Business Combinations

12 Months Ended

Dec. 31, 2015

Business Combinations [Abstract]

Business Combinations

Business Combinations

On October 27, 2014, the Company completed the Acquisition from MSI for a purchase price of $3.45 billion. The Acquisition enables the Company to further sharpen its strategic focus on providing mission-critical Enterprise Asset Intelligence solutions for its customers. Certain assets and liabilities historically associated with the Enterprise business were retained by MSI, including MSI’s iDEN infrastructure business. The Acquisition was completed pursuant to the Master Acquisition Agreement dated April 14, 2014, as amended (the “Master Acquisition Agreement”) and was structured as a combination of stock and asset acquisitions and a merger of certain US entities, resulting in 100% ownership of Enterprise.

The Company financed the Acquisition through a combination of cash on hand and borrowings of $3.25 billion (the “Indebtedness”), including the sale of 7.25% senior notes due 2022 in an aggregate principal amount of $1.05 billion and a credit agreement with various lenders that provided a term loan of $2.2 billion due 2021. See Note 14 Long-Term Debt. The consideration paid to MSI was 100% cash in the amount of $3.45 billion. During the year ended December 31, 2015, the Company paid additional consideration of $51 million to MSI which included a $2 million opening cash adjustment and settlement of working capital adjustments.

In connection with its acquisitions, the Company incurred related transaction expenses, which have been recorded in acquisition and integration costs in the consolidated statements of operations of approximately $144 million, $127 million and $5 million for the years ended December 31, 2015, 2014 and 2013, respectively.

In connection with the closing of the Acquisition, the Company issued stock-based awards to Enterprise employees with value equivalent to the unvested portion of the employees’ awards as of the date of close. The new awards issued were in the form of performance restricted stock, performance stock units, restricted stock and restricted stock units. Under MSI’s legacy equity awards, in the event that an Enterprise employee’s employment is terminated as a result of a divestiture of the MSI business, unvested awards at the time of divestiture would vest on a pro rata basis through the divestiture date, with the remaining awards (or portion of awards) being forfeited. Consequently, the legacy MSI awards held by Enterprise employees vested pro rata up to the date of Acquisition and the remaining awards (or portions of awards) were forfeited. The replacement grants of equity awards by the Company to Enterprise employees representing the unvested (and therefore forfeited) legacy MSI awards require future service to be rendered to Zebra, beginning on the grant date. As a result, the fair value of the replacement awards is recognized as compensation cost in the post-combination financial statements, and there was no adjustment to the Acquisition purchase price.

Goodwill represents the consideration paid in excess of the fair value of the net tangible and intangible assets acquired. The Company paid this premium for a number of reasons, including acquiring an experienced workforce and enhanced technology capabilities as further described above.

The purchase price was allocated to identifiable tangible and intangible assets acquired and liabilities assumed based on their estimated fair values resulting in goodwill of $2.339 billion. See Note 9 Goodwill and Other Intangibles. During 2015, the Company adjusted certain preliminary values from 2014. The fair value adjustments resulted in an increase of $96 million in assets, an increase of $107 million in liabilities, a foreign currency translation adjustment of $8 million and a corresponding increase to goodwill of $3 million. Certain intangible assets including goodwill are denominated in foreign currency and, as such, include the effects of foreign currency translation.

The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of the Acquisition (in millions):

Cash and cash equivalents	$	101
Accounts receivable (1)	440
Inventories	264
Deferred income taxes, current	142
Other current assets	22
Property and equipment	123
Deferred income taxes	85
Intangible assets	994
Other non-current assets	49
Deferred revenue	(172		)
Tax liabilities	(10		)
Deferred income taxes, current	(36		)
Other current liabilities (2)	(364		)
Long-term deferred revenue	(103		)
Unrecognized tax benefits	(6		)
Other non-current liabilities	(24		)
Deferred income taxes	(299		)
Total identifiable net assets	$	1,206

(1) Based on the purchase price allocations, accounts receivable estimated fair value is $440 million and a gross contractual value of $461 million. The difference represents The Company’s best estimate of the contractual cash flows that will not be collected.

(2) Other current liabilities include accounts payable, customer reserves, and employee compensation and related benefits.

The intangible assets of $994 million consist of the following (in millions):

	Amount		Weighted Avg Amortization   Period (in years)
Customer relationships	$	450	7.0 years
Unpatented technology	270		3.9 years
Patented technology	215		3.5 years
Trade names	40		2 years
Backlog	19		1 year
Acquired other intangibles	$	994

As of December 31, 2015 and December 31, 2014, there were $20 million of indemnification assets recorded to reflect MSI’s obligation to reimburse the Company for pre-acquisition tax liabilities, statutory bonus accruals, and sales incentive plan accruals assumed. The amounts were recorded in accordance with the Master Acquisition Agreement.

Goodwill has been assigned to the Enterprise operating segment. The amount of tax deductible goodwill is $103 million.

Concurrent with the closing of the transaction, we entered into Transition Services Agreements (“TSAs”) with MSI, whereby MSI provides various services; primarily information technology. Our costs under the TSAs commenced in November 2014. Zebra is scheduled to exit the TSAs in October 2017, which is a 12 month extension from the original October 2016 exit date. The monthly cost is approximately $5 million per month. These costs are being reduced as we discontinue certain services and transition these services into our own processes. We incurred $10 million under the TSAs from October 28^th through December 31, 2014 and $58 million under the TSA from January 1, 2015 through December 31, 2015.

During September 2015, the Company received a revised valuation report from a third party valuation firm. After reviewing the results of the valuation reports, the Company reduced the value of intangible assets $20 million, property and equipment $3 million and deferred revenue $1 million and increased inventory $1 million with a corresponding $21 million increase to goodwill. As discussed in Note 2 Summary of Significant Accounting Policies, the Company has adopted ASU 2015-16 “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments,” which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The fair value, balance sheet adjustments recorded during the third quarter of 2015 and related income statement effects that would have been recognized in previous periods even if we had not early adopted ASU 2015-16 are immaterial.

Hart Systems In the fourth quarter 2013, The Company acquired all of the outstanding membership interests in Hart Systems, LLC (a New York limited liability company) for approximately $96 million with $61 million of the purchase price allocated to goodwill. As of September 27, 2014 the purchase price allocation was finalized and the amount of goodwill was reduced to $59 million for adjustments related to deferred taxes. The Consolidated Statements of Operations includes the impact of this acquisition subsequent to the December 18, 2013 acquisition date.