漢威聯合 (HON) 2003 Q4 法說會逐字稿

Good morning and thank you for standing by. Welcome to the UNOVA 2003 fourth-quarter and full year 2003 earnings results conference call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question and answer session. (Operator Instructions). Today's conference call is being recorded. If you have any objections you may disconnect at this time. Now I will turn the meeting over to Mr. Kevin McCarty, Director of Investor Relations. Sir, you may begin.

Thank you very much. Good morning everyone and welcome to UNOVA's fourth quarter fiscal year 2003 earnings release conference call. Joining me on the call this morning is Larry Brady, our Chairman and Chief Executive Officer and also Michael Keane, our Chief Financial Officer. Once we conclude our remarks this morning, we will open up the call for a question and answer period.

Before we begin our prepared remarks, I wish to remind investors that statements made during 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. This is also 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 its filings within the Securities and Exchange Commission, including but not limited to the company's annual report on form 10-K for the year ended December 31, 2002 and the company's report filed on form 10-Q for the quarter ending September 30, 2003. Copies of these filings may be obtained by contacting the Company or the SEC. Now it is my pleasure to introduce Larry Brady, CEO of UNOVA. Larry?

Thank you, Kevin, and good morning everyone. Once again, we're pleased to be with you and pleased to report the fourth quarter and full year results for 2003. Our operating performance for the period was somewhat better than we projected the last time we talked to you. For the Corporation, fourth-quarter revenue of $300 million yielded a segment operating profit of $13.8 million. This was down $26 million in sales and 6.5 million in profit from the fourth quarter of 2002. The differential and both cases is more than explained by the effect of intellectual property transactions and related operating profit. The net change in revenue associated with IP was a reduction of 30.5 million and the net change in segment operating profit was a reduction of 25 million. Therefore, the residual are (ph) product and service operating results recorded a net increase in revenue of $5 million and a net increase in segment operating profit of $18 million.

The fourth quarter brings to conclusion a year of milestone achievements. I would like to take a minute and cover some of these that are more significant. First, as we begin 2003, we targeted no cash outflows for the Corporation despite the considerable cost of merging our two largest IAS divisions and the operating losses from that segment. In fact, our cash position continued to improve throughout the year and we closed the year with a $76 million improvement in cash net of debt for the full year.

Secondly, in the Lamb and Cincinnati Machine divisions of IAS, we commenced a very complex set of division merger activities, including plant consolidation and closure, IC system consolidation and significant personnel reductions. We completed those activities on or ahead of schedule at cost reductions which exceeded our targets and with no disruption to our customers. We achieved our target of breakeven by year-end, despite lower new business contract margins due to some strong performance in one of our divisions. We are continuing our cost reduction efforts in pursuit of a stable balance of cost structure and revenue and our target of a full year profit in 2004.

We also continue to harvest cash from the IAS segment, a second primary objective. The divestiture of the selected assets of our Lamb body and assembly business at a price which approximated our book value aided the segment cash flow. The business unit was market disadvantaged and operated at a chronic loss. Total cash flow from the segment was about $75 million. At Intermec, we entered the year having only recently achieved breakeven at the operating level. At the time, that is the beginning of last year, we forecasted an ability to bring 30 cents of incremental profit for each sales dollar over our breakeven level of $580 million annually. On our actual achievement of 688 million in sales, this incremental profit margin would have predicted a segment operating profit of about $32 million. We actually achieved $53 million of segment operating profit. Remarkably, this incremental contribution over breakeven of more than 50 cents exceeds our product gross margin.

All of this performance was exclusive of IP settlements. We also generated positive cash flow of $30 million in the ADS segment, plus an additional cash flow of $12 million from intellectual property. We have moved Intermec's pretax return on capital year utilized past our cost of capital. Since the first quarter of the year, annualized pretax ROCU has shown an improving trend, exceeding 40 percent for the full year.

Another significant event in 2003 was the rapid rise in interest in RFID technology and its implementation. Announcement of intended implementation dates and commencement of trials at both Wal-Mart and the Department of Defense has lent credence to the new interest. A great deal of confusion continues to exist around standards and the effects of intellectual property on the development of the technology. However, this is being sorted out and should not in our view pose any delays to the implementation schedules. The recent announcement of our co-chair position on the EPC UHF generation II standards working group furthers this belief on our part. Also on the quarter, new announcement of intentions and trials in Europe only expanded the buzz. Finally, while not on par with the significance of previously discussed items, we did complete our corporate headquarters relocation and downsizing in 2003.

Moving now to quarterly performance detail in our two segments, we will talk first about industrial automation. Sales of $115 million for the fourth quarter were down $4 million from the comparative prior-year period. Segment operating profit of $1 million however improved by more than $13 million. This is surprisingly robust improvement in our performance over prior year and our quarter to quarter trend line can be attributed to our Landis (ph) Grinding Systems business. Landis has historically been the most profitable of our business units while they suffer from the same volume downturn as our other businesses, their differentiated market position has netted better margins in price premiums than their sister divisions in IAS and better than their competitors. In the fourth quarter, Landis was able to shift certain product previously scheduled for the first quarter of 2004. In conjunction with the continued cost reduction throughout industrial automation, we were able to outperform our prior projections by several million dollars. It would be really easy to get overly enthusiastic about this achievement, however it would be largely unwarranted. Our outlook for the future has not materially changed. The first quarter of the new year should demonstrate the historic weakness characteristic of our business pattern and will be negatively impacted by the earlier shipments we just described as well. The IAS first quarter operating loss should be in the range of about $5 million. Still, we would plant to breakeven performance about midyear and conclude the year with a full year of profit. Currently, upside exists on the basis of strengthening U.S. activity. However, the double-edged sword of currency will hurt our three facilities in the UK when the pound sterling is at its strongest level in 11 years.

Backlog in industrial automation fell during the quarter as bookings of $93 million fell below our revenue trend line of $105 million plus or 10 million for continuing operations. This currently does not appear to be a signal of further weakness in the marketplace and we would think that the first half bookings rates for 2004 will return to trend, if not higher. While our outlook has not significantly changed, there was an encouraging event during the quarter when Boeing decided to proceed with the development of their new plane, the 77 (ph). As described previously, this new plane incorporates a major increase in composite structure. Orders in 2004 and 2005 for Cincinnati Machine composite units were expected to benefit from the ramp-up of the joint strike fighter and the Airbus 380 programs. The start of the 77 could significantly improve the effect of new programs on our composite orders. As previously discussed, our composite business is a higher margin business as a result of our technological leadership in the area. The recent decision by Boeing confirms our belief that composites will represent an increasing percentage of Cincinnati Machine orders commencing in 2004.

Moving the discussion to our Intermec business, sales in the fourth quarter were $186 million. No intellectual property settlements were completed in the quarter, although we did experience some associated legal costs. In discussing segment operating profit, we will as always divide the discussion into two parts -- results from intellectual property settlements and those from product and service activity. Total segment operating profit of $13.1 million in the quarter included $14.4 million of profit from products and services and a $1.3 million loss from IP legal expense. In the corresponding quarter last year, segment operating profit of $32.7 million included $9 million from profit from products and services and 23.7 million of profit from IP settlements. Thus, in comparing the critical products and services results for the quarter, a revenue improvement over last year's fourth quarter of 5 percent yielded a profit improvement of 60. Breakdown of revenues shows the same general strength internationally that has characterized the year. Comparisons of Q4 results versus prior years showed that North America grew 3 percent, Europe 17 percent, Asia-Pacific 37 percent and Latin America fell 24 percent as a result of the large enterprise shipments made during the last half of 2002 that were not repeated. On a product basis, our systems and solutions business grew 4 percent, printer and media grew 3 percent and service grew 11 percent. The currency impact on revenue was a favorable $9 million.

Perhaps the most significant discussion concerning our financial results relates our changing investment in growth. Since the second quarter, we have discussed our intention to accelerate investment in research and development. A combination of events has prompted this change. We have shown accelerating returns on capital utilized, surpassing our cost of capital since the beginning of this past year. It represents, as we said at the time, an opportunity to increase enterprise value through increased investment and growth. We also believe the current environment represent an opportunity unique Intermec. Three factors influence our conclusion. Most obviously is the clear incentive for increased spending in RFID. Secondly, we have a large increase in interest from enterprise accounts in nontraditional market. This interest is prompted by several recent changes. One, the broadening of our product line to support these markets; two, our new technology solutions integrator status with Cisco that provides improved access to retail and health care markets and three, the increasing speculation that Intermec represents the best supplier bridge from traditional data capture to our RFID.

Finally, investment in further penetration of the government market, homeland security, defense and broad-based RFID is home also an area of unusual growth potential for Intermec. In the fourth quarter, we increased our R&D spending by $3.5 million over the fourth quarter of 2002. Clearly, the profit leverage demonstrated by the Company for the past 18 months is continuing although now it is fueling both improved profits and the significant increase in R&D spending. More specifically, our comparison of product and service results for the fourth quarter versus the prior year show a profit improvement of $5 million and an R&D spending increase of $3.5 million, enabled by a sales increase of only 5 percent. Our belief is that continuing these incremental R&D investments in 2004 would enable achievement of our medium-term target of double-digit growth and profit margins.

Also during the quarter, Intermec introduced several new products. We introduced a new vehicle mount unit, the CV-60 and a new handheld computer, the CK-30, developing the next generation of our industrial products. Both products are designed for RFID reader capability to be added and both are designed to be Cisco CCX compatible. The CV-60 is a 12-inch screen vehicle mount unit intended primarily for use on forklifts for warehousing applications. During the quarter, the CV-60 received Cisco's CCX certification and became the first ADC product to be CCX qualified. The CK-30 is the first of a new generation of handheld computers intended to replace our very successful Antares product family. The family has some 200,000 units in the installed base. The CK-30 is targeted for both light industrial and retail customer applications. Both products began shipping in volume during the quarter and both are experiencing strong initial acceptance. Our model 700 products continued their strong 2003 sales performance with over 15,000 units being shipped in December and a total of nearly 100,000 units shipped for the full year. We also received voice (ph) certification for the model 760 computer from AT&T during the quarter, becoming the first ADC product to be voice-certified. We expect this certification to pave the way for additional sales of the 700s and field service applications.

Finally, we should address the outlook for Intermec. While most of our planned increase in R&D is aimed at fueling above-market growth in 2005 and beyond, current levels of customer interest and activity also encourage us. Our traditional industrial market has strengthened. The direct store delivery segment is implementing new upgrades. Field service markets, like cable television service, are growing and proof of delivery and workforce automation projects within transportation and logistics are accelerating. We believe revenue growth for the year will be in the range of 10 percent. We also believe that we can continue to contribute 40 percent of every sales dollar over our annual breakeven of $580 million to growth in both profit and incremental R&D investment. Sales growth should show an accelerating trend throughout the year as IT spending continues its recovery. In the first quarter, our seasonally weakest, we believe sales growth should outpace the prior year period by 5-10 percent. Profits should follow the model we just described, allowing for some of the incremental leverage to support increased R&D investment.

Before turning the discussion over to Mike Keane, I'd observe that our increased emphasis in R&D marks a milestone of sorts. We believe that a shift in our industry is incurring. The impact of change in technology and competitive strategy will shape the competitive landscape for some time to come and we will be dependent on the success of implementing these emerging technologies and individual company strategies. Now Mike will take you through the financial discussion. Mike?

Thank you, Larry. In (indiscernible) the review of UNOVA's operating results, the Company reported 2.8 million in pretax earnings from continuing operations after giving consideration to corporate and other costs of 1.1 million, net interest expense of 2.9 million and special charges of 7 million relative to the industrial automation and corporate restructuring activities.

I would like to note that included in the corporate and other costs for the fourth quarter is a foreign exchange translation gain of 3.3 million. The gain is principally due to the strengthening of the euro relative to the dollar in the past quarter. Special charges included approximately 4 million of non-cash charges related primarily to impaired (technical difficulty) equipment sold or remove from the Cincinnati campus in preparation for its sale. The remainder of the charges are primarily severance costs incurred with further headcount reductions and relocation activities within our industrial automation businesses. Total headcount reduction to date since the announced restructuring activities in October of 2002 has exceeded 1100, or approximately 35 percent of the employee base.

The fourth quarter also resulted in a profit for discontinued operations of 1.1 million. This actually is a net amount that includes a 4.4 million tax benefit recorded in the fourth quarter related to year-to-date pretax losses from discontinued operations of 12.6 million. The Company determined in the fourth quarter that it was no longer necessary at this time to provide valuation allowances against tax benefits derived from domestic net operating losses. The balance sheet continues to strengthen as our year-end net cash, cash less debt, balance of $30 million reflected a $12 million increase in the fourth quarter. Assets held for sale of almost 24 million represent various real estate parcels and some equipment that are idle and actively being marketed. Our goal is to monetize these identified assets as additions our cash flow within the next twelve months, if not sooner. Our depreciation and amortization of 5.2 million for the fourth quarter compared to 6.2 million in the previous quarter and is reflective of our ongoing asset reduction activities. Our total capital expenditures for 2003 were 20 million and in-line with our expectations.

Our expectation for 2004 is that capital expenditures will approximate depreciation charges of 19-20 million. The majority of the capital expenditures are associated with investments in our Intermec business. We also expect at this time our income tax provision in 2004 will appear to be more normalized at an average rate of about 37 percent. Net operating loss carryforwards will be utilized to minimize cash payment of taxes. You may have also noticed that on February 5, we announced resolution of a patent dispute with Apple Computer regarding patents held by both companies, including UNOVA's smart battery technology. Although the terms of the resolution are confidential, it is consistent with our prior intellectual property settlements and will have a significant positive impact on UNOVA's first quarter operating results.

Let me close my comments by stating that our liquidity remains strong and we believe we have the necessary resources to fund growth in our businesses. We currently have no bank debt and no expectation of bank borrowings in the foreseeable future.

(Operator Instructions). Mark Roberts, Wachovia Capital Market.

Thank you, good morning. I have a couple of questions here. First of all, did I understand you correctly, Michael, is the effective tax rate going to be 37 percent, or is that the gross tax rate that we want to apply NOLs against?

That is the effective tax rate for provision purposes.

Okay and the spending on legal expenses to enforce IP in the quarter was -- how much of that was related to RFID patents?

This is only related to the settlement activity. We have had the kind of expenses all along, they just tend to be offset by the settlement themselves. In this case, it wasn't. It was primarily related to the two ongoing activities, Apple and HP. Apple of course has now gone away, so that number should diminish. We were conducting -- we were significantly in process of going to trial on that from those both sides (indiscernible) countersuit and so the settlement was helpful in that regard.

Thank you. My last question -- as you joined -- you're more active in the EPC global standards process, several representatives of EPC global have been making public pronouncements in various venues about trying to I guess for lack of a better term strong-arm participants in the industry not to charge royalties on their IP. Could you talk about your relationship to EPC global in regard to the royalty issues and kind of what of some of the major issues are as they're trying to resolve that?

I will be happy to. That was the nature of my comment about some confusion in the world about what is going on. Firstly, our position to EPC Global is we are highly supportive of the effort. We believe standards are absolutely required if the industry is going to progress, if there is going to be broad-based adoption and we see it as an essential process. The whole nature of intellectual property is based around an attempt to balance the two competing activities (indiscernible) on the one hand providing multiple access for customers to a complete competitive environment from suppliers, which is EPC's fundamental progress being largely representative of the consumer products companies and an expanding audience. And on the other hand, the need to incentivized innovation. We believe that can occur in a give and take process that involves on the one hand, contribution of intellectual property free of charge that provides access to players and does not block people from participating. A second element of that strategy is the use of reasonable and non-discriminatory licenses which tend to be a netting out process so that the folks with the most intellectual property are in essence in a series of exchanges and trades, wind up with some net incentive for the investment they have made. And finally, there is intellectual property which does not preclude the implementation of standards, but relates to differentiation of product from different competitors and the advancement of that product which is held by the players themselves. What we're trying to do in the UHF Gen II working group is to start out how that interplay works. Perhaps an example in the real world of barcode would be useful. Barcodes never got rolling -- firstly, everybody patented a whole bunch of barcodes and the industry never got rolling until such time as those patents were donated to the public in such a way that standards could be created and moved forward. By the same token, as you know in both laser scanning and imaging, the major players hold patent estates (ph) and they cross-license each other in that regard and so that access can be obtained. And that does not result in incremental or staired (ph) increases in prices to customers, it results in the folks that have done the intellectual property work getting some additional compensation. The people that don't do any wind paying their R&D bill through a different door, but it levels the playing field in competitive pricing, causes a highly competitive environment, which is desirable on the part of the customers. And, finally, there are always those differentiating patents that don't preclude people from playing, but distinctly differentiate product which provides the ongoing activity in the industry, which in RFID frankly is critical because this is an emerging technology and we simply will not have an implementable technology if it stops at this point. We still have lots of (indiscernible) and there still needs to be continued incentive for further innovation. So the net of all of that as I said is we think these things will be sorted out. Clearly, there will be contributions of intellectual property. We started that sometime ago during the ISO standards phase of this whole standards-setting process where we've contributed intellectual property relative to the (indiscernible) interface that allows access from all the players and we continue to see that process sorting itself out through the working group.

Great, thank you.

Walter Liptak, McDonald Investments.

Thank you, good morning. My question is related to the incremental R&D spending. And I wonder if you can tell us a little bit more specifically how much went into spending on RFID related products, and then as a follow-up, what kind of incremental spending for RFID we would expect in 2004 and maybe what is going to take in total to get RFID products ready for market over the next couple of years?

You will just have to forgive me, Walt. I am uncomfortable answering that question for competitive reasons. I think to say that the incremental number we're talking about is reasonably represented by the fourth quarter is fair, i.e., you should look -- we established a 7 percent R&D baseline. We will spend over that baseline and our model was originally built on and the incremental contribution of profit was originally built on the baseline of that seven percent. We will increment R&D by an additional amount not unlike the delta that you saw in the fourth quarter in the four quarters of next year. That will be divided into three pieces. The whole data capture area, which for us is largely RFID in terms of the incremental investment. The enterprise accounts space where these non-traditional markets as I said represent very unusual opportunity for us to be developing specific special applications for customers and vertical markets. And finally, the government space. And for lack of -- it is not precisely that way, Walt, but it is in the neighborhood of one-third, one-third, one-third in those categories.

Okay, thank you.

Reik Read (ph), Robert W. Baird.

Good morning. Larry, just off of that same question can you maybe talk little bit more within the data capture, the enterprise account, the government area -- what other specific products, product priorities that you're going to be looking for R&D incremental R&D dollars?

No. I don't know -- that feels like that what you're asking me is tell me the competitive strategy that we're going to use to seriously invade other people's markets. I am uncomfortable as I said to some extent to Walt to answer that thought. Specifically, you are aware of the contracts that are coming up in the government space and they are big deals and we consider ourselves players in those. And those have not been around for a time and they require incremental spending and we're going to participate and hopefully win. And as you know, that will provide us significant incremental revenue in years to come if we're successful at it. If you talk about my commentary about enterprise accounts in non-traditional markets, we are enthused about the Cisco relationship. We think it gives us access to retail and health-care enterprise players that would be attractive customers and also set an attractive precedent of our greater play in those spaces. The RFID activity encourages that because people see us not only as a second supplier in those spaces, but also as a legitimate bridge to RFID. So it is a simultaneous attractiveness to us in this space.

Is there a greater emphasis on I guess what I would call product iterations, changes to existing products, or are these going to be new products that are coming out?

Well, in essence, both, but I think the fair answer to your question is yes, because our traditional model of product development is this combination on the one the hand of engineering coming up with the latest and greatest of this applications of technologies into our product line, and the other is the tendency which we've had over the years to work with leaders in the vertical market to develop what begins as a custom application for the customer, but leads into the next generation of product for that vertical channel because it is an excellent proving ground for how you adopt that product. And moreover, enterprise customers are not anxious these days to have totally custom product that does not lend itself to further generation. So that's just the way it works out.

I wanted to go back to the legal expense. Did I understand that you said that the expenses that you incurred are really more onetime in nature and they're related to the settlements than they should (multiple speakers).

Yes and no. They're not one kind in nature in that they're ongoing because (indiscernible) onetime in nature in that they apply to specific lawsuits. Having settled one and one gone relatively dormant, we see a decline in that. But obviously, you will see it as a net out number in the second quarter because of the settlement we have. By the same token, what will be left will simply be Hewlett-Packard because we are down to the short strokes on who's left in the pace and it is a bit of a legal skirmish with Hewlett-Packard that will either be successful or not and that will conclude the activity.

One other question on the special charges. You had broken it out in the press release that the IAS restructuring was 6.1 million and that the total was 7 million. What is the remaining 900,000 in there?

That relates primarily to corporate office relocation.

Great, thank you very much.

Eli Lustgarten, JB Hanauer & Co.

Good morning. I have a couple questions about the fourth quarter. Corporate was 1. something, 1 million. Nice number, does it stay there, (indiscernible) should I analyze that for 2004?

No, you shouldn't. That would be a nice number to annualize Eli. But what I indicated in my comments, and maybe it was not clear, was that embedded in that number was approximately a $3 million translation gain for foreign exchange.

The more number is more likely 4.1?

I'd say 4 to 4.5 is a good range.

Good ongoing number. (indiscernible) how much did you actually spend in R&D in the fourth and for the year?

We don't make that public, but 7 percent plus the increment is not a bad estimate.

So, something like 21 million plus the increment (indiscernible) for the fourth quarter.

No, that's way too high a number. Intermec sales, I'm sorry. (inaudible) You just look at Intermec sales, multiply it by 7 percent and add the increment. That is a pretty good proxy.

R&D on the industrial side is many times customer sponsored and is relatively low number relative to sales.

In the fourth quarter, you made 2.8 million if we take out -- you had a 6.2 million tax charge. (indiscernible) what the ongoing real profitability in the fourth quarter. You would have made not 2.8, but 8.8. Was it being taxed against that and is that how you would get what you really earned in the fourth quarter?

We had a lot of pluses and minuses in our tax provision for 2003. And looking forward in 2004 as I indicated, it would be more normalized 37 percent of earnings. The fourth quarter basically was -- it looked unusual because we had a number of pluses and minuses. But it is primarily related to foreign taxes and where you did not see the offsets on the domestic side.

So that 6 million tax, there was no benefit from the write-off of charges or anything like that?

That's correct.

Okay. When you look out into 2004, you started indicating IAS has its weak first quarter, which means the volume looks like it's going to go under 100 million for a change (indiscernible) forward orders.

It was particularly the orders we pulled forward. I think basically what happened is Landis made early shipments. Landis is by far the most profitable of our operations, and we basically flipped our expectations in the fourth and the first quarter.

So, it would be less than 100 million. Is there enough activity now we've seen enough (indiscernible) now to get that volume up 10 million a quarter for the rest of the year?

No, we still see flat. I think there are some indications of activity and pace, but we don't see anything that suggest that we're going either up or down. I don't think we're concerned about further erosion, but simultaneously, we don't see a big kick up with the potential exception of these Cincinnati composite devices. And to some extent, we're a bit concerned about Europe because with what's going on with the euro and particularly the pound where our plants are located, we're starting to hit some resistance levels on customer delaying (multiple speakers).

Did you say you lose 5 million in the first quarter and you'd breakeven in the second quarter and hopefully (indiscernible) back in the second half?

That's fair. We're trying to hedge, as you can tell from our language, whether that breakeven occurs in second or third, it will be close regardless. But whether we actually move over the hump in second or third. The fact is as you say that we see the trend line as moving up and netting positive for the full year.

In ADC, you indicated you're doing a 40 percent incremental margin, you go with 30 percent. Is it fair to model that the 30 percent is what you intend to bring down and everything over that is what you're spending on R&D?

Let me clarify. What I meant to say was we started out last year talking about 30 percent. Before we got halfway in the year, we were talking about 40 not 30 because what had happened is we had demonstrated the capability to move virtually all of our gross margin, all of our product margin to the bottom line. And we continue to do that through the course of the year. In fact, we did more than that because our gross, our product margin improved over the course of the year. So we not only got the full -- we not only held expenses relatively flat, we got of the full impact of incremental margin from incremental sales and then we got improved total margin which applied across the total base. So the result was we got more like 50 cents than 40 cents. We will move back to relatively flat margin outlook over the period and we'll take some portion of that 40 cents and move it back into R&D. We also had the benefits of currency impact which we've talked to you about every quarter.

You said you had 9 million currency in the fourth quarter. That means the actual sales were relatively flat?

That is right. And as you know, we also said that we were in the second half, shipped about $20 million worth of (indiscernible) in Latin America that was not recurring and disadvantaged us in the other direction versus a comparison.

I would like to clarify that, because when we talk about currency impact, that is a quantitative calculation. However, it is true economic profit that we received and that is as a result of our pricing strategies, as opposed to just being a translation of the currency.

Okay. And as you said, the government business, we had the post office contract up this year. Is there anything else besides that?

Those profits and AIT (ph) are the two big ones. We may or may not participate in both, we'll definitely participate in one.

When are these due?

Probably mid-year, we'll have some fairly concrete indication as to which way they are going.

Thank you.

Eli, I'd like to just double back to the tax provision, just make sure that it's a clear understanding. The 6.2 million seems like a relatively high provision for the quarter, but I also want to point out that netted against discontinued operations is a tax benefit of about 4.4 million. And we are required to net that against the loss on that line item. So when you look at the tax provision for the quarter all combined, it was roughly in the $2 million range.

So, is it unfair to say that you had made 8.8 before we get the charges, so that's $2 million, so you probably made around 6 million or a dime a share?

Still when you get to look for the year, we were about a 35 percent tax rate on incremental profit. So it's going to be 37 percent going forward in 2004.

Okay, thank you.

(indiscernible), Thomas Weisel Partners.

Good morning, gentlemen. Just a couple of questions on the guidance for the Intermec business. For the year, you talked about growth of about 10 percent and you also talked about growing faster in the market, so that would imply that the market would be growing slower than that. And the second question (indiscernible) some clarification on that. And the second question is -- are you including IP settlement revenues in '03, and what sort of overall revenue number would that imply for '04?

The two references you talk about were for different years. I talk about a 10 percent increase in sales for the year 2004 and I talk about the above-market growth as our ambition as to why we are investing incremental R&D dollars. That is, we would anticipate the above market growth in '05, not in '04. So the 10 percent is tantamount to a market growth projection as well.

What would that mean in terms of actual revenue dollars in '04? Because the '03 clean (ph) numbers and -- I don't have an absolutely clean number over there?

The '03 clean (ph) number is 688 and so 10 percent of 688 is 68.8 million and then you multiply 0.4 and subtract the incremental -- I'm sorry -- you subtract -- I'm sorry -- that's the incremental -- never mind (multiple speakers).

That's fine. Basically, for the first quarter when you talked about 5 percent growth relative to the first quarter of last year, are you suggesting that it's going to be 5 percent faster growth than you grew last year?

No, I'm suggesting that the number we have for the first quarter of '03 that the first quarter of '04 will be in the range of five to 10 percent higher than that number. And that is simply because we see the 10 percent full year growth as ramping to a certain extent. The build -- the acceleration of IT spending will occur so that we have a small back-end load.

That number does not exclude what revenue you might get, what you might receive from the Apple settlement?

You are correct. We do not include the intellectual property numbers in our projections. They are always product and service revenue based.

One housekeeping question. Looking at your corporate and other expenses when you are trying to look at the segment wide profitability breakdown that you provide, we saw a decline over there from 5.5 million to 1.2 million in the fourth quarter and that seemed a little bit sharp. So just trying to understand what went into that and what should we be looking at that adjustment in the first quarter of '04?

Basically, that 1.1 million has a foreign exchange translation gain in it, so you have to back that out. And that foreign exchange gain is a little over $3 million. So that would imply that the run rate in the fourth quarter was about $4.5 million, in terms of corporate and other corporation-type expenses that we do not allocate through the segment. I think that is a relatively good number going forward.

4.5?

Yes.

And roughly just for your information, that's about half corporate office and half what you would call corporate-like expenses, like financing expenses and insurance and that sort of thing that we don't not allocate, as Mike said.

One last question, which is that your campus that you have in Cincinnati, is there any kind of time line for the sale of it more, or is there anything that we should be looking at over there in terms of a liquidity event?

It's a dynamic time line that keeps pushing out to the right. Every call, I say that we're close and we are always close. But I could use a 300-pound fullback to push it over the goal line, to be honest with you. We are really down to nits and nats in terms of discussions and there's really no issues between us and the developers who (indiscernible). We have to work through various legal issues but it is not a money issue. And it is legal issues because you're dealing with a property that has over 100 years of industrial use and has things like easements and utility rights and things like that, you have to make sure that you have crossed your Ts and dotted your Is. But it is progressing and we are as confident as we can be that we're going to have conclusion to it. I just cannot give definitive time.

On the same question, just a small follow-up, which is the (indiscernible) you consolidated in the IAS segment, has the full benefit already hit the income statement or will the full benefit only hit in the first quarter of the cost cutting, the consolidation of the (indiscernible)?

I think I understood your question correctly, Ajay (ph). You are saying -- have we completed our restructuring in IAS in that we've been the full benefit of doing. The answer to that question, if that's your question, is we continue to see cost reduction in the first and even into the second quarter. So we see -- the fact is that we don't see much change in revenue. We see some improvement in product margin, but most of the way that we are getting to our projected full-year profit is through the reduction of the cost line as compared to the improvement of the margin line and we simply got out of sync because the performance of our Landis group in getting a larger volume and sales in the fourth quarter basically flipped the two quarters in terms of the trend line.

The question was more directed towards necessities that you have, the Landis (indiscernible) that have all been consolidated into one facility right now. The old facilities, what is the timing when you stopped the impact of those old facilities hitting your income statement? Was it like at the end of the fourth quarter, or was it the beginning of the fourth quarter?

You're asking us about facilities, and specifically I think the question -- well, there are two -- Michael answered the question, but just for clarification, there are two issues. One is getting out of the facilities and not having the cost of the facilities. The second of course is just the ongoing cost before we sell them, which still means property, taxes and having guards around. And we are in the process, as Mike said, with the abandoned properties of trying to sell a number of properties, but we have completed all of our moves. So I will let Mike tell you about the financial impact and the timing of those.

As a single line item, we have these assets held for sale and those assets held for sale do include the Cincinnati campus being the largest parcel of that portfolio. And there are some maintenance costs that are relative to that, they are relatively minor. And since they are part of the restructuring activity, we might have some minor period charges in 2004 until those properties are liquidated. But they are really very low maintenance. The properties are empty, you keep minimal amount of utilities, some property taxes, things of that nature, but they are not significant costs.

So the continued cost structure improvement will come from headcount reduction.

Okay, thank you so much.

Kevin Stark, Bear Stearns.

Good morning. A bunch of questions for you. First one, can you tell us what the foreign exchange effect might have been on operating profit?

It is a judgment call, Kevin, but roughly 50 percent. We have 30 percent in SG&A cost, and then some of our product costs are local and some of them are dollar-denominated, but 50 percent is not a bad approximation.

You're saying that 50 percent of operating profit was contributed by foreign exchange?

No, I'm saying 50 percent of the impact of revenue increases.

Do you anticipate any further charges in 2004?

Just these minor period charges I was talking about regarding maintenance of the idle properties. And as I said, they are relatively minor.

Given that you spent a lot of money on litigation in the fourth quarter and are going to book the income, the revenue from that in the first quarter, would it stand to reason that the operating contribution, the operating profit contribution from the Apple settlement will be larger than usual?

No. First of all, I don't think we spent a lot of money. It was $1 million and we're talking about settlement that are in the range of $20-$30 million. So I guess it is all relative. It's certainly large relative to our typical legal expense. But the thing that we typically net out, Kevin, is the legal fees of our representatives who is sharing the benefits with us on a bit of a sliding scale. There are the additional costs of pursuing the trials themselves. That is what you see in this case. In most instances, we have settled before we actually got to trial, which is why this is a bit of an anomaly. This one actually had to go forward to the steps, if you will, in order to get conclusion. So it's a bit of an unusual event, although it is becoming more regular because the last two people who, as you might imagine, were the most contentious, being Apple and HP, we wound up in more of a legal circumstance. [So] that's why you see these numbers.

In the past, they've been not material.

What I'm trying to get at, though, is when I model for the effective settlements, sort of a sign, kind of an arbitrary cost of goods sold to that?

Right. And I think the way we should answer that question is -- the net of the proceeds will be diminished more because we went further along in the case, and that is the nature of the arrangement we have.

If you see the contribution margin, if you will, from past settlements, we should be in the same range over the course of the year.

Right. Finally, the AIT-1 contract expires in March. And worst-case, assuming you don't get AIT-3, what kind of revenue drop-off might you see from the expiring of the first contract from first quarter to second quarter?

Let's back up a step and make sure everyone's on the same page. We won AIT-1, we lost AIT-2, we are competing AIT-3. If we win AIT-3, we would see it -- I think you are aware and it's fairly well-known, the order of magnitude of the benefit should be between $30 and $50 million annually. That is not all incremental because since we won AIT-1, we had continued follow-on business, even though we did not won AIT-2 as a part of continuing to supply the installed base through GSA. So all of the business wouldn't be incremental, but is on that order of magnitude.

What if it went the other way? What is AIT-1 worth to you in a quarter?

In a quarter, it is a smallish number. Let me try and -- something less than 5 percent of sales.

Last question. I sense a concern among some investors that I talk to about the dual role that Intermec plays in the development of EPC. One is sort of the licenser of technology and two potentially is a supplier and integrator of that technology, with the emphasis sort of being placed too much on the former rather than the latter. Some of your competitors for example talked a lot about on their calls or in recent statements in the marketplace about business that they're getting among the Wal-Mart 100, the Metro 100, the DOD suppliers, and I don't hear a lot about that from you all. Can you comment on that?

I am at a loss to comment. We are all in the mode of running trials of products with Wal-Mart in order to reach a point where we are not doing pilots, but doing real business. I think we have had something like 990 inquiries that are confirmed, legitimate expressions of interest, something like 60 project proposals certainly currently underway. But we are not talking about significant revenues because (indiscernible) revenues come when we establish the standard when (indiscernible) 2 capability is available and when we implement major systems, not prototype activities in the marketplace. And I don't see us retarded in that capability or that activity. So I am confused by the competitive commentary.

How many pilots are you engaged in right now?

I don't know. I just don't have the number. We will get it for you, Kevin, (multiple speakers).

The commentary was very helpful.

It's not a meaningful revenue source for us, but we anticipate it will lead to a meaningful revenue source.

Exactly. Thank you very much.

Mike Whitfield, Wachovia Capital Markets.

Good morning. I just had a follow-up question regarding the HP outstanding issues. What is your -- you mentioned that it is somewhat dormant. What is your expectation on timing there, and is HP trying to use since you guys have already probably in the past prior to its merger with Compaq, Compaq has been resolved. Is Compaq a shield here for HP?

That is the contention. And that's why we have absolutely no ability to give you any timing forecast on when that would occur. that's what we're trying to sort out, whether that is a legitimate defense.

Okay, thank you.

Jeff Rosenberg, William Blair.

Mike, did you give the number for full year operating profit from products and services?

In terms of 2003?

I'm sorry, yes.

And you're talking about Intermec only, or do you want full corporation?

I should ask my question in full. The number that was for ADS, so the comparable to the 14.4?

I think basically, and Larry's commentary indicated, that we had just over $50 million in segment operating profit relating to products and services.

And so if I sort of use your contribution margin, you should be getting close to sort of a 10 percent operating margin if you could do everything you hope to in 2004. Any sort of update on kind of ultimately where your target is longer-term as to where you expect that margin to trend?

I think we've talked about this in the past. Once again, the operating margin is going to be a function of growth. And because we are able to drop 30-40 cents profit on incremental sales to the operating margin line, that will drive the margin percentage. So you can model your own growth rate in terms of what the range is, and we have established a breakeven level of 580, roughly $580 million sales volume, products and services.

Is there some point at which you -- another level of revenue at which you expect the contribution margin to start to be a little bit less robust?

I would say in the intermediate term, we would stay within that range. If it were to accelerate or ramp, I think we would have to look for the dynamics at that point in time.

Can you talk a little bit qualitatively about how much the strength in that margin is coming from improved gross margin versus SG&A leverage?

I think we're getting a lot of benefit in terms of as we get larger or you win larger deals. There's pull-through, in terms of savings and procurement. You're of course leveraging off a G&A that has a higher element of fixed costs in it rather than variable costs, and therefore we're getting good operating leverage.

It's also fair to say that we've been through sort of three transitions. If you go back two years, virtually all of our savings were through SG&A reductions. We were dealing in a flat to down market. This past year, it has been a sharing of the two in part because our service margins have improved dramatically and therefore, our total product margins have improved dramatically, which is why we said earlier we can get more than product margin incrementally to the bottom line, whereas we have held the line on expenses pretty much, but the percent of sales number improves. And then as we move forward, you will see some further movement of SG&A R&D, specifically as we said, over the baseline and the remainder of R&D we consider variable in any case. And so you won't see the same contribution from SG&A percentage that you've seen in the past.

How close are your gross margins to where you think you would like them to be long-term?

I think our gross margins are where we anticipated them to be. We have been delighted with the statesmanlike pricing in the marketplace pretty much across the board and we have seen product margins move up over the last couple of years partly as Mike says because we have had, or this year we have had sales increases that enable deficiencies. And some of our non-product related, i.e., other cost of goods sold, improved in our implementation because of improved processes. But a significant part of our improvement in margins has been the significant movement upward of our service margins and we have reached the point where those are above historic and satisfactory. So we don't see a major improvement in margins from this point forward.

Okay, that's helpful. Thanks.

Mark Roberts, Wachovia Capital Markets.

Thank you. Just one quick question here. Michael, when you were talking about the calculation for operating margins at Intermec, 40 percent agreement with a breakeven of 580 million, does that include your comment today about the increase in R&D spending expected in '04?

What we said is that going forward, that 40 percent incremental would contribute to two areas -- margin and increased R&D. And the incremental R&D is discretionary and program related.

So the R&D increment is in the 40 percent, not the 580?

Correct. The incremental is.

Got it. Thank you.

Reik Read (ph), Robert W. Baird.

Two quick follow-ups. Does the 10 percent Intermec guidance include any expectation from either AIT-3 or USPS?

We don't believe that that would be material in terms of revenue during the year. So no is the answer.

Secondly on the tax rate, Mike, last quarter, you mentioned that you thought that a normalized tax rate might be 32-35 percent. Could you give us a little bit of an understanding as to why that would move up and talk about will that be uniform throughout the '04 year?

The 37 percent?

Yes.

Basically, it is an interplay of foreign tax credits and research and development credits that may or may not be available at any point in time. That is really the incremental.

Will that be a uniform tax rate throughout the year?

I hope so. Actually, I hope it goes lower, that is not my anticipation at this point.

But we're not going to see significant volatility?

I don't think so, based on what I see today. I will also point out that that is a provision rate and that the cash payment against that will be relatively low because we do have net operating loss carryforwards.

Great, thank you.

That was our final question.

Thanks everybody.

Thank you for participating in today's conference call.