漢威聯合 (HON) 2004 Q4 法說會逐字稿

Welcome to the fourth quarter and full year 2004 earnings conference call for UNOVA Incorporated. (OPERATOR INSTRUCTIONS).

This conference is being recorded.

If you have any objections, you may disconnect at this time.

I would like now to turn the call over to Mr. Kevin McCarty, Director of Investor Relations and Analysis for UNOVA Incorporated.

Mr. McCarty, you may begin.

Thank you very much.

And good afternoon everyone and welcome to UNOVA's fourth quarter fiscal year 2004 earnings release conference call.

Joining me on the call this afternoon is Larry Brady, UNOVA's Chairman and Chief Executive Officer;

Michael Keane, UNOVA's Chief Financial Officer;

Tom Miller, President of Intermec Technologies; and Robert Smith, President of our Industrial Automation Systems.

Once we conclude our remarks this morning -- excuse me, this afternoon -- we will open up the call for a question and answer period.

Before we begin our prepared remarks, I wish to remind investors that statements made during the course of this conference call that express the Company's or management's intentions, 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 with the Securities and Exchange Commission, including but not limited to the Company's annual report on Form 10-K for the year ending December 31, 2003, and the Company's report filed on Form 10-Q for the quarter ending September 30, 2004.

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

Now I would like to turn the call over to Larry Brady, Chairman and CEO of UNOVA.

Good afternoon everyone.

The fourth quarter of 2004 provided an effective punctuation for the strong performance of UNOVA operations throughout 2004.

For each quarter of the past 3 years we have met or exceeded the projections that we provided at the beginning of those quarters.

In the fourth quarter of 2004 we again exceeded the operating projections that we provided at last conference call.

As you can see all from our press release, we have also passed a meaningful strategic milestone with the placement of our Industrial Automation Segment into discontinued operations.

As we told you at our last conference call, we have completed the major prerequisites for separating our 2 business segments.

And we are now positioning IAS for success independent of UNOVA.

Accordingly, we have commenced a process which we believe will lead to the disposition of Industrial Automation.

During his report, Mike Keane will take you through the details of our non-cash write-downs taken in anticipation of the disposition.

The full year 2004 also represents a number of additional and significant milestones.

Our continued and dedicated emphasis to cash flow has led to a second year end in a row of a best ever net cash position for the Corporation.

We are nearing completion of the major restructuring at our Industrial Automation Segment, which has produced a significant reduction in operating losses, from $22 million in 2003 to $2 million in 2004, a 5 percent increase in sales at IAS for the first annual increase since 1998, a 2 year increase in revenue per employee of 39 percent, a best ever networking asset to sales ratio, and a sound structure and plan for future success outside the UNOVA portfolio.

At Intermec, the implementation of an aggressive increase in R&D investment has produced a record annual segment sales growth and a quarterly sales increase of 27 percent over the prior year period specifically targeted in our R&D investments supported A., increased share in the government market with the award of the AIT3 contract after a 5 year hiatus;

B., increased share in nontraditional markets at enterprise accounts, with our revenue in the retail market increasing more than 100 percent;

C., a position of clear ascendancy in RFID; and D., development and introduction of leapfrog technology in laser scanning.

Moreover, the continued focus on levering that Intermec sales growth has produced a record segment product and services profit of $74 million for the year and $29 million for the quarter.

And the increasing leverage of sales growth, combined with the 3 year productivity increase of over 50 percent in revenue per employee, has led to our highest ever operating profit margin percentage of 9.4 percent for the year, and more than 12 percent for the quarter.

Also, during the quarter, EPC Global approved the UHF RFID Generation 2 standard, which we see as a major point of progress in the development and adoption of this emerging technology.

Now that standards have been approved, which allow the efficient employment of the technology, we believe that both the pilots necessary to demonstrate effectiveness and the corresponding requirement of others to deal with our intellectual property can proceed at a more brisk pace.

We believe that we can carry the momentum from 2004 into the new year.

In 2005 we expect continuing operations, that is our ADS Segment, to achieve sales growth in the range of 10 to 15 percent.

We believe profit margins will exceed 10 percent for the year, and full year segment profit will increase 20 to 30 percent over 2004.

In the first quarter of 2005, our historically weakest quarter, we project a sales increase of 10 to 15 percent over the prior year quarter, and a product and service profit of 14 to $18 million.

We have previously observed a trend which we continue to believe is relevant.

That is we believe that a shift in leadership of our industry is occurring.

The impact of changes in technology and competitive strategy will shape the landscape for some time to come.

In the future a company's success will depend on effective implementation of emerging technologies, as well as on individual company strategies.

The companies that emerged as leaders will be those who invest today in technology development and in the partnerships that emerging markets demand.

We believe that the past year has demonstrated both our resolve and our capability in this regard.

Now I would like to turn the discussion over to Mike Keane for his comments on operational and financial performance.

Good afternoon everyone.

As you probably noticed by now, our financial statement presentation has taken on a new look compared to past periods.

UNOVA's stated commitment to a process to divest the Industrial Automation business and has resulted in a reclassification of the IAS Business Group activity into discontinued operations for financial statement reporting purposes.

Accordingly, both sales and operating results within continuing operations are now reflective of our Intermec operations and our corporate support activities.

One has to keep in mind though that our corporate and unallocated expenses are continuing to support 2 business segments.

With that in mind, our sales and operating profits from continuing operations and our balance sheet begin to give a view of UNOVA and Intermec blending into a pure play automated data capture and mobile computing company.

UNOVA achieved earnings per share of 42 cents from containing operations in the fourth quarter, compared to earnings per share of 5 cents from continuing operations in the same period last year.

There were no intellectual property settlements in either quarter.

The improvement in earnings per share was a result of profitable growth at our Intermec operations, combined with the recognition certain favorable tax events, offset somewhat by higher corporate and unallocated charges.

At this time I would like to walk you through the statement of operations.

The selected segment information shows that consolidated revenues are now entirely comprised of our ADS Segment activities, including product and service sales, as well as any intellectual property settlement related revenues.

Intermec sales of 237 million in the quarter increased 27 percent over the prior year quarter sales, including 35 percent growth from the Systems and Solutions business.

Sales revenues also increased 22 percent sequentially over the third quarter, including a 22 percent sequentially increase for Systems and Solutions.

For the full fiscal year, product and service sales of 792 million also increased 15 percent compared to the prior year period, and the Systems and Solutions business increased 21 percent.

Product and Service profits of 29.1 million in the quarter were a 102 percent increase compared to the prior year quarter.

The operating profit margin was 12.3 percent versus 7.7 percent in the prior year period.

The fourth quarter performance was a record operating margin, and is further evidence that we have the ability to achieve our goal of double-digit segment operating profits at Intermec when our annualized revenue run rate exceed 800 million.

The Product and Service profits for the full fiscal year were 74 million, or 9.4 percent, a 39 percent increase over the comparable prior year operating profit of 53 million, or a 7.7 percent of related sales, all while investing for future growth with approximately 2 points of incremental investment in research and development expenses in the first 3 quarters of the year.

All of Intermec's major Products and Service categories achieved growth in the fourth quarter compared to the prior year quarter.

As previously noted, growth was led by a 35 percent increase in our core Systems and Solutions business.

Service revenues grew at approximately 14 percent, and Printer Media revenues grew 11 percent.

A significant amount of the growth acceleration is attributable to large enterprise account wins across all regions, continuing to reflect high continued customer interest in Intermec's broad based solutions, comprising the well-established Series 700 Mobile Computer, as well as the recently introduced CK30 handheld, and the CV60 vehicle mount terminal.

Also contributing is the beginning ramp up of our deliveries against the AIT3 contract which we won mid year.

Geographically North American continued to show improved growth rates as sales during the quarter grew approximately 16 percent compared to the prior year.

The favorable comparison continue to reflect good performance, both within our direct and indirect channels.

The region benefited from significant deliveries to key retail enterprise accounts, as well as field service, transportation, logistics and industrial applications.

For the year North American revenues increased 11 percent.

Our European Middle East revenues grew 44 percent compared to the prior year quarter, and were continuing to be supported by a broader base of business as evidenced in the previous quarter this year, combined with continued penetration within the retail field service and logistics sectors.

The annual growth in European Middle East was 20 percent.

Latin America was up 44 percent led by competitive wins within retail and consumer product accounts, combined with a continued strong presence with direct store delivery customers.

For the year Latin America business achieved a 20 percent growth rate.

Asia-Pacific experienced a decline of 11 percent compared to the prior year quarter, however, achieved a 22 percent growth rate on a year-to-year comparison.

Expansion of our customer base occurred throughout the region.

And we had key enterprise account wins in the retail and pharmaceutical industries, as well as consumer product customers.

Moving down within our segment operating profit section, you can see that our corporate and other expenses were 7.7 million for the fourth quarter, compared to 4.7 million in the previous year.

This increase is primarily reflective of our increased spending on independent auditor and consultant fees relative to SOX 404 compliance activities, albeit at slightly lower level than we experienced in the prior quarters.

Absent the incremental SOX 404 related costs, our year to date corporate and other expenses exhibit a lower core spending rate then 2003.

Our net interest costs were flat on a quarter to quarter comparison, as debt balances were constant over both periods.

This expense should begin to decline in 2005 as we intend to repay 100 million of our bonds in March of this current quarter.

The Company also reported an income tax benefit of 9 million related to continuing operations in the fourth quarter reflecting recognition of R&D tax credits and capturing the benefit of net operating losses generated from legal restructuring of certain foreign subsidiaries.

The interest rate looking forward remains 38 to 40 percent.

However, as we have done previously (technical difficulty) seek opportunities to reduce our global tax expense.

At this time I would like to turn the discussion towards our Industrial Automation businesses, including their recent performance and the activities that resulted both from their classification as a discontinued segment, and an impairment charge portion of the net assets within that group.

Although not evident in the reported results, the Industrial Automation Group achieved revenues of 126 million for the quarter, and an operating loss of 900,000 for the fourth quarter.

Both levels were positive variances to our previously forecasted levels.

The favorable comparisons are largely attributable to improvements achieved within the Landis Grinding businesses.

For the year, the Industrial Automation businesses achieved revenues of 470 million, and an operating loss of 2.8 million versus revenues of 416 million and an operating loss of 22.1 million in fiscal year 2003.

Favorable comparisons for the prior year were achieved both in gross margin and in selling, general and administrative expenses relative to sales as a result of previous restructuring activities.

This segment also achieved very strong fourth quarter bookings of 143 million, providing further evidence of improving market conditions in this sector.

We're further encouraged by increased international activity, especially in China and India, plus the U.S. industry activity to develop and design to develop and design diesel engines to ensure compliance with diesel emmission standards due to take effect in 2007.

Each of these trends have allowed us to establish that the necessary prerequisites have been met to separate these businesses from the UNOVA portfolio.

With the approval of our Board, we have commenced a formal process to divest all the Industrial Automation businesses, and the excess assets through a sale process that has a high probability of conclusion within 2005.

As part of that process, we have received expressions of interest in both the group as a whole, and for the Cincinnati Lamb and Landis Grinding businesses as separate transactions.

We're pursuing a variety of sale alternatives that will strive to achieve separation and monitization, while allowing these leading businesses to operate successfully independent of UNOVA.

The development of this process have allowed us to reasonably estimate an appropriate net realizable value for each of these divisions.

And thus we have recorded an impairment charge against the goodwill and long lived assets of the Cincinnati Lamb operations.

That charge, net of tax, is 103.2 million, and is also recorded within discontinued operations in the fourth quarter of 2004.

Landis operating assets do not require any such impairment as there is very strong evidence that we will be able to sell that operation at a significant premium to its book value.

Obviously, we would not be recording any such gain until a transaction is concluded.

After considering our discontinued operations and the impairment charge net of taxes, UNOVA's fully diluted earnings per share were a loss of $1.14 for the fourth quarter compared to a loss of 4 cents in the same period in 2003.

Now turning to our balance sheet and cash flows, where we ended the quarter with 268 million of cash and marketable securities, including restricted cash, and a net cash position of 59 million.

This increase reflects strong positive cash flow in the quarter from both segments, and particularly at Intermec where they achieved net working assets turns of 5 times for the year.

Restricted cash represents balances we are required to maintain on deposit in accordance with the terms of our credit agreement until we retire our bonds this upcoming March.

Capital expenditures for the quarter within continuing operations were 2.6 million compared to the depreciation and amortization expense of 2.5 million.

There were no significant asset sales in the quarter.

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

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

A growth range of 10 to 15 percent increase in Intermec Products and Service revenues over the prior year's first quarter would imply a range of 190 to 199 million.

Given the expected revenue range, segment operating profits in the fourth quarter are forecasted to be in a range of 14 to 18 million.

Corporate and other expense -- other expenses should be in the range of 6 to 7 million as we complete our fiscal 2004 audit activities.

Our outlook for our effective tax rate is still 38 to 40 percent, once again absent any opportunistic benefits we can achieve.

Thank you very much, Mike.

Operator, at this time I would like to open up the call for our question-and-answer period.

(OPERATOR INSTRUCTIONS).

Walt Liptak.

KeyBanc Capital Markets.

Congratulations on an nice quarter guys.

I guess my first question is on the corporate expenses at 7.7 million, and the number that I guess you're projecting for the first quarter.

How much did you spend during the quarter on those outside resources and/or audit fees related to Sarbanes-Oxley?

Most of the delta that you see compared to the prior year are related to those types of expenses.

And then in your commentary you mentioned that because you're still supporting 2 businesses, corporate expense would continue at a similarly high level, is that correct?

That's correct.

Let me give you a little more detail on that.

The majority of our corporate and other unallocated expenses are the type of outside expenses you expense for a public corporation to support the size that we have.

Accordingly, some of those declined naturally for a smaller revenue base company.

So there will be some attrition as we move forward.

But until such time we complete the sale activities, we are supporting 2 businesses at the same time.

And the financial statements being 00 having been restated -- will we get quarterly restatements, or have those been published someplace for the -- for 2004?

They have not been published.

But when the 10-K released, you'll have that type of granularity.

Okay.

Of course on a going forward basis, we will be comparing against the quarters as reclassified.

And then your leverage in the quarter before corporate expenses look like it was in the low 30s, 32 percent or so in the Intermec division, obviously.

What kind of incremental R&D spending did you have in the quarter?

And does that decline in the first quarter and in 2005?

A couple of comments.

One is we have been, as you know, discouraging the concept of incremental above break even, because we have reached a point, as we said we would 2 years ago where we're driving our expenses so that they didn't increase with increasing sales.

At some point that is just neither clever nor possible.

And that is why we have shifted our vocabulary to be one of operating margins and improving operating margins, which is a continued draw, but we expect to get continued leverage.

But what we can't do is put all the gross margin on the bottom line, or we will starve the business for growth, so your mechanical observation is appropriate.

It is better than 30 percent, but it is not our intention to be delivering that kind of 30 to 40 percent range of incremental profits in the future as we continue to grow sales, because we will be inadequately investing in the business.

As it relates to R&D we had a lesser percentage of R&D approaching our normal in the fourth quarter because we had such a high sales level.

And as we told you before, it was our intention to move back to our traditional 7 percent of sales.

I think it will be slightly higher than that in the upcoming year.

And we had taken a slightly higher level into consideration when we give you our forecast of profits for the full year.

But it is a reduction in percent of sales invested.

Reik Read.

Can you guys talk a little bit more about where you guys are from a revenue standpoint in that you're talking about 10 to 15 percent revenue growth, although you did well above that this past quarter?

Is that a situation where you're coming up against tougher comps?

Or can you talk a little bit about what you're seeing in various markets?

And maybe break them down even further in terms of the traditional markets, i.e., industrial and some of the newer segments, retail, field service, and what you might be seeing there?

Yes, I will give you just a quick umbrella statement, and then Tom will expand on greater granularity.

But as we have said, we believe that we will grow faster than the market, and we are calibrating that next year as a 10 to 15 percent growth profile.

We think that is kind of our norm, maybe toward the higher end of that range, but our norm nonetheless.

The fourth quarter was a very unusual event in our mind.

I don't think we can grow at 27 percent in our total business, and 30 plus percent in Systems and Solutions on a continuing basis.

The reason that occurred is, if you go back to the beginning of last year, we said we were going to invest in R&D in order to get that superior to market growth for 2005.

As it turns out, it really hit materially in the fourth quarter.

And so we got a real boost in the fourth quarter relative to the prior year, over and above what we were expecting and delivered some large enterprise orders, as well as Mike indicated, even a small amount of the AIT3 contract coming in.

As far as granularity is concerned, I will let tom make comments on that.

Our business has grown in all areas.

We're getting good growth throughout all the regions.

We're very pleased to see the growth that is occurring in North America, which the last few years we struggled with the turnaround and we are on a good growth rate there.

In terms of Latin America, the business has been strong.

It has been in 2 areas.

It has been in DSD and retail.

In Europe we have had very strong growth there.

That is in transportation, logistics and retail also.

And then in Asia-Pacific over the course of year it grew 20 percent.

Going forward in 2005, we expect to see similar type growth.

Our DSD business we expect growth.

We have a roll out that will be occurring this year with Frito Lay.

Our retail business will continue to grow.

And we have a new product line that we launched at NRF called the CN30, which is a modular retail product line, so we will see growth there.

We will see business in the second half of the year associated with RFID Gen 2 with customers such as METRO AG.

So we're pretty confident.

It is broad based industry growth in the industrial sector.

We have new products there, the CK31, a new keypad terminal we're introducing, as well as some new intrinsically safe product.

So we expect the business to build as we move through the year similar to what happened last year.

Tom, just a follow-up on that.

With your traditional Industrial segment, that is something that appears to have lagged versus some of the other segments, and maybe in the last 2 quarters has started to move forward a little bit more.

Is that a fair statement?

And is that segment still in the process of maybe coming back up to speed and isn't quite there yet?

You're absolutely accurate.

It did lag the other sectors.

And it is coming up to speed.

The automotive sector we see coming around nicely, plus some new lines of products that we have for it.

So we anticipate that sector, which is very dependent on the economy, we expect that sector to become more robust as we move through the year.

And can you give us a sense of what your expectation is in 2005 for RFID related revenue?

And I'm not so much talking about licensing, although if you want to talk about that, that's great.

But I guess I'm looking more from a product standpoint.

From a product standpoint, we are in a state of transition.

We have -- in second quarter we are offering multiprotocol readers for those customers that want to move from Gen 1 to Generation 2.

The second half of the year we will have a complete set of Generation 2 products.

And that does conclude printers, fixed readers, portable readers, ethernet and serial, plus a forklift mount reader.

It is a relatively small portion of the overall revenue.

This past year 2004 business grew roughly 50 percent.

This year it will double.

But you'll see it build again as it moves into the second half of the year, and as Gen 2 moves beyond pilot into roll outs towards the end of year.

And one last question for you.

I understand what you said about the corporate and other expenses before that you're supporting 2 entities with those right now.

But just can you talk a little bit about how they should progress during year?

And presumably with Sarbanes-Oxley and other types of things becoming less of a drag, should we see those go down throughout the year?

I think that it is obvious that the run rate you have seen over the last 3 quarters are heavily driven by incremental Sarbanes-Oxley spending.

And I think you'll see that start to decline as we move forward.

I can't give you a specific number at this point in time, because some of that will also be related -- could be offset by some increased activities with the sale process.

Although many of those activities would be probably allocated towards the discontinued operations line.

I think naturally if you see part of the divestitures occur, there may be lag effect on some of the expenses.

But you'll see them naturally start to scale down.

You know of course, there's some certain expenses where whether you're a 1 or $2 billion revenue company they are virtually the same.

So you have to take that into consideration as well.

Chris Quilty.

Raymond James.

Good evening gentlemen.

Just a follow-up on the IAS question from earlier.

The balance sheet reflects about 232 million of assets.

And just to make sure, on go forward basis here I don't know whether there is other items in the balance sheet I am not seeing.

If you record a sales price above or below that, you're going to record a onetime gain or loss on the sale of those operations, is that correct?

There is -- you have to take the liabilities into consideration as well.

I think you were only -- I assume you were talking net assets, although you didn't say that.

Correct.

The net assets -- there is 4 line items, I believe, on the balance sheet, and if you combine them that is basically the net book assets of the operations that are being held for sale.

And that is reflective of the net realizable value of each of the major components of that portfolio.

What I said in my commentary is that as a result of that exercise, we wrote down the asset values -- the net realizable value for Cincinnati Lamb operations.

And Landis not did not require any such impairment charge.

And if I'm correct on the accounting rules, if you listed this as discontinued ops, it means you expect to sell them within 12 months time?

That's correct.

Okay.

And I know you don't look at the business this way, but if I just plug in to my model the EBIT that you reported for both segments, it looks like it would have been 12 cents, if you hadn't done the discontinued -- or sorry, 16 cents in the quarter, if you hadn't done the discontinued ops?

I think there is a --.

I don't know if we have done the calculation.

As you know, (multiple speakers) this has been a real race to not only get to the finish line with Sarbanes-Oxley in place, but with this recent calibration of discontinued ops.

We can get that number to you.

But you know the material pieces, which are the $900,000 loss at IAS segment -- operating loss versus the 2 to 3 million that we had previously forecasted, and the Intermec profits of 29 million versus the sort of 21-ish million that we had forecasted earlier.

I understand.

I was just trying to throw together an apples-to-apples comparison to what the consensus was, because some of the headlines that hit the tape are reading, UNOVA Q4 loss widens to sell the IAS unit, which don't reflect the strength of the quarter that you reported here.

Right.

And we will just have to do that calculation.

I will just verify what Larry said.

If you want to look at it relative to how we reported it in the past you would be looking at a segment ops -- for the quarter a segment operating loss for the IAS group of 900,000.

Okay.

And the continuing operations line reflects -- of course we have operating profits from continuing operations for the quarter at 21.1 million.

And then you have your interest that you would add back.

Okay.

I'm using 16 cents.

Okay.

Also, on a go forward basis, can you give us an idea of what you're going to do on segment reporting either by product segment, which you historically just given percentages without giving actual numbers by product, or by geography or end market sales?

We continue to report to you what we do versus geography, right?

We continue to report to you how we do versus the 3 segments of our business, Systems and Solutions, Printer Media, and Service.

We will break out on a going forward for SEC purposes, we will have an Automated Data Systems product sales, as well as service sales because service represents more than 10 percent of the business, so we break it out separately.

We will also break out intellectual property settlements, which is a first for us, and we can finally clarify this question of how much of the business is coming from product and service sales.

Okay, so you are basically going to condense what are the 3 product segments you have been reporting into 2, a product and service?

And if we have any further intellectual property settlements, we would record that separately, assuming that it achieves a 10 percent of the revenue disclosure item.

In essence though we're going to get less granularity on a go forward basis, because you used to break out Systems and Solutions versus Printer and Media.

And now that is all going to get bundled up into a single --?

We've never done that on our segment reporting.

But each time we have a conference call, we tell you about our progress in each in each of those areas.

We will continue that trend.

Good.

And a final question here.

Could you characterize for us the degree of the upside here in the fourth quarter, if you're saying you're expecting ongoing revenue growth of 10 to 15 percent, and obviously you were well above that?

You mentioned that the AIT contract was a contributor.

Can you give us an idea of did it account for 50 or 80 percent of the upside?

No, it was a tiny number.

The big upside was enterprise accounts.

Enterprise accounts.

Were there any --?

There was a couple of very large orders that we were processing in the fourth quarter that resulted in that significant increase.

Mark Roberts.

Wachovia Securities.

If it's okay, Michael and Larry, I would like to revisit the question that Chris was just talking about.

If I look at the balance sheet, it looks to me like, if I did the math right, the net asset value of the discontinued operations is around 41 million.

Is that a right number?

Hold on one second.

The reason I asked that, I'm wondering if there are any of the deferred tax liability or assets that I need to add to that number?

No, anything -- everything related to those operations are encompassed on those 4 line items.

If there are deferred tax assets within our accounts those are basically related to the ongoing operations, or utilized by the ongoing operations of UNOVA.

And, Michael, I gathered from your comments earlier that when you all were determining the amount of write-down for the discontinued operations, you did that conservatively.

So you would anticipate that the proceeds that you get in one form or another from the disposition of these businesses would be above the calculated net asset value?

I think we had indicated that we felt that we could achieve at least the net tangible asset value of the business.

Or we're trying to achieve that in a number of ways, both in terms of extracting networking assets from the business, which we have done.

The second half of the year we had positive cash flow in terms of mining networking assets from the business.

And also indicated that we would be generating positive cash flow as we take a category listed in our balance sheet called, assets held for sale, monetizing those assets as we move forward.

And then of course in terms of divestment of the businesses themselves.

Let me just restate what Mike said a different way.

We did not write it down to what we saw as a conservative value.

What we did was, we believed that the value of Cincinnati Lamb required a write-down.

And we anticipate that the value of Landis will be realized as higher than book value.

And Mike's comment was in aggregate we see those 2 as relatively the same.

But from an accounting standpoint we chose to -- we didn't choose to, we are required to write-down the net realizable value of Cincinnati Lamb.

And we're not allowed to write-up the value at Landis.

Right.

Okay.

But from a standpoint of kind of speculating on what cash flow from the sale of these businesses might be, would it be fair to say that the calculated call it 41 million net asset value would be more of a floor than a middle point or a ceiling?

That's correct.

Thank you.

Next question.

I would also like to revisit the general corporate expenses.

Can you give us an idea, even if it is in round millions, of when the discontinued operations are sold, how much corporate overhead do you think you might be able to take out of the business?

Is it 1 million, is it 4 million?

Let me answer that with the comment that we made in the past.

We have not labored long and hard on how to do this, because the environment itself is changing dramatically.

What Mike has said in the past is $4.5 million, which is what we had the fourth quarter of last year, is kind of a baseline.

We have had SOX spending that is greater.

There is some -- firstly in the first quarter you'll just get some spillover of the 2004 activities that didn't get billed to 2005.

And secondly there will be ongoing SOX activity in the operation.

However, we also believe that we can -- that a number of our costs in the corporate category are variable expenses and will decline.

The perfect example would be auditing fees.

An example of fixed costs, our Board of Directors fees, where we don't anticipate that we will have a smaller Board as a result of the activity.

What we hope said in the past is we think that we can get those expenses under $15 million over time.

That is kind of our initial ambition as we get it sorted out.

But right now are energies are not around getting that expense down, they are around spending the monies necessary to achieve the disposition, and then we will undertake that activity.

So would it be fair for us -- as we're trying to sort of calculate what our '05 estimates and models should look like -- it sounds like that that something in the neighborhood of flat to slightly down from what we saw in '04 would be more appropriate?

Yes, I think down, whether it is slightly down or a little more than slightly down.

But I think probably somewhere between that base line and this year spending is not a bad number.

Or another way to look at it is take 2003 and 2004, and somewhere in the mid range between those 2 years.

That's helpful.

Thank you.

Ajit Pai.

This Iny Arr (ph) for Ajit Pai from Thomas Weisel Partners.

Congratulations on a very strong quarter.

A couple of questions.

One is regarding the market in Europe.

It seems to be very strong this quarter.

It seems to be in contrast with the general weakness in Europe -- European market.

So can you give us a little bit more color in terms of why Europe is so strong for you this quarter?

Also, expand a little bit on Asian market, since it was pretty weak this quarter.

This is Tom.

We began our -- we began to change or business model in Europe 3 years ago.

And we shifted the business model to one of sales segmentation.

And we focused on enterprise accounts and project accounts.

And quite frankly, we're just doing a much, much better job with our organization.

Plus we were able to take dollars that had been in the back office and get them out onto the front office.

And so our growth has come in -- the average size of the transaction has increased considerably.

The win ratio has gone up considerably.

And we're doing a better job, and particularly in retail as well as transportation and logistics.

The other area that we are seeing growth is in Eastern Europe, as well as the Mid East.

We have seen a pretty significant increase in our business in the Mid East, as we have expanded our distribution.

In Asia, we are still carving out and developing our business model.

We have made investments last year in a service center in Shanghai.

We added offices in Beijing, Guanjo (ph) and Shanghai.

We're putting in place enterprise level type resources.

And we building out a product line that would be suitable for Asia.

So because of that you see a little bit of an uneasiness -- unevenness from quarter to quarter.

But by and large what you're going to see is continued growth in Asia.

We believe it is an important growth vehicle for the Company going forward.

And we will continue to expand in that area.

That's great.

One question regarding RFID.

We recently seen a press release from you regarding the struggle for the royalty -- the (indiscernible).

Can you give a little bit more color on that particular announcement?

Sure.

We talk about -- well, first of all, we're very supportive of the EPC process.

We participated in it.

We were involved in the first demonstration of Gen 2 product in terms of an artifact in December.

And we believe the industry is needed -- the ratification of the Gen 2 standard.

And attention was able to move now from all this focus on the standard to commercial viability.

We also applaud the steps that EPC has taken with ISO with the reconciliation of the 2 standards.

EPC, as you know, broadcasted a royalty free standard, and we don't quibble with that.

In fact, depending on a certain type of implementation, a company could implement potentially a royalty free standard and without Intermec ramp.

That is a possibility.

You do have to look and say, then well what do you have in the way of the performance of a system?

And the performance of the system will not be that competitive.

It will be lacking certain key features that Intermec IP has, features like dense reader mode, and extended temperature range, and write protection.

These are all very important for the supply chain.

And so companies will need to deal with the intellectual property situation with Intermec.

But because EPC stated that our ran program was not necessary to implement all areas of the standard, it was no longer relevant, and so we withdrew the ran.

Now that does not mean we're withdrawing from licensing.

In fact, we believe that that the market requires multiple suppliers.

Customers want multiple suppliers.

And so we will -- we are embarking on a licensing program that makes sense.

The thing about RAN, it is one size fits all, doesn't fit all.

The licensing program we are embarking on will match up other companies business needs, what they have which is of value, and what they have which is of intellectual value.

And we will do cross licensing.

And it will make sense.

And they will license what they need.

So we're not holding back from our licensing.

We believe it makes more sense than ever.

And that is the context of which this situation has occurred.

Richard Davis.

(technical difficulty) and Company.

Richard Davis and Company.

The question I have is about RFID licensing.

How does is that going?

And do you think the Gen 2 standard will implement more licenses for you?

Yes, this is Tom.

Since the Gen 2 standard has been ratified, the interest has picked up considerably.

Companies are inquiring -- are in discussions with us, and we do believe the licensing -- the licensing discussions have definitely picked up since the Gen 2 standard was ratified.

(OPERATOR INSTRUCTIONS).

Philip Holling (ph).

Philip Holling of Bear Stearns.

Just wanted to drill down a little bit more on the growth projections that you have out there, the 10 to 15 percent figure.

Can you give us a sense -- and you have made some comments on the call with respect to the RFID growth opportunity.

Could you maybe share with us what your visibility is there?

And on a going forward basis are you going to be breaking out those numbers, and what could you share there?

This is me.

Just a general comment.

We're not going to be breaking out RFID.

We're not going to be breaking out that kind of visibility.

As Tom said, while we talk about RFID in terms of significant growth, it continues to be, and will for next year, be a small portion of our revenues.

When we talk about growth rates, we're really talking about driving the new initiatives that we described earlier for our R&D spending as compared to RFID.

The problem with RFID is that there's no track record there unless we go back 30 years to see how bar-codes developed for understanding what is going to happen.

And so we tend to be very conservative in building it into our forecast, because we don't have any kinds of projections that we can do, as it relates to how fast this pilot activity will translate into full-blown roll outs, will translate into significant Gen 2 insulations.

Our response to that is to to spend money and be conservative in our forecast.

I think our forecast as it relates to the conventional AIDC markets are the stuff of which the growth numbers that you see are being recorded.

As we look into the visibility of 2005 with respect to RFID, for example, we now in excess of 125 authorized RFID partners.

And so as they build out their solutions, not just for compliance, but also closed loop systems, we anticipate good growth there.

We have updated the 700 this year into a -- with a new wireless platform.

And it makes it easier to implement wireless.

It deploys the new wireless technologies.

So that provides a kicker to that product platform.

As part of the AIT contract we developed a new rugged wireless PDA.

The commercial version of that takes place in mid year.

And that gets involved into mobile applications and retail.

We have a new DSD product line that comes out here second, third quarter.

That is associated initially with the Frito Lay nationwide roll out.

So we have a new business line with that.

And we have a new product line associated with our industrial line.

With our channel, we have implemented in new honors program.

Last year our top 20 honors partners business grew 50 percent.

There's a lot of momentum associated with the honors program.

And as we build out our platform, they are able to extend their solutions.

So we believe this year would be a good year.

Momentum will build as we move through the year.

So I just one to clarify, the 10 to 15 percent growth figure that you're talking about you're really not baking in any material impacts to that from incremental sales of our RFID related solutions?

No major increases, right.

That's helpful.

On the -- certainly in the past -- with respect to segment operating profit margins you have typically talked about those exclusive of the corporate expenses.

Given the announcements this evening with respect to discontinued operations on IAS going forward, does it make sense really to just start looking at the operating margins for the business there, inclusive of those corporate expenses?

And perhaps you could speak to that?

Well, we did when we said that we think that the corporate expenses are not simply to Service Automated Data Systems.

But if you choose to do that of course the information is there for you to do it with.

We just believe that if you were really looking at the pure play EPS, you would allocate a portion of the corporate expenses to the IAS business.

We're not going to do that.

And so what we will do is just give you the transparency to do that calculation as you choose to do it.

Should we be really be baking in any sort of incremental expense with respect to the planted divestiture, and is there anything that you can -- where are the expectations really as far as any sort of additions to corporate expense, given work to facilitate the sale of these businesses?

Yes, there are some potential banking fees associated, but they're not going to be very material to the transaction you're talking about.

We will probably get caught up in the gains -- what we believe to be the remaining gains.

Mike is going to comment in more detail.

Any such expenses that you would see in that regard would be in the discontinued operations line, which is going to get a little fuzzy because there's a number of things.

The operations will continue to operate as you would expect, combined with the fact that we will have some increased expenses.

Some of those expenses will be directly related to the transactions, and as a result would be recorded as part of the gain on sales or loss as the case might be.

As I indicated in my commentary, we expect -- we would expect to see a gain on the sale of our Landis assets.

Our last question comes from Neil Miller.

Fidelity Investments.

I'm kind of wondering what window you have for the enforcement of your intellectual property?

In other words, at what point do people want to go into a production mode and incorporate the features you talked about?

Is that kind of like a September this year event?

I'm not sure specifically.

We will all give that a go in terms of responding.

But I think what Tom said is the Gen 2 equipment is going to be available in the second half.

We think we will be on the leading edge of that as it relates to product availability.

We believe that is when you'll see that the -- that a functioning and viable Gen 2 system can't be created without our intellectual property, even though a standard might be.

And that is when we believe you are at a point where there is a significant allocation of our property to other people's needs.

And ideally we will have negotiated significant agreements in advance of that, or alternatively, we will have to deal with other means.

But that is kind of a time frame, if that is addressing your question.

It sure it is.

I'm just kind of wondering what background discussions you are having with some of the players that want this to occur, the Department of Defense and Wal-Mart, METRO, those kind of people?

Our backdrop is more with the supplier base than with the customer base.

As we have said, we think we understand what the customer base wants, which is multiple suppliers given our intellectual property position.

Therefore we choose to make that available to pretty much anybody that is willing to have a meaningful and useful discussion with us.

And so to some extent our policy hasn't changed in that regard.

And we believe that in doing that, we will honor the requirements or the needs of the customer base.

I guess what I'm kind of wondering about is, in this world of hardball, you are used to enforcing intellectual property.

But I'm just kind of wondering whether somebody end run it in the sense they can play hardball and say, we won't take any of your equipment unless you open it up or something.

In other words, if Wal-Mart or Department of Defense gang up against you, I just don't know whether that is a scenario that could take place.

I think what you're talking about is not our customer base but our customer's customer base.

And what you talked about is always feasible, but that is not the primary source of the revenue stream for us.

So it is unlikely to be a rational response.

I think, you know, at the end of the day the systems have to perform well amid user requirements.

The one advantage Intermec has is that we can implement the full strength of the Gen 2 specification with all the required and desired feature sets.

Companies can license our IP base on what they need.

Some companies don't have a lot of IP in that area.

They may need to license more of our IP than others.

Some companies will buy modules, because we are in the OEM business, and we will OEM our RFID modules.

And other companies may design around it, but then the question will be well they meet user requirements?

And so we will have to see how this plays out in the industry and see how it goes.

But we like where we are positioned.

We'll use our position responsibly, and we'll use it to grow the market.

But it sounds like what you're saying kind of is this shouldn't be -- royalty shouldn't be the major factor here.

That it is a business backdrop and a business opportunity and people can pick and choose.

I think of course we're saying that.

This industry has operated for 30 years with lots of royalty agreements moving back and forth between the players.

We don't see any reason why yet another addition to the technology portfolio of AIDC is cause for treating this radically separate or independent.

It is the same risk reward structure you have for investing in the development of a technology, being right about that investment, and then having everybody play on a level playing field.

Thanks so much

We don't choose to create a level playing field after the initial investments and successful investments have been made.

Thank you, operator.

We would like to now thank you all again for joining us this afternoon.

And we look forward to speaking with you all again in the near future.

Thank you.

Goodbye.

Thank you very much.

That concludes today's conference.

You may disconnect at this time.