Edgar Filing: Intermec, Inc.

q3_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 28, 2008

OR

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

For the transition period from to

Commission file number: 001-13279

Intermec, Inc.

(Exact name of registrant as specified in its charter)

Delaware		95-4647021
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

6001 36th Avenue West, Everett, WA		98203-1264
(Address of principal executive offices)		(Zip Code)

(425) 265-2400

(Registrant’s telephone number, including area code)

[None]

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý

No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer ý				Accelerated filer 

Non-accelerated filer 				Smaller reporting company filer 
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o

No ý

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

Class		Outstanding at October 26, 2008
Common Stock, $0.01 par value per share		61,763,445 shares

INTERMEC, INC.

TABLE OF CONTENTS

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 28, 2008

		Page Number
PART I. FINANCIAL INFORMATION

ITEM 1.	Financial Statements (unaudited)

	Condensed Consolidated Statements of Operations (unaudited) Three and Nine Month Periods Ended September 28, 2008 and September 30, 2007.		3

	Condensed Consolidated Balance Sheets (unaudited) September 28, 2008, and December 31, 2007		4

	Condensed Consolidated Statements of Cash Flows (unaudited) Nine Months Ended September 28, 2008, and September 30, 2007		5

	Notes to Condensed Consolidated Financial Statements (unaudited)		6-14

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15-22

ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk		22

ITEM 4.	Controls and Procedures		23

PART II. OTHER INFORMATION

ITEM 1.	Legal Proceedings		24

ITEM 1A.	Risk Factors		24-25

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		26

ITEM 6.	Exhibits		26

Signature

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTERMEC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands of dollars, except per share amounts)

(unaudited)

	Three Months Ended						Nine Months Ended
	September 28, 2008			September 30, 2007			September 28, 2008			September 30, 2007
Revenues:
Product	$	195,727		$	169,219		$	555,756		$	480,669
Service		38,656			36,787			113,667			115,178
Total revenues		234,383			206,006			669,423			595,847

Costs and expenses:
Cost of product revenues		119,948			105,536			335,842			306,454
Cost of service revenues		22,783			22,404			65,642			65,611
Research and development		15,000			16,006			48,665			48,977
Selling, general and administrative		57,271			57,527			175,415			162,890
Flood related charges		-			-			1,122			-
Restructuring		3,337			-			3,337			-
Total costs and expenses		218,339			201,473			630,023			583,932

Operating profit from continuing operations		16,044			4,533			39,400			11,915
Interest income		874			2,910			3,720			7,930
Interest expense		(156	)		(2,204	)		(2,291	)		(6,847	)
Earnings from continuing operations before income taxes		16,762			5,239			40,829			12,998
Provision for income taxes		5,784			847			14,423			5,108
Earnings before discontinued operations		10,978			4,392			26,406			7,890
Loss from discontinued operations, net of tax		-			-			-			(1,283	)
Net earnings	$	10,978		$	4,392		$	26,406		$	6,607

Basic earnings (loss) per share
Continuing operations	$	0.18		$	0.07		$	0.43		$	0.13
Discontinued operations		-			-			-			(0.02	)
Net earnings per share	$	0.18		$	0.07		$	0.43		$	0.11

Diluted earnings (loss) per share
Continuing operations	$	0.18		$	0.07		$	0.43		$	0.13
Discontinued operations		-			-			-			(0.02	)
Net earnings per share	$	0.18		$	0.07		$	0.43		$	0.11

Shares used in computing earnings (loss) per share
Basic		61,238			60,484			61,121			60,242
Diluted		61,644			61,325			61,599			61,099

See accompanying notes to condensed consolidated financial statements.

INTERMEC, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands of dollars)

(unaudited)

	September 28, 2008			December 31, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	201,854		$	237,247
Short-term investments		304			28,230
Accounts receivable, net of allowance for doubtful accounts and sales returns of $13,400 and $12,854		150,810			191,487
Inventories		122,491			113,145
Net current deferred tax assets		61,480			61,532
Other current assets		16,755			14,690
Total current assets		553,694			646,331

Property, plant and equipment, net		42,572			47,732
Intangibles, net		3,799			4,138
Net deferred tax assets		141,695			150,154
Other assets		51,454			52,280
Total assets	$	793,214		$	900,635

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	103,244		$	141,667
Payroll and related expenses		27,345			32,170
Deferred revenue		44,434			49,020
Current debt		-			100,000
Total current liabilities		175,023			322,857

Long-term deferred revenue		26,340			20,109
Other long-term liabilities		75,677			73,558

Shareholders' equity:
Common stock (250,000 shares authorized, 61,725 and 61,192 shares issued and outstanding)		617			612
Additional paid-in-capital		694,234			679,241
Accumulated deficit		(170,891	)		(196,795	)
Accumulated other comprehensive income (loss)		(7,786	)		1,053
Total shareholders' equity		516,174			484,111
Total liabilities and shareholders' equity	$	793,214		$	900,635

See accompanying notes to condensed consolidated financial statements.

INTERMEC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(thousands of dollars)

(unaudited)

	Nine Months Ended
	September 28, 2008			September 30, 2007
				(as restated)

Cash and cash equivalents at beginning of year	$	237,247		$	155,027

Cash flows from operating activities:
Net earnings		26,406			7,890
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities
of continuing operations:
Depreciation and amortization		11,770			9,601
Provision for bad debt		(2,106	)		1,551
Change in prepaid pension costs, net		844			705
Deferred taxes		12,099			3,598
Stock-based compensation and other		7,729			6,754
Gain on sale of property, plant and equipment		(2,873)			(51	)
Excess tax benefits from stock-based payment arrangements		(937	)		(2,232	)
Changes in operating assets and liabilities:
Accounts receivable		42,783			(5,889	)
Inventories		(11,974	)		7,834
Other current assets		(2,065	)		3,513
Accounts payable and accrued expenses		(38,320	)		5,300
Payroll and related expenses		(4,825	)		(8,164	)
Deferred revenue		1,645			7,685
Other long-term liabilities		(2,167	)		(6,846	)
Other operating activities		272			(9,456	)
Net cash provided by operating activities of continuing operations		38,282			21,794

Cash flows from investing activities of continuing operations:
Capital expenditures		(9,880	)		(10,136	)
Proceeds from the sale of property, plant and equipment		5,497			-
Purchases of investments		(760	)		(1,465	)
Sale of investments		28,515			1,407
Patent legal fees		(2,827	)		(1,562	)
Other investing activities		-			(140	)
Net cash provided by (used in) investing activities of continuing operations		20,545			(11,896	)

Cash flows from financing activities of continuing operations:
Repayment of debt		(100,000	)		-
Excess tax benefits from stock-based payment arrangements		937			2,232
Proceeds from stock options exercised		4,167			5,654
Other financing activities		2,165			1,756
Net cash (used in) provided by financing activities of continuing operations		(92,731	)		9,642

Effect of exchange rate changes on cash and cash equivalents		(1,488)			9,137
Net cash provided by investing activities of discontinued operations		-			1,601

Resulting (decrease) increase in cash and cash equivalents		(35,392	)		30,278

Cash and cash equivalents at end of period	$	201,854		$	185,305

See accompanying notes to condensed consolidated financial statements.

INTERMEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. Basis of Presentation

Our interim financial periods are based on a thirteen-week internal accounting calendar. In our opinion, the accompanying condensed consolidated balance sheets, interim statements of operations and statements of cash flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The financial statements include the accounts of Intermec and our subsidiaries. Intercompany transactions and balances have been eliminated. Equity investments in which we exercise significant influence but do not exercise control and are not the primary beneficiary are accounted for using the equity method. Investments in which we are not able to exercise significant influence over the investee are accounted for under the cost method. Preparing our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and financial data included in the accompanying notes to the financial statements. Actual results and outcomes may differ from our estimates and assumptions.

Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K, as amended, for the year-ended December 31, 2007 (the “Annual Report on Form 10-K for the year ended December 31, 2007”).

Reclassification and Correction of Error

Prior to the fourth quarter of 2007, we provided the effect of exchange rates on cash and cash equivalents as supplemental information within the Consolidated Statement of Cash Flows. We have determined that the effect of exchange rates on cash and cash equivalents should have been recorded as a reconciling item between beginning and ending cash and cash equivalents. Accordingly, we reclassified $9.1 million from “net cash provided by operating activities” within the Condensed Consolidated Statement of Cash Flows to “effect of exchange rate changes on cash and cash equivalents” for the nine months ended September 30, 2007 to correct the error. Additionally, in the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2007 we reclassified $1.4 million of collection on notes receivable from investing activities of operations to investing activities of discontinued operations, and reclassified and separately presented cash provided by deferred revenue from accounts payable and accrued expenses and other long-term liabilities for comparability with the current year.

In the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2007 we reclassified and separately presented research and development expenses from selling, general and administrative expenses for comparability with the current year.

Recent Accounting Pronouncements

In April 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (FSP) No. FAS 142-3, Determination of the Useful Life of Intangible Assets. The final FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, “Goodwill and Other Intangible Assets”. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We are in the process of evaluating the impact FSP 142-3 will have on our consolidated financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133, which requires additional disclosures about the objectives of the derivative instruments and hedging activities, the method of accounting for such instruments under SFAS No. 133 and its related interpretations, and a tabular disclosure of the effects of such instruments and related hedged items on our financial position, financial performance, and cash flows. SFAS No. 161 is effective for us beginning January 1, 2009. We are currently assessing the potential impact that adoption of SFAS No. 161 may have on our financial statements.

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115. SFAS No. 159 permits entities to measure eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other generally accepted accounting principles. The fair value measurement election is irrevocable and subsequent changes in fair value must be recorded in earnings. We adopted SFAS No. 159 effective January 1, 2008 and elected to not adopt the fair value option for any financial assets or liabilities. The adoption did not have a material impact on our consolidated financial statements.

INTERMEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. Basis of Presentation (continued)

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies to all financial instruments that are being measured and reported on a fair value basis. As defined in this statement, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We adopted SFAS No. 157 effective January 1, 2008. The adoption of SFAS No. 157 did not have a material impact on our condensed consolidated financial statements. While SFAS 157 was effective in the first fiscal quarter of 2008, the FASB provided a one year deferral for the implementation with respect to other nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We have deferred implementation of SFAS No. 157 for our nonfinancial assets and liabilities.

SFAS No. 157 requires financial assets and liabilities to be classified and disclosed in one of the following three categories:

§ Level 1: Inputs based on quoted market prices for identical assets or liabilities in active markets.

§ Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

§ Level 3: Unobservable inputs that are not corroborated by market data.

Our level 1 financial instrument values are based on quoted market prices in active markets for identical assets, which we use to value our certificates of deposit, money market funds and equity securities. Our level 2 financial instrument values are based on comparable sales, such as quoted market rates for similar contracts. We do not have any financial instruments that require valuation using level 3 inputs.

Our financial assets and liabilities subject to these fair value measurement provisions comprised the following (thousands of dollars):

								Balance as of
	Level 1		Level 2			Level 3		September 28, 2008
Money market funds	$	79,997	-			$	-	$	79,997
Certificates of deposit		4,365	-				-		4,365
Stock		304	-				-		304
Derivative instruments - assets		-	$	1,378			-		1,378
Total assets at fair value	$	84,666	$	1,378		$	-	$	86,044

								Balance as of
	Level 1		Level 2			Level 3		September 28, 2008
Derivative instruments - liabilities	$	-	$	(1,286	)	$	-	$	(1,286	)
Total liabilities at fair value	$	-	$	(1,286	)	$	-	$	(1,286	)

INTERMEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. Basis of Presentation (continued)

In September 2006, the FASB issued SFAS No. 158, Employer’s Accounting for Defined Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS No. 158 has new provisions regarding the measurement date as well as certain disclosure requirements. Effective December 31, 2008, SFAS No. 158 will require us to measure plan assets and benefit obligations at fiscal year end. We currently perform this measurement at September 30 of each year. In addition, beginning in fourth quarter of 2007, SFAS No. 158 required that we eliminate the use of a three-month lag period when recognizing the impact of curtailments or settlements and instead, recognize these amounts in the period in which they occur. The provisions of SFAS No. 158 do not permit retrospective application. We recorded $0.3 million as an adjustment to opening retained earnings in the quarter as a result of adopting this provision for our U.S. pension plan due to the curtailment event. We expect to incur approximately$0.2 million as an adjustment to retained earnings upon adoption of the remainder of this statement for our other plans.

In September 2006, the Emerging Issues Task Force (“EITF”) issued EITF 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements (“EITF 06-04”), which we adopted on January 1, 2008. The Task Force concluded that an employer should recognize a liability for future benefits in accordance with SFAS No. 106, “Employers' Accounting for Postretirement Benefits Other Than Pensions” or Accounting Principles Board Opinion 12 (“Opinion 12”), “Classification and Disclosure of Allowances Disclosure of Depreciable Assets and Depreciation Deferred Compensation Contracts Capital Changes Convertible Debt and Debt Issued with Stock Warrants Amortization of Debt Discount and Expense or Premium” based on the substantive agreement with the employee. Upon adoption of EITF 06-4, as of January 1, 2008, we increased accumulated deficit $0.9 million, recognized a $1.4 million long-term liability, and recorded a tax effect of $0.5 million within long-term deferred tax assets.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations, which will be effective on a prospective basis for all business combinations with an acquisition date on or after January 1, 2009 with the exception of the accounting for deferred taxes, related valuation allowances and acquired uncertain tax positions. This statement generally requires an acquirer to recognize the assets acquired, the liabilities assumed, contingent purchase consideration, and any noncontrolling interest in the acquiree, at fair value on the date of acquisition. SFAS No. 141R also requires an acquirer to expense most transaction and restructuring costs as incurred, and not include such items in the cost of the acquired entity. We are currently evaluating the impact of the adoption of SFAS No. 141R on our consolidated financial statements.

2. Inventories

Inventories comprise the following (thousands of dollars):

	September 28, 2008		December 31, 2007

Raw materials	$	59,730	$	65,257
Work in process		335		1,318
Finished goods		62,426		46,570
Inventories	$	122,491	$	113,145

INTERMEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

3. Debt

We have an unsecured Revolving Credit Facility (the “Revolving Facility”) with a maximum amount available under the Revolving Facility of $50.0 million. Net of outstanding letters of credit and limitations on availability, we had borrowing capacity at September 28, 2008, of $46.9 million under the Revolving Facility. We made no borrowings under the Revolving Facility during 2008, and as of September 28, 2008, no borrowings were outstanding under this facility. As of September 28, 2008, we were in compliance with all financial covenants of the Revolving Facility. The Revolving Facility matures in October 2012.

We also have letter-of-credit reimbursement agreements totaling $ 3.7 million at September 28, 2008, and December 31, 2007.

During March 2008, we paid off our $100.0 million senior unsecured debt.

4. Provision for Income Taxes

The tax expense for the three and nine months ended September 28, 2008, reflects an effective tax rate for continuing operations of 34.5% and 35.3%, respectively, compared to a U.S. statutory rate of 35%. In the third quarter of 2008, we recorded tax benefits which decreased our Q3 effective tax rate 1.7% for a foreign tax refund and adjustments pertaining to our 2007 tax returns filed this quarter. These rates reflect our recurring estimated effective tax rate of approximately 37% for fiscal year 2008, which excludes the impact of discrete items.

The tax expense for the three and nine months ended September 30, 2007, reflects an effective tax rate for continuing operations of 16.2% and 39.3%, respectively, compared to a U.S. statutory rate of 35%. In the third quarter of 2007, the tax provision was decreased to record benefits primarily resulting from certain changes in foreign and state tax law and for deferred taxes related to tax amortizable goodwill. These rates reflect our recurring estimated effective tax rate of approximately 36% for fiscal year 2007, which excludes the impact of discrete items.

5. Discontinued Operations

We completed our divestiture of the IAS businesses with the sale of the Cincinnati Lamb business in the first quarter of 2005 and the sale of the Landis Grinding Systems business in the fourth quarter of 2005. There was a net loss of $1.3 million from discontinued operations for the nine months ended September 30, 2007. Final operations ceased on April 3, 2005 for our Cincinnati Lamb business and December 9, 2005 for our Landis Grinding Systems business.

6. Shares Used in Computing Earnings per Share

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

	Three Months Ended
	September 28, 2008		September 30, 2007
Weighted average shares – basic		61,238,149		60,483,794
Dilutive effect of unvested restricted shares and stock options		406,345		840,780
Weighted average shares – diluted		61,644,494		61,324,574

	Nine Months Ended
	September 28, 2008		September 30, 2007
Weighted average shares – basic		61,120,946		60,241,602
Dilutive effect of unvested restricted shares and stock options		477,565		857,730
Weighted average shares – diluted		61,598,511		61,099,332

Our employees and directors held total options to purchase 2,484,295 and 2,059,248 shares of our common stock for the three and nine months ended September 28, 2008, respectively, and 863,331 and 768,898 shares for the three and nine months ended September 30, 2007, respectively, that were not included in weighted average shares diluted because they were anti-dilutive to the diluted earnings per share computation. These options could become dilutive in future periods if the average market price of our common stock exceeds the exercise price of the outstanding options and we report net earnings.

INTERMEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

7. Equity

For the three and nine months ended September 28, 2008, we granted to employees 70,000 and 884,250 options respectively with an average Black-Scholes value of $8.52 per option, which vest annually in even quantities over four years. For the three and nine months ended September 28, 2008 we granted to Directors 83,684 and 118,167 options respectively with a Black-Scholes value of $10.06 per option which vest quarterly beginning on the date of grant and each quarter thereafter for the year following the most recent annual meeting of stockholders. The Black-Scholes assumptions used for this calculation were as follows, except for the Directors where we use an expected life in years of 6.59.

	Three months ended			Nine months ended
Fair value assumptions	September 28, 2008
Expected life in years		4.72			4.73
Expected volatility		43.56	%		41.02	%
Annual rate of dividends		0	%		0	%
Discount rate - bond equivalent yield		3.18	%		3.13	%

Our accumulated other comprehensive income (loss) comprised the following (thousands of dollars):

	September 28, 2008			December 31, 2007
Foreign currency translation adjustment, net of tax	$	5,940		$	8,842
Unamortized benefit plan costs, net of tax		(13,555	)		(7,884	)
Unrealized gain (loss) on securities, net of tax		(171	)		95
Accumulated other comprehensive income (loss)	$	(7,786	)	$	1,053

Other comprehensive income (loss) for the three and nine months ended September 28, 2008 and September 30, 2007, was as follows (thousands of dollars):

	Three Months Ended
	September 28, 2008			September 30, 2007
Net income	$	10,978		$	4,392
Other comprehensive income (loss) :
Change in equity due to foreign currency translation adjustments, net of tax		(8,405	)		(3,463	)
Unrealized (loss) on investment, net of tax		(11	)		(21	)
Amortization of benefit plan costs, net of tax		(5,260	)		(744	)
Other comprehensive income (loss)	$	(2,698	)	$	164

	Nine Months Ended
	September 28, 2008			September 30, 2007
Net income	$	26,406		$	6,607
Other comprehensive income (loss):
Change in equity due to foreign currency translation adjustments, net of tax		(2,902	)		(5,326	)
Unrealized loss on investment, net of tax		(266	)		(21	)
Amortization of benefit plan costs, net of tax		(5,671	)		(2,415	)
Other comprehensive income (loss)	$	17,567		$	(1,155	)

INTERMEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

8. Segment Reporting

We design, develop, manufacture, integrate, sell, resell and service wired and wireless automated identification and data collection (“AIDC”) products, which include radio frequency identification (“RFID”) products, wired and wireless AIDC products, mobile computing products, barcode scanners, wired and wireless bar code printers and label media products. Our revenue also comes from license fees and royalty revenue from our intellectual property licenses. Our reportable segments comprise products and services. The product segment generates revenue from the design, development, manufacture, sale and resale of AIDC products, including RFID products and intellectual property licenses. The service segment generates revenue from customer support, product maintenance and other services related to the products and to systems integration.

The accounting policies of our two reportable segments are the same as those used to prepare our condensed consolidated financial statements. Performance and resource allocation are primarily measured by sales and standard gross profit. All other earnings, costs and expenses are aggregated and reported on a consolidated basis.

ScanSource, Inc., one of our distributors, accounted for sales of $31.0 million and $80.1 for the three and nine months ended September 28, 2008, and $29.7 million and $70.7 million for the three and nine months ended September 30, 2007, respectively.

The following table sets forth our operations by reportable segment (millions of dollars):

	Three Months Ended				Nine Months Ended
	September 28, 2008		September 30, 2007		September 28, 2008		September 30, 2007
Revenues:
Product	$	195.7	$	169.2	$	555.8	$	480.6
Service		38.7		36.8		113.7		115.2
Total	$	234.4	$	206.0	$	669.4	$	595.8

Gross profit:
Product	$	75.8	$	63.7	$	219.9	$	174.2
Service		15.9		14.4		48.0		49.6
Total	$	91.7	$	78.1	$	267.9	$	223.8

The following table sets forth our revenues by product lines (millions of dollars):

	Three Months Ended				Nine Months Ended
	September 28, 2008		September 30, 2007		September 28, 2008		September 30, 2007
Revenues:
Systems and solutions	$	145.5	$	118.4	$	400.7	$	329.4
Printer and media		50.2		50.8		155.0		151.2
Service		38.7		36.8		113.7		115.2
Total	$	234.4	$	206.0	$	669.4	$	595.8

INTERMEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

9. Commitments and Contingencies

Provisions for estimated expenses related to product warranties are made at the time products are sold. These estimates are established using historical information on the nature, frequency, and average cost of warranty claims. We actively study trends of warranty claims and take action to improve product quality and minimize warranty claims. The following table indicates the change in our warranty accrual included in current liabilities (thousands of dollars):

	Nine Months Ended
	September 28, 2008			September 30, 2007
Beginning Balance	$	4,482		$	6,800
Payments		(904	)		(3,234	)
Increase in liability (new warranties issued)		1,813			2,297
Ending Balance	$	5,391		$	5,863

We have entered into a variety of agreements with third parties that include indemnification clauses, both in the ordinary course of business and in connection with our divestitures of certain product lines. These clauses require us to compensate these third parties for certain liabilities and damages incurred by them.

FASB Interpretation No. 45, “Guarantors’ Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” requires that we estimate and record the fair value of guarantees as a liability. We do not believe that we have any significant exposure related to such guarantees and therefore have not recorded a liability as of September 28, 2008, or December 31, 2007. We have not made any significant indemnification payments as a result of these clauses.

We currently, and from time to time, are subject to claims and lawsuits arising in the ordinary course of business. Such claims and lawsuits may take the form of counter claims in lawsuits we bring to enforce our rights. The ultimate resolution of currently pending proceedings is not expected to have a material adverse effect on our business, financial condition, results of operations or liquidity.

In June 2008, our Cedar Rapids, Iowa facilities were flooded, and we incurred damages to both a facility that we own and one that we lease. A portion of these damages was covered by insurance. While the flood caused significant damage, we were able to redirect the work done by our Cedar Rapids groups to temporary locations, and therefore the flood did not cause a significant interruption of our business. During the three and nine months ended September 28, 2008, we had $5.1 million in clean up costs and property damages that were offset by $4.0 million of insurance proceeds, for a net pre-tax charge of $1.1 million.

INTERMEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

10. Restructuring Charges

In July 2008, we committed to a business restructuring plan intended to reduce our cost structure and streamline operations. Pursuant to this plan, we will relocate the final assembly of our product lines from Everett, Washington, to Venture Corporation Limited, a global electronics services provider. As part of the plan we will also consolidate two U.S. service depots to existing locations in Charlotte, North Carolina, and Monterey, Mexico, and transfer our on-site field service repair to a third party supplier. We expect the plan to be fully implemented by June 30, 2009.

As of September 28, 2008, 55 employees have been terminated as part of the restructuring. All severance and other periodic transitional costs will be cash expenditures. Our remaining future expected costs are $0.2 million for employee termination and $ 0.8 million for other costs. The aggregate costs incurred to date are presented in restructuring costs in the Condensed Consolidated Statement of Operations and are itemized along with expected additional costs in the table below:

In millions of dollars	SFAS 112 (1)			SFAS 146 (2)		Employee termination			Other costs			Total restructuring

Total Restructuring
Original restructuring charge, Third quarter of 2008	$	2.7		$	0.3	$	3.0		$	0.3		$	3.3
Utilization		(0.6	)		-		(0.6	)		(0.3	)		(0.9	)

Balance at September 28, 2008	$	2.1		$	0.3	$	2.4		$	-		$	2.4

Utilization by segment

Service	$	0.6
Products	$	0.3

(1) - Accounted for in accordance with SFAS No. 112, "Employer's Accounting for Post Employment Benefits."

(2) - Accounted for in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."

INTERMEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

11. Pension and Other Postretirement Benefit Plans

The information in this note represents the net periodic pension and post-retirement benefit costs and related components in accordance with SFAS No.132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits (as amended).” The components of net pension and post-retirement periodic benefit cost (credit) for the three and nine months ended September 28, 2008, and September 30, 2007, is as follows (thousands of dollars):

	U.S. Defined Benefit Plans						Non-U.S. Defined Benefit Plans						Other Postretirement Benefit Plans
Three Months Ended September 28, 2008, and September 30, 2007	2008			2007			2008			2007			2008		2007

Service cost	$	284		$	453		$	-		$	-		$	-	$	-
Interest cost		2,713			2,678			666			689			44		44
Expected return on plan assets		(2,699	)		(2,610	)		(903	)		(894	)		-		-
Amortization and deferrals:
Transition asset		-			-			(43	)		(45	)		-		-
Actuarial loss		18			941			-			110			-		-
Prior service cost		144			144			-			-			-		-
Curtailment loss (gain)		8			-			-			-			-		-
Net pension and postretirement periodic benefit cost (credit)	$	468		$	1,606		$	(280	)	$	(140	)	$	44	$	44

Nine Months Ended September 28, 2008,and September 30, 2007
Service cost	$	1,017		$	1,358		$	-		$	-		$	-	$	-
Interest cost		8,123			8,034			1,997			1,997			132		132
Expected return on plan assets		(8,441	)		(7,832	)		(2,710	)		(2,592	)		-		-
Amortization and deferrals:
Transition asset		-			-			(128	)		(130	)		-		-
Actuarial loss		715			2,825			-			317			-		-
Prior service cost		432			433			-			-			-		-
Curtailment loss (gain)		8			-			-			-			-		-
Net pension and postretirement periodic benefit cost (credit)	$	1,853		$	4,818		$	(841	)	$	(408	)	$	132	$	132

During the quarter ended September 28, 2008, we contributed approximately $3.1 million to our pension and other postretirement benefit plans, comprising $1.8 million in benefits paid pertaining to unfunded U.S. defined benefit plans, $0.7 million in matching contributions to our 401(k) plan, and $0.6 million in contributions to our foreign pension plans.

Our business restructuring plan (see Note 10) resulted in a reduction of our workforce and the curtailment of pension benefits to the redundant employees who were participants in the U.S. pension plan. In accordance with SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” (“SFAS 88”), the curtailment required a new measurement date to determine the gain or loss on curtailment. Additionally, the measurement resulted in a decrease in asset value of $8.6 million and an increase in losses as a component of Accumulated Other Comprehensive Income.

During the nine months ended September 28, 2008, we contributed approximately $8.7 million to our pension and other postretirement benefit plans, comprising $4.6 million in benefits paid pertaining to unfunded U.S. defined benefit plans, $2.3 million in matching contributions to our 401(k) plan, and $1.8 million in contributions to our foreign pension plans. Benefits paid pertaining to our other postretirement benefit plans were not material during the three and nine month periods ended September 28, 2008. We expect to contribute approximately $3.0 million to these plans during the remainder of 2008, of which $1.7 million relates to benefit payments on our unfunded U.S. defined benefit plans, $0.6 million in matching contributions to our 401(k) plan, $0.6 million in contributions to our foreign pension plans and $0.1 million in benefit payments pertaining to our other postretirement benefit plans.

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

Forward-Looking Statements and Risk Factors

Forward-looking statements contained in this filing are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995 (alternatively: Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934) and are dependent upon a variety of important factors that could cause actual results to differ materially from those reflected in such forward-looking statements.

Forward-looking statements include but are not limited to statements about: maintaining or improving our revenues, gross margins or profits of our continuing operations, for the current period or any future period; competing effectively with our current products and planned products, and introducing new products; effectively completing restructuring activities, including the closure of certain facilities and redeployment of related functions; maintaining or reducing expenses; maintaining or improving operational efficiency; increasing product development capacity; using our investment in research and development to generate future revenue; and the applicability of accounting policies used in our financial reporting. When used in this document and in documents it references, the words “anticipate,” “believe,” “will,” “intend,” “project” and “expect” and similar expressions as they relate to Intermec or our management are intended to identify such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this quarterly report.

Forward-looking statements involve and are dependent upon certain risks and uncertainties and are not guarantees of future performance. A number of factors can impact our business and determine whether we can or will achieve any forward-looking statement made in this report. Any one of these factors could cause our actual results to differ materially from those expressed or implied in a forward-looking statement. We outline these risk factors in reports that we file with the SEC, in press releases and on our website, www.intermec.com. You are encouraged to review the discussion below in this Part I, “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as the Risk Factors set forth in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007, and the Risk Factors set forth in Part II, “Item 1A. Risk Factors” of our Quarterly Reports on Form 10-Q which discuss risk factors associated with our business.

Results of Operations

The following discussion compares our results of operations for the three and nine months ended September 28, 2008, and September 30, 2007. Results of operations and percentage of revenues were as follows (millions of dollars):

	Three Months Ended						Nine Months Ended
	September 28, 2008			September 30, 2007			September 28, 2008			September 30, 2007
	Amounts			Amounts			Amounts			Amounts
Revenues	$	234.4		$	206.0		$	669.4		$	595.8
Costs and expenses:
Cost of revenues		142.7			127.9			401.5			372.0
Research and development		15.0			16.0			48.7			49.0
Selling, general and administrative		57.3			57.6			175.4			162.9
Flood related charges		-			-			1.1			-
Restructuring		3.3			-			3.3			-
Total costs and expenses		218.3			201.5			630.0			583.9
Operating profit from continuing operations		16.0			4.5			39.4			11.9
Interest, net		0.7			0.7			1.4			1.1
Earnings from continuing operations, before income tax		16.8			5.2			40.8			13.0
Provision for income tax		5.8			0.8			14.4			5.1
Earnings from continuing operations, net of tax		11.0			4.4			26.4			7.9
Loss from discontinued operations, net of tax		-			-			-			(1.3	)
Net earnings	$	11.0		$	4.4		$	26.4		$	6.6

	Percent of Revenues			Percent of Revenues			Percent of Revenues			Percent of Revenues
Revenues
Costs and expenses:
Cost of revenues		60.9	%		62.1	%		60.0	%		62.4	%
Research and development		6.4	%		7.7	%		7.3	%		8.2	%
Selling, general and administrative		24.4	%		28.0	%		26.2	%		27.4	%
Flood related charges		-			-			-			-
Restructuring		-			-			-			-
Total costs and expenses		93.2	%		97.8	%		94.1	%		98.0	%
Operating profit from continuing operations		6.9	%		2.2	%		5.9	%		2.0	%
Interest, net		0.3	%		-			0.2	%		-	%
Earnings from continuing operations, before income tax		7.2	%		2.5	%		6.1	%		2.2	%
Provision for income tax		-			-			-			-
Earnings from continuing operations, net of tax		4.7	%		2.1	%		3.9	%		1.3	%
Loss from discontinued operations, net of tax		-			-			-			-
Net earnings		4.7	%		2.1	%		3.9	%		1.1	%

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Revenues

Revenues by category and geographic region and as a percentage of total revenues from continuing operations for the three and nine months ended September 28, 2008, and September 30, 2007, as well as the same three and nine month’s revenue changes were as follows (millions of dollars):

	Three Months Ended
	September 28, 2008					September 30, 2007				Change		Percentage Change
	Amount		Percent of Revenues			Amount		Percent of Revenues
Revenues by product line:
Systems and solutions	$	145.5		62.1	%	$	118.4	57.5	%	$	27.1	22.9	%
Printer and media		50.2		21.4	%		50.8	24.6	%		(0.6)	(1.3	%)
Service		38.7		16.5	%		36.8	17.9	%		1.9	5.1	%
Total revenues	$	234.4		100.0	%	$	206.0	100.0	%	$	28.4	13.8	%

Revenues by geographic region:
North America	$	129.1		55.1	%	$	100.8	48.9	%	$	28.4	28.1	%
Europe, Middle East and Africa
(EMEA)		78.1		33.3	%		74.2	36.0	%		3.8	5.1	%
All others		27.2		11.6	%		31.0	15.1	%		(3.8)	(12.3	%)
Total revenues	$	234.4		100.0	%	$	206.0	100.0	%	$	73.6	13.8	%

Total revenue increased $28.4 million, or 13.8% for the three months ended September 28, 2008 compared to the prior year period, as a result of a $26.5 million increase in product revenue and a $1.9 increase in service revenue. The increase in product revenue was attributable to a $27.1 million increase in systems and solution products, primarily as a result of revenue growth in North America. The $0.6 million decline in printer and media product revenue is due to lower printer revenue in Latin America, partially offset by revenue growth in EMEA (Europe, Middle East and Africa). Sequentially, total revenue increased 7.4% from the second quarter of 2008, primarily from the increase in product revenue and modest growth in service revenue.

The increase in quarterly service revenues of $1.9 million, or 5.1%, is primarily attributable to a 16.7% increase in EMEA as a result of improved pricing and the impact of favorable foreign currency exchange rates compared to the prior year period. North America service revenue was relatively flat, while the rest of the world experienced 8.2% growth on a relatively smaller base.

Geographically, revenues in North America and EMEA increased $28.4 million, or 28.1%, and $3.8 million, or 5.1%, respectively, over the corresponding prior-year period. The increase in North America was primarily attributable to increased hardware demand for handheld computers, particularly from governmental agencies. The changes in foreign currency conversion rates favorably impacted EMEA revenue by $3.7 million in the third quarter of 2008, as compared to the prior year period.

In the three months ended September 28, 2008, we observed longer purchase decision-making time frames among large enterprise customers. Thus far, this appears to have resulted in a delay, rather than a cancellation, of some customer projects. We believe that customers in our target markets will continue to invest in projects intended to enhance mobile worker productivity but they may subject these projects to closer scrutiny and longer decision-making processes, in response to uncertainty in the general economic outlook.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

	Nine Months Ended
	September 28, 2008					September 30, 2007					Change			Percentage Change
	Amount		Percent of Revenues			Amount		Percent of Revenues
Revenues by product line:
Systems and solutions	$	400.7		59.9	%	$	329.5		55.3	%	$	71.2			21.6	%
Printer and media		155.0		23.1	%		151.1		25.4	%		3.9			2.5	%
Service		113.7		17.0	%		115.2		19.3	%		(1.5	)		(1.3	%)
Total revenues	$	669.4		100.0	%	$	595.8		100.0	%	$	73.6			12.3	%

Revenues by geographic region:
North America	$	355.8		53.1	%	$	299.8		50.4	%	$	56.0			18.7	%
Europe, Middle East and Africa
(EMEA)		232.0		34.7	%		205.8		34.5	%		26.3			12.8	%
All others		81.6		12.2	%		90.2		15.1	%		(8.7	)		(9.6	%)
Total revenues	$	669.4		100.0	%	$	595.8		100.0	%	$	73.6			12.3	%

Total revenue for the nine months ended September 28, 2008, increased $73.6 million, or 12.3%, due to a $75.1 million, or 24.1%, increase in product revenues, partially offset by $1.5 million, or 1.3%, decrease in service revenues. The increase in product revenues was due to the $71.2 million increase in systems and solution products and a $3.9 million increase in printer and media products. The product revenue growth is primarily a result of the 18.7% growth in North America and 12.8% growth in EMEA. New product introductions continue to drive increased hardware demand in both regions. Product revenue for the rest of the world decreased 9.6%, primarily due to lower revenue in Latin America.

The decrease in nine month service revenues of $ 1.5 million, or 1.3%, was primarily attributable to the slightly lower contract revenue in the first quarter ended March 30, 2008, combined with lower year-to-date custom software and break fix time and material revenues.

Geographically, revenues in North America and EMEA increased $56 million, or 18.7%, and $26.3 million, or 12.8%, respectively, over the corresponding prior-year period. The increases were primarily attributable to increased hardware demand in both regions, with new product introductions driving a majority of the growth. The changes in foreign currency conversion rates favorably impacted EMEA revenue by $19.0 million for the nine months ended September 28, 2008, as compared to the prior year period.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Gross Profit

Gross profit and gross margin by revenue category for the three and nine months ended September 28, 2008 and September 30, 2007, were as follows (millions of dollars):

Three Months Ended

Nine Months Ended

September 28, 2008

September 30, 2007

September 28, 2008

September 30, 2007

Gross Profit

Gross Margin

Gross Profit

Gross Margin

Gross Profit

Gross Margin

Gross Profit

Gross Margin

Pro