漢威聯合 (HON) 2005 Q1 法說會逐字稿

Please stand by.

The meeting’s about to begin.

Good afternoon, and thank you for holding.

Welcome to the 1st Quarter 2005 Earnings Conference Call for UNOVA, Inc.

All parties will be in a listen-only mode until the q-and-a portion of this conference.

If you would like to ask a question, please press *1 at that time.

This conference is being recorded, so if you have any objections, you may disconnect at this time.

I would now like to turn the call over to Mr. Kevin McCarty, Director of IR and Analysis at UNOVA, Inc.

Mr. McCarty, you may begin.

Thank you very much.

Good afternoon, everyone.

Welcome to UNOVA’s 1st Quarter Fiscal Year 2005 Earnings Release Conference Call.

Joining me on the call this afternoon is Larry Brady, UNOVA’s Chairman and CEO.

Michael Keane, UNOVA’s CFO, Tom Miller, President of Intermec Technologies -- and Robert Smith, President of our Industrial Automations Systems.

Once we conclude our remarks this morning, we will open up the call for a q-and-a 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.

These forward-looking statements are contained within the meaning of the Securities Litigation Reform Act of 1995.

It’s 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 SEC -- including but not limited to the Company’s annual report on Form 10K for the Year Ending December 31st 2004, and other reports filed from time-to-time with the SEC.

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

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

Larry?

Thanks, Kevin.

Good afternoon, everybody.

For nearly 3 years now, we’ve achieved or exceeded the operating forecast that we’ve provided you with at the beginning of each quarter.

This quarter was no exception.

Intermec operations achieved the forecasted range for both revenue and segment-operating profit.

Versus our forecasted sales range of $191-199 million, we posted product and service revenues of $197 million -- a 13 percent increase over the prior-year period.

Versus a segment-operating profit forecasted range of $14-18 million, we achieved $16 million in product and service operating profit.

A 31 percent increase over the 2004 1st quarter.

Product and service profit margins improved from 7.1 percent in the 1st quarter of 2004, to 8.2 percent in this year’s 1st quarter.

These results were particularly notable following the record level of shipments in the 4th quarter of last year.

As encouraged as we are by this continuing strength and growth of our business, we’re even more encouraged by our strategic progress.

At the end of the 1st quarter, we completed the sale of our Cincinnati Lamb business -- which represents about 70 percent of the revenues of our discontinued industrial automation segment.

It is also the business which has reported significant losses for the past 3 years.

In sheer contrast the remaining IS business -- Landis Grinding -- is a consistently profitable operation, with attractive profit margins and returns.

Landis Grinding also has solid upward progress.

In the 1st quarter, Landis improved its operating profit over the prior-year quarter by about 75 percent, improved bookings by about 90 percent, and improved backlog by an out 60 percent.

The sale of the Cincinnati Lamb business and the attractive performance of the Landis Grinding business serve to further our confidence in the complete disposition of industrial automation operations during the fiscal year.

Potential buyer interest in the remaining business only serves to improve our confidence.

The 1st quarter of 2005 was also strategically significant for Intermec Technologies.

During the period, we introduced LeapFrog Technology and Laser Scanning, with our new EXCELerate series of scan engines.

This asserted our insistence on recognized technology leadership in RFID, demonstrated the first UHF Gen-2 RFID system at Metro AG, and achieved our long-term ambition to divorce ourselves from the necessity for any cooperating relationship with Symbol Technology.

In the 1st quarter, Symbol breached the long-standing supply agreement for laser scanners with Intermec.

That they would fail to supply was not a surprise to us.

They had canceled a contract before, and we were well-prepared for such an action.

We’d been preparing a product response for the last 6 years, and then announced that response to manage based laser scan engine series late last year.

Since the last contract negotiations in the spring of 2003, Intermec has been building a multiyear supply of laser scan engines.

That supply will allow an orderly phase-in of our EXCELerate product, and a lifetime supply of spares for the current install base.

It should also allow us to reduce our scanner inventory levels and generate more cash.

As we’ve remarked before, our industry is undergoing a change in technology leadership.

It should be anticipated the change will be challenged.

But it is our belief that leadership in the automated data-capture industry can only be established through leadership in the 3 core data-capture technologies.

Those being RFID, imaging and laser scanning.

It is our objective to clearly establish our leadership in each of these technologies, and to defend that leadership.

To that end, we are today announcing a new licensing program for RFID, which will serve to accelerate customers’ adoption of the technology.

Following the announcement of the UHF Gen2 standard in December of last year, there was a notable surge in interest in our licensing program for RFID intellectual property.

The custom approach we took at the time with each potential licensee was time-consuming and inconsistent with our customers’ need for greater certainty.

We believe that there is a need to resolve the identification of licensees, prior to the commencement of broad-based implementations of Gen2 later this year.

Our Rapid-Start program is designed to eliminate the uncertainty for customers concerning exactly who is and who isn’t licensed by Intermec, to use our considerable technology.

The program works like this.

We’ll open a 90-day window for licensing Intermec’s RFID technology.

We’ll provide attractive terms for a limited number of rapid-start suppliers.

At the end of 90 days, we will close the program.

Following that time period, it is our intention to offer only the identified RAM patents for license, and we will do so at the currently-offered higher rates.

The different in access, of course, is the difference between access to a handful of RAM patents versus access to as many as 145 or more in the Rapid Start program.

We believe that there will be substantive adoption during the period, and that customer choice of multiple suppliers will be established.

Certainty will also be provided as we intend to publish the list of licensees at the end of the 90-day period.

As to our outlook for the 2nd quarter and for the year, it has not changed since the beginning of this year.

We still expect a 10-15 percent increase in product and service sales for the year, and performance in that same range for the 2nd quarter versus prior-year.

Our legal costs will be higher, as we sort out current legal disputes, and enforce the RFID licensing program in the aftermath of the 90-day sign-up period.

I’d now like to turn the discussion over to Mike Keane for a detailed review of our operating and financial performance, and the specifics on our expectations.

Mike?

Thank you, Larry.

UNOVA achieved operating profits and continuing operations of $0.1 million in the 1st quarter of 2005, compared to $24.9 million in the same period last year.

The prior-year operating profits from continuing operations included $15.8 million related to an intellectual property settlement.

Intermec segment-operating profits from product and service revenue was $16 million in the 1st quarter of 2005, compared to $12.3 million in the prior-year period.

This 31 percent growth rate reflects Intermec’s ability to leverage its product and service sales growth at a greater-than-2-times rate.

This leverage was also evident in the bottom line, as the Company achieved EPS of $0.09 from continuing operations in the 1st quarter -- directly inline with expectations.

Intermec product and service sales of $197 million in the 1st quarter increased over 13 percent compared to the prior-year quarter product and service sales of $173 million, including 11 percent growth from systems and solutions, 16 percent from printer and media, and 12 percent from services.

It is particularly important to note that growth from printer sales exceeded 20 percent.

The overall growth for this past quarter was very broad-based.

There was no significant single enterprise account rollout program driving the favorable comparison.

However, there was particularly strong activity experienced through our distribution partners, as that channel achieved 37 percent growth over the prior-year quarter.

Growth rates continue to be led by solutions, integrating the well-established Series 700 mobile computers.

As well as the CK30 handheld and CV60 vehicle-mount terminals.

In addition, we had a particularly strong contribution from growth in mobile printer sales, within field service and direct store-delivery applications.

Total product sales contributed to gross margins of approximately 43 percent -- consistent with the prior-year period.

And services achieved gross margins of approximately 40 percent -- down almost 2 points from the prior-year quarter.

Service margins declined due to an isolated charge in the quarter for certain service parts.

Product and service operating profits of $16 million in the quarter were a 31 percent increase compared to the prior-year quarter.

The operating profit margin was 8.2 percent versus 7.1 percent in the prior year -- a 15.5 percent improvement.

Geographically, North America grew approximately 11 percent compared to the prior year.

There were strong contributions by both our direct and indirect channels into retail, industrial, field service, transportation logistics and direct store delivery applications.

Our EMEA revenues also grew 11 percent compared to he prior-year quarter, including a broad participation in most of our primary vertical markets and a strong contribution from printer sales through our indirect channels.

Latin America was up 34 percent, once again led by continued strong presence with consumer products customers, primarily for direct store delivery application.

Asia-Pacific achieved a 30 percent growth rate, with strong activity in the industrial markets, and also a significant contribution from our distribution channels.

Our “corporate and other” unallocated expenses were $5.9 million for the 1st quarter compared to $3.1 million in the previous year.

The prior-year quarter included a reversal of a $2 million legal accrual due to a favorable ruling in an intellectual property dispute.

The current quarter included approximately $1.3 million incremental spending on independent auditor and consultant fees relative to SOX404 compliance activates, and the completion of the 2004 year-end audit.

We expect this spending to decline in 2005.

Our net interest costs of $2.1 million were lower on a quarter-to-quarter comparison, due to lower average set balances during the quarter, as $100 million of bonds were retired during March.

This net expense should also continue to decline in 2005, as we generate positive cash flow both from operations and the divestiture of our IAS operations.

The Company also achieved an effective tax rate of 32 percent in the quarter for continuing operations -- somewhat better than expected due to favorable foreign exchange rate movement.

As you’re aware, during the quarter we completed the sale of our Cincinnati Lamb operation.

This was a significant first step toward our stated strategic goal of completing the divestiture of the IAS businesses within 2005.

The sale of Cincinnati Lamb also will significantly decrease the volatility of working capital necessary to fund UNOVA’s ongoing operations.

The remainder of our IAS operations is comprised of Landis Grinding Systems, which in the 1st quarter achieved operating profit exceeding 9 percent, on sales of $28 million.

Landis bookings for the quarter of $54 million were up almost 90 percent over the prior-year quarter -- and as mentioned previously, backlog improved almost 60 percent.

Both of these trends should contribute to increased Landis sales and profit momentum throughout 2005.

Continued improving performance strengthens our belief that the sale of Landis will be completed in 2005, and should result in a sale value representing a significant premium to its current book value.

We are further encouraged by the significant number of enquiries we have received from interested buyers.

After considering the impact of our discontinued operations and the completion of the Cincinnati Lamb sale, the loss from discontinued operations net of taxes was $1.9 million, compared to a loss of $5.2 million in the 1st quarter of 2004.

UNOVA fully-diluted EPS after the impact of discontinued operations was $0.06 a share for the 1st quarter, compared to $0.17 in the same period in 2004 -- which, once again included a $15.8 million pre-tax impact on an IP settlement.

Now let’s review our balance sheet and cash flow.

We ended the quarter with $155 million of cash and marketable securities.

The decline in cash balances versus the 4th quarter was primarily related to the retirement of $100 million of bonds in March, mentioned previously.

The retirement of the bonds released the restriction on $50 million of cash previously required by the Company’s credit agreement.

Total average networking assets within our Intermec operation relative to sales continued to show improvement in the 1st quarter over 2004 levels -- turning at an annualized rate of just over 5 times.

An increase in inventories since year-end 2004 is primarily attributable to the ramp-up of several product introductions in the 1st quarter.

These products include the next-generation of several product categories, including our new 700-series handheld, the CK31 industrial terminal, the CK60 direct store delivery system, and the SF51 Bluetooth wireless scanner.

Capital expenditures for the quarter, within continuing operations, were $2.6 million -- compared to depreciation and amortization expense of $2.3 million.

Asset sales of several idle facilities contributed an additional $6 million in cash flow.

At this time, let me conclude with some further details on our outlook for the next quarter.

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

The forecasted growth range of 10-15 percent increase in Intermec products and service revenues over the prior-year’s 2nd quarter would imply a range of $205-250 million in revenue.

Given the expected revenue range, segment-operating profits in the 2nd quarter are forecasted to be in the range of $17-20 million.

Corporate and other expenses should be in the range of $5-5.5 million.

Our ongoing effective tax rate for the next quarter and the year is now expected to be in the range of 36-38 percent -- absent any opportunistic benefits we can achieve.

Our cash assets paid should approximate about ¼ of the Company’s provision rate, or 8-10 percent of earnings, as we’re utilizing certain tax credits and net operating loss carry-forward.

At this time, I’d like to have Kevin open up the call for any questions.

Great.

Thank you, Mike.

Operator, at this time, we’d like to open up the call for q-and-a period, please.

Thank you.

We’ll now begin the q-and-a session.

If you would like to ask a question, please press *1 on your telephone keypad.

To withdraw your request, press *2.

If you’re using speakerphone equipment, you may need to lift your telephone receiver before making your selection.

One moment please for the first question to queue up.

Neal Miller, Fidelity.

I was pleased with your announcement to incentivize adaptation of your intellectual property -- particularly incentivized with the completion date.

I’m just kind of wondering how you price that product.

I kind of missed the details on that.

Then I have another question.

Neal, this is Tom Miller.

We just put out an announcement in the last half hour regarding our Rapid Start licensing program.

There are some details associated with that.

Essentially, what we have done -- we have taken our comprehensive portfolio and we’ve grouped it into 4 categories.

Those being chips, those being label tags, those being reader infrastructure, and the last category would be forklift readers, mobile readers.

Then we have priced the portfolios accordingly.

The rates range from 2.5 percent to 7.5 percent.

With 2.5 percent being on the area associated with chips, and the 7.5 percent being more associated with forklift readers.

That program will begin June 1st.

We are notifying companies of the program here, over the course of the next week.

And it will go into further details with the program.

There are significant benefits available to companies to sign up.

They have a lower sign-up fee.

They get access to the patents for the life of the patents.

They get continuations.

They’ve got a situation where they’re free from any patent infringement.

In essence, they get amnesty.

And the real purpose of this program is to encourage adoption of Gen2, going forward.

As you know, there will be Gen2 products later on in the year -- the 2nd half of the year.

It’s important that the focus be on developing those Gen2 products and bringing them to market.

This will bring clarity and assurance to the marketplace, as to who is licensed and who is not.

Boy, what a fabulous backdrop, here.

I hope success prevails.

Another question is on the MEMS device.

I’m wondering if this enables you to get into the POS retail checkout position, whereas before it was harder to get a berth, there.

Well, we already are into the kiosk and POS business with our existing engine.

Our existing linear engines are actually being sold on an OEM basis to some major POS suppliers.

So we already are there.

MEMS is a great technology.

I mean this most-recent consumer electronics show just 2 weeks ago, MEMS was everywhere.

There were over 70 models of BLP TVs with MEMS.

There were pocket phones.

There were portable weather stations.

MEMS really is the technology of the future.

You are going to see it throughout consumer electronics.

Intermec has taken the innovation position, starting 6 years ago, to bring it to the market.

And we’re working according to our schedule, and the products will come on-schedule to the marketplace 2nd half of the year.

Appreciate it.

I’ve got one more question.

There was a reference in your comments to success in printer sales.

Is there anything to comment further, there?

Well, we work real hard on improving our printer position.

I don’t think you can draw a lot of conclusions based on one quarter results.

But I will say this.

We had very good growth in our mobile printer and our portable printer line.

That particular printer line grew north of 30 percent.

We also had growth in printers in every single region, led by Europe.

We also have seen those printer sales increase for tabletops as well as portable printers.

So yes, I don’t think we can draw a lot of conclusions, but I do think it’s evident that we have a strong printer business.

And those printers were sold largely through distribution.

Which also ties in with our strong distribution performance.

Chris Quilty, Raymond & Associates.

Congratulations.

Thank you, Chris.

Just a follow-up on that IP licensing.

I’m assuming you were probably in some stage of discussions with a number of different potential licensees.

Does that mean that all those negotiations get reset?

And was that made evident to whomever you might’ve been negotiating?

The second part of the question is, if you have to go into cross-licensing discussions, I assume that that could potentially extend discussions beyond 90 days.

Or is there again a call to just wrap it up in 90 days and settle out?

Yes.

Chris, we’re a little bit reticent to discuss the program, because we haven’t had a chance to discuss it with the potential licensees.

So forgive the absence of detailed response to your question.

We will resent.

It’s a pretty standard approach.

It’s a pretty standard approach to cross-licensing that doesn’t require valuation.

But the details of the program will be forthcoming over the next probably 30 days or so.

We just want the opportunity to get to the people concerned before we start airing details of the program in public.

And I would say this -- we were in discussions with a number of companies.

And most discussions were moving along well with some of those companies.

But I think the issue was that everything was a custom-complicated discussion.

So I have been in touch with those companies that we were along the lines with in discussions.

I would say the program reflects their input.

The program properly reflects what we think are the right price points that are associated with the license -- and the right terms.

One element of the program I think that is very important is the upfront fees are not excessive.

It encourages people to get into the program, and as the market develops, the program is paid for through the development of the RFID sales.

Just a follow-up question on the overall growth picture for the Company.

You said there were no major single deals that boosted the numbers.

But if I remember from the last call, you were starting to see some activity on the Department of Defense, AIT3 contract.

Did you see any incremental benefit from that?

And/or Frito-Lay or FedEx?

Some other ones that you’ve been sort of stepping up on?

We don’t have any direct customer that represents over 3 percent of our revenue.

That’s what Mike referred to when he said it was broad-based.

In terms specifically of the Department of Defense, we will see activity from the contract later in the year.

The contracting vehicle has been working to get put in place.

The rules and regulations associated with that are being put in place.

The products that we were developing for the contract were completed in the 1st quarter, and we will see impact from that business the rest of the year.

We did not see impact the 1st quarter, but we will see it the rest of the year.

In terms of some of the other contracts, it is true.

I mean, we do have a contract with Frito-Lay.

There were some shipments to Frito-Lay.

We are on-target with them for shipments, this year.

We also are continuing rollouts with customers such as Home Depot.

We also have business with customers such as FedEx and FedEx International.

And other large customers. [Feril Gas] is another example.

GeoPost in Europe.

What I would say is that these represent broad-based accounts -- virtually in every industry.

In every industry, we have seen solid performance.

We have not seen any significant weakness.

To the contrary, we’ve seen solid performance out of all the industries.

But Chris, what Tom was saying is, those are just incidental shipments to those customers.

Correct.

They’re filling out an order.

Not representing -- as we saw in the 4th quarter -- a huge rollout.

Another question, just on the guidance -- to make sure I got it right.

Was the $17-20 million referring to the operating profits with the operating expenses -- the corporate overhead -- included in that number?

Or to get to your targeted operating profit, we should take out $5-5.5 million?

Chris, this is Mike.

The $17-20 million is at the Intermec segment level.

Then you would subtract “corporate and other” from that.

Because as I look at the analyst consensus out there, which I think for the 2nd quarter reflects $0.15, I think that would probably put most of us at an operating profit of around $17 million or so.

So it looks like your guidance, if you take out $5-5.5 million -- is more like $11.5 to $15.

Albeit you’re heading in the right direction, but to get to 10 percent for the full year, are you ramping up quickly enough through the 2nd quarter to get there for your full-year targets?

Yes.

We think so.

As you know, with the volume, it helps out a bunch.

You’re correct in all of your assessments.

The wildcard in the numbers for us is legal expense.

We’re hopefully being conservative in that.

That’s never a very useful expenditure of funds -- but nonetheless, necessary.

And we still feel very comfortable with our full-year guidance of 10-15 percent sales growth, and 20-30 percent profit growth, and 10-plus percent profit margin.

So it just looks perhaps a little bit more back-ended than the analyst community had been modeling.

That’s what would be our assumption.

That’s correct.

Ajit Pai, Thomas Weisel Partners.

Congratulations on a solid quarter.

Thank you.

A couple of quick questions.

The first would be your interest expense, so far has been -- I think the net interest expense has been a negative $2.1 million this quarter.

After you’ve actually gotten the cash for the transaction that just occurred in terms of the asset sale, you’ve paid down $100 million in debt already, and you’re building up cash balances right now.

What would the interest expense below the operating line be for the 2nd quarter?

For the 2nd quarter, Ajit?

Yes.

I think it’ll trend down just below $2 million.

On a net-net expense basis.

Shouldn’t it be more substantial than that?

Down to about $1.5 or so?

Well, it could be.

I think it’s going to depend on cooperation from market interest rates on the cash.

Then when you’re looking at the tax expense that you have… Not the cash expense, which is substantially lower.

But the pro forma rates -- you had a 32 percent pro forma rate of close to that, this quarter.

And you’re guiding to 35 percent?

Did I hear that right?

For the rest of the year?

Yes.

That’s correct.

So that’s below the [inaudible] assumption you had previously?

No.

Guiding 36 to 38 percent on the provision.

It is more favorable, as you’re saying.

Then on the operating income line, when you talked about $17-20 million -- could you give us some indication as to the legal expenses?

What percentage of that is at the Intermec level, and what percentage of that is at the corporate level?

That is inclusive at the Intermec level of all of the legal expenses, except a minor amount associated with discontinued operations on the tower suit that we discussed, before.

Then on the regular corporate overhead, there was a timeline for that to start winding down gradually, as some of it was allocated to [inaudible] as some jobs become redundant.

So where should we assume that that level would be, at the end of the year?

Since you’ve mentioned that both businesses would’ve been sold, including last year.

Yes.

You are perfectly correct.

That timeline is -- we think it would be foolish to try to take expenses out while we’re trying to do the critical operations of disposition.

So don’t look for it until we’ve concluded the disposition in terms of reduction.

We’re targeting a number in the range of $18 million for the end-of-the-year exit rate, Ajit.

And I think if there’s a wildcard in that, it’s the whole question of how SOX is going to shake out.

I think it’s the most unnerving process we’ve been through, to see what their requirements are going to be and how they’re going to be carried out.

But clearly, we’re going to be completely and fully compliant in that.

But that’s a wildcard, if there is one in those numbers.

Just going a little deeper into your SOX -- which is really -- how to look at what those expenses are.

How would you guide us in initial startup costs?

What is the ongoing component of that?

That’s the $64,000 question.

There was a time at which we thought it was all one-time costs.

Now we’ve got quarterly buy-ins and we’ve got all kinds of requirements that continue to require some continuing expenditures.

Last year, we spent in excess -- as we disclosed before -- we spent in excess of $7 million last year -- combination of both consultant fees and auditor fees.

A large part of that, of course, were ramp-up costs in terms of documentation and getting through the process for the first time.

Coverage of not only the operations we have today, but the decentralized operations we had at Cincinnati Lamb, as well.

So naturally, some of those costs will go away.

We don’t have to revisit the total documentation process.

We’re in a monetary and compliance mode.

The question, though, is where we’ll set out in terms of those maintenance costs.

We don’t have a great number, at this point in time, so we’d rather not try to put some brackets around that.

And as you know, it’s going to fall off, as well, Ajit, when we take some what is probably about 40 percent of our total business and don’t have those requirements any more.

So those are all the wildcards in the play.

It’s just that right now, the clarity of what the requirements are going to be and what it’s going to cost us is not as good as you’d like it to be.

There’s another sort of interesting thing that I saw in your balance sheet.

I just watched your net of tax assets.

The net net of tax assets go up from $135 million to $192 million, sequentially.

So I mean it’s nice that you have those assets -- those increased assets -- but could you give us some indication as to where those came from?

Since your losses are now -- whether you can still claim losses on discontinued ops, or whether there’s a charge over it that actually created something.

Or was it a different profitability in different jurisdictions?

And whether we expect to see the net of tax assets increase or gradually begin to decrease from this point onwards?

Let me take that in reverse.

I would expect to see them decrease, from this point on.

That’s one of the reasons that our cash taxes paid rate is going to be about ¼ of our provision rate.

It will be utilizing net operating loss carryforwards and tax credits, as well.

Those are reflected as net-deferred tax assets, today.

You were asking in terms of what caused that increase.

The way we were able to structure the sale of Cincinnati Lamb actually provided us tax value -- tax shield value -- in terms of generating both net operating loss and capital loss carryforwards.

So those are the main drivers of that increase.

We will be utilizing those as we go forward.

Both to shield a gain on what we expect to gain… A significant gain on the Landis sale… As well as ongoing operations of Intermec and UNOVA.

So that could be used against capital gains and selling Landis?

A portion of them.

Yes.

A portion of them.

Then the long-term assets of discontinued operations.

I take it that the $20.5 million is largely due to Landis.

Was there any progress made on the Cincinnati Lamb sale?

Was there any progress made on the Cincinnati Lamb sale?

Land.

The actual land that you have.

Oh.

The land.

I’m sorry.

I misunderstood you.

Mike just lost a bet.

Yes.

We’re always making progress -- but its intentions would not be.

So no, we have not completed anything on the Cincinnati Oakwood Campus sale.

Then lastly, just going through business conditions right now -- you’ve had 2 of your competitors report in the past 24 hours or 30 hours.

Business conditions for them seem like things were sort of broadly softening in certain markets.

Based on your press release and based on the tone of your discussion, it seems like you’re not seeing much softness.

Is it because manufacturing is not seeing softness?

Or are you actually experiencing a slowdown in any of your markets?

Ajit, this is Tom.

We’ve not seen a slowness.

I think if you look at it, we positioned our Company as an AIDD company.

We’re not positioned as an IT company or a networking company.

What we’ve seen is companies are continuing to move forward, making investments in our products and in our services.

And we’re seeing solid growth in transactions occurring within field service as they focus on improving return on servicing customers.

We’re seeing significant activity in the transportation and logistics.

Especially with applications such as proof of delivery.

We are seeing renewed interest, especially in direct store delivery.

And we have our next-generation DSD system that is coming to market.

That was a solution that Frito-Lay is purchasing, and other companies are.

The retail sector continues to be very active for us.

Especially in Europe.

Our Asia business has been strong.

I think that’s lead by a changing business model there, where we focused more on enterprise accounts, as well as upgrading and building out better distribution partners and resellers in Asia.

And the Latin America business, as Mike reported, has been also strong.

Those are major projects.

We have not seen or been impacted by what may be characterized as a weak economy.

Just have not seen it.

Then you talked about 37 percent growth in your

Then you talked about 37 percent growth in your indirect channels.

Could you give us some indication as to what percentage of your overall revenues the indirect channel is, and where you expect to take it over the next 2.5 to 3 years?

Well, our indirect channel is growing.

Today, it’s crossed over the 60 percent threshold.

And it continues to grow faster than our direct.

Let me make a couple of comments about distribution.

First of all, a lot of that distribution growth we had was through Scan Source.

In fact, we gave and we encouraged several resellers to select a distributor this past quarter, and they selected Scan Source.

That was upward around 40 resellers that made the transition to Scan Source.

Even with that transition, those resellers that buy direct from us -- that business went up over 20 percent.

We also are seeing in terms of our business model -- we put in place a global distribution program, where really there was a leverage of common policies and common programs on a global basis.

So from a distribution standpoint, we see that business growing.

We think there are good value-added services that are being applied to resellers.

We are encouraged.

We actually dropped 100 box-pushers to encourage resellers to create demand.

Finally, we added Tech Data as a new distributor and [Synus] as a new distributor, which takes us into new markets and new applications that previously we did not reach.

Phillip Alling, Bear Stearns.

Just one to get a sense whether you can give us any color, really, in terms of the progress you’ve made in product sales in the RFID area and what the plans are when it comes to providing visibility for investors, about going forward.

We’ve explained this before, but RFID is a minute portion of our business at this point in time.

It’s a positioning activity for us.

Just simply because we’re not going to get in the habit of every quarter giving you a number -- it’s influenced more by the progress of the industry than it is by all the possibilities in the industry.

We just don’t comment on RFID sales, except to say it’s not material.

What about some color on negotiations that you had with firms on the prior licensing schemes that you had introduced in RFID?

Well, we were in conversation with pretty much everybody in the industry.

It was going slow, and it was going slow because in each case, there was a desire that we considered this of theirs and this of ours.

And there was an awful lot of toing-and-froing, but it wasn’t getting to a point of completion at the level of acceptance that is necessary for our customers at the 3rd quarter of this year to be doing trials, knowing that they’re dealing in a certain environment.

So our conclusion was we needed a better approach.

We incentivized a pretty standard approach.

We plan to provide it to provide it suppliers on a standard basis, and we hope that we’ll have provided clarifications that customers need by the end of the 90-day period.

Any more details really as far as a go-to-market strategy for this Rapid Start licensing program?

Are you going to be making initial contacts with the major vendors in the states in the near-term?

Yes.

We’re sending out the letters, today.

With respect to… Just wanted a little more clarification on a comment that you made regarding the MEMS laser scanner.

Is that… Are you planning to introduce product based on that technology later this year in Europe and/or North America?

Just some more specifics there, if you could.

Yes, Phillip.

As we had communicated last quarter and when we announced MEMS, this is a product that we’ve had in field-test going back to last fall.

It continues to perform very well.

And it continues to meet the expectations.

And as we announced back then, we will bring it to market outside North America in the 3rd quarter, and then later in North America.

In preparation for that, we have built up -- as Larry mentioned -- multiple years of supply of scanners, to allow customers to make the easy transition for traditional laser scanning into MEMS.

I think the key thing about MEMS cannot be understated.

This is a very, very significant technology.

As I stated earlier, you are seeing this throughout the electronics industry.

Because it’s more cost, more reliable, it’s faster.

It allows the integration of mechanical into the silicon itself.

It creates a whole new level of performance.

And it opens up new applications associated with scanning, tying in with sensors and other activities that open up new applications.

So we consider this a major innovation for Intermec.

While it’s commonly been done throughout other industries, we will be the first company that really has brought this to market inside the AIDC industry, and it’s something that we’ve been working on for 5-6 years.

So the program is meeting expectations.

It’s underway.

It’s being launched just as we had talked about, and you will see it later this year.

Then just the final question on expectations of cash flow, going forward.

Could you give us any comments, there?

Any time you look at our cash flow, you can pretty much look at the earnings-before-taxes.

Our capex spending rates go into our depreciation.

The key issue then is working capital.

Our working capital is running, as indicated.

Our networking asset turns are going right around 5 times a year.

So you could look at saying growth and incremental sales takes a little less than $0.20 on the $1.00 of working assets.

Then the cash assets paid, as I said, are running at a fairly low rate.

Phillip, let me take the opportunity, too, to come back on a question that Chris Quilty asked.

I want to be sure there’s no confusion.

Chris had talked about operating profit margins and whether corporate was included, or not.

The comment -- each time we talk about operating profits and margin, we’re talking about Intermec operations, only.

So if we say this quarter went from 7.1 to 8.2, when we talk about that plus-percent operating margins of this year for the full year, we are talking about Intermec operations.

That’s likewise applicable to the 20-30 percent increase.

Chris Quilty, Raymond & Associates.

I guess now I can say, “Okay.” A question for you.

I know you said you were strong in retail.

Can you give us any kind of an idea on a percentage basis -- I don’t know whether you break it out -- whether that was up strongly, relative to other verticals?

Or just sort of in-line?

Well, we don’t break it out, Chris, in detail.

It was in line.

It was in line with growth.

Last year, our retail business doubled.

It’s going to continue to grow this year.

We do have some significant retailers that we are in rollout with, and we will begin rollouts both in Europe and in the US.

But we have not… We do not break out the exact percentages by each of our verticals.

On the MEMS technology, there was a long discussion, there.

I don’t know whether you commented specifically on whether the initial schedule you announced last year, of having products available in the international markets in the 1st half of the year and domestic market in the back half of the year.

Does that still hold?

Yes, it does.

And we do have product operating, as Tom pointed out, Chris, in international markets, right now.

One of your competitors recently commented that they were selling their RFID equipment at-cost.

Are you currently finding a competitive or challenging pricing environment?

Or can you earn a fair profit on your RFID hardware sales?

Or is it just a matter really of volumes needing to get up before they become profitable as the corporate average?

I think it’s a matter of philosophy about what you do with pilots.

I mean you can show pilots at zero revenue, at cost or at a profit.

It’s more philosophical.

I mean we’re really talking early days in this technology and what’s going on.

We’re not talking about operating setups and funding operating setups.

But I don’t think anybody is anticipating that this isn’t going to be fully as attractive a margin as the barcode business -- and in all likelihood, better.

First of all, we don't make a practice of selling products at-cost.

And actually, when it comes to pilots, we as a customer in practice don’t do free pilots.

Because it involves valuable company resources.

And our approach has been that customers should pay for the pilots that are shared in the cost.

But as Larry said, at this point, it’s in startup mode, with respect to RFID.

Let’s put it in perspective.

Gen2 products.

Intermec demonstrated the first Gen2 product with Metro.

This past week in Paris, at the ECR 2005, we had the first world’s demonstration of interoperability with Philips and [Inhinge] of RFID operating in a supply-chain mode.

That is a pallet moving through a portal.

So this is very early.

We will be there 2nd half of the year with our products.

We are in a lot of development work right now, with some very leading consumer disk companies, which will ship from Class 1 to Gen2 products, and they re in the development and testing mode with us, working together.

When that is done and that is ready, we will be selling our RFID products.

We will not be giving them away, free.

Shifting over to the other side of RFID, on the Department of Defense side -- can you discuss for us the progress that you see on the Department of Defense’s mandate, and whether in fact you’re going into an entire separate set of discussions with contractors -- with vendors -- in that environment than you are from the sort of packaged-goods companies -- more typical of the Wal-Mart vendor?

Well, the Department of Defense has had mixed results, as you know, with respect to the testing they’ve done with RFID.

They have had… There have been some reports written recently about the results they had.

The difficulties they had with RFID, associated with putting the tag on the case, in the proper position on the case.

And they’ve had to go through and select out those exact types of products and suppliers and how they’re going to adopt it.

The Department of Defense is moving ahead, though, with their approved suppliers’ list.

In fact, in the 1st quarter, we received an award to supply tags -- actually Class 1 tags -- to the Department of Defense.

There’ll be further awards in each of the 5 categories, such as readers and printers, that we expect to get the business for.

So like anything -- the technology is going through a shakeout period.

As it goes through the shakeout period, they’re discovering and learning.

The Department of Defense is committed to moving forward.

I can’t say they’re necessarily moving forward at the original pace that everybody thought they would, but it is going to move forward.

Final question, here.

Just general, in nature.

Do you feel that you’re losing market share in any areas of your business?

Or in general, are you gaining market share?

We haven’t… we don’t show evidence that we’re losing market share.

First of all, I think I said this earlier -- you can’t measure market share on a quarter-by-quarter basis.

Because most customers buy and rollout over more than a quarter.

But I think the evidence is, if you look at our growth this quarter, we had better growth than our competition.

If you look at our growth last quarter, we had better growth than our competition.

So I think if you look at it over a period of successive quarters, the conclusion would be that we’re keeping up or we’re gaining market share.

Reik Reed, Robert Baird.

I wanted to ask Larry, off of the Tech Data [Synax].

You had mentioned that you were trying to get into different areas with those guys.

Could you just give us a little more understanding of where those guys might help you out in terms of penetrating new areas?

Yes.

That was Tom’s comment.

Right?

So he’ll comment.

Sure.

That’s right.

I think in the area that they’ll help us out, it’s the small-mid-sized marketplace.

In particular, Tech Data will help us with joint go-to-market programs with Cisco and with Tech Data.

They also will help us with our data-capture products.

More of our lower-end value printers, as well as our scanners.

[Synax] -- we have a relationship with EMJ -- we’ve had it for 2 years up in Canada with their acquisition.

It allows us to extend that distribution reach in the US.

Because they have customers that cross over.

In order for them to compete, they need to have that in the US.

In every case that we add a distributor, though, we really look for value-added services.

We’re not interested in having distributors is if all their doing is taking business from one distributor to another distributor.

That doesn’t help us and it doesn’t help our existing distributor network.

The other thing that I would point out that we’re doing is we are very strongly encouraging our resellers to go with one distributors.

Not go with multiple distributors and shop, but go with one distributor.

Because those distributors can provide value-added services.

Financial services, management services, inventory services.

Things that we can’t provide.

We’re encouraging them to line up with a distributor and develop a relationship as a value-added model.

Then Tom, you had also been commenting in the last couple of quarters that the industrial segments that you guys participate in have continued to move forward.

Is that something where you’d expect that momentum to continue?

I guess I’m asking with the backdrop that not just in this industry, but I think as we’ve seen reports come in, technology in general.

That there’s caution of IT spending weakness.

I’m just wondering as you look at the industrial segment, in those comments that you’ve been making with the momentum, do you expect that that continues?

I think a big portion of our printer increase was associated with industrial.

A big portion of our Asia-Pacific increase was associated with industrial.

The other thing is that as we move throughout the year, we have some new products that are targeted specifically at the industrial market.

One of the products we have is the new intrinsically safe product that know about later in the year.

Mike also mentioned in his letter the CJ31.

That’s a next-generation data-collection terminal for the industrial market.

We expect -- because industrial, as you know, has been a strength of Intermec, over the years -- and we think that with some of the new products and the new focus as well as an international orientation, we’ll see that move forward.

Then just going back to the Rapid Start program that you guys had announced tonight.

Did you guys have an opportunity to discuss this with some of the major end-users?

The consumer product companies or the retailers?

And what would be their view of the program?

What end-users have communicated to us -- and most -- nearly all the end users -- they’re really not concerned about royalties.

Because they’re not paying the royalties.

The manufacturers are paying the royalties.

Their number-1 concern is getting product that is working, that gets high read rates, that works effectively.

They also are very concerned about the transition to Gen2.

Because they realize that most investment they put into Class [inaudible] and Class 1, they’re going to have to throw away.

So the issues on royalties are less-associated with the end-users than companies out there… Other technology companies who really don’t want to volunteer and pay the royalties.

We believe that this new program addresses their concerns, because it provides multiple suppliers.

We know through our discussions with several companies, the way we’ve categorized the program and what we’re offering -- if I’m another company out there and I look at this program from Intermec, I can move forward with my program.

I’m free from any concern over patent infringement.

I get an entire portfolio and the continuation of those patents for the life of the patent.

That is a big deal.

That will encourage investment in research and development, on top of what’s been done.

Let me try asking it a different way.

A lot of the major end-users out there -- specifically the companies that are putting forth mandates -- seem to have a concern that IP could derail the momentum that has been built up already.

I guess the question I would have is, “Is this a program that they view favorably, that allays some of those concerns?” In your view?

Because we just announced the program this evening, we have not sat down and talked about the specifics of the program.

I do know, for example, the Gartner Group -- Jeff Woods -- put out a quote that is very supportive of the program, as an example.

He believes that companies need to get beyond arguing over IP.

IP is common in the technology industry.

Manufacturers commonly license it.

We have a reasonable program.

They need to get on with it and put it behind.

A lot of this issue is stirred up by other companies -- not by the end-users.

Ajit Pai, Thomas Weisel.

I was interested in your gross margins.

Right now, sequentially, you’re watched on much lower revenues, and substantially better gross margins.

From 41.6 to 42.2.

Going forward, if you get back to similar levels of revenue as in the 4th quarter and also going forward, how should we think about the gross margin trending?

I think basically, you’re going to see gross margins really around this level, right now.

In the 4th quarter, volumes were higher and the gross margins were slightly less, because we had some large significant enterprise account rollouts, which at early stages tend to have a slightly smaller margin.

But when you have a normalized flow, I think you’re going to see margins more at this level.

And sometimes, even better.

So it depends on the mix.

As I also indicated previously, this quarter we had a slight degradation of service margins.

But it was really a timing issue, in terms of the next spends.

So going forward, I’d say that we’re still in line with what you’re seeing in the 1st quarter.

Then just moving on to the wireless portable printer.

You did mention you saw strong sales of that product.

When did that product… I know you announced it a while ago at some point last year, but when did that product really start ramping, in terms of sales?

I know they were in short supply about 3 or 4 months ago.

Actually, Ajit, in terms of our printer business, we’ve been playing catch up now, actually, for the last couple of quarters.

Meeting some of the demands in certain segments of the printer business.

But specifically, the mobile printer that you’re referring to is a new-receipt mobile printer targeted for route accounting and field service applications.

It just began shipping in 1st quarter.

The big advantage of this product is it uses the same power system.

The same batteries as a handheld, as well as the printer, itself.

Total cost of ownership is very important to customers.

We have one large customer that made the decision to buy the mobile printer and the handheld from Intermec versus buying somebody else’s mobile printer because they saved over $1 million on the total cost of ownership over 5 years in savings from batteries, alone.

So you will see in the future other types of products associated with that, that will leverage our total position of handhelds and printing in the industrial.

In the industries that you hold right now, just watching that number climb sequentially so much -- is that having to do with anticipated data sales, this quarter?

Or is it new products that you’re putting into the channel and it requires you to hold that?

What exactly draws most of that increase?

Most of that increase was really due to new ramp up of several product introductions, which I’d identified.

But just to repeat, those products we’re transitioning into -- a new 700-series handheld.

We have this CK31 industrial terminal that Tom referred to, also -- in terms of being introduced.

We’ve actually already started build and introduction.

And we have the CK50 direct store delivery system.

And then we also have this SF51 Bluetooth wireless scanner.

Those are really the main components of that increase in inventory.

Absent that, we also may have a favorable effect on our inventory levels, because we will no longer be stockpiling safety stock of laser scan engines.

Then the last question would be about wireless LAN.

Could you give us some indication of sort of infrastructure projects?

There was a strategic move from you maybe about a year and a half or two years ago that in the [inaudible] space, you’d actually start using [inaudible] equipment, and then in the tiled space or the factory space, your own.

Has there been a change in thinking, as far as that goes?

What are the trends over there?

Are you seeing more deployments in the industrial -- manufacturing -- area?

And are you getting involved with wireless LAN projects in retail, as well?

Yes, we are.

I think the key here is we made the decision two years ago that we would align ourselves with Cisco, because of their down-up presence in wireless networking.

There really isn’t anybody competitive to them beyond that.

So we made that move.

The other aspect I would point out is that we still have our own access points.

They still go in for some legacy applications and they still provide certain feature sets.

But the Cisco wireless network is a growing part of our business.

Two other comments, I’d like to make.

One is that we have done a lot of work on what we call smart, safe, secure systems.

This is the intelligent Intermec system.

We refer to it as EZADC, where you can put a system in a warehouse, it self-configures itself.

It brings itself online.

It has diagnostics built in.

It has device-management built in.

We’ve had good response to that, and that type of solution will be extended into other areas of our marketplace.

The second thing that we find is customers want open systems.

They do not want to be locked into a supplier who has a proprietary system.

We have teamed up with what we consider an A-plus player in [wavelength], who is able to offer interoperability, who’s able to tie together old legacy systems from multiple vendors with new systems in an open environment, in conjunction with Cisco, and in conjunction with Intermec.

So you will see that as we continue forward, this whole idea of opening up that network to retailers -- which is having a very receptive message -- as well as to other companies -- is a key strategy, for our company.

And the gross margin.

Could you give us some indication of the percentage of the revenues?

How large that business is?

The gross margins must be quite low, because you’re reselling someone else’s equipment.

Your operating margins must be decent.

Could you give us some idea what’s going on as far as that goes?

Ajit, you know we don’t break that out?

And it’s relatively small, Ajit.

It’s what goes along with it that’s the big issue.

Richard Davis, Richard W. Davis & Company.

I’m intrigued by the printer business, and want to ask of these portable mobile printers.

Do they benefit from your technology and battery life?

That’s one question.

Then the relative question is, “Do you see opportunities as well as portable printers -- truck-mounted printers and maybe even briefcase printers, somewhere down the road?”

If we look at the history of Intermec, if we turn back the clock, we actually got in the printer business -- the mobile printer business -- back in 1982 with the route accounting business.

Direct store delivery.

We developed a whole series of 80 column printers and 40 column printers.

That’s been extended to car-rental companies and so on.

Then a few years ago, we were largely equipped, designing those printers, ourselves.

We were buying them in on an OEM basis.

We now are taking more control of that back in-house.

We consider that a core competency.

Certainly the way that power management occurs -- you put a printer in a truck, for example.

You have a lot of concerns about static and emissions from the truck and ignition.

We actually developed an air-free protocol -- an AFNAC protocol -- that allows a printer to talk to the handheld, to make sure that the invoice tracks accurately.

So we have a lot of competency in that.

That’s an area that we’re reasserting ourselves back into the business.

And you’ll see that as an important part of our future, going forward.

I think the only static of that, Richard, is when you mentioned briefcases -- I just want to clarify.

We are a supply-chain management company.

Lots of times, our products can take us into arenas -- and RFID might be an example of that -- where we’re outside the supply-chain competence and not getting the leverage that we get from that focus.

That’s an improbable participation, for us.

We’re showing no further questions from the phone line.

We’ll turn it back over to you for further comments.

Well thanks, everybody, for joining us, again.

We look forward to speaking with you again in the not-so-distant future.

I just want everybody to know that you didn’t ask Bob Smith a question for the second successive conference call.

So he probably won’t be on the next call.

Thank you all very much.

This concludes today’s conference.

Thank you for participating.

You may disconnect at this time.