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Derivative Instruments | 3 Months Ended
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Apr. 04, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments | Note 11 – 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 variable interest payments on the term facility that was used to fund the Acquisition. We entered into forward interest rate swaps to hedge the interest rate risk associated with the Term Loan. The fair value of the forward starting interest rate swap contracts is 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, Derivative and Hedging we recognize derivative instruments 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 as 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 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 statements of operations as other income (expense) is as follows (in thousands):
|  | Three Months Ended |
|  | April 4, 2015 |  |  | March 29, 2014 |
Realized gains from foreign exchange derivatives |  | $ | 1,100 |  |  | $ | 25 |
Loss on net foreign currency assets |  |  | (28,291 | ) |  |  | (317 | )
Foreign exchange (loss) |  | $ | (27,191 | ) |  | $ | (292 | )
|  | As of |
|  | April 4, 2015 |  |  | December 31, 2014 |
Notional balance of outstanding contracts: |  |  |  |  |  |  |  |
Pound/US dollar |  | £ | 6,643 |  |  | £ | 4,574 |
Euro/US dollar |  | € | 40,852 |  |  | € | 40,218 |
Net fair value of outstanding contracts |  | $ | 259 |  |  | $ | 250 |
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 |
|  | April 4, 2015 |  |  | March 29, 2014 |
Change in unrealized gains on anticipated sales hedging: |  |  |  |  |  |  |  |
Gross |  | $ | 2,112 |  |  | $ | 780 |
Income tax expense |  |  | 422 |  |  |  | 167 |
Net |  | $ | 1,690 |  |  | $ | 613 |
Summary financial information related to the cash flow hedges of future revenues follows (in thousands, except percentages):
|  | As of |
|  | April 4, 2015 |  |  | December 31, 2014 |
Notional balance of outstanding contracts versus the dollar |  | € | 90,306 |  |  | € | 88,969 |
Hedge effectiveness |  |  | 100 | % |  |  | 100 | %
|  | Three Months Ended |
|  | April 4, 2015 |  |  | March 29, 2014 |
Net gains (losses) included in revenue |  | $ | 6,435 |  |  | $ | (971 | )
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 4 of Zebra’s consolidated financial statements. The amounts recorded on our consolidated balance sheet are as follows (in thousands):
|  | As of |
|  | April 4, 2015 |  |  | December 31, 2014 |
Assets: |  |  |  |  |  |  |  |
Prepaid expenses and other current assets |  | $ | 14,074 |  |  | $ | 9,318 |
Total |  | $ | 14,074 |  |  | $ | 9,318 |
Forward Interest Rate Swaps The forward interest rate swaps hedge the interest rate risk associated with the variable interest payments on our Term Loan that was used to fund the Acquisition. In June 2014, we entered into a commitment letter for a new variable rate credit facility to fund the Acquisition and we also entered into two tranches of floating-to-fixed forward interest rate swaps (“Original Swaps”). These Original Swaps were used to economically hedge interest rate risk associated with the variable rate commitment until July 30, 2014, and as such, changes in their fair value were recognized in earnings in other income (expense). Effective July 30, 2014, the Original Swaps were designated as cash flow hedges of interest rate exposure associated with variability in future cash flows on the variable rate commitment. On October 27, 2014, the variable rate commitment was funded and we entered into a Term Loan that accrues interest at a variable rate of LIBOR (subject to a floor of 0.75% per annum) plus a margin of 4.0%. On October 30, 2014, we discontinued hedge accounting for the Original Swaps due to the syndication of the Original Swaps to a group of commercial banks (“Syndicated Swaps”), which resulted in their termination. The changes in fair value of the Original Swaps between July 30, 2014 and their termination were included in other comprehensive income (loss), and any ineffectiveness was insignificant. The amounts included in other comprehensive income (loss) will be amortized to earnings in other income (expense) as the interest payments under the Term Loan affect earnings. The Syndicated Swaps were not designated as hedges and the changes in fair value are recognized in earnings in other income (expense). On November 20, 2014 we entered into additional floating-to-fixed forward starting interest rate swaps (“New Swaps”) and designated these as cash flow hedges of interest rate exposure associated with variability in future cash flows on our Term Loan. To offset the impact to earnings of the changes in fair value of the Syndicated Swaps, we also entered into fixed-to-floating forward starting interest rate swaps (“Offsetting Swaps”), which were not designated in a hedging relationship and the changes in the fair value are recognized in earnings in other income (expense). Changes in fair value of the New Swaps that are designated as cash flow hedges and are effective at offsetting variability in the future cash flows on our Term Loan are recognized in other comprehensive income (loss). Ineffectiveness is immediately recognized in earnings. The location of the forward interest rate swaps designated in a hedge relationship is as follows (in thousands):
|  | As of |
|  | April 4, 2015 |  |  | December 31, 2014 |
Liabilities: |  |  |  |  |  |  |  |
Other long-term liabilities |  | $ | 13,904 |  |  | $ | 2,170 |
Total |  | $ | 13,904 |  |  | $ | 2,170 |
The interest rate swap designated in a hedging relationship is highly effective. The forward interest rate swaps not designated in a hedging relationship are recorded in a net liability position of $12.9 million in the Consolidated Balance Sheets. The gross and net amounts offset at April 4, 2015 were as follows (in thousands):
|  | Gross Fair Value |  |  | Counterparty Offsetting |  |  | Net Fair Value in the Consolidated Balance Sheets |
Counterparty A |  | $ | 11,543 |  |  | $ | 5,862 |  |  | $ | 5,681 |
Counterparty B |  |  | 3,697 |  |  |  | 1,140 |  |  |  | 2,557 |
Counterparty C |  |  | 4,221 |  |  |  | 1,422 |  |  |  | 2,799 |
Counterparty D |  |  | 7,962 |  |  |  | 2,760 |  |  |  | 5,202 |
Counterparty E |  |  | 4,058 |  |  |  | 1,343 |  |  |  | 2,715 |
Counterparty F |  |  | 4,103 |  |  |  | 1,377 |  |  |  | 2,726 |
Counterparty G |  |  | 5,082 |  |  |  | 0 |  |  |  | 5,082 |
Total |  | $ | 40,666 |  |  | $ | 13,904 |  |  | $ | 26,762 |
The volume of the forward interest rate swaps, New Swaps, designated in a hedge relationship is as follows (in thousands):
|  | As of |
|  | April 4, 2015 |  |  | December 31, 2014 |
Notional balance of outstanding contracts |  | $ | 3,339,000 |  |  | $ | 3,339,000 |
The New Swaps, each with a term of one year, are designated as cash flow hedges of interest rate exposure associated with variability in future cash flows on the Term Loan. The notional amount of the designated New Swaps effective in each year of the cash flow hedge relationships does not exceed the principal amount of the Term Loan which is hedged. The New Swaps have the following notional amounts per year (in thousands):
Year 2015 |  | $ | 1,010,000 |
Year 2016 |  |  | 697,000 |
Year 2017 |  |  | 544,000 |
Year 2018 |  |  | 544,000 |
Year 2019 |  |  | 272,000 |
Year 2020 |  |  | 272,000 |
Notional balance of outstanding contracts |  | $ | 3,339,000 |
The gain (loss) recognized on the forward interest rate swaps not designated in a hedge relationship is as follows (in thousands):
|  | Three Months Ended |
|  | April 4, 2015 |  |  | March 29, 2014 |
Gain on forward interest-rate swaps |  | $ | 1,689 |  |  | $ | 0 |
The gain (loss) recognized in other comprehensive income (loss) on the forward interest rate swaps designated in a hedging relationship is as follows (in thousands):
|  | As of |
|  | April 4, 2015 |  |  | March 29, 2014 |
Change in unrealized loss on forward interest rate swap hedging: |  |  |  |  |  |  |  |
Gross |  | $ | (11,734 | ) |  | $ | 0 |
Income tax (benefit) |  |  | (4,683 | ) |  |  | 0 |
Total |  | $ | (7,051 | ) |  | $ | 0 |
No gain (loss) was reclassified from accumulated other comprehensive income (loss) into earnings on the forward interest rate swaps designated in a hedging relationship during the three month periods ended April 4, 2015 and March 29, 2014. At April 4, 2015, we expect that approximately $6.0 million in losses on the forward interest rate swaps designated in a hedging relationship will be reclassified from accumulated other comprehensive loss into earnings during the next 4 quarters.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80748-113994 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5618551-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5708775-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 25 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6886632&loc=d3e76258-113986 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624181-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4H -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624258-113959 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4B -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624163-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4J -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5708773-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80784-113994 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4D -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624177-113959 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35706170&loc=d3e41620-113959 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5579245-113959 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1B -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5580258-113959 Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5579240-113959 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=35706170&loc=d3e41641-113959 Reference 18: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=35706170&loc=d3e41638-113959 Reference 19: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624171-113959 + Details
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