漢威聯合 (HON) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to the Intermec Q2 2012 financial results conference call.

During today's presentation, all parties will be in a listen-only mode.

Following the presentation, the conference will be opened for questions.

(Operator Instructions)

This conference is being recorded today, August 2, 2012, and I would now like to turn the conference over to Dan Evans.

Please go ahead.

Thank you, Amerilis.

Good afternoon everyone, and welcome to Intermec's second quarter 2012 earnings call.

With me on the call this afternoon are Intermec's Chairman and Interim Chief Executive Officer, Allen J. Lauer, and Chief Financial Officer, Robert Driessnack.

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

Today's call will include forward-looking statements.

These statements will include, for example, statements about Intermec's expected financial performance, as well as it's strategic and operating plans.

A number of risks and uncertainties could cause Intermec's actual results to differ materially from those expressed in, or implied by, our forward-looking statements.

We include a more complete description of what we consider to be forward-looking statements in our Forms 10-K and 10-Q filed with the SEC.

Any forward-looking statements made today reflect our opinion as of August 2, 2012, and we undertake no obligation to revise or update them.

In addition, in today's call we'll describe certain non-GAAP financial measures or adjusted items.

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

Please refer to our reconciliations from GAAP to non-GAAP items included in today's earnings release and Form 8-K.

With that, I'd like to now turn it over to Al Lauer.

Thank you, Dan.

Good afternoon, everybody.

In Q2 Intermec delivered sequential improvement over Q1.

As you have probably noticed, there are substantial differences between our GAAP and non-GAAP reporting.

The non-GAAP numbers do not include goodwill impairment, intangible amortization, executive severance, and restructuring charges.

I will comment today on the adjusted non-GAAP results, as I think the non-GAAP numbers highlight the Q2 operating improvements accomplished in a relatively short time.

Following my comments, Bob Driessnack will comment on the relevant GAAP numbers.

I'm pleased to say that we made respectable progress in Q2 towards getting the Company back to profitability.

While our results are below what they were in Q2 a year ago, we achieved strong sequential improvement over Q1, despite continuing economic uncertainty.

Three sequential metrics all pointed in the right direction.

First, revenues increased by $21.3 million, nearly 12% over Q1, driven by gains in North America, and strong gains in Latin America and Asia.

Our systems and solutions products rebounded sharply from Q1, growing sequentially 18.5%.

Second, gross margins improved by 250 basis points over Q1.

This was driven by a more favorable product mix and better pricing controls.

Third, operating expenses were $4.4 million below Q1 levels.

When these three metrics start going in the right direction, results will always improve as our adjusted operating results moved to a profit of approximately $4 million in Q2 from an approximate loss of $14 million in Q1.

This is approximately a positive $18 million operating profit improvement from Q1 on an incremental $21 million increase in revenues.

Adjusted EBITDA went from a negative $7 million in Q1 to approximately a positive $10 million in Q2, a positive $17 million improvement sequentially.

Of course, this is just the first step towards reaching a satisfactory level of financial performance, but I believe we are on a much better trajectory as we head into the second half of 2012.

In addition, the benefits of the restructuring announced late in Q2 will begin flowing into operating results in the second half of 2012.

At this time, I do not intend to provide guidance for Q3, since we are still implementing many changes, and the timing of improvements are uncertain.

I do see sequential improvement in our results, measured by quarter, for the rest of the year.

I'll now turn the call over to Bob for some comments, and then I will return with some concluding remarks.

Thank you, Al.

Today I will briefly review our overall results and cover several specific financial items in the quarter that warrant further explanation.

As Al mentioned, revenue was up 12% sequentially, but declined about 9% year-over-year.

We reported significant improvement in our adjusted operating income and net earnings during the quarter.

Non-GAAP operating income was $3.9 million for the quarter, compared to a loss of $13.8 million in the first quarter.

This is a sequential improvement, as noted, of almost $18 million.

This carried through to our adjusted EBITDA, which was $10.2 million as compared to a loss of about $7 million in the first quarter.

I won't repeat all the other numbers that are already in the press release, but let me add some color on revenues and key items in our financial statements.

On a constant currency basis, our revenues year-over-year included a negative impact from currency of about 2%.

In the EMEA, the current impact was significant, with a $4.7 million, or almost 7% decline in revenue, from the significant weakening of the euro, and to a lesser extent, other currencies.

Therefore, on a constant currency basis, the reported decline in the EMEA of 20.1% would be about 13.5%.

We reported a modest sequential growth in Q2 of about 2% for EMEA, but the region remains under pressure.

While Eurozone challenges impact the entire region, in Q2 more than 60% of our sales came from areas such as Eastern Europe, Nordic, Benelux, the UK, Germany, Austria, and Switzerland, which are some of the more stable economies.

Our focus is on winning enterprise deals that are available in the current environment.

Independent channel reviews from organizations like VDC indicated that our performance and programs in the channel continue to be ranked among the best in the program -- in the region.

Latin America and Asia-Pacific year-over-year revenues were up 1.1% and down 1.7%, respectively, but these regions increased substantially from the first quarter, up 34% and 28%, respectively, as we saw the return of some large deals in both markets with good momentum in mobile computers, especially with our In-Premise business.

North America reported a year-over-year decline of 5.6%, but delivered 10% sequential improvement in Q2, with several additional enterprise deals, particularly in transportation and logistics and delivery companies.

Our system and solutions and printer media businesses were both impacted year over year by the EMEA declines, but showed solid sequential improvement as well.

Intermec-branded services primarily reflects the lower hardware volumes for the first half.

Turning to our voice solutions business, Vocollect revenue showed slight growth in the quarter, which was impacted by the general European economic pressures and delays in closing some deals in Asia and North America.

However, through cost reduction initiatives in the supply chain, and tight management of expenses, Vocollect maintained its high gross margin profile and mid-double digit adjusted operating profitability ratio.

Moving to gross margin, our adjusted gross margins were down year-over-year, impacted by currency weakness and lower volumes, but rebounded 250 basis points from the first quarter with a sequential revenue increase, more favorable customer mix, and pricing discipline.

Our combined R&D and SG&A expenses declined in the quarter.

These were favorably impacted by intense cost focus, but also by decisions taken to reduce certain discretionary costs and lower incentive-based compensation.

There was negligible benefit in the second quarter from the restructuring savings, which we do expect will lower our costs and expenses beginning in the third quarter, but we also expect less favorable impact from the discretionary and incentive reductions that were recorded in Q2.

There were several adjustments to reconcile our GAAP and non-GAAP, or adjusted, results.

During the quarter, we recorded a $1.9 million cash charge for executive severance, which was partially offset by the non-cash benefit of forfeited equity grants of about $1.2 million.

The net impact in the quarter, therefore, was about $700,000.

We also recorded a net restructuring charge of $5.6 million and a non-cash impairment charge against goodwill of $28.3 million.

As it relates to the restructuring, on June 12 we announced a company-wide restructuring plan to better align our cost structure with our current and anticipated needs by lowering our costs, primarily in North America and Europe.

We targeted costs in our operations overhead and G&A areas, which will improve both gross margins and expense levels, while limiting the impact in R&D, sales and marketing, particularly in higher growth regions.

Initially we announced a reduction of 170 employees, or about 7% of our work force.

To date we have made reductions totaling 160 employees, and expect that number to remain unchanged for at least the next quarter.

At the time of the announcement, we expected approximately $6 million to $7 million of restructuring costs in the second quarter.

We did record almost $6 million for severance and related costs relative to this 2012 plan in the second quarter, and expect to record up to an additional $1 million of related costs in the balance of the year.

We now expect the total charge for this recently announced plan will total $6 million to $7 million.

The reported restructuring cost of $5.6 million in the second quarter is net of a favorable reduction in costs of about $300,000, which was previously accrued for the restructuring program announced in 2011, which we have now completed.

We continue to expect the restructuring to generate approximately $19 million to $20 million in annual savings, and continue to work diligently to review and reduce costs wherever possible.

In the second quarter, we recognized a non-cash impairment charge of $28.3 million, and reduced the carrying value of goodwill.

Recently the company completed what in GAAP is referred to as Step 2 of the analysis we began in the first quarter.

This analysis was heavily impacted by our first quarter results, our reassessment of 2012, and a substantial decline in our market capitalization.

The Step 2 analysis is a hypothetical modeling of the fair value of intangibles and other assets of acquired companies, and it's done as if the transaction occurred at the current measurement period versus the original transaction date.

The majority of the impairment charge that we are recognizing in the second quarter is related to this Step 2 analysis, and is driven by an implied increase in the value of the net assets, other than goodwill, which cannot be increased or written up in value.

The result is a hypothetical reduction in the value that can remain in goodwill, which must then be written down in line with the analysis.

In addition to completion of the Step 2 analysis following Q1, due to the changes in executive management, further analysis of our projections, and the global economic environment, we performed additional testing of our recorded goodwill and other long-lived assets.

The total non-cash charge reflects our current best estimate, based on the goodwill impairment test prescribed by GAAP.

The Company believes that we'll complete these analyses, and adjust the impairment amount, if needed, before it files financial results for the second fiscal quarter of 2012, pending the completion of management and external reviews.

Quickly on our tax provision, our provision of $3.1 million in the quarter reflects a $1.7 million provision for taxes in foreign jurisdictions and a $1.4 million deferred tax provision related to cash that we have loaned to certain subsidiaries that is likely to be in excess of the amount needed in the original legal entity.

This is sometimes referred to as a deemed dividend.

I expect the provision for our foreign earnings to be fairly consistent going forward, at about $1.7 million per quarter in the balance of the year, and do not expect additional deferred tax provision for the deemed dividend-type transactions.

Moving to the balance sheet, our cash position at the end of the quarter was about $75 million.

Operating cash flow showed a use of cash of more than $14 million during the quarter, driven almost entirely by the sequential increase in revenue and the related accounts receivable.

We reduced inventory levels in the quarter and managed all other cash inflows and outflows carefully.

Our ending cash balance also benefited from the surrender of, and borrowing against, certain long-held corporate-owned life insurance, or COLI policies.

The loans against the cash surrender value are not considered debt, and are reported as an increase in cash within the investing activity section of the statement of cash flows.

That concludes my financial comments, and I'll turn it back over to Al and Dan for our wrap-up and questions.

Thank you, Bob.

I have been at Intermec for three months now, and I thought I might share with you some of my initial impressions.

The most obvious is that our expenses were out of line with the size of revenue, and we have taken initial steps to correct this imbalance.

More importantly, upon reviewing each of our businesses, the product lines, go to market strategy and leadership teams, I believe there are many positives that we can leverage.

We have state-of-the-art products and solutions that are well recognized in the industry and by customers for their capabilities.

Vocollect provides an important differentiator as we work closely with customers to improve their operating efficiency.

We have made progress in developing and building our channel business, and I believe we have an excellent group of channel partners.

That being said, I know we need to drive our go-to-market strategy to increase revenue.

While I'm not ready to announce specifics today, I do believe that increasing direct contact with our partners and customers on a more regular basis will be vital to our long term success.

As we reduce costs throughout the company, we intend to shift some of the savings toward more customer-facing resources.

While our focus is on short term improvement, Management and the Board have been very engaged in a review of our longer term strategic direction.

While this review is ongoing, we believe that we are well positioned to take advantage of opportunities before us.

In addition, the Board continues to work on the leadership needs of the Company.

While many of you may have questions about our activities in these areas, that is all we can really say right now.

We will, of course, update you as soon as we have anything significant to report.

I'd like to conclude my comments by expressing my thanks to the management team and all Intermec employees, who have, without hesitation, implemented a series of needed changes that have set us on a course for improving top line, and much better profitability.

The depth of experience within the Company is amazing, and it is a real pleasure to work with this team.

Thank you very much.

Thank you, Al.

Amerilis, we'd now like to open the line for questions.

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions)

Tavis McCourt, Raymond James.

First one, a couple of strategic points for you, Al, and then I had a follow-up for Bob.

In terms of the Company's leadership, is there an active search for a permanent CEO at this point, Al?

Yes.

There is?

Okay.

Then secondly, has there been any turnover in any of the business unit leaders since April, or has the turn been relatively low?

The top management team here is very stable and very capable, and there has been no turnover in the direct reports, reporting directly to me.

However, I will make one comment.

We did bring on board a new leader for Vocollect.

He actually came aboard a week after I arrived.

The original private equity leadership in that company had moved on.

Ron Kubera was actually hired before I arrived, and has turned out to be, I think, a very good leader for that business.

So that's the one area where there's been some new leadership.

In terms of your deep dive into the Company over the last few weeks, it sounds like the one major takeaway you had was perhaps not enough direct sales people, or enough direct contact with the end customer?

That's obviously a tough math equation to solve when you're looking to cut costs simultaneously.

So is a lot of the go-to-market strategy going to be delayed until a permanent CEO is found, or are these changes you can make on an interim basis?

Well, first of all, I want to say that the team we have in the field right now proved that they can do the job, and they did it in the second quarter for us.

We really needed the bounce-back in revenues.

I think an 18% quarter-to-quarter improvement in revenues by our global team in the field is something that I'm very grateful for, and I think they did a remarkable job.

I don't think we have, with the people that are out there, I think they're doing a marvelous job, and I think we can provide them with more tools that can help them with their productivity, but we do need more people.

We do need to improve our coverage if we're going to implement the kind of strategies that we have in mind.

In the restructuring, there were minor reductions in our global operations, mainly the ship resources.

We went down in some places where the business was just not going to recover and added back in other areas.

So a sense of net-on-net, the restructuring didn't really rob our capabilities in the field.

Clearly in the short term we've got to quickly improve the profitability.

So I would say in the next quarter or so, we'll try to capture as much as we can for that down to the bottom line.

As soon as I'm comfortable that we are on the right track, which I think we are, some of the savings are going to get diverted to expanding our coverage in the field.

And I just, I can't tell you anything about the timing because I'm not sure about the timing, but this is something that will be started as soon as possible, and I'm not going to wait for my successor.

Got you.

Then a couple for you, Bob.

On gross margins, I recognize they were up sequentially, but still the product gross margins in 37%, at least what I show here, well below what you've done historically, I think even at similar revenue levels.

Is it just that the pricing environment today is substantially tougher than it has been historically, or is it a sales mix issue?

Any explanation there?

What's changed between today's gross margins versus what seemed to be a normalized run rate in the slightly above 40% range on product?

Yes, and Tavis, to reiterate the numbers.

So on an adjusted basis, our product gross margins in the quarter just over 39%.

A year ago, for example, that was 41.9%, which I think is the genesis of your question.

A couple of key drivers.

One is we have seen, and I think I've heard this discussed in other settings as well, is the FX rates in Europe, where about one-third of our business is located, are pressuring product gross margins, in particular in that region.

I think that has had a heavy impact on it.

In addition, both in the quarter and year to date, we had certain volume-based purchase agreements, which we have recorded some additional costs to, from an accounting perspective, to make sure that I'm covered there.

I do expect to sell through that going forward, and believe that will be some uplift going forward.

Those are the two most significant ones.

Specific to ASPs, when you look at individual product SKUs, we have not seen significant pricing pressure.

I think I've seen a little bit of pressure in terms of the desire for channel incentives, as revenue is difficult for everybody to find.

So those would be the key items.

Can you remind me the adjustments that you made to gross margin to get to the 39% level?

The only adjustment we have, which is detailed in the reconciliation of GAAP to non-GAAP gross margins in the press release, is for amortization of intangibles, which is all charged against product revenues.

Got you, thanks.

Then final question.

You've burned a little cash in the first half of this year, this quarter.

I recognize it was all working capital, but do you expect to generate cash in the back half of the year?

Yes, we do.

Okay.

Thanks a lot.

Keith Housum, Northcoast Research.

This is actually [John Bart] on the line for Keith, and I appreciate you taking my call.

I guess first question I had was, from the acquisition of Vocollect, there's is a little bit higher low-double-digit growth rate there.

What's really offsetting that?

Is it just larger deals not coming through, or a longer sales cycle?

Specific to Vocollect, I think, make sure I've got the question right, Is that you're wondering why it's not at, say, a high single digits or low double digit growth rate versus roughly up just a few tenths in the quarter, is that correct?

Yes.

Okay.

I think the key drivers in the quarter, obviously year-over-year Vocollect is seeing the same economic pressures in Europe that the region is facing in general, and similar to the profile of total Intermec, Vocollect does have close it one-third of its revenues originate in the European region.

I think specifically, Asia is a small developing emerging market for the Company, which we've been investing on, and we have solid pipeline and solid, strong expectations there, but saw some delays in closing some deals in the quarter.

We don't expect they're gone, just that they've pushed out.

Similarly in the Americas, I think a little bit of slower caution in that region, little bit below what we would have expected, but again, a solid pipeline, a lot of activity, and we need to finish closing those deals and getting them done.

Okay.

One follow-up.

Do you have any expectations for R&D and SG&A going forward?

I know you want to drive sales as soon as possible, but do you expect further cuts there in SG&A?

Can you provide any color?

Well, I'll try to give you a little information on that.

In the restructuring that we did near the end of June, the G&A was a major target, unfortunately, but it had to be.

The impact of that will start flowing through now here in the third and fourth quarter.

So we will see some improvement in the G&A as we go forward.

As far as future restructuring or anything like that, I certainly don't have any plan for this quarter, and we have no tentative plans for the fourth quarter.

But having said that, we have to be more efficient.

We have to make gains, and we need to find these savings to be able to support more people in the field.

So I think on an incremental going forward, as we look for savings, we'll probably find them, but they're going to come from a lot of hard work and a lot of good ideas from now on.

Okay, thank you.

Thank you.

This does continue include the question-and-answer session.

I'd like to hand over to management for any closing remarks.

I'd like to thank everyone for their time today, and we look forward to talking to you after the end of our Q3 results.

Thank you.

Ladies and gentlemen, this concludes the conference call for today.

We thank you for your participation, and you may not disconnect.