漢威聯合 (HON) 2004 Q1 法說會逐字稿

Hello, and welcome to the UNOVA first-quarter 2004 financial results teleconference.

Following today's presentation, there will be a formal question-and-answer session. (OPERATOR INSTRUCTIONS).

At the request of the Company, today's conference is being recorded.

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

I would like to introduce today's conference host, the Director of Investor Relations and Analysis, Mr. Kevin McCarty.

Sir, you may begin.

Well, thank you, very much, and good morning, everyone, and welcome to UNOVA's first-quarter fiscal year 2004 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 began 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.

It 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 in its filings with the Securities and Exchange Commission, including, but not limited to, the Company's annual report on Form 10-K for the year ended December 31st, 2003, and the Company's report filed on Form 10-Q for the quarter ending September 30th, 2003.

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

And now it is my pleasure to introduce Larry Brady, our Chairman and CEO of UNOVA.

Larry.

Thank you, Kevin, and good morning, everybody.

It's our pleasure to speak with you again.

Given the historic weakness of our typical first quarter, we are pleased with the strong results from the first quarter that we've just completed.

For the period, the corporation recorded sales of $298 million, an increase of 13 percent over the first quarter of 2003.

Net income of over $10 million was 25 million better than the comparable prior-year quarter, as results in both of our segments improved.

The quarter was favorably impacted by a confidential intellectual property settlement, a result we will calibrate in our segment discussions.

Additionally, after the quarter close, an appellate court decision overturned the unfavorable ruling previously recorded in our intellectual property suit against Hewlett-Packard, thus allowing those particular proceedings to continue.

We are hopeful that we can conclude a successful outcome with this, the last of the major laptop producers, against whom we've brought suit.

Also during the quarter, we announced a new management structure at Intermec.

As we have indicated in the past, our strategic focus is shifting from profit growth to expense control and asset efficiency to a focus of profit growth through topline growth and investment.

With this change, it's appropriate to place leadership in the hands of two seasoned industry veterans, Tom Millar, previously head of Worldwide Sales, will take the position of President of Intermec, and Steve Winter, previously head of Global Service, will be Intermec's Executive Vice President.

This change will also enable Mike Keane and me the opportunity to drive an agenda of corporate portfolio change, a requirement for the successful evolution of our company.

Turning now to a discussion of segment performance, we will cover Intermec first.

Sales of $193 million at Intermec were up 18 percent over the prior-year quarter and profits were up over 200 percent.

These results, however, include the effective of our IP settlement during the quarter.

The prior-year quarter did not include any IP settlement but did include a small IP legal expense.

In eliminating IP impact from the comparison, Intermec sales from product and services were up over 6 percent and product and service profits were up 25 percent.

Product and service sales growth in the first quarter of '04 also followed strong growth in last year's first quarter.

The growth over the two-year first quarter periods is more than an 11 percent compounded annual growth.

Likewise, the leverage of growth is apparent.

This was the most profitable first quarter in Intermec's history.

The profit was achieved while increasing R&D spending by more than $4 million over last year's first quarter.

More specifically, an increase in product and service revenue of about $10 million produced a contribution to increased R&D spending and increased profit of about $7 million.

Further to the point of leverage, the operating profit margin at Intermec improved 18 percent over the prior year period from 6.0 percent to 7.1 percent, despite the increase in R&D spending.

As we have indicated in previous calls, we've increased our R&D spending above our baseline of 7 percent of sales.

The logic for this more aggressive investment profile is the unusual opportunity that 2000 affords for the Company in three areas -- first, the increased access to enterprise customers in nontraditional markets such as health care and retail, as a result of expanded product offerings and our Cisco relationship.

Second, the window of increased government commitments in defense and Homeland Security.

And finally, the expanded opportunities associated with data capture technologies, including imaging in our traditional AIDC space, and more importantly, the emerging technology of radio frequency identification or RFID.

Several recent events in RFID warrant notation.

April 14th was the deadline for proposals to EPCglobal on specifications for UHF Generation 2.

Previously, the working group for UHF Generation 2 was established with Intermec's Harley Heinrich and Wal-Mart's Richard Aldrich (ph) as co-chairs.

In response to the April 14th deadline, Intermec joined a unified group with 12 other companies in one of the four proposals submitted.

Among the 12 companies in the Unified Group are Phillips, Texas Instruments, Zebra Technologies, and Savvy, amongst others.

The term Unified Group comes from the common commitment to exclusively support the group proposal.

On the same date, Intermec was required to declare all relevant intellectual property.

Declarations were made in all three categories, that is Class 0, Class 1, Version 1, and UHF Generation 2.

As we have previously commented, we remain committed to supporting the efforts of EPCglobal to provide broad-based access to a range of RFID suppliers to the customer base, while maintaining the incentive for innovation that is key to the continuing development of this emerging technology.

We also support the recent energy associated with driving compatibility between EPCglobal and the currently established ISO standard.

Moving now to an examination of our sales growth for the quarter in more detail, our Systems and Solutions business grew by about 7 percent versus prior year.

Printer media was up 8 percent and service grew at 5 percent.

Worldwide, our model 700 product continues its popularity.

Versus the comparable period last year, model 700 series terminals grew at 11 percent this quarter.

The favorable impact of currency rates on revenue in the quarter was $8.8 million versus last year.

About 85 percent of the total was associated with European currencies.

Geographically, Europe continues to be our star performer on the strength of good growth and a favorable currency tail-link (ph).

European revenues were up 22 percent.

Our success in Europe is driven largely by model 700 applications in new enterprise accounts.

Expansions of our business in transportation, field service and retail have added to our traditional base in industrial markets and route accounting.

First-quarter examples would include NL (ph), the Italian National Electricity Company for field service application, France Express, a track and trace delivery application, and Tesco (ph) Czech Republic, an in-store retail application.

Field Service Transportation and Logistics are also primary sources of future expansion in North America.

Sales during the quarter grew 3 percent in North America.

But in house orders from a national cable company, a national gas company, and a national appliance service repair organization are all first-time field service automation programs, which should increase growth later this year in the region.

Also of interest during the quarter, Hallmark selected the new Intermec CN1 (ph) product for the store merchandising application.

Over 9,000 units will be placed into service this summer.

The CN1 computer notepad is a rugged PDA and is a new product category for Intermec, that extends Intermec's product reach into applications, such as in-store retail, field automation, and remote ordering.

In the rest of the world, Latin America was down 22 percent as we continue to suffer from the comparisons to last year's massive rollout with BeenvoBeacon (ph), although less so than in last year's second half.

Asia-Pacific was up 25 percent from last year's first quarter on an improving economic picture in the region and particular strength in Australia.

Our outlook for Intermec is for continued and accelerating improvement.

Revenue for the second quarter should be in the range of a 7 to 10 percent increase over the prior year's second quarter.

Our model for incremental profit continues to be relevant.

Specifically, we anticipate a 40 percent contribution from quarterly sales over our $145 million quarterly breakeven level to provide contribution to profit and incremental R&D, that is, R&D over our baseline 7 percent amount.

Incremental R&D spending over the baseline is anticipated in the second quarter to be between 4 and $5 million.

Shifting to our Industrial Automation segment, revenues of $105 million were up about 3 percent over the corresponding prior year period.

A segment loss of $5.3 million was in line with our prior forecast and more than a 36 percent improvement over the 2003 first quarter.

Bookings of $85 million were under our expectation as a result of postponement of orders from our European customers who have been impacted by a strong currency.

However, just after the quarter closed, we received one of those orders, a large contract for our UK grinding business, which would have been sufficient to bring performance in line with the expected range.

Despite being below our bookings run rate for the last two quarters, we remain optimistic about improving current revenue levels.

At this juncture, we believe that IS revenues probably bottomed in mid-2003.

This was about the same time that industrial capacity utilization bottomed as well, and that's been a measurement that's shown historical correlation.

This belief is made more tangible by the apparent beginnings of a turn in commercial aerospace and the solid improvement in heavy engine demand currently being experienced by our U.S. customers.

Some selected industrial demand is also returning after a lengthy hiatus.

Early indications are that our automotive customers may well change the nature of the upcoming recovery.

Currently, both our orders and strategic commentary by customers suggest that retooling of existing equipment rather than new equipment orders will characterize the early phase of recovery.

This will impact our industrial automation business in three areas.

First, as a result of UNOVA's historically strong market position, our installed base is a competitive advantage that should translate to strong market share if retools are the majority of orders.

Secondly, retools represent much lower sales dollars than new equipment, generally, under 50 percent.

Finally, retools are typically at better margins because of the advantage that the incumbent holds over competition.

On the whole, we believe the balance of these trends will be advantageous to the profitability of our industrial automation segment.

As to outlook, it now appears that we will realize our ambition of achieving profitability for industrial automation in the second quarter and for the remainder of the year.

Second quarter should return to the level achieved in the fourth quarter of 2003.

Now I will turn it over to Mike Keane for his comments.

Mike.

Thank you, Larry.

Continuing the review of UNOVA's operating results, the improvement in pretax earnings versus the prior-year quarter included favorable comparisons in corporate and other expenses, as well as net interest expense.

Reduction in corporate expenses of 3.5 million versus the first quarter of 2003 resulted from the absence of loan termination costs, favorable litigation outcomes as well as the cost benefits received from transitioning headquarters to Everett, Washington.

Net interest expense declined 800,000 due to lower debt and higher cash balances.

Relatively minor special charges of 383,000 and net loss from discontinued operations of 30,000 represents period expense charges relative to remaining restructuring in body and assembly business shutdown activities.

The effective income tax rate was 34 percent for the quarter and lower than expectations due to a benefit recognized for certain state income tax loss carryforwards.

Our normalized effective rate over the remainder of the year should be in the 38 to 40 percent range.

However, cash taxes paid of 2 million for the quarter should remain low as we've utilized net operating loss carryforwards, which currently are roughly about $85 million.

Our balance sheet remains strong with a net cash position of $19 million.

However, the company was a net user of cash of 10.9 million during the first quarter.

Overall cash flow from operations was neutral, as positive cash flow from our Intermec operations was offset by working capital usage within our industrial automation operation to support the early build cycle in certain long-term contracts.

The 10.9 million usage resulted primarily from interest payments of $7 million on our bonds and net capital expenditures of approximately $3 million.

There were no significant asset sales during the quarter.

Both capital expenditures and depreciation and amortization expenses of 4.8 million were in line with expectations.

The reduction in depreciation and amortization of 2 million versus the prior-year quarter is a reflection of our fixed asset reduction programs, primarily within the industrial automation segment.

Our liquidity continues to remain strong and provides the necessary resources to fund our growth initiatives.

Now, before we open this call to questions, I'd like to summarize our outlook comments, consistent with the financial model we have communicated to our shareholders over the prior year.

We anticipate that Intermec's second-quarter products and service revenues increase 7 to 10 percent over the prior year quarter, resulting in a range of approximately 184 to 189 million.

Using a breakeven quarterly sales level of 145 million, a 40 percent incremental margin contribution and less incremental R&D spending of approximately 4 million over our normal run rate, implies an ADS segment operating profit of 11.6 to 13.6 million for the quarter.

Industrial Automation group is expected to achieve profitability of approximately 1 million, resulting in total segment operating profit for the corporation of 12.6 to 14.6 million.

Operator, we'd like to now open up the call to questions, please.

(OPERATOR INSTRUCTIONS).

Mark Roberts, Wachovia.

Thank you.

Good morning.

Larry, just a question on the IP settlement, if I'm doing the math right here, if I want to try to back out what the gross revenues were on the IP settlement, am I correctly doing the math here, that it looks like about 21 million with a contribution of 15.8?

Well the contribution is correct, Mark.

And I can comment because of the confidential nature of the settlement, but you get real close if you take a tad over 6 percent and multiply it by last year's sales of 162882.

So yes, is the answer to your question.

Okay.

So I am doing the math right.

Okay.

Thank you, very much.

Ajit Pai.

Good morning, gentlemen.

Two questions, the first is the CN1 product, could you give us some idea of what the suggested retail price of that product is?

And then the second question would be about your Cincinnati machining (ph) -- when do you expect something to happen over there in terms of the sale?

And is the entire amount that's on your balance sheet as assets held for sale to do with that political (ph) facility (ph)?

You nailed two questions which we can't answer, Ajit.

The first is, there is no published list price on the CN1.

It is a terminal that was developed as a special application.

But we are looking for -- not looking for -- we have found additional major applications for the product.

But right now, it is not on a published list price for Intermec.

The second, topic is, as you know, we have concluded that our strategy requires, and indeed some of our organizational restructuring addresses, the need to separate the two businesses of UNOVA.

We are still in the process of determining the best way to do that.

And it's tied, of course, to the attractiveness of the performance of the units.

But we are just not in a position to answer a question about the sale of any part of the corporate portfolio.

I'm sorry, Larry, what I was asking about is actually the assets held for sale on your balance sheet -- the 22.9 --

Oh, oh, oh, the -- (multiple speakers) -- real estate -- (multiple speakers) --

Only the (multiple speakers), the real estate -- so (multiple speakers) not for the IS.

I apologize.

The nature of those is basically, it's predominantly real estate, and some property, plant and equipment.

We have the intention to be able to sell those assets within the next year.

And we anticipate that we should be able to sell them at least at the value that is shown on the balance sheet there, net book value.

Okay, and just one follow-up question, which is, I think this morning on the Wall Street Journal, there was a comment about the pilot programs beginning in some of Wal-Mart's Dallas locations.

And it did mention Hewlett-Packard and Procter & Gamble as two of the eight players that were actually you know, the vendors that were shipping things there.

Are you involved with either and with any of those eight programs -- eight vendors?

We are.

We've got approximately 27 either Gen 2 proposals awaiting pilots or pilots in process.

They include a bunch of consumer product names that you would recognize, and a substantial portion of those are aimed at the Wal-Mart requirements.

Okay.

Thank you.

If there's time at the end, I'd like a few more questions.

Sure.

Eli Lustgarten.

Good morning, gentlemen. (inaudible).

A couple of (inaudible).

You said you're going to make sort of $1 million on (inaudible) in the fourth quarter.

Is that a sustainable run rate?

I mean, the orders were disappointing; you said you picked up enough after the quarter to get you to that point in this quarter.

But, do you have enough business on hand or high likelihood to be able to sustain that run rate past the second quarter, or will you wait and see?

We really believe that the 100 million bucks kind of sales revenue that we had in the middle of 2003, Eli, was the bottom, that revenues will continue to climb from the current just over $100 million level.

The bookings have been weak for two quarters.

But it appears to be postponement, not cancellation.

The activity is really strong and it seems to be strong now versus different times because of some very bullish comments being made by customers.

As you know, lots of people are talking about heavy engine demand picking up, and that's our sweet spot in the LAN businesses.

And the combination of just some comeback in commercial aviation, but in particular, the start of orders and the commitment for 2000 deliveries on the 77 suggest that we are already at the point where suppliers need to be ordering equipment from Cincinnati to support that build schedule.

So, we really do believe that the under-range bookings were an anomaly.

And we do have the backlog to continue to sustain the revenue level.

Right.

And when you talk about, you know, Intermec, you sort of said (inaudible) incremental market, is that before the R&D increase or including the R&D increase?

It's before the R&D increase.

Forty percent -- our product margins are a tad higher than 40 percent.

What we've always committed is that we can get the benefit of product margin to the bottom line, so long as we hold the line on cost.

We decided last year that we weren't going to hold the line on R&D costs as a percent of sales, that we were going to significantly increase it, in the range of a third.

And so, you need to first service the increased R&D expense out of the mix.

And finally, I just thought of for (inaudible) question -- the Wal-Mart project has started in Texas, I think you said.

Are you on that one specifically?

I know you're on a whole bunch of other ones, but the one that they highlighted today on the news, I don't know if you saw that or not?

It's -- we're not talking about that, Eli.

It's Hewlett-Packard specific, is the specific application.

We are involved in a whole series of those applications.

As you know, the Intermec solution, and indeed, Intermec shares the Gen 2 working group for EPCglobal -- we see that as the emerging and popular standard.

And simply because that standard isn't set, the solutions set is not available to the rest of the base.

So, those pilots that we're doing are either using OEM equipment on Class Zero and Class I or alternatively using ISO standards, depending on the customer needs.

Okay.

Thank you.

Kevin Starke.

Good morning.

Are you able to give us any guidance in terms of magnitude of gross margin improvement on either side of the business over the past year?

Gross margin improvement is a couple points.

Because as you know, our spending is up a tad.

Not G&A, but selling expenses are up a tad.

You know -- (multiple speakers)

You're talking about the Intermec side, right?

On the Intermec side, you know -- yes, I'm sorry, when you talk about gross margin, I'm only talking about the segment.

It's also true, while we are on the topic, however, that the same dilemma that we saw -- I mean clearly, our sales are not going up in IS; our expenses have continued to decline.

What we do see in our new order rate, the --

Okay.

Another question -- on the expenses related to the legal settlement, is that all cost of goods sold?

Or is part of it SG&A?

The expenses on the legal settlement are only legal costs.

What we have -- those are -- oh, I'm sorry, where is it on the income statement is the question.

Yes.

Which one is he talking about?

The $5 million product (multiple speakers) expense is in cost of sales.

We've had a conference, and we have concluded it is in cost of sales.

Entirely?

Yes.

Okay.

Great.

It just helps for modeling.

And then final question, do you feel like you're losing shares at Zebra?

No, that is a frequently asked question.

Because, that's kind of a funny answer, because we have been pretty glib in saying if your sales are going up more than the other guy, doesn't that de facto mean you're gaining share?

And it is true that Zebra's sales are up higher than ours.

There are two mitigating factors which you need to take into account to answer that question.

The first of those is, when we tell you our sales increased, it's a Printer/Media sales increase.

Actually, the approximately 8 percent increase that we saw in Printer/Media was zero in Media and something and the range of 16 to 19 percent in Printer.

So one thing is we tend to, by virtue of combining it with Media, understate the case.

And our Media business is substantially larger as a weighting factor than Zebra's.

The other is, they are in the card business, which is their high-growth business.

Now, that's not to say their bar-code business is not, but because they don't break that out, it's impossible for us to tell which way that shift is occurring.

It is true that we strategically position our printer business different than Zebra does.

They are a horizontal supplier of printers, and that's the business they're in.

We use printers as a part of the system sell that we have in our solutions set.

And so, it is logical that in the indirect business which Zebra uses for the majority of their sales, that they'll have some channel advantage over somebody that has what in essence is a compromised solution from the standpoint of printers alone.

Stated differently, we optimize the total solution instead of optimizing the printer subset.

They have a different strategy.

But it's pretty close.

It's not nearly as egregious as the comparison of sales level would suggest you to believe.

Thanks very much, Larry.

Jerry Masano (ph).

Michael, Larry, very simply put, they love you on the way up and they hate you on the way down.

Can --

But which direction are we going in, Jerry?

Right now, we're going down.

Okay.

But basically, Larry, my question really is this -- is that I'm a long-term holder of the shares and I've owned quite a bit from time to time and I still hold a lot.

My point -- well my question actually is number one, is there a seller out there?

Do you know of someone who has been a fan of yours and has turned negative?

Number two, I wouldn't ask you to rate yours and Michael's job of getting this story out to Wall Street, but what is the problem?

Why can't investors, why can't institutions embrace your idea and see the forward-looking opportunity that you and Michael articulately, let's say, express?

Or maybe I'm missing it and this really isn't a forward-looking opportunity here.

Jerry, as you know, we try our best to run the business and we let investors decide what the share price is going to be.

From our vantage point, we are trading with the market, the market for both techs and midcaps has not been as strong in the last three or four months.

But we are trading in the peer group.

So we don't see the same issues that your raising.

Clearly the stock price has declined, but after a 280 percent increase in the prior year, you might anticipate some pullback.

Is there any one particular seller in that group?

No, not that we are aware of.

And would you guys be willing to buy some shares back at or around these levels of that cash (inaudible)?

No, we are not.

And just to be more clear on that, we are actually precluded from doing that under our current banking agreements.

I appreciate the honesty and I will probably be a buyer of stock today.

Thanks.

Richard Davis.

Good morning.

I have questions about the Cisco arrangement -- the SPI Systems, or Solution Psychology Integrator?

And is that -- you mentioned that in your opening remarks that it's opening retail markets and markets in health care that were not previously open to you.

How is that doing, is the general question I'm asking.

Like any new relationship, Richard, there are things for us to iron out.

But it's really exciting from our vantage point, because there are markets -- retail is certainly one of them -- where name recognition for us, given our long-term lack of participation in that segment of the market, is not nearly as high.

Cisco is clearly a market leader.

Their willingness to not only ally with us in the selling process but in fact to ally with us in the design process so that we have got compatible equipment, is turning out to be a real boon.

And I would argue that an awful lot of the interest level that we are seeing and the kind of announcements we're making about our success in some of these nontraditional markets, as well as the increased R&D that we're spending to support this arrangement, are testimony to how excited we are about it.

Is it fair to say that you and others in this program are taking market share away from Symbol?

Let me put a different way -- the retail market is a market -- we have -- it's $1 billion market.

We have got well under 10 percent market share.

We could do very well and it probably wouldn't be very apparent as to what the swing in their share is on a percentage basis.

We can say that we are making significant inroads in a market where we have not been a significant player before.

Thank you for those comments.

Michael Rabenstein (ph).

Good morning, gentlemen.

I have a couple of questions, here.

One is on our RFID.

I know you guys had mentioned the tire tracking and some border crossing applications have been used in the past.

I was wondering if there's any more clarity on that?

Those are all pilots that are continuing to roll toward the conclusion of -- we hope lots and lots of tag applications.

They are successful pilots just the same as these other 27 that I mentioned, that we think all will eventually lead to significant sales in the RFID arena.

We are most excited, obviously, about the supply chain applications, just because of the forecast for such broad-based growth in that arena over the next three to five years.

So, things like the tire tag application for us are quite significant precursors of an expanded supply chain market.

That's great, thanks.

Second question was -- in relation to your partner program, and I was wondering if you had any comments on that, and basically if you're seeing any disruption in the channel from some competitors, and maybe gaining some share based off that?

No.

In fact, we are exceptionally pleased with our partner program.

Since the announcement of the honors program last year, we have seen a virtual -- a very significant increase in the participation of the partner group, and continue to see that level of interest.

I think right now, it's a competitive advantage for us.

Okay.

That's great.

Thank you.

Mark Roberts.

Thank you.

I do have a follow-up question.

Larry, in your guidance for Intermec, you are guiding to some increased R&D spending.

And I guess my question is two part; one, is the R&D spending that you're doing to generate more revenues, is that being kind of forced by competition in the sense that we are going to see more types of R&D spending in the future in order to generate revenues?

And the second is kind of related to that -- if that's true or not true, when would we expect to see Intermec operating margins up in the double digits?

The first answer to your question is, we believe 2004 represents a window of opportunity for a step change in the growth rate of our revenues, and so we are taking that.

We could continue to spend 7 percent on R&D and pass on that.

But what would happen is, we'd walk away from some fairly significant growth.

If you look at government programs that are long-term programs but come up for RFQ this year, that's an example.

If we did not get that business, it would not be a new event.

But if we do get the business, it's a substantial improvement in the baseline growth of the business.

If you look at RFID, we can continue to operate our AIDC business without major investments in that regard, but we see it as incremental growth beyond.

What we really said is that -- and the same issue with this Cisco relationship in the nontraditional markets where we don't play.

So we ought to be able to recognize traditional growth in the industrial sector of our AIDC market without these investments.

These investments, therefore, should increase the growth rate of the company.

What we've also said is to realize the ambition that we're talking about in 2005 of double-digit profit margins; we need to get that growth.

That's the legitimate way of funding it as compared to our historic funding of improved profit margin through cost reduction.

And so, that's the nature of the change strategy and the nature of the pursuit.

So (multiple speakers) the answer to your question about when we would get double-digit profit margins.

Okay.

So from a practical standpoint for modeling, should we be thinking about -- if the growth rate on revenues are going to accelerate and we add in some base level of additional R&D spending, should we assume that the 145 million breakeven level is something like 150?

Well, probably that's true, just because of inflationary reasons.

But the fact is that we shouldn't have to be spending at this level of R&D on a continuing basis.

Probably 35 percent as an incremental investment is a better number than 40 as you move forward.

But you should increment that with sales volume that's beyond market growth.

And we have said that -- just to complete the thought -- we have said that the things that we are investing in will be 2005 revenue impacts as compared to any significant 2004 revenue impacts. (multiple speakers) price in 2004.

Right.

That's helpful.

Thank you.

Ajit Pai.

Good morning, again.

Three questions -- I'll go through them one by one.

The first is on the pricing environment.

Are you seeing on the ADS side of things in Intermec, an improvement in the pricing environment in your core products?

I don't think improvement is the right word, Ajit.

We have said for some time that we think the pricing environment has remained statesman-like, that only in very large accounts have we seen unusual intensity in pricing.

And so we are quite pleased with the discipline in the price environment.

I think it's probably true that all of the competitors are determined to see their profit margins improve, and so you don't get some of the lesser-discipline behavior that might have characterized the environment a couple, three years ago.

But you are seeing the same kind of gross margin improvement in that business that your competitors are?

We are, but we are seeing it in our mind because of the improved sales growth as compared to an improved -- and costing in manufacturing as compared to an improved pricing environment.

Okay.

The second question is about your Cincinnati LAN operations, and particularly the composite side of things.

You know, you had Boeing announce 14 new aircraft orders or 14 new aircraft for the Boeing 77, which has much higher composite content.

Right.

Now do you have a very good shot of getting almost all that business?

And what kind of time line are we going to see that you know transfer into orders and then into revenues?

Right.

The first answer to the question is, historically, we've had a 70 to 80 percent share of the market.

And Boeing has been -- we have been a major supplier of their machine tool capability for a long period of time.

So it is logical that our expectation is for significant participation in that program.

Secondarily, the time line for 2007 deliveries, which as you say, the response to the recent orders was 2007 deliveries, has already commenced.

And the supplier base would say to you that Boeing is actually just a tad behind the power curve in terms of their letting contracts to the supplier group, which would result in contracts to us for machine tools.

So we are at the point where we ought to start to see those orders flow.

And certainly, the remainder of 2004 ought to be characterized by some of those orders as a part of the inflow.

Is that the answer to your question?

Yes, that's the answer.

And then to the last question, when you're looking at the FDA bar-code opportunity, that's one of the segments -- you now, the entire health care segment vertical that you have not been very active in the past -- but recently, you know, we have seen brochures from Intermec in that area.

Do you think that you're timing it right?

Do you think you're too late?

Do you think you're too early?

And when do you think that opportunity really takes off?

I think the opportunity is starting to mobilize.

It will be a smaller opportunity for us.

We are participating.

It's just not a big deal like the other initiatives you've heard from us.

Okay.

Well, thank you so much, and congratulations on a great quarter.

Richard Davis.

Yes, I wanted to ask about the patent area, particularly when it goes to imaging devices.

I think that charge coupler (ph) devices was a strength of your company.

Could you comment generally on that side of the hill?

Yes, we believe, Richard, that your characterization is correct.

We believe that in data capture technologies that we have got a particularly strong patent position in both imagers and RFID, which of course we believe is the direction in which the industry is moving.

And so, we see ourselves ideally situated in that regard.

And we have for a long time licensed people in the use of our technology in imaging, and will be doing a similar kind of activity in RFID.

Thank you, very much.

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Thank you, everyone.

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