ZEBRA TECHNOLOGIES CORPORATION This section generally discusses fiscal 2019 and 2018 items and year-over-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 are not included herein. Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 for this discussion.
Overview
Zebra Technologies Corporation and its subsidiaries ("Zebra" or the "Company") is a global leader respected for innovative Enterprise Asset Intelligence ("EAI") solutions in the automatic identification and data capture solutions industry. We design, manufacture, and sell a broad range of products that capture and move data, including: mobile computers; barcode scanners and imagers; radio frequency identification device ("RFID") readers; specialty printers for barcode labeling and personal identification; real-time location systems ("RTLS"); related accessories and supplies, such as self-adhesive labels and other consumables; and software utilities and applications. We also provide a full range of services, including maintenance, technical support, and repair, managed and professional services, including cloud-based subscriptions. End-users of our products and services include those in the retail and e-commerce, transportation and logistics, manufacturing, healthcare, hospitality, warehouse and distribution, energy and utilities, government and education enterprises around the world. We provide products and services in approximately 180 countries, with 124 facilities and approximately 8,200 employees worldwide. Our customers have traditionally benefited from proven solutions that increase productivity and improve efficiency and asset utilization. The Company is poised to drive, and capitalize on, the evolution of the data capture industry into the broader EAI industry, based on important technology trends like the Internet of Things ("IoT"), ubiquitous mobility, automation and cloud computing. EAI solutions offer additional benefits to our customers including real-time, data-driven insights that improve operational visibility and drive workflow optimization.
Segments
The Company's operations consist of two reportable segments: Asset Intelligence & Tracking ("AIT") and Enterprise Visibility & Mobility ("EVM").
The AIT segment is an industry leader in barcode printing and asset tracking technologies. Its major product lines include barcode and card printers, supplies, services, location solutions, and retail solutions. Industries served include retail and e-commerce, transportation and logistics, manufacturing, healthcare, and other end markets within the following regions:North America ;Europe ,Middle East , andAfrica ("EMEA");Asia-Pacific ; andLatin America . The EVM segment is an industry leader in automatic information and data capture solutions. Its major product lines include mobile computing, data capture, RFID, and services. Industries served include retail and e-commerce, transportation and logistics, manufacturing, healthcare, and other end markets within the following regions:North America ; EMEA;Asia-Pacific ; andLatin America . Geographic Information For the year endedDecember 31, 2019 , the Company generated$4.5 billion of Net sales, of which approximately 50.4% were attributable toNorth America ; approximately 32.6% were attributable to EMEA; and approximately 17.0% were attributable to other foreign locations. Relative Net sales attributable to each region is comparable with the prior year period. Acquisitions and Integration Acquisitions are accounted for under the acquisition method of accounting for business combinations, with results included in the Company's operating results beginning on each respective acquisition date. Recent acquisitions contributed 1.9% to the current year consolidated Net sales growth. OnNovember 5, 2019 , the Company acquiredCortexica Vision Systems Limited ("Cortexica"), a provider of computer vision-based artificial intelligence solutions primarily serving the retail industry, for$7 million in cash. Additionally, we incurred approximately$2 million of acquisition-related costs in 2019, which primarily included third-party transaction and advisory fees and are reflected within Acquisition and integration costs on the Consolidated Statements of Operations. The operating results of Cortexica are included within the EVM segment. OnMay 31, 2019 , the Company acquiredProfitect, Inc. ("Profitect"), a provider of prescriptive analytics primarily serving the retail industry. The Company's total purchase consideration was$79 million , which consisted of$75 million in cash paid, net of cash acquired, and the fair value of the Company's existing minority ownership interest in Profitect of$4 million , as 25
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remeasured upon acquisition. Included within Other, net on the Consolidated Statements of Operations is a$4 million gain resulting from the remeasurement of the Company's previously held ownership interest in Profitect. 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 operating results of Profitect are included within the EVM segment. OnFebruary 21, 2019 , the Company acquiredTemptime Corporation ("Temptime"), a developer and manufacturer of temperature-monitoring labels and devices. In connection with this acquisition, the Company paid$180 million in cash, net of cash acquired. Additionally, we incurred$3 million of acquisition-related costs in 2019, which primarily included third-party transaction and advisory fees and are reflected within Acquisition and integration costs on the Consolidated Statements of Operations. The operating results ofTemptime are included within the AIT segment. OnAugust 14, 2018 , the Company completed its tender offer to acquire all outstanding common stock ofXplore Technologies Corporation ("Xplore") for$6.00 per share. In connection with this acquisition, the Company paid$87 million in cash, which included$72 million for the net assets acquired, a$9 million payment ofXplore debt, as well as$6 million of otherXplore transaction-related obligations. Additionally, we incurred$8 million of acquisition-related costs in 2018, which primarily included third-party transaction and advisory fees, and$2 million of system integration costs in 2019. These costs are reflected within Acquisition and integration costs on the Consolidated Statements of Operations. The operating results ofXplore are included within the EVM segment. OnOctober 27, 2014 , the Company acquired the Enterprise business from Motorola Solutions, Inc. ("MSI") and began integration activities focused on creating "One Zebra". Our integration priorities centered on maintaining business continuity while identifying and implementing cost synergies, operating efficiencies, and integration of functional organizations and processes, in addition to concluding MSI-provided transition service agreements ("TSAs"). During 2017, the Company substantially completed its integration activities associated with the Enterprise acquisition, including the implementation of a common enterprise resource planning system and exiting the TSAs. Restructuring Programs 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 theNorth America and 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 endedDecember 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 theOctober 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.
When reviewing the Company's results, our Chief Operating Decision Maker does not include Exit and restructuring costs in the operating results of our segments; as such, these costs are reported as a component of Corporate.
See Note 9, Exit and Restructuring Costs in the Notes to Consolidated Financial Statements.
Impact ofU.S. Tax Reform Enacted onDecember 22, 2017 , the Tax Cut and Jobs Act ("the Act") reduced theU.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 Global Intangible Low-Taxed Income, Base Erosion Anti-Avoidance Tax, and the Deduction for Foreign-Derived Intangible Income provisions of the Act, for which we recorded income tax expense of$12 million and$10 million for the years endedDecember 31, 2019 and 2018, respectively. We are not currently subject to the new limitations which deferU.S. interest deductions in excess of 30% of adjusted taxable income. However, the application of the interest limitation 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 26
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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.
During 2017, the Company provisionally recognized an income tax expense of$72 million associated with the Act, comprised of a one-time transition tax of$37 million and$35 million remeasurement of its netU.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 throughDecember 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 substantially reduce its cash payments for the one-time transition tax.
During 2019, there were no retroactive law changes that impacted the 2018 reassessment.
See Note 16, Income Taxes in the Notes to Consolidated Financial Statements for further information.
Other Developments In 2019, the Company incurred$5 million related to efforts to diversify its product sourcing footprint, to include sourcing products fromTaiwan ,Vietnam , andMalaysia , thereby reducing its reliance on Chinese-based manufacturing and the impacts of related customs duties ("tariffs") onU.S. imports fromChina . These costs are primarily reflected within Operating expense on the Consolidated Statements of Operations. The Company anticipates incurring additional one-time operating costs of up to$25 million by the middle of fiscal year 2020 as well as incremental equipment purchases of approximately$10 million to$15 million . As a result of these actions, along with certainU.S. pricing actions and based on current economic and operating conditions, the Company expects to substantially mitigate the ongoing financial impacts of Chinese tariffs. InDecember 2019 , a strain of the coronavirus surfaced inWuhan, China . InJanuary 2020 , a broad number of governmental and commercial efforts commenced to contain the spread of the virus inChina . As a result, many of our supply chain partners inChina temporarily suspended or modified their business operations beyond the normal ChineseLunar New Year shutdown. As ofFebruary 10, 2020 , operations have resumed, to varying degrees, at many of our supply chain partners. The situation is complex and rapidly-evolving. We are not yet able to fully ascertain its impact on our results of operations, either with respect to its impact on our manufacturing operations inChina or with respect to its impact on our sales to customers inChina . Our current expectation is the coronavirus outbreak could have a negative impact to our sales of between$0 and$50 million . This expectation is based solely on facts as we understand them to be today. The impact could be significantly greater if the coronavirus outbreak were to develop in a manner that is significantly worse than our current expectations. 27
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Results of Operations: Year Ended 2019 versus 2018 and Year Ended 2018 versus
2017
Consolidated Results of Operations
(amounts in millions, except percentages)
Year Ended December 31, Percent Percent
Change 2019 Change 2018 vs
2019 2018 2017 vs 2018 2017
Net sales $ 4,485 $ 4,218 $ 3,722 6.3 % 13.3 %
Gross profit 2,100 1,981 1,710 6.0 % 15.8 %
Gross margin 46.8 % 47.0 % 45.9 % (20) bps 110 bps
Operating expenses 1,408 1,371 1,388 2.7 % (1.2 )%
Operating income $ 692 $ 610 $ 322 13.4 % 89.4 %
Net sales to customers by geographic region were as follows (amounts in millions, except percentages):
Year Ended December 31, Percent
Percent Change 2018 vs
2019 2018 2017 Change 2019 vs 2018 2017
North America $ 2,261 $ 2,041 $ 1,798 10.8 % 13.5 %
EMEA 1,462 1,409 1,221 3.8 % 15.4 %
Asia-Pacific 518 520 468 (0.4 )% 11.1 %
Latin America 244 248 235 (1.6 )% 5.5 %
Total Net sales $ 4,485 $ 4,218 $ 3,722 6.3 % 13.3 %
Operating expenses are summarized below (amounts in millions, except percentages):
Year Ended December 31 , As a Percentage of Net sales
2019 2018 2017 2019 2018 2017
Selling and marketing $ 503 $ 483 $ 448 11.2 % 11.5 % 12.0 %
Research and development 447 444 389 10.0 % 10.5 % 10.5 %
General and
administrative 323 328 301 7.2 % 7.8 % 8.1 %
Amortization of
intangible assets 103 97 184 NM NM NM
Acquisition and
integration costs 22 8 50 NM NM NM
Exit and restructuring
costs 10 11 16 NM NM NM
Total Operating expenses
Consolidated Organic Net sales growth:
Year Ended December 31,
2019 2018
Reported GAAP Consolidated Net sales growth 6.3 % 13.3 % Adjustments: Impact of foreign currency translations (1) 1.1 % (1.6 )% Impact of acquisitions (2)
(1.9 )% (0.6 )%
Consolidated Organic Net sales growth 5.5 % 11.1 %
Consolidated Organic Net sales growth is a non-GAAP financial measure. See the Non-GAAP Measures section at the end of this item.
(1) Operating results reported in
exchange rate fluctuations. Foreign currency translation impact
represents the difference in results that are attributable to fluctuations in
the currency exchange rates used to convert the results for businesses where
the functional currency is not the
translating the current period results at the currency exchange rates used in
the comparable prior year period, inclusive of the Company's foreign currency
hedging program.
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(2) For purposes of computing Organic Net sales, amounts directly attributable to
business acquisitions are excluded for twelve months following their
respective acquisition dates.
2019 compared to 2018
Net sales increased $267 million or 6.3% compared with the prior year,
reflecting growth in the North America and EMEA regions. Excluding the effects
of acquisitions and unfavorable foreign currency changes, the increase in
Consolidated Organic Net sales was 5.5%, primarily due to higher sales of mobile
computing products and support services, which were partially offset by lower
sales of data capture products.
Gross margin decreased to 46.8% in the current period compared to 47.0% in the
prior year period. AIT gross margin was slightly lower compared to the prior
period, while EVM gross margin was unchanged.
Operating expenses for the years ended December 31, 2019 and 2018 were $1,408
million and $1,371 million , or 31.4% and 32.5% of Net sales, respectively. As a
percentage of Net sales, operating costs continue to trend favorably, reflecting
continued operating leverage improvement. The current year Operating expenses
include higher acquisition-related costs and costs associated with the
diversification of the Company's product sourcing footprint, partially offset by
lower incentive-based compensation costs. The prior year Operating expenses
included a $13 million legal settlement cost.
Operating income was $692 million for the current year compared to $610 million
for the prior year. The increase was primarily due to higher Net sales and Gross
profit, which were partially offset by higher Operating expenses.
Total Other expenses, net was $94 million for the current year, compared to $86
million for the prior year. The current year benefited from lower interest
expense due to lower outstanding debt levels and lower amortization of debt
issuance costs. The current year also included a $19 million loss on interest
rate swaps, $7 million of debt refinancing costs as well as $3 million in
investment gains. The prior year included $10 million in investment gains, an $8
million gain on interest rate swaps as well as $7 million of debt refinancing
costs.
The Company recognized income tax expense of $54 million and $103 million for
the years ended December 31, 2019 and 2018, respectively. The Company's
effective tax rates were 9.0% and 19.7% as of December 31, 2019 and 2018,
respectively. The decrease in the effective tax rate compared to the prior year
was primarily due to favorable changes in uncertain income tax positions.
Results of Operations by Segment
The following commentary should be read in conjunction with the financial
results of each operating business segment as detailed in Note 20, Segment
Information & Geographic Data in the Notes to Consolidated Financial Statements.
To the extent applicable, segment results exclude purchase accounting
adjustments, amortization of intangible assets, acquisition and integration
costs, impairment of goodwill and other intangibles, exit and restructuring
costs, and product sourcing diversification costs.
Asset Intelligence & Tracking Segment ("AIT")
(amounts in millions, except percentages)
Year Ended December 31, Percent Percent
Change 2019 Change 2018
2019 2018 2017 vs 2018 vs 2017
Net sales $ 1,479 $ 1,423 $ 1,311 3.9 % 8.5 %
Gross profit 736 710 640 3.7 % 10.9 %
Gross margin 49.8 % 49.9 % 48.8 % (10) bps 110 bps
Operating expenses 381 385 366 (1.0 )% 5.2 %
Operating income $ 355 $ 325 $ 274 9.2 % 18.6 %
AIT Organic Net sales growth:
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December 31, 2019 2018
AIT Reported GAAP Net sales growth 3.9 % 8.5 % Adjustments: Impact of foreign currency translations(1) 1.0 % (1.5 )% Impact of acquisition(2)
(2.7 )% - %
AIT Organic Net sales growth 2.2 % 7.0 %
AIT Organic Net sales growth is a non-GAAP financial measure. See the Non-GAAP Measures section at the end of this item.
(1) Operating results reported in
exchange rate fluctuations. Foreign currency translation impact
represents the difference in results that are attributable to fluctuations in
the currency exchange rates used to convert the results for businesses where
the functional currency is not the
translating the current period results at the currency exchange rates used in
the comparable prior year period, inclusive of the Company's foreign currency
hedging program.
(2) For purposes of computing Organic Net sales, amounts directly attributable to
the Temptime acquisition are excluded for twelve months following the
February 21, 2019 acquisition date.
2019 compared to 2018
Net sales for AIT increased $56 million or 3.9% compared to the prior year,
including the impacts of the Temptime acquisition and unfavorable foreign
currency changes. AIT Organic Net Sales growth of 2.2% was primarily due to
increases in printing products, support services, and supplies.
Gross margin decreased to 49.8% in the current year compared to 49.9% for the
prior year, primarily due to the unfavorable impacts of Chinese import tariffs
and foreign currency changes, partially offset by favorable product mix.
Operating income increased 9.2% due to higher Net sales, Gross profit, and lower Operating expenses.
Enterprise Visibility & Mobility Segment ("EVM")
(amounts in millions, except percentages)
Year Ended December 31, Percent Percent
Change 2019 Change 2018
2019 2018 2017 vs 2018 vs 2017
Net sales $ 3,006 $ 2,795 $ 2,414 7.5 % 15.8 %
Gross profit 1,371 1,274 1,073 7.6 % 18.7 %
Gross margin 45.6 % 45.6 % 44.4 % 0 bps 120 bps
Operating expenses 888 870 772 2.1 % 12.7 %
Operating income $ 483 $ 404 $ 301 19.6 % 34.2 %
EVM Organic Net sales growth:
December 31,
2019 2018
EVM Reported GAAP Net sales growth 7.5 % 15.8 %
Adjustments:
Impact of foreign currency translations (1) 1.1 % (1.6 )% Impact of acquisitions (2) (1.4 )% (0.8 )% EVM Organic Net sales growth 7.2 % 13.4 %
EVM Organic Net sales growth is a non-GAAP financial measure. See the Non-GAAP Measures section at the end of this item.
(1) Operating results reported in
exchange rate fluctuations. Foreign currency translation impact
represents the difference in results that are attributable to fluctuations in
the
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currency exchange rates used to convert the results for businesses where the functional currency is not theU.S. Dollar. This impact is calculated by translating the current period results at the currency exchange rates used in the comparable prior year period, inclusive of the Company's foreign currency hedging program.
(2) For purposes of computing Organic Net sales, amounts directly attributable to
the
months following their respective acquisition dates.
2019 compared to 2018 Net sales for EVM increased$211 million or 7.5% compared to the prior year, including the impacts of acquisitions and unfavorable foreign currency changes. EVM OrganicNet Sales growth of 7.2% was primarily attributable to higher mobile computing product sales and support services, which were partially offset by lower sales of data capture products. Gross margin was 45.6% in both the current and prior year periods, as the unfavorable impacts of product and business mix, Chinese import tariffs, and foreign currency changes collectively offset operational efficiencies.
Operating income for the current year increased 19.6% due to higher Net sales and Gross profit, which were partially offset by higher Operating expenses.
Critical Accounting Policies and Estimates Management prepared the consolidated financial statements of the Company under accounting principles generally accepted in theU.S. The application of these principles requires the use of estimates, judgments, and assumptions which affect the amounts reported in our consolidated financial statements. We believe that our estimates, judgments, and assumptions are reasonable based upon available information. Our more significant estimates and assumptions include those related to the recognition and measurement of income tax assets and liabilities, development of reporting unit fair values as part of our annual goodwill impairment testing, and the measurement of variable consideration and allocation of transaction price to performance obligations in revenue transactions. See Note 2, Significant Accounting Policies in the Notes to Consolidated Financial Statements for additional discussion of these as well as other accounting policies. New Accounting Pronouncements EffectiveJanuary 1, 2019 , the Company adopted a new accounting standard related to leases. See Note 2, Significant Accounting Policies in the Notes to Consolidated Financial Statements for further information on this and other accounting pronouncements. Liquidity and Capital Resources The primary factors that influence our liquidity include the amount and timing of our revenues, cash collections from our customers, cash payments to our suppliers, capital expenditures, repatriation of foreign cash and investments, acquisitions, and share repurchases. Management believes that our existing capital resources, inclusive of available borrowing capacity on debt and other financing facilities, and funds generated from operations are sufficient to meet anticipated capital requirements and service our indebtedness. The following table summarizes our cash flow activities for the years indicated (in millions): Year EndedDecember 31 ,
$ Change 2019 vs
2019 2018 2017 2018 $ Change 2018 vs 2017
Cash flow (used in)
provided by:
Operating activities $ 685 $ 785 $ 478 $ (100 ) $ 307
Investing activities (335 ) (137 ) (51 ) (198 ) (86 )
Financing activities (365 ) (661 ) (517 ) 296 (144 )
Effect of exchange rates on
cash balances 1 (5 ) (4 ) 6 (1 )
Net change in cash and cash
equivalents $ (14 ) $ (18 ) $ (94 ) $ 4 $ 76
2019 vs. 2018
The change in our cash and cash equivalents balance during the current year is
reflective of the following:
• Cash flow provided by operating activities decreased by
compared to the prior year. The decrease was primarily due to timing of
vendor payments, timing of accounts receivable collections, as well as
higher income tax and incentive compensation payments, which were
partially offset by higher net income, reduced inventory levels, and lower
cash payments for interest.
• The increase in net cash used in investing activities was primarily driven
by business acquisitions.
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• The decrease in cash used in financing activities was primarily due to
lower net debt repayments in the current year, including amounts borrowed
to fund acquisitions, partially offset by repurchases of common shares in
the current year.
Company 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
Credit Facilities
The Company's debt includes borrowings under Term Loan A and a multi-currency
Revolving Credit Facility, both maturing in 2024. Borrowings under the
facilities bear interest at a variable rate plus an applicable margin, for which
the Company has entered into interest rate swap contracts to manage interest
rate exposure. All borrowings under the credit facilities as of December 31,
2019 were denominated in U.S. Dollars, except for €92 million in
Euro-denominated borrowings under the Revolving Credit Facility. The average
interest rates as of December 31, 2019 for Term Loan A and the Revolving Credit
Facility were 3.01% and 1.25%, respectively. Interest is paid for each
instrument on a monthly basis. The Company is required to prepay certain amounts
in the event of certain circumstances or transactions. Also, the Company may
make prepayments against Term Loan A, in whole or in part, without premium or
penalty.
During the third quarter of 2019, the Company amended the terms of its credit
facilities, which included increasing its borrowing under Term Loan A from $608
million to $1 billion and increasing its borrowing capacity under the Revolving
Credit Facility from $800 million to $1 billion , while extending the maturities
of each of these instruments to August 2024 . In conjunction with increasing its
borrowing capacity under Term Loan A and the Revolving Credit Facility, the
Company made a payment of $445 million to extinguish Term Loan B. This debt
refinancing reduces the Company's future interest cost while meeting anticipated
capital requirements.
During the second quarter of 2018, the Company amended the terms of its credit
facilities, which included the replacement of existing Term Loan A with a new
Term Loan A of $670 million , increasing the borrowing capacity under the
Revolving Credit Facility from $500 million to $800 million , and entering into a
partial debt extinguishment of $300 million on Term Loan B.
See Note 12, Long-Term Debt in the Notes to Consolidated Financial Statements
for further details related to the Company's credit facilities and refinancing
activities.
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 domestically originated accounts receivables. In May 2019 , the Company
entered into an Additional Receivables Financing Facility which allows for
additional borrowings of up to $100 million , increasing the Company's total
borrowing capacity to $280 million , using receivables as collateral. Both
facilities are accounted for as secured borrowings and bear interest at a
variable rate. As of December 31, 2019 , the facilities had an average interest
rate of 2.60% and the Company's Consolidated Balance Sheets included $545
million of receivables that were pledged, of which $266 million had been
borrowed against. All borrowings under the facilities were denominated in U.S.
Dollars. The Receivable Financing Facility will mature on March 29, 2021 and the
Additional Receivables Financing Facility will mature on May 18, 2020 .
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. As of
December 31, 2019 , the Company was in compliance with all debt covenants.
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See Note 12, Long-Term Debt in the Notes to Consolidated Financial Statements for further details.
Receivables Factoring In addition to the Company's borrowing arrangements described above, the Company has Receivables Factoring arrangements. The first arrangement was entered into inDecember 2018 , and a second arrangement was entered into inSeptember 2019 under similar terms as the first. Under the Receivables Factoring arrangements, the Company sells certain EMEA-originated receivables to banks in exchange for cash without maintaining a beneficial interest in the receivables sold. At any time, 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 Accounting Standards Codification Topic 860, Transfers and Servicing of Financial Assets with related cash flows reflected in operating cash flows.$60 million and$33 million of uncollected receivables were sold and removed from the Company's Consolidated Balance Sheets as ofDecember 31, 2019 and 2018, respectively. The Company may enter into additional Receivables Factoring arrangements in the future in order to provide additional liquidity.
See Note 19, Accounts Receivable Factoring in the Notes to Consolidated Financial Statements for further details.
Share Repurchases OnJuly 30, 2019 , the Company announced that its Board of Directors authorized a share repurchase program for up to an aggregate amount of$1 billion of its outstanding shares of common stock. The new share repurchase program supersedes the Company's prior share repurchase program, which was authorized inNovember 2011 . The new share repurchase program does not have a stated expiration date. The level of the Company's repurchases depends on a number of factors, including its financial condition, capital requirements, cash flows, results of operations, future business prospects and other factors management may deem relevant. The timing, volume and nature of repurchases are subject to market conditions, applicable securities laws and other factors and may be amended, suspended or discontinued at any time. Repurchases may be effected from time to time through open market purchases, including pursuant to a pre-set trading plan meeting the requirements of Rule 10b5-1(c) of the Securities Exchange Act of 1934. During the year endedDecember 31, 2019 the Company repurchased 237,886 shares of common stock for$47 million . Cash and Cash Equivalents Included in the Company's Cash and cash equivalents are amounts held by foreign subsidiaries. The Company had$26 million and$39 million of foreign cash and cash equivalents included in the Company's total cash positions of$30 million and$44 million as ofDecember 31, 2019 and 2018, respectively. Contractual Obligations Zebra's contractual obligations as ofDecember 31, 2019 were as follows (in millions): Payments due by period Less than 1 More than 5 Total year 1-3 years 3-5 years years
Operating lease obligations(1)$ 152 $ 36 $ 54$ 35 $ 27 Deferred compensation liability(2) 24 2 1 1 20 Debt principal payments 1,286 197 155 934 - Interest payments(3) 146 40 69 37 - Purchase obligations(4) 365 365 - - - Total$ 1,973 $ 640$ 279 $ 1,007 $ 47
(1) Includes leases of facilities, distribution centers, and sales and
administrative offices that are classified as operating leases. The
contractual obligations above include future minimum payments, including
payments for those periods where renewal options are reasonably certain to be
exercised.
(2) Includes payments related to obligations under our deferred compensation
plan. The deferred compensation plan allows certain members of management and
other highly-compensated employees to defer receipt of a portion of their
compensation. The amount in "More than 5 Years" includes the remaining total
balance under the deferred compensation plan to be paid to participants who
have not terminated employment, since we cannot estimate the timings of those
terminations and withdrawals.
(3) Includes payments related to interest on the Company's debt, as well as
related settlements of interest rate swap agreements. These payments are
estimated based on applicable interest rates and margins along with the
balance of
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outstanding debt as ofDecember 31, 2019 . Future interest payments may increase or decrease based upon fluctuations in market rates and/or the Company's borrowing levels. (4) Purchase obligations are for purchases made in the normal course of business
to meet operational requirements, primarily raw materials and finished goods.
Purchase obligations included in the table above are based on quarterly
forecasted component and manufacturing requirements and typically provide for
fulfillment within agreed upon lead-times and/or commercially standard
lead-times for products. The Company does not have contractual obligations
related to take-or-pay arrangements.
Uncertain tax benefits of$10 million have been excluded from the table above because we cannot reliably estimate the period of cash settlement, if any, with the respective taxing authorities. See Note 16, Income Taxes in the Notes to Consolidated Financial Statements for further information. Non-GAAP Measures The Company has provided reconciliations of the supplemental non-GAAP financial measures, as defined under the rules of theSecurities and Exchange Commission , presented herein to the most directly comparable financial measures calculated and presented in accordance with GAAP. These supplemental non-GAAP financial measures - Consolidated Organic Net sales growth, AIT Organic Net sales growth, and EVM Organic Net sales growth - are presented because our management evaluates our financial results both including and excluding the effects of business acquisitions and foreign currency translation, as applicable. Management believes that the supplemental non-GAAP financial measures presented provide additional perspective and insights when analyzing the core operating performance of our business from period to period and trends in our historical operating results. These supplemental non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with the GAAP financial measures presented. 34
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the sensitivity of income to changes in interest rates, commodity
prices, and foreign currency changes. Zebra is primarily exposed to the
following types of market risk: interest rates and foreign currency.
Interest Rate Risk
We are exposed to interest rate volatility with regard to existing debt
issuances. Primary exposures include the London Inter-bank Offered Rate
("LIBOR"). From time to time, we use interest rate derivative contracts,
including interest rate swaps, to mitigate our exposure from interest rate
changes on existing debt and future debt issuances, thereby reducing the
volatility of our financing costs and, based on current and projected market
conditions, achieve a desired proportion of fixed versus floating-rate debt.
Generally, under these swaps, we agree with a counterparty to exchange
floating-rate for fixed-rate interest amounts with an agreed upon notional
amount.
The United Kingdom's Financial Conduct Authority , which regulates LIBOR,
announced in 2017 that it intends to phase out LIBOR by the end of 2021. Some
of the Company's contracts with respect to its borrowings and interest rate swap
contracts already contain comparable alternative reference rates that would
automatically take effect upon the phasing out of LIBOR. For certain other
contracts that do not already contain sufficient alternative reference rate
provisions, the Company anticipates negotiating comparable replacement reference
rates with its counterparties.
As of December 31, 2019 , we had approximately $1.3 billion of debt outstanding
under our debt facilities, which bears interest determined by reference to a
variable rate index. A one percentage point increase or decrease in interest
rates would increase or decrease annual interest expense by approximately $5
million . This exposure includes the impact of associated forward interest rate
swaps outstanding as of December 31, 2019 . Refer to Note 11, Derivative
Instruments in the Notes to Consolidated Financial Statements for further
discussion of these risk mitigation activities. Exposure to variable interest
may increase or decrease, to the extent that the Company's borrowings under its
Revolving Credit Facility or Receivables Financing Facilities increase or
decrease, respectively.
Foreign Exchange Risk
We provide products and services in approximately 180 countries throughout the
world and, therefore, at times are exposed to risk based on movements in foreign
exchange rates. On occasion, we invoice customers in their local currency and
have a resulting foreign currency denominated revenue transaction and accounts
receivable. We also purchase certain raw materials and other items in foreign
currencies. We manage these risks using derivative financial instruments. See
Note 11, Derivative Instruments in the Notes to Consolidated Financial
Statements for further discussions of hedging activities.
We are exposed to fluctuations in foreign currency exchange rates, primarily
with respect to the Euro, British Pound Sterling, Czech Koruna, Brazilian Real
and Chinese Yuan. A one percentage point increase or decrease in exchange rates
relative to the U.S. Dollar would increase or decrease our pre-tax income by
approximately $1 million . This amount is inclusive of the impact of associated
derivative contracts. We enter into foreign currency forward contracts to hedge
against the effect of exchange rate fluctuations on the Consolidated Balance
Sheets of certain entities with exposures denominated in foreign currencies.
These transactions are typically one month in maturity and are not designated as
hedges.
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