UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 1998
-------------
Commission File Number 0-6072
ELECTROMAGNETIC SCIENCES, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1035424
------------------------------ ----------------------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation of 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 bee
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of each of the issuer's classes of
common stock, as of the close of business on August 1, 1998:
Class Number of Shares
Common Stock, $.10 par Value 8,668,344
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INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Earnings -
Quarters and Six Months Ended
July 3, 1998 and June 27, 1997 3
Consolidated Balance Sheets - July 3,
1998 and December 31, 1997 4-5
Consolidated Statements of Cash Flows -
Six Months Ended July 3, 1998 and June 27,
1997 6
Notes to Interim Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II Other Information
Item 4. Submission of Matters to a Vote of Security
Holders 9
Item 6. Exhibits and Reports on Form 8-K 9
<page break>
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Earnings (Unaudited)
(In thousands, except net earnings per share data)
Second quarter ended Six months ended
-------------------- ----------------
July 3 June 27 July 3 June 27
1998 1997 1998 1997
------ ------ ------ ------
Net sales $46,231 41,046 88,907 80,677
Cost of sales 29,404 26,710 56,670 52,745
Selling, general and
administrative expenses 9,990 8,828 19,333 17,463
Research and development
expenses 3,041 2,389 5,862 4,739
------ ------ ------ ------
Operating income 3,796 3,119 7,042 5,730
Non-operating income (expense),
net (19) 186 32 102
Interest expense (424) (396) (900) (791)
------ ------ ------ ------
Earnings before income
taxes 3,353 2,909 6,174 5,041
Income tax expense 1,315 1,163 2,393 1,992
------ ------ ------ ------
Net earnings $ 2,038 1,746 3,781 3,049
====== ====== ====== ======
Net earnings per share:
Basic $ .24 .20 .44 .36
Diluted .23 .20 .43 .35
Weighted average number
of shares:
Common 8,656 8,525 8,644 8,496
Common and dilutive
common equivalent 8,907 8,802 8,890 8,782
See accompanying notes to interim consolidated financial statements.
<page break>
Consolidated Balance Sheets (Unaudited)
(In thousands)
July 3 December 31
1998 1997
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 6,027 4,300
Trade accounts receivable, net 62,057 58,431
Inventories:
Work in process 4,064 5,994
Parts and materials 22,899 16,330
------- -------
Total inventories 26,963 22,324
------- -------
Deferred income taxes 2,697 2,697
------- -------
Total current assets 97,744 87,752
------- -------
Property, plant and equipment:
Land 1,150 1,150
Building and leasehold improvements 15,444 15,332
Machinery and equipment 59,463 55,150
Furniture and fixtures 4,493 5,134
------- -------
Total property, plant
and equipment 80,550 76,766
Less accumulated depreciation and
amortization 47,063 44,179
------- -------
Net property, plant and
equipment 33,487 32,587
Other assets 5,855 6,602
Goodwill, net of accumulated amortization 16,111 16,713
------- -------
$153,197 143,654
======= =======
See accompanying notes to interim consolidated financial statements.
<page break>
Consolidated Balance Sheets (Unaudited), continued
(In thousands except share data)
July 3 December 31
1998 1997
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 4,123 4,521
Accounts payable 16,100 14,436
Income taxes payable 3,415 2,474
Accrued compensation costs 4,615 4,150
Accrued retirement costs 1,157 700
Deferred revenue 3,365 1,558
Other liabilities 1,096 1,357
------- -------
Total current liabilities 33,871 29,196
Long-term debt, excluding current
installments 18,425 17,160
Deferred income taxes 2,078 2,078
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Total liabilities 54,374 48,434
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Stockholders' equity:
Preferred stock of $1.00 par value
per share. Authorized 10,000,000
shares; none issued - -
Common stock of $.10 par value per
share. Authorized 75,000,000 shares;
issued and outstanding 8,667,000 in
1998 and 8,626,000 in 1997 867 863
Additional paid-in capital 34,590 34,487
Accumulated other comprehensive income
(note 3) (1,678) (1,393)
Retained earnings 65,044 61,263
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Total stockholders' equity 98,823 95,220
------- -------
$153,197 143,654
======= =======
See accompanying notes to interim consolidated financial statements.
<page break>
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Six Months Ended
July 3 June 27
1998 1997
-------- --------
Cash flow from operating activities:
Net earnings $ 3,781 3,049
Adjustments to reconcile net earnings to
net cash used in operating activities:
Depreciation and amortization 2,885 2,786
Goodwill amortization 602 549
Changes in operating assets and
liabilities:
Trade accounts receivable (3,616) (8,313)
Inventories (4,642) (2,894)
Accounts payable 1,389 (1,761)
Income taxes 941 2,127
Accrued costs, deferred revenue
and other current liabilities 2,468 1,670
Other 708 (286)
------ ------
Net cash provided by (used in)
operating activities 4,516 (3,073)
------ ------
Cash flows from investing activities:
Purchase of property, plant and equipment (3,785) (4,121)
Purchase of subsidiary common stock from
minority shareholders - (519)
------ ------
Net cash used in investing
activities (3,785) (4,640)
------ ------
Cash flows from financing activities:
Borrowing of long-term debt 867 5,687
Proceeds from exercise of stock options 107 282
------ ------
Net cash provided by
financing activities 974 5,969
------ ------
Net change in cash and cash
equivalents 1,705 (1,744)
Effect of exchange rates on cash 22 (17)
Cash and cash equivalents at January 1 4,300 4,321
------ ------
Cash and cash equivalents at July 3 $ 6,027 2,560
====== ======
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 900 791
Cash paid for income taxes $ 1,702 259
See accompanying notes to interim consolidated financial statements.
<page break>
Notes to Interim Consolidated Financial Statements (Unaudited)
(1) Basis of Presentation
The interim consolidated financial statements include the
accounts of Electromagnetic Sciences, Inc., its wholly-owned
subsidiaries, EMS Technologies, Inc., LXE Inc., and CAL
Corporation (collectively, "the Company"). In the opinion of
management, the interim consolidated financial statements reflect
all normal and recurring adjustments necessary for a fair
presentation of results for such periods. The results of
operations for any interim period are not necessarily indicative
of results for the full year. These consolidated financial
statements should be read in conjunction with the consolidated
financial statements and related notes contained in the Company=s
Annual Report on Form 10-K for the year ended December 31, 1997.
(2) Earnings per Share
In 1997, the Company adopted Statement of financial
Accounting Standards (SFAS) No. 128, "Earnings per Share," which
established new standards for computing and presenting earnings
per share information. Basic earnings per share is the per share
allocation of income available to common stockholders 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 stockholders based on the weighted average number of
common shares actually outstanding plus all dilutive potential
common shares outstanding during the period. All dilutive
potential common shares relate to the Company's stock option
plan.
(3) Comprehensive Income
Beginning in fiscal 1998, the Company has adopted SFAS 130,
"Reporting Comprehensive Income," which establishes standards for
the reporting and display of comprehensive income and its
components. Under SFAS 130, all items that are recognized under
accounting standards as components of comprehensive income must
be reported in the financial statements. The only element of
comprehensive income that is applicable to the Company is the
change in the foreign currency translation adjustment. Following
is a summary of comprehensive income (in thousands):
Quarter Ended Six Months Ended
---------------- ----------------
July 3 June 27 July 3 June 27
1998 1997 1998 1997
------ ------- ------ -------
Net income $2,038 1,746 3,781 3,049
Other comprehensive expense-
foreign currency
translation adjustment (67) (438) (285) (1,021)
----- ----- ----- -----
Comprehensive income $1,971 1,308 3,496 2,028
===== ===== ===== =====
<page break>
ITEM 2. Management's Discussion And Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Consolidated net sales for the second quarter and first six
months of 1998 were $46.2 million and $88.9 million
respectively, compared with $41.0 million and $80.7 million
for the same respective periods in 1997. Most of this
revenue growth was derived from the Company's wireless
products segment, including higher sales of DualPolTM antennas
and other infrastructure products for PCS/cellular
communications. Sales of these infrastructure products have
benefited from the Company's expansion into new markets,
particularly Latin America, and from North American customers
that continued to expand their networks. The Company also
had higher sales, especially in North America, of its network
and systems integration products for logistics applications.
Cost of sales, as a percentage of consolidated net sales, was
64% for both the second quarter and first six months of 1998,
compared with 65% for the same periods in 1997. This
decrease was related to comparatively higher sales of certain
products within the wireless products segment (mainly
wireless infrastructure products for PCS/cellular
communications) and within the space and technology segment
(mainly airborne SATCOM antenna systems).
Selling general and administrative expenses were greater in
1998 than in 1997 in absolute dollars, but remained at 22% of
net sales in both 1998 and 1997.
The increase in research and development expenses related to the
enhancement of the Company's wireless products lines and the
development of new capabilities in the space and technology segment.
These expenses represent the cost of the Company's internally funded
efforts. In the Company's space and technology segment, significant
research and development effort also occurs under many specific
customer orders and, accordingly, is reflected in cost of sales.
Interest expense increased in 1998 compared with 1997 due to higher
levels of borrowing.
The 39% effective income tax rate for 1998 was comparable with the
rate for the preceding fiscal year.
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities was the main factor in the
increase in cash during the first half of 1998, and for the remainder
of the year, the Company expects to generate further positive cash
flow before financing activities.
At June 30, 1998, the Company had three immediate sources of credit:
$8.1 million remaining under one revolving credit agreement, $1.6
million remaining under another revolving credit agreement, and $2.3
million available under a line of credit in Canada.
Management believes that the Company's present liquidity, together
with cash from operations and sources of external financing, will
support its current business activities and near-term capital
investment plans, but management expects that additional sources of
liquidity will be needed over the next few years if sales and
production levels continue to grow at rates similar to those of the
past two years.
Risk Factors and Forward-Looking Statements
- --------------------------------------------
Forward-looking statements with respect to expected cash flows
and tax rates are included in management's discussion and
analysis of financial condition and results of operations.
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, the
Company's ability to achieve product development and
manufacturing objectives within the cost and timing parameters
created by customers and end-users, and timeliness of orders and
payments from customers, and availability of funding for major
new space programs, and the strength and timing of end-user
acceptance of new communications services, such as high-data-rate
mobile services.
PART II
OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on May 1, 1998.
At the meeting, each of the following individuals was elected to
serve as a member of the Board of Directors during the
forthcoming year, by the vote indicated:
Abstain or
For Withheld Broker Non-Votes
--------- -------- ----------------
Jerry H. Lassiter 7,441,187 5,474 57,907
John B. Mowell 7,444,531 2,130 57,907
Don T. Scartz 7,444,531 2,130 57,907
Thomas E. Sharon 7,444,231 2,430 57,907
Elvie L. Smith 7,443,989 2,672 57,907
Norman E. Thagard 7,441,937 4,724 57,907
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The following exhibit is filed as part of this report:
27.1 Financial Data Schedule
(b) Reports on Form 8-K - The Company has not filed any reports on
Form 8-K during the three months ended July 3, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ELECTROMAGNETIC SCIENCES, INC.
By: /s/ Thomas E. Sharon Date: 8/17/98
----------------------------- -----------
Thomas E. Sharon
President and Chief Executive
Officer
By: /s/ Don T. Scartz Date: 8/17/98
----------------------------- -----------
Don T. Scartz
Treasurer and Chief Financial
Officer
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