漢威聯合 (HON) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by.

Welcome to the Intermec first quarter 2011financial results conference call.

(Operator Instructions).

I would now like to turn the conference over to Mr.

Geoff Buscher.

Thank you, operator.

Good afternoon everyone, and welcome to Intermec's first quarter fiscal year 2011 earnings release conference call.

With me on the call this afternoon are Intermec's President and Chief Executive Officer, Patrick Byrne, and Chief Financial Officer Robert Driessnack.

In a moment, Pat will discuss our quarterly overview and Bob will provide a summary of our operating performance and discuss our second quarter guidance.

Following our prepared remarks we will begin a question-and-answer session.

Today's discussion may include predictions, estimates and other information that might be considered forward-looking statements.

Under the Private Securities Litigation Reform Act of 1995, some of the statements we made today may be considered forward looking including, but not limited to, Intermec's expected financial performance as well as Intermec's strategic and operational plans in future financial and operating results of the combined Company along with additional examples that were set forth in today's earnings release.

Those statements involve a number of risks and uncertainties that could cause actual results to differ materially.

Please note that these forward-looking statements only reflect our opinion as of today, May 4, 2011, and we undertake no obligation to revise or publicly release results of any revision to these forward-looking statements.

In addition we will describe certain non-GAAP financial measures which we will also refer to as adjusted items.

These items should be considered in addition to, and not in lieu of, compared to GAAP financial measures.

Please refer to today's earnings release which contains and illustrates our reconciliation from GAAP to non-GAAP items.

A more complete description of what we consider to be forward-looking statements and about the factors that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements is contained in our press release and in our SEC filings including our Form 10-K and Form 10-Q.

Copies may be obtained by contacting us or the SEC.

With that I would like to turn the call over to Pat.

Thanks, Jeff.

In Q1 Intermec delivered $179 million of revenue, representing 20% growth compared to Q1 of last year.

With 13% organic growth and $10 million from one month of Vocollect operations.

Non-GAAP operating income, net of acquisition related expenses, was minus $0.01.

Cash flow was positive for the quarter.

The international businesses drove the organic growth of the Company, delivering 27% year-over-year growth net of Vocollect.

With Vocollect included international grew 34%.

Strong international sales results, which in Q1 represented over 55% of the Company's revenues, continue a trend that we saw all through 2010.

The North America business grew 5% with Vocollect included, and was down slightly compared to last year on an organic basis.

As we reported previously, we replaced two distributors in North America with two AIDC focus distributors.

This was completed during Q1 and was done to improve our competitive position and increase our channel reach.

The former distributors had remaining inventory that needed to be sold through, and this impacted our sales in, in Q1 in North America.

This is a one-time event and limited our revenue growth in the region in Q1.

The underlying demand in North America was strong with 22% growth on a sales out basis through the channel.

Therefore we are confident that we are on track for solid growth in the North America region this year.

New products contributed to the strong product sales results in Q1.

The CN50 continues to see strong demand.

In addition, the new 70 series and CS40 mobile computers are being well accepted and began shipping in volume in the first quarter.

The Printer Media business also had a strong quarter delivering growth of19% compared to Q1 of last year.

Enterprise sales were solid in the quarter across all of the regions.

With the completion of the Vocollect acquisition this quarter, we further transformed the Company into a solutions-focused strategic supplier for our customers.

This acquisition positions Intermec as a clear market leader in rugged mobile business solutions in the warehouse, one of the largest AIDC markets.

In addition, we completed the acquisition of Enterprise Mobile, a complimentary managed services business.

I will now turn the call over to Bob to discuss the financial results and then I will return to discuss our business in more detail.

Thank you, Pat.

Intermec's first quarter revenue of $179 million represented a 20% increase from the prior year first quarter.

On a constant currency basis, the overall growth was 19%.

Our reported 20% growth included approximately $10 million, or a 7 percentage point benefit, from one month of Vocollect revenues.

Later in my comments, I will note Vocollect results and the growth rates for each region, and then the systems and solutions and services revenues as appropriate.

On a GAAP basis, our first quarter loss before tax was $9 million with a net loss of $6.1 million or minus $0.10 per share.

This compares to first quarter 2010 loss before tax of $6.2 million with a net loss of $3.6 million or minus $0.06 per share.

On a non-GAAP basis, first quarter 2011 earnings per share were a loss of $0.01, compared to the prior year comparable loss of $0.03 per share.

This excludes acquisition-related costs that totaled $7.8 million in the quarter, comprised of $4.8 million for transaction-related costs such as investment bank, legal and financial expenses to successfully complete the Vocollect and Enterprise Mobile transactions during the quarter and $3 million of purchasing accounting adjustments for acquired inventory of $1.2 million, deferred revenue charges of $0.7 million and $1.1 million for amortization of acquired intangibles.

Turning to first quarter revenues, on a regional basis as compared to the prior year quarter, North American revenue increased 5%.

Excluding Vocollect, the region was down slightly versus the prior year quarter.

As Pat noted our growth in North America was impacted by the change of two significant distribution partners and is not expected to have an on going affect.

Europe, Middle East and Africa, or EMEA, increased 30% year-over-year, including the benefit of about 8 percentage points from Vocollect.

On a constant currency basis, revenues in EMEA were up 31%.

Our other international areas also delivered strong revenues, up 44% in total.

This was driven by organic growth of 41% with one month of Vocollect sales adding 3% in those regions.

This was led by Latin America growing a very strong 53% while our Asia Pacific region grew 33%.

On a product line basis, our systems and solutions revenue of $98 million was up 23% year-over-year which includes a growth of 10% from Vocollect products.

This was driven by growth in the CN50, CK3, and continued strong sales of CN3 products as well as initial shipments of our 70 series and our CS40 products.

Similar to fourth quarter there were about 25 enterprise deals with an average rollout size of about $1 million per transaction, both through the channel and with key direct customers.

Printer Media revenues of $43 million increased 19% year-over-year, continuing the strong growth we saw the last several quarters.

Our services businesses of $37 million grew 12% year-over-year including a 6% benefit from Vocollect service sales.

There are several items of note within gross margins that I will walk through.

First as we completed our plans for 2011, certain costs previously reported in SG&A have been allocated to margins this year.

Therefore some prior year amounts have been revised for comparability to the 2011 numbers.

In total, our bottom line obviously did not change for 2010.

We reported total gross margin of 38.3% versus the comparable 37.6% from the prior year, an increase of 70 basis points.

The reported gross margins include the impact of several items related to Vocollect including $1.2 million for fair value of inventory adjustments.

$1.1 million of amortization of intangibles and $0.7 million for fair value of deferred services revenues.

The fair value inventory uplift was fully reflected in reported margin in Q1 and will not recur.

The fair value of deferred services adjustment will continue for the balance of 2011 at approximately $2.2 million per quarter.

This impacts both revenue and margin in the service business.

The amortization of intangibles will likewise continue at about $3.3 million per quarter.

Both these items represent our best assessment under purchase accounting rules at this time, however, we expect to finalize the values during the second quarter.

Excluding the purchase accounting adjustments for inventory, amortization and deferred revenue, our non-GAAP operational gross margins were 39.8%, reflecting one month benefit of Vocollect margin mix, partially offset by the distribution product transition mix.

Looking to our segment margin performance, product gross margins as reported were 38.6% compared to 37.4% in the prior year first quarter.

Excluding the acquisition-related inventory costs of $1.2 million and the acquired intangibles amortization of $1.1 million, non-GAAP product gross margins were 40.2%.

Service gross margins as reported were 36.8% compared to 38.4% in first quarter 2010.

Excluding the $0.7 million of deferred revenue, our non-GAAP services gross margins were 38.0%.

Total operating expenses for the quarter were $76.9 million which includes $6.4 million of expenses from Vocollect operations and acquisition-related expenses of $4.8 million.

That compares to prior year operating expenses of $62.1 million, which included facility impairment and restructuring charges of $2.4 million and $0.7 million respectively.

On a comparable basis, core Intermec operating expenses were $65.7 million in the quarter versus $59 million in the prior year quarter.

This reflects our investments in new product development and the associated product launches along with additional sales resources and marketing initiatives that drove 13% organic growth in the first quarter.

We have given you a number of data points around Vocollect.

A quick summary of the operating results shows revenue of about $10 million.

Gross margins were strong and expense was well controlled as we began the merger of the two businesses.

Vocollect contributed over $1 million of operating profit before purchase adjustments and transaction costs in their first month as part of Intermec.

We expect to provide the historical data required for Vocollect and the pro forma results of the combined entity via an 8-K filing in approximately one week.

Our total effective tax rate in Q1 was approximately 33% which reflects the base rate of about 45% offset by discreet charges for certain non deductible acquisition costs.

Moving to the balance sheet, we reduced core Intermec inventory by an additional $1 million in the quarter.

Adding approximately $6 million of acquired inventories at quarter end results in the reported increase of ending inventory of $5 million.

Moving to accounts receivable, at the end of Q1 our balance increased $11 million due to the addition of about $18 million of acquired receivables, partially offset by a reduction in core Intermec balances of about $7 million.

Our comparable number of days in receivables improved approximately six days from the prior year quarter continuing our solid performance on managing our assets.

First quarter cash flow from operations was about $2 million compared to a use of cash of almost $8 million a year ago.

We continued our share repurchase program in the quarter, announcing an additional $10 million program from our existing board authorization.

During the quarter Intermec repurchased 429,328 shares of its outstanding common stock at a total cost of $4.5 million or $10.56 per share.

Subsequent to the end of the first quarter the Company repurchased an additional 507,205 shares for approximately $5.5 million or $10.81 per share.

Following completion of this $10 million program there is approximately $45 million remaining under the share repurchase authorization.

During the quarter, to help finance the acquisition of Vocollect, we borrowed $97 million against our new, $100 million, three-year credit agreement.

Net of outstanding letters of credit there is $1.5 million available under this credit facility.

As of April 3rd, net of the $4.5 million spent in the first quarter to repurchase shares and the acquisition of the Vocollect and Enterprise Mobile businesses, our cash, cash equivalents and short-term investments totaled $124 million.

I also wanted to call your attention -- to call to your attention that we have included in our press release reconciliations of the adjustments I have mentioned in my comments that bridge our reported operating results to our non-GAAP operating results.

Going forward, we will provide guidance for our anticipated operating and non-GAAP operating results.

Due to the acquisitions, we have also added for the first time our definition and calculations of EBITDA and non-GAAP EBITDA which we believe will help investors understand the underlying cash earnings of the Business.

This will be reported going forward in our quarterly earnings release, but we will not provide specific guidance for these measures.

Our non-GAAP EBITDA beginning with our non-GAAP operating income and adding back the noncash depreciation and amortization, in addition to that from the acquired intangibles, plus non-cash stock-based compensation expense totaled $5.4 million or 3% of revenues.

This compares to $2.8 million or 1.9% from the year ago quarter.

One additional item to note before moving to our guidance for the second quarter.

Consistent with our on going cost structure and expense management focus we announced today that we will be implementing a plan to streamline certain non-U.S.

service depots and support operations.

These actions are expected to impact about 2% of employee head count and are intended primarily to improve the Company's services, cost structure and margins.

The actions are expected to occur during 2011 with expected annual savings of about $3 million once fully implemented.

The Company expects to record approximately $4.5 million to $5 million of restructuring charges in 2011 related to this cost reduction plan.

Approximately $4 million is expected to be reported in the second quarter.

The charges are primarily severance related and will be incurred in cash.

Moving to our guidance, as we look to the second quarter of 2011, we view that revenues are expected to be within a range of $205 to $215 million which represents growth of 28% to 34% from the prior year second quarter.

This includes approximately $30 million or 18% to 19% growth due to acquisitions.

Second quarter earnings per share on a GAAP basis are expected to be within a range of minus $0.04 to break even on a per share basis.

Our non-GAAP earnings per share is expected to be within a range of $0.08 to $0.12 cents per share excluding the impact of restructuring charges of about $4 million, acquisition related costs of$ 0.9 million, amortization of intangibles of $3.3 million and deferred services revenue acquisition related adjustments of $2.2 million.

Our earnings per share guidance assumes a diluted share count of approximately 59.6 million shares for the second quarter.

That completes our financial comments and I will turn the call back to Pat.

Thanks, Bob.

In Q1 we had strong growth in the computer business, which is included in our Systems and Solutions product line.

The rugged mobile computer business grew over 30% in the international markets.

In North America the growth was muted by the distribution transition, but as mentioned, the sales results were strong.

Mobility applications continued to drive the growth of unit volumes for the computer business in applications such as field service, transportational logistics, [post of courier] express, and direct store delivery.

Enterprise activity was solid with 26 deals contributing $25 million in the quarter.

New products also made a significant contribution to the quarter.

The CN50 pilot activity from 2010 continues to expand into larger deployments.

We expect this trend to continue.

We have strong early interest in the 70 series and the CS40.

Both products contributed to revenue in Q1 and there is a strong sales funnel going into Q2.

The 70 series was launched during the first quarter as the industry-leading rugged computer.

It has the latest computer and wireless technologies and innovative imaging for bar code scanning.

The performance of our imaging solutions exceeds traditional laser scanning in many applications.

The 70 series are the only products in the industry with an eight-foot drop spec, making it a no compromises platform for customers in our target deployment environments.

As we stated, the 70 series is targeted at specific applications and direct store delivery, warehousing, field service, and postal courier express.

Together with our focused reseller network Intermec has distinct competitive advantage when it comes to delivering a robust, rugged mobile business solution.

The CS40, which was launched late last year, has the size and styling of a Smartphone, but also a robust design to withstand multiple four-foot drops to concrete.

From a software standpoint it is a ready for enterprise mobility application.

We expect these new products to ramp throughout 2011 and to contribute to our overall portfolio delivering strong, profitable growth.

The Printer Media business had a strong quarter delivering 19% growth with strength in each region and product category encompassing both fixed and rugged mobile printers.

On a unit volume basis, this was the second highest unit sales volume in the last ten quarters and continues the momentum we built in the second half of 2010.

Printers are primarily sold through distribution, so our channel focus over the last few years has helped our Printer Media business, especially in the international markets where our progress in the midmarket has been robust.

Our service business had a strong quarter with 6% growth on an organic basis.

We made significant progress improving attachment of our services through the reseller net work.

Q1 showed good results in both professional services and software with revenues and margins ahead of plan.

Our global channel revenues continued to expand with greater than 18% growth year-over-year with every product category showing strong growth.

In Q1 Intermec completed five regional partner events around the world.

Attendees represented all of our top resellers, distributors and ISVs for product and solution training.

Intermec was also awarded the CRN five-star channel program award and in addition our global channel leader was selected as a channel chief by this prestigious channel publication.

We also began the global rollout of the Top Runner program.

This is a program to cut administrative complexity from channel transactions as well as to better enable our partners to penetrate the midmarket.

Turning now to our acquisition activities.

In early March we closed the Vocollect acquisition and in the first month Vocollect delivered about $10 million in revenue for Intermec.

Vocollect is the clear market leader in voice solutions for the warehouse.

Vocollect brings $120 million of annualized business to Intermec along with more than 1,500 customers and 300,000 users in 60 countries.

The Vocollect business contributes to Intermec by accelerating growth with a profitable business and providing opportunities for Intermec to differentiate with unique solutions in the warehouse.

Our priorities for the integration of Vocollect are one, delivering on Vocollect organic growth plan and two, generating revenue synergies by leverage each Company's sales and marketing abilities through cross selling initiatives.

In addition, there are product-based synergies such as combinations of technologies that are developed and commercialized.

Longer term there are opportunities for voice solutions in deployment environments outside of the warehouse.

There are cost synergies as well especially leveraging our combined purchasing power and infrastructure.

We are very excited about the market leading position this acquisition provides to Intermec.

Turning now to our acquisition of Enterprise Mobile which we also closed and completed in March.

Enterprise Mobile accelerates our momentum in providing total mobility life cycle services.

Our ability to support our partners and customers by developing, deploying, training, managing and supporting mobility solutions is greatly enhanced through this acquisition.

Venture Data Corporation, or VDC, predicts that by 2013, over 12.5 million devices will be under third party management.

The Enterprise Mobile acquisition complements our in-control managed services platform, which provides a remote device and data management platform for mobility applications.

Together these services put Intermec in a strong market leading position.

We expect to generate new service revenues streams in the coming quarters, as these solutions are adopted by direct customers and resellers.

Turning now to Q2, we expect double-digit growth from our core Intermec business as well as a full quarter of Vocollect and Enterprise Mobile results.

We anticipate these will contribute to approximately 30% growth compared to the prior year second quarter.

As Bob has outlined we expect solid operating leverage from the additional revenue as shown in our non-GAAP operating income expectations.

That completes my comments and I will now turn it over to Geoff for the Q&A section of the call.

Operator, before you give us instructions on how to work the Q&A, I would like to introduce Jim McDonnell who is the Senior Vice President of Global Sales and Marketing for Intermec and he joined us for the question-and-answer session as well.

Operator, if you would give the instructions, please.

Thank you, sir, we will now begin the question-and-answer session.

(Operator Instructions).

Our first question is from the line of Tavis McCourt.

Please go ahead.

Thanks guys for taking my question.

And nice quarter.

My first question is, I wonder if you could quantify a little bit how much the change in distributor in the U.S.

impacted revenues in the quarter?

And was that something you had known was coming or an adjustment made mid-quarter?

And then I had a couple follow-ups for you, Bob.

Well, let me start real quick, and then Jim may have some comments as well.

I think the transition in the quarter was really as inventory moved from the two former distributors, it was purchased by one of our go-forward distributors, and of course then they sold through that.

The approximate amount varies because the channel inventories can move up and down a little bit each quarter.

But approximately $5 million to $8 million is our estimate of the sell through of inventory that was completed in the quarter.

Okay.

And, Bob, for you I know some of the balance sheet metrics are thrown off a bit by the acquisition, but the DSO's were a little higher than I would have thought and I was wondering if you could kind of break out the core DSO's in the Intermec business and were those in line with your expectations?

And then secondly in terms of the cash balance -- what is the cash balance that you would expect to keep on the balance sheet versus keeping the line of credit at this point?

A couple comments here.

First let me start with the DSO's.

The DSO in the core Intermec business increased somewhat from year-end, but we had a great quarter, ended the year at about 50 days DSO for the core Intermec business in the fourth quarter.

There was about 55 days in the first quarter.

But 50 to 55 days actually is on the low end of what we have averaged over the past few years.

A year ago the core Intermec DSO was actually 61 days.

So we have improved that about six days year-over-year and seasonally it is up a few days here, five days in the first quarter, but pretty much in line with what we expected.

Maybe a little more color on that would be that our aging percent, so the percent of receivables that are current is over 80%, about 83% or 84%.

The DSO profile for the Vocollect business is slightly lower than Intermec.

It is right about in the 50 day range and I would expect it to be that range going forward.

So I think it's the combination, Tavis, that has probably thrown it off.

Keep in mind we have one month of Vocollect revenues in our revenue results for Q1 as opposed to a full three months.

That might smooth out the metric a little bit.

Then as far as the cash, we finished the quarter at about $124 million of cash.

We are monitoring that obviously daily and weekly.

One of the key priorities I have right now is looking at where the cash is.

We used a lot of our domestic cash to complete the acquisitions.

And so we've got 75% to 80% of our cash is actually global today.

And looking at managing that and making sure we have working capital in all the places around the world.

We have strong liquidity.

The cash balance is very adequate and we've got great access to capital here within the Company.

Great, thanks, a lot.

Thank you.

Our next question is from the line of Chris [Golti].

Please go ahead.

Good evening, gentlemen and welcome back, Pat.

Thank you.

So, question, just as a follow-up on the post Vocollect, how things look, can you give us an idea, Bob, of what the run rate OpEx might look like excluding charges as we go into the second quarter?

And should we expect any different seasonality patterns either on the spending side or the revenue from Vocollect?

Yes, I think the -- let me kind of break that down into -- from a core Intermec side, we don't typically guide on expense lines.

I would expect the core Intermec would be roughly flat.

Last year you'll recall in the second quarter we actually ramped up some product development activities and efforts.

And I believe you will see we again finished those products and launched them here in the first quarter.

So the R&D and product development would edge back a couple million.

SG&A investments, particularly marketing and selling activities, to continue to accelerate growth, would just about offset that.

The other items would be flat.

So roughly flat for the core Intermec year-over-year.

I do expect about, as I said about $4 million of restructuring related costs in the second quarter.

I also expect about $900,000 or just under $1 million of the completion of transaction costs and retention, things like that that will be incurred in the second quarter.

The run rate on the Vocollect expenses, I don't have that number in my head, Chris.

I think we will be in about the mid-- or about the $80-million range, a little bit over that on an all in basis.

But then I have got to set aside the costs.

So it would be roughly in that range.

And a question on the second quarter charge, you did a very detailed break out of the items that comprised that.

One of the items listed in there was the acquired intangibles, and I just wanted to make sure that's not the regular amortization of the intangibles that you would be doing on quarterly basis but a separate, one-time write-down?

This is actually the on going.

So as we looked at the intangibles related to the acquisition, Chris -- so it is not the core that we had prior to the acquisition.

That is the amortization for the technology, the customer, and so forth that is looked at.

Our interpretation at this time of the current purchase accounting rules are that you have to look at what is driving or where the benefit of those intangibles is, and it is our current view that we have to amortize that in margin.

So the $3.3 million is the amortization for the acquired intangibles, kind of the opening balance sheet intangibles, a little over $3 million per quarter at this point is our estimate in margins.

Okay.

So you are saying basically all of the acquired intangibles that get amortized on a quarterly basis should be excluded from your EPS -- your non-GAAP EPS calculation?

That's how we are viewing it, that's correct.

And have you detailed how much of that would roll into 2012?

We have not at this point.

We are finishing the purchase accounting I believe in the second quarter here, and I think we could provide a directional view of that going forward once I am confident that we are pretty close to final.

Okay.

Great.

And can you give us a ballpark estimate for what you are looking for in interest expense for the year?

Good question.

The interest expense on about $100 million of debt, roughly, outstanding, the interest rate is about 2.2% or 2.3% at this point in time.

So you could factor in -- that's about two point -- it should be about $2.5 million per quarter -- no, for the full year.

It is about $600,000, or $500,000 to $600,000 per quarter, Chris.

Got you.

And just as a follow up, it sounds like some of your enterprise activity is picking up, but you said to be some of the smaller deals.

If I heard the numbers right, 25 enterprise deals, $26 million.

Do you have any of those large double-digit type products that are still in the pipeline or things that might come to fruition this year)

Yes, hi Chris, it's Jim McDonnell here.

So the enterprise spending, which was similar to Q4, we are seeing it very steady and building.

And there are a lot of pilots outside right now today, particularly around the 70 series and the CS40 as we began shipping those products as pat mentioned in Q1.

So we see it as improving, steady and improving, and we expect to continue to close deals throughout the year.

Okay.

Great, thank you, guys.

Chris, this is Bob.

One -- just to clarify the OpEx number that I was trying to capture, it is just over $80 million is how I would view the on going sort of combined operating expenses excluding the one-time items.

Got it.

Thank you.

Thank you.

And our next question is from the line of Andrew Abrams.

Please go ahead.

Hi, guys and congratulations.

Thank you, Andy.

Just a couple of -- well, more on a general basis, can you point us to the growth rate that you guys see in Vocollect?

It doesn't necessarily have to be previous growth rate, but where you guys look at this company as a subset of your Business over the next two years.

Are we talking about 12%?

20%?

40%?

Can you kind of give us a little guidance there?

This is Pat.

The way I would characterize it is to frame it in the context.

Vocollect has a strong market leading position in voice, but voice is still getting penetrated in the warehouse, let alone other deployment environments.

We see this as the early phase of voice adoption and of course there is geographic expansion opportunities as well.

We see this as a significant new technology platform for many years of sequential growth.

The way to put this in context is last year Vocollect had about a 15% growth.

So I expect this year to also have -- and over the next few years to have a compound annual growth rate in the double-digit region.

We are also going to be looking for revenue synergies, cross-selling opportunities where Vocollect technologies into Intermec customers, and of course Intermec technologies into Vocollect customers.

Which could accelerate the growth.

But that's the way I think about this, it is a solid double-digit growth business with good operating margins and strong synergies.

Got it.

And maybe some color on the time frame for the deals that you are talking about, the million dollar deals for the enterprise.

Have they shortened in terms of inquiry to actual purchase?

Where are they relative to maybe where they were six months or nine months ago?

I would say -- this is Jim McDonnell again.

I would say they haven't necessarily shortened.

What's happened is we're seeing more activity.

The funnels are bigger than they have been from a year ago.

Our order situation is much better than it was a year ago, so we are seeing more volume, but the process is still pretty consistent which involves pilot or proof of concept, if you will, and then rolling out the deployment.

And again, depending on the customer, that deployment can be relatively short within a quarter though many customers it would be more like six to nine months until you achieve full deployment.

Got it.

And last, can you just update us on what is going on in the military business.

Has that changed at all?

The U.S.

government business for us is flat year-over-year, and we are still struggling with the demand side of it.

The government is not buying anywhere near the levels they had in the past.

However, we are optimistic for the rest of the year that we will see some demand break loose.

It is not that we are losing business at all, but it is a matter on the demand side.

Do they give you any -- I know they probably don't, but do they give you any color on what would stimulate that business?

Is this a function of dollars being shipped overseas to a theater or something more than that?

I can't really speculate a lot.

It changes day-to-day based upon what bills are going through Congress.

Earmark appropriations, military spending, it is all tied into the general Washington set of issues.

Okay, well thanks very much.

Thanks, Andy.

Thank you.

And our next question is from the line of Eli Lustgarten.

Please go ahead.

Good afternoon, everyone.

Hi, Eli.

Just a longer-term question.

I know we have all of the charges and restructuring, but let me go out not just not (inaudible) for the next couple of years.

Which of these non-GAAP charges will we have to deal every year for the next five years or so?

I assume we're going to have the amortization of intangibles goes on for every quarter for quite awhile, almost forever.

So can you give us -- which ones (inaudible) I have to worry about for the next five year?

Yes, Eli, this is Bob.

The inventory fair value uplift was essentially cleared in the first quarter.

The deferred services, it is similar in concept that you have to set aside the profit on the existing deferred service contract revenues.

That will be for the remainder of 2011 at about $2.2 million per quarter.

And then next year it is de minimis.

It's maybe $1 million for the entire year, so less than $100,000 per month or about $300,000 per quarter on average.

The intangibles, yes, those will continue as we complete the valuation work, there will be -- the $3.3 million will be the significant initial amount.

It will taper down because we are really -- we will be amortizing those over the useful lives of the various intangibles and so my view would be that it will be a little bit higher in 2011.

It will start to drop off a little bit in 2012 and 2013 going forward.

But the intangibles -- the intangible amortization will have probably a total life of five to seven years.

Is there anything else -- any other adjustments?

What I'm driving at is we have -- I have some companies that report GAAP and non-GAAP earnings, and the question is, are we going to be converting to non-GAAP for a [relevant number, just issue] or is this a prolonged issue is what I am trying to find out about.

Yes, obviously I think the reason we started to EBITDA and adjusted EBITDA as a metric even though it is a non-GAAP metric is because we believe it will be a useful measure for investors to kind of look at the cash earnings.

Of course we are a GAAP filing Company.

We are trying to provide some visibility into items that are not in our historical operating patterns so that you have a good picture of how we compare both looking backward and then projecting forward.

That's our intention to try to guide on the operating and non operating which hopefully several quarters or through the end of this year I would hope that some of those items would drop off or they would be baked into the historical run rate so we wouldn't need to call those out as much.

The opportunity to report EBITDA or adjusted EBITDA for investors to use the data as they find value is our intent.

So basically, essentially it is only the intangible $3 million plus or minus the significant number going forward after 2011 is what it sounds like.

At this point, yes, that's correct.

The other question is what do you think you have to do to become profitable on a GAAP basis at this point?

Is it strictly volume or are there other things you need to do across the board?

So a couple thoughts.

One is we certainly on a GAAP basis will be knocking on that door in our guidance in the second quarter.

In addition I think one of the items we announced is the continued view of how we improve our operations and we are continuing to look for ways to streamline the cost structure and reduce expense.

That was the action that we announced, and that action, essentially the charges will hit in the second quarter.

The $4 million that you talked about?

That's correct.

Which would mean that there is $500,000 to $1 million in the remainder of the year.

I would expect to be -- at this point I would expect to be profitable on a GAAP basis in the third and fourth quarters and for the full year.

Yes.

Okay.

Eli this is Pat.

One of the things I note is if you go back to last year's non-GAAP operating income and then look at the second quarter, and then look at the second quarter of guidance we provided, what you will see is very solid operating leverage in the core Intermec business on the additional revenue we are generating.

So another message or thing I would land with you is if you look at the organic growth plan and the operating leverage coming off the incremental Intermec revenue it is very solid operating leverage in the order of 35% to 40%.

So that operating leverage is really one of the key -- continues to be a key strategic focus of the Company.

We've invested in sales and marketing.

We have stabilized and continue to improve our gross margins, and that combination along with growing expenses slower than revenues going forward will enable this operating leverage to deliver as Bob said moving into GAAP profitability.

Thank you.

Thank you.

Thank you.

(Operator Instructions.) Our next question is from the line of Keith [Housand].

Please go ahead.

Thanks, gentlemen for taking my phone call.

Just a little clarification, Bob, on the cost reductions going forward, that $3 million.

Is that going to be primarily in the cost of goods sold line or are we going to see that in the G&A line?

You'll see probably 80% of that will be in the cost of goods sold, specifically the services margin line, once it's fully implemented.

Smaller amount, 20% or so would be in the expenses.

Okay, great, thanks.

And I really can't let a quarter go by without anyone asking this question on RFID.

If you guys could just shed a little bit of light on what you are seeing in the demand for RFID, and is that progressing as you guys would expect, acknowledging that it is still very small as a total.

Yes, this is Pat.

The way I would characterize it is, we are seeing a good, solid activity and growth in RFID.

It is a small business in closed loop applications, especially in mobile asset tracking, and other closed loop applications.

There is also activity in the item level tag area in retail which of course drives some of our IP licensing revenues.

That's the way I would characterize it as the recession is recovering it is still an important complementary technology that continues to grow.

Okay, great.

Thank you.

Great quarter.

Thanks, Keith.

Thank you.

And there are no further questions at this time.

I would now like to turn the call back over to Mr.

Buscher for closing remarks.

Thanks, operator.

We would like to thank everyone for joining us this afternoon.

And always if you have any follow-up questions, please don't hesitate to give us a call.

That concludes our remarks for this afternoon.

We look forward to talking to you again soon.

Ladies and gentlemen, this concludes the Intermec first quarter 2011 financial results conference call.

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