Nathan Winters
Chief Financial Officer at Zebra Technologies
Thank you, Anders. Let's start with the P&L on slide six. In Q4, adjusted net sales increased 11.7%, including the impact of currency acquisitions and 10% on an organic basis, reflecting broad-based demand for our solutions. Our Asset Intelligence and Tracking segment, including printing and supplies grew 3.1% despite significant supply constraints on our printer products and cycling very strong prior year results. Enterprise Visibility & Mobility segment sales increased 13.2%, driven by exceptional growth in mobile computing. We continue to drive solid growth across services and software with strong service attach rates and expansion of our software offerings. We recognized solid growth in all four regions. North America sales increased 4% with strength in mobile computing, supplies and services. EMEA sales increased 9%, driven by strong growth in mobile computing. Asia Pacific sales grew 29% with strength across all major geographies, including China. And in Latin America, sales increased 42%, continuing strong double-digit growth in all major offerings. Adjusted gross margin declined 210 basis points to 45.7% due to unprecedented premium freight costs partially offset by higher service and software margins. We will discuss transitory costs, including premium freight further in a moment. Adjusted operating expenses as a percentage of sales improved 40 basis points as we scaled our cost structure while continuing to prioritize high-return investment opportunities in the business. Fourth quarter adjusted EBITDA margin was 21.7%, a 180-basis point decrease from the prior year period, entirely attributable to lower gross margin from transitory impacts, partially offset by operating expense leverage. We drove non-GAAP earnings per diluted share of $4.54, an $0.08 or 1.8% year-over-year increase, which also reflects lower interest expense and a slightly higher tax rate.
Turning now to the balance sheet and cash flow highlights on slide seven. In 2021, we generated more than $1 billion of free cash flow for the first time in our history. This was $115 million higher than the prior year, primarily due to increased profitable growth. Our balance sheet remains strong. From a debt leverage perspective, we ended the year at a modest 0.5 times net debt to adjusted EBITDA leverage ratio, which provides us ample flexibility. In 2021, we invested $452 million to acquire Antuit, Fetch Robotics and Adaptive Vision to advance our solutions offerings in retail, manufacturing and the warehouse. In addition, we made $34 million of venture investments in five portfolio companies, $59 million of capital expenditures, $257 million of net debt repayments and $57 million of share repurchases. On slide eight, we show the multiyear impact of transitory costs primarily related to expedited freight due to supply chain bottlenecks caused by the pandemic as well as tariffs on China imports. Our team is making heroic efforts to satisfy customer demand. This includes dedicating substantial engineering resources to product redesigns, negotiating long-term supply agreements with new and existing suppliers, shifting virtually all transport to air promotion and expediting component parts and finished goods to meet customer commitments.
Global freight rates have reached record high cost per kilo for all modalities of delivery across our supply chain. In Q4 compared to pre-pandemic rates, we incurred incremental premium freight costs of $67 million, which is higher than we had anticipated in our prior outlook and $58 million higher than the prior year. Partially offsetting this impact were $4 million of refunds of China import tariffs, which was $8 million less than we received in the fourth quarter of 2020. In total, these transitory items had a combined unfavorable gross margin impact of $66 million year-over-year. I will discuss our assumptions regarding the 2022 impact of transitory costs in a moment. Let's now turn to our outlook. We entered the year with a strong order backlog and healthy sales pipeline supported by broad-based demand for our solutions. Our expected sales growth of 1% to 3% for the first quarter has been capped by what we can deliver to our customers due to extended lead times and limited availability of component parts. Our outlook assumes an approximately one percentage point additive impact from acquisitions and foreign currency changes.
We anticipate Q1 adjusted EBITDA margin to be approximately 20%, which assumes gross margin contraction from the prior year due to unfavorable sales mix and expected premium freight costs of $60 million, which translates to a 340-basis point unfavorable impact to the prior year period. We also expect increased operating expenses as a percent of sales primarily due to our entry into multiple expansion markets since last spring and resuming in-person events. We believe total supply chain impacts, including transitory costs and product availability are peaking in Q1, with recent improvements in freight capacity and better visibility and supplier commitments to component supply into the second quarter. Non-GAAP diluted EPS is expected to be in the range of $3.70 to $4. For the full year 2022, we expect adjusted net sales to grow between 3% and 7%, with the assumption that supply chain constraints steadily abate throughout the year. This outlook assumes a net neutral impact from acquisitions and foreign currency changes. We anticipate full year 2022 adjusted EBITDA margin between 23% and 24%, which assumes total transitory cost impacts, including premium freight expenses of approximately $140 million to $160 million. This is slightly higher than the impact we realized in 2021. We expect our free cash flow to be at least $900 million for the year. Please reference additional modeling assumptions shown on slide nine. With that, I will turn the call back to Anders to discuss how we are advancing our Enterprise Asset Intelligence vision and to provide an update on our served market opportunity and long-term growth expectations.