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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    
For the transition period from                                          to                                         
Commission File Number: 000-19406
Zebra Technologies Corporation
(Exact name of registrant as specified in its charter)
Delaware36-2675536
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3 Overlook Point, Lincolnshire, IL 60069
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (847634-6700
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of exchange on which registered
Class A Common Stock, par value $.01 per shareZBRAThe NASDAQ Stock Market, LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes       No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 Large accelerated filerAccelerated filer
 Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No  
As of October 27, 2020, there were 53,316,406 shares of Class A Common Stock, $.01 par value, outstanding.


Table of Contents
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
QUARTER ENDED SEPTEMBER 26, 2020
TABLE OF CONTENTS
 
  PAGE
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 6.
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PART I - FINANCIAL INFORMATION
 
Item 1.Consolidated Financial Statements
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
September 26,
2020
December 31,
2019
 (Unaudited)
Assets
Current assets:
Cash and cash equivalents$39 $30 
Accounts receivable, net of allowances for doubtful accounts of $2 million as of September 26, 2020 and December 31, 2019
535 613 
Inventories, net484 474 
Income tax receivable59 32 
Prepaid expenses and other current assets75 46 
Total Current assets1,192 1,195 
Property, plant and equipment, net265 259 
Right-of-use lease assets113 107 
Goodwill2,998 2,622 
Other intangibles, net427 275 
Deferred income taxes84 127 
Other long-term assets166 126 
Total Assets$5,245 $4,711 
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt$481 $197 
Accounts payable546 552 
Accrued liabilities443 379 
Deferred revenue286 238 
Income taxes payable9 38 
Total Current liabilities1,765 1,404 
Long-term debt1,086 1,080 
Long-term lease liabilities110 100 
Long-term deferred revenue248 221 
Other long-term liabilities105 67 
Total Liabilities3,314 2,872 
Stockholders’ Equity:
Preferred stock, $.01 par value; authorized 10,000,000 shares; none issued
  
Class A common stock, $.01 par value; authorized 150,000,000 shares; issued 72,151,857 shares
1 1 
Additional paid-in capital372 339 
Treasury stock at cost, 18,853,395 and 18,148,925 shares as of September 26, 2020 and December 31, 2019, respectively
(917)(689)
Retained earnings2,537 2,232 
Accumulated other comprehensive loss(62)(44)
Total Stockholders’ Equity1,931 1,839 
Total Liabilities and Stockholders’ Equity$5,245 $4,711 
See accompanying Notes to Consolidated Financial Statements.
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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except share data)
(Unaudited)
 
 Three Months EndedNine Months Ended
 September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
Net sales:
Tangible products$972 $981 $2,684 $2,868 
Services and software160 149 456 425 
Total Net sales1,132 1,130 3,140 3,293 
Cost of sales:
Tangible products543 497 1,480 1,456 
Services and software96 98 275 281 
Total Cost of sales639 595 1,755 1,737 
Gross profit493 535 1,385 1,556 
Operating expenses:
Selling and marketing119 124 350 373 
Research and development113 110 316 329 
General and administrative71 78 219 244 
Amortization of intangible assets20 26 52 84 
Acquisition and integration costs19 12 21 20 
Exit and restructuring costs1  7 2 
Total Operating expenses343 350 965 1,052 
Operating income150 185 420 504 
Other expenses:
Foreign exchange (loss) gain(3)2 (15)(2)
Interest expense, net(10)(28)(69)(85)
Other, net1  8 2 
Total Other expenses, net(12)(26)(76)(85)
Income before income tax 138 159 344 419 
Income tax expense22 23 39 44 
Net income$116 $136 $305 $375 
Basic earnings per share$2.18 $2.52 $5.70 $6.95 
Diluted earnings per share$2.16 $2.50 $5.65 $6.87 
See accompanying Notes to Consolidated Financial Statements.
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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
 Three Months EndedNine Months Ended
 September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
Net income$116 $136 $305 $375 
Other comprehensive income (loss), net of tax:
Changes in unrealized gains and losses on anticipated sales hedging transactions(8)15 (14)7 
Changes in unrealized gains and losses on forward interest rate swap hedging transactions (1)  
Foreign currency translation adjustment4 (5)(4)(3)
Comprehensive income$112 $145 $287 $379 
See accompanying Notes to Consolidated Financial Statements.
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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, except share data)
(Unaudited)

Class A Common Stock SharesClass A Common Stock ValueAdditional Paid-in CapitalTreasury StockRetained EarningsAccumulated Other Comprehensive LossTotal
Balance at December 31, 201954,002,932 $1 $339 $(689)$2,232 $(44)$1,839 
Issuances of treasury shares related to share-based compensation plans, net of forfeitures15,792 — — — — — — 
Shares withheld to fund withholding tax obligations related to share-based compensation plans(4,361)— — (1)— — (1)
Share-based compensation— — 7 — — — 7 
Repurchases of common stock(948,740)— — (200)— — (200)
Net income— — — — 89 — 89 
Changes in unrealized gains and losses on anticipated sales hedging transactions (net of income taxes)— — — — — 2 2 
Foreign currency translation adjustment— — — — — (9)(9)
Balance at March 28, 202053,065,623 $1 $346 $(890)$2,321 $(51)$1,727 
Issuances of treasury shares related to share-based compensation plans, net of forfeitures399,634 — (9)13 — — 4 
Shares withheld to fund withholding tax obligations related to share-based compensation plans(142,206)— — (34)— — (34)
Share-based compensation— — 13 — — — 13 
Net income— — — — 100 — 100 
Changes in unrealized gains and losses on anticipated sales hedging transactions (net of income taxes)— — — — — (8)(8)
Foreign currency translation adjustment— — — — — 1 1 
Balance at June 27, 202053,323,051 $1 $350 $(911)$2,421 $(58)$1,803 
Issuances of treasury shares related to share-based compensation plans, net of forfeitures(22,960)— 9 (6)— — 3 
Shares withheld to fund withholding tax obligations related to share-based compensation plans(1,629)— — — — — — 
Share-based compensation— — 13 — — — 13 
Net income— — — — 116 — 116 
Changes in unrealized gains and losses on anticipated sales hedging transactions (net of income taxes)— — — — — (8)(8)
Foreign currency translation adjustment— — — — — 4 4 
Balance at September 26, 202053,298,462 $1 $372 $(917)$2,537 $(62)$1,931 




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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, except share data)
(Unaudited)

Class A Common Stock SharesClass A Common Stock ValueAdditional Paid-in CapitalTreasury StockRetained EarningsAccumulated Other Comprehensive LossTotal
Balance at December 31, 201853,871,184 $1 $294 $(613)$1,688 $(35)$1,335 
Issuances of treasury shares related to share-based compensation plans, net of forfeitures110,382 — 1 3 — — 4 
Shares withheld to fund withholding tax obligations related to share-based compensation plans(5,829)— — (1)— — (1)
Share-based compensation— — 10 — — — 10 
Net income— — — — 115 — 115 
Changes in unrealized gains and losses on anticipated sales hedging transactions (net of income taxes)— — — — — 4 4 
Balance at March 30, 201953,975,737 $1 $305 $(611)$1,803 $(31)$1,467 
Issuances of treasury shares related to share-based compensation plans, net of forfeitures345,067 — (5)9 — — 4 
Shares withheld to fund withholding tax obligations related to share-based compensation plans(212,975)— — (41)— — (41)
Share-based compensation— — 14 — — — 14 
Net income— — — — 124 — 124 
Changes in unrealized gains and losses on anticipated sales hedging transactions (net of income taxes)— — — — — (12)(12)
Changes in unrealized gains and losses on forward interest rate swap hedging transactions (net of income taxes)— — — — — 1 1 
Foreign currency translation adjustment— — — — — 2 2 
Balance at June 29, 201954,107,829 $1 $314 $(643)$1,927 $(40)$1,559 
Issuances of treasury shares related to share-based compensation plans, net of forfeitures44,215 — (2)1 — — (1)
Shares withheld to fund withholding tax obligations related to share-based compensation plans(3,864)— — (1)— — (1)
Share-based compensation— — 12 — — — 12 
Repurchases of common stock(101,062)— — (20)— — (20)
Net income— — — — 136 — 136 
Changes in unrealized gains and losses on anticipated sales hedging transactions (net of income taxes)— — — — — 15 15 
Changes in unrealized gains and losses on forward interest rate swap hedging transactions (net of income taxes)— — — — — (1)(1)
Foreign currency translation adjustment— — — — — (5)(5)
Balance at September 28, 201954,047,118 $1 $324 $(663)$2,063 $(31)$1,694 

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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 Nine Months Ended
 September 26,
2020
September 28,
2019
Cash flows from operating activities:
Net income$305 $375 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization103 139 
Amortization of debt issuance costs and discounts2 6 
Share-based compensation33 36 
Deferred income taxes(2) 
Unrealized loss on forward interest rate swaps37 28 
Other, net(5)(4)
Changes in operating assets and liabilities:
Accounts receivable, net96 (73)
Inventories, net(7)65 
Other assets3 (20)
Accounts payable(7)(51)
Accrued liabilities(40)(62)
Deferred revenue58 43 
Income taxes(58)(58)
Other operating activities13 (4)
Net cash provided by operating activities531 420 
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired(548)(255)
Purchases of property, plant and equipment(49)(44)
Proceeds from sale of long-term investments6 10 
Purchases of long-term investments(32)(21)
Net cash used in investing activities(623)(310)
Cash flows from financing activities:
Payment of debt issuance costs and discounts(1)(5)
Payments of long-term debt(103)(661)
Proceeds from issuance of long-term debt389 593 
Payments of debt extinguishment costs (1)
Payments for repurchases of common stock(200)(20)
Net payments related to share-based compensation plans(28)(36)
Change in unremitted cash collections from servicing factored receivables73 8 
Other financing activities1 2 
Net cash provided by (used in) financing activities131 (120)
Effect of exchange rate changes on cash and cash equivalents, including restricted cash(1)(1)
Net increase (decrease) in cash and cash equivalents, including restricted cash38 (11)
Cash and cash equivalents, including restricted cash, at beginning of period30 44 
Cash and cash equivalents, including restricted cash, at end of period$68 $33 
Less restricted cash, included in Prepaid expenses and other current assets(29) 
Cash and cash equivalents at end of period$39 $33 
Supplemental disclosures of cash flow information:
Income taxes paid$100 $102 
Interest paid$28 $49 
See accompanying Notes to Consolidated Financial Statements.
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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 Description of Business and Basis of Presentation

Zebra Technologies Corporation and its subsidiaries (“Zebra” or the “Company”) is a global leader providing innovative Enterprise Asset Intelligence 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 and solutions. 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 unaudited interim consolidated financial statements according to the rules and regulations of the Securities and Exchange Commission for interim financial information and notes. As permitted under Article 10 of Regulation S-X and the instructions of Form 10-Q, these 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 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, 2019.

In the opinion of the Company, these interim financial statements include all adjustments (of a normal, recurring nature) necessary to fairly present its Consolidated Balance Sheet as of September 26, 2020, the Consolidated Statements of Operations, Comprehensive Income, and Stockholders’ Equity for the three and nine months ended September 26, 2020 and September 28, 2019, and the Consolidated Statements of Cash Flows for the nine months ended September 26, 2020 and September 28, 2019. These results, however, are not necessarily indicative of the results expected for the full fiscal year ending December 31, 2020.

Note 2 Significant Accounting Policies

Recently Adopted Accounting Pronouncements

On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 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. With respect to the Company’s financial assets, including trade receivables and contract assets, a cumulative effect transition approach was applied. In order to determine the transition impact of ASU 2016-13, the Company considered historical loss experience, the short duration of its trade receivables and durations of other financial assets, and expectations of the future economic environment.  The adoption of ASU 2016-13 did not have a significant impact to the Company’s financial statements upon transition or for the nine months ended September 26, 2020.

Recently Issued Accounting Pronouncements Not Yet Adopted

In March 2020, the Financial Accounting Standards Board issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). Subject to meeting certain criteria, ASU 2020-04 provides optional expedients and exceptions to applying contract modification accounting under existing generally accepted accounting principles, for contracts that are modified to address the expected phase out of the London Inter-bank Offered Rate (“LIBOR”) by the end of 2021. Some of the Company’s contracts with respect to its borrowings and interest rate swap contracts already contain comparable alternative reference rates that would automatically take effect upon the phasing out of LIBOR, while for others, the Company anticipates negotiating comparable replacement rates with its counterparties.  At this stage of its contract assessment, the Company does not expect ASU 2020-04 to have a material impact to its financial statements.

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Note 3 Revenues

The Company recognizes revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration which it expects to receive for providing those goods or services.

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 revenue for tangible products is recognized at a point in time, whereby revenue for services and software is predominantly recognized over time.

Disaggregation of Revenue
The following table presents our Net sales disaggregated by category for each of our segments, Asset Intelligence & Tracking (“AIT”) and Enterprise Visibility & Mobility (“EVM”), for the three and nine months ended September 26, 2020 and September 28, 2019 (in millions):
Three Months Ended
September 26, 2020September 28, 2019
SegmentTangible ProductsServices and SoftwareTotalTangible ProductsServices and SoftwareTotal
AIT$314 $32 $346 $337 $36 $373 
EVM658 130 788 644 113 757 
Corporate, eliminations(1)
 (2)(2)   
Total$972 $160 $1,132 $981 $149 $1,130 

Nine Months Ended
September 26, 2020September 28, 2019
SegmentTangible ProductsServices and SoftwareTotalTangible ProductsServices and SoftwareTotal
AIT$898 $94 $992 $1,001 $99 $1,100 
EVM1,786 364 2,150 1,867 326 2,193 
Corporate, eliminations(1)
 (2)(2)   
Total$2,684 $456 $3,140 $2,868 $425 $3,293 

(1)Amounts included in Corporate, eliminations consist of purchase accounting adjustments.

In addition, refer to Note 16, Segment Information & Geographic Data for Net sales to customers by geographic region.

Performance Obligations
The Company’s remaining performance obligations primarily relate to repair and support services, as well as solutions offerings. The aggregated transaction price allocated to remaining performance obligations for these types of arrangements with an original term exceeding one year was $874 million and $724 million, inclusive of deferred revenue, as of September 26, 2020 and December 31, 2019, respectively. On average, remaining performance obligations as of September 26, 2020 and December 31, 2019 are expected to be recognized over a period of approximately two years.

Contract Balances
Progress on satisfying performance obligations under contracts with customers is recorded on the Consolidated Balance Sheets in Accounts receivable, net for billed revenues. Progress on satisfying performance obligations under contracts with customers related to unbilled revenues (“contract assets”) is reflected on the Consolidated Balance Sheets as Prepaid expenses and other current assets for revenues expected to be billed within the next 12 months, and Other long-term assets for revenues expected to be billed thereafter. The total contract asset balances were $13 million and $8 million as of September 26, 2020 and December 31, 2019, respectively. These contract assets result from timing differences between the billing and delivery schedules of products, services and software, as well as the impact from the allocation of the transaction price among performance obligations for contracts that include multiple performance obligations. Contract assets are evaluated for impairment and no impairment losses have been recognized during the three and nine months ended September 26, 2020 and September 28, 2019.

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Deferred revenue on the Consolidated Balance Sheets consists of payments and billings in advance of our performance. The combined short-term and long-term deferred revenue balances were $534 million and $459 million as of September 26, 2020 and December 31, 2019, respectively. During the three and nine months ended September 26, 2020, the Company recognized $47 million and $204 million in revenue, respectively, which was previously included in the beginning balance of deferred revenue as of December 31, 2019. During the three and nine months ended September 28, 2019, the Company recognized $41 million and $168 million in revenue, respectively, which was previously included in the beginning balance of deferred revenue as of December 31, 2018.

Note 4 Inventories

The components of Inventories, net are as follows (in millions): 
 September 26,
2020
December 31,
2019
Raw material$120 $128 
Work in process4 4 
Finished goods360 342 
Total Inventories, net$484 $474 

Note 5 Acquisition

On September 1, 2020, the Company acquired all of the equity interests in Reflexis Systems, Inc. (“Reflexis”), a provider of task and workforce management, execution, and communication solutions for customers in the retail, food service, hospitality, and banking industries. Through its acquisition of Reflexis, the Company intends to enhance its solution offerings to customers in those industries by combining Reflexis’ platform with its existing software solutions.

The Reflexis acquisition was accounted for under the acquisition method of accounting for business combinations. The Company’s cash purchase consideration was $548 million, net of Reflexis’ cash on-hand.

In connection with its acquisition of Reflexis, and in exchange for the cancellation of unvested Reflexis stock options, the Company granted replacement share-based compensation awards to certain Reflexis employees in the form of Zebra incentive stock options. A total of 38,228 replacement incentive stock options were granted, with a weighted average acquisition-date fair value per option of $230. The total fair value of approximately $9 million is primarily attributable to service to be rendered subsequent to acquisition and will be expensed over the remaining service period. As of the acquisition date, the weighted average future service period associated with the replacement options was 1.7 years, and the weighted average remaining contractual life was 7.7 years.

The Company incurred approximately $19 million of acquisition-related costs during the third quarter of 2020, which primarily consisted of payments to settle certain existing Reflexis share-based compensation awards whose vesting was accelerated at the discretion of Reflexis contemporaneously with the acquisition. Those payments, as well as $5 million of other acquisition-related costs primarily related to third-party transaction and advisory fees, are included within Acquisition and integration costs on the Consolidated Statements of Operations.

The acquisition of Reflexis was funded, in part, by the issuance of a new term loan (the “2020 Term Loan”) in the amount of $200 million. The acquisition of Reflexis was otherwise funded using the Company’s cash on hand and borrowing under the Company’s existing Revolving Credit Facility. See additional details related to the Company’s debt arrangements in Note 10, Long-Term Debt.

The Company utilized estimated fair values as of September 1, 2020 to allocate the total purchase consideration to the identifiable assets acquired and liabilities assumed. The fair value of the net assets acquired was based on a number of estimates and assumptions, as well as customary valuation procedures and techniques, primarily income-based methodologies such as the excess earnings method for technology and patent intangible assets, as well as exit cost methodologies for liabilities such as deferred revenues. While we believe these estimates provide a reasonable basis to record the net assets acquired, the purchase price allocation is considered preliminary and subject to adjustment during the measurement period, which is up to one year from the acquisition date. The primary fair value estimates considered preliminary include intangible assets and income tax-related items.

The preliminary purchase price allocation to assets acquired and liabilities assumed was as follows (in millions):
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Identifiable intangible assets$204 
Accounts receivable20 
Property, plant and equipment10 
Other assets acquired17 
Deferred revenue(16)
Deferred tax liabilities(49)
Other liabilities assumed(14)
Net assets acquired$172 
Goodwill on acquisition376 
Total purchase consideration$548 

The $376 million of goodwill, which will be non-deductible for tax purposes, has been allocated to the EVM segment and principally relates to the planned integration of Reflexis’ solution offerings with the Company’s existing solution offerings as well as the expansion in current and new markets and industries.

The preliminary purchase price allocation to identifiable intangible assets acquired was:
Fair Value (in millions)Useful Life (in years)
Technology and patents$160 8
Customer and other relationships43 2
Trade names1 2
Total identifiable intangible assets$204 

Note 6 Investments

The carrying value of the Company’s investments was $80 million and $45 million as of September 26, 2020 and December 31, 2019, respectively, which are included in Other long-term assets on the Consolidated Balances Sheets. During the nine months ended September 26, 2020, the Company paid $32 million for the purchases of long-term investments, which primarily related to the acquisition of additional shares in an existing investment in the second quarter of 2020. In connection with this additional investment in the second quarter of 2020, the Company identified an observable price change that resulted in a $7 million gain on its existing investment. During the nine months ended September 26, 2020, the Company also received cash proceeds of $6 million related to the sale of a long-term investment.

Net gains and losses related to the Company’s investments are included within Other, net on the Consolidated Statements of Operations. During the three and nine months ended September 26, 2020, the Company recognized net investment gains of $1 million and $8 million, respectively. During the three and nine months ended September 28, 2019, the Company recognized net investment gains of $0 million and $3 million, respectively.

Note 7 Exit and Restructuring Costs
In the fourth quarter of 2019, the Company committed to certain organizational changes designed to generate operational efficiencies (collectively referred to as the “2019 Productivity Plan”).  The organizational design changes under the 2019 Productivity Plan have principally occurred within the North America and Europe, Middle East, and Africa (“EMEA”) regions, relate primarily to employee severance and related benefits, and are expected to be substantially completed by the end of 2020.  Exit and restructuring charges for the 2019 Productivity Plan were $1 million and $7 million during the three and nine months ended September 26, 2020, respectively, and $15 million cumulatively through the quarter ended September 26, 2020. Estimated remaining costs to be incurred in the fourth quarter of 2020 under the 2019 Productivity Plan are expected to be up to $3 million.

As of September 26, 2020, the Company’s total remaining obligations under its exit and restructuring programs were $4 million, which are expected to be mostly settled within the next year and are reflected within Accrued liabilities on the Consolidated Balance Sheets.

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Note 8 Fair Value Measurements

Financial assets and liabilities are measured using inputs from three levels of the fair value hierarchy in accordance with Accounting Standards Codification (“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 and money market funds).
Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs to the extent possible. In addition, the Company considers counterparty credit risk in the assessment of fair value.
The Company’s financial assets and liabilities carried at fair value as of September 26, 2020, are classified below (in millions):
 Level 1Level 2Level 3Total
Assets:
Money market investments related to the deferred compensation plan$26 $ $ $26 
Total Assets at fair value$26 $ $ $26 
Liabilities:
Foreign exchange contracts (1)
$ $14 $ $14 
Forward interest rate swap contracts (2)
 50  50 
Liabilities related to the deferred compensation plan26   26 
Total Liabilities at fair value$26 $64 $ $90 
The Company’s financial assets and liabilities carried at fair value as of December 31, 2019, are classified below (in millions):
Level 1Level 2Level 3Total
Assets:
Foreign exchange contracts (1)
$ $3 $ $3 
Money market investments related to the deferred compensation plan24   24 
Total Assets at fair value$24 $3 $ $27 
Liabilities:
Forward interest rate swap contracts (2)
$ $13 $ $13 
Liabilities related to the deferred compensation plan24   24 
Total Liabilities at fair value$24 $13 $ $37 
(1)The fair value of the foreign exchange contracts is calculated as follows:
a.Fair value of regular forward contracts associated with forecasted sales hedges is calculated using the period-end exchange rate adjusted for current forward points.
b.Fair value of hedges against net assets is calculated at the period-end exchange rate adjusted for current forward points unless the hedge has been traded but not settled at period end (Level 2). If this is the case, the fair value is calculated at the rate at which the hedge is being settled (Level 1).
(2)The fair value of forward interest rate swaps is based upon a valuation model that uses relevant observable market inputs at the quoted intervals, such as forward yield curves, and is adjusted for the Company’s credit risk and the interest rate swap terms.

Note 9 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
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may elect to designate certain derivatives as hedging instruments under ASC Topic 815, <