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IN > SEC Filings for IN > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for INTERMEC, INC.


3-May-2013

Quarterly Report


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

FORWARD-LOOKING STATEMENTS AND RISK FACTORS; SAFE HARBOR
Statements made in this filing and any related statements that express Intermec's or our management's intentions, hopes, indications, beliefs, expectations, guidance, estimates, forecasts or predictions of the future constitute forward-looking statements, as defined by the Private Securities Litigation Reform Act of 1995, and relate to matters that are not historical facts. They include, without limitation, statements regarding: the proposed acquisition of Intermec by Honeywell International Inc., the receipt of regulatory approval for the potential merger transaction, and the anticipated timing of the closing of the proposed merger transaction, if at all; our view of general economic and market conditions; our revenue, expense, earnings, tax attributes or financial information for the first quarter of 2013 and any other periods; our ability to develop, produce, market or sell our products, either directly or through third parties, to reduce or control expenses, to improve efficiency, to realign resources, to successfully integrate acquired companies, or to continue operational improvement and year-over-year or sequential growth; our impairment analysis for goodwill and long-lived assets, and our deferred tax valuation allowances; our evaluation of internal controls over financial reporting; and the applicability and results of accounting policies used in our financial reporting and the necessity to update information in our periodic or other required reports. They also include, without limitation, statements about future financial and operating results of our Company after the acquisition of other businesses and the benefits of such acquisitions. When used in this document and in documents it refers to, the words "anticipate," "believe," "will," "intend," "project" and "expect" and similar expressions as they relate to us or our management are intended to identify such forward-looking statements. These statements represent beliefs and expectations only as of the date they were made. We may elect to update forward-looking statements but we expressly disclaim any obligation to do so, even if our beliefs and expectations change.
Actual results may differ from those expressed or implied in our forward-looking statements. Such forward-looking statements involve and are subject to certain risks and uncertainties, which may cause our actual results to differ materially from those discussed in a forward-looking statement. These include, but are not limited to, risks and uncertainties described more fully in our reports filed or to be filed with the Securities and Exchange Commission including, but not limited to, our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, which are available, among other places, on our website at www.intermec.com.
You are encouraged to review the Risk Factors portion of Item 1A of Part II of this filing and in Item 1A of Part I of our 2012 Form 10-K, which discuss risk factors associated with our business.
Merger Agreement with Honeywell
On December 9, 2012, Intermec, Inc. ("us", "we", "our", or the "Company") entered into an Agreement and Plan of Merger with Honeywell International Inc. ("Honeywell") and Hawkeye Merger Sub Corp. ("Merger Sub"). Under the Merger Agreement, Merger Sub will merge with and into Intermec, with Intermec continuing as the surviving corporation and a wholly owned subsidiary of Honeywell (the "Merger"). After completion of the Merger, Honeywell will own 100% of Intermec's outstanding stock, and current stockholders will no longer have any interest in Intermec.
The closing of the Merger is subject to customary closing conditions. One condition is receiving the required approval of the Company's stockholders. As previously reported, the Company's stockholders approved the adoption of the Merger Agreement at the Special Meeting of Stockholders held on March 19, 2013. Another condition of closing of the merger is the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and any applicable waiting period or approvals under the competition, antitrust or similar laws of certain foreign jurisdictions. As previously reported, on March 11, 2013, Intermec and Honeywell each received a request for additional information from the U.S. Federal Trade Commission ("FTC") in connection with the proposed Merger. Intermec intends to respond expeditiously to this request and to continue to work cooperatively with the FTC in connection with its review. Also, on March 13, 2013, with agreement by Intermec, Honeywell withdrew the notification to the European Commission ("EC") of its proposed acquisition of Intermec. Honeywell intends to submit a revised notification to the EC in relation to this transaction. Intermec continues to expect that the transaction will close by the end of the second quarter of 2013. For information about Merger Related Litigation, refer to Part II, "Item 1. Legal Proceedings" of this Quarterly Report on Form 10-Q. The Merger Agreement and related materials can be found in the Company's SEC filings at www.sec.gov. Overview
Intermec, Inc. is a global business that designs, develops, integrates, sells and resells wired and wireless automated identification and data collection ("AIDC") products and related services. Our products and services are used by businesses of all sizes, throughout


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

the world, and are particularly suited for challenging or harsh environments where mobility, reliability and durability are important. We offer a broad range of products including mobile computers, bar code scanners, printers, label media, radio frequency identification ("RFID") products and related software, and wearable voice data collection devices and related software. With our products, we also offer a variety of services. Refer to Item 1 of Part I in our 2012 Form 10-K, for detail about our products and services. Most of our revenue is currently generated through sales of mobile computers, wearable voice data capture devices and related software, bar code scanners, printers and repair services.
Our strategy is to provide mobile business solutions that help our customers improve workflow performance, increase revenues, lower costs and improve customer satisfaction and loyalty. As part of that strategy, we seek to strengthen our position as a solutions company in the AIDC industry through vertical market expertise, a solutions orientation, and a focus on customer and partner relationships. We also seek to grow our business by targeting vertical markets, increasing our marketing activities, expanding our channel, adding software and managed services to our offerings and introducing innovative new products.
For the three months ended March 31, 2013 ("Q1 2013"), total revenue increased by 11%, or $19.7 million, compared to the three months ended April 1, 2012 ("Q1 2012"). During Q1 2013, we completed a large enterprise deal, which accounted for the majority of this increase, and which specifically benefited revenues in our Europe, Middle East and Africa ("EMEA") region. In comparison, Q1 2012 was a weaker quarter with no comparable large deals. More specifically, in Q1 2012, worldwide revenues had increased only 1% over the comparable prior-year quarter, and decreased 12% when revenues from businesses acquired in 2011 were excluded. Total gross margin dollars in Q1 2013 improved over Q1 2012, attributable to improvements in our Intermec-branded products and Voice solutions segments. However, gross margin yields were less than those recorded in the last three quarters of 2012 due to a lower relative proportion of higher margin voice products in the revenues mix, lower revenues in our lifecycle services business, and several larger enterprise deals at competitive pricing in our EMEA and North American regions.
Operating expenses were relatively flat in Q1 2013 compared with the prior year period. The Company's restructuring activities from 2012 delivered realized savings, but these were partially offset by selling, general and administrative expenses comprising legal and audit costs related to the Merger Agreement with Honeywell, increased audit fees for additional 2012 year-end procedures completed in the first quarter of 2013, and other legal fees, as well as by increased research and development program driven investments. These operating expense increases were largely offset by other decreases in Q1 2013 due to our North America and EMEA Intermec Partner Summit events taking place in the second quarter of 2013, rather than in the first quarter, as they did in 2012. Our net loss in Q1 2013 was $13.5 million, an improvement over Q1 2012 of $228.6 million. During Q1 2012, we had $221.8 million in non-cash charges, including a valuation allowance of $206.9 million against our U.S. deferred tax assets and goodwill impairment charges of $14.9 million. In Q1 2013, we recorded a minor non-cash charge to the valuation allowance of $0.1 million.
In Q1 2013, operating cash flows provided $7.7 million, compared with net cash used in operating activities of $12.0 million in Q1 2012.


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

Results of Operations
The following compares our results of operations and percentages of revenues for
the three months ended March 31, 2013 and April 1, 2012 (in millions, except for
per share data):
                                                     Three Months Ended
                                     March 31,     Percent of     April 1,    Percent of
                                        2013        Revenues        2012       Revenues
Revenues                            $    199.4                   $  179.7
Costs and expenses:
Cost of revenues                         123.2         61.8  %      113.8         63.3  %
Research and development, net             21.0         10.5  %       20.0         11.1  %
Selling, general and administrative       66.7         33.4  %       66.0         36.7  %
Gain on sale of assets                       -            -  %       (1.4 )       (0.8 )%
Restructuring charges                      0.1          0.1  %          -            -  %
Impairment of goodwill                       -            -  %       14.9          8.3  %
Total costs and expenses                 211.0        105.8  %      213.3        118.7  %

Operating loss                           (11.6 )       (5.8 )%      (33.6 )      (18.7 )%
Interest expense, net                     (0.8 )       (0.4 )%       (0.6 )       (0.4 )%
Loss before income taxes                 (12.4 )       (6.2 )%      (34.2 )      (19.1 )%
Income tax expense                         1.1          0.6  %      207.9        115.8  %
Net loss                            $    (13.5 )       (6.8 )%   $ (242.1 )     (134.7 )%

Loss per share:
Basic                               $    (0.22 )                 $  (4.03 )
Diluted                             $    (0.22 )                 $  (4.03 )


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

 Revenues (in millions)
Total revenues for Q1 2013 increased $19.7 million, or 11.0%, compared to Q1
2012. Unfavorable movement in foreign currency rates reduced total revenue by
$2.0 million, or 1.1%. The majority of the unfavorable change in foreign
currencies was attributable to fluctuations in the British Pound.
The following tables provide revenues, revenues as a percentage of total
revenues, and changes in revenues, by category and geographic region for the
three months ended March 31, 2013 and April 1, 2012 (in millions):
                                                Three Months Ended
                               March 31,     Percent of      April 1,     Percent of                  Percentage
                                 2013         Revenues         2012        Revenues       Change        Change
Revenues by category:
Intermec-branded products:
Systems and solutions        $     100.8          50.5 %   $     81.8          45.5 %   $   19.0        23.2  %
Printer and media                   39.4          19.8 %         37.1          20.6 %        2.3         6.2  %
Intermec-branded services           33.0          16.5 %         33.4          18.6 %       (0.4 )      (1.2 )%
Voice solutions                     26.2          13.2 %         27.4          15.3 %       (1.2 )      (4.4 )%
Total revenues               $     199.4         100.0 %   $    179.7         100.0 %   $   19.7        11.0  %

The following discusses our revenues by category for Q1 2013 as compared to Q1 2012:
Intermec-branded product revenues of $140.1 million grew by $21.3 million, or 17.9%. The increase was driven primarily by a large enterprise deal of approximately $13.7 million in Q1 2013, with no comparable deal in Q1 2012.

Intermec-branded service revenues of $33.0 million were down slightly by $0.4 million, or 1.2%. The decrease was due to lower life cycle services revenues in our managed services business.

Voice solutions revenues of $26.2 million decreased $1.2 million, or 4.4%, which we believe is partially due to our health care customers allocating a greater portion of their investment dollars to solutions that respond to the Patient Protection and Affordable Care Act, and delayed timing of customer investments in voice in North America.

                                                Three Months Ended
                               March 31,     Percent of      April 1,     Percent of                 Percentage
                                 2013         Revenues         2012        Revenues       Change       Change
Revenues by geographic
region:
North America                $      96.7          48.4 %   $     91.7          51.0 %   $    5.0          5.5  %
Europe, Middle East and
Africa (EMEA)                       72.3          36.3 %         54.6          30.4 %       17.7         32.4  %
Latin America and Mexico
(LATAM)                             21.1          10.6 %         19.9          11.1 %        1.2          6.0  %
Asia Pacific (ASIAPAC)               9.3           4.7 %         13.5           7.5 %       (4.2 )      (31.1 )%
Total revenues               $     199.4         100.0 %   $    179.7         100.0 %   $   19.7         11.0  %

The following discusses our revenues by geographic region for Q1 2013 as compared to Q1 2012:
North America revenues increased primarily due to increases of $6.5 million in Systems and solutions and $1.7 million in Printer and media. These increases were partially offset by decreases of $2.2 million in Voice solutions and $0.8 million in Services revenues.

EMEA revenues increased $17.7 million, or 32.4%, primarily due to stronger Systems and solutions, which increased $14.9 million, or 58.4%. Printer and media revenue in EMEA increased $1.3 million, or 11.0%, and Voice solutions increased $1.2 million, or 14.8%. We completed a large enterprise deal in EMEA in Q1 2013 with no comparably sized deals in Q1 2012. Foreign currency conversion rates unfavorably impacted EMEA revenue by $0.7 million, or 1.3%.

LATAM revenues increased $1.2 million, or 6.0%, primarily in Intermec-branded products.

ASIAPAC revenues decreased $4.2 million, or 31.1%, primarily due to decreases of $2.9 million in Systems and solutions and $1.2 million in Printer and media, representing an approximate 42% decrease in both categories. The decline is a reflection of both management turnover and economic softness in the region.


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

Gross Profit and Gross Margin
Gross profit and gross margin by revenue category for the three months ended
March 31, 2013 and April 1, 2012, were as follows (in millions):
                                      Three Months Ended
                             March 31, 2013         April 1, 2012
                            Gross       Gross      Gross      Gross
                            Profit     Margin     Profit     Margin
Intermec-branded products $    47.2     33.7 %   $   37.6     31.6 %
Intermec-branded services      12.6     38.2 %       13.0     38.8 %
Voice solutions                16.4     62.2 %       15.3     56.0 %
Total                     $    76.2     38.2 %   $   65.9     36.7 %

Total gross profit for Q1 2013 increased $10.3 million, or 150 basis points ("bps"), as compared to Q1 2012. An analysis of this increase by category follows:
Intermec-branded product gross profit increased $9.6 million, or 210 bps, on stronger revenues, partially offset by increased costs and price discounting on larger deals.

Intermec-branded services gross profit decreased $0.4 million, or 60 bps, due to lower volume with slightly higher costs across our lifecycle services business.

Voice solutions gross profit increased $1.1 million, or 620 bps, mainly due to a decrease in amortization expense that resulted from changes made during the fourth quarter of 2012 to the useful lives of Vocollect's intangible assets, resulting in a decrease in amortization expense.

Operating Expenses and Interest Expense, Net Operating expenses and interest expense, net, for the three months ended March 31, 2013 and April 1, 2012, were as follows (in millions):

                                                  Three Months Ended
                                     March 31, 2013      April 1, 2012     Change
Research and development, net       $           21.0    $        20.0     $  1.0
Selling, general and administrative             66.7             66.0        0.7
Gain on sale of assets                             -             (1.4 )      1.4
Restructuring costs                              0.1                -        0.1
Impairment of goodwill                             -             14.9      (14.9 )
Interest expense, net                            0.8              0.6        0.2

Research and Development Expenses, net - Total research and development expenses, net, were $21.0 million for Q1 2013 compared to $20.0 million for Q1 2012. The slight increase of $1.0 million was primarily due to a $1.3 million increase in program spend partially offset by decreases in compensation expense of $0.3 million.
Selling, General and Administrative Expenses - Total selling, general and administrative ("SG&A") expenses of $66.7 million for Q1 2013 were relatively flat compared to $66.0 million for Q1 2012. The slight increase in SG&A expenses was primarily attributable to merger-related transaction costs of $3.1 million in Q1 2013, offset by $2.4 million reduction in costs related to the timing of our North America and EMEA Intermec Product Summit events, which occurred in first quarter of 2012 compared to the second quarter in 2013.
Restructuring Costs - Net restructuring charges of $0.1 million for Q1 2013 pertain to severance-related payments made under our June 2012 restructuring plan, which were in excess of our accrued restructuring costs at December 31, 2012. We had no comparable expense in Q1 2012.


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

Impairment of Goodwill - In Q1 2012, we recorded goodwill impairment charges of $14.9 million related to our Vocollect Supply Chain reporting unit. See Note 6, Goodwill, to the Consolidated Financial Statements for further discussion. We had no charges related to impairment of goodwill during Q1 2013. Interest Expense, Net - Net interest expense was $0.8 million for Q1 2013, relatively flat compared to Q1 2012. Interest in both years relates to borrowings under our Revolving Credit Facility, discussed further in the Liquidity and Capital Resources section within this Item. Income Tax Expense, Net (in millions)
Income tax expense, net, for Q1 2013 and Q1 2012 was as follows (in millions):

Three Months Ended
March 31, 2013 April 1, 2012 Change
Income tax expense $ 1.1 $ 207.9 $ (206.8 )

We recorded a tax provision for the quarter ended March 31, 2013 of $1.1 million on foreign earnings and no tax benefit for the United States, Singapore and Japan due to losses in those jurisdictions. We currently record valuation allowances in those jurisdictions that offset any tax benefit.
Under GAAP, a valuation allowance against our deferred tax assets is appropriate if, based on the available evidence, it is more likely than not (defined as a likelihood of more than 50%) that the value of such assets will not be realized in the future. The valuation of deferred tax assets requires judgment in assessing a number of factors, including the likely future tax consequences of events we expect to recognize in our financial statements and tax returns, as well as our historical performance. The tax provision for the three months ended April 1, 2012 included a net $206.9 million non-cash charge made to record a valuation allowance against our U.S. deferred tax assets. There was a similar non-cash charge made in the first quarter of 2013 in the amount of $0.1 million. A sustained period of profitability in our U.S. operations is required before we would change our judgment regarding the need for a full valuation allowance against our U.S. deferred tax assets. In the event that we determine in the future that we expect to benefit from our deferred income tax assets in excess of the net balance at that time, we will make an adjustment to the deferred tax asset valuation allowance. This will reduce the provision for income taxes in that period. Until such time, we will offset U.S. profits against our deferred tax assets and will reduce the overall level of deferred tax assets subject to valuation allowance as a result.
For the jurisdictions where we did not record a valuation allowance, our tax provision includes an estimated annual effective tax rate from continuing operations of approximately 31.8%. Our effective tax rate from continuing operations in those jurisdictions is lower than the U.S. statutory rate of 35% due primarily to lower tax rates and tax incentives in those jurisdictions. Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents, short-term investments, cash flow from operations and borrowings available under our Revolving Credit Facility. Our primary cash needs are capital expenditures, research and development expenditures, debt service payments and funding working capital requirements.
We believe that our cash on hand, cash from operations and borrowings available to us under our Revolving Credit Facility will be adequate to meet our liquidity needs, capital expenditure and research and development requirements and debt service payments for at least the next twelve months.
Projected cash flows from operations are largely based on our revenue estimates, cost estimates, and the related timing of cash receipts and cash disbursements. If our actual performance differs from our estimated performance, our cash flows from operations could be negatively impacted. Our cash flows from operations may be negatively affected by a deterioration of global, regional or local political, economic or social conditions, which could affect potential customers in ways that reduce demand for our products and disrupt our manufacturing and sales plans. Similarly, due to the global nature of our operations, a deterioration of political, economic or social conditions in any country or region in which we do business could reduce or eliminate our ability to collect accounts receivable in that country or region.
Our Revolving Credit Facility includes covenants that, if not met, could have an adverse effect on our cash flows. If we failed to satisfy one or more of these covenants, we may need to make choices that limit some of our business or financing activities in


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

order to bring ourselves into compliance. These choices could have an adverse
effect on our results of operations and cash flows.
Cash Flow Summary
Our cash flows are summarized in the following table (in millions):
                                                                    Year Ended
                                                              March 31,     April 1,
                                                                2013          2012
Net cash provided by (used in) operating activities          $     7.7     $  (12.0 )
Net cash used in investing activities                             (3.1 )       (0.2 )
Net cash (used in) provided by financing activities               (0.5 )        0.7
Effect of exchange rate changes on cash and cash equivalents      (1.3 )        1.7
Net change in cash and cash equivalents                      $     2.8     $   (9.8 )

At March 31, 2013, cash, cash equivalents and short-term investments totaled $88.2 million, an increase of $2.8 million compared to the December 31, 2012 balance of $85.4 million. The increase in cash is primarily due to cash provided by operations, offset by capital expenditure investments and a negative effect of foreign exchange rates.
Cash provided by or used in operating activities consists of net earnings or losses adjusted for non-cash items and the effect of changes in working capital and other activities. Our Q1 2013 net loss of $13.5 million was offset by cash provided by working capital and other activities of $11.5 million, and by non-cash expenses of $9.7 million, including depreciation and amortization of $8.2 million and stock-based compensation expenses of $2.0 million, resulting in net cash provided by operating activities of $7.7 million. Cash used in operating activities of $12.0 million in Q1 2012 was primarily due to a net loss of $242.1 million, adjusted for increases in non-cash items, including a $210.8 million deferred tax valuation allowance and $14.9 million goodwill impairment charges, and decreases in working capital of $5.4 million.
Net cash used in investing activities in Q1 2013 was $3.1 million, consisting primarily of capital expenditures of $2.9 million. During Q1 2012, net cash used in investing activities of $0.2 million primarily related to capital expenditures of $1.8 million, offset by proceeds from the sale of intellectual property of approximately $1.7 million.
Net cash used in financing activities in Q1 2013 was $0.5 million, related to our financing lease obligation, discussed in Note 10, Litigation, Commitments and Contingencies - Commitments, in the Notes to Condensed Consolidated Financial Statements. Financing activities in Q1 2012 provided cash of $0.7 million from employee purchases of stock under our Employee Stock Purchase Plan . . .

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