Attached files
file | filename |
---|---|
EX-32 - EXHIBIT 32 - EMS TECHNOLOGIES INC | c04675exv32.htm |
EX-31.2 - EXHIBIT 31.2 - EMS TECHNOLOGIES INC | c04675exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - EMS TECHNOLOGIES INC | c04675exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 3, 2010
Commission file number 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
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 þ 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 whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See 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 þ | 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 þ
The number of shares outstanding of each of the issuers classes of common stock, as of the close
of business on August 9, 2010:
Class | Number of Shares | |
Common Stock, $0.10 par value | 15,299,423 |
Table of Contents
PART I
FINANCIAL INFORMATION
Item 1. | Financial Statements |
EMS Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
Three Months Ended | Six Months Ended | |||||||||||||||
July 3 | July 4 | July 3 | July 4 | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Product net sales |
$ | 73,350 | 75,906 | 140,909 | 144,698 | |||||||||||
Service net sales |
15,127 | 21,032 | 30,470 | 44,518 | ||||||||||||
Net sales |
88,477 | 96,938 | 171,379 | 189,216 | ||||||||||||
Product cost of sales |
49,040 | 50,456 | 95,473 | 97,094 | ||||||||||||
Service cost of sales |
7,080 | 14,229 | 13,929 | 31,576 | ||||||||||||
Cost of sales |
56,120 | 64,685 | 109,402 | 128,670 | ||||||||||||
Selling, general and administrative expenses |
22,128 | 23,038 | 43,801 | 44,972 | ||||||||||||
Research and development expenses |
4,709 | 4,233 | 10,130 | 8,639 | ||||||||||||
Impairment loss on goodwill related charges |
| | 384 | | ||||||||||||
Acquisition-related items |
346 | 1,627 | 563 | 5,522 | ||||||||||||
Operating income |
5,174 | 3,355 | 7,099 | 1,413 | ||||||||||||
Interest income |
101 | 103 | 281 | 165 | ||||||||||||
Interest expense |
(542 | ) | (667 | ) | (1,019 | ) | (1,288 | ) | ||||||||
Foreign exchange gain (loss), net |
244 | 235 | (449 | ) | (232 | ) | ||||||||||
Earnings before income taxes |
4,977 | 3,026 | 5,912 | 58 | ||||||||||||
Income tax (expense) benefit |
(1,109 | ) | 160 | (1,453 | ) | 160 | ||||||||||
Net earnings |
$ | 3,868 | 3,186 | 4,459 | 218 | |||||||||||
Net earnings per share: |
||||||||||||||||
Basic |
$ | 0.25 | 0.21 | 0.29 | 0.01 | |||||||||||
Diluted |
0.25 | 0.21 | 0.29 | 0.01 | ||||||||||||
Weighted-average number of common
shares outstanding: |
||||||||||||||||
Basic |
15,191 | 15,159 | 15,185 | 15,152 | ||||||||||||
Diluted |
15,230 | 15,225 | 15,218 | 15,244 |
See accompanying notes to interim unaudited consolidated financial statements.
2
Table of Contents
EMS Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(in thousands)
July 3 | December 31 | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 44,805 | 47,174 | |||||
Trade accounts receivable, net of allowance for doubtful account of
$1,166 in 2010 and $1,208 in 2009 |
75,706 | 60,959 | ||||||
Costs and estimated earnings in excess of billings on long-term contracts |
19,054 | 25,290 | ||||||
Inventories |
46,327 | 40,655 | ||||||
Deferred income taxes |
4,198 | 4,306 | ||||||
Other current assets |
15,056 | 19,117 | ||||||
Total current assets |
205,146 | 197,501 | ||||||
Property, plant and equipment: |
||||||||
Land |
1,150 | 1,150 | ||||||
Buildings and leasehold improvements |
18,749 | 18,792 | ||||||
Machinery and equipment |
110,721 | 107,712 | ||||||
Furniture and fixtures |
10,513 | 10,542 | ||||||
Total property, plant and equipment |
141,133 | 138,196 | ||||||
Less accumulated depreciation |
94,399 | 90,256 | ||||||
Net property, plant and equipment |
46,734 | 47,940 | ||||||
Deferred income taxes |
9,411 | 9,421 | ||||||
Goodwill |
60,343 | 60,336 | ||||||
Other intangible assets, net of accumulated amortization
of $22,639 in 2010 and $18,817 in 2009 |
44,858 | 49,256 | ||||||
Costs and estimated earnings in excess of billings on long-term contracts |
14,449 | 7,771 | ||||||
Other assets |
1,666 | 1,920 | ||||||
Total assets |
$ | 382,607 | 374,145 | |||||
See accompanying notes to interim unaudited consolidated financial statements.
3
Table of Contents
EMS Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited), continued
(in thousands, except share data)
Consolidated Balance Sheets (Unaudited), continued
(in thousands, except share data)
July 3 | December 31 | |||||||
2010 | 2009 | |||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Current installments of long-term debt |
$ | 1,450 | 1,398 | |||||
Accounts payable |
32,170 | 27,333 | ||||||
Billings in excess of contract costs and estimated earnings on long-term contracts |
12,276 | 9,380 | ||||||
Accrued compensation and related costs |
14,122 | 13,946 | ||||||
Deferred revenue |
10,852 | 9,805 | ||||||
Contingent consideration arrangement liability |
6,833 | 13,729 | ||||||
Other current liabilities |
15,446 | 23,763 | ||||||
Total current liabilities |
93,149 | 99,354 | ||||||
Long-term debt, excluding current installments |
37,613 | 26,352 | ||||||
Deferred income taxes |
5,521 | 5,757 | ||||||
Other liabilities |
7,172 | 5,591 | ||||||
Total liabilities |
143,455 | 137,054 | ||||||
Shareholders equity: |
||||||||
Preferred stock of $1.00 par value per share; Authorized 10,000 shares; none issued |
| | ||||||
Common stock of $0.10 par value per share; Authorized 75,000 shares, issued and
outstanding 15,300 in 2010 and 15,249 in 2009 |
1,530 | 1,525 | ||||||
Additional paid-in capital |
136,954 | 136,112 | ||||||
Accumulated other comprehensive income foreign currency translation adjustment |
2,821 | 6,066 | ||||||
Retained earnings |
97,847 | 93,388 | ||||||
Total shareholders equity |
239,152 | 237,091 | ||||||
Commitments and contingencies |
||||||||
Total liabilities and shareholders equity |
$ | 382,607 | 374,145 | |||||
See accompanying notes to interim unaudited consolidated financial statements.
4
Table of Contents
EMS Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Six Months Ended | ||||||||
July 3 | July 4 | |||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net earnings |
$ | 4,459 | 218 | |||||
Adjustments to reconcile net earnings to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
9,819 | 10,160 | ||||||
Deferred income taxes |
(119 | ) | | |||||
Stock-based compensation expense |
885 | 1,070 | ||||||
Change in fair value of contingent cosideration liability |
304 | 1,767 | ||||||
Payment for acquisition of business under contingent consideration arrangement |
(1,248 | ) | ||||||
Changes in operating assets and liabilities, net of effects of acquisitions: |
||||||||
Trade accounts receivable |
(16,503 | ) | 3,331 | |||||
Costs and estimated earnings in excess of billings on long-term contracts |
(545 | ) | 4,607 | |||||
Billings in excess of contract costs |
2,890 | 536 | ||||||
Inventories |
(6,112 | ) | 3,211 | |||||
Accounts payable |
4,105 | (2,140 | ) | |||||
Deferred revenue |
3,432 | 899 | ||||||
Other |
4,816 | (1,607 | ) | |||||
Net cash provided by operating activities in continuing operations |
6,183 | 22,052 | ||||||
Net cash used in operating activities in discontinued operations |
(8,810 | ) | | |||||
Net cash provided by (used in) operating activities |
(2,627 | ) | 22,052 | |||||
Cash flows from investing activities: |
||||||||
Purchases of property, plant and equipment |
(3,820 | ) | (8,064 | ) | ||||
Payments for acquisitions of businesses, net of cash acquired |
| (87,264 | ) | |||||
Proceeds from sales of assets |
24 | 36 | ||||||
Net cash used in investing activities |
(3,796 | ) | (95,292 | ) | ||||
Cash flows from financing activities: |
||||||||
Net borrowings under revolving credit facility |
12,000 | 28,501 | ||||||
Repayment of other debt |
(687 | ) | (635 | ) | ||||
Deferred financing costs paid |
(28 | ) | (251 | ) | ||||
Payment for acquisition of business under contingent consideration arrangement |
(5,952 | ) | | |||||
Payments for repurchase and retirement of common shares |
(51 | ) | (110 | ) | ||||
Proceeds from exercises of stock options |
13 | 238 | ||||||
Net cash provided by financing activities |
5,295 | 27,743 | ||||||
Effect of changes in exchange rates on cash and cash equivalents |
(1,241 | ) | 595 | |||||
Net change in cash and cash equivalents |
(2,369 | ) | (44,902 | ) | ||||
Cash and cash equivalents at beginning of period |
47,174 | 86,979 | ||||||
Cash and cash equivalents at end of period |
$ | 44,805 | 42,077 | |||||
See accompanying notes to interim unaudited consolidated financial statements.
5
Table of Contents
EMS Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
July 3, 2010 and July 4, 2009
1. Basis of Presentation
EMS Technologies, Inc. (EMS) is a leading provider of wireless connectivity solutions over
satellite and terrestrial networks. EMS keeps people and systems connected, wherever they are on
land, at sea, in the air or in space. Serving the aeronautical, asset-tracking, defense, and
mobile computing industries, EMS products and services enable universal mobility, visibility and
intelligence.
The consolidated financial statements include the accounts of EMS Technologies, Inc. and its
subsidiaries, each of which is a wholly owned subsidiary of EMS (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 2009 consolidated financial statements to conform to the
2010 presentation.
The accompanying unaudited consolidated financial statements included herein have been prepared in
accordance with U.S. generally accepted accounting principles (GAAP) for interim financial
statements and are based on the Securities and Exchange Commissions (SEC) Regulation S-X and its
instructions to Form 10-Q. They do not include all of the information and notes required by GAAP
for complete financial statements. In the opinion of management, the accompanying unaudited
consolidated financial statements reflect all adjustments, consisting of normal recurring items,
necessary to present fairly the financial condition, results of operations and cash flows for the
interim periods presented. We have performed an evaluation of subsequent events through the date
the financial statements were issued. These interim consolidated financial statements should be
read in conjunction with the financial statements and related notes included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2009.
Managements Use of Estimates
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.
Recently Issued Pronouncements Not Yet Adopted
In January 2010, the Financial Accounting Standards Board (FASB) issued guidance amending and
clarifying requirements for fair value measurements and disclosures in the FASB issued Accounting
Standards Update (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 levels, and disclosures about inputs and valuation
techniques for Level 2 and Level 3. The guidance was effective for the Company in the first quarter
of 2010 and the disclosure reconciliation of all activity in Level 3 is effective for the Company
in the first quarter of 2011. The adoption of ASU 2010-06 did not have a material impact on the
Companys consolidated financial statements.
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 the 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.
6
Table of Contents
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 April 2010, the FASB issued ASU 2010-17, Milestone Method of Revenue Recognition, which provides
guidance on defining a milestone and determining when it may be appropriate to apply the milestone
method of revenue recognition for research and development arrangements in which one or more
payments are contingent upon achieving uncertain future events or circumstances. This update is
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, if
any, the adoption will have on its consolidated financial statements.
2. Business Combinations
During the six months ended July 4, 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 Moorestown, New Jersey, and Satamatics Global Limited
(Satamatics), of Tewkesbury, UK, on January 9, 2009 and February 13, 2009, respectively.
The Company was required to adopt Statement of Financial Accounting Standards (SFAS) No. 141(R),
Business Combinations, which is included in FASB Accounting Standards CodificationTM
(ASC) Topic 805, Business Combinations, 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. Of this
amount, $88.8 million was paid in the first quarter of 2009, and the remaining $1.9 million was
paid in the second quarter of 2009 upon resolution of working capital and cash provisions in the
purchase agreements. In addition, one of the purchase agreements included a contingent
consideration arrangement of up to $15 million. The final payment amount under the contingent
consideration arrangement has been determined and a total of $14.0 million is due to the sellers,
payable in cash in 2010, of which $7.2 million was paid in the second quarter of 2010. The
remaining $6.8 million is due December 31, 2010. Of the $7.2 million paid in the second quarter of
2010, $6.0 million is reflected in the financing activities section of the consolidated statement
of cash flows since that amount was included in the estimated fair value of the contingent
consideration liability as of the acquisition date. The remaining $1.2 million, which is reflected
as an acquisition-related charge in the consolidated statement of operations since the acquisition
date, is reflected as an operating activity in the consolidated statement of cash flows.
7
Table of Contents
For the acquired companies, the results for the three and six months ended July 3, 2010 included
net sales of $11.8 million and $26.1 million, respectively, and a loss before income taxes of $0.4
million for both periods. The results for the three and six months ended July 4, 2009 included net
sales of $16.7 million and $31.6 million, and earnings before taxes of $0.5 million and $1.1
million, respectively. The Company recognized charges of $0.3 million and $0.6 million related to
the acquisitions in the three and six months ended July 3, 2010 and $1.6 million and $5.5 million
for the three and six months ended July 4, 2009, respectively, which are included in
acquisition-related items in the consolidated statements of operations. The acquisition-related
charges included in the first six months of 2010 were primarily for professional fees related to
acquired research and development tax credits and an adjustment in the earn-out liability for
changes in payments to be made under the contingent consideration arrangement. The
acquisition-related charges recorded in the first six months of 2009 included acquisition-related
expenses as a result of the adoption of SFAS 141(R), and accretion of the contingent consideration
liability. The first six months of 2009 also included 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.
3. Goodwill and Other Intangible Assets
The following table presents the changes in the carrying amount of goodwill by reportable operating
segment during the six months ended July 3, 2010 (in thousands):
Global | ||||||||||||||||
Aviation | Tracking | LXE | Total | |||||||||||||
Balance as of December 31, 2009 |
$ | 35,108 | 23,429 | 1,799 | 60,336 | |||||||||||
Foreign currency translation adjustment |
| | 7 | 7 | ||||||||||||
Balance as of July 3, 2010 |
$ | 35,108 | 23,429 | 1,806 | 60,343 | |||||||||||
The Company had $18.9 million of accumulated impairment losses recorded on LXEs goodwill as
of July 3, 2010.
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
July 3, 2010 and December 31, 2009 (in thousands):
As of July 3, 2010 | ||||||||||||
Gross | Net | |||||||||||
Carrying | Accumulated | Carrying | ||||||||||
Amount | Amortization | Amount | ||||||||||
Developed technology |
$ | 39,973 | 15,769 | 24,204 | ||||||||
Customer relationships |
18,944 | 3,556 | 15,388 | |||||||||
Trade names and trademarks |
6,152 | 1,432 | 4,720 | |||||||||
Other |
2,428 | 1,882 | 546 | |||||||||
$ | 67,497 | 22,639 | 44,858 | |||||||||
8
Table of Contents
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 | |||||||||
Amortization expense related to these intangible assets for the three months and six months ended
July 3, 2010 was $2.1 million and $4.1 million, respectively, and for the three months and six
months ended July 4, 2009 was $2.9 million and $5.2 million, respectively. Expected amortization
expense for the remainder of 2010 and for each of the five succeeding years is as follows: 2010 -
$4.1 million, 2011 $7.5 million, 2012 $7.8 million, 2013 $7.1 million, 2014 $3.8 million
and 2015 $3.6 million.
As of July 3, 2010, we had approximately $60.3 million of goodwill and $44.9 million of other
intangible assets on our consolidated balance sheet, collectively representing approximately 28% 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. If we are required to recognize an impairment loss related to goodwill or long-lived
assets, the related charge, although a noncash charge, could materially reduce reported earnings or
result in a loss for the period in which the impairment loss is recognized.
4. Fair Value Measurements
The Company measures financial and non-financial assets and liabilities in accordance with ASC
Topic 820, Fair Value Measurements and Disclosures. This guidance states 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, this
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. |
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.
9
Table of Contents
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 fair values of foreign currency
contracts of $558,000 net liability at July 3, 2010 and $39,000 net asset at December 31, 2009 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 and other
current assets, respectively, in the consolidated balance sheets. Gains and losses related to these
forward contracts are included in foreign exchange gain (loss), net, in the consolidated statement
of operations.
The Company has two fixed-rate mortgages and has borrowings under its revolving credit facility.
One mortgage has an 8.0% interest rate and a carrying amount as of July 3, 2010 and December 31,
2009 of $6.0 million and $6.4 million, respectively. The other mortgage has a 7.1% interest rate
and a carrying amount as of July 3, 2010 and December 31, 2009 of $2.6 million and $2.9 million,
respectively. The Companys outstanding borrowings under its revolving credit facility were $30.5
million and $18.5 million as of July 3, 2010 and December 31, 2009, respectively. The estimated
fair value of the Companys total debt was $37.9 million at July 3, 2010 and is based on quoted
market prices for similar instruments (a level 2 input).
Management believes that these assets and liabilities can be liquidated without restriction.
5. Interim Segment Disclosures
The Company is organized into four reportable operating segments: Aviation, Defense & Space, LXE
and Global Tracking. 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 and earnings before interest, taxes, depreciation and amortization
(EBITDA).
The Aviation segment 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 Inmarsat and Iridium satellites and air-to-ground links.
This segment also designs and builds aircraft cabin equipment to process data on board aircraft,
including rugged data storage, cabin-wireless connectivity, and air-to-ground connectivity.
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. 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 three markets: the Americas
market, which is comprised of North, South and Central America; the International market, which is
comprised of all other geographic areas with the highest concentration in Europe; and direct sales
to original equipment manufacturers (OEM).
The Defense & Space 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. Products are typically sold to prime contractors or
systems integrators rather than to end-users.
The Global Tracking segment provides 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.
Prior to 2010, the Company operated under three reportable operating segments: Communications &
Tracking, D&S and LXE. The Aviation and Global Tracking segments were previously included in our
Communications and Tracking segment. The Companys historical financial data has been recast in
this Quarterly Report on Form 10-Q to conform to its 2010 segment presentation.
10
Table of Contents
Following is a summary of the Companys interim segment data (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
July 3 | July 4 | July 3 | July 4 | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net sales: |
||||||||||||||||
Aviation |
$ | 25,338 | 33,408 | $ | 51,524 | 67,920 | ||||||||||
LXE |
36,365 | 29,807 | 66,938 | 53,751 | ||||||||||||
Defense & Space |
16,758 | 25,189 | 33,292 | 52,097 | ||||||||||||
Global Tracking |
10,526 | 8,534 | 20,386 | 15,448 | ||||||||||||
Less intercompany sales |
(510 | ) | | (761 | ) | |||||||||||
Global Tracking external sales |
10,016 | 8,534 | 19,625 | 15,448 | ||||||||||||
Total |
$ | 88,477 | 96,938 | $ | 171,379 | 189,216 | ||||||||||
Operating income (loss): |
||||||||||||||||
Aviation |
$ | 1,816 | 3,799 | $ | 2,125 | 8,865 | ||||||||||
LXE |
2,077 | 214 | 2,969 | (4,847 | ) | |||||||||||
Defense & Space |
1,694 | 2,301 | 2,612 | 5,193 | ||||||||||||
Global Tracking |
684 | (4 | ) | 838 | (763 | ) | ||||||||||
Corporate & Other |
(1,097 | ) | (2,955 | ) | (1,445 | ) | (7,035 | ) | ||||||||
Total |
$ | 5,174 | 3,355 | $ | 7,099 | 1,413 | ||||||||||
Earnings (loss) before income taxes: |
||||||||||||||||
Aviation |
$ | 1,877 | 3,999 | $ | 1,805 | 9,555 | ||||||||||
LXE |
2,050 | (22 | ) | 2,833 | (5,160 | ) | ||||||||||
Defense & Space |
1,694 | 2,301 | 2,616 | 5,193 | ||||||||||||
Global Tracking |
888 | 239 | 934 | (168 | ) | |||||||||||
Corporate & Other |
(1,532 | ) | (3,491 | ) | (2,276 | ) | (9,362 | ) | ||||||||
Total |
$ | 4,977 | 3,026 | $ | 5,912 | 58 | ||||||||||
The results before income taxes for Corporate & Other for the second quarter and first six
months of 2009 includes $1.6 million and $5.5 million of acquisition-related charges, respectively.
The first six months of 2009 also includes a $1.4 million foreign exchange loss related to the
funding of the Satamatics acquisition and other expenses that are not allocated to operating
segments in the financial data reviewed by the chief operating decision maker.
July 3 | December 31 | |||||||
2010 | 2009 | |||||||
Assets: |
||||||||
Aviation |
$ | 143,780 | 144,483 | |||||
LXE |
83,227 | 71,632 | ||||||
Defense & Space |
53,919 | 53,883 | ||||||
Global Tracking |
78,573 | 75,922 | ||||||
Corporate & Other |
23,108 | 28,225 | ||||||
Total |
$ | 382,607 | 374,145 | |||||
Concentration of net assets by geographic region: |
||||||||
United States |
$ | 68,270 | 72,826 | |||||
Canada |
66,119 | 62,239 | ||||||
Europe |
100,350 | 97,216 | ||||||
Other |
4,413 | 4,810 | ||||||
Total |
$ | 239,152 | 237,091 | |||||
11
Table of Contents
Sales to no individual customer exceeded 10% of our net sales during the three and six months
ended July 3, 2010, or July 4, 2009.
6. Earnings Per Share
Following is a reconciliation of the denominators for basic and diluted earnings per share
calculations (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
July 3 | July 4 | July 3 | July 4 | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Basic weighted-average number of common shares
outstanding |
15,191 | 15,159 | 15,185 | 15,152 | ||||||||||||
Dilutive potential shares using the treasury share method |
39 | 66 | 33 | 92 | ||||||||||||
Diluted weighted-average number of common shares
outstanding |
15,230 | 15,225 | 15,218 | 15,244 | ||||||||||||
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 |
1,008 | 653 | 1,045 | 835 | ||||||||||||
7. Comprehensive Income (loss)
Following is a summary of comprehensive income (loss) (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
July 3 | July 4 | July 3 | July 4 | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net earnings |
$ | 3,868 | 3,186 | 4,459 | 218 | |||||||||||
Other comprehensive income (loss): |
||||||||||||||||
Foreign currency translation adjustment |
(5,056 | ) | 4,076 | (3,245 | ) | 2,896 | ||||||||||
$ | (1,188 | ) | 7,262 | 1,214 | 3,114 | |||||||||||
8. Inventories
Inventories as of July 3, 2010 and December 31, 2009 include the following (in thousands):
July 3 | December 31 | |||||||
2010 | 2009 | |||||||
Parts and materials |
$ | 29,243 | 25,221 | |||||
Work-in-process |
5,727 | 5,142 | ||||||
Finished goods |
11,357 | 10,292 | ||||||
$ | 46,327 | 40,655 | ||||||
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 $2.2 million at July 3, 2010, and $1.1 million at December 31, 2009.
12
Table of Contents
9. Revolving Credit Facility
During the first six months of 2009, the Company completed two acquisitions and used borrowings
under its revolving credit facility to fund a portion of the transactions. During the second
quarter of 2010, the Companys net borrowings increased by $11.5 million mainly to fund cash
payments for award costs related to claims made by the purchasers of the Companys former EMS
Wireless division of $8.6 million (see Note 13 for additional information) and $7.2 million for
earn-out amounts related to acquisitions completed in 2009. As of July 3, 2010, the Company had
$30.5 million of borrowings outstanding under its revolving credit facility.
The Company has $2.1 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, at
July 3, 2010 the Company had $29.5 million available for borrowing in the U.S. and $12.9 million
available for borrowing in Canada under the revolving credit agreement.
10. Warranty Liability
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. The Company
records a liability at the time of sale for the estimated costs to be incurred under warranties,
which is included in other current liabilities on the consolidated balance sheets. The amount of
this liability is based upon historical, as well as expected, experience.
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):
Three Months Ended | Six Months Ended | |||||||||||||||
July 3 | July 4 | July 3 | July 4 | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Balance at beginning of the period |
$ | 4,510 | 3,380 | 4,085 | 2,789 | |||||||||||
Additions at dates of acquisition for businesses
acquired during period |
| | | 516 | ||||||||||||
Accruals for warranties issued during the period |
849 | 1,285 | 2,056 | 2,284 | ||||||||||||
Settlements made during the period |
(835 | ) | (869 | ) | (1,617 | ) | (1,793 | ) | ||||||||
Balance at end of period |
$ | 4,524 | 3,796 | 4,524 | 3,796 | |||||||||||
11. Stock-Based Compensation
The Company has granted nonvested restricted stock and nonqualified stock options to key employees
and directors under several stock award plans. The Company granted stock awards with an aggregate
fair value of approximately $2.4 million during the first six months of 2010 and the first six
months of 2009. The Company recognized expense in the second quarter and first six months of $0.5
million and $0.9 million in 2010, and $0.6 million and $1.1 million in 2009, respectively, before
income tax benefits, for all the Companys stock plans.
12. Income Taxes
The Companys effective income tax rate is generally less than the amounts computed by applying the
U.S. federal income tax rate of 34% due to a portion of earnings being earned in Canada, where the
Companys effective rate is much lower than the rate in the U.S. due to research-related tax
benefits. In the three and six months ended July 3, 2010, the rate was impacted by tax benefits
for certain loss jurisdictions that have not been recognized. In addition, the effective rate in
2010 is higher than 2009 since the earnings in Canada in 2010 are expected to be subject to higher
rates due to provincial taxes and the rate used for U.S. taxable income is higher since certain key
provisions of the U.S. tax law, including the research and development credit, have not been
extended to be in effect for tax year 2010.
13
Table of Contents
The Company is under audit in Canada at the federal level for the years 2006 and 2007. The Company
expects the audits to be completed 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.
13. Discontinued Operations
Prior to 2009, 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 the Company 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, based on the interim decision, in discontinued
operations in the fourth quarter of 2009. On April 30, 2010, the arbitrator issued the final
decision awarding the purchaser of the Companys former EMS Wireless division $8.6 million. Based
on this final award, the Company reduced its estimated liability by $0.6 million in the first
quarter of 2010. This favorable adjustment in discontinued operations in the three months ended
April 3, 2010 was offset by additional charges related to estimated contingent liabilities
associated with other divisions disposed of prior to 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 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 July 3, 2010,
with respect to this contingency. The Company incurred no additional costs related to this
disposition through the second quarter of 2010.
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 from 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 July 3, 2010, 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 finalizing
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 July 3, 2010.
14. Repurchases of Common Shares
On July 29, 2008, the Companys Board of Directors authorized a stock repurchase program for up to
$20 million of the Companys common shares. As of July 3, 2010, the Company had repurchased
495,000 common shares for approximately $10.1 million. Further repurchases are no longer permitted
under the terms of the Companys principal credit agreements. There were no repurchases of common
shares under this program during the six months ended July 3, 2010.
14
Table of Contents
15. Litigation
The Company is involved in various 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.
15
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis should be read in conjunction with our consolidated financial
statements and related notes included in Item 1 of Part 1 of this Quarterly Report and the audited
consolidated financial statements and notes and Managements Discussion and Analysis of Financial
Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended
December 31, 2009.
We are a leading provider of wireless connectivity solutions over satellite and terrestrial
networks. We keep people and systems connected, wherever they are on land, at sea, in the air or
in space. Serving the aeronautical, asset-tracking, defense, and mobile computing industries, our
products and services enable universal mobility, visibility and intelligence. Our operations
include the following four reportable operating segments:
| 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 Inmarsat and Iridium satellites and air-to-ground links. This segment also designs and builds aircraft cabin equipment to process data on board aircraft, including rugged data storage, cabin-wireless connectivity, and air-to-ground connectivity; |
| 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 three markets: the Americas market, which is comprised of North, South and Central America; the International market, which is comprised of all other geographic areas, with the highest concentration in Europe; along with direct sales to original equipment manufacturers (OEM); |
| 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; and |
| Global Tracking Provides 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. |
Following is a summary of significant factors affecting or related to our results of operations for
the three months and six months ended July 3, 2010:
| Our earnings before income taxes were $5.0 million in the second quarter of 2010, an improvement of $4.0 million from the first quarter of 2010, with higher earnings reported by each of our four segments. Our earnings before income taxes improved by $2.0 million in the second quarter of 2010 from the second quarter of 2009, and by $5.9 million in the first six months of 2010 compared with the first six months of 2009. Both LXE and Global Tracking reported higher earnings than in the prior year and the combined acquisition-related charges and amortization expense were substantially lower in 2010. For the second quarter and first six months of 2010, acquisition-related charges were lower by $1.3 million and $5.0 million, respectively, and amortization expense was lower by $0.9 million and $1.1 million, respectively, as compared with the same periods of 2009. |
| LXE had its best quarterly sales quarter since 2008, with $36.4 million in revenues, up 19% from the first quarter and 22% higher than the second quarter a year ago. This revenue improvement was mainly due to a resurgent Americas market. International revenues also increased, but at a much lower rate, as revenue and gross margins were pressured by a weaker Euro. |
| Net sales improved at Global Tracking mainly due to strong product sales in the security market and higher airtime revenues. |
16
Table of Contents
| Defense & Space and Aviation each reported improved earnings in the second quarter of 2010 compared to the first quarter. Strong program execution drove the improvement at Defense & Space and strong demand for military SwiftBroadband provided the improvement at Aviation. However, each segment reported lower revenue and earnings compared to comparable periods in 2009. Defense & Space completed a large military satellite communications research project in 2009. Sales of aviation products in 2010 reflect the current state of commercial aviation markets especially for business jets and for air-to-ground connectivity to airlines. Shipment of new military orders was a positive factor for Aviation as over one-third of Aviations orders in the second quarter of 2010 related to intelligence, surveillance and reconnaissance applications, underscoring EMSs market strength in this strategic area. |
| As certain of our markets continue to be impacted by the economy, they may face continuing pressures and risks. We expect that we will continue to be faced with these economic pressures at least through the end of 2010. These and other factors could cause a decline in expected future cash flows for one or more of our business units (including our recently acquired businesses), and as a result it is reasonably possible that we may be required to recognize an impairment loss related to goodwill or other long-lived assets in the future. |
Results of Operations
The following table sets forth items from the consolidated statements of operations as reported and
as a percentage of net sales (or product net sales and service net sales for product cost of sales
and service cost of sales, respectively) for each period (in thousands, except percentages):
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
July 3 | July 4 | July 3 | July 4 | |||||||||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||||||
Product net sales |
$ | 73,350 | 82.9 | % | $ | 75,906 | 78.3 | % | $ | 140,909 | 82.2 | % | $ | 144,698 | 76.5 | % | ||||||||||||||||
Service net sales |
15,127 | 17.1 | 21,032 | 21.7 | 30,470 | 17.8 | 44,518 | 23.5 | ||||||||||||||||||||||||
Net sales |
88,477 | 100.0 | 96,938 | 100.0 | 171,379 | 100.0 | 189,216 | 100.0 | ||||||||||||||||||||||||
Product cost of sales |
49,040 | 66.9 | 50,456 | 66.5 | 95,473 | 67.8 | 97,094 | 67.1 | ||||||||||||||||||||||||
Service cost of sales |
7,080 | 46.8 | 14,229 | 67.7 | 13,929 | 45.7 | 31,576 | 70.9 | ||||||||||||||||||||||||
Cost of sales |
56,120 | 63.4 | 64,685 | 66.7 | 109,402 | 63.9 | 128,670 | 68.0 | ||||||||||||||||||||||||
Selling, general and
administrative expenses |
22,128 | 25.1 | 23,038 | 23.7 | 43,801 | 25.6 | 44,972 | 23.8 | ||||||||||||||||||||||||
Research and development
expenses |
4,709 | 5.3 | 4,233 | 4.4 | 10,130 | 5.9 | 8,639 | 4.6 | ||||||||||||||||||||||||
Impairment loss on
goodwill related charges |
| | | | 384 | 0.2 | | | ||||||||||||||||||||||||
Acquisition-related items |
346 | 0.4 | 1,627 | 1.7 | 563 | 0.3 | 5,522 | 2.9 | ||||||||||||||||||||||||
Operating income |
5,174 | 5.8 | 3,355 | 3.5 | 7,099 | 4.1 | 1,413 | 0.7 | ||||||||||||||||||||||||
Interest income |
101 | 0.1 | 103 | 0.1 | 281 | 0.2 | 165 | 0.1 | ||||||||||||||||||||||||
Interest expense |
(542 | ) | (0.6 | ) | (667 | ) | (0.7 | ) | (1,019 | ) | (0.6 | ) | (1,288 | ) | (0.7 | ) | ||||||||||||||||
Foreign exchange gain
(loss), net |
244 | 0.3 | 235 | 0.2 | (449 | ) | (0.3 | ) | (232 | ) | (0.1 | ) | ||||||||||||||||||||
Earnings before income
taxes |
4,977 | 5.6 | 3,026 | 3.1 | 5,912 | 3.4 | 58 | | ||||||||||||||||||||||||
Income tax (expense)
benefit |
(1,109 | ) | (1.2 | ) | 160 | 0.2 | (1,453 | ) | (0.8 | ) | 160 | 0.1 | ||||||||||||||||||||
Net earnings |
$ | 3,868 | 4.4 | % | $ | 3,186 | 3.3 | % | $ | 4,459 | 2.6 | % | $ | 218 | 0.1 | % | ||||||||||||||||
Three Months ended July 3, 2010 and July 4, 2009:
Net sales of $88.5 million in the second quarter of 2010 were 8.7% lower than the $96.9 million in
the second quarter of 2009. Lower net sales from our D&S and Aviation segments were partially
offset by higher net sales from our LXE and Global Tracking segments. Net sales were lower at D&S
mainly due to the conclusion of work performed on a significant military communications research
project in the fourth quarter of 2009, and therefore not included in the 2010 results. Net sales
were lower at Aviation primarily due to a lower volume of connectivity products and of Inmarsat
high-speed data and antenna product shipments reflecting a slow-down in the air-transport, military
and business jet markets, and lower shipments of Aviations
other products as a customer nears completion of a significant project in the second
quarter of 2010. LXEs net sales in the second quarter of 2010 were $6.6 million higher than in
the same period in 2009, an increase of 22%, with higher net sales in the Americas market and to a
lesser extent in the International and new OEM markets. The increase in net sales at Global
Tracking was primarily a result of the timing of revenue recognized on two long-term emergency
management programs and an increase in airtime revenue as a result of a higher number of terminals
in use from our asset-tracking product lines.
17
Table of Contents
Product net sales of $73.4 million in the second quarter of 2010 were 3.4% lower than product net
sales in the second quarter of 2009. This was primarily due to a lower volume of shipments of our
connectivity and Inmarsat high-speed data and antenna products at Aviation, and lower product net
sales at D&S, partially offset by an increase in product net sales from a higher number of
terminals shipped by LXE, and additional net sales generated from our asset-tracking products at
Global Tracking. Service net sales of $15.1 million in the second quarter of 2010 were 28.1% lower
than service net sales in the same period in 2009, mainly due to the conclusion of significant work
performed on a military communications research project by D&S partially offset by an increase in
airtime revenue at Global Tracking generated from our asset-tracking product line acquired during
the first quarter of 2009. As a result, product net sales comprised a higher percentage of total
net sales in the second quarter of 2010 compared with the second quarter of 2009.
Overall cost of sales as a percentage of consolidated net sales was lower in the second quarter of
2010 compared with the same period of 2009 due to lower cost-of-sales percentages reported by three
of our four reportable operating segments and a higher percentage of net sales generated from our
LXE and Global Tracking segments, which have lower cost-of-sales percentages than our other two
segments. Service cost of sales as a percentage of respective net sales was lower and product cost
of sales as a percentage of respective net sales was relatively unchanged in the second quarter of
2010 compared with the same period in 2009. The decrease in the service cost-of-sales percentage
was mainly due to a lower proportion of service revenues generated from our D&S segment, which has
a higher service cost-of-sales percentage than our other three reportable operating segments.
SG&A
expenses as a percentage of consolidated net sales was higher for the second quarter of 2010
compared with the second quarter in 2009. Actual expenses were $0.9 million lower in the second
quarter of 2010 compared with the same period in 2009 mainly due to managements cost reduction
efforts, lower severances charges by approximately $0.4 million, and the favorable effect of
changes in foreign currency exchange rates on our LXE international operations. These lower costs
were partially offset by the additional marketing and selling costs related to the higher sales at
LXE and Global Tracking, and the unfavorable effect of changes in foreign currency exchange rates
on Aviations Canadian operations.
R&D expenses were $0.5 million higher in the second quarter of 2010 than in the comparable period
in 2009 mainly due to additional R&D expenses at Aviation, D&S and LXE for the expansion of our
technology base, and unfavorable effects of changes in foreign currency exchange rates on our
Canadian operations.
Acquisition-related items included charges of $0.3 million in the second quarter of 2010. These
costs were primarily for professional fees related to acquired research and development tax credits
and an adjustment in the earn-out liability for changes in payments to be made for one of the
acquisitions completed in the first quarter of 2009. Acquisition-related charges were $1.6 million
in the second quarter of 2009. These costs were primarily related to professional fees for legal,
due-diligence, valuation, and integration services for the acquisition of our Formation and
Satamatics businesses (see Note 2 to the consolidated financial statements in this Quarterly Report
for additional information on these business acquisitions).
The second quarter of 2010 included a $0.2 million foreign exchange net gain related to the
conversion of assets and liabilities not denominated in the functional currency and related to
changes in the fair value of forward contracts used to hedge against currency exposure.
We recognized income tax expense of $1.1 million in the second quarter of 2010 equal to 22% of
earnings before income taxes. The Companys effective income tax rate is generally less than the
amounts computed by applying the U.S. federal income tax rate of 34% due to a portion of earnings
being earned in Canada, where the Companys effective rate is much lower than the rate in the U.S.
due to research-related tax benefits. In the three months ended July 3, 2010, the rate was higher
than it otherwise would have been since tax benefits for certain loss jurisdictions have not been
recognized. In addition, the effective rate in 2010 was higher than 2009 since the earnings in
Canada in 2010 are expected to be subject to higher rates due to provincial taxes, and the rate
used for U.S. taxable income is higher since certain key provisions of the U.S. tax law, including
the research and development credit, have not been extended to be in effect for 2010 as of the end
of the second quarter. If these provisions are extended, our effective tax rate will be lower for
the remainder of 2010. However, we can make no assurances that these provisions will be extended to
be in effect for 2010.
18
Table of Contents
Six Months ended July 3, 2010 and July 4, 2009:
Net sales of $171.4 million in the first six months of 2010 were 9.4% lower than the $189.2 million
in the same period in 2009. Lower net sales from our D&S and Aviation segments were partially
offset by higher net sales from our LXE and Global Tracking segments. Net sales were lower at D&S
mainly due to the conclusion of work performed on a significant military communications research
project in the fourth quarter of 2009, and therefore not included in the 2010 results. Net sales
were lower at Aviation primarily due to a lower volume of connectivity products and of Inmarsat
high-speed data and antenna product shipments reflecting a slow-down in the air-transport, military
and business jet markets, and lower shipments of Aviations
other products as a customer nears completion of a significant project in the second
quarter of 2010. LXEs net sales in the first six months of 2010 were $13.2 million higher than in
the same period in 2009, an increase of 24.5%, mainly due to higher net sales in the Americas
market. Net sales were also higher, but to a lesser extent, in the International market, and from
a new source of revenue from sales made directly to OEMs. The increase in net sales at Global
Tracking was primarily a result of additional net sales generated from our asset-tracking product
line acquired in February 2009.
Product net sales of $140.9 million in the first six months of 2010 were 2.6% lower than product
net sales in the first six months of 2009. This was primarily due to lower net sales from a lower
volume of shipments of our connectivity and Inmarsat high-speed data and antenna products at
Aviation, and lower product net sales at D&S partially offset by an increase in product net sales
from a higher number of terminals shipped by LXE, and additional net sales generated from our
asset-tracking products at Global Tracking. Service net sales of $30.5 million in the first six
months of 2010 were 31.6% lower than service net sales in the same period in 2009, mainly due to
the conclusion of significant work performed on a military communications research project by D&S
partially offset by an increase in airtime revenue generated from our asset-tracking product line
acquired during the first quarter of 2009. As a result, product net sales comprised a higher
percentage of total net sales in the first six months of 2010 compared with the first six months of
2009.
Overall cost of sales as a percentage of consolidated net sales was lower in the first six months
of 2010 compared with the same period of 2009 due to lower cost-of-sales percentages reported by
three of our four reportable operating segments and a higher percentage of net sales generated from
our LXE and Global Tracking segments which have lower cost-of-sales percentages than our other two
segments. Service cost of sales as a percentage of its respective net sales was lower and product
cost of sales as a percentage of its respective net sales was relatively unchanged in the first six
months of 2010 compared with the same period in 2009. The lower service cost-of-sales percentage
was mainly due to a lower proportion of service revenues generated from our D&S segment, which has
a higher service cost-of-sales percentage than our other three reportable operating segments.
SG&A expenses as a percentage of consolidated net sales increased for the first six months of 2010
compared with the first six months in 2009. Actual expenses were $1.2 million lower in the first
six months of 2010 compared with the same period in 2009 mainly due to managements cost reduction
efforts, lower severances charges by approximately $1.0 million, and the favorable effect of
changes in foreign currency exchange rates on our LXE international operations. These lower costs
were partially offset by the additional costs related to the acquired product lines, and the
unfavorable effect of changes in foreign currency exchange rates on Aviations Canadian operations.
R&D expenses were $1.5 million higher in the first six months of 2010 than in the comparable
period in 2009 mainly due to additional R&D spending by each of our segments for the expansion of
our technology base, and unfavorable effects of changes in foreign currency exchange rates on our
Canadian operations.
Impairment loss on goodwill related charges was $0.4 million in the first six months of 2010. The
charges included in this category represent the costs of engaging outside professionals for
valuation and audit services related to the goodwill impairment analysis conducted in the first six
months of 2010.
19
Table of Contents
Acquisition-related items included charges of $0.6 million in the first six months of 2010. These
costs were primarily for professional fees related to acquired research and development tax credits
and an adjustment in the earn-out liability for changes in payments to be made for one of the
acquisitions completed in the first quarter of 2009. Acquisition-related charges were $5.5 million
in the first six months of 2009. These costs were primarily related to professional fees for legal,
due-diligence, valuation, and integration services for the acquisition of our Formation and
Satamatics businesses (see Note 2 to the consolidated financial statements in this Quarterly Report
for additional information on these business acquisitions).
The first six months of 2010 included a $0.4 million foreign exchange net loss related to
changes in the functional currency equivalent of assets and liabilities not denominated in the
functional currency and related to changes in the fair value of forward contracts used to hedge
against these currency exposures. The first six months of 2009 included 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 first six months of 2009 were net gains from changes in the functional currency
equivalent of assets and liabilities not denominated in the functional currency and changes in the
fair value of forward contracts.
We recognized income tax expense of $1.5 million in the first six months of 2010 equal to 25% of
earnings before income taxes. The Companys effective income tax rate is generally less than the
amounts computed by applying the U.S. federal income tax rate of 34% due to a portion of earnings
being earned in Canada, where the Companys effective rate is much lower than the rate in the U.S.
due to research-related tax benefits. In the six months ended July 3, 2010, the rate was higher
than it otherwise would have been since tax benefits for certain loss jurisdictions have not been
recognized. In addition, the effective rate in 2010 was higher than 2009 since the earnings in
Canada in 2010 are expected to be subject to higher rates due to provincial taxes and the rate used
for U.S. taxable income is higher since certain key provisions of the U.S. tax law, including the
research and development credit, have not been extended to be in effect for 2010 as of the end of
the second quarter.
20
Table of Contents
Segment Analysis
Our segment net sales, cost of sales as a percentage of respective segment net sales, segment
operating income (loss) and Adjusted EBITDA were as follows (in thousands, except percentages):
Percentage | ||||||||||||||||||||||||
Three Months Ended | Six Months Ended | Increase (Decrease) | ||||||||||||||||||||||
July 3 | July 4 | July 3 | July 4 | Three | Six | |||||||||||||||||||
2010 | 2009 | 2010 | 2009 | Months | Months | |||||||||||||||||||
Net sales: |
||||||||||||||||||||||||
Aviation |
$ | 25,338 | 33,408 | 51,524 | 67,920 | (24.2) | % | (24.1 | ) | |||||||||||||||
LXE |
36,365 | 29,807 | 66,938 | 53,751 | 22.0 | 24.5 | ||||||||||||||||||
Defense & Space |
16,758 | 25,189 | 33,292 | 52,097 | (33.5 | ) | (36.1 | ) | ||||||||||||||||
Global Tracking |
10,526 | 8,534 | 20,386 | 15,448 | 23.3 | 32.0 | ||||||||||||||||||
Less intercompany sales |
(510 | ) | | (761 | ) | | 2 | | ||||||||||||||||
Global Tracking external sales |
10,016 | 8,534 | 19,625 | 15,448 | 17.4 | 27.0 | ||||||||||||||||||
Total |
$ | 88,477 | 96,938 | 171,379 | 189,216 | (8.7 | ) | (9.4 | ) | |||||||||||||||
Cost of sales percentage: |
||||||||||||||||||||||||
Aviation |
62.7 | % | 62.3 | 65.0 | 61.8 | 0.4 | 3.2 | |||||||||||||||||
LXE |
59.7 | 61.1 | 59.1 | 63.8 | (1.4 | ) | (4.7 | ) | ||||||||||||||||
Defense & Space |
74.5 | 80.6 | 76.0 | 79.4 | (6.1 | ) | (3.4 | ) | ||||||||||||||||
Global Tracking |
51.1 | 61.7 | 51.8 | 68.1 | (10.6 | ) | (16.3 | ) | ||||||||||||||||
Total |
63.4 | 66.7 | 63.9 | 68.0 | (3.3 | ) | (4.1 | ) | ||||||||||||||||
Operating income (loss): |
||||||||||||||||||||||||
Aviation |
$ | 1,816 | 3,799 | 2,125 | 8,865 | (52.2 | ) | (76.0 | ) | |||||||||||||||
LXE |
2,077 | 214 | 2,969 | (4,847 | ) | 870.6 | 2 | |||||||||||||||||
Defense & Space |
1,694 | 2,301 | 2,612 | 5,193 | (26.4 | ) | (49.7 | ) | ||||||||||||||||
Global Tracking |
684 | (4 | ) | 838 | (763 | ) | 2 | 2 | ||||||||||||||||
Corporate & Other |
(1,097 | ) | (2,955 | ) | (1,445 | ) | (7,035 | ) | 2 | 2 | ||||||||||||||
Total |
$ | 5,174 | 3,355 | 7,099 | 1,413 | 54.2 | 402.4 | |||||||||||||||||
Adjusted EBITDA (1) |
||||||||||||||||||||||||
Aviation |
$ | 3,713 | 6,199 | 5,872 | 13,830 | (40.1 | ) | (57.5 | ) | |||||||||||||||
LXE |
3,076 | 1,037 | 4,783 | (2,988 | ) | 196.6 | 2 | |||||||||||||||||
Defense & Space |
2,616 | 3,218 | 4,447 | 6,981 | (18.7 | ) | (36.3 | ) | ||||||||||||||||
Global Tracking |
1,808 | 1,598 | 2,762 | 1,738 | 13.1 | 58.9 | ||||||||||||||||||
Corporate & Other |
(84 | ) | (606 | ) | 718 | (93 | ) | 2 | 2 | |||||||||||||||
Total |
$ | 11,129 | 11,446 | 18,582 | 19,468 | (2.8 | ) | (4.6 | ) | |||||||||||||||
(1) | Adjusted EBITDA is considered a non-generally accepted accounting principles (GAAP) financial measure. See section entitled Adjusted EBITDA for an explanation of this measure and a reconciliation to net earnings on page 25. | |
(2) | The percentage change is not calculable. |
Aviation:
Net sales decreased by $8.1 million and $16.4 million in the second quarter and first six
months of 2010, respectively, as compared with the same periods in 2009. The decrease in net sales
was mainly due to a lower volume of shipments of Aviations connectivity and Inmarsat products in
the second quarter and first six months of 2010. Shipments were lower
for Aviations air-to-ground in-cabin connectivity products into
the air transport market due to delays in customer orders resulting
from changes in the airlines rollout schedule of connectivity,
and to a transition to a new buying pattern by our customer to
acquire inventory as needed to meet scheduled installations instead
of maintaining a stock of inventory of on-hand. Shipments were lower
for Aviations other products as a customer nears completion of
a significant project in the second quarter of 2010. Shipments were lower for Aviations other connectivity products due to
the completion of a significant project in the second quarter of 2010. Shipments were lower for
Aviations Inmarsat high-speed-data terminal and antenna products into the air transport, military
and business jet markets reflecting a slow-down in those markets in the second quarter and first
six months of 2010 as compared with the same periods of 2009. However, shipments of Inmarsat
products to the military market were higher in the second quarter of 2010, approximately double, as
compared with the first quarter of 2010, indicating a strong demand for Aviations products in that
market.
21
Table of Contents
Cost of sales as a percentage of net sales was higher for the second quarter and first six
months of 2010 as compared with the second quarter and first six months of 2009. The cost-of-sales
percentage was higher mainly due to lower production volume over which fixed costs were absorbed,
and an unfavorable effect of changes in foreign currency exchange rates that affected our reported
international costs in the second quarter and first six months of 2010, partially offset by a more
favorable mix of Inmarsat products sold and lower amortization costs of intangible assets than the
same periods of 2009.
Operating income decreased by $2.0 million and $6.7 million in the second quarter and first six
months of 2010 as compared with the same periods in 2009, primarily as a result of lower net sales,
and a higher cost-of-sales percentage in the second quarter and first six months of 2010. In
addition, operating income was lower due to the unfavorable effects of foreign currency exchange
rates in the first six months of 2010 and approximately $0.5 million of severance charges recorded
in the second quarter of 2010. Operating income as a percentage of net sales was 7.2% and 11.4% in
the second quarters of 2010 and 2009, respectively, and was 4.1% and 13.1% in the first six months
of 2010 and 2009, respectively.
Adjusted EBITDA decreased by $2.5 million and $8.0 million in the second quarter and first six
months of 2010 as compared with the same periods in 2009, respectively, due to a decrease in
operating income. Adjusted EBITDA also decreased in the first six months of 2010 as compared with
the same period of 2009 due to an unfavorable change in foreign currency gains and losses.
LXE: Net sales in the second quarter of 2010 were higher than each of the preceding five quarters,
and increased by $5.8 million as compared with the first quarter of 2010, and $6.6 million as
compared with the same period in 2009. Net sales were also higher in the first six months of 2010
by $13.2 million as compared with the first six months of 2009. Net sales increased in the Americas
market and to a lesser extent in the International market in the second quarter and first six
months of 2010, as compared with the same periods in 2009. The increase in net sales in the
Americas market resulted primarily from a higher volume of terminals shipped in that market in
response to a higher demand for rugged handheld computer products. The increase in net sales in the
International market was mainly due to a higher volume of terminals shipped in that market
partially offset by the unfavorable effect of changes in foreign currency exchange rates on the
reported net sales from LXEs International market. Sales generated from handheld computer
products introduced in the fourth quarter of 2009 to the OEM market gained acceptance in certain
service industries in 2010 and represents $1.9 million or 5.4% and $4.4 million or 6.6% of net
sales in the second quarter and first six months of 2010, respectively.
Cost of sales as a percentage of net sales was lower in the second quarter and first six months of
2010 as compared with the same periods in 2009 mainly due to managements efforts to reduce costs,
a higher production volume over which fixed costs were absorbed, and a $0.7 million reduction in
cost of sales for purchased items previously included in accounts payable that were determined to
no longer be liabilities. Additional purchased items included in liabilities are being reviewed and
are expected to be resolved in future periods, which could result in further reductions to cost of
sales. The effects of these reductions in cost of sales as a percentage of net sales were partially
offset by an unfavorable effect of changes in foreign currency exchange rates that affected our
reported International net sales in the first six months of 2010. Revenues are generally
denominated in the local functional currency but product costs are denominated in the U.S. dollar,
which was stronger in the first six months of 2010 compared with the same period in 2009.
LXE generated operating income of $2.0 million and $3.0 million in the second quarter and first
six months of 2010 as compared with operating income of $0.2 million in the second quarter of 2009,
and an operating loss of $4.8 million in the first six months of 2009. This increase in operating
income in 2010 was mainly a result of the margin delivered by the higher net sales. In addition,
operating income increased as a result of a more favorable cost-of-sales percentage. These
increases in operating income were partially offset by higher R&D expenses reflecting the
development of three new products to be released later in 2010. SG&A expenses were $0.6 million
higher in the second quarter of 2010, but were lower in the first six months of 2010 by $0.4
million as compared with the same periods of 2009. SG&A expenses were higher in the second quarter
of 2010 mainly due to increased commissions and other selling expenses as a result of higher sales.
Lower SG&A expenses for the first six months of 2010 were primarily a result of staff reductions to
reduce LXEs cost structure, the favorable effect of changes in foreign currency exchange rates on
reported costs, and lower severance charges. Severance charges were lower by approximately by $1.3
million in the first six months of 2010 as compared with the same period in 2009. Operating income
as a percentage of net sales was 5.7% and 0.7% in the second quarter of 2010 and 2009,
respectively, and was 4.4% and negative 9.0% in the first six months of 2010 and 2009,
respectively.
22
Table of Contents
Adjusted EBITDA increased by $2.0 million and $7.8 million in the second quarter and first six
months of 2010, respectively, as compared with the second quarter and first six months of 2009,
mainly due to an increase in operating income in 2010.
Defense & Space: Net sales decreased by $8.4 million and $18.8 million in the second quarter and
first six months of 2010, respectively, as compared with the same period of 2009 mainly due to work
performed on military programs that were included in the second quarter and first six months of
2009, including a large military satellite communications research project, but that were completed
in 2009 and will not contribute to net sales in future quarters. Order backlog of long-term
contracts was $84.8 million at July 3, 2010, a decrease of $4.8 million from December 31, 2009.
Order backlog consists of a higher percentage of production contracts than development contracts as
of July 3, 2010 as compared with the order backlog as of July 4, 2009.
Cost of sales as a percentage of net sales was lower in the second quarter of 2010 than each of the
preceding seven quarters, and was lower in the first six months of 2010 as compared with the first
six months of 2009, mainly due to a favorable mix of contracts and production efficiencies gained
on certain long-term defense-related projects in the second quarter and first six months of 2010.
The cost-of-sales percentage for the second quarter and first six months of 2009 included
approximately $0.5 million of severance changes which were not included in the first six months of
2010.
Operating income was lower by $0.6 million and $2.6 million in the second quarter and first six
months of 2010, respectively, as compared with the second quarter and first six months of 2009.
The lower operating income was mainly due to the decrease in net sales generated in the second
quarter and first six months of 2010, and higher R&D expenses, partially offset by lower SG&A
expenses. The lower SG&A costs reflect the impact of managements cost reduction efforts initiated
in 2009. Operating income as a percentage of net sales was 10.1% and 9.1% in the second quarter of
2010 and 2009, respectively, and was 7.8% and 10.0% in the first six months of 2010 and 2009,
respectively.
Adjusted EBITDA decreased by $0.6 million and $2.5 million in the second quarter and first six
months of 2010, respectively, as compared with the second quarter and first six months of 2009,
mainly due to a decrease in operating income in 2010.
Global Tracking: Net sales increased by $2.0 million and $4.9 million in the second quarter and
first six months of 2010, respectively, as compared with the same periods in 2009. The increase in
net sales in the second quarter of 2010 was primarily a result of the completion of two long-term
emergency management programs that triggered revenue recognition and an increase in airtime revenue
as a result of a higher number of terminals in use from our asset-tracking product lines. The
increase in net sales in the first six months of 2010 was mainly due to the net sales generated
from our new asset-tracking product lines acquired on February 13, 2009, which contributed $2.9
million of additional net sales in the first six months of 2010, including higher airtime revenue,
compared to the same period of 2009. Net sales included a higher concentration of product
shipments to the security market in the second quarter and first six months of 2010 as compared
with the second quarter and first six months of 2009, reflecting growth in that market.
Cost of sales as a percentage of net sales was lower for the second quarter and first six months of
2010 as compared with the same periods in 2009. The cost-of-sales percentage for the second
quarter and first six months of 2010 included a more favorable sales mix, reflecting a growth in
airtime revenue which has a lower cost-of-sales percentage than product net sales, and lower
amortization costs of intangible assets than the same periods of 2009 mainly due to certain
acquired intangible assets that were fully amortized after the second quarter of 2009.
23
Table of Contents
Operating income increased by $0.7 million and $1.6 million in the second quarter and first six
months of 2010, respectively, as compared with the same periods in 2009, primarily as a result of
higher net sales and a lower cost-of-sales percentage, partially offset by higher SG&A costs. For
the second quarter of 2010, these higher SG&A costs were mainly due to additional staff and
marketing efforts to support the growth in the asset tracking business, and an increase in selling
expenses resulting from the growth in net sales. For the first six months of 2010, these higher
costs were primarily a result of the timing of the acquisition of our new product lines in the
first quarter of 2009; the costs related to the newly acquired product lines were included in the
operating results of our Global Tracking segment for the first six months of 2009 from the date of
acquisition, but were included in the full six months of 2010. Operating income as a percentage of
net sales was 6.5% and breakeven in the second quarter of 2010 and 2009, respectively and was 4.3%
and a negative 4.9% in the first six months of 2010 and 2009, respectively.
Adjusted EBITDA increased by $0.2 million and $1.0 million in the second quarter and first six
months of 2010, respectively, as compared with the second quarter and first six months of 2009
mainly due to an increase in operating income in 2010. The increase in Adjusted EBITDA for the
first six months of 2010 as compared with the same period of 2009 was partially offset by an
unfavorable change in foreign currency gains year over year.
24
Table of Contents
Adjusted EBITDA
In addition to traditional GAAP financial measures, we also measure our performance based on the
non-GAAP financial measure of earnings before interest expense, income taxes, depreciation and
amortization, and before impairment loss on goodwill related charges, stock-based compensation,
acquisition-related items and acquisition-related foreign exchange adjustments (Adjusted EBITDA).
The following table is a reconciliation of net earnings (which is the most directly comparable
GAAP operating performance measure) and earnings (loss) before income taxes by segment to Adjusted
EBITDA for the three and six months ended July 3, 2010 and July 4, 2009 (in thousands):
Aviation | LXE | D&S | GT | Corp & Other |
Total | |||||||||||||||||||
Three Months Ended July 3, 2010 |
||||||||||||||||||||||||
Net earnings |
$ | 3,868 | ||||||||||||||||||||||
Income tax expense |
1,109 | |||||||||||||||||||||||
Earnings (loss) before income taxes |
$ | 1,877 | 2,050 | 1,694 | 888 | (1,532 | ) | 4,977 | ||||||||||||||||
Interest expense |
4 | 1 | | 1 | 536 | 542 | ||||||||||||||||||
Depreciation and amortization |
1,752 | 951 | 865 | 899 | 312 | 4,779 | ||||||||||||||||||
Stock-based compensation |
80 | 74 | 57 | 20 | 254 | 485 | ||||||||||||||||||
Acquisition-related items |
| | | | 346 | 346 | ||||||||||||||||||
Adjusted EBITDA |
$ | 3,713 | 3,076 | 2,616 | 1,808 | (84 | ) | $ | 11,129 | |||||||||||||||
Six Months Ended July 3, 2010 |
||||||||||||||||||||||||
Net earnings |
$ | 4,459 | ||||||||||||||||||||||
Income tax expense |
1,453 | |||||||||||||||||||||||
Earnings (loss) before income taxes |
$ | 1,805 | 2,833 | 2,616 | 934 | (2,276 | ) | 5,912 | ||||||||||||||||
Interest expense |
4 | 18 | | 1 | 996 | 1,019 | ||||||||||||||||||
Depreciation and amortization |
3,920 | 1,789 | 1,710 | 1,793 | 607 | 9,819 | ||||||||||||||||||
Impairment loss on goodwill related charges |
| | | | 384 | 384 | ||||||||||||||||||
Stock-based compensation |
143 | 143 | 121 | 34 | 444 | 885 | ||||||||||||||||||
Acquisition-related items |
| | | | 563 | 563 | ||||||||||||||||||
Adjusted EBITDA |
$ | 5,872 | 4,783 | 4,447 | 2,762 | 718 | $ | 18,582 | ||||||||||||||||
Three Months Ended July 4, 2009 |
||||||||||||||||||||||||
Net earnings |
$ | 3,186 | ||||||||||||||||||||||
Income tax benefit |
(160 | ) | ||||||||||||||||||||||
Earnings (loss) before income taxes |
$ | 3,999 | (22 | ) | 2,301 | 239 | (3,491 | ) | 3,026 | |||||||||||||||
Interest expense |
27 | 57 | | | 583 | 667 | ||||||||||||||||||
Depreciation and amortization |
2,129 | 942 | 849 | 1,353 | 280 | 5,553 | ||||||||||||||||||
Stock-based compensation |
44 | 60 | 68 | 6 | 395 | 573 | ||||||||||||||||||
Acquisition-related items |
| | | | 1,627 | 1,627 | ||||||||||||||||||
Adjusted EBITDA |
$ | 6,199 | 1,037 | 3,218 | 1,598 | (606 | ) | $ | 11,446 | |||||||||||||||
Six Months Ended July 4, 2009
|
||||||||||||||||||||||||
Net earnings |
$ | 218 | ||||||||||||||||||||||
Income tax benefit |
(160 | ) | ||||||||||||||||||||||
Earnings (loss) before income taxes |
$ | 9,555 | (5,160 | ) | 5,193 | (168 | ) | (9,362 | ) | 58 | ||||||||||||||
Interest expense |
70 | 142 | | | 1,076 | 1,288 | ||||||||||||||||||
Depreciation and amortization |
4,132 | 1,908 | 1,655 | 1,900 | 565 | 10,160 | ||||||||||||||||||
Stock-based compensation |
73 | 122 | 133 | 6 | 736 | 1,070 | ||||||||||||||||||
Acquisition-related items |
| | | | 5,522 | 5,522 | ||||||||||||||||||
Acquisition-related foreign exchange adjustment |
| | | | 1,370 | 1,370 | ||||||||||||||||||
Adjusted EBITDA |
$ | 13,830 | (2,988 | ) | 6,981 | 1,738 | (93 | ) | $ | 19,468 | ||||||||||||||
25
Table of Contents
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 nonoperating 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 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 to 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.
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 an
order backlog that extends substantially beyond one fiscal quarter except for annual or multi-year
maintenance service agreements. Our Aviation and Global Tracking businesses have customer
arrangments with both short delivery cycles and delivery cycles that extend beyond the next twelve
months. Our segment backlog as of July 3, 2010 and December 31, 2009 was as follows (in millions):
July 3 | December 31 | |||||||
2010 | 2009 | |||||||
Aviation |
$ | 38.7 | 49.4 | |||||
LXE |
21.5 | 22.0 | ||||||
Defense & Space |
84.8 | 89.6 | ||||||
Global Tracking |
19.3 | 17.2 | ||||||
Total |
$ | 164.3 | 178.2 | |||||
Included in the backlog of firm orders for our D&S segment was approximately $5.1 million and
$22.5 million of unfunded orders, mainly for military contracts, as of July 3, 2010, and December
31, 2009, respectively. Of the orders in backlog as of July 3, 2010, the following are expected to
be filled in the following twelve months: Aviation 75%; LXE 72%; D&S 56%; and Global
Tracking 68%. LXEs backlog as of July 3, 2010 was substantially the same as the backlog
reported as of December 31, 2009, but was nearly 60% higher than the backlog as of July 4, 2009,
mainly due to a shortage of certain component parts from LXEs suppliers which caused a delay in
the fulfillment of LXEs orders received in the second quarter of 2010. LXE is working closely
with suppliers to identify and implement ways to resolve the sourcing issues.
Liquidity and Capital Resources
During the first six months of 2010, net cash and cash equivalents decreased by $2.4 million to
$44.8 million as of July 3, 2010. Of the $44.8 million of cash as of July 3, 2010, $41.2 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.
The primary cash flow activities during the period included the following:
| Operating activities from continuing operations contributed $6.7 million in positive cash flow; |
| We borrowed a net $12.0 million from our revolving credit facility; |
| On April 30, 2010, the arbitrator issued the final award related to claims made by the purchaser of our former EMS Wireless division. We paid the final award of $8.6 million to the purchaser in the second quarter of 2010; |
| We made a payment of $7.2 million for the contingent consideration agreement related to one of the acquisitions completed in 2009; and |
| We invested $4.3 million in property, plant and equipment. |
Operating activities from continuing operations contributed $6.7 million in positive cash flows in
the first six months of 2010. We reported net earnings for the period of $4.5 million and the
level of noncash charges, primarily for depreciation and amortization, exceeded increases in
working capital. The growth in our business in the second quarter of 2010 resulted in increases in
receivables from customers and inventories. The large sales volume toward the end of the quarter
resulted in strong cash collections after the end of the quarter and we were able to reduce our
borrowings under our revolving credit facility by $5 million in July.
26
Table of Contents
During the first six months of 2009, cash and cash equivalents decreased by $44.9 million to $42.1
million at July 4, 2009. The primary factor contributing to the decrease during the period was
cash utilized for our acquisitions of Formation and Satamatics.
Operating activities contributed $22.1 million in positive cash flows in the first six months of
2009. Although we reported net earnings for the period of only $0.2 million, we nevertheless
generated positive cash flow due to the level of noncash charges for depreciation and amortization,
and decreases in working capital. We experienced good customer collections during the period and
were able to lower inventory levels. Acquisition-related charges of $2.8 million paid in the first
six months of 2009 are included as reductions of cash provided by operating activities in the
consolidated statement of cash flows.
During the first six months of 2009, we used $87.3 million of cash to acquire Formation and
Satamatics. These acquisitions were partially funded with approximately $33.8 million of borrowings
under our revolving credit facility. We subsequently repaid approximately $5.3 million of
borrowings under our revolving credit facility, and spent $8.1 million on capital expenditures
during the first six months of 2009.
We have a revolving credit facility under an agreement with a syndicate of banks with a $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, subject to additional commitments from the current lenders or from new
lenders. The existing lenders have no obligation to increase their commitments. The credit
facility provides for borrowings through February 28, 2013, with no principal payments required
prior to that date. The credit facility is secured by substantially all of our tangible and
intangible assets, with certain exceptions for real estate that secures existing mortgages, for
other permitted liens, and for certain assets outside the U.S.
As of July 3, 2010, we had $30.5 million of borrowings outstanding, $2.1 million of outstanding
letters of credit, and $42.4 million available borrowing capacity under the revolving credit
facility. At July 3, 2010, we were in compliance with all the covenants under the credit
agreement.
We expect that capital expenditures in 2010 will range from $12 million to $14 million, excluding
acquisitions of businesses. These expenditures are being 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 facility will provide sufficient liquidity to meet the
operating and capital expenditure needs for existing operations during the next twelve months.
Our Board of Directors has authorized a stock repurchase program for up to $20 million of our
common shares. As of July 3, 2010, we had repurchased approximately 495,000 of our common shares
for approximately $10.1 million. Further repurchases are no longer permitted under the terms of
the Companys credit agreement. There were no repurchases under the program during the six months
ended July 3, 2010.
27
Table of Contents
A cash payment of $7.2 million was made in the second quarter of 2010 related to acquisitions
completed in 2009 based upon the achievement of performance targets in 2009, and an additional $6.8
million is due December 31, 2010 based on an agreement to settle the 2010 earn-out amount. Refer
to Note 2 of the consolidated financial statements for additional information on these
acquisitions.
On April 30, 2010, the arbitrator issued the final award related to claims made by the purchaser of
our former EMS Wireless division. The final award of $8.6 million was paid by EMS to the purchaser
in the second quarter of 2010.
Off-Balance Sheet Arrangements
We have $2.1 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 July 3, 2010 we had $29.5 million available for borrowing in the
U.S. and $12.9 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, $4.7 million of cash is in escrow accounts as of July 3, 2010 and is payable to the
sellers within specified periods following the respective dates of acquisition, subject to claims
we may make against the sellers.
We have an agreement with the purchaser of our former S&T/Montreal division to warrant
approximately $3 million in the event of specified in-orbit failures of the Radarsat-2 payload.
Based upon the available information, management believes that the outcome for this particular
contingency is not probable and cannot be estimated. As a result, we have not incurred any costs
to date, and have not recorded a liability as of July 3, 2010, with respect to this contingency.
We also have an agreement with the purchaser of our 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 from this guarantee. Without the guarantee, we estimate
that our portion of the satellite service revenues will be less than the acquisition cost, and we
have accordingly reflected a liability for the net cost in our consolidated balance sheet. As of
July 3, 2010, we have made no 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 finalizing
settlement under 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 is
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 July 3, 2010.
Commitments and Contractual Obligations
As of July 3, 2010, our material contractual cash commitments and material other commercial
commitments have not changed significantly from those disclosed in Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K
for the year ended December 31, 2009, other than an increase in long-term debt excluding capital
lease obligations of $11.3 million mainly due to an increase in our net borrowings to fund cash
payments for award costs related to claims made by the purchasers of the our former EMS Wireless
division of $8.6 million (see Note 13 for additional information), and earnout amounts of $7.2
million paid in the second quarter of 2010. The earnout payment also decreased our obligation of
acquisition costs for earn-out provisions by the same amount.
28
Table of Contents
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with U.S. GAAP, which often
require the judgment of management in the selection and application of certain accounting
principles and methods. We discuss our critical accounting policies in Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on
Form 10-K for the year ended December 31, 2009. There have been no significant changes in our
critical accounting policies since the end of 2009.
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. 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. 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, changes in tax laws, including the provisions of the U.S. tax law that have not been extended for 2010, such as the research and development credit, and the extent to which deferred 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; |
29
Table of Contents
| the continued availability of financing for various mobile and high-speed data communications systems; |
| risk that credit market conditions may limit the ability of 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 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; |
| 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; and |
| our ability to maintain compliance with the requirements of the Federal Aviation Administration and the Federal Communications Commission, and with other government regulations affecting our products and their production, service and functioning. |
Further information concerning relevant factors and risks are identified under the caption Risk
Factors in Part II Item 1A. of this Quarterly Report on Form 10-Q, and in our Annual Report on
Form 10-K for the year ended December 31, 2009.
Effect of New Accounting Pronouncements
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 will
become 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; |
30
Table of Contents
| 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 April 2010, the FASB issued ASU 2010-17, Milestone Method of Revenue Recognition, which provides
guidance on defining a milestone and determining when it may be appropriate to apply the milestone
method of revenue recognition for research and development arrangements in which one or more
payments are contingent upon achieving uncertain future events or circumstances. This update is
effective for us in the first quarter of 2011. Early adoption is permitted. If we adopt this
standard in a period other than the beginning of its fiscal year, we 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. We
are evaluating when to adopt the updates and the effect, if any, the adoption will have on its
consolidated financial statements.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
As of July 3, 2010, 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 0.45% at July 3, 2010) |
$ | 20,987 | ||
Revolving credit facility with U.S. and Canadian banks, maturing
in February 2013, interest payable quarterly at a variable rate
(4.0% at July 3, 2010) |
$ | 30,500 |
A 100 basis-point change in the interest rates of our market-risk sensitive instruments would have
changed interest income by approximately $51,000 for the second quarter of 2010 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 July 3, 2010, we had
approximately $30.5 million of borrowings outstanding in the U.S., and no borrowings outstanding in
Canada under our revolving credit agreement. A 100 basis-point change in the interest rate on our
revolving credit facility would have changed interest expense by approximately $60,000 for the
second quarter of 2010 based upon the average outstanding borrowings under these obligations.
At July 3, 2010, 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
31
Table of Contents
parents products for sale), intercompany sales of products from foreign subsidiaries to a U.S.
subsidiary, and cash advances to foreign subsidiaries as follows:
Exchange Rate | USD | |||||||
(USD per unit of | in thousands | |||||||
local currency) | (reporting currency) | |||||||
Australia |
0.8427 /AUD | $ | 2,565 | |||||
Canada |
0.9413 /CAD | 1,517 | ||||||
Sweden |
0.1310 /SEK | 1,027 | ||||||
Belgium |
1.2550 /EUR | 642 | ||||||
United Kingdon |
1.5197 /GBP | 262 | ||||||
Netherlands |
1.2550 /EUR | 193 | ||||||
Italy |
1.2550 /EUR | 171 | ||||||
France |
1.2550 /EUR | 149 | ||||||
Germany |
1.2550 /EUR | 125 | ||||||
Total amount subject to foreign currency risk |
$ | 6,651 | ||||||
We had accounts receivable and accounts payable balances denominated in currencies other than the
functional currency of the local entity at July 3, 2010 as follows:
Exchange Rate | ||||||||||||
Functional | ||||||||||||
Currency per | USD | |||||||||||
Currency | Functional | Denominated | Equivalent | |||||||||
Denomination | Currency | Currency | (in thousands) | |||||||||
Accounts Receivable |
||||||||||||
USD |
CAD | 1.0624 | $ | 15,747 | ||||||||
USD |
EUR | 0.7968 | 1,161 | |||||||||
USD |
GBP | 0.6580 | 243 | |||||||||
Other currencies | 407 | |||||||||||
$ | 17,558 | |||||||||||
Accounts Payable |
||||||||||||
USD |
CAD | 1.0624 | $ | 1,228 | ||||||||
GBP |
USD | 1.5197 | 184 | |||||||||
EUR |
GBP | 0.8286 | 182 | |||||||||
Other currencies |
192 | |||||||||||
$ | 1,786 | |||||||||||
32
Table of Contents
We also had cash accounts denominated in currencies other than the functional currency of the local
entity at July 3, 2010 as follows:
Exchange Rate | ||||||||||||
Functional | ||||||||||||
Currency per | USD | |||||||||||
Currency | Functional | Denominated | Equivalent | |||||||||
Denomination | Currency | Currency | (in thousands) | |||||||||
USD |
CAD | 1.0624 | $ | 3,312 | ||||||||
GBP |
CAD | 1.6163 | 1,561 | |||||||||
GBP |
USD | 1.5197 | 1,289 | |||||||||
EUR |
CAD | 1.3392 | 222 | |||||||||
AUD |
CAD | 0.8980 | 180 | |||||||||
Other currencies |
487 | |||||||||||
$ | 7,051 | |||||||||||
We enter into foreign currency forward contracts in order to mitigate the risks associated with
currency fluctuations on future fair values of foreign denominated assets and liabilities. At July
3, 2010, 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) |
12,700 | USD | 1.0210 | $ | (534 | ) | |||||||||
Australian dollars (sell for Canadian dollars) |
350 | AUD | 0.9074 | (4 | ) | ||||||||||
British pounds (sell for U.S. dollars) |
150 | GBP | 1.4770 | (6 | ) | ||||||||||
Euros (sell for U.S. dollars) |
950 | EUR | 1.2406 | (14 | ) | ||||||||||
$ | (558 | ) | |||||||||||||
33
Table of Contents
Item 4. | Controls and Procedures |
(a) Evaluation of Disclosure Controls and Procedures
The Company has established and maintains disclosure controls and procedures (as defined in
Securities Exchange Act Rules 13a-15(e)). The objective of these controls and procedures is to
ensure that information relating to the Company, including its consolidated subsidiaries, and
required to be filed by it in reports under the Securities Exchange Act, as amended, is effectively
communicated to the Companys CEO and CFO, and is recorded, processed, summarized and reported on a
timely basis.
The CEO and CFO have evaluated the Companys disclosure controls and procedures as of the end of the period covered in
this report. Based upon this evaluation, the CEO and CFO have concluded that the Companys disclosure controls and
procedures were effective as of July 3, 2010 to ensure that information required to be disclosed in the reports that
the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Commissions rules and forms and is accumulated and communicated to the Companys management
including its CEO and CFO as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting
During the second quarter of 2010, there were no changes that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting (as defined
in Rule 13a 15(f) under the Exchange Act).
34
Table of Contents
PART II
OTHER INFORMATION
Item 1A. | Risk Factors |
In addition to the other information set forth in this Quarterly Report on Form 10-Q, carefully
consider the factors discussed in Part I, Item 1A. Risk Factors, in our Annual Report on Form
10-K for the year ended December 31, 2009, which could materially affect our business, financial
condition or future results. The risks described in our Annual Report on Form 10-K, and this
Quarterly Report on Form 10-Q, are not the only risks we face. Additional risks and uncertainties
not currently known to us or that we currently believe are immaterial also may materially adversely
affect our business, financial condition and/or operating results.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table summarizes the Companys purchases of its common shares for the three months
ended July 3, 2010:
ISSUER PURCHASES OF EQUITY SECURITIES
(d) Maximum Number | ||||||||||||||||
(c) Total Number | (or Approximate | |||||||||||||||
of Shares | Dollar Value) of | |||||||||||||||
Purchased as | Shares that May Yet | |||||||||||||||
Part of Publicly | Be Purchased | |||||||||||||||
(a) Total Number | (b) Average | Announced | Under the Plans or | |||||||||||||
of Shares | Price Paid | Plans or | Programs (3) | |||||||||||||
Period | Purchased (1) | Per Share | Program (2) | (in millions) | ||||||||||||
Period 4 2010
(April 4 to May 1) |
| | | |||||||||||||
Period 5 2010 (May
2 to May 29) |
2,386 | $ | 15.94 | | ||||||||||||
Period 6 2010 (May
30 to July 3) |
| | | |||||||||||||
Total |
2,386 | $ | 15.94 | | $ | | ||||||||||
(1) | The category includes 2,386 shares delivered to us by employees to pay withholding taxes due upon vesting of restricted share awards. | |
(2) | During the period covered by this Quarterly Report on Form 10-Q, no shares were repurchased under the Companys $20 million repurchase program (the Program) which was initially announced on July 30, 2008. Further repurchases are no longer permitted under the terms of the Companys credit agreement. | |
(3) | This balance represents the value of shares that could be repurchased under the Program as of July 3, 2010. |
35
Table of Contents
Item 6. | Exhibits |
The following exhibits are filed as part of this report:
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 July 4, 2009). |
|||
3.2 | Bylaws of EMS Technologies, Inc. as amended through December 21, 2009 (incorporated by
reference to Exhibit 3.2 to our Annual Report on Form 10-K for the year ended December 31, 2009). |
|||
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 | 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 |
36
Table of Contents
SIGNATURES
Pursuant to the requirements 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 (Principal Executive Officer) |
Date: August 11, 2010 | ||
By:
|
/s/ Gary B. Shell
Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) |
Date: August 11, 2010 |
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 the Companys website is not part of this report.
37