漢威聯合 (HON) 2011 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Intermec third-quarter 2011 financial results conference call. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions.

(Operator Instructions)

I would like to remind everyone that this conference call is being recorded today, Thursday, November 3, 2011, at 2 PM Pacific Standard time. I'll now turn the conference over to Mr. Dan Evans, Senior Director Investor Relations. Please go ahead.

Thank you, Yvette Good afternoon, everyone, and welcome to Intermec's third-quarter fiscal year 2011 earnings release conference call. With me on the call this afternoon are Intermec's President and Chief Executive Officer, Pat Byrne; and Chief Financial Officer, Robert Dreissnack.

In a moment, Pat will discuss our quarterly overview, and Bob will provide a summary of our operating performance and discuss our fourth-quarter guidance. Following our prepared remarks we'll begin a question-and-answer session. During Q&A, Jim McDonnell, Senior Vice President of Global Sales and Marketing, will join the call.

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 make 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, November 3, 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 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 and can be found on our Form 8-K filing that is available on our website with other SEC filings.

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 SEC filings including our Form 10-K and Form 10-Q. Copies may be obtained by contacting us or the SEC. With that, I'd like to now turn the call over to Pat.

Thanks, Dan. In Q3, Intermec delivered revenue of $212 million, an increase of 26% compared to the same quarter last year. Intermec revenue, excluding Voice solutions, was $181 million, which is up 7% compared to Q3 2010. Voice solutions delivered $33 million operationally in the quarter, which is an increase of more than 12% for that business compared to the same period last year.

Revenue fell short of our expectations, primarily driven by timing of orders and revenue generation in Europe. While we are disappointed that we did not convert all of EMEA potential revenue in the third quarter, we did convert orders received late in the quarter to revenue in the early days of the fourth quarter and we continue to be very confident of our business in the region. In addition to external market conditions in EMEA, we completed both a major SAP system deployment in the quarter and a major transition in our service business. These operational transitions also affected revenue conversion late in the third quarter. However, these transitions are behind us and we expect strong sequential growth in EMEA in Q4.

Gross margins on an adjusted basis for the quarter were 43.6%, compared to 38.8% in Q3 2010. Most of this 480-basis-point increase was driven by the addition of the Voice solutions business. The core Intermec business also delivered improved gross margins in the quarter. We are pleased with our gross margin performance, as we have delivered more than 43% on an operational basis for a second quarter in a row after the completion of our recent acquisitions. For the quarter, we generated positive net cash from operations of $1.6 million and ended the quarter with $73 million in cash and cash equivalents. The late timing of orders in the quarter had an impact on our cash generation, but we expect receivables and inventory to return to more normal levels in Q4, enabling significant cash generation before year end.

Bob will discuss cash more in details in his remarks. Non-GAAP or adjusted earnings per share for the quarter was $0.09, compared to a loss of $0.09 per share in the same period 2010. Our Q3 2011 EPS performance was in the middle of our guidance in spite of the lower revenue generation. Strong gross margins and good expense control contributed to our solid EPS results.

I'll now turn it over to Bob for a more detailed financial discussion

Thank you, Pat. Intermec's third-quarter revenue of $212 million represents a 26% increase from the same quarter of 2010. On a constant currency basis, the overall growth rate was 23%. Our reported revenue includes approximately $34 million in revenue from Vocollect and Enterprise Mobile. On an organic basis, excluding the impact of acquisitions, Intermec's third-quarter revenue grew 5% from the year-ago quarter.

On a GAAP basis, our third-quarter net income was $700,000, or $0.01 per share. This compares to our third-quarter 2010 net loss of $6.9 million, or minus $0.11 per share. Our non-GAAP earnings per share were positive $0.09 for the quarter, compared to a prior-year loss of $0.09 per share. We incurred $6.8 million of costs and expenses related to the Vocollect and Enterprise Mobile acquisitions and restructuring costs of $600,000 in the current-year quarter. Excluding these items, our non-GAAP adjusted net earnings were $5.5 million, or, as noted, $0.09 per share.

Our third-quarter revenues on a regional basis, as compared to the prior-year quarter, for North America increased 27%. Excluding acquisitions, the region grew 5% year over year. Europe, Middle East and Africa, or EMEA, increased 27% year over year. On a constant currency basis, EMEAs in Europe were up 20%; excluding acquisitions, revenue increased 5%. Our other international areas also delivered solid results, with revenues up 18% in total, driven primarily by 42% overall growth and 27% organic growth in Asia-Pacific. Latin America had a very strong quarter against the toughest comparable from the prior year, with overall growth of 6%, but was down about 2% excluding acquisitions.

On a product-line basis, our systems and solutions revenue of $102 million was up almost 10% year over year. Print or media revenues, of about $44 million, increased 6% year over year. Our Intermec Services-branded revenue was $35 million, up 3% year over year. Voice solutions reported revenues which includes both products and services related to voice and totaled $30.8 million for the third quarter. This reflects $33 million of what we refer to as the operational revenues, less the purchase accounting adjustment of $2.2 million for deferred services revenues that will continue for the remainder of 2011.

Total gross margins, as reported, were 41.5% versus the comparable 38.3% from the prior year, an increase of 320 basis points on a GAAP standpoint. Excluding the impact of $5.4 million in acquisition-related adjustments, our adjusted non-GAAP gross margins were 43.6%. The higher gross margins reflect improvement in the core Intermec gross margins of about 60 basis points, with the remainder due to a favorable impact from our acquired products and service revenues.

Drilling a bit deeper on margins, product gross margins, as reported, were 41.5% compared to 38.2% in the prior-year quarter. Excluding acquisition-related amortization of $3.2 million, adjusted product gross margins were 43.2%. Service gross margins, as reported, were also 41.5% compared to 38.5% in the third quarter of 2010. Excluding the purchase accounting impact for deferred revenues of $2.2 million, our adjusted services gross margins were 44.2%.

Total operating expenses for the quarter were $86.9 million, which includes ongoing operating expenses for Vocollect and Enterprise Mobile of $17.3 million and acquisition-related costs of $1.2 million. We recorded $600,000 of restructuring costs in the third quarter for the previously announced plans to streamline our international service and support operations. Setting those items aside, the core Intermec operating expense was $67.7 million. That compares to prior-year operating expenses of $62.2 million, which included the favorable impact of a gain on sale of intellectual property of $2.9 million and a gain from a corporate-owned life insurance policy of about $500,000, offset by restructuring charges of $1.8 million.

On a comparable basis, therefore, the core Intermec operating expense of $67.7 million this year compares to $63.8 million in the prior-year quarter. The increase is primarily rated to our global systems deployment costs in the quarter and higher pension and compensation costs versus the prior year. When compared to Q2, 2011, total expenses decreased from $94.4 million to $86.9 million. This quarter-to-quarter decrease was driven by lower restructuring costs of $4.5 million; slightly lower acquisition-related costs of about $200,000; a collection of certain receivables, which resulted in a reduction of our bad debt expense recorded prior to the current period of $700,000; and other net expense reductions of $2.1 million. Income taxes in the quarter reflect a small net benefit, due primarily to the completion of our annual state and federal return filings in the quarter and a small benefit as a result. Our operational tax rate remains approximately 41% and I expect our overall tax rate to be consistent with that for the fourth quarter.

Moving to the balance sheet, total inventories increased approximately $7 million in the quarter driven by several factors. One of the factors was our system transition in Europe. While the system transition went well, we were not able to ship several orders that were received late in the quarter and, as a result, we shipped those orders in the fourth quarter. This and other inventory reduction activities we expect, will reduce overall inventories to a level consistent with the end of the second quarter.

Accounts receivable at the end of the third quarter increased $2 million, due to the timing of billings within the quarter. The number of days receivables or DSO, was approximately 61 days at the end of the quarter, about 3 days higher than in the second quarter. Our receivables have a very high percentage within terms consistent with our prior trends and we do not believe represents an increase of credit risk.

Intermec generated $1.6 million in cash from operations in the third quarter, which reflects our net income, the add-back of non-cash expenses, and increased liabilities offsetting the higher inventory and receivable levels. We are driving for key working capital improvements in the fourth quarter and are confident of our ability to generate strong operating and free cash flow going forward. Cash, cash equivalents, and short-term investments totaled $74 million at the end of the quarter. The decline from the prior quarter was driven by weaker foreign exchange rates, capital spending for our Global ERP system, and tooling for new products, offset by our operating cash flow.

Our adjusted EBITDA was $16.4 million for the third quarter, as compared to $11.2 million in the prior-year quarter, primarily due to the increase in the adjusted operating earnings. As we look to the fourth quarter of 2011, we currently expect fourth-quarter revenues will be within a range of $235 million to $245 million. This estimate includes approximately $37 million to $38 million from acquisitions. Fourth-quarter earnings per share on a GAAP basis are expected to be within the range of positive $0.08 to $0.13 on a per-share basis. Non-GAAP earnings per share is expected to be within a range of $0.16 to $0.21, which excludes the impact of amortization of intangibles, up $3.7 million; deferred service revenue adjustments of $2.2 million; and other acquisition-related adjustments of $1.2 million. Our earnings-per-share guidance assumes a diluted share count of approximately 59.9 million shares for the fourth quarter.

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

Thanks, Bob. There are a number of key topics I wanted to highlight as we head into the fourth quarter and look into 2012. Intermec has a distinct market opportunity that places us at the forefront of the transformation of the mobile workforce in deployment environments like the distribution center, field service, parcel express delivery, and direct store delivery. Customers invest with Intermec because we offer compelling value to increase business velocity in front-line IT applications using mobile technologies. Our products are recognized as best in class in the rugged mobile category and, with the acquisition of Vocollect, which launched our voice solutions segment, positions Intermec as the clear leader in delivering high-quality voice solutions in our target market segments. We expect to leverage this leadership position into superior results for our shareholders.

A significant and growing opportunity for Intermec is our international markets. In 2006, the international business for Intermec represented approximately 42% of the Company's revenue of that year. This year, 5 years later, we expect the international business to be about 55% of revenue. As a global Company with operations on 6 continents and an extensive global channel network, we are strategically positioned to meet the evolving needs of global customers. As a comment in each of our regions, I'll be focused primarily on our Intermec-branded products and services, and I'll address our Voice solutions business separately.

In EMEA, we grew the business 5% compared to last year's third quarter. This lower growth rate relative to recent quarters was driven by several factors. One factor I've already mentioned is that our business levels were slow in the first month or two of the business -- of the quarter, which is not uncommon in Europe over the summer months, but began picking up in September. Activity in EMEA remains solid through October. We believe this trend is consistent with the overall market and economic conditions.

The second factor in EMEA for Intermec was the simultaneous operational transitions we made in the quarter, deploying an ERP system and also transitioning our service business to a lower cost outsource partner. This transitions, combined with the late timing of order in the quarter, led to some revenue shortfall in the region in Q3. However, as I mentioned earlier, orders received closer to the end of the quarter were converted to revenue in October and we expect strong sequential growth for EMEA in Q4.

Despite the challenges in Q3, Intermec-branded systems and solutions business grew 16% year over year in EMEA, so we believe we are in a solid market position. Sales in the UK and Middle East were particularly strong in the quarter. During the quarter we won a number of significant deals in the UK in retail and distribution centers. For the first three quarters of the year, EMEA is up 15% compared to the same 3 periods in 2010 and we anticipate a solid finish to the year, with strong sequential growth and a strong position going into 2012.

Turning now to recent results in other international markets, Asia-Pacific grew more than 25% in the third quarter on a year-over-year basis. We expect sales in the region to reach record levels this year. The more established markets of Australia and New Zealand were primary contributors to the region growth, with a number of important wins in both countries. In Australia, for example, we recently completed an important deal with the country's largest equipment rental company for 1200 CN50s to be deployed over the coming months.

Sales into China are growing at a pace of 50% per year right now. And we anticipate a record year in 2011. We believe there are strong opportunities for core Intermec and for Voice solutions in China going forward. Demand for our products in the Asia-Pacific region is broad based. We recently closed an important deal with a customer to implement the CK-3 Rugged computer and PM4i bar code printer on the manufacturing line for a popular consumer tablet device. This is an important production facility and our customer scrutinized multiple products and solutions before selection. Their selection of Intermec for both mobile computing and printer media for this critical production line speaks highly of our reliability, durability, and effectiveness and, most importantly, the return on investment of the solutions that we offer.

In Latin America, results this year have been very strong and Q3 was another strong quarter. Sales were down slightly versus last year's third quarter, which was our strongest quarter last year. Year-to-date, sales in Latin America for core Intermec-branded products and services are up 33%. Sales in Mexico continued to be strong, driven by technology refresh projects. We're having a record year in Brazil, with strong sales results in all our major Intermec-branded product lines. We also expect very good opportunities for our Voice solutions business in the region going forward.

The largest micro finance bank in the Western Hemisphere, based in Mexico, required a rugged mobile solution that would help them take the bank to their customers' door, primarily in rural parts of the country. They selected the CN50 for its durability and GPS functions that could track sales, loan promotion administration, and customer retention. We see this opportunity expanding as the bank takes the solution to other parts of Mexico and throughout Latin America.

Turning now to North America, North America reported a solid quarter with revenues up 6% year over year for core Intermec sales. Computers delivered strong results in the region, which also had a beneficial impact in our overall margins. We recently implemented the new CN70 in Manhattan Beer, one of the largest beer distributors in the US, to automate their fleet of 300 delivery vehicles. They selected the CN70 as it allows them to meet their current and future technology needs, while improving their productivity, all in one rugged mobile solution. The customer said there's several key factors in this decision -- the CN70 allowed the customer to meet current and future technology needs in terms of real-time wireless communications today; it's the new product in the beginning of its product lifecycle, which would provide the customer with a long, useful life in the field; and, third, the experience of Intermec and the account team in the route distribution industry was a very strong contributor. This speaks directly to what sets Intermec apart -- quality products and the experience to deliver the right solution in a range of deployment environments.

The channel continues to deliver important wins as well. Recently, with one channel partner, we began the rollout of 6000 CN50s to a nationwide field service company to help improve its customers' business productivity and simplify their back-office processes.

I'd like to share a few Q3 highlights about the rugged computer business, our largest product line in the Intermec-branded systems and solutions category. In January 2011, we launched the 70 series, and it has been well received in the market. In September, the CK71 was recognized by Everything Channels Computer Reseller News as a recipient of the technology innovator award in the hand-held category. Awards like this reinforce what we know -- that our products are the best in the business. As a demonstration of future innovations, the 70 Series will have Vocollect software built into every device. We believe this will benefit the sales synergies that we've been targeting in the combined business.

During the quarter, we closed 27 Enterprise deals, worth $35 million. In addition to newer products like the 70 Series, our core computer products continue to sell well and delivered 13% year-over-year growth in the quarter. And we've grown the computer business 20% year-to-date as compared to the first three quarters of 2010.

Turning now to our Voice solutions segment, I'll provide more details on our Q3 performance. We've completed two full quarters since the acquisition of Vocollect and are very excited about this business. We are on track with a standalone growth plan, as well as with the execution of revenue and cost synergies. The team is very capable and is focused on delivering superior value to customers. The Voice solutions business is meeting our expectations, which is a real tribute to the employees who drive that business. In Q3 revenues of our Voice solutions segment were more than 12% higher than Vocollect pre-acquisition revenue for the same quarter last year. Results in North America were particularly strong.

We're looking to aggressively grow this Voice solutions business in the international markets as well. We believe there are strong opportunities to expand results in Asia-Pacific, Latin America, and throughout EMEA. One of the metrics we use to track progress in this business is new logos. These are customers who are new to using voice solutions. They have evaluated the return on investment for the solution based on improved work force productivity and distribution center execution metrics, like picking accuracy, and have elected to adopt our voice solutions for the first time. In Q3 we added 40 new logos on a global basis with participation from every region. One of our key strategic initiatives for Voice solutions is to leverage the Intermec channel to expand the reach of the sales organization on a global basis.

To support their growth we launched the Vocollect Voice Partner program in September 2011, which expands the network of AIDC resellers who are certified to sell voice solutions in partnership with key software suppliers. We've received strong interest in this program with over 100 Intermec partners at various stages of certification in the Vocollect Voice Partner program. With the increase in the Partner network and the expansion of new logos, we're excited about the growth prospects for Voice solutions and are on track to deliver $8 million to $10 million of revenue synergy in the first year of combined operations. The other acquisition we made this year was Enterprise Mobile, a business that deploys and manages mobile devices for other businesses. While its current financial impact on Intermec results is relatively small, the business is growing. Currently, we project the number of devices under management is on track to be over 100,000 by the end of 2011, including both rugged and non-rugged devices.

As we look forward to Q4 and into 2012, we believe we are well positioned with our products and service offerings, channel reach and brand awareness to drive revenue growth. We've built a strong foundation for the business and will continue to focus on improving profitability by maintaining discipline on expenses, targeting R&D investments that deliver innovative solutions, and expanding our global sales and marketing initiatives to increase demand for our offerings.

I'd like to now turn it over to Dan for the question-and-answer session.

Thank you, Pat. And, Operator, if you could please provide instructions for Q&A to everyone, that would be great.

Thank you. (Operator instructions). One moment please for a first question. Our first question comes from the line of Tavis McCourt with Morgan, Keegan. Please go ahead.

Great, thanks for taking my questions. I missed the first part of the call, so some of these you may have answered. In terms of the business in Europe which would seem to slow quite a bit this quarter, how much of that was the general market versus not wanting to compete on more price aggressive deals as you did in Q2?

Well, Tavis, this is Pat. Most of the impact that we saw that we mentioned what we already outlined which was the timing of orders and the conversion of those orders into revenue. We continue to compete for business across the board and see our underlying growth prospects to be strong in the region.

In terms of when I back out the acquisitions which seems to be doing very well, the core historic Intermec business, looks like it grew kind of mid-single digit maybe in this quarter and the guidance is for potentially down slightly in Q4. In your opinion is that market share or is that simply what the market is doing in this environment?

Yes, so I'd say that the North American business -- just going through the regions, the North American business grew about 6%; Europe grew about 5%. As I said, some of that is because the revenue moved into Q4. This is Q3 that I'm mentioning. Asia grew strong. Latin America was down in Q3 compared to last year, but really Latin America is having a very strong year as I mentioned in my remarks. As you look into Q4, Q4 of last year was particularly strong and we're estimating that our Q4 business in core Intermec will be up modestly in Q4 compared to Q4 of last year. Bob, do you want to add anything with that?

Yes, I think -- and Jim may have a comment or two as well, but I think, Tavis, last year, as Pat mentioned, Q4 was really by far our strongest quarter of the year. And I think the guidance, if you kind of look at the core there, is probably down a couple points; up 3 points or so. Given the economic uncertainties and things, I don't think we've been overly aggressive in our guidance, but believe that it 's absolutely appropriate [agenda] at this point. The key really is, I think, Q4 being the strongest comparable quarter in the prior year.

Got you. And in terms of the -- final question, I promise. On the SG&A, this quarter was down a few million dollars. Obviously that usually trends up a bit in Q4 with seasonality, but can you go through the puts and takes, and the differences between the $66 million in Q2 and the $63.5 million in Q3 and what's kind of a better run rate to use as we look into next year?

Yes, I think Tavis -- I haven't really offered specific line item guidance other than the revenue and the earnings per share, but I think your perception that seasonally with higher volumes in the fourth quarter that typically volume-related expenses would increase with that. From the second to third quarter we worked hard to bring our expenses down and control spending. We're looking at everything that we have and whether that's discretionary variable costs or whether that's any structural fixed costs. As you know we're already kind of looking at and going after the international service costs. Just about complete with that project. And then we've looked at some of the support costs that support both that business and the international operations as well.

So I think, Tavis, one way of looking at this is that the levels that we're are at now, we're going to be trying to maintain expenses in this range for the coming quarters. As you said, it will go up some in Q4, but we think this level that we're at is about the right level.

Okay, thanks.

Our next question comes from the line of Andrew Abrams with Avian Securities. Please go ahead.

Hi guys. Just a couple of quick questions. How much of the Vocollect business actually went through the distribution channel in the quarter? And how much do you think that's going to increase in the fourth quarter and maybe through the first half of next year?

If you think about it this way, the international business all goes through the channel in Vocollect. In the US it's a mix -- it's a mix of direct and through the channel. Going forward we would expect the channel business to grow. Really for two reasons, the first one is that we'll be leveraging the Intermec channel. As I said, we have the new VHP program, so these are channel partners that are established, successful partners for Intermec, interested in selling voice. The second one is as the international business grows as a portion of the voice solutions business, that will be all through the channel. So, right now it's probably 60%. 65% is through the channel. I would expect that to grow over time due to those two factors.

And are you using Scansource the way you would use Scansource for your basic business in Vocollect or have you kind of structured it differently depending -- because of the difference in the product line?

Yes, the way that the product line works is it's a direct relationship between Intermec for our voice solutions segment and the resellers, so right now we do not use distributors for that business.

Got it. Okay, so it's really a direct relationship for you to the reseller itself.

That's right.

Got it. Okay. And is it possible for you to define the base you have in China? I know it grows and I know it's growing rapidly, is there any way we can actually get an idea of how big that actually is?

We don't disclose the country specific results, it's our fastest growing business in Asia. And we do disclose what the overall Asia results are.

Okay, great. Thanks very much.

Our next question comes from the line of Ajit Pai with Stifel Nicolaus. Please go ahead.

Good afternoon.

Hi, Ajit.

A couple of quick questions, I think. The first one is on the competitive dynamics. Just you've had one competitor enter the space and consolidate a few of the players there. And then you've also had Motorola split up right now. So, could you give us some color as to whether there's been any change in competitive behavior over the past 12 to 18 months? Also on the pricing front whether the margin that you have right now and you expect over the next couple of quarters on the growth side, how -- what's the impact on pricing that's been assumed for that?

I will start with the second one. We've demonstrated a number of quarters in a row that -- stable to improving gross margins. I would say the overall pricing environment is relatively stable. But it's very important for us to continue to innovate with new products that earn pricing from our -- with our customers. I would say that the competitive dynamics -- things are evolving, but Intermec is very focused on delivering value to our customers. We believe we have a distinct competitive advantage in the deployment environments we're focused on. And we believe we have a really first-class channel program that delivers great value to our partners as well as to our customers. So, I would say that that's the main thing that's driving the business is our execution of that business, not any of the evolving competitive dynamics. Although, of course, we track those and look at them on a regular basis.

The second question is just looking at two verticals, I think you've given us some color on the manufacturing side, but on the postal and transportation and logistics vertical, can you give us some color as to what's going on there? It has historically been an important vertical to you. Then, also two new verticals that you talked about a while ago that I haven't heard you mentioned recently, and that would be the healthcare and then the retail vertical, whether those are still relevant or far less important?

Yes, sure, I'll go through each of those. The transportation and logistics or what we called postal express parcel business is one of the most dynamic ones there. This is a very exciting business segment because of the transformation that's happening in the postal industry, due to letter volumes dropping and therefore all these postals around the world are really building new business models. A lot of those business models depend upon the productivity and revenue generation capability of the mobile workforce. So it's a very significant shift in the economics of those businesses and then you add on top of that eCommerce is growing around the world and you've got a really exciting market opportunity.

Intermec is very focused on this and we have important customers there. Really the who's who of the postal industry as well as parcel delivery companies and its a global market opportunity. We of products we introduced in the 70 series that are directly focused with unique contributions in this area. And we anticipate this, because of the eCommerce effect, the global nature of this and the changing business models associated with the global postal industry to be an exciting opportunity for years to come and we really like our position.

Moving to retail and healthcare, we have a good business in the healthcare segment. Maybe Jim could make some comments on some of these like retail in a moment, I'll turn that part over to him. But in healthcare we have a good business in our printer area and some select opportunistic areas in our mobile computers. So, Jim, do you want to make any comments about our retail participation especially in Europe?

Yes. We have very strong customers in the retail segment in Europe -- particularly in the UK, some of the largest retailers. Then, of course, with our Vocollect voice business, of course, that also has many of the very large retailers around the world. So, retail is definitely one of the segments that we sell into and compete in and have competed in very successfully in the past and intend to in the future.

The same thing with healthcare. Healthcare, particularly with our printer business, is where we've had most of the focus around certification of the products, as you know you need to do in healthcare. And we've done that and we've seen good success in that market also.

I'd just add one other comment. In our Vocollect business we also have a segment to that business where we have a voice solution specifically for healthcare. It's a business that's growing very rapidly. It's utilizing the technology for the tracking of tasks that are done in healthcare applications and it's a very successful growing subsegment of the voice solutions business.

Then one question on your tax rate. Just looking at the changing mix of your business geographically and trying to get to a pro forma tax rate, one for this third quarter, the fourth quarter, but then also how to think about it going forward. If you expect international business to be growing faster than domestic business, could you give some color as to how to think about a pro forma tax rate?

Yes, Ajit, this is Bob. In the third quarter, as noted, we're pretty close to breakeven on a GAAP basis, so really that was a small -- the small benefit in the quarter was really the return to provision true-ups. The fourth quarter operationally about 41% overall blended tax rate. As you've noted, growth in the international areas and some planning opportunities that we have established, I think, give us an opportunity as our profit expands in the next year or 2 to see the rate drop down into the high $30s, and to the mid $30s over the next couple of years.

Right. And then the last question is just looking at imagers versus laser scanners in your business portfolio. I mean, historically, your largest supplier for laser scan engines had been a fairly unreliable, but was a competitor. You've done a lot of innovation internally in terms of being able to substitute that internally as well as being focus on proliferating the imagers instead. Can you give some color as to the percentage of your business mix -- whether you're still out in the merging market, buying over there or whether the internal volumes are completely met through internal solutions? And then where the imagers are becoming materially larger percentage of your overall business.

Yes, sure. The imaging business -- all our products sell with imagers. So that's the -- that's the headline is that we have an outstanding technology team and a great manufacturing capability with our partners to manufacture these imagers. There are 3 ways those imagers get deployed. The first one is in the computers. By the way, these imagers are not just reading barcodes, they're also reading documents. And they're able to do automated address verification, for example, in the postal industry, where it's able to pull the address off of a label and verify that that's the correct address. So this goes way beyond barcode scanning for the imaging. That's the -- and we have outstanding technologies and it's a key attribute of our mobile computer business is the strength of our imaging contribution. That's all Intermec technologies.

The second-place we sell imaging technologies is in hand-held scanners; not in the computer but in hand-held scanners. That's a rapidly growing smaller business, but also using Intermec technologies. And the third one is we actually sell these imagers on an OEM basis as part of our business as well. Also rapidly growing as these are really best in class price-performance imagers for other applications outside of our industry.

Got it, thank you.

Thank you.

Our next question comes from the line of Keith Housum with Northcoast Research. Please go ahead. Perhaps your line is muted.

I'm sorry about that, thank you. Thanks for taking my phone call. If you can just expand on the conversation a few moments ago regarding the SG&A expenses. I just want to make sure I was clear. Even though that you had -- Pat, I think you said the numbers were -- should be pretty steady into the fourth quarter. Just because of the increase, say, probably on a percentage basis, we still expect some operating leverage there, correct?

Hi, Keith, this is Bob. I think on the expenses, What i would say is, we worked pretty hard to control and reduce the expense levels from the second quarter to the third quarter and will continue to look for every opportunity we can to reduce and control those and reserve the right to make decisions as we evaluate the economic situation and any uncertainty or opportunity that are on the horizon. I think what we said was from the third quarter to the fourth quarter, Tavis had commented that there's a normal seasonal volume driven uptick and that on a proportional basis, adjusting for that volume that expenses would remain in that sort of band.

But we would expect expenses as a percentage of revenue to go down in Q4. As a function of the volume.

It really is a function of the volume and a function and so, yes, would expect some operating leverage going forward driven by that.

Okay. Appreciate that. Just a follow-up question then, back to the outlook for Vocollect into the fourth quarter. It looks like the outlook provides for some significant sequential gains over the current quarter. Is that going to be driven more by Enterprise Mobile or more by Vocollect and if it's by Vocollect -- I guess what do you see is driving that? Is that the addition of the channel changes in September?

I would say the sequential increase to our voice solutions business in Q4 relative to Q3 is really the normal seasonality of that business having a strong Q4.

I would agree, although the increase is driven by both businesses. It's relative to the size of the two businesses with -- obviously Vocollect is about 10 times the size of Enterprise Mobile on a revenue basis.

Okay. Great, thank you, appreciate it.

Okay.

Our next question comes from the line of Eli Lustgarten from Longbow Securities. Please go ahead.

Good afternoon, everyone.

Good afternoon.

Couple of -- you went in accounting questions, because you went through adjustments in the quarter from the acquisitions. Now the 2.2 revenue -- deferred revenue goes off in the fourth quarter and then reverses in 2012? Is that how it works? And the 2.7 intangibles will continue on for a while?

Yes, Eli, let me break that into two pieces. First on the deferred revenue, this is really the fair value of service contracts that existed at the time of the acquisition. So, there's -- similar to the inventory uplift that you would see in an acquisition, there's a fair-value uplift. We have to eliminate that. And it's tied to the length of the service contract, so there was a large chunk that was tied to the first year, the 2011 service contracts. And then there's a much smaller chunk, much smaller portion that would still be there next year, but it's a fraction of the amount from this year. So, that does not reverse next year, although the 2.2 will not recur. So, maybe that's how you're phrasing the question. (Multiple speakers). I'm sorry, go ahead.

The 2.2 so -- the 2.2 would disappear next year, but you don't have a revenue -- a deferred revenue that will reverse?

That's correct.

So the 2.2, it does -- it goes away and ceases to exist. We'll have maybe $100,000 a month next year, it will be so much smaller that I don't think we'll flag it or call it out.

Okay.

And then on the amortization of intangibles -- and actually I think we'll -- you'll see this laid out in the queue that I expect to be filed next week, with an estimate for about the next 4 or 5 years. Basically, each of the intangibles has a life. The amortization of intangibles will probably be pretty constant for the first, second, and third years. Then there's some things that drop off and that rate will drop about in half in years 4 and 5. But you'll see those detailed numbers in a table in our 10-Q that's filed next week.

And we should annualize it at 3.7 a quarter for the next couple of years?

That's in the ballpark.

It's not going to matter, but that's close enough.

Yes, that's right the ballpark.

It's about $14 million a year or some number like that.

That's correct.

Okay, I knew that. Now you gave us a percent gain by the over seas market. Do you have the percents of sales in each of the regions? The where you are year-to-date at this point?

For year to date?

Yes or --.

I think Pat had profiled the year-to-date growth for Latin America, because they --

I understand the growth. I wasn't looking for the growth. I was looking for how much of the sales are to Latin America? I understand the growth. How much are Asia? How much is Latin America? How much is Europe?

Yes, at this point in time we kind of -- we combined Latin America and Asia into that one total. We tried to give some color on the growth rates individually. Obviously as those regions grow, if they get to the point where they need to be broken out separately, we'd look at that as well.

I guess I'm saying if North America is [60]% of the business, and Europe, EMEA are 30% and 10% Latin America, Asia. I just wanted to get an idea.

Yes, so the -- Bob will do the calculations here for a minute. In terms -- what you're asking is year-to-date what percentage is in North America? And so we'll do some of those quick calculations here year to date.

It's actually -- if you refer to -- there's the supplemental sales information by geographical region; there's a table in the press release. It's -- North America is about 48%, just under 48% for the nine months year to date. That includes all the revenues, both the organic and the acquired revenues.

And EMEA -- I guess the question is how much of the business is in Europe this time?

About 33% for the 9 months year-to-date.

And the question that -- you were indicating that Europe wasn't doing reasonably well, but we're seeing all sorts of warning signs about European activity at this point, particularly from manufacturing numbers to --. You know, they actually cut rates today, which probably will help that. Do you see any sign of slowdown in Europe at all for any impact? I'm not talking about the next quarter, but more as an impact --

Yes, I understand the question. I think that the way that we're looking at the future and, of course, we read all the same things that you read -- is that we've seen over the last 6 to 8 quarters, we've seen a rebound in business as really the technologies have been recapitalized. And moving forward we expect some moderation of that growth rate in Europe in the economic environment as well as the purchase cycle. What we don't want to do at this point is really forecast European growth rates beyond what's embedded in the guidance that we provided. But we do believe as we look into 2012 that the growth rates will moderate in Europe due to the -- those factors.

And you took -- and the same question as far as China goes, because you're talking about fastest-growing region yet virtually every other company in every other market is now seeing a little bit of slowdown in China. Now I know -- I realize it's not a big piece of it, so you can still -- be far different in the market, but there's nothing impacting your China business at this point?

At this point what I would say -- and maybe, Jim, I'll turn it over to you to answer some questions about China here as well. What I see is that given the size of that market and our relative share position, there's a lot of upside for us continuing even if the overall GDP rates slow in China compared to the recent years. Jim, do you want to add any comments?

I think you characterized it well, Pat. Our business in China continues to grow. We focus primarily on manufacturing in China and the business is still there and still to be had, still growing.

Alright, thank you very much.

Thank you, Eli.

Our final question comes from the line of Chris Marangi with Gamco Please go ahead

Hi, good afternoon. I've got a few. First, as you move through the integration of Vocollect, are there any areas out there that -- either geographic or product that you think you could add to the acquisition?

I think that the opportunities, Chris -- the first opportunity is that this is a really good business and the chief thing is it's relatively small penetration. It really can be expanded in terms of where in the warehouse it's used, as well as it can be expanded outside the warehouse. Furthermore it can be expanded internationally. Those are the primary growth drivers. So leveraging the global channel that Intermec has, expanding the contribution to other processes outside of ticking and warehouses, and then looking into other deployment environments which, of course, Intermec is engaged in a number of different application areas. Those are the primary things that I think will drive the growth of the business. The technology is strong, we have an outstanding team and we've already demonstrated some of the benefits of synergy.

So those are all organic opportunities as opposed to --

That's right. I think that that's the -- right now that's where our focus --our primary -- as I said when we acquired Vocollect and created the voice solutions segment, our first priority is keeping the organic plan on track. We're on a -- we're in a great spot this year. And the second one is looking for those revenue synergies. That's right now what I'd say is the focus of the management team is those two factors.

Okay, and if I could reverse the question a little bit and ask you a philosophical question which is what is -- Pat, what is the board's process for dealing with approaches from other companies? And would public disclosure of an approach be part of that process?

Yes, I just would not want to speculate on this or describe what the board processes are in the --. The board considers all important matters before the board in the right governance approaches. And that's about all I'd like to discuss on that.

Okay. And was there any reason that you weren't in the market buying back stock? This quarter or less quarter?

Yes, Chris this is Bob. I think we always look at it and I think it's making sure that the -- as I think about the third quarter and going forward, we always look at the availability and the use of cash. As you can see, we did use a little bit of free cash flow. We generated a small amount of operating cash flow in the third quarter, used a little bit of free cash flow. So with the economic uncertainties, we would have a normal process where we look at our liquidity, where we look at our sources and uses of cash, and then evaluate any options that are in front of us. So, certainly we'll continue to do that to look at all those options going forward.

So, a financial rather than a legal restriction in buying back stock in the third quarter?

Yes, I would say that there was no legal restriction on buying back stock specifically. It was just really looking at the evaluation of the different options and our available cash and the economic uncertainty that was out there.

Fair enough. Thanks a lot.

Thanks, Chris.

We have no further questions at this time. Please continue.

Thanks, everyone, for joining us today. And if you have any questions, please feel free to follow up with us. Thank you very much.

Ladies and gentlemen, this concludes your conference call for today. Thank you for participating. Please disconnect your lines.