UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

Commission file number  001-13279

 

UNOVA, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		95-4647021
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
6001 36th Avenue West Everett, WA www.unova.com		98203-1264
(Address of principal executive offices and internet site)		(Zip Code)

 

Registrant’s telephone number, including area code:  (425) 265-2400

 

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  ý  No  o 

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  ý  No  o 

 

On April 30, 2005 there were 61,321,332 shares of Common Stock outstanding, exclusive of treasury shares.

 

 

UNOVA, INC.
INDEX
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 3, 2005

 

 

 

 

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

 

		Quarter Ended
		April 3, 2005			March 31, 2004
Revenues:
Product		$	161,943		$	142,606
Service		34,552			30,749
Intellectual property settlements		—			19,650
Total Revenues		196,495			193,005
Costs and Expenses:
Cost of product revenues		92,747			81,490
Cost of service revenues		20,886			17,980
Cost of intellectual property settlements		—			3,857
Selling, general and administrative		72,756			64,755
Total Costs and Expenses		186,389			168,082
Operating Profit from Continuing Operations		10,106			24,923
Interest, net		(2,126		)	(3,068		)
Foreign currency exchange, net		(15		)	(420		)
Earnings from Continuing Operations before Income Taxes		7,965			21,435
Provision for Income Taxes		(2,553		)	(5,709		)
Earnings from Continuing Operations, Net of Tax		5,412			15,726
Loss from Discontinued Operations, Net of Tax		(1,932		)	(5,244		)
Net Earnings		$	3,480		$	10,482
Basic Earnings (Loss) per Share
Continuing Operations		$	0.09		$	0.26
Discontinued Operations		(0.03		)	(0.09		)
Net Earnings per Share		$	0.06		$	0.17
Diluted Earnings (Loss) per Share
Continuing Operations		$	0.09		$	0.25
Discontinued Operations		(0.03		)	(0.08		)
Net Earnings per Share		$	0.06		$	0.17
Shares Used in Computing Basic Earnings (Loss) per Share		61,093			60,188
Shares Used in Computing Diluted Earnings (Loss) per Share		62,813			62,126

 

See accompanying notes to consolidated financial statements.

 

2

 

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

 

		April 3, 2005			December 31, 2004
ASSETS
Current Assets:
Cash and cash equivalents		$	155,150		$	217,899
Restricted cash		—			50,000
Accounts receivable, net of allowance for doubtful accounts of $9,102 and $9,771		162,184			157,833
Inventories		93,165			80,854
Net deferred tax assets		58,730			81,769
Assets held for sale		14,196			19,748
Current assets of discontinued operations		52,214			211,116
Other current assets		9,987			8,831
Total Current Assets		545,626			828,050
Property, Plant and Equipment, Net of Accumulated Depreciation of $100,845 and $99,714		30,462			30,375
Intangibles, Net		3,972			4,072
Net Deferred Tax Assets		192,127			134,978
Long Term Assets of Discontinued Operations		20,504			21,238
Other Assets		59,868			53,964
Total Assets		$	852,559		$	1,072,677
LIABILITIES AND SHAREHOLDERS’ INVESTMENT
Current Liabilities:
Accounts payable and accrued expenses		$	176,902		$	160,001
Payroll and related expenses		24,510			30,077
Current portion of long-term debt		8,500			108,500
Current liabilities of discontinued operations		31,327			130,257
Total Current Liabilities		241,239			428,835
Long-term Debt		100,000			100,000
Other Long-term Liabilities		86,751			86,220
Long-term Liabilities of Discontinued Operations		12,112			46,388
Shareholders’ Investment:
Common stock		611			611
Additional paid-in capital		706,235			703,416
Accumulated deficit		(303,215		)	(306,695		)
Accumulated other comprehensive income		8,826			13,902
Total Shareholders’ Investment		412,457			411,234
Total Liabilities and Shareholders’ Investment		$	852,559		$	1,072,677

 

See accompanying notes to consolidated financial statements.

 

3

 

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

 

		Quarter Ended
		April 3, 2005			March 31, 2004
Cash and Cash Equivalents at Beginning of Period		$	217,899		$	238,447
Cash Flows from Operating Activities of Continuing Operations:
Net earnings from continuing operations		5,412			15,726
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization		2,313			2,865
Change in prepaid pension costs, net		2,994			2,463
Deferred taxes		(34,110		)	1,158
Loss on sale of discontinued operations		34,723			—
Stock-based compensation and other		(55		)	573
Changes in operating assets and liabilities:
Accounts receivable		8,868			(1,041		)
Inventories		(12,758		)	(8,062		)
Other current assets		(1,329		)	2,639
Accounts payable and accrued expenses		63			2,268
Payroll and related expenses		(6,935		)	(4,384		)
Other long-term liabilities		584			(1,429		)
Other operating activities		(34		)	252
Net Cash Provided by (Used in) Operating Activities of Continuing Operations		(264		)	13,028
Cash Flows from Investing Activities of Continuing Operations:
Capital expenditures		(2,624		)	(2,212		)
Sale of property, plant and equipment		6,000			70
Other investing activities		152			(69		)
Net Cash Provided by (Used in) Investing Activities of Continuing Operations		3,528			(2,211		)
Cash Flows from Financing Activities of Continuing Operations:
Decrease in restricted cash		50,000			—
Repayment of long-term obligations		(100,000		)	—
Stock options exercised		1,269			1,686
Other financing activities		(302		)	4
Net Cash Provided by (Used in) Financing Activities of Continuing Operations		(49,033		)	1,690
Net Cash Provided by (Used in) Continuing Operations		(45,769		)	12,507
Net Cash Used in Operating Activities of Discontinued Operations		(17,221		)	(22,633		)
Net Cash Provided by (Used in) Investing Activities of Discontinued Operations		241			(791		)
Resulting Decrease in Cash and Cash Equivalents		(62,749		)	(10,917		)
Cash and Cash Equivalents at End of Period		$	155,150		$	227,530
Supplemental Disclosure of Cash Flow Information:
Effect of exchange rates on cash and cash equivalents		$	(2,449	)	$	1,126
Interest paid		(7,987		)	(7,326		)
Income taxes paid		(1,450		)	(2,023		)

 

See accompanying notes to consolidated financial statements.

 

4

 

UNOVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

1.         Basis of Presentation

 

UNOVA, Inc. and subsidiaries (“UNOVA” or the “Company”), through its wholly owned subsidiary Intermec Technologies Corporation (“Intermec”), is a leader in global supply chain solutions, the development, manufacture and integration of wired and wireless automated data collection,  Intellitag® RFID (radio frequency identification), mobile computing systems, bar code printers and label media. Intermec products and services are used by customers to improve productivity, quality and responsiveness of business operations such as supply chain management, warehouse operations, inventory management, field service, in-transit visibility, direct-store delivery, store operations and store management. Intermec products and services are sold globally to a diverse set of customers in markets such as industrial manufacturing, transportation and logistics, retail, consumer goods and government.

 

Effective the fourth quarter of 2004, the Company committed to a plan to sell its Industrial Automation Systems (“IAS”) businesses, comprising the Cincinnati Lamb division and the Landis Grinding Systems division after the Board of Directors concluded that the IAS segment no longer aligned with the Company’s long-term strategy. Company management believes that divesting the IAS businesses will enable the Company to concentrate better on Intermec’s core competencies and growth opportunities. The Company has classified the IAS businesses as discontinued operations for accounting purposes in the Company’s consolidated financial statements and related notes. During the quarter ended April 3, 2005, the Company completed the sale of the Cincinnati Lamb business and intends to sell the Landis Grinding Systems business as a going concern within the 2005 fiscal year (see Note 5 to the consolidated financial statements). All prior periods presented have been restated to reflect this classification.

 

Beginning in 2005, the Company's interim financial periods are based on a thirteen week internal accounting calendar.  The Company does not believe this change has any material impact on the comparability of the financial statements.  The amounts included in this report are unaudited; however, in the opinion of management, all adjustments necessary for a fair presentation of results of operations, financial position and cash flows for the stated periods have been included. These adjustments are of a normal recurring nature. Certain prior-year amounts have been reclassified to conform to the current year presentation. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2004. The results of operations for the interim periods presented are not necessarily indicative of operating results for the entire year.

 

2.         Stock-Based Compensation

 

As permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, the Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” under which compensation cost is recognized over the vesting period if the fair value is greater than the exercise price (the intrinsic value method) at the grant of stock options. Had compensation cost for these plans been determined consistent with SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net earnings and basic and diluted earnings per share from

 

5

 

continuing operations for the quarters ended April 3, 2005, and March 31, 2004, would have been reduced to the pro forma amounts indicated in the following table (thousands of dollars):

 

		Quarter Ended
		April 3, 2005			March 31, 2004
Net earnings as reported		$	3,480		$	10,482
Add: stock compensation expense recorded under the intrinsic value method, net of tax effect		484			173
Less: pro forma stock compensation expense computed under the fair value method, net of tax effect		(2,848		)	(821		)
Pro forma net earnings		$	1,116		$	9,834
Net earnings per share as reported:
Basic		$	0.06		$	0.17
Diluted		$	0.06		$	0.17
Pro forma net earnings per share:
Basic		$	0.02		$	0.16
Diluted		$	0.02		$	0.16

 

During the quarter ended April 3, 2005, the Company issued 138,820 shares of Common Stock under its stock compensation plans, including 133,402 shares issued upon the exercise of options, 4,666 shares of restricted stock and 752 shares issued under the Employee Stock Purchase Plan and Directors Stock Option and Fee Plan. Also during the quarter ended April 3, 2005, 63,736 shares of restricted stock vested due to completion of the vesting period.

 

3.         Inventories

 

Inventories comprise the following (thousands of dollars):

 

		April 3, 2005			December 31, 2004
Raw materials		$	62,716		$	53,714
Work in process		213			304
Finished goods		30,236			26,836
Inventories		$	93,165		$	80,854

 

4.         Long-term Debt and Interest, net

 

As of April 3, 2005 the Company maintains two secured long-term credit facilities: a $100 million revolving credit facility (the “Revolving Facility”) and a £15 million ($28.1 million) revolving facility and related overdraft facility (collectively, the “UK Facility”).

 

Net of outstanding letters of credit and limitations on minimum availability, the Company had borrowing capacity at April 3, 2005, of $32.3 million under the Revolving Facility and no borrowing capacity under the UK Facility. The Company made no borrowings under the Revolving Facility or the UK Facility during the first quarter of 2005, and as of April 3, 2005, no borrowings were outstanding under either the Revolving

 

6

 

Facility or the UK Facility. As of April 3, 2005, the Company was in compliance with the financial covenants of each of these agreements.

 

The key terms of the Revolving Facility are as follows:

 

•      The Company’s obligations under the Revolving Facility are secured by substantially all the U.S. assets of the Company and its U.S. subsidiaries and a pledge of 65% of the stock of certain of its foreign subsidiaries.

 

•      Borrowings under the Revolving Facility bear interest at a variable rate equal to (at the Company’s option) (i) LIBOR plus an applicable margin ranging from 1.5% to 2.5% based on consolidated leverage, or (ii) the greater of the federal funds rate plus 0.50% or the Bank’s prime rate, plus an applicable margin ranging from 0.5% to 1.5% based on consolidated leverage.

 

•      If the Company sells subsidiaries within its Industrial Automation Systems segment, the net proceeds, or a portion thereof, as defined in the agreement, must be applied to repay borrowings outstanding under the Revolving Facility.

 

•      Until it retired its 6.875% Notes due March 15, 2005, the Company was required to maintain a minimum balance of $50 million as restricted cash. This amount is classified as restricted cash on the Company’s consolidated balance sheet as of December 31, 2004. This cash restriction has been removed as of April 3, 2005.

 

•      The Revolving Facility places certain restrictions on the ability of the Company and its subsidiaries to consolidate or merge, make acquisitions, create liens, incur additional indebtedness or dispose of assets.

 

•      Financial covenants include a Consolidated Leverage test, a Consolidated Interest Coverage test and a Consolidated Net Worth test, each as defined in the agreement.

 

In March 1998, the Company sold $200.0 million principal amount of senior unsecured debt in an underwritten offering. The debt comprised $100.0 million of 6.875% seven-year notes and $100.0 million of 7.00% ten-year notes. Interest payments are due semi-annually. Including underwriting fees, discounts and other issuance costs, the effective interest rates on the seven-year and ten-year notes are 7.125% and 7.175%, respectively. In March 2005, the Company retired the $100.0 million seven-year notes.

 

The Company additionally has outstanding an $8.5 million industrial revenue bond, bearing interest at 4.57%, maturing in July 2005, which is classified as current portion of long-term obligations on the Company’s consolidated balance sheet.

 

Interest, net comprises the following (thousands of dollars):

 

		Quarter Ended
		April 3, 2005			March 31, 2004
Interest expense		$	3,928		$	4,009
Interest income		(1,802		)	(941		)
Interest, net		$	2,126		$	3,068

 

The Company also has letter-of-credit reimbursement agreements totaling $47.2 million at April 3, 2005, compared to $53.6 million at December 31, 2004.  As of April 3, 2005, $21.2 million of the agreements related to performance on contracts with current customers and vendors, and $26.0 million of the agreements related to customer contracts assumed by the purchaser of Cincinnati Lamb the operations sold.  The Company is indemnified by the purchaser on the entire $26 million of letter-of-credit agreements and under the terms of the sale the purchaser is required to provide a backup letter of credit for certain of these commitments in the aggregate amount of $8.9 million.  The Company believes it is not practicable to estimate fair values of these instruments and considers the risk of non-performance on the contracts to be remote.

 

7

 

 

5.         Discontinued Operations

 

During the fourth quarter of 2004, the Company committed to a plan to dispose of its IAS businesses, comprising the Cincinnati Lamb and Landis Grinding Systems businesses, after it was determined that the IAS businesses are no longer aligned with the Company’s long-term strategy. During the first quarter of 2005, the Company completed the sale of the Cincinnati Lamb business. The Company intends to sell the Landis Grinding Systems business during the 2005 fiscal year. In accordance with SFAS 144, “Accounting for Disposal or Impairment of Long-Lived Assets,” the IAS businesses are classified as discontinued operations in the Company’s consolidated financial statements for all periods presented.

 

On April 3, 2005, the Company completed the sale of the Cincinnati Lamb business.  The consideration received for the Cincinnati Lamb business includes (i) a receivable of $16 million, paid on April 4, 2005,  (ii) a long-term secured note receivable with an estimated fair value of $8.4 million and (iii) liabilities related to certain pension and other post-retirement obligations of $39.1 million assumed by the buyer. The Company was also required to deliver to the buyer a guaranteed net working asset balance. Accordingly, the Company estimates it will reimburse to the buyer up to $12.6 million for accounts payable related to the Cincinnati Lamb business, subject to final purchase price adjustment.  Based on the terms of the agreement, the buyer has 90 days from the transfer date to review the preliminary closing balance sheet.

 

The long-term note receivable collateralized by the assets sold has a face value of $10.0 million and bears interest at an annual rate of LIBOR plus three percent, with interest payable quarterly. Principal payments on the note are due in five equal semiannual installments of $2.0 million beginning October 2006. The estimated fair value of the note of $8.4 million is based on the estimated cash flows from the note and a risk-adjusted discount rate equal to LIBOR plus eight percent.

 

The Company’s consolidated balance sheet as of April 3, 2005 classifies the $16 million of cash received on April 4, 2005 in accounts receivable, the $8.4 million long-term note receivable in other assets, and the accrual of reimbursable payables of $12.6 million in accounts payable and accrued expenses.

 

The Company recognized a pre-tax loss on the sale of the Cincinnati Lamb business of $34.7 million during the quarter ended April 3, 2005. The net assets sold of the Cincinnati Lamb business were recorded at $36.7 million as of the date of the sale and comprised the following:

 

Current Assets:
Accounts receivable, net		$	125,217
Inventories, net		33,684
Other current assets		5,279
Impairment of current assets		(10,563		)
Total current assets		153,617
Current Liabilities:
Accounts payable and accrued expenses		71,280
Accrued payroll		6,470
Total current liabilities		77,750
Long-term Liabilities		39,127
Net Assets Sold		$	36,740

 

Long-term liabilities in the above table represent pension and post-retirement obligations assumed by the buyer (see Note 13).

 

8

 

The loss on the sale includes an $8.3 million gain related to cumulative translation adjustment and a $12.9 million charge related to the adjustment to recognize minimum pension liability, related to Cincinnati Lamb, which previously had been included in the accumulated other comprehensive income component of shareholders’ investment (“OCI”). The Company also incurred $5.3 million of transaction related expense primarily for severance and professional services.

 

The following table sets forth the components of the loss from discontinued operations, net of tax, for the quarters ended April 3, 2005 and March 31, 2004 (thousands of dollars):

 

		Quarter Ended
		April 3, 2005			March 31, 2004
Product and service revenues		$	114,534		$	104,665
Operating loss		(5,834		)	(5,655		)
Loss on sale of Cincinnati Lamb		(34,723		)	—
Loss from discontinued operations before tax		(40,557		)	(5,655		)
Benefit for income taxes		38,625			411
Loss from discontinued operations, net of tax		$	(1,932	)	$	(5,244	)

 

The tax benefit for the quarter ended April 3, 2005 reflects an effective tax rate of 95.2% compared to the U.S. statutory tax rate of 35%. The increase is primarily due to $24.8 million of tax benefits from the disposition of the Cincinnati Lamb business. These benefits, including a tax effected capital loss carryforward in the U.S. in the amount of $12.4 million, resulted from differences between the book basis of assets sold and the related tax basis of the stock and a benefit of $6.9 million from a prior period election to treat a foreign subsidiary as a branch.

 

The tax benefit for the quarter ended March 31, 2004 reflects an effective tax rate of 7.3%.  The reduction from the statutory rate of 35% is primarily due to adjustments to state deferred tax assets in the amount of $1.6 million.

 

9

 

The table below sets forth the assets and liabilities of discontinued operations as of April 3, 2005 and December 31, 2004 (thousands of dollars):

 

		April 3, 2005			December 31, 2004
Current assets of discontinued operations:
Accounts receivable, net		$	27,656		$	160,118
Inventories, net		23,563			55,926
Other current assets		995			5,635
Impairment of current assets					(10,563		)
Total current assets of discontinued operations		52,214			211,116
Long-term assets of discontinued operations:
Property, plant and equipment, net		12,599			13,356
Goodwill and other intangibles, net		7,796			7,796
Other Assets		109			86
Total long-term assets of discontinued operations:		20,504			21,238
Current liabilities of discontinued operations:
Accounts payable and accrued expenses		27,444			117,026
Accrued payroll		3,883			13,231
Total current liabilities of discontinued operations		31,327			130,257
Long-term liabilities of discontinued operations		12,112			46,388
Net assets of discontinued operations		$	29,279		$	55,709

 

The Company’s goodwill of $7.8 million relates to its Landis Grinding Systems business and is classified as long-term assets of discontinued operations on the Company’s consolidated balance sheets as of April 3, 2005 and March 31, 2004. Long-term liabilities of discontinued operations comprise pension and postretirement obligations.

 

As of April 3, 2005, accumulated other comprehensive income on the Company's consolidated balance sheet includes a credit balance of $9.0 million related to Landis Grinding Systems cumulative translation adjustments.

 

6.         Provision for Income Taxes

 

The tax provision for the quarter ended April 3, 2005 reflects an effective tax rate for continuing operations of 32.1% 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.

 

The tax provision for the quarter ended March 31, 2004 reflects an effective tax rate for continuing operations of 26.6%.  The reduction from the statutory rate of 35% is primarily due to the recognition of $2.6 million of previously unrecognized state deferred tax assets.

 

10

 

7.         Earnings per Share and Shareholders’ Investment

 

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 and outstanding stock options using the “treasury stock” method.

 

		Quarter Ended
		April 3, 2005		March 31, 2004
Weighted average common shares - Basic		61,092,942		60,187,811
Dilutive effect of unvested restricted shares and stock options		1,719,661		1,938,300
Weighted average shares - Diluted		62,812,603		62,126,111

 

As of April 3, 2005, Company employees and directors held options to purchase 106,500 shares of Company common stock that were antidilutive to the diluted earnings (loss) per share computation. These options could become dilutive in future periods if the average market price of the Company’s common stock exceeds the exercise price of the outstanding options and the Company reports net earnings.

 

8.         Comprehensive Earnings (Loss)

 

The Company’s comprehensive earnings (loss) amounts comprise the following (thousands of dollars):

 

		Quarter Ended
		April 3, 2005			March 31, 2004
Net earnings		$	3,480		$	10,482
Change in equity due to foreign currency translation adjustments		(14,220		)	(2,030		)
Change in equity due to minimum pension liability adjustment		9,144			—
Comprehensive earnings (loss)		$	(1,596	)	$	8,452

 

Foreign currency translation adjustments for the quarter ended April 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.

 

9.         Intellectual Property Settlements

 

During the first quarter of 2004, the Company received compensation in relation to one settlement regarding certain of its intellectual property (“IP”). The terms of this settlement are confidential. The operating profit from the IP settlement, net of legal fees, for the quarter ended March 31, 2004, was $15.8 million. IP settlement compensation is classified as sales revenues and the related legal costs are classified as cost of sales on the Company’s consolidated statements of operations.

 

10.      Segment Reporting

 

The Company’s Intermec segment provides products and services include rugged mobile computing solutions, wireless and automated data collection systems for field workers, on-premises and site-based workers as well as wireless network systems for untethered enablement of an enterprise, and barcode label

 

11

 

and printing solutions. Intermec’s rugged and robust systems, solutions and services enable Intermec’s customers to more efficiently and effectively manage their supply chains and fulfillment activities.

 

Corporate and other amounts include corporate operating costs. Intercompany transactions have been eliminated. The following table sets forth the Company’s operations by business segments (thousands of dollars):

 

		Quarter Ended
		April 3, 2005			March 31, 2004
Sales And Service Revenues from Continuing Operations
Intermec:
Product and Service Revenues		$	196,495		$	173,355
Intellectual Property Settlements Revenue		—			19,650
Total Intermec Revenues		196,495			193,005
Corporate and Other		—			—
Total Revenues		$	196,495		$	193,005
Operating Profit (Loss) from Continuing Operations
Intermec:
Product and Service		$	16,040		$	12,253
Intellectual Property Settlements		—			15,793
Total Intermec Operating Profit		16,040			28,046
Corporate and Other		(5,934		)	(3,123		)
Total Operating Profit from Continuing Operations		$	10,106		$	24,923

 

11.      Related Party Transactions

 

At December 31, 2004, other assets included a receivable due from a certain non-executive Company officer of $0.2 million. As of April 3, 2005, this receivable was paid off.

 

12.      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 the Company’s warranty accrual included in current liabilities (thousands of dollars):

 

12

 

		Product Warranty Liabilities
Beginning balance as of January 1, 2005		$	4,878
Payments		(1,801		)
Increase in accrual for new warranties issued		2,177
Ending balance as of April 3, 2005		$	5,254

 

The Company has 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 the Company estimate and record the fair value of guarantees as a liability. The Company does not believe there is any significant exposure related to such guarantees and therefore has not recorded a liability as of April 3, 2005, or December 31, 2004. The Company has not made any significant indemnification payments as a result of these clauses, nor does it believe the fair value of any of these guarantees has a material effect on the Company’s financial position or results of operations.

 

The Company is currently, and is from time to time, subject to claims and suits arising in the ordinary course of its business. In the opinion of the Company’s General Counsel, the ultimate resolution of currently pending proceedings, with the potential exception of one case discussed below, will not have a material adverse effect on the Company’s consolidated financial statements.

 

Tower Automotive Products Co. v. Lamb Technicon Body and Assembly is a lawsuit filed on March 11, 2002 in the Kent County Circuit Court in Michigan, generally alleging a breach of contract involving a frame assembly production line.  No specific claim for damages was made in the Complaint by Tower Automotive Products Co. The Company has responded to the Complaint. A trial date has been scheduled for the second quarter of 2005. Management believes the lawsuit is without merit and is vigorously contesting the case. Nevertheless, should there be an unfavorable result, it is possible that cash flows or results of discontinued operations could be materially affected in that period or subsequent periods.

 

On March 11, 2005, Symbol Technologies, Inc. (“Symbol”) announced its intent to terminate its original equipment manufacturing (“OEM”) agreement with Intermec to supply laser scan engines and stopped shipping laser scan engines to the Company. On the same date, Symbol filed a lawsuit seeking a declaratory judgment that its termination of the OEM agreement is lawful. The Company believes that the cancellation of the OEM agreement by Symbol will not have a material adverse effect on operations.

 

Also on March 11, 2005, Symbol announced that it had filed a lawsuit against Intermec for wireless patent infringement. On March 23, 2005, the Company filed its answer to Symbol’s wireless patent infringement complaint and filed counterclaims against Symbol for infringing Intermec’s wireless access, terminal and software patents. The Company simultaneously filed its answer to Symbol’s declaratory judgment action and filed counterclaims against Symbol for breach of the OEM agreement. On April 28, 2005, Symbol announced that it had filed a lawsuit against Intermec for infringing Symbol’s barcode decoding patents.

 

The Complaints in Symbol’s wireless and barcode decoding lawsuits do not contain sufficient details for the Company to assess what Symbol will claim regarding the relationship between its cited patents and Intermec products. However, based on prior Company analysis of the cited Symbol patents, the Company believes it has substantial defenses to each of those patents and the Company intends to vigorously defend itself against the claims made in Symbol’s lawsuits. Accordingly, the Company believes that the ultimate resolution of this complaint would not have a material adverse effect on the Company’s consolidated financial position.

 

13

 

13.      Pension and Other Postretirement Benefit Plans

 

The following represents the net periodic pension and post-retirement benefit costs and related components in accordance with SFAS 132(R):

 

Components of Net Pension and Postretirement Periodic Benefit Cost for quarters ended April 3, 2005 and March 31, 2004 are as follows (thousands of dollars):

 

		U.S. Defined Benefit Plans						Non-U.S. Defined Benefit Plans						Postretirement Benefit Plans
		2005			2004			2005			2004			2005			2004
Service Cost		$	2,404		$	2,459		$	1,269		$	1,449		$	34		$	39
Interest Cost		2,520			2,242			2,548			2,361			1,063			745
Expected return on plan assets		(2,506		)	(2,448		)	(2,646		)	(2,428		)	—			—
Amortization and deferrals:
Transition (asset)		—			(11		)	(87		)	(85		)	—			—
Actuarial Loss		850			787			515			480			324			287
Prior service cost (benefit)		179			179			—			—			(598		)	(299		)
Curtailment loss (gain)		57			—			(5,396		)	—			(12,274		)	—
Settlement (gain)		—			—			(332		)	—			(21,090		)	—
Special termination benefits		264			—			—			—			—			—
		$	3,768		$	3,208		$	(4,129	)	$	1,777		$	(32,541	)	$	772

 

The Company’s pre-tax loss on the sale of Cincinnati Lamb in the first quarter of 2005 (see Note 5) takes into consideration the curtailment and settlement gains totaling $39.1 million, comprising $33.4 million relating to the postretirement benefit plans, and $5.7 million relating to the Non-U.S. Defined Benefit Plans.  These curtailment and settlement gains comprise the pension and post-retirement obligations assumed by the buyer.  In addition, the pre-tax loss on the sale of Cincinnati Lamb includes a loss of $12.9 million representing the cumulative adjustment to recognize the minimum pension liability of the Company’s Non-U.S. defined benefit plans, which prior to the sale, had been deferred in the other comprehensive loss component of shareholders’ investment on the Company’s consolidated balance sheets.

 

During the quarter ended April 3, 2005, the Company contributed approximately $4.0 million to its pension and other postretirement benefit plans, comprising $0.6 million in benefits paid pertaining to unfunded U.S. defined benefit plans, $0.8 million in matching contributions to its 401(k) plan, $1.6 million in contributions to its foreign pension plans, and $1.0 million in benefits paid pertaining to its other postretirement benefits plans. The Company presently anticipates contributing an additional $5.0 million to these plans during the remainder of 2005, of which $1.7 million relates to benefit payments on its unfunded U.S. defined benefit plans, $1.4 million in matching contributions to its 401(k) plan, $0.9 million in contributions to its foreign pension plans and $1.0 million in benefit payments pertaining to its other postretirement benefit plans.

 

14.      Recent Accounting Pronouncements

 

The FASB has issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R). Under the provisions of SFAS 123R, companies are required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exception). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. On April 14, 2005, the Securities and Exchange Commission (SEC) approved a delay to the effective date of SFAS 123R. Under the new SEC rule, SFAS 123R is effective for annual periods that begin after June 15, 2005. SFAS 123R applies to all awards granted, modified, repurchased or cancelled by us after December 31, 2005 and to unvested options at the date of adoption. The Company is currently evaluating pricing models and the transition

 

14

 

provisions of SFAS 123R and will begin expensing stock-based compensation in accordance with the standard in the first quarter of 2006. The Company has not yet determined whether the adoption of SFAS 123R will result in an impact to its consolidated financial statements similar to the current pro forma disclosures under SFAS 123.

 

In March 2005, the FASB issued Interpretation No. (FIN) 47, Accounting for Conditional Asset Retirement Obligations, to clarify the requirement to record liabilities stemming from a legal obligation to clean up and retire fixed assets, such as a plant or factory, when an asset retirement depends on a future event. The Company plans to adopt FIN 47 in the first quarter of fiscal 2006, and does not expect the application of FIN 47 to have a material impact on its results of operations, cash flows or financial position.

 

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs – an Amendment of ARB No. 43, Chapter 4.” This standard provides clarification that abnormal amounts of idle facility expense, freight, handling costs, and spoilage should be recognized as current-period charges. Additionally, this standard requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this standard are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

 

15

 

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

 

Overview

 

UNOVA, Inc. and subsidiaries (“UNOVA” or the “Company”), through its wholly owned subsidiary Intermec Technologies Corporation (“Intermec”), is a leader in global supply chain solutions, the development, manufacture and integration of wired and wireless automated data collection,  Intellitag® RFID (radio frequency identification), mobile computing systems, bar code printers and label media. Intermec products and services are used by customers to improve productivity, quality and responsiveness of business operations such as supply chain management, warehouse operations, inventory management, field service, in-transit visibility, direct-store delivery, store operations and store management. Intermec products and services are sold globally to a diverse set of customers in markets such as industrial manufacturing, transportation and logistics, retail, consumer goods and government.

 

Effective the fourth quarter of 2004, the Company committed to a plan to sell its Industrial Automation Systems (“IAS”) businesses, comprising the Cincinnati Lamb division and the Landis Grinding Systems division after the Board of Directors concluded that the IAS segment no longer aligned with the Company’s long-term strategy. Company management believes that divesting the IAS businesses will enable the Company to concentrate better on Intermec’s core competencies and growth opportunities. The Company has classified the IAS businesses as discontinued operations for accounting purposes in the Company’s consolidated financial statements and related notes (see Note 5 to the consolidated financial statements). All prior periods presented have been restated to reflect this classification.

 

During the quarter ended April 3, 2005, the Company completed the sale of the Cincinnati Lamb business and intends to sell the Landis Grinding division as a going concern within the 2005 fiscal year. The IAS businesses are leading producers of value-added manufacturing products and services spanning the production cycle from process engineering and design to systems integration including comprehensive life cycle support. The IAS businesses include integrated manufacturing systems, machining systems, stand-alone machine tools and precision grinding and abrasives operations primarily serving the global aerospace, automotive, off-road vehicle and diesel engine manufacturing industries as well as the industrial components, heavy equipment and general job shop markets.

 

The Company’s strategy for its Intermec segment revolves around continued investment in technology, intellectual property, research and development and innovation; expanding and strengthening the product portfolio; providing integrated solutions; partnering with global industry leaders; delivering value to customers and working to reduce costs and improve profitability; and working to profitably increase market share and the scale of the business. The technology and innovation for which the Company focuses its research and development efforts are related to developing products, processes and services that help improve productivity, efficiency, information and controls in a variety of manufacturing, distribution, retail, field service and logistics supply chain applications.

 

The Intermec results appear to confirm management’s belief that Intermec products tend to lead IT spending recoveries due to the high returns on investment and short payback periods associated with customer implementation of the Company’s systems and solutions. The Company believes that there are future growth opportunities for Intermec products as a result of increasing interest in RFID (radio frequency identification), the next generation item-tracking technology; increasing interest in item-tracking technologies within the government market, such as Defense and Homeland Security; improved access for Intermec to non-traditional markets as a result of broadening the product line to support these markets; and partnering arrangements with industry leaders to provide integrated solutions. The Company’s financial strength and ability to adapt to the current market and economic conditions are dependent in part on the generation of cash flow, effective management of working capital, funding commitments and other obligations, as well as the growth of the business.

 

16

 

Results of Operations

 

The following discussion compares the Company’s results of operations for the fiscal quarters ended April 3, 2005 and March 31, 2004. Results from continuing operations include the Intermec segment and the Corporate and Other segment. The operating results of the IAS business are classified as discontinued operations. Results of operations were as follows (millions of dollars):

 

		Quarter Ended
		April 3, 2005			March 31, 2004
Revenues:
Product and service		$	196.5		$	173.3
Intellectual property settlements		—			19.7
Total Revenues		196.5			193.0
Costs and Expenses:
Cost of product and service revenues		113.6			99.5
Cost of intellectual property settlements		—			3.9
Selling, general and administrative		72.8			64.7
Total Costs and Expenses		186.4			168.1
Operating Profit from Continuing Operations		10.1			24.9
Interest, net		(2.1		)	(3.1		)
Foreign currency exchange, net		—			(0.4		)
Earnings from Continuing Operations before Income Taxes		8.0			21.4
Provision for Income Taxes		2.6			5.7
Earnings from Continuing Operations, net of tax		5.4			15.7
Loss from Discontinued Operations, net of tax		(1.9		)	(5.2		)
Net Earnings		$	3.5		$	10.5

 

17

 

Revenues

 

Revenues by category and as a percentage of related revenues from continuing operations for the quarters ended April 3, 2005 and March 31, 2004 were as follows (millions of dollars):

 

		Quarter Ended
		April 3, 2005						March 31, 2004
		Amount			Percent of Revenues			Amount			Percent of Revenues
Revenues:
Product		$	161.9		82.4	%		$	142.6		73.9	%
Service		34.6			17.6	%		30.7			15.9	%
Intellectual Property Sales and Settlements		—			—			19.7			10.2	%
Total Revenues		$	196.5		100.0	%		$	193.0		100.0	%

 

		Amount			Percent
Product and Service Revenue Growth (Quarter ended April 3, 2005 v. quarter ended March 31, 2004):
Product		$	19.3		13.5	%
Service		3.9			12.7	%
Total Product and Service Revenues		$	23.2		13.4	%

 

Product revenues for the quarter ended April 3, 2005, were $161.9 million, an increase of $19.3 million, or 13.5%, compared with corresponding prior year period. For the quarter ended April 3, 2005, systems and solutions revenue increased by 10.9%, printer/media products increased 16.0% and service increased by 12.4% over the corresponding prior year period. Geographically, product and service revenue for Europe, Middle East and Africa increased 11.2%, North America increased 10.9%, and the rest of the world increased 33.0% compared to the corresponding prior year period.

 

Intermec operating results for quarter ended March 31, 2004 include $19.7 million of revenue and $15.8 million of operating profit from compensation related to a settlement regarding certain of the Company’s intellectual property (“IP settlements”). The Company is currently the plaintiff in a patent infringement lawsuit regarding its battery power-management patents which may result in future revenue and operating profit. Settlements relating to the battery power-management patents have been reached to date with companies that in the aggregate represent approximately ninety percent of U.S. laptop sales. In addition, the Company is also the plaintiff in various patent infringement lawsuits. Management cannot predict the outcome, timing or amount of future settlements or judgments.

 

18

 

Gross Profit

 

Gross profit and gross margin by revenue category for the quarter ended April 3, 2005 and March 31, 2004 were as follows (millions of dollars):

 

		Quarter Ended
		April 3, 2005						March 31, 2004
		Gross Profit			Gross Margin			Gross Profit			Gross Margin
Product		$	69.2		42.7	%		$	60.4		42.4	%
Service		13.7			39.6	%		12.8			41.5	%
Intellectual Property Sales and Settlements		—			—			15.8			80.4	%
Total Gross Profit and Gross Margin		$	82.9		42.2	%		$	89.0		46.1	%

 

Product and service gross profit for the quarter ended April 3, 2005 increased $9.7 million, or 13.3% compared to the corresponding prior year period. The improvement in gross profit is due to the increase in revenues as the product gross margin was consistent with the corresponding prior year period and service gross margin was down by approximately 2 points due to an isolated charge in the quarter for certain service parts.

 

Operating Profit

 

Operating profit and operating profit percentage by revenue category for quarter ended April 3, 2005, and March 31, 2004 were as follows (millions of dollars):

 

		Quarter Ended
		April 3, 2005						March 31, 2004
		Operating Profit			Operating Profit Margin			Operating Profit			Operating Profit Margin
Operating Profit from Continuing Operations Intermec:
Product and Service		$	16.0		8.2	%		$	12.2		7.1	%
Intellectual Property Sales and Settlements		—			—			15.8			80.4	%
Total Intermec		16.0						28.0
Corporate and Other		(5.9		)	(3.0	)%		(3.1		)	(1.6	)%
Total Operating Profit from Continuing Operations		$	10.1					$	24.9

 

Product and service operating profit for the quarter ended April 3, 2005 increased $3.8 million, or 31.1%, compared to the corresponding prior year period.

 

Operating expenses for Corporate and Other were $5.9 million and $3.1 million for the quarters ended April 3, 2005, and March 31, 2004, respectively. The 2005 period includes $1.3 million of expense related to compliance with the internal control provision of Sarbanes-Oxley section 404 and the year end audit. Corporate and Other expenditures for the first quarter of 2004 included the reversal of a $2.0 million legal accrual due to a favorable ruling in an Intellectual Property dispute during the quarter.

 

Selling, General and Administrative

 

Selling, general and administrative (“SG&A”) expenses were $72.8 million and $64.8 million for the quarters ended April 3, 2005 and March 31, 2004, respectively. Intermec’s SG&A expense of $66.9 million represents an increase of $5.2 million compared to the corresponding prior year period. SG&A decreased to 34.0% of product and service revenue in the first quarter of 2005 compared to 35.6% in the corresponding 2004 period. The decrease in SG&A

 

19