漢威聯合 (HON) 2003 Q1 法說會逐字稿

Good morning.

Thank you for joining the UNOVA first quarter 2003 conference call.

All participants will be in a listen-only mode until the question and answer.

This call is being recorded.

If you have objections, please disconnect at this time.

I would like to introduce David Brooks, director of corporate public and investor relations

Thank you.

Welcome to the first quarter of 2003.

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

I wish to remind investors that statements made in the course of this conference call that express the company's or management's expectations, beliefs or predictions for the future are forward-looking statements.

It is important to note that the results could differ materially from those projected.

Additional information concerning factors that could cause actual result to differ materially is contained, from time to time, in the company's press releases and in its SEC filings, included but not limited to, the company's Form 10-K for the year ended December 31, 2002, filed in March of this year, and the company's report Form 10-Q for the quarter ended September 30, 2002, filed last fall.

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

It is my pleasure to introduce Larry Brady, CEO, of UNOVA.

Larry.

Thank you.

Good morning, everybody.

It is a beautiful day in Seattle.

We're pleased to report results that exceeded our earlier expectations.

With the understanding that our first quarter is historically our seasonally weakest for both the operating segments, we appear to be off to go start.

Intermec contributed to the performance.

This is notable our customer base is seeing declines in production, GDP, and when the factory used component of capacity utilization is at its lowest since 1983.

Now, to the numbers.

For the corporation, revenue of $274 million in the first quarter was down 6% from the prior year quarter.

A net loss of $14.9 million represents an improvement of $3.3 million, or 6 cents per share on the same comparative period.

Also, there were no significant changes in pension expense, goodwill amortization, or intellectual property settlements in either the comparison periods that require a separate explanation.

This is a welcome change.

There were two small nonrecurring items that are detailed in the press release.

Moving directly to the segment results, I'd like to discuss Intermec, our ADS segment first.

Revenues at Intermec continued to double-digit rebound we've seen for the past nine months.

First quarter sales of $163 million were up 16% over the prior year quarter.

Quarterly segment operating profit of $9 million was up $10 million over the prior year.

On a comparable quarter basis, the first quarter revenue increase of 16% followed the prior two-quarter increases of 16% and 13% respectively.

Based on these results, it would appear that the long awaited rebound is under way.

As significant as the sales rebound is, the profit and profit margin impact represents even greater leverage.

Our $9 million quarterly segment profit represents a 5.5% segment profit margin.

This improves on the 5.1% and 4.6% segment operating margins of the prior two quarters.

It also represents a bottom-line impact of 43% of the incremental sales volume over the prior year.

That is, literally, 43 cents of each sales dollar over break-even being contributed to profit, a significant improvement over the 30-cent incremental margin goal we set a year ago, giving us the capability to both leverage volume growth for profit improvement and invest to stimulate future growth.

Contributing to the profit margin improvement, product and service gross margins were up more than two points over the prior year period and SG&A as a percent of sales was down four points in the same period.

With annualized capitalization turnover in the first quarter of 5.5 times in 2003, that's 5.5 times capital turnover and 5.5% pretax segment margin, our pretax return on capital utilized is over 30%, well beyond our cost of capital.

Looking at the mix of sales, we again saw our strongest improvement in our core Systems and Solutions business and in our international markets.

On a product line basis, Systems and Solutions grew 27% over the prior year period.

Our Printer/Media business increased 2%, and our service business improved 12%.

Geographically, North America grew 3%, Europe and Middle East/Africa grew 31%, and the rest of the world, comprising Asia Pacific and Latin America, grew 71%.

The positive currency translation on revenue was $7 million.

Within these numbers, and perhaps contributing to the surge in revenue, is a pronounced trend toward wireless installations and the continuing success of the model 700 handhelds introduced in 2001.

In 2002, combined sales of model 700 mono and color units increased five-fold over the last three quarters of 2001 when we introduced the product.

In the first quarter of 2003, the volume increased an additional 42% over the 2002 quarterly average.

Added to this market acceptance is the functional value added by wireless connectivity and our handheld computers.

Local area network versions of our model 700 handhelds have gone from 25% of the total product line sales in 2001 to 45% in 2002 and to more than 65% in the first quarter of 2003.

Wide area network versions have grown from less than 5% of total model 700 sales in 2001 to more than 25% in the first quarter of this year.

In just two years, in fact, in only 18 months, the mix of wireless 700 handhelds has gone from under 30% of total 700 sold to currently more than 90% of all model 700 units.

In addition to the success of the model 700 and the move to wireless, there are several other macro factors that appear to be driving AIDC and Intermec as the leading edge of the tech spending recovery.

One is increased customer concern for improving asset efficiency.

In the after math of the manufacturing downturn in early 2000, customers turned their attention to debt paydown at the expense of IT capital expenditures.

Now as we commence a slow recovery, there is an unusually strong sales recovery in the [ADCM] industry, benefiting Intermec and other participants.

The traditional demand driver of worker productivity improvement is strong but can't currently account for strong levels of growth.

In examining rationale of customers, it appears some are making AIDC investment for major capital improvements.

Working capital management has become more complex in the wake of significant manufacturing outsourcing, and while working capital improvement is not a new requirement, it does appear the combination of new lower cost AIDC systems, evolving methodology such as CPFR and the success of several high profile companies in differentiating themselves through effective working capital management are all driving the expanded focus on the denominator on the return on investment calculation.

Finally, it is also true that our incorrect business in the U.S. is growing faster than our direct business.

We attribute a significant part of the success to the popularity of our new honors partner program that focuses our relationship with partners more on value add than strictly on volume.

Since our announcement of the program, recruitment of new partners has escalated.

Our outlook for Intermec continues to be strong.

However, with three successive quarters of double digit growth, we would temper our outlook to a 7 to 12% growth over prior year in the upcoming quarter.

I would like to turn the discussion to the industrial automation business.

You will note that following the merger of our two LAN division with Cincinnati Machine, we no longer have standalone performance at Cincinnati and have consolidated the previous AME segment into the total for IAS.

Sales for our IAS segment were $111 million for the first quarter, a 27% decline over the prior year period.

Segment losses of $10.4 million represent a decline of $10.3 million from the essentially breakeven performance of the prior year.

Our segment operating performance was better than the range of $11 to $16 million loss that we discussed in our last conference call as a result of earlier shipment of some higher margin business.

As we look at our goal of a breakeven target in the range of $450 to $500 million in annual sales and compared to the first quarter loss of $10.4 million, we anticipate between $4 and $5 million of additional quarterly cost reduction from the previously announced personnel reductions. $3 million of quarterly cost reductions from lower facilities costs, $700,000 quarterly savings from the absence of restructuring charges, which were in this quarter's results, and the remaining $2 million per quarter required should come from further or needs to come from further gross margin improvement.

We continue to target these objectives by year-end.

Perhaps the most meaningful trends for the IAS business are those of bookings and backlog.

Backlog increased slightly in the first quarter.

This is the first backlog increase in 3.5 years.

Despite a small decline in the fourth quarter of last year, backlog changed for the six months also shows a slight improvement.

Looking at the underlying bookings trend is instructed in analyzing a possible bottom.

For the past five quarters, our average quarterly bookings level has been $115 million.

Over the five quarter periods, bookings have not deviated from the average by more than plus or minus $10 million.

Actually, 107 was the low and 124 was the high.

It would appear that the downturn is bottoming.

This is particularly significant when we note that in 2001 the period preceding this five-quarter flattening, bookings were down an average 30 million per quarter.

The trend warrants further discussion in view of the continuing difficult environment for our automotive and aerospace customers.

First, as we said during the last call, the repetitive portion of our revenues, that which derives from consumables and after market repair is flat to slightly up.

With the long-term decline in new machine sales, this recurring business represents about 33% of the total.

Secondly, our customers are still anxious to shepard their cash reserves.

As such, an increasing portion of capital expenditures are directed to retools of existing installations.

Those purchases favor our large install base, both in percent of contract wins and contract margins.

New machine purchases, however, remain intensely competitive and are frequently taken at negative margins by our competitors.

Nonetheless, it appears we have reached some sustenance level which is driving the bottoming process.

Finally, we are encouraged by the activity associated with our Asia Pacific alliances.

While no major orders have been received, the number and size of quotations are a refreshing change.

Our outlook for the second quarter does not represent any substantive improvement from the first quarter given the higher than anticipated shipments.

We do believe in viewing the market opportunity we should be able to, again, improve backlog in the upcoming quarter.

I would like to turn the discussion over to Mike Keane, our CFO.

Mike.

Thank you, Larry.

Good morning.

You may have notice in the press release statements we have delineated the 7 million and corporate other charges included in the UNOVA expenses.

Two items to note.

One, our foreign exchange loss for this quarter were slightly higher by $800,000 compared to quarter one in 2002, and, two, in the first quarter of 2003, we included a $700,000 charge associated with the early retirement of the remaining $16.2 million of the term loan which we retired in January.

Both our CAPEX of $4.4 million and depreciation and amortization of $7.2 million in the first quarter are reflective of the expected run rates for the year.

As indicated in our February call, CAPEX for 2003 are expected to increase about $10 million over 2002, due to facility build-outs related to the Cincinnati Lamb division merger.

We expect 2004 capital expenditures to return to a more normalized run rate.

We still have no bank debt outstanding and have no expectation of bank borrowings throughout 2003 or the foreseeable future.

Our current availability, our borrowing base, including our cash balances, still exceeds $200 million, and we are in compliance with all our loan covenants.

Our liquidity position has allowed us to reduce the domestic facility committed line from $200 million down to $100 million in April, thus allowing savings of commitment fees.

As an added note, you may have noticed that standard and poor recently changed its outlook on our D minus righting from negative to positive reflecting the strength in balance sheet and positive momentum in operations.

Thanks, Mike.

At this time, let's open the phone lines for questions.

Thank you.

If you would like to ask a question, you may press star one.

You will be announced prior to asking your question.

To withdraw your question, you may press star two.

Once again, to ask a question, press star one.

Our first question comes from Mr. Walt Liptak from McDonald Investments.

Hi.

Good morning.

Good quarter.

Thanks.

With regard to the outlook for sales growth, I believe you said in the second quarter you're looking for 7 to 12%.

At Intermec, right?

At Intermec.

In the second quarter last year, there was an IP settlement in there.

You're excluding that, I imagine?

That's true.

We -- forecasting IP settlements is not a very rewarding activity, Walt.

We excluded those from any forecasts.

Okay.

So you're looking for revenue potentially in the $180 million range?

If you look at last year, it was 153 and 7 to 12% on that

Okay.

And in terms of the leverage that you're getting, the 43%, is that related to product mix, or is that sustainable going forward?

Well, it's not sustainable, but it's not sustainable by choice.

I think what we see is despite the fact that manufacturing statistics don't seem to warrant it and despite the fact we tend to track fairly well with manufacturing statistics, it's pretty clear the industry is starting to surge.

That gives us a fair amount of investment opportunity.

What we're trying to do is maintain a dedication to significant incremental profit with each sales dollar, but, at the same time, invest in that future growth.

So what's really happened is, because of our ability to get substantially more -- in this case, more than 40% more than we thought in terms of the incremental sales dollar, it gives the opportunity to serve both those needs.

Okay.

The automation segment.

You know, the loss was less than expected, the $10.5 million.

During the quarter, were there further restructurings?

If you are at a run rate of $110 million of revenue, could we expect that those losses will continue to get paired back?

That's right.

What you're seeing now -- firstly, to answer your specific question.

We're on track and on plan.

We're reduced the number of people we talked about.

So all the plans we've talked to you about are, in fact, proceeding on pace, if not better.

What's happening is in the early part of the year, just to take an example, we've got the IT people from Cincinnati and the IT people from Lamb both employed in order to get the movement to a single system.

That was completed at the end of March.

So you start to free up some reductions.

We've announced the total reduction, but we haven't been able to implement it because as we move factory locations or move G&A activity to a single location, it is only after that move we're able to free --

Okay.

So in the second and third quarter more overhead will be coming out?

We're targeting a fourth quarter breakeven.

Obviously, our belief is, A, we can achieve the 4 to $5 million in further people reductions.

B, the $3 odd million in facility reductions and further gross margin improvement by the time we get to the fourth quarter or year-end.

Okay.

And the plants for sale in Michigan and Ohio, any progress on that?

We're continuing on plan, Walt.

We are still targeting to have our Cincinnati campus sold by the end of the second quarter and we have miscellaneous properties in Michigan we have either completed or are in process.

And you will recall, Walt, that is the rationale for our forecast of being able to be cash flow positive in the second.

Right.

Okay.

Thanks very much.

Do you have a target for where you expect to end the year in terms of net debt?

Well, we had indicated in February that we expected that net debt would be about even to where we entered the year.

So that would imply that, basically, cash flow for the year would be breakeven.

We're, obviously, ahead of that at this point in time.

Our expectations is that we may be able to hold that rate at this point in time, but we could always give back a little bit in the next three quarters.

Depends somewhat on the growth of the IS business, as you know.

Okay.

Thank you.

Our next question comes from Eli Lustgarten from HC Wainwright.

Good morning.

Couple of quick questions.

At Intermec, 7 to 12% growth rate.

Is that excluding currency?

No.

That's all inclusive

Currency in the second quarter should look similar to the first quarter, particularly with the Euro.

It would average 95-cent Euro last year.

The 7 to 12 is versus prior year quarter.

Okay.

So you've got -- we had 7 million impact this quarter over prior year.

I think we had something like 2 million sequential.

We're looking at versus last year -- as you know, the Euro was going up over the course of last year.

It is probably a similar kind of number, maybe smaller

So basically half of it is currency and ha is real?

That's a fair statement

Can you give us the idea of what the impact was on profitability?

I think Mike said there was a loss in the quarter on foreign exchange, on hedging.

Was the currency helping the profitability?

At the gross margin line, it probably had a positive impact of 1 to 2 million.

Then we had some hedging costs and, as I indicated, this was not Intermec alone, but company wide, we had about an 800,000 negative variance to the same quarter last year

So a little bit of the profit and the $9 million would have come from currency, is what you're saying?

That's correct.

The profit contributions you're seeing relative to the quarter was, really, operations driven.

Okay.

The $7 million corporate expense number for the rest of the year, you had a couple things there.

Does it finally come down at some point?

It is declining.

We indicated earlier in our February call we would have some higher expenses earlier in the year and decline over the course of the year as we completed the move to Everett.

So $6 million in the second quarter and down after that?

Yeah.

The run rate should be actually closer to $5m and maybe below that as we get towards the end of the year.

The other indication is we had a $700,000 charge in the first quarter that was related to the retirement of the term loan.

That won't be there in the second.

It should be less than $6 million in the second quarter, or around 6 million?

Yes.

You indicated that you have a loss at IAS because you booked higher margin business forward.

Is that due to the challenge of matching losses second quarter versus the first?

Yeah, it does.

I think we said in the first quarter, perhaps in answer to one of your questions, that we saw an improvement on the first quarter performance in the second quarter, and we talked at some length as to whether that was relative to the $11 million adjusted profit if you took out the restructuring or whether it was relative to the $16 reported, and we said somewhere in that range.

We did better than that.

Probably about $2 million or so better than we thought, and the ability, therefore, to leverage first into second, has been balanced by the capability.

So we see it in the same kind of range.

Any word on the Mercedes world car platform, the big contract that you guy --.

Yeah.

The world engine program is continuing to move forward.

We continue to be, as I suggested in the remarks, maybe too subtly, but we continue to be excited about that whole range of opportunities of transplants and world engine and generally international alliances.

World engine has gone to discussion, pretty intense discussion.

It's been narrowed down to a small number of players.

We continue to be optimistic about our opportunity.

However, in part, it's also deviated somewhat from the intention of being a single engine in a worldwide application.

It's now got modifications depending on the region of the world in which it's going to operate, and, as a result of that, probably you will see further regionalization of the participation, Eli.

I think we continue to be excited by the prospects.

We continue to be excited by the prospects of anybody spending any kind of capital money in the automotive business, but it probably isn't the big bang theory of you get one contract and live on it for the next three years.

It is a '04 phenomenon at this point?

No.

The bid will go up this year.

The majority of profit impact will be '04 phenomena.

Final question.

Can we hope for this is the profitability predicted for the next quarter?

I've never been a proponent of not winning.

Stated differently, we believe we will see growth from Intermec going here on out.

We really do believe that continued growth in the product line is somewhat a given because of all of the factors that I mentioned that are all contributing to positive performance.

I suppose you could put together a scenario economically that -- where the economy turns down and scares people to death and they stop investing again.

I don't see that as legitimate.

We do believe we demonstrated our capability to get product to the bottom line.

Yeah.

I think that's a rational conclusion.

Are you seeing any impact from Symbols new marketing approach and restructuring of the new market approach?

I think we both announced -- I think you're talking about the equivalent of their honors partners to ours.

We both announced similar kinds of programs.

We are probably implementing them differently.

I think they are the right thing for the industry to do, and I think both the manufacturers, as well as the value added reseller network, feels that way.

Who will be most successful is, in fact, built into the implementation of the program and we're encouraged by our results today.

All right.

Thank you.

Thank you.

Our next question comes from Mr. Steven McBoil with Lord Abbot.

With regard to the Intermec growth expectations of 7 to 12%, you characterized them as tempered.

In light of the fact you, obviously, had several quarters of double digit growth, is there anything that has change from your perspective in terms of growth outlook near term or is it just a matter of coming up against tougher comparables?

I think it's two things.

It's tougher comparables.

That's going to be a continuing activity, but the other is, it's always frightening when you look at GDPs that are disappointing people and you look at durable goods orders that, over the last six months, have waned considerably, and you look at capacity utilization numbers that continue to be well below any typical investment norm for renewed CAPEX.

All of those kinds of historic indicators don't suggest of a rebound, which is why, I think, people in general are talking about second quarter kinds of recoveries.

The second quarter recovery that everybody is predicting has been going on for nine months for us.

So one of the concerns we've got is, what is it going to take for people to stop investing?

I'm sure there is a sort of double dip recession scenario that could cause that to happen.

We don't think it's probable.

We'll always temper this question of how boisterous is our outlook with the question of how the economy is doing.

The other thing that's happening is while our business is, in large part, business that's recurring at some predictable levels, we do go out and sleigh elephants that get into the books.

If you look at the first quarter results this year, you see slower growth in the U.S. than you see in the international arenas.

While that is a normal phenomenon and, in part, the fact that the base in international is smaller.

It is due to the fact last year we had a large implementation of a DSD account in our result that isn't recurring this year.

Therefore, you see some impact.

So it is -- the capability to not only duplicate large orders from the past, but do it in a comparable period basis has some small impact.

Have you disclosed backlog or bookings for Intermec?

No.

We don't do that because the shipment time, the average shipment time for a product is about six days.

So backlog is kind of a meaningless number for us.

You've got short shipment times.

It is misleading.

With respect to the partner programs and your competitors somewhat similar program, there's been a fair amount of discussion as to the perhaps heightened level of disruption in the channel and, perhaps, the benefit directly or indirectly to yourselves in terms of gaining share.

Have you seen that through the quarter, and would you expect to see that in upcoming quarters as your competitors program goes in place?

It's always difficult to make competitive comparisons short of fairly direct share comparisons.

Invariably, our view is somewhat parochial and rose colored glasses.

The industry has tended to announce new partner programs.

Implementation, while theory is about the same, implementation is different.

For what whatever reason, we see some significant enhancement in activity and we're signing up resellers probably at a rate of three-fold what we saw last year.

That could be just more activity.

That could be the rebound of our company.

That could be comparative programs.

What the causal factors are, are way beyond intelligent comparison at this time.

We are quite pleased with the resurgence in our indirect business.

Of those reseller that you're finding that are signing up, do you have the ability to determine whether it's sign up by way of disgruntlement relative to, perhaps, who they have used previously?

No.

And can you break out the percentage of direct versus indirect currently and, perhaps, what the trends have been there?

Yeah.

The industry -- we and the industry have tended toward more and more indirect.

If you look at our business, it's probably right now about 60-40.

If you look at individual pieces, you get way different pictures.

For example, our government business, as you can imagine, is largely a direct business.

Our DSD business is largely a direct business, or more of the higher percentage.

So you get a lot of mix in that, using the numbers and average.

That can be misleading.

I think within the context of indirect, there's also the distribution versus a value added reseller mix and our distribution mix is going up as well.

Okay.

Is there an initiative on your part to increase indirect as a percent today to a higher level of percent that you could speak to?

No, because -- I'll tell you why.

The initiative is, in fact, the honors program.

What we've concluded is, there's a place for indirect and a place for direct.

What you clearly don't want is to have your indirect and direct sides competing with each other, but to have a collaborative environment.

I think, more importantly, because of the lower margins in the indirect business, part of the rationale for pursuing that side of the business is, you have lower costs, but you also have lower margins.

What you have to have is a value add that's consistent with the lower margins.

That's why you see these programs moving from volume to value added.

I missed the break with respect to geographical year-over-year growth.

3% North America, 30% Europe and Middle East Africa and 70% rest of the world.

Great.

On the IAS side of the business, when you look at the leading indicators that you would in monitoring the business, are any of them turning positively, understanding, obviously, you have backlog up sequentially.

Understand the macro factoring utilization levels have been steady to, perhaps, negative.

Is there any other indicators you used historically to monitor health of the business that may be turning up?

Well, that's why we say we appear to be bottoming but we're bottoming because of sustenance.

What you see is we have five quarters of flat bookings and the sales are come down though that level.

That's what's going on with the backlog, as compared to the resurgence that's created the higher backlog number.

In fact, what we have tended to look at are relationships in aerospace, planes built, that sort of stuff, which is not a positive indicator and capacity utilizations for the general machine tools kinds of activities.

That's way off the mark in terms of any indicator of resurgence.

There isn't anything out there in your typical resurgence analysis that would make you positive.

Indeed, probably the most positive phenomena is the absence of capital investment which tends to drive retools to investment.

Okay.

Fair enough.

Thank you very much.

Our next question comes from Trent Porter with MBM.

You answered most of my questions.

Could you give us the revolver availability excluding cash?

It depends.

We have to keep a minimum of 30 million.

We have approximately another 30 million above that.

That's all driven by defined borrowing base.

Right.

Okay.

By the way, that's U.S. only.

We have an additional 20 million above that overseas.

Okay.

Your answer, I think, to Walt, I want to make sure I understood it.

It sounded like the 43% contribution margin on Intermec, are you actually saying that you expect the 43% to moderate back down somewhere between 30 and 40% going forward?

It sounded like you were saying you would reinvest some of it.

Yeah.

You heard correctly.

When we first step -- this goes way back -- a breakeven target at 145, what we also said is our objective, once we get to our cost reduce breakeven point, will be to hold fixed costs in such a way that as we grow, we can get 30 cents of every dollar beyond 145 to the bottom line.

What you see is, as you point out, performance that's -- that's my word, dramatically.

Performance in excess of that 30%.

Because of the growth that's occurring and the strength of the growth that's occurring, it is very appropriate for us to reinvest in the business, and, therefore, you heard correctly.

We would not anticipate a 43-cent incremental margin going forward.

Okay.

The breakeven still at around 145 million?

We're slightly better.

I think it was fair to say on the basis of the December calculation that the 145 was still holding, but, you know, in December, we did 177 million sales and made $9 million in the first quarter, which is typically a weaker quarter.

We did 163 or 14 million less and made the same $9 million.

Something happened on break-even.

If you look at the quest of the company to continue to improve its productivity, both of the income statement as well as the balance sheet, that's just the result.

Right.

Okay.

Then I have two more questions and I'll let you go.

The first is, in order to get to a breakeven in the fourth quarter, you've got to get to an annualized sales level of 450 to 500, which suggests, you know, quarterly sales level of somewhere between 112 and 125 which suggests a resurgence.

Am I doing the math wrong?

No.

You're doing the math right.

The accuracy of my calculator from 111 to 112 is limited.

I think we're at the bottom end of the range right now.

You know, we're into drips and drabs in terms of our ability to make that.

All we're saying is, the good news is, it feels like we're bottoming.

We're able to put bookings on the books that sustain the lower end of that range.

Will we get some buff from that?

Perhaps so.

The more important issue is gross margin.

You can take people out.

That's a predictable activity for us, and we're confident in our ability to run the business on the basis of the staffing that we proposed and will pursue.

You can drop facilities cost because as you eliminate facilities, the cost of running those facilities will go down.

What happened at gross margin is the bigger issue as it relates to resurgence or the kind of business we book more than sales increase.

We'll get more than out of a margin point than increases in sales in all probability.

The last question, are there any updates on some of the exciting RFID going on?

What's taken [Chep] so long to beta test the product and that sort of thing?

It is a wonderful question.

I think the promise of RFID since 1994 is a classic example of what's going on.

The nature of these prototype operations for large scale installations take a long time, always take longer than we would propose, always involve significantly more activities than we would think, and the truth of the matter is that the launch of the product requires large scale installations.

You can't go into a plant and implement RFID profitably.

You have to go for large scale kinds of proof in like base security in the Army, like border security for the INS, like palate activities with [Chep], like tire tagging with the car companies.

Those are the things we're pursuing.

They take a long time to develop.

I think we've adjusted our expectations accordingly.

I will say that in the aftermath of what appears to be a willingness to reinvest, companies appeared to pay down debt that they're looking at their early capital expenditures, RFID is getting more conversation than it was even six months ago.

Thanks a lot.

Our next question comes from Mr. John Walthausen with Paradigm Capital.

Good morning.

Congratulations on a good quarter.

You mentioned earlier in the remarks that, of course, the first quarter tends to be seasonally weak.

Looking at Intermec, can you help me understand what proportion of your annual sales you would typically expect out of the first quarter and out of the second quarter?

Yeah.

There are different factors to consider for both us as well as our competitors because of our different focus.

We've got different seasonality in the businesses.

In our case, the seasonality is driven by the fact the fiscal year ends in December, and there is something of a surge in our business as both our customers spend and our sales guys close out the quarter, and as a result of that, what occurs is that, typically, the first quarter represents -- typically is a hard word.

Let me give you the average of the longer period.

Represent about 23% of the total.

The fourth quarter represents 27% of the total.

The two in the middle tend to be the average quarters.

The third quarter is weaker internationally because everybody goes on vacation a month or two.

The second quarter tends to be the weaker quarter in the U.S.

Those two tend to balance out.

Fourth is larger, first is smaller by those amounts.

Okay.

That's very helpful.

When I try to under the implications of the 43% incremental margins, it struck me that currency would be -- a lot of your costs are domestically based, would be the biggest factor in exceeding your 30%.

Is that correct or are there other factors in mix or, you know, better than expected pricing or the channels that you go market through that allow you to achieve that?

That's not exactly correct.

We do have some incremental cost that are Euro based in terms of sales cost and delivery and things of that nature.

So you don't see a significant contribution margin coming from the currency play alone.

Okay.

So then was it better pricing or mix, or is it too hard to break it apart?

It is really all the above.

Basically, it is driven off the efficiencies.

As you get proper scale moving through the factory, you get a better contribution margin.

That's helpful, thanks.

Once again, to ask a question, press star one.

Our next question comes from Walt Liptak from McDonald Investments.

I guess this question could be for Michael.

You did ROIC calculation for the first.

Can you break it out invested capital and machinery and ADS?

The number you had seen was common in the earlier was related to Intermec in terms of a quarterly annualized run rate of 30%.

We don't break it out between the segments.

Walt, let me tell you why you heard that number for the first time.

I think not being overly theoretical, but we're fairly strong believers in the fact that if we're anxious to pursue shareholder value, that investing in growth below the cost of capital is not the way you do that.

Therefore, as you know, we've had a dramatic focus on getting every penny that we can of incremental value to the profit line.

That's the 43 cents we talked about.

Now, that we're earning better than cost to capital, it is our firm belief as well that the market rewards growth in the segment.

So you see us -- I don't think we'll ever abandon the pursuit of significant profit improvement, but you see a bit more balance in the tone of how we would anticipate running the Intermec business.

I will tell you this, Walt, the mix of assets is comparable to where we ended the year.

Okay.

Thanks a lot.

There are no further questions at this time.

Thank you, everyone, for participating.

If you have any questions, please give me a call back in Woodland Hills.

Otherwise, we'll see you at the send of the second quarter.

Thank you.