**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

## **FORM 10-Q**

 

**(MarkOne)**

 

**ý****                                ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the quarterly period ended July 3, 2005**

 

**OR**

 

**o****                                ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**Commission file number 001-13279**

 

**UNOVA, INC.**

(Exact name of registrant as specified in its charter)

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

 

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

# ** **

Indicate by check 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 file suchreports), and (2) has been subject to such filing requirements for thepast 90 days. Yes ý No o

 

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

 

On July 31, 2005,there were 61,854,401 shares of Common Stock outstanding, exclusive of treasuryshares.

 

 

----

 

**UNOVA, INC.**

**INDEX**

**REPORT ON FORM 10-Q**

**FOR THE QUARTER ENDED JULY 3, 2005**

 
| **PART I. FINANCIAL INFORMATION** |                                                                                                                    |
|----------------------------------------|-------------------------------------------------------------------------------------------------------------------------|
|                                   |                                                                                                                    |   |
| **ITEM  1.**                           | Financial Statements                                                                                                    |   |
| ** **                             |                                                                                                                    |   |
|                                   | Consolidated  Statements of Operations (unaudited)  Three and Six Months Ended July 3, 2005 and June 30, 2004 |   |
|                                   |                                                                                                                    |   |
|                                   | Consolidated  Balance Sheets (unaudited)  July 3, 2005 and December 31, 2004                                  |   |
|                                   |                                                                                                                    |   |
|                                   | Consolidated  Statements of Cash Flows (unaudited)  Six Months Ended July 3, 2005 and June 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 4.**                            | Submission  of Matters to a Vote of Security Holders                                                                    |   |
|                                   |                                                                                                                    |   |
| **ITEM  6.**                           | Exhibits                                                                                                                |   |
| ** **                             |                                                                                                                    |   |
| Signature                              |                                                                                                                    |   |

 

----

 

**PART I.  FINANCIALINFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**UNOVA,INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(amountsin thousands, except per share amounts)**

**(unaudited)**

 
| ** **                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                  | ** ** | **July 3,**            | ** ** | **June 30,**         | ** ** | **July 3,** | ** ** | **June 30,** | ** ** |
| ** **                                                  | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                        |       |                   |       |                 |       |   |   |   |   |
| Revenues:                                                   |       |                   |       |                 |       |   |   |   |   |
| Product                                                     |       | $                      | 181,007    |                 | $          | 152,991 |   | $ | 342,950 |   | $ | 315,247 |   |
| Service                                                     |       | 36,452                 |       | 33,588               |       | 71,004 |   | 64,337 |   |
| Total Revenues                                              |       | 217,459                |       | 186,579              |       | 413,954 |   | 379,584 |   |
|                                                        |       |                   |       |                 |       |   |   |   |   |
| Costs and  Expenses:                                        |       |                   |       |                 |       |   |   |   |   |
| Cost of product  revenues                                   |       | 101,954                |       | 88,610               |       | 194,701 |   | 173,727 |   |
| Cost of service  revenues                                   |       | 21,084                 |       | 19,798               |       | 41,970 |   | 38,008 |   |
| Selling, general  and administrative                        |       | 75,992                 |       | 68,316               |       | 148,748 |   | 133,071 |   |
| Total Costs and  Expenses                                   |       | 199,030                |       | 176,724              |       | 385,419 |   | 344,806 |   |
| Operating Profit  from Continuing Operations                |       | 18,429                 |       | 9,855                |       | 28,535 |   | 34,778 |   |
| Interest, net                                               |       | (1,120                 | )          | (3,186               | )          | (3,246 | ) | (6,254 | ) |
| Foreign currency  exchange, net                             |       | 215                    |       | (246                 | )          | 200 |   | (666 | ) |
| Earnings from  Continuing Operations before Income Taxes    |       | 17,524                 |       | 6,423                |       | 25,489 |   | 27,858 |   |
| Provision for  Income Taxes                                 |       | 5,669                  |       | 3,260                |       | 8,222 |   | 8,969 |   |
| Earnings from Continuing  Operations, Net of Tax            |       | 11,855                 |       | 3,163                |       | 17,267 |   | 18,889 |   |
| Earnings (Loss)  from Discontinued Operations, Net of Tax   |       | 213                    |       | 2,540                |       | (1,719 | ) | (2,704 | ) |
| Net Earnings                                                |       | $                      | 12,068     |                 | $          | 5,703 |   | $ | 15,548 |   | $ | 16,185 |   |
|                                                        |       |                   |       |                 |       |   |   |   |   |
| Basic Earnings  (Loss) per Share                            |       |                   |       |                 |       |   |   |   |   |
| Continuing  Operations                                      |       | $                      | 0.19       |                 | $          | 0.05 |   | $ | 0.28 |   | $ | 0.31 |   |
| Discontinued  Operations                                    |       | 0.01                   |       | 0.04                 |       | (0.03 | ) | (0.04 | ) |
| Net Earnings per  Share                                     |       | $                      | 0.20       |                 | $          | 0.09 |   | $ | 0.25 |   | $ | 0.27 |   |
|                                                        |       |                   |       |                 |       |   |   |   |   |
| Diluted Earnings  (Loss) per Share                          |       |                   |       |                 |       |   |   |   |   |
| Continuing  Operations                                      |       | $                      | 0.19       |                 | $          | 0.05 |   | $ | 0.28 |   | $ | 0.30 |   |
| Discontinued  Operations                                    |       | 0.00                   |       | 0.04                 |       | (0.03 | ) | (0.04 | ) |
| Net Earnings per  Share                                     |       | $                      | 0.19       |                 | $          | 0.09 |   | $ | 0.25 |   | $ | 0.26 |   |
|                                                        |       |                   |       |                 |       |   |   |   |   |
| Shares Used in  Computing Basic Earnings (Loss) per Share   |       | 61,361                 |       | 60,403               |       | 61,228 |   | 60,296 |   |
|                                                        |       |                   |       |                 |       |   |   |   |   |
| Shares Used in  Computing Diluted Earnings (Loss) per Share |       | 62,768                 |       | 62,011               |       | 62,792 |   | 62,069 |   |

 

See accompanying notes to consolidated financial statements.

 

1

----

 

**UNOVA,INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(amountsin thousands)**

**(unaudited)**

 
| ** **                                                                              | ** ** | **July 3,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------|------------|-----------------------|------------|
| ** **                                                                              | ** ** | **2005**         | ** ** | **2004**              | ** ** |
|                                                                                    |       |             |       |                  |       |
| **ASSETS**                                                                              | ** ** | ** **       | ** ** | ** **            | ** ** |
|                                                                                    |       |             |       |                  |       |
| Current Assets:                                                                         |       |             |       |                  |       |
| Cash and cash equivalents                                                               |       | $                | 172,769    |                  | $          | 217,899 |   |
| Restricted cash                                                                         |       |             |       | 50,000                |       |
| Accounts receivable, net of allowance for doubtful  accounts of $9,226 and $9,771       |       | 162,706          |       | 157,833               |       |
| Inventories                                                                             |       | 102,752          |       | 80,854                |       |
| Net deferred tax assets                                                                 |       | 61,919           |       | 81,769                |       |
| Assets held for sale                                                                    |       | 13,518           |       | 19,748                |       |
| Current assets of discontinued operations                                               |       | 58,253           |       | 211,116               |       |
| Other current assets                                                                    |       | 9,361            |       | 8,831                 |       |
| Total Current Assets                                                                    |       | 581,278          |       | 828,050               |       |
| Property, Plant and Equipment, Net of Accumulated  Depreciation of $102,230 and $99,714 |       | 30,368           |       | 30,375                |       |
| Intangibles, Net                                                                        |       | 3,872            |       | 4,072                 |       |
| Net Deferred Tax Assets                                                                 |       | 183,970          |       | 134,978               |       |
| Long-term Assets of Discontinued Operations                                             |       | 19,683           |       | 21,238                |       |
| Other Assets                                                                            |       | 59,484           |       | 53,964                |       |
| Total Assets                                                                            |       | $                | 878,655    |                  | $          | 1,072,677 |   |
|                                                                                    |       |             |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’ INVESTMENT**                                       | ** ** | ** **       | ** ** | ** **            | ** ** |
|                                                                                    |       |             |       |                  |       |
| Current Liabilities:                                                                    |       |             |       |                  |       |
| Accounts payable and accrued expenses                                                   |       | $                | 178,056    |                  | $          | 160,001 |   |
| Payroll and related expenses                                                            |       | 26,339           |       | 30,077                |       |
| Current portion of long-term debt                                                       |       | 8,500            |       | 108,500               |       |
| Current liabilities of discontinued operations                                          |       | 34,787           |       | 130,257               |       |
| Total Current Liabilities                                                               |       | 247,682          |       | 428,835               |       |
| Long-term Debt                                                                          |       | 100,000          |       | 100,000               |       |
| Other Long-term Liabilities                                                             |       | 92,682           |       | 86,220                |       |
| Long-term Liabilities of Discontinued Operations                                        |       | 11,943           |       | 46,388                |       |
|                                                                                    |       |             |       |                  |       |
| Shareholders’ Investment:                                                          |       |             |       |                  |       |
| Common stock                                                                            |       | 618              |       | 611                   |       |
| Additional paid-in capital                                                              |       | 716,128          |       | 703,416               |       |
| Accumulated deficit                                                                     |       | (291,147         | )          | (306,695              | )          |
| Accumulated other comprehensive income                                                  |       | 749              |       | 13,902                |       |
| Total Shareholders’ Investment                                                     |       | 426,348          |       | 411,234               |       |
| Total Liabilities and Shareholders’ Investment                                     |       | $                | 878,655    |                  | $          | 1,072,677 |   |

 

See accompanying notes to consolidated financial statements.

 

2

----

 

**UNOVA, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(amounts in thousands)**

**(unaudited)**

 
| ** **                                                                           | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                           | ** ** | **July 3,**     | ** ** | **June 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                                              |       | 17,267               |       | 18,889 |   |
| Adjustments to reconcile net earnings to net cash  provided by operating activities: |       |                 |       |   |   |
| Depreciation and amortization                                                        |       | 4,992                |       | 5,709 |   |
| Change in prepaid pension costs, net                                                 |       | 5,767                |       | 5,271 |   |
| Deferred taxes                                                                       |       | 9,537                |       | (1,790 | ) |
| Stock-based compensation and other                                                   |       | 587                  |       | 280 |   |
| Changes in operating assets and liabilities:                                         |       |                 |       |   |   |
| Accounts receivable                                                                  |       | 5,137                |       | (8,845 | ) |
| Inventories                                                                          |       | (22,929              | )          | (13,796 | ) |
| Other current assets                                                                 |       | (1,168               | )          | 8,151 |   |
| Accounts payable and accrued expenses                                                |       | 3,951                |       | 1,382 |   |
| Payroll and related expenses                                                         |       | (4,495               | )          | (9,065 | ) |
| Other long-term liabilities                                                          |       | 6,355                |       | (306 | ) |
| Other operating activities                                                           |       | (2,819               | )          | 1,688 |   |
| Net Cash Provided by Operating Activities of  Continuing Operations                  |       | 22,182               |       | 7,568 |   |
|                                                                                 |       |                 |       |   |   |
| Cash Flows from Investing Activities of Continuing  Operations:                      |       |                 |       |   |   |
| Capital expenditures                                                                 |       | (5,510               | )          | (4,990 | ) |
| Sale of property, plant and equipment                                                |       | 6,051                |       | 4,026 |   |
| Decrease in restricted cash                                                          |       | 50,000               |       | — |   |
| Other investing activities                                                           |       | 190                  |       | (404 | ) |
| Net Cash Provided by (Used in) Investing Activities  of Continuing Operations        |       | 50,731               |       | (1,368 | ) |
|                                                                                 |       |                 |       |   |   |
| Cash Flows from Financing Activities of Continuing  Operations:                      |       |                 |       |   |   |
| Repayment of long-term obligations                                                   |       | (100,000             | )          | — |   |
| Stock options exercised                                                              |       | 7,644                |       | 2,774 |   |
| Other financing activities                                                           |       | 1,258                |       | 1,409 |   |
| Net Cash Provided by (Used in) Financing Activities  of Continuing Operations        |       | (91,098              | )          | 4,183 |   |
| Net Cash Provided by (Used in) Continuing Operations                                 |       | (18,185              | )          | 10,383 |   |
| Net Cash Used in Operating Activities of Discontinued  Operations                    |       | (27,350              | )          | (58,075 | ) |
| Net Cash Provided by Investing Activities of  Discontinued Operations                |       | 405                  |       | 315 |   |
| Resulting Decrease in Cash and Cash Equivalents                                      |       | (45,130              | )          | (47,377 | ) |
| Cash and Cash Equivalents at End of Period                                           |       | $                    | 172,769    |   | $ | 191,070 |   |
|                                                                                 |       |                 |       |   |   |
| Supplemental Disclosure of Cash Flow Information:                                    |       |                 |       |   |   |
| Effect of exchange rates on cash and cash  equivalents                               |       | $                    | (5,987     | ) | $ | 925 |   |
| Interest paid                                                                        |       | (7,713               | )          | (7,600 | ) |
| Income taxes paid                                                                    |       | (3,222               | )          | (4,307 | ) |

 

See accompanying notes to consolidated financial statements.

 

3

----

 

**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.

 

The consolidated statement of cash flows for the sixmonths ended July 3, 2005, reflects the reclassification of $50 million inrestricted cash during the three months ended March 31, 2005 from financingactivities to investing activities.

 

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 divesting 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.  The Company completed thesale of the Cincinnati Lamb business during the quarter ended April 3,2005, and expects to sell the Landis Grinding Systems business within the 2005fiscal year (see Note 5 to the consolidated financial statements). All priorperiods presented have been restated to reflect this classification.

 

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 normal recurringnature. Certain prior-year amounts have been reclassified to conform to thecurrent year presentation. These consolidated financial statements should beread in conjunction with the audited financial statements and notes theretoincluded in the Company’s annual report on Form 10-K for the year ended December 31,2004. The results of operations for the interim periods presented are notnecessarily indicative of operating results for the entire year.

 

4

----

 

**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 sixmonths ended July 3, 2005, and June 30, 2004, would have been reducedto the pro forma amounts indicated in the following table (thousands ofdollars):

 
| ** **                                                                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                          | ** ** | **July 3,**       | ** ** | **June 30,**    | ** ** | **July 3,** | ** ** | **June 30,** | ** ** |
| ** **                                                                                          | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                          | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings as reported                                                                            |       | $                      | 12,068     |                 | $          | 5,703 |   | $ | 15,548 |   | $ | 16,185 |   |
| Add: stock-based compensation expense recorded under  the intrinsic value method, net of tax effect |       | 584                    |       | 340                  |       | 1,068 |   | 513 |   |
| Less: stock compensation expense computed under the  fair value method, net of tax effect           |       | (1,385                 | )          | (892                 | )          | (2,849 | ) | (1,713 | ) |
| Pro forma net earnings                                                                              |       | $                      | 11,267     |                 | $          | 5,151 |   | $ | 13,767 |   | $ | 14,985 |   |
|                                                                                                |       |                   |       |                 |       |   |   |   |   |
| Net earnings per share as reported:                                                                 |       |                   |       |                 |       |   |   |   |   |
| Basic                                                                                               |       | $                      | 0.20       |                 | $          | 0.09 |   | $ | 0.25 |   | $ | 0.27 |   |
| Diluted                                                                                             |       | $                      | 0.19       |                 | $          | 0.09 |   | $ | 0.25 |   | $ | 0.26 |   |
|                                                                                                |       |                   |       |                 |       |   |   |   |   |
| Pro forma net earnings per share:                                                                   |       |                   |       |                 |       |   |   |   |   |
| Basic                                                                                               |       | $                      | 0.18       |                 | $          | 0.09 |   | $ | 0.22 |   | $ | 0.25 |   |
| Diluted                                                                                             |       | $                      | 0.18       |                 | $          | 0.08 |   | $ | 0.22 |   | $ | 0.24 |   |

 

The above amounts reflect arevision of previously-reported pro-forma stock-based compensation expense forthe three months ended April 3, 2005. The effect of this revision was todecrease stock-based compensation expense computed under the fair value method,net of tax effect, by $1,383 for the three months ended April 3, 2005, andincrease pro-forma net earnings for that period by the same amount. The effecton both basic and diluted pro-forma earnings per share was an increase of $.02for the three months ended April 3, 2005.

 

During the six months ended July 3, 2005, theCompany issued 694,171 shares of Common Stock under its stock compensationplans, including 594,608 shares issued upon the exercise of options, 11,366shares of restricted stock and 88,197 shares issued under the Employee StockPurchase Plan and Directors Stock Option and Fee Plan. Also during the sixmonths ended July 3, 2005, 123,697 shares of restricted stock vested dueto completion of the vesting period.

 

**3.****                          Inventories**

 

Inventories comprise the following (thousands ofdollars):

 
| ** **      | ** ** | **July 3,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2005**         | ** ** | **2004**              | ** ** |
|            |       |             |       |                  |       |
| Raw materials   |       | $                | 61,169     |                  | $          | 53,714 |   |
| Work in process |       | 623              |       | 304                   |       |
| Finished goods  |       | 40,960           |       | 26,836                |       |
|            |       |             |       |                  |       |
| Inventories     |       | $                | 102,752    |                  | $          | 80,854 |   |

 

5

----

 

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

 

As of July 3, 2005 the Company maintains twosecured long-term credit facilities: a $100 million revolving credit facility(the “Revolving Facility”) and a £15 million ($26.7million) revolving facility and related overdraft facility (collectively, the “UKFacility”).

 

Net of outstanding letters of credit and limitationson minimum availability, the Company had borrowing capacity at July 3,2005, of $30.5 million under the Revolving Facility and £4.4 million ($7.8million) under the UK Facility. The Company made no borrowings under theRevolving Facility or the UK Facility duringthe first six months of 2005, and as of July 3, 2005, no borrowingswere outstanding under either the Revolving Facility or the UK Facility. As of July 3,2005, 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 its foreignsubsidiaries.

 

•                  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 July 3, 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 Company sold $200.0 millionprincipal amount of senior unsecured debt in an underwritten offering. The debtcomprised $100.0 million of 6.875% seven-year notes and $100.0 million of 7.00%ten-year notes. Interest payments are due semi-annually. Including underwritingfees, discounts and other issuance costs, 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.

 

The Company additionally has outstanding as of July 3,2005, an $8.5 million industrial revenue bond, bearing interest at 4.77%, whichis classified as current portion of long-term obligations on the Company’sconsolidated balance sheet.  The Companyretired the industrial revenue bond upon its maturity in July 2005.

 

6

----

 

Interest, net comprises the following (thousands ofdollars):

 
| ** **       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------|------------|------------------------|------------|----------------------|------------|
| ** **       | ** ** | **July 3,**       | ** ** | **June 30,**    | ** ** | **July 3,** | ** ** | **June 30,** | ** ** |
| ** **       | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|             |       |                   |       |                 |       |   |   |   |   |
| Interest expense |       | $                      | 2,471      |                 | $          | 4,130 |   | $ | 6,399 |   | $ | 8,139 |   |
| Interest income  |       | (1,351                 | )          | (944                 | )          | (3,153 | ) | (1,885 | ) |
| Interest, net    |       | $                      | 1,120      |                 | $          | 3,186 |   | $ | 3,246 |   | $ | 6,254 |   |

 

The Company also has letter-of-credit reimbursementagreements totaling $41.3 million at July 3, 2005, compared to $53.6million at December 31, 2004. As of July 3, 2005, $15.6 million ofthe agreements related to performance on contracts with current customers andvendors, and $24.4 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 $24.4 million ofletter-of-credit agreements and is the beneficiary of a backup letter-of-creditin the aggregate amount of $8.6 million issued pursuant to the terms of thesale. The Company believes it is not practicable to estimate fair values ofthese instruments and considers the risk of non-performance on the contracts tobe remote.

 

# **5.**                          Discontinued Operations

 

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 theIAS businesses are no longer aligned with the Company’s long-term strategy.During the first quarter of 2005, the Company completed the sale of theCincinnati Lamb business. The Company intends to sell the Landis GrindingSystems business during the 2005 fiscal year. In accordance with SFAS 144, “Accountingfor Disposal or Impairment of Long-Lived Assets,” the IAS businesses areclassified as discontinued operations in the Company’s consolidated financialstatements for all periods presented.

 

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 of2005 the Company reimbursed the buyer $12.6 million for accounts payablerelated to the Cincinnati Lamb business, pursuant to the net working assetadjustment.

 

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 (6.1% as of July 3, 2005) with interest payable quarterly.Principal payments on the note are due in six semiannual installments beginningApril 2007 of $1.5 million, $2.0 million, $2.0 million, $2.5 million, $2.0million and $2.5 million. As of July 3, 2005, the estimated fair value ofthe note is $10.2 million, based on the estimated cash flows from the note anda risk-adjusted discount rate equal to LIBOR plus eight percent. The Company’sconsolidated balance sheet as of July 3, 2005, classifies the $10.2million long-term note receivable as other assets.

 

7

----

 

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 a $1.2 millionpre-tax loss on the sale of the 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 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.

 

The following table sets forth the components of theloss from discontinued operations, net of tax, for the three and six months endedJuly 3, 2005, and June 30, 2004 (thousands of dollars):

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                              | ** ** | **July 3,**       | ** ** | **June 30,**         | ** ** | **July 3,** | ** ** | **June 30,** | ** ** |
| ** **                                              | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                    |       |                   |       |                 |       |   |   |   |   |
| Product and service revenues                            |       | $                      | 46,354     |                 | $          | 117,634 |   | $ | 160,888 |   | $ | 222,299 |   |
|                                                    |       |                   |       |                 |       |   |   |   |   |
| Operating profit (loss)                                 |       | 1,119                  |       | 3,052                |       | (4,715 | ) | (2,603 | ) |
| Loss on sale of Cincinnati Lamb                         |       | (1,203                 | )     | —               |       | (35,926 | ) | — |   |
| Profit (Loss) from discontinued operations before  tax  |       | (84                    | )          | 3,052                |       | (40,641 | ) | (2,603 | ) |
| Provision (Benefit) for income taxes                    |       | (297                   | )          | 512                  |       | (38,922 | ) | 101 |   |
| Profit (Loss) from discontinued operations, net of  tax |       | $                      | 213        |                 | $          | 2,540 |   | $ | (1,719 | ) | $ | (2,704 | ) |

 

Operating loss from discontinued operations for thethree and six months ended July 3, 2005, includes an impairment charge of$2.0 million to write-down property, plant and equipment, classified as assetsheld for sale on the Company’s consolidated balance sheets, to its estimatednet realizable value.

 

8

----

 

The tax benefit for the six months ended July 3,2005, reflects an effective tax rate of 95.8% compared to the U.S. statutorytax rate of 35%.  The increase isprimarily due to $24.8 million of tax benefits from the disposition of theCincinnati Lamb business.  These benefits,including a tax effected capital loss carryforward in the U.S. in the amount of$12.4 million, resulted from differences between the book basis of assets soldand the related tax basis of the stock and a benefit of $6.9 million from aprior period election to treat a foreign subsidiary as a branch.

 

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

 

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

 
| ** **                                           | ** ** | **July 3,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **2005**         | ** ** | **2004**              | ** ** |
| Current assets of discontinued operations:           |       |             |       |                  |       |
| Accounts receivable, net                             |       | $                | 30,760     |                  | $          | 160,118 |   |
| Inventories, net                                     |       | 26,526           |       | 55,926                |       |
| Other current assets                                 |       | 967              |       | 5,635                 |       |
| Impairment of current assets                         |       |             |       | (10,563               | )          |
| Total current assets of discontinued operations      |       | 58,253           |       | 211,116               |       |
|                                                 |       |             |       |                  |       |
| Long-term assets  of discontinued operations:        |       |             |       |                  |       |
| Property, plant and equipment, net                   |       | 11,806           |       | 13,356                |       |
| Goodwill and other intangibles, net                  |       | 7,796            |       | 7,796                 |       |
| Other Assets                                         |       | 81               |       | 86                    |       |
| Total long-term assets of discontinued operations:   |       | 19,683           |       | 21,238                |       |
|                                                 |       |             |       |                  |       |
| Current  liabilities of discontinued operations:     |       |             |       |                  |       |
| Accounts payable and accrued expenses                |       | 30,716           |       | 117,026               |       |
| Accrued payroll                                      |       | 4,071            |       | 13,231                |       |
| Total current liabilities of discontinued operations |       | 34,787           |       | 130,257               |       |
|                                                 |       |             |       |                  |       |
| Long-term  liabilities of discontinued operations    |       | 11,943           |       | 46,388                |       |
| Net assets of  discontinued operations               |       | $                | 31,206     |                  | $          | 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 July 3,2005,

 

9

----

 

and December 31, 2004. Long-term liabilities ofdiscontinued operations comprise pension and postretirement obligations.

 

As of July 3, 2005, accumulated othercomprehensive income on the Company’s consolidated balance sheet includes acredit balance of $10.2 million related to Landis Grinding Systems cumulativetranslation adjustments.

 

# **6.**                          Provision for Income Taxes

 

The tax provision for the three and six months ended July 3,2005, reflects an effective tax rate for continuing operations of 32.4% and 32.3%,respectively, compared to a U.S. statutory provision rate of 35%. The reductionin the effective tax rate is primarily due to favorable foreign currencyexchange variances associated with foreign tax contingency accruals.

 

The tax provision for the three and six months ended June 30,2004, reflects an effective tax rate for continuing operations of 50.8% and 32.2%,respectively.  The increase in theeffective tax rate for the three months ended June 30, 2004, is due toadjustments to federal deferred tax assets of $1.1 million.

 

# **7.**                          Earnings (Loss) per Share andShareholders’ Investment

 

Basic earnings (loss) pershare is calculated using the weighted average number of common sharesoutstanding and issuable for the applicable period. Diluted earnings per shareis computed using basic weighted average shares plus the dilutive effect ofunvested restricted stock and outstanding stock options using the “treasurystock” method.

 
| ** **                                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                      | ** ** | **July 3,**       | ** ** | **June 30,**    | ** ** | **July 3,** | ** ** | **June 30,** | ** ** |
| ** **                                                      | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                            |       |                   |       |                 |       |   |   |   |   |
| Weighted average common shares - Basic                          |       | 61,360,586             |       | 60,403,192           |       | 61,228,208 |   | 60,295,503 |   |
| Dilutive effect of unvested restricted stock and  stock options |       | 1,407,696              |       | 1,608,045            |       | 1,563,680 |   | 1,773,173 |   |
| Weighted average shares - Diluted                               |       | 62,768,282             |       | 62,011,237           |       | 62,791,888 |   | 62,068,676 |   |

 

Company employees and directors held options topurchase 136,920 and 121,710 shares of Company common stock for the three andsix months ended July 3, 2005, respectively, and 832,620 and 416,310 shares forthe three and six months ended June 30, 2004, respectively, that wereantidilutive to the diluted earnings (loss) per share computation. Theseoptions could become dilutive in future periods if the average market price ofthe Company’s common stock exceeds the exercise price of the outstandingoptions and the Company reports net earnings.

 

10

----

 

# **8.**                          Comprehensive Earnings

 

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

 
| ** **                                                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                        | ** ** | **July 3,**       | ** ** | **June 30,**    | ** ** | **July 3,** | ** ** | **June 30,** | ** ** |
| ** **                                                        | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                              |       |                   |       |                 |       |   |   |   |   |
| Net earnings                                                      |       | $                      | 12,068     |                 | $          | 5,703 |   | $ | 15,548 |   | $ | 16,185 |   |
| Change in equity due to foreign currency translation  adjustments |       | (8,156                 | )          | 311                  |       | (22,376 | ) | (1,642 | ) |
| Change in equity due to minimum pension liability  adjustment     |       | —                 |       | —               |       | 9,144 |   | — |   |
| Unrealized gains on cash flow hedges                              |       | 79                     |       | 197                  |       | 79 |   | 120 |   |
|                                                              |       |                   |       |                 |       |   |   |   |   |
| Comprehensive earnings                                            |       | $                      | 3,991      |                 | $          | 6,211 |   | $ | 2,395 |   | $ | 14,663 |   |

 

The change in equity due to foreigncurrency translation adjustments for the six months ended July 3, 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.**                          Intellectual PropertySettlements

 

Duringthe first quarter of 2004, the Company received compensation of $19.7 million inrelation 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 six months ended June 30, 2004, was$15.8 million. IP settlement compensation is classified as sales revenues andthe related legal costs are classified as cost of sales on the Company’sconsolidated statements of operations.

 

# **10.**                   Segment Reporting

 

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.

 

11

----

 

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** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                              | ** ** | **July 3,**       | ** ** | **June 30,**    | ** ** | **July 3,** | ** ** | **June 30,** | ** ** |
| ** **                                              | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                    |       |                   |       |                 |       |   |   |   |   |
| **Revenues**                                            |       |                   |       |                 |       |   |   |   |   |
| Intermec Revenues                                       |       | $                      | 217,459    |                 | $          | 186,579 |   | $ | 413,954 |   | $ | 379,584 |   |
|                                                    |       |                   |       |                 |       |   |   |   |   |
| **Operating Profit (Loss) from Continuing  Operations** |       |                   |       |                 |       |   |   |   |   |
| Intermec                                                |       | $                      | 23,848     |                 | $          | 15,599 |   | $ | 39,888 |   | $ | 43,645 |   |
| Corporate and Other                                     |       | (5,419                 | )          | (5,744               | )          | (11,353 | ) | (8,867 | ) |
| Total Operating Profit from Continuing Operations       |       | $                      | 18,429     |                 | $          | 9,855 |   | $ | 28,535 |   | $ | 34,778 |   |

 

Total assets at July 3, 2005, and December 31, 2004,are $371 million and $340 million for Intermec, respectively, and $430 millionand $500 million for Corporate and Other, respectively.  Total assets of discontinued operations are$78 million and $232 million as of July 3, 2005 and December 31, 2004,respectively.

 

# **11.**                   Related Party Transactions

 

At December 31,2004, other assets included a receivable due from a certain non-executiveCompany officer of $0.2 million. This receivable was fully paid during thefirst quarter of 2005.

 

# **12.**                   Commitments and Contingencies

 

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):

 
| ** **                                      | ** ** | **Product Warranty** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **Liabilities**      | ** ** |
|                                            |       |                 |       |
| Beginning balance as of January 1, 2005    |       | $                    | 4,878      |   |
| Payments                                        |       | (3,578               | )          |
| Increase in liability for new warranties issued |       | 4,036                |       |
| Ending balance as of July 3, 2005          |       | $                    | 5,336      |   |

 

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.

 

12

----

 

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 July 3, 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. In the opinion of the Company’s General Counsel, theultimate resolution of currently pending proceedings, with the potentialexception of one case discussed below, will not have a material adverse effecton the Company’s consolidated financial statements.

 

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. The Companyhas responded to the Complaint. A trial date has been scheduled for September 2005.Management believes the lawsuit is without merit and is vigorously contestingthe case. Nevertheless, should there be an unfavorable result, it is possiblethat cash flows or results of discontinued operations could be materiallyaffected in that period or subsequent periods.

 

In March 2005, SymbolTechnologies, Inc. (“Symbol”) terminated its original equipmentmanufacturing (“OEM”) agreement with Intermec to supply laser scan engines andstopped shipping laser scan engines to the Company. At the same time, Symbolfiled a lawsuit seeking a declaratory judgment that its termination of the OEMagreement is lawful. The Company believes that the termination of the OEMagreement by Symbol will not have a material adverse effect on operations.

 

Also in March 2005,Symbol announced that it had filed a lawsuit against Intermec for wirelesspatent infringement. On March 23, 2005, the Company filed its answer toSymbol’s wireless patent infringement complaint and filed counterclaims againstSymbol for infringing Intermec’s wireless access, terminal and softwarepatents. The Company simultaneously filed its answer to Symbol’s declaratoryjudgment action and filed counterclaims against Symbol for breach of the OEMagreement. On April 28, 2005, Symbol announced that it had filed a lawsuitagainst Intermec for infringing Symbol’s barcode decoding patents.

 

The Complaints in Symbol’swireless and barcode decoding lawsuits do not contain sufficient details forthe Company to assess what Symbol will claim regarding the relationship betweenits cited patents and Intermec products. However, based on prior Companyanalysis of the cited Symbol patents, the Company believes it has substantial defensesto each of those patent infringement claims and the Company intends tovigorously defend itself against the claims made in Symbol’s lawsuits.Accordingly, the Company believes that the ultimate resolution of thesecomplaints would not have a material adverse effect on the Company’sconsolidated financial position.

 

13

----

 

# **13.**                   Pension and Other PostretirementBenefit Plans

 

The information in this note representsthe net periodic pension and post-retirement benefit costs and relatedcomponents in accordance with SFAS 132(R).  Components of net pension and postretirementperiodic benefit cost for the three and six months ended July 3, 2005, andJune 30, 2004, are as follows (thousands of dollars):

 
| **Three Months Ended July 3, 2005 and June  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                                                 |       | $                               | 2,406      |                                | $          | 2,417                                   |       | $ | 850 |   | $ | 1,428 |   | $ | 33 |   | $ | 39 |   |
| Interest Cost                                                |       | 2,520                           |       | 2,239                               |       | 1,157                                   |       | 2,326 |   | 166 |   | 745 |   |
| Expected return on plan assets                               |       | (2,506                          | )          | (2,449                              | )          | (1,034                                  | )          | (2,393 | ) | — |   | — |   |
| Amortization and deferrals:                                  |       |                            |       |                                |       |                                    |       |   |   |   |   |   |   |
| Transition obligation (asset)                                |       | —                          |       | (10                                 | )          | (85                                     | )          | (84 | ) | — |   | — |   |
| Actuarial loss                                               |       | 850                             |       | 788                                 |       | 246                                     |       | 473 |   | 16 |   | 287 |   |
| Prior service cost (benefit)                                 |       | 179                             |       | 180                                 |       | —                                  |       | — |   | — |   | (299 | ) |
| Net pension and postretirement periodic benefit cost         |       | $                               | 3,449      |                                | $          | 3,165                                   |       | $ | 1,134 |   | $ | 1,750 |   | $ | 215 |   | $ | 772 |   |
|                                                              |            |                                 |            |                                     |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| **Six Months Ended July 3, 2005 and June 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                                                    |       | $                               | 4,810      |                                | $          | 4,835                                   |       | $ | 2,119 |   | $ | 2,877 |   | $ | 67 |   | $ | 78 |   |
| Interest Cost                                                   |       | 5,040                           |       | 4,477                               |       | 3,705                                   |       | 4,687 |   | 1,229 |   | 1,416 |   |
| Expected return on plan assets                                  |       | (5,012                          | )          | (4,897                              | )          | (3,680                                  | )          | (4,821 | ) | — |   | — |   |
| Amortization and deferrals:                                     |       |                            |       |                                |       |                                    |       |   |   |   |   |   |   |
| Transition obligation (asset)                                   |       | —                          |       | (21                                 | )          | (172                                    | )          | (169 | ) | — |   | — |   |
| Actuarial loss                                                  |       | 1,700                           |       | 1,575                               |       | 761                                     |       | 953 |   | 340 |   | 496 |   |
| Prior service cost (benefit)                                    |       | 358                             |       | 359                                 |       | —                                  |       | — |   | (598 | ) | (598 | ) |
| Special termination benefits                                    |       | 264                             |       | —                              |       | —                                  |       | — |   | — |   | — |   |
| Curtailment loss (gain)                                         |       | 57                              |       | —                              |       | (5,396                                  | )          | — |   | (12,274 | ) | — |   |
| Settlement gain                                                 |       | —                          |       | —                              |       | (332                                    | )          | — |   | (21,090 | ) | — |   |
| Net pension and postretirement periodic benefit cost            |       | $                               | 7,217      |                                | $          | 6,328                                   |       | $ | (2,995 | ) | $ | 3,527 |   | $ | (32,326 | ) | $ | 1,392 |   |

 

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 six months ended July 3, 2005, the Company contributed approximately$6.5 million to its pension and other postretirement benefit plans, comprising$1.3 million in benefits paid pertaining to unfunded U.S. defined benefitplans, $1.3 million in matching contributions to its 401(k) plan, $2.5 millionin contributions to its

 

14

----

 

foreignpension plans, and $1.4 million in benefits paid pertaining to its otherpostretirement benefits plans. The Company expects to contribute an additional$4.2 million to these plans during the remainder of 2005, of which $0.9 millionrelates to benefit payments on its unfunded U.S. defined benefit plans, $0.9million in matching contributions to its 401(k) plan, $1.7 million incontributions to its foreign pension plans and $0.7 million in benefit paymentspertaining to its other postretirement benefit plans.

 

# **14.**                   Recent 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 consolidated financialcondition or results of operations.

 

InDecember 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 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 of operations,cash flows or financial position.

 

In November 2004,the FASB issued SFAS No. 151, “Inventory Costs – an Amendment of ARB No. 43,Chapter 4.” This standard provides clarification that abnormal amounts of 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.

 

15

----

 
| **ITEM  2.** | ** ** | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|--------------|------------|-------------------------------------------------------------------------------------------------|

 

# **Overview**

 

UNOVA, Inc. and subsidiaries (“UNOVA” or the “Company”),through its wholly owned subsidiary Intermec Technologies Corporation (“Intermec”),is a leader in global supply chain solutions, the development, manufacture 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 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 (see Note 5 to the consolidated financial statements). All priorperiods presented have been conformed to reflect this classification.

 

The Company completed the sale of the CincinnatiLamb business during the quarter ended April 3, 2005, and expects to sellthe Landis Grinding Systems business within the 2005 fiscal year. The IASbusinesses are leading producers of value-added manufacturing products andservices spanning the production cycle from process engineering and design tosystems integration including comprehensive life cycle support. The IASbusinesses include integrated manufacturing systems, machining systems, stand-alonemachine tools and precision grinding and abrasives operations primarily servingthe global aerospace, automotive, off-road vehicle and diesel enginemanufacturing industries as well as the industrial components, heavy equipmentand general job shop markets.

 

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 Company focusesits research and development efforts are related to developing products,processes and services that help improve productivity, efficiency, informationand controls in a variety of manufacturing, distribution, retail, field serviceand 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; andpartnering arrangements with industry leaders to provide integrated solutions.The Company’s financial strength and ability to adapt to the current market andeconomic conditions are dependent in part on the generation of cash flow,effective management of working capital, funding commitments and otherobligations, as well as the growth of the business.

 

16

----

 

# **Results of Operations**

# ** **

The following discussion compares the Company’sresults of operations for the three and six months ended July 3, 2005 and June 30,2004. Results from continuing operations include the Intermec segment and theCorporate and Other segment. The operating results of the IAS business areclassified as discontinued operations. Results of operations were as follows(millions of dollars):

 
| ** **                                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                | ** ** | **July 3,**       | ** ** | **June 30,**    | ** ** | **July 3,** | ** ** | **June 30,** | ** ** |
| ** **                                                | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                      |       |                   |       |                 |       |   |   |   |   |
| Product and Service Revenues                              |       | $                      | 217.5      |                 | $          | 186.6 |   | $ | 414.0 |   | $ | 379.6 |   |
|                                                      |       |                   |       |                 |       |   |   |   |   |
| Costs and Expenses:                                       |       |                   |       |                 |       |   |   |   |   |
| Cost of product and service revenues                      |       | 123.1                  |       | 108.4                |       | 236.7 |   | 211.7 |   |
| Selling, general and administrative                       |       | 76.0                   |       | 68.3                 |       | 148.8 |   | 133.1 |   |
| Total Costs and Expenses                                  |       | 199.1                  |       | 176.7                |       | 385.5 |   | 344.8 |   |
|                                                      |       |                   |       |                 |       |   |   |   |   |
| Operating Profit from Continuing Operations               |       | 18.4                   |       | 9.9                  |       | 28.5 |   | 34.8 |   |
|                                                      |       |                   |       |                 |       |   |   |   |   |
| Interest, net                                             |       | (1.1                   | )          | (3.2                 | )          | (3.2 | ) | (6.3 | ) |
| Foreign currency exchange, net                            |       | 0.2                    |       | (0.3                 | )          | 0.2 |   | (0.6 | ) |
|                                                      |       |                   |       |                 |       |   |   |   |   |
| Earnings from Continuing Operations before Income  Taxes  |       | 17.5                   |       | 6.4                  |       | 25.5 |   | 27.9 |   |
|                                                      |       |                   |       |                 |       |   |   |   |   |
| Provision for Income Taxes                                |       | 5.6                    |       | 3.2                  |       | 8.2 |   | 9.0 |   |
|                                                      |       |                   |       |                 |       |   |   |   |   |
| Earnings from Continuing Operations, net of tax           |       | 11.9                   |       | 3.2                  |       | 17.3 |   | 18.9 |   |
|                                                      |       |                   |       |                 |       |   |   |   |   |
| Earnings (Loss) from Discontinued Operations, net of  tax |       | 0.2                    |       | 2.5                  |       | (1.7 | ) | (2.7 | ) |
|                                                      |       |                   |       |                 |       |   |   |   |   |
| Net Earnings                                              |       | $                      | 12.1       |                 | $          | 5.7 |   | $ | 15.6 |   | $ | 16.2 |   |

 

17

----

 

*Revenues*

 

Revenues by category andas a percentage of related revenues from continuing operations for the three andsix months ended July 3, 2005 and June 30, 2004 were as follows(millions of dollars):

 
| ** **     | ** ** | **Three Months Ended** | ** ** |
|----------------|------------|------------------------|------------|
| ** **     | ** ** | **July 3, 2005**  | ** ** | **June 30, 2004** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **     | ** ** | **Amount**             | ** ** | **Percent of  Revenues** | ** ** | **Amount** | ** ** | **Percent of  Revenues** | ** ** | **Change** | ** ** | **Percent Change** | ** ** |
| Revenues:      |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Product        |       | $                      | 181.0      |   | 83.2 | % |   | $ | 153.0 |   | 82.0 | % |   | $ | 28.0 |   | 18.3 | % |   |
| Service        |       | 36.5                   |       | 16.8 | % |   | 33.6 |   | 18.0 | % |   | 2.9 |   | 8.6 | % |   |
| Total Revenues |       | $                      | 217.5      |   | 100.0 | % |   | $ | 186.6 |   | 100.0 | % |   | $ | 30.9 |   | 16.6 | % |   |

 

Quarterly revenue growth of 16.6% was driven by strong,broad based product demand, including a good balance of large enterpriseaccount rollouts across Intermec’s industry segments and strong growth from theCompany’s indirect channel. Systems and solutions revenue increased by 16.8%and printer/media products increased 18.9%.  Product revenues for the three months endedJuly 3, 2005, were $181.0 million, an increase of $28.0 million, or 18.3%,compared with the corresponding prior-year period.  Systems and solutions revenue increased by16.8% and printer/media products increased 18.9%.  Service revenue increased 8.5% over thecorresponding prior year period, and realized strong increases 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 20.7% over the correspondingprior-year period,  Europe, Middle Eastand Africa increased 10.2%, and the rest of the world increased 13.4%.

 
| ** **              | ** ** | **Six Months Ended**  | ** ** |
|-------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **July 3, 2005** | ** ** | **June 30, 2004** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Amount**            | ** ** | **Percent of Revenues** | ** ** | **Amount** | ** ** | **Percent of Revenues** | ** ** | **Change** | ** ** | **Percent Change** | ** ** |
| Revenues:               | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product related         |       | $                     | 343.0      |   | 82.9 | % |   | $ | 295.6 |   | 77.9 | % |   | $ | 47.4 |   | 16.0 | % |   |
| IP settlement           |       | —                |       | — |   |   | 19.7 |   | 5.2 | % |   | (19.7 | ) | (100.0 | )% |   |
| Total Product  Revenues |       | 343.0                 |       | 82.9 | % |   | 315.3 |   | 83.1 | % |   | 27.7 |   | 8.8 | % |   |
| Service                 |       | 71.0                  |       | 17.1 | % |   | 64.3 |   | 16.9 | % |   | 6.7 |   | 10.4 | % |   |
| Total Revenues          |       | $                     | 414.0      |   | 100.0 | % |   | $ | 379.6 |   | 100.0 | % |   | $ | 34.4 |   | 9.1 | % |   |

 

Product revenues for the six months ended June 30,2004 include $19.7 million of revenue and $15.8 million of operating profitfrom compensation related to a settlement regarding certain of the Company’sintellectual property (“IP settlement”).  Product related revenue increased 16.0% andservice revenue increased 10.4%, resulting in a combined increase of 15.0% forthe six months ended July 3, 2005, compared with the corresponding prior-yearperiod.  Geographically, product andservice revenue in North America increased 16.0% over the correspondingprior-year period, Europe, Middle East and Africa increased 10.7% and the restof the world increased 22.1%.

 

18

----

 

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. laptopsales.  The Company is also the plaintiffin various other patent infringement lawsuits, which may result in futurerevenue and operating profit.  Managementcannot predict the outcome of any of these lawsuits or the timing or amount offuture settlements or judgments.

 

*Gross Profit*

 

Gross profit and gross margin by revenue categoryfor the three and six months ended July 3, 2005 and June 30, 2004were as follows (millions of dollars):

 
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **July 3, 2005**  | ** ** | **June 30, 2004** | ** ** |
| ** **                          | ** ** | **Gross Profit**       | ** ** | **Gross Margin** | ** ** | **Gross Profit** | ** ** | **Gross Margin** | ** ** |
|                                |       |                   |       |   |   |   |   |   |   |
| Product related                     |       | $                      | 79.0       |   | 43.6 | % |   | $ | 64.4 |   | 42.1 | % |   |
| Service                             |       | 15.4                   |       | 42.2 | % |   | 13.8 |   | 41.1 | % |   |
| Total Gross Profit and Gross Margin |       | $                      | 94.4       |   | 43.4 | % |   | $ | 78.2 |   | 41.9 | % |   |

 

Product and service gross profit for the threemonths ended July 3, 2005 increased $16.2 million, or 20.7%, compared withcorresponding prior year period. The improvement in gross profit resulted froma favorable product and customer mix and related efficiencies achieved.

 
| ** **                          | ** ** | **Six Months Ended**  | ** ** |
|-------------------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **July 3, 2005** | ** ** | **June 30, 2004** | ** ** |
| ** **                          | ** ** | **Gross Profit**      | ** ** | **Gross Margin** | ** ** | **Gross Profit** | ** ** | **Gross Margin** | ** ** |
|                                |       |                  |       |   |   |   |   |   |   |
| Product related                     |       | $                     | 148.3      |   | 43.2% |   | $ | 125.8 |   | 42.6% |   |
| IP Settlement                       |       | —                |       | — |   | 15.8 |   | 80.2% |   |
| Total Product                       |       | 148.3                 |       | 43.2% |   | $ | 141.6 |   | 44.9% |   |
| Service                             |       | 29.0                  |       | 40.8% |   | 26.3 |   | 40.9% |   |
| Total Gross Profit and Gross Margin |       | $                     | 177.3      |   | 42.8% |   | $ | 167.9 |   | 44.2% |   |

 

Gross profit for the six months ended June 30,2004 includes $15.8 million from compensation related to the IP settlement. Totalgross profit for the six months ended July 3, 2005 increased $9.4 million,or 5.6%, compared with the corresponding prior-year period. Product relatedgross profit for the six months ended July 3, 2005 increased $22.5million, or 17.9%, compared with the corresponding prior year period as aresult of the 16.0% increase in revenue combined with the 0.6 point improvementin gross margin.  The increase in servicerevenue for the six months ended July 3, 2005 contributed a $2.7 millionincrease in gross profit compared with the corresponding 2004 period.

 

*Selling, General andAdministrative*

 

Selling, general and administrative (“SG&A”)expenses were $76.0 million and $148.8 million for the three and six monthsended July 3, 2005, respectively, compared with SG&A expenses of $68.3million and $133.1 million for the corresponding prior-year period. Intermec’sSG&A expense for the three months ended July 3, 2005 was $70.6 million,or 32.5% of revenue compared with 33.5% of revenue for the corresponding prior-yearperiod. The decrease in Intermec SG&A expense as a percentage of revenue wasprimarily due to the ability to leverage Intermec’s SG&A structure asproduct and service revenues increased. Intermec’s R&D expense was 7.4% ofrevenues for the quarter ended July 3, 2005 compared with 9.0% for thecorresponding prior-year period.

 

19

----

 

Operating expenses for Corporate and Other were $5.4million and $5.7 million for the three months ended July 3, 2005, and June 30,2004, respectively, and $11.3 million and $8.8 million for the correspondingsix 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 six months ended July 3, 2005, and June 30,2004, were as follows (millions of dollars):

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **July 3, 2005**  | ** ** | **June 30, 2004** | ** ** |
| ** **                                        | ** ** | **Operating  Profit**  | ** ** | **Operating  Profit Margin** | ** ** | **Operating  Profit** | ** ** | **Operating  Profit Margin** | ** ** |
|                                              |       |                   |       |   |   |   |   |   |   |
| Operating Profit from Continuing Operations       |       |                   |       |   |   |   |   |   |   |
|                                              |       |                   |       |   |   |   |   |   |   |
| Intermec                                          |       | $                      | 23.8       |   | 10.9 | % |   | $ | 15.6 |   | 8.4 | % |   |
| Corporate and Other                               |       | (5.4                   | )          | (2.5 | )% |   | (5.7 | ) | (3.1 | )% |   |
| Total Operating Profit from Continuing Operations |       | $                      | 18.4       |   | 8.5 | % |   | $ | 9.9 |   | 5.3 | % |   |

 

Intermec operating profit for the three months endedJuly 3, 2005 increased $8.2 million, or 53%, compared with the correspondingprior year period. Total operating profit from continuing operations for thethree months ended July 3, 2005, increased $8.5 million, or 86%, comparedwith the corresponding prior-year period.

 
| ** **                                        | ** ** | **Six Months Ended**  | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **July 3, 2005** | ** ** | **June 30, 2004** | ** ** |
| ** **                                        | ** ** | **Operating  Profit** | ** ** | **Operating  Profit Margin** | ** ** | **Operating  Profit** | ** ** | **Operating  Profit Margin** | ** ** |
|                                              |       |                  |       |   |   |   |   |   |   |
| Operating Profit from Continuing Operations       |       |                  |       |   |   |   |   |   |   |
|                                              |       |                  |       |   |   |   |   |   |   |
| Intermec:                                         |       |                  |       |   |   |   |   |   |   |
| Product and Service                               |       | $                     | 39.8       |   | 9.6 | % |   | $ | 27.8 |   | 7.3 | % |   |
| IP Settlements                                    |       | —                |       | — |   |   | 15.8 |   | 4.2 | % |   |
| Total Intermec                                    |       | 39.8                  |       | 9.6 | % |   | 43.6 |   | 11.5 | % |   |
| Corporate and Other                               |       | (11.3                 | )          | (2.7 | )% |   | (8.8 | ) | (2.3 | )% |   |
| Total Operating Profit from Continuing Operations |       | $                     | 28.5       |   | 6.9 | % |   | $ | 34.8 |   | 9.2 | % |   |

 

Intermec product and service operating profit forthe six months ended July 3, 2005, increased $12.0 million, or 43%,compared with the corresponding prior-year period. Intermec operating profitfor the six months ended July 3, 2005, decreased $3.8 million, compared withthe corresponding prior-year period due to the $15.8 million impact of the IPsettlement in the first quarter of 2004.

 

*Interest, Net*

 

Net interest expense was $1.1 million and $3.2 millionfor the three and six months ended July 3, 2005, respectively, comparedwith $3.2 million and $6.3 million for the corresponding prior year period. Thereduction in net interest expense primarily reflects the lower average debtbalances during the six months ended July 3, 2005, compared with thecorresponding prior-year period.

 

20

----

 

*Provision for Income Taxes*

 

The tax provision for the three and six months endedJuly 3, 2005, reflects an effective tax rate for continuing operations of 32.4%and 32.3%, respectively, compared with a U.S. statutory provision rate of35%.  The reduction in the effective taxrate is primarily due to favorable foreign currency exchange variancesassociated with foreign tax contingency accruals.

 

The tax provision for the three and six months endedJune 30, 2004, reflects an effective tax rate for continuing operations of50.8% and 32.2%, respectively.  The increasein the effective tax rate for the three months ended June 30, 2004 is dueto adjustments to federal deferred tax assets of $1.1 million.

 

*Loss fromDiscontinued Operations*

 

During the fourth quarterof 2004, the Company committed to a plan to dispose of its IAS businesses,comprising the Cincinnati Lamb and Landis Grinding Systems businesses, after itwas determined that the IAS businesses are no longer aligned with the Company’slong-term strategy. During the first quarter of 2005, the Company completed thesale of the Cincinnati Lamb business. The Company intends to sell the LandisGrinding Systems business during the 2005 fiscal year. In accordance with SFAS144, “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 April 3, 2005,the Company completed the sale of the Cincinnati Lamb business. Theconsideration received for the Cincinnati Lamb business included (i) $16million, paid in cash on April 4, 2005, (ii) a $10.0 million long-termsecured note receivable 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 second quarterof 2005 the Company reimbursed the buyer $12.6 million for accounts payablerelated to the Cincinnati Lamb business, pursuant to the net working assetadjustment.

 

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 (6.1% as of July 3, 2005) with interestpayable quarterly. 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 July 3, 2005,the estimated fair value of the note is $10.2 million, based on the estimatedcash flows from the note and a risk-adjusted discount rate equal to LIBOR pluseight percent. The Company’s consolidated balance sheet as of July 3,2005, classifies the $10.2 million long-term note receivable as other assets.

 

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 2005,the Company recognized a $1.2 million pre-tax loss on the sale of theCincinnati Lamb business. The net assets sold of the Cincinnati Lamb businesswere recorded at $36.7 million as of the date of the sale and comprised thefollowing (millions of dollars):

 

21

----

 
| Current Assets:                       |   |   |   |
|---------------------------------------|--------|--------|--------|
| Accounts receivable, net              |   | $      | 125.2  |   |
| Inventories, net                      |   | 33.7   |   |
| Other current assets                  |   | 5.3    |   |
| Impairment of current assets          |   | (10.6  | )      |
| Total current assets                  |   | 153.6  |   |
|                                  |   |   |   |
| Current Liabilities:                  |   |   |   |
| Accounts payable and accrued expenses |   | 71.3   |   |
| Accrued payroll.                      |   | 6.5    |   |
| Total current liabilities             |   | 77.8   |   |
|                                  |   |   |   |
| Long-term Liabilities                 |   | 39.1   |   |
| Net Assets Sold                       |   | $      | 36.7   |   |

 

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 six months ended July 3, 2005 and June 30, 2004 (millionsof dollars):

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                              | ** ** | **July 3,**       | ** ** | **June 30,**         | ** ** | **July 3,** | ** ** | **June 30,** | ** ** |
| ** **                                              | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                    |       |                   |       |                 |       |   |   |   |   |
| Product and service revenues                            |       | $                      | 46.4       |                 | $          | 117.6 |   | $ | 160.9 |   | $ | 222.3 |   |
|                                                    |       |                   |       |                 |       |   |   |   |   |
| Operating profit (loss)                                 |       | 1.1                    |       | 3.0                  |       | (4.7 | ) | (2.6 | ) |
| Loss on sale of Cincinnati Lamb                         |       | (1.2                   | )          | —               |       | (35.9 | ) | — |   |
| Profit (Loss) from discontinued operations before  tax  |       | (0.1                   | )          | 3.0                  |       | (40.6 | ) | (2.6 | ) |
| Provision (Benefit) for income taxes                    |       | (0.3                   | )          | 0.5                  |       | (38.9 | ) | 0.1 |   |
| Profit (Loss) from discontinued operations, net of  tax |       | $                      | 0.2        |                 | $          | 2.5 |   | $ | (1.7 | ) | $ | (2.7 | ) |

 

Operating loss fromdiscontinued operations for the three and six months ended July 3, 2005includes an impairment charge of $2.0 million to write-down property, plant andequipment, classified as assets held for sale on the Company’s consolidatedbalance sheets, to its estimated net realizable value.

 

The tax benefit for thesix months ended July 3, 2005, reflects an effective tax rate of 95.8%compared to the U.S. statutory tax rate of 35%. The increase is primarily due to $24.8 million of tax benefits from thedisposition of the Cincinnati Lamb business. These benefits, including a tax effected capital loss carryforward inthe U.S. in the amount of $12.4 million, resulted 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.

 

22

----

 

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

 

The table below setsforth the assets and liabilities of discontinued operations as of July 3,2005, and December 31, 2004 (millions of dollars):

 
| ** **                                           | ** ** | **July 3,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **2005**         | ** ** | **2004**              | ** ** |
| Current assets of discontinued operations:           |       |             |       |                  |       |
| Accounts receivable, net                             |       | $                | 30.8       |                  | $          | 160.1 |   |
| Inventories, net                                     |       | 26.5             |       | 55.9                  |       |
| Other current assets                                 |       | 1.0              |       | 5.6                   |       |
| Impairment of current assets                         |       |             |       | (10.5                 | )          |
| Total current assets of discontinued operations      |       | 58.3             |       | 211.1                 |       |
|                                                 |       |             |       |                  |       |
| Long-term assets of discontinued operations:         |       |             |       |                  |       |
| Property, plant and equipment, net                   |       | 11.8             |       | 13.3                  |       |
| Goodwill and other intangibles, net                  |       | 7.8              |       | 7.8                   |       |
| Other Assets                                         |       | 0.1              |       | 0.1                   |       |
| Total long-term assets of discontinued operations:   |       | 19.7             |       | 21.2                  |       |
|                                                 |       |             |       |                  |       |
| Current liabilities of discontinued operations:      |       |             |       |                  |       |
| Accounts payable and accrued expenses                |       | 30.7             |       | 117.0                 |       |
| Accrued payroll                                      |       | 4.1              |       | 13.2                  |       |
| Total current liabilities of discontinued operations |       | 34.8             |       | 130.2                 |       |
|                                                 |       |             |       |                  |       |
| Long-term liabilities of discontinued operations     |       | 12.0             |       | 46.4                  |       |
| Net assets of discontinued operations                |       | $                | 31.2       |                  | $          | 55.7 |   |

 

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 July 3, 2005 and December 31, 2004. Long-termliabilities of discontinued operations comprise pension and postretirementobligations.

 

As of July 3, 2005,accumulated other comprehensive income on the Company’s consolidated balancesheet includes a credit balance of $10.2 million related to Landis GrindingSystems cumulative translation adjustments.

 

23

----

 

**Liquidity and Capital Resources**

 

The Company’s cash and cash equivalent position asof July 3, 2005, was $173 million. In March 2005, the Company retired $100million of its bonds and thus removed the cash restriction of $50 millionrequired under the Company’s credit agreements as of December 31, 2004.Excluding the impact of the bond retirement and the restricted cash, cash andcash equivalents increased by $5 million compared with the December 31,2004 balance. The increase comprised $32 million provided by continuingoperations offset by $27 million used by discontinued operations. Operatingactivities of continuing operations provided $22 million, including $8 millionreceived for IP license fees that were recorded as deferred revenue, offset by $8 millionof interest payments. Investing activities of continuing operations for thefirst six months of 2005 provided net cash flow of $51 million due to proceedsfrom the sale of assets held for sale and the removal of the restriction on $50million of restricted cash, partially offset by capital expenditures of $6 million.Financing activities of continuing operations reflect the use of $100 millionfor the repayment of debt, partially offset by $8 million of proceeds fromstock option exercises during the six months ended July 3, 2005. Operatingactivities of discontinued operations used $27 million. Investing activities ofdiscontinued operations provided $0.4 million.

 

Net of outstandingletters of credit and limitations on minimum availability, the Company hadborrowing capacity at July 3, 2005, of $30.5 million under the RevolvingFacility and £4.4 million ($7.8 million) under the UK Facility. The Companymade no borrowings under the Revolving Facility or the UK Facility during thefirst six months of 2005, and as of July 3, 2005, no borrowings wereoutstanding under either the Revolving Facility or the UK Facility. As of July 3,2005, the Company was in compliance with the financial covenants of each of theseagreements.

 

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 New 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 asrestricted cash. This amount is classified as restricted cash on the Company’sconsolidated balance sheet as of December 31, 2004 and this restrictionhas been removed as of July 3, 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 Company sold $200.0 millionprincipal amount of senior unsecured debt in an underwritten offering. The debtcomprised $100.0 million of 6.875% seven-year notes and $100.0 million of 7.00%ten-year notes. Interest payments are due semi-annually. Including underwritingfees, discounts and other issuance costs, 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.

 

24

----

 

The Company additionally has outstanding an $8.5million industrial revenue bond, bearing interest at 4.77%, which is classifiedas current portion of long-term obligations on the Company’s consolidatedbalance sheet.  The Company retired theindustrial revenue bond upon its maturity in July 2005.

 

Management believes that cash and cash equivalentson hand combined with projected cash flow from operations, the sale ofdiscontinued operations and assets held for sale and available borrowings underthe Company’s revolving facility will be sufficient to fund the Company’soperations, research and development efforts, anticipated capital expenditures,and other liabilities and commitments, and other capital requirements, for atleast the next twelve months. Projected cash flows from operations are largelybased on the Company’s revenue estimates, cost estimates, and the relatedtiming of cash receipts and cash disbursements. If actual performance differsfrom estimated performance, cash flow from operations could be positively ornegatively impacted.

 

**ContractualObligations**

 

In March 2005, Symbol Technologies, Inc. (“Symbol”)terminated its original equipment manufacturing (“OEM”) agreement with Intermecto supply laser scan engines and stopped shipping laser scan engines to theCompany. The Company believes that the termination of the OEM agreement bySymbol will not have a material adverse effect on its future operations. TheCompany believes Symbol breached the terms of the contract and that all relatedpurchase commitments under this contract of $18 million and $16 million for2005 and 2006, respectively, are eliminated.

 

On March 15, 2005, the Company retired $100million of bonds.

 

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 July 3,2005, have not changed materially from those disclosed in Item 7 of the Company’sannual report on Form 10-K for the year ended December 31, 2004**.**

 

**Critical Accounting 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, and the reported amounts ofrevenues and expenses. Actual amounts could differ from those estimates underdifferent assumptions or conditions. Significant estimates and assumptions wereused to determine the provisions for uncollectible accounts receivable, excessand obsolete inventory, tax valuation allowances, recoverability of goodwilland other intangible assets, warranty costs, percentage-of-completion onlong-term contracts, retiree medical and pension obligations, estimatedproceeds on businesses to be divested, estimated net realizable value of assetsheld for sale and litigation loss contingencies. Despite these inherentlimitations, management believes that Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (“MD&A”) and the financialstatements and related footnotes provide a meaningful and fair perspective ofthe Company. Management’s beliefs regarding significant accounting policieshave not changed significantly from those disclosed in Item 7 of the Company’sannual report on Form 10-K for the year ended December 31, 2004.

 

25

----

 

**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.

 

InDecember 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 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 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 such forward-lookingstatements. These factors include but are not limited to the Company’s abilityto continue to improve profit of its business segment, reduce expenses, improveefficiency, leverage its research and development investment to drivesignificant future revenue, complete its divestiture of its IAS businesses andrealize the estimated market values. Such forward-looking statements involveand are dependent upon certain risks and uncertainties. When used in thisdocument and documents referenced, the words “anticipate,” “believe,” “will,” “intend,”and “expect” and similar expressions as they relate to the Company or itsmanagement are intended to identify such forward-looking statements. TheCompany undertakes no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents, changed circumstances or any other reason after the date of this quarterlyreport. Forward-looking statements include, but are not limited to, statementsabout the following:

 

26

----

 

•                  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 enterpriseaccounts and 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 the phase-outof 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;

 

•                  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-lookingstatements are not guarantees of future performance. Several factors governwhether the Company will or can achieve any forward-looking statement made inthis report. Any one of these factors could cause the Company’s actual resultsto differ materially from those discussed in a forward-looking statement. TheCompany outlines these risk factors in reports that it files with the SEC, inpress releases and on its website, www.unova.com. Such risk factors include,but are not limited to:

 

27

----

 

•                  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 theanticipated time 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 from sellinga particular Intermec product or family of products which could adverselyimpact results of operations and the Company’s future growth;

 

•                  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;

 

28

----

 

•                  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 considerthe foregoing risk factors in evaluating the Company’s ability to achieveexpected results or objectives set forth in any forward-looking statement. Inaddition, readers should not place undue reliance on forward-looking statementsin making investment decisions regarding the Company. The Company disclaims anyobligation to update publicly any forward-looking statement, whether as aresult of new information, future events or otherwise.

 

29

----

 

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

 

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

 

Due to its globaloperations, the Company’s cash flows and earnings are exposed to foreignexchange rate fluctuations. When appropriate, the Company may attempt to limitits exposure to changing foreign exchange rates by entering into short-termforeign currency exchange contracts. As of July 3, 2005, the Company heldshort-term contracts for the purpose of hedging foreign currency cash flows withan aggregate notional amount of $205.1 million.

 

Except as noted in thepreceding paragraph, as of July 3, 2005, there have been no materialchanges in information provided in Item 7A of the Company’s annual report on Form 10-Kfor the year ended December 31, 2004, which contains a complete discussionof the Company’s material exposures to interest rate and foreign exchange raterisks.

 

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

### ** **

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

 

Under the supervision andwith the participation of Company management, including the CEO and CFO, anevaluation was performed on the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures as of the end of the periodcovered by this quarterly report. Based on that evaluation, Company management,including the CEO and CFO, concluded that the Company’s disclosure controls andprocedures were effective as of July 3, 2005.

 

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

 

30

----

 

## **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** | ** ** |
|----------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|
| April 3 to May 1, 2005 |       | —                                           |       | $                                           | —     |                                                                                                   | —     |                                                                                                                          | —     |   |
| May 2 to May 29, 2005  |       | 13,508                                           |       | 19.95                                       |       | —                                                                                                 |       | —                                                                                                                        |       |
| May 30 to July 3, 2005 |       | 411                                              |       | 26.54                                       |       | —                                                                                                 |       | —                                                                                                                        |       |
| Total                            |       | 13,919                                           |       | $                                           | 20.14      |                                                                                                   | —     |                                                                                                                          | —     |   |

 

Thepurchased shares indicated in the above table were surrendered to the Companyto satisfy tax withholding obligations in connection with the vesting ofrestricted stock.

 

# **ITEM4.**          SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS.

# ** **

(a)                                 TheCompany’s Annual Meeting of Shareholders was held on May 18, 2005.

 

(b)                                 Atthe Annual Meeting, Stephen E. Frank, Claire W. Gargalli and Lydia H. Kennardwere elected directors for three-year terms expiring on the date of the annualmeeting in 2008.  The votes were asfollows:

 
| **Director / Nominee** | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|------------------------|------------|------------|------------|--------------|------------|
| Stephen E. Frank       |       | 55,807,162 |       | 2,590,047    |       |
| Claire W. Gargalli     |       | 56,059,764 |       | 2,337,445    |       |
| Lydia H. Kennard       |       | 56,282,045 |       | 2,115,164    |       |

 

TheTerms of the following directors continued after the Annual Meeting:

 

LarryD. Brady

GregoryK. Hinckley

AllenJ Lauer

StephenP. Reynolds

StevenB. Sample

LarryD. Yost

 

(c)                                  Proposal2, a shareholder proposal requesting declassification of the Board ofDirectors, received the votes of a majority of shares present and voting on theproposal.

 
| ** **       | ** ** | **Number of Votes** | ** ** | **% of Shares  Present on this  Proposal** | ** ** | **% of Shares  Outstanding** | ** ** |
|------------------|------------|---------------------|------------|--------------------------------------------|------------|------------------------------|------------|
| For              |       | 28,773,074          |       | 56.27                                      | %          | 46.96                        | %          |
| Against          |       | 22,239,044          |       | 43.49                                      | %          | 36.30                        | %          |
| Abstain          |       | 118,340             |       | 0.23                                       | %          | 0.19                         | %          |
| Broker non-votes |       | 7,266,751           |       | 0.00                                       | %          | 11.86                        | %          |

 

31

----

 

**ITEM 6.                EXHIBITS**

 
| 10.1       |       | Form of  Incentive Stock Option Agreement for awards under the UNOVA, Inc. 2004  Stock Incentive Plan (the “2004 Plan).       |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                   |
| 10.2       |       | Form of  Non-Qualified Stock Option Agreement for awards under the 2004 Plan.                                                           |
|       |       |                                                                                                                                         |
| 10.3       |       | Form of  Incentive Stock Option Agreement for awards under the UNOVA, Inc. 2001  Stock Incentive Plan (the “2001 Plan).       |
|       |       |                                                                                                                                         |
| 10.4       |       | Form of  Non-Qualified Stock Option Agreement for awards under the 2001 Plan.                                                           |
|       |       |                                                                                                                                         |
| 10.5       |       | Form of  Incentive Stock Option Agreement for awards under the UNOVA, Inc. 1999  Stock Incentive Plan (the “1999 Plan).       |
|       |       |                                                                                                                                         |
| 10.6       |       | Form of  Non-Qualified Stock Option Agreement for awards under the 1999 Plan.                                                           |
|       |       |                                                                                                                                         |
| 10.7       |       | Purchase and Sale  of Cincinnati Lamb Group — Settlement Agreement, dated June 30, 2005.                                                |
|       |       |                                                                                                                                         |
| 31.1       |       | Certification of  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002, dated as of August 12, 2005. |
|       |       |                                                                                                                                         |
| 31.2       |       | Certification of  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002, dated as of August 12, 2005. |
|       |       |                                                                                                                                         |
| 32.1       |       | Certification of  Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002, dated as of August 12, 2005. |
|       |       |                                                                                                                                         |
| 32.2       |       | Certification of  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002, dated as of August 12, 2005. |

 

32

----

 

**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/ | Michael E. Keane |   |
|   |         |   |   |
|   |         |   | Michael E. Keane |
|   |         |   | *Senior  Vice President and* |
|   |         |   | *Chief  Financial Officer* |
|   |         |   |   |
|   |         |   | August 11,  2005 |

 

33

----