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| IN > SEC Filings for IN > Form 10-K on 26-Feb-2009 | All Recent SEC Filings |
26-Feb-2009
Annual Report
The following discussion should be read in conjunction with the Consolidated Financial Statements and the notes thereto that appear in Item 8 of this annual report on Form 10-K.
Overview
Intermec, Inc. ("Intermec", "us", "we", "our") designs, develops, integrates, sells, resells and services wired and wireless automated identification and data collection ("AIDC") products and provides related services. Our products include mobile computing products, bar code scanners, radio frequency identification ("RFID") products, wired and wireless bar code printers and label media products. These products and services allow customers to identify, track and manage their assets and other resources in ways that improve the efficiency and effectiveness of their business operations. Our products are designed to withstand mobile use and rugged warehouse and field conditions.
Our products are sold globally for field mobility applications such as asset visibility and management, direct store delivery, maintenance and repair, in-transit visibility, routing and navigation, and telematics. Our products are also sold globally for in-premise applications such as asset visibility, freight yard operations, inventory management, warehouse operations, and work-in-process management.
The key elements of our strategy are to target high growth opportunities in selected application markets; focus on developing and selling differentiated new products and services; emphasize channel fulfillment; pursue geographic expansion opportunities; and continue the transformation of our supply chain and our other efficiency initiatives.
Our financial reporting currency is the U.S. Dollar, and changes in exchange rates can significantly affect our financial trends and reported results. If the U.S. Dollar weakens year-over-year relative to currencies in our international locations, our consolidated revenues, costs of revenues and operating expenses will be higher than if currencies had remained constant. If the U.S. Dollar strengthens year-over-year relative to currencies in our international locations, our consolidated revenues, costs of revenues and operating expenses will be lower than if currencies had remained constant. We believe it is important to evaluate our operating results and growth rates before and after the effect of currency changes.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations
The following discussion compares our historical results of operations for the years ended December 31, 2008, 2007 and 2006. The results of operations and percentage of revenues were as follows (millions of dollars):
Year Ended December 31,
2008 2007 2006
Percent of Percent of Percent of
Amounts Revenues Amounts Revenues Amounts Revenues
Revenues $ 890.9 $ 849.2 $ 850.0
Costs and expenses:
Cost of revenues 536.1 60.2 % 522.4 61.5 % 517.9 60.9 %
Research and
development 64.5 7.2 % 65.6 7.7 % 72.4 8.5 %
Selling, general and
administrative 236.4 26.5 % 223.8 26.4 % 227.8 26.8 %
Gains on intellectual
property settlements - - - - (16.5 ) -1.9 %
Flood related charge 1.1 0.1 % - -
Restructuring charge 5.8 0.7 % - - 11.6 1.4
Total costs and
expenses 843.9 94.7 % 811.8 95.6 % 813.2 95.7 %
Operating profit from
continuing
operations 47.0 5.3 % 37.4 4.4 % 36.8 4.3 %
Interest, net 2.3 0.3 % 1.8 0.2 % 6.5 0.8 %
Gain on sale of
investments - - - - 2.3 0.3 %
Earnings from
continuing operations
before
income taxes 49.3 5.5 % 39.2 4.6 % 45.6 5.4 %
Provision for income
taxes 13.6 1.5 % 14.8 1.8 % 10.6 1.2 %
Earnings from
continuing
operations, net of
tax 35.7 4.0 % 24.4 2.9 % 35.0 4.1 %
Loss from
discontinued
operations, net of
tax - - % (1.3 ) -0.2 % (3.0 ) -0.4 %
Net earnings $ 35.7 4.0 % $ 23.1 2.7 % $ 32.0 3.8 %
Basic earnings per
share from
continuing operations $ 0.58 $ 0.40 $ 0.56
Diluted earnings per
share from
continuing operations $ 0.58 $ 0.40 $ 0.55
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Revenues
Revenues by category and as a percentage of total revenues from continuing
operations for the years ended December 31, 2008, 2007 and 2006, as well as the
year-over-year product and service revenue changes were as follows (millions of
dollars):
Year Ended December 31,
2008 2007 2006
Percent Percent Percent
of of of
Amount Revenues Amount Revenues Amount Revenues
Revenues by category:
Systems and solutions $ 542.1 60.8 % $ 485.6 57.2 % $ 477.2 56.1 %
Printer and media 196.3 22.0 % 206.4 24.3 % 215.2 25.3 %
Total product 738.4 82.8 % 692.0 81.5 % 692.4 81.5 %
Service 152.5 17.2 % 157.2 18.5 % 157.6 18.5 %
Total revenues $ 890.9 100.0 % $ 849.2 100.0 % $ 850.0 100.0 %
2008 v. 2007 2007 v. 2006
Product and service revenue change: Amount Percent Amount Percent
Systems and solutions $ 56.5 11.6 % $ 8.4 1.8 %
Printer and media (10.1 ) -4.9 % (8.8 ) -4.1 %
Total product $ 46.4 6.7 % $ (0.4 ) -0.1 %
Service (4.7 ) -3.0 % (0.4 ) -0.3 %
Total revenues $ 41.7 4.9 % $ (0.8 ) -0.1 %
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Revenues by geographic region and as a percentage of related revenues from continuing operations for the years ended December 31, 2008, 2007 and 2006, as well as the year-over-year geographic region revenue changes were as follows (millions of dollars):
Year Ended December 31,
2008 2007 2006
Percent Percent Percent
of of of
Amount Revenues Amount Revenues Amount Revenues
Revenues by geographic
region:
North America $ 492.8 55.3 % $ 422.9 49.8 % $ 494.4 58.2 %
Europe, Middle East and
Africa 290.4 32.6 % 290.6 34.2 % 241.1 28.4 %
All others 107.7 12.1 % 135.7 16.0 % 114.5 13.4 %
Total revenues $ 890.9 100.0 % $ 849.2 100.0 % $ 850.0 100.0 %
2008 v. 2007 2007 v. 2006
Geographic region revenue change: Amount Percent Amount Percent
North America $ 69.9 16.5 % $ (71.5 ) -14.4 %
Europe, Middle East and Africa (EMEA) - 0 % 49.5 20.4 %
All others (28.0 ) -20.6 % 21.2 18.5 %
Total revenues $ 41.7 4.9 % $ (0.8 ) -0.1 %
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Product revenues in 2008 increased $46.4 million, or 6.7% compared to 2007. The growth in our 2008 product revenue was driven by system and solutions revenues, which increased $56.5 million, or 11.6%, compared to 2007. This increase resulted from North America systems and solutions revenue growth as a result of larger direct accounts, sales to the U.S. Government Department of Defense and higher revenue through our distribution partners. The increase in revenues from systems and solutions was offset by a $10.1 million, or 4.9%, decline in our printer and media revenue for the comparable periods. The decrease in printer and media revenue in 2008 was primarily related to less revenue in Latin America, which had a number of large direct accounts that included significant printer revenue in 2007. Product revenues in Europe, the Middle East and Africa (EMEA) were flat in 2008 compared to 2007, which includes approximately $8.4 million from favorable changes in currency exchange rates in 2008 compared to 2007. Product revenue in the Rest of the World ("ROW") decreased 23%, primarily due to lower product revenue in Latin America, which had a number of large direct accounts in 2007.
Product revenues in 2007 were flat compared to 2006. The growth in our 2007 system and solutions revenues of $8.4 million, or 1.8%, compared to 2006, was offset by an $8.8 million, or 4.1%, decline in our printer and media revenue for the comparable periods. The growth in systems and solutions resulted from 2007 growth rates of 31.2% and 14.7% in EMEA and ROW, respectively, partially offset by a 16.2% decrease in North America. The higher systems and solutions revenue in EMEA during 2007 was primarily attributable to strong market acceptance of new product introductions and a refreshed product line to be in compliance with the European Union's Reduction of Hazardous Substances ("RoHS") directive. The growth in EMEA revenue also includes approximately $12.0 million, or 9.0%, from favorable changes in currency exchange rates in 2007 compared to 2006. The lower systems and solutions revenue in North America during 2007 compared to 2006 reflects declining revenues in the first half of 2007, as a result of lower enterprise sales and delays in customer purchases during our transition to newly introduced products, partially offset by 20% growth in the fourth quarter of 2007 compared to the corresponding 2006 period.
Service revenues of $152.5 million for 2008 were down $4.7 million, or 3.0% compared to 2007. We experienced higher 2008 service revenue in EMEA, which was more than offset by lower service revenue in North America and Latin America compared to 2007. The decrease in North America service revenues is primarily a result of lower time-and-material repairs.
Service revenues of $157.2 million for 2007 were essentially flat with 2006. We experienced higher service revenue in EMEA and Latin America during 2007, primarily from the regional growth in product revenues, which was offset by a decrease in U.S. Government professional services and declines in time-and-material repairs.
Geographically, for the year ended December 31, 2008, product and service revenues increased in North America by 16.5%, while EMEA remained flat and ROW decreased 20.6%. The growth in North America revenue is primarily attributable to strong system and solutions revenue. The revenue decrease in ROW is primarily attributable to lower product revenue in Latin America, which had a number of large direct accounts in 2007.
For 2007, product and service revenue decreased in North America by 14.4%, while EMEA and ROW increased by 20.4 % and 18.5%, respectively. The growth in EMEA revenue is primarily attributable to strong market acceptance of new products and $21.5 million, or 9.0%, from favorable changes in currency exchange rates in 2007 compared to 2006. The revenue growth in ROW is primarily attributable to several large enterprise sales in Latin American and approximately $3.6 million, or 3.1%, due to favorable changes in currency exchange rates.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Gross Profit
Gross profit and gross margin by revenue category for the years ended
December 31, 2008, 2007 and 2006, were as follows (millions of dollars):
Year Ended December 31,
2008 2007 2006
Gross
Gross Profit Gross Margin Gross Profit Gross Margin Gross Profit Margin
Product $ 290.2 39.3 % $ 259.9 37.6 % $ 262.7 37.9 %
Service 64.6 42.4 % 67.0 42.6 % 69.3 44.0 %
Total gross profit and
gross margin $ 354.8 39.8 % $ 326.9 38.5 % $ 332.0 39.1 %
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Total gross profit for the year ended December 31, 2008, increased $27.9 million, or 8.5%, compared to 2007. The increase in total gross profit is primarily due to the 6.7% increase in product revenue, combined with a 170 basis point improvement in the related gross margin. The increase in product gross margins is primarily a result of a higher proportion of our product revenue from systems and solutions, the favorable impact from foreign exchange rate movements, component cost reductions and higher capacity utilization related to the revenue growth. Service gross profit decreased by $2.4 million, or 3.6%, in 2008 compared to 2007 due primarily to the 3.0% decrease in related revenue.
Total gross profit for the year ended December 31, 2007, decreased $5.1 million, or 1.6%, compared to the prior year end. Product gross profit decreased by $2.8 million, or 12.5%, in 2007 compared to 2006, due primarily to the 30 basis point decrease in gross margin percentage. Service gross profit decreased by $2.3 million, or 3.3%, in 2007 compared to 2006 due to the 140 basis point reduction in gross margin. The decrease in gross margins is due to the regional mix change, as lower service revenues in North America were offset by increases in lower margin service revenues in Latin America.
Research and Development Expense, net (In millions)
Year Ended December 31,
Change from Prior Change from Prior
2008 Amount Year 2007 Amount Year 2006 Amount
Research and development expense $ 64.5 $ (1.1 ) $ 65.6 $ (6.8 ) $ 72.4
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Research and development ("R&D") expense decreased $1.1 million in 2008 compared to 2007. The decrease in R&D expense resulted from a $1.8 million credit recorded for the reimbursement of certain R&D expenses under a foreign grant program which was received during 2008.
R&D expense decreased $6.8 million in 2007 compared to 2006. The decrease primarily reflects the elimination of $7.7 million of incremental expense incurred during 2006 to redesign our current products and bring them into compliance with the European Parliament and Council Directive 2002/95/EC on the Restrictions of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (the "RoHS Directive").
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Selling, General and Administrative Expense (In millions)
Year Ended December 31,
Change from Prior Change from Prior
2008 Amount Year 2007 Amount Year 2006 Amount
Selling, general and
administrative expense $ 236.4 $ 12.6 $ 223.8 $ (4.1 ) $ 227.9
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The increase in selling, general and administrative expense ("SG&A") in 2008 of $12.6 million compared to 2007 is primarily attributable to a $4.1 million increase for information systems expense , primarily resulting from higher depreciation expense and consulting costs, as a result of our ERP upgrade, a $3.2 million increase due to the impact of international costs translated to U.S. dollars at less favorable average exchange rates during 2008, a $3.2 million increase in foreign exchange contract and re-measurement losses, and higher labor costs.
The decrease in SG&A of $4.1 million in 2007 compared to 2006 primarily reflects a $4.5 million reduction in our U.S. pension and post-retirement expense as a result of the changes to our U.S. plans in 2006.
Flood related charges
In June 2008, our Cedar Rapids, Iowa facilities were flooded, and we incurred damages to both a facility that we own and one that we lease. A portion of these damages was covered by insurance. While the flood caused significant damage, we were able to redirect the work done by our Cedar Rapids groups to temporary locations, and therefore the flood did not cause a significant interruption of our business. For the year ended December 31, 2008, we had $5.1 million in clean up costs and property damages that were partially offset by $4.0 million of insurance for a net pre-tax charge of $1.1 million.
Gains on Intellectual Property Settlements
In March 2006, we settled an intellectual property ("IP") lawsuit relating to our battery power-management patents. IP settlements relating to the battery power-management patents have been reached to date with companies that, in the aggregate, represent over ninety percent of U.S. laptop sales. We are involved in various other patent infringement lawsuits that may result in future revenue or gains and operating profit. Management cannot predict the outcome, timing or amount of future settlements or judgments in IP lawsuits. There were no IP settlements for the years ended December 31, 2008 or 2007. The net pretax gain from an IP settlement included in operating profits was $16.5 million in 2006.
Restructuring Costs
In July 2008, we committed to a business restructuring plan intended to reduce our cost structure and streamline operations. Pursuant to this plan, we relocated the final assembly of our product lines from Everett, Washington, to Venture Corporation Limited, a global electronics services provider. As part of the plan we have consolidated two U.S. service depots to existing locations in Charlotte, North Carolina and Monterey, Mexico and transferred our on-site field service repair to a third party supplier.
We commenced implementation of the plan in the third quarter of 2008 and expect the plan to be fully implemented in the first half of 2009. As of December 31, 2008, 230 employees have been terminated as part of the restructuring. We expect all severance and other periodic transitional costs will be cash expenditures. All the restructuring costs have been accrued as of December 31, 2008. The aggregate costs incurred to date are presented in restructuring costs in the Condensed Consolidated Statement of Operations and are itemized along with expected additional costs in the table below.
Employee
In millions of dollars SFAS No. 112 SFAS No. 146 termination Other costs Total restructuring
Total Restructuring
Original restructuring charge $ 3.0 $ 2.1 $ 5.1 $ 0.7 $ 5.8
Utilization (1.8 ) (2.1 ) (3.9 ) (0.6 ) (4.5 )
Balance at December 31, 2008 $ 1.2 $ - $ 1.2 $ 0.1 $ 1.3
Utilization by segment
Services $ 1.2
Products $ 3.3
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
In March 2006, we announced our plan to close our design centers in Goteborg and Lund, Sweden. The activities previously assigned to the design centers in Sweden were reassigned to other parts of our business or moved to third-party vendors to improve efficiencies and reduce costs. In addition to the anticipated cost savings, this realignment of resources is expected to increase new product development capacity. This restructuring activity was substantially completed by the end of 2006.
On November 15, 2006, we committed to a business restructuring plan intended to reduce costs, streamline operations and improve productivity. The restructuring included headcount reductions and consolidation of certain facilities on a regional and/or global basis. The restructuring was substantially completed by the end of 2006.
As of December 31, 2006, 86 employees had been terminated and $1.6 million in severance costs had been paid. The total restructuring costs of $11.6 million include employee termination expense of $9.9 million, facility closure costs of $1.3 million and $0.4 million of other exit costs in accordance with Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."
On January 7, 2009, we committed to a business restructuring plan intended to reorganize our sales function and to reduce our operating cost structure and improve efficiency. We believe these actions are appropriate strategically and are prudent changes in view of the generally weakened global economy and uncertain market conditions expected in the foreseeable future.
We expect to implement this plan over the next six months and to reduce our workforce by approximately 150 employees worldwide. A majority of the headcount reductions will be made in the United States. The total restructuring costs are expected to be in a pre-tax range of $9.8 million to $10.8 million, including employee termination costs of approximately $9.3 million, and $0.5 million to $1.5 million of other restructuring costs. We expect to record most of the restructuring charge in the first quarter of 2009, and the remainder in the second quarter of 2009. We anticipate that all of the severance related and periodic transitional costs will be cash expenditures.
Interest, Net (In millions)
Year Ended December 31,
Change from Prior Change from Prior
2008 Amount Year 2007 Amount Year 2006 Amount
Interest, net $ 2.3 $ 0.5 $ 1.8 $ (4.7 ) $ 6.5
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Net interest income for the year ended December 31, 2008, increased $0.5 million compared with 2007 due to the reduction of interest expense as a result of our $100 million debt repayment during March 2008.
Net interest income for the year ended December 31, 2007, was $1.8 million, compared to net interest income of $6.5 million in the prior year. The decrease in net interest income reflects decreased interest rates and lower average invested cash in 2007 when compared to 2006.
Provision for Income Taxes (In millions)
Year Ended December 31,
Change from Prior Change from Prior
2008 Amount Year 2007 Amount Year 2006 Amount
Provision for income taxes $ 13.6 $ (1.2 ) $ 14.8 $ 4.2 $ 10.6
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The provision for income taxes for the year ended December 31, 2008, reflects an effective tax rate for continuing operations of 27.6%, compared to a U.S. statutory provision rate of 35.0%. The provision for income taxes includes a favorable adjustment of $4.0 million as a result of our new manufacturing structure and future foreign income expectations. We also recorded a benefit for 2008 research credits and provisions for state taxes and nondeductible incentive stock based compensation.
The provision for income taxes for the year ended December 31, 2007, reflects an effective tax rate for continuing operations of 37.9%, compared to a U.S. statutory provision rate of 35.0%. The effective tax rate exceeded the statutory tax rate primarily due to state taxes and nondeductible incentive stock based compensation, which was partially offset by research tax credit benefits.
The provision for income taxes for the year ended December 31, 2006, reflects an effective tax rate for continuing operations of 23.2%, compared to a U.S. statutory provision rate of 35.0%. The reduction in the effective tax rate is primarily due to the settlement of foreign tax audits.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Foreign Currency Transactions and Effect of Foreign Exchange Rates
We are subject to the effects of currency fluctuations due to the global nature of our operations. Currency exposures are hedged as part of our global risk management program, which is designed to minimize short-term exposure to currency fluctuations. Movements in exchange rates, net of hedging activities, resulted in net currency transaction losses of $(4.7) million , $(1.5) million and $(1.3) million for the years ended December 31, 2008, 2007 and 2006, respectively.
For fiscal year 2008, we derived approximately 45.3% of revenues from non-U.S. customers. At December 31, 2008, long-lived assets attributable to countries outside of the U.S. comprised 6.6% of total net long-lived assets. The largest components of these assets are attributable to France followed by Mexico.
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