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Executives

Patrick Byrne - President and CEO

Bob Driessnack - CFO

Analysts

Chuck Murphy - Sidoti and Company

Andrew Abrams - Avian Securities

Matt McKee - Morgan Keegan

Ajit Pai - Stifel Nicolaus

Richard Davis - Richard Davis & Company

Eli Lustgarten - Longbow

Intermec Inc. (IN) Q3 2010 Earnings Conference Call October 28, 2010 5:00 PM ET

Operator

Welcome and thank you for standing by. At this time all participants are in a listen-only mode until the question-and-answer session of today’s conference. (Operator Instructions).

I will now introduce Mr. Kevin McCarty, Vice President of Corporate Development. You may begin sir.

Kevin McCarty

Great, thanks, Lorrie. Good afternoon everyone and welcome to Intermec’s Third Quarter Fiscal Year 2010 Earnings Release Conference Call. With me on the call this afternoon are Intermec’s President and Chief Executive Officer, Patrick Byrne, and our Chief Financial Officer, Bob Driessnack.

In just a moment, Pat will discuss our quarterly overview and then Bob will provide a summary of our operating performance and discuss fourth quarter guidance. Subsequent to those discussions, we will begin our question and answer period.

Today’s discussions will include predictions, estimates and other information that might be considered forward-looking statement under the Private Securities Litigation Reform Act of 1995. Some of the statements we make today may be considered forward-looking, including but not limited to Intermec’s expected financial performance as well as Intermec’s strategic and operational plans, along with additional examples that were set forth in today’s earnings release.

These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward-looking statements only reflect our opinions as of the date of this presentation, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.

In addition, we will describe certain non-GAAP financial measures which we also refer to as adjusted items. These items should be considered in addition to and not in lieu of comparable GAAP financial measures. Please refer to today’s earnings release which contains and illustrates our reconciliation from GAAP to non-GAAP items.

If warranted a more detailed description of the risk factors could impact our actual results, can be achieved by reviewing our filings with the Securities and Exchange Commission. These filings include our annual report on Form 10-K and our quarterly reports on Form 10-Q. To obtain copies of these reports please visit our Investor Relations section of our corporate website.

Now transitioning to the next portion of our call, I’d like to turn the call over to Pat.

Patrick Byrne

Thanks, Kevin and good afternoon. Intermec had third quarter 2010 revenues of $169 million and adjusted earnings before taxes a $4.1 million meeting our expectation. Tax provisions were $9.2 million this quarter, which is in excess of earnings. Bob will discuss this primarily non-cash expense in his remarks.

In North America, the US government business continued to flow in the quarter but did show progress in bookings, which we anticipate converting to revenue in Q4. North America revenue was down 6% compared to Q3 of last year, but was up 4% excluding US government business. Bookings were stronger in the quarter for North America overall and we expect sequential growth in the fourth quarter.

International sales results were strong with 21% growth compared to Q3 of last year. These results continue a trend we have seen all year in the international markets. In addition, we saw continue to strength new product sales as well strong results from our global channel.

Total gross margins and product margins increased both sequentially year-over-year. Service margins improved sequentially as we expected. In the quarter introduced innovative new products and services which I will outline in my later remarks. We also considered the acquisition of a software company for our solution business. I am now going to turn it over to Bob and then I would return to discuss our results in more detail as well as our priorities and outlook for Q4.

Bob Driessnack

Thank you, Pat. Intermec’s third quarter revenue of $169 million represented a 6% increase from the prior year third quarter and was up 5% sequentially. On constant currency basis, year-over-year revenues were up 9% and on a constant currency basis with sequential increase was 4%.

On a GAAP basis our third quarter earnings before tax were $2.3 million. The company recorded a $9.2 million primarily non-cash tax expense in the quarter to align its year-to-date provision with updated fiscal year 2010 revenue and income estimates. This true up resulted in a net loss of $6.9 million or a loss of $0.11 per share, which compares to a break even earnings per share in the third quarter of 2009. Our GAAP results included the impact of restructuring charges of approximately $1.8 million which equates to $0.02 per share.

The company’s tax provision for Q3 of $9.2 million primarily reflects three items. First, we reversed tax benefits recorded in Q1 and Q2 that were based on our then current forecast of full year income. Combined with a non-cash tax provision for our earnings in Q3, this year-to-date true up is a total non-cash expense of approximately $6.2 million.

Second, we recorded a charge from steps we took to establish in international headquarters for our supply chain and international sales of approximately $2 million for the quarter which is also non-cash. Third, profits in certain foreign sales offices will be taxed in those countries and we will owe cash tax of approximately $1 million which we recorded in the quarter. These three items drove the requirements for a tax provision of about $9.2 million in the quarter, but as noted only $1 million of this amount represents cash tax expense.

Looking forward, we expect we expect that is annual profitability increases additional pretax income will lower our tax rates in normal levels. Additional disclosure and discussion of our tax rates will be included in our Form 10-Q.

Turning back to our third quarter revenues on regional basis as compared to the prior year quarter, North America declined 6% impacted by continuing softness in US government sales. As Pat noted, outside of the US government business the remainder of the North America grew 4%. Europe, Middle East and Africa or EMEA increased an 11% year over year. On constant currency basis revenues in EMEA were up 21%. Our other international areas also delivered strong results with Latin America increasing 62%, while our Asia Pacific region grew 13%.

On a product line basis, our systems and solutions revenue of $93 million was up 6% year over year. On a sequential basis this product line grew 8%. Printer and media revenues of $41 million delivered solid growth of 10% of year over year, but were down slightly from Q2.

Our Services business increased 4% year-over-year and was up 5% sequentially. Overall gross margins of 38.8% increased 20 basis points over the prior year period and 190 basis points sequentially. On a product level gross margins improved by 90 basis points to 37.9% over the prior year and were up 160 basis points sequentially.

Service gross margins declined year-over-year by 250 basis points to 42.2%. Sequentially, our service margin improvements of 320 basis points were consistent with guidance provided on our last call.

Our total operating expense for the quarter was $63.1 million compared to $61.2million in the prior year quarter. Adjusted operating expenses excluding restructuring charges of $1.8 million in Q3 of 2010 and $2.7 million in Q3 2009, totaled $61.3 million and $58.5 million respectively. Third quarter 2010 expenses include the favorable effect of a gain from the sale of an intellectual property of $2.9 million. Excluding the benefit of a gain on sale of IP assets our expenses reflect investments in new product development and launch along with additional sales resources and initiatives to drive future growth.

We recorded the remaining restructuring from our previously announced programs of approximately $1.8 million in the third quarter. These were primarily non-cash real estate related costs.

Looking at the balance sheet, we reduced our inventory by approximately $8 million in the quarter and $16 million from our 2009 year-end.

Moving to accounts receivable, at the end of Q3 our receivable balance of $107 million is flat from our year end levels. While the ending balance increased from the second quarter this was driven by the timing of revenue in the quarter with September reflecting a higher levels than June. The number of days in receivables was 58 days at the end of the quarter.

During the quarter we repurchased approximately $1.8 million shares at a total cost of $20 million dollars. These purchases were at an average price of $10.89 per share. The company’s outstanding shares ended the third quarter at approximately 60 million shares. Due to the timing of the repurchases the average share count for Q3 was $61.4 million.

Third quarter cash flow from operations was $5.7 million and year-to-date is approximately $5 million. As of quarter end, our cash, cash equivalent and short term investments totaled just over $211 million. The company continues to be in a very solid financial position.

As we look to the fourth quarter of 2010, we are viewing that fourth quarter revenues are expected to be within the range of $180 million to $190 million. Fourth quarter earnings per share on a GAAP basis are expected to be within the range of $0.04 to $0.09 per diluted share.

We anticipate the effective tax rate for the fourth quarter will be approximately 40%. Our earnings per share guidance assumes a diluted share count of approximately $60 million shares for the fourth quarter.

That completes our financial comments and I’ll turn the call back to Pat.

Patrick Byrne

Thanks Bob. The highlight for growth in the quarter was our international business where we continue a trend of solid sequential and year over year growth. The international business was up 21% compared to Q3 of last year.

In each of the international regions we had strong channel sales results and good performance from each of the three businesses: Systems and Solutions, Printer Media and the Service business. Year-to-date the international business is up 19% compared to the first three quarters of 2009.

In Europe, Middle East and Africa or EMEA, we have a number of important moves in transportation and logistics, postal, retail and consumer package goods delivering. We saw solid growth in distribution sales and direct channels across the EMEA region, especially Eastern Europe, Nordic and the Middle East.

The pilot in first phases of deployments of new technology’s results are strong which is driving good growth in some of larger European economies. Many customers are committing to the first phases of deployment which they intend to scale throughout the next quarter. A typical example is where a couple of hundred units were deployed in the first phase of the project so far this year and now the customers planted a multi quarter roll out of several thousand units planned for Q4 into 2011. We also added about 100 channel partners in the EMEA region in the quarter.

In Latin America, we had strong sales results with technology refresh projects in consumer packaged goods delivery. We also saw continues progress in channel and distribution sales. Also in Latin America, we had an important win in RFID. The local governments in Brazil’s Rio Norte region will begin implementing an electronic vehicle registration EVR system based on Intermec’s RFID tags and fixed and mobile meters.

In Asia, we had a solid quarter in printers and rugged computers with good results in Australia, New Zealand or ANZ, as well as South East Asia and China. We held our APAC Partner Summit in Taiwan during the quarter, and the summit launched our APAC Partner Net Program, which was deployed in the Americas and EMEA earlier in the year. The event was well attended by partners from across the region.

Our North America business grew 4% compared to Q3 of last year excluding the US government business. There are a number of positive factors in the region including CK3 and CN50 new product sales, distribution sales in printer media. We are seeing good progression, support and feedback as a release to our piloting activities. There are a number of customer who have deployed a couple of hundred devices and anticipate scaling of deployment in 2011. We are also focused on increasing our sales coverage and demand generation with our channel partners as well as attaching services for those deployments. Accelerating growth in North America remains the top priority for the company.

We continue to see weakness from in the US government business in Q3. However, we did make progress in bookings for these customers and anticipate sequential improvement in business in Q4. There have been a number of Intermec wins this year under the AIT core contract. We also won the RFID hardware portion of Homeland Security’s Land Border Integration Initiative.

As was outlined before, we have building the channel sales organization in North America and we continue to make good progress. Our channel program has gotten very good attraction, excellent feed back from resellers. It is now rated one of the top channel programs in the industry. We added approximately 70 partners in partner net program in North America in Q3.

We also announced the addition of both Ingram Micro and Bluestar for North America distribution network. Ingram Micro and Blue stars well aligned with our business work and can provide the credit in inventory capabilities needed by resellers. We anticipate this change will enable us to sell to more resellers in the future and grow our run rate business.

During the quarter, we introduced several and port new products and in the coming quarters we expect this initiative. As we outlined six months ago, we expected this year to be significant for new products and are making investments this year to continue to strengthen our product line up to fuel long term growth. These investments are in R&D and sales and marketing initiatives related to new product launches. Intermec has the broadest range of products in AIDC industry to offer our customers and our new product development efforts are focused on building and sustaining this advantage.

In September, we introduced the CS40 rugged mobile computer which is a new form factor for the company and the industry. It is almost 40% smaller and lighter than our CN50 and leverages many of the same technology. When the CN50 was launched a year it was 30% smaller and lighter than previous models. So, its clear we are making big contribution in industry leadership in rugged mobile product design. Compact rugged design is a key differentiator for Intremec.

The CS 40 delivers these benefits along with the advance state of capture technology as well as the [robust] software platform that supports applications. Furthermore, the CS40 is compatible with Intermec’s Skynax, Smart Systems and IN Control managed services, which makes a significant contribution to ease of the deployment in data security for these devices as well as the long term supportability. The CS40 is designed for mobile workers in the merchandising presale field service and transportation markets.

The customer and partner interest in the CS40 has been positive and we anticipate shipping the product during the quarter. We expect the product to make contributions to new business in 2011.

In addition to the CS40 and other hardware products under development, we have been introducing new solution offerings, targeted at adding value in software and services in our core vertical markets and applications. Intermec is well positioned to deliver rugged mobile business solutions to our customers both directly and through our partners.

The following are three examples of key innovations in this area. Intermec announced the acquisition of Skynax software, which provides the reliable and secure mobile communication and data management capabilities used in enterprise class applications.

Connectivity and secure data management are important in many of the deployment environments in our core markets, especially those requiring real time proof of delivery and payment. In fact DDC recently ranked connection as the most frequent problem encounter by mobile device users. Skynax is our solution to that problem and the one that is already been adopted by several large consumer package goods customers.

We also launched IN Control services, our new manned services portfolio which allows customers to ship their day to day device management over to Intermec and our value added partners. Using our hosted web-based tool set this improves up time and lowers total cost of ownership for mobility deployments.

Again according to DDC the use of services like IN Control and save the company up to $300 per use per year. This key service will be very beneficial for customers engaged in consumer packaged goods delivery in field service (inaudible).

We also introduced VERDEX software which is the joint development between the Intermec and RAF Technology, a leader in information extraction and data verification solutions in the postal industry. Vertex is the industry’s first mobile version of address extraction and verification at the point of parcel collection. This is the key solution component for the courier express delivery and postal companies as it improves the mobile business process by eliminating a major rework process called unavailable at address or UAA. We have estimate the addressers cause within $200 million than extra cause each year in the North America regional alone.

Looking forward, our focus in Q4 is to deliver sequential and year over year growth. We have strong momentum in international sales as well as printer media and expect good sequential from North America this quarter. We expect to begin shipping the CS40 this quarter as well as starting delivering new solution offerings we just discussed. We are also planning significant new offering in early 2011. We believe these investments will deliver growth in 2011 as these new products and service offerings ramp. In addition to the new product in service offering we have been investing in and preparing for the related sales and marketing initiatives.

I will turn it now back over to Kevin for the Q & A section of this call.

Kevin McCarty

Great, thanks Pat. Lorrie, at this time we’d like to open up our call for our question and answer period please. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from Chuck Murphy. Sir, your line is open.

Chuck Murphy - Sidoti and Company

Few questions for you. First, the sales came in at the higher end of your range. I was just wondering how margins and OpEx reported compared to your expectations.

Bob Driessnack

Chuck, this is Bob. Think both the margins were inline. We’re perhaps just a little bit better than we had originally expected coming into the quarter, we saw the guided improvement in services from the second quarter to the third quarter that we expected. Products were just a little bit better and we had some favorable mix with some of the international growth as well.

The operating expenses were little below. You will recall in the last earnings call, we said 62 to 63 million, that compares to about 61.3 million level that we achieved. I had included in that 62 to 63 some gain on the sale of the patents that we were aware of. It came in a little bit better than I had expected.

Chuck Murphy - Sidoti and Company

If I back out the gain, back out the restructuring and I kind of use a more normal tax rate, I mean I get to like a EPS about a penny, I mean is that about right, does that sound about right to you guys?

Bob Driessnack

I understand your math, I can’t really project a non GAAP tax rate. So, but, I understand your math.

Chuck Murphy - Sidoti and Company

Well, I was just wondering if the sales were on the high end and then the margins were as expected, if not little bit better, and the OpEx was a little bit lower, I was just kind of wondering how the EPS round up on the lower end of the range.

Bob Driessnack

We were consistent. It would be the mix of the revenues and the contribution of the dollars from those. So, on an individual product margins came in, we’re expected in services little difference in the mix of revenues for products as opposed to services with the dollar shift.

Chuck Murphy - Sidoti and Company

My other question was could you talk a little bit about the sales, where are they today versus the kind of historical norm and will they be getting any better any time soon?

Patrick Byrne

Yes, I’ll add a few comments on that. Far this year, through the third quarter defense sales had been lower, I said bookings picked up in Q3 which we anticipate shipping in Q4 and we are not guiding any, we are not guiding in 2011 yet, but we do believe that the business will be growing as we are going forward. It hasn’t returned to the levels of 2009 as I had mentioned before. It’s down significantly compared to 2009, but we do expect sequential improvement in Q4 and returning some growth going forward in 2011.

Chuck Murphy - Sidoti and Company

Got you. Part of the explanation before was that they needed to authorize some more funds for Afghanistan and so; they hadn’t authorized money for Afghanistan yet, so all the money was being funneled over there rather than on stuff like mobile computers. Is that still the case? I mean what needs to happen in order for your defense sales to pickup?

Patrick Byrne

Yes, there was a significant amount of business we got through 2008 and ‘09 on the AIT fleet contract, the AIT-IV contract before, as I said we have a number wins there they’re starting to spend. That there is a technology refreshes that will happen over the next several years as new opportunities emerge as well as frankly outside of the DoD applications and other federal government agencies were seeing some progress as well.

Operator

Our next question comes from Andrew Abrams. Your line is open, sir.

Andrew Abrams - Avian Securities

Thanks. Couple of questions, if you look at the C, the new product the C, the CS40, are we looking at the same kind of ramp that you guys looked at for the CN50, is this in your mind, is this going to ramp roughly the same way or is this a faster or slower depending on how guys perceived this product?

Patrick Byrne

Yes, so that this will ramp similar to that. There is an adoption cycle of the technologies which happened in the first quarter. The way to think about this, in the first question we got some distribution orders as well as some early customer adoption as those devices are tested, then they go through a verification and deployment phase which then shows up as more growth three or four quarters later.

We expect that the product will ramp. When you put all that together there is sort of a multi quarter ramps in the time we introduced it and began shipping it. So, as I said we expected to deliver similar kinds of ramp as our prior products and deliver new business growth in 2011.

Andrew Abrams - Avian Securities

The recent focus on software, is this going to be in your mind, is this going to be a meaningful change in your revenue stream for one and should we expect to see this as all service revenue or how are you going to account for most of the revenue that goes on and is it going to be significant enough that you’re going to start to breaking out as a separate item or at least talk about it as a separate item?

Bob Driessnack

Yes, Andy. This is Bob. Let me start with the classification, the software for us is considered a product. So, it is in the product revenue stream today and as it builds, unless it became a significant number for us, I would expect that it will continue to be in there. Going forward, we are looking to break, just to build the business from a solutions standpoint and Pat I don’t know if you want to comment on the solution side of the business focus overall and how software factors into that.

Patrick Byrne

Yes, we will be reporting it in the segment that we got systems and solutions and services, the managed services business will be reported, our current plans are to report that as part of the rest of our service business. There is a number of elements that make up our service business besides repairing hardware. So, we’ll be reporting that in that area. It’s pretty mature to outline how big that business will be at this point, but it’s an important part of building our competitive advantage and solving customers’ needs in the key industries that we are in. We believe it’s part of getting closer to customers and adding more value.

Andrew Abrams - Avian Securities

Got you. Just last anything left on the restructuring side or are we almost done there?

Bob Driessnack

Nothing for the previously announced programs. Those were completed in the third quarter.

Operator

Our next caller is Matt McKee on behalf of Tavis McCourt at Morgankeegan.com. Your line is open.

Matt McKee - Morgan Keegan

Hi, guys. Thanks for taking my call. I had a couple of questions, first is you addressed the R&D a little bit with the IT sale, but what should we think about it on a run rate going forward?

Patrick Byrne

So, could you clarify the question, is this related to R&D spending or?

Matt McKee - Morgan Keegan

Yes, how should we think about R&D going forward, what sort of run rate?

Patrick Byrne

Yes, so what we have got is, Bob you can comment on the percentages, but as we outlined six months ago that we were increasing R&D spending in this year, fiscal 2010 in order to get these products that were under development, some of which we’ve released and some of which are still under development.

Our expectation is to as we are headed into 2011 to look at the ratios of how fast we grow expenses relative to revenue, so we’ll, again I don’t want to guide any further ahead of that. That the R&D spending is down from Q2 into Q3. It’s fairly stable where it is.

Bob Driessnack

What I would add is sort of the we did reduce R&D spending last year by about 10% versus 2008 and 2010 we brought it back up. What I would expect for full year forecast is something that’s close to 2008, but little bit less in the, we don’t normally guide a line item on the OpEx, but I’m going to [indiscernible] that and wouldn’t really guide going forward into 2011. You can tell from past descriptions the number of products that we’ve developed and released and our expectation is that will continue at similar level.

Matt McKee - Morgan Keegan

Just similar levels for 2008.

Bob Driessnack

To the 2010 run rates.

Matt McKee - Morgan Keegan

Okay. With the increased gross margin recently, do you guys see that as stable going forward and are you seeing any price competition in the market?

Bob Driessnack

Let me start with the level we expect and we don’t provide the guidance on the gross margin. The third quarter was a good step forward for us. We saw a similar pattern last year and then the fourth quarter last year was just a little bit better. Volumes improves our leverage ability and I would expect based on the revenue you could assume that.

Patrick Byrne

Let me just make a few comments on gross margin. We have made progress on improving gross margins and we expect to continue to make progress. It’s the key focus of the company. We believe there are continues to be opportunities for streamlining the end to end supply chain as well as other cost issue.

We also believe that as we add more software and services to the mid that will help us as well. New products are also an opportunity for current and future product line up and it gives the opportunity for customers to get a range of price performance level from Intermec which enables us to participate in a broader range in the marketplace without needing to bring the prices down at the higher end more premier products.

It is a very competitive marketplace and it has been and we anticipate it will continue to. So, by having a range of product offerings as well as some of these other attributes, we believe we’ll continue to make progress on gross margin.

Operator

Our next line is Ajit Pai of Stifel Nicolaus. Your line is open.

Ajit Pai - Stifel Nicolaus

Yes, good afternoon. Yes, just looking at the CS40 mobile phone or mobile computer, it’s, beginning to resemble more and more the smartphones that are in the market. I know it’s far more capable than all of that, but it’s beginning to get that similar kind of form factor which makes very usable.

In terms of threat in the marketplace as you go out and you are out there with this product. Are you beginning to see smartphones, BlackBerries, iPhones etcetera beginning to start reaching into your market? Also if you are, and they have hundreds of developers, application developers on those platform, what is the step you are taking to check that from your end?

Patrick Byrne

So, Ajit what we are focused on with the CS40 is really the used cases where there is a real value for ruggedness and high functionality. We deliver advanced state of capture technologies. We also make these products compatible with our software and our managed services capability which really enables it to be very effective in deployment. So, our contribution is very much to focus on - again we made the product more compact, but we made sure that it also delivers the core benefit people expect from rugged products.

So, physically rugged as well as how they work on systems. We believe that’s the key innovation. As a result our products that is significantly smaller than traditional devices and has some of the styling as you probably seen on the product that makes it very appealing to the target markets we’ve got which is presales, merchandizing and field service applications, transportation. We believe that, we keep focused on those applications and the value we deliver that it offers the superior total cost of ownership to smartphone or other alternatives.

In fact the work that’s been done on total cost of ownership shows that it’s a clear differentiated position relative to the smartphones. And, but we don’t really think about that as the competition. We really think about adding value for our customers in these applications.

Ajit Pai - Stifel Nicolaus

Got it, but, do you really have the applications? Because traditionally you’ve had the best, one of the most rugged devices out there, so on total cost of ownership the value add is pretty apparent. When you’re looking at your customers, I mean are they looking more for applications or are they looking more for the rugged nature of the device?

Patrick Byrne

Yes, so, there is a, so you have to think about these applications as enterprise class line of business applications. These are things that are task oriented mission critical tools in the hands of mobile workers to conduct business everyday. That’s the focus of these applications.

We work with leading resellers as well as independent software vendors to deliver best in class applications with the hardware products as well as of course it delivers the infrastructure, the software infrastructure that enables those applications to really become robust enterprises class application. That’s the way to think about the application of these products and our customers.

Ajit Pai - Stifel Nicolaus

Got it. The same point, the amount of content you are getting, maybe not in a per device, but when you do a deployment of like 50 or 100 of these computers, are you seeing the total average price per computer when you look at the whole deployment, are you seeing that static over the past five years, down or up?

Patrick Byrne

So, the overall, this is reported in analysts reports about the industry. There is a - the development of the marketplace is in expanding mobility applications. Many people are starting to use this. The reason is that the wide area network is available as an enterprise IP platform, so people are able to use these devices in wide area applications. In order to do that people are innovating with products to add products across the portfolio. Intermec is leading this charge, we believe.

What’s that doing is adding unit counts in devices in devices that are range of products. There is still the strength of the really rugged products and those prices are relatively stable, but they are going down over time as all devices, that’s what happen within IT businesses. It’s not dramatically going down, but just a look at the product categories and the range of product categories, the fully rugged, and then some of these more, field mobile devices. Those are, we are targeting those at specific prices that adds volume over time and build new businesses.

Operator

Our next call is from Richard Davis of Richard Davis & Company. Your line is open.

Richard Davis - Richard Davis & Company

Yes. I just wanted to follow-up about how many pilot operations do you have with the CS40 at this point?

Patrick Byrne

So, the CS 40 has not begun shipping yet, as they said they will ship in the fourth quarter. We have units out with some development partners and they are developing with the product, but we have not begun shipping it to customers yet. They’ll, we anticipate that happening in the fourth quarter.

Richard Davis - Richard Davis & Company

I see. Some enterprises that you have done business within the past is there active interest in the CS40?

Patrick Byrne

Yes, there is. So, we’ve, during the development phase, we have a very customer oriented product development approach. We’ve been, as we’ve been developing the product, we’ve been discussing it with customers under non-disclosure and now of course it’s public last month and a half and there is a firm interest in the product as a complementary product to some of the other ones that we’ve got because what it does it allows a form factoring functionally that is, as I said, complementary to more so high end premier products. We still believe that the strong rugged - it’s really compact ruggedness. It’s a new product category that we believe will add business in the future.

Operator

(Operator instructions) Our next question comes from of Eli Lustgarten of Longbow. Your line is open.

Eli Lustgarten - Longbow

Good afternoon. Just a couple of quick follow-ups, one what’s the incremental change in R&D spending 2010 versus 2009, how many million dollars or what is the change that we are actually spending?

Robert Driessnack

Yes, on the year-to-date basis, it’s about $3 million to $4 million, so it’s not, it’s about $4 million year-to-date, Eli, is what you are seeing. You will recall the first quarter was actually less than the second and third.

Eli Lustgarten - Longbow

Basically that’s been more - we’re expecting to keep at this run rate for a while is sort of the guidance I’m hearing.

Patrick Byrne

Yes, it’s Patrick, we’ve got new, additional new products that we will be launching really next year and so obviously the R&D spend is related to those product launches.

Eli Lustgarten - Longbow

There has been a lot of, more volatility in the service profitability than you might have expected as well as revenue. Can you talk about what’s going on in the service business, is it basically not going anywhere, are we going to see some growth or what’s happening in that part of the business.

Robert Driessnack

In the service business, from a profitability standpoint, the first half of the year was impacted by the significant decline in the government business which included significant service component previously. We’ve obliviously taken actions here in the third quarter as we’ve said we would to bring the service profitability back to little over the 42% level and we would anticipate continuing to expand that in the fourth quarter.

The services business growth really comes from attaching our service contracts to the devices that are sold, additional advanced services and the managed services that Pat has mentioned and that we have some announcements on recently and were included in the press release today. That will drive additional revenue growth at a pretty solid profit margin.

Patrick Byrne

Yes, we do anticipate growing the service business that we recently introduced control services, we believe that’s in a way meaningful opportunity for the company. As Bob said, we’ve improved the margin in Q3 back more to the levels that we’ve seen in prior quarters after a dip as we outlined last quarter in Q2.

Eli Lustgarten - Longbow

Thank you.

Patrick Byrne

You okay, Eli?

Operator

I have no further questions at this time.

Patrick Byrne

Right, thank you very much. On behalf of Intermec, we appreciate you joining us this afternoon and that will conclude our call for the day. Have a great evening.

Operator

This concludes today’s conference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

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