Zebra(ZBRA) - 2022 Q4 - Annual Report

Part I Business Zebra Technologies is a global leader in Enterprise Asset Intelligence solutions, operating through AIT and EVM segments, providing a wide range of products and services to diverse industries - The company operates through two reportable segments: Asset Intelligence & Tracking (AIT), focusing on barcode/card printing and supplies, and Enterprise Visibility & Mobility (EVM), which includes mobile computing, data capture, RFID, and workflow optimization solutions[26] - Zebra has made several strategic acquisitions to expand its portfolio, including Matrox (machine vision), Antuit (demand-sensing software), Fetch (autonomous mobile robots), Adaptive Vision (machine vision software), and Reflexis (workforce management software); all acquired entities' results are included in the EVM segment[20][21][22] Research and Development Expenditures (2020-2022) | Year | R&D Expense (in millions) | % of Net Sales | | :--- | :--- | :--- | | 2022 | 570 | 9.9% | | 2021 | 567 | 10.1% | | 2020 | 453 | 10.2% | Net Sales to Significant Customers (% of Total Net Sales) | Customer | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Customer A | 20.7% | 22.3% | 20.7% | | Customer B | 15.0% | 13.6% | 13.9% | | Customer C | 12.8% | 12.6% | 17.7% | - As of December 31, 2022, the company had approximately 10,500 employees globally and held approximately 6,500 patents and patent applications worldwide[62][68] Risk Factors The company identifies various risks across general business, operational, financial, and legal/regulatory categories that could materially affect its operations - General business risks include managing increased business complexity from growth, challenges in identifying and integrating future acquisitions, adapting to rapid technological changes, and intense industry competition[76][78][81] - Operational risks are significant due to substantial non-U.S. operations and supply chains, particularly in China, alongside exposures to intellectual property infringement claims, cybersecurity incidents, reliance on third-party operating systems like Android, and disruptions from natural disasters or public health issues like COVID-19[86][89][93] - Financial and market risks include the adverse impact of changes in customs duties and trade policies, challenges from tax authorities, complexities in forecasting the effective tax rate, and potential disruptions from adverse economic conditions[118][119][122] - Legal and regulatory risks involve potential costs and fines from laws handling personal data, unfavorable outcomes of litigation, and compliance with a wide range of product safety, consumer, and environmental laws, including those related to ESG matters[129][131][132] Unresolved Staff Comments The company reports that there are no unresolved staff comments - None[138] Properties The company's corporate headquarters is in Lincolnshire, Illinois, with three owned facilities and 117 leased facilities globally as of December 31, 2022, deemed adequate for current requirements - As of December 31, 2022, the Company owned three facilities and leased a total of 117 facilities globally[140] Legal Proceedings In June 2022, Zebra and Honeywell resolved all patent infringement disputes through a License and Settlement Agreement, with Zebra agreeing to pay Honeywell $360 million for past damages - In June 2022, Zebra and Honeywell resolved their patent infringement disputes, with Zebra agreeing to pay Honeywell $360 million for past damages, payable in eight equal quarterly installments[142] - The settlement included a mutual general release from all past claims, a covenant not to sue for patent infringement, and a royalty-free cross-license for each party's existing patent portfolio for the life of the patents[142] Mine Safety Disclosures This item is not applicable to the company - Not applicable[144] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Zebra's Class A Common Stock trades on NASDAQ under 'ZBRA', with no cash dividends paid since its 1991 IPO, and a new $1 billion share repurchase program authorized in May 2022 - The company has not paid cash dividends since its initial public offering in 1991 and does not anticipate doing so in the foreseeable future[147] Share Repurchases (Q4 2022) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2 - Oct 29, 2022 | 187,024 | $267.33 | | Oct 30 - Nov 26, 2022 | 12 | $282.67 | | Nov 27 - Dec 31, 2022 | 187,629 | $250.50 | | Total | 374,665 | $258.90 | - As of December 31, 2022, $945 million remained available for future share repurchases under the authorized programs[149] Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal year 2022, Zebra's net sales grew 2.7% to $5.78 billion, but operating income fell 46.0% to $529 million due to a $372 million legal settlement charge, with operating cash flow decreasing significantly to $488 million Overview Zebra maintained market leadership in 2022, making strategic investments like the $881 million Matrox acquisition, while navigating supply chain disruptions, macroeconomic challenges, and a $372 million legal settlement charge 2022 Financial Highlights | Metric | 2022 (in millions) | 2021 (in millions) | | :--- | :--- | :--- | | Net Sales | 5,781 | 5,627 | | Operating Income | 529 | 979 | | Net Income | 463 | 837 | | Diluted EPS | $8.80 | $15.52 | | Operating Cash Flow | 488 | 1,069 | - In June 2022, the company acquired Matrox Electronic Systems Ltd. for $881 million in cash, significantly expanding its machine vision products and software offerings within the EVM segment[158] - A legal settlement resulted in a $372 million pre-tax charge in 2022, inclusive of $12 million in legal fees, with the $360 million settlement amount being paid in eight quarterly installments[165] Results of Operations For 2022, total net sales increased 2.7% to $5.78 billion, but gross margin decreased to 45.4%, and operating income fell 46.0% to $529 million due to a $372 million legal settlement and higher operating expenses Consolidated Results of Operations (2022 vs. 2021) | Metric | 2022 (in millions) | 2021 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Total Net Sales | 5,781 | 5,627 | 2.7% | | Gross Profit | 2,624 | 2,628 | (0.2)% | | Gross Margin | 45.4% | 46.7% | (130) bps | | Operating Income | 529 | 979 | (46.0)% | - Consolidated Organic Net Sales, a non-GAAP measure excluding currency and acquisition impacts, grew by 3.2% in 2022[168][170] - The AIT segment's net sales increased 4.8% to $1.74 billion, with organic growth of 6.7%, while operating income decreased 5.8% due to lower gross margin and higher operating expenses[176][178][179] - The EVM segment's net sales increased 1.7% to $4.05 billion, with organic growth of 1.7%, and operating income decreased 5.1% primarily due to higher operating expenses[180][181][183] Liquidity and Capital Resources The company's liquidity was impacted by lower operating cash flow, which decreased to $488 million in 2022, primarily due to higher inventory and legal settlement payments, while total debt increased to $2.03 billion following credit facility refinancing Cash Flow Summary (in millions) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash from Operating | 488 | 1,069 | | Net cash used in Investing | (968) | (546) | | Net cash from (used in) Financing | 253 | (371) | - Total debt increased to $2.03 billion as of December 31, 2022, from $996 million a year prior, following the refinancing of credit facilities in May 2022, which increased Term Loan A to $1.75 billion and Revolving Credit Facility capacity to $1.5 billion[185][339] - The company repurchased $751 million of its common stock during 2022, with $945 million remaining authorized for future repurchases as of year-end[195] Critical Accounting Estimates Management identifies critical accounting estimates requiring significant judgment, including income taxes, business acquisitions, goodwill impairment testing, and revenue recognition - Key estimates include income tax provisions, fair value allocation for business acquisitions (like the recent Matrox purchase), annual goodwill impairment testing, and revenue recognition for contracts with multiple elements[199] - The annual goodwill impairment test, completed in Q4 2022, indicated that the fair values of all reporting units significantly exceed their carrying values[202] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate risk on its $2.0 billion variable-rate debt, managed with interest rate swaps, and foreign currency risk from international operations, managed with derivative instruments - The company is exposed to interest rate volatility on its $2.0 billion of variable-rate debt, where a one percentage point change in interest rates would impact annual interest expense by approximately $12 million, including the effect of interest rate swaps[210] - Primary foreign currency exposures are to the Euro, British Pound Sterling, and Czech Koruna, where a one percentage point change in exchange rates relative to the U.S. Dollar would impact pre-tax income by approximately $2 million, inclusive of derivative contracts[212] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for the fiscal year ended December 31, 2022, along with the independent auditor's report and detailed notes Consolidated Financial Statements The consolidated financial statements show total assets of $7.53 billion and total liabilities of $4.80 billion as of December 31, 2022, with net sales of $5.78 billion and net income of $463 million for the year Consolidated Balance Sheet Data (in millions) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | 1,883 | 1,689 | | Total Assets | 7,529 | 6,215 | | Total Current Liabilities | 2,332 | 1,800 | | Total Liabilities | 4,796 | 3,231 | | Total Stockholders' Equity | 2,733 | 2,984 | Consolidated Statement of Operations Data (in millions) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total Net Sales | 5,781 | 5,627 | 4,448 | | Gross Profit | 2,624 | 2,628 | 2,003 | | Operating Income | 529 | 979 | 651 | | Net Income | 463 | 837 | 504 | | Diluted EPS | $8.80 | $15.52 | $9.35 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, including revenue recognition, the $881 million Matrox acquisition, goodwill, debt structure, lease obligations, share-based compensation, income taxes, and segment performance - Note 5 details the acquisition of Matrox for $881 million, which resulted in $640 million of goodwill and $297 million of identifiable intangible assets, primarily allocated to the EVM segment[286][290][291] - Note 12 outlines the company's debt, which totaled $2.03 billion at year-end 2022, including a $1.73 billion Term Loan A and $50 million drawn on the Revolving Credit Facility[337] - Note 16 shows the company's effective tax rate was 14.9% in 2022, lower than the U.S. statutory rate of 21% primarily due to lower tax rates in foreign jurisdictions and tax credits[375][376] - Note 20 provides segment results, showing AIT operating income of $360 million on $1.74 billion in sales, and EVM operating income of $712 million on $4.05 billion in sales for 2022[402] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[408] Controls and Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2022, excluding the recently acquired Matrox Electronic Systems Ltd - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[409] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, with this assessment excluding the recently acquired Matrox Electronic Systems Ltd[410][411] - There were no material changes in the company's internal control over financial reporting during the fourth quarter of 2022[413] Other Information This item is not applicable - Not applicable[425] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable - Not applicable[426] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the company's definitive proxy statement[429] Executive Compensation Information for this item is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the company's definitive proxy statement[429] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the company's definitive proxy statement[430] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the company's definitive proxy statement[430] Principal Accounting Fees and Services Information for this item is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the company's definitive proxy statement[431] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K, with schedules omitted as information is included in the Notes to Consolidated Financial Statements - This section provides an index to the consolidated financial statements and notes included in the report[432] - Financial statement schedules are omitted because the required information is already present in the Notes to Consolidated Financial Statements[433] Form 10-K Summary The company has not provided a summary for its Form 10-K - None[438]