recorded in income and are generally offset by the transaction gains and losses related to their net asset positions. The notional values and the net fair value of these outstanding contracts were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Notional balance of outstanding contracts:
|
|
|
|
British Pound/U.S. Dollar
|
£
|
14
|
|
|
£
|
1
|
|
Euro/U.S. Dollar
|
€
|
36
|
|
|
€
|
45
|
|
British Pound/Euro
|
£
|
—
|
|
|
£
|
6
|
|
Canadian Dollar/U.S. Dollar
|
C$
|
1
|
|
|
C$
|
6
|
|
Australian Dollar/U.S. Dollar
|
A$
|
42
|
|
|
A$
|
47
|
|
Japanese Yen/U.S. Dollar
|
¥
|
264
|
|
|
¥
|
396
|
|
Singapore Dollar/U.S. Dollar
|
S$
|
19
|
|
|
S$
|
7
|
|
Mexican Peso/U.S. Dollar
|
Mex$
|
115
|
|
|
Mex$
|
225
|
|
Chinese Yuan/U.S. Dollar
|
¥
|
|
|
|
¥
|
71
|
|
South African Rand/U.S. Dollar
|
R
|
42
|
|
|
R
|
42
|
|
Net fair value of assets of outstanding contracts
|
$
|
—
|
|
|
$
|
1
|
|
The Company’s use of non-designated forward contracts to manage Euro currency exposure is limited, as Euro-denominated borrowings under the Revolving Credit Facility naturally hedge part of such risk. See Note 12, Long-Term Debt for further discussion of Euro-denominated borrowings.
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 an applicable margin. See Note 12, Long-Term Debt for further details related to these borrowings. As a result, the Company is exposed to market risk associated with the variable interest rate payments on 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 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 due effective 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 settlements effective starting in December 2022 and ending 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, as amended. The Company’s interest rate swaps are not designated as hedges and changes in fair value are recognized immediately as Interest expense, net on the Consolidated Statements of Operations.
The Company previously had a floating-to-fixed interest rate swap, which was designated as a cash flow hedge. This swap was terminated, and hedge accounting treatment was discontinued in 2014. The Company reclassified $2 million and $2 million of losses to Interest expense, net on the Consolidated Statements of Operations during the years ended December 31, 2019 and 2018, respectively. No losses remain to be amortized as of December 31, 2019.
During the fourth quarter of 2018, the Company terminated three interest rate swaps. The first swap was entered into with a syndicated group of commercial banks for the purpose of fixing the interest rate on the Company’s floating-rate debt. The second swap largely offset the first swap, causing interest payments to again be exposed to rate fluctuations. Neither of these instruments were designated as accounting hedges, with changes in fair value recognized in Interest expense, net on the Consolidated Statements of Operations. The third interest rate swap converted the floating-rate debt to fixed-rate debt and was designated as a cash flow hedge. As part of the termination, the Company settled all three swaps resulting in a $7 million cash payment to counterparties that was classified within Net cash provided by operating activities. Hedge accounting treatment was discontinued on the third swap, which had less than $1 million of pretax losses remaining in AOCI at the time of termination.
Note 12 Long-Term Debt
The following table shows the carrying value of the Company’s debt (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Term Loan A
|
$
|
917
|
|
|
$
|
608
|
|
Term Loan B
|
—
|
|
|
445
|
|
Revolving Credit Facility
|
103
|
|
|
408
|
|
Receivables Financing Facilities
|
266
|
|
|
139
|
|
Total debt
|
$
|
1,286
|
|
|
$
|
1,600
|
|
Less: Debt issuance costs
|
(6
|
)
|
|
(5
|
)
|
Less: Unamortized discounts
|
(3
|
)
|
|
(4
|
)
|
Less: Current portion of debt
|
(197
|
)
|
|
(157
|
)
|
Total long-term debt
|
$
|
1,080
|
|
|
$
|
1,434
|
|
As of December 31, 2019, the future maturities of debt, excluding debt discounts and issuance costs, are as follows (in millions):
|
|
|
|
|
|
2020
|
$
|
197
|
|
2021
|
99
|
|
2022
|
56
|
|
2023
|
81
|
|
2024
|
853
|
|
Thereafter
|
—
|
|
Total future maturities of debt
|
$
|
1,286
|
|
All borrowings as of December 31, 2019 were denominated in U.S. Dollars, except for €92 million under the Revolving Credit Facility that was borrowed in Euros.
The estimated fair value of our debt approximated $1.3 billion and $1.6 billion as of December 31, 2019 and 2018, 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 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 a number of factors, including fluctuations in market interest rates as well as changes to the Company’s credit ratings.
Credit Facilities
On July 26, 2017, the Company entered into an Amended and Restated Credit Agreement which provided for the issuance of Term Loan A and increased funding available under the Revolving Credit Facility to $500 million. In conjunction therewith, the Company partially paid down and repriced Term Loan B. As part of these refinancing activities, the Company capitalized $5 million of debt issuance costs and recorded $6 million of pre-tax charges related to third-party fees for arranger, legal and other services and accelerated amortization of debt issuance costs and discounts within Other, net on the Company’s Consolidated Statements of Operations. During 2017, the Company also fully redeemed $1.1 billion of outstanding principal of other debt obligations which had a scheduled maturity in 2022. In accounting for the early termination, the Company applied debt extinguishment accounting and recognized a $65 million make whole premium and $16 million acceleration of debt issuance costs within Interest expense, net on the Company’s Consolidated Statements of Operations.
On May 31, 2018, the Company entered into Amendment No. 1 to the Amended and Restated Credit Agreement (“Amendment No. 1”). Amendment No. 1 resulted in a new Term Loan A with principal of $670 million and increased the Revolving Credit Facility from $500 million to $800 million. Also, as part of Amendment No. 1, the Company had a partial early debt extinguishment of $300 million and repricing of its Term Loan B. Amendment No. 1 resulted in $6 million of non-cash accelerated amortization of debt issuance costs and $1 million of one-time charges related to third party fees, both of which were reflected in Interest Expense, net on the Consolidated Statements of Operations. Amendment No. 1 also resulted in $2 million of third party fees for arranger, legal, and other services that were capitalized.
On August 9, 2019, the Company entered into Amendment No. 2 to the Amended and Restated Credit Agreement (“Amendment No. 2”). Amendment No. 2 increased the Company’s borrowing under Term Loan A from $608 million to $1 billion and increased the Company’s borrowing capacity under the Revolving Credit Facility from $800 million to $1 billion. Term Loan A and the Revolving Credit Facility will continue to bear interest at variable rates plus an applicable margin. The
maturities of Term Loan A and the Revolving Credit Facility were each extended to August 9, 2024. In conjunction with entering into Amendment No. 2, a payment of $445 million was made to fully pay off Term Loan B.
The refinancing of the Company’s debt during the third quarter of 2019 resulted in non-cash accelerated amortization of debt discount and debt issuance costs of $4 million and one-time charges of $3 million, which included certain third party fees and the accelerated amortization of losses on terminated interest rate swaps released from AOCI. These items are included in Interest Expense, net on the Consolidated Statements of Operations. Additionally, issuance costs of $6 million incurred related to this debt refinancing were capitalized and will be amortized over the remaining term of Term Loan A and the Revolving Credit Facility.
The principal on Term Loan A is due in quarterly installments, with the next quarterly installment due in July 2021 and the majority due upon its August 9, 2024 maturity. The Company may make prepayments against the amended Term Loan A, in whole or in part, without premium or penalty. The Company would be required to prepay certain outstanding amounts in the event of certain circumstances or transactions. As of December 31, 2019, the Term Loan A interest rate was 3.01%. Interest payments are made monthly.
The Revolving Credit Facility is available for working capital and other general corporate purposes, including letters of credit. As of December 31, 2019, the Company had letters of credit totaling $5 million, which reduced funds available for borrowings under the agreement from $1 billion to $995 million. As of December 31, 2019, the Revolving Credit Facility had an average interest rate of 1.25%. Interest payments are made monthly. All remaining principal is due upon the Revolving Credit Facility’s maturity on August 9, 2024.
Receivables Financing Facilities
In December 2017, the Company entered into a Receivables Financing Facility with a financial institution that has a borrowing limit of up to $180 million. As collateral, the Company pledges a perfected first-priority security interest in its U.S. domestically originated accounts receivable. The Company has accounted for transactions under the Receivables Financing Facility as secured borrowings. As amended during the second quarter of 2019, the Receivables Financing Facility will mature on March 29, 2021.
During the second quarter of 2019, the Company entered into an Additional Receivable Financing Facility with another financial institution, which allows for additional borrowings of up to $100 million, and thus total borrowings of up to $280 million, using U.S. domestically originated accounts receivables as collateral. The Company has also accounted for transactions under this Additional Receivables Financing Facility as secured borrowings. The Additional Receivables Financing Facility will mature on May 18, 2020.
As of December 31, 2019, the Company’s Consolidated Balance Sheets included $545 million of receivables that were pledged under the two Receivables Financing Facilities. As of December 31, 2019, $266 million had been borrowed, of which $197 million is classified as current. Borrowings under the Receivables Financing Facilities bear interest at a variable rate plus an applicable margin. As of December 31, 2019, the Receivables Financing Facilities had an average interest rate of 2.60% and require monthly interest payments.
Both the Revolving Credit Facility and Receivables Financing Facilities 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 11, Derivative Instruments for further information.
As of December 31, 2019, the Company was in compliance with all debt covenants.
Note 13 Leases
The Company leases certain manufacturing facilities, distribution centers, sales and administrative offices, equipment, and vehicles, which are accounted for as operating leases. Remaining lease terms are up to 13 years, with certain leases containing renewal options.
The following table presents activities associated with our operating leases during the year ended December 31, 2019 (in millions):
|
|
|
|
|
|
Fixed lease expenses
|
|
$
|
37
|
|
Variable lease expenses
|
|
29
|
|
Total lease expenses
|
|
$
|
66
|
|
|
|
|
Cash paid for leases
|
|
$
|
67
|
|
|
|
|
ROU assets obtained in exchange for lease obligations
|
|
$
|
42
|
|
Reduction of ROU assets and lease liabilities
|
|
(16
|
)
|
Net non-cash increases to ROU assets and lease liabilities
|
|
$
|
26
|
|
The variable lease expenses incurred during the year were not included in the measurement of the Company’s ROU assets and lease liabilities. Variable lease expenses consisted primarily of distribution center service costs that were based on product distribution volumes, as well as non-fixed common area maintenance, real estate taxes, and other operating costs associated with various facility leases. Expenses incurred during the year related to short term leases were not significant.
Cash payments for operating leases are included within Net cash provided by operating activities on the Consolidated Statements of Cash Flows.
ROU assets obtained in exchange for lease obligations includes new lease arrangements entered into by the Company during the year, as well as lease arrangements obtained through acquisitions. Additionally, ROU assets obtained in exchange for lease obligations include contract modifications that occurred during the year, as well as changes in assessments made during the year rendering it reasonably certain that lease renewal options will be exercised based on facts and circumstances that arose during the year.
Reductions in the Company’s ROU assets and lease liabilities were primarily related to a modification to one of the Company’s distribution center lease agreements during the fourth quarter of 2019, resulting in a reduction to fixed future lease payments. That amendment is not, however, expected to significantly affect total future lease costs, inclusive of variable lease payments.
As of December 31, 2019, the weighted average remaining term of the Company’s operating leases was approximately 6 years, and the weighted average discount rate used to measure the ROU assets and lease liabilities was approximately 6%.
Future minimum lease payments under non-cancellable operating leases as of December 31, 2019 were as follows (in millions):
|
|
|
|
|
|
2020
|
|
$
|
36
|
|
2021
|
|
30
|
|
2022
|
|
24
|
|
2023
|
|
20
|
|
2024
|
|
15
|
|
Thereafter
|
|
27
|
|
Total future minimum lease payments
|
|
$
|
152
|
|
Less: Interest
|
|
(23
|
)
|
Present value of lease liabilities
|
|
$
|
129
|
|
|
|
|
Reported as of December 31, 2019:
|
|
|
Current portion of lease liabilities
|
|
$
|
29
|
|
Long-term lease liabilities
|
|
100
|
|
Present value of lease liabilities
|
|
$
|
129
|
|
The current portion of lease liabilities is included within Accrued liabilities on the Consolidated Balance Sheets.
Rent expense under the Company’s operating leases during the years ended December 31, 2018 and 2017, prior to the Company’s adoption of ASC 842, was $33 million and $34 million, respectively. The Company’s total future minimum lease obligations under non-cancellable operating leases as of December 31, 2018 was comparable to those as of December 31, 2019.
Revenues earned from lease arrangements under which the Company is a lessor were not significant.
Note 14 Commitments and Contingencies
Warranties
The following table is a summary of the Company’s accrued warranty obligations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Warranty Reserve
|
2019
|
|
2018
|
|
2017
|
Balance at the beginning of the year
|
$
|
22
|
|
|
$
|
18
|
|
|
$
|
21
|
|
Acquisitions
|
—
|
|
|
1
|
|
|
—
|
|
Warranty expense
|
25
|
|
|
34
|
|
|
28
|
|
Warranties fulfilled
|
(26
|
)
|
|
(31
|
)
|
|
(31
|
)
|
Balance at the end of the year
|
$
|
21
|
|
|
$
|
22
|
|
|
$
|
18
|
|
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.
During 2018, the Company settled in its entirety a commercial lawsuit resulting in a $13 million pre-tax charge reflected within General and administrative expenses on the Consolidated Statements of Operations.
Note 15 Share-Based Compensation
On May 17, 2018, shareholders approved the Zebra Technologies Corporation 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 remains in effect with respect to outstanding awards under the 2015 Plan until such awards have been exercised, forfeited, canceled, expired or otherwise terminated in accordance with their terms. Together, the 2018 Plan and 2015 Plan provide for incentive compensation to the Company’s non-employee directors, officers, and employees. The awards available under the plans include stock appreciation rights, restricted stock awards, performance share awards, cash-settled stock appreciation rights, restricted stock units, performance stock units, incentive stock options, and non-qualified stock options.
The Company uses outstanding treasury shares as its source for issuing shares under the share-based compensation programs.
A summary of the equity awards available for future grants under the 2018 Plan is as follows:
|
|
|
|
Available for future grants as of December 31, 2018
|
3,789,800
|
|
Granted
|
(304,840
|
)
|
Available for future grants as of December 31, 2019
|
3,484,960
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Compensation costs and related income tax benefit
|
2019
|
|
2018
|
|
2017
|
Cost of sales
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
3
|
|
Selling and marketing
|
17
|
|
|
13
|
|
|
8
|
|
Research and development
|
16
|
|
|
15
|
|
|
11
|
|
General and administration
|
23
|
|
|
21
|
|
|
16
|
|
Total compensation expense
|
$
|
60
|
|
|
$
|
53
|
|
|
$
|
38
|
|
Income tax benefit
|
$
|
9
|
|
|
$
|
10
|
|
|
$
|
11
|
|
As of December 31, 2019, total unearned compensation costs related to the Company’s share-based compensation plans was $62 million, which will be amortized to expense over the weighted average remaining service period of 1.4 years.
Stock Appreciation Rights (“SARs”)
Upon exercise of SARs, the Company issues whole shares of Class A Common Stock to participants based on the difference between the fair market value of the stock at the time of exercise and the exercise price. Fractional shares are settled in cash upon exercise. The grant date fair value of SARs is expensed over the 4-year vesting period of the related awards.
A summary of the Company’s SARs outstanding is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
SARs
|
SARs
|
|
Weighted-
Average
Exercise
Price
|
|
SARs
|
|
Weighted-
Average
Exercise
Price
|
|
SARs
|
|
Weighted-
Average
Exercise
Price
|
Outstanding at beginning of year
|
1,261,185
|
|
|
$
|
75.71
|
|
|
1,817,991
|
|
|
$
|
65.73
|
|
|
1,740,786
|
|
|
$
|
56.15
|
|
Granted
|
70,141
|
|
|
205.12
|
|
|
88,042
|
|
|
149.75
|
|
|
402,029
|
|
|
98.87
|
|
Exercised
|
(395,015
|
)
|
|
66.82
|
|
|
(598,249
|
)
|
|
55.93
|
|
|
(250,326
|
)
|
|
48.66
|
|
Forfeited
|
(39,388
|
)
|
|
92.72
|
|
|
(46,161
|
)
|
|
80.41
|
|
|
(66,550
|
)
|
|
75.38
|
|
Expired
|
—
|
|
|
—
|
|
|
(438
|
)
|
|
108.20
|
|
|
(7,948
|
)
|
|
108.20
|
|
Outstanding at end of year
|
896,923
|
|
|
$
|
89.05
|
|
|
1,261,185
|
|
|
$
|
75.71
|
|
|
1,817,991
|
|
|
$
|
65.73
|
|
Exercisable at end of year
|
489,357
|
|
|
$
|
70.37
|
|
|
595,086
|
|
|
$
|
60.85
|
|
|
874,942
|
|
|
$
|
50.86
|
|
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.
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:
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Expected dividend yield
|
0%
|
|
0%
|
|
0%
|
Forfeiture rate
|
8.20%
|
|
8.40%
|
|
9.37%
|
Volatility
|
36.79%
|
|
35.93%
|
|
35.49%
|
Risk free interest rate
|
2.28%
|
|
2.96%
|
|
1.77%
|
Expected weighted-average life (in years)
|
4.02
|
|
4.11
|
|
4.13
|
Weighted-average grant date fair value of SARs granted
(per underlying share)
|
$64.17
|
|
$47.63
|
|
$29.86
|
The following table summarizes information about SARs outstanding as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
Aggregate intrinsic value (in millions)
|
$
|
149
|
|
|
$
|
91
|
|
Weighted-average remaining contractual term (in years)
|
4.9
|
|
|
4.5
|
|
The intrinsic value for SARs exercised during fiscal 2019, 2018 and 2017 was $58 million, $59 million and $14 million, respectively. The total fair value of SARs vested during fiscal 2019, 2018 and 2017 was $9 million, $12 million and $8 million, respectively.
Restricted Stock Awards (“RSAs”) and Performance Share Awards (“PSAs”)
The Company’s restricted stock grants consist of time-vested RSAs and PSAs, which hold voting rights and therefore are considered participating securities. 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. The Company’s RSAs and PSAs 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, such as an equity retainer fee, vest upon grant. PSA targets are set based on certain Company-wide financial metrics. Compensation cost is calculated as the market date fair value of the Company’s Class A Common Stock on grant date multiplied by the number of shares granted, net of estimated forfeitures.
The Company also issues stock awards to non-employee directors. Each director receives an equity grant of shares annually in 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 the Company’s Class A Common Stock. New directors in any fiscal year earn a prorated amount. During fiscal 2019, there were 7,371 shares granted to non-employee directors compared to 7,980 and 12,488 shares granted during fiscal 2018 and 2017, respectively. The shares vest immediately upon the grant date.
A summary of information relative to the Company’s RSAs is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Restricted Stock Awards
|
|
Shares
|
|
Weighted-Average
Grant Date Fair Value
|
|
Shares
|
|
Weighted-Average
Grant Date Fair Value
|
|
Shares
|
|
Weighted-Average
Grant Date Fair Value
|
Outstanding at beginning of year
|
|
657,724
|
|
|
$
|
93.45
|
|
|
628,642
|
|
|
$
|
77.70
|
|
|
622,814
|
|
|
$
|
70.19
|
|
Granted
|
|
170,502
|
|
|
204.26
|
|
|
206,922
|
|
|
150.60
|
|
|
199,629
|
|
|
98.90
|
|
Released
|
|
(372,075
|
)
|
|
73.71
|
|
|
(154,878
|
)
|
|
107.22
|
|
|
(165,846
|
)
|
|
75.90
|
|
Forfeited
|
|
(21,510
|
)
|
|
141.29
|
|
|
(22,962
|
)
|
|
88.77
|
|
|
(27,955
|
)
|
|
72.81
|
|
Outstanding at end of year
|
|
434,641
|
|
|
$
|
151.52
|
|
|
657,724
|
|
|
$
|
93.45
|
|
|
628,642
|
|
|
$
|
77.70
|
|
The fair value of each PSA granted includes assumptions around the Company’s performance goals. A summary of information relative to the Company’s PSAs is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Performance Share Awards
|
|
Shares
|
|
Weighted-Average
Grant Date Fair Value
|
|
Shares
|
|
Weighted-Average
Grant Date Fair Value
|
|
Shares
|
|
Weighted-Average
Grant Date Fair Value
|
Outstanding at beginning of year
|
|
259,727
|
|
|
$
|
86.41
|
|
|
265,747
|
|
|
$
|
77.04
|
|
|
379,226
|
|
|
$
|
70.14
|
|
Granted
|
|
150,224
|
|
|
206.04
|
|
|
59,849
|
|
|
146.83
|
|
|
79,423
|
|
|
98.97
|
|
Released
|
|
(231,513
|
)
|
|
120.86
|
|
|
(57,074
|
)
|
|
107.31
|
|
|
(2,029
|
)
|
|
62.70
|
|
Forfeited
|
|
(7,689
|
)
|
|
102.42
|
|
|
(8,795
|
)
|
|
81.07
|
|
|
(190,873
|
)
|
|
73.09
|
|
Outstanding at end of year
|
|
170,749
|
|
|
$
|
144.47
|
|
|
259,727
|
|
|
$
|
86.41
|
|
|
265,747
|
|
|
$
|
77.04
|
|
Other Award Types
The Company also has cash-settled compensation awards, including cash-settled stock appreciation rights, restricted stock units and 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, and the fair value is remeasured at the end of each reporting period based on the Company’s stock price. Cash settlement is based on the fair value of share equivalents at the time of vesting, which was $6 million, $2 million and $2 million in 2019, 2018 and 2017, respectively. Share-equivalents issued under these programs totaled 17,207, 20,393 and 45,781 in fiscal 2019, 2018 and 2017, respectively.
Non-qualified Stock Options
A summary of the Company’s non-qualified options outstanding under the Company’s 2006 Long-Term Incentive Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Non-qualified Options
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
Outstanding at beginning of year
|
—
|
|
|
$
|
—
|
|
|
15,705
|
|
|
$
|
26.34
|
|
|
154,551
|
|
|
$
|
35.96
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercised
|
—
|
|
|
—
|
|
|
(15,705
|
)
|
|
26.34
|
|
|
(132,905
|
)
|
|
36.86
|
|
Forfeited
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Expired
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,941
|
)
|
|
41.25
|
|
Outstanding at end of year
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
15,705
|
|
|
$
|
26.34
|
|
Exercisable at end of year
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
15,705
|
|
|
$
|
26.34
|
|
The last remaining non-qualified stock options were exercised in 2018. The intrinsic value for non-qualified options exercised in fiscal 2018 and 2017 was $2 million and $8 million, respectively. Cash received from the exercise of non-qualified options was less than $1 million and approximately $5 million during fiscal 2018 and 2017, respectively. The related income tax benefit realized was $2 million and $2 million during fiscal 2018 and 2017, respectively.
No non-qualified options vested during fiscal 2019, 2018 or 2017, as all such options had previously become fully vested.
Employee Stock Purchase Plan
The Zebra Technologies Corporation 2011 Employee Stock Purchase Plan (“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 the 2011 Plan is 1,500,000 shares. As of December 31, 2019, 774,186 shares were available for future purchase.
Note 16 Income Taxes
The geographical sources of income (loss) before income taxes were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
United States
|
$
|
83
|
|
|
$
|
(25
|
)
|
|
$
|
(152
|
)
|
Outside United States
|
515
|
|
|
549
|
|
|
240
|
|
Total
|
$
|
598
|
|
|
$
|
524
|
|
|
$
|
88
|
|
Income tax expense (benefit) consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
Federal
|
$
|
16
|
|
|
$
|
20
|
|
|
$
|
10
|
|
State
|
(1
|
)
|
|
3
|
|
|
8
|
|
Foreign
|
81
|
|
|
77
|
|
|
62
|
|
Total current
|
$
|
96
|
|
|
$
|
100
|
|
|
$
|
80
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(32
|
)
|
|
(11
|
)
|
|
20
|
|
State
|
(5
|
)
|
|
5
|
|
|
(10
|
)
|
Foreign
|
(5
|
)
|
|
9
|
|
|
(19
|
)
|
Total deferred
|
$
|
(42
|
)
|
|
$
|
3
|
|
|
$
|
(9
|
)
|
Total
|
$
|
54
|
|
|
$
|
103
|
|
|
$
|
71
|
|
The Company’s effective tax rates were 9.0%, 19.7% and 80.7% for the years ended December 31, 2019, 2018 and 2017, respectively.
A reconciliation of the U.S. federal statutory income tax rate to our actual income tax rate is provided below:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Provision computed at statutory rate
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
U.S. Tax Reform - one-time transition tax
|
—
|
|
|
(0.6
|
)
|
|
41.8
|
|
Remeasurement of deferred taxes
|
0.2
|
|
|
0.7
|
|
|
(56.0
|
)
|
Change in valuation allowance
|
(1.7
|
)
|
|
(4.5
|
)
|
|
96.4
|
|
U.S. impact of Enterprise acquisition
|
1.0
|
|
|
1.1
|
|
|
12.9
|
|
Change in contingent income tax reserves
|
(3.3
|
)
|
|
3.2
|
|
|
14.0
|
|
Foreign earnings subject to U.S. taxation
|
1.8
|
|
|
2.0
|
|
|
2.0
|
|
Foreign rate differential
|
(0.7
|
)
|
|
(2.0
|
)
|
|
(29.1
|
)
|
Intra-entity transactions
|
—
|
|
|
—
|
|
|
(18.8
|
)
|
State income tax, net of federal tax benefit
|
(0.2
|
)
|
|
0.8
|
|
|
(5.3
|
)
|
Tax credits
|
(2.3
|
)
|
|
(1.9
|
)
|
|
(5.7
|
)
|
Equity compensation deductions
|
(4.0
|
)
|
|
(2.0
|
)
|
|
(5.6
|
)
|
Return to provision and other true ups
|
(2.0
|
)
|
|
1.1
|
|
|
(3.2
|
)
|
Other
|
(0.8
|
)
|
|
0.8
|
|
|
2.3
|
|
Provision for income taxes
|
9.0
|
%
|
|
19.7
|
%
|
|
80.7
|
%
|
For the year ended December 31, 2019, the Company’s effective tax rate was lower than the federal statutory rate of 21% primarily due to the favorable impacts of share-based compensation benefits, lapses of the statute of limitations on uncertain tax positions, and the generation of tax credits. These benefits were partially offset by the impacts of foreign earnings and deemed royalties taxed in the U.S.
For the year ended December 31, 2018, the Company’s effective tax rate was lower than the federal statutory rate of 21% primarily due to lower tax rates in foreign jurisdictions and the generation of tax credits. These benefits were partially offset by increases related to foreign earnings subject to U.S. taxation, the U.S. impact of the Enterprise acquisition and certain discrete items. The discrete items included the favorable impacts of reductions in valuation allowances and share-based compensation benefits, which were offset by audit settlements with the U.S. Internal Revenue Service for the fiscal years 2013, 2014, and 2015 and an increase in uncertain tax positions resulting from interpretive guidance issued during the year.
For the year ended December 31, 2017, the Company’s effective tax rate was higher than the federal statutory rate of 35%, primarily due to an increase in valuation allowance on foreign deferred tax assets, the one-time transition tax and remeasurement of net U.S. deferred tax assets under the Act, the U.S. impact of the Enterprise acquisition, and an increase in uncertain tax benefits. These expenses were partially offset by remeasurement of foreign net deferred tax assets, the benefit of lower tax rates in foreign jurisdictions, the recognition of deferred tax assets on intercompany asset transfers, the generation of tax credits and share-based compensation benefits.
The Company earns a significant amount of its operating income outside of the U.S., primarily in the United Kingdom, Singapore, and Luxembourg, with statutory rates of 19%, 17%, and 25%, respectively. During 2018, the Company applied for and was granted a second extension of its incentivized tax rate by the Singapore Economic Development Board. The incentive reduces the income tax rate to 10.5% from the statutory rate of 17% and is effective for calendar years 2019 to 2023. The Company has committed to making additional investments in Singapore over the period 2019 to 2022; 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.
Tax effects of temporary differences that resulted in deferred tax assets and liabilities are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
Capitalized research expenditures
|
$
|
37
|
|
|
$
|
28
|
|
Deferred revenue
|
24
|
|
|
21
|
|
Tax credits
|
29
|
|
|
28
|
|
Net operating loss carryforwards
|
410
|
|
|
394
|
|
Other accruals
|
21
|
|
|
20
|
|
Inventory items
|
18
|
|
|
20
|
|
Capitalized software costs
|
2
|
|
|
8
|
|
Sales return/rebate reserve
|
48
|
|
|
41
|
|
Share-based compensation expense
|
12
|
|
|
15
|
|
Accrued bonus
|
7
|
|
|
3
|
|
Unrealized gains and losses on securities and investments
|
4
|
|
|
—
|
|
Valuation allowance
|
(421
|
)
|
|
(56
|
)
|
Total deferred tax assets
|
$
|
191
|
|
|
$
|
522
|
|
Deferred tax liabilities:
|
|
|
|
Depreciation and amortization
|
62
|
|
|
411
|
|
Unrealized gains and losses on securities and investments
|
—
|
|
|
2
|
|
Undistributed earnings
|
2
|
|
|
3
|
|
Total deferred tax liabilities
|
$
|
64
|
|
|
$
|
416
|
|
Net deferred tax assets
|
$
|
127
|
|
|
$
|
106
|
|
In 2019, the Company reorganized its Luxembourg holding company structure which resulted in a taxable gain in Luxembourg that was offset by operating loss carryforwards. There was no net impact to the Provision for income taxes as these activities also resulted in the realization of deferred tax liabilities related to depreciation and amortization and a corresponding increase in valuation allowances.
As of December 31, 2019, the Company had approximately $410 million (tax effected) of net operating losses (“NOLs”) and approximately $29 million of credit carryforwards. Approximately $161 million of NOLs will expire beginning in 2020 through 2033, and $15 million of credits will expire beginning in 2023 through 2032, with the remaining amounts of NOLs and credit carryforwards having no expiration dates.
Impact of U.S. Tax Reform
Overview
Enacted on December 22, 2017, the Act reduced the U.S. federal corporate tax rate from 35% to 21%, requiring companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. Based on current operations, the Company is subject to the GILTI, BEAT and FDII provisions of the Act, for which we recorded income tax expense of $12 million and $10 million for the years ended December 31, 2019 and 2018, respectively. We are not currently subject to the new limitation which defers U.S. interest deductions in excess of 30% of adjusted taxable income. However, the application of the interest limitations may apply in the future, depending on changes in the Company’s business model. Additionally, the Company is no longer able to deduct performance-based compensation for its covered employees which exceeds the limitation under amended Internal Revenue Code Section 162(m). These impacts are included in the calculation of the Company’s effective tax rate.
Foreign Tax Effects
As part of the Act, the Company recognized a one-time transition tax based on its total post-1986 earnings and profits that were previously deferred from U.S. income taxes and recorded a provision related to deemed foreign inclusions through December 31, 2017 as a result of the transition tax.
As of December 31, 2019, the Company is no longer permanently reinvested with respect to its U.S. directly-owned foreign subsidiary earnings. For periods after 2017, the Company is subject to U.S. income tax on substantially all foreign earnings under the GILTI provisions of the Act, while any remaining foreign earnings are eligible for the new dividends received
deduction. As a result, future repatriation of earnings will no longer be subject to U.S. 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. Thus, as a result of these changes, the assertion of permanent reinvestment is no longer applicable under current U.S. tax laws.
The Company has not recognized deferred tax liabilities in the U.S. with respect to its outside basis differences in its directly-owned foreign affiliates. It is not practicable to determine the amount of unrecognized deferred tax liabilities on these indefinitely reinvested earnings.
Performance-Based Executive Compensation
The Act amended the rules related to the exclusion of performance-based compensation under Internal Revenue Code 162(m). The Company is no longer be able to claim a deduction for compensation accrued after January 1, 2018 for any covered employee exceeding $1 million, unless the compensation is earned in relation to a binding contract in existence on November 2, 2017 (“Grandfathered Contracts”). The Company has remeasured the Section 162(m)-grandfathered deferred tax assets at 21% for its covered employees for equity award agreements issued and executed prior to November 2, 2017. Additionally, the Company has determined that its short-term bonus plan does not qualify for the grandfathered contract provisions, and thus any associated deferred tax assets have been derecognized.
Provisional and Final Effects
During 2017, the Company provisionally recognized an income tax expense of $72 million associated with the Act, including a one-time transition tax of $37 million and $35 million remeasurement of its net U.S. deferred tax assets based on the federal statutory rate of 21%.
During 2018, the Company finalized its analysis of the Act, including the one-time transition tax and measurement of net deferred tax assets, and recorded a $3 million income tax benefit as a result of differences between its final analysis and provisional analysis from the prior year. The final analysis included both federal and state tax effects based on legislative pronouncements through December 31, 2018. The Company also utilized a total of $28 million of available net operating losses, research and development credits, alternative minimum tax credits, and foreign tax credits in order to reduce its future cash payments for the one-time transition tax.
During 2019, there were no retroactive law changes that impacted the 2018 reassessment.
Unrecognized tax benefits
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2019
|
|
2018
|
Balance at beginning of year
|
$
|
50
|
|
|
$
|
51
|
|
Additions for tax positions related to the current year
|
1
|
|
|
1
|
|
Additions for tax positions related to prior years
|
—
|
|
|
22
|
|
Reductions for tax positions related to prior years
|
(5
|
)
|
|
(11
|
)
|
Settlements for tax positions
|
(16
|
)
|
|
(13
|
)
|
Lapse of statutes
|
(20
|
)
|
|
—
|
|
Balance at end of year
|
$
|
10
|
|
|
$
|
50
|
|
As of December 31, 2019 and December 31, 2018, there were $9 million and $48 million, respectively, of unrecognized tax benefits that, if recognized, would affect the annual effective tax rate. The Company is currently undergoing U.S. federal income tax audits for the tax years 2016 and 2017. Fiscal 2004 through 2018 remain open to examination by multiple foreign and U.S. state taxing jurisdictions.
In the fourth quarter of fiscal 2019, the Company settled and made payment for a tax dispute for $19 million. Additionally, the statute of limitations on the U.S. federal income tax audit years 2013, 2014 and 2015 lapsed, resulting in a total benefit of $20 million during fiscal 2019. As of December 31, 2019, no other 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 settlement or other uncertain tax positions may change and the actual tax benefits may differ significantly from estimates.
The Company recognized $6 million, $8 million and $2 million of interest and penalties related to income tax matters as part of Income tax expense on the Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017, respectively. The Company had included $8 million and $14 million of estimated interest and penalty obligations within Income taxes payable on the Consolidated Balance Sheets as of December 31, 2019 and 2018, respectively.
Note 17 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Basic:
|
|
|
|
|
|
Net income
|
$
|
544
|
|
|
$
|
421
|
|
|
$
|
17
|
|
Weighted-average shares outstanding
|
53,991,249
|
|
|
53,591,655
|
|
|
53,021,761
|
|
Basic earnings per share
|
$
|
10.08
|
|
|
$
|
7.86
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
Net income
|
$
|
544
|
|
|
$
|
421
|
|
|
$
|
17
|
|
Weighted-average shares outstanding
|
53,991,249
|
|
|
53,591,655
|
|
|
53,021,761
|
|
Dilutive shares
|
603,168
|
|
|
708,157
|
|
|
667,071
|
|
Diluted weighted-average shares outstanding
|
54,594,417
|
|
|
54,299,812
|
|
|
53,688,832
|
|
Diluted earnings per share
|
$
|
9.97
|
|
|
$
|
7.76
|
|
|
$
|
0.32
|
|
Anti-dilutive options to purchase common shares are excluded from diluted earnings per share calculations. Anti-dilutive options consist primarily of SARs with an exercise price greater than the average market closing price of the Class A Common Stock. There were 47,240, 72,856, and 259,142 shares that were anti-dilutive for the years ended December 31, 2019, 2018, and 2017, respectively.
Note 18 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 11, Derivative Instruments for more details.
|
|
|
•
|
Unrealized gain (loss) on forward interest rate swaps hedging transactions refers to the hedging of the interest rate risk exposure associated with the Company’s variable rate debt. As a result of the Company’s debt refinancing during the third quarter of 2019, remaining losses associated with terminated interest rate swaps were recognized as a component of Interest expense, net on the Consolidated Statements of Operations. See Note 12, Long-Term Debt 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 changes in each component of AOCI during the three years ended December 31, 2019, 2018 and 2017 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on sales hedging
|
|
Unrealized gain (loss) on forward interest rate swaps
|
|
Foreign currency translation adjustments
|
|
Total
|
Balance at December 31, 2016
|
$
|
6
|
|
|
$
|
(15
|
)
|
|
$
|
(36
|
)
|
|
$
|
(45
|
)
|
Other comprehensive (loss) income before reclassifications
|
(26
|
)
|
|
1
|
|
|
2
|
|
|
(23
|
)
|
Amounts reclassified from AOCI(1)
|
8
|
|
|
8
|
|
|
—
|
|
|
16
|
|
Tax effect
|
3
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
Other comprehensive loss (income), net of tax
|
(15
|
)
|
|
6
|
|
|
2
|
|
|
(7
|
)
|
Balance at December 31, 2017
|
(9
|
)
|
|
(9
|
)
|
|
(34
|
)
|
|
(52
|
)
|
Other comprehensive income (loss) before reclassifications
|
38
|
|
|
8
|
|
|
(13
|
)
|
|
33
|
|
Amounts reclassified from AOCI(1)
|
(13
|
)
|
|
4
|
|
|
—
|
|
|
(9
|
)
|
Tax effect
|
(4
|
)
|
|
(3
|
)
|
|
—
|
|
|
(7
|
)
|
Other comprehensive income (loss), net of tax
|
21
|
|
|
9
|
|
|
(13
|
)
|
|
17
|
|
Balance at December 31, 2018
|
12
|
|
|
—
|
|
|
(47
|
)
|
|
(35
|
)
|
Other comprehensive income before reclassifications
|
30
|
|
|
—
|
|
|
1
|
|
|
31
|
|
Amounts reclassified from AOCI(1)
|
(42
|
)
|
|
2
|
|
|
—
|
|
|
(40
|
)
|
Tax effect
|
2
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
Other comprehensive income (loss), net of tax
|
(10
|
)
|
|
—
|
|
|
1
|
|
|
(9
|
)
|
Balance at December 31, 2019
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
(46
|
)
|
|
$
|
(44
|
)
|
(1) See Note 11, Derivative Instruments regarding timing of reclassifications to operating results.
Note 19 Accounts Receivable Factoring
In 2018, the Company entered into a Receivables Factoring arrangement, pursuant to which certain receivables originated from the EMEA region are sold to a bank in exchange for cash. In the third quarter of 2019, the Company entered into an additional Receivables Factoring arrangement, which provides for additional sales of EMEA-originated receivables to a bank under similar terms. 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 of $125 million 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. Transactions under the Receivables Factoring arrangements are accounted for as sales under ASC 860 with related cash flows reflected in operating cash flows. As of December 31, 2019 and December 31, 2018 there were $60 million and $33 million, respectively, of uncollected receivables that had been sold and removed from the Company’s Consolidated Balance Sheets.
In its capacity as servicer of factored receivables, the Company had $33 million of cash collections that were not yet remitted to the banks as of December 31, 2019 due to the timing of collection processing activities. These amounts, whose use is not legally restricted, are included within Accrued liabilities on the Consolidated Balance Sheets and reflected within financing activities on the Consolidated Statements of Cash Flows. No liability existed as of December 31, 2018. Changes in such unremitted cash collection liabilities are reflected within financing cash flows.
Fees incurred in connection with these arrangements were not significant.
Note 20 Segment Information & Geographic Data
Segment results
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 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.
Financial information by segment is presented as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Net sales:
|
|
|
|
|
|
AIT
|
$
|
1,479
|
|
|
$
|
1,423
|
|
|
$
|
1,311
|
|
EVM
|
3,006
|
|
|
2,795
|
|
|
2,414
|
|
Total segment net sales
|
4,485
|
|
|
4,218
|
|
|
3,725
|
|
Corporate, eliminations(1)
|
—
|
|
|
—
|
|
|
(3
|
)
|
Total Net sales
|
$
|
4,485
|
|
|
$
|
4,218
|
|
|
$
|
3,722
|
|
Operating income:
|
|
|
|
|
|
AIT(2)(3)
|
$
|
355
|
|
|
$
|
325
|
|
|
$
|
274
|
|
EVM(2)(3)
|
483
|
|
|
404
|
|
|
301
|
|
Total segment operating income
|
838
|
|
|
729
|
|
|
575
|
|
Corporate, eliminations(4)
|
(146
|
)
|
|
(119
|
)
|
|
(253
|
)
|
Total Operating income
|
$
|
692
|
|
|
$
|
610
|
|
|
$
|
322
|
|
|
|
(1)
|
Amounts included in Corporate, eliminations consist of purchase accounting adjustments related to the Enterprise Acquisition.
|
|
|
(2)
|
During 2018, the Company revised its methodology for allocating certain operating expenses across its two reportable segments to more accurately reflect where these operating costs are being incurred. The reallocations relate primarily to facilities, information technology, marketing and human resources expenses. All periods are presented on a comparable basis and reflect these changes which reclassified operating expenses from AIT to EVM of $14 million for the year ended December 31, 2017. There was no impact to the Consolidated Financial Statements as a result of these reallocations.
|
|
|
(3)
|
AIT and EVM segment operating income includes depreciation and share-based compensation expense. The amounts of depreciation and share-based compensation attributable expense to AIT and EVM are proportionate to each segment’s Net sales.
|
|
|
(4)
|
To the extent applicable, amounts included in Corporate, eliminations consist of 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.
|
Sales to significant customers
Our Net sales to significant customers as a percentage of the total Company’s Net sales by segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
AIT
|
|
EVM
|
|
Total
|
|
AIT
|
|
EVM
|
|
Total
|
|
AIT
|
|
EVM
|
|
Total
|
Customer A
|
5.3
|
%
|
|
13.0
|
%
|
|
18.3
|
%
|
|
6.2
|
%
|
|
14.1
|
%
|
|
20.3
|
%
|
|
6.3
|
%
|
|
15.0
|
%
|
|
21.3
|
%
|
Customer B
|
4.7
|
%
|
|
9.0
|
%
|
|
13.7
|
%
|
|
5.6
|
%
|
|
10.1
|
%
|
|
15.7
|
%
|
|
5.3
|
%
|
|
8.9
|
%
|
|
14.2
|
%
|
Customer C
|
6.1
|
%
|
|
10.5
|
%
|
|
16.6
|
%
|
|
6.2
|
%
|
|
7.9
|
%
|
|
14.1
|
%
|
|
6.2
|
%
|
|
7.0
|
%
|
|
13.2
|
%
|
All three of the above customers are distributors and not end-users. No other customer accounted for 10% or more of total Net sales during the years presented.
The Company’s three largest customers accounted for 16.8%, 7.8%, and 20.6%, respectively, of accounts receivable as of December 31, 2019, and 23.0%, 16.9% and 14.6%, respectively, of accounts receivable as of December 31, 2018. No other customer accounted for more than 10% of accounts receivable.
Geographic data
Information regarding the Company’s operations by geographic area is contained in the following tables. Net sales amounts are attributed to geographic area based on customer location.
Net sales by region was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
North America
|
$
|
2,261
|
|
|
$
|
2,041
|
|
|
$
|
1,798
|
|
EMEA
|
1,462
|
|
|
1,409
|
|
|
1,221
|
|
Asia-Pacific
|
518
|
|
|
520
|
|
|
468
|
|
Latin America
|
244
|
|
|
248
|
|
|
235
|
|
Total Net sales
|
$
|
4,485
|
|
|
$
|
4,218
|
|
|
$
|
3,722
|
|
The United States and Germany were the only countries that accounted for more than 10% of the Company’s net sales in 2019, 2018, and 2017. Net sales during these years was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
United States
|
$
|
2,243
|
|
|
$
|
2,020
|
|
|
$
|
1,746
|
|
Germany
|
523
|
|
|
523
|
|
|
439
|
|
Other
|
1,719
|
|
|
1,675
|
|
|
1,537
|
|
Total Net sales
|
$
|
4,485
|
|
|
$
|
4,218
|
|
|
$
|
3,722
|
|
For the year ended December 31, 2019, the Company presented revenues by major country on the same basis as revenues by region, based on customer location. Prior to fiscal 2019, the Company presented revenues by major country based on the country where products, solutions, and services were invoiced from. Revenues by major country for the years ended December 31, 2018 and December 31, 2017 are presented above based on the location of customer, in order to conform to the same basis of presentation as the current year.
Geographic data for long-lived assets is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
North America
|
$
|
280
|
|
|
$
|
225
|
|
|
$
|
238
|
|
EMEA
|
39
|
|
|
14
|
|
|
14
|
|
Asia-Pacific
|
40
|
|
|
7
|
|
|
9
|
|
Latin America
|
7
|
|
|
3
|
|
|
3
|
|
Total long-lived assets
|
$
|
366
|
|
|
$
|
249
|
|
|
$
|
264
|
|
Long-lived assets are defined by the Company as property, plant and equipment as well as ROU assets. ROU assets were recognized upon adoption of ASC 842 in 2019, prior to which, there were no long-lived assets related to leasing activities. Primarily all of the Company’s long-lived assets in the North America region are located in the United States.
Note 21 Supplementary Financial Information
The components of Accrued liabilities are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Accrued incentive compensation
|
$
|
96
|
|
|
$
|
127
|
|
Customer reserves
|
44
|
|
|
45
|
|
Accrued payroll
|
63
|
|
|
55
|
|
Accrued warranty
|
21
|
|
|
22
|
|
Current portion of lease liabilities
|
29
|
|
|
—
|
|
Unremitted cash collections due to banks on factored accounts receivable
|
33
|
|
|
—
|
|
Accrued freight and duty
|
23
|
|
|
7
|
|
Accrued other expenses
|
70
|
|
|
66
|
|
Accrued liabilities
|
$
|
379
|
|
|
$
|
322
|
|
Summary of Quarterly Results of Operations (unaudited, in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Total Year
|
|
|
|
|
|
|
|
|
|
|
Total Net sales
|
$
|
1,066
|
|
|
$
|
1,097
|
|
|
$
|
1,130
|
|
|
$
|
1,192
|
|
|
$
|
4,485
|
|
Gross profit
|
501
|
|
|
520
|
|
|
535
|
|
|
544
|
|
|
2,100
|
|
Net income
|
115
|
|
|
124
|
|
|
136
|
|
|
169
|
|
|
544
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share:
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
$
|
2.14
|
|
|
$
|
2.28
|
|
|
$
|
2.52
|
|
|
$
|
3.13
|
|
|
$
|
10.08
|
|
Diluted earnings per share:
|
2.12
|
|
|
2.26
|
|
|
2.50
|
|
|
3.10
|
|
|
9.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Total Year
|
Net sales
|
$
|
977
|
|
|
$
|
1,012
|
|
|
$
|
1,092
|
|
|
$
|
1,137
|
|
|
$
|
4,218
|
|
Gross profit
|
465
|
|
|
472
|
|
|
505
|
|
|
539
|
|
|
1,981
|
|
Net income
|
109
|
|
|
70
|
|
|
127
|
|
|
115
|
|
|
421
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share:
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
$
|
2.04
|
|
|
$
|
1.31
|
|
|
$
|
2.37
|
|
|
$
|
2.14
|
|
|
$
|
7.86
|
|
Diluted earnings per share:
|
2.01
|
|
|
1.29
|
|
|
2.34
|
|
|
2.11
|
|
|
7.76
|
|