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 software utilities and applications. We also provide a full range of services, including maintenance, technical support, and repair, managed and professional services, including cloud-based subscriptions. End-users of our products and services include those in the retail and e-commerce, transportation and logistics, manufacturing, healthcare, hospitality, warehouse and distribution, energy and utilities, government and education enterprises 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 an extensive network of partners. We provide products and services in over 180 countries, with 114 facilities and approximately 7,000 employees worldwide.

Segments

The Company’s operations consist of two reportable segments: Asset Intelligence & Tracking (“AIT”) and Enterprise Visibility & Mobility (“EVM”). In January 2018, the Company changed the names of the reportable segments to better reflect business operations: (1) Asset Intelligence & Tracking (“AIT”), formerly Legacy Zebra, comprised of barcode and card printing, location solutions, supplies, and services; and (2) Enterprise Visibility & Mobility (“EVM”), formerly Enterprise, comprised of mobile computing, data capture, RFID, and services.

Asset Intelligence & Tracking

The AIT segment is an industry leader in barcode printing and asset tracking technologies. Its major product lines include barcode and card printers, supplies, services and location solutions. Industries served include retail and e-commerce, 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 Visibility & Mobility

The EVM 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 and e-commerce, 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, 2017, the Company recorded $3.7 billion of net sales in its consolidated statements of operations, of which approximately 48.3% were attributable to North America; approximately 32.8% were attributable to Europe, Middle East, and Africa (“EMEA”); and other foreign locations accounted for the remaining 18.9%. Net sales attributable from each region are relatively consistent with the prior year period.

Acquisition and Integration

In October 2014, the Company acquired the Enterprise business (“Enterprise”), from Motorola Solutions, Inc. (“MSI”) (the “Acquisition”) and began integration activities focused on creating “One Zebra”. Our integration priorities centered on maintaining business continuity while identifying and implementing cost synergies, operating efficiencies, and integration of functional organizations and processes. Another key focus of the integration was to exit MSI-provided transition service agreements (“TSAs”) related primarily to IT systems and support services. These TSAs were an interim measure to continue the operations of the Enterprise business without disruption while integration activities were completed. The Company substantially completed its integration activities, including the implementation of a common enterprise resource planning system and has exited the last TSAs with MSI.

Restructuring Programs

In the first quarter 2017, the Company’s executive leadership approved an initiative to continue the Company’s efforts to increase operational efficiency (the “Productivity Plan”). The Company expects the Productivity Plan to build upon the exit and restructuring initiatives specific to the acquisition of the Enterprise business (“Enterprise”) from Motorola Solutions, Inc. in October 2014, (the “Acquisition Plan”). Actions under the Productivity Plan include organizational design changes, process improvements and automation. Implementation of actions identified through the Productivity Plan is expected to be substantially complete by December 2018. Exit and restructuring costs are not included in the operating results of our segments as they are not deemed to impact the specific segment measures as reviewed by our Chief Operating Decision Maker and

therefore are reported as a component of Corporate, eliminations. See Note 15, Segment Information and Geographic Data in the Notes to Consolidated Financial Statements included in this Form 10-K for further information.

Total exit and restructuring charges of $12 million life-to-date and year-to-date specific to the Productivity Plan have been recorded through December 31, 2017 and relate to severance and related benefits, lease exit costs and other expenses. Total remaining charges associated with this plan are expected to be in the range of $8 million to $12 million with activities expected to be substantially complete by the end of fiscal 2018.

Total exit and restructuring charges of $69 million life-to-date specific to the Acquisition Plan have been recorded through December 31, 2017 and include severance and related benefits, lease exit costs and other expenses. Charges related to the Acquisition Plan for the twelve-month period ended December 31, 2017 and 2016, were $4 million and $19 million, respectively. The Company has substantially completed the activities associated with the Acquisition Plan.

See Note 5, Costs Associated with Exit and Restructuring Activities in the Notes to Consolidated Financial Statements included in this Form 10-K for further information.

Impact of U.S. Tax Reform

The Company is in the process of analyzing the impact of the Tax Cut and Jobs Act (“TCJA” or “the Act”) signed into law on December 22, 2017 and has provisionally provided income tax expense of $72 million, including remeasurement of its net deferred tax assets at 21% of $35 million and the one-time transition tax of $37 million. The one-time transition tax impact has been reduced by approximately $10 million of income tax credit carryfowards, resulting in an estimated cash tax liability of $26 million, of which $2 million has been classified as a short term liability and $24 million as a long term liability, both to be remitted over the next eight years as follows (in millions):

	One-Time Transition Tax - Payments Due for Calendar Year Tax Returns
	2017				2018				2019				2020				2021				2022				2023				2024
Unremitted Earnings Payments	$	2			$	2			$	2			$	2			$	2			$	4			$	5			$	7

The Company expects that the greatest factor impacting its future effective tax rate is the federal reduction in the tax rate from 35% to 21%. Primarily due to uncertainties in the interpretation of the one-time transition tax rules and the determination of cash or other specified assets, the December 31, 2017 effective tax rate could differ materially from the amount disclosed in the financial statements. As permitted, the Company will update the estimates disclosed herein on a quarterly basis throughout 2018. See Note 12, Income Taxes in the Notes to Consolidated Financial Statements included in this Form 10-K for further information.

The Company has reviewed the impact of other provisions of the Act which took effect on January 1, 2018 and after. Based on current operations, we estimate that the Company will be subject to the Global Intangible Low-Taxed Income and the Deduction for Foreign-Derived Intangible Income provisions of the Act. We estimate that the new limitations which defer U.S. interest deductions in excess of 30% of Adjusted Taxable Income will not be applicable. Additionally, the Company will no longer be able to deduct compensation for its covered employees which exceeds the limitation under Internal Revenue Code Section 162(m).

Results of Operations: Year Ended 2017 versus 2016 and Year Ended 2016 versus 2015

Consolidated Results of Operations

(amounts in millions, except percentages)

	Year Ended December 31,												Percent Change 2017 vs 2016			Percent Change 2016 vs 2015
	2017				2016				2015
Net sales	$	3,722			$	3,574			$	3,650			4.1	%		(2.1	)%
Gross profit	$	1,710			$	1,642			$	1,644			4.1	%		(0.1	)%
Operating expenses	1,388				1,562				1,607				(11.1	)%		(2.8	)%
Operating income	$	322			$	80			$	37			302.5	%		116.2	%
Gross margin	45.9		%		45.9		%		45.0		%

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

	Year Ended December 31,												Percent Change 2017 vs 2016			Percent Change 2016 vs 2015
	2017				2016				2015
Europe, Middle East, and Africa	$	1,221			$	1,138			$	1,194			7.3	%		(4.7	)%
Latin America	235				214				219				9.8	%		(2.3	)%
Asia-Pacific	468				483				463				(3.1	)%		4.3	%
Total International	1,924				1,835				1,876				4.9	%		(2.2	)%
North America	1,798				1,739				1,774				3.4	%		(2.0	)%
Total Net sales	$	3,722			$	3,574			$	3,650			4.1	%		(2.1	)%

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

	Year Ended December 31,												Percent Change 2017 vs 2016			Percent Change 2016 vs 2015
	2017				2016				2015
Selling and marketing	$	448			$	444			$	494			0.9	%		(10.1	)%
Research and development	389				376				394				3.5	%		(4.6	)%
General and administrative	301				307				283				(2.0	)%		8.5	%
Amortization of intangible assets	184				229				251				(19.7	)%		(8.8	)%
Acquisition and integration costs	50				125				145				(60.0	)%		(13.8	)%
Impairment of goodwill and other intangibles	—				62				—				(100.0	)%		NMF
Exit and restructuring costs	16				19				40				(15.8	)%		(52.5	)%
Total Operating expenses	$	1,388			$	1,562			$	1,607			(11.1	)%		(2.8	)%

Consolidated Organic Net sales growth:

	December 31,
	2017			2016
Reported GAAP Consolidated Net sales growth	4.1	%		(2.1	)%
Adjustments:
Impact of Wireless LAN Net sales (1)	3.2	%		1.4	%
Impact of foreign currency translation (2)	(0.6	)%		1.3	%
Corporate, eliminations (3)	(0.2	)%		(0.2	)%
Consolidated Organic Net sales growth	6.5	%		0.4	%

(1) The Company sold the wireless LAN business in October 2016. The Company excludes the impact of the net sales of this business in the prior year period when computing organic net sales growth.

(2) Operating results reported in U.S. dollars are affected by foreign currency exchange rate fluctuations. Foreign currency translation impact represents the difference in results that are attributable to fluctuations in the currency exchange rates used to convert the results for businesses where the functional currency is not the U.S. dollar. This impact is calculated by translating, for certain currencies, the current period results at the currency exchange rates used in the comparable prior year period, rather than the exchange rates in effect during the current period. In addition, we exclude the impact of the company’s foreign currency hedging program in both the current and prior year periods.

(3) Amounts included in Corporate, eliminations consist of purchase accounting adjustments not reported in segments related to the Acquisition.

2017 compared to 2016

Net sales increased by $148 million or 4.1% compared with the prior year period. The increase in net sales was due to higher hardware sales in North America, EMEA, and Latin America, offset by lower hardware sales in Asia-Pacific. The increase in hardware sales was largely attributable to increased sales of mobile computing, data capture, and barcode printing products, partially offset by the impact of the divestiture of the wireless LAN business in October 2016. Services sales were lower primarily due to the impact of the wireless LAN divestiture. Consolidated Organic Net sales growth was 6.5%, reflecting growth in all four geographic regions, most notably in EMEA and North America, and Latin America.

Gross margin as a percent of sales was 45.9%, or flat compared to the prior year. This reflects an increase in gross margin in the EVM segment primarily due to changes in business mix and improved product costs, offset by lower AIT segment gross margin driven primarily by higher overhead and services costs, and increased customer sales incentives.

Operating expenses for the year ended December 31, 2017 and 2016, were $1.4 billion, or 37.3% of net sales and $1.6 billion or 43.7% of net sales, respectively. The reduction in operating expenses was primarily due to impairment charges related to the disposal of the Company’s wireless LAN business in the prior year period, lower acquisition and integration costs, and lower amortization of intangible assets. During 2017, the Company substantially completed its integration activities, including the implementation of a common enterprise resource planning system, associated with the Acquisition. The Company also exited the transition services agreements with Motorola Solutions. The decrease in amortization of intangible assets was due to certain assets reaching full amortization in 2017. Exit and restructuring costs were also lower than the year-ago period due to the prior year charges that included costs associated with the divestiture of the wireless LAN business. Research and development costs were higher primarily due to increased incentive compensation expense associated with improved financial performance partially offset by the impact of the divestiture of the wireless LAN business. General and administrative expenses were lower compared to the prior year period due primarily to reduced facility and IT expenses, professional fees, and employee benefits costs, as well as the impact of the divestiture of the wireless LAN business being offset partially by increased incentive compensation expense associated with improved financial performance.

Operating income increased $242 million compared to the prior year. The increase was due to the decline in operating expenses as well as the increase in sales and gross profit.

Interest expense was $227 million for the year ended December 31, 2017 compared to $193 million in the prior year. The increase over the prior year was driven by the payments for early debt extinguishment of $65 million and accelerated amortization of debt issuance costs related to the redemption of Senior Notes of $16 million offset, in part, by the impact of early repayments of debt and lower interest rates.

Other non-operating expenses decreased $5 million to $6 million for the year ended December 31, 2017. This decrease is driven by long-term investment impairments of $1 million in the current year compared to $7 million in the prior year.

The Company recognized tax expense of $71 million and $8 million for the period ending December 31, 2017 and 2016, respectively. The Company’s effective tax rates were 80.7% and (6.2)% as of December 31, 2017 and 2016, respectively. The Company’s effective tax rate was higher than the federal statutory rate of 35% primarily due to deferred income taxed on the outbound transfer of U.S. assets, an increase in uncertain tax benefits, increased valuation allowance for its foreign deferred tax assets, foreign non-deductible expenses, the one-time transition tax and remeasurement of its net U.S. deferred tax assets under U.S. tax reform. These increases were partially offset by the benefit of lower tax rates in foreign jurisdictions, recognition of deferred tax assets on intercompany asset transfers, the generation of tax credits in the current year, and deductions from vesting of equity compensation.

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. Organic net sales increased 0.4% compared to the prior year period, reflecting growth in Asia-Pacific and North America, offset by declines in EMEA, and Latin America.

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 EVM segment gross margin primarily due to lower services and hardware product costs. AIT 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 8, 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.

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 15, 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.

Asset Intelligence & Tracking Segment (“AIT”)

(amounts in millions, except percentages)

	Year Ended December 31,												Percent Change 2017 vs 2016			Percent Change 2016 vs 2015
	2017				2016				2015
Net sales	$	1,311			$	1,247			$	1,286			5.1	%		(3.0	)%
Gross profit	$	640			$	620			$	654			3.2	%		(5.2	)%
Operating expenses	380				380				396				—	%		(3.9	)%
Operating income	$	260			$	240			$	258			8.3	%		(7.0	)%
Gross margin	48.8		%		49.7		%		50.9		%

AIT Organic Net sales growth:

	December 31,
	2017			2016
AIT Reported GAAP Net sales growth	5.1	%		(3.0	)%
Adjustments:
Impact of foreign currency translations (1)	(0.5	)%		1.8	%
AIT Organic Net sales growth	4.6	%		(1.2	)%

(1) Operating results reported in U.S. dollars are affected by foreign currency exchange rate fluctuations. Foreign currency translation impact represents the difference in results that are attributable to fluctuations in the currency exchange rates used to convert the results for businesses where the functional currency is not the U.S. dollar. This impact is calculated by translating, for certain currencies, the current period results at the currency exchange rates used in the comparable prior year period, rather than the exchange rates in effect during the current period. In addition, we exclude the impact of the company’s foreign currency hedging program in both the current and prior year periods.

2017 compared to 2016

AIT net sales for the period ending December 31, 2017 increased $64 million or 5.1% compared to prior year period. The increase in net sales was largely driven by higher sales of barcode and card printers, primarily in the EMEA and Asia-Pacific regions. Sales of supplies and services were also higher than the prior year. The year-on-year growth also reflects a price concession to distributors of barcode printer products imported into China in the third quarter of 2016. During 2017, no additional price concession provisions were required and a reduction of the 2016 provision was recorded due to a change in import classification for barcode printers. AIT organic Net sales growth for the year-ended December 31, 2017 was 4.6%.

Gross margin as a percentage of sales was 48.8% compared to 49.7% for comparable prior year period. The decrease in gross margin reflects higher overhead costs, including freight and costs associated with our regional distribution center transitions, higher services costs and increased customer sales incentives offset partially by lower provisions for price concessions to distributors of barcode printer products imported into China.

Operating income increased 8.3% as a result of increased net sales and gross profit. Operating expenses were comparable to the prior year period.

2016 compared to 2015

AIT net sales for the period ending December 31, 2016 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. AIT organic net sales declined compared to the prior year period by 1.2%.

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 profit, partially offset by lower operating expenses.

Enterprise Visibility & Mobility Segment (“EVM”)

(amounts in millions, except percentages)

	Year Ended December 31,												Percent Change 2017 vs 2016			Percent Change 2016 vs 2015
	2017				2016				2015
Net sales	$	2,414			$	2,337			$	2,380			3.3	%		(1.8	)%
Gross profit	$	1,073			$	1,032			$	1,010			4.0	%		2.2	%
Operating expenses	758				746				774				1.6	%		(3.6	)%
Operating income	$	315			$	286			$	236			10.1	%		21.2	%
Gross margin	44.4		%		44.2		%		42.4		%

EVM Organic Net sales growth:

	December 31,
	2017			2016
EVM Reported GAAP Net sales growth	3.3	%		(1.8	)%
Adjustments:
Impact of Wireless LAN Net sales (1)	4.9	%		2.2	%
Impact of foreign currency translation (2)	(0.7	)%		0.9	%
EVM Organic Net sales growth	7.5	%		1.3	%

(1) The Company sold the wireless LAN business in October 2016 and excludes the net sales of this business in the prior year period when computing organic net sales growth.

(2) Operating results reported in U.S. dollars are affected by foreign currency exchange rate fluctuations. Foreign currency translation impact represents the difference in results that are attributable to fluctuations in the currency exchange rates used to convert the results for businesses where the functional currency is not the U.S. dollar. This impact is calculated by translating, for certain currencies, the current period results at the currency exchange rates used in the comparable prior year period, rather than the exchange rates in effect during the current period. In addition, the Company excludes the impact of it’s foreign currency hedging program in both the current and prior year periods.

2017 compared to 2016

EVM net sales for the period ending December 31, 2017 increased $77 million or 3.3% compared to prior year period. The increase in net sales was driven by higher sales of mobile computing and data capture products, primarily in the North America and EMEA regions, partially offset by impact of the divestiture of the wireless LAN business in October 2016. EVM organic net sales growth for the year-ended December 31, 2017 was 7.5%.

Gross margin for the year ended December 31, 2017 was 44.4% compared to 44.2% in the prior year period. The increase in gross margin primarily reflects changes in business mix and improvements in hardware product costs.

Operating income increased 10.1% primarily as a result of higher sales and gross profit, partially offset by an increase in operating expenses.

2016 compared to 2015

EVM net sales for the period ending December 31, 2016 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. EVM organic net sales increased compared to the prior year period by 1.3%.

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 higher gross profit and lower operating expenses, partially offset by lower sales.

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,
	2017				2016				2015
Cash flow (used in) provided by:
Operating activities	$	478			$	380			$	122
Investing activities	(51		)		(39		)		(148		)
Financing activities	(517		)		(384		)		(161		)
Effect of exchange rates on cash balances	(4		)		7				(15		)
Net decrease in cash and cash equivalents	$	(94	)		$	(36	)		$	(202	)

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

2017 vs. 2016

Cash flows from operations increased $98 million during 2017 to $478 million. This improvement was driven by an increase in net earnings of $154 million, partially offset by a decline in working capital primarily related to higher inventory levels and lower accounts payable. Net inventory increased primarily as a result of growth in the business and changes in product mix, an increased backlog level compared to the prior year, and our recent transition to a new distribution model for our European operations. In addition, the prior year working capital benefited from the successful renegotiation of longer payment terms with vendors.

Net cash used in the purchase of property, plant and equipment declined $27 million as compared to the prior year, as capital expenditures related to the Acquisition integration were substantially completed in 2016. The prior year investing activities also included net cash proceeds of $39 million related to the sale of the wireless LAN business.

Net cash used in financing activities during 2017 consisted of proceeds related to the A&R Credit agreement for Term Loan A of $688 million, a draw on the Revolving Credit Facility of $275 million, and proceeds related to the receivables financing facility of $145 million. These proceeds were primarily used to redeem $1.1 billion in principal of the 7.25% Senior Notes, maturing October 2022. The Company also had debt principal prepayments on Term Loan A and Term Loan B of $502 million and on the receivables financing facility of $10 million. As part of the repricing of Term Loan B, a portion of the debt was deemed to be modified and therefore, the Company included $263 million in proceeds from the issuance of long-term debt, offset by $263 million in payments of long-term debt within the Consolidated Statements of Cash Flows.

2016 vs. 2015

Cash flows from operations increased $258 million during 2016 to $380 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 related items of $90 million during 2016. Working capital

related 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 in 2016 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.

See Note 8, Long-Term Debt in the Notes to the Consolidated Financial Statements included in this Form 10-K for further details.

The following table shows the carrying value of the Company’s debt (in millions):

	December 31,
	2017				2016
Senior Notes	$	—			$	1,050
Term Loan B	1,160				1,653
Term Loan A	679				—
Revolving Credit Facility	275				—
Receivables Financing Facility	135				—
Total debt	2,249				2,703
Less: Debt issuance costs	(7		)		(22		)
Less: Unamortized discounts	(15		)		(33		)
Less: Current portion of long-term debt	(51		)		—
Total long-term debt	$	2,176			$	2,648

Credit Facilities

On July 26, 2017, the Company entered into the A&R Credit Agreement, which amended, modified and added provisions to the Company’s previous credit agreement. The A&R Credit Agreement provides for a Term Loan A of $688 million and increased the existing Revolving Credit Facility from $250 million to $500 million. The Company incurred and capitalized debt issuance costs of $5 million related to Term Loan A and the increased Revolving Credit Facility under the A&R Credit Agreement.

In addition, as part of the A&R Credit Agreement, the Company partially paid down and repriced its Term Loan B. The A&R Credit Agreement also lowered the index rate spread for LIBOR loan from LIBOR + 250 bp to LIBOR + 200 bp for its Term Loan B.

In accounting for the early termination and repricing of Term Loan B, the Company applied the provisions of ASC 470-50, Modifications and Extinguishments (“ASC 470-50”). The evaluation of the accounting under ASC 470-50 was done on a creditor by creditor basis in order to determine if the terms of the debt were substantially different and, as a result, whether to apply modification or extinguishment accounting. The Company determined that the terms of the debt were not substantially different for approximately 80.4% of the lenders, and applied modification accounting. For the remaining 19.6% of the lenders, extinguishment accounting was applied. Certain lenders elected not to participate in the debt repricing, which resulted in a debt principal prepayment of $75 million of the Company’s outstanding debt balance. The debt repricing transaction also resulted in one-time pre-tax charges including third-party fees for arranger, legal and other services and accelerated discount and amortization of debt issuance costs on the debt principal prepayment of approximately $6 million. These costs are reflected as non-operating expenses in Other, net on the Company’s Consolidated Statements of Operations.

As of December 31, 2017, the Term Loan A interest rate was 3.35%, and the Term Loan B interest rate was 3.37%. Borrowings under the Term Loan B, as amended, bear interest at a variable rate subject to a floor of 2.75%. The facility allows for interest payments payable monthly or quarterly on Term Loan A and quarterly on Term Loan B. The Company has entered into interest

rate swaps to manage interest rate risk on its long-term debt on Term Loan B. See Note 7, Derivative Instruments in the Notes to the Consolidated Financial Statements included in this Form 10-K.

The A&R Credit Agreement also requires the Company to prepay certain amounts in the event of certain circumstances or transactions, as defined in the A&R Credit Agreement. The Company may make prepayments against the Term Loans, in whole or in part, without premium or penalty. Under Term Loan A, the Company made debt principal prepayments of $9 million during the year ended December 31, 2017. Under Term Loan B, the Company made debt principal prepayments of $493 million during the year ended December 31, 2017. The Term Loan A, unless amended, modified, or extended, will mature on July 27, 2021 (the “Term Loan A Maturity Date”). The Term Loan B, unless amended, modified, or extended, will mature on October 27, 2021 (the “Term Loan B Maturity Date”). To the extent not previously paid, the Term Loans are due and payable on, respectively, the Term Loan A Maturity Date and Term Loan B Maturity Date. At such time, the Company will be required to repay all outstanding principal, accrued and unpaid interest and other charges in accordance with the A&R Credit Agreement. Assuming the Company makes no further optional debt principal prepayments on Term Loan A, the outstanding principal as of the Term Loan A Maturity Date will be approximately $498 million. Assuming the Company makes no further optional debt principal prepayments on the Term Loan B, the outstanding principal as of the Term Loan B Maturity Date will be approximately $1.2 billion.

The Revolving Credit Facility is available for working capital and other general corporate purposes including letters of credit. The amount (including letters of credit) cannot exceed $500 million. As of December 31, 2017, the Company had letters of credit totaling $5 million, which reduced funds available for other borrowings under the Revolving Credit Facility to $495 million. The Revolving Credit Facility will mature and the related commitments will terminate on July 27, 2021.

Borrowings under the Revolving Credit Facility bear interest at a variable rate plus an applicable margin. As of December 31, 2017, the Revolving Credit Facility had an average interest rate of 3.39%. The facility allows for interest payments payable monthly or quarterly. As of December 31, 2017, the Company had borrowings of $275 million against the Revolving Credit Facility. There were no borrowings against the Revolving Credit Facility in the prior year comparable period.

Senior Notes

During fiscal 2017, the Company used proceeds from Term Loan A, the Revolving Credit Facility and the receivables financing facility to redeem $1.1 billion in outstanding principal of the 7.25% Senior Notes (the “Senior Notes”), maturing October 2022. In accounting for the early termination of Senior Notes, the Company applied the provisions of ASC 470-50, Modifications and Extinguishments (“ASC 470-50”). Based on the terms of the debt, the Company concluded extinguishment accounting was appropriate to apply. The Company recognized a $65 million make whole premium, which was recorded as Interest expense, net on the Company’s Consolidated Statements of Operations. The Company also recognized accelerated debt issuance costs of $16 million which were recorded as Interest expense, net on the Company’s Consolidated Statements of Operations.

Receivables Financing Facility

On December 1, 2017, a wholly-owned, bankruptcy-remote, special-purpose entity (“SPE”) of the Company entered into the Receivables Purchase Agreement, which provides for a receivables financing facility of up to $180 million. The SPE utilizes the receivables financing facility in the normal course of business as part of its management of cash flows. Under its committed receivables financing facility, a subsidiary of the Company sells its domestically originated accounts receivables at fair value, on a revolving basis, to the SPE which was formed for the sole purpose of buying the receivables. The SPE, in turn, pledges a valid and perfected first-priority security interest in the pool of purchased receivables to a financial institution for borrowing purposes. The subsidiary retains an ownership interest in the pool of receivables that are sold to the SPE and services those receivables. Accordingly, the Company has determined that these transactions do not qualify for sale accounting under ASC 860, Transfers and Servicing of Financial Assets, and has, therefore, accounted for the transactions as secured borrowings.

At December 31, 2017, the Company’s Consolidated Balance Sheets included $421 million of receivables that were pledged and $135 million of associated liabilities. The SPE borrowed $145 million on the receivables financing facility and repaid $10 million in 2017. In 2017, the Company recorded expenses related to its receivables financing facility of $1 million as Interest expense, net on the Company’s Consolidated Statements of Operations. The receivables financing facility will mature on November 29, 2019.

Borrowings under the receivables financing facility bear interest at a variable rate plus an applicable margin. As of December 31, 2017, the receivables financing facility had an average interest rate of 2.35% and requires monthly interest payments.

Both the Revolving Credit Facility and receivables financing facility include terms and conditions that limit the incurrence of additional borrowings and require that certain financial ratios be maintained at designated levels.

From January 1, 2018 through February 22, 2018, the Company made principal debt repayments of $63 million.

The company was in compliance with all covenants as of December 31, 2017 and is currently not aware of any events that would cause non-compliance with any covenants in the future.

Summary of fiscal 2017 actions

The actions taken during fiscal 2017 resulted in net repayments of $454 million and included the following:

•	Term Loan A borrowings of $688 million,

•	Term Loan A debt principal payments of $9 million,

•	Revolving Credit Facility borrowings of $275 million,

•	Senior Note debt principal prepayments of $1.05 billion,

•	Term Loan B debt principal prepayments of $493 million,

•	Receivables financing facility borrowings of $145 million, and

•	Receivables financing facility payments of $10 million.

Historically, significant portions of our cash inflows were generated by our operations. We currently expect this trend to continue throughout 2018. We believe that our existing cash and investments, borrowings available under our Revolving Credit Facility and receivables financing 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.

Certain domestic subsidiaries of the Company (the “Guarantor Subsidiaries”) guarantee the Term Loans and the Revolving Credit Facility on a senior basis: For the period ended December 31, 2017, the non-Guarantor Subsidiaries would have (a) accounted for 57.3% of our total revenue and (b) held 86.9% or $4.3 billion of our total assets and approximately 87.6% or $3.0 billion of our total liabilities including trade payables but excluding intercompany liabilities.

As of December 31, 2017, the Company’s cash position of $62 million included foreign cash and investments of $54 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, 2017 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	$	138			$	32			$	47			$	23			$	36
Deferred compensation liability	15				—				—				—				15
Long-term debt – principal payments	2,249				51				230				1,968				—
Interest payments	286				80				153				53				—
Payments on interest rate swaps	46				8				24				14				—
Purchase obligations	357				357				—				—				—
Total	$	3,091			$	528			$	454			$	2,058			$	51

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

Uncertain tax benefits of $51 million have been excluded from the above table. $20 million is a current liability as of December 31, 2017. The remainder is classified as long-term in nature as we cannot make a reasonably reliable estimate of the period of cash settlement with the respective taxing authority. See Note 12, Income Taxes in the Notes to Consolidated Financial Statements included in this Form 10-K for further information.