漢威聯合 (HON) 2002 Q4 法說會逐字稿

Good morning and thank you for joining UNOVA's fourth quarter 2002 earnings review conference call.

All participants will be able to listen only until the question-and-answer session 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 would now like to introduce Mr. David Brooks, Director of Corporate Public Relations and Investor Relations.

Sir, you may begin.

Thank you, Jennifer.

Welcome to UNOVA's investor conference call to discuss the financial results for the fourth quarter and full year of 2002.

Your hosts today are Larry Brady, CEO, and Michael E. Keane, CFO.

Before we begin today's call, I wish to remind investors that statements made in the course of this conference call that express the company's or management's intentions, 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 31, 2001, the company's annual report on Form 10-K for the year ended December 31, 2002, which will be filed in March, 2003, and, finally, the company's report filed on Form 10-Q for the quarter ended September 30, 2002.

Copies of these filings may be obtained by contacting the company or the SEC.

Now it's my pleasure to introduce Larry D. Brady, CEO of UNOVA.

Larry?

Thank you, David.

Good morning everyone, and thanks for joining us for our first of many earnings calls from UNOVA's Everett headquarters location.

It's my pleasure to discuss our results for the fourth quarter and full year 2002, a period that provided us with a wealth of milestone achievements, some of which I'd like to highlight for you now.

For the full year, revenues of $1.3b produced segment operating income of $87m and a net income, after corporate expense, interest expense, and special charges, of $2.4m.

Since the start of the year, net debt was reduced from $176m to $46m, providing further evidence of the company's successful focus on cash flow.

Over the past 21 months, we have reduced UNOVA's net debt from well over $400m to its current level of $46m.

The corporation's segment operating profit of $87m for the full year represents a $74m improvement despite a $215m revenue decline.

Our Intermec (ph) operations achieved their targeted breakeven of $145m in quarterly sales in the second quarter and have been increasingly profitable ever since.

Intermec not only achieved profitable operations since the second quarter, but it grew product and service revenues by 25% since the first quarter 2002.

That's 25% in nine months.

More importantly, and, as targeted, Intermec has, for the past three quarters, managed to deliver approximately 30% of incremental sales above breakeven to the segment operating profit line.

We've also commenced an historic consolidation in our industrial automation businesses intended to dramatically lower our breakeven level and ensure the capability to compete in this extended market downturn.

To that end, we have taken restructuring charges in the fourth quarter of $23.5m.

To date, we have completed 300 of the 800 to 900 in employee reductions scheduled.

While these make nice headlines, it remains true that the only way to truly understand UNOVA is through a discussion of the individual segments -- so we'll first discuss industrial automation systems, or IAS.

These businesses recorded revenue of $569m for the full year of 2002, a reduction of 35%, or $305m from 2001.

Excluding special charges related to the IAS restructuring, IAS profits declined $51m driven by the revenue decline and the absence of 2001's pension income as the result of last year's pension reversion.

Excluding the $20m change in IAS pension income, we have been able to hold the effect of each revenue dollar declined at IAS to about a 10-cent impact on segment operating profit.

The businesses also continued to achieve working capital reductions as a result of these declining sales, which was a strong contributor to the decline in corporate net debt, which was cited earlier.

For the fourth quarter, our industrial automation businesses lost $16m on revenues of $128m.

Approximately $5m of this was in unusual provisions, the largest of which was an inventory write-down in our IPS segment.

The significant event of the quarter is recorded in the special charges section of our income statement.

The IAS restructuring charge of $23.5m is meant to provide for a majority of the intended reduction of 800 to 900 people in the third and fourth quarters and throughout 2003.

Total restructuring charges were expected to reach approximately $30m to $32m with the remainder incurred within 2003.

In our third quarter call we first discussed our breakeven targets.

It is our intention to achieve a breakeven level for our IAS businesses of $450m to $500m in annual revenue by the time we complete our restructuring in the fourth quarter of 2003.

Our target is the bottom of that breakeven range; that is, $450m.

Currently we have only established how to achieve breakeven in the upper end of that range.

Following the cutbacks in the fourth quarter, further headcount reductions will be on an approximately linear pattern for the remainder of the year -- about 125 to 150 employees per quarter as we roll through the transition of people and facilities.

Payroll and related cost reduction will provide the impetus to achieve the upper end of the breakeven range; that is, something lower than $500m.

It is facilities cost reduction that is required to achieve the lower end and that will require not only vacating and successfully consolidating locations but the disposition of assets as well.

Examining the issues facing our industrial businesses is, of course, the key to understanding our strategy.

The issues we face are a shrinking automotive and aerospace capital market that has been in decline since 1999; a shrinking share of world markets held by our traditional customer base; a strong U.S. dollar which, despite recent declines still places U.S. machine tool manufacturers at a decided disadvantage; and a vertically integrated cross-structure in our Cincinnati Machine business that cannot achieve cost reduction commensurate with volume reduction due to the high fixed-cost base.

Faced with these major and continuing issues, we've had to abandon our approach of aggressive incremental reduction and instead implement a step change in our operations, thus prompting the merger of Cincinnati Machine and Lamb Technico (ph).

Here is a brief progress report on our efforts.

First, we have begun the integration of Lamb Machining, Lamb Body and Assembly, and Cincinnati Machine headquarters to achieve a significant reduction in overhead.

Secondly, our manufacturing plan calls for vacating the Oakley campus of Cincinnati Machine in favor of new facilities with lower and more variable costs.

We will locate Cincinnati's composites, aerospace, and after-market service businesses to a currently vacant UNOVA facility in Hebron, Kentucky, about 20 miles away, a local move, which allows us to retain workers with critical skills as we transform our cost structure.

We will move production of our horizontal machining system centers to existing Lamb facilities in Detroit where we have established a supplier infrastructure and a culture for variable cost production.

Third, we have sold, or have letters of intent to sell, real estate comprising two locations in Michigan and our campus in Cincinnati.

These transactions would provide proceeds of approximately $25m.

We expect the sale of the Cincinnati campus to close sometime in the first half of 2003.

Fourth, we have begun a consolidation of our IT systems into a single integrated structure with targeted completion in April, and that completion will facilitate the remaining SG&A reductions.

Reductions in force will continue throughout this year until we reach a capacity level more appropriate to our projected needs.

Including the employee reduction currently ongoing, we will have reduced total personnel throughout our industrial automation systems segment from 6,000 in 1999 to about 2,500 by year-end.

It should be expected that a market, as robust as we experienced in the '90s, would take a long time in working out the downside of the cycle.

As we have passed through the comments which people make on this decline, which started out as worst in 10 years, then progressed to worst in 30 years, and is currently the worst since the Great Depression, it's still not clear when we will achieve the bottom.

Even so, there are some sources of meager encouragement.

First, our recurring businesses -- those are our maintenance and consumables businesses -- represent an increasingly higher percentage of the total as machine and system sales continue to decline.

These recurring businesses have themselves bottomed out and do generally represent higher-margin businesses.

Second, during the fourth quarter, our bookings nearly equaled our shipments.

This has happened only once in the past three and a half years.

Moreover, fourth quarter bookings were the best quarterly performance this year.

While an encouraging sign, however, one quarter doesn't constitute a trend.

And third, our recent Asian alliances are starting to pay off.

Let me provide some more color commentary about this last point.

During our last call, I mentioned our alliance agreements with Coretec (ph) and Yasunaga (ph).

In the fourth quarter, we added three more partners -- Hyundai of Korea and Dong Feng (ph) of The People's Republic of China for machining systems and TMS of Austria for body and assembly.

These alliances broaden our international capabilities, allowing Lamb to export its process knowledge while accessing lower-cost manufacturing capabilities.

Through these alliances, we will obtain expanded opportunities to participate in business that is truly incremental for us.

The best example of these expanded opportunities is Daimler Chrysler's World Engine program, an ambitious program to create a truly world-class, fuel-efficient new engine.

Daimler Chrysler is working with Mitsubishi and Hyundai to develop a new engine platform for as many as 1 million vehicles that will be manufactured in plants around the world.

The first round of bidding has been completed, and UNOVA has been notified that it and our partner, Yasunaga, are among the four finalists for the program.

Lamb is the only finalist from North America.

Three of our largest German competitors were excluded from the final list, either because of their higher cost or their lack of an Asian partner.

Furthermore, we have already booked about $4m of orders for machine tools as a direct result of these new partnerships.

Let's now shift our attention to Intermec, our other segment, where we continue to enjoy strong momentum.

At our last conference call, and given the surprisingly strong results posted in the third quarter of this past year, we suggested a range for fourth quarter growth from zero to 5%.

In fact, our fourth quarter product revenues grew about 16% over prior year and nearly 10% over the already strong sequential comparison.

Before we go into the various revenue and profit comparisons, let's discuss certain events that make these comparisons more difficult.

First, we had two favorable impacts from intellectual property revenues, whose cumulative total was close to $30m.

The profit impact was approximately $24m.

The continuing defense of our battery management patents produced another settlement, this time with NEC.

We also sold 150 of our current portfolio patents to BroadCom with a reciprocal license for Intermec to use these patents in pursuit of its businesses.

I'll talk about this transaction in a minute.

Now back to this segment -- total Intermec revenue including intellectual property revenue was $208m, with segment profit of $33m.

Product revenue excluding intellectual property was up $24m, or 16% over the prior-year quarter.

Profits exclusive of intellectual property were up $16m – 16% over 24% being a very healthy percentage of the incremental revenue dollar over prior-year performance.

In examining revenue growth in more detail, we'll comment, as usual, on both regional and product trends.

First, comparisons will be made versus the fourth quarter of last year.

Regionally, all areas were strong.

North America was up 13%.

Our Europe, Middle East, Africa, or EMEA, region posted 10% growth, and the rest of the world; that is, Latin America and Asia Pacific, was up a robust 40%.

Sequentially, the pattern was quite different, reflecting the acceleration that has occurred during the year versus the third quarter of 2002.

North America grew 7%, EMEA grew 19%, and the rest of the world was up 4%.

Turning to products, on the quarter-versus-prior-year-quarter basis, our core Systems and Solutions business was up 21%.

This is the second quarter in a row the growth of Systems and Solutions has exceeded 20%.

Our Printer/Media business grew 7%, and our Services business was up 9%.

Each of our product businesses also demonstrated good growth on a sequential basis.

Versus the third quarter, Systems and Solutions grew 10%, Printer/Media was up 6%, and Services was up 4%.

Segment operating profits of $32.7m included the effects of the IP transactions.

Without the benefit of any IP, Intermec earned better than a 5% operating margin, and with its four capital utilization turns, achieved pretax return on capital utilized in excess of 20% in the fourth quarter.

Gross margins were more than 6 points better in the fourth quarter of 2002 than the prior-year quarter.

Improved product mix and larger volumes resulted in better overhead absorption and a related reduction in other cost-of-goods sold.

For the full year, gross margins were 4 points better than 2001.

SG&A expenditure was reduced, down 3 points from the fourth quarter of 2001.

Intermec's SG&A spending for the full year of 2002 was approximately 5 points lower than in 2001, and general and administrative expense alone was reduced more than 24% from 2001 levels.

These improvements in every facet of our business are a continuation of the turnaround that has generated $100m operating improvement in segment profit as Intermec over a two-year period.

Late in the quarter, Intermec and Mechanical Technologies Corporation signed an agreement to jointly develop miniature fuel cells to power next-generation portable computing devices.

We believe fuel cells will be an important long-term technology, providing increased energy and longer service life for our mobile computing products.

Intermec has led the industry with power management technology designed to extend the performance of portable computing devices between recharges.

Fuel cells are part of Intermec's long history of investments in technologies that provide significant customer advantage as has been evident in our investment in RFID.

Interestingly, our first application of this new fuel-cell technology will be on a portable RFID reader.

Also in December we sold 150 patents to BroadCom Corporation for $24m.

These patents were primarily related to wireless networking but included Intermec patents for computer power supplies and even for recording video images on hard-disk drives.

These patents were not related to our smart battery intellectual property.

BroadCom obtained IP that could be strategically useful for its business.

These businesses do not directly compete in our core ADC markets.

Intermec, for its part, received $24m of cash, which has allowed us to retire the outstanding balance of our term loan.

Immediately after the quarter, Intermec participated in an important project with the City of Long Beach, California.

Intermec was selected by Long Beach to install the first public wireless LAN hot spot west of the Rockies.

We provided environmentally sealed wi-fi (ph) access points and professional services for the site surveys and integration that accompanied this installation.

The Long Beach hot zone showcases Intermec's strong wireless capabilities, hardware, and services, and as a demonstration of our strategic push to expand professional services as a further source of competitive differentiation.

Finally, in early January, Michelin Corporation announced it was introducing a new RFID tag concept based on Intellitag (ph) technology.

The new chip package, compliant with the approved B1 standard can be molded into tires to facilitate item-level tracking.

This is another important milestone in the market's acceptance of Intellitag as a leading RFID technology.

Another source for Intermec RFID has been in Homeland Security.

Intermec's readers and Intellitag-based identification cards are being deployed at the U.S.-Canada border crossing.

The system gives commuters pre-approved access privileges between the two countries, improving traffic flow while providing higher levels of border access security.

This is not unlike the installation that we talked about earlier at Fort McPherson, just outside Atlanta, where Army bases are using similar control technology.

Despite these very favorable trends in our business and the strong growth discussed earlier, it is clear that Intermec's recent growth is incongruent with current market conditions.

We currently believe that first quarter 2003 revenues will be up between 5% and 10% over the 2002 first quarter but down sequentially.

But first quarter has historically been our weakest, and there is no reason to believe that this will change in the current quarter.

Looking at our total corporation and the outlook for the year ahead, the nature of UNOVA continues to change.

In the third quarter of 2002, Intermec became the largest portion of our different businesses.

This trend will continue in 2003.

Intermec will continue to grow in revenue and profit, and industrial automation will continue to shrink, despite the major cost reductions in our industrial automation restructuring.

The time to complete the transition will cause us to incur greater losses in 2003 than in 2002.

Quarterly losses in IAS should be increasingly smaller from the first quarter to fourth, with the goal of breakeven for the fourth quarter.

The nature of our objective for 2003 is probably better understood when looking at segment cash flows.

Intermec cash flow should be positive in 2003, as profits grow and we improve our already high capital utilization turnover.

We also anticipate positive cash flow from our industrial automation businesses in 2003.

In this instance, the cash required to support an operating loss and significant restructuring cash outflows should be covered by our demonstrated capability to harvest working capital from the sales decline of the businesses, as well as the disposition of unused facilities and assets.

Now at this point, I'd like to turn the discussion over to Mike Keane, our CFO.

Mike?

Thank you, Larry.

I want to emphasize a couple of comparative issues regarding UNOVA's reported annual results of 2002 versus 2001.

First, 2001 included pension income of $23.5m, mostly within our IAS segment.

In 2002, the comparative number was a pension expense of $1.5m or a negative impact on comparative results of $25m between the two years.

The decline was due to our pension reversion in fiscal 2001, which netted the corporation cash proceeds in excess of $140m.

Second, 2001 results included goodwill amortization of $10.9m, and there was no goodwill amortization recorded in 2002.

The unallocated and corporate expenses were $24.6m for 2002 versus $35.7m in 2001.

The decrease of $11.1m is attributable to continued cost-cutting, reductions in staffing, and lower financing costs.

Our unallocated costs were $4.6m in the fourth quarter and they should trend lower in 2003 as we substantially complete the corporate headquarters move to Everett by midyear.

Excluding special charges, UNOVA generated EBITDA of $100m in 2002.

Our capital expenditures were $10.5m versus depreciation expense of $33.1m for the year.

Capital expenditures in 2003 will be approximately $10m higher due to facility build outs related to the Cincinnati/Lamb division merger.

Our debt structure is currently very simple to understand.

We retired the remainder of the 13% term loan this January, and our outstanding debt consists of $200m in public bonds and an $8.5m industrial revenue bond.

Our average interest cost is just under 7%.

We have had no bank debt outstanding throughout 2002, and we have no expectations of bank borrowing throughout 2003.

Our current availability under our facilities exceeds $200m, and we remain in compliance with all our loan covenants.

Our goal, on a consolidated basis in 2003, is to achieve breakeven cash flow, including cash outlays related to the IAS restructuring.

The achievement of that goal will be dependent upon the success of physical asset sales to fund the restructuring activities in addition to the achievement of our operating plans.

Thanks, Mike, and now, Operator, I'd like to open up the line for questions.

Thank you, sir.

At this time, we're ready to begin the formal question-and-answer session.

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

You will be announced prior to asking your question.

To withdraw your question, please press star 2.

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

One moment, please.

Our first question comes from Mr. Trent Porter from BNP.

Sir, you may ask your question.

Hi, guys.

Good morning.

I just have two questions, and then I'll get back in queue.

The first one -- you've been throwing off working capital at about 35 cents on the dollar of decline for IAS, which I think is pretty much exactly what you said you would do.

Is there any reason to believe in 2003 that relationship would change?

No.

Okay, and then the Apple lawsuit -- I guess it's been about a month since that was filed.

Are you able to give us any more color on what's going on there -- any sense of the potential size of their claim?

Sure, Trent.

The situation with Apple as, I think you know, is we sued Apple, amongst others, as a part of our smart battery patent enforcement.

Apple chose to launch a countersuit.

This is the same process that we went through with Compaq, I guess, a year and a half ago -- it was actually two and a half years ago -- which finally was resolved, but at least, from our vantage point, this is just a part of the posturing leading up to some kind of resolution and hopefully a settlement like all the others.

Oh, okay.

Just one more question -- the 13% term is gone, and you've got a ton of availability and cash.

Clearly, you're going to need a lot of working capital if machine tool consumption picks up -- I guess I've got two more questions -- so the first one is would you consider going after the bonds now that the term is gone?

And then, the second question, forgive me if I missed this, but can you give us a sense for how large the potential machine tool expenditures are resulting from the Daimler World Engine could be -- and the timing?

I'll handle the question regarding the cash and bonds first, and let Larry handle the World Engine program question.

It's true, you know, we have $178m of cash on the balance sheet at the end of the year, and we've got $200m in bonds.

We obviously have the ability to pay down some of those bonds at this point in time and, as a matter of fact, I feel extremely comfortable about our ability to retire the tranche that comes due in 2005, looking at our future cash flow projections.

That being said, though, we will retain the flexibility at this point in time.

We have no current plans to retire those bonds early.

Okay.

On the World Engine program, Trent, there are a couple of answers to the question.

One is it still remains foggy because we're just trying to line up who the participants are to do the SE project to define what the size is, but what they're talking about, and that could also be modified, is a kind of a universal solution.

There are at least two schools of thought.

One is that it will, in fact, be universal, and the other is it will be coordinated, but it will be a different solution in each country.

But what you're talking about are lines for multiple facilities, how many multiple facilities is a question that is as yet -- continues undefined -- but, certainly, you're at least talking about a line per region, and lines will typically cost upwards of $100m.

So you can start to rough it out.

It's a very large element and at this point to say it's probably more than $100m and less than $1b is probably the -- and there's still the question of even after you do the SE, will you give it all to one guy?

So all of that is factored into the question of what's the opportunity space, but it's pretty large.

And in our mind, it's even more significant that we're establishing a strategic competence outside our traditional boundary at a time when our traditional boundary has pretty meager pickings.

Right, okay.

All right, great, thank you very much.

Mr. Giles Van Prar (ph) from Delafield Asset Management, you may ask your question.

One quick accounting-related question -- looking at Intermec and trying to understand what it actually earned, you talked about the 5.1% operating margin -- if I could just run through a couple of things to make sure that I understand this properly -- if I exclude what you said in your comments about what the top-line impact was on the IP of about $30m, it looks like the revenues in the fourth quarter were something like $178m.

Excluding the impact to the operating income line of about $24m, it looks like you were at about $8.7m, which is the roughly 5%.

But then should I add in the $6.3m of severance to get you to an operating income of something like $15m, or an 8.5% operating margin?

Is that the way I should think about it?

No, you shouldn't.

You should take into consideration the fact that we continue to try to pursue productivity as a part of our ability to achieve better than cost-of-capital returns but in the quarter most of the puts and takes equaled out and so you've got the numbers correctly in terms of an assessment.

But on a go-forward basis, obviously, this 8.5% is not sustainable, is what you're telling me?

That's right.

We haven't demonstrated the capability to do that yet.

Okay, and separately, in 2003, what should the cash impact be of the IAS restructuring?

Well, we said back in October that we anticipated that the total cost of the restructuring that would be incurred would be in the $27m to $32m range, and we obviously would be able to tighten that range as we move forward, and we anticipate now that that range is still there.

We're still in a $28 to $32 range, and you could almost say it's about $30m, if you wanted to put a single number on a sheet, and I would say of that, you're talking about the fact that cash flows were in the low-to-mid $20m range.

Most of that cash will be expended within 2003.

It's not the question you asked, but just to further expand on the question, what we also said is we took about $23m of those charges and, if you listen to the text, what it says is we will have, in transition costs, probably $7m next year that's a part of that transition cost that we did not accrue this year.

I'm sorry, I'm being a little bit dense -- so the total cash impact from restructuring in '03 from this program is going to be something like $7m?

No, the total P&L impact will be something like $7m.

Okay, the total cash will be in the low $20s.

The total cash will be [inaudible].

Thank you.

Eli Lustgarten from H.C.

Wainwright, you may ask your question.

Good morning, gentlemen.

Good morning, Eli.

Could we go through some clarification?

First, just to make sure I've figured out what you've really earned from operations in 2002 in the fourth quarter, it seems like if you went through -- it was $8.7m was the number for Intermec, and the $6.3 severance -- now, is there going to be continuing severance in 2003 at Intermec?

Not unless there is a decline in revenues, Eli.

We still think that our SG&A percentage is too high, and so we'll continue to take opportunities to improve our productivity, but in terms of getting to year-end and taking a provision, that's not something we anticipate.

Not likely, and while, hopefully, you've demonstrated your breakeven, so, I mean, your operating profit margins go between zero and 8.5%, depending on where volume goes, but it means that you really did make $15m on an operating basis before you took severance from Intermec, and your loss was $16, but you said there were [inaudible] charges around $11m from IAS.

Yeah, the only issue, Eli, is you're taking a severance provision at Intermec as a negative, and you're not looking at some one-time positives and, in my mind, they netted out.

So that kind of $9m number is more indicative of operations.

Okay, so of the $9m you lost about $11m, that means you probably lost 12 or 13 cents in the quarter from operations?

Oh, that's way too complicated for me to do.

Mike has to answer that.

Too early, Eli.

Well, I'm just trying to get an idea -- if you made $9m and lost $11m.

A couple of million bucks on 58 million shares, right.

That's two, and you lost two and then you add the interest charges and there's no tax benefit, per se, at this point, is that correct?

That's correct.

So you basically lost about $7m or $8m or something like that.

Is that sort of the ballpark of what happened in the quarter?

Including interest charges, that's correct.

Okay.

Has there been any tax provision at all in '03?

If we're profitable, but I think what you'll see is something very similar to this year.

Because the frond end of the year we expect a higher level of losses on the industrial automation side, probably the corporation as a whole with interest and corporate charges we'll be in a loss position.

We do not provide a tax benefit from those losses.

However, we will have probably provision if the -- and we expect the international component of our operations to be profitable.

So we do have some small provisions for foreign taxes and for state income tax.

Okay.

Do you have any feel for interest charges for '03?

$200 million times 7%.

7%, $14 million?

Approximately, yes.

And corporate [inaudible] you said will be less than $4.6 million a quarter?

That's a run rate.

We think it will be trending lower.

It will be about $16m for the year, something like that?

Yeah, $16m to $18m.

$18m?

And the reasons I say that is because we also have some costs that we have to accrue relative to the relocation that are incentive stay bonus-related type things.

Now, you gave us some guidance for Intermec in the first quarter, which is up by 5% or 10% over the $140 that we had a year ago.

Do you have any feeling for what will happen to IAS in the first quarter?

I assume it will go down a little bit from the $129?

I think that's right.

I think it will go down a little bit, but really right now our viewpoint and, as you know, for two-thirds of our business, is pretty good.

We see kind of flat quarters throughout next year.

Okay, and is it fair that the loss in the first quarter for IAS will exceed the fourth-quarter loss?

It depends on how you define the fourth-quarter loss, but it's in the ballpark.

Any changes will be sort of the same as the revenue change.

Somewhere between $11m and $16m is what you're saying?

Yes.

Then we'll get better for the rest of the year?

Right, right, and you understand that's because we've got transition costs, going forward, right?

Yes, and you mentioned -- [inaudible] -- you talked about that RFID tag for Michelin -- is that strictly for product identification or is it part of the TREAD Act program that they're working on?

I'm sorry -- define the TREAD Act program?

The TREAD Act is a government requirement --

Right, it's all -- everything that the tire companies are doing are related to the Act that speaks to the ability to identify tires on the vehicle, but there's a huge cost savings associated with recalls, if you can identify all the specifics.

But your chip is not being used to measure the pressure?

No, there are no other sensing connections.

Okay, because there are chips that they're using for measuring the pressure, but this is excluded from it.

I'll let somebody else ask some questions.

Okay, thank you.

Thank you.

Mr. Walter Liptak from McDonald Investments, you may ask your question.

Hi, good morning, Mike and Larry.

The comment that you made about $16m of EBIT in the quarter in the Intermec business versus the incremental base business revenue of $24m -- that's the leverage that you talked about, right?

Well, you know, you can look at incremental in lots of different ways.

One way we look at it, as you know, Walt, is we say $145 is our breakeven.

Look at the sales over $145, multiply them by 30 cents, and you've got what we like to believe is a predictor of our profitability versus that baseline.

The other is, what have we been doing over the course of the past year, and that's the one that you're referring to, where our sales over last year's fourth quarter are up $24m, but our profits -- all this exclusive of IP activities -- our profits are up $16m.

So we've managed to get 75 cents of every incremental sales dollar since the last quarter to the bottom line, because we've had improvements in expenses, we've had improvements in gross margins, and we've had volume improvements.

So we're hitting on all eight cylinders in that regard.

Okay, did that $16m exclude the $6.3m severance charge?

No, I'm just doing one-to-one.

Again, our feeling is that the severance charge is a negative, but there are other positives that occurred that caused that not to be something you can look at as an add-back to performance.

Okay.

Okay, so if you keep hitting on all cylinders in the first or second quarter, you would have something better than 30% leverage?

No, I don't think so, Walt.

At least that's not what we're suggesting.

One of the issues you get into is does breakeven stay the same, despite the fact that healthcare costs are going up 25% and salary increases are being given and stuff like that.

The truth is that the baseline continues to go up on breakeven, and we've got to do productivity kinds of actions in order to keep it flat.

So our belief is that we'll hold to the $145, despite the fact that it should be gradually inching up because we've got to do productivity measures to do that.

Okay.

And then in Intermec, the revenue growth was really pretty good.

Is it because of new product introductions or market share gains or because of the channel shift that's going on with Symbol?

The 700 and particularly the 700 Color is the most successful, most popular, most error-free product in the history of Intermec, and so not to attribute a significant part of our success to that introduction, firstly, in mono last year and then in color this year, would be inappropriate.

Given that all of our competitors haven't announced, it's hard to make a judgment on how much we share.

Our Systems and Solutions business was up 21%, and, as I said, that's the second quarter in a row that it's been more than 20.

So we're very pleased with the volume, and that's where we are.

Okay.

On the machinery side of the business, thanks for the elaboration on the different charges that you're going to be taking, but I just want to understand the timing on the charges.

You'll be done with all the restructuring by the end of the year.

What can we expect on a quarter-by-quarter basis?

Well, you've got about $7m worth of -- you're talking P&L now, right, not cash?

Yeah, and cash out, too.

Well, as Mike said, it's $20m -- what we think is going to happen from here on is, from a people standpoint, which is the big chunk, you're going to have a linear pattern of reduction; so 125 to 150 people a quarter will go out.

The hard-to-forecast thing is the, what's going to happen on the asset sales side of the house, Walt.

Those things don't lend themselves to monthly kind of analysis, and when we complete the asset sales and whether we complete them at an above-book or below-book value basis, will be something of a driver in that, but the larger portion will happen pretty linear.

Okay, fair enough.

You haven't talked at all too much about your Aerospace Defense business.

Are you seeing any increased order activity?

First of all, how big is your composite business and some of your five access machines that go to Aerospace Defense in terms of revenue and are you seeing a pickup in mix on the defense side?

More of our business is coming from the defense side, and more of our business is coming from the composite side.

The composites, Mike, are maybe 20% of the total at this point?

That's right.

It's about a double-margin business for us, and people are still jockeying for position in some of the orders.

As you know, these joint strike fighters and European fighters are long-term programs, and we believe that orders will be let over the next three years.

There's an awful lot of positioning going on in commercial aerospace for composites, where Boeing and Airbus are deciding not only how much of their planes are going to be composites.

Certainly it's an increasing amount, but how much is yet to be determined in some cases, and, as you know, last quarter Boeing said they're not going to build a Sonic Cruiser, but they're going to build a highly efficient smaller plane that's a 757/767 replacement which, again, we see as having increasingly higher composites.

So we believe that composites is already a significant part, and it's going to be a major play in -- or impact -- on the metal cutting business worldwide.

As the business jet market recovers, that also is a high utilization rate of deposits, and we're well positioned in that regard.

Okay, thanks.

Mr. Dennis Delafield from Delafield Asset Management, you may ask your question.

Thank you.

I think most of my questions have been answered, but I want to go back, first, to the $6.3m.

You said it was a number of things, but what sorts of things might those credits have been?

Would they have been sales of assets or --

No, no, they were things like -- they're obscure activities, Dennis, but it's like a tax reserve, as one of the examples.

It's resolution of some issues that don't relate to the operation of the business, but nonetheless happened.

The ongoing business -- okay.

And lastly, I just want to reaffirm what I think I heard -- that after you add everything up for the year, if it comes in as you expect, after all charges and asset sales, you'll be cash-neutral on the year?

That's our goal for the year for the corporation as a whole.

That's what I thought.

Thanks very much -- and great quarter.

Appreciate it.

Mr. Walt Liptak from McDonald Investments, you may ask your question.

Just a follow-up -- the share count looks like it dropped a little bit.

Are you buying back stock or would you consider doing a stock buyback?

We are not buying back stock, and I don't believe the --

[inaudible] numbers wrong.

Okay, but you're not going to do a stock repurchase?

No.

Okay, thanks.

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

One moment, please.

Jennifer, if that's all the questions, I think we can end.

Sir, we do have one more question -- Mr. John Yushillo (ph) from Dodge and Cox, you may ask you question.

Good morning, gentlemen.

Good morning, John, you have a hard name to pronounce.

Yeah, I do.

Just on the intellectual property portfolio, I think the [inaudible] were pretty impressive this year.

What do you guys see, looking forward, in terms of just other areas that's there to mine, I guess, or just is not strategic to the company?

Yeah, we're getting down to the short strokes.

I think we've had two major activities underway, John.

One is smart battery and, as you know, we're probably somewhere between two-thirds and three-quarters through.

Most of what's left seems to be in a process of people want to gnaw on that bone for a while before they come to the inevitable conclusion, but it's probably about 25% of that left to go after.

We don't see any reason why it shouldn't eventually all occur, but it will be slow-paced from here -- certainly nothing like what we saw last year.

Secondarily, we have been -- because the NORAN (ph) folks really brought a wealth of patent estate to the acquisition in '97, we've been looking at the potential of mining some of the property that is not terribly useful to us in the context of our business but really was groundbreaking at the time that they did it, and we've been doing things like going to folks like BroadCom to do that.

The BroadCom settlement was a major settlement in that regard, and I don't see on the horizon anything that would approach that kind of activity.

We'll be doing some continued activity, but it's really relatively small dollars from here.

A follow-up question to the last question that was asked about stock buybacks -- you guys put in a significant amount of your income -- your own personal salary bonus of last year into the stock, and I think the number was 7.

You know, a lot of value, I guess, through debt reduction was created this year, and yet the stock is still in the 5s.

Is the priority for cash in the future when this thing starts generating, you know, and you don't have as many priorities, obviously, with the debt reduction -- is acquisitions going to be something you're going to be looking at as more of a priority than buying back stock?

Look out a couple of years -- three to five years.

Definitely, we believe that the growth potential for Intermec is higher than we are able to pursue because of the cash situation, and it would be a first priority supporting that growth as well as supporting the working capital needs of the businesses are the two first calls on catch.

Okay.

A final question for me -- the people retention issue; there is a lot of moving parts and moving bodies around in the next year.

You've done that in the last six months and, actually, for the last two years.

What are you doing to make sure the people that you want to retain are being retained?

Is anything changing in terms of the retention plans or anything like that?

Nothing in a major way -- the markets, as you know, are not overwhelmingly attractive, but the fact is that we've sorted that out, and I think -- you know, we are going through at IAS right now what we went through at Intermec, which is we've got a solid [inaudible] need to retain really good people but to take out a significant portion of the total headcount, and you'll lose some good people in that transaction, but I think in the main, the IS folks see that what we're creating is a much stronger entity that has much greater prospects than the one that existed before we went at this.

We are using some small incentives, but they're not going to make any big difference in total retention.

Last question -- you mentioned the IT integration, trying to get all your IT systems into one place -- how much risk would you assign to that operation?

Well, I think anytime you're changing IT systems, there's some element of risk.

However, based on the plans we're seeing and the methodology and the fact that we have integrated other industrial businesses within the Lamb business system, we feel that the risk is relatively low.

The issue is more timing.

We think that it will be -- they're under an aggressive schedule, and the question is, do they finish by the first quarter or do they finish by the second quarter and that's really the risk is timing rather than execution.

Is there going to be any impact on billing or anything like that?

No, the billing -- I mean -- there's always impact and we think there's mapping plans in place that will accomplish a successful changeover in that regard and should not -- I think the follow-on to that is if it affects billing does it affect your cash collection?

Right.

We don't anticipate any problems in that regard.

It's not a high-volume billing environment.

It's an environment where we have relatively large dollars being billed and low volume and, as a result, you could even do a hand invoice in an emergency, you could accomplish the same task.

It is probably important to differentiate, though, given that you've raised it, John, between the abortive SAP implementation of Intermec a couple or three years ago and this challenge for us. 75% of the businesses of IAS are already on the system, so it's not the implementation of a totally new system where we see if it works or not.

It's just putting together 25% on the system.

That doesn't make it un-challenging, but it makes it a little more predictable in terms of the outcome and, as Mike says, timing is also a big issue for us because we need to get that system in place in order to be able to accomplish the other kinds of savings that we're looking at.

Okay, thanks.

Thank you.

At this time, sir, there are no further questions.

Great.

Thank you, everyone, for joining us.

You can disconnect at this time, and we'll see you again to review our first quarter results sometime in early April.