**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

| **ý**                                                                                                                                                                                                                                                                                             | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE**  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                             | ** ** | **SECURITIES EXCHANGE ACT OF 1934**                           |
|                                                                                                                                                                                                                                                                                                   |       |                                                          |
| **For the quarterly period ended April 2, 2006**                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                                   |       |                                                          |
| **OR**                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                   |       |                                                          |
| **o**                                                                                                                                                                                                                                                                                                  | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE** |
| ** **                                                                                                                                                                                                                                                                                             | ** ** | **SECURITIES EXCHANGE ACT OF 1934**                           |
|                                                                                                                                                                                                                                                                                                   | ** ** |                                                          |
| **For the transition period from                         to                       ** |

 

**Commissionfile number:  001-13279**

 

**INTERMEC,INC.**(Exact name of registrant as specified in its charter)

 

| **Delaware**                             | ** ** | **95-4647021**      |
|------------------------------------------|------------|---------------------|
| (State or other jurisdiction of          |       | (I.R.S. Employer    |
| incorporation or organization)           |       | Identification No.) |
|                                     |       |                |
| **6001 36th Avenue West, Everett, Wa**   | ** ** | **98203-1264**      |
| (Address of principal executive offices) |       | (Zip Code)          |

 

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

 

**[None]**(Former name, former address and former fiscal year, if changed since lastreport)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.
|   | Yes ý | No o |
|--------|-----------------|-----------|

 

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

| Large accelerated filer ý |   | Accelerated filer  o |   | Non-accelerated filer  o |
|-------------------------------------|--------|--------------------------------|--------|------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).
|   | Yes o | No ý |
|--------|------------|----------------|

 

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

 

| **Class**                                | ** ** | **Outstanding  at April 28, 2006** |
|------------------------------------------|------------|------------------------------------|
| Common Stock,  $0.01 par value per share |       | 63,106,965  shares                 |

 

 

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

 
| ** **                         | ** **                                                                                          | **Page  Number** |
|------------------------------------|-----------------------------------------------------------------------------------------------------|------------------|
| ** **                         | ** **                                                                                          | ** **       |
| **PART  I. FINANCIAL INFORMATION** |                                                                                                | 2                |
|                               |                                                                                                |             |
| **ITEM 1.**                        | Financial  Statements                                                                               |             | 2 |
| ** **                         |                                                                                                |             |   |
|                               | Consolidated Statements of  Operations (unaudited)  Quarters Ended April 2, 2006, and April 3, 2005 |             | 2 |
|                               |                                                                                                |             |   |
|                               | Consolidated Balance Sheets  (unaudited)  April 2, 2006, and December 31, 2005                      |             | 3 |
|                               |                                                                                                |             |   |
|                               | Consolidated Statements of  Cash Flows (unaudited)  Quarters Ended April 2, 2006, and April 3, 2005 |             | 4 |
|                               |                                                                                                |             |   |
|                               | Notes to Consolidated  Financial Statements (unaudited)                                             |             | 5 |
|                               |                                                                                                |             |   |
| **ITEM 2.**                        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations         |             | 19 |
|                               |                                                                                                |             |   |
| **ITEM 3.**                        | Quantitative  and Qualitative Disclosures about Market Risk                                         |             | 24 |
|                               |                                                                                                |             |   |
| **ITEM 4.**                        | Controls  and Procedures                                                                            |             | 24 |
|                               |                                                                                                |             |   |
| **PART  II. OTHER INFORMATION**    |                                                                                                | 25               |
|                               |                                                                                                |             |   |
| **ITEM 1.**                        | Legal  Proceedings                                                                                  |             | 25 |
|                               |                                                                                                |             |   |
| **ITEM 1A.**                       | Risk Factors                                                                                        |             | 26 |
|                               |                                                                                                |             |   |
| **ITEM 2.**                        | Unregistered  Sales of Equity Securities and Use of Proceeds                                   |             | 33 |
|                               |                                                                                                |             |   |
| **ITEM  6.**                       | Exhibits                                                                                            |             | 33 |
|                               |                                                                                                |             |
| Signature                          |                                                                                                | 34               |

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

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

 
| ** **                                                  | ** ** | **Quarter Ended**  | ** ** |
|-------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                  | ** ** | **April 2,  2006** | ** ** | **April 3,  2005** | ** ** |
|                                                        |       |                    |       |   |   |
| Revenues:                                                   |       |                    |       |   |   |
| Product                                                     |       | $                       | 166,350    |   | $ | 161,943 |   |
| Service                                                     |       | 37,481                  |       | 34,552 |   |
| Intellectual  property settlement                           |       | 23,000                  |       | — |   |
| Total revenues                                              |       | 226,831                 |       | 196,495 |   |
|                                                        |       |                    |       |   |   |
| Costs and  expenses:                                        |       |                    |       |   |   |
| Cost of product  revenues                                   |       | 100,614                 |       | 92,747 |   |
| Cost of service  revenues                                   |       | 22,861                  |       | 20,886 |   |
| Cost of  intellectual property settlement                   |       | 6,462                   |       | — |   |
| Selling, general  and administrative                        |       | 77,793                  |       | 72,771 |   |
| Restructuring  charge                                       |       | 1,107                   |       | — |   |
| Total costs and  expenses                                   |       | 208,837                 |       | 186,404 |   |
| Operating profit  from continuing operations                |       | 17,994                  |       | 10,091 |   |
| Interest income  (expense), net                             |       | 1,144                   |       | (2,126 | ) |
| Earnings from  continuing operations before income taxes    |       | 19,138                  |       | 7,965 |   |
| Provision for  income taxes                                 |       | 4,069                   |       | 2,553 |   |
| Earnings from  continuing operations, net of tax            |       | 15,069                  |       | 5,412 |   |
| Loss from  discontinued operations, net of tax              |       | (1,078                  | )          | (1,932 | ) |
| Net earnings                                                |       | $                       | 13,991     |   | $ | 3,480 |   |
|                                                        |       |                    |       |   |   |
| Basic earnings  per share                                   |       |                    |       |   |   |
| Continuing  Operations                                      |       | $                       | 0.24       |   | $ | 0.09 |   |
| Loss from  Discontinued Operations                          |       | (0.02                   | )          | (0.03 | ) |
| Net Earnings per  Share                                     |       | $                       | 0.22       |   | $ | 0.06 |   |
|                                                        |       |                    |       |   |   |
| Diluted Earnings  per Share                                 |       |                    |       |   |   |
| Continuing  Operations                                      |       | $                       | 0.23       |   | $ | 0.09 |   |
| Loss from  Discontinued Operations                          |       | (0.01                   | )          | (0.03 | ) |
| Net Earnings per  Share                                     |       | $                       | 0.22       |   | $ | 0.06 |   |
|                                                        |       |                    |       |   |   |
| Shares Used in  Computing Basic Earnings (Loss) per Share   |       | 63,025                  |       | 61,093 |   |
|                                                        |       |                    |       |   |   |
| Shares Used in  Computing Diluted Earnings (Loss) per Share |       | 64,603                  |       | 62,813 |   |

 

See accompanying notes toconsolidated financial statements.

 

2

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**INTERMEC, INC.CONSOLIDATED BALANCE SHEETS(amounts in thousands)(unaudited)**
| ** **                                                                                           | ** ** | **April 2,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                                                                                 |       |                    |       |                        |       |
| **ASSETS**                                                                                           | ** ** | ** **              | ** ** | ** **                  | ** ** |
|                                                                                                 |       |                    |       |                        |       |
| Current assets:                                                                                      |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                           |       | $                       | 282,788    |                        | $          | 256,782 |   |
| Short-term  investments                                                                              |       | 19,695                  |       |                        |       |
| Accounts  receivable, net of allowance for doubtful accounts and sales returns of  $7,735 and $8,157 |       | 158,209                 |       | 180,985                     |       |
| Inventories                                                                                          |       | 88,954                  |       | 82,088                      |       |
| Net current  deferred tax assets                                                                     |       | 49,677                  |       | 100,656                     |       |
| Assets held for  sale                                                                                |       | 8,050                   |       | 8,517                       |       |
| Other current  assets                                                                                |       | 22,795                  |       | 29,468                      |       |
| Total current  assets                                                                                |       | 630,168                 |       | 658,496                     |       |
|                                                                                                 |       |                    |       |                        |       |
| Property, plant  and equipment, net of accumulated depreciation of $101,759 and $99,032              |       | 33,401                  |       | 30,820                      |       |
| Intangibles, net                                                                                     |       | 6,771                   |       | 6,871                       |       |
| Net deferred tax  assets                                                                             |       | 186,313                 |       | 137,578                     |       |
| Other assets                                                                                         |       | 66,408                  |       | 68,955                      |       |
| Total assets                                                                                         |       | $                       | 923,061    |                        | $          | 902,720 |   |
|                                                                                                 |       |                    |       |                        |       |
| **LIABILITIES AND SHAREHOLDERS’ INVESTMENT**                                                    | ** ** | ** **              | ** ** | ** **                  | ** ** |
|                                                                                                 |       |                    |       |                        |       |
| Current  liabilities:                                                                                |       |                    |       |                        |       |
| Accounts payable  and accrued expenses                                                               |       | $                       | 142,834    |                        | $          | 148,731 |   |
| Payroll and  related expenses                                                                        |       | 26,101                  |       | 31,011                      |       |
| Deferred revenue                                                                                     |       | 44,708                  |       | 38,369                      |       |
| Total current  liabilities                                                                           |       | 213,643                 |       | 218,111                     |       |
|                                                                                                 |       |                    |       |                        |       |
| Deferred revenue                                                                                     |       | 20,583                  |       | 20,095                      |       |
| Long-term debt                                                                                       |       | 100,000                 |       | 100,000                     |       |
| Other long-term  liabilities                                                                         |       | 88,884                  |       | 88,711                      |       |
|                                                                                                 |       |                    |       |                        |       |
| Commitments and  contingencies                                                                       |       |                    |       |                        |       |
|                                                                                                 |       |                    |       |                        |       |
| Shareholders’  investment:                                                                      |       |                    |       |                        |       |
| Common stock                                                                                         |       | 631                     |       | 627                         |       |
| Additional  paid-in capital                                                                          |       | 745,285                 |       | 736,224                     |       |
| Accumulated  deficit                                                                                 |       | (230,912                | )          | (244,903                    | )          |
| Accumulated  other comprehensive income                                                              |       | (15,053                 | )          | (16,145                     | )          |
| Total  shareholders’ investment                                                                 |       | 499,951                 |       | 475,803                     |       |
| Total  liabilities and shareholders’ investment                                                 |       | $                       | 923,061    |                        | $          | 902,720 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

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**INTERMEC, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(thousands of dollars)**

 
| ** **                                                                                                     | ** ** | **Quarter Ended**      | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                     | ** ** | **April 2, 2006** | ** ** | **April 3, 2005** | ** ** |
| ** **                                                                                                     | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Cash and Cash  Equivalents at Beginning of Year                                                                |       | $                           | 256,782    |   | $ | 217,899 |   |
|                                                                                                           |       |                        |       |   |   |
| Cash Flows from  Operating Activities:                                                                         |       |                        |       |   |   |
| Net earnings  from continuing operations                                                                       |       | 15,069                      |       | 5,412 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities of continuing  operations: |       |                        |       |   |   |
| Depreciation and  amortization                                                                                 |       | 2,588                       |       | 2,313 |   |
| Change in  prepaid pension cost                                                                                |       | 3,868                       |       | 2,994 |   |
| Deferred taxes                                                                                                 |       | 2,792                       |       | 4,515 |   |
| Stock-based  compensation and other                                                                            |       | 2,894                       |       | (55 | ) |
| Excess tax  benefits from stock-based payment arrangements                                                     |       | (2,183                      | )          | — |   |
| Changes in  operating assets and liabilities:                                                                  |       |                        |       |   |   |
| Accounts  receivable                                                                                           |       | 24,825                      |       | 8,868 |   |
| Inventories                                                                                                    |       | (6,794                      | )          | (12,758 | ) |
| Other current  assets                                                                                          |       | 5,655                       |       | (1,329 | ) |
| Accounts payable  and accrued expenses                                                                         |       | (6,178                      | )          | 63 |   |
| Payroll and  related expenses                                                                                  |       | (4,596                      | )          | (6,935 | ) |
| Other long-term  liabilities                                                                                   |       | 4,771                       |       | 584 |   |
| Other operating  activities                                                                                    |       | 1,659                       |       | (34 | ) |
| Net Cash  Provided by Operating Activities of Continuing Operations                                            |       | 44,370                      |       | 3,638 |   |
|                                                                                                           |       |                        |       |   |   |
| Cash Flows from  Investing Activities:                                                                         |       |                        |       |   |   |
| Capital  expenditures                                                                                          |       | (4,268                      | )          | (2,624 | ) |
| Purchases of  investments                                                                                      |       | (19,695                     | )          | — |   |
| Cash restricted  for repayment of debt                                                                         |       | —                      |       | 50,000 |   |
| Proceeds from  sale of property, plant and equipment                                                           |       | —                      |       | 6,000 |   |
| Other investing  activities                                                                                    |       | 73                          |       | 152 |   |
| Net Cash  Provided by (Used in) Investing Activities of Continuing Operations                                  |       | (23,890                     | )          | $ | 53,528 |   |
|                                                                                                           |       |                        |       |   |   |
| Cash Flows from  Financing Activities:                                                                         |       |                        |       |   |   |
| Repayment of  long-term obligations                                                                            |       | —                      |       | (100,000 | ) |
| Excess tax  benefits from stock-based payment arrangements                                                     |       | 2,183                       |       | — |   |
| Stock options  exercised                                                                                       |       | 3,113                       |       | 1,269 |   |
| Other financing  activities                                                                                    |       | 881                         |       | (302 | ) |
| Net Cash  Provided by (Used in) Financing Activities of Continuing Operations                                  |       | 6,177                       |       | (99,033 | ) |
|                                                                                                           |       |                        |       |   |   |
| Net Cash Provided  by (Used in) Continuing Operations                                                          |       | 26,657                      |       | (41,867 | ) |
| Net Cash (Used  in) Operating Activities of Discontinued Operations                                            |       | —                      |       | (21,123 | ) |
| Net Cash  Provided by (Used in) Investing Activities of Discontinued Operations                                |       | (651                        | )          | 241 |   |
|                                                                                                           |       |                        |       |   |   |
| Resulting  Increase (Decrease) in Cash and Cash Equivalents                                                    |       | 26,006                      |       | (62,749 | ) |
|                                                                                                           |       |                        |       |   |   |
| Cash and Cash  Equivalents at End of Period                                                                    |       | $                           | 282,788    |   | $ | 155,150 |   |
|                                                                                                                |            |                             |            |  |  |  |  |  |

 

See accompanying notes toconsolidated financial statements.

 

4

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

 

**1.****                          Descriptionof the Business**

 

EffectiveJanuary 1, 2006, Intermec changed its name from UNOVA, Inc. to Intermec, Inc. (“Intermec”).Intermec is a leader in global supply chain solutions and in the design,development, manufacture and integration of wired and wireless automated datacollection, mobile computing systems, bar code printers, label media andIntermec RFID (radio frequency identification). Intermec’s products and servicesare used by customers in many industries to improve productivity, quality andresponsiveness of business operations, from supply chain management andenterprise resource planning to field sales and service. Intermec’s productsand services are sold globally to a diverse set of customers in markets such asmanufacturing, warehousing, direct store delivery, retail, consumer goods,field services, government, security, healthcare, transportation and logistics.

 

In2005, Intermec divested its Industrial Automation Systems (“IAS”) businesses,which comprised the Cincinnati Lamb and Landis Grinding Systems divisions. TheIAS businesses are classified as discontinued operations for accountingpurposes in Intermec’s consolidated financial statements and related notes.

 

**2.****                          Basis ofPresentation**

 

Intermec’sinterim financial periods are based on a thirteen-week internal accountingcalendar. In the opinion of management, the accompanying balance sheets andinterim statements of operations, and statements of cash flows include alladjustments, consisting only of normal recurring items, necessary for theirfair presentation in conformity with accounting principles generally acceptedin the United States of America (“U.S. GAAP”). The financial statements includethe accounts of Intermec and its subsidiaries. Intercompany transactions andbalances have been eliminated. Equity investments in which we exercisesignificant influence but do not exercise control and are not the primarybeneficiary are accounted for using the equity method. Investments in which weare not able to exercise significant influence over the investee are accountedfor under the cost method. Preparing financial statements requires managementto make estimates and assumptions that affect the reported amounts of assets,liabilities, revenue, and expenses, and financial data included in theaccompanying notes to the financial statements. Actual results and outcomes maydiffer from management’s estimates and assumptions.

 

Interimresults are not necessarily indicative of results for a full year. Theinformation included in this Form 10-Q should be read in conjunction withManagement’s Discussion and Analysis and the financial statements and notesthereto included in the Intermec Inc.’s 2005 Form 10-K.

 

Certain amounts in ourprior-period consolidated financial statements and notes have been reclassifiedto conform to the current-period presentation. The consolidated statement ofcash flows for the three months ended April 3, 2005, reflects the reclassificationof $50 million in restricted cash from financing activities to investingactivities and $3.9 million of cash used in operating activities ofdiscontinued operations was reclassified from operating activities ofcontinuing operations.

 

5

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**3.****                          Stock-BasedCompensation**

 

Weadopted Statement of Financial Accounting Standards (SFAS) 123 (revised 2004), “Share-BasedPayment” (SFAS 123(R)), using the modified prospective transition methodbeginning January 1, 2006. The statement eliminates the ability to accountfor share-based compensation transactions, as we formerly did, using theintrinsic value method as prescribed by Accounting Principles Board, or APB,Opinion No. 25, “Accounting for Stock Issued to Employees,” and generallyrequires that such transactions be accounted for using a fair-value-basedmethod and recognized as expenses in our consolidated statement of income.

 

Ourconsolidated financial statements as of and for the quarter ended April 2, 2006reflect the impact of adopting SFAS 123(R). In accordance with themodified prospective method, the consolidated financial statements for priorperiods have not been restated to reflect, and do not include, the impact ofSFAS 123(R).

 

Stock-basedcompensation expense recognized during the period is based on the value of theportion of stock options that are ultimately expected to vest. Stock-basedcompensation expense recognized in the consolidated statement of operationsduring the first quarter of 2006 included compensation expense for stock-basedpayment awards granted prior to, but not yet vested, as of December 31,2005 based on the grant date fair value estimated in accordance with the proforma provisions of SFAS 148 “Accounting for Stock-Based Compensation—Transitionand Disclosure” (SFAS 148) and compensation expense for the stock-based paymentawards granted subsequent to December 31, 2005, based on the grant datefair value estimated in accordance with SFAS 123(R). As stock-basedcompensation expense recognized in the statement of operations for the firstquarter of 2006 is based on awards ultimately expected to vest, the expense hasbeen reduced for estimated forfeitures. SFAS 123(R) requires forfeituresto be estimated at the time of grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from those estimates. In the pro formainformation required under SFAS 148 for the periods prior to 2006, weaccounted for forfeitures as they occurred.

 

Accordingly,during the three-month period ended April 3, 2006, we recorded stock-basedcompensation expense for awards granted prior to, but not yet vested, as ofJanuary 1, 2006, as if the fair value method required for pro formadisclosure under SFAS 123 were in effect for expense recognition purposes,adjusted for estimated forfeitures.  Forstock-based awards granted after January 1, 2006, we have recognizedcompensation expense based on the estimated grant date fair value method usingthe Black-Scholes valuation model. For these awards, we have recognizedcompensation expense using a straight-line amortization method. AsSFAS 123(R) requires that stock-based compensation expense be based onawards that are ultimately expected to vest, stock-based compensation for thethree-month period ended April 2, 2006 has been reduced for estimatedforfeitures. When estimating forfeitures, we consider voluntary terminationbehaviors as well as trends of actual option forfeitures. The impact on ourresults of operations of recording stock-based compensation for the three-monthperiod ended April 2, 2006 was as follows (in thousands):

 
| Cost of revenues                         |   | $     | 38     |   |
|----------------------------------------------------|--------|-------|--------|--------|
| Selling, general and administrative |   | 1,886 |   |
|                                               |   | $     | 1,924  |   |

 

Priorto adopting SFAS 123(R), we presented all tax benefits resulting from theexercise of stock options as operating cash flows in the Statement of CashFlows. SFAS 123(R) requires cash flows resulting from excess tax benefitsto be classified as a part of cash flows from financing activities. Excess taxbenefits are realized tax benefits from tax deductions for exercised options inexcess of the deferred tax asset attributable to stock compensation costs forsuch options. As a result of adopting SFAS 123(R), $2.2 million of excesstax benefits for the three months ended April 2, 2006 have been classifiedas a source of cash from financing activities. Cash

 

6

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receivedfrom option exercises under all share-based payment arrangements for thethree-month periods ended April 2, 2006 and April 3, 2005, was $3.1 million and$1.3 million, respectively. The total income tax benefit recognized in thestatement of operations for stock-based compensation costs was $0.7 million, and$0.5 million for the three-month periods ended April 2, 2006, and April 3,2005, respectively.

 

Wecalculated the fair value of each option award on the date of grant using theBlack-Scholes option pricing model. The following assumptions were used foreach respective period:

 
| ** **                 | ** ** | **April 2, 2006** | ** ** | **April 3, 2005** | ** ** |
|----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Risk-free interest  rates  |       | 4.16                        | %          | 3.72                        | %          |
| Expected lives  (in years) |       | 5.0                         |       | 5.0                         |       |
| Expected dividend  yield   |       | 0.0                         | %          | 0.0                         | %          |
| Expected  volatility       |       | 52                          | %          | 56                          | %          |

 

Ourcomputation of expected volatility for the first quarter of 2006 is based on acombination of historical and market-based implied volatility from tradedoptions on our stock. Prior to 2006, our computation of expected volatility wasbased on historical volatility. Our computation of expected life in 2006, wasdetermined based on historical experience of similar awards, givingconsideration to the contractual terms of the stock-based awards, vestingschedules and expectations of future employee behavior. The interest rate forperiods within the contractual life of the award is based on theU.S. Treasury yield curve in effect at the time of grant.

 

The fair value of theoptions granted based on the above assumptions are $16.76 and $12.72 for theperiods ended April 2, 2006 and April 3, 2005, respectively.  All grants of our options under all plansmust be approved by the Compensation Committee of the Board of Directors, whichconsists entirely of outside directors.

 

7

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Thefollowing table summarizes the pro forma effect of stock-based compensation asif the fair value method of accounting for stock compensation had been applied.

 
| ** **                                                                                           | ** ** | **April 3,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                           | ** ** | **2005**          | ** ** |
| ** **                                                                                           | ** ** | ** **        | ** ** |
| Net earnings as  reported                                                                            |       | $                 | 3,480      |   |
| Add: stock  compensation expense recorded under the intrinsic value method, net of tax  effect       |       | 484               |       |
| Less: pro forma  stock compensation expense computed under the fair value method, net of tax  effect |       | (1,284            | )          |
|                                                                                                 |       |              |       |
| Pro forma net  earnings                                                                              |       | $                 | 2,680      |   |
|                                                                                                 |       |              |       |
| Net earnings per  share as reported:                                                                 |       |              |       |
| Basic                                                                                                |       | $                 | 0.06       |   |
| Diluted                                                                                              |       | $                 | 0.06       |   |
|                                                                                                 |       |              |       |
| Pro forma net  earnings per share:                                                                   |       |              |       |
| Basic                                                                                                |       | $                 | 0.04       |   |
| Diluted                                                                                              |       | $                 | 0.04       |   |

 

Theabove amounts reflect a revision of previously reported pro forma stock-basedcompensation expense for the three months ended April 3, 2005.  The effect of this revision was to decreasestock-based compensation expense computed under the fair value method, net oftax effect, by $1,383 for the three months ended April 3, 2005, and increasepro forma net earnings for that period by the same amount. The effect on bothbasic and diluted pro forma earnings per share was an increase of $0.02 for thethree months ended April 3, 2005. Additionally, the above amounts reflects theadoption of SFAS 123(R) and a reduction to the previously recorded pro formstock-based compensation expense, net of tax effect, by $181 for the threemonths ended April 3, 2005.  The effecton pro forma net earnings was an increase of the same amount.  There was no effect on the basic and dilutedpro forma earnings per share for the three months ended April 3, 2005.

 

TheIntermec, Inc. 2001, 1999 and 1997 Stock Incentive Plans and the Intermec Inc.2004 Omnibus Incentive Compensation Plan (the “Stock Incentive Plans,”collectively) provide for the grant of incentive awards to officers and otherkey employees. The numbers of shares authorized for grant under the 2004, 2001and 1999 plans are 3,000,000, 1,000,000, and 4,500,000, respectively. Noadditional shares are authorized for grant under the 1997 plan, which wasfrozen subsequent to the approval of the 1999 Stock Incentive Plan. As of April2, 2006, there were 551,304 options outstanding that were granted under the1997 Plan before it was frozen.

 

Incentiveawards may be granted in the form of stock options with or without relatedstock appreciation rights, restricted stock, restricted stock units andperformance units. Under the Stock Incentive Plans, stock options may not begranted at an exercise price less than the market value of Intermec’s commonstock on the date of grant. The Stock Incentive Plans options generally vest inequal increments over five years and expire in ten years.

 

The2002 Director Stock Option and Fee Plan (“2002 DSOP”) and the 1997 DirectorStock Option Plan (“1997 DSOP”, collectively “DSOPs”) provide for the grant ofstock options to Intermec’s non-employee directors. The numbers of sharesauthorized for grant under the 2002 DSOP is 745,000. No additional shares areauthorized under the 1997 DSOP. Subsequent to the grant of 255,000 optionsunder the 1997 DSOP, it was frozen upon the approval of the 2002 DSOP. Underthe 2002 DSOP, stock options are granted annually at an exercise price equal tothe fair market value of Intermec’s common stock on the date of grant. Thenumber of options granted annually to each director is fixed by the DirectorPlan. Such options become fully exercisable on the first anniversary of theirdate of grant. Additionally, there was a grant in January, 2006 to theDirector’s that vested immediately. Therefore, the corresponding expense wasrecorded in the quarter ended April 2, 2006.

 

As ofApril 2, 2006 there were 3,153,026 shares available for grant under Intermec’sStock Incentive Plans and DSOPs. The following table summarizes changes inoptions outstanding and exercisable under Intermec’s stock award plans:

 

8

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| ** **                                 | ** ** | ** **         | ** ** | **Average**             | ** ** | ** **          | ** ** | ** **             | ** ** |
|--------------------------------------------|------------|--------------------|------------|-------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **Number**         | ** ** | **Exercise Price** | ** ** | **Remaining**       | ** ** | **Intrinsic**          | ** ** |
| ** **                                 | ** ** | **of Shares** | ** ** | **Per Share**      | ** ** | **Term**            | ** ** | **Value**              | ** ** |
|                                       |       |               |       |                    |       | **(in years)** |       | **(in millions)** |       |
| **Stock  Options**                         |       |               |       |                    |       |                |       |                   |       |
| Nonvested  balance at December 31, 2005    |       | 3,218,926          |       | $                       | 13.35      |                |       |                   |       |   |
| Granted                                    |       | 90,000             |       | 33.96                   |       |                |       |                   |       |
| Exercised                                  |       | (290,712           | )          | 10.71                   |       |                |       |                   |       |
| Forfeited                                  |       | —             |       |                    |       |                |       |                   |       |
| Canceled                                   |       | (5,800             | )          | 15.19                   |       |                |       |                   |       |
| Outstanding  balance at April 2, 2006 |       | 3,012,414          |       | 14.22                   |       | 5.8                 |       | $                      | 49.0       |   |
| Exercisable at  April 2, 2006              |       | 1,739,522          |       | 13.48                   |       | 4.5                 |       | 30.0                   |       |
|                                            |            |                    |            |                         |            |                     |            |                        |            |  |  |

 

As ofApril 2, 2006, there was $5.6 million of total unrecognized compensation costrelated to non-vested options. That cost is expected to be recognized over aweighted average period of 2 years and 11 months.

 
| ** **                               | ** ** | ** **         | ** ** | **Weighted-**  | ** ** |
|------------------------------------------|------------|--------------------|------------|----------------|------------|
| ** **                               | ** ** | ** **         | ** ** | **Average**    | ** ** |
| ** **                               | ** ** | **Number**         | ** ** | **Grant Date** | ** ** |
| ** **                               | ** ** | **of Shares** | ** ** | **Fair Value** | ** ** |
|                                     |       |               |       |           |       |
| **Restricted  stock awards:**            |       |               |       |           |       |
| Nonvested  balance at December 31, 2005  |       | 86,070             |       | 11.52          |       |
| Granted                                  |       | —             |       | —         |       |
| Vested                                   |       | (21,786            | )          | 6.66           |       |
| Forfeited                                |       | —             |       | —         |       |
| Nonvested  balance at April 2, 2006 |       | 64,284             |       | 13.7           |       |

 

Thefair value of each restricted stock award (RSA) is the market price of ourstock on the date of grant. The total intrinsic value of RSA’s vested duringthe three months ended April 2, 2006 and April 3, 2005, was $0.6 million and $0.8million, respectively. As of April 2, 2006, there was $0.8 million of totalunrecognized compensation cost related to non-vested RSA’s. That cost isexpected to be recognized over a weighted average period of 2 years and 6 months.

 

SharedPerformance Stock Awards are a form of stock award in which the number ofshares ultimately received depends on our performance against specifiedperformance targets. The performance period is January 1 through December 31and covers a period of 3 fiscal years. At the end of the performance period, thenumber of shares of stock and stock awards issued will be determined byadjusting upward or downward from the target in a range between 0% and 200%.The final performance percentage on which the payout will be based, consideringperformance metrics established for the performance period, will be determinedby the Board of Directors or a committee of the board in its sole discretion.Shares of stock will be issued following the end of the performance period.Shared Performance Stock Awards are amortized over the vesting period(generally 32 months) using the straight line method.  Total compensation expense related toperformance stock awards was $711,711 and $323,172, for the periods ended April2, 2006 and April 13, 2005, respectively.

 

Weadminister the Employee Stock Purchase Plan under which $5.0 million shares arereserved for issuance. Employees with three months of continuous service prior toan offering period are eligible to participate in the plan. Eligible employeesmay elect to become participants in the plan and may contribute up to $21,250 peryear through payroll deductions to purchase stock purchase rights. Participantsmay, at any time and for any reason, cancel their payroll deductionauthorizations and have the balance in their stock purchase right accountapplied to the purchase of shares or have the amount refunded. The offeringperiod begins on the first day of the quarter and ends on the last day of thequarter. The stock purchase rights are used to purchase the common stock ofIntermec at 85 percent of the fair market value of a share as of the grant dateapplicable to the participant.

 

 

9

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**4.****                          Inventories**

 

Inventoriescomprise the following (thousands of dollars):

 
| ** **      | ** ** | **April 2,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------------|------------|
|            |       |                    |       |                        |       |
| Raw materials   |       | $                       | 53,247     |                        | $          | 50,505 |   |
| Work in process |       | 743                     |       | 705                         |       |
| Finished goods  |       | 34,964                  |       | 30,878                      |       |
|            |       |                    |       |                        |       |
| Inventories     |       | $                       | 88,954     |                        | $          | 82,088 |   |

 

**5.****                          NotesReceivable**

 

Inconnection with the sale of Cincinnati Lamb, Intermec received a $12.5 millionlong-term note receivable secured by the assets sold, bearing interest at anannual rate of LIBOR plus three percent (7.83% as of April 2, 2006) withinterest payable quarterly. Principal payments on the note are due in sixsemiannual installments beginning April 2007 of $1.5 million, $2.0 million,$2.0 million, $2.5 million, $2.0 million and $2.5 million. As of April 2, 2006,the estimated fair value of the note is $10.7 million, based on the estimatedcash flows from the note and a risk-adjusted discount rate equal to LIBOR pluseight percent. Intermec’s consolidated balance sheet as of April 2, 2006,classifies the $10.7 million long-term note receivable as other assets.

 

Aspart of the sale of Landis Grinding Systems we received a $10 million two-yearnote at an interest rate of five percent per annum guaranteed by the buyer’sparent company. As of April 2, 2006, the estimated fair value of the note is$9.5 million, based on the estimated cash flows from the note and arisk-adjusted discount rate equal to LIBOR plus 2.25% (7.54% as of April 2,2006). This long-term note receivable is included in other assets on ourbalance sheet.

 

**6.****                          Long-termDebt and Interest, net**

 

Intermechas a secured long-term revolving credit facility (the “Revolving Facility”)with a maximum amount available under the Revolving Facility of $50.0 million.Net of outstanding letters of credit and limitations on availability, Intermechad borrowing capacity at April 2, 2006, of $17.7 million under the RevolvingFacility. Intermec made no borrowings under the Revolving Facility during 2006,and as of April 2, 2006, no borrowings were outstanding under this facility. Asof April 2, 2006, Intermec was in compliance with all financial covenants ofthis agreement.

 

TheCompany has $100.0 million of ten-year senior unsecured debt outstanding as ofApril 2, 2006. Interest payments at 7.0% are due semi-annually in March andSeptember. Including underwriting fees, discounts and other issuance costs, theeffective interest rate is 7.175%. In March 2005, Intermec retired the $100.0million of seven-year notes.

 

10

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Interestincome (expense) comprises the following (thousands of dollars):

 
| ** **                     | ** ** | **Quarter Ended**  | ** ** |
|--------------------------------|------------|-------------------------|------------|
| ** **                     | ** ** | **April 2,  2006** | ** ** | **April 3,  2005** | ** ** |
|                           |       |                    |       |   |   |
| Interest income                |       | $                       | 3,360      |   | $ | 1,802 |   |
| Interest expense               |       | (2,216                  | )          | (3,928 | ) |
| Net interest  income (expense) |       | $                       | 1,144      |   | $ | (2,126 | ) |

 

Intermecalso has letter-of-credit reimbursement agreements totaling $14.0 million atApril 2, 2006, compared to $25.8 million at December 31, 2005. As of April 2,2006, $7.8 million of the agreements related to performance on contracts withcurrent customers and vendors, and $3.9 million of the agreements related tocustomer contracts assumed by the purchaser of the Cincinnati Lamb operationsthat were sold and $2.3 million of the agreements related to customer contractsassumed by the purchaser of the Landis operations that were sold. Intermec isindemnified by the purchaser of the Cincinnati Lamb operation on the $3.9million of letter-of-credit agreements related to Cincinnati Lamb and is thebeneficiary of a backup letter-of-credit in the aggregate amount of $4.2million issued pursuant to the terms of the sale. Intermec believes it is notpracticable to estimate fair values of these instruments and considers the riskof non-performance on the contracts to be remote. Intermec is indemnified bythe purchaser of the Landis operations on the $2.3 million of letter-of-creditagreement to Landis**.**

 

**7.****                          DiscontinuedOperations**

 

During 2005, Intermec completed its divestiture of theIAS businesses with the sale of the Cincinnati Lamb business in the firstquarter of 2005 and the sale of the Landis Grinding Systems business in thefourth quarter of 2005. The loss from discontinued operations for the threemonths ended April 2, 2006 include period expenses related to finalizing thesale of the Landis Grinding Systems and changes to the estimated purchase priceadjustment, net of tax benefits.

 

The loss from discontinued operations for the threemonths ended April 3, 2005, includes the operating results of the CincinnatiLamb and Landis Grinding Systems businesses as well as the loss on the sale ofCincinnati Lamb, net of related tax benefits.

 

**8.****                          RestructuringCosts**

 

In March 2006, Intermec announced its plan to closeits design centers in Goteborg and Lund, Sweden. The activities currentlyassigned to the design centers in Sweden will be reassigned to other parts ofIntermec or moved to third-party vendors to improve efficiencies and benefitfrom reduced cost. In addition to the anticipated cost savings, thisrealignment of resources is expected to increase new product developmentcapacity. The total cost of closing the design centers in Sweden and theelimination of 65 positions in Sweden is estimated to be approximately $5.0million. The estimated restructuring costs include $2.9 million of employeetermination expense, facility closure costs of $1.4 million non-cash, assetimpairment expense of $0.1 million and other exit costs of $0.6 million. We recordeda restructuring charge of $1.1 million for employee termination costs, inthe first quarter of 2006, in accordance with SFAS 146, “Accounting for CostsAssociated with Exit or Disposal Activities” (SFAS 146), and anticipate most ofthe remaining unrecognized restructuring costs will be recognized over the last3 quarters of 2006.

 

 

11

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**9.****                          IntellectualProperty Settlement**

 

During the first quarter of 2006, we receivedcompensation in relation to a settlement of a patent dispute regarding certainof Intermec’s intellectual property (“IP”). Intermec’s patents involved itssmart battery management technology in which a portable computer incorporates arechargeable battery that uses a processor chip to communicate data to theportable computer so that the computer can monitor and regulate battery use. Theeffective date of this settlement was February 27, 2006 and the terms areconfidential. The operating profit from this settlement, net of attorneys feesand costs, is $16.5 million for the first quarter of 2006. IP settlementcompensation is classified as revenue and the related legal costs areclassified as cost of intellectual property settlement in our consolidatedstatements of operations.

 

**10.****                   Provision forIncome Taxes**

 

The tax provision for the quarter ended April 2, 2006reflects an effective tax rate for continuing operations of 21.3% compared to aU.S. statutory rate of 35%. The tax provision for the 2006 first quarter wasreduced by $2.2 million due to the favorable conclusion of a Canadian tax audit.

 

The tax provision for the quarter ended April 3, 2005reflects an effective tax rate for continuing operations of 32.1% compared to aU.S. statutory rate of 35%. The reduction in the effective tax rate isprimarily due to favorable foreign currency exchange variance associated withforeign tax contingency accruals.

 

**11.****                   Shares Used inComputing Earnings per Share**

 

Basic earnings per share is calculated using theweighted average number of common shares outstanding and issuable for theapplicable period. Diluted earnings per share is computed using basic weightedaverage shares plus the dilutive effect of unvested restricted stock andoutstanding stock options using the “treasury stock” method.

 
| ** **                                                       | ** ** | **Quarter Ended**  | ** ** |
|------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                       | ** ** | **April 2,  2006** | ** ** | **April 3,  2005** | ** ** |
|                                                             |       |                    |       |   |   |
| Weighted average  common shares - Basic                          |       | 63,025,006              |       | 61,092,942 |   |
| Dilutive effect  of unvested restricted shares and stock options |       | 1,578,367               |       | 1,719,661 |   |
| Weighted average  shares - Diluted                               |       | 64,603,373              |       | 62,812,603 |   |

 

Our employees and directors held options to purchase 93,151and 106,500 shares of Intermec common stock for the quarters ended April 2,2006, and April 3, 2005, respectively, that were not included in weightedaverage shares diluted because they were antidilutive to the diluted earningsper share computation. These options could become dilutive in future periods ifthe average market price of Intermec’s common stock exceeds the exercise priceof the outstanding options and Intermec reports net earnings.

 

12

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**12.****                   ComprehensiveEarnings**

 

Intermec’scomprehensive earnings comprise the following (thousands of dollars):

 
| ** **                                                        | ** ** | **Quarter Ended**  | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                        | ** ** | **April 2,  2006** | ** ** | **April 3,  2005** | ** ** |
|                                                              |       |                    |       |   |   |
| Net earnings                                                      |       | $                       | 13,991     |   | $ | 3,480 |   |
| Change in equity  due to foreign currency translation adjustments |       | 1,092                   |       | (14,220 | ) |
| Change in equity  due to minimum pension liability adjustment     |       |                    |       | 9,144 |   |
|                                                              |       |                    |       |   |   |
| Comprehensive  earnings (loss)                                    |       | $                       | 15,083     |   | $ | (1,596 | ) |

 

Foreign currencytranslation adjustments for the quarter ended April 3, 2005 in the above tableinclude a credit balance cumulative translation adjustment of $8.3 millionwhich was reclassified from OCI to net earnings as a result of the CincinnatiLamb sale.

 

**13.****                   SegmentReporting**

 

During the firstquarter of 2006, we integrated the corporate expense into our Products andService segments. Intrasegment transactions have been eliminated and there areno material intersegment transactions. It is not practicable to segregateoperating profit, capital expenditures, depreciation and amortization expenseor total assets into the Intermec Product and Intermec Service segments, sothis is reported below in aggregate. The following table sets forth Intermec’soperations by reportable segments (thousands of dollars):

 
| ** **                                              | ** ** | **Quarter Ended**  | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|
| ** **                                              | ** ** | **April 2,  2006** | ** ** | **April 3,  2005** | ** ** |
|                                                    |       |                    |       |   |   |
| **Revenues**                                            |       |                    |       |   |   |
| Product                                                 |       | $                       | 189,350    |   | $ | 161,943 |   |
| Service                                                 |       | 37,481                  |       | 34,552 |   |
| Total revenues                                          |       | $                       | 226,831    |   | $ | 196,495 |   |
|                                                    |       |                    |       |   |   |
| **Gross  profit**                                       |       |                    |       |   |   |
| Product                                                 |       | $                       | 82,271     |   | $ | 69,196 |   |
| Service                                                 |       | 14,620                  |       | 13,666 |   |
| Total gross  profit                                     |       | $                       | 96,894     |   | $ | 82,862 |   |
|                                                    |       |                    |       |   |   |
| **Operating  profit (loss) from continuing operations** |       |                    |       |   |   |
| Total operating  profit from continuing Operations      |       | $                       | 17,994     |   | $ | 10,091 |   |

 

13

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**14.****                   Related PartyTransactions**

 

Unitrin, Inc. andits subsidiaries (“Unitrin”) is a significant shareholder of Intermec, owning contractwith approximately 20% of our outstanding shares. In January 2005, Unitrin’sLife and Health Insurance segment agreed to contract with our subsidiary todevelop the software for the next generation of Life and Health Insurance’shandheld computers. In the quarters ended April 2, 2006, and April 3, 2005,Intermec did not recognize any revenues from this arrangement.

 

**15.****                   Commitments andContingencies**

 

Provisions forestimated expenses related to product warranties are made at the time productsare sold. These estimates are established using historical information on thenature, frequency, and average cost of warranty claims. Management activelystudies trends of warranty claims and takes action to improve product qualityand minimize warranty claims. The following table indicates the change inIntermec’s warranty accrual included in current liabilities (thousands ofdollars):

 
| ** **                                     | ** ** | **Quarter ended**      | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **April 2, 2006** | ** ** | **April 3, 2005** | ** ** |
|                                           |       |                        |       |   |   |
| Beginning  balance                             |       | $                           | 5,542      |   | $ | 4,878 |   |
| Payments                                       |       | (1,892                      | )          | (1,801 | ) |
| Increase in  liability (new warranties issued) |       | 1,864                       |       | 2,177 |   |
| Ending Balance                                 |       | $                           | 5,514      |   | $ | 5,254 |   |

 

Intermec has entered into a variety of agreements withthird parties that include indemnification clauses, both in the ordinary courseof business and in connection with our divestitures of certain product lines.These clauses require Intermec to compensate these third parties for certainliabilities and damages incurred by them.

 

FASB Interpretation No. 45, “Guarantors’ Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others” requires that Intermec estimate and record the fairvalue of guarantees as a liability. Intermec does not believe it has anysignificant exposure related to such guarantees and therefore has not recordeda liability as of April 2, 2006, or December 31, 2005. Intermec has not madeany significant indemnification payments as a result of these clauses, nor doesit believe the fair value of any of these guarantees has a material effect onIntermec’s financial position or results of operations.

 

Intermec is currently, and is from time to time,subject to claims and lawsuits arising in the ordinary course of its business.Intermec believes it has valid defenses with respect to legal matters pendingagainst it. The ultimate resolution of currently pending proceedings is notexpected to have a material adverse effect on Intermec’s financial condition,results of operations or liquidity. Nevertheless, it is possible that cashflows or results of operations could be materially affected in any particularperiod by the unfavorable resolution of one or more of these contingencies orby the creation of significant legal or other expenses related to such matters.

 

On March 10, 2005, Symbol Technologies, Inc. (“Symbol”)terminated its original equipment manufacturing (“OEM”) agreement with Intermecto supply laser scan engines and stopped shipping laser scan engines toIntermec. On March 10, 2005, Symbol filed a lawsuit in the United StatesDistrict Court for the District of Delaware seeking a declaratory judgment thatits termination of the OEM agreement is lawful (the “Contract Case”). Intermecbelieves that the termination of the OEM agreement by Symbol will not have amaterial adverse effect on operations.

 

14

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Also on March 11, 2005, Symbol announced that it hadfiled a lawsuit against Intermec on March 10, 2005, in the United StatesDistrict Court for the District of Delaware for infringement of certain ofSymbol’s wireless technology patent (the “Wireless Case”). On March 23, 2005,Intermec filed its answer to Symbol’s complaint and filed counterclaims againstSymbol for infringing Intermec’s wireless access, terminal and softwarepatents. Intermec simultaneously filed its answer to Symbol’s declaratoryjudgment action in the contract case and filed counterclaims against Symbol forbreach of the OEM agreement.

 

On April 28, 2005, Symbol announced that it had fileda lawsuit against Intermec in the United States District Court for the WesternDistrict of Wisconsin for infringing Symbol’s barcode decoding patents (the “DecodingCase”). On July 14, 2005, in response to a motion by Intermec, the DecodingCase was transferred to the United States District Court for the District ofDelaware. That case has now been consolidated for purposes of discovery withthe Wireless Case. Intermec has denied liability in the Decoding Case andpursuant to the standstill agreement discussed below retains the right to filecounterclaims against Symbol in the Decoding Case.

 

On June 30, 2005, Intermec filed a complaint with theU.S. International Trade Commission (the “ITC”) alleging that Symbol isillegally importing products that infringe Intermec patents that coverpocket-sized handheld computing devices, modular handheld computing devices andrecharging and data exchanging cradles (the “ITC Case”). On July 29, 2005, theITC voted to investigate Intermec’s allegations against Symbol. Pursuant to thestandstill agreement, discussed below, Intermec asked the ITC to dismiss andclose the investigation. On September 26, 2005, in response to Intermec’srequest, the Administrative Law Judge terminated the investigation. On October12, 2005, the ITC entered a Notice Not to Review the Order terminating theinvestigation.

 

The complaints in Wireless Case and Decoding Case donot contain sufficient details for Intermec to assess what Symbol will claimregarding the relationship between its cited patents and Intermec’s products.However, based on Intermec’s analysis of the cited Symbol patents, Intermecbelieves it has substantial defenses to each of those patent infringementclaims and Intermec intends to vigorously defend itself against the claims madein Symbol’s lawsuits.

 

On September 1, 2005, the parties agreed that theywould try to resolve their patent disputes through negotiation. To facilitatethat effort, the parties entered into a standstill agreement pursuant to whichthey sought the court’s permission to postpone litigation activity in the casespending in the U.S. District Court for the District of Delaware (the Contract,Wireless and Decoding Cases) until December 1, 2005, and to postpone filing anynew patent infringement law suits against each other until March 1, 2006. Thestandstill agreement’s only exception to the agreed ban on new lawsuits untilMarch 1, 2006, allows Intermec to file counterclaims against Symbol in theDecoding Case and to file a case in the United States District Court for theDistrict of Delaware alleging infringement by Symbol of the patents asserted byIntermec in the ITC case. According to the standstill agreement these permittedcounterclaims and new action had to have been filed no sooner than December 1,2005, and no later than December 9, 2005. The parties also agreed not to pursueor seek temporary restraining orders, preliminary injunctions or ITC exclusionorders against each other for a period of two years. The United States DistrictCourt for the District of Delaware has granted the scheduling changes requiredto effectuate the standstill agreement of the parties.

 

In December of 2005, the parties agreed to provideadditional time for settlement discussions by extending the schedule set forthin the standstill agreement by a minimum of 120 days. The parties sought theapproval of the United States District Court for the District of Delaware forthe scheduling changes required to postpone litigation activity in the casespending in that court for an additional 120 days. The court has granted thosescheduling changes with respect to the Wireless and Decoding Cases.

 

15

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With respect to the Contract Case, the parties agreedthat Symbol would dismiss without prejudice its declaratory judgment complaintand that Intermec would dismiss without prejudice the breach of contract andpatent infringement counterclaims.  If the parties are unable to reach asettlement, each party will have the right to refile those claims andcounterclaims in the same court.

 

On May 8, 2006, the parties agreed to provideadditional time for settlement discussions by extending the schedule set forthin the standstill agreement by 64 days.

 

**16.****                   Pension andOther Postretirement Benefit Plans**

 

The information inthis note represents the net periodic pension and post-retirement benefit costsand related components in accordance with SFAS 132(R). The components of netpension and postretirement periodic benefit cost (credit) for the three monthsended April 2, 2006, and April 3, 2005, are as follows (thousands of dollars):

 
| **Three Months Ended April 2, 2006,** | ** ** | **U.S. Defined Benefit Plans** | ** ** | **Non-U.S. Defined Benefit  Plans** | ** ** | **Other Postretirement  Benefit Plans** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------|------------|
| **and April 3, 2005:**                          | ** ** | **2006**                                      | ** ** | **2005**                                      | ** ** | **2006**                                          | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service Cost                                                   |       | $                                             | 1,741      |                                          | $          | 2,404                                             |       | $ | 263 |   | $ | 1,269 |   | $ | 4 |   | $ | 34 |   |
| Interest Cost                                                  |       | 2,988                                         |       | 2,520                                         |       | 531                                               |       | 2,548 |   | 66 |   | 1,063 |   |
| Expected return  on plan assets                                |       | (2,508                                        | )          | (2,506                                        | )          | (727                                              | )          | (2,646 | ) | — |   | — |   |
| Amortization and  deferrals:                                   |       |                                          |       |                                          |       |                                              |       |   |   |   |   |   |   |
| Transition asset                                               |       | —                                        |       | —                                        |       | (38                                               | )          | (87 | ) | — |   | — |   |
| Actuarial loss                                                 |       | 1,239                                         |       | 850                                           |       | 108                                               |       | 515 |   | 27 |   | 324 |   |
| Prior service  cost (benefit)                                  |       | 177                                           |       | 179                                           |       | —                                            |       | — |   | — |   | (598 | ) |
| Curtailment loss  (gain)                                       |       | —                                        |       | 57                                            |       | —                                            |       | (5,396 | ) | — |   | (12,274 | ) |
| Settlement gain                                                |       | —                                        |       | —                                        |       | —                                            |       | (332 | ) | — |   | (21,090 | ) |
| Special  termination benefits                                  |       | 675                                           |       | 264                                           |       |                                              |       | — |   |   |   | — |   |
| Net pension and  postretirement periodic benefit cost          |       | $                                             | 4,312      |                                          | $          | 3,768                                             |       | $ | 137 |   | $ | (4,129 | ) | $ | 97 |   | $ | (32,541 | ) |

 

Ourpre-tax loss on the sale of Cincinnati Lamb in the first quarter of 2005 takesinto consideration the curtailment and settlement gains totaling $39.1 million,comprising $33.4 million relating to the postretirement benefit plans, and $5.7million relating to the Non-U.S. Defined Benefit Plans. These curtailment andsettlement gains comprise the pension and post-retirement obligations assumedby the buyer. In addition, the pre-tax loss on the sale of Cincinnati Lambincludes a loss of $12.9 million representing the cumulative adjustment torecognize the minimum pension liability of our Non-U.S. defined benefit plans,which prior to the sale, had been deferred in the other comprehensive losscomponent of shareholders’ investment in our consolidated balance sheets.

 

Duringthe three months ended April 2, 2006, we contributed approximately $1.7 millionto our pension and other postretirement benefit plans, comprising $0.5 millionin benefits paid pertaining to unfunded U.S. defined benefit plans, $0.5million in matching contributions to its 401(k) plan, $0.6 million incontributions to its foreign pension plans, and $0.1 million in benefits paidpertaining to its other postretirement benefits plans. We expect to contributean additional $4.0 million to these plans during the remainder of 2006, ofwhich $1.7 million relates to benefit payments on our unfunded U.S. definedbenefit plans, $1.2 million in matching contributions to our 401(k) plan, $0.8million in contributions to our foreign pension plans and $0.3 million inbenefit payments pertaining to our other postretirement benefit plans.

 

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**17.****                   RecentAccounting Pronouncements**

# ** **

In May 2005, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 154, “Accounting Changes and ErrorCorrections, a replacement of Accounting Principles Board (“APB”) OpinionNo. 20 and FASB Statement No. 3” (“SFAS No. 154”). SFASNo. 154 requires retrospective application to prior periods’ financialstatements of a voluntary change in accounting principle unless it isimpracticable. APB Opinion No. 20, “Accounting Changes,” previouslyrequired that most voluntary changes in accounting principle be recognized byincluding in net income of the period of the change the cumulative effect ofchanging to the new accounting principle. SFAS No. 154 became effectivefor us on January 1, 2006. The adoption of SFAS No. 154 did not havea material impact on our consolidated financial statements.

 

Effective January 1,2006, we adopted SFAS No. 123(R), “Share-Based Payment”, using themodified prospective application transition method. Because the fair valuerecognition provisions of SFAS No. 123 and SFAS No. 123(R) werematerially consistent under our equity plans, the adoption of SFASNo. 123(R) did not have a significant impact on our financial position orour results of operations. Prior to our adoption of SFAS No. 123(R),benefits of tax deductions in excess of recognized compensation costs werereported as operating cash flows. SFAS No. 123(R) requires excess taxbenefits be reported as a financing cash inflow rather than as a reduction oftaxes paid.

 

In November 2005, theFASB issued Staff Position (“FSP”) FAS123(R)-3, Transition Election toAccounting for the Tax Effects of Share-Based Payment Awards. This FSP requiresan entity to follow either the transition guidance for theadditional-paid-in-capital pool as prescribed in SFAS No. 123(R),Share-Based Payment, or the alternative transition method as described in theFSP. An entity that adopts SFAS No. 123(R) using the modified prospectiveapplication may make a one-time election to adopt the transition method describedin this FSP. An entity may take up to one year from the later of its initialadoption of SFAS No. 123(R) or the effective date of this FSP to evaluateits available transition alternatives and make its one-time election. This FSPbecame effective in November 2005. We continue to evaluate the impact that theadoption of this FSP could have on our financial statements.

 

In February 2006, theFASB issued Staff Position (“FSP”) FAS123(R)-4, Classificationof Options and Similar Instruments Issued as Employee Compensation That Allowfor Cash Settlement upon the Occurrence of a Contingent Event. This FSPaddresses the classification of options and similar instruments issued asemployee compensation that allow for cash settlement upon the occurrence of a contingentevent. We have evaluated the impact of this FSP and do not expect it to have amaterial impact on our financial statements.

 

In November 2005, theFASB issued FASB Staff Position (“FSP”) No. FAS 115-1 and FAS 124-1, “TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments,” which addresses the determination as to when an investment isconsidered impaired, whether that impairment is other than temporary, and themeasurement of an impairment loss.  This FSP also includes accountingconsiderations subsequent to the recognition of an other-than-temporaryimpairment and requires certain disclosures about unrealized losses that havenot been recognized as other-than-temporary impairments. The guidance in thisFSP amends SFAS No. 115, Accounting for Certain Investments in Debt and EquitySecurities, and SFAS No. 124, Accounting for Certain Investments Held byNot-for-Profit Organizations, and APB Opinion No. 18, The Equity Method ofAccounting for Investments in Common Stock. This FSP became effective for us inthe first quarter of 2006. The adoption of this Statement did not have amaterial impact on our financial condition or results of operations.

 

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**ITEM 2.**** MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

# **SpecialNote About Forward-Looking Statements**

 

**Forward-Looking Statements andRisk Factors**

 

Forward-lookingstatements contained in this filing are subject to the safe harbor created bythe Private Securities Litigation Reform Act of 1995 (alternatively: Section27A of the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934) and are dependent upon a variety of important factors that couldcause actual results to differ materially from those reflected in suchforward-looking statements. These factors include but are not limited toIntermec’s ability to maintain or to improve the revenues and profits of itscontinuing operations, maintain or reduce expenses, maintain or improveoperational efficiency, use its investment in research and development togenerate future revenue, maintain or improve year-over-year growth in therevenues and profits of its continuing operations and the other factorsdescribed in Part I, Item 2 and Part II, Item 1A of this filing. Intermecundertakes no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events, changedcircumstances or any other reason after the date of this quarterly report.

 

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

 

Forward-lookingstatements are not guarantees of future performance. A number of factors canimpact Intermec’s business and determine whether Intermec can or will achieveany forward-looking statement made in this report. Any one of these factorscould cause Intermec’s actual results to differ materially from those discussedin a forward-looking statement. Intermec outlines these risk factors in reportsthat it files with the SEC, in press releases and on its website,www.intermec.com.

 

Readers of this reportare encouraged to review the Risk Factors portion of Part II, Item 1A of thisfiling which discusses the risk factors associated with Intermec’s business.

 

# **Overview**

 

Continuing Operations

 

Effective January 1,2006, Intermec changed its name from UNOVA, Inc. to Intermec, Inc. (“Intermec”).Intermec designs, develops, manufactures, integrates, sells, resells andservices wired and wireless automated identification and data collection (“AIDC”)products and systems, mobile computing products and systems, wired and wirelessbar code printers, label media and RFID (radio frequency identification)products and systems. Intermec’s products and services are used by customerswithin and outside of the United States to improve the productivity, qualityand responsiveness of their business operations including supply chainmanagement, enterprise resource planning and field sales and service. Customersfor Intermec’s products and services operate in market segments that includemanufacturing, warehousing, direct store delivery, retail, consumer packagedgoods, field service, government, and transportation and logistics.

 

Intermec’s strategy consistsof: technology leadership in the AIDC industry; expanding, strengthening andleveraging Intermec’s AIDC intellectual property portfolio; expanding andstrengthening Intermec’s AIDC product portfolio; providing integrated AIDCsolutions; partnering with global industry leaders; achieving economies ofscale and scope; profitably increasing market share; and increasing the scaleof the business.

 

Intermec’s strategy isfocused on customers in certain vertical markets, including: retailers;consumer goods manufacturers; industrial goods manufacturers; transportationand logistics providers; and government agencies.

 

Intermec’s strategy isalso focused on certain application markets, including: warehouse anddistribution center operations; retail store operations; retail storemanagement; in-transit visibility; field service; manufacturing operations;direct store delivery; and RFID supply chain.

 

Discontinued Operations

 

In 2005, Intermecdivested its Industrial Automation Systems (IAS) businesses, which comprisedthe Cincinnati Lamb and Landis Grinding Systems divisions. The IAS businessesare classified as discontinued operations for accounting purposes in Intermec’sconsolidated financial statements and related notes. The IAS businesses areproducers of manufacturing products and services, including integratedmanufacturing systems, machining systems, stand-alone machine tools andprecision grinding and abrasives operations primarily serving the globalaerospace, automotive, off-road vehicle and diesel engine industries as well asthe industrial components, heavy equipment and general job shop markets.

 

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# **Resultsof Operations**

# ** **

The following discussioncompares the Company’s results of operations for the fiscal quarter ended April2, 2006 and April 3, 2005. Results from continuing operations include theoperations of Intermec Technology and Corporate expenses. The operating resultsof the IAS business are classified as discontinued operations. Results of operationswere as follows (millions of dollars): 

 
| ** **                                               | ** ** | **Quarter Ended**    | ** ** |
|----------------------------------------------------------|------------|---------------------------|------------|
| ** **                                               | ** ** | **April 2,****2006** |       | **April 3,****2005** |   |
|                                                     |       |                      |       |   |   |
| Revenues:                                                |       |                      |       |   |   |
| Product and  service                                     |       | $                         | 203.8      |   | $ | 196.5 |   |
| Intellectual  property settlements                       |       | 23.0                      |       | — |   |
| Total revenues                                           |       | 226.8                     |       | 196.5 |   |
|                                                     |       |                      |       |   |   |
| Costs and  expenses:                                     |       |                      |       |   |   |
| Cost of product  and service revenues                    |       | 123.4                     |       | 113.6 |   |
| Cost of  intellectual property settlements               |       | 6.5                       |       | — |   |
| Selling, general  and administrative                     |       | 77.8                      |       | 72.8 |   |
| Restructuring  charge                                    |       | 1.1                       |       | — |   |
| Total costs and  expenses                                |       | 208.8                     |       | 186.4 |   |
|                                                     |       |                      |       |   |   |
| Operating profit  from continuing operations             |       | 18.0                      |       | 10.1 |   |
|                                                     |       |                      |       |   |   |
| Interest income  (expense)                               |       | 1.1                       |       | (2.1 | ) |
|                                                     |       |                      |       |   |   |
| Earnings from  continuing operations before income taxes |       | 19.1                      |       | 8.0 |   |
|                                                     |       |                      |       |   |   |
| Provision for  income taxes                              |       | 4.0                       |       | 2.6 |   |
|                                                     |       |                      |       |   |   |
| Earnings from  continuing operations, net of tax         |       | 15.1                      |       | 5.4 |   |
|                                                     |       |                      |       |   |   |
| Loss from  discontinued operations, net of tax           |       | (1.1                      | )          | (1.9 | ) |
|                                                     |       |                      |       |   |   |
| Net earnings                                             |       | $                         | 14.0       |   | $ | 3.5 |   |

 

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*Revenues*

 

Revenuesby category and as a percentage of related revenues from continuing operationsfor the quarters ended April 2, 2006 and April 3, 2005 were as follows(millions of dollars):

 
| ** **                        | ** ** | **Quarter Ended**      | ** ** | ** **                  | ** ** | ** ** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|-----------------------------|------------|------------|------------|
| ** **                        | ** ** | **April 2, 2006** | ** ** | **April 3, 2005** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | ** **                  | ** ** | **Percent of**         | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                        | ** ** | **Amount**                  | ** ** | **Revenues**                | ** ** | **Amount** | ** ** | **Revenues** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Revenues:                         |       |                        |       |                        |       |       |       |   |   |   |   |   |   |
| Product                           |       | $                           | 166.3      |                        | 73.3       | %          | $          | 161.9 |   | 82.4 | % | $ | 4.4 |   | 2.7 | % |
| Service                           |       | 37.5                        |       | 16.5                        | %          | 34.6       |       | 17.6 | % | 2.9 |   | 8.5 | % |
| Intellectual  Property Settlement |       | 23.0                        |       | 10.2                        | %          | —     |       | 0.0 | % | 23.0 |   | — |   |
| Total Revenues                    |       | $                           | 226.8      |                        | 100.0      | %          | $          | 196.5 |   | 100.0 | % | $ | 30.3 |   | 15.4 | % |

 

Quarterly revenue growthof 15.4% was primarily attributable to the intellectual property settlement andSystems and Solutions revenue growth of 7.4% compared to the prior year period.Product revenues for the quarter ended April 2, 2006 increased 2.7% comparedwith the corresponding prior-year period as a result of the strong Systems andSolutions revenue growth partially offset by the 9.9% decrease for Printer/Mediaproducts. Service revenue increased 8.5% over the corresponding prior-yearperiod principally from the technical engineering services for governmentcontracts, as a result of AIT III. Geographically, products and service revenuein North America rose 18.8% over the corresponding prior-year period,offsetting decreases of 16.9% and 9.0% in Europe, Middle East and Africa (“EMEA”)and the rest of the world, respectively. Approximately half of the decrease inEMEA revenue is attributable to unfavorable foreign exchange rates and theremainder of the decrease is primarily a result of the regional economicweakness compounded by the European compliance regulations to eliminatehazardous material from electronic products.

 

Intermec operatingresults for the quarter ended April 2, 2006 include $23.0 million of revenueand $16.5 million of operating profit from compensation related to a settlementregarding certain of the Company’s intellectual property (“IP Settlement”).This IP Settlement represents the last of the laptop computer manufacturers tosettle with the Company regarding its battery power-management patents.

 

*Gross Profit*

 

Gross profit and grossmargin by revenue category for the quarter ended April 2, 2006 and April 3,2005 were as follows (millions of dollars):

 
| ** **                           | ** ** | **Quarter Ended**      | ** ** |
|--------------------------------------|------------|-----------------------------|------------|
| ** **                           | ** ** | **April 2, 2006** | ** ** | **April 3, 2005** | ** ** |
| ** **                           | ** ** | **Gross Profit**       | ** ** | **Gross Margin** | ** ** | **Gross Profit** | ** ** | **Gross Margin** | ** ** |
|                                 |       |                        |       |   |   |   |   |   |   |
| Product                              |       | $                           | 65.8       |   | 39.6 | % | $ | 69.2 |   | 42.7 | % |
| Service                              |       | 14.6                        |       | 39.0 | % | 13.7 |   | 39.6 | % |
| Intellectual  Property Settlement    |       | 16.5                        |       | 71.9 | % | — |   |   |   |
| Total Gross  Profit and Gross Margin |       | $                           | 96.9       |   | 42.7 | % | $ | 82.9 |   | 42.2 | % |

 

The total gross profitfor the quarter ended April 2, 2006 increased $14.0 million, or 16.9% comparedto the corresponding prior-year period. The increase in gross profit primarilyresults from the $16.5 million in gross profit from the intellectual propertysettlement partially offset by the reduction in product related gross profit.Product gross margin for the quarter ended April 2, 2006 decreased 3 percentagepoints. The reduction in product gross

 

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margin is due to theunfavorable change in foreign exchange rates, an increase in mix of lowermargin enterprise business, and the mix of the growth in the various salesregions.

 

*Selling, General and Administrative*

 

The total selling,general and administrative (“SG&A”) expenses were $77.8 million and $72.8million for the quarters ended April 2, 2006 and April 3, 2005, respectively.The $5.0 million increase in Intermec’s SG&A expense is attributable to the$2.6 million incremental investment in research and development activities and$1.9 million in stock option expense recognized as a result of the adoption SFAS123(R). Intermec’s R&D expense as a percentage of product and servicerevenues increased to 8.9% for the quarter ended April 2, 2006 compared with7.9% for the corresponding prior-year period.

 

*Restructuring Charge*

 

In March 2006, Intermecannounced its plan to close its design centers in Goteborg and Lund, Sweden.The activities currently assigned to the design centers in Sweden will bereassigned to other parts of Intermec or moved to third-party vendors toimprove efficiencies and benefit from reduced cost. In addition to anticipatedcost savings, this realignment of resources is expected to result in asignificant increase in new product development capacity. The total cost ofclosing the design centers in Sweden and the elimination of approximately 65positions in Sweden is estimated to be approximately $5 million. Estimatedrestructuring costs include employee severance, facility closure and other exitcosts. The Company recorded a restructuring charge of $1.1 million for employeetermination costs in the first quarter of 2006, and anticipates the majority ofthe remaining restructuring costs will be recognized over the remainder of2006. Intermec estimates that the savings from these restructuring activitieswill begin in the fourth quarter of 2006, and reach its estimated annualpre-tax savings of $8 million by the first quarter of 2007.

 

*Operating Profit*

 

Intermec operating profitfrom continuing operations for the quarter ended April 2, 2006, increased $7.9million, or 78.3%, compared with the corresponding prior-year period. Theoperating results for the first quarter 2006 include the IP Settlement, whichfavorably impacted operating profit by $16.5 million. The restructuring chargein the quarter related to the closure of the Swedish design centers negativelyimpacted operating profit by $1.1 million. In the first quarter of 2006, theCompany adopted SFAS No. 123(R), Share-Based Payment, which resulted in therecognition of $1.9 million in expense related to stock options and theemployee stock purchase plan. Operating profit was negatively impacted in thefirst quarter of 2006 compared to the prior year period by incremental researchand development expense of $2.6 million and lower gross margins for product andservice revenue.

 

*Interest, Net*

 

Net interest income was$1.1 million for the quarter ended April 2, 2006 compared to interest expenseof $2.1 million for the corresponding prior-year period. The $3.2 millionimprovement in net interest reflects the reduction in the outstanding debtbalance, the increase in average cash, cash equivalent and short-terminvestment balances as well as higher investment returns.

 

*Provision for Income Taxes*

 

The tax provision for thequarter ended April 2, 2006 reflects an effective tax rate for continuingoperations of 21.3% compared to a U.S. statutory rate of 35%. The tax provisionfor the 2006 first quarter was reduced by $2.2 million due to the favorableconclusion of a Canadian tax audit. 

 

The tax provision for thequarter ended April 3, 2005 reflects an effective tax rate for continuingoperations of 32.1% compared to a U.S. statutory rate of 35%. The reduction inthe effective tax rate is primarily due to favorable foreign currency exchangevariance associated with foreign tax contingency accruals.

 

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*Loss from Discontinued Operations*

 

During 2005, Intermeccompleted its divestiture of the IAS businesses with the sale of the CincinnatiLamb business in the first quarter of 2005 and the sale of the Landis GrindingSystems business in the fourth quarter of 2005. The loss from discontinuedoperations for the three months ended April 2, 2006 include period expensesrelated to finalizing the sale of the Landis Grinding Systems and changes tothe estimated purchase price adjustment, net of tax benefits.

 

The operating loss fromdiscontinued operations for the three months ended April 3, 2005, includes theoperating results of the Cincinnati Lamb and Landis Grinding Systems businessesas well as the loss on the sale of Cincinnati Lamb, net of related taxbenefits.

 

**Liquidity and Capital Resources**

 

The Company’s cash, cashequivalents and short-term investments as of April 2, 2006, totaled $283million. Operating activities of continuing operations for the first quarter of2006 provided $44 million of cash flow, primarily due to the $15 million fromnet earnings, which includes the IP Settlement, and $25 million from the netreduction of the accounts receivable balance. Investing activities ofcontinuing operations for the first quarter of 2006 used $24 million primarilyfor the purchase of short-term investments totaling $20 million and $4 millionfor capital expenditures. Financing activities of continuing operations reflectthe $6 million of proceeds from stock option and other related stock awardsduring the first quarter of 2006.

 

The Company hasundertaken a review of employee compensation and benefits, with the desire ofaligning the compensation structure, benefit plans and programs with trendstypical of the Intermec’s industry. The Company has made changes and expects tomake further changes in the overall mix of compensation and benefit programs,and in the terms of such programs. Management believes that the aggregateeffect of these changes will not have a material effect on the financialresults or liquidity of the Company.

 

Net of outstandingletters of credit and limitations on minimum availability, the Company hadborrowing capacity at April 2, 2006, of $18 million under the RevolvingFacility. The Company made no borrowings under the Revolving Facility during thefirst quarter of 2006, and as of April 2, 2006, no borrowings were outstandingunder the Revolving Facility. As of April 2, 2006, the Company was incompliance with the financial covenants of each of these agreements.

 

The key terms of theRevolving Facility are as follows:

 

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

 

•                        Borrowings under the RevolvingFacility 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 onconsolidated 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.

 

•                        The Revolving Facility placescertain restrictions on the ability of the Company and its subsidiaries toconsolidate or merge, make acquisitions, create liens, incur additionalindebtedness or dispose of assets.

 

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

 

The Company has $100.0 millionof ten-year senior unsecured debt outstanding as of April 2, 2006. Interestpayments at 7.0% are due semi-annually in March and September. Includingunderwriting fees, discounts and other issuance costs, the effective interestrates is 7.175%.

 

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Management believes thatcash and cash equivalents on hand, combined with projected cash flow fromoperations, assets held for sale and available borrowings under the Company’sRevolving Facility will be sufficient to fund the Company’s operations,research and development efforts, anticipated capital expenditures,liabilities, commitments, and other capital requirements, for at least the nexttwelve months.

 

**ContractualObligations**

 

TheCompany’s contractual commitments as of April 2, 2006, have not changed materially from those disclosed in Item 7 of theCompany’s annual report on Form 10-K for the year ended December 31, 2005**.**

 

**CriticalAccounting Policies**

 

“Management’sDiscussion and Analysis of Financial Condition and Results of Operations”discusses the Company’s consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, the disclosure of contingent assets and liabilities,and the reported amounts of revenues and expenses. Actual amounts could differfrom those estimates under different assumptions or conditions. Management’sbeliefs regarding significant accounting policies have not changedsignificantly from those disclosed in Item 7 of the Company’s annual report onForm 10-K for the year ended December 31, 2005.

 

TheCompany’s consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States. Thepreparation of these financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities, and the reported amounts ofrevenues and expenses. Actual amounts could differ from those estimates underdifferent assumptions or conditions. Significant estimates and assumptions wereused to determine the provisions for uncollectible accounts receivable, excessand obsolete inventory, tax valuation allowances, recoverability of intangibleassets, warranty costs, retiree medical and pension obligations, estimated netrealizable value of assets held for sale and litigation loss contingencies.Despite these inherent limitations, management believes that Management’sDiscussion and Analysis of Financial Condition and Results of Operations (“MD&A”)and the financial statements and related footnotes provide a meaningful andfair perspective of the Company. Management’s beliefs regarding significantaccounting policies have not changed significantly from those disclosed in Item7 of the Company’s annual report on Form 10-K for the year endedDecember 31, 2005.

 

**NewAccounting Pronouncements**

 

In May 2005, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 154, “Accounting Changes and ErrorCorrections, a replacement of Accounting Principles Board (“APB”) OpinionNo. 20 and FASB Statement No. 3” (“SFAS No. 154”). SFASNo. 154 requires retrospective application to prior periods’ financialstatements of a voluntary change in accounting principle unless it isimpracticable. APB Opinion No. 20, “Accounting Changes,” previouslyrequired that most voluntary changes in accounting principle be recognized byincluding in net income of the period of the change the cumulative effect ofchanging to the new accounting principle. SFAS No. 154 became effectivefor us on January 1, 2006. The adoption of SFAS No. 154 did not havea material impact on our consolidated financial statements.

 

Effective January 1,2006, we adopted SFAS No. 123(R), “Share-Based Payment”, using themodified prospective application transition method. Because the fair valuerecognition provisions of SFAS No. 123 and SFAS No. 123(R) werematerially consistent under our equity plans, the adoption of SFASNo. 123(R) did not have a significant impact on our financial position orour results of operations. Prior to our adoption of SFAS No. 123(R),benefits of tax deductions in excess of recognized compensation costs werereported as operating cash flows. SFAS No. 123(R) requires excess tax benefitsbe reported as a financing cash inflow rather than as a reduction of taxespaid.

 

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

 

In February 2006, theFASB issued Staff Position (“FSP”) FAS123(R)-4, Classificationof Options and Similar Instruments Issued as Employee Compensation That Allowfor Cash Settlement upon the Occurrence of a Contingent Event. This FSPaddresses the classification of options and similar instruments issued asemployee compensation that allow for cash settlement upon the occurrence of acontingent event. We have evaluated the impact of this FSP and do not expect itto have a material impact on our financial statements.

 

In November 2005, theFASB issued FASB Staff Position (“FSP”) No. FAS 115-1 and FAS 124-1, “TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments,” which addresses the determination as to when an investment isconsidered impaired, whether that impairment is other than temporary, and themeasurement of an impairment loss.  This FSP also includes accountingconsiderations subsequent to the recognition of an other-than-temporaryimpairment and requires certain disclosures about unrealized losses that have notbeen recognized as other-than-temporary impairments. The guidance in this FSPamends SFAS No. 115, Accounting for Certain Investments in Debt and EquitySecurities, and SFAS No. 124, Accounting for Certain Investments Held byNot-for-Profit Organizations, and APB Opinion No. 18, The Equity Method ofAccounting for Investments in Common Stock. This FSP became effective for us inthe first quarter of 2006. The adoption of this Statement did not have amaterial impact on our financial condition or results of operations.

 

 

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alternatives and make its one-time election. ThisFSP became effective in November 2005. We continue to evaluate the impact thatthe adoption of this FSP could have on our financial statements.

 

InNovember 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 115-1 andFAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Applicationto Certain Investments,” which addresses the determination as to when aninvestment is considered impaired, whether that impairment is other thantemporary, and the measurement of an impairment loss.  This FSP alsoincludes accounting considerations subsequent to the recognition of another-than-temporary impairment and requires certain disclosures aboutunrealized losses that have not been recognized as other-than-temporaryimpairments. The guidance in this FSP amends SFAS No. 115, Accounting forCertain Investments in Debt and Equity Securities, and SFAS No. 124, Accountingfor Certain Investments Held by Not-for-Profit Organizations, and APB OpinionNo. 18, The Equity Method of Accounting for Investments in Common Stock. ThisFSP becomes effective for Intermec in the first quarter of 2006. Intermec doesnot expect the adoption of this Statement to have a material impact on itsfinancial condition or results of operations.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

The Company is exposed tointerest rate risk primarily from its short-term and long-term borrowings and toforeign exchange rate risk with respect to its foreign operations and fromforeign currency transactions.

 

Due to its globaloperations, the Company’s cash flows and earnings are exposed to foreignexchange rate fluctuations. When appropriate, the Company may attempt to limitits exposure to changing foreign exchange rates by entering into short-termforeign currency exchange contracts. As of April 2, 2006, the Company heldshort-term contracts for the purpose of hedging foreign currency cash flowswith an aggregate notional amount of $175.9 million.

 

Except as noted in thepreceding paragraph, as of April 2, 2006, there have been no material changesin information provided in Item 7A of the Company’s annual report on Form 10-Kfor the year ended December 31, 2005, which contains a complete discussion ofthe Company’s material exposures to interest rate and foreign exchange raterisks.

 

### **ITEM4. CONTROLS AND PROCEDURES**

### ** **

The Company maintainsdisclosure controls and procedures, which are designed to ensure thatinformation required to be disclosed in the reports the Company files orsubmits under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms, and that such informationis accumulated and communicated to Company management, including the ChiefExecutive Officer, or CEO, and Chief Financial Officer, or CFO, as appropriateto allow timely decisions regarding required disclosure.

 

Under the supervision andwith the participation of Company management, including the CEO and CFO, anevaluation was performed on the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures as of the end of the periodcovered by this quarterly report. Based on that evaluation, Company management,including the CEO and CFO, concluded that the Company’s disclosure controls andprocedures were effective as of April 2, 2006.

 

An evaluation was alsoperformed under the supervision and with the participation of Companymanagement, including the CEO and CFO, of any change in the Company’s internalcontrols over financial reporting that occurred during the last fiscal quarterand that has materially affected, or is reasonably likely to materially affect,the Company’s internal controls over financial reporting. That evaluation didnot identify any change in the Company’s internal controls over financialreporting that occurred during the latest fiscal quarter and that hasmaterially affected, or is reasonably likely to materially affect, the Company’sinternal controls over financial reporting.

 

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## **PARTII. OTHER INFORMATION**

## ** **

**ITEM 1. LEGAL PROCEEDINGS**

 

Intermec is currently,and is from time to time, subject to claims and suits arising in the ordinarycourse of its business. Intermec believes it has valid defenses with respect tolegal matters pending against it. The ultimate resolution of currently pendingproceedings is not expected to have a material adverse effect on Intermec’sfinancial condition, results of operations or liquidity.  Nevertheless, it is possible that cash flowsor results of operations could be materially affected in any particular periodby the unfavorable resolution of one or more of these contingencies or by thecreation of significant legal or other expenses related to such matters.

 

On March 10, 2005,Symbol Technologies, Inc. (“Symbol”) terminated its original equipmentmanufacturing (“OEM”) agreement with Intermec to supply laser scan engines andstopped shipping laser scan engines to Intermec. On March 10, 2005, Symbolfiled a lawsuit in the United States District Court for the District ofDelaware seeking a declaratory judgment that its termination of the OEMagreement is lawful (the “Contract Case”). Intermec believes that thetermination of the OEM agreement by Symbol will not have a material adverseeffect on operations.

 

Also on March 11,2005, Symbol announced that it had filed a lawsuit against Intermec on March 10,2005, in the United States District Court for the District of Delaware forinfringement of certain of Symbol’s wireless technology patent (the “WirelessCase”). On March 23, 2005, Intermec filed its answer to Symbol’s complaintand filed counterclaims against Symbol for infringing Intermec’s wirelessaccess, terminal and software patents. Intermec simultaneously filed its answerto Symbol’s declaratory judgment action in the contract case and filedcounterclaims against Symbol for breach of the OEM agreement.

 

On April 28, 2005,Symbol announced that it had filed a lawsuit against Intermec in the UnitedStates District Court for the Western District of Wisconsin for infringingSymbol’s barcode decoding patents (the “Decoding Case”). On July 14, 2005,in response to a motion by Intermec, the Decoding Case was transferred to theUnited States District Court for the District of Delaware. That case has nowbeen consolidated for purposes of discovery with the Wireless Case. Intermechas denied liability in the Decoding Case and pursuant to the standstillagreement discussed below retains the right to file counterclaims againstSymbol in the Decoding Case.

 

On June 30, 2005,Intermec filed a complaint with the U.S. International Trade Commission (the “ITC”)alleging that Symbol is illegally importing products that infringe Intermecpatents that cover pocket-sized handheld computing devices, modular handheldcomputing devices and recharging and data exchanging cradles (the “ITC Case”).On July 29, 2005, the ITC voted to investigate Intermec’s allegationsagainst Symbol. Pursuant to the standstill agreement, discussed below, Intermecasked the ITC to dismiss and close the investigation. On September 26,2005, in response to Intermec’s request, the Administrative Law Judgeterminated the investigation. On October 12, 2005, the ITC entered aNotice Not to Review the Order terminating the investigation.

 

The complaints inWireless Case and Decoding Case do not contain sufficient details for Intermec toassess what Symbol will claim regarding the relationship between its citedpatents and Intermec’s products. However, based on Intermec’s analysis of thecited Symbol patents, Intermec believes it has substantial defenses to each ofthose patent infringement claims and Intermec intends to vigorously defenditself against the claims made in Symbol’s lawsuits.

 

On September 1,2005, the parties agreed that they would try to resolve their patent disputesthrough negotiation. To facilitate that effort, the parties entered into astandstill agreement pursuant to which they sought the court’s permission topostpone litigation activity in the cases pending in the U.S. District Courtfor the District of Delaware (the Contract, Wireless and Decoding Cases) until December 1,2005, and to postpone filing any new patent infringement law suits against eachother until March 1, 2006. The standstill agreement’s only exception tothe agreed ban on new lawsuits until March 1, 2006, allows Intermec tofile counterclaims against Symbol in the Decoding Case and to file a case inthe United States District Court for the District of Delaware alleginginfringement by Symbol of the patents asserted by Intermec in the ITC case.According to the standstill agreement these permitted counterclaims and newaction had to have been filed no sooner than December 1, 2005, and nolater than December 9, 2005.  Theparties also agreed not to pursue or seek temporary restraining orders,preliminary injunctions or ITC exclusion orders against each other for a periodof two years. The United States District Court for the District of Delaware hasgranted the scheduling changes required to effectuate the standstill agreementof the parties.

 

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In December of 2005,the parties agreed to provide additional time for settlement discussions byextending the schedule set forth in the standstill agreement by a minimumof 120 days.  The parties sought theapproval of the United States District Court for the District of Delaware forthe scheduling changes required to postpone litigation activity in the casespending in that court for an additional 120 days.  The court has granted those schedulingchanges with respect to the Wireless and Decoding Cases.

 

With respect to theContract Case, the parties agreed that Symbol would dismiss without prejudiceits declaratory judgment complaint and that Intermec would dismiss withoutprejudice the breach of contract and patent infringement counterclaims. If the parties are unable to reach a settlement, each party will have the rightto refile those claims and counterclaims in the same court.

 

On May 8, 2006, theparties agreed to provide additional time for settlement discussions byextending the schedule set forth in the standstill agreement by 64 days.

 

During the first quarterof 2006, Intermec settled a patent dispute with Hewlett-Packard regardingpatents owned by Intermec.  Intermec’spatents involved itssmart battery management technology in which a portable computer incorporates arechargeable battery that uses a processor chip to communicate data to theportable computer so that the computer can monitor and regulate batteryuse.  The effective date of thissettlement was February 27, 2006 and the terms are confidential.  The operating profit from this settlement,net of attorneys’ fees and costs, is $16.5 million for first quarter of2006.  The parties agreed to dismiss withprejudice cases pending in the United States District Court for the CentralDistrict of California (Western Division) and in the District Court of HarrisCounty, Texas.  The parties to thesecases were Intermec, Inc. (formerly UNOVA, Inc.) and Intermec IPCorp. on the one hand, and Hewlett-Packard Company (in the Texas case, onbehalf of the former Compaq Computer Corporation) on the other.

 

**ITEM1A. RISK FACTORS**

** **

**Forward-LookingStatements and Risk Factors**

** **

Forward-lookingstatements contained in this filing are subject to the safe harbor created bythe Private Securities Litigation Reform Act of 1995 (alternatively: Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934) and are dependent upon a variety of important factors that couldcause actual results to differ materially from those reflected in such forward-lookingstatements. These factors include but are not limited to Intermec’s ability tomaintain or to improve the revenues and profits of its continuing operations,maintain or reduce expenses, maintain or improve operational efficiency, useits investment in research and development to generate future revenue, maintainor improve year-over-year growth in the revenues and profits of its continuingoperations and the other factors described in Item 1A and Item 7 of thisfiling. Intermec undertakes no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents, changed circumstances or any other reason after the date of this annualreport.

 

Suchforward-looking statements involve and are dependent upon certain risks anduncertainties. When used in this document and in documents it references, thewords “anticipate,” “believe,” “will,” “intend,” “project” and “expect” andsimilar expressions as they relate to Intermec or its management are intendedto identify such forward-looking statements.

 

Forward-lookingstatements are not guarantees of future performance. A number of factors canimpact Intermec’s business and determine whether Intermec can or will achieveany forward-looking statement made in this report. Any one of these factorscould cause Intermec’s actual results to differ materially from those discussedin a forward-looking statement. Intermec outlines these risk factors in reportsthat it files with the SEC, in press releases and on its website,www.intermec.com.

 

Readersof this report are encouraged to review the Risk Factors portion of Item 1A ofthis filing which discusses the risk factors associated with Intermec’sbusiness.

 

•       ***Rapidtechnological change might render Intermec’s products obsolete.*******Customer requirements for automated identification and datacapture (AIDC) products, systems and services are rapidly evolving. To keep upwith new customer requirements and to distinguish itself from competitors, theCompany 

 

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mustinvest in research and development (R&D). Because of the fast pace ofinnovation and product development in the AIDC industry, Intermec’s productsand services are often obsolete before the patents related to them expire, andsometimes are obsolete before the patents related to them are even granted.There is no assurance that Intermec will be able to make sufficient investmentsin R&D to keep up with technological change in the AIDC industry or that suchinvestments will result in competitive products and systems. Intermec’s futuregrowth and the results of its operations could be materially and adverselyimpacted if it does not adequately invest in R&D or if its R&Dinvestments do not yield marketable technological improvements or if thoseimprovements are not completed in time to meet the market window.

 

•       ***Technologicalconvergence could intensify competition in some of Intermec’s target markets.***A number offirms have developed handheld mobile computing and communication devices suchas personal digital assistants and cellphones for light-duty consumer andbusiness applications. Improvements in the computing power, the communicationcapabilities or the ruggedness of these devices might make them attractive substitutesfor some of the products that Intermec has developed for AIDC applications. Torespond to such technological convergence, Intermec must improve its AIDCproducts and systems by investing in R&D. There is no assurance thatIntermec will be able to make sufficient investments in R&D to keep up withtechnological convergence or that such investments will result in competitiveproducts and systems. If Intermec is not able to respond to such technologicalconvergence with competitive improvements in its products and systems, itssales, profits, results of operations and future growth could be materially andadversely affected.

 

•       ***Rapidtechnological change or technological convergence could hurt results ofoperations by rendering Intermec’s inventories obsolete.*** Rapidtechnological change or technological convergence could cause Intermec to haveexcess and/or obsolete inventory. In such event, Intermec might have to sellall or a portion of the excess and/or obsolete products or parts atsubstantially lower prices than originally planned, or write off the carryingvalue of all or a portion of the excess and/or obsolete inventory. This couldmaterially and adversely impact Intermec’s revenues, gross profit margins andresults of operations.

 

•          ***Ifthe market for Intermec’s RFID products and systems does not develop as wecurrently anticipate,  Intermec’s sales,revenues,  results of operations andgrowth could be adversely affected. *** There is significant uncertainty about thevolume and the timing of demand for RFID products and systems in the verticalmarkets and applications targeted by Intermec. There is no assurance that demand for RFID products and systems inIntermec’s target markets will achieve the levels currently anticipated at thetimes currently projected by Intermec. RFID customers typically use pilot programs, qualification processes andcertification processes to decide which vendor’s equipment and system topurchase.  There is no assurance thatIntermec will be successful in these programs or processes.  The purchase decisions of some RFID customers(e.g., Wal Mart and the U.S. Department of Defense) influence the purchasedecisions of other customers.  There is noassurance that any of these influential customers will select Intermec as anRFID vendor.  Since a customer may changeRFID vendors over time or purchase from two or more RFID vendors at the sametime, there is no assurance that Intermec will be the sole source for any RFIDcustomer or that Intermec will be able to obtain repeat business from any RFIDcustomer.  Some vendors are giving RFIDproducts and systems to customers without charge or selling them at prices thatare below or only slightly above cost. If these price pressures persist longer than currently anticipated,Intermec’s sales, revenues, results of operations and growth could bematerially and adversely affected.

 

•       ***Intermec’sgrowth may be adversely affected if it is not successful in improving itsbusiness processes and systems or in attracting and retaining skilled managersand employees.*** In order to increase sales and profits,Intermec must expand its operations into new product and geographic markets anddeepen its penetration of the markets it currently serves. To achieve andsupport this growth, Intermec needs to improve its business processes and itsfinancial, information technology and enterprise resource planning systems.Successful completion of these projects will require skillful managers and askilled workforce. Intermec’s growth could be materially and adversely affectedif it is unable to complete 

 

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businessprocess improvements and system upgrades or if it is unable to attract andretain enough skilled managers and employees.

 

•       ***IfIntermec is unable to increase sales to large enterprise customers whileincreasing sales to medium and small businesses, its growth and results ofoperations may be adversely affected.*** One elementof Intermec’s strategy is to increase sales to large enterprises because they arehigh volume consumers of supply chain products and systems of the type sold byIntermec and because their purchase decisions influence the purchase decisionsof medium and small businesses. Another element is to concurrently increasesales to medium and small businesses. This is because large enterprise salestend to have lower gross profit margins than sales to medium and smallbusinesses. There is no assurance that Intermec will be able to increase salesto large enterprise customers or that it will be able to do so while increasingsales to medium and small businesses. Intermec’s revenue, revenue growth, grossprofit margins and results of operations could be materially and adverselyaffected if it is unable to increase large enterprise sales or if growth insales to medium and small businesses does not keep up with growth in sales tolarge enterprises.

 

•       ***Exportcontrols, import controls and operating conditions in markets outside of theU.S. could adversely affect Intermec’s revenues, gross profit margins andresults of operations.*** Intermec sells a significant percentageof its products and systems in markets outside of the U.S. and one element ofIntermec’s strategy is to expand sales outside of the U.S., particularly indeveloping countries. U.S. and foreign government restrictions on the export orimport of technology could prevent Intermec from selling some or all of itsproducts or systems in one or more countries outside of the U.S. Intermec’ssales outside of the U.S. could also be materially and adversely affected byburdensome laws, regulations, tariffs, quotas, taxes, trade barriers or capitalflow restrictions imposed by the U.S. or foreign governments. In addition,political and economic instability in foreign countries could reduce demand forIntermec’s products or impair or eliminate its ability to sell or deliver thoseproducts to customers in those countries or put its foreign assets at risk.There is no assurance that Intermec will be able to continue or expand sales ofits products or systems in any foreign market. Disruptions of such sales couldmaterially and adversely impact Intermec’s revenues, revenue growth, grossprofit margins and results of operations.

 

•       ***Changesor disruptions in Intermec’s international design, manufacture, production,delivery, service and support operations or in its international outsourcingarrangements could have an adverse effect on its operations and results ofoperations***. A significant percentage of Intermec’sproducts and systems and components for those products and systems aredesigned, manufactured, produced, delivered, serviced or supported in countriesoutside of the U.S. and, from time to time, Intermec outsources one or more ofthese activities or portions thereof by arranging for companies outside of theU.S. to perform these tasks. For operational, legal or other reasons, Intermecmay have to change the mix of U.S. and international operations or moveoutsourced activities from one overseas vendor to another. In addition, U.S. orforeign government actions or economic or political instability may disrupt orrequire changes in Intermec’s international operations or internationaloutsourcing arrangements. The process of implementing such changes and dealingwith such disruptions is complex. There is no assurance that Intermec will beable to accomplish these tasks at all or in an efficient or cost-effectivemanner. If Intermec encounters difficulties in making such transitions, itsrevenues, gross profit margins and results of operations could be materiallyand adversely affected.

 

•       ***Fluctuationsin foreign exchange rates may adversely impact Intermec’s cash flows andearnings.*** Due to its global operations, Intermec’scash flow and earnings are exposed to foreign exchange rate fluctuations. Whenappropriate, Intermec may attempt to limit its exposure to foreign exchangerate changes by entering into short-term foreign currency exchange contracts.There is no assurance that Intermec will hedge or will be able to hedge suchforeign currency exchange risk or that its hedges will be successful. Intermec’sforeign currency exchange gains or losses (net of hedges) may materially andadversely impact its cash flows and earnings.

 

•       ***Seasonalvariations in demand could increase the volatility of Intermec’s financialresults*****.**Intermec’squarterly results reflect seasonality in the sale of its products and services,as its revenues are typically highest in the fourth fiscal quarter and thelowest in the first fiscal quarter. These seasonal fluctuations 

 

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couldincrease the volatility of Intermec’s revenues, gross margins and results ofoperations from one period to another.

 

•       ***Macroeconomicconditions beyond Intermec’s control could lead to deterioration in the qualityof its accounts receivable.*** Intermec’s sales are typically made onunsecured credit terms that are generally consistent with the prevailingbusiness practices in the country in which the customer is located. Adeterioration of political or economic conditions in a given country or regioncould reduce or eliminate Intermec’s ability to collect on accounts receivablein that country or region. In that event, Intermec’s results of operationscould be materially and adversely affected.

 

•       ***Intermec’sgrowth and results of operations could suffer if it is unable to expand itspatent estate.*******One elementof Intermec’s strategy is to expand its AIDC patent estate and to use thatestate to differentiate itself in the marketplace and/or generate royaltyrevenue. The creation and maintenance of a patent estate is a complex activitywith uncertain outcomes. There is no assurance that Intermec can or will obtainvaluable AIDC patents in the jurisdictions where Intermec and its competitorsoperate. Intermec’s future growth and the results of its operations could bematerially and adversely impacted if it does not adequately invest in theacquisition and maintenance of AIDC patents or if, despite such investment, itis unable to obtain AIDC patents covering products and services that customersconsider valuable enough to purchase.

 

•       ***Intermec’sgrowth and results of operations could be adversely affected if its effort toenforce its patents through litigation is not successful.*** Intermectries to use its AIDC patents to ensure demand for its AIDC products bypreventing competitors from selling infringing AIDC products or to collectroyalties from such sales or to deter competitors from enforcing their AIDCpatents against Intermec. As part of this effort, Intermec may be required toinitiate patent infringement lawsuits. Patent lawsuits are complex proceedingsand the results are very difficult to predict. There is no assurance thatIntermec will prevail in all or any of these cases. Adverse results in suchpatent lawsuits could give competitors the legal right to compete with Intermecand its licensees using technology that arguably infringes Intermec’s patents.In that event, demand for Intermec’s products, product revenues, royaltyrevenues and results of operations could be materially and adversely affected.

 

•       ***Expansionin developing markets with weak intellectual property regimes could hurtIntermec’s growth and results of operations if it is unable to protect itstechnology in those jurisdictions.***Intermec’sstrategy includes expanding operations in and into developing countries (e.g.,China) where the institutional structures for creating and enforcingintellectual property rights are very new and where government agencies, courtsand market participants have little experience with intellectual propertyrights. There is no assurance that Intermec will be able to protect itstechnology in such countries because it may not be able to obtain or enforcepatents or other intellectual property rights in those jurisdictions andbecause alternative methods of protecting its technology may not be effective.If Intermec is unable to prevent competitors in these developing markets frommisappropriating its technology, that could materially and adversely affectIntermec’s sales, revenues and results of operations in those developingmarkets and in markets supplied from those developing markets.

 

•       ***Patentscontrolled by Intermec’s competitors, potential competitors or others mayprevent Intermec from selling or may increase the cost of its products andsystems.*** Intermec’s competitors, potentialcompetitors and companies that purchase and enforce patents may have patentscovering AIDC products and services similar to those marketed and sold byIntermec. These firms may try to use their patents to prevent Intermec fromselling some of its AIDC products and systems or to collect royalties from suchsales or to deter Intermec from enforcing its patents against them. As part ofthis effort, the patent-holders may initiate patent infringement lawsuitsagainst Intermec or its customers. As explained above, patent lawsuits arecomplex proceedings with uncertain outcomes. There is no assurance thatIntermec or its customers will prevail in any patent lawsuits initiated bythird party patent-holders. If the results of such litigation are adverse toIntermec or its customers, they could be enjoined from practicing an inventioncovered by the patent in question and may be required to pay damages for pastinfringement, which, in Intermec’s case, might have a material adverse effecton results of operations. If an injunction is issued, Intermec may not be ableto sell a particular product or product line and that could materially andadversely impact its sales, revenues and results of operations. If third party 

 

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patent-holdersare willing to license or sell their patents to Intermec, the cost could have amaterial and adverse effect on Intermec’s sales, revenues or results ofoperations.

 

•       ***Unfavorableresults in pending patent lawsuits could have a material adverse impact onIntermec’s business.*******Intermec iscurrently involved in several patent infringement lawsuits with a competitor,Symbol Technologies, Inc. (see “Legal Proceedings” which is Part I, Item3 in our report on Form 10-K for the fiscal year ended December 31,2005 and is Part II, Item 1 in this report). In each of these cases,Intermec is simultaneously prosecuting and defending infringement claimsinvolving multiple patents. There is no assurance that Intermec will prevail inany of these patent lawsuits or that it will prevail on any of the claims ordefenses asserted in those cases. An unfavorable result in one or more of theselawsuits or on one or more of the claims or defenses asserted in those casescould prevent Intermec from selling one or more of its products, product linesor systems or increase the cost of those products, product lines and systems byforcing Intermec to pay a royalty to the other party. An unfavorable result in thesecases might also give the other party the right to compete with Intermec usingtechnology that arguably infringes Intermec’s patents and might depriveIntermec of royalty revenue. Any these events could have a material adverseeffect on Intermec’s revenues, revenue growth, gross profit margin and resultsof operations.

 

•       ***Patentlitigation expense may materially impact or increase the volatility of Intermec’sfinancial results.*** Since litigation over AIDC patentsinvolves complex technical and economic issues, these cases can be quiteexpensive to prosecute or defend and it is very difficult to predict the amountor the timing of costs associated with such litigation. Intermec generallyincludes such costs in Sales, General and Administrative (SG&A) expense andrecords those expenses as they are incurred. In some periods, patent litigationexpense could be a significant percentage of SG&A expense and could exhibitlarge fluctuations from prior periods, increasing the volatility of Intermec’sSG&A expense and potentially impacting Intermec’s earnings per share. Thereis no assurance that patent litigation will generate royalty revenue forIntermec but, when it does, recognition of that revenue and related currentperiod legal expenses may materially impact Intermec’s results of operations,positively or negatively, increasing the volatility of its results ofoperations.

 

•          ***Inconnection with standards setting activities, Intermec might intentionally orinadvertently transfer or donate some of its patents or some claims of itspatents to the AIDC industry on a royalty-free basis or on a reasonable andnon-discriminatory royalty-bearing (RAND) basis and this might adversely impactIntermec’s sales, revenues and results of operations.*** AIDC customers typically want the ability tochoose between two or more vendors and to seamlessly use the products andsystems of one vendor that work with the products and systems of othervendors.  Intermec and other AIDC vendorstry to respond to these customer requirements by participating in standardssetting activities sponsored by organizations such as ISO, AIM, IEEE andEPCglobal.   Depending on the standard,the standards organization and the form of participation, Intermec may decide toor may be required to transfer or donate one or more of its patents or one ormore claims in its patents to the industry or portion thereof on a royalty-freeor RAND basis.  It is also possible that,during standards setting and product certification activities associated withEPCglobal, Intermec might inadvertently transfer or donate one or more of itspatents or one or more claims in its patents to the industry or a portionthereof on a royalty-free basis by failing to follow EPCglobal rules regardingdisclosure of patents that cover an emerging EPCglobal standard.  Such transfers or donations might preventIntermec from obtaining injunctive relief against infringers of itspatents.  Royalty-free transfers ordonations would prevent Intermec from collecting any royalty for the use of itspatented inventions and RAND donations would limit Intermec’s royalty from alicensee to a reasonable amount that is consistent with the royalty Intermeccollects from other licensees of the same technology.

 

•       ***Sincesome of Intermec’s competitors are substantially larger or are more profitablethan Intermec, they are a significant competitive threat.*** Some ofIntermec’s competitors are substantially larger in terms of revenue or profitthan Intermec. The scale advantage of these firms may allow them to invest morein R&D, systems and human resources than Intermec and may allow them toweather market downturns longer than Intermec or adapt more quickly to markettrends or price declines. Intermec has various strategies for offsetting thisscale imbalance but there is no assurance that all or any of those strategies 

 

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willbe successful or will be successful enough to eliminate all or a substantialportion of that imbalance. If Intermec is unable to offset all or a significantportion of the scale imbalance, its revenues, revenue growth and results ofoperations may be materially and adversely affected.

 

•       ***U.S.and international technical and environmental standards and regulations mayhurt Intermec’s sales and profits.***Intermec’sability to sell AIDC products and systems in a given country and the grossmargins on products and systems sold in a given country could be affected bytechnical and environmental standards and regulations that govern or influencethe design, components or operation of such products and systems. Changes inthose standards and regulations are always possible and, in some jurisdictions,changes may be introduced with little or no time to bring products and systemsinto compliance with the revised technical standard or regulation. Uncertaintyconnected with changes in standards and regulations may cause customers topostpone or cancel purchases of Intermec products and systems and that may havea material adverse effect on Intermec’s revenues.   Standards and regulations may preventIntermec from selling one or more of its products or systems in a particularcountry or increase Intermec’s cost of supplying the products by forcingIntermec to redesign existing products or to use more expensive designs orcomponents. In these cases, Intermec may experience unexpected disruptions inits ability to supply customers with its products and systems or may have toincur unexpected costs to bring its products and systems into compliance. Thiscould have an adverse effect on Intermec’s revenues, gross profit margins andresults of operations and increase the volatility of its financial results.

 

Inan increasing number of countries, legislative bodies and government agencieshave adopted or are planning to adopt environmental laws and regulationssimilar to the European Union (“EU”) directives known as RoHS and WEEE. RoHSrequires that electrical and electronic equipment placed on the EU market afterJuly 1, 2006 be free of lead, mercury, cadmium, hexavalent chromium (abovea threshold limit) and brominated flame retardants.  WEEE requires producers of electrical goodsto pay for specified collection, recycling, treatment and disposal of past andfuture covered products.  Uncertaintyconnected with these types of environmental regulations may cause customers topostpone or cancel purchases of Intermec’s products and systems and that mayhave a material adverse effect on Intermec’s revenues.  These environmental regulations may also havean adverse impact on revenues if they prevent Intermec from selling one or moreof its products or systems in a particular jurisdiction.  Environmental regulations of this type couldalso disrupt Intermec’s sales and increase its costs if the regulations requireIntermec to redesign existing products or components or to use more expensivedesigns or components.

 

•       ***Intermec’seffective tax rate is impacted by a number of factors that could have amaterial impact on Intermec’s financial results and could increase thevolatility of those results.*** Intermec operates in a number ofcountries around the world and is therefore subject to tax in a number ofjurisdictions. Accordingly, Intermec files a significant number of tax returnsthat are subject to audit by the relevant tax authorities. Tax audits are oftencomplex and may require several years to resolve. There is no assurance thatall or any of these tax audits will be resolved in Intermec’s favor. Intermec’sfinancial results may include favorable or unfavorable adjustments to its estimatedtax liabilities in the periods when the tax assessments are made or resolved orwhen statutes of limitations on the tax assessments expire. The outcome ofthese tax assessments could have a material positive or negative impact onIntermec’s earnings and increase the volatility of its earnings relative toprior periods.

 

•***      ******Changesor disruptions in Intermec’s outsourcing arrangements could have a materialadverse impact on its operations and financial results.***From time totime, Intermec outsources the manufacture, production, delivery, installationor service of its products or systems or outsources elements of its back-officeoperations such as order taking and order entry systems, customer service andsupport systems, information technology systems and financial systems. Changesin the mix of Intermec’s internal and outsourced operations may be necessary orappropriate in the future and it is possible that outsourced operations mayhave to be moved from one vendor to another with little or no advance notice.The process of implementing such changes and dealing with such disruptions iscomplex. There is no assurance that Intermec will be able to accomplish thesetasks at all or in an efficient or cost-effective 

 

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manner.If Intermec encounters difficulties in making such transitions, its revenues,gross profit margins and results of operations could be materially andadversely affected.

 

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informationtechnology systems and financial systems. Changes in the mix of Intermec’sinternal and outsourced operations may be necessary or appropriate in thefuture and it is possible that outsourced operations may have to be moved fromone vendor to another with little or no advance notice. The process ofimplementing such changes and dealing with such disruptions is complex. Thereis no assurance that Intermec will be able to accomplish these tasks at all orin an efficient or cost-effective manner. If Intermec encounters difficultiesin making such transitions, its revenues, gross profit margins and results ofoperations could be materially and adversely affected.

 

**ITEM 2.****          UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

(c)               Issuer Purchases ofEquity Securities

 
|                              |   | **(a) Total  Number of  Shares  Purchased** |   | **(b) Average  Price Paid  per Share** |   | **(c) Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs** |   | **(d) Maximum Number of  Shares (or Approximate  Dollar Value) that May  Yet Be Purchased Under  the Plans or Programs** |   |
|-----------------------------------|--------|---------------------------------------------|--------|----------------------------------------|--------|----------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------|--------|
| January 1 to  January 30, 2006    |   | —                                      |   | —                                 |   | —                                                                                       |   | —                                                                                                                   |   |
| January 30 to  February 26 , 2006 |   | 5,858                                       |   | 30.21                                  |   | —                                                                                       |   | —                                                                                                                   |   |
| February 26 to  April 2, 2006     |   | —                                      |   | —                                 |   | —                                                                                       |   | —                                                                                                                   |   |
| Total                             |   | 5,858                                       |   | 30.21                                  |   | —                                                                                       |   | —                                                                                                                   |   |

 

The purchased sharesindicated in the above table were surrendered to the Company to pay theexercise price in connection with the exercise of employee stock options and tosatisfy tax withholding obligations in connection with the vesting ofrestricted stock.

 

**ITEM 6.****          EXHIBITS**

 
| 31.1   |   | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,  dated as of May 10, 2006. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                            |
| 31.2   |   | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,  dated as of May 10, 2006. |
|   |   |                                                                                                                            |
| 32.1   |   | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,  dated as of May 10, 2006. |
|   |   |                                                                                                                            |
| 32.2   |   | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,  dated as of May 10, 2006. |

 

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## **SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   | Intermec, Inc. |
|--------|----------------|
|   | (Registrant)   |
|   |           |
|   |           |
|   | By             | /s/ Fredric B. Anderson |   |
|   |           |   |
|   |           | Fredric B. Anderson |
|   |           | *Vice  President and Controller* |
|   |           | *(Acting  Chief Financial Officer)* |
|   |           |   |
|   |           | May 12, 2006 |

 

34

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