Derivative Instruments

3 Months Ended

Mar. 29, 2014

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Derivative Instruments

Note 8 – Derivative Instruments

Portions of our operations are subject to fluctuations in currency values. We manage these risks using derivative financial instruments. We conduct business on a multinational basis in a wide variety of foreign currencies. Our exposure to market risk for changes in foreign currency exchange rates arises from international financing activities between subsidiaries, foreign currency denominated monetary assets and liabilities and transactions arising from international trade. Our objective is to preserve the economic value of non-functional currency denominated cash flows. We attempt to hedge transaction exposures with natural offsets to the fullest extent possible and, once these opportunities have been exhausted, through foreign exchange forward and option contracts with third parties.

Credit and market risk

Financial instruments, including derivatives, expose us to counter party credit risk for nonperformance and to market risk related to interest and currency exchange rates. We manage our exposure to counterparty credit risk through specific minimum credit standards, diversification of counterparties, and procedures to monitor concentrations of credit risk. Our counterparties in derivative transactions are commercial banks with significant experience using derivative instruments. We monitor the impact of market risk on the fair value and cash flows of our derivative and other financial instruments considering reasonably possible changes in interest rates and currency exchange rates and restrict the use of derivative financial instruments to hedging activities. We continually monitor the creditworthiness of our customers to which we grant credit terms in the normal course of business. The terms and conditions of our credit sales are designed to mitigate or eliminate concentrations of credit risk with any single customer.

Fair Value of Derivative Instruments

Zebra has determined that derivative instruments for hedges that have traded but have not settled are considered Level 1 in the fair value hierarchy, and hedges that have not traded are considered Level 2 in the fair value hierarchy. Derivative instruments are used to manage risk and are not used for trading or other speculative purposes, nor do we use leveraged derivative financial instruments. Our foreign currency exchange contracts are valued using broker quotations or market transactions, in either the listed or over-the-counter markets.

Hedging of Net Assets

We use forward contracts to manage exposure related to our pound and euro denominated net assets. Forward contracts typically mature within three months after execution of the contracts. We record gains and losses on these contracts and options in income each quarter along with the transaction gains and losses related to our net asset positions, which would ordinarily offset each other.

Summary financial information related to these activities included in our consolidated statement of earnings as other income (expense) is as follows (in thousands):

	Three Months Ended
	March 29, 2014			March 30, 2013
Change in gains (losses) from foreign exchange derivatives	$	25		$	1,581
Loss on net foreign currency assets		(317	)		(1,679	)
Foreign exchange loss	$	(292	)	$	(98	)

	As of
	March 29, 2014		December 31, 2013
Notional balance of outstanding contracts:
Pound/US dollar	£	1,556	£	0
Euro/US dollar	€	36,620	€	41,021
Net fair value of outstanding contracts	$	61	$	33

Hedging of Anticipated Sales

We can manage the exchange rate risk of anticipated euro-denominated sales using purchased options, forward contracts, and participating forwards. We designate these contracts as cash flow hedges which mature within twelve months after the execution of the contracts. Gains and losses on these contracts are deferred in other comprehensive income until the contracts are settled and the hedged sales are realized. The deferred gains or losses will then be reported as an increase or decrease to sales.

Summary financial information related to the cash flow hedges is as follows (in thousands):

	As of
	March 29, 2014		March 30, 2013
Unrealized gains on hedging transactions:
Gross	$	780	$	2,270
Income tax expense		167		527
Net	$	613	$	1,743

Summary financial information related to the cash flow hedges of future revenues follows (in thousands, except percentages):

	As of
	March 29, 2014			December 31, 2013
Notional balance of outstanding contracts versus the dollar	€	88,513		€	85,627
Hedge effectiveness		100	%		100	%

	Three Months Ended
	March 29, 2014			March 30, 2013
Net losses included in revenue	$	(971	)	$	(1,046	)

Forward Contracts

We record our forward contracts at fair value on our consolidated balance sheet as either long-term other assets or long-term other liabilities, depending upon the fair value calculation as detailed in Note 2 of Zebra’s financial statements. The amounts recorded on our consolidated balance sheet are as follows (in thousands):

	As of
	March 29, 2014		December 31, 2013
Liabilities:
Accrued liabilities	$	1,074	$	2,743
Total	$	1,074	$	2,743