Attached files
file | filename |
---|---|
EX-18 - EX-18 - EMS TECHNOLOGIES INC | g22130exv18.htm |
EX-3.2 - EX-3.2 - EMS TECHNOLOGIES INC | g22130exv3w2.htm |
EX-4.1 - EX-4.1 - EMS TECHNOLOGIES INC | g22130exv4w1.htm |
EX-31.2 - EX-31.2 - EMS TECHNOLOGIES INC | g22130exv31w2.htm |
EX-31.1 - EX-31.1 - EMS TECHNOLOGIES INC | g22130exv31w1.htm |
EX-21.1 - EX-21.1 - EMS TECHNOLOGIES INC | g22130exv21w1.htm |
EX-32.1 - EX-32.1 - EMS TECHNOLOGIES INC | g22130exv32w1.htm |
EX-10.1 - EX-10.1 - EMS TECHNOLOGIES INC | g22130exv10w1.htm |
EX-23.1 - EX-23.1 - EMS TECHNOLOGIES INC | g22130exv23w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
Commission File #0-6072
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
Commission File #0-6072
EMS TECHNOLOGIES,
INC.
(Exact name of registrant as specified in its charter)
Georgia | 58-1035424 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer ID Number) |
660 Engineering Drive, Norcross, Georgia | 30092 | |
(Address of principal executive offices)
|
(Zip Code) |
Registrants telephone number, including area code:
(770) 263-9200
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
|
Exchange on Which
Registered
|
|
Common Stock, $.10 par value
|
Nasdaq Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act: Yes o No x
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act: Yes o No x
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 x No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K: 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: Large accelerated
filer o Accelerated filer x
Non-accelerated filer o Smaller reporting company o
Non-accelerated filer o Smaller reporting company o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act): Yes o No x
The aggregate market value of voting stock held by persons other
than directors or executive officers as of July 2, 2009 was
$315 million, based on a closing price of $20.87 per share.
The basis of this calculation does not constitute a
determination by the registrant that all of its directors and
executive officers are affiliates as defined in Rule 405.
As of March 26, 2010, the number of shares of the
registrants common stock outstanding was
15,248,681 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain information contained in the Companys definitive
proxy statement for the 2010 Annual Meeting of Shareholders of
the registrant is incorporated herein by reference in
Part III of this Annual Report on
Form 10-K.
1 of 105
EMS
TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2009
TABLE OF CONTENTS
2 of 105
Table of Contents
FORWARD-LOOKING
STATEMENTS
The discussions of the Companys business in this Report,
including under the caption
Business,Managements Discussion and
Analysis of Financial Condition and Results of Operations
in Item 7, and in other public documents or statements that
may from time to time incorporate or refer to these disclosures,
contain various statements that are, or may be deemed to be,
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Words such as
plan, expect, believe,
anticipate, estimate, will,
should, could and other words and terms
of similar meaning, typically identify such forward-looking
statements. Forward-looking statements include, but are not
limited to:
1. statements about what the Company or management believes
or expects,
2. | statements about anticipated technological developments or anticipated market response to or impact of current or future technological developments or product offerings, |
3. statements about potential or anticipated benefits of
recent acquisitions,
4. statements about trends in markets that are served or
pursued by the Company,
5. | statements implying that the Companys technology or products are well-suited for particular markets, and |
6. statements about the Companys plans for product
developments or market initiatives.
These statements are based on assumptions and analyses made by
us in light of our experience and our perception of historical
trends, current conditions and expected future developments, as
well as other factors we believe are appropriate under the
circumstances. Actual results could differ materially from those
suggested in any forward-looking statements as a result of a
variety of factors, including those risks and uncertainties set
forth under Risk Factors in Item 1A. You should not place
undue reliance on these forward-looking statements. We expressly
disclaim any obligation or undertaking to release publicly any
updates or revisions to these forward-looking statements to
reflect events or circumstances that occur or arise or are
anticipated to occur or arise after the date of this Report
except as may be required by law.
PART I
Item 1. | Business |
Overview
In this report, unless the context otherwise requires,
we, us, our, and the
Company refer to the continuing operations of EMS
Technologies, Inc. and its consolidated subsidiaries. Unless
otherwise indicated, all financial and statistical information
pertains solely to our continuing operations.
We are a leading provider of wireless connectivity solutions
addressing the enterprise mobility,
communications-on-the-move,
tracking and in-flight connectivity markets for both commercial
and government users. We focus on the needs of the mobile
information user and the increasing demand for wireless
broadband communications. Our products and services enable
communications across a variety of coverage areas, ranging from
global to regional to within a single facility.
During 2009, our business operated in three segments,
Communications & Tracking, LXE and Defense &
Space (D&S). In early 2010, we realigned our
business segments for strategic growth and replaced
Communications & Tracking with two new segments,
Aviation and Global Tracking (see the section Our New
Segment Structure as of 2010 below for additional
information). Each of our segments is focused on a different
application of wireless technology. These segments share a
common foundation in broadband and other advanced wireless
technologies, which provides important technical and marketing
synergies and contributes to our ability to continually develop
and commercialize new products for use in a wide array of mobile
communications. Our business provides product solutions and
services that enable aviation in-cabin wireless and
satellite-based connectivity, security, vehicle and maritime
tracking, and military radar/space and
3 of 105
Table of Contents
communication-on-the-move
applications. We also provide product solutions and support
services for use in supply chain management networks for
warehousing, distribution and ports, as well as new markets such
as field services and agriculture.
Founded in 1968 as Electromagnetic Sciences, we initially
concentrated on microwave components, products and technology
and subsequently developed subsystems for one of the first
electronically steerable antennas deployed in space. The
expertise and technology we have developed during the past
41 years in this original business remain directly
applicable to a range of our current defense and commercial
products, including products for satellite, ground and airborne
communications, as well as radar, signal intelligence and
electronic countermeasure systems.
In the early 1980s, we developed a line of wireless mobile
computers and local-area network products for use in
materials-handling applications. These products enable our
industrial customers to connect mobile employees to central data
networks and take advantage of sophisticated enterprise software
and automatic-identification technologies such as bar-code
scanning and voice recognition.
Beginning in the mid-1990s and continuing through to
present day, we have expanded into several new markets through
the development or acquisition of additional product lines. We
have established an industry-leading position in the market for
high-speed, two-way satellite communications solutions for use
on aircraft and other mobile platforms, and we develop and
market antennas and terminals and support services for use by
search-and-rescue
and emergency management organizations around the world.
Today, our connectivity and tracking offerings serve the
aeronautical, defense, maritime, commercial space and
auto-identification/data capture markets making possible
mobility, visibility and intelligence. For example, our
Communications & Tracking segment supplies both high-
and low-speed data communications equipment, which enable voice,
e-mail,
tracking, video conferencing and Internet capabilities on
aircraft. Our D&S segment provides data links, radar and
Satcom systems to give the military real-time intelligence
integrated across naval, ground and air platforms. Our
Communications & Tracking segment also provides the
capability to track, monitor and control remote assets,
regardless of whether they are fixed, semi-fixed or mobile. More
than 18 governments worldwide rely on this segments
software and hardware for search and rescue applications. Our
LXE segment develops supply chain logistics solutions with our
wireless network infrastructure and rugged mobile computers.
Competitive
Strengths
Technological
Leadership
Since our founding in 1968, we have been an innovative leader in
the development and commercialization of wireless communications
technologies. Early in our history, we pioneered the use of
ferrite materials for electronic beam forming, a practice that
remains important in many sophisticated defense communications
applications. Our more recent innovations include the following
products, which we believe were the first in their respective
markets: airborne terminals and antennas for high-speed, two-way
data transmission via satellite for the communication of voice
and data in the military, business and air transportation
markets; airborne computer and networking systems; antenna
systems allowing commercial airlines to provide satellite
television to passengers, and satellite anti-jam systems to
protect commercial communication satellites from jamming and
transponder hijackings.
Commitment
to Research and Development
We continually devote significant resources to research and
development that enhances and maintains our technological
advantages, and enables us to overcome the substantial technical
barriers that are often encountered in the commercialization of
sophisticated wireless communications equipment. Over the past
three years, we have invested an aggregate of $58 million
in company-sponsored research and development. In addition, our
work under government and commercial contracts for new wireless
communications equipment often leads to innovations that benefit
us on future contracts and product development efforts.
Approximately 25% of our employees hold engineering degrees, and
our engineers actively participate in professional and
4 of 105
Table of Contents
industry technical conferences and working groups. As of
December 31, 2009, our personnel have been awarded, and
have assigned to us, 62 currently active U.S. patents and
28 foreign patents. In addition, as of December 31, 2009,
we had pending applications for approximately 18 U.S. and
18 foreign patents covering various technology improvements and
other current or potential products.
Technological
Synergies
Although we conduct our businesses through separately managed
segments, we have established a variety of processes that
facilitate technical exchanges and cooperation among them. Our
shared knowledge base and core expertise in wireless
technologies create synergies among our various businesses. We
believe this provides us advantages in research and development,
manufacturing, and sales and marketing, and better positions us
as an important supplier of connectivity and tracking systems
and services to a diverse base of military and commercial
customers. An example is the technical collaboration of
engineering teams within our Aviation business to bring to
market a new in-flight connectivity service that uses the
Iridium network to reliably provide
e-mail
access to any WiFi-enabled smartphone or PDA.
Strong
Customer Relationships
During our 41 years of operation, we have developed
cooperative and on-going relationships with important commercial
and government customers. We build and strengthen these
relationships by anticipating and recognizing our
customers needs, by working with them to understand how we
should focus our internal innovation efforts, and by providing
customers with technologically advanced and cost-effective
solutions coupled with excellent customer service. We continue
to receive important orders and contracts from companies that
have been our customers or industrial partners for many years.
Within the Communications & Tracking segment, those
firms include Airbus, Rockwell Collins, Honeywell, Panasonic
Avionics and Aircell.
We are particularly proud of our industry recognition, including
a Silver Supplier Award from Northrop Grumman Space Systems and
seven MobileStar Awards given to our LXE segment for customer
service excellence, voted on by industry decision makers. The
LXE segment also has been awarded Best Channel
Vendor by Business Solutions magazine.
Diverse
Global Customer Base
We offer multiple wireless product lines to a diverse customer
base through facilities in 13 countries. Sales to no individual
customer exceeded more than 10% of our annual net sales during
any of the years ended December 31, 2008 or 2007. Sales to
one of our customers during the year ended December 31,
2009 exceeded 10% of our annual net sales, with sales of
$37.9 million, mainly due to a significant order received
by our D&S segment that is not expected to reoccur. Sales
to various customers for U.S. government end use accounted
for 29.7% of our net sales in 2009, 26.3% of our net sales in
2008 and 24.6% of our net sales for 2007. Additionally, 29.8%,
39.6% and 38.8% of our net sales for 2009, 2008 and 2007,
respectively, were derived from sales to customers outside the
U.S. We believe our geographically diverse customer base
and broad range of products provide us ample opportunity to grow
our business and help mitigate the effects of a downturn in any
one of our markets.
Strong
Manufacturing Capabilities
We manufacture certain of our products in our manufacturing
facilities, and for others, we source components from foreign
and domestic suppliers, and primarily perform final assembly and
test functions. For our defense applications, we have developed
our own highly specialized domestic manufacturing capabilities.
Through our continuous efforts to improve our manufacturing and
sourcing processes, we have dramatically reduced the time
required for us to ship products in several of the commercial
markets in which a short delivery cycle for custom-manufactured
products is an important competitive factor. We have also
achieved major reductions in rework on highly engineered space
and defense products. These efforts have enhanced our ability to
compete for new business and improved our profitability.
5 of 105
Table of Contents
Our
Markets and Products
Our business is the design, manufacture and sale of advanced
wireless communications products. We participate in selected
markets within the broad wireless communications industry that
typically require a high level of technical expertise,
innovative product development and, in many cases, specialized
manufacturing capabilities. Although our businesses share a
common heritage and focus on wireless communications, they
address a variety of markets with different technical and
manufacturing requirements, distribution channels, customers and
purchasing processes.
Accordingly, through 2009, we were organized into three
separately managed reporting segments, as follows:
Segment | Primary Operations | Percentage of Net Sales | ||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||
Communications & Tracking |
Satellite communications antennas, terminals and networking equipment for aircraft, rugged data storage, data recording/replay, end-to-end tracking and mapping equipment and services, and ground-based vehicles and satellite ground stations for search and rescue operations (majority commercial) | 44.2 | 33.6 | 31.3 | ||||||||||||||
LXE | Rugged mobile terminals and related equipment for wireless data collection (predominantly commercial) | 30.4 | 43.5 | 48.2 | ||||||||||||||
Defense & Space | Engineered hardware for satellites, defense and electronics applications (primarily defense) | 25.4 | 22.9 | 20.5 | ||||||||||||||
Communications &
Tracking
The Communications & Tracking segment was previously
reported as the Satellite Communications segment. The
Communications & Tracking segment includes our SATCOM
business, and the Sky Connect business acquired in August 2008,
and the Formation and Satamatics businesses that were acquired
in January and February 2009, respectively. In early 2010, we
realigned our business segments for strategic growth and
replaced Communications & Tracking with two new
segments, Aviation and Global Tracking. A summary of the
products and services offered by this segment, their key
benefits and features, as well as the markets and customers that
it serves are summarized by the new Aviation and Global Tracking
businesses as follows:
New Segment | Primary Operations | Percentage of Net Sales | ||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||
Aviation | Connectivity and in-cabin infrastructure equipment for a broad range of commercial and military aircraft, including satellite communications antennas, terminals and networking equipment, rugged data storage and data recording/replay | 34.5 | 27.7 | 24.6 | ||||||||||||||
Global Tracking
|
End-to-end tracking and mapping equipment and services for security, land tracking, and maritime markets, as well as, satellite ground stations for search and rescue operations | 9.7 | 5.9 | 6.7 | ||||||||||||||
Aviation
The Aviation segment includes SATCOMs aeronautical
business, and the Sky Connect and Formation businesses, which
were acquired in August 2008 and January 2009, respectively.
Aviation designs and develops satellite-based communications
solutions through a broad array of terminals and antennas for
the aeronautical market. The segment also builds in-cabin
connection devices and computers to process data on board
aircraft, including rugged data storage, airborne connectivity,
air-to-ground
connectivity, and data recording and replay equipment.
Aviations products enable customers in aircraft and other
mobile platforms to communicate over satellite networks at a
variety of data speeds. Most of its growth and major product
expansions in these markets have occurred since 2004. Its
equipment is used to safeguard and monitor cargo, personnel and
fleet assets in some of the harshest environments of the world
and for emergency management services.
6 of 105
Table of Contents
The demand for mobile communications has driven the rise of
aero-connectivity system use on business and commercial jets
around the world. EMS continues to lead the industry as a key
supplier of Inmarsat Swift64 and SwiftBroadband products that
support airborne communications at DSL speeds, as well as
Iridium-based messaging and tracking for airplanes and
helicopters. Aviations high-speed data terminals, antennas
and networking products are designed for use in the aeronautical
market. We believe that we are the top supplier of Swift64
high-speed data communications equipment, garnering more than an
estimated 75% of the high-speed data Satcom market for military
aircraft. Aviations eNfusion
Broadbandtm
line of aeronautical products enable voice,
e-mail,
videoconferencing and internet capabilities on a broad variety
of aircraft. Aviation directly sells equipment and technology
under the Forté, eNfusion and Fleet brand names, and also
sells indirectly as a supplier to leading airframe and avionics
manufacturers and other aviation players. Aviation customers
include Fortune 100 companies and the
U.S. Governments VIP Fleet, as well as the United
States leading airborne emergency medical service
transport, air taxi, airborne firefighting and offshore oil
transport companies.
In the air transport market, Aviation delivers its equipment and
technology through partners such as Panasonic Avionics, Aircell,
OnAir, Aeromobile Row44, and LiveTV. Aviations equipment
and technology enables in-flight connectivity on more than 40
airlines, including Lufthansa, Delta Air Lines, Airtran,
Continental, Emirates, Air France, Ryanair, and TAP, to name a
few. In the aviation market, Aviations terminals, antennas
and networking equipment provide a globally capable solution for
a broad variety of aircraft. One variant provides office-like
communications capabilities to the cabin while providing
critical safety communications capabilities to the cockpit.
Aviations
CNX®
Cabin Gateway family of networking products is widely used for
airborne networking equipment, and variations of this product
line offer compression and acceleration of data, which
significantly reduces the users airtime costs.
Aviations antennas are mounted on the fuselage or on the
tail to accommodate a variety of aircraft, including the
Bombardier Global Express, Dassault Falcon 7X, Gulfstream G550,
and Airbus A320. More than 1,300 of Aviations antennas
have been installed on more than 35 different types of aircraft.
Aviation also sells an antenna specifically for military use.
This antenna is mounted in the forward hatch of a C-130 military
cargo aircraft and, when connected to the transceiver, provides
instant communications that can be rolled on and off the
aircraft.
Aviation markets and sells most of its hardware through
distributor channels. Third-party distributors sell directly to
end users, such as the aircraft manufacturers. One
of Aviations most significant distribution
7 of 105
Table of Contents
channels relates to technology components or avionics terminal
systems sold through leading airframe and avionics
manufacturers, including Boeing, Airbus, Honeywell, Rockwell
Collins, and Thales.
Products/Services | Key Features/Benefits | Selected Applications | Customers | ||||||
Aeronautical Antennas
|
Mechanically and electronically-steered antennas for two-way communications connected to an aircrafts Satcom, steerable antenna systems for live television from broadcast satellites | Corporate aircraft, government and military aircraft, commercial airlines | Gulfstream, Bombardier, Honeywell, Dassault, Thales, L3 Communications, Boeing, Panasonic Avionics | ||||||
Aeronautical Tracking
|
Lightweight, autonomous tracking terminals provide GPS-based location and status reporting from anywhere on or in-flight over the globe. | Off-shore Oil, Air Medical Transport, Fire Patrol and Suppression, Paramilitary Drug Interdiction, Pipeline Patrol | Bristow, Air Methods, Chevron, U.S. Forest Service, U.S. State Department, Military | ||||||
Aeronautical Telephony and E-mail Services |
Narrowband telephony provides in-flight voice and e-mail access to cabin telephones and cockpit interface devices | Corporate aircraft, Commercial airlines, helicopters, general aviation | El Al, Qantas, Pfizer, ALCOA, Merrill Lynch, Omniflight | ||||||
Aeronautical Terminals |
Provide aircraft operators with two-way high-speed data (broadband) capability | Corporate aircraft, government and military aircraft, commercial airlines | Corporate aircraft modification centers, U.S. Department of Defense, Northrop Grumman, L3 Communications, Boeing, Rockwell Collins, Honeywell, Thales | ||||||
Avionics Data Networking Products |
Data servers, routers, switches, and storage devices to manage Internet, entertainment and operational data aboard aircraft | Corporate aircraft, government and military aircraft, commercial airlines | Airbus, Boeing, Rockwell Collins, AirCell, Row44, Northrop Grumman, L3 | ||||||
Global
Tracking
Global Tracking includes the asset tracking and emergency
management operations of our SATCOM business, and the Satamatics
business which was acquired in February 2009. Global Tracking
provides the capability to track, monitor and control remote
assets, regardless of whether they are fixed, semi-fixed or
mobile. One of only two IsatM2M providers in the world and
backed by a dedicated global network, the Global Tracking
segment has in excess of 150,000 terminals delivered to date.
Its equipment is used to safeguard and monitor cargo, personnel
and fleet assets in some of the harshest environments of the
world. Additionally, SATCOM is the leading provider of ground
segment equipment for the Cospas-Sarsat search and rescue system
and incident management software for rescue coordination
worldwide with more than 75% market share. Global Tracking
revenues are derived from both product sales and recurring
airtime and support services. In 2009, more than half of this
segments revenue came from the services side of the
business.
Tracking terminals are sold in three vertical
markets security, land tracking and maritime. The
segment also offers
end-to-end
solutions in the various markets with the inclusion of its
applications, systems integration, including tracking and
mapping,
multi-network
communication gateways and communication devices. These products
and services are sold to military for Blue Force Tracking
systems used by NATO, and in the transport trucking market
predominantly in the Americas, Africa and the Middle East. It
provides critical logistics support to coalition forces in
Afghanistan and Iraq.
8 of 105
Table of Contents
Global Tracking markets and sells most of its equipment and
services through its value-added-reseller network, and directly
markets its emergency management products to end-user
organizations in governments worldwide.
Products/Services | Key Features/Benefits | Selected Applications | Customers | ||||||
Very Low Data Rate:
|
|||||||||
SAT202
|
Fourth-generation IsatM2M terminal, smaller, lighter, engineered
in-house Near global operation |
Tracking, M2M communications, fleet management, rapid alerting, ship ID and position | Maritime commercial and private trucking fleets, tuna fishing fleets, logistics security | ||||||
Osprey Personnel Tracking Terminal |
Cost effective messaging for small data payloads | Lone worker, Corporate Duty of Care, Personnel Security | NGOs, Private Security Firms, Risk Management, Government, Military | ||||||
Low Data Rate:
|
|||||||||
Satellite Packet Data Terminals |
Iridium, Skyterra, and Inmarsat-based, two-way messaging, micro telemetry, geo fencing, security/panic alarm,
Both regional and global services available |
Transportation, Public Safety, Workforce Automation, Oil and Gas Remote Monitoring and Control, Force Tracking | NGOs, Long-Haul Trucking Companies, NATO, EU, U.S. Department of Defense | ||||||
Emergency Management Products |
Hardware and software for search and rescue (SAR) systems | Rescue and Mission Control Centers | Over 18 Governments Worldwide | ||||||
Services and Support
|
24/7 global operations in 5 countries, lifecycle support maintenance, in-field subject-matter consulting expertise, network and airtime services | ||||||||
LXE
LXEs rugged terminals and wireless wide-area networks
(WWAN) have been installed at more than 7,500 sites
worldwide, including the facilities of many Fortune
500 companies and some of the worlds largest
materials-handling installations. In 2009, 2008 and 2007,
approximately 51%, 56% and 55% of LXEs net sales were
generated outside the U.S., respectively.
A typical LXE system consists of mobile terminals that
incorporate WLAN radios, automatic-identification capabilities,
network access points that provide a radio link to the wired
network and associated host computers, and software that manages
and facilitates the communications process. LXEs systems
generally incorporate barcode scanning or other
automatic-identification capabilities, and are primarily based
on the 802.11 open system standards. Uses of these systems
include employment of real-time data communications in directing
and tracking inventory movement in a large warehouse,
manufacturing facility, or container yard.
In 2009, LXE began placing greater emphasis on markets outside
these core warehousing, manufacturing and intermodal markets.
The introduction of the ultra-rugged MX9 handheld computer,
which supports WWAN in a terrestrial cellular network, and the
addition of WWAN support in the VX8 and VX9 vehicle-mount
computers, are the first steps to migrate the product line in
this direction. These products allow LXE to sell into a wider
range of potential markets including field service,
transportation, forestry, agriculture, mining, utilities and
public safety. LXE also began shipping a custom version of the
MX9 to Itron, the leading worldwide provider of utility meters
and the systems used to read them, for use in their meter
reading applications. This gives LXE a significant position in
the tough outdoor data collection application. LXE products
normally are used in conjunction with IT infrastructure products
provided by others, such as host computer systems and
inventory-management or other applications software.
LXE generally designs and manufactures the mobile computers it
sells for use in wireless systems. In addition, LXE sells
certain handheld models that it jointly designed with original
equipment manufacturers. LXEs computers are grouped into
three product families: handheld units, hands-free units that
can be worn on the
9 of 105
Table of Contents
wrist or hip and operated using a keypad or voice and units that
are mounted on a forklift, truck or other vehicle. LXE has also
developed hybrid units, which easily detach from
vehicle-mounting hardware to operate as a handheld device. All
are ruggedized to withstand harsh conditions in warehouses, port
facilities and outdoor environments. The latest generation of
mobile computers has significantly more computing power than
previous models, supports the
Windows®
and Windows
CE®
operating systems, and offers improved power-management features
and superior ergonomics. Radio access points and other
infrastructure products are generally acquired from third
parties for resale and installation by LXE. With the acquisition
of Akerstroms Trux AB, LXE has expanded its product offerings to
include mobile computers for warehouse and production
environments that support the Windows
XP®
operating systems.
Over the past several years, LXE has made a substantial
commitment to the use of alternative auto-identification
technologies, including imaging, voice recognition, and mobile
RFID, in the execution of distribution tasks. Innovations
include implementation of voice-directed applications on
LXEs entire Windows CE product line through the use of
sophisticated audio controls and noise reduction techniques,
development of a standards-based wearable computer to enable
hands-free picking and other warehousing functions, and
integration of
Bluetooth®
technology in demanding industrial environments.
In conjunction with several supply chain execution software
partners, LXE has also developed concepts for the concurrent use
of these technologies, which have the potential to make
warehouse activities much more efficient. LXE has been
recognized by leading industry analysts for its thought
leadership in distribution operations.
Equipment is marketed directly to end-users and through
distributors, and integrators (such as value-added resellers who
provide inventory management software) that incorporate it with
their products and services for sale and delivery to end users.
Products/Services | Key Features/Benefits | Selected Applications | Customers | ||||||
Handheld Terminals
|
Small, lightweight and rugged, providing true mobility | Warehousing, Logistics | |||||||
Vehicle-Mounted Terminals | Heavier-duty design for use on forklifts, cranes, and other material handling vehicles | Consumer product manufacturers, Third-party logistics providers, Retailers, | |||||||
Wearable Terminals
|
Very small and lightweight with ergonomic schemes for mounting on operators | Warehouse order picking | Container port operators | ||||||
Wireless Networks
|
Communications link between mobile computers and local network, primarily based on 802.11 standard | ||||||||
Host connectivity software; accessory products; maintenance services | Industry-standard connectivity to various host computers; enhanced system functionality; extended service on either a contract or pay-as-you-go basis | ||||||||
Defense &
Space
D&S principally develops advanced microwave-based RF
systems for a broad range of military and defense electronics
applications. D&S provides military and defense customers
with critical RF systems and subsystems for terrestrial,
airborne and space-based communication; radar and electronic
warfare systems; and advanced surveillance, electronic
counter-measure and secure communications capabilities.
D&S products are also used in a number of commercial and
civil ventures. D&S products are sold primarily to space
and defense prime contractors or commercial communications
systems integrators rather than to end-users, and are deployed
on airborne, naval, terrestrial and space platforms.
Defense markets are vital to D&S. Secure communications as
well as intelligence and surveillance systems are being
developed or significantly upgraded as a part of the
U.S. Department of Defenses initiatives to
10 of 105
Table of Contents
transform military communications and to achieve
information dominance over adversaries. D&S
also performs research and development services directly for the
U.S. Department of Defense. Our D&S facilities meet
requirements for performing on classified military programs,
including special access, military programs, and over 250 of our
personnel hold Department of Defense security clearances.
Products/Services | Key Features/Benefits | Selected Applications | Programs | ||||||
Communications- On-The-Move Data Link and Satcom Antenna Systems |
Low weight, low profile, low radar signature (stealth), high performance and agile beam antennas, RF electronics, and positioning systems | Military tactical communications (airborne, ship, ground mobile, and soldier) | F-22 Intra-Flight Data Link, High Altitude Long Endurance (HALE) Datalink, Hawklink MH-60 Datalink, WIN-T Army Mobile DataLinks, Navy Airborne Data Links, Panasonic. | ||||||
Military and commercial SATCOM communications (airborne, ground mobile, and soldier) | Manpack Portable GBS Suite | ||||||||
Radar Microwave Systems |
Low loss, high power ferrite components and electronic systems, and RF front end RADAR panels and conformal millimeter wave radar antenna systems that allow for co-boresighting of laser and EO/IR for tri-mode missile seekers | Defense electronic surveillance and countermeasure and Precision strike air-to-ground missiles | EW - F-16, AQL-211 Radar - Phalanx, JSTARS, TPQ-37 and Joint Air to Ground Missile (JAGM), Small Diameter Bomb II | ||||||
Space Hardware Systems |
Microwave subsystems capable of high-frequency, low noise, high-power and fast switching, facilitating jam-resistant, secure mobile communications | High-rate commercial and secure military communications | Wideband Global SATCOM (WGS), Advanced EHF (AEHF), National Security Programs, W2A, Skynet 5, Hylas 2, Yahsat | ||||||
Additional information regarding our revenues, earnings and
total assets for each of our reportable operating segments, and
the revenues and assets for each major geographic area for 2009,
2008 and 2007, is included in Note 5 of our consolidated
financial statements included immediately following the
signature page to this Annual Report on
Form 10-K.
Acquisitions
Completed in 2009
Formation
We acquired Formation, Inc. (Formation) of
Moorestown, NJ on January 9, 2009. Formation has
approximately 110 employees and designs and manufactures
equipment and software products and provides related engineering
services for the defense, aviation, data communications and
transportation industries. Its products include rugged hard
disks, advanced integrated recorders, avionics-class servers,
and rugged wired and wireless networks. Formations
fastest-growing products are its rugged servers and cabin
Wireless Access Points (WAPs), which enable
aircraft broadband systems to extend connectivity to laptops and
personal digital assistants (PDAs).
Formations equipment supports in-flight communications
regardless of whether the connectivity is through terrestrial or
satellite-based networks. Formation is an approved direct
supplier to Airbus and also is a major supplier to Rockwell
Collins, Aircell and Panasonic. Formation and other EMS
businesses have common supplier relationships and complementary
customer bases in the avionics, defense and transportation
markets.
Acquiring Formation signalled our continued investment in its
aero-connectivity strategy to become a more comprehensive
solutions provider. Our goal is to meet the growing demand for
aeronautical communications from airlines and business aircraft
owners, as well as governments. With Formation, we cover the
spectrum of air-connectivity solutions, delivering the platforms
and systems that airlines can use across multiple satellite
platforms. Since its acquisition, Formations financial
results have been included in our Communications &
Tracking segment. In 2010, its financial results will be
included in our newly formed Aviation segment.
11 of 105
Table of Contents
Satamatics
Satamatics Global Limited (Satamatics) was acquired
on February 13, 2009. Satamatics has approximately
50 employees and is a global telematics company, providing
customized,
end-to-end
tracking and monitoring solutions that will work anywhere in the
world. Operating with Inmarsats IsatM2M satellite service,
Satamatics enables land transport, security, maritime and oil
and gas organizations to locate, track and communicate with
mobile assets, to safeguard fleets, cargo and personnel, and to
monitor fixed assets in the worlds most hostile and remote
areas. Founded in 2001, Satamatics has an extensive worldwide
distribution network of value-added resellers, but also supplies
direct to end users complete tracking and monitoring solutions
(equipment, airtime and mapping) for land transport, oil and
gas, and maritime industries.
The Satamatics acquisition complements our existing Iridium- and
Inmarsat-based tracking solutions. Acquiring Satamatics extended
our satellite capabilities into the growing M2M market using
low-cost satellite data terminals, and further strengthened EMS
as a market leader in satellite-based applications for tracking
people and assets worldwide. We anticipate significant synergies
with our current satellite-based helicopter and military-vehicle
tracking businesses. In particular, we expect promising growth
for security and logistics applications in the road transport
market, particularly in South America, Africa and the Middle
East. Since its acquisition, Satamatics financial results
have been included in our Communications & Tracking
segment. In 2010, its financial results will be included in our
newly formed Global Tracking segment.
With these acquisitions, we believe we have the capabilities to
adapt products and technologies from one aero-connectivity
application to another, enabling us to get to market faster and
more profitably than companies entering the market today.
Acquisitions
Completed in 2008
Akerstroms
Trux
We acquired Akerstroms Trux AB (Trux) of Bjorbo,
Sweden in February 2008. At that time, Trux had approximately
20 employees. Trux was an international company with focus
on development, sales and marketing of robust and reliable
vehicle-mount computing solutions for warehousing and production
environments in the Nordic region. The acquisition of Trux
brought us a new, market-ready Windows XP-based product line
targeted at customers running advanced wireless applications in
demanding warehousing and production environments. Since its
acquisition, Truxs product line, manufacturing process,
employees and financial results have been integrated into our
LXE operating segment.
Sky
Connect
We acquired Sky Connect, LLC (Sky Connect) of Takoma
Park, MD in August 2008. Sky Connect has approximately
20 employees and offers a range of satellite-based
tracking, text messaging, and telephone systems for airborne,
ground-based, and marine applications in both the commercial and
government markets. Sky Connect provides automated flight
tracking with true worldwide coverage. Aircraft phone systems
support headset interfaces plus corded or cordless handsets. Sky
Connect uses the Iridium satellite network for complete earth
coverage and mission effectiveness.
Sky Connects innovative and flexible offering provides
100 percent global coverage on the Iridium satellite
network and continues to lead the industry in the development of
integrated
Machine-to-Machine
(M2M) and voice applications. Iridium is the
platform of choice for tracking of aviation, marine and
land-mobile assets on the move, with over 50,000 M2M data units
deployed.
Acquiring Sky Connect complemented our aero-connectivity
strategy by adding Iridium hardware and a services business
targeting the growing general aviation market. In addition, Sky
Connects efforts with Qantas, Air New Zealand and El Al
paralleled our similar expansion into the air transport market.
Since its acquisition, Sky Connects financial results have
been included in our Communications & Tracking
segment. In 2010, its financial results will be included in our
newly formed Aviation segment.
12 of 105
Table of Contents
Sales and
Marketing
Communications & Tracking markets its products and
services to a variety of customers including major airframe
manufacturers, avionics original equipment manufacturers
(OEM), aircraft operators and owners. It provides
products and solutions through key integrators, a network of
completion centers that install aeronautical products and
value-added resellers.
LXE markets its products and services through distributors,
integrators (such as value-added resellers who provide inventory
management software) that incorporate it with their products and
services for sale and delivery to end users and directly to end
users. LXE also markets its products and services across North
America and through eight international subsidiaries (seven in
Europe) through a direct sales force, all assisted by inside
sales and sales support staff, and through independent marketing
representatives.
Our D&S unit produces highly technical products that are
often co-engineered with the customer. For these products,
internal personnel with strong engineering backgrounds conduct
significant sales efforts. D&S also utilizes independent
marketing representatives, both in the U.S. and
internationally, selected for their knowledge of local markets
and their ability to provide technical support and on-going,
direct contact with current and potential customers. The
development of major business opportunities for D&S often
involves significant
bid-and-proposal
effort. This work often requires complex pre-award engineering
to determine the technical feasibility and cost-effectiveness of
various design approaches.
The markets for space and defense electronics comprise a
relatively small number of large customers, which are typically
first or second-tier contractors. Our D&S marketing efforts
rely on on-going communications with this base of potential
customers, to determine customers future needs and to
inform customers of our capabilities and recent developments.
Technical support and service after the sale are also important
factors that affect our ability to maintain strong relationships
and generate additional sales.
Research,
Development and Intellectual Property
We spent $18.7 million, $20.1 million and
$18.8 million in 2009, 2008 and 2007, respectively, on
company-sponsored research and development. In addition, our
work under government and commercial contracts for new wireless
communications hardware creates new intellectual property that
we own, which often leads to innovations that benefit us on
future contracts and product development efforts; most of the
costs for this work are included with the overall manufacturing
costs for specific orders.
We use both patents and trade-secret procedures to protect our
technology and product development efforts. With respect to
patents, as of December 31, 2009, we owned 62 currently
active U.S. patents, expiring 2011 through 2027, and 28
foreign patents expiring 2012 through 2022. We do not expect
that any impending patent expirations to have a material effect
on our business. In addition, as of December 31, 2009, we
had pending applications for approximately 18 U.S. and 18
foreign patents, covering various technology improvements and
other current or potential products. While we expect to continue
to expand our patent activities, we also believe that many of
our processes and much of our know-how are more efficiently and
effectively protected as trade secrets, and we seek to maintain
that protection through the use of employee and third-party
non-disclosure agreements, physical controls and
need-to-know
restrictions.
In some cases, we rely on licenses from third parties under
patent rights that could otherwise restrict our ability to
market significant products. The principal instances of such
licenses involve the integration of bar code scanners in certain
LXE terminals under license from Motorola, and the development
and sale of laser and imager-based products by LXE under license
from Intermec Corporation (Intermec). In each case,
the licenses are non-exclusive, and are noncancelable for the
lives of the relevant patents except upon default by us.
Backlog
The backlog of firm orders related to continuing operations as
of December 31, 2009, was $178.2 million, compared
with $185.9 million as of December 31, 2008. We had
$155.7 million of funded backlog and
13 of 105
Table of Contents
$22.5 million of unfunded backlog as of December 31,
2009, as compared with $137.5 million of funded backlog and
$48.4 million of unfunded backlog as of December 31,
2008.
Backlog is very important for our D&S segment due to the
long delivery cycles for its projects. The backlog for D&S
as of December 31, 2009 was $89.6 million compared
with $114.9 million as of December 31, 2008. Many
customers of our LXE segment typically require short delivery
cycles. As a result, LXE usually converts orders into revenues
within a few weeks, and it generally does not build up a
significant order backlog that extends substantially beyond one
fiscal quarter except for annual or multi-year maintenance
service agreements. Our Communications & Tracking
segment has projects with both short delivery cycles, and
delivery cycles that extend beyond the next twelve months. Of
the orders in backlog as of December 31, 2009, the
following are expected to be filled in 2010:
Communications & Tracking 70%;
LXE 80%; and D&S 50%. LXEs
backlog as of December 31, 2009 was nearly double that of
December 31, 2008 mainly due to a shortage of certain
component parts from LXEs suppliers which caused a delay
in the fulfillment of LXEs orders received late in 2009.
LXE is working closely with suppliers to identify and implement
ways to resolve the sourcing issues. LXE is expecting to
increase critical parts inventories in 2010 to avoid further
delays.
Manufacturing
We have manufacturing operations in five facilities; four in the
U.S., and one in Canada. We manufacture certain of our products
in our manufacturing facilities, and for others, we source
components from foreign and domestic suppliers, and primarily
perform final assembly and test functions. For our defense
applications, we perform extensive manufacturing operations,
including the production of advanced integrated electronic
circuitry, the formulation and fabrication of unique
ferrite-based ceramic materials, and precision machining. Our
manufacturing strategy is:
| to perform those functions for which we have special capabilities and that are most critical to quality and timely performance; | |
| to equip ourselves with the modern tools we need to perform our manufacturing functions efficiently; | |
| to use outside sources for functions requiring special skills that we do not have, or that do not offer attractive potential returns, or to perform standard tasks at a competitive price leaving our internal resources to focus on providing quicker response for tasks that require special needs and skills; and |
| to further improve the cost-effectiveness and time-to-market of our manufacturing operations. |
All of our production activities have been ISO 9001:2000
certified, and are AS9100 certified where applicable. Our
facilities, equipment and processes enable us to meet all
quality and process requirements applicable to our products
under demanding military and space hardware standards, and we
are also certified by the U.S. Federal Aviation
Administration and Transport Canada to manufacture equipment for
installation on commercial aircraft.
Materials
We believe we have adequate sources for the supply of raw
materials and components for our manufacturing and service
needs. Electronic components and other raw materials used in the
manufacture of our products are generally available from several
suppliers. However, LXE systems include barcode scanners in
almost all orders, and a significant number of the scanners are
purchased from an LXE competitor, Motorola. There are
alternative suppliers that manufacture and sell barcode
scanners, either independently or under license agreements with
Motorola. We believe that many of LXEs competitors also
rely on scanning equipment purchased from or licensed by
Motorola. In addition, LXE has a license agreement with Motorola
that allows us to utilize Motorolas patented integrated
scanning technology in certain products.
Our advanced technology products often require sophisticated
subsystems supplied or cooperatively developed by third parties
having specialized expertise, production skills and economies of
scale. Important examples include critical specialized
components and subsystems required for successful completion of
certain D&S
14 of 105
Table of Contents
programs, and application-specific integrated circuitry and
computers incorporated into LXE products. In such cases, the
performance, reliability and timely delivery of our products can
be heavily dependent on the effectiveness of those third parties.
Materials used in D&S products consist of magnetic
microwave ferrites, metals such as aluminum and brass, permanent
magnet materials and electronic components. Most of the raw
materials for the formulation of magnetic microwave ferrite
materials are purchased from two suppliers, while permanent
magnet materials and space-qualified electronic components are
purchased from a limited number of suppliers. Other electronic
components and metals are available from a larger number of
suppliers and manufacturers.
We believe that the loss of any supplier or subassembly
manufacturer would not have a material adverse effect on our
business as a whole. Generally, shortages of supplies and delays
in the receipt of necessary components have not had a material
adverse effect on shipments of our established products,
although in 2009 we did encounter delays in supplies of certain
component parts needed to fill pending orders at LXE, a
situation that we believe reflected temporary capacity
reductions in response to the slow economy rather than a
longer-term capacity reductions. In addition, from time to time
the rollout of new standard products and our performance on
certain programs at our D&S and Communications &
Tracking segments have been adversely affected by quality and
scheduling problems with developers/suppliers of critical
subsystems. In some cases, these problems have resulted in
significant additional costs to us and in difficulties with our
customers. Such problems could have a material adverse effect on
us if they recur in the future.
Competition
We believe that each of our reportable segments is an important
supplier in our principal markets. However, these markets are
highly competitive, and some of our competitors have substantial
resources that exceed ours. We also compete against smaller,
specialized firms.
In Communications & Trackings markets, our
competitors include Thrane & Thrane, Chelton, Ltd.,
Tecom, Qualcomm, and VP Miltope. LXEs principal
competitors include Intermec, Motorola, and Psion Teklogix.
D&S competes with specialized divisions of large
U.S. industrial concerns, such as Boeing, Lockheed Martin,
L3 Communications, DRS Technologies, Inc., Northrop Grumman,
Harris Corporation and BAE, as well as with companies outside
the U.S., such as COMDEV. Some of these companies, as well as
others, are both potential competitors for certain contracts and
potential customers on other contracts. In addition, D&S
occasionally experiences competition from existing or potential
customers when these customers choose to develop and manufacture
products internally rather than purchasing them from us.
We believe that the key competitive factors in all of our
reportable segments are product performance (including quality
and reliability), technical expertise and on-going support to
customers,
time-to-market,
time-to-ship
and adherence to delivery schedules and price.
Employees
As of December 31, 2009, we had approximately
1,300 employees. Approximately 55% of our personnel are
directly involved in engineering or manufacturing activities. No
employees are represented by a labor union. Management believes
that our relationship with our employees is good.
Regulatory
Matters
Certain of our products are subject to regulation by various
agencies in the U.S. and abroad. Our airborne satellite
communications products used in civil aviation applications are
subject to continued compliance with applicable regulatory
requirements. Our airborne products sold in the U.S. are
required to comply with Federal Aviation Administration
regulations, and similar agencies in other countries in which
those systems are sold that govern production and quality
systems, airworthiness and installation approvals, repair
procedures and continuing operational safety. Some of our
products, such as radio frequency transmitters and receivers,
must also comply with U.S. Federal Communications
Commission regulations governing authorization and operational
approval of telecommunications equipment.
15 of 105
Table of Contents
Our products used in defense applications are subject to a
variety of federal regulations. Our contract costs and
accounting practices are audited periodically by the Defense
Contract Audit Agency. Audits and investigations are conducted
from time to time to determine if the performance and
administration of our U.S. Government contracts are
compliant with applicable contractual terms, including federal
procurement regulations and statutes which include, in many
cases, security requirements related to classified military
programs.
Our products for use in defense applications and on satellites
are subject to the U.S. State Departments
International Traffic in Arms Regulations, and as a result we
must obtain licenses in order to export these products or to
disclose their non-public design features to persons who are not
citizens or permanent residents of the United States. We have
trained internal personnel to monitor compliance, to educate our
personnel on the restrictions and procedures and to process
license applications. The licensing process occasionally
prevents us from working with suppliers outside the U.S. on
European or Asian space programs, and it also affects the extent
to which we can involve our engineers from foreign locations on
D&S programs, or use D&S engineers and capabilities to
assist our
non-U.S. operations
on their products or programs.
Greenhouse gas emissions have increasingly become the subject of
a large amount of international, national, regional, state and
local attention. At this time, we do not believe that existing
or pending climate change legislation, regulation, or
international treaties or accords are reasonably likely to have
a material effect in the foreseeable future on our business or
markets that we serve or on our results of operations, capital
expenditures or financial position. However, the enactment of
cap-and-trade
proposals would likely increase the cost of energy, including
purchases of electricity, and of certain raw materials that we
use. In addition, future environmental regulatory developments
related to climate change, whether pursuant to future treaty
obligations or statutory or regulatory changes, are possible,
and could increase our operating, manufacturing and delivery
costs.
We believe that our products and business operations are in
material compliance with current standards and regulations.
However, governmental standards and regulations may affect the
design, cost and schedule for new products. In addition, future
regulatory changes could require modifications in order to
continue to market certain of our products.
AVAILABLE
INFORMATION
EMS Technologies, Inc. makes available free of charge, on or
through its website at www.ems-t.com, its annual,
quarterly and current reports, and any amendments to those
reports, as soon as reasonably practicable after electronically
filing such reports with the Securities and Exchange Commission.
Information contained on our website is not part of this report.
16 of 105
Table of Contents
EXECUTIVE
OFFICERS OF THE REGISTRANT
Information concerning the executive officers of the Company is
set forth below:
John B. Mowell, age 75, was appointed Executive
Director of the Company in December 2009. He has been serving as
the Chairman of the Board of the Company since 2001.
Mr. Mowell is President of Mowell Financial Group, Inc.,
Tallahassee, FL, an investment counseling firm, and Director and
Chairman of the Board of Entegrion Inc., a privately held
medical technologies company. He was formerly Chairman of the
Board
(1981-1990)
and Chief Executive Officer
(1985-1989)
for Reflectone, Inc., Tampa, FL, a manufacturer of aircraft
flight simulators and training systems for commercial and
military markets. Mr. Mowell is past Chairman of the
Florida State Board of Administrations Investment Advisory
Council for the $100 billion Florida state teachers
retirement fund; and Founding President, past Chairman and
Chairman Emeritus of The Economic Club of Florida.
Neilson A. Mackay, age 68, became President and
Chief Executive Officer of the Company in November 2009. He
served as Chief Operating Officer and Executive Vice President
from July 2008, and as Executive Vice President - Strategy
from December 2007. From March 2007 until December 2007, he held
the positions of Vice President - Corporate Development and
President of SATCOM, and from 2001 to 2007, he served as Senior
Vice President and General Manager of SATCOM. He joined the
Company in January 1993, when the Company acquired an Ottawa,
Ontario-based space satellite communications business of which
he served as President.
Gary B. Shell, age 55, was appointed Senior
Vice President, Chief Financial Officer and Treasurer of the
Company in May 2008. He previously served as Vice President,
Finance from November 2007 and as Vice President, Corporate
Finance
(2004-2007),
and in those capacities was the Companys chief accounting
officer. He had served as Director, Corporate Finance from 1998
to 2004. He joined the Company in 1983 as Corporate Financial
Analyst. Mr. Shell is a certified public accountant, having
formerly served on the audit staff of KPMG LLP.
Timothy C. Reis, age 52, became Vice
President and General Counsel of the Company in August 2005. He
is responsible for the legal affairs of the Company and its
operating subsidiaries. Mr. Reis first joined the Company
in 2001 as Assistant General Counsel. Previously, he was engaged
in the private practice of law with King & Spalding
and as in-house counsel for United Parcel Service and for
Manufacturers Hanover, a New York bank, focusing his
practice on intellectual property and technology transactions.
David M. Sheffield, age 48, became Vice President,
Finance and Chief Accounting Officer of the Company in August
2008. From 2005 until 2008, Mr. Sheffield served as Vice
President, Finance and Accounting, for Allied Systems Holdings,
Inc., a vehicle-hauling company providing a range of logistics
and other support services to the automotive industry. From 2003
to 2005, he served as Vice President and Chief Accounting
Officer for Matria Healthcare, Inc. Mr. Sheffield, a
certified public accountant, also held senior accounting and
finance positions with Rubbermaid, Gulfstream Aerospace and
Safety-Kleen, after beginning his career with
Deloitte & Touche LLP.
R. Nim Evatt, age 68, was appointed Vice
President and General Manager of the Companys newly formed
Aviation division in January 2010. He joined the Company in
January 2009 when the Company acquired Formation, Inc. of which
he had served as President and Chief Executive Officer since
1998. From 1991 to 1998 he was President and Chief Executive
Officer of Liberty Technologies, a provider of
condition-monitoring products and services for energy
industries, and he previously led General Electric Power
Systems installation and service engineering business for
Europe, Africa and the Middle East.
Stephen M. Newell, age 42, was appointed
Vice President and General Manager of the Companys LXE
division in April 2009. He joined the Companys SATCOM
group in January 2003, and since then has been given assignments
of increasing responsibilities, including appointment as
Director, Military Aeronautical Sales in 2004, Vice President,
Military Sales in May 2006, and Vice President, Sales from May
2006 to March 2007 at SATCOM. Prior to joining EMS,
Mr. Newell was Manager of Avionics Systems at AIRIA, Inc.
from
17 of 105
Table of Contents
November 2000 to January 2003, where he was responsible for the
development of the Companys Inmarsat-based aeronautical
television system.
Adoption
of Shareholder Rights Plan
On July 27, 2009, our Board of Directors adopted a
Shareholder Rights Plan (the Plan) to replace a
similar plan adopted in 1999 that expired on August 6,
2009. Under the Plan, a dividend distribution of one right for
each our outstanding common shares was made to shareholders of
record at the close of business on August 7, 2009. Upon the
occurrence of certain triggering events, as set forth in the
Plan, the rights would become exercisable.
Item 1A. | Risk Factors |
Our business is subject to certain risks, including the risks
described below. This Item 1A does not describe all risks
applicable to our business and is intended only as a summary of
the most significant factors that affect our operations and the
industries in which we operate. More detailed information
concerning these and other risks is contained in other sections
of this Annual Report on
Form 10-K.
The risks described below, as well as the other risks that are
generally set forth in this Annual Report on
Form 10-K,
and other risks and uncertainties not presently known to us or
that we currently consider immaterial, could materially and
adversely affect our business, results of operations and
financial condition. Readers of this Annual Report on
Form 10-K
should take such risks into account in evaluating any investment
decision involving our common stock. At any point, the trading
price of our common stock could decline, and investors could
lose all or a portion of their investment.
Risks
Related to Our Operations
In addition to general economic conditions, both domestic and
foreign, which can change unexpectedly and generally affect
U.S. businesses with worldwide operations, we are subject
to a number of risks and uncertainties that are specific to us
or the businesses we operate:
Decisions
by our customers about the timing and scope of capital spending,
particularly on major programs, can have a significant effect on
our net sales and earnings.
Each of our businesses is dependent on our customers
capital spending decisions, which are affected by numerous
factors, such as general economic conditions, end-user demand
for their particular products, capital availability, and
comparative anticipated returns on their capital investments. In
addition, large defense programs are an important source of our
current and anticipated future net sales, especially in
D&S. Customer decisions as to the nature and timing of
their capital spending, and developments affecting these large
defense programs, can have a significant effect on us. Our net
sales and earnings would decline in the event of general
reductions in capital spending by our customers, or delay in the
implementation of, or significant reduction in the scope of, any
of the current or major anticipated programs in which we
participate.
Unfavorable
economic or financial market conditions or other developments
may affect the fair value of one or more of our business units
and increase the potential for additional asset impairment
charges that could adversely affect our earnings.
As of December 31, 2009, we had approximately
$60.3 million of goodwill and $49.3 million of other
intangible assets on our consolidated balance sheet,
collectively representing approximately 29% of our total assets.
We test goodwill for impairment on an annual basis in the fourth
quarter of the year. We are also required to test goodwill and
other long-lived assets on an interim basis if an event occurs
or circumstances change which indicate that an asset might be
impaired. A significant amount of judgment is involved in
determining if an indicator of impairment has occurred. Such
indicators may include a sustained, significant decline in our
share price and market capitalization, a decline in expected
future cash flows for one or more of our business units
(including our recently acquired businesses), a significant
adverse change in legal factors or in the business climate,
unanticipated competition
and/or
slower-than-expected
growth rates, among others. We
18 of 105
Table of Contents
recognized an impairment loss on the goodwill of
$19.9 million associated with our LXE business in 2009
(refer to Note 3 of the consolidated financial statements
for additional information). Our tests in the fourth quarter of
2009 for Formation, Satamatics and Sky Connect did not indicate
an impairment. However, the estimated fair values did not exceed
the carrying amount by a significant amount. If we are required
to recognize an additional impairment loss in the future related
to goodwill or long-lived assets, the related charge, although a
noncash charge, could materially reduce reported earnings or
result in a loss from continuing operations for the period in
which the impairment loss is recognized.
If our
commercial customers fail to find adequate funding for major
potential programs, or our government customers do not receive
necessary funding approvals, our net sales would
decline.
To proceed with major programs, such as upgrades for satellite
data-communications systems, our customers typically must obtain
substantial amounts of capital, from either governmental or
private sources. The availability of this capital is directly
affected not only by general economic conditions, but also by
political developments and by conditions in the private capital
markets, which at times in recent years have been very unstable.
If adequate funds are not available to our targeted customers
for these programs, our expected net sales may be adversely
affected. Large defense programs are often funded in multiple
phases, requiring periodic further funding approvals, which may
be withheld for a variety of political, budgetary or technical
reasons, including the effects of defense budget pressures on
near-term spending priorities. Such multi-year programs can also
be terminated or modified by the government in ways adverse to
us and, in many cases, with limited notice and without penalty.
These developments would reduce our net sales below the levels
we would otherwise expect.
We may
encounter technical problems or contractual uncertainties, which
can cause delays, added costs, lost sales and liability to
customers.
From time to time we have encountered technical difficulties
that have caused delays and additional costs in our technology
development efforts. We are particularly exposed to this risk in
new product development efforts and in fixed-price contracts on
technically advanced programs at D&S and
Communications & Tracking that require novel
approaches and solutions. In these cases, the additional costs
that we incur may not be covered by revenue commitments from our
customers, and therefore reduce our earnings. In addition,
technical difficulties can cause us to miss expected delivery
dates for new product offerings, which could cause customer
orders to fall short of expectations.
Some of our products perform mission-critical functions in space
applications. If we experience technical problems and are unable
to adhere to a customers schedule, the customer could
experience costly launch delays or re-procurements from other
vendors. The customer may then be contractually entitled to
substantial financial damages from us. The customer would also
be entitled to cancel future deliveries, which would reduce our
future revenues and could make it impossible for us to recover
our design, tooling or inventory costs, or our remaining
commitments to third-party suppliers.
Due to technological uncertainties in new or unproven
applications of technology, our contracts may be broadly defined
in their early stages, with a structure to accommodate future
changes in the scope of work or contract value as technical
development progresses. In such cases, management must evaluate
these contract uncertainties and estimate the future expected
levels of scope of work and likely contract-value changes to
determine the appropriate level of revenue associated with costs
incurred. Actual changes may vary from expected changes,
resulting in a reduction of net sales and earnings recognized in
future periods.
19 of 105
Table of Contents
Our
products are subject to a variety of certification requirements
of the Federal Aviation Administration (FAA) and the Federal
Communications Commission (FCC), including stringent standards
for performance, reliability and manufacturing processes. Our
failure to meet any of these standards, which may involve
complex testing and technical issues, could limit our ability to
market these products and thereby reduce our sales and earnings.
Our sales and earnings may also be adversely affected by the
costs and delays associated with meeting these standards and
obtaining the required certifications.
Products that we sell for installation on aircraft must receive
approvals and certifications from the FAA, and generally must be
produced in facilities that are themselves FAA-certified. In
addition, many of the products we sell require FCC approval or
certification before our customers are permitted to use them.
The applicable standards are rigorous, can be costly to meet,
and must be met on a continuing basis. The approval and
certification standards for our aviation products require that
we meet standards for performance and reliability, as well as
for the appropriateness of products for particular aircraft
types, and our facilities must meet standards for consistent and
reliable production processes. FCC certification of our products
requires that we demonstrate technical performance in accordance
with certain required RF characteristics. We have generally been
successful in obtaining required product approvals and
certifications, and the facilities in which we produce aviation
products currently hold all required certifications. However, in
the past we have addressed, or we currently are addressing,
technical issues raised by the FAA and the FCC with respect to
certain products, and such technical issues or changes in
applicable standards could affect any of these certifications,
or cause us to incur significant expense or delays in marketing
our products.
If we
cannot continue to rapidly develop, manufacture and market
innovative products and services that meet customer requirements
for performance and reliability, we may incur development costs
that we cannot recover and our net sales and earnings will
suffer.
The process of developing new wireless communications products
is complex and uncertain, and failure to anticipate
customers changing needs and emerging technological trends
accurately, or to develop or obtain appropriate intellectual
property, could significantly harm our results of operations. In
many instances we must make long-term investments and commit
significant resources before knowing whether our investments
will eventually result in products that the market will accept.
If our new products are not accepted by the market, our net
sales and earnings will decline.
Competing
technology could be superior to ours, and could cause customer
orders and net sales to decline.
The markets in which we compete are very sensitive to
technological advances. As a result, technological developments
by competitors can cause our products to be less desirable to
customers, or even to become obsolete. Those developments could
cause our customer orders and net sales to decline.
Our
competitors marketing and pricing strategies could make
their products more attractive than ours. This could cause
reductions in customer orders or our profits.
We operate in highly competitive technology markets, and some of
our competitors have substantially greater resources and
facilities than we do. As a result, our competition may be able
to pursue aggressive marketing strategies, such as significant
price discounting. These competitive activities could cause our
customers to purchase our competitors products rather than
ours, or cause us to increase marketing expenditures or reduce
prices, in any such case, causing a reduction of net sales and
earnings below expected levels.
Our
transitions to new product offerings can be costly and
disruptive, and could adversely affect our net sales or
profitability.
Because our businesses involve constant efforts to improve
existing technology, we regularly introduce new generations of
products. During these transitions, customers may reduce
purchases of older equipment more rapidly than we expect, or may
choose not to migrate to our new products, which could result in
lower net sales and excessive inventories. In addition, product
transitions create uncertainty about both production costs and
customer acceptance. These potential problems are generally more
severe if our product introduction
20 of 105
Table of Contents
schedule is delayed by technical development issues. These
problems could cause our net sales or profitability to be less
than expected.
Our
products may inadvertently infringe third-party patents, which
could create substantial liability to our customers or the
third-party patent owners.
As we regularly develop and introduce new technology, we face
risks that our new products or manufacturing techniques may
infringe valid patents held, or currently being processed, by
others. The earliest that the U.S. Patent Office publishes
patents is 18 months after their initial filing, and
exceptions exist so that some applications are not published
before they issue as patents. Thus, we may be unaware of a
pending patent until well after we have introduced an infringing
product. In addition, questions of whether a particular product
infringes a particular patent can involve significant
uncertainty. As a result of these factors, third-party patents
may require us to redesign our products and to incur both added
expense and delays that interfere with marketing plans. We may
also be required to make significant expenditures from time to
time to defend or pay damages or royalties on infringement
claims, or to respond to customer indemnification claims
relating to third-party patents. Such costs could reduce our
earnings.
We may
not be successful in protecting our intellectual
property.
Our unique intellectual property is a critical resource in our
efforts to produce and market technically advanced products. We
primarily seek to protect our intellectual property, including
product designs and manufacturing processes, through patents and
as trade secrets. If we are unable to obtain enforceable patents
on certain technologies, or if information we protect as trade
secrets becomes known to our competitors, then competitors may
be able to copy or otherwise appropriate our technology, we
would lose competitive advantages, and our net sales and
operating income could decline. In any event, litigation to
enforce our intellectual property rights could result in
substantial costs and diversion of resources that could have a
material adverse effect on our operations regardless of the
outcome of the litigation. We may also enter into transactions
in countries where intellectual property laws are not well
developed and legal protection of our rights may be ineffective.
Our
success depends on our ability to attract and retain a highly
skilled workforce.
Because our products and programs are technically sophisticated,
we must attract and retain employees with advanced technical and
program-management skills. Many of our senior management
personnel also possess advanced knowledge of the business in
which we operate and are otherwise important to our success.
Other employers also often recruit persons with these skills,
both generally and in focused engineering fields. If we are
unable to attract and retain skilled employees and senior
management, our performance obligations to our customers could
be affected and our net sales could decline.
We
depend on highly skilled suppliers, who may become unavailable
or fail to achieve desired levels of technical
performance.
In addition to our requirements for basic materials and
electronic components, our advanced technological products often
require sophisticated subsystems supplied or cooperatively
developed by third parties. To meet those requirements, our
suppliers must have specialized expertise, production skills and
economies of scale, and in some cases there are only a limited
number of qualified potential suppliers. Our ability to perform
according to customer contract requirements, or to introduce new
products on the desired schedule, can be heavily dependent on
our ability to identify and engage appropriate suppliers, and on
the effectiveness of those suppliers in meeting our development
and delivery objectives. If these highly skilled suppliers are
unavailable when needed, or fail to perform as expected, our
ability to meet our performance obligations to our customers
could be affected and our net sales and earnings could decline.
21 of 105
Table of Contents
Changes
in regulations that limit the availability of licenses or
otherwise result in increased expenses could cause our net sales
or earnings to decline.
Many of our products are incorporated into wireless
communications systems that are regulated in the U.S. by
the Federal Communications Commission and internationally by
other government agencies. Changes in government regulations
could reduce the growth potential of our markets by limiting
either the access to or availability of frequency spectrum. In
addition, other changes in government regulations could make the
competitive environment more difficult by increasing costs or
inhibiting our customers efforts to develop or introduce
new technologies and products. Also, changes in government
regulations could substantially increase the difficulty and cost
of compliance with government regulations for both our customers
and us. All of these factors could result in reductions in our
net sales and earnings.
Additional
environmental regulation could increase costs and adversely
affect our future earnings.
Greenhouse gas emissions have increasingly become the subject of
a large amount of international, national, regional, state and
local attention. Any enactment of
cap-and-trade
proposals would likely increase the cost of energy, including
purchases of electricity, and of certain raw materials used by
us. In addition, future environmental regulatory developments
related to climate change, whether pursuant to future treaty
obligations or statutory or regulatory changes, are possible,
and could increase our operating, manufacturing and delivery
costs.
The
export license process for space products is uncertain,
increasing the chance that we may not obtain required export
licenses in a timely or cost-effective manner.
Our products for use on commercial satellites are included on
the U.S. Munitions List of the U.S. International
Traffic in Arms Regulations and are subject to U.S. State
Department licensing requirements. The licensing process for our
products for use on commercial satellite and many of our other
products is time-consuming, and political considerations can
increase the time and difficulty of obtaining licenses for
export of technically advanced products. The license process may
prevent particular sales, and generally has created schedule
uncertainties that encourage foreign customers, such as those in
Western Europe, to develop internal or other foreign sources
rather than use U.S. suppliers. If we are unable to obtain
required export licenses when we expect them or at the costs we
expect, our net sales and earnings could be adversely affected.
Export
controls on space technology restrict our ability to hold
technical discussions with foreign customers, suppliers and
internal engineering resources, which reduces our ability to
obtain sales from foreign customers or to perform contracts with
the desired level of efficiency or profitability.
U.S. export controls severely limit unlicensed technical
discussions with any persons who are not U.S. citizens or
permanent residents. As a result, we are restricted in our
ability to hold technical discussions between
U.S. personnel and current or prospective customers or
suppliers outside the U.S., between Canadian personnel and
current or prospective U.S. customers or suppliers, and
between U.S. employees and our other employees outside the
U.S. These restrictions reduce our ability to win
cross-border space work, to utilize cross-border supply sources,
and to deploy technical expertise in the most effective manner.
Economic
or political conditions in other countries could cause our net
sales or earnings to decline.
International sales significantly affect our financial
performance. Approximately $107.2 million,
$132.5 million and $111.7 million, or 29.8%, 39.6% and
38.8% of our net sales for 2009, 2008, and 2007, respectively,
were derived from customers residing outside of the
U.S. Adverse economic conditions in our customers
countries, mainly in Western Europe, Latin America and the
Pacific Rim, have affected us in the past, and could adversely
affect future international revenues in all of our businesses,
especially LXE. Unfavorable currency exchange rate movements can
adversely affect the marketability of our products by increasing
the local-currency cost. In addition to these economic factors
directly related to our markets, there are risks and
uncertainties inherent in doing business internationally that
could have an adverse effect on us, such as potential adverse
effects of political instability or changes in governments,
changes in foreign income tax laws,
22 of 105
Table of Contents
and restrictions on funds transfers by us or our customers, as
well as unfavorable changes in laws and regulations governing a
broad range of business concerns, including proprietary rights,
legal liability, and employee relations. All of these factors
could cause significant harm to our net sales or earnings.
Unfavorable
currency exchange rate movements could result in foreign
exchange losses and cause our earnings to decline.
We have international operations, and we use forward currency
contracts to reduce the earnings risk from holding certain
assets and liabilities denominated in different currencies, but
we cannot entirely eliminate those risks. In addition,
Canada-based SATCOM derives a major portion of its sales from
agreements in U.S. dollars; but its costs are predominately
in Canadian dollars; as a result, a stronger Canadian dollar
would increase our costs relative to our U.S. net sales,
and we are unlikely to recover these increased costs through
higher U.S. dollar prices due to competitive conditions. As
a result of these factors, our financial results will continue
to have an element of risk related to foreign currency exchange
rates.
Our
net sales in certain markets depend on the availability and
performance of other companies with which we have marketing
relationships.
With respect to some applications, including mobile satellite
communications, we seek to develop marketing relationships with
other companies that have superior direct customer access from
advantages such as specialized software and established customer
service systems. For example, the marketing of our line of
high-speed commercial airline communications products is
dependent on the success of our direct customers in the sale of
our products as a complementary offering with their own lines of
avionics products. In other markets, such as wireless local-area
networks, a major element of our distribution channels is a
network of value-added retailers and independent distributors.
In foreign markets for many of our products, we are often
dependent on successful working relationships with local
distributors and other business personnel. If we are unable to
identify and structure effective relationships with other
companies that are able to market our products, our net sales
could fail to grow in the ways we expect.
Customer
orders in backlog may not result in sales.
Our order backlog represents firm orders for products and
services. However, our customers may cancel or defer orders for
products and services, in most cases without penalty.
Cancellation or deferral of an order in our D&S segment
typically involves penalties and termination charges for costs
incurred to date, but these termination penalties would still be
considerably less than what we would have expected to earn if
the order could have been completed. We make management
decisions based on our backlog, including hiring of personnel,
purchasing of materials, and other matters that may increase our
production capabilities and costs whether or not the backlog is
converted into revenue. Cancellations, delays or reductions of
orders could adversely affect our results of operations and
financial condition.
We are
exposed to the credit risk of some of our customers and to
credit exposures in weakened markets, which could cause our
earnings to decline.
Most of our sales are on an open credit basis, with typical
payment terms of up to 60 days in the U.S. and,
because of local customs or conditions, longer in some markets
outside the U.S. In the past, certain of our customers have
experienced credit problems, up to and including bankruptcy.
Although any resulting loss has not been material to date,
future losses, if incurred, could harm our business and have an
adverse effect on our operating results and financial condition.
Additionally, to the degree that the recent turmoil in the
credit markets makes it more difficult for some customers to
obtain financing, our customers ability to pay could be
adversely impacted, which in turn could have an adverse impact
on our business, operating results, and financial condition.
23 of 105
Table of Contents
Our
products typically carry warranties, and the costs to us to
repair or replace defective products could exceed the amounts we
have experienced historically.
Most of our products carry basic warranties of between one and
five years, depending on the type of product. For certain
products, customers can purchase warranty coverage for specified
additional periods. If our products are returned for repair or
replacement under warranty or otherwise under circumstances in
which we assume responsibility, particularly if at a higher rate
than we expect based on historical experience, we can incur
significant costs that may be in excess of the allowances that
we have established based on our historical warranty cost
levels, which would reduce our earnings.
Changes
in our consolidated effective income tax rate and the related
effect on our results can be difficult to predict.
We earn taxable income in various tax jurisdictions around the
world. The rates of income tax that we pay can vary
significantly by jurisdiction, due to differing income tax rates
and benefits that may be available in some jurisdictions and not
in others. In particular, our earnings in Canada are subject to
very low income taxes due to research-related tax incentives. As
a result, our overall effective income tax rate depends upon the
relative annual income that we earn in each of the tax
jurisdictions where we do business, and the rate reported in our
quarterly financial results depends on our expectations for such
relative earnings for the balance of the year. Thus, even though
our actual or expected consolidated earnings before taxes could
remain unchanged, our income tax expenses and net earnings may
still increase or decrease, depending upon changes in the
jurisdictions in which we have generated or expect to generate
those earnings.
We may
not effectively manage possible future growth, which could
result in reduced earnings.
Historically, we have experienced broad fluctuations in demand
for our products and services. These changes in demand have
depended on many factors and have been difficult to predict. In
recent years, there has also been an increasing complexity in
the technologies and applications in certain of our businesses.
These changes in our businesses place significant demands on
both our management personnel and our management systems for
information, planning and control. If we are to achieve further
strong growth on a profitable basis, our management must
identify and exploit potential market opportunities for our
products and technologies, while continuing to manage our
current businesses effectively. Furthermore, our management
systems must support the changes to our operations resulting
from our business growth. If our management and management
systems fail to meet these challenges, our business and
prospects will be adversely affected.
We may
make acquisitions and investments that could adversely affect
our earnings or otherwise fail to perform as
expected.
To support growth, we have made and may continue to make
acquisitions of and investments in businesses, products and
technologies that could complement or expand our businesses.
However, if we should be unable to successfully negotiate with a
potential acquisition candidate, finance the acquisition, or
effectively integrate the acquired businesses, products or
technologies into our existing business and products, our net
sales and earnings could be adversely affected. Furthermore, to
complete future acquisitions, we may issue equity securities,
incur debt, assume contingent liabilities or the risk of unknown
liabilities, or we may incur amortization expenses or
write-downs of acquired assets as a result of future
acquisitions, all of which could cause our earnings or earnings
per share to decline. In addition, under newly adopted Statement
of Financial Accounting Standards No. 141(R), Business
Combinations, which is now included in the FASB Accounting
Standards
Codificationtm
(ASC) Topic 805, effective for us for business
combinations completed after January 1, 2009, we are
required to record certain acquisition-related costs and other
items as current period expenses, reducing our reported earnings
in the period in which an acquisition is consummated, and to
reflect post-closing changes in the fair value of contingent
consideration as a charge (or credit) to reported earnings. We
also may acquire businesses that do not perform as we expect,
are subject to undisclosed or unanticipated liabilities, or are
otherwise dilutive to our earnings.
24 of 105
Table of Contents
We
have residual liabilities under the terms of our sales of
discontinued businesses.
We have reserved amounts we believe to be adequate to cover our
potential liabilities that we consider probable and estimable on
actual claims asserted under warranties and representations that
we made in connection with our prior dispositions of
discontinued operations. However, payment of such contingent
liabilities would decrease our cash, and if the final resolution
of such liabilities exceeded our reserves, our results of
discontinued operations would also be adversely affected.
Risks
Related to our Common Stock
In addition to risks and uncertainties related to our
operations, there are investment risks that could adversely
affect the return to an investor in our common stock and could
adversely affect our ability to raise capital for financing
future operations.
Our
quarterly results are volatile and difficult to predict. If our
quarterly performance results fall short of market expectations,
the market value of our shares is likely to
decline.
The quarterly net sales and earnings contributions of some of
our segments are heavily dependent on customer orders or product
shipments in the final weeks or days of the quarter. Due to some
of the risks related to our business discussed above, it can be
difficult for us to predict the timing of receipt of major
customer orders, and we are unable to control timing decisions
made by our customers. This can create volatility in quarterly
results, and hinders our ability to determine before the end of
each quarter whether quarterly earnings will meet prevailing
expectations. The market price for our shares is likely to be
adversely affected by quarterly earnings results that are below
analyst and market expectations.
Our
share price may fluctuate significantly, and an investor may not
be able to sell our shares at a price that would yield a
favorable return on investment.
The market price of our stock will fluctuate in the future, and
such fluctuations could be substantial. Price fluctuations may
occur in response to a variety of factors, including:
| actual or anticipated operating results; | |
| the limited average trading volume and public float for our stock, which means that orders from a relatively few investors can significantly impact the price of our stock, independently of our operating results, | |
| announcements of technological innovations, new products or new contracts by us, our customers, our competitors or our customers competitors; | |
| government regulatory action; | |
| developments with respect to wireless and satellite communications; and | |
| general market conditions. |
In addition, the stock market has from time to time experienced
significant price and volume fluctuations that have particularly
affected the market prices for the stocks of technology
companies, and that have been unrelated to the operating
performance of particular companies.
Future
sales of our common stock may cause our stock price to
decline.
Our outstanding shares are freely tradable without restriction
or further registration, and shares reserved for issuance upon
exercise of stock options will also be freely tradable upon
issuance, in each case unless held by affiliates. Sales of
substantial amounts of common stock by our shareholders,
including those who have acquired a significant number of shares
in connection with business acquisitions or private investments,
or even the potential for such sales, may depress the market
price of our common stock and could impair our ability to raise
capital through the sale of our equity securities.
25 of 105
Table of Contents
Provisions
in our governing documents and law could prevent or delay a
change of control not supported by our Board of
Directors.
Our shareholder rights plan and provisions of our amended and
restated articles of incorporation and amended bylaws could make
it more difficult for a third party to acquire us. These
documents include provisions that:
| allow our shareholders the right to acquire common stock from us at discounted prices in the event a person acquires 20% or more of our common stock, or announces an attempt to do so, without our Board of Directors prior consent; | |
| authorize the issuance of up to 10,000,000 shares of blank check preferred stock by our Board of Directors without shareholder approval, which stock could have terms that could discourage or thwart a takeover attempt; | |
| limit who may call a special meeting of shareholders; | |
| require unanimous written consent for shareholder action without a meeting; | |
| establish advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be acted upon at shareholder meetings; | |
| adopt the fair price requirements and rules regarding business combinations with interested shareholders set forth in Article 11, Parts 2 and 3 of the Georgia Business Corporation Code; and | |
| require approval by the holders of at least 75% of the outstanding common stock to amend any of the foregoing provisions. |
Item 1B. | Unresolved Staff Comments |
None.
Item 2. | Properties |
Our corporate headquarters, and D&Ss and LXEs
domestic operations are located in four buildings, three of
which we own comprising approximately 290,000 square feet
of floor space on 21 acres, as well as one that is leased
totaling approximately 37,000 square feet (lease expires in
2015), all located in a suburb of Atlanta, Georgia. These
facilities include drafting and design facilities, engineering
laboratories, assembly and test areas, materials storage and
control areas, and offices.
We lease approximately 160,000 square feet of office and
manufacturing space for our Communications & Tracking
segment, with the majority located in Ottawa, Ontario (lease to
expire in 2017), with other facilities located in Moorestown, NJ
(lease to expire in 2013), Tewkesbury, UK (lease to expire in
2012), and in Takoma Park, MD (lease to expire in 2011).
We lease several small sites in the U.S., Europe, Singapore, the
UAE, and China for LXE sales offices. If any of these leases are
terminated, we believe we could arrange for comparable
replacement facilities on similar terms.
Item 3. | Legal Proceedings |
Prior to 2007, we disposed of our S&T/Montreal, SatNet, and
EMS Wireless divisions. The sales agreements for each of these
disposals contained standard indemnification provisions for
various contingencies that could not be resolved before the
dates of closing and for various representations and warranties
provided by us and the purchasers. In 2008, the purchaser of EMS
Wireless asserted claims under such representations and
warranties. The parties agreed to arbitration, which commenced
in the third quarter of 2009. In March 2010, we received an
interim decision from the arbitrator on these claims awarding
the purchaser a total of approximately $9.2 million under
the warranty provisions of the purchase agreement. As a result,
we accrued a liability for the award costs in discontinued
operations in 2009. The interim award will not become final
until the arbitrator determines awards of costs and
attorneys fees, which the parties will be briefing in the
near
26 of 105
Table of Contents
future. It is not possible at this time to determine the amount
of any additional award, but any such award would be reflected
in discontinued operations when it becomes probable and
estimable.
We are involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not
have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
Item 4. | [Reserved] |
27 of 105
Table of Contents
PART II
Item 5. Market
for Registrants Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities
The common stock of EMS Technologies, Inc. is traded on the
NASDAQ Global Select Market (symbol ELMG). At March 19,
2010, there were approximately 400 shareholders of record,
we believe that there were approximately 2,900 beneficial
shareholders, based upon broker requests for distribution of
Annual Meeting materials. The price range of the stock is shown
below:
2009 Price Range | 2008 Price Range | |||||||||||||||
High | Low | High | Low | |||||||||||||
First Quarter
|
$ | 26.48 | 17.07 | $ | 27.71 | 27.18 | ||||||||||
Second Quarter
|
21.45 | 16.93 | 22.29 | 21.63 | ||||||||||||
Third Quarter
|
23.17 | 17.55 | 22.04 | 21.50 | ||||||||||||
Fourth Quarter
|
20.37 | 12.00 | 26.72 | 25.00 |
We have never paid a cash dividend with respect to shares of our
common stock, and have retained our earnings to provide cash for
the operation and expansion of our business. We cannot currently
declare or make any cash dividends without the consent of the
lenders in our revolving credit agreement. Future dividends, if
any, will be determined by the Board of Directors in light of
the circumstances then existing, including our earnings and
financial requirements and general business conditions.
The following table summarizes our repurchases of our common
shares for the quarter ended December 31, 2009:
ISSUER
PURCHASES OF EQUITY SECURITIES
(c) Total Number |
(d) Maximum Number |
|||||||||||||||
of Shares |
( or Approximate |
|||||||||||||||
Purchased as |
Dollar Value) of |
|||||||||||||||
Part of Publicly |
Shares that May Yet |
|||||||||||||||
(a) Total Number |
(b) Average |
Announced |
Be Purchased |
|||||||||||||
of Shares |
Price Paid |
Plans or |
Under the Plans or |
|||||||||||||
Period | Purchased | Per Share | Program(1) | Programs(2) | ||||||||||||
October 2009 (October 4 to October 31)
|
- | - | ||||||||||||||
November 2009 (November 1 to November 28)
|
- | - | - | |||||||||||||
December 2009 (November 29 to December 31)
|
20,600 | 12.13 | 20,600 | |||||||||||||
Total
|
20,600 | $ | 12.13 | 20,600 | $ | 9.9 million | ||||||||||
(1) | This balance represents the number of shares that were repurchased under our $20 million repurchase program (the Program) which was initially announced on July 30, 2008. Unless terminated earlier by resolution of our Board of Directors, the Program will expire when we have purchased all shares authorized for repurchase. The Program does not obligate us to repurchase any particular amount of common shares, and may be suspended or discontinued at any time without notice. | |
(2) | This balance represents the value of shares that could be repurchased in the future under the Program as of December 31, 2009. |
28 of 105
Table of Contents
Item 6. | Selected Financial Data |
The following table sets forth selected consolidated financial
data with respect to our operations. The data should be read in
conjunction with Item 7. Managements Discussion
and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and
notes thereto, which appear immediately following the signature
page of this Annual Report on
Form 10-K.
The statement of operations data for each of the five years
ended December 31, 2009, and the related balance sheet data
have been derived from the audited consolidated financial
statements (in thousands, except per share data).
Years Ended December 31 | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Net sales
|
$ | 359,972 | 335,045 | 287,879 | 261,119 | 225,887 | ||||||||||||||
Cost of sales
|
241,124 | 213,885 | 175,278 | 164,611 | 146,965 | |||||||||||||||
Selling, general and administrative expenses
|
87,722 | 81,426 | 74,561 | 66,335 | 56,944 | |||||||||||||||
Research and development expenses
|
18,662 | 20,110 | 18,773 | 15,816 | 11,754 | |||||||||||||||
Impairment loss on goodwill
|
19,891 | - | - | - | - | |||||||||||||||
Acquistion-related items
|
7,206 | - | - | - | - | |||||||||||||||
Operating (loss) income
|
(14,633 | ) | 19,624 | 19,267 | 14,357 | 10,224 | ||||||||||||||
Interest income
|
207 | 2,430 | 5,403 | 2,254 | 588 | |||||||||||||||
Interest expense
|
(2,181 | ) | (1,679 | ) | (1,953 | ) | (1,921 | ) | (3,304 | ) | ||||||||||
Foreign exchange loss, net
|
(808 | ) | (586 | ) | (1,390 | ) | (710 | ) | (288 | ) | ||||||||||
(Loss) earnings from continuing operations before income taxes
|
(17,415 | ) | 19,789 | 21,327 | 13,980 | 7,220 | ||||||||||||||
Income tax benefit (expense)
|
4,266 | 682 | (2,080 | ) | 1,823 | (2,094 | ) | |||||||||||||
(Loss) earnings from continuing operations
|
(13,149 | ) | 20,471 | 19,247 | 15,803 | 5,126 | ||||||||||||||
Discontinued operations:
|
||||||||||||||||||||
(Loss) earnings from discontinued operations before income taxes
|
(10,917 | ) | - | (585 | ) | 24,427 | (13,971 | ) | ||||||||||||
Income tax benefit (expense)
|
4,001 | - | 82 | (7,222 | ) | (2,598 | ) | |||||||||||||
(Loss) earnings from discontinued operations
|
(6,916 | ) | - | (503 | ) | 17,205 | (16,569 | ) | ||||||||||||
Net (loss) earnings
|
$ | (20,065 | ) | 20,471 | 18,744 | 33,008 | (11,443 | ) | ||||||||||||
Net (loss) earnings per share:
|
||||||||||||||||||||
Basic:
|
||||||||||||||||||||
From continuing operations
|
$ | (0.87 | ) | 1.32 | 1.25 | 1.08 | 0.46 | |||||||||||||
From discontinued operations
|
(0.45 | ) | - | (0.03 | ) | 1.18 | (1.48 | ) | ||||||||||||
Net (loss) earnings
|
$ | (1.32 | ) | 1.32 | 1.22 | 2.26 | (1.02 | ) | ||||||||||||
Diluted:
|
||||||||||||||||||||
From continuing operations
|
$ | (0.87 | ) | 1.31 | 1.24 | 1.08 | 0.46 | |||||||||||||
From discontinued operations
|
(0.45 | ) | - | (0.03 | ) | 1.17 | (1.48 | ) | ||||||||||||
Net (loss) earnings
|
$ | (1.32 | ) | 1.31 | 1.21 | 2.25 | (1.02 | ) | ||||||||||||
Weighted-average number of common shares outstanding:
|
||||||||||||||||||||
Basic
|
15,169 | 15,452 | 15,354 | 14,621 | 11,179 | |||||||||||||||
Diluted
|
15,169 | 15,628 | 15,482 | 14,679 | 11,225 | |||||||||||||||
As of December 31 | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Working capital related to continuing operations
|
$ | 98,147 | 165,419 | 198,491 | 176,570 | 67,580 | ||||||||||||||
Total assets
|
374,145 | 327,365 | 323,800 | 291,684 | 225,341 | |||||||||||||||
Long-term debt, including current installments
|
27,750 | 10,552 | 13,720 | 14,857 | 43,408 | |||||||||||||||
Shareholders equity
|
237,091 | 242,742 | 247,126 | 213,083 | 113,656 |
No cash dividends have been declared or paid during any of the
periods presented.
30 of 105
Table of Contents
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
We have included forward-looking statements in
managements discussion and analysis of financial condition
and results of operations. All statements, other than statements
of historical fact, included in this report that address
activities, events or developments that we expect or anticipate
will or may occur in the future, or that necessarily depend upon
future events, including such matters as our expectations with
respect to future financial performance, future capital
expenditures, business strategy, competitive strengths, goals,
expansion, market and industry developments and the growth of
our businesses and operations, are forward-looking
statements.
The following discussion and analysis should be read in
conjunction with the consolidated financial statements and
related notes and other financial information appearing
elsewhere in this Annual Report on
Form 10-K.
Actual results could differ materially from those anticipated in
the forward-looking statements as a result of a variety of
factors, including those addressed at the end of this item and
those discussed under the caption Risk Factors in
Item 1A. of this Annual Report on
Form 10-K.
The historical results of operations are not necessarily
indicative of future results.
Overview
We are a leading innovator in the design, manufacture, and
marketing of wireless communications solutions addressing the
enterprise mobility,
communications-on-the-move
and in-flight connectivity markets for both commercial and
government end-users. We focus on the needs of the mobile
information user and the increasing demand for wireless
broadband communications. We provide products and services that
enable communications across a variety of coverage areas,
ranging from global, to regional, to within a single facility.
As of 2009, our continuing operations include the following
three reportable operating segments:
| Communications & Tracking Supplies a broad array of terminals and antennas that enable end-users in aircraft and other mobile platforms to communicate over satellite and air-to-ground links. This segment includes the previously reported Satellite Communications segment, and the newly acquired Formation, Inc. (Formation) and Satamatics Global Limited (Satamatics) product lines which include aeronautical wi-fi communications and data storage, aeronautical voice and tracking, and satellite-based machine-to-machine mobile communications (refer to Acquisitions Completed in 2009 in Item 1 of this Annual Report and Note 2 to the Consolidated Financial Statements for additional information); | |
| LXE Provides rugged mobile terminals and wireless data networks used for logistics applications such as distribution centers, warehouses and container ports. LXE operates mainly in two markets: the Americas market, which is comprised of North, South and Central America; and the International market, which is comprised of all other geographic areas, with the highest concentration in Europe; and | |
| Defense & Space (D&S) Supplies highly engineered subsystems for defense electronics and sophisticated satellite applications from military communications, radar, surveillance and countermeasures to commercial high-definition television, satellite radio, and live TV for innovative airlines. |
In early 2010, we realigned our business segments for strategic
growth and replaced Communications & Tracking with two
new segments, Aviation and Global Tracking.
| Aviation - Includes SATCOMs aeronautical business, and the Sky Connect and Formation businesses, which were acquired in August 2008 and January 2009, respectively. Aviation designs and develops satellite-based communications solutions through a broad array of terminals and antennas for the aeronautical market that enable end-users in aircraft and other mobile platforms to communicate over satellite and air-to-ground links. This segment also builds in-cabin connection devices and computers to process data on board aircraft, including rugged data storage, airborne connectivity, air-to-ground connectivity, and data recording and replay. |
31 of 105
Table of Contents
| Global Tracking - Includes the asset tracking and emergency management operations of our SATCOM business, and the Satamatics business, which was acquired in February 2009. Global Tracking provides aeronautical voice and tracking, and satellite-based machine-to-machine mobile communications equipment and services to track, monitor and control remote assets, regardless of whether they are fixed, semi-fixed or mobile. Additionally, Global Tracking provides equipment for the Cospas-Sarsat search and rescue system and incident management software for rescue coordination worldwide. |
This new segment structure will be presented beginning in 2010.
We sell LXE products and the majority of
Communications & Tracking products for commercial
applications. We sell D&S products primarily for defense
and space applications. Sales of products for
U.S. government end-use comprised 29.7%, 26.3% and 24.6% of
our net sales in 2009, 2008 and 2007, respectively.
Our sales to customers in the U.S. accounted for 70.3%,
60.4% and 61.2% of our consolidated net sales in 2009, 2008 and
2007, respectively. The remainder of our sales were to customers
in markets outside of the U.S. Net sales from our markets
outside the U.S. have generally increased when the Euro and
other local functional currencies have increased in value as
compared with the U.S. dollar.
Financial
and Performance Highlights of 2009
Following is a summary of significant factors affecting our
business in 2009:
| We completed the acquisitions of Formation and Satamatics on January 9, 2009 and February 13, 2009, respectively. In 2009, these newly acquired product lines along with Sky Connect, LLC (Sky Connect), which was acquired in August of 2008, generated $68.9 million of net sales, and losses of $1.8 million before income taxes. The loss includes a charge of $7.8 million for amortization of intangible assets. | |
| Consolidated net sales were 7.4% higher in 2009 as compared with same period in 2008. Higher net sales at Communications & Tracking (reflected the newly acquired product lines), and D&S were partially offset in 2009 by lower net sales at LXE (reflecting the challenging global economic climate). Net sales from Communications & Trackings organic product lines were down for 2009, as compared with 2008, due to lower net sales from aeronautical products and from the Inmarsat development project that concluded in 2008 and, therefore, was not included in the 2009 results. | |
| Our pre-tax loss from continuing operations of $17.4 million included a $19.9 million impairment loss on goodwill at LXE, $7.2 million of acquisition-related charges that are required to be reported as a current expense under the provisions of Statement of Financial Accounting Standards (SFAS) No. 141(R), Business Combinations (which is now included in Financial Accounting Standards Board (FASB) Accounting Standards Codificationtm (ASC) Topic 805, Business Combinations), $7.8 million of amortization of intangible assets related to our new acquisitions, and approximately $3.9 million of severance costs. | |
| Our markets continue to see the unfavorable impact of the economy and they are not immune to increasing pressures and risks. We expect that we will continue to be faced with these economic pressures through 2010. We recorded an impairment loss on goodwill of $19.9 million at our LXE segment in the fourth quarter of 2009. We concluded during our annual impairment evaluation that the carrying amount of LXEs goodwill exceeded its implied fair value reflecting the unfavorable affects of the global economic climate on the projected future cash flows of our LXE business. The economy and other factors could cause a decline in expected future cash flows for one or more of our other business units (including our recently acquired businesses) and it is reasonably possible that we may be required to recognize additional impairment losses related to goodwill or other long-lived assets. | |
| Our discontinued operations reported a loss before income taxes of $10.9 million in 2009. The loss was mainly a result of a $9.2 million liability recorded in 2009 for costs awarded in an interim award by an arbitrator for warranty claims under the provisions of the sales agreement of our former EMS Wireless division, and for legal costs of $1.5 million associated with the defense of these claims. |
32 of 105
Table of Contents
Description
of Net Sales, Costs and Expenses
Net
sales
The amount of net sales is generally the most significant factor
affecting our operating income in a period. We recognize
product-related net sales under most of our customer agreements
when we ship completed units or complete the installation of our
products. If multiple deliverables are involved in a revenue
arrangement, or if software included in an offering is more than
incidental to a product as a whole, we recognize revenue in
accordance with ASC Subtopic
605-25,
Revenue Recognition-Multiple-Element Arrangements, or ASC
Subtopic
985-605,
Software-Revenue Recognition, as applicable. If the
customer agreement is in the form of a long-term contract
(mainly at D&S and to a lesser degree at
Communications & Tracking), we recognize revenue under
the
percentage-of-completion
method, using the ratio of cost-incurred-to-date to
total-estimated-cost-at-completion as the measure of
performance. Estimated
cost-at-completion
for each of these contracts is reviewed on a routine periodic
basis, and adjustments are made periodically to the estimated
cost-at-completion
based on actual costs incurred, progress made, and estimates of
the costs required to complete the contractual requirements.
When the estimated
cost-at-completion
exceeds the contract value, the entire estimated loss resulting
from the projected cost overruns is immediately recognized. If
the customer agreement is in the form of a cost-reimbursement
contract, we recognize revenue based on the type of fee
specified in the contract, which is typically a fixed fee, award
fee or a combination of both.
We also generate net sales from product-related service
contracts, repair services, airtime and mapping services, and
engineering services projects. We recognize revenue from
product-related service contracts, extended warranties ratably
over the life of the contract. We recognize revenue from repair
services and tracking, voice, and data services as services are
rendered. We recognize revenue from contracts for engineering
services using the
percentage-of-completion
method for fixed price contracts, or as costs are incurred for
cost-type contracts.
Cost of
sales
Product cost of sales includes the cost of materials, payroll
and benefits for direct and indirect manufacturing labor,
engineering and design costs, outside costs such as
subcontracts, consulting or travel related to specific
contracts, and manufacturing overhead expenses such as
depreciation, utilities and facilities maintenance. We also
include amortization of intangible assets for development
technologies in cost of sales.
We sell a wide range of advanced wireless communications
products into markets with varying competitive conditions, and
cost of sales as a percentage of net sales varies by product.
Consequently, the mix of products sold in a given period is a
significant factor affecting our operating income.
The
cost-of-sales
percentage is principally a function of competitive conditions
and product and customer mix, but Communications &
Tracking is also affected by changes in foreign currency
exchange rates, mainly because the Canadian-based SATCOM
business derives most of its net sales from contracts
denominated in U.S. dollars, but incurs most of its costs
in Canadian dollars. When the U.S. dollar weakens against
the Canadian dollar, our reported manufacturing costs for SATCOM
increase relative to our net sales, which increases the
cost-of-sales
percentage. When the U.S. dollar strengthens, the opposite
effect results. Our LXE business derives a significant portion
of its net sales from international markets, mainly in Euros,
but incurs most of its costs in U.S. dollars. When the U.S.
dollar weakens against the Euro and other international
currencies, our reported net sales generally increase relative
to our costs, which decreases the
cost-of-sales
percentage. When the U.S. dollar strengthens, the opposite
effect generally results.
Service cost of sales is based on labor and other costs
recognized as incurred to fulfill obligations under most of our
service contracts, and the cost of airtime for providing
tracking, voice and data services. Cost of sales for long-term
engineering services contracts are based on labor and other
costs incurred.
33 of 105
Table of Contents
Selling,
general and administrative expenses
Selling, general and administrative (SG&A)
expenses include salaries, commissions, bonuses and related
overhead costs for our personnel engaged in sales,
administration, finance, information systems and legal
functions. Also included in SG&A expenses is amortization
of intangible assets for trademarks, trade names and customer
lists as well as costs of engaging outside professionals for
consultation on legal, accounting, tax and management
information system matters, auditing and tax compliance, and
general corporate expenditures to other outside suppliers and
service providers.
Research
and development expenses
Research and development (R&D) expenses
represent the cost of our development efforts, net of
reimbursement under specific customer-funded R&D
agreements. R&D expenses include salaries of engineers and
technicians and related overhead expenses, the cost of materials
utilized in research, and additional engineering or consulting
services provided by independent companies. R&D costs are
expensed as they are incurred. We also often incur significant
development costs to meet the specific requirements of customer
contracts in D&S and Communications & Tracking,
and we report these costs in the consolidated statements of
operations as cost of sales.
Acquisition-related
items
Acquisition-related items include the costs of engaging outside
professionals for legal, due diligence, business valuation, and
integration services related to business combinations. The
category also includes adjustments related to changes in the
fair value of the earn-out liability associated with one
acquisition completed in 2009.
Impairment
loss on goodwill
An impairment loss on goodwill is recognized to the extent that
a reporting units carrying amount of goodwill exceeds the
implied fair value of its goodwill, determined in accordance
with ASC Topic 350, Intangibles-Goodwill and Other.
Goodwill is evaluated for impairment annually, and between
annual tests if an event or changes in circumstances indicate
that the goodwill might be impaired. We complete our annual
evaluation of goodwill for impairment in the fourth quarter of
each fiscal year.
Interest
income
Interest income is earned primarily from our investments in
government-obligations money market funds, other money market
instruments, and interest-bearing deposits.
Interest
expense
We incur interest expense principally related to mortgages on
certain facilities and our revolving credit facility. We
incurred no interest expense in 2008 and 2007 related to
borrowings under revolving credit facility because during those
periods we had no borrowings outstanding under this facility.
Foreign
exchange gains and losses
We recognize foreign exchange gains and losses at any of our
subsidiaries that have assets and liabilities that are
denominated in a currency different than its local functional
currency. For our Canada-based SATCOM business, most trade
receivables are denominated in U.S. dollars; when the
U.S. dollar weakens against the Canadian dollar, the value
of SATCOMs trade receivables decreases and foreign
exchange losses result. For our LXE segments international
subsidiaries, most trade payables are in U.S. dollars and
relate to their purchases of equipment from LXEs
U.S. operations for sale in Europe; when the
U.S. dollar weakens against the Euro or other international
currencies, the value of the LXE subsidiaries trade
payables decreases and foreign exchange gains result. When the
U.S. dollar strengthens, the opposite effects on trade
payables and foreign exchange gains and losses result.
34 of 105
Table of Contents
We regularly assess our exposures to changes in foreign currency
exchange rates and as a result, we enter into forward currency
contracts to reduce those exposures. The notional amount of each
forward currency contract is based on the amount of exposure for
net assets or liabilities subject to changes in foreign currency
exchange rates. We record changes in the fair value of these
contracts in foreign exchange gains and losses in our
consolidated statements of operations.
Income
taxes
Typically, the main factor affecting our effective income tax
rate each year is the relative proportion of taxable income that
we expect to earn in Canada, where the effective rate is lower
than in the U.S. and other locations. The lower effective
rate in Canada results from certain Canadian tax benefits for
research-related expenditures.
Discontinued
operations
Prior to 2007, we disposed of our Space &
Technology/Montreal (S&T/Montreal), Satellite
Networks (SatNet) and EMS Wireless divisions. The
losses reported in discontinued operations relate directly to
the resolution of various contingencies, representations or
warranties as specified under the standard indemnification
provisions of the sales agreements. We record a liability
related to a contingency, representation or warranty when
management considers that the liability is both probable and can
be reasonably estimated.
Results
of Operations
The following table sets forth the percentage relationship of
each line item to net sales for each period.
Years Ended December 31 | ||||||||||||
2009
|
2008
|
2007
|
||||||||||
Product net sales
|
78.1 | % | 81.6 | % | 86.0 | % | ||||||
Service net sales
|
21.9 | 18.4 | 14.0 | |||||||||
Net sales
|
100.0 | 100.0 | 100.0 | |||||||||
Product cost of sales as a percentage of product net sales
|
69.0 | 64.4 | 61.3 | |||||||||
Service cost of sales as a percentage of service net sales
|
59.9 | 61.2 | 58.6 | |||||||||
Cost of sales
|
67.0 | 63.8 | 60.9 | |||||||||
Selling, general and administrative expenses
|
24.4 | 24.3 | 25.9 | |||||||||
Research and development expenses
|
5.2 | 6.0 | 6.5 | |||||||||
Impairment loss on goodwill
|
5.5 | - | - | |||||||||
Acquisition-related charges
|
2.0 | - | - | |||||||||
Operating (loss) income
|
(4.1 | ) | 5.9 | 6.7 | ||||||||
Interest income
|
0.1 | 0.7 | 1.9 | |||||||||
Interest expense
|
(0.6 | ) | (0.5 | ) | (0.7 | ) | ||||||
Foreign exchange loss, net
|
(0.2 | ) | (0.2 | ) | (0.5 | ) | ||||||
(Loss) earnings from continuing operations before income taxes
|
(4.8 | ) | 5.9 | 7.4 | ||||||||
Income tax benefit (expense)
|
1.1 | 0.2 | (0.7 | ) | ||||||||
Net (loss) earnings from continuing operations
|
(3.7 | ) | 6.1 | 6.7 | ||||||||
Discontinued operations:
|
||||||||||||
Loss from discontinued operations before income taxes
|
(3.0 | ) | - | (0.2 | ) | |||||||
Income tax benefit
|
1.1 | - | - | |||||||||
Loss from discontinued operations
|
(1.9 | ) | - | (0.2 | ) | |||||||
Net (loss) earnings
|
(5.6 | ) % | 6.1 | % | 6.5 | % | ||||||
35 of 105
Table of Contents
Years
ended December 31, 2009 and 2008:
Net sales increased by 7.4% to $360.0 million from
$335.0 million in 2009 as compared with 2008, reflecting
growth in net sales from two of our three reportable operating
segments, Communications & Tracking, and D&S,
with increases of 41.3%, and 19.5%, respectively. The increase
in net sales in the Communications & Tracking segment
was the result of our recently acquired product lines. Such
increases were partially offset by declines in net sales from
Communications & Tracking organic product lines in
2009, as compared with 2008, and from the Inmarsat development
project that was concluded in 2008 and therefore, not included
in the 2009 results. D&Ss net sales were higher in
2009 mainly due to significant work performed on a military
communications research project and increased activity on both
military and commercial programs. LXEs net sales in 2009
were $36.4 million lower than the same period in 2008, a
decrease of 25.0%, with a decrease in net sales in both the
Americas and International markets.
Product net sales increased by 2.9% to $281.2 million in
2009 as compared with 2008. This was primarily due to the
product net sales generated from our recently acquired product
lines and increased activity on both defense and commercial
programs, including significant work to supply phase-shifter
products for a military program, and antennas for systems
that provide connectivity to the internet, live television
programs and cellular services on-board commercial aircraft.
These increases were partially offset by a lower number of
terminals shipped by LXE in both the International and Americas
markets and lower net sales of high-speed-data aeronautical
products from the organic product lines of
Communications & Tracking. Service net sales increased
by 27.6% to $78.8 million in 2009 as compared with the same
period in 2008, mainly due to significant work performed on a
military communications research project by D&S, and the
service revenue generated from our newly acquired product lines
at Communications & Tracking. As a result, service net
sales comprised a higher percentage of total net sales in 2009
as compared with 2008.
Overall cost of sales as a percentage of consolidated net sales
was higher in 2009 as compared with 2008 due to higher
cost-of-sales
percentages reported by each of our three reportable operating
segments. Product cost of sales as a percentage of net sales,
was higher in 2009 as compared with 2008. The increase in
product cost of sales as a percentage of net sales was mainly
due to the acquisition of the new product lines in 2009 at
Communications & Tracking which had a higher
cost-of-sales
percentages than our existing SATCOM business, primarily due to
the amortization of intangible assets, and a higher percentage
of net sales generated by our D&S segment, which has a
higher
cost-of-sales
percentage than our other two reportable operating segments.
Product cost of sales was also higher due to a lower production
volume by our LXE segment over which fixed costs were absorbed,
and an unfavorable effect of changes in foreign currency
exchange rates, and additional severance costs of
$1.8 million recorded in 2009 for a reduction in workforce
across all divisions to realign the staffing needs of the
business with current economic conditions. Service cost of sales
as a percentage of net sales was lower in 2009 as compared with
2008. The decrease in the service
cost-of-sales
percentage was mainly due to an increase in service revenue from
our newly acquired product lines at Communications &
Tracking which had a lower
cost-of-sales
percentage than our other two operating segments. Service cost
of sales as a percentage of net sales was also lower in 2009 as
compared with 2008 due to lower volume of repairs experienced
under existing maintenance contracts at our D&S and LXE
segments in 2009.
SG&A expenses as a percentage of consolidated net sales
increased slightly in 2009 as compared with 2008. Actual
expenses grew by $6.3 million in 2009 as compared with 2008
mainly due to the additional costs related to the acquired
product lines, including additional amortization of intangible
assets. These additional costs were partially offset by the
impact of managements continued cost reduction efforts and
the favorable effect of changes in foreign currency exchange
rates on our LXE and SATCOM international operations.
R&D expenses were $1.4 million lower in 2009 than in
2008 mainly due to additional funding received from the Canadian
government under a program to encourage technology development
in areas such as satellite communications, reduced spending due
to cost control measures, and the completion of certain internal
development programs at SATCOM and LXE in 2009. R&D
expenses were also lower due to the favorable effect of changes
in foreign currency exchange rates in 2009. These decreases in
expenses were partially offset by additional R&D expenses
related to our recently acquired product lines.
36 of 105
Table of Contents
An impairment loss on goodwill of $19.9 million was
recorded by our LXE segment in 2009. We completed our annual
evaluation for goodwill impairment in the fourth quarter of 2009
and concluded that the goodwill of our LXE segment might be
impaired, since the estimated fair value of the reporting unit
was less than the carrying amount. The amount of the impairment
loss was determined by comparing the carrying amount of the
goodwill for the reporting unit to the implied fair value of the
goodwill determined in accordance with current accounting
standards. While the carrying amount exceeded the estimated fair
value by only $6.0 million, the impairment loss was
measured as $19.9 million. The requirements to determine
the impairment loss stipulate that the estimated fair value of
all assets and liabilities of the reporting unit be determined
similar to the method used in a business combination. The
aggregate fair value of the assets and liabilities, including
those not reflected in the carrying amount, is compared to the
estimated reporting unit fair value with the difference being
implied goodwill. The excess of goodwill on the balance sheet
and this implied goodwill is the impairment loss. For a
reporting unit with unrecognized intangible assets or other
assets whose fair value exceeds the carrying amount, the
impairment loss will exceed the reporting unit fair value
deficiency since the accounting rules do not allow for a step up
in fair value for these other assets in this process.
Goodwill in our consolidated balance sheet as of
December 31, 2009 includes the remaining goodwill of LXE of
$1.8 million and the goodwill related to the acquisitions
of Formation, Satamatics and Sky Connect, for which no
impairment was indicated in 2009.
Acquisition-related charges were $7.2 million in 2009.
These charges were primarily for professional fees for legal,
due-diligence, valuation, and integration services for the
acquisition of our Formation and Satamatics businesses, as well
as increases in the estimated fair value of the earn-out
liability associated with one of the acquisitions. The fair
value increased by $3.2 million during 2009 primarily
related to accretion in the liability from the acquisition date,
changes in the expected earn-out payments based on the results
of 2009, and an agreement between the Company and the sellers of
the acquired entity to set the 2010 earn-out at a fixed amount,
which settled the contingency.
Interest income was $2.2 million lower in 2009 than in 2008
mainly as a result of lower average investment balances and, to
a lesser extent, lower average interest rates earned on our
investment balances.
Interest expense was $0.5 million higher in 2009 than in
2008 mainly due to borrowings under our revolving credit
facility incurred in the first quarter of 2009 to partially fund
the acquisition of our new product lines.
Our foreign exchange net loss was $0.2 million higher in
2009 than in 2008. Included in 2009, was a $1.4 million
foreign exchange loss related to the funding of the Satamatics
acquisition, which was required to be paid in British pounds
sterling. The loss resulted from changes in foreign currency
exchange rates from the date we funded the transaction to the
date the acquisition was completed. Partially offsetting this
loss in the period were net gains from the conversion of assets
and liabilities not denominated in the functional currency and
changes in the fair value of forward contracts used to hedge
against currency exposure.
We recognized an income tax benefit of $4.3 million for
continuing operations in 2009. Earnings were generated in
Canada, where we have a much lower effective rate than in the
U.S. or other locations due to research-related tax
benefits. Other jurisdictions incurred losses, which generated a
tax benefit. In addition we recognized a change in estimate of
$1.9 million for prior-year research and development
credits in the U.S. after completion of an Internal Revenue
Service examination. No tax benefit was recognized for the loss
on impairment of goodwill. Income tax for 2008 was a net benefit
of $0.7 million. A $0.9 million tax benefit was
recognized in 2008 related to revised estimates for research and
development costs qualifying for U.S. Federal tax credits
from prior years. We also recognized a $1.3 million benefit
in 2008 from the reduction of the valuation allowance against
deferred tax assets based upon the expected continuing
profitability of SATCOM. Our effective tax rate for 2010 is
expected to be approximately 15%.
Years
ended December 31, 2008 and 2007:
Net sales increased by 16.4% to $335.0 million from
$287.9 million, for 2008 as compared with 2007, with net
sales growth contributed by each of our three reportable
operating segments. Communications & Tracking and
D&S recorded the largest growth in net sales, with
increases of 25.1% and 29.7%, respectively. These
37 of 105
Table of Contents
increases were mainly due to the strong demand for
high-speed-data aeronautical products from both commercial and
military markets and the revenues generated from the development
of the Inmarsat global satellite/GSM phone by our
Communications & Tracking segment, and the increased
activity on both commercial and military programs by our
D&S segment. Net sales for LXE were higher by 5.1%
primarily due to growth in net sales from the international
market along with a favorable effect of changes in exchange
rates that increased the reported net sales from international
markets.
Product net sales increased by 10.4% to $273.3 million in
2008 as compared with 2007 mainly due to the strong demand for
high-speed-data aeronautical products from both commercial and
military markets, and higher net sales of terminals and wireless
data collection equipment for logistics management systems.
Service net sales increased by $21.4 million to
$61.8 million in 2008 as compared with 2007 mainly due to
significant work performed on a military communications research
project by D&S. Service net sales made up a slightly higher
percentage of total net sales in 2008 compared with 2007.
Overall cost of sales as a percentage of consolidated net sales
increased in 2008 as compared with 2007, due to higher
cost-of-sales
percentages recorded by each of our three reportable segments.
Product cost of sales as a percentage of its respective net
sales increased in 2008 as compared with 2007, mainly due to a
higher percentage of net sales generated from indirect channels
at LXE, and the revenues generated in 2008 by
Communications & Tracking related to an agreement to
develop the Inmarsat global satellite/GSM phone, that did not
generate gross margin. An agreement was reached with Inmarsat in
January 2009 and the project has been concluded with the full
effect recognized in the fourth quarter of 2008. Service cost of
sales as a percentage of its respective net sales increased in
2008 as compared with 2007, mainly due to a higher percentage of
net sales generated by D&S, which has a higher
cost-of-sales
percentage than our LXE and Communications & Tracking
segments.
SG&A expenses as a percentage of consolidated net sales
were lower in 2008 as compared with 2007. The $6.9 million
growth in actual expenses mainly related to the effect of
changes in foreign currency exchange rates that increased the
reported costs of the international activities at LXE, and
sales-related efforts, such as selling and marketing, to support
the growth in net sales. SG&A expenses also included
additional costs from our Trux and Sky Connect operations which
were acquired in February and August 2008, respectively, as well
as approximately $1.1 million of severance costs primarily
related to staff reductions in LXEs international
operations that occurred during 2008. These additional costs
were partially offset by the impact of managements
cost-reduction efforts at LXE which began in the second quarter
of 2008.
R&D expenses increased by $1.3 million mainly due to
additional internal development programs for next-generation
products at SATCOM, and the effect of changes in foreign
currency exchange rates on its reported costs.
Interest income decreased by $3.0 million mainly as a
result of lower average interest rates earned on our investment
balances and to a lesser extent the decrease in the average
investment balances.
Our foreign currency forward contract program was somewhat more
effective in reducing the currency risk in 2008, resulting in
smaller foreign currency exchange losses in 2008 as compared
with 2007.
Income tax for 2008 was a net benefit of $0.7 million. A
$0.9 million tax benefit was recognized in 2008 related to
revised estimates for research and development costs qualifying
for U.S. Federal tax credits from prior years. We also
recognized a $1.3 million benefit in 2008 from the
reduction of the valuation allowance against deferred tax assets
based upon the expected continuing profitability of SATCOM.
Excluding these special items, our effective income tax rate for
2008 was 7.7%. The rate was 9.8% for the year ended
December 31, 2007. The decrease in the estimated annual
rate is due to a higher proportion of earnings in Canada, where
we have a much lower effective rate than in the U.S. or
other locations due to research-related tax benefits.
38 of 105
Table of Contents
Segment
Analysis
Our net sales,
cost-of-sales
(as a percentage of respective segment net sales), operating
income (loss), and Adjusted EBITDA for the years ended
December 31, 2009, 2008 and 2007 were as follows for each
of our reportable operating segments (in thousands, except
percentages):
Years Ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Net sales:
|
||||||||||||
Communications & Tracking
|
$ | 158,952 | 112,517 | 89,968 | ||||||||
LXE
|
109,441 | 145,885 | 138,821 | |||||||||
Defense & Space
|
91,579 | 76,643 | 59,090 | |||||||||
Total
|
$ | 359,972 | 335,045 | 287,879 | ||||||||
Cost of sales percentage:
|
||||||||||||
Communications & Tracking
|
61.7 | % | 58.6 | % | 55.9 | % | ||||||
LXE
|
63.6 | 60.3 | 58.0 | |||||||||
Defense & Space
|
80.1 | 77.0 | 75.4 | |||||||||
Total
|
67.0 | 63.8 | 60.9 | |||||||||
Operating income (loss):
|
||||||||||||
Communications & Tracking
|
$ | 11,383 | 14,187 | 12,189 | ||||||||
LXE
|
(26,531 | ) | 2,861 | 7,067 | ||||||||
Defense & Space
|
7,314 | 6,381 | 4,876 | |||||||||
Corporate & Other
|
(6,799 | ) | (3,805 | ) | (4,865 | ) | ||||||
Total
|
$ | (14,633 | ) | 19,624 | 19,267 | |||||||
Adjusted
EBITDA(1)
|
||||||||||||
Communications and Tracking
|
$ | 24,326 | 19,122 | 15,244 | ||||||||
LXE
|
(3,379 | ) | 6,724 | 9,508 | ||||||||
Defense & Space
|
10,682 | 9,410 | 7,503 | |||||||||
Corporate & Other
|
1,623 | (1,290 | ) | 691 | ||||||||
Total
|
$ | 33,252 | 33,966 | 32,946 | ||||||||
(1) Adjusted
EBITDA is considered a non-GAAP financial measure. See section
entitled Adjusted EBITDA for an explanation of this
measure and a reconciliation to net earnings (loss).
Communications & Tracking: Net
sales were $46.4 million higher in 2009 as compared with
2008. The increase was due to the sales generated from our
recently acquired product lines, which contributed
$64.7 million of additional net sales in 2009. This
increase in net sales was partially offset by lower net sales of
high-speed-data aeronautical products into the military and air
transport markets in 2009, as compared with 2008. Net sales from
the business jet market were also lower in 2009 as compared with
2008. Sales of new corporate aircraft have declined in 2009 due
to general economic conditions and a high level of inventory of
used aircraft. Positive customer acceptance of new equipment
offerings in 2009 helped to fuel sales of SwiftBroadband
products. Revenues for 2008 included the development of the
Inmarsat global satellite/GSM phone, which was concluded in 2008
and, therefore, had no effect on the results of 2009. Net sales
of $112.5 million were reported for 2008, an increase of
25.1% as compared with 2007, mainly as a result of the strong
demand for high-speed-data aeronautical products from both
commercial and military markets, and revenues generated from the
development of the Inmarsat global satellite/GSM phone.
39 of 105
Table of Contents
Cost of sales as a percentage of net sales was higher in 2009 as
compared with 2008. The
cost-of-sales
percentage for 2009 was impacted by a change in product mix and
amortization costs of intangible assets from our new product
lines acquired in 2009. Cost of sales as a percentage of net
sales was higher for 2008 as compared with 2007. The increase in
cost of sales percentage was mainly related to cost increases on
the Inmarsat global satellite/GSM phone project which was
partially offset by a more favorable product mix.
Operating income was $2.8 million lower in 2009 as compared
with 2008. This was primarily as a result of higher SG&A
expenses, additional intangible asset amortization costs from
our new product lines, and severance charges of approximately
$0.7 million in 2009, which offset the higher margin
contribution from an increase in net sales generated, and the
favorable effects of foreign currency exchange rates in 2009.
Operating income was $2.0 million higher in 2008 as
compared with 2007 primarily due to a higher margin contribution
from an increase in net sales generated in 2008. Operating
income as a percentage of net sales was 7.2%, 12.6% and 13.5% in
2009, 2008 and 2007, respectively.
Adjusted EBITDA of $24.3 million in 2009 was
$5.2 million more than 2008, primarily due to the operating
income before depreciation and amortization contributed by our
new product lines acquired in 2009, and a $1.5 million
favorable change in foreign currency gains and losses. Adjusted
EBITDA increased by $3.9 million in 2008 as compared with
2007, mainly due to higher operating income contribution by
SATCOMs organic product lines and lower foreign currency
exchange losses in 2008.
LXE: Net sales in 2009 were
$36.4 million lower as compared with 2008, reflecting the
impact of the slowdown in the global economy. Net sales
decreased in both the International and Americas markets in
2009, as compared with 2008, resulting primarily from a lower
number of terminals shipped in both markets. It was also lower
due to the foreign currency translation effect on the reported
net sales for LXEs International market. Net sales in 2008
increased as compared with the preceding year resulting from an
increased number of terminals shipped in the International
market, along with a favorable effect of changes in foreign
currency exchange rates that increased the reported net sales
from International market. Increased International sales more
than offset the decline in net sales in the Americas in 2008. We
believe that the softer Americas and International markets
reflect slower capital spending in a sluggish economy. The
economy may continue to be sluggish in both the Americas and
International markets in 2010, which could continue to delay
customer capital-spending decisions.
Cost of sales as a percentage of net sales was higher in 2009 as
compared with 2008, mainly due to lower production volume over
which fixed costs were absorbed, a higher percentage of net
sales generated from indirect channels which have a higher
cost-of-sales
percentage than net sales generated from direct sales channels,
and an unfavorable effect of changes in foreign currency
exchange rates that affected our reported International net
sales. Revenues are reported in the local functional currency
but product costs are reported in the U.S. dollar, which
was stronger in 2009 compared with 2008. Cost of sales as a
percentage of net sales was higher in 2008 as compared with 2007
mainly as a result of a higher percentage of net sales generated
from indirect channels, which has a higher
cost-of-sales
percentage than net sales generated from direct sales channels,
partially offset by the favorable effects of changes in
international currencies that increased our reported
international net sales.
LXE reported an operating loss of $26.5 million in 2009.
This was a decrease in operating income of $29.4 million as
compared with 2008 mainly due to an impairment loss on goodwill
recorded in 2009 of $19.9 million, lower net sales recorded
in 2009 and a less favorable
cost-of-sales
percentage. These impacts were partially offset by lower
SG&A and R&D expenses. SG&A and R&D expenses
were lower in 2009 by $8.6 million as compared with the
same periods in 2008 reflecting the impact of managements
efforts to control spending. Lower SG&A expenses were
primarily a result of staff reductions to realign LXEs
cost structure with the expected needs of the business, and the
favorable effect of changes in foreign currency exchange rates
on reported costs, partially offset by higher severance
expenses. Lower R&D expenses were mainly a result of
controlled spending through headcount reductions, redeploying
development efforts offshore and the completion of certain
internal development programs in 2009. Operating income
decreased by $4.2 million in 2008 as compared with 2007
primarily due to a lower margin contribution resulting from a
less favorable
cost-of-sales
percentage, and an increase in SG&A expenses. SG&A
expenses increased in 2008, as
40 of 105
Table of Contents
compared with 2007, mainly as a result of the unfavorable
effects of changes in foreign currency exchange rates, as well
as approximately $1.1 million of severance costs primarily
related to staff reductions in LXEs international
operations in 2008. The increase in SG&A costs was
partially offset by the impact of managements cost
reduction efforts begun in the second quarter of 2008. Operating
income as a percentage of net sales was negative 24.2%, and
positive 2.0% and 5.1% in 2009, 2008 and 2007, respectively.
Adjusted EBITDA decreased in 2009 and in 2008 by
$10.1 million and $2.8 million, respectively, as
compared with the previous year, mainly due to lower operating
income in both 2009 and in 2008.
Defense & Space: Net sales
increased by $14.9 million in 2009, or 19.5%, compared to
2008. Net sales for 2008 were $17.6 million higher, or
29.7%, compared to 2007. The increases were mainly due to
increased work performed on military programs in 2009 and 2008,
and increased activity on commercial projects, including
significant work to supply phase-shifter products for a military
program, and antennas for systems that provide connectivity to
the internet, live television programs and cellular services
on-board commercial aircraft. The work performed on a large
military satellite communications research project was an
individually significant contributor to the net sales increase
in both 2009 and 2008, but the work was completed early in the
fourth quarter of 2009, and is not expected to contribute to
future net sales. As a result, D&S began an operational
transition and workforce reduction in the fourth quarter of 2009
to reduce capacity; however, the extent and cost of that
transition will depend upon the success of business development
efforts and the timing of orders. Order backlog of long-term
contracts was $89.6 million at December 31, 2009, a
decrease of $25.3 million from December 31, 2008.
Customer orders in 2008 were a record $125.7 million. This
increased sales order volume contributed to the increase in net
sales as it allowed D&S to expand its workforce to meet the
order demand. The strong order volume also left D&S with a
record backlog for long-term contracts of $114.9 million at
December 31, 2008, a 75% increase from December 31,
2007.
Cost of sales as a percentage of net sales was higher in 2009
and 2008 as compared with the previous years, mainly due to an
unfavorable mix of contracts and an increase in costs from a
higher volume of subcontracted projects utilized to meet
scheduling demands for certain military programs. Cost of sales
as a percentage of net sales was also higher in 2009 as compared
with 2008 due to unfavorable contract performance experienced on
certain programs in 2009.
Operating income improved by $0.9 million in 2009 as
compared with 2008. Operating income improved mainly due to the
increase in net sales generated in 2009, and lower SG&A
expenses, partially offset by severance charges of approximately
$1.6 million in 2009. Operating income improved by
$1.5 million in 2008, as compared with 2007, primarily due
to a higher margin contribution from an increase in net sales
generated in 2008. Operating income as a percentage of net sales
was 8.0% in 2009, and was 8.3% in both 2008 and 2007.
Adjusted EBITDA increased in 2009 and in 2008 by
$1.3 million, and $1.9 million, respectively, as
compared with the previous year, due to an increase in operating
income in both 2009 and in 2008.
Adjusted
EBITDA
We also measure our performance based on the non-GAAP financial
measure of earnings before interest expense, income taxes,
depreciation and amortization, and before discontinued
operations, impairment loss on goodwill, acquisition-related
items and acquisition-related foreign exchange adjustment
(Adjusted EBITDA).
41 of 105
Table of Contents
The following table is a reconciliation of net (loss) earnings
(which is the most directly comparable GAAP operating
performance measure) to Adjusted EBITDA and earnings (loss) from
continuing operations before income taxes by segment, for 2009,
2008, and 2007 (in thousands):
Corp & |
||||||||||||||||||||
C&T
|
LXE
|
D&S
|
Other
|
Total
|
||||||||||||||||
Year Ended December 31, 2009
|
||||||||||||||||||||
Net loss
|
$ | (20,065 | ) | |||||||||||||||||
Loss from discontinued operations
|
6,916 | |||||||||||||||||||
Income tax benefit from continuing operations
|
(4,266 | ) | ||||||||||||||||||
Earnings (loss) from continuing operations before income taxes
|
$ | 12,141 | (26,708 | ) | 7,315 | (10,163 | ) | (17,415 | ) | |||||||||||
Interest expense
|
68 | 93 | - | 2,020 | 2,181 | |||||||||||||||
Depreciation and amortization
|
12,117 | 3,345 | 3,367 | 1,160 | 19,989 | |||||||||||||||
Impairment loss on goodwill
|
- | 19,891 | - | - | 19,891 | |||||||||||||||
Acquisition-related items
|
- | - | - | 7,206 | 7,206 | |||||||||||||||
Acquisition-related foreign exchange adjustment
|
- | - | - | 1,400 | 1,400 | |||||||||||||||
Adjusted EBITDA
|
$ | 24,326 | (3,379 | ) | 10,682 | 1,623 | $ | 33,252 | ||||||||||||
Year Ended December 31, 2008
|
||||||||||||||||||||
Net earnings
|
$ | 20,471 | ||||||||||||||||||
Income tax benefit from continuing operations
|
(682 | ) | ||||||||||||||||||
Earnings (loss) from continuing operations before income taxes
|
$ | 13,971 | 2,955 | 6,347 | (3,485 | ) | 19,789 | |||||||||||||
Interest expense
|
62 | 406 | 40 | 1,171 | 1,679 | |||||||||||||||
Depreciation and amortization
|
5,089 | 3,363 | 3,023 | 1,023 | 12,498 | |||||||||||||||
Adjusted EBITDA
|
$ | 19,122 | 6,724 | 9,410 | (1,291 | ) | $ | 33,966 | ||||||||||||
Year Ended December 31, 2007
|
||||||||||||||||||||
Net earnings
|
$ | 18,744 | ||||||||||||||||||
Loss from discontinued operations
|
503 | |||||||||||||||||||
Income tax expense from continuing operations
|
2,080 | |||||||||||||||||||
Earnings (loss) from continuing operations before income taxes
|
$ | 11,504 | 6,955 | 4,742 | (1,874 | ) | 21,327 | |||||||||||||
Interest expense
|
121 | 348 | 141 | 1,343 | 1,953 | |||||||||||||||
Depreciation and amortization
|
3,619 | 2,205 | 2,620 | 1,222 | 9,666 | |||||||||||||||
Adjusted EBITDA
|
$ | 15,244 | 9,508 | 7,503 | 691 | $ | 32,946 | |||||||||||||
We believe that earnings that are based on this non-GAAP
financial measure provide useful information to investors,
lenders and financial analysts because (i) this measure is
more comparable with the results for prior fiscal periods, and
(ii) by excluding the potential volatility related to the
timing and extent of non operating activities, such as
acquisitions or revisions of the estimated value of post-closing
earn-outs, such results provide a useful means of evaluating the
success of our ongoing operating activities. Also, we use this
information, together with other appropriate metrics, to set
goals for and measure the performance of our operating
businesses, and to assess our compliance with debt covenants.
Management further considers
42 of 105
Table of Contents
Adjusted EBITDA an important indicator of operational strengths
and performance of our businesses. EBITDA measures are used
historically by investors, lenders and financial analysts to
estimate the value of a company, to make informed investment
decisions and evaluate performance. Management believes that
Adjusted EBITDA facilitates comparisons of our results of
operations with those of companies having different capital
structures. In addition, a measure similar to Adjusted EBITDA is
a component of our bank lending agreement, which requires
certain levels of Adjusted EBITDA to be achieved. This
information should not be considered in isolation or in lieu of
our operating and other financial information determined in
accordance with generally accepted accounting principles
(GAAP). In addition, because EBITDA and adjustments
to EBITDA are not determined consistently by all entities,
Adjusted EBITDA as presented may not be comparable to similarly
titled measures of other companies.
Discontinued
Operations:
Our discontinued operations reported a loss before income taxes
of $10.9 million in 2009. The loss was mainly a result of a
$9.2 million liability recorded in 2009 for costs awarded
for warranty claims under the provisions of the sales agreement
of our former EMS Wireless division, and for legal costs
associated with the defense of these claims.
Prior to 2007, we disposed of our S&T/Montreal, SatNet, and
EMS Wireless divisions. The sales agreements for each of these
disposals contained standard indemnification provisions for
various contingencies that could not be resolved before the
dates of closing and for various representations and warranties
provided by us and the purchasers. The purchaser of EMS Wireless
asserted claims under such representations and warranties. The
parties agreed to arbitration, which commenced in the third
quarter of 2009. In March of 2010, we received an interim
decision from the arbitrator on these claims awarding the
purchaser a total of approximately $9.2 million under the
warranty provisions of the purchase agreement. As a result, we
accrued a liability for the awarded costs in discontinued
operations in 2009. We accrue for a liability related to a
contingency, representation or warranty when management
considers that the liability is both probable and can be
reasonably estimated. Prior to the decision by the arbitrator,
we did not believe that sufficient information existed to
evaluate such claims, and could not reasonably estimate the
range of this liability, or determine whether such liability
would be material. The interim award will not become final until
the arbitrator determines awards of costs and attorneys
fees, which the parties will be briefing in the near future. It
is not possible at this time to determine the amount of any
additional award, but any such award would be reflected in
discontinued operations when it becomes probable and estimable.
We are assessing our options in response to the interim award.
Legal costs of $1.5 million associated with the defense of
this claim were also reflected in discontinued operations in
2009.
In 2008, discontinued operations had no effect on our net
earnings. Our discontinued operations reported a loss before
income taxes of $0.6 million in 2007, mainly due to
additional costs incurred to settle various contingent items, as
well as expenses for legal, audit, and other outside services
for the sale of SatNet and EMS Wireless.
We have an agreement with the purchaser of the former
S&T/Montreal division to acquire a license for
$8 million in payments over a seven-year period, beginning
in December 2008, for the rights to a certain satellite
territory. We have a corresponding sublicense agreement with the
purchaser that granted the territory rights back to the
purchaser, under which we are to receive a portion of the
satellite service revenues from the specific market territory
over the same period. The purchaser had previously guaranteed
that the revenues derived under the sublicense would equal or
exceed the acquisition cost of the license. As part of the
agreement to sell the net assets of S&T/Montreal, we
released the purchaser for this guarantee. Without the
guarantee, we estimate that our portion of the satellite service
revenues will be less that the acquisition cost, and we have
accordingly reflected a liability for the net cost in our
consolidated balance sheet.
As of December 31, 2009, we have not made any payments
under this license agreement. The satellite service revenues
from the specific market territory included under the sublicense
agreement are considerably lower than expected. We believe that
sufficient efforts are not being made by the purchaser of the
former S&T/Montreal division to market this satellite
service. The parties are in discussions of a possible settlement
under
43 of 105
Table of Contents
these agreements. We believe that the net liability recorded in
our consolidated balance sheet is our best estimate of the
settlement amount. If a settlement is reached, it would be
expected to be paid in the following twelve months, and
therefore the net liability is recorded as a current liability
in our consolidated balance sheet as of December 31, 2009.
In 2006, we completed the sale of our former SatNet division.
The asset purchase agreement (APA) provided for the
payment of $2.3 million of the aggregate consideration in
an interest-bearing note to be repaid over a three-year period
beginning in May 2007. As of December 31, 2009,
approximately $1.1 million of this note receivable,
excluding accrued interest, remained unpaid. The purchaser has
indicated that it believes it has claims that offset the unpaid
balance. We do not believe that these claims are valid according
the terms of the APA and have filed an arbitration demand with
the purchaser. We believe that the purchaser has the ability to
pay the remaining balance of this note receivable, and that the
receivable recorded in its consolidated balance sheet is fully
collectible.
Backlog
Backlog is very important for our D&S segment due to the
long delivery cycles for its projects. Many customers of our LXE
segment typically require short delivery cycles. As a result,
LXE usually converts orders into revenues within a few weeks,
and it generally does not build up a significant order backlog
that extends substantially beyond one fiscal quarter except for
annual or multi-year maintenance service agreements. Our
Communications & Tracking business has projects with
both short delivery cycles, and delivery cycles that extend
beyond the next twelve months. Our segment backlog as of
December 31, 2009 and December 31, 2008 was as follows
(in millions):
December 31 | ||||||||
2009 | 2008 | |||||||
Communications & Tracking
|
$ | 66.6 | 58.4 | |||||
LXE
|
22.0 | 12.6 | ||||||
Defense & Space
|
89.6 | 114.9 | ||||||
Total
|
$ | 178.2 | 185.9 | |||||
Included in the backlog of firm orders for our D&S segment
was approximately $22.5 million and $48.4 million of
unfunded orders, mainly for military contracts, as of
December 31, 2009, and December 31, 2008,
respectively. Of the orders in backlog as of December 31,
2009, the following are expected to be filled in 2010:
Communications & Tracking 70%;
LXE 80%; and D&S 50%. LXEs
backlog as of December 31, 2009 was nearly double that of
December 31, 2008 mainly due to a shortage of certain
component parts from LXEs suppliers which caused a delay
in the fulfillment of LXEs orders received in 2009. LXE is
working closely with suppliers to identify and implement ways to
resolve the sourcing issues. LXE is expecting to increase
critical parts inventories in 2010 to avoid further delays.
Liquidity
and Capital Resources
During 2009, cash and cash equivalents decreased by
$39.8 million to $47.2 million as of December 31,
2009. The primary factor contributing to the decrease during the
period was cash utilized for our Formation and Satamatics
acquisitions. Of the $47.2 million of cash as of
December 31, 2009, $39.3 million is held by
subsidiaries outside of the U.S. These undistributed
earnings are considered to be permanently reinvested and are not
available for use in the U.S.
Operating activities from continuing operations contributed
$42.3 million in positive cash flows in 2009. Although we
reported a loss from continuing operations loss of
$13.1 million in 2009, that loss included noncash charges
for depreciation and amortization of $20.0 million and an
impairment loss on goodwill of $19.9 million. We
experienced good customer collections during the period and were
able to lower inventory levels. Acquisition-related charges of
$3.1 million paid in 2009 are included as reductions of
cash provided by operating activities in the consolidated
statement of cash flows. Discontinued operations used cash of
44 of 105
Table of Contents
$0.6 million mainly for legal fees to defend us against
claims made by the purchaser of our EMS Wireless division, net
of tax benefits.
During 2009, we used $87.3 million of cash to acquire our
Formation and Satamatics businesses. These acquisitions were
partially funded with approximately $33.8 million of
borrowings under our revolving credit facility. We subsequently
repaid approximately $15.3 million of borrowings under our
revolving credit facility. We used $13.4 million for
purchases of capital equipment, the expansion of D&Ss
facility, and to upgrade the enterprise reporting system at LXE
in 2009.
During 2008, cash and cash equivalents decreased by
$47.0 million to $87.0 million as of December 31,
2008. The primary uses of cash during the period included
$31.6 million of cash used to acquire our Trux and Sky
Connect businesses, $13.9 million for purchases of capital
equipment and the expansion of D&Ss facility, and
$10.0 million to repurchase common shares under our share
repurchase program.
Continuing operating activities contributed $16.5 million
in positive cash flows in 2008. Net earnings of
$20.5 million and noncash charges, primarily depreciation
and amortization of $12.5 million and stock-based
compensation of $2.3 million, were partially offset by
increases in working capital.
During 2007, cash flow from continuing operating activities
increased to $42.1 million mainly due to the net earnings
reported by each of our four segments, and significant
collections of receivables by D&S and LXE. The
$3.3 million of net cash used in operating activities in
discontinued operations was mainly for payments of working
capital adjustments in accordance with the terms of the sales
agreements for our former SatNet and EMS Wireless.
We have a revolving credit agreement with a syndicate of banks.
Under the agreement, we have $60 million total capacity for
borrowing in the U.S. and $15 million total capacity
for borrowing in Canada. The agreement also has a provision
permitting an increase in the total borrowing capacity of up to
an additional $50 million with additional commitments from
the current lenders or from new lenders. The existing lenders
have no obligation to increase their commitments. The credit
agreement provides for borrowings through February 28,
2013, with no principal payments required prior to that date.
The credit agreement is secured by substantially all of our
tangible and intangible assets, with certain exceptions for real
estate that secures existing mortgages, other permitted liens
and for certain assets in foreign countries.
As of December 31, 2009, we had $18.5 million of
borrowings outstanding under this facility. We had
$2.5 million of outstanding letters of credit at
December 31, 2009, and the net total available for
borrowing under our revolving credit facility was
$54.0 million.
We expect that capital expenditures in 2010 will range from
$12 million to $14 million, excluding acquisitions of
businesses. These expenditures will be used to purchase
equipment that increases or enhances capacity and productivity,
and to upgrade the enterprise reporting system of our LXE
division.
Management believes that existing cash and cash equivalent
balances, cash provided from operations, and borrowings
available under our credit agreement will provide sufficient
liquidity to meet the operating and capital expenditure needs
for existing operations during the next twelve months.
On July 29, 2008, our Board of Directors authorized a stock
repurchase program for up to $20 million of our common
shares. We repurchased 495,000 common shares for approximately
$10.1 million under this program as of December 31,
2009.
We will make additional cash payments in 2010 of
$13.7 million related to acquisitions completed in 2009
based upon the achievement of performance targets in 2009, and
an agreement to settle the 2010 earn-out amount. Refer to
Note 2 of the consolidated financial statements for
additional information on these acquisitions.
In March of 2010, we received an interim decision from the
arbitrator on claims made by the purchaser of our former EMS
Wireless division. The arbitrator awarded the purchaser a total
of approximately $9.2 million under the warranty provisions
of the purchase agreement. We have sufficient cash resources to
pay this award.
45 of 105
Table of Contents
Off-Balance
Sheet Arrangements
We have $2.5 million of standby letters of credit
outstanding under our revolving credit facility to satisfy
performance guarantee requirements under certain customer
contracts. While these obligations are not normally called, they
could be called by the beneficiaries at any time before the
expiration date, if we failed to meet certain contractual
requirements. After deducting the outstanding letters of credit,
at December 31, 2009 we had $41.5 million available
for borrowing in the U.S. and $12.5 million available
for borrowing in Canada under the revolving credit facility.
During 2009, we completed acquisitions of two entities. Of the
total purchase price of these businesses, $10.2 million of
cash is in escrow accounts and is payable to the sellers within
specified periods following the respective dates of acquisition,
subject to claims we may make against the sellers.
The sales agreements for the disposal of our former
S&T/Montreal, SatNet, and EMS Wireless divisions contain
standard indemnification provisions for various contingencies
that could not be resolved before the dates of closing and for
various representations and warranties by the purchasers and us.
The purchaser of EMS Wireless asserted claims under such
representations and warranties. The parties agreed to
arbitration, which commenced in the third quarter of 2009. In
March of 2010, we received an interim decision from the
arbitrator on these claims awarding the purchaser a total of
approximately $9.2 million under the warranty provisions of
the purchase agreement. As a result, we accrued a liability for
the awarded costs in discontinued operations in 2009. We accrue
for a liability related to a contingency, representation or
warranty when management considers that the liability is both
probable and can be reasonably estimated. Prior to the decision
by the arbitrator, we did not believe that sufficient
information existed to evaluate such claims, and could not
reasonably estimate the range of this liability, or determine
whether such liability would be material. The interim award will
not become final until the arbitrator determines awards of costs
and attorneys fees, which the parties will be briefing in
the near future. It is not possible at this time to determine
the amount of any additional award, but any such award would be
reflected in discontinued operations when it becomes probable
and estimable.
Also as part of the agreement to sell the net assets of
S&T/Montreal, we released the purchaser from a corporate
guarantee, and have reported a noncurrent liability in the
consolidated balance sheet as of December 31, 2009. This
liability represents our estimated loss under an agreement to
acquire a license from the purchaser for $8 million in
payments over a seven-year period for the rights to a certain
satellite territory and a corresponding sublicense agreement
that granted the territory rights back to the purchaser, under
which we will receive a portion of the satellite service
revenues from the specific market territory over the same
period. The purchaser had previously guaranteed that the
revenues derived under the sublicense would equal or exceed the
acquisition cost of the license; however, having released the
guarantee, we currently estimate that our portion of the
satellite service revenues will be less than the acquisition
cost, and we have accordingly reflected a net liability as
current in the consolidated balance sheet.
46 of 105
Table of Contents
Commitments
and Contractual Obligations
Following is a summary of our material contractual cash
commitments as of December 31, 2009 (in thousands):
Payments due by period
|
||||||||||||||||||||
Less than |
1-3 |
4-5 |
After 5 |
|||||||||||||||||
Total
|
1 year
|
years
|
years
|
years
|
||||||||||||||||
Purchase commitments (1)
|
$ | 34,028 | 33,946 | 82 | - | - | ||||||||||||||
Long-term debt, excluding capital lease obligations (2)
|
27,748 | 1,396 | 3,052 | 21,359 | 1,941 | |||||||||||||||
Operating lease obligations
|
24,963 | 5,160 | 8,281 | 5,630 | 5,892 | |||||||||||||||
Acquisition costs for earn-out provisions
|
13,729 | 13,729 | - | - | - | |||||||||||||||
License to acquire satellite service
|
8,000 | 2,000 | 2,000 | 2,000 | 2,000 | |||||||||||||||
FIN 48-Uncertain
tax positions
|
2,019 | 2,019 | - | - | - | |||||||||||||||
Deferred compensation agreements
|
709 | 156 | 198 | 34 | 321 |
(1) | Purchase commitments primarily represent existing commitments under purchase orders or contracts to purchase inventory and raw materials for our products. Most of these purchase orders and contracts can be terminated for a fee that is either fixed or based on when termination occurs. | |
(2) | Excludes interest payments on long-term debt. Future interest expense is unpredictable and varies depending on the level of borrowings outstanding, and the timing of repayments, and therefore has not been included in the above table. Interest payments in 2009 were approximately $1.5 million. There was no accrued interest as of December 31, 2009. |
Critical
Accounting Policies
Our consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting
principles, which often require the judgment of management in
the selection and application of certain accounting principles
and methods. We consider the following accounting policies to be
critical to understanding our consolidated financial statements,
because the application of these policies requires significant
judgment on the part of management, and as a result, actual
future developments may be different from those expected at the
time that we make these critical judgments. We have discussed
these critical accounting policies with the Audit Committee.
Revenue
recognition
Revenue recognition for fixed-price, long-term contracts is a
critical accounting policy involving significant management
estimates by D&S, and Communications & Tracking.
Long-term contracts use the ratio of cost-incurred-to-date to
total-estimated-cost-at-completion as the measure of performance
that determines how much revenue should be recognized
(percentage-of-completion
method of accounting). Cost incurred and estimates of cost to
complete include overhead expenses, which are applied at a
budgeted rate; the budgeted overhead rate has historically been
closely comparable with the periodic actual overhead rate, but
any budget-versus-actual rate variance during an accounting
period is expensed in that period, with no effect on revenues
recognized.
The determination of total estimated cost relies on engineering
estimates of the cost to complete the contract, with allowances
for identifiable risks and uncertainties. If changes in
engineering estimates result in an expected cost overrun but not
an overall loss on the contract (i.e., the estimated cost to
complete exceeds the revenue to be recognized on the remainder
of the contract), then revenue
recognized-to-date
will be adjusted accordingly based on the application of the
percentage-of-completion
method. If changes in engineering estimates result in the total
estimated
cost-at-completion
in excess of total contact value, the entire estimated loss is
immediately recognized. Engineering estimates are frequently
reviewed and updated; however,
47 of 105
Table of Contents
unforeseen problems can occur to substantially reduce the rate
of future revenue recognition in relation to costs incurred.
Billings under a long-term contract are often subject to the
accomplishment of contractual milestones or specified billing
arrangements that are not directly related to the rate of costs
being incurred under a contract. As a result, revenue recognized
under
percentage-of-completion
for any particular period may vary from billings for the same
period. As of December 31, 2009, we had recognized a
cumulative total of $33.1 million in revenues under
percentage-of-completion
accounting, for which revenues were unbilled as of that date due
to the billing milestones specified in the respective customer
contracts. This is included in estimated earnings in excess of
billings on long-term contracts and other non-current assets in
our consolidated balance sheets. We had also recognized
$9.6 million in billings in excess of contract costs and
estimated earnings on long-term contracts. This is included in
noncurrent liabilities in our consolidated balance sheets.
Net sales under cost-reimbursement contracts in D&S are
recorded as costs are incurred and include an estimate of fees
earned under specific contract terms. Costs incurred include
overhead, which is applied at rates approved by the customer.
Fixed fees are earned ratably over the life of a contract.
Incentive fees are based upon achievement of objective criteria
for technical product performance or delivery milestones,
although such fees may also be based upon subjective criteria
(for example, the customers qualitative assessment of our
project management). In all cases related to incentive fee
arrangements, we do not record revenue until the fee has been
earned under the terms of the contract.
We recognize revenue from product-related service contracts, and
extended warranties, ratably over the life of the contract.
Amounts paid by customers at the inception of the extended
warranty period are reflected as deferred revenue with the
portion estimated to be recognized as revenue within the next
twelve months reflected in other current liabilities in the
consolidated balance sheets and the remainder reflected in
noncurrent liabilities. We recognize revenue from repair
services and tracking, voice and data services as services are
rendered. We recognize revenue from contracts for engineering
services using the
percentage-of-completion
method for fixed price contracts, or as costs are incurred for
cost-type contracts.
Net sales under all arrangements are recognized when units are
shipped or services are performed, unless multiple deliverables
are involved or software is more than incidental to a product as
a whole (mainly experienced at Communications &
Tracking), in which case we recognize revenue in accordance with
either ASC Subtopic
605-25,
Revenue Recognition-Multiple-Element Arrangements, or ASC
Subtopic
985-605,
Software-Revenue Recognition, as applicable. Net sales do
not include sales tax collected.
Inventory
valuation
We reduce the carrying amount of our inventory for estimated
obsolete and slow-moving inventory to its estimated net
realizable value based on assumptions about future demand and
market conditions. If actual market conditions are less
favorable than those projected by management, additional
adjustments could be required. Such adjustments reduce the
inventorys cost basis, and the cost basis is not increased
upon any subsequent increases in estimated net realizable value.
Evaluation
of fair value measurements
We adopted ASC Topic 820, Fair Value Measurements and
Disclosures, for financial assets and liabilities on
January 1, 2008, and for non-financial assets and
liabilities on January 1, 2009. This guidance clarifies
that fair value is an exit price, representing the amount that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants.
As such, fair value is a market-based measurement that should be
determined based on assumptions that market participants would
use in pricing an asset or liability. As a basis for considering
such assumptions, the new guidance establishes a three-tier
fair-value hierarchy, which prioritizes the inputs used in
measuring fair value as follows:
| Level 1 Observable inputs consisting of quoted prices in active markets; |
48 of 105
Table of Contents
| Level 2 Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and | |
| Level 3 Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
Business
combinations
We account for business combinations in accordance with the
provisions of ASC Topic 805, Business Combinations
(ASC 805). The provisions of ASC 805 were
previously contained in Statement of Financial Accounting
Standards (SFAS) No. 141(R), Business
Combinations. These provisions require that identifiable
assets acquired and liabilities assumed be reported at fair
value as of the acquisition date of a business combination.
Transaction costs are expensed as incurred, and are classified
within cash flows from operating activities in the consolidated
statement of cash flows. Costs associated with restructuring or
exit activities of an acquired entity are also expensed when
incurred. Contingent consideration in a business combination is
recognized at fair value at the acquisition date as a liability
or as equity. Subsequent adjustments of an amount recognized as
a liability, including accretion of the discounted liability,
are recognized in the statement of operations.
ASC 805 requires that we recognize and measure deferred tax
assets or liabilities arising from assets acquired and
liabilities assumed to be accounted for in accordance with the
provisions of ASC Topic 740, Income Taxes, with
appropriate allowances for uncertain tax positions and valuation
allowances against deferred tax assets. Subsequent changes to
valuation allowances against deferred tax assets after the
measurement period are recognized as an adjustment to income tax
expense.
An intangible asset is recognized as an asset apart from
goodwill if it arises from contractual or other legal rights or
if it is separable, that is, it is capable of being separated or
divided from the acquired entity and sold, transferred,
licensed, rented, or exchanged. Goodwill is recognized as a
result of a business combination to the extent the consideration
transferred exceeds the acquisition-date amounts of identifiable
assets acquired and liabilities assumed, determined in
accordance with the provisions of ASC 805.
In accordance with ASC Topic 350, Intangibles
Goodwill and Other (ASC 350), goodwill and
intangible assets acquired in a business combination and
determined to have indefinite useful lives are not being
amortized, but instead are evaluated for impairment annually,
and between annual tests if an event occurs or circumstances
change that indicate that the asset might be impaired.
ASC 350 requires that if the fair value of a reporting unit is
less than its carrying amount, including goodwill, further
analysis is required to measure the amount of the impairment
loss, if any. The amount by which the reporting units
carrying amount of goodwill exceeds the implied fair value of
the reporting units goodwill, determined in accordance
with ASC 350, is to be recognized as an impairment loss. During
2009, we changed the annual impairment testing date from
December 31 to the first day of our twelfth reporting period in
the fiscal year. We believe this change is preferable since it
provides additional time prior to our year-end to complete the
goodwill impairment testing and report the results in our Annual
Report on
Form 10-K.
In accordance with ASC 350, intangible assets, other than those
determined to have an indefinite life, are amortized to their
estimated residual values on a straight-line basis, or on the
basis of expected economic benefit, over their estimated useful
lives. These intangible assets are reviewed for impairment in
accordance with ASC Subtopic
360-35,
Impairment or Disposal of Long-Lived Assets, whenever
events or changes in circumstances indicate that their carrying
amounts may not be recoverable. Recoverability of an asset to be
held and used is measured by comparing its carrying amount to
the estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge
would be recognized for the amount by which the carrying amount
of the asset exceeds its fair value. An asset to be disposed of
would be reported at the lower of the carrying amount or fair
value less costs to sell, and would no longer be depreciated.
Cash flow projections, although subject to a degree of
uncertainty, are based on managements estimates of future
performance, giving consideration to existing and anticipated
competitive and economic conditions.
49 of 105
Table of Contents
Evaluation
of long-lived assets for impairment
All long-lived assets on the consolidated balance sheet are
periodically reviewed for impairment. If an indication of
impairment arises, we test recoverability by estimating the cash
flows expected to result from the long-lived assets under
several different scenarios, including the potential sale of
assets, as well as continued holding of the assets under several
different kinds of business conditions.
Evaluation
of goodwill for impairment
We have four reporting units with goodwill from prior
acquisitions reported on the balance sheet at December 31,
2009. In completing the annual test for impairment in the fourth
quarter of 2009, the estimated fair value of three of our four
reporting units with goodwill exceeded the carrying amount. The
determination of estimated fair value includes a number of
assumptions that drive the value and these assumptions
inherently include a level of uncertainty. Future events,
circumstances, or both, could have a negative effect on the fair
value of any or all of the reporting units which could result in
the fair value not exceeding the carrying amount in future
tests. If this were to occur, we would be required to measure
the amount, if any, of an impairment loss of goodwill.
For our LXE reporting unit, the estimated fair value did not
exceed the carrying amount. Therefore, we completed step two of
the impairment testing process to measure the amount of the
impairment loss. While the carrying amount exceeded the
estimated fair value by only $6.0 million, the impairment
loss was measured as $19.9 million. The requirements to
determine the impairment loss stipulate that the estimated fair
value of all assets and liabilities of the reporting unit be
determined similar to the method used in a business combination.
The aggregate fair value of the assets and liabilities,
including those not reflected in the carrying amount, is
compared to the estimated reporting unit fair value with the
difference being implied goodwill. The excess of goodwill on the
balance sheet and this implied goodwill is the impairment loss.
For a reporting unit with unrecognized intangible assets or
other assets whose fair value exceeds the carrying amount, the
impairment loss will exceed the reporting unit fair value
deficiency since the accounting rules do not allow for a step up
in fair value for these other assets in this process. The LXE
reporting unit was last tested for impairment as of the end of
the first quarter in 2009. At that time no impairment of
goodwill was indicated. LXEs results for the remainder of
the year improved from the first quarter, however, they were
somewhat below revised expectations. In developing the 2010
operating plan for the reporting unit, and the longer-term cash
flow projections, the cash flows are now projected to be less
than previously estimated. Furthermore, the discount rate used
to determine the present value of the estimated future cash
flows is now higher.
The amount of goodwill for each reporting unit that passed the
initial step of the impairment test as of December 31,
2009, and the percentage by which the estimated fair value
exceeded the carrying amount of the reporting unit is as follows
(dollars in thousands):
Estimated |
||||||||
Fair Value in |
||||||||
Reported |
Excess of |
|||||||
Goodwill | Carrying Amount | |||||||
Formation
|
$ | 24,060 | 5.9 | % | ||||
Satamatics
|
23,429 | 2.5 | ||||||
Sky Connect
|
11,048 | 11.0 |
Each of these reporting units was recently acquired. At the
acquisition date, the carrying amount of a reporting unit is
equal to its purchase price. Therefore, a significant excess
would not be expected for a recently acquired reporting unit.
The key assumptions that drive the estimated fair value of the
reporting units include future cash flows from operations, the
discount rate applied to those future cash flows, determined
from a weighted-average cost of capital calculation, and EBITDA
and revenue multiples using guideline comparable companies. The
future cash flows include additional key assumptions relating to
revenue growth rates, margins and costs. The estimated revenue
growth rates for each of these reporting units are in excess of
anticipated inflation and industry forecasts in general since
the revenues of these reporting units have been
50 of 105
Table of Contents
negatively impacted by the global economic environment in recent
years so we expect a recovery to impact revenues favorably.
Furthermore, several of these reporting units operate in growing
markets. In addition, our reporting units are introducing a
number of new products in the near future that we expect to be
well received in the market. In the near term, we believe that
these reporting units will see the impact of a rebounding
economy over the next two years that will support such growth
projections. Actual future results could differ materially from
these estimates which could have a negative effect on fair
value. Particularly, if the markets served by these reporting
units do not expand as we expect, the fair value of one or more
of the reporting units could be determined to be below the
carrying amount.
The carrying amount of consolidated net assets on our balance
sheet as of the goodwill impairment testing date exceeded the
market capitalization of our common stock by approximately 30%
prior to recording the $19.9 million loss on impairment of
goodwill for LXE. At December 31, 2009, the carrying
amount of net assets exceeded the market capitalization by 7%.
At March 26, 2010, the market capitalization of our common stock
was 14% higher than the December 31, 2009 level.
Evaluation
of contingencies related to discontinued
operations
In 2005 and 2006, we disposed of S&T/Montreal, SatNet, and
EMS Wireless, all of which have been reported as discontinued
operations. The costs reported under discontinued operations in
2007 and 2009 mainly related to the resolution of various
contingencies, representations or warranties under standard
indemnification provisions in the sales agreements. We record a
liability related to a contingency, representation or warranty
when management considers that the liability is both probable
and can be reasonably estimated. The amounts we have accrued
related to the expected resolution of the dispositions of
discontinued operations that could vary from the actual amounts.
The purchaser of EMS Wireless asserted claims under such
representations and warranties. The parties agreed to
arbitration, which commenced in the third quarter of 2009. In
March of 2010, we received an interim decision from the
arbitrator on these claims awarding the purchaser a total of
approximately $9.2 million under the warranty provisions of
the purchase agreement. As a result, we accrued a liability for
the awarded costs in discontinued operations in 2009. We accrue
for a liability related to a contingency, representation or
warranty when management considers that the liability is both
probable and can be reasonably estimated. Prior to the decision
by the arbitrator, we did not believe that sufficient
information existed to evaluate such claims, and could not
reasonably estimate the range of this liability, or determine
whether such liability would be material. The interim award will
not become final until the arbitrator determines awards of costs
and attorneys fees, which the parties will be briefing in
the near future. It is not possible at this time to determine
the amount of any additional award, but any such award would be
reflected in discontinued operations when it becomes probable
and estimable.
Income
taxes
As part of the process of preparing our consolidated financial
statements, we are required to determine income taxes related to
each of the jurisdictions in which we operate. This process
involves estimating current tax expense, together with assessing
temporary differences resulting from differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carryforwards. These differences result in
deferred tax assets and liabilities in our consolidated balance
sheet.
For all deferred tax assets that exist in relation to an
uncertain tax position, we must determine the amount of that
benefit to recognize in accordance with the recognition and
measurement provisions of FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in
Income Taxes an Interpretation of FASB Statement
No. 109 (which is now included in ASC Subtopic
740-10-05,
Income Taxes). This determination requires judgments to
be made regarding the likelihood that the position would be
sustained upon examination based on the technical merits of the
position and estimates of the amount to be realized upon
settlement. A portion of the unrecognized tax benefits that
exist at December 31, 2009 would affect our effective tax
rate in the
51 of 105
Table of Contents
future if recognized. In 2009 we lowered the amount of
unrecognized benefits by $1.9 million related to prior-year
research and development credits in the U.S. after
completion of an Internal Revenue Service examination.
We must also assess the likelihood that the deferred tax assets
in each jurisdiction will be recovered from taxable income and,
to the extent we believe that recovery is not likely, we must
establish a valuation allowance against the deferred tax assets.
In determining the required level of valuation allowance, we
consider whether it is more likely than not that all or some
portion of the deferred tax assets will not be realized. This
assessment is based on managements expectations as to
whether sufficient taxable income of an appropriate character
will be realized within tax carryback and carryforward periods.
Our assessment involves estimates and assumptions about matters
that are inherently uncertain, and unanticipated events or
circumstances could cause actual results to differ from these
estimates. Should we change our estimate of the amount of
deferred tax assets that we would be able to realize, a change
to the valuation allowance would result in an increase or
decrease to the provision for income taxes in the period in
which such change in estimate is made.
Our most significant amount of deferred tax assets relates to
our Canadian operations, primarily from research-related tax
benefits. A valuation allowance has been established for a
portion of the Canadian deferred tax assets. It had been
managements expectation until 2005 that our Canadian
operations would generate enough research-related tax benefits
each year to offset any Canadian federal tax liability for any
given year. As a result, we had reserved substantially all the
net deferred tax assets associated with these research-related
tax benefits because the extent to which these deferred income
tax assets were to be realized in the future was uncertain. With
the disposal of unprofitable operations beginning in 2005 and
the improving profitability of continuing operations in Canada,
we have reassessed the required amount of valuation allowance
against our research-related deferred tax assets in Canada each
year. We have made adjustments each year in which we concluded
that it was more likely than not that additional tax benefits
would be realized based on an assessment of all available
evidence. The valuation allowance could be increased or
decreased in the future, which would result in an income tax
expense or benefit in future consolidated statements of
operations. A benefit could result if profitability expectations
for our Canadian operations increase.
We also have net deferred tax assets in the U.S., including net
operating loss and research and development credit carryforwards
from acquired companies. We completed our assessment in 2009 and
determined that no valuation allowance was necessary for those
deferred tax assets based on a consideration of all available
evidence about sources of taxable income. We will make an
evaluation of the likelihood of realization each reporting
period in the future, and we could determine that a valuation
allowance is necessary against all, or a portion, of the these
deferred tax assets.
Stock-based
compensation
We measure compensation expense based on estimated fair values
of all share-based awards to our employees and directors. We
estimate the fair value of stock options on the date of grant
using the Black-Scholes option valuation model. Stock-based
compensation is recognized on a straight-line basis over the
requisite service period for each separately vesting portion of
an award as if the award was, in substance, multiple awards. We
estimate future forfeitures based on historical experience and
review such estimates periodically and adjust expense
recognition accordingly.
The Black-Scholes option valuation model requires additional
estimates and assumptions, including expected stock price
volatility, expected term, and forfeitures rates. Our estimated
expected volatility is based on historical volatility of our
stock over a period equal to the expected term. The expected
term of options granted is based on historical data and
represents the period of time that options granted are expected
to be outstanding. Forfeitures are based on actual forfeiture
rates experienced.
52 of 105
Table of Contents
Risk
Factors and Forward-Looking Statements
The Company has included forward-looking statements in
managements discussion and analysis of financial condition
and results of operations. Actual results could differ
materially from those suggested in any forward-looking
statements as a result of a variety of factors. Such factors
include, but are not limited to:
| economic conditions in the U.S. and abroad and their effect on capital spending in our principal markets; | |
| difficulty predicting the timing of receipt of major customer orders, and the effect of customer timing decisions on our results; | |
| our successful completion of technological development programs and the effects of technology that may be developed by, and patent rights that may be held or obtained by, competitors; | |
| U.S. defense budget pressures on near-term spending priorities; | |
| uncertainties inherent in the process of converting contract awards into firm contractual orders in the future; | |
| volatility of foreign currency exchange rates relative to the U.S. dollar and their effect on purchasing power by international customers, and on the cost structure of our operations outside the U.S., as well as the potential for realizing foreign exchange gains and losses associated with assets or liabilities denominated in foreign currencies; | |
| successful resolution of technical problems, proposed scope changes, or proposed funding changes that may be encountered on contracts; | |
| changes in our consolidated effective income tax rate caused by the extent to which actual taxable earnings in the U.S., Canada and other taxing jurisdictions may vary from expected taxable earnings and the extent to which determined tax assets are considered realizable; | |
| successful transition of products from development stages to an efficient manufacturing environment; | |
| changes in the rate at which our products are returned for repair or replacement under warranty; | |
| customer response to new products and services, and general conditions in our target markets (such as logistics and space-based communications) and whether these responses and conditions develop according to our expectations; | |
| the increased potential for asset impairment charges as unfavorable economic or financial market conditions, or other developments might affect the estimated fair value of one or more of our business units; | |
| the success of certain of our customers in marketing our line of high-speed commercial airline communications products as a complementary offering with their own lines of avionics products; | |
| the continued availability of financing for various mobile and high-speed data communications systems; | |
| risk that the unsettled conditions in the credit markets may make it more difficult for some customers to obtain financing and adversely affect their ability to pay, which in turn could have an adverse impact on our business, operating results and financial condition; | |
| development of successful working relationships with local business and government personnel in connection with the distribution and manufacture of products in foreign countries; | |
| the demand growth for various mobile and high-speed data communications services; | |
| our ability to attract and retain qualified senior management and other personnel, particularly those with key technical skills; | |
| our ability to effectively integrate our acquired businesses, products or technologies into our existing businesses and products, and the risk that any such acquired businesses, products or technologies do |
53 of 105
Table of Contents
not perform as expected, are subject to undisclosed or unanticipated liabilities, or are otherwise dilutive to our earnings; |
| the potential effects, on cash and results of discontinued operations, of final resolution of potential liabilities under warranties and representations that we made, and obligations assumed by purchasers, in connection with our dispositions of discontinued operations; | |
| the availability, capabilities and performance of suppliers of basic materials, electronic components and sophisticated subsystems on which we must rely in order to perform according to contract requirements, or to introduce new products on the desired schedule; and | |
| uncertainties associated with U.S. export controls and the export license process, which restrict our ability to hold technical discussions with customers, suppliers and internal engineering resources and can reduce our ability to obtain sales from customers outside the U.S. or to perform contracts with the desired level of efficiency or profitability. |
Additional information concerning these and other potential risk
factors is included in Item 1A. of this Annual Report on
Form 10-K
under the caption Risk Factors.
Effect of
New Accounting Pronouncements
Recently Issued Pronouncements Not Yet Adopted
In October 2009 the FASB issued two Accounting Standards Updates
(ASU) that could result in revenue being recognized
earlier in certain revenue arrangements with multiple
deliverables. Both updates are effective for us in the first
quarter of 2011. Early adoption is permitted. We are evaluating
when to adopt the updates and the effect the adoption will have
on our consolidated financial statements.
ASU 2009-13,
Revenue Recognition Multiple-Deliverable Revenue
Arrangements, amends the accounting for revenue arrangements
with multiple deliverables. Among other things, ASU
2009-13:
| Eliminates the requirement for objective evidence of fair value of an undelivered item for treatment of the delivered item as a separate unit of accounting; | |
| Requires use of the relative selling price method for allocating total consideration to elements of the arrangement instead of the relative-fair-value method or the residual method; | |
| Allows the use of an estimated selling price for any element within the arrangement to allocate consideration to individual elements when vendor-specific objective evidence or other third party evidence of selling price do not exist; and | |
| Expands the required disclosures. |
ASU 2009-14,
Software Certain Revenue Arrangements That
Include Software Elements, amends the guidance for revenue
arrangements that contain tangible products and software
elements. ASU
2009-14
redefines the scope of arrangements that fall within software
revenue recognition guidance by specifically excluding tangible
products that contain software components that function together
to deliver the essential functionality of the tangible product.
Under current guidance, products that contain software that is
more than incidental to the product as a whole fall within the
scope of software revenue recognition guidance, which requires,
among other things, the existence of vendor-specific objective
evidence of fair value of all undelivered items to allow a
delivered item to be treated as a separate unit of accounting.
Such tangible products excluded from the requirements of
software revenue recognition requirements under ASU
2009-14
would follow the revenue recognition requirements for other
revenue arrangements, including the new requirements for
multiple-deliverable arrangements contained in ASU
2009-13.
In January 2010, the FASB issued guidance amending and
clarifying requirements for fair value measurements and
disclosures in ASU 2010-06, Improving Disclosures About Fair
Value Measurements. The new guidance requires disclosure of
transfers in and out of Level 1 and Level 2 and a
reconciliation of all activity in Level 3. The guidance
also requires detailed disaggregation disclosure for each class
of assets and liabilities in all
54 of 105
Table of Contents
levels, and disclosures about inputs and valuation techniques
for Level 2 and Level 3. The guidance is effective at
the start of interim or annual reporting periods beginning after
December 15, 2009 and the disclosure reconciliation of all
activity in Level 3 is effective at the start of annual
reporting periods beginning after December 15, 2010. We do
not expect that the adoption of ASU
2010-06 will
have a material impact on our consolidated financial statements.
Refer to Note 1 of our consolidated financial statements in
this Annual Report for additional information on accounting
changes recently adopted, and recently issued pronouncements not
yet adopted.
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
As of December 31, 2009, we had the following market-risk
sensitive instruments (in thousands):
Government-obligations money market funds, other money market
instruments, and interest-bearing time deposits, with maturity
dates of less than 3 months interest payable monthly at
variable rates (a weighted-average rate of 0.2% at
December 31, 2009)
|
$ | 18,165 | ||
Revolving credit agreement with U.S. and Canadian banks,
maturing in February 2013, interest payable quarterly at a
variable rate (3.75% at December 31, 2009)
|
$ | 18,500 |
A 100 basis point change in the interest rates of our
market-risk sensitive instruments would have changed interest
income by approximately $237,000 for the year based upon their
respective average outstanding balances.
Our revolving credit agreement includes variable interest rates
based on the lead banks prime rate or the then published
LIBOR for the applicable borrowing period. As of
December 31, 2009 we had approximately $18.5 million
of borrowings outstanding in the U.S., and no borrowings
outstanding under in Canadian under our revolving credit
agreement. A 100 basis point change in the interest rate on
our revolving credit agreement would have changed interest
expense by approximately $227,000 for the year based upon the
average outstanding borrowings under these obligations.
At December 31, 2009, we also had intercompany accounts
that eliminate in consolidation but that are considered
market-risk sensitive instruments because they are denominated
in a currency other than the local functional currency. These
include short-term amounts due to the parent (payable by
international subsidiaries arising from purchase of the
parents products for sale), intercompany sales of products
from foreign subsidiaries to a U.S. subsidiary and cash
advances to foreign subsidiaries.
Exchange Rate |
USD |
|||||||
(USD per unit of |
in thousands |
|||||||
local currency) | (reporting currency) | |||||||
Australia
|
0.8983 /AUD | $ | 2,246 | |||||
Canada
|
0.9515 /CAD | 1,482 | ||||||
Sweden
|
0.1397 /SEK | 1,382 | ||||||
France
|
1.4316 /EUR | 375 | ||||||
Italy
|
1.4316 /EUR | 272 | ||||||
Netherlands
|
1.4316 /EUR | 224 | ||||||
Total amount subject to foreign currency risk
|
$ | 5,981 | ||||||
55 of 105
Table of Contents
We had accounts receivable and accounts payable balances
denominated in currencies other than the functional currency of
the local entity at December 31, 2009 as follows:
Exchange Rate |
||||||||||||
Functional |
||||||||||||
Currency per |
USD |
|||||||||||
Currency |
Functional |
Denominated |
Equivalent |
|||||||||
Denomination | Currency | Currency | (in thousands) | |||||||||
Accounts Receivable
|
||||||||||||
USD
|
CAD | 1.0510 | $ | 14,951 | ||||||||
USD
|
EUR | 0.6985 | 634 | |||||||||
EUR
|
SEK | 10.2529 | 173 | |||||||||
EUR
|
GBP | 0.8866 | 150 | |||||||||
Other currencies
|
205 | |||||||||||
$ | 16,113 | |||||||||||
Accounts Payable
|
||||||||||||
GBP
|
CAD | 1.6918 | $ | 1,154 | ||||||||
USD
|
CAD | 1.0510 | 847 | |||||||||
EUR
|
SEK | 10.2529 | 686 | |||||||||
EUR
|
GBP | 0.8866 | 531 | |||||||||
GBP
|
USD | 1.6163 | 284 | |||||||||
AUD
|
CAD | 0.9395 | 142 | |||||||||
Other currencies
|
268 | |||||||||||
$ | 3,912 | |||||||||||
We also had cash accounts denominated in currencies other than
the functional currency of the local entity at December 31,
2009 as follows:
Exchange Rate |
||||||||||||
Functional |
||||||||||||
Currency per |
USD |
|||||||||||
Currency |
Functional |
Denominated |
Equivalent |
|||||||||
Denomination | Currency | Currency | (in thousands) | |||||||||
USD
|
CAD | 1.0510 | $ | 2,876 | ||||||||
GBP
|
CAD | 1.6918 | 1,909 | |||||||||
GBP
|
USD | 1.6163 | 1,787 | |||||||||
EUR
|
SEK | 10.2529 | 504 | |||||||||
AUD
|
CAD | 0.9395 | 292 | |||||||||
Other currencies
|
566 | |||||||||||
$ | 7,934 | |||||||||||
56 of 105
Table of Contents
We enter into foreign currency forward and option contracts in
order to mitigate the risks associated with currency
fluctuations on future fair values of foreign denominated assets
and liabilities. At December 31, 2009, we had forward
contracts as follows (in thousands, except average contract
rate):
Average |
Fair |
|||||||||||
Notional |
Contract |
Value |
||||||||||
Amount | Rate | (USD) | ||||||||||
Foreign currency forward contracts:
|
||||||||||||
U.S. dollars (sell for Canadian dollars)
|
15,000 USD | 1.0509 | $ | 40 | ||||||||
Euros (sell for U.S. dollars)
|
250 EUR | 1.4259 | (1 | ) | ||||||||
$ | 39 | |||||||||||
Item 8. | Financial Statements and Supplementary Data |
Information required for this item is contained in the
Consolidated Financial Statements and Notes to Consolidated
Financial Statements included immediately after the Signature
Page of this Annual Report on
Form 10-K
and incorporated herein by this reference.
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Item 9A. | Controls and Procedures |
(a) | Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures |
The Company has established disclosure controls and procedures
to provide reasonable assurance that the information required to
be disclosed by us in reports filed under the Securities
Exchange Act of 1934 is (i) recorded, processed, summarized
and reported within the time periods specified in the SECs
rules and forms, and (ii) accumulated and communicated to
our management, including the Chief Executive Officer
(CEO) and Chief Financial Officer(CFO),
as appropriate to allow timely decisions regarding disclosure. A
controls system cannot provide absolute assurance that the
objectives of the controls system are met, and no evaluation of
controls can provide absolute assurance that all control issues,
errors and instances of fraud, if any, within a company have
been detected.
The Companys management, including the CEO and CFO,
evaluated the effectiveness of the design and operation of the
Companys disclosure controls and procedures as of
December 31, 2009, as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended. Based on
that evaluation, the CEO and CFO have concluded that the
Companys disclosure controls were effective as of
December 31, 2009.
(b) | Managements Annual Report on Internal Control Over Financial Reporting |
Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting
as defined in
Rule 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934. The scope of
managements assessment of the effectiveness of internal
control over financial reporting includes all of the
Companys businesses except for the operations of Formation
and Satamatics, acquired in January 2009, and February 2009,
respectively. These two businesses constituted approximately
$122.7 million of the total assets and $60.2 million
of the total revenues included in the Companys
consolidated financial statements as of and for the year ended
December 31, 2009. Further discussion of these acquisitions
can be found in Note 2 of our consolidated financial
statements. The Companys internal control over financial
reporting is designed to provide reasonable assurance to the
Companys management and board of directors regarding the
preparation and fair presentation of published financial
statements for external purposes, in accordance with generally
accepted accounting principles. Management conducted its
evaluation of the effectiveness of the
57 of 105
Table of Contents
Companys internal control over financial reporting as of
December 31, 2009 using the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
in Internal ControlIntegrated Framework, and concluded
that the Companys internal control over financial
reporting was effective as of December 31, 2009 based on
these criteria.
KPMG LLP, the independent registered public accounting firm that
audited the consolidated financial statements of the Company,
has issued an audit report on the Companys internal
control over financial reporting. The report is included in
Item 9A.(d) under the heading Report of Independent
Registered Public Accounting Firm.
(c) | Changes in Internal Control Over Financial Reporting |
In the fourth quarter of 2009, the Company was required to
complete its annual assessment of goodwill for impairment for
two additional reporting units, changed the date within the
fourth quarter in which it completes its annual assessment, and
was required to measure the amount of goodwill impairment loss
at its LXE reporting unit. The Company enhanced its controls in
connection with each of these related matters. Except for these
items, there were no changes in internal control over financial
reporting that occurred during the fourth quarter of 2009 that
materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial
reporting (as defined in Rule 13a 15(f) under
the Exchange Act).
(d) | Report of Independent Registered Public Accounting Firm |
The Board of Directors and Shareholders
EMS Technologies, Inc.:
We have audited EMS Technologies, Inc.s (the Company)
internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Annual Report on Internal Control over
Financial Reporting (Item 9A.(b)). Our responsibility is to
express an opinion on the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based
upon the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that
58 of 105
Table of Contents
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2009, based on criteria established in
Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
EMS Technologies, Inc. acquired Formation, Inc.
(Formation) and Satamatics Global Limited
(Satamatics) during 2009, and management excluded
from its assessment of the effectiveness of EMS Technologies,
Inc.s internal control over financial reporting as of
December 31, 2009, Formation and Satamatics internal
control over financial reporting associated with total assets of
$122.7 million and total revenues of $60.2 million
included in the consolidated financial statements of EMS
Technologies, Inc. and subsidiaries as of and for the year ended
December 31, 2009. Our audit of internal control over
financial reporting of EMS Technologies, Inc. also excluded an
evaluation of the internal control over financial reporting of
Formation, Inc. and Satamatics Global Limited.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of EMS Technologies, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the
related consolidated statements of operations,
shareholders equity and comprehensive income (loss), and
cash flows for each of the years in the three-year period ended
December 31, 2009, and our report dated March 31, 2010
expressed an unqualified opinion on those consolidated financial
statements.
/s/ KPMG
LLP
Atlanta, Georgia
March 31, 2010
59 of 105
Table of Contents
Item 9B. | Other Information. |
None.
PART III
Item 10. | Directors, Executive Officers, and Corporate Governance |
The information concerning directors and the Audit Committee
financial expert called for by this Item will be contained in
our definitive Proxy Statement for our 2010 Annual Meeting of
Shareholders and is incorporated herein by reference.
We have a written Code of Business Ethics and Conduct that
applies to our directors and to all of our employees, including
our CEO and CFO. Our Code of Business Ethics and Conduct has
been distributed to all employees, is available free of charge
on our website at www.ems-t.com, under the link for
Investor Relations, and is included as
Exhibit 14 to this Annual Report.
The information concerning executive officers called for by this
Item is set forth under the caption Executive Officers of
the Registrant in Item 1 hereof.
Item 11. | Executive Compensation |
The information called for by this Item will be contained in our
definitive Proxy Statement for our 2010 Annual Meeting of
Shareholders and is incorporated herein by reference.
60 of 105
Table of Contents
Item 12. Security
Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters
The following table sets forth certain information about our
equity compensation plans as of December 31, 2009:
(c) |
||||||||||||
(a) |
Number of securities |
|||||||||||
Number of securities |
(b) |
remaining available for |
||||||||||
to be issued upon |
Weighted average |
future issuance under |
||||||||||
exercise of |
exercise price of |
equity compensation plans |
||||||||||
outstanding options, |
outstanding options, |
(excluding securities |
||||||||||
Plan Category
|
warrants and rights | warrants and rights | reflected in column(a)) | |||||||||
Equity compensation plans approved by security holders
|
832,761 | $ | 20.82 | 1,631,600 | ||||||||
Equity compensation plans not approved by security holders
|
161,525 | 19.64 | 201,517 | (i) | ||||||||
Total
|
994,286 | $ | 20.63 | 1,833,117 | ||||||||
(i) Available at December 31, 2009 under a Plan that
expired in January 2010. No additional shares or options were
issued under this Plan prior to its expiration, and the shares
remaining at December 31, 2009 are no longer available for
future issuance.
All other information called for by this Item will be contained
in our definitive Proxy Statement for our 2010 Annual Meeting of
Shareholders and is incorporated herein by reference.
Item 13. | Certain Relationships and Related Transactions and Director Independence |
The information called for by this Item will be contained in our
definitive Proxy Statement for our 2010 Annual Meeting of
Shareholders and is incorporated herein by reference.
Item 14. | Principal Accountant Fees and Services |
Information on the Audit Committees pre-approval policy
for the independent registered public accounting firms
services, and information on the principal accountants
fees and services called for by this Item will be contained in
the our definitive Proxy Statement for our 2010 Annual Meeting
of Shareholders and is incorporated herein by reference.
PART IV
Item 15. | Exhibits, Financial Statement Schedules |
(a) 1. Financial Statements
The consolidated financial statements listed in the accompanying
Index to Consolidated Financial Statements, appearing
immediately after the Signature Page, are filed as part of this
Annual Report on
Form 10-K.
(a) 2. Financial Statement Schedule
Schedule II. Valuation and Qualifying Accounts - Years
ended December 31, 2009, 2008 and 2007
All other schedules are omitted as the required information is
inapplicable, or the information is presented in the financial
statements or related notes.
61 of 105
Table of Contents
SCHEDULE II
VALUATION AND QUALIFYING
ACCOUNTS
(in thousands):
Years Ended December 31, 2009, 2008 and 2007 | ||||||||||||||||||||
Additions |
||||||||||||||||||||
Balance at |
charged to |
Balance |
||||||||||||||||||
beginning |
costs and |
at end |
||||||||||||||||||
Classification
|
of year | expenses | Deductions | Other | of year | |||||||||||||||
Allowance for Doubtful Accounts:
|
||||||||||||||||||||
2007
|
$ | 741 | 1,404 | (1,041 | )(a) | - | 1,104 | |||||||||||||
2008
|
1,104 | 333 | (653 | )(a) | 72 | (b) | 856 | |||||||||||||
2009
|
856 | 921 | (679 | )(a) | 110 | (b) | 1,208 | |||||||||||||
Valuation Allowance for Deferred Tax Assets:
|
||||||||||||||||||||
2007
|
$ | 32,921 | 16,222 | (c) | (49 | ) | - | 49,094 | ||||||||||||
2008
|
49,094 | - | (20,545 | )(d) | - | 28,549 | ||||||||||||||
2009
|
28,549 | - | - | 9,302 | (e) | 37,851 |
(a) Deductions represent receivables that were charged off
to the allowance or recovered during the year.
(b) Includes the balances at the date of acquisition for
new businesses acquired during 2008 and 2009.
(c) In 2007, we increased the valuation allowance by
$16.2 million net, mainly for the benefits associated with
certain foreign net operating losses. This increase in valuation
allowance was based on managements assessment that, due to
changing business conditions and the limitation of tax planning
strategies, we were not likely to fully realize these deferred
tax assets.
(d) The decrease in the valuation allowance in 2008 was
attributable primarily to utilization of carryforwards with
current period taxable income ($4.1 million), reduction of
existing carryforwards as a result of revisions to amounts
available ($5.9 million), the effect of changes in foreign
currency exchange rates ($9.2 million) and a release of a
portion of the
beginning-of-the-year
valuation allowance based on revisions to projected taxable
income in the relatively near term ($1.3 million),
supported by actual continuing profitability in the past several
years.
(e) The valuation allowance increase in 2009 was
attributable primarily to Canada including the effect of changes
in foreign currency exchange rates ($4.3 million),
revaluing the deferred tax asset to reflect future lower tax
rates in the period the asset will be includable in taxable
income ($3.5 million), the generation of additional
deferred tax assets ($5.1 million) and revision in estimate
of prior year deferred tax assets ($7.4 million). These
increases were partially offset by utilization of carry forwards
with current period taxable income ($9.3 million) and a
revision in estimated utilization of deferred tax assets in the
prior year ($4.9 million). The remaining increase is due to
business acquisitions and other jurisdictions with deferred tax
assets for which realization is not more likely than not.
a) 3. Exhibits
The following exhibits are filed as part of this report:
2.1 Asset Purchase Agreement dated as of October 31,
2006, between EMS Technologies, Inc. and Andrew Corporation
(incorporated by reference to Exhibit 2.01 to our Report on
Form 8-K
dated December 1, 2006).
2.2 Amending Agreement, dated as of December 1, 2006,
to the Asset Purchase Agreement dated as of October 31,
2006, between EMS Technologies, Inc. and Andrew Corporation
(incorporated by reference to Exhibit 2.02 to our Report on
Form 8-K
dated December 1, 2006).
2.3 Agreement and Plan of Merger dated as of
December 11, 2008, by and among EMS Technologies, Inc., EMS
Acquisitions, Inc., Formation, Inc., and Nim Evatt solely as
Stockholder Representative (incorporated by reference to
Exhibit 2.1 to our Report on
Form 8-K
dated January 9, 2009).
62 of 105
Table of Contents
2.4 Share Purchase Agreement dated as of November 20,
2008, by and among the Company, EMS Acquisition Company Limited,
Satamatics Global Limited, and other various parties
(incorporated by reference to Exhibit 2.1 to our Report on
Form 8-K
dated February 13, 2009).
3.1 Second Amended and Restated Articles of Incorporation
of EMS Technologies, Inc., effective March 22, 1999
(incorporated by reference to Exhibit 3.1 to our Quarterly
Report on
Form 10-Q
for the quarter ended April 4, 2009).
3.2 Bylaws of EMS Technologies, Inc. as amended through
December 21, 2009. *
4.1 Amendment No. 3, dated April 21, 2009, to
Credit Agreement among EMS Technologies, Inc. and EMS
Technologies Canada, LTD., the lenders party thereto, and Bank
of America as Domestic and Canadian Administrative Agent. *
4.2 Second amendment dated February 13, 2009, to EMS
Technologies, Inc.s Credit Agreement, dated as of
February 29, 2008, among EMS Technologies, Inc. and EMS
Technologies Canada, LTD., the lenders from time to time party
thereto, and Bank of America as Domestic and Canadian
Administrative Agent (incorporated by reference to
Exhibit 4.1 to our Quarterly Report on
Form 10-Q
for the quarter ended April 4, 2009).
4.3 EMS Technologies, Inc. Shareholder Rights Plan dated as
of August 6, 2009 (incorporated by reference to
Exhibit 4.1 to our Current Report on
Form 8-K
dated July 27, 2009).
10.1 Summary of compensation arrangements with non-employee
members of the Board of Directors, as revised through
February 18, 2010. *
10.2 Compensation Arrangements with Certain Executive
Officers (incorporated by reference to Exhibit 10.2 to our
Quarterly Report on
Form 10-Q
for the quarter ended April 4, 2009).
10.3 Severance Agreement dated August 17, 2009, and
effective September 17, 2009, between EMS Technologies,
Inc. and David A. Smith (incorporated by reference to
Exhibit 10.1 to our Report on
Form 8-K
dated September 17, 2009).
10.4 Letter dated April 29, 2006 between the Company
and Paul B. Domorski concerning the terms of his employment as
President and Chief Executive Officer (incorporated by reference
to Exhibit 10.1 to our Quarterly Report on
Form 10-Q
for the quarter ended July 1, 2006).
10.5 Form of Restricted Stock Award Restriction Agreement,
dated June 2, 2006, under the 1997 Stock Incentive Plan,
entered between the Company and Paul B. Domorski (incorporated
by reference to Exhibit 10.2 to our Quarterly Report on
Form 10-Q
for the quarter ended July 1, 2006).
10.6 Agreement, effective as of June 2, 2006, between
the Company and Paul B. Domorski, concerning termination of
employment under certain circumstances (incorporated by
reference to Exhibit 10.1 to our Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2006).
10.7 Form of Amendment, December 15, 2008, to
Agreement, effective as of June 2, 2006, between the
Company and Paul Domorski (incorporated by reference to
Exhibit 10.4 to our Annual Report on
Form 10-K
for the year ended December 31, 2008).
10.8 Form of Agreement between the Company and each of its
executive officers other than the Chief Executive Officer,
related to certain
change-of-control
events (incorporated by reference to Exhibit 10.6 to our
Annual Report on
Form 10-K
for the year ended December 31, 2006).
10.9 Form of Amendment, December 15, 2008, to
Agreement between the Company and each of its executive officers
other than the Chief Executive Officer, related to certain
change-of-control
events (incorporated by reference to Exhibit 10.6 to our
Annual Report on
Form 10-K
for the year ended December 31, 2008).
10.10 EMS Technologies, Inc. Officers Deferred
Compensation Plan, as amended and restated October 30, 2008
(incorporated by reference to Exhibit 10.7 to our Annual
Report on
Form 10-K
for the year ended December 31, 2008).
63 of 105
Table of Contents
10.11 EMS Technologies, Inc. Deferred Compensation Plan for
Non-Employee Directors, as amended and restated October 30,
2008 (incorporated by reference to Exhibit 10.8 to our
Annual Report on
Form 10-K
for the year ended December 31, 2008).
10.12 EMS Technologies, Inc. 1997 Stock Incentive Plan, as
adopted January 24, 1997, and amended through May 10,
2004 (incorporated by reference to Exhibit 10.1 to our
Quarterly Report on
Form 10-Q
for the quarter ended July 3, 2004).
10.13 Form of Restricted Stock Award Restriction Agreement,
dated July 28, 2006, under the 1997 Stock Incentive Plan,
entered between the Company and Neilson A. Mackay, Executive
Vice President of the Company (incorporated by reference to
Exhibit 10.3 to our Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2006).
10.14 Form of Stock Option Agreement evidencing options
granted after 2000 (other than in 2005) to executive
officers under the EMS Technologies, Inc. 1997 Stock Incentive
Plan, together with related Terms of Officer Stock Option,
Form 1/25/01
(incorporated by reference to Exhibit 10.9 to our Annual
Report on
Form 10-K
for the year ended December 31, 2007).
10.15 Form of Stock Option Agreement evidencing options
granted in 2005 to executive officers under the EMS
Technologies, Inc. 1997 Stock Incentive Plan, together with
related Terms of Officer Stock Option,
Form 1/25/01
(incorporated by reference to Exhibit 10.10 to our Annual
Report on
Form 10-K
for the year ended December 31, 2005).
10.16 Form of Stock Option Agreement evidencing options
granted automatically to non-employee members of the Board of
Directors, upon each election to an additional one-year term of
service, under the EMS Technologies, Inc. 1997 Stock Incentive
Plan (incorporated by reference to Exhibit 10.12 to our
Annual Report on
Form 10-K
for the year ended December 31, 2005).
10.17 EMS Technologies, Inc. 2000 Stock Incentive Plan
(incorporated by reference to Exhibit 10.15 to our Annual
Report on
Form 10-K
for the year ended December 31, 2005).
10.18 Form of Stock Option Agreement evidencing options
granted in 2005 to employees under the EMS Technologies, Inc.
2000 Stock Incentive Plan, together with related Terms of Stock
Option,
Form 02/16/00
(incorporated by reference to Exhibit 10.16 to our Annual
Report on
Form 10-K
for the year ended December 31, 2005).
10.19 Form of Stock Option Agreement evidencing options
granted (other than in 2005) to employees under the EMS
Technologies, Inc. 2000 Stock Incentive Plan, together with
related Terms of Stock Option,
Form 02/16/00
(incorporated by reference to Exhibit 10.17 to our Annual
Report on
Form 10-K
for the year ended December 31, 2005).
10.20 Form of Restricted Stock Award Memo evidencing shares
of stock issued, subject to certain restrictions, to employees
under the 2000 Stock Incentive Plan, together with related Terms
of Restricted Stock,
Form 5-02-08
(incorporated by reference to Exhibit 10.17 to our Annual
Report on
Form 10-K
for the year ended December 31, 2008).
10.21 Form of Stock Option Agreement evidencing options
granted automatically to non-employee members of the Board of
Directors upon their initial election to the Board, under the
EMS Technologies, Inc. 2007 Stock Incentive Plan (incorporated
by reference to Exhibit 10.17 to our Annual Report on
Form 10-K
for the year ended December 31, 2007).
10.22 EMS Technologies, Inc. 2007 Stock Incentive Plan,
effective May 18, 2007 (incorporated by reference to
Exhibit 10.1 to our Quarterly Report on
Form 10-Q
for the period ended June 30, 2007).
10. 23 Form of Stock Option Agreement evidencing options
granted automatically to non-employee members of the Board of
Directors, upon each election to an additional one-year term of
service, under the EMS Technologies, Inc. 2007 Stock Incentive
Plan, together with related Terms of Director Stock Option,
64 of 105
Table of Contents
Form 5-18-07
(incorporated by reference to Exhibit 10.18 to our Annual
Report on
Form 10-K
for the year ended December 31, 2007).
10.24 Form of Stock Option Agreement evidencing options
granted to executive officers under the EMS Technologies, Inc.
2007 Stock Incentive Plan, together with related Term of Officer
Stock Options,
Form 5/18/07
(incorporated by reference to Exhibit 10.19 to our Annual
Report on
Form 10-K
for the year ended December 31, 2007).
10.25 Form of Indemnification Agreement between the Company
and each of its directors (incorporated by reference to
Exhibit 10.22 to our Annual Report on
Form 10-K
for the year ended December 31, 2008).
10.26 Form of Indemnification Agreement between the Company
and each of Don T. Scartz, Timothy C. Reis, Gary B. Shell,
Neilson A. Mackay and the Companys Vice President and
Chief Accounting Officer (incorporated by reference to
Exhibit 10.23 to our Annual Report on
Form 10-K
for the year ended December 31, 2008).
10.27 EMS Technologies, Inc. Executive Annual Incentive
Compensation Plan, as amended and restated May 18, 2007
(incorporated by reference to Exhibit 10.2 to our Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2007).
10.28 Letter Agreement dated May 2, 2008, between the
Company and Don T. Scartz (incorporated by reference to
Exhibit 10.1 to our Quarterly Report on
Form 10-Q
for the quarter ended June 28, 2008).
10.29 Supplemental Retirement Income Agreement, dated
November 16, 2007, between the Company and Don T. Scartz
(incorporated by reference to Exhibit 10.22 to our Annual
Report on
Form 10-K
for the year ended December 31, 2007).
10.30 Letter dated March 19, 2007 concerning
compensation arrangements with Vice President of Corporate
Development (now President and Chief Executive Officer)
(incorporated by reference to Exhibit 10.2 to our Quarterly
Report on
Form 10-Q
for the quarter ended March 31, 2007).
10.31 Letter Agreement dated May 1, 2008, between the
Company and James S. Childress (incorporated by reference to
Exhibit 10.2 to our Quarterly Report on
Form 10-Q
for the quarter ended June 28, 2008).
10.32 Form of Restricted Stock Award Restriction Agreement
under the 2007 Stock Incentive Plan, entered between the Company
and Gary B. Shell, Senior Vice President and Chief Financial
Officer, and in substantially similar form with its Vice
President and Chief Accounting Officer and one of its
non-executive employees (incorporated by reference to
Exhibit 10.31 to our Annual Report on
Form 10-K
for the year ended December 31, 2008).
14.1 EMS Technologies, Inc. Code of Business Ethics and
Conduct, as revised February 6, 2004 (incorporated by
reference to Exhibit 14.1 to our Annual Report on
Form 10-K
for the year ended December 31, 2008).
18 Preferability letter from KPMG on change in date of
annual goodwill impairment testing performed by the Company. *
21.1 Subsidiaries of the registrant. *
23.1 Consent of Independent Registered Public Accounting
Firm. *
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1 Certification of the Companys Chief Executive
Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. *
* Filed herewith
65 of 105
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
EMS TECHNOLOGIES, INC.
|
||
By: /s/ Neilson A. Mackay President and Chief Executive Officer |
Date: 3/31/10 |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature | Title | Date | ||||
/s/ Neilson
A. Mackay Neilson A. Mackay |
President and Chief Executive Officer (Principal Executive Officer) | 3/31/10 | ||||
/s/ Gary
B. Shell Gary B. Shell |
Senior Vice President, Chief Financial Officer, and Treasurer (Principal Financial Officer) | 3/31/10 | ||||
/s/ David
M. Sheffield David M. Sheffield |
Vice President, Finance and Chief Accounting Officer (Principal Accounting Officer) | 3/31/10 | ||||
/s/ John
R. Bolton John R. Bolton |
Director | 3/31/10 | ||||
/s/ Hermann
Buerger Hermann Buerger |
Director | 3/31/10 | ||||
/s/ Francis
J. Erbrick Francis J. Erbrick |
Director | 3/31/10 | ||||
/s/ John
R. Kreick John R. Kreick |
Director | 3/31/10 | ||||
/s/ John
B. Mowell John B. Mowell |
Director, Chairman of the Board | 3/31/10 | ||||
/s/ Thomas
W. OConnell Thomas W. OConnell |
Director | 3/31/10 | ||||
/s/ Bradford
W. Parkinson Bradford W. Parkinson |
Director | 3/31/10 | ||||
/s/ Norman
E. Thagard Norman E. Thagard |
Director | 3/31/10 | ||||
/s/ John
L. Woodward, Jr. John L. Woodward, Jr. |
Director | 3/31/10 |
66 of 105
Table of Contents
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
EMS Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of
EMS Technologies, Inc. and subsidiaries (the
Company) as of December 31, 2009 and 2008, and
the related consolidated statements of operations,
shareholders equity and comprehensive income (loss), and
cash flows for each of the years in the three-year period ended
December 31, 2009. In connection with our audits of the
consolidated financial statements, we also have audited the
financial statement schedule included in Item 15(a)2. These
consolidated financial statements and financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of EMS Technologies, Inc. and subsidiaries as of
December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2009, in conformity
with U.S. generally accepted accounting principles. Also in
our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial
statements, the Company changed its method of accounting for
business combinations in 2009 due to the adoption of
SFAS 141(R), Business Combinations (incorporated
into ASC Topic 805, Business Combinations).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), EMS
Technologies, Inc.s internal control over financial
reporting as of December 31, 2009, based on criteria
established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 31, 2010
expressed an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.
/s/ KPMG LLP
Atlanta, Georgia
March 31, 2010
68 of 105
Table of Contents
EMS
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Product net sales
|
$ | 281,153 | 273,268 | 247,504 | ||||||||
Service net sales
|
78,819 | 61,777 | 40,375 | |||||||||
Net sales
|
359,972 | 335,045 | 287,879 | |||||||||
Product cost of sales
|
193,888 | 175,837 | 151,611 | |||||||||
Service cost of sales
|
47,236 | 38,048 | 23,667 | |||||||||
Cost of sales
|
241,124 | 213,885 | 175,278 | |||||||||
Selling, general and administrative expenses
|
87,722 | 81,426 | 74,561 | |||||||||
Research and development expenses
|
18,662 | 20,110 | 18,773 | |||||||||
Impairment loss on goodwill
|
19,891 | - | - | |||||||||
Acquistion-related items
|
7,206 | - | - | |||||||||
Operating (loss) income
|
(14,633 | ) | 19,624 | 19,267 | ||||||||
Interest income
|
207 | 2,430 | 5,403 | |||||||||
Interest expense
|
(2,181 | ) | (1,679 | ) | (1,953 | ) | ||||||
Foreign exchange loss, net
|
(808 | ) | (586 | ) | (1,390 | ) | ||||||
(Loss) earnings from continuing operations before income taxes
|
(17,415 | ) | 19,789 | 21,327 | ||||||||
Income tax benefit (expense)
|
4,266 | 682 | (2,080 | ) | ||||||||
(Loss) earnings from continuing operations
|
(13,149 | ) | 20,471 | 19,247 | ||||||||
Discontinued operations:
|
||||||||||||
Loss from discontinued operations before income taxes
|
(10,917 | ) | - | (585 | ) | |||||||
Income tax benefit
|
4,001 | - | 82 | |||||||||
Loss from discontinued operations
|
(6,916 | ) | - | (503 | ) | |||||||
Net (loss) earnings
|
$ | (20,065 | ) | 20,471 | 18,744 | |||||||
Net (loss) earnings per share:
|
||||||||||||
Basic:
|
||||||||||||
From continuing operations
|
$ | (0.87 | ) | 1.32 | 1.25 | |||||||
From discontinued operations
|
(0.45 | ) | - | (0.03 | ) | |||||||
Net (loss) earnings
|
$ | (1.32 | ) | 1.32 | 1.22 | |||||||
Diluted:
|
||||||||||||
From continuing operations
|
$ | (0.87 | ) | 1.31 | 1.24 | |||||||
From discontinued operations
|
(0.45 | ) | - | (0.03 | ) | |||||||
Net earnings
|
$ | (1.32 | ) | 1.31 | 1.21 | |||||||
Weighted-average number of common shares outstanding:
|
||||||||||||
Basic
|
15,169 | 15,452 | 15,354 | |||||||||
Diluted
|
15,169 | 15,628 | 15,482 |
See accompanying notes to consolidated financial statements.
69 of 105
Table of Contents
EMS
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31 | ||||||||
2009 | 2008 | |||||||
ASSETS
|
||||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$ | 47,174 | 86,979 | |||||
Trade accounts receivable, net of allowance for doubtful account
of
|
||||||||
$1,208 in 2009 and $856 in 2008
|
60,959 | 65,831 | ||||||
Costs and estimated earnings in excess of billings on long-term
contracts
|
25,290 | 30,485 | ||||||
Inventories
|
40,655 | 35,670 | ||||||
Deferred income taxes
|
4,306 | 1,632 | ||||||
Other current assets
|
19,117 | 12,184 | ||||||
Total current assets
|
197,501 | 232,781 | ||||||
Property, plant and equipment:
|
||||||||
Land
|
1,150 | 1,150 | ||||||
Buildings and leasehold improvements
|
18,792 | 16,238 | ||||||
Machinery and equipment
|
107,712 | 92,100 | ||||||
Furniture and fixtures
|
10,542 | 10,059 | ||||||
Total property, plant and equipment
|
138,196 | 119,547 | ||||||
Less accumulated depreciation
|
90,256 | 78,975 | ||||||
Net property, plant and equipment
|
47,940 | 40,572 | ||||||
Deferred income taxes
|
9,421 | 7,318 | ||||||
Goodwill
|
60,336 | 31,402 | ||||||
Other intangible assets, net of accumulated amortization of
$18,817 in 2009 and $8,219 in 2008
|
49,256 | 11,166 | ||||||
Other assets
|
9,691 | 4,126 | ||||||
Total assets
|
$ | 374,145 | 327,365 | |||||
See accompanying notes to consolidated financial statements.
70 of 105
Table of Contents
EMS
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, continued
(in thousands, except share data)
CONSOLIDATED BALANCE SHEETS, continued
(in thousands, except share data)
December 31 | ||||||||
2009 | 2008 | |||||||
LIABILITIES AND SHAREHOLDERS EQUITY
|
||||||||
Current liabilities:
|
||||||||
Current installments of long-term debt
|
$ | 1,398 | 1,302 | |||||
Accounts payable
|
27,333 | 25,361 | ||||||
Billings in excess of contract costs and estimated earnings on
long-term contracts
|
9,597 | 8,172 | ||||||
Accrued compensation and retirement costs
|
13,946 | 14,456 | ||||||
Deferred service revenue
|
9,588 | 7,998 | ||||||
Acquisition costs for earn-out provisions
|
13,729 | - | ||||||
Other current liabilities
|
23,763 | 10,073 | ||||||
Total current liabilities
|
99,354 | 67,362 | ||||||
Long-term debt, excluding current installments
|
26,352 | 9,250 | ||||||
Deferred income taxes
|
5,757 | 461 | ||||||
Other liabilities
|
5,591 | 7,550 | ||||||
Total liabilities
|
137,054 | 84,623 | ||||||
Shareholders equity:
|
||||||||
Preferred stock of $1.00 par value per share; Authorized
10,000 shares; none issued
|
- | - | ||||||
Common stock of $.10 par value per share; Authorized
75,000 shares, issued and outstanding 15,249 in 2009 and
15,188 in 2008
|
1,525 | 1,519 | ||||||
Additional paid-in capital
|
136,112 | 133,270 | ||||||
Accumulated other comprehensive income (loss) - foreign
currency translation adjustment
|
6,066 | (5,500 | ) | |||||
Retained earnings
|
93,388 | 113,453 | ||||||
Total shareholders equity
|
237,091 | 242,742 | ||||||
Commitments and contingencies
|
||||||||
Total liabilities and shareholders equity
|
$ | 374,145 | 327,365 | |||||
See accompanying notes to consolidated financial statements.
71 of 105
Table of Contents
EMS
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31 | ||||||||||||
(in thousands) | 2009 | 2008 | 2007 | |||||||||
Cash flows from operating activities:
|
||||||||||||
Net (loss) earnings
|
$ | (20,065 | ) | 20,471 | 18,744 | |||||||
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
|
||||||||||||
Depreciation and amortization
|
19,989 | 12,498 | 9,666 | |||||||||
Impairment loss on goodwill
|
19,891 | - | - | |||||||||
Deferred income taxes
|
(4,629 | ) | (2,400 | ) | 887 | |||||||
Gain (loss) on sale of assets
|
78 | (64 | ) | (1 | ) | |||||||
Loss from discontinued operations
|
6,916 | - | 503 | |||||||||
Stock-based compensation expense
|
2,470 | 2,339 | 1,727 | |||||||||
Tax benefit for exercise of stock options
|
133 | 203 | 643 | |||||||||
Change in fair value of contingent consideration liability
|
3,229 | - | - | |||||||||
Excess tax benefits from stock-based compensation
|
(23 | ) | (75 | ) | (24 | ) | ||||||
Changes in operating assets and liabilities, net of effects of
acquisitions:
|
||||||||||||
Trade accounts receivable
|
12,575 | (5,584 | ) | 14,259 | ||||||||
Costs and estimated earnings in excess of billings on long-term
contracts
|
1,628 | (7,991 | ) | (989 | ) | |||||||
Inventories
|
6,957 | (7,801 | ) | (904 | ) | |||||||
Accounts payable
|
(5,026 | ) | 1,076 | (7,113 | ) | |||||||
Accrued compensation and retirement costs
|
(1,994 | ) | 819 | 1,167 | ||||||||
Other
|
138 | 2,960 | 3,498 | |||||||||
Net cash provided by operating activities in continuing
operations
|
42,267 | 16,451 | 42,063 | |||||||||
Net cash used in operating activities in discontinued operations
|
(555 | ) | - | (3,329 | ) | |||||||
Net cash provided by operating activities
|
41,712 | 16,451 | 38,734 | |||||||||
Cash flows from investing activities:
|
||||||||||||
Purchases of property, plant and equipment
|
(13,433 | ) | (13,869 | ) | (14,579 | ) | ||||||
Payments for acquisitions of businesses, net of cash acquired
|
(87,264 | ) | (32,354 | ) | (5,000 | ) | ||||||
Proceeds from sales of assets
|
58 | 1,371 | 907 | |||||||||
Net cash used in investing activities
|
(100,639 | ) | (44,852 | ) | (18,672 | ) | ||||||
Cash flows from financing activities:
|
||||||||||||
Net borrowings under revolving credit facility
|
18,500 | - | - | |||||||||
Repayment of other debt
|
(1,294 | ) | (3,159 | ) | (1,281 | ) | ||||||
Change in restricted cash
|
- | - | 81 | |||||||||
Deferred financing costs paid
|
(251 | ) | (1,254 | ) | - | |||||||
Payments for repurchase and retirement of common shares
|
(374 | ) | (9,963 | ) | - | |||||||
Excess tax benefits from stock-based compensation
|
23 | 75 | 24 | |||||||||
Proceeds from exercise of stock options
|
620 | 925 | 4,332 | |||||||||
Net cash provided by (used in) financing activities
|
17,224 | (13,376 | ) | 3,156 | ||||||||
Effect of changes in exchange rates on cash and cash equivalents
|
1,898 | (5,203 | ) | 1,310 | ||||||||
Net change in cash and cash equivalents
|
(39,805 | ) | (46,980 | ) | 24,528 | |||||||
Cash and cash equivalents at beginning of period
|
86,979 | 133,959 | 109,431 | |||||||||
Cash and cash equivalents at end of period
|
$ | 47,174 | 86,979 | 133,959 | ||||||||
Supplemental disclosure of cash flow information:
|
||||||||||||
Cash paid for interest
|
$ | 1,839 | 1,094 | 1,147 | ||||||||
Cash paid for income taxes
|
983 | 2,289 | 357 |
See accompanying notes to consolidated financial statements.
72 of 105
Table of Contents
EMS
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
(LOSS) (in thousands)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
(LOSS) (in thousands)
Three Years Ended December 31, 2009 | ||||||||||||||||||||||||||||
Accum- |
||||||||||||||||||||||||||||
ulated |
||||||||||||||||||||||||||||
other |
||||||||||||||||||||||||||||
Compre- |
compre- |
Total |
||||||||||||||||||||||||||
Additional |
hensive |
hensive |
share- |
|||||||||||||||||||||||||
Common Stock |
paid-in |
income |
income |
Retained |
holders |
|||||||||||||||||||||||
Shares | Amount | capital | (loss) | (loss) | earnings | equity | ||||||||||||||||||||||
Balance December 31, 2006
|
15,327 | $ | 1,533 | 133,050 | 4,262 | 74,238 | 213,083 | |||||||||||||||||||||
Net earnings
|
- | - | - | 18,744 | - | 18,744 | 18,744 | |||||||||||||||||||||
Tax benefit for exercise of stock options
|
- | - | 643 | - | - | - | 643 | |||||||||||||||||||||
Exercise of common stock options
|
311 | 31 | 5,758 | - | - | - | 5,789 | |||||||||||||||||||||
Redemption of shares upon exercise of common stock options
|
(58 | ) | (6 | ) | (1,427 | ) | - | - | - | (1,433 | ) | |||||||||||||||||
Repurchases of common stock
|
(1 | ) | - | (24 | ) | - | - | - | (24 | ) | ||||||||||||||||||
Stock-based compensation
|
2 | - | 1,727 | - | - | - | 1,727 | |||||||||||||||||||||
Foreign currency translation adjustment
|
- | - | - | 8,597 | 8,597 | - | 8,597 | |||||||||||||||||||||
Comprehensive income for 2007
|
27,341 | |||||||||||||||||||||||||||
Balance December 31, 2007
|
15,581 | 1,558 | 139,727 | 12,859 | 92,982 | 247,126 | ||||||||||||||||||||||
Net earnings
|
- | - | - | 20,471 | - | 20,471 | 20,471 | |||||||||||||||||||||
Tax benefit for exercise of stock options
|
- | - | 203 | - | - | - | 203 | |||||||||||||||||||||
Exercise of common stock options
|
56 | 6 | 989 | - | - | - | 995 | |||||||||||||||||||||
Redemption of shares upon exercise of common stock options
|
(3 | ) | - | (70 | ) | - | - | - | (70 | ) | ||||||||||||||||||
Repurchases of common stock
|
(480 | ) | (48 | ) | (9,915 | ) | - | - | - | (9,963 | ) | |||||||||||||||||
Stock-based compensation
|
34 | 3 | 2,336 | - | - | - | 2,339 | |||||||||||||||||||||
Foreign currency translation adjustment
|
- | - | - | (18,359 | ) | (18,359 | ) | - | (18,359 | ) | ||||||||||||||||||
Comprehensive income for 2008
|
2,112 | |||||||||||||||||||||||||||
Balance December 31, 2008
|
15,188 | 1,519 | 133,270 | (5,500 | ) | 113,453 | 242,742 | |||||||||||||||||||||
Net loss
|
- | - | - | (20,065 | ) | - | (20,065 | ) | (20,065 | ) | ||||||||||||||||||
Tax benefit for exercise of stock options
|
- | - | 133 | - | - | - | 133 | |||||||||||||||||||||
Exercise of common stock options
|
48 | 5 | 663 | - | - | - | 668 | |||||||||||||||||||||
Redemption of shares upon exercise of common stock options
|
(2 | ) | - | (47 | ) | - | - | - | (47 | ) | ||||||||||||||||||
Repurchases of common stock
|
(27 | ) | (3 | ) | (373 | ) | - | - | - | (376 | ) | |||||||||||||||||
Stock-based compensation
|
42 | 4 | 2,466 | - | - | - | 2,470 | |||||||||||||||||||||
Foreign currency translation adjustment
|
- | - | - | 11,566 | 11,566 | - | 11,566 | |||||||||||||||||||||
Comprehensive income (loss) for 2009
|
(8,499 | ) | ||||||||||||||||||||||||||
Balance December 31, 2009
|
15,249 | $ | 1,525 | 136,112 | 6,066 | 93,388 | 237,091 | |||||||||||||||||||||
See accompanying notes to consolidated financial statements.
73 of 105
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 and 2007
DECEMBER 31, 2009, 2008 and 2007
(1) | BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
EMS Technologies, Inc. (EMS) designs, manufactures
and markets products to satellite and wireless communications
markets for both commercial and defense applications. EMSs
products are focused on the needs of the mobile information
user, with an increasing emphasis on broadband applications for
high-data-rate, high-capacity wireless communications.
The consolidated financial statements include the accounts of
EMS Technologies, Inc. and its wholly owned subsidiaries
(collectively, the Company). All significant
intercompany balances and transactions have been eliminated in
consolidation. There are no other entities controlled by the
Company, either directly or indirectly. Certain
reclassifications have been made to the 2008 consolidated
financial statements to conform to the 2009 presentation.
The accompanying consolidated financial statements included
herein have been prepared in accordance with U.S. generally
accepted accounting principles (GAAP) and are based
on the Securities and Exchange Commissions
(SEC)
Regulation S-X
and its instructions to
Form 10-K.
The preparation of financial statements in conformity with GAAP
requires management to make a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities as of
the balance sheet date and reporting of revenue and expenses
during the period. Actual future results could differ materially
from those estimates. We have also performed an evaluation of
subsequent events through the date the financial statements were
issued.
Following is a summary of the Companys significant
accounting policies:
Revenue
Recognition
Net sales are derived from sales of the Companys products
to end-users, value-added resellers, other manufacturers or
systems integrators and distributors; service to support such
products; and research and development arrangements under
specific requirements of customer contracts. Net sales are
generally recognized when completed units are shipped and as
services are performed, unless multiple deliverables are
involved or software is more than incidental to a product as a
whole, in which case we recognize revenue in accordance with
Financial Accounting Standards Board (FASB)
Accounting Standards
Codificationtm
(ASC) Subtopic
605-25,
Revenue Recognition-Multiple-Element Arrangements, or ASC
Subtopic
985-605,
Software-Revenue Recognition, as applicable. We recognize
revenue from product-related service contracts, and extended
warranties, ratably over the life of the contract. Amounts paid
by customers at the inception of the extended warranty period
are reflected as deferred revenue with the portion estimated to
be recognized as revenue within the next twelve months reflected
in other current liabilities in the consolidated balance sheets
and the remainder reflected in other noncurrent liabilities. We
recognize revenue from repair services and tracking, voice and
data services as services are rendered. We recognize revenue
from contracts for engineering services using the
percentage-of-completion
method for fixed price contracts, or as costs are incurred for
cost-type contracts.
Net sales under certain long-term contracts of our D&S and
Communications & Tracking segments, many of which
provide for periodic payments, are recognized under the
percentage-of-completion
method using the ratio of cost incurred to total estimated cost
as the measure of performance. Estimated costs at completion for
these contracts are reviewed on a routine periodic basis, and
adjustments are made to the estimated costs at completion based
on actual costs incurred, progress made, and estimates of the
costs required to complete the contractual requirements. When
the estimated
cost-at-completion
exceeds the contract value, the loss resulting from cost
overruns is immediately recognized.
The Company establishes budgeted overhead rates, which are used
to apply overhead costs to projects to calculate the estimated
cost to complete for revenue recognition calculations. The
Company expenses the monthly rate variance between actual
overhead expenses incurred versus overhead expenses applied at
74 of 105
Table of Contents
budgeted rates. The monthly rate variance has no effect on the
Companys calculation of revenues to be recognized under
percentage-of-completion
accounting.
In applying the
percentage-of-completion
method of accounting, certain contracts may have revenue
recognized in excess of billings (costs and estimated earnings
in excess of billings), and other contracts may have billings in
excess of revenue recognized (billings in excess of contract
costs and estimated earnings). Under long-term contracts, the
prerequisites for billing the customer for periodic payments
generally involve the Companys achievement of
contractually specific, objective milestones (e.g., completion
of design, testing, or other engineering phase, delivery of test
data or other documentation or delivery of an engineering model
or flight hardware). Costs and estimated earnings in excess of
billings under long-term contracts are usually billed and
collected within one year. Such amounts are reflected in current
assets on the consolidated balance sheet. The amounts estimated
to be collected after one year of $7.8 million as of
December 31, 2009, and $0.6 million as of
December 31, 2008 are included in other noncurrent assets
in the consolidated balance sheet.
Net sales under cost-reimbursement contracts in D&S are
recognized depending on the type of fee specified in the
contract. Contracts may have a fixed fee, award fee or a
combination of both. A fixed fee is recognized over the
performance of a cost-reimbursement contract in the same ratio
as the costs incurred to date to the total target contract costs
at completion. This same ratio is used for both billing the
customer and recognizing net sales. If the expected costs to be
incurred under the contract subsequently become materially
different from the original estimated total costs, the fixed fee
ratio and related fee recognition are adjusted accordingly. If
the contract includes a clause for partial withholding of the
fee pending specific acceptance or performance criteria, then
the amount of withheld fee to be recognized will depend upon
managements evaluation of the likelihood of the withheld
fee amount being paid. An award or incentive fee is usually
variable based upon specific performance criteria stated in the
contract. Award or incentive fees are recognized only upon
achieving the contractual criteria and after the customer has
approved or granted the award or incentive.
Government
Research Incentives
The Communications & Tracking segment receives
government-sponsored research incentives in the form of cash
reimbursement for a portion of certain qualified research
expenditures. These incentives are recorded as a reduction of
cost of sales if the underlying research efforts are to meet
specific requirements of customer contracts. Otherwise, they are
recorded as a reduction of research and development expense.
Cash
Equivalents
The Company considers all highly liquid debt instruments with
initial or remaining maturities of three months or less when
purchased to be cash equivalents. Cash equivalents as of
December 31, 2009 and 2008 included investments of
$18.2 million and $78.9 million, respectively, in
government-obligations money market funds, in other money market
instruments, and in interest-bearing deposits. Cash and cash
equivalents that are restricted under escrow agreements are not
available for general use in the Companys operations and
are classified in other current assets or other noncurrent
assets in the Companys consolidated balance sheets.
Inventories
Inventories are stated at the lower of cost
(first-in,
first-out) or market (net realizable value).
Work-in-process
consists of raw material and production costs, including
indirect manufacturing costs. We reduce the carrying amount of
our inventory for estimated obsolete and slow-moving inventory
to its estimated net realizable value based on assumptions about
future demand and market conditions. If actual market conditions
are less favorable than those projected by management,
additional adjustments could be required. Such adjustments
reduce the inventorys cost basis, and the cost basis is
not increased upon any subsequent increases in estimated net
realizable value.
75 of 105
Table of Contents
Property,
Plant and Equipment
Property, plant and equipment are stated at cost less
accumulated depreciation. Depreciation is provided
primarily using the straight-line method over the estimated
useful lives of the respective assets which are as follows:
Buildings
|
20 to 40 years | |
Machinery and equipment
|
3 to 8 years | |
Furniture and fixtures
|
4 to 10 years |
Leasehold improvements are amortized over the shorter of their
estimated useful lives or the terms of the respective leases.
Total depreciation expense was $10.3 million,
$10.0 million, and $8.0 million for 2009, 2008, and
2007, respectively.
Long-Lived
Assets
The Company reviews long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to
be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds their
fair value. If assets are to be disposed of, such assets are
reported at the lower of carrying amount or fair value less
costs to sell, and no longer depreciated.
Goodwill
and Other Intangible Assets
Goodwill is recognized as a result of a business combination to
the extent the consideration transferred exceeds the
acquisition-date amounts of identifiable assets acquired and
liabilities assumed, determined in accordance with the
provisions of ASC 805. An intangible asset is recognized as an
asset apart from goodwill if it arises from contractual or other
legal rights or if it is separable, that is, it is capable of
being separated or divided from the acquired entity and sold,
transferred, licensed, rented, or exchanged. Such identifiable
intangible assets are recorded at fair value at the date of
acquisition. Goodwill and intangible assets acquired in a
business combination and determined to have indefinite useful
lives are not being amortized, but instead are evaluated for
impairment annually, and between annual tests if an event occurs
or circumstances change that indicate that the asset might be
impaired.
The Company completes its annual evaluation of goodwill for
impairment in the fourth quarter of each fiscal year. ASC Topic
350 requires that if the fair value of a reporting unit is less
than its carrying amount, including goodwill, further analysis
is required to measure the amount of the impairment loss, if
any. The amount by which the reporting units carrying
amount of goodwill exceeds the implied fair value of the
reporting units goodwill, determined in accordance with
ASC Topic 350, is to be recognized as an impairment loss. As a
result of the Companys annual evaluation of goodwill in
the fourth quarter of 2009, the Company recorded an impairment
charge of $19.9 million related to the Companys LXE
segment. Refer to Note 3 for additional information.
During 2009, the Company changed its annual impairment testing
date from December 31 to the first day of the Companys
twelfth reporting period in the fiscal year, which was November
29 for the year ended December 31, 2009. The Company
believes this change is preferable since it provides additional
time prior to the Companys year-end to complete the
goodwill impairment testing and report the results in its Annual
Report on
Form 10-K.
In accordance with ASC Topic 350, intangible assets, other than
those determined to have an indefinite life, are amortized to
their estimated residual values on a straight-line basis, or on
the basis of economic benefit, over their estimated useful
lives. The useful life of the intangible asset is the period
over which the asset is expected to contribute directly or
indirectly to the entitys future cash flows. These
intangible assets are reviewed for impairment in accordance with
ASC Topic
360-10-05,
Impairment or Disposal of Long-Lived
76 of 105
Table of Contents
Assets, whenever events or changes in circumstances
indicate that their carrying amounts may not be recoverable.
Recoverability of an asset to be held and used is measured by
comparing its carrying amount to the estimated undiscounted
future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge would be recognized for the amount
by which the carrying amount of the asset exceeds its fair
value. An asset to be disposed of would be reported at the lower
of the carrying amount or fair value less costs to sell, and
would no longer be depreciated. Cash flow projections, although
subject to a degree of uncertainty, are based on
managements estimates of future performance, giving
consideration to existing and anticipated competitive and
economic conditions.
Unfavorable economic or financial market conditions or other
developments may affect the fair value of one or more of the
Companys business units and it is reasonably possible that
the Company may be required to record additional asset
impairment charges in the future. As of December 31, 2009,
the Company had approximately $60.3 million of goodwill and
$49.3 million of other intangible assets on the
consolidated balance sheet, collectively representing
approximately 29% of total assets. A significant amount of
judgment is involved in determining if an indicator of
impairment has occurred. Such indicators may include a
sustained, significant decline in the Companys share price
and market capitalization, a decline in expected future cash
flows for one or more business units, a significant adverse
change in legal factors or in the business climate,
unanticipated competition
and/or
slower-than-expected
growth rates, among others. If the Company is required to
recognize an additional impairment loss related to goodwill or
long-lived assets, the related charge, although a noncash
charge, could materially impact reported earnings or loss from
continuing operations for the period in which the impairment
loss is recognized.
Loss
Contingencies
We record a liability for a loss contingency when the loss is
considered probable to occur and can be reasonably estimated.
Legal costs related to a loss contingency are recorded when
costs are incurred.
Income
Taxes
The Company provides for income taxes using the asset and
liability method. Under the asset and liability method, deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. 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
be recovered or settled. Deferred tax assets and liabilities are
classified as current or noncurrent based upon the nature of the
underlying temporary differences. The effect on deferred taxes
of a change in tax rates is recognized in earnings in the period
that includes the enactment date.
The Company assesses the recoverability of deferred tax assets
based on estimates of future taxable income and establishes a
valuation allowance against its deferred tax assets in a
jurisdiction if it believes that it is more likely than not that
the deferred tax assets will not be recoverable.
On January 1, 2007, the Company adopted the provisions of
FASB Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109 (which is now
included in ASC Subtopic
740-10-05,
Income Taxes), which prescribes a recognition threshold
and measurement attribute for tax positions taken or expected to
be taken in a tax return. This interpretation also provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. The evaluation of a tax position in accordance with
this interpretation is a two-step process. In the first step,
recognition, the Company determines whether it is
more-likely-than-not that a tax position will be sustained upon
examination, including resolution of any related appeals or
litigation processes, based on the technical merits of the
position. The second step addresses measurement of a tax
position that meets the more-likely-than-not criteria. The tax
position is measured at the largest amount of benefit that is
greater than 50 percent likely of being realized upon
ultimate settlement.
77 of 105
Table of Contents
The Companys policy is to include interest and penalties
related to unrecognized tax benefits within the income tax
expense line item in its consolidated statements of operations.
Earnings
Per Share
Basic earnings per share is the per-share allocation of income
available to common shareholders based only on the
weighted-average number of common shares actually outstanding
during the period. Diluted earnings per share represents the
per-share allocation of income attributable to common
shareholders based on the weighted-average number of common
shares actually outstanding plus all potential common share
equivalents outstanding during the period, if dilutive. The
Company uses the treasury stock method to determine diluted
earnings per share.
The following table is a reconciliation of the denominator for
basic and diluted earnings per share calculations for the years
ended December 31, 2008 and 2007 (in thousands). Potential
dilutive shares were excluded from the computation of diluted
net loss per share for the year ended December 31, 2009,
because the effect of their inclusion would have been
anti-dilutive:
2009 | 2008 | 2007 | ||||||||||
Basic weighted-average number of common shares outstanding
|
15,169 | 15,452 | 15,354 | |||||||||
Dilutive potential shares using the treasury share method
|
- | 176 | 128 | |||||||||
Diluted weighted-average number of common shares outstanding
|
15,169 | 15,628 | 15,482 | |||||||||
Shares that were not included in computation of diluted earnings
per share that could potentially dilute future basic earnings
per share because their effect on the periods were antidilutive
|
1,045 | 341 | 44 | |||||||||
Stock-Based
Compensation
Stock-based compensation is recognized on a straight-line basis
over the requisite service period for each separately vesting
portion of an award as if the award was, in substance, multiple
awards. The Company estimates future forfeitures based on
historical experience and review such estimates periodically and
adjust expense recognition accordingly.
Foreign
Currency Translation
The functional currency is generally the local currency for each
of the Companys subsidiaries. The assets and liabilities
of the Companys foreign subsidiaries are translated into
U.S. dollars using current exchange rates in effect at the
balance sheet date. Revenues and expenses are translated using
average monthly exchange rates. The resulting translation
adjustments are recorded as accumulated other comprehensive
income in the accompanying consolidated statements of
shareholders equity and comprehensive income.
Certain transactions produce receivables or payables denominated
in a currency other than the functional currency. Any subsequent
changes in exchange rates between the functional currency and
the currency in which a transaction is denominated generates a
foreign currency transaction gain or loss that is generally
included in determining net earnings. However, gains or losses
resulting from intercompany foreign currency transactions that
are of a long-term-investment nature (that is, settlement is not
planned or anticipated in the foreseeable future) are reported
in the same manner as translation adjustments.
78 of 105
Table of Contents
Comprehensive
Income
Comprehensive income consists of net earnings, foreign currency
translation adjustments and reclassification due to the sale of
discontinued operations, and is presented in the consolidated
statements of shareholders equity and comprehensive income.
Derivative
Financial Instruments
The Company uses derivative financial instruments (foreign
currency forward contracts) to economically hedge currency
fluctuations in future cash flows denominated in foreign
currencies, thereby limiting the Companys risk that would
otherwise result from changes in exchange rates. The Company has
established policies and procedures for risk assessment and for
the approval, reporting and monitoring of derivative financial
instrument activities. The Company does not enter into
derivative financial instruments for trading or speculative
purposes.
None of the derivative financial instruments are designated as a
hedge for a accounting purposes. Therefore, each instrument is
reflected at fair value in the consolidated balance sheet with
the change in fair value reflected in earnings.
Warranties
The Company provides a limited warranty for a variety of its
products. The specific terms and conditions of the warranties
vary depending upon the specific products and markets in which
the products are sold. The Company records a liability at the
time of sale for the estimated costs to be incurred under
warranties, based on historical, as well as expected,
experience. The warranty liability is periodically reviewed for
adequacy and adjusted as necessary.
Accounting
Changes Recently Adopted
In the third quarter of 2009, the Company adopted the FASB
Statement of Financial Accounting Standards (SFAS) No. 168,
FASB Accounting Standards Codification and Hierarchy of
GAAP. SFAS No. 168 replaces
SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles and establishes the FASB ASC as the
source of authoritative accounting principles recognized by the
FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with GAAP.
Rules and interpretive releases of the SEC under authority of
federal securities laws are also sources of authoritative GAAP
for SEC registrants. SFAS No. 168 is meant to be a
codification of existing GAAP, therefore, the adoption of this
pronouncement did not have a material impact on the
Companys consolidated financial statements.
Effective January 1, 2008, the Company adopted
SFAS No. 157, Fair Value Measurements, for all
financial instruments. Effective January 1, 2009, the
Company adopted the provisions of SFAS No. 157 for
nonfinancial instruments accounted for at fair value on a
nonrecurring basis. SFAS No. 157, which is now
included in ASC Topic 820, Fair Value Measurements and
Disclosures, establishes a new framework for measuring fair
value and expands related disclosures. The fair-value
disclosures for financial instruments are included in
Note 4 and the fair-value disclosures related to the fair
values of assets and liabilities from business combinations
completed during 2009 are included in Note 2.
On January 1, 2009, the Company adopted
SFAS No. 141(R), Business Combinations, which
is now included in ASC Topic 805, Business Combinations.
SFAS No. 141(R) significantly changes the
accounting for business combinations for which the acquisition
date is on or after January 1, 2009, both during the period
of acquisition and in subsequent periods. Among the more
significant changes in the accounting for acquisitions are the
following:
| An acquiring entity must recognize all the assets acquired and liabilities assumed in a business combination at the acquisition-date fair value, as determined under the provisions in ASC Topic 820; | |
| Transaction costs are expensed as incurred, and are classified within cash flows from operating activities in the consolidated statement of cash flows. Such costs were previously capitalized as part |
79 of 105
Table of Contents
of the cost of an acquisition, and were classified within cash flows from investing activities in the consolidated statement of cash flows; |
| Contingent consideration is recognized at fair value at the acquisition date as a liability or as equity. Subsequent adjustments of an amount recognized as a liability are recognized in the statement of operations. Contingent consideration was previously accounted for as an adjustment to the cost of the acquisition when the results of the contingency were determined; | |
| Subsequent changes to valuation allowances against deferred tax assets after the measurement period are recognized as an adjustment to income tax expense. Such changes were previously reflected as an adjustment to goodwill. This provision of SFAS No. 141(R) also applies to acquisitions completed prior to the effective date; | |
| Acquired in-process research and development (IPR&D) is recognized as an asset at fair value at the acquisition date, with the fair value recognized as an expense as the asset is realized or abandoned. IPR&D was previously expensed at the acquisition date; and | |
| Costs associated with restructuring or exit activities of an acquired entity are expensed when incurred. Previously, such costs were recorded as liabilities at the acquisition date if specified criteria were met. |
During 2009, the Company recognized net acquisition-related
charges of $7.2 million. These net charges were principally
a result of the adoption of SFAS No. 141(R), including
transaction costs, and the accretion of an earn-out liability
related to one of the Companys recent acquisitions
recorded at estimated fair value on a discounted basis. These
net charges also included a charge related to an increase in the
estimated fair value of the earn-out liability in 2009
reflecting changes in the expected earn-out payments based on
the results of 2009, and an agreement between the Company and
the sellers of the acquired entity to settle the 2010 earn-out
provisions. These charges are included within
acquisition-related items in the consolidated statement of
operations. In addition, the net charges recorded during 2009
include costs incurred as of December 31, 2008, related to
potential acquisitions that did not have an acquisition date on
or prior to December 31, 2008, that were included as an
asset on the consolidated balance sheet as of that date as
required by the provisions of SFAS No. 141,
Business Combinations, the predecessor to
SFAS No. 141(R). Acquisition-related charges of
$3.1 million were paid during 2009 and were included as a
reduction of cash provided by operating activities in the
consolidated statement of cash flows.
In the second quarter of 2009, the Company adopted
SFAS No. 165, Subsequent Events, which is now
included in ASC Topic 855, Subsequent Events.
SFAS No. 165 establishes general standards of
accounting and disclosure of events that occur after the balance
sheet date but before financial statements are issued or
available to be issued. Specifically, this standard sets forth
the period after the balance sheet date during which management
should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements,
the circumstances under which an entity should recognize events
or transactions occurring after the balance sheet date in its
financial statements, and the disclosures that an entity should
make about events or transactions that occurred after the
balance sheet date. Since this standard only formalizes existing
GAAP, the adoption of this pronouncement did not have a material
impact on the Companys 2009 consolidated financial
statements.
In August 2009, the FASB issued Accounting Standards Update
(ASU)
2009-05,
Fair Value Measurements and Disclosures - Measuring
Liabilities at Fair Value. ASU
2009-05
updates the guidance on measuring the fair value of liabilities
and provides clarification that in circumstances in which a
quoted price in an active market for the identical liability is
not available, a reporting entity is required to measure fair
value using one or more of the following techniques: 1) a
valuation technique that uses a quoted price of an identical
liability when traded as an asset or quoted prices for similar
liabilities or similar liabilities when traded as assets;
2) a technique that is based on the amount at the
measurement date that the reporting entity would pay to transfer
an identical liability; or 3) a technique based on the
amount a reporting entity would receive to enter into an
identical liability. ASU
2009-05 also
clarifies that both a quoted price in an active market for an
identical liability at the measurement date and a quoted price
for the identical liability when traded as an asset in an
80 of 105
Table of Contents
active market when no adjustments to the quoted price of the
asset are required are level 1 fair value measurements. ASU
2009-05 is
effective for the Company in the fourth quarter of 2009. The
adoption of ASU
2009-05 did
not have a material impact on the Companys 2009
consolidated financial statements.
Recently
Issued Pronouncements Not Yet Adopted
In October 2009 the FASB issued two accounting standards updates
that could result in revenue being recognized earlier in certain
revenue arrangements with multiple deliverables. Both updates
are effective for the Company in the first quarter of 2011.
Early adoption is permitted. If the Company adopts this standard
in a period other than the beginning of its fiscal year, the
Company will be required to apply this standard retrospectively
to beginning of its fiscal year, and disclose certain financial
information as revised for all interim periods previously
reported in the fiscal year adopted. The Company is evaluating
when to adopt the updates and the effect the adoption will have
on its consolidated financial statements.
ASU 2009-13,
Revenue Recognition - Multiple-Deliverable Revenue
Arrangements, amends the accounting for revenue arrangements
with multiple deliverables. Among other things, ASU
2009-13:
| Eliminates the requirement for objective evidence of fair value of an undelivered item for treatment of the delivered item as a separate unit of accounting; | |
| Requires use of the relative selling price method for allocating total consideration to elements of the arrangement instead of the relative-fair-value method or the residual method; | |
| Allows the use of an estimated selling price for any element within the arrangement to allocate consideration to individual elements when vendor-specific objective evidence or other third party evidence of selling price do not exist; and | |
| Expands the required disclosures. |
ASU 2009-14,
Software - Certain Revenue Arrangements That Include
Software Elements, amends the guidance for revenue
arrangements that contain tangible products and software
elements. ASU
2009-14
redefines the scope of arrangements that fall within software
revenue recognition guidance by specifically excluding tangible
products that contain software components that function together
to deliver the essential functionality of the tangible product.
Under current guidance, products that contain software that is
more than incidental to the product as a whole fall within the
scope of software revenue recognition guidance, which requires,
among other things, the existence of vendor-specific objective
evidence of fair value of all undelivered items to allow a
delivered item to be treated as a separate unit of accounting.
Such tangible products excluded from the requirements of
software revenue recognition requirements under ASU
2009-14
would follow the revenue recognition requirements for other
revenue arrangements, including the new requirements for
multiple-deliverable arrangements contained in ASU
2009-13.
In January 2010, the FASB issued guidance amending and
clarifying requirements for fair value measurements and
disclosures in
ASU 2010-6,
Improving Disclosures About Fair Value Measurements. The
new guidance requires disclosure of transfers in and out of
Level 1 and Level 2 and a reconciliation of all
activity in Level 3. The guidance also requires detailed
disaggregation disclosure for each class of assets and
liabilities in all levels, and disclosures about inputs and
valuation techniques for Level 2 and Level 3. The
guidance is effective at the start of interim or annual
reporting periods beginning after December 15, 2009 and the
disclosure reconciliation of all activity in Level 3 is
effective at the start of annual reporting periods beginning
after December 15, 2010. The Company does not expect that
the adoption of ASU
2010-06 will
have a material impact on its consolidated financial statements.
(2) | BUSINESS COMBINATIONS |
The Company has expanded its technology base by acquiring
various companies or their assets.
During 2009, the Company completed the acquisitions of two
businesses that expanded its technology base. The Company
completed the acquisition of all of the equity interest in
Formation, Inc. (Formation), of
81 of 105
Table of Contents
Moorestown, New Jersey, and Satamatics Global Limited
(Satamatics), of Tewkesbury, UK, on January 9,
2009 and February 13, 2009, respectively.
Formations core product lines are rugged disk data storage
products, wireless access points, advanced integrated recorders,
terminal data loaders, and avionics and media file servers.
Acquiring Formation is part of the Companys continued
investment in its aero-connectivity strategy to become a more
comprehensive solutions provider. The Companys goal is to
meet the growing demand for aeronautical communications from
airlines and business aircraft owners, as well as governments.
With the inclusion of Formation in its product portfolio, the
Company covers the spectrum of air-connectivity solutions for
those markets across multiple satellite platforms.
Satamatics core products include satellite data
communications terminals for mobile asset tracking and
monitoring, and related airtime services. This acquisition
complements the Companys existing Iridium- and
Inmarsat-based tracking solutions, extends the Companys
satellite capabilities into a new market, and further
strengthens the Companys market position in
satellite-based applications for tracking people and assets
worldwide.
As discussed in Note 1 to the consolidated financial
statements, the Company was required to adopt
SFAS No. 141(R), which is now included in ASC Topic
805, effective January 1, 2009, and these acquisitions were
reflected in the consolidated financial statements in accordance
with these revised standards.
The aggregate cash purchase price for these two entities was
approximately $90.7 million paid in 2009. In addition, one
of the purchase agreements included a contingent consideration
arrangement. That contingency has since been settled, and an
additional $13.7 million is due to the sellers and payable
in cash in 2010. Management estimated that the fair value of the
contingent consideration arrangement at the acquisition date was
approximately $10.5 million. This was determined by
applying a form of the income approach, based on the
probability-weighted projected payment amounts discounted to
present value at a rate appropriate for the risk of achieving
the milestones. The key assumptions were the earn-out period
payment probabilities, and an appropriate discount rate. These
assumptions are considered by ASC Topic 820 to be level 3
inputs, which are not observable in the market. Including the
contingent consideration as originally estimated, the aggregate
estimated fair value of the consideration for these two
entities, as of the respective acquisition dates, was
approximately $101.2 million. As discussed in Note 1,
the estimated fair value of the earn-out liability was increased
during 2009 with a net charge to earnings from continuing
operations in the consolidated statement of operations.
Of the total cash consideration, approximately
$10.2 million is in escrow accounts payable to the sellers
after specified periods, subject to claims against the sellers.
Of this amount, approximately $4.8 million is in accounts
in the name of the Company; therefore, this portion is reflected
as restricted cash and included in other current assets in the
consolidated balance sheet as of December 31, 2009, with a
corresponding liability in other current liabilities.
ASC Topic 805 requires that identifiable assets acquired and
liabilities assumed be reported at fair value as of the
acquisition date of a business combination. Certain adjustments
to estimated fair value were recorded in 2009 based on new
information obtained that existed as of the acquisition dates.
These adjustments are detailed in the table below. ASC Topic 805
requires that such adjustments to provisional amounts be
reflected in comparative financial information presented in the
financial statements on a retrospective basis. These
adjustments, however, would not have resulted in a material
change to the statement of operations for the periods presented,
and therefore retrospective application was not applied.
82 of 105
Table of Contents
The fair values of major classes of assets acquired and
liabilities assumed as originally determined and revised as of
December 31, 2009, including a reconciliation to the total
consideration, is as follows (in millions):
Acquisition Date Fair Value Measurements | ||||||||||||
Measurement |
As of |
|||||||||||
As of |
Period |
December 31, |
||||||||||
April 4, 2009 | Adjustments | 2009 | ||||||||||
Cash
|
$ | 5.0 | - | 5.0 | ||||||||
Receivables
|
4.7 | - | 4.7 | |||||||||
Inventories
|
10.4 | (0.1 | ) | 10.3 | ||||||||
Developed technology
|
21.2 | 2.1 | 23.3 | |||||||||
Customer relationships
|
11.8 | 3.7 | 15.5 | |||||||||
Other identifiable intangible assets
|
8.2 | (0.6 | ) | 7.6 | ||||||||
Other assets
|
4.1 | 0.7 | 4.8 | |||||||||
Payables and accrued expenses
|
(8.5 | ) | (0.3 | ) | (8.8 | ) | ||||||
Deferred tax liabilities
|
(9.9 | ) | 1.2 | (8.7 | ) | |||||||
47.0 | 6.7 | 53.7 | ||||||||||
Goodwill
|
54.2 | (6.7 | ) | 47.5 | ||||||||
$ | 101.2 | - | 101.2 | |||||||||
The accounting for these acquisitions is substantially complete
as of December 31, 2009, with the primary resolution being
the potential finalization of deferred taxes in the first
quarter of 2010. The valuation methods and assumptions used to
determine fair value of major classes of assets acquired and
liabilities assumed in accordance with ASC Topic 820 are as
follows:
| Cash and cash equivalents, trade accounts receivable, accounts payable and accrued expenses The carrying amounts of each of these items approximated fair value because of the short-term maturity of these instruments. | |
| Inventories were valued on the basis of estimated selling prices less the sum of (a) costs of disposal and (b) reasonable profit allowances on the selling effort. The inventory values were established separately for raw materials, work-in-process, and finished goods. The fair value of materials was based on the carrying amounts at current replacement cost. The fair value of work-in-process and finished goods was determined so that the Company would not generate a profit on the ultimate disposition of the acquired inventory based on value added in the manufacturing process prior to the acquisition date. | |
| Property, plant and equipment assets (included in the other assets category above) were valued based on a cost and market approach. The cost approach quantifies value by examining either the historical cost to reproduce it or the estimated current cost to replace it at a given level of functionality and estimated physical deterioration. A physical deterioration factor was considered for the loss in value brought about by wear and tear of the elements, disintegration, use in service, and all physical factors that reduce the life and serviceability of the property. An obsolescence factor was considered to adjust for the economic and functional obsolescence created by the passage of time. The market approach measures the value of an asset through an analysis of recent sales or offerings of comparable property. Once the cost and market approaches were completed, an analysis of the overall validity of each approach was performed based on the resources used to arrive at a fair value of each asset. | |
| Developed technology assets can be defined as proprietary knowledge or processes that have been developed or purchased and are recognized as providing or having the potential to provide, significant competitive advantages or product differentiation. A developed technology intangible asset can be identified as the end product, such as in high-tech companies, or can be an internally developed system or software package that enhances the process of producing other products, delivering a |
83 of 105
Table of Contents
service, or facilitates general business management. The developed technology acquired is inclusive of patented technology, proprietary software and trade secrets. For a portion of the developed technology acquired, a variation of the income approach known as the excess earnings method was used to value this developed technology. The income approach measures the future economic income that can be attributed to the developed technology based on its expected remaining useful life. The excess earnings method requires an analysis of the following two key inputs: 1) the average remaining useful lives of the developed technologies, and 2) the debt-free net cash flow expected to be generated by the developed technology over its average remaining useful life after deducting charges for contributory assets. Key assumptions and inputs used to develop the debt-free cash flow for developed technologies were projected revenue growth, the average remaining useful life and decay curve, the base earnings before income tax, depreciation, and amortization (EBITDA) margin, an adjustment to account for the R&D expenses related to maintenance of the existing developed technology, an estimated income tax rate, required return for the use of other contributory assets, an appropriate discount rate, and the incremental value of the tax savings generated by the amortization of intangible assets. The Relief from Royalty (RFR) method under the income approach was used to value the remaining portion of the developed technology acquired. This approach provides an estimate of the value of the developed technology based on the present value of the projected cost savings attributable to the ownership of the developed technology. This method is based on the theory that the owner of the developed technology is relieved of paying a royalty for license fee for the use of the developed technology. The method is a function of: 1) projected sales from products or services attributable to the developed technology, 2) a reasonable market royalty rate that would otherwise be charged to a licensor of the developed technology to a licensee of the developed technology, and 3) an appropriate discount rate to reflect the risk of achieving the projected royalty savings attributable to the developed technology. Key assumptions and inputs used to develop the debt-free cash flow for developed technologies value using the RFR method were projected revenue growth, the average remaining useful life and decay curve, a royalty rate, an estimated income tax rate and an appropriate discount rate. |
| A customer relationship exists between an entity and its customer if the following conditions are met: 1) the entity has information about the customer and has regular contact with the customer; and 2) the customer has the ability to make direct contact with the entity. Relationships may arise from contracts, such as supplier contracts and service contracts. However, customer relationships may arise through means other than contracts, such as through regular contact by sales or service representatives. The income approach known as the excess earnings method was used to value customer relationships. The income approach measures the future economic income that can be attributed to the customer relationships based on their expected remaining useful lives. The income approach requires an analysis of the following two key inputs: 1) the remaining useful lives of the customer relationships, considering current contracted terms and renewal probabilities based on historical customer attrition analysis; and 2) the debt-free net cash flow expected to be generated by the customer relationships over their remaining useful lives. Key assumptions and inputs used to develop the debt-free cash flow for developed technologies were projected revenue growth, the average remaining useful life and decay curve, the base EBITDA margin, a sales and marketing adjustment to account for expenses related to attracting new customers, an estimated income tax rate, required return for the use of other contributory assets, and an appropriate discount rate. | |
| The other identifiable intangible assets include trade names and trademarks, order backlog, noncompete agreements, and in-process research and development assets, the most significant of which are the trade names and trademarks. Trade names and trademarks are developed through years of advertising, consistent packaging, promotional campaigns, and customer satisfaction. A recognized trade name or trademark leads to a positive pre-existing disposition on the part of potential purchasers toward purchasing goods and services. A trade name is the name of a business, association or other organization used to identify it. Trade names and trademarks have three basic values to an owner. First is the publicizing value, which is the impact on a customer, a retailer or an industrial |
84 of 105
Table of Contents
user, based on exposure, advertising, etc. Second is the educational value, implying product attributes, etc. Third is the psychological or heritage value, which implies comfort and induces sales. The RFR method under the income approach was used to estimate the value of the acquired trade names and trademarks. The key assumptions and inputs used are listed above under developed technology assets. |
| Deferred tax assets and liabilities were determined in accordance with ASC Topic 740, Income Taxes. Since both of these business combinations were nontaxable transactions, the assets are not adjusted to fair value for income tax reporting purposes. Therefore, deferred tax liabilities are reflected for the tax effects of the difference in bases for financial reporting and income tax purposes that result from applying the acquisition method of accounting for financial reporting purposes. |
Identifiable intangible assets of $46.1 million are subject
to amortization over a weighted-average amortization period, of
9.1 years in total, and for the major classes:
7.5 years for developed technology, 12.3 years for
customer relationships and 10.0 years for trade names and
trademarks. In-process research and development assets of
$0.3 million are not subject to amortization until the
projects are complete or abandoned. The Company did not incur
costs to renew or extend the term of acquired intangible assets
during the period ended December 31, 2009.
The goodwill results from the application of ASC Topic 805 since
it requires that the acquirer subsume into goodwill the value of
any acquired intangible asset that is not identifiable and the
value attributed to items that do not qualify for separate
recognition as assets at the acquisition date. The revised
standard on accounting for business combinations prohibits
separate recognition for certain acquired intangible assets that
do not arise from contractual or other legal rights or do not
meet specified separation criteria (e.g., assembled workforce).
In addition, value is attributed by management to certain items
that do not qualify as assets at the acquisition date, such as
future technologies that management expects to be developed
based on a track record of the acquired entities meeting market
demands. Management also believes that synergies exist between
these newly acquired product lines and the Companys
existing aero and connectivity businesses that allow the
opportunity for promising growth. The goodwill was assigned to
the Communications & Tracking reporting segment and is
not deductible for income tax purposes. The assignment of
goodwill to reporting units has been completed and assigned to
the Formation and Satamatics reporting units.
The Company included the operating results of Formation and
Satamatics in the Communications & Tracking segment in
the consolidated statement of operations since the acquisition
date for each respective entity. The results for 2009 included
net sales of $60.2 million and a loss from continuing
operations before taxes of $0.2 million. During 2009, the
Company recognized net acquisition-related charges of
$7.2 million. These net charges were principally a result
of the adoption of SFAS No. 141(R), including
transaction costs, and a net charge related to an increase in
the earn-out liability. Also included in 2009, was a
$1.4 million foreign exchange loss related to the funding
of the Satamatics acquisition, which was required to be paid in
British pounds sterling. The loss resulted from changes in
foreign currency exchange rates from the date the Company funded
the transaction to the date the acquisition was completed.
The following table provides unaudited supplemental pro forma
information of the Company for 2009 and as if these acquisitions
had been completed on January 1 of the respective years. The
results were prepared based on the historical financial
statements of the Company and the acquired entities and include
pro forma adjustments to reflect the effects of the transactions
and the provisions of SFAS No. 141(R) as if it had
been in effect at these hypothetical acquisition dates (in
thousands):
Years Ended | ||||||||
December 31 |
December 31 |
|||||||
2009 | 2008 | |||||||
Net sales
|
$ | 362,970 | 383,584 | |||||
(Loss) earnings from continuing operations
|
(19,475 | ) | 6,397 |
During 2008, the Company completed acquisitions of two entities.
Akerstroms Trux AB (Trux) of Bjorbo, Sweden was
acquired on February 8, 2008, and Sky Connect, LLC
(Sky Connect) of Takoma Park, MD was
85 of 105
Table of Contents
acquired on August 15, 2008. Trux manufactures and markets
vehicle-mount computing solutions for warehousing and production
environments in the Nordic region, and Sky Connect is a leading
provider of Iridium-based combined tracking and voice systems
for the aviation market.
The aggregate purchase price for the entities acquired in 2008
was approximately $33 million. The cost of the acquired
entities was allocated based on the fair value of the underlying
assets and liabilities, which included identifiable intangible
assets of approximately $8.4 million. Intangible assets are
subject to amortization based on expected useful lives that
range from three to five years. Goodwill, totaling approximately
$22.4 million, represented the excess of the cost over the
net of the amounts allocated to the assets acquired and
liabilities assumed. Approximately $11.0 million of the
acquired goodwill is deductible over a
15-year
period for income tax purposes.
Sky Connect is included in the Companys
Communications & Tracking reportable operating
segment, and Trux is included in the Companys LXE
reportable operating segment. Their operating results are being
included in the Companys results of operations from their
respective dates of acquisition. The Company recognized a loss
on impairment of goodwill of $19.9 million in 2009 at the
LXE reporting unit (see Note 3 for additional information).
A proportional share of the loss was allocated to the goodwill
resulting from the acquisition of Trux.
Pro forma financial statements and information have not been
included for either of the 2008 acquisitions since they are not
considered significant acquisitions individually or in aggregate
in relation to the Companys consolidated financial
statements.
(3) | GOODWILL AND OTHER INTANGIBLE ASSETS |
As discussed in Note 2, the Company completed two business
combinations during 2009, and two during 2008. The consolidated
financial statements include the identifiable intangible assets
and goodwill resulting from these business combinations in
addition to amounts from acquisitions of businesses completed
prior to 2008.
The following table presents the changes in the carrying amount
of goodwill during 2008 and 2009 (in thousands):
Communication |
||||||||||||
& Tracking | LXE | Total | ||||||||||
Balance as of December 31, 2007
|
$ | - | 9,982 | 9,982 | ||||||||
Goodwill acquired during year
|
11,007 | 12,395 | 23,402 | |||||||||
Foreign currency translation adjustment
|
- | (1,982 | ) | (1,982 | ) | |||||||
Balance as of December 31, 2008
|
11,007 | 20,395 | 31,402 | |||||||||
Goodwill acquired during year
|
47,530 | - | 47,530 | |||||||||
Foreign currency translation adjustment
|
- | 1,295 | 1,295 | |||||||||
Impairment loss
|
- | (19,891 | ) | (19,891 | ) | |||||||
Balance as of December 31, 2009
|
$ | 58,537 | 1,799 | 60,336 | ||||||||
The Company has four reporting units with goodwill from prior
acquisitions reported on the balance sheet at December 31,
2009. In completing the annual evaluation for impairment in the
fourth quarter of 2009, the estimated fair value of three of the
Companys four reporting units with goodwill exceeded the
carrying amount. The amount of goodwill for each reporting unit
that passed step one as of December 31, 2009, and
86 of 105
Table of Contents
the percentage by which the estimated fair value exceeded the
carrying amount of the reporting unit is as follows (dollars in
thousands):
Estimated |
||||||||
Fair Value in |
||||||||
Reported |
Excess of |
|||||||
Goodwill | Carrying Amount | |||||||
Formation
|
$ | 24,060 | 5.9 | % | ||||
Satamatics
|
23,429 | 2.5 | ||||||
Sky Connect
|
11,048 | 11.0 |
Each of these reporting units was recently acquired. At the
acquisition date, the carrying amount of a reporting unit is
equal to its fair value. Therefore, a significant excess would
not be expected for a recently acquired reporting unit.
For the Companys LXE reporting unit, the estimated fair
value did not exceed the carrying amount. Therefore, the Company
completed step two of the impairment testing process to measure
the amount of the impairment loss. While the carrying amount
exceeded the estimated fair value by only $6.0 million, the
impairment loss was measured as $19.9 million, the amount
by which the goodwill on LXEs balance sheet exceeded the
implied fair value. The aggregate fair value of the assets and
liabilities, including those not reflected in the carrying
amount, is compared to the estimated reporting unit fair value
with the difference being implied goodwill. The excess of
goodwill reported on the balance sheet and this implied goodwill
is the impairment loss. For a reporting unit with unrecognized
intangible assets or other assets whose fair value exceeds the
carrying amount, the impairment loss will exceed the reporting
unit fair value deficiency since under U.S. GAAP a step up
in fair value for these other assets is not permitted. The
impairment loss on goodwill of $19.9 million was recorded
at our LXE segment in the fourth quarter of 2009 and represented
93% of the carrying amount of goodwill for this reporting unit.
The Company estimated the fair value of each of its reporting
units in a manner similar to the method used in a business
combination. The Company utilized both the income approach and
the market approach present value techniques in the
determination of fair value. Under the income approach,
estimated fair value is based on the discounted cash flow
method. The key assumptions that drive the estimated fair value
of the reporting units under the income approach are
level 3 inputs and include future cash flows from
operations and the discount rate applied to those future cash
flows, determined from a weighted-average cost of capital
calculation. The future cash flows include additional key
assumptions relating to revenue growth rates, margins and costs.
Under the market approach, the value of invested capital is
derived through industry multiples and other assumptions. The
key assumptions that drive the estimated fair value of the
reporting units under the market approach include EBITDA and
revenue multiples using guideline companies, the majority of
which are level 3 inputs.
The LXE reporting unit was last tested for impairment as of the
end of the first quarter in 2009. At that time no impairment of
goodwill was indicated LXEs results for the remainder of
the year improved from the first quarter, however, they were
somewhat below revised expectations. In developing the 2010
operating plan for the reporting unit, and the longer-term cash
flow projections, the cash flows are now projected to be less
than previously estimated. Furthermore, the discount rate used
to determine the present value of the estimated future cash
flows is now higher.
There were no accumulated impairment losses for the
Companys goodwill as of December 31, 2008. After the
impairment loss recorded on LXEs goodwill in 2009, the
Company had $19.5 million of accumulated impairment losses
on goodwill including foreign currency translation adjustments
as of December 31, 2009.
87 of 105
Table of Contents
The following table presents the gross carrying amounts and
accumulated amortization, in total and by major intangible asset
class, for the Companys intangible assets subject to
amortization as of December 31, 2009 and December 31,
2008 (in thousands):
As of December 31, 2009 | ||||||||||||
Gross |
Net |
|||||||||||
Carrying |
Accumulated |
Carrying |
||||||||||
Amount | Amortization | Amount | ||||||||||
Developed technology
|
$ | 40,385 | 13,460 | 26,925 | ||||||||
Customer relationships
|
19,052 | 2,493 | 16,559 | |||||||||
Trade names and trademarks
|
6,208 | 1,052 | 5,156 | |||||||||
Other
|
2,428 | 1,812 | 616 | |||||||||
$ | 68,073 | 18,817 | 49,256 | |||||||||
As of December 31, 2008 | ||||||||||||
Gross |
Net |
|||||||||||
Carrying |
Accumulated |
Carrying |
||||||||||
Amount | Amortization | Amount | ||||||||||
Developed technology
|
$ | 15,002 | 7,621 | 7,381 | ||||||||
Customer relationships
|
3,405 | 351 | 3,054 | |||||||||
Trade names and trademarks
|
830 | 217 | 613 | |||||||||
Other
|
148 | 30 | 118 | |||||||||
$ | 19,385 | 8,219 | 11,166 | |||||||||
Amortization expense related to these intangible assets for 2009
and 2008 was $9.4 million and $2.2 million,
respectively. Amortization expense of $5.5 million and
$0.4 million was included in cost of sales,
$3.6 million and $1.6 million was included in selling,
general and administrative expenses, and $0.2 million and
$0.2 million was included in research and development
expenses in the Companys consolidated statements of
operations for 2009 and 2008, respectively. Expected
amortization expense for the five succeeding years is as
follows: 2010 -$8.2 million, 2011
$7.6 million, 2012 $7.8 million,
2013 $7.1 million, and 2014
$3.8 million.
In-process research and development assets of $0.3 million
are not subject to amortization until the projects are complete
or abandoned.
(4) | FAIR VALUE MEASUREMENTS |
The Company adopted ASC Topic 820, Fair Value Measurements
and Disclosures, for financial assets and liabilities on
January 1, 2008, and for nonfinancial assets and
liabilities on January 1, 2009. This guidance clarifies
that fair value is an exit price, representing the amount that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants.
As such, fair value is a market-based measurement that should be
determined based on assumptions that market participants would
use in pricing an asset or liability. As a basis for considering
such assumptions, the new guidance establishes a
three-tier
fair-value hierarchy, which prioritizes the inputs used in
measuring fair value as follows:
| Level 1 Observable inputs consisting of quoted prices in active markets; | |
| Level 2 Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and | |
| Level 3 Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
88 of 105
Table of Contents
Assets
and Liabilities Measured at Fair Value on a Recurring
Basis
The carrying amounts of cash and cash equivalents, trade
accounts receivable, accounts payable and accrued expenses
approximate their fair values because of the short-term maturity
of these instruments.
The Company uses derivative financial instruments, primarily in
the form of foreign currency forward contracts, in order to
mitigate the risks associated with currency fluctuations on
future fair values of foreign denominated assets and
liabilities. The Companys policy is to execute such
instruments with creditworthy financial institutions, and it
does not enter into derivative contracts for speculative
purposes. The fair values of foreign currency contracts of
$39,000 net asset at December 31, 2009 and
$1.2 million net liability at December 31, 2008 are
based on quoted market prices for similar instruments using the
income approach (a level 2 input per the provisions of ASC
Topic 820) and are recorded in other current liabilities in
the Companys consolidated balance sheets.
The Company has two fixed-rate, long-term mortgages and has
borrowings under its revolving credit facility. One mortgage has
an 8.0% rate and a carrying amount as of December 31, 2009
and December 31, 2008 of $6.4 million and
$7.1 million, respectively. The other mortgage has a 7.1%
rate and a carrying amount as of December 31, 2009 and
December 31, 2008 of $2.9 million and
$3.5 million, respectively. The Companys borrowings
under its revolving credit facility were $18.5 million as
of December 31, 2009. The Company did not have any
borrowings under its revolving credit facility as of
December 31, 2008. The estimated fair value of the
Companys total debt was $26.5 million at
December 31, 2009 and is based on quoted market prices for
similar instruments (a level 2 input). Mortgage debt and
borrowings under the Companys credit facility are recorded
in current and long-term debt on the Companys consolidated
balance sheets.
Management believes that these assets and liabilities can be
liquidated without restriction.
The Company had a contingent consideration liability for
earn-out provisions resulting from an acquisition completed in
the first quarter of 2009 (Refer to Note 1 for additional
information). The contingency has since been settled and
$13.7 million is due to the sellers, payable in cash in
2010. This liability is recorded in current liabilities on the
Companys consolidated balance sheet as of
December 31, 2009. Prior to the amendment to fix the amount
of the payment the estimated fair value of this contingent
consideration liability was determined by applying a form of the
income approach (a level 3 input) based on the
probability-weighted projected payment amounts discounted to
present value at a rate appropriate for the risk of achieving
the milestones.
The table below includes a summary of the change in estimated
fair value of the contingent consideration liability (in
thousands):
Year Ended |
||||
December 31, 2009 | ||||
Balance at the beginning of the period
|
$ | - | ||
Acquisitions
|
10,500 | |||
Fair value adjustment, including accretion
|
3,229 | |||
Balance at the end of the period
|
$ | 13,729 | ||
During 2009, the fair value adjustment was an increase of
$3.2 million reflecting changes in its expected payments
based on the results of 2009, and an agreement to settle the
2010 earn-out amount. This fair value adjustment was included in
acquisition-related items in the consolidated statements of
operations.
Assets
and Liabilities Measured at Fair Value on a Nonrecurring Basis
Subsequent to the Initial Recognition
In accordance with the provisions of ASC Topic 350, goodwill for
our LXE segment with a carrying amount of $21.7 million was
written down to its implied fair value of $1.8 million,
resulting in an impairment charge of $19.9 million, which
was included in loss from continuing operations for 2009. The
estimated fair value used in the Companys impairment
testing evaluation was determined by applying the income
approach and
89 of 105
Table of Contents
market approach, both level 3 inputs. Refer to Note 3
for additional information including the valuation techniques
used in the Companys goodwill impairment evaluation.
ASC Topic 805 requires that identifiable assets acquired and
liabilities assumed be reported at fair value as of the
acquisition date of a business combination completed on of after
January 1, 2009. The Company completed two acquisitions in
2009. Refer to Note 2 for additional information on the
estimated fair values of, and the valuation techniques used, for
the assets acquired and the liabilities in these two
acquisitions.
(5) | BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION |
Through December 31, 2009, the Company was organized into
three reportable segments: Communications & Tracking,
LXE, and Defense & Space (D&S). The
Communications & Tracking segment includes the product
lines previously reported in the Satellite Communications
segment, and the newly acquired Formation, and Satamatics
businesses. (Refer to Note 2 of the Companys
consolidated financial statements for additional information on
these recent acquisitions.) The Company determines operating
segments in accordance with the Companys internal
management structure, which is organized based on products and
services that share distinct operating characteristics. Each
segment is separately managed and is evaluated primarily upon
operating income.
The Communications & Tracking segment offers
satellite-based communications, tracking, and messaging
solutions through a broad array of terminals and antennas for
the aeronautical, ground-mobile and emergency management
markets. The manufacturing cycle for each order is generally
just a few days, and revenues are recognized upon shipment of
hardware. Product and services are marketed to a variety of
customers including major airframe manufacturers, avionics
original equipment manufacturers (OEM), aircraft
operators and owners. Communications & Tracking also
derives a portion of its net sales from performance on long-term
development contracts. Net sales on these contracts are
generally accounted for using
percentage-of-completion
accounting.
The LXE segment manufactures mobile terminals and wireless data
collection equipment for logistics management systems. The
manufacturing cycle for each order is generally just a few days,
and generally revenues are recognized upon shipment of product.
Products are marketed directly to end-users, through
distributors, and integrators (such as value-added resellers who
provide inventory management software) that incorporate it with
their products and services for sale and delivery to end users.
LXE operates mainly in two markets; the Americas market, which
is comprised of North, South and Central America and the
international market which is comprised of all other geographic
areas with the highest concentration in Europe.
The D&S segment manufactures custom-designed, highly
engineered subsystems for use in space, airborne, and
terrestrial applications for communications, radar,
surveillance, precision tracking and electronic countermeasures.
Orders typically involve development and production schedules
that can extend a year or more, and most revenues are recognized
under the
percentage-of-completion
long-term contract accounting method. Products are typically
sold to prime contractors or systems integrators rather than to
end-users.
Accounting policies for segments are the same as those described
in the summary of significant accounting policies.
90 of 105
Table of Contents
The following segment data is presented in thousands:
Years Ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Net sales:
|
||||||||||||
Communications & Tracking
|
$ | 158,952 | 112,517 | 89,968 | ||||||||
LXE
|
109,441 | 145,885 | 138,821 | |||||||||
Defense & Space
|
91,579 | 76,643 | 59,090 | |||||||||
Total
|
$ | 359,972 | 335,045 | 287,879 | ||||||||
Operating (loss) income:
|
||||||||||||
Communications & Tracking
|
$ | 11,383 | 14,187 | 12,189 | ||||||||
LXE
|
(26,531 | ) | 2,861 | 7,067 | ||||||||
Defense & Space
|
7,314 | 6,381 | 4,876 | |||||||||
Corporate & Other
|
(6,799 | ) | (3,805 | ) | (4,865 | ) | ||||||
Total
|
$ | (14,633 | ) | 19,624 | 19,267 | |||||||
Interest income, net of foreign exchange losses:
|
||||||||||||
Communications & Tracking
|
$ | 826 | (154 | ) | (564 | ) | ||||||
LXE
|
(84 | ) | 500 | 236 | ||||||||
Defense & Space
|
1 | 6 | 7 | |||||||||
Corporate & Other
|
(1,344 | ) | 1,492 | 4,334 | ||||||||
Total
|
$ | (601 | ) | 1,844 | 4,013 | |||||||
Interest expense:
|
||||||||||||
Communications & Tracking
|
$ | 68 | 62 | 121 | ||||||||
LXE
|
93 | 406 | 348 | |||||||||
Defense & Space
|
- | 40 | 141 | |||||||||
Corporate & Other
|
2,020 | 1,171 | 1,343 | |||||||||
Total
|
$ | 2,181 | 1,679 | 1,953 | ||||||||
(Loss) earnings from continuing operations before income taxes:
|
||||||||||||
Communications & Tracking
|
$ | 12,141 | 13,971 | 11,504 | ||||||||
LXE
|
(26,708 | ) | 2,955 | 6,955 | ||||||||
Defense & Space
|
7,315 | 6,347 | 4,742 | |||||||||
Corporate & Other
|
(10,163 | ) | (3,484 | ) | (1,874 | ) | ||||||
Total
|
$ | (17,415 | ) | 19,789 | 21,327 | |||||||
The results from continuing operations before income taxes for
Corporate & Other for the year ended December 31,
2009 include a net charge of $7.2 million for
acquisition-related items, and other corporate expenses that are
not allocated to operating segments in the financial data
reviewed by the chief operating decision maker. The
acquisition-related items were principally a result of the
adoption of SFAS No. 141(R), including transaction
costs, and the accretion of an earn-out liability related to one
of the Companys recent acquisitions recorded at estimated
fair value on a discounted basis an increase in the estimated
fair value of the earn-out liability in 2009 reflecting changes
in the expected earn-out payments based on the results of 2009,
and an agreement between the Company and the sellers of the
acquired entity to settle the 2010 earn-out provisions. In
addition, the results from continuing operations before income
taxes for 2009 includes a $1.4 million foreign exchange
loss related to the funding of the Satamatics acquisition.
The results from continuing operations before income taxes for
LXE include an impairment loss on goodwill of $19.9 million
for the year ended December 31, 2009. The Company completed
its annual evaluation for goodwill impairment in the fourth
quarter of 2009 and determined that the amount of goodwill
recorded in
91 of 105
Table of Contents
connection with the LXE segment was impaired, as the current
performance and future expectations do not support the carrying
amount of its goodwill.
Years Ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Capital expenditures:
|
||||||||||||
Communications & Tracking
|
$ | 3,076 | 4,385 | 6,589 | ||||||||
LXE
|
3,726 | 2,957 | 3,364 | |||||||||
Defense & Space
|
5,966 | 6,105 | 3,684 | |||||||||
Corporate & Other
|
665 | 422 | 942 | |||||||||
Total
|
$ | 13,433 | 13,869 | 14,579 | ||||||||
Depreciation and amortization:
|
||||||||||||
Communications & Tracking
|
$ | 12,117 | 5,089 | 3,619 | ||||||||
LXE
|
3,345 | 3,363 | 2,205 | |||||||||
Defense & Space
|
3,367 | 3,023 | 2,620 | |||||||||
Corporate & Other
|
1,160 | 1,023 | 1,222 | |||||||||
Total
|
$ | 19,989 | 12,498 | 9,666 | ||||||||
December 31 | ||||||||
2009 | 2008 | |||||||
Assets:
|
||||||||
Communications & Tracking
|
$ | 220,405 | 99,323 | |||||
LXE
|
71,632 | 107,230 | ||||||
Defense & Space
|
53,883 | 47,417 | ||||||
Corporate & Other
|
28,225 | 73,395 | ||||||
Total
|
$ | 374,145 | 327,365 | |||||
Following is a summary of enterprise-wide information (in
thousands):
Years Ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Net sales to customers in the following countries:
|
||||||||||||
United States
|
$ | 252,749 | 202,520 | 176,209 | ||||||||
Other foreign countries
|
107,223 | 132,525 | 111,670 | |||||||||
Total
|
$ | 359,972 | 335,045 | 287,879 | ||||||||
92 of 105
Table of Contents
Net sales are attributed to individual countries based on the
customers country of origin at the time of the sale.
December 31 | ||||||||
2009 | 2008 | |||||||
Long-lived assets (excluding goodwill) are located in the
following countries:
|
||||||||
United States
|
$ | 54,372 | 32,831 | |||||
United Kingdom
|
24,442 | 2,050 | ||||||
Canada
|
8,820 | 7,609 | ||||||
Other foreign countries
|
9,562 | 9,248 | ||||||
Total
|
$ | 97,196 | 51,738 | |||||
Concentration of net assets by geographic region:
|
||||||||
United States
|
$ | 72,826 | 128,692 | |||||
Canada
|
62,239 | 53,252 | ||||||
Europe
|
97,216 | 53,801 | ||||||
Other
|
4,810 | 6,997 | ||||||
Total
|
$ | 237,091 | 242,742 | |||||
Sales to no individual customer exceeded more than 10% of our
annual net sales during any of the years ended December 31,
2008 or 2007. Sales to one of our customers during the year
ended December 31, 2009 exceeded 10% of our annual net
sales, with sales of $37.9 million, mainly due to a
significant order received by our D&S segment that is not
expected to reoccur.
(6) | INVENTORIES |
Inventories as of December 31, 2009 and 2008 included the
following (in thousands):
December 31 | ||||||||
2009 | 2008 | |||||||
Parts and materials
|
$ | 25,221 | 26,730 | |||||
Work-in-process
|
5,142 | 2,404 | ||||||
Finished goods
|
10,292 | 6,536 | ||||||
$ | 40,655 | 35,670 | ||||||
Costs included in inventories related to long-term programs or
contracts are primarily for materials and work performed on
programs awaiting funding, or on contracts not yet finalized.
Such costs were $1.1 million at December 31, 2009, and
$1.6 million at December 31, 2008.
93 of 105
Table of Contents
(7) | LONG-TERM DEBT |
The following is a summary of long-term debt as of
December 31, 2009 and 2008 (in thousands):
2009 | 2008 | |||||||
Revolving credit loan with a syndicate of banks in the U. S.,
which matures in February 2013, interest payable monthly at a
variable rate (3.75% at the end of 2009)
|
$ | 18,500 | -- | |||||
Promissory note, secured by a first mortgage on the
Companys headquarters facility, maturing in 2016,
principal and interest payable in equal monthly installments of
$104 with a fixed interest rate of 8.0%
|
6,370 | 7,076 | ||||||
Term loan with an insurance company, secured by a U.S. building,
maturing in February 2014, principal and interest payable in
equal monthly installments of $68 with a fixed interest rate of
7.1%
|
2,878 | 3,466 | ||||||
Capital lease agreements, secured by machinery and equipment,
computer hardware, software and peripherals, with various terms
through 2010, due in quarterly installments with implicit
interest rates of 3.0% to 4.2%
|
2 | 10 | ||||||
Total long-term debt
|
27,750 | 10,552 | ||||||
Less current installments of long-term debt
|
1,398 | 1,302 | ||||||
Long-term debt, excluding current installments
|
$ | 26,352 | 9,250 | |||||
The Company has a revolving credit agreement with a syndicate of
banks. Under this agreement, the Company has $60 million
total capacity for borrowing in the U.S. and
$15 million total capacity for borrowing in Canada. The
agreement also has a provision permitting an increase in the
total borrowing capacity of up to an additional $50 million
with additional commitments from the current lenders or from new
lenders. The existing lenders have no obligation to increase
their commitments. The credit agreement provides for borrowings
through February 28, 2013, with no principal payments
required until maturity. The credit agreement is secured by
substantially all of the Companys tangible and intangible
assets, with certain exceptions for real estate that secures
existing mortgages, for other permitted liens, and for certain
assets in foreign countries.
Interest will be, at the Companys option, a function of
either the lead banks prime rate or the then-published
London Interbank Offered Rate (LIBOR) for the
applicable borrowing period. A commitment fee equal to 0.30% per
annum of the average daily unused credit is payable quarterly.
As of December 31, 2009, the Company had $18.5 million
of borrowings outstanding under this revolving credit facility.
The credit agreement includes a financial covenant that
establishes a maximum ratio of total funded debt to historical
consolidated earnings before interest, taxes, depreciation, and
amortization (EBITDA). The credit agreement also
establishes a minimum ratio of consolidated EBITDA less capital
expenditures and taxes paid to specific fixed charges, primarily
interest, scheduled principal payments under all debt agreements
and dividends. The credit agreement includes various other
covenants that are customary in such borrowings. The agreement
also restricts the ability of the Company to declare or pay cash
dividends.
The Company has $2.5 million of standby letters of credit
to satisfy performance guarantee requirements under certain
customer contracts. While these obligations are not normally
called, they could be called by the beneficiaries at any time
before the expiration date should the Company fail to meet
certain contractual requirements. After deducting outstanding
letters of credit, as of December 31, 2009, the Company had
$41.5 million available for borrowing in the U.S. and
$12.5 million available for borrowing in Canada under the
revolving credit agreement.
94 of 105
Table of Contents
Following is a summary of the combined principal maturities of
all long-term debt (in thousands) as of December 31, 2009:
2010
|
$ | 1,398 | ||||||
2011
|
1,434 | |||||||
2012
|
1,618 | |||||||
2013
|
20,245 | |||||||
2014
|
1,114 | |||||||
Thereafter
|
1,941 | |||||||
Total principal maturities
|
$ | 27,750 | ||||||
Included in these totals are principal payments to be made under
the Companys capital lease agreements.
8) | STOCK-BASED COMPENSATION |
The Company has granted nonqualified stock options and nonvested
restricted stock to key employees and directors under several
stock option plans. All outstanding options have been granted
with an exercise price equal to the fair market value of the
stock on the grant date. The principal vesting requirement for
all options granted prior to and after 2006 was satisfaction of
a service condition. The vesting requirements for options
granted in 2006 included service-based and performance-based
conditions. Grants to executives are made from a
shareholder-approved plan. Grants to non-executives are made
from a plan that has not been subject to shareholder approval.
As of December 31, 2009, there were options exercisable
under all plans for approximately 789,000 shares of common
stock, and there were approximately 1,833,000 shares
available for future option grants. Upon exercise of an option,
the Companys policy is to issue new shares.
The grants of restricted stock are valued on the date of grant
at the intrinsic value of the underlying stock. Typically, the
only restriction related to these grants is a service condition.
Stock-based compensation is recognized on a straight-line basis
over the requisite service period for each separately vesting
portion of an award as if the award was, in substance, multiple
awards. As of December 31, 2009, the Company had granted
124,000 nonvested shares to employees of which
25,000 shares vested in 2009, and 3,000 shares were
forfeited.
The Company recognized charges to income of $2,470,000 in 2009,
$2,339,000 in 2008, and $1,727,000 in 2007, before income tax
benefit, for all the Companys stock plans. The Company
also recognized related income tax benefits of $846,000,
$955,000, and $758,000 for the same periods, respectively.
Following is a summary of options outstanding as of
December 31, 2009 (shares in thousands):
Outstanding | Exercisable | |||||||||||||||||||||||
Number |
Weighted |
Weighted Average |
Number |
Weighted |
Weighted Average |
|||||||||||||||||||
Range of |
of |
Average |
Remaining |
of |
Average |
Remaining |
||||||||||||||||||
Exercise Prices
|
Shares
|
Exercise Price
|
Contractual Life
|
Shares
|
Exercise Price
|
Contractual Life
|
||||||||||||||||||
$ | 11.63 - 13.89 | 51 | $ | 13.14 | 51 | $ | 13.14 | |||||||||||||||||
13.90 - 14.93 | 49 | 14.22 | 49 | 14.22 | ||||||||||||||||||||
14.94 - 15.80 | 62 | 15.63 | 62 | 15.63 | ||||||||||||||||||||
15.81 - 18.98 | 161 | 18.22 | 142 | 18.23 | ||||||||||||||||||||
18.99 - 20.00 | 171 | 19.34 | 127 | 19.27 | ||||||||||||||||||||
20.01 - 22.74 | 201 | 21.15 | 178 | 21.04 | ||||||||||||||||||||
22.75 - 28.67 | 299 | 25.67 | 180 | 25.97 | ||||||||||||||||||||
$ | 11.63 - 28.67 | 994 | $ | 20.63 | 3.4 years | 789 | $ | 20.02 | 3.1 years | |||||||||||||||
95 of 105
Table of Contents
Options with service-based vesting only
The principal vesting requirement for all options granted prior
to and after 2006 is a service condition that requires an
employee to render service to the Company for a specified period
of time. Vesting periods range from six months to four years,
and substantially all of these options have graded vesting over
these periods. Options provide for accelerated vesting if there
is a change of control, as defined in the plans. All outstanding
options expire from six to ten years after the date of grant.
Following is a summary of service-based option activity for 2009
(shares and aggregate intrinsic value in thousands):
Weighted |
||||||||||||||||
Average |
||||||||||||||||
Weighted |
Remaining |
|||||||||||||||
Number |
Average |
Contractual |
Aggregate |
|||||||||||||
of |
Exercise |
Life |
Intrinsic |
|||||||||||||
Shares | Price | (in years) | Value | |||||||||||||
Options outstanding at December 31, 2008
|
774 | $ | 20.16 | |||||||||||||
Granted
|
188 | 22.43 | ||||||||||||||
Exercised
|
(48 | ) | 13.80 | |||||||||||||
Forfeited or expired
|
(46 | ) | 23.67 | |||||||||||||
Options outstanding at December 31, 2009
|
868 | 20.82 | 3.5 | $ | 163 | |||||||||||
Options exercisable at December 31, 2009
|
677 | 20.11 | 2.9 | 163 | ||||||||||||
The fair value of each service-based option grant is estimated
on the date of grant using the Black-Scholes option pricing
model and the assumptions noted in the table below. Expected
volatilities are based on historical volatilities of the
Companys stock over a period equal to the expected term.
The Company uses historical data to estimate option exercise and
post-vesting termination behavior. The expected term of options
granted is based on historical data and represents the period of
time that options granted are expected to be outstanding. The
risk-free interest rate for the expected term of the option is
based on the U.S. Treasury yield curve in effect at the
time of the grant.
2009 | 2008 | 2007 | ||||
Expected volitility
|
47% | 45% - 46% | 53% - 59% | |||
Expected term (in years)
|
4.6 | 4.8 - 5.0 | 4.7 - 8.3 | |||
Risk-free rate
|
1.5% - 2.1% | 2.9% - 3.0% | 4.5% - 4.9% | |||
Expected dividend yield
|
None | None | None |
The weighted-average grant-date fair value of service-based
options granted in years 2009, 2008, and 2007 was $9.15, $12.02,
and $9.98, respectively. The total intrinsic value for
service-based options exercised during the years ended
December 31, 2009, 2008 and 2007 was $370,000, $501,000 and
$2,257,000, respectively.
As of December 31, 2009, there was $787,000 of total
unrecognized compensation cost related to nonvested
service-based options granted under the Companys plans.
That cost is expected to be recognized over a weighted-average
period of 2.3 years.
Options with performance-based and service-based vesting
In 2006, the Company issued options that included both
performance-based and service-based vesting conditions. Each
option became exercisable as to 25% of the shares beginning on
the first anniversary of the grant and continuing on the
subsequent three anniversaries, provided that the Company or, in
the case of segment employees, the employees principal
segment during the year, has achieved, during the year preceding
each vesting date, the earnings target specified by the
Boards compensation committee at the beginning of each
year. These performance-based options expire on the sixth
anniversary of the date of grant. All other terms and conditions
of these option grants are similar to options with service-based
vesting only.
96 of 105
Table of Contents
Following is a summary of option activity for options with both
performance-based and service-based vesting conditions for 2009
(shares and aggregate intrinsic value in thousands):
Weighted |
||||||||||||||||
Average |
||||||||||||||||
Weighted |
Remaining |
|||||||||||||||
Number |
Average |
Contractual |
Aggregate |
|||||||||||||
of |
Exercise |
Life |
Intrinsic |
|||||||||||||
Shares | Price | (in years) | Value | |||||||||||||
Options outstanding at December 31, 2008
|
134 | $ | 19.21 | |||||||||||||
Granted
|
- | - | ||||||||||||||
Exercised
|
- | - | ||||||||||||||
Forfeited or expired
|
(8 | ) | 18.05 | |||||||||||||
Options outstanding at December 31, 2009
|
126 | 19.28 | 2.3 | $ | - | |||||||||||
Options exercisable at December 31, 2009
|
112 | 19.44 | 2.3 | - | ||||||||||||
The fair value of each performance-based and service-based
option grant is estimated on the date of grant using the
Black-Scholes option pricing model and the assumptions noted in
the table below. The basis for each of the critical assumptions
listed below is the same as those used to determine the fair
value of the Companys service based option grants.
There were no options granted in 2009, 2008 or 2007 with both
performance-based and service-based vesting conditions. There
were no such options exercised during the year ended
December 31, 2009. The total intrinsic value of such
options exercised during the years ended December 31, 2008
and 2007 was $3,000, and $56,000, respectively.
The combined grant-date fair value of both service-based and
performance and service-based grants vested during the years
ended December 31, 2009, 2008, and 2007 was
$2.2 million, $1.3 million, and $1.1 million,
respectively. The Company received $0.5 million,
$0.9 million, and $4.3 million from all share options
exercised, net of withholding taxes, during 2009, 2008, and
2007, respectively.
Nonvested
stock
Following is a summary of nonvested stock activity for 2009
(shares in thousands):
Weighted- |
||||||||
Number |
Average |
|||||||
of |
Grant-Date |
|||||||
Shares | Fair Value | |||||||
Nonvested stock outstanding at December 31, 2008
|
55 | $ | 24.99 | |||||
Granted
|
44 | 18.86 | ||||||
Vested
|
(25 | ) | 23.03 | |||||
Forefeited
|
(3 | ) | 28.00 | |||||
Nonvested stock outstanding at December 31, 2009
|
71 | $ | 21.77 | |||||
Nonvested stock valued at $72,000, $206,000, and $58,000 was
granted to certain senior executives during 2009, 2008, and
2007, respectively, and $746,000 was granted to nonexecutive
employees in 2009. The only restriction on the stock is the
completion of specified service periods. As of December 31,
2009, there was $736,000 of total unrecognized compensation cost
related to nonvested stock awards. That cost is expected to be
recognized on a straight-line basis over a weighted-average two
year service period.
97 of 105
Table of Contents
9) | INCOME TAXES |
Total income tax benefit (expense) provided for in the
Companys consolidated financial statements consists of the
following for the years ended December 31, 2009, 2008, and
2007 (in thousands):
2009 | 2008 | 2007 | ||||||||||
Income tax benefit (expense), continuing operations
|
$ | 4,266 | 682 | (2,080 | ) | |||||||
Income tax benefit, discontinued operations
|
4,001 | - | 82 | |||||||||
Income tax benefit resulting from exercise of stock options
credited to shareholders equity
|
133 | 203 | 643 | |||||||||
Total
|
$ | 8,400 | 885 | (1,355 | ) | |||||||
The components of income tax benefit (expense) for continuing
operations for the years ended December 31, 2009, 2008 and
2007 were (in thousands):
2009 | 2008 | 2007 | ||||||||||
Current:
|
||||||||||||
Federal
|
$ | (42 | ) | (1,460 | ) | (1,483 | ) | |||||
State
|
(128 | ) | (176 | ) | (332 | ) | ||||||
Foreign
|
(193 | ) | (689 | ) | (1,274 | ) | ||||||
Total
|
(363 | ) | (2,325 | ) | (3,089 | ) | ||||||
Deferred:
|
||||||||||||
Federal
|
4,646 | 1,569 | 878 | |||||||||
State
|
5 | 9 | 35 | |||||||||
Foreign
|
(22 | ) | 1,429 | 96 | ||||||||
Total
|
4,629 | 3,007 | 1,009 | |||||||||
Total income tax benefit (expense)
|
$ | 4,266 | 682 | (2,080 | ) | |||||||
Income tax benefit (expense) for continuing operations differed
as follows from the amounts computed by applying the
U.S. federal statutory income tax rate of 34% to loss
(earnings) from continuing operations before income taxes for
the years ended December 31, 2009, 2008, and 2007,
respectively (in thousands):
2009 | 2008 | 2007 | ||||||||||
Benefit (expense) computed at the federal statutory rate Effect
of:
|
$ | 5,921 | (6,728 | ) | (7,251 | ) | ||||||
State income taxes, net of federal income tax effects
|
(81 | ) | (110 | ) | (196 | ) | ||||||
Tax credits from research activities
|
3,563 | 1,716 | 936 | |||||||||
Difference in effective foreign tax rates
|
5,262 | 4,544 | 4,127 | |||||||||
Valuation allowance
|
(1,040 | ) | 1,195 | 49 | ||||||||
Foreign permanent differences
|
(215 | ) | (55 | ) | (177 | ) | ||||||
Nondeductible goodwill impairment
|
(6,763 | ) | | | ||||||||
Nondeductible acquisition-related items
|
(2,450 | ) | | | ||||||||
Other
|
69 | 120 | 432 | |||||||||
Income tax benefit (expense)
|
$ | 4,266 | 682 | (2,080 | ) | |||||||
98 of 105
Table of Contents
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities as of December 31, 2009 and 2008 are presented
below (in thousands):
2009 | 2008 | |||||||
Deferred tax assets:
|
||||||||
Inventories
|
$ | 1,353 | 602 | |||||
Accrued compensation costs
|
2,499 | 769 | ||||||
Accrued warranty costs
|
1,278 | 779 | ||||||
Foreign research expense and tax credit carryforwards
|
40,241 | 33,721 | ||||||
U.S. and foreign net operating loss carryforwards
|
4,932 | 1,272 | ||||||
Credit for corporate minimum tax
|
709 | 408 | ||||||
U.S. research and development credit carryforwards
|
7,714 | 1,427 | ||||||
Stock-based compensation
|
2,283 | 1,594 | ||||||
Other
|
2,388 | 1,843 | ||||||
Total gross deferred tax assets
|
63,397 | 42,415 | ||||||
Valuation allowance
|
(37,851 | ) | (28,549 | ) | ||||
25,546 | 13,866 | |||||||
Deferred tax liabilities:
|
||||||||
Property, plant and equipment
|
3,715 | 3,993 | ||||||
Intangible Assets
|
13,132 | - | ||||||
Other
|
729 | 923 | ||||||
17,576 | 4,916 | |||||||
Net deferred tax assets
|
$ | 7,970 | 8,950 | |||||
The net change in the valuation allowance for 2009, 2008 and
2007 was an increase of $9.3 million, a decrease of
$20.5 million, and an increase of $16.2 million,
respectively. The majority of the valuation allowance is
necessary for the deferred tax assets in Canada, primarily the
research expense and tax credit carryforwards. The Canadian
increase in the valuation allowance in 2009 was attributable
primarily to the effect of changes in foreign currency exchange
rates ($4.3 million), revaluing the deferred tax asset to
reflect future lower tax rates in the period the asset will be
includable in taxable income ($3.5 million), generation of
additional deferred tax assets ($5.1 million) and revision
in estimate of prior year deferred tax assets
($7.4 million). These increases were partially offset by
utilization of carryforwards with current period taxable income
($9.3 million) and revision in estimated utilization of
deferred tax assets in the prior year ($4.9 million). The
remaining increase in the valuation allowance in 2009 is due to
business acquisitions and other jurisdictions with deferred tax
assets for which realization is not more likely than not. The
decrease in the valuation allowance in 2008 was attributable
primarily to utilization of carryforwards with current period
taxable income ($4.1 million), reduction of existing
carryforwards as a result of revisions to amounts available
($5.9 million), the effect of changes in foreign currency
exchange rates ($9.2 million) and a release of a portion of
the
beginning-of-the-year
valuation allowance based on revisions to projected taxable
income in the relatively near term ($1.3 million),
supported by actual continuing profitability in the past several
years. The increase in the valuation allowance in 2007 was
attributable primarily to an increase in existing carryforwards
as a result of revisions to amounts available
($8.2 million) and the effect of changes in foreign
currency exchange rates ($5.8 million).
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. The ultimate realization of the deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences become
deductible, or prior to expiration of carryforward items.
Management considers the expected reversal of deferred tax
liabilities, expected levels of future taxable income and tax
planning
99 of 105
Table of Contents
strategies in making this assessment. Based on these
considerations, management believes it is more likely than not
that the Company will realize the benefits of these deferred tax
assets, net of the existing valuation allowances as of
December 31, 2009. In most jurisdictions, recent levels of
earnings are sufficient to realize the benefits of the deferred
tax assets, net of the valuation allowance, over a relatively
short period of time. Due to the length of time until all of the
deferred tax assets would be realized and the uncertainty that
exists in the current global economy, no additional benefit was
realized in Canada in 2009. The valuation allowance may be
reduced further in the future resulting in an income tax benefit
to future consolidated statements of operations if profitability
expectations for the future increase or the certainty of such
projections increases. The amount of deferred tax asset
considered realizable, however, could be reduced in the future
if estimates of future taxable income during the carryforward
period are reduced.
The Company has Investment Tax Credit carryforwards in Canada
with a
20-year
expiration carryforward period. The net amount of the deferred
tax benefit is $40.2 million with the majority of the
amount offset by a valuation allowance. The specific
carryforward periods for the Investment Tax Credits extend from
years 2019 through 2029 from amounts generated from tax years
1999 through 2009. The Company has $13.7 million of net
foreign operating loss carryforwards in multiple jurisdictions.
Despite an unlimited expiration carryforward period, the Company
has close to a full valuation allowance placed on these benefits
as it is more likely than not that the attributes will not be
utilized in the future. The Company has $1.5 million of net
U.S. Federal operating loss carryforward as a result of an
acquisition in 2009. The specific carryforward period of the
U.S. Federal operating loss extends to 2029 from amounts
generated in 2009. The Company also has net $7.7 million of
U.S. research and development credits. The specific
carryforward period of the U.S. research and development
credits extends from years 2020 through 2029 from amounts
generated from tax years 2000 through 2009. The Company has not
placed a valuation allowance against these U.S. Federal and
state benefits as it is more likely than not the attributes will
be utilized in the future based on projected future taxable
income net of reversal of deferred tax liabilities.
The U.S. operations are consolidated for federal income tax
purposes. These U.S. operations had a loss from continuing
operations before income taxes of $19.5 million in 2009.
However, U.S. taxable income for income tax reporting is
expected to be approximately $2.1 million primarily due to
nondeductible amounts for the goodwill impairment loss and
acquisition related items. The U.S. operation had earnings
before income taxes of $4.5 million in 2008, and
$5.7 million in 2007. The continuing combined foreign
operations reported earnings before income taxes of
$2.1 million, $15.3 million, and $15.6 million in
2009, 2008, and 2007, respectively. The loss for discontinued
operations in 2009 was primarily within the U.S.
The Company adopted the provisions of FASB Interpretation
No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes an Interpretation of
FASB Statement No. 109 (which is now included in ASC
Subtopic
740-10
Income Taxes) on January 1, 2007. As a result of the
adoption of ASC Subtopic
740-10, the
Company recognized no material adjustment in the liability for
unrecognized income tax benefits. Upon adoption on
January 1, 2007, the Company had $2.6 million of
unrecognized tax benefits, as adjusted to $2.7 million to
reflect the reclassification of amounts in discontinued
operations and accrued interest on unrecognized benefits. As of
December 31, 2009, the Company had $2.0 million of
unrecognized tax benefits, all of which would affect the
Companys effective tax rate if recognized.
100 of 105
Table of Contents
The following table summarizes the activity related to the
Companys unrecognized tax benefits, excluding interest and
penalties, for the years ended December 31, 2009 and 2008
(in thousands):
2009 | 2008 | |||||||
Balance as of January 1
|
$ | 2,949 | 2,591 | |||||
Increases related to current year tax positions
|
917 | 194 | ||||||
Increases related to prior year tax positions
|
5 | 270 | ||||||
Decreases related to lapsing of statute of limitations
|
(6 | ) | (14 | ) | ||||
Decreases related to settlements with taxing authorities
|
(1,915 | ) | - | |||||
Changes in foreign currency exchange rate
|
69 | (92 | ) | |||||
Balance as of December 31
|
$ | 2,019 | 2,949 | |||||
In the normal course of business, the Company is subject to
audits from the federal, state, provincial and other tax
authorities regarding various tax liabilities. The Company
records refunds from audits when receipt is assured and records
assessments when a loss is probable and estimable. These audits
may alter the timing or amounts of taxable income or deductions,
or the allocation of income among tax jurisdictions. The amount
ultimately paid upon resolution of issues raised may differ from
the amounts accrued. The Company is generally no longer subject
to income tax examination by tax authorities for years before
2002.
The Company settled an audit by the Internal Revenue Service for
the tax year 2006 in the third quarter 2009. The Company settled
a Canada provincial audit for 2004 and 2005 in the fourth
quarter 2009. The settlement of these audits resulted in a
decrease in unrecognized tax benefits of $1.9 million as
noted above. The Company also settled a Canada federal audit for
the years 2002 through 2004 in the first quarter 2010. The
settlement did not affect any amounts reflected in the
consolidated financial statements as of December 31, 2009.
The Company is still under audit in Canada at the federal level
for years 2006 and 2007. The Company expects to complete the
audits in the next twelve months. Any related unrecognized tax
benefits could be adjusted based on the results of the audits.
The Company cannot estimate the range of the change that is
reasonably possible at this time.
(10) | DISCONTINUED OPERATIONS |
Prior to 2007, the Company disposed of its S&T/Montreal,
SatNet, and EMS Wireless divisions. The sales agreements for
each of these disposals contained standard indemnification
provisions for various contingencies that could not be resolved
before the dates of closing and for various representations and
warranties provided by us and the purchasers. The purchaser of
EMS Wireless asserted claims under such representations and
warranties. The parties agreed to arbitration, which commenced
in the third quarter of 2009. In March of 2010, the Company
received an interim decision from the arbitrator on these claims
awarding the purchaser a total of approximately
$9.2 million under the warranty provisions of the purchase
agreement. As a result, the Company accrued a liability for the
award costs in discontinued operations in the fourth quarter of
2009. The Company accrues for a liability related to a
contingency, representation or warranty when management
considers that the liability is both probable and can be
reasonably estimated. Prior to the decision by the arbitrator,
the Company did not believe that sufficient information existed
to evaluate such claims, and could not reasonably estimate the
range of this liability, or determine whether such liability
would be material. The interim award will not become final until
the arbitrator determines awards of costs and attorneys
fees, which the parties will be briefing in the near future. It
is not possible at this time to determine the amount of any
additional award, but any such award would be reflected in
discontinued operations when it becomes probable and estimable.
The Company is assessing its options in response to the interim
award. Legal costs of $1.5 million associated with the
defense of this claim were also reflected in discontinued
operations in 2009.
In conjunction with the sale of S&T/Montreal in 2005, an
existing contractual requirement for the Company to post
approximately $3 million to secure in-orbit incentive
performance of the Radarsat-2 payload was eliminated, but the
Company continues to warrant that amount in the event of
specified in-orbit payload failures. Based upon the available
information, management believes that the outcome for this
particular
101 of 105
Table of Contents
contingency is not probable and cannot be estimated. As a
result, the Company has not incurred any costs to date, and has
not recorded a liability as of December 31, 2009, with
respect to this contingency. The Company incurred no additional
costs related to this disposition in 2009, 2008 or 2007.
The Company has an agreement with the purchaser of the former
S&T/Montreal division to acquire a license for
$8 million in payments over a seven-year period, beginning
in December 2008, for the rights to a certain satellite
territory. The Company and the purchaser have a corresponding
sublicense agreement that granted the territory rights back to
the purchaser, under which the Company is to receive a portion
of the satellite service revenues from the specific market
territory over the same period. The purchaser had previously
guaranteed that the revenues derived under the sublicense would
equal or exceed the acquisition cost of the license. As part of
the agreement to sell the net assets of S&T/Montreal, the
Company released the purchaser for this guarantee. Without the
guarantee, the Company estimates that its portion of the
satellite service revenues will be less than the acquisition
cost, and the Company has accordingly reflected a liability for
the net cost in its consolidated balance sheet. As of
December 31, 2009, no payments have been made by the
Company under this license agreement. The satellite service
revenues from the specific market territory included under the
sublicense agreement are considerably lower than expected. The
Company believes that sufficient efforts are not being made by
the purchaser of the former S&T/Montreal division to market
this satellite service. The parties are in discussions of a
possible settlement under these agreements. The Company believes
that the net liability recorded in its consolidated balance
sheet is its best estimate of the settlement amount. If a
settlement is reached, it is expected to be paid in the
following twelve months, and therefore the net liability is
recorded as a current liability in the Companys
consolidated balance sheet as of December 31, 2009.
In 2006, the Company completed the sale of its former SatNet
division. The asset purchase agreement (APA)
provided for the payment of $2.3 million of the aggregate
consideration in an interest-bearing note to be repaid over a
three-year period beginning in May 2007. As of December 31,
2009, approximately $1.1 million of this note receivable,
excluding accrued interest, remained unpaid. The purchaser has
indicated that it believes it has claims that offset the unpaid
balance. The Company does not believe that these claims are
valid according the terms of the APA and has filed an
arbitration demand with the purchaser. Management believes that
the purchaser has the ability to pay the remaining balance of
this note receivable, and that the receivable recorded in its
consolidated balance sheet is fully collectible.
The results of these discontinued operations for 2009, 2008 and
2007 were as follows (in thousands):
2009 | 2008 | 2007 | ||||||||||
Loss before income taxes
|
$ | (10,917 | ) | - | (585 | ) | ||||||
Income tax benefit
|
4,001 | - | 82 | |||||||||
Loss from discontinued operations
|
$ | (6,916 | ) | - | (503 | ) | ||||||
The Companys discontinued operations reported a loss
before income taxes of $10.9 million in 2009. The loss was
mainly a result of a $9.2 million liability recorded in
2009 for costs awarded for warranty claims under the provisions
of the sales agreement of our former EMS Wireless division, and
for legal costs associated with the defense of these claims. In
2008, discontinued operations had no effect on the
Companys net earnings. The Companys discontinued
operations reported a loss before income taxes of
$0.6 million in 2007, mainly due to additional costs
incurred to settle various contingent items, as well as expenses
for legal, audit, and other outside services for the sale of
SatNet and EMS Wireless.
(11) | RETIREMENT PLANS |
The Company established a qualified defined contribution plan in
1993. All
U.S.-based
employees that met a minimum service requirement were eligible
to participate in the plan prior to 2008. In 2008, eligibility
was reduced to employees who had more than 15 years of
service and were at least 50 years of age at
December 31, 2007. Approximately 450 employees were
eligible to participate in the plan in 2009, 500 in 2008, and
650 in 2007. The Company contributions are allocated to each
participant based upon an age-weighted formula that discounts an
equivalent benefit (as a percentage of eligible compensation) at
age 65 to each employees current
102 of 105
Table of Contents
age. Accumulated contributions are invested at each
participants discretion from among a diverse range of
investment options offered by an independent investment firm
selected by the Company.
The Companys contribution to this plan is determined each
year by the Board of Directors. There is no required minimum
annual contribution, but the contribution for 2009 was
approximately 1.8% of base payroll of eligible employees. The
plan is scheduled to be terminated after 2015. Contributions
after 2007 were at a lower level than in prior years and are
further reduced for employees who had less than 15 years of
service or were less than 50 years of age at
December 31, 2007. The Companys total expense through
continuing operations related to the defined contribution plan
totaled $0.6 million in 2009, $1.1 million in 2008,
and $2.4 million for 2007.
The Company sponsors qualified retirement savings plans in the
U.S., Canada and the United Kingdom, in which the Company
matches a portion of each eligible employees
contributions. The Companys matching contributions to
these plans through continuing operations were $2.1 million
in 2009, $2.5 million in 2008, and $1.9 million in
2007.
(12) | OTHER EQUITY MATTERS |
On July 29, 2008, the Companys Board of Directors
authorized a stock repurchase program for up to $20 million
of the Companys common shares. The Company had repurchased
495,000 common shares for $10.1 million under this program
as of December 31, 2009.
On July 27, 2009, the Companys Board of Directors
adopted a Shareholder Rights Plan (the Plan) to
replace a similar plan adopted in 1999 that expired on
August 6, 2009. Under the Plan, a dividend distribution of
one right for each of the Companys outstanding common
shares was made to shareholders of record at the close of
business on August 7, 2009. Upon the occurrence of certain
triggering events, as set forth in the Plan, the rights would
become exercisable.
(13) | COMMITMENTS AND CONTINGENCIES |
The Company is committed under several noncancelable operating
leases for office space, computer and office equipment and
automobiles. Minimum annual lease payments under such leases
having initial or remaining terms in excess of one year are
$5,160,000 in 2010, $4,468,000 in 2011, $3,813,000 in 2012,
$3,099,000 in 2013, $2,531,000 in 2014 and $5,892,000
thereafter. The Company also has short-term leases for regional
sales offices, equipment and automobiles. Total rent expense
under all operating leases was approximately $5,377,000,
$4,518,000, and $4,067,000 in 2009, 2008, and 2007, respectively.
The Companys Canadian-based SATCOM division has received
cost-sharing assistance from the Government of Canada under
several programs that support the development of new commercial
technologies and products. This funding is repayable in the form
of royalties, the level of which will depend upon future revenue
earned by SATCOM above a certain threshold. These royalties
accrue at rates generally less than one percent of sales and
typically require growth in revenue for amounts to be payable.
As a result, although the Company cannot accurately estimate the
level of future possible royalties, the Company does not believe
that such royalties will have a material adverse effect on
future results of operations. The Company is also required to
pay royalties through LXE. These royalty fees are based on the
sales of specific products and are calculated at fixed
percentages on their net selling price. In total, the Company
incurred costs of $1.2 million, $1.3 million, and
$1.1 million related to royalty fees in 2009, 2008 and
2007, respectively.
The Company periodically enters into agreements with customers
and suppliers that include limited intellectual property
indemnification obligations that are customary in the industry.
These guarantees generally require the Company to compensate the
other party for certain damages and costs incurred as a result
of third-party intellectual property claims arising from these
transactions. The nature of the intellectual property
indemnification obligations prevents the Company from making a
reasonable estimate of the maximum potential amount for which it
could be obligated.
103 of 105
Table of Contents
The Company provides a limited warranty for a variety of its
products. The basic warranty periods vary from one to five
years, depending upon the type of product. The Company records a
liability for the estimated costs to be incurred under basic
warranties, which is included in other current liabilities on
the Companys consolidated balance sheets. The amount of
this liability is based upon historical, as well as expected,
rates of warranty claims. The warranty liability is periodically
reviewed for adequacy and adjusted as necessary. Following is a
summary of the activity for the periods presented related to the
Companys liability for limited warranties (in thousands):
Years Ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Balance at beginning of the period
|
$ | 2,789 | 2,647 | 2,051 | ||||||||
Additions at dates of acquisition for businesses acquired during
period
|
464 | - | - | |||||||||
Accruals for warranties issued during the period
|
3,866 | 3,308 | 3,175 | |||||||||
Settlements made during the period
|
(3,034 | ) | (3,166 | ) | (2,579 | ) | ||||||
Balance at end of period
|
$ | 4,085 | 2,789 | 2,647 | ||||||||
(14) | LITIGATION |
Prior to 2007, the Company disposed of its S&T/Montreal,
SatNet, and EMS Wireless divisions. The sales agreements for
each of these disposals contained standard indemnification
provisions for various contingencies that could not be resolved
before the dates of closing and for various representations and
warranties provided by us and the purchasers. The purchaser of
EMS Wireless asserted claims under such representations and
warranties. The parties agreed to arbitration, which commenced
in the third quarter of 2009. In March of 2010, the Company
received an interim decision from the arbitrator on these claims
awarding the purchaser a total of approximately
$9.2 million under the warranty provisions of the purchase
agreement. As a result, the Company accrued a liability for the
award costs in discontinued operations in 2009. The Company
accrues for a liability related to a contingency, representation
or warranty when management considers that the liability is both
probable and can be reasonably estimated. Prior to the decision
by the arbitrator, the Company did not believe that sufficient
information existed to evaluate such claims, and could not
reasonably estimate the range of this liability, or determine
whether such liability would be material. The interim award will
not become final until the arbitrator determines awards of costs
and attorneys fees, which the parties will be briefing in
the near future. It is not possible at this time to determine
the amount of any additional award, but any such award would be
reflected in discontinued operations when it becomes probable
and estimable.
The Company is involved in various other claims and legal
actions arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters
will not have a material adverse effect on the Companys
consolidated financial position, results of operations or cash
flows.
104 of 105
Table of Contents
(15) | SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) |
Following is a summary of interim financial information for the
years ended December 31, 2009 and 2008 (in thousands,
except net earnings (loss) per share):
2009 Quarters Ended | ||||||||||||||||
April 4
|
July 4
|
October 3
|
December 31
|
|||||||||||||
Net sales
|
$ | 92,278 | 96,938 | 85,731 | 85,025 | |||||||||||
Operating (loss) income
|
(1,942 | ) | 3,355 | 2,566 | (18,612 | ) | ||||||||||
(Loss) earnings from continuing operations
|
(2,968 | ) | 3,186 | 5,989 | (19,356 | ) | ||||||||||
Loss from discontinued operations
|
- | - | (709 | ) | (6,207 | ) | ||||||||||
Net (loss) earnings
|
(2,968 | ) | 3,186 | 5,280 | (25,563 | ) | ||||||||||
Net (loss) earnings per share:
|
||||||||||||||||
Basic:
|
||||||||||||||||
Continuing operations
|
$ | (0.20 | ) | 0.21 | 0.39 | (1.27 | ) | |||||||||
Discontinued operations
|
- | - | (0.05 | ) | (0.41 | ) | ||||||||||
Net (loss) earnings
|
$ | (0.20 | ) | 0.21 | 0.34 | (1.68 | ) | |||||||||
Diluted:
|
||||||||||||||||
Continuing operations
|
$ | (0.20 | ) | 0.21 | 0.39 | (1.27 | ) | |||||||||
Discontinued operations
|
- | - | (0.05 | ) | (0.41 | ) | ||||||||||
Net (loss) earnings
|
$ | (0.20 | ) | 0.21 | 0.34 | (1.68 | ) | |||||||||
2008 Quarters Ended | ||||||||||||||||
March 29
|
June 28
|
September 27
|
December 31
|
|||||||||||||
Net sales
|
$ | 75,494 | 81,279 | 87,842 | 90,430 | |||||||||||
Operating income
|
3,437 | 3,407 | 7,205 | 5,575 | ||||||||||||
Net earnings
|
4,160 | 3,411 | 6,077 | 6,823 | ||||||||||||
Net earnings per share:
|
||||||||||||||||
Basic:
|
||||||||||||||||
Continuing operations
|
$ | 0.27 | 0.22 | 0.39 | 0.45 | |||||||||||
Discontinued operations
|
- | - | - | - | ||||||||||||
Net earnings
|
$ | 0.27 | 0.22 | 0.39 | 0.45 | |||||||||||
Diluted:
|
||||||||||||||||
Continuing operations
|
$ | 0.26 | 0.22 | 0.39 | 0.44 | |||||||||||
Discontinued operations
|
- | - | - | - | ||||||||||||
Net earnings
|
$ | 0.26 | 0.22 | 0.39 | 0.44 | |||||||||||
The sum of the earnings per share information on an interim
basis in the two tables above may not equal the earnings per
share information for the full year due to rounding differences.
105 of 105