Derivative Instruments

6 Months Ended

Jun. 28, 2014

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Derivative Instruments

Note 9 – 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.

In addition, we have exposure to market risk for changes in interest rates resulting from the announced acquisition of the Enterprise business of Motorola Solutions, Inc. During the three months ended June 28, 2014, we entered into a commitment letter for a new variable rate credit facility to fund the announced acquisition and we also entered into two tranches of floating-to-fixed forward interest rate swaps to economically hedge the interest rate risk.

The fair value of the forward interest rate swap contracts are estimated using market quoted forward interest rates for the London Interbank Offered Rate “LIBOR” at the balance sheet date and the application of such rates subject to the interest rate swap terms. In accordance with ASC 815 we recognize derivative instruments and hedging activities as either assets or liabilities on the balance sheet and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting.

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 and forward interest-rate swap 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						Six Months Ended
	June 28,			June 29,			June 28,			June 29,
	2014			2013			2014			2013
Change in gains (losses) from foreign exchange derivatives	$	516		$	(862	)	$	541		$	719
Gain (loss) on net foreign currency assets		(473	)		400			(790	)		(1,279	)
Foreign exchange gain (loss)	$	43		$	(462	)	$	(249	)	$	(560	)

	As of
	June 28, 2014		December 31, 2013
Notional balance of outstanding contracts:
Pound/US dollar	£	835	£	0
Euro/US dollar	€	36,600	€	41,021
Net fair value of outstanding contracts	$	70	$	33

Hedging of Anticipated Sales

We 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
	June 28, 2014		June 29, 2013
Unrealized gains on hedging transactions:
Gross	$	1,779	$	1,760
Income tax expense		390		408
Net	$	1,389	$	1,352

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

	As of
	June 28, 2014			December 31, 2013
Notional balance of outstanding contracts versus the dollar	€	91,463		€	85,627
Hedge effectiveness		100	%		100	%

	Three Months Ended						Six Months Ended
	June 28, 2014			June 29, 2013			June 28, 2014			June 29, 2013
Net losses included in net sales	$	(957	)	$	(900	)	$	(1,928	)	$	(1,947	)

Forward Contracts

We record our forward contracts at fair value on our consolidated balance sheet as a current asset or current liability, 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
	June 28, 2014		December 31, 2013
Assets:
Prepaid expenses and other current assets	$	401	$	0
Total	$	401	$	0
Liabilities:
Accrued liabilities	$	0	$	2,743
Total	$	0	$	2,743

Forward Interest Rate Swaps

The forward interest rate swap contracts economically hedge the interest rate risk associated with the variable rate commitment entered into for the announced acquisition of the Enterprise business of Motorola Solutions, Inc.

These forward interest rate swaps did not qualify for hedge accounting as of June 28, 2014, and as such, were recognized at their fair value through the Statement of earnings in other income (expense).

	Three Months Ended					Six Months Ended
	June 28,			June 29,		June 28,			June 29,
	2014			2013		2014			2013
Loss on forward interest-rate swaps	$	(2,433	)	$	0	$	(2,433	)	$	0

	As of
	June 28, 2014		December 31, 2013
Liabilities:
Other long-term liabilities	$	2,433	$	0
Total	$	2,433	$	0