Fair Value Measurements

6 Months Ended

Jul. 02, 2011

Fair Value Measurements

Fair Value Measurements

Note 2 – Fair Value Measurements

Financial assets and liabilities are to be measured using inputs from three levels of the fair value hierarchy. Fair value is based on 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. Zebra uses a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

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, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in the assessment of fair value.

Included in our investment portfolio are two auction rate security instruments. These instruments are classified as available-for-sale securities and are reflected at fair value. Due to events in credit markets, however, the auction events for the instruments held by Zebra as of July 2, 2011, are failed. Therefore, the fair values of these securities are estimated utilizing broker quotations, discounted cash flow analysis or other types of valuation adjustment methodologies at July 2, 2011. These analyses consider, among other items, the collateral underlying the security instruments, the creditworthiness of the counterparty, the timing of expected future cash flows, estimates of the next time the security is expected to have a successful auction, and Zebra's intent and ability to hold such securities until credit markets improve. These securities were also compared, when possible, to other securities with similar characteristics. In June 2010, one of the four auction rate securities held at the end of the first quarter of 2010 was called by the issuer and redeemed at par value. In May 2011, one of the three auction rate securities held at the end of the first quarter of 2011 was converted to actively traded securities in the amount of $2,550,000. The remaining $450,000 was sold during the quarter at a loss of $36,000.

Of the two auction rate security instruments still owned as of July 2, 2011, Zebra deemed one to be other than temporarily impaired and recorded the estimated value decline in 2008. The decline in the market value of the other security is considered temporary and has been recorded in accumulated other comprehensive income (loss) on Zebra's balance sheet. Since Zebra has the intent and ability to hold these securities until they are sold at auction, redeemed at carrying value or reach maturity, we have classified them as long-term investments on the balance sheet.

Financial assets and liabilities carried at fair value as of July 2, 2011, are classified below (in thousands):

	Level 1		Level 2		Level 3		Total
Assets:
U.S. government and agency securities	$	27,651	$	—	$	—	$	27,651
Obligations of government-sponsored enterprises (1)		3,836		—		—		3,836
State and municipal bonds		151,873		—		—		151,873
Corporate securities		63,547		—		2,914		66,461
Other investments		36		—		—		36
Investments subtotal		246,943		—		2,914		249,857
Money market investments related to the deferred compensation plan		3,487		—		—		3,487
Total assets at fair value	$	250,430	$	—	$	2,914	$	253,344
Liabilities:
Forward contracts (2)		1,833		1,769		—		3,602
Liabilities related to the deferred compensation plan	$	3,487	$	—	$	—	$	3,487
Total liabilities at fair value	$	5,320	$	1,769	$	—	$	7,089

Financial assets and liabilities carried at fair value as of December 31, 2010, are classified below (in thousands):

	Level 1		Level 2		Level 3		Total
Assets:
U.S. government and agency securities	$	21,318	$	—	$	—	$	21,318
Obligations of government-sponsored enterprises (1)		5,785		—		—		5,785
State and municipal bonds		131,626		—		2,683		134,309
Corporate securities		46,683		—		2,914		49,597
Other investments		36		—		—		36
Investments subtotal		205,448		—		5,597		211,045
Forward contracts (2)		1,569		1,706		—		3,275
Money market investments related to the deferred compensation plan		3,427		—		—		3,427
Total assets at fair value	$	210,444	$	1,706	$	5,597	$	217,747
Liabilities:
Liabilities related to the deferred compensation plan	$	3,427	$	—	$	—	$	3,427
Total liabilities at fair value	$	3,427	$	—	$	—	$	3,427

(1) Includes investments in notes issued by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Federal Home Loan Bank.

(2) The fair value of forward contracts are calculated as follows:

a. Fair value of forward collar contract associated with forecasted sales hedges are calculated using the midpoint of ask and bid rates for similar contracts.

b. Fair value of regular forward contracts associated with forecasted sales hedges are calculated using the period-end exchange rate adjusted for the discount rate (3 month LIBOR rate).

c. Fair value of balance sheet hedges are calculated at the period end exchange rate adjusted for current forward points unless the hedge has been traded but not settled at period end. If this is the case, the fair value is calculated at the rate at which the hedge is being settled.

The following table presents Zebra's activity for assets measured at fair value on a recurring basis using significant unobservable inputs, Level 3, for the six month periods (in thousands):

	Six Months Ended
	July 2, 2011			July 3, 2010
Balance at beginning of the year	$	5,597		$	7,047
Transfers to Level 3		—			—
Total losses (realized or unrealized):
Included in earnings		(36	)		—
Included in other comprehensive income (loss)		317			200
Purchases and settlements (net)		(2,964	)		(1,650	)
Balance at end of period	$	2,914		$	5,597
Total gains and (losses) for the period included in earnings attributable to the change in unrealized losses relating to assets still held at end of period	$	—		$	—

The following is a summary of short-term and long-term investments at July 2, 2011 and December 31, 2010 (in thousands):

	As of July 2, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government and agency securities	$	27,556	$	95	$	—		$	27,651
Obligations of government-sponsored enterprises		3,805		31		—			3,836
State and municipal bonds		151,459		422		(8	)		151,873
Corporate securities		66,668		369		(576	)		66,461
Other investments		36		—		—			36
Total investments	$	249,524	$	917	$	(584	)	$	249,857

	As of December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government and agency securities	$	21,226	$	98	$	(6	)	$	21,318
Obligations of government-sponsored enterprises		5,731		54		—			5,785
State and municipal bonds		134,370		402		(463	)		134,309
Corporate securities		49,884		199		(486	)		49,597
Other investments		36		—		—			36
Total investments	$	211,247	$	753	$	(955	)	$	211,045

The maturity dates of investments are as follows (in thousands):

	As of July 2, 2011
	Amortized Cost		Estimated Fair  Value
Less than 1 year	$	163,366	$	163,509
1 to 5 years		86,158		86,348
6 to 10 years		—		—
Thereafter		—		—
Total	$	249,524	$	249,857

The carrying value for Zebra's financial instruments classified as current assets (other than short-term investments) and current liabilities approximate fair value due to short maturities.