漢威聯合 (HON) 0 Q0 法說會逐字稿

Good morning and welcome to the Intermec Technologies' fourth quarter and full year 2006 earnings release.

At this time, all participants are in a listen-only mode.

After the presentation, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS).

At the request of the Company, this conference is being recorded for playback purposes.

It is now my pleasure to turn the meeting over to your host, Mr. Kevin McCarty.

Sir, you may begin your conference.

Thank you very much and good morning, everyone.

We appreciate you joining us this morning as we discuss Intermec's fourth-quarter fiscal year 2006 earnings release.

Joining me on the call this morning is Larry Brady, Intermec's Chairman and Chief Executive Officer, Steve Winter, President and Chief operating Officer, and Lanny Michael, Senior Vice President and Chief Financial Officer.

Before we begin our prepared remarks, I wish to remind investors that statements made in today's release and related statements during the course of this conference call that express the Company's or management's intentions, hopes, beliefs, expectations or predictions for the future, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

They included statements about the Company's first-quarter, fiscal year 2007 revenue outlook, and other examples included in the forward-looking statement paragraph in today's earnings release.

Our business is subject to a number of risk factors that could negatively affect our results from business operations, or cause actual results to differ materially from those projected or indicated in any forward-looking statement.

These include but are not limited to the risks and uncertainties described more fully in the Company's filings with the Securities and Exchange Commission, including but not limited to its annual report on Form 10-K and quarterly reports on form 10-Q.

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

With that, I'd like to turn the call over to Larry Brady, Intermec's Chairman and CEO.

Larry?

Thank you, Kevin, and good morning, everyone.

This morning, we reported results for the fourth quarter and full year 2006.

Sales of $219 million, and earnings per share of $0.09 on continuing operations for the fourth quarter were within the range of our earlier guidance.

For the full year, revenues totaled approximately $873 million, and earnings per share from continuing operations were $0.55 per share.

All of these figures are Generally Accepted Accounting Principle based.

There were several notable items included in our fourth-quarter results that we would like to review in advance of our commentary on operations.

During the quarter, we repurchased $50 million of company stock and in doing so completed the $100 million stock buyback authorized by our Board of Directors in the first quarter.

This use of cash--that's the first quarter of 2006.

This use of cash drove a reduction in our net cash position of $72 million over the course of the past year.

Lanny will provide more details on the buyback in his report.

In November, we announced a significant cost and organizational restructuring.

We targeted a reduction in quarterly costs of 5 to $6 million for an annualized rate of 20 to $25 million from the average quarterly cost base during the first half of 2006.

Further, we targeted completion of substantially all of the savings by the end of the first quarter of 2007.

Through year-end 2006, we completed more than half of the planned reductions and now believe that we will exceed our earlier estimates over the course of 2007.

As anticipated, reductions in the U.S. are proceeding faster than those in Europe as a result of the more complex regulatory environment in Europe.

The income statement attached to our press release shows a $7.4 million or $0.07 per-share charge in the fourth quarter associated with our two restructuring events, the organizational restructuring announced in November, 2006 and the completion of the Swedish R&D restructuring announced in January of 2006.

These charges are consistent with the range we estimated in our earlier announcements.

There are remaining restructuring charges which will be taken in 2007 and are currently estimated at approximately $2 million.

Steve will provide more granularity on the restructuring during his review of operations.

Finally, our taxes for the quarter show a credit versus the normal rate of about 37% and our fourth-quarter 2005 rate of 25%.

As significantly, however, our cash tax rate, as a result of continuing use of tax loss carryforwards, remains well below the book rate of 25% that we reported for the full year of 2006.

Now, I'd like to turn it over to Steve Winter to review our operations.

Steve?

Thank you, Larry.

In our November 2006 earnings call, we commented that revenue results for the third quarter were negatively impacted by three items, new product introductions, the European reduction of hazardous substance, or RoHS regulations, and increased competitive pressure.

In discussing our expected recovery, we stated that the planned introduction of new products in the first half of 2007, primarily the CN3 Rugged Mobile computer and the Intellibeam EX25 autofocusing area imagery should put the impact on sales from new product introduction issues behind us by the second half of 2007.

We further stated that the impact on sales of the RoHS regulation would be behind us at the close of Q3, and the impact on sales of increased competitive pressure would subside with the anticipated introduction of our new products.

We indicated it was our belief that Europe was most heavily impacted by the RoHS regulations, while North America was most heavily impacted by new product introductions and competitive pressures.

Our fourth-quarter results are providing positive indications of the predicted causal factors.

Given the significant downturn that occurred in Q3, it is appropriate to measure fourth-quarter results on a sequential basis to determine the magnitude of rebound that occurred.

Thus, relative to the third quarter of 2006, revenue for the fourth quarter increased 12%.

While revenues increased across all sales regions, Europe led the way with a 31% increase on strong sales of printers and systems and solutions products, as RoHS-compliant versions became generally available and customers completed product recertification testing.

The European recovery occurred broadly across the industrial P&L, retail and consumer-goods vertical and included several sizable sales wins for our new model CN3 Rugged Mobile computer.

We are encouraged by the fact that early ramp rate of the CN3 is higher than any other pin-key product we've introduced, including our very successful model 700.

Our rest-of-world business increased 14% on strong consumer goods verticals sales in Latin America, and continued double-digit growth in China.

North America posted a modest increase of 2.5%.

On a product-line basis, systems and solutions revenue increased over 18%, Printer/Media revenues increased 3.3%, and service revenue increased 8%.

Moving to the more traditional comparison with the fourth quarter of 2005, fourth-quarter 2006 revenues were down 9.6%.

Looking on a regional basis, rest-of-world revenues increased 28% during the period, North America was down 21%, and Europe was flat, providing further indication that European sales recovered from the impact of RoHS in the fourth quarter.

On a product-line basis, systems and solutions revenue declined 13%, and Printer/Media revenues declined 6%.

The majority of the decreases in these product lines occurred in North America on lower enterprise sales where new product introductions have had the greatest impact.

Internationally, we saw significant growth in both systems and solutions and printer sales.

Service revenues were down 3% on the lower hardware volumes.

Looking forward, we expect sales to lag prior-year comparisons for the first half of 2007 as new product introductions are completed.

We expect growth above market rates versus prior year in the second half of 2007 led by a recovery in North America enterprise business as the new product introductions are converted into enterprise rollouts.

Turning now to margins, on a sequential basis, gross margins in the fourth quarter were 37% versus 38.8 in the third quarter of 2006.

In the second and third quarter of 2006, we converted 100% of our product line to RoHS-compliance.

While we believe this action will yield significant long-term benefits by maintaining a single, global product configuration, product margins in the fourth quarter were negatively impacted by one-time product introduction and inventory reduction costs related to completion of the RoHS transition.

The impact of these one-time transition costs was approximately $3.5 million.

This amount represents the difference between the third-quarter margins of 38.8% and the fourth-quarter margins of 37%.

Looking at price erosion, from the third to the fourth quarter, it was less than 0.5%, indicating competitive pressures are easing.

Relative to the prior year, gross margins were 37% in the fourth quarter of 2006 versus 40.2% in the fourth quarter of 2005.

The difference in margins from year-on-year can be attributed to the $3.5 million of one-time impacts associated with RoHS compliance discussed earlier and lower enterprise systems and solution sales in North America.

In the fourth quarter of 2005, we completed production and delivery of mobile computers and printers for the North American direct-store delivery rollout by PepsiCo's Frito Lay division.

This very large order with a single product configuration provided favorable purchase price variances and labor absorption and accounts for the remaining margin difference.

In the first half of 2007, we expect gross margins to be a slight improvement over the 38.8% achieved in Q3 of 2006 with completion of RoHS introductions and improving new product volumes.

We expect gross margins to improve in the second half of 2007 to the low 40% range by Q4.

Our restructuring and productivity initiatives are proceeding according to the guidance that we provided in November and are generating the predicted savings.

Q4 2006 SG&A expense is down 10% over Q4 of 2005.

Further reductions are anticipated by the end of Q1 2007, as we complete our European restructuring.

On a sequential basis, our total employment is down 157 or 6% from Q3 of 2006.

Employment in the cost of goods sold functions at service and operations is down 4%.

SG&A employment is down 7%.

This is our lowest employment level since 2003.

Revenue per employee has climbed each year since 2002.

These increases in productivity have been achieved as a result of our continued shifts towards an indirect selling model, the merging of our corporate and operating division G&A functions, our continued migration into an Asian sourcing model, and consolidation of customer service activities globally.

In Q4 we began manufacturing systems and solution products in Brazil to further enhance our ability to compete and win in this growing market, and media manufacturing will begin in Brazil in Q3 of 2007.

We completed the transition of our printer design center from Gothenburg to Singapore in Q4, per the plan presented in Q1 of 2006.

We are already seeing significant benefits from closer proximity to our development partners, lower design costs and increased design velocity.

As a result of implementing these productivity measures, we expect operating expense in Q1 to be in the range of 72 to $75 million with incremental improvement each quarter to the 69 to $71 million range by Q4.

Several new products were introduced in Q4.

The model CN3 Rugged Mobile computer was introduced with Bluetooth 802.11 wireless local area network, and Edge GPRS wireless Wide Area Networking connectivity, as well as our own 2-D imager and a color camera option.

Customers are impressed with its small size, battery life, bright color display and range of wireless connectivity options.

The color camera feature and soon-to-be-released integrated global positioning system radio, or GPS radio, are taking us into new applications in the field service, transportation logistics, consumer goods, public sector and retail verticals.

By example, our first domestic implementation of the CN3 is with the city of San Jose Police Department.

Officers use the device in their eCitation application to issue citations, perform real-time inquiries, and eliminate the costly keying errors from entering handwritten tickets.

Participation in this rapidly growing public sector application was made possible by the unique capabilities of the CN3 and the application expertise of our value-added reseller.

The market's early reception of the CN3 has been very good.

We began shipping the North American CDMA wireless Wide Area Networking connectivity option this month and anticipate release of the integrated GPS option by quarter end.

In Q4, we also introduced a speech-recognition option for our popular 700 Series Rugged Mobile computer.

This is for hands-free picking applications.

We introduced a long-range laser scanner and performance enhancements for our RFID reader line.

In November, we submitted our performance enhanced model IM5 RFID reader for testing by [Oden] Technologies.

They are the leading independent testing and benchmark company for RFID readers.

According to Oden, "The new IF5 dense reader mode implementation performs exceptionally well.

It's leading performance in both the adjacent door and conveyor application makes the new IF5 one of the best overall readers in its class."

In fact, Intermec performed all--outperformed all leading competitive readers in the challenging adjacent [doctor use] case.

This test evaluates reader performance in very large warehouse environments with multiple dock doors, in close proximity where reader-to-reader interference is a significant concern.

Industry leading performance is a core RFID strategy for Intermec, and we are pleased with the results of our efforts.

In Q1, we introduced two new RFID-enabled printers, the model PF2i is specifically designed to print RFID-enabled bag tags for use in airline package tracking applications, and the PA30 print engine which is assigned for integration into label applicators in automated RFID smart label print and apply applications.

We have already begun deploying the PF2i printer at the Hong Kong airport and have successfully completed qualification trials at other airlines.

RFID is especially well-suited for baggage tracking application and Intermec expects to achieve a leading share in this important RFID market.

We also introduced the Model SR61, a wireless handheld scanner equipped with our own MEMS laser scanner engine.

This is an important companion product to our model CV30 vehicle mount computer that we introduced in Q3.

The market also appears to be anxiously anticipating the introduction of our Intellibeam EX25 autofocusing area imager, which is capable of reading linear and 2-D bar codes in any orientation from 6 inches to 60 feet.

Early indications from industry analysts like ARC are showing excitement for the product.

They said of the EX25 "For end-users having one scanner that reads codes in any orientation dramatically improves productivity.

For IT departments, the EX25 decreases the number of data capture devices needed, reducing training and support costs."

The rapid increase in the popularity of 2-D bar codes has made 2-D area imagers the fastest-growing product in the scanner segment.

The multi-distance scanning capabilities of EX25 is expected to be a further catalyst for that growth.

EX25 will first be introduced in the market as a scanner option in our popular CK31 industrial computer and SR61 handheld scanner.

We expect shipments of these products to be commencing in Q2.

I would now like to turn it over to Lanny for further comment on financial measures.

Lanny?

Thank you, Steve.

As we communicated on February 7, the Company required additional time to complete its analysis and accounting for income taxes resulting primarily from the application of the new accounting pronouncements.

The Company had to go through an analysis based on FASB interpretation #48, accounting for uncertainty in income taxes, which is referred to as FIN 48.

To complete our FIN 48 analysis, the Company established a very robust process of review.

Due to the complexity of the Company's tax accounting, including legacy tax items related to our discontinued operations, we required additional time to complete the analysis and accounting.

Now, shifting the discussion to our liquidity position, total cash and short-term investments at the end of the fourth quarter was $184.5 million.

This reflects the net utilization of cash of $72 million in the full year 2006 and approximately $53 million in the fourth quarter, primarily the result of the Company completing the $100 million share repurchase pursuant to the Board authorization buyback.

We completed a $50 million buyback in the fourth quarter, having also executed a $50 million repurchase completed in the third quarter of the year.

A total of 3.8 million shares were repurchased from the two tranches.

The average price per share on the second tranche was $23.95 and for the total repurchase was $26.14 per share.

Outstanding shares at the end of 2006 were 60.3 million, about 2.9 million shares lower than prior year-end, reflecting the share repurchase offset by slightly less than about 1 million net shares issued from option and stock program purchases.

As we commented in our November call, we had targeted the reduction of net inventory balances in the fourth quarter by 20 to $25 million.

We did achieve a reduction of $19 million, thereby reducing inventory balances to $119 million at year-end.

Our reduction of inventories resulted from a focused effort to utilize components and move finished product, coupled with a reduction of purchasing activities, thereby avoiding the buildup of inventory.

This latter activity had the effect of reducing our trades payable in the quarter, which more than offset the impact on working capital from the inventory reduction.

We believe it will take the next two quarters or so to bring the purchasing turnover and balance of inventory into better equilibrium with our business.

Finally, we would like to provide our outlook for the first quarter.

We believe first-quarter revenues will be in the range of 177 million to $197 million.

The range we are providing is in keeping with the correspondingly higher volatility present in our current operating environment.

The midpoint of our revenue guidance is a decline of 8% over the prior-year first quarter.

This compares to a 10% decline in the fourth quarter and an 11% decline in the third quarter of 2006 compared to the prior year.

In the first quarter of 2007, we expect gross margins to be improved over fourth quarter 2006 levels and slightly improved over the 38.8% achieved in Q3, 2006 with completion of the RoHS introductions and improving new product lines.

Diluted EPS from continuing operations are expected to be $0.01, plus or minus $0.04 for the first quarter of 2007.

This compares to the first quarter of 2006 reported EPS from continuing operations of $0.23 per share, which included an IP settlement which positively impacted EPS by $0.16 and a favorable tax settlement which improved performance by about $0.05.

That concludes our prepared commentary.

I will now turn the call back to Kevin for your questions.

Great, thanks, [Larry].

Operator, we'd know like to shift to our question-and-answer session, please.

Thank you. (OPERATOR INSTRUCTIONS).

Philip Alling, Bear Stearns.

My first question here is just really, with respect to comments you made as far as expectations of market growth in excess of, you know, for the second half of the year, what assumptions are you making there in terms of sort of what growth in the market you are seeing?

Clearly, you are showing some declines in year-over-year revenues for several quarters, so how should we really be thinking about sort of how the market is growing and how you expect to perform relative to the market?

Yes, Philip, this is Larry.

I think, either Steve or I could answer that question.

Our assumption is that, as roll-outs build, that we will exceed the market pace just because of that building of roll-outs, and that the product line will keep us apace so that you get a bump on the market growth.

We are less convinced of our capability to tell you what that market growth would be, and we would rely on the recent trendlines as well as some of the industry experts for that information, which I think would place it in the sort of 6 to 8% range.

Now, any comments from you with respect to competitive dynamic in the market?

I mean, should we be interpreting these recent results as indications of a shift in market share, or how should we be thinking about that going forward?

Well, as we indicated, competitive pressures are one of the factors; they are not the most significant factor by any means.

The two bigger issues for us were the RoHS transition and the impact of new product introductions on our own pipeline of enterprise sales.

So in fact we see the competitive pressures easing a bit with regard to price erosion.

Long-term, we don't think it will have share impacts.

We think we're going to be able to retain those enterprise accounts.

It's a matter of introducing the product going through the recertification cycle with them and basically than going through roll-outs.

That's the largest impact in North America--has been the introducing the product, getting customers used to new product, certified on the new product, have their applications on it, and then getting into a roll-out cycle.

With respect to RFID, there have been some mixed data points, some vendors indicating that the business they did in RFID in '06 was well down from what happened in '05, and others indicating that they see themselves gaining some share.

What can you tell us one way or another as far as, with the royalties, royalty reports that you are getting from vendors that are involved in your licensing program for access to you IP in this space?

I mean, is it your expectation that--is your view really that revenues are building in that space industry-wide, given the visibility that you have, and how should investors be thinking about that going forward?

You know, we can only comment on our own RFID sales.

We can't comment on royalty rates as an indication of how the market is doing because we have confidentiality agreements and really we don't think it's our place to predict what the RFID market is doing as a whole.

But our own RFID revenues doubled in 2006 over 2005, so we were pleased with the progress.

We are also pleased with the performance of some of our new products in the markets that it's opening up, like the bag-tag printer and the print-and-apply applications.

So we are seeing some very positive signs in the market--still growing off a small base, but growing at double the year, which is nice to see.

Now, just a couple of housekeeping items from me and then I will move it on--just one.

With respect to the number that you released this morning for the quarter, I just was trying to make sure that the math works.

You'd indicated about 5.2 million in earnings before discontinued operations, and your diluted share count of 62.12 million.

I actually do the math and get just a little over $0.08 per share, not $0.09.

That's just based on the numbers that you actually put in your own release.

So is there--perhaps you could just help us better understand that.

Also, I was wondering if you could give some color on the sequential decline in Accounts Payable, what was driving that and what should expectations be there going forward?

Just the final one would be on tax rate assumptions in the Q1 guidance.

On the Accounts Payable, I will pick that on up--you know, the primary driver, as we had talked about at the beginning of the quarter, was our target of reducing inventories.

We did that by controlling our purchase flow during the quarter to give us better equilibrium in that area.

Going forward, we would anticipate, as I mentioned in my comments, as Steve mentioned, to continue to actively look at and work on inventory to get it back more in equilibrium.

So we will have some pressure in the first quarter because, as Steve mentioned, we are building up new product inventories but we also continue to be very focused on the work done of our existing inventory balances.

Also, Philip, we will get back to you on the calculation; we will follow-up with you on a separate call.

The tax rate that we are assuming for the first quarter is what we call our normalized tax rate of about $0.37.

Jeff Kessler, Lehman Brothers.

I wonder if you could collaborate a little on any vertical market trends that you saw, relative to the third and fourth quarter, as we move into the first quarter and the first half of the year.

Sure, this is Steve.

I will take that.

We are seeing pretty much a continuation of the trend that we've been seeing for the last six to nine months, which is that transportation and logistics continues to be a very strong growth market, as does field service.

Field service applications for us include everything from servicing HVAC equipment to servicing electronic equipment, to pest control and lawn care and things like that.

So we are seeing good growth in both of those segments.

We are seeing reasonable growth in the retail area, as we are seeing more turnover of the product line base that's been in place for quite some time in the second-tier players especially.

Is that being masked right now by the product turnover, or the product transition in retail?

Yes, that's basically what I meant was the product--second-tier players tend to hold onto their product line a lot long the first-tier players do, but in retail, they all tend to hold onto their product for quite some period of time.

We are seeing indications that some of that product base is starting to turn over.

Most of it's based on the old DOS operating system and it's just not supportable or serviceable anymore.

You know, the other sectors that continue to do well for us, we are seeing some growth in the government sector but the two highest-growth markets for us for now are T&L and field services.

Okay.

As far as verticals go, any verticals that you saw that were less than satisfactory over the last quarter which you see changing for the better or not changing at all?

Well, the five that we focus on are all growing at or above market rates, so we're not seeing disappointment in any particular segment.

Okay.

Realizing that your transition toward your own product and towards the MEMS product was an ongoing one last year, could you just update us where you are at this point in time?

How far--are you completely transitioned or is there going to be another quarter or so to go before you are out into your all your own product?

Well, basically every product that's being introduced or reintroduced as a result of RoHS is coming out with MEMS-compliant scanners, our MEMS-capable scanners.

We still have some older versions that we probably won't convert; we will just end-of-life them with existing scanners in them just to burn off inventory.

But virtually every new product that is released, or every updated version of a new product, is coming out with MEMS.

I think the last transition will occur by the end of Q2 as we introduce some updated versions of the CK31.

What we're finding is the popularity of scanners is moving toward the imaging area, and we are seeing tremendous growth in the imaging area so more and more of our products are actually coming out with imaging-based scanners.

One final question--can you talk a little bit about the component of royalty income in Q4 and where you see that trending over the course of the first half of the year?

Perhaps if you can give us a crystal ball in the second half of the year.

I know it's pushing it a little bit but some of this has to do with industry trends overall.

But if you could give us the royalty numbers, that would be great.

Yes, Jeff, we can't do that.

I apologize for that.

I understand the logic of the question.

What we can tell you is that there is a fixed component of royalty in our revenue, and that was the prepayments, the early upfront fees that we charged on the RapidStart program, which totaled about 23-24 million and we take it over five years.

So it's about $4 million year.

We can't comment on the variable portion of that.

Okay, that's obviously what I was trying to ask. (LAUGHTER).

I can at least try!

Thank you very much.

Andrew Abrams, Avian Securities.

I wonder if you could go through a little bit on the printer side.

You mentioned that some of the printer strength that they were seeing printer strength this year.

Is it particular to any region, particular to any vertical?

How associated is it with the VAR channel versus any direct sales that you might be doing?

Sure.

We have two basic printer models.

We have portable printers, which are typically tied to sales of mobile computers.

And we have the fixed printers, which are typically sold into warehousing applications and other fixed labeling applications.

The fixed printers, we saw growth consistently across all regions in 2006.

The fixed printers are mostly a channel product and we saw the largest growth in that area in Europe.

In the mobile printers, with the lower sales in North American enterprise sales, we did see lower sales in the mobile printers.

Again, that's directly related to the systems and solution sales.

We expect that to return with the return of the systems and solutions business as we introduce these new products and expect to see growth in that segment again.

But we did seeing good growth in the fixed printers.

Thank you.

Tavis McCourt, Morgan Keegan.

I wonder if you could comment on the mix of direct versus indirect in the quarter.

As you roll through 2007, is there any significant changes expected there in terms of the percentage of sales coming through the channel?

Yes, we track it on an annual basis, how we are doing on our indirect sales versus direct sales, and we've consistently improved it about 2 points, improved meaning sold more through the channel each year than the prior year.

Looking at the trends from 2006, it wasn't markedly different.

A couple of percent more of our sales went through the indirect channel in 2006 than did in 2005.

Our total mix globally is about 60/40 right now, and it varies by region with Europe--or excuse me, Asia being the highest, Europe being the second-highest and then the U.S. and Latin America.

When Steve says we do it on an annual basis, obviously on a quarterly basis, the influence of a large enterprise customer can be quite meaningful in that distribution of the ratios.

By way of example, in the fourth quarter, the fundamental difference between our sales in the fourth quarter of this year versus the fourth quarter of last year was a single, a large enterprise order.

Obviously, if you include that, you get a quite-different picture than if you don't include it.

The same thing--that was a systems and solutions order, but also the fact that the printers are pulled along with that order was the reason that printers were up everywhere except in North America, by way of comparison.

I understand that.

Larry, in terms of the strategy for capital deployment this year, you guys were pretty aggressive buying back stock last year.

Cash balances are down a little bit but obviously you should be generating some nice cash flow this year.

Can you talk about kind of you or the Board's strategies at this point for the cash?

At what cash level would you be willing to reinstate a buyback program?

Yes, as you can imagine, it's an ongoing question for the management as well as the Board.

We have been pretty conservative in our cash utilization as a result of probably the five or six year ago experience that we had in not getting ahead of ourselves and we do continue to revisit.

At this point, we have not made a decision about what to do, and looking at the rebound will probably precipitate the speed at which we do it.

I think the more significant issue in answer to your question is what are the various means of utilization?

As we've said before, we don't really see acquisitions as our significant path forward.

We may make one or two small technology acquisitions because of our focus on leadership and data capture technology, but we don't see large acquisitions as the vehicle that we would use for growth.

As we examine both our conventional AIDC markets as well as the RFID market, we see ample opportunity for above-20% EBIT growth on a long-term basis by simply servicing our existing market.

Therefore, the normalized or in a year where things are normal, if there is such a thing, we believe that we've got significant cash-producing capability, largely because our working capital ratios tend to run under $0.20 on the sales dollar.

Therefore, we get more profit from the incremental sales dollar than we have to use cash.

As you know, our capital expenditures, even in an aggressive year like this past one, just don't amount to very much in the way of cash utilization.

Largely it's just software--internal software buys and tooling for manufacturing.

So Intermec does have the potential and indeed has recently demonstrated the capability to produce cash on an ongoing basis consistently.

I think that we will--we could look forward to that time but the specific way in which we will get that back to the shareholder in the absence of acquisitions and with the support of strong growth, even still yielding additional cash, is yet to be determined.

I got you.

A couple of funds for you, Lanny--the deferred revenues were down slightly in the quarter--two questions.

Are those all service-related or their product deferred revenues in there?

Number two, was there r anything seasonal in that or would you expect the deferred revenue balances generally to grow over time?

Yes, that's largely a service-driven activity, and it's just a billing cycle that causes it to bounce.

I got you.

Then I wanted to make sure I kind of understood the commentary in terms of Accounts Payable and inventory going forward.

It sounded like you're talking about a few puts and takes in inventory but kind of roughly a flat inventory trend over a couple of quarters.

Then I was wondering, given the big drop in Accounts Payable, how we should be thinking about that, given its impact on cash flow?

Yes, as I commented, in the fourth quarter, we particularly had efforts to slow the flow of incoming components and finished goods, which as you might imagine then we had a drop in our Accounts Payable in the fourth quarter because of that.

With the buildup of new product and coupled with our continued deployment of existing product, we would expect inventories, as you commented, to be relatively flattish into the first part of the year.

Our use of cash in the way of buildup of Accounts Payable will probably reflect our buildup of new inventory.

So as I mentioned, over the first couple of quarters, we expect it will get back into equilibrium in terms of where inventory balances are, product flow, and then our working capital deployment in that regard.

Okay, thanks for the clarification.

Kevin Starke, Weeden & Co.

As part of the restructuring, is there a business that you can quantify that you've actually walked away from to explain some of the year-on-year declines in the first quarter?

No, the restructuring--and Steve may want to expand on this, Kevin--but the restructuring is largely driven by two activities.

One is we're going to a region structure in Europe versus a country-by-country structure, and that provides us significant opportunity for taking SG&A out of our program.

It's an activity whose time has come.

The decline in sales gave us the urgency in order to accomplish that.

The second piece is we've done a little bit of consolidation of facilities, so we shut down an operation for media in Las Vegas and moved it into our existing facilities here in Everett.

But none of that involves walking away from business.

Okay.

The $3.5 million charge to inventory, does that in any way--does that essentially amount to a write-down of some of this maybe non-RoHS-compliant inventory?

Or are they two separate issues?

It wasn't a write-down, and it wasn't a charge.

It was just unusual expenses that were associated with completion of the turnover of our product line to RoHS compliance.

So it's just expenses that we don't expect to recur going forward.

But it wasn't a charge or an inventory write-down.

Would you say there's any significant risk of any inventory being impaired, particularly because of RoHS compliance?

No, we don't see that as an issue.

We think we are reserved appropriately and inventory turns are appropriate to keep us at this current level.

Okay.

The new facility in Brazil, did that have any negative margin impact, given that it was just getting going?

No, it has no impact on the results.

It's a relationship that we have with a local company that helps us obfuscate the cost of that.

Okay, that's all for me.

Thank you.

Eli Lustgarten, Longbow Securities.

Good morning.

Just a couple quick follow-up questions--one, I assume the tax rate you are assuming for the year was 37% (indiscernible) the first quarter?

That is correct.

Two, has there been any sort of (indiscernible) change in the marketplace from the acquisition of Symbol?

We haven't seen a marked change yet.

Probably the only early indications that we've seen is that some of the pricing pressure has eased, and in fact, we have seen some raising of prices, especially in the service area in some regions of the world.

But from a product line perspective, we haven't seen any changes and wouldn't expect to in the short-term.

But we're seeing pricing pressure ease a bit and we're seeing some price increases.

I think, Eli, we've probably commented in the past that what we do see is a surge in alliance interest from other players who are competitors of Motorola who are looking for greater linkage.

That has resulted in a number of conversations.

Then, the implication of your guidance is that 2007 is almost a mirror image of '06 and will come in, volume-wise, relatively close to '06, maybe slightly up, if--.

Yes, let me comment on that.

You're talking about first quarter now, and the implication of first quarter, Eli, as compared to full year is that, as you know from the numbers, we see, at the midpoint of our guidance, revenue down about $17 million from prior year, or about 8% as Lanny commented.

The comparison, once you take out the two items of tax rate and IP, suggests that the earnings on that lower revenue is about the same.

The reason behind that is simply that, as we planned with our restructuring that we announced back in November, the lower costs of SG&A are offsetting the gross margin loss in the reduced sales, so that you get approximate performance.

If you talk about the longer term, I think you certainly can suggest that our comments on the longer term are that we will do less well in the first half than we did last year, and that will do better in the second half than we did last year.

At this point, it's just premature for us to speculate how much of either is going to occur.

I understand that.

I was just trying to stretch the interpretation obviously a little bit, particularly when you said you expect the second-half volume gains to be better than the industry gains that you foresee.

Let me put it another way.

Is the volume--your expectation in the second half '07 upturn, you talk about it based on your plans.

Have you seen indications of potential commitments from customers, based on the new products that everything works out, that give you a high confidence level in that or is it strictly a market intelligence forecast?

At this point, it's an interest measurement, not an order measurement.

All right, thank you.

(OPERATOR INSTRUCTIONS). [Ryan Rackley], Raymond James.

Just one quick question on your RFID pilot--about how many do you have running now?

Looking forward, are you adding new pilots at would you say steady pace, accelerated pace or a decelerating rate?

With regard to RFID pilots, we don't see a significant change in the number.

What we have seen is a significant change in the type.

We are typically now getting more serious consideration of RFID implementation, a lot more closed-loop applications where the customers can easily identify the benefits themselves within their own operations.

We are seeing increasing interest in areas like this bag-tag printing and bag-tag tracking applications.

So the volume of--I wouldn't say the volume of pilots have gone up, but the quality of the pilots and the close rate on those pilots into actual rollouts has improved significantly, hence the increase in sales that we are seeing.

Great, thank you very much.

Reik Read, Robert W. Baird & Co.

Steve, to go back to some of the things that you had said in part of your prepared remarks, that the final version of the CN3 and the EX25 will be coming out I think in March and kind of April/May, respectively, are those products that have demos available today?

If not, when would they be out?

Yes, we have--the last version of the CN3 to come out, which was coming out in March, is the GPS version.

We currently have about 200 units that we've deployed out in the field into early pilots to demonstrate the capability.

It's generating a tremendous amount of interest.

That's going to be probably one of the more favorable applications for us, is that integrated GPS.

Then with the EX25, we have had about 100 units out there for about a month and a half now and are getting favorable responses to those as well.

We will probably have some additional units out there before we finally begin production shipping.

Again, kind of the March for the CN3 and then April/May for the EX25, when you say "production levels" is that something where there will need to be a production ramp or will there be some ample quantity of those units out there at that point?

No, that assumes that production is able to produce at the normal run-rate for those products, so when we say shipping, it means we are in production at production volumes.

Okay.

Then with the EX25, it seems like there is maybe a slight delay there.

I think, last quarter, you were talking about the end of first quarter; now you're talking about early second quarter.

Can you talk about what the source (indiscernible) is, the major issue and the confidence level you have in kind of the April/May timeframe?

Yes, sure.

It's just a matter of interpretation.

What we said was we would introduce the product in Q1, by the end of Q1, and we have introduced it.

We've got units out there; it's being evaluated by customers.

But the actual production of it begins in Q2, so we're still basically on the same schedule that we've been.

Okay.

Then with respect to the rest of the industry, and you've alluded to this a little bit in your enterprise business, but in the last couple of quarters, we've seen maybe some greater talk of larger deals starting to get closed.

Can you guys talk about--are you seeing that level of activity?

Is it related to the new products?

When do you think you will start to see close rates improve from that?

Yes, what we are seeing typically, we're talking about the larger enterprise business, and the larger enterprise business has a closed cycle of anywhere from three to nine months or even longer in some cases, but typically with the introduction of the new product kind of in the three to six months timeframe, which is consistent with our prediction that the second half will start to see the larger deployments of enterprise product or enterprise customers with the new CN3, so we are seeing a significantly increased level of interest in the product, and we think that will start converting into enterprise sales and rollouts in the second half.

Okay.

Then just one question on the restructuring--Larry, as part of your comments you had suggested that some things were being realized better-than-expected.

Is that timing or magnitude?

Can you talk a little bit about the reason for the improvement versus expectation?

I think the reference that I made is not a timing reference, because we think we will be in the first quarter and in the second quarter, per the numbers that Steve gave you, in the position we thought we would be in.

The ability to continue that into the fourth quarter on existing plans is a more aggressive reduction than we had communicated.

We've just seen in the ability to get some of the things that were in doubt at the time of our announcements.

I think, with respect to what you guys have announced so far, the majority of that seems to be focused more on the SG&A line.

Are there some other things that you're looking at from a cost of sales standpoint that might be incremental to what you talked about?

I'm not asking you to announce it but are you evaluating other things at this point?

Well, I think we're always announcing improvements in cost of goods sold.

If you mean by that product design and purchase price, when we announced the savings level of 20 to 25 million, we implied that the majority of that was going to come from SG&A, let's say in the range of 80%. 20% of that would come from the cost of goods sold area in both service as well as in product costs.

That is to say that changes in a cost structure like manufacturing overhead or like plant shutdowns or consolidations, or reductions in the labor associated with the service.

Just to clarify, in our November discussion, we did comment on that, relative, as Larry said, about 75% of the savings we thought would be in the SG&A area and the remainder would be in the area of cost of sales.

Right.

Sorry.

Maybe I didn't ask this very well but I guess what I was suggesting is you are not extracting that much out of cost of sales at this point.

Are you evaluating other significant changes within your cost structure that would address more on the cost of sales side?

Because you're talking about gross margins that will get into the low 40s, and it strikes me that you guys probably have an opportunity to do a little bit better than that.

Yes, in the cost of goods sold line, there is a limited amount of ability to get labor savings out of there because the majority of the expense outside of the service organization is purchased materials.

So the focus area for us and getting additional costs out of the (indiscernible) COGS area will be improving our purchases, our purchase savings.

We anticipate that to come from additional volume, as well as to come from consolidation of product lines down into less-complicated products and more versatile products like the CN3.

Okay, great.

Thank you much.

[Andy Young], Thomas Weisel Partners.

Just one quick question--do you have any (indiscernible) [Aviant] that you want to take, enforce some action regarding RFID royalties right now?

We are always considering that, Andy.

There clearly is a kind of a queue of folks we are observing in the process as it relates to behavior and as it relates to protecting our licensees from unauthorized use.

So, I think the answer to your question is yes, we are considering other actions but at this point we are not committed to those actions.

Okay, great.

Thanks.

At this time, I show no further questions.

Great.

Thank you, operator.

That will conclude our call for today.

Once again, we want to thank you all for joining us.

Today's conference has ended.

Thank you and have a good day.