**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-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 June 30, 2004** |
| ** **     |   |
| ** **     | **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 of registrantas 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’stelephone number, including area code: **(425)265-2400

# ** **

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ýNo o

 

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

 

On July 30, 2004 there were 60,870,065 shares of Common Stockoutstanding, exclusive of treasury shares.

 

 

----

 

**UNOVA,INC.**

 

**INDEX**

 

**REPORTON FORM 10-Q**

 

**FOR THEQUARTER ENDED JUNE 30, 2004**

 
| **PART I.   FINANCIAL INFORMATION** |        |
|------------------------------------------|-------------|
|                                     |        |   |
| ** **                               | **ITEM 1.** | Financial  Statements |   |
| ** **                               | ** **  |   |
|                                     |        | Consolidated Statements  of Operations  Six Months Ended June 30, 2004 and 2003 (unaudited) |   |
|                                     |        |   |
|                                     |        | Consolidated  Statements of Operations  Three Months Ended June 30, 2004 and 2003 (unaudited) |   |
|                                     |        |   |
|                                     |        | Consolidated  Balance Sheets  June 30, 2004 and December 31, 2003 (unaudited) |   |
|                                     |        |   |
|                                     |        | Consolidated Statements of  Cash Flows  Six Months Ended June 30, 2004 and 2003 (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.** | Changes  in Securities, Use of Proceeds and Issuer Purchases of Equity Securities |   |
|                                     |        |   |
| ** **                               | **ITEM 4.** | Submission  of Matters to a Vote of Security Holders |   |
|                                     |        |   |
| ** **                               | **ITEM 6.** | Exhibits  and Reports on Form 8-K |   |
|                                     |        |   |
| Signature                                |        |

 

----

 

**PART I****.  FINANCIAL INFORMATION**

 

**ITEM 1****. FINANCIALSTATEMENTS**

 

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

 
| ** **                                                      | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                      | ** ** | **2004**                       | ** ** | **2003** | ** ** |
|                                                            |       |                           |       |   |   |
| Sales and  Service Revenues:                                    |       |                           |       |   |   |
| Sales revenues                                                  |       | $                              | 546,590    |   | $ | 486,471 |   |
| Service revenues                                                |       | 55,293                         |       | 57,239 |   |
| Total Sales and  Service Revenues                               |       | 601,883                        |       | 543,710 |   |
|                                                            |       |                           |       |   |   |
| Costs and Expenses:                                             |       |                           |       |   |   |
| Cost of sales                                                   |       | 365,452                        |       | 341,992 |   |
| Cost of service                                                 |       | 36,793                         |       | 37,389 |   |
| Selling, general  and administrative                            |       | 158,055                        |       | 149,554 |   |
| Depreciation and  amortization                                  |       | 9,394                          |       | 13,402 |   |
| Special charges                                                 |       | 642                            |       | 1,945 |   |
|                                                            |       |                           |       |   |   |
| Total Costs and  Expenses                                       |       | 570,336                        |       | 544,282 |   |
|                                                            |       |                           |       |   |   |
| Operating Profit  (Loss) from Continuing Operations             |       | 31,547                         |       | (572 | ) |
|                                                            |       |                           |       |   |   |
| Interest, net                                                   |       | (6,254                         | )          | (7,039 | ) |
| Earnings (Loss)  from Continuing Operations before Income Taxes |       | 25,293                         |       | (7,611 | ) |
| Provision for  Income Taxes                                     |       | (9,084                         | )          | (4,200 | ) |
| Earnings (Loss)  from Continuing Operations, Net of Tax         |       | 16,209                         |       | (11,811 | ) |
| Loss from  Discontinued Operations, Net of Tax                  |       | (115                           | )          | (3,872 | ) |
|                                                            |       |                           |       |   |   |
| Net Earnings  (Loss)                                            |       | $                              | 16,094     |   | $ | (15,683 | ) |
|                                                            |       |                           |       |   |   |
| Basic Earnings  (Loss) per Share                                |       |                           |       |   |   |
| Continuing  Operations                                          |       | $                              | 0.27       |   | $ | (0.20 | ) |
| Discontinued  Operations                                        |       | (0.00                          | )          | (0.07 | ) |
| Net Earnings  (Loss) per Share                                  |       | $                              | 0.27       |   | $ | (0.27 | ) |
|                                                            |       |                           |       |   |   |
| Diluted Earnings  (Loss) per Share                              |       |                           |       |   |   |
| Continuing  Operations                                          |       | $                              | 0.26       |   | $ | (0.20 | ) |
| Discontinued  Operations                                        |       | (0.00                          | )          | (0.07 | ) |
| Net Earnings  (Loss) per Share                                  |       | $                              | 0.26       |   | $ | (0.27 | ) |
|                                                            |       |                           |       |   |   |
| Shares Used in  Computing Basic Earnings (Loss) per Share       |       | 60,296                         |       | 58,444 |   |
|                                                            |       |                           |       |   |   |
| Shares Used in  Computing Diluted Earnings (Loss) per Share     |       | 62,069                         |       | 58,444 |   |

 

See accompanying notes toconsolidated financial statements.

 

1

----

 

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

 
| ** **                                                  | ** ** | **Three Months  Ended  June 30,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                  | ** ** | **2004**                          | ** ** | **2003** | ** ** |
|                                                        |       |                              |       |   |   |
| Sales and Service Revenues:                                 |       |                              |       |   |   |
| Sales revenues                                              |       | $                                 | 277,413    |   | $ | 249,947 |   |
| Service revenues                                            |       | 26,800                            |       | 29,755 |   |
| Total Sales and Service Revenues                            |       | 304,213                           |       | 279,702 |   |
|                                                        |       |                              |       |   |   |
| Costs and Expenses:                                         |       |                              |       |   |   |
| Cost of sales                                               |       | 189,433                           |       | 173,249 |   |
| Cost of service                                             |       | 17,856                            |       | 18,968 |   |
| Selling, general and administrative                         |       | 79,404                            |       | 73,274 |   |
| Depreciation and amortization                               |       | 4,610                             |       | 6,618 |   |
| Special charges                                             |       | 259                               |       | 947 |   |
|                                                        |       |                              |       |   |   |
| Total Costs and Expenses                                    |       | 291,562                           |       | 273,056 |   |
|                                                        |       |                              |       |   |   |
| Operating Profit from Continuing Operations                 |       | 12,651                            |       | 6,646 |   |
|                                                        |       |                              |       |   |   |
| Interest, net                                               |       | (3,186                            | )          | (3,177 | ) |
| Earnings from Continuing Operations before Income Taxes     |       | 9,465                             |       | 3,469 |   |
| Provision for Income Taxes                                  |       | (3,768                            | )          | (2,600 | ) |
| Earnings from Continuing Operations, Net of Tax             |       | 5,697                             |       | 869 |   |
| Loss from Discontinued Operations, Net of Tax               |       | (85                               | )          | (1,669 | ) |
|                                                        |       |                              |       |   |   |
| Net Earnings (Loss)                                         |       | $                                 | 5,612      |   | $ | (800 | ) |
|                                                        |       |                              |       |   |   |
| Basic Earnings (Loss) per Share                             |       |                              |       |   |   |
| Continuing Operations                                       |       | $                                 | 0.09       |   | $ | 0.02 |   |
| Discontinued Operations                                     |       | (0.00                             | )          | (0.03 | ) |
| Net Earnings (Loss) per Share                               |       | $                                 | 0.09       |   | $ | (0.01 | ) |
|                                                        |       |                              |       |   |   |
| Diluted Earnings (Loss) per Share                           |       |                              |       |   |   |
| Continuing Operations                                       |       | $                                 | 0.09       |   | $ | 0.02 |   |
| Discontinued Operations                                     |       | (0.00                             | )          | (0.03 | ) |
| Net Earnings (Loss) per Share                               |       | $                                 | 0.09       |   | $ | (0.01 | ) |
|                                                        |       |                              |       |   |   |
| Shares Used in Computing Basic Earnings (Loss) per Share    |       | 60,403                            |       | 58,474 |   |
|                                                        |       |                              |       |   |   |
| Shares Used in Computing Diluted Earnings (Loss) per  Share |       | 62,011                            |       | 59,661 |   |

 

See accompanying notes toconsolidated financial statements.

 

2

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

 
| ** **                                                                                           | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                                                           | ** ** | ** **         | ** ** | ** **             | ** ** |
| **ASSETS**                                                                                           |       |               |       |                   |       |
|                                                                                                 |       |               |       |                   |       |
| Current Assets:                                                                                      |       |               |       |                   |       |
| Cash and cash equivalents                                                                            |       | $                  | 191,070    |                   | $          | 238,447 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $15,725, 2004 and $21,964, 2003      |       | 320,659            |       | 275,594                |       |
| Inventories, net of progress billings                                                                |       | 157,874            |       | 132,324                |       |
| Deferred tax assets                                                                                  |       | 65,424             |       | 71,229                 |       |
| Assets held for sale                                                                                 |       | 19,681             |       | 23,840                 |       |
| Other current assets                                                                                 |       | 17,071             |       | 19,513                 |       |
| Total Current Assets                                                                                 |       | 771,779            |       | 760,947                |       |
|                                                                                                 |       |               |       |                   |       |
| Property, Plant and Equipment, Net of Accumulated  Depreciation of $220,731, 2004 and $215,944, 2003 |       | 74,558             |       | 77,292                 |       |
| Goodwill and Other Intangibles, Net                                                                  |       | 75,015             |       | 75,639                 |       |
| Deferred Tax Assets                                                                                  |       | 116,113            |       | 111,820                |       |
| Other Assets                                                                                         |       | 57,108             |       | 65,119                 |       |
| Total Assets                                                                                         |       | $                  | 1,094,573  |                   | $          | 1,090,817 |   |
|                                                                                                 |       |               |       |                   |       |
| **LIABILITIES AND SHAREHOLDERS’ INVESTMENT**                                                    |       |               |       |                   |       |
|                                                                                                 |       |               |       |                   |       |
| Current Liabilities:                                                                                 |       |               |       |                   |       |
| Accounts payable and accrued expenses                                                                |       | $                  | 257,895    |                   | $          | 265,626 |   |
| Payroll and related expenses                                                                         |       | 40,456             |       | 54,893                 |       |
| Current portion of long-term obligations                                                             |       | 100,000            |       | —                 |       |
| Total Current Liabilities                                                                            |       | 398,351            |       | 320,519                |       |
|                                                                                                 |       |               |       |                   |       |
| Long-term Obligations                                                                                |       | 108,500            |       | 208,500                |       |
| Other Long-term Liabilities                                                                          |       | 134,930            |       | 130,970                |       |
|                                                                                                 |       |               |       |                   |       |
| Shareholders’ Investment:                                                                       |       |               |       |                   |       |
| Common stock                                                                                         |       | 610                |       | 605                    |       |
| Additional paid-in capital                                                                           |       | 698,132            |       | 690,745                |       |
| Accumulated deficit                                                                                  |       | (241,472           | )          | (257,566               | )          |
| Accumulated other comprehensive loss                                                                 |       | (4,478             | )          | (2,956                 | )          |
| Total Shareholders’ Investment                                                                  |       | 452,792            |       | 430,828                |       |
| Total Liabilities and Shareholders’ Investment                                                  |       | $                  | 1,094,573  |                   | $          | 1,090,817 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

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

 
| ** **                                                                                            | ** ** | **Six Months  Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                            | ** ** | **2004**                        | ** ** | **2003** | ** ** |
|                                                                                                  |       |                            |       |   |   |
| Cash and Cash Equivalents at Beginning of Period                                                      |       | $                               | 238,447    |   | $ | 178,269 |   |
|                                                                                                  |       |                            |       |   |   |
| Cash Flows from Operating Activities:                                                                 |       |                            |       |   |   |
| Net earnings (loss)                                                                                   |       | 16,094                          |       | (15,683 | ) |
| Adjustments to reconcile net earnings (loss) to net cash  provided by (used in) operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                                         |       | 9,394                           |       | 14,138 |   |
| Change in prepaid and accrued pension costs, net                                                      |       | 5,401                           |       | 3,901 |   |
| Deferred taxes                                                                                        |       | (1,081                          | )          | (1,658 | ) |
| Special charges and other                                                                             |       | (521)                           |       | (83) |   |
| Changes in operating assets and liabilities:                                                          |       |                            |       |   |   |
| Accounts receivable                                                                                   |       | (41,755                         | )          | 54,045 |   |
| Inventories                                                                                           |       | (25,619                         | )          | 277 |   |
| Other current assets                                                                                  |       | 2,387                           |       | (2,260 | ) |
| Accounts payable and accrued expenses                                                                 |       | (4,435                          | )          | (780 | ) |
| Payroll and related expenses                                                                          |       | (14,282                         | )          | (16,631 | ) |
| Other long-term liabilities                                                                           |       | (114                            | )          | 189 |   |
| Other operating activities                                                                            |       | 5,059                           |       | 5,493 |   |
|                                                                                                  |       |                            |       |   |   |
| Net Cash Provided by (Used in) Operating Activities                                                   |       | (49,472                         | )          | 40,948 |   |
|                                                                                                  |       |                            |       |   |   |
| Cash Flows from Investing Activities:                                                                 |       |                            |       |   |   |
| Capital expenditures                                                                                  |       | (6,417                          | )          | (7,814 | ) |
| Sale of property, plant and equipment                                                                 |       | 4,409                           |       | 4,187 |   |
| Other investing activities                                                                            |       | (63                             | )          | 1,163 |   |
|                                                                                                  |       |                            |       |   |   |
| Net Cash Used in Investing Activities                                                                 |       | (2,071                          | )          | (2,464 | ) |
|                                                                                                  |       |                            |       |   |   |
| Cash Flows from Financing Activities:                                                                 |       |                            |       |   |   |
| Stock Options exercised                                                                               |       | 2,774                           |       | 879 |   |
| Repayment of long-term obligations                                                                    |       | —                          |       | (16,200 | ) |
| Other financing activities                                                                            |       | 1,392                           |       | 1,549 |   |
|                                                                                                  |       |                            |       |   |   |
| Net Cash Provided by (Used in) Financing Activities                                                   |       | 4,166                           |       | (13,772 | ) |
|                                                                                                  |       |                            |       |   |   |
| Resulting Increase (Decrease) in Cash and Cash  Equivalents                                           |       | (47,377                         | )          | 24,712 |   |
|                                                                                                  |       |                            |       |   |   |
| Cash and Cash Equivalents at End of Period                                                            |       | $                               | 191,070    |   | $ | 202,981 |   |
|                                                                                                  |       |                            |       |   |   |
| Supplemental Disclosure of Cash Flow Information:                                                     |       |                            |       |   |   |
| Interest paid                                                                                         |       | $                               | (7,600     | ) | $ | (8,185 | ) |
| Income taxes paid                                                                                     |       | $                               | (4,307     | ) | $ | (4,152 | ) |

 

See accompanying notes toconsolidated financial statements.

 

4

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

 

**1.****                         ****Basis of Presentation**

 

UNOVA, Inc. and subsidiaries (“UNOVA” or the “Company”) isa global supplier of mobile computing and wireless network products fornon-office applications and of manufacturing systems technologies primarily forthe automotive and aerospace industries. The Company is headquartered inEverett, Washington and incorporated in the state of Delaware.

 

The amounts included in this report are unaudited; however,in the opinion of management, all adjustments necessary for a fair presentationof results of operations, financial position and cash flows for the statedperiods have been included. These adjustments are of a normal recurring nature.Certain prior-year amounts have been reclassified to conform to 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, 2003.The results of operations for the interim periods presented are not necessarilyindicative of operating results for the entire year.

 

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

 

As permitted by Statement of Financial Accounting Standards(“SFAS”) No. 123, the Company accounts for its stock-based compensation plansin accordance with Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees,” under which compensation cost is recognized overthe vesting period if the fair value is greater than the exercise price (theintrinsic value method) at the grant of stock options. Had compensation costfor these plans been determined consistent with SFAS No. 123, “Accounting forStock-Based Compensation,” the Company’s net earnings (loss) and basic anddiluted earnings (loss) per share for the three and six months ended June 30,2004, and 2003, would have been reduced (increased) to the pro forma amountsindicated in the following table (thousands of dollars):

 
| ** **                                                                                           | ** ** | **Six  Months Ended  June 30,** | ** ** | **Three  Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                           | ** ** | **2004**                        | ** ** | **2003**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net earnings (loss) as reported                                                                      |       | $                               | 16,094     |                              | $          | (15,683 | ) | $ | 5,612 |   | $ | (800 | ) |
| Add: stock-based compensation expense recorded under the  intrinsic value method,. net of tax effect |       | 513                             |       | 588                               |       | 340 |   | 375 |   |
| Less: stock compensation expense computed under the fair  value method, net of tax effect            |       | (1,713                          | )          | (2,292                            | )          | (892 | ) | (1,203 | ) |
| Pro forma net earnings (loss)                                                                        |       | $                               | 14,894     |                              | $          | (17,387 | ) | $ | 5,060 |   | $ | (1,628 | ) |
|                                                                                                 |       |                            |       |                              |       |   |   |   |   |
| Earnings (loss) per share as reported:                                                               |       |                            |       |                              |       |   |   |   |   |
| Basic                                                                                                |       | $                               | 0.27       |                              | $          | (0.27 | ) | $ | 0.09 |   | $ | (0.01 | ) |
| Diluted                                                                                              |       | $                               | 0.26       |                              | $          | (0.27 | ) | $ | 0.09 |   | $ | (0.01 | ) |
|                                                                                                 |       |                            |       |                              |       |   |   |   |   |
| Pro forma earnings (loss) per share:                                                                 |       |                            |       |                              |       |   |   |   |   |
| Basic                                                                                                |       | $                               | 0.25       |                              | $          | (0.30 | ) | $ | 0.08 |   | $ | (0.03 | ) |
| Diluted                                                                                              |       | $                               | 0.24       |                              | $          | (0.30 | ) | $ | 0.08 |   | $ | (0.03 | ) |

 

During the six months ended June 30, 2004, the Company issued628,984 shares of Common Stock under its stock compensation plans, including456,740 shares issued upon the exercise of options, 66,402 shares of restrictedstock and 105,842 shares issued under the Employee Stock Purchase Plan andDirectors Stock Option and Fee Plan. Also during the six months ended June 30,2004, 80,212 shares of restricted stock vested due to completion of the vestingperiod.

 

5

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**3.****                         ****Inventories,Net of Progress Billings**

 

Inventories, net of progress billings, comprise thefollowing (thousands of dollars):

 
| ** **                            | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------|------------|--------------------|------------|------------------------|------------|
| Raw materials                         |       | $                  | 88,288     |                   | $          | 89,085 |   |
| Work in process                       |       | 56,249             |       | 50,908                 |       |
| Finished goods                        |       | 25,870             |       | 16,105                 |       |
| Less: progress billings               |       | (12,533            | )          | (23,774                | )          |
| Inventories, net of progress billings |       | $                  | 157,874    |                   | $          | 132,324 |   |

 

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

 

The Company maintains two secured long-term creditfacilities: a $100 million asset-based revolving credit facility (the“Revolving Facility”) and a £15.0 million ($27.4 million) revolving facilityand related overdraft facility (collectively, the “UK Facility”).

 

Net of outstanding letters of credit and limitations onMinimum Availability, the Company had borrowing capacity at June 30, 2004, of$21.6 million under the Revolving Facility and £6.9 million ($12.5 million)under the UK Facility. The Company made no borrowings under the RevolvingFacility or the UK Facility at any time during the first six months of 2004,and as of June 30, 2004, no borrowings were outstanding under either facility.As of June 30, 2004, the Company was in compliance with the financial covenantsof each of these agreements. On July 9, 2004, the Revolving Facility wasamended to extend its termination date to October 8, 2004.

 

In March 1998, the Company sold $200.0 million principalamount of senior unsecured debt in an underwritten offering. The debt comprised$100.0 million of 6.875% seven-year notes and $100.0 million of 7.00% ten-yearnotes. Interest payments are due semi-annually. Including underwriting fees,discounts and other issuance costs, the effective interest rates on theseven-year and ten-year notes are 7.125% and 7.175%, respectively. As of June30, 2004, the $100.0 million seven-year notes, maturing in March 2005, areclassified as current portion of long-term obligations on the Company’sconsolidated balance sheet.

 

The Company additionally has outstanding $8.5 million of3.21% industrial revenue bonds, maturing in July 2005.

 

Interest, net comprises the following (thousands ofdollars):

 
| ** **       | ** ** | **Six  Months Ended  June 30,** | ** ** | **Three  Months Ended  June 30,** | ** ** |
|------------------|------------|---------------------------------|------------|-----------------------------------|------------|
| ** **       | ** ** | **2004**                        | ** ** | **2003**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Interest expense |       | $                               | 8,139      |                              | $          | 8,706 |   | $ | 4,130 |   | $ | 4,065 |   |
| Interest income  |       | (1,885                          | )          | (1,667                            | )          | (944 | ) | (888 | ) |
| Interest, net    |       | $                               | 6,254      |                              | $          | 7,039 |   | $ | 3,186 |   | $ | 3,177 |   |

 

6

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The Company also has letter-of-credit reimbursementagreements primarily related to the Company’s performance on contracts withcustomers totaling $34.7 million at June 30, 2004, compared to $35.9 million atDecember 31, 2003. The Company believes it is not practicable to estimate fairvalues of these instruments and considers the risk of non-performance on thecontracts to be remote.

 

**5.****                         ****SpecialCharges and Restructuring Activities**

 

Special charges comprise the following by reportablesegment (thousands of dollars):

 
| ** **                                  | ** ** | **Six  Months Ended  June 30,** | ** ** | **Three  Months Ended  June 30,** | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|
| ** **                                  | ** ** | **2004**                        | ** ** | **2003**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| IAS:                                        |       |                            |       |                              |       |   |   |   |   |
| Facility consolidation                      |       | $                               | 170        |                              | $          | 661 |   | $ | (130 | ) | $ | 568 |   |
| Impairment of property, plant and equipment |       | 83                              |       | —                            |       | — |   | — |   |
| Severance                                   |       | —                          |       | 641                               |       | — |   | 17 |   |
| Total IAS                                   |       | 253                             |       | 1,302                             |       | (130 | ) | 585 |   |
|                                        |       |                            |       |                              |       |   |   |   |   |
| Corporate:                                  |       |                            |       |                              |       |   |   |   |   |
| Facility consolidation                      |       | 383                             |       | 643                               |       | 383 |   | 362 |   |
| Severance                                   |       | 6                               |       | —                            |       | 6 |   | — |   |
| Total Corporate                             |       | 389                             |       | 643                               |       | 389 |   | 362 |   |
| Special charges                             |       | $                               | 642        |                              | $          | 1,945 |   | $ | 259 |   | $ | 947 |   |

 

*IAS Segment:*The following tablesummarizes IAS restructuring activities during the six months ended June 30,2004 (thousands of dollars):

 
| ** **                           | ** ** | **Workforce  reduction** | ** ** | **Consolidation of  facilities** | ** ** | **Total**  | ** ** |
|--------------------------------------|------------|--------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                           | ** ** | ** **               | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Accrual balance at December 31, 2003 |       | $                        | 6,008      |                             | $          | 1,129      |       | $ | 7,137 |   |
| Total charges                        |       | —                   |       | 170                              |       | 170        |       |
| Cash payments                        |       | (3,703                   | )          | (998                             | )          | (4,701     | )          |
| Other                                |       | (35                      | )          | 308                              |       | 273        |       |
| Accrual balance at June 30, 2004     |       | $                        | 2,270      |                             | $          | 609        |       | $ | 2,879 |   |

 

In the fourth quarter of 2002, as a result of the continuedeconomic downturn in the global automotive, aerospace and heavy equipmentindustries, the Company initiated a plan to consolidate its Cincinnati Machine,Lamb Machining Systems and Lamb Body & Assembly Systems divisions into thenew operating entity, Cincinnati Lamb. The plan included the relocation ofcertain Cincinnati Machine operations, outsourcing of certain manufacturingactivities, termination of employees, and the sale of certain plant andequipment. This restructuring was substantially complete by December 31, 2003.

 

During the six months ended June 30, 2004, IAS recordedadditional charges of $0.2 million for additional facility consolidation costsand $0.1 million for impairment of property, plant and equipment in conjunctionwith this plan. As of June 30, 2004, the IAS segment had terminated 793employees and paid $20.0 million in severance, cumulatively, in conjunctionwith this plan. During the six months ended June 30, 2004, 109 employees wereterminated and $3.7 million of severance was paid in conjunction with thisplan. The number of employees terminated does not include 228 employees of LambBody & Assembly that are no longer IAS employees as a result of thedivestiture of this operation in September 2003.

 

7

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*Corporate:* During the third quarter of2002, the Company initiated a plan to relocate its corporate office to itsexisting Intermec Technologies Corporation facility in Everett, Washington.This relocation was substantially complete by June 30, 2003. As of June 30,2004, 22 employees had been terminated and $0.7 million in severance costs hadbeen paid, cumulatively, of which 2 employee terminations and $0.3 million inseverance payments occurred during the six months ended June 30, 2004. In thefirst quarter of 2004, $1.4 million of the workforce reduction accrual,relating to certain pension obligations for certain individuals affected by therestructuring plan, was reclassified to other long-term liabilities. Thecorporate restructuring accrual as of June 30, 2004, of $2.0 million relates toongoing leased facility obligations. During the six months ended June 30, 2004,$1.0 million of leased facility costs were paid and during the six and threemonths ended June 30, 2004, the Company recognized $0.4 million of expenserelated to ongoing leased facility obligations.

 

**6.****                         ****Loss fromDiscontinued Operations, Net of Tax**

 

During the third quarter of 2003, in conjunction with theconsolidation plan described in Note 5, the Company sold substantially all theassets and existing backlog of its Lamb Body & Assembly Systems division.The Company received $12.8 million in 2003, and $2.5 million in April 2004, andretained $9.9 million in accounts payable. The division meets the definition ofa “component of an entity” and has been accounted for as a discontinuedoperation under Statement of Financial Accounting Standards No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No.144”). The Company’s consolidated statement of operations for the six and threemonths ended June 30, 2003, have been restated to present this division asdiscontinued operations for comparative purposes.

 

Sales and service revenue from discontinued operations was$0.9 million for the six and three month periods ended June 30, 2004, comparedwith $22.1 million and $12.4 million, for the respective corresponding prioryear periods. Losses from discontinued operations were $0.1 million for the sixand three months ended June 30, 2004. The related tax effect from discontinuedoperations was $0.1 million for the six and three months ended June 30, 2004.Losses from discontinued operations were $3.9 million and $1.7 million for thesix and three months ended June 30, 2003. Losses from discontinued operationsdid not have a tax effect for the six and three months ended June 30, 2003, asthe Company’s domestic income tax benefit was offset by a correspondingvaluation allowance.

 

The Company’s consolidated balance sheet as of June 30,2004, includes $2.9 million in current assets, including $1.8 million of netproperty, plant and equipment classified as assets held for sale, $6.6 millionin current liabilities, and $5.2 million in other long-term liabilitiespertaining to discontinued operations. The Company’s consolidated balance sheetas of December 31, 2003, includes $3.7 million in current assets, including$1.8 million of assets held for sale, $7.0 million in current liabilities and$5.1 million in other long-term liabilities pertaining to discontinuedoperations.

 

**7.****                         ****Provisionfor Income Taxes**

 

The provision for income taxes for the six and three monthsended June 30, 2004, is primarily related to federal, state and foreign taxes.The provision for income taxes for the six and three months ended June 30,2003, is primarily related to foreign and state taxes, as the domestic taxbenefit was offset by a corresponding valuation allowance.

 

8

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**8.****                         ****Earnings(Loss) per Share and Shareholders’ Investment**

 

Basic earnings (loss) 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.

 
| ** **                                                      | ** ** | **Six  Months Ended  June 30,** | ** ** | **Three  Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|
| ** **                                                      | ** ** | **2004**                        | ** ** | **2003**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Weighted average common shares - Basic                          |       | 60,295,503                      |       | 58,443,754                        |       | 60,403,192 |   | 58,474,431 |   |
| Dilutive effect of unvested restricted stock and stock  options |       | 1,773,173                       |       |                              |       | 1,608,045 |   | 1,186,286 |   |
| Weighted average shares - Diluted                               |       | 62,068,676                      |       | 58,443,754                        |       | 62,011,237 |   | 59,660,717 |   |

 

Because the Company reported a net loss from continuingoperations for the six months ended June 30, 2003, stock options and unvestedrestricted stock are excluded from the diluted earnings per share computationas their effect would have been antidilutive. At June 30, 2003, Companyemployees and directors held options to purchase 5,831,194 shares of Companycommon stock. Also, Company employees held a weighted average of 446,786unvested restricted shares for the six month period ended June 30, 2003.

 

**9.****                         ****ComprehensiveEarnings (Loss)**

 

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

 
| ** **                                                        | ** ** | **Six Months Ended  June 30,** | ** ** | **Three Months  Ended  June 30,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| ** **                                                        | ** ** | **2004**                       | ** ** | **2003**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net earnings (loss)                                               |       | $                              | 16,094     |                              | $          | (15,683 | ) | $ | 5,612 |   | $ | (800 | ) |
| Change in equity due to foreign currency translation  adjustments |       | (1,642                         | )          | 8,694                             |       | 311 |   | 8,378 |   |
| Unrealized gains on cash flow hedges                              |       | 120                            |       | —                            |       | 197 |   | — |   |
| Comprehensive earnings (loss)                                     |       | $                              | 14,572     |                              | $          | (6,989 | ) | $ | 6,120 |   | $ | 7,578 |   |

 

**10.****                  ****IntellectualProperty Settlements**

 

During the first quarter of 2004, the Company receivedcompensation in relation to one settlement regarding certain of itsintellectual property. Additionally, the Company received compensation inrelation to two IP settlements during the second quarter of 2003. The terms ofthese settlements are confidential. The operating profit from IP settlements,net of legal fees, for the six months ended June 30, 2004, and 2003, was $15.8million and $4.6 million, respectively. Operating profit from IP settlementswas $5.3 million for the three months ended June 30, 2003. IP settlementcompensation is classified as sales revenues and the related legal costs areclassified as cost of sales on the Company’s consolidated statements of income.

 

**11.****                  ****SegmentReporting**

 

The Company has two reportable segments, Automated DataSystems (“ADS”) and Industrial Automation Systems (“IAS”).  Segments are determined principally on thebasis of their products and services.  TheADS segment comprises the Company’s wholly owned subsidiary IntermecTechnologies Corporation (“Intermec”). Intermec products and services includerugged mobile computing solutions, wireless, radio frequency identification(RFID) and automated data collection systems for field workers, on-premises andsite-based workers as well as wireless network systems for untetheredenablement of an enterprise, and barcode label and printing solutions. ADS’srugged and robust systems, solutions and services enable Intermec’s customersto more

 

9

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efficiently and effectively manage their supply chains andfulfillment activities. The IAS segment comprises the Cincinnati Lamb divisionand the Landis Grinding Systems division. IAS is a leading producer ofvalue-added manufacturing technologies, products and services spanning theproduction cycle from process engineering and design to systems integrationincluding comprehensive life cycle support. IAS serves primarily the globalaerospace, automotive, off-road vehicle and diesel engine industries as well asindustrial components, heavy equipment and general job shop markets.

 

Corporate and other amounts include corporate operatingcosts and foreign currency transaction gains and losses.  Intercompany transactions have beeneliminated. The following table sets forth the Company’s operations by businesssegments (thousands dollars):

 
| ** **                                              | ** ** | **Six Months Ended  June 30,** | ** ** | **Three Months  Ended  June 30,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| ** **                                              | ** ** | **2004**                       | ** ** | **2003**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                    |       |                           |       |                              |       |   |   |   |   |
| **Sales and Service Revenues**                          |       |                           |       |                              |       |   |   |   |   |
| Automated Data Systems                                  |       | $                              | 379,584    |                              | $          | 341,922 |   | $ | 186,579 |   | $ | 179,040 |   |
| Industrial Automation Systems                           |       | 222,299                        |       | 201,788                           |       | 117,634 |   | 100,662 |   |
| Total Sales and Service Revenues                        |       | $                              | 601,883    |                              | $          | 543,710 |   | $ | 304,213 |   | $ | 279,702 |   |
|                                                    |       |                           |       |                              |       |   |   |   |   |
| **Operating Profit (Loss) from Continuing  Operations** |       |                           |       |                              |       |   |   |   |   |
| Segment Operating Profit (Loss)                         |       |                           |       |                              |       |   |   |   |   |
| Automated Data Systems                                  |       | $                              | 43,645     |                              | $          | 30,497 |   | $ | 15,599 |   | $ | 21,495 |   |
| Industrial Automation Systems                           |       | (2,242                         | )          | (16,431                           | )          | 3,011 |   | (8,235 | ) |
| Total Segment Operating Profit                          |       | 41,403                         |       | 14,066                            |       | 18,610 |   | 13,260 |   |
|                                                    |       |                           |       |                              |       |   |   |   |   |
| Corporate and Other                                     |       | (9,214                         | )          | (12,693                           | )          | (5,700 | ) | (5,667 | ) |
| Special Charges                                         |       | (642                           | )          | (1,945                            | )          | (259 | ) | (947 | ) |
| Operating Profit (Loss) from Continuing Operations      |       | $                              | 31,547     |                              | $          | (572 | ) | $ | 12,651 |   | $ | 6,646 |   |

 

**12.****                  ****RelatedParty Transactions**

 

An amount due from a non-executive officer of $0.2 millionis included in other assets at June 30, 2004, and December 31, 2003.

 

Unitrin, Inc., a significant shareholder of the Company,owning approximately 21% of the Company’s outstanding common shares, andvarious of its subsidiaries (collectively, “Unitrin”) participated as a lenderin the Term Loan. In January 2003, the Company paid off the remaining $16.2million balance of the Term Loan, of which Unitrin had committed to and funded$6.8 million. Interest expense associated with amounts funded by Unitrin was$0.1 million for the six months ended June 30, 2003.

 

10

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**13.****                  ****Commitmentsand Contingencies**

 

Provisions for estimated expenses related to productwarranties are made at the time products are sold. These estimates areestablished using historical information on the nature, frequency, and averagecost of warranty claims. Management actively studies trends of warranty claimsand takes action to improve product quality and minimize warranty claims. Thefollowing table indicates the change in the Company’s warranty accrual includedin current liabilities (thousands of dollars):

 
| ** **                                     | ** ** | **Product  Warranty  Liabilities** | ** ** |
|------------------------------------------------|------------|------------------------------------|------------|
|                                           |       |                               |       |
| Beginning balance as of   January 1, 2004 |       | $                                  | 27,139     |   |
| Payments                                       |       | (8,919                             | )          |
| Increase in liability (new warranties issued)  |       | 6,318                              |       |
| Adjustments (pre-existing warranties)          |       | 115                                |       |
| Currency translation adjustment                |       | 194                                |       |
| Ending Balance as of June 30, 2004             |       | $                                  | 24,847     |   |

 

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 June 30, 2004, and December 31, 2003.  The Company has not made any significantindemnification payments as a result of these clauses, nor does it believe thefair value of any of these guarantees has a material effect on the Company’sfinancial position or results of operations.

 

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

 

*Tower Automotive Products Co. v. LambTechnicon Body and Assembly* is a lawsuit filed on March 11, 2002 in the Kent CountyCircuit Court in Michigan, generally alleging a breach of contract and warrantyinvolving a frame assembly production line. The Company has responded to theComplaint. A trial date has been scheduled for the first quarter of 2005. Managementbelieves the lawsuit is without merit and is vigorously contesting the case.Nevertheless, should there be an unfavorable result it is possible that cashflows or results of operations could be materially affected in that period orsubsequent periods.

 

**14.****                  ****Pension and Other PostretirementBenefit Plans.**

 

The following represents the net periodic pension andpost-retirement benefit costs and related components in accordance with SFAS132(R) as described in Note 15:

 

Components of Net Pension and Postretirement PeriodicBenefit Cost for the six and three months ended June 30, 2004 and 2003 are asfollows (thousands of dollars):

 

11

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| ** **                     | ** ** | **U.S.  Defined Benefit  Plans** | ** ** | **Non-U.S.  Defined Benefit  Plans** | ** ** | **Other  Postretirement  Benefit Plans** | ** ** |
|--------------------------------|------------|----------------------------------|------------|--------------------------------------|------------|------------------------------------------|------------|
| **Six Months Ended  June 30,** | ** ** | **2004**                         | ** ** | **2003**                             | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Service Cost                   |       | $                                | 4,835      |                                 | $          | 4,472                                    |       | $ | 2,877 |   | $ | 2,545 |   | $ | 78 |   | $ | 237 |   |
| Interest Cost                  |       | 4,477                            |       | 3,697                                |       | 4,687                                    |       | 3,893 |   | 1,490 |   | 1,988 |   |
| Expected return on plan assets |       | (4,897                           | )          | (4,891                               | )          | (4,821                                   | )          | (4,721 | ) | — |   | — |   |
| Amortization and deferrals:    |       |                             |       |                                 |       |                                     |       |   |   |   |   |   |   |
| Transition obligation (asset)  |       | (21                              | )          | (128                                 | )          | (169                                     | )          | (148 | ) | — |   | 72 |   |
| Actuarial Loss                 |       | 1,575                            |       | 391                                  |       | 953                                      |       | 110 |   | 574 |   | 271 |   |
| Prior service cost (benefit)   |       | 359                              |       | 331                                  |       | —                                   |       | — |   | (598 | ) | — |   |
| Special Termination Benefits   |       | —                           |       | 71                                   |       | —                                   |       | — |   | — |   | — |   |
|                           |       | $                                | 6,328      |                                 | $          | 3,943                                    |       | $ | 3,527 |   | $ | 1,679 |   | $ | 1,544 |   | $ | 2,568 |   |

 
| ** **                       | ** ** | **U.S.  Defined Benefit  Plans** | ** ** | **Non-U.S.  Defined Benefit  Plans** | ** ** | **Other  Postretirement  Benefit Plans** | ** ** |
|----------------------------------|------------|----------------------------------|------------|--------------------------------------|------------|------------------------------------------|------------|
| **Three Months  Ended June 30,** | ** ** | **2004**                         | ** ** | **2003**                             | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Service Cost                     |       | $                                | 2,417      |                                 | $          | 2,050                                    |       | $ | 1,428 |   | $ | 1,269 |   | $ | 39 |   | $ | 118 |   |
| Interest Cost                    |       | 2,239                            |       | 1,873                                |       | 2,326                                    |       | 1,941 |   | 745 |   | 994 |   |
| Expected return on plan assets   |       | (2,449                           | )          | (2,501                               | )          | (2,393                                   | )          | (2,354 | ) | — |   | — |   |
| Amortization and deferrals:      |       |                             |       |                                 |       |                                     |       |   |   |   |   |   |   |
| Transition obligation (asset)    |       | (10                              | )          | (64                                  | )          | (84                                      | )          | (74 | ) | — |   | 36 |   |
| Actuarial Loss                   |       | 788                              |       | 152                                  |       | 473                                      |       | 55 |   | 287 |   | 135 |   |
| Prior service cost (benefit)     |       | 180                              |       | 150                                  |       | —                                   |       | — |   | (299 | ) | — |   |
| Special Termination Benefits     |       | —                           |       | —                               |       | —                                   |       | — |   | — |   | — |   |
|                             |       | $                                | 3,165      |                                 | $          | 1,660                                    |       | $ | 1,750 |   | $ | 837 |   | $ | 772 |   | $ | 1,283 |   |

 

During the six months ended June 30, 2004, the Companycontributed approximately $8.3 million to its pension and other postretirementbenefit plans, comprising $1.0 million in benefits paid pertaining to unfundedU.S. defined benefit plans, $1.5 million in matching contributions to its401(k) plan, $3.4 million in contributions to its foreign pension plans, and$2.4 million in benefits paid pertaining to its other postretirement benefitsplans. The Company presently anticipates contributing an additional $7.7million to these plans during the remainder of 2004, of which $1.0 millionrelates to benefit payments on its unfunded U.S. defined benefit plans, $1.3million in matching contributions to its 401(k) plan, $3.4 million incontributions to its foreign pension plans and $2.0 million in benefit paymentspertaining to its other postretirement benefit plans.

 

In December, 2003, the Medicare Prescription Drug,Improvement and Modernization Act of 2003 (the “Act”) was passed into law. TheAct introduces a prescription drug benefit under Medicare Part D and a federalsubsidy to sponsors of postretirement health care plans that provide aprescription drug benefit that is at least actuarially equivalent to MedicarePart D. The Company elected to defer accounting for the effects of the Act onthe Company’s postretirement healthcare plans. Accordingly, as of June 30,2004, any measures of the APBO or net periodic postretirement benefit cost inthe Company’s consolidated financial statements do not reflect the effects ofthe Act.

 

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**15.****                  ****RecentAccounting Pronouncements**

 

In May 2004, the Financial Accounting Standards Board(“FASB”) issued FASB Staff Position (“FSP”) FAS 106-2, “Accounting andDisclosure Requirements Related to the Medicare Prescription Drug, Improvementand Modernization Act of 2003” (the “Act”). This FSP supercedes FSP FAS No.106-1, “Accounting and Disclosure Requirements Related to the MedicarePrescription Drug, Improvement and Modernization Act of 2003”.

 

FSP FAS 106-2 provides guidance on accounting for theeffects of the Act for employers that sponsor postretirement health care plansthat provide drug benefits. The FSP also requires those employers to providecertain disclosures regarding the effect of the federal subsidy provided by theAct. The FSP becomes effective for the Company in the third quarter of2004.  In the first interim and annualfinancial statements in which the employer includes the effects of the Act inmeasuring net periodic postretirement benefit costs or the Accumulated BenefitPlan Obligation (“APBO”), the following disclosures are required.

 

•                  The reduction in the APBOrelated to the subsidy provided by the Act.

•                  The effect of the subsidy onthe measurement of net periodic postretirement benefit cost for the currentperiod, including the effects related to amortization of the actuarial gain,the reduction in current period service cost due to the subsidy, and thereduction interest cost on the APBO resulting from the subsidy.

•                  An explanation of anysignificant change in the benefit obligation not otherwise apparent in thedisclosure required the FSP.

 

The Company elected to defer accounting for the effects ofthe Act on the Company’s postretirement healthcare plans. Accordingly, as ofJune 30, 2004, any measures of the APBO or net periodic postretirement benefitcost in the Company’s consolidated financial statements do not reflect theeffects of the Act.

 

In March 2004, the Emerging Issues Task Force (“EITF”)reached a consensus on Issue No. 03-1, “The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments.” EITF 03-1 providesguidance on other-than-temporary impairment models for marketable debt andequity securities accounted for under SFAS No. 115, “Accounting for CertainInvestments in Debt and Equity Securities,” and SFAS No. 124, “Accounting forCertain Investments Held by Not-for-Profit Organizations,” and non-marketableequity securities accounted for under the cost method. The EITF developed abasic three-step model to evaluate whether an investment isother-than-temporarily impaired. The provisions of EITF 03-1 will be effectivefor the Company in the third quarter of fiscal 2004, and will be appliedprospectively to all current and future investments. Quantitative andqualitative disclosures for investments accounted for under SFAS No. 115 areeffective for the Company’s year ending December 31, 2004. The Company does notexpect the adoption of EITF 03-1 to have a material effect on its consolidatedfinancial statements.

 

In December 2003, the FASB issued SFAS No. 132 (revised2003), “Employer’s Disclosures about Pensions and Other PostretirementBenefits.” The revised statement retains the disclosure requirements containedin SFAS No. 132, which it replaces, and requires additional disclosures aboutthe assets, obligations, cash flows and net periodic benefit cost of definedbenefit pension plans and other defined benefit postretirement plans. Except asnoted below, the provisions of this statement are effective for the Company’sfinancial statements for the year ended December 31, 2003. The interim perioddisclosure requirements of the statement became effective for the Company’sinterim financial statements for the quarter ending March 31, 2004, and areincluded Note 14. The statement’s disclosure requirements relating to estimatedfuture benefit payments and relating to foreign plans are effective for the Company’sfinancial statements for the year ending December 31, 2004.

 

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

 

**Overview**

 

UNOVA, Inc. (the “Company”)is a global technology company providing customers with integrated solutionsfor improving their efficiency and productivity. The Company earns revenuesfrom the sale of products, technologies, solutions and services to businesses.

 

The Company has two reportablesegments, Automated Data Systems (“ADS”) and Industrial Automation Systems(“IAS”). The ADS segment comprises the Company’s wholly owned subsidiaryIntermec Technologies Corporation. Intermec products and services includerugged mobile computing solutions, wireless, radio frequency identification(RFID) and automated data collection systems for field, on-premises, andsite-based workers as well as wireless network systems for untetheredenablement of an enterprise, and barcode label and printing solutions. ADS’srugged and robust systems, solutions and services enable Intermec customers tomore efficiently and effectively manage their supply chains and fulfillmentactivities. The IAS segment, comprising the Cincinnati Lamb division and theLandis Grinding Systems division, is a leading producer of value-addedmanufacturing products and services spanning the production cycle from processengineering and design to systems integration including comprehensive lifecycle support. IAS serves the global aerospace, automotive, off-road vehicleand diesel engine industries as well as the industrial components, heavyequipment and general job shop markets.

 

The Company’s strategyrevolves around continued investment in technology, intellectual property,research and development and innovation; expanding and strengthening theproduct portfolio; providing integrated solutions; partnering with globalindustry leaders; delivering value to customers and working to reduce costs andimprove profitability, market share and strength.  The technology and innovation for which theCompany focuses its research and development efforts are related to developingproducts, processes and services that help improve productivity, efficiency,information and controls in a variety of manufacturing, distribution, retail,field service and logistics supply chain applications. All the Company’sbusinesses offer integrated solutions as well as single products to theircustomers.  Future growth in these businessesis expected to primarily result from expansion of the Company’s existingoperations and customer base. The Company’s financial strength and ability toadapt to the current market and economic conditions are dependent in part onthe generation of cash flow, effective management of working capital, fundingcommitments and other obligations, as well as the growth of the business.

 

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**Results of Operations**

 

The following discussioncompares the Company’s results of operations for the six and three months endedJune 30, 2004 and 2003. Results from continuing operations exclude theoperating results of Lamb Body & Assembly, classified as discontinuedoperations. Results of operations in millions of dollars and as a percentage ofrevenues were as follows:

 
| ** **                                                      | ** ** | **Six Months Ended  June 30,** | ** ** | **Three Months  Ended June 30,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                                                      | ** ** | **2004**                       | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                            |       |                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales and Service Revenues                                      |       | $                              | 601.9      |                             |       |   | $ | 543.7 |   |   |   | $ | 304.2 |   |   |   | $ | 279.7 |   |   |   |
|                                                            |       |                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Costs and Expenses:                                             |       |                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of sales and service                                       |       | 402.2                          |       | 66.8                             | %          | 379.4 |   | 69.8 | % | 207.3 |   | 68.1 | % | 192.2 |   | 68.7 | % |
| Selling, general and administrative                             |       | 158.1                          |       | 26.3                             | %          | 149.6 |   | 27.5 | % | 79.4 |   | 26.1 | % | 73.3 |   | 26.2 | % |
| Depreciation and amortization                                   |       | 9.4                            |       | 1.6                              | %          | 13.4 |   | 2.5 | % | 4.6 |   | 1.5 | % | 6.6 |   | 2.4 | % |
| Special charges                                                 |       | 0.6                            |       | 0.1                              | %          | 1.9 |   | 0.3 | % | 0.2 |   | 0.1 | % | 0.9 |   | 0.3 | % |
| Total Costs and Expenses                                        |       | 570.3                          |       | 94.7                             | %          | 544.3 |   | 100.1 | % | 291.5 |   | 95.8 | % | 273.0 |   | 97.6 | % |
|                                                            |       |                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating Profit (Loss) from Continuing Operations              |       | 31.6                           |       | 5.3                              | %          | (0.6 | ) | (0.1 | )% | 12.7 |   | 4.2 | % | 6.7 |   | 2.4 | % |
|                                                            |       |                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest, net                                                   |       | (6.3                           | )          | (1.0                             | )%         | (7.0 | ) | (1.3 | )% | (3.2 | ) | (1.1 | )% | (3.2 | ) | (1.1 | )% |
|                                                            |       |                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings (Loss) from Continuing Operations before Income  Taxes |       | 25.3                           |       | 4.2                              | %          | (7.6 | ) | (1.4 | )% | 9.5 |   | 3.1 | % | 3.5 |   | 1.3 | % |
|                                                            |       |                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for Income Taxes                                      |       | (9.1                           | )          | (1.5                             | )%         | (4.2 | ) | (0.8 | )% | (3.8 | ) | (1.2 | )% | (2.6 | ) | (0.9 | )% |
|                                                            |       |                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings (Loss) from Continuing Operations, net of tax          |       | 16.2                           |       | 2.7                              | %          | (11.8 | ) | (2.2 | )% | 5.7 |   | 1.9 | % | 0.9 |   | 0.3 | % |
|                                                            |       |                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss from Discontinued Operations                               |       | (0.1                           | )          | (0.0                             | )%         | (3.9 | ) | (0.7 | )% | (0.1 | ) | (0.0 | )% | (1.7 | ) | (0.6 | )% |
|                                                            |       |                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Earnings (Loss)                                             |       | $                              | 16.1       |                             | 2.7        | % | $ | (15.7 | ) | (2.9 | )% | $ | 5.6 |   | 1.8 | % | $ | (0.8 | ) | (0.3 | )% |

 

*Sales and Service Revenues*

 

Total revenues for the sixmonths ended June 30, 2004, were $601.9 million, an increase of $58.2 million,or 10.7%, compared with the corresponding prior year period. Total revenues forthe three months ended June 30, 2004, were $304.2 million, an increase of $24.5million, or 8.8%, compared with the corresponding prior year period. During thefirst quarter of 2004, and the second quarter of 2003, the Company receivedcompensation related to settlements regarding certain of its intellectualproperty (“IP settlements”), which resulted in a significant, positive impacton the Company’s revenues and results of operations for the six months endedJune 30, 2004, and the six and three months ended June 30, 2003. During the sixmonths ended June 30, 2004, products and service revenue increasedapproximately $45.7 million, or 8.5%, compared with the corresponding prioryear period as a result of revenue increases of 7.5% and 10.2% in the ADS and IAS segments, respectively. The relatedproducts and service operating profit increased $16.1 million from the prioryear comparable period due to increases of $1.9 million and $14.2 million inthe ADS and IAS segments, respectively. During the three months ended June 30,2004, products and service revenue increased approximately $31.7 million, or11.6%, compared with the corresponding prior year period as a result of revenueincreases of 8.6% and 16.9% in the ADS and IAS segments, respectively. Therelated product and service operating profit increase of $10.7 million from theprior year comparable period reflects an improvement of $11.2 million in theIAS segment, partially offset by a decrease of $0.5 million in the ADS segment.

 

15

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*Costs and Expenses*

 

Cost of sales and serviceincreased $22.8 million, or 6.0%, to $402.2 million for the six months endedJune 30, 2004, from $379.4 million for the six months ended June 30, 2003, and$15.1 million, or 7.9%, to $207.3 million for the three months ended June 30,2004, from $192.2 million for the three months ended June 30, 2003. Cost ofsales and service as a percentage of sales decreased to 66.8% and 68.1% for thesix and three months ended June 30, 2004, respectively, compared with 69.8% and68.7% for the comparable prior year periods. The improvement in gross marginfor the six months ended June 30, 2004, was primarily due to a 2.2 percentagepoint improvement in ADS product and service gross margins, the impact of IP settlementsand a 2.6 percentage point improvement in IAS gross margins in 2004. Theimprovement in gross margin for the three months ended June 30, 2004, wasprimarily due to a 1.4 percentage point improvement in ADS gross margins and a4.8 percentage point improvement in IAS gross margins.

 

*Selling, General and Administrative*

 

Selling, general andadministrative (“SG&A”) expenses were $158.1 million and $79.4 million forthe six and three months ended June 30, 2004, respectively, compared withSG&A expenses of $149.6 million and $73.3 million for the correspondingprior year period. SG&A as a percentage of sales was 26.3% and 27.5% forthe six months ended June 30 2004, and 2003, respectively, and 26.1% and 26.2%for the three months ended June 30, 2004, and 2003, respectively. The six-monthincrease of $8.5 million from the prior year period is primarily due to a $9.5million increase in ADS research and development (“R&D”) expense and a $2.3million increase in SG&A expense due to the growth in ADS products andservice revenues. The increase in SG&A expense within ADS was partiallyoffset by the efficiencies resulting from the IAS restructuring and a $2.8million reduction in corporate and other unallocated expenses resulting fromthe absence of loan termination expense, a favorable litigation outcome and thecost benefits received from transitioning the corporate headquarters toEverett.  The $6.1 million increase inSG&A in the three months ended June 30, 2004, compared to the prior yearperiod was primarily due to a ADS incremental R&D spending of $5.1 millionand increased spending corresponding to increased product and service revenuespartially offset by the effect of the IAS restructuring.

 

*Depreciation and Amortization*

 

Depreciation andamortization expense for the six and three months ended June 30, 2004, were$9.4 million and $4.6 million, respectively, compared with $13.4 million and$6.6 million for the corresponding prior year periods. The decrease indepreciation and amortization expense of $4.0 million and $2.0 million for thesix and three months ended June 30, 2004, respectively, from the correspondingprior year periods is primarily due to lower property, plant and equipment(“PP&E”) balances. The decrease in the PP&E balance primarily relatesto the IAS restructuring which included the sale of assets, asset impairmentand during the third quarter of 2003 PP&E with a net book value of $30.0million was reclassified to assets held for sale, eliminating depreciation onthose assets.

 

*Special Charges*

 

The following table setsforth the charges relating to the Company’s restructuring activities,comprising severance, facility consolidation, and impairment of PP&E,classified as special charges on the consolidated statements of operations(millions of dollars):

 

16

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| ** **                                  | ** ** | **Six Months Ended  June 30,** | ** ** | **Three Months  Ended  June 30,** | ** ** |
|---------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| ** **                                  | ** ** | **2004**                       | ** ** | **2003**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| IAS:                                        |       |                           |       |                              |       |   |   |   |   |
| Facility consolidation                      |       | $                              | 0.1        |                              | $          | 0.7 |   | $ | (0.1 | ) | $ | 0.6 |   |
| Impairment of property, plant and equipment |       | 0.1                            |       | —                            |       | — |   | — |   |
| Severance                                   |       | —                         |       | 0.6                               |       | — |   | — |   |
| Total IAS                                   |       | 0.2                            |       | 1.3                               |       | (0.1 | ) | 0.6 |   |
|                                        |       |                           |       |                              |       |   |   |   |   |
| Corporate:                                  |       |                           |       |                              |       |   |   |   |   |
| Facility consolidation                      |       | 0.4                            |       | 0.6                               |       | 0.4 |   | 0.3 |   |
| Total Corporate                             |       | 0.4                            |       | 0.6                               |       | 0.4 |   | 0.3 |   |
| Special charges                             |       | $                              | 0.6        |                              | $          | 1.9 |   | $ | 0.3 |   | $ | 0.9 |   |

 

*IAS Segment:*In the fourth quarter of 2002, as a result of the continuedeconomic downturn in the global automotive, aerospace and heavy equipmentindustries, the Company initiated a plan to consolidate its Cincinnati Machine,Lamb Machining Systems and Lamb Body & Assembly Systems divisions into thenew operating entity, Cincinnati Lamb. The plan included the relocation ofcertain Cincinnati Machine operations, outsourcing of certain manufacturingactivities, termination of employees, and the sale of certain plant andequipment. This restructuring was substantially complete by December 31, 2003.

 

During the six months endedJune 30, 2004, IAS recorded additional charges of $0.2 million for additionalfacility consolidation costs and $0.1 million for impairment of property, plantand equipment in conjunction with this plan. As of June 30, 2004, the IASsegment had terminated 793 employees and paid $20.0 million in severance,cumulatively, in conjunction with this plan. During the six months ended June30, 2004, 109 employees were terminated and $3.7 million of severance was paidin conjunction with this plan. The number of employees terminated does notinclude 228 employees of Lamb Body & Assembly that are no longer IAS employeesas a result of the divestiture of this operation in September 2003.

 

*Corporate:*During the third quarter 2002, the Company initiated a plan to relocate itscorporate office to its existing Intermec Technologies Corporation facility inEverett, Washington. This relocation was substantially complete by June 30,2003. As of June 30, 2004, 22 employees had been terminated and $0.7 million inseverance costs had been paid, cumulatively, of which 2 employee terminationsand $0.3 million in severance payments occurred during the six months endedJune 30, 2004. In the first quarter of 2004, $1.4 million of the workforcereduction accrual, relating to certain pension obligations for certainindividuals affected by the restructuring plan, was reclassified to other long-termliabilities. The corporate restructuring accrual of $2.0 million as of June 30,2004, relates to ongoing leased facility obligations. During the six monthsended June 30, 2004, $1.0 million of leased facility costs were paid and duringthe three and six months ended June 30, 2004, the Company recognized $0.4million of expense related to ongoing leased facility obligations.

 

17

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*Interest, Net*

 

Net interest expense was$6.3 million and $3.2 million for the six and three months ended June 30, 2004,respectively, compared with $7.0 million and $3.2 million for the correspondingprior year periods, reflecting lower average debt in the six months ended June30, 2004, and higher cash and cash equivalent balances during the six and threemonth periods ended June 30, 2004, compared to the corresponding prior yearperiods. In January 2003, the Company fully paid down and terminated theremaining $16.2 million balance of a term loan.

 

*Provision for Income Taxes*

 

The provision for incometaxes for the six and three months ended June 30, 2004, is primarily related tofederal, state and foreign taxes. The effective income tax rate for the six andthree months ended June 30, 2004, was 36% and 40%, respectively. The effectiveincome tax rate for the six months ended June 30, 2004, was lower than thenormal effective tax rate of 38% to 40% due to the recognition of certainpreviously unrecognized state income tax loss carryforwards in the firstquarter 2004. The provision for income taxes for the six and three months endedJune 30, 2003, is primarily related to foreign and state taxes, as the domestictax benefit was offset by a corresponding valuation allowance.

 

*Loss from Discontinued Operations*

 

During the third quarter2003, in conjunction with the consolidation plan described in Note 5, theCompany sold substantially all the assets and existing backlog of its Lamb Body& Assembly Systems division. The Company received $12.8 million in 2003,and $2.5 million in April 2004, and retained $9.9 million in accounts payable.The division meets the definition of a “component of an entity” and has beenaccounted for as a discontinued operation under Statement of FinancialAccounting Standards No. 144 (“SFAS No. 144”), “Accounting for the Impairmentor Disposal of Long-Lived Assets.” The Company’s consolidated statement ofoperations for the six and three month periods ended June 30, 2003, have beenrestated to present this division as discontinued operations for comparativepurposes.

 

Sales and service revenuefrom discontinued operations for the six and three month periods ended June 30,2004, were $0.9 million and $0.9 million, respectively, compared with $22.1million and $12.4 million for the corresponding prior year period. Losses fromdiscontinued operations were $0.1 million and $0.1 million for the six andthree months ended June 30, 2004. The related tax effect from discontinuedoperations for the six and three months ended June 30, 2004, was not material.Losses from discontinued operations were $3.9 million and $1.7 million for thesix and three months ended June 30, 2003. Losses from discontinued operationsdid not have a tax effect for the six and three months ended June 30, 2003, asthe Company’s domestic income tax benefit was offset by a correspondingvaluation allowance.

 

18

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**Segment Information**

 

The following table setsforth sales and service revenues, segment operating profit and operating profit(loss) from continuing operations for the six and three month periods endedJune 30, 2004,and 2003 (millions of dollars):

 
| ** **                                              | ** ** | **Six  Months Ended  June 30,** | ** ** | **Three  Months Ended  June 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|
| ** **                                              | ** ** | **2004**                        | ** ** | **2003**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                    |       |                            |       |                              |       |   |   |   |   |
| **Sales and Service Revenues**                          |       |                            |       |                              |       |   |   |   |   |
| Automated Data Systems                                  |       | $                               | 379.6      |                              | $          | 341.9 |   | $ | 186.6 |   | $ | 179.0 |   |
| Industrial Automation Systems                           |       | 222.3                           |       | 201.8                             |       | 117.6 |   | 100.7 |   |
| Total Sales and Service Revenues                        |       | $                               | 601.9      |                              | $          | 543.7 |   | $ | 304.2 |   | $ | 279.7 |   |
|                                                    |       |                            |       |                              |       |   |   |   |   |
| **Operating Profit (Loss) from Continuing  Operations** |       |                            |       |                              |       |   |   |   |   |
| Segment Operating Profit (Loss)                         |       |                            |       |                              |       |   |   |   |   |
| Automated Data Systems                                  |       | $                               | 43.6       |                              | $          | 30.5 |   | $ | 15.6 |   | $ | 21.5 |   |
| Industrial Automation Systems                           |       | (2.2                            | )          | (16.5                             | )          | 3.0 |   | (8.2 | ) |
| Total Segment Operating Profit                          |       | 41.4                            |       | 14.0                              |       | 18.6 |   | 13.3 |   |
|                                                    |       |                            |       |                              |       |   |   |   |   |
| Corporate and Other                                     |       | (9.2                            | )          | (12.7                             | )          | (5.7 | ) | (5.7 | ) |
| Special Charges                                         |       | (0.6                            | )          | (1.9                              | )          | (0.2 | ) | (0.9 | ) |
| Operating Profit from Continuing Operations             |       | $                               | 31.6       |                              | $          | (0.6 | ) | $ | 12.7 |   | $ | 6.7 |   |

 

 

*Automated Data Systems*

 

ADS segment revenues for thesix and three month periods ended June 30, 2004, were $379.6 million and $186.6million, respectively, representing increases of 11.0% and 4.2% from revenuesof $341.9 million and $179.0 million for the same periods in 2003. The sixmonths ended June 30, 2004, and 2003, include significant revenue and operatingprofit related to IP settlements. The specific terms of the settlement areconfidential. For the six months ended June 30, 2004, and 2003, the IPsettlement, net of legal fees, resulted in a favorable impact on segmentoperating profit of $15.8 million and $4.6 million, respectively.  For the three months ended June 30, 2003, IPsettlements, net of legal fees provided $5.3 million in segment operatingprofit.

 

ADS product and servicerevenue for the six and three months ended June 30, 2004, increased 7.5% and8.5%, respectively, from the prior year comparable period. For the three monthsended June 30, 2004, systems and solutions revenues increased by 15.2%,printer/media increased by 0.9% and service increased by 1.7% over thecorresponding prior year period. Geographically, product and service revenuefor EMEA increased 5.4%, North America increased 8.6%, Asia Pacific increased30.6% and Latin America increased 10.0% compared to the corresponding prioryear period. The revenue increase in North America reflects improvedperformance in the region’s indirect sales channels and continued enhancementof product lines which allow greater sales traction with existing and newpartners. EMEA revenues comprise a broader customer base in contrast to thecorresponding prior year period, which included significant large shipments.The revenue increase in the Asia Pacific region is due to broader expansionthroughout the region. The revenue increase in Latin America was primarily dueto direct store delivery applications. For the six and three months ended June 30, 2004, favorable foreignexchange rates contributed approximately $14.0 million and $5.1 million of therevenue increase compared to the related prior year periods.

 

For the six and three monthsended June 30, 2004, ADS reported operating profit from product and servicerevenue of $27.9 million and $15.6 million, respectively, compared withoperating profit of $25.9 million and $16.2 million in the corresponding prioryear period. The operating profits in 2004 primarily reflect the impact ofadditional gross profits from the increases in product and service revenues, aswell as the effect of gross margin improvement of 2.2 and 1.4 percentage pointsfor the six and three months ended June 30, 2004 from the comparable prior yearperiods, increased R&D spending of $9.5 million and $5.1 million,respectively, and the incremental selling, marketing and other SG&Aexpenses.

 

19

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An additional patentinfringement lawsuit regarding the Company’s battery power-management patentsis pending and may result in future revenue. Settlements have been reached to date with companies that in theaggregate represent approximately ninety percent of U.S. laptop sales.Management cannot predict the outcome, timing or amount of future settlementsor judgments.

 

*Industrial Automation Systems*

 

IAS segment revenues fromcontinuing operations increased $20.5 million, or 10.2%, and $17.0 million, or16.9%, for the six and three month periods ended June 30, 2004, respectively,compared with the corresponding prior year periods. IAS operating losses forthe six months ended June 30, 2004, and 2003, were $2.2 million and $16.4million, respectively. IAS operating income for the three months ended June 30,2004, was $3.0 million, compared with operating losses of $8.2 million for thesame period in 2003. The favorable comparisons are primarily due toimprovements in the Cincinnati Lamb business, the lower breakeven levelsresulting from the merger of these divisions and a $0.7 million gain on thesale of a facility which was classified in assets held for sale.  Additionally, order rates for the IASaftermarket parts and service business returned to their highest level sincethe September 11th tragedy in 2001.

 

Backlog for the IAS segmentwas $268.2 million at June 30, 2004, compared with $266.1 million at December31, 2003, adjusted to exclude discontinued operations. In the second quarter of2004, IAS bookings were $138.7 million compared to bookings in the range of $85million to $106 million in the preceding three quarters.  This increase was primarily due to thesegment receiving its first large orders for machines in China and continuingto experience strong demand for retool programs in North America.

 

The six and three monthperiods ended June 30, 2004, and 2003, include special charges resulting fromthe IAS segment’s cost reduction actions including consolidation of plantfacilities, sale or closure of certain underperforming operations and theconsolidation of the Cincinnati Machine and the Lamb Machining Systemsoperations. See the discussion above under the heading “Special Charges.”

 

*Corporate and Other*

 

Operating expenses fromCorporate and Other were $9.2 million and $5.7 million for the six and threemonths ended June 30, 2004, respectively, compared with operating expenses of$12.7 million and $5.7 million for the same periods in 2003. The decrease inexpense of $3.5 million was primarily due to cost reductions from therelocation of corporate headquarters to Everett, Washington in 2003, afavorable ruling in an IP legal dispute during the first quarter of 2004 and a$0.5 million reduction in currency losses, compared to the comparable prioryear period, partially offset by $1.2 million in 2004 costs related to SarbanesOxley 404 compliance activities.

 

**Expectations**

 

During its quarterlyconference call on July 26, 2004, the Company provided projections of segmentrevenues and operating profit for the third quarter of 2004, as discussedbelow.  The Company cannot ensure thatsuch projections will be realized as future results may be affected by numerousuncertainties, many of which are described in the section below captioned“Forward-Looking Statements and Risk Factors.”

 

ADS products and servicerevenues for the third quarter of 2004, are expected to be in the range of $187to $192 million, reflecting a projected increase in the range of 12% to 15%over the corresponding prior year quarter. The related operating profit isexpected to be in the range of $12 to $14 million.

 

The IAS segment revenues forthe third quarter of 2004, are expected to be in the range of $120 to $130million and there is expected to be a higher mix of lower margin business thanoriginally anticipated.  The relatedoperating loss is expected to be in the range of $2 to $3 million.

 

20

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**Liquidity and Capital Resources**

 

The Company’s cash and cashequivalent position as of June 30, 2004, was $191.1 million, a decrease of$47.3 million compared to the December 31, 2003 balance. Long-term obligationsdecreased from $208.5 million at December 31, 2003, to $108.5 million at June30, 2004, due to the reclassification to current portion of long-termobligations of $100 million which mature in March 2005.

 

Cash used in operatingactivities of $49.5 million was due primarily to $7.0 million in bond interestpaid and $42.5 million used by operations. Cash provided by the ADS segment,primarily from IP settlement proceeds, was more than offset by cash used by theIAS segment of $56.0 million, primarily related to the working capitalrequirements in the early build cycle in certain long-term contracts. Theseworking capital requirements are evidenced by growth in the Company’s accountsreceivable and inventory levels. Accounts receivable increased $45.1 million,or 16%, to $320.7 million at June 30, 2004, reflecting the IAS segment’s earlybuild-cycle in long-term contracts; and inventory increased $25.6 million, or19%, to $157.9 million at June 30 2004, compared to December 31, 2003,reflecting the IAS early build cycle in long-term contracts and a buildup ofADS inventory levels due to new products. Investing activities used $2.1million, primarily due to $6.4 million in capital expenditures, which wasoffset by $4.4 million in proceeds from sales of property and equipment andassets held for sale. Financing activities provided $4.2 million from stockoption exercises and stock issued under the Employee Stock Purchase Plan.

 

The Company maintains twosecured long-term credit facilities: a $100 million asset-based revolvingcredit facility (the “Revolving Facility”) and a £15.0 million ($27.4 million)revolving facility and related overdraft facility (collectively, the “UKFacility”).

 

The Company had borrowingcapacity at June 30, 2004, of $21.6 million under the Revolving Facility and£6.9 million ($12.5 million) under the UK Facility, net of outstanding lettersof credit and limitations on Minimum Availability. The Company had noborrowings under the Revolving Facility or the UK Facility at any time duringthe six months ended June 30, 2004. As of June 30, 2004, the Company was incompliance with the financial covenants of each of these agreements. As ofMarch 31, 2004, the Revolving Facility was amended to provide greaterflexibility for the Company to, among other things, change the organizationalstructure of Intermec Technologies Corporation, acquire or create additionalsubsidiaries in connection with stock or asset purchases, recapitalize certainsubsidiaries, prepay or repurchase certain debt and increase the amount of cashand cash equivalents that can be pledged to secure certain external agreements.On July 9, 2004, the Revolving Facility was amended to extend its terminationdate to October 8, 2004.

 

In March 1998, the Companysold $200.0 million principal amount of senior unsecured debt in anunderwritten offering. The debt comprised $100.0 million of 6.875% seven-yearnotes and $100.0 million of 7.00% ten-year notes. Interest payments are duesemi-annually. Including underwriting fees, discounts and other issuance costs,the effective interest rates on the seven-year and ten-year notes are 7.125%and 7.175%, respectively. As of June 30, 2004, the $100.0 million seven-yearnotes, maturing in March 2005, are classified as current portion of long-termobligations on the Company’s consolidated balance sheet.

 

The Company additionally hasoutstanding $8.5 million of 3.21% industrial revenue bonds, maturing in July2005.

 

Management believes thatcash and cash equivalents on hand combined with projected cash flow fromoperations will provide adequate funding to meet its expected working capitaland capital expenditure requirements for the next twelve months and therepayment of $100 million in bonds, maturing in March 2005. Projected cashflows from operations are largely based on the Company’s revenue estimates,cost estimates, and the related timing of cash receipts and cash disbursements.If actual performance differs from estimated performance, cash flow fromoperations could be positively or negatively impacted. Additional sources ofliquidity for the Company include the Revolving Facility and the UK Facility.

 

21

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**Contractual Obligations**

 

The Company’s contractualcommitments as of June 30, 2004, have not changed materially from thosedisclosed in Item 7 of the Company’s annual report on Form 10-K for the yearended December 31, 2003.

 

**Critical Accounting Policies**

 

“Management’s Discussion andAnalysis of Financial Condition and Results of Operations” discusses theCompany’s consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of these financial statements requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities, and thereported amounts of revenues and expenses. Actual amounts could differ fromthose estimates under different assumptions or conditions. Management’s beliefsregarding significant accounting policies have not changed significantly fromthose disclosed in Item 7 of the Company’s annual report on Form 10-K for theyear ended December 31, 2003.

 

**New Accounting Pronouncements**

 

In May 2004, the FinancialAccounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS106-2, “Accounting and Disclosure Requirements Related to the MedicarePrescription Drug, Improvement and Modernization Act of 2003” (the “Act”). ThisFSP supercedes FSP FAS No. 106-1, “Accounting and Disclosure RequirementsRelated to the Medicare Prescription Drug, Improvement and Modernization Act of2003”.

 

FSP FAS 106-2 providesguidance on accounting for the effects of the Act for employers that sponsorpostretirement health care plans that provide drug benefits. The FSP alsorequires those employers to provide certain disclosures regarding the effect ofthe federal subsidy provided by the Act. The FSP becomes effective for theCompany in the third quarter of 2004.  Inthe first interim and annual financial statements in which the employerincludes the effects of the Act in measuring net periodic postretirementbenefit costs or the Accumulated Benefit Plan Obligation (“APBO”), thefollowing disclosures are required.

 

•                  The reduction in the APBOrelated to the subsidy provided by the Act.

•                  The effect of the subsidy onthe measurement of net periodic postretirement benefit cost for the currentperiod, including the effects related to amortization of the actuarial gain,the reduction in current period service cost due to the subsidy, and thereduction interest cost on the APBO resulting from the subsidy.

•                  An explanation of anysignificant change in the benefit obligation not otherwise apparent in thedisclosure required by the FSP.

 

The Company elected to deferaccounting for the effects of the Act on the Company’s postretirementhealthcare plans. Accordingly, as of June 30, 2004, any measures of the APBO ornet periodic postretirement benefit cost in the Company’s consolidatedfinancial statements do not reflect the effects of the Act.

 

In March 2004, the EmergingIssues Task Force (“EITF”) reached a consensus on Issue No. 03-1, “The Meaningof Other-Than-Temporary Impairment and Its Application to Certain Investments.”EITF 03-1 provides guidance on other-than-temporary impairment models formarketable debt and equity securities accounted for under SFAS No. 115,“Accounting for Certain Investments in Debt and Equity Securities,” and SFASNo. 124, “Accounting for Certain Investments Held by Not-for-ProfitOrganizations,” and non-marketable equity securities accounted for under thecost method. The EITF developed a basic three-step model to evaluate whether aninvestment is other-than-temporarily impaired. The provisions of EITF 03-1 willbe effective for the Company in the third quarter of fiscal 2004 and will beapplied prospectively to all current and future investments. Quantitative andqualitative disclosures for investments accounted for under SFAS No. 115 areeffective for the Company’s year ending December 31, 2004. The Company does notexpect the adoption of EITF 03-1 to have a material effect on its consolidatedfinancial statements.

 

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In December 2003, the FASBissued SFAS No. 132 (revised 2003), “Employer’s Disclosures about Pensions andOther Postretirement Benefits.” The revised statement retains the disclosurerequirements contained in SFAS No. 132, which it replaces, and requiresadditional disclosures about the assets, obligations, cash flows and netperiodic benefit cost of defined benefit pension plans and other definedbenefit postretirement plans. Except as noted below, the provisions of thisstatement are effective for the Company’s financial statements for the yearended December 31, 2003. The interim period disclosure requirements of thestatement became effective for the Company’s interim financial statements forthe quarter ending March 31, 2004, and are included Note 14. The statement’sdisclosure requirements relating to estimated future benefit payments andrelating to foreign plans are effective for the Company’s financial statementsfor the year ending December 31, 2004.

 

**Forward-Looking Statements and Risk Factors**

 

All statements in thisreport that are not historical facts or that include such words as“expect,”  “project,” “estimate,”“believe,” “could,” “may” or “plan” or other similar words are forward-lookingstatements that the Company deems to be covered by and to qualify for the safeharbor protection of the Private Securities Litigation Reform Act of 1995(alternatively: Section 27A of the Securities Act of 1933 and Section 21E ofthe Securities Exchange Act of 1934). Forward-looking statements include, butare not limited to, statements about the following:

 

•                  The Company’s anticipatedsegment revenues and operating profit;

 

•                  The anticipated demand forthe Company’s products and services;

 

•                  Anticipated improvements ofexisting products and development of new products in the Company’s ADS segment;

 

•                  The Company’s view of theshort- and long-term outlook for and trends in the markets for the Company’sproducts and services;

 

•                  The Company’s anticipatedcontributions to its pension and other postretirement benefit plans.

 

•                  The Company’s ability to

 

•                  meet its working capital andcapital expenditure requirements;

 

•                  achieve its goals withrespect to revenues and cost savings in each of its segments;

 

•                  successfully manage andcomplete large-scale industrial systems contracts for customers;

 

•                  successfully obtain criticalcomponents for its products;

 

•                  complete large-scale mobilecomputing installations;

 

Forward-looking statements arenot guarantees of future performance. Several factors govern whether theCompany will or can achieve any forward-looking statement made in this report.Any one of these factors could cause the Company’s actual results to differmaterially from those discussed in a forward-looking statement. The Companyoutlines these risk factors in reports that it files with the SEC, in pressreleases and on its website, www.unova.com. Such risk factors include, but arenot limited to:

 

•                  Continued weakness in theautomotive and aerospace markets could lead to reduced demand for the Company’sproducts.

 

•                  Technological changes andconsequent market shifts could adversely impact demand for the Company’sproducts and systems.

 

•                  Some of the Company’scompetitors have greater financial and other resources than the Company and, asa result, may be able to adapt more quickly to market trends or price declines.

 

•                  If the Company is unable toobtain key components of its products from its current suppliers, the cost ofmanufacturing the Company’s products could increase, the Company might have tore-engineer some products, and delivery times of some of the Company’s productscould be delayed.

 

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•                  Political instabilityoutside of the U.S. and hostility against U.S. companies in foreignjurisdictions could adversely affect the Company’s international operations.

 

•                  Changes in U.S. and foreigngovernment regulations regarding radio emissions could adversely affect theCompany’s ability to sell its ADS products or complete development ofanticipated new products.

 

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 QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

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

 

Due to its globaloperations, the Company’s cash flows and earnings are exposed to foreignexchange rate fluctuations. When appropriate, the Company may attempt to limitits exposure to changing foreign exchange rates by entering into short-termforeign currency exchange contracts. As of June 30, 2004, the Company heldshort-term contracts for the purpose of hedging foreign currency cash flowswith an aggregate notional amount of $132.2 million.

 

Except as noted in thepreceding paragraphs, as of June 30, 2004, there have been no material changesin information provided in Item 7A of the Company’s annual report on Form 10-Kfor the year ended December 31, 2003, which contains a complete discussion ofthe Company’s material exposures to interest rate and foreign exchange raterisks.

 

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

 

The Company’s management,including the Chief Executive Officer and the Chief Financial Officer,supervised and participated in an evaluation of the effectiveness of the designand operation of the Company’s disclosure controls and procedures, as definedin Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, asamended, as of the end of the period covered by this report (the “EvaluationDate”). Based on this evaluation, the Chief Executive Officer and the ChiefFinancial Officer concluded as of the Evaluation Date that the Company’sdisclosure controls and procedures were effective such that the informationrequired to be disclosed in the Company’s Securities and Exchange Commission(“SEC”) reports is recorded, processed, summarized and reported within the timeperiods specified in SEC rules and forms and is accumulated and communicated toCompany management, including the Chief Executive Officer and the ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure.

 

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**PART II****. OTHER INFORMATION**

 

**ITEM 2****.****         ****CHANGES INSECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

(e)               Issuer Purchases of EquitySecurities

 
| ** **                | ** ** | **(a) Total  Number of  Shares  Purchased** | ** ** | **(b) Average  Price Paid per  Share** | ** ** | **(c) Total  Number of  Shares Purchased as Part  of Publicly Announced  Plans or Programs** | ** ** | **(d) Maximum  Number of  Shares (or Approximate  Dollar Value) that May Yet  Be Purchased Under the  Plans or Programs** | ** ** |
|---------------------------|------------|---------------------------------------------|------------|----------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|
| April 1 to April 30, 2004 |       | —                                      |       | —                                 |       | —                                                                                       |       | —                                                                                                                    |       |
| May 1 to May 31, 2004     |       | 11,783                                      |       | $                                      | 17.30      |                                                                                         | —     |                                                                                                                      | —     |   |
| June 1 to June 30, 2004   |       | —                                      |       | —                                 |       | —                                                                                       |       | —                                                                                                                    |       |
| Total                     |       | 11,783                                      |       | $                                      | 17.30      |                                                                                         | —     |                                                                                                                      | —     |   |

 

The purchased sharesindicated in the above table were surrendered to the Company to satisfy taxwithholding obligations in connection with the vesting of restrictedstock.  Additionally, in February 2004,the Company purchased 59,397 shares of Common Stock, at an average price pershare of $21.39, comprising shares surrendered to the Company to satisfy taxwithholding obligations in connection with the vesting of restricted stock andshares deemed surrendered to the Company to pay the exercise price and tosatisfy tax withholding obligations in connection with the exercise of employeestock options.

 

**ITEM 4****.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

(a)               The Company’s Annual Meetingof Shareholders was held on May 6, 2004.

 

(b)              At the Annual Meeting, LarryD. Brady, Joseph T. Casey and Allen J. Lauer were elected directors forthree-year terms expiring on the date of the annual meeting in 2007.  The votes were as follows:

 
| **Director/Nominee** | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|----------------------|------------|------------|------------|--------------|------------|
| Larry D. Brady       |       | 52,477,041 |       | 1,186,605    |       |
| Joseph T. Casey      |       | 51,958,730 |       | 1,704,916    |       |
| Allen J. Lauer       |       | 52,316,687 |       | 1,346,959    |       |

 

The termsof the following directors continued after the Annual Meeting:

 
| Stephen  E. Frank   |   | Steven B.  Sample |
|---------------------|--------|-------------------|
| Claire W.  Gargalli |   | William  D. Walsh |
| Lydia H.  Kennard   |   | Larry D.  Yost    |

 

(c)               Proposal 2, a Board proposalrecommending adoption of the UNOVA, Inc. 2004 Omnibus Incentive CompensationPlan, was approved, with the following votes:

 
| ** **       | ** ** | **Number of  Votes** | ** ** | **% of Shares  Present on  this Proposal** | ** ** | **% of Shares  Outstanding** | ** ** |
|------------------|------------|----------------------|------------|--------------------------------------------|------------|------------------------------|------------|
| For              |       | 34,832,045           |       | 79.64                                      | %          | 57.58                        | %          |
| Against          |       | 7,837,021            |       | 17.92                                      | %          | 12.95                        | %          |
| Abstain          |       | 1,068,879            |       | 2.44                                       | %          | 1.77                         | %          |
| Broker non-votes |       | 9,925,701            |       | 0.00                                       | %          | 16.40                        | %          |

 

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Proposal 3,a shareholder proposal requesting declassification of the Board of Directors,received the votes of a majority of the shares present on the proposal.

 
| ** **       | ** ** | **Number of  Votes** | ** ** | **% of Shares  Present on  this Proposal** | ** ** | **% of Shares  Outstanding** | ** ** |
|------------------|------------|----------------------|------------|--------------------------------------------|------------|------------------------------|------------|
| For              |       | 24,207,317           |       | 55.35                                      | %          | 40.01                        | %          |
| Against          |       | 19,293,724           |       | 44.11                                      | %          | 31.89                        | %          |
| Abstain          |       | 236,902              |       | 0.54                                       | %          | 0.39                         | %          |
| Broker non-votes |       | 9,925,703            |       | 0.00                                       | %          | 16.40                        | %          |

 

**ITEM 6****.****                              ****EXHIBITSAND REPORTS ON FORM 8-K**

 

(a)                        Exhibits:

 
| 10.1   |   | UNOVA,  Inc. 2004 Omnibus Incentive Compensation Plan, filed as Appendix C to the  Company’s definitive Proxy Statement relating to the Annual Meeting of  Shareholder held on May 6, 2004, and incorporated herein by reference. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                   |
| 31.1   |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002, dated as of August 6, 2004.                                                                                                      |
|   |   |                                                                                                                                                                                                                                   |
| 31.2   |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002, dated as of August 6, 2004.                                                                                                      |
|   |   |                                                                                                                                                                                                                                   |
| 32.1   |   | Certification  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002, dated as of August 6, 2004.                                                                                                      |
|   |   |                                                                                                                                                                                                                                   |
| 32.2   |   | Certification  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002, dated as of August 6, 2004.                                                                                                      |

 

 

(b)                       Reports on Form 8-K:

 

On May 4,2004, the Company filed a Form 8-K in regard to its press release announcingits financial results for the quarter ended March 31, 2004.

 

On July 26,the Company filed a Form 8-K in regard to its press release announcing theelection of Gregory K. Hinckley to its Board of Directors and in regard to itspress release announcing its financial results for the quarter ended June 30,2004.

 

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**SIGNATURE**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|     | UNOVA,  INC. |
|----------|--------------|
|     | (Registrant) |
|     |         |
|     |         |
|     | By           | /s/  Michael E. Keane |   |
|     |         |
|     |         | Michael  E. Keane |
| * * |         | *Senior Vice President and* |
| * * |         | *Chief Financial Officer* |
|     |         |
|     |         | August 9,  2004 |
|          |              |  |  |  |

 

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