ZEBRA TECHNOLOGIES CORP [ZBRA] Filings

10-Q 1 zbra-20230701.htm 10-Q zbra-20230701

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 1, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


			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 July 25, 2023, there were 51,338,364 shares of Class A Common Stock, $.01 par value, outstanding.

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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

QUARTER ENDED JULY 1, 2023

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		PAGE
PART I - FINANCIAL INFORMATION		3
Item 1.	Consolidated Financial Statements	3
	Consolidated Balance Sheets as of July 1, 2023 (unaudited) and December 31, 2022	3
	Consolidated Statements of Operations (unaudited) for the three and si x months ended July 1, 2023 and July 2, 2022	4
	Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six months ended July 1, 2023 and July 2, 2022	5
	Consolidated Statements of Stockholders’ Equity (unaudited) for the three and six months ended July 1, 2023 and July 2, 2022	6
	Consolidated Statements of Cash Flows (unaudited) for the six months ended July 1, 2023 and July 2, 2022	8
	Notes to Consolidated Financial Statements (unaudited)	8
	Note 1: Description of Business and Basis of Presentation	9
	Note 2: Significant Accounting Policies	9
	Note 3: Revenues	10
	Note 4: Inventories	11
	Note 5: Business Acquisitions	11

	Note 6: Investments	11
	Note 7: Exit and Restructuring Costs	11
	Note 8: Fair Value Measurements	11
	Note 9: Derivative Instruments	13
	Note 10: Long-Term Debt	15
	Note 11: Leases	17
	Note 12: Accrued Liabilities, Commitments and Contingencies	17
	Note 13 : Share -Based Compensation	18
	Note 1 4 : Income Taxes	20
	Note 15: Earnings (Loss) Per Share	21
	Note 1 6 : Accumulated Other Comprehensive Income (Loss)	21
	Note 1 7 : Accounts Receivable Factoring	22
	Note 1 8 : Segment Information & Geographic Data	22
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
	Overview	23
	Results of Operations	25
	Results of Operations by Segment	28
	Liquidity and Capital Resources	30
	Significant Customers	32
	Safe Harbor	33
	New Accounting Pronouncements	33
	Non-GAAP Measures	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34
Item 5.	Other Information	37
PART II - OTHER INFORMATION		35
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 6.	Exhibits	38
Signatures		39

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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)


	July 1, 2023		December 31, 2022
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	68	$	105
Accounts receivable, net of allowances for doubtful accounts of $1 each as of July 1, 2023 and December 31, 2022	663		768
Inventories, net	864		860
Income tax receivable	20		26
Prepaid expenses and other current assets	138		124
Total Current assets	1,753		1,883
Property, plant and equipment, net	301		278
Right-of-use lease assets	173		156
Goodwill	3,895		3,899
Other intangibles, net	578		630
Deferred income taxes	441		407
Other long-term assets	315		276
Total Assets	$	7,456	$	7,529
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	166	$	214
Accounts payable	562		811
Accrued liabilities	583		744
Deferred revenue	443		425
Income taxes payable	16		138
Total Current liabilities	1,770		2,332
Long-term debt	2,042		1,809
Long-term lease liabilities	157		139
Deferred income taxes	75		75
Long-term deferred revenue	331		333
Other long-term liabilities	89		108
Total Liabilities	4,464		4,796
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	580		561
Treasury stock at cost, 20,818,920 and 20,700,357 shares as of July 1, 2023 and December 31, 2022, respectively	(1,859)		(1,799)
Retained earnings	4,330		4,036
Accumulated other comprehensive loss	(60)		(66)
Total Stockholders’ Equity	2,992		2,733
Total Liabilities and Stockholders’ Equity	$	7,456	$	7,529

See accompanying Notes to Consolidated Financial Statements.

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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except share data)

(Unaudited)


	Three Months Ended				Six Months Ended
	July 1, 2023		July 2, 2022		July 1, 2023		July 2, 2022
Net sales:
Tangible products	$	986	$	1,259	$	2,156	$	2,466
Services and software	228		209		463		434
Total Net sales	1,214		1,468		2,619		2,900
Cost of sales:
Tangible products	522		685		1,140		1,366
Services and software	111		109		231		223
Total Cost of sales	633		794		1,371		1,589
Gross profit	581		674		1,248		1,311
Operating expenses:
Selling and marketing	146		151		307		303
Research and development	130		148		276		285
General and administrative	69		97		168		196
Settlement and related costs	—		372		—		372
Amortization of intangible assets	26		35		52		68
Acquisition and integration costs	2		14		2		18
Exit and restructuring costs	14		2		24		2
Total Operating expenses	387		819		829		1,244
Operating income (loss)	194		(145)		419		67
Other (loss) income, net:
Foreign exchange (loss) gain	(5)		(3)		(4)		5
Interest (expense) income, net	(16)		(3)		(53)		27
Other (expense), net	(2)		(2)		(6)		(2)
Total Other (expense) income, net	(23)		(8)		(63)		30
Income (loss) before income tax	171		(153)		356		97
Income tax expense (benefit)	27		(55)		62		(10)
Net income (loss)	$	144	$	(98)	$	294	$	107
Basic earnings (loss) per share	$	2.80	$	(1.87)	$	5.72	$	2.04
Diluted earnings (loss) per share	$	2.78	$	(1.87)	$	5.68	$	2.02

See accompanying Notes to Consolidated Financial Statements.

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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

(Unaudited)


	Three Months Ended				Six Months Ended
	July 1, 2023		July 2, 2022		July 1, 2023		July 2, 2022
Net income (loss)	$	144	$	(98)	$	294	$	107
Other comprehensive income (loss), net of tax:
Changes in unrealized gains on anticipated sales hedging transactions	4		7		1		12


Foreign currency translation adjustment	2		(6)		5		(11)
Comprehensive income (loss)	$	150	$	(97)	$	300	$	108

See accompanying Notes to Consolidated Financial Statements.

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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, 2022	51,451,500	$	1	$	561	$	(1,799)	$	4,036	$	(66)	$	2,733

Issuances of treasury shares related to share-based compensation plans, net of forfeitures	29,784	—		5		—		—		—		5
Shares withheld to fund withholding tax obligations related to share-based compensation plans	(504)	—		—		—		—		—		—
Share-based compensation	—	—		18		—		—		—		18
Repurchase of common stock	(55,811)	—		—		(15)		—		—		(15)
Net income	—	—		—		—		150		—		150
Changes in unrealized gains and losses on anticipated sales hedging transactions (net of income taxes)	—	—		—		—		—		(3)		(3)

Foreign currency translation adjustment	—	—		—		—		—		3		3
Balance at April 1, 2023	51,424,969	$	1	$	584	$	(1,814)	$	4,186	$	(66)	$	2,891

Issuances of treasury shares related to share-based compensation plans, net of forfeitures	75,271	—		(6)		1		—		—		(5)
Shares withheld to fund withholding tax obligations related to share-based compensation plans	(28,795)	—		—		(9)		—		—		(9)
Share-based compensation	—	—		2		—		—		—		2
Repurchase of common stock	(138,508)	—		—		(37)		—		—		(37)
Net income	—	—		—		—		144		—		144

Changes in unrealized gains and losses on forward interest rate swap hedging transactions (net of income taxes)	—	—		—		—		—		4		4
Foreign currency translation adjustment	—	—		—		—		—		2		2
Balance at July 1, 2023	51,332,937	$	1	$	580	$	(1,859)	$	4,330	$	(60)	$	2,992

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	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
Repurchase 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
Repurchase 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

See accompanying Notes to Consolidated Financial Statements.

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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)


	Six Months Ended
	July 1, 2023		July 2, 2022
Cash flows from operating activities:
Net income	$	294	$	107
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	88		103


Share-based compensation	20		42

Deferred income taxes	(29)		(124)
Unrealized loss (gain) on forward interest rate swaps	1		(52)
Other, net	2		3
Changes in operating assets and liabilities:
Accounts receivable, net	105		(170)
Inventories, net	(3)		(108)
Other assets	(22)		(52)
Accounts payable	(273)		121
Accrued liabilities	(107)		(77)
Deferred revenue	16		34
Income taxes	(116)		(9)
Settlement liability	(90)		320
Other operating activities	4		16
Net cash (used in) provided by operating activities	(110)		154
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired	—		(875)
Purchases of property, plant and equipment	(34)		(31)

Purchases of long-term investments	(1)		(6)
Net cash used in investing activities	(35)		(912)
Cash flows from financing activities:
Payment of debt issuance costs, extinguishment costs and discounts	—		(8)
Payments of long-term debt	(183)		(119)
Proceeds from issuance of long-term debt	368		1,294

Payments for repurchases of common stock	(52)		(605)
Net proceeds related to share-based compensation plans	(9)		(16)
Change in unremitted cash collections from servicing factored receivables	(27)		(28)

Net cash provided by financing activities	97		518
Effect of exchange rate changes on cash and cash equivalents, including restricted cash	(1)		(6)
Net decrease in cash and cash equivalents, including restricted cash	(49)		(246)
Cash and cash equivalents, including restricted cash, at beginning of period	117		344
Cash and cash equivalents, including restricted cash, at end of period	$	68	$	98
Less restricted cash, included in Prepaid expenses and other current assets	—		—
Cash and cash equivalents at end of period	$	68	$	98
Supplemental disclosures of cash flow information:
Income taxes paid	$	212	$	120
Interest paid	$	50	$	15

See accompanying Notes to Consolidated Financial Statements.

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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 (“AIDC”) industry. We design, manufacture, and sell a broad range of products and solutions, as well as various workflow optimization solutions, including cloud-based software subscriptions and robotic automation solutions. 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, 2022.

In the opinion of the Company, these interim financial statements include all adjustments (of a normal, recurring nature) necessary to fairly present its Consolidated Balance Sheet as of July 1, 2023, the Consolidated Statements of Operations, Comprehensive Income (Loss) and Stockholders’ Equity for the three and six months ended July 1, 2023 and July 2, 2022, and the Consolidated Statement of Cash Flows for the six months ended July 1, 2023 and July 2, 2022. These results, however, are not necessarily indicative of the results expected for the full fiscal year ending December 31, 2023.

In the second quarter, our advanced location technology solutions business, which is primarily comprised of radio frequency identification devices (“RFID”) and real-time location solution offerings (“RTLS”), moved from our Enterprise Visibility & Mobility (“EVM”) segment into our Asset Intelligence & Tracking (“AIT”) segment contemporaneous with a change in our organizational structure and management of the business. We have reported our segment results reflecting this change, including historical periods, on a comparable basis. This change does not have an impact on the Consolidated Financial Statements.

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, 2022. There have been no changes to our significant accounting policies since our Annual Report on Form 10-K for the year ended December 31, 2022.

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Note 3 Revenues

The Company recognizes revenue to depict the transfer of goods, solutions or services to a customer at an amount that reflects the consideration which it expects to receive for providing those goods, solutions 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 (in millions):


	Three Months Ended
	July 1, 2023						July 2, 2022
Segment	Tangible Products		Services and Software		Total		Tangible Products		Services and Software		Total
AIT	$	432	$	27	$	459	$	441	$	26	$	467
EVM	554		201		755		818		183		1,001

Total	$	986	$	228	$	1,214	$	1,259	$	209	$	1,468

	Six Months Ended
	July 1, 2023						July 2, 2022
Segment	Tangible Products		Services and Software		Total		Tangible Products		Services and Software		Total
AIT	$	927	$	54	$	981	$	824	$	54	$	878
EVM	1,229		409		1,638		1,642		380		2,022

Total	$	2,156	$	463	$	2,619	$	2,466	$	434	$	2,900

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 relate to repair and support services, as well as software solutions. The aggregated transaction price allocated to remaining performance obligations for arrangements with an original term exceeding one year was $1,130 million and $1,105 million, inclusive of deferred revenue, as of July 1, 2023 and December 31, 2022, respectively. On average, remaining performance obligations as of July 1, 2023 and December 31, 2022 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 $16 million as of July 1, 2023 and December 31, 2022, respectively. These contract assets result from timing differences between billing and satisfying performance obligations, as well as the impact of the allocation of the transaction price among performance obligations for contracts that include multiple performance obligations. Contract assets are evaluated for impairment and no impairment losses have been recognized during the three and six months ended July 1, 2023 and July 2, 2022, 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 $774 million and $758 million as of July 1, 2023 and December 31, 2022, respectively. During the three and six months ended July 1, 2023, the Company recognized $114 million and $249 million in revenue, which was previously included in the beginning balance of deferred revenue as of December 31,

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2022. During the three and six months ended July 2, 2022, the Company recognized $108 million and $237 million in revenue, which was previously included in the beginning balance of deferred revenue as of December 31, 2021.

Note 4 Inventories

The components of Inventories, net are as follows (in millions):


	July 1, 2023		December 31, 2022
Raw materials (1)	$	345	$	293
Work in process	5		4
Finished goods	514		563
Total Inventories, net	$	864	$	860

(1) Raw material inventories primarily consist of product components as well as supplies used in repair operations.

Note 5 Business Acquisitions

Matrox

During the second quarter of 2023, the Company finalized the purchase price allocation for its acquisition of Matrox Electronic Systems Ltd. (“Matrox”). The measurement period adjustments recorded in the current year, all relating to facts and circumstances existing as of the acquisition date, were insignificant.

Note 6 Investments

The carrying value of the Company’s long-term investments, which are included in Other long-term assets on the Consolidated Balance Sheets, was $113 million as of both July 1, 2023 and December 31, 2022.

The Company paid $1 million and $6 million for the purchase of long-term investments during the six months ended July 1, 2023 and July 2, 2022, respectively. Net gains and losses related to the Company’s long-term investments are included within Other (expense), net on the Consolidated Statements of Operations. There were no net gains or losses during the three months ended July 1, 2023. The Company recognized net losses of $1 million during the six months ended July 1, 2023. The Company did not recognize any net gains or losses during the three and six months ended July 2, 2022.

Note 7 Exit and Restructuring Costs

The Company expanded the scope of the 2022 Productivity Plan, which is still expected to be substantially completed in 2023, with a total cost now estimated to be at least $60 million. Total Exit and restructuring charges associated with the 2022 Productivity Plan to date were $36 million, including $14 million and $24 million recorded for the three and six months ended July 1, 2023, respectively. The Company’s obligations under the 2022 Productivity Plan are expected to be substantially settled by the first quarter of 2024 and are primarily reflected within Accrued liabilities on the Consolidated Balance Sheets.

In addition, the Company initiated a voluntary retirement plan (“VRP”) applicable to retirement-eligible U.S. employees to generate incremental cost efficiencies. Employees who participate in the VRP agree to retire in 2023 in exchange for cash severance and other benefits that will be classified within Exit and restructuring on the Consolidated Statements of Operations. The Company estimates the total cost of the VRP will be approximately $45 million and will be recorded in the third quarter aligned with the Company’s commitment to the VRP obligations. Payment obligations are expected to be substantially settled by the first quarter of 2024 and will be reflected within Accrued liabilities on the Consolidated Balance Sheets.

Note 8 Fair Value Measurements

Financial assets and liabilities are measured using inputs from three levels of the fair value hierarchy in accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established 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.

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•Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs to the extent possible. In addition, the Company considers counterparty credit risk in the assessment of fair value.

The Company’s financial assets and liabilities carried at fair value as of July 1, 2023, are classified below (in millions):


	Level 1		Level 2		Level 3		Total
Assets:

Forward interest rate swap contracts (2)	$	—	$	108	$	—	$	108
Investments related to the deferred compensation plan	38		—		—		38
Total Assets at fair value	$	38	$	108	$	—	$	146
Liabilities:
Foreign exchange contracts (1)	$	2	$	13	$	—	$	15
Forward interest rate swap contracts (2)	—		36		—		36
Liabilities related to the deferred compensation plan	38		—		—		38
Total Liabilities at fair value	$	40	$	49	$	—	$	89

The Company’s financial assets and liabilities carried at fair value as of December 31, 2022, are classified below (in millions):


	Level 1		Level 2		Level 3		Total
Assets:

Forward interest rate swap contracts (2)	$	—	$	72	$	—	$	72
Investments related to the deferred compensation plan	35		—		—		35
Total Assets at fair value	$	35	$	72	$	—	$	107
Liabilities:
Foreign exchange contracts (1)	$	5	$	14	$	—	$	19

Liabilities related to the deferred compensation plan	35		—		—		35
Total Liabilities at fair value	$	40	$	14	$	—	$	54

(1)The fair value of the foreign exchange contracts is calculated as follows:

•Fair value of regular forward contracts associated with forecasted sales hedges is calculated using the period-end exchange rate adjusted for current forward points.

•Fair value of hedges against net assets denominated in foreign currencies is calculated at the period-end exchange rate adjusted for current forward points unless the hedge has been traded but not settled at year end (Level 2). If this is the case, the fair value is calculated at the rate at which the hedge is being settled (Level 1).

(2)The fair value of forward interest rate swaps is based upon a valuation model that uses relevant observable market inputs at the quoted intervals, such as forward yield curves, and is adjusted for the Company’s credit risk and the interest rate swap terms.

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Note 9 Derivative Instruments

In the normal course of business, the Company is exposed to global market risks, including the effects of changes in foreign currency exchange rates and interest rates. The Company uses derivative instruments to manage its exposure to such risks and may elect to designate certain derivatives as hedging instruments under ASC Topic 815, Derivatives and Hedging (“ASC 815”). The Company formally documents all relationships between designated hedging instruments and hedged items as well as its risk management objectives and strategies for undertaking hedge transactions. The Company does not hold or issue derivatives for trading or speculative purposes.

In accordance with ASC 815, the Company recognizes derivative instruments as either assets or liabilities on the Consolidated Balance Sheets and measures them at fair value. The following table presents the fair value of its derivative instruments (in millions):


	Asset (Liability)
		Fair Values as of
	Balance Sheets Classification	July 1, 2023		December 31, 2022
Derivative instruments designated as hedges:

Foreign exchange contracts	Accrued liabilities	$	(13)	$	(14)


Total derivative instruments designated as hedges		$	(13)	$	(14)

Derivative instruments not designated as hedges:

Forward interest rate swaps	Prepaid expenses and other current assets	$	40	$	25
Forward interest rate swaps	Other long-term assets	68		47
Foreign exchange contracts	Accrued liabilities	(2)		(5)
Forward interest rate swaps	Accrued liabilities	(14)		—
Forward interest rate swaps	Other long-term liabilities	(22)		—
Total derivative instruments not designated as hedges		$	70	$	67
Total net derivative asset		$	57	$	53

The following table presents the net gains (losses) from changes in fair values of derivatives that are not designated as hedges (in millions):


	Gains (Losses) Recognized in Income
		Three Months Ended				Six Months Ended
	Statements of Operations Classification	July 1, 2023		July 2, 2022		July 1, 2023		July 2, 2022
Derivative instruments not designated as hedges:
Foreign exchange contracts	Foreign exchange gain (loss)	$	1	$	9	$	(4)	$	8
Forward interest rate swaps	Interest income (expense), net	18		11		11		45
Total net gain recognized in income		$	19	$	20	$	7	$	53

Activities related to derivative instruments are reflected within Net cash (used in) provided by operating activities on the Consolidated Statements of Cash Flows.

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Credit and Market Risk Management

Financial instruments, including derivatives, expose the Company to counterparty credit risk of nonperformance and to market risk related to currency exchange rate and interest rate fluctuations. The Company manages its exposure to counterparty credit risk by establishing minimum credit standards, diversifying its counterparties, and monitoring its concentrations of credit. The Company’s counterparties are commercial banks with expertise in derivative financial instruments. The Company evaluates the impact of market risk on the fair value and cash flows of its derivative and other financial instruments by considering reasonably possible changes in interest rates and currency exchange rates. The Company continually monitors the creditworthiness of the customers to which it grants credit terms in the normal course of business. The terms and conditions of the Company’s credit policies are designed to mitigate concentrations of credit risk.

The Company’s master netting and other similar arrangements with the respective counterparties allow for net settlement under certain conditions, which are designed to reduce credit risk by permitting net settlement with the same counterparty. We present the assets and liabilities of our derivative financial instruments, for which we have net settlement agreements in place, on a net basis on the Consolidated Balance Sheets. If the derivative financial instruments had been presented gross on the Consolidated Balance Sheets, the asset and liability positions would have been increased by $1 million and $4 million as of July 1, 2023 and December 31, 2022, respectively.

Foreign Currency Exchange Risk Management

The Company conducts business on a multinational basis in a variety of foreign currencies. Exposure to market risk for changes in foreign currency exchange rates arises primarily from Euro-denominated external revenues, cross-border financing activities between subsidiaries, and foreign currency denominated monetary assets and liabilities. The Company manages its objective of preserving the economic value of non-functional currency denominated cash flows by initially hedging transaction exposures with natural offsets and, once these opportunities have been exhausted, through foreign exchange forward and option contracts, as deemed appropriate.

The Company manages the exchange rate risk of anticipated Euro-denominated sales using forward contracts, which typically mature within twelve months of execution. The Company designates these derivative contracts as cash flow hedges. Unrealized gains and losses on these contracts are deferred in Accumulated other comprehensive income (loss) (“AOCI”) on the Consolidated Balance Sheets until the contract is settled and the hedged sale is realized. The realized gain or loss is then recorded as an adjustment to Net sales on the Consolidated Statements of Operations. Realized amounts reclassified to Net sales were $7 million of losses and $27 million of gains for the three months ended July 1, 2023 and July 2, 2022, respectively. Realized amounts reclassified to Net sales were $10 million of losses and $43 million of gains for the six months ended July 1, 2023 and July 2, 2022, respectively. As of July 1, 2023 and December 31, 2022, the notional amounts of the Company’s foreign exchange cash flow hedges were €754 million and €549 million, respectively. The Company has reviewed its cash flow hedges for effectiveness and determined that they are highly effective.

The Company uses forward contracts, which are not designated as hedging instruments, to manage its exposures related to net assets denominated in foreign currencies. These forward contracts typically mature within one month after execution. Monetary gains and losses on these forward contracts are recorded in income and are generally offset by the transaction gains and losses related to their net asset positions. The notional values and the net fair values of these outstanding contracts were as follows (in millions):


	July 1, 2023		December 31, 2022
Notional balance of outstanding contracts:
British Pound/U.S. Dollar	£	9	£	11
Euro/U.S. Dollar	€	152	€	191


Euro/Czech Koruna	€	16	€	15



Japanese Yen/U.S. Dollar	¥	579	¥	—
Singapore Dollar/U.S. Dollar	S$	11	S$	5
Mexican Peso/U.S. Dollar	Mex$	138	Mex$	372


Polish Zloty/U.S. Dollar	zł	84	zł	47
Net fair value of liabilities of outstanding contracts	$	2	$	5

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Interest Rate Risk Management

The Company’s debt consists of borrowings under a term loan (“Term Loan A”), Revolving Credit Facility, and Receivables Financing Facilities, which bear interest at variable rates plus applicable margins. As a result, the Company is exposed to market risk associated with the variable interest rate payments on these borrowings. See Note 10, Long-Term Debt for further details related to these borrowings.

The Company manages its exposure to changes in interest rates by utilizing long-term forward interest rate swaps to hedge this exposure and to achieve a desired proportion of fixed versus variable-rate debt, based on current and projected market conditions. The Company has interest rate swap agreements with a total notional amount of $800 million to lock into a fixed SOFR interest rate base, which are subject to monthly net cash settlements effective through October 2027.

In the second quarter, the Company entered into new interest rate swap agreements that contain a total notional amount of $400 million to lock into a variable interest rate base designed to offset a portion of the Company’s existing swap agreements. These agreements are subject to monthly cash settlements effective through October 2027. At the same time, the Company entered into additional new interest rate swap agreements that contain a total notional amount of $400 million to lock into a fixed SOFR interest rate base, which are subject to monthly cash settlements effective through June 2030. As a result of these transactions, the Company maintained fixed interest rates on a total notional amount of $800 million through October 2027 and a total notional amount of $400 million through June 2030. There was no cash settlement, or significant impact on the Consolidated Statement of Operations, as a result of these transactions in the second quarter of 2023.

Note 10 Long-Term Debt

The following table shows the carrying value of the Company’s debt (in millions):


	July 1, 2023		December 31, 2022
Term Loan A	$	1,684	$	1,728

Revolving Credit Facility	388		50
Receivables Financing Facilities	144		254

Total debt	$	2,216	$	2,032
Less: Debt issuance costs	(4)		(4)
Less: Unamortized discounts	(4)		(5)
Less: Current portion of debt	(166)		(214)
Total long-term debt	$	2,042	$	1,809

As of July 1, 2023, the future maturities of debt are as follows (in millions):


2023 (6 months remaining)	$	—
2024	188
2025	66
2026	88
2027	1,874

Total future maturities of debt	$	2,216

All borrowings as of July 1, 2023 were denominated in U.S. Dollars.

The estimated fair value of the Company’s debt approximated $2.1 billion and $2.0 billion as of July 1, 2023 and December 31, 2022, respectively. These fair value amounts, developed based on inputs classified as Level 2 within the fair value hierarchy, represent the estimated value at which the Company’s lenders could trade its debt within the financial markets and do not represent the settlement value of these liabilities to the Company. The fair value of debt will continue to vary each period based on a number of factors, including fluctuations in market interest rates as well as changes to the Company’s credit ratings.

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Term Loan A

The principal on Term Loan A is due in quarterly installments, with the next quarterly installment due in March 2024 and the majority due upon maturity in 2027. The Company may make prepayments, as it did in the first quarter of 2023, in whole or in part, without premium or penalty, and would be required to prepay certain outstanding amounts in the event of certain circumstances or transactions. As of July 1, 2023, the Term Loan A interest rate was 6.20%. Interest payments are made monthly and are subject to variable rates plus an applicable margin.

Revolving Credit Facility

The Company has a Revolving Credit Facility that is available for working capital and other general business purposes, including letters of credit. As of July 1, 2023, the Company had letters of credit totaling $9 million, which reduced funds available for borrowings under the Revolving Credit Facility from $1,500 million to $1,491 million. As of July 1, 2023, the Revolving Credit Facility had an average interest rate of 6.15%. Upon borrowing, interest payments are made monthly and are subject to variable rates plus an applicable margin. The Revolving Credit Facility matures on May 25, 2027.

Receivables Financing Facilities

The Company has two Receivables Financing Facilities with financial institutions that have a combined total borrowing limit of up to $280 million. As collateral, the Company pledges perfected first-priority security interests in its U.S. domestically originated accounts receivable. The Company has accounted for transactions under its Receivables Financing Facilities as secured borrowings. The Company’s first Receivables Financing Facility allows for borrowings of up to $180 million and matures on March 19, 2024. During the second quarter of 2023, the Company amended the second Receivables Financing Facility, which allows for borrowings up to $100 million, to extend the maturity to May 13, 2024, but otherwise did not substantially change the terms of the facility.

As of July 1, 2023, the Company’s Consolidated Balance Sheets included $621 million of receivables that were pledged under the two Receivables Financing Facilities. As of July 1, 2023, $144 million had been borrowed and was classified as current. Borrowings under the Receivables Financing Facilities bear interest at a variable rate plus an applicable margin. As of July 1, 2023, the Receivables Financing Facilities had an average interest rate of 6.50%. Interest is paid monthly on these borrowings.

Each of the Company’s borrowings described above include terms and conditions that limit the incurrence of additional borrowings and require that certain financial ratios be maintained at designated levels.

The Company uses interest rate swaps to manage the interest rate risk associated with its debt. See Note 9, Derivative Instruments for further information.

As of July 1, 2023, the Company was in compliance with all debt covenants.

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Note 11 Leases

During the six months ended July 1, 2023, the Company recorded an additional $38 million of right-of-use (“ROU”) assets obtained in exchange for lease obligations primarily related to the commencement of a new office facility lease.

Future minimum lease payments under non-cancellable leases as of July 1, 2023 were as follows (in millions):


2023 (6 months remaining)	$	25
2024	48
2025	37
2026	32
2027	25
Thereafter	76
Total future minimum lease payments	$	243
Less: Interest	(47)
Present value of lease liabilities	$	196

Reported as of July 1, 2023:
Current portion of lease liabilities	$	39
Long-term lease liabilities	157
Present value of lease liabilities	$	196

The current portion of lease liabilities is included within Accrued liabilities on the Consolidated Balance Sheets.

Note 12 Accrued Liabilities, Commitments and Contingencies

Accrued Liabilities

The components of Accrued liabilities are as follows (in millions):


	July 1, 2023		December 31, 2022
Settlement	$	135	$	180
Unremitted cash collections due to banks on factored accounts receivable	103		130
Payroll and benefits	88		90
Customer rebates	42		55
Leases	39		37
Incentive compensation	29		100
Warranty	25		26
Foreign exchange contracts	15		19
Short-term interest rate swaps	14		—
Freight and duty	12		19
Other	81		88
Accrued liabilities	$	583	$	744

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Warranties

The following table is a summary of the Company’s accrued warranty obligations (in millions):


	Six Months Ended
	July 1, 2023		July 2, 2022
Balance at the beginning of the period	$	26	$	26
Warranty expense	13		15
Warranties fulfilled	(14)		(15)
Balance at the end of the period	$	25	$	26

Contingencies

The Company is subject to a variety of investigations, claims, suits, and other legal proceedings that arise from time to time in the ordinary course of business, including but not limited to, intellectual property, employment, tort, and breach of contract matters. The Company currently believes that the outcomes of such proceedings, individually and in the aggregate, will not have a material adverse impact on its business, cash flows, financial position, or results of operations. Any legal proceedings are subject to inherent uncertainties, and the Company’s view of these matters and their potential effects may change in the future. The Company records a liability for contingencies when a loss is deemed to be probable and can be reasonably estimated.

During the second quarter of 2022, the Company entered into a License and Settlement Agreement (“Settlement”) to resolve certain patent-related litigation. The payment terms under the Settlement consist of 8 quarterly payments of $45 million that began in the second quarter of 2022. The remaining 3 quarterly amounts will be paid by the first quarter of 2024 and are included within Accrued liabilities on the Consolidated Balance Sheets.

Note 13 Share-Based Compensation

The Company issues share-based compensation awards under the Zebra Technologies 2018 Long-Term Incentive Plan (“2018 Plan”), approved by shareholders in 2018 which superseded and replaced all prior share-based incentive plans. Outstanding awards issued prior to the 2018 Plan are governed by the provisions of those plans until such awards have been exercised, forfeited, canceled, expired, or otherwise terminated in accordance with their terms. Awards available under the 2018 Plan include stock-settled awards, including stock-settled restricted stock units, stock-settled performance stock units, restricted stock awards, performance share awards, stock appreciation rights, incentive stock options, and non-qualified stock options. Awards available under the 2018 Plan also include cash-settled awards, including cash-settled stock appreciation rights, cash-settled restricted stock units, and cash-settled performance stock units. No awards remain available for future grants under previous plans.

The Company uses treasury shares as its source for issuing shares under the share-based compensation programs. As of July 1, 2023, the Company had 2,365,581 shares of Class A Common stock remaining available to be issued under the 2018 Plan.

The compensation expense from the Company’s share-based compensation plans and associated income tax benefit, excluding the effects of excess tax benefits or shortfalls, were included in the Consolidated Statements of Operations as follows (in millions):


	Three Months Ended				Six Months Ended
Compensation costs and related income tax benefit	July 1, 2023		July 2, 2022		July 1, 2023		July 2, 2022
Cost of sales	$	2	$	1	$	3	$	2
Selling and marketing	1		6		7		10
Research and development	6		10		13		16
General and administration	(6)		10		3		16
Total compensation expense	$	3	$	27	$	26	$	44
Income tax benefit	$	3	$	5	$	7	$	8

As of July 1, 2023, total unearned compensation cost related to the Company’s share-based compensation plans was $141 million, which will be recognized over the weighted average remaining service period of approximately 1.6 years.

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The majority of the Company’s share-based compensation awards are generally issued as part of its employee and non-employee director incentive program during the second quarter of each fiscal year. The Company also issues awards associated with business acquisitions or other off-cycle events. The majority of the Company’s share-based compensation is comprised of stock-settled awards.

Stock-settled awards

Beginning in 2021, the Company began issuing stock-settled restricted stock units (“stock-settled RSUs”) and stock-settled performance share units (“stock-settled PSUs”) for the majority of its share-based compensation awards. Prior to which, the Company primarily awarded restricted stock awards (“RSAs”), performance share awards (“PSAs”), and stock appreciation rights (“SARs”). The Company’s awards are typically time-vested with stock-settled RSUs and RSAs vesting ratably in three annual installments, stock-settled PSUs and PSAs vesting at the end of the three-year period, and SARs vesting ratably in four annual installments.

Vesting for each participant is subject to restrictions, such as continuous employment, except in certain cases as set forth in each stock agreement. Upon vesting, stock-settled RSUs and PSUs convert to shares of Class A Common Stock that are released to participants. RSAs and PSAs are considered participating securities, and as such, are included as part of the Company’s Class A Common Stock outstanding at the time of grant.

Compensation cost for the stock-settled RSUs, stock-settled PSUs, RSAs, and PSAs is expensed over each participant’s required service period. Compensation cost is calculated as the fair market value of the Company’s Class A Common Stock on the grant date multiplied by the number of units or awards granted, net of estimated forfeitures. The expected attainment of the performance goals for the stock-settled PSUs and PSAs is reviewed at the end of each reporting period, with adjustments recorded to compensation expense in the Consolidated Statements of Operations, as necessary. As a result of this assessment, the current quarter results include a $30 million reduction in compensation costs. Fair value and compensation cost for SARs are determined using a binomial model on the grant date.

The Company also issues RSAs to non-employee directors. The number of shares granted to each non-employee director is determined by dividing the value of the annual grant by the price of a share of the Company’s Class A Common Stock. New directors in any fiscal year earn a prorated amount. During the first six months of 2023, there were 6,640 shares granted to non-employee directors compared to 5,686 shares during the first six months of 2022. The shares vest immediately upon grant.

A summary of the Company’s restricted and performance stock-settled awards for the six months ended July 1, 2023 is as follows:


	RSUs			PSUs			RSAs			PSAs
	Units	Weighted-Average Grant Date Fair Value		Units	Weighted-Average Grant Date Fair Value		Shares	Weighted-Average Grant Date Fair Value		Shares	Weighted-Average Grant Date Fair Value
Outstanding at beginning of period	242,732	$	404.19	105,928	$	406.89	46,971	$	271.92	35,246	$	245.79
Granted	279,224	265.58		104,446	258.63		6,640	271.77		—	—
Released	(74,829)	403.10		(64)	482.42		(45,129)	252.61		(34,525)	244.97
Forfeited	(11,198)	425.27		(1,096)	389.82		(1,375)	300.62		(75)	244.97
Outstanding at end of period	435,929	$	314.40	209,214	$	332.94	7,107	$	384.26	646	$	291.43

The Company did not issue any SARs during the six months ended July 1, 2023 and July 2, 2022. A summary of the Company’s SARs for the six months ended July 1, 2023 is as follows:

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	SARs	Weighted-Average Exercise Price
Outstanding at beginning of period	443,476	$	122.67
Granted	—	—
Exercised	(24,576)	98.86
Forfeited	(157)	239.89
Expired	—	—
Outstanding at end of period	418,743	$	124.02
Exercisable at end of period	403,092	$	118.58

The following table summarizes information about SARs outstanding as of July 1, 2023:


	Outstanding		Exercisable
Aggregate intrinsic value (in millions)	$	72	$	72
Weighted-average remaining contractual life (in years)	2.2		2.1

The intrinsic value of SARs exercised during the six months ended July 1, 2023 and July 2, 2022 was $5 million and $6 million, respectively. The total fair value of SARs that vested during the six months ended July 1, 2023 and July 2, 2022 was $2 million and $3 million, respectively.

Cash-settled awards

The Company also issues cash-settled share-based compensation awards, including cash-settled stock appreciation rights, cash-settled restricted stock units and cash-settled performance stock units that are classified as liability awards. These awards are expensed over the vesting period of the related award, which is typically three years. Compensation cost is calculated as the fair value on grant date multiplied by the number of share-equivalents granted. The expected attainment of the performance goals for the cash-settled performance stock units is reviewed at the end of each reporting period, with adjustments recorded to compensation expense in the Consolidated Statements of Operations, as necessary. Cash settlement is based on the fair value of share equivalents at the time of vesting, which was $8 million and $4 million for the six months ended July 1, 2023 and July 2, 2022, respectively. Share-equivalents issued under these programs totaled 39,407 and 64,056 during the six months ended July 1, 2023 and July 2, 2022, respectively.

Employee Stock Purchase Plan

Eligible Zebra employees may purchase common stock at 95% of the fair market value at the date of purchase pursuant to the Zebra Technologies Corporation 2020 Employee Stock Purchase Plan (“2020 ESPP”). Employees may make purchases by cash or payroll deductions up to certain limits. The aggregate number of shares that may be purchased under the 2020 ESPP is 1,500,000 shares. As of July 1, 2023, 1,365,953 shares remained available for future purchase.

Note 14 Income Taxes

The Company’s effective tax rate for the three and six months ended July 1, 2023 was 15.8% and 17.4%, respectively, compared to 35.9% and (10.3)% for the three and six months ended July 2, 2022, respectively. In the current period, the variance from the 21% federal statutory rate was primarily due to U.S. tax credits and the favorable impacts of foreign earnings subject to U.S. taxation. In the prior period, the variance from the 21% federal statutory rate was primarily attributable to a discrete tax benefit resulting from the Settlement and related costs recorded in the second quarter of 2022, lower tax rates on foreign earnings, and U.S. tax credits. The change in the effective tax rate from the prior three and six month periods was primarily due to the one-time discrete tax benefit from the Settlement in the prior period.

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Note 15 Earnings (Loss) Per Share

Basic net earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of diluted common shares outstanding. Diluted common shares outstanding is computed using the Treasury Stock method and, in periods of income, reflects the additional shares that would be outstanding if dilutive share-based compensation awards were converted into common shares during the period.

Earnings (loss) per share (in millions, except share data):


	Three Months Ended				Six Months Ended
	July 1, 2023		July 2, 2022		July 1, 2023		July 2, 2022
Basic:
Net income (loss)	$	144	$	(98)	$	294	$	107
Weighted-average shares outstanding (1)	51,377,064		52,138,470		51,395,062		52,642,348
Basic earnings (loss) per share	$	2.80	$	(1.87)	$	5.72	$	2.04

Diluted:
Net income (loss)	$	144	$	(98)	$	294	$	107
Weighted-average shares outstanding (1)	51,377,064		52,138,470		51,395,062		52,642,348
Dilutive shares (2)	330,396		—		328,964		391,381
Diluted weighted-average shares outstanding	51,707,460		52,138,470		51,724,026		53,033,729
Diluted earnings (loss) per share	$	2.78	$	(1.87)	$	5.68	$	2.02

(1) In periods of a net loss, restricted stock and performance share awards, which are participating securities, are excluded from weighted-average shares outstanding.

(2) In periods of net loss, all unvested share-based awards were anti-dilutive and therefore excluded from diluted shares.

Anti-dilutive share-based compensation awards are excluded from diluted earnings per share calculations. There were 247,453 and 151,872 shares that were anti-dilutive for the three and six months ended July 1, 2023, respectively. There were 630,182 and 335,476 shares that were anti-dilutive for the three and six months ended July 2, 2022, respectively.

Note 16 Accumulated Other Comprehensive Income (Loss)

Stockholders’ equity includes certain items classified as AOCI, including:

•Unrealized gain (loss) on anticipated sales hedging transactions relates to derivative instruments used to hedge the exposure related to currency exchange rates for forecasted Euro sales. These hedges are designated as cash flow hedges, and the Company defers income statement recognition of gains and losses until the hedged transaction occurs. See Note 9, Derivative Instruments for more details.

•Foreign currency translation adjustments relate to the Company’s non-U.S. subsidiary companies that have designated a functional currency other than the U.S. Dollar. The Company translates the subsidiary functional currency financial statements to U.S. Dollars using a combination of historical, period end, and average foreign exchange rates. This combination of rates creates the foreign currency translation adjustment component of AOCI.

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The changes in each component of AOCI during the six months ended July 1, 2023 and July 2, 2022 were as follows (in millions):


	Unrealized gain (loss) on sales hedging		Foreign currency translation adjustments		Total
Balance at December 31, 2021	$	18	$	(47)	$	(29)
Other comprehensive income (loss) before reclassifications	57		(11)		46
Amounts reclassified from AOCI(1)	(43)		—		(43)
Tax effect	(2)		—		(2)
Other comprehensive income (loss), net of tax	12		(11)		1
Balance at July 2, 2022	$	30	$	(58)	$	(28)

Balance at December 31, 2022	$	(11)	$	(55)	$	(66)
Other comprehensive (loss) income before reclassifications	(9)		5		(4)
Amounts reclassified from AOCI(1)	10		—		10

Other comprehensive income, net of tax	1		5