漢威聯合 (HON) 2003 Q2 法說會逐字稿

Good morning and thank you for joining UNOVA's second quarter 2003 earnings review 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 industrial relations. Sir, you may begin.

Thank you, Tiffany, and good morning everyone, welcome to our call. Your hosts today are Larry Brady, CEO and Michael Keane, CFO. Before we begin today 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 result actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially is contained from time to time in the company's press releases and in its SEC filings, including but not limited to the company's annual report on form 10-K for the year ended December 31st, 2002 filed in March and the company's report form 10-Q for the quarter ended March 31st, filed in May. Coins of these filings may be obtain by contacting the company or the SEC and now it's my pleasure to introduce Larry Brady, CFO of UNOVA. Larry.

Thank you, David. Good morning, everyone. We're pleased to be with you at this very dynamic time for UNOVA and we're please with our second quarter results. Our IS businesses did achieve performance in line with our expectations and our previous quarter's communication to you and our Intermec business continued to outperform our expectations. First let's quick quickly deal with the full corporation's result before examining the segment detail. Second quarter revenues for UNOVA were $292 million up $63 million decline from prior year. There were intellectual property settlements in both periods. Product and service revenues in the second quarter of 2003 were $285 million, about a $25 million decline from the prior year quarter. Despite the decline in product and service revenues total segment operating profit from products and services for the two segments was up nearly $3 million. As improved profits from Intermec more than offset declines from industrial automation. To better understand the trend lines, we'll move directly to our segment discussions. Industrial automation systems performance was sequentially flat in revenue and loss and the result was in line with the estimate we have discussed in our first quarter conference call.

For the quarter on prior year quarter comparison revenue of $113 million was down substantially following about 28% and losses of $10 million increased from the $1 million loss of the 2002 second quarter. The positive news in segment comes from the same source as last quarter, bookings and backlog. In the first quarter conference call we told you that bookings had been flat in the range of $115 million plus or minus $10 million for the past five quarters and that backlog had ceased its decline. This quarter bookings increased sharply on the strength of one major order. Bookings of $154 million resulted in an increase in backlog of $45 million the first major increase in over three and a half years.

During the quarter our LAN and LANDIS operations booked to orders for equipment to Hyundai east new Alabama facility for well over $50 million. I'll discuss this order in greater detail in a moment. We talked about our expanded program of alliances with major Asian players in the past as a part of our strategy to decrease dependence on our North American customer base. This strategy appears to be paying off. Getting the top line stabilization is, of course, a major element in the restoration of profitability at our IS operations. While the product margins of our business have been slow to respond and are running below our expectations, other elements of the program are running on or ahead of plan. In October 2002 we announced personnel reduction in range of 800 to 900 people. About 650 of these have been completed and our current expectation is to be at the upper end of the reduction range. Our facility relocations are on plan. Our Hebron, Kentucky plant is now housing production that has moved from our Oakley Cincinnati campus. The Oakley facility itself will be available by year-end. Our ability to outsource much of the vertical integration at Cincinnati is prompting optimism. It appears that we can match our previous parts costs without the fixed overhead and with reduced levels of invested capital.

As to margins, we will continue to closely track our progress and to the extent that margins continue to disappoint, we will adjust other cost levels to compensate. Our ambition continues to be achieving a break-even level in the range of $450 to $500 million in annual revenue. Our outlook for the third quarter is for modest improvement from the second. Some operating cost improvement will occur but major cost reduction is pending plant consolidation in the fourth quarter. Before we move on to Intermec, I want to spend a few minutes talking about market conditions at IS. As I mentioned earlier, we received some positive news during the second quarter when Hyundai awarded IS with a contract to provide a complete engine machining and assembly system for its state of the art plant in Montgomery, Alabama.

The new lines will produce up to 200,000 new 3.3-liter P 6 engines per year for Hyundai's next generation designs of the popular Sonata sedan and Santa Fe sport utility vehicle for North America. This contract is important to IS in several ways. It is our first significant order in from the North American transplant manufacturer, and the first time we have installed a flexible cylinder head and block system, and the Hyundai site will illustrate our full technology breath from flexible transfer lines from the head and block to the Grinding Systems and the final engine assembly process. However, despite this order the environment for automotive and automotive supply chain is still tough, and we don't see any immediate catalyst for a recovery. Defense aerospace is one of the few markets offering any encouragement.

During the quarter IS received an order from Lockheed Martin in early support of the joint strike fighter program. The order was for three composite's cutting and drilling machines and will be used by Lockheed to support the JSF wing and fuselage manufacturing and assembly process. The JSF is the largest defense aerospace program in the world. Estimates are that more than 3,000 JSF planes will be stole at a cost of $300 billion. Composite parts will make up approximately 40% of the plane's skin, tail and wings, 48 major structural components that will be produced with fiber placement manufacturing processes. Fiber placement technology is pro jetted to save up to 25% in labor and 28% in material costs over traditional manual fabrication methods. We have already delivered three fibro-placement machines to support the initial development phase of the program in which 22 JSF fighters will be built for evaluation. Most of the composite parts for these 22 planes were modeled and validated for manufacturability using Cincinnati machines' acro place software.

Internationally, Cincinnati machine has announced that it recently signed a memorandum of agreement with European aeronautic defense and space company, EADS for production equipment and systems forcing. This agreement in part is part of the global sourcing strategy that has been hand you across EADS. Airbus is a division of EADS and just recently selected IS for additional high contour tape players to support production expansion of the new air bus 8380 jumbo passenger jet. Boeing is also making significant headlines were its innovative new 7E 7 passenger jet that promises significant weight reduction, increased fuel efficiency, and greater passenger capacity, thanks to the extensive use of composites.

Cincinnati Machine has joined an elite group of world class companies that will participate in developing manufacturing technology for the 7E 7 including the enterprise team led by block aircraft industries. The promise of opportunity in aerospace has been enhanced as a result of the shakeout caused by industry consolidation. Customers abandoned by the exodus of our competitors are approaching Cincinnati Machine to assist with critical production needs. Earlier in the quarter a major aerospace customer asked Cincinnati Machine to acquire some critical IP if in the area of high speed machine of large aluminum parts in anticipation of a $7 million order, an order which was subsequently received. With the recently bankrupcy filing of Inc. er Saul (ph) milling machine Cincinnati is now the only supplier of fibroplacement technology for large structural aircraft components. We have already received several inquiries from former Inc.er Saul customers seeking an alternative source of supply.

Now to our Intermec results. Revenues of $179 million, included intellectual property settlements from (inaudible). Correct and service revenues of $172 million were up over 12% from the prior year quarter and over 5% sequentially from the first quarter of 2003. Operating profit from product and service revenues was $16 million. More than (inaudible) the quarterly profit and increasing the sequential quarterly profit by more than 60%. The associated operating profit margin was 50% better than last quarter, and the highest level since before the 1997 acquisition of Norand and UBI. We do have a tail wind provided by favorable euro dollar exchange rates. The positive effect of currency on revenue is about $9 million versus prior year. Still, with capital turnover and excessive five turns our pretax return on capital utilized is running at a multiple of our cost of capital.

Now let's examine our revenue mix. We'll discuss both geographic and product category comparisons on both the prior year quarter and sequential quarter basis. The sequential versus prior year patterns turn out to be quite different as a result of the strong growth in our base that we've seen over the last year. Looking at the details of our 12% growth versus the prior year quarter, all of our regional growth was in international markets. With Europe, middle east, Africa or EMEA growing 40% from the and the rest of the world growing 50% while North America decline 4%. Accounting for the 5% sequential growth versus our 2003 first quarter, EMEA grew 19%. The rest of the world decline by 6%, and North America grew 2%. In the product comparisons all categories showed strength versus the prior year quarter Systems and Solutions as well as our printer media organizations both grew 11%. And services grew 16%.

Sequentially, quarterly growth was 1% for Systems and Solutions, 10% for PrinterMedia, and 13% for services. During the quarter we shipped 100,000th unit of our highly popular 700 series hand held and the 200,000th unit of our entire east line (ph). These improving volumes in our product line are having a very favorable effect on leverage in our income statement and corresponding improvement in profit margin. In the second quarter of 2003 our product and service profit margin was over 9% versus a 2.9% segment profit margin in the second quarter of 2002. The corresponding profit margin last quarter, that is Q1 '03, was 6%. Let me repeat. 33% a year ago, 6% last quarter, and more than 9% this quarter. The treb link (ph) of segment profit margin year-on-year resulted in an improvement in two areas, product growth margins and SG&A spending percentages. Profit gross margins improved by 1.8 points versus prior year and by 0.7 years sequentially. SG&A spending as a percent of sales improved by 4.8 points versus the prior year quarter and by 2.7 points versus the sequential quarter. Now to events.

This morning we announced that testco, Europe's major supermarket retailer, has already started the process to purchase nearly 10,000 Intermec model 700s for its retail stores. Testco will use the devices for in-store price markdowns in combination with a portable printer, reporting general stock transactions and checking delivery accuracy using RSGPS activity. The 700 is the only rugged handheld computer available with the capability to support three simultaneous wireless connections. A second newsworthy area is the recent emergence of interest in RFID solutions, the world's largest retailer, Wal-Mart, announced in June that it will acquire its top 100 suppliers to outfit RFID tags on pallets and cases entering Wal-Mart's 162 distribution centers.

More importantly, from our standpoint, three weeks later Wal-Mart also announced that it suspended a trial of an RFAD second technology and did smart shells, where RFID tags were to be placed on individual items inside the store. The current focus appears clearly to be the warehouse and distribution system, that is, the supply chain versus the in-store system. At a recent detailed (inaudible) conference of science, technology, and defense experts, RFID was named one of the top ten technologies most likely to improve defense and homeland security Intermec is already selling IRFID to the Immigration and Naturalization Service for this purpose. Project Nexus now being rolled out across the U.S.-Canadian border outfits frequent travelers with special RFID window tags that corresponded to a database of trusted travelers. As the car approaches the border crossing, the RFID tag is interrogated and the driver's picture appears on a computer monitor. When the border guard matches the face of the driver with the database, the vehicle is cleared, thus allowing the boarders to focus on increased scrutiny of unregistered vehicles.

As further evidence of the global RFID momentum the Japanese military recently began studies to relinquish its portion of the UHF wireless spectrum to the public domain specifically because of commercial demand for UHF RFID tags. This development could clear the way for a single standard for RFID tags that can now legally interoperate in the UHF frequency band in all global trading regions. We believe Intermec is the best positioned RFID supplier to take advantage of current interests. We have implemented more than 80 successful customer installations of RFID. To date we have sold more than 7 million RFID chips for a variety of supply chain focused applications. We have more than 120 RFID patents. Beyond these core competencies we've a complete solution. RFID implementation requires tags, infrastructure, and expertise in automating warehouses and distribution centers. And wireless systems designed for industrial environment. Finally, as I mentioned earlier, we also surpassed our 200,000th unit sold of our popular Antares industrial terminals and computers. Antares' intermix platform of choice for warehouses and distribution centers.

Later this quarter we will be launching two entirely new products that are design to eventually replace the Antares design. These new devices the CK 30 and CV 60 are designed for the future with security and the latest Microsoft.net operating environment. They also offer customers a convenient migration path for legacy character based applications.

With an install base of several hundred thousand text base from Intermec, these devices are well positioned to help customers migrate hardware platforms without the expense of recompiling or recoding their existing software. To understand our outlook for Intermec revenue you only need to examine our recent sources trend. Our quarterly revenue pattern has generally been a strong fourth and second quarter in that order, and a weak first and third quarter. The reason for a traditional third quarter weakness is the fall-off in international markets to trend with the annual summer holidays. Owing to our recent strength in Europe, a 40% growth in past quarter, and if large international shipment we I had shipped in the third and fourth quarter we expect our growth in the region will be less in the upcoming quarter.

Quarterly growth for Intermec as a whole should be in the range of 0 to 5% versus prior year. As to profit margins, we do not intend to maintain a second quarter levels due to our decision to increase incremental investment levels which we excited last quarter while this new spending was not in evidence last quarter it is our intention to substantially increase our investment in R&D and selling expense in the second half of this year in an effort to accelerate available growth opportunity. Our objective continues to be a 30 to 40-cent contribution of each incremental sales dollar over our break-even level of $145 million in quarterly revenue. Our second quarter achievement of nearly 60 cents of each incremental dollar flowing to profit, while an encouraging sign of the leverage in our business model, is not indicative of resources necessary to support long-term growth opportunities. Our spending priorities faster introduction of new products, increased development of new data capture technologies, and increased support of interprice customer base. With these investment levels and a recovering economy we believe medium term growth in the low double digits is achievable, and with the leverage already demonstrated, that growth should lead to low double digit operating profit margins. I'd now like to turn the discussion over to Mike Keane who shepherds our continued record setting in debt reduction.

Thank you, Larry, and good morning. You know that cash balance has increased to over $200 million during the quarter, and as of result the company's net debt was reduced by $15.4 million to $5.5 million as of the end of the second quarter. This performance was achieved principally by continue cash generation from operations including networking as a reduction as well as intellectual property settlements. This performance was also noteworthy because proceeds from asset sales during the quarter were not significant.

The sale our Cincinnati campus, once concluded, will further reduce our net debt position. Our continued improvement in operating cash flow performance as well as the strengthening of our balance sheet was again recognized during this quarter as Fitch rating agency upgraded UNOVA's credit rating from triple C to B minus. The continuing to have dialogue with all the rating agencies so they can track our progress.

We have no bank debt outstanding, and we have no expectation of bank borrowing in the foreseeable future. Our current availability, that is, borrowing base including our cash balances, still exceed the $200 million and we are in compliance with all our loan covenants. Our depreciation and amortization of $7 million for the quarter is reflective of our run rate for the year. However, it should decline once again once we conclude the sale of the Cincinnati campus. Our capital expenditures should be slightly higher in the second half the of the year compared to the $7.8 million expended in the first half as we complete the buildout of our Hebron facilities. Total capital expenditures for the year are expected to be approximately $20 million and somewhat lower in 2004. Our special charges line reflects both the IAS and corporate restructuring and transition efforts which are now resulting in lower head counts and improving cost structure.

Thank you, pique, and now operator I'd like to open up the lines for questions.

Thank you. If you would like to ask a question, please press as star 1. You will be announced prior to asking your question. To withdraw a question, you may press star 2. Once again, please press star 1 to ask a question. One moment, please, for our first question. Our first question comes from Walter Liptak of McDonald investment. You may ask your question.

Good morning.

Good morning, Walt.

On the, Michael, on the sale of the Cincinnati campus, what's the timing on the sale of that and I guess what's a ballpark of cash in from it?

We had extended the closing date into a scheduled date in the third quarter primarily due to the additional due diligence requested by the buyer so they could secure their financing. I think the second part of your question was the price range. Proceeds are roughly in the 15 to $18 million range.

Okay. And in the second half the of the year what kind of restructuring charge should we expect?

Well, I think you will see some remaining charges comparable to what you've seen in this quarter. Some of it will be depending on how further we go in terms of staffing reductions in terms of our ability to achieve a break even point.

Okay. And on the Intermec part of the business, the leverage that you had, what held back, I guess, R&D spending during the quarter? I mean, why didn't we see increased R&D and selling expenses? I guess what should we expect for incremental, you know, expenses in the third and fourth quarters?

Yes, it was just a ramp up kind of an issue, Walt. As you can imagine, turning on additional projects means the hiring in of additional teams or the re-staffing of additional teams from current resources, and it's not a two-month kind of an activity, but, as we said before, we see this as a sustained opportunity. We've exceeded our expectations in getting the profit levels. And so what's happening is to get what in our mind is a proper balance between short-term profit and long-term growth, we're accelerating in investment programs, and it just takes us a certain amount of time to ramp up in those.

It's largely additional R&D folks for additional projects or the acceleration of projects as well as staffing at interprice customer accounts.

Okay. And I guess switching back to the Hyundai booking for Alabama, what do the margins look like on that job and the shipping schedule? You know, when could we expect shipments to stretch out to?

the shipments will be over a one-year period, but it will be a percent completion accounting, and so you'll see the impact -- you won't see the impact early on in the process but after about six months you'll start to see the revenues accumulate. The margins are below what are desirable in the industry, but we maintain our insistence on profitable business.

Okay. Thank you.

Our next question comes from Trent Porter of MBM, you may ask your question.

Hi, guys. Just a couple of questions. The first, if you if if you go back a couple, few quarters, we were looking at sort of a pent-up demand situation for, you know, for the LAN machines based, I think there were about 31 new engine programs, and now I was just wondering has a lot of that sort of been syphoned off by Europeans taking unprofitable jobs or are we still sort of looking at a situation where the auto manufacturers are deferring, just deferring the expenditures. And then in a related question I was wonder regular if you could update us on the status of the global engine project.

Sure. In fact, the two answers blend together. The first answer is in the main, the majority of things that you're talking about relate to one of two phenomena, one, the propensity of the auto companies to announce programs that they don't yet have a plan for implementing; and the second is the seemingly never-ending deferral of programs which are, in fact, hard programs. World engines falls into that category. It has not been announced. We anticipated at one time that it could be announced as early as early second quarter. It's also turn out not to be a world engine program. We had envisioned this delightful activity where presence on three continents and facilities on three continents would lead to a single engine for manufacturers on three continents. In fact, it's going to be one off programs, the same as all other programs have been, and so this pot of gold at the end of the rainbow has ceased to exist. Our current belief is that we'll probably participate in the grinding part of that business and not in the engine block and head part of the business.

Understood. Just a follow-up question related to the same, the flexible system for Hyundai, I just want to make sure I understand. Is that, you know, one of your high volume modular manufacturing systems or is that a completely sort of flexible system and possibly an indication that you are now competitive in totally flexible systems as well?

I'll answer that and also give Mike the opportunity to do the same. It's more the former than the latter. It's not an assembly of C&C machines for total flexibility. It is a conventional transfer line modified with modular systems that make it highly flexible for future use and modification, and so it's more a traditional LAN transfer line than it is a Cincinnati C&C center. And it is high volume, as we talked about when we talked about 200,000 engines per year. So it is -- it's the migration of the traditional LAN Lamb transfer line into the today's manufacturing technology which requires longer utilization of lines in order to get more appropriate and more usable depreciation and less asset risk for the manufacturers.

Okay. I just have one housekeeping question. Then I'll get back in line. Can you give what the borrowing base veil bill was at the end of the quarter?

the borrowing base which we define as the actual base plus cash available exceeded $200 million.

Trent, let me amplify and, again, invite Mike to do the same. It's important that you understand the significance of the Hyundai order is in part we set out to get a broader base of customers. We've done that. But as importantly, this is not just a head and block line. A head and block flexible transfer line is a big deal for us because the big ones are few and far between. But in addition to that we have the Grinding Systems associated with that same facility and our Lamb assembly and test operation is doing the assembly systems for that, for that operation, so it's really a soup to nuts kind of a capability on the engine production.

Okay. Did the interest bankruptcy play a role in that or ...

No.

All right. Thank you.

John Ayanuccio (ph) of Dodge and Kahn (ph). You may ask your question.

Great. Can you talk a little bit about the revenue opportunity for composites in aerospace had you mentioned a number of programs coming up. I was wondering if you have any idea what you think the gross opportunity would be for all competitors looking out into the future, say, the next three to five years and maybe what the timing of orders could be looking at these different programs.

Let me say that, you know, that the answer of that question is as elusive I have as where and when will Boeing launch the 77. The closest program for us is joint strike fighter which is why we tend to talk more about that when we've actually seen some early orders out of the program. That program will create its machine requirements and its composite requirements over the course of the next three to five years, and we reckon that that program can support about a 50 to $75 million investment in machine tools over that time period.

We've got lots of different ways to try to come to that number, but that gives you an idea of one of the programs. The rate at which Airbus accelerates the A380 and the number of planes it wants to produce, as you know, is the same as the Boeing 747 are going to be driven by the commercial airplane cycle which certainly isn't encouraging right now, so we see that farther out into the future, but it's also true that composites are just going crazy. I mean, folks are, with the advent of this automation capability, with the kind of economics that I described in the text about material and labor cost savings, what's happening is people are coming up with new and clever ways to use composites in all kinds of applications. It used to be that defense was the only place it could be afforded because while you gain on strength and labor ratio, you lost out on cost.

Now, with the cost economics that are in place on composites, you see ship contents being made from composites. You talk about cars being made from composites, certainly all manner of aircraft are actually being marketed by virtue of their composite content. And so this does seem to be, while it will probably be paced by the rebound of the commercial aircraft, as the major user, this seems to be a technology that's going to be extremely widespread in the future and conceivably a replacement technology.

Just a quick follow-up from the Intermec side. Congratulations on the test co-order. Do you guys see a significant retail refresh coming up in the next couple of years? And if so, you know, how do you plan to play that?

Sure we do. I think -- but I would argue, given the spending on IT that we've seen for the past three years, we see considerable refresh coming up everywhere. I do believe that there are some products that are no longer on the market from names that have disappeared that create an opportunity space for replacing systems. So, sure.

Any update on the U.S. postal deal? I don't know if that's still in the works or what the story is there.

Oh, U.S. postal will be rolling out RFQ and bids and that whole process over the course of the next six months. It's a very significant program. And there will be lots of participants.

Okay. Thank you.

Sure thing.

Once again, to ask a question, you may press star 1. Eli Lustgartner of HC Wainwright. You may ask your question.

Good morning. A couple of housekeeping questions, one, what were the taxes on the $5.2 million intellectual property settlement?

Well, in essence, they were blended in. They are considered domestic, and most, the majority our tax pro provision is only for foreign and state income tax taxes at this point in time so the lot bottom line answer is zero when you net it against domestic operating results.

So the in the quarter had nothing to do with the intellectual property.

That's correct.

So the full thing came to the bottom line. Secondly, you gave us an ADS --

Eli, before you leave that impression, we did have legal expenses, so we talk about the profit as different than the -- than the cash settlement.

that's the difference between the 7.2 and the 5.3.

Right. That's the 7.2 and 5.3 would be the legal difference.

Exactly.

But 5.3 would come to the bottom line.

Exactly.

Now, you gave us a 5%, zero to 5% forecast for ADS in the third quarter. Is that include or exclude any currency? Because currency is running 5%.

That includes currency. That includes -- yeah.

So you're talking relatively flat quarter to quarter.

That's right. And we are because we have -- on a sequential basis what we're concerned about is the third is down from the second. On a year-on-year basis it's really Latin America and the huge order that we had with Beanbo (ph) this largest bakery company in South America.

How big was that order?

The total order was north of $25 million. A significant portion of it was delivered in the third, and a large part of remainder in the fourth quarter of last year.

So you should be able to hold margins better than the first quarter even on that volume level (inaudible).

Say that again.

You should be able to hold margins better than the first quarter, 9. 4 in the first quarter but the 5.5 in the first quarter.

That's kind of, if you just do the math, that's kind of the range of what we're talking about.

Now, the machine tool shipments for the Hyundai project you begin to show up in the fourth quarter?

No, I don't think you'll see much in the fourth quarter, Eli. I think it hadn't a next-year phenomena. You ought to start seeing some early signs of that through percentage completion at the end of the first quarter.

Yes, but so it won't give you any benefit at all in volume or doctor.

Well, the only thing --

What you'll see is you'll start to see the revenue perform an in the fourth quarter, and then that he'll start to ram ramp up more in 2004 as we get further completion but the entire accounting for that is on a percentage completion.

the opportunity, of course, is that having filled that space in we're not going to have to lay off folks and take those hits.

Your comment before about the world engine sort of indicating that you don't expect to get another soup to nuts kind of project such as Hyundai?

There will not be a soup to nuts kind of a project such as Hyundai, in our mind, and I think that's pretty clear.

So you're just going to be able to bid and get the grinding on pieces --

That's correct.

And you don't think you can get any block or headlines at all?

I do not, and I don't think the person who gets it will have plans in more than one country.

Or make any money on it?

Or make any money on it.

One final question. We talked -- you talked a little bit about the wall Wal-Mart shift from focus on supply chain on shelf items. That's basically a commitment to smart tags as opposed to Matrix dumb tags that are out there? Is that sort of what's going on? Hello? Hello? Did I get cut off.

Please stand by, sir.

Okay. oops!

Please stand by, your conference will be resumed in a moment. Please stand by. Go ahead, sir. One moment.

Can anybody hear me?

Eli, we left you and heard a busy signal and we assumed that wasn't you at the time of your saying Wal-Mart made a decision on RFID, that's where I lost you.

Yeah, I was talking about the movement in the supply chain versus on shelf items. That one movement more toward smart tags as opposed to I guess the matrix dumb tags, if you want. The second part, are there any formation of consortiums to handle the Wal-Mart that tag that you're part of.

the answer to the first question, I don't think is the technology reading, read many, write one, read many, factory installed tag information. I think it's an issue of tag cost for item level tracking you really need low cost tags, and so the consensus is that while that will come, it's out in the future and trials are premature. In contrast to the supply chain management where you do have established capability. In answer to your second question about consortiums, the answer is no, at least from our perspective, Eli, that's the result of the fact that you've got to have an entire collect of capability in order to -- in order to undertake these trials, and we perceive our ourselves to be ideally positioned in that regard. Other suppliers have got pieces of the requirement but have to, in fact, form those consortiums with people that can supply the remainder, and then it gets to be fairly a serious discussion about who gets the profitability of the enterprise.

Symbol doesn't have a radio at all. Are they going to Europe at all or who are they going to use?

We don't know the answer to that.

All right. Thank you.

Our next question comes from Steven McBoil of Lord Abbot. You may ask your question.

Yes. First question with regards to the industrial side of the business, you're obviously at a run rate of, call it, 44, $40 million EBITA loss, and I'm you're just at the you're just is the goal to be break even be$450 million level by the fourth quarter, and if that is the case, recognizing that there is certainly bucketed costs that come out here, labor and facility costs and so forth, you can you kind of walk me through what management's goals are there with, specifically within each of the components.

Sure. Just quickly, that has been our plan, continue to be our plan. The set back in our plan comes from the product gross margins available from jobs that we are getting. They have been disappointing to us in terms of the plan we laid out last September, October, so what we said was in order to get to breakeven we need to do a certain amount of cost reduction, assuming that our margins remain at this level or stay or are achieve this level, which was actually a slight decline from where we were at that time. In order to do that, we said we need to take out eight to 900 people.

We need to consolidate manufacturing locations, and we need to get out of vertical integration in Cincinnati. So what we've done is we've taken out 650 of the 800 to 900 which now looks like 900, which we'll reevaluate in the fourth quarter. Maybe more. The plant consolidations are on track and fortunately what we've found out is that when we took the entire parts manufacturer out of our Cincinnati, Oakley campus we were able to duplicate the cost of parts without the investment level as we moved, as we moved the production in assembly to Hebron but outsourced the parts. So that's on track, but what is not on track is customer margins, and we're trying to see how that develops with this flattening out of the business, whether we see a rebound in the margins or whether they continue to stay depressed. If they continue to stay depressed, we are no less intent on achieving the breakeven we talk about. It's just going to require more cost reduction, which the process that we are currently assessing.

Okay. And if I assume with that being the case, if I were to assume this quarter's performance, as I understand it, the 800 and 900 people that you spoke of are bucketed out to be $18 million in labor cost facilities, you had facility cost savings of about $12 million, and I know you've got call at this time absence of $3 million in restructuring costs not occurring in '03 versus '02, I guess what I was looking for is there is an additional, call it, $10 million bucket of costs that have to come out.

Right.

Now what I'm hearing is customer margins may be a little bit lighter. And yet I guess on a net-net basis it sound like you're A, fully committed so it sounds look the difference, the additional $10 million may be a little more incremental, may come from the labor side of the equation?

Well, it is will either from come from labor or the vendor side. As you know, we're moving toward a more variable cost basis structure, so having our vendors share in the pain of low margins is certainly a part of what we are trying to accomplish, and it's a fairly inviting environment right now because there's not a lot of work out there. But, but you've nailed it correctly. We remain committed to what we're doing. If the margins aren't there for us to get the breakeven, in our mind that's a mathematical equation that says we've got to do more cost reduction. To say that it's all going to come out of labor I think is incorrect.

Okay. Great. And --

to some extent also, Steve, we're in kind of a when we get this consolidation occurring in a new plant environment that's of a greater variable cost structure, what is it going to look like? I mean, right now we've sort of thrown the straws up in the air and they're in the process of landing on the table and making an accurate assessment of margins at this point. Gets to be more difficult than it will when we achieve manufacturing stead state post-consolidation.

Okay. On the Intermec side of the business, obviously very impressed with the leverage in the margin performance in the quarter, just understanding the guidance being effectively flat sequentially, absent foreign currency, if I look beyond the third quarter, I think you spoke to double digit revenue as well as operating profit growth.

Right.

What I just want to get a sense as to, is that -- obviously you've got a seasonal strength in the fourth quarter, but beyond that, that's the appropriate growth to be thinking off of a operating profit margin base of about 5-1/2, not anywhere near where we are currently because of the lack of R&D; is that correct?

Let me try and restate it and see if I captured your issues. Number 1, we grew last year from first to fourth quarter by 25%. It was just an astronomical period of growth, so the comparisons in third and fourth quarter are painful for us. We don't see that as a comment on the progress of the businesses and what we do think is 2004 has got this potential medium term cape belt of being a double digit sales increase. If you look at profit margins, and you just do the math on, subtract $145 million per quarter from the revenue that that creates and put between 30 and 40 cents on the bottom line, you start to get if numbers that are higher than you're talking about.

Okay.

and it will be the revenue growth that drives the profit growth.

I understand.

and I think we've demonstrated that.

and I was wondering if you could just talk to North American trends throughout the quarter. I think you mentioned the fact that they were down. Just curious how that actually trended out through the quarter and sequentially if you've seen any pickup of late.

Sure. North America was down 4%. And, honestly, it's, in our mine, the result of what we've been talking about, which is an awful lot of the indicators are weak. Interestingly enough, we are just recently starting to see those rebound with something like durable goods, but we've historically tracked those indicators and we professed some kind of amazement in the first six months that we've been growing in the face of a weak North American market. What we saw dynamically during the quarter was a pretty strong first half of the quarter and a pretty weak second half of the quarter. It started to come back in the latter part of June, the last two weeks in June, but we wound up not getting everything out the back door that was backlogged, which is an untypical condition for us.

Okay. And a few odd questions here. The Lockheed Martin, the initial order that you received there, did you mention the size of that?

: No. It was under 10 million bucks.

I mean, it was lower by most standards but we anticipate significantly larger orders in JSF funding in the future.

More importantly, it's an indication of Lockheed mart than coming to us for assistance.

And I think faster than initially expected, correct?

Because of the shakeout in the industry, right.

and then with respect to the balance sheet, net debt obviously down impressively. I think, if I understand, if I remember correctly, you were anticipating that that remained fairly stable through to the end of the year. Has growth plan changed now?

We had anticipated a couple things in that. One, we had anticipated actually there could have been a slight in increase in net debt towards the end of the year, and also we had anticipated we are going to have the relatively flat from the first quarter to the second quarter, and that was including the sale of the Cincinnati, including the sale of the Cincinnati campus so we are ahead of our plan in terms of driving cash flow from operations.

and where ought do you think, given that fact, where would you be at the end of the year?

Well, I think at the end of the year if we are able to conclude the sale of the Cincinnati campus, I think we have an opportunity to either say flat to maybe even improve the net debt situation.

Okay. Great. Thank you very much.

Thank you.

Our last question comes from Trent Porter of BMP prevists. You may ask your question.

Eli took care of most of my questions, but further on the Walmart issue, is there -- I just wanted to kind of get a better sense of the timing. Is there a standards issue there or are there a set of standards available already for the supply chain management? Is this -- in other words, is this the kind of thing that could take as long as, say, tire tagging or bag matching? And then the second question, I could have sworn we were looking for about $25 million in cash restructuring charges in the year, and I think that's what you said about that. I was hoping you could update me there.

First let me talk about Wal-Mart. As you said, Wal-Mart said they expect their suppliers to be here over a five-year period. That five-year period entails two issues, one issue is their own trials to determine who they want to supply them and how; and the second is the resolution of a whole bunch of standards as it relates to global standards. I think you can talk about isolated standards within the U.S. that that other this or authorizes this or that, but in the main, in order to get what Wal-Mart is requesting for, you need universal standards in the range in order to be able to do did warehouse and distribution center management, and that, at least by our prognostications, is well on the way to resolution, but to your point and to the point of all of the other systems that are looking for similar kinds of standards, it's taken a long time. We've been at this for a while. Intermec has always tried to take a leadership position, both in working with the standards committees as well as making IP available to folks in order to we can get worldwide standards, but it will take time.

Okay.

regarding the comment on the $25 million expected spending, that was true. We took a charge last year, our first charge regarding the restructuring, and it was approximately $25 million; however, at that time we indicated that not all of it was going to be cash flow from the corporation. Part of the charge related to early retirement programs which we had offered in lieu of severances, and as a result that cash flow would be coming from the pension plan which is still in a surplus condition. The remainder of the spending I, think if you look at our balance sheet and see the reduction in the accrued payroll and related expenses, you'll see a decline in that accrual from year end. That number was about $72 million as of December 31, and it's decline to $57 million. A good portion of is that is related to paydown of severances as people exit the payroll.

So it's sort of embedded in -- okay. Thank you.

Okay. Thank you all very much.

Thank you, everyone. You may disconnect at this time.