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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 1, 2022
OR
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| | For the transition period from to |
Commission File Number: 000-19406
Zebra Technologies Corporation
(Exact name of registrant as specified in its charter)
| | | | | |
| Delaware | 36-2675536 |
(State or other jurisdiction of
incorporation or organization) | (I.R.S. Employer
Identification No.) |
3 Overlook Point, Lincolnshire, IL 60069
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (847) 634-6700
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | | | | | | | |
| Title of each class | | Trading Symbol(s) | | Name of exchange on which registered |
| Class A Common Stock, par value $.01 per share | | ZBRA | | The NASDAQ Stock Market, LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
| | Large accelerated filer | ☒ | Accelerated filer | ☐ |
| | Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 28, 2022, there were 51,629,798 shares of Class A Common Stock, $.01 par value, outstanding.
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
QUARTER ENDED OCTOBER 1, 2022
TABLE OF CONTENTS
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| Item 4. | | |
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| Item 1A. | | |
| Item 2. | | |
| Item 6. | | |
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PART I - FINANCIAL INFORMATION
| | | | | |
| Item 1. | Consolidated Financial Statements |
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
| | | | | | | | | | | |
| October 1,
2022 | | December 31,
2021 |
| | (Unaudited) | | |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 81 | | | $ | 332 | |
Accounts receivable, net of allowances for doubtful accounts of $1 million each as of October 1, 2022 and December 31, 2021 | 804 | | | 752 | |
| Inventories, net | 814 | | | 491 | |
| Income tax receivable | 11 | | | 8 | |
| Prepaid expenses and other current assets | 161 | | | 106 | |
| Total Current assets | 1,871 | | | 1,689 | |
| Property, plant and equipment, net | 272 | | | 272 | |
| Right-of-use lease assets | 172 | | | 131 | |
| Goodwill | 3,891 | | | 3,265 | |
| Other intangibles, net | 659 | | | 469 | |
| Deferred income taxes | 304 | | | 192 | |
| Other long-term assets | 279 | | | 197 | |
| Total Assets | $ | 7,448 | | | $ | 6,215 | |
| Liabilities and Stockholders’ Equity | | | |
| Current liabilities: | | | |
| Current portion of long-term debt | $ | 144 | | | $ | 69 | |
| Accounts payable | 835 | | | 700 | |
| Accrued liabilities | 675 | | | 639 | |
| Deferred revenue | 401 | | | 380 | |
| Income taxes payable | 18 | | | 12 | |
| Total Current liabilities | 2,073 | | | 1,800 | |
| Long-term debt | 2,017 | | | 922 | |
| Long-term lease liabilities | 150 | | | 121 | |
| Deferred income taxes | 78 | | | 6 | |
| Long-term deferred revenue | 323 | | | 315 | |
| Other long-term liabilities | 150 | | | 67 | |
| Total Liabilities | 4,791 | | | 3,231 | |
| Stockholders’ Equity: | | | |
Preferred stock, $.01 par value; authorized 10,000,000 shares; none issued | — | | | — | |
Class A common stock, $.01 par value; authorized 150,000,000 shares; issued 72,151,857 shares | 1 | | | 1 | |
| Additional paid-in capital | 542 | | | 462 | |
Treasury stock at cost, 20,336,198 and 18,736,582 shares as of October 1, 2022 and December 31, 2021, respectively | (1,702) | | | (1,023) | |
| Retained earnings | 3,850 | | | 3,573 | |
| Accumulated other comprehensive loss | (34) | | | (29) | |
| Total Stockholders’ Equity | 2,657 | | | 2,984 | |
| Total Liabilities and Stockholders’ Equity | $ | 7,448 | | | $ | 6,215 | |
See accompanying Notes to Consolidated Financial Statements.
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | October 1,
2022 | | October 2,
2021 | | October 1,
2022 | | October 2,
2021 |
| Net sales: | | | | | | | |
| Tangible products | $ | 1,164 | | | $ | 1,240 | | | $ | 3,630 | | | $ | 3,585 | |
| Services and software | 214 | | | 196 | | | 648 | | | 575 | |
| Total Net sales | 1,378 | | | 1,436 | | | 4,278 | | | 4,160 | |
| Cost of sales: | | | | | | | |
| Tangible products | 632 | | | 687 | | | 1,998 | | | 1,896 | |
| Services and software | 118 | | | 103 | | | 341 | | | 305 | |
| Total Cost of sales | 750 | | | 790 | | | 2,339 | | | 2,201 | |
| Gross profit | 628 | | | 646 | | | 1,939 | | | 1,959 | |
| Operating expenses: | | | | | | | |
| Selling and marketing | 149 | | | 148 | | | 452 | | | 430 | |
| Research and development | 143 | | | 141 | | | 428 | | | 422 | |
| General and administrative | 92 | | | 85 | | | 288 | | | 259 | |
| Settlement and related costs | — | | | — | | | 372 | | | — | |
| Amortization of intangible assets | 39 | | | 29 | | | 107 | | | 81 | |
| Acquisition and integration costs | 1 | | | 6 | | | 19 | | | 11 | |
| Exit and restructuring costs | 2 | | | — | | | 4 | | | — | |
| Total Operating expenses | 426 | | | 409 | | | 1,670 | | | 1,203 | |
| Operating income | 202 | | | 237 | | | 269 | | | 756 | |
| Other income (loss), net: | | | | | | | |
| Foreign exchange gain (loss) | — | | | (4) | | | 5 | | | (3) | |
| Interest income (expense), net | 21 | | | (5) | | | 48 | | | (10) | |
| Other (expense) income, net | (1) | | | — | | | (3) | | | (1) | |
| Total Other income (expense), net | 20 | | | (9) | | | 50 | | | (14) | |
| Income before income tax | 222 | | | 228 | | | 319 | | | 742 | |
| Income tax expense | 52 | | | 29 | | | 42 | | | 96 | |
| Net income | $ | 170 | | | $ | 199 | | | $ | 277 | | | $ | 646 | |
| Basic earnings per share | $ | 3.28 | | | $ | 3.72 | | | $ | 5.29 | | | $ | 12.08 | |
| Diluted earnings per share | $ | 3.26 | | | $ | 3.69 | | | $ | 5.25 | | | $ | 11.98 | |
See accompanying Notes to Consolidated Financial Statements.
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | October 1,
2022 | | October 2,
2021 | | October 1,
2022 | | October 2,
2021 |
| Net income | $ | 170 | | | $ | 199 | | | $ | 277 | | | $ | 646 | |
| Other comprehensive income (loss), net of tax: | | | | | | | |
| Changes in unrealized gains on anticipated sales hedging transactions | (1) | | | 12 | | | 11 | | | 46 | |
| | | | | | | |
| | | | | | | |
| Foreign currency translation adjustment | (5) | | | (2) | | | (16) | | | (5) | |
| Comprehensive income | $ | 164 | | | $ | 209 | | | $ | 272 | | | $ | 687 | |
See accompanying Notes to Consolidated Financial Statements.
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, except share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A Common Stock Shares | | Class A Common Stock Value | | Additional Paid-in Capital | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| Balance at December 31, 2021 | | 53,415,275 | | | $ | 1 | | | $ | 462 | | | $ | (1,023) | | | $ | 3,573 | | | $ | (29) | | | $ | 2,984 | |
| | | | | | | | | | | | | | |
| Issuances of treasury shares related to share-based compensation plans, net of forfeitures | | 20,082 | | | — | | | 8 | | | (2) | | | — | | | — | | | 6 | |
| Shares withheld to fund withholding tax obligations related to share-based compensation plans | | (1,639) | | | — | | | — | | | (1) | | | — | | | — | | | (1) | |
| Share-based compensation | | — | | | — | | | 17 | | | — | | | — | | | — | | | 17 | |
| Repurchases of common stock | | (648,875) | | | — | | | — | | | (305) | | | — | | | — | | | (305) | |
| Net income | | — | | | — | | | — | | | — | | | 205 | | | — | | | 205 | |
| Changes in unrealized gains and losses on anticipated sales hedging transactions (net of income taxes) | | — | | | — | | | — | | | — | | | — | | | 5 | | | 5 | |
| | | | | | | | | | | | | | |
| Foreign currency translation adjustment | | — | | | — | | | — | | | — | | | — | | | (5) | | | (5) | |
| Balance at April 2, 2022 | | 52,784,843 | | | $ | 1 | | | $ | 487 | | | $ | (1,331) | | | $ | 3,778 | | | $ | (29) | | | $ | 2,906 | |
| | | | | | | | | | | | | | |
| Issuances of treasury shares related to share-based compensation plans, net of forfeitures | | 70,821 | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
| Shares withheld to fund withholding tax obligations related to share-based compensation plans | | (56,431) | | | — | | | — | | | (22) | | | — | | | — | | | (22) | |
| Share-based compensation | | — | | | — | | | 25 | | | — | | | — | | | — | | | 25 | |
| Repurchases of common stock | | (844,239) | | | — | | | — | | | (300) | | | — | | | — | | | (300) | |
| Net loss | | — | | | — | | | — | | | — | | | (98) | | | — | | | (98) | |
| Changes in unrealized gains and losses on anticipated sales hedging transactions (net of income taxes) | | — | | | — | | | — | | | — | | | — | | | 7 | | | 7 | |
| | | | | | | | | | | | | | |
| Foreign currency translation adjustment | | — | | | — | | | — | | | — | | | — | | | (6) | | | (6) | |
| Balance at July 2, 2022 | | 51,954,994 | | | $ | 1 | | | $ | 512 | | | $ | (1,652) | | | $ | 3,680 | | | $ | (28) | | | $ | 2,513 | |
| | | | | | | | | | | | | | |
| Issuances of treasury shares related to share-based compensation plans, net of forfeitures | | 20,587 | | | — | | | 2 | | | — | | | — | | | — | | | 2 | |
| Shares withheld to fund withholding tax obligations related to share-based compensation plans | | (159) | | | — | | | — | | | — | | | — | | | — | | | — | |
| Share-based compensation | | — | | | — | | | 28 | | | — | | | — | | | — | | | 28 | |
| Repurchases of common stock | | (159,763) | | | — | | | — | | | (50) | | | — | | | — | | | (50) | |
| Net income | | — | | | — | | | — | | | — | | | 170 | | | — | | | 170 | |
| Changes in unrealized gains and losses on anticipated sales hedging transactions (net of income taxes) | | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
| | | | | | | | | | | | | | |
| Foreign currency translation adjustment | | — | | | — | | | — | | | — | | | — | | | (5) | | | (5) | |
| Balance at October 1, 2022 | | 51,815,659 | | | $ | 1 | | | $ | 542 | | | $ | (1,702) | | | $ | 3,850 | | | $ | (34) | | | $ | 2,657 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A Common Stock Shares | | Class A Common Stock Value | | Additional Paid-in Capital | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| Balance at December 31, 2020 | | 53,462,082 | | | $ | 1 | | | $ | 395 | | | $ | (919) | | | $ | 2,736 | | | $ | (69) | | | $ | 2,144 | |
| | | | | | | | | | | | | | |
| Issuances of treasury shares related to share-based compensation plans, net of forfeitures | | 48,584 | | | — | | | (6) | | | — | | | — | | | — | | | (6) | |
| Shares withheld to fund withholding tax obligations related to share-based compensation plans | | (400) | | | — | | | — | | | — | | | — | | | — | | | — | |
| Share-based compensation | | — | | | — | | | 16 | | | — | | | — | | | — | | | 16 | |
| Repurchases of common stock | | (100) | | | — | | | — | | | — | | | — | | | — | | | — | |
| Net income | | — | | | — | | | — | | | — | | | 228 | | | — | | | 228 | |
| Changes in unrealized gains and losses on anticipated sales hedging transactions (net of income taxes) | | — | | | — | | | — | | | — | | | — | | | 32 | | | 32 | |
| | | | | | | | | | | | | | |
| Foreign currency translation adjustment | | — | | | — | | | — | | | — | | | — | | | (3) | | | (3) | |
| Balance at April 3, 2021 | | 53,510,166 | | | $ | 1 | | | $ | 405 | | | $ | (919) | | | $ | 2,964 | | | $ | (40) | | | $ | 2,411 | |
| | | | | | | | | | | | | | |
| Issuances of treasury shares related to share-based compensation plans, net of forfeitures | | 27,226 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares withheld to fund withholding tax obligations related to share-based compensation plans | | (81,810) | | | — | | | — | | | (40) | | | — | | | — | | | (40) | |
| Share-based compensation | | — | | | — | | | 22 | | | — | | | — | | | — | | | 22 | |
| Repurchases of common stock | | (52,289) | | | — | | | — | | | (25) | | | — | | | — | | | (25) | |
| Net income | | — | | | — | | | — | | | — | | | 219 | | | — | | | 219 | |
| Changes in unrealized gains and losses on anticipated sales hedging transactions (net of income taxes) | | — | | | — | | | — | | | — | | | — | | | 2 | | | 2 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Balance at July 3, 2021 | | 53,403,293 | | | $ | 1 | | | $ | 427 | | | $ | (984) | | | $ | 3,183 | | | $ | (38) | | | $ | 2,589 | |
| | | | | | | | | | | | | | |
| Issuances of treasury shares related to share-based compensation plans, net of forfeitures | | 52,369 | | | — | | | — | | | (1) | | | — | | | — | | | (1) | |
| Shares withheld to fund withholding tax obligations related to share-based compensation plans | | (1,593) | | | — | | | — | | | (1) | | | — | | | — | | | (1) | |
| Share-based compensation | | — | | | — | | | 20 | | | — | | | — | | | — | | | 20 | |
| | | | | | | | | | | | | | |
| Net income | | — | | | — | | | — | | | — | | | 199 | | | — | | | 199 | |
| Changes in unrealized gains and losses on anticipated sales hedging transactions (net of income taxes) | | — | | | — | | | — | | | — | | | — | | | 12 | | | 12 | |
| | | | | | | | | | | | | | |
| Foreign currency translation adjustment | | — | | | — | | | — | | | — | | | — | | | (2) | | | (2) | |
| Balance at October 2, 2021 | | 53,454,069 | | | $ | 1 | | | $ | 447 | | | $ | (986) | | | $ | 3,382 | | | $ | (28) | | | $ | 2,816 | |
See accompanying Notes to Consolidated Financial Statements.
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
| | | | | | | | | | | |
| Nine Months Ended |
| October 1,
2022 | | October 2,
2021 |
| Cash flows from operating activities: | | | |
| Net income | $ | 277 | | | $ | 646 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 158 | | | 136 | |
| | | |
| | | |
| Share-based compensation | 70 | | | 58 | |
| | | |
| Deferred income taxes | (115) | | | (6) | |
| Unrealized gain on forward interest rate swaps | (92) | | | (17) | |
| Other, net | 4 | | | 1 | |
| Changes in operating assets and liabilities: | | | |
| Accounts receivable, net | (58) | | | (107) | |
| Inventories, net | (293) | | | 75 | |
| Other assets | (68) | | | (25) | |
| Accounts payable | 127 | | | (2) | |
| Accrued liabilities | (101) | | | 42 | |
| Deferred revenue | 27 | | | 101 | |
| Income taxes | 3 | | | (67) | |
| Legal Settlement Liability | 270 | | | — | |
| Other operating activities | 12 | | | 1 | |
| Net cash provided by operating activities | 221 | | | 836 | |
| Cash flows from investing activities: | | | |
| Acquisition of businesses, net of cash acquired | (878) | | | (307) | |
| Purchases of property, plant and equipment | (51) | | | (38) | |
| | | |
| Purchases of long-term investments | (12) | | | (24) | |
| Net cash used in investing activities | (941) | | | (369) | |
| Cash flows from financing activities: | | | |
| Payment of debt issuance costs, extinguishment costs and discounts | (8) | | | — | |
| Payments of long-term debt | (210) | | | (277) | |
| Proceeds from issuance of long-term debt | 1,385 | | | 21 | |
| | | |
| Payments for repurchases of common stock | (655) | | | (25) | |
| Net payments related to share-based compensation plans | (14) | | | (48) | |
| Change in unremitted cash collections from servicing factored receivables | (28) | | | (22) | |
| | | |
| Net cash provided by (used in) financing activities | 470 | | | (351) | |
| Effect of exchange rate changes on cash and cash equivalents, including restricted cash | (2) | | | — | |
| Net (decrease) increase in cash and cash equivalents, including restricted cash | (252) | | | 116 | |
| Cash and cash equivalents, including restricted cash, at beginning of period | 344 | | | 192 | |
| Cash and cash equivalents, including restricted cash, at end of period | $ | 92 | | | $ | 308 | |
| Less restricted cash, included in Prepaid expenses and other current assets | (11) | | | (1) | |
| Cash and cash equivalents at end of period | $ | 81 | | | $ | 307 | |
| Supplemental disclosures of cash flow information: | | | |
| Income taxes paid | $ | 152 | | | $ | 169 | |
| Interest paid | $ | 34 | | | $ | 25 | |
See accompanying Notes to Consolidated Financial Statements.
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 Description of Business and Basis of Presentation
Zebra Technologies Corporation and its subsidiaries (“Zebra” or the “Company”) is a global leader providing innovative Enterprise Asset Intelligence (“EAI”) solutions in the automatic identification and data capture solutions industry. We design, manufacture, and sell a broad range of products and solutions, including cloud-based software subscriptions, that capture and move data. We also provide a full range of services, including maintenance, technical support, repair, managed and professional services. End-users of our products, solutions and services include those in retail and e-commerce, manufacturing, transportation and logistics, healthcare, public sector, and other industries. We provide our products, solutions and services globally through a direct sales force and an extensive network of channel partners.
Management prepared these unaudited interim consolidated financial statements according to the rules and regulations of the Securities and Exchange Commission for interim financial information and notes. As permitted under Article 10 of Regulation S-X and the instructions of Form 10-Q, these consolidated financial statements do not include all the information and notes required by United States Generally Accepted Accounting Principles (“GAAP”) for complete financial statements, although management believes that the disclosures made are adequate to make the information not misleading. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
In the opinion of the Company, these interim financial statements include all adjustments (of a normal, recurring nature) necessary to fairly present its Consolidated Balance Sheet as of October 1, 2022, the Consolidated Statements of Operations, Comprehensive Income and Stockholders’ Equity for the three and nine months ended October 1, 2022 and October 2, 2021, and the Consolidated Statement of Cash Flows for the nine months ended October 1, 2022 and October 2, 2021. These results, however, are not necessarily indicative of the results expected for the full fiscal year ending December 31, 2022.
Effective January 1, 2022, the location solutions offering, which provides a range of real-time location systems (“RTLS”) and services that generate on-demand information about the physical location and status of assets, equipment, and people, moved from our Asset Intelligence & Tracking (“AIT”) segment into our Enterprise Visibility & Mobility (“EVM”) segment contemporaneous with a change in our organizational structure and management of the business. We have reported our results reflecting this change, including historical periods, on a comparable basis. This change does not have an impact to the Consolidated Financial Statements. See Note 18, Segment Information & Geographic Data for additional information related to each segment’s results.
Note 2 Significant Accounting Policies
For a discussion of our significant accounting policies, see Note 2, Significant Accounting Policies within Part II, Item 8. “Financial Statements and Supplementary Data” in the Annual Report on Form 10-K for the year ended December 31, 2021. There have been no changes to our significant accounting policies since our Annual Report on Form 10-K for the year ended December 31, 2021.
Note 3 Revenues
The Company recognizes revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration which it expects to receive for providing those goods or services.
Revenues for products are generally recognized upon shipment, whereas revenues for services and solution offerings are generally recognized over time by using an output or time-based method, assuming all other criteria for revenue recognition have been met. Revenues for software are recognized either upon delivery or over time using a time-based method, depending upon how control is transferred to the customer. In cases where a bundle of products, services, solutions and/or software are delivered to the customer, judgment is required to select the method of progress which best reflects the transfer of control.
Disaggregation of Revenue
The following table presents our Net sales disaggregated by product category for each of our segments, AIT and EVM, for the three and nine months ended October 1, 2022 and October 2, 2021 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| October 1, 2022 | | October 2, 2021 |
| Segment | Tangible Products | | Services and Software | | Total | | Tangible Products | | Services and Software | | Total |
| AIT | $ | 392 | | | $ | 23 | | | $ | 415 | | | $ | 354 | | | $ | 24 | | | $ | 378 | |
| EVM | 772 | | | 191 | | | 963 | | | 886 | | | 172 | | | 1,058 | |
Corporate, eliminations(1) | — | | | — | | | — | | | — | | | — | | | — | |
| Total | $ | 1,164 | | | $ | 214 | | | $ | 1,378 | | | $ | 1,240 | | | $ | 196 | | | $ | 1,436 | |
| | | | | | | | | | | |
| Nine Months Ended |
| October 1, 2022 | | October 2, 2021 |
| Segment | Tangible Products | | Services and Software | | Total | | Tangible Products | | Services and Software | | Total |
| AIT | $ | 1,184 | | | $ | 71 | | | $ | 1,255 | | | $ | 1,151 | | | $ | 70 | | | $ | 1,221 | |
| EVM | 2,446 | | | 577 | | | 3,023 | | | 2,434 | | | 511 | | | 2,945 | |
Corporate, eliminations(1) | — | | | — | | | — | | | — | | | (6) | | | (6) | |
| Total | $ | 3,630 | | | $ | 648 | | | $ | 4,278 | | | $ | 3,585 | | | $ | 575 | | | $ | 4,160 | |
(1)Amounts included in Corporate, eliminations consist of purchase accounting adjustments.
In addition, refer to Note 18, Segment Information & Geographic Data for Net sales to customers by geographic region.
Performance Obligations
The Company’s remaining performance obligations primarily relate to repair and support services, as well as solution offerings. The aggregated transaction price allocated to remaining performance obligations for arrangements with an original term exceeding one year was $1,056 million and $1,033 million, inclusive of deferred revenue, as of October 1, 2022 and December 31, 2021, respectively. On average, remaining performance obligations as of October 1, 2022 and December 31, 2021 are expected to be recognized over a period of approximately two years.
Contract Balances
Progress on satisfying performance obligations under contracts with customers related to billed revenues is reflected on the Consolidated Balance Sheets in Accounts receivable, net. Progress on satisfying performance obligations under contracts with customers related to unbilled revenues (“contract assets”) is reflected on the Consolidated Balance Sheets as Prepaid expenses and other current assets for revenues expected to be billed within the next twelve months, and Other long-term assets for revenues expected to be billed thereafter. The total contract asset balances were $14 million and $10 million as of October 1, 2022 and December 31, 2021, respectively. These contract assets result from timing differences between billing and satisfying performance obligations, as well as the impact from the allocation of the transaction price among performance obligations for contracts that include multiple performance obligations. Contract assets are evaluated for impairment and no impairment losses have been recognized during the three and nine months ended October 1, 2022 and October 2, 2021, respectively.
Deferred revenue on the Consolidated Balance Sheets consists of payments and billings in advance of our performance. The combined short-term and long-term deferred revenue balances were $724 million and $695 million as of October 1, 2022 and December 31, 2021, respectively. During the three and nine months ended October 1, 2022, the Company recognized $92 million and $329 million in revenue, which was previously included in the beginning balance of deferred revenue as of December 31, 2021. During the three and nine months ended October 2, 2021, the Company recognized $74 million and $259 million in revenue, which was previously included in the beginning balance of deferred revenue as of December 31, 2020.
Note 4 Inventories
The components of Inventories, net are as follows (in millions):
| | | | | | | | | | | |
| | October 1,
2022 | | December 31,
2021 |
| Raw materials | $ | 292 | | | $ | 196 | |
| Work in process | 3 | | | 3 | |
| Finished goods | 519 | | | 292 | |
| Total Inventories, net | $ | 814 | | | $ | 491 | |
Note 5 Business Acquisitions
Matrox
On June 3, 2022, the Company acquired Matrox Electronic Systems Ltd. (“Matrox”), a developer of advanced machine vision components and software. Through its acquisition of Matrox, the Company intends to expand its machine vision products and software offerings.
The acquisition was accounted for under the acquisition method of accounting for business combinations. The Company’s total purchase consideration was $878 million comprised of $875 million in cash paid at closing, net of Matrox’s cash on-hand and an additional $3 million of cash that was paid in the third quarter of 2022.
The Company utilized estimated fair values as of the acquisition date to allocate the total purchase consideration to the identifiable assets acquired and liabilities assumed. The fair value of the net assets acquired was based on several estimates and assumptions, as well as customary valuation techniques, primarily the excess earnings method for customer relationships as well as the relief from royalty method for technology and patent intangible assets. 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.
During the third quarter of 2022, the Company recorded measurement period adjustments to increase customer relationship and technology intangible assets, as well as deferred tax liabilities by $36 million, $4 million and $11 million, respectively. These adjustments, relating to facts and circumstances existing as of the acquisition date, resulted in a $29 million reduction of goodwill. The primary fair value estimates still considered preliminary as of October 1, 2022 include intangible assets and income tax-related items.
The preliminary purchase price allocation to assets acquired and liabilities assumed was as follows (in millions):
| | | | | |
| Identifiable intangible assets | $ | 297 | |
| Inventory | 33 | |
| |
| Other assets acquired | 13 | |
| Deferred tax liabilities | (79) | |
| |
| |
| Other liabilities assumed | (21) | |
| Net assets acquired | $ | 243 | |
| Goodwill on acquisition | 635 | |
| Total purchase price | $ | 878 | |
The $635 million of goodwill, which is non-deductible for tax purposes, has been allocated to the EVM segment and principally relates to the planned global expansion and integration of Matrox into the Company’s machine vision offerings.
The preliminary purchase price allocation to identifiable intangible assets acquired was as follows:
| | | | | | | | | | | |
| Fair Value (in millions) | | Useful Life (in years) |
| Customer and other relationships | $ | 232 | | | 11 |
| Technology and patents | 63 | | | 7 |
| Trade names | 2 | | | 2 |
| Total identifiable intangible assets | $ | 297 | | | |
In connection with the acquisition of Matrox, the Company granted $13 million of cash-settled RSUs to certain employees in the second quarter, which are attributable to service to be rendered subsequent to the acquisition and will generally be expensed over a 3-year service period.
The Company has not included unaudited pro forma results, as if Matrox had been acquired as of January 1, 2021, as doing so would not yield materially different results.
Fetch
During the third quarter of 2022, the Company finalized the purchase price allocation for its acquisition of Fetch Robotics, Inc. (“Fetch”). The measurement period adjustments recorded in the current year, all relating to facts and circumstances existing as of the acquisition date, were insignificant.
Antuit.ai
During the third quarter of 2022, the Company recorded measurement period adjustments relating to its acquisition of Antuit Holdings Pte. Ltd. (“Antuit”). The measurement period adjustments, all relating to facts and circumstances existing as of the acquisition date, consisted of a $7 million decrease to deferred tax liabilities, a $2 million increase to accounts payable, with an offsetting $5 million decrease to goodwill. The primary fair value estimates still considered preliminary as of October 1, 2022 relate to income tax items.
Acquisition and integration costs
The Company incurred approximately $19 million of acquisition-related costs during the nine months ended October 1, 2022, primarily related to third-party and advisory fees associated with the Matrox acquisition. For the three months ended October 1, 2022, acquisition-related costs were $1 million. These costs are included within Acquisition and integration costs on the Consolidated Statement of Operations.
Note 6 Goodwill and Other Intangibles
Goodwill
Changes in the net carrying value of goodwill by segment were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| AIT | | EVM | | Total |
| Goodwill as of December 31, 2021 | $ | 169 | | | $ | 3,096 | | | $ | 3,265 | |
| Matrox acquisition | — | | | 635 | | | 635 | |
| Fetch purchase price allocation adjustments | — | | | 2 | | | 2 | |
| Antuit purchase price allocation adjustments | — | | | (5) | | | (5) | |
| Foreign exchange impact | — | | | (6) | | | (6) | |
| Goodwill as of October 1, 2022 | $ | 169 | | | $ | 3,722 | | | $ | 3,891 | |
See Note 5, Business Acquisitions for further details related to the Company’s acquisitions and purchase price allocation adjustments.
Other Intangibles, net
The balances in Other Intangibles, net consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of October 1, 2022 | | As of December 31, 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
| Amortized intangible assets: | | | | | | | | | | | |
| Technology and patents | $ | 950 | | | $ | (605) | | | $ | 345 | | | $ | 889 | | | $ | (566) | | | $ | 323 | |
| Customer and other relationships | 859 | | | (562) | | | 297 | | | 631 | | | (503) | | | 128 | |
| Trade names | 66 | | | (49) | | | 17 | | | 64 | | | (46) | | | 18 | |
| Total | $ | 1,875 | | | $ | (1,216) | | | $ | 659 | | | $ | 1,584 | | | $ | (1,115) | | | $ | 469 | |
Amortization expense was $39 million and $29 million during the three months ended October 1, 2022 and October 2, 2021, respectively, and $107 million and $81 million during the nine months ended October 1, 2022 and October 2, 2021, respectively.
As of October 1, 2022, estimated future intangible asset amortization expense is as follows (in millions):
| | | | | |
| |
| 2022 (remaining 3 months) | $ | 29 | |
| 2023 | 102 | |
| 2024 | 98 | |
| 2025 | 96 | |
| 2026 | 93 | |
| Thereafter | 241 | |
| Total | $ | 659 | |
Note 7 Investments
The carrying value of the Company’s venture investments was $113 million and $101 million as of October 1, 2022 and December 31, 2021, respectively, which are included in Other long-term assets on the Consolidated Balance Sheets.
During the three and nine months ended October 1, 2022, the Company paid $6 million and $12 million for the purchases of long-term investments, respectively. Comparatively, during the three and nine months ended October 2, 2021, the Company paid $7 million and $24 million for the purchases of new long-term investments, respectively.
Net gains and losses related to the Company’s investments are included within Other (expense) income, net on the Consolidated Statements of Operations. The Company did not recognize any net gains or losses during the three and nine months ended October 1, 2022. The Company recognized net gains of $1 million during the three and nine months ended October 2, 2021.
Note 8 Exit and Restructuring Costs
In the third quarter of 2022, the Company committed to certain leased site rationalization and organizational changes designed to generate structural cost efficiencies (collectively referred to as the “2022 Productivity Plan”). Exit and restructuring charges associated with the 2022 Productivity Plan are expected to be at least $10 million and be completed by the end of 2023. For the three months ended October 1, 2022, the Company recorded $2 million primarily related to facility site exits and employee severance.
Note 9 Fair Value Measurements
Financial assets and liabilities are measured using inputs from three levels of the fair value hierarchy in accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into the following three broad levels:
•Level 1: Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs (e.g. U.S. Treasuries and money market funds).
•Level 2: Observable prices that are based on inputs not quoted in active markets but corroborated by market data.
•Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs to the extent possible. In addition, the Company considers counterparty credit risk in the assessment of fair value.
The Company’s financial assets and liabilities carried at fair value as of October 1, 2022, are classified below (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
Foreign exchange contracts (1) | $ | |