Significant Accounting Policies

Description of Business

Intermec, Inc. ("Intermec", "us", "we", "our" or the "Company") is a Delaware corporation, headquartered in Everett, Washington. We design, develop, integrate, and sell wired and wireless automated identification and data collection solutions through our suite of products, voice technologies, and related software and services. Our solutions products are designed for rugged environments and to maintain connectivity, preserve computing capability, and retain data despite harsh conditions and heavy use. We generate our revenues primarily through the sale of products and post-warranty equipment service and repair contracts, as well as other managed services. Most of our revenue is currently generated through sales of mobile computers, bar code scanners, printers and repair services.

Principles of Consolidation

The consolidated financial statements include the accounts of Intermec, Inc. and our wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. We have no unconsolidated subsidiaries.

Foreign Currencies

Our consolidated financial statements are presented in U.S. dollars. The financial statements of our operations outside the U.S., whose functional currencies are not the U.S. dollar, are translated into U.S. dollars at the exchange rates in effect at the balance sheet dates for assets and liabilities and at average rates for the period for revenues and expenses. The unrealized translation gains and losses on our net investment in these operations, including long-term intercompany advances considered part of the net investment, are accumulated as a component of other comprehensive income (loss). Gains and losses resulting from foreign currency remeasurement are included in selling, general, and administrative expenses on the consolidated statements of operations. Operating results include net foreign currency transaction losses of $1.9 million, $2.5 million, and $0.9 million for the years ended December 31, 2012, 2011, and 2010, respectively.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses for each reported period. Actual results could differ from those estimates. Significant estimates and assumptions were used to determine the provision for allowance for sales returns, sales incentives, excess and obsolete inventory, tax valuation allowances, liabilities for uncertain tax provisions, impairment of goodwill, pension and postretirement obligations, useful lives of our intangible assets, and stock-based compensation.

Revenue Recognition

We record revenue, net of excise and sales taxes, when it is realized, or realizable, and earned. We consider these criteria met when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectibility is reasonably assured.

Intermec-Branded Product Sales. Revenue from Intermec-branded product sales is recognized when the customer has assumed risk of loss of the goods sold and all performance obligations are complete. These sales may contain discounts, price exceptions, return provisions, or other customer incentives. We reduce revenue by providing allowances for estimated customer returns, price exceptions, and other incentives that occur under sales programs established by us directly or with our distributors and resellers. The sales allowances are estimated based on management’s best estimate of the amount of allowances that the customer will ultimately receive and based on our historical experience taking into account the type of products sold and type of customers involved. We accrue the estimated cost of basic product warranties at the time we recognize revenue based on historical experience. In addition to basic product warranties, we frequently offer extended warranties, including renewals, to our customers in the form of product maintenance services. Our product and services are separately stated and priced. We defer the stated amount of the separately stated and priced product maintenance services contracts and recognize the deferred revenue as services are rendered, generally straight-line over the contract term.

We infrequently enter into multiple-element arrangements with our customers, and these sales may include deliverables such as hardware, software, professional consulting services, and maintenance support services. For arrangements involving multiple deliverables, where deliverables include software and non-software products and services, we apply the provisions of multiple elements accounting to separate the deliverables and allocate the total arrangement consideration. Each unit of accounting is then accounted for under the applicable revenue recognition guidance.

We sell products with embedded software to our customers. The embedded software is not sold separately, is not a significant focus of the marketing effort, and we do not provide post-contract customer support specific to software or incur significant costs related to creating software products. Additionally, the functionality that the software provides is marketed as part of the overall product. The software embedded in the product is incidental to the equipment as a whole such that software revenue recognition is not generally applicable. In certain infrequent situations where our solutions contain software that is more than incidental to the hardware and services, revenue related to the software and software-related elements is recognized in accordance with software revenue recognition accounting.

Our customers infrequently request that delivery and passage of title and risk of loss occur on a bill and hold basis. For these transactions, we recognize revenue when delivery has occurred.

Voice Solutions. A substantial portion of Voice solutions revenues are derived from arrangements that contain multiple deliverables that may include terminals, software, accessories, hardware and support, and consulting services. Most of these products have both software and non-software components that function together to deliver the products’ essential functionality. As a result, we separate and assign a value to each element in our multiple-element arrangements. For those deliverables that qualify as separate units of accounting, we assign a value based on each deliverable's vendor-specific objective evidence (“VSOE”) of value, if available. If not available, we use third-party evidence (“TPE”) indicating value. We use an estimated selling price (“ESP”) if neither VSOE nor TPE is available. Arrangement consideration is then allocated to all deliverables using the relative selling price method.

Management performs an analysis to determine the relative selling price of each unit of accounting. We have established VSOE for certain hardware and software support, based on standalone renewal transactions, and for professional services, based on standalone consulting services. We have been unable to establish comparable TPE for our deliverables. Generally, our go-to-market strategy differs from our peers', and our offerings contain a significant level of customization and differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor product selling prices are on a standalone basis.

Management’s ESP is used for terminals and related software and accessories. We determine ESP for a product or service by considering multiple factors, including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives, and pricing practices. The determination of ESP is made through consultation with and formal approval by our management, taking into consideration the go-to-market strategy.

Voice solutions units of accounting are terminals and related software, headsets and accessories, hardware support, software support and professional services. Products are typically considered delivered upon shipment. Support services revenue is deferred and recognized ratably over the period during which the services are performed, which is typically one to three years. Professional services revenue is recognized as the services are delivered or as milestones are invoiced, so long as such invoicing approximates services delivery. Our arrangements generally do not provide any provisions for cancellation, termination, or refunds that would significantly impact recognized revenue.

Allowance for Doubtful Accounts, Sales Returns and Sales Incentives

We provide an allowance for doubtful accounts equal to the estimated uncollectible accounts receivable. This estimate is based on historical collection experience, the aging of the accounts receivable, current international, political, economic, and market conditions, and a review of the current status of specific customer’s trade accounts receivable. We reduce revenue by providing allowances for estimated customer returns, price exceptions, and other incentives that occur under sales programs established by us directly or with our distributors and resellers. Our allowance for doubtful accounts, sales returns and sales incentives totaled $19.2 million and $13.9 million at December 31, 2012, and 2011, respectively.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Inventory costs include material, labor and related benefits, and manufacturing overhead. The valuation of inventory requires us to estimate obsolete or excess inventory as well as inventory that is not of saleable quality. The determination of obsolete or excess inventory requires us to estimate the future demand for our products and market conditions.

Cost of Product Revenues

Cost of product revenues includes the purchase cost of inventory and inventory valuation adjustments; direct labor costs of production; fulfillment costs, such as freight; depreciation of machinery and equipment used for producing the products; certain costs of royalties; licensing and warranty costs; and amortization of capitalized research and development costs for certain customer specified products.

Cost of Service Revenues

Cost of service revenues includes direct labor costs, service parts and depreciation of tooling.

Pension and Other Postretirement Benefits

We have qualified and nonqualified pension plans that cover some of our employees. Our U.S. qualified pension plan and U.S. nonqualified plans were fully frozen effective February 28, 2010 and December 31, 2009, respectively. Annual employer contributions are made to the extent such contributions are actuarially determined to be required in order to adequately fund the plans, and to match a portion of the employees’ contributions. Retiree benefits are based on the amount of participant contributions over the term of the participant’s employment.

We perform an annual measurement of our projected obligations and plan assets or when major events occur requiring remeasurement. These measurements require several assumptions, the most critical of which are the discount rate, the expected long-term rate of return on plan assets, and health care cost projections.

Income Taxes

We account for income taxes using the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. This method also requires the recognition of future tax benefits, such as net operating loss carry forwards and other tax credits. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Valuation allowances are provided to reduce deferred tax assets to an amount that is more likely than not to be realized. We evaluate the likelihood of realizing our deferred tax assets by estimating sources of future taxable income and the impact of tax planning strategies. Our deferred tax assets include future tax benefits of discontinued operations that remain with us. We record benefits from uncertain tax positions based on the largest amount of benefit with greater than 50% cumulative probability of being realized upon ultimate settlement with the tax authority.

Goodwill and Intangible Assets

Goodwill and intangible assets result from our acquisitions. We use estimates, including estimates of useful lives of intangible assets, the amount and timing of related future cash flows, and fair values of the related operations, in determining the value assigned to goodwill and intangible assets. Our intangible assets have a finite life and are amortized over their estimated useful lives on an accelerated basis determined by their estimated discounted cash flows.

Goodwill is evaluated using a two-step impairment test at the reporting unit level.


•	The first step of the goodwill impairment test compares the book value of a reporting unit, including goodwill, with its fair value. If the book value of a reporting unit exceeds its fair value, we perform the second step of the impairment test.

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In the second step, we estimate an implied fair value of the reporting unit’s goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill (including any unrecognized intangible assets). The difference between the total fair value of the reporting unit and the fair value of all the assets and liabilities other than goodwill is the implied fair value of that goodwill. The amount of impairment loss is equal to the excess of the book value of the goodwill over the implied fair value of that goodwill.

We assigned goodwill to our reporting units based on the expected benefit from the synergies arising from each business combination. We have three reportable segments: Intermec-branded products, Intermec-branded services, and Voice solutions. Intermec-branded services and Voice solutions each comprise two reporting units. Intermec-branded services are divided into: Core Service and Integrated Global Services (“IGS”). Voice solutions contains the Vocollect Supply Chain (“VSC”) and Vocollect Healthcare Solutions (“VHS”) reporting units.

The accounting for goodwill requires that we test the goodwill of our reporting units for impairment on an annual basis, or more frequently when an event occurs or circumstances change such that it is more likely than not that an impairment exists. Our annual testing date is as of our November month-end. In assessing the existence of impairment, our considerations include the impact of significant adverse changes in market and economic conditions; the results of our operational performance and strategic plans; unanticipated changes in competition; market share; and the potential for the sale or disposal of all or a significant portion of our business or a reporting unit.

Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. To calculate the fair values we use the discounted cash flow method and market approach for Step 1. We forecast discounted future cash flows at the reporting unit level using risk-adjusted discount rates and estimated future revenues and operating costs, which take into consideration factors such as expected future orders, our tax rate, useful lives, and expectations of competitive and economic environments. We estimate our cash flows over a significant future period of time, which can make those estimates and assumptions subject to a high degree of uncertainty. Where available and as appropriate, comparative market multiples and the quoted market price of our common stock are used to corroborate the results of the discounted cash flow method. We also identify similar publicly-traded companies and develop a correlation, referred to as a multiple, to apply to the operating results of the reporting units. These combined fair values are then reconciled to the aggregate market value of our common stock on the date of valuation, while considering a reasonable control premium.

Assumptions used in our analysis that have the most significant effect on the estimated fair values of our reporting units include:


•	Our estimated weighted-average cost of capital (WACC);


•	Our estimated long-term growth; and


•	Market multiples.

We assess the recoverability of long-lived assets when events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. If undiscounted expected cash flows to be generated by a long-lived asset or asset group are less than its carrying amount, we record an impairment to write down the long-lived asset or asset group to its estimated fair value. Fair value is estimated based on discounted expected future cash flows. For asset groups classified as held for sale (disposal group), the carrying value is compared to the disposal group’s fair value less costs to sell. We estimate fair value by considering market appraisals from third party brokers, management judgment and other valuation techniques.

Capitalized Legal Patent Costs

We capitalize external legal costs incurred in the defense of our patents where we believe that there is an evident increase in the value of the patent and that the successful outcome of the legal action is probable. In the event of a successful outcome, the capitalized costs for that case would be amortized over the remaining life of the patents in the case. During the course of any legal action, the court where the case is pending makes decisions and issues rulings of various kinds, which may be favorable or unfavorable. We monitor developments in the legal action, the legal costs incurred and the anticipated outcome of the legal action, and assess the likelihood of a successful outcome based on the entire action. If changes in the anticipated outcome were to occur that reduce the likelihood of a successful outcome of the entire action to less than probable, the capitalized costs would be charged to expense in the period in which the change is determined. As of December 31, 2012, and 2011, $7.5 million and $7.4 million of legal patent defense costs have been capitalized, respectively. The capitalized legal patent costs are recorded in other assets on our consolidated balance sheets. During 2011, we wrote off $5.6 million of legal costs that were capitalized between 2007 and 2011 attributable to a patent lawsuit. See also Note 13, Litigation, Commitments and Contingencies, to the Consolidated Financial Statements.

Research and Development, Net

Research and development (“R&D”) costs, net of credits, are expensed as incurred. Total R&D costs were $82.5 million, $84.4 million, and $69.5 million, net of credits from U.S. and foreign governments relating to reimbursement of certain R&D expenses of $0.4 million, $0.3 million, and $0.4 million for the years ended December 31, 2012, 2011, and 2010, respectively. These expenditures were for Company-sponsored R&D and were primarily for labor, materials, and other administrative costs. We incurred no costs associated with R&D sponsored by customers or other external parties.

Deferred Development Costs

Certain pre-production costs under a guaranteed long-term supply contract are capitalized. We have capitalized approximately $6.2 million and $2.2 million of such costs as of December 31, 2012 and December 31, 2011, which are recorded in other assets on the consolidated balance sheet. The deferred development costs are recognized as cost of product revenues upon the sale of the related products.

Reclassification and Corrections

Certain reclassifications and corrections have been made to prior periods to conform to the current year presentation, as follows:

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In the consolidated balance sheets, we corrected $10.1 million from accounts payable to accrued expenses for the year ended December 31, 2011. The impact of this correction is also reflected in our consolidated statements of cash flows as a correction of $10.1 million and $9.8 million from accounts payable to accrued expenses within the changes in operating assets and liabilities for the years ended December 31, 2011 and December 31, 2010, respectively, in the consolidated statements of cash flows.

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In the consolidated statements of operations, costs that were previously included in cost of service revenues were reclassified to cost of product revenues in the amount of $3.3 million and $3.2 million for the years ended December 31, 2011 and 2010, respectively. Additionally, in the consolidated statement of operations for the year ended December 31, 2010, we reclassified a loss on sale of property of $0.2 million, previously recorded in selling, general and administrative expense, to gain on sale of assets.


•	In the consolidated statements of cash flows, amounts that were previously included in other operating activities have been reclassified to the following line items within cash flows from operating activities: gain on sale of assets; other current assets; and other long-term liabilities.

Offsetting of Financial Assets and Financial Liabilities

We have company-owned life insurance policies that have a cash surrender value, against which we have taken out loans from the insurer. We have no current intention to repay the loans prior to maturity or cancellation, and the policies allow us to offset the loans against the proceeds received upon maturity or cancellation of the policies. Therefore, we offset the cash surrender values by the related loans. The gross amount of the cash surrender values was $19.0 million and $26.1 million at December 31, 2012 and December 31, 2011, respectively. The gross amount of the policy loans was $17.4 million and $16.0 million at December 31, 2012 and December 31, 2011, respectively. The net amounts of $1.6 million and $10.1 million at December 31, 2012 and December 31, 2011, respectively, are included in our consolidated balance sheets in other assets, net.

Recent Accounting Pronouncements

Fair Value Measurement - In May 2011, the Financial Accounting Standards Board (“FASB”) issued guidance that generally provides a consistent definition of fair value and ensures that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. The guidance changes certain fair value measurement principles and enhances the disclosure requirements, particularly for Level 3 fair value measurements. This guidance was effective for interim and annual reporting periods beginning after December 15, 2011 and was applied on a prospective basis. We adopted the guidance on January 1, 2012, as required. There was no material impact on the Consolidated Financial Statements resulting from the adoption. See Note 3, Fair Value Measurements for additional disclosures related to this pronouncement.

Comprehensive Income - In June 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-5, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” (“ASU 2011-5”). ASU 2011-5 eliminates the option to report other comprehensive income (loss) and its components in the statement of changes in equity and requires that all non-owner changes in shareholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-5,” to defer the effective date to present items that are reclassified out of accumulated other comprehensive income to net income alongside their respective components of net income and other comprehensive income. All other provisions of this update, which are to be applied retrospectively, were effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We adopted this guidance in the first quarter of 2012 and applied it retrospectively. To implement this standard we have added a separate statement labeled Consolidated Statement of Comprehensive Income (Loss).

Intangibles – Goodwill and Other - In September 2011, the FASB issued ASU No. 2011-8, “Intangibles – Goodwill and Other (Topic 350). The amendments in this update will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. This new guidance was adopted and applied beginning January 2012. The adoption of this accounting standard update did not have an impact on our financial position, results of operations, cash flows, or comprehensive income as we did not perform a qualitative assessment.

Recent Accounting Pronouncements Not Yet Adopted

Comprehensive Income - In February 2013, the FASB issued ASU No. 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," an accounting standard update, which requires companies to present information about reclassifications out of accumulated other comprehensive income in a single note or on the face of the financial statements. The updated standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012, with early adoption permitted. We will adopt the updated standard in the first quarter of 2013. The adoption of this updated accounting standard will not have a significant impact on our consolidated financial position, results of operations, or cash flows.

Merger Agreement with Honeywell

On December 9, 2012, Intermec, Inc. entered into an Agreement and Plan of Merger (the "Merger Agreement") with Honeywell International, Inc. ("Honeywell") and Hawkeye Merger Sub Corp., a wholly owned subsidiary of Honeywell ("Merger Sub"). Under the Merger Agreement, Merger Sub will merge with and into Intermec, with Intermec continuing as the surviving corporation and a wholly owned subsidiary of Honeywell (the “Merger”). After completion of the Merger, Honeywell will own 100% of Intermec's outstanding stock, and current stockholders will no longer have any interest in Intermec.

The closing of the Merger is subject to customary closing conditions, including (i) receiving the required approval of the Company's stockholders and (ii) the expiration or termination of the applicable waiting periods under the Hart-Scott-Rodina Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and any applicable waiting period or approvals under the competition, antitrust or similar laws of certain foreign jurisdictions. On February 14, 2013, the Company filed with the SEC its definitive proxy statement (the "Proxy Statement") for a Special Meeting of Stockholders to consider the adoption of the Merger Agreement and related matters (the "Special Meeting") to be held on March 19, 2013, and began mailing the Proxy Statement and notice of the Special Meeting on February 15, 2013. Additional detail about the closing conditions to the Merger can be found in the Merger Agreement and the Proxy Statement.

The Merger Agreement and related materials can be found in the Company's SEC filings at www.sec.gov.