**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

## **FORM10-Q**

 

**(Mark One)**

 

| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------|-----------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                    |
| ** ** | ** ** | **For the  quarterly period ended April 3, 2005**                                             |
| ** ** | ** ** | ** **                                                                                    |
| ** ** | ** ** | **OR**                                                                                        |
| ** ** | ** ** | ** **                                                                                    |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commissionfile number  001-13279**

 

**UNOVA,INC.**

(Exact name ofregistrant as specified in its charter)

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

 

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

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes  ý  No  o 

 

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

 

On April 30, 2005 therewere 61,321,332 shares of Common Stock outstanding, exclusive of treasuryshares.

 

 

----

 

**UNOVA,INC.INDEXREPORT ON FORM 10-QFOR THE QUARTER ENDED APRIL 3, 2005**

 

 

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

 

----

 

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

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

 

See accompanying notes toconsolidated financial statements.

 

2

----

 

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

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

 

See accompanying notes toconsolidated financial statements.

 

3

----

 

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

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

 

See accompanying notes toconsolidated financial statements.

 

4

----

 

**UNOVA, INC.**

**NOTES TO****CONSOLIDATED FINANCIAL STATEMENTS (unaudited)**

 

**1.****         Basisof Presentation**

 

UNOVA,Inc. and subsidiaries (“UNOVA” or the “Company”), through its wholly ownedsubsidiary Intermec Technologies Corporation (“Intermec”), is a leader inglobal supply chain solutions, the development, manufacture and integration ofwired and wireless automated data collection, Intellitag® RFID (radio frequency identification), mobile computingsystems, bar code printers and label media. Intermec products and services areused by customers to improve productivity, quality and responsiveness ofbusiness operations such as supply chain management, warehouse operations,inventory management, field service, in-transit visibility, direct-storedelivery, store operations and store management. Intermec products and servicesare sold globally to a diverse set of customers in markets such as industrialmanufacturing, transportation and logistics, retail, consumer goods andgovernment.

 

Effectivethe fourth quarter of 2004, the Company committed to a plan to sell itsIndustrial Automation Systems (“IAS”) businesses, comprising the CincinnatiLamb division and the Landis Grinding Systems division after the Board ofDirectors concluded that the IAS segment no longer aligned with the Company’slong-term strategy. Company management believes that divesting the IASbusinesses will enable the Company to concentrate better on Intermec’s corecompetencies and growth opportunities. The Company has classified the IASbusinesses as discontinued operations for accounting purposes in the Company’sconsolidated financial statements and related notes. During the quarter endedApril 3, 2005, the Company completed the sale of the Cincinnati Lamb businessand intends to sell the Landis Grinding Systems business as a going concernwithin the 2005 fiscal year (see Note 5 to the consolidated financialstatements). All prior periods presented have been restated to reflect thisclassification.

 

Beginningin 2005, the Company's interim financial periods are based on a thirteen weekinternal accounting calendar.  TheCompany does not believe this change has any material impact on thecomparability of the financial statements. The amounts included in this report are unaudited; however, in theopinion of management, all adjustments necessary for a fair presentation ofresults of operations, financial position and cash flows for the stated periodshave been included. These adjustments are of a normal recurring nature. Certainprior-year amounts have been reclassified to conform to the current yearpresentation. These consolidated financial statements should be read inconjunction with the audited financial statements and notes thereto included inthe Company’s annual report on Form 10-K for the year ended December 31, 2004.The results of operations for the interim periods presented are not necessarilyindicative of operating results for the entire year.

 

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

 

Aspermitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, theCompany accounts for its stock-based compensation plans in accordance withAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” under which compensation cost is recognized over the vesting periodif the fair value is greater than the exercise price (the intrinsic valuemethod) at the grant of stock options. Had compensation cost for these plansbeen determined consistent with SFAS No. 123, “Accounting for Stock-BasedCompensation,” the Company’s net earnings and basic and diluted earnings pershare from 

 

5

----

 

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

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

 

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

 

**3.****         Inventories**

 

Inventoriescomprise the following (thousands of dollars):

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

 

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

 

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

 

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

 

6

----

 

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

 

Thekey terms of the Revolving Facility are as follows:

 

•      The Company’s obligations under the RevolvingFacility are secured by substantially all the U.S. assets of the Company and itsU.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) LIBOR plusan applicable margin ranging from 1.5% to 2.5% based on consolidated leverage,or (ii) the greater of the federal funds rate plus 0.50% or the Bank’s primerate, plus an applicable margin ranging from 0.5% to 1.5% based on consolidatedleverage.

 

•      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. Thiscash restriction has been removed as of April 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.

 

InMarch 1998, the Company sold $200.0 million principal amount of seniorunsecured debt in an underwritten offering. The debt comprised $100.0 millionof 6.875% seven-year notes and $100.0 million of 7.00% ten-year notes. Interestpayments are due semi-annually. Including underwriting fees, discounts andother issuance costs, the effective interest rates on the seven-year and ten-yearnotes are 7.125% and 7.175%, respectively. In March 2005, the Company retiredthe $100.0 million seven-year notes.

 

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

 

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

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

 

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

 

7

----

 

 

# **5.**         DiscontinuedOperations

 

Duringthe fourth quarter of 2004, the Company committed to a plan to dispose of itsIAS businesses, comprising the Cincinnati Lamb and Landis Grinding Systemsbusinesses, after it was determined that the IAS businesses are no longeraligned with the Company’s long-term strategy. During the first quarter of2005, the Company completed the sale of the Cincinnati Lamb business. TheCompany intends to sell the Landis Grinding Systems business during the 2005fiscal year. In accordance with SFAS 144, “Accounting for Disposal or Impairmentof Long-Lived Assets,” the IAS businesses are classified as discontinuedoperations in the Company’s consolidated financial statements for all periodspresented.

 

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

 

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

 

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

 

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

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

 

Long-termliabilities in the above table represent pension and post-retirementobligations assumed by the buyer (see Note 13).

 

8

----

 

Theloss on the sale includes an $8.3 million gain related to cumulativetranslation adjustment and a $12.9 million charge related to the adjustment torecognize minimum pension liability, related to Cincinnati Lamb, whichpreviously had been included in the accumulated other comprehensive incomecomponent of shareholders’ investment (“OCI”). The Company also incurred $5.3million of transaction related expense primarily for severance and professionalservices.

 

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

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

 

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

 

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

 

9

----

 

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

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

 

TheCompany’s goodwill of $7.8 million relates to its Landis Grinding Systemsbusiness and is classified as long-term assets of discontinued operations onthe Company’s consolidated balance sheets as of April 3, 2005 and March 31,2004. Long-term liabilities of discontinued operations comprise pension andpostretirement obligations.

 

As ofApril 3, 2005, accumulated other comprehensive income on the Company'sconsolidated balance sheet includes a credit balance of $9.0 million related toLandis Grinding Systems cumulative translation adjustments.

 

# **6.**         Provisionfor Income Taxes

 

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

 

The tax provision for thequarter ended March 31, 2004 reflects an effective tax rate for continuingoperations of 26.6%.  The reduction fromthe statutory rate of 35% is primarily due to the recognition of $2.6 millionof previously unrecognized state deferred tax assets.

 

10

----

 

# **7.**         Earningsper Share and Shareholders’ Investment

 

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

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

 

As of April 3, 2005, Company employees and directorsheld options to purchase 106,500 shares of Company common stock 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.

 

# **8.**         ComprehensiveEarnings (Loss)

 

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

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

 

Foreigncurrency translation adjustments for the quarter ended April 3, 2005 in theabove table include a credit balance cumulative translation adjustment of $8.3million which was reclassified from OCI to net earnings as a result of theCincinnati Lamb sale.

 

# **9.**         IntellectualProperty Settlements

 

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

 

# **10.**      SegmentReporting

 

TheCompany’s Intermec segment provides products and services include rugged mobilecomputing solutions, wireless andautomated data collection systems for field workers, on-premises and site-basedworkers as well as wireless network systems for untethered enablement of anenterprise, and barcode label

 

11

----

 

andprinting solutions. Intermec’s rugged and robust systems, solutions andservices enable Intermec’s customers to more efficiently and effectively managetheir supply chains and fulfillment activities.

 

Corporateand other amounts include corporate operating costs. Intercompany transactionshave been eliminated. The following table sets forth the Company’s operationsby business segments (thousands of dollars):

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

 

# **11.**      RelatedParty Transactions

 

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

 

# **12.**      Commitmentsand Contingencies

 

Provisionsfor estimated expenses related to product warranties are made at the timeproducts are sold. These estimates are established using historical informationon the nature, frequency, and average cost of warranty claims. Managementactively studies trends of warranty claims and takes action to improve productquality and minimize warranty claims. The following table indicates the changein the Company’s warranty accrual included in current liabilities (thousands ofdollars):

 

12

----

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

 

The Company has entered into a variety of agreements withthird parties that include indemnification clauses, both in the ordinary courseof business and in connection with our divestitures of certain productlines.  These clauses require us tocompensate these third parties for certain liabilities and damages incurred bythem. FASB Interpretation No. 45, “Guarantors’ Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers” requires that the Company estimate and record the fair value ofguarantees as a liability. The Company does not believe there is anysignificant exposure related to such guarantees and therefore has not recordeda liability as of April 3, 2005, or December 31, 2004. The Company has not madeany significant indemnification payments as a result of these clauses, nor doesit believe the fair value of any of these guarantees has a material effect onthe Company’s financial position or results of operations.

 

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

 

*Tower Automotive Products Co. v.Lamb Technicon Body and Assembly* is a lawsuit filed on March11, 2002 in the Kent County Circuit Court in Michigan, generally alleging abreach of contract involving a frame assembly production line.  No specific claim for damages was made in theComplaint by Tower Automotive Products Co. The Company has responded to theComplaint. A trial date has been scheduled for the second quarter of 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.

 

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

 

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

 

The Complaints in Symbol’s wireless and barcodedecoding lawsuits do not contain sufficient details for the Company to assesswhat Symbol will claim regarding the relationship between its cited patents andIntermec products. However, based on prior Company analysis of the cited Symbolpatents, the Company believes it has substantial defenses to each of thosepatents and the Company intends to vigorously defend itself against the claimsmade in Symbol’s lawsuits. Accordingly, the Company believes that the ultimateresolution of this complaint would not have a material adverse effect on theCompany’s consolidated financial position.

 

13

----

 

# **13.**      Pensionand Other Postretirement Benefit Plans

 

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

 

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

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

 

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 BenefitPlans.  These curtailment and settlementgains comprise the pension and post-retirement obligations assumed by thebuyer.  In addition, the pre-tax loss onthe sale of Cincinnati Lamb includes a loss of $12.9 million representing thecumulative adjustment to recognize the minimum pension liability of theCompany’s Non-U.S. defined benefit plans, which prior to the sale, had beendeferred in the other comprehensive loss component of shareholders’ investmenton the Company’s consolidated balance sheets.

 

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

 

# **14.**      RecentAccounting Pronouncements

 

TheFASB has 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 us after December 31, 2005 and tounvested options at the date of adoption. The Company is currently evaluatingpricing models and the transition

 

14

----

 

provisionsof SFAS 123R and will begin expensing stock-based compensation in accordancewith the standard in the first quarter of 2006. The Company has not yetdetermined whether the adoption of SFAS 123R will result in an impact to itsconsolidated financial statements similar to the current pro forma disclosuresunder SFAS 123.

 

InMarch 2005, the FASB issued Interpretation No. (FIN) 47, Accounting forConditional Asset Retirement Obligations, to clarify the requirement to recordliabilities stemming from a legal obligation to clean up and retire fixedassets, such as a plant or factory, when an asset retirement depends on afuture event. The Company plans to adopt FIN 47 in the first quarter of fiscal2006, and does not expect the application of FIN 47 to have a material impacton its results of operations, cash flows or financial position.

 

InNovember 2004, the FASB issued SFAS No. 151, “Inventory Costs – an Amendment ofARB No. 43, Chapter 4.” This standard provides clarification that abnormalamounts of idle facility expense, freight, handling costs, and spoilage shouldbe recognized as current-period charges. Additionally, this standard requiresthat allocation of fixed production overheads to the costs of conversion bebased on the normal capacity of the production facilities. The provisions ofthis standard are effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005. The Companydoes not expect the adoption of this standard to have a material impacton its consolidated financial statements.

 

15

----

 

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

 

# **Overview**

 

UNOVA, Inc. and subsidiaries (“UNOVA”or the “Company”), through its wholly owned subsidiary Intermec TechnologiesCorporation (“Intermec”), is a leader in global supply chain solutions, thedevelopment, manufacture and integration of wired and wireless automated datacollection,  Intellitag® RFID (radiofrequency identification), mobile computing systems, bar code printers andlabel 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 of2004, the Company committed to a plan to sell its Industrial Automation Systems(“IAS”) businesses, comprising the Cincinnati Lamb division and the LandisGrinding Systems division after the Board of Directors concluded that the IASsegment no longer aligned with the Company’s long-term strategy. Companymanagement believes that divesting the IAS businesses will enable the Companyto concentrate 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 restated to reflect this classification.

 

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

 

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

 

The Intermec results appear toconfirm management’s belief that Intermec products tend to lead IT spending recoveriesdue to the high returns on investment and short payback periods associated withcustomer implementation of the Company’s systems and solutions. The Companybelieves that there are future growth opportunities for Intermec products as aresult of increasing interest in RFID (radio frequency identification), thenext generation item-tracking technology; increasing interest in item-trackingtechnologies within the government market, such as Defense and HomelandSecurity; improved access for Intermec to non-traditional markets as a resultof broadening the product line to support these markets; and partneringarrangements with industry leaders to provide integrated solutions. TheCompany’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

----

 

# **Resultsof Operations**

 

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

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

 

17

----

 

*Revenues*

 

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

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

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

 

Product revenues for the quarterended April 3, 2005, were $161.9 million, an increase of $19.3 million, or13.5%, compared with corresponding prior year period. For the quarter endedApril 3, 2005, systems and solutions revenue increased by 10.9%, printer/mediaproducts increased 16.0% and service increased by 12.4% over the correspondingprior year period. Geographically, product and service revenue for Europe,Middle East and Africa increased 11.2%, North America increased 10.9%, and therest of the world increased 33.0% compared to the corresponding prior yearperiod.

 

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

 

18

----

 

*Gross Profit*

 

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

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

 

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

 

*Operating Profit*

 

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

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

 

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

 

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

 

*Selling, General and Administrative*

 

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

 

19

----

 

expense as a percentage of productand service revenue was primarily due to the ability to leverage Intermec’sSG&A structure as product and service revenues increase. Intermec’s R&Dexpense was 7.9% of product and service revenues for the quarter ended April 3,2005 compared with 9.1% for the corresponding prior year period.

 

*Interest, Net*

 

Net interest expense was $2.1million for the quarter ended April 3, 2005, compared with $3.1 million for thecorresponding prior year period, reflecting higher interest income on cash andcash equivalents during the quarter ended April 3, 2005, compared to thecorresponding prior year period.

 

*Provision for Income Taxes*

 

The tax provision for the quarterended April 3, 2005 reflects an effective tax rate for continuing operations of32.1% compared to a U.S. statutory rate of 35%. The reduction in the effective tax rate is primarily due to favorableforeign currency exchange variance associated with foreign tax contingencyaccruals.

 

The tax provision for the quarterended March 31, 2004 reflects an effective tax rate for continuing operationsof 26.6%.  The reduction from thestatutory rate of 35% is primarily due to the recognition of $2.6 million ofpreviously unrecognized state deferred tax assets.

 

*Loss from Discontinued Operations*

 

Duringthe fourth quarter of 2004, the Company committed to a plan to dispose of itsIAS business, comprising the Cincinnati Lamb and Landis Grinding Systemsbusinesses, after it was determined that the IAS businesses are no longeraligned with the Company’s long-term strategy. During the first quarter of2005, the Company completed the sale of the Cincinnati Lamb business. TheCompany intends to sell the Landis Grinding Systems business during the 2005fiscal year. In accordance with SFAS 144, “Accounting for Disposal orImpairment of Long-Lived Assets,” the IAS businesses are classified asdiscontinued operations in the Company’s consolidated financial statements forall periods presented.

 

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

 

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

 

20

----

 

TheCompany recognized a pre-tax loss on the sale of the Cincinnati Lamb businessof $34.7 million during the quarter ended April 3, 2005. The net assets sold ofthe Cincinnati Lamb business were recorded at $36.7 million as of the date ofthe sale.  The following table sets forththe components of the loss from discontinued operations, net of tax, for thequarters ended April 3, 2005 and March 31, 2004 (thousands of dollars):

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

 

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

 

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

 

21

----

 

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

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

 

TheCompany’s goodwill of $7.8 million relates to its Landis Grinding Systemsbusiness and is classified as long-term assets of discontinued operations onthe Company’s consolidated balance sheets as of April 3, 2005 and March 31,2004. Long-term liabilities of discontinued operations comprise pension andpostretirement obligations.

 

As ofApril 3, 2005, accumulated other comprehensive income on the Company'sconsolidated balance sheet includes a credit balance of $9.0 million related toLandis Grinding Systems cumulative translation adjustments.

 

**Liquidity and CapitalResources**

 

The Company’s cash and cashequivalent position as of April 3, 2005, was $155.2 million.  In March of 2005, the Company retired $100million of its bonds and thus removed the cash restriction of $50 million requiredunder the Company’s credit agreements as of December 31, 2004. Excluding theimpact of the bond retirement and the restricted cash, cash and cashequivalents decreased by $12.7 million compared to the December 31, 2004balance. The decrease in the first quarter of 2005 was primarily due to $17.2million used in the operating activities of discontinued operations.  Investing activities of discontinuedoperations provided $0.2 million. Operating activities of continuing operations used $0.3 million, including$8.0 million of interest payments. Investing activities of continuingoperations for the first quarter of 2005 provided net cash flow of $3.5 milliondue to the sale of assets held for sale partially offset by capitalexpenditures. Financing activities of continuing operations reflect the use of$100 million for the repayment of debt, partially offset by the removal of therestriction on $50 million of cash and $1.3 million of proceeds from stockoption exercises during the quarter ended April 3, 2005.

 

Net of outstanding letters ofcredit and limitations on minimum availability, the Company had borrowingcapacity at April 3, 2005, of $32.3 million under the Revolving Facility andzero under the UK Facility. The Company made no borrowings under the RevolvingFacility or the UK Facility during thefirst quarter of 2005, and as of April 3, 2005, no borrowings wereoutstanding under either the Revolving Facility or the UK Facility. As of April3, 2005, the Company was in compliance with the financial covenants of each ofthese agreements.

 

22

----

 

The key terms of the RevolvingFacility are as follows:

 

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

 

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

 

•        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 restriction hasbeen removed as of April 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 million principal amount of senior unsecured debt in an underwrittenoffering. The debt comprised $100.0 million of 6.875% seven-year notes and$100.0 million of 7.00% ten-year notes. Interest payments are duesemi-annually. Including underwriting fees, discounts and other issuance costs,the effective interest rates on the seven-year and ten-year notes are 7.125%and 7.175%, respectively. In March 31, 2005, the Company fully paid down $100.0million seven-year notes.

 

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

 

Management believes that cash andcash equivalents on hand combined with projected cash flow from operations, thesale of discontinued operations and assets held for sale are sufficient tofinance anticipated capital requirements. Projected cash flows from operationsare largely based on the Company’s revenue estimates, cost estimates, and therelated timing of cash receipts and cash disbursements. If actual performancediffers from estimated performance, cash flow from operations could bepositively or negatively impacted. Additional sources of liquidity for theCompany include the Revolving Facility.

 

**ContractualObligations**

 

On March 11, 2005, SymbolTechnologies, Inc. (“Symbol”) announced its intent to terminate its originalequipment manufacturing (“OEM”) agreement with Intermec to supply laser scanengines and stopped shipping laser scan engines to the Company. The Company believesthat the cancellation of the OEM agreement by Symbol will not have a materialadverse effect on its future operations. The Company believes Symbol breached the terms of the contract and thatall related purchase commitments under this contract of $18 million and $16million for 2005 and 2006, respectively, are eliminated.

 

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

 

23

----

 

Except forthe elimination of the purchase commitments with Symbol and the reduction oflong-term debt obligations noted above, the Company’s contractual commitmentsas of April 3, 2005, have not changed materially from thosedisclosed in Item 7 of the Company’s annual report on Form 10-K for the yearended December 31, 2004**.**

 

**CriticalAccounting Policies**

 

The Company’s consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities, and the reported amounts of revenues andexpenses. Actual amounts could differ from those estimates under differentassumptions or conditions. Significant estimates and assumptions were used todetermine the provisions for uncollectible accounts receivable, excess andobsolete inventory, tax valuation allowances, recoverability of goodwill andother intangible assets, warranty costs, percentage-of-completion on long-termcontracts, retiree medical and pension obligations, estimated proceeds onbusinesses to be divested, estimated net realizable value of assets held forsale and litigation loss contingencies. Despite these inherent limitations,management believes that Management’s Discussion and Analysis of FinancialCondition and Results of Operations (“MD&A”) and the financial statementsand related footnotes provide a meaningful and fair perspective of the Company.Management’s beliefs regarding significantaccounting policies have not changed significantly from those disclosed in Item7 of the Company’s annual report on Form 10-K for the year endedDecember 31, 2004.

 

**NewAccounting Pronouncements**

 

The FASB has issued Statement ofFinancial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment” (SFAS 123R). Under the provisions of SFAS 123R, companies are requiredto measure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of the award (withlimited exception). That cost will be recognized over the period during whichan employee is required to provide service in exchange for the award, usuallythe vesting period. On April 14, 2005, the Securities and ExchangeCommission (SEC) approved a delay to the effective date of SFAS 123R. Under thenew SEC rule, SFAS 123R is effective for annual periods that begin afterJune 15, 2005. SFAS 123R applies to all awards granted, modified, repurchasedor cancelled by us after December 31, 2005 and to unvested options at thedate of adoption. The Company is currently evaluating pricing models and thetransition provisions of SFAS 123R and will begin expensing stock-basedcompensation in accordance with the standard in the first quarter of 2006. TheCompany has not yet determined whether the adoption of SFAS 123R will result inan impact to its consolidated financial statements similar to the current proforma disclosures under SFAS 123.

 

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

 

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

 

#### ***Forward-Looking Statements andRisk Factors***

* *

Forward-looking statementscontained in this filing are subject to the safe harbor created by the PrivateSecurities Litigation Reform Act of 1995 (alternatively: Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Actof 1934) and are highly dependant upon a variety of important factors whichcould cause actual results to differ materially from those reflected in suchforward-looking statements. These factors include but are not limited to theCompany’s ability to continue to improve profit of its business segment, reduceexpenses,

 

24

----

 

improve efficiency, leverage itsresearch and development investment to drive significant future revenue,complete its divestiture of its IAS businesses and realize the estimated marketvalues. Such forward-looking statements involve and are dependent upon certainrisks and uncertainties. When used in this document and documents referenced,the words “anticipate,” “believe,” “will,” “intend,” and “expect” and similar expressionsas they relate to the Company or its management are intended to identify suchforward-looking statements. The Company undertakes no obligation to publiclyupdate or revise any forward-looking statements, whether as a result of newinformation, future events, changed circumstances or any other reason after thedate of this annual report. Forward-looking statements include, but are notlimited to, statements about the following:

 

•      TheCompany’s expected divestiture of its remaining IAS businesses 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 & development;

 

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

 

•      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;

 

•      TheCompany’s prospects for selling Intermec products and services to majorenterprise accounts 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 thephase-out of old Intermec products and services;

 

•      TheCompany’s view of the short- and long-term outlook for and trends in themarkets for the Company’s 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 internationalstandards setting activities that could impact its Intermec products andsystems;

 

•      TheCompany’s ability to:

 

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

 

•              Achieveits goals with respect to revenues and cost savings;

 

25

----

 

•              Successfullyobtain critical components for its products at reasonable prices;

 

•              Successfullycomplete large-scale mobile computing installations.

 

Forward-looking statements are notguarantees of future performance. Several factors govern whether the Companywill or can achieve any forward-looking statement made in this report. Any oneof these factors could cause the Company’s actual results to differ materiallyfrom those discussed in a forward-looking statement. The Company outlines theserisk factors in reports that it files with the SEC, in press releases and onits website, www.unova.com. Such risk factors include, but are not limited to:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

•      Othercompanies may infringe the Company’s intellectual property.  If the Company is unable to enforce itsintellectual property through appropriate licensing agreements, litigation orother means, demand for the Company’s products, royalty revenues and results ofoperations could be adversely affected;

 

•      Ifthe Company is unable to realize anticipated royalty revenue during theanticipated time frame 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

 

26

----

 

prevented from selling a particular Intermec productor family of products which could adversely impact results of operations andthe Company’s future growth;

 

•      Approvalof national and international standards applicable to the Company’s Intermecproducts and systems could adversely impact demand for the Company’s productsand systems;

 

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

 

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

 

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

 

•      Ifthe Company is unable to obtain key components of its Intermec products at areasonable cost and in a timely manner, the cost manufacturing those productscould increase, the Company might have to discontinue or re-engineer some ofthose products, and delivery of some of those products might be delayed, whichcould adversely impact results of operations and the Company’s future growth;

 

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

 

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

 

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

 

Readers should consider theforegoing risk factors in evaluating the Company’s ability to achieve expectedresults or objectives set forth in any forward-looking statement. In addition,readers should not place undue reliance on forward-looking statements in makinginvestment 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.

 

**ITEM 3****.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT 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 global operations, theCompany’s cash flows and earnings are exposed to foreign exchange ratefluctuations. When appropriate, the Company may attempt to limit its exposureto changing foreign exchange rates by entering into short-term foreign currencyexchange contracts. As of April 3, 2005, the Company held short-term contractsfor the purpose of hedging foreign currency cash flows with an aggregatenotional amount of $251.8 million.

 

Except as noted in the precedingparagraphs, as of April 3, 2005, there have been no material changes ininformation provided in Item 7A of the Company’s annual report on Form 10-K forthe year ended December 31, 2004, which contains a complete discussion of theCompany’s material exposures to interest rate and foreign exchange rate risks.

 

27

----

 

### **ITEM 4**. CONTROLS AND PROCEDURES

 

The Company maintains disclosurecontrols and procedures, which are designed to ensure that information requiredto be disclosed in the reports we file or submit under the Securities ExchangeAct of 1934, as amended, is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’s rulesand forms, and that such information is accumulated and communicated to Companymanagement, including the Chief Executive Officer, or CEO, and Chief FinancialOfficer, or CFO, as appropriate to allow timely decisions regarding requireddisclosure.

 

Under the supervision and with theparticipation of Company management, including the CEO and CFO, an evaluationwas performed on the effectiveness of the design and operation of the Company’sdisclosure controls and procedures as of the end of the period covered by thisquarterly report. Based on that evaluation, Company management, including theCEO and CFO, concluded that the Company’s disclosure controls and procedureswere effective as of April 3, 2005.

 

An evaluation was also performedunder the supervision and with the participation of Company management,including the CEO and CFO, of any change in the Company’s internal controlsover financial reporting that occurred during the last fiscal quarter and thathas materially affected, or is reasonably likely to materially affect, theCompany’s internal controls over financial reporting. That evaluation did notidentify any change in the Company’s internal controls over financial reportingthat occurred during the latest fiscal quarter and that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrols over financial reporting.

 

28

----

 

## **PART II**.  OTHERINFORMATION

 

**ITEM 2.  UNREGISTERED****SALES OF EQUITY SECURITIES AND USE OFPROCEEDS**

 

(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** | ** ** |
|----------------------------------|------------|---------------------------------------------|------------|----------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|
| January 1 to  January 31, 2005   |       | —                                      |       | $                                      | —     |                                                                                         | —     |                                                                                                                     | —     |   |
| February 1 to  February 28, 2005 |       | 5,350                                       |       | 23.52                                  |       | —                                                                                       |       | —                                                                                                                   |       |
| March 1 to April  3, 2005        |       | 8,919                                       |       | 20.49                                  |       | —                                                                                       |       | —                                                                                                                   |       |
| Total                            |       | 14,269                                      |       | $                                      | 21.62      |                                                                                         | —     |                                                                                                                     | —     |   |

 

The purchased sharesindicated in the above table were surrendered to the Company to satisfy taxwithholding obligations in connection with the vesting of restricted stock.

 

# **ITEM 6**.        EXHIBITS

 
| 4.1        |       | Purchase and Sale  Agreement among UNOVA, Inc., UNOVA Industrial Automation Systems, Inc., UNOVA  U.K. Limited, Cincinnati Machine U.K. Limited, Honsberg Lamb  Sonderwerkzeugmachinen GmbH, UNOVA Canada, Inc., UNOVA IP Corp. as Selling  entities and R&B Plastics Holdings, Inc., MAG Industrial Automation  Systems, LLC as Purchaser, dated as of March 17, 2005.*                                                                                                                                                                                                                                                                                                                                                                       |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.2        |       | First Amendment to  Purchase and Sale Agreement, dated April 1, 2005.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.3        |       | Amendment No. 1 to  Credit Agreement and Consents and Waiver and Amendment No. 1 to Security  Agreement – Borrowers among UNOVA, INC., a Delaware corporation, UNOVA  Industrial Automation Systems, Inc., Intermec Technologies Corporation,  Intermec International, Inc., Intermec Technologies Manufacturing, LLC, Intermec  IP Corp., and UNOVA IP Corp, each a Borrower and collectively as the  Borrowers, the financial institutions listed on the signature pages of the  Credit Agreement, as the Lenders, Keybank National Association, a national  banking association, as the Administrative Agent for the Lenders, and Keybank  National Association, a national banking association, as the LC Issuer, dated  March 29, 2005.* |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 31.1       |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,  dated as of May 10, 2005.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 31.2       |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,  dated as of May 10, 2005.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 32.1       |       | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,  dated as of May 10, 2005.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 32.2       |       | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,  dated as of May 10, 2005.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

----

   *           Copiesof these exhibits are included in this Quarterly Report on Form 10-Q filed withthe Securities and Exchange Commission.

 

29

----

 

## **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* |
|     |         |   |   |
|     |         |   | May 10, 2005 |

 

30

----