filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
42K characters. Original on sec.gov ·
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Percentage changes provided throughout Management's Discussion and Analysis of Financial Condition and Results of Operations were calculated on amounts rounded to the nearest thousand. All of the financial information presented in this Item 7 has been revised to reflect the restatement more fully described in Note 2 to the Consolidated Financial Statements.
Zebra is a global leader respected for innovative EAI solutions in the automatic information and data capture solutions industry. We design, manufacture, and sell a broad range of products that capture and move data, including: mobile computers; barcode scanners and imagers; RFID readers; WLAN products; specialty printers for barcode labeling and personal identification; RTLS; related accessories and supplies, such as self-adhesive labels and other consumables; and utilities and application software. End-users of our products include those in the retail, transportation and logistics, manufacturing, healthcare, hospitality, warehouse and distribution, energy and utilities, and education industries around the world. Benefits of our solutions include improved efficiency and workflow management, increased productivity and asset utilization, real-time, actionable enterprise information, and better customer experiences. We provide our products and services globally through a direct sales force and extensive network of partners. We provide products and services in over 170 countries, with approximately 120 facilities and 7,000 employees worldwide.
In October 2014, Zebra acquired the Enterprise from MSI, excluding its iDEN, or Integrated Digital Enhanced Network Business, for $3.45 billion in cash. Enterprise is an industry leader in mobile computing and advanced data capture technologies and services, which complement Zebra’s printing and RFID products. Its products include rugged and enterprise-grade mobile computers; barcode scanners and imagers; RFID readers; WLAN solutions; and accessories, software; and services that are associated with these products. Enterprise service revenues include sales arising from maintenance, repair, product support, system installation and integration services, and other services.
Similar to Zebra’s pre-Acquisition business, Enterprise’s products and services are sold to a wide range of enterprise customers globally, including those in the retail, transportation and logistics, manufacturing, health care, hospitality, warehouse and distribution, energy and utilities, and education industries.
Zebra financed the Acquisition through a combination of cash on hand and borrowings of $3.25 billion (the “Indebtedness”), including the sale of 7.25% senior notes due 2022 with an aggregate principal amount of $1.05 billion and a new credit agreement with various lenders that provided a term loan of $2.20 billion due 2021. The new credit agreement also included a $250 million revolving credit facility.
Segments
Commencing with the completion of the Acquisition in October 2014, the Company’s operations consist of two reportable segments: Legacy Zebra and Enterprise.
Legacy Zebra
The Legacy Zebra segment is an industry leader in barcode printing and asset tracking technologies. Its major product lines include barcode and card printers, location solutions, supplies, and services. Industries served include retail, transportation and logistics, manufacturing, healthcare, and other end markets within the following regions: North America; Latin America; Asia-Pacific; and Europe, Middle East, and Africa.
Enterprise
The Enterprise segment is an industry leader in automatic information and data capture solutions. Its major product lines include mobile computing, data capture, RFID, WLAN, and services. Industries served include retail, transportation and logistics, manufacturing, healthcare, and other end markets within the following regions: North America; Latin America; Asia-Pacific; and Europe, Middle East, and Africa.
Geographic Information. For the year ended December 31, 2015, the Company recorded $3.7 billion of net sales in its consolidated statements of operations, of which approximately 48.6% were attributable to North America; approximately 32.7% were attributable to Europe, Middle East, and Africa ("EMEA"); and other foreign locations accounted for the remaining 18.7%.
Results of Operations: Year Ended 2015 (Restated) versus Year Ended 2014 and Year Ended 2014 versus Year Ended 2013
Consolidated Results of Operations (Acquisition of Enterprise impacted the last two months of 2014)
(Amounts in millions, except percentages)
| Year Ended December 31, | Percent Change 2015 vs 2014 | Percent Change 2014 vs 2013 | ||||||||||||||
| 2015 Restated | 2014 | 2013 | ||||||||||||||
| Net sales | $ | 3,650 | $ | 1,671 | $ | 1,038 | 118.3 | % | 61.0 | % | ||||||
| Gross profit | 1,644 | 778 | 503 | 111.3 | % | 54.5 | % | |||||||||
| Operating expenses | 1,607 | 689 | 343 | 133.1 | % | 100.8 | % | |||||||||
| Operating income | $ | 37 | $ | 89 | $ | 160 | (58.4 | )% | (44.5 | )% | ||||||
| Gross margin | 45.0 | % | 46.6 | % | 48.5 | % |
Net sales by product category were as follows (amounts in millions, except percentages):
| Year Ended December 31, | Percent Change 2015 vs 2014 | Percent Change 2014 vs 2013 | ||||||||||||||
| 2015 Restated | 2014 | 2013 | ||||||||||||||
| Hardware | $ | 2,863 | $ | 1,234 | $ | 740 | 132.1 | % | 66.6 | % | ||||||
| Supplies | 268 | 265 | 244 | 1.2 | % | 8.7 | % | |||||||||
| Service and Software | 519 | 172 | 54 | 201.7 | % | 220.8 | % | |||||||||
| Total Net sales | $ | 3,650 | $ | 1,671 | $ | 1,038 |
Net sales to customers by geographic region were as follows (in millions, except percentages):
| Year Ended December 31, | Percent Change 2015 vs 2014 | Percent Change 2014 vs 2013 | ||||||||||||||
| 2015 Restated | 2014 | 2013 | ||||||||||||||
| Europe, Middle East, and Africa | $ | 1,194 | $ | 583 | $ | 326 | 104.8 | % | 78.6 | % | ||||||
| Latin America | 219 | 135 | 99 | 62.7 | % | 35.9 | % | |||||||||
| Asia-Pacific | 463 | 216 | 153 | 114.3 | % | 41.4 | % | |||||||||
| Total International | 1,876 | 934 | 578 | 100.9 | % | 61.4 | % | |||||||||
| North America | 1,774 | 737 | 460 | 140.7 | % | 60.3 | % | |||||||||
| Total Net sales | $ | 3,650 | $ | 1,671 | $ | 1,038 |
Operating expenses are summarized below (in millions, except percentages):
| Year Ended December 31, | Percent Change 2015 vs 2014 | Percent Change 2014 vs 2013 | ||||||||||||||
| 2015 Restated | 2014 | 2013 | ||||||||||||||
| Selling and marketing | $ | 494 | $ | 213 | $ | 138 | 131.6 | % | 54.5 | % | ||||||
| Research and development | 394 | 151 | 91 | 160.7 | % | 65.8 | % | |||||||||
| General and administrative | 283 | 138 | 96 | 104.8 | % | 43.2 | % | |||||||||
| Amortization of intangible assets | 251 | 54 | 7 | 364.0 | % | 632.7 | % | |||||||||
| Acquisition and integration costs | 145 | 127 | 5 | 14.4 | % | NM | ||||||||||
| Exit and restructuring costs | 40 | 6 | 6 | 565.9 | % | 2.0 | % | |||||||||
| Total Operating expenses | $ | 1,607 | $ | 689 | $ | 343 | 133.2 | % | 100.8 | % |
The Company's non-operating income and expense items and income taxes are summarized in the following tables (in millions, except percentages):
| Year Ended December 31, | Percent Change 2015 vs 2014 | Percent Change 2014 vs 2013 | |||||||||||||
| 2015 Restated | 2014 | 2013 | |||||||||||||
| Foreign exchange loss | $ | (23 | ) | $ | (9 | ) | $ | (1 | ) | 162.6 | % | NM | |||
| Interest expense and other, net | (194 | ) | (63 | ) | 5 | 207.0 | % | NM | |||||||
| Total other (expenses)/income | $ | (217 | ) | $ | (72 | ) | $ | 4 | 201.6 | % | NM |
| Year Ended December 31, | Percent Change 2015 vs 2014 | Percent Change 2014 vs 2013 | ||||||||||||||
| 2015 Restated | 2014 | 2013 | ||||||||||||||
| Income tax (benefit) expense | $ | (22 | ) | $ | (15 | ) | $ | 30 | 46.7 | % | (150.7 | )% |
2015 compared to 2014
Net sales growth of 118.3% for the twelve months ended December 31, 2015 as compared to the prior year was primarily as a result of the Acquisition of the Enterprise business and higher North America sales, offset partially by $149 million of unfavorable foreign currency effects, net of hedges. The Enterprise business, including purchase accounting adjustments, contributed $1,888 million or 95.4% of the increase in total net sales, increased gross profit by $808 million or 93.4%, and increased recurring operating expenses by $830 million or 95.9%, and non-recurring operating expenses by $42 million or 81.3%. Included within the total recurring operating expenses was an increase of $197 million of amortization expense as a result of intangibles acquired. Within non-recurring operating expenses were increases of $18 million of integration and acquisition costs as a result of IT costs of transitioning and exiting the Motorola platforms and $24 million of exit and restructuring costs as a result of integrating acquired facilities and related employees.
Included in the total Enterprise impacts of 2015 versus 2014 are the following purchase accounting adjustments: a $10 million reduction in revenue related to the valuation of service contracts acquired, a $25 million decrease to cost of sales related to a step up in value of inventory acquired, and a $167 million increase in depreciation and amortization expenses.
Net sales, excluding the impact of the Acquisition of the Enterprise business, increased by $91 million or 7.7% in 2015 versus 2014. The unfavorable impact of foreign currency reduced sales by $70 million. This increase is primarily due to sales growth in the North America and Asia-Pacific regions, specifically higher volumes of barcode printers and location solutions. Latin America sales were lower driven by a weak macro-economic environment. Consolidated net sales, excluding the effect of the Enterprise business, grew 12.5%, on a constant currency basis.
Gross margin as a percent of sales, excluding the effect of the Enterprise business, was 50.9% for the year ended December 31, 2015 compared to 50.0% in the comparable year ended December 31, 2014. This increase in margins reflects the favorable impact of higher unit sales within the North America and Asia-Pacific regions and lower product costs for both hardware and supplies, offset partially by unfavorable foreign currency effects, net of hedges.
Operating expenses for the year ended December 31, 2015, excluding the effect of the Enterprise business, were $415 million compared to $370 million in the prior year. Included in the increase were exit and restructuring costs within Legacy Zebra of $10 million related to organizational redesign. As a percentage of sales, operating expenses, excluding the Enterprise business, were 32.3% for the year ended December 31, 2015 compared to 31.0% for the year ended December 31, 2014 primarily due to additional investments made to support business growth in the sales, research and development, and administrative functions, and exit and restructuring costs.
Operating income for the year ended December 31, 2015, excluding the effect of the Enterprise business, increased $12 million or 5.2% compared to the prior year. The increase is primarily due to higher sales and gross profit, partially offset by higher operating expenses and the unfavorable foreign currency effects, net of hedges.
The Company recognized a foreign exchange loss of $23 million for 2015 as a result of changes in the value of non-US dollar assets and liabilities primarily related to the Enterprise business that were not hedged during the period.
Interest expense was $194 million for the year ended December 31, 2015 compared to $63 million for 2014 mainly reflecting the indebtedness incurred related to the Acquisition of $3.2 billion borrowed in October of 2014. There was also $4 million of
forward interest rate swap gains in 2015 included in interest expense compared to a $5 million loss in 2014 primarily due to the changes in the market interest rates.
In 2015, the Company recognized a tax benefit of $22 million compared to a tax benefit of $15 million for 2014. The Company’s effective tax rates were 12.2% and (95.0)% as of December 31, 2015 and December 31, 2014, respectively. The Company’s effective tax rate was lower than the federal statutory rate of 35% primarily due to pre-tax losses in the United States and corporate structure realignment initiatives in various non-US jurisdictions.
Since the date of the Acquisition, as part of its corporate initiatives of integrating the Enterprise business, the Company has been executing its integration plan for the Enterprise business (the “Integration Plan”). The Company anticipates completing the Integration Plan as soon as practicable and expects that the Integration Plan will allow the combined businesses to achieve further synergies and cost savings associated with the Acquisition. As part of the Integration Plan, the Company began realigning certain acquired assets of the Enterprise business with and into the Company’s corporate structure and business model.
2014 compared to 2013
Net sales growth of 60.9% for the twelve months ended December 31, 2014 as compared to 2013 was primarily a result of the Acquisition of the Enterprise business and higher sales in all regions and product categories. The Enterprise business contributed $476 million or 75.3% of the increase in total net sales, increased gross profit by $180 million or 65.7%, increased recurring operating expenses by $185 million or 83.1%, and non-recurring operating expenses by $135 million or 108.5%. Included within the total recurring operating expenses were $47 million of amortization expense as a result of the Acquisition. Included within non-recurring operating expenses were $127 million of acquisition related costs also as a result of the Acquisition and $6 million of exit and restructuring costs related to organizational redesign.
Included in the total Enterprise impacts of 2014 are the following purchase accounting adjustments: $6 million reduction in revenue related to the valuation of service contracts acquired, $29 million increase to cost of sales related to a step up in value of inventory acquired, and $35 million increase in depreciation and amortization expenses.
Net sales, excluding the impact of the Enterprise business, increased by $157 million or 15.1% in 2014 versus 2013. The Company experienced net sales growth across all regions and all product categories in 2014 with notable increases in supplies and service contracts, and sales of tabletop, desktop, and mobile printers. Sales growth of $24 million was also derived from the December 2013 acquisition of Hart Systems, LLC.
Gross margin as a percent of sales, excluding the effect of the Enterprise business, was 50.0% for the year ended December 31, 2014 compared to 48.5% in the comparable year ended December 31, 2013. The improvement in gross margin reflected the favorable impact of higher sales, as well as product cost reductions on printers and supplies, and the December 2013 acquisition of Hart Systems LLC. The gross profit increase in 2014 versus 2013 was primarily due to the higher sales, improved gross margin percentage, and the December 2013 acquisition of Hart Systems LLC.
Operating expenses for the year ended December 31, 2014, excluding the effect of the Enterprise business, were $369 million compared to $343 million in the prior year. As a percentage of sales, operating expenses, excluding the Enterprise business, were 31.0% for the year ended December 31, 2014 compared to 33.1% for the year ended December 31, 2013 primarily due to a higher rate of sales growth than the rate of increase in expenses.
Operating income for the year ended December 31, 2014, excluding the effect of the Enterprise business, increased $68 million or 42.0% compared to the prior year. The increase is primarily due to higher sales and gross margin percentage improvement, which resulted in a gross profit increase of $94 million. This was partially offset by higher operating expenses to support business growth.
The Company recognized a foreign exchange loss of $9 million for 2014 as a result of changes in the value of non-US dollar assets and liabilities that were not hedged during the period. Zebra did not hedge the Enterprise monetary assets until the second quarter of 2015.
Interest expense was $62 million for the year ended 2014 compared to a minimal amount in 2013 mainly reflecting the indebtedness incurred related to the Acquisition. There is also $5 million of forward swap loss included in interest expense in 2014.
In 2014, the Company recognized a tax benefit of $15 million compared to tax expense of $30 million for 2013. The Company’s effective tax rates were (95)% and 18.1% as of December 31, 2014 and December 31, 2013, respectively. The 2014
rate benefit is primarily driven by foreign earnings taxed at lower rates and a domestic pre-tax loss, which is attributable to third-party interest expense and acquisition expenses.
Results of Operations by Segment
The following commentary should be read in conjunction with the financial results of each operating business segment as detailed in Note 22 Segment Information and Geographic Data in the Notes to the Consolidated Financial Statements included in this Form 10-K/A. The segment results exclude purchase accounting adjustments, amortization, acquisition, integration, and exit and restructuring costs.
Legacy Zebra Segment
(amounts in millions, except percentages)
| Year Ended December 31, | Percent Change 2015 vs 2014 | Percent Change 2014 vs 2013 | ||||||||||||||
| 2015 Restated | 2014 | 2013 | ||||||||||||||
| Net sales | $ | 1,286 | $ | 1,195 | $ | 1,038 | 7.7 | % | 15.1 | % | ||||||
| Gross profit | 654 | 598 | 504 | 9.4 | % | 18.7 | % | |||||||||
| Operating expenses | 396 | 360 | 325 | 10.0 | % | 10.6 | % | |||||||||
| Operating income | $ | 258 | $ | 238 | $ | 179 | 8.4 | % | 33.3 | % | ||||||
| Gross margin | 50.9 | % | 50.0 | % | 48.5 | % |
2015 compared to 2014
Net sales for 2015 increased $91 million or 7.7% compared to 2014. Net sales growth compared to 2014 on a constant currency basis was $149 million or 12.5%. This reflects higher net sales for the North America and Asia-Pacific regions. Net sales in EMEA were essentially unchanged while Latin America net sales were lower. On a constant currency basis, net sales in EMEA increased 14% compared to 2014. The increase in net sales for the North America region was primarily due to higher volume of sales related to barcode printers and location solutions. The higher level of net sales for EMEA and Asia-Pacific regions reflected increased volumes of barcode printers. The decrease in net sales in the Latin America region was primarily driven by a weak macro-economic environment.
Gross margin as a percentage of sales was 50.9% for the year ended December 31, 2015 compared to 50.0% for 2014. This increase in margins reflects the favorable impact of higher unit sales and lower product costs for both hardware and supplies, offset partially by unfavorable foreign currency effects, net of hedges.
Operating income for the year ended December 31, 2015, increased 8.4% as a result of higher sales and gross profit partially offset by increases in operating expenses and unfavorable foreign currency effects, net of hedges. Operating expenses increased compared to the prior year primarily to support business growth.
2014 compared to 2013
Net sales for 2014 increased 15.1% compared to 2013. This increase is a result of growth across all regions and across all product categories, with notable increases in supplies and service contracts, and sales of tabletop, desktop, and mobile printers. Increased services and software revenue is attributable to both organic growth and the December 2013 acquisition of Hart Systems LLC, which increased sales by $24 million. Movement in foreign currency, net of hedges, increased sales growth by $10 million.
Gross margin for 2014 of 50.0% versus 48.5% for 2013, reflects the favorable impact of higher sales, as well as lower product costs, including the improved absorption of fixed costs and lower freight costs, and revenue associated with the December 2013 acquisition of Hart Systems LLC. Favorable movements in foreign currency, net of hedges, increased gross profit by $7 million.
Operating income for the year ended December 31, 2014 increased 33.3% from the prior year. This is the result of 15.1% sales growth and gross margin improvement of 150 basis points. This resulted in a gross profit improvement of $94 million, or 18.7%. This was partially offset by increases in operating expenses to support business growth.
Enterprise Segment (amounts in millions, except percentages)
| Year Ended December 31, | Percent Change 2015 vs 2014 | ||||||||||
| 2015 Restated | 2014 | ||||||||||
| Net sales | $ | 2,380 | $ | 482 | 393.6 | % | |||||
| Gross profit | 1,010 | 215 | 370.3 | % | |||||||
| Operating expenses | 774 | 150 | 416.7 | % | |||||||
| Operating income | $ | 236 | $ | 65 | 263.1 | % | |||||
| Gross margin | 42.4 | % | 44.5 | % |
2015 compared to 2014
On October 27, 2014, the Company acquired Enterprise, an industry leader in mobile computing and data capture technologies and services, therefore 2014 only includes results since the acquisition date.
For the year ended December 31, 2015, net sales for Enterprise were $2.4 billion compared to $482 million in 2014, which includes net sales only for the period following the Acquisition. Mobile computing, data capture, and repair services generated the majority of Enterprise net sales for the year in 2015 and 2014. The regions which accounted for the majority of 2015 and 2014 Enterprise net sales included North America and EMEA. Sales in the fourth quarter were $635 million, up 4.8% compared to the third quarter due to higher net sales in EMEA.
Gross profit margin for the full year 2015 was 42.4%. Gross margin of 44.5% in 2014 reflects only the period following the Acquisition on October 27, 2014. Gross margin in the fourth quarter was 42.4%, comparable to the third quarter of 2015, reflecting higher gross margin in services offset by unfavorable foreign currency effects.
Enterprise's operating expenses for 2015 were $774 million and operating income for 2015 was $236 million. Operating expenses in the fourth quarter were flat compared to the third quarter; however the fourth quarter was 30.8% of sales compared to 31.9% in the third quarter of 2015 due to the improved operating leverage.
Retail Solutions Group Goodwill
The Retail Solutions Group reporting unit had total goodwill of $59 million as of December 31, 2015. During the fourth quarter of 2015, we finalized the determination of estimated fair value of the Retail Solutions Group reporting unit as of the first day of the fourth quarter of 2015. The determination of fair value and the allocation of that value to individual assets and liabilities within the Retail Solutions Group reporting unit requires us to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to: the selection of appropriate peer group companies; a control premium appropriate for acquisitions in the industries in which the Retail Solutions Group reporting unit competes; a discount rate; a terminal growth rate; and forecasts of revenue, operating income, depreciation and amortization, and capital expenditures. The estimate of fair value indicated that the fair value of the Retail Solutions Group reporting unit exceeded its carrying value by approximately 12% as of the valuation date. Although we believe our estimate of fair value is reasonable, actual financial results could differ from that estimate due to the inherent uncertainty involved in making such estimate.
Critical Accounting Policies and Estimates
Management prepared the consolidated financial statements of Zebra under accounting principles generally accepted in the United States of America. These principles require the use of estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions we used are reasonable, based upon the information available at that time.
Our estimates and assumptions affect the reported amounts in our consolidated financial statements. See Note 3 Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in this Form 10-K/A.
Recently Issued Accounting Pronouncements
See Note 3 Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in this Form 10-K/A.
Liquidity and Capital Resources
In connection with the Acquisition in October 2014, we incurred indebtedness totaling $3.25 billion. As of December 31, 2015, we had long-term debt totaling $3.09 billion. We did not have any borrowings against our revolving credit facility with $247 million available ($250 million less $3 million of outstanding letters of credit). See Note 14 Long-Term Debt in the Notes to Consolidated Financial Statements included in this Form 10-K/A for further details and under Financing activities below. The primary factors that influence our liquidity include, but are not limited to, the amount and timing of our revenues, cash collections from our customers, capital expenditures, repatriation of foreign cash and investments, and acquisitions of third-parties. Management believes that existing capital resources and funds generated from operations are sufficient to meet anticipated capital requirements and service our indebtedness. The following table summarizes our cash flow activities for the years indicated (in millions):
| Year Ended December 31, | |||||||||||
| 2015 Restated | 2014 | 2013 | |||||||||
| Cash flow (used in) provided by: | |||||||||||
| Operating activities | $ | 110 | $ | 248 | $ | 194 | |||||
| Investing activities | (148 | ) | (3,111 | ) | (153 | ) | |||||
| Financing activities | (149 | ) | 3,192 | (44 | ) | ||||||
| Effect of exchange rates on cash balances | (15 | ) | 2 | 1 | |||||||
| Net (decrease) increase in cash and cash equivalents | $ | (202 | ) | $ | 331 | $ | (2 | ) |
The change in our cash and cash equivalents balance is reflective of the following:
2015 vs. 2014
Cash flows from operations decreased $138 million during 2015 to $110 million. While an increase in net loss of $190 million netted against an increase in non-cash operating items of $161 million yielded a decrease in cash flow from operations of $29 million, the overall decrease in cash provided by operating activities is primarily attributable to changes in certain assets and liabilities of $109 million during 2015. These changes consisted primarily of a decrease in cash inflows related to accounts payable and accrued liabilities of $252 million offset by a $72 million decrease in cash outflows for accounts receivable and a $52 million increase in cash inflows for income taxes payable.
Net cash used in investing activities during 2015 included additional consideration of $51 million paid to MSI in relation to the opening cash balance and working capital adjustments. In addition, there were capital expenditures of $122 million in 2015 compared to $39 million in 2014. The increase in capital expenditures in 2015 as compared to 2014 consisted primarily of investments in IT infrastructure, software applications, facilities, engineering, development, test equipment, and production and tooling equipment. Reflecting the effect of the Acquisition on the Company’s capital structure, net cash used for investing activities during 2014 included $3.4 billion paid to MSI and purchases of marketable securities of $651 million offset by $644 million and $336 million of proceeds from the sale and maturity of investments in marketable securities, respectively.
Net cash used in financing activities during 2015 consisted primarily of principal repayments of $165 million under the Term Loan compared to proceeds of $3.2 billion from the issuance of long-term debt to fund the Acquisition during 2014. Additionally, proceeds received from the exercise of stock options and employee stock purchase plan purchases ("ESPP") were $17 million this year compared to $26 million in 2014 reflecting decreased option exercises and ESPP purchases. The taxes paid related to the net share settlement of equity awards were $13 million in 2015 compared to $5 million in 2014 reflecting increased restricted stock trading activity.
2014 vs. 2013
Cash flows from operations increased $54 million during 2014 to $248 million. While a decrease in net income of $102 million netted against an increase in non-cash operating items of $13 million yielded a decrease in cash flow from operations of $89 million, the overall increase in cash provided by operating activities was primarily attributable to changes in certain assets and liabilities of $143 million during 2014. These changes consisted primarily of an increase in cash inflows of accounts payable and accrued liabilities of $213 million offset by a $63 million increase in cash outflows related to accounts receivable.
Net cash used in investing activities during 2014 included $3.4 billion paid to MSI in the Acquisition and purchases of marketable securities of $651 million offset by $644 million and $336 million of proceeds from the sale and maturity of investments in marketable securities respectively. During 2013, net cash used in investing activities included $95 million paid for the acquisition of Hart Systems LLC and $410 million for the purchase of marketable securities offset by $337 million and $49 million of proceeds from the sale and maturity of investments in marketable securities, respectively.
Net cash provided by financing activities during 2014 consisted primarily of proceeds of $3.2 billion from the issuance of long-term debt to fund the Acquisition. Additionally, proceeds received from the exercise of stock options and ESPP were $26
million in 2014 compared to $23 million in 2013 reflecting increased option exercises and ESPP purchases. The taxes paid related to the net share settlement of equity awards were $5 million in 2014 compared to $8 million in 2013 reflecting decreased restricted stock trading activity.
Effect of exchange rates on cash
Certain assets on the consolidated balance sheet are denominated in foreign currency and, as such, include the effects of foreign currency translation. The effect of exchange rate changes on cash during the years ended December 31, 2015 and 2014 were $16 million loss and $2 million gain, respectively.
The following table shows our level of indebtedness and other information as of December 31, 2015 (in millions):
| Senior Notes | $ | 1,050 | |
| Term loan | 2,035 | ||
| Less: debt issuance costs | (26 | ) | |
| Less: unamortized discounts | (47 | ) | |
| Total outstanding debt | $ | 3,012 |
Private Offering
On October 15, 2014, the Company completed a private offering of $1.05 billion in 7.25% Senior Notes due October 15, 2022. Interest on the Senior Notes is payable in cash on April 15 and October 15 of each year.
The indenture covering the Senior Notes contains certain covenants limiting among other things the ability of the Company and its restricted subsidiaries, with certain exceptions as described in the indenture, to; (i) incur indebtedness or issue certain preferred stock; (ii) incur liens; (iii) pay dividends or make distributions in respect of capital stock; (iv) purchase or redeem capital stock; (v) make investments or certain other restricted payments; (vi) sell assets; (vii) issue or sell stock of restricted subsidiaries; (viii) enter into transactions with stockholders or affiliates; or (ix) effect a consolidation or merger. On December 31, 2015, the Company was in compliance with the covenants.
Credit Facilities
On October 27, 2014, the Company entered into a credit agreement, which provides for a term loan of $2.2 billion ("Term Loan") and a revolving credit facility of $250 million ("Revolving Credit Facility"). Borrowings under the Term Loan bear interest at a variable rate plus an applicable margin, subject to an all-in floor of 4.75%. As of December 31 2015, the Term Loan interest rate was 4.75%. Interest payments are payable quarterly. The October 2012 revolving credit agreement for $250 million with a syndicate of banks was terminated upon execution of this credit agreement. The Company has entered into interest rate swaps to manage interest rate risk on its long-term debt. See Note 14 Derivative Instruments in the Notes to Consolidated Financial Statements in this Form 10-K/A for further details.
The credit agreement requires the Company to prepay the Term Loan and Revolving Credit Facility, under certain circumstances or transactions defined in the credit agreement. Also, the Company may voluntarily prepay its obligations under the Term Loan at any time in whole or in part, without premium or penalty. The Company has made such optional principal prepayments of $165 million in 2015. In February 2016, the Company made additional optional principal prepayments of $80 million. Unless satisfied by further optional prepayments, the Company is required to make a scheduled principal payment of $1.99 billion due on October 27, 2021.
The Revolving Credit Facility is available for working capital and other general corporate purposes including letters of credit. The amount (including letters of credit) shall not exceed $250 million. As of December 31, 2015, the Company had established letters of credit totaling $3 million, which reduced funds available for other borrowings under the agreement to $247 million. The Revolving Credit Facility will mature and the commitments thereunder will terminate on October 27, 2019.
Borrowings under the Revolving Credit Facility bear interest at a variable rate plus an applicable margin. The applicable margin for borrowings under the Revolving Credit Facility ranges from 2.25% to 2.75% depending on the Company’s consolidated total secured net leverage ratio, which is evaluated on a quarterly basis. Interest payments are payable quarterly. As of December 31 2015, the Company did not have any borrowings against the Revolving Credit Facility.
The Revolving Credit Facility contains certain covenants limiting among other things, the ability of the Company and its restricted subsidiaries, with certain exceptions as described in the credit agreement, to: (i) incur indebtedness, make guarantees or issue certain equity securities; (ii) pay dividends on its capital stock or redeem, repurchase or retire its capital stock; (iii) make certain investments, loans and acquisitions; (iv) sell certain assets or issue capital stock of restricted subsidiaries; (v) create liens or engage in sale-leaseback transactions; (vi) merge, consolidate or transfer or dispose of substantially all of their assets; (vii) engage in certain transactions with affiliates; (viii) alter the business it conducts; (ix) amend, prepay, redeem
or purchase subordinated debt; and (x) enter into agreements limiting subsidiary dividends and distributions. The Revolving Credit Facility also requires the Company to comply with a financial covenant consisting of a quarterly maximum consolidated Total Secured Net Leverage Ratio, (as defined in the credit agreement). This test is only required to be performed at the end of the fiscal quarter and when 20% of the commitments under the Revolving Credit Facility have been drawn and remain outstanding.
The Term Loan and obligations under the Revolving Credit Facility are collateralized by a security interest in substantially all of the Company’s assets as defined in the security agreement and guaranteed by its direct and indirect wholly-owned existing and future domestic restricted subsidiaries, subject to certain exceptions.
Certain domestic subsidiaries of the Company (the “Guarantor Subsidiaries”) guarantee the Notes, the Term Loan and the Revolving Credit Facility on a senior basis: For the year ended December 31, 2015, the non-Guarantor Subsidiaries would have (a) accounted for 44% of our total revenue and (b) held 24% or $1.3 billion of our total assets and approximately 10% or $430 million of our total liabilities including trade payables but excluding intercompany liabilities.
On December 31, 2015, the Company was in compliance with all covenants.
Historically, significant portions of our cash inflows were generated by our operations. We currently expect this trend to continue throughout 2016. We believe that our existing cash and investments, borrowings available under our Revolving Credit Facility, together with cash flows expected from operations will be sufficient to meet expected operating, capital expenditure and debt obligation requirements for the next 12 months.
As of December 31, 2015, the Company's cash position of $192 million included foreign cash and investments of $166 million.
Management believes that existing capital resources and funds generated from operations are sufficient to finance anticipated capital requirements.
Contractual Obligations
Zebra’s contractual obligations as of December 31, 2015 were (in millions):
| Payments due by period | |||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
| Operating lease obligations | $ | 140 | $ | 26 | $ | 47 | $ | 29 | $ | 38 | |||||||||
| Deferred compensation liability | 9 | — | — | — | 9 | ||||||||||||||
| Long-term debt – principal payments | 3,085 | — | — | — | 3,085 | ||||||||||||||
| Interest payments | 1,080 | 173 | 345 | 346 | 216 | ||||||||||||||
| Interest rate swap | 57 | 8 | 25 | 20 | 4 | ||||||||||||||
| Purchase obligations | 260 | 260 | — | — | — | ||||||||||||||
| Total | $ | 4,631 | $ | 467 | $ | 417 | $ | 395 | $ | 3,352 |
Purchase obligations are for purchases made in the normal course of business to meet operational requirements, primarily raw materials and finished goods.
Uncertain tax position liabilities of $40 million have been excluded from the above table as we cannot make a reasonably reliable estimate of the period of cash settlement with the respective taxing authority.
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