UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended July 2, 2011
Commission file number 0-6072
EMS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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Georgia
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58-1035424
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(State or other jurisdiction of incorporation or
organization)
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(IRS Employer ID Number)
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660 Engineering Drive, Norcross, Georgia
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30092
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(Address of principal executive offices)
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(Zip Code)
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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
þ
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:
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
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Smaller reporting company
o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
o
No
þ
The number of shares outstanding of each of the issuers classes of common stock, as of the close
of business on August 5, 2011:
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Class
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Number of Shares
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Common Stock, $0.10 par value
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15,551,048
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PART I
FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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EMS Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
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Three Months Ended
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Six Months Ended
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July 2
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July 3
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July 2
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July 3
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2011
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2010
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2011
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2010
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Product net sales
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$
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75,567
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71,879
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146,563
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138,080
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Service net sales
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15,472
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16,598
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29,513
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33,299
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Net sales
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91,039
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88,477
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176,076
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171,379
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Product cost of sales
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53,419
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48,066
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100,165
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93,311
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Service cost of sales
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7,828
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8,054
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14,642
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16,091
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Cost of sales
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61,247
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56,120
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114,807
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109,402
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Selling, general and administrative
expenses
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23,987
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22,128
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45,501
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43,801
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Research and development expenses
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6,921
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4,709
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12,595
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10,130
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Proxy contest and merger-related costs
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6,114
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6,834
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Impairment loss on goodwill related
charges
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384
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Acquisition-related items
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346
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563
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Operating (loss) income
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(7,230
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)
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5,174
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(3,661
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)
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7,099
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Interest income
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110
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101
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222
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281
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Interest expense
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(557
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)
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(542
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)
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(1,070
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)
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(1,019
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)
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Foreign exchange (loss) gain, net
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(104
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)
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244
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(283
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)
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(449
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)
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(Loss) earnings before income taxes
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(7,781
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)
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4,977
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(4,792
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)
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5,912
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Income tax (benefit) expense
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(1,337
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)
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1,109
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(742
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)
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1,453
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Net (loss) earnings
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$
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(6,444
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)
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3,868
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(4,050
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)
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4,459
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Net (loss) earnings per share:
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Basic
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$
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(0.42
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)
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0.25
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(0.27
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)
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0.29
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Diluted
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(0.42
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0.25
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(0.27
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0.29
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Weighted-average number of common
shares
outstanding:
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Basic
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15,304
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15,191
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15,267
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15,185
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Diluted
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15,304
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15,230
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15,267
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15,218
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See accompanying notes to interim unaudited consolidated financial statements.
2
EMS Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
(in thousands)
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July 2
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December 31
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2011
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2010
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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72,847
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55,938
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Trade accounts receivable, net of allowance for doubtful accounts of
$1,184 in 2011 and $1,389 in 2010
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63,608
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68,691
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Costs and estimated earnings in excess of billings on long-term
contracts
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24,247
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21,980
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Inventories
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48,731
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41,649
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Deferred income taxes
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2,317
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3,891
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Other current assets
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8,228
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7,319
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Total current assets
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219,978
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199,468
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Property, plant and equipment:
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Land
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1,150
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1,150
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Buildings and leasehold improvements
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19,463
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19,115
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Machinery and equipment
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123,086
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117,855
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Furniture and fixtures
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11,019
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10,850
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Total property, plant and equipment
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154,718
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148,970
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Less accumulated depreciation
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106,370
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100,587
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Net property, plant and equipment
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48,348
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48,383
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Deferred income taxes
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12,930
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11,845
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Goodwill
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60,554
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60,474
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Other intangible assets, net of accumulated amortization
of $32,510 in 2011 and $28,079 in 2010
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37,682
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41,319
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Costs and estimated earnings in excess of billings on long-term contracts
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8,538
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8,611
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Other assets
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2,898
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2,844
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Total assets
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$
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390,928
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372,944
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See accompanying notes to interim unaudited consolidated financial statements.
3
EMS Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited), continued
(in thousands, except share data)
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July 2
|
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December 31
|
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|
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2011
|
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2010
|
|
|
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LIABILITIES AND SHAREHOLDERS EQUITY
|
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Current liabilities:
|
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Current installments of long-term debt
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$
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1,559
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1,496
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Accounts payable
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35,135
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24,979
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Billings in excess of contract costs and estimated earnings on
long-term contracts
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|
6,293
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|
|
|
8,593
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|
Accrued compensation and related costs
|
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13,697
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|
|
|
20,626
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Deferred revenue
|
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11,130
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|
|
|
10,897
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Other current liabilities
|
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|
8,826
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|
|
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6,946
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|
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|
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Total current liabilities
|
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76,640
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|
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73,537
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|
|
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Long-term debt, excluding current installments
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40,109
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27,476
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Deferred income taxes
|
|
|
1,164
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|
|
|
4,859
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Other liabilities
|
|
|
11,711
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|
|
|
10,052
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|
|
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Total liabilities
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129,624
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|
|
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115,924
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Shareholders equity:
|
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Preferred stock of $1.00 par value per share; Authorized 10,000
shares; none issued
|
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Common stock of $0.10 par value per share; Authorized 75,000 shares;
issued and
outstanding 15,514 in 2011 and 15,311 in 2010
|
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|
1,551
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|
|
|
1,531
|
|
Additional paid-in capital
|
|
|
141,727
|
|
|
|
138,138
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|
Accumulated other comprehensive income foreign currency translation
adjustment
|
|
|
14,623
|
|
|
|
9,898
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|
Retained earnings
|
|
|
103,403
|
|
|
|
107,453
|
|
|
|
|
|
|
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Total shareholders equity
|
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|
261,304
|
|
|
|
257,020
|
|
|
|
|
|
|
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Commitments and contingencies
|
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|
|
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|
|
|
|
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|
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Total liabilities and shareholders equity
|
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$
|
390,928
|
|
|
|
372,944
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|
|
|
|
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|
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|
See accompanying notes to interim unaudited consolidated financial statements.
4
EMS Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
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Six Months Ended
|
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|
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July 2
|
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July 3
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2011
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|
2010
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(4,050
|
)
|
|
|
4,459
|
|
Adjustments to reconcile net earnings to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
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Depreciation and amortization
|
|
|
9,861
|
|
|
|
9,819
|
|
Deferred income taxes
|
|
|
(3,191
|
)
|
|
|
(119
|
)
|
Stock-based compensation expense
|
|
|
992
|
|
|
|
885
|
|
Change in fair value of contingent consideration liability
|
|
|
|
|
|
|
304
|
|
Excess tax benefits from stock-based compensation
|
|
|
(130
|
)
|
|
|
|
|
Payment for acquisition of business under contingent consideration
arrangement
|
|
|
(325
|
)
|
|
|
(1,248
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
6,742
|
|
|
|
(16,503
|
)
|
Costs and estimated earnings in excess of billings on long-term contracts
|
|
|
(1,708
|
)
|
|
|
(545
|
)
|
Billings in excess of costs and estimated earnings on long-term contracts
|
|
|
(2,304
|
)
|
|
|
3,035
|
|
Inventories
|
|
|
(6,407
|
)
|
|
|
(6,112
|
)
|
Accounts payable
|
|
|
9,897
|
|
|
|
4,105
|
|
Income taxes
|
|
|
1,596
|
|
|
|
316
|
|
Accrued compensation and retirement costs
|
|
|
(7,244
|
)
|
|
|
459
|
|
Deferred revenue
|
|
|
1,413
|
|
|
|
3,287
|
|
Other
|
|
|
85
|
|
|
|
4,041
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities in continuing operations
|
|
|
5,227
|
|
|
|
6,183
|
|
Net cash used in operating activities in discontinued operations
|
|
|
|
|
|
|
(8,810
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
5,227
|
|
|
|
(2,627
|
)
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(5,726
|
)
|
|
|
(3,820
|
)
|
Proceeds from sales of assets
|
|
|
356
|
|
|
|
24
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(5,370
|
)
|
|
|
(3,796
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net borrowings under revolving credit facility
|
|
|
13,500
|
|
|
|
12,000
|
|
Repayment of other debt
|
|
|
(804
|
)
|
|
|
(687
|
)
|
Deferred financing costs paid
|
|
|
|
|
|
|
(28
|
)
|
Payment for acquisition of business under contingent consideration
arrangement
|
|
|
(626
|
)
|
|
|
(5,952
|
)
|
Payments for repurchase and retirement of common shares
|
|
|
(121
|
)
|
|
|
(51
|
)
|
Excess tax benefits from stock-based compensation
|
|
|
130
|
|
|
|
|
|
Proceeds from exercises of stock options
|
|
|
2,738
|
|
|
|
13
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
14,817
|
|
|
|
5,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of changes in exchange rates on cash and cash equivalents
|
|
|
2,235
|
|
|
|
(1,241
|
)
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
16,909
|
|
|
|
(2,369
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
55,938
|
|
|
|
47,174
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
72,847
|
|
|
|
44,805
|
|
|
|
|
|
|
|
|
See accompanying notes to interim unaudited consolidated financial statements.
5
EMS Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
July 2, 2011 and July 3, 2010
1. Basis of Presentation
EMS Technologies, Inc. (EMS) designs, manufactures and markets products 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. EMSs products and services are focused on
the needs of the mobile information user, enabling 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 2010 consolidated financial statements to conform to the
2011 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, 2010.
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 and gains and losses during the period. Actual future results could differ
materially from those estimates.
The nature of the Companys customer arrangements to design, develop and manufacture
technologically advanced products may involve uncertainty related to the costs to complete overall
projects and the timing of completion of the critical phases of the projects, particularly when the
projects involve novel approaches and solutions and/or require sophisticated subsystems supplied or
cooperatively developed by third parties. The accounting for such arrangement requires significant
judgment regarding the ultimate amount to be realized from a revenue contract or the amount of
costs to be reimbursed by customers under funded development projects, and the overall costs to be
incurred. The consolidated financial results include managements estimates of these aspects of
such arrangements. Potential penalties under customer arrangements are reflected in the financial
statements based on managements assessment of the likelihood and amount of any such penalty. That
assessment often requires significant judgment by management. Under certain arrangements it is
reasonably possible that customers claims, including penalty provisions that may be contained
within the arrangements, could result in revised estimates of amounts that are materially different
than managements current estimates of amounts to be realized from a revenue contract, costs to be
incurred or amounts to be reimbursed under funded development projects in the near term.
Recently Adopted Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued guidance amending
and clarifying requirements for fair value measurements and disclosures in the 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
was effective for the Company in the first quarter of 2011. The adoption of ASU 2010-06 did not
have a material impact on the Companys consolidated financial statements.
6
In December 2010, the FASB issued ASU 2010-29,
Disclosure of Supplementary Pro Forma Information
for Business Combinations
. The amendments in this update specify that if a public entity presents
comparative financial statements, the entity should disclose revenue and earnings of the combined
entity as though the business combination(s) that occurred during the current year had occurred as
of the beginning of the comparable prior annual reporting period only. The amendments also expand
the supplemental pro forma disclosures under FASB Accounting Standards Codification
TM
(ASC) Topic 805,
Business Combinations
, to include a description of the nature and amount of
material, nonrecurring pro forma adjustments directly attributable to the business combination
included in the reported pro forma revenue and earnings. The amendments in this update are
effective prospectively for business combinations for which the acquisition date is on or after
January 1, 2011. The adoption of ASU 2010-29 did not have a material impact on the Companys
consolidated financial statements.
In October 2009 the FASB issued two accounting standards updates that change the requirements for
recognizing revenue for revenue arrangements with multiple elements. Both updates were adopted by
the Company on January 1, 2011, on a prospective basis. The effect of adoption was not material to
the Companys consolidated financial statements for the three and six months ended July 2, 2011.
The Company does not currently anticipate that the adoption will have a material effect on the
consolidated financial statements for the year ending December 31, 2011, since historically the
Company has not had significant aggregate deferrals of revenue related to multiple-element
arrangements for which revenue would be recognized earlier under the new ASUs. However, the actual
effect on the consolidated financial statements will depend on the specific types of
multiple-element arrangements into which the Company enters in the future and the terms and
conditions contained therein.
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. 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 multiple-element revenue arrangements into which the Company enters or that are materially
modified after adoption of the new standards updates on January 1, 2011, the Company recognizes
revenue separately for each separate unit of accounting per the guidance contained in the new
standards updates. To recognize revenue for an element that has been delivered when other elements
within the arrangement have not been delivered, the delivered element must be determined to be a
separate unit of accounting. For a delivered item to qualify as a separate unit of accounting, it
must have standalone value apart from the undelivered item. For arrangements with tangible
products that contain software components that function together to deliver the essential
functionality of the tangible product, these same separation criteria apply. For arrangements that
include software that is more than incidental and that
does not function together with a tangible product, the Company must also have vendor-specific
objective evidence of fair value of the undelivered item for the delivered item to be considered a
separate unit of accounting. When a delivered item is considered to be a separate unit of
accounting, the amount of revenue recognized upon delivery (assuming all other revenue recognition
criteria are met) is generally an allocation of the arrangement consideration based on the relative
selling price of the delivered item to the aggregate standalone selling prices of all deliverables.
The amount of revenue to be recognized for a delivered item is limited to the amount of
consideration that is not contingent upon delivery of the other elements within the revenue
arrangement. When a delivered item is not considered a separate unit of accounting, revenue is
deferred and generally recognized as the undelivered item qualifies for revenue recognition.
7
In multiple-element revenue arrangements into which the Company entered prior to January 1, 2011,
the Company recognizes revenue separately for each separate unit of accounting per the guidance
that existed prior to the new standards updates. To recognize revenue for an element that has been
delivered when other elements within the arrangement have not been delivered, the delivered element
must be determined to be a separate unit of accounting. For a delivered item to qualify as a
separate unit of accounting, it must have standalone value apart from the undelivered item, and
there must be objective evidence of the fair value of the undelivered item. For arrangements that
include software that is more than incidental, the undelivered item must have vendor-specific
objective evidence of fair value. When a delivered item is considered to be a separate unit of
accounting, the amount of revenue recognized upon delivery (assuming all other revenue recognition
criteria were met) is generally an allocation of the arrangement consideration based on the
relative fair value of the delivered item to the aggregate fair value of all deliverables. If the
Company cannot determine the fair value of the delivered item, the residual method is used to
determine the amount of the arrangement consideration to allocate to the delivered item. When a
delivered item is not considered a separate unit of accounting, revenue is deferred and generally
recognized as the undelivered item qualifies for revenue recognition.
The following describes the primary multiple-element revenue arrangements into which the Company
generally enters and certain provisions relevant to the accounting under the new accounting
standards updates:
|
|
|
Certain arrangements require that the Company design and develop technology
products to specifications provided by the customer and manufacture and deliver the
technology products. Such arrangements may also include services. These arrangements
generally do not fall under the guidelines of the new accounting standards updates, but are
accounted for in accordance with specific accounting guidance for construction-type and
production-type contracts for which specifications are provided by the customer, generally
following the percentage-of-completion method of accounting. If an arrangement includes
post-contract support, revenue for the support services is generally recognized on the
straight-line basis over the period of support.
|
|
|
|
Other customer arrangements include the delivery of a standard product and a
related service contract that provides warranty and product maintenance over periods
ranging from one to three years. Generally, the products are considered a separate unit of
accounting, and revenue is recognized upon delivery. The service contracts are accounted
for as separately priced extended warranty and product maintenance contracts and the
revenue is deferred based on the stated contract price and recognized in income on a
straight-line basis over the contract period.
|
|
|
|
The Company also enters arrangements under which the Company delivers a
standard product and one or more services, such as, installation, training certification,
airtime and support. Under certain of these arrangements, the product and certain services
are considered a single unit of accounting since the product does not have standalone value
without the related services. Under such arrangements the revenue is recognized for that
combined unit of accounting when the revenue recognition criteria are met for the services.
In other arrangements, the product does have standalone value without the service, in
which case the revenue is recognized when the recognition criteria are met for that unit of
accounting. The arrangement consideration is allocated to the units of accounting based on
the relative selling prices of each element on a standalone basis. The standalone selling
prices for each element are determined based on the best available information for each
element of the arrangement. Many of the Companys products and services are sold in
standalone transactions, in which case the Company uses the selling prices in those
standalone sales transactions to comparable customers for the standalone selling prices.
Such standalone
sales are considered vendor specific objective evidence of selling price. For products and
services for which the Company has no, or limited, standalone sales transactions, the
Company estimates standalone selling price using a combination of the limited standalone
sales, price lists, cost plus margins, standalone sales of similar products and stated
contract prices.
|
8
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2011, FASB issued Accounting Standards Update No. 2011-05,
Comprehensive Income:
Presentation of Comprehensive Income
(ASU 2011-05). ASU 2011-05 amends existing guidance by
allowing only two options for presenting the components of net earnings and other comprehensive
income: (1) in a single continuous financial statement, statement of comprehensive income or (2) in
two separate but consecutive financial statements, consisting of an income statement followed by a
separate statement of other comprehensive income. Also, items that are reclassified from other
comprehensive income to net earnings must be presented on the face of the financial statements. ASU
No. 2011-05 requires retrospective application, and it is effective for fiscal years beginning
after December 15, 2011. The Company will adopt the provisions of ASU 2011-05 in the first quarter
of 2012, and is currently evaluating which presentation option for the components of net earnings
and other comprehensive income will be used.
2. Plan of Merger
On June 13, 2011, the Company entered into an agreement and plan of merger (the Merger Agreement)
with Honeywell International Inc. (Honeywell), a Delaware corporation, and Egret Acquisition
Corp., a Georgia corporation and a wholly-owned subsidiary of Honeywell (Purchaser). Under the
terms of the Merger Agreement, Purchaser agreed to commence a tender offer (the Offer) to
purchase all of the issued and outstanding shares of common stock, $0.10 par value, of the Company
(the Shares) at a price of $33.00 per share (the Offer Price) in cash. Upon successful
completion of the Offer, the Purchaser will merge with and into the Company (the Merger) and the
Company will become a wholly owned subsidiary of Honeywell. At the effective time of the Merger,
each remaining outstanding Share not tendered in the Offer and for which dissenters rights have
not been perfected will be converted into the right to receive cash in an amount equal to the Offer
Price. All unvested stock options representing the right to purchase Shares will vest and become
exercisable prior to the acceptance for purchase of Shares in the Offer. At the effective time of
the Merger, each then outstanding option will be cancelled and will represent the right to receive
an amount in cash equal to the excess, if any, of the Offer Price over the exercise price of such
option. In addition, immediately prior to the time of the acceptance for purchase of Shares in the
Offer, each share of restricted stock under the Companys equity incentive plans that is
outstanding shall become fully vested. The Companys Board of Directors has unanimously approved
the Merger Agreement and has recommended that shareholders tender their Shares into the Offer.
EMS and Honeywell will continue to operate separately until the transaction closes. The Merger
Agreement is subject to customary closing conditions and is expected to close in the third quarter
of 2011.
The Offer commenced on June 27, 2011 and is scheduled to expire at 5:30 p.m., New York City time,
on August 19, 2011, unless further extended or earlier terminated. Purchaser will accept and
promptly pay for each Share validly tendered, and not withdrawn, in accordance with the terms of
the Offer. The Purchasers obligation to accept for payment and pay for all Shares validly
tendered pursuant to the Offer is subject to (i) the condition that the number of Shares validly
tendered and not withdrawn represents at least a majority of the total number of Shares outstanding
at the expiration of the Offer on a fully diluted basis, and (ii) the satisfaction or waiver of
other customary closing conditions as set forth in the Merger Agreement, including the receipt of
necessary regulatory approval.
The Company has granted to Purchaser an irrevocable option, which Purchaser, subject to certain
conditions, may exercise after the consummation of the Offer (including any subsequent offering
period), to purchase such number of newly additional Shares at the Offer Price from the Company
such that, when added to the Shares already owned by Honeywell, Purchaser and their subsidiaries at
the time of such exercise, constitutes one more Share than 90% of the total number of Shares
outstanding on a fully diluted basis (the Top-up Option). The Top-Up Option is intended to
expedite the timing of the completion of the Merger. If the Purchaser acquires more than 90% of
the outstanding Shares in the Offer or through exercise of the Top-Up Option, it will complete the
Merger through the short form procedures available under Georgia law, which would not require the
Company to hold a meeting of its shareholders to vote on the adoption of the Merger Agreement. In
the event that Purchaser does not hold at least
90% of the outstanding Shares following the consummation of the Offer and the exercise of the
Top-Up Option, the Company must obtain the approval of its shareholders to consummate the Merger.
In this event, the Merger agreement would require the Company to call and convene a shareholder
meeting to obtain this approval, and Honeywell and Purchaser would vote all of the Shares owned by
them (including Shares acquired pursuant of the Offer) in favor of the adoption of the Merger
Agreement and the consummation of the Merger.
9
Effective upon the consummation of the Offer, the Purchaser will be entitled to designate a number
of directors, rounded up to the next whole number, on the Companys Board of Directors equal to the
product of (i) the total number of directors on the Companys Board of Directors and (ii) the
percentage that the number of Shares beneficially owned by Honeywell or Purchaser bears to the
number of Shares then outstanding, but in no event less than a majority of the number of directors.
However, Honeywell, Purchaser and the Company shall use their reasonable best efforts to ensure
that after the consummation of the Offer, at least three independent directors currently serving on
the Companys Board of Directors shall continue to be on the Companys Board of Directors until the
effective time of the Merger. The Merger Agreement contains customary representations and
warranties by the Company, Purchaser and Honeywell. The Merger Agreement also contains customary
covenants and agreements, including with respect to the operation of the business of the Company
and its subsidiaries between the signing of the Merger Agreement and the closing of the Merger,
restrictions on the solicitation of alternative acquisition proposals by the Company, changing the
Boards recommendation to the transaction, entering into another acquisition transaction,
governmental filings and approvals, and other matters.
The Merger Agreement contains certain termination rights for the Company, Purchaser and Honeywell,
including in the event that the Company terminates the agreement in order to accept a superior
proposal. In connection with the termination of the Merger Agreement under specified
circumstances, including with respect to the Companys entry into an agreement with respect to a
superior proposal, the Company may be required to pay Honeywell a termination fee equal to $19.6
million. In addition, in the event of termination of the Merger Agreement relating to Honeywells
failure to agree to certain required or requested actions in connection with obtaining antitrust
clearance and subject to other specified conditions, Honeywell may be required to pay the Company a
termination fee equal to $19.6 million. However, Honeywell has satisfied the competition law
condition of the Merger Agreement so this is unlikely to occur.
The foregoing description of the Offer, Merger and Merger Agreement is only a summary, does not
purport to be complete and is qualified in its entirety by reference to (i) the Merger Agreement, a
copy of which is filed as Exhibit 2.1 to the Companys Current Report on Form 8-K filed with the
SEC on June 13, 2011 and incorporated herein by reference, and is included to provide investors
with information regarding its terms, and (ii) the information contained in the Tender Offer
Statement on Schedule TO filed by Purchaser on June 27, 2011, as amended from time to time, and the
Solicitation/Recommendation Statement on Schedule 14D-9 filed by us with the SEC on June 27, 2011,
as amended from time to time.
3. Goodwill and Other Intangible Assets
The consolidated financial statements include the identifiable intangible assets and goodwill
resulting from acquisitions of businesses completed prior to 2010. The following table presents
the changes in the carrying amount of goodwill by reportable operating segment during the six
months ended July 2, 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
|
|
|
|
|
|
|
|
|
|
LXE
|
|
|
Tracking
|
|
|
Aviation
|
|
|
Total
|
|
Balance as of December 31, 2010
|
|
$
|
1,937
|
|
|
|
23,429
|
|
|
|
35,108
|
|
|
|
60,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of July 2, 2011
|
|
$
|
2,017
|
|
|
|
23,429
|
|
|
|
35,108
|
|
|
|
60,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had $21.0 million of accumulated impairment losses recorded on LXEs goodwill as
of July 2, 2011.
10
The following table presents the gross carrying amounts and accumulated amortization, in total and
by major intangible asset class, for the Companys intangible assets subject to amortization as of
July 2, 2011 and December 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 2, 2011
|
|
|
|
Gross
|
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology
|
|
$
|
42,115
|
|
|
|
21,905
|
|
|
|
20,210
|
|
Customer relationships
|
|
|
19,305
|
|
|
|
5,941
|
|
|
|
13,364
|
|
Trade names and trademarks
|
|
|
6,332
|
|
|
|
2,318
|
|
|
|
4,014
|
|
Other
|
|
|
2,440
|
|
|
|
2,346
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
70,192
|
|
|
|
32,510
|
|
|
|
37,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
|
Gross
|
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology
|
|
$
|
41,525
|
|
|
|
19,039
|
|
|
|
22,486
|
|
Customer relationships
|
|
|
19,164
|
|
|
|
4,787
|
|
|
|
14,377
|
|
Trade names and trademarks
|
|
|
6,281
|
|
|
|
1,961
|
|
|
|
4,320
|
|
Other
|
|
|
2,428
|
|
|
|
2,292
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
69,398
|
|
|
|
28,079
|
|
|
|
41,319
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to these intangible assets for the three months and six months
ended July 2, 2011 was $1.9 million and $3.9 million, respectively, and for the three months and
six months ended July 3, 2010 was $2.1 million and $4.1 million, respectively. Expected
amortization expense for the remainder of 2011 and for each of the five succeeding years is as
follows: 2011 $3.9 million, 2012 $8.0 million, 2013 $7.4 million, 2014 $3.9 million, 2015 -
$3.7 million and 2016 $3.5 million.
Amortization expense for intangible assets and other items included in cost of sales, selling,
general and administrative expense, and in research and development expenses for the three and six
months ended July 2, 2011 and July 3, 2010 are summarized in the following table (in millions of
dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 2
|
|
|
July 3
|
|
|
July 2
|
|
|
July 3
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
1.0
|
|
|
|
0.9
|
|
|
|
2.1
|
|
|
|
1.9
|
|
Selling, general and
administrative
|
|
|
1.0
|
|
|
|
1.4
|
|
|
|
1.9
|
|
|
|
2.3
|
|
Research and development
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense
|
|
$
|
2.1
|
|
|
|
2.4
|
|
|
|
4.1
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
4. Fair Value Measurements
The Company is required to disclose information about the estimated fair value of certain financial
and non-financial assets and liabilities in accordance ASC Topic 820,
Fair Value Measurements and
Disclosures
. This guidance indicates 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 is 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. Of the $71.5 million of cash and cash equivalents at July 2, 2011, $34.4 million was
held in Canada, $17.4 million was held in the U.K. and
$13.5 million was held in the Netherlands.
The Company uses derivative financial instruments, in the form of foreign currency forward
contracts (a single class of equity securities), 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 $24,000 net liability and $467,000 net asset as of
July 2, 2011 and December 31, 2010, respectively, are based on quoted market prices for similar
instruments using the income approach (a level 2 input) and are reflected at fair value 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 July 2, 2011 and December 31, 2010 of
$5.2 million and $5.7 million, respectively. The other mortgage has a 7.1% rate and a carrying
amount as of July 2, 2011 and December 31, 2010 of $2.0 million and $2.3 million, respectively.
The Companys outstanding borrowings under its revolving credit facility were $34.5 million as of
July 2, 2011. The estimated fair value of the Companys total debt was $40.9 million as of July 2,
2011 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, at the amount of unpaid principal.
Management believes that these assets and liabilities can be liquidated without restriction.
The Company had a contingent consideration liability for earn-out provisions resulting from an
acquisition completed in 2009. The contingency has since been settled and the remaining liability
of $0.9 million was paid in cash in the first quarter of 2011. The estimated fair value of this
contingent consideration liability was determined by applying a form of the income approach (a
level 3 input) based on the probability-weighted projected payment amounts discounted to present
value at a rate appropriate for the risk of achieving the milestones. There was no change in the
estimated fair value of this contingent consideration liability in the three months and six months
ended July 2, 2011, nor in the three months ended July 3, 2010. The estimated fair value of this
contingent consideration liability increased by $0.2 million in the three months ended July 3, 2010
and was included in acquisition-related items in the Companys consolidated statement of
operations.
12
5. Interim Segment Disclosures
The Company is organized into four reportable segments: LXE, Global Tracking, Aviation, and Defense
& Space (D&S). The Company determines operating segments in accordance with the Companys
internal management structure, which is organized based on products and services that share
distinct operating characteristics. Each segment is separately managed and is evaluated primarily
upon operating income and earnings before interest expense, income taxes, depreciation and
amortization (EBITDA).
The LXE segment manufactures mobile terminals and wireless data collection equipment for logistics
management systems. LXE operates mainly in three target 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). LXEs service revenue is mainly generated from product-related
repair contracts and extended warranty arrangements.
The Global Tracking segment provides satellite-based machine-to-machine mobile communications
equipment and services to track, monitor and control remote, mobile and fixed assets.
Additionally, Global Tracking provides equipment for the Cospas-Sarsat search-and-rescue system and
incident-management software for rescue coordination worldwide. Global Tracking service revenue is
mainly generated from airtime service contracts.
The Aviation segment designs and develops communications solutions through a broad array of
terminals and antennas for the aeronautical market that enable end-users in aircraft to communicate
over satellite and air-to-ground links. This segment also designs equipment to process data on
board aircraft, including rugged data storage, cabin-wireless connectivity, and air-to-ground
connectivity equipment. Aviation service revenue is generated mainly from product-related service
contracts, extended warranty arrangements, and airtime services.
The Defense & Space segment manufactures custom-designed, highly engineered subsystems and provides
design and development services on research projects for defense electronics and satellite
applications. These applications include products from military communications, RADAR,
surveillance and countermeasures to high-definition television, satellite radio, and live TV for
commercial airlines. D&S service revenue is mainly generated from projects that are limited to
design and development-related services, and from product-related service contracts.
Following is a summary of the Companys interim segment data (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 2
|
|
|
July 3
|
|
|
July 2
|
|
|
July 3
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LXE
|
|
$
|
37,801
|
|
|
|
36,365
|
|
|
|
74,020
|
|
|
|
66,938
|
|
Global Tracking
|
|
|
11,736
|
|
|
|
10,526
|
|
|
|
21,644
|
|
|
|
20,386
|
|
Less intercompany sales
|
|
|
(186
|
)
|
|
|
(510
|
)
|
|
|
(358
|
)
|
|
|
(761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Tracking external sales
|
|
|
11,550
|
|
|
|
10,016
|
|
|
|
21,286
|
|
|
|
19,625
|
|
Aviation
|
|
|
25,947
|
|
|
|
25,338
|
|
|
|
50,957
|
|
|
|
51,524
|
|
Defense & Space
|
|
|
15,741
|
|
|
|
16,758
|
|
|
|
29,813
|
|
|
|
33,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
91,039
|
|
|
|
88,477
|
|
|
|
176,076
|
|
|
|
171,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LXE
|
|
$
|
113
|
|
|
|
2,077
|
|
|
|
1,798
|
|
|
|
2,969
|
|
Global Tracking
|
|
|
1,190
|
|
|
|
684
|
|
|
|
1,395
|
|
|
|
838
|
|
Aviation
|
|
|
(2,867
|
)
|
|
|
1,816
|
|
|
|
(2,042
|
)
|
|
|
2,125
|
|
Defense & Space
|
|
|
292
|
|
|
|
1,694
|
|
|
|
724
|
|
|
|
2,612
|
|
Corporate & Other
|
|
|
(5,958
|
)
|
|
|
(1,097
|
)
|
|
|
(5,536
|
)
|
|
|
(1,445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(7,230
|
)
|
|
|
5,174
|
|
|
|
(3,661
|
)
|
|
|
7,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 2
|
|
|
July 3
|
|
|
July 2
|
|
|
July 3
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Earnings (loss) before income
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LXE
|
|
$
|
169
|
|
|
|
2,050
|
|
|
|
1,826
|
|
|
|
2,833
|
|
Global Tracking
|
|
|
1,184
|
|
|
|
888
|
|
|
|
1,343
|
|
|
|
934
|
|
Aviation
|
|
|
(2,943
|
)
|
|
|
1,877
|
|
|
|
(2,141
|
)
|
|
|
1,805
|
|
Defense & Space
|
|
|
292
|
|
|
|
1,694
|
|
|
|
724
|
|
|
|
2,616
|
|
Corporate & Other
|
|
|
(6,483
|
)
|
|
|
(1,532
|
)
|
|
|
(6,544
|
)
|
|
|
(2,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(7,781
|
)
|
|
|
4,977
|
|
|
|
(4,792
|
)
|
|
|
5,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
expenses for Corporate & Other in the three and six months ended July 2, 2011 included
professional fees, mainly related to the proxy contest initiated by one of our shareholders, the
review of strategic alternatives, and the proposed merger with Honeywell, and $0.8 million of
compensation expense related to an increase in the fair value of phantom stock awards granted the
Companys Directors, which together, was approximately $6.1 million and $6.8 million, respectively.
These expenses were partially offset by costs allocated from Corporate and Other to our operating
segments in those periods. We anticipate additional professional fees and transaction costs
related to the merger in the third quarter of 2011.
|
|
|
|
|
|
|
|
|
|
|
July 2
|
|
|
December 31
|
|
|
|
2011
|
|
|
2010
|
|
Assets:
|
|
|
|
|
|
|
|
|
LXE
|
|
$
|
96,020
|
|
|
|
78,588
|
|
Global Tracking
|
|
|
81,638
|
|
|
|
80,103
|
|
Aviation
|
|
|
153,041
|
|
|
|
149,834
|
|
Defense & Space
|
|
|
41,477
|
|
|
|
45,968
|
|
Corporate & Other
|
|
|
18,752
|
|
|
|
18,451
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
390,928
|
|
|
|
372,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentration of net assets by geographic
region:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
54,468
|
|
|
|
77,006
|
|
Canada
|
|
|
75,031
|
|
|
|
68,677
|
|
Europe
|
|
|
122,713
|
|
|
|
101,880
|
|
Other
|
|
|
9,092
|
|
|
|
9,457
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
261,304
|
|
|
|
257,020
|
|
|
|
|
|
|
|
|
Sales to no individual customer exceeded 10% of our net sales during the three months and six
months ended July 2, 2011, or July 3, 2010.
14
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 2
|
|
|
July 3
|
|
|
July 2
|
|
|
July 3
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average number of common shares
outstanding
|
|
|
15,304
|
|
|
|
15,191
|
|
|
|
15,267
|
|
|
|
15,185
|
|
Dilutive potential shares using the treasury share method
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average number of common shares
outstanding
|
|
|
15,304
|
|
|
|
15,230
|
|
|
|
15,267
|
|
|
|
15,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
1,281
|
|
|
|
1,008
|
|
|
|
971
|
|
|
|
1,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share is the per-share allocation of income available to common
shareholders based only on the weighted-average number of common shares actually outstanding during
the period. Diluted earnings per share represents the per-share allocation of income attributable
to common shareholders based on the weighted-average number of common shares actually outstanding
plus all potential common share equivalents outstanding during the period, if dilutive. The
Company uses the treasury stock method to determine diluted earnings per share. Potential dilutive
shares were excluded from the computation of diluted net loss per share for the three and six
months ended July 2, 2011 because the effect of their inclusion would have been anti-dilutive.
7. Comprehensive (Loss) Income
Following is a summary of comprehensive (loss) income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 2
|
|
|
July 3
|
|
|
July 2
|
|
|
July 3
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(6,444
|
)
|
|
|
3,868
|
|
|
|
(4,050
|
)
|
|
|
4,459
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
1,116
|
|
|
|
(5,056
|
)
|
|
|
4,725
|
|
|
|
(3,245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5,328
|
)
|
|
|
(1,188
|
)
|
|
|
675
|
|
|
|
1,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Inventories
Inventories as of July 2, 2011 and December 31, 2010 include the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 2
|
|
|
December 31
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
Parts and materials
|
|
$
|
30,942
|
|
|
|
24,996
|
|
Work-in-process
|
|
|
8,791
|
|
|
|
6,127
|
|
Finished goods
|
|
|
8,998
|
|
|
|
10,526
|
|
|
|
|
|
|
|
|
|
|
$
|
48,731
|
|
|
|
41,649
|
|
|
|
|
|
|
|
|
15
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 $4.1 million as of July 2, 2011, and $1.0 million as of December 31, 2010.
9. Revolving Credit Facility
As of July 2, 2011, the Company had $34.5 million of borrowings outstanding under its revolving
credit facility.
The Company has $2.9 million of standby letters of credit to satisfy performance guarantee
requirements under certain customer contracts. While these obligations are not normally called,
they could be called by the beneficiaries at any time before the expiration date should the Company
fail to meet certain contractual requirements. After
deducting outstanding letters of credit, as of July 2, 2011 the Company had $24.7 million available
for borrowing in the U.S. and $12.9 million available for borrowing in Canada under the revolving
credit agreement.
10. Warranty Liability
The Company provides a limited warranty for a variety of its products. The specific terms and
conditions of the warranties vary depending upon the specific products and markets. The Company
records a liability at the time of sale for the estimated costs to be incurred under warranties,
which is included in other current liabilities on the consolidated balance sheets. The amount of
this liability is based upon historical, as well as expected, experience. The warranty liability is
periodically reviewed for adequacy and adjusted as necessary. Following is a summary of the
activity for the periods presented related to the Companys liability for limited warranties (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 2
|
|
|
July 3
|
|
|
July 2
|
|
|
July 3
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Balance at beginning of the period
|
|
$
|
4,424
|
|
|
|
4,510
|
|
|
|
4,205
|
|
|
|
4,085
|
|
Accruals for warranties issued
during the period
|
|
|
966
|
|
|
|
849
|
|
|
|
1,921
|
|
|
|
2,056
|
|
Settlements made during the period
|
|
|
(848
|
)
|
|
|
(835
|
)
|
|
|
(1,584
|
)
|
|
|
(1,617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
4,542
|
|
|
|
4,524
|
|
|
|
4,542
|
|
|
|
4,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. Stock-Based and Other 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 $2.9 million and $2.4 million during the first six months ended July 2,
2011 and July 3, 2010, 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 of $0.5 million and $1.0
million in the three month and six month periods ended July 2, 2011, and $0.5 million and $0.9
million in three month and six month periods ended July 3, 2010, respectively, before income tax
benefits, for all the Companys stock plans.
On June 13, 2011, the Board of Directors approved an amendment to each of the Companys stock
incentive plans whereby upon a reorganization transaction, including a merger, consolidation, or
acquisition in which the outstanding shares of the Company are converted into cash, all outstanding
unvested stock options become fully vested and immediately exercisable at the commencement of a
tender offer. All outstanding stock options not exercised as of the occurrence of a reorganization
transaction shall be cancelled in exchange for payments of $33.00 in cash per option. If a
reorganization transaction does not close, the options that were unvested prior to the commencement
of a tender offer would again become unvested and vest over their stated vesting schedules. In
addition, all unvested restricted stock awards granted under the Companys stock incentive plans
that are outstanding immediately prior to the time of acceptance of the tender offer by Honeywell
will become fully vested and transferable upon the close of that tender offer as prescribed by the
Merger Agreement.
16
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. The three- and six-month periods ended July 2, 2011 each reflect a net tax benefit from
the loss before income taxes. The rate of the benefit is less than U.S. statutory rate since tax
benefits for certain loss jurisdictions have not been recognized and certain merger-related costs
may not be deductible for income tax purposes. The rate in both periods in 2010 is higher than it
otherwise would have been since tax benefits for certain loss jurisdictions had not been recognized
and the estimated rate used for U.S. taxable income was higher in 2010 since certain key provisions
of the U.S. tax law, including the research and development credit, had not been extended to be in
effect for tax year 2010 until the fourth quarter of 2010.
The Company is currently undergoing audits at the federal level in the U.S. for tax year 2009, in
Canada for the years 2006 and 2007 and in Germany for the years 2006 through 2008. 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. Litigation
On July 8, 2011, Victoria Shaev, filed a complaint (the Shaev Complaint) on behalf of herself and
as a putative class action on behalf of the Companys public shareholders against EMS, certain
members of the Board of Directors (the Individual Defendants), certain members of management,
Honeywell and Purchaser in the Superior Court of Fulton County of the State of Georgia. In the
Shaev Complaint, plaintiff alleges, among other things, that the Individual Defendants breached
their fiduciary duties in connection with the Offer and Merger by failing to engage in a fair sale
process and by providing materially misleading and incomplete information regarding the
transaction. The plaintiff also alleges that the Company, Parent and Purchaser have aided and
abetted the alleged breach of fiduciary duties. The Shaev Complaint seeks judicial action, among
other things, (i) declaring that the action is properly maintainable as a class action and
certifying plaintiff as class representative and plaintiffs counsel as class counsel, (ii)
preliminary and permanently enjoining defendants from effectuating the transaction, (iii) declaring
the transaction void and ordering rescission if the transaction is consummated, (iv) requiring
disgorgement and imposing a constructive trust on all property and profits that the defendants
receive as a result of their wrongful conduct, and (v) awarding damages, including rescissory
damages, and reasonable fees and expenses. The Company and the other defendants believe the
plaintiffs allegations lack merit, and are contesting them vigorously.
The Company is involved in various other claims and legal actions arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these matters will not have a
material adverse effect on the Companys consolidated financial position, results of operations or
cash flows.
17
|
|
|
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, 2010.
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:
|
|
|
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);
|
|
|
|
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;
|
|
|
|
Aviation
Designs and develops 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;
and
|
|
|
|
Defense & Space (D&S)
Supplies highly engineered subsystems for defense electronics
and sophisticated satellite applications from military communications, radar, surveillance
and countermeasures to commercial high-definition television, satellite radio, and live TV
for innovative airlines.
|
Plan of Merger
On June 13, 2011, the Company entered into an agreement and plan of merger (the Merger Agreement)
with Honeywell International Inc. (Honeywell), a Delaware corporation, and Egret Acquisition
Corp., a Georgia corporation and a wholly-owned subsidiary of Honeywell (Purchaser). Under the
terms of the Merger Agreement, Purchaser agreed to commence a tender offer (the Offer) to
purchase all of the issued and outstanding shares of common stock, $0.10 par value, of the Company
(the Shares) at a price of $33.00 per share (the Offer Price) in cash. Upon successful
completion of the Offer, the Purchaser will merge with and into the Company (the Merger) and the
Company will become a wholly owned subsidiary of Honeywell. At the effective time of the Merger,
each remaining outstanding Share not tendered in the Offer will be converted into a cash amount
equal to the Offer Price. All unvested stock options representing the right to purchase our common
stock will vest and become exercisable prior to the acceptance for
purchase of Shares in the Offer. At the effective time of the Merger, each then outstanding option will be cancelled and
will represent the right to receive an amount in cash equal to the excess, if any, of the Offer
Price over the exercise price of such option. In addition, at the time of the acceptance for
purchase of Shares in the Offer, each share of restricted stock under the Companys equity
incentive plans that is outstanding shall become fully vested. The Companys Board of Directors has
unanimously approved the Merger Agreement and has recommended that shareholders tender their Shares
into the Offer. EMS and Honeywell will continue to operate separately until the transaction
closes. The Merger Agreement is subject to customary closing conditions and is expected to close
in the third quarter of 2011. For further information on the Offer and Merger, refer to Note 2 of
our consolidated financial statements in this Quarterly Report.
18
The foregoing description of the Offer, Merger and Merger Agreement is only a summary, does not
purport to be complete and is qualified in its entirety by reference to (i) the Merger Agreement, a
copy of which is filed as Exhibit 2.1 to the Companys Current Report on Form 8-K filed with the
SEC on June 13, 2011 and incorporated herein by reference, and is included to provide investors
with information regarding its terms, and (ii) the information contained in the Tender Offer
Statement on Schedule TO filed by Purchaser on June 27, 2011, as amended from time to time, and the
Solicitation/Recommendation Statement on Schedule 14D-9 filed by us with the SEC on June 27, 2011,
as amended from time to time.
Following is a summary of significant factors affecting or related to our results of operations for
the three and six months ended July 2, 2011:
|
|
|
Consolidated net sales were $91.0 million and $176.1 million in the three and six months
ended July 2, 2011, up approximately 3% from the same periods in 2010, reflecting the
second highest second quarter and first six months sales in our history. The increase in
net sales was mainly driven by record sales achieved by our LXE segment for both periods in
2011, reflecting the continued improvement in the overall logistics market and the positive
effects of changes in its marketing strategy. Net sales also increased at Global Tracking
primarily from an increase in shipments of tracking product to the security market in both
periods of 2011. Net sales at our D&S segment were lower in the three and six months ended
July 2, 2011 as compared to the same period in 2010 mainly due to a decrease in activity on
certain development programs that were completed at the end of 2010. However, net sales
were higher in the second quarter of 2011 by $1.7 million as compared with the first
quarter of 2011 due to an acceleration in scheduled production activity for certain
programs. Net sales at Aviation were comparable in both periods.
|
|
|
|
Operating results for the second quarter and first six months of 2011 included charges
of $6.1 million and $6.8 million, respectively, for proxy contest and merger related costs.
These costs were primarily for professional fees related to the proxy contest initiated by
one of our shareholders, professional fees related to the review of various strategic
alternatives and costs related to the proposed merger with Honeywell. We anticipate
additional professional fees related to the merger in the third quarter of 2011.
|
|
|
|
On a consolidated basis, we incurred losses of $6.4 million and $4.1 million for the
three and six months ended July 2, 2011, respectively, despite positive net earnings
reported by three of our four segments. The net losses were mainly due to approximately $6
million for proxy contest and merger related costs, a $2.2 million net loss recorded by our
Aviation segment, and research and development costs and marketing expenses related to new
product introductions that were included in the second quarter of 2011. New products were
introduced by our LXE (the Thor
TM
vehicle-mount computer and the
Marathon
TM
field computer), Aviation (the Aspire line of satellite communication
equipment and the portable Airmail solutions) and Global Tracking (the OCC-600 operations
control console for emergency management applications) segments.
|
|
|
|
Certain of our markets continue to see the unfavorable impact of the economy, and they
are not immune to increasing pressures and risks. We expect that we will continue to be
faced with these economic pressures at least through 2011. The economy and other factors
could cause a decline in expected future cash flows for one or more of our business units,
and it is reasonably possible that we may be required to recognize impairment losses
related to goodwill or other long-lived assets.
|
19
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 2
|
|
|
July 3
|
|
|
July 2
|
|
|
July 3
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product net sales
|
|
$
|
75,567
|
|
|
|
83.0
|
%
|
|
$
|
71,879
|
|
|
|
81.2
|
%
|
|
$
|
146,563
|
|
|
|
83.2
|
%
|
|
$
|
138,080
|
|
|
|
80.6
|
%
|
Service net sales
|
|
|
15,472
|
|
|
|
17.0
|
|
|
|
16,598
|
|
|
|
18.8
|
|
|
|
29,513
|
|
|
|
16.8
|
|
|
|
33,299
|
|
|
|
19.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
91,039
|
|
|
|
100.0
|
|
|
|
88,477
|
|
|
|
100.0
|
|
|
|
176,076
|
|
|
|
100.0
|
|
|
|
171,379
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product cost of sales
|
|
|
53,419
|
|
|
|
70.7
|
|
|
|
48,066
|
|
|
|
66.9
|
|
|
|
100,165
|
|
|
|
68.3
|
|
|
|
93,311
|
|
|
|
67.6
|
|
Service cost of sales
|
|
|
7,828
|
|
|
|
50.6
|
|
|
|
8,054
|
|
|
|
48.5
|
|
|
|
14,642
|
|
|
|
49.6
|
|
|
|
16,091
|
|
|
|
48.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
61,247
|
|
|
|
67.3
|
|
|
|
56,120
|
|
|
|
63.4
|
|
|
|
114,807
|
|
|
|
65.2
|
|
|
|
109,402
|
|
|
|
63.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
|
23,987
|
|
|
|
26.3
|
|
|
|
22,128
|
|
|
|
25.1
|
|
|
|
45,501
|
|
|
|
25.9
|
|
|
|
43,801
|
|
|
|
25.6
|
|
Research and development
expenses
|
|
|
6,921
|
|
|
|
7.6
|
|
|
|
4,709
|
|
|
|
5.3
|
|
|
|
12,595
|
|
|
|
7.1
|
|
|
|
10,130
|
|
|
|
5.9
|
|
Proxy contest and
merger-related costs
|
|
|
6,114
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
6,834
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
Impairment loss on goodwill
related charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
384
|
|
|
|
0.2
|
|
Acquisition-related items
|
|
|
|
|
|
|
|
|
|
|
346
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
563
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(7,230
|
)
|
|
|
(7.9
|
)
|
|
|
5,174
|
|
|
|
5.8
|
|
|
|
(3,661
|
)
|
|
|
(2.1
|
)
|
|
|
7,099
|
|
|
|
4.1
|
|
Interest income
|
|
|
110
|
|
|
|
0.1
|
|
|
|
101
|
|
|
|
0.1
|
|
|
|
222
|
|
|
|
0.1
|
|
|
|
281
|
|
|
|
0.2
|
|
Interest expense
|
|
|
(557
|
)
|
|
|
(0.6
|
)
|
|
|
(542
|
)
|
|
|
(0.6
|
)
|
|
|
(1,070
|
)
|
|
|
(0.6
|
)
|
|
|
(1,019
|
)
|
|
|
(0.6
|
)
|
Foreign exchange(loss) gain, net
|
|
|
(104
|
)
|
|
|
(0.1
|
)
|
|
|
244
|
|
|
|
0.3
|
|
|
|
(283
|
)
|
|
|
(0.1
|
)
|
|
|
(449
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before income
taxes
|
|
|
(7,781
|
)
|
|
|
(8.5
|
)
|
|
|
4,977
|
|
|
|
5.6
|
|
|
|
(4,792
|
)
|
|
|
(2.7
|
)
|
|
|
5,912
|
|
|
|
3.4
|
|
Income tax (benefit) expense
|
|
|
(1,337
|
)
|
|
|
(1.4
|
)
|
|
|
1,109
|
|
|
|
1.2
|
|
|
|
(742
|
)
|
|
|
(0.4
|
)
|
|
|
1,453
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(6,444
|
)
|
|
|
(7.1
|
)%
|
|
$
|
3,868
|
|
|
|
4.4
|
%
|
|
$
|
(4,050
|
)
|
|
|
(2.3
|
)%
|
|
$
|
4,459
|
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended July 2, 2011 and July 3, 2010:
Net sales increased by 2.9% to $91.0 million from $88.5 million in the three months ended July 2,
2011 compared with the same period in 2010. Higher net sales from our LXE, Global Tracking and
Aviation segments were partially offset by lower net sales from our D&S segment. LXE reported
record second quarter net sales in the three months ended July 2, 2011 which were $1.4 million
higher than in the same period in 2010, due to a higher volume of terminal shipments and continued
growth in demand for rugged handheld computer products to OEM partners. Net sales were higher at
Global Tracking primarily as a result of higher shipments of tracking products to the security
market and an increase in service revenue from support contracts generated by emergency management
projects. Net sales were higher at Aviation mainly due to higher net sales from high-speed-data
aeronautical products mainly to OEM partners which offset lower net sales of in-cabin connectivity
products into the general aviation market. Net sales were lower at D&S mainly due to a decrease in
activity on design and development projects and a slow-down in the volume of orders received in
late 2010 and in 2011.
Product net sales increased by 5.1% to $75.6 million in the three months ended July 2, 2011 as
compared with the same period in 2010. Each of our four segments contributed to the $3.7 million
increase in product net sales in the three months ended July 2, 2011 with the most significant
increases contributed by our LXE and D&S segments. LXEs product shipments reached an all-time high
for second quarter sales in 2011, and D&S had an increase in activity mainly on a significant
commercial program to provide antenna products for airborne internet and cell phone service and on
a space program to provide component parts for the Iridium NEXT constellation in the second quarter
of 2011. Service net sales decreased by 6.8% to $15.5 million in the three months ending July 2,
2011 compared with the same period in 2010 mainly due to certain significant design and development
projects at D&S that were included in net sales in the three months ended July 3, 2010 but have
since concluded and were not included in its net sales in the three months ended July 2, 2011.
20
Overall cost of sales as a percentage of consolidated net sales was higher in the three months
ended July 2, 2011 compared with the same period in 2010 due to higher cost-of-sales percentages
reported by three of our four reportable operating segments. Product cost of sales and service
cost of sales, as a percentage of their respective net sales, were higher in the three months ended
July 2, 2011 compared with the same periods of 2010. Our product cost-of-sales percentage was
higher mainly due to a less favorable product mix and lower labor utilization rates at D&S, and a
less favorable product mix, an increase in contract costs on certain development programs, and an
unfavorable effect of changes in foreign currency exchange rates that affected our reported
international costs at Aviation in 2011. Our service cost-of-sales percentage was higher primarily
as a result of higher discounts on service contracts, and higher labor costs at LXE in 2011,
partially offset by 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.
Selling, general and administrative expenses as a percentage of consolidated net sales increased
for the three months ended July 2, 2011 compared with same period in 2010. Actual expenses
increased by $1.9 million in 2011 mainly from higher commissions and other selling expenses
resulting from the growth in net sales at LXE, an increase in marketing expenses related to new
products introductions in the second quarter of 2011 at LXE and Aviation, an unfavorable effect of
foreign currency exchange rates on LXE and Aviations international expenses, and higher
depreciation expense related to the upgrade of LXEs enterprise reporting system in 2011.
Research and development expenses were $2.2 million higher in the three months ended July 2, 2011
than in the comparable period in 2010 mainly due to additional expenses related to the development
of new products as well as the unfavorable effect of changes in foreign currency exchange rates on
our Canadian expenses.
Proxy contest and merger related costs included charges of $6.1 million in the second quarter of
2011. These costs were primarily for professional fees related to the proxy contest initiated by
one of our shareholders, professional fees related to the review of various acquisition
alternatives and transaction costs related to the proposed merger with Honeywell. These costs also
included $0.8 million of compensation expense related to an increase in the fair value of phantom
stock awards granted the Companys Directors. We anticipate additional professional fees and
transaction costs related to the merger in the third quarter of 2011.
We recognized income tax benefit of $1.4 million in the three months ended July 2, 2011, equal to
17% of the loss before income taxes, and income tax expense of $1.1 million in the three months
ended July 3, 2010, equal to 23% 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. The rate of the benefit
in 2011 is less than U.S. statutory rate since tax benefits for certain loss jurisdictions have not
been recognized and certain merger-related costs may not be deductible for income tax purposes.
The rate in 2010 is higher than it otherwise would have been since tax benefits for certain loss
jurisdictions had not been recognized and the estimated rate used for U.S. taxable income was
higher in 2010 since certain key provisions of the U.S. tax law, including the research and
development credit, had not been extended to be in effect for tax year 2010 until the fourth
quarter of 2010.
Six Months ended July 2, 2011 and July 3, 2010:
Net sales increased by 2.7% to $176.1 million from $171.4 million in the six months ended July 2,
2011 compared with the same period in 2010. Higher net sales from our LXE and Global Tracking
segments were partially offset by lower net sales from our D&S and Aviation segments. LXE reported
record net sales for the first six month period in the six months ended July 2, 2011 which were
$7.1 million higher than in the same period in 2010 mainly due to a higher volume of terminal
shipments and continued growth in demand for rugged handheld computer products to OEM in 2011. Net
sales were higher at Global Tracking primarily a result of higher shipments of tracking products to
the security market, an increase in service revenue from support contracts generated by emergency
management projects, and higher airtime revenues in the first six months of 2011 as compared with
the same period of 2010, mainly due an increase in the average revenue generated per terminal in
2011. Net sales were lower at D&S mainly due to a decrease in activity on design and development
projects and a slow-down in the volume of orders received in late 2010 and in 2011. Net sales were
lower at Aviation mainly due to a decrease in net sales of in-cabin connectivity products into the
general aviation market as orders continue to fluctuate due to changes in the airlines rollout
schedule of connectivity, and from fewer funded engineering projects in the first six months of
2011 as compared with the same period in 2010, partially offset by higher net sales of
high-speed-data aeronautical products as compared with the same period in 2010.
21
Product net sales increased by 6.1% to $146.6 million in the six months ended July 2, 2011 as
compared with the same period in 2010. Each of our four segments contributed to the $8.5 million
increase in product net sales in the six months ended July 2, 2011 with the most significant
increases contributed by our LXE segment. LXEs product shipments reached an all-time high for the
first six-month period in 2011 reflecting growth in net sales in the Americas, International and
OEM markets. Service net sales decreased by 11.4% to $29.5 million in the six months ending July
2, 2011 compared with the same period in 2010 mainly due to certain significant design and
development projects at D&S that were included in net sales in the six months ended July 3, 2010
but have since concluded and were not included in its net sales in the six months ended July 2,
2011, higher discounts on service contracts as a result of competitive pricing pressures mainly in
the international market, and a lower volume of funded engineering projects at Aviation in 2011.
Overall cost of sales as a percentage of consolidated net sales was higher in the six months ended
July 2, 2011 compared with the same period in 2010 due to higher cost-of-sales percentages reported
by each of our four reportable operating segments. Product cost of sales and service cost of
sales, as a percentage of their respective net sales, were higher in the six months ended July 2,
2011 compared with the same period in 2010. Our product cost-of-sales percentage was higher mainly
due to a less favorable product mix and lower labor utilization rates at D&S, and a less favorable
product mix, an increase in contract costs on certain development programs, and an unfavorable
effect of changes in foreign currency exchange rates that affected our reported international costs
at Aviation in 2011. Our service cost-of-sales percentage was higher primarily as a result of
higher discounts on service contracts, and higher labor costs at LXE in 2011, partially offset by 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.
Selling, general and administrative expenses as a percentage of consolidated net sales increased
for the six months ended July 2, 2011 compared with same period in 2010. Actual expenses increased
by $1.7 million in 2011 mainly from higher commissions and other selling expenses resulting from
the growth in net sales at LXE, an increase in marketing expenses related to new product
introductions in the second quarter of 2011 at LXE and Aviation, unfavorable effect of foreign
currency exchange rates on LXE and Aviations international expenses, and higher depreciation
expense related to the upgrade of LXEs enterprise reporting system in 2011.
Research and development expenses were $2.5 million higher in the six months ended July 2, 2011
than in the comparable period of 2010 mainly due to additional expenses related to the development
of new products as well as the unfavorable effect of changes in foreign currency exchange rates on
our Canadian expenses.
Proxy contest and merger related costs included charges of $6.8 million in the first six months of
2011. These costs were primarily for professional fees related to the proxy contest initiated by
one of our shareholders, professional fees related to the review of various acquisition
alternatives and transaction costs related to the proposed merger with Honeywell. These costs also
included $0.8 million of compensation expense related to an increase in the fair value of phantom
stock awards granted the Companys Directors. We anticipate additional professional fees and
transaction costs related to the merger in the third quarter of 2011.
We recognized income tax benefit of 0.8 million in the six months ended July 2, 2011, equal to 16%
of the loss before income taxes, and income tax expense of $1.5 million in the six months ended
July 3, 2010, equal to 25% of earnings before income taxes. The Companys effective income tax rate
is generally less than the amounts computed by applying the U.S. federal income tax rate of 34% due
to a portion of earnings being earned in Canada, where the Companys effective rate is much lower
than the rate in the U.S. due to research-related tax benefits. The rate of the benefit in 2011 is
less than U.S. statutory rate since tax benefits for certain loss jurisdictions have not been
recognized and certain merger-related costs may not be deductible for income tax purposes. The
rate in 2010 is higher than it otherwise would have been since tax benefits for certain loss
jurisdictions had not been recognized and the estimated rate used for U.S. taxable income was
higher in 2010 since certain key provisions of the U.S. tax law, including the research and
development credit, had not been extended to be in effect for tax year 2010 until the fourth
quarter of 2010.
22
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Increase (Decrease)
|
|
|
|
July 2
|
|
|
July 3
|
|
|
July 2
|
|
|
July 3
|
|
|
Three
|
|
|
Six
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Months
|
|
|
Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LXE
|
|
$
|
37,801
|
|
|
|
36,365
|
|
|
|
74,020
|
|
|
|
66,938
|
|
|
|
3.9
|
%
|
|
|
10.6
|
|
Global Tracking
|
|
|
11,736
|
|
|
|
10,526
|
|
|
|
21,644
|
|
|
|
20,386
|
|
|
|
11.5
|
|
|
|
6.2
|
|
Less intercompany sales
|
|
|
(186
|
)
|
|
|
(510
|
)
|
|
|
(358
|
)
|
|
|
(761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Tracking external sales
|
|
|
11,550
|
|
|
|
10,016
|
|
|
|
21,286
|
|
|
|
19,625
|
|
|
|
|
|
|
|
|
|
Aviation
|
|
|
25,947
|
|
|
|
25,338
|
|
|
|
50,957
|
|
|
|
51,524
|
|
|
|
2.4
|
|
|
|
(1.1
|
)
|
Defense & Space
|
|
|
15,741
|
|
|
|
16,758
|
|
|
|
29,813
|
|
|
|
33,292
|
|
|
|
(6.1
|
)
|
|
|
(10.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
91,039
|
|
|
|
88,477
|
|
|
|
176,076
|
|
|
|
171,379
|
|
|
|
2.9
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales percentage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LXE
|
|
|
62.4
|
%
|
|
|
59.7
|
|
|
|
61.6
|
|
|
|
59.1
|
|
|
|
2.7
|
|
|
|
2.5
|
|
Global Tracking
|
|
|
49.1
|
|
|
|
51.1
|
|
|
|
52.0
|
|
|
|
51.8
|
|
|
|
(2.0
|
)
|
|
|
0.2
|
|
Aviation
|
|
|
73.1
|
|
|
|
62.7
|
|
|
|
69.0
|
|
|
|
65.0
|
|
|
|
10.4
|
|
|
|
4.0
|
|
Defense & Space
|
|
|
79.5
|
|
|
|
74.5
|
|
|
|
77.9
|
|
|
|
76.0
|
|
|
|
5.0
|
|
|
|
1.9
|
|
Total
|
|
|
67.3
|
|
|
|
63.4
|
|
|
|
65.2
|
|
|
|
63.9
|
|
|
|
3.9
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LXE
|
|
$
|
113
|
|
|
|
2,077
|
|
|
|
1,798
|
|
|
|
2,969
|
|
|
|
(94.6
|
)
|
|
|
(39.4
|
)
|
Global Tracking
|
|
|
1,190
|
|
|
|
684
|
|
|
|
1,395
|
|
|
|
838
|
|
|
|
74.0
|
|
|
|
66.5
|
|
Aviation
|
|
|
(2,867
|
)
|
|
|
1,816
|
|
|
|
(2,042
|
)
|
|
|
2,125
|
|
|
|
|
(2)
|
|
|
|
(2)
|
Defense & Space
|
|
|
292
|
|
|
|
1,694
|
|
|
|
724
|
|
|
|
2,612
|
|
|
|
(82.8
|
)
|
|
|
(72.3
|
)
|
Corporate & Other
|
|
|
(5,958
|
)
|
|
|
(1,097
|
)
|
|
|
(5,536
|
)
|
|
|
(1,445
|
)
|
|
|
|
(2)
|
|
|
283.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(7,230
|
)
|
|
|
5,174
|
|
|
|
(3,661
|
)
|
|
|
7,099
|
|
|
|
(239.7
|
)
|
|
|
(151.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LXE
|
|
$
|
1,398
|
|
|
|
3,076
|
|
|
|
4,112
|
|
|
|
4,783
|
|
|
|
(54.6
|
)
|
|
|
(14.0
|
)
|
Global Tracking
|
|
|
2,165
|
|
|
|
1,808
|
|
|
|
3,275
|
|
|
|
2,762
|
|
|
|
19.7
|
|
|
|
18.6
|
|
Aviation
|
|
|
(810
|
)
|
|
|
3,713
|
|
|
|
1,959
|
|
|
|
5,872
|
|
|
|
(121.8
|
)
|
|
|
(66.6
|
)
|
Defense & Space
|
|
|
1,186
|
|
|
|
2,616
|
|
|
|
2,474
|
|
|
|
4,447
|
|
|
|
(54.7
|
)
|
|
|
(44.4
|
)
|
Corporate & Other
|
|
|
490
|
|
|
|
(84
|
)
|
|
|
2,145
|
|
|
|
718
|
|
|
|
|
(2)
|
|
|
198.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,429
|
|
|
|
11,129
|
|
|
|
13,965
|
|
|
|
18,582
|
|
|
|
(60.2
|
)
|
|
|
(24.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Adjusted EBITDA is a financial measure that is not defined within
generally accepted accounting principles (GAAP). See section entitled Adjusted EBITDA
for an explanation of this measure and a reconciliation of the measure to net earnings
(loss).
|
|
(2)
|
|
The percentage change is not calculable or not meaningful.
|
LXE:
Net sales for LXE reached an all-time high for second quarter and first six months sales in
the three and six months ended July 2, 2011. Net sales improved by $1.4 million and $7.1 million
in the second quarter and first six months of 2011, respectively, as compared with the same periods
in 2010. Net sales increased in the International market and to OEMs in both the second quarter
and first six months of 2011, as compared with the same periods in 2010. Net sales to the Americas
market were lower in the second quarter of 2011, and increased in the first six months of 2011 as
compared with the same periods in 2010 mainly due to the timing of shipments in those periods. The
improvement in net sales in both the second quarter and first six
months of 2011 was mainly due to a
higher volume of terminal shipments reflecting the continued improvement in the overall market in
2011, the continued success of LXEs marketing strategy to extend its market reach through channel
partners and distributors, and the strong demand for rugged handheld computer products which has
continued to gain acceptance in the OEM market. The improvement in net sales was also due to the
favorable effects of foreign currency translation on net sales due to the weaker U.S. dollar
relative to foreign currencies in the second quarter and first six months of 2011 as compared with
the same periods in 2010.
23
Cost of sales as a percentage of net sales was higher in the second quarter and first six months of
2011 as compared with the same periods of 2010 mainly due to a higher cost-of-sales percentage
related to LXEs service revenue in 2011. The increase in LXEs service cost-of-sales percentage
was mainly due to higher discounts on service contracts as a result of competitive pricing
pressures mainly in the international market, and higher labor costs for additional resources
needed in the second quarter of 2011 to address the repair order backlog that resulted during the
upgrade of LXEs enterprise reporting system in the first quarter of 2011.
LXE generated operating income of $0.1 million in the second quarter of 2011 as compared with $2.1
million in the second quarter of 2010. This decrease in operating income of $2.0 million was
mainly a result of a lower margin
contribution generated from a less favorable cost-of-sales percentage, higher commissions and other
selling expenses as a result of the higher net sales, an increase in marketing expenses related to
LXEs new products introductions, the Thor
TM
vehicle-mount computer and the
Marathon
TM
field computer, in the second quarter of 2011, and higher depreciation
expense related to the upgrade of LXEs enterprise reporting system in 2011. Operating income as a
percentage of net sales was 0.3% and 5.7% in the second quarter of 2011 and 2010, respectively, and
was 2.4% and 4.4% in the first six months of 2011 and 2010, respectively.
Adjusted EBITDA decreased by $1.7 million and $0.7 million in the second quarter and first six
months of 2011, respectively, as compared with the second quarter and first six months of 2010,
respectively, mainly due to a decrease in operating income in 2011. The decrease in Adjusted EBITDA
was partially offset by a favorable change in foreign currency gains and losses for the second
quarter and first six months of 2011 as compared with the same periods in 2010.
Global Tracking:
Net sales increased by $1.2 million and $1.3 million in the second quarter and
first six months of 2011, respectively, as compared with the same periods in 2010. The increase in
net sales was primarily a result of higher shipments of our tracking products mainly to the
security market in the second quarter and first six months of 2011 as compared with the same
periods in 2010, reflecting the continued strong demand for tracking and monitoring products in
that market and an increase in service revenue from support contracts generated by emergency
management projects in both periods. These increases in net sales were partially offset by lower
product revenues generated from emergency management projects. Airtime revenues were comparable in
the second quarter of 2011 and the second quarter of 2010. Airtime revenues increased in the first
six months of 2011 as compared with the same period in 2010, mainly due an increase in the average
revenue generated per terminal in 2011.
Cost of sales as a percentage of net sales was lower for the second quarter of 2011 as compared
with the second quarter of 2010 primarily due to a more favorable product mix. Cost of sales as a
percentage of net sales was relatively unchanged for the first six months of 2011 as compared with
the first six months of 2010.
Operating income increased by $0.5 million and $0.6 million in the second quarter and first six
months of 2011, respectively, as compared with the same periods in 2010, primarily as a result of
higher net sales, and lower selling, general and administrative expense in 2011, partially offset
by an increase in development expenses. Operating income also increased in the first six months of
2011 due to a higher contribution margin from the lower cost-of-sales percentage in 2011. The
lower selling, general and administrative expense was mainly due to lower administrative costs
allocated to the Global Tracking segment related to the Ottawa operation that is shared with the
Aviation segment. The increase in development expenses was mainly for design and development
efforts to enable existing tracking products to be compatible with other satellite platforms, and
for the development of Global Trackings latest operations control console, the OCC-600, for
emergency management applications. Operating income as a percentage of net sales was 10.1% and
6.5% in the second quarter of 2011 and 2010, respectively, and was 6.4% and 4.1% in the first six
months of 2011 and 2010, respectively.
24
Adjusted EBITDA increased by $0.4 million and $0.5 million in the second quarter and first six
months of 2011, respectively, as compared with the second quarter and first six months of 2010,
respectively, mainly due to an increase in operating income in 2011. The increase in Adjusted
EBITDA in both the second quarter and first six months of 2011 was partially offset by an
unfavorable change in foreign currency gains and losses in 2011.
Aviation:
Net sales increased by $0.6 million in the second quarter of 2011 as compared with the
second quarter of 2010, and decreased by $0.6 million in first six months of 2011 as compared with
the first six months of 2010. Net sales were higher in the second quarter and first six months of
2011 from high-speed-data aeronautical products mainly to OEM partners as compared with the same
periods in 2010. These higher net sales were partially offset in the second quarter of 2011, and
fully offset in the first six months of 2011, due to lower net sales of in-cabin connectivity
products into the general aviation market as orders continue to fluctuate due to changes in the
airlines rollout schedule of connectivity, and from fewer funded engineering projects in both the
second quarter and first six months of 2011 as compared with the same periods in 2010.
Cost of sales as a percentage of net sales was higher in the second quarter and first six months of
2011 as compared with the second quarter and first six months of 2010 mainly due to a less favorable
product mix, an increase in
contract costs on certain development programs, and an unfavorable effect of changes in foreign
currency exchange rates that affected our reported international costs in 2011.
Operating income decreased by $4.7 million and $4.2 million in the second quarter and first six
months of 2011 as compared with the same periods in 2010, respectively. The decrease in operating
income was primarily as a result of a lower margin contribution from the unfavorable changes in the
cost-of-sales percentage, and an increase in selling, general and administrative costs and higher
research development expenses. The decrease in operating income in the first six months of 2011
was also due to lower net sales generated in the first six months of 2011. The increase in
selling, general and administrative costs and higher research and development expenses was mainly
related to Aviations new product introductions in the second quarter of 2011, including the Aspire
line of satellite communication equipment and the portable Airmail solutions. In addition,
operating costs increased in 2011 as a result of an unfavorable effect of foreign currency exchange
rates, lower administrative costs allocated to the Global Tracking segment related to the Ottawa
operation that is shared with the Global Tracking segment. Operating results as a percentage of
net sales was a negative 11.0% and a positive 7.2% in the second quarter of 2011 and 2010,
respectively, and was a negative 4.0% and a positive 4.1% in the first six months of 2011 and 2010,
respectively.
Adjusted EBITDA decreased by $4.5 million and $3.9 million in the second quarter and first six
months of 2011, respectively, as compared with the second quarter and first six months of 2010,
respectively, mainly due to a decrease in operating income in 2011, partially offset by lower
amortization in 2011. The decrease in Adjusted EBITDA was also impacted by an unfavorable change
in foreign currency gains and losses in the second quarter of 2011 as compared with the second
quarter of 2010. But, the decrease in Adjusted EBITDA for the first six months of 2011 was
partially offset by a favorable change in foreign currency gains and losses as compared with the
same period of 2010.
Defense & Space
: Net sales were lower by $1.0 million and $3.5 million in the second quarter and
first six months of 2011 as compared with the same periods of 2010 mainly due to a decrease in
activity on certain development programs that were completed at the end of 2010, and lower labor
utilization rates resulting from a decrease in the number of programs available for near-term
efforts. These decreases were partially offset by an increase in activity on a significant
commercial program to provide antenna products for airborne internet and cell phone service and on
a space program to provide component parts for the Iridium NEXT constellation in the second quarter
of 2011. Net sales were also lower in the first six months of 2011 as compared with the same
period in 2010 due to an unfavorable impact of severe weather that resulted in fewer working days
in D&Ss Atlanta facility in the first quarter of 2011. However, net sales were higher in the
second quarter of 2011 by $1.7 million as compared with the first quarter of 2011 due to an
acceleration in scheduled production activity for certain programs to utilize excess short-term
capacity. Order backlog of long-term development and production contracts increased by $3.0 million
from December 31, 2010 to $76.1 million as of July 2, 2011. Other than a significant order for
component parts for the Iridium NEXT constellation, orders have been lower than expected during
2011. The low order volume and a less favorable contract mix is expected to cause operating
profits to be lower for D&S at least through the remainder of 2011 as compared with 2010.
25
Cost of sales as a percentage of net sales for second quarter and first six months of 2011 was
higher as compared with the same periods in 2010 mainly due to lower labor utilization rates and a
less favorable contract mix in 2011.
Operating income was lower by $1.4 million and $1.9 million in the second quarter and first six
months of 2011, respectively, as compared with the same periods in 2010. The lower operating
income was primarily due to the decrease in net sales generated in the second quarter and first six
months of 2011, and the less favorable cost-of-sales percentage in those periods. Operating income
was also lower due to increased sales commissions mainly due to higher commission fees related to
the order for component parts for the Iridium NEXT constellation, and higher research and
development costs to expand its technology base. Operating income as a percentage of net sales
was 1.9% and 10.1% in the second quarter of 2011 and 2010, respectively, and was 2.4% and 7.8% in
the first six months of 2011 and 2010, respectively.
Adjusted EBITDA decreased by $1.4 million and $2.0 million in the second quarter and first six
months of 2011, respectively, as compared with the second quarter and first six months of 2010,
respectively, mainly due to a decrease in operating income in 2011.
Supplemental Information
In February 2011, we formed EMS Global Resource Management, which is a combination of the LXE and
Global Tracking segments. We also have begun the alignment of Aviation and D&S as the
AeroConnectivity group. We have included the net sales, cost-of-sales (as a percentage of
respective market net sales), operating income (loss)
and Adjusted EBITDA for the three and six months ended July 2, 2011 and July 3, 2010 for these
groups as follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 2
|
|
|
July 3
|
|
|
July 2
|
|
|
July 3
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LXE
|
|
$
|
37,801
|
|
|
|
36,365
|
|
|
|
74,020
|
|
|
|
66,938
|
|
Global Tracking
|
|
|
11,550
|
|
|
|
10,016
|
|
|
|
21,286
|
|
|
|
19,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Resource
Management
|
|
|
49,351
|
|
|
|
46,381
|
|
|
|
95,306
|
|
|
|
86,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aviation
|
|
|
25,947
|
|
|
|
25,338
|
|
|
|
50,957
|
|
|
|
51,524
|
|
Defense & Space
|
|
|
15,741
|
|
|
|
16,758
|
|
|
|
29,813
|
|
|
|
33,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AeroConnectivity
|
|
|
41,688
|
|
|
|
42,096
|
|
|
|
80,770
|
|
|
|
84,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
91,039
|
|
|
|
88,477
|
|
|
|
176,076
|
|
|
|
171,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales percentage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LXE
|
|
|
62.4
|
%
|
|
|
59.7
|
|
|
|
61.6
|
|
|
|
59.1
|
|
Global Tracking
|
|
|
49.1
|
|
|
|
51.1
|
|
|
|
52.0
|
|
|
|
51.8
|
|
Global Resource
Management
|
|
|
59.2
|
|
|
|
57.8
|
|
|
|
59.4
|
|
|
|
57.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aviation
|
|
|
73.1
|
|
|
|
62.7
|
|
|
|
69.0
|
|
|
|
65.0
|
|
Defense & Space
|
|
|
79.5
|
|
|
|
74.5
|
|
|
|
77.9
|
|
|
|
76.0
|
|
AeroConnectivity
|
|
|
75.5
|
|
|
|
67.4
|
|
|
|
72.3
|
|
|
|
69.3
|
|
Total
|
|
|
67.3
|
|
|
|
63.4
|
|
|
|
65.2
|
|
|
|
63.9
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 2
|
|
|
July 3
|
|
|
July 2
|
|
|
July 3
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LXE
|
|
$
|
113
|
|
|
|
2,077
|
|
|
|
1,798
|
|
|
|
2,969
|
|
Global Tracking
|
|
|
1,190
|
|
|
|
684
|
|
|
|
1,395
|
|
|
|
838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Resource
Management
|
|
|
1,303
|
|
|
|
2,761
|
|
|
|
3,193
|
|
|
|
3,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aviation
|
|
|
(2,867
|
)
|
|
|
1,816
|
|
|
|
(2,042
|
)
|
|
|
2,125
|
|
Defense & Space
|
|
|
292
|
|
|
|
1,694
|
|
|
|
724
|
|
|
|
2,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AeroConnectivity
|
|
|
(2,575
|
)
|
|
|
3,510
|
|
|
|
(1,318
|
)
|
|
|
4,737
|
|
Corporate & Other
|
|
|
(5,958
|
)
|
|
|
(1,097
|
)
|
|
|
(5,536
|
)
|
|
|
(1,445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(7,230
|
)
|
|
|
5,174
|
|
|
|
(3,661
|
)
|
|
|
7,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LXE
|
|
$
|
1,398
|
|
|
|
3,076
|
|
|
|
4,112
|
|
|
|
4,783
|
|
Global Tracking
|
|
|
2,165
|
|
|
|
1,808
|
|
|
|
3,275
|
|
|
|
2,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Resource
Management
|
|
|
3,563
|
|
|
|
4,884
|
|
|
|
7,387
|
|
|
|
7,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aviation
|
|
|
(810
|
)
|
|
|
3,713
|
|
|
|
1,959
|
|
|
|
5,872
|
|
Defense & Space
|
|
|
1,186
|
|
|
|
2,616
|
|
|
|
2,474
|
|
|
|
4,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AeroConnectivity
|
|
|
376
|
|
|
|
6,329
|
|
|
|
4,433
|
|
|
|
10,319
|
|
Corporate & Other
|
|
|
490
|
|
|
|
(84
|
)
|
|
|
2,145
|
|
|
|
718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,429
|
|
|
|
11,129
|
|
|
|
13,965
|
|
|
|
18,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (a non-GAAP financial measure)
In addition to traditional financial measures determined in accordance with GAAP, we also measure
our performance based on the non-GAAP financial measure of earnings before interest expense, income
taxes, depreciation and amortization, and before stock-based compensation, impairment loss on
goodwill and related charges, acquisition-related items and proxy contest costs (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 2,
2011 and July 3, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
|
|
|
|
|
|
|
|
|
|
|
Corp &
|
|
|
|
|
|
|
LXE
|
|
|
Tracking
|
|
|
Aviation
|
|
|
D&S
|
|
|
Other
|
|
|
Total
|
|
Three Months Ended July 2, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(6,444
|
)
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes
|
|
$
|
169
|
|
|
|
1,184
|
|
|
|
(2,943
|
)
|
|
|
292
|
|
|
|
(6,483
|
)
|
|
|
(7,781
|
)
|
Interest expense
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
521
|
|
|
|
557
|
|
Depreciation and amortization
|
|
|
1,073
|
|
|
|
934
|
|
|
|
1,974
|
|
|
|
751
|
|
|
|
293
|
|
|
|
5,025
|
|
Stock-based compensation
|
|
|
75
|
|
|
|
25
|
|
|
|
93
|
|
|
|
88
|
|
|
|
233
|
|
|
|
514
|
|
Proxy contest costs
|
|
|
45
|
|
|
|
22
|
|
|
|
66
|
|
|
|
55
|
|
|
|
5,926
|
|
|
|
6,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
1,398
|
|
|
|
2,165
|
|
|
|
(810
|
)
|
|
|
1,186
|
|
|
|
490
|
|
|
$
|
4,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
|
|
|
|
|
|
|
|
|
|
|
Corp &
|
|
|
|
|
|
|
LXE
|
|
|
Tracking
|
|
|
Aviation
|
|
|
D&S
|
|
|
Other
|
|
|
Total
|
|
Six Months Ended July 2, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,050
|
)
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(742
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes
|
|
$
|
1,826
|
|
|
|
1,343
|
|
|
|
(2,141
|
)
|
|
|
724
|
|
|
|
(6,544
|
)
|
|
|
(4,792
|
)
|
Interest expense
|
|
|
60
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
1,007
|
|
|
|
1,070
|
|
Depreciation and amortization
|
|
|
2,032
|
|
|
|
1,861
|
|
|
|
3,852
|
|
|
|
1,524
|
|
|
|
592
|
|
|
|
9,861
|
|
Stock-based compensation
|
|
|
149
|
|
|
|
49
|
|
|
|
179
|
|
|
|
171
|
|
|
|
444
|
|
|
|
992
|
|
Proxy contest costs
|
|
|
45
|
|
|
|
22
|
|
|
|
66
|
|
|
|
55
|
|
|
|
6,646
|
|
|
|
6,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
4,112
|
|
|
|
3,275
|
|
|
|
1,959
|
|
|
|
2,474
|
|
|
|
2,145
|
|
|
$
|
13,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 3, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,868
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes
|
|
$
|
2,050
|
|
|
|
888
|
|
|
|
1,877
|
|
|
|
1,694
|
|
|
|
(1,532
|
)
|
|
|
4,977
|
|
Interest expense
|
|
|
1
|
|
|
|
1
|
|
|
|
4
|
|
|
|
|
|
|
|
536
|
|
|
|
542
|
|
Depreciation and amortization
|
|
|
951
|
|
|
|
899
|
|
|
|
1,752
|
|
|
|
865
|
|
|
|
312
|
|
|
|
4,779
|
|
Stock-based compensation
|
|
|
74
|
|
|
|
20
|
|
|
|
80
|
|
|
|
57
|
|
|
|
254
|
|
|
|
485
|
|
Acquisition-related items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
346
|
|
|
|
346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
3,076
|
|
|
|
1,808
|
|
|
|
3,713
|
|
|
|
2,616
|
|
|
|
(84
|
)
|
|
$
|
11,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended July 3, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,459
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes
|
|
$
|
2,833
|
|
|
|
934
|
|
|
|
1,805
|
|
|
|
2,616
|
|
|
|
(2,276
|
)
|
|
|
5,912
|
|
Interest expense
|
|
|
18
|
|
|
|
1
|
|
|
|
4
|
|
|
|
|
|
|
|
996
|
|
|
|
1,019
|
|
Depreciation and amortization
|
|
|
1,789
|
|
|
|
1,793
|
|
|
|
3,920
|
|
|
|
1,710
|
|
|
|
607
|
|
|
|
9,819
|
|
Impairment loss on goodwill
related charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
384
|
|
|
|
384
|
|
Stock-based compensation
|
|
|
143
|
|
|
|
34
|
|
|
|
143
|
|
|
|
121
|
|
|
|
444
|
|
|
|
885
|
|
Acquisition-related items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
563
|
|
|
|
563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
4,783
|
|
|
|
2,762
|
|
|
|
5,872
|
|
|
|
4,447
|
|
|
|
718
|
|
|
$
|
18,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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.
28
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 July 2, 2011 and
December 31, 2010 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 2
|
|
|
December 31
|
|
|
|
2011
|
|
|
2010
|
|
LXE
|
|
$
|
23,985
|
|
|
|
29,106
|
|
Global Tracking
|
|
|
16,490
|
|
|
|
15,449
|
|
Aviation
|
|
|
44,376
|
|
|
|
38,049
|
|
Defense & Space
|
|
|
76,112
|
|
|
|
73,058
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
160,963
|
|
|
|
155,662
|
|
|
|
|
|
|
|
|
Included in the backlog of firm orders for our D&S segment was approximately $2.9 million and
$4.0 million of unfunded orders, mainly for military contracts, as of July 2, 2011, and December
31, 2010, respectively. Of the orders in backlog as of July 2, 2011, the following are expected to
be filled in the following twelve months: Aviation 85%; LXE 60%; D&S 55%; and Global
Tracking 85%.
Liquidity and Capital Resources
During the six months ended July 2, 2011, net cash and cash equivalents increased by $16.9 million
mainly due to a $13.5 million increase in borrowings, $5.2 million of cash provided by operating
activities, and $2.7 million of cash from the exercise of stock options, partially offset by $5.7
million of cash used for capital expenditures during the six months ended July 2, 2011. Operating
activities contributed $5.2 million in positive cash flow primarily from earnings generated by
Global Tracking, D&S, and LXE, an increase in payables due to the timing of supplier payments, and
a decrease in receivables primarily from strong collections at D&S and Aviation. This was
partially offset by incentive compensation payments, and an increase in inventory balances mainly
at LXE and Aviation in the six months ended July 2, 2011 mainly to meet material requirements
anticipated for the third quarter of 2011.
In the first six months of 2011, we have incurred approximately $6.8 million of costs primarily
related to the proxy contest initiated by one of our shareholders, review of strategic alternatives
and the merger transaction with Honeywell of which $2.0 million was paid in the first six months of
2011. We anticipate additional professional fees and transaction costs related to the merger in the
third quarter of 2011.
Of the $72.8 million of cash as of July 2, 2011, $71.5 million is held by subsidiaries outside of
the U.S. These undistributed earnings are considered to be permanently reinvested and are not
available for use in the U.S. We do not intend to repatriate such holdings to the U.S.; however,
if we did, some portion of any such repatriated holdings would be subject to income tax in the U.S.
During the first six months of 2010, net cash and cash equivalents decreased by $2.4 million to
$44.8 million as of July 3, 2010. The $7.4 million of positive cash flow contributed by operating
activities excluding the portion of the payment for the contingent consideration agreement, and the
additional $12.0 million of borrowings from our revolving credit facility was offset by an $8.6
million payment for the final award related to claims made by the purchaser of our former EMS
Wireless division, a $7.2 million payment for the contingent consideration agreement related to one
of the acquisitions completed in 2009, and $3.8 million of capital expenditures.
Operating activities contributed $6.7 million in positive cash flows in the first six months of
2010. We reported net earnings for the period of $4.5 million and the level of noncash charges,
primarily for depreciation and amortization, exceeded increases in working capital. The growth in
our business in the second quarter of 2010 resulted in increases in receivables from customers and
inventories.
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.
29
As of July 2, 2011, we had $34.5 million of borrowings outstanding, $2.9 million of outstanding
letters of credit, and $37.6 million available borrowing capacity under the revolving credit
facility. As of July 2, 2011, we were in compliance with all the covenants under the credit
agreement.
We expect that capital expenditures in 2011 will range from $10 million to $15 million, excluding
acquisitions of businesses. These expenditures are being used to purchase equipment that enhances
productivity, or is being used for new product introductions, and the replacement of the enterprise
reporting systems of our Global Tracking segment.
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.
Off-Balance Sheet Arrangements
We have $2.9 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, as of July 2, 2011 we had $24.7 million available for borrowing in
the U.S. and $12.9 million available for borrowing in Canada under the revolving credit facility.
Commitments and Contractual Obligations
As of July 2, 2011, 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, 2010.
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, 2010.
In the six months ended July 2, 2011, the Company adopted ASU 2009-13,
Revenue Recognition
Multiple-Deliverable Revenue Arrangements
, and ASU 2009-14,
Software Certain Revenue
Arrangements That Include Software Elements
. Refer to Note 1 to the consolidated financial
statements in this Quarterly Report on Form 10-Q for a description of these updates. The effect
of adoption was not material to the consolidated financial statements for the three and six months
ended July 2, 2011. We do not currently anticipate that the adoption will have a material effect
on the consolidated financial statements for the year ending December 31, 2011, since historically
we have not had significant aggregate deferrals of revenue related to multiple-element arrangements
for which revenue would be recognized earlier under the new ASUs. However, the actual effect on
the consolidated financial statements will depend on the specific types of multiple-element
arrangements into which we enter in the future and the terms and conditions contained therein.
There have been no other significant changes in our critical accounting policies since the end of
2010.
30
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, potential business combinations, 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:
|
|
|
failure to consummate the proposed merger of the Company with Honeywell;
|
|
|
|
the time required of our management and employees, the general disruption to
our operations, and additional cost due to the proposed merger transaction with Honeywell;
|
|
|
|
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 deferred tax assets are considered
realizable;
|
|
|
|
successful transition of products from development stages to an efficient
manufacturing environment;
|
|
|
|
changes in the rate at which our products are returned for repair or
replacement under warranty;
|
|
|
|
customer response to new products and services, and general conditions in our
target markets (such as logistics, and space-based communications), and whether these
responses and conditions develop according to our expectations;
|
|
|
|
the increased potential for asset impairment charges as unfavorable economic or
financial market conditions or other developments might affect the estimated fair value of
one or more of our business units;
|
|
|
|
the success of certain of our customers in marketing our line of high-speed
commercial airline communications products as a complementary offering with their own lines
of avionics products;
|
|
|
|
the continued availability of financing for various mobile and high-speed data
communications systems;
|
31
|
|
|
risk that changes 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 Quarterly Report on Form 10-Q, and in our Annual Report on
Form 10-K for the year ended December 31, 2010.
32
|
|
|
Item 3.
|
|
Quantitative and Qualitative Disclosures about Market Risk
|
As of July 2, 2011, we had the following market-risk sensitive instruments (in thousands):
|
|
|
|
|
Money market funds with interest payable monthly at variable
rates and interest-bearing time deposits with interest payable
upon maturity (a weighted-average rate of 1.1% at July 2, 2011)
|
|
$
|
30,318
|
|
|
|
|
|
|
Revolving credit agreement with U.S. and Canadian banks, maturing
in February 2013, interest payable quarterly at a variable rate
(4.00% at July 2, 2011)
|
|
|
34,500
|
|
A 100 basis-point change in the interest rates of our market-risk sensitive instruments would have
changed interest income by approximately $78,000 for the three months ended July 2, 2011 based upon
their respective average outstanding balances.
Our revolving credit agreement includes variable interest rates based on the lead banks prime rate
or the then-published LIBOR for the applicable borrowing period. As of July 2, 2011, we had
approximately $34.5 million of borrowings outstanding in the U.S., and no borrowings outstanding in
Canada under our revolving credit agreement. A 100 basis-point change in the interest rate on our
revolving credit agreement would have changed interest expense by approximately $74,000 for the
three months ended July 2, 2011 based upon the average outstanding borrowings under these
obligations.
As of July 2, 2011, 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
|
|
|
Receivable /
|
|
|
|
|
|
|
|
Functional
|
|
|
(Payable)
|
|
|
|
|
|
|
|
Currency per
|
|
|
USD
|
|
Currency
|
|
Functional
|
|
|
Denominated
|
|
|
Equivalent
|
|
Denomination
|
|
Currency
|
|
|
Currency
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AUD
|
|
CAD
|
|
|
1.0348
|
|
|
$
|
4,677
|
|
USD
|
|
CAD
|
|
|
0.9585
|
|
|
|
(2,211
|
)
|
USD
|
|
EUR
|
|
|
0.6884
|
|
|
|
(1,136
|
)
|
USD
|
|
SEK
|
|
|
6.2634
|
|
|
|
(397
|
)
|
Other currencies
|
|
|
|
|
|
|
|
|
|
|
(388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
We had accounts receivable and accounts payable balances denominated in currencies other than
the functional currency of the local entity at July 2, 2011 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange Rate
|
|
|
|
|
|
|
|
|
|
|
Functional
|
|
|
|
|
|
|
|
|
|
|
Currency per
|
|
|
USD
|
|
Currency
|
|
Functional
|
|
|
Denominated
|
|
|
Equivalent
|
|
Denomination
|
|
Currency
|
|
|
Currency
|
|
|
(in thousands)
|
|
Accounts
Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
USD
|
|
CAD
|
|
|
0.9585
|
|
|
$
|
16,525
|
|
USD
|
|
SEK
|
|
|
6.2972
|
|
|
|
531
|
|
USD
|
|
EUR
|
|
|
0.6884
|
|
|
|
458
|
|
GBP
|
|
EUR
|
|
|
1.1062
|
|
|
|
444
|
|
Other
currencies
|
|
|
|
|
|
|
|
|
|
|
1,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
USD
|
|
CAD
|
|
|
0.9585
|
|
|
$
|
2,341
|
|
Other
currencies
|
|
|
|
|
|
|
|
|
|
|
262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We also had cash accounts denominated in currencies other than the functional currency of the
local entity at
July 2, 2011 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange Rate
|
|
|
|
|
|
|
|
|
|
|
Functional
|
|
|
|
|
|
|
|
|
|
|
Currency per
|
|
|
USD
|
|
Currency
|
|
Functional
|
|
|
Denominated
|
|
|
Equivalent
|
|
Denomination
|
|
Currency
|
|
|
Currency
|
|
|
(in thousands)
|
|
|
GBP
|
|
USD
|
|
|
1.6075
|
|
|
$
|
1,281
|
|
GBP
|
|
CAD
|
|
|
1.5493
|
|
|
|
931
|
|
EUR
|
|
GBP
|
|
|
0.9040
|
|
|
|
799
|
|
USD
|
|
SEK
|
|
|
6.2634
|
|
|
|
682
|
|
USD
|
|
CAD
|
|
|
0.9585
|
|
|
|
657
|
|
Other
currencies
|
|
|
|
|
|
|
|
|
|
|
1,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We enter into foreign currency forward contracts in order to mitigate the risks associated
with currency fluctuations on future fair values of foreign denominated assets and liabilities. At
July 2, 2011, we had forward contracts as follows (in thousands, except average contract rate):
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Average
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Fair
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Notional
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Contract
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Value
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Amount
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Rate
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(USD)
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|
Foreign currency forward contracts:
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U.S. dollars (sell for Canadian dollars)
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12,300
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USD
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0.9611
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$
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(17
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)
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British pounds (sell for Canadian
dollars)
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150
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GBP
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1.5791
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(1
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)
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Euros (sell for U.S. dollars)
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300
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EUR
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1.4311
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(6
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)
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$
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(24
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)
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34
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Item 4.
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Controls and Procedures
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(a) Evaluation of Disclosure Controls and Procedures
The Company has established and maintains disclosure controls and procedures (as defined in
Securities Exchange Act Rules 13a-15(e)). The objective of these controls and procedures is to
ensure that information relating to the Company, including its consolidated subsidiaries, and
required to be filed by it in reports under the Securities Exchange Act, as amended, is effectively
communicated to the Companys CEO and CFO, and is recorded, processed, summarized and reported on a
timely basis.
The CEO and CFO have evaluated the Companys disclosure controls and procedures as of the end of
the period covered in this report. Based upon this evaluation, the CEO and CFO have concluded that
the Companys disclosure controls and procedures were effective as of July 2, 2011.
(b) Changes in Internal Control Over Financial Reporting
During the second quarter of 2011, 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).
35
PART II
OTHER INFORMATION
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, 2010, 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. In addition to the risks and
uncertainties described within this Quarterly Report, we believe our business and results of
operations are subject to the following risks:
The merger transaction with Honeywell may not be completed. If the merger is not completed, our
stock price, future business and results of operations could be materially adversely affected.
On June 13, 2011, the Company entered into an agreement and plan of merger (the Merger),
with Honeywell International Inc. (Honeywell), a Delaware corporation, and Egret Acquisition
Corp., a Georgia corporation and a wholly-owned subsidiary of Honeywell (Purchaser). Under the
terms of the Merger Agreement, Purchaser commenced a tender offer (the Offer) on June 27, 2011 to
purchase all of the issued and outstanding shares of common stock, $0.10 par value, of EMS for
$33.00 per share in cash. Refer to Note 2 in the Companys consolidated financial statements in
this Quarterly Report for additional information on the proposed merger transaction with Honeywell.
The Merger has been approved by the Boards of Directors of both companies. The completion of the
Merger is subject to obtaining approval of regulatory authorities including the Federal
Communications Commission. The merger agreement is subject to customary closing conditions and is
expected to close in the third quarter of 2011. If any of these conditions are not satisfied or
waived, the Merger may not be completed and we will remain liable for
considerable related expenses that we have incurred. In addition, the future direction of the
Company may be perceived as
uncertain, which may result in the loss of potential business
opportunities and, to the extent that the current market price reflects an assumption that the
Merger will be completed, our stock price may be adversely affected.
The time required of our management and employees, the general disruption to our operations, and
additional cost due to the proposed merger transaction with Honeywell could adversely affect our
business and results of operations.
While the Merger is pending,
a substantial amount of the attention of management and employees is
being directed toward the completion of the Merger and therefore, may
be diverted from day-to-day operations which could adversely affect our relationship with customers, suppliers, and other
strategic partners and negatively impact our revenues and earnings.
In addition, current and
prospective employees may be uncertain about their future roles following the completion of the
Merger, which could impair our ability to attract prospective
employees and retain and motivate current employees. Further, significant
additional costs may be incurred for professional fees, including
legal fees for any related litigation that has been or may be filed,
and other fees related to the merger
transaction. The impact of these factors could adversely affect our business and results of
operations.
36
|
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|
Item 2.
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|
Unregistered Sales of Equity Securities and Use of Proceeds
|
The following table summarizes the Companys purchases of its common shares for the three months
ended July 2, 2011:
ISSUER PURCHASES OF EQUITY SECURITIES
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(d) Maximum Number
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(c) Total Number
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(or Approximate
|
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of Shares
|
|
|
Dollar Value) of
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Purchased as
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Shares that May Yet
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Part of Publicly
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Be Purchased
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(a) Total Number
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(b) Average
|
|
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Announced
|
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Under the Plans or
|
|
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|
of Shares
|
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|
Price Paid
|
|
|
Plans or
|
|
|
Programs (3)
|
|
Period
|
|
Purchased (1)
|
|
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Per Share
|
|
|
Program (2)
|
|
|
(in millions)
|
|
Period 4 2011 (April 3 to April
30)
|
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|
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|
|
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|
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|
Period 5 2011 (May 1 to May 28)
|
|
|
2,050
|
|
|
$
|
25.54
|
|
|
|
|
|
|
|
|
|
Period 6 2011 (May 29 to July 2)
|
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Total
|
|
|
2,050
|
|
|
$
|
25.54
|
|
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(1)
|
|
The category represents 2,050 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.
|
37
The following exhibits are filed as part of this report:
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|
|
|
2.1
|
|
|
Agreement and Plan of Merger, dated June 13, 2011, by and among EMS Technologies, Inc.,
Honeywell International Inc., and Egret Acquisition Corp. (incorporated by reference to Exhibit 2.1
to the Companys Report on Form 8-K filed with the SEC by the Company on June 13, 2011).
|
|
|
|
|
|
|
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 the Companys Quarterly Report on Form
10-Q for the quarter ended April 4, 2009).
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|
|
|
|
3.2
|
|
|
Bylaws of EMS Technologies, Inc. as amended through November 5, 2010 (incorporated by
reference to Exhibit 3.2 to the Companys Quarterly Report on Form 10-Q for the quarter ended
October 2, 2010).
|
|
|
|
|
|
|
3.3
|
|
|
EMS Technologies, Inc. Shareholder Rights Plan (incorporated by reference to Exhibit 4.1 to
the Companys report on Form 8-A/A dated January 7, 2011).
|
|
|
|
|
|
|
3.4
|
|
|
Amendment No. 1 to Amended and Restated Shareholder Rights Plan, dated as of June 12, 2011
(incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed on June
13, 2011).
|
|
|
|
|
|
|
10.1
|
|
|
Amendment, dated June 12, 2011, to the Employee Performance Bonus Plan (incorporate by
reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on June 16, 2011).
|
|
|
|
|
|
|
10.2
|
|
|
Amendments, dated June 12, 2011, to the 1997 Stock Incentive Plan, 2000 Stock Incentive Plan
and 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Companys Current
Report on Form 8-K filed on June 16, 2011).
|
|
|
|
|
|
|
10.3
|
|
|
Amendment, dated June 12, 2011, to the Directors Deferred Compensation Plan (incorporated by
reference to Exhibit 10.5 to the Companys Current Report on Form 8-K filed on June 16, 2011).
|
|
|
|
|
|
|
10.4
|
|
|
Amended and Restated Executive Protection Agreement between the Company and Neilson A.
Mackay, dated June 12, 2011 (incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed on June 16, 2011).
|
|
|
|
|
|
|
10.5
|
|
|
Amended and Restated Executive Protection Agreement between the Company and Gary B. Shell,
dated June 23, 2011 (incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed on June 27, 2011).
|
|
|
|
|
|
|
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. *
|
|
|
|
|
|
38
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: August 11, 2011
|
|
|
|
|
|
|
|
|
|
Neilson A. Mackay
|
|
|
|
|
|
|
President, and Chief Executive Officer
|
|
|
|
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Gary B. Shell
|
|
|
|
Date: August 11, 2011
|
|
|
|
|
|
|
|
|
|
Gary B. Shell
|
|
|
|
|
|
|
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.
39
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