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Intermec, Inc. 10-Q 2006

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 1, 2006

OR

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to            

Commission file number:  001-13279

INTERMEC, INC.

(Exact name of registrant as specified in its charter)

Delaware

 

95-4647021

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

6001 36th Avenue West, Everett, Wa

 

98203-1264

(Address of principal executive offices)

 

(Zip Code)

 

(425) 265-2400

(Registrant’s telephone number, including area code)

[None]

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x            Accelerated filer  o            Non-accelerated filer  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes 
o       No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class

 

Outstanding at October 27, 2006

Common Stock, $0.01 par value per share

 

62,193,729 shares

 

 




INTERMEC, INC.
TABLE OF CONTENTS
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 1, 2006

PART I. FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

Financial Statements

 

 

 

 

 

Consolidated Statements of Operations (unaudited)
Three and Nine Month Periods Ended October 1, 2006, and October 2, 2005

 

 

 

 

 

Consolidated Balance Sheets (unaudited)
October 1, 2006, and December 31, 2005

 

 

 

 

 

Consolidated Statements of Cash Flows (unaudited)
For the Nine Months Ended October 1, 2006, and October 2, 2005

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

 

 

 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

 

 

 

 

ITEM 4.

Controls and Procedures

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

ITEM 1.

Legal Proceedings

 

 

 

 

ITEM 1A.

Risk Factors

 

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

ITEM 6.

Exhibits

 

 

 

 

Signature

 

 

 

2




PART I. FINANCIAL INFORMATION

INTERMEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 1,

 

October 2,

 

October 1,

 

October 1,

 

 

 

2006

 

2005

 

2006

 

2005

 

Revenues:

 

 

 

 

 

 

 

 

 

Product

 

$

156,951

 

$

179,640

 

$

515,741

 

$

522,590

 

Service

 

38,996

 

40,174

 

115,474

 

111,178

 

Intellectual property settlement

 

 

 

23,000

 

 

Total Revenues

 

195,947

 

219,814

 

654,215

 

633,768

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of product revenues

 

98,807

 

107,054

 

315,811

 

301,755

 

Cost of service revenues

 

21,026

 

25,083

 

65,311

 

67,053

 

Cost of intellectual property settlement

 

 

 

6,462

 

 

Selling, general and administrative

 

70,573

 

74,143

 

226,862

 

222,691

 

Restructuring charge

 

1,758

 

 

4,000

 

 

Total costs and expenses

 

192,164

 

206,280

 

618,446

 

591,499

 

Operating profit from continuing operations

 

3,783

 

13,534

 

35,769

 

42,269

 

Gain on sale of investments

 

 

 

2,305

 

 

Interest income (expense), net

 

1,705

 

(665

)

4,615

 

(3,911

)

Earnings from continuing operations before income taxes

 

5,488

 

12,869

 

42,689

 

38,358

 

Provision for income taxes

 

2,043

 

1,601

 

12,878

 

9,823

 

Earnings before discontinued operations

 

3,445

 

11,268

 

29,811

 

28,535

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) from discontinued operations, net of tax

 

1,352

 

(6,697

)

(667

)

(8,416

)

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

4,797

 

$

4,571

 

$

29,144

 

$

20,119

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.05

 

$

0.18

 

$

0.47

 

$

0.46

 

Discontinued operations

 

0.02

 

(0.11

)

(0.01

)

(0.13

)

Net earnings per share

 

$

0.07

 

$

0.07

 

$

0.46

 

$

0.33

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.05

 

$

0.18

 

$

0.46

 

$

0.45

 

Discontinued operations

 

0.02

 

(0.11

)

(0.01

)

(0.13

)

Net earnings per share

 

$

0.07

 

$

0.07

 

$

0.45

 

$

0.32

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing basic earnings (loss) per share

 

62,749

 

62,077

 

63,009

 

61,509

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing diluted earnings (loss) per share

 

64,061

 

63,635

 

64,428

 

63,071

 

 

See accompanying notes to consolidated financial statements.

3




INTERMEC, INC.
CONSOLIDATED BALANCE SHEETS

(amounts in thousands)

(unaudited)

 

 

 

October 1.

 

December 31,

 

 

 

2006

 

2005

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

218,614

 

$

256,782

 

Short-term investments

 

19,130

 

 

 

 

 

 

 

 

Accounts receivable, net of allowance for doubtful accounts and sales returns of $7,728 and $8,157

 

158,161

 

180,985

 

Inventories

 

138,071

 

82,088

 

Net current deferred tax assets

 

47,857

 

100,656

 

Assets held for sale

 

8,529

 

8,517

 

Other current assets

 

14,177

 

29,468

 

Total current assets

 

604,539

 

658,496

 

 

 

 

 

 

 

Property, plant and equipment, net of accumulated depreciation of $105,790 and $99,032

 

41,918

 

30,820

 

Intangibles, net

 

5,976

 

6,871

 

Net deferred tax assets

 

185,373

 

137,578

 

Other assets

 

61,822

 

68,955

 

Total assets

 

$

899,628

 

$

902,720

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

143,173

 

$

148,731

 

Payroll and related expenses

 

26,727

 

31,011

 

Deferred revenue

 

46,183

 

38,369

 

Total current liabilities

 

216,083

 

218,111

 

 

 

 

 

 

 

Long-term deferred revenue

 

18,845

 

20,095

 

Long-term debt

 

100,000

 

100,000

 

Other long-term liabilities

 

86,679

 

88,711

 

 

 

 

 

 

 

Shareholders’ investment:

 

 

 

 

 

Common stock

 

634

 

627

 

Additional paid-in capital

 

703,316

 

736,224

 

Accumulated deficit

 

(215,760

)

(244,903

)

Accumulated other comprehensive loss

 

(10,169

)

(16,145

)

Total shareholders’ investment

 

478,021

 

475,803

 

Total liabilities and shareholders’ investment

 

$

899,628

 

$

902,720

 

 

See accompanying notes to consolidated financial statements.

4




INTERMEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

 

Nine Months Ended

 

 

 

October 1,

 

October 2,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$

256,782

 

$

217,899

 

 

 

 

 

 

 

Cash flows from operating activities of continuing operations:

 

 

 

 

 

Net earnings from continuing operations

 

29,811

 

28,535

 

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

7,818

 

7,504

 

Change in prepaid pension costs, net

 

3,458

 

7,667

 

Deferred taxes

 

7,085

 

7,120

 

Stock-based compensation and other

 

5,147

 

888

 

Excess tax benefits from stock-based payment arrangements

 

(4,183

)

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

22,824

 

(9,787

)

Inventories

 

(55,983

)

(21,604

)

Other current assets

 

10,825

 

180

 

Accounts payable and accrued expenses

 

2,410

 

5,998

 

Payroll and related expenses

 

(3,892

)

(5,002

)

Other long-term liabilities

 

2,236

 

18,128

 

Other operating activities

 

2,415

 

(971

)

 

 

 

 

 

 

Net cash provided by operating activities of continuing operations

 

29,971

 

38,656

 

 

 

 

 

 

 

Cash flows from investing activities of continuing operations:

 

 

 

 

 

Capital expenditures

 

(17,276

)

(7,159

)

Purchases of investments

 

(19,695

)

 

Decrease in restricted cash

 

 

50,000

 

Proceeds from sales of investments

 

565

 

 

Capitalization of patent legal fees

 

(408

)

 

Proceeds from sale of property, plant and equipment

 

 

6,050

 

Other investing activities

 

(128

)

593

 

 

 

 

 

 

 

Net cash (used in) provided by investing activities of continuing operations

 

(36,942

)

49,484

 

 

 

 

 

 

 

Cash flows from financing activities of continuing operations:

 

 

 

 

 

Repayment of long-term obligations

 

 

(108,500

)

Excess tax benefits from stock-based payment arrangements

 

4,183

 

 

Proceeds from stock options exercised

 

5,819

 

16,373

 

Stock repurchase

 

(49,948

)

 

Other financing activities

 

2,187

 

1,118

 

 

 

 

 

 

 

Net cash used in financing activities of continuing operations

 

(37,759

)

(91,009

)

 

 

 

 

 

 

Net cash used in continuing operations

 

(44,730

)

(2,869

)

Net cash used in operating activities of discontinued operations

 

 

(34,662

)

Net cash provided by (used in) investing activities of discontinued operations

 

6,562

 

(806

)

 

 

 

 

 

 

Resulting decrease in cash and cash equivalents

 

(38,168

)

(38,337

)

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

218,614

 

$

179,562

 

 

See accompanying notes to consolidated financial statements.

5




INTERMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1.                          Description of the Business

Effective January 1, 2006, we changed our name from UNOVA, Inc. to Intermec, Inc. (“Intermec”). We design, develop, manufacture, integrate, sell, resell and service wired and wireless automated identification and data collection (“AIDC”) products and systems, mobile computing products and systems, wired and wireless bar code printers, label media and radio frequency identification (“RFID”) products and systems. Our products and services are used by customers within and outside of the United States to improve the productivity, quality and responsiveness of their business operations including supply chain management, enterprise resource planning and field sales and service. We grant licenses to use portions of our intellectual property portfolio, including certain patent rights essential to and/or useful in RFID and AIDC products, and receive license fees as well as ongoing royalties based on sales by licensees. Customers for our products and services operate in market segments that include manufacturing, warehousing, direct store delivery, retail, consumer packaged goods, field service, government, and transportation and logistics.

In 2005, we divested our Industrial Automation Systems (“IAS”) businesses, which comprised the Cincinnati Lamb and Landis Grinding Systems divisions. The IAS businesses are classified as discontinued operations for accounting purposes in our consolidated financial statements and related notes.

2.                          Basis of Presentation

Our interim financial periods are based on a thirteen-week retail calendar. In the opinion of management, the accompanying balance sheets and interim statements of operations, and statements of cash flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The financial statements include the accounts of Intermec and its subsidiaries. Intercompany transactions and balances have been eliminated. Equity investments in which we exercise significant influence but do not exercise control and are not the primary beneficiary are accounted for using the equity method. Investments in which we are not able to exercise significant influence over the investee are accounted for under the cost method. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and financial data included in the accompanying notes to the financial statements. Actual results and outcomes may differ from management’s estimates and assumptions.

Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis and the audited financial statements and notes thereto included in our December 31, 2005 Form 10-K.

Certain amounts in our prior-period consolidated financial statements and notes have been reclassified to conform to the current-period presentation. The consolidated statement of cash flows for the nine months ended October 2, 2005, reflects the reclassification of $50 million in restricted cash from financing activities to investing activities and $3.9 million of cash used in operating activities of discontinued operations was reclassified from operating activities of continuing operations.

3.                          Stock-Based Compensation

We adopted Statement of Financial Accounting Standards (“SFAS”) 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), using the modified prospective transition method beginning January 1, 2006. SFAS 123(R) eliminates the ability to account for share-based compensation transactions, as we formerly did, using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and generally requires that such transactions be accounted for using a fair-value-based method and recognized as expenses in our consolidated statements of operations.

Our consolidated financial statements for the three and nine months ended October 1, 2006, reflect the impact of adopting SFAS 123(R). In accordance with the modified prospective method, the consolidated financial statements for prior periods have

6




stock-based compensation expense recognized in the consolidated statement of operations during the third quarter of 2006, included compensation expense for stock-based payment awards granted prior to, but not yet vested, as of December 31, 2005, based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 148 “Accounting for Stock-Based Compensation—Transition and Disclosure” (“SFAS 148”) and compensation expense for the stock-based payment awards granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with SFAS 123(R).

Stock-based compensation expense recognized in the consolidated statement of operations for the three and nine months ended October 1, 2006, is based on options ultimately expected to vest. The expense has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the pro forma information required under SFAS 148 for the periods prior to January 1, 2006, we accounted for forfeitures as they occurred.

Accordingly, during the three and nine month periods ended October 1, 2006, we recorded stock-based compensation expense for awards granted prior to, but not yet vested as of, January 1, 2006, as if the fair value method required for pro forma disclosure under SFAS 123 were in effect for expense recognition purposes, adjusted for estimated forfeitures.  For stock-based awards granted after January 1, 2006, we have recognized compensation expense based on the estimated grant date fair value method using the Black-Scholes valuation model. For these awards, we have recognized compensation expense using a straight-line amortization method. Because SFAS 123(R) requires that stock-based compensation expense be based on awards that are ultimately expected to vest, stock-based compensation for the three and nine month periods ended October 1, 2006, has been reduced for estimated forfeitures. When estimating forfeitures, we consider voluntary termination behaviors as well as trends of actual option forfeitures. The impact on our results of operations of recording stock-based compensation for the three and nine month periods ended October 1, 2006 was as follows (in thousands):

 

Three Months

 

Nine Months

 

 

 

Ended

 

Ended

 

 

 

October 1,  2006

 

October 1,  2006

 

Cost of revenues

 

$

74

 

$

184

 

Selling, general and administrative

 

762

 

3,573

 

 

 

$

836

 

$

3,757

 

 

Prior to adopting SFAS 123(R), we presented all tax benefits resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. SFAS 123(R) requires cash flows resulting from excess tax benefits to be classified as a part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions for exercised options in excess of the deferred tax asset attributable to stock compensation costs for such options. As a result of adopting SFAS 123(R) $4.2 million of excess tax benefits for the nine months ended October 1, 2006, has been classified as a source of cash from financing activities. Cash received from option exercises under all share-based payment arrangements for the nine month periods ended October 1, 2006 and October 2, 2005, was $5.8 million and $16.4 million, respectively. The total income tax benefit recognized in the statement of operations for stock-based compensation costs was $0.3 million, and $1.4 million for the three and nine month periods ended October 1, 2006, and $0.4 million and $1.0 million for the three and nine month periods ended October 2, 2005, respectively.

We calculated the fair value of each option award on the date of grant using the Black-Scholes option pricing model. The following assumptions were used for each respective period:

 

October 1,
2006

 

October 2,
2005

 

Risk-free interest rates

 

4.82

%

4.09

%

Expected lives (in years)

 

4.80

 

5.00

 

Expected dividend yield

 

0.00

%

0.00

%

Expected volatility

 

40.15

%

52.94

%

 

Our computation of expected volatility for the third quarter of 2006 is based on a combination of historical and market-based implied volatility from traded options on a group of peer stocks. Prior to 2006, our computation of expected volatility was based on historical volatility. Our computation of expected life in 2006, was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.

7




The fair value of the options granted based on the above assumptions are $11.46 and $12.80 for the three and nine month periods ended October 1, 2006 and $14.71 and $10.72 for the three and nine month periods ended October 2, 2005, respectively.  All grants of our options under all plans must be approved or authorized by the Compensation Committee of the Board of Directors, which consists entirely of outside directors.

The following table summarizes the pro forma effect of stock-based compensation as if the fair value method of accounting for stock compensation had been applied in periods prior to January 1, 2006.

 

Three Months

 

Nine Months

 

 

 

Ended

 

Ended

 

 

 

October 2,
2005

 

October 2,
2005

 

Net earnings as reported

 

$

4,571

 

$

20,119

 

Add: stock compensation expense recorded under the intrinsic value method, net of tax effect

 

593

 

1,661

 

Less: pro forma stock compensation expense computed under the fair value method, net of tax effect

 

(1,485

)

(4,077

)

 

 

 

 

 

 

Pro forma net earnings

 

$

3,679

 

$

17,703

 

 

 

 

 

 

 

Net earnings per share as reported:

 

 

 

 

 

Basic

 

$

0.07

 

$

0.33

 

Diluted

 

$

0.07

 

$

0.32

 

 

 

 

 

 

 

Pro forma net earnings per share:

 

 

 

 

 

Basic

 

$

0.06

 

$

0.29

 

Diluted

 

$

0.06

 

$

0.28

 

 

Our 2001, 1999 and 1997 Stock Incentive Plans and our 2004 Omnibus Incentive Compensation Plan (the “Stock Incentive Plans,” collectively) provide for the grant of incentive awards to officers and other key employees. The numbers of shares authorized for grant under the 2004, 2001 and 1999 Plans are 3,000,000, 1,000,000, and 4,500,000, respectively. No additional shares are authorized for grant under the 1997 Plan, which was frozen subsequent to the approval of the 1999 Stock Incentive Plan. As of October 1, 2006, there were 536,294 options outstanding that were granted under the 1997 Plan before it was frozen.

Incentive awards may be granted in the form of stock options with or without related stock appreciation rights, restricted stock, restricted stock units and performance units. Under the Stock Incentive Plans, stock options may not be granted at an exercise price less than the market value of our common stock on the date of grant. The Stock Incentive Plans’ options generally vest in equal increments over five years and expire in ten years.

The 2002 Director Stock Option and Fee Plan (“2002 DSOP”) and the 1997 Director Stock Option Plan (“1997 DSOP”, collectively “DSOPs”) provide for the grant of stock options to our non-employee directors. The numbers of shares authorized for grant under the 2002 DSOP is 745,000. No additional shares are authorized under the 1997 DSOP. Subsequent to the grant of 255,000 options under the 1997 DSOP, it was frozen upon the approval of the 2002 DSOP. Under the 2002 DSOP, stock options are granted annually at an exercise price equal to the fair market value of our common stock on the date of grant. The number of options granted annually to each director is fixed by the Director Plan. Prior to 2006, such options became fully exercisable on the first anniversary of their date of grant. Pursuant to an amendment, the grant made to the directors in January, 2006, vested immediately. Therefore, the corresponding expense was recorded in the quarter ended April 2, 2006.

As of October 1, 2006, there were 2,548,326 shares available for grant under our Stock Incentive Plans and DSOPs. The following table summarizes changes in options outstanding and exercisable under our stock award plans:

8




 

 

 

 

Average

 

 

 

 

 

 

 

Number

 

Exercise Price

 

Remaining

 

Intrinsic

 

 

 

of Shares

 

Per Share

 

Term

 

Value

 

 

 

 

 

 

 

(in years)

 

(in millions)

 

Stock Options:

 

 

 

 

 

 

 

 

 

Nonvested balance at December 31, 2005

 

3,218,926

 

$

13.35

 

 

 

 

 

Granted

 

604,250

 

28.26

 

 

 

 

 

Exercised

 

(516,750

)

14.41

 

 

 

 

 

Forfeited

 

(84,671

)

21.17

 

 

 

 

 

Canceled

 

(7,000

)

14.71

 

 

 

 

 

Outstanding balance at October 1, 2006

 

3,214,755

 

16.28

 

6.22

 

$

84.7

 

Exercisable at October 1, 2006

 

1,925,483

 

13.59

 

4.73

 

50.8

 

 

As of October 1, 2006, there was $9.3 million of total unrecognized compensation cost related to non-vested options. That cost is expected to be recognized over a weighted average period of 3 years and 4 months.

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

Number

 

Grant Date

 

 

 

of Shares

 

Fair Value

 

Restricted stock awards:

 

 

 

 

 

Nonvested balance at December 31, 2005

 

86,070

 

$

11.52

 

Granted

 

109,088

 

27.29

 

Vested

 

(66,802

)

9.14

 

Forfeited

 

(6,977

)

21.94

 

Nonvested balance at October 1, 2006

 

121,379

 

26.40

 

 

The fair value of each restricted stock award (“RSA”) is the market price of our stock on the date of grant. The total fair value of RSA’s vested during the three and nine months ended October 1, 2006, and October 2, 2005, was $0 and $ 1.8 million, and $ 0.5 and $ 3.1 million, respectively. As of October 1, 2006, there was $1.8 million of total unrecognized compensation cost related to non-vested RSA’s. That cost is expected to be recognized over a weighted average period of 2 years.

Shared Performance Stock Awards are a form of stock award in which the number of shares ultimately received depends on our performance against specified performance targets. The performance period is January 1 through December 31 and covers a period of 3 fiscal years. At the end of the performance period, the number of shares of stock and stock awards issued will be determined by adjusting upward or downward from the target in a range between 0% and 200%. The final performance percentage on which the payout will be based, considering performance metrics established for the performance period, will be determined by the Board of Directors or a committee of the board in its sole discretion. Shares of stock will be issued following the end of the performance period. Shared Performance Stock Awards are amortized over the vesting period (generally 32 months) using the straight line method.  Total compensation expense related to performance stock awards was $ (1.3) million and $ 0.2 million, for the three and nine month periods ended October 1, 2006 and $0.6 million and $1.2 million for the three and nine month periods ended October 2, 2005, respectively.  The $ (1.3) million credit included in compensation expense for the three months ended October 1, 2006, related to a change in estimate for our performance against our performance targets.

We administer the Employee Stock Purchase Plan (“ESPP”) under which five million shares are reserved for issuance. Employees with three months of continuous service prior to an offering period are eligible to participate in the Plan. Eligible employees may elect to become participants in the Plan and may contribute up to $21,250 per year through payroll deductions to purchase stock purchase rights. Participants may, at any time and for any reason, cancel their payroll deduction authorizations and have the balance in their stock purchase right account applied to the purchase of shares or have the amount refunded. The offering period begins on the first day of the quarter and ends on the last day of the quarter. The stock purchase rights are used to purchase the common stock of Intermec at 85 percent of the fair market value of a share as of the grant date applicable to the participant. We treat this expense as compensation. The compensation expense related to ESPP was $139,000 for the three months, and $457,000 for the nine months ended October 1,2006.

9




 

4.                          Inventories

Inventories comprise the following (in thousands of dollars):

 

October 1,

 

December 31,

 

 

 

2006

 

2005

 

Raw materials

 

$

82,310

 

$

50,505

 

Work in process

 

595

 

705

 

Finished goods

 

55,166

 

30,878

 

 

 

 

 

 

 

Inventories

 

$

138,071

 

$

82,088

 

 

5.                          Notes Receivable

In connection with the sale of Cincinnati Lamb, we received a $12.5 million long-term note receivable secured by the assets sold, bearing interest at an annual rate of LIBOR plus three percent (8.32% as of September 29, 2006) with interest payable quarterly. Principal payments on the note are due beginning April 2007, in six semiannual installments of $1.5 million, $2.0 million, $2.0 million, $2.5 million, $2.0 million and $2.5 million. As of October 1, 2006, the estimated fair value of the note is $11.1 million, based on the estimated cash flows from the note and a risk-adjusted discount rate equal to LIBOR plus three percent. Our consolidated balance sheet as of October 1, 2006, classifies the $11.1 million note receivable as other current assets and other assets.

As part of the sale of Landis Grinding Systems, we received a $10 million two-year note at an interest rate of five percent per annum guaranteed by the buyer’s parent company. As of October 1, 2006, the estimated fair value of the note is $9.6 million, based on the estimated cash flows from the note and a risk-adjusted discount rate equal to LIBOR plus 2.25% (7.55% as of September 29, 2006). This long-term note receivable is included in other assets on our balance sheet.

6.                          Long-term Debt and Interest, net

We have a secured long-term revolving credit facility (the “Revolving Facility”) with a maximum amount available under the Revolving Facility of $50.0 million. Net of outstanding letters of credit and limitations on availability, we had borrowing capacity at October 1, 2006, of $18.1 million under the Revolving Facility. We made no borrowings under the Revolving Facility during 2006, and as of October 1, 2006, no borrowings were outstanding under this facility. As of October 1, 2006, we were in compliance with all financial covenants under the Revolving Facility.

We have $100.0 million of ten-year senior unsecured debt outstanding as of October 1, 2006. Interest payments at 7.0% are due semi-annually in March and September. Including underwriting fees, discounts and other issuance costs, the effective interest rate is 7.175%. In March 2005, we retired the $100.0 million of seven-year notes, which were issued March 1998.

Interest income (expense) comprises the following (in thousands of dollars):

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 1,

 

October 2,

 

October 1,

 

October 2,

 

 

 

2006

 

2005

 

2006

 

2005

 

Interest income

 

$

4,178

 

$

1,592

 

$

11,517

 

$

4,745

 

Interest expense

 

(2,473

)

(2,257

)

(6,902

)

(8,656

)

Net interest income (expense)

 

$

1,705

 

$

(665

)

$

4,615

 

$

(3,911

)

 

We also have letter-of-credit reimbursement agreements totaling $9.2 million at October 1, 2006, compared to $25.8 million at December 31, 2005. As of October 1, 2006, $7.9 million of the agreements related to performance on contracts with current customers and vendors, and $0.2 million of the agreements related to customer contracts assumed by the purchaser of the Cincinnati Lamb operations that were sold and $1.1 million of the agreements related to customer contracts assumed by the purchaser of the Landis operations that were sold. We are indemnified by the purchaser of the Cincinnati Lamb operations on the $0.2 million of letter-of-credit agreements related to Cincinnati Lamb.

We believe it is not practicable to estimate fair values of these instruments and consider the risk of non-performance on the

10




contracts to be remote. We are indemnified by the purchaser of the Landis operations on the $1.1 million letter-of-credit agreement to Landis.

7.                          Discontinued Operations

During 2005, we completed our divestiture of the IAS businesses with the sale of the Cincinnati Lamb business in the first quarter of 2005 and the sale of the Landis Grinding Systems business in the fourth quarter of 2005. The earnings from discontinued operations for the three month period ended October 1, 2006, and the loss from discontinued operations for the nine month period ended October 1, 2006, includes period expenses related to finalizing the sale of the Landis Grinding Systems and changes to the estimated purchase price adjustment, net of tax benefits.  Also included in the earnings from discontinued operations for the three month period ended October 1, 2006, is a $1.4 million benefit related to our true up of the tax provision.

The loss from discontinued operations for the three and nine month periods ended October 2, 2005, includes the operating results of the Cincinnati Lamb and Landis Grinding Systems businesses as well as the loss on the sale of Cincinnati Lamb, net of related tax benefits.

8.                          Restructuring Costs

In March 2006, we announced our plan to close our design centers in Goteborg and Lund, Sweden. The activities currently assigned to the design centers in Sweden will be reassigned to other parts of our business or moved to third-party vendors to improve efficiencies and benefit from reduced cost. In addition to the anticipated cost savings, this realignment of resources is expected to increase new product development capacity. The total cost of closing the design centers in Sweden and the elimination of 65 positions in Sweden is estimated to be $4.5 million. The estimated restructuring costs include $2.9 million of employee termination expense, facility closure costs of $1.3 million non-cash and other related costs of $0.3 million. During the three and nine months ended October 1, 2006, we have recorded restructuring charges of $1.8 million and $4.0 million, respectiviely.  The recorded restructuring charges primarily relate to employee termination costs and facility closure costs, in accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), and we anticipate that the remaining unrecognized restructuring costs will be recognized during the fourth quarter of 2006.

9.                          Intellectual Property Settlement

During the first quarter of 2006, we received compensation in relation to a settlement of a patent dispute regarding certain of our intellectual property (“IP”). Our patents involved smart battery management technology in which a portable computer incorporates a rechargeable battery that uses a processor chip to communicate data to the portable computer so that the computer can monitor and regulate battery use. The effective date of this settlement was February 27, 2006, and the terms are confidential. The operating profit from this settlement, net of attorneys’ fees and costs, is $16.5 million for the first quarter of 2006. IP settlement compensation of $23.0 million is classified as revenue and $6.5 million of related legal costs are classified as cost of intellectual property settlement in our consolidated statements of operations.

10.                   Provision for Income Taxes

The tax provision for the three and nine month periods ended October 1, 2006, reflects an effective tax rate for continuing operations of 37.2% and 30.2%, respectively, compared to a U.S. statutory rate of 35%.  The effective tax rate for the three months ended October 1, 2006, reflects the U.S. statutory rate and state income tax implications.  The tax provision for the nine months ended October 1, 2006, was reduced by $2.1 million, primarily due to the favorable conclusion of a Canadian tax audit during the first quarter of 2006. 

The tax provision for the three and nine month periods ended October 2, 2005, reflects an effective tax rate for continuing operations of 12.4% and 25.6% compared to a U.S. statutory rate of 35%. The reduction in the effective tax rate is primarily due to a $3.7 million reduction in the foreign tax contingency accrual as a result of the resolution of a German tax audit.

11




11.                   Shares Used in Computing Earnings per Share

Basic earnings per share is calculated using the weighted average number of common shares outstanding and issuable for the applicable period. Diluted earnings per share is computed using basic weighted average shares plus the dilutive effect of unvested restricted stock, unvested performance stock awards and outstanding stock options using the “treasury stock” method.

 

Three months Ended

 

 

 

October 1,

 

October 2,

 

 

 

2006

 

2005

 

Weighted average common shares — Basic

 

62,748,714

 

62,076,898

 

Dilutive effect of unvested restricted shares and stock options

 

1,312,122

 

1,557,960

 

Weighted average shares — Diluted

 

64,060,836

 

63,634,858

 

 

 

Nine months Ended

 

 

 

October 1,

 

October 2,

 

 

 

2006

 

2005

 

 Weighted average common shares — Basic

 

63,008,778

 

61,509,047

 

Dilutive effect of unvested restricted shares and stock options

 

1,418,883

 

1,561,772

 

Weighted average shares — Diluted

 

64,427,661

 

63,070,819

 

 

Our employees and directors held options to purchase 599,901 and 426,484 shares of our common stock for the three and nine months ended October 1, 2006, and 81,140 for the nine month period ended October 2, 2005, respectively, that were not included in weighted average shares diluted because they were antidilutive to the diluted earnings per share computation.  These options could become dilutive in future periods if the average market price of our common stock exceeds the exercise price of the outstanding options and we report net earnings.  There were no antidilutive options held for the three month period ended October 2, 2005. 

An authorization from our Board of Directors allows us to repurchase up to $100 million in shares of our common stock.  On August 7, 2006, we entered into a share repurchase agreement under Rule 10b5-1 of the Securities Exchange Act of 1934 to facilitate the repurchase of up to $50 million of our common stock pursuant to the previously announced share repurchase authorization by our Board of Directors.  For the nine months ended October 1, 2006, we have repurchased $49.9 million in shares of our common stock.  On November 3, 2006, we entered into a share repurchase agreement under Rule 10b5-1 of the Securities Exchange Act of 1934 to facilitate the repurchase of up to $50 million of our common stock pursuant to the same, previously announced share repurchase authorization.

12.                   Pension and Other Postretirement Benefit Plans

The information in this note represents the net periodic pension and post-retirement benefit costs and related components in accordance with SFAS 132(R). The components of net pension and postretirement periodic benefit cost (credit) for the three and nine month periods ended October 1, 2006, and October 2, 2005, are as follows (in thousands of dollars):

 

U.S.

 

Non-U.S.

 

Other

 

 

 

Defined

 

Defined

 

Postretirement

 

Three Months Ended October 1, 2006,

 

Benefit Plans

 

Benefit Plans

 

Benefit Plans

 

and October 2, 2005:

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

Service Cost

 

$

1,741

 

$

1,701

 

$

281

 

$

827

 

$

4

 

$

33

 

Interest Cost

 

2,988

 

2,407

 

567

 

1,126

 

66

 

166

 

Expected return on plan assets

 

(2,508

)

(2,537

)

(777

)

(1,006

)

 

 

Amortization and deferrals:

 

 

 

 

 

 

 

 

 

 

 

 

 

Transition asset

 

 

 

(40

)

(82

)

 

 

Actuarial loss

 

1,241

 

765

 

115

 

239

 

27

 

17

 

Prior service cost (benefit)

 

177

 

161

 

 

 

 

 

Curtailment loss (gain)

 

(2,146

)

 

 

 

 

 

Settlement gain

 

 

 

 

 

 

 

Special termination benefits

 

 

 

 

 

 

 

Net pension and postretirement periodic benefit cost

 

$

1,493

 

$

2,497

 

$

146

 

$

1,104

 

$

97

 

$

216

 

 

12




 

 

 

 

Non-U.S.

 

Other

 

 

 

U.S. Defined

 

Defined

 

Postretirement

 

Nine Months Ended October 1, 2006,

 

Benefit Plans

 

Benefit Plans

 

Benefit Plans

 

and October 2, 2005:

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

Service Cost

 

$

5,223

 

$

6,511

 

$

817

 

$

2,946

 

$

12

 

$

100

 

Interest Cost

 

8,964

 

7,447

 

1,650

 

4,831

 

198

 

1,395

 

Expected return on plan assets

 

(7,524

)

(7,549

)

(2,260

)

(4,686

)

 

 

Amortization and deferrals:

 

 

 

 

 

 

 

 

 

 

 

 

 

Transition asset

 

 

 

(117

)

(254

)

 

 

Actuarial loss

 

3,721

 

2,465

 

335

 

1,000

 

82

 

357

 

Prior service cost (benefit)

 

531

 

519

 

 

 

 

(598

)

Curtailment loss (gain)

 

(2,146

)

57

 

 

(5,396

)

 

(12,274

)

Settlement gain

 

 

 

 

(332

)

 

(21,090

)

Special termination benefits

 

1,350

 

264

 

 

 

 

 

Net pension and postretirement periodic benefit cost

 

$

10,119

 

$

9,714

 

$

425

 

$

(1,891

)

$

292

 

$

(32,110

)

 

Effective June 30, 2006, we amended our Financial Security and Savings Program, Pension Plan, Restoration Plan and Supplemental Executive Retirement Plan (collectively, the “U.S. Defined Benefit Plans”). The effect of these amendments was to “freeze” benefit accruals under the U.S. Defined Benefit Plans and to fully vest benefits under the U.S. Defined Benefit Plans, except for the Nonqualified SERP, as of June 30, 2006, for most participants. In accordance with SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” (“SFAS 88”), the effects of these amendments require a new measurement date. The impact of the related curtailments reflected in the third quarter of 2006 was $2.1 million as a result of the three month lag period utilized by us for measuring pension obligations.

Our pre-tax loss on the sale of Cincinnati Lamb in the first six months of 2005 takes into consideration the curtailment and settlement gains totaling $39.1 million, comprising $33.4 million relating to the postretirement benefit plans, and $5.7 million relating to the Non-U.S. Defined Benefit Plans. These curtailment and settlement gains comprise the pension and post-retirement obligations assumed by the buyer. In addition, the pre-tax loss on the sale of Cincinnati Lamb includes a loss of $12.9 million representing the cumulative adjustment to recognize the minimum pension liability of our Non-U.S. defined benefit plans, which prior to the sale, had been deferred in the other comprehensive loss component of shareholders’ investment in our consolidated balance sheets.

During the nine months ended October 1, 2006, we contributed approximately $4.9 million to our pension and other postretirement benefit plans, comprising $1.9 million in benefits paid pertaining to unfunded U.S. defined benefit plans, $1.9 million in matching contributions to our 401(k) plan, $1.0 million in contributions to our foreign pension plans, and $0.1 million in benefits paid pertaining to our other postretirement benefits plans. We expect to contribute an additional $2.8 million to these plans during the remainder of 2006, of which $ 1.2 million relates to benefit payments on our unfunded U.S. defined benefit plans, $0.7 million in matching contributions to our 401(k) plan, $0.4 million in contributions to our foreign pension plans and $0.5 million in benefit payments pertaining to our other postretirement benefit plans.

13.                   Comprehensive Earnings

Our comprehensive earnings comprise the following (in thousands of dollars):

 

Three Months Ended

 

 

 

October 1,

 

October 2,

 

 

 

2006

 

2005

 

Net earnings

 

$

4,797

 

$

4,571

 

Change in equity due to foreign currency translation adjustments

 

434

 

(668

)

Change in equity due to minimum pension liability adjustment

 

1,727

 

 

Unrealized loss on cash flow hedges

 

 

(34

)

Comprehensive earnings

 

$

6,958

 

$

3,869

 

 

13




 

 

Nine Months Ended

 

 

 

October 1,

 

October 2,

 

 

 

2006

 

2005

 

Net earnings

 

$

29,144

 

$

20,119

 

Change in equity due to foreign currency translation adjustments

 

4,248

 

(23,044

)

Change in equity due to minimum pension liability adjustment

 

1,727

 

9,144

 

Unrealized gain on cash flow hedges

 

 

45

 

Comprehensive earnings

 

$

35,119

 

$

6,264

 

 

Foreign currency translation adjustments for the nine months ended October 2, 2005, in the above table, include a credit balance cumulative translation adjustment of $8.3 million which was reclassified from OCI to net earnings as a result of the Cincinnati Lamb sale.

14.                   Segment Reporting

During the first quarter of 2006, we integrated the corporate expense into our Products and Service segments. Intrasegment transactions have been eliminated and there are no material intersegment transactions. It is not practicable to segregate operating profit, capital expenditures, depreciation and amortization expense or total assets into our Product and Service segments,  therefore, in aggregate this information is available in our consolidated financial statements. The following table sets forth our operations by reportable segments (in thousands of dollars):

 

Three Months Ended

 

 

 

October 1,

 

October 2,

 

 

 

2006

 

2005

 

Revenues

 

 

 

 

 

Product

 

$

156,951

 

$

179,640

 

Service

 

38,996

 

40,174

 

Total revenues

 

$

195,947

 

$

219,814

 

Gross profit

 

 

 

 

 

Product

 

$

58,144

 

$

72,586

 

Service

 

17,970

 

15,091

 

Total gross profit

 

$

76,114

 

$

87,677

 

 

 

 

 

 

 

Operating profit from continuing operations

 

 

 

 

 

Total operating profit from continuing operations

 

$

3,783

 

$

13,534

 

 

 

Nine Months Ended

 

 

 

October 1,

 

October 2,

 

 

 

2006

 

2005

 

Revenues

 

 

 

 

 

Product

 

$

538,741

 

$

522,590

 

Service

 

115,474

 

111,178

 

Total revenues

 

$

654,215

 

$

633,768

 

 

 

 

 

 

 

Gross profit

 

 

 

 

 

Product

 

$

216,468

 

$

220,835

 

Service

 

50,163

 

44,125

 

Total gross profit

 

$

266,631

 

$

264,960

 

 

 

 

 

 

 

Operating profit from continuing operations

 

 

 

 

 

Total operating profit from continuing operations

 

$

35,769

 

$

42,269

 

 

15.                   Related Party Transactions

Unitrin, Inc. and its subsidiaries (“Unitrin”) is a significant shareholder of Intermec, owning approximately 20% of our outstanding shares. In January 2005, Unitrin’s Life and Health Insurance segment agreed to contract with our subsidiary, Intermec Technology, to develop the software for the next generation of Life and Health Insurance’s handheld computers. For the three and nine month periods ended October 1, 2006, we did not recognize any revenues from this arrangement.  For the three and nine month periods ended October 2, 2005, we recognized $2.0 million and $2.2 million in revenues from Unitrin, respectively.  We also recorded $0.3 million of deferred service revenue from Unitrin during the three and nine months ended October 2, 2005.  We believe that the prices of goods and services sold to Unitrin are comparable to those received from unaffiliated third parties.

14




16.                   Commitments and Contingencies

Provisions for estimated expenses related to product warranties are made at the time products are sold. These estimates are established using historical information on the nature, frequency, and average cost of warranty claims. Management actively studies trends of warranty claims and takes action to improve product quality and minimize warranty claims. The following table indicates the change in our warranty accrual included in current liabilities (in thousands of dollars):

Beginning balance January 1, 2006

 

$

5,542

 

Payments

 

(5,727

)

Increase in liability (new warranties issued)

 

6,425

 

Ending Balance October 1, 2006

 

$

6,240

 

 

We have entered into a variety of agreements with third parties that include indemnification clauses, both in the ordinary course of business and in connection with our divestitures of certain product lines. These clauses require us to compensate these third parties for certain liabilities and damages incurred by them.

Financial Accounting Standards Board (“FASB”) Interpretation No. 45, “Guarantors’ Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” requires that we estimate and record the fair value of guarantees as a liability. We do not believe we have any significant exposure related to such guarantees and therefore have not recorded a liability as of October 1, 2006, or December 31, 2005. We have not made any significant indemnification payments as a result of these clauses, nor do we believe the fair value of any of these guarantees has a material effect on our financial position or results of operations.

We currently, and from time to time, are subject to claims and lawsuits arising in the ordinary course of business. The ultimate resolution of currently pending proceedings is not expected to have a material adverse effect on our business, financial condition, results of operations or liquidity. Nevertheless, it is possible that cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies or by the creation of significant legal or other expenses related to such matters.

17.                   Recent Accounting Pronouncements

The Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), in September 2006. SAB 108 provides guidance on how the effects of the carryover or reversal of prior year financial statement misstatements should be considered in quantifying a current year misstatement. Prior practice allowed the evaluation of materiality on the basis of (1) the error quantified as the amount by which the current year income statement was misstated (“rollover method”) or (2) the cumulative error quantified as the cumulative amount by which the current year balance sheet was misstated (“iron curtain method”). Reliance on either method in prior years could have resulted in misstatement of the financial statements. The guidance provided in SAB 108 requires both methods to be used in evaluating materiality. Immaterial prior year errors may be corrected with the first filing of prior year financial statements after adoption. The cumulative effect of the correction would be reflected in the opening balance sheet with appropriate disclosure of the nature and amount of each individual error corrected in the cumulative adjustment, as well as a disclosure of the cause of the error and that the error had been deemed to be immaterial in the past. SAB 108 is effective for fiscal year 2007.  We are currently evaluating the impact this Bulletin might have on our financial position or results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement is effective for fiscal years beginning after November 15, 2007. We are currently in the process of determining the impact of this Statement on our consolidated financial statements.

15




In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans–an amendment of FASB Statements No. 87, 88, 106, and 132(R).” The Statement requires employers to recognize in their balance sheet the overfunded or underfunded status of defined benefit post-retirement plans, measured as the difference between the fair value of plan assets and the benefit obligation (the projected benefit obligation for pension plans and the accumulated postretirement benefit obligation for other post-retirement plans). Employers must also recognize the change in the funded status of the plan in the year in which the change occurs through comprehensive income. This Statement also requires plan assets and obligations to be measured as of the employer’s balance sheet date. The recognition provisions of this Statement are effective for fiscal years ending after December 15, 2006, however, early application is encouraged. The measurement provision of this Statement will be effective for fiscal years beginning after December 15, 2008. Again, early application is encouraged. We are in the process of determining the impact of this Statement on our consolidated financial statements.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 prescribes a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. This Interpretation is effective as of January 1, 2007. We are currently evaluating the impact of FIN 48 on our financial statements.

 

In November 2005, the FASB issued Staff Position (“FSP”) FAS123(R)-3, Transition Election to Accounting for the Tax Effects of Share-Based Payment Awards. This FSP requires an entity to follow either the transition guidance for the additional-paid-in-capital pool as prescribed in SFAS No. 123(R), Share-Based Payment, or the alternative transition method as described in the FSP. An entity that adopts SFAS No. 123(R) using the modified prospective application may make a one-time election to adopt the transition method described in this FSP. An entity may take up to one year from the later of its initial adoption of SFAS No. 123(R) or the effective date of this FSP to evaluate its available transition alternatives and make its one-time election. This FSP became effective in November 2005. We continue to evaluate the impact that the adoption of this FSP could have on our financial statements.

 

16




ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Special Note About Forward-Looking Statements

Forward-Looking Statements and Risk Factors

Forward-looking statements contained in this filing are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995 (alternatively: Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934) and are dependent upon a variety of important factors that could cause actual results to differ materially from those reflected in such forward-looking statements. These factors include but are not limited to our ability to maintain or to improve the revenues and profits of our continuing operations, maintain or reduce expenses, maintain or improve operational efficiency, use our investment in research and development to generate future revenue, maintain or improve year-over-year growth in the revenues and profits of our continuing operations and the other factors described in Part I, Item 2 and Part II, Item 1A of this filing. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this quarterly report.

Such forward-looking statements involve and are dependent upon certain risks and uncertainties. When used in this document and in documents it references, the words “anticipate,” “believe,” “will,” “intend,” “project” and “expect” and similar expressions as they relate to Intermec or its management are intended to identify such forward-looking statements.

Forward-looking statements are not guarantees of future performance. A number of factors can impact our business and determine whether we can or will achieve any forward-looking statement made in this report. Any one of these factors could cause our actual results to differ materially from those discussed in a forward-looking statement. We outline these risk factors in reports that we file with the SEC, in press releases and on our website, www.intermec.com.

Readers of this report are encouraged to review the Risk Factors portion of Part II, Item 1A of this filing which discusses the risk factors associated with our business.

Overview

Continuing Operations

Effective January 1, 2006, we changed our name from UNOVA, Inc. to Intermec, Inc. (“Intermec”). We design, develop, manufacture, integrate, sell, resell and service wired and wireless automated identification and data collection (“AIDC”) products and systems, mobile computing products and systems, wired and wireless bar code printers, label media and radio frequency identification (“RFID”) products and systems. Our products and services are used by customers within and outside of the United States to improve the productivity, quality and responsiveness of their business operations including supply chain management, enterprise resource planning and field sales and service. We grant licenses to use portions of our intellectual property portfolio, including certain patent rights essential to and/or useful in RFID and AIDC products, and receive license fees as well as ongoing royalties based on sales by licensees. Customers for our products and services operate in market segments that include manufacturing, warehousing, direct store delivery, retail, consumer packaged goods, field service, government, and transportation and logistics.

Our strategy consists of: technology leadership in the AIDC industry; expanding, strengthening and leveraging our AIDC intellectual property portfolio; expanding and strengthening our AIDC product portfolio; providing integrated AIDC solutions; partnering with global industry leaders; achieving economies of scale and scope; profitably increasing market share; and increasing the scale of the business.

Our strategy is focused on customers in certain vertical markets, including: retailers; consumer goods manufacturers; industrial goods manufacturers; transportation and logistics providers; and government agencies.

Our strategy is also focused on certain application markets, including: warehouse and distribution center operations; retail store operations; retail store management; in-transit visibility; field service; manufacturing operations; direct store delivery; and RFID supply chain.

17




Discontinued Operations

In 2005, we divested our Industrial Automation Systems (IAS) businesses, which comprised the Cincinnati Lamb and Landis Grinding Systems divisions. The IAS businesses are classified as discontinued operations for accounting purposes in our consolidated financial statements and related notes.

Results of Operations

The following discussion compares our results of operations for the three and nine month periods ended October 1, 2006, and October 2, 2005. Results from continuing operations include the operations of Intermec Technology and Corporate expenses. The operating results of the IAS business are classified as discontinued operations. Results of operations were as follows (in millions of dollars):

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 1,

 

October 2,

 

October 1,

 

October 2,

 

 

 

2006

 

2005

 

2006

 

2005

 

Revenues:

 

 

 

 

 

 

 

 

 

Product and Service Revenues

 

$

195.9

 

$

219.8

 

$

631.2

 

$

633.8

 

Intellectual property settlements

 

 

 

23.0

 

 

Total Revenues

 

195.9

 

219.8

 

654.2

 

633.8

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

Cost of product and service revenues

 

119.8

 

132.1

 

381.1

 

368.8

 

Cost of intellectual property settlements

 

 

 

6.5

 

 

Selling, general and administrative

 

70.5

 

74.1

 

226.8

 

222.7

 

Restructuring charge

 

1.8

 

 

4.0

 

 

Total Costs and Expenses

 

192.1

 

206.2

 

618.4

 

591.5

 

 

 

 

 

 

 

 

 

 

 

Operating Profit from

 

 

 

 

 

 

 

 

 

Continuing Operations

 

3.8

 

13.6

 

35.8

 

42.3

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of investments

 

 

 

2.3

 

 

Interest, net

 

1.7

 

(.7

)

4.6

 

(4.0

)

 

 

 

 

 

 

 

 

 

 

Earnings from Continuing

 

 

 

 

 

 

 

 

 

Operations before Income Taxes

 

5.5

 

12.9

 

42.7

 

38.3

 

 

 

 

 

 

 

 

 

 

 

Provision for Income Taxes

 

2.1

 

1.6

 

12.9

 

9.8

 

 

 

 

 

 

 

 

 

 

 

Earnings from Continuing

 

 

 

 

 

 

 

 

 

Operations, net of tax

 

3.4

 

11.3

 

29.8

 

28.5

 

 

 

 

 

 

 

 

 

 

 

Earnings (Loss) from Discontinued

 

 

 

 

 

 

 

 

 

Operations, net of tax

 

1.4

 

(6.7

)

(0.7

)

(8.4

)

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

4.8

 

$

4.6

 

$

29.1

 

$

20.1

 

 

18




Revenues

Revenues by category and geographic category and as a percentage of related revenues from continuing operations for the three and nine month periods ended October 1, 2006, and October 2, 2005, were as follows (in millions of dollars):

 

Three Months Ended

 

 

 

 

 

 

 

October 1, 2006

 

October 2, 2005

 

 

 

 

 

 

 

 

 

Percent of

 

 

 

Percent of

 

Dollar

 

Percent

 

 

 

Amount

 

Revenues

 

Amount

 

Revenues

 

Change

 

Change

 

Revenues by Category:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

156.9

 

80.1

%

$

179.6

 

81.7

%

(22.7

)

(12.6

)%

Service

 

39.0

 

19.9

%

40.2

 

18.3

%

(1.2

)

(2.9

)%

Total Revenues

 

$

195.9

 

100

%

$

219.8

 

100

%

(23.9

)

(10.9

)%

 

 

Three Months Ended

 

 

 

 

 

 

 

October 1, 2006

 

October 2, 2005

 

 

 

 

 

 

 

 

 

Percent of

 

 

 

Percent of