漢威聯合 (HON) 2005 Q2 法說會逐字稿

Hello and welcome to the UNOVA Second Quarter Earnings Conference Call.

At the Company's request, this conference is being recorded for instant replay purposes.

Please note that all lines will be in a listen-only mode until the question and answer portion of today's call. [OPERATOR INSTRUCTIONS].

I'd now like to turn the conference over to Mr. Kevin McCarty, Director of Investor Relations and Analysis for UNOVA.

Sir, you may begin.

Thank you very much and good afternoon everyone, and welcome to UNOVA's second quarter fiscal year 2005 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; and Tom Miller, President of Intermec Technologies.

Once we conclude our remarks 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.

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

It's also important to note that such Company -- excuse me 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, 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?

Thank you Kevin, and good afternoon everybody.

For four years now, we've met or exceeded the quarterly expectations, which we set at the beginning of each quarter when we talk to you.

This quarter was no exception to the established trend except perhaps to the degree that we exceeded those expectations.

As you have seen from our earlier press release, revenue of $217 million was up more than 16% over the prior-year quarter, and EPS from continuing operations of $0.19 was nearly four fold the $0.05 of the 2004 second quarter.

Before we go into a more detailed description of Intermec performance, let's first cover a brief summary of discontinued operations.

Our sole remaining discontinued operation is Landis Grinding.

This business is in the latter phase of disposition, as Mike Keane will describe in more detail later.

Performance by Landis in the second quarter provided further confidence that sale of the business will be completed by year-end and possibly in the third quarter of this year.

Now let's turn to Intermec.

As was described in our last conference call, Intermec commenced its Rapid Start RFID licensing program on June 1st, and is scheduled to terminate on August 31st.

To date, we have had about 70 increases.

Of those, we have formally accepted about 30 candidates as applicants for licensing including nearly everybody that we would want to consider as a candidate.

It is not our intention, however, to license all applicants.

To date, we have announced two of the earlier licensees, SAMSys and Zebra.

We did this solely to distance with the speculation by competitors and some analysts that the program would only attract smaller or insignificant players.

It continues to be our intention to announce all additional licensees following the program's termination day on August 31.

While we will not discuss further licensees beyond the initial two until the program concludes, it is appropriate to give you an indication of financial impact to date.

In the second quarter, Intermec collected approximately $8 million associated with fixed fees in the Rapid Start program.

These fees are recorded as deferred revenue and will be recognized over the next five years.

Accordingly, there is no favorable P&L impact in the second quarter, but the Company's performance will benefit from these transactions in future periods.

Also obviously, our cash flow shows a current benefit.

The other side of this favorable impact, which we've discussed previously is that we will have to sustain legal expenses in the last half of this year to defend our intellectual property.

We currently estimate those incremental expenses to be between 5 and $10 million.

While no legal expense can be described as good, we do intend to make a more than reasonable return on this investment.

With that description complete, we can now focus on the performance of our Intermec operations.

As we said earlier, second quarter sales of $217 million or more than a 16% improvement over the prior-year quarter.

Second quarter segment operating profit of $24 million was more than 50% higher than the second quarter of 2004.

There are several highlights that deserve special mention.

For the first time in a number of years, our US operations grew faster than international operations.

This growth was across the board in our direct and indirect business in all of our industry segments and in our government business.

We continue to see growth from our European business, particularly with large enterprise accounts in the retail and consumer products industries.

We are beginning to see results from recent new product introductions, as sales of the new CK31 industrial keypad terminal, the CK60 DSD terminal, CN2 ruggedized PDA computer, and the new wireless 700 system have begun volume shipments.

Our printer and media sales growth exceeded our systems and solutions growth, and both individually exceeded our total growth percentage.

Our Generation 2 RFID development work continues on track as evidenced by the world's first public demonstrations of interoperability of Intermec RFID products, reading multiple vendor tags at Metro AG.

The FAA has certified the use of passive UHF RFID for use in commercial aviation for parts marking, and we have been a long-term collaborator with Boeing in this effort.

We booked two domestic food retail grocery accounts in the second quarter, which is a major breakthrough for us in this large vertical market.

Intermec was selected by public supermarkets to provide handheld computers and related equipment to refresh existing technology used for inventory management and other in-store applications.

We closed another quarter with good cash flow and another record net cash position.

We posted this growing sales and profit growth performance in the phase of a strengthening dollar and therefore without the currency benefits that our industry has seen for the last several years.

Turning now to our outlook for the third quarter and the full year.

Our perspective has not changed.

We continue to project an increase in product and service sales at Intermec of 10 to 15% over prior year for both the third quarter and the full year.

We also continue to project Intermec profit for the full year at a 20 to 30% increase over 2004.

For the third quarter, product and service profit should be up by the same 20 to 30%, plus the increase in legal fees for the quarter.

Actually, when we say our outlook has not changed, that's only true financially.

Our outlook for full-year business performance is more favorable than it was at the beginning of the year as evidenced by our over-performance to date.

We are able to maintain our forecast of financial performance in the pace of a number of negative factors affecting the business, which include an approximate $5 million expense to engineer and manage harsh new product disposal regulations in Europe.

Secondly, the 5 to $10 million increase in legal expenses associated with intellectual property defense.

Thirdly, a strengthening dollar, which was down at the end of this quarter by 10% from the beginning of the year, and fourthly a declining market outlook from some of our major competitors.

Holding our financial outlook in that environment therefore requires a healthy perspective.

And now I would like to turn it over to Mike Keane for his review of operational and financial performance.

Thank you, Larry.

This past quarter, the Company continued its historical trend of delivering double-digit sales growth at a higher multiple of earnings growth.

UNOVA achieved operating profits from continuing operations of 18.4 million in the second quarter of 2005, compared to 9.9 million in the same period last year.

Intermec's segment operating profit was 23.8 million in the second quarter of 2005 compared to 15.6 million in the prior year period.

This 53% growth rate was a three times multiple of related sales growth and continues to confirm the profitable leverage in Intermec's business model.

This leverage is also evident in the bottom line as the Company achieved diluted earnings per share of $0.19 from continuing operations in the second quarter.

This performance represents a significant growth compared to diluted earnings per share of $0.05 from continuing operations in the prior year quarter.

Intermec revenues of 217 million in the first quarter increased 16.6% compared to the prior year quarter revenues of 187 million, including 17% growth from Systems and Solutions, 19% from Printer and Media and 9% from services.

In many ways, the momentum established in the first quarter of this year continued to build in the second quarter.

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

We continued to have a good line of enterprise account rollouts across our industry segments as well as significant growth from our indirect channels.

Our global distribution partners achieved in excess of 40% growth over the prior year quarter.

Growth rates were driven by solutions integrating new wireless versions of the Series 700 Mobile Computers and also reflected strong contributions from two newly introduced models, the CK31 and CK60 terminals, both of which began volume shipments in the second quarter.

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

Total product sales contributed gross margins of approximately 44%, an improvement of approximately 1.5 points compared to the prior year period, and services achieved gross margin of 42%, an improvement of 1 point in the prior year quarter and 2.6 points over the first quarter.

Margin improvements resulted from a favorable product and customer mix and related efficiencies achieved.

Product and service operating profit margin was 11%, versus 8.4% from the prior year, that's a 31% improvement.

Geographically, North America grew approximately 21% compared to the prior year.

We had strong contributions by both our direct and indirect channels associated with retail, industrial, field service, transportation, government and direct store delivery applications.

Our EMEA revenues also grew 10% compared to the prior year quarter, reflecting rollout from retail consumer products and transportation accounts.

Latin America was 30%, once again led by continued strong presence with consumer products customers, primarily for field automation projects.

Asia-Pacific was the only region showing a comparative decline of 11% for the quarter, but is still showing 5% growth on a year-to-date basis.

Project activity strength is still evident in Asia and it is expected to contribute to growth in the second half of the year.

Examining other general and administrative expenses, our corporate and other unallocated expenses were 5.4 million for the second quarter, compared to 5.7 million in the previous year, and in line with our expectations.

Our net interest cost of 1.1 million was lower on a quarter-to-quarter comparison due to lower average debt balances.

This net expense should also continued to decline in 2005 as we generate positive cash flow both from operations and the expected divestitures of our remaining IAS operations.

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

Our discontinued operations contributed an after-tax profit of 200,000.

Our Landis operation continues to exhibit strong performance and bookings, sales and operating profit in the second quarter.

This was offset by wind-down activities of other discontinued and sold operations putting an impairment charge of 2 million pretax relative to certain excess real estate held for sale.

UNOVA's fully diluted earnings per share after the impact of discontinued operations were $0.19 for the first quarter compared to $0.09 in the same period in 2004.

Now let's review our balance sheet and cash flows where we ended the quarter with 173 million of cash and marketable securities or an increase of 18 million over the first quarter, including an $8 million contribution in upfront fixed RFID license fees.

Total average networking assets relative to sales within our Intermec operations continue to turn at an annualized rate of just over five times.

The increase in inventories and receivables since year-end 2004 is consistent with the sales growth.

Capital expenditures for the quarter within continuing operations were 2.9 million compared to depreciation and amortization expense of 2.7 million.

There were no other significant asset sales in the quarter.

Cash flows are expected to remain positive over the remainder of the year and should be supplemented by the expected sale of our Landis division at a significant valuation premium to its book value.

There is insignificant progress in the sale process leading to a reasonable probability, this transaction may be concluded within the third quarter.

Many of them, it appears the sale will be concluded within the remainder of the fiscal year.

Let me conclude with some further details on 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.

Forecasted growth range of 10 to 15% increase in Intermec revenues over the prior year's second quarter would imply a revenue range of 214 to 224 million.

Given the expected revenue range, segment operating profits in the second quarter are forecasted to be in a range of 18 to 22 million.

Corporate and other expenses should be in the range of 5.5 to 6.5 million.

Our ongoing effective tax rate for the next quarter and the year is now expected to be approximately 35%.

Our cash taxes paid should continue to be approximately one-fourth of the Company's provision rate or 8 to 10% of earnings as we continue to utilize net operating loss carryforwards in the foreseeable future.

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

Great, thanks Mike.

Operator, at this time we'd like to open up the call for our question and answer period, please.

[OPERATOR INSTRUCTIONS].

Philip Alling, Bear Stearns.

Going forward basis, are you guys going to be breaking out the deferred revenue separately on the balance sheet from what you have done currently?

No, we don't anticipate that will happen, it's sitting both in current accruals and also long-term sections.

We have other types of deferred revenue such as service revenue.

We wouldn't call for it to be separately disclosed.

And when should we expect on -- the license fee that you collected in RFID this quarter?

Should -- are those going to begin flowing through the income statement next quarter?

Yes.

As we indicated they will be recognized in revenue over a five-year period.

Right, and so that's over five years and so, those will be -- those will show up as IP revenues?

Those will show up as product and service revenues.

In product and service revenues, okay.

Could you give us any more color with respect to the growth that you showed in Systems and Solutions and Printers and Media in the quarter, could you perhaps just provide us a little more color there?

Sure Philip.

This is Tom Miller.

As Mike mentioned in his note, the growth really has been across the board.

We are seeing at regionally, we continue to have good growth in Europe and that's coming predominantly from transportation as well as retail where we have some significant account wins and roll outs.

North America, we are seeing at in all our vertical sectors.

We are showing good growth in field service, transportation logistics.

We have several direct store delivery rollouts underway.

It's been reflected from some of the new products that we introduced last quarter, we are getting some traction out of those products.

Our government AIT business, we are seeing effects now from that beginning to kick in as the purchasing vehicle is in place and the Department of Defense is beginning to buy under that vehicle.

We are seeing in printers, we are seeing it both in desktop printers, where our growth is above 20% and our mobile printers where our growth is above 30%.

So, it really is in across-the-board growth and I think finally, final comment is we have a nice balance of business between our distribution business and our enterprise account business, and our distributor business is up over 40% compared to a year ago, and in particular, we are seeing very good growth out of two of the distributors of ScanSource and Avnet.

Okay.

That's helpful.

Thanks for that.

Just with respect to the slight -- you had a slight deceleration in the growth that you showed in your services business in the quarter compared to what you had in the first, could you comment on that at all?

Well, I think overall, if we look at it, our service business was up 9% compared to a year ago, and which has been pretty typical for that type of business, you know.

As you know, we have a big means of business of which, to get the type of growth in the service, you just don't get it as quickly.

It is true the quarter-on-quarter growth in service was up 5%.

So, it's still a positive trend, you just don't see the results in a shorter time frame versus comparison over a total year.

But we do have good growth in our services as well as our traditional repair.

We have some projects within the Department of Defense that is contributing some good services business.

Right.

Just a final question from me.

With respect, I mean, based on the comments that you have made with respect to the Rapid Start program, should we assume that it's just the two licensees that you currently have now?

You know, you did indicate you have sort of --?

No, you shouldn't assume that.

You should assume that we are going to tell you who the licensees are on shortly after August 31st.

Fair enough.

Thanks much.

Reik Read, Robert W. Baird & Co. Go ahead, sir.

Good afternoon.

It appears that on the $8 million that you guys have booked, it's coming from a single licensee.

Can you guys give us some insight in terms of what the structure is there?

They are paying what looks like a one-time upfront payment, is this something that has a limited usage over this five-year period, or there are limitations for that?

Can you just give us an idea of how that's structured?

No, we can't.

Okay.

Can you at least tell us when you book the revenue, you said product service revenue, will it be product or service?

It will be in the product category.

Okay.

With respect to the inventory, Mike you said it was up consistent with revenue, but I guess I would have expected it maybe to start to come down, given that you are depleting some of the scan engine inventories.

Can you just give us a sense for how much of that inventory has been depleted and what the offset is to keep it up along with sales?

In particular since you raised the question, we were continuing to procure scan engine inventory through the end of the first quarter in anticipation of potential cancellation.

And so, you were seeing a build at that point in time.

Simultaneous with that, we have just -- we have been indicating we have an introduction of new products during the second quarter, and as is traditional in our operations, we will build inventory anticipation of those shipments.

So, that's why you are seeing the increase, but if you look at the networking assets of the business, in other words, you are looking are the receivables, the inventories, and the accounts payable, you are showing that the accounts payable increases consistent with the inventory increase, so it's being properly managed.

And then with respect to the sequential jump in service margins you noted the 260 basis points there, with revenue fairly flat.

Can you just give us an idea of what contributed to that and what might be the forward expectation with services?

I think that really I commented on that -- you look at customer mix of contracts combined with certain efficiencies achieved, and I think you can look at the overall 6 to 12 months trend on services and we are pretty holding within this fairly consistent range.

And then last question on the RFID side, will you guys be submitting your or maybe the better question is what products will you be submitting to EPC Global for interoperability testing on August 16?

Well, I don't have the exact list of products but we are participating in the interoperability testing and we have a full suite of products, fixed readers as well as mobile readers that would be submitted.

Chris Quilty, Raymond James

Good evening gentlemen.

Congratulations.

You have mentioned new product intros inventory builds, can you give us update on your MEMS-based scanner?

Sure Chris.

In terms of MEMS, the program continues on schedule, we've had units out in (indiscernible) since October of last year.

What we have communicated in the past still holds true.

We are planning a launch and introduction here in the third quarter and with shipments this year.

And can you give us any indications of what you will do strategically in terms of pricing and positioning that product relative to your existing line of scanners?

There is really no need to -- you have a strategy, Chris, I mean I think in terms of the value MEMS scanning is on the front end of the technology curve and has much higher functionality in our opinion higher value than traditional forms of scanning and our consideration is to price it such that would property reflect the value of the product.

You mentioned a couple grocery store wins and only mentioned one public, could you give us the other one and is there something particular about the grocery store industry that you are seeing success as you got some business with Tesco back a while ago also or is that just a vertical that you are focusing on?

It's a good question.

We did have another grocery store win both of them are in North America, we don't have permission from the customer to release it yet at this time.

But for us, this is an important segment of the retail industry.

We have had wins in non-food retail as you know with customers such as Home Depot, but we have not had in North America success until we announced these wins.

And this reflects the investment we began a year ago in a new product line for retail, the products referred to is a CN30, which is a modular computer, modular system, we are finding very good acceptance of this.

So, for us retail represents an opportunity for our Company, for us it's more of an opportunity than a downside, and I think you are seeing that reflected.

And so, I don't think if I remember correctly, Tesco was not a CN30, that was 700 series.

That's correct Chris, that was an account that we won two years ago, two and a half years ago, and we continue to roll out.

We also filed up Tesco with a win with Sainsbury, which we have been rolling out also, and we had couple other retail wins in Europe, Swiss Coop as well as (indiscernible), so our retail business continues to grow.

Very good.

Back to the finance is a question on the royalties, have you settled on a method of how that's going to be booked once you start to generate royalty revenues, is this simply hitting the sale on the product side, without an offset in COGS?

So, Chris there is multi parts to that answer.

First of all, for any upfront fixed fees that are deferred will probably be recorded on a straight-line basis over the period of recognition, in this case being five years.

As far as the variable portion of royalties, they will be recorded at the time products are know to have been shipped and basically when -- slightly when royalty payments are received.

At that time if we have direct costs against those, they will be recognized at that point in time as cost of sales.

So, no offsetting cost of good sales.

Final question, given some struggles of competitors in the market, are you seeing any changes in the pricing environment?

The pricing environment really hasn't changed much, it's been pretty much what we have seen over the last several years.

When you get into a big large enterprise account, this is the competitive nature of competing for the business and we see price competition with no more than what we normally have.

Our margins have actually increased over the last quarter and so we have not seen any real change in the pricing environment, Chris.

Great.

And just a final request for Kevin, if he can find out the name of that sound track they were using on the music hold. (indiscernible) of music I have heard in years and I want to send it to you for Christmas.

I will get right on that Chris.

Appreciated.

Ajit Pai, Thomas Weisel.

Good evening gentlemen and congratulations on a solid quarter.

Couple of quick questions, the first one would be about legal expense.

You have given us some indication of what you expect in the second half as stepped up expenses.

Could you just quantify those again, sort of in a quarterly basis and then how long beyond that would you want us to expect those to continue?

5 to 10 million is our number Ajit and it probably will be just because of the escalation a bit more in the fourth versus the third and we would anticipate that level of spending would continue through mid next year when the majority of these things come to fruition.

All right.

The second is, a question that was asked before but I didn't quite catch the answer, which is what is the contribution margin that you expect for fees like the 8 million that you got, I know it's deferred revenue and you got to recognize it overtime.

Can we expect a contribution margin in the approximately sort of 80% range?

Actually we can't answer that question specifically, Ajit.

We do have some obligations ourself, we have got to base on our fees and it varies overtime and it varies with the item over an extended period of time your number is probably not far off, but it will run in buckets.

And then looking at Asia, you have had some volatile results in Asia recently.

I know you did mention that you are up 5% for the first half.

Could you give us some indication as to whether you are seeing competitive dynamics in Asia from some of the local competitors pressuring your margins there, taking away business, and what you expect to happen in that particular arena?

I think it's more a reflection of where we are with our Asia-Pacific business, Ajit.

We entered into Asia in the last few years.

We are working on drawing the business.

A few years ago virtually all our business was through small dealers and resellers.

We have been rebalancing the channel, put in place enterprise account program.

And I think, that's more a reflection why it has been lumpy.

I can tell you that our backlog and our projects are increasing, our activity is increasing, we have a new General Manager in China and so, we anticipate good growth in Asia, but I think, it's just a reflection more on maturity of our business and how, where we are with Asia than anything else.

Okay, and then looking at your sort of key partners -- when you are looking at, you know, partners like Cisco, Microsoft, and then IBM, some of them had some pretty active set of initiatives looking at RFID.

Could you give us some color as to -- and some of them actually are introducing their own products as well I think IBM introduced a printer that's branded IBM for RFID and encoder.

Could you give us some color as to how those relationships are progressing, and going forward, which one of those do you consider to be of primary strategic advantage?

Well, each of the relationships you mentioned are all strategic with us.

We've had strategic initiatives with IBM for RFID.

One particular area we've been focused on with IBM is automotive where we have put together go-to-market strategies and activities with them with RFID.

We also have initiatives with SAP and Oracle and those are not only channel initiatives but those also have been development initiatives.

Cisco and Intermec have been working together very closely in wireless and RFID of putting together more end-to-end type solutions.

And then we have other alliances that have been evolving also.

So, these are all key partners.

All the enterprise players have been working with us in this area and not just in RFID, but in the other aspects of the ADIC business also.

Okay and then last question would be to Mike.

First of all, Mike, congratulations on some excellent work here over the past few years.

I think you have done an incredible job taking the Company's balance sheet and income statement from where it was to where it is now.

But when you are looking at the cash flows of the companies right now, what do you -- what have you suggested as the primary uses for the cash that is now going to be increasing over time?

So, I think we had identified that.

Thank you first of all for those comments.

I appreciate it very much.

I think if you look forward, and the answer is similar to what we've said in prior quarters is that we are looking at opportunities to grow this business both through internal development and essentially through external additions through our capabilities.

So, the key is continuing to examine our portfolio of our capabilities, see if there is any gaps, if there is anything in the external market that could meet it, or whether there is a tangential opportunity that we might have from a technology standpoint.

And that is currently being examined daily and developed as we move forward.

So, Larry then, we can assume that the cash is not going to be paid out in a dividend or in a share buyback, and will primarily be used to grow the business?

I think for sure, you can assume that.

A dividend while we continue to examine such issues and their viability doesn't look like a very logical activity for somebody that has the growth prospects that this Company does.

Well, thank you so much and congratulations again on a very solid quarter.

Walter Liptak, Keybanc Capital.

Thank you and congratulations from me too as well as good luck to you Mike.

My questions are I guess, first in Europe.

Could you break out what European volume looked like, and it doesn't like you are seeing much of the slow down, I wonder what in particular you might be doing well in Europe, what products you are selling your go-to-market strategies to get good growth there?

Hi Walte, this is Tom.

Let me talk -- we don't -- we aren't going to break it out specifically, but I can tell you that our growth rate in Europe -- our growth has been good.

I mean a year ago, though we are getting 20%, we also had currency benefit and I think the fact that as Larry mentioned we don't have that tow-in anymore.

We are still posing very good growth.

It really relates to a changed business model that we implemented about three years ago.

Our model was to -- we had hundreds and literally hundreds of small dealers and resellers and we wanted to move them to more pan-European distributors.

We have been working hand-in-hand with distributors such as ScanSource and others over there to make that happen.

And so we worked on really shoring up our distribution channel, also shoring up our printer business.

Our printer business a few years ago, we drifted away from that.

And that was always a corner stone of our success in Europe and so really focusing on our distribution of printers.

The second area then was to build up our enterprise accounting, and we really are focusing on the verticals of retail, transportation logistics and manufacturing.

Those three verticals in Europe are referred to those as project accounts and we have significantly increased our win ratio over the last few years and our ability to penetrate those accounts.

And then lastly, we felt that in order to be successful in Europe, we needed to improve our performance in these big three countries Germany, France, and UK and that is something that we've been continue to improve and accomplishing over the last few years.

Thanks.

The growth that you were talking about, the 40% at ScanSource, is it primarily because of your efforts with them in Europe or is it across the board?

The 40% growth was really with our distributors and wasn't just with ScanSource, although ScanSource was a big part of that growth rate and it really is --- it is really largely Europe and North America.

And we're focusing in our attention on Latin America and Asia Pacific to strengthen our distribution there.

Okay.

Good, the next one.

And the legal expenses, is that an accrual or you setting up reserves for legal or is that actual cash out spending for lawyers.

No, we are taking on as we go.

Kevin Starke, Weeden & Company.

Could you tell us what you are spending on R&D as a percentage of sales?

It's still running in the same means as we talked about 7.5, 8%.

Some of your competitors provide a fairly usual number in their quarterly calls, they tell us what new products were as a percentage of sales however they define it.

Do you (indiscernible) have that kind of a data?

No.

Dick Davis, Richard W. Davis Co.

Congratulations on (indiscernible) and a fine second quarter.

Couple of questions, I understand that CFO is retiring and therefore needs to replaced.

He's not retiring, he is actually continuing -- its going to be continue to be gain for employees.

Okay, basically what sort of search are you doing to -- to do that?

What I would call standard -- a standard procedure, we're looking both externally and internally at the candidate pool and we would anticipate that we'll have Mike's replacement on Board, although I guess truly Mike can't be replaced, but we will have somebody who sits in his chair on Board probably we reckon in a 3 to 5-month period.

The other question on legal expenses, were there any final legal expenses of 5 to $10 million magnitude in this past quarter?

No.

As we've had an ongoing case that we've disclosed which is in our discontinued operation with Power Automotive (ph), that's been the primary activity prior to that we had some efforts associated with factory managements patterns which have largely all disappeared, and so what we were talking about in the third and fourth quarter and in fact the first and second quarter of '06 are incremental expenses associated with intellectual property both ongoing litigation with our largest competitor as well as other enforcement activities associated with RFID that we would anticipate.

And then just for a refreshment -- what's the functionality of the new CK-31 and the new CK-60?

Just to refresh my memory if you would.

Sure.

Those are Windows mobile based terminals; they have the latest processor technology from Intel, some of those models have some unique innovations associated with display technology in the form of plastic lens.

But they are implementing Windows mobile CE and later Windows CE 5.0 and Windows mobile 5.0, and they also have -- some of those products have some enhanced wireless capabilities.

And the other product build of that platform is something called a CN2, which is a rugged computerized notepad.

I see, and then final question is, to what extent are you considering renaming the Company to Intermec, because that's the main operation of the Company now?

Yes, we are -- that is an active consideration.

Clearly, we would wait till we've completed the disposition of our industrial automation business.

But at that time, it's a very appropriate consideration, and certainly we would like to eliminate some of the confusion that occurs when references to the division don't include references with the corporation.

So, there is a lot of logic to it.

Eli Lustgarten, Longbow Research.

Could I get a couple of clarifications?

One, you know, the reference on the 8 million licenses, it came from a single source as opposed to two sources?

No, that wasn't our reference.

We are not commenting on that.

How many -- did they come from two or they come from more than that?

We are not commenting on that.

Okay.

It's something -- the legal expenses that you say should be by the middle of next year, I mean it's hard for me to believe that this won't go on forever, you know, the kind of thing, there's always challenges to these kind of things and I am not sure --?

The biggest issue is that we are talking about in terms of legal expenses don't have to do with the defense of our IP.

We could see selective ongoing activities like that but certainly not of this magnititude.

This is largely the set of activities associated with Symbol Technologies.

Do you have a tax rate number for 2006, Mike?

Well, 35% is our best estimate at this point.

You stated 35%.

And then another question, you talked about growth of 10% to 15% almost despite what some of your competitors are doing, (indiscernible).

Can you give us an idea what the growth in the market place really look like as opposed to the growth that you are realizing?

Eli, this is Tom.

The growth has been estimated for the market around 9% to 12%.

And now its tough to say it on a quarter-by-quarter basis.

It's tough to look at our market and draw a conclusion based on a particular quarter and if we look at the past quarter some competitors were less than that, some are better than that, some posted results better than that.

And so it's been kind of a mixed model here over the previous quarter.

But I think that's still the outlook for the market at large for the IDC business.

Can you give us a sense of where that would head and what's in line or above and what's below, I mean by segment or market, I mean, what's industrial and retail and things like that?

Well, clearly I think retail overall has -- the growth rate in that has been a little less, but for us because I've made the comment, retail represents more of an opportunity because it's a -- it has traditionally been a very small part of our business.

The industrial market has somewhat been less than that type of growth rate.

On the other hand anything that is mobile right now, you know, a field service application, a transportation application, proof of delivery, customer service, very high growth rate with that.

And those are all being enabled wirelessly high growth associated the GPRS and CDMA wireless technologies.

And that's where we are seeing a great deal of growth, and that's one of the very traditional strongholds of Intermec.

One final question, if it's going to bounce back on Larry, I am not in for too long.

You just set a target of doing double digit operating margins at Intermec which are now floating with on a quarter-by-quarter basis.

Can you talk about what your target profitability levels look like now for these three operation with the pure play?

Well, there are -- I am not quite sure how to answer your question.

Let me try and then you tell me how close we came.

What we said was, when we made the investment commencing in early 2004, that we needed to accelerate sales growth in order to achieve the double-digit segment operating profit at Intermec.

That's Intermec operating margins, not inclusive of the corporate expense.

Obviously corporate expense is running a couple of points that reduced that further, and we talked about how that will change as we get out of the IAS business.

But, the math Eli, works out to be this belief that we can by accelerating our sales and Tom talked to you about what the market growth is, we think that a couple of things are happening in addition to market growth that helped us out.

One is there is consolidation in the business.

So, the big guys are getting bigger.

And secondarily, at least for the time being, we are taking shares, so I think that's how we get to the point that we get to.

If you look at our -- at the leverage that we have had for an extended period of time, while it slowed from the cents per sales dollar that we put on the bottom line, for every incremental dollar, there continues to be significant leverage and that was Mikes point when we talked about a 2X multiple on profit growth over sales growth.

If you just do the math on that, you see that if we are successful at what we seem to be doing quite well and that's a 10% to 11% kind of profit margin in our business that we will grow that every year because of the increase in sales growth.

If we have twice the profit growth than we have in sales growth you just run the math on how it works.

Yes, I think the question is, as we go from 10% to 11%, the next stop in the mid-teens on this operations, could you --?

I think our conclusion is that over the -- if you just run that math over the next five years you get this sort of steady straight line movement from something in the range of 10% to 11% to something in the range of 15%.

At that point I think you started to test the competitive dynamics and the limitation are sealing off what you are able to reach because of competitive pricing.

When do you say it's capacity constraints?

Capacity constraints or not an issue for us. 85% of our cost of good sold are variable costs through outsourced manufacturing.

So, we basically have got variable costs and variable capacity manufacturing.

Edward Williams(ph), ABM Securities

And just a couple of quick questions.

Is the SG&A guidance inclusive of land as being sold in the third quarter meaning corporate rationalization anything you are going to pull out as the unit gets old?

Yes, it is.

We won't see those.

We have said in the past, we are not going to look at corporate consolidation till such time as that is clearly behind us.

It's an important support activity and we would lose a great deal more by moving toward any acceleration than we would by nominal benefit that we'll achieve.

And we probably shouldn't oversell, what we are expecting either -- you know, our corporate expenses are running in the range of 21ish kind of million and we are talking about a reduction in that number of something in the range of $5 million over time.

The real issue is that, that number isn't going to grow.

As the sales of Intermec grow at this, whatever sales growth rate we have, we don't anticipate any need for increased corporate expenses.

Things like Board of Directors aren't going to get bigger because we have more sales.

Can you characterize a little bit how the BPAs are going to -- once that you have gotten so far.

How the BPAs are going to help you flow the government business into probably early next year and were do you guys see those BPAs leading to in terms of overall government business with the DoD and any other organizations?

And how would you characterize your chances for the remaining the two hand scanners and printers?

You have been unbelievable successful so far so I know you are not going to stick your neck out very far but may be give us some color on that?

Well, we look at our Department of Defense business and government business, we really have two dynamics going on here one is the IT3 contract and that was a sole source supplier under that agreement to the army and other services are buying under it.

And we have been preparing our products and getting the purchasing vehicle in place and we are starting as we have mentioned in the last quarter to see some effects of that.

The other are the announcements that are being made regarding RFID for the BPAs, which stand for Blanket Purchase Agreements.

We are well positioned; we won a large number of goals; we have feel we are well positioned for the rest.

And I think what it is, it allows us to go, hunt; it allows for us to compete for that business.

We think as they move and -- there has been some delays by the DoD associated with the implementation of RFID, but we believe that we are well positioned to capitalize on that as well positioned as anybody, and that you will see some results out of those BPAs here as we move into 2006.

And lastly let me give this one a shot.

Because of the way the industry has been going I guess in the last two quarters or so and the orientation of some of your competitors being oriented toward the retail vertical or associated verticals can you give us -- I guess without give us the percentages, since I know that you are not going to do that, just some more color in terms of how your revenue breaks down in terms of the verticals, where you are established and the order of magnitude in which you see some of those verticals increasing over the next 6 to 12 months?

I think the key there is that we have a balance model and that, and we started working on this model several years ago, traditionally Intermec strength has been in two of the primary markets which is consumer goods as well as industrial.

And those continue to be probably our largest sectors.

We wanted to get ourselves positioned very well for the high growth sectors, which would be field service and transportation.

As the cost of the wireless enablement has been driven down, we are seeing many customers now able to justify on ROI basis until the cost of ownership of implementing that, and so those are probably some of our highest growth sectors.

The other area was back in the late '90s, we did not get the IT2 contract.

We feel what was really critical for us because we have a long history in government was to win the AIT3 contract and we spent a great deal of effort, time, and resources to do that, and so we will see some good growth on that.

So, when you look at it's balance model.

For retailer it has traditionally been a small part of our business.

But it is a grueling part of our business; we have been a player in the distribution centers, we wanted to move in store, and that was a key factor.

And then finally, was getting the right mix of enterprise accounts where you use your own direct sales resources and make sure that you resources as a Company which are very valuable, I really dedicate it to servicing and building outstanding relationships with those big accounts, and then you leverage the channels in a more cost efficient manner through the use of taking resellers working with the distributors on the right types of merchandising programs and support programs, and that as been a area of a great deal focus by our sales organization, and I think we are seeing some very positive results out of that.

So, it is all about a balance model, which allows you -- because they are going to move at different rates in these markets and these segments will move at different times and by managing the whole portfolio, we can hopefully leverage that properly going forward as we've shown in the past.

Reik Read, Robert Baird.

Just a quick follow-up, Mike, on the guidance that you gave -- the segment guidance of 18 to 22 million.

Is that net of the legal expenses?

It's net of the legal expenses and it's before corporate expenses.

Rick Kleinenberg (ph).

Guys, again congratulations.

Mike, it's been great work, nice job.

There has been a lot of mashing of teeth at ScanSource with the potential of Ingram and Tech Data coming into the space.

By the same token, there is the idea that given the work they do with smaller wires etcetera that they can greatly expand the market.

I am wondering what your view is on that?

And how it's going with Tech Data, given that that is just in the early stages?

Well, we -- from InterMax perspective, we felt that we needed to broaden out our distribution model to reach into certain sectors that we were not at all recovering.

But, we didn't want everybody -- to bring everybody onboard to distribute our product.

We did add Tech Data a quarter ago.

Their results have been way ahead of expectations that both of our companies have had, but they have not been at the expense of ScanSource.

We look at ScanSource as a unique servicing model.

They understand the bar coding industry, they understand the industrial markets, they understand how to manage those partners.

When we added Tech Data and it was not a light decision, they took us into new markets, new applications, expanded our presence and point-of-sale that we previously didn't reach.

We also, with Tech Data -- they have some -- they have a product line that is not the full suite.

In other words, we are matching up our product lines with their capabilities, so that both companies can be properly leveraged.

So, we think there is literally thousands of potential resellers that are out there that are not been serviced today.

These resellers, in generally, focus on the small- and mid-size market and that is a market that all vendors, not only in our industry, but also information technology industry struggle to find a way how to reach.

And so, we think that adding somebody like Tech Data supplements two fine distributors we have today in ScanSource and Avnet and allows us to reach the small- and mid-size market more than what a single distributor could.

All right.

We are showing no further questions on the phone line.

Gentlemen, we will turn it back over to you for further comments.

Great and thank you very much operator.

I would like to take this time -- this opportunity to thank you all for joining us this afternoon, and we look forward to speaking with all in the near future.

Thank you.

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