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file | filename |
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EX-32 - EXHIBIT 32 - EMS TECHNOLOGIES INC | c00922exv32.htm |
EX-4.1 - EXHIBIT 4.1 - EMS TECHNOLOGIES INC | c00922exv4w1.htm |
EX-10.1 - EXHIBIT 10.1 - EMS TECHNOLOGIES INC | c00922exv10w1.htm |
EX-31.2 - EXHIBIT 31.2 - EMS TECHNOLOGIES INC | c00922exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - EMS TECHNOLOGIES INC | c00922exv31w1.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 April 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 May 7, 2010:
Class | Number of Shares | |
Common Stock, $.10 par value | 15,307,081 |
TABLE OF CONTENTS
Page | ||||||||
2 | ||||||||
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2 | ||||||||
3 | ||||||||
5 | ||||||||
6 | ||||||||
15 | ||||||||
26 | ||||||||
29 | ||||||||
30 | ||||||||
30 | ||||||||
30 | ||||||||
31 | ||||||||
32 | ||||||||
Exhibit 4.1 | ||||||||
Exhibit 10.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
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 | ||||||||
April 3 | April 4 | |||||||
2010 | 2009 | |||||||
Product net sales |
$ | 66,656 | 68,791 | |||||
Service net sales |
16,246 | 23,487 | ||||||
Net sales |
82,902 | 92,278 | ||||||
Product cost of sales |
44,538 | 47,414 | ||||||
Service cost of sales |
8,744 | 16,571 | ||||||
Cost of sales |
53,282 | 63,985 | ||||||
Selling, general and administrative expenses |
21,674 | 21,934 | ||||||
Research and development expenses |
5,421 | 4,406 | ||||||
Impairment loss on goodwill related charges |
384 | | ||||||
Acquisition-related items |
217 | 3,895 | ||||||
Operating income (loss) |
1,924 | (1,942 | ) | |||||
Interest income |
181 | 62 | ||||||
Interest expense |
(477 | ) | (621 | ) | ||||
Foreign exchange loss, net |
(693 | ) | (467 | ) | ||||
Earnings (loss) before income taxes |
935 | (2,968 | ) | |||||
Income tax expense |
344 | | ||||||
Net earnings (loss) |
$ | 591 | (2,968 | ) | ||||
Net earnings (loss) per share: |
||||||||
Basic |
$ | 0.04 | (0.20 | ) | ||||
Diluted |
0.04 | (0.20 | ) | |||||
Weighted-average number of common shares
outstanding: |
||||||||
Basic |
15,179 | 15,146 | ||||||
Diluted |
15,206 | 15,146 |
See accompanying notes to interim unaudited consolidated financial statements.
2
Table of Contents
EMS Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(in thousands)
April 3 | December 31 | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 53,723 | 47,174 | |||||
Trade accounts receivable, net of allowance for doubtful account of
$1,162 in 2010 and $1,208 in 2009 |
60,369 | 60,959 | ||||||
Costs and estimated earnings in excess of billings on long-term
contracts |
24,518 | 25,290 | ||||||
Inventories |
42,697 | 40,655 | ||||||
Deferred income taxes |
4,234 | 4,306 | ||||||
Other current assets |
19,556 | 19,117 | ||||||
Total current assets |
205,097 | 197,501 | ||||||
Property, plant and equipment: |
||||||||
Land |
1,150 | 1,150 | ||||||
Buildings and leasehold improvements |
18,809 | 18,792 | ||||||
Machinery and equipment |
109,849 | 107,712 | ||||||
Furniture and fixtures |
10,560 | 10,542 | ||||||
Total property, plant and equipment |
140,368 | 138,196 | ||||||
Less accumulated depreciation |
93,199 | 90,256 | ||||||
Net property, plant and equipment |
47,169 | 47,940 | ||||||
Deferred income taxes |
9,426 | 9,421 | ||||||
Goodwill |
60,403 | 60,336 | ||||||
Other intangible assets, net of accumulated amortization
of $21,170 in 2010 and $18,817 in 2009 |
47,304 | 49,256 | ||||||
Costs and
estimated earnings in excess of billings on long-term contracts |
10,462 | 7,711 | ||||||
Other assets |
1,910 | 1,920 | ||||||
Total assets |
$ | 381,771 | 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)
(in thousands, except share data)
April 3 | December 31 | |||||||
2010 | 2009 | |||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Current installments of long-term debt |
$ | 1,423 | 1,398 | |||||
Accounts payable |
29,472 | 27,333 | ||||||
Billings in excess of contract costs and estimated earnings on long-term contracts |
9,952 | 9,597 | ||||||
Accrued compensation and retirement costs |
14,461 | 13,946 | ||||||
Deferred service revenue |
10,875 | 9,588 | ||||||
Contingent consideration arrangement liability |
13,946 | 13,729 | ||||||
Other current liabilities |
23,492 | 23,763 | ||||||
Total current liabilities |
103,621 | 99,354 | ||||||
Long-term debt, excluding current installments |
26,486 | 26,352 | ||||||
Deferred income taxes |
5,324 | 5,757 | ||||||
Other liabilities |
6,445 | 5,591 | ||||||
Total liabilities |
141,876 | 137,054 | ||||||
Shareholders equity: |
||||||||
Preferred stock of $1.00 par value per share; Authorized 10,000 shares; none
issued |
| | ||||||
Common stock of $.10 par value per share; Authorized 75,000 shares, issued and
outstanding 15,307 in 2010 and 15,249 in 2009 |
1,525 | 1,525 | ||||||
Additional paid-in capital |
136,514 | 136,112 | ||||||
Accumulated other comprehensive income foreign currency translation adjustment |
7,877 | 6,066 | ||||||
Retained earnings |
93,979 | 93,388 | ||||||
Total shareholders equity |
239,895 | 237,091 | ||||||
Commitments and contingencies |
||||||||
Total liabilities and shareholders equity |
$ | 381,771 | 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)
(in thousands)
Three Months Ended | ||||||||
April 3 | April 4 | |||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net earnings (loss) |
$ | 591 | (2,968 | ) | ||||
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities: |
||||||||
Depreciation and amortization |
5,040 | 4,607 | ||||||
Stock-based compensation expense |
400 | 497 | ||||||
Change in fair value of contingent consideration liability |
217 | 388 | ||||||
Changes in operating assets and liabilities, net of effects of acquisitions: |
||||||||
Trade accounts receivable |
327 | 1,063 | ||||||
Costs and estimated earnings in excess of billings on long-term contracts |
(1,276 | ) | 7,893 | |||||
Inventories |
(1,691 | ) | (979 | ) | ||||
Accounts payable |
1,741 | 1,197 | ||||||
Deferred service revenue |
2,580 | 2,259 | ||||||
Other |
(350 | ) | 18 | |||||
Net cash provided by operating activities |
7,579 | 13,975 | ||||||
Cash flows from investing activities: |
||||||||
Purchases of property, plant and equipment |
(1,787 | ) | (4,505 | ) | ||||
Payments for acquisitions of businesses, net of cash acquired |
| (83,814 | ) | |||||
Proceeds from sales of assets |
18 | 1 | ||||||
Net cash used in investing activities |
(1,769 | ) | (88,318 | ) | ||||
Cash flows from financing activities: |
||||||||
Net borrowings under revolving credit facility |
500 | 33,759 | ||||||
Repayment of other debt |
(340 | ) | (315 | ) | ||||
Deferred financing costs paid |
(28 | ) | (251 | ) | ||||
Proceeds from exercise of stock options |
| 153 | ||||||
Net cash provided by financing activities |
132 | 33,346 | ||||||
Effect of changes in exchange rates on cash and cash equivalents |
607 | (38 | ) | |||||
Net change in cash and cash equivalents |
6,549 | (41,035 | ) | |||||
Cash and cash equivalents at beginning of period |
47,174 | 86,979 | ||||||
Cash and cash equivalents at end of period |
$ | 53,723 | 45,944 | |||||
See accompanying notes to interim unaudited consolidated financial statements.
5
Table of Contents
EMS Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
April 3, 2010 and April 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.
Accounting Changes
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 is effective at the start of interim or annual
reporting periods beginning after December 15, 2009 and the disclosure reconciliation of all
activity in Level 3 is effective at the start of annual reporting periods beginning after
December 15, 2010. The adoption of ASU 2010-06 did not have a material impact on the Companys
consolidated financial statements.
Recently Issued Pronouncements Not Yet Adopted
In October 2009 the FASB issued two accounting standards updates that could result in revenue being
recognized earlier in certain revenue arrangements with multiple deliverables. Both updates are
effective for the Company in the first quarter of 2011. Early adoption is permitted. If the
Company adopts this standard in a period other than the beginning of its fiscal year, the Company
will be required to apply this standard retrospectively to beginning of its fiscal year, and
disclose certain financial information as revised for all interim periods previously reported in
the fiscal year adopted. The Company is evaluating when to adopt the updates and the effect the
adoption will have on its consolidated financial statements.
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.
2. Business Combinations
During the three months ended April 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, the acquisition arrangement with Formation included contingent
consideration of up to $15 million. The final payment amount under the contingent consideration
arrangement has been determined and a total of $13.9 million is due to the sellers, payable in cash
in 2010. Subsequent to April 3, 2010, $7.2 million was paid. The remaining $6.7 million is due
December 31, 2010.
For the acquired companies, the results for the first quarter of 2010 included net sales of $14.3
million and no earnings before taxes, and the results for the first
quarter of 2009 included net sales of $14.9 million and earnings before
taxes of $0.6 million. The Company recognized charges of $0.2 million and $3.9 million related to
the acquisitions in the first quarter of 2010 and first quarter of 2009, respectively, which are
included in acquisition-related items in the consolidated statements of operations. The
acquisition-related charges included in the first quarter of 2010 were primarily due to a change in
the amount of the contingent consideration liability. The acquisition-related charges recorded in
the first quarter 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 quarter 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.
7
Table of Contents
3. Goodwill and Other Intangible Assets
As discussed in Note 2, the Company completed two business combinations during the three months
ended April 4, 2009. The consolidated financial statements include the identifiable intangible
assets and goodwill resulting from these business combinations in addition to amounts from
acquisitions of businesses completed in prior periods.
The following table presents the changes in the carrying amount of goodwill by reportable operating
segment during the three months ended April 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 |
| | 67 | 67 | ||||||||||||
Balance as of April 3, 2010 |
$ | 35,108 | 23,429 | 1,866 | 60,403 | |||||||||||
The Company had $19.6 million of accumulated impairment losses recorded on LXEs goodwill as
of April 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
April 3, 2010 and December 31, 2009 (in thousands):
As of April 3, 2010 | ||||||||||||
Gross | Net | |||||||||||
Carrying | Accumulated | Carrying | ||||||||||
Amount | Amortization | Amount | ||||||||||
Developed technology |
$ | 40,797 | 15,017 | 25,780 | ||||||||
Customer relationships |
19,045 | 3,046 | 15,999 | |||||||||
Trade names and trademarks |
6,204 | 1,261 | 4,943 | |||||||||
Other |
2,428 | 1,846 | 582 | |||||||||
$ | 68,474 | 21,170 | 47,304 | |||||||||
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 ended April 3, 2010
and for the three months ended April 4, 2009 was $2.1 million and $2.3 million,
respectively. Expected amortization expense for the remainder of 2010 and for each of the five
succeeding years is as follows: 2010 $6.1 million, 2011 $7.6 million, 2012 $7.8 million,
2013 $7.1 million, 2014 $3.8 million and 2015 $3.6 million.
In-process research and development assets of $0.3 million are not subject to amortization until
the projects are completed or abandoned.
8
Table of Contents
4. Fair Value Measurements
The Company measures financial and non-financial assets and liabilities in accordance ASC Topic
820, Fair Value Measurements and Disclosures. This guidance clarifies that fair value is an exit
price, representing the amount that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. As such, fair value is a
market-based measurement that should be determined based on assumptions that market participants
would use in pricing an asset or liability. As a basis for considering such assumptions, 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.
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 $469,000 at April 3, 2010 and $39,000 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 assets in the consolidated balance sheets.
The Company has two fixed-rate mortgages and has borrowings under its revolving credit facility.
One mortgage has an 8.0% rate and a carrying amount as of April 3, 2010 and December 31, 2009 of
$6.2 million and $6.4 million, respectively. The other mortgage has a 7.1% rate and a carrying
amount as of April 3, 2010 and December 31, 2009 of $2.7 million and $2.9 million, respectively.
The Companys outstanding borrowings under its revolving credit facility were $19.0 million as of
April 3, 2010. The estimated fair value of the Companys total debt was $26.6 million at April 3,
2010 and is based on quoted market prices for similar instruments (a level 2 input). Mortgage debt
and borrowings under the Companys credit facility are recorded in current and long-term debt on
the Companys consolidated balance sheets, but not at fair value.
Management believes that these assets and liabilities can be liquidated without restriction.
5. Interim Segment Disclosures
The Company is organized into four reportable segments: Aviation, Defense & Space (D&S), 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 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 satellite 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).
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The D&S segment manufactures custom-designed, highly engineered subsystems for use in space,
airborne, and terrestrial applications for communications, radar, surveillance, precision tracking
and electronic countermeasures. Orders typically involve development and production schedules that
can extend a year or more. 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.
Following is a summary of the Companys interim segment data (in thousands):
Three Months Ended | ||||||||
April 3 | April 4 | |||||||
2010 | 2009 | |||||||
Net sales: |
||||||||
Aviation |
$ | 26,186 | 34,513 | |||||
LXE |
30,573 | 23,944 | ||||||
Defense & Space |
16,534 | 26,908 | ||||||
Global Tracking |
9,860 | 6,913 | ||||||
Less intercompany sales |
(251 | ) | | |||||
Global Tracking external sales |
9,609 | 6,913 | ||||||
Total |
$ | 82,902 | 92,278 | |||||
Operating income (loss): |
||||||||
Aviation |
$ | 309 | 5,066 | |||||
LXE |
892 | (5,061 | ) | |||||
Defense & Space |
918 | 2,892 | ||||||
Global Tracking |
154 | (759 | ) | |||||
Corporate & Other |
(349 | ) | (4,080 | ) | ||||
Total |
$ | 1,924 | (1,942 | ) | ||||
Earnings (loss) before income taxes: |
||||||||
Aviation |
$ | (72 | ) | 5,556 | ||||
LXE |
783 | (5,138 | ) | |||||
Defense & Space |
922 | 2,892 | ||||||
Global Tracking |
46 | (407 | ) | |||||
Corporate & Other |
(744 | ) | (5,871 | ) | ||||
Total |
$ | 935 | (2,968 | ) | ||||
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The results before income taxes for Corporate & Other for the first quarter of 2009 includes
$3.9 million of acquisition-related charges, 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.
April 3 | December 31 | |||||||
2010 | 2009 | |||||||
Assets: |
||||||||
Aviation |
$ | 146,155 | 144,483 | |||||
LXE |
79,285 | 71,632 | ||||||
Defense & Space |
55,133 | 53,883 | ||||||
Global Tracking |
76,641 | 75,922 | ||||||
Corporate & Other |
24,557 | 28,225 | ||||||
Total |
$ | 381,771 | 374,145 | |||||
Concentration of net assets by geographic
region: |
||||||||
United States |
$ | 63,202 | 72,826 | |||||
Canada |
65,982 | 62,239 | ||||||
Europe |
106,284 | 97,216 | ||||||
Other |
4,427 | 4,810 | ||||||
Total |
$ | 239,895 | 237,091 | |||||
Sales to no individual customer exceeded 10% of our net sales during the three months ended
April 3, 2010, or April 4, 2009.
6. Earnings Per Share
Following is a reconciliation of the denominators for basic and diluted earnings (loss) per share
calculations (in thousands):
Three Months Ended | ||||||||
April 3 | April 4 | |||||||
2010 | 2009 | |||||||
Basic weighted-average number of common shares
outstanding |
15,179 | 15,146 | ||||||
Dilutive potential shares using the treasury share method |
27 | | ||||||
Diluted weighted-average number of common shares
outstanding |
15,206 | 15,146 | ||||||
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 |
1,081 | 1,016 | ||||||
Dilutive potential shares are not included in the computation of diluted per-share amounts
when a net loss exists because their effect is antidilutive. The first
quarter of 2009 results were a net loss and therefore the diluted loss per
share computation did not include dilutive potential shares.
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7. Comprehensive Income
Following is a summary of comprehensive income (loss) (in thousands):
Three Months Ended | ||||||||
April 3 | April 4 | |||||||
2010 | 2009 | |||||||
Net earnings (loss) |
$ | 591 | (2,968 | ) | ||||
Other comprehensive income (loss): |
||||||||
Foreign currency translation adjustment |
1,811 | (1,180 | ) | |||||
$ | 2,402 | (4,148 | ) | |||||
8. Inventories
Inventories as of April 3, 2010 and December 31, 2009 include the following (in thousands):
April 3 | December 31 | |||||||
2010 | 2009 | |||||||
Parts and materials |
$ | 26,839 | 25,221 | |||||
Work-in-process |
5,419 | 5,142 | ||||||
Finished goods |
10,439 | 10,292 | ||||||
$ | 42,697 | 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 $1.6 million at April 3, 2010, and $1.1 million at December 31, 2009.
9. Revolving Credit Facility
During the first three months of 2009, the Company completed two acquisitions and used borrowings
under its revolving credit facility to fund a portion of the transactions. As of April 3, 2010,
the Company had $19.0 million of borrowings outstanding under its revolving credit facility.
The Company has $2.5 million of standby letters of credit to satisfy performance guarantee
requirements under certain customer contracts. While these obligations are not normally called,
they could be called by the beneficiaries at any time before the expiration date should the Company
fail to meet certain contractual requirements. After deducting outstanding letters of credit, at
April 3, 2010 the Company had $41.0 million available for borrowing in the U.S. and $12.5 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.
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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 | ||||||||
April 3 | April 4 | |||||||
2010 | 2009 | |||||||
Balance at beginning of the period |
$ | 4,085 | 2,789 | |||||
Additions at dates of acquisition for businesses
acquired during period |
| 516 | ||||||
Accruals for warranties issued during the period |
762 | 975 | ||||||
Settlements made during the period |
(337 | ) | (900 | ) | ||||
Balance at end of period |
$ | 4,510 | 3,380 | |||||
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
$2.0 million and $1.3 million during the first quarter of
2010 and the first quarter of 2009, respectively. Stock based
compensation is recognized on a straight line basis over the
requisite service period for each separately vesting portion of an
award as if the award was, in substance, multiple awards. The Company recognized expense in the three months
ended April 3, 2010 and April 4, 2009 of $0.4 million and $0.5 million, 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. However, in the first quarter of 2010, the rate was slightly higher than 34% since tax
benefits for certain loss jurisdictions 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.
The Company settled a Canada federal audit for the years 2002 through 2004 in the first quarter
2010. The settlement did not affect any amounts reflected in the consolidated financial statements
as of and for the period ended April 3, 2010. The Company is still 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. Discontinued operations had no net effect on the Companys net earnings
in the first quarter of 2010 or the first quarter of 2009.
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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 April 3, 2010, with respect to this
contingency. The Company incurred no additional costs related to this disposition through the
first 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 April 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 in discussions of a
possible settlement under these agreements. The Company believes that the net liability recorded in
its consolidated balance sheet is its best estimate of the settlement amount. If a settlement is
reached, it is expected to be paid in the following twelve months, and therefore the net liability
is recorded as a current liability in the Companys consolidated balance sheet as of April 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 April 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 three months ended April 3, 2010.
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.
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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 satellite 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. |
Prior to 2010, we 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. Our historical financial data has been recast in this
Quarterly Report on Form 10-Q to conform to our 2010 segment presentation.
Following is a summary of significant factors affecting or related to our results of operations for
the three months ended April 3, 2010:
| Consolidated net sales were 10.2% lower in the first quarter of 2010, compared with same period in 2009. Lower net sales at D&S and Aviation offset higher net sales at LXE and Global Tracking in the first quarter of 2010. Net sales at D&S were lower due to the completion of a significant military project that was included in D&Ss net sales in the first quarter of 2009. The decline in net sales at Aviation reflects the impact of the global economic slow-down in the air-transport, military, and business jet markets. Higher product shipments to the Americas market and a new source of revenue from sales made directly to OEMs increased net sales at LXE. Net sales improved at Global Tracking mainly due to strong product sales in the security market and higher airtime revenues. | ||
| Our net earnings for the first quarter of 2010 were $0.6 million compared with a net loss of $3.0 million in the first quarter of 2009. This improvement was mainly due to an increase in operating income at LXE and Global Tracking of $6.0 million and $0.9 million, respectively, and lower acquisition-related charges of $3.7 million partially offset by a decrease in operating income at Aviation and D&S of $4.8 million and $2.0 million, respectively. | ||
| Our markets continue to be impacted by the economy in certain markets and they are not immune to increasing pressures and risks. We expect that we will continue to be faced with these economic pressures through 2010. 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. |
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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 | ||||||||||||||||
April 3 | April 4 | |||||||||||||||
2010 | 2009 | |||||||||||||||
Product net sales |
$ | 66,656 | 80.4 | % | $ | 68,791 | 74.5 | % | ||||||||
Service net sales |
16,246 | 19.6 | 23,487 | 25.5 | ||||||||||||
Net sales |
82,902 | 100.0 | 92,278 | 100.0 | ||||||||||||
Product cost of sales |
44,538 | 66.8 | 47,414 | 68.9 | ||||||||||||
Service cost of sales |
8,744 | 53.8 | 16,571 | 70.6 | ||||||||||||
Cost of sales |
53,282 | 64.3 | 63,985 | 69.3 | ||||||||||||
Selling, general and administrative
expenses |
21,674 | 26.1 | 21,934 | 23.8 | ||||||||||||
Research and development expenses |
5,421 | 6.5 | 4,406 | 4.8 | ||||||||||||
Impairment loss on goodwill related
charges |
384 | 0.5 | | | ||||||||||||
Acquisition-related items |
217 | 0.3 | 3,895 | 4.2 | ||||||||||||
Operating income (loss) |
1,924 | 2.3 | (1,942 | ) | (2.1 | ) | ||||||||||
Interest income |
181 | 0.2 | 62 | 0.1 | ||||||||||||
Interest expense |
(477 | ) | (0.6 | ) | (621 | ) | (0.7 | ) | ||||||||
Foreign exchange loss, net |
(693 | ) | (0.8 | ) | (467 | ) | (0.5 | ) | ||||||||
Earnings (loss) before income taxes |
935 | 1.1 | (2,968 | ) | (3.2 | ) | ||||||||||
Income tax expense |
344 | (0.4 | ) | | | |||||||||||
Net earnings (loss) |
$ | 591 | 0.7 | % | $ | (2,968 | ) | (3.2 | )% | |||||||
Three Months ended April 3, 2010 and April 4, 2009:
Net sales decreased by 10.2% to $82.9 million from $92.3 million in the first quarter of 2010
compared with 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 net sales of
high-speed-data aeronautical products, and in-cabin connectivity products reflecting a continued
slow-down in its air-transport, military, and business jet markets in the first quarter of 2010.
LXEs net sales in the first quarter of 2010 were $6.6 million higher than in the same period in
2009, an increase of 27.7%, with higher net sales in the Americas market. 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 decreased by 3.1% to $66.7 million in the first three months of 2010 compared
with the first three months of 2009. This was primarily due to lower net sales of high-speed-data
aeronautical products from the organic product lines and newly acquired aviation product line at
our Aviation segment, partially offset by an increase in product net sales from a higher number of
terminals shipped by LXE in the Americas market, and additional product net sales generated from
our asset-tracking product lines at Global Tracking acquired during the first quarter of 2009.
Service net sales decreased by 30.8% to $16.2 million in the first three months of 2010 compared
with 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 at Global
Tracking. As a result, product net sales comprised a higher percentage of total net sales in the
first three months of 2010 compared with the first three months of 2009.
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Overall cost of sales as a percentage of consolidated net sales was lower in the first quarter of
2010 compared with the same period of 2009 due to lower cost-of-sales percentages reported by three
of the four reportable operating segments. Product cost of sales, and service cost of sales, as a
percentage of their respective net sales were also lower in the first three months of 2010 compared
with the same period in 2009. The decrease in product cost of sales as a percentage of its
respective net sales was mainly due to a higher percentage of net sales generated by our LXE and
Global Tracking divisions, which had lower cost-of-sales percentages than the other two operating
segments, and as a result of managements cost reduction efforts at LXE and D&S. This decrease in
product cost-of-sales percentage of sales was partially offset by an increase in product
cost-of-sales percentage at Aviation due to a lower production volume over which fixed costs were
absorbed, and an unfavorable effect of changes in foreign currency exchange rates. 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 increased for the first quarter of 2010
compared with the first quarter in 2009. Actual expenses decreased by $0.3 million in the first
quarter of 2010 compared with the same period in 2009 mainly due to managements cost reduction
efforts, lower severances charges by approximately $0.6 million, and the favorable effect of
changes in foreign currency exchange rates on our LXE international operations. These decreased in
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 international
operations.
R&D expenses were $1.0 million higher in the first quarter of 2010 than in the comparable period in
2009 mainly due to additional R&D expenses at Aviation, D&S and Global Tracking for the expansion
of our technology base, and unfavorable effects of changes in foreign currency exchange rates on
our Canadian operations. These increases offset lower R&D expenses at LXE.
Charges for impairment loss on goodwill were $0.4 million in the first quarter 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
quarter of 2010.
Acquisition-related items included charges of $0.2 million in the first quarter of 2010. These
costs were primarily
related to an increase 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 $3.9 million
in the first 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 the Quarterly Report
for additional information on these business acquisitions).
The first quarter of 2010 included a $0.7 million foreign exchange net loss related to the
conversion of assets and liabilities not denominated in the functional currency and to changes in
the fair value of forward contracts used to hedge against currency exposure. The first quarter 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 quarter of 2009 were net
gains from the conversion of assets and liabilities not denominated in the functional currency and
forward contracts.
We recognized income tax expense of $0.3 million in the first quarter of 2010 equal to 37% 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. However, in the first quarter of 2010, the rate was slightly
higher than 34% since tax benefits for certain loss jurisdictions were not 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 first
quarter.
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Segment Analysis
Our segment net sales, cost of sales as a percentage of respective segment net sales, and segment
operating income (loss) and Adjusted EBITDA were as follows (in thousands, except percentages):
Three Months Ended | Percentage | |||||||||||
April 3 | April 4 | Increase | ||||||||||
2010 | 2009 | (Decrease) | ||||||||||
Net sales: |
||||||||||||
Aviation |
$ | 26,186 | 34,513 | (24.1 | )% | |||||||
LXE |
30,573 | 23,944 | 27.7 | |||||||||
Defense & Space |
16,534 | 26,908 | (38.6 | ) | ||||||||
Global Tracking |
9,860 | 6,913 | 42.6 | |||||||||
Less intercompany sales |
(251 | ) | | (2) | ||||||||
Global Tracking external sales |
9,609 | 6,913 | 39.0 | |||||||||
Total |
$ | 82,902 | 92,278 | (10.2 | ) | |||||||
Cost of sales percentage: |
||||||||||||
Aviation |
67.2 | % | 61.2 | |||||||||
LXE |
58.3 | 67.3 | ||||||||||
Defense & Space |
77.5 | 78.4 | ||||||||||
Global Tracking |
52.5 | 76.1 | ||||||||||
Total |
64.3 | 69.3 | ||||||||||
Operating income (loss): |
||||||||||||
Aviation |
$ | 309 | 5,066 | (93.9 | ) | |||||||
LXE |
892 | (5,061 | ) | (117.6 | ) | |||||||
Defense & Space |
918 | 2,892 | (68.3 | ) | ||||||||
Global Tracking |
154 | (759 | ) | (120.3 | ) | |||||||
Corporate & Other |
(349 | ) | (4,080 | ) | 91.4 | |||||||
Total |
$ | 1,924 | (1,942 | ) | (199.1 | ) | ||||||
Adjusted EBITDA (1) |
||||||||||||
Aviation |
$ | 2,096 | 7,602 | (72.4 | ) | |||||||
LXE |
1,638 | (4,087 | ) | (140.1 | ) | |||||||
Defense & Space |
1,767 | 3,698 | (52.2 | ) | ||||||||
Global Tracking |
940 | 140 | 571.4 | |||||||||
Corporate & Other |
612 | 172 | (255.8 | ) | ||||||||
Total |
$ | 7,053 | 7,525 | (6.3 | ) | |||||||
(1) | Adjusted EBITDA is considered a non-GAAP financial measure. See section entitled Adjusted EBITDA for an explanation of this measure and a reconciliation to net earnings (loss). | |
(2) | The percentage change is not calculable. |
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Aviation: Net sales decreased by $8.3 million in the first quarter of 2010 as compared with the
same period in 2009. The decrease was mainly due to lower net sales of high-speed-data
aeronautical products into the air transport, business jet, and military markets in the first
quarter of 2010. Net sales of in-cabin connectivity products into the air transport market were
also lower in the first quarter of 2010 as compared with the first quarter of 2009.
Cost of sales as a percentage of net sales was higher for the first quarter of 2010 as compared
with the first quarter 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 first quarter
of 2010.
Operating income decreased by $4.8 million in the first quarter of 2010 as compared with the same
period in 2009, primarily as a result of lower net sales, and a higher cost-of-sales percentage in
the first quarter of 2010. In addition, operating income was lower due to the unfavorable effects
of foreign currency exchange rates in the first quarter of 2010. Operating income, as a percentage
of net sales, was 1.2% and 14.7% in the first quarter of 2010 and 2009, respectively.
Adjusted
EBITDA decreased by $5.5 million in the first quarter of 2010 as compared with the first
quarter of 2009, due to a decrease in operating income and to a $0.9 million unfavorable change in
foreign currency gains and losses.
LXE: Net sales in the first quarter of 2010 was higher than each of the preceding four quarters,
and increased by $6.6 million as compared with the same period in 2009. An increase in net sales
in the Americas market offset a slight decline in net sales in the International market in the
first quarter of 2010, as compared with the same period in 2009. The increase in net sales in the
Americas market resulted primarily from a higher volume of terminals shipped in that market. The
slight decrease in net sales in the International market was mainly due to the unfavorable effect
of changes in foreign currency exchange rates on the reported net sales from LXEs International
market, and lower service revenue resulting from the adoption of a fully indirect sales model in
2009, partially offset by a higher volume of terminals shipped in that market. Sales to the OEM
market began in the fourth quarter of 2009 and represents $2.5 million or 8.2% of first-quarter
sales.
Cost of sales as a percentage of net sales was lower in the first quarter of 2010 as compared with
the same period in 2009 mainly due to a higher production volume over which fixed costs were
absorbed, and lower product costs from efforts made throughout 2009 and in the first quarter of
2010 to redesign and simplify product offerings. Cost of sales as a percentage of net sales was
also lower in the first quarter of 2010 due to a $0.5 million reduction in cost of sales for
purchased items previously included in accounts payable that were determined to no longer be
liabilities. Additional items 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, and a higher
percentage of net sales generated from indirect channels, which have a higher cost-of-sales
percentage than net sales generated from direct sales channels. Revenues are denominated in the
local functional currency but product costs are denominated in the U.S. dollar, which was stronger
in the first quarter of 2010 compared with the same period in 2009.
LXE generated operating income of $0.9 million in the first quarter of 2010 as compared with an
operating loss of $5.1 million in the first quarter of 2009. This increase in operating income of
$6.0 million was mainly a result of higher net sales. In addition, operating income increased as a
result of a more favorable cost-of-sales percentage and lower SG&A and R&D expenses. SG&A and R&D
expenses were lower in the first quarter of 2010 as compared with the same period in 2009 by $1.1
million, reflecting the impact of managements cost-reduction efforts. Lower SG&A expenses 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 $0.6 million in the first quarter of 2010 as
compared with the same period in 2009.
Adjusted EBITDA increased by $5.7 million in the first quarter of 2010 as compared with the first
quarter of 2009, mainly due to an increase in operating income in 2010.
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Defense & Space: Net sales decreased by $10.4 million in the first quarter of 2010 as compared with
the same period of 2009, mainly due to work performed on military programs that were included in
the first quarter 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 $87.2 million at April 3, 2010, a decrease of $2.4 million from
December 31, 2009.
Cost of sales as a percentage of net sales was lower in the first quarter of 2010 as compared with
the same period in 2009, mainly due to a favorable mix of contracts and improved contract
performance on certain defense-related projects in the first quarter of 2010.
Operating income was lower by $2.0 million in the first quarter of 2010 as compared with the first
quarter of 2009. The lower operating income was mainly due to the decrease in net sales generated
in the first quarter 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 5.6% and 10.7% in the first quarter of 2010 and
2009, respectively.
Adjusted EBITDA decreased by $1.9 million in the first quarter of 2010 as compared with the first
quarter of 2009, mainly due to a decrease in operating income in 2010.
Global Tracking: Net sales increased by $2.9 million in the first quarter of 2010 as compared with
the same period in 2009. The increase was mainly due to the net sales generated from our new
asset-tracking product lines acquired on February 13, 2009, which contributed $2.3 million of
additional net sales in the first quarter of 2010 compared to the first quarter of 2009. Net sales
included a higher concentration of product shipments to the security market in the first quarter of
2010 as compared with the first quarter of 2009, reflecting growth in that market. Net sales also
were higher due to an increase in airtime revenue as a result of a higher number of terminals in
use, and the first quarter of 2010 included approximately 40 additional billing days.
Cost of sales as a percentage of net sales was lower for the first quarter of 2010 as compared with
the same period in 2009. The cost-of-sales percentage for the first quarter of 2010 included a
more favorable product mix, and an increase in service revenue, which has a lower cost-of-sales
percentage than product net sales.
Operating income increased by $0.9 million in the first quarter of 2010 as compared with the same
period in 2009, primarily as a result of higher net sales and a lower cost-of-sales percentage,
partially offset by higher SG&A and R&D costs. 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 quarter of 2009 from the date of acquisition, but were included from the
beginning of the first quarter of 2010. Operating income, as a percentage of net sales, was 1.6%
and a negative 11.0% in the first quarter of 2010 and 2009, respectively.
Adjusted EBITDA increased by $0.8 million in the first quarter of 2010 as compared with the first
quarter of 2009, due to an increase in operating income partially
offset by a $0.5 million unfavorable change in
foreign currency gains and losses year over year.
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Adjusted EBITDA
We also measure our performance based on the non-GAAP financial measure of earnings before interest
expense, income taxes, depreciation and amortization, and before discontinued operations,
impairment loss on goodwill and related charges, acquisition-related items and acquisition-related
foreign exchange adjustments (Adjusted EBITDA). The following table is a reconciliation of net
earnings (loss) (which is the most directly comparable
GAAP operating performance measure) to Adjusted EBITDA and earnings (loss) before income taxes by
segment, for the first quarters of 2010 and 2009 (in thousands):
Defense & | Global | Corp | ||||||||||||||||||||||
Aviation | LXE | Space | Tracking | & Other | Total | |||||||||||||||||||
Three Months Ended April 3, 2010 |
||||||||||||||||||||||||
Net earnings |
$ | 591 | ||||||||||||||||||||||
Income tax expense |
344 | |||||||||||||||||||||||
(Loss) earnings before income taxes |
$ | (72 | ) | 783 | 922 | 46 | (744 | ) | 935 | |||||||||||||||
Interest expense |
| 17 | | | 460 | 477 | ||||||||||||||||||
Depreciation and amortization |
2,168 | 838 | 845 | 894 | 295 | 5,040 | ||||||||||||||||||
Impairment loss related charges |
| | | | 384 | 384 | ||||||||||||||||||
Acquisition-related items |
| | | | 217 | 217 | ||||||||||||||||||
Adjusted EBITDA |
$ | 2,096 | 1,638 | 1,767 | 940 | 612 | $ | 7,053 | ||||||||||||||||
Three Months Ended April 4, 2009 |
||||||||||||||||||||||||
Net loss |
$ | (2,968 | ) | |||||||||||||||||||||
Income tax expense |
| |||||||||||||||||||||||
Earnings (loss) before income taxes |
$ | 5,556 | (5,138 | ) | 2,892 | (407 | ) | (5,871 | ) | (2,968 | ) | |||||||||||||
Interest expense |
43 | 85 | | | 493 | 621 | ||||||||||||||||||
Depreciation and amortization |
2,003 | 966 | 806 | 547 | 285 | 4,607 | ||||||||||||||||||
Acquisition-related items |
| | | | 3,895 | 3,895 | ||||||||||||||||||
Acquisition-related foreign
exchange adjustment |
| | | | 1,370 | 1,370 | ||||||||||||||||||
Adjusted EBITDA |
$ | 7,602 | (4,087 | ) | 3,698 | 140 | 172 | $ | 7,525 | |||||||||||||||
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.
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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 projects with both short delivery cycles and delivery cycles that extend beyond the
next twelve months. Our segment backlog as of April 3, 2010 and December 31, 2009 was as follows
(in millions):
April 3 | December 31 | |||||||
2010 | 2009 | |||||||
Aviation |
$ | 42.1 | 49.4 | |||||
LXE |
21.1 | 22.0 | ||||||
Defense & Space |
87.3 | 89.6 | ||||||
Global Tracking |
22.2 | 17.2 | ||||||
Total |
$ | 172.7 | 178.2 | |||||
Included in the backlog of firm orders for our D&S segment was approximately $15.9 million and
$22.5 million of unfunded orders, mainly for military contracts, as of April 3, 2010, and December
31, 2009, respectively. Of the orders in backlog as of April 3, 2010, the following are expected
to be filled in the following twelve months: Aviation 70%; LXE 75%; D&S 60%; and Global
Tracking 75%. LXEs backlog as of April 3, 2010 was lower than as of December 31, 2009, but was
nearly double that of April 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 first quarter of
2010. LXE is working closely with suppliers to identify and implement ways to resolve the sourcing
issues. LXE is expecting to further increase critical parts inventories in 2010 to avoid continued
delays.
Liquidity and Capital Resources
During the first quarter of 2010, net cash and cash equivalents increased by $6.5 million.
Operating activities contributed $7.6 million in positive cash flow mainly due to earnings
generated by LXE and Global Tracking, an increase in accounts payable due to the timing of supplier
payments, and deferred service revenue at LXE. This was partially offset by an increase in
inventory balances mainly at LXE and Aviation, and an increase in costs and estimated earnings in
excess of billings on long-term contracts at Aviation and D&S in the first quarter of 2010. The
cash flow generated from operating activities was partially offset by $1.8 million used for capital
expenditures during the first quarter of 2010.
During the first three months of 2009, cash and cash equivalents decreased by $41.0 million to
$45.9 million at April 4, 2009. The primary factor contributing to the decrease during the period
was cash utilized for our Formation and Satamatics acquisitions, net of borrowings under our credit
facility.
Operating activities contributed $14.0 million in positive cash flows in
the first quarter of 2009. Although we reported a net loss for the period, we nevertheless
generated positive cash flow due to the level of noncash charges for depreciation and amortization,
and decreases in working capital. Acquisition-related charges of $1.7 million were also paid
during the quarter ended April 4, 2009 and were included as a reduction of cash provided by
operating activities in the consolidated statement of cash flows.
During the first quarter of 2009, we used $83.8 million of cash to acquire our Formation and
Satamatics businesses, net of cash acquired, which was partially funded by borrowings under our
revolving credit facility. We borrowed $33.8 million under our revolving credit facility, and spent
$4.5 million on capital expenditures, during the first quarter of 2009.
We have a revolving credit facility 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 agreement provides
for borrowings through February 28, 2013, with no principal payments required prior to that date.
The credit agreement is secured by substantially all of our tangible and intangible assets, with
certain exceptions for real estate that secures existing mortgages, for other permitted liens, and
for certain assets outside the U.S.
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As of April 3, 2010, we had $19.0 million of borrowings outstanding, $2.5 million of outstanding
letters of credit, and $53.5 million available borrowing capacity under the revolving credit
facility. At April 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 agreement 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 April 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 principal credit agreements. There were no repurchases under the program during the
three months ended April 3, 2010.
Additional cash payments of $13.9 million will be made in 2010 related to acquisitions completed in
2009 based upon the achievement of performance targets in 2009, and an agreement to settle the 2010
earn-out amount, $7.2 million of which was paid subsequent to April 3, 2010. The remaining $6.7
million is due December 31, 2010. Refer to Note 2 of the consolidated financial statement 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 is to be paid to the purchaser
in the second quarter of 2010.
Off-Balance Sheet Arrangements
We have $2.5 million of standby letters of credit outstanding under our revolving credit facility
to satisfy performance guarantee requirements under certain customer contracts. While these
obligations are not normally called, they could be called by the beneficiaries at any time before
the expiration date, if we failed to meet certain contractual requirements. After deducting the
outstanding letters of credit, at April 3, 2010 we had $41.0 million available for borrowing in the
U.S. and $12.5 million available for borrowing in Canada under the revolving credit facility.
During 2009, we completed acquisitions of two entities. Of the total purchase price of these
businesses, $9.8 million of cash is in escrow accounts and is payable to the sellers within
specified periods following the respective dates of acquisition, subject to claims we may make
against the sellers.
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 April 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
April 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 in
discussions of
a possible 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 April 3, 2010.
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Commitments and Contractual Obligations
As of April 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 purchase commitments of $6.6
million due to an increase in critical parts inventory at LXE to avoid continued delays in
fulfillment of orders caused by a shortage of certain component parts from LXEs suppliers.
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, and the extent to which determined tax assets are considered realizable; | ||
| successful transition of products from development stages to an efficient manufacturing environment; |
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| 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 fair value of one or more of our business units; | ||
| the success of certain of our customers in marketing our line of high-speed commercial airline communications products as a complementary offering with their own lines of avionics products; | ||
| the continued availability of financing for various mobile and high-speed data communications systems; | ||
| risk that the recent turmoil in the credit markets may make it more difficult for some customers to obtain financing and adversely affect their ability to pay, which in turn could have an adverse impact on our business, operating results, and financial condition; | ||
| development of successful working relationships with local business and government personnel in connection with the distribution and manufacture of products in foreign countries; | ||
| the demand growth for various mobile and high-speed data communications services; | ||
| our ability to attract and retain qualified senior management and other personnel, particularly those with key technical skills; | ||
| our ability to effectively integrate our acquired businesses, products or technologies into our existing businesses and products, and the risk that any such acquired businesses, products or technologies do 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 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 are
effective for the Company in the first quarter of 2011. Early adoption is permitted. If the
Company adopts this standard in a period other than the
beginning of its fiscal year, the Company will be required to apply this standard retrospectively
to beginning of its fiscal year, and disclose certain financial information as revised for all
interim periods previously reported in the fiscal year adopted. The Company is evaluating when to
adopt the updates and the effect the adoption will have on its consolidated financial statements.
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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.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
As of April 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 0.2% at April 3, 2010) |
$ | 18,837 | ||
Revolving credit agreement with U.S.
and Canadian banks, maturing in
February 2013, interest payable
quarterly at a variable rate (4.0%
at April 3, 2010) |
$ | 19,000 |
A 100 basis-point change in the interest rates of our market-risk sensitive instruments would have
changed interest income by approximately $46,000 for the first 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 April 3, 2010, we had
approximately $19.0 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 agreement would have changed interest expense by approximately $47,000 for the
first quarter of 2010 based upon the average outstanding borrowings under these obligations.
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At April 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 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 |
0.9193 /AUD | $ | 2,801 | |||||
Belgium |
1.3491 /EUR | 1,664 | ||||||
Canada |
0.9917 /CAD | 1,045 | ||||||
Germany |
1.3491 /EUR | 886 | ||||||
Netherlands |
1.3491 /EUR | 383 | ||||||
United Kingdon |
1.5026 /GBP | 284 | ||||||
Sweden |
0.1391 /SEK | 179 | ||||||
France |
1.4316 /EUR | 176 | ||||||
Italy |
1.3491 /EUR | 60 | ||||||
Total amount subject to
foreign currency risk |
$ | 7,478 | ||||||
We had accounts receivable and accounts payable balances denominated in currencies other than
the functional currency of the local entity at April 3, 2010 as follows:
Exchange Rate | ||||||||||||
Functional | ||||||||||||
Currency per | USD | |||||||||||
Currency | Functional | Denominated | Equivalent | |||||||||
Denomination | Currency | Currency | (in thousands) | |||||||||
Accounts Receivable |
||||||||||||
USD |
CAD | 1.0084 | $ | 11,188 | ||||||||
USD |
EUR | 0.7412 | 1,147 | |||||||||
USD |
GBP | 0.6576 | 117 | |||||||||
Other currencies |
268 | |||||||||||
$ | 12,720 | |||||||||||
Accounts Payable |
||||||||||||
USD |
CAD | 1.0084 | $ | 1,429 | ||||||||
EUR |
GBP | 0.8875 | 516 | |||||||||
GBP |
USD | 1.5207 | 436 | |||||||||
EUR |
USD | 1.3479 | 233 | |||||||||
EUR |
SEK | 9.7305 | 161 | |||||||||
Other currencies |
123 | |||||||||||
$ | 2,898 | |||||||||||
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We also had cash accounts denominated in currencies other than the functional currency of the
local entity at April 3, 2010 as follows:
Exchange Rate | ||||||||||||
Functional | ||||||||||||
Currency per | USD | |||||||||||
Currency | Functional | Denominated | Equivalent | |||||||||
Denomination | Currency | Currency | (in thousands) | |||||||||
USD |
CAD | 1.0084 | $ | 8,074 | ||||||||
GBP |
CAD | 1.5404 | 1,337 | |||||||||
GBP |
USD | 1.5206 | 1,092 | |||||||||
USD |
GBP | 0.6576 | 1,216 | |||||||||
USD |
EUR | 0.7412 | 2,167 | |||||||||
Other currencies |
585 | |||||||||||
$ | 14,471 | |||||||||||
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 April 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) |
14,500USD | 1.0439 | $ | 469 |
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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 April 3, 2010.
(b) Changes in Internal Control Over Financial Reporting
During the first 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).
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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 April 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 1 2010 (January 1 to January 30) |
| | | |||||||||||||
Period 2 2010 (January 31 to February
27) |
980 | $ | 12.92 | | ||||||||||||
Period 3 2010 (February 28 to April 3) |
| | | |||||||||||||
Total |
980 | $ | 12.92 | | $ | 9.9 | ||||||||||
(1) | The category includes 980 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 principal credit agreements. | |
(3) | This balance represents the value of shares that could be repurchased under the Program as of April 3, 2010. |
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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 April 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). |
|||
4.1 | Waiver agreement, dated March 31, 2010, to Credit Agreement among EMS Technologies, Inc. and
EMS Technologies Canada, Inc. and Bank of America as Domestic and Canadian Administrative Agent. * |
|||
10.1 | Compensation Arrangements with Certain Officers. * |
|||
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 |
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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 | Date: May 13, 2010 | ||
President, and Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
By:
|
/s/ Gary B. Shell | Date: May 13, 2010 | ||
Senior Vice President, Chief Financial | ||||
Officer and Treasurer (Principal Financial Officer) |
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.
32