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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 October 2, 2021
OR
| | | | | |
| ☐ | 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 October 26, 2021, there were 53,441,491 shares of Class A Common Stock, $.01 par value, outstanding.
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
QUARTER ENDED OCTOBER 2, 2021
TABLE OF CONTENTS
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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 2,
2021 | | December 31,
2020 |
| | (Unaudited) | | |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 307 | | | $ | 168 | |
Accounts receivable, net of allowances for doubtful accounts of $1 million as of October 2, 2021 and December 31, 2020, respectively | 613 | | | 508 | |
| Inventories, net | 438 | | | 511 | |
| Current income taxes | 72 | | | 16 | |
| Prepaid expenses and other current assets | 94 | | | 70 | |
| Total Current assets | 1,524 | | | 1,273 | |
| Property, plant and equipment, net | 274 | | | 274 | |
| Right-of-use lease assets | 130 | | | 135 | |
| Goodwill | 3,194 | | | 2,988 | |
| Other intangibles, net | 456 | | | 402 | |
| Deferred income taxes | 106 | | | 139 | |
| Other long-term assets | 181 | | | 164 | |
| Total Assets | $ | 5,865 | | | $ | 5,375 | |
| Liabilities and Stockholders’ Equity | | | |
| Current liabilities: | | | |
| Current portion of long-term debt | $ | 51 | | | $ | 364 | |
| Accounts payable | 609 | | | 601 | |
| Accrued liabilities | 550 | | | 559 | |
| Deferred revenue | 363 | | | 308 | |
| Income taxes payable | 8 | | | 19 | |
| Total Current liabilities | 1,581 | | | 1,851 | |
| Long-term debt | 940 | | | 881 | |
| Long-term lease liabilities | 120 | | | 129 | |
| | | |
| Long-term deferred revenue | 318 | | | 273 | |
| Other long-term liabilities | 90 | | | 97 | |
| Total Liabilities | 3,049 | | | 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 | 447 | | | 395 | |
Treasury stock at cost, 18,697,788 and 18,689,775 shares as of October 2, 2021 and December 31, 2020, respectively | (986) | | | (919) | |
| Retained earnings | 3,382 | | | 2,736 | |
| Accumulated other comprehensive loss | (28) | | | (69) | |
| Total Stockholders’ Equity | 2,816 | | | 2,144 | |
| Total Liabilities and Stockholders’ Equity | $ | 5,865 | | | $ | 5,375 | |
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 2,
2021 | | September 26,
2020 | | October 2,
2021 | | September 26,
2020 |
| Net sales: | | | | | | | |
| Tangible products | $ | 1,240 | | | $ | 972 | | | $ | 3,585 | | | $ | 2,684 | |
| Services and software | 196 | | | 160 | | | 575 | | | 456 | |
| Total Net sales | 1,436 | | | 1,132 | | | 4,160 | | | 3,140 | |
| Cost of sales: | | | | | | | |
| Tangible products | 687 | | | 543 | | | 1,896 | | | 1,480 | |
| Services and software | 103 | | | 96 | | | 305 | | | 275 | |
| Total Cost of sales | 790 | | | 639 | | | 2,201 | | | 1,755 | |
| Gross profit | 646 | | | 493 | | | 1,959 | | | 1,385 | |
| Operating expenses: | | | | | | | |
| Selling and marketing | 148 | | | 119 | | | 430 | | | 350 | |
| Research and development | 141 | | | 113 | | | 422 | | | 316 | |
| General and administrative | 85 | | | 71 | | | 259 | | | 219 | |
| Amortization of intangible assets | 29 | | | 20 | | | 81 | | | 52 | |
| Acquisition and integration costs | 6 | | | 19 | | | 11 | | | 21 | |
| Exit and restructuring costs | — | | | 1 | | | — | | | 7 | |
| Total Operating expenses | 409 | | | 343 | | | 1,203 | | | 965 | |
| Operating income | 237 | | | 150 | | | 756 | | | 420 | |
| Other expenses: | | | | | | | |
| Foreign exchange loss | (4) | | | (3) | | | (3) | | | (15) | |
| Interest expense, net | (5) | | | (10) | | | (10) | | | (69) | |
| Other (expense) income, net | — | | | 1 | | | (1) | | | 8 | |
| Total Other expenses, net | (9) | | | (12) | | | (14) | | | (76) | |
| Income before income tax | 228 | | | 138 | | | 742 | | | 344 | |
| Income tax expense | 29 | | | 22 | | | 96 | | | 39 | |
| Net income | $ | 199 | | | $ | 116 | | | $ | 646 | | | $ | 305 | |
| Basic earnings per share | $ | 3.72 | | | $ | 2.18 | | | $ | 12.08 | | | $ | 5.70 | |
| Diluted earnings per share | $ | 3.69 | | | $ | 2.16 | | | $ | 11.98 | | | $ | 5.65 | |
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 2,
2021 | | September 26,
2020 | | October 2,
2021 | | September 26,
2020 |
| Net income | $ | 199 | | | $ | 116 | | | $ | 646 | | | $ | 305 | |
| Other comprehensive income (loss), net of tax: | | | | | | | |
| Changes in unrealized gains (losses) on anticipated sales hedging transactions | 12 | | | (8) | | | 46 | | | (14) | |
| | | | | | | |
| | | | | | | |
| Foreign currency translation adjustment | (2) | | | 4 | | | (5) | | | (4) | |
| Comprehensive income | $ | 209 | | | $ | 112 | | | $ | 687 | | | $ | 287 | |
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, 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2019 | | 54,002,932 | | | $ | 1 | | | $ | 339 | | | $ | (689) | | | $ | 2,232 | | | $ | (44) | | | $ | 1,839 | |
| | | | | | | | | | | | | | |
| Issuances of treasury shares related to share-based compensation plans, net of forfeitures | | 15,792 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares withheld to fund withholding tax obligations related to share-based compensation plans | | (4,361) | | | — | | | — | | | (1) | | | — | | | — | | | (1) | |
| Share-based compensation | | — | | | — | | | 7 | | | — | | | — | | | — | | | 7 | |
| Repurchases of common stock | | (948,740) | | | — | | | — | | | (200) | | | — | | | — | | | (200) | |
| Net income | | — | | | — | | | — | | | — | | | 89 | | | — | | | 89 | |
| Changes in unrealized gains and losses on anticipated sales hedging transactions (net of income taxes) | | — | | | — | | | — | | | — | | | — | | | 2 | | | 2 | |
| | | | | | | | | | | | | | |
| Foreign currency translation adjustment | | — | | | — | | | — | | | — | | | — | | | (9) | | | (9) | |
| Balance at March 28, 2020 | | 53,065,623 | | | $ | 1 | | | $ | 346 | | | $ | (890) | | | $ | 2,321 | | | $ | (51) | | | $ | 1,727 | |
| | | | | | | | | | | | | | |
| Issuances of treasury shares related to share-based compensation plans, net of forfeitures | | 399,634 | | | — | | | (9) | | | 13 | | | — | | | — | | | 4 | |
| Shares withheld to fund withholding tax obligations related to share-based compensation plans | | (142,206) | | | — | | | — | | | (34) | | | — | | | — | | | (34) | |
| Share-based compensation | | — | | | — | | | 13 | | | — | | | — | | | — | | | 13 | |
| | | | | | | | | | | | | | |
| Net income | | — | | | — | | | — | | | — | | | 100 | | | — | | | 100 | |
| Changes in unrealized gains and losses on anticipated sales hedging transactions (net of income taxes) | | — | | | — | | | — | | | — | | | — | | | (8) | | | (8) | |
| | | | | | | | | | | | | | |
| Foreign currency translation adjustment | | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | |
| Balance at June 27, 2020 | | 53,323,051 | | | $ | 1 | | | $ | 350 | | | $ | (911) | | | $ | 2,421 | | | $ | (58) | | | $ | 1,803 | |
| | | | | | | | | | | | | | |
| Issuances of treasury shares related to share-based compensation plans, net of forfeitures | | (22,960) | | | — | | | 9 | | | (6) | | | — | | | — | | | 3 | |
| Shares withheld to fund withholding tax obligations related to share-based compensation plans | | (1,629) | | | — | | | — | | | — | | | — | | | — | | | — | |
| Share-based compensation | | — | | | — | | | 13 | | | — | | | — | | | — | | | 13 | |
| | | | | | | | | | | | | | |
| Net income | | — | | | — | | | — | | | — | | | 116 | | | — | | | 116 | |
| Changes in unrealized gains and losses on anticipated sales hedging transactions (net of income taxes) | | — | | | — | | | — | | | — | | | — | | | (8) | | | (8) | |
| | | | | | | | | | | | | | |
| Foreign currency translation adjustment | | — | | | — | | | — | | | — | | | — | | | 4 | | | 4 | |
| Balance at September 26, 2020 | | 53,298,462 | | | $ | 1 | | | $ | 372 | | | $ | (917) | | | $ | 2,537 | | | $ | (62) | | | $ | 1,931 | |
See accompanying Notes to Consolidated Financial Statements.
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
| | | | | | | | | | | |
| | Nine Months Ended |
| October 2,
2021 | | September 26,
2020 |
| Cash flows from operating activities: | | | |
| Net income | $ | 646 | | | $ | 305 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 136 | | | 103 | |
| | | |
| | | |
| Share-based compensation | 58 | | | 33 | |
| | | |
| Deferred income taxes | (6) | | | (2) | |
| Unrealized (gain) loss on forward interest rate swaps | (17) | | | 37 | |
| Other, net | 1 | | | (3) | |
| Changes in operating assets and liabilities: | | | |
| Accounts receivable, net | (107) | | | 96 | |
| Inventories, net | 75 | | | (7) | |
| Other assets | (25) | | | 3 | |
| Accounts payable | (2) | | | (7) | |
| Accrued liabilities | 42 | | | (40) | |
| Deferred revenue | 101 | | | 58 | |
| Income taxes | (67) | | | (58) | |
| Other operating activities | 1 | | | 13 | |
| Net cash provided by operating activities | 836 | | | 531 | |
| Cash flows from investing activities: | | | |
| Acquisition of businesses, net of cash acquired | (307) | | | (548) | |
| Purchases of property, plant and equipment | (38) | | | (49) | |
| Proceeds from sale of long-term investments | — | | | 6 | |
| Purchases of long-term investments | (24) | | | (32) | |
| Net cash used in investing activities | (369) | | | (623) | |
| Cash flows from financing activities: | | | |
| Payment of debt issuance costs and discounts | — | | | (1) | |
| Payments of long-term debt | (277) | | | (103) | |
| Proceeds from issuance of long-term debt | 21 | | | 389 | |
| | | |
| Payments for repurchases of common stock | (25) | | | (200) | |
| Net payments related to share-based compensation plans | (48) | | | (28) | |
| Change in unremitted cash collections from servicing factored receivables | (22) | | | 73 | |
| Other financing activities | — | | | 1 | |
| Net cash (used in) provided by in financing activities | (351) | | | 131 | |
| Effect of exchange rate changes on cash and cash equivalents, including restricted cash | — | | | (1) | |
| Net increase in cash and cash equivalents, including restricted cash | 116 | | | 38 | |
| Cash and cash equivalents, including restricted cash, at beginning of period | 192 | | | 30 | |
| Cash and cash equivalents, including restricted cash, at end of period | $ | 308 | | | $ | 68 | |
| Less restricted cash, included in Prepaid expenses and other current assets | (1) | | | (29) | |
| Cash and cash equivalents at end of period | $ | 307 | | | $ | 39 | |
| Supplemental disclosures of cash flow information: | | | |
| Income taxes paid | $ | 169 | | | $ | 100 | |
| Interest paid | $ | 25 | | | $ | 28 | |
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 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 around the world. 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, 2020.
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 2, 2021, the Consolidated Statements of Operations, Comprehensive Income, and Stockholders’ Equity for the three and nine months ended October 2, 2021 and September 26, 2020, and the Consolidated Statements of Cash Flows for the nine months ended October 2, 2021 and September 26, 2020. These results, however, are not necessarily indicative of the results expected for the full fiscal year ending December 31, 2021.
Effective January 1, 2021, Retail Solutions, which provides a range of physical inventory management solutions with application in the retail industry, including solutions for full store physical inventories, cycle counts and analytics, 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. Prior period results have been reclassified to conform to the current period’s presentation. This change does not have an impact on the Consolidated Financial Statements. See Note 16, Segment Information & Geographic Data for additional information related to each segment’s results.
Note 2 Significant Accounting Policies
Recently Issued Accounting Pronouncements Not Yet Adopted
In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). Subject to meeting certain criteria, ASU 2020-04 provides optional expedients and exceptions to applying contract modification accounting under existing generally accepted accounting principles for contracts that are modified to address the expected phase out of the London Inter-bank Offered Rate (“LIBOR”). Some of the Company’s contracts with respect to its borrowings and interest rate swap contracts already contain comparable alternative reference rates that would automatically take effect upon the phasing out of LIBOR, while for others, the Company anticipates negotiating comparable replacement rates with its counterparties. At this stage of its contract assessment, the Company does not expect ASU 2020-04 to have a material impact on its consolidated financial statements.
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 solutions offerings are generally recognized 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 using a time-based method, depending upon how control is transferred to the customer. In cases where a bundle of products, services, 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 2, 2021 and September 26, 2020 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| October 2, 2021 | | September 26, 2020 |
| Segment | Tangible Products | | Services and Software | | Total | | Tangible Products | | Services and Software | | Total |
| AIT | $ | 358 | | | $ | 28 | | | $ | 386 | | | $ | 314 | | | $ | 25 | | | $ | 339 | |
| EVM | 882 | | | 168 | | | 1,050 | | | 658 | | | 137 | | | 795 | |
Corporate, eliminations(1) | — | | | — | | | — | | | — | | | (2) | | | (2) | |
| Total | $ | 1,240 | | | $ | 196 | | | $ | 1,436 | | | $ | 972 | | | $ | 160 | | | $ | 1,132 | |
| | | | | | | | | | | |
| Nine Months Ended |
| October 2, 2021 | | September 26, 2020 |
| Segment | Tangible Products | | Services and Software | | Total | | Tangible Products | | Services and Software | | Total |
| AIT | $ | 1,161 | | | $ | 82 | | | $ | 1,243 | | | $ | 898 | | | $ | 69 | | | $ | 967 | |
| EVM | 2,424 | | | 499 | | | 2,923 | | | 1,786 | | | 389 | | | 2,175 | |
Corporate, eliminations(1) | — | | | (6) | | | (6) | | | — | | | (2) | | | (2) | |
| Total | $ | 3,585 | | | $ | 575 | | | $ | 4,160 | | | $ | 2,684 | | | $ | 456 | | | $ | 3,140 | |
(1)Amounts included in Corporate, eliminations consist of purchase accounting adjustments.
In addition, refer to Note 16, 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 solutions offerings. The aggregated transaction price allocated to remaining performance obligations for arrangements with an original term exceeding one year was $1,019 million and $974 million, inclusive of deferred revenue, as of October 2, 2021 and December 31, 2020, respectively. On average, remaining performance obligations as of October 2, 2021 and December 31, 2020 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 $11 million and $10 million as of October 2, 2021 and December 31, 2020, respectively. These contract assets result from timing differences between the billing and delivery schedules of products, services and software, as well as the impact from the allocation of the transaction price among performance obligations for contracts that include multiple performance obligations. Contract assets are evaluated for impairment and no impairment losses have been recognized during the three and nine months ended October 2, 2021 and September 26, 2020.
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 $681 million and $581 million as of October 2, 2021 and December 31, 2020, respectively. During the three and nine months ended October 2, 2021, the Company recognized $74 million and $259 million in revenue, respectively, which was previously included in the beginning balance of deferred revenue as of December 31, 2020. During the three and nine months ended September 26, 2020, the Company recognized $47 million and $204 million in revenue, respectively, which was previously included in the beginning balance of deferred revenue as of December 31, 2019.
Note 4 Inventories
The components of Inventories, net are as follows (in millions):
| | | | | | | | | | | |
| | October 2,
2021 | | December 31,
2020 |
| Raw materials | $ | 144 | | | $ | 117 | |
| Work in process | 3 | | | 4 | |
| Finished goods | 291 | | | 390 | |
| Total Inventories, net | $ | 438 | | | $ | 511 | |
Note 5 Business Acquisitions
Fetch
On August 9, 2021, the Company acquired Fetch Robotics, Inc. (“Fetch”), a provider of autonomous mobile robot solutions for customers who operate in the manufacturing and warehousing markets. Through its acquisition of Fetch, the Company intends to expand its automation solution offerings to customers in the manufacturing, distribution, and fulfillment industries.
The acquisition was accounted for under the acquisition method of accounting for business combinations. The total purchase consideration was $301 million, which consisted of $290 million in cash paid, net of cash on-hand, and the fair value of the Company’s existing ownership interest in Fetch of $11 million, as remeasured upon acquisition. This remeasurement resulted in a $1 million gain reflected in Other (expense) income, net on the Consolidated Statements of Operations.
The Company utilized estimated fair values as of August 9, 2021 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 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. The primary fair value estimates still considered preliminary as of October 2, 2021 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 | $ | 114 | |
| Right-of-use lease asset | 11 | |
| Inventories | 6 | |
| Other assets acquired | 5 | |
| Deferred tax liabilities | (27) | |
| Lease liability | (11) | |
| Other liabilities assumed | (4) | |
| Net assets acquired | $ | 94 | |
| Goodwill on acquisition | 207 | |
| Total purchase price | $ | 301 | |
The $207 million of goodwill, which is non-deductible for tax purposes, has been allocated to the EVM segment and principally relates to the planned geographic expansion and integration of Fetch into the Company’s manufacturing and warehouse automation offerings.
The preliminary purchase price allocation to identifiable intangible assets acquired was as follows:
| | | | | | | | | | | |
| Fair Value (in millions) | | Useful Life (in years) |
| Technology and patents | $ | 100 | | | 7 |
| Customer and other relationships | 5 | | | 2 |
| Trade names | 9 | | | 5 |
| Total identifiable intangible assets | $ | 114 | | | |
In connection with the acquisition of Fetch, the Company granted share-based compensation awards, principally as replacement awards for unvested Fetch stock options, in the form of stock-settled restricted stock units (“stock-settled RSUs”). A total of 40,837 stock-settled RSUs were granted, each with a grant-date fair value of $563.98. The total fair value of approximately $23 million is attributable to service to be rendered subsequent to acquisition and will generally be expensed over a 3-year service period.
The Company has not included unaudited pro forma results, as if Fetch had been acquired as of January 1, 2020, as doing so would not yield materially different results.
Adaptive Vision
On May 17, 2021, the Company acquired Adaptive Vision Sp. z o.o. (“Adaptive Vision”), a provider of graphical machine vision software with applications in the manufacturing industry, as well as a provider of libraries and other offerings for machine vision developers. The acquisition was accounted for under the acquisition method of accounting for business combinations. The Company’s cash purchase consideration of $18 million, net of cash on-hand, was primarily allocated to technology-related intangible assets of $13 million and associated deferred tax liabilities, and goodwill of $7 million. The technology-related intangible assets have an estimated useful life of eight years. While we believe these estimates provide a reasonable basis to record the net assets acquired, the purchase price allocation is considered preliminary and subject to adjustment during the measurement period, which is up to one year from the acquisition date. The goodwill, which will be non-deductible for tax purposes, has been allocated to the EVM segment and principally relates to the planned expansion of the Adaptive Vision technologies into new product offerings and markets. The Company has not included unaudited pro forma results, as if Adaptive Vision had been acquired as of January 1, 2020, as doing so would not yield materially different results.
Reflexis
During the third quarter of 2021, the Company finalized the purchase price allocation related to its September 1, 2020 acquisition of Reflexis Systems, Inc. (“Reflexis”). Before finalizing the purchase price allocation, during the second quarter of 2021, the Company recorded measurement period adjustments consisting of a $9 million increase to the trade name intangible assets and a $4 million increase to deferred tax liabilities. During the third quarter of 2021, the Company recorded its final measurement period adjustment consisting of a $2 million decrease to deferred tax liabilities. These adjustments, relating to facts and circumstances existing as of the acquisition date, resulted in a $7 million reduction of goodwill.
During the second quarter of 2021, the Company also received escrow proceeds of $1 million related to resolution of contractual items resulting from the Reflexis acquisition. These proceeds were reflected as a reduction in purchase price with a corresponding decrease of goodwill.
Acquisition and integration costs
We incurred approximately $6 million and $11 million of acquisition-related costs, primarily related to third-party transaction and advisory fees, during the three and nine months ended October 2, 2021, respectively, associated with our business acquisitions. These costs are included within Acquisition and integration costs on the Consolidated Statements 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, 2020 | $ | 228 | | | $ | 2,760 | | | $ | 2,988 | |
| Retail Solutions move to EVM segment, effective January 1, 2021 | (59) | | | 59 | | | — | |
| Fetch acquisition | — | | | 207 | | | 207 | |
| Adaptive Vision acquisition | — | | | 7 | | | 7 | |
| Reflexis purchase price allocation adjustments | — | | | (7) | | | (7) | |
| Reflexis purchase price reduction | — | | | (1) | | | (1) | |
| | | | | |
| Goodwill as of October 2, 2021 | $ | 169 | | | $ | 3,025 | | | $ | 3,194 | |
Other Intangibles, net
The balances in Other Intangibles, net consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of October 2, 2021 | | As of December 31, 2020 |
| Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
| Amortized intangible assets: | | | | | | | | | | | |
| Technology and patents | $ | 851 | | | $ | (553) | | | $ | 298 | | | $ | 739 | | | $ | (527) | | | $ | 212 | |
| Customer and other relationships | 624 | | | (484) | | | 140 | | | 620 | | | (431) | | | 189 | |
| Trade names | 63 | | | (45) | | | 18 | | | 44 | | | (43) | | | 1 | |
| Total | $ | 1,538 | | | $ | (1,082) | | | $ | 456 | | | $ | 1,403 | | | $ | (1,001) | | | $ | 402 | |
During the three months ended October 2, 2021 and September 26, 2020, the Company recognized amortization expense of $29 million and $20 million, respectively. During the nine months ended October 2, 2021 and September 26, 2020, the Company recognized amortization expense of $81 million and $52 million, respectively.
As of October 2, 2021, estimated future intangible asset amortization expense is as follows (in millions):
| | | | | | | | |
| 2021 (remaining 3 months) | | $ | 31 | |
| 2022 | | 110 | |
| 2023 | | 64 | |
| 2024 | | 62 | |
| 2025 | | 62 | |
| Thereafter | | 127 | |
| Total | | $ | 456 | |
See Note 5, Business Acquisitions for further details related to the Company’s acquisitions and purchase price allocation adjustments.
Note 7 Investments
The carrying value of the Company’s venture investments was $91 million and $77 million as of October 2, 2021 and December 31, 2020, respectively, which are included in Other long-term assets on the Consolidated Balance Sheets.
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 invest