ZEBRA TECHNOLOGIES CORP/DE - 10-Q Quarterly Report

Item 1. Consolidated Financial Statements

ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

(Amounts in thousands)

	October 2, 2004		December 31, 2003
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	10,269	$	14,266
Investments and marketable securities	512,771		433,582
Accounts receivable, net	95,300		81,867
Inventories, net	54,313		42,781
Deferred income taxes	5,481		4,507
Prepaid expenses	4,921		4,415
Total current assets	683,055		581,418

Property and equipment at cost, less accumulated depreciation and amortization	42,500		39,286
Goodwill	61,137		61,150
Other intangibles, net	7,164		9,031
Other assets	25,907		10,726
Total assets	$	819,763	$	701,611

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	22,033	$	16,238
Accrued liabilities	25,915		26,938
Current portion of obligation under capital lease	55		153
Income taxes payable	4,983		2,273
Total current liabilities	52,986		45,602
Obligation under capital lease, less current portion	131		452
Deferred income taxes	1,189		723
Deferred rent	566		518
Other long-term liabilities	3,553		2,401
Total liabilities	58,425		49,696

Stockholders’ equity:
Preferred Stock	¾		¾
Class A Common Stock	717		711
Additional paid-in capital	81,691		61,929
Retained earnings	674,528		585,846
Accumulated other comprehensive income	4,402		3,429
Total stockholders’ equity	761,338		651,915
Total liabilities and stockholders’ equity	$	819,763	$	701,611

See accompanying notes to consolidated financial statements.

ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Amounts in thousands, except per share data)

(Unaudited)

	Three Months Ended						Nine Months Ended
	October 2, 2004			September 27, 2003			October 2, 2004			September 27, 2003
Net sales	$	171,176		$	134,649		$	488,180		$	389,197
Cost of sales	84,030			66,876			235,916			190,517
Gross profit	87,146			67,773			252,264			198,680

Operating expenses:
Selling and marketing	19,217			15,871			54,447			47,128
Research and development	9,596			7,898			27,725			23,037
General and administrative	11,865			9,937			37,139			30,437
Amortization of intangible assets	647			371			1,921			1,113
Exit costs	715			¾			1,953			¾
Merger costs	10			¾			68			¾
Total operating expenses	42,050			34,077			123,253			101,715

Operating income	45,096			33,696			129,011			96,965

Other income (expense):
Investment income (loss)	2,515			(982		)	7,678			4,474
Interest expense	(7		)	(64		)	(39		)	(116		)
Foreign exchange gains (losses)	737			(18		)	493			(248		)
Other, net	(381		)	(263		)	(1,232		)	(549		)
Total other income (expense)	2,864			(1,327		)	6,900			3,561

Income before income taxes	47,960			32,369			135,911			100,526
Income taxes	16,641			9,370			47,229			33,225
Net income	$	31,319		$	22,999		$	88,682		$	67,301

Basic earnings per share	$	0.44		$	0.32		$	1.24		$	0.95
Diluted earnings per share	$	0.43		$	0.32		$	1.22		$	0.94

Basic weighted average shares outstanding	71,696			70,880			71,489			70,536
Diluted weighted average and equivalent shares outstanding	72,673			71,785			72,485			71,331

Note: Share and per share amounts have been adjusted for a three-for-two stock split paid in the form of a 50% stock dividend on August 25, 2004.

See accompanying notes to consolidated financial statements.

ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

	Three Months Ended						Nine Months Ended
	October 2, 2004			September 27, 2003			October 2, 2004			September 27, 2003
Net income	$	31,319		$	22,999		$	88,682		$	67,301

Other comprehensive income (loss):
Foreign currency translation adjustment	(794		)	195			(26		)	1,604
Changes in unrealized gains/losses on hedging transactions, net of tax	(45		)	(7		)	864			144
Changes in unrealized gains on investments, net of tax	1,663			1,113			135			840
Comprehensive income	$	32,143		$	24,300		$	89,655		$	69,889

See accompanying notes to consolidated financial statements.

ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

	Nine Months Ended
	October 2, 2004			September 27, 2003
Cash flows from operating activities:
Net income	$	88,682		$	67,301
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	9,030			8,619
Tax benefit from exercise of stock options	6,346			3,362
Deferred income taxes	(505		)	462
Changes in assets and liabilities:
Accounts receivable, net	(13,272		)	(10,549		)
Inventories	(11,472		)	(713		)
Other assets	(14,071		)	(8,357		)
Accounts payable	5,705			1,457
Accrued liabilities	(1,028		)	1,529
Income taxes payable	2,697			4,921
Other operating activities	542			(2,027		)
Net cash provided by operating activities	72,654			66,005

Cash flows from investing activities:
Purchases of property and equipment	(10,298		)	(6,293		)
Purchases of investments and marketable securities	(1,072,540		)	(927,794		)
Sales and maturities of investments and marketable securities	993,351			855,214
Net cash used in investing activities	(89,487		)	(78,873		)

Cash flows from financing activities:
Proceeds from exercise of stock options and stock purchase plan purchases	13,660			13,891
Payments for obligation under capital lease	(419		)	(198		)
Other financing activities	(238		)	(142		)
Net cash provided by financing activities	13,003			13,551

Effect of exchange rate changes on cash	(167		)	782

Net increase (decrease) in cash and cash equivalents	(3,997		)	1,465
Cash and cash equivalents at beginning of period	14,266			18,418
Cash and cash equivalents at end of period	$	10,269		$	19,883

Supplemental disclosures of cash flow information:
Interest paid	$	39		$	116
Income taxes paid	39,515			29,226

Supplemental disclosures of non-cash transactions:
Conversion of Class B Common Stock to Class A Common Stock	¾			58

See accompanying notes to consolidated financial statements.

ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

Management prepared these unaudited interim consolidated financial statements for Zebra Technologies Corporation and subsidiaries (Zebra) according to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information required in full-year audited financial statements is omitted, as allowed by SEC rules and regulations. These omissions relate to information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States. You should read our annual financial statements with their notes in our Form 10-K for the year ended December 31, 2003, for these additional disclosures.

The consolidated balance sheet as of December 31, 2003, in this Form 10-Q is taken from the audited consolidated balance sheet in our Form 10-K. These interim financial statements include all adjustments necessary to present fairly Zebra’s consolidated financial position as of October 2, 2004, the consolidated results of operations for the three and nine months ended October 2, 2004 and September 27, 2003, and cash flows for the nine months ended October 2, 2004 and September 27, 2003. These results, however, are not necessarily indicative of results for the full year.

Note 2—Stock-Based Compensation

As of October 2, 2004, we had three stock-based compensation plans available for future grants. We account for these plans under the principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based compensation cost is reflected in net income, because all options granted under these plans had grant prices equal to the market value of the underlying common stock on the date of grant. The following table shows the effect on net income and earnings per share if we had used the alternative fair value recognition provisions of Statement of Financial Standards (SFAS) No. 123, Accounting for Stock-based Compensation (in thousands, except per share data):

	Three Months Ended						Nine Months Ended
	October 2, 2004			September 27, 2003			October 2, 2004			September 27, 2003
Net income	$	31,319		$	22,999		$	88,682		$	67,301
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects	(1,309		)	(1,360		)	(4,037		)	(4,370		)
Pro forma net income	$	30,010		$	21,639		$	84,645		$	62,931

Basic earnings per share:
As reported	$	0.44		$	0.32		$	1.24		$	0.95
Pro forma	0.42			0.31			1.18			0.89

Diluted earnings per share:
As reported	$	0.43		$	0.32		$	1.22		$	0.94
Pro forma	0.41			0.30			1.17			0.88

Note 3 – Inventories

The components of inventories are as follows (in thousands):

	October 2, 2004		December 31, 2003
Raw materials	$	31,592	$	29,127
Work in process	515		645
Finished goods	22,206		13,009
Total inventories	$	54,313	$	42,781

Note 4 – Investments and Marketable Securities

We classify the majority of our investments and marketable securities as available-for-sale in accordance with the classifications defined in SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.

SFAS No. 115 requires that changes in the market value of available-for-sale securities be reflected in the accumulated other comprehensive income caption of stockholders’ equity in the balance sheet, until we dispose of the securities. Once these securities are disposed of, either by sale or maturity, the accumulated changes in market value are transferred to investment income. On the cash flow statements, changes in the balances of available-for-sale securities are shown as purchases, sales and maturities of investments and marketable securities.

Changes in market value of trading securities are recorded in investment income as they occur, and the related cash flow statement includes changes in the balances of trading securities as operating cash flows.

Unrealized gains and losses on investment securities are included in these financial statements as follows (in thousands):

	Three Months Ended					Nine Months Ended
	October 2, 2004			September 27, 2003		October 2, 2004		September 27, 2003

Changes in unrealized gains on available-for-sale securities, net of tax, recorded in accumulated other comprehensive income	$	1,663		$	1,113	$	135	$	840

Unrealized gains and losses on trading securities recorded in investment income	$	(1	)	¾		$	12	¾

Note 5—Stockholders’ Equity

Share count and par value data related to stockholders’ equity are as follows:

	October 2, 2004		December 31, 2003
Preferred Stock
Par value per share	$	0.01	$	0.01
Shares authorized	10,000,000		10,000,000
Shares outstanding	¾		¾
Common Stock - Class A
Par value per share	$	0.01	$	0.01
Shares authorized	150,000,000		117,537,284
Shares issued	71,751,147		71,098,953
Shares outstanding	71,751,147		71,098,953

On July 15, 2004, the Board of Directors authorized a fifty percent (50%) Class A common stock dividend on each issued share of Class A common stock payable before the close of business on August 25, 2004, to the holders of record of all such shares at the close of business on July 29, 2004. All share counts and per-share amounts have been restated to reflect this stock dividend.

Note 6—Other Comprehensive Income (Loss)

Stockholders’ equity includes certain items classified as other comprehensive income, including:

• Foreign currency translation adjustment relates to our non-U.S. subsidiary companies that have designated a functional currency other than the U.S. dollar. We are required to translate the subsidiary functional currency financial statements to dollars using a combination of historical, month-end, and average foreign exchange rates. This combination of rates creates the foreign currency translation adjustment component of other comprehensive income.

• Unrealized gains (losses) on foreign currency hedging activities relate to derivative instruments used to hedge the currency exchange rates for forecasted euro sales. These hedges are designated as cash flow hedges, and we have deferred income statement recognition of gains and losses until the hedged transaction occurs. See Note 9 for more details.

• Unrealized gains (losses) on investments classified as available-for-sale are deferred from income statement recognition until the gains or losses are realized. See Note 4 for more details.

The components of other comprehensive income (loss) included in the Consolidated Statements of Comprehensive Income are as follows (in thousands):

	Three Months Ended						Nine Months Ended
	October 2, 2004			September 27, 2003			October 2, 2004			September 27, 2003
Foreign currency translation adjustments	$	(794	)	$	195		$	(26	)	$	1,604

Changes in unrealized gains and losses on foreign currency hedging activities:
Gross	$	(69	)	$	(11	)	$	1,329		$	222
Income tax (benefit)	(24		)	(4		)	465			78
Net	$	(45	)	$	(7	)	$	864		$	144

Changes in unrealized gains on investments classified as available-for-sale:
Gross	$	2,559		$	1,712		$	207		$	1,292
Income tax	896			599			72			452
Net	$	1,663		$	1,113		$	135		$	840

The components of other comprehensive income (loss) included in the Consolidated Balance Sheets are as follows (in thousands):

	As of
	October 2, 2004			December 31, 2003
Foreign currency translation adjustments	$	4,084		$	4,110

Unrealized losses on foreign currency hedging activities:
Gross	$	(208	)	$	(1,537	)
Income tax benefit	(73		)	(538		)
Net	$	(135	)	$	(999	)

Unrealized gains on investments classified as available-for-sale:
Gross	$	697		$	489
Income tax	244			171
Net	$	453		$	318

Note 7—Earnings Per Share

Earnings per share were computed as follows (in thousands, except per share amounts):

	Three Months Ended				Nine Months Ended
	October 2, 2004		September 27, 2003		October 2, 2004		September 27, 2003
Basic earnings per share:
Net income	$	31,319	$	22,999	$	88,682	$	67,301
Weighted average common shares outstanding	71,696		70,880		71,489		70,536
Per share amount	$	0.44	$	0.32	$	1.24	$	0.95

Diluted earnings per share:
Net income	$	31,319	$	22,999	$	88,682	$	67,301
Weighted average common shares outstanding	71,696		70,880		71,489		70,536
Add: Effect of dilutive securities – stock options	977		905		996		795
Diluted weighted average and equivalent shares outstanding	72,673		71,785		72,485		71,331
Per share amount	$	0.43	$	0.32	$	1.22	$	0.94

Potentially dilutive securities that were excluded from the earnings per share calculation consist of stock options with an exercise price greater than the average market price of the Class A common stock. These options were as follows:

	Three Months Ended		Nine Months Ended
	October 2, 2004	September 27, 2003	October 2, 2004	September 27, 2003
Potentially dilutive shares	¾	43,000	1,800	43,000

Note 8—Goodwill and Other Intangible Asset Data

Intangible asset data are as follows (in thousands):

	October 2, 2004					December 31, 2003
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets
Current technology	$	12,258	$	(7,172	)	$	12,034	$	(5,467	)
Customer relationships	2,333		(255		)	2,503		(39		)
Total	$	14,591	$	(7,427	)	$	14,537	$	(5,506	)

Unamortized intangible assets
Goodwill	$	61,137				$	61,150

Aggregate amortization expense
For the year ended December 31, 2003						$	1,640
For the three months ended October 2, 2004	$	647
For the nine months ended October 2, 2004	1,921

Estimated amortization expense
For the year ended December 31, 2004	$	2,568
For the year ended December 31, 2005	1,691
For the year ended December 31, 2006	1,103
For the year ended December 31, 2007	1,103
For the year ended December 31, 2008	1,099
For the year ended December 31, 2009	975
For the year ended December 31, 2010	292
For the year ended December 31, 2011	254

We test the impairment of goodwill each year or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We completed our last assessment during June 2004.

We evaluate the impairment of other long-lived assets including identifiable intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Factors considered that might trigger an impairment review consist of:

• Significant underperformance relative to historical or projected future operating results

• Significant changes in the manner of use of the acquired assets or the strategy for the overall business

• Significant negative industry or economic trends

• Significant decline in Zebra’s stock price for a sustained period

• Significant decline in market capitalization relative to net book value

If we believe that one or more of the above indicators of impairment have occurred, we measure impairment based on a projected discounted cash flow methodology using a discount rate that incorporates the risk inherent in the cash flows.

Note 9—Derivative Instruments

In the normal course of business, portions of Zebra’s operations are subject to fluctuations in currency values. We manage these risks using derivative financial instruments.

Hedging of Net Assets

We use forward contracts and options to manage exposure related to our pound and euro denominated net assets and designate these contracts and options as fair value hedges. We record gains and losses on these contracts and options in income each quarter along with the transaction gains and losses related to our net euro asset position, which would ordinarily offset each other to a large extent. Summary financial information related to these activities follows (in thousands):

	Three Months Ended						Nine Months Ended
	October 2, 2004			September 27, 2003			October 2, 2004			September 27, 2003
Change in gains (losses) from foreign exchange derivatives	$	(445	)	$	(5	)	$	(100	)	$	(2,519	)
Gain (loss) on net foreign currency assets	1,182			(13		)	593			2,271
Net foreign exchange gain (loss)	$	737		$	(18	)	$	493		$	(248	)

	As of
	October 2, 2004		December 31, 2003
Notional balance of outstanding contracts:
Pound	£	10,176	£	8,569
Euro	€	29,000	€	22,000

Hedging of Anticipated Sales

We manage the exchange rate risk of anticipated euro denominated sales using forward contracts and option collars. We designate these contracts as cash flow hedges. Gains and losses on these contracts are deferred in other comprehensive income until the contracts are settled and the hedged sales are realized, at which time the deferred gains or losses will be reported as an increase or decrease to sales. Summary financial information related to the cash flow hedges of future revenues follows (in thousands, except percentages):

	As of
	October 2, 2004			December 31, 2003
Net unrealized losses deferred in other comprehensive income:
Gross	$	(208	)	$	(1,537	)
Income tax benefit	(73		)	(538		)
Net	$	(135	)	$	(999	)

Notional balance of outstanding contracts	€	30,000		€	30,420
Hedge effectiveness	100		%	100		%

	2004			2003
Net gains (losses) included in revenue for the:
Three months ended September 27, 2003				$	415
Three months ended October 2, 2004	$	69
Nine months ended September 27, 2003				$	415
Nine months ended October 2, 2004	$	(561	)

Note 10—Costs associated with Exit or Disposal Activities

During the third quarter of 2003, we initiated a plan to close our engineering site in Varades, France. This plan was announced in October 2003 and is accounted for under SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. All exit costs associated with this activity are identified on a separate line of our income statement, as part of operating expenses. Our consolidation plan is intended to reduce costs and improve manufacturing efficiency.

Our Varades facility conducted the product development for our line of card imaging printers and included the European service center for these printers. We transferred the product development activities to Camarillo, California, where we have manufactured these printers since 2001. We transferred the European card imaging printer service operation to our Preston, United Kingdom, facility where the Europe, Middle East and African distribution of these printers already occurs. To date, we eliminated most of the Varades administrative functions including finance, information systems and human resources support. At the completion of the plan, the Varades facility will be closed and no employees will remain. As of October 2, 2004, we incurred the following exit costs (in thousands):

Type of Cost	Total Costs incurred
Severance, stay bonuses, and other employee-related expenses	$	1,748
Asset disposal costs	63
Other exit costs	211
Total	$	2,022

No further costs are expected to be incurred for this project.

During January 2004, we announced plans to consolidate our Warwick, Rhode Island, printer manufacturing and repair service into our Camarillo, California and Vernon Hills, Illinois locations. This transition was expected to take 12 to 18 months to complete. The Warwick facility will continue to manufacture and distribute bar code label printer supplies, as well as house engineering, product management, and the key account sales functions for mobile products. As of October 2, 2004, we expect the following exit costs (in thousands):

Type of Cost	Costs incurred to date		Additional costs expected		Total costs expected to be incurred
Severance, stay bonuses, and other employee-related expenses	$	837	$	18	$	855
Asset disposal costs	¾		150		150
Other exit costs	285		240		525
Total	$	1,122	$	408	$	1,530

Liabilities and expenses related to exit activities for the three and nine months ended October 2, 2004 were as follows (in thousands):

	Varades Closure			Warwick Consolidation		Total
Accrued liabilities related to exit activities at December 31, 2003	$		990	$	—	$	990

Expenses incurred for the six ended July 3, 2004	614			624		1,238
Expenses incurred for the three months ended October 2, 2004	218			497		715
Total expenses incurred for the nine months ended October 2, 2004	832			1,121		1,953

Amounts paid for the nine months ended October 2, 2004	1,604			870		2,474
Accrued liabilities related to exit activities at October 2, 2004	$	218		$	251	$	469

Note 11—Contingencies

On April 24, 2003, Paxar Americas, Inc. (Paxar Americas) filed a patent infringement lawsuit in the United States District Court for the Southern District of Ohio against Zebra and certain of its subsidiaries. Paxar Americas’ Complaint alleges that certain of Zebra’s products infringe on one or more of eight identified Paxar Americas patents, although not each product is accused of infringing each patent. Zebra has filed an Answer to Paxar Americas’ Complaint, denying Paxar Americas’ allegations of infringement and asserting several affirmative defenses, including the invalidity of Paxar Americas’ asserted patent claims. Paxar has moved to amend its complaint to add other allegations of infringement and a trademark-based claim. Zebra has opposed Paxar’s Motion to Amend, and the Court’s ruling on the Motion is pending. On July 15, 2004, the Court heard argument from the parties regarding the proper construction of the claims of the patents in suit. The parties have fully briefed the issue of claim construction, and that issue is now before the Court.

On November 21, 2003, Zebra’s wholly-owned subsidiary, ZIH Corp. (ZIH), filed a Complaint in the United States District Court for the District of Massachusetts against Paxar Corporation, alleging that Paxar Corporation printers infringe ZIH’s U.S. Patent Nos. 5,813,343 and 5,860,753. Paxar Corporation answered ZIH’s Complaint, denying infringement and seeking a declaratory judgment that ZIH’s patents-in-suit are not infringed and are invalid and/or unenforceable. Paxar Corporation filed a motion to transfer ZIH’s Massachusetts suit to the United States District Court for the Southern District of Ohio. ZIH opposed Paxar Corporation’s motion to transfer, and the Court’s ruling on the transfer motion is pending.

On November 25, 2003, Paxar Americas filed a Complaint against ZIH in the United States District Court for the Southern District of Ohio, seeking a declaratory judgment that the patents asserted by ZIH in its Massachusetts Complaint are not infringed and are invalid and unenforceable. On December 17, 2003, Paxar Americas amended its complaint to add Zebra Technologies Corporation as a defendant. The Court granted the parties’ motion to stay this action pending the District Court of Massachusetts’ ruling on Paxar Corporation’s motion to transfer. The parties have

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations: Third Quarter of 2004 versus Third Quarter of 2003, Year-to-date 2004 versus Year-to-date 2003

Sales

Sales by product category, percent change, and percent of total sales for the three and nine months ended October 2, 2004, and September 27, 2003, were (in thousands, except percentages):

	Three Months Ended
Product Category	October 2, 2004		September 27, 2003		Percent Change		Percent of Total Sales - 2004	Percent of Total Sales - 2003
Hardware	$	135,383	$	102,764	31.7		79.1	76.3
Supplies	29,007		24,436		18.7		16.9	18.1
Service and software	5,431		6,068		(10.5	)	3.2	4.5
Shipping and handling	1,286		966		33.3		0.8	0.8
Cash flow hedging activities	69		415		(83.4	)	¾	0.3
Total sales	$	171,176	$	134,649	27.1		100.0	100.0

	Nine Months Ended
Product Category	October 2, 2004			September 27, 2003		Percent Change		Percent of Total Sales - 2004		Percent of Total Sales - 2003
Hardware	$	381,027		$	295,882	28.8		78.1		76.0
Supplies	85,953			71,781		19.7		17.6		18.4
Service and software	18,255			18,190		0.4		3.7		4.7
Shipping and handling	3,506			2,929		19.7		0.7		0.8
Cash flow hedging activities	(561		)	415		(235.2	)	(0.1	)	0.1
Total sales	$	488,180		$	389,197	25.4		100.0		100.0

Sales to customers by geographic region, percent changes and percent of total sales for the three and nine months ended October 2, 2004, and September 27, 2003, were (in thousands, except percentages):

	Three Months Ended
Geographic Region	October 2, 2004		September 27, 2003		Percent Change	Percent of Total Sales - 2004	Percent of Total Sales - 2003
Europe, Middle East and Africa	$	48,553	$	40,759	19.1	28.4	30.3
Latin America	9,631		7,573		27.2	5.6	5.6
Asia-Pacific	13,578		10,558		28.6	7.9	7.8
Total International	71,762		58,890		21.9	41.9	43.7
North America	99,414		75,759		31.2	58.1	56.3
Total sales	$	171,176	$	134,649	27.1	100.0	100.0

	Nine Months Ended
Geographic Region	October 2, 2004		September 27, 2003		Percent Change	Percent of Total Sales - 2004	Percent of Total Sales - 2003
Europe, Middle East and Africa	$	154,161	$	122,650	25.7	31.6	31.5
Latin America	27,522		21,428		28.4	5.6	5.5
Asia-Pacific	37,767		29,689		27.2	7.7	7.6
Total International	219,450		173,767		26.3	44.9	44.6
North America	268,730		215,430		24.7	55.1	55.4
Total sales	$	488,180	$	389,197	25.4	100.0	100.0

We believe that our sales growth for the third quarter of 2004 reflects the increasing success of sales and marketing programs to improve demand for Zebra products, strengthen distribution channel relationships and increase the awareness of Zebra products and the Zebra brand in targeted end markets, within a favorable environment for the adoption of barcoding and specialty printing applications. The growth in Zebra’s business was well balanced across geographies, products, and channels. New printer products (defined as printers released within 18 months prior to the end of the applicable fiscal period) accounted for 21.4% of printer sales in the third quarter of 2004 and 24.8% of printer sales in

the third quarter of 2003. Year to-date, new printer products accounted for 25.7% of printer sales in 2004, compared with 23.8% for the corresponding period in 2003.

Our international sales are denominated in multiple currencies, primarily the dollar, pound and euro, which cause our reported sales to be subject to fluctuations in currency rates. When significant currency rate fluctuations occur, we review our product pricing and make appropriate changes to maintain our competitive position. We estimate that favorable foreign exchange movements of the euro and the pound versus the dollar had a net positive effect of $2,893,000 on sales during the third quarter.

We currently hedge a portion of anticipated euro-denominated sales to protect Zebra against exchange rate movements. For the third quarter, this program resulted in a gain of $69,000 and a year-to-date loss of $561,000. See note 9 to the financial statements for a more detailed discussion of this hedging program.

Printer unit volumes and average selling price information is summarized below:

	Three Months Ended					Nine Months Ended
	October 2, 2004		September 27, 2003		Percent Change	October 2, 2004		September 27, 2003		Percent Change
Total printers shipped	169,770		135,619		25.2	485,353		394,597		23.0
Average selling price of printers shipped	$	659	$	625	5.4	$	649	$	622	4.3

For the third quarter of 2004, unit volumes increased in nearly all product lines and all regions.

Gross Profit

Gross profit information is summarized below (in thousands, except percentages):

	Three Months Ended					Nine Months Ended
	October 2, 2004		September 27, 2003		Percent Change	October 2, 2004		September 27, 2003		Percent Change
Gross Profit	$	87,146	$	67,773	28.6	$	252,264	$	198,680	27.0
Gross Margin	50.9		50.3			51.7		51.0

Gross margin improved by 0.6 percentage points over last year due to higher rates of capacity utilization and favorable foreign exchange rates. The relatively modest gain over last year speaks primarily to the fact that last year’s margins were quite strong and increases from this level are more difficult to attain.

Selling and Marketing Expenses

Selling and marketing expenses are summarized below (in thousands, except percentages):

	Three Months Ended					Nine Months Ended
	October 2, 2004		September 27, 2003		Percent Change	October 2, 2004		September 27, 2003		Percent Change
Selling and marketing expenses	$	19,217	$	15,871	21.1	$	54,447	$	47,128	15.5
Percent of sales	11.2		11.8			11.2		12.1

We continue to invest heavily in demand-generating activities to build brand equity in our core product lines as well as in the emerging area of radio frequency identification (RFID). During the third quarter of 2004, selling and marketing expenses increased due to higher payroll costs from increased staffing as well as higher advertising, market development funding, consulting costs, legal fees, and outside commissions. Much of the additional headcount related to placing more Zebra representatives in high-growth international regions as part of our geographic expansion activities. We also increased staff for better coverage of strategic accounts. For the first nine months of 2004, information systems and demonstration unit costs also increased over the corresponding period of 2003.

Research and Development Costs

The development of new products and enhancement of existing products are important to Zebra’s business and growth prospects. To maintain and build our product pipeline, we made investments in research and development, summarized below (in thousands, except percentages):

	Three Months Ended					Nine Months Ended
	October 2, 2004		September 27, 2003		Percent Change	October 2, 2004		September 27, 2003		Percent Change
Research and development costs	$	9,596	$	7,898	21.5	$	27,725	$	23,037	20.3
Percent of sales	5.6		5.9			5.7		5.9

Quarterly product development expenses fluctuate widely depending on the status of on-going projects. We are committed to a long-term strategy of significant investment in product development. For the third quarter of 2004, payroll and benefits increased by $794,000 in relation to the third quarter of 2003. Increases in project expenses ($676,000) and consulting costs ($172,000) also resulted from additional expenditures for new products including radio frequency identification (RFID) products. We expect to invest a larger portion of our engineering expenditures in the future on the development of RFID printer/encoders.

General and Administrative Expenses

General and administrative expenses are summarized in the table below (in thousands, except percentages):

	Three Months Ended					Nine Months Ended
	October 2, 2004		September 27, 2003		Percent Change	October 2, 2004		September 27, 2003		Percent Change
General and administrative expenses	$	11,865	$	9,937	19.4	$	37,139	$	30,437	22.0
Percent of sales	6.9		7.4			7.6		7.8

For the third quarter of 2004, information system expenses increased $769,000, and legal expenses increased $1,303,000. The increase in legal expenses is related to litigation with Paxar as described in Note 11 and increased intellectual property work. We expect large increases in legal expenses to continue for subsequent quarters, based on the legal activity we are currently experiencing.

Exit Costs

During the fourth quarter of 2003, we announced plans to close our engineering site in Varades, France. This plan is accounted for under SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Included in operating expenses for the third quarter of 2004 are exit costs in the amount of $218,000. These costs consist primarily of severance costs, asset disposal costs and other employee related expenses. For the first nine months of 2004, exit costs relating to the Varades closure were $832,000.

During the first quarter of 2004, we announced plans to consolidate our Warwick, Rhode Island, printer manufacturing and repair service business into our Camarillo, California and Vernon Hills, Illinois locations. During the third quarter, we incurred exit costs of $497,000 for severance and travel costs related to the consolidation. For the first nine months of 2004, exit costs relating to the Warwick consolidation were $1,121,000.

Operating Income

Operating income is summarized in the following table (in thousands, except percentages):

	Three Months Ended					Nine Months Ended
	October 2, 2004		September 27, 2003		Percent Change	October 2, 2004		September 27, 2003		Percent Change
Operating income	$	45,096	$	33,696	33.8	$	129,011	$	96,965	33.0
Percent of sales	26.3		25.0			26.4		24.9

The increase in operating income is attributable to the following factors:

• Higher third quarter and year-to-date sales,

• Improved gross margins,

• Favorable changes in foreign exchange rates for Zebra’s non-dollar denominated businesses, and

• Operating expense growth held below the rate of sales growth.

As a result of these factors, operating income increased by 6.7 percentage points more than the rate of sales growth during the third quarter and 7.6 percentage points more than the rate of sales growth year-to-date.

Non-operating Income and Expenses

Zebra’s non-operating income and expense items are summarized in the following table (in thousands):

	Three Months Ended						Nine Months Ended
	October 2, 2004			September 27, 2003			October 2, 2004			September 27, 2003
Investment income	$	2,515		$	(982	)	$	7,678		$	4,474
Interest expense	(7		)	(64		)	(39		)	(116		)
Foreign exchange gain (losses)	737			(18		)	493			(248		)
Other, net	(381		)	(263		)	(1,232		)	(549		)
Total other income	$	2,864		$	(1,327	)	$	6,900		$	3,561

During the third quarter of 2004, Zebra earned $2,515,000 on beginning cash and marketable securities balances of $498,944,000, which equates to a 2.0% rate of return.

Income Taxes

The effective income tax rates for the third quarter and the year to-date were 34.7%, compared with 28.9% for the third quarter of 2003 and 33.1% for the year to-date period. During the third quarter of 2003, we eliminated a reserve on research and experimentation tax credits and recorded a reduction to income tax expense of $1,947,000, because the Internal Revenue Service approved our refund applications.

Net Income

Zebra’s net income is summarized below (in thousands, except per share amounts):

	Three Months Ended				Nine Months Ended
	October 2, 2004		September 27, 2003		October 2, 2004		September 27, 2003
Net income	$	31,319	$	22,999	$	88,682	$	67,301
Diluted earnings per share	$	0.43	$	0.32	$	1.22	$	0.94

Liquidity and Capital Resources

Zebra continued to generate cash well in excess of its operating requirements. As a result, Zebra’s cash and investment balances have continually grown over time. As of October 2, 2004, Zebra had $523,040,000 in cash, cash equivalents, investments and marketable securities, compared with $447,848,000 at December 31, 2003. Factors affecting cash and investment balances during the first nine months of 2004 include:

• Operations provided cash in the amount of $72,654,000, primarily from net income.

• Accounts receivable increased $13,272,000 year-to-date (net of the effect of foreign currency translation adjustment) because of higher sales. Days sales outstanding held constant at 51 days in the third quarter of 2004 compared to the end of 2003.

• Inventories increased $11,472,000, net of foreign currency translation adjustment. This increase was in support of the higher sales levels. Inventory turns are down to 6.2 from 6.8 at the end of 2003.

• Other assets increased $14,071,000, net of foreign currency translation adjustment, primarily due to the purchase of life insurance policies on key executives with guaranteed returns, which due to the nature of these investments are classified as long-term.

• Accounts payable increased $5,705,000, net of foreign currency translation adjustment, due to higher inventory levels.

• Taxes payable increased $2,697,000 because of the timing of tax payments combined with increased taxation resulting from higher profits.

• Purchases of property and equipment totaled $10,298,000.

• Net purchases of investments and marketable securities totaled $79,189,000.

• Stock option exercises and purchases under the stock purchase plan contributed $13,660,000.

Management believes that existing capital resources and funds generated from operations are sufficient to finance anticipated capital requirements. It is our intention to actively pursue opportunities to acquire other businesses.

Critical Accounting Policies and Estimates

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

Our estimates and assumptions affect the reported amounts in our financial statements. The following accounting policies comprise those that we believe are the most critical in understanding and evaluating Zebra’s reported financial results.

Revenue Recognition

Zebra recognizes product sales at the time of shipment and passage of title, which are generally the same. Other items that affect our revenue recognition include:

Customer returns

Customers have the right to return products that do not function properly within a limited time after delivery. We monitor and track product returns and record a provision for the estimated future returns based on historical experience and any notification received of pending returns. Returns have historically been within expectations and the provisions established, but Zebra cannot guarantee that it will continue to experience return rates consistent with historical patterns. A significant increase in product failure rates and the resulting credit returns could have a material effect on our operating results. A 10% increase (decrease) in returns above historical levels would have decreased (increased) operating income for the third quarter of 2004 by $103,000, or 0.2% of operating income.

Volume Rebates

Some of our customers are offered incentive rebates based on the volume of product they purchase from us over a quarter or year. These rebates are recorded as a reduction to revenue. Each quarter, we estimate the amount of outstanding volume rebates and establish a reserve for them based on shipment history. Historically, actual volume rebates have been in line with our estimates.

Price Protection

Some of our customers are offered price protection by Zebra as an incentive to carry inventory of our product. These price protection plans provide that if we lower prices, we will credit them for the price decrease on inventory they hold. We estimate future payments under price protection programs quarterly and establish a reserve, which is charged against revenue. Our customers typically carry limited amounts of inventory, and Zebra infrequently lowers prices on current products. As a consequence, the amounts paid under theses plans have been minimal. We cannot guarantee that this minimal level will continue.

Software Revenue

We sell three types of software and record revenue as follows:

• Our printers contain embedded firmware, which is part of the hardware purchase. We consider the sale of this firmware to be incidental to the sale of the printer and do not attribute any revenue to it.

• We sell a limited amount of prepackaged, or off-the-shelf, software for the creation of bar code labels using our printers. There is no customization required to use this software, and we have no post-shipment obligations on the software. Revenue is recognized at the time this prepackaged software is shipped.

• We sometimes provide custom software as part of a printer installation project. We bill custom software development services separate from the related hardware. Revenue related to custom software is recognized once the custom software development services have been completed and accepted by the customer.

Shipping and Handling

We charge our customers for shipping and handling services based upon our internal price list for these items. The amounts billed to customers are recorded as revenue when the product ships. Any costs incurred related to these services are included in cost of sales.

Investments and Marketable Securities

Investments and marketable securities at October 2, 2004 consisted of U.S. government securities (25.4%), state and municipal bonds (61.1%), corporate bonds (7.7%) and partnership interests (5.8%). We classify our debt and marketable equity securities in one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities that

Zebra has the ability and intent to hold until maturity. All securities not included in trading or held-to-maturity are classified as available-for-sale.

Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of discounts or premiums. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders’ equity until realized.

Accounts Receivable

We have standardized credit granting and review policies and procedures for all customer accounts, including:

• Credit reviews of all new customer accounts,

• Ongoing credit evaluations of current customers,

• Credit limits and payment terms based on available credit information,

• Adjustments to credit limits based upon payment history and the customer’s current credit worthiness, and

• An active collection effort by regional credit functions, reporting directly to the corporate financial officers.

We reserve for estimated credit losses based upon historical experience and specific customer collection issues. Over the last three years, accounts receivable reserves varied from 1.6% to 2.9% of total accounts receivable. Accounts receivable reserves as of October 2, 2004, were $1,575,000, or 1.6% of the balance due. We feel this reserve level is appropriate considering the quality of the portfolio as of October 2, 2004. While credit losses have historically been within expectations and the provisions established, we cannot guarantee that our credit loss experience will continue to be consistent with historical experience.

Inventories

We value our inventories at the lower of the actual cost to purchase or manufacture using the first-in, first-out (FIFO) method, or the current estimated market value. We review inventory quantities on hand and record a provision for excess and obsolete inventory based on forecasts of product demand and production requirements for the subsequent twelve months.

A significant increase in the demand for Zebra’s products could result in a short-term increase in the cost of inventory purchases; however, this would be offset by improved overhead utilization resulting from the additional demand. A significant decrease in demand could result in an increase in excess inventory quantities on hand.

Our forecasted product demand may prove to be inaccurate, in which case the provision required for excess and obsolete inventory may be understated or overstated. If inventories were determined to be overvalued, we would recognize such costs in cost of goods sold at the time of such determination. We make every effort to ensure the accuracy of our forecasts of product demand; however, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of inventories and reported operating results.

Over the last three years, our reserves for excess and obsolete inventories have ranged from 10.4% to 13.1% of gross inventory. As of October 2, 2004, reserves for excess and obsolete inventories were $7,230,000, or 11.3% of gross inventory. We feel this reserve level is appropriate considering the quantities and quality of the inventories as of October 2, 2004.

Valuation of Long-Lived and Intangible Assets and Goodwill.

We test the impairment of identifiable intangibles and goodwill each year or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We completed our last assessment during June 2004.

We evaluate the impairment of other long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Factors considered that may trigger an impairment review consist of:

• Significant underperformance relative to expected historical or projected future operating results,

• Significant changes in the manner of use of the acquired assets or the strategy for the overall business,

• Significant negative industry or economic trends,

• Significant decline in Zebra’s stock price for a sustained period, and

• Significant decline in market capitalization relative to net book value.

If we believe that one or more of the above indicators of impairment have occurred, we measure impairment based on projected discounted cash flows using a discount rate that incorporates the risk inherent in the cash flows. Net intangible assets, long-lived assets and goodwill amounted to $110,801,000 as of October 2, 2004.

Contingencies

We record estimated liabilities related to contingencies based on our estimates of the probable outcomes. Quarterly, we assess the potential liability related to pending litigation, tax audits and other contingencies and confirm or revise estimates and reserves as appropriate.

We do not believe a liability is probable and are unable at this time to estimate the range of the potential liability that would result from an unsuccessful defense, and consistent with the requirements of SFAS No. 5, Accounting for Contingencies, no liability has been recorded in Zebra’s consolidated financial statements as of October 2, 2004.

Stock-Based Compensation

As of October 2, 2004, Zebra had three stock-based compensation plans available for future grants. We account for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-based Compensation, to stock-based compensation (in thousands, except per share amounts):

	Three Months Ended						Nine Months Ended
	October 2, 2004			September 27, 2003			October 2, 2004			September 27, 2003
Net income, as reported	$	31,319		$	22,999		$	88,682		$	67,301
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects	(1,309		)	(1,360		)	(4,037		)	(4,370		)
Pro forma net income	$	30,010		$	21,639		$	84,645		$	62,931

Basic earnings per share:
As reported	$	0.44		$	0.32		$	1.24		$	0.95
Pro forma	0.42			0.31			1.18			0.89

Diluted earnings per share:
As reported	$	0.43		$	0.32		$	1.22		$	0.94
Pro forma	0.41			0.30			1.17			0.88

Significant Customer

ScanSource, Inc. is our most significant customer and our sales to them accounted for the following percentages of total net sales:

	October 2, 2004		September 27, 2003
For the three months ended	14.1	%	15.0	%
For the nine months ended	13.8	%	13.8	%

No other customer accounted for 10% or more of total net sales during these time periods.

Expectations

As stated on our quarterly conference call on October 27, 2004, we estimated net sales, gross profit margins, operating expenses, and earnings for the fourth quarter of 2004 as follows (in thousands, except per share amounts and percentages):

		Fourth Quarter 2004
Net sales		$170,000 to $174,000
Gross profit margins		50.5% to 51.5%
Operating expenses		$43,000
Diluted earnings per share		$0.41 to $0.44

The effective tax rate is expected to be 34.75% of income before income taxes for the fourth quarter of 2004.

Safe Harbor

Forward-looking statements contained in this filing, including without limitation the information contained in “Expectations” directly above, are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995 and are highly dependent upon a variety of important factors which could cause actual results to differ materially from those reflected in such forward looking statements. These factors include market acceptance of Zebra’s printer and software products and competitors’ product offerings. They also include the effect of market conditions in North America and other geographic regions on Zebra’s financial results. Profits will be affected by Zebra’s ability to control manufacturing and operating costs. Because of Zebra’s large investment portfolio, interest rate and financial market conditions will also have an impact on results. Foreign exchange rates will have an effect on financial results, because of

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There were no material changes, except as discussed below, in Zebra’s market risk during the quarter ended October 2, 2004. For additional information on market risk, refer to the “Quantitative and Qualitative Disclosures About Market Risk” section of our Form 10-K for the year ended December 31, 2003.

In the normal course of business, portions of Zebra’s operations are subject to fluctuations in currency values. We manage these risks using derivative financial instruments.

Hedging of Net Assets

	Three Months Ended						Nine Months Ended
	October 2, 2004			September 27, 2003			October 2, 2004			September 27, 2003
Change in gains (losses) from foreign exchange derivatives	$	(445	)	$	(5	)	$	(100	)	$	(2,519	)
Gain (loss) on net foreign currency assets	1,182			(13		)	593			2,271
Net foreign exchange gain (loss)	$	737		$	(18	)	$	493		$	(248	)

	As of
	October 2, 2004		December 31, 2003
Notional balance of outstanding contracts:
Pound	£	10,176	£	8,569
Euro	€	29,000	€	22,000

Hedging of Anticipated Sales

During the second quarter of 2003, we began a program to manage the exchange rate risk of anticipated euro denominated sales using forward contracts and option collars. We designated these contracts as cash flow hedges. Gains and losses on these contracts are deferred in other comprehensive income until the contracts are settled and the hedged sales are realized, at which time the deferred gains or losses will be reported as an increase or decrease to sales. Summary financial information related to the cash flow hedges of future revenues follows (in thousands, except percentages):

	As of
	October 2, 2004			December 31, 2003
Net unrealized losses deferred in other comprehensive income:	$	(208	)	$	(1,537	)
Gross	(73		)	(538		)
Income tax benefit	$	(135	)	$	(999	)
Net

Notional balance of outstanding contracts	€	30,000		€	30,420
Hedge effectiveness	100		%	100		%

	2004			2003
Net gains (losses) included in revenue for the:				415
Three months ended September 27, 2003	$	69
Three months ended October 2, 2004
Nine months ended September 27, 2003				415
Nine months ended October 2, 2004	$	(561	)

Delaware		36-2675536
State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

333 Corporate Woods Parkway, Vernon Hills, IL 60061
(Address of principal executive offices) (Zip Code)

PART I - FINANCIAL INFORMATION

Item 1.		Consolidated Financial Statements

	Consolidated Balance Sheets as of October 2, 2004 (unaudited) and December 31, 2003

	Consolidated Statements of Earnings (unaudited) for the three and nine months ended October 2, 2004 and September 27, 2003

	Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended October 2, 2004 and September 27, 2003

	Consolidated Statements of Cash Flows (unaudited) for the nine months ended October 2, 2004 and September 27, 2003

	Notes to Consolidated Financial Statements

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.		Quantitative and Qualitative Disclosures About Market Risk

Item 4.		Controls and Procedures

PART II - OTHER INFORMATION

Item 1.		Legal Proceedings

Item 6.		Exhibits and Reports on Form 8-K

SIGNATURES

31.1		Rule 13a-14(a)/15d-14(a) Certification
31.2		Rule 13a-14(a)/15d-14(a) Certification
32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

		ZEBRA TECHNOLOGIES CORPORATION


Date:	November 3, 2004		By:	/s/Edward L. Kaplan
				Edward L. Kaplan
				Chief Executive Officer


Date:	November 3, 2004		By:	/s/Charles R. Whitchurch
				Charles R. Whitchurch
				Chief Financial Officer

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to