Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company is a global leader respected for innovative EAI solutions in the automatic information and data capture solutions industry. We design, manufacture, and sell a broad range of products that capture and move data, including: mobile computers; barcode scanners and imagers; RFID readers; specialty printers for barcode labeling and personal identification; RTLS; related accessories and supplies, such as self-adhesive labels and other consumables; and utilities and application software. We also provide a full range of services, including maintenance, technical support, repair, and managed services, including cloud-based subscriptions. End-users of our products and services include those in the retail, transportation and logistics, manufacturing, healthcare, hospitality, warehouse and distribution, energy and utilities, and education industries around the world. Benefits of our solutions include improved efficiency and workflow management, increased productivity and asset utilization, real-time, actionable enterprise information, and better customer experiences. We provide our products and services globally through a direct sales force and extensive network of partners. We provide products and services in over 170 countries, with approximately 120 facilities and 6,500 employees worldwide.

In October 2014, Zebra acquired Enterprise from MSI, excluding its iDEN, or Integrated Digital Enhanced Network Business, for $3.45 billion in cash. Zebra 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 with an aggregate principal amount of $1.05 billion and a new credit agreement with various lenders that provided a term loan of $2.20 billion due 2021. The new credit agreement also included a $250 million revolving credit facility. See Note 3 Business Combinations and Divestitures for additional information.

On September 13, 2016, the Company entered into an Asset Purchase Agreement with Extreme Networks, Inc. to divest of its wireless LAN (“WLAN”) business (“Divestiture Group”). WLAN operating results are reported in the Enterprise segment through the closing date of the WLAN divestiture of October 28, 2016. See Note 3 Business Combinations and Divestitures for additional information.

Segments

The Company’s operations consist of two reportable segments: Legacy Zebra and Enterprise.

Legacy Zebra

The Legacy Zebra segment is an industry leader in barcode printing and asset tracking technologies. Its major product lines include barcode and card printers, location solutions, supplies, and services. Industries served include retail, transportation and logistics, manufacturing, healthcare, and other end markets within the following regions: North America; Europe, Middle East, and Africa; Asia-Pacific; and Latin America.

Enterprise

The Enterprise segment is an industry leader in automatic information and data capture solutions. Its major product lines include mobile computing, data capture, RFID, and services. Industries served include retail, transportation and logistics, manufacturing, healthcare, and other end markets within the following regions: North America; Europe, Middle East, and Africa; Asia-Pacific; and Latin America.

Geographic Information. For the year ended December 31, 2016, the Company recorded $3.6 billion of net sales in its consolidated statements of operations, of which approximately 48.7% were attributable to North America; approximately 31.8% were attributable to Europe, Middle East, and Africa (“EMEA”); and other foreign locations accounted for the remaining 19.5%. Net sales attributable from each region are relatively consistent with the prior year period.

Results of Operations: Year Ended 2016 versus 2015 and Year Ended 2015 versus 2014

Consolidated Results of Operations

(Amounts in millions, except percentages)

	Year Ended December 31,												Percent Change 2016 vs 2015			Percent Change 2015 vs 2014
	2016				2015				2014(1)
Net sales	$	3,574			$	3,650			$	1,671			(2.1	)%		118.3	%
Gross profit	1,642				1,644				778				(0.1	)%		111.3	%
Operating expenses	1,562				1,607				689				(2.8	)%		133.1	%
Operating income	$	80			$	37			$	89			116.2	%		(58.4	)%
Gross margin	45.9		%		45.0		%		46.6		%

Net sales by product category were as follows (amounts in millions, except percentages):

	Year Ended December 31,												Percent Change 2016 vs 2015			Percent Change 2015 vs 2014
	2016				2015				2014(1)
Hardware	$	2,778			$	2,863			$	1,234			(3.0	)%		132.1	%
Supplies	278				268				265				3.7	%		1.2	%
Service and Software	518				519				172				(0.2	)%		201.7	%
Total Net sales	$	3,574			$	3,650			$	1,671

Net sales to customers by geographic region were as follows (in millions, except percentages):

	Year Ended December 31,												Percent Change 2016 vs 2015			Percent Change 2015 vs 2014
	2016				2015				2014(1)
Europe, Middle East, and Africa	$	1,138			$	1,194			$	583			(4.7	)%		104.8	%
Latin America	214				219				135				(2.3	)%		62.7	%
Asia-Pacific	483				463				216				4.3	%		114.3	%
Total International	1,835				1,876				934				(2.2	)%		100.9	%
North America	1,739				1,774				737				(2.0	)%		140.7	%
Total Net sales	$	3,574			$	3,650			$	1,671

Operating expenses are summarized below (in millions, except percentages):

	Year Ended December 31,												Percent Change 2016 vs 2015			Percent Change 2015 vs 2014
	2016				2015				2014(1)
Selling and marketing	$	444			$	494			$	213			(10.1	)%		131.6	%
Research and development	376				394				151				(4.6	)%		160.7	%
General and administrative	307				283				138				8.5	%		104.8	%
Amortization of intangible assets	229				251				54				(8.8	)%		364.0	%
Acquisition and integration costs	125				145				127				(13.8	)%		14.4	%
Impairment of goodwill and other intangibles	62				—				—				NMF			—	%
Exit and restructuring costs	19				40				6				(52.5	)%		565.9	%
Total Operating expenses	$	1,562			$	1,607			$	689			(2.8	)%		133.2	%

The Company’s non-operating income and expense items are summarized in the following tables (in millions, except percentages):

	Year Ended December 31,												Percent Change 2016 vs 2015			Percent Change 2015 vs 2014
	2016				2015				2014(1)
Foreign exchange loss	$	(5	)		$	(23	)		$	(9	)		(78.3	)%		162.6	%
Interest expense	(193		)		(193		)		(62		)		—	%		211.3	%
Other, net	(11		)		(1		)		(1		)		1,000.0	%		—	%
Total Other (expenses) income	$	(209	)		$	(217	)		$	(72	)		(3.7	)%		201.6	%

(1) The businesses included in our Enterprise segment were acquired as part of the Acquisition. The consolidated results for the year ended December 31, 2014 include only two months (November and December 2014) of the Enterprise segment. The increase in net sales, gross profit, operating expenses and operating income, for the year ended December 31, 2014 was primarily related to the Acquisition.

2016 compared to 2015

Net sales decreased by $76 million or 2.1% compared with the prior year period. The decline in net sales is due to lower hardware sales in North America, EMEA, and Latin America, including the unfavorable impact of foreign currency changes, partially offset by higher hardware sales in Asia-Pacific. The decline in hardware sales is largely attributable to lower sales of barcode printer, data capture, wireless LAN products, and location solutions. On a constant currency basis and excluding purchase accounting adjustments, overall net sales declined approximately 1% compared to the prior year period, reflecting growth of approximately 4% in Asia-Pacific, offset by declines of approximately 2%, 1%, and 3% in North America, EMEA, and Latin America, respectively.

Gross margin as a percent of sales was 45.9% compared to the prior year period of 45.0%. This improvement in gross margin reflects an increase in the Enterprise segment gross margin primarily due to lower services and hardware product costs. Legacy Zebra segment gross margin decreased primarily due to lower sales demand and the impact of incentive programs, including the concessions to distributors of printer products imported into China, partially offset by product cost improvements.

Operating expenses for the year ended December 31, 2016 and 2015, were $1.6 billion, or 43.7% and 44.0% of net sales, respectively. The reduction in operating expenses as a percentage of net sales reflects the Company’s continued focus on improving operating efficiency and controlling expenses. Selling and marketing expenses were lower compared to the prior year due to the full-year impact of staff reductions implemented in 2015 and lower discretionary expenses and promotional spending. The decrease in research and development costs was primarily due to a reduction in headcount and other third-party resources, the impact from the divestiture of the wireless LAN business, and shifting of headcount to lower cost engineering locations. The increase in general and administrative costs was primarily due to higher IT related expenses, including increased support and maintenance costs for IT infrastructure and business systems as we exit transition services agreements with Motorola Solutions, and increased legal fees and litigation related expenses. The decrease in amortization of intangibles was due to impairment charges taken in the current year along with other intangible assets becoming fully amortized. Impairment of goodwill and other intangibles of $62 million was recorded during the third quarter related to the wireless LAN business divestiture. The Company has made significant progress on its integration activities associated with the Acquisition, including exiting many transition services agreements with Motorola Solutions. This has resulted in a decline in acquisition and integration costs compared to the prior year period. Exit and restructuring costs were lower due to a reduced level of restructuring activity as the Company progresses with its restructuring plan related to the Acquisition, partially offset by expenses associated with the Company’s divestiture of its wireless LAN business.

Operating income increased $43 million or 116.2% compared to the prior year. The increase was primarily due to the decline in operating expenses.

The Company conducts business in multiple currencies throughout the world, thus has exposure to movements in foreign exchange rates with regard to non-functional denominated revenue, cash assets, and cash liabilities. As a result of these exposures, the Company recognized a foreign exchange loss of $5 million for 2016.

Interest expense was $193 million for the year ended December 31, 2016, flat compared to the prior year. Early repayments of debt resulted in accelerated amortization costs while debt refinancing savings were offset by closing costs of the refinancing.

Other non-operating expenses increased $10 million to $11 million for the year ended December 31, 2016. This increase is driven by long-term investment impairments of $7 million and an increase in accelerated loan discount amortization of $3 million due to the debt refinancing. See Note 9 Long-Term Debt for further information on the debt refinancing amendments.

In the period ending December 31, 2016, the Company recognized tax expense of $8 million compared to a tax benefit of $22 million for 2015. The Company’s effective tax rates were (6.2)% and 12.2% as of December 31, 2016 and December 31, 2015, respectively. The Company’s effective tax rate was lower than the federal statutory rate of 35% primarily due to deferred income taxed on the outbound transfer of U.S. assets, pre-tax losses in the United States, and the rate differential between U.S. and foreign jurisdictions.

2015 compared to 2014

Net sales growth of 118.3% for the twelve months ended December 31, 2015 as compared to the prior year was primarily as a result of the Acquisition of the Enterprise business and higher North America sales, offset partially by $149 million of unfavorable foreign currency effects, net of hedges. The Enterprise business contributed $1,888 million or 95.4% of the increase in total net sales, increased gross profit by $808 million or 93.4%, and increased recurring operating expenses by $830 million or 95.9%, and non-recurring operating expenses by $42 million or 81.3%. Included within the total recurring operating expenses was an increase of $197 million of amortization expense as a result of intangibles acquired. Within non-recurring operating expenses were increases of $18 million of integration and acquisition costs as a result of IT costs of transitioning and exiting the Motorola platforms and $34 million of exit and restructuring costs as a result of integrating acquired facilities and related employees.

Included in the total Enterprise impacts of 2015 versus 2014 are the following purchase accounting adjustments: a $10 million reduction in revenue related to the valuation of service contracts acquired, a $25 million decrease to cost of sales related to a step up in value of inventory acquired, and a $167 million increase in depreciation and amortization expenses.

Net sales, excluding the impact of the Acquisition of the Enterprise business, increased by $91 million or 7.7% in 2015 versus 2014. The unfavorable impact of foreign currency reduced sales by $70 million. This increase is primarily due to sales growth in the North America and Asia-Pacific regions, specifically higher volumes of barcode printers and location solutions. Latin America sales were lower driven by a weak macro-economic environment. Consolidated net sales, excluding the effect of the Enterprise business, grew 12.5%, on a constant currency basis.

Gross margin as a percent of sales, excluding the effect of the Enterprise business, was 50.9% for the year ended December 31, 2015 compared to 50.0% in the comparable year ended December 31, 2014. This increase in margins reflects the favorable impact of higher unit sales within the North America and Asia-Pacific regions and lower product costs for both hardware and supplies, offset partially by unfavorable foreign currency effects, net of hedges.

Operating expenses for the year ended December 31, 2015, excluding the effect of the Enterprise business, were $415 million compared to $370 million in the prior year. Included in the increase were exit and restructuring costs within Legacy Zebra of $10 million related to organizational redesign. As a percentage of sales, operating expenses, excluding the Enterprise business, were 32.3% for the year ended December 31, 2015 compared to 31.0% for the year ended December 31, 2014 primarily due to additional investments made to support business growth in the sales, research and development, and administrative functions, and exit and restructuring costs.

Operating income for the year ended December 31, 2015, excluding the effect of the Enterprise business, increased $12 million or 5.2% compared to the prior year. The increase is primarily due to higher sales and gross profit, partially offset by higher operating expenses and the unfavorable foreign currency effects, net of hedges.

The Company recognized a foreign exchange loss of $23 million for 2015 as a result of changes in the value of non-US dollar assets and liabilities primarily related to the Enterprise business that were not hedged during the period.

Interest expense was $194 million for the year ended December 31, 2015 compared to $63 million for 2014 mainly reflecting the indebtedness incurred related to the Acquisition of $3.2 billion borrowed in October of 2014. There was also $4 million of forward interest rate swap gains in 2015 included in interest expense compared to a $5 million loss in 2014 primarily due to the changes in market interest rates.

In 2015, the Company recognized a tax benefit of $22 million compared to a tax benefit of $15 million for 2014. The Company’s effective tax rates were 12.2% and (95.0)% as of December 31, 2015 and December 31, 2014, respectively. The Company’s effective tax rate was lower than the federal statutory rate of 35% primarily due to pre-tax losses in the United States and corporate structure realignment initiatives in various non-US jurisdictions.

Since the date of the Acquisition, as part of its corporate initiatives of integrating the Enterprise business, the Company has been executing its integration plan for the Enterprise business (the “Integration Plan”). The Company anticipates completing the Integration Plan as soon as practicable and expects that the Integration Plan will allow the combined businesses to achieve further synergies and cost savings associated with the Acquisition. As part of the Integration Plan, the Company began realigning certain acquired assets of the Enterprise business with and into the Company’s corporate structure and business model.

Results of Operations by Segment

The following commentary should be read in conjunction with the financial results of each operating business segment as detailed in Note 16 Segment Information and Geographic Data in the Notes to the Consolidated Financial Statements included in this Form 10-K. The segment results exclude purchase accounting adjustments, amortization of intangible assets, acquisition and integration costs, impairment of goodwill and intangibles, and exit and restructuring costs.

Legacy Zebra Segment

(amounts in millions, except percentages)

	Year Ended December 31,												Percent Change 2016 vs 2015			Percent Change 2015 vs 2014
	2016				2015				2014
Net sales	$	1,247			$	1,286			$	1,195			(3.0	)%		7.7	%
Gross profit	620				654				598				(5.2	)%		9.4	%
Operating expenses	380				396				360				(3.9	)%		10.0	%
Operating income	$	240			$	258			$	238			(7.0	)%		8.4	%
Gross margin	49.7		%		50.9		%		50.0		%

2016 compared to 2015

Net sales for the period ending December 31, 2016 within Legacy Zebra decreased $39 million or 3.0% compared to prior year period. The decline in net sales was primarily due to lower net sales of barcode printers and location solutions, and the unfavorable impact of foreign currency changes, most notably in EMEA which was partially offset by an increase in sales of supplies. The barcode printer sales decline was primarily due to lower sales in North America and EMEA. Legacy Zebra sales declined compared to the prior year period on a constant currency basis by approximately 1%.

Gross margin as a percentage of sales was 49.7% compared to 50.9% for comparable prior year period. The decrease in gross margin included impacts from lower sales of barcode printers, the impact of incentive programs, including the concession to distributors of printer products imported into China, costs associated with the relocation of North American distribution operations, and the unfavorable impact of foreign currency changes. These factors were partially offset by manufacturing cost improvements in supplies and lower hardware product costs.

Operating income declined 7.0% as a result of lower net sales and gross margin, partially offset by lower operating expenses.

2015 compared to 2014

Net sales for 2015 increased $91 million or 7.7% compared to 2014. Net sales growth compared to 2014 on a constant currency basis was $149 million or 12.5%. This reflects higher net sales for the North America and Asia-Pacific regions. Net sales in EMEA were essentially unchanged while Latin America net sales were lower. On a constant currency basis, net sales in EMEA increased 14% compared to 2014. The increase in net sales for the North America region was primarily due to higher volume of sales related to barcode printers and location solutions. The higher level of net sales for EMEA and Asia-Pacific regions reflected increased volumes of barcode printers. The decrease in net sales in the Latin America region was primarily driven by a weak macro-economic environment.

Gross margin as a percentage of sales was 50.9% for the year ended December 31, 2015 compared to 50.0% for 2014. This increase in margin reflects the favorable impact of higher unit sales and lower product costs for both hardware and supplies, offset partially by unfavorable foreign currency effects, net of hedges.

Operating income for the year ended December 31, 2015, increased 8.4% as a result of higher sales and gross profit partially offset by increases in operating expenses and unfavorable foreign currency effects, net of hedges. Operating expenses increased compared to the prior year primarily to support business growth.

Enterprise Segment (amounts in millions, except percentages)

	Year Ended December 31,												Percent Change 2016 vs 2015			Percent Change 2015 vs 2014
	2016				2015				2014(1)
Net sales	$	2,337			$	2,380			$	482			(1.8	)%		393.6	%
Gross profit	1,032				1,010				215				2.2	%		370.3	%
Operating expenses	746				774				150				(3.6	)%		416.7	%
Operating income	$	286			$	236			$	65			21.2	%		263.1	%
Gross margin	44.2		%		42.4		%		44.5		%
(1) The businesses included in our Enterprise segment were acquired as part of the Acquisition. The Enterprise segment’s results, including the increases in net sales, gross profit, operating expenses and operating income, for the year ended December 31, 2014 was primarily related to the Acquisition. Accordingly, the results for this segment for the year ended December 31, 2014 include only two months (November and December 2014).

2016 compared to 2015

Net sales for the period ending December 31, 2016 within Enterprise decreased $43 million or 1.8% compared to prior year period. The decline in net sales was primarily driven by lower sales of wireless LAN and data capture products and the unfavorable impact of foreign currency changes in EMEA, partially offset by higher sales of mobile computing products. The sales decline compared to the prior year period on a constant currency basis was approximately 1%.

Gross profit margin for the year ended December 31, 2016 was 44.2% compared to 42.4% in the prior year period. The improvement in gross margin was due primarily to lower service and hardware product costs, including lower excess and obsolescence expense. The prior year costs also included higher product rebranding expenses. This improvement was partially offset by product mix and the unfavorable impact of foreign currency changes.

Operating income increased 21.2% primarily as a result of improvement in gross margin and lower operating expenses, partially offset by lower sales.

2015 compared to 2014

On October 27, 2014, the Company acquired Enterprise, an industry leader in mobile computing and data capture technologies and services, therefore 2014 only includes results since the acquisition date and is not directly comparable to the full fiscal year 2015.

For the year ended December 31, 2015, net sales for Enterprise were $2.4 billion compared to $482 million in 2014, which includes net sales only for the period following the Acquisition. Mobile computing, data capture, and repair services generated the majority of Enterprise net sales for the year in 2015 and 2014. The regions which accounted for the majority of 2015 and 2014 Enterprise net sales included North America and EMEA. Sales in the fourth quarter were $635 million, up 4.8% compared to the third quarter due to higher net sales in EMEA.

Gross profit margin for the year ended December 31, 2015 was 42.4% compared to 44.5% in the prior year period. Gross margin of 44.5% in 2014 reflects only the period following the Acquisition on October 27, 2014. Gross margin in the fourth quarter was 42.4%, comparable to the third quarter of 2015, reflecting higher gross margin in services offset by unfavorable foreign currency effects.

Enterprise’s operating expenses for the year ended December 31, 2015 were $774 million and operating income was $236 million. Operating expenses in the fourth quarter were flat compared to third quarter; however, the fourth quarter was 30.8% of sales compared to 31.9% in the third quarter of 2015 due to the improved operating leverage.

Critical Accounting Policies and Estimates

Management prepared the consolidated financial statements of the Company under accounting principles generally accepted in the United States of America. These principles require the use of estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions we used are reasonable based upon the information available at that time.

Our estimates and assumptions affect the reported amounts in our consolidated financial statements. See Note 2 Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in this Form 10-K.

Recently Issued Accounting Pronouncements

See Note 2 Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in this Form 10-K.

Liquidity and Capital Resources

The primary factors that influence our liquidity include, but are not limited to, the amount and timing of our revenues, cash collections from our customers, capital expenditures, repatriation of foreign cash and investments, and acquisitions of third-parties. Management believes that our existing capital resources and funds generated from operations are sufficient to meet anticipated capital requirements and service our indebtedness. The following table summarizes our cash flow activities for the years indicated (in millions):

	Year Ended December 31,
	2016				2015				2014
Cash flow (used in) provided by:
Operating activities	$	372			$	110			$	248
Investing activities	(39		)		(148		)		(3,111		)
Financing activities	(376		)		(149		)		3,192
Effect of exchange rates on cash balances	7				(15		)		2
Net (decrease) increase in cash and cash equivalents	$	(36	)		$	(202	)		$	331

The change in our cash and cash equivalents balance is reflective of the following:

2016 vs. 2015

Cash flows from operations increased $262 million during 2016 to $372 million. This improvement was driven by lower net losses of $21 million, which included significant non-cash drivers of a lower deferred income tax benefit of $98 million and asset impairment for goodwill, intangibles and other assets of $69 million, primarily related to the wireless LAN business divestiture. Additionally, the Company had improved working capital of $85 million during 2016. Working capital improvements consisted primarily of accounts payable increases due to the Company successfully renegotiating longer payment terms with vendors being partially offset by an increase in income tax cash outflows.

Net cash used in investing activities during 2016 included capital expenditures of $77 million compared to $122 million in 2015. The decrease consisted primarily of a reduction in integration and real estate related capital expenditures. This was offset somewhat by the sale of the wireless LAN business resulting in net cash received of $39 million.

Net cash used in financing activities during 2016 consisted primarily of early debt principal repayments of $382 million under the Term Loan compared to early debt principal repayments of $165 million in the comparable prior year period. Resulting from the debt refinancing amendments entered into during fiscal 2016, the Company recognized $102 million of proceeds from the issuance of long-term debt, offset by $102 million in payments of long-term debt within the Consolidated Statements of Cash Flows. Additionally, proceeds received from the exercise of stock options and employee stock purchase plan purchases (“ESPP”) were $11 million this year compared to $17 million in 2015 reflecting decreased option exercises and stock purchase plan purchases. The taxes paid related to the net share settlement of equity awards were $8 million in 2016 compared to $13 million in 2015 reflecting decreased stock exercises.

In connection with the Acquisition in October 2014, we incurred indebtedness totaling $3.25 billion. As of December 31, 2016, we had long-term debt, gross of unamortized discounts and debt issuance costs, totaling $2.7 billion. We did not have any borrowings against our revolving credit facility with $246 million available ($250 million less $4 million of outstanding letters of credit). See Note 9 Long-Term Debt for further details and under Financing activities below.

2015 vs. 2014

Cash flows from operations decreased $138 million during 2015 to $110 million. While an increase in net loss of $190 million netted against an increase in non-cash operating items of $161 million yielded a decrease in cash flow from operations of $29 million, the overall decrease in cash provided by operating activities is primarily attributable to changes in certain assets and liabilities of $109 million during 2015. These changes consisted primarily of a decrease in accounts payable and accrued liabilities of $252 million offset by a $72 million increase in accounts receivable and a $52 million increase in income taxes payable.

Net cash used in investing activities during 2015 included additional consideration of $51 million paid to MSI in relation to the opening cash balance and working capital adjustments. In addition, there were capital expenditures of $122 million in 2015 compared to $39 million in 2014. The increase in capital expenditures in 2015 as compared to 2014 consisted primarily of investments in IT infrastructure, software applications, facilities, engineering, development, test equipment, and production and tooling equipment. Reflecting the effect of the Acquisition on the Company’s capital structure, net cash used for investing activities during 2014 included $3.4 billion paid to MSI and purchases of marketable securities of $651 million offset by $644 million and $336 million of proceeds from the sale and maturity of investments in marketable securities, respectively.

Net cash used in financing activities during 2015 consisted primarily of principal repayments of $165 million under the Term Loan compared to proceeds of $3.2 billion from the issuance of long-term debt to fund the Acquisition during 2014. Additionally, proceeds received from the exercise of stock options and employee stock purchase plan purchases (“ESPP”) were $17 million this year compared to $26 million in 2014 reflecting decreased option exercises and ESPP purchases. The taxes paid related to the net share settlement of equity awards were $13 million in 2015 compared to $5 million in 2014 reflecting increased restricted stock exercises.

The following table shows our level of indebtedness as of December 31, 2016 (in millions):

Senior Notes	$	1,050
Term loan	1,653
Less: debt issuance costs	(22		)
Less: unamortized discounts	(33		)
Total outstanding debt	$	2,648

Private Offering

On October 15, 2014, the Company completed a private offering of $1.05 billion in 7.25% Senior Notes due October 15, 2022. Interest on the Senior Notes is payable in cash on April 15 and October 15 of each year.

The indenture covering the Senior Notes contains certain covenants limiting among other things the ability of the Company and its restricted subsidiaries, with certain exceptions as described in the indenture, to; (i) incur indebtedness or issue certain preferred stock; (ii) incur liens; (iii) pay dividends or make distributions in respect of capital stock; (iv) purchase or redeem capital stock; (v) make investments or certain other restricted payments; (vi) sell assets; (vii) issue or sell stock of restricted subsidiaries; (viii) enter into transactions with stockholders or affiliates; or (ix) effect a consolidation or merger. On December 31, 2016, the Company was in compliance with the covenants.

Credit Facilities

On October 27, 2014, the Company entered into a new credit agreement which provides for a term loan of $2.2 billion (“Term Loan”) and a revolving credit facility of $250 million (“Revolving Credit Facility”). On June 2, 2016, the Company entered into the first amendment to the credit agreement (the “Refinancing Amendment 1”). The Refinancing Amendment lowered the index rate spread for LIBOR loans from LIBOR + 400 bp to LIBOR + 325 bp. During the second quarter of 2016, the Company recorded a one-time $2.7 million expense, primarily related to costs incurred with third parties for arranger, legal and other services and the loss incurred on the extinguished debt. These expenses are reflected as non-operating expenses within the consolidated statement of operations. Additionally, the Company paid $4.9 million to the creditors in exchange for the modification and reported it as debt discount which is being amortizing over the life of the modified debt using the interest method. Borrowings under the modified Term Loan bear interest at a variable rate subject to a floor of 4.00%.

On December 6, 2016, the Company entered into the second amendment to our existing credit agreement dated as of October 27, 2014 (the “Refinancing Amendment 2”). The Refinancing Amendment lowered the index rate spread for LIBOR loans from LIBOR + 325 bp to LIBOR + 250 bp. As a result of the December 6, 2016 refinancing transaction, the Company recorded a one-time $1.7 million expense, primarily related to costs incurred with third parties for arranger, legal and other services and the loss incurred on the modified debt. The Company had no costs due to creditors associated with fees for the modification.

As of December 31, 2016, the Term Loan interest rate was 3.45%. Interest payments are payable quarterly. The Company has entered into interest rate swaps to manage interest rate risk on its long-term debt. See Note 8 Derivative Instruments for further details.

The credit agreement requires the Company to prepay the Term Loan and Revolving Credit Facility, under certain circumstances or transactions defined in the credit agreement. Also, the Company may voluntarily prepay its obligations under the Term Loan at any time in whole or in part, without premium or penalty. The Company has made such optional principal prepayments of $382 million in 2016. Through February 2017, the Company made an additional optional principal prepayment

of $20 million. Unless satisfied by further optional prepayments, the Company is required to make a scheduled principal payment of $1.6 billion on October 27, 2021.

The Revolving Credit Facility is available for working capital and other general corporate purposes including letters of credit. The amount (including letters of credit) shall not exceed $250 million. As of December 31, 2016, the Company had established letters of credit totaling $4 million, which reduced funds available for other borrowings under the agreement to $246 million. The Revolving Credit Facility will mature and the commitments thereunder will terminate on October 27, 2019.

Borrowings under the Revolving Credit Facility bear interest at a variable rate plus an applicable margin. The applicable margin for borrowings under the Revolving Credit Facility ranges from 2.25% to 2.75% depending on the Company’s consolidated total secured net leverage ratio, which is evaluated on a quarterly basis. Interest payments are payable quarterly. As of December 31, 2016, the Company did not have any borrowings outstanding against the Revolving Credit Facility.

The Revolving Credit Facility contains certain covenants limiting among other things, the ability of the Company and its restricted subsidiaries, with certain exceptions as described in the credit agreement, to: (i) incur indebtedness, make guarantees or issue certain equity securities; (ii) pay dividends on its capital stock or redeem, repurchase or retire its capital stock; (iii) make certain investments, loans and acquisitions; (iv) sell certain assets or issue capital stock of restricted subsidiaries; (v) create liens or engage in sale-leaseback transactions; (vi) merge, consolidate or transfer or dispose of substantially all of their assets; (vii) engage in certain transactions with affiliates; (viii) alter the business it conducts; (ix) amend, prepay, redeem or purchase subordinated debt; and (x) enter into agreements limiting subsidiary dividends and distributions. The Revolving Credit Facility also requires the Company to comply with a financial covenant consisting of a quarterly maximum consolidated Total Secured Net Leverage Ratio, (as defined in the credit agreement). This test is only required to be performed at the end of the fiscal quarter and when 20% of the commitments under the Revolving Credit Facility have been drawn and remain outstanding.

The Term Loan and obligations under the Revolving Credit Facility are collateralized by a security interest in substantially all of the Company’s assets as defined in the security agreement and guaranteed by its direct and indirect wholly-owned existing and future domestic restricted subsidiaries, subject to certain exceptions.

Certain domestic subsidiaries of the Company (the “Guarantor Subsidiaries”) guarantee the Notes, the Term Loan and the Revolving Credit Facility on a senior basis: For the year ended December 31, 2016, the non-Guarantor Subsidiaries would have (a) accounted for 45% of our total revenue and (b) held 24% or $1 billion of our total assets and approximately 12% or $0.4 billion of our total liabilities including trade payables but excluding intercompany liabilities.

On December 31, 2016, the Company was in compliance with all covenants.

Historically, significant portions of our cash inflows were generated by our operations. We currently expect this trend to continue throughout 2017. We believe that our existing cash and investments, borrowings available under our Revolving Credit Facility, together with cash flows expected from operations will be sufficient to meet expected operating, capital expenditure and debt obligation requirements for the next 12 months.

As of December 31, 2016, the Company’s cash position of $156 million included foreign cash and investments of $98 million.

Management believes that existing capital resources and funds generated from operations are sufficient to finance anticipated capital requirements.

Contractual Obligations

Zebra’s contractual obligations as of December 31, 2016 were (in millions):

	Payments due by period
	Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Operating lease obligations	$	140			$	30			$	46			$	26			$	38
Deferred compensation liability	11				—				—				—				11
Long-term debt – principal payments	2,703				—				—				1,653				1,050
Interest payments	752				135				270				270				77
Interest on interest rate swaps	45				11				22				12				—
Purchase obligations	318				318				—				—				—
Total	$	3,969			$	494			$	338			$	1,961			$	1,176

Purchase obligations are for purchases made in the normal course of business to meet operational requirements, primarily raw materials and finished goods.

Uncertain tax position liabilities of $42 million have been excluded from the above table as we cannot make a reasonably reliable estimate of the period of cash settlement with the respective taxing authority.

The Company anticipates that it is reasonably possible that $5 million of unrecognized tax benefits may reverse in 2017, due to settlements with the tax authorities. The Company is currently undergoing audits of the 2013 through 2015 US federal income tax returns. The Company is engaged in an inquiry from the UK HM Revenue and Customs for the years 2012 and 2014. The tax years 2011 through 2016 remain open to examination by multiple foreign and U.S. state taxing jurisdictions. Due to uncertainties in any tax audit outcome, the Company’s estimates of the ultimate settlement of uncertain tax positions may change and the actual tax benefits may differ significantly from the estimates. The Company continues to review these positions.