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 at June 29, 2013, is an auction rate security which is classified as available for sale and is reflected at fair value. Due to events in credit markets, however, the auction event for the instrument held by Zebra is failed. Therefore, the fair value of this security is estimated utilizing broker quotations, discounted cash flow analysis or other types of valuation adjustment methodologies at June 29, 2013. 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. The security was also compared, when possible, to other securities with similar characteristics.

The decline in the market value of our auction rate security discussed above 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 this auction rate security until it is sold at auction, redeemed at carrying value or reaches maturity, we have classified it as a long-term investment on the balance sheet.

Financial assets and liabilities carried at fair value as of June 29, 2013, are classified below (in thousands):


	Level 1		Level 2			Level 3		Total
Assets:
U.S. Government and agency securities	$	100,262	$	0		$	0	$	100,262
Obligations of government-sponsored enterprises (1)		0		13,914			0		13,914
State and municipal bonds		0		108,963			0		108,963
Corporate securities		0		161,447			2,588		164,035
Other investments		0		10,978			0		10,978

Investments subtotal		100,262		295,302			2,588		398,152
Money market investments related to the deferred compensation plan		4,103		0			0		4,103

Total assets at fair value	$	104,365	$	295,302		$	2,588	$	402,255


Liabilities:
Forward contracts (2)	$	669	$	(312	)	$	0	$	357
Liabilities related to the deferred compensation plan		4,103		0			0		4,103

Total liabilities at fair value	$	4,772	$	(312	)	$	0	$	4,460

Financial assets and liabilities carried at fair value as of December 31, 2012, are classified below (in thousands):


	Level 1		Level 2		Level 3		Total
Assets:
U.S. Government and agency securities	$	83,532	$	0	$	0	$	83,532
Obligations of government-sponsored enterprises (1)		0		4,840		0		4,840
State and municipal bonds		0		96,516		0		96,516
Corporate securities		0		128,368		2,588		130,956
Other investments		0		13,491		0		13,491

Investments subtotal		83,532		243,215		2,588		329,335
Money market investments related to the deferred compensation plan		3,553		0		0		3,553

Total assets at fair value	$	87,085	$	243,215	$	2,588	$	332,888


Liabilities:
Forward contracts (2)	$	1,174	$	871	$	0	$	2,045
Liabilities related to the deferred compensation plan		3,553		0		0		3,553

Total liabilities at fair value	$	4,727	$	871	$	0	$	5,598

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

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

Fair value of a collar or put option contract associated with forecasted sales hedges are calculated using bid and ask rates for similar contracts.

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

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 following periods (in thousands):


	Six Months Ended
	June 29, 2013		June 30, 2012
Balance at beginning of the year	$	2,588	$	2,588
Transfers to Level 3		0		0
Total losses (realized or unrealized):
Included in earnings		0		0
Included in other comprehensive income (loss)		0		0
Purchases and settlements (net)		0		0

Balance at end of period	$	2,588	$	2,588

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	$	0	$	0

The following is a summary of short-term and long-term investments (in thousands):


	As of June 29, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Government and agency securities	$	100,275	$	22	$	(35	)	$	100,262
Obligations of government-sponsored enterprises		13,905		9		0			13,914
State and municipal bonds		109,106		102		(245	)		108,963
Corporate securities		164,747		346		(1,058	)		164,035
Other investments		10,964		19		(5	)		10,978

Total investments	$	398,997	$	498	$	(1,343	)	$	398,152


	As of December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Government and agency securities	$	83,499	$	33	$	0		$	83,532
Obligations of government-sponsored enterprises		4,830		10		0			4,840
State and municipal bonds		96,383		161		(28	)		96,516
Corporate securities		130,634		790		(468	)		130,956
Other investments		13,450		44		(3	)		13,491

Total investments	$	328,796	$	1,038	$	(499	)	$	329,335

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


	As of June 29, 2013
	Amortized Cost		Estimated Fair Value
Less than 1 year	$	143,924	$	144,074
1 to 5 years		246,137		245,725
6 to 10 years		8,936		8,353
Thereafter		0		0

Total	$	398,997	$	398,152

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 their short maturities.