UNITED STATES
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

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)

Registrant’s 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 issuer’s classes of common stock, as of the close of business on August 9, 2010:

Class		Number of Shares
Common Stock, $0.10 par value		15,299,423

 

 

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION			2
Item 1. Financial Statements			2
Consolidated Statements of Operations (unaudited)			2
Consolidated Balance Sheets (unaudited)			3
Consolidated Statements of Cash Flows (unaudited)			5
Notes to Consolidated Financial Statements (unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Quantitative and Qualitative Disclosures about Market Risk			31
Item 4. Controls and Procedures			34
PART II — OTHER INFORMATION			35
Item 1A. Risk Factors			35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			35
Item 6. Exhibits			36
SIGNATURES			37
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I

FINANCIAL INFORMATION

Item 1.		Financial Statements

EMS Technologies, Inc. and Subsidiaries

		Three Months Ended								Six Months Ended
		July 3				July 4				July 3				July 4
		2010				2009				2010				2009
Product net sales		$	73,350				75,906				140,909				144,698
Service net sales			15,127				21,032				30,470				44,518
Net sales			88,477				96,938				171,379				189,216
Product cost of sales			49,040				50,456				95,473				97,094
Service cost of sales			7,080				14,229				13,929				31,576
Cost of sales			56,120				64,685				109,402				128,670
Selling, general and administrative expenses			22,128				23,038				43,801				44,972
Research and development expenses			4,709				4,233				10,130				8,639
Impairment loss on goodwill related charges			—				—				384				—
Acquisition-related items			346				1,627				563				5,522
Operating income			5,174				3,355				7,099				1,413
Interest income			101				103				281				165
Interest expense			(542	)			(667	)			(1,019	)			(1,288	)
Foreign exchange gain (loss), net			244				235				(449	)			(232	)
Earnings before income taxes			4,977				3,026				5,912				58
Income tax (expense) benefit			(1,109	)			160				(1,453	)			160
Net earnings		$	3,868				3,186				4,459				218
Net earnings per share:
Basic		$	0.25				0.21				0.29				0.01
Diluted			0.25				0.21				0.29				0.01
Weighted-average number of common shares outstanding:
Basic			15,191				15,159				15,185				15,152
Diluted			15,230				15,225				15,218				15,244

See accompanying notes to interim unaudited consolidated financial statements.

EMS Technologies, Inc. and Subsidiaries

		July 3				December 31
		2010				2009
ASSETS
Current assets:
Cash and cash equivalents		$	44,805				47,174
Trade accounts receivable, net of allowance for doubtful account of $1,166 in 2010 and $1,208 in 2009			75,706				60,959
Costs and estimated earnings in excess of billings on long-term contracts			19,054				25,290
Inventories			46,327				40,655
Deferred income taxes			4,198				4,306
Other current assets			15,056				19,117
Total current assets			205,146				197,501
Property, plant and equipment:
Land			1,150				1,150
Buildings and leasehold improvements			18,749				18,792
Machinery and equipment			110,721				107,712
Furniture and fixtures			10,513				10,542
Total property, plant and equipment			141,133				138,196
Less accumulated depreciation			94,399				90,256
Net property, plant and equipment			46,734				47,940
Deferred income taxes			9,411				9,421
Goodwill			60,343				60,336
Other intangible assets, net of accumulated amortization of $22,639 in 2010 and $18,817 in 2009			44,858				49,256
Costs and estimated earnings in excess of billings on long-term contracts			14,449				7,771
Other assets			1,666				1,920
Total assets		$	382,607				374,145

See accompanying notes to interim unaudited consolidated financial statements.

EMS Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited), continued
(in thousands, except share data)

		July 3				December 31
		2010				2009
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current installments of long-term debt		$	1,450				1,398
Accounts payable			32,170				27,333
Billings in excess of contract costs and estimated earnings on long-term contracts			12,276				9,380
Accrued compensation and related costs			14,122				13,946
Deferred revenue			10,852				9,805
Contingent consideration arrangement liability			6,833				13,729
Other current liabilities			15,446				23,763
Total current liabilities			93,149				99,354
Long-term debt, excluding current installments			37,613				26,352
Deferred income taxes			5,521				5,757
Other liabilities			7,172				5,591
Total liabilities			143,455				137,054
Shareholders’ equity:
Preferred stock of $1.00 par value per share; Authorized 10,000 shares; none issued			—				—
Common stock of $0.10 par value per share; Authorized 75,000 shares, issued and outstanding 15,300 in 2010 and 15,249 in 2009			1,530				1,525
Additional paid-in capital			136,954				136,112
Accumulated other comprehensive income — foreign currency translation adjustment			2,821				6,066
Retained earnings			97,847				93,388
Total shareholders’ equity			239,152				237,091
Commitments and contingencies
Total liabilities and shareholders’ equity		$	382,607				374,145

See accompanying notes to interim unaudited consolidated financial statements.

EMS Technologies, Inc. and Subsidiaries

		Six Months Ended
		July 3				July 4
		2010				2009
Cash flows from operating activities:
Net earnings		$	4,459				218
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			9,819				10,160
Deferred income taxes			(119	)			—
Stock-based compensation expense			885				1,070
Change in fair value of contingent cosideration liability			304				1,767
Payment for acquisition of business under contingent consideration arrangement			(1,248	)
Changes in operating assets and liabilities, net of effects of acquisitions:
Trade accounts receivable			(16,503	)			3,331
Costs and estimated earnings in excess of billings on long-term contracts			(545	)			4,607
Billings in excess of contract costs			2,890				536
Inventories			(6,112	)			3,211
Accounts payable			4,105				(2,140	)
Deferred revenue			3,432				899
Other			4,816				(1,607	)
Net cash provided by operating activities in continuing operations			6,183				22,052
Net cash used in operating activities in discontinued operations			(8,810	)			—
Net cash provided by (used in) operating activities			(2,627	)			22,052
Cash flows from investing activities:
Purchases of property, plant and equipment			(3,820	)			(8,064	)
Payments for acquisitions of businesses, net of cash acquired			—				(87,264	)
Proceeds from sales of assets			24				36
Net cash used in investing activities			(3,796	)			(95,292	)
Cash flows from financing activities:
Net borrowings under revolving credit facility			12,000				28,501
Repayment of other debt			(687	)			(635	)
Deferred financing costs paid			(28	)			(251	)
Payment for acquisition of business under contingent consideration arrangement			(5,952	)			—
Payments for repurchase and retirement of common shares			(51	)			(110	)
Proceeds from exercises of stock options			13				238
Net cash provided by financing activities			5,295				27,743
Effect of changes in exchange rates on cash and cash equivalents			(1,241	)			595
Net change in cash and cash equivalents			(2,369	)			(44,902	)
Cash and cash equivalents at beginning of period			47,174				86,979
Cash and cash equivalents at end of period		$	44,805				42,077

See accompanying notes to interim unaudited consolidated financial statements.

EMS Technologies, Inc. and Subsidiaries

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 Commission’s (“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 Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

— Management’s Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date and reporting of revenue and expenses during the period. Actual future results could differ materially from those estimates.

— Recently Issued Pronouncements Not Yet Adopted

In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance amending and clarifying requirements for fair value measurements and disclosures in the FASB issued Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures About Fair Value Measurements. The new guidance requires disclosure of transfers in and out of Level 1 and Level 2 and a reconciliation of all activity in Level 3. The guidance also requires detailed disaggregation disclosure for each class of assets and liabilities in all levels, and disclosures about inputs and valuation techniques for Level 2 and Level 3. The guidance was effective for the Company in the first quarter of 2010 and the disclosure reconciliation of all activity in Level 3 is effective for the Company in the first quarter of 2011. The adoption of ASU 2010-06 did not have a material impact on the Company’s consolidated financial statements.

In October 2009 the FASB issued two accounting standards updates that could result in revenue being recognized earlier in certain revenue arrangements with multiple deliverables. Both updates are effective for the Company in the first quarter of 2011. Early adoption is permitted. If the Company adopts this standard in a period other than the beginning of its fiscal year, the Company will be required to apply this standard retrospectively to the beginning of its fiscal year, and disclose certain financial information as revised for all interim periods previously reported in the fiscal year adopted. The Company is evaluating when to adopt the updates and the effect the adoption will have on its consolidated financial statements.

ASU 2009-13, Revenue Recognition — Multiple-Deliverable Revenue Arrangements, amends the accounting for revenue arrangements with multiple deliverables. Among other things, ASU 2009-13:

•

Eliminates the requirement for objective evidence of fair value of an undelivered item for treatment of the delivered item as a separate unit of accounting;

•

Requires use of the relative selling price method for allocating total consideration to elements of the arrangement instead of the relative-fair-value method or the residual method;

•

Allows the use of an estimated selling price for any element within the arrangement to allocate consideration to individual elements when vendor-specific objective evidence or other third party evidence of selling price do not exist; and

•

Expands the required disclosures.

ASU 2009-14, Software — Certain Revenue Arrangements That Include Software Elements, amends the guidance for revenue arrangements that contain tangible products and software elements. ASU 2009-14 redefines the scope of arrangements that fall within software revenue recognition guidance by specifically excluding tangible products that contain software components that function together to deliver the essential functionality of the tangible product.

Under current guidance, products that contain software that is more than incidental to the product as a whole fall within the scope of software revenue recognition guidance, which requires, among other things, the existence of vendor-specific objective evidence of fair value of all undelivered items to allow a delivered item to be treated as a separate unit of accounting. Such tangible products excluded from the requirements of software revenue recognition requirements under ASU 2009-14 would follow the revenue recognition requirements for other revenue arrangements, including the new requirements for multiple-deliverable arrangements contained in ASU 2009-13.

In April 2010, the FASB issued ASU 2010-17, Milestone Method of Revenue Recognition, which provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development arrangements in which one or more payments are contingent upon achieving uncertain future events or circumstances. This update is effective for the Company in the first quarter of 2011. Early adoption is permitted. If the Company adopts this standard in a period other than the beginning of its fiscal year, the Company will be required to apply this standard retrospectively to beginning of its fiscal year, and disclose certain financial information as revised for all interim periods previously reported in the fiscal year adopted. The Company is evaluating when to adopt the updates and the effect, if any, the adoption will have on its consolidated financial statements.

2. Business Combinations

During the six months ended July 4, 2009, the Company completed the acquisitions of two businesses that expanded its technology base. The Company completed the acquisition of all of the equity interest in Formation, Inc. (“Formation”), of Moorestown, New Jersey, and Satamatics Global Limited (“Satamatics”), of Tewkesbury, UK, on January 9, 2009 and February 13, 2009, respectively.

The Company was required to adopt Statement of Financial Accounting Standards (“SFAS”) No. 141(R), Business Combinations, which is included in FASB Accounting Standards Codification^TM (“ASC”) Topic 805, Business Combinations, effective January 1, 2009, and these acquisitions were reflected in the consolidated financial statements in accordance with these revised standards.

The aggregate cash purchase price for these two entities was approximately $90.7 million. Of this amount, $88.8 million was paid in the first quarter of 2009, and the remaining $1.9 million was paid in the second quarter of 2009 upon resolution of working capital and cash provisions in the purchase agreements. In addition, one of the purchase agreements included a contingent consideration arrangement of up to $15 million. The final payment amount under the contingent consideration arrangement has been determined and a total of $14.0 million is due to the sellers, payable in cash in 2010, of which $7.2 million was paid in the second quarter of 2010. The remaining $6.8 million is due December 31, 2010. Of the $7.2 million paid in the second quarter of 2010, $6.0 million is reflected in the financing activities section of the consolidated statement of cash flows since that amount was included in the estimated fair value of the contingent consideration liability as of the acquisition date. The remaining $1.2 million, which is reflected as an acquisition-related charge in the consolidated statement of operations since the acquisition date, is reflected as an operating activity in the consolidated statement of cash flows.

For the acquired companies, the results for the three and six months ended July 3, 2010 included net sales of $11.8 million and $26.1 million, respectively, and a loss before income taxes of $0.4 million for both periods. The results for the three and six months ended July 4, 2009 included net sales of $16.7 million and $31.6 million, and earnings before taxes of $0.5 million and $1.1 million, respectively. The Company recognized charges of $0.3 million and $0.6 million related to the acquisitions in the three and six months ended July 3, 2010 and $1.6 million and $5.5 million for the three and six months ended July 4, 2009, respectively, which are included in acquisition-related items in the consolidated statements of operations. The acquisition-related charges included in the first six months of 2010 were primarily for professional fees related to acquired research and development tax credits and an adjustment in the earn-out liability for changes in payments to be made under the contingent consideration arrangement. The acquisition-related charges recorded in the first six months of 2009 included acquisition-related expenses as a result of the adoption of SFAS 141(R), and accretion of the contingent consideration liability. The first six months of 2009 also included a $1.4 million foreign exchange loss related to the funding of the Satamatics acquisition, which was required to be paid in British pounds sterling. The loss resulted from changes in foreign currency exchange rates from the date the Company funded the transaction to the date the acquisition was completed.

3. Goodwill and Other Intangible Assets

The following table presents the changes in the carrying amount of goodwill by reportable operating segment during the six months ended July 3, 2010 (in thousands):

						Global
		Aviation				Tracking				LXE				Total
Balance as of December 31, 2009		$	35,108				23,429				1,799				60,336
Foreign currency translation adjustment			—				—				7				7
Balance as of July 3, 2010		$	35,108				23,429				1,806				60,343

The Company had $18.9 million of accumulated impairment losses recorded on LXE’s goodwill as of July 3, 2010.

The following table presents the gross carrying amounts and accumulated amortization, in total and by major intangible asset class, for the Company’s intangible assets subject to amortization as of July 3, 2010 and December 31, 2009 (in thousands):

		As of July 3, 2010
		Gross								Net
		Carrying				Accumulated				Carrying
		Amount				Amortization				Amount
Developed technology		$	39,973				15,769				24,204
Customer relationships			18,944				3,556				15,388
Trade names and trademarks			6,152				1,432				4,720
Other			2,428				1,882				546
		$	67,497				22,639				44,858

		As of December 31, 2009
		Gross								Net
		Carrying				Accumulated				Carrying
		Amount				Amortization				Amount
Developed technology		$	40,385				13,460				26,925
Customer relationships			19,052				2,493				16,559
Trade names and trademarks			6,208				1,052				5,156
Other			2,428				1,812				616
		$	68,073				18,817				49,256

Amortization expense related to these intangible assets for the three months and six months ended July 3, 2010 was $2.1 million and $4.1 million, respectively, and for the three months and six months ended July 4, 2009 was $2.9 million and $5.2 million, respectively. Expected amortization expense for the remainder of 2010 and for each of the five succeeding years is as follows: 2010 - $4.1 million, 2011 — $7.5 million, 2012 — $7.8 million, 2013 — $7.1 million, 2014 — $3.8 million and 2015 — $3.6 million.

As of July 3, 2010, we had approximately $60.3 million of goodwill and $44.9 million of other intangible assets on our consolidated balance sheet, collectively representing approximately 28% of our total assets. We test goodwill for impairment on an annual basis in the fourth quarter of the year. We are also required to test goodwill and other long-lived assets on an interim basis if an event occurs or circumstances change which indicate that an asset might be impaired. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include a sustained, significant decline in our share price and market capitalization, a decline in expected future cash flows for one or more of our business units (including our recently acquired businesses), a significant adverse change in legal factors or in the business climate, unanticipated competition and/or slower-than-expected growth rates, among others. If we are required to recognize an impairment loss related to goodwill or long-lived assets, the related charge, although a noncash charge, could materially reduce reported earnings or result in a loss for the period in which the impairment loss is recognized.

4. Fair Value Measurements

The Company measures financial and non-financial assets and liabilities in accordance with ASC Topic 820, Fair Value Measurements and Disclosures. This guidance states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, this guidance establishes a three-tier fair-value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

•

Level 1 — Observable inputs consisting of quoted prices in active markets;

•

Level 2 — Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

•

Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The carrying amounts of cash and cash equivalents, trade accounts receivable, accounts payable and accrued expenses approximate their fair values because of the short-term maturity of these instruments.

The Company uses derivative financial instruments, primarily in the form of foreign currency forward contracts, in order to mitigate the risks associated with currency fluctuations on future fair values of foreign denominated assets and liabilities. The fair values of foreign currency contracts of $558,000 net liability at July 3, 2010 and $39,000 net asset at December 31, 2009 are based on quoted market prices for similar instruments using the income approach (a level 2 input per the provisions of ASC Topic 820) and are recorded in other current liabilities and other current assets, respectively, in the consolidated balance sheets. Gains and losses related to these forward contracts are included in foreign exchange gain (loss), net, in the consolidated statement of operations.

The Company has two fixed-rate mortgages and has borrowings under its revolving credit facility. One mortgage has an 8.0% interest rate and a carrying amount as of July 3, 2010 and December 31, 2009 of $6.0 million and $6.4 million, respectively. The other mortgage has a 7.1% interest rate and a carrying amount as of July 3, 2010 and December 31, 2009 of $2.6 million and $2.9 million, respectively. The Company’s outstanding borrowings under its revolving credit facility were $30.5 million and $18.5 million as of July 3, 2010 and December 31, 2009, respectively. The estimated fair value of the Company’s total debt was $37.9 million at July 3, 2010 and is based on quoted market prices for similar instruments (a level 2 input).

Management believes that these assets and liabilities can be liquidated without restriction.

5. Interim Segment Disclosures

The Company is organized into four reportable operating segments: Aviation, Defense & Space, LXE and Global Tracking. The Company determines operating segments in accordance with the Company’s internal management structure, which is organized based on products and services that share distinct operating characteristics. Each segment is separately managed and is evaluated primarily upon operating income and earnings before interest, taxes, depreciation and amortization (“EBITDA”).

The Aviation segment designs and develops satellite-based communications solutions through a broad array of terminals and antennas for the aeronautical market that enable end-users in aircraft and other mobile platforms to communicate over Inmarsat and Iridium satellites and air-to-ground links. This segment also designs and builds aircraft cabin equipment to process data on board aircraft, including rugged data storage, cabin-wireless connectivity, and air-to-ground connectivity.

The LXE segment manufactures mobile terminals and wireless data collection equipment for logistics management systems. The manufacturing cycle for each order is generally just a few days. Products are marketed directly to end-users, through distributors, and integrators (such as value-added resellers who provide inventory management software) that incorporate it with their products and services for sale and delivery to end users. LXE operates mainly in three markets: the Americas market, which is comprised of North, South and Central America; the International market, which is comprised of all other geographic areas with the highest concentration in Europe; and direct sales to original equipment manufacturers (“OEM”).

The Defense & Space segment manufactures custom-designed, highly engineered subsystems for use in space, airborne, and terrestrial applications for communications, radar, surveillance, precision tracking and electronic countermeasures. Orders typically involve development and production schedules that can extend a year or more. Products are typically sold to prime contractors or systems integrators rather than to end-users.

The Global Tracking segment provides satellite-based machine-to-machine mobile communications equipment and services to track, monitor and control remote assets, regardless of whether they are fixed, semi-fixed or mobile.

Additionally, Global Tracking provides equipment for the Cospas-Sarsat search-and-rescue system and incident-management software for rescue coordination worldwide.

Prior to 2010, the Company operated under three reportable operating segments: Communications & Tracking, D&S and LXE. The Aviation and Global Tracking segments were previously included in our Communications and Tracking segment. The Company’s 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 Company’s interim segment data (in thousands):

		Three Months Ended								Six Months Ended
		July 3				July 4				July 3				July 4
		2010				2009				2010				2009
Net sales:
Aviation		$	25,338				33,408			$	51,524				67,920
LXE			36,365				29,807				66,938				53,751
Defense & Space			16,758				25,189				33,292				52,097
Global Tracking			10,526				8,534				20,386				15,448
Less intercompany sales			(510	)			—				(761	)
Global Tracking external sales			10,016				8,534				19,625				15,448
Total		$	88,477				96,938			$	171,379				189,216
Operating income (loss):
Aviation		$	1,816				3,799			$	2,125				8,865
LXE			2,077				214				2,969				(4,847	)
Defense & Space			1,694				2,301				2,612				5,193
Global Tracking			684				(4	)			838				(763	)
Corporate & Other			(1,097	)			(2,955	)			(1,445	)			(7,035	)
Total		$	5,174				3,355			$	7,099				1,413
Earnings (loss) before income taxes:
Aviation		$	1,877				3,999			$	1,805				9,555
LXE			2,050				(22	)			2,833				(5,160	)
Defense & Space			1,694				2,301				2,616				5,193
Global Tracking			888				239				934				(168	)
Corporate & Other			(1,532	)			(3,491	)			(2,276	)			(9,362	)
Total		$	4,977				3,026			$	5,912				58

The results before income taxes for Corporate & Other for the second quarter and first six months of 2009 includes $1.6 million and $5.5 million of acquisition-related charges, respectively. The first six months of 2009 also includes a $1.4 million foreign exchange loss related to the funding of the Satamatics acquisition and other expenses that are not allocated to operating segments in the financial data reviewed by the chief operating decision maker.

		July 3				December 31
		2010				2009
Assets:
Aviation		$	143,780				144,483
LXE			83,227				71,632
Defense & Space			53,919				53,883
Global Tracking			78,573				75,922
Corporate & Other			23,108				28,225
Total		$	382,607				374,145
Concentration of net assets by geographic region:
United States		$	68,270				72,826
Canada			66,119				62,239
Europe			100,350				97,216
Other			4,413				4,810
Total		$	239,152				237,091

Sales to no individual customer exceeded 10% of our net sales during the three and six months ended July 3, 2010, or July 4, 2009.

6. Earnings Per Share

Following is a reconciliation of the denominators for basic and diluted earnings per share calculations (in thousands):

		Three Months Ended								Six Months Ended
		July 3				July 4				July 3				July 4
		2010				2009				2010				2009
Basic weighted-average number of common shares outstanding			15,191				15,159				15,185				15,152
Dilutive potential shares using the treasury share method			39				66				33				92
Diluted weighted-average number of common shares outstanding			15,230				15,225				15,218				15,244
Shares that were not included in computation of diluted earnings per share that could potentially dilute future basic earnings per share because their effect on the periods were antidilutive			1,008				653				1,045				835

7. Comprehensive Income (loss)

Following is a summary of comprehensive income (loss) (in thousands):

		Three Months Ended								Six Months Ended
		July 3				July 4				July 3				July 4
		2010				2009				2010				2009
Net earnings		$	3,868				3,186				4,459				218
Other comprehensive income (loss):
Foreign currency translation adjustment			(5,056	)			4,076				(3,245	)			2,896
		$	(1,188	)			7,262				1,214				3,114

8. Inventories

Inventories as of July 3, 2010 and December 31, 2009 include the following (in thousands):

		July 3				December 31
		2010				2009
Parts and materials		$	29,243				25,221
Work-in-process			5,727				5,142
Finished goods			11,357				10,292
		$	46,327				40,655

Costs included in inventories related to long-term programs or contracts are primarily for materials and work performed on programs awaiting funding, or on contracts not yet finalized. Such costs were $2.2 million at July 3, 2010, and $1.1 million at December 31, 2009.

9. Revolving Credit Facility

During the first six months of 2009, the Company completed two acquisitions and used borrowings under its revolving credit facility to fund a portion of the transactions. During the second quarter of 2010, the Company’s net borrowings increased by $11.5 million mainly to fund cash payments for award costs related to claims made by the purchasers of the Company’s former EMS Wireless division of $8.6 million (see Note 13 for additional information) and $7.2 million for earn-out amounts related to acquisitions completed in 2009. As of July 3, 2010, the Company had $30.5 million of borrowings outstanding under its revolving credit facility.

The Company has $2.1 million of standby letters of credit to satisfy performance guarantee requirements under certain customer contracts. While these obligations are not normally called, they could be called by the beneficiaries at any time before the expiration date should the Company fail to meet certain contractual requirements. After deducting outstanding letters of credit, at July 3, 2010 the Company had $29.5 million available for borrowing in the U.S. and $12.9 million available for borrowing in Canada under the revolving credit agreement.

10. Warranty Liability

The Company provides a limited warranty for a variety of its products. The specific terms and conditions of the warranties vary depending upon the specific products and markets. The Company records a liability at the time of sale for the estimated costs to be incurred under warranties, which is included in other current liabilities on the consolidated balance sheets. The amount of this liability is based upon historical, as well as expected, experience.

The warranty liability is periodically reviewed for adequacy and adjusted as necessary. Following is a summary of the activity for the periods presented related to the Company’s liability for limited warranties (in thousands):

		Three Months Ended								Six Months Ended
		July 3				July 4				July 3				July 4
		2010				2009				2010				2009
Balance at beginning of the period		$	4,510				3,380				4,085				2,789
Additions at dates of acquisition for businesses acquired during period			—				—				—				516
Accruals for warranties issued during the period			849				1,285				2,056				2,284
Settlements made during the period			(835	)			(869	)			(1,617	)			(1,793	)
Balance at end of period		$	4,524				3,796				4,524				3,796

11. Stock-Based Compensation

The Company has granted nonvested restricted stock and nonqualified stock options to key employees and directors under several stock award plans. The Company granted stock awards with an aggregate fair value of approximately $2.4 million during the first six months of 2010 and the first six months of 2009. The Company recognized expense in the second quarter and first six months of $0.5 million and $0.9 million in 2010, and $0.6 million and $1.1 million in 2009, respectively, before income tax benefits, for all the Company’s stock plans.

12. Income Taxes

The Company’s 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 Company’s effective rate is much lower than the rate in the U.S. due to research-related tax benefits. In the three and six months ended July 3, 2010, the rate was impacted by tax benefits for certain loss jurisdictions that have not been recognized. In addition, the effective rate in 2010 is higher than 2009 since the earnings in Canada in 2010 are expected to be subject to higher rates due to provincial taxes and the rate used for U.S. taxable income is higher since certain key provisions of the U.S. tax law, including the research and development credit, have not been extended to be in effect for tax year 2010.

The Company is under audit in Canada at the federal level for the years 2006 and 2007. The Company expects the audits to be completed in the next twelve months. Any related unrecognized tax benefits could be adjusted based on the results of the audits. The Company cannot estimate the range of the change that is reasonably possible at this time.

13. Discontinued Operations

Prior to 2009, the Company disposed of its S&T/Montreal, SatNet, and EMS Wireless divisions. The sales agreements for each of these disposals contained standard indemnification provisions for various contingencies that could not be resolved before the dates of closing and for various representations and warranties provided by the Company and the purchasers. The purchaser of EMS Wireless asserted claims under such representations and warranties. The parties agreed to arbitration, which commenced in the third quarter of 2009. In March of 2010, the Company received an interim decision from the arbitrator on these claims awarding the purchaser a total of approximately $9.2 million under the warranty provisions of the purchase agreement. As a result, the Company accrued a liability for the award costs, based on the interim decision, in discontinued operations in the fourth quarter of 2009. On April 30, 2010, the arbitrator issued the final decision awarding the purchaser of the Company’s former EMS Wireless division $8.6 million. Based on this final award, the Company reduced its estimated liability by $0.6 million in the first quarter of 2010. This favorable adjustment in discontinued operations in the three months ended April 3, 2010 was offset by additional charges related to estimated contingent liabilities associated with other divisions disposed of prior to 2009.

In conjunction with the sale of S&T/Montreal in 2005, an existing contractual requirement for the Company to post approximately $3 million to secure in-orbit incentive performance of the Radarsat-2 payload was eliminated, but the Company continues to warrant that amount in the event of specified in-orbit payload failures. Based upon the available information, management believes that the outcome for this particular contingency is not probable and cannot be estimated. As a result, the Company has not incurred any costs to date, and has not recorded a liability as of July 3, 2010, with respect to this contingency. The Company incurred no additional costs related to this disposition through the second quarter of 2010.

The Company has an agreement with the purchaser of the former S&T/Montreal division to acquire a license for $8 million in payments over a seven-year period, beginning in December 2008, for the rights to a certain satellite territory. The Company and the purchaser have a corresponding sublicense agreement that granted the territory rights back to the purchaser, under which the Company is to receive a portion of the satellite service revenues from the specific market territory over the same period. The purchaser had previously guaranteed that the revenues derived under the sublicense would equal or exceed the acquisition cost of the license. As part of the agreement to sell the net assets of S&T/Montreal, the Company released the purchaser from this guarantee. Without the guarantee, the Company estimates that its portion of the satellite service revenues will be less than the acquisition cost, and the Company has accordingly reflected a liability for the net cost in its consolidated balance sheet. As of July 3, 2010, no payments have been made by the Company under this license agreement. The satellite service revenues from the specific market territory included under the sublicense agreement are considerably lower than expected. The Company believes that sufficient efforts are not being made by the purchaser of the former S&T/Montreal division to market this satellite service. The parties are finalizing settlement under these agreements. The Company believes that the net liability recorded in its consolidated balance sheet is its best estimate of the settlement amount. If a settlement is reached, it is expected to be paid in the following twelve months, and therefore the net liability is recorded as a current liability in the Company’s consolidated balance sheet as of July 3, 2010.

14. Repurchases of Common Shares

On July 29, 2008, the Company’s Board of Directors authorized a stock repurchase program for up to $20 million of the Company’s common shares. As of July 3, 2010, the Company had repurchased 495,000 common shares for approximately $10.1 million. Further repurchases are no longer permitted under the terms of the Company’s principal credit agreements. There were no repurchases of common shares under this program during the six months ended July 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 Company’s consolidated financial position, results of operations or cash flows.

Item 2.		Management‘s 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2009.

We are a leading provider of wireless connectivity solutions over satellite and terrestrial networks. We keep people and systems connected, wherever they are — on land, at sea, in the air or in space. Serving the aeronautical, asset-tracking, defense, and mobile computing industries, our products and services enable universal mobility, visibility and intelligence. Our operations include the following four reportable operating segments:

•

Aviation — Designs and develops satellite-based communications solutions through a broad array of terminals and antennas for the aeronautical market that enable end-users in aircraft and other mobile platforms to communicate over Inmarsat and Iridium satellites and air-to-ground links. This segment also designs and builds aircraft cabin equipment to process data on board aircraft, including rugged data storage, cabin-wireless connectivity, and air-to-ground connectivity;

•

LXE — Provides rugged mobile terminals and wireless data networks used for logistics applications such as distribution centers, warehouses and container ports. LXE operates mainly in three markets: the Americas market, which is comprised of North, South and Central America; the International market, which is comprised of all other geographic areas, with the highest concentration in Europe; along with direct sales to original equipment manufacturers (“OEM”);

•

Defense & Space (“D&S”) — Supplies highly engineered subsystems for defense electronics and sophisticated satellite applications from military communications, radar, surveillance and countermeasures to commercial high-definition television, satellite radio, and live TV for innovative airlines; and

•

Global Tracking — Provides satellite-based machine-to-machine mobile communications equipment and services to track, monitor and control remote assets, regardless of whether they are fixed, semi-fixed or mobile. Additionally, Global Tracking provides equipment for the Cospas-Sarsat search-and-rescue system and incident-management software for rescue coordination worldwide.

Following is a summary of significant factors affecting or related to our results of operations for the three months and six months ended July 3, 2010:

•

Our earnings before income taxes were $5.0 million in the second quarter of 2010, an improvement of $4.0 million from the first quarter of 2010, with higher earnings reported by each of our four segments. Our earnings before income taxes improved by $2.0 million in the second quarter of 2010 from the second quarter of 2009, and by $5.9 million in the first six months of 2010 compared with the first six months of 2009. Both LXE and Global Tracking reported higher earnings than in the prior year and the combined acquisition-related charges and amortization expense were substantially lower in 2010. For the second quarter and first six months of 2010, acquisition-related charges were lower by $1.3 million and $5.0 million, respectively, and amortization expense was lower by $0.9 million and $1.1 million, respectively, as compared with the same periods of 2009.

•

LXE had its best quarterly sales quarter since 2008, with $36.4 million in revenues, up 19% from the first quarter and 22% higher than the second quarter a year ago. This revenue improvement was mainly due to a resurgent Americas market. International revenues also increased, but at a much lower rate, as revenue and gross margins were pressured by a weaker Euro.

•

Net sales improved at Global Tracking mainly due to strong product sales in the security market and higher airtime revenues.

•

Defense & Space and Aviation each reported improved earnings in the second quarter of 2010 compared to the first quarter. Strong program execution drove the improvement at Defense & Space and strong demand for military SwiftBroadband provided the improvement at Aviation. However, each segment reported lower revenue and earnings compared to comparable periods in 2009. Defense & Space completed a large military satellite communications research project in 2009. Sales of aviation products in 2010 reflect the current state of commercial aviation markets — especially for business jets and for air-to-ground connectivity to airlines. Shipment of new military orders was a positive factor for Aviation as over one-third of Aviation’s orders in the second quarter of 2010 related to intelligence, surveillance and reconnaissance applications, underscoring EMS’s market strength in this strategic area.

•

As certain of our markets continue to be impacted by the economy, they may face continuing pressures and risks. We expect that we will continue to be faced with these economic pressures at least through the end of 2010. These and other factors could cause a decline in expected future cash flows for one or more of our business units (including our recently acquired businesses), and as a result it is reasonably possible that we may be required to recognize an impairment loss related to goodwill or other long-lived assets in the future.

Results of Operations

The following table sets forth items from the consolidated statements of operations as reported and as a percentage of net sales (or product net sales and service net sales for product cost of sales and service cost of sales, respectively) for each period (in thousands, except percentages):

		Three Months Ended																Six Months Ended
		July 3								July 4								July 3								July 4
		2010								2009								2010								2009
Product net sales		$	73,350				82.9	%		$	75,906				78.3	%		$	140,909				82.2	%		$	144,698				76.5	%
Service net sales			15,127				17.1				21,032				21.7				30,470				17.8				44,518				23.5
Net sales			88,477				100.0				96,938				100.0				171,379				100.0				189,216				100.0
Product cost of sales			49,040				66.9				50,456				66.5				95,473				67.8				97,094				67.1
Service cost of sales			7,080				46.8				14,229				67.7				13,929				45.7				31,576				70.9
Cost of sales			56,120				63.4				64,685				66.7				109,402				63.9				128,670				68.0
Selling, general and administrative expenses			22,128				25.1				23,038				23.7				43,801				25.6				44,972				23.8
Research and development expenses			4,709				5.3				4,233				4.4				10,130				5.9				8,639				4.6
Impairment loss on goodwill related charges			—				—				—				—				384				0.2				—				—
Acquisition-related items			346				0.4				1,627				1.7				563				0.3				5,522				2.9
Operating income			5,174				5.8				3,355				3.5				7,099				4.1				1,413				0.7
Interest income			101				0.1				103				0.1				281				0.2				165				0.1
Interest expense			(542	)			(0.6	)			(667	)			(0.7	)			(1,019	)			(0.6	)			(1,288	)			(0.7	)
Foreign exchange gain (loss), net			244				0.3				235				0.2				(449	)			(0.3	)			(232	)			(0.1	)
Earnings before income taxes			4,977				5.6				3,026				3.1				5,912				3.4				58				—
Income tax (expense) benefit			(1,109	)			(1.2	)			160				0.2				(1,453	)			(0.8	)			160				0.1
Net earnings		$	3,868				4.4	%		$	3,186				3.3	%		$	4,459				2.6	%		$	218				0.1	%

Three Months ended July 3, 2010 and July 4, 2009:

Net sales of $88.5 million in the second quarter of 2010 were 8.7% lower than the $96.9 million in the second quarter of 2009. Lower net sales from our D&S and Aviation segments were partially offset by higher net sales from our LXE and Global Tracking segments. Net sales were lower at D&S mainly due to the conclusion of work performed on a significant military communications research project in the fourth quarter of 2009, and therefore not included in the 2010 results. Net sales were lower at Aviation primarily due to a lower volume of connectivity products and of Inmarsat high-speed data and antenna product shipments reflecting a slow-down in the air-transport, military and business jet markets, and lower shipments of Aviation’s other products as a customer nears completion of a significant project in the second quarter of 2010. LXE’s net sales in the second quarter of 2010 were $6.6 million higher than in the same period in 2009, an increase of 22%, with higher net sales in the Americas market and to a lesser extent in the International and new OEM markets. The increase in net sales at Global Tracking was primarily a result of the timing of revenue recognized on two long-term emergency management programs and an increase in airtime revenue as a result of a higher number of terminals in use from our asset-tracking product lines.

Product net sales of $73.4 million in the second quarter of 2010 were 3.4% lower than product net sales in the second quarter of 2009. This was primarily due to a lower volume of shipments of our connectivity and Inmarsat high-speed data and antenna products at Aviation, and lower product net sales at D&S, partially offset by an increase in product net sales from a higher number of terminals shipped by LXE, and additional net sales generated from our asset-tracking products at Global Tracking. Service net sales of $15.1 million in the second quarter of 2010 were 28.1% lower than service net sales in the same period in 2009, mainly due to the conclusion of significant work performed on a military communications research project by D&S partially offset by an increase in airtime revenue at Global Tracking generated from our asset-tracking product line acquired during the first quarter of 2009. As a result, product net sales comprised a higher percentage of total net sales in the second quarter of 2010 compared with the second quarter of 2009.

Overall cost of sales as a percentage of consolidated net sales was lower in the second quarter of 2010 compared with the same period of 2009 due to lower cost-of-sales percentages reported by three of our four reportable operating segments and a higher percentage of net sales generated from our LXE and Global Tracking segments, which have lower cost-of-sales percentages than our other two segments. Service cost of sales as a percentage of respective net sales was lower and product cost of sales as a percentage of respective net sales was relatively unchanged in the second quarter of 2010 compared with the same period in 2009. The decrease in the service cost-of-sales percentage was mainly due to a lower proportion of service revenues generated from our D&S segment, which has a higher service cost-of-sales percentage than our other three reportable operating segments.

SG&A expenses as a percentage of consolidated net sales was higher for the second quarter of 2010 compared with the second quarter in 2009. Actual expenses were $0.9 million lower in the second quarter of 2010 compared with the same period in 2009 mainly due to management’s cost reduction efforts, lower severances charges by approximately $0.4 million, and the favorable effect of changes in foreign currency exchange rates on our LXE international operations. These lower costs were partially offset by the additional marketing and selling costs related to the higher sales at LXE and Global Tracking, and the unfavorable effect of changes in foreign currency exchange rates on Aviation’s Canadian operations.

R&D expenses were $0.5 million higher in the second quarter of 2010 than in the comparable period in 2009 mainly due to additional R&D expenses at Aviation, D&S and LXE for the expansion of our technology base, and unfavorable effects of changes in foreign currency exchange rates on our Canadian operations.

Acquisition-related items included charges of $0.3 million in the second quarter of 2010. These costs were primarily for professional fees related to acquired research and development tax credits and an adjustment in the earn-out liability for changes in payments to be made for one of the acquisitions completed in the first quarter of 2009. Acquisition-related charges were $1.6 million in the second quarter of 2009. These costs were primarily related to professional fees for legal, due-diligence, valuation, and integration services for the acquisition of our Formation and Satamatics businesses (see Note 2 to the consolidated financial statements in this Quarterly Report for additional information on these business acquisitions).

The second quarter of 2010 included a $0.2 million foreign exchange net gain related to the conversion of assets and liabilities not denominated in the functional currency and related to changes in the fair value of forward contracts used to hedge against currency exposure.

We recognized income tax expense of $1.1 million in the second quarter of 2010 equal to 22% of earnings before income taxes. The Company’s 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 Company’s effective rate is much lower than the rate in the U.S. due to research-related tax benefits. In the three months ended July 3, 2010, the rate was higher than it otherwise would have been since tax benefits for certain loss jurisdictions have not been recognized. In addition, the effective rate in 2010 was higher than 2009 since the earnings in Canada in 2010 are expected to be subject to higher rates due to provincial taxes, and the rate used for U.S. taxable income is higher since certain key provisions of the U.S. tax law, including the research and development credit, have not been extended to be in effect for 2010 as of the end of the second quarter. If these provisions are extended, our effective tax rate will be lower for the remainder of 2010. However, we can make no assurances that these provisions will be extended to be in effect for 2010.

Six Months ended July 3, 2010 and July 4, 2009:

Net sales of $171.4 million in the first six months of 2010 were 9.4% lower than the $189.2 million in the same period in 2009. Lower net sales from our D&S and Aviation segments were partially offset by higher net sales from our LXE and Global Tracking segments. Net sales were lower at D&S mainly due to the conclusion of work performed on a significant military communications research project in the fourth quarter of 2009, and therefore not included in the 2010 results. Net sales were lower at Aviation primarily due to a lower volume of connectivity products and of Inmarsat high-speed data and antenna product shipments reflecting a slow-down in the air-transport, military and business jet markets, and lower shipments of Aviation’s other products as a customer nears completion of a significant project in the second quarter of 2010. LXE’s net sales in the first six months of 2010 were $13.2 million higher than in the same period in 2009, an increase of 24.5%, mainly due to higher net sales in the Americas market. Net sales were also higher, but to a lesser extent, in the International market, and from a new source of revenue from sales made directly to OEMs. The increase in net sales at Global Tracking was primarily a result of additional net sales generated from our asset-tracking product line acquired in February 2009.

Product net sales of $140.9 million in the first six months of 2010 were 2.6% lower than product net sales in the first six months of 2009. This was primarily due to lower net sales from a lower volume of shipments of our connectivity and Inmarsat high-speed data and antenna products at Aviation, and lower product net sales at D&S partially offset by an increase in product net sales from a higher number of terminals shipped by LXE, and additional net sales generated from our asset-tracking products at Global Tracking. Service net sales of $30.5 million in the first six months of 2010 were 31.6% lower than service net sales in the same period in 2009, mainly due to the conclusion of significant work performed on a military communications research project by D&S partially offset by an increase in airtime revenue generated from our asset-tracking product line acquired during the first quarter of 2009. As a result, product net sales comprised a higher percentage of total net sales in the first six months of 2010 compared with the first six months of 2009.

Overall cost of sales as a percentage of consolidated net sales was lower in the first six months of 2010 compared with the same period of 2009 due to lower cost-of-sales percentages reported by three of our four reportable operating segments and a higher percentage of net sales generated from our LXE and Global Tracking segments which have lower cost-of-sales percentages than our other two segments. Service cost of sales as a percentage of its respective net sales was lower and product cost of sales as a percentage of its respective net sales was relatively unchanged in the first six months of 2010 compared with the same period in 2009. The lower service cost-of-sales percentage was mainly due to a lower proportion of service revenues generated from our D&S segment, which has a higher service cost-of-sales percentage than our other three reportable operating segments.

SG&A expenses as a percentage of consolidated net sales increased for the first six months of 2010 compared with the first six months in 2009. Actual expenses were $1.2 million lower in the first six months of 2010 compared with the same period in 2009 mainly due to management’s cost reduction efforts, lower severances charges by approximately $1.0 million, and the favorable effect of changes in foreign currency exchange rates on our LXE international operations. These lower costs were partially offset by the additional costs related to the acquired product lines, and the unfavorable effect of changes in foreign currency exchange rates on Aviation’s Canadian operations.

R&D expenses were $1.5 million higher in the first six months of 2010 than in the comparable period in 2009 mainly due to additional R&D spending by each of our segments for the expansion of our technology base, and unfavorable effects of changes in foreign currency exchange rates on our Canadian operations.

Impairment loss on goodwill related charges was $0.4 million in the first six months of 2010. The charges included in this category represent the costs of engaging outside professionals for valuation and audit services related to the goodwill impairment analysis conducted in the first six months of 2010.

Acquisition-related items included charges of $0.6 million in the first six months of 2010. These costs were primarily for professional fees related to acquired research and development tax credits and an adjustment in the earn-out liability for changes in payments to be made for one of the acquisitions completed in the first quarter of 2009. Acquisition-related charges were $5.5 million in the first six months of 2009. These costs were primarily related to professional fees for legal, due-diligence, valuation, and integration services for the acquisition of our Formation and Satamatics businesses (see Note 2 to the consolidated financial statements in this Quarterly Report for additional information on these business acquisitions).

The first six months of 2010 included a $0.4 million foreign exchange net loss related to changes in the functional currency equivalent of assets and liabilities not denominated in the functional currency and related to changes in the fair value of forward contracts used to hedge against these currency exposures. The first six months of 2009 included a $1.4 million foreign exchange loss related to the funding of the Satamatics acquisition, which was required to be paid in British pounds sterling. The loss resulted from changes in foreign currency exchange rates from the date we funded the transaction to the date the acquisition was completed. Partially offsetting this loss in the first six months of 2009 were net gains from changes in the functional currency equivalent of assets and liabilities not denominated in the functional currency and changes in the fair value of forward contracts.

We recognized income tax expense of $1.5 million in the first six months of 2010 equal to 25% of earnings before income taxes. The Company’s 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 Company’s effective rate is much lower than the rate in the U.S. due to research-related tax benefits. In the six months ended July 3, 2010, the rate was higher than it otherwise would have been since tax benefits for certain loss jurisdictions have not been recognized. In addition, the effective rate in 2010 was higher than 2009 since the earnings in Canada in 2010 are expected to be subject to higher rates due to provincial taxes and the rate used for U.S. taxable income is higher since certain key provisions of the U.S. tax law, including the research and development credit, have not been extended to be in effect for 2010 as of the end of the second quarter.

Segment Analysis

Our segment net sales, cost of sales as a percentage of respective segment net sales, segment operating income (loss) and Adjusted EBITDA were as follows (in thousands, except percentages):

																		Percentage
		Three Months Ended								Six Months Ended								Increase (Decrease)
		July 3				July 4				July 3				July 4				Three				Six
		2010				2009				2010				2009				Months				Months
Net sales:
Aviation		$	25,338				33,408				51,524				67,920				(24.2)	%			(24.1	)
LXE			36,365				29,807				66,938				53,751				22.0				24.5
Defense & Space			16,758				25,189				33,292				52,097				(33.5	)			(36.1	)
Global Tracking			10,526				8,534				20,386				15,448				23.3				32.0
Less intercompany sales			(510	)			—				(761	)			—					2			—
Global Tracking external sales			10,016				8,534				19,625				15,448				17.4				27.0
Total		$	88,477				96,938				171,379				189,216				(8.7	)			(9.4	)
Cost of sales percentage:
Aviation			62.7	%			62.3				65.0				61.8				0.4				3.2
LXE			59.7				61.1				59.1				63.8				(1.4	)			(4.7	)
Defense & Space			74.5				80.6				76.0				79.4				(6.1	)			(3.4	)
Global Tracking			51.1				61.7				51.8				68.1				(10.6	)			(16.3	)
Total			63.4				66.7				63.9				68.0				(3.3	)			(4.1	)
Operating income (loss):
Aviation		$	1,816				3,799				2,125				8,865				(52.2	)			(76.0	)
LXE			2,077				214				2,969				(4,847	)			870.6					2
Defense & Space			1,694				2,301				2,612				5,193				(26.4	)			(49.7	)
Global Tracking			684				(4	)			838				(763	)				2				2
Corporate & Other			(1,097	)			(2,955	)			(1,445	)			(7,035	)				2				2
Total		$	5,174				3,355				7,099				1,413				54.2				402.4
Adjusted EBITDA (1)
Aviation		$	3,713				6,199				5,872				13,830				(40.1	)			(57.5	)
LXE			3,076				1,037				4,783				(2,988	)			196.6					2
Defense & Space			2,616				3,218				4,447				6,981				(18.7	)			(36.3	)
Global Tracking			1,808				1,598				2,762				1,738				13.1				58.9
Corporate & Other			(84	)			(606	)			718				(93	)				2				2
Total		$	11,129				11,446				18,582				19,468				(2.8	)			(4.6	)

Aviation: Net sales decreased by $8.1 million and $16.4 million in the second quarter and first six months of 2010, respectively, as compared with the same periods in 2009. The decrease in net sales was mainly due to a lower volume of shipments of Aviation’s connectivity and Inmarsat products in the second quarter and first six months of 2010. Shipments were lower for Aviation’s air-to-ground in-cabin connectivity products into the air transport market due to delays in customer orders resulting from changes in the airline’s rollout schedule of connectivity, and to a transition to a new buying pattern by our customer to acquire inventory as needed to meet scheduled installations instead of maintaining a stock of inventory of on-hand. Shipments were lower for Aviation’s other products as a customer nears completion of a significant project in the second quarter of 2010. Shipments were lower for Aviation’s other connectivity products due to the completion of a significant project in the second quarter of 2010. Shipments were lower for Aviation’s Inmarsat high-speed-data terminal and antenna products into the air transport, military and business jet markets reflecting a slow-down in those markets in the second quarter and first six months of 2010 as compared with the same periods of 2009. However, shipments of Inmarsat products to the military market were higher in the second quarter of 2010, approximately double, as compared with the first quarter of 2010, indicating a strong demand for Aviation’s products in that market.

Cost of sales as a percentage of net sales was higher for the second quarter and first six months of 2010 as compared with the second quarter and first six months of 2009. The cost-of-sales percentage was higher mainly due to lower production volume over which fixed costs were absorbed, and an unfavorable effect of changes in foreign currency exchange rates that affected our reported international costs in the second quarter and first six months of 2010, partially offset by a more favorable mix of Inmarsat products sold and lower amortization costs of intangible assets than the same periods of 2009.

Operating income decreased by $2.0 million and $6.7 million in the second quarter and first six months of 2010 as compared with the same periods in 2009, primarily as a result of lower net sales, and a higher cost-of-sales percentage in the second quarter and first six months of 2010. In addition, operating income was lower due to the unfavorable effects of foreign currency exchange rates in the first six months of 2010 and approximately $0.5 million of severance charges recorded in the second quarter of 2010. Operating income as a percentage of net sales was 7.2% and 11.4% in the second quarters of 2010 and 2009, respectively, and was 4.1% and 13.1% in the first six months of 2010 and 2009, respectively.

Adjusted EBITDA decreased by $2.5 million and $8.0 million in the second quarter and first six months of 2010 as compared with the same periods in 2009, respectively, due to a decrease in operating income. Adjusted EBITDA also decreased in the first six months of 2010 as compared with the same period of 2009 due to an unfavorable change in foreign currency gains and losses.

LXE: Net sales in the second quarter of 2010 were higher than each of the preceding five quarters, and increased by $5.8 million as compared with the first quarter of 2010, and $6.6 million as compared with the same period in 2009. Net sales were also higher in the first six months of 2010 by $13.2 million as compared with the first six months of 2009. Net sales increased in the Americas market and to a lesser extent in the International market in the second quarter and first six months of 2010, as compared with the same periods in 2009. The increase in net sales in the Americas market resulted primarily from a higher volume of terminals shipped in that market in response to a higher demand for rugged handheld computer products. The increase in net sales in the International market was mainly due to a higher volume of terminals shipped in that market partially offset by the unfavorable effect of changes in foreign currency exchange rates on the reported net sales from LXE’s International market. Sales generated from handheld computer products introduced in the fourth quarter of 2009 to the OEM market gained acceptance in certain service industries in 2010 and represents $1.9 million or 5.4% and $4.4 million or 6.6% of net sales in the second quarter and first six months of 2010, respectively.

Cost of sales as a percentage of net sales was lower in the second quarter and first six months of 2010 as compared with the same periods in 2009 mainly due to management’s efforts to reduce costs, a higher production volume over which fixed costs were absorbed, and a $0.7 million reduction in cost of sales for purchased items previously included in accounts payable that were determined to no longer be liabilities. Additional purchased items included in liabilities are being reviewed and are expected to be resolved in future periods, which could result in further reductions to cost of sales. The effects of these reductions in cost of sales as a percentage of net sales were partially offset by an unfavorable effect of changes in foreign currency exchange rates that affected our reported International net sales in the first six months of 2010. Revenues are generally denominated in the local functional currency but product costs are denominated in the U.S. dollar, which was stronger in the first six months of 2010 compared with the same period in 2009.

LXE generated operating income of $2.0 million and $3.0 million in the second quarter and first six months of 2010 as compared with operating income of $0.2 million in the second quarter of 2009, and an operating loss of $4.8 million in the first six months of 2009. This increase in operating income in 2010 was mainly a result of the margin delivered by the higher net sales. In addition, operating income increased as a result of a more favorable cost-of-sales percentage. These increases in operating income were partially offset by higher R&D expenses reflecting the development of three new products to be released later in 2010. SG&A expenses were $0.6 million higher in the second quarter of 2010, but were lower in the first six months of 2010 by $0.4 million as compared with the same periods of 2009. SG&A expenses were higher in the second quarter of 2010 mainly due to increased commissions and other selling expenses as a result of higher sales. Lower SG&A expenses for the first six months of 2010 were primarily a result of staff reductions to reduce LXE’s cost structure, the favorable effect of changes in foreign currency exchange rates on reported costs, and lower severance charges. Severance charges were lower by approximately by $1.3 million in the first six months of 2010 as compared with the same period in 2009. Operating income as a percentage of net sales was 5.7% and 0.7% in the second quarter of 2010 and 2009, respectively, and was 4.4% and negative 9.0% in the first six months of 2010 and 2009, respectively.

Adjusted EBITDA increased by $2.0 million and $7.8 million in the second quarter and first six months of 2010, respectively, as compared with the second quarter and first six months of 2009, mainly due to an increase in operating income in 2010.

Defense & Space: Net sales decreased by $8.4 million and $18.8 million in the second quarter and first six months of 2010, respectively, as compared with the same period of 2009 mainly due to work performed on military programs that were included in the second quarter and first six months of 2009, including a large military satellite communications research project, but that were completed in 2009 and will not contribute to net sales in future quarters. Order backlog of long-term contracts was $84.8 million at July 3, 2010, a decrease of $4.8 million from December 31, 2009. Order backlog consists of a higher percentage of production contracts than development contracts as of July 3, 2010 as compared with the order backlog as of July 4, 2009.

Cost of sales as a percentage of net sales was lower in the second quarter of 2010 than each of the preceding seven quarters, and was lower in the first six months of 2010 as compared with the first six months of 2009, mainly due to a favorable mix of contracts and production efficiencies gained on certain long-term defense-related projects in the second quarter and first six months of 2010. The cost-of-sales percentage for the second quarter and first six months of 2009 included approximately $0.5 million of severance changes which were not included in the first six months of 2010.

Operating income was lower by $0.6 million and $2.6 million in the second quarter and first six months of 2010, respectively, as compared with the second quarter and first six months of 2009. The lower operating income was mainly due to the decrease in net sales generated in the second quarter and first six months of 2010, and higher R&D expenses, partially offset by lower SG&A expenses. The lower SG&A costs reflect the impact of management’s cost reduction efforts initiated in 2009. Operating income as a percentage of net sales was 10.1% and 9.1% in the second quarter of 2010 and 2009, respectively, and was 7.8% and 10.0% in the first six months of 2010 and 2009, respectively.

Adjusted EBITDA decreased by $0.6 million and $2.5 million in the second quarter and first six months of 2010, respectively, as compared with the second quarter and first six months of 2009, mainly due to a decrease in operating income in 2010.

Global Tracking: Net sales increased by $2.0 million and $4.9 million in the second quarter and first six months of 2010, respectively, as compared with the same periods in 2009. The increase in net sales in the second quarter of 2010 was primarily a result of the completion of two long-term emergency management programs that triggered revenue recognition and an increase in airtime revenue as a result of a higher number of terminals in use from our asset-tracking product lines. The increase in net sales in the first six months of 2010 was mainly due to the net sales generated from our new asset-tracking product lines acquired on February 13, 2009, which contributed $2.9 million of additional net sales in the first six months of 2010, including higher airtime revenue, compared to the same period of 2009. Net sales included a higher concentration of product shipments to the security market in the second quarter and first six months of 2010 as compared with the second quarter and first six months of 2009, reflecting growth in that market.

Cost of sales as a percentage of net sales was lower for the second quarter and first six months of 2010 as compared with the same periods in 2009. The cost-of-sales percentage for the second quarter and first six months of 2010 included a more favorable sales mix, reflecting a growth in airtime revenue which has a lower cost-of-sales percentage than product net sales, and lower amortization costs of intangible assets than the same periods of 2009 mainly due to certain acquired intangible assets that were fully amortized after the second quarter of 2009.

Operating income increased by $0.7 million and $1.6 million in the second quarter and first six months of 2010, respectively, as compared with the same periods in 2009, primarily as a result of higher net sales and a lower cost-of-sales percentage, partially offset by higher SG&A costs. For the second quarter of 2010, these higher SG&A costs were mainly due to additional staff and marketing efforts to support the growth in the asset tracking business, and an increase in selling expenses resulting from the growth in net sales. For the first six months of 2010, these higher costs were primarily a result of the timing of the acquisition of our new product lines in the first quarter of 2009; the costs related to the newly acquired product lines were included in the operating results of our Global Tracking segment for the first six months of 2009 from the date of acquisition, but were included in the full six months of 2010. Operating income as a percentage of net sales was 6.5% and breakeven in the second quarter of 2010 and 2009, respectively and was 4.3% and a negative 4.9% in the first six months of 2010 and 2009, respectively.

Adjusted EBITDA increased by $0.2 million and $1.0 million in the second quarter and first six months of 2010, respectively, as compared with the second quarter and first six months of 2009 mainly due to an increase in operating income in 2010. The increase in Adjusted EBITDA for the first six months of 2010 as compared with the same period of 2009 was partially offset by an unfavorable change in foreign currency gains year over year.

Adjusted EBITDA

In addition to traditional GAAP financial measures, we also measure our performance based on the non-GAAP financial measure of earnings before interest expense, income taxes, depreciation and amortization, and before impairment loss on goodwill related charges, stock-based compensation, acquisition-related items and acquisition-related foreign exchange adjustments (“Adjusted EBITDA”). The following table is a reconciliation of net earnings (which is the most directly comparable GAAP operating performance measure) and earnings (loss) before income taxes by segment to Adjusted EBITDA for the three and six months ended July 3, 2010 and July 4, 2009 (in thousands):

		Aviation				LXE				D&S				GT				Corp & Other				Total
Three Months Ended July 3, 2010
Net earnings																						$	3,868
Income tax expense																							1,109
Earnings (loss) before income taxes		$	1,877				2,050				1,694				888				(1,532	)			4,977
Interest expense			4				1				—				1				536				542
Depreciation and amortization			1,752				951				865				899				312				4,779
Stock-based compensation			80				74				57				20				254				485
Acquisition-related items			—				—				—				—				346				346
Adjusted EBITDA		$	3,713				3,076				2,616				1,808				(84	)		$	11,129
Six Months Ended July 3, 2010
Net earnings																						$	4,459
Income tax expense																							1,453
Earnings (loss) before income taxes		$	1,805				2,833				2,616				934				(2,276	)			5,912
Interest expense			4				18				—				1				996				1,019
Depreciation and amortization			3,920				1,789				1,710				1,793				607				9,819
Impairment loss on goodwill related charges			—				—				—				—				384				384
Stock-based compensation			143				143				121				34				444				885
Acquisition-related items			—				—				—				—				563				563
Adjusted EBITDA		$	5,872				4,783				4,447				2,762				718			$	18,582
Three Months Ended July 4, 2009
Net earnings																						$	3,186
Income tax benefit																							(160	)
Earnings (loss) before income taxes		$	3,999				(22	)			2,301				239				(3,491	)			3,026
Interest expense			27				57				—				—				583				667
Depreciation and amortization			2,129				942				849				1,353				280				5,553
Stock-based compensation			44				60				68				6				395				573
Acquisition-related items			—				—				—				—				1,627				1,627
Adjusted EBITDA		$	6,199				1,037				3,218				1,598				(606	)		$	11,446
Six Months Ended July 4, 2009
Net earnings																						$	218
Income tax benefit																							(160	)
Earnings (loss) before income taxes		$	9,555				(5,160	)			5,193				(168	)			(9,362	)			58
Interest expense			70				142				—				—				1,076				1,288
Depreciation and amortization			4,132				1,908				1,655				1,900				565				10,160
Stock-based compensation			73				122				133				6				736				1,070
Acquisition-related items			—				—				—				—				5,522				5,522
Acquisition-related foreign exchange adjustment			—				—				—				—				1,370				1,370
Adjusted EBITDA		$	13,830				(2,988	)			6,981				1,738				(93	)		$	19,468