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 March 29, 2014, 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 and other types of valuation adjustment methodologies at March 29, 2014. 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, we have classified it as a long-term investment on the balance sheet.

Financial assets and liabilities carried at fair value as of March 29, 2014, are classified below (in thousands):


	Level 1		Level 2		Level 3		Total
Assets:
U.S. government and agency securities	$	114,598	$	0	$	0	$	114,598
Obligations of government-sponsored enterprises (1)		0		30,146		0		30,146
State and municipal bonds		0		56,710		0		56,710
Corporate securities		0		189,850		2,588		192,438
Other investments		0		22,839		0		22,839

Investments subtotal		114,598		299,545		2,588		416,731
Money market investments related to the deferred compensation plan		5,094		0		0		5,094

Total assets at fair value	$	119,692	$	299,545	$	2,588	$	421,825


Liabilities:
Forward contracts (2)	$	4	$	1,070	$	0	$	1,074
Liabilities related to the deferred compensation plan		5,094		0		0		5,094

Total liabilities at fair value	$	5,098	$	1,070	$	0	$	6,168

Financial assets and liabilities carried at fair value as of December 31, 2013, are classified below (in thousands):


	Level 1		Level 2		Level 3		Total
Assets:
U.S. government and agency securities	$	89,626	$	0	$	0	$	89,626
Obligations of government-sponsored enterprises (1)		0		33,510		0		33,510
State and municipal bonds		0		51,627		0		51,627
Corporate securities		0		163,832		2,588		166,420
Other investments		0		11,785		0		11,785

Investments subtotal		89,626		260,754		2,588		352,968
Money market investments related to the deferred compensation plan		4,827		0		0		4,827

Total assets at fair value	$	94,453	$	260,754	$	2,588	$	357,795


Liabilities:
Forward contracts (2)	$	1,165	$	1,578	$	0	$	2,743
Liabilities related to the deferred compensation plan		4,827		0		0		4,827

Total liabilities at fair value	$	5,992	$	1,578	$	0	$	7,570

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):


	Three Months Ended
	March 29, 2014		March 30, 2013
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 March 29, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government and agency securities	$	114,611	$	38	$	(51	)	$	114,598
Obligations of government-sponsored enterprises		30,141		5		0			30,146
State and municipal bonds		56,671		74		(35	)		56,710
Corporate securities		192,404		622		(588	)		192,438
Other investments		22,849		16		(26	)		22,839

Total investments	$	416,676	$	755	$	(700	)	$	416,731


	As of December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government and agency securities	$	89,617	$	27	$	(18	)	$	89,626
Obligations of government-sponsored enterprises		33,506		5		(1	)		33,510
State and municipal bonds		51,573		82		(28	)		51,627
Corporate securities		166,642		453		(675	)		166,420
Other investments		11,771		15		(1	)		11,785

Total investments	$	353,109	$	582	$	(723	)	$	352,968

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


	As of March 29, 2014
	Amortized Cost		Estimated Fair Value
Less than 1 year	$	113,737	$	113,835
1 to 5 years		294,039		294,435
6 to 10 years		8,900		8,461
Thereafter		0		0

Total	$	416,676	$	416,731

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.