** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

## **FORM 10-Q**

 

**(MarkOne)**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|--------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended October 2, 2005**

 

**OR**

 
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**Commission file number 001-13279**

 

**UNOVA, INC.**

 (Exact name of registrant asspecified 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**                 |       | ** **          |
| **www.unova.com**               |       | ** **          |
| (Address of principal executive | ** ** | **98203-1264**      |
| offices and internet site)      |       | (Zip Code)          |

 

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

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 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 forthe past 90 days. Yes ýNo o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act). Yes ýNo o

 

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

 

On October 31, 2005,there were 62,529,335 shares of Common Stock outstanding, exclusive of treasuryshares.

 

 

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**UNOVA, INC.**

 

**INDEX**

 

**REPORT ON FORM 10-Q**

 

**FOR THE QUARTER ENDED OCTOBER 2, 2005**

 
| **PART I. FINANCIAL INFORMATION** |                                                                                        |
|----------------------------------------|---------------------------------------------------------------------------------------------|
|                                   |                                                                                        |   |
| **ITEM  1.**                           | Financial Statements                                                                        |   |
|                                   |                                                                                        |   |
|                                   | Consolidated Statements of  Operations (unaudited)                                          |   |
|                                   | Three  and Nine Months Ended October 2, 2005, and September 30, 2004              |   |
|                                   |                                                                                        |   |
|                                   | Consolidated Balance Sheets  (unaudited)                                                    |   |
|                                   | October 2,  2005, and December 31, 2004                                           |   |
|                                   |                                                                                        |   |
|                                   | Consolidated Statements of  Cash Flows (unaudited)                                          |   |
|                                   | Nine  Months Ended October 2, 2005, and September 30, 2004                        |   |
|                                   |                                                                                        |   |
|                                   | Notes to Consolidated  Financial Statements (unaudited)                                     |   |
|                                   |                                                                                        |   |
| **ITEM 2.**                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                                   |                                                                                        |   |
| **ITEM 3.**                            | Quantitative  and Qualitative Disclosures about Market Risk                                 |   |
|                                   |                                                                                        |   |
| **ITEM 4.**                            | Controls and  Procedures                                                                    |   |
|                                   |                                                                                        |   |
| **PART II. OTHER  INFORMATION**   |                                                                                        |
|                                   |                                                                                        |   |
| **ITEM 2.**                            | Unregistered  Sales of Equity Securities and Use of Proceeds                                |   |
|                                   |                                                                                        |   |
| **ITEM  6.**                           | Exhibits                                                                                    |   |
|                                   |                                                                                        |   |
| Signature                              |                                                                                        |   |

 

----

 

**PART I.  FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**UNOVA, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(amounts in thousands, except pershare amounts)**

**(unaudited)**

 
| ** **                                                  | ** ** | **Three Months Ended**    | ** ** | **Nine Months Ended**        | ** ** |
|-------------------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                                                  | ** ** | **October 2,  2005** | ** ** | **September 30,  2004** | ** ** | **October 2,  2005** | ** ** | **September 30,  2004** | ** ** |
|                                                        |       |                      |       |                         |       |   |   |   |   |
| Revenues:                                                   |       |                      |       |                         |       |   |   |   |   |
| Product                                                     |       | $                         | 179,640    |                         | $          | 160,054 |   | $ | 522,590 |   | $ | 475,301 |   |
| Service                                                     |       | 40,174                    |       | 34,760                       |       | 111,178 |   | 99,097 |   |
| Total Revenues                                              |       | 219,814                   |       | 194,814                      |       | 633,768 |   | 574,398 |   |
|                                                        |       |                      |       |                         |       |   |   |   |   |
| Costs and  Expenses:                                        |       |                      |       |                         |       |   |   |   |   |
| Cost of product revenues                                    |       | 107,054                   |       | 95,093                       |       | 301,755 |   | 268,820 |   |
| Cost of service revenues                                    |       | 25,083                    |       | 20,345                       |       | 67,053 |   | 58,353 |   |
| Selling, general and administrative                         |       | 74,106                    |       | 70,588                       |       | 222,854 |   | 203,659 |   |
| Total Costs and Expenses                                    |       | 206,243                   |       | 186,026                      |       | 591,662 |   | 530,832 |   |
| Operating Profit  from Continuing Operations                |       | 13,571                    |       | 8,788                        |       | 42,106 |   | 43,566 |   |
| Interest, net                                               |       | (665                      | )          | (3,189                       | )          | (3,911 | ) | (9,443 | ) |
| Foreign currency exchange, net gain (loss)                  |       | (37                       | )          | (246                         | )          | 163 |   | (912 | ) |
| Earnings from  Continuing Operations before Income Taxes    |       | 12,869                    |       | 5,353                        |       | 38,358 |   | 33,211 |   |
| Provision  (Benefit) for Income Taxes                       |       | 1,601                     |       | (1,493                       | )          | 9,823 |   | 7,476 |   |
| Earnings from  Continuing Operations, Net of Tax            |       | 11,268                    |       | 6,846                        |       | 28,535 |   | 25,735 |   |
| Loss from  Discontinued Operations, Net of Tax              |       | (6,697                    | )          | (943                         | )          | (8,416 | ) | (3,647 | ) |
| Net Earnings                                                |       | $                         | 4,571      |                         | $          | 5,903 |   | $ | 20,119 |   | $ | 22,088 |   |
|                                                        |       |                      |       |                         |       |   |   |   |   |
| Basic Earnings  (Loss) per Share                            |       |                      |       |                         |       |   |   |   |   |
| Continuing Operations                                       |       | $                         | 0.18       |                         | $          | 0.11 |   | $ | 0.46 |   | $ | 0.43 |   |
| Discontinued Operations                                     |       | (0.11                     | )          | (0.01                        | )          | (0.13 | ) | (0.06 | ) |
| Net Earnings per Share                                      |       | $                         | 0.07       |                         | $          | 0.10 |   | $ | 0.33 |   | $ | 0.37 |   |
|                                                        |       |                      |       |                         |       |   |   |   |   |
| Diluted Earnings  (Loss) per Share                          |       |                      |       |                         |       |   |   |   |   |
| Continuing Operations                                       |       | $                         | 0.18       |                         | $          | 0.11 |   | $ | 0.45 |   | $ | 0.42 |   |
| Discontinued Operations                                     |       | (0.11                     | )          | (0.01                        | )          | (0.13 | ) | (0.06 | ) |
| Net Earnings per Share                                      |       | $                         | 0.07       |                         | $          | 0.10 |   | $ | 0.32 |   | $ | 0.36 |   |
|                                                        |       |                      |       |                         |       |   |   |   |   |
| Shares Used in  Computing Basic Earnings (Loss) per Share   |       | 62,077                    |       | 60,631                       |       | 61,509 |   | 60,408 |   |
|                                                        |       |                      |       |                         |       |   |   |   |   |
| Shares Used in  Computing Diluted Earnings (Loss) per Share |       | 63,635                    |       | 62,098                       |       | 63,071 |   | 62,079 |   |

 

See accompanying notes to consolidated financial statements.

 

1

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**UNOVA, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(amounts in thousands)**

**(unaudited)**

 
| ** **                                                                              | ** ** | **October 2,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                                                              | ** ** | **2005**            | ** ** | **2004**              | ** ** |
|                                                                                    |       |                |       |                  |       |
| **ASSETS**                                                                              | ** ** | ** **          | ** ** | ** **            | ** ** |
|                                                                                    |       |                |       |                  |       |
| Current Assets:                                                                         |       |                |       |                  |       |
| Cash and cash equivalents                                                               |       | $                   | 179,562    |                  | $          | 217,899 |   |
| Restricted cash                                                                         |       | —              |       | 50,000                |       |
| Accounts receivable, net of allowance for doubtful  accounts of $8,187 and $9,771       |       | 177,919             |       | 157,833               |       |
| Inventories                                                                             |       | 101,485             |       | 80,854                |       |
| Net deferred tax assets                                                                 |       | 63,037              |       | 81,769                |       |
| Assets held for sale                                                                    |       | 13,492              |       | 19,748                |       |
| Current assets of discontinued operations                                               |       | 63,546              |       | 211,116               |       |
| Other current assets                                                                    |       | 8,316               |       | 8,831                 |       |
| Total Current Assets                                                                    |       | 607,357             |       | 828,050               |       |
| Property, Plant and Equipment, Net of Accumulated  Depreciation of $103,465 and $99,714 |       | 29,619              |       | 30,375                |       |
| Intangibles, Net                                                                        |       | 3,772               |       | 4,072                 |       |
| Net Deferred Tax Assets                                                                 |       | 186,362             |       | 134,978               |       |
| Long-term Assets of Discontinued Operations                                             |       | 19,192              |       | 21,238                |       |
| Other Assets                                                                            |       | 60,381              |       | 53,964                |       |
| Total Assets                                                                            |       | $                   | 906,683    |                  | $          | 1,072,677 |   |
|                                                                                    |       |                |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’ INVESTMENT**                                       | ** ** | ** **          | ** ** | ** **            | ** ** |
|                                                                                    |       |                |       |                  |       |
| Current Liabilities:                                                                    |       |                |       |                  |       |
| Accounts payable and accrued expenses                                                   |       | $                   | 174,220    |                  | $          | 160,001 |   |
| Payroll and related expenses                                                            |       | 25,848              |       | 30,077                |       |
| Current portion of long-term debt                                                       |       | —              |       | 108,500               |       |
| Current liabilities of discontinued operations                                          |       | 46,370              |       | 130,257               |       |
| Total Current Liabilities                                                               |       | 246,438             |       | 428,835               |       |
| Long-term Debt                                                                          |       | 100,000             |       | 100,000               |       |
| Other Long-term Liabilities                                                             |       | 105,176             |       | 86,220                |       |
| Long-term Liabilities of Discontinued Operations                                        |       | 11,773              |       | 46,388                |       |
|                                                                                    |       |                |       |                  |       |
| Shareholders’ Investment:                                                          |       |                |       |                  |       |
| Common stock                                                                            |       | 625                 |       | 611                   |       |
| Additional paid-in capital                                                              |       | 729,200             |       | 703,416               |       |
| Accumulated deficit                                                                     |       | (286,576            | )          | (306,695              | )          |
| Accumulated other comprehensive income                                                  |       | 47                  |       | 13,902                |       |
| Total Shareholders’ Investment                                                     |       | 443,296             |       | 411,234               |       |
| Total Liabilities and Shareholders’ Investment                                     |       | $                   | 906,683    |                  | $          | 1,072,677 |   |

 

See accompanying notes to consolidated financial statements.

 

2

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**UNOVA, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(amounts inthousands)**

**(unaudited)**

 
| ** **                                                                                                          | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                          | ** ** | **October 2,**   | ** ** | **September 30,** | ** ** |
| ** **                                                                                                          | ** ** | **2005**              | ** ** | **2004** | ** ** |
| ** **                                                                                                          | ** ** | ** **            | ** ** | ** ** | ** ** |
| Cash and Cash Equivalents at Beginning of Period                                                                    |       | $                     | 217,899    |   | $ | 238,447 |   |
|                                                                                                                |       |                  |       |   |   |
| Cash Flows from Operating Activities of Continuing  Operations:                                                     |       |                  |       |   |   |
| Net earnings from continuing operations                                                                             |       | 28,535                |       | 25,735 |   |
| Adjustments to reconcile net earnings to net  cash provided by operating activities of  continuing operations: |       |                  |       |   |   |
| Depreciation and amortization                                                                                       |       | 7,504                 |       | 8,360 |   |
| Change in prepaid pension costs, net                                                                                |       | 7,667                 |       | 7,756 |   |
| Deferred taxes                                                                                                      |       | 7,120                 |       | (7,981 | ) |
| Stock-based compensation and other                                                                                  |       | 888                   |       | 751 |   |
| Changes in operating assets and liabilities:                                                                        |       |                  |       |   |   |
| Accounts receivable                                                                                                 |       | (9,787                | )          | (12,478 | ) |
| Inventories                                                                                                         |       | (21,604               | )          | (12,349 | ) |
| Other current assets                                                                                                |       | 180                   |       | 11,127 |   |
| Accounts payable and accrued expenses                                                                               |       | 5,998                 |       | (9,500 | ) |
| Payroll and related expenses                                                                                        |       | (5,002                | )          | (2,829 | ) |
| Other long-term liabilities                                                                                         |       | 18,128                |       | 5,111 |   |
| Other operating activities                                                                                          |       | (971                  | )          | (34 | ) |
| Net Cash Provided by Operating Activities of  Continuing Operations                                                 |       | 38,656                |       | 13,669 |   |
|                                                                                                                |       |                  |       |   |   |
| Cash Flows from Investing Activities of Continuing  Operations:                                                     |       |                  |       |   |   |
| Capital expenditures                                                                                                |       | (7,159                | )          | (7,674 | ) |
| Sale of property, plant and equipment                                                                               |       | 6,050                 |       | 4,026 |   |
| Restricted cash                                                                                                     |       | 50,000                |       | (50,000 | ) |
| Other investing activities                                                                                          |       | 593                   |       | 64 |   |
| Net Cash Provided by (Used in) Investing Activities  of Continuing Operations                                  |       | 49,484                |       | (53,584 | ) |
|                                                                                                                |       |                  |       |   |   |
| Cash Flows from Financing Activities of Continuing  Operations:                                                     |       |                  |       |   |   |
| Repayment of long-term obligations.                                                                                 |       | (108,500              | )          | — |   |
| Stock options exercised                                                                                             |       | 16,373                |       | 2,836 |   |
| Other financing activities                                                                                          |       | 1,118                 |       | 319 |   |
| Net Cash Provided by (Used in) Financing  Activities  of Continuing Operations                                 |       | (91,009               | )          | 3,155 |   |
| Net Cash Used in Continuing Operations                                                                              |       | (2,869                | )          | (36,760 | ) |
| Net Cash Used in Operating Activities  of Discontinued Operations                                              |       | (34,662               | )          | (39,270 | ) |
| Net Cash Used in Investing Activities  of Discontinued Operations                                              |       | (806                  | )          | (1,038 | ) |
| Resulting Decrease in Cash and Cash Equivalents                                                                     |       | (38,337               | )          | (77,068 | ) |
| Cash and Cash Equivalents at End of Period                                                                          |       | $                     | 179,562    |   | $ | 161,379 |   |
|                                                                                                                |       |                  |       |   |   |
| Supplemental Disclosure of Cash Flow Information:                                                                   |       |                  |       |   |   |
| Effect of exchange rates on cash and cash  equivalents                                                              |       | $                     | (6,397     | ) | $ | 785 |   |
| Interest paid                                                                                                       |       | (12,064               | )          | (14,815 | ) |
| Income taxes paid                                                                                                   |       | (5,249                | )          | (5,709 | ) |

 

See accompanying notes to consolidated financial statements.

 

3

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**UNOVA, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (unaudited)**

 

**1.****                          Basis ofPresentation**

 

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

 

Effective the fourth quarter of 2004, the Companycommitted to a plan to sell its Industrial Automation Systems (“IAS”)businesses, comprising the Cincinnati Lamb division and the Landis GrindingSystems division after the Board of Directors concluded that the IAS businessesare no longer aligned with the Company’s long-term strategy. Company managementbelieves that divesture of the IAS businesses will enable the Company toconcentrate better on Intermec’s core competencies and growth opportunities.The Company has classified the IAS businesses as discontinued operations foraccounting purposes in the Company’s consolidated financial statements andrelated notes. All prior periods presented have been restated to reflect thisclassification. The Company completed the sale of the Cincinnati Lamb businessduring the quarter ended April 3, 2005, and on October 27, 2005,signed an agreement to sell Landis Grinding Systems business (see Note 5 to theconsolidated financial statements).

 

Beginning in 2005, the Company’s interim financialperiods are based on a thirteen-week internal accounting calendar. The Companydoes not believe this change has any material impact on comparability of thefinancial statements. The amounts included in this report are unaudited;however, in the opinion of management, all adjustments necessary for a fairpresentation of results of operations, financial position and cash flows forthe stated periods have been included. These adjustments are of a normalrecurring nature. Certain prior-year amounts have been reclassified to conformto the current year presentation. These consolidated financial statementsshould be read in conjunction with the audited financial statements and notesthereto included in the Company’s annual report on Form 10-K for the yearended December 31, 2004. The results of operations for the interim periodspresented are not necessarily indicative of operating results for the entireyear.

 

The consolidated statements of cash flows for the ninemonths ended October 2, 2005 and September 30, 2004, reflect thereclassification of $50 million in restricted cash from financing activities toinvesting activities.

** **

**Significant Accounting Policies**

 

*Revenuerecognition for Rapid Start intellectual property (“IP”) royalties*–The Company licenses rights to use portions of its IP portfolio, includingcertain patents essential to and/or useful in the manufacture and sale ofcertain RFID products. As a result of the Company’s Rapid Start RFID IPlicensing program, which ended on August 31, 2005, the Company has expanded itsrevenue recognition policy to include the license fees from this program.  Licensees participating in the Rapid Startprogram typically paid a nonrefundable up-front fee and agreed to pay ongoingroyalties based on their sales of products incorporating or using the Company’slicensed RFID IP. Under the terms of such Rapid Start RFID license agreements,the licensees receive the right to certain future divisions, continuations andcontinuations-in-part of the licensed RFID patents. Non-refundable up-frontfees related to the Company’s Rapid Start RFID IP licensing program arerecorded as deferred revenue and recognized over five years, representing theestimated future period the Company expects to receive patents on certain divisions,continuations and/or continuations-in-part for the licensed RFID patents andthe Company’s estimate of the average technology lifecycle for the automateddata capture industry. The Company earns royalties on licensed RFID productssold worldwide by its licensees at the time that the licensees’ salesoccur.  The Company’s licensees reportand pay royalties owed for sales in any given quarter after the conclusion ofthat

 

4

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quarter. The Company has determined that, due to thelack of historical trends coupled with the anticipated escalating businesstrends, the Company does not have the ability to reliably estimate the runningroyalties when earned. Therefore, the Company recognizes such royalty revenuein the quarter in which the royalties are reported to the Company by thelicensees.

 

**2.****                          Stock-BasedCompensation**

 

As permitted by Statement ofFinancial Accounting Standards (“SFAS”) No. 123, the Company accounts forits stock-based compensation plans in accordance with Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees,” underwhich compensation cost is recognized over the vesting period if the fair valueis greater than the exercise price (the intrinsic value method) at the grant ofstock options. Had compensation cost for these plans been determined consistentwith SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’snet earnings and basic and diluted earnings per share for the three and ninemonths ended October 2, 2005, and September 30, 2004, would have beenreduced to the pro forma amounts indicated in the following table (thousands ofdollars):

 
| ** **                                                                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                     | ** ** | **October 2,**    | ** ** | **September 30,** | ** ** | **October 2,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                                     | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                           |       |                   |       |                   |       |   |   |   |   |
| Net earnings as reported                                                                                       |       | $                      | 4,571      |                   | $          | 5,903 |   | $ | 20,119 |   | $ | 22,088 |   |
| Add: stock-based compensation expense  recorded under the intrinsic value  method, net of tax effect |       | 593                    |       | 181                    |       | 1,661 |   | 694 |   |
| Less: stock compensation expense  computed under the fair value method, net  of tax effect                |       | (1,599                 | )          | (758                   | )          | (4,449 | ) | (2,471 | ) |
| Pro forma net earnings                                                                                         |       | $                      | 3,565      |                   | $          | 5,326 |   | $ | 17,331 |   | $ | 20,311 |   |
|                                                                                                           |       |                   |       |                   |       |   |   |   |   |
| Net earnings per share as reported:                                                                            |       |                   |       |                   |       |   |   |   |   |
| Basic                                                                                                          |       | $                      | 0.07       |                   | $          | 0.10 |   | $ | 0.33 |   | $ | 0.37 |   |
| Diluted                                                                                                        |       | $                      | 0.07       |                   | $          | 0.10 |   | $ | 0.32 |   | $ | 0.36 |   |
|                                                                                                           |       |                   |       |                   |       |   |   |   |   |
| Pro forma net earnings per share:                                                                              |       |                   |       |                   |       |   |   |   |   |
| Basic                                                                                                          |       | $                      | 0.06       |                   | $          | 0.09 |   | $ | 0.28 |   | $ | 0.34 |   |
| Diluted                                                                                                        |       | $                      | 0.06       |                   | $          | 0.09 |   | $ | 0.27 |   | $ | 0.33 |   |

 

During the nine months ended October 2, 2005, theCompany issued 1,446,098 shares of Common Stock under its stock compensationplans, including 1,345,554 shares issued upon the exercise of options, 9,332shares of restricted stock, 2,034 shares issued upon vesting of restrictedstock units and 89,178 shares issued under the Employee Stock Purchase Plan andDirectors Stock Option and Fee Plan. Also during the nine months ended October 2,2005, 142,778 shares of restricted stock vested due to completion of thevesting period.

 

5

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**3.****                          Inventories**

 

Inventories comprise the following (thousands ofdollars):

 
| ** **      | ** ** | **October 2,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|---------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2005**            | ** ** | **2004**              | ** ** |
| ** **      | ** ** | ** **          | ** ** | ** **            | ** ** |
| Raw materials   |       | $                   | 62,593     |                  | $          | 53,714 |   |
| Work in process |       | 734                 |       | 304                   |       |
| Finished goods  |       | 38,158              |       | 26,836                |       |
| Inventories     |       | $                   | 101,485    |                  | $          | 80,854 |   |

 

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

 

As of October 2, 2005, the Company maintainstwo secured long-term credit facilities: a $100 million revolving creditfacility (the “Revolving Facility”) and a £15 million ($26.5 million) revolvingfacility and related overdraft facility (collectively, the “UK Facility”).

 

Net of outstanding letters of credit and limitationson minimum availability, the Company had borrowing capacity at October 2,2005, of $32.1 million under the Revolving Facility and £5.6 million ($9.9million) under the UK Facility. The Company made no borrowings under theRevolving Facility or the UK Facility duringthe first nine months of 2005, and as of October 2, 2005, no borrowingswere outstanding under either the Revolving Facility or the UK Facility. As of October 2,2005, the Company was in compliance with the financial covenants of each ofthese agreements.

 

The key terms of the Revolving Facility are asfollows:

 

•                  The Company’s obligations under the RevolvingFacility are secured by substantially all the U.S. assets of the Company andits U.S. subsidiaries and a pledge of 65% of the stock of certain of itsforeign subsidiaries.

 

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

 

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

 

•                  Until it retired its 6.875% Notes due March 15,2005, the Company was required to maintain a minimum balance of$50 million as restricted cash. This amount is classified as restrictedcash on the Company’s consolidated balance sheet as of December 31, 2004.This cash restriction has been removed as of October 2, 2005.

 

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

 

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

 

In March 1998, the Companysold $200.0 million principal amount of senior unsecured debt in anunderwritten offering. The debt comprised $100.0 million of 6.875% seven-yearnotes and $100.0 million of 7.00% ten-year notes. Interest payments are duesemi-annually. Including underwriting fees, discounts and other issuance costs,

 

6

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the effective interest rates on theseven-year and ten-year notes are 7.125% and 7.175%, respectively. In March 2005,the Company retired the $100.0 million seven-year notes. In July 2005, theCompany also retired an $8.5 million industrial revenue bond.

 

Interest, net comprises the following (thousands ofdollars):

 
| ** **       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|------------------|------------|------------------------|------------|------------------------|------------|
| ** **       | ** ** | **October 2,**    | ** ** | **September 30,** | ** ** | **October 2,** | ** ** | **September 30,** | ** ** |
| ** **       | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest expense |       | $                      | 2,257      |                   | $          | 4,112 |   | $ | 8,656 |   | $ | 12,251 |   |
| Interest income  |       | (1,592                 | )          | (923                   | )          | (4,745 | ) | (2,808 | ) |
| Interest, net    |       | $                      | 665        |                   | $          | 3,189 |   | $ | 3,911 |   | $ | 9,443 |   |

 

The Company also has letter-of-credit reimbursementagreements totaling $29.9 million at October 2, 2005, compared to $53.6million at December 31, 2004. As of October 2, 2005, $11.7 million ofthe agreements related to performance on contracts with current customers andvendors, and $18.2 million of the agreements related to customer contractsassumed by the purchaser of the Cincinnati Lamb operations that were sold. TheCompany is indemnified by the purchaser on the entire $18.2 million ofletter-of-credit agreements related to Cincinnati Lamb and is the beneficiaryof a backup letter-of-credit in the aggregate amount of $6.6 million issuedpursuant to the terms of the sale. The Company believes it is not practicableto estimate fair values of these instruments and considers the risk of non-performanceon the contracts to be remote.

 

# **5.**                          DiscontinuedOperations

# ** **

During the fourth quarter of 2004, the Companycommitted to a plan to dispose of its IAS businesses, comprising the CincinnatiLamb and Landis Grinding Systems businesses, after it was determined that theyare no longer aligned with the Company’s long-term strategy. In accordance withSFAS 144, “Accounting for Disposal or Impairment of Long-Lived Assets,” the IASbusinesses are classified as discontinued operations in the Company’sconsolidated financial statements for all periods presented.

 

On October 27, 2005, the Company entered into aPurchase and Sale Agreement (“The Agreement”) to sell its Landis GrindingSystems division (“Landis”). Under the Agreement, the purchasing parties willacquire the global operations of Landis through the purchase of substantiallyall of the assets of the Landis Grinding Systems. The consideration for thepurchased assets consists of $69 million in cash, a $10 million two-year noteat an interest rate of five percent per annum guaranteed by the buyer's parent,and the buyer's assumption of certain liabilities, including certain pensionand other post-retirement obligations. The purchase price is subject to possible adjustments based on theamount of net working assets at closing.

 

The Agreement contains customary covenants and closingconditions, including operation of Landis in the ordinary course until theclosing, obtaining third-party consents to the transaction, and non-competitionfor five years in the U.S. and three years in the U.K.

 

On April 3, 2005, the Company completed the saleof the Cincinnati Lamb business. The consideration received for the CincinnatiLamb business included (i) $16 million, paid in cash on April 4,2005, (ii) a $10.0 million long-term secured note receivable with anestimated fair value of $8.4 million and (iii) liabilities related tocertain pension and other post-retirement obligations of $39.1 million assumedby the buyer. The Company was also required to deliver to the buyer aguaranteed net working asset balance. Accordingly, during the second quarter of

 

7

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2005 the Company reimbursed the buyer $12.6 millionfor accounts payable related to the Cincinnati Lamb business, satisfying thenet working asset adjustment.

 

In connection with the sale, during the second quarterof 2005 the Company loaned to the buyer $1.5 million. This note receivable, the$10.0 million long-term secured note and an additional $1.0 million of facevalue were combined into a single $12.5 million long-term note receivablesecured by the assets sold, bearing interest at an annual rate of LIBOR plusthree percent (6.9% as of October 2, 2005) with interest payablequarterly. Principal payments on the note are due in six semiannualinstallments beginning April 2007 of $1.5 million, $2.0 million, $2.0million, $2.5 million, $2.0 million and $2.5 million. As of October 2,2005, the estimated fair value of the note is $10.4 million, based on theestimated cash flows from the note and a risk-adjusted discount rate equal toLIBOR plus eight percent. The Company’s consolidated balance sheet as of October 2,2005, classifies the $10.4 million long-term note receivable as other assets.

 

The Company recognized a pre-tax loss on the sale ofthe Cincinnati Lamb business of $34.7 million during the quarter ended April 3,2005. During the second quarter of 2005 the Company recognized an additional$1.2 million pre-tax loss on the sale of the Cincinnati Lamb business. The netassets sold of the Cincinnati Lamb business were recorded at $36.7 million asof the date of the sale and comprised the following (thousands of dollars):

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

 

Long-term liabilities in the above table representpension and post-retirement obligations assumed by the buyer (see Note 13 tothe Consolidated Financial Statements).

 

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

 

8

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The following table sets forth the components of theloss from discontinued operations, net of tax, for the three and nine monthsended October 2, 2005, and September 30, 2004 (thousands of dollars):

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **October 2,**    | ** ** | **September 30,** | ** ** | **October 2,** | ** ** | **September 30,** | ** ** |
| ** **                                    | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Product and service revenues                  |       | $                      | 38,871     |                   | $          | 121,919 |   | $ | 199,750 |   | $ | 344,218 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |   |   |   |   |
| Operating loss                                |       | (7,781                 | )          | (1,007                 | )          | (12,496 | ) | (3,610 | ) |
| Loss on sale of Cincinnati Lamb               |       | —                 |       | —                 |       | (35,926 | ) | — |   |
| Loss from discontinued operations, before tax |       | (7,781                 | )          | (1,007                 | )          | (48,422 | ) | (3,610 | ) |
| Provision (Benefit) for income taxes          |       | (1,084                 | )          | (64                    | )          | (40,006 | ) | 37 |   |
| Loss from discontinued operations, net of tax |       | $                      | (6,697     | )                      | $          | (943 | ) | $ | (8,416 | ) | $ | (3,647 | ) |

 

Operating loss from discontinued operations for thethree and nine months ended October 2, 2005, includes a $9.5 millioncharge for the settlement of a lawsuit (see Note 12). Operating loss fromdiscontinued operations for the nine months ended October 2, 2005,includes an impairment charge in the second quarter of $2.0 million towrite-down property, plant and equipment, classified as assets held for sale onthe Company’s consolidated balance sheets, to its estimated net realizablevalue.

 

The tax benefit for the nine months ended October 2,2005, reflects an effective tax rate of 82.6% compared to the U.S. statutorytax rate of 35%.  The increase isprimarily due to tax benefits from the disposition of the Cincinnati Lambbusiness of approximately $24.0 million. These benefits, including a tax effected capital loss carryforward inthe U.S. in the amount of $12.4 million, result from differences between thebook basis of assets sold and the related tax basis of the stock and a benefitof $6.9 million from a prior period election to treat a foreign subsidiary as abranch.

 

The Company ceased permanently reinvesting in Canada,Germany and Korea as a result of the disposition of the Cincinnati Lambbusiness.  The tax on repatriateddividends was substantially offset by foreign tax credits.

 

9

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The table below sets forth the assets and liabilitiesof discontinued operations as of October 2, 2005, and December 31,2004 (thousands of dollars):

 
| ** **                                           | ** ** | **October 2,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **2005**            | ** ** | **2004**              | ** ** |
| Current assets of discontinued operations:           |       |                |       |                  |       |
| Accounts receivable, net                             |       | $                   | 35,270     |                  | $          | 160,118 |   |
| Inventories, net                                     |       | 27,452              |       | 55,926                |       |
| Other current assets                                 |       | 824                 |       | 5,635                 |       |
| Impairment of current assets                         |       | —              |       | (10,563               | )          |
| Total current assets of discontinued operations      |       | 63,546              |       | 211,116               |       |
|                                                 |       |                |       |                  |       |
| Long-term assets of discontinued operations:         |       |                |       |                  |       |
| Property, plant and equipment, net                   |       | 11,342              |       | 13,356                |       |
| Goodwill                                             |       | 7,796               |       | 7,796                 |       |
| Other assets                                         |       | 54                  |       | 86                    |       |
| Total long-term assets of discontinued operations    |       | 19,192              |       | 21,238                |       |
|                                                 |       |                |       |                  |       |
| Current liabilities of discontinued operations:      |       |                |       |                  |       |
| Accounts payable and accrued expenses                |       | 28,206              |       | 117,026               |       |
| Accounts payable-Tower Automotive settlement         |       | 13,500              |       | —                |       |
| Accrued payroll                                      |       | 4,664               |       | 13,231                |       |
| Total current liabilities of discontinued operations |       | 46,370              |       | 130,257               |       |
| Long-term liabilities of discontinued operations     |       | 11,773              |       | 46,388                |       |
| Net assets of discontinued operations                |       | $                   | 24,595     |                  | $          | 55,709 |   |

 

The Company’s goodwill of $7.8 million relates to itsLandis Grinding Systems business and is classified as long-term assets ofdiscontinued operations on the Company’s consolidated balance sheets as of October 2,2005, and December 31, 2004. Long-term liabilities of discontinuedoperations comprise pension and postretirement obligations.

 

As of October 2, 2005, accumulated othercomprehensive income on the Company’s consolidated balance sheet includes acredit balance of $9.6 million related to Landis Grinding Systems cumulativetranslation adjustments.

 

# **6.**                          Provisionfor Income Taxes

# ** **

The tax provision for thethree and nine months ended October 2, 2005, reflects effective tax ratesfor continuing operations of 12.4% and 25.6%, respectively, compared to a U.S.statutory provision rate of 35%.  Thereduction in the effective tax rates is primarily due to a reduction in theforeign tax contingency accrual as a result of the resolution of a German taxaudit.

 

The tax benefit for thethree months ended and the tax provision for the nine months ended September 30,2004, reflects effective tax rates for continuing operations of 27.9% and22.5%, respectively.  The reduction inthe effective tax rates is primarily due to the recognition of deferred taxassets and other tax benefits that were previously unrecognized.

 

10

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# **7.**                          SharesUsed in Computing Earnings per Share

# ** **

Basic earnings per shareis calculated using the weighted average number of common shares outstandingand issuable for the applicable period. Diluted earnings per share is computedusing basic weighted average shares plus the dilutive effect of unvestedrestricted stock and outstanding stock options using the “treasury stock”method.

 
| ** **                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                      | ** ** | **October 2,**    | ** ** | **September 30,** | ** ** | **October 2,** | ** ** | **September 30,** | ** ** |
| ** **                                                      | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                            |       |                   |       |                   |       |   |   |   |   |
| Weighted average common shares - Basic                          |       | 62,076,898             |       | 60,631,341             |       | 61,509,047 |   | 60,408,219 |   |
| Dilutive effect of unvested restricted stock and  stock options |       | 1,557,960              |       | 1,466,819              |       | 1,561,772 |   | 1,671,055 |   |
| Weighted average shares - Diluted                               |       | 63,634,858             |       | 62,098,160             |       | 63,070,819 |   | 62,079,274 |   |

 

Company employees and directors held options topurchase 81,140 shares of Company common stock for the nine months ended October 2,2005, and 2,069,320 and 967,313 shares for the three and nine months ended September 30,2004, respectively, that were antidilutive to the diluted earnings per sharecomputation. These options could become dilutive in future periods if theaverage market price of the Company’s common stock exceeds the exercise priceof the outstanding options and the Company reports net earnings. No optionswere antidilutive for the three months ended October 2, 2005.

 

# **8.**                          ComprehensiveEarnings

# ** **

The Company’s comprehensiveearnings comprise the following (thousands of dollars):

 
| ** **                                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                        | ** ** | **October 2,**    | ** ** | **September 30,** | ** ** | **October 2,** | ** ** | **September 30,** | ** ** |
| ** **                                                        | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                              |       |                   |       |                   |       |   |   |   |   |
| Net earnings                                                      |       | $                      | 4,571      |                   | $          | 5,903 |   | $ | 20,119 |   | $ | 22,088 |   |
| Change in equity due to foreign currency translation  adjustments |       | (668                   | )          | 2,916                  |       | (23,044 | ) | 1,274 |   |
| Change in equity due to minimum pension liability  adjustment     |       | —                 |       | —                 |       | 9,144 |   | — |   |
| Unrealized gains on cash flow hedges                              |       | (34                    | )          | 167                    |       | 45 |   | 287 |   |
| Comprehensive earnings                                            |       | $                      | 3,869      |                   | $          | 8,986 |   | $ | 6,264 |   | $ | 23,649 |   |

 

The change in equity due to foreigncurrency translation adjustments for the nine months ended October 2,2005, includes a credit balance of $8.3 million for cumulative translationadjustments that was previously included in accumulated other comprehensiveincome and recognized in net earnings in the first quarter of 2005 inconnection with the sale of Cincinnati Lamb.

 

# **9.**                          IntellectualProperty Settlements

# ** **

Duringthe first quarter of 2004, the Company received compensation of $19.7 millionin relation to one settlement regarding certain of its intellectual property (“IP”).The terms of this settlement are confidential. The operating profit from the IPsettlement, net of legal fees, for the nine months ended September 30,2004, was $15.7 million. IP settlement compensation is classified as salesrevenues and the related legal costs are classified as cost of sales on theCompany’s consolidated statements of operations.

 

11

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# **10.**                   SegmentReporting

# ** **

The Company’s Intermec segment provides products andservices that include rugged mobile computing solutions, wireless and automated datacollection systems for field workers, on-premises and site-based workers aswell as wireless network systems for untethered enablement of an enterprise,and barcode label and printing solutions. Intermec’s rugged and robust systems,solutions and services enable Intermec’s customers to more efficiently andeffectively manage their supply chains and fulfillment activities.

 

Corporate and other amounts include corporateoperating costs. Intercompany transactions have been eliminated. The followingtable sets forth the Company’s operations by business segments (thousands ofdollars):

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                              | ** ** | **October 2,**    | ** ** | **September 30,** | ** ** | **October 2,** | ** ** | **September 30,** | ** ** |
| ** **                                              | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                    |       |                   |       |                   |       |   |   |   |   |
| **Revenues**                                            |       |                   |       |                   |       |   |   |   |   |
| Intermec Revenues                                       |       | $                      | 219,814    |                   | $          | 194,814 |   | $ | 633,768 |   | $ | 574,398 |   |
| **Operating Profit (Loss) from Continuing  Operations** |       |                   |       |                   |       |   |   |   |   |
| Intermec                                                |       | $                      | 18,020     |                   | $          | 17,084 |   | $ | 57,908 |   | $ | 60,729 |   |
| Corporate and Other                                     |       | (4,449                 | )          | (8,296                 | )          | (15,802 | ) | (17,163 | ) |
| Total Operating Profit from Continuing Operations       |       | $                      | 13,571     |                   | $          | 8,788 |   | $ | 42,106 |   | $ | 43,566 |   |

 

Total assets at October 2, 2005, and December 31,2004, are $377 million and $340 million for Intermec, respectively, and $447million and $500 million for Corporate and Other, respectively.  Total assets of discontinued operations are$83 million and $232 million as of October 2, 2005, and December 31,2004, respectively.

 

# **11.**                   Related PartyTransactions

# ** **

Unitrin, Inc. andits subsidiaries (“Unitrin”) is a significant shareholder of the Company,owning approximately 20% of the Company’s outstanding shares.  In January 2005, Unitrin’s Life andHealth Insurance segment agreed to hire the Company’s Intermec subsidiary todevelop the software for the next generation of Life and Health Insurance’shandheld computers. During the three and nine months ended October 2,2005, the Company recognized $2.0 million and $2.2 million in revenues fromUnitrin, respectively. Also during the three and nine months ended October 2,2005, the Company recorded $0.3 million of deferred service revenue fromUnitrin. The Company believes that the prices of goods and services sold to Unitrinare comparable to those received from unaffiliated third parties. As of October 2,2005, the Company has $2.2 million of accounts receivable from Unitrin.

 

At December 31,2004, other assets included a receivable due from a certain non-executive Companyofficer of $0.2 million. This receivable was fully paid during the firstquarter of 2005.

 

# **12.**                   Commitments andContingencies

# ** **

Provisions for estimated expensesrelated to product warranties are made at the time products are sold. Theseestimates are established using historical information on the nature,frequency, and average cost of warranty claims. Management actively studiestrends of warranty claims and takes action to improve product quality andminimize warranty claims. The following table indicates the change in theCompany’s warranty accrual included in current liabilities (thousands ofdollars):

 

12

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| ** **                                      | ** ** | **Product Warranty** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **Liabilities**      | ** ** |
|                                            |       |                 |       |
| Beginning balance as of January 1, 2005    |       | $                    | 4,878      |   |
| Payments                                        |       | (5,493               | )          |
| Increase in liability for new warranties issued |       | 6,319                |       |
| Ending balance as of October 2, 2005       |       | $                    | 5,704      |   |

 

The Company has enteredinto a variety of agreements with third parties that include indemnificationclauses, both in the ordinary course of business and in connection with ourdivestitures of certain product lines. These clauses require the Company tocompensate these third parties for certain liabilities and damages incurred bythem.

 

FASB Interpretation No. 45,“Guarantors’ Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” requires that the Companyestimate and record the fair value of guarantees as a liability. The Companydoes not believe it has any significant exposure related to such guarantees andtherefore has not recorded a liability as of October 2, 2005, or December 31,2004. The Company has not made any significant indemnification payments as aresult of these clauses, nor does it believe the fair value of any of theseguarantees has a material effect on the Company’s financial position or resultsof operations.

 

The Company is currently,and is from time to time, subject to claims and suits arising in the ordinarycourse of its business. The Company believes it has valid defenses with respectto legal matters pending against it. 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 expenses. 

 

Tower Automotive ProductsCo. v. Lamb Technicon Body and Assembly is a lawsuit filed on March 11,2002, in the Kent County Circuit Court in Michigan, generally alleging a breachof contract involving a frame assembly production line. No specific claim fordamages was made in the Complaint by Tower Automotive Products Co. (“Tower”).  On September 15, 2005, the partiesagreed to settle this lawsuit. Tower agreed to dismiss the complaint withprejudice and to release the Company from any and all claims it may have hadagainst the Company. The Company agreed to dismiss its counter claim withprejudice and to release Tower from any and all claims it may have had againstTower. In accordance with the terms of the settlement, the Company paid $13.5million to Tower on October 12, 2005. The settlement resulted in a chargeof $9.5 million, classified as loss from discountinued operations on theCompany's consolidated statements of operations for the three and nine monthsended October 2, 2005. On the Company’s consolidated balance sheet as of October 2,2005, this liability is classified as current liabilities of discontinuedoperations.

 

The settlement agreementwas subject to approval of the U.S. Bankruptcy Court for the Southern Districtof New York (“the Bankruptcy Court”) in the case captioned in re: TowerAutomotive, Inc., et al. The Bankruptcy Court approved the settlementagreement on September 27, 2005.

 

13

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On March 10, 2005, Symbol Technologies, Inc.(“Symbol”) terminated its original equipment manufacturing (“OEM”) agreementwith Intermec to supply laser scan engines and stopped shipping laser scanengines to the Company. On March 10, 2005, Symbol filed a lawsuit in theUnited States District Court for the District of Delaware seeking a declaratoryjudgment that its termination of the OEM agreement is lawful (the “ContractCase”). The Company believes that the termination of the OEM agreement bySymbol will not have a material adverse effect on operations.

 

Also on March 11, 2005, Symbol announced that ithad filed a lawsuit against Intermec on March 10, 2005, in the UnitedStates District Court for the District of Delaware for wireless patentinfringement (the “Wireless Case”). On March 23, 2005, the Company filedits answer to Symbol’s wireless patent infringement complaint and filedcounterclaims against Symbol for infringing Intermec’s wireless access,terminal and software patents. The Company simultaneously filed its answer toSymbol’s declaratory judgment action and filed counterclaims against Symbol forbreach of the OEM agreement.

 

On April 28, 2005, Symbol announced that it hadfiled a 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 the Company, theDecoding Case was transferred to the United States District Court for theDistrict of Delaware. That case has now been consolidated for purposes ofdiscovery with the Wireless Case. The Company has denied liability in theDecoding Case and pursuant to the standstill agreement discussed below retainsthe right to file counterclaims against Symbol in the Decoding Case.

 

On June 30, 2005, Intermec filed a complaint withthe U.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,the ITC voted to investigate Intermec’s allegations against Symbol. Pursuant tothe standstill agreement, discussed below, the Company asked the ITC to dismissand close the investigation. On September 26, 2005, in response to theCompany’s request, the Administrative Law Judge terminated the investigation.On October 12, 2005, the ITC entered a Notice Not to Review the Orderterminating the investigation.

 

The Complaints in Symbol’s wireless and barcodedecoding lawsuits do not contain sufficient details for the Company to assesswhat Symbol will claim regarding the relationship between its cited patents andIntermec products. However, based on prior Company analysis of the cited Symbolpatents, the Company believes it has substantial defenses to each of thosepatent infringement claims and the Company intends to vigorously defend itselfagainst 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 the Company 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 the Company in the ITC case.According to the standstill agreement these permitted counterclaims and newaction must be filed no sooner than December 1, 2005, and no later than December 9,2005.  The parties also agreed not topursue or seek temporary restraining orders, preliminary injunctions or ITCexclusion orders against each other for a period of two years. The UnitedStates District Court for the District of Delaware has granted the schedulingchanges required to effectuate the standstill agreement of the parties.

 

# **13.**                   Pension andOther Postretirement Benefit Plans

# ** **

The information in this noterepresents the net periodic pension and post-retirement benefit costs andrelated components in accordance with SFAS 132(R). The components of netpension and postretirement periodic benefit cost (credit) for the three andnine months ended October 2, 2005, and September 30, 2004, are asfollows (thousands of dollars):

 
| **Three Months Ended October 2, 2005,  and September 30, 2004:** | ** ** | **U.S. Defined Benefit  Plans** | ** ** | **Non-U.S. Defined  Benefit Plans** | ** ** | **Other Postretirement  Benefit Plans** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                 | **2005**   | ** **                      | **2004**   | ** **                          | **2005**   | ** **                              | **2004**   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service Cost                                                               |       | $                               | 1,701      |                                | $          | 2,417                                   |       | $ | 827 |   | $ | 1,440 |   | $ | 33 |   | $ | 39 |   |
| Interest Cost                                                              |       | 2,407                           |       | 2,238                               |       | 1,126                                   |       | 2,347 |   | 166 |   | 671 |   |
| Expected return  on plan assets                                            |       | (2,537                          | )          | (2,448                              | )          | (1,006                                  | )          | (2,414 | ) | — |   | — |   |
| Amortization and  deferrals:                                               |       |                            |       |                                |       |                                    |       |   |   |   |   |   |   |
| Transition asset                                                           |       | —                          |       | (11                                 | )          | (82                                     | )          | (84 | ) | — |   | — |   |
| Actuarial loss                                                             |       | 765                             |       | 785                                 |       | 239                                     |       | 477 |   | 17 |   | 209 |   |
| Prior service cost (benefit)                                               |       | 161                             |       | 179                                 |       | —                                  |       | — |   | — |   | (299 | ) |
| Net pension and postretirement periodic benefit cost                       |       | $                               | 2,497      |                                | $          | 3,160                                   |       | $ | 1,104 |   | $ | 1,766 |   | $ | 216 |   | $ | 620 |   |

 

14

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| **Nine Months Ended October 2, 2005,  and September 30, 2004:** | ** ** | **U.S. Defined Benefit  Plans** | ** ** | **Non-U.S. Defined  Benefit Plans** | ** ** | **Other Postretirement  Benefit Plans** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                | **2005**   | ** **                      | **2004**   | ** **                          | **2005**   | ** **                              | **2004**   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service Cost                                                              |       | $                               | 6,511      |                                | $          | 7,252                                   |       | $ | 2,946 |   | $ | 4,317 |   | $ | 100 |   | $ | 117 |   |
| Interest Cost                                                             |       | 7,447                           |       | 6,715                               |       | 4,831                                   |       | 7,034 |   | 1,395 |   | 2,087 |   |
| Expected return on plan  assets                                           |       | (7,549                          | )          | (7,345                              | )          | (4,686                                  | )          | (7,235 | ) | — |   | — |   |
| Amortization and deferrals:                                               |       |                            |       |                                |       |                                    |       |   |   |   |   |   |   |
| Transition asset                                                          |       | —                          |       | (32                                 | )          | (254                                    | )          | (253 | ) | — |   | — |   |
| Actuarial loss                                                            |       | 2,465                           |       | 2,360                               |       | 1,000                                   |       | 1,430 |   | 357 |   | 705 |   |
| Prior service cost  (benefit)                                             |       | 519                             |       | 538                                 |       | —                                  |       | — |   | (598 | ) | (897 | ) |
| Special termination  benefits                                             |       | 264                             |       | —                              |       | —                                  |       | — |   | — |   | — |   |
| Curtailment loss (gain)                                                   |       | 57                              |       | —                              |       | (5,396                                  | )          | — |   | (12,274 | ) | — |   |
| Settlement gain                                                           |       | —                          |       | —                              |       | (332                                    | )          | — |   | (21,090 | ) | — |   |
| Net pension and  postretirement periodic benefit cost (credit)            |       | $                               | 9,714      |                                | $          | 9,488                                   |       | $ | (1,891 | ) | $ | 5,293 |   | $ | (32,110 | ) | $ | 2,012 |   |

 

TheCompany’s pre-tax loss on the sale of Cincinnati Lamb in the first quarter of2005 (see Note 5) takes into consideration the curtailment and settlement gainstotaling $39.1 million, comprising $33.4 million relating to the postretirementbenefit plans, and $5.7 million relating to the Non-U.S. Defined Benefit Plans.These curtailment and settlement gains comprise the pension and post-retirementobligations assumed by the buyer. In addition, the pre-tax loss on the sale ofCincinnati Lamb includes a loss of $12.9 million representing the cumulativeadjustment to recognize the minimum pension liability of the Company’s Non-U.S.defined benefit plans, which prior to the sale, had been deferred in the othercomprehensive loss component of shareholders’ investment on the Company’sconsolidated balance sheets.

 

Duringthe nine months ended October 2, 2005, the Company contributedapproximately $8.8 million to its pension and other postretirement benefitplans, comprising $1.8 million in benefits paid pertaining to unfunded U.S.defined benefit plans, $1.8 million in matching contributions to its 401(k)plan, $3.5 million in contributions to its foreign pension plans, and $1.7million in benefits paid pertaining to its other postretirement benefits plans.The Company expects to contribute an additional $2.1 million to these plansduring the remainder of 2005, of which $0.5 million relates to benefit paymentson its unfunded U.S. defined benefit plans, $0.5 million in matchingcontributions to its 401(k) plan, $0.8 million in contributions to its foreignpension plans and $0.3 million in benefit payments pertaining to its other postretirementbenefit plans.

 

# **14.**                   RecentAccounting Pronouncements

# ** **

In May 2005,the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections —a Replacement of APB Opinion No. 20 and FASB Statement No. 3,” whichchanges the requirements for the accounting and reporting of a change inaccounting principle. The Statement applies to all voluntary changes inaccounting principle and to changes required by an accounting pronouncement inthe unusual instance that the pronouncement does not include specifictransition provisions. This Statement requires retrospective application toprior periods’ financial statements of a change in accounting principle, unlessit is impracticable to determine either the period-specific effects or thecumulative effect of the change. The Company is required to adopt thisstatement during the first quarter of 2006, and does not expect the adoption ofthis statement to have a material impact on its consolidated financialcondition or results of operations.

 

In March 2005,the FASB issued Interpretation No. (FIN) 47, Accounting for ConditionalAsset Retirement Obligations, to clarify the requirement to record liabilitiesstemming from a legal obligation to clean up and retire fixed assets, such as aplant or factory, when an asset retirement depends on a future event. The

 

15

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Companyplans to adopt FIN 47 in the first quarter of fiscal 2006, and does not expectthe application of FIN 47 to have a material impact on its results ofoperations, cash flows or financial position.

 

In December 2004,the FASB issued Statement of Financial Accounting Standards No. 123(revised 2004), “Share-Based Payment” (SFAS 123R). Under the provisions of SFAS123R, companies are required to measure the cost of employee services receivedin exchange for an award of equity instruments based on the grant-date fairvalue of the award (with limited exception). That cost will be recognized overthe period during which an employee is required to provide service in exchangefor the award, usually the vesting period. On April 14, 2005, theSecurities and Exchange Commission (SEC) approved a delay to the effective dateof SFAS 123R. Under the new SEC rule, SFAS 123R is effective for annual periodsthat begin after June 15, 2005. SFAS 123R applies to all awards granted,modified, repurchased or cancelled by the Company after December 31, 2005,and to unvested options at the date of adoption. The Company is currentlyevaluating pricing models and the transition provisions of SFAS 123R and willbegin expensing stock-based compensation in accordance with the standard in thefirst quarter of 2006. The Company has not yet determined whether the adoptionof SFAS 123R will result in an impact to its consolidated financial statementssimilar to the current pro forma disclosures under SFAS 123.

 

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

 

16

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

 

# **Overview**

 

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

 

Effective the fourth quarter of 2004, the Companycommitted to a plan to sell its Industrial Automation Systems (“IAS”)businesses, comprising the Cincinnati Lamb division and the Landis GrindingSystems division after the Board of Directors concluded that the IAS segment nolonger aligned with the Company’s long-term strategy. Company managementbelieves that divesting the IAS businesses will enable the Company toconcentrate better on Intermec’s core competencies and growth opportunities.The Company has classified the IAS businesses as discontinued operations foraccounting purposes in the Company’s consolidated financial statements andrelated notes (see Note 5 to the consolidated financial statements). All priorperiods presented have been conformed to reflect this classification. TheCompany completed the sale of the Cincinnati Lamb business during the quarterended April 3, 2005, and expects to complete the sale of the LandisGrinding Systems business in the fourth quarter of 2005.

 

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

 

Intermec’s results appear to confirm management’sbelief that Intermec products tend to lead information technology (“IT”)spending recoveries due to the high returns on investment and short paybackperiods associated with customer implementation of the Company’s systems andsolutions. The Company believes that there are future growth opportunities forIntermec products as a result of increasing interest in RFID (radio frequencyidentification), the next generation item-tracking technology; increasinginterest in item-tracking technologies within the government market, such asDefense and Homeland Security; improved access for Intermec to non-traditionalmarkets as a result of broadening the product line to support these markets;and partnering arrangements with industry leaders to provide integratedsolutions to customers. The Company’s financial strength and ability to adaptto the current market and economic conditions are dependent in part on thegeneration of cash flow, effective management of working capital, fundingcommitments and other obligations, as well as the growth of the business.

 

17

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# **Results of Operations**

# ** **

The following discussion compares the Company’sresults of operations for the three and nine months ended October 2, 2005and September 30, 2004. Results from continuing operations include theIntermec segment and the Corporate and Other segment. The operating results ofthe IAS business are classified as discontinued operations. Results ofoperations were as follows (millions of dollars):

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                               | ** ** | **October 2,**    | ** ** | **September 30,** | ** ** | **October 2,** | ** ** | **September 30,** | ** ** |
| ** **                                               | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Product and Service Revenues                             |       | $                      | 219.8      |                   | $          | 194.8 |   | $ | 633.8 |   | $ | 574.4 |   |
|                                                     |       |                   |       |                   |       |   |   |   |   |
| Costs and Expenses:                                      |       |                   |       |                   |       |   |   |   |   |
| Cost of product and service revenues                     |       | 132.1                  |       | 115.4                  |       | 368.8 |   | 327.2 |   |
| Selling, general and administrative                      |       | 74.1                   |       | 70.6                   |       | 222.9 |   | 203.6 |   |
| Total Costs and Expenses                                 |       | 206.2                  |       | 186.0                  |       | 591.7 |   | 530.8 |   |
| Operating Profit  from Continuing Operations             |       | 13.6                   |       | 8.8                    |       | 42.1 |   | 43.6 |   |
| Interest, net                                            |       | (0.7                   | )          | (3.2                   | )          | (3.9 | ) | (9.5 | ) |
| Foreign currency exchange, net gain (loss)               |       | —                 |       | (0.3                   | )          | 0.1 |   | (0.9 | ) |
| Earnings from Continuing Operations before Income  Taxes |       | 12.9                   |       | 5.3                    |       | 38.3 |   | 33.2 |   |
| Provision (Benefit) for Income Taxes                     |       | 1.6                    |       | (1.5                   | )          | 9.8 |   | 7.5 |   |
| Earnings from Continuing Operations, net of tax          |       | 11.3                   |       | 6.8                    |       | 28.5 |   | 25.7 |   |
| Loss from Discontinued Operations, net of tax            |       | (6.7                   | )          | (0.9                   | )          | (8.4 | ) | (3.6 | ) |
| Net Earnings                                             |       | $                      | 4.6        |                   | $          | 5.9 |   | $ | 20.1 |   | $ | 22.1 |   |

 

18

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*Revenues*

 

Revenues by category andas a percentage of related revenues from continuing operations for the threeand nine months ended October 2, 2005 and September 30, 2004 were asfollows (millions of dollars):

 
| ** **     | ** ** | **Three Months Ended**   | ** ** | ** **                  | ** ** | ** ** | ** ** |
|----------------|------------|--------------------------|------------|-----------------------------|------------|------------|------------|
| ** **     | ** ** | **October 2, 2005** | ** ** | **September 30, 2004** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **     | ** ** | ** **               | ** ** | **Percent of**              | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **     | ** ** | **Amount**               | ** ** | **Revenues**                | ** ** | **Amount** | ** ** | **Revenues** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Revenues:      |       |                     |       |                        |       |       |       |   |   |   |   |   |   |
| Product        |       | $                        | 179.6      |                        | 81.7       | %          | $          | 160.0 |   | 82.1 | % | $ | 19.6 |   | 12.3 | % |
| Service        |       | 40.2                     |       | 18.3                        | %          | 34.8       |       | 17.9 | % | 5.4 |   | 15.5 | % |
| Total Revenues |       | $                        | 219.8      |                        | 100.0      | %          | $          | 194.8 |   | 100.0 | % | $ | 25.0 |   | 12.8 | % |

 

Quarterly revenue growthof 12.8% was driven by strong, broad based product demand, including a goodbalance of large enterprise account rollouts across Intermec’s industrysegments and strong growth from the Company’s indirect channel. Productrevenues for the three months ended October 2, 2005, were $179.6 million,an increase of $19.6 million, or 12.3%, compared with the corresponding prior-yearperiod.  Systems and solutions revenueincreased by 11.8% and printer/media products increased 10.0%. Service revenueincreased 15.8% over the corresponding prior-year period from technicalengineering services for government contracts, which are increasing as a resultof the AIT III contract, and continued growth in Latin America. Geographically,product and service revenue in North America increased 18.3% over thecorresponding prior-year period, Europe, Middle East and Africa increased 6.6%,and the rest of the world increased 2.3%.

 
| ** **             | ** ** | **Nine Months Ended**    | ** ** | ** **                  | ** ** | ** ** | ** ** |
|------------------------|------------|--------------------------|------------|-----------------------------|------------|------------|------------|
| ** **             | ** ** | **October 2, 2005** | ** ** | **September 30, 2004** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **             | ** ** | ** **               | ** ** | **Percent of**              | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **             | ** ** | **Amount**               | ** ** | **Revenues**                | ** ** | **Amount** | ** ** | **Revenues** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Revenues:              |       |                     |       |                        |       |       |       |   |   |   |   |   |   |
| Product related        |       | $                        | 522.6      |                        | 82.5       | %          | $          | 455.6 |   | 79.3 | % | $ | 67.0 |   | 14.7 | % |
| IP settlement          |       | —                   |       | —                      |       | 19.7       |       | 3.4 | % | (19.7 | ) | (100.0 | )% |
| Total Product Revenues |       | 522.6                    |       | 82.5                        | %          | 475.3      |       | 82.7 | % | 47.3 |   | 10.0 | % |
| Service                |       | 111.2                    |       | 17.5                        | %          | 99.1       |       | 17.3 | % | 12.1 |   | 12.2 | % |
| Total Revenues         |       | $                        | 633.8      |                        | 100.0      | %          | $          | 574.4 |   | 100.0 | % | $ | 59.4 |   | 10.3 | % |

 

Product revenues for the nine months ended September 30,2004 include $19.7 million of revenue and $15.7 million of operating profitfrom compensation related to a settlement regarding certain of the Company’sintellectual property (“IP settlement”). Product related revenue increased14.7% and service revenue increased 12.2%, resulting in a combined increase of14.3% for the nine months ended October 2, 2005, compared with thecorresponding prior-year period. Geographically, product and service revenue inNorth America increased 16.8% over the corresponding prior-year period, Europe,Middle East and Africa increased 9.3% and the rest of the world increased14.3%.

 

The Company is currently the plaintiff in a patentinfringement lawsuit regarding its battery power-management patents, which mayresult in future revenue and operating profit. Settlements relating to thebattery power-management patents have been reached to date with companies thatin the aggregate represent approximately ninety percent of U.S. laptop sales.In addition, the Company is also the plaintiff in various other patentinfringement lawsuits which may result in future revenue and operating profit.Management cannot predict the outcome of any of these lawsuits or the timing oramount of future settlements or judgments.

 

19

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*Gross Profit*

 

Gross profit and gross margin by revenue categoryfor the three and nine months ended October 2, 2005, and September 30,2004 were as follows (millions of dollars):

 
| ** **                          | ** ** | **Three Months Ended**   | ** ** |
|-------------------------------------|------------|--------------------------|------------|
| ** **                          | ** ** | **October 2, 2005** | ** ** | **September 30, 2004** | ** ** |
| ** **                          | ** ** | **Gross Profit**         | ** ** | **Gross Margin** | ** ** | **Gross Profit** | ** ** | **Gross Margin** | ** ** |
| Product related                     |       | $                        | 72.6       |   | 40.4 | % |   | $ | 65.0 |   | 40.6 | % |   |
| Service                             |       | 15.1                     |       | 37.6 | % |   | 14.4 |   | 41.5 | % |   |
| Total Gross Profit and Gross Margin |       | $                        | 87.7       |   | 39.9 | % |   | $ | 79.4 |   | 40.7 | % |   |

 

Product and service gross profit for the threemonths ended October 2, 2005, increased $8.3 million, or 10.4% compared tothe corresponding prior-year period as a result of the revenue increase. Theproduct gross margin decreased by 0.2 points due to the mix of growth in the UScompared to Europe, in Latin America compared to Asia and more significantly tolower margins realized from large enterprise accounts. The decrease in servicemargins of 3.9 points is due primarily to the mix of large enterprise accounts.

 
| ** **                          | ** ** | **Nine Months Ended**    | ** ** |
|-------------------------------------|------------|--------------------------|------------|
| ** **                          | ** ** | **October 2, 2005** | ** ** | **September 30, 2004** | ** ** |
| ** **                          | ** ** | **Gross Profit**         | ** ** | **Gross Margin** | ** ** | **Gross Profit** | ** ** | **Gross Margin** | ** ** |
| Product related                     |       | $                        | 220.9      |   | 42.3 | % |   | $ | 190.8 |   | 41.9 | % |   |
| IP Settlement                       |       | —                   |       | — |   |   | 15.7 |   | 79.7 | % |   |
| Total Product                       |       | 220.9                    |       | 42.3 | % |   | $ | 206.5 |   | 43.4 | % |   |
| Service                             |       | 44.1                     |       | 39.7 | % |   | 40.7 |   | 41.1 | % |   |
| Total Gross Profit and Gross Margin |       | $                        | 265.0      |   | 41.8 | % |   | $ | 247.2 |   | 43.0 | % |   |

 

Gross profit for the nine months ended September 30,2004, includes $15.7 million from compensation related to the IP settlement.Total gross profit for the nine months ended October 2, 2005, increased$17.8 million or 7.2% compared with the corresponding prior-year period.Product related gross profit for the nine months ended October 2, 2005,increased $30.1 million, or 15.8%, compared with the corresponding prior-yearperiod as a result of the 14.7% increase in revenue combined with the 0.4 pointimprovement in gross margin.  Theincrease in service revenue for the nine months ended October 2, 2005,contributed a $3.4 million increase in gross profit compared with thecorresponding 2004 period.

 

*Selling, General andAdministrative*

 

Selling, general and administrative (“SG&A”)expenses were $74.1 million and $222.9 million for the three and nine monthsended October 2, 2005, respectively, compared with SG&A expenses of$70.6 million and $203.7 million for the corresponding prior-year period.Intermec’s SG&A expense for the three months ended October 2, 2005, was$69.7 million, or 31.8% of revenue, compared with 32.0% of revenue for thecorresponding prior-year period. The decrease in Intermec SG&A expense as apercentage of revenue was primarily due to the ability to leverage Intermec’sSG&A structure as product and service revenues increase, partially offsetby incremental legal expense of $5.7 million in the quarter primarilyassociated with the pursuit of a legal remedy for the Company's many disputeswith Symbol Technologies. Intermec’s R&D expense decreased to 7.1% ofrevenues for the quarter ended October 2, 2005 compared with 8.3% for thecorresponding prior-year period primarily due to the improved leverage as aresult of the revenue increase.

 

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Operating expenses for Corporate and Other were $4.4million and $8.3 million for the three months ended October 2, 2005, and September 30,2004, respectively, and $15.8 million and $17.2 million for the correspondingnine month periods. Corporate and Other expenditures for the first quarter of2004 included the reversal of a $2.0 million legal accrual due to a favorableruling in an Intellectual Property dispute during the quarter.

 

*Operating Profit*

 

Operating profit and operating profit margin byrevenue category for the three and nine months ended October 2, 2005, and September 30,2004, were as follows (millions of dollars):

 
| ** **                                        | ** ** | **Three Months Ended**   | ** ** |
|---------------------------------------------------|------------|--------------------------|------------|
| ** **                                        | ** ** | **October 2, 2005** | ** ** | **September 30, 2004** | ** ** |
| ** **                                        | ** ** | **Operating  Profit**    | ** ** | **Operating  Profit Margin** | ** ** | **Operating  Profit** | ** ** | **Operating  Profit Margin** | ** ** |
| Operating Profit from Continuing Operations       |       |                     |       |   |   |   |   |   |   |
| Intermec                                          |       | $                        | 18.0       |   | 8.2 | % |   | $ | 17.1 |   | 8.8 | % |   |
| Corporate and Other                               |       | (4.4                     | )          | (2.0 | )% |   | (8.3 | ) | (4.3 | )% |   |
| Total Operating Profit from Continuing Operations |       | $                        | 13.6       |   | 6.2 | % |   | $ | 8.8 |   | 4.5 | % |   |
|                                                   |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |

 

Intermec operating profit for the three months endedOctober 2, 2005, including the impact of $5.7 million of incremental legalexpense, increased $0.9 million, or 5%, compared with the correspondingprior-year period. Total operating profit from continuing operations for thethree months ended October 2, 2005, increased $4.8 million, or 55%,compared with the corresponding prior-year period, due to the $3.9 milliondecrease in Corporate and Other expense combined with $0.9 million improvementin Intermec operating profit.

 
| ** **                                        | ** ** | **Nine Months Ended**    | ** ** |
|---------------------------------------------------|------------|--------------------------|------------|
| ** **                                        | ** ** | **October 2, 2005** | ** ** | **September 30, 2004** | ** ** |
| ** **                                        | ** ** | **Operating  Profit**    | ** ** | **Operating  Profit Margin** | ** ** | **Operating  Profit** | ** ** | **Operating  Profit Margin** | ** ** |
| Operating Profit from Continuing Operations       |       |                     |       |   |   |   |   |   |   |
| Intermec:                                         |       |                     |       |   |   |   |   |   |   |
| Product and Service                               |       | $                        | 57.9       |   | 9.1 | % |   | $ | 45.0 |   | 7.8 | % |   |
| IP Settlements                                    |       | —                   |       | — |   |   | 15.7 |   | 2.7 | % |   |
| Total Intermec                                    |       | 57.9                     |       | 9.1 | % |   | 60.7 |   | 10.5 | % |   |
| Corporate and Other                               |       | (15.8                    | )          | (2.5 | )% |   | (17.1 | ) | (3.0 | )% |   |
| Total Operating Profit from Continuing Operations |       | $                        | 42.1       |   | 6.6 | % |   | $ | 43.6 |   | 7.6 | % |   |
|                                                   |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |

 

Intermec product and service operating profit forthe nine months ended October 2, 2005, increased $12.9 million, or 28.7%,compared with the corresponding prior-year period. Intermec operating profitfor the nine months ended October 2, 2005, decreased $2.8 million comparedwith the corresponding prior-year period due to the $15.7 million impact of theIP settlement in the first quarter of 2004.

 

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*Interest, Net*

 

Net interest expense was $0.7 million and $3.9million for the three and nine months ended October 2, 2005, respectively,compared with $3.2 million and $9.4 million for the corresponding prior yearperiod. The reduction in net interest expense primarily reflects the loweraverage debt balances during the three and nine months ended October 2,2005, compared with the corresponding prior-year periods.

 

*Provision for Income Taxes*

 

The tax provision for thethree and nine months ended October 2, 2005, reflects effective tax ratesfor continuing operations of 12.4% and 25.6%, respectively, compared to a U.S.statutory provision rate of 35%.  Thereduction in the effective tax rates is primarily due to a reduction in theforeign tax contingency accrual as a result of the resolution of a German taxaudit.

 

The tax benefit for thethree months ended and the tax provision for the nine months ended September 30,2004, reflect effective tax rates for continuing operations of 27.9% and 22.5%,respectively.  The reduction in theeffective tax rates is primarily due to the recognition of deferred tax assetsand other tax benefits that were previously unrecognized.

 

*Loss fromDiscontinued Operations*

 

During the fourth quarterof 2004, the Company committed to a plan to dispose of its IAS businesses, comprisingthe Cincinnati Lamb and Landis Grinding Systems businesses, after it wasdetermined that they are no longer aligned with the Company’s long-termstrategy. During the first quarter of 2005, the Company completed the sale ofthe Cincinnati Lamb business. In accordance with SFAS 144, “Accounting forDisposal or Impairment of Long-Lived Assets,” the IAS businesses are classifiedas discontinued operations in the Company’s consolidated financial statementsfor all periods presented.

 

On April 3, 2005, theCompany completed the sale of the Cincinnati Lamb business. The considerationreceived for the Cincinnati Lamb business included (i) $16 million, paidin cash on April 4, 2005, (ii) a $10.0 million long-term secured notereceivable with an estimated fair value of $8.4 million and (iii) liabilitiesrelated to certain pension and other post-retirement obligations of $39.1million assumed by the buyer. The Company was also required to deliver to thebuyer a guaranteed net working asset balance. Accordingly, during the secondquarter of 2005 the Company reimbursed the buyer $12.6 million for accountspayable related to the Cincinnati Lamb business, satisfying the net workingasset adjustment.

 

In connection with thesale, during the second quarter of 2005 the Company loaned to the buyer $1.5million. This note receivable, the $10.0 million long-term secured note and anadditional $1.0 million of face value were combined into a single $12.5 millionlong-term note receivable secured by the assets sold, bearing interest at anannual rate of LIBOR plus three percent (6.9% as of October 2, 2005) withinterest payable quarterly. Principal payments on the note are due in sixsemiannual installments beginning April 2007 of $1.5 million, $2.0million, $2.0 million, $2.5 million, $2.0 million and $2.5 million. As of October 2,2005, the estimated fair value of the note is $10.4 million, based on theestimated cash flows from the note and a risk-adjusted discount rate equal toLIBOR plus eight percent. The Company’s consolidated balance sheet as of October 2,2005, classifies the $10.4 million long-term note receivable as other assets.

 

22

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The Company recognized apre-tax loss on the sale of the Cincinnati Lamb business of $34.7 millionduring the quarter ended April 3, 2005. During the second quarter of 2005the Company recognized an additional $1.2 million pre-tax loss on the sale ofthe Cincinnati Lamb business. The net assets sold of the Cincinnati Lambbusiness were recorded at $36.7 million as of the date of the sale andcomprised the following (thousands of dollars):

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

 

Long-term liabilities inthe above table represent pension and post-retirement obligations assumed bythe buyer (see Note 13 to the Consolidated Financial Statements).

 

The loss on the saleincludes an $8.3 million gain related to cumulative translation adjustment anda $12.9 million charge related to the adjustment to recognize minimum pensionliability related to Cincinnati Lamb, which previously had been included in theaccumulated other comprehensive income component of shareholders’ investment (“OCI”).The Company also incurred $5.3 million of transaction-related expense primarilyfor severance and professional services.

 

The following table setsforth the components of the loss from discontinued operations, net of tax, forthe three and nine months ended October 2, 2005, and September 30,2004 (thousands of dollars):

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **October 2,**    | ** ** | **September 30,** | ** ** | **October 2,** | ** ** | **September 30,** | ** ** |
| ** **                                    | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Product and service revenues                  |       | $                      | 38,871     |                   | $          | 121,919 |   | $ | 199,750 |   | $ | 344,218 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| Operating loss.                               |       | (7,781                 | )          | (1,007                 | )          | (12,496 | ) | (3,610 | ) |
| Loss on sale of Cincinnati Lamb               |       | —                 |       | —                 |       | (35,926 | ) | — |   |
| Loss from discontinued operations, before tax |       | (7,781                 | )          | (1,007                 | )          | (48,422 | ) | (3,610 | ) |
| Provision (Benefit) for income taxes..        |       | (1,084                 | )          | (64                    | )          | (40,006 | ) | 37 |   |
| Loss from discontinued operations, net of tax |       | $                      | (6,697     | )                      | $          | (943 | ) | $ | (8,416 | ) | $ | (3,647 | ) |

 

Operating loss fromdiscontinued operations for the three and nine months ended October 2,2005, includes a $9.5 million charge for the settlement of a lawsuit (see Note12). Operating loss from discontinued operations for the nine months ended October 2,2005, includes an impairment charge in the second quarter of $2.0 million towrite-down property, plant and equipment, classified as assets held for sale onthe Company’s consolidated balance sheets, to its estimated net realizablevalue.

 

23

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The tax benefit for thenine months ended October 2, 2005, reflects an effective tax rate of 82.6%compared to the U.S. statutory tax rate of 35%. The increase is primarily due to tax benefits from the disposition ofthe Cincinnati Lamb business of approximately $24.0 million.  These benefits, including a tax effectedcapital loss carryforward in the U.S. in the amount of $12.4 million, resultfrom differences between the book basis of assets sold and the related taxbasis of the stock and a benefit of $6.9 million from a prior period electionto treat a foreign subsidiary as a branch.

 

The Company ceasedpermanently reinvesting in Canada, Germany and Korea as a result of thedisposition of the Cincinnati Lamb business. The tax on repatriated dividends was substantially offset by foreign taxcredits.

 

The table below setsforth the assets and liabilities of discontinued operations as of October 2,2005, and December 31, 2004 (thousands of dollars):

 
| ** **                                           | ** ** | **October 2,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **2005**            | ** ** | **2004**              | ** ** |
| Current assets of discontinued operations:           |       |                |       |                  |       |
| Accounts receivable, net                             |       | $                   | 35,270     |                  | $          | 160,118 |   |
| Inventories, net                                     |       | 27,452              |       | 55,926                |       |
| Other current assets                                 |       | 824                 |       | 5,635                 |       |
| Impairment of current assets                         |       | —              |       | (10,563               | )          |
| Total current assets of discontinued operations      |       | 63,546              |       | 211,116               |       |
|                                                 |       |                |       |                  |       |
| Long-term assets of discontinued operations:         |       |                |       |                  |       |
| Property, plant and equipment, net                   |       | 11,342              |       | 13,356                |       |
| Goodwill                                             |       | 7,796               |       | 7,796                 |       |
| Other assets                                         |       | 54                  |       | 86                    |       |
| Total long-term assets of discontinued operations    |       | 19,192              |       | 21,238                |       |
|                                                 |       |                |       |                  |       |
| Current liabilities of discontinued operations:      |       |                |       |                  |       |
| Accounts payable and accrued expenses                |       | 28,206              |       | 117,026               |       |
| Accounts Payable-Tower Automotive settlement         |       | 13,500              |       | —                |       |
| Accrued payroll                                      |       | 4,664               |       | 13,231                |       |
| Total current liabilities of discontinued operations |       | 46,370              |       | 130,257               |       |
|                                                 |       |                |       |                  |       |
| Long-term liabilities of discontinued operations     |       | 11,773              |       | 46,388                |       |
| Net assets of discontinued operations                |       | $                   | 24,595     |                  | $          | 55,709 |   |

 

The Company’s goodwill of$7.8 million relates to its Landis Grinding Systems business and is classifiedas long-term assets of discontinued operations on the Company’s consolidatedbalance sheets as of October 2, 2005, and December 31, 2004.Long-term liabilities of discontinued operations comprise pension andpostretirement obligations.

 

As of October 2,2005, accumulated other comprehensive income on the Company’s consolidatedbalance sheet includes a credit balance of $9.6 million related to LandisGrinding Systems cumulative translation adjustments.

 

24

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**Liquidity and Capital Resources**

 

The Company’s cash and cash equivalent position asof October 2, 2005, was $180 million. In March 2005, the Companyretired $100 million of its bonds and thus removed the cash restriction of $50million required under the Company’s credit agreements as of December 31,2004. In July 2005, the Company also retired its $8.5 million industrialrevenue bonds. Excluding the impact of the bond retirements and the restrictedcash, cash and cash equivalents increased by $20 million compared with the December 31,2004 balance. The increase comprised $55 million provided by continuingoperations offset by $35 million used by discontinued operations.

 

Operating activities of continuing operationsprovided $39 million, comprised of $51 million from operations, partiallyoffset by $12 million of interest payments. Investing activities ofcontinuing operations for the nine months of 2005 provided net cash flow of $49million due to proceeds from the sale of assets held for sale and the removalof the restriction on $50 million of restricted cash, partially offset bycapital expenditures of $7 million. Financing activities of continuingoperations reflect the use of $108 million for the repayment of debt, partiallyoffset by $16 million of proceeds from stock option exercises during the ninemonths ended October 2, 2005. Operating activities of discontinuedoperations used $35 million. Investing activities of discontinued operationsused $1 million.

 

Net of outstandingletters of credit and limitations on minimum availability, the Company hadborrowing capacity at October 2, 2005, of $32.1 million under theRevolving Facility and £5.6 million ($9.9 million) under the UK Facility. TheCompany made no borrowings under the Revolving Facility or the UK Facilityduring the first nine months of 2005, and as of October, 2005, no borrowingswere outstanding under either the Revolving Facility or the UK Facility. As of October 2,2005, the Company was in compliance with the financial covenants of each ofthese agreements.

 

The key terms of theRevolving Facility are as follows:

 

•                        The Company’s obligations under the RevolvingFacility are secured by substantially all the U.S. assets of the Company andits U.S. subsidiaries and a pledge of 65% of the stock of certain of itsforeign subsidiaries.

 

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

 

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

 

•                        Until it retired its 6.875% Notes due March 15,2005, the Company was required to maintain a minimum balance of$50 million as restricted cash. This amount is classified as restrictedcash on the Company’s consolidated balance sheet as of December 31, 2004.This cash restriction has been removed as of October 2, 2005.

 

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

 

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

 

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

 

25

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the Company retired the$100.0 million seven-year notes. In July 2005, the Company retired the$8.5 million industrial revenue bond.

 

Management believes thatcash and cash equivalents on hand, combined with projected cash flow fromoperations, the sale of discontinued operations and assets held for sale andavailable borrowings under the Company’s Revolving Facility will be sufficientto fund the Company’s operations, research and development efforts, anticipatedcapital expenditures, liabilities, commitments, and other capital requirements,for at least the next twelve months. 

 

**Subsequentevents**

 

On October 27, 2005the Company entered into a Purchase and Sale Agreement (“The Agreement”) tosell its Landis Grinding Systems division (“Landis”). Under the Agreement, thepurchasing parties will acquire the global operations of Landis through thepurchase of substantially all of the assets of the Landis Grinding Systems. Theconsideration for the purchased assets consists of $69 million in cash, a $10million two-year note at an interest rate of five percent per annum guaranteedby the buyer's parent, and the buyer's assumption of certain liabilities,including certain pension and other post-retirement obligations.  The purchase price is subject to possibleadjustments based on the amount of net working assets at closing.

 

The Agreement containscustomary covenants and closing conditions, including operation of Landis inthe ordinary course until the closing, obtaining third-party consents to thetransaction, and non-competition for five years in the U.S. and three years inthe U.K.

 

**ContractualObligations**

 

In March 2005, SymbolTechnologies, Inc. (“Symbol”) terminated its original equipmentmanufacturing (“OEM”) agreement with Intermec to supply laser scan engines and stoppedshipping laser scan engines to the Company. The Company believes that thetermination of the OEM agreement by Symbol will not have a material adverseeffect on its future operations. The Company believes Symbol breached the termsof the contract and that all related purchase commitments under this contractof $18 million and $16 million for 2005 and 2006, respectively, are eliminated.

 

On March 15, 2005,the Company retired $100 million of bonds. In July 2005, the Companyretired the $8.5 million industrial revenue bond.

 

Except for the elimination ofthe purchase commitments with Symbol and the reduction of long-term debtobligations noted above, the Company’s contractual commitments as of October 2, 2005, have not changedmaterially from those disclosed in Item 7 of the Company’s annual report on Form 10-Kfor the year ended December 31, 2004**.**

 

**CriticalAccounting Policies**

 

“Management’s Discussion andAnalysis of Financial Condition and Results of Operations” discusses theCompany’s consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of these financial statements requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities, and thereported amounts of revenues and expenses. Actual amounts could differ fromthose estimates under different assumptions or conditions. Management’s beliefsregarding significant accounting policies have not changed significantly fromthose disclosed in Item 7 of the Company’s annual report on Form 10-K forthe year ended December 31, 2004.

 

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,

 

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andthe reported amounts of revenues and expenses. Actual amounts could differ fromthose estimates under different assumptions or conditions. Significantestimates and assumptions were used to determine the provisions foruncollectible accounts receivable, excess and obsolete inventory, tax valuationallowances, recoverability of goodwill and other intangible assets, warrantycosts, percentage-of-completion on long-term contracts, retiree medical andpension obligations, estimated proceeds on businesses to be divested, estimatednet realizable 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 ended December 31,2004.

 

**New Accounting Pronouncements**

 

In May 2005,the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections —a Replacement of APB Opinion No. 20 and FASB Statement No. 3”, whichchanges the requirements for the accounting and reporting of a change inaccounting principle. The Statement applies to all voluntary changes inaccounting principle and to changes required by an accounting pronouncement inthe unusual instance that the pronouncement does not include specifictransition provisions. This Statement requires retrospective application toprior periods’ financial statements of a change in accounting principle, unlessit is impracticable to determine either the period-specific effects or thecumulative effect of the change. The Company is required to adopt thisstatement during the first quarter of 2006, and does not expect the adoption ofthis statement to have a material impact on its financial condition or resultsof operations.

 

In March 2005,the FASB issued Interpretation No. (FIN) 47, Accounting for ConditionalAsset Retirement Obligations, to clarify the requirement to record liabilitiesstemming from a legal obligation to clean up and retire fixed assets, such as aplant or factory, when an asset retirement depends on a future event. TheCompany plans to adopt FIN 47 in the first quarter of fiscal 2006, and does notexpect the application of FIN 47 to have a material impact on its results ofoperations, cash flows or financial position.

 

In December 2004,the FASB issued Statement of Financial Accounting Standards No. 123(revised 2004), “Share-Based Payment” (SFAS 123R). Under the provisions of SFAS123R, companies are required to measure the cost of employee services receivedin exchange for an award of equity instruments based on the grant-date fairvalue of the award (with limited exception). That cost will be recognized overthe period during which an employee is required to provide service in exchangefor the award, usually the vesting period. On April 14, 2005, theSecurities and Exchange Commission (SEC) approved a delay to the effective dateof SFAS 123R. Under the new SEC rule, SFAS 123R is effective for annual periodsthat begin after June 15, 2005. SFAS 123R applies to all awards granted,modified, repurchased or cancelled by the Company after December 31, 2005,and to unvested options at the date of adoption. The Company is currently evaluatingpricing models and the transition provisions of SFAS 123R and will beginexpensing stock-based compensation in accordance with the standard in the firstquarter of 2006. The Company has not yet determined whether the adoption ofSFAS 123R will result in an impact to its consolidated financial statementssimilar to the current pro forma disclosures under SFAS 123.

 

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

 

#### ***Forward-Looking Statements 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 highly dependent upon a variety of important factors whichcould cause actual results to differ materially from those reflected in suchforward-looking statements. These factors include but

 

27

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are not limited to theCompany’s ability to continue to improve profit of its business segment, reduceexpenses, improve efficiency, leverage its research and development investmentto drive significant future revenue, complete its divestiture of its IASbusinesses and realize the estimated market values. Such forward-lookingstatements involve and are dependent upon certain risks and uncertainties. Whenused in this document and documents referenced, the words “anticipate,” “believe,”“will,” “intend,” and “expect” and similar expressions as they relate to theCompany or its management are intended to identify such forward-lookingstatements. The Company undertakes no obligation to publicly update or reviseany forward-looking statements, whether as a result of new information, futureevents, changed circumstances or any other reason after the date of thisquarterly report. Forward-looking statements include, but are not limited to,statements about the following:

 

•                  TheCompany’s expected divestiture of its remaining IAS business and assets heldfor sale and the timing of those transactions;

 

•                  Theestimated market value of the Company’s remaining IAS business and assets heldfor sale;

 

•                  Theestimated cash flow for the Company’s businesses and the timing of that cashflow;

 

•                  TheCompany’s anticipated corporate and other expenses;

 

•                  TheCompany’s expected effective tax rate;

 

•                  TheCompany’s expected growth profile and growth range;

 

•                  Theanticipated revenues and operating profit in the Company’s Intermec business;

 

•                  Theanticipated cost of goods sold or cost of services sold in the Company’sIntermec business;

 

•                  TheCompany’s anticipated spending on research and development;

 

•                  Theanticipated revenues from licensing the Company’s intellectual property and thetiming of such revenues;

 

•                  Theanticipated costs of enforcing or defending the Company’s intellectual propertyand the timing of such costs;

 

•                  TheCompany’s prospects for obtaining licenses under intellectual property owned orotherwise controlled by a third party;

 

•                  Theanticipated costs associated with intellectual property owned or otherwisecontrolled by a third party and licensed by the Company and the timing of suchcosts;

 

•                  TheCompany’s prospects for realization of deferred tax assets;

 

•                  Theanticipated demand for the Company’s Intermec products and services;

 

•                  Theprospects for selling Intermec products and services to major enterprise accountsand government agencies;

 

•                  Theanticipated improvements in existing Intermec products and services and thedevelopment of new Intermec products and services;

 

•                  Thetiming of the introduction of new Intermec products and services and thephase-out of old Intermec products and services;

 

•                  TheCompany’s view of the short- and long-term outlook for and trends in themarkets for Intermec products and services;

 

•                  TheCompany’s anticipated contributions to its pension and other post-retirementbenefit plans;

 

•                  TheCompany’s belief regarding the outcome of pending or threatened litigation;

 

•                  TheCompany’s belief regarding the timing and outcome of national and internationalstandards-setting activities that could impact Intermec products and systems;

 

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•                  TheCompany’s ability to:

 

•                                          Meetits debt obligations, as well as working capital and capital expenditurerequirements;

 

•                                          Achieveits goals with respect to revenues and cost savings;

 

•                                          Successfullyobtain critical components for its products at reasonable prices;

 

•                                          Successfullycomplete large-scale mobile computing installations.

 

Forward-looking statements are not guarantees offuture performance. Several factors govern whether the Company will or can achieveany forward-looking statement made in this report. Any one of these factorscould cause the Company’s actual results to differ materially from thosediscussed in a forward-looking statement. The Company outlines these riskfactors in reports that it files with the SEC, in press releases and on itswebsite, www.unova.com. Such risk factors include, but are not limited to:

 

•                  TheCompany’s inability to realize (within the next 12 months or thereafter) theestimated market value of its IAS business and the assets held for sale;

 

•                  Weaknessin the automotive and aerospace markets could lead to reduced demand for theIAS business’ products and services and could reduce the Company’s netrealizable value from the planned divestiture of the IAS business;

 

•                  Ifthe Company is unable to generate anticipated cash flows from its businessesduring the anticipated time frame, that could adversely impact the Company’sability to meet debt obligations, working capital or capital expenditurerequirements;

 

•                  Unexpectedincreases in corporate and other expenses could adversely impact the Company’snet income;

 

•                  Ifthe Company is unable to achieve the expected effective tax rate, that couldadversely impact the Company’s net income;

 

•                  Ifthe Company is unable to realize deferred tax assets, that could adverselyimpact the Company’s net income;

 

•                  Ifthe Company is unable to sell Intermec products and services to majorenterprise accounts and government agencies, that could adversely impact theCompany’s revenues and operating profit;

 

•                  Ifthe Company does not make the anticipated level of investment in research anddevelopment, that could adversely impact its future growth;

 

•                  Ifthe Company’s research and development effort does not yield marketableimprovements in existing Intermec products and services and new Intermecproducts and services that could adversely impact results of operations and theCompany’s future growth;

 

•                  Ifimprovements in existing Intermec products and services or new Intermecproducts and services are not completed in a timely fashion, that couldadversely impact results of operations and the Company’s future growth;

 

•                  Othercompanies may infringe the Company’s intellectual property. If the Company isunable to enforce its intellectual property through appropriate licensingagreements, litigation or other means, demand for the Company’s products,royalty revenues and results of operations could be adversely affected;

 

•                  Ifthe Company is unable to realize anticipated royalty revenue during the anticipatedtime frame, that could adversely impact results of operations;

 

•                  Technologicalchanges and consequent shifts in the Intermec market could adversely impactdemand for the Company’s Intermec products and services and the Company’srevenues and operating profit;

 

•                  Ifthe Company is unable to obtain licenses under third party intellectualproperty at a reasonable cost or is enjoined from practicing an invention basedon third party intellectual property, the Company could be prevented fromselling a particular Intermec product or family of products which couldadversely impact results of operations and the Company’s future growth;

 

29

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•                  Approvalof national and international standards applicable to Intermec products andsystems could adversely impact demand for the Company’s products and systems;

 

•                  Changesin U.S. and foreign government regulations applicable to Intermec products andservices could adversely impact demand for the Company’s products and servicesor prevent the Company from selling some of its products and services in somejurisdictions;

 

•                  Unexpectedincreases in the Company’s cost of goods sold or cost of services sold in itsIntermec business or the Company’s inability to reduce those costs to expectedlevels could adversely impact the Company’s operating profit;

 

•                  Someof the Company’s competitors have greater financial and other resources thanthe Company and, as a result, may be able to adapt more quickly to markettrends or price declines;

 

•                  Ifthe Company is unable to obtain key components of its Intermec products at areasonable cost and in a timely manner, the cost of manufacturing thoseproducts could increase, the Company might have to discontinue or re-engineersome of those products, and delivery of some of those products might bedelayed, which could adversely impact results of operations and the Company’sfuture growth;

 

•                  Ifpending litigation results in an unfavorable outcome, the Company’s financialposition, results of operations, cash flows or future growth could be adverselyaffected;

 

•                  Actsof terrorism within the U.S. could adversely affect the Company’s domesticoperations;

 

•                  Actsof terrorism, political instability and hostility to U.S. companies in foreignjurisdictions could adversely affect the Company’s international operations.

 

Readers should consider the foregoing risk factorsin evaluating the Company’s ability to achieve expected results or objectivesset forth in any forward-looking statement. In addition, readers should notplace undue reliance on forward-looking statements in making investmentdecisions regarding the Company. The Company disclaims any obligation to updatepublicly any forward-looking statement, whether as a result of new information,future events or otherwise.

 

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

 

The Company is exposed to interest rate riskprimarily from its short-term and long-term borrowings and to foreign exchangerate risk with respect to its foreign operations and from foreign currencytransactions.

 

Due to its global operations, the Company’s cashflows and earnings are exposed to foreign exchange rate fluctuations. Whenappropriate, the Company may attempt to limit its exposure to changing foreignexchange rates by entering into short-term foreign currency exchange contracts.As of October 2, 2005, the Company held short-term contracts for thepurpose of hedging foreign currency cash flows with an aggregate notionalamount of $198.3 million.

 

Except as noted in the preceding paragraph, as of October 2,2005, there have been no material changes in information provided in Item 7A ofthe Company’s annual report on Form 10-K for the year ended December 31,2004, which contains a complete discussion of the Company’s material exposuresto interest rate and foreign exchange rate risks.

 

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

### ** **

The Company maintains disclosure controls andprocedures, which are designed to ensure that information required to bedisclosed in the reports the Company files or submits under the SecuritiesExchange Act of 1934, as amended, is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms, and that such information is accumulated andcommunicated to Company management, including the Chief Executive Officer, orCEO, and Chief Financial Officer, or CFO, as appropriate to allow timelydecisions regarding required disclosure.

 

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Under the supervision and with the participation ofCompany management, including the CEO and CFO, an evaluation was performed onthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures as of the end of the period covered by this quarterlyreport. Based on that evaluation, Company management, including the CEO andCFO, concluded that the Company’s disclosure controls and procedures wereeffective as of October 2, 2005.

 

An evaluation was also performed under thesupervision and with the participation of Company management, including the CEOand CFO, of any change in the Company’s internal controls over financialreporting that occurred during the last fiscal quarter and that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrols over financial reporting. That evaluation did not identify any changein the Company’s internal controls over financial reporting that occurredduring the latest fiscal quarter and that has materially affected, or isreasonably likely to materially affect, the Company’s internal controls overfinancial reporting.

 

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## **PART II.  OTHER INFORMATION**

## ** **

**ITEM 2.****         ****UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

 

(c)               IssuerPurchases of Equity 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** | ** ** |
|----------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|
| July 4 to July 31, 2005      |       | 5,213                                            |       | $                                           | 27.82      |                                                                                                   | —     |                                                                                                                          | —     |   |
| August 1 to August 28 , 2005 |       | —                                           |       | —                                      |       | —                                                                                                 |       | —                                                                                                                        |       |
| August 29 to October 2, 2005 |       | 20,463                                           |       | 34.21                                       |       | —                                                                                                 |       | —                                                                                                                        |       |
| Total                                  |       | 25,676                                           |       | $                                           | 32.91      |                                                                                                   | —     |                                                                                                                          | —     |   |

 

Thepurchased shares indicated in the above table were surrendered to the Companyto pay the exercise price in connection with the exercise of employee stockoptions and to satisfy tax withholding obligations in connection with the vestingof restricted stock.

 

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

 
| 4.1        |       | Thomas O. Miller  Employment Agreement, dated as of October 21, 2005.                                                                                                                                                                                                                                                   |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                   |
| 4.2        |       | Purchase and  Sale Agreement among UNOVA, Inc., UNOVA Industrial Automation Systems, Inc.,  UNOVA IP Corp. and UNOVA U.K. Limited as Selling Entities and Compagnie De  Fives-Lille, Cinetic Landis Grinding Corp. and Cinetic Landis Grinding  Limited as Purchasing Entities, dated as of October 27, 2005. |
|       |       |                                                                                                                                                                                                                                                                                                                         |
| 31.1       |       | Certification of  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002, dated as of November 8, 2005.                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                                         |
| 31.2       |       | Certification of  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002, dated as of November 8, 2005.                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                                         |
| 32.1       |       | Certification of  Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002, dated as of November 8, 2005.                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                                         |
| 32.2       |       | Certification of  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002, dated as of November 8, 2005.                                                                                                                                                                                |

 

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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.

 

 
|   | UNOVA, INC.  |
|--------|--------------|
|   | (Registrant) |
|   |         |
|   |         |
|   | By           | /s/ Fredric B.  Anderson |   |
|   |         |   |
|   |         | Fredric B. Anderson |
|   |         | *Vice President and Controller* |
|   |         | *(Acting Chief Financial Officer)* |
|   |         |   |
|   |         | November 9, 2005 |

 

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