漢威聯合 (HON) 2002 Q1 法說會逐字稿

Good morning, and welcome to the UNOVA corporate conference call. All participants will be able to listen-only until the question and answer portion of the call. This conference is being recorded at the request of UNOVA. If anyone has any objections, you may disconnect at this time. I'd like to introduce your host for today's call, Mr. David Brooks, Director of Corporate Public Relations and Investor Relations. Mr. Brooks, you may begin.

Thank you, Operator. Good morning, everyone. Welcome to our conference call to discuss the results for the first quarter 2002.

Before I introduce Larry Brady and Michael Keane, I'd like to make some brief introductory remarks to investors regarding forward-looking statements. Statements made in the course of this conference call that express the Company's or Management's intentions, hopes, beliefs, expectations, or predictions of the future are forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially is contained from time to time in the Company's press releases and in its SEC filings including, but not limited to, the Company's annual report on Form 10-K for the year ended December 31st, 2001, filed in March of this year, and the Company's report filed on Form 10-Q for the quarter ended September 30th and June 30th, 2001. Copies of these filings may be obtained by contacting the Company or the SEC. And now it's my pleasure to introduce Larry D. Brady, Chairman and CEO of UNOVA, and Michael E. Keane, UNOVA's Chief Financial Officer. Larry?

Thanks, David, and good morning everybody, and thanks for joining us. Our first quarter results turned out somewhat better than we had indicated in our last conference call in February. Our Industrial Automation Systems and Automated Data Systems segments exceeded the expectations we had at the time. We'll discuss the significance of this change when we cover segment results. The first quarter did display a seasonal weakness, but the revenue trend accelerated in the latter part of the quarter following a weak January. Our established modus operandi of using cost reduction in an attempt to offset the impact of volume decline, was again evident in our performance. For the quarter, revenues of $292 million resulted in a total segment operating loss before special charges of under $1 million. Revenues were down $111 million from the prior year's first quarter. The comparable segment profit decline was $8 million. To complete the comparison, however, we have to describe two non-cash items which affected the results and which we have discussed in earlier conversations.

First, as a result of last year's pension reversion, our pension income has moved from a positive impact on results to a small charge. Secondly, the changes in accounting rules eliminating goodwill amortization have had a positive impact on the comparison. The net of the two for segment operating results reduced first quarter 2002 by $5 million compared to the prior year. Items below the segment profit line also deserve commentary. Favorable impacts include a $5 million or 43 percent decrease in corporate expense due to lower banking fees and a major headcount reduction at the corporate office. Currency effect was favorable by $1 million, and net interest expense was $3 million or 36 percent improved over prior year as a result of the very favorable cash flows over the last 12 months. Unfavorable impacts on the net income line include a $4.7 million charge associated with the sale of a plastic extrusion equipment business, and the $4.7 million change associated with the absence of a tax credit provision. Both of these items are largely non-cash. Moving now to our business segments, we will begin with our Industrial Automation Business. Revenues of $152 million are down 81 million or 35 percent from 2001's first quarter, reflecting the 35 percent decline in backlog we saw and discussed with you in our yearend comparisons. SG&A expenses for these businesses were down approximately 30 percent in anticipation of the decline in revenue. IAS segment operating profit for the quarter was at breakeven in contrast to the greater weakness we foresaw in our last conference call. The reason for the difference between our earlier outlook and our final result is accounted for by earlier equipment deliveries to customers. Since our backlog continued to decline during the quarter, we have only succeeded in transferring the outlook for an operating loss from the first quarter to the second.

Given the long-term decline in our Industrial Automation backlog, it is appropriate to provide greater granularity for the data. In fact, the changes vary widely by division. Moving from the most affected to the least, our Lamb businesses, including Machining Systems and Body and Assembly, have collectively seen a 59 percent decrease in backlog since yearend 2000. I'll use five quarters ago or yearend 2000 as the jumping off point for each one of these comparisons.

In the last six months more anticipated system orders have been cancelled or delayed than have been placed. Lamb has participated in more than 50 percent of the orders over that period, but the falloff in the market has resulted in continuing backlog decline. It is not clear when the market will improve. Additional bookings in the near term are unlikely to affect sales levels in 2002, but they will determine the extent of engineering and manufacturing overhead absorption and thereby impact profits.

The second IAS business for discussion is Landis Grinding. Their backlog is down 19 percent since December, 2000. Landis has traditionally had a very high share of the crank and camshaft market, which represents approximately 80 percent of all their sales. Their market share has not materially changed over the last two years. Recent studies show Landis' approximate share is 80 percent domestically and 60 percent in Europe. In Europe the majority of remaining market is represented by one competitor serving one customer, a target we continue to pursue. Landis' revenues for 2002 like Lamb will be generally unaffected by further bookings. Bookings during the upcoming quarter will determine the first quarter 2003 revenue. For final division backlog discussion is Cincinnati Machine. Here backlog is down only 7 percent from yearend 2000, and has been relatively flat for the past year and a half. Cincinnati, however, has a much shorter average delivery cycle than either Lamb or Landis, one to three months versus nine to 12 months for those two. The current backlog at Cincinnati Machine has a greater mix of advance systems business which generally has a longer delivery cycle. In this instance, a market upturn for general metal working equipment would translate more quickly into sales of our Value machines, supported by the longer-term Advanced Systems backlog. Cincinnati's share of their traditional metal cutting equipment has not changed, although bookings currently represent more aerospace and less [job shops].

Share for composite machinery is increasing as is composites as a percent of total backlog. The number of future aerospace programs, which increasingly use composites, is unprecedented, including Joint Strike Fighter, European Fighter, Airbus [3AX], and the new Boeing Sonic Cruiser. Cincinnati has also recently been name a Q100 supplier for Boeing and the preferred supplier of composites to Airbus. Its share of the US aerospace market is above 50 percent for metal cutting, and above 80 percent for composites. Looking finally at total Industrial Automation backlog mix regionally, the US backlog is down 55 percent since December, 2000, while the European backlog is down only 2 percent.

Recovery at Lamb and Landis depends upon a resumption of the capital investment plans of automotive OEMs. New car programs planned for the model year 2004 and 2005 should result in orders for capital equipment. But as we mentioned earlier, we have not yet seen any evidence of this upturn.

Recovery of Cincinnati depends upon a recovery in the industrial economy. Historically a capital capacity utilization figure in the high 70 percent to low 80 percent range signals a replenishment cycle. Currently that number is increasing, but is still in the low 70 percent range.

We will continue our highly variable cost structure at Lamb and Landis, adjusting expenses in proportion to anticipated revenues. We are committed to maintaining its market leadership for power train manufacturing systems, and its world renowned process engineering and design expertise. And regardless of market conditions, we will continue our strategy of reducing vertical integration at Cincinnati machine to improve its relatively higher fixed cost profile. In short, we seem to have very good market positions in a lousy part of the market cycle. Moving now to our Intermec business, the difference between the Industrial Automation segment and Intermec is momentum. For the last two quarters we have exceeded our beginning quarter forecast at the time that we've talked to you on the conference call. We have met our objective of reducing spending to $145 million quarterly revenue breakeven. We have continued to gain share, as evidenced by our revenue patterns, and we have managed our working capital more efficiently than our leading competitor. During our last conference call we suggested that our fourth quarter sequential improvement of 7 percent in sales was the result of traditional seasonal patterns, not run rate improvement. We also said that this seasonal pattern would reverse in the first quarter such that the average of the first and fourth would approximate the third quarter level. Finally we said that nothing in the first month of the year had altered that view. The math suggests that we were anticipating a first quarter revenue in the low 130s. To begin with, the month of January was the lowest revenue month that we've seen in over four years. Since we achieved revenue for the quarter some 5 percent beyond our expectation, you can understand my reference to momentum, especially following the very positive results in fourth quarter. Secondly, to accommodate the seasonal impact, our average quarterly revenue for the fourth and first quarters is $146 million, up some 2.5 percent from the third quarter, unlike the declines over that time of our leading competitors and the industry in general. Finally, while our quarter versus prior year comparisons are down about 17 percent, that is only half the erosion reported by our leading competitor. Let's look at Intermec sales from both a geographic and product perspective. When we average sales from the fourth and first quarter and compare them to the third quarter run rate, there was little variation in any geographic region. For example, and to explain the math, sales in Latin America were about $8 million in the third quarter, increasing to $10 million in the fourth quarter, but retracting to 6 million in the most recent quarter, thereby continuing the run rate at about $8 million. The average of the first and fourth quarter is therefore in line with third quarter sales. And sales from North America and EMEA followed this same pattern only with less variation between the two quarters. It is true that if you take the average of fourth and first you wind up with a higher number than the third quarter run rate, or what we called our run rate, and that's due almost entirely to better success in Europe, Middle East, Africa. In terms of product mix, we saw increased activity in short lead time items, especially media and supplies, up about 2 percent from the fourth quarter, and printers up about 12 percent. These products are more heavily distributed through the indirect channel, and have also been leading indicators both of Intermec's performance and the economy in general.

Looking at profit you will recall that Intermec lost $6.7 million in the fourth quarter of 2001 on revenues of $153 million. The loss included a severance provision of $8.1 million. Even adjusting for the provision, our breakeven sales level was about $150 million for that quarter. Our loss of 700,000 on first quarter sales of 140 million suggests that we have achieved our goal of a breakeven level of spending at a $145 million quarterly revenue. The average sales of the last two quarters is above 145 million, therefore we should achieve increasingly profitable operations as the market rebounds. Equally encouraging is our performance versus competitors in product margins. Intermec's first quarter gross margins are up about ½ a point over last year's first quarter, and almost a point and a half from last year's fourth quarter. It is appropriate, however, to sound a note of concern in this area. The aggressiveness of competitive pricing is unprecedented in recent years. If there is a down side to our performance in the future, it will most likely occur here. In closing, let me describe a specific instance which reflects Intermec's continuing commitment to product differentiation in a market increasingly characterized by sameness. Late in the quarter Intermec began a rollout of the industry's first complete mobile computing system featuring Bluetooth short-range wireless technology. The customer, who is a major home delivery company, will soon outfit its drivers with several thousand Intermec model 700 computers linked via Bluetooth radios to Intermec portable printers.

Drivers can thereby complete a delivery transaction, then offer customers an immediate receipt or even an invoice. This was much more difficult and cumbersome in the wired world, including greater interference by the wires. The new Bluetooth enabled system will eliminate the tangle of cables between a handheld computer and printer, which has the immediate benefit in terms of convenience, safety, and driver efficiency.

And longer term, Bluetooth offers all our mobile customers important advantages, and easy to implement, low power protocol ideally suited for mobile computing applications where simplicity and battery life are crucial, and an emerging global standard for peer-to-peer device communications. In the faster paced markets in which we compete fifth to market and first to market can be critical differentiators.

With that, I'll hand the call over to Mike Keane, who can give you a perspective on UNOVA's financial performance. Mike?

Thanks, Larry. I'm going to focus my comments primarily on our balance sheet and our cash flow. Our net debt during the first quarter increased by $29 million, in line with our cash flow expectations. Operating cash usage of 31 million was primarily driven by working capital needs of our IPS segment. Capital expenditures of 1.9 million continue to run under our planned spending, as lower business levels have not required any significant new investments in planned capacity. Capital spending was more then funded by proceeds from asset sales just over $4 million, including the sale of our plastics extrusion equipment business and other excess property and equipment. We continue to expect capital spending to be less than our depreciation rates for the remainder of the year. During the quarter, we continued to reduce our debt levels as we've paid down our 13 percent term loan by another $1.7 million. Our funding needs were entirely met with cash on hand, and no amounts were borrowed from our revolving credit facilities during the first quarter. Subsequent to the first quarter, we closed on the sale of our corporate headquarters building, and we used $10 million of the proceeds to further reduce our term loan.

We continue to expect that we will remain unborrowed against our revolving credit lines in the second quarter. We will also continue to seek opportunities to monetize non-core assets and further reduce our term loan in increments prior to its maturity date. Our improving position was recognized just after the end of the quarter by one of the rating agencies, Standard and Poor's, who upgraded our debt from a triple C+ to a B- and removed UNOVA from the credit watch. Also during the quarter we were successful in renegotiating our covenants within both our domestic revolving credit facility and our term loan. The current covenants more properly recognize our ability to manage our liquidity levels during periods of volatility in generating EBITDA. Major changes in the covenants were the modification of a fixed charge ratio, and the elimination of minimum EBITDA levels. As a result, we now have a two-tiered test. If we maintain sufficient liquidity, which is defined as availability greater than $50 million, UNOVA is not subject to a cash flow covenant. If our availability is less than $50 million and we have borrowings greater than $10 million, then we are subject to a free cash flow test in the year 2002.

In addition, fixed charge coverage ratio requirements in subsequent years were lowered. However, given the less stringent EBITDA requirements, we are also required at all times to maintain minimum domestic availability of $30 million. The new covenants were included as an exhibit to our 10-K filing in March if you want further details. In summary, we have continued to improve the flexibility of our liquidity resources so we can continue to support Intermec's recovery as well as allow our IAS businesses to remain strong competitors as we await the market's recovery.

Thanks, Mike. And now, Operator, we'd like to open up the phone lines for questions.

Thank you. At this time we are ready to begin the question and answer portion of the conference. If you would like to ask a question, please press star one. You will be announced prior to asking your question. To withdraw your question, please star two. One moment. Our first question comes from Walt Liptak from McDonalds Investments. Sir, you may ask your question.

Yes. Just I guess a question about some of the revenue guidance that you gave. In the IPS segment it sounds like revenue will be down sequentially for the second quarter. Can you give us a little bit more clarity on the range? Will it be less, you know, by 20 million sequentially or more?

I think we're anticipating, Walt, that the revenues will be closer to flat in the second quarter than down significantly. We saw the first quarter previously as the low with a comeback from there. But with the earlier deliveries we see it about flat. We do see lesser profits as we indicated on that and that's really timing of the cycle.

Okay, and then when you look into the second half, you know, I don't see any reason why you would have any kind of a pick up with the backlog where it is in IPS. So would you expect it to stay flat throughout the rest of the year?

Yeah, we would. As I said, we don't really see any further order activity having much of an influence, and so yeah, that's about right.

Let me hurry to suggest to you that we've been avoiding the guidance that you're asking us about. But the answer to the question is yeah, that's our expectation. We see right now, for reasons that are seasonal in nature rather than recovery in nature, that our run rate is in the range that you just talked about and we don't see it- we don't see it materially changing in the second quarter. And given our spending levels, we see a profit performance in the same fashion you're talking about, so sure.

Okay. And then you talked about- a little bit about market share gains and you said it was the measure that you're using is looking at revenue versus your competitors. Is that market share gain related to- could it be related more towards the sectors that you serve? Because you're stronger in industrial and warehousing, et cetera versus competitors that are stronger in retail. Or are there instances where you know that you're taking share on the retail side?

I think there are two answers to that question. The first is our share in retail is sufficiently small, but yes, we think we are, but I'm not sure how material it is. And the second is really that your first call is the proper one. Much as we saw ourselves decline earlier as a result of our focus on the industrial businesses, I think we're seeing a rebound largely driven by the fact that our industrial customer is coming back. But you are correct, Walt. My observations relate to the fact that in the final analysis, while the competitive landscape tends to have greater concentration in different segments of the market, the fact is that we compete in the market at large.

Okay, and then my last question is on the 700s that you're going to be selling to that large mobile system, are you seeing other sales of the 700s? And also, I guess, is another question, are there any other large mobile systems sales that are in the pipeline that, you know, that we can kind of expect?

I'm very hesitant to talk about that, but the answer is that's our business and absolutely there are those activities which continue to be ongoing as stimulated by the fact that the 700 competitive products have encouraged rotation of the generations.

Okay. Thank you.

And as we commented last time, Walt, the 700 is our most successful product introduction ever in handhelds in terms of its ramp up speed.

Okay. I understand. Thanks.

Mr. Jason [Cove] with [Barclay] Capital Asset Management you may ask your question.

JASON [COVE]: Hi, thank you so much. Just wanted to get further color on Intermec. The sense I got is that the revenue line, which on a seasonally adjusted basis is at, you know, at a certain level which would suggest that in the second half you could see some improvement over the current run rate. If you could clarify whether I have the correct understanding, number one. Number two, I would like some further clarity in terms of the working capital cash burn as it pertains to decreasing accounts payable. Thanks.

Sure thing, Jason. I'll take the first question and Mike will take the second one. We have tried because of the seasonality of our business not to declare victory when sales go up and correspondingly to try to alert you to the seasonal effects of them going down. And so in the fourth quarter what we said was you've seen a 7 percent increase and our competitors didn't see that and so perhaps there's cause for rejoicing, but indeed, we don't believe that. We just believe it was seasonal effect, and we believe it'll right itself in terms of run rate in the first quarter.

If you look at those averages, you see that the average of fourth and first is about 146 million at Intermec, which is slightly up from the 142, 143 level of third quarter. We still don't believe we've seen market recovery. There's some early evidence, as we said, in some of our point products like printer and media, which tend to precede the upturn, but there's certainly not a firmly established market recovery and therefore to your point and to Walter Liptak's earlier question, our sense is that the 145 to 150 range is currently where- is our current business level or current run rate. Mike, [inaudible].

Sure. The question regarding the change or usage of cash and working capital, and I think more specifically you were alluding to the accounts payable balances. There's really two things going on simultaneously during the quarter. First of all there's an increased use of cash to support the contract build both with- primarily within our IPS segment. And those are the type of contracts where we tend to have more longer-term contracts that are accounted for under percentage completion. Therefore, we had some build going on there that is supported by working capital build out. And then as those contracts are delivered they turn into billed receivables and later cash. In conjunction with that also we had accruals at the end of the year to represent various severance programs and reorganization activities, and some of the cash flow to pay down those accruals occurred in the first quarter as well. And those are the primary reasons you're seeing those variations.

JASON [COVE]: Just in terms of the accruals, that's a pretty substantial impact on the accounts payable. Am I understanding that correctly? I'm not sure if I'm understanding how the- I wonder if you could break down the 30 million change in accounts payable.

Well, we're not going to go into specifics of that, but let me…

JASON [COVE]: But in rough, you know, terms.

Let me give you some generalities. I mean, it's accounts payable and accrued expenses, and some of it is the same. Some of the accrued expenses were relative to, as I said, severance and reorganization. We disclosed that we had about $8 million of severance charge for Intermec alone in the fourth quarter. And a majority of that payment in terms of people actually leaving premises occurred in the first quarter of this year. That's just one example.

But I think you need to understand the cycle of how the contract builds occur within IPS to get a better feel. We have certain contracts where we're putting cash into the contract, equipment, final integration, and we generally do pay our vendors prior to receiving our final billing from our customer. So in any one or two week period you can have a mismatch, if you will, where the payables will decline because we have paid our vendors, and then within two, three week period we were receiving a billed receipt from one of our major customers. And these things tend to come in large lumps.

JASON [COVE]: I understand. Thanks.

You're welcome.

Mr. Eli Lustgarten with H.C. Wainright, you may ask your question.

Morning. Crosstalk] A couple of questions [inaudible] a simple one. Interest charges were, what, 5.6 million in the quarter.

No, I don't see any major change occurring.

So we'll stay around 5-1/2, 5.6 for the rest of the year?

I've already said that we paid down another 10 million in the month of April.

Okay, so, all right. So it'll stay relatively flat for the rest of the year. Now how much was IPS brought forward into the first quarter [inaudible] profit contribution that we got in the first quarter which wasn't in the second?

There are about six different answers to that, as you know, Eli.

Some involve relative to plan. Some involve relative to expectations at the time that we talk to you guys.

But we're talking round numbers, something a little over $10 million, and we're talking about the impact somewhere in the sort of three to four range.

About 10 million in sales and three to four million of operating profit?

Right.

That's what we're saying, right.

Now [Milicron's] business turned out to have probably less of a loss than I expected. Does that get better as we look out?

We have been working really hard at trying to chase the sales levels down in a highly vertically integrated business, as you're aware. And we have been consistently outsourcing more and more of the manufacturing. We really have businesses at two ends of the extreme. At Lamb we really got an assembly business that's well north of 80 percent purchase materials, whereas at Cincinnati we started with almost a wholly integrated manufacturing cycle.

We have reduced vertical integration, and as a result of that have been more successful at taking costs out. I think headcount is an example as we've seen the revenue drop by more than 50 percent has gone down by something like 60 percent. And we continue to work at that effort, and so the more we can variableize our cost structure, the more success we're going to have. I think it's our conclusion that at the current revenue levels we can improve profit somewhat, but clearly it's going to take a rebound for that business to make any appreciable profits just because we're running up against fixed costs that we can't influence.

Will we have any volume improvement in the second quarter of [Milicron] versus the first quarter?

You say [Milicron] and we say Cincinnati Machine.

I'm sorry, Cincinnati- I'm sorry, Cincinnati Machine. Is there any improvement in the second quarter volume versus the first quarter volume, because 10 million improvement was all at IPS, right?

That's right, and fundamentally all at Lamb. And the answer is we don't anticipate any significant improvement in Cincinnati Machine.

Okay. And as you look into ADS, you know, you sort of pre-established a base point for the second quarter, whatever it turns out to be, somewhere in 145, 150. Normally it seems the seasonality is a little different. Now were you looking with the potential for the third quarter actually being higher than the second quarter?

That's what we're anticipating, but the only real indicator that we have at this point is these indirect channel point products of printers and media, which as we said will tend to surge- tend to increase when the market starts to come back because that's the short cycle sale. So we're encouraged by that, and indeed, I would even argue we're encouraged by the level of business and quote activity, but it hasn't translated to sales. And as you know, we've been predicting a next half recovery for the last year and a half so I hope it happens.

Well, we're going to be right one of these days anyway.

I hope so.

And finally, one final question. The shipping schedules at IPS I thought were skewed somewhat to the second half, in other words you'd have higher revenue without any pick up in business revenues in the second half of IPS would be somewhat higher than the first half just on the basis of the way the current backlog would ship.

That was our anticipation earlier on, and the result of orders cancelled or deferred- anticipated orders cancelled. The stuff that we thought was going to come up in late fourth and throughout the first quarter, half of it- half of it made it to the marketplace. And it's been a- it's been a- some of those were quite significant cancellations of intentions or deferral of intentions into 2003 and beyond. And that was the- that's why we don't anticipate at this point, because we've got that clarity with nine to 12 month lead times on the Lamb product line, we don't anticipate that upturn.

So you're expecting volume in the second quarter at IPS to drop a bit from the 120 and then sort of go back up to the 120 level the rest of the year? Is that sort of the kind of profile we're looking at?

Yeah. That's fair.

Thank you.

Thank you.

Mr. [Steven Troy] with W. L. [Roth] and Company, you may ask your question.

STEVEN TROY]: Hi, good morning, guys.

Morning, [Steven].

STEVEN TROY]: Can you detail under the current borrowing base formula either today or as of quarter end how much availability you had?

Under the credit lines in total?

STEVEN TROY]: Correct.

Okay. Globally we had as of last week probably I think it was in excess of $120 million availability. And that's defined as basically cash plus what the borrowing base would support under the credit lines.

STEVEN TROY]: Right. Okay, and just a follow up question. Given the restructured covenants and the availability of hurdles and the way that the year is tracking and the outlook, are you comfortable with the covenants for the balance of the year?

Yes. Very comfortable.

STEVEN TROY]: Okay. Great. Thank you.

Mr. Trent Porter with BNP Paribas, you may ask your question.

Hi, guys. Just a few quick questions. The first one- CHEP is, I guess, testing, you know, your RFID solutions for about a million other pallets. But that has the potential to be significantly larger opportunity. I was just wondering what the timing of that thing is. Is that like a, you know, a year or two out or have they- are they coming close to reaching a decision or are we still waiting for our standards?

All of the above. It's impossible to predict because despite the very significant amount of tags that are involved, we're still talking about a prototype exercise. CHEP, as you know, is the largest pallet guy around and the good news is A, we look for folks in industries where they can set a de facto standard. And B, we look for folks who can materially influence the setting of standards.

We've said from the get go that progress on the standards front is critical to RFID because we just can't have a series of proprietary solutions. But CHEP represents that kind of customer. And the outcome is totally dependent on the success of the- the success of the trial.

I got you.

Even down to whether we're talking about one or two tags per pallet. I mean, we're still at that phase.

Oh, okay. So how long do you think a trial goes on?

I don't believe that the success of the trial will impact 2002 revenues beyond the prototype.

Okay. The, you know, SG&A of 74 million, is it fair to assume then since it looks like sales are roughly flat that that's a reasonable quarterly run rate for SG&A? And then, you know, throughout 2001 you realized incremental improvements in SG&A based on, you know, your restructuring activities. Is there more to come?

Let me try and broadly address what you asked. And I think our preference is to deal with it on a segment basis. We have over the course of the last year and a half brought the breakeven at Intermec from about 225 down to about 145 million in quarterly sales largely as a result of being able to hold margins and being able to reduce SG&A. We put a plan in place at the beginning of the year to achieve that 145. We think that the direction of sales in the future is up. We don't know what the timing of that is, but we don't see any material erosion.

But you know as well as I do every time you look at a national association of purchasing managers index that goes down or a consumer confidence that goes down, you worry about the next wave. So I can't- all I can tell you is that our current intention is for no material reduction from this point going forward because we anticipate sales increase to provide the profit activity. And we don't- we will not increase fixed costs on the way back up.

I got you.

On the IPS side, we're just trying really hard to keep up with the level of business in terms of cost reductions. That's easier in Lamb and Landis because of the variable cost structure. At Cincinnati it isn't. But if the businesses do continue to decline, we'll surely be taking out SG&A cost to accommodate.

Okay. I got you. And then the last question I'm going to- I'm afraid may be sort of a dumb question but, in the IPS business you get an order in hand say, July 1st. Percentage of, you know- I guess what I'm asking is what's the timing? When does it actually become part of the pipeline? When do you start building on it? Because percentage of completion would suggest to me that, you know, then at the end of September you'd have a quarters worth of that contract in sales.

Yeah, but I think the important thing to remember- and Mike can certainly add to that as appropriate. The cycle breaks down. This nine to 12 month cycle breaks down into about three phases. The first phase is engineering, which is about a third of the phase. The second phase is procurement, which is a little less then, but nearly a third of the phase. The last third is manufacturing. And it's that cycle that causes a backend loading of the impact on percent completion.

I got you. Okay, thank you.

In other words, it's not a linear progression.

There is, but it's much depressed. And in terms of the profitability, the way we recognize margin over the course of the contract accelerates toward the end of the contract so that we don't wind up getting out ahead of ourselves.

Okay. Oh, one last one. The overall decrease or decline in gross margins, I guess that comes from the IAS side. Was that just primarily just negative operating leverage or is there something else?

It's primarily the fixed cost nature of the manufacturing operations where we see- where we see a significant impact because we can't reduce the fixed costs, particularly Cincinnati Machine where we saw a significant increase. But it's also pension expense. Pension expense has been a part of that mix and a part of that calculation. And the absence of that eight or $9 million worth of benefit translates mostly into our IAS businesses.

Oh, okay. I got you. Thank you.

Mr. [Carl Goldschmidt] with M.W. Post, you may ask your question.

CARL GOLDSCHMIDT]: Hi. A couple of things. Just quickly, when you went over the global liquidity available, I think you threw out 120 million. But I think you said that includes cash, and I wondered if you could just break out what the actual revolver availability is?

Well, we generally don't disclose that separately, but it's cash that is what I call readily available. So it's not necessarily the balance sheet cash. It's the most highly liquid cash plus the borrowings.

CARL GOLDSCHMIDT]: Plus what's available on the borrowing base. Okay. You sold the headquarters, I think you mentioned there may be- are there any other asset sales, non-core asset sales, in the pipeline?

There's a number of things that we're trying to achieve. We do have some excess real estate, mostly industrial type properties that we're looking to move, but right now it's not a great market for those types of properties. But we continue to work on the effort.

CARL GOLDSCHMIDT]: And should we think about anything as far as timing or amount of proceeds that may come in over '02 or expectations?

It's hard to anticipate. As I've commented in previous calls, I've sold this building, the headquarters building, here it took three tries. The third time was the charm.

CARL GOLDSCHMIDT]: Okay. I won't hold you to anything.

Okay. Thank you.

CARL GOLDSCHMIDT]: And anything further on further patent settlements or the patent suits?

Well the situation, [Carl], is that the trial is scheduled for the 28th of the month to begin. The nature of those things are such that all of the stuff that you would expect to be going on at this point in time is going on, but it's also the nature of these things that how it'll turn out is wholly unpredictable. The only thing I can say is that the situation is heating up just because we're getting closer to trial day.

CARL GOLDSCHMIDT]: Right. Okay. And is there only- I thought there was potentially more than one party to go after as well. I mean, you're obviously involved in this trial, but I thought there were some other parties as well.

I'm sorry. The current pursuit is Dell Computer. We have settled in the past with three manufacturers, and most recently, about a year ago, maybe eight or nine- nine or 10 months ago with Compaq-it was a second quarter event last year, I think-and have then moved on to Dell. Once we have conclusion with Dell there continue to be a bevy of opportunity, what Mike Keane would call a target rich environment for us to pursue. And we will do that. What we've said to you in the past is the expense of mounting these campaigns is such that we need to do it in sort of series or heel to toe fashion just because we can't wage war on that many fronts simultaneously. So once we conclude the Dell activity, we'll move on to the next candidate.

CARL GOLDSCHMIDT]: Okay. Okay. And I think you alluded to the fact that within Intermec that the quarterly trend was better per say than January was very weak and then things grew over the quarter.

Well, what I'll- I mean if you don't do anything except either look at industry increases or industry declines over the timeframe, the fact that our January revenue was the lowest in four years gives you at least some hint of the fact that it was way down. And we not only recovered that differential, but in fact, exceeded what we've described as our run rate in the following two months. And so we were quite pleased at the rebound, but again, I wouldn't suggest to you therefore that we're in a full fledged hot, steaming market recovery. I would just say that we had a depressed January for lots of reasons, which probably are at least in part the administrative capability of sort of getting the year going, getting the sales moving.

February and March would- because they recovered January, they were better than we would have anticipated, but they just reflect ongoing kinds of run rates. And in fact, April did not exhibit the characteristic weakness that we saw- the first month weakness we saw in January. It was more- it was more typical of a first month of the quarter.

CARL GOLDSCHMIDT]: I see. Okay, that's helpful. And are there any other- in the accrual reserves, et cetera for restructuring, are they any further cash restructuring costs going forward as far as severance or facility closure costs?

Relatively minor.

You know, there- as Mike alluded to, we're attempting asset sales, and largely those are real estate. As we found with this smaller sale of the plastics excursion business, there are very small increments of non-core businesses that we would sell if we find the proper climate for it. And you could find some kind of minor restructuring activity associated, but it really is minor kind of numbers.

CARL GOLDSCHMIDT]: Got you. And can you give me any insight into customer feedback on the IPS side, specifically with the automotive customers as to, you know, we're all seeing that, you know, there's sort of a stabilization or even, you know, pick up in the big three production builds and that things feel better. And yet, I guess, on the capital equipment side you guys really aren't seeing anything. And just from the- just commentary-wise, I mean, you know, what are your customers saying? Are they saying that they've got all the equipment they need from the last cycle or that, you know, maybe next year, or I don't know just if there's any commentary behind that?

Yeah, [Carl], the- firstly, as you know, it's important to differentiate between the sale of units, where parts makers tend to benefit, and the sale of capital equipment, which tends to be driven by future models. Almost universally the leadership of the big three, which tend to be our customer base as well as the truck engine manufacturers, the leadership of the big three has changed to represent more product guides.

And so guys like [inaudible] Chrysler are taking a hard look at model introductions, but in the main it serves to both focus and delay as plans get re-tracked. There's a commitment to model change. It just hasn't been reflected in the reorganized process of understanding what those product plans are going to be. And so what we hear from our customers is positive news about what's coming, it's just that every time it gets to the time to go out for a specific quote, it gets delayed. In the truck business that's true in spades, truck engines.

CARL GOLDSCHMIDT]: Yeah. Okay. So if I'm just sort of like paraphrasing what you're saying, it's that, you know, obviously between Ford and GM they've got old tired models and they obviously want to do a lot to refresh and change those models, but that may be, you know, down the pipe in the future. And so when that translates into, you know, new orders for you guys may be pushed out, so to speak or I don't know if that's- waiting for that refreshment of model change over maybe sometime out in the future.

Yeah, they continue to be optimistic, and our issue is not is it their intention. It's just when it's coming.

CARL GOLDSCHMIDT]: When. Okay.

Carl], we probably ought to move on because we got a fair queue here.

CARL GOLDSCHMIDT]: I appreciate it. Thanks.

Thank you very much.

Mr. Rich [Ruben] with Hawkeye, you may ask your question.

RICH [RUBEN]: Hi, guys.

Hi, Rich.

RICH [RUBEN]: Larry, first question. I thought we had sold the headquarters building before and leased it back.

Yeah, Mike will explain this transaction, which only Mike can explain.

RICH [RUBEN]: Okay, and then my second question is, have you continued to see Ingersoll just pull out of the market or continue to downsize?

Mike, why don't you answer the first question.

Okay. Regarding the building sale, you know, we had commented that it was one of the assets that we were attempting to sell and, you know, as I joked, I had it sold three times because we got to the altar and the deal left at the last second. That was just the reflection of the real estate markets in general.

But what you may be thinking is the fact that the building was originally held by the pension fund, and when we did the pension reversion it reverted back to the company as part of the proceeds of that activity. And then subsequently we put the building up for sale so we could turn it into cash, and we are leasing back, of course, the appropriate space that we need. But we finally concluded that sale activity within the last couple weeks.

What was the second part of your question, Rich?

Oh, yeah. I'm very reticent to comment about that. I can say to you that like Cincinnati Machine, Ingersoll is a highly integrated company and therefore the downturn in sales which the total industry saw- and indeed, most machine tool folks, in an effort to compete with the Japanese, have tended to be vertically integrated. It's why the industry at large is getting killed in this downturn, and Ingersoll was not well positioned for that event. And so they, like virtually the entire industry, have been struggling. Beyond that I'm really reticent to comment.

RICH [RUBEN]: Okay.

Mr. Walt Liptak with McDonalds Investments, you may ask your question.

Question's been answered, thanks.

It was nice to hear from you, Walt.

Our final question comes from Jason [Cove] with [Barclay] Capital Asset Management. Sir, you may ask your question.

JASON [COVE]: Hi, thanks, appreciate that. Just a couple of quick questions. I know that you've been reticent about giving out guidances in past and continue to do so, but if there's a bit of a telegraph here is that we should continue to expect kind of flat levels for the rest of the year.

For IAS.

JASON [COVE]: Yes.

If you talk about revenue levels, you get the right sense. We believe that on the ADS side there is, you know, there are very short delivery cycles, and an upturn in the industry can be very impactful and, you know, unlike the relatively smallish margins we have on the IS side, ADS margins or contribution, as you know, is in the range of 40 percent. So you get an uptake and it has a decidedly favorable impact. It's also true that if you look at capital requirements, particularly our cash conversion cycle, which is way favorable to our competitor's, is about half the working capital requirement of our IAS business. And so you kind of get a two for. If ADS turns up, you get a lot of money, a lot of the revenue hitting the bottom line, and you don't get as material a buildup in working capital.

JASON [COVE]: I understand.

So we could see that as having a major impact, but it's going to be market recovery related.

JASON [COVE]: I understand, but that's not something you see currently.

That's right. That's fair.

JASON [COVE]: And in terms of the- in terms of the contribution margin in excess of the $145 million profit breakeven point, what would you say is the excess, you know, margin down to the operating line?

Forty percent.

Yeah, that's what I'm talking about. If you look at gross margin and additional absorption and offset by variable costs of commissions and stuff like that to give you a conservative financial answer I'd probably more accurately say 30 to 40, but at Intermec we talk about 40. So that is the answer to that question.

JASON [COVE]: Understood, and just one more quick thing. In terms of D&A, you know, broken down to three segments, what is the current run rate?

I'm sorry, G&A? JASON [COVE]: D&A. Depreciation and amortization, you know, with $30 million of Intermec and et cetera. What's the, you know, what's the current run rate?

Jason, we'll have to get back to you on that.

The ratio that's shown in the 10-K has not changed appreciably. You can see it was about $9 million for the quarter.

JASON [COVE]: Understood. Okay. Thanks a lot.

Our final question comes from Mr. Eli Lustgarten with H.C. Wainright. You may ask your question.

Well, I figured I'd try one more time. What's the probability of breakeven sometime this year? Would you just need the volume in the machine tool business to come back to get there?

Doing the math, which I'm sure you've already done, for all intent and purpose we think we're operating in and around the breakeven point on a segment operating profit basis. So what we've got to do is cover interest and overhead. And if I take that roughly $9 million, $10 million expense and divide it by .4, then I get the sales increase in Intermec that's going to be required to get there. That's the real answer to your question. And when we do it, that's how we'll do it.

All right. So you don't think that machine tool [inaudible] in September is going to mark a change.

If it does it won't mark a change in terms of our ability to put appreciable product on the bottom line for the remainder of this year.

Yeah, but it'll affect- it will affect Cincinnati Machine relatively quickly.

Yeah, that's true. That's true.

And the overhead absorption at IAS would be the difference between earning, you know, three or $4 million a quarter and $10 million a quarter from [inaudible]. There's a huge difference.

Yeah, I guess it- probably we're more optimistic about that upturn.

I know, but there's a 30 percent depreciation kick in the, you know, build so, you know, we're betting on September so… Thank you.

Thank you, Operator. I think we're done for this call. And we look forward to hosting another call sometime in July. Thank you.