ELMG Ems Technologies, Inc. (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended October 2, 2010

Commission file number 0-6072

EMS TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

Georgia		58-1035424
(State or other jurisdiction of incorporation or		(IRS Employer ID Number)
organization)
660 Engineering Drive, Norcross, Georgia		30092
(Address of principal executive offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code: (770) 263-9200

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares outstanding of each of the issuer’s classes of common stock, as of the close of business on November 5, 2010:

Class		Number of Shares
Common Stock, $0.10 par value		15,310,524

 

 

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations (unaudited)			2
Consolidated Balance Sheets (unaudited)			3
Consolidated Statements of Cash Flows (unaudited)			5
Notes to Consolidated Financial Statements (unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Quantitative and Qualitative Disclosures about Market Risk			30
Item 4. Controls and Procedures			33
PART II — OTHER INFORMATION
Item 1A. Risk Factors			34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			34
Item 5. Other information			35
Item 6. Exhibits			36
SIGNATURES			37
Exhibit 3.2
Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

EMS Technologies, Inc. and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(in thousands, except per share data)

		Three Months Ended								Nine Months Ended
		October 2				October 3				October 2				October 3
		2010				2009				2010				2009
Product net sales		$	69,913				65,766				209,896				210,464
Service net sales			15,810				19,965				47,206				64,483
Net sales			85,723				85,731				257,102				274,947
Product cost of sales			47,098				46,892				140,664				141,014
Service cost of sales			7,463				10,843				23,299				45,391
Cost of sales			54,561				57,735				163,963				186,405
Selling, general and administrative expenses			21,996				20,496				65,797				65,468
Research and development expenses			4,898				5,149				15,028				13,788
Impairment loss on goodwill related charges			—				—				384				—
Acquisition-related items			—				(215	)			563				5,307
Operating income			4,268				2,566				11,367				3,979
Interest income			60				14				341				179
Interest expense			(467	)			(549	)			(1,486	)			(1,837	)
Foreign exchange gain (loss), net			18				(154	)			(431	)			(386	)
Earnings from continuing operations before income taxes			3,879				1,877				9,791				1,935
Income tax (expense) benefit			(408	)			4,112				(1,861	)			4,272
Earnings from continuing operations			3,471				5,989				7,930				6,207
Discontinued operations:
Loss from discontinued operations before income taxes			—				(1,143	)			—				(1,143	)
Income tax benefit			—				434				—				434
Loss from discontinued operations			—				(709	)			—				(709	)
Net earnings		$	3,471				5,280				7,930				5,498
Net earnings (loss) per share:
Basic:
From continuing operations		$	0.23				0.39				0.52				0.41
From discontinued operations			—				(0.05	)			—				(0.05	)
Net earnings		$	0.23				0.34				0.52				0.36
Diluted:
From continuing operations		$	0.23				0.39				0.52				0.41
From discontinued operations			—				(0.05	)			—				(0.05	)
Net earnings		$	0.23				0.34				0.52				0.36
Weighted-average number of common shares outstanding:
Basic			15,197				15,175				15,189				15,161
Diluted			15,251				15,258				15,229				15,250

See accompanying notes to interim unaudited consolidated financial statements.

EMS Technologies, Inc. and Subsidiaries

Consolidated Balance Sheets (Unaudited)

(in thousands)

		October 2				December 31
		2010				2009
ASSETS
Current assets:
Cash and cash equivalents		$	49,671				47,174
Trade accounts receivable, net of allowance for doubtful accounts of $1,456 in 2010 and $1,208 in 2009			65,264				60,959
Costs and estimated earnings in excess of billings on long-term contracts			17,418				25,290
Inventories			48,779				40,655
Deferred income taxes			4,426				4,306
Other current assets			10,122				19,117
Total current assets			195,680				197,501
Property, plant and equipment:
Land			1,150				1,150
Buildings and leasehold improvements			18,879				18,792
Machinery and equipment			115,097				107,712
Furniture and fixtures			10,750				10,542
Total property, plant and equipment			145,876				138,196
Less accumulated depreciation			97,785				90,256
Net property, plant and equipment			48,091				47,940
Deferred income taxes			9,436				9,421
Goodwill			60,476				60,336
Other intangible assets, net of accumulated amortization of $25,399 in 2010 and $18,817 in 2009			43,504				49,256
Costs and estimated earnings in excess of billings on long-term contracts			15,156				7,771
Other assets			1,535				1,920
Total assets		$	373,878				374,145

See accompanying notes to interim unaudited consolidated financial statements.

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

		October 2				December 31
		2010				2009
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current installments of long-term debt		$	1,477				1,398
Accounts payable			28,468				27,333
Billings in excess of contract costs and estimated earnings on long-term contracts			12,204				9,380
Accrued compensation and related costs			15,500				13,946
Deferred revenue			10,333				9,805
Contingent consideration arrangement liability			6,833				13,729
Other current liabilities			10,546				23,763
Total current liabilities			85,361				99,354
Long-term debt, excluding current installments			28,234				26,352
Deferred income taxes			4,933				5,757
Other liabilities			7,261				5,591
Total liabilities			125,789				137,054
Shareholders’ equity:
Preferred stock of $1.00 par value per share; Authorized 10,000 shares; none issued			—				—
Common stock of $0.10 par value per share; Authorized 75,000 shares; issued and outstanding 15,311 in 2010 and 15,249 in 2009			1,531				1,525
Additional paid-in capital			137,487				136,112
Accumulated other comprehensive income — foreign currency translation adjustment			7,753				6,066
Retained earnings			101,318				93,388
Total shareholders’ equity			248,089				237,091
Commitments and contingencies
Total liabilities and shareholders’ equity		$	373,878				374,145

See accompanying notes to interim unaudited consolidated financial statements.

EMS Technologies, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

		Nine Months Ended
		October 2				October 3
		2010				2009
Cash flows from operating activities:
Net earnings		$	7,930				5,498
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			14,434				15,050
Deferred income taxes			(959	)			(2,865	)
Loss on sale of assets			—				68
Loss from discontinued operations			—				709
Stock-based compensation expense			1,425				1,662
Change in fair value of contingent consideration liability			304				1,510
Payment for acquisition of business under contingent consideration arrangement			(1,248	)			—
Changes in operating assets and liabilities, net of effects of acquisitions:
Trade accounts receivable			(4,243	)			12,624
Costs and estimated earnings in excess of billings on long-term contracts			1,003				2,625
Billings in excess of costs and estimated earnings on long-term contracts			2,747				976
Inventories			(7,808	)			2,467
Accounts payable			(254	)			(1,479	)
Income taxes			555				(541	)
Accrued compensation and retirement costs			1,453				(2,433	)
Deferred revenue			2,556				151
Other			3,844				(3,062	)
Net cash provided by operating activities in continuing operations			21,739				32,960
Net cash used in operating activities in discontinued operations			(8,824	)			(484	)
Net cash provided by operating activities			12,915				32,476
Cash flows from investing activities:
Purchases of property, plant and equipment			(7,091	)			(10,689	)
Payments for acquisitions of businesses, net of cash acquired			—				(87,264	)
Proceeds from sales of assets			222				58
Net cash used in investing activities			(6,869	)			(97,895	)
Cash flows from financing activities:
Net borrowings under revolving credit facility			3,000				18,500
Repayment of other debt			(1,037	)			(961	)
Deferred financing costs paid			(28	)			(251	)
Payment for acquisition of business under contingent consideration arrangement			(5,952	)			—
Payments for repurchase and retirement of common shares			(61	)			(125	)
Proceeds from exercises of stock options			15				620
Net cash (used in) provided by financing activities			(4,063	)			17,783
Effect of changes in exchange rates on cash and cash equivalents			514				1,343
Net change in cash and cash equivalents			2,497				(46,293	)
Cash and cash equivalents at beginning of period			47,174				86,979
Cash and cash equivalents at end of period		$	49,671				40,686

See accompanying notes to interim unaudited consolidated financial statements.

EMS Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

October 2, 2010 and October 3, 2009

1. Basis of Presentation

EMS Technologies, Inc. (“EMS”) is a leading provider of wireless connectivity solutions over satellite and terrestrial networks. EMS keeps people and systems connected, wherever they are — on land, at sea, in the air or in space. Serving the aeronautical, asset-tracking, defense, and mobile computing industries, EMS products and services enable universal mobility, visibility and intelligence.

The consolidated financial statements include the accounts of EMS Technologies, Inc. and its subsidiaries, each of which is a wholly owned subsidiary of EMS (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation. There are no other entities controlled by the Company, either directly or indirectly. Certain reclassifications have been made to the 2009 consolidated financial statements to conform to the 2010 presentation.

The accompanying unaudited consolidated financial statements included herein have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and are based on the Securities and Exchange Commission’s (“SEC”) Regulation S-X and its instructions to Form 10-Q. They do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring items, necessary to present fairly the financial condition, results of operations and cash flows for the interim periods presented. We have performed an evaluation of subsequent events through the date the financial statements were issued. These interim consolidated financial statements should be read in conjunction with the financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

— Management’s Use of Estimates

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

— Recently Adopted Pronouncements

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

— Recently Issued Pronouncements Not Yet Adopted

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

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

•

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

•

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

•

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

•

Expands the required disclosures.

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

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

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

In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses . ASU 2010-20 requires a greater level of disaggregation in disclosures relating to the credit quality of financing receivables and the allowance for doubtful accounts, and also requires enhanced disclosures around nonaccrual and past due financing receivables, impaired loans and loan modifications. The provisions of this ASU are effective for the Company for the annual reporting period ending December 31, 2010. Except for the expanded disclosure requirements, the adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

2. Business Combinations

During the nine months ended October 3, 2009, the Company completed the acquisitions of two businesses that expanded its technology base. The Company completed the acquisition of all of the equity interest in Formation, Inc. (“Formation”), of Moorestown, New Jersey, and Satamatics Global Limited (“Satamatics”), of Tewkesbury, UK, on January 9, 2009 and February  13, 2009, respectively.

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

The aggregate cash purchase price for these two entities was approximately $90.7 million. In addition, one of the purchase agreements included a contingent consideration arrangement of up to $15 million. The final payment amount under the contingent consideration arrangement has been determined to be $14.0 million, of which $7.2 million was paid in the second quarter of 2010. The remaining $6.8 million is due December 31, 2010. Of the $7.2 million paid in the second quarter of 2010, $6.0 million is reflected in the financing activities section of the consolidated statement of cash flows since that amount was included in the estimated fair value of the contingent consideration liability as of the acquisition date. The remaining $1.2 million, which is reflected as an acquisition-related charge in the consolidated statement of operations since the acquisition date, is reflected as an operating activity in the consolidated statement of cash flows. In the third quarter 2010, $4.8 million of cash that had been previously distributed into an escrow account for the purchase of these two businesses was released to the sellers.

For the acquired companies, the results for the three and nine months ended October 2, 2010 included net sales of $9.9 million and $36.0 million, respectively, and a loss before income taxes from continuing operations of $2.2 million and $2.6 million, respectively. The results for the three and nine months ended October 3, 2009 included net sales of $13.3 million and $44.9 million, and a loss before income taxes from continuing operations of $1.6 million and $0.5 million respectively. During the nine months ended October 3, 2009, the Company recognized net acquisition-related charges of $5.3 million. These net charges were principally a result of the adoption of SFAS No. 141(R), including transaction costs, accretion of the contingent consideration arrangement liability, and a net charge related to an increase in the contingent consideration liability. The Company recognized a credit of $0.2 million in acquisition-related items in the three months ended October 3, 2009, mainly due to a decrease in the estimated fair value of the contingent consideration liability, reflecting a change in the expected probability of paying the projected amounts, net of accretion. The nine months ended October 3, 2009 also included a $1.4 million foreign exchange loss related to the funding of one of the acquisitions, which was required to be paid in British pounds sterling. The loss resulted from changes in foreign currency exchange rates from the date the Company funded the transaction to the date the acquisition was completed.

3. Goodwill and Other Intangible Assets

The following table presents the changes in the carrying amount of goodwill by reportable operating segment during the nine months ended October 2, 2010 (in thousands):

						Global
		Aviation				Tracking				LXE				Total
Balance as of December 31, 2009		$	35,108				23,429				1,799				60,336
Foreign currency translation adjustment			—				—				140				140
Balance as of October 2, 2010		$	35,108				23,429				1,939				60,476

The Company had $20.2 million of accumulated impairment losses recorded on LXE’s goodwill as of October 2, 2010.

The following table presents the gross carrying amounts and accumulated amortization, in total and by major intangible asset class, for the Company’s intangible assets subject to amortization as of October 2, 2010 and December 31, 2009 (in thousands):

		As of October 2, 2010
		Gross								Net
		Carrying				Accumulated				Carrying
		Amount				Amortization				Amount
Developed technology		$	41,039				17,514				23,525
Customer relationships			19,167				4,224				14,943
Trade names and trademarks			6,269				1,744				4,525
Other			2,428				1,917				511
		$	68,903				25,399				43,504

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

Amortization expense related to these intangible assets for the three months and nine months ended October 2, 2010 was $2.0 million and $6.1 million, respectively, and for the three months and nine months ended October 3, 2009 was $2.1 million and $7.3 million, respectively. Expected amortization expense for the remainder of 2010 and for each of the five succeeding years is as follows: 2010 — $1.9 million, 2011 — $7.7 million, 2012 — $7.9 million, 2013 — $7.3 million, 2014 - $3.8 million and 2015 — $3.6 million.

As of October 2, 2010, we had approximately $60.5 million of goodwill and $43.5 million of other intangible assets on our consolidated balance sheet, collectively representing approximately 28% of our total assets. We test goodwill for impairment on an annual basis in the fourth quarter of the year. We are also required to test goodwill and other long-lived assets on an interim basis if an event occurs or circumstances change which indicate that an asset might be impaired. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include a sustained, significant decline in our share price and market capitalization, a decline in expected future cash flows for one or more of our business units (including our recently acquired businesses), a significant adverse change in legal factors or in the business climate, unanticipated competition and/or slower-than-expected growth rates, among others. If we are required to recognize an impairment loss related to goodwill or long-lived assets, the related charge, although a noncash charge, could materially reduce reported earnings or result in a loss for the period in which the impairment loss is recognized.

4. Fair Value Measurements

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

•

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

•

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

•

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

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

The Company uses derivative financial instruments, primarily in the form of foreign currency forward contracts, in order to mitigate the risks associated with currency fluctuations on future fair values of foreign denominated assets and liabilities. The fair values of foreign currency contracts of $336,000 net asset at October 2, 2010 and $39,000 net asset at December 31, 2009 are based on quoted market prices for similar instruments using the income approach (a level 2 input per the provisions of ASC Topic 820) and are recorded in other current assets and other current liabilities, respectively, in the consolidated balance sheets. Gains and losses related to these forward contracts are included in foreign exchange gain (loss), net, in the consolidated statements of operations.

The Company has two fixed-rate mortgages and has borrowings under its revolving credit facility. One mortgage has an 8.0% interest rate and a carrying amount as of October 2, 2010 and December 31, 2009 of $5.8 million and $6.4 million, respectively. The other mortgage has a 7.1% interest rate and a carrying amount as of October 2, 2010 and December 31, 2009 of $2.4 million and $2.9 million, respectively. The Company’s outstanding borrowings under its revolving credit facility were $21.5 million and $18.5 million as of October 2, 2010 and December 31, 2009, respectively. The estimated fair value of the Company’s total debt was $29.4 million at October 2, 2010 and is based on quoted market prices for similar instruments (a level 2 input).

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

5. Interim Segment Disclosures

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

The Aviation segment designs and develops satellite-based communications solutions through a broad array of terminals and antennas for the aeronautical market that enable end-users in aircraft and other mobile platforms to communicate over 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.

The LXE segment manufactures mobile terminals and wireless data collection equipment for logistics management systems. LXE operates mainly in three markets: the Americas market, which is comprised of North, South and Central America; the International market, which is comprised of all other geographic areas with the highest concentration in Europe; and direct sales to original equipment manufacturers (“OEM”).

The Defense & Space segment manufactures custom-designed, highly engineered subsystems for 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. Orders typically involve development and production schedules that can extend a year or more.

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

Prior to 2010, the Company operated under three reportable operating segments: Communications & Tracking, D&S and LXE. The Aviation and Global Tracking segments were previously included in our Communications & Tracking segment. The Company’s historical financial data has been recast in this Quarterly Report on Form 10-Q to conform to its 2010 segment presentation.

Following is a summary of the Company’s interim segment data (in thousands):

		Three Months Ended								Nine Months Ended
		October 2				October 3				October 2				October 3
		2010				2009				2010				2009
Net sales:
Aviation		$	24,161				25,669			$	75,685				93,589
LXE			35,613				26,237				102,551				79,988
Defense & Space			16,784				23,056				50,076				75,153
Global Tracking			9,399				10,769				29,785				26,217
Less intercompany sales			(234	)			—				(995	)			—
Global Tracking external sales			9,165				10,769				28,790				26,217
Total		$	85,723				85,731			$	257,102				274,947
Operating income (loss):
Aviation		$	1,479				(451	)		$	3,604				8,415
LXE			2,096				(1,348	)			5,065				(6,195	)
Defense & Space			1,655				2,140				4,267				7,333
Global Tracking			68				883				906				119
Corporate & Other			(1,030	)			1,342				(2,475	)			(5,693	)
Total		$	4,268				2,566			$	11,367				3,979
Earnings (loss) from continuing operations before income taxes:
Aviation		$	1,382				(479	)		$	3,187				9,077
LXE			2,434				(1,213	)			5,267				(6,373	)
Defense & Space			1,660				2,218				4,276				7,411
Global Tracking			(80	)			647				855				478
Corporate & Other			(1,517	)			704				(3,794	)			(8,658	)
Total		$	3,879				1,877			$	9,791				1,935

The results before income taxes for Corporate & Other for the first nine months of 2009 includes $5.3 million of acquisition-related charges, (which includes a $1.4 million foreign exchange loss related to the funding of the Satamatics acquisition) and other expenses that are not allocated to operating segments in the financial data reviewed by the chief operating decision maker.

		October 2				December 31
		2010				2009
Assets:
Aviation		$	146,994				144,483
LXE			80,101				71,632
Defense & Space			47,725				53,883
Global Tracking			79,551				75,922
Corporate & Other			19,507				28,225
Total		$	373,878				374,145
Concentration of net assets by geographic region:
United States		$	69,166				72,826
Canada			67,577				62,239
Europe			103,223				97,216
Other			8,123				4,810
Total		$	248,089				237,091

Sales to no individual customer exceeded 10% of our net sales during the three and nine months ended October 2, 2010, or October 3, 2009.

6. Earnings Per Share

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

		Three Months Ended								Nine Months Ended
		October 2				October 3				October 2				October 3
		2010				2009				2010				2009
Basic weighted-average number of common shares outstanding			15,197				15,175				15,189				15,161
Dilutive potential shares using the treasury share method			54				83				40				89
Diluted weighted-average number of common shares outstanding			15,251				15,258				15,229				15,250
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			1,005				526				1,031				557

7. Comprehensive Income

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

		Three Months Ended								Nine Months Ended
		October 2				October 3				October 2				October 3
		2010				2009				2010				2009
Net earnings		$	3,471				5,280				7,930				5,498
Other comprehensive income:
Foreign currency translation adjustment			4,932				5,922				1,687				8,818
		$	8,403				11,202				9,617				14,316

8. Inventories

Inventories as of October 2, 2010 and December 31, 2009 include the following (in thousands):

		October 2				December 31
		2010				2009
Parts and materials		$	29,493				25,221
Work-in-process			6,406				5,142
Finished goods			12,880				10,292
		$	48,779				40,655

Costs included in inventories related to long-term programs or contracts are primarily for materials and work performed on programs that are awaiting funding, or on contracts not yet finalized. Such costs were $2.1 million at October 2, 2010, and $1.1 million at December 31, 2009.

9. Revolving Credit Facility

As of October 2, 2010, the Company had $21.5 million of borrowings outstanding under its revolving credit facility.
The Company has $2.1 million of standby letters of credit to satisfy performance guarantee requirements under certain customer contracts. While these obligations are not normally called, they could be called by the beneficiaries at any time before the expiration date should the Company fail to meet certain contractual requirements. After deducting outstanding letters of credit, at October 2, 2010 the Company had $38.5 million available for borrowing in the U.S. and $12.9 million available for borrowing in Canada under the revolving credit agreement.

10. Warranty Liability

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

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

		Three Months Ended								Nine Months Ended
		October 2				October 3				October 2				October 3
		2010				2009				2010				2009
Balance at beginning of the period		$	4,524				3,796				4,085				2,789
Additions at dates of acquisition for businesses acquired during period			—				—				—				516
Accruals for warranties issued during the period			831				734				2,887				2,987
Settlements made during the period			(679	)			(694	)			(2,296	)			(2,456	)
Balance at end of period		$	4,676				3,836				4,676				3,836

11. Stock-Based Compensation

The Company has granted nonvested restricted stock and nonqualified stock options to key employees and directors under several stock award plans. The Company granted stock awards with an aggregate fair value of approximately $2.6 million during the first nine months of 2010, and $2.5 million during the first nine months of 2009. The Company recognized expense in the third quarter and first nine months of $0.5 million and $1.4 million in 2010, and $0.6 million and $1.7 million in 2009, respectively, before income tax benefits for all the Company’s stock plans.

12. Income Taxes

The Company’s effective income tax rate is generally less than the amounts computed by applying the U.S. federal income tax rate of 34% due to a portion of earnings being earned in Canada, where the Company’s effective rate is much lower than the rate in the U.S. due to research-related tax benefits. In the three and nine months ended October 2, 2010, the rate was impacted by tax benefits for certain loss jurisdictions that have not been recognized. In the three and nine months ended October 3, 2009, the Company recognized a benefit of $1.9 million for its prior-year research and development credits in the U.S. after completion of an Internal Revenue Service examination. Furthermore, a benefit of $2.2 million and $2.4 million was recognized in the third quarter and first nine months of 2009, respectively, related to the year-to-date loss before income taxes in certain jurisdictions since a loss had been projected for the full year in those jurisdictions. Of this benefit, $0.4 million was allocated to discontinued operations.

The Company is under audit in Canada at the federal level for the years 2008 and 2009. The Company expects the audits to be completed in the next twelve months. Any related unrecognized tax benefits could be adjusted based on the results of the audits. The Company cannot estimate the range of the change that is reasonably possible at this time.

13. Discontinued Operations

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

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

The Company has an agreement with the purchaser of the former S&T/Montreal division to acquire a license for $8 million in payments over a seven-year period, beginning in December 2008, for the rights to a certain satellite territory. The Company and the purchaser have a corresponding sublicense agreement that granted the territory rights back to the purchaser, under which the Company is to receive a portion of the satellite service revenues from the specific market territory over the same period. The purchaser had previously guaranteed that the revenues derived under the sublicense would equal or exceed the acquisition cost of the license. As part of the agreement to sell the net assets of S&T/Montreal, the Company released the purchaser from this guarantee. Without the guarantee, the Company estimates that its portion of the satellite service revenues will be less than the acquisition cost, and the Company has accordingly reflected a liability for the net cost in its consolidated balance sheet. As of October 2, 2010, no payments have been made by the Company under this license agreement. The satellite service revenues from the specific market territory included under the sublicense agreement are considerably lower than expected. The Company believes that sufficient efforts are not being made by the purchaser of the former S&T/Montreal division to market this satellite service. The parties are finalizing a settlement under these agreements. The Company believes that the net liability recorded in its consolidated balance sheet is its best estimate of the settlement amount. If a settlement is reached, it is expected to be paid in the following twelve months, and therefore the net liability is recorded as a current liability in the Company’s consolidated balance sheet as of October 2, 2010.

14. Repurchases of Common Shares

On July 29, 2008, the Company’s Board of Directors authorized a stock repurchase program for up to $20 million of the Company’s common shares. As of October 2, 2010, the Company had repurchased 495,000 common shares for approximately $10.1 million. Further repurchases are no longer permitted under the terms of the Company’s principal credit agreements. There were no repurchases of common shares under this program during the nine months ended October 2, 2010.

15. Litigation

The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in Item 1 of Part 1 of this Quarterly Report and the audited consolidated financial statements and notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2009.

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

•

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

•

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

•

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

•

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

Following is a summary of significant factors affecting or related to our results of operations for the three months and nine months ended October 2, 2010:

•

Consolidated net sales from continuing operations were $85.7 million and $257.1 million in third quarter and first nine months of 2010, reflecting another quarter of strong sales, though down by 7% compared with the first nine months of 2009. Net sales in 2010 reflect a recovery in our logistics business and the additional net sales from the acquisitions made in 2008 and 2009.

•

Operating profits were contributed by each of the four operating segments in the third quarter and the first nine months of 2010, respectively. In total, operating profits improved by $1.7 million and $7.4 million from the third quarter and first nine months of 2009, respectively, mainly from the higher volume of logistics products shipped, the lower cost-of-sales percentages reported by our operating segments, and lower acquisition-related charges and amortization expense in 2010. For the first nine months of 2010, acquisition-related charges were lower by $4.7 million and amortization expense was lower by $1.2 million compared with the same period of 2009.

•

As certain of our markets continue to be impacted by the economy, they may face continuing pressures and risks. We expect that we will continue to be faced with these economic pressures at least through the middle of 2011. These and other factors could cause a decline in expected future cash flows for one or more of our business units (including our recently acquired businesses), and as a result it is reasonably possible that we may be required to recognize an impairment loss related to goodwill or other long-lived assets in the future.

Results of Operations

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

		Three Months Ended																Nine Months Ended
		October 2								October 3								October 2								October 3
		2010								2009								2010								2009
Product net sales		$	69,913				81.6	%		$	65,766				76.7	%		$	209,896				81.6	%		$	210,464				76.5	%
Service net sales			15,810				18.4				19,965				23.3				47,206				18.4				64,483				23.5
Net sales			85,723				100.0				85,731				100.0				257,102				100.0				274,947				100.0
Product cost of sales			47,098				67.4				46,892				71.3				140,664				67.0				141,014				67.0
Service cost of sales			7,463				47.2				10,843				54.3				23,299				49.4				45,391				70.4
Cost of sales			54,561				63.6				57,735				67.4				163,963				63.9				186,405				67.8
Selling, general and administrative expenses			21,996				25.7				20,496				23.9				65,797				25.6				65,468				23.8
Research and development expenses			4,898				5.7				5,149				6.0				15,028				5.8				13,788				5.0
Impairment loss on goodwill related charges			—				—				—				—				384				0.1				—				—
Acquisition-related items			—				—				(215	)			(0.3	)			563				0.2				5,307				1.9
Operating income			4,268				5.0				2,566				3.0				11,367				4.4				3,979				1.5
Interest income			60				—				14				—				341				0.2				179				0.1
Interest expense			(467	)			(0.5	)			(549	)			(0.6	)			(1,486	)			(0.6	)			(1,837	)			(0.7	)
Foreign exchange gain (loss), net			18				—				(154	)			(0.2	)			(431	)			(0.2	)			(386	)			(0.2	)
Earnings from continuing operations before income taxes			3,879				4.5				1,877				2.2				9,791				3.8				1,935				0.7
Income tax (expense) benefit			(408	)			(0.5	)			4,112				4.8				(1,861	)			(0.7	)			4,272				1.6
Earnings from continuing operations			3,471				4.0				5,989				7.0				7,930				3.1				6,207				2.3
Loss from discontinued operations			—				—				(709	)			(0.8	)			—				—				(709	)			(0.3	)
Net earnings		$	3,471				4.0	%		$	5,280				6.2	%		$	7,930				3.1	%		$	5,498				2.0	%

Three Months ended October 2, 2010 and October 3, 2009:

Net sales of $85.7 million in the third quarter of 2010 were the same level as the net sales in 2009. Higher net sales from our LXE segment were offset by lower net sales from our D&S, Aviation and Global Tracking segments. LXE’s net sales in the third quarter of 2010 were $9.4 million higher than in the same period in 2009, an increase of 35.7%, driven primarily by higher product shipments in the Americas market. LXE’s product sales were also higher, but to a lesser extent, in the International market, and from a new source of revenue from direct sales to OEMs. Net sales were lower at D&S mainly due to the conclusion of work performed on a significant military communications research project in the fourth quarter of 2009, and therefore not included in the 2010 results. Net sales were lower at Aviation primarily due to a lower volume of shipments of air-to-ground in-cabin connectivity products into the air transport market due to a change in the airline’s rollout schedule of connectivity, partially offset by an increase in Inmarsat high-speed-data and antenna product shipments to the military market. The decrease in net sales at Global Tracking was primarily a result of the completion of a significant emergency management project in the third quarter of 2009 that triggered revenue recognition in that period, partially offset by an increase in airtime revenue from a higher number of terminals in use from our asset-tracking product lines.

Product net sales of $69.9 million in the third quarter of 2010 were 6.3% higher than product net sales in the third quarter of 2009. These higher product net sales were primarily due to a higher volume of terminals shipped by LXE, partially offset by lower product net sales at Aviation, Global Tracking and D&S. The lower product net sales at Aviation were mainly due to a lower volume of shipments of air-to-ground connectivity products. The lower product net sales at Global Tracking were primarily due to the timing of revenue recognized on emergency management projects as described above. The lower sales level at D&S was mainly due to the timing of revenue recognized on long-term contracts. Service net sales of $15.8 million in the third quarter of 2010 were 20.8% lower than service net sales in the same period in 2009, mainly due to the conclusion of significant work performed on a military communications research project by D&S partially offset by an increase in airtime revenue at Global Tracking generated from our asset-tracking product line acquired during the first quarter of 2009. As a result, product net sales comprised a higher percentage of total net sales in the third quarter of 2010 compared with the third quarter of 2009.

Overall cost of sales as a percentage of consolidated net sales was lower in the third quarter of 2010 compared with the same period of 2009 due to lower cost-of-sales percentages reported by each of our four reportable operating segments and a higher percentage of net sales generated from our LXE segment, which has a lower cost-of-sales percentage than the consolidated group. Product cost of sales and service cost of sales as a percentage of their respective net sales were lower in the third quarter of 2010 compared with the same period in 2009. The product cost-of-sales percentage was lower in all four of our segments due to a more favorable product mix, cost reduction efforts targeted at reducing product costs at Aviation and Global Tracking, a higher production volume at LXE, and improved program execution at D&S. The decrease in the service cost-of-sales percentage was mainly due to a lower proportion of service revenues generated from our D&S segment, which has a higher service cost-of-sales percentage than our other three reportable operating segments.

Selling, general and administrative expenses were $1.5 million higher in the third quarter of 2010 compared with the same period in 2009 mainly due to additional marketing and selling costs related to the higher sales at LXE which has a higher commission structure than our other operating segments, higher incentive compensation costs due to the improved performance projected for the Company in 2010 as compared with 2009, and an increase in outside service expense mainly for tax related services.

Research and development expenditures were slightly lower in the third quarter of 2010 compared with the third quarter of 2009. Expenditures during the third quarter 2010 were higher than the third quarter in 2009 from the development of new product offerings in 2010. However, a higher proportion of these expenditures were recoverable in the third quarter of 2010 compared with the same period in 2009 from the Canadian government and certain commercial contracts.

We recognized income tax expense of $0.4 million in the third quarter of 2010 equal to 11% of earnings from continuing operations before income taxes. The Company’s effective income tax rate is generally less than the amounts computed by applying the U.S. federal income tax rate of 34% due to a portion of earnings being earned in Canada, where the Company’s effective rate is much lower than the rate in the U.S. due to research-related tax benefits. In the three months ended October 2, 2010, the rate was higher than it otherwise would have been since tax benefits for certain loss jurisdictions have not been recognized. We recognized an income tax benefit of $4.1 million in the third quarter of 2009. During the quarter we recognized a benefit of $1.9 million for prior-year R&D credits in the U.S. after completion of an Internal Revenue Service examination. Furthermore, a benefit of $2.2 million was recognized related to the year-to-date losses before income taxes in certain jurisdictions in which losses had been projected for the full year. The effective rate in 2010 was also higher than 2009 since the earnings in Canada in 2010 are expected to be subject to higher rates due to provincial taxes, and the rate used for U.S. taxable income is higher since certain key provisions of the U.S. tax law, including the research and development credit, have not been extended to be in effect for 2010 as of the end of the third quarter. If these provisions are extended, our effective tax rate will be lower than the year-to-date rate for the remainder of 2010. However, we can make no assurances that these provisions will be extended to be in effect for 2010.

Nine Months ended October 2, 2010 and October 3, 2009:

Net sales of $257.1 million in the first nine months of 2010 were 6.5% lower than the $274.9 million in the same period in 2009. Lower net sales from our D&S and Aviation segments were partially offset by higher net sales from our LXE and Global Tracking segments. Net sales were lower at D&S mainly due to the conclusion of work performed on a significant military communications research project in the fourth quarter of 2009, and therefore not included in the 2010 results. Net sales were lower at Aviation primarily due to a lower volume of shipments of connectivity products and Inmarsat high-speed-data and antenna products reflecting the slow-down in the Aviation commercial business since the third quarter of 2009. LXE’s net sales in the first nine months of 2010 were $22.6 million higher than in the same period in 2009, an increase of 28.2%, mainly due to higher product shipments in the Americas market. LXE’s product sales were also higher, but to a lesser extent, in the International market, and from a new source of revenue from direct sales to OEMs. The increase in net sales at Global Tracking was primarily a result of the timing of the acquisition of our asset-tracking product line February 2009 and additional airtime revenues.

Product net sales of $209.9 million in the first nine months of 2010 were relatively unchanged from the same period in 2009. A higher volume of terminals shipped by LXE, and the additional product net sales generated from our asset-tracking product lines acquired in February 2009, were offset by lower product net sales at Aviation and D&S. The lower product net sales at Aviation were mainly due to a lower volume of shipments of our connectivity products and Inmarsat high-speed-data and antenna products to the commercial markets. The lower product net sales at D&S were mainly due to the timing of revenue recognized on long-term contracts. Service net sales of $47.2 million in the first nine months of 2010 were 26.8% lower than service net sales in the same period in 2009, mainly due to the conclusion of significant work performed on a military communications research project by D&S partially offset by an increase in airtime revenue at Global Tracking and Aviation generated from our new lines of business acquired during the first quarter of 2009. As a result, product net sales comprised a higher percentage of total net sales in the first nine months of 2010 compared with the first nine months of 2009.

Overall cost of sales as a percentage of consolidated net sales was lower in the first nine months of 2010 compared with the same period of 2009 due to lower cost-of-sales percentages reported by three of our four reportable operating segments and a higher percentage of net sales generated from our LXE and Global Tracking segments which have lower cost-of-sales percentages than our other two segments. Product cost of sales and service cost of sales as a percentage of their respective net sales were lower in the first nine months of 2010 compared with the same period in 2009. Product cost of sales was lower in three of our four segments due to a more favorable product mix, and cost reduction efforts targeted at reducing product costs at Aviation and Global Tracking, a higher production volume at LXE, and improved program execution at D&S. The lower service cost-of-sales percentage was mainly due to a lower proportion of service revenues generated from our D&S segment, which has a higher service cost-of-sales percentage than our other three reportable operating segments.

Selling, general and administrative expenses as a percentage of consolidated net sales increased for the first nine months of 2010 compared with the first nine months in 2009. Actual expenses were only $0.3 million higher in the first nine months of 2010 compared with the same period in 2009 mainly due to additional marketing and selling costs related to the higher sales at LXE which has a higher commission structure than our other operating segments, additional costs related to the acquired product lines, and higher incentive compensation costs due to the improved performance projected for the Company in 2010 as compared with 2009. These increased costs were partially offset by management’s cost reduction efforts at our Aviation and D&S segments, and the net favorable effect of changes in foreign currency exchange rates on our international operations. The first nine months of 2009 also included higher severance charges of approximately $1.1 million.

Research and development expenses were $1.2 million higher in the first nine months of 2010 than in the comparable period in 2009 mainly for the development of new product offerings, and the expansion of our technology base in 2010. Research and development expenses also increased in the first nine months of 2010 due to the unfavorable effects of changes in foreign currency exchange rates on our Canadian operations. A higher proportion of these expenditures were recoverable in the first nine months of 2010 compared with the same period in 2009 from the Canadian government and certain commercial contracts which partially offset the higher research and development expenditures.

Acquisition-related items included charges of $0.6 million in the first nine months of 2010. These costs were primarily for professional fees related to acquired research and development tax credits and an adjustment in the earn-out liability for changes in payments to be made for one of the acquisitions completed in the first quarter of 2009. Acquisition-related charges were $5.3 million in the first nine months of 2009. These costs were primarily related to professional fees for legal, due-diligence, valuation, and integration services for the acquisition of our Formation and Satamatics businesses (see Note 2 to the consolidated financial statements in this Quarterly Report for additional information on these business acquisitions).

We recognized income tax expense of $1.9 million in the first nine months of 2010 equal to 19% of earnings from continuing operations before income taxes. The Company’s effective income tax rate is generally less than the amounts computed by applying the U.S. federal income tax rate of 34% due to a portion of earnings being earned in Canada, where the Company’s effective rate is much lower than the rate in the U.S. due to research-related tax benefits. In the nine months ended October 2, 2010, the rate was higher than it otherwise would have been since tax benefits for certain loss jurisdictions have not been recognized. We recognized an income tax benefit of $4.3 million in the first nine months of 2009. This benefit was primarily realized during the third quarter, an explanation for which is included in the quarterly comparisons section of our management’s discussion and analysis section of this Quarterly Report. In addition, the effective rate in 2010 was higher than 2009 since the earnings in Canada in 2010 are expected to be subject to higher rates due to provincial taxes and the rate used for U.S. taxable income is higher since certain key provisions of the U.S. tax law, including the research and development credit, have not been extended to be in effect for 2010 as of the end of the third quarter.

Segment Analysis

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

																		Percentage
		Three Months Ended								Nine Months Ended								Increase (Decrease)
		October 2				October 3				October 2				October 3				Three				Nine
		2010				2009				2010				2009				Months				Months
Net sales:
Aviation		$	24,161				25,669				75,685				93,589				(5.9)	%			(19.1	)
LXE			35,613				26,237				102,551				79,988				35.7				28.2
Defense & Space			16,784				23,056				50,076				75,153				(27.2	)			(33.4	)
Global Tracking			9,399				10,769				29,785				26,217				(12.7	)			13.6
Less intercompany sales			(234	)			—				(995	)			—				—				—
Global Tracking external sales			9,165				10,769				28,790				26,217				(14.9	)			9.8
Total		$	85,723				85,731				257,102				274,947				—				(6.5	)
Cost of sales percentage:
Aviation			65.4	%			67.2				65.1				63.3				(1.8	)			1.8
LXE			60.1				62.9				59.4				63.5				(2.8	)			(4.1	)
Defense & Space			75.4				79.6				75.8				79.5				(4.2	)			(3.7	)
Global Tracking			46.0				52.7				50.0				61.8				(6.7	)			(11.8	)
Total			63.6				67.3				63.9				67.8				(3.7	)			(3.9	)
Operating income (loss):
Aviation		$	1,479				(451	)			3,604				8,415					2			(57.2	)
LXE			2,096				(1,348	)			5,065				(6,195	)				2				2
Defense & Space			1,655				2,140				4,267				7,333				(22.7	)			(41.8	)
Global Tracking			68				883				906				119				(92.3	)			661.3
Corporate & Other			(1,030	)			1,342				(2,475	)			(5,693	)				2				2
Total		$	4,268				2,566				11,367				3,979				66.2				185.7
Adjusted EBITDA (1)
Aviation		$	3,418				1,755				9,290				15,586				94.8				(40.4	)
LXE			3,229				(361	)			8,012				(3,348	)				2				2
Defense & Space			2,343				3,047				6,790				10,028				(23.1	)			(32.3	)
Global Tracking			863				1,514				3,626				3,252				(43.0	)			11.5
Corporate & Other			(352	)			1,738				365				1,642					2			(77.8	)
Total		$	9,501				7,693				28,083				27,160				23.5				3.4

Aviation: Net sales decreased by $1.5 million and $17.9 million in the third quarter and first nine months of 2010, respectively, as compared with the same periods in 2009, mainly due to a lower volume of shipments of Aviation’s air-to-ground connectivity products. Shipments were lower for Aviation’s air-to-ground in-cabin connectivity products into the air transport market due to delays in customer orders resulting from changes in the airline’s rollout schedule of connectivity, and to a transition to a new buying pattern by our customer to acquire inventory as needed to meet scheduled installations instead of maintaining a stock of inventory of on-hand. The lower shipments of air-to-ground connectivity products in the third quarter of 2010 compared with the same period of 2009 were partially offset by an increase in Aviation’s Inmarsat high-speed-data terminal and antenna products, mainly to the military market, indicating continued strength in the demand for Aviation products in that market. The decrease in net sales in the first nine months of 2010 were also due to a lower volume of shipment of Aviation’s Inmarsat high-speed-data terminal and antenna products reflecting the slow-down in the Aviation commercial business beginning in the third quarter of 2009.

Cost of sales as a percentage of net sales was lower in the third quarter 2010 as compared with the third quarter of 2009 mainly due to a more favorable mix of Inmarsat products partially offset by the unfavorable effect of changes in foreign currency exchange rates that affected our reported international costs, and the negative impact of a net increase in estimated costs on long-term projects in the third quarter of 2010. The cost-of-sales percentage was higher in the first nine months of 2010 as compared with the same period of 2009 mainly due to a lower production volume over which fixed costs were absorbed, the unfavorable effect of changes in foreign currency exchange rates, and the negative impact of a net increase in estimated costs on long-term projects. These increases in the cost-of-sales percentage were partially offset by lower amortization costs of intangible assets and a more favorable mix of Inmarsat products in the first nine months of 2010.

Operating income increased by $1.9 million in the third quarter of 2010 compared with the third quarter of 2009 due to a lower cost-of-sales percentage, and lower selling, general and administrative and research and development expenses in the third quarter of 2010. These lower selling, general and administrative expenses were mainly due to staff reductions made in the second quarter of 2010, and from certain cost centers that supported the Aviation segment in 2009 that began supporting Global Tracking in 2010. The lower research and development expenses were primarily a result of additional funding received from the Canadian government under a program to encourage technology development in areas such as satellite communications. Operating income decreased by $4.8 million in the first nine months of 2010 compared with the same period in 2009 mainly as a result of lower net sales in 2010. Operating income as a percentage of net sales was 6.1% and a negative 1.8% in the third quarters of 2010 and 2009, respectively, and was 4.8% and 9.0% in the first nine months of 2010 and 2009, respectively.

Adjusted EBITDA increased by $1.7 million in the third quarter of 2010 compared with the same period in 2009 mainly due to an increase in operating income in the third quarter of 2010. Adjusted EBITDA decreased by $6.3 million in the first nine months of 2010 compared with the same period in 2009 due to a decrease in operating income and an unfavorable swing in foreign currency gains and losses.

LXE: Net sales exceeded $35 million in both the second and third quarters of 2010, and were higher than the net sales of each of the preceding five quarters, indicating a recovery in the North American markets for our logistics business. Net sales were higher by $9.4 million in the third quarter of 2010, and by $22.6 million in the first nine months of 2010 compared with the same periods of 2009 mainly due to an increase in net sales in the Americas market, and to a lesser extent in the International market in the third quarter and first nine months of 2010. The increase in net sales in the Americas market resulted primarily from a higher volume of terminals shipped in that market in response to a higher demand for rugged handheld computer products. The increase in net sales in the International market was mainly due to a higher volume of terminals shipped in that market partially offset by the unfavorable effect of changes in foreign currency exchange rates on the reported net sales. Sales generated from handheld computer products introduced in the fourth quarter of 2009 to the OEM market gained acceptance in certain service industries in 2010 and represents $1.7 million, or 4.7%, and $6.1 million, or 5.9%, of net sales in the third quarter and first nine months of 2010, respectively.

Cost of sales as a percentage of net sales was lower in the third quarter and first nine months of 2010 compared with the same periods in 2009 mainly due to management’s cost reduction efforts, and a higher production volume over which fixed costs were absorbed. Another factor impacting the cost of sales as a percentage of net sales in the first nine months of 2010 was a $0.9 million reduction in cost of sales for purchased items previously included in accounts payable that were determined to no longer be liabilities. The effects of these reductions in cost of sales as a percentage of net sales were partially offset by an unfavorable effect of changes in foreign currency exchange rates that affected our reported International net sales in the first nine months of 2010. Revenues are generally denominated in the local functional currency but product costs are denominated in the U.S. dollar, which was stronger relative to the foreign currencies in the first nine months of 2010 compared with the same period in 2009.

LXE’s operating income improved in each of the first three quarters of 2010 compared with the previous quarter mainly due to the strength of the recovering North American markets. LXE generated operating income of $2.1 million and $5.1 million in the third quarter and first nine months of 2010 compared with operating losses of $1.3 million and $6.2 million in the third quarter and the first nine months of 2009, respectively. These increases in operating income in 2010 were mainly a result of the margin contributed by the higher net sales and more favorable cost-of-sales percentages. These increases in operating income were partially offset by higher research and development expenses reflecting the development of three new products to be released in early 2011 and higher selling, general and administrative expenses mainly due to increased commissions and other selling expenses as a result of higher sales. These higher selling, general and administrative expenses were partially offset by the favorable effect of changes in foreign currency exchange rates on reported costs and lower severance charges. Severance charges were lower by approximately $1.4 million in the first nine months of 2010 compared with the same period in 2009. Operating income as a percentage of net sales was 5.9% and negative 5.1% in the third quarter of 2010 and 2009, respectively, and was 4.9% and negative 7.7% in the first nine months of 2010 and 2009, respectively.

Adjusted EBITDA increased by $3.6 million and $11.4 million in the third quarter and first nine months of 2010, respectively, compared with the third quarter and first nine months of 2009, in line with the increases in operating income in 2010.

Defense & Space : Net sales were $6.3 million and $25.1 million lower in the third quarter and first nine months of 2010, respectively, compared with the same periods in 2009 mainly due to work performed on military programs that were included in the third quarter and first nine months of 2009, including a large military satellite communications research project, but were completed in the fourth quarter of 2009 and will not contribute to net sales in future quarters. Order backlog of long-term contracts was $71.2 million at October 2, 2010, a decrease of $18.4 million from December 31, 2009. Orders for long-term defense contracts slowed during the third quarter of 2010 as a result of delays in customer funding.

Cost of sales as a percentage of net sales was lower in the third quarter and first nine months of 2010 compared with the same periods in 2009. These lower cost-of-sale percentages were mainly due to a net decrease in estimated costs to complete long-term programs resulting from improved program execution, and production efficiencies gained on certain long-term defense-related projects in the third quarter and first nine months of 2010. Cost of sales for the first nine months of 2009 included approximately $0.7 million of severance changes.

Operating income was lower by $0.5 million and $3.1 million in the third quarter and first nine months of 2010, respectively, compared with the third quarter and first nine months of 2009. The lower operating income was mainly due to the decrease in net sales generated in the third quarter and first nine months of 2010. The lower operating income in the first nine months of 2010 was also due to higher research and development expenses, partially offset by lower selling, general and administrative expenses. The lower selling, general and administrative costs reflect the impact of management’s cost reduction efforts initiated in 2009. Operating income as a percentage of net sales was 9.9% and 9.3% in the third quarter of 2010 and 2009, respectively, and was 8.5% and 9.8% in the first nine months of 2010 and 2009, respectively.

Adjusted EBITDA decreased by $0.7 million and $3.2 million in the third quarter and first nine months of 2010, respectively, compared with the third quarter and first nine months of 2009, in line with the decrease in operating income in 2010.

Global Tracking: Net sales were $1.4 million lower in the third quarter of 2010 compared with the third quarter of 2009 mainly due to the completion of a significant emergency management project in the third quarter of 2009 that triggered revenue recognition in that period, partially offset by an increase in airtime revenue in the third quarter of 2010. The increase in airtime revenue in the third quarter 2010 was mainly a result of a higher number of terminals in use by customers. Net sales were $3.6 million higher in the first nine months of 2010 compared with the same period in 2009. The increase in net sales in the first nine months of 2010 was mainly due to timing of the acquisition of our new asset-tracking product line (acquired on February 13, 2009), and higher airtime revenue, which contributed $3.3 million of additional net sales in the first nine months of 2010 compared to the same period in 2009. The increase in airtime revenue in the first nine months of 2010 was a result of a higher number of terminals in use, and a more favorable mix of airtime contracts reflecting the migration of existing customers to current network platforms which yield higher airtime rates. As a result, the average revenue being generated per terminal by the new asset-tracking product line has grown in the first nine months of 2010 compared with the first nine months of 2009. Net sales also included a higher concentration of product shipments to the security market in the third quarter and first nine months of 2010 compared with the third quarter and first nine months of 2009, reflecting growth in that market.

Cost of sales as a percentage of net sales was lower for the third quarter and first nine months of 2010 as compared with the same periods in 2009. The cost-of-sales percentage for the third quarter and first nine months of 2010 included a more favorable product mix, the effects of management’s efforts to lower costs on certain hardware products targeted for improvement, and a higher proportion of airtime revenue, which has a lower cost-of-sales percentage than product net sales. The cost-of-sales percentage comparison was also affected by lower intangible asset amortization expense in 2010.

Operating income was $0.8 million lower in the third quarter of 2010 compared with the third quarter of 2009, mainly due to higher selling, general and administrative and research and development expenses. The lower net sales in the third quarter of 2010 were offset by the lower cost of sales in that period compared with the same period in 2009. Operating income was $0.8 million higher in the first nine months of 2010, compared with the same period in 2009 primarily as a result of the increased gross margin contributed from higher net sales and the lower cost-of-sales percentage, partially offset by higher selling, general and administrative and research and development expenses. These higher selling, general and administrative costs were mainly from certain cost centers that supported the Aviation segment in 2009 that began supporting Global Tracking in 2010, and the timing of the acquisition of our new line of business in the first quarter of 2009; the costs related to the newly acquired business were included in the operating results of our Global Tracking segment for the first nine months in 2009 from the date of acquisition, but were included in the full nine months of 2010. Research and development expenses were higher for the third quarter and first nine months of 2010 compared with the same period of 2009 due to increased efforts on development projects for next generation products. Operating income as a percentage of net sales was 0.7% and 8.2% in the third quarter of 2010 and 2009, respectively and was 3.1% and 0.5% in the first nine months of 2010 and 2009, respectively.

Adjusted EBITDA decreased by $0.7 million in the third quarter of 2010 compared with the third quarter of 2009, primarily due to a decrease in operating income in 2010. Adjusted EBITDA increased by $0.4 million in the first nine months of 2010 compared with the first nine months of 2009 mainly due to an increase in operating income in 2010. The increase in Adjusted EBITDA for the first nine months of 2010 as compared with the same period of 2009 was partially offset by an unfavorable change in foreign currency gains year over year.

Adjusted EBITDA

In addition to traditional GAAP financial measures, we also measure our performance based on the non-GAAP financial measure of earnings before interest expense, income taxes, depreciation and amortization, and before impairment loss on goodwill related charges, stock-based compensation, acquisition-related items and acquisition-related foreign exchange adjustments (“Adjusted EBITDA”). The following table is a reconciliation of net earnings (which is the most directly comparable GAAP operating performance measure) and earnings (loss) from continuing operations before income taxes by segment to Adjusted EBITDA for the three and nine months ended October 2, 2010 and October 3, 2009 (in thousands):

																		Corp &
		Aviation				LXE				D&S				GT				Other				Total
Three Months Ended October 2, 2010
Net earnings																						$	3,471
Income tax expense																							408
Earnings (loss) from continuing operations before income taxes		$	1,382				2,434				1,660				(80	)			(1,517	)			3,879
Interest expense			—				(21	)			—				2				486				467
Depreciation and amortization			1,972				762				638				923				320				4,615
Stock-based compensation			64				54				45				18				359				540
Adjusted EBITDA		$	3,418				3,229				2,343				863				(352	)		$	9,501
Nine Months Ended October 2, 2010
Net earnings																						$	7,930
Income tax expense																							1,861
Earnings (loss) from continuing operations before income taxes		$	3,187				5,267				4,276				855				(3,794	)			9,791
Interest expense			4				(3	)			—				3				1,482				1,486
Depreciation and amortization			5,892				2,551				2,348				2,716				927				14,434
Impairment loss on goodwill related charges			—				—				—				—				384				384
Stock-based compensation			207				197				166				52				803				1,425
Acquisition-related items			—				—				—				—				563				563
Adjusted EBITDA		$	9,290				8,012				6,790				3,626				365			$	28,083
Three Months Ended October 3, 2009
Net earnings																						$	5,280
Loss from discontinued operations																							709
Income tax benefit from continuing operations																							(4,112	)
Earnings (loss) from continuing operations before income taxes		$	(479	)			(1,213	)			2,218				646				705				1,877
Interest expense			(2	)			63				(78	)			—				566				549
Depreciation and amortization			2,190				728				838				858				276				4,890
Stock-based compensation			46				61				69				10				406				592
Acquisition-related items			—				—				—				—				(215	)			(215	)
Adjusted EBITDA		$	1,755				(361	)			3,047				1,514				1,738			$	7,693
Nine Months Ended October 3, 2009
Net earnings																						$	5,498
Loss from discontinued operations																							709
Income tax benefit from continuing operations																							(4,272	)
Earnings (loss) from continuing operations before income taxes		$	9,077				(6,373	)			7,411				478				(8,658	)			1,935
Interest expense			68				205				(78	)			—				1,642				1,837
Depreciation and amortization			6,322				2,636				2,493				2,758				841				15,050
Stock-based compensation			119				184				202				16				1,140				1,661
Acquisition-related items			—				—				—				—				5,307				5,307
Acquisition-related foreign exchange adjustment			—				—				—				—				1,370				1,370
Adjusted EBITDA		$	15,586				(3,348	)			10,028				3,252				1,642			$	27,160