UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

For the transition period from                       to

Commission file number:  001-13279

INTERMEC, INC.

(Exact name of registrant as specified in its charter)

 

(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.

 

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.

 

INTERMEC, INC.
INDEX
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JULY 2, 2006

						Page Number
PART I. FINANCIAL INFORMATION						2
	ITEM 1.		Financial Statements			2
			Consolidated Statements of Operations (unaudited) Three and Six Month Periods Ended July 2, 2006, and July 3, 2005			2
			Consolidated Balance Sheets (unaudited) July 2, 2006, and December 31, 2005			3
			Consolidated Statements of Cash Flows (unaudited) For the Six Months Ended July 2, 2006, and July 3, 2005			4
			Notes to Consolidated Financial Statements (unaudited)			5
	ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
	ITEM 3.		Quantitative and Qualitative Disclosures about Market Risk			21
	ITEM 4.		Controls and Procedures			22
PART II. OTHER INFORMATION						23
	ITEM 1.		Legal Proceedings			23
	ITEM 1A.		Risk Factors			24
	ITEM 2.		Unregistered Sales of Equity Securities and Use of Proceeds			24
	ITEM 4.		Submission of Matters to a Vote of Security Holders			25
	ITEM 6.		Exhibits			25
Signature						26

 

PART I.  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTERMEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amounts)
(unaudited)

 

		Three Months Ended						Six Months Ended
		July 2,			July 3,			July 2,			July 3,
		2006			2005			2006			2005
Revenues:
Product		$	192,440		$	181,007		$	358,790		$	342,950
Service		38,997			36,452			76,478			71,004
Intellectual property settlement		—			—			23,000			—
Total Revenues		231,437			217,459			458,268			413,954
Costs and expenses:
Cost of product revenues		116,401			101,954			217,015			194,701
Cost of service revenues		21,413			21,084			44,274			41,970
Cost of intellectual property settlement		—			—			6,462			—
Selling, general and administrative		78,496			75,777			156,289			148,548
Restructuring Charge		1,135			—			2,242			—
Total costs and expenses		217,445			198,815			426,282			385,219
Operating profit from continuing operations		13,992			18,644			31,986			28,735
Gain on sale of investments		2,305			—			2,305			—
Interest income (expense), net		1,766			(1,120		)	2,910			(3,246		)
Earnings from continuing operations before income taxes		18,063			17,524			37,201			25,489
Provision for income taxes		6,767			5,669			10,835			8,222
Earnings before discontinued operations		11,296			11,855			26,366			17,267
Earnings (loss) from discontinued operations, net of tax		(940		)	213			(2,019		)	(1,719		)
Net earnings		$	10,356		$	12,068		$	24,347		$	15,548
Basic earnings (loss) per share
Continuing operations		$	0.18		$	0.19		$	0.42		$	0.28
Discontinued operations		$	(0.02	)	0.01			$	(0.03	)	(0.03		)
Net earnings per share		$	0.16		$	0.20		$	0.39		$	0.25
Diluted earnings (loss) per share
Continuing operations		$	0.18		$	0.19		$	0.41		$	0.28
Discontinued operations		$	(0.02	)	0.00			$	(0.03	)	(0.03		)
Net earnings per share		$	0.16		$	0.19		$	0.38		$	0.25
Shares used in computing basic earnings (loss) per share		63,252			61,361			63,138			61,228
Shares used in computing diluted earnings (loss) per share		64,529			62,768			64,565			62,792

 

See accompanying notes to consolidated financial statements.

2

---

INTERMEC, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
(unaudited)

 

		July 2,			December 31,
		2006			2005
ASSETS
Current assets:
Cash and cash equivalents		$	303,683		$	256,782
Short-term investments		19,130			—
Accounts receivable, net of allowance for doubtful accounts and sales returns of $8,943 and $8,157		162,379			180,985
Inventories		104,628			82,088
Net current deferred tax assets		51,554			100,656
Assets held for sale		8,239			8,517
Other current assets		18,275			29,468
Total Current Assets		667,888			658,496
Property, plant and equipment, net of accumulated depreciation of $105,146 and $99,032		38,778			30,820
Intangibles, net		6,794			6,871
Net deferred tax assets		182,046			137,578
Other assets		63,424			68,955
Total assets		$	958,930		$	902,720
LIABILITIES AND SHAREHOLDERS’ INVESTMENT
Current Liabilities:
Accounts payable and accrued expenses		$	155,399		$	148,731
Payroll and related expenses		30,639			31,011
Deferred revenue		44,861			38,369
Total current liabilities		230,899			218,111
Long-term deferred revenue		19,479			20,095
Long-term debt		100,000			100,000
Other long-term liabilities		89,754			88,711
Shareholders’ investment:
Common stock		632			627
Additional paid-in capital		750,362			736,224
Accumulated deficit		(220,557		)	(244,903		)
Accumulated other comprehensive loss		(11,639		)	(16,145		)
Total shareholders’ investment		518,798			475,803
Total liabilities and shareholders’ investment		$	958,930		$	902,720

 

See accompanying notes to consolidated financial statements.

3

---

INTERMEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)

 

		Six Months Ended
		July 2,			July 3,
		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		24,347			17,267
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		5,186			4,992
Change in prepaid pension costs, net		3,392			5,767
Deferred taxes		10,097			9,537
Stock-based compensation and other		5,125			587
Excess tax benefits from stock-based payment arrangements		(3,076		)	—
Changes in operating assets and liabilities:
Accounts receivable		18,616			5,137
Inventories		(22,540		)	(22,929		)
Other current assets		3,524			(1,168		)
Accounts payable and accrued expenses		9,770			3,951
Payroll and related expenses		94			(4,495		)
Other long-term liabilities		2,294			6,355
Other operating activities		5,557			(2,819		)
Net cash provided by operating activities of continuing operations		62,386			22,182
Cash flows from investing activities of continuing operations:
Capital expenditures		(12,304		)	(5,510		)
Purchases of investments		(19,695		)	6,051
Decrease in restricted cash		—			50,000
Proceeds from sales of investments		565			—
Other investing activities		5			190
Net cash (used in) provided by investing activities of continuing operations		(31,429		)	50,731
Cash flows from financing activities of continuing operations:
Repayment of long-term obligations		—			(100,000		)
Excess tax benefits from stock-based payment arrangements		3,076			—
Stock options exercised		4,340			7,644
Other financing activities		1,616			1,258
Net cash provided by (used in) financing activities of continuing operations		9,032			(91,098		)
Net cash provided by (used in) continuing operations		39,989			(18,185		)
Net cash used in operating activities of discontinued operations		—			(27,350		)
Net cash provided by investing activities of discontinued operations		6,912			405
Resulting increase (decrease) in cash and cash equivalents		46,901			(45,130		)
Cash and cash equivalents at end of period		$	303,683		$	172,769

 

See accompanying notes to consolidated financial statements.

4

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 Intermec’s consolidated financial statements and related notes.

2.                          Basis of Presentation

Our interim financial periods are based on a thirteen-week internal accounting 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 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 six months ended July  3, 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, or APB, 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 six months ended July 2, 2006, reflect the impact of adopting SFAS 123(R). In accordance with the modified prospective method, the consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).

Stock-based compensation expense recognized in the consolidated statement of operations during the second 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

5

---

 

expense recognized in the statement of operations for the three and six months ended July 2, 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 six month periods ended July 2, 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 six month periods ended July 2, 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 six month periods ended July 2, 2006 was as follows (in thousands):

		Three Months			Six Months
		Ended			Ended
		July 2, 2006			July 2, 2006
Cost of revenues		$	72		$	110
Selling, general and administrative		925			2,811
		$	997		$	2,921

 

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), $3.1 million of excess tax benefits for the six months ended July 2, 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 six month periods ended July 2, 2006 and July 3, 2005, was $4.3 million and $7.7 million, respectively. The total income tax benefit recognized in the statement of operations for stock-based compensation costs was $0.4 million, and $1.1 million for the three and six month periods ended July 2, 2006, and $0.3 and $0.6 for the three and six month periods ended July 3, 2005.

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:

		July 2, 2006		July 3, 2005
Risk-free interest rates		4.88	%	3.72	%
Expected lives (in years)		4.8		5.0
Expected dividend yield		0.0	%	0.0	%
Expected volatility		44.9	%	56.0	%

 

Our computation of expected volatility for the second 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.

The fair value of the options granted based on the above assumptions are $12.16 and $12.89 for the three and six month periods ended July 2, 2006 and $10.26 and $10.66 for the three and six month periods ended July 3, 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, 2005.

6

---

 

		Three Months			Six Months
		Ended			Ended
		July 3, 2005			July 3, 2005
Net earnings as reported		$	12,068		$	15,548
Add: stock compensation expense recorded under the intrinsic value method, net of tax effect		584			1,068
Less: pro forma stock compensation expense computed under the fair value method, net of tax effect		(1,308		)	(2,592		)
Pro forma net earnings		$	11,344		$	14,024
Net earnings per share as reported:
Basic		$	0.20		$	0.25
Diluted		$	0.19		$	0.25
Pro forma net earnings per share:
Basic		$	0.18		$	0.23
Diluted		$	0.18		$	0.22

 

 

Our 2001, 1999 and 1997 Stock Incentive Plans and the 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 July 2, 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 Intermec’s 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 Intermec’s 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 Intermec’s common stock on the date of grant. The number of options granted annually to each director is fixed by the Director Plan. Such options become fully exercisable on the first anniversary of their date of grant. Additionally, there was a grant in January, 2006 to the Director’s that vested immediately. Therefore, the corresponding expense was recorded in the quarter ended April 2, 2006.

As of July 2, 2006 there were 2,470,355 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:

7

---

 

				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		568,250		28.31
Exercised		(404,125	)	10.74
Forfeited		(26,966	)	18.97
Canceled		(5,800	)	15.19
Outstanding balance at July 2, 2006		3,350,285		16.14			6.46		$	79.1
Exercisable at July 2, 2006		2,023,157		13.54			4.98		46.9

 

As of July 2, 2006, there was $8.8 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 0 months.

				Weighted-
				Average
		Number		Grant Date
		of Shares		Fair Value
Restricted stock awards:
Nonvested balance at December 31, 2005		86,070		11.52
Granted		89,088		27.25
Vested		(66,802	)	9.14
Forfeited		(3,387	)	19.39
Nonvested balance at July 2, 2006		104,969		26.13

 

The fair value of each restricted stock award (RSA) is the market price of our stock on the date of grant. The total intrinsic value of RSA’s vested during the three and six months ended July 2, 2006, and July 3, 2005, was $1.2 and $ 1.8 million, and $ 1.2 and $ 2.6 million, respectively. As of July 2, 2006, there was $ 2.7 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 1 year and 1 month.

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 $ 0.8 and $ 1.5, for the three and six month periods ended July 2, 2006 and $0.3 and $0.6 for the three and six month periods ended July 3, 2005, respectively.

We administer the Employee Stock Purchase Plan under which 5.0 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.

8

---

 

4.                          Inventories

Inventories comprise the following (thousands of dollars):

		July 2,			December 31,
		2006			2005
Raw materials		$	55,394		$	50,505
Work in process		739			705
Finished goods		48,495			30,878
Inventories		$	104,628		$	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 (8.33% as of July 2, 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 July 2, 2006, the estimated fair value of the note is $10.9 million, based on the estimated cash flows from the note and a risk-adjusted discount rate equal to LIBOR plus eight percent. Our consolidated balance sheet as of July 2, 2006, classifies the $10.9 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 July 2, 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% (7.94% as of July 2, 2006). This long-term note receivable is included in other assets on our balance sheet.

6.                          Long-term Debt and Interest, net

Intermec has 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, Intermec had borrowing capacity at July 2, 2006, of $18.1 million under the Revolving Facility. We made no borrowings under the Revolving Facility during 2006, and as of July 2, 2006, no borrowings were outstanding under this facility. As of July 2, 2006, we were in compliance with all financial covenants of this agreement.

We have $100.0 million of ten-year senior unsecured debt outstanding as of July 2, 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 entered into in March, 1998.

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

		Three Months Ended						Six Months Ended
		July 2,			July 3,			July 2,			July 3,
		2006			2005			2006			2005
Interest income		$	3,979		$	1,351		$	7,339		$	3,153
Interest expense		2,213			2,471			4,429			6,399
Net interest income (expense)		$	1,766		$	(1,120	)	$	2,910		$	(3,246	)

 

We also have letter-of-credit reimbursement agreements totaling $13.2 million at July 2, 2006, compared to $25.8 million at December 31, 2005. As of July 2, 2006, $7.9 million of the agreements related to performance on contracts with current customers and vendors, and $4.1 million of the agreements related to customer contracts assumed by the purchaser of the Cincinnati Lamb operations that were sold and $1.4 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 $4.1 million of letter-of-credit agreements related to Cincinnati Lamb and the beneficiary of a backup letter-of-credit in the aggregate amount of $0.6 million issued pursuant to the terms of the sale.

 

9

 

We believe it is not practicable to estimate fair values of these instruments and consider the risk of non-performance on the contracts to be remote. We are indemnified by the purchaser of the Landis operations on the $1.3 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 loss from discontinued operations for the three and six month periods ended July 2, 2006, include period expenses related to finalizing the sale of the Landis Grinding Systems and changes to the estimated purchase price adjustment, net of tax benefits.

The loss from discontinued operations for the three and six month periods ended July 3, 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 Intermec 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 $2.8 million of employee termination expense, facility closure costs of $1.4 million non-cash, asset impairment expense of $0.1 million and other related costs of $0.2 million. During the six months ended July 2, 2006, we have already recorded restructuring charges of $2.3 million, mostly employee termination costs, in accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146), and anticipate that the majority of  the remaining unrecognized restructuring costs will be recognized over the last 2 quarters 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 Intermec’s intellectual property (“IP”). Intermec’s patents involved its 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 six month periods ended July 2, 2006, reflects an effective tax rate for continuing operations of 37.4% and 29.1% respectively, compared to a U.S. statutory rate of 35%. The tax provision was reduced by $2.2 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 six month periods ended July 3, 2005 reflects an effective tax rate for continuing operations of 32.4% and 32.3% compared to a U.S. statutory rate of 35%. The reduction in the effective tax rate is primarily due to favorable foreign currency exchange variance associated with foreign tax contingency accruals.

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
		July 2,		July 3,
		2006		2005
Weighted average common shares — Basic		63,252,443		61,360,586
Dilutive effect of unvested restricted shares and stock options		1,276,159		1,407,696
Weighted average shares — Diluted		64,528,602		62,768,282

 

10

---

 

		Six months Ended
		July 2,		July 3,
		2006		2005
Weighted average common shares — Basic		63,138,099		61,228,208
Dilutive effect of unvested restricted shares and stock options		1,427,263		1,563,680
Weighted average shares — Diluted		64,565,362		62,791,888

 

Our employees and directors held options to purchase 586,401 and 339,776 shares of our common stock for the three and six months ended July 2, 2006, and 136,920 and 121,710 for the three and six month periods ended July 3, 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.

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 six month periods ended July 2, 2006, and July 3, 2005, are as follows (thousands of dollars):

		U.S.						Non-U.S.						Other
		Defined						Defined						Postretirement
Three Months Ended July 2, 2006,		Benefit Plans						Benefit Plans						Benefit Plans
and July 3, 2005:		2006			2005			2006			2005			2006			2005
Service Cost		$	1,741		$	2,406		$	273		$	850		$	4		$	33
Interest Cost		2,988			2,520			552			1,157			66			166
Expected return on plan assets		(2,508		)	(2,506		)	(756		)	(1,034		)	—			—
Amortization and deferrals:
Transition asset		—			—			(39		)	(85		)	—			—
Actuarial loss		1,241			850			112			246			28			16
Prior service cost (benefit)		177			179			—			—			—			—
Curtailment loss (gain)		—			—			—			—			—			—
Settlement gain		—			—			—			—			—			—
Special termination benefits		675			—			—			—			—			—
Net pension and postretirement periodic benefit cost		$	4,314		$	3,449		$	142		$	1,134		$	98		$	215

 

								Non-U.S.						Other
		U.S. Defined						Defined						Postretirement
Six Months Ended July 2, 2006,		Benefit Plans						Benefit Plans						Benefit Plans
and July 3, 2005:		2006			2005			2006			2005			2006			2005
Service Cost		$	3,482		$	4,810		$	536		$	2,119		$	8		$	67
Interest Cost		5,976			5,040			1,083			3,705			132			1,229
Expected return on plan assets		(5,016		)	(5,012		)	(1,483		)	(3,680		)	—			—
Amortization and deferrals:
Transition asset		—			—			(77		)	(172		)	—			—
Actuarial loss		2,480			1,700			220			761			55			340
Prior service cost (benefit)		354			358			—			—			—			(598		)
Curtailment loss (gain)		—			57			—			(5,396		)	—			(12,274		)
Settlement gain		—			—			—			(332		)	—			(21,090		)
Special termination benefits		1,350			264			—			—			—			—
Net pension and postretirement periodic benefit cost		$	8,626		$	7,217		$	279		$	(2,995	)	$	195		$	(32,326	)

 

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 will be reflected in our third quarter, as a result of the three month lag period utilized by us for measuring pension obligations, and the change in our ongoing expense will be realized across the balance of our measurement year.

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

11

---

 

$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 six months ended July 2, 2006, we contributed approximately $3.2 million to our pension and other postretirement benefit plans, comprising $1.2 million in benefits paid pertaining to unfunded U.S. defined benefit plans, $1.1 million in matching contributions to our 401(k) plan, $0.8 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 $2.6 million to these plans during the remainder of 2006, of which $ 0.9 million relates to benefit payments on our unfunded U.S. defined benefit plans, $0.6 million in matching contributions to our 401(k) plan, $0.6 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 (thousands of dollars):

		Three Months Ended
		July 2,			July 3,
		2006			2005
Net earnings		$	10,356		$	12,068
Change in equity due to foreign currency translation adjustments		2,722			(8,156		)
Change in equity due to minimum pension liability adjustment		—			—
Unrealized gain on cash flow hedges		—			79
Comprehensive earnings		$	13,078		$	3,991

 

		Six Months Ended
		July 2,			July 3,
		2006			2005
Net earnings		$	24,347		$	15,548
Change in equity due to foreign currency translation adjustments		3,814			(22,376		)
Change in equity due to minimum pension liability adjustment					9,144
Unrealized gain on cash flow hedges		—			79
Comprehensive earnings		$	28,161		$	2,395

 

Foreign currency translation adjustments for the six months ended July 3, 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 (thousands of dollars):

		Three Months Ended
		July 2,			July 3,
		2006			2005
Revenues
Product		$	192,440		$	181,007
Service		38,997			36,452
Total revenues		$	231,437		$	217,459
Gross profit
Product		$	76,039		$	79,053
Service		17,584			15,368
Total gross profit		$	93,623		$	94,421
Operating profit from continuing operations
Total operating profit from continuing operations		$	13,992		$	18,644

 

12

---

 

		Six Months Ended
		July 2,			July 3,
		2006			2005
Revenues
Product		$	381,790		$	342,950
Service		76,478			71,004
Total revenues		$	458,268		$	413,954
Gross profit
Product		$	158,313		$	148,219
Service		32,204			29,034
Total gross profit		$	190,517		$	177,286
Operating profit from continuing operations
Total operating profit from continuing operations		$	31,986		$	28,735

 

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 to develop the software for the next generation of Life and Health Insurance’s handheld computers. In the three and six month periods ended July 2, 2006, and July 3, 2005, we did not recognize any revenues from this arrangement.

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 (thousands of dollars):

Beginning balance January 1, 2006		$	5,514
Payments		(1,830		)
Increase in liability (new warranties issued)		2,149
Ending Balance July 2, 2006		$	5,833

 

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.

FASB Interpretation No. 45, “Guarantors’ Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” requires that Intermec 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 July 2, 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

13

---

 

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.

On March 10, 2005, Symbol Technologies, Inc. (“Symbol”) terminated its original equipment manufacturing (“OEM”) agreement with us to supply laser scan engines and stopped shipping laser scan engines to us. On March 10, 2005, Symbol also filed a lawsuit against us in the United States District Court for the District of Delaware seeking a declaratory judgment that its termination of the OEM agreement is lawful (the “Contract Case”). We believe that the termination of the OEM agreement by Symbol has not had a material adverse effect on our operations.

In addition, on March 11, 2005, Symbol announced that it had filed a lawsuit against us on March 10, 2005, in the United States District Court for the District of Delaware for infringement of certain of Symbol’s wireless technology patents (the “Wireless Case”). On March 23, 2005, we filed an answer to Symbol’s complaint and filed counterclaims against Symbol for infringing our wireless access, terminal and software patents. We simultaneously filed our answer to Symbol’s declaratory judgment action in the Contract Case and filed counterclaims against Symbol for breach of the OEM agreement.

On July 28, 2005, Symbol announced that it had filed a lawsuit against us in the United States District Court for the Western District of Wisconsin for infringing Symbol’s barcode decoding patents (the “Decoding Case”). On July 14, 2005, in response to a motion we filed, the Decoding Case was transferred to the United States District Court for the District of Delaware. That case was consolidated for purposes of discovery with the Wireless Case. We denied liability in the Decoding Case, and pursuant to the standstill agreement discussed below, we retained the right to file counterclaims against Symbol in the Decoding Case.

On June 30, 2005, we filed a complaint with the U.S. International Trade Commission (the “ITC”) alleging that Symbol was illegally importing products that infringe our patents that cover pocket-sized handheld computing devices, modular handheld computing devices and recharging and data exchanging cradles (the “ITC Case”). On July 29, 2005, the ITC voted to investigate our allegations against Symbol. Pursuant to the standstill agreement, discussed below, we asked the ITC to dismiss and close the investigation. On September 26, 2005, in response to our request, the Administrative Law Judge terminated the investigation. On October 12, 2005, the ITC entered a Notice Not to Review the Order terminating the investigation.

On September 1, 2005, the parties agreed that they would try to resolve their patent disputes through negotiation. To facilitate that effort, the parties entered into a standstill agreement pursuant to which they sought the court’s permission to postpone litigation activity in the cases pending in the U.S. District Court for the District of Delaware (the Contract, Wireless and Decoding Cases)  sought the ITC’s permission to dismiss the ITC action and agreed to postpone filing any new patent infringement law suits against each other.   The ITC agreed to dismiss the ITC case and the United States District Court for the District of Delaware granted the scheduling changes required to effectuate the standstill agreement of the parties.

On July 18, 2006, we issued a joint press release with Symbol announcing the settlement of the parties’ remaining pending intellectual property disputes (the “2006 Settlement Agreement”).  Under the 2006 Settlement Agreement, we and Symbol have cross-licensed certain patents, have entered into four-year covenants not to sue with respect to remaining patents, and have released patent infringement damage claims that may have existed on the settlement date or may arise before the covenants expire. We also agreed to dismiss without prejudice all claims in the Wireless Case and the Decoding Case.  The specific terms of the 2006 Settlement Agreement are confidential.

Earlier, in September 2005, we and Symbol resolved the portion of the dispute that concerned radio frequency identification (RFID). At that time, Symbol joined our Rapid Start RFID intellectual property licensing program by entering into an RFID cross-license agreement. That 2005 cross-license agreement, which is unchanged by the 2006 Settlement Agreement, gave Symbol access to our RFID IP and gave us access to Symbol’s RFID IP.

17.                   Recent Accounting Pronouncements

In March 2006, the Financial Accounting Standards Board (FASB) issued an exposure draft of a proposed standard that, if enacted in its current form, would make a significant change to existing rules by requiring recognition in the balance sheet of the overfunded or underfunded positions of defined benefit pension and other postretirement plans,

14

---

 

along with a corresponding noncash, after-tax adjustment to stockholders’ equity. The proposed standard would be effective for year ends starting after December 15, 2006, and would require adoption on a retrospective basis. The proposed standard has not yet completed the FASB’s process for review and enactment, and therefore the final provisions of the standard and its effects on our financial statements, if and when it is issued, are not yet known.

In response to the public’s concern over the adequacy of pension plan funding, Congress has been drafting legislation to address the amount of annual contributions that companies are required to pay into their pension funds. Both the Senate and the House of Representatives have passed their own versions of a pension funding bill and those bills are currently in conference. It is expected that the conference process will produce compromises and changes in the Senate and House bills, and ultimate passage of a bill is uncertain. This uncertainty makes it difficult to quantify the potential impact to our pension funding.

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.

In June 2006, the Financial Accounting Standards Board 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.

15