漢威聯合 (HON) 2004 Q3 法說會逐字稿

Hello and welcome to Unova's third quarter earnings release conference call.

Following today's presentation there will be a formal question and answer session.

Until that time all lines will remain in a listen only fashion.

Today's conference is being recorded.

If there are any objections you may disconnect at this time.

I would now like to introduce today's conference host, Mr. Kevin McCarty.

Sir, you may begin.

Thank you very much and good morning, everyone, and welcome to Unova's third quarter fiscal year 2004 earnings release conference call.

Joining me on the call this morning is Larry Brady, our Chairman and Chief Executive Officer, Michael Keane, Unova's Chief Financial Officer, Tom Miller, President of Internet Technologies and Robert Smith, President of our Industrial Automation Systems.

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 during the course of this conference call that express the Company's of management's intentions, hopes, beliefs, expectations or predictions for 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 of the Securities and Exchange Commission -- including but not limited to -- the Company's annual report on Form 10-K for the year ending December 31st, 2003, and the Company's report filed on 10-Q for the quarter ending June 30, 2004.

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

I would now like to turn the call over to Larry Brady, Unova's Chairman and CEO.

Larry.

Thank you, Kevin, and good morning, everyone.

We're pleased to be with you and, again, are encouraged by our results.

For nearly three years we have met or exceeded our projections for segment operating profit.

And this most recent quarter is no exception.

Both of our operating segments exceeded the guidance that we provided during our last quarterly conference call.

For the Corporation as a whole, you know the sales of $317 million were up 14 percent over the third quarter of 2003.

Segment operating profit of $17.4 million was up 14 percent but the comparison includes a favorable impact of $9.3 million from an IP settlement in the prior year quarter.

Excluding this impact, segment operating profit from product and service was more than 2 1/2 times the prior year quarter.

An even clearer picture of the accomplishments of our operations can be seen in comparing year-to-date performance.

For the first nine months of 2004, Unova sales of $919 million were up 12 percent over the corresponding period in 2003.

Segment operating profit for the same nine month period was up 98 percent.

Near doubling over the prior year.

Net income for the Corporation improved from a $17 million loss to a $22 million profit.

And EPS improved from a 29 cent loss to a 36 cent gain.

This performance is the result of the continuing commitment to and the achievement of those strategic objectives which we communicated to you at the beginning of the year.

At Intermec, our strategy calls for an aggressive increase in R&D investment, following a year of strong profit improvement.

In 2003, Intermec more then doubled its segment operating profit from the products and services.

The business earned pretax returns on capital utilized well beyond its cost of capital.

With profitability and asset efficiency demonstrated, it was time to turn to a more aggressive growth agenda.

The objective of our 2004 investment is to improve 2005 operating performance.

As we indicated, at the time, a successful R&D investment program will lead to double-digit growth and a double-digit profit margin.

We are on track to achieve both in 2005 and should achieve these results a quarter early, based on the success of our programs.

Our strategy calls for investment in three distinct areas, each the result of a specific window of opportunity in the marketplace.

The first area of investment is an improved share in our government business.

In the second quarter, we announced the award of the AIT 3 contract to Intermec.

We look forward to expensive replacement and expansion of the existing supply chain management systems through the contract period and are encouraged by both the growth and profit prospects of the contract.

We will see first shipments as a result of this contract by the end of the year.

The second strategic objective is expansion in nontraditional markets as a result of increased customer credibility in those markets.

This credibility resulting from the combination of our improved product offering for those vertical markets, a strong alliance with Cisco, and our capabilities in RFID.

As we look at deliveries projected for the fourth quarter, many new nontraditional customers populate the list.

Those names include Home Depot, Staples, Office Depot, Hallmark, Sanesberry (ph) and Tesco, among others.

In Q3, Home Depot selected Intermec to provide its CV 60 mobile computer for in-store retail applications in all existing and new stores in the United States.

This rollout -- in excess of 9,000 units -- began in Q3 and will finish in Q2 2005.

The third area of investment is RFID itself.

In this area, our intellectual property will play a major role.

We anticipate an equally important role for products and services.

Most activities in RFID are awaiting confirmation of the EPC generation 2 standard.

While slipping slightly the ratification of the standard continues to be forecast as a near-term event and we are working with interested parties to bring this to fruition.

During Q3, our compliance RFID labeling, we announce the PM4I, the industry's first protocol printer which supports all EPC and ISO protocols and is upgradable to generation 2.

We also announced that the Intermec RFID IF4 serial reader and the IF5 network reader were the first RFID product certified as compliant to ETSI radio standards for operation in Europe -- including the newly established 2.OW standard which permits higher RF power.

Our IAS business represents a quite different strategy from Intermec, but also a pattern of meaningful achievement.

The strategy entails a dramatic improvement in profitability; growth in the core technology and composite equipment for aerospace; and an expanded customer base which achieves less reliance on the big three automakers.

The elements of this strategy are clearly focused on enabling a corporate portfolio strategy to separate our two businesses.

As to the first element of our strategy for Industrial Automation Systems -- improved profitability -- the $2 million segment operating loss through nine months represents a $21 million improvement over the first nine months of 2003.

Secondly, we continue to be the leader in composite equipment, supplying increased levels of product to Boeing, the Joint Strike Fighter program, and Airbus.

Indeed, we have recently added composite equipment orders to our backlog for the EADs (ph) 400M, a new military transport aircraft from Airbus.

And, thirdly, recent sales in China for engine programs, as well as our nearly completed deliveries to Hyundai mark the expansion of our customer base.

Taken together, we believe that we have accomplished the prerequisites for separation of our businesses and are now pursuing the alternatives available to us.

We will provide you with more details on the process as it evolves.

Finally, let's examine our outlook for the upcoming fourth quarter.

At IAS, the improvement vs. projection of several million dollars in the third quarter does not change our second half outlook; and, thus, the third quarter overage will be mirrored by a fourth quarter underage.

At Intermec, we should see strong sales growth in the range of 15 to 20 percent versus the fourth quarter of 2003, as well as the early achievement of our targeted 10 percent profit margin.

There is a good chance that Intermec will register a best ever level of product and service sales, and operating profit in the fourth quarter.

On that happy note, I will turn the discussion over to Mike Keane for a more in-depth analysis of our operating and financial performance.

Mike.

Thank you, Larry, and good morning, everyone.

Unova achieved earnings per share of 11 cents in continuing operations, and 10 cents net earnings per share after discontinued operations in the third quarter, compared to earnings per share of 7 cents from continuing operations and a 2 cent net loss per share after discontinued operations in the same period last year.

The prior year period included an intellectual property settlement that had a positive 9 cent impact on earnings per share.

There were no intellectual property settlements in the current quarter.

Improvement in earnings per share was the result of profitable growth in both segments, combined with the recognition of certain favorable tax events, offset somewhat by higher corporate and unallocated charges.

Since we already communicated on consolidated revenues I would like to discuss our segment performance, beginning with Intermec first.

Eliminating intellectual property impacts in the comparison, Intermec sales of 195 million from product and service increased 16 percent over the prior year product and service sales, including 25 percent growth on the systems and solutions business.

Sales revenues also increased 4 percent, sequentially, over the second quarter, including a 10 percent sequential increase for the systems and solutions.

For the nine-month period, year-to-date product and service sales also increased 11 percent, compared to the prior year period; and systems and solutions business increased 16 percent.

Product and service profits of 17.1 million in the quarter were a 33 percent increase compared to the prior year quarter.

The operating profit percentage was 8.8 percent versus 7.7 percent in the prior year.

We were able to leverage our growth into increased margins while also supporting an increase in R&D spending in excess of $3 million or approximately 1 point above our normal R&D spending baseline at 7 percent of sales.

Our ability to leverage our growth is also apparent in year-to-date comparisons where our year-to-date product and service operating profit percentage is 8.1 percent of sales has increased compared to 7.7 percent in the prior year, while also supporting almost 2 points of incremental R&D spending over the prior year.

All of Intermec's major product and service categories achieved growth compared to the prior year quarter.

As previously noted, growth was largely attributable to a 25 percent increase in our core systems and solutions business.

Service revenues grew at approximately 11 percent while printer media revenues grew 3 percent.

Geographically, each of our major markets also achieved growth.

North America continues to show the improvement exhibited last quarter over prior period growth rates as sales during the quarter grew approximately 13 percent compared to the prior year.

The favorable comparison reflects good performance both within our direct and indirect channels.

The region benefited from solutions delivered to key accounts and field service, transportation, logistics, and retail applications.

Including within those solutions were front end deliveries of multiquarter rollout programs to significant retail enterprise customers.

Our EMEA revenues grew 9 percent compared to the prior year quarter and continue to be supported by a broader base of business evidenced in the second quarter this share.

Reporting (ph) EMEA growth has continued expansion within the retail and transportational logistics sector.

Latin America was up 68 percent as direct store delivery customers in the beverage and snack businesses continue to choose Intermec's leading mobile computing solutions.

Asia-Pacific exceed a record quarter with an increase of 48 percent over last year's third quarter and continued expansion throughout the region in key enterprise account wins in the retail and pharmaceutical industries.

Many of the significant enterprise account wins across all the regions have been the result of continued customer interest in Intermec solutions comprised in the popular series 700 Mobile Computer, as well as the recently introduced CK 30 handheld and the CD 60 Vehicle Mount Terminals.

Now let's discuss the performance of our industrial automation segment where our restructuring efforts have allowed us to achieve sequential profitability in the second and third quarters and continued the trend on quarterly favorable comparisons to the prior year.

Industrial automation achieved slight profitability in the third quarter despite our earlier expectations of loss in the $2-$3 million range.

Revenues of 122 million were up 23 percent over the prior year quarter.

Segment profit of 300,000 was an improvement of 6.7 million.

The favorable comparisons are largely attributable to improvements achieved both within the Cincinnati Lamb and the Landis Grinding businesses.

Favorable comparisons to the prior year were achieved both in gross margin and SG&A expenses, relative to sales.

Bookings were 92 million for the quarter; and we are in line with the trend we have witnessed over the prior four quarters.

Average bookings during the year, although relatively flat, have shown improved pricing margins compared to the prior year; and we continue to see strengthening in our aftermarket run rate business.

In addition, we continue to add orders for composite machinery from the aerospace industry.

The decrease in the industrial automation reported backlog primarily reflects progress completed to date on the Hyundai motor contract.

Although not reflected in bookings and backlogs to date, we are encouraged by industry activity in the development and design of diesel engines to ensure compliance with diesel admission standards due to take effect in 2007.

Continuing down the income statement, the corporate and other expenses of 7.9 million reflect a peak spending period and outside resources combined with independent auditor fees related to Sarbanes-Oxley 404 compliance activities.

This increased corporate expense pattern of last two quarters due to compliance activities should continue at least through the end of this year, however, at lower spending levels compared to the third quarter.

The Company also reported an income tax benefit of 1.2 million in the third quarter, reflecting recognition of R&D and foreign tax credit and deferred tax assets primarily within our foreign subsidiaries.

Our expected tax rate, looking forward, remains 38 to 40 percent; however, we continue to seek opportunities to reduce our global tax expense.

Now let's review our balance sheet and cash flows where we ended the quarter with 211 million of cash and marketable securities and a net cash position of almost 3 million.

As you may (technical difficulty) first half the Company was a net user of cash of approximately $47 million.

We previously indicated that this cash flow trend was in line with our expectations and was driven primarily by working capital requirements to support certain long-term contracts within the industrial automation segment.

We also indicated that as these programs are delivered to our customers in the second half of the year, we expected the cash flow trend would turn positive again.

This expected trend has been substantiated by the positive cash flow of 20 million in the third quarter.

This increase reflects a combination of certain major industrial automation program deliveries and increased profitability within Intermec while maintaining continued efficient management of its working capital.

Capital expenditures for the quarter were 2.8 million compared to the depreciation and amortization expense of 4.3 million.

There were no significant asset sales in the quarter.

Our strong liquidity and operational improvements have prompted favorable outlook trend comments from the rating agencies and have also enabled the Company to enter into a new three-year domestic banking facility that will result in lower financing costs and increased operating flexibility.

The terms of that agreement require that we set aside 50 million in a restricted interest-bearing account in anticipation of repaying our 100 million of bonds due in March of 2005.

And, therefore, we have classified that amount as restricted cash as of the end of the quarter.

Let me conclude with some further details on our outlook for next quarter.

We expect a continued improving growth profile for Intermec, supported by recent new business wins and major enterprise accounts.

A growth range of 15 to 20 percent increase in Intermec revenues over the prior year's fourth quarter when (indiscernible) revenue range of 214-222 million.

This would also represent a 10-13 percent sequential revenue increase vs. the third quarter.

Segment operating profits in the fourth quarter are forecast as being in a range of 21-24 million or an increase of 45 percent to 65 percent over the prior year and 20-40 percent on a sequential basis vs. the third quarter.

Our outlook in the aggregate for the second half of 2004 within our industrial automation segment has not changed since our previous quarter discussion.

Accordingly, the favorable variances achieved in the third quarter are expected to be offset by the impact of an unfavorable contract margin mix in the fourth quarter.

Accordingly, our industrial automation segment is expected to incur a segment loss between 1-3 million in the fourth quarter.

Corporate and unallocated costs in the fourth quarter should be at a level in between what was incurred in the second and third quarters this year or a range of 6-7 million.

In summary, we are seeing our investments within Intermec yielding stronger growth and increased profitability.

Our restructuring efforts within industrial automation have yielded significant performance improvement over the prior year, while pricing margins have increased within the industrial automation backlog.

Our increased corporate costs due to SOX 404 compliance activities have, to date, been offset by incremental tax savings; and that spending should trend downwards in future periods.

At this time, we should open up the call for questions and answers.

Kevin.

Operator, please, we would like to now open up the call for our question and answer period.

(OPERATOR INSTRUCTIONS) Mark Roberts with Wachovia Securities.

Can you talk a little bit about the new larger -- you have several larger contracts coming on board that you are going to start shipping out of Intermec in the fourth quarter.

It looks like those contracts, generally, have better operating margins than the norm?

Or is it just the result of we're seeing increased revenue growth above the fixed overhead burden?

This is Tom Miller, Mark, from Intermec.

We have improved in terms of larger accounts and I think Larry mentioned The Home Depot contract.

That actually started shipments in Q3; but a significant amount of those shipments will occur in Q4 and into Q1.

We also have other large accounts that are continuing the performance; and I would say that from enterprise accounts, the margins are acceptable.

They are not overly low, they are not excessively high.

And they certainly are contributing to the bottom-line performance of the Company.

A lot of these activities are coming in the retail sector itself.

We have contracts not only with Home Depot but also Staples for the home delivery business.

Also we've had contracts with Tesco, picking up their home delivery business, Staples was actually a delivery business so it's a mixture of retail contracts.

Also in the DSD (ph), we've had contracts within the snack industry.

Another interesting contract within DSD is with Cocoa Enterprise or a pen tablet system from us where there are an advanced sales business and we continue to roll out accounts such as McKey (ph) Baking Company and Krispy Kreme doughnuts.

Okay, but, my question was as -- is there a general rule that the larger the contract generally the lower the gross margin?

For enterprise accounts, Mark, that is what we said only talked about moving into the enterprise account business.

The specific margin for large enterprise accounts tends to be lower than our normal margin; but because of the volume build we get, we tend to get cost benefits across the entire product line.

And in aggregate we've found out it benefits the income statement.

Larry, you mentioned earlier in your remarks that you are expecting in '05 to see better than -- did I understand you correctly?

Better than 10 percent revenue growth at Intermec and better than 10 percent margins?

That is correct.

When we said that we were going to notch up our R&D investment, we said, clearly, everything is dependent on whether we are successful or not; but if we are successful, we believe that that will result in a growth prospect for the business of greater -- of double-digit growth -- and that we would achieve our 10 percent margin target which we had committed to.

So, yes is the answer.

Philip Holling of Bear Stearns.

With respect to some of the investments that you are making in the RFID area, you made some comments about a new printer that's coming out, a multiprotocol printer there.

Is the strategy now to introduce product that is compliant with sort of (inaudible) and one protocol that are going to be used for initial compliance at Wal-Mart and perhaps at the DOD as well?

And is that a shift from earlier thinking that your product strategy and RFID space was going to be more focused on the Gen 2 standard which has not yet been ratified?

Again, this is Tom.

I think if you look at our RFID strategy, it has been pretty consistent.

So Intermec technology has been predominantly captive RFID.

It has been in the UHF sector.

And because we have focused in the past on rewrite, we've tended to have higher functionality technology.

Now.

With retail, with the emphasis on compliance and the Class 0 and Class 1 that was a lower set of functionality than what our technology, originally, had gone after.

So what have we've done about it?

We have done a couple of things.

First of all we support the ISO efforts and we will see a reconciliation of Gen 2 and ISO down the road as Gen 2 (indiscernible) specifications approved and submitted into ISO.

Second.

We have stated that the purposes of the pilots and the testing that is undergoing in the retail consumer goods industry, that's been predominantly Class 0 and Class 1.

Now we will support Class 0 and Class 1 with multiprotocol readers and printers.

But, clearly, the industry is moving to a Gen 2 specification and Class 0 and Class 1 will sunset.

We are very well positioned with respect to Gen 2 developing products according to the candidates specifications and also assisting customers through their pilots from Class 0 and Class 1 as they upgrade to Gen 2.

So to answer the question, it is an expansion of the strategy; but we think we're very well aligned with where the industry is going to move and where it eventually will end up with respect to product and standards.

Could you give us an update with respect to your licensing plan and RFID space that you had indicated previously, the goal being, say a 5 percent royalty for tags and 7 percent on (indiscernible) space?

We continue to move ahead with our licensing program.

We've taken our 140 patents.

And we have grouped them according to tags, readers, printers.

And we put together a licensing program.

We have announced it, we've taken it out into the marketplace.

We have met with a number of companies and we've begun discussions with a number of those companies; and we expect crosslicensing to occur with some of our fellow inventors in the RFID arena.

And, again, I would emphasize these agreements be consummated between the technology providers.

So it's also important to note that we already have existing licensing agreements in place too.

But, again, that is very early in the process as this unfolds.

So at this point would you say that you have visibility to some royalties going forward from that program?

Or how would you characterize that?

I think if we look at the state of the art of the industry, it is very, very early.

And it is very speculative to say that to put down a consistent revenue stream that would come from licensing.

You mentioned our rates, it is in that range of the program and as the market bills and sales take off that will become an income stream.

But at this point it would be highly speculative to put a number on it.

A question also on the remodeling purposes, the tax rate going forward.

Is there any update in terms of what we should be looking -- how we should be looking at that?

In terms of forward tax rate we're still expecting 38 to 40 percent; but as I indicated there -- we are always working on special programs to find savings in that; but absent those programs, it should be a 38-40 percent effective tax rate.

Mike Reid, Robert Baird & Company.

Larry, I guess for the last couple of quarters here, you guys have given some upside growth expectations on the Intermec side.

And you kind of talked about, before, how the enterprise side has kicked in.

But I guess can you talk about it from a market standpoint in terms of it sounds like you're getting some pretty good traction in the nontraditional market; but I'm also wondering in kind of a traditional industrial space, has that started to pick up?

And is that where you are seeing more of this upside?

Or is it still in this nontraditional area?

Yes I will let Tom answer the question; but I think the answer is both the -- because of the base on which we are comparing it, obviously, the enterprise business -- which is a new and expanding experience for us -- is the source of larger growth.

But the industry market has returned; and we are seeing good volume in our traditional market.

So -- of industrial and DSD; and as you know the indicators are continuing to be favorable on the industrial front.

But I think the answer to your question is both.

The industrial is lagging the enterprise account by a bit, because of the comparison of traditional vs. nontraditional.

Tom.

Yes.

To expand on that, the growth is coming from certain product categories, such as the CV 60 computer which is really targeted at distribution centers largely.

The CK 30, which is targeted at the industrial markets, as well as the new computer notepad product which we talked about last quarter at Hallmark which is in the process of rolling out.

It is true that we are getting some very favorable business within the retail sector.

Also in Europe for example we had (indiscernible) which is another retailer to our business as a well as test (ph) rollouts occurring in Thailand and Korea.

But a couple of the other sectors that are very strong are the transportation and field service sector.

We've had significant account and projects and wins at accounts such as FedEx, Grade and FedEx China, Conway Transportation, Yellow Freight with (indiscernible); in field service we are seeing good growth there for the 700 series computer wireless with account such as (indiscernible) Gas and Maytag and Trugreen.

The DFD business is strong and, specifically, within the manufacturing sector we are seeing that sector come back.

We are seeing a comeback, also, through our indirect channel where we are seeing growth in excess of 23 percent over prior year.

So we reached a lot of that manufacturing business through our direct channel.

We are seeing solid growth there and we will have our first 700 intrinsically safe products at the end of the year with additional products being added next year.

So that sector is improving and, particularly, within that sector, automotive.

And, Tom, if I could, I wanted to follow back up on the RFID question.

The way I understand it, you guys have essentially asserted 14 of your patents out there with respect to potential royalty; and I guess two questions off that.

One.

Can you talk about the steps that you have taken to maybe ease some of the concerns that are out there with the industry having to pay a royalty rate?

And 2, what's the position out there from the standpoint that the Chicago Protocol is being evaluated?

Our understanding is that the end user community, as part of EPC Global tends to vote on that protocol to see if they are willing to pay standard.

And if they decide that they don't want to pay the royalties, is there a risk that they scrap Chicago and go for something else?

Well, let's talk about the EPC process.

That was kind of a long question but let me try to put in context.

First of all, there will be an announcement coming out this week from Intermec and EPC.

As way of background I see you represented within the hardware action group with NEPC, they unanimously voted on a candidate specification.

And I think it is version 1.07 or as it's also affectionately referred to as the Chicago Specification.

And part of that process, we donated five patents royalty-free.

These were absolutely critical to the emergence of the standard and specification, it gets into areas such as a data numbering scheme, putting data numbering on the tag.

The ability of the system to send and receive data from the transponder so these were very critical patents.

Those were 5.

Another 9 were associated with RAM (ph).

And the reason why we went with 9 patents was simply because the -- (MULTIPLE SPEAKERS)

RAM being reasonable and nondiscriminatory licensing.

Right and the reason is because the practice of RFID goes well beyond any standard and these are foundational and fundamental patents so we are trying to balance an intellectual property decision that we have developed over many years and invested millions of dollars, making it free and available and accessible to the marketplace on a RAM basis.

And, also, allowing the standard to go up royalty-free.

Now what we've done as a necessary step through EPC, the next step in the process is to take this candidate specification and to use prototype product from the vendors, which is referred to as artifacts, and test against the candidate specifications.

To make sure it is valid, that it works and it meets the requirements.

And what we have communicated to EPC Global is that we are going to provide a temporary waiver, or a suspension, of our RFID intellectual property, RAN, for 60 days.

And this will allow validation of the Gen 2 candidate specification and move forward.

Just temporary suspension is going to allow the RFID manufacturers to build prototype products without concern about violating our intellectual property rights.

So what this means now is that the next step in the process that we will allow testing to occur; and we are doing that only for purposes of testing to validate workability of the specification.

Once artifacts and prototypes have been built, have been tested, the technical steering committee of EPC will evaluate the results.

And then that will go to the Board of Governors for EPC for ratification of the standard, which is projected to occur by the end of the year.

So that is the process as it currently stands today.

Just one follow-up on what you said.

What is the announcement that would come this week between Intermec and EPC?

Just what I talked about.

That we are temporarily suspending or waiving our IP for purposes of validation of a candidate specification with prototype product and testing.

Which is just another statement that we are working hard with EPC in orer to get the standards approved.

Ajit Pai of Thomas Weisel Partners.

Good morning and congratulations on a great quarter.

First a couple of housekeeping questions, before we move onto the business.

One is that the different tax assets that you have on your balance sheet, there is about a91 million.

And I just wanted to check that in case the industrial automation business just in case at some point it is spun out, how much of those assets would be going to that business and what kind of (indiscernible) do you expect to use those assets in?

I would say the majority of the assets would remain with UNOVA.

There are certain deferred tax assets that do sit on the foreign subsidiary books, although they are relatively immaterial compared to the total; and, therefore, if the subsidiary were to be separated from the Company, those deferred tax assets would go with that subsidiary in most cases.

And the second is about the Hewlett-Packard potential settlement at some point.

Do you have any further data points on that whether you are making any progress to it (indiscernible)?

The legal wranglings continue as we have in virtually every laptop provider.

We've had to go to court, typically.

Our activities have been settled on the courthouse steps.

You may recall HP took an action of a deviation in the process which sidetracked it for a time and got a positive judgment which was subsequently overturned on appeal.

So this has just taken a bunch longer than the typical process.

It's the last of the breed, in terms of any major settlements, Ajit, and is totally unpredictable at this time when it may come to fruition.

And on the real estate sale of the land in Cincinnati.

Do you have any -- a progress report on that as well?

That is Mike's role.

I think what Larry has indicated in his comments is that we have now reached a point because things have lined up properly in the business and we have greater confidence in terms of its continued improvement that now is the time that we will begin a process -- an official process -- of looking at ways to separate the business.

And, then, in conjunction with that of course, also, a majority of the assets held for sale belong to the industrial automation segment.

So we continue a two-part process there in terms of evaluating separation and also liquidating the assets.

Now the previous asset that exists within that is the Cincinnati campus.

It is still under contract and though I can't report a lot of movement in that contract because we keep extending the due date; and, at this point in time, it is just really one issue that is holding it back.

And that is working out certain tax financing issues with the municipal municipalities.

And, then, just the ratifying the IAS sales guidance for the fourth quarter.

I didn't quite catch what the sales guidance over there was.

Sales guidance in terms of Intermec range (MULTIPLE SPEAKERS) IAS?

Probably didn't give it but I will.

It still looks very much like the third quarter in the 120-130 million range.

Okay; and in that business you mentioned that you've seen several quarters now of orders in the 92 million range.

Do you expect that to accelerate, going into 2005, improve from those levels because of what you're seeing in the auto (ph) as well as the aerospace industry?

This is Bob Smith.

If you were to look back, we've had a couple of quarters in the $90 million range.

But our second quarter was about $139 million order entry.

As you know this business is a bit lumpy in terms of the projects and the way in which the orders come in.

We don't expect the business to be in the $90 million range.

We expect it to be improving and above what our previous range has been, the $95-$105 million norm.

But as I commented, when you look at it the orders are a bit lumpy and so $139 million in the second quarter -- excuse me in '93 and the third quarter we would expect to be in or above the $95-$105 million range going forward.

Okay.

And then just to amplify a bit.

It is important to note as Mike said as we track the backlog, the margins in the backlog are improving over time.

And, potentially, in 2005, this business could have mid single digit margins, operating margins, right?

I'm not (MULTIPLE SPEAKERS) we're, as you know, we are in the budgeting process.

We are pretty comfortable with profitability in 2005 in that we've arrived at our breakeven point.

Manifestation of improved margins should drive us, but this early in the budget process we are just uncoverable providing you guidance for next year.

Okay.

And the last question would be about your printer business.

You mention printers and supplies grew, just 3 percent, it was probably the slowest growing part of your overall business in Intermec.

Could you give us some color over there as to why this lagging?

And you had some exciting new product that you introduced recently that might be impacting a 2005 growth rate in that business but I think, what, the portable wireless printer etc.

can you give us some color as to your strategy for your printer business?

Sure, Ajit, this is Tom.

First of all, our printer media business, as a part of our total business, it really services our greater solution capabilities that we offer out to the marketplace.

So it's a little different direction of our printer media business, relative to being a stand-alone printer company or stand-alone media company.

Our media volume has actually been growing higher than the 3-4 percent.

But the mix of business has resolved in about 3 percent growth.

And we believe that as there's economic recovery, that business will grow in a slightly higher rate.

Industry growth for that whole media sector is only 5 percent per year.

On the printer side there are a couple of different areas that -- and actions that we're doing.

One of the areas where Intermec has not really participated in is portable printing.

We have not had a portable printing line of our own and we will be introducing our first portable printers next year.

Receipt printing targeted initially for the DSD industry.

And that is part of the Frito-Lay contract that we will roll out next year.

The second area is billed now lower end value product line and that's a product that -- those are products that will come through ODM efforts out of Asia.

And the third area for growth in the future for the business is with our RFID printer line and as -- you are correct we did announce that PM4I with our RFID printing capabilities and we believe next year as compliance activity takes hold within the RFID area that will lead to some growth.

So we expect to see improvement in our printer performance in 2005.

And just one set of questions.

There's a competitor a company called Cybernaught (ph) that this morning announced in a press release that they had won a contract with Tesco for supplying thousands of their wearable computers.

Is that a product that competes with any of your products?

No.

The only wearable computer product that we have is something we call the SF51 which is a wireless flashlight scanner.

That was just announced recently but that will not be competitive.

We do not have a like competitor product.

Thank you so much and congratulations on a great quarter.

Walt Liptak of KeyBanc Capital Markets.

Good morning and congratulations from me too.

Great quarter.

On the machinery segment of the business (indiscernible) data and some of the machinery data out there suggested growing 30 percent.

Is there a reason why you seem to be growing slower on the order intact?

This is Bob Smith.

First of all that data would tend to cover a broad cross-section of the markets and tends to be more in the standard machine pool area.

If you were to look at our segment, which is more on the standard machine-tool area, we would have higher growth rates then on average for us.

We've also got -- we had a focus on improving margins so that our growth may not be as strong as the overall industry growth from the revenue perspective.

That is an important issue, Walt, which I want to amplify.

As you know, one of our reasons associated with separating the business is what the large capital requirements of IAS on expansion; and we have purposefully chosen to be selective on orders, an order that we can improve the margin mix without major increases in working capital commitments.

That makes sense.

Are you seeing better activity for the larger transfer lines?

Maybe heavy truck industry as that booms?

There is a lot of discussion on the -- what's required to to meet the 2007 diesel emission standards.

But order activity is relatively small at this point.

In the orders that we received in the second quarter there's only one small modest initial program.

But we are in discussions with each of the large diesel engine manufacturers on how to meet those 2007 emission standards.

And we would expect that to show up in future quarters.

With retail, sounds like as you pick up these customers your mix of business is finally moving more towards retail.

What is your percentage of sales during the quarter and what was it in the year ago?

We don't break out, specifically, the market performance, but in general more than 50 percent of our business is coming outside our traditional markets now.

Traditional markets would be defined as DSP and industrial and so the mixture of that business is coming from retail both in the distribution center as well as in-store, field service predominantly field mobile applications, transportation which has been a very good sector for us and in health care also.

One of the areas and initiatives for us is with IBM for the Australian pharmaceutical industry.

That's starting to provide good activity and in Europe for example retail actually is becoming our largest contributor of our business in Europe; and we are seeing great progress in the U.S. in North America as well.

Just a couple of other quick questions.

The special charge, I don't know if you mentioned what that was related to the 927,000?

Yes, Walt, special charges are basically cleanup activities resulting from our prior restructuring activities.

And so from time to time, as we had indicated in prior periods there are certain costs we are allowed to record as period charges as opposed to front end accrual.

Okay, so there was --

So basically it's remnants of leasing activity, subleasing activity.

Things of that nature.

And the section 404 incremental expenses?

Can you quantify those?

During the quarter?

Yes it was in excess of $3 million.

We think we've reached the peak of spending on that.

We had a lot of activity in the third quarter in terms of moving the progress along.

That will start to trend downwards as we conclude the year.

And you talked a lot about RFID on the conference call.

Let me just ask you this question generally.

It sounds like there's customers out there as well as competitors who are still pushing for the free IP.

What does that mean to the industry or you?

Is that something that is ever going to happen?

It is really difficult.

When you've got intellectual property that has been developed well before standard organizations have started working in that area and then to set the goal and objective is saying it's all going to be royalty free, it's a very difficult position.

And I know Cymbal (ph) on their conference call stated that they are one of the companies that stay royalty free.

And we thought that was a very very odd answer coming from them.

Because if you contrast our IT program with theirs, and what they did with blazer I mean, their technology was proprietary.

After initially giving out a license they cut off all licensings.

And they required companies to secure product of only from Cymbal.

And they prevented companies from making or having make their own laser products.

And contrast that with Intermec you know about where we've taken our portfolio; and we've put it out there and said it's available for license.

We will make it available to any company and you can license the technology; you can make your product -- you don't have to invest unnecessarily to try to get around our IP.

It is opened and accessible to you to help grow the market.

And another difference, you know, when companies would purchase standards from Cymbal originally they had embedded licensing rates.

And they ranged from 7 to 15 percent originally; and now they are embedded into the product cost and I would contrast that to Intermec you know, but we are very open about our licensing and our rates and what it means.

So I think it's important to note that we are providing open access to the market.

We support open standards.

I saw all the major standard bodies have provisioned for RAN.

ABC has provisions for RAN.

So somehow this impression that what Intermec is doing is not supportable or it's not the right thing to do.

Ir's just not right.

So, Walt, the answer to your question is we do not imagine an environment where there will be royalty-free standards.

More than that, we think it would be a very unhealthy environment were that to occur and would seriously dampen further development of an emerging technology.

We've announced a program.

We think the program is fair.

We think it is significantly more customer-friendly than other programs which are currently resident in the industry so we don't see a significant change.

There is some talk and you should be aware of the fact that there is a difference between a royalty-free standard and a royalty-free practice.

That is to say the 14 patents that were earlier discussed, five of which we contributed, nine of which we have offered under Rand (ph) are the licensing, are the patents associated with a standard.

Additionally however there are 126 patents that aren't associated with the standard which is a part of the Rand process.

So the whole dialog around royalty-free standards is not really a very useful dialog because it only deals with 10 percent of the patent (inaudible).

And even if there were a royalty-free standard the standard tends to be built around the area interface protocol and the data specifications.

So when a company puts into practice or a company puts it into use, there is other intellectual property from Intermec and that's what Larry was referring to.

Therefore what we're saying is and we made available the comprehensive portfolio that we have so there's no question.

Thank you for your candor and thanks for a great quarter.

Kevin Starkey, Imperial Capital.

(inaudible) Home Depot order.

Are you replacing telephone installation there by chance?

Actually it's the mobile vice computer system that is in their store and I believe it's Fujitsu.

The second question is completely different and I am assuming by now you probably received some bids for the IAS division.

It would be a dream world if you could tell us what kind of --

I don't want to leave that impression on the call.

We have not had a process in place leading up to now; and therefore, it would have been irrational for us to receive bids on the business.

When we conduct a process we would hope to receive an orderly set of inputs.

I don't mean to suggest that we haven't (indiscernible) interests.

Obviously hearing interest is an important part of our assessment, Kevin, but getting business is something that has not occurred.

The question may be premature but I will ask it anyway.

Have any of these expressions of interest had EBITDA multiples attached to them?

That you could share with us?

No they haven't and, indeed, if you look at our various IAS businesses, some of those are rationally dealt with on an EBITDA multiple and some are not.

So selling them separately rather than altogether remains a possibility?

Everything remains a possibility.

There was a benchmarking study on RFID tags; and the Avery TriFlex tag was highly regarded.

I may have -- I think I heard perhaps mistakenly that somewhere in there is included some Intermec intellectual property in that Avery may be buying the chips for that tag from Philips who licenses (indiscernible).

Is that correct?

Or incorrect?

Well I can't -- I don't really want to comment on the results of that study because quite frankly I'm not sure what chip was with that tag that was tested.

And I don't want to say something -- there have been studies done.

There have been Phillips is a major chip supplier; and they participate in the EPC process.

They also have an Isel (ph) based type product.

They are going to be a major player in it.

So I'm really -- I really can't respond to that because I don't have adequate information on it.

A question in a similar vein.

Zebra announced just before (indiscernible) it was teaming up with Sing (ph) Magic also to do a multiprotocol printer.

I don't know if you a chance to look at it but if you could sort of do a head-to-head comparison on your PM 4I (ph) versus that printer.

Including the list price?

That would be very helpful.

Well we haven't been out there what the list price is but suffice it to say the PM4I printer from us it compares very favorably.

It supports all EPC classes plus ISOL (ph) and that was the key.

That was the first printer to support ISOL plus all EPC classes and that's a differentiator.

And it is a printer that is being put into trials and pilots in Europe under some of the ISOL classifications.

Do you think the multiprotocol aspect of it put you in the sight of (indiscernible) in terms of patent, potential patent litigation?

We don't want to comment on litigation or legal strategy or anything along those lines.

Tim Lesnick (ph), Mayo (ph) Capital.

Great quarter.

My questions have been answered.

I just want to reconfirm something that in terms of IAS as you go into Q4.

Had you -- did you comment on anything on the working capital in terms of what we can expect there?

I think kind of as the cash flows from the Company as a whole.

We had indicated, previously, that the second half of the year we would see positive trend.

We have seen that trend confirmed in the third quarter and we expect the positive trend to continue through the fourth quarter.

IAS, specifically, is working capital, it's a lumpy proposition.

Increases, decreases, along with the activity in the contracts.

But as look across the company as a whole we see the positive trend continuing.

Stephen McDoyle (ph) of Lord Abbott.

First on the Australian program, perhaps I am not understanding this.

But did the priority of it, was it shipped this quarter?

And could you take me through why the operating income was obviously higher than you anticipated?

Bob's going to answer that.

I was going to address the Hyundai issue.

The Hyundai issue -- a large portion of the revenue of the Hyundai project was recognized in the third quarter.

But there's still a significant amount that remains in the fourth quarter.

So given that and given your initial expectations of down 2 to 3 in terms of operating income for the quarter and obviously that did not take place, was the underlying (indiscernible) business more profitable than you anticipated or infer that the remainder of the business is operating at higher profitability rates than you expected?

Let me see if I can address that, to your satisfaction.

First of all, just a better understanding on terms of our long-term contracts, in general; and Hyundai is a good example.

First of all the revenue recognition is under percentage completion.

So as we move towards milestones in the program we recognize revenue.

And then any margins that would be associated with that.

The second part of that program has to do with the cash flow of the program.

As we make multiple deliveries, under the program, we are under the specifics of the contract we are allowed to build the customer; and we have been doing that.

We have been making periodic deliveries against the milestones.

We bill the customer and we are able to collect the cash.

And as a matter of fact, some of those deliveries have allowed us to bring some of that cash into the third quarter.

We do still have deliveries that will be occurring against that contract in the fourth quarter.

We will build them at that time and collect within a normal period.

In terms of the third quarter profitability.

It is really a combination of basically looking at we had some contracts where we had better performance than expected and, therefore, the law we're dealing on a basis of 120 to 130 million revenue.

So if you get a slight improvement or if you have a slight degradation in any one contract that can have a swing factor from some slight profitability or slight loss or a slight loss back to slight profitability.

And that is where we are at.

We are really out a breakeven point right now.

And Stephen, so, the answer is it came from the base business not from Hyundai.

Hyundai as we have said in the past is not as profitable somewhere over to the fourth quarter replaced by base business was a favorable mix for us.

It'll have a correspondingly slight negative impact on the fourth quarters as Mike earlier commented but it was the base business being better and having more of it, relative to the Hyundai mix that caused the third quarter to be better.

(technical difficulty) how you end the project is that an unprofitable project?

No it's not a very profitable project.

And are there any other similar strategic transplant programs in the backlog that may serve as a significant detriment in terms of seeing the kind of core margins come through here over time?

We said at the time we took that contract we were taking less profitable contract for the reasons of establishing and demonstrating our capabilities in that business and establishing that relationship.

That was a onetime event for us.

In retrospect, it was a very healthy thing for us to do but it does make your analysis more difficult in terms of the mix if that business; but while there are other international customer contracts that we've signed they are not of this nature in terms of profitability.

On the operating leverage front for ADS I think the fourth quarter guidance numbers you gave, looked as if it implied a 25 percent leverage for the incremental dollar in the fourth quarter.

If that's the right number how would one think of the kind of incremental R&D spend in the fourth quarter that obviously looks like that is a lower rate of leverage than what you've posted this quarter?

Yes the answer is, we are.

Constantly trying to move away from the concept that we can grow the business forever with no increase in fixed costs.

We have done that from 600 million to pretty close to 800 million and that is just not feasible anymore.

So while we still see significant leverage in our business in terms of getting a portion -- a significant portion of the gross margin to the bottom line, we also see needs to invest in the business.

We continue to support R&D at a variable rate so it is variable to the sales level.

We are selling expenses or investments, particularly with nontraditional markets where we need to make investments in enterprise accounts.

I think we still have very much the same attitude about G&A, that G&A doesn't need to grow with increasing sales or at least if it does on a very limited basis and that is what gets the majority of our leverage is the ability to take margins between 40 and 50 percent and service both the selling expenses and the R&D expenses and the marketing expenses on a relatively variable bases and the G&A on a relatively fixed basis and generate those kinds of margins.

We haven't done the precise calculation.

But that is not an unreasonable expectation.

So I think what I've heard is -- let me (indiscernible) this way.

I think in the past you forecasted 30 to 35 percent operating leverage?

Is that a good number to think of?

Or isemort the fourth quarter guidance a better proxy going forward?

I think the fourth quarter guidance is a better proxy going forward because what we -- in order to do that, what we had to do was hold selling, marketing, expenses pretty much flat.

In order to do what we've done in the past.

And that's not an intelligent way for us to run the business in the significant growth that we're experiencing.

But clearly we expect multiples of sales growth as a profit growth number.

Then on the corporate expenses is it possible to ge an order of magnitude in terms of what dollars may drop off in '05 relative to the run rate that you are showing currently?

We are still examining that prior to the activities Sarbanes-Oxley we are running slightly under $5 million a question all in.

The question is will we return to that rate?

There will be, probably, some slight increase spend rate just in terms of ongoing monitoring.

I think that is going to be the case for most companies.

But we should be turning back toward our traditional spending levels.

Matt Grossman, SAC Capital.

Great quarter, Mike.

Quick question for you, it really set out to me the international revenue growth.

Can you talk a little bit about what is going on there and if you can distinguish between local currency growth and U.S. dollar growth?

Thank you.

Clearly, I think anybody who is based in the U.S. is if they're shipping outside the U.S. is benefiting from currency rates.

And the question is how do they catcher those rates in terms of their strategy and pricing activities.

If you did just a straightforward quantitative analysis and that is always a difficult process because it doesn't capture all of the elements.

You would say that currency would have contributed slightly over $5 million of revenue on a constant unit shipped period to period over a comparison over the year.

And that's a global, that's a global look at our business.

And how does that effect the operating margin?

Some component of that flows through or is it all passed through?

It's not all passed through.

We do have also increased expenses overseas as well in terms of delivery.

But there is some favorable impact.

We typically don't break that out.

What you do have to understand that we do have people in activities on the ground overseas and those costs on relative basis would also increase.

So as we think about the longer-term guidance for the business, if we can assume a flat dollar environment, approximately, how much will that impact your revenue guidance by?

It would have been $5 billion this quarter.

Our revenue guidance doesn't anticipate any change in the currency exchange rates.

(inaudible).

When we talk about the fourth quarter, our assumption is the same currency exchange rate that we currently have.

Just coming back, can you give us some sense of what the EP&L (ph) contribution was from the currency?

No we can't.

As Mike said, 30 percent of our cost more or less in SG&A overseas will be subject to the same impact as the currency but the real issue that drives that question is the individual pricing in individual countries.

It is our perception that we have been better at retaining that currency benefit in the price than our competitors.

And so we've gotten a better P&L hit but the specific calculation is virtually impossible.

And you have to analyze average selling price by country by contract and we just don't do that.

Dennis Delafield (ph).

Delafield Asset Management.

Just one question.

Can you talk about the R&D numbers and the incremental expense?

Do you have the actual -- or I'm sure you have them but would you give us the actual numbers quarter by quarter or of R&D as it impacted ADS or last year and the first quarters of this year?

Dennis as you know we don't break out the complete income statement.

What we've chosen to do, instead, is give incremental R&D.

And as we have said, each quarter, that has varied between $3 and $5 million each quarter.

What Mike has also said is our baseline, I mean available for calculation, therefore, our baseline is 7 percent.

And we have been ranging between 2 and 3 and the early part of the year now dropping off to 1 and 2 points of sales over in, R&D, in the fourth quarter, we anticipate a further decline in the percent of R&D because, as we have said at the beginning of last year, we are ramping up for specific windows of opportunity at the conclusion of servicing those, we will ramp down.

Whether that is precisely seven or not it's certainly trending in the 7 to 8 percent range.

And Larry was it the core fourth quarter last year where the incremental spending began? (MULTIPLE SPEAKERS)

It was.

It was and therefore the -- that's right.

That's correct.

Mark Roberts, Wachovia.

I do have one follow-up question.

Larry, it sounds like you've given enough that is here in terms of what your expectations are around six o'clock in the Internet business and the incremental profit.

And you talked about wanting to have 10 percent, north of 10 percent revenue growth.

Is that correct?

What we have said is, the original premise of our R&D investment has as Dennis just pointed out at the end of 2003 the ramp up in R&D was specifically undertaken in order to achieve growth rates for 2005 in excess of 10 percent and operating margins at or in excess of 10 percent.

So on that basis, can you give us a sense of what your targets or earnings would be?

In district -- just n broad ranges.

In 2005.

Yes.

The answer to that is no, and it's just -- we will tell you what we're trying to accomplish.

We're trying to accomplish it, but we like all companies go through an exhaustive budget process where we look at all the opportunities facing the company.

The spending requirements and how we do them; and in my mind it's just not responsible to give you guidance in advance of us completing that process so it would be expectation that we will be fully ready to give you that in three months but right now is just an invitation to the wrong and so we prefer to avoid it.

Jeff Hershey.

My questions have been answered.

Just wanted to echo my congratulations.

At this time I am showing no further questions or comments.

Well let's end the call now; thank you, everybody, for joining us and we look forward to speaking with you soon.

Thank you for participating in today's teleconference and have a good day.