漢威聯合 (HON) 2002 Q3 法說會逐字稿

Good morning and thank you for joining UNOVA's third quarter earnings conference call.

All participants will be able to listen only until the question-and-answer session of the call.

This call is being recorded at the request of UNOVA.

If anyone has any objections you may disconnect at this time.

I would like to introduce Mr. David Brooks, Director of Corporate Public Relations and Investor Relations.

Sir, you may begin.

Thank you, Amy.

Good morning and welcome to our call, everyone to discuss the results of the third quarter and -- of -- ended September 30, 2002.

Before I introduce Larry Brady and Mike Keane, I'd like to make some introductory remarks to investors regarding forward-looking statements made during this call.

Statements made during 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 S.E.C. filings including but not limited to the company's annual report on form 10-K for the year ended December 31 2001 filed in march of this year and the company's report filed on form 10-Q for the quarter ended June 30, 2002.

Copies of these filings may be obtained by contacting the company or the S.E.C.

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?

Good morning, everybody.

Thanks for joining us.

As I indicated in the press release, the third quarter was a period of significant progress for UNOVA.

While the fortunate of our two operating segments are diverging, the third quarter marked significant and historic changes for both.

There is a lot of noise in this quarter's results that make comparisons more difficult.

In this quarter, IP settlements and charges for the corporate headquarters move and in last year's quarter restructuring and asset impairment charges.

Therefore, as we go through the call I would like to focus on three key areas -- first, excluding any gains from IP settlements, Intermec demonstrated a solid return to profitability earning more than $7 million in segment operating profit for the quarter.

Second, the restructuring of our industrial automation systems businesses will allow us to realize the strategic benefits of consolidated divisions while lowering overhead costs in the face of continuing declines in the market.

Third, our continuing ability to generate cash from operations as well as asset sales and IP settlements has resulted in a new record low for net debt of $116 million.

In the third quarter, segment operating profits for the corporation were up $29 million versus the same 2001 period.

Aided by Intermec's improved sales performance and profit margins as well as intellectual property settlements but impacted by revenue declines within our IPS and AME segments.

Total revenues of $330 million declined $29 million from last year's third quarter.

A number of items outside normal operations were included in these results.

And I will categorize those for you.

The third quarter of 2002 included $37 million of IP related revenue and a $5 million charge for the impending relocation of corporate headquarters.

The prior year comparable quarter included $258 million in goodwill and asset impairment charges.

The comparison also benefited from a reduction in goodwill amortization of $3.2 million, offset by a $3.6 million change in pension income, because of last year's pension reversion.

We have been cautious about reporting IP revenues, that's intellectual property revenues, in the past, due to the confidential nature of legal settlements.

Since we received two IP settlements during the quarter, we can deal with the aggregate amount and give you greater transparency to Intermec's product and service revenue performance.

In fact, let's discuss Intermec's results.

Intermec reached a major milestone in the past quarter as the size of the segment reached a level of more than half of UNOVA's sales.

This is true independent of the IP settlements.

The trend lines for Intermec demonstrate continuing revenue and profit growth and continuing market share gains.

Intermec had $162 million in product and service revenues, up 13% improvement versus the same period in 2001.

In the last conference call we told you to expect flat sequential revenues.

The fact that our third quarter is generally weaker than the second, and the significant increase of 9% in the second quarter over first quarter led us to this expectation.

In fact, we were wrong.

We did recognize significant sequential gains, which were aided by two unusually large DSD roll-outs.

Schwan's the leading home food delivery company in the midwest and [INAUDIBLE] Bakeries, Latin America's largest bakery company.

Examining Intermech's performance on a product line basis, our key systems and solutions business comprising wireless hand held terminals, scanners and mobile computers.

That business posted a 22% increase versus prior year results.

This is a fair proxy of our sales performance against our largest rival.

Again, it is indicative of our continuing market share gains.

In our other support product lines, printer media sales declined by 4% versus third quarter 2001, while service revenues increased 9%.

The sequential quarter comparisons show similar upward trends.

Systems and solutions product revenues, improved 12% sequentially.

Continuing the double-digit growth trend established earlier this year, between the first and second quarters.

Service revenues were flat on a sequential basis, and printer media was down.

Product and service revenue improvements were positive across all geographic regions.

North America revenues were up 7% and sales in Europe, Middle East and Africa were up 10%.

Sales from the rest of the world increased 62% versus prior year results.

Continuing through the Intermec income statement, segment operating profits improved $18.7 million versus the prior year results.

Higher product and service volumes or revenues and a more than 3 point improvement in gross margin contributed a $12 million increase in gross profit.

Operating expenses were $5 million lower in the third quarter of 2002, and the absence of goodwill amortization contributed an additional $2 million.

Summarizing, then, the key points about Intermec's performance, first, this is the second consecutive quarter of double-digit revenue improvement for Intermec's systems and solutions products.

Second, we appear to be successful thus far in our ability to get at least 30% of incremental sales dollars above the break-even level to the segment operating profit line, an ambition of ours in the early part of the recovery.

Third, our underlying product and service revenues appear to be growing at a faster rate than the market, implying market share gains.

Insights from an analysis of Intermech's balance sheet efficiency are equally significant.

Our consistent focus on measures including networking asset efficiency and cash conversion cycle have yielded tangible results with important implications.

Specifically Intermec's working capital-to-revenue efficiency is nearly two times better than our largest competitor.

Intermec's capital turnover, defined as the ratio of sales to average capital utilized, now stands at approximately four capital terms.

In a gradually recovering environment, this greater asset efficiency is important.

Intermec can generate returns that exceed its cost of capital on roughly half the profit level of its largest competitor and thus at an earlier point in the cycle.

Other achievements in the quarter, include the fact that Intermec's new color 700 pocket PC computer was selected by one of Europe's leading retailers for their in-store system.

Later in this quarter, Intermec will begin a replacement program of an existing system at that retailer including the Intermec color 700, communicating over a Sysco wireless network.

This order is significant not only in size but because it marks yet another win against an entrenched competitor in an increasingly important market for us.

Further, it demonstrates the importance of alliances with other companies.

In this case we integrate Sysco radio cards into our hand helds to deliver a complete solution that best meets a customer's needs.

Another trend we are watching is the continued preference expressed by our customers for linear images based on CCD and CMOS sensor technology rather than lasers.

Supply chains are increasing in sophistication and bar codes need to carry more information.

This requires higher density symbolologies such as 2-D bar codes.

As a result, we have seen a comparative acceleration in our CCD-based scanner and scan engine business.

The most significant commercial development this quarter was perhaps the first commercial shipment of our color 700.

The color 700 defines state-of-the-art for today's mobile worker.

A color 700 is based on a 400 megaHertz version of Intel's new video processor and has 70% more battery life than competitive offerings.

It even has an integrated imager for capturing and decoding 2-D bar codes or for taking black and white digital pictures for delivery confirmation.

The color 700 is the only pocket PC hand held with three built-in wireless radios, our personal area wireless or bluetooth for cable-free connections between a worker and his or her portable printer, a local area wireless for 802.11b for in-premises wireless connectivity to a host computer and the wide area wireless radio for a realtime communications link between a field service worker and a dispatch office.

We are pleased with the sales performance to date for the model 700.

Unit sales doubled from the first to the second quarter and doubled again from the second to the third.

Preorders and inquiries for the color 700 are equally promising.

The success of the model 700 and our third quarter results give further confidence in the potential timing in the resurgence of automated data collection investment versus that of general I.T. spending.

The ability of our industry to show customers a fast payback on their investment increases the likelihood that ADC will be an early indicator of an IT spending recovery.

The ever declining cost of devices, and wireless services services further improve that ROI calculation.

The downside of this outlook is, of course, continued sluggishness within the global manufacturing economy.

Speaking to our specific outlook, sequential improvement is tempered by the two large DSD shipments in the third quarter that I mentioned earlier, which improved revenues beyond our run rate.

Nonetheless, we think our fourth quarter sales performance will be flat-to-5% higher than in the third quarter.

So the pattern is becoming clearer.

Barring a double dip recession, we believe Intermec sales bottomed in the first quarter of this year.

Recovery will probably mirror the decline, requiring 1.5 to two years to return to prior revenue levels.

Profitability at these recovered levels will be significantly improved due to dramatic improvements in productivity and margins over the past two years.

We would like to turn now to our industrial automation business, where declining markets and backlog have reduced this segment to less than one-half of UNOVA's revenues.

The comparisons will continue to trend down over the next 12 months.

The IS segments reported a loss of $5.7 million, on a 39% revenue decline, to 131 million in the third quarter of 2002.

Comparisons to last year's third quarter are particularly difficult since that quarter was the strongest of last year due to contract timing.

Our IPS segment reported the worst decline, at 43%.

That is 43% revenue decline, while sustaining approximate break-even performance.

Expense savings only partially offset the loss of gross margin caused by lower volumes and to a lesser extent margin compression.

AME sales, at Cincinnati machine, up $35.7 million, represented a 26% decline versus the prior-year quarter.

The organization's higher fixed cost structure caused the operating loss to widen by $3.6 million.

As has been our practice for several years now, we continue to harvest cash from the decline.

During the last 12 months, we have reduced networking assets by about a hundred million dollars in these business segments, a major contributor to the net debt reduction over the same period.

Bookings continue to decline.

Clearly, any hope for a recovery at the IMTS show in Chicago were premature.

The continued backlog decline at IS is highly correlated with U.S. government statistics for total machine tool backlog.

Manufacturing customers continue to postpone or cancel many planned capital spending programs to conserve cash in the face of persistent overcapacity, a lack of future visibility and importantly restricted access to capital.

The continued decline in IS backlog and the lack of any short-term market catalyst has prompted us to take steps to consolidate three significant parts of our IS business.

Lamb Technacon Machining Systems [PH], Lamb Technacon Body and Assembly [PH] and Cincinnati Machine, each of which operated as other separate division.

Landis Grinding Systems will remain a separate division.

The new division, UNOVA Manufacturing Technologies, will share engineering, administrative and manufacturing resources in the Detroit area headquarters.

It will also retain a significant local presence in the Cincinnati area for its high tech aerospace machining and composites business as well as its promising Cincinnati-plus services organization.

Although the locations will change, our marketing strategy is focused on aggressively leveraging the brand equity of the existing Lamb and Cincinnati Machine names.

The strategic importance of this merger should not be underestimated.

The need for a highly variable cost structure at Cincinnati machine has been evident in virtually every quarter since its acquisition.

Cincinnati's expertise in flexible automation will significantly benefit Lamb as its OEM and tier 1 automotive customers increase demand for flexible systems.

We can achieve cooperation between those two units as a separate unit which we haven't been able to achieve independently.

Both organizations are approaching critical mass.

And would have limited ability to further reduce costs without a consolidated structure.

To ensure our market success, last week we named an operating team comprised of the best talent from both organizations.

Leading this team is Jim Herrman, currently UNOVA's Senior Vice President and Group Executive in charge of IES.

Jim is a 36-year veteran of the capital goods industry.

Supporting Jim will be an executive staff of experienced management chosen from both the Lamb and Cincinnati organizations.

Mike Keane, our CFO, will lead the business transition team, supporting operating management to ensure the transition is smooth and cash flows are well managed.

We expect the worst -- workforce reduction to involve between 800 and 900 employees or approximately 25% of the IS workforce.

Transition of manufacturing operations will begin early next year, and will be largely completed by year-end.

As a prerequisite for G & A consolidation, integration of IT systems should be complete by mid-year.

We are still in the process of projecting the costs and potential savings afforded by this action.

However, we expect charges in the range of $27 to $32 million, and we anticipate taking the bulk of these in our fourth quarter 2002 results.

Of these, approximately 22 to 27 million are expected to be cash-related for workers' severance and relocation costs.

When we achieve steady state, we anticipate annual savings from the effort, to be at least $50 million.

And now I would like to turn it over to Mike Keane to review our financial performance.

Mike?

Thank you, Larry.

Good morning.

Before I discuss the balance sheet and our financing activities, let me provide some further information on our expenses below the segment operating line.

Our unallocated corporate and other expenses were 6.7 million versus 4.8 million in the comparable prior year quarter.

The increase in these expenses was primarily due to a little over $1 million increase in currency translation losses.

We have also accrued a special charge of 5.2 million related to the relocation of UNOVA's headquarters to Everett, Washington.

The majority of the relocation activity will be completed by midyear 2003.

Our tax provision of 3.5 million is primarily related to foreign and state taxes.

As Larry indicated previously in this morning's call, our cash generation has allowed us to reduce our net debt to just under 116 million as of September 30.

That represents a $47 million reduction from June 30 and about a 62 million reduction from December 31.

The positive cash flow has been achieved through a combination of intellectual property settlements, [INAUDIBLE] sales and operations.

Our capital spending of 2.6 million in the third quarter of 2002 continued at a level below our depreciation rate of 8 million for the same period.

We continue to expect capital spending to be less than our depreciation rates for the remainder of the year.

We have focused on using our excess cash flow to reduce our most expensive debt.

During the quarter we paid down our 13% term loan by $21 million to a $20 million balance using some of the proceeds from our third quarter intellectual property settlement.

As we look forward, at least in the near term, we will maintain our excess cash flow and short-term investments until we specifically determine the timing of cash outflows related to the restructuring of our IAS businesses.

If we are able to accomplish certain asset sales early in the restructuring process, or achieve additional cash flow from further intellectual property settlements, we will have greater flexibility towards early retirement of the remaining $20 million balance on the term loan.

To date, we have not borrowed against our revolving credit facilities this year, and expect to remain in that position for the remainder of the year based on our current cash flow outlook.

Our current availability under these facilities exceeds $150 million.

We remain in full compliance with all our loan covenants and our liquidity remains strong.

Thanks, mike.

And now Andy, I would like to open up the phone lines for questions.

Thank you.

At this time, we are ready to begin the question-and-answer session.

If you would like to ask a question, please press star 1.

You will be announced prior to asking your question.

If you would like to withdraw the question, press star 2.

Once again, to ask a question, please press star 1.

One moment.

Our first question comes from Walt Lipteck [PH] with McDonald Investments.

Sir, you may ask your question.

Hi, good morning.

This is Walt Lipteck with McDonald.

The IP settlements, you are not mentioning who settled with you.

That was the IBM in [INAUDIBLE] Walt that we announced last quarter.

Okay, and were there any legal expenses charged against that $33 million?

Well, the difference between the revenue and the -- and the profit line is in fact the legal expense.

That's the 37 minus the 33.

Okay.

All right, good.

And also on the -- in the machinery business, it looked like incoming orders are somewhere around 110 million, and I guess the question is, what size of revenue per quarter, you know, are you sizing the business to?

That's a moving target, Walt.

We have been doing that for three years.

What we are trying to do is continue to size the business consistent with the declining backlogs.

But as you know, I mean, I think the question you are asking is an annualized question, and it is a harder question to ask because different parts of the business have got different lead times.

In the case of -- in the case of Lamb, we have got pretty much -- pretty close to 12 months' visibility, in the case of Landis it is closer to 9 and in the case of Cincinnati it is more like 3.

It is a composite of all that.

In at least two of those cases we don't have a real good visibility of the latter half of next year.

Okay.

All right.

Let me ask you about the fourth quarter, then, and the machinery businesses.

With the shipment schedule, as you say is already kind of, you know -- you are set for the fourth quarter, you know what you are going to ship.

Is it going to be higher than it is in the third quarter?

It is about the same.

Okay.

Okay, thank you.

Sure.

Our next question comes from Ely Lustgarden with H.C. Wainwright.

Sir you may ask your question.

Good morning.

We go through a whole bunch of technical things just to make sure I understand it.

Mike said corporate expenses you said were six seven, do you get an idea what the fourth quarter run rate might look like and what next year will like?

And you know ex currency, I really [INAUDIBLE].

You were running, got down to a little under 5 million last year and all of a sudden we are running in the six to seven. [INAUDIBLE].

Are we down between 5 and 5.5 now?

Eli, we are running around that 5 million rate.

We model in 5 million for the Q4 or something like that?

Now that would be appropriate.

And next year we model in 20 million, is that the kind of thing we are looking at?

We are actually shooting for less than that but that would be conservative number.

Mike and I disagree a little bit on that, Eli.

The reason we are taking a charge is because, as you know, we are relocating the headquarters, and that is going to provide some transition issues about expenses, but when we get to the relocation, which should be largely complete by mid-year, I think the latter part of the year, you should anticipate a significant lowering of expenses.

So I am not quarreling with Mike's run rate, but for the full-year number we would be expect some lower numbers at the end.

Okay, well, I hope you make it.

Now, net interest charges, are you still at -- you came in at 4.9, does it drop to 4 million or 4.2 or something like that in the quarter and what does next year look like?

I think a lot of it -- I think that it will drop somewhat and a lot of it will depend on short-term actually investment rates as opposed to our interest rate expense charges.

Because pretty much the debt we have in place, has a fixed rate on it.

So the major driver will be the $200 million of public bonds out at a 7% rate.

And we would hope, of course pending my comments regarding asset sales and freeing up cash, that we would be able to reduce the term loan which is carrying a 13% rate.

That is it right now a $20 million balance.

You have a 16.6 base plus whatever the interest -- the net -- the interest you earn on it, is that the way it works?

Whatever interest we earn on short term cash investment.

How much cash do you have now?

About a hundred million.

So, you know, we are basically looking next year we will be probably somewhere in the vicinity of 14 or 15 million?

Yeah, I think that's appropriate.

Some of it will depend on the cash outflow regarding the restructuring.

But I think that will occur [INAUDIBLE] over the year.

Now, let's take ADC going into the fourth quarter, you talked about 160 to $165 million worth of revenue.

We are basically assuming that profits in the fourth quarter will probably be slightly higher than the third quarter, 7.4 million, is that a fair?

We were a little bit favorably surprised at margins in the third quarter as well as spending.

But yeah, in that range.

When we look at the machine tool business we are looking at the same 130-plus million.

Will the loss begin to widen [INAUDIBLE] or can you hold the numbers similar to the third quarter?

Well, the -- barring any interference from outside forces, the answer to your question is yes, because as volumes decline, so will profits.

But of course that is the reason we are doing a massive change in the cost structure, Eli.

And it's going to be -- it's going to be fuzzy for the first -- for the first while, as we jockey these operations around, and move things from place to place and consolidate.

The first six months is going to be a fair amount of transition activity before we start to zero in on steady state.

I think the answer to your question is yes, you will see an accelerating gap in the near term, followed by a much better solution in the longer term.

We will see the Q4 profit to be a little bit worse than the third quarter in IS?

Yes.

So again, if you take the fourth quarter and try to do it, you lost about 17 cents from a pure operating basis in the third quarter, I calculated.

I assume we are looking at a slightly lower loss, something near that level in the fourth quarter, you know, on an apples to apples basis?

It seems reasonable.

Something on that basis.

Now, as we look at -- into 2003, what is the probability of profitability?

I think the answer is it depends on two things very significantly.

The first of those is what happens during the year to the economy, will it turn up and will we get some kick toward the end in our shorter-cycle businesses?

And the second and probably equally important is how fast can we get through this transition?

I mean, as you know, we have got very significant overheads that we are trying to turn into variable costs.

The ability to do that is going to help us weather the storm.

Bring in $50 million worth of cost savings to the business certainly gives us an anticipation of being profitable at lower revenue levels once we get to steady state.

But it is a pretty massive change when you -- when you talk about the -- the SG&A stuff that we are doing is pretty straightforward, and is more than anything, paced by our ability to consolidate IT systems because if we want to do some things like centralized accounting then you need to have a single IT system where you are working it.

The manufacturing is the much more complex issue.

In terms of, A, moving the horizontal business from Cincinnati to Warren, and, B, moving the composites business and the high-tech aerospace business to separate facilities in the Cincinnati area.

Which haven't been identified yet?

Which haven't been identified yet.

And where we have a much higher purchase content of the product.

So you're sort of diagramming, if you broke even in 03, you would be happy at this point?

That's a fair statement.

That's a fair statement given the revenue trend lines and the transition kinds of activities we are talking about.

And the visibility you have in machine tool business?

Right.

Exactly.

Nothing I see on the horizon says it is getting any better.

In fact, there seems to be increasing concern about us getting worse.

All right, thank you.

Our next question comes from [INAUDIBLE] Chopra with EA Moose [ phonetic ].

Sir you may ask your question.

Good morning. [INAUDIBLE] Chopra at EA Moose.

Some of my questions have been answered.

The -- can you tell us what the backlog was for Intermec at the end of the quarter?

No, we don't publish that because it is not a very meaningful number.

It bounces around a lot.

The fact of the matter is we ship most of our orders out within seven days of receipt and we don't really take large letters of intent from the customers into backlog.

And so we basically backlog purchase orders and it is a very small number and not meaningful.

Okay.

Within IAS, what was the backlog at Cincinnati versus the AME?

Can you break that out?

IPS, rather.

You gave a consolidated number of 236 million.

Basically, the -- we call the AME segment backlog was just under 50 million.

Okay.

That backlog relative to the other operations has the shortest lead times.

You know, I realize this is a very difficult manufacturing recession that seems -- never seems to end, and, therefore, the machine tool industry as a whole is hurting all over the world, and I have -- you know, going back and looking at your numbers, this is like the ninth quarter in a row that AME is losing money, and of course it is not -- it is probably because of some of it is beyond your control.

But could you tell us in more concrete terms as to what cost savings all these consolidation things will actually result in and when do we start seeing the bottom line impact?

I mean, is it a Q3, 03, event?

Is it Q4, or is it even further than that?

I mean, I realize that the economy is not cooperating, but you are taking cash charges to restructure this, and it looks like it is a fairly big restructuring at this point.

So when do we see this thing making money?

That is what I tried to just answer.

The -- your conclusions on Cincinnati are correct --

Let's say you keep at this run rate of revenues, let's say things don't pick up.

Let's say it is 40 million a quarter or between 40 and 50, you know, a year ago, you were talking -- you were telling us that the break-even run rate for Intermec was around 140 and you wanted to get there and once you got there, sure enough, it turned.

And it started showing profits.

So I guess what I am looking for is, you know, somebody else asked this question also, but what sort of run rate are you driving this business towards?

Breaking even at?

The answer is we will be achieving, and a part of what we are doing, as you know, is getting the precision of our calculation refined and getting the ability to move folks and understanding who is going to take what programs and how we are going to achieve the activity, but we will be -- we will be looking to a break-even point in the aggregate that is under $500 million.

With the changes that we are taking on.

The problem [INAUDIBLE] that you are describing in Cincinnati is very real, and despite our efforts to chase the snowball downhill, we have not been able to take out overhead as fast as the declining volumes.

Because the Cincinnati machine business, of all our businesses, was by far the most vertically integrated, all the way down to the machine shop on the floor.

That is quite the opposite profile of our Lamb business and our Lamb business has a real purchasing competence because it is a highly variable cost structure.

By merging the two and moving out of the Cincinnati complex, we can shed that fixed cost burden and, therefore, reduce the absorption requirements.

So the answer to your question is, A, in aggregate, for the industrial businesses, we are looking to position the business for a break even of less than 500.

And as we accomplish these -- or get these numbers more refined than they are right now you will get a greater level of precision from us just like you did on the Intermec side of the business.

But the answer to your question about when do you get there is how long does it take us to transition?

And the kind of reductions that we did at Intermec were largely SG&A reductions.

The kinds of -- the reductions that we are doing here are manufacturing-related and therefore more complex and more time-consuming, and it will take us a longer period of time.

When you talk about 500 million, is that IAS as a whole?

Yes.

Okay.

We can afford another $100 million reduction next year from current rates and still be at break even.

Okay.

Thank you, sir.

The next question comes from David Bach with [INAUDIBLE].

Sir you may ask your question.

Good morning, Dave Bach at [INAUDIBLE].

Can you tell me, you just mentioned how the synergistic effects of the merger are reducing costs, can you give an example of where it can increase revenues either by increased manufacturing capability or increased marketing capability?

Yeah, at least a couple.

The first one is in product design, Cincinnati makes a conventional machine tool, Lamb makes system.

Lamb's capability is process, Cincinnati's capability is devices.

We have tried and the divisions have tried to bring their expertise together, but when you are in separate businesses, it tends to be a lower priority.

We believe that the merger of these engineers shops will give us a greater response to a market that increasingly has demands for flexible machinery.

Secondarily, if you look at the expertise of the two businesses, Cincinnati was not pursuing the automotive business with vigor in the past.

If you go way back, they did.

But they -- but they moved away from that product line, and their great expertise is in aerospace.

Similarly, Lamb is fundamentally, almost totally an automotive supplier.

In joint sales calls in the past year, we have seen examples where the aerospace guys like to understand the -- the automotive technology and the process know-how of Lamb, indeed they perceive that the Europeans are practicing it more than they are, and are very anxious to bring that process expertise into house and we have greater receptivity when we have joint sales calls.

The same thing is true on the automotive side for the point that I talked about in terms of flexibility.

So we do see that the ability to go to the market is going to be more significant.

Correspondingly, I would say to you that while it is not so much related to the merger of the businesses, we are looking to Asia for some of that same kind of alliance work.

And the recent announcements on Yasunaga and Hundai, where we are doing cooperative alliances in order to be able to access more flexible capability is a part of that same puzzle.

Okay.

When the airline industry is moving to the moving line process, is UNOVA benefiting from that?

And is there still more there?

Yeah, we think so.

I mean, I -- basically, our aerospace customer went from a position of feeling highly confident in process methodology to a more -- casting a broader net about different ways that things could be done, and I think it is true that Europe's technologies more resemble those in the automotive industry than the U.S.'s technologies.

So there has been a broad degree of interest in that regard.

Also, the -- the other issue of course is the issue that we talked about a great deal, which eventually will make a -- will make a significant impact on our sales, and that is the composite capabilities that we have at both airbus and Boeing where we tend to dominate the market.

Thank you.

The next question comes from Walt Lipteck with McDonald Investments.

Sir you may ask your question.

She'll get it right sometime.

Walt Lipteck.

I'm not sure.

We like Lapteck [PH].

Mike, you mention that you could see more IP settlement, cash -- last time around you talked about how two-thirds or so you had settled -- two-thirds of the laptop industry, where are you now?

And I guess are there other suits that are in the pipeline for the possible settlement in the fourth quarter or early next year?

Right.

I think we had already announced that we had one settlement in the month of October.

We did not disclose the amount.

It was -- you know, they are all relevant, although this one was maybe not as significant as some of the others.

We are slightly above the two-thirds mark now in terms of total coverage.

And we have some -- a couple significant players still out there that we are pursuing.

I mean, there is a large number of smaller entities, and maybe a couple of what I would call mid-tier type settlements.

Okay.

Are there any other IP settlements beyond the laptop industry?

I think the laptop industry comprises the majority of the potential.

There may be some other potentials, but you have to understand that some of the settlements that we have reached are all-encompassing.

And those same entities that we reached settlement with also cover other parts of the electronics industry.

Yeah, I think the Noram [PH] portfolio, Walt, is a significant portfolio of intellectual property and has some monetization potential.

But as mike says it is not on the order of what we have seen with the smart batteries.

Okay.

Let me ask you a question on the IPS business.

You know, from what we understand, there is new projects, new programs, auto programs in the pipeline, but that the capital is not being released.

What is the design, you know, backlog look like?

And you know, is there any visibility at all when automotive capital spending might pick up again?

The problem is believing what you hear.

The -- as you know, there is like a three-year lead time on requirements.

We keep getting told about the new models that are going to be introduced in the future.

When we get to the point of culmination, the project doesn't go forward or it gets delayed or it gets canceled.

What -- the other -- the other compounding factor is the few that do come through, which are large in scale create this absolutely carnivorous feeding frenzy which would require us to take business below cost.

That combination is what we are facing, though.

The only positive and we don't even talk about it around here, is that our rate of decline is slowing.

If you could take any confidence in that, it is true.

Okay.

The Cap Ex for next year, you know, it looks like you are at a run rate of about 12 or so for this year, are you planning a flat Cap Ex for next year?

I think the Cap Ex would be comparable with one caveat is that there may be some investment required with the relocation of facilities and that number we are still trying to get a handle but you could put anywhere from, you know, 2 to $7 million.

Now, the question is, is that 2 to 7 million incremental to 12 or are we able to include it within it?

So I think that a large part of it will be included, because there will not be -- other than those improvements there would be hardly any capital spending on the industrial automation businesses.

Yeah, we will clearly get more visibility for that as we go into -- into the budget cycle, Walt.

There is -- at Intermec, the big issue is tooling, and we will invest in whatever tooling is required for the introduction of new products but we are just pulling that into our capital budgets at this point.

Michael, you mentioned the asset sales related to the real structuring, can you tell us the number of facilities that potentially could be sold?

Are they on the market and then kind of a ballpark of the dollar cash in from that?

Sure.

Basically we are -- we are real estate rich to put it bluntly.

The most significant single piece of real estate is what we call our Oakley facility within Cincinnati.

It is a very large complex.

Rather than put dollar values on that particular item, what we have is a combination of that facility plus miscellaneous properties in the Michigan area surrounding -- primarily surrounding the Detroit area.

And the total number of buildings probably exceeds -- well, if you take the Oakley facility as one and that's a number of buildings and add to that, we are talking about 5-plus facilities that we are looking at.

We have not finalized, though, what facilities we remain in.

That is still under discussion.

So that could have an impact on exactly which ones are sold.

Okay, but they are not on the market yet?

There are some facilities that are on the market and there are actually some facilities that are actually under purchase contract.

In fact, the market heated up once we made the announcement.

Okay.

We are getting good receptivity on some of the properties and that is encouraging to us.

That will help us in the funding mechanism.

But I would say from real estate alone, I am going -- I should exceed 20 to $25 million in terms of funding.

Okay, great.

Okay, thank you very much.

The next question comes from John Yenacello [PH] with Dodge and Cox.

Sir, you may ask your question.

Great.

How you doing guys?

A couple of questions, some for Larry and some for Mike.

Can you talk about what you learned from the NORAND Intermec consolidation and why -- what you learned will help you in this case?

That didn't go smoothly, as I recall, as I remember.

And it is, you know, may be concerning to investors sitting here looking at this thinking about the next steps you need to take to reduce your overhead.

There are two answers to that question, John.

The first answer and the reference that you are making, is the 99 timeframe, where we didn't really do a consolidation.

What we did was a -- an implementation of SAP that was designed to be the base for the further consolidation of the businesses.

And that was a disastrous implementation in the sense that it really caused us to go blind in manufacturing followed by the same phenomenon in our service business.

In fact, if you look at the recent consolidation which I would label a consolidation of NORAND, UBI and Intermec, I think we have a perfect model.

This will be more complex because of manufacturing, but it is a perfect model.

We had organizational structures that were not very tidy and certainly not streamlined, and we reorganized Intermec to be a functional business, as a low-cost profile, in order to be scale competitive.

We took our Cedar Rapids manufacturing facility, a small part of which we had tried to transfer to Everett, with disastrous consequences and successfully transferred the bulk of it about a year and a half ago.

The key there was to get the processes consistent.

Or, stated differently and importantly, John, I think the learning which UNOVA has done is to better appreciate the significance of common process before you start implementing common systems.

The ability to take even little-bit-different systems or processes and put them on the same system is a difficulty.

It is something we are sensitive to when we combine IT capability in our IAS businesses.

And it is the reason why we are cautious in giving you timeframes that this will be completed, because one of the major pacing items is the IT consolidation that we want to make sure that we get right, and you have to do that before you can start to have some of the administrative savings from centralization.

So I think we have got a very good model at Intermec.

I think the way we got from a 195 or actually north of $200 million break-even down to 145, the way we have sustained it, the way we merged IT systems, the way we merged manufacturing systems in the last year and a half will be a model for IAS.

And another question, Larry, this is sort of an academic question but something that is interesting.

How do you avoid a price war with symbol, given that you guys are looking to obviously enhance your credibility given the kind of the blowups at Intermec in 1999 timeframe, et cetera.

They are looking -- and you are looking at going into retail which is their stronghold.

They're looking at going into direct store and route accounting which is your stronghold.

Both sides can continue to say they are taking market share from each other in the strongholds that they have, how do you walk the balance there?

And not turn this into a Boeing-airbus contest where everyone talks about market share and no one makes any money.

It is a very important question and I wish we were in total control of it.

I think the answer, though, is the conversation that you hear from us is a little bit like the idea of nuclear capability.

If we find a competitor who can come after us in our key markets, and we can't do the same, then in all likelihood, we will see Sherman's march to the sea, if you will, in the ability to provide a low-cost, or low-price buy-in.

To the extent that that is a more balanced capability on both sides, I think you get more statesmanlike behavior.

And the truth is if you look at the last 10-year history in this industry, statesmanlike pricing has, in fact, characterized both of the key players.

I do believe that Telezon was the deviant in that regard in that they had significantly large discounting policies, but they have been -- they and that behavior have been removed from the market.

So while I think it is -- as would always be true when you see a greater merging of participation in the markets, I think historic profiles on the part of both of the players tend to give you some hope that that is not going to occur in any meaningful way.

Could you give me a quick update on the printer business relative to zebra and why it seems to be weak when the rest of the business was fairly strong?

Yeah, there are a couple of answers to that question.

The first is that we find that difficult time comparing to Zebra.

If you just look at performance versus performance, they are clearly outperforming us.

In the past, when we have done these calculations, John, what we find is that the several parts of their business in which we don't participate, and which have nothing to do with our bar code business and we are not interested in participating in because we don't want to become a horizontal player in each of our devices.

We are trying to become a broad-based systems supplier, not a supplier of devices.

But those areas in which we don't participate drive the largest portion of their growth.

And it has been our impression that both our businesses have been -- both of our bar code businesses have been shrinking.

Recently they have been more confident in their bar code business in their announcements.

And that leaves us a little bit puzzled.

It is distinctly true that if you look at volumes, we have had significant increases in our printer volumes, it is the average selling price that is changing.

And it is -- it is at least conceivable that some of the difference you see is a -- an increasing awareness on our part that the printer business gives us access to about four times the amount of revenue on the media side to the extent that we get the printer business.

And so some of our pricing policies and printers have become more aggressive as a result.

I think having said all of those kinds of excuses, the fact is that we probably don't do as good a job at competing with Zebra as we do on the systems side of the business.

I have got more questions, but I don't want to hog the call.

I guess I can talk to you guys off-line.

Okay, appreciate it.

The next question comes from Andrew Klaus with Canseco Capital Management.

Sir you may ask your question.

Good morning.

I just wanted to ask the question about why did you leave the 13% notes outstanding if you have the ability to pay those off?

Is there a restriction on that?

I have no restrictions, other than some early pay penalties which we have incurred all along as we paid it down.

The issue is one of basically staying flexible as we fund the industrial automation restructuring.

And in essence, as I indicated on the call, we -- if we are able to achieve some of these asset sales early in the process, I will be able to further pay down that note.

Would there be a point in time where once that is paid off you would even look to go to the public notes if the -- if you are incurring a negative flow and the price is right?

Well, we would have to see if the moon and the stars are all lined up.

Sure.

But I have to say that is our lowest priority.

Great, okay, thank you.

Once again, if you would like to ask a question, please press star 1.

One moment.

We do have a question from John Yenacello with Dodge and Cox.

Sir you may ask your question.

Mike, can you give us an update on the pension plan, where it stands, how overfunded it still is?

I remember you mentioned you started moving into equities over the last quarter or so.

Actually we moved in equities prior to that, and so we have taken the view that the pension plan is now once again a long-term living vehicle, and ought to be allocated accordingly.

Okay.

In essence, we have assets that are in excess of our accumulated, you know, benefit obligations and our projected benefit obligations so we are still in a surplus condition.

Was R & D spending at Intermec lower in the last two quarters while the company showed better profitability?

No, we have got -- We pretty much hang in there around 7%.

You could just see some timing issues about when products get launched and stuff like that that can cause slight changes but we are fairly committed to 7% of sales kind of spending in that area.

Have you -- can you talk a little bit about the competitive landscape in the different sectors of Intermec?

Have you noticed some getting more aggressive in route accounting or direct store deliveries, et cetera, what does it mean to you guys looking forward?

I am not keen on that kind of conversation, because it largely gets into opinion.

The fact is, as I indicated earlier, I have a high degree of confidence that the competitive behavior is a wholesome kind of competitive behavior that improves the market and continues to get ever decreasing product cycles to the benefit of our customers.

It seems that symbol with some of its announcements is moving more into the -- into the network kinds of competition which isn't our direction, and so if anything, I think perhaps it has gotten less competitive in the last three to six months.

Any update on some of the RFID projects that are taking place at least on a test basis?

Well, I -- the key -- what we said some time ago, John, is that the RFID business for us was one of the hardest hit in the IT spending, because people -- every one of these things requires fairly significant customer spending for prototypes for proof of concept and for tag design and all that sort of stuff.

People were not willing to belly up to that, given other kinds of demands, and other kinds of capital access.

And so what has happened is that business has been -- has been somewhat stagnant.

We see a resurgence in that area and indeed the folks are making a kind of a PR tool right now to rekickoff that whole RFID program.

But the several places where we see some significant benefit, because I think what we are looking for is large wins, is firstly, in the security area at Fort McPherson, we talked about this gate entry capability where when folks drive up with the RFID tag on the windshield, the reader actually accesses the database and flashes a picture of the driver to the gate guard.

And that kind of security in a broad-based application across military bases has very significant potential for us, something on the order of $3 million a base.

The car tagging program, which is also gathering steam, firstly, as just labels -- tag containing labels on tires, and progressing to embedded tires, is a process that continues in its development with positive signs at every step and we have said before that, you know, that's got potential in the range of just in the U.S., 75 million tires a year times a tag for each tire.

So both of those are big-deal kinds of applications, as is the pallet work that we are doing with Chip.

Those are the three more explosive potentials that are $5 million plus potentials for next year that we see as building the runway for the launch of that product.

Great, thank you.

Our final question comes from Walt Lipteck with McDonald Investments.

You know, Walt, I think lap-teck is a neat IPO name.

Walt?

Okay, hello?

Sorry about that.

The -- my question is on tax rate.

The fourth quarter tax rate excluding the charge, where do you expect it to be in and for 2003, what kind of tax rate shall we use?

I think the fourth quarter absolute amount should be comparable to what you have seen in the third quarter.

The reason for that is that the provision that you are seeing is primarily related to both foreign and state taxes, not U.S. federal taxes.

I think -- and just to explain the technicality of that, is if you include the projected charge for the fourth quarter, in essence you are looking at U.S. profitability being basically nil for the year and therefore no provision.

And looking forward to 2003, basically, if you are looking at profitability, you would go back to a normalization of about a 35% rate.

Okay, thank you.

At this time, there are no further questions.

Great.

Thank you, Amy, thanks for your help.

Thank you, everyone, for participating.

You may disconnect at this time.