NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 Description of Business and Basis of Presentation

Zebra Technologies Corporation and its wholly-owned subsidiaries (“Zebra” or the “Company”) is a global leader providing innovative Enterprise Asset Intelligence (“EAI”) solutions in the automatic identification and data capture solutions industry. We design, manufacture, and sell a broad range of products that capture and move data. 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 retail and e-commerce, transportation and logistics, manufacturing, healthcare, hospitality, warehouse and distribution, energy and utilities, and education industries around the world. We provide our products and services globally through a direct sales force and an extensive network of channel partners.

Management prepared these condensed unaudited interim consolidated financial statements according to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information and notes. As permitted under Article 10 of Regulation S-X and the instructions of Form 10-Q, these condensed consolidated financial statements do not include all the information and notes required by United States Generally Accepted Accounting Principles (“GAAP”) for complete financial statements, although management believes that the disclosures made are adequate to make the information not misleading. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

The Company reclassified $41 million of costs from Accrued liabilities to Accounts payable on the Consolidated Balance Sheets for the period ended December 31, 2017 to conform to the current period presentation. A similar reclassification was made to the Consolidated Statements of Cash Flows resulting in a change to Accounts payable and Accrued liabilities within Net cash provided by operating activities for the period ended June 30, 2017.

In the opinion of the Company, these interim financial statements include all adjustments (of a normal, recurring nature) necessary to present fairly its Consolidated Balance Sheets as of June 30, 2018 , the Consolidated Statements of Operations and Comprehensive Income for the three and six-months ended June 30, 2018 and July 1, 2017 , and the Consolidated Statements of Cash Flows for the six-months ended June 30, 2018 and July 1, 2017 . These results, however, are not necessarily indicative of the results expected for the full year ending December 31, 2018.

Note 2 Significant Accounting Policies

Revenue Recognition. Revenue includes sales of hardware, supplies and services (including repair services and product maintenance service contracts, which typically occur over time, and professional services such as installation, integration and provisioning, which typically occur in the early stages of a project). The average life of repair and maintenance service contracts is approximately three years. The duration of professional service arrangements ranges from a day to several weeks or months. We recognize revenues when we transfer control of promised goods or services to our customers in an amount that reflects the consideration to which we expect to receive in exchange for those goods or services.

The Company elects to exclude from the transaction price sales and other taxes assessed by a governmental authority and collected by the Company from a customer. The Company also considers shipping and handling activities as part of the fulfillment costs, not as a separate performance obligation.

Recently Adopted Accounting Pronouncements

On January 1, 2018, we adopted Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”) applying the modified retrospective method to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605, Revenue Recognition (“ASC 605”). The adoption of ASC 606 did not have a material effect on the Company’s consolidated financial statements or results of operations.

The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet related to the adoption of ASC

606 were as follows (in millions):

	As Reported December 31, 2017				Adjustment				As Adjusted January 1, 2018
Assets:
Inventories, net (1)	$	458			$	(3	)		$	455
Prepaid expenses and other current assets (2)	24				7				31
Long-term deferred income taxes (3)	119				(5		)		114
Other long-term assets (4)	65				12				77
Liabilities:
Deferred revenue (5)	186				(2		)		184
Long-term deferred revenue  (6)	148				(6		)		142
Stockholders’ Equity:
Retained earnings	1,248				19				1,267

Under the modified retrospective method of adoption, we are required to disclose the impact to the Consolidated Financial Statements had we continued to follow our accounting policies under the previous revenue recognition guidance. Had the Company applied the previous revenue recognition guidance, revenue would have been $3 million lower for the quarter ended June 30, 2018 and $2 million lower for the six-month period ended June 30, 2018 .

See Note 3, Revenues for further information.

In January 2016, the FASB issued ASU 2016-01, “ Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities .” On January 1, 2018, the Company adopted this ASU. ASU 2016-01 amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. The adoption of this ASU did not have a material impact to the Company's consolidated financial statements or related disclosures.

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, “ Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments .” The new standard requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. It replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. There are two transition methods available under the new standard dependent upon the type of financial instrument, either cumulative effect or prospective. The standard will be effective for the Company in the first quarter of 2020. Earlier adoption is permitted only for annual periods after December 15, 2018. Management has assessed the impact of adoption of the new standard and determined there are no material impacts to the Company's consolidated financial statements or disclosures resulting from the adoption of this ASU.

In February 2016, the FASB issued ASU 2016-02, “ Leases (Subtopic 842) .” This ASU increases the transparency and comparability of organizations by recognizing lease assets and liabilities on the Consolidated Balance Sheets and disclosing key quantitative and qualitative information about leasing arrangements. The principal difference from previous guidance is that the lease assets and lease liabilities arising from operating leases were not previously recognized in the Consolidated Balance Sheets. The recognition, measurement and cash flows arising from a lease by a lessee have not significantly changed. This standard will be effective for the Company in the first quarter of 2019, with early adoption permitted. In transition, lessees

and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply.  While Management is currently assessing the impact of adoption on its consolidated financial statements, we have identified and collected data on our significant leases, made progress in assessing practical expedients and policy elections we will make upon adoption, as well as, selected an accounting system to support future accounting and disclosure requirements.  At this time, we do not have an estimate of the expected increase in assets and liabilities on the Company’s consolidated balance sheet upon adoption of this ASU in the first quarter of 2019.

Note 3 Revenues

As prescribed in ASC 606, the Company recognizes revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.

Performance Obligations

We enter into contract arrangements that may include various combinations of tangible products and services, which generally are capable of being distinct and accounted for as separate performance obligations. For these types of contract arrangements, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract has more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue recorded in the reporting period. We use the accounting guidance on “capable of being distinct” and “distinct within the context of the contract” to help with the aforementioned evaluation.

For contract arrangements that include multiple performance obligations, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices for the products and/or services underlying each performance obligation. When the standalone selling prices are not directly observable, we estimate the standalone selling prices primarily based on the expected cost-plus margin approach. For arrangements comprised strictly of the sale of product and performance of maintenance type services where the standalone selling price of the maintenance service is not discernible, we estimate the standalone selling price of the maintenance contract through the use of the residual approach. When the residual approach cannot be applied, regional pricing, marketing strategies and business practices are evaluated and analyzed to derive the estimated standalone selling price through the use of a cost-plus margin methodology.

The Company recognizes revenue when transfer of control has occurred for the goods or services sold. Control is deemed to have been transferred when the customer has the ability to direct the use of and has obtained substantially all of the remaining benefits from the goods and services sold. The Company uses judgment in the evaluation of the following criteria: 1) the customer simultaneously receives and consumes the benefits provided by the transfer of goods or service; 2) the performance creates or enhances an asset that is under control of the customer; 3) the performance does not create an asset with an alternative use to the customer and the Company has an enforceable right to payment, in order to determine whether control transfers at a point in time or over time. For each performance obligation satisfied over time, the Company measures its progress toward completion to determine the timing of revenue recognition. Judgment is also used in the evaluation of the following transfer of control criteria: 1) the Company has a present right to payment for the asset; 2) the legal title to the asset has transferred to the customer; 3) the customer has physical possession of the asset; 4) the customer has the significant risks and rewards of ownership of the asset; 5) the customer has accepted the asset, in order to determine when revenue should be recognized in a point in time revenue recognition pattern. Assuming all other criteria for revenue recognition have been met, for products and services sold on a standalone basis, revenue is generally recognized upon shipment and by using an output method or time-based method respectively. In cases where a bundle of products and services are delivered to the customer, judgment is required to select the method of progress which best reflects the transfer of control.

The Company’s remaining obligations that are greater than one year in duration relate primarily to repair and support services. The aggregated transaction price allocated to remaining performance obligations related to these types of service arrangements is $430 million as of June 30, 2018 . We expect to recognize these performance obligations over the approximate three -year average contract term.

For some of our transactions, products are sold with a right of return, and we may also provide other rebates, price protection, or incentives, which are accounted for as variable consideration. The Company estimates the amount of variable consideration by using the expected value or the most likely amount method and reduces the revenue by those estimated amounts, only to the extent it is probable that a significant reversal in the cumulative revenue recognized will not occur. These estimates are reviewed and updated, as necessary, at the end of each reporting period.

Revenue recognized in the reporting period from performance obligations satisfied in previous periods was not material for the three and six-month periods ended June 30, 2018.

In addition, refer to Note 14, Segment Information for Net sales to customers by geographic region.

We recognize revenue arising from performance obligations outlined in contracts with our customers that are satisfied at a point in time and over time. Substantially all of our revenue for tangible products is recognized at a point in time, whereby revenue for services and software is predominantly recognized over time.

Contract Balances

Progress on satisfying performance obligations under contracts with customers and the related billings and cash collections are recorded on the Consolidated Balance Sheets in Accounts receivable, net and Prepaid expenses and other current assets. The opening and closing contract assets balances were $7 million and $5 million , as of January 1, 2018 and June 30, 2018 , respectively, and were recorded within Prepaid expenses and other current assets on the Consolidated Balance Sheets. These contract assets result from timing differences between the billing schedule and the products and services delivery schedules, as well as, the impact from the allocation of the transaction price among performance obligations for contracts that include multiple performance obligations. Our policy is to test these contract asset balances for impairment in accordance with ASC 310 Receivables . No impairment losses have been recorded for the three and six-month periods ended June 30, 2018 .

Deferred revenue on the Consolidated Balance Sheets, consist of payments and billings in advance of our performance. The combined short-term and long-term Deferred revenue balances were $348 million and $334 million at June 30, 2018 and December 31, 2017, respectively. During the three-month and six-month period ended June 30, 2018 , the Company recognized $55 million and $120 million in revenue respectively, which was previously included in the beginning balance of deferred revenue.

  

Our payment terms vary by the type and location of our customer and the products or services offered. The time between invoicing and when payment is due is not significant. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined that our contracts do not include a significant financing component.

Costs to obtain a contract

Our incremental direct costs of obtaining a contract, which consist of sales commissions and incremental fringe benefits, are deferred and amortized over the weighted-average contract term, consistent with the guidance in ASC 340 Other Assets and Deferred Costs . The incremental costs to obtain a contract, which were previously expensed as incurred under ASC 605, and the determination of the amortization period are derived at a portfolio level and the amortization is recognized on a straight-line basis. The adoption of ASC 606 required the capitalization of these costs which resulted in an adjustment to increase retained earnings. The Company recorded $12 million to Other long-term assets on the Consolidated Balance Sheets as of January 1, 2018. The Company recognized amortization expense related to commissions during the three-month and six-month period ended June 30, 2018 of $3 million and $5 million , respectively. The ending balance of the deferred commissions was $12 million as of June 30, 2018 . The Company elected a practical expedient permitted by ASC 606, whereby the incremental costs of obtaining a contract are expensed as incurred if the amortization period of the assets would otherwise be one year or less.

Note 4 Inventories

Inventories are stated at the lower of a moving-average cost (which approximates cost on a first-in, first-out basis) and net realizable value. Manufactured inventory cost includes materials, labor, and manufacturing overhead. Purchased inventory cost also includes internal purchasing overhead costs.

Provisions are made to reduce excess and obsolete inventories to their estimated net realizable values. Inventory provisions are based on forecasted demand, experience with specific customers, the age and nature of the inventory, and the ability to redistribute inventory to other programs or to rework into consumable inventory.

The components of Inventories, net are as follows (in millions): 

Note 5 Costs Associated with Exit and Restructuring Activities

In the first quarter of 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”). The Company completed all initiatives under the Acquisition Plan as of December 31, 2017. Actions under the Productivity Plan include organizational design changes, process improvements and automation. 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 14,  Segment Information .

Total exit and restructuring charges of $17 million life-to-date specific to the Productivity Plan have been recorded through June 30, 2018 and relate to severance and related benefits and other expenses. Exit and restructuring charges of $1 million and $5 million were recorded in the respective three and six-month periods ended June 30, 2018 , respectively. Total remaining charges associated with this plan are expected to be less than  $6 million  with activities expected to be substantially complete by the end of fiscal 2018.

A roll forward of the exit and restructuring accruals is as follows (in millions):

The $4 million accrual as of June 30, 2018 is reflected within the Consolidated Balance Sheet as $3 million within Accrued liabilities and $1 million within Other long-term liabilities. The long-term portion of the accrual relates to non-cancellable lease payments associated with exited facilities whose latest term expires May 2021.

Note 6 Fair Value Measurements

Financial assets and liabilities are to be measured using inputs from three levels of the fair value hierarchy in accordance with ASC Topic 820, “ Fair Value Measurements .” Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into the following three broad levels:

Level 1: Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs (e.g. U.S. Treasuries & money market funds).

Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. In addition, the Company considers counterparty credit risk in the assessment of fair value.

Financial assets and liabilities carried at fair value as of June 30, 2018 , are classified below (in millions):

Financial assets and liabilities carried at fair value as of December 31, 2017, are classified below (in millions):

Note 7 Derivative Instruments

In the normal course of business, the Company is exposed to global market risks, including the effects of changes in foreign currency exchange rates and interest rates. The Company uses derivative instruments to manage its exposure to such risks and may elect to designate certain derivatives as hedging instruments under ASC 815, Derivatives and Hedging . The Company

formally documents all relationships between designated hedging instruments and hedged items as well as its risk management objectives and strategies for undertaking hedge transactions. The Company does not hold or issue derivatives for trading or speculative purposes.

In accordance with ASC 815, the Company recognizes derivative instruments as either assets or liabilities on the Consolidated Balance Sheets and measures them at fair value. The following table presents the fair value of its derivative instruments (in millions):

	Asset (Liability) Derivatives
			Fair Values as of
	Balance Sheet Classification		June 30, 2018				December 31, 2017
Derivative instruments designated as hedges:
Foreign exchange contracts	Prepaid expenses and other current assets		$	16			$	—
Foreign exchange contracts	Accrued liabilities		—				(9		)
Forward interest rate swaps	Accrued liabilities		(1		)		(2		)
Forward interest rate swaps	Other long-term liabilities		(1		)		(8		)
Total derivative instruments designated as hedges			$	14			$	(19	)
Derivative instruments not designated as hedges:
Foreign exchange contracts	Prepaid expenses and other current assets		$	1			$	—
Forward interest rate swaps	Other long-term assets		12				—
Foreign exchange contracts	Accrued liabilities		—				(2		)
Forward interest rate swaps	Accrued liabilities		(3		)		(1		)
Forward interest rate swaps	Other long-term liabilities		—				(7		)
Total derivative instruments not designated as hedges			$	10			$	(10	)
Total net derivative asset (liability)			$	24			$	(29	)

The following table presents the gains (losses) from changes in fair values of derivatives that are not designated as hedges (in millions):

	Gain (Loss) Recognized in Income
			Three Months Ended								Six Months Ended
	Statements of Operations Classification		June 30, 2018				July 1, 2017				June 30, 2018				July 1, 2017
Derivative instruments not designated as hedges:
Foreign exchange contracts	Foreign exchange gain (loss) gain		$	1			$	(11	)		$	1			$	(16	)
Forward interest rate swaps	Interest expense, net		5				—				18				1
Total gain (loss) recognized in income			$	6			$	(11	)		$	19			$	(15	)

Credit and Market Risk Management

Financial instruments, including derivatives, expose the Company to counterparty credit risk of nonperformance and to market risk related to currency exchange rate and interest rate fluctuations. The Company manages its exposure to counterparty credit risk by establishing minimum credit standards, diversifying its counterparties, and monitoring its concentrations of credit. The Company’s credit risk counterparties are commercial banks with expertise in derivative financial instruments. The Company evaluates the impact of market risk on the fair value and cash flows of its derivative and other financial instruments by considering reasonably possible changes in interest rates and currency exchange rates. The Company continually monitors the creditworthiness of the customers to which it grants credit terms in the normal course of business. The terms and conditions of the Company’s credit sales are designed to mitigate or eliminate concentrations of credit risk with any single customer.

Foreign Currency Exchange Risk Management

The Company conducts business on a multinational basis in a wide variety of foreign currencies. Exposure to market risk for changes in foreign currency exchange rates arises from euro denominated external revenues, cross-border financing activities between subsidiaries, and foreign currency denominated monetary assets and liabilities. The Company realizes its objective of preserving the economic value of non-functional currency denominated cash flows by initially hedging transaction exposures with natural offsets to the fullest extent possible and, once these opportunities have been exhausted, through foreign exchange forward and option contracts.

The Company manages the exchange rate risk of anticipated euro denominated sales using put options, forward contracts, and participating forwards, all of which typically mature within twelve months of execution. The Company designates these derivative contracts as cash flow hedges. Unrealized gains and losses on these contracts are deferred in Accumulated other comprehensive income (loss) (“AOCI”) on the Company’s Consolidated Balance Sheets until the contract is settled and the hedged sale is realized. The realized gain or loss is then recorded as an adjustment to Net sales on the Consolidated Statements of Operations. Realized (losses) were  $(1) million  and  $0 million  for the quarter ending  June 30, 2018 , and July 1, 2017 , respectively.  For the comparable six-month period ended June 30, 2018 , and July 1, 2017 , realized (losses) or gains were $(6) million and $1 million , respectively. As of June 30, 2018 , and December 31, 2017 , the notional amounts of the Company’s foreign exchange cash flow hedges were  €402 million and €389 million , respectively. The Company has reviewed cash flow hedges for effectiveness and determined they are highly effective .

The Company uses forward contracts, which are not designated as hedging instruments, to manage its exposures related to its Brazilian real, British pound, Canadian dollar, Czech koruna, Euro, Australian dollar, Swedish krona, Japanese yen, and Singapore dollars, Mexican Peso and Chinese Yuan denominated net assets. These forward contracts typically mature within one -month after execution. Monetary gains and losses on these forward contracts are recorded in income each quarter and are generally offset by the transaction gains and losses related to their net asset positions. The notional values and the net fair value of these outstanding contracts are as follows (in millions):

Interest Rate Risk Management

The Company’s debt consists of borrowings under two term loans (“Term Loan A” and “Term Loan B”), the Revolving Credit Facility and the receivables financing facility which bear interest at variable rates plus an applicable margin. See Note 8,  Long-Term Debt . As a result, the Company is exposed to market risk associated with the variable interest rate payments on both term loans.

The Company manages its exposure to changes in interest rates by utilizing interest rate swaps to hedge this exposure and to achieve a desired proportion of fixed versus floating-rate debt, based on current and projected market conditions. The Company does not enter into derivative instruments for trading or speculative purposes.

In December 2017, the Company entered into an  $800 million  forward long-term interest rate swap agreement to lock into a fixed LIBOR interest rate base for debt facilities subject to monthly interest payments, including Term Loan A, the Revolving Credit Facility and receivables financing facility. Under the terms of the agreement,  $800 million  in variable-rate debt will be swapped for a fixed interest rate with net settlement terms due effective in December 2018. The changes in fair value of these swaps are not designated as hedges and are recognized immediately as Interest expense, net on the Consolidated Statements of Operations.

The Company previously had a floating-to-fixed interest rate swap, which was designated as a cash flow hedge. This swap was terminated and the hedge accounting treatment discontinued in 2014. The terminated swap has approximately  $3 million  remaining to be amortized through AOCI on the Consolidated Balance Sheets and subsequently reclassified into net earnings through June 2021. Approximately  $2 million  is expected to be amortized and expensed in 2018. There was less than $1 million expensed by the Company in the second quarter of 2018 and $1 million expensed for the six-month period ended June 30, 2018 .

The Company has  three  interest rate swaps previously entered into for the purpose of converting floating-to-fixed rate debt. The first swap was entered into with a syndicated group of commercial banks for the purpose of moving from floating-to-fixed rate debt. The second swap largely offsets the first swap, moving from fixed-to-floating rate debt. Both of these instruments are not designated as hedges with the changes in fair value recognized in Interest expense, net on the Consolidated Statements of Operations. The third swap entered into is an interest rate swap converting floating-to-fixed rate debt which was designated as a cash flow hedge and receives hedge accounting treatment. All  three  swaps have a termination date in June 2021.

The changes in fair value of the active swap designated as a cash flow hedge are recognized in AOCI on the Consolidated Balance Sheets, with any ineffectiveness immediately recognized in earnings.

The notional amount of the interest rate swaps effective in each year of the cash flow hedge relationships does not exceed the principal amount of Term Loan B, which is hedged. The Company has reviewed the interest rate swap hedges for effectiveness and determined they are 100% effective.

At  June 30, 2018 , the Company estimated that approximately  $1 million  in losses on the forward interest rate swap designated as a cash flow hedge will be reclassified from AOCI on the Consolidated Balance Sheets into earnings during the next four quarters.

The Company’s master netting and other similar arrangements with the respective counterparties allow for net settlement under certain conditions, which are designed to reduce credit risk by permitting net settlement with the same counterparty. The following table presents the (liability) asset gross fair values and related offsetting counterparty fair values as well as the net fair value amounts at June 30, 2018 (in millions):

The interest rate swaps have future maturities consisting of the following notional amounts per year (in millions):