Note 4 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. (i.e. U.S. Treasuries and money market funds)
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 December 31, 2013, was an auction rate security which was classified as available for sale and reflected at fair value. Due to events in credit markets, however, the auction event for the instruments was failed. Therefore, the fair value of this security was estimated utilizing broker quotations, discounted cash flow analysis or other types of valuation adjustment methodologies at December 31, 2013. On October 1, 2011, Zebra deemed the decline in the market value of the auction rate security temporary and recorded the estimated decline of $412,000 in accumulated other comprehensive income. As of the third quarter 2014, Zebra decided to dispose of the security, deemed the investment to be permanently impaired and recorded a loss of $600,000. During the fourth quarter Zebra sold the security for $2.4 million and recorded an additional loss of $30,000.

Financial assets and liabilities carried at fair value as of December 31, 2014, are classified below (in thousands):


	Level 1		Level 2		Level 3		Total

Assets:
U.S. government and agency securities	$	10,720	$	0	$	0	$	10,720
Obligations of government-sponsored enterprises (1)		0		705		0		705
State and municipal bonds		0		5,179		0		5,179
Corporate securities		0		7,781		0		7,781

Investments subtotal		10,720		13,665		0		24,385
Forward contracts (2)		2,039		7,279		0		9,318
Money market investments related to the deferred compensation plan		6,008		0		0		6,008

Total assets at fair value	$	18,767	$	20,944	$	0	$	39,711

Liabilities:
Forward interest rate swap contracts (3)	$	0	$	16,718	$	0	$	16,718
Liabilities related to the deferred compensation plan		6,008		0		0		6,008

Total liabilities at fair value	$	6,008	$	16,718	$	0	$	22,726

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

Includes investments in notes issued by the Federal Home Loan Mortgage Corporation and the Federal Home Loan Bank.

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 fair value of forward interest rate swap contracts is based upon a valuation model that uses relevant observable market inputs at quoted intervals, such as forward yield curves, and is adjusted for Zebra’s own credit risk and the interest rate swap terms.

The following table presents Zebra’s activity for assets measured at fair value on a recurring basis using significant unobservable inputs, Level 3 as defined in ASC 820 for the years ended December 31 (in thousands):


	Year Ended
	December 31, 2014			December 31, 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		(630	)		0
Included in other comprehensive income (loss)		412			0
Purchases and settlements (net)		(2,370	)		0

Balance at end of period	$	0		$	2,588


Total gains (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 investments at December 31, 2014 and December 31, 2013 (in thousands):


	As of December 31, 2014

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value

U.S. government and agency securities	$	10,720	$	0	$	0		$	10,720
Obligations of government-sponsored enterprises		705		0		0			705
State and municipal bonds		5,156		27		(4	)		5,179
Corporate securities		7,779		12		(10	)		7,781


Total investments	$	24,360	$	39	$	(14	)	$	24,385


	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 as of December 31, 2014 are as follows (in thousands):


	As of December 31, 2014

	Amortized Cost		Estimated Fair Value

Less than 1 year	$	6,241	$	6,248
1 to 5 years		16,824		16,837
6 to 10 years		1,295		1,300
Thereafter		0		0

Total	$	24,360	$	24,385

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 short term maturities.